Strategic

Cost
Management
CMA
CMA FINAL
FINAL
DIVYA JADI BOOTI

` ` `
CA SATISH JALAN
 Strategic Cost
Management
Divya Jadi Booti
For CMA - Final

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Preface
This is a compilation from the new syllabus of the Institute of Cost Accountants of India for the
subject of Strategic Cost Management. Entire module of Institute has been covered in this
book. The effort has been made to structure the material for ease of conceptual learning. Some
solutions have been modified to keep them consistent with all other solutions and for others
we referred the solution given by the institute.
The explanation of all the solutions here, have been given in the class and it is very important
that this study material should not be referred in isolation, (i.e., without the class)
In exam, the paper comprises of three types of questions, based on - MCQ, Theories (Short
notes) and Practical Questions. You need to prepare the MCQ’s and detailed theories directly
from the institute material. Everything is important for your exam and comprehensive
preparation is required to pass the examination. Please remember that in order to get full
confidence in the subject, you have to solve this material at least 3 times after you’ve learnt
with us in the classes.
We have segregated here the topics as per the relevant concepts and have given immense
effort along with our team to ensure that there are limited errors in this book.
All due care has been taken to eliminate the errors. However, some errors may have gone
unnoticed and we would be happy if you bring it to our notice by sending us an email to care@
sjc.co.in
We would like to thank our editorial team (Nitesh, Sayantan, Anirban) for their consistent effort
to help me to bring this compilation for you.
Wish you All the Best and Happy Learning 

Satish Jalan
• Chartered Accountant (AIR - 27 in Inter)
• Company Secretary (AIR 3 - Inter, AIR 5 - Final)
• Chartered Management Accountant (CIMA, UK)
(AIR - I in Gateway)
• St. Xavier’s College Alumnus, Kolkata

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 Our Aim
is to Gift CA/CMAs to Every Family

Welcome Abroad
To Our Goal

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 Bird's Eye View

Sl.
Chapter name Term
No
Jun'23 Dec'23 Jun'24
Strategic Cost Management for Decision Making
1 Intrtoduction to SCM 6 7
2 Quality Cost Management 18 14
3 Decision Making Technique 15 28 28
4 Activity Based management and Just in Time 5 7 7
5 Evaluating Performance 12 14 14
Quantative Technique in Decision Making
1 Linear Programming 6 7 7
2 Transportation
3 Assignment 8 7
4 Game Theory 8
5 Simulation 7 7
6 Network Analysis-PERT,CPM 8 7 7
7 Learning Curve 8 7
8 Business application of Maxima and Minima 6 7
9 Business Forecasting Models 7 7
10 Introduction to Tools for Data Analytics 6
Total 106 98 98
MCQ 25 30 30

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Contents

Sl.
Module Name Chapter Name Page No Weight
No.

SECTION A: Strategic Cost Management for Decision Making

1 Introduction to Strategic 1.1 Concepts of Strategic Cost 1.2
Cost Management Management in different stages
of Value Chain
1.2 Value Chain Analysis and Value 1.7
Engineering - Business Process
Reengineering
1.3 Cost Control and Cost Reduction 1.9
– Contemporary Techniques
2 Quality Cost 2.1 Managing Quality in Competitive 2.2
Management Environment
2.2 Cost of Quality 2.3
2.3 Total Quality Management 2.6
2.4 Lean Accounting 2.13
2.5 Six Sigma 2.21
3 Decision Making 3.1 Decisions Involving Alternative 3.2
Techniques Choices
3.2 Pricing Decisions and Strategies 3.14
3.3 Transfer Pricing 3.15
3.4 Relevant Cost Analysis 3.32
3.5 Target Costing 3.42
3.6 Product Life Cycle Costing 3.46
3.7 Asset Life Cycle Costing 3.47
3.8 Decision Making using 3.49
Probability
4 Activity Based 4.1 Activity Based Costing 4.2
Management and Just 4.2 JIT - Introduction, Benefits, 4.4
in Time (JIT) Use of JIT - in measuring the
Performance
4.3 Throughput Accounting 4.7
4.4 Back flush Accounting 4.12
4.5 Benchmarking 4.13

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 5 Evaluating Performance 5.1 Variance Analyses 5.1 – 2.20
SECTION B: Quantitative Techniques in Decision Making
6 Linear Programming 6.1 – 6.10
7 Transportation 7.1 – 7.6
8 Assignment 8.1 – 8.10
9 Game Theory 9.1 – 9.6
10 Simulation 10.1 – 10.12
11 Network Analysis – PERT, CPM 11.1 – 11.18
12 Learning Curve 12.1 – 12.10
13 Business Application of Maxima and Minima 13.1 – 13.6
14 Business Forecasting Models (Time Series and Regression 14.1 – 14.8
Analysis)
15 Introduction to Tools for Data Analytics 15.1 – 15.4
16 Objectives 16.1 – 16.32

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 Introduction to Strategic Cost Management


Chapter 1
Introduction to Strategic
Cost Management

Concepts of Strategic Cost Management in different

1.1 stages of Value Chain

Value Chain Analysis and Value Engineering -

1.2 Business Process Reengineering

Cost Control and Cost Reduction – Contemporary

1.3 Techniques

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 Introduction to Strategic Cost Management
Concepts of Strategic Cost Management in different stages of Value Chai

1.1
Concepts of Strategic Cost Management
in different stages of Value Chain

1 Jun'23 MTP Set 1

‘Value chain is a powerful tool for disaggregating a company into its strategically relevant
activities’ - explain the elements of the value chain. [4]

Elements of Value chain

Answer
Developed by Michael Porter in 1985 and used throughout the world, the value chain is a
powerful tool for disaggregating a company into its strategically relevant activities in order
to focus on the sources of competitive advantage, that is, the specific activities that result in
lower costs or higher prices. A company’s value chain is typically part of a larger value system
that includes companies either upstream (suppliers) or downstream (distribution channels), or
both. This perspective about how value is created forces managers to consider and see each
activity not just as a cost, but as a step that has to add some increment of value to the finished
product or service. Manufacturing companies create value by acquiring raw materials and
using them to produce something useful. Retailers bring together a range of products and
present them in a way that is convenient to customers, sometimes supported by services such
as trial rooms or personal shopper advice and insurance companies offer policies to customers
that are underwritten by larger re-insurance policies. Here, they are packaging these larger
policies in a customer-friendly way, and distributing them to a mass audience. In other words,
the value that is created and captured by a company as reduced by the costs incurred is the
profit margin. Expressed as a formula the equation would read as:
Value Created and Captured – Cost of Creating that Value = Profit Margin
The more value an organisation creates, the more profitable it is likely to be. As more and
more value is provided to the customers, competitive advantage creeps in. Understanding
how a company creates value, and looking for ways to add more value, are critical elements in
developing a competitive strategy. Thus, the value chain is a set of activities that an organisa-
tion carries out to create value for its customers. Porter proposed a general-purpose value chain

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 Introduction to Strategic Cost Management
Concepts of Strategic Cost Management in different stages of Value Chai

that companies can use to examine all of their activities, and see how they are connected. The
way in which value chain activities are performed determines costs and affects profits.
Elements in Porter’s Value Chain
Rather than looking at departments or accounting cost types, Porter’s Value Chain focuses on
systems, and how inputs are changed into the outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities common to all businesses, and he divided them
into primary and support activities, as shown below.
Primary Activities: Primary activities relate directly to the physical creation, sale, maintenance
and support of a product or service. They consist of the following:
• Inbound Logistics: These are all the processes related to receiving, storing, and distribut-
ing the inputs internally. The supplier relationships are a key factor in creating value here.
• Operations: These are the transformation activities that change inputs into outputs that
are sold to customers. Here, operational systems create value.
• Outbound Logistics: These activities deliver the product or service to the customer. These
are the things like collection, storage, and distributing the outputs. They may be internal or
external to the organisation.
• Marketing and Sales: These are the processes that are used to persuade clients to purchase
from the firm instead of its competitors. The benefits being offered, and how well they are
communicated to the customers, are sources of value here.
• Service: These are the activities related to maintaining the value of the product or service
to customers, once it has been purchased.
Support Activities:
Support activities support the primary functions stated above. Each support, or secondary,
activity can play a role in each primary activity. For example, procurement supports operations
with certain activities, but it also supports marketing and sales with other activities.
• Procurement (Purchasing): This is what the organisation does to get the resources it
needs to operate. This includes finding vendors and negotiating best prices.
• Human Resource Management: This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
• Technological Development: These activities relate to managing and processing
information, as well as protecting a company’s knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.
• Infrastructure: These are a company’s support systems, and the functions that allow it to
maintain daily operations. Accounting, legal, administrative, and general management are
examples of necessary infrastructure that businesses can use to their advantage.

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 Introduction to Strategic Cost Management
Concepts of Strategic Cost Management in different stages of Value Chai

2 Jun'23 MTP Set 1

“Value chain analysis help an organization in gaining competitive advantage” – Explain the
validity of the above statement in a dynamic business world. [2]

Value Chain Analysis to gain competitive

advantage

Answer
Value chain analysis (VCA) is a process where a firm identifies its primary and support activities
that add value to its final product and then analyse these activities to reduce costs or increase
differentiation. Value chain analysis relies on the basic economic principle of advantage -
companies are best served by operating in sectors where they have a relative productive
advantage compared to their competitors. Simultaneously, companies should ask themselves
where they can deliver the best value to their customers. Conducting a value chain analysis
prompts a firm to consider how each step adds or subtracts value from its final product or
service. This, in turn, can help it realize some form of competitive advantage, such as:
• Cost reduction, by making each activity in the value chain more efficient and, therefore,
less expensive
• Product differentiation, by investing more time and resources into activities like research
and development, design, or marketing that can help the product stand out
Typically, increasing the performance of one of the four secondary activities can benefit at least
one of the primary activities.
There are as such five steps in developing the value chain analysis
Step 1: Identify all value chain activities
Step 2: Calculate the cost of each activity
Step 3: Look at what your customers perceive as value
Step 4: Look at your competitors’ value chains
Step 5: Decide on a competitive advantage

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 Introduction to Strategic Cost Management
Concepts of Strategic Cost Management in different stages of Value Chai

3 Postal Test Paper

What are the generic links of Porter’s Value Chain? [8]

Primary and Support Activities

Answer
Elements in Porter’s Value Chain
Rather than looking at departments or accounting cost types, Porter’s Value Chain focuses on
systems, and how inputs are changed into the outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities common to all businesses, and he divided them
into primary and support activities, as shown below.
Primary Activities: Primary activities relate directly to the physical creation, sale, maintenance
and support of a product or service. They consist of the following:
• Inbound Logistics: These are all the processes related to receiving, storing, and distribut-
ing the inputs internally. The supplier relationships are a key factor in creating value here.
• Operations: These are the transformation activities that change inputs into outputs that
are sold to customers. Here, operational systems create value.
• Outbound Logistics: These activities deliver the product or service to the customer. These
are the things like collection, storage, and distributing the outputs. They may be internal or
external to the organisation.
• Marketing and Sales: These are the processes that are used to persuade clients to purchase
from the firm instead of its competitors. The benefits being offered, and how well they are
communicated to the customers, are sources of value here.
• Service: These are the activities related to maintaining the value of the product or service
to customers, once it has been purchased.
Support Activities:
Support activities support the primary functions stated above. Each support, or secondary,
activity can play a role in each primary activity. For example, procurement supports operations
with certain activities, but it also supports marketing and sales with other activities.
• Procurement (Purchasing): This is what the organisation does to get the resources it
needs to operate. This includes finding vendors and negotiating best prices.

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 Introduction to Strategic Cost Management
Concepts of Strategic Cost Management in different stages of Value Chai

• Human Resource Management: This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
• Technological Development: These activities relate to managing and processing
information, as well as protecting a company’s knowledge base. Minimizing information
technology costs, staying current with technological advances, and maintaining technical
excellence are sources of value creation.
• Infrastructure: These are a company’s support systems, and the functions that allow it to
maintain daily operations. Accounting, legal, administrative, and general management are
examples of necessary infrastructure that businesses can use to their advantage.

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 Introduction to Strategic Cost Management
Value Chain Analysis and Value Engineering - Business Process Reengineering

1.2
Value Chain Analysis and Value Engineering
- Business Process Reengineering

1 Jun’23
“Business Process Re-engineering involves the radical redesign of core business processes to
achieve dramatic improvements in productivity, cycle times and qualiity.” In this context, state
what are the characteristics and principles of Business Process Re-engineering. [6]

BPR - Characteristics and Principles

Answer
Characteristics
(i) Several jobs are combined into one
(ii) Very often workers make decisions
(iii) The steps in the process are performed in a logical order
(iv) Work is performed, where it makes most sense
(v) Quality is built in
(vi) Manager provides a single point of contact
(vii) Centralized and decentralized operations are combined.
Seven Principles
(i) Processes should be designed to achieve a desired outcome rather than focusing on
existing tasks
(ii) Personnel who use the output from a process should perform the process
(iii) Information processing should be included in the work, which produces the information
(iv) Geographically dispersed resources should be treated, as if they are centralized
(v) Parallel activities should be linked rather than integrated
(vi) Doers should be allowed to be self-managing
(vii) Information should be captured once at source

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 Introduction to Strategic Cost Management
Value Chain Analysis and Value Engineering - Business Process Reengineering

2 Dec’23
“Value Analysis is a methodical approach to sharpening the efficiency and effectiveness of any
process” — In this context, summarise the phases of Value Analysis. (Any five) [7]

Phases of Value Analysis

Answer
The Phases of Value Analysis are summarized as follows:
(1) Origination: The phase of origination starts with the identification of a project to undertake
value analysis. After selecting the project, a project team consisting of experts from various
fields and departments is constituted.
(2) Information: The second phase is that of collecting relevant information. In this phase, the
relevant facts relating to specifications, drawings, methods, materials, etc. are collected.
Costs are, also, ascertained for each of the elements that are being studied.
(3) Functional Analysis: Then follows the important phase of functional analysis. After familiar-
isation with the relevant facts & figures, a functional analysis is carried out to determine the
functions and uses of the product and its components. The cost and importance of each
function are identified. A value index is computed on the basis of cost benefit ratio for each
of the functions),
(4) Innovation: This is the creative phase concerned with the generation of new alternatives
to replace or remove the existing ones. The objective is to produce ideas and to formulate
alternative means and methods for accomplishing the essential functions and improving
the value of the element under consideration.
(5) Evaluation: During the stage of evaluation, each and every alternative is analysed and
the most promising alternatives are selected. These alternatives are further examined for
economic and technical feasibility. The alternatives finally selected must be capable of
performing the desired functions satisfactorily.
(6) Choice: In this phase, the decision makers choose the best of alternatives. The programs
and action plans are then developed to implement the chosen alternative.
(7) Implementation: The chosen alternative is put to the actual use with the help of the
programs and action plans. The progress of implementation is continuously monitored
and followed up to ensure that the desired results are achieved.

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 Introduction to Strategic Cost Management
Cost Control and Cost Reduction – Contemporary Techniques

1.3
Cost Control and Cost Reduction
– Contemporary Techniques

1 Postal Test Paper

Differentiate Cost Control with Cost Reduction. [4]

Cost Control and Cost Reduction

Answer
Sl. Nomenclature Cost Control Cost Reduction
1 Objective Containing the cost in accordance Exploring ways and means of
with the pre-set targets improving the targets
2 Approach Attaining lowest possible costs A continuous process of analysis
under the existing circumstances to find out new ways & means to
achieve reduction in costs.
3 Nature Preventive function Corrective function
4 Emphasis The emphasis is on the past i.e.., The emphasis is on the present
on predetermined standards and the future i.e.., on feasible
permanent reductions
5 Assumptions Assumes the existence of certain Assumes the existence of
standards or norms concealed potential savings in the
standards or norms

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 Introduction to Strategic Cost Management
Cost Control and Cost Reduction – Contemporary Techniques

NOTES

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 Quality Cost Management


Chapter 2
Quality Cost Management

2.1 Managing Quality in Competitive Environment

2.2 Cost of Quality

2.3 Total Quality Management

2.4 Lean Accounting

2.5 Six Sigma

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 Quality Cost Management
Managing Quality in Competitive Environment

2.1
Managing Quality in Competitive Environment

No questions have been asked yet from this chapter !

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 Quality Cost Management
Cost of Quality

2.2
Cost of Quality

1 June'23 MTP Set 2

Rags Ltd. manufactures and sells premium quality of sports shoes in India. Noted sports clubs
and its members are the main customers. Finished products show some rectifiable defects.
These problems can be detected and rectified during internal inspection. Inspection cost is ₹30
per unit. Rectification cost is ₹18 per unit. During 2022, 60000 pairs of shoes were manufac-
tured and sold. After inspection defect was detected in respect of 5% of output. Inspection cost
is ₹ 30 per pair. After sales, customers reported defects in respect of 6% of output. These shoes
were received back from customers at a transportation cost of ₹ 10 per pair. Due to negative
publicity arising out of sale of defective materials, loss in sales is expected in next year to the
extent of 5% of external failures.
Required:
a. Calculate the cost of quality showing the elements separately.
b. If the selling price per pair of shoes is ₹ 600 and variable cost is 60% of sales, fixed cost is
₹5,50,000 p.a., prepare the profitability statement for the product during 2022. [2 + 3 = 5]

Cost of Quality & Profitability

Answer
(a) Statement of Costs of Quality
₹
(a) Inspection or Appraisal Cost (30 x 60,000 shoes) 18,00,000
(b) Internal failure (re-work) cost (5% x 60,000 × ₹ 18) 54,000
(c) External failure cost (i.e., transportation + re-work cost) 1,00,800
[6% x 60,000 x (₹ 10 + 18)]
(d) Opportunity cost (i.e., loss of contribution) 43,200
[5% x (6% x 60,000) x (₹ 600 x 40%)]
Total Quality Cost 19,98,000

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 Quality Cost Management
Cost of Quality

(b) Profitability Statement

₹
Sales (60,000 x ₹ 600) 3,60,00,000
Less: Variable Cost (60%) 2,16,00,000
Contribution 1,44,00,000
Less: Quality Cost (as above) 19,98,000
Contribution, net of quality costs 1,24,02,000
Less: Fixed Cost 5,50,000
Net Profit 1,18,52,000

2 Jun’23
The following financial information has been extracted from the records of ASHREEN LTD. for
analyzing the cost of quality for the year 2022-2023:
(i) Sales Revenue for the year: ₹ 400 lakh
(ii) During the year, customers returned 40,000 units needing repair, repair cost averages ₹ 8
per unit.
(iii) Six Inspectors are employed each earning an annual salarty of ₹ 2,00,000. These six
inspectors are involved only with final inspection (Product acceptance).
(iv) Total Scrap is 30,000 units. All scraps are quality related. The cost of scrap is about ₹ 20 per
unit.
(v) During the year, approximate 1,20,000 units are rejected in final inspection. Of these units,
90 per cent can be recovered through rework. The cost of rework is ₹ 8 per unit.
(vi) The company employs 5 full time employees in the complaint department. Each earns
₹1,00,000 for this year.
(vii) The company requires all new employees to take three hour quality training programme.
The estimated cost for the programme is ₹ 1,50,000.
(viii) Inspection of the final products require testing equipment. The annual cost of operating
and maintaining this equipment is ₹ 1,80,000
Required:
(I) Analyse the costs of quality showing its elements separately with workings.
(II) If the selling price per unit is ₹ 50 and variable cost is 60% of the sales and fixed costs ₹ 70
lakh per annum. Determine what will be the profit (Net of quality costs) of the company
for the year 2022-2023. [4 + 3 = 7]

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 Quality Cost Management
Cost of Quality

Cost of Quality analysis, Profit of the

Company

Answer
(i) Cost of Quality = ₹ 38,14,000
(ii) Net Profit = ₹ 51,86,000

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 Quality Cost Management
Total Quality Management

2.3
Total Quality Management

1 June'23; Postal Test Paper

Narrate the steps for implementing the Total Quality Management.’ [8]

Steps for TQM

Answer
STEPS IN TOTAL QUALITY MANAGEMENT
Step 1: Identification of customers/customer groups:
Through a team approach (a technique called Multi-Voting), the Firm should identify major
customer groups. This helps in generating priorities in the identifi- cation of customers and
critical issues in the provision of decision-support information.
Step 2: Identifying customer expectations:
Once the major customer groups are identified, their expectations are listed. The question to be
answered is - What does the customer expect from the Firm?
Step 3: Identifying customer decision-making requirements and product utilities:
By identifying the need to stay close to the customers and follow their suggestions, a
decision-support system can be developed, incorporating both financial and non-financial
and non-financial information, which seeks to satisfy user require- ments. Hence, the Firm finds
out the answer to - What are the customer’s decision-making requirements and product
utilities? The answer is sought by listing out managerial perceptions and not by actual interac-
tion with the customers.
Step 4: Identifying perceived problems in decision-making process and product utilities:
Using participative processes such as brainstorming and multi-voting, the Firm seeks to list
out its perception of problem areas and shortcomings in meeting customer requirements.
This will list out areas of weakness where the greatest impact could be achieved through

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 Quality Cost Management
Total Quality Management

the implementation of improvements. The Firm identifies the answer to the question - What
problem areas do we perceive in the decision-making process?
Step 5: Comparison with other Firms and benchmarking:
Detailed and systematic internal deliberations allow the Firm to develop a clear idea of their
own strengths and weaknesses and of the areas of most significant deficiency. Benchmarking
exercise allows the Firm to see how other Companies are coping with similar problems and
opportunities.
Step 6: Customer Feedback:
Steps 1 to 5 provide a information base developed without reference to the customer. This is
rectified at Steps 6 with a survey of representative customers, which embraces their views on
perceived problem areas. Interaction with the customers and obtaining their views helps the
Firm in correcting its own perceptions and refining its processes.
Steps 7 & 8: Identification of improvement opportunities and implementation of Quality
Improvement Process:
The outcomes of the customer survey, benchmarking and internal analysis, provides the inputs
for Steps 7 and 8, i.e. the identification of improvement opportunities and the implementation
of a formal improvement process. This is done through a six-step process called PRAISE, for
short.

2 Postal Test Paper

What do you understand by 6C’s? [4]

6C's

Answer
The essential requirements for successful implementation are described as the six C’s of TQM.
These are:
The 6C’s

Commitment If a TQM culture is to be developed, total commitment must come from

top management. It is not sufficient to delegate ‘quality’ issues to a single
person. Quality expectations must be made clear by the top management,
together with the support and training required for its achievement.

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 Quality Cost Management
Total Quality Management

Culture Training lies at the centre of effecting a change in culture and attitudes.
Negative perceptions must be changed to encourage individual contribu-
tions and to make ‘quality’ a normal part of everyone’s job.
Continuous TQM should be recognised as a ‘continuous process’. It is not a ‘one-time
improvement programme’. There will always be room for improvement, however small it
may be.
Co-operation TQM visualises Total Employee Involvement (TEI). Employee involvement
and co-operation should be sought in the development of improvement
strategies and associated performance measures.
Customer The needs of external customers (in receipt of the final product or service)
focus and also the internal customers (colleagues who receive and supply goods,
services or information), should be the prime focus.
Control Documentation, procedures and awareness of current best practice are
essential if TQM implementations are to function appropriately. Unless
control procedures are in place, improvements cannot be monitored and
measured nor deficiencies corrected.

3 June'23 MTP Set 1

“A traditional approach to quality management is that there is an optimal level of quality effort,
that minimizes total quality costs, and there is a point beyond which spending more on quality
yields a benefit that is less than the additional cost incurred”.
Describe the principles of Total Quality Management (TQM) in the above context?
Distinguish those from the traditional approach to quality management? [3]

Principles of TQM

Answer
In order to identify how and to what extent TQM differs from the traditional model of quality
management, the philosophy behind the TQM is to be identified, which are;
(a) Failure and poor quality are unacceptable. It is inappropriate to think of an optimal level
of quality at which some failures will occur, and the inevitability of errors is not something
that an organisation should accept. The target should be zero defects.
(b) Quality costs are difficult to measure, and failure costs in particular are often seriously
underestimated. The real costs of failure include not just the cost of scrapped items and
reworking faulty items, but also the management time spent sorting out problems and the

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 Quality Cost Management
Total Quality Management

loss of confidence between different parts of the organisation whenever faults occur.
(c) A TQM approach does not accept that the prevention costs of achieving zero defects
becomes unacceptably high as the quality standard improves and goes above a certain
level. In other words, diminishing returns do not necessarily set in. If everyone in the
organisation is involved in improving quality, the cost of continuous improvement need
not be high.
(d) If an organisation accepts an optimal quality level that it believes will minimize total
quality costs, there will be no further challenge to management to improve quality further.

4 June'23 MTP Set 2

Explain the principles of Total Quality Management (TQM). Also describe the essential require-
ments for the implementation of Total Quality Management (TQM)? [6]

Principles and essential requirement of

TQM

Answer
TQM is a vision based, customer focused, prevention oriented, continuous improvement
strategy based on scientific approach adopted by cost conscious people committed to satisfy
the customers first time every time. It aims at Managing an organization so that it excels in
areas important to the customer.
Principles of TQM are
• Customer Focus: The first of the Total Quality Management principles puts the focus
back on the people buying your product or service. Your customers determine the
quality of your product. If your product fulfills a need and lasts as long or longer than
expected, customers know that they have spent their money on a quality product. When
you understand what your customer wants or needs, you have a better chance of figuring
out how to get the right materials, people, and processes in place to meet and exceed their
expectations.
• Total Employee Commitment: You can’t increase productivity, processes, or sales without
the total commitment of all employees. They need to understand the vision and goals
that have been communicated. They must be sufficiently trained and given the proper
resources to complete tasks in order to be committed to reaching goals on time.
• Process Approach: Adhering to processes is critical in quality management. Processes
ensure that the proper steps are taken at the right time to ensure consistency and speed
up production.

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Total Quality Management

• Integrated System: Typically, a business has many different departments, each with
their own specific functions and purposes. These departments and functions should be
interconnected with horizontal processes that should be the focus of Total Quality
Management. But sometimes these departments and functions operate in isolated silos. In
an integrated system, everybody in every department should have a thorough understand-
ing of policies, standards, objectives, and processes. Integrated systems help the company
to look for continual improvement in order to achieve an edge over the competition.
• Strategic and Systematic Approach: The International Organization for Standardization
(ISO) describes this principle as: “Identifying, understanding and managing interrelated
processes as a system contributes to the organization’s effectiveness and efficiency in
achieving its objectives.” Multiple processes within a development or production cycle are
managed as a system of processes in an effort to increase efficiency.
• Continual Improvement: Optimal efficiency and complete customer satisfaction do not
happen in a day– your business should continually find ways to improve processes and
adapt your products and services as customer needs shift.
• Fact-based Decision-making: Analysis and data gathering lead to better decisions based
on the available information. Making informed decisions leads to a better understand-
ing of customers and your market.
• Communications: Everybody in your organization needs to be aware of plans, strategies
and methods that will be used to achieve goals. There is a greater risk of failure if you don’t
have a good communication plan.
The essential requirements for successful implementation are described as the six C’s of TQM
as tabulated below
• Commitment - If a TQM culture is to be developed, total commitment must come from
top management. It is not sufficient to delegate ‘quality’ issues to a single person. Quality
expectations must be made clear by the top management, together with the support and
training required for its achievement.
• Culture - Training lies at the centre of effecting a change in culture and attitudes.
Negative perceptions must be changed to encourage individual contributions and to
make ‘quality’ a normal part of everyone’s job.
• Continuous Improvement - TQM should be recognised as a ‘continuous process’. It is not
a ‘one-time programme’. There will always be room for improvement, however small it may
be.
• Co-operation - TQM visualises Total Employee Involvement (TEI). Employee involve-
ment and cooperation should be sought in the development of improvement strategies
and associated performance measures.
• Customer Focus - The needs of external customers (in receipt of the final product or service)
and also the internal customers (colleagues who receive and supply goods, services or
information), should be the prime focus.

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Total Quality Management

• Control Documentation, procedures and awareness of current best practice are essential
if TQM implementations are to function appropriately. Unless control procedures are in
place, improvements cannot be monitored and measured nor deficiencies corrected.

5 Jun’23
SUNRISE PRAKASHAN LTD. is in the business of publishing a leading news paper which has a
wide customer base. It measures quality of service in terms of:
(i) Print quality
(ii) On time delivery
(iii) No. of damaged and unsold paper
To improve its business prospects and performance, the company is considering installing a
scheduling and tracking system which involve an annual additional cost of ₹ 3,00,000 besides
equipments costing ₹4,00,000 needed for the installation of system.
To purchase the equipment, the company is planning to utilize the proceeds of a investment
fetching an income @9%. Details regarding the present and future performance are given as
under :
Present Expected
On time delivery 80% 95%
Variable cost per lot of newspaper damaged and unsold (₹) 40 40
Fixed Cost (₹) 60,000 60,000
No. of lots of newspaper damaged and unsold 6,000 1,000
It is expected that each percentage increases in on time performance will result in revenue
increase of ₹ 35,000 per annum. Required contribution margin is 40%.
Required :
Draw inference from the information given above and evaluate, whether Sunrise Prakashan
Ltd. should install the new system. [5]

Evaluation of New System Installation

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Total Quality Management

Answer
TQM
Savings (6,000 - 1,000) × 40 = 2,00,000
Inc contribution (35,000 × 15) × 40% = 2,00,000
4,10,000
(-) Annual Cost = 3,00,000
Eq Cost Int = 36,000
= 74,000

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 Quality Cost Management
Lean Accounting

2.4
Lean Accounting

1 June'23 MTP Set 1

Explain the notion of continuous improvement. What is the cornerstone of continuous
improvement? [3]

Continuous Improvement - Notion &

Cornerstone

Answer
According to Colin Drury Continuous Improvement (CI) is an ‘ongoing process that involves a
continuous search to reduce costs, eliminate waste, and improve the quality and performance
of activities that increase customer value or satisfaction’.
The implementation of continuous improvement does not necessarily call for significant
investment, but it does require a great deal of commitment and continuous effort. Continu-
ous improvement is often associated with incremental changes in the day-to-day process of
work suggested by employees themselves. This is not to say that continuous improvement
organisations do not engage in radical change. Quantum leaps in performance can occur
when cumulative improvements synergize, the sum of a number of small improvements
causing a profound net effect greater than the sum of all the small improvements. The process
must be ongoing, and sustained success is more likely in organisations that regularly review
their business methods and processes in the drive for improvement.
Cornerstones of continuous improvement (CI)
• Quality – the creation of key performance indicators (KPIs) with a focus on meeting
customer needs was an important step in improving these processes. Previous measures
had focused on output.
• Process improvements – a process of benchmarking its KPIs means that Tata is always
reviewing its activities, and by sharing relevant information within Tata, it maintains the
drive necessary to keep the system working.
• Teamwork – CI requires everyone to work differently. Every employee needs to feel that
they can and should spot areas of weakness and make suggestions about how to make

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Lean Accounting

improvements. To help employees make this shift in attitude, a phased approach was used
whereby initially CI coaches were responsible for CI, then CI champions, managers, team
leaders and finally the team.

2 Jun'23 MTP Set 2

‘Lean evolved from the manufacturing philosophy of the Toyota Production System’ – explain
the evolution process. In this context explain Lean Accounting and its three principles. [6]

Evaluation, Meaning and principles of

Lean Accounting

Answer
Taiichi Ohno (1912-1990) is more a symbol of Japan’s manufacturing resurgence after the
Second World War. Born in Dalian, in eastern China, he joined Toyota Automatic Loom Works
between the wars. Ohno felt that there was no reason other than inefficiency and wasteful-
ness why Toyota’s productivity should be any lower than that of Detroit. Hence, he set out to
eradicate inefficiency and eliminate waste in that part of the production process that he was
responsible for. This became the core of the so-called Toyota Production System (TPS) that
he and others subsequently developed between the mid-1940s and the mid-1970s. Several
elements of this system have become familiar in the West; for example, muda (the elimination
of waste), jidoka (the injection of quality) and kanban (the tags used as part of a system of
just-in-time stock control). Lean was evolved from the manufacturing philosophy of the Toyota
Production System.
The cornerstone of lean is the elimination of waste from processes with a mindset
of continuous improvement. In its most basic form, Lean Manufacturing is the systematic
elimination of waste by focusing on production costs, product quality and delivery, and worker
involvement. It is said that the famed Toyota Production system was inspired by what the Toyota
executives learned during their visits to the Ford Motor Company in the 1920s and developed
by Toyota leaders such as Taiichi Ohno and consultant Shigeo Shingo after World War II. Broadly
speaking, Lean Manufacturing represents a fundamental paradigm shift from tradition-
al “batch and queue” mass production to production systems based on product aligned
“single-piece flow, pull production.” Whereas “batch and queue” involves mass-production of
large inventories of products in advance based on potential or predicted customer demands,
a “single-piece flow” system rearranges production activities in a way that processing steps of
different types are conducted immediately adjacent to each other in a continuous and single
piece flow. If implemented properly, a shift in demand can be accommodated immediate-
ly, without the loss of inventory stockpiles associated with traditional batch-and-queue
manufacturing.

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 Quality Cost Management
Lean Accounting

Lean Accounting is the application of lean thinking to all accounting and finance processes
and systems. It is an essential component of a successful lean transformation for any organiza-
tion. Lean accounting uses a method that categorizes costs by value stream rather than
by department. This approach “provides the basis for sound management decisions”. The
researchers define value stream accounting as “tracking revenue and the associated variable
costs required to generate those sales.” It is experienced that value stream costing includes a
simpler cost collection method and reduces the number of cost centers. They also list features
of value stream accounting as:
• Costs calculated weekly
• No distinction made between direct or indirect costs – all costs of the value stream are
considered direct costs
• Value stream costs include labour, materials, production support, machines and
equipment, operation support, facilities and maintenance
• Value stream costing provides a more accurate picture by elimination of unnecessary
costs outside control of value stream managers
Lean accounting groups together costs that fall outside of the value stream as “business sustain-
ing costs” that do not get included in value stream costs. This, in turn, helps the businesses to
find better price points for products and do further research into high-cost areas. The bottom
line is that Lean accounting can help business leaders quickly know if they are heading in the
right direction or need to make a change. Three principles guide Lean Accounting and form
the foundation for all of accounting’s work and interaction with the organization:
(i) Customer value: Delivering the relevant and reliable information in a timely manner to all
users of the information inside the organization.
(ii) Continuous improvement: Improving accounting processes, cross-functional business
processes and the information used inside the business for analysis and decision making.
(iii) Respect for people: Adopting a learning attitude by seeking to understand root causes of
business problems and issues in a cross-functional, collaborative manner.

Continuous
Improvement
Customer Respect for
Value People

Principles of
Lean Accounting

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Lean Accounting

3 MTP Dec’23 Set 1

Narrate the principles, practices, and tools of lean accounting.

Principles, Practices and Tools

Answer
Sl. Principles Practices Tools of lean accounting
1 Lean & simple Continuously eliminates • Value stream mapping; current &
business waste from the transac- future state
accounting tions, processes, reports,
and other accounting
• Kaizen (lean continuous
improvement).
methods
• PDCA (Planning, Doing, Checking
and Acting) problem solving
2 Accounting Management control & • Performance Measurement Linkage
processes that continuous improvement Chart; linking metrics for cell/process,
support lean value streams, plant & corporate
transformation reporting to the business strategy,
target costs, and lean improvement
• Value stream performance boards
containing break- through and
continuous improvement projects
• Box scores showing value stream
performance
Cost management • Value stream costing
• Value stream income statements
Customer & supplier value • Target costing
and cost management

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Lean Accounting

3 Clear & timely Financial reporting • “Plain English” financial statements

communi- Simple, largely cash-based
cation of accounting
information Visual reporting Primary reporting using visual
of financial & non- performance boards; division, plant,
financial performance value stream, cell/ process in production,
measurements product design, sales/marketing,
administration, etc.
Decision-making Incremental cost & profitability analysis
using value stream costing and box
scores
4 Planning Planning & budgeting • Hoshin policy deployment. (Hosin
from a lean Kanri (also called Policy Deployment
perspective is a method for ensuring that a
company’s strategic goals drive
progress and action at every level
within that company. This method
eliminates the waste that comes
from inconsistent direction and poor
communication). Sales, operations,
& financial planning (SOFP)
Impact of lean • Value stream cost and capacity
improvement analysis
• Current state & future state value
stream maps
• Box scores showing operational,
financial, and capacity changes from
lean improvement.
• Plan for financial benefit from the
lean changes
Capital planning • Incremental impact of capital
expenditure on value stream box-
score. Often used with 3P approach-
es. (Production Preparation Process)
Invest in people • Performance measurements track-
ing continuous improvement par-
ticipation, employee satisfaction &
cross- training Profit sharing

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Lean Accounting

5 Strength- Internal control based on • Transaction elimination matrix

en internal
accounting
lean operational controls
• Process maps showing controls and
SOX risks. (A SOX control is a rule that
control prevents and detects error within a
process cycle of financial reporting.
These controls fall under the
Sarbanes-Oxley Act of 2002 (SOX).
SOX is a U.S. federal law requiring all
public companies doing business in
the United States to comply with the
regulation).
Inventory valuation • Simple methods to value inventory
without the requirement for
perpetual inventory records and
product costs can be used when the
inventory is low and under visual
control.

4 Jun'24 MTP Set 1

Discuss the significance of lean accounting. [7]

Significance

Answer
Lean accounting is the application of lean principles to the accounting and associated functions
within the enterprise. Lean Accounting facilitates the changes that are required to a company’s
accounting, control, measurement, and management processes to support lean manufactur-
ing and lean thinking.
Lean Accounting enables identification and elimination of non-value adding waste in the
accounting and reporting processes; Improves visual reporting on product lines; and realigns
accounting activities to a consulting role rather than a transaction role.
9
Lean accounting empowers the finance and accounting functions to partner with the evolving
lean enterprise. When the finance department revamps its processes in line with the lean
methods, the time savings and communication gains are substantial.

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 Quality Cost Management
Lean Accounting

The purpose of lean accounting is to tell us about the flow through the Value Stream; to tell us
about the capacity for extra work in the Value stream; and to tell us about the incremental costs
of alternative decisions and actions.
Lean accounting provides a stage that enables the accounting team to move from a transaction
focus to a new high value role of consulting within other areas of the company. Enterprises using
Lean accounting have better information for decision-making, have simple and timely reports
that are clearly understood by everyone in the company, they understand the true financial
impact of lean changes; they focus the business around the value created for the customers,
and accounting actively drives the lean transformation. This helps the company to grow, to add
more value for the customers, and to increase cash flow and value for the stock-holders and
owners.
Lean accounting ensures the right people have the right information at the right time to make
the right decision in the areas of pricing, production, procuring, inventory management,
performance measuring, etc.

