5. FINAL Advanced Management Accounting Nov 2016 09 · PDF file · 2016-11-11 Gurukripa’s Guideline Answers for Nov 2016 CA Final Advanced Management Accounting Exam Nov 2016.2

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Gurukripa’s Guideline Answers for Nov 2016 CA Final Advanced Management Accounting Exam

Nov 2016.1

Gurukripa’s Guideline Answers to Nov 2016 Exam Questions CA Final – Advanced Management Accounting

Question No.1 is compulsory (4 × 5 = 20 Marks). Answer any five questions from the remaining six questions (16 × 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]

Working Notes should form part of the answers. Note: Page Number References are from “Padhuka’s A Ready Referencer on Advanced Management Accounting”

Question 1(a): Performance Measurement – Analysis of Variances 5 Marks X Ltd is a Manufacturer of Cardboard Boxes. An analysis of its Operating Income between 2014 & 2015 shows the following: Income

Statement (amt in 2014)

Revenue & Cost effect of growth

component in 2015

Revenue & Cost Effect of Price Recovery

Component in 2015

Cost effect of Productivity

component in 2015

Income Statement

(amt in 2015) Revenue (`) 40,00,000 2,00,000 (F) 4,20,000 (F) – 46,20,000 Cost (`) 29,20,000 60,000 (A) 2,56,000 (A) 58,000 (F) 31,78,000 Operating Income (`) 10,80,000 1,40,000 (F) 1,64,000 (F) 58,000 (F) 14,42,000 X Limited sold 4,00,000 boxes and 4,20,000 boxes in 2014 and 2015 respectively. During 2015, the market for Cardboard Boxes grew 3% in terms of number of units and all other changes are due to Company’s Differentiation Strategy and Productivity. Required: Compute how much of the change in Operating Income from 2014 to 2015 is due to the Industry Market Size Factor, Productivity and Product Differentiation and also reconcile the Profit of both years due to these factors. Solution: Same as Page May 2014.16, Q.No.6(b) [M 14]

A. Industry Market Size Factor Additional Sales Quantity

4,20,000 – 4,00,000 = 20,000 units

Market Size Effect Market Share Effect = 3% of 4,00,000 = (balancing figure)

= 12,000 units = 8,000 units.

(a) Net Effect of Growth Component (given) = ` 1,40,000 F (b) Increase in Operating Income due to Market Size Factor rather than any specific strategic action =

= ` 14,00,000 × 000,20

000,12 = ` 84,000 F

(c) Balance attributed to Product Differentiation (a–b) = ` 56,000 F

B. Product Differentiation Factor Particulars `

(a) Increase in Selling Price of Products = Revenue Effect of Price Recovery Component (given) 4,20,000 F (b) Increase in Prices of Inputs = Cost Effect of Price Recovery Component (given) 2,56,000 A (c) Growth in Market Share due to Product Differentiation, i.e. for 8,000 units (as per Item c above) 56,000 F

Increase in Operating Income due to Product Differentiation Factor 2,20,000 F

C. Cost Leadership Factor = Cost Effect of Productivity Component = ` 58,000 F (given).

D. Summary of Effect of Industry Market Size, Product Differentiation & Cost Leadership Factors Particulars `

Operating Income of 2014 10,80,000Add: (a) Industry Market Size Factor 84,000 F (b) Product Differentiation Factor 2,20,000 F (c) Cost Leadership Factor / Productivity Component) 58,000 F

Operating Income of 2015 14,42,000

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Nov 2016.2

Question 1(b): Relevant Cost Analysis 5 Marks Some statements are given below. Identify name of the cost with examples and state whether it is relevant/non–relevant in decision making. (a) Costs are Historical Costs which have already been incurred and cannot change by any decision made in future. (b) It is measure of benefits foregone by rejecting the second best alternative of resources in favour of the best. (c) It is portioning of cost which involves payments to outsiders i.e, it gives rise to cash expenditure as opposed to such

costs as Depreciation. (d) Total Cost is changed (increase or decrease) due to change in the level of activity, technology or production process or

method of production. (e) Cost used in evaluation of a product to reflect the use of resources but that have no observable cost. Solution: Refer Principles in Chapter 4 – Relevant Cost Analysis

Name of Cost Example Relevance

(a) Historical /Sunk Cost Irrevocable agreements for Rent, Consulting Fees already paid. Irrelevant

(b) Opportunity Cost Producing new Product when Company is already operating at full capacity. Relevant

(c) Explicit Cost / Out of Pocket Cost Material to be purchased, Wages to the New Workers to be appointed. Relevant

(d) Differential Cost Cost of Production with Labour–Intensive Operations is ` 3,00,000 and with Capital–Intensive Operation is ` 3,75,000. Differential Cost is ` 75,000.