5 Jun'24
What is Lean Accounting? Append the Principles and Practices of Lean Accounting. [7]

Meaning, Principles and Practices

Answer
Lean Accounting:
Lean Accounting is the application of Lean thinking to all accounting and finance process
and system. It is an essential component of a successful Lean transformation for any organiza-
tion. Lean accounting uses a method that categorizes costs by value stream rather than by
department. This approach “provides the basis for sound management decisions”. Lean
accounting groups together costs that fall outside of the value stream as “business sustaining
costs” that do not get included in value stream costs. This, in turn, helps the businesses to find
better price points for products and do further research into high-cost areas. The bottom line
is that Lean accounting can help business leaders quickly know if they are heading in the right
direction or need to make a change.

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Lean Accounting

The principles and Practices of Lean Accounting are appended in the following table:
Principles Practices
Lean & Simple Business Continuously eliminates waste from the transactions, processes,
Accounting reports, and other accounting methods.
Accounting process Management Control & Continuous improvement.
that supports lean Cost Management
transformation
Customer & supplier value and Cost Management.
Clear & Timely Communi- Financial reporting
cation of information Visual reporting of financial & non-financial performance
measurements.
Decision making
Planning from a lean Planning & Budgeting.
perspective Impact of lean improvement.
Capital planning
Invest in people
Strengthen internal Internal control based on Lean Operational Controls.
accounting control Inventory Valuation.

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Six Sigma

2.5
Six Sigma

No questions have been asked yet from this chapter !

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Six Sigma

NOTES

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 Decision Making Techniques


Chapter 3
Decision Making Techniques

3.1 Decisions Involving Alternative Choices

3.2 Pricing Decisions and Strategies

3.3 Transfer Pricing

3.4 Relevant Cost Analysis

3.5 Target Costing

3.6 Product Life Cycle Costing

3.7 Asset Life Cycle Costing

3.8 Decision Making using Probability

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 Decision Making Techniques
Decisions Involving Alternative Choices

3.1
Decisions Involving Alternative Choices

1 Jun’23
You have been approached by a friend who is seeking your advice as to whether he should give
up his job as an engineer, with a current salary of ₹ 14,800 per month and go into business on
his own, assembling and selling a component which he has invented. He can procure the parts
required to manufacture the component from a supplier.
It is very difficult to forecast the sales potential of the component, but after some research, your
friend has estimated the sales as follows:
(I) Between 600 to 900 components per month at a selling price of ₹ 250 per component.
(ii) Between 901 to 1,250 components per month at a selling price of ₹ 220 per component for
the entire lot.
The costs of the parts required would be 140 for each completed component. However, if more
than 1,000 components are produced in each month, a discount of 5% would be received from
the supplier of parts on all purchases.
Assembly costs would be ₹ 60,000 per month upto 750 components. Beyond this level of
activity assembly costs would increase to ₹ 70,000 per month.
Your friend has already spent ₹ 30,000 on development, which he would write off over the first
five years of the venture.
Required:
(i) Analyse the information stated supra and formulate by way of calculating for each of the
possible sales levels at which your friend could expect to benefit by going into the venture
on his own.
(ii) Formulate by way of calculating the breakeven point of the venture for each of the selling
price and suggest your friend on each level of break-even point.
(iii) Advise your friend as to the viability of the venture.

Evaluation of New Business Break Even Point

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 Decision Making Techniques
Decisions Involving Alternative Choices

Answer
(i) The salary of ₹ 14,800 per month is a benefit foregone by going into business. It should
therefore be considered as a minimum profit which must be earned p.m. from the new
venture in order to be not worse-off than before.
(ii) Sum of ₹ 30,000 spent on the development work of the new venture cannot be recovered
irrespective of the decision and thus it should be ignored.
(iii) Advise on the viability of the venture:
(a) At a selling price of ₹ 250 he will not be at a loss if the demand of the component
exceeds 680 units to 749 units and 770.909 units to 900 units.
(b) At a selling price of ₹ 220, it is not worthwhile to sell if the demand is less than 1000
components without availing a discount of 5%.

2 June'23 MTP Set 1

A Company manufacturing a highly successful line of cosmetics intends to diversify the product
line to achieve fuller utilization of its plant capacity. As a result of considerable research made
the company has been able to develop a new product called ‘EMO’. EMO is packed in tubes of
50 grams capacity and is sold to the wholesalers in cartons of 24 tubes at ₹ 240 per carton. Since
the company uses its spare capacity for the manufacture of EMO, no additional fixed expenses
will be incurred. However, the cost accountant has allocated a share of ₹ 4,50,000 per month
as fixed expenses to be absorbed by EMO as a fair share of the company’s present fixed costs
to the new production for costing purposes. The company estimated the production and sale
of EMO at 3,00,000 tubes per month and on this basis the following cost estimates have been
developed.
₹ per carton
Direct Materials 108
Direct Wages 72
All overheads 54
Total costs 234
After a detailed market survey, the company is confident that the production and sales of EMO
can be increased to 3,50,000 tubes and the cost of empty tubes, purchased from outside will
result in a saving of 20% in material and 10% in direct wages and variable overhead costs of
EMO. The price at which the outside firm is willing to supply the empty tubes is ₹1.35 per empty
tube. If the company desires to manufacture empty tubes in excess of 3,00,000 tubes, new
machine involving an additional fixed overheads ₹ 30,000 per month will have to be installed.
Required:
(i) Discuss with reasons as the Cost Accountant of the company whether it should make or
buy the empty tubes at each of the three volumes of production of EMO namely 3,00,000;
3,50,000 and 4,50,000 tubes.

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Decisions Involving Alternative Choices

(ii) At what volume of sales will it be economical for the company to install the additional
equipment for the manufacture of empty tubes?
(iii) Determine the profitability on the sale of EMO at each, of the aforesaid three levels of
output based on your decision and showing the cost of empty tubes as a separate element
of cost. [3 + 2 + 3 = 8]

Evaluation of Make or Buy

Answer
(i) Make or Buy
Total Cost per tube of EMO:
Per Tube
Direct Material = (108 ÷ 24) = ₹ 4.50
Direct Wages = (72 ÷ 24) = ₹ 3.00
Variable Overheads = {(54 ÷ 24) – (4,50,000 ÷ 3,00,000) = ₹ 0.75

Particulars Total Cost (₹) Tube Cost (₹) Product Cost (₹)
Material 4.50 20% of total cost = 0.90 3.60
Wages 3.00 10% of total cost = 0.30 2.70
Variable Overhead 0.75 10% of total cost = 0.075 0.675
Total 8.25 1.275 6.975
Cost of Making = (3,00,000 × 1.275) = ₹ 3,82,500
Cost of Buying = (3,00,000 × 1.35) = ₹ 4,05,000
Therefore, it is better to make the tubes at 3,00,000 level of output, as it is cheaper than
Buying.
Computation of Cost for additional tubes at the level of 3,50,000 and 4,50,000:
Particulars 3,50,000 4,50,000
Additional tubes needed 50,000 1,50,000
over 3,00,000
Cost of Making (₹) 93,750 2,21,750 [(1,50,000×1.275)+
[(50,000×1.275)+30,000] 30,000]
Cost of Buying (₹) 67,500 (50,000 × 1.35) 2,02,500 (1,50,000 × 1.35)
From the above, it is better to Buy the empty tubes at the level of 3,50,000 and 4,50,000, as
it is deeper than making at both levels.

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 Decision Making Techniques
Decisions Involving Alternative Choices

(ii) The level at which it is beneficial to make the tubes over and above 300000 units
Additional Fixed Overheads = ₹ 30,000
Excess of buying cost over variable cost = (1.35 - 1.275) = ₹ 0.075
Indifference Point = (Additional Fixed Overheads ÷ Excess Buying Cost)
= 30,000 ÷ 0.075
= 4,00,000 units
Therefore, the Company will be justified to install the additional Equipment for the
manufacture of Empty tubes at a sales volume of 400000 units.
(iii) Evaluation of Profitability at the three levels of output
Sl. No. Particulars 3,00,000 3,50,000 4,00,000
(i) Sales @ ₹ 10 p.u. 30,00,000 35,00,000 45,00,000
(ii) Product Cost @ ₹ 20,92,500 24,41,250 31,38,750
6.975 p.u. (3,00,000×6.975) (3,50,000×6.975) (4,50,000×6.975)
(iii) Tube Cost (₹) [As 3,82,500 4,72,500 (3,50,000 6,07,500
per (i)] (3,00,000×1.275) × 1.35) (4,50,000×1.35)
(iv) Fixed cost (₹) 4,50,000 4,50,000 4,50,000
(v) Total Cost (₹) 29,25,000 33,63,750 41,96,250
(vi) Profit (I–V) (₹) 75,000 1,36,250 3,03,750

3 June'23 MTP Set 1

A company makes three products X, Y and Z. All three products use the same type of labour
which is limited to 1,000 hours per month. Individual details are as follows;
Product X Y Z
Contribution/unit ₹ 25 ₹ 40 ₹32
Labour hours/unit 5 6 8
Maximum demand 50 100 400
Suggest the management on the optimal product mix. [4]

Key Factor - Optimal Product Mix

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Decisions Involving Alternative Choices

Answer
Contribution per labour hour of X = ₹ 25 ÷ 5 = ₹ 5 (2nd)
Contribution per labour hour of Y = ₹ 40 ÷ 6 = ₹ 6.67 (1st)
Contribution per labour hour of Z = ₹ 32 ÷ 8 = ₹ 4 (3rd)
Quantities produced
Hours
100 units of Y 600
50 units of X 250
18.75 unit of Z 150 (balance)
1,000
Since it would not be practical to produce 0.75 of a unit, we would produce 18 units of product
Z with 6 spare hours.

4 Postal Test Paper

The income statement of Ashok Gears Ltd. is summarized as below:

Net Revenue ₹ 80,00,000

Less: Expenses (including ₹40,00,000 of Fixed Cost) ₹ 88,00,000
Net Loss ₹ 8,00,000
The manager believes that an increase of ₹20,00,000 as fixed expenditure in advertising outlays
will increase the sales substantially. His plan was approved by the Board.
You are required to calculate:
(i) At what sales volume will the Company have break even?
(ii) What sales volume will result in a Net Profit of ₹ 4,00,000? [4]

Sales Volume to Break Even & to Earn

Profit

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Answer
(i) Computation of Break-Even Sales
Net Revenue = ₹ 80,00,000
Variable Expenses = ₹ (88,00,000 - 40,00,000) = ₹ 48,00,000
Contribution = (80,00,000 – 48,00,000) = ₹ 32,00,000
Contribution Margin Ratio = 32,00,000 ÷ 80,00,000 = 40% (PV Ratio)
Revised Fixed Cost = (Existing 40,00,000 +20,00,000 of Advertising)
= ₹ 60,00,000
Break Even Sales = (Fixed Cost ÷ PV Ratio) = (60,00,000 ÷ 40%)
= ₹ 1,50,00,000
(ii) Computation of sales level to earn a Net Profit of ₹ 4,00,000
Targeted Contribution = (Fixed Cost + Desired Profit)
= (60,00,000 + 4,00,000) = ₹ 64,00,000
Required Sales = (Targeted Contribution ÷ PV Ratio)
= (64,00,000 ÷ 40%)
= ₹ 1,60,00,000
(Explanatory Comment: The problem brings forth the primary application of marginal costing
in manufacturing sector for the purposes of calculating the BEP and profit planning.)

5 MTP Dec’23 Set 1

Forward and Foundry Ltd. is feeling the effects of a general recession in the industry. Its budget
for the coming half year is based on an output of only 500 tonnes of casting a month which is
less than half of its capacity. The prices of casting vary with the composition of the metal and
the shape of the mould, but they average ₹ 175 a tonnes. The following details are from the
Monthly Production Cost Budget at 500 tonnes levels:
Core making Melting and Moulding Cleaning and
₹ Pouring ₹ ₹ Grinding ₹
Labour 10,000 16,000 6,000 4,500
Variable overhead 3,000 1,000 1,000 1,000
Fixed overhead 5,000 9,000 2,000 1,000
18,000 26,000 9,000 6,500
Labour and O.H. rate per direct 9.00 6.50 6.00 5.2
labour hour

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Operation at this level has brought the company to the brink of break-even. It is feared that if
the lack of work continues, the company may have to lay off some of the most highly skilled
workers whom it would be difficult to get back when the volume picks up later on. No wonder,
the work’s Manager at this Juncture, welcomes an order for 90,000 casting, each weighing about
40 lbs., to be delivered on a regular schedule during the next six months. As the immediate
concern of the Works Manager is to keep his work force occupied, he does not want to lose the
order and is ready to recommended a quotation on a no-profit and no-loss basis.
Materials required would cost ₹ 1 per casting after deducting scrap credits. The direct labour
hour per casting required for each department would be:

Core Making 0.09

Melting and pouring 0.15
Moulding 0.06
Cleaning and grinding 0.06
Variable overheads would bear a normal relationship to labour cost in the melting and pouring
department and in the moulding department. In core making, cleaning and grinding however,
the extra labour requirements would not be accompanied by proportionate increases in variable
overhead. Variable overhead would increase by ₹1.20 for every additional labour hour in core
making and by 30 paise for every additional labour hour in cleaning and grinding. Standard
wage rates are in operation in each department and no labour variances are anticipated.
To handle an order as large as this, certain increases in factory overheads would be necessary
amounting to ₹ 1,000 a month for all departments put together. Production for this order would
be spread evenly over the six months period.
You are required to:
(a) Prepare a revised monthly labour and overhead cost budget, reflecting the addition of
this order.
(b) Determine the lowest price at which quotation can be given for 90,000 castings without
incurring a loss.

Lowest price computation Revised Labour & Overhead

Budget

3.8 |CMA Final Strategic Cost Management

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Answer
Computation of Labour and Overhead Rate
Core Melting & Cleaning &
Moulding
making pouring grinding
Labour & overheads (₹) 18,000.00 26,000.00 9,000.00 6,500.00
Labour & overheads per hour (₹) 9.00 6.50 6.00 5.20
No. of hours 2,000.00 4,000.00 1,500.00 1,250.00
Variable overhead per hour (₹) 1.50 0.25 0.67 0.80
Labour rate per hour (₹) 5.00 4.00 4.00 3.60
Hours required for new order 1,350.00 2,250.00 900.00 900.00
Labour cost required for order (₹) 6,750.00 9,000.00 3,600.00 3,240.00
Variable overhead cost for order (₹) 1,620.00 563.00 600.00 270.00
Revised monthly labour and overheads cost budget reflecting the additions of the order
Core Melting & Cleaning &
Moulding Total
Making Pouring Grinding
₹ ₹ ₹ ₹ ₹
Labour 10,000.00 16,000.00 6,000.00 4,500.00
Labour for the order 6,750.00 9,000.00 3,600.00 3,240.00
16,750.00 25,000.00 9,600.00 7,740.00
Variable overheads 3,000.00 1,000.00 1,000.00 1,000.00
Variable overheads for the 1,620.00 563.00 600.00 270.00
order
4,620.00 1,563.00 1,600.00 1,270.00
Fixed cost 5,000.00 9,000.00 2,000.00 1,000.00
Total 26,370.00 35,563.00 13,200.00 10,010.00 85,143.00
Add : additional fixed cost 1,000.00
Total: 86,143.00
Computation of total price for the order
₹
Material (15,000 × 1) 15,000.00
Labour & overheads (86,143 – 59,500) 26,643.00
41,643.00
Total price for the order (41,643 × 6) 2,49,858

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6 Jun'24 MTP Set 1

A manufacturing company currently operating at 80% capacity has received an export order
from Middle East, which will utilise 40% of the capacity of the factory. The order has to be either
taken in full and executed at 10% below the current domestic prices or rejected totally. The
current sales and cost data are given below: [14]

Sales ₹ 16.00 lakhs

Direct Material ₹ 5.80 lakhs
Direct Labour ₹ 2.40 lakhs
Variable Overheads ₹ 0.60 lakhs
Fixed Overheads ₹ 5.20 lakhs

The following alternatives are available to the management:

A. Continue with domestic sales and reject the export order.
B. Accept the export order and allow the domestic market to starve to the extent of excess of
demand.
C. Increase capacity so as to accept the export order and maintain the domestic demand by:
(i) Purchasing additional plant and increasing 10% capacity and thereby increasing fixed
overheads by ₹ 65,000, and
(ii) Working overtime at one and half time the normal rate to meet balance of the required
capacity.
Evaluate each of the above alternatives and suggest the best one.

Export Offer

Answer
Alternative (A): Continue with domestic sales and reject the export order.
Serial Description Workings ₹Lakhs
1 Capacity Given – 80%
2 Sales Given 16.00
3 Variable Costs
(a) Direct Material 5.80
(b) Direct Labour Given 2.40

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(c) Variable Overheads .60

(d) Sub Total 8.80
4 Contribution (2-3) 7.20
5 Fixed Costs Given 5.20
6 Profit (4-5) 2.00
Alternative (B): Accept the export order and allow the domestic market to starve to the extent
of excess of demand
This alternative envisages utilization of 40% of the capacity for the export order and 60% of
the capacity for domestic market. Further, the export order is to be executed at 10% below the
current domestic prices i.e.., (100- 10) % = 90% of the price. Accordingly:
Sales at 100% Capacity = (16 ÷ 80%) = ₹20 Lakhs
Value of the export order = (40% of Capacity × 90% of the Price) = (20 × 40% × 90%) = ₹ 7.20
lakhs.
Value of the domestic sales = (20 × 60%) = ₹ 12.00 lakhs.
Serial Description Workings ₹Lakhs
1 Capacity Export 40% + Domestic 60%
2 Sales 7.20+12.00 19.20
3 Variable Costs
(a) Direct Material (5.80 / 80%) × 100% 7.25
(b) Direct Labour (2.40 / 80%) × 100% 3.00
(c) Variable Overheads (0.60 / 80%) × 100% 0.75
(d) Sub Total 11.00
4 Contribution (2-3) 8.20
5 Fixed Costs Given 5.20
6 Profit (4-5) 3.00
Alternative (C): Increase capacity so as to accept the export order and maintain the domestic
demand by:
(i) Purchasing additional plant and increasing 10% capacity and thereby increasing fixed
overheads by ₹ 65,000, and
(ii) Working overtime at one and half time the normal rate to meet balance of the required
capacity.
Serial Description Workings ₹Lakhs
1 Capacity Export 40% + Domestic 80%
2 Sales 7.20 + 16.00 23.20
3 Variable Costs

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(a) Direct Material (5.80 / 80%) × 120% 8.70

(b) Direct Labour (2.40 / 80%) × 120% 3.60
(c) Variable Overheads (0.60 / 80%) × 120% 0.90
(d) Overtime Premium [Balance capacity (2.40 / 80%) × 10% × 50% 0.15
of 10%]
(e) Sub Total 13.35
4 Contribution (2-3) 9.85
5 Fixed Costs (5.20+0.65) 5.85
6 Profit (4-5) 4.00
Suggestion: Alternative (C) with the highest profit of ₹4.00 lakhs works out to be the best.

7 Jun'24
ZOYAN Limited is currently manufacturing 5000 units of the product ‘ZN 100’ annually making
full use of its machine capacity. The selling price and total costs per unit associated with ‘ZN
100’ are as follows:
₹ ₹
Selling price per unit 900
Costs per unit:
Direct material 200
Variable machine operating cost 150
(₹ 100 per machine hour)
Manufacturing overhead cost 180
Marketing and administrative cost 200 730
Operating income per unit of ‘ZN 100’ 170
ZOYAN Limited can sell additional 3000 units of ‘ZN 100’, if it can outsource those additional
units.
AOB Limited, a supplier of quality products, has agreed to supply up to 6000 units of ‘ZN 100’
per year at a price of₹ 650 per unit delivered at ZOYAN’s factory.
ZOYAN Limited can use its facility to produce an alternative product ‘ZN 200’. It can sell up to
12000 units of ‘ZN 200’ annually. Estimated selling price and total costs per unit to manufacture
and sell 12000 units of ‘ZN 200’ are as follows:
₹ ₹
Selling price per unit 600
Costs per unit:
Direct material 200

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Variable machine operating cost 50

(₹ 100 per machine hour)
Manufacturing overhead cost 60
Marketing and administrative cost 110 420
Operating income per unit of ‘ZN 200’ 180
Other information pertaining to the operation of Zoyan Limited is as follows:
(i) ZOYAN Ltd., use machine hours as the basis for assigning fixed manufacturing overhead.
The fixed manufacturing overhead for the current year is ₹ 3,00,000. These costs will not be
affected by the product-mix decision.
(ii) Variable marketing and administrative cost per unit for various products are as follows: .

Manufactured ‘ZN 100’ ₹80

Purchased ‘ZN 100’ ₹ 40
Manufactured ‘ZN 200’ ₹60
Fixed marketing and administrative costs for the current year is ₹ 6,00,000. These costs will be
affected by the product mix decision.
Required :
(a) Analyse the Contribution per unit between manufactured ‘ZN 100’ and manufactured ‘ZN
200’.
(b) Analyse the Contribution per unit between manufactured ‘ZN 100’ and purchased ‘ZN 100’.
(c) Calculate the quantity of each product that ZO Y AN Limited should manufacture and/or
purchase to maximize operating income. [14]

Subcontracting - Key Factor

Answer
(a) Contribution per unit Manufactured “ZN 100” = ₹ 350 Manufactured “ZN 200” = ₹ 255
(b) Contribution per unit Manufactured “ZN 100” = ₹ 350 Purchased “ZN 100” = ₹ 210
(c) Quantity of each product that ZOYAN Limited should manufacture and / or purchase to
maximize operating income.
Manufactured “ZN 200” 12,000 units
Manufactured “ZN 100” 1,000 units
Purchased “ZN 100” 6,000 units

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Pricing Decisions and Strategies

3.2
Pricing Decisions and Strategies

No questions have been asked yet from this chapter !

3.14 |CMA Final Strategic Cost Management

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Transfer Pricing

3.3
Transfer Pricing

1 June'23 MTP Set 2

Kobe Co manufactures electronic mobility scooters. The company is split into two divisions: the
scooter division (Division S) and the motor division (Division M). Division M supplies electronic
motors to both Division S and to external customers. The two divisions run as autonomously
as possible, subject to the group’s current policy that Division M must make internal sales first
before selling outside the group; and that Division S must always buy its motors from Division
M. However, this company policy, together with the transfer price which Division M charges
Division S, is currently under review.
Details of the two divisions are given below.
Division S
Division S’s budget for the coming year shows that 35 000 electronic motors will be needed. An
external supplier could supply these to Division S for ₹ 800 each.
Division M
Division M has the capacity to produce a total of 60 000 electronic motors per year. Details of
Division M’s budget, which has just been prepared for the forthcoming year, are as follows:

Budgeted sales volume (units) 60 000

Selling price per unit for external sales of motors ₹ 850
Variable costs per unit for external sales of motors ₹ 770
Maximum external demand for the motors is 30 000 units per year.
Required:
Assuming that the group’s current policy could be changed, determine, using suitable calcula-
tions, the number of motors which Division M should supply to Division S in order to maximize
group profits. Calculate the transfer price or prices at which these internal sales should take
place. Note: All relevant workings must be shown
The variable cost per unit for motors sold to Division S is ₹ 30 per unit lower due to cost savings
on distribution and packaging. [4]

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Transfer Pricing

No. of units to be transferred, Transfer

Price

Answer
Division M generates a contribution to profit of ₹ 80 (₹ 850 – ₹ 770) for the group as a whole for
every motor sold externally. The incremental cost for every motor which Division S has to buy
from outside of the group is ₹ 60 per unit (₹ 800 – [₹ 770 – ₹ 30]). Therefore, from the group’s
perspective as many external sales as possible should be made before any internal transfers are
made. Division M’s total capacity is 60,000 units so 30,000 units should be sold externally and
the remaining 30,000 units transferred to Division S. From the group’s perspective, the cost of
supplying these internally is ₹ 60 per unit (₹ 800 – ₹ 740) cheaper than buying externally. Division
S’s remaining demand of 5000 units should be bought form the external supplier at ₹ 800 per
unit. Therefore, the group’s current policy will need to be changed. In order to determine
the transfer price which should be set for the internal sales of 30,000 motors, the perspective of
both divisions should be considered. Division M can only sell the motors to Division S and the
lowest price it would be prepared to charge is the marginal cost of ₹ 740 of making these units
but it will also wish to make a profit on each unit transferred. From Division S’s perspective it can
buy as many external motors as it needs from between ₹ 740 and ₹ 800. The total group profit
will be the same irrespective of where in this range the transfer price is set outside the group at
a price of ₹ 800 per unit so this will be the maximum price which it is prepared to pay. Therefore,
the transfer price should be set somewhere between ₹ 740 and ₹ 800. The total group profit
will be the same irrespective of where in this range the transfer price is set.

2 Postal Test Paper, June'23 MTP Set 2

AB Ltd. Has two divisions Alfa & Beta. Alfa produces components, two units of which are required
for one unit of final product produced by Beta. Alfa has a capacity to produce 20000 units and
entire quantity is supplied to Beta @ ₹ 200 per unit. Variable cost component at Alfa is ₹ 190 &
fixed cost ₹ 20 per unit. For final product of Beta, per unit variable cost excluding component is
₹ 700, fixed cost ₹ 200 and selling price is ₹ 1500.
Alfa has placed a proposal for increasing the transfer price to ₹ 220 i.e. the market price. Facility
at Alfa can be rented out @ ₹ 3.00 Lacs p.a. Manager at Alfa wants to opt for this alternative
Beta can buy this component from outside market @ ₹ 210
If capacity of Alfa is augmented to 40000 units with an additional investment of ₹ 15 lacs, it can
sell 20000 units to external market and balance to Beta @ ₹ 210 per unit. Fixed cost for Alfa will
be up by ₹ 1.00 lac.

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Transfer Pricing

Evaluate and give your opinion under the following decision options.
(a) Facility of Alfa is rented out and Beta buys from market @ ₹ 210 per unit
(b) Alfa sells to outside market @ ₹ 220 and Beta buys @ 210 per unit from market
(c) Capacity enhancement with cost of capital @ 12 % [8]

Evaluation of transfer Cost of Capital Effect

Answer
Present position on transfer of component @ ₹ 200:
Particulars Division Alfa Division Beta
Units Sold 20000 10000
Selling Price/unit ₹ 200 ₹ 1,500
Variable Cost/unit ₹ 190 ₹ 1,100
Contribution /unit ₹ 10 ₹ 400
Fixed Cost/unit ₹ 20 ₹ 200
Profit /unit ₹ -10 ₹ 200
Total Profit/Loss ₹ -2,00,000 ₹ 20,00,000
Overall profit for the Company is ₹18,00,000.
(a) Facility of Alfa is rented out and beta buys from market @ ₹ 210 per unit
Particulars Division Alfa Division Beta
Units Sold 10000
Selling Price/unit ₹ 1,500
Variable Cost/unit ₹ 1,120
Contribution /unit ₹ 380
Total Contribution ₹ 38,00,000
Fixed Cost ₹ 20,00,000
Rental Income ₹ 3,00,000
Total Profit ₹ 3,00,000 ₹ 18,00,000
Overall Profit for the Company is ₹ 21,00,000

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Transfer Pricing

(b) Alfa sells to outside market @ ₹ 220 and Beta buys @ ₹ 210 per unit from market.
Particulars Division Alfa Division Beta
Units Sold 20000 10000
Selling Price/unit ₹ 220 ₹ 1,500
Variable Cost/unit ₹ 190 ₹ 1,120
Contribution /unit ₹ 30 ₹ 380
Total Contribution ₹ 6,00,000 ₹ 38,00,000
Fixed Cost ₹ 4,00,000 ₹ 20,00,000
Total Profit ₹ 2,00,000 ₹ 18,00,000
Overall Profit for the Company is ₹ 20,00,000
(c) Capacity enhancement at the Cost of Capital @ 12 %
Division Alfa Division Alfa
Particulars Division Beta
(Sales) (transfer)
Units Sold 20000 20000 10000
Selling Price/unit ₹220 ₹ 210 ₹ 1,500
Variable Cost/unit ₹190 ₹ 190 ₹ 1,120
Contribution /unit ₹30 ₹ 20 ₹ 380
Total Contribution ₹ 6,00,000 ₹ 4,00,000 ₹ 38,00,000
Fixed Cost ₹ 4,00,000 ₹ 1,00,000 ₹ 20,00,000
Cost of Capital ₹ 1,80,000
Total Profit ₹2,00,000 ₹ 1,20,000 ₹ 18,00,000
Overall profit for the Company is ₹ 21,20,000.
Since overall profit is the highest in Option “C”, it can be adopted.

3 Postal Test Paper

Your company fixes the inter-divisional transfer prices for its products on the basis of cost, plus
a return on investment in the division. The Budget for Division A for 2021-22 appears as under:
Particulars ₹
Fixed Asset 5,00,000
Current Asset 3,00,000
Debtors 2,00,000
Annual Fixed cost of the division 8,00,000
Variable cost per unit of product ₹ 10 per unit
Budgeted Volume 4,00,000 units per year
Desired ROI 28%

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Transfer Pricing

Determine the transfer price for Division A. [6]

Transfer Price Based on ROI

Answer
Particulars ₹
Variable Cost 10.00
Fixed Cost per unit 8,00,000 ÷ 4,00,000 2.00
10 , 00 , 000 × 28%
Required Return 0.70
4 , 00 , 000
Total cost or Transfer price 12.70

4 MTP Dec'23 Set 1

A Company with two manufacturing divisions is organised on profit centre basis. Division ‘A’ is
the only source for the supply of a component that is used in Division B in the manufacture of
a product KLIM. One such part is used in each unit of the product KLIM. As the demand for the
product is not steady. Division B can obtain orders for increased quantities only by spending
more on sales promotion and by reducing the selling prices. The Manager of Division B has
accordingly prepared the following forecast of sales quantities and selling prices.
Sales units per day Average Selling price per unit of KLIM ₹
1,000 5.25
2,000 3.98
3,000 3.30
4,000 2.78
5,000 2.40
6,000 2.01
The manufacturing cost of KLIM in Division B is ₹3,750 for first 1,000 units and ₹750 per 1,000
units in excess of 1,000 units.
Division A incurs a total cost of ₹1,500 per day for an output to 1,000 components and the total
costs will increase by ₹900 per day for every additional 1,000 components manufactured. The
Manager of Division A states that the operating results of his Division will be optimised if the
transfer price of the component is set at ₹1.20 per unit and he has accordingly set the aforesaid
transfer price for his supplies of the component to Division B.

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Transfer Pricing

You are required:

(a) Prepare a schedule showing the profitability at each level of output for Division A and
Division B.
(b) Find the profitability of the company as a whole at the output level which
(i) Division A’s net profit is maximum.
(ii) Division B’s net profit is maximum.
(c) If the Company is not organised on profit centre basis, what level of output will be chosen
to yield the maximum profit.

Divisional and Overall Profitability Profit Centre & Cost Centre

basis

Answer
(i) Statement showing profit of division A:
Sale per day Sale value Cost Profit/(loss)
(units) ₹ ₹ ₹
1,000 1,200 1,500 (300)
2,000 2,400 2,400 -
3,000 3,600 3,300 300
4,000 4,800 4,200 600
5,000 6,000 5,100 900
6,000 7,200 6,000 1,200
Profit of division B:
Sales Transfer price Other manufacturing cost Total cost Profit/(loss)
No of units
₹ ₹ ₹ ₹ ₹
1,000 5,250 1,200 3,750 4,950 300
2,000 7,960 2,400 4,500 6,900 1,060
3,000 9,900 3,600 5,250 8,850 1,050
4,000 11,120 4,800 6,000 10,800 320
5,000 12,000 6,000 6,750 12,750 (750)
6,000 12,060 7,200 7,500 14,700 (2,640)

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 Decision Making Techniques
Transfer Pricing

(ii) Profitability of the company at the output level where division A’s net profit is
maximum:
₹
Profit of division A at 6,000 units 1,200
Profit of division B at 6,000 units (2,640)
Profit /(loss) (1,440)
Division B’s net profit is maximum:
Profit of division A at 2,000 units -
Profit of division B at 2,000 units 1,060
1,060
(c) When the company is not organized on profit centre basis Profit at different levels of
output
Division A Division B Total
Units
₹ ₹ ₹
1,000 (300) 300 —
2,000 — 1,060 1,060
3,000 300 1,050 1,350
4,000 600 320 920
5,000 900 (750) 150
6,000 1,200 (2,640) (1,440)
Best output level is 3,000 units

5 June'23 MTP Set 1

SBA is a company that produces televisions and components for televisions. The company has
two divisions, Division S and Division B. Division S manufactures components for televisions.
Division S sells components to Division B and to external customers. Division B uses five of the
components in each of the televisions that it manufactures, and sells televisions directly to
external customers.
Division S

Budgeted Variable manufacturing cost per component ₹

Direct Material 14
Direct Labour 18
Variable Overhead 12

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Transfer Pricing

The following information relating to next year is also available

Fixed Cost ₹ 5,60,000

Production Capacity 175000 components
External demand 150000 components
Potential demand from Division B 80000 components
The anticipated external market price for a component is ₹ 50
Division B

Sales Price ₹ 450

Budgeted variable manufacturing cost per television
Direct Material ₹ 40
Direct Labour ₹ 62
Variable overhead ₹16
In addition to the variable costs above, each television produced needs five components. Fixed
costs are budgeted to be ₹14,60,000 for next year. Annual sales of televisions are expected to
be 16,000 units.
Transfer pricing policy
Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components externally.
Division B is allowed to purchase components from Division S or from external suppliers.
Required:
1. Assuming that Division B buys all the components it requires from Division S: Produce
a profit statement for each division detailing sales and costs, showing external sales and
internal company transfers separately where appropriate.
2. A specialist external supplier has approached Division B and offered to supply 80,000
components at a price of ₹42 each. The components fulfill the same function as those
manufactured by Division S. The manager of Division B has accepted the offer and has
agreed to buy all the components it requires from this supplier.
Develop and submit a revised profit statement for each division and for the total SBA
company
3. Discuss the potential implications for SBA of outsourcing the production of one type of
component that it manufactures [8]

Divisional and Overall Profitability

Statement

3.22 |CMA Final Strategic Cost Management

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Transfer Pricing

Answer
(1) If Division B buys all of its components from division S (80000) then division S will sell its
remaining capacity (95000) on the external market. This will result in unfulfilled demand
of 55000 components (total demand of 150000 295000) in the external market. In terms
of the transfer price 55000 of the components transferred will have an opportunity cost
equal to the lost sales revenue of ₹ 50. This could be restated as variable cost (₹ 44) + lost
contribution (₹ 6) giving a transfer price of ₹ 50. The remaining 25 000 units transferred to
division B do not have an opportunity cost so the relevant cost is the marginal cost of ₹ 44.
The profit statements will be as follows:
S (₹) B (₹) Working
Sales
Internal 38,50,000 1
External 47,50,000 72,00,000 2
86,00,000 72,00,000
Variable costs
Components
Internal 0 3
External 77,00,000 4
Other Variable 0 18,88,000 5
Fixed Costs 5,60,000 14,60,000
Profit 3,40,000 2,000
Workings:
1 (55,000 × ₹ 50) + (25,000 × ₹ 44) = ₹ 38,50,000
2 95,000 × ₹ 50) + ₹ 47,50,000 Division S, 16,000 × ₹ 450 = ₹ 72,00,000
3 Same as division S internal sales revenue
4 1,75,000 × ₹ 44 = ₹ 77,00,000
5 16,000 × ₹ 118 = ₹ 18,88,000
(2)
S (₹) B (₹) SBA (₹) Working
Sales
Internal 0 0 0
External 75,00,000 72,00,000 1,47,00,000 1
75,00,000 72,00,000 1,47,00,000
Variable costs
Components
Internal 0 0 0
External 66,00,000 33,60,000 99,60,000 2

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Transfer Pricing

Other Variable 0 18,88,000 18,88,000 3

Fixed Costs 5,60,000 14,60,000 20,20,000
Profit 3,40,000 4,92,000 8,32,000
Workings:
1 Division S = 1,50,000 maximum external demand × ₹ 50;
division B = 16,000 × ₹ 450 = ₹ 72,00,000
2 Division S = 1,50,000 × ₹ 44 variable cost = ₹ 66,00,000,
division B = 80,000 × ₹ 42 = ₹ 33,60,000
3 16,000 × ₹ 118 = ₹ 18,88,000.
(3) The motivation for outsourcing is that the external supplier may be able provides the
component at a lower cost than SBA is currently incurring internally. Specialist component
manufacturers may be more efficient arising from utilizing the latest manufacturing
technology. The major disadvantage of outsourcing is that there is a potential loss of
control and a danger that SBA will be at the mercy of the supplier when negotiating a new
contract. This danger will be minimized if there are many other suppliers that can provide
the component at a competitive price. A close relationship will be required between
the two organizations requiring knowledge of lead times and the demand cycle at SBA.
Outsourcing the manufacture of components may also result in spare capacity at SBA. Can
this be utilized or can cost savings be achieved from reducing capacity?
S (₹) B (₹) SBA (₹) Working
Sales
Internal 0 0 0
External 75,00,000 72,00,000 1,47,00,000 1
75,00,000 72,00,000 1,47,00,000
Variable costs
Components
Internal 0 0 0
External 66,00,000 33,60,000 99,60,000 2
Other Variable 0 18,88,000 18,88,000 3
Fixed Costs 5,60,000 14,60,000 20,20,000
Profit 3,40,000 4,92,000 8,32,000

3.24 |CMA Final Strategic Cost Management

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Transfer Pricing

6 Dec’23
Division A of DOXIN Ltd. has been given a budgeted target of selling 2,00,000 components
TOM 22 it manufactures at a pricc which would fetch a return of 25% on the average assets
employed by it. The following figures are relevant:

Fixed Overhead ₹ 4,00,000

Variable Cost ₹ 1 per unit
Average assets:
Sales debtors 2,00,000
Stocks 6,00,000
Plant and other assets 4,00,000
However, the marketing department of the company finds out by a survey that the maximum
number of TOM 22, the market can take, at the Pproposed price is only 1,40,000 units,
Fortunately, Division B is willing 1o purchase the balance 60,000 units. The Manager, the
Manager, Division A is willing to sell to Division B at a concessional price of ₹ 4 per unit. But the
manager Division B, is ready to pay ₹ 2.25 only per unit, as he feels he can himself in his Division
at that price, make TOM 22 in his Division at that price.
Rather than sell to Division B at ₹ 2.25, the Manager, Division A, feels he will restrict the activity
of his Division to the manufacture and sale of 1,40,000 components only. By this, he could
reduce ₹ 80,0000 in stocks, ₹ 1,20,000 of plant and other assets and ₹ 40,000 in selling and
administration expenses (fixed in nature).
Required:
As a cost and management accountant, you are:
(i) Asked to make comparative study of proposals of Divisional Manager and
(ii) Justify that selling 60,000 TOM 22 to Division B at ₹ 2.25 per unit would be in the interest
of the organization,

Comparative Study of proposal,

Evaluation of Transfer

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Answer
Sales price per unit ₹ 450
Transfer to Division Band Sale to outside
sale to outside parties parties only
Sales (units) 2,00,000 1,40,000
₹ ₹
Sales value (140000 units) 6,30,000 6,30,000
(60000 units) 135000 Nil
7,65,000 6,30,000
Less: Variable cost 2,00,000 1,40,000
Contribution 5,65,000 4,90,000
Less: Fixed overhead 4,00,000 3,60,000
Net profit 1,65,000 1,30,000
Average assets employed 12,00,000 2,80,000
Return on investment 13.75% 46.43%
Justification: If the component is transferred to Division B as well as sold to outside parties,
it is more profitable as the contribution and net profit are more than the existing proposal.
Therefore selling the components to Division B at ₹ 2.25 per unit is in the overall interest of the
company is justified.

7 Jun'24 MTP Set 1

Division A is a profit centre which produces three products X, Y and Z. Each product has an
external market. The details are as follows:
X Y Z
External market price per unit (₹) 48 46 40
Variable cost of production in division A (₹) 33 24 28
Labour hours required per unit in division A 3 4 2
Product Y can be transferred to Division B, but the maximum quantity that might be required
for transfer is 300 units of Y.
X Y Z
The maximum external sales are: 800 Units 500 Units 300 Units
Instead of receiving transfers of Product Y from Division A, Division B could buy similar product
in the open market at a slightly cheaper price of ₹ 45 per unit.

3.26 |CMA Final Strategic Cost Management

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Transfer Pricing

Compute the transfer price for each unit, for 300 units of Y, if the total labour hours available in
Division A are?
(a) 3800 hours
(b) 5600 hours. [7]

TP for Goal Congruency - with Key Factor

Answer
Computation of contribution per labour hour from external sales:
X Y Z
Market price (₹) 48 46 40
Variable cost (₹) 33 24 28
Contribution (₹) 15 22 12
Labour hours required 3 4 2
Contribution per labour hour (₹) 5 5.50 6
Ranking III II I
(a) Computation of transfer price when the capacity is 3800 hours:
Allocation of Hours if the capacity is 3800 labour hours
X Y Z
External Sales (Units) 800 500 300
Labour hours required per Unit 3 4 2
Hours needed for External Sales 2400 2000 600
Allocation of Hours if the capacity is 3800 hours as 1200 2000 2400
per ranking (Bal. fig.)
The existing capacity is not sufficient, even, to produce the units to meet the external sales.
In order to transfer 300 units of Y, 1200 hours are required in which division A has to give
up the production of X [since lowest ranking] to the extent of 1200 hours (1200 hours ÷ 3
labour p.a. =400 units).
Transfer price for 300 units of Y will, therefore, work out to
Variable Cost of Y (₹ 24) + [{(Contribution loss for X (₹ 5 × 1200 hours = 6,000)} ÷300] = 24
+ 20 = ₹ 44

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(b) Computation of transfer price when the capacity is 5600 labour hours:
Allocation of Hours if the capacity is 5600 hours
X Y Z
External Sales (Units) 800 500 300
Labour hours required per Unit 3 4 2
Hours needed for External Sales 2400 2000 600
Balance of hours (Surplus) 600
Labour Hours needed for 300 units of Y = 300 × 4 = 1200
Surplus Labour Hours Available = 5600 – 5000 = 600
Short fall in Labour Hours = 1200 – 600 = 600
The short fall 600 hours may have to be diverted from X resulting in a contribution loss of
₹3,000 (600 × ₹5)
Transfer price for 300 units of Y will, therefore, work out to
Variable Cost of Y (₹24) + [{Contribution loss for X (₹5 × 600 hours = 3,000)} ÷ 300] = ₹24 +
₹10 = ₹34

8 Jun'24
MN Co. has profit centre divisions EXE and WYE making products X and Y respectively. Each unit
of Y requires one unit of X and WYE can sell a maximum of 1,00,000 units in the external market
at a selling price of ₹ 200 per unit. EXE has the capacity to produce 2,00,000 units of X. The
variable cost per unit is ₹ 15. Fixed costs are ₹ 15,00,000. EXE can sell the following quantities in
the external market:
Price per unit Demand units
₹ 25 160000 units
₹ 30 175000 units
₹ 35 150000 units
₹ 40 125000 units
₹ 45 100000 or less
WYE can purchase its requirement from the external market at ₹ 35 per unit.
Required:
(i) Assess what will be the best strategy for EXE, if no demand from WYE.
(ii) Calculate the minimum transfer price that EXE will agree if EXE has to supply 1,00,000
units to WYE.
(iii) If WYE agrees to accept the partial supplies, assess and recommend what will be the EXE’s
best strategy under no compulsion to transfer the maximum units? Calculate the quantity

3.28 |CMA Final Strategic Cost Management

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 Decision Making Techniques
Transfer Pricing

that EXE will agree to transfer and the corresponding price, assuming both divisions agree
to share the benefits of transfer equally. [7]

Best Strategy, Minimum TP, Quantity of

Transfer

Answer
(i) If there is no demand from WYE, the optimal strategy for EXE would be to manufacture
1,25,000 units for external demand where it can achieve the maximum contribution of ₹
31,25,000.
(ii) Minimum transfer price = ₹ 16.25 per unit
If EXE is strong enough, it can demand a price of ₹ 35 which WYE will be paying to outside
suppliers.
(iii) EXE can supply 1,25,000 units for external demand and earn the maximum contribution ₹
31,25,000. Balance 75,000 units can be offered to WYE at the variable cost of ₹ 15.
WYE will not pay anything above ₹ 35 per unit EXE will not accept anything below ₹ 15 per
unit.
Total benefit to be shared equally between X and Y = ₹ 20 per unit
∴ Transfer price per unit, will be = ₹ 25, so that WYE benefits by ₹ 10 and EXE also gets
additional contribution of ₹ 10 per unit transferred.
Total units to be transferred = 75,000 units.

9 MTP Dec’24 Set 1

Transferor Ltd. has two processes, Preparing and Finishing. The normal output per week is 7,500
units (Completed) at a capacity of 75%. Transferee Ltd. had production problems in preparing
and requires 2,000 units per week of prepared material for their finishing processes. The existing
cost structure of one prepared unit of Transferor Ltd. at existing capacity is as follows:
Material = ₹2.00 (variable 100%) Labour = ₹2.00 (Variable 50%) Overhead = ₹4.00 (variable 25%)
The sale price of a completed unit of Transferor Ltd is ₹16 with a profit of ₹4 per unit.
Required:
Construct the effect on the profits of Transferor Ltd., for six months (25 weeks) of supplying
units to Transferee Ltd. with the following alternative transfer prices per unit:
(i) Marginal Cost

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(ii) Marginal Cost + 25%

(iii) Marginal Cost + 15% Return on capital (assume capital employed as ₹20 lakhs)
(iv) Existing Cost
(v) Existing Cost + a portion of profit on the basis of (Preparing cost ÷ Total Cost) x Unit Profit)
(vi) At an agreed market price of ₹8.50. Assume no increase in fixed cost. [7]

Effect of Profits Various TP

Answer
Evaluation of the effect of transfer of 2,000 units per week for 25 weeks on profit
Sl. Alternative TP (₹) Effect on Profit (₹)
Per Unit (TP For 50,000 units
– Profit) (WN 2)
(i) Marginal Cost 4.00 (4.00 - 4.00) = 0 Nil
(Working Note 1)
(ii) Marginal Cost + 25% 4.00 + 25% = 5.00 (5.00 - 4.00) = 1.00 50,000 × 1 =
(Working Note 3) ₹50,000
(iii) Marginal Cost + 15% ROI 4.00 + 3.00 = 7.00 (7.00 - 4.00) = 3.00 50,000 × 3 =
(Working Note 3) ₹1,50,000
(iv) Existing Cost 8.00 (8.00 - 4.00) = 4.00 50,000 × 4 = ₹
(Working Note 1) 2,00,000
(v) Existing Cost + Proportion- 8.00 + 2.67 = 10.67 (10.67 - 4.00) = 6.67 50,000 × 6.67 =
ate Profit (Working Note 4) ₹3,33,500
(vi) Agreed Market Price 8.50 (8.50 - 4.00) = 4.50 50,000 × 4.50 =
₹2,25,000
Working Note 1
Existing Cost Structure One Prepared Unit of Preparing Unit
Serial Element Workings (₹)
1 Variable (Marginal) Costs
(i) Material (100%) (2.00 × 50%) 2.00
(ii) Labour (50%) (4.00 × 25%) 1.00
(iii) Overheads (25%) 1.00
Total (i to iii) 4.00

3.30 |CMA Final Strategic Cost Management

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Transfer Pricing

2 Fixed Costs
(i) Labour (50%) (2.00 × 50%) 1.00
(ii) Overheads (75%) (4.00 × 75%) 3.00
Total (i to ii) 4.00
3 Total Preparing Cost (1 + 2) 8.00
Working Note 2
Units to be Transferred in 25 weeks = 25 × 2,000 = 50,000
Working Note 3
Capital Employed = ₹20,00,000
ROI per annum @ 15% = 20,00,000 × 15% = ₹3,00,000
ROI for 6 months = {(3,00,000 ÷ 12) × 6} = ₹1,50,000
ROI per Unit = (1,50,000 ÷ 50,000) = ₹3.00
Working Note 4
Sale Price of the Completed Unit = ₹16.00 Profit per Unit – ₹4.00
Cost per Completed Unit = (16.00 – 4.00) = 12.00
Proportionate Profit for Prepared Unit = {(Preparing cost ÷ Total Cost) × Unit Profit)
= {(8 ÷ 12) × 4} = ₹2.67
(Explanatory Comment: The problem highlights different methods of adopting the transfer
price within an organisation)

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3.4
Relevant Cost Analysis

1 June'23 MTP Set 1

Mr Belle has recently developed a new improved video cassette and shown below is a summary
of a report by a firm of management consultants on the sales potential and production costs
of the new cassette. Sales potential: The sales volume is difficult to predict and will vary with
the price, but it is reasonable to assume that at a selling price of ₹ 10 per cassette, sales would
be between 7,500 and 10,000 units per month. Alternatively, if the selling price was reduced
to ₹ 9 per cassette, sales would be between 12,000 and 18,000 units per month. Production
costs: If production is maintained at or below 10,000 units per month, then variable manufac-
turing costs would be approximately ₹ 8.25 per cassette and fixed costs ₹ 12,125 per month.
However, if production is planned to exceed 10,000 units per month, then variable costs would
be reduced to ₹ 7.75 per cassette, but the fixed costs would increase to ₹ 16,125 per month. Mr.
Belle has been charged ₹ 2,000 for the report by the management consultants and, in addition,
he has incurred ₹ 3,000 development costs on the new cassette. If Mr. Belle decides to produce
and sell the new cassette it will be necessary for him to use factory premises which he owns,
but are leased to a colleague for a rental of ₹400 per month. Also he will resign from his current
post in an electronics firm where he is earning a salary of ₹ 1,000 per month.
Required:
(a) Draw inference from the information given above and identify the following
(i) an opportunity cost,
(ii) a sunk cost.
(b) Making whatever calculations you consider appropriate, analyze the report from the
consultants and advise Mr. Belle of the potential profitability of the alternatives shown in
the report.
(c) You are required to analyze the basis on which the above decisions are applied and state
the assumptions considered necessary or matters which may require further investigation
or comment should be clearly stated. [2 + 4 + 2 = 8]

Opportunity Cost, Sunk Cost - Evaluation

based on BES & MOS

3.32 |CMA Final Strategic Cost Management

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Relevant Cost Analysis

Answer
(a) (i) The opportunity costs of producing cassettes are the salary forgone of ₹ 1,000 per
month and the rental forgone of ₹ 400 per month.
(ii) The consultant’s fees and development costs represent sunk costs.
(b) The following information can be obtained from the report.
₹ 10 Selling price ₹ 9 selling price
Sales quantity 7500 – 10000 units 12000 – 18000 units
Fixed costsa ₹ 13,525 ₹ 17,525
Profit at maximum salesb ₹ 3,975 ₹ 4,975
Profit/(Loss) at minimum salesc (₹ 400) (₹ 2,525)
Break-even pointd 7729 units 14020 units
Margin of safety:
Below maximum 2271 units 3,980 units
Above minimum 229 units 2020 units
Notes:
(a) Fixed production cost + ₹ 1,400 opportunity cost
(b) (10000 units × ₹ 1.75 contribution) – ₹ 13,525 fixed costs = ₹ 3,975 profit
(18000 units × ₹ 1.25 contribution) – ₹ 17,525 fixed costs = ₹ 4,975 profit
(c) (7500 units × ₹ 1.75 contribution) – ₹ 13,525 fixed costs = ₹ 400 loss
(12000 units × ₹ 1.25 contribution) – ₹ 17,525 fixed costs = ₹ 2,525 loss
(d) Fixed costs / contribution per unit
Conclusions
(i) The ₹ 10 selling price is less risky than the ₹ 9 selling price. With the ₹ 10 selling price,
the maximum loss is lower and the break-even point is only 3% above minimum sales
(compared with 17% for a ₹ 9 selling price).
(ii) The ₹ 9 selling price will yield the higher profits if maximum sales quantity is achieved.
(iii) In order to earn ₹ 3975 profits at a ₹ 9 selling price, we must sell 17,200 units (required
contribution of 17,525 fixed costs plus ₹ 3,975 divided by a contribution per unit of ₹
1.25).
(c) Additional information required:
These are the assumptions
(i) Details of capital employed for each selling price.
(ii) Details of additional finance required to finance the working capital and the relevant
interest cost so as to determine the cost of financing the working capital.
(iii) Estimated probability of units sold at different selling prices.
(iv) How long will the project remain viable?
(v) Details of range of possible costs. Are the cost figures given in the question certain?

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2 June'23 MTP Set 2

ASA LLP has been approached by a customer who would like a special job to be done for him
and is willing to pay ₹ 22,000 for it. The job would require materials A, B, C and D. the details of
the material are given below;
Total units Units already Book Value of units in Realisable Value Replacement Cost
Materials
required in inventory stock (₹ per unit) (₹ per unit) (₹ per unit)
A 1000 0 - - 6
B 1000 600 2 2.5 5
C 1000 700 3 2.5 4
D 200 200 4 6 9
The following information are also furnished.
(i) Material B is used regularly by X Ltd. and if stocks were required for this job, they would
need to be replaced to meet other production demand.
(ii) Materials C and D are in stock as the result of previous excess purchase and they have a
restricted use. No other use could be found for material C but material D could be used
in another job as substitute for 300 units of material which currently costs ₹ 5 per unit (of
which the company has no units in stock at the moment.)
(iii) Assume all other expenses on this contract to be specially incurred besides the relevant
cost of material is ₹ 550.
Analyze the relevant costs of material, in deciding whether or not to accept the contract? [7]

Relevant Costs of Material

Answer
Computation of relevant costs of Material
Material Relevant Cost Workings Amount (₹)
A Replacement Cost (1000 × 6) 6,000.00
B Replacement Cost (1000 × 5) 5,000.00
C Realisable Value for 700 units and [(700 × 2.5) + 300 × 4] 2,950.00
Replacement Cost for 300 units
D Substitution Cost (300×5) 1,500.00
Sub Total 15,450.00

3.34 |CMA Final Strategic Cost Management

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 Decision Making Techniques
Relevant Cost Analysis

Add: Other expenses 550.00

Total 16,000.00
As the revenue from the order, is more than the relevant costs of ₹ 16,000 the order should be
accepted.
Justification of the solution for each material is given as under
• Material A: Since it is not in stock, needs to be purchased from market at replacement
cost, hence it is Relevant
• Material B: It is in stock and is being regularly used for other production demand. So it
needs to be purchased from market at replacement cost, hence it is Relevant
• Material C: partly available Ex stock, so realisable value is relevant and balance needs to be
purchased from market at replacement cost, hence it is Relevant
• Material D: available ex stock but it can be used for other job where replacement cost is
300 units @ ₹ 5 each so 300 × 5 = 1500 is relevant cost

3 Jun’23
SONTECH LTD., a machine manufacturing company, had nearly completed a job relating to
construction of specialized equipment when it discovered that the customer had gone into
liquidation. At this stage, the position of the job was as under:
₹
Original cost estimated 1,75,200
Costs incurred so far 1,48,500
Costs to be incurred 29,700
Progress payments received from original customer 1,00,000
After searches, a new customer for the Equipment has been found. He is interested to take the
equipment if certain modifications are carried out. The new customer wants the equipment in
its original condition, but without its control device and with certain other modifications. The
costs of these additions and modifications are estimated as under :
Direct materials at cost : ₹ 1,050
Direct Wages : ₹ 3,500
Variable overheads: 25% of direct Wages
Delivery costs: ₹ 1,350
Fixed overheads will be absorbed at 50% of direct wages.

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The following additional information is available:

(i) The direct materials required for the modification are in stock and if not used for modifica-
tion of the order, they will be used in another job in place of materials that will now cost ₹
2,250.
(ii) The Department is extremely busy. Its direct wages is ₹ 2,500 and currently yielding a
contribution of ₹ 3.20 per rupee of direct wages.
(iii) Supervisory overtime payable for the modification is ₹ 1,050.
(iv) The cost of control device that the new customer does not require is ₹ 13,500. If it is taken
out, it can be used in another job in place of a different mechanism. This latter mechanism
has otherwise to be bought for ₹ 10,500. The dismantling and removal of the control
mechanism is ₹ 120.
(v) If the conversion is not carried out, some of the materials in the original equipment can be
used in another contract in place of materials that would have cost ₹ 12,000. It would have
taken wages cost of ₹ 240 to make them suitable for this purpose. The remaining materials
will realize ₹ 11,400 as scrap. The drawings, which are included as part of the job, can be
sold for ₹ 1,500.
Required:
Analyse the relevant costs of equipment in deciding at what minimum price that the company
can afford to quote for the new customer. [7]

Minimum price based on Relevant Costing

Answer
The minimum price that SONTECH Ltd. can afford to quote for the new Customer is ₹ 60945.

4 Dec’23
RONTEX LTD., (Builders) has been offered a contract by Exyan Lid. to build for it five special
Guest Houses for use by top management. Each guest house will be an independent one. The
contract will be for a period of one year and the offer price is ₹ 1 crore. In addition Exyan Ltd. will
also provide 2 grounds of land free of cost for the purpose of construction.
The Chief Accountant of Rontex T.td. has prepared an estimate on the basis of which he has that
the contract should not be accepted at the price offered. His estimate was as follows :

3.36 |CMA Final Strategic Cost Management

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Relevant Cost Analysis

₹ in Lakhs
Tintakn Land (3 Grounds at ¥ 20 lakh cach) 60
Drawing and Design 7
Registration 10
Materials:
Cement and Sand 6
Bricks and Tiles 4
Steel 10
Others (Including interior d ccoration) 10
Labour-Skilled 12
-Unskilled 8
Supervisor’s Salary 6
Overheads General 12
Depreciation 6
Total Cost 150
The Accountant also provides the following information;
Land: The total requirement of land is 3 grounds costing ₹ 20 lacs per ground, Exyan Ltd, will
provide 2 grounds free of cost.
Drawing and Design: These have already been prepared and 50% of the cost has already been
incurred.
Materials:
(i) Cerent and Sand are already in stock and are in regular use, if used for this contract, they
have to be replaced at a cost of ₹ 8 Lakh.
(ii) Bricks and Tiles represent purchases made several months before for a different contract.
They could be sold readily for a net ₹ 5 lakh after meeting all further expensed.
(iii) Others: Materials worth ₹ 2 lakh relating o interior decoration are in stock for which no
alternative use is expected in the near future. However, they can be sold for ₹ 1 lakh.
Labour:
(i) Skilled workers will be transferred to this project from another project. The project manager
claimed that if the men were returned to him, he could have earned the company an
additional ₹ 2 lakh in terms of profits.
(ii) The supervisor undertakes various tasks in the sites and his pay and continuity of
employment will not be affected by the new contract. If the contract is taken, he will devote
half of his time.

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Overheads:
(i) The equipment that would be used on the contract was bought onc year betore for ₹ 30
lakh and is expected to last for five years. It can also be uscd on other contacts and the
current replacement price will be 232 lakh and in a year’s time it will be ₹ 25 lakh.
(ii) The general overheads includes both specific and absorbed overheads. If the contract 15
not undertaken, ₹ 4 lakh of the same can be avoided.
RONTEX LTD. has also on hand another project, which would not be executed if the contract
from Exyan Lid. were to be accepted. The estimated profit on that project is ₹ 10 lakh.
Required:
(a) Draw inference from the information given supra and identify the following.
(i) Relevant cost if the contract is accepted
(ii) Irrelevant cost if the contract is accepted
(b) Indicate with reasons as a cost and management accountant of the company whether it
should accept the contract from Exyan Ltd. or not. [14]

Relevant and Irrelevant cost of Contract

Answer
(a) (i) Relevant cost if the contract is accepted ₹ 93 lakh.
(ii) Irrelevant cost if the contract is accepted ₹ 18 lakh.
(b) Decision:
Since the offer price of contract is ₹ 1 crore and its total relevant cost is ₹ 93 Lakh these
figures clearly shows that the offer should be accepted.

5 MTP Dec’24 Set 1

Forward and Foundry Ltd. is feeling the effects of a general recession in the industry. Its budget
for the coming half year is based on an output of only 500 tons of casting a month which is less
than half of its capacity. The prices of casting vary with the composition of the metal and the
shape of the mould, but they average ₹175 a tone. The following details are from the Monthly
Production Cost Budget at 500 tone levels:

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Relevant Cost Analysis

Core making Melting and Cleaning and

Particulars Moulding (₹)
(₹) pouring(₹) Grinding (₹)
Labour 10,000 16,000 6,000 4,500
Variable overhead 3,000 1,000 1,000 1,000
Fixed overhead 5,000 9,000 2,000 1,000
18,000 26,000 9,000 6,500
Labour and O.H. rate per direct 9.00 6.50 6.00 5.2
labour hour
Operation at this level has brought the company to the brink of break-even. It is feared that if
the lack of work continues, the company may have to lay off some of the most highly skilled
workers whom it would be difficult to get back when the volume picks up later on. No wonder,
the work’s Manager at this Juncture, welcomes an order for 90,000 casting, each weighing about
40 lbs., to be delivered on a regular schedule during the next six months. As the immediate
concern of the Works Manager is to keep his work force occupied, he does not want to lose the
order and is ready to recommended a quotation on a no-profit and no-loss basis.
Materials required would cost ₹1 per casting after deducting scrap credits. The direct labour
hour per casting required for each department would be:

Core Making 0.09

Melting and pouring 0.15
Moulding 0.06
Cleaning and grinding 0.06
Variable overheads would bear a normal relationship to labour cost in the melting and pouring
department and in the moulding department. In core making, cleaning and grinding however,
the extra labour requirements would not be accompanied by proportionate increases in variable
overhead. Variable overhead would increase by ₹1.20 for every additional labour hour in core
making and by 30 paise for every additional labour hour in cleaning and grinding. Standard
wage rates are in operation in each department and no labour variances are anticipated.
To handle an order as large as this, certain increases in factory overheads would be necessary
amounting to ₹1,000 a month for all departments put together. Production for this order would
be spread evenly over the six months’ period.
You are required to:
(a) Prepare a revised monthly labour and overhead cost budget, reflecting the addition of
this order.
(b) Determine the lowest price at which quotation can be given for 90,000 castings without
incurring a loss. [14]

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Relevant Cost Analysis

Revised Budget and Lowest Quotation

Answer
Computation of Labour and Overhead Rate
Cleaning and
Core making Melting and
Particulars Moulding (₹) Grinding
(₹) pouring(₹)
(₹)
Labour & overheads (₹) 18,000.00 26,000.00 9,000.00 6,500.00
Labour & overheads per hour (₹) 9.00 6.50 6.00 5.20
No. of hours 2,000.00 4,000.00 1,500.00 1,250.00
Variable overhead per hour (₹) 1.50 0.25 0.67 0.80
Labour rate per hour (₹) 5.00 4.00 4.00 3.60
Hours required for new order 1,350.00 2,250.00 900.00 900.00
Labour cost required for order (₹) 6,750.00 9,000.00 3,600.00 3,240.00
Variable overhead cost for order (₹) 1,620.00 563.00 600.00 270.00
Revised monthly labour and overheads cost budget reflecting the additions of the order
Melting and Cleaning and
Core making
Particulars pouring Moulding (₹) Grinding Total (₹)
(₹)
(₹) (₹)
Labour 10,000.00 16,000.00 6,000.00 4,500.00
Labour for the order 6,750.00 9,000.00 3,600.00 3,240.00
16,750.00 25,000.00 9,600.00 7,740.00
Variable overheads 3,000.00 1,000.00 1,000.00 1,000.00
Variable overheads 1,620.00 563.00 600.00 270.00
for the order
4,620.00 1,563.00 1,600.00 1,270.00
Fixed cost 5,000.00 9,000.00 2,000.00 1,000.00
Total 26,370.00 35,563.00 13,200.00 10,010.00 85,143.00
Add : additional 1,000.00
fixed cost
Total: 86,143.00

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 Decision Making Techniques
Relevant Cost Analysis

Computation of total price for the order

Particulars (₹) (₹)
Material (15,000 x 1) 15,000.00
Labour & overheads (86,143 – 59,500) 26,643.00
41,643.00
Total Price of the order (41,643 x 6) 2,49,858

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 Decision Making Techniques
Target Costing

3.5
Target Costing

1 Dec’23
TECON LTD. (TL) a manufacturing company, sells its product at ₹ 1,200 per unit. Its competi-
tors are likely to reduce the price by 20%.TI. wants to respond aggressively by cutting price by
25% and expects that the present volume of 150000 units per annum will increase to 200000
units. TL wants to earn a 15% target profit on sales. Based on a detailed value engineering, the
comparative position is given below:
Particulars Existing (₹) Target (₹)
Direct material cost per unit 425 400
Direct Labour cost per unit 65 60
Direct machinery cost per unit 80 70
Direct manufacturing expenses per unit 550 530
Manufacturing Overheads
No of orders (₹ 80 per order) 23,000 22,000
Testing hours (₹ 2 per hour) 45,00,000 35,00,000
Units reworked (₹ 100) 13000 14400
Manufacturing overheads are allocated using relevant cost drivers. Other operating for the
expected volume are estimated as follows:
Research and Design ₹ 60
Marketing and Customer Service ₹ 124
₹ 184
Required:
(i) Determine target costs per unit and identify target costs for the proposed volume showing
breakup of different elements.
(ii) Prepare target product profitability statement. [7]

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 Decision Making Techniques
Target Costing

Target Cost per unit, Target Product

Profitability

Answer
(i) Target Cost per unit ₹ 765
The breakup of the target cost of ₹ 765 per unit is as follows:
₹
Direct Materials 400
Direct Labour 60
Direct Machinery Costs 70
Direct Manufacturing Costs 530
Add : Manufacturing Overheads 51
Other Operating Costs 184
Full Product Costs 765
(ii) Target Product Profitability
Particulars Per Unit Total (₹) Total for 200000 Unit (₹)
1. Sales 900 180000000
2. Cost of Goods Sold 581 116200000
3. Gross Margin (1 - 2) 319 63800000
4. Operating costs 184 36800000
5. Operating Profit (3 - 4) 135 27000000

2 MTP Dec’24 Set 1

S Ltd. has sales of 2,00,000 units at a price of ₹100.00 per unit and profit of ₹70.00 Lakhs in the
current year. Due to stiff competition, next year the Company has to reduce its price of product
@ 3% to achieve same target volume of sales. The cost structure and profit for the current year
is given as below:
Particulars (₹ Lakhs)
Direct Material 50.00
Direct Wages 40.00
Variable Factory Overheads 15.00
Fixed Overheads including Sales & Admin Expenses 25.00
Total Cost 130.00

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Target Costing

To achieve the Target Cost to maintain the same profit, the Company is evaluating the proposal
to reduce Labour Cost and Fixed Factory Overheads. A Vendor supplying the Machine suitable
for the Company’s operations has offered an advanced technology Semi-Automatic Machine of
₹10 Lakhs as replacement of Old Machine worth ₹3 Lakhs. The Vendor is agreeable to take back
the Old Machine at ₹1 Lakh only. The Company’s policy is to charge depreciation at 15% on
WDV. The Maintenance Charge of the Existing Machine is ₹1 Lakh per annum whereas there will
be warranty of services free of cost for the New Machine first two years. There are 7 Supervisors
whose Salary is ₹1.50 Lakhs per annum. The New Machine having Conveyor Belt is expected to
help in cost cutting measures in the following ways -
(1) Improve Productivity of workers by 10%
(2) Cut-down Material Wastage by 5%
(3) Elimination of services of Supervisors because of automatic facilities of the machine
(4) Saving in Packaging Cost by ₹1 Lakhs.
Assuming Cost of Capital to be 15%, calculate how many Supervisors should be removed from
the production activities to achieve the Target Cost. [7]

No. of Supervisor to be Removed

Answer
A. Targeted Cost Reduction
Targeted price Reduction = 3% of 200 lakhs = ₹6 lakhs
Targeted Cost Reduction = ₹6 lakhs
B. Net Savings on account of New Machine
1. Savings on account of the New Machine
a. Reduction in wages due to Improve Productivity of workers by 10%
= {40 lakhs – [(40 lakhs ÷110) ×100] = (40.00 -36.36) = ₹3.64 lakhs
b. Cut-down Material Wastage by 5% = 5% of 50 lakhs = ₹2.50 lakhs
c. Saving in Packaging Cost = ₹1.00 lakhs
d. Saving in Maintenance Cost = ₹1.00 lakhs
e. Total Savings = 3.64 + 2.50 +1.00 + 1.00 = ₹8.14 lakhs
2. Additional Costs on account of the New Machine
a. Loss in Disposal of Old Machine = (₹3 lakhs - ₹1 lakhs) = ₹2.00 lakhs
b. Difference in Depreciation = (₹10 lakhs - ₹3 lakhs) × 15% = ₹1.05 lakhs

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Target Costing

c. Cost of Capital Investment = (₹10 lakhs × 15%) = ₹1.50 lakhs

d. Total Additional Costs = (2.00 + 1.05 + 1.50) = ₹4.55 lakhs
3. Net Savings = (8.14 – 4.55) = ₹3.59 lakhs
C. Supervisors to be Removed
Short Fall = (A-B) = (6.00 – 3.59) = ₹2.41lakhs
Number of Supervisors to be removed = (2.41 lakhs ÷ 1.50 lakhs per supervisors)
= 1.61 i.e. say 2 Supervisors

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 Decision Making Techniques
Product Life Cycle Costing

3.6
Product Life Cycle Costing

No questions have been asked yet from this chapter !

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 Decision Making Techniques
Asset Life Cycle Costing

3.7
Asset Life Cycle Costing

1 June'23 MTP Set 1

Company X is forced to choose between two machines A and B. The two machines are designed
differently but have identical capacity and do exactly the same job. Machine A costs ₹1,50,000
and will last for 3 years. It costs ₹40,000 per year to run. Machine B is an ‘economy’ model
costing only ₹1,00,000, but will last only for 2 years, and costs ₹60,000 per year to run. These
are real cash flows. The costs are forecasted in rupees of constant purchasing power. Ignore tax.
Opportunity cost of capital is 10%.
Suggest the management as to which machine it should buy. [4]

Equivalent Annual Cost

Answer
Compound present value of 3 years @ 10% = 2.486
P.V. of running cost of Machine A for 3 years = ₹ 40,000 x 2.486 = ₹ 99,440
Compound present value of 2 years @ 10% = 1.735
P.V. of running cost of Machine B for 2 years = ₹ 60,000 x 1.735 = ₹ 1,04,100
Statement Showing Evaluation of Machines A and B (₹)
Particulars Machine A Machine B
Cost of purchase 1,50,000 1,00,000
Add: P.V. of running cost for 3 years 99,440 1,04,100
P.V. of Cash outflow 2,49,440 2,04,100
2,49,440 2,04,100
Equivalent present value of annual cash outflow 2.486 1.735
= 1,00,338 = 1,17,637
Analysis: Since the annual cash outflow of Machine B is higher, Machine A can be purchased.

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Asset Life Cycle Costing

2 Jun'24
POSIN Limited supports the concept of the life cycle costing for new investment decisions
covering its engineering activities.
The Company is to replace a number of its machines and the Production Manager is to decide
between the ‘BX’ machine, a more expensive machine with a life of 12 years, and the ‘SW’
machine with an estimated life of 6 years. If the ‘SW’ machine is chosen it is likely that it would
be replaced at the end of 6 years by another ‘SW’ machine. The pattern of maintenance and
running cost differs between two types of machine and relevant data are shown below :
Machine BX (₹) SW (₹)
Purchase Price 38,00,000 26,00,000
Trade-in-value 6,00,000 6,00,000
Annual Repair Cost 4,00,000 5,20,000
Overhaul Cost (p.a.) 8,00,000 4,00,000
(at year 8) (at year 4)
Estimated financing costs averaged over machine life (p.a.) 10% 10%
PVIF(10%, 6) = 4.36, PVIFA (10%, 12) = 6.81
Analyze and Recommend which machine should be purchased. [7]

Evaluation of Machines

Answer
Equivalent Annualized Cost (EAC) = ₹ 9,85,022 (Machine BX-life 12 year)
Equivalent Annualized Cost (EAC) = ₹ 11,01,651 (Machine SW-life 6 year)
Recommendation:
Since the annualized equivalent Cost of Machine BX (₹ 9,85,022) is lower than that of Machine
SW (₹ 11,01,651), the Machine BX should be purchased.

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 Decision Making Techniques
Decision Making using Probability

3.8
Decision Making using Probability

1 June'23 MTP Set 2

E Ltd manufactures a metal trimming device which has been sold at ₹ 16 per unit for a number
of years. The selling price is to be reviewed and the following information is available on costs
and likely demand. The standard variable cost of manufacture is ₹ 10 per unit and an analysis
of the cost variances for the past 20 months show the following pattern which the production
manager expects to continue in the future. Adverse variances of +10% of standard variable cost
occurred in ten of the months. Nil variances occurred in six of the months. Favourable variances
of –5% of standard variable cost occurred in four of the months. Monthly data Fixed costs have
been ₹ 4 per unit on an average sales level of 20,000 units but these costs are expected to rise
in the future and the following estimates have been made for the total fixed cost:
Monthly data Fixed costs have been ₹ 4 per unit on an average sales level of 20,000 units but
these costs are expected to rise in the future and the following estimates have been made for
the total fixed cost:
₹
Optimistic estimate (Probability 0.3) 82,000
Most likely estimate (Probability 0.5) 85,000
Pessimistic estimate (Probability 0.2) 90,000
The demand estimates at the two new selling prices being considered are as follows:

If the selling price/unit is demand would be: ₹ 17 ₹ 18

Optimistic estimate (Probability 0.2) 21 000 units 19 000 units
Most likely estimate (Probability 0.5) 19 000 units 17 500 units
Pessimistic estimate (Probability 0.3) 16 500 units 15 500 units
It can be assumed that all estimates and probabilities are independent.
You are required to
(a) Advise management, based only on the information given above, whether they should
alter the selling price and, if so, the price you would recommend;
(b) Calculate the expected profit at the price you recommend and the resulting margin of
safety, expressed as a percentage of expected sales;

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Decision Making using Probability

(c) Criticize the method of analysis you have used to deal with the probabilities given in the
question;
(d) Describe briefly how computer assistance might improve the analysis. [8]

Expected Profit

Answer
(a) For each of selling price there are three possible outcomes for sales demand, unit variable
cost and fixed costs. Consequently, there are 27 possible outcomes. In order to present
probability distributions for the two possible selling prices, it would be necessary to
compute profits for 54 outcomes. Clearly, there would be insufficient time to perform
these calculations within the examination time that can be calculations to be based on an
expected value approach.
The expected value calculations are as follows:
(i) Variable cost
₹
₹(10+₹10 × 10%) × 10/20 5.50
₹ 10×6/20 3.00
₹ (10 - 10×5%) × 4/20 1.90
10.40
(ii) Fixed cost
₹
₹ 82,000 × 0.3 24,600
₹ 85,000 × 0.5 42,500
₹ 90,000×0.2 18,000
85,100
(iii) ₹ 17 selling price
Particulars Unit
21000 units × 0.2 4,200
19000 units × 0.5 9,500
16500 units × 0.3 4,950
18,650

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 Decision Making Techniques
Decision Making using Probability

(iv) ₹ 18 selling price

Particulars Unit
19000 units × 0.2 3,800
17500 units × 0.5 8,750
15500 units × 0.3 4,650
17,200
Expected contribution:
Selling price ₹17 = (₹ 17.00- ₹ 10.40) ×18,650 = ₹ 1,23,090
Selling price ₹ 18 = (₹ 18 - ₹ 10.40 ) × 17,200 = ₹ 1,30,720
The existing selling price is ₹ 16, and if demand continues at 20,000 units per annum then
the total contribution will be 1120 [₹ (16 – 10.40) × 20,000 units] using the expected value
approach, a selling price of ₹ 18 is recommended.
(b) Expected profit = ₹ 1,30,720 - ₹ 85,100 = ₹ 45,620 (fixed cost)
Break Even Point = Fixed cost /Contribution per unit
₹ 85,100/ ₹ 7.60 = 11,197 units
Margin of safety = expected demand ( 17,200 units) - 11,197 units = 6,003 units
% margin of safety = 6003/17,200 = 34.9% of sales
Note that the most pessimistic estimate is above the break - even point.
(c) An Expected Value approach has been used. The answer should draw attention to the
limitations of basing the decision solely on expected values. In particular, it should be
stressed that risk is ignored and the range of possible outcomes is not considered. The
decision ought to be based on a comparison of the probability distributions for the
proposed selling prices.
(d) Computer assistance would enable a more complex analysis to be undertaken. In particular,
different scenarios could be considered, based on different combinations of assumption
regarding variable cost, fixed cost, selling prices and demand. Using computers would also
enable the Monte Carlo simulation to be used for more complex decisions.

2 MTP Dec'23 Set 1; Postal Test Paper

A company has estimated the following demand level of its product:

Sales Volume (units) 10000 12000 14000 16000 18000

Probability 0.10 0.15 0.25 0.30 0.20
It has assumed that the sales price of ₹ 6 per unit, marginal cost of ₹ 3.50 per unit, and fixed
costs of ₹ 34,000.

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Decision Making using Probability

What is the probability that?