Relevant

(e) Notional / Imputed Cost Cost of Proprietors’ own Capital, Own Building used for Business, etc. Relevant Question 1(c): Marginal Costing – Shut Down Point 5 Marks G Ltd produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The Selling Price of product is ` 8 per unit. The Variable Cost is 75% of Sales Price per unit. The Fixed Cost is ` 3,50,000. The Company is continuously incurring losses and Management plans to shut–down the Plant. The Fixed Cost is expected to be reduced to ` 1,30,000. Additional Costs of Plant Shut–Down are expected at ` 15,000. Should the Plant be shut–down? Find the Shut–Down Point in units and also in percentage of capacity level of production.

Solution: Same as Page 2.39, Q.No.3.2 [M 96, N 10]

1. Contribution per unit = Sale Price less Variable Costs per unit = ` 8 – 75% of ` 8 = ` 2 p.u.

2. Avoidable Fixed Costs

= Total Fixed Cost ` 3,50,000 – Minimum Fixed Cost ` 1,30,000 – Shut–down Costs ` 15,000

= ` 2,05,000

3. Shut Down Point =

UnitperonContributiCostsFixedAvoidable

= 2000,05,2

`

`

Since, Present Output of 95,000 units < Shut Down Point, it is preferable to close down the Plant. =1,02,500 uts

4. Total Capacity= %80000,95

= = 1,18,750 units

5. Capacity Level at Shut down Point = 750,18,1500,02,1

= = 86.32%

Question 1(d): Learning Curve 5 Marks A Company which has developed a new machine has observed that the time taken to manufacture the first machine is 600 hours. Required: 1. Calculate the time which the Company will take to manufacture the second machine if the actual Learning Curve Rate is –

(i) 80% and (ii) 90%. 2. Explain which of the two Learning Rates will show faster learning. Solution: Same as Page 20.4, Q.No.1 [N 08]




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Nov 2016.3

Particulars 80% 90% 1. Time taken to manufacture 1st Machine 600 hours 600 hours 2. Average Time taken to manufacture 2 machines 600 × 80% = 480 hours 600 × 90% = 540 hours

3. Total Time taken to manufacture 2 machines 2 machines × 480 hours

= 960 hours 2 machines × 540 hours

= 1,080 hours 4. Additional Time to manufacture 2nd Machine = (3) – (1) 360 hours 480 hours Therefore, 80% Learning Curve Rate will show faster learning. Question 2(a): ABC and Target Costing 10 Marks Speedo Limited is a specialist Car Manufacturer that produces various models of Cars. The organization is due to celebrate its 100th Anniversary next year. To mark the occasion, Speedo Limited intends to produce a Sports Car, the Model Royal. As this will be a special edition, production will be limited to 1,000 numbers of Model Royal Cars.

Speedo Limited is considering using a Target Costing approach and has conducted a market research to determine the features that consumers require in a Sports Car. Based on this market research and knowledge of Competitor’s products, the Company has decided to price the Model Royal at ` 9.75 Lakhs. The Company requires an Operating Profit Margin of 25% of the Selling Price of the Car. Details for the forthcoming year are as follows –

Forecast of Direct Costs for a Model Royal Car – Labour ` 2,50,000, Material ` 4,75,000

Forecast of Annual Overhead Costs – Particulars ` in Lakhs Cost Driver

Production Line Cost 2310 See Note 1 Transportation Costs 900 See Note 2

Note 1: The production line that would be used for Model Royal has a capacity of 60,000 machine hours per year. The Production Line time required for Model Royal is 6 machine hours per car. This production line will also be used to make other cars and will be working at full capacity.