(A) The company will break-even in the period?
(B) The company will make a profit of at least ₹ 10,000? [6]

Probability of break-even, making a profit Sales based

Answer
(a) Probability of Break-even for the period
In order to break-even, the company must earn enough total contribution to cover its fixed
costs. The contribution is ₹ 2.50 per unit (i.e.. 6 - 3.5).
Break-even Sales = (Fixed Cost ÷ Contribution per Unit)
= (34,000 ÷ 2.50) = 13,600 units
Contribution required/ Contribution per unit = ₹ 34,000/₹2.50 = 13600 units
The probability that sales will equal or exceed 13,600 units is the probability that sales will
be 14,000, 16,000 or 18,000 units which is (0.25 + 0.30 + 0.20) = 0.75 or 75%.
(b) Probability of earning Profit of ₹10,000
Contribution Needed = (Profit Needed + Fixed Cost)
= (10,000 + 34,000) = ₹44,000
Desired Sales = (Contribution Needed ÷ Contribution per Unit)
= (44,000 ÷ 2.50) = 17,600 units
The probability that sales will equal or exceed 17,600 units is the probability that sales will
be 18,000 units which is 0.20 or 20%

3 Jun'24 MTP Set 1

A company has estimated the unit variable cost of a Product to be ₹ 10, and the selling price is
₹ 15 per unit. Budgeted sales for the year are 20,000 units. Estimated fixed costs are as follows:

Fixed Cost p.a.(₹) 50,000 60,000 70,000 80,000 90,000

Probability 0.1 0.3 0.3 0.2 0.1
Assess the probability that the company will equal or exceed its target profit of ₹ 25,000 for the
year? [7]

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 Decision Making Techniques
Decision Making using Probability

Pb of achieving desired profit Fc based

Answer
The different outcomes for fixed cost are mutually exclusive events. If fixed costs are ₹ 50,000
for example, they can’t be anything else as well.
Budgeted sales = 20,000 units
Budgeted Contribution per Unit = 15 - 10 = ₹ 5

Budgeted total contribution (20,000 × ₹5) 1,00,000

Target profit 25,000
Maximum fixed costs if target is to be achieved 75,000
Higher Profit would mean lower FC, other things remaining constant.
So, Pb that Co. will equal or Exceed its target profit of ₹ 25,000 = Pb that FC will be ₹ 75,000 or
less. The probability that fixed costs will be ₹ 75,000 or less is:
= P (50,000 or 60,000 or 70,000)
= P (50,000) + P (60,000) + P (70,000)
= 0.1 + 0.3 + 0.3
= 0.7 or 70%

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Decision Making using Probability

NOTES

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 Activity Based Management and Just in Time (JIT)


Chapter 4
Activity Based Management
and Just in Time (JIT)

4.1 Activity Based Costing

JIT - Introduction, Benefits, Use of JIT - in measuring

4.2 the Performance

4.3 Throughput Accounting

4.4 Back flush Accounting

4.5 Benchmarking

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 Activity Based Management and Just in Time (JIT)
Activity Based Costing

4.1
Activity Based Costing

1 Dec’23
ADF Bank operated for years under the assumption that profitability can be increased by increas-
ing Rupee volumes. But that has not been the case. Cost analysis has revealed the following:-
Activity Activity Cost (₹) Activity Driver Activity Capacity
Providing ATM Service 1,00,000 No, of transactions 2,00,000
Computer processing 10,00,000 No. of transactions 25,00,000
lssuing Statements 8,00,000 No.of statements 5,00,000
Customer inquirics 3,60,000 Telephone minutes 6,00,000
The following annual information on three products was also made available:
Checking Personal
Gold Visa
Accounts Loans
Units of Product 30,000 5,000 10,000
ATM transactions 1,80,000 0 20,000
Computer transactions 20,00,000 2,00,000 3,00,000
Number of statements 3,00,000 50,000 1,50,000
Telephone minutes 3,50,000 90,000 1,60,000
Required:
(i) Calculate rates for each activity.
(i) Using the rates computed in requirement (i), assess the cost of each product. [7]

Rates for each Activity, Cost of each

Product

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 Activity Based Management and Just in Time (JIT)
Activity Based Costing

Answer
Rates for each Activity
Activity Rate
Activity
(₹)
Providing ATM Service 0.50
Computer Processing 0.40
Issuing Statements 1.60
Customer Inquiries 0.60
Cost of each Product
Checking Accounts (₹) Personal Loans (₹) Gold VISA (₹)
Cost of each Product 52.67 42.80 46.60

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 Activity Based Management and Just in Time (JIT)
JIT - Introduction, Benefits, Use of JIT - in measuring the Performanc

4.2
JIT - Introduction, Benefits, Use of JIT
- in measuring the Performance

1 Jun'23
PANIT LTD., a video company sells package of blank video tapes to its customers. It purchases
video tapes from VISAN (I) Company @ ₹ 140 a packet. VISAN (I) Company pays all freight to PANIT
LTD. No incoming inspection is necessary because VISAN (I) Company has a superb reputation
for delivery of quality merchandise. Annual demand of PANIT LTD. is 13,000 packages. PANIT
LTD. requires 15% annual return on investment. The purchase order lead time is two weeks. The
purchase order is passed through internet and it costs ₹ 3 per order. The relevant insurance,
material handling etc. ₹ 5.10 per package per year. PANIT LTD. has to decide whether or not to
shift to JIT purchasing. VISAN (I) company agrees to deliver 100 packages of video tapes 130
times per year (5 times every two weeks) instead of existing delivery system of 1,000 packages
13 times a year, with additional amount of ₹ 0.50 per package. PANIT LTD. incurs no stock out
under its current purchasing policy. It is estimated, PANIT LTD. incurs stock out cost on 50 video
tape packages under a JIT purchasing policy. In the event of a stock out, PANIT LTD. has to rush
order tape packages which costs ₹ 4 per package.
Required:
Assess the information as stated supra and advise PANIT LTD. as to whether it should implement
JIT Purchasing system? [5]

JIT Purchasing System

Answer
Normal JIT
Purchase Cost (A × PP/ut) 1,30,000 × 140 1,30,000 × 140.5
TOC (No. of orders × Cost/order) 13 × 3 130 × 3
Q 1,000 × (140 × 15% + 5.10) 100 × (140.5 × 15% + 5.10)
TCC ( × (CC% × PP/ut + other
2 2 2
ccpup.a.)
Stock out cost - 50 × 4
18,33,089 18,28,399
Savings = 4,690

4.4 |CMA Final Strategic Cost Management

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 Activity Based Management and Just in Time (JIT)
JIT - Introduction, Benefits, Use of JIT - in measuring the Performanc

2 MTP Dec’24 Set 1

B Ltd. has decided to adopt JIT policy for materials. The following effects of JIT policy are
identified-
1. To implement JIT, the company has to modify its production and material receipt facilities
at a capital cost of ₹10,00,000. The new machine will require a cash operating cost ₹1,08,000
p.a. The capital cost will be depreciated over 5 years.
2. Raw material stockholding will be reduced from ₹40,00,000 to ₹10,00,000.
3. The company can earn 15% on its long-term investments.
4. The company can avoid rental expenditure on storage facilities amounting to ₹33,000
per annum. Property. Taxes and insurance amounting to ₹22,000 will be saved due to JIT
programme
5. Presently there are 7 workers in the store department at a salary of ₹5,000 each per month.
After implementing JIT scheme, only 5 workers will be required in this department. Balance
2 workers’ employment will be terminated.
6. Due to receipt of smaller lots of Raw Materials, there will be some disruption of production.
The costs of stock-outs are estimated at ₹77,000 per annum.
Determine the financial impact of the JIT policy. Is it advisable for the company to implement
JIT system? [7]

JIT Purchase

Answer
Cost-Benefit Analysis of JIT policy
A. Costs (Per annum)
Serial Particulars (₹)
1 Interest on capital for modifying production facilities (₹ 10,00,000 ×
15%) / Interest Income Fore gone 1,50,000
2 Operating Costs of new production facilities (given) 1,08,000
3 Stock-Outs Costs (given) 77,000
4 Total Costs 3,35,000

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 Activity Based Management and Just in Time (JIT)
JIT - Introduction, Benefits, Use of JIT - in measuring the Performanc

B. Benefits (per Annum)

Serial Particulars (₹)
1 Interest on investment on funds released due to reduction in raw 4,50,000
material stocking ( ₹ 40,00,000 - ₹ 10,00,000) ×15%
2 Saving in salary of 2 workers terminated ( ₹ 5,000×12 months×2) 1,20,000
3 Saving in Rental Expenditure 33,000
4 Saving in Property Tax & Insurance 22,000
6 Total Benefits 6,25,000
C. Net Benefits = (6,25,000 – 3,35,000) = ₹2,90,000
Advise: The JIT policy may be implemented, as there is a Net Benefit of ₹2,90,000 per annum.
Note: Depreciation, being apportionment of capital cost, is ignored in decision-making, Tax
Saving on Depreciation is not considered in the above analysis.

4.6 |CMA Final Strategic Cost Management

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 Activity Based Management and Just in Time (JIT)
Throughput Accounting

4.3
Throughput Accounting

3 MTP Dec'23 Set 1; Postal Test Paper

Modern Co produces 3 products, A, B and C, details of which are shown below:
Particulars A B C
Selling price per unit (₹) 120 110 130
Direct material cost per unit (₹) 60 70 85
Variable overhead (₹) 30 20 15
Maximum demand (units) 30,000 25,000 40,000
Time required on the bottleneck resource (hours per unit) 5 4 3
There are 3,20,000 bottleneck hours available each month.
Required:
Calculate the optimum product mix based on the throughput concept. [8]

Ranking & Allocation

Answer
Particulars A B C
Selling price per unit (₹) 120 110 130
Direct material cost per unit (₹) 60 70 85
Throughput per unit (₹) 60 40 45
Time required on the bottleneck 5 4 3
resource (hours per unit)
Return per factory hour (₹) 12 10 15
Ranking 2 3 1
Total Available hours = 3,20,000

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 Activity Based Management and Just in Time (JIT)
Throughput Accounting

(-) Hours used for C (40,000 x 3) = 1,20,000

(-) Hours used for A (30,000 x 5) = 1,50,000 = 2,70,000

Balance hours available for B = 50,000
No. of units that can be made in balance hours = 50,000/4 = 12,500 units.
Statement showing optimum mix:
A B C
No. of units 30,000 12,500 40,000

4 Jun'24 MTP Set 1

T Ltd, produces a product which passes through two processes - cutting and finishing. The
following information is provided: [7]
Cutting Finishing
Hours available per annum 50,000 60,000
Hours needed per unit of product 5 12
Fixed operating costs per annum excluding direct material (₹) 10,00,000 10,00,000
The selling price of the product is ₹ 1,000 per unit and the only variable cost per unit is direct
material, which costs ₹ 400 per unit. There is demand for all units produced.
Evaluate each of the following proposals independent of each other:
(i) An outside agency is willing to do the finishing operation of any number of units between
5,000 and 7,000 at ₹ 400 per unit.
(ii) Another outside agency is willing to do the cutting operation of 2,000 units at ₹ 200 per
unit
(iii) Additional equipment for cutting can be bought for ₹ 10,00,000 to increase the cutting
facility by 50,000 hours, with annual fixed costs increased by ₹ 2 lakhs.

Evaluation of Capacity Increase

Answer
Cutting process capacity = 50,000hours ÷ 5 = 10,000 units
Finishing process capacity = 60,000hours ÷ 12 = 5,000 units

4.8 |CMA Final Strategic Cost Management

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 Activity Based Management and Just in Time (JIT)
Throughput Accounting

Throughput contribution per unit = (Selling Price – Material Cost)

= ( ₹ 1,000 – ₹ 400) = ₹ 600 per unit
Observation: Finishing capacity (5,000 units) is less than the cutting capacity (10,000 units).
Therefore, Finishing Capacity is the bottleneck resource.
Alternative - I : If an outside agency is willing to do the finishing operation of any number of
units between 5,000 and 7,000
Increase in throughput contribution per unit = ( Throughput contribution – Subcontracting
charges)
= (₹ 600 – ₹ 400) = ₹ 200
Throughput Contribution for 5,000 units = (5000 × 200) = ₹ 10,00,000
Throughput Contribution for 7,000 units = (7000 × 200) = ₹ 14,00,000
Observation: Increase in throughput contribution is higher than the fixed operating costs of ₹
10,00,000 - per annum beyond 5,000 level of subcontracting. Therefore, subcontracting above
the 5,000 level is beneficial.
Alternative - II : If an outside agency is willing to do the cutting operation.
The capacity of cutting process is 10,000 unis as against the finishing capacity of 5,000 units.
Cutting is not the bottleneck and hence outsourcing is not beneficial.
Alternative - III : Installation of additional equipment for cutting process.
The cutting process has surplus capacity. It is, therefore, suggested not to increase non-bottle-
neck capacity.

5 Jun'24
BIVON Ltd., a manufacturing company, manufactures 3 products VN, DN and XN. Due to scarcity
of machine hours, management of BIVON Ltd., is planning to adopt Throughput Accounting in
the company. The informations pertaining to the three products are as follows:
VN DN XN
Selling price per unit ₹ 5,000 ₹ 4,000 ₹ 3,500
Material Cost per unit ₹ 2,500 ₹ 2,500 ₹ 2,000
Machine Hours required 5 6 4
Maximum annual demand 3000 units 4000 units 2000 units
Total factory cost is ₹ 1,05,00,000 and available machine hours are 35000 hours.
BIVON Ltd. has to supply 2500 units of product DN to Beta Ltd. as per a court judgement which
cannot be denied.

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 Activity Based Management and Just in Time (JIT)
Throughput Accounting

Required:
(i) Rank the products using Throughput Accounting and prepare a statement showing
Optimal Mix for maximization of profit.
(ii) Whether court Judgement has affected the Optimum Plan of profit of the company, if yes,
by which amount? [7]

Ranking and Optimum Mix

Answer
(i) Statement of Ranking
Particulars VN DN XN
Selling price per unit ₹ 5000 ₹ 4000 ₹ 3500
Less: Material cost per unit ₹ 2500 ₹ 2500 ₹ 2000
Throughput per unit ₹ 2500 ₹ 1500 ₹ 1500
Throughput Return per hour ₹ 500 ₹ 250 ₹ 375
Throughput Accounting Ratio 1.67 0.83 1.25
Ranking I III II
Statement showing optimal mix for maximization of profit
Product No. of units Total Machine hours T/P per hr. (₹) Total T/P (₹)
DN to Beta Ltd. 2500 15000 250 37,50,000
VN 3000 15000 500 75,00,000
XN 1250 5000 375 18,75,000
Total 1,31,25,000
Less : Total Factory cost 1,05,00,000
Profit 26,25,000
(ii) Statement showing optimal plan of profit if there is no such court’s judgement:
Product No. of units Total Machine hours T/P per hr. (₹) Total T/P (₹)
VN 3000 15,000 500 75,00,000
XN 2000 8,000 375 30,00,000
DN 2000 12,000 250 30,00,000
Total 1,35,00,000
Less: Total Factory Cost 1,05,00,000
Profit 30,00,000

4.10 |CMA Final Strategic Cost Management

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 Activity Based Management and Just in Time (JIT)
Throughput Accounting

From the above Calculation, we can say that court’s judgement has affected the optimal plan of
Profit. Due to court’s judgement profit of the company has been reduced by ₹ 3,75,000

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 Activity Based Management and Just in Time (JIT)
Back flush Accountin

4.4
Back flush Accounting

No questions have been asked yet from this chapter !

4.12 |CMA Final Strategic Cost Management

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 Activity Based Management and Just in Time (JIT)
Benchmarking

4.5
Benchmarking

No questions have been asked yet from this chapter !

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 Activity Based Management and Just in Time (JIT)
Benchmarking

NOTES

4.14 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


Chapter 5
Evaluating Performance
- Variance Analysis

1 Jun'23 MTP Set 1

You have been provided with the following data for S plc for September:
Accounting method: Variances Absorption (₹) Marginal (₹)
Selling Price 1,900 (A) 1,900 (A)
Sales Volume 4,500 (A) 7,500 (A)
Fixed overhead expenditure 2,500 (F) 2,500 (F)
Fixed overhead volume 1,800 (A) n/a
During September production and sales volumes were as follows:
Sales Production
Budget 10000 10000
Actual 9500 9700
Required:
(a) Calculate:
(i) the standard contribution per unit;
(ii) the standard profit per unit;
(iii) the actual fixed overhead cost total.
(b) Using the information presented above, analyze how different variances are calculated on
the basis of the choice of marginal or absorption costing. [6 + 2 = 8]

Different Variances - Marginal or

Absorption Costing

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 Evaluating Performance - Variance Analysis


Answer
(a) (i) Sales margin variance (Marginal costing):
(Actual Volume – Budgeted Volume) × Standard Contribution Margin
= (9500 – 10000) × Standard Contribution Margin (SCM) = ₹ 7,500 (A)
500 SCM = ₹ 7,500 (A)
Therefore, SCM (Standard Contribution Margin) = ₹ 15
(ii) Sales margin volume variance (Absorption Costing)
(Actual Volume – Budgeted Volume) × Standard profit margin per unit
= (9500 – 10000) × Standard Profit Margin (SPM) = ₹ 4,500 (A)
500 SPM = ₹4,500 (A)
SPM (Standard Profit Margin) = ₹ 9
(iii) Fixed Overhead Volume Variance
(Actual Production – Budgeted Production) × Standard Rate
= (9700 – 10000) × Standard Rate = ₹ 1,800 (A)
Standard Fixed Overhead rate per unit = ₹ 6
Budgeted Fixed Overheads = 10000 units × ₹ 6 = ₹ 60,000
Fixed Overhead expenditure variance = ₹ 2,500 (F)
Actual Fixed Overheads (₹ 60,000 – ₹ 2,500) = ₹ 57,500.
(b) Absorption costing unitises fixed overheads and treats them as product costs whereas
marginal costing does not charge fixed overheads to products. Instead, the total amount
of fixed overheads is charged as an expense (period cost) for the period. A fixed overhead
volume variance only occurs with an absorption costing system. Because marginal costing
does not unitise fixed costs product margins are expressed as contribution margins
whereas absorption costing expresses margins as profit margins.

2 Jun'23 MTP Set 1

From past experience a company operating a standard cost system has accumulated the
following information in relation to variances in its monthly management accounts:
Percentage of total number of variances
1. Its variances fall into two categories:
Category 1: those that are not worth investigating 64%
Category 2: those that are worth investigating 36%
100%

5.2 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


2. Of Category 2, corrective action has elimiated 70 per cent of the vairances, but the
remainder have continued.
3. The cost of investigation averages ₹350 and that of correcting variances averages ₹550.
4. The average size of any variance not corrected is ₹525 per month and the company’s policy
is to assess the present value of such costs at 2% per month for a period of five months.
You are required to prepare two decsion trees, to represent the position if an investigation is
(i) carried out;
(ii) not carried out. [2 + 2 = 4]

Decision Tree - Investigation of Variances

Answer
Decision Tree if an investigation is carried out

Not worth
Fault eliminated
investigating
(p = 0.7)
Investigation further (p = 0.64)
undertaken (Cost)
₹ 350 Worth investigating and
Fault not eliminated
corrective action taken
(p = 0.3)
(₹ 550) (p = 0.64)

It is assumed that the ₹ 550 correction cost applies to all variances that the initial investigation
indicates are worthy of further investigation. The expected cost if the investigation is carried
out is -
₹ 350 + ₹ 550 (corrective action) + 0.36 × 0.3 × ₹ 246 (conituning variance) = ₹ 815
[note: ₹ 246 represents the PV of ₹ 525 for 5 month at 2% (₹ 525 × 4.7135) for cariancs that are
not eliminated]
Decision Tree if an investigation is not carried out

Not worth
investigating
further (p = 0.64)
No investigation
Worth investigating but
not done, so variance
continues (p = 0.36)

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 Evaluating Performance - Variance Analysis


The expected cost if no investigation is undertaken is

0.36 × ₹ 525 × 4.7135 = ₹ 891.

3 Jun'23 MTP Set 2

The summarized results of a company for the two years ended 31st December 2021 and 2022
are given below:
2021 (₹ in Lakhs) 2022 (₹ in Lakhs)
Direct Materials 324 300
Sales 770 600
Direct Wages 137 120
Variable Overheads 69 60
Fixed Overheads 150 80
Profit 90 40
As a result of re-organization of production methods and extensive advertisement campaign,
the company was able to secure an increase in the selling prices by 10% during the year 2022
as compared to the previous year.
In the year 2022, the company consumed 1,20,000 Kgs. of raw materials and used 24,00,000
hours of direct labour. In the year 2023, the corresponding figures were 1,35,000 kgs of raw
materials and 26,00,000 hours of direct labour.
You are required to:
Use information given for the year 2022 as the base year information to analyze the results of
the year 2023 and to show in a form suitable to the management the amount each factor has
contributed by way of price, usage and volume to the change in profit in 2023. [8]

Profit Reconciliation Statement

Answer
A. Sales Variance
1. Sales price variance = ₹ 770 – (₹ 770 × 100/110) – ₹ 600 = ₹ 70 (F)
2. Sales Volume Variance = ₹(770 × 100/110) – ₹ 600 = ₹ 100 (F)
% increase in volume = (100/600) × 100 = ₹ 16.67%
3. Sales value variance = ₹ 770 – ₹ 600 = ₹ 170 (F)

5.4 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


B. Material Variance
Material price = (300,00,000)/120000 = ₹ 250/-
Material expected to be used = (120000/600) ×700 = 140000 kgs
Standard Material Cost = 140000 × ₹ 250 = ₹ 350 lacs
4. Material Cost variance = ₹(350 – 324) = ₹ 26
5. Material volume variance = 300 × 1/6 = ₹ 50 (A)
6. Material usage variance = 5000 × ₹ 250 = ₹ 12,50,000(F)
7. Material price variance = ₹(250 – 240)×135000 = ₹ 13,50,000 (F)
C. Labour Variance
Labour hours expected to be used = (24,00,000/600) × 700 = 28,00,000
Labour rate = (120,00,000)/24,00,000= ₹ 5
Standard labour cost = 28,00,000 × ₹ 5 = ₹ 140 lacs
8. Labour cost variance = ₹ 140 – ₹ 137 = ₹ 3 (F)
9. Labour volume variance = 120/6 = ₹ 20 (A)
10. Labour efficiency variance = 2 × ₹ 5 = ₹ 10 (F)
11. Labour rate variance = ₹ (20 – 3 – 10) = ₹ 7 (A)
D. Overhead Variance
Standard variance overheads = ₹ 60 + (₹ 60 × 16.67 %) = ₹ 70
Standard variable overhead rate per hour = ₹ 60/24 = ₹ 2.5
12. VOH Cost variance = ₹ (70 – 69) = ₹ 1 (F)
13. VOH volume variance = ₹ 60/6 = ₹ 10 (A)
14. VOH efficiency variance = (2800000 – 2600000) × ₹ 2.5 = ₹ 5 (F)
15. VOH expenditure variance = ₹ (10 – 1– 5) = ₹ 4 (A)
16. FOH cost variance = ₹ 70 (A)
Profit Reconciliation Statement:
Particulars ₹ in lakhs ₹ in lakhs
Profit for 2022 40
(+) sales variance :
Price 70
Volume 100
Material Variance :
Usage 12.50
Price 13.50

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 Evaluating Performance - Variance Analysis


(-) material volume variance 50

Labour variance – efficiency 10
Labour Variance :
Volume 20
Rate 7
VOH Variances:
VOH efficiency variance 5 211
251
Volume 10
Expenditure 4
FOH cost variance : 70 161
Profit for 2023 90

4 Jun'23 MTP Set 2

At the beginning of 2023, ASA Inc. set a standard marginal cost for its major product of ₹ 25
per unit. The standard cost is recalculated once each year. Actual production costs during
August 2023 were ₹ 3,04,000, when 8,000 units were made. With the benefit of hindsight, the
management of ASA Inc. realizes that a more realistic standard cost for current conditions
would be ₹ 40 per unit. The planned standard cost of ₹ 25 is unrealistically low.
Required
(i) Calculate the planning and operational variances.
(ii) What is the implication of planning and operational variances against traditional variance?
State your answer in particular reference to the information given in the above situation.
[4]

Planning and Operational Variances

Answer
(i) With the benefit of hindsight, the realistic standard should have been ₹ 40. The variance
caused by favourable or adverse operating performance should be calculated by comparing
actual results against this realistic standard.

5.6 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


₹
Revised standard cost of actual production (8,000 × ₹ 40) 3,20,000
Actual cost 3,04,000
Total operational variance 16,000 (F)
The variance is favourable because the actual cost was lower than would have been
expected using the revised basis. The planning variance reveals the extent to which the
original standard was at fault.
₹
Revised standard cost 8,000 units × ₹ 40 per unit 320,000
Original standard cost 8,000 units × ₹ 25 per unit 200,000
Planning variance 120,000 (A)
It is an adverse variance because the original standard was too optimistic, overestimating
the expected profits by understating the standard cost. More simply, it is adverse because
the revised cost is much higher than the original cost.
₹
Planning variance 120,000 (A)
Operational variance 16,000 (F)
Total 104,000 (A)
(ii) If traditional variance analysis had been used, the total cost variance would have been the
same, but all the blame would appear to lie on actual results and operating inefficiencies
(rather than some being due to faulty planning).
₹
Standard cost of 8000 units × ₹ 25 per unit 2,00,000
Actual cost of 8000 units 3,04,000
Total cost variance 1,04,000 (A)

5 Jun'23
SUZIN LTD. using a detailed system of standard costing finds that the cost of investigation of
variances is ₹ 20,000. If after investigation an out of control situation is discovered, the cost
of correction is ₹ 30,000. if no investigation is made, the present value of extra cost involved
is ₹ 1,50,000. The probability of the process being in control is 0.82 and the probability of the
process being out of control is 0.18.
You are required to advise:
(I) Whether investigation of the variances should be undertaken or not
(II) the probability at which it is desirable to institute investigation into variance. [4]

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 Evaluating Performance - Variance Analysis


Evaluation of investigation of Variances Profitability Calculation

Answer
Variance

Investigate = 20,000 Do not Investigate = 20,000

Out of Control = 30,000 In control = Nil Out of Control = 1,50,000 In control = Nil
Pb = 0.18 Pb = 0.82 Pb = 0.18 Pb = 0.82

Expected Cost of Investigate = (20,000 + 30,000) × 0.18 + 20,000 × 0.82

Exp = 25,400
Expected Cost of No Investigate = 1,50,000 × 0.18 = 27,000
∴ Investigate.
Pb : Indifference
50,000 × P + 20,000 × (1 – p) = 1,50,000 × P
50,000P + 20,000 - 20,000P = 1,50,000P
1,20,000P = 20,000
20 1
P= = = 16.67%
120 6

Pb of out of control = 16.67% or higher, these only investigate.

6 Jun'23 MTP Set 2

Director-Operations of ABC Ltd. (ABCL) is the view that Standard Costing has little to offer in the
reporting of material variances due to frequently change in price of materials.
ABCL can utilize one of two equally suitable raw materials and always plan to utilize the raw
material which will lead to cheapest total production costs. However ABCL is frequently trapped
by price changes and the material actually used often provides, after the event, to have been
more expensive than the alternative which was originally rejected.

5.8 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


During last accounting period, to produce a unit of ‘Gama’, ABCL could user either 5 kg. of ‘Exe’
or 5 kg. of ‘Wye’. ABCL planned to use ‘Exe’ as it appeared it would be cheaper of the two and
plans were based on a cost of ‘Exe’ of ₹ 3 per kg. Due to market movements the actual price
changed and if ABCL had purchased efficiently the cost would have been:
‘Exe’ ₹ 4.50 per kg
‘Wye’ ₹ 4 per kg
Production of ‘Gama’ 1,000 units and usage of ‘Exe’ amounted to 5,400 kg at a total cost of ₹
25,920.
Calculate the material variance for ‘Gama’ by:
(i) Traditional variance analysis and
(ii) An approach which distinguishes between Planning and Operational Variances. [8]

Material variances - Planning, Operational

& Traditional Variances

Answer
Planning Operating

Original Standard Rev Standard Act

for AO for AO

Q R A Q R A Q R A
Exe 5,000 3 15,000 Exe 5,000 4.50 22,500 Exe 5,400 4.8 25,920
WYe 5,000 ? ? WYe 5,000 4 ? WYe
Traditional : MCV = 15,000 – 25,920 = 10,920 A
Original Std vs Act MPV = (3 – 4.8) × 5,400 = 9,720 A
MUV = (5,000 – 5,400) × 3 = 1,200 A
Planning : MCV = 15,000 – 22,500 = 7,500 A
Original Std vs Act MPV = Uncontrollable = (3 – 4) × 5,000 = 5,000 A
MUV = Controllable = (4 – 4.5) × 5,000 = 2,500 A
7,500 A

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 Evaluating Performance - Variance Analysis


Operational : MCV = 22,500 – 25,920 = 3,420 A

Original Std vs Rev Std MPV = (4.50 – 4.8) × 5,400 = 1,620 A
MUV = (5,000 – 5,400) × 4.5 = 1,800 A

7 MTP Dec’23 Set 1

S.V. Ltd. manufactures BXE by mixing three raw materials. For every batch of 100Kg. of BXE, 125
Kg. of raw materials are used. In April 2021, 60 batches were prepared to produce an output of
5,600 Kg. of BXE. The standard and actual particulars for April 2021 are as under:
Standard Actual Quantity of raw materials
Raw material
Mix % Price per kg Mix % Price per kg purchased kg
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate relevant material variances. [7]

Material variances Processing Loss

Answer
Standard Production = (60 batches × 100 units per batch) = 6,000 units
Standard Raw Material for 6,000 units = (60 batches × 125 kg) = 7,500 kg
Standard Loss = (7,500 – 6,000) = 1,500 kg
Actual Production = 5,600 units
Standard Mix for 60 batches (i.e., 6,000 units)
Raw Material Mix (%) Quantity (Kg) Price (₹) Value (₹)
A 50 3,750 20 75,000
B 30 2,250 10 22,500
C 20 1,500 5 7,500
Total 7,500 1,05,000
Standard Loss @ 25 kg per batch 60 × 25 = 1,500
Production 6,000 1,05,000

5.10 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


Standard Mix for Actual Production of 5,600 units

Raw Material Mix (%) Quantity (Kg) Standard Price (₹) Value (₹)
A 50 3,500 20 70,000
B 30 2,100 10 21,000
C 20 1,400 5 7,000
Total 7,000 98,000
Actual Mix for 5,600 units
Quantity Standard Actual Price Standard Actual
Raw Material Mix (%)
(Kg) Price (₹) (₹) Value (₹) Value (₹)
A 60 4,500 20 21 90,000 94,500
B 20 1,500 10 8 15,000 12,000
C 20 1,500 5 6 7,500 9,000
Total 7,500 1,12,500 1,15,500
Actual Loss = 7,500 – 5600 1,900
Production 5,600 1,12,500 1,15,500
Note:
Purchased quantity is 8,200 kg; but consumed quantity is only 7,500 kg.
Material Cost Variance = Standard Cost – Actual Cost = 98,000 – 1,15,500 = ₹ 17,500 (A)
Material Price Variance = AQ (SP – AP) = (1,12,500 – 1,15,500) = ₹ 3,000 (A)
Material Yield Variance = (Standard Price of Standard Mix for Actual Production – Standard
Price of Standard Mix for Standard Production)
= (98,000 – 1,05,000) = ₹ 7,000 (A)
Material Mix Variance = Standard Price of Standard Mix for Standard Production – Standard
Price of Actual Mix for Actual Production
= (1,05,000 – 1,12,500) = ₹ 7,500 (A)

8 MTP Dec’23 Set 1

Vinak Ltd. has furnished you the following information for the month of February, 2017.
Budget Actual
Output ( Units) 30,000 32,500
Hours 30,000 33,000
Fixed Overhead ₹45,000 ₹ 50,000
Variable overhead 60,000 68,000
Working days 25 26

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 Evaluating Performance - Variance Analysis


Calculate Variances. [7]

Varianble OH & Fixed OH Variances

Answer
Calculation of Fixed OH Variances using hourly rate:
SRSH (1) SRAH (2) SRRBH (3) SRBH (4) ARAH (5)
1.5 × 32500 1.5 × 33000 1.5 × 31200
48750 49500 46800 45000 50000
BFO 45, 000
SR = = = 1.5
BH 30 , 000

RBH 25 -------------- 30000

26 -------------- ?
SH 30000 --------------- 30000
32500 ------------- ?
Fixed Overhead Efficiency Variance : 1 – 2 = 750 (A)
Fixed Overhead Capacity Variance : 2 – 3 = 2700
Fixed Overhead Calendar Variance : 3 – 4 = 1800
Fixed Overhead Volume Variance : 1 – 4 =3750
Fixed Overhead Budget Exp. Variance: 4 – 5 = 5000 (A)
Fixed Overhead Cost Variance: 1 – 5 = 1250(A)
Calculation of Variable OH’s Variance:
SRSH (1) SRAH (2) ARAH (3)
2 × 32500 2 × 33000
65000 66000 68000
BVOH 60 , 000
SR = = =2
BH ’ s 30 , 000

SRSH = Std. Cost of Std. Variable Overhead’s

SRAH = Atd Cost of Actual Variable Overhead’s

5.12 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


ARAH = Actual Cost of actual Variable Overhead’s

(A) Variable Overhead Efficiency Variance 1 – 2 =1000 (A)
(B) Variable Overhead Budget/Exp Variance 2 – 3 = 2000 (A)
(C) Variable Overhead Cost Variance 1 – 3 = 3000 (A)

9 Dec’23
DOTSON Ltd. has a manufacturing division which makes a product to which the following
details relate:
Per unit ₹
Direct Material: 5 kg at ₹ 20 100
Direct labour: 12 hours at ₹ 20 240
Variable overheads: 12 hours at ₹ 10 120
Relevant fixed overheads are based at ₹ 1,00,000 per month and planned output is 2,000 units
per month. The selling price is ₹ 550 per unit. During a recent month, when output was 1,800
units, the following actual cost were incurred.
₹
Direct materials (8,500 kg) 1,72,000
Direct labour (20,000 hours) 4,20,000
Veriable overhead 2,20,000
Fixed overhead 98,000
9,10,000
Profit 40,000
Sales Value 9,50,000
Required :
(a) Analyse the variances which occurred during the month.
(b) Reconcile the actual profit with standard profit, showing the causes of differences. [14]

Profit Reconciliation Statement

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 Evaluating Performance - Variance Analysis


Answer
(a) Computation of Variance
(1) Material Price Variance = 2000 (Adv)
(i) Material Usage Variance = 10000 (FAV)
(iii) Wage Usage Variance = 20000 (Adv)
(iv) Wage Efficiency Variance = 32000 (Fav)
(v) Variable Overhead expenditure Variance = 20000 (Adv)
(vi) Variable overhead efficiency Variance = 16000 (Fav)
(vii) Fixed overhead expenditure Variance = 2000 (Fav)
(viii) Fixed overhead Capacity Variance = 16667 (Adv)
(ix) Fixed overhead efficiency Variance = 6667 (Fav)
(x) Sales Margin price Variance = 40000 (Adv)
(xi) Sales Margin Volume variance = 8000 (Adv)
(b) Reconciliation of Profit.
₹
Budgeted Profit 80,000
Add: Favorable Variances: 66,667
Less: Adverse variances: (1,06,667)
Actual Profit (for the period): 40,000

10  Jun'24 MTP Set 1

Compute the missing data indicated by the Question marks from the following: [14]
Product ‘R’ Product ‘S’
Sales quantity
Std.(units) ? 400
Actual (Units) 500 ?
Price (Unit)
Standard ₹ 12 ₹ 15
Actual ₹ 15 ₹ 20
Sales price variance ? ?
Sales volume variance ₹ 1,200 F ?
Sales value variance ? ?
Sales mix variance for both the products together was ₹ 450 F. ‘F’ denotes Favourable.

5.14 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


Sales Variances Missing Figure

Answer
Let the standard units of product R be r
Actual units of product S be s
Standard Actual
Quantity Price Value Quantity Price Value
R r 12 12r 500 15 7500
S 400 15 6000 s 20 20s
400 + r 6000 + 12r 500 + s 7500 + 20s
Given sales volume variance for R = ₹ 1200(F)
i.e., AQSP –SQSP = ₹ 1200
[(500 × 12) - 12 r] = 1200 or 6000 - 12r = 1200
r = ₹ 400
AQSP RSQSP
R 12 × 500 12 × {(500+s)/(400+r)} × 400 = 3000 + s
S 15 × s 15 × {(500+s)/(400+r)} × 400 = 3750 +s
6000 + 15s 6750 + 13.5s
Given, Sales Mix Variance = (AQSP – RSQSP) = ₹ 450(F)
(6000 + 15s – 6750 -13.5s) = 450 -750 +1.5 s = 450
Then s = 800
We, thus, have
Standard units of product R, r = ₹ 400
Actual units of product S, s = ₹ 800
Sales price variance for R = AQ (AP - SP) = ₹ 1500(F)
Sales price variance for S = AQ (AP – SP) = 4000(F)
Sales volume variance for S = SP (AQ – SQ) = ₹ 6000(F)
Sales value variance for R = (AQAP – SQSP) = ₹ 2700(F)
Sales value variance for S = (AQAP – SQSP) = ₹ 10000(F)

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 Evaluating Performance - Variance Analysis


11  Jun'24
Eighteen workers (12 Type I workers and 6 Type II workers) work in a production process of
RONT Ltd. during a month of 25 working days. Each Type I worker is expected to produce 8
units per day and Type II worker is expected to produce 10 units per day. They work on the
regular shift from 9:00 a.m. to 5:00 p.m. and have a tea break between 10:30 to 10:45 a.m. and
3:00 to 3:15 p.m. and also have a lunch break from 1:00 to 1:30 p.m. The actual production was
2000 units by Type I workers and 1200 units by Type II workers. The standard wage rate per hour
were ₹ 80 and ₹ 90 for Type I and Type II workers respectively and corresponding actuals were
₹ 90 and ₹ 100 respectively. During the month, 16 hours were lost actually for both types Of
workers, which is also as per expectation for waiting for materials and inspection.
Note: Normal waiting and breaks time are included in standard hours for production.
Analyse and calculate the following:
(i) Standard Labour Cost for the month
(ii) Labour Cost Variance
(iii) Labour Efficiency Variance
(iv) Idle Time Variance [7]

Labour Variances Idle Time Calculation

Answer
Type I Type II Total (₹)
Std. Labour Cost (₹) 1,60,000 86,400 2,46,400
Labour Cost Variance (₹) 56000 (A) 33600 (A) 89,600(A)
Efficiency Variance (₹) 32000 (A) 21600 (A) 53600 (A)
Idle Time Variance ** (₹) Nil Nil 0
** Since normal waiting and break are included in standard hours of production

12  Jun'24
ZOSIN Ltd., a manufacturing company using the budgetary control and standard costing
system, has furnished the following information:
Standard overhead absorption rate per unit ₹20

5.16 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


Standard rate per hour ₹4

Budgeted production 12,000 units
Actual production 15,560 units
Actual working hours 74,000
Actual overheads amounted to ₹ 2,95,000 out of which ₹ 62,500 are fixed.
Overheads are based on the following flexible budget:
Production (units) Total overheads (₹)
8000 1,80,000
10000 2,10,000
14000 2,70,000
Required:
Analyse and calculate the following overheads variances on the basis of hours :
(i) Variable Overhead Efficiency variance
(ii) Variable Overhead Expenditure variance
(iii) Fixed Overhead Efficiency variance
(iv) Fixed Overhead Capacity variance [7]

VOH and FOH Variances

Answer
(i) Variable Overhead Efficiency Variance = ₹ 11,400 (F)
(ii) Variable Overhead Expenditure Variance = ₹ 10,500 (A) or ₹ 10,501 (A)
(iii) Fixed Overhead Efficiency Variance = ₹ 3,800 (F)
(iv) Fixed Overhead Capacity Variance = ₹ 14,000 (F)

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 Evaluating Performance - Variance Analysis


13 MTP Dec’24 Set 1

Particulars (₹ In Lakhs)
31-03-2023 31-03-2024
Sales 120 129.60
Prime Cost of Sales 80 91.10
Variable Overheads 20 24
Fixed expenses 15 18.50
Profit 5 (4)
During 2023-24, average prices increased over those of the previous years
(1) 20% in case of sales
(2) 15% in case of prime cost
(3) 10% in case of Overheads.
Prepare a profit variance statement from the above data. [14]

Profit Reconciliation Statement

Answer
Step 1: Calculation of Variances:
1. Sales Price Variance = 129.60 – (129.60 × 100/120) = ₹21.60 (F) (Increase in sale price by
20%)
2. Sales Volume Variance = (129.60 × 100/120) - 120 = ₹12 (A) (Reduction in sales volume =
10%)
3. Sales Value Variance = 129.60 – 120 = ₹9.60 (F)
4. Prime Cost Price Variance = (91.10 × 100/115) – 91.10 = ₹11.88 (A)
5. Prime Cost Volume Variance = 80 × 10/100 = ₹8 (F) (Reduction corresponding to Sales)
6. Prime Cost Usage or Efficiency Variance = (80 × 90/100) - (91.10 × 100/115) = ₹7.22 (A)
7. Prime Cost Variance = 80 – 91.1 = ₹11.1 (A)
8. Variable Overhead Price Variance = (24 × 100/110) - 24 = ₹2.18 (A)
9. Variable Overhead Volume Variance = 20 × 10/100 = ₹2 (F)
10. Variable Overhead Efficiency Variance = (20 × 90/100) - (24 × 100/110) = ₹3.82 (A)

5.18 |CMA Final Strategic Cost Management

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 Evaluating Performance - Variance Analysis


11. Variable Overhead Cost Variance = 20 – 24 = ₹4 (A)

12. Fixed Overhead Price Variance = (18.50 × 100/110) – 18.50 = ₹1.68 (A)
13. Fixed Overhead Efficiency Variance = 15 - (18.50 × 100/110) = ₹1.82 (A)
14. Fixed Overhead Cost Variance = 15 – 18.50 = ₹3.5 (A)
Step 2: Profit Variance Statement
Particulars (₹ In Lakhs) (₹ In Lakhs)
Budgeted Profit 5.00
Add: Sales price variance 21.60
Prime cost volume variance 8.00
Variable overhead variance 2.00 31.60
36.60
Less: Sales volume variance 12.00
Prime cost price variance 11.88
Prime cost usage variance 7.22
Variable overhead price variance 2.18
Variable overhead efficiency variance 3.82
Fixed overhead price variance 1.68
Fixed overhead efficiency variance 1.82 40.60
Actual Loss 4.00

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 Evaluating Performance - Variance Analysis


NOTES

5.20 |CMA Final Strategic Cost Management

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 Linear Programming


Chapter 6
Linear Programming

1 Jun'23 MTP Set 1

An animal feed company must produce 200 kg. of a mixture consisting of ingredients X1 and X2.
The ingredient X1 cost ₹ 3 per kg. and X2 cost ₹ 5 per kg. Not more than 80 kg. of X1 can be used
and at least 60 kg. of X2 must be used.
Find the minimum cost mixture, using LP technique. [6]

Minimum Cost Mixture - Graphical

Solution

Answer
The appropriate mathematical formulation of the given problem as LP model is as follows:
Minimize (total cost) = 3x1 + 5x2
Subject to the constraints
x1 + x2 = 200, x1 ≤ 80, x2 ≥ 60,
x1≥ 0 and x2 ≥ 0
Drawing the lines x1 + x2 = 200, x1 = 80 and x2 = 60 on a graph sheet, we get the adjoining figure.
x2

200 x1 = 80

160

120 P
x1 + x2 = 200
80

40 x2 = 60

0 40 80 120 160 200 x1

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 Linear Programming


It may be observed from the adjoining figure that the given problem has no feasible solution
space (shaded area) but has only one feasible point with its co-ordinates x1 = 80 and x2 = 120.
Hence the optimum solution is to mix 80 kgs. of ingredients X1 and 120 kgs. of ingredients X2 to
have a minimum cost of ₹ 840.

2 Jun'23 MTP Set 2

Write the dual of the following linear programming problem:
Minimize Z = 5x1 – 6x2 + 4x3
Subject to the constraints
3x1 + 4x2 + 6x3 ≥ 9
x1 + 3x2 + 2x3 ≥ 5
7x1 – 2x2 – x3 ≤ 10
x1 – 2x2 + 4x3 ≥ 4
2x1 + 5x2 – 3x3 = 3
x1 ≥0, x2 ≥ 0, x3 ≥ 0 [7]

Formulation of Dual

Answer
First, we convert the equality constraint in terms of two inequalities, one involving ‘≤’ by (-1).
Then the primal problem can be written as follows:
Minimize Zx = 5x1 – 6x2 + 4x3
Subject to the constraints
3x1 + 4x2 + 6x3 ≥ 9
x1 + 3x2 + 2x3 ≥ 5
-7x1 + 2x2 + x3 ≥ -10
X1 – 2x2 + 4x3 ≥4
2x1 + 5x2 + 3x3 ≥ 3

6.2 |CMA Final Strategic Cost Management

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 Linear Programming


-2x1 – 5x2 + 3x3 ≥ -3

x1 , x2 , x3 ≥ 0
Let y1, y2, y3 y4, y5 and y6 be the dual variables corresponding to the six constraints in given order,
then the dual of the given primal problem can be formulated as follows:
Maximize Zy = 9y1 + 5y2 – 10y3 + 4y4 + 3y5 – 3y6
Subject to the constraints
3y1 + y2 – 7y3 + y4 + 2y5 – 2y6 ≤ 5
4y1 + 3y2 + 2y3 – 2y4 + 5y5 – 5y6 ≤ - 6
6y1 + 2y2 + y3 + 4y4 – 3y5 + 3y6 ≤ 4
y1, y2, y3, y4, y5, y6 ≥ 0
Let y7 = y5 – y6, then the above dual problem reduces to the form:
Maximize Zy = 9y1 + 5y2 – 10y3 + 4y4 + 3y7
Subject to the constraints
3y1 + y2 – 7y3 + y4 + 2y7 ≤ 5
-4y1 – 3y2 – 2y3 + 2y4 – 5y7 ≥ 6
6y1 + 2y2 + y3 + 4y4 – 3y7 ≤ 4
y1, y3, y3, y4 ≥ 0 and y7 is unrestricted in sign.

3 Jun'23
UTKARSH Bank is in the process of formulating its loan policy involving a maximum of ₹ 600
million. Table below gives the relevant types of loans. Bad debts are not recoverable and produce
no interest revenue. To meet competition from other banks, the following policy guidelines have
been set. At least 40% of the funds must be allocated to the Agricultural and Commercial loans.
Funds allocated to Housing must be at least 50% of all loans given to personal, car, housing. The
overall bad debts on all loans may not exceed 0.06.
Type of Loan Interest Rate (%) Bad Debt (Probability)
Personal 17 0.10
Car 14 0.07
Housing 11 0.05
Agricultural 10 0.08
Commercial 13 0.06

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 Linear Programming


Required:
Develop and formulate a linear programming model to determine optimal loan allocation.[6]

Formulation of LP

Answer
Maximise Z = 0.17x1 + 0.14 x2 + ...
Subjected to :
Total Loan = x1 + x2 + ... ≤ 600
Agriculture and Commercial = x4 + x5 ≥ 0.4 (x1 + x2 + x3 + x4 + x5)
Housing = x3 ≥ 0.5 (x1 + x2 + x3)
Bad debt = 0.10 x1 + 0.07x2 + 0.05x3 + 0.08x4 + 0.06x5 ≤ 0.06 (x1 + x2 + x3 + x4 + x5 + x6)
NNA ⇒
x1 ≥ 0.10
i = 1-6

4 MTP Dec’23 Set 1

Mr. Lal is on a low cholesterol diet. During lunch at the office canteen he always chooses between
two particular types of meal – Type A and Type B. The table below lists the amount of protein,
carbohydrates and vitamins each meal provides along with the amount of cholesterol (which
he is trying to minimize). He needs at least 200 grams of protein, 960 grams of carbohydrates
and 40 grams of vitamins for lunch each month. Over this time period, how many days should
he have Type A meal and how many days the Type B meal so that he gets adequate amount
of protein, carbohydrates and vitamins and at the same time minimizes his cholesterol intake?
Use Graphical Method.
Type A meal Type B meal
Protein (Grams) 8 16
Carbohydrates (Grams) 60 40
Vitamins (Grams) 2 2
Cholesterol (Miligrams) 60 50

6.4 |CMA Final Strategic Cost Management

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 Linear Programming


Formulation and Solution of LPP Graphically

Answer
Let, x = No. of days Mr. Lal will take Type A meal & y = No. of days Mr. Lal will take Type B meal
Since the goal is to minimize Mr. Lal’s cholesterol intake, the Objective Function should represent
the total cholesterol provided by both the meals.
So the Objective Function is Z = 60x + 50y The constraints are given as follows –
8x + 16y ≥ 200 (Constraint associated with the total protein provided by the two types of meals)
Or, x + 2y ≥ 25
60x + 40y ≥ 960 (Constraint associated with the total carbohydrates provided by the two types
of meals)
Or. 3x + 2y ≥ 48
2x + 2y ≥ 40 (Constraint associated with the total vitamins provided by the two types of meals
Or, x + y ≥ 20
Also x and y being number of days cannot be negative i.e x ≥ 0 and y ≥ 0 So the formulated LPP
can be stated as –
Minimize Z = 60x + 50y Subject to the constraints x + 2y ≥ 25
3x + 2y ≥ 48 x + y ≥ 20
x ≥ 0 and y ≥ 0
To find the feasible region, first of all the straight lines corresponding to the above constraints
are drawn using the method followed in the previous illustration.
x + 2y = 25 Or, x/25 + y/12.5 = 1 is the first constraint line and it passes through (25,0) and
(0,12.5)
3x + 2y = 48 Or, x/16 + y/24 = 1 is the second constraint line which passes through (16,0) and
(0,24)
x + y = 20 Or, x/20 + y/20 = 1 is the third constraint line and it passes through (20,0) and (0,20) x
= 0 is the axis of y and y = 0 is the axis of x
Now the constraint inequalities are graphed and the common region of the same is shaded as
shown in the diagram below. It can be mentioned that the region of feasibility in this case is
unbounded on the upper side. But that is not a matter of concern because the problem deals
with minimization of the Objective Function which is confined to the corner points of the lower

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 Linear Programming


boundary of the envelope. As per the diagram, such corner points are A, B, C and D. Of these
points coordinates of A and D are directly available from the graph because they lie on the axes.
Coordinates of C and D can also be obtained from the graph. But it is suggested to get those by
solving the simultaneous equations.
Coordinates of B is obtained by solving the equations 3x + 2y = 48 and x + y = 20 and those of
C is obtained by solving x + y = 20 and x + 2y = 25
y
3x + 2y = 48

x + y = 20 A (0, 24)
20
x + 2y = 25 16
12 (8, 12)
B
8 C (15, 5)
4 (25, 0)
D
0
x
4 8 12 15 20 24

Now the value of the Objective Function is computed at each of the corner points and shown
in the table below.
Coordinates of the Corner Point Value of the Objective Function (Z = 60x+50y)
A (0,24) 60.0+50.24 = 1200
B (8.12) 60.8+50.12 = 1080
C (15.5) 60.15+50.5 = 1150
D (25.0) 60.25+50.0 = 1500
It is clear from the table above that the value of the Objective Function is minimum at B (8, 12).
Thus the solution of the LPP is given as Zmin = 1080 miligrams and the corresponding values of
the decision variables are x = 8 and y = 12
Hence Mr. Lal should take Type A meal for 8 days and Type B for 12 days to intake least cholesterol.

5 Jun'24 MTP Set 1

A retired person has plans to invest in shares. He has been suggested by one of his friends who
plays in the share market to invest in two shares A and B which gives dividends @ 12% and 4%
p.a. respectively. For an investment of ₹ 1, the growth in the market value of the shares A and B
are respectively 10 paise and 40 paise in one year. The retired person wants to invest such that
the dividend income is at least ₹ 600 p.a. and the growth of initial investment in one year is at
least ₹ 1,000.

6.6 |CMA Final Strategic Cost Management

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 Linear Programming


(i) Formulate it as a Linear Programming Problem.

(ii) Write its Dual. [7]

LP Formulation and Dual

Answer
(i) Let x1 and x2 be the number of units of the shares A and B to be purchased by the retired
person. The LP can be formulated as –
Minimize Z = x1 + x2 Subject to the Constraints
0.12x1 + 0.04x2 ≥ 600 (Constraint on the income from Dividend)
0.10x1 + 0.40x2 ≥ 1000 (Constraint on the income from Growth)
x1, x2 ≥ 0 (Non-negativity Constraint)
This is the formulated Primal Problem
(ii) To obtain the Dual, the data are summarized in the table below.
PRIMAL (Minimization problem)
DUAL Decision Variables x1 x2 Relation RHS of Constraint
(Maximization y1 0.12 0.04 ≥ 600
problem) Y2 0.10 0.04 ≥ 1000
Relation ≤ ≤ – –
RHS of Constraint 1 1 – –
The Dual is given as –
To Maximize Z* = 600y1 + 1000y2
Subject to the Constraints
0.12y1 + 0.10y2 ≤ 1
0.04y1 + 0.40y2 ≤ 1
y1, y2 ≥ 0

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 Linear Programming


6 Jun'24
FAMC Ltd., a manufacturing company produces three products A, B and C. It uses two types of
raw materials I and II of which 5000 and 7500 units respectively are available. The raw material
requirements per unit of the products are given below:
Raw Material Requirement per unit of Product
A B C
I 3 4 5
II 5 3 5
The labour time for each unit of product A is twice that of product B and three times that of
product C. The entire labour force of the firm can produce the equivalent of 3,000 units. The
minimum demand of the three products is 600, 650 and 500 units respectively. Also the ratios
of the number of units produced must be equal to 2:3:4. The profits per unit of A, B and C are ₹
50, ₹ 50 and ₹ 80 respectively.
Required:
Analyze and Formulate the problem as a linear programming model in order to determine the
number of units of each product which will maximize the profit. [7]

LP Formulation

Answer
Let the firm produce X1 units of product A, X2 units of product B and X3 units of product C. The
profit per unit of products A, B and C is ₹ 50, ₹ 50 and ₹ 80 respectively.
The objective function is : Maximise Z = 50X1 + 50X2 + 80X3
Raw material constraints are : 3X1 +4X2 + 5X3 ≤ 5,000 & 5X1 + 3X2 + 5X3 ≤ 7,500
The labour time for each unit of product A is twice that of product B and three times that of
product C. Also, the entire labour force can produce the equivalent of 3000 units.
x2 x3
x1    3, 000
2 3

6X1 + 3X2 + 2X3 ≤ 18,000

Demand constraints are: X1 ≥ 600, X2 ≥ 650 and X3 ≥500

6.8 |CMA Final Strategic Cost Management

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 Linear Programming


Since the ratios of the number of units produced must be equal to 2 : 3 : 4, therefore,
1 1 1 1
= X1 = X2 and X2 X3
2 3 3 4

Or, 3X1 = 2X2 and 4X2 = 3X3

The linear programming model can be formulated as follows:
Maximise Z = 50 X1 + 50X2 + 80X3
Subject to the Constraints
3X1 + 4X2 + 5X3 ≤ 5000
5X1 + 3X2 + 5X3 ≤ 7500
6X1 + 3X2 + 2X3 ≤ 18000
3X1 = 2X2 and 4X2 = 3X3
X1 ≥ 600, X2 ≥ 650 and X3 ≥ 500

7 MTP Dec’24 Set 1

A farmer has a farm with 125 acres. He produces Carrot, Beetroot and Potato. Whatever he
produces is fully sold in the market. He gets ₹5 per kg for Carrot, ₹4 per kg for Beetroot and
₹5 per kg for Potato. The average yield is 1,500 kg of Carrot per acre, 1,800 kg of Beetroot per
acre and 1,200 kg of Potato per acre. To produce each 100 kg of Carrot and Beetroot and 80 kg
of Potato, a sum of ₹12.50 has to be spent for manure. Labour required for each acre to raise
the crop is 6 man-days for Carrot and Potato each and 5 man-days for Beetroot. A total of 500
man-days of labour at the rate of ₹40 per man-day are available.
Formulate a LLP to maximise the farmer’s total profit. [7]

LP Formulation

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 Linear Programming


Answer
Let C, B and P be the number of acres allotted for cultivating Carrot, Beetroot and
Potato respectively. The profit from the produces is determined in the following manner –
Particulars per acre Carrot Beetroot Potato
Selling Price ₹ 5 / Kg x 1,500 kgs ₹ 4 / kg x 1,800 kgs ₹ 5 / kg x 1,200 kgs
= ₹ 7,500 = ₹ 7,200 = ₹ 6,000
Less: Manure Cost 1,500 kgs x 1,800 kgs x 1,200 kgs x ₹
₹12.50/100 ₹12.50/100 12.50/80
= ₹ 187.50 = ₹ 225.00 = ₹ 187.50
Less: Labour Cost ₹ 40 x 6 = ₹ 240 ₹ 40 x 5 = ₹ 200 ₹ 40 x 6 = ₹ 240
Profit per acre ₹ 7,072.50 ₹6,775 ₹ 5,572.50
Maximise Profit Z = 7,072.50 C + 6,775 B + 5,572.5 P
subject to, C + B + P ≤ 125 (Land Availability)
6C + 5B + 6P ≤ 500 (Man Days Availability)
C, B, P ≥ 0 (Non-Negativity Assumption)

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 Transportation


Chapter 7
Transportation

1 Jun'23 MTP Set 1

Problems of Linear Programming with objective of minimizing Total Cost of transportation
of a particular commodity from different Sources to various Destinations is solved using the
methodology of Transportation technique. Traditionally such problems involve one Objective
function. But in real life, problems involve more than one Objective function. An example of such
type, is transportation of perishable items or deteriorating items. For these items minimization
of deterioration is equally important along with that of cost of transportation.
Egg is a commodity which comes under the category of deterioration in the form of its breakage.
Any broken egg is of zero value to the manufacturing firms. Thus minimization of breakage of
eggs during transportation is one of the most important objectives of the egg transportation
problem. At the same time there are the other important objectives too, like minimization of
distance travelled to supply, optimization of time taken to supply etc. In fact, these factors are
all related to the minimization of deterioration. As eggs are traditionally transported through
roads in our country, which are not of best possible quality as far as smoothness is concerned,
chances of breakage increase with increased distance travelled. Similarly, optimization of time
taken to reach the Destination (which has a relationship with the speed of the transporting
vehicle) is important because more the speed of the vehicle less is the time taken to reach but
with a higher chance of breakage of eggs. So it is quite clear that logistics and supply chain for
eggs is a multi- objective problem of transportation.
Help of software is needed to find solution of such problems without any hassle. In fact, the
solutions obtained are heuristic type where some compromise among the optimum values of
the individual functions is done to reach the ultimate goal.
A problem of transportation of eggs is given as follows –
Suppose there are three sources A, B & C with capacities (in lakhs of eggs) 8, 5 & 3 respectively
to supply eggs to three destinations I, II & III having respective demands (in lakhs of eggs) of
5, 3 and 2. The distance in kilometres between the sources and destinations are given in the
following matrix.

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 Transportation


To Destination
From Source
I II III
A 551 314 280
B 521 267 341
C 396 142 193
Software provided the following optimal allocation of eggs to the different cells of the matrix
while going for distance minimization: - A – III = 2, B – I = 2, B – II = 3 and C – I = 3
Based on the above, the minimum distance to be travelled is given to be 1464 Kms. which has
the beak-up of (280 + 521 + 267 + 396).
The objective of minimization of Percentage Breakage of eggs is taken care of based on the
following data
To Destination @ 30 To Destination @ 35 To Destination @ 40
From Source
Kmph Kmph Kmph
I II III I II III I II III
A 5.00 2.85 2.54 5.50 3.13 2.80 6.00 3.42 3.05
B 4.77 2.42 3.10 5.20 2.66 3.40 5.67 2.91 3.71
C 3.61 1.29 1.75 3.95 1.42 1.93 4.13 1.55 2.00
Optimal allocations for different Speeds of vehicles as provided by the software are given in the
tables below.
To Destination @ 30 To Destination @ 35 To Destination @ 40 Supply in
From Source
Kmph Kmph Kmph Lakhs
I II III I II III I II III
A 2 2 2 8
B 2 3 2 3 2 3 5
C 3 3 3 3
Demand in Lakhs 5 3 2 5 3 2 5 3 2
Using the methodology similar to that of Distance minimization, the total breakage percentage
for a speed of 30 Kmph is found to be 13.34 and the average breakage percentage is 3.335.
Total Transportation cost is found to be ₹ 2,80,000/-
Based on the above information answer the following questions –
1. Instead of using the software if the problem is to be solved manually then formulate the
first step.
2. Is the figure of average breakage percentage correct for a speed of 30 Kmph? Justify.
3. What is the Transportation Cost of an egg per kilometre of distance travelled?
4. Formulate a matrix for minimizing the time taken to supply when the vehicle speed is 35
Kmph. [8]

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 Transportation


Balancing, Average Speed, Transportation

Cost

Answer
(1) As per the given information, Total demand of eggs = 10 Lakh pieces and Total supply is 16
Lakh pieces. Thus the problem is unbalanced one with Supply > Demand
So, the very first step should be to make it balanced by introducing a DUMMY destination
having a demand of 16 – 10 = 6 Lakh pieces.
(2) When the vehicle speed is 30 Kmph then the total percentage of broken eggs is
(2.54+4.77+2.42+3.61) = 13.34.
So, the average percentage of broken eggs = 13.34 ÷ 4 = 3.335.
Hence the figure of average breakage percentage for a speed of 30 Kmph is correct.
(3) Total Cost of transportation = ₹ 280000/-, Total No. of eggs to be supplied = 10,00,000
Minimum total distance to be travelled = 1464 Kms.
So, Cost of Transportation per egg per Km =280000 ÷ (10,00,000 x 1464) = ₹ 0.00019.
(4) Time (Hours) Matrix for Vehicle Speed 35 Kmph
To Destination
From Source
I II III
A 15.74 8.97 8.00
B 14.89 7.63 9.74
C 11.31 4.06 5.51
Note : Time in hours = Distance in Km ÷ Speed in Kmph.

2 Jun'23 MTP Set 2

A multi-plant company has three manufacturing plants, A, B and C. It sells products in two
markets X and Y. Production cost at A, B and C is ₹ 1,500; 1,600; and 1,700 per piece respectively.
Selling prices in X and Y are ₹ 4,400 and ₹ 4,700 respectively. Demands in X and Y are 3,500 and
3,600 piece respectively. Production capacities at A, B and C are 2,000; 3,000 and 4,000 pieces
respectively. Transportation costs are as shown in the table below. Build a mathematical model.

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 Transportation


Plant Market
X Y
A 1,000 1,500
B 2,000 3,000
C 1,500 2,500
[7]

Formulation of LP for Transportation

Answer
Here three plants differ in production cost. Therefore, our problem is to determine the schedule
of production which may result in the maximum profit. The various profits per item are as
shown in the adjacent table.
Plant Market
X Y
A 1,900 1,700
B 800 100
C 1,200 500
The profit (selling price - production cost – transportation cost) data from plants to markets are
shown below:
from A to X: 4400 – 1500- 1000 = 1900;
from A to Y: 4700 – 1500 – 1500 = 1700;
From B to X: 4400 – 1600 – 2000 = 800; and so on.
Further, total production at A, B and C plants is 2,000 + 3,000 + 4,000 = 9,000 units while total
requirement at X and T is 3,500 + 3,600 = 7,100 units. Hence this is an unbalanced transpor-
tation problem. By Introducing a dummy market Z to receive an excess production of 9,000
– 7,100 = 1,900 units, the complete relevant information is summarized in the following table:

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 Transportation


Market
Plant Supply
X Y Dummy
1,900 1,700 0
A x11 x12 x13 2,000

800 100 0
B x21 x22 x23 3,000

1,200 500 0
C x31 x32 x33 4,000

Demand 3,500 3,600 1,900 9,000

Let xij be quantity to be transported from plant i, (i = 1, 2, 3) to market j, (j = 1, 2, 3). Now the LP
model based on the given data can be formulated as follows:
Maximize (total profit) Z = 1900x11 + 1700x12 + 800x21 + 100x22 + 1200x31 + 500x32
Subject to the constraints
x11 + x12 + x13 = 2,000
x21 + x22 + x23 = 3,000 supply constraints
x31 + x32 + x33 = 4,000
x11 + x21 + x31 = 3,500
x12 + x22 + x32 = 7,600 demand constraints
x13 + x23 + x33 = 1,900
Xij ≥ 0 for all i and j

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 Transportation


NOTES

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 Assignment


Chapter 8
Assignment

1 Jun'23 MTP Set 1

Consider a problem of assigning four officers to four tasks. The time (hours) required to complete
the tasks is given below:
Tasks
Officer A B C D
Officer 1 4 7 5 6
Officer 2 - 8 7 4
Officer 3 3 - 5 3
Officer 4 6 6 4 2
Officer 2 cannot be assigned to task A and officer 3 cannot be assigned to task B.
Find all the optimal assignment schedules. [8]

Optimal Assignment Prohibited Cells

Answer
Step 1: Assign a high cost, denoted by M, to the paif (A, 2) and (B, 3).
ROW SUBSTRACTION
Task
A B C D
Officer

1 0 3 1 2

2 M 4 3 0

3 0 M 2 0

4 4 4 2 0

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 Assignment


Column SUBSTRACTION
Task
A B C D
Officer
1 0 0 0 2
2 M 1 2 0
3 0 M 1 0
4 4 1 1 0

Step 2 : Draw minimum number of straight lines to cover all zeros.

Task
A B C D
Officer

1 0 0 0 2

2 M 1 2 0

3 0 M 1 0

4 4 1 1 0

Step 3 : Smallest uncovered number subtracted from uncovered numbers, added to

numbers at intersection of two lines.
Task
A B C D
Officer

1 1 0 0 3

2 M 0 1 0

3 0 M 0 0

4 4 0 0 0

Step 4 : Return to step 2. Cover all zeros. Since the number of lines is 4, the optimum
solution is reached
Task
A B C D
Officer

1 1 0 0 3

2 M 0 1 0

3 0 M 0 0

4 4 0 0 0

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 Assignment


Assign:
Officer Job Time
1 to B 7 hrs
2 to D 4 hrs
3 to A 3 hrs
4 to C 4 hrs
Total 18 hrs

2 Postal Test Paper

A travelling salesman has to visit five cities. He wishes to start from a particular city, visit each
city once and then return to his starting point. The travelling cost (in ₹ 00 ) between any two
cities is given in the table below:
To City
From city
A B B D E
A M 5 8 4 5
B 5 M 7 4 5
C 8 7 M 8 6
D 4 4 8 M 8
E 5 5 6 8 M
Find the cost minimising sequence of visit. [7]

Travelling Salesman

Answer
Table – 1 showing reduced matrix after Row subtraction operation
To City
From City
A B C D E
A M 1 4 0 1
B 1 M 3 0 1
C 2 1 M 2 0
D 0 0 4 M 4
E 0 0 1 3 M

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 Assignment


Table – 2 showing reduced matrix after Column subtraction operation

To City
From City
A B C D E
A M 1 3 0 1
B 1 M 2 0 1
C 2 1 M 2 0
D 0 0 3 M 4
E 0 0 0 3 M
Here minimum number of horizontal and vertical straight lines to cover all the zeros = 4 ≠ Order
(5) of the matrix. So the solution is non–optimal. Improvement of the above matrix is done
by subtracting the minimum value of the uncovered elements i.e. 1 from all the uncovered
elements and adding the same to the elements at the junction of the horizontal and vertical
lines. The resultant matrix is shown below.
Table – 3 showing improved matrix (Optimal)
To City
From City
A B C D E
A M 0 2 0 1
B 0 M 1 0 1
C 1 0 M 2 0
D 0 0 3 M 5
E 0 0 0 4 M
Here the minimum number of straight lines required to cover all the zeros = 5 = Order of the
matrix. So the solution is optimal. Now assignments are done by following the standard rules
of Hungarian Method as below.
Table – 4 showing matrix with Optimal Assignments (Alternative – 1)
To City
From City
A B C D E

A M 0 2 0 1

B 0 M 1 0 1

C 1 0 M 2 0

D 0 0 3 M 5

E 0 0 0 4 M

As per the solution above, the Salesman will travel from A to B, then B to D, then D to A. But this
is not meeting the requirement of travelling through all the cities and finally returning to the

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 Assignment


starting point i.e.. A. Hence the solution is unacceptable.

Table – 5 showing matrix with Optimal Assignments (Alternative – 2)
To City
From City
A B C D E

A M 0 2 0 1

B 0 M 1 0 1

C 1 0 M 2 0

D 0 0 3 M 5

E 0 0 0 4 M

Again the solution above shows the travelling route as A to D, then D to B, then B to A. This is
also not acceptable because of violation of the basic requirement of the problem.
Under the circumstances it is decided to try for the assignment at the cells which are having next
highest entry after zero. It can be mentioned that as far as practicable Assignments should be
done at the cells having 0 entry. Here next highest entry in the table after 0 is 1 and it appears at
the four cells – (A, E), (B, C), (B, E) and (C, A). By arbitrarily choosing any one of these, assignment
is done afresh. Let the cell (A, E) be chosen for the purpose
Table – 5 showing matrix with the required solution
To City
From City
A B C D E

A M 0 2 0 1

B 0 M 1 0 1

C 1 0 M 2 0

D 0 0 3 M 5

E 0 0 0 4 M

Using the standard procedure of Hungarian Method assignments are made starting from 1st
Row cell (A, E) and finally required solution is reached which shows the travel route of the
salesman as – A to E, E to C, C to B, B to D and D to A. Minimum Cost of travel is 5 + 4 + 7 + 4 +
6 = 26

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 Assignment


3 Jun'23
A travelling salesman has to visit five cities. S,T, X,Y and Z. The inter city distances are tabulated
below. Note the distance between two cities not be same both ways.
From | To S T X Y Z
S - 14 26 27 17
T 8 - 18 20 9
X 12 13 - 20 14
Y 16 19 24 - 18
Z 14 15 25 27 -
The distance are in km.
Required:
If the travelling salesman starts from City S and has to come back to city S, by applying the
principle of quantitative technique, which route would you advise him to take so that total
distance travelled by him is minimized? [8]

Travelling Salesman

Answer
(i) Row Minimisation
- 0 12 13 3
0 - 10 12 1
0 1 - 8 2
0 3 8 - 2
0 1 11 2 -
(ii) Column Minimisation

- 0 4 11 2
0 - 2 10 0
0 1 - 6 1
0 3 0 - 1
0 1 3 0 -

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 Assignment


(iii) Boxing

S T X Y Z

S - 0 4 11 2

T 0 - 2 10 0

X 0 1 - 6 1

Y 0 3 0 - 1

Z 0 1 3 0 -

Cycle
S→T→Z→Y→X
Optimum Assignment
From To Cost
S T 14
T Z 9
X S 12
Y X 24
Z Y 27
86

4 Dec’23
Mr. Tushar, production supervisor is considering how he should assign five jobs that are to be
performed, to the mechanists working under him. He wants to assign the jobs to the mechanists
in such a manner that the aggregate cost to perform the jobs is the least. He has following
information about the wages paid to the mechanists for performing these jobs.
Jobs
Mechanists 1 2 3 4 5
A 10 3 3 2 8
B 9 7 8 2 7
C 7 5 6 2 4
D 3 5 8 2 4
E 9 10 9 6 10

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 Assignment


Analyse and assign the jobs to the mechanists so that the aggregate cost is the least. [7]

Minimization problem

Answer
The given problem is a standard minimization problem.
Subtracting minimum element of each row from all the elements of that now, the given problem
reduces to
JOBS
Mechanist 1 2 3 4 5

A 8 1 1 0 6

B 7 15 6 0 5

C 5 3 4 0 2

D 1 3 6 0 2

E 3 14 3 0 4

Subtract the minimum element of each column from all the elements of that column. Draw the
minimum number of lines horizontal or vertical so as to cover all zeros.
JOBS
Mechanist 1 2 3 4 5

A 7 0 0 0 4

B 6 4 5 0 0

C 4 2 3 0 0

D 0 2 5 0 0

E 2 3 2 0 2

Since the minimum number of lines covering all zeros is equal to 4 which is less than the number
of columns/ row (= 5), the above table will not provide optimal solution. Subtract the minimum
uncovered element (= 2) from all uncovered elements and add to the elements lying on the
intersection of two lines, we get the following matrix.

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 Assignment


JOBS
Mechanist 1 2 3 4 5

A 7 0 0 2 6

B 4 2 3 0 3

C 2 0 1 0 0

D 0 2 5 2 2

E 0 1 0 0 2

Since the minimum number of horizontal and vertical lines to cover all zeros is equal to five
which is equal to the order of the matrix, the above table will give the optimal solution. The
optimal assignment is made below.
JOBS
Mechanist 1 2 3 4 5

A 7 0 0 2 6

B 4 2 3 0 3

C 2 0 1 0 0

D 0 2 5 2 2

E 0 1 0 0 2

The optimal assignment is given below:

Mechanist Job Wages (₹)
A 2 3
B 4 2
C 5 4
D 1 3
E 3 9
21
The total least cost associated with the optimal mechanist-job assignment = 21

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 Assignment


NOTES

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 Game Theory


Chapter 9
Game Theory

1 Jun'23 MTP Set 1

Infer the optimum solution of the Game using Dominance Principle

15 2 3 
 6 5 7
 
 7 4 0 
[8]

Dominance Principle

Answer
Let the given Game is played by the players A and B with A (the maximizing player) having
strategies A1, A2 and A3, represented along the rows and B (the minimizing player) having
strategies B1, B2 and B3 represented along the columns. So the given payoff Matrix can be
written as follows –

Strategies of B
Strategies of A
B1 B2 B3
A1 15 2 3
A2 6 5 7
A3 -7 4 0

All the elements of Row A3 are less than the corresponding elements of Row A2. So A3 is
dominated by A2. Henceit is ignored and deleted. The new matrix is given below.
Strategies of B
Strategies of A
B1 B2 B3
A1 15 2 3
A2 6 5 7

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 Game Theory


Here all the elements of B3 are more than the corresponding elements of B2. Hence B3 is
dominated by B2 and ignored to get the new matrix below.
Strategies of B
Strategies of A
B1 B2 Row Min.
A1 15 2 2
A2 6 5 5
Column Max. 15 5
Maximum among the Row minimums = 5 = Maximin value and Minimum among the Column
maximums = 5 = Minimax value. As, Maximin and Minimax values are equal, there exists a
Saddle Point. It occurs at the cell A2B2.
Hence optimal strategies of A and B are respectively A2 and B2. Also value of the Game = 5

2 Jun'23
A and B play game in which each has three coins, a 5R, 10R and 20R. Each selects a coin without
the knowledge of the other’s choice. If the sum of the coins is an odd amount, A wins B’s coin, if
the sum is even B wins A’s coin.
Required:
(i) Prepare the pay-off matrix for two players (A and B).
(ii) Find the best strategy for each player and
(iii) Calculate the value of Game using Dominance Principle. [8]

Pay-off matrix, Best Strategy, Dominance

Principle

Answer
Payoff (Net gain)
A (Maximising)
B
5 10 20
A 5 B (Net Gain 5) A(10) A(20)
10 A(5) B(10) B(10)
20 A(5) B(20) B(20)

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 Game Theory


Best strategy A = 5 [2 times win chance]

B = 10 or 20 but 10 is preferred to minimise loss
Value of Game
Comparing R2 and R3
Dominance
R2 can be eliminated (Lower)
B
C1 C2 C3
A R1 5 10 20
R3 5 20 20
Comparing C1 and C3
C3 can be eliminated
B
C1 C2 C3

A R1 5 10 5
R3 5 20 5

Minimax 5 20
∴ Value of Game = 0

3 Postal Test Paper

The Management of a company is negotiating with its Union for revision of hourly wages of its
employees. The Management deployed a Consulting Firm who has prepared a payoff matrix
for the purpose which indicates the additional hourly cost (in ₹) to the company. It is shown
below: you being a part of the Consulting Firm have to assist the Management in selecting the
best strategy.
Management’ s
Strategies of the Union
Strategies
U1 U2 U3 U4
M1 2.50 2.70 3.50 -0.20
M2 2.00 1.60 0.80 0.80
M3 1.40 1.20 1.50 1.30
M4 3.00 1.40 1.90 0
What is the value of the game? How is it going to affect the company’s cost? [7]

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 Game Theory


Mixed Strategy - Odds Method Rule of Dominance

Answer
As the Management’s objective is to minimise the cost, they can be considered as the Minimis-
ing Player and the Union as the Maximising Player in this problem of Game. Thus, to solve the
problem we have to recast the given Payoff Matrix by transposing it as below :
Strategies of the Union Management's Strategies Row Minimum
M1 M2 M3 M4
U1 2.50 2.00 1.40 3.00 1.40 = Maximin
U2 2.70 1.60 1.20 1.40 1.20
U3 3.50 0.80 1.50 1.90 0.80
U4 -0.20 0.80 1.30 0 -0.20
Column Maximum 3.50 2.00 1.50 = Minimax 3.00
Maximin value (1.40) ≠ Minimax value (1.50). Thus, Saddle Point does not exist. So this is a
problem of Mixed Strategy. Since the matrix is not a (2 × 2) Matrix, Dominance Rules are applied
to reduce its size to make it a (2 × 2) Matrix.
As all the elements of the 3rd Row of the above matrix are either greater than or equal to the
corresponding elements of the 4th Row, the 3rd Row can be considered to dominate the 4th.
So the 4th Row is ignored and the new matrix is shown below.
Management's Strategies
Strategies of the Union
M2 M3 M4
U1 2.00 1.40 3.00
U2 1.60 1.20 1.40
U3 0.80 1.50 1.90
Again all the elements of the 1st Column are greater than the corresponding elements of the
2nd Column, the 1st Column is dominated by the 2nd Column. So the 1st Column is ignored
and the new matrix is shown below.
Management’s Strategies
Strategies of the Union
M2 M3 M4
U1 2.00 1.40 3.00
U2 1.60 1.20 1.40
U3 0.80 1.50 1.90

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 Game Theory


All the elements of the 3rd Column (i.e. for Strategy M4) of this matrix are more than the
corresponding elements of 2nd Column (i.e. for Strategy M3). Hence M4 is dominated by M3
and ignored. The new matrix is shown below.
Management's Strategies
Strategies of the Union
M2 M3
U1 2.00 1.40
U3 0.80 1.50
This is a (2 × 2) Matrix. Now the problem of Game is solved by using Odds Method. Odds are
calculated as below.