Note 2: Some models of cars are delivered to Showrooms using Car Transporters. 60% of the Transportation Costs are related to the number of deliveries made. 40% of the Transportation Costs are related to the distance travelled.

The Car Transporters have forecast to make a total of 640 deliveries in the year and carry 10 cars each time. The car transporter will always carry its maximum capacity of 10 cars.

The total annual distance travelled by Car Transporters is expected to be 2,25,000 kms. 50,000 kms of this is for the delivery of Model Royal Cars only. All 1,000 Model Royal Cars that will be produced will be delivered in the year using the Car Transporters.

Required: 1. Calculate the Forecast Total Cost of producing and delivering a Model Royal Car, using Activity Based Costing Principles

to assign the Overhead Costs. 2. Calculate the cost gap that currently exists between the Forecast Total Cost and Target Total Cost of a Model Royal Car.

Solution: Refer Principles/Illustrations in Chapter 8 – ABC Costing and Chapter 9 – Target Costing

1.Computation of Overhead using Activity Based Costing

Particulars Activity Cost

Pool (` Lakhs) Cost

Driver Cost

Driver Qty ABC Rate

(`)Resource required for

Royal (1,000 Cars) OH for

Royal (`) Production Line Cost 2310 Machine

Hours 60,000

M/c Hours ` 3,850 per

M/c Hour 6 × 1,000

= 6,000 M/c Hours 2,31,00,000

Transportation

(i) 60% related to Deliveries 900×60%= 540 No. of.

Deliveries 640

Deliveries ` 84,375

Per Delivery Cars10

Cars1,000=100 Deliveries 84,37,500

(ii) 40% related to Distance 900×40% = 360 No. of.

Kms 2,25,000

km ` 160 Per

km Given = 50,000 Km 80,00,000

Total OH for 1,000 Cars of Model Royal 3,95,37,500So, OH Cost per Car = Total OH Cost ÷ 1,000 Cars 39,537.50




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Nov 2016.4

2. Target Cost, Forecast Total Cost and Cost Gap Particulars ` per Car

Target Selling Price per Car 9,75,000.00 Less: Target Profit on the above Selling Price (9,75,000 × 25%) 2,43,750.00 1. Target Total Cost 7,31,250.002. Forecast Total Costs:

Material 4,75,000.00 Labour 2,50,000.00 OH (WN 1) 39,537.50 7,64,537.50

3. Cost Gap between Forecast Total Cost and the Target Cost (1 – 2) (Cost reduction required) 33,287.50 Question 2(b): LPP Formulation 6 Marks A Manufacturing Company has 100 kg of A, 180 kg of B and 120 kg of C ingredients available per month. The Company can use these materials to make three basic products namely 5–10–5, 5–5–10 and 20–5–10, where the numbers in each case represent the percentage of Weight of A, B and C respectively in each of the products.

The Costs of these Raw Materials are as follows: Ingredient Cost per kg (`)

A 64 B 16 C 40

Inert Ingredients 16 Selling Prices of these products are ` 32.60, ` 34.80 and ` 36 per kg respectively. There is capacity restriction of the Company Product 5–10–5, so that the Company cannot produce more than 30 kg per month.

Only formulate this as LP Model to determine the productions (in kg) of each product which will maximize its monthly profit.

Solution: Similar to Q.No.15 to 22 in Chapter–18 Linear Programming

Product Reference 5–10–5 5–5–10 20–5–10Let the number of kgs of this Product be referred as X Y Z

1. Selling Price per kg 32.60 34.80 36.00 2. Raw Material Cost per kg A 5% × 64 = 3.20 5% × 64 = 3.20 20% × 64 = 12.80 B 10% × 16 = 1.60 5% × 16 = 0.80 5% × 16 = 0.80 C 5% × 40 = 2.00 10% × 40 = 4.00 10% × 40 = 4.00

Inert Ingredients (bal.fig in % weight) 80% × 16 = 12.80 80% × 16 = 12.80 65% × 16 = 10.40 19.60 20.80 28.00 3. Profit 13.00 14.00 8.00