Strategies of Management's Strategies

the Union M2 M3 ODDs
U1 2.00 = a1 1.40 = a2 b1 - b2 = 0.80 - 1.50 = 0.70
U3 0.80 = b1 1.50 = b2 a1 - a2 = 2.00 - 1.40 = 0.60
ODDs a2 - b2 = 1.40 - 1.50 = 0.10 a1 - b1 = 2.00 - 0.80 = 1.20 Sum of the ODDs = 1.30
Probabilities of the Union and the Management taking their different strategies are calculated
as follows – P(U1) = (b1 – b2) ÷ [(b1 – b2) + (a1 – a2)] = 0.70 / [0.70 + 0.60] = 0.70/1.30 = 7/13
P(U3) = (a1 – a2) ÷ [(b1 – b2) + (a1 – a2)] = 0.60 / [0.70 + 0.60] = 0.60/1.30 = 6/13
P(M2) = (a2 – b2) ÷ [(a2 – b2) + (a1 – b1)] = 0.10 / [0.10 + 1.20] = 0.10/1.30 = 1/13
P(M3) = (a1 – b1) ÷ [(a2 – b2) + (a1 – b1)] = 1.20 / [0.10 + 1.20] = 1.20/1.30 = 12/13
Value of the Game = v = [a1(b1 – b2) + b1(a1 – a2)] ÷ [(b1 – b2) + (a1 – a2)] = [2.00 × 0.70 + 0.80 ×
0.60] ÷ [0.70 + 0.60]
= [1.40 + 0.48] /1.30 = 1.88/1.30 = 1.45
So the Union chooses its Strategies U1, U2, U3 & U4 with probabilities (7/13, 0, 6/13, 0) and the
Management chooses its Strategies M1, M2, M3 & M4 with probabilities (0, 1/13, 12/13, 0).
Expected Gain to the Union is ₹ 1.45 and the corresponding Loss to the Management is ₹ 1.45.
Thus, the hourly cost of the company will increase by ₹ 1.45

4 MTP Dec’23 Set 1

Solve the Game using Dominance Principle

15 2 3 
 6 5 7
 
 7 4 0 

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 Game Theory


Pure Strategy Rule of dominance

Answer
Let the given Game is played by the Players A and B with A (the maximising player) having
strategies A1, A2 and A3 represented along the rows and B (the minimising player) having
strategies B1, B2 and B3 represented along the columns. So the given Payoff Matrix can be
written as follows –
Strategies of B
Strategies of A
B1 B2 B3
A1 15 2 3
A2 6 5 7
A3 -7 4 0
All the elements of Row A3 are less than the corresponding elements of Row A2. So A3 is
dominated by A2. Hence it is ignored and deleted. The new matrix is given below.
Strategies of B
Strategies of A
B1 B2 B3
A1 15 2 3
A2 6 5 7
Here all the elements of B3 are more than the corresponding elements of B2. Hence B3 is
dominated by B2 and ignored to get the new matrix below.
Strategies of B
Strategies of A Row Min
B1 B2
A1 15 2 2
A2 6 5 5
Column Max. 15 5
Maximum among the Row minimums = 5 = Maximin value and Minimum among the Column
maximums = 5 = Minimax value. As, Maximin and Minimax values are equal, there exists a
Saddle Point. It occurs at the cell A2 B2.
Hence optimal strategies of A and B are respectively A2 and B2. Also value of the Game = 5
[Note – This is a problem of Pure Strategy and could have been solved without the use of
Dominance Rules, but the question has specifically asked for the usage of Dominance Rules. So
the same is used.]

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 Simulation


Chapter 10
Simulation

1 Jun’23 MTP Set 2

At a service station a study was made over a period of 50 days to determine both the number of
automobiles being brought in for service and the number of automobiles serviced. The results
are given in the adjoining table:
No. of automobiles arriving for service Frequency of Frequency of
or completing services/day arrival daily serviced
0 4 6
1 8 4
2 20 24
3 10 6
4 6 8
5 2 2
Simulate the arrival service pattern for a ten-day period and estimate the mean number of
automobiles that remain in service for more than a day.
Use the following series of random numbers:

For arrivals 09 54 42 01 80 06 06 26 57 79
For Service 49 16 36 76 68 91 97 85 56 84
[8]

Waiting Line Simulation Mean Number of Automobiles

Answer
The cumulative probability distributions and random number intervals both for inter arrival
time and service time are shown in table below:

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 Simulation


Determination of Random Number Internal

No. of Arriving pattern Servicing pattern
arrivals /
services / Cum. RN Cum. RN
Frequency Probability Frequency Probability
day Prob Internal Prob Internal

0 4 4/50 0.08 00-07 6 6/50 0.12 00-11

1 8 8/50 0.24 08-23 4 4/50 0.20 12-19
2 20 20/50 0.64 24-63 24 24/50 0.68 20-67
3 10 10/50 0.84 64-83 6 12/50 0.80 68-79
4 6 6/50 0.86 84-95 8 8/50 0.96 80-95
5 2 2/50 1.00 96-99 2 2/50 1.00 96-99
The simulation worksheet developed to the problem is shown in table below: Simulation
Experiments Worksheet
Arrivals Services
Total no.
Total
held from Number Held for
Day Random Simulated Random Simulated previous waiting for
services Next Day
number arrival number services services
day
1 09 01 49 02 00 01 02 -
2 54 02 16 01 00 02 01 01
3 42 02 36 02 01 03 02 01
4 01 00 76 03 01 01 03 -
5 80 03 68 03 00 03 03 -
6 06 00 91 04 00 00 04 00
7 06 00 97 05 00 00 05 00
8 26 02 85 04 00 02 04 -
9 57 03 56 02 00 03 02 01
10 79 03 84 04 04 04 04 -
Average number of automobiles remaining in service for more than one day = 3/10

2 MTP Dec’23 Set 1

Patients arriving at a village dispensary are treated by a doctor on a first-come-first-served
basis. The inter-arrival time of the patients is known to be uniformly distributed between 0 and
80 minutes, while their service time is known to be uniformly distributed between 15 and 40
minutes. It is desired to simulate the system and determine the average time a patient has to be
in the queue for getting service and the proportion of time the doctor would be idle.
Carry out the simulation using the following sequences of random numbers. The numbers
have been selected between 00 and 80 to estimate inter-arrival times and between 15 and 40
to estimate the service times required by the patients.

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 Simulation


Series 1 07 21 12 80 08 03 32 65 43 74
Series 2 23 37 16 28 30 18 25 34 19 21

Waiting Line Simulation • No Random Interval

• Average waiting time of
Patient and Doctor

Answer
Simulation of data at a village dispensary
Inter Waiting
Entry time Service Time Service Idle time
No. of arrival time End time time of
in to queue Random No. Start time of doctor
patients Random No. (hrs) patient
(hrs) (minutes) (hrs) (minutes)
(minutes) (minutes)
1 07 8.07 23 8.07 8.30 - 07
2 21 8.28 37 8.30 9.07 2 -
3 12 8.40 16 9.07 9.23 27 -
4 80 10.00 28 10.00 10.28 - 37
5 08 10.08 30 10.28 10.58 20 -
6 03 10.11 18 10.58 11.16 47 -
7 32 10.43 25 11.16 11.41 33 -
8 65 11.48 34 11.48 12.22 - 07
9 43 12.31 19 12.31 12.50 - 09
10 74 01.45 21 01.45 02.06 - 55
Total (in minutes) 129 115
Average waiting time of patient = 129 / 10 = 12.9 minutes
Average waiting time of doctor = 115 / 10 = 11.5 minutes
It has been assumed that starting time be 8.00 A.M.

3 Postal Test Paper

The past data of demand per week (in ‘00 kgs.) of a confectionery item is given below –

Demand/Week 0 5 10 15 20 25
Frequency 2 11 8 21 5 3
Using the sequence of random numbers – 35, 52, 13, 90, 23, 73, 34, 57, 35, 83, 94, 56, 67, 66
generate the demand for the next 10 weeks. Also find out the average demand per week.

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 Simulation


Average Demand per week

Answer
Table showing Random Number Range for Demand
Probability Cumulative
Demand/ week Frequency (f) Range
(p = f / ∑f) Probability
0 2 .04 .04 00-03
5 11 .22 .26 04-25
10 8 .16 .42 26-41
15 21 .42 .84 42-83
20 5 .10 .94 84-93
25 3 .06 1.00 94-99
Total ∑f = 50 1.00
Table showing Simulated values for the next ten weeks
Week Random No. Demand in '00 Kgs.
1 35 10
2 52 15
3 13 5
4 90 20
5 23 5
6 73 15
7 34 10
8 57 15
9 35 10
10 83 15
Total = 120
Explanatory Note on the method of obtaining simulated demed :
35 is the first one of the given Random Nos. So it is used for Week 1. Also 35 lies within the
Range 26-41 of the previous table. Again 10 is the demand / week for the range 26-41. Hence
demand for week 1 is 10. Similarly, the demands for the other weeks are simulated.
Average demand per week = Total demand / No. of weeks = 120/10 = 12 (‘00) Kgs.

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 Simulation


4 Dec’23
Sugam Travelling Agency has to deal with a number of clients. The time taken by the officer of
the agency to deal with clients and the arrival pattern of clients follow the distribution given
below:
Time to deal with the clients:
Minutes Probability
2 0.05
4 0.10
6 0.15
10 0.30
14 0.25
20 0.10
30 0.05
Time elapsing between arrivals of clients:
Minutes Probability
1 0.20
8 0.40
15 0.30
25 0.10
Required:
(i) Simulate the arrival and serving of 10 clients by taking the following Random numbers.
Random Numbers for:
Arrival pattem 02 48 43 75 89 36 96 - 47 36 61
Serving pattern 60 73 6l 35 28 16 80 46 60 11
(i) Indicate which of the clients will wait for how many minutes.
(iii) Assess probability of time office being idle, Laking the starting ime as 10am. [7]

Service Line Probability

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 Simulation


Answer
(i/ i/ iii)
Simulation Worksheet: (Starting Time at 10 AM)
Client Random Time Arrival Service Random Service Service Time Time
No. Nos. for between time beginning Nos. for time end client office idle
arrival arrivals at (hours) services (minutes) (hours) waiting (minutes)
(hrs) (minutes) (minutes)
1. 2 1 10.01 10.01 60 14 10.15 - 1
2. 48 8 10.09 10.15 73 14 10.29 6 —
3. 43 8 10.17 10.29 61 14 10.43 12 —
4. 75 15 10.32 10.43 35 10 10.53 11 —
5. 89 15 10.47 10.53 28 6 10.59 6 —
6. 36 8 10.55 10.59 16 6 11.05 4 —
7. 96 25 11.20 11.20 80 14 11.34 — 15
8. 47 8 11.28 11.34 46 10 11.44 6 —
9. 36 8 11.36 11.44 60 14 11.58 8 —
10. 61 15 11.51 11.58 11 4 12.02 7 —
60 16
From the table above, it may be seen that the simulation study has been carried out on the
queue system for duration of 122 minutes (10 AM to 12.02 PM). During this time, TIME OFFICE
of the agency was idle for a total for 16 minutes.
Probability of the time office being idle 13.11%

5 Jun'24 MTP Set 1

The past data of demand per week (in ‘00 kgs.) of a confectionery item is given below –

Demand/Week 0 5 10 15 20 25
Frequency 2 11 8 21 5 3
Using the sequence of random numbers – 35, 52, 13, 90, 23, 73, 34, 57, 35, 83, 94, 56, 67, 66
generate the demand for the next 10 weeks. Also determine the average demand per week
[7]

Average Demand

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 Simulation


Answer
Table showing Random Number Range for Demand
Probability Cumulative
Demand/ week Frequency (f) Range
(p = f / ∑f) Probability
0 2 .04 .04 00-03
5 11 .22 .26 04-25
10 8 .16 .42 26-41
15 21 .42 .84 42-83
20 5 .10 .94 84-93
25 3 .06 1.00 94-99
Total ∑f = 50 1.00
Table showing Simulated values for the next ten weeks
Week Random No. Demand in '00 Kgs.
1 35 10
2 52 15
3 13 5
4 90 20
5 23 5
6 73 15
7 34 10
8 57 15
9 35 10
10 83 15
Explanatory Note on the method of obtaining simulated demed :
35 is the first one of the given Random Nos. So it is used for Week 1. Also 35 lies within the
Range 26- 41 of the previous table. Again 10 is the demand / week for the range 26-41. Hence
demand for week 1 is 10. Similarly, the demands for the other weeks are simulated.
Average demand per week = Total demand / No. of weeks = 120/10 = 12 (‘00) Kgs.

6 Jun'24
MOSAN Ltd., an International tourist company deals with numerous personal callers each day
and prides itself on its level of service. The time to deal with each caller depends on the client’s
requirements which range from, say a request for a brochure to booking a round-the-world-
cruise. If a client has to wait for more than 10 minutes for attention, it is company’s policy for the
manager to see him personally and to give him a holiday voucher worth ₹ 15.

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 Simulation


The company’s observations have shown that the time taken to deal with clients and the arrival
pattern of their calls follow the following distribution pattern:

Minutes 2 4 6 10 14 20 30
Time to deal with clients
Probability 0.05 010 0.15 0.30 0.25 010 0.05
Minutes 1 8 15 25
Time between call arrivals
Probability 0.2 0.4 0.3 01
Required :
(i) Demonstrate how you would simulate the operation of the travel agency based on the
use of random number tables.
(ii) Simulate the arrival and serving of 12 clients and show the number of clients who receive
a voucher (use Line 1 of the random numbers below to derive the arrival pattern and Line
2 for serving times)
Note: for using Random Number.

Line 1 3 47 43 73 86 36 96 47 36 61 46 98
Line 2 63 71 62 33 26 16 80 45 60 11 14 10
[7]

Service Line Simulation

Answer
(i) & (ii) Time to deal with Clients :
Time (Minutes) Probability Cumulative Probability Assigned Random Number
2 0.05 0.05 00 – 04
4 0.10 0.15 05 – 14
6 0.15 0.30 15 – 29
10 0.30 0.60 30 – 59
14 0.25 0.85 60 – 84
20 0.10 0.95 85 – 94
30 0.05 1.00 95 – 99

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 Simulation


Time between arrivals:

Time (Minutes) Probability Cumulative Probability Assigned Random Number
1 0.2 0.2 00 – 19
8 0.4 0.6 20 – 59
15 0.3 0.9 60 – 89
25 0.1 1.0 90 – 99
Simulation table for time between arrivals and service time:
RN for Time Between Arrival RN for Serving Time Waiting
Client Time in
arrival Arrival Time Service Time out Time
1 3 1 1 1 63 14 15 --
2 47 8 9 15 71 14 29 6
3 43 8 17 29 62 14 43 12
4 73 15 32 43 33 10 53 11
5 86 15 47 53 26 6 59 6
6 36 8 55 59 16 6 65 4
7 96 25 80 80 80 14 94 --
8 47 8 88 94 45 10 104 6
9 36 8 96 104 60 14 118 8
10 61 15 111 118 11 4 122 7
11 46 8 119 122 14 4 126 3
12 98 25 144 144 10 4 148 --
If a client has to wait for more than 10 minutes, he is entitled for a holiday voucher worth ₹ 15. It
is obvious from the above table that Clients3 & 4 wait for more than 10 minutes. Hence, number
of clients who receive a holiday voucher is 2.

7 MTP Dec’24 Set 1

A Small retailer has studied the weekly receipts and payments over the past 200 weeks and has
developed the following set of information
Weekly Receipts (₹) Probability Weekly Payments (₹) Probability
3000 0.20 4000 0.30
5000 0.30 6000 0.40
7000 0.40 8000 0.20
12000 0.10 10000 0.10
Using the following set of random numbers, simulate the weekly pattern of receipts and
payments for the 12 weeks of the next quarter, assuming further that the beginning bank

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 Simulation


balance is ₹8000. What is the estimated balance at the end of the 12week period? What is
the highest weekly balance during the quarter? What is the average weekly balance for the
quarter? [7]
Random Numbers

For Receipts 03 91 38 55 17 46 32 43 69 72 24 22
For Payments 61 96 30 32 03 88 48 28 88 18 71 99

Weekly Receipts and Payments

Answer
Table showing Range of Random Numbers for Receipts and Payments
Receipt Cumulative Cumulative
Probability Range Payment (₹) Probability Range
(₹) Probability Probability
3000 0.20 0.20 00-19 4000 0.30 0.30 00-29
5000 0.30 0.50 20-49 6000 0.40 0.70 30-69
7000 0.40 0.90 50-89 8000 0.20 0.90 70-89
12000 0.10 1.00 90-99 10000 0.10 1.00 90-99
Simulated values of Receipts & Payments for the next 12 weeks and Calculation of week end
Balances
Random No. Expected Random No. Expected End of week
Week
for Receipts Receipts (₹) for Payments Payments (₹) Balance (₹)
Opening balance 8000
1 03 3000 61 6000 5000
2 91 12000 96 10000 7000
3 38 5000 30 6000 6000
4 55 7000 32 6000 7000
5 17 3000 03 4000 6000
6 46 5000 88 8000 3000
7 32 5000 48 6000 2000
8 43 5000 28 4000 3000
9 69 7000 88 8000 2000
10 72 7000 18 4000 5000
11 24 5000 71 8000 2000

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 Simulation


12 22 5000 99 10000 (3000)

Total 45000
N.B - End of week Balance for a particular week = End of week Balance for the previous week +
Receipt during the week – Payment made in the week]

Estimated balance at the end of 12th week = ₹(3,000)

Highest weekly balance during the quarter = ₹ 7,000
Average weekly balance for the quarter = 45,000/12 = ₹3750

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 Simulation


NOTES

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 Network Analysis – PERT, CPM


Chapter 11
Network Analysis – PERT, CPM

1 Jun'23
DHAMIN & CO., an Audit firm having numerous clients with identical financial years, is faced
with a problem of framing the audit programme in such a way that reports of all its clients do
not get delayed. Manpower and time are its chief constraints. Mr. Panth, partner of the firm, an
auditor, is a Manager in the same that he has to plan his audit programme, organize the firm’s
articles and it’s clerks, direct them to achieve their pre-determined objectives, control quality of
work, time and cost, and lastly report his observations to the firm’s clients. Thus, the knowledge
of sophisticated techniques PERT/CPM helps him as an auditor to plan his audit programme
logically and control avoidable and unnecessary delays and costs. In order to simplify the
analysis, the following assumptions are made:
(i) The audit is a medium sized limited company.
(ii) A final or complete audit is undertaken.
(iii) The size of the audit team is one senior and three juniors.
(iv) No significant fraud or irregularities are observed to hamper the audit time schedule.
(v) All queries are clarified during the process of audit itself.
(vi) Expected time (duration) is based on past experience.

Activity and Activity Preceded Expected Time (Days)

identification description by Optimistic Most likely Pessimistic
A 1-2 Persue the memorandum and - 1 1 7
Article of Association, prospec-
tus etc. of the company
B 1-3 Scrutinize the Board Minutes - 1 4 7
and Important resolutions which
have a bearing on accounts
C 1-4 Vouch and post cash book - 2 2 8
involving receipts and payments
etc.
D 2-5 Test the efficiency of internal A 1 1 1
control in operation

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 Network Analysis – PERT, CPM


E 3-5 Vouch and post purchases and B 2 5 14

sales ledger and check purchases
and sales ledger balances
F 4-6 Examine journal entries and C 2 5 8
check their posting and examine
and check trial balance
G 5-6 Verify and value various assets D&E 3 6 15
and liabilities of the company
and check all the schedules
forming part of P&L Aic and
Balance Sheet
H 6-7 Ensure the truth and fairness of F&G 1 2 3
P&L A/c and Balance Sheet and
finalise report keeping in mind
the requirements of Sec. 143 of
the Companies Act and forward
it for approval and signature
Required:
(i) Design the PERT network.
(ii) Identify the critical path and assess the expect project (Audit) completion time.
(iii) Evaluate what duration will have 95% confidence for project (Audit) completion.
(iv) If the average duration for activity F increases to 14 days (assume its variance = 1), assess
what will be its effect on the expected project (Audit) completion time which will have
95% confidence.
Given:

Z Value 1.00 1.50 1.645 2.00

Probability 0.8413 0.9332 0.950 0.9772

PERT network, Critical path, Duration,

Effect on Expected Profit

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 Network Analysis – PERT, CPM


Answer
Part (I)

2
2
9
2 1

0 4 4 6 10
1 3 5
0 3 4 10 7

3 5 17 19
4 6 7
12 17 2 19

Part (II) CP = 1-3-5-6-7

Expected Duration = 19
Part (III) A (Z < 1.645)
x − 19
Z=
3.02
x − 19
1.645 =
3.02
x = 23.97 = 24 days
Part (IV)

2
2
9
2 1

0 4 4 6 10
1 3 5
0 3 4 10 7

3 14 17 19
4 6 7
3 17 2 19

New CP = 1-4-6-7
Duration = 19
Variation = 1 + 1 + 0.11 = 2.11 (of new CP)
SD = 1.452
Z = 1.645 (Pb = 95%)
x − 19
= 1.645 x = 21.39 days = 22 days (reduced by 2 days)
1.452

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 Network Analysis – PERT, CPM


2 Postal Test Paper

Distinguish between PERT and CPM.

PERT & CPM

Answer
Distinguish between PERT and CPM:
PERT CPM
1. It is a technique for planning schedul- 1. It is a technique for planning scheduling
ing & controlling of projects whose & controlling of projects whose activities
activities are subject to uncertainty in the not subjected to any uncertainty and the
performance time. Hence it is a probabil- performance times are fixed. Hence, it
istic model. is a deterministic model.
2. It is an Event oriented system 2. It is an Activity oriented system
3. Basically dose not differentiate critical 3. Differentiate clearly the critical
and non- critical activities. activities from the other activities.
4. Used in projects where resources (men, 4. Used in projects where overall costs is
materials, money) are always available of primarily important. Therefore better
when required. utilized resources.
5. Suitable for Research and Develop- 5. Suitable for civil constructions.
ment projects where times cannot be
predicted.

3 MTP Dec’23 Set 1

The following table gives the activities and other relevant information related to “Making of a
loaf”.
Activity Preceded by Elapsed Time (Minutes)
A - Weigh ingredients - 1
B - Mix ingredients A 3
C - Dough rising time B 60
D - Prepare tins - 1
E - Pre-heat oven - 10

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 Network Analysis – PERT, CPM


F - Knock back dough and place in tins C&D 2

G - 2nd dough rising time F 15
H - Cooking time E&G 45
Draw a Network diagram. Also find the Earliest and Latest Times of each Event of the Network.
Identify the different paths of the Network and their corresponding durations. Which path is
critical? Find the time required to complete the job. [7]

Network diagram, Critical Path, Earliest

Time, Latest Time, Duration of Project

Answer
D
1

0 A 1 B 4 C 64 F 66 G 81 H 124
1 2 3 4 4 6 7
0 1 1 3 4 60 64 2 44 15 81 45 124

E
10

4 MTP Jun’23 Set 2

The following table gives data on normal time & cost. You need to develop the Network diagram
and briefly discuss with reason the Critical Path.
Also find out the Normal duration of the project and analyse the corresponding Total Cost
associated with it.

Normal
Activity
Time (days) Cost (₹)
1–2 6 600
1–3 4 600
2–4 5 500
2–5 3 450
3–4 6 900
4–6 8 800

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 Network Analysis – PERT, CPM


5–6 4 400
6–7 3 450 [6]

Network diagram, Critical Path, Duration,

Total Cost

Answer
The network for normal activity times indicates project duration of 22 days with critical path
1-2-4-6-7. It is shown below.

5
9 15
3 4

1 6 2 5 4 8 6 3 7
0 0 6 6 11 11 19 19 22 22

4 6
3
4 5

Total Cost = (600 + 600 + 500 + 450 + 900 + 800 + 400 + 450) = ₹ 4,700

5 Dec’23
An engineering firm is tendering for a contract to supply 2 stec) fabrication with target duration
of 46 days. The tasks have been analysed as follows:
Activity Duration (Days)
1-2 10
1-3 12
1-4 10
2-4 9
2-5 13
3-6 17
4-6 12
5-6 14

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 Network Analysis – PERT, CPM


The firm is awarded the contract and starts work with all activitics on their earliest start times
but after work on the 15th day there is a’fire which destroys all the work -in- progress on task
2-4, 2-5 and 3-6. Fortunately, no other completed tasks are affected but itis estimated that task
5-6 will now need 20 days. The project manager feels that due 1o fire there will be variability
in the task times and has made some uncertainty estimates which are shown as task standard
deviation in days:
Activity Standard Deviation (Days)
2-4 0.82
2-5 1.33
5-6 0.47
4-6 2.17
3-6 1.33
(i) Prepare a PERT network as originally envisaged.
(ii) Assess the new expected project duration and identify the critical path through the
remaining activities after the fire,
(iii) Evalulate the probability of the project being completed on time after the fire,
[Given area between Z = 0 and 7 = ~1.42 is 0.4222)

Network Diagram, Expected Project Updation

Duration, C. Path, Project on time

Answer
Network Diagram before Fire
3 17
12 12 20
6
1 14 37 37
10 5
0 0 13
23 23
2
10 30
12
9
10

4
10 25

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 Network Analysis – PERT, CPM


Activities 1-2, 1-3 and 1-4 had already been completed before the fire. After fire, 15 days are
over and 31 days (46 days-15 days) remain with the following outstanding activities:
Activity Duration (Days)
24 9
2-5 13
3-6 17
4-6 12
5-6 20
Network Diagram after Fire
3 17
15 31

6
20 48 48
13
2 5
15 15 28 28

9
12

4
15 36

(ii) New Expected Project Duration is 48 days and Revised Critical Path after fire is 2-5-6.
(iii) Standard Deviation of the Project = 1.41
Using Z value, we have Z = -1.42
Using area under standard normal curve, the probability of achieving 46 days is = 8%

6 Jun'24 MTP Set 1

The following table gives data on normal time & cost as well as crash time & cost for a project.
You need to draw the Network diagram and identify the Critical Path.
Also compute the Normal duration of the project and the corresponding Total Cost associated
with it.
Crash the relevant activities systematically and determine the optimum completion time of
the project. Also determine the corresponding cost when it is given that the Indirect Cost is

11.8 |CMA Final Strategic Cost Management

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 Network Analysis – PERT, CPM


₹100 per day. [7]

Normal Crash
Activity
Time (days) Cost (₹) Time (days) Cost (₹)
1—2 6 600 4 1,000
1—3 4 600 2 2,000
2—4 5 500 3 1,500
2—5 3 450 1 650
3—4 6 900 4 2,000
4—6 8 800 4 3,000
5—6 4 400 2 1,000
6—7 3 450 2 800

Crashing of Project

Answer
The network for normal activity times indicates project duration of 22 days with critical path
1-2-4-6-7. It is shown below:

5
9 15
3 4

1 6 2 5 4 8 6 3 7
0 0 6 6 11 11 19 19 22 22

4 6
3
4 5

Total Cost associated with it is given as (Normal Direct Cost + Indirect Cost for 22 Days @ ₹ 100
per Day)
Normal Direct Cost = (600 + 600 + 500 + 450 + 900 + 800 + 400 + 450) = ₹ 4700
Indirect Cost = 22 × 100 = ₹ 2200
Required Total Cost = 4700 + 2200 = ₹ 6900

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 Network Analysis – PERT, CPM


1st Stage of Crashing

Cost slope of each of the Critical Activities of the Network diagram is calculated and ranked as
below.
Rank as per ascending order of Cost
Critical Activity Cost Slope =
Slope
1-2 (1000 – 600)/ (6 – 4) = ₹ 200 per day 1
2-4 (1500 – 500)/ (5 – 3) = ₹ 500 per day 3
4-6 (3000 – 800)/ (8 – 4) = ₹ 550 per day 4
6-7 (800 – 450)/ (3 – 2) = ₹ 350 per day 2
As Cost Slope of Activity 1 – 2 is minimum, crashing is to be started from this Activity. Maintain-
ing criticality of the existing Critical Path, Activity 1 – 2 is crashed by 1 Day.

5
8 14
3 4

1 5 2 5 4 8 6 3 7
0 0 5 5 10 10 18 18 21 21

4 6
3
4 4

New Network Diagram is shown above. It is having Duration of 21 Days and the associated Total
Cost is given as TC
= Normal Direct Cost + Indirect Cost (for 21 Days @ ₹ 100 per Day) + Cost of Crashing Activity
1-2 by 1 Day
= 4700 + 21 × 100 + 1 × 200 = ₹ 7000
It is seen that other activities too have become Critical. Now there are two Critical Paths given
by 1 – 2 – 4 – 6– 7 as well as 1 – 3 – 4 – 6 – 7
2nd Stage of Crashing
Cost Slopes of each of the new Critical Activities are calculated as below.
Cost Slope of Activity 1 – 3 = (2000 – 600)/ (4 – 2) = ₹ 700 per Day & that of 3 – 4 = (2000 – 900)/
(6 - 4) = ₹ 550/- per Day.
As there are more than one Critical Path, parallel Crashing is necessary for some of the activities
to maintain criticality of the existing Critical Paths. Various options of Crashing and their
corresponding Cost Slopes are shown below.

11.10 |CMA Final Strategic Cost Management

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 Network Analysis – PERT, CPM


Options Possible Crash (Days) Cost Slope (₹/ Day) Rank

Activities (1 - 2) & (1 - 3) 1* 200 + 700 = 900 4
Activities (1 - 2) & (3 - 4) 1* 200 + 550 = 750 3
Activities (2 - 4) & (1 - 3) 2 500 + 700 = 1200 6
Activities (2 - 4) & (3 - 4) 2 500 + 550 = 1050 5
Activity (4 – 6) 4 550 2
Activity ( 6 – 7) 1 350 1
* Though as per the supplied data activities (1-3) & (3-4) can be crashed by 2 days each, but (1
– 2) cannot be crashed more than 1 Day after 1st stage of Crashing.
From the above ranking Crashing of (6-7) by 1 Day is suggested. Due to this project duration
will be 20 Days and associated Total Cost = Normal Direct Cost + Indirect Cost for 20 Days @
₹ 100 per Day+ Crashing Cost of Activity (1 – 2) by 1 Day @ ₹ 200 per Day + Crashing Cost of
Activity (6 – 7) by 1 Day @ ₹ 350 per Day = 4900+ 20 × 100 + 1 × 200 + 1 × 350 = ₹ 7450
3rd Stage of Crashing
After 2nd Stage of Crashing, no new Critical Path emerged. So the options remain same as in
the 2nd Stage with the exception of Activity (6 – 7) which is totally crashed in the 2nd Stage.
From the above list of Ranking, Activity (4 – 6) is having lowest Cost Slope. Thus it is crashed by
4 days now. New Network having project duration of 16 Days is shown below.

5
8 10
3 4

1 5 2 5 4 4 6 3 7
0 0 5 5 10 10 14 14 16 16

4 6
3
4 4

Total Cost of the Project = Normal Direct Cost + Indirect Cost (for 16 Days @ ₹ 100/ Day) +
Crashing Cost [for Activity (1 – 2) by 1 Day @ ₹ 200/ Day + for Activity (6 – 7) by 1 Day @ ₹ 350/
Day + for Activity (4 – 6) by 4 Days @ ₹ 550/ Day] = 4900 + 1600 + 200 + 350 + 550 × 4 = ₹ 9250
4th Stage of Crashing
After 3rd Stage of Crashing, no new Critical Path emerged. So the options remain same as in the
2nd Stage with the exception of Activities (6 – 7) and (4 – 6) which are fully crashed in the 2nd
and 3rd Stages.
From the above list of Ranking, Activity (1 – 2) and (3 – 4) together is having lowest Cost Slope.

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Thus both are crashed by 1 day now. New Network having project duration of 15 Days is shown
below.

5
7 9
3 4

1 4 2 5 4 4 6 2 7
0 0 4 4 9 9 13 13 15 15

4 5
3
4 4

Total Cost of the Project

= Normal Direct Cost + Indirect Cost (for 15 Days @ ₹ 100/ Day) + Crashing Cost [for Activity (1
– 2) by 1 Day @ ₹ 200/ Day + for Activity (6 – 7) by 1 Day @ ₹ 350/ Day + for Activity (4 – 6) by 4
Days @ ₹ 550 per Day + for Activities (1 – 2) & (3 – 4) together by 1 Day @ ₹ 750/Day]
= 4900 + 1500 + 200 + 350 + 550 × 4 + 750 = ₹ 9900
5th Stage of Crashing
Though after 4th Stage of Crashing no new Critical Paths emerged, but the Activity (1 – 2) has
been crashed fully. Thus the options remaining are as follows.
Options Possible Crash (Days) Cost Slope (₹/ Day) Rank
Activities (2 - 4) & (1 - 3) 2 500+700=1200 2
Activities (2 - 4) & (3 - 4) 1* 500+550=1050 1
* Though Activity (2 - 4) can be crashed by 2 Days but after 4th Stage, (3 – 4) has only 1 Day of
Crashing left.
As Cost Slope of Activities (2 – 4) & (3 – 4) taken together is least, both are crashed by 1 Day and
the new Network diagram is shown below. It shows project duration of 14 Days.

11.12 |CMA Final Strategic Cost Management

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 Network Analysis – PERT, CPM


5
7 8
3 4

1 4 2 4 4 4 6 2 7
0 0 4 4 8 8 12 12 14 14

4 4
3
4 4

Total Cost of the Project

= Normal Direct Cost + Indirect Cost (for 14 Days @ ₹ 100/ Day) + Crashing Cost [for Activity
(1 – 2) by 1
Day @ ₹ 200/ Day + for Activity (6 – 7) by 1 Day @ ₹ 350/ Day + for Activity (4 – 6) by 4 Days @ ₹
550/ Day +
for Activities (1 – 2) & (3 – 4) together by 1 Day @ ₹ 750/Day + for Activities (2 – 4) & (3 – 4)
together by 1 Day@ ₹ 1050/ Day]
= 4900 + 1400 + 200 + 350 + 550 X 4 + 750 + 1050 = ₹ 10850
6th Stage of Crashing
After 5th Stage of Crashing no new Critical Paths emerged. So the available option as per the
table above is to crash (2 – 4) and (1 – 3) together and they can be crashed by 1 Day because
after 5th Stage only 1 Day of crashing is available for Activity (2 – 4). The new Network diagram
having project duration of 13 Days is shown below.

5
7 7
3 4

1 4 2 3 4 4 6 2 7
0 0 4 4 7 7 11 11 13 13

3 4
3
3 3

Total Cost of the Project

= Normal Direct Cost + Indirect Cost (for 13 Days @ ₹ 100/ Day) + Crashing Cost [for Activity
(1 – 2) by 1 Day @ ₹ 200/ Day + for Activity (6 – 7) by 1 Day @ ₹ 350/ Day + for Activity (4 – 6)

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 Network Analysis – PERT, CPM


by 4 Days @ ₹ 550 per Day + for Activities (1 – 2) & (3 – 4) together by 1 Day @ ₹ 750/Day + for
Activities (2 – 4) & (3 – 4) together by 1 Day @ ₹ 1,050/ Day + for Activities + for Activities (2 – 4)
& (1 – 3) by 1 Day @ ₹ 1,200/ Day]
= 4,900 + 1,300 + 200 + 350 + 550 X 4 + 750 + 1,050 + 1,200 = ₹ 11,950
From the diagram it is clear that all the paths of the Network are Critical. Also activities of the
path 1 – 2 – 4 – 6- 7 are each fully crashed. Thus no further crashing of the Network is possible.
It is noticed that the Total Cost of the Project kept on increasing all along. This has happened
due to the fact that the rate of decrease of Indirect Cost is much lower than the rate of increase
of Direct Cost for Crashing. Hence optimum duration of the project cannot be obtained and
rather minimum possible duration is obtained and that value is 13 Days. Associated Total Cost
of project is ₹ 11,950.

7 Jun'24
JOBSON Ltd., a manufacturer of plant and machinery is in the process of quoting a tender called
by ZOYB Ltd. Delivery date once promised is crucial and penalty clause is applicable. The Project
Manager of JOBSON Ltd. has listed down the activities of the project as under:
ACTIVITY (i – j) Estimated Duration (in Weeks)
Optimistic (a) Most likely (m) Pessimistic (b)
1-2 1 1 7
1-3 1 4 7
1-4 2 2 8
2-5 1 1 1
3-5 2 5 14
4-6 2 5 8
5-6 3 6 15
Required:
(i) Design the project network and indicate all the paths through it.
(ii) Analyse the expected duration and variances for each activity and Assess project length.
(iii) Calculate the standard deviation of the project length and critically assess the probability
that the project will be completed:
(a) At least 3 weeks earlier than expected time.
(b) No more than 3 weeks later than expected time.
(iv) If the project due date is 18 weeks, assess the probability of not meeting the due date.

11.14 |CMA Final Strategic Cost Management

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 Network Analysis – PERT, CPM


Given: Table for areas under normal curve for O to Z.