The LPP is: Objective: Maximize Profit Z = 13X + 14Y + 8Z Subject to 5% X + 5% Y + 20% Z ≤ 100 (RM – A Condition) 10% X + 5% Y + 5% Z ≤ 180 (RM – B Condition) 5% X + 10% Y + 10% Z ≤ 120 (RM – C Condition) X ≤ 30 (Maximum Production Condition) X, Y, Z ≥ 0 (Non–Negativity Assumption) Question 3(a): Standard Costing – Sales Variances 8 Marks Zed Company manufactures two types of Flooring Rolls. Budgeted and actual data for 2015 are–

Static Budget Actual Result Industrial Domestic Total Industrial Domestic Total Unit Sales in Rolls (‘000) 200 600 800 252 588 840 Contribution Margin (` in Lakhs) 100.00 240.00 340.00 119.70 246.96 366.66




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Nov 2016.5

In late 2014, a marketing research estimated industrial volume for Industrial and Domestic Flooring at 80 Lakh Rolls. Actual Industry Volume for 2015 was 70 Lakh Rolls.

Compute: 1. Sales Mix Variance and Sales Quantity Variance by type of Flooring Rolls and in total. 2. Market Share Variance and Market Size Variance.

Solution: Similar to Page 1.28, Q.No.13 [M 96]

1. Computation of RAQ (Lakh Rolls)

Total AQ Sold = Given = 8.40 Lakh Rolls Type Industrial Domestic Ratio 2 6 RAQ 2.10 Lakh Rolls 6.30 Lakh Rolls

2. Computation of Budgeted Average Contribution p.u.

Particulars Industrial Domestic Total (a) Budgeted Contribution Margin (` Lakhs) 100 240 340

(b) Budgeted Sale Quantity (Lakh Rolls) 2 6 8 (c) Budgeted Average Contribution p.u. (c ÷ a) ` 50 ` 40 ` 42.50

3. Computation of Sales Variances (Impact on Contribution)

Note: Quantities in Lakh Rolls, Margins in ` p.u, Result Computation in ` Lakhs. Particulars Col. (1): BQ × BM Col. (2): RAQ × BM Col. (3): AQ × BM Col. (4): AQ × AMIndustrial 2 × ` 50 = ` 100 2.10 × ` 50 =` 105 2.52 × ` 50 =` 126.00 Given = ` 119.70 Domestic 6 × ` 40 = ` 240 6.30 ×` 40 = ` 252 5.88 × ` 40 =` 235.20 Given = ` 246.96

Total ` 340 ` 357 ` 361.20 ` 366.66

Sales Margin Quantity Variance + Sales Margin Mix Variance + Sales Margin Price Variance Industrial = ` 100 – ` 105 = ` 5 F = ` 105 – ` 126 = ` 21 F = ` 126 – ` 119.70 = ` 6.3 A Domestic = ` 240 – ` 252 = ` 12 F = ` 252 – ` 235.2 = ` 16.8 A = ` 235.2 – ` 246.96 = ` 11.76F

Total = ` 340 – ` 357 = ` 17 F = ` 357 – ` 361.2 = ` 4.2 F = ` 361.2 – ` 366.66 = ` 5.46 F

Note: Sales Margin Price Variance is not required to be computed in the given Qn. It is given for information value only.

4. Computation of Market Size and Market Share Variances

WN.1: Budgeted Market Share = Lakhs80Lakh 8

= 10% WN.2: Actual Market Share = Lakhs70

Lakh 8.40= 12%

(a)Market Size Variance=Budgeted Market Share %× (Budgeted Industry Sale Quantity

less Actual Industry Sale Quantity) × Budgeted Average

Contribution p.u.

= 10%× (80– 70) Lakh Rolls × ` 42.50

= ` 42.5 Lakhs Adverse

(b) Market Share Variance=Actual Industry Sale Quantity × (Budgeted Market Share %

less Actual Market Share %) × Budgeted Average

Contribution p.u.

= 70 Lakh Rolls × (10% – 12%) × ` 42.50

= ` 59.5 Lakhs Favourable

Note: Market Size + Market Share Variance = 42.5 A + 59.5 F = Net 17 F, to match with Sales Margin Quantity Variance.