Z = O to Z 0.10 0.33 0.67 1.00 1.33 2.00

Table Value 0.0398 0.1293 0.2486 0.3413 0.4082 0.4772
[14]

Network Diagram, Expected Duration,

Standard Duration, Probability

Answer
(i) The network as below :
2 1 5
2 9 10 10
2
6
1 3 7
0 0 4 4 4

2
4 6
3 12 5 17 17

(ii) Critical path is 1 – 3 – 5 – 6

The total project duration is sum of the duration of each critical activity, i.e.
4 + 6 + 7 = 17 Weeks.
(iii) Variance of the critical path is sum of the variance of each critical activity, i.e.
1 + 4 + 4 = 9 Weeks.
OR, (S. D.) = Variance of the Project = 3

(a) At least 3 weeks earlier than expected :

The Standard normal equation can be applied as follows:
Due date  Expecteddate of Completion 3
Z=  =−1
S.D. 3
Referring to the normal table, we find a probability of
= 0.1587 i.e. 15.87 %

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(b) No more than 3 weeks later than expected:

20 − 17
Z= =1
3
Probability = (0.50 + 0.3413) = 0.8413 i.e. 84.13%
18 − 17
(iv) Z = = 0.33
3
Therefore, Probability of meeting the due date= 0.50 + 0.1293 = 0.6293 i.e. 62.93%
Probability of not meeting the due date = (1 – 0.6293) = 0.3707 = 0.3707 i.e. 37.07%

8 MTP Dec’24 Set 1

A small maintenance project consists of the following twelve jobs whose precedence relations
are identified with their node number:

Job (i,j) : (1,2) (1,3) (1,4) (2,3) (2,5) (2,6)

Duration (in days) : 10 4 6 5 12 9
Job (i,j) : (3,7) (4,5) (5,6) (6,7) (6,8) (7,8)
Duration (in days) : 12 15 6 5 4 7
(i) Draw an arrow diagram representing the project.
(ii) Calculate earliest start, earliest finish, latest finish time for all the jobs. [7]

Network Diagram - EST, EFT, LFT

11.16 |CMA Final Strategic Cost Management

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Answer
(i) The network diagram of the project corresponding to normal duration is given below:
Key
4 15 5 Event
6 7 22 22
EST LFT
6 12 6

1 10 2 9 6 4 8
0 0 10 10 28 28 40 40
5 5
4
7
3 12 7
15 21 33 33

(ii) Statement showing Earliest Start Time (EST), Earliest Finish Time (EFT), Latest Start
Time (LST) and Latest Finish Time (LFT) for all jobs.
Duration in Earliest Start Earliest finish Latest Start Latest Finish
Jobs
days time (EST) time (EFT) time (LST) time (LFT)

1-2 10 0 10 0 10
1-3 4 0 4 17 21
1-4 6 0 6 1 7
2-3 5 10 15 16 21
2-5 12 10 22 10 22
2-6 9 10 19 19 28
3-7 12 15 27 21 33
4-5 15 6 21 7 22
5-6 6 22 28 22 28
6-7 5 28 33 28 33
6-8 4 28 32 36 40
7-8 7 33 40 33 40

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NOTES

11.18 |CMA Final Strategic Cost Management

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 Learning Curve


Chapter 12
Learning Curve

1 Jun'23 MTP Set 1

Z.P.L.C experience difficulty in its budgeting process because it finds it necessary to quantify
the learning effect as new products are introduced.
Substantial product changes occur and result in the need for retraining.
An order for 30 units of a new product has been received by Z.P.L.C so far, 14 have been
completed; the first unit required 40 direct labour hours and a total of 240 direct labour has
been recorded for the 14 units. The production manager expects an 80% learning effect for this
type of work.
The company uses standard absorption costing. The costs attributed to the centre in which the
unit is manufactured are as follows:
Head Cost (₹)
Direct Material ₹ 30.00 per unit
Direct Labour ₹ 6.00 per unit
Variable Overhead ₹ 0.50 per direct labour hour
Fixed Overhead ₹ 6,000 per 4 week operating period.
There are ten direct employees working a five-day week, eight hours per day. Personal and other
downtime allowances account for 25% of total available time. The company usually quotes a
four-week delivery period for orders. You are required to:
Determine whether the assumption of an 80% learning effect is a reasonable one in this case,
by using the standard formula Y = axb
Where Y = the cumulative average direct labour time per unit (productivity). a = the average
labour time per unit for the first batch.
x = the cumulative number of batches produced. b = the index of learning.
(i) Calculate the number of direct labour hours likely to be required for an expected second
order of 20 units.
(ii) Use the cost data given to produce an estimated product cost for the initial order, examine
the problems.
Use logarithmic tables to find the values of Logarithm and Anti-Logarithm. [4 + 4 = 8]

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 Learning Curve


Direct Labour Hours, Estimated Product

Cost

Answer
Total time taken to produce 14 units
Y = axb
Y = 40 (14) -0.322
log Y = log 40 – (0.322) log 14
= 1.60221 – (0.322) × 1.1461
= 1.60221 – 0.3690 = 1.233
Y = Antilog (1.233) = 17.14
Total time = 17.14 × 14 = 239.96
= 240 hours (which is same as the hours recorded)
So the assumption that learning ratio 80% is reasonable.
(i) 30 units
Y = 40 (30) – 0.322 = 13.380 hours (Average time)
50 units
Y = 40 (50) – 0.322 = 11.35 hours (Average time)
Total time for 30 units = 13.38 × 30 = 401.4 hours
Total time for 50 units = 11.35 × 50 = 567.5 hours
Time taken for 20 units from 31 to 50 units (567.5 – 401.4) = 166.1 hours
(ii) Man hours = 10 × 8 × 5 × 4 = 1,600
(−) down time (25% × 1600) = 400
1,200
Fixed Cost per hour = 6000/1200 = ₹ 5
Computation of total cost for the initial order
Material (30 × 30) = ₹ 900.0
Labour (401.4 ×6) = ₹ 2,408.4
Variable Overheads (0.5 × 401.4) = ₹ 200.7

12.2 |CMA Final Strategic Cost Management

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 Learning Curve


Fixed Overheads (5 ×401.4) = ₹ 2007.0

Total Cost = ₹ 5516.1

2 Jun'23 MTP Set 2

Human performance of activities typically shows improvement when the activities are done on
a repetitive basis. The time required to perform a task decreases with increasing repetitions. The
degree of improvement and the number of repetitions needed to realize the major portion of
the improvement is a function of the task being done. If the task is short and somewhat routine,
only a modest amount of improvement is likely to occur and it generally occurs during the first
few repetitions. If the task is fairly complex and has a longer duration, improvements will occur
over a large number of repetitions.
Any kind of surgery comes under the category of fairly complex or complex task. Surgeons
require large number of repetitions of a particular type of surgery to master it. This is due to the
fact that random complications may arise due to the patients₹ conditions. Hence it is important
to know the number of repetitions required for a surgeon to stabilize the operating times and
the complication rates.
Dr. X of ABC Hospital reported the results of 100 consecutive operations for laparoscopic hernia
repair on 98 patients. Approximately two thirds of the surgeries were unilateral (left / right)
and the remaining one third were bilateral involving contra lateral defects, many unsuspected
before surgery. The average surgery time (from skin incision to skin closure) was 46 minutes for
unilateral and 62 minutes for bilateral. Surgery times for the unilateral procedure began to level
off after 50 operations. The average surgery times (in minutes) reported by the doctor for each
quartile of the 100 operations, classified by the type of operation are as provided in the table
below
Type of Surgery 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile
Unilateral 59 45 38 37
Bilateral 69 67 58 52
At the end of the study the times had levelled off at 58 minutes (operating time) including 37
minutes of surgical time for Unilateral type which are considered to be the historical times for
open repair. Complication rates were also reduced in an approximately exponential manner,
beginning to level off at 50 operations and becoming stable after 75. It is also reported that
the 1st to 4th quartile of the Unilateral type surgery are represented by the 8th, 24th, 40th and
58th observations respectively and those of Bilateral are 4th, 12th, 20th and 28th observations
respectively.
(1) Analyse the incidence described above and formulate a set of brief explanations to
ascertain which particular phenomenon of human behaviour the above incidence refers
to?
(2) How you can decide which one of the two types of surgeries was grasped faster by the
surgeon? Explain.

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 Learning Curve


(3) What type of relationship exists between the Average time required to complete a particu-
lar operation with the number of operations done by the surgeon?
(4) Design with brief reasons the procedure to determine the time required by the surgeon to
complete 59th Unilateral type surgery and 27th Bilateral type surgery. [8]

Comments on Learning

Answer
(1) The described information refers to the LEARNING phenomenon of human beings. The
data provided show a continuous reduction of Operating time for both types of surgeries.
In other words, there is a continuous improvement in the performance of a human being
(the Surgeon) with repetition of the task. This happens only due the Learning effect.
(2) To understand the grasping rate of the surgeon for any type of surgery one has to find out
his LEARNING PERCENTAGE for that type of surgery from the supplied data. Higher is the
numerical value of the Learning Percentage for a particular type, faster is said to be the
grasping rate for that.
(3) If TN be the Average time required to complete the nth operation and T1 be that of the
first one then the relation between TN and N (the number of operations done) is given as
follows -
TN = T1.Nb where b = Learning Index = log (Learning Percentage/100) ÷ log 2
Thus an Exponential relation exists between the Average time required to complete an
operation and the number of operations done by the surgeon.
(4) From the basic concept of Learning we can say –
Time required to complete the Nth operation (tN) = Difference between the total time
required for N operations and (N -1) operations
Now total time required for N operations = N.TN where TN represents the Average time per
operation when N operations are done.
Thus tN = N.TN – (N -1).T(N-1)
So for the Unilateral type, t59 = 59. T59 – 58. T58 where the values of T59 and T58 are to be
computed from the supplied data for Unilateral type.
Similarly for Bilateral type, t27 = 27.T27 – 26.T26

12.4 |CMA Final Strategic Cost Management

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 Learning Curve


3 Jun'23
GANGOTRI LTD. is developing a new product. During its expected life, 16,000 units of the
product will be sold for ₹ 102 per unit. Production will be in batches of 1,000 units throughout
the life of the product. The direct labour cost is expected to reduce due to the effects of learning
for the first eight batches, produced. Thereafter, the direct labour cost will remain constant at
the same cost per batch as in the 8th batch.
The direct labour cost of the first batch of 1,000 units is expected to be ₹ 55,000 and a 90%
learning effect is expected to occur. The direct material and other non-labour related variable
costs will be ₹ 50 per unit throughout the life of the product.
There are no fixed costs that are specific to the product.
[Given: The learning index for a 90% learning curve = – 0.152; 8–0.152 = 0.729;
7–0.152 = 0.744; 9–0.152 = 0.716 and 4√0.4532 = 0.8205, 4√0.3773 = 0.7837, 4√0.2636 = 0.7166]
Required:
(i) Calculate the expected direct labour cost of the 8th batch,
(ii) Assess the expected contribution to be earned from the product over its lifetime.
(iii) Infer the rate of learning required to achieve a lifetime product contribution of 6,00,000,
assuming that a constant rate of learning applies throughout the product’s life. [3+2+3=8]

Use of Learning Curve Equation - Direct Life cycle cost

Labour Cost, Contribution, Rate of
Learning

Answer
(a) D/L Cost of 8th Batch
First 8 batches Y = K × x5 = 55,000 × 8-0.152
= 55,000 × 0.729
= 40,095/ batch
First 7 batches = 55,000 × 7-0.152
= 55,000 × 0.744
= 40,920/ batch
For 8th batch = 40,095 × 8 – 40,920 × 7
= 34,320

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 Learning Curve


(b) Expected Contribution

Sales 102 × 16,000
(-) D/M 50 × 16,000
D/L First 8 × 40,095
Next 8 × 34,300
2,36,680
(c) Learning Rate
Sales 16,32,000
(-) D/M 8,00,000
D/L 2,32,000
Contribution 6,00,000
16 × r4 × 55,000 = 2,32,000; r = 0.7166 = 71.66%

4 MTP Dec’23 Set 1

The usual learning curve model is Y = axb where
Y is the average time per unit for x units.
a is the time for first unit
x is the cumulative number of units b is the learning coefficient and is
log 0.8
equal to = – 0.322 fo a learning rate of 80%
log 2
Given that a = 10 hours and learning rare 80%.
You are required to Calculate:
(i) The average time for 20 units.
(ii) The total time for 30 units.
(iii) The time for units 31 to 40.
Given that log 2 = 0.301, Antilog of 0.5811 = 3.812
log 3 = 0.4771, Antilog of 0.5244 = 3.345.
log 4 = 0.6021, Antilog of 0.4841 = 3.049

12.6 |CMA Final Strategic Cost Management

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 Learning Curve


Use of Learning curve equation, Log &

Antilog

Answer
(i) Y = AXb
Y = 10(20)-0.322
Taking log on both sides
Log y = log 10 + log 20(-0.322)
Log y = log 10 – (0.322) log 20
= 1 – (0.322) log 20
= 1- (0.322) x (1.3010)
= 1-0.41892 = 0.5811
Log y = 0.5811
Y = Anti log (0.5811) = 3.812 hrs (average time)
Total Time = 3.812 × 20 = 76.24 hours
(ii) Log y = log 10 + log 30(-0.322)
Log y = 1– (0.322) × (1.4771)
= 1 – (0.4756) = 0.5244
Y = anti log (0.5244) = 3.345 hrs (average time)
Total time = 3.345 × 30 = 100.35 hrs
(iii) Log y = log 10 + log40(-0.322)
= 1– (0.322) x (1.6021) Log y = 0.4841
Y = anti log (0.4841) = 3.049hrs Total time = 40 x 3.049 = 121.96hrs
Time from 31 to 40 units = 121.96 – (100.35) = 21.61 hrs

5 Dec’23
Heavy India Shipbuilders produce a special type of boat to be used by a shipping company. A
90% learning curve is expected to apply to production of this type of boat. It is agreed that boats
will be supplied at variable cost plus 20%. The variable cost of the first boat to be produced has
been estimated as follows:

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₹
Materials 8,000
Labour (1000 hrs @ % 4 per hour) 4,000
Variable Overhead (200% of direct labour) 8,000
Order will be for a minimum of 2 boats.
(1) Find the average selling price per boat if the order is for 4 boats and 8 boats.
(2) Also ascertain the separate selling price for 3rd and 4th boats. [7]

Average selling price

Answer
Selling Price
For 4 Boats (₹) For 8 Boats (₹)
Selling Price / Boat 21,264 20,097.63
Price for 3” and 4™ Boats:
Amount (₹)
Selling Price / Boat 19,968

6 Jun'24 MTP Set 1

A firm received an order to make and supply eight units of standard product which involves
intricate labour operations. The first unit was made in 10 hours. It is understood that this type
of operation is subject to an 80% learning rate. The workers are getting wages at the rate of ₹12
per hour.
(i) What is the total time and labour cost required to execute the above order
(ii) If a repeat order of 24 units is also received from the same customer, calculate the labour
cost necessary for the second order. [7]

Total time and Labour Cost - First and

Repeat Order

12.8 |CMA Final Strategic Cost Management

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 Learning Curve


Answer
80% Learning Curve results are given below:
Production (Units) Cumulative Average Time (hours) Total Time (hours)
1 10 10
2 8 16
4 6.4 25.6
8 5.12 40.96
16 4.096 65.54
32 3.2768 104.86
Labour time required for first eight units = 40.96 hours
Labour cost required for 8 units = 40.96 hours × ₹ 12/hr = ₹ 491.52 Labour time for 32 units =
104.86 hours
Labour time for first eight units = 40.96 hours Labour time required for 2nd order of 24 units
= 104.86 – 40.96 = 63.90 hours
Labour cost for the 2nd order of 24 units = 63.90 hours × ₹12/hr = ₹ 766.80

7 MTP Dec’24 Set 1

The Learning Curve in management accounting has now become or is going to become an
accepted tool in industry, for its applications are almost unlimited. When it is used correctly, it
can lead to increased business and higher profits; when used without proper knowledge, it can
lead to lost business and bankruptcy. State precisely:
(i) Your understanding of the Learning Curve:
(ii) The theory of Learning Curve;
(iii) The areas where Learning Curves may assist in management accounting; and
(iv) Illustrate the use of Learning Curves for calculating the expected average unit cost of
making–
(a) 4 machines
(b) 8 machines Using the data below:
Data:
Direct Labour needed to make first machine = 1000 hrs.
Learning Curve = 90%
Direct Labour cost = ₹15 per hour.

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 Learning Curve


Direct materials cost = ₹1,50,000

Fixed cost for either size orders = ₹60,000. [7]

Expected Average Cost per unit

Answer
Statement showing computation of expected average cost of making 4 machines & 8
machines:
Average time Labour cost Material Cost
No of machines Fixed cost (₹) Total Cost (₹)
(Hours) (@₹15/Hr) (₹)
1 1000 15,000 1,50,000 60,000 2,25,000
2 900 13,500 1,50,000 30,000 1,93,500
4 810 12,150 1,50,000 15,000 1,77,150
8 729 10,935 1,50,000 7,500 1,68,435
Average cost of making 4 machines - ₹ 1,77,150
Average cost of making 8 machines - ₹ 1,68,435

12.10 |CMA Final Strategic Cost Management

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 Business Application of Maxima and Minima


Chapter 13
Business Application of
Maxima and Minima

1 Jun'23 MTP Set 1

Assume the Cost in Rupee term for manufacturing x number of a product per day is C(x) =
14,400 + 550x + 0. 01x2.
Suggest the no. of units of the product that should be manufactured per day so that the Average
Cost is minimum. Also find the Average Cost and the total cost at this level of production. [6]

No. of Units, Average Cost, Total Cost

Answer
Cost function is given to be C(x) = 14400 + 550x + 0.01x2
So Average Cost function = C(x) / x
Or, AC(x) = (14400 + 550x + 0.01x2) /x
Or, AC(x) = 14400/x + 550 + 0.01x
This is the Objective function which has to be minimized.
Differentiating both sides of the above function with respect to ‘x’ we get
d
[AC(x)] = 14400/x2 + 0.01 (i)
dx
d
As per the necessary condition of optimization, [AC(x)] = 0
dx
or, -14400/x2 + 0.01
or, 0.01x2 = 14400
or, x2 = 14400/ 0.01

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 Business Application of Maxima and Minima


Or, x = ± √1440000
Or, x = ± 1200
But x being the quantity cannot be negative. Hence x = 1200
To ascertain whether this value of x corresponds to minima, we have to take help of the sufficient
condition mentioned above.
d2
Again differentiating both sides of 9i) with respect to ‘x’ we get, [AC(x)]
dx2
= 28800/x3
d2
For x = 1200, the value of 2nd order Derivative is [AC(1200)] = 28,800/(1,200)3
dx2
= 1.67 ×10-5 > 0
So there exist a Minima to the Objective Function at x = 1200
Hence 1200 units should be produced per day to minimize the Average Cost. At this level of
production,
Average Cost = [AC(X)] at x = 1200
= 14,400/1,200 + 550 + 0.01 × 1,200
= ₹ 574 per unit
Also at this level of production,
Total Cost = [C(x)] at x = 1200
= 14,400 + 550 × 1,200 + 0.01 × 1,2002
= ₹ 6,88,800/-

2 Jun'23 MTP Set 2

A company produces two products x and y. The total Profit (in ₹ ‘000) earned by the company
is expressed algebraically by the function ∏ = 100x – x2 – 2xy + 200y – 3y2. Critically assess the
Profit maximizing quantities of the products.
Also determine the maximum profit with justification in support of your determined value. [7]

Maximum Profit

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 Business Application of Maxima and Minima


Answer
Profit function is given as: ∏ = 100x – x2 – 2xy + 200y – 3y2
Differentiating the function partially with respect to x we get,
∏x = 100 – 2x – 2y (I)
Also differentiating the function partially with respect to y we get
∏y = -2x + 200 – 6y (II)
To determine the Critical Point, we have ∏x = 0 and ∏y = 0
So, 100 – 2x – 2y = 0 Or. x + y = 50 ---(1) and -2x + 200 -6y = 0 or, x + 3y = 100 (2)
(2) – (1) gives, 2y = 50 or, y = 25 Putting y = 25 in (1) we get x = 25
Thus Critical Point is (25, 25)
To check whether this point is a local Maxima, we have to find out the values of the 2nd Order
Partial Derivatives at this point.
Again differentiating (I) partially with respect to x we get ∏xx = -2 Or, A = -2 (Let) Or, A<0
Similarly differentiating (II) partially with respect to y we get ∏yy = -6 Or, C = -6 (Let) or, C<0
Also differentiating (I) partially with respect to y we get ∏xy = -2 Or, B = -2 (Let) So D = AC – B2
= (-2) × (-6) – (2)2 = 8 >0
Hence D> 0 and A, C <0
Thus there is a local Maxima at the already determined Critical Point (25, 25)
Required Profit maximizing quantities of the products are x = 25 units and y = 25 units. Also
Maximum profit = Value of the function ∏ at x = 25 & y = 25 = 100 ×25 – 252 – 2 ×25 ×25 + 200
×25 - 3×252 = ₹3,750 (₹000)

3 Jun'23
The total cost function of a firm

C = x – 5x2 + 28x +10 ,

3

3
Where C is total cost and ‘x’ is the output, A GST @ ₹2 per unit of output is imposed and the
producer adds it to his cost. If the demand function is given by D = 2,530 – 5x, where D is the
price per unit of output.
Required:
Evaluate the profit maximizing output and the price at the level. [6]

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 Business Application of Maxima and Minima


Profit maximizing output GST Rate

Answer
Maximum profit is at 50 units
Price = ₹ 2,280

4 Dec’23
ZOXIN Ltd., a manufacturing company is planning to market a new model of a doll. Rather than
setting the selling price of the doll based only on production cost estimation, management
polls the retailers of the doll to see how many dolls they will buy for various prices. From this
survey, it is determined that the unit demand function is X = 1500 – 75p, and the cost function
is given by C = 4x + 1400, for the doll, where P is the price per unit and x is the number of units
demanded.
Required:
(i) Evaluate how many number of dolls are sold to the retailers to maximize the profit of the
company.
(ii) Identify the price the company should charge to tetailers in order to obtain maximum
profit.
(iii) Assess the maximum profit available to ZOXIN Ltd. [7]

Maximum profit

Answer
(i) Dolls = 600
(ii) Price = ₹ 12
(iii) Profit (Maximum) = ₹ 3400

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 Business Application of Maxima and Minima


5 Jun'24
ZUZOO Ltd., a Mobile manufacturer produces % sets per week at total cost of x2 + 78x + 300.
ZUZOO Ltd. is a monopolist and demand function for the product is x = (600 – P)/8 when price
in rupees is P per set.
Required:
(i) Analyze the Optimal (Profit maximizing) production per week.
(ii) Assess the monopoly price per week.
(iii) Assess the Total Cost and Profit at the optimal production. [7]

Profit Maximisation

Answer
(i) Optimal Production per week = 29 sets
(ii) Monopoly Price = ₹ 368
(iii) Total Cost = ₹ 3,403
Total Profit = ₹ 7,269

6 MTP Dec’24 Set 1

A firm has the Cost Function C = x3/3 – 7x2 + 111x + 50 and Demand function x = 100-p.
Determine the Equilibrium Output, Price and Profit earned. [7]

Cost Maximisation

Answer
Demand function is x = 100 – p or, p = 100 - x
So, Total Revenue = TR = p.x or, TR = (100 – x) x Or, TR = 100x – x2
Also Profit = Total Revenue – Cost

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Or, π = TR – C
Or, π = (100x – x2) – (x3/3 – 7x2 + 111x + 50) Or, π = - x3/3 + 6x2 – 11x - 50
Differentiating both sides with respect to x
we have d/dx(π) = - x2 + 12x – 11 ... (1)
As per the necessary condition of maximization we have d /dx(π) = 0 Or, - x2 + 12x – 11 = 0
Or, (x – 1) (x – 11) = 0
So the critical values are x = 1 and x = 11
Now differentiating both sides of (1) we have d2 /dx2 (π) = - 2x + 12
When x = 1 then d2 /dx2(π) = - 2.1 + 12 = 10 > 0
So by the sufficient condition of 2nd Order Derivative test there is a minima at x = 1
When x = 11 then d2 /dx2 (π) = -2.11 + 12 = - 10 < 0
So by the sufficient condition of 2nd Order Derivative test there is a maxima at x = 11
Thus Profit (π) is Maximum when x = 11 units.
This is the required Equilibrium Output.
Equilibrium Price = p Equilibrium = [100 – x]at x = 11 = 100 – 11 = ₹89
Equilibrium Profit = (π)Max = [- x3/3 + 6x2 – 11x – 50]
= - (11)3/3 + 6(11)2 – 11.11 – 50 = ₹111.33
[Note – The equilibrium output can be determined by using the relation MR = MC. Subsequent-
ly this value of output can be substituted in the Demand and Profit functions to obtain Equilib-
rium Price and Profit.]

13.6 |CMA Final Strategic Cost Management

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 Business Forecasting Models (Time Series and Regression Analysis)


Chapter 14
Business Forecasting Models (Time
Series and Regression Analysis)

1 Postal Test Paper

M/S B.P. Leathers, a shoe manufacturer has modern outlook and they depend heavily on Business
Forecasting methodology to plan their business activities like manufacturing, marketing,
finance etc. At the beginning of the year 2022 they have forecasted data of demand of their
shoes for the beginning of the month of March as 1000 pairs. But the actual demand turned out
to be 900 pairs. Using a Smoothing Coefficient of 0.1 forecast the demand at the beginning of
the 2nd week of March 2022.
Also forecast the demands using Exponential Smoothing technique at the beginning of each
week till mid-April 2022 when the actual demands are as follows –
At the beginning of the 2nd week of March – 1010 pairs, At the beginning of the 3rd week of
March – 1032 pairs, At the beginning of the 4th week of March – 976 pairs, At the beginning of
the 1st week of April – 934 pairs, At the beginning of 2nd week of April – 1008 pairs & At the end
of the 2nd week of April – 1020 pairs.

Exponential Smoothing

Answer
As per the concept of Exponential Smoothing we have ut = ut-1 + αet where et = yt – ut-1
= Forecast Error & α = 0.1
Calculations for Exponential Smoothing
Demand of Previous
Forecast Error Correction New Forecast
Beginning of shoe Forecast
(et = yt - ut-1) (αet) (α = 0.1) (ut = ut-1+ αet)
(yt in Pairs) (ut-1)
March 1st week 900 1000 - 100 - 10 990
March 2nd week 1010 990 20 2 992
March 3rd week 1032 992 40 4 996

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March 4th week 976 996 - 20 -2 994

April 1st week 934 994 - 60 -6 988
April 2nd week 1008 988 20 2 990
April 2nd week 1020 990 30 3.0 993
end or Mid April
[Note – Except the 1st entry of 3rd column, all the other entries are taken from the last column].

2 Jun'23 MTP Set 2

From the following past data of Sales (in lakhs rupees) of a company estimate the same for the
year 2025.

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sales 15.3 14.6 16.8 17.3 17.2 20.9 22.3 20 23.1 24.5
Assume the trend line to be linear. What is the monthly rate of increase of sales? [7]

Straight Line Trend, Monthly Rate of

Increase of Sales

Answer
Let the best fit Linear Trend line to the given data be y = a + bx (origin at the middle of the year
2014 & 2015 and x unit = 6 months)
Normal equation are ∑y = a.n + b.∑x (1) where n = No, of years = 10 (here)
∑xy = a.∑x + b.∑x2 (2)
Using the values (from calculations below) of ∑y, ∑x and n is equation (1) we get,
192 = a.10 + b.0
Or, a = 19.2
Also using the values (from calculations below) of ∑xy, ∑x and ∑x2 and putting in the equation
(2) we get,
177 = a.0 + b.330
Or, b = 0.536

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 Business Forecasting Models (Time Series and Regression Analysis)


Calculations for fitting Straight Line Trend

Year Sales (y in ₹ Millions) x x2 xy
2010 15.3 -9 81 -137.7
2011 14.6 -7 49 -102.2
2012 16.8 -5 25 -84
2013 17.3 -3 9 -51.9
2014 17.2 -1 1 -17.2
2015 20.9 1 1 20.9
2016 22.3 3 9 66.9
2017 20 5 25 100
2018 23.1 7 49 161.7
2019 24.5 9 81 220.5
Total 192 0 330 177
So the required equation of Straight Line Trend is y = 19.2 + 0.536x (Origin = At the middle of
2014 & 2015, x unit = 6 months)
For the year 2025, x = 21. So the estimated sales for the year 2025 = 19.2 + 0.536 × 21
= 30.456 Million
Yearly rate of increase in Sales = b = 0.536. so monthly rate of increase in Sales = b/12
= 0.0467 Million

3 MTP Dec’23 Set 1

Find trend values of the following year wise data of Goods carried by a fleet of trucks of a
Transport Company having pan India network using the Moving Average Method. [Assume a 4
yearly cycle]

Year 1975 1976 1977 1978

Goods carried (Tons) 2204 2500 2360 2680
Year 1979 1980 1981 1982
Goods carried (Tons) 2424 2634 2904 3098
Year 1983 1984 1985 1986
Goods carried (Tons) 3172 2952 3248 3172

Moving Average Method - Simple Average 4 Yearly

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 Business Forecasting Models (Time Series and Regression Analysis)


Answer
Calculations for 4 Yearly Moving Average Trend values
4 Yearly Moving 4 Yearly Moving
Goods carried 4 Yearly 2 item Moving
Year Average (Not Average
(Tons) Moving Total Total (Centred)
centred) (Centred)
(1) (2) (3) (4) = (3) 4 (5) (6) = (5) 2
1975 2204 - - - -
1976 2500 - - - -
9744 2436
1977 2360 4927 2463.50
9964 2491
1978 2680 5015.5 2507.75
10098 2524.5
1979 2424 5185 2592.50
10642 2660.5
1980 2634 5425.5 2712.75
11060 2765
1981 2904 5717 2858.50
11808 2952
1982 3098 5983.5 2991.75
12126 3031.5
1983 3172 6149 3074.5
12470 3117.5
1984 2952 6253.5 3126.75
12544 3136
1985 3248 - - - -
1986 3172 - - - -

4 Dec’23
The Sales of ZINC in a plant of KHT Ttd. for the years 2014 to 2022 are given below: [7]
Year 2014 2016 2018 2020 2022
Sales of ZINC (in Million%) 36 42 46 54 32
Required:
(i) Using the method of least squares, analyse a straight line trend value.
(ii) Assess the sale (in Million ) of ZINC for the year 2019 and 2025.

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 Business Forecasting Models (Time Series and Regression Analysis)


Straight line trend

Answer
(i) Straight Line Trend Ye = 42 + 0.20 x
(ii) Sales (₹ in Million) for:
Year 2019 = ₹ 42.20 Million
Year 2025 = ₹ 43.40 Million

5 Jun'24 MTP Set 1

Calculate the Seasonal Indices for the following quarterly data in certain units. Appropriate
method for finding the Indices has to be decided by you with due explanation.
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2020 39 21 52 81
2021 45 23 63 76
2022 44 26 69 75
2023 53 23 64 84
[7]

Seasonal Indices

Answer
The values in any quarter do not reveal any definite tendency to change. Thus there is no appreci-
able trend in the given dataset. So it is decided to use Method of Simple Average (Quarterly) to
find out the Seasonal Indices. Also a Multiplicative Model is assumed for the data.

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Calculations for Seasonal Index

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
2020 39 21 52 81 -
2021 45 23 63 76 -
2022 44 26 69 75 -
2023 53 23 64 84 -
Total 181 93 248 316 838
Arithmetic Mean 45.25 23.25 62 79 209.5
Seasonal Index 86.4 44.4 118.4 150.8 400
Calculations
Arithmetic Mean for any Quarter = Total for that quarter /4, Grand Average = Total of the
Arithmetic Means /4
Seasonal Index for any Quarter = (Arithmetic Mean of that Quarter / Grand Average) x100

6 Jun'24
From the following data fit a Straight Line trend by the Method of Least Squares and assess the
export turnover in the year 2025.

Year 2015 2016 2017 2018 2019 2020 2021

Exports(Figures in crores) 20 22 25 27 26 30 32
[7]

Method of Least Squares

Answer
The required equation of Straight line trend is y =26 +1.893x
(Origin=2018,x unit=1 year)
Export Turnover for Year 2025:
For the year 2025, x=7
So, the estimated no. of exports in the year 2025:
= ₹ 39.25 Crores

14.6 |CMA Final Strategic Cost Management

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 Business Forecasting Models (Time Series and Regression Analysis)


7 MTP Dec’24 Set 1

The following table relates to the tourist arrivals in India during 2015 to 2021.

Year 2015 2016 2017 2018 2019 2020 2021

Tourist arrivals (lakhs) 18 20 23 25 24 28 30
Fit a Straight Line trend by the Method of Least Squares and estimate the number of tourists
that would arrive in the year 2025. [7]

Method of Least Squares

Answer
Let the best fit Trend line to the given data be y = a + bx (Origin at the year 2018 and x unit = 1
year
Normal equations are Σy = a.n + b.Σx ... (1) and Σxy = a.Σx + b.Σx2 ...(2) where n = No. of years
= 7 (here)
Calculations for fitting Straight Line Trend
Year Tourist arrivals (y in lakhs) x x2 xy
2015 18 –3 9 – 54
2016 20 –2 4 – 40
2017 23 –1 1 – 23
2018 25 0 0 0
2019 24 1 1 24
2020 28 2 4 56
2021 30 3 9 90
Total 168 0 28 53
Putting the values of Σy, Σx and n in equation (1) we get 168 = a.7 + b.0 Or, a = 24
Also putting the values of Σxy, Σx and Σx2 in equation (2) we get, 53 = a.0 + b.28 Or, b = 1.893
So the required equation of Straight Line Trend is y = 24 + 1.893x (Origin = 2018, x unit = 1 year)
For the year 2025, x = 7. So the estimated number of tourists in the year 2025 = 24 + 1.893.7
=₹37.25 lakhs

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NOTES

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 Introduction to tools for Data Analytics


Chapter 15
Introduction to tools for Data Analytics

1 Jun'23 MTP Set 1

(i) What do you mean by Data Mining
(ii) Discuss briefly applications of R Programming in the real world. [3 + 3 = 6]

Data Mining, Applications of R

Programming

Answer
(i) Data Mining
This is the activity of “Data Discovery” because here the patterns and inconsistencies of
data unveiled through automated or semi-automated data analysis. Common correlations
drawn from Data Mining include grouping specific sets of data, finding outliers in data and
drawing connections and dependencies from disparate datasets.
Data Mining often uncovers the patterns used in more complex analyses, like Predictive
modelling which makes it an essential part of the BI Process whose growth is correlated
directly with the rise of Big Data in businesses of all sizes.
Of the standard processes performed by Data Mining, association rule learning presents
the greatest benefit. By examining data to draw dependencies and construct correlations,
the association rule can help businesses better understand the way customers interact
with their website or even what factors influence their purchasing behavior.
Association rule learning was originally introduced to uncover connections between
purchase data recordedin point of sale systems at supermarkets. For example, if a customer
purchased Tomato Sauce and Cheese, the association rules would likely uncover that the
customer purchased Hamburger Meat as well. Though thisis a very simple example but
it works well to understand the type of analysis that now connects incredibly complex
chains of events in all sorts of industries and helps users find correlations that would have
remained hidden otherwise.

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(ii) Applications of R Programming in the real world

1. Data Science – With the advent of “Internet of things” (IoT) devices creating terabytes
and terabytesof data that can be used to make better decisions, Data Science is a field
that has no other way but togo up. Simply explained, a data scientist is a statistician
with an extra asset – computer programmingskills. Programming languages like R
give a data scientist superpowers that allow them to collect data in real time, perform
statistical and predictive analysis, create visualisation and communicate actionable
results to the stakeholders.
2. Statistical Computing – R is the most popular programming language among statisti-
cians. In fact, it was initially built by statisticians for carry work related to statistical
data. It has a rich package repository with over 9000 packages having every statistical
function one can think of. R₹s expressivesyntax allows researchers – even those from
non- computer science backgrounds to quickly import, clean and analyse data from
various data sources. R also has charting capabilities which means onecan plot the
data and create interesting visualisations from any dataset.
3. Machine Learning – R has found a lot of use in predictive analytics and machine
learning. Ithas various packages for common ML tasks like linear and nonlinear
regression, decision trees, linear and non- linear classification and many more.
Everyone from machine learning enthusiasts to researchers use R to implement
machine learning algorithms in fields like finance, genetics research, retail, marketing
and health care.

2 Postal Test Paper

What are the different types of Data Analysis Tool? [6]

Data Analysis tool

Answer
Data Analysis Tools
These tools are meant for Analysis part of the data. Broad classification of these tools are –
• Spread-sheets
• Business Intelligence (BI) tools
• Financial data Analytics tools
• Programming Languages

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 Introduction to tools for Data Analytics


• Tools for Statistical Data Analysis

• Industry Specific tools

3 Jun’23
(i) What do you mean by Business Intelligence (BI) software?
(ii) Discuss in brief what are the features of R Programming Language.

Business Intelligence; R Programming

Language

Answer
(i) Business Intelligence (BI) Software is a set of business analytics solutions used by
companies to retrieve, analyse and transform data into useful business insights usually
within easy-to-read visualization - like charts, graphs and dashboards. Examples of the
best BI Tools include data visualization, data warehouses, interactive dashboards and BI
reporting tools. A BI Solution pulls internal data produced by a company, into an Analytics
platform for deep insights as to how different parts of a business affect one another.
As Big Data has gained in prominence, the tendency for companies to collect, store and
mine their business data has increased many times and so has the popularity of BI Software.
Companies generate, track and compile business data at a scale never seen before. The
ability to integrate cloud software directly with proprietary systems has further driven the
need to combine multiple data sources and take advantage of data preparation tools. But
all this data is nothing if we can₹t make sense of it and use it to improve business outcomes.
To make informed choices, businesses need to make their decisions on evidence. The
mountains of data that businesses and their customers produce contain evidence of
purchasing patterns and market trends. By aggregating, standardising and analysing that
data, businesses can better understand their customers, better forecast their revenue
growth and better protect themselves against business pitfalls.
Business intelligence has traditionally taken the form of quarterly or yearly reports that
report on a defined set of Key Performance Indicators (KPI). But today’s BI Reporting
software is backed by Data Analytics tools that work continuously at the speed of light.
These insights can help a company take a course of action within minutes.
BI Software interprets a sea of quantifiable customer and business actions and returns
queries based on patterns in the data. BI comes in many forms and spans, many different
types of technology.
The chart below shows a comparison of few top Business Intelligence Tools according to
user popularity and major features.

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(ii) Features of R Programming language

1. Statistical features of R:
Basic Statistics – Most common terms of basic statistics are Mean, Median and Mode
which are the Measures of Central Tendency for a dataset. These can be very easily
computed using R.
Static Graphics – R is rich with facilities for creating and developing interesting Static
Graphics. R contains functionality for many plot types including graphic maps, mosaic
plots, bi-plots and the list goes on.
Probability Distributions – Probability Distributions play vital role in statistics. By
using R various types of problems related to probability distributions (such as Binomial
Distribution, Normal Distribution, Student’s t Distribution, Chi Square Distribution
etc.) can be handled very easily.
Data Analysis – It provides a large, coherent and integrated collection of tools for
data analysis.
2. Programming features of R:
R Packages – One of the major features of R is the fact that it has a wide availability of
libraries. R has CRAN (Comprehensive R Archive Network) which is repository holding
more than 10,000 packages.
Distributed Computing – Distributed computing is a model in which components
of a software system are shared among multiple computers to improve efficiency and
performance. Packages like ddR and multidplyr are used for distributed programming
in R.

15.4 |CMA Final Strategic Cost Management

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 Objectives


Chapter 16
Objectives

MTP Jun’23 Set 1

(i) The cost incurred to ensure that failures do not happen is known as _____. Provide a justifi-
cation for your answer.
(a) External failure cost
(b) Internal failure cost
(c) Prevention cost
(d) None of the above
(ii) Which of the following is not the quality parameter for service organizations and why?
(a) Consistency
(b) Friendliness
(c) Durability
(d) Promptness
(iii) Which one of the following is not a standard definition of ‘Quality’ and why?
(a) Conformance to Specifications
(b) Fitness for Use
(c) Psychological Criteria
(d) Physiological Criteria
(iv) Prevention costs are all costs incurred in the process of preventing poor quality from
occurring. Which one of the following is not included in Prevention cost? Provide a
justification.
(a) Cost of creating and maintaining quality circles
(b) Cost related to statistical process control activities
(c) Costs related to System Development for prevention
(d) WIP testing and inspecting
(v) The best way to define the principles that guide Lean Accounting and form the foundation
for all of accounting’s work and interaction with the organization are _____. Provide a
justification for your answer.
(a) Customer value:

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(b) Continuous improvement:

(c) Respect for people:
(d) All of the above.
(vi) A company is considering to accept a one-year contract which will require four skilled
employees. The four skilled employees could be recruited on a one-year contract at a cost
of ₹ 40,000 per employee. The employees would be supervised by an existing manager
who earns ₹ 60,000 per annum. It is expected that supervision of the contract would take
10% of the manager’s time.
Instead of recruiting new employees, the company could retrain some existing staff who
currently earns ₹30,000 per year. The training would cost ₹15,000 in total but if those
employees were used they would need to be replaced at a total cost of ₹100,000. The
relevant labour cost of the contract is _____.
(a) ₹ 1,15,000
(b) ₹1,00,000
(c) ₹ 85,000
(d) ₹ 1,10,000
(vii) A firm has some material which originally cost ₹ 45,000. It has a scrap value of ₹12,500 but
if reworked at a cost of ₹ 7,500 it could be sold for ₹17,500. What would be the incremental
effect of reworking and selling the material?
(a) A Loss of ₹ 27,500
(b) B Loss of ₹2,500
(c) C Profit of ₹ 5,000
(d) D Profit of ₹10,000
(viii) The product of XYZ Company is sold at a fixed price of ₹1,500 per unit. As per company’s
estimate, 500 units of the product are expected to be sold in the coming year. If the value
of investments of the company is ₹15 lakhs and it has a target ROI of 15%, the target cost
would be_____.
(a) ₹ 930
(b) ₹ 950
(c) ₹ 1,050
(d) ₹ 1,130
Answer :
Sl.
Answer Justification
No.
(i) c Cost to ensure that failure does not happen is for ensuring that in future failure
is prevented.

16.2 |CMA Final Strategic Cost Management

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 Objectives


(ii) c Service organizations produce a product that is intangible. Usually, the

complete product cannot be seen or touched. Rather, it is experienced.
Examples include delivery of health care, experience of staying at a vacation
resort, and learning at a university. Thus durability cannot be a parameter of
quality of Service organization.
(iii) d (i) Today, there is no single universal definition of quality. Some people view
quality as “performance to standards.” Others view it as “meeting the customer’s
needs” or “satisfying the customer.” Some of the more common definitions of
quality are;
a. Conformance to Specifications:
b. Fitness for Use
c. Value for Price Paid
d. Support Services
e. Psychological Criteria
Thus Physiological Criteria is certainly not one of the standard definitions of
Quality.
(iv) d The first category of quality cost consists of costs necessary for achieving high
quality, which are also called quality control costs. These are either prevention
cost or appraisal cost. While prevention costs are all costs incurred in the process
of preventing poor quality from occurring appraisal costs are incurred in the
process of uncovering defects. They include the cost of quality inspections,
product testing, and performing audits to make sure that quality standards are
being met. Thus it is quite evident that WIP testing and inspecting is appraisal
cost and not prevention cost.
(v) d (i) Three principles guide Lean Accounting and form the foundation for all of
accounting’s work and interaction with the organization:
• Customer value: Delivering the relevant and reliable information in a
timely manner to all users of the information inside the organization.
• Continuous improvement: Improving accounting processes,
cross-functional business processes and the information used inside
the business for analysis and decision making.
• Respect for people: Adopting a learning attitude by seeking
to understand root causes of business problems and issues in a
cross-functional, collaborative manner.
Thus the best way of defining the principles of Lean Accounting are all of
the above.

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 Objectives


(vi) a (i) The relevant cost in this example is the lower of the relevant cost for each
option
Recruitment
Four employees @ ₹ 40,000 each = £160,000
(Super vision is sunk as it is already incurred)
Retrain and replace
Training ₹ 15,000
Replacement ₹1,00,000
₹ 1,15,000
So answer is ₹ 1,15,000
(vii) b B (incremental approach)
Option 1
Sell for scrap ₹ 12,500
Option 2
Extra cost 7,500
Extra revenue 5,000
Loss 2,500

(viii) c Target ROI at 15% of total investment of ₹ 15 lakhs

= ₹ 15,00,000 × 0.15
= ₹ 2,25,000
Expected output = 500 units
Target Profit per unit of output = ₹ 2,25,000 ÷500
= ₹ 450 per unit
Target cost per unit = Selling Price – Profit per unit
= ₹ 1,500 – ₹ 450
= ₹ 1,050 per unit

16.4 |CMA Final Strategic Cost Management

Divya Jadi Booti
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 Objectives


MTP Jun’23 (Set 2)

(i) Which one of the following is not true for a Blue Ocean Strategy?
(a) Create uncontested market space
(b) Make the competition irrelevant
(c) Exploit existing demand
(d) Create and capture new demand
Briefly state a reason supporting your selection.
(ii) One of the following is not an advantages of cost control are mainly as:
(a) Achieving the expected return on capital employed by maximizing or optimizing
profit.
(b) Increasing the productivity of the available resources.
(c) Delivering the product or service to the customers at a reasonable price.
(d) It is a corrective function, thus corrects an existing situation.
Briefly justify your answer.
(iii) The rules governing the application of the Value Analysis (VA) approach are
(a) No cost can be removed if it compromises the quality of the product or its reliability.
(b) Marketability is another issue that cannot be compromised.
(c) Any activity that reduces the maintainability of the product increases the cost of
ownership to the customer and can lower the value attached to the product.
(d) None of the above
Briefly state a reason in support of your selection.
(iv) Which of the following is not a term normally used in value analysis and why?
(a) Exchange value
(b) Use value
(c) Esteem value
(d) Cost value
(v) Which of the three principles guide Lean Accounting and form the foundation for all of
accountants’ work and interaction with the organization and why?
(a) Customer value, quality circle, respect for people
(b) Supplier value, quality circle, respect for people
(c) Customer value, continuous improvement, respect for people
(d) Supplier value, continuous improvement, suggestion box

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(vi) The standard variable production overhead cost of product B is as follows.

4 hours at ₹ 1.70 per hour = ₹ 6.80 per unit
During period 3 the production of B amounted to 400 units. The labour force worked 1,690
hours, of which 30 hours were recorded as idle time. The variable overhead cost incurred
was ₹ 2,950. The variable production overhead efficiency variance for period 3 is
(a) ₹ 102 (F)
(b) ₹ 102 (A)
(c) ₹ 105 (A)
(d) ₹ 153 (A)
(vii) M Co sells product L. An extract from its budget for the four-week period ended 28 October
2022 shows that it planned to sell 500 units at a unit price of ₹ 300, which would give a C/S
ratio of 30%. Annual sales were 521 units at an average selling price of ₹ 287. The actual C/S
ratio averaged 26%. The sales volume contribution variance (to the nearest ₹ 1) was
(a) ₹ 1,890 (F)
(b) ₹ 1,808 (F)
(c) ₹ 1,638 (F)
(d) ₹ 1,567 (F)
(viii) A technical writer is to set up her own business. She anticipates working a 40-hour week
and taking four weeks’ holiday per year. General expenses of the business are expected to
be ₹ 10,000 per year, and she has set herself a target of ₹ 40,000 a year salary. Assuming
that only 90% of her time worked will be chargeable to customers, her charge for each
hour of writing (to the nearest cent) should be
(a) ₹ 26.04
(b) ₹ 30.94
(c) ₹ 28.94
(d) ₹ 29.84
Answer :
Sl.
Answer Justification
No.
(i) (c) Blue ocean strategists recognize that market boundaries exist only in managers’
minds, and they do not let existing market structures limit their thinking. To
them, extra demand is out there, largely untapped.
Thus exploiting existing markets [C] cannot be an option.

16.6 |CMA Final Strategic Cost Management

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 Objectives


(ii) (d) The advantages of cost control are

• The advantages of cost control are mainly as follows:
• Achieving the expected return on capital employed by maximizing or
optimizing profit.
• Increasing the productivity of the available resources.
• Delivering the product or service to the customers at a reasonable price.
• Continued employment and job opportunity for the workers
• Economic use of limited resources of production
• Increased credit worthiness
• Prosperity and economic stability of the industry
Thus it is clear that cost control is not a corrective function. Point D is the answer
(iii) (d) The key focus of the Value Analysis (VA) approach is the management of
‘functionality’ to yield value for the customer. If a company seeks to reduce the
costs of producing a product, then it must seek out costs that are unnecessary
or items of the product that provide no functional value to the customer. In
this case the first three (No cost can be removed if it compromises the quality
of the product or its reliability, marketability is another issue that cannot be
compromised and any activity that reduces the maintainability of the product
increases the cost of ownership to the customer and can lower the value
attached to the product) are issues of adding functionality to
(iv) (a) Value Analysis is a process of improving value for money in a product, service
or company. It is a systematic approach to analyze, identify and reduce costs
and/or improve performance. The focus of Value Analysis is to optimize value
by eliminating or reducing unnecessary costs and improving effectiveness of
resources. This is done by examining the functions that are performed, the
processes and materials used, the costs associated and the overall performance
of the system. Exchange value is the amount of money that can be exchanged
for a given item or service and is not a part of Value Analysis.
Thus A is the answer.
(v) (c)
Continuous
Improvement
Customer Respect for
Value People

Principles of
Lean Accounting

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(vi) (b) Justification

400 Units of Product B should take (× 4 hours) = 1600 hours
But did take (active hours) = 1660 hours
Efficiency variance in hours = 60 hours
× standard rate per hour × 1.70
102 (A)

(vii) (a) Budgeted C/S ration = 30%

Therefore, Budgeted Contribution = 30% × budgeted selling price
= 30% × ₹ 300 = ₹ 90
Sales Volume should have been = 500 units
But was = 521 units
Sales volume variance in units = 21 units (F)
× Standard contribution per unit = × ₹ 90
Sales volume contribution variance = ₹ 1,890 (F)
(viii) (c) Weeks worked per year = 52 – 4 = 48
Hours worked per year = 48 × 40 hours = 1920 hours
Hours chargeable to clients = 1920 × 90% = 1728
Total expenses = ₹ 10,000 + ₹ 40,000 = ₹ 50,000
50 , 000
Hourly rate = = ₹ 28.94
1, 728

16.8 |CMA Final Strategic Cost Management

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 Objectives


Jun’23
(i) Which one of the following is not a support activity of value chain?
(a) Human Resource Management
(b) Technological Development
(c) Service
(d) Infrastructure
(ii) Warranty period return of finished goods sold falls under the following quality cost:
(a) Prevention
(b) Appraisal
(c) Internal failure
(d) External failure
(iii) Target Costing is the answer to
(a) Market Driven Prices
(b) Seller’s Market
(c) No Profit Situation
(d) None of the above
(iv) Producing more non bottleneck output
(a) creates more inventory and increases througput contribution
(b) creates more inventory but does not increase trhoughput contribution
(c) creates less pressure for the bottleneck workstations
(d) allows for the maximisation of overall contribution
(v) Which one of the following is not true for a Red ocean strategy and why?
(a) Beat the competition
(b) Exploit existing demand
(c) Make the value cost trade-off
(d) Break the value cost trade-off
(vi) SINT Ltd. determine its selling price by marking up the variable cost 50%. In addition, the
company uses frequent selling price mark down to stimulate sales. The mark down average
is 20%, what is the company’s distribution margin ratio?
(a) 16.67%
(b) 18.50%

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 Objectives


(vii) At ROXIN LTD., cost of personnel department has always been charged to production
department based upon no. of employees. Recently opinion gathered from the department
manager indicate that the no. of new hires might be better predictor or personnel cost.
Total personnel department costs are ₹ 3,00,000.
Department C D F
Number of Employees 40 300 160
Number of new hires 10 32 8
If the number of new hire is considered the cost driver, what amount of cost will be allocated
to Department D?
(a) ₹ 2,00,000
(b) ₹ 1,92,000
(c) ₹ 1,50,000
(d) ₹ 1,30,000
(viii) BOSAN LTD. using added costing system provides the following information pertaining
to Direct Labour for its product JUM for the month of May, 2023.
Standard Direct Labour Rate per hour ₹ 16
Actual Direct Labour Rate per hour ₹ 14.50
Labour Rate Variance ₹ 15,000 (Fav)
Standard hours allowed for Actual production 8000 hours
How many Direct Labour hours were worked during month of May, 2023?
(a) 12,000 hours
(b) 11,000 hours
(c) 10,000 hours
(d) None of the above
Answer :

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

c d a b d a b c

16.10 |CMA Final Strategic Cost Management

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 Objectives


MTP Dec’23 Set 1

(i) Which of the following is not a term normally used in value analysis?
(a) Resale value
(b) Use value
(c) Esteem value
(d) Cost value
(ii) DMIADV is a methodology associated with
(a) Pareto Analysis
(b) PRAISE
(c) Six Sigma
(d) None of the above
(iii) XYZ Ltd. has the following alternative planned activity levels.
Level E F G
Total cost (₹) 1,00,000 1,50,000 2,00,000
No. of units produced 5000 10000 15000
If fixed overhead remains constant, then fixed overhead cost per unit at Level E is:
(a) ₹ 20
(b) ₹ 15
(c) ₹13.33
(d) ₹ 10
(iv) A company has a breakeven point when sales are ₹ 3,20,000 and variable cost at that
level of sales are ₹ 2,00,000. How much would contribution margin increase or decrease if
variable expenses are dropped by ₹30,000?
(a) Increase by 27.5%
(b) Increase by 9.375%
(c) Decrease by 9.375%
(d) Increase by 37.5%
(v) H Group has two divisions, Division P and Division Q. Division P manufactures an item that
is transferred to Division Q. The item has no external market and 6000 units produced are
transferred internally each year. The costs of each division are as follows:
Division P Division Q
Variable Cost (₹) 100 per unit 120 per unit
Fixed cost each year (₹) 1,20,000 90,000

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 Objectives


Head Office management decided that a transfer price should be set that provides a profit
of ₹ 30,000 to Division P. What should be the transfer price per unit?
(a) ₹ 145
(b) ₹ 125
(c) ₹ 120
(d) ₹ 135
(vi) A company has the capacity of producing 80000 units and presently sells 20000 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 if
the demand is doubled at full capacity and profit margin on sale is taken at 25%?
(a) ₹ 75
(b) ₹ 90
(c) ₹ 25
(d) ₹ 60
(vii) A factory can make only one of the three products X, Y or Z in a given production period.
The following information is given:
Per Unit ₹ X Y Z
Selling Price 1500 1800 2000
Variable Cost 700 950 1000
Assume that there is no constraint on resource utilization or demand and similar resources
are consumed by X, Y and Z. The opportunity cost of making one unit of Z is:
(a) ₹ 850
(b) ₹ 800
(c) ₹ 1,800
(d) ₹ 1,500
(viii) Twin Ltd. uses JIT and back flush accounting. It does not use a raw material stock control
account. During September 2021, 10000 units were produced and sold. The standard cost
per unit is ₹ 150 which includes materials of ₹ 60. During September 2021, ₹ 9,90,000
of conversion costs were incurred. The debit balance in cost of goods sold account for
September 2021 is:
(a) ₹ 14,00,000
(b) ₹ 14,80,000
(c) ₹ 15,90,000
(d) ₹ 16,20,000
(ix) The following figures are extracted from the books of a company:
Budgeted O/H ₹ 10,000 (Fixed ₹ 6,000, Variable ₹ 4,000)

16.12 |CMA Final Strategic Cost Management

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 Objectives


Budgeted Hours 2000

Actual O/H ₹ 10,400 (Fixed ₹ 6,100, Variable ₹ 4,300)
Actual Hours 2100
Variable O/H cost variance and Fixed O/H cost variance will be:
(a) 100 (A) and 200 (A)
(b) 100 (F) and 200 (F)
(c) 100 (A) and 200 (F)
(d) 200 (A) and 100 (F)
(x) Tableau is a –
(a) Business Intelligence Tool
(b) Visualisation Tool
(c) Both (a) and (b)
(d) None of the above
(xi) Which one of the following is a Key feature of SAS language?
(a) Capability of handling data analysis related to Operations Research and Project
Management.
(b) Capability of report formation with perfect graphs.
(c) Capability to interact with multiple host systems
(d) All the above
(xii) A feasible solution of LPP –
(a) Must satisfy all the constraints simultaneously.
(b) Need not satisfy all the constraints, only some of them.
(c) Must be a corner point of the feasible region
(d) All the above
(xiii) A PERT activity has an optimistic time of 3 days, pessimistic time of 15 days and an expected
time of 7 days. What is the most likely time of the activity?
(a) 10 days
(b) 6 days
(c) 5 days
(d) None of the above
(xiv) MR is
(a) First order derivative of TC
(b) Second order derivative of TR

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(c) First order derivative of TR

(d) Second order derivative of TC
(xv) The equations of the two lines of Regression are 4x + 3y + 7 = 0 and 3x + 4y + 8 = 0. The
Coefficient of Correlation between x and y is –
(a) 1.25
(b) 0.25
(c) – 0.75
(d) 0.92
Answer :

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
a c d b d d a c c c d a b c c

16.14 |CMA Final Strategic Cost Management

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 Objectives


Dec’23
(i) Down time due to defect in qualilty in an example of
(a) Internal failure cost
(b) Prevention cost
(c) Appraisal cost
(d) External failure cost
(ii) Which one of the important pillars of Strategic Cost Management determines the
company’s comparative position in the Industry in terms of performance?
(a) Cost drivers Analysis
(b) Value chain Analysis
(c) Strategic positioning analysis
(d) Competitive value analysis
(iii) A production of ZON Ltd. has the capacity to produce either 4000 units of A, or 3500
units of B or 5000 units of C. Only one product can be made in a production period. The
contributions per unit of A, B and C are ₹ 10, ₹ 11 and ₹ 8 respectively. The opportunity cost
of A would be :
(a) ₹ 44,000
(b) ₹ 38,000
(c) ₹ 50,000
(d) ₹ 40,000
(iv) ROBINSON Ltd., a manufacturing company has a break even point, when sales are ₹ 10
lakh and fixed costs of ₹ 4 lakh. To realize profits of ₹ 2 lakhs from sales of 3,00,000 units,
the selling price per unit will be -
(a) ₹ 6
(b) ₹ 5
(c) ₹ 4
(d) ₹ 2
(v) AMON Ltd. plans to introduce a new product ZOS and is using Target cost
approach. The selling price of product ZOS is set at ₹ 120 for each unit and sales revenue
for the coming year is expected to be ₹ 9,60,000. The company requires a return of 15%
on the coming year on its investment of ₹ 20 lakh. What is the Target Cost per unit for the
coming year?
(a) ₹ 90.00
(b) ₹ 85.00
(c) ₹ 82.50

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(d) 80.50
(vi) The highest negative opportunity cost value in an unused cell of a Transportation
Matrixis chosen to improve the current solution because -
(a) It represents maximum possible cost reduction per unit
(b) It ensures no violation of Rim Condition
(c) It represents per unit cost improvement
(d) Either one of the above
(vii) RRS, a manufacturer of large windows, is experiencing a bottleneck in its plant. Setup time
at one of its workstations has been identified as the culprit. A manager has proposed a
plan to reduce setup time at a cost of ₹ 7,20,000. The change will result in 800 addition-
al windows. The selling price per window is ₹ 18,000, direct labour costs are ₹ 3,000 per
window and the costs of direct materials is ₹ 7,000 per window. Assume all units produced
can be sold. The change will result in an increase in the throughput contribution of _____
(a) ₹ 64,00,000
(b) ₹ 88,00,000
(c) ₹ 56,80,000
(d) ₹ 1,44,00,000
(viii) An employee of ROB Ltd. took 200 minutes to complete the first set up on a new machine.
Using a 90% incremental unit time learning model indicates that the second set up on the
new machine is expected to take -
(a) 160 minutes
(b) 120 minutes
(c) 100 minutes
(d) 80 minutes
(ix) The drive-up window of a fast food operation was being studied using simulation for
a variety of operating characteristics. As part of the study, data was collected on Order
Processing Time as given in the following table. Using the first two digits of the Random
Numbers, determine the processing time that would be used to simulate the fifth sample.
Processing time (Minutes) 1 2 3 4
Probability 0.30 0.45 0.20 0.05

Customer 1 2 3 4 5 6 7 8 9
Random No. 1048 2236 2413 4216 3757 1501 4657 4836 9309
(a) 2 minutes
(b) 4 minutes
(c) 1 minute

16.16 |CMA Final Strategic Cost Management

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 Objectives


(d) 3 minutes
(x) A Co. producing output X and Y uses standard costing. The standard overhead contents
of each product is :
X : ₹ 3 per unit and Y : ₹ 2.25 per unit.
The budgeted overhead is ₹ 860 and budgeted time is 3440 hours.
Actual Output :
X 200 units and Y 100 units.
Actual time : 3200 hours
Actual overhead : ₹ 875. Compute Overhead Volume Variance.
(a) ₹ 35 (A)
(b) ₹ 35 (A)
(c) ₹ 25 (A)
(d) ₹ 15 (A)
(xi) The value of the game of
Player B
Player A B1 B2
A1 4 6
A2 -10 10
is _____. Fill in the above.
(a) 4
(b) 6
(c) 8
(d) None of the above
(xii) The slack time of tail event of activity Z of a project is 2 days. If the total Float and free float
of the activity Z are 10 days and 7 days respectively, the Independent float of activity Z will
be:
(a) 5 days
(b) 6 days
(c) 7 days
(d) 2 days
(xiii) Which of the following has no relation to business intelligence?
(a) A set of business analytics solutions to retrieve, analyse and transform data into useful
business sights
(b) Visualisation Tools are primarily BI Tools

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(c) ABS Glue is a tool used for the purpose of Business Intelligence
(d) Embedded Analytics is an important part of any Business Intelligence Tool
(xiv) Which of the following is/ are the Financial analytics tools?
(a) Hyper Anna
(b) Jedox
(c) Net Suite
(d) All of the above
(xv) Which one of the following is not a part of qualitative type of forecasting techniques?
(a) Survey Technique
(b) Barometric Technique
(c) Exponential Smoothing
(d) Delphi Technique
Answer :

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
a c d b c a b a a a a a c d c

16.18 |CMA Final Strategic Cost Management

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 Objectives


MTP Jun’24 Set 1

Choose the correct option: [15 × 2 = 30]

(i) Which of the following is not a secondary activity of Value Chain?
(a) Procurement
(b) Human Resource Development
(c) Service
(d) Technology Development
(ii) The break-even point of a manufacturing company is ₹1,60,000. Fixed cost is ₹48,000.
Variable cost is ₹12 per unit. The PV ratio will be:
(a) 20%
(b) 40%
(c) 30%
(d) 25%
(iii) The higher the actual hours worked _____ .
(a) The lower the capacity usage ratio.
(b) The higher the capacity usage ratio.
(c) The lower the capacity utilization ratio.
(d) The higher the capacity utilization ratio.
(iv) The Tech Company has fixed costs of ₹ 400,000 and variable costs are 75% of the selling
price. To realize profits of ₹ 100,000 from sales of 5,00,000 units, the selling price per unit
_____ .
(a) must be ₹1.00
(b) must be ₹4.80
(c) must be ₹4.00
(d) cannot be determined
(v) X Ltd. has 1000 units of an obsolete item which are carried in inventory at the original
price of ₹ 50,000. If these items are reworked for ₹ 20,000, they can be sold for ₹ 36,000.
Alternatively, they can be sold as a scrap for ₹ 6,000 in the market. In a decision model used
to analyse the reworking proposal, the opportunity cost should be taken as _____.
(a) ₹ 16,000
(b) ₹ 6,000
(c) ₹ 30,000
(d) ₹ 20,000

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 Objectives


(vi) A Ltd. Plans to introduce a new product and issuing the target cost approach. Projected
sales revenue is ₹ 90,00,000 (₹45 per unit) and target costs are ₹ 64,00,000. What is the
desired profit per unit?
(a) ₹ 13
(b) ₹ 17
(c) ₹ 32
(d) ₹ 10
(vii) AP Products sells product A at a selling price of ₹₹40 per unit. AP’s cost per unit based on
the full capacity of 5,00,000 units is as follows:
Direct material 6
Direct Labour 3
Indirect Manufacturing Expense 60% of which is fixed 10
Total 19
A one-time only special order offering to buy 50,000 units was received from an overseas
distributor. The only other costs that would be incurred on this order would be ₹ 4 per
unit for shipping. AP has sufficient existing capacity to manufacture the additional units.
In negotiating a price for the special order, AP should consider that the minimum selling
price per unit should be _____.
(a) ₹ 17
(b) ₹ 19
(c) ₹ 21
(d) ₹ 23
(viii) 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
What is the throughput contribution per bottleneck resource per hour?
(a) ₹ 270
(b) ₹ 150
(c) ₹ 120
(d) ₹ 90
(ix) Efficiency Ratio is _____.
(a) Available working days ÷ Budgeted working days × 100
(b) Budgeted hours ÷ Maximum hours in budgeted period × 100
(c) Standard hours ÷ Actual hours × 100

16.20 |CMA Final Strategic Cost Management

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 Objectives


(d) None of the above

(x) Which of the following statement is incorrect?
(a) Microsoft Excel is most popular among all the available spreadsheets.
(b) Zoho Analytics is a tool used for Financial Data analysis.
(c) Visualisation Tools are the Reporting Tools.
(d) None of the above.
(xi) Prescriptive Analytics is very important because –
(a) It tells about the action to be taken.
(b) It tells about what is likely to happen.
(c) It tells about how something has happened.
(d) It tells about what has happened.
(xii) The information relating to the direct material cost of a company is as follows: Standard
price per unit ₹ 7.20
Actual quantity purchased in units 1600
Standard quantity allowed for actual production in units 1450
Material price variance on purchase (Favourable) ₹480 What is the actual purchase price
per unit?
(a) ₹ 7.50
(b) ₹ 6.40
(c) ₹ 6.5
(d) ₹ 6.90
(xiii) The Normal duration and Normal cost of an activity are respectively 10 days and ₹ 350. The
cost slope is ₹ 75 per day. If the Crash duration is 8 days, then what is the Crash cost of the
activity?
(a) ₹ 400
(b) ₹ 500
(c) ₹ 600
(d) ₹ 650
(xiv) Optimization is the method of finding _____.
(a) The maximum point
(b) The minimum point
(c) The critical point
(d) ll of the above

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 Objectives


(xv) The actual demand for a period is 100 units. But forecast demand was 90 units. The forecast
error is –
(a) – 10
(b) 10
(c) 5
(d) None of the above
Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
(c) (c) (d) (c) (b) (a) (a) (a) (b) (d) (a) (d) (b) (d) (b)

16.22 |CMA Final Strategic Cost Management

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 Objectives


Jun’24

Choose the correct option from the four alternatives given: 2 × 15 = 30

(i) Which one of the following is true for Blue Ocean Strategy?
(a) Beat the competition
(b) Exploit existing demand
(c) Make the competition irrelevant
(d) Make the value-cost trade off
(ii) Which of the following Quality Cost is incurred in the process of uncovering defects?
(a) Appraisal Costs
(b) Prevention Costs
(c) Internal Failure Costs
(d) External Failure Costs
(iii) BONAS Ltd. adopting a Standard Costing System provides the following information
pertaining to Direct Materials for the month of April, 2024.
Standard price per unit ₹ 7.20
Actual quantity purchased in units 3200
Standard quantity allowed for actual production in units 2900
Material Price Variance on purchase (FAY) ₹960
What will be the actual purchase price per unit?
(a) ₹ 8-50
(b) ₹ 7-80
(c) ₹ 6-90
(d) ₹ 6-50
(iv) The Break Even Sales of GXT Ltd., a manufacturing company, is ₹ 3,75,000, while its fixed
cost is ₹ 1,12,500. If the Margin of Safety is 40%, what will be its Profit?
(a) ₹ 80,000
(b) ₹ 75,000
(c) ₹ 64,000
(d) Insufficient information

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Divya Jadi Booti
 Objectives


(v) The Pay-off Matrix of a game is given below:

Player B
 3 1 4 
 
Player A  1 8 2 
 16 8 6 
 

What is the value of Game to Player A(using Maximin-Minimax Principle)?

(a) 6
(b) 8
(c) 16
(d) None of the above
(vi) BENT Ltd., a manufacturer of components for VCD, has a capacity to produce 4 Lakh units.
The market demand is sensitive to the sale price and the company could sell 1 Lakh units
at a price of ₹ 5,000 each. The demand thereafter would double for each ₹ 500 per unit fall
in the selling price. If the company expects a minimum margin of 25%, what would be the
Target Cost per unit for the company to sell at full capacity utilization?
(a) ₹ 4,000
(b) ₹ 3,200
(c) ₹ 3,000
(d) ₹ 2,900
(vii) DOXT Ltd., a manufacturing company, is preparing a quotation for a new product-D. The
time taken for the first unit is 30 hours. The company expects 85% learning curve (Index is -
0.2345). The company desires that the quotation should be based on the time taken for the
final output within the Learning period which is expected to end after the company has
produced 200 units. What will be the time per unit of product to be used for the quotation?
[Given: 199-0.2345 = 0.28901, 200-0.2345 = 0.28867 and 201-0.2345 = 0.28834]
(a) 6.63 hours
(b) 10.34 hours
(c) 11.50 hours
(d) None of the above
(viii) Production overheads of XYZ Ltd. for 500 units of product X are:
Machine oriented activity cost: ₹ 1,35,400
Material ordering overheads: ₹ 69,570
Machine hours are 1.50 hours per unit and No. of material orders are 6 per unit.
What is the Machine Oriented Cost per unit and Material Ordering Cost per unit respectively?

16.24 |CMA Final Strategic Cost Management

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 Objectives


(a) ₹ 270.80 & ₹ 139.14

(b) ₹ 180.53 & ₹ 23.19
(c) ₹ 23.19 & ₹ 180.53
(d) ₹ 139.14 & ₹ 270.80
(ix) Which of the following is/are not the features of Jedox tool?
(a) Deployable in the cloud as well as on premise server or Hybrid.
(b) BI and Analytics platform.
(c) Allows users to easily create and share powerful reports within minutes.
(d) (B) and (C) only
(x) Analysis of a dataset has revealed the fact that profit of a business has reduced for the
financial year 2022-23. What category of data analytics it conies under?
(a) Descriptive Analytics
(b) Predictive Analytics
(c) Diagnostic Analytics
(d) Prescriptive Analytics
(xi) A particular job MB requires 800 kgs. of a material. 500 kgs. of the particular material is
currently in stock. The original price of the material was ₹ 300 but current resale value of
the same has been determined as ₹ 200. The current replacement price of the material is
Re. 0.80 per kg., what will be the relevant cost of material for job MB?
(a) ₹640
(b) ₹ 440
(c) ₹ 300
(d) None of the above
(xii) Total Revenue of ZOM Ltd., from the Sales of the quantity (units) is given by the equation
1
R  X3  X2  10X  5 If the Marginal revenue is 25, what will be number of quantity (in
3
units)?
(a) 6
(b) 4
(c) 5
(d) None of the above
(xiii) When a maximisation assignment problem is converted to minimisation problem, the
resultant matrix is called:
(a) Profit Matrix.
(b) Regret Matrix.

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 Objectives


(c) Cost Matrix.

(d) Dummy Matrix.
(xiv) The important step(s) required for simulation approach in solving a problem is/are:
(a) Test and validate the Model
(b) Design the experiment
(c) Conduct the experiment
(d) All of the above
(xv) The expected time for an activity of Project LM is 20 days. If the most likely and pessimistic
time are 19 days and 28 days, what will be the variance of the activity?
(a) 1.36
(b) 1.78
(c) 4
(d) 0
Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
(c) (a) (c) (b) (a) (c) (a) (a) (d) (a) (b) (c) (b) (d) (c)

16.26 |CMA Final Strategic Cost Management

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 Objectives


MTP Dec’24 Set 1

Choose the correct option: [15 x 2 = 30]

(i) If project A has a net present value (NPV) of ₹30,00,000 and project B has an NPV of
₹50,00,000, what is the opportunity cost if project B is selected?
(a) ₹23,00,000
(b) ₹30,00,000
(c) ₹20,00,000
(d) ₹50,00,000
(ii) Marketing department of an organisation estimates that 40,000 of new mixers could
be sold annually at a price of ₹60 each. To design, develop and produce these new mixers
an investment of ₹40,00,000 would be required. The company desires a 15% return on
investment (ROI). Given these data, the target cost to manufacture, sell, distribute and
service one mixer will be
(a) ₹37.50
(b) ₹40.00
(c) ₹45.00
(d) ₹48.60
(iii) Activities required to design, develop, produce, market, distribute, and service a product
is known as
(a) Target activities
(b) Value-chain activities
(c) Whole life activities
(d) Overhead
(iv) Which of the following is TRUE about the theory of constraints?
(a) TOC recognizes that lower inventories means slower response to customers.
(b) TOC recognizes that lowering inventory decreases carrying costs and thus decreases
operating expenses and improves net income.
(c) TOC recognizes that lower inventories means more defects.
(d) TOC recognizes that EOQ is important.
(v) Backflush costing is most likely to be used when:
(a) Management desires sequential tracking of costs
(b) A Just-in-Time inventory philosophy has been adopted
(c) The company carries significant amount of inventory
(d) Actual production costs are debited to work-in-progress

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| 16.27
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 Objectives


(vi) A company produces a product which is sold at a price of ₹80. Its Variable cost is ₹32. The
company’s Fixed cost is ₹11,52,000 p.a. The company operates at a margin of safety of 40%.
The total sales of the company are: -
(a) 4,000 units
(b) 40,000 units
(c) 30,000 units
(d) 20,000 units
(vii) Max Ltd. Fixes the inter divisional transfer prices for its product on the basis of cost plus
a return on investment in the division. The budget for division X for 2023-2024 appears as
under –
Fixed Assets ₹5,00,000
Current assets ₹3,00,000
Debtors ₹2,00,000
Annual fixed cost of the division ₹8,00,000
Variable cost per unit of the product ₹10
Budgeted volume 4,00,000 units per year
Desired ROI 28%
Transfer price for division X is a) ₹12.70
(a) ₹10.70
(b) ₹8.70
(c) ₹14.70
(viii) Standard cost and budgeted cost are _____.
(a) Interrelated but not interdependent.
(b) Interdependent but not interrelated.
(c) Interrelated and interdependent.
(d) None of the above
(ix) Uniform costing is .
(a) a separate method of costing
(b) a type of costing
(c) a technique of costing
(d) None of the above
(x) If the time taken to produce the first unit of a product is 4000 hrs, what will be the
total time taken to produce the 5th to 8th unit of the product, when a 90% learning curve
applies?
(a) 10,500 hours

16.28 |CMA Final Strategic Cost Management

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 Objectives


(b) 12,968 hours

(c) 9,560 hours
(d) 10,368 hours
(xi) In a transportation matrix (where Ri are rows and Cj are columns), the second allocation
under the North West Corner Rule can be –
(a) R1C2
(b) R1C3
(c) R2C3
(d) None of these
(xii) Simulation may be applied to:
(a) Bricklaying
(b) Scheduling aircraft
(c) Paper manufacturing
(d) Toy manufacturing
(xiii) In a PERT network, the optimistic time for a particular activity is 9 weeks and the
pessimistic time is 21 weeks. Which one of the following is the best estimate of the standard
deviation for the activity?
(a) 12
(b) 9
(c) 6
(d) 2
(xiv) Tableau is a –
(a) Business Intelligence Tool
(b) Visualisation Tool
(c) Both (a) and (b)
(d) None of the above
(xv) Script Ends – is related to which type of programming language?
(a) R Programming
(b) SAS
(c) Python
(d) SPSS

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 Objectives


Answers:

i ii iii iv v vi vii viii ix x xi xii xiii xiv xv

b c b b b b a a c d a b d c c

16.30 |CMA Final Strategic Cost Management

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 Objectives


Postal Test Paper

(i) Which of the following is not a term normally used in value analysis?
(a) Resale value
(b) Use value
(c) Esteem value
(d) Cost value
(ii) PRAISE stands for :
(a) Appreciating someone
(b) Product, Recognition, Adoption, Invention, Solution & Evaporation
(c) Problem Identification, Ranking, Analysis, Innovation, Solution & Evaluation
(d) None of the above
(iii) Which of the following is not the quality parameter for service organizations?
(a) Consistency
(b) Friendliness
(c) Durability
(d) Promptness
(iv) The break-even point of a manufacturing company is ₹1,60,000. Fixed cost is ₹48,000.
Variable cost is ₹12 per unit. The PV ratio will be:
(a) 20%
(b) 40%
(c) 30%
(d) 25%
(v) T Ltd. produces and sells a product. The company expects the following revenues and costs
in 2022: Revenues (400 sets sold @ ₹ 600 per product) = ₹ 2,40,000
Variable costs = ₹ 1,60,000
Fixed costs = ₹ 50,000
What amount of sales must T Ltd. have to earn a target net income of ₹63,000 if they have
a tax rate of 30%?
(a) ₹ 4,20,000
(b) ₹ 4,29,000
(c) ₹ 3,00,000
(d) ₹ 4,89,000

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CMA Final Strategic Cost Management
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 Objectives


(vi) If project A has a net present value (NPV) of ₹ 30,00,000 and project B has an NPV of ₹
50,00,000, what is the opportunity cost if project B is selected?
(a) ₹ 23,00,000
(b) ₹ 30,00,000
(c) ₹ 20,00,000
(d) ₹ 50,00,000
(vii) Target costing is the answer to :
(a) Market driven prices
(b) Sellers’ market
(c) No Profit situation
(d) None of the above
(viii) Glasso, a manufacturer of large windows, is experiencing a bottleneck in its plant. Setup
time at one of its workstations has been identified as the culprit. A manager has proposed
a plan to reduce setup time at a cost of ₹ 7,20,000. The change will result in 800 addition-
al windows. The selling price per window is ₹ 18,000, direct labour costs are ₹ 3000 per
window, and the cost of direct materials is ₹ 7,000 per window. Assume all units produced
can be sold. The change will result in an increase in the throughput contribution of _____.
(a) ₹ 64,00,000
(b) ₹ 88,00,000
(c) ₹ 56,80,000
(d) ₹ 1,44,00,000
Answer :

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

a c c c a b a b

16.32 |CMA Final Strategic Cost Management

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