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Nov 2016.6

Question 3(b): Network Analysis – Crashing 8 Marks The following Table shows for each activity needed to complete the Road Construction Project, the normal time, the shortest time in which the activity can be completed and cost per day for reducing the time of each activity,. The Contract includes a Penalty Clause of ` 80 per day over 19 days. The Overhead Cost is ` 150 per day. The cost of completing the eight activities in normal time is ` 6,000.

Activity Normal time in days Shortest time in days Cost of Reduction per day (`) 1–2 7 5 90 1–3 9 5 100 1–4 7 4 40 2–4 4 4 – 2–5 6 4 50 3–6 13 9 210 4–6 8 5 60 5–6 6 6 –

Required: 1. Draw the Network Diagram for the Project and identify the Critical Path and show Normal Duration and Minimum Duration

of different paths. 2. Calculate the Total Cost associated to Normal Duration of the project. 3. Crash the relevant activities systematically and determine the Lowest Cost and the Associated Time. Solution: Similar to Page May 2014.12, Q.No.4(b) [M 14] and other Illustrations in Project Crashing

1.Network Diagram

2. Computation of Maximum Time Reduction Possible (1) Activity (2) Normal Days (3) Crash Days Maximum Time Reduction Possible (4) = (2–3)

1–2 7 5 2 1–3 9 5 4 1–4 7 4 3 2–4 4 4 0 2–5 6 4 2 3–6 13 9 4 4–6 8 5 3 5–6 6 6 0

3. Paths Table

Path Normal Duration

Minimum Duration

Duration after Stage I II III IV V VI VII

A: 1–2–5–6 7+6+6 = 19 5+4+6 = 15 19 19 19 18 17 16 15 B: 1–2–4–6 7+4+8 = 19 5+4+5 = 14 19 19 19 18 17 16 15 C: 1–4–6 7+8 = 15 4+5 = 9 15 15 15 15 15 15 15 D: 1–3–6 9+13 = 22 5+9 = 14 21 20 19 18 17 16 15

6

1

3

4

2 5

6

9

7 8

13

7

6

4




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Nov 2016.7

Observation: Critical Path is Path D (1–3–6) with highest normal duration. Normal Duration = 22 days. Critical Path with Minimum Days is Path A (15 days). Hence, Least Duration of the Project is 15 days.

4.Crashing Process Stage CP Decision on Crashing Crash Cost

I D

(a) Activities for Crashing are 1–3 (Slope 100) and 3–6 (Slope 210). So, 1–3 is chosen. (b) 1–3 can be crashed for maximum 4 days. Also, it does not occur on any other Path. (c) Next CP is Paths A and B with 19 days duration, and the gap between Path D and Paths

A and B is 22 – 19 = 3 days. (d) So, Activity 1–3 can be crashed for least of (a) and (b) = 3 days. (e) Since Penalty Costs are involved, and step–by–step crashing is required, Activity 1–3 is

crashed for 1 day in this Stage.

` 100×1 day = ` 100

II D Same as above. Activity 1–3 is crashed for 1 day in this Stage. = ` 100

III D Same as above. Activity 1–3 is crashed for 1 day in this Stage. = ` 100

IV A, B, D

Options for Crashing are as under – Costs are – (a) 1–3 on Path D, and 1–2 on Paths A and B 100 + 90 = 190 (b) 1–3 on Path D, 2–5 on Path A, and 4–6 on Path B 100+50+60 = 210 (c) 3–6 on Path D, and 1–2 on Paths A and B 210 + 90 = 300 (d) 3–6 on Path D, 2–5 on Path A, and 4–6 on Path B 210+50+60 = 320 Least Cost Option is (a) above. Activity 1–3 can be crashed for 1 more day (Total 4 less 3 days already crashed). 1–2 can be crashed for 2 days max, at this stage. Hence, Decision is to crash 1–3 on Path D, and 1–2 on Paths A and B, by 1 day.

` 190×1 day = ` 190

V A, B, D

Options for Crashing are as under – Costs are – (a) 3–6 on Path D, and 1–2 on Paths A and B 210 + 90 = 300 (b) 3–6 on Path D, 2–5 on Path A, and 4–6 on Path B 210+50+60 = 320 Least Cost Option is (a) above. Activity 1–2 can be crashed for 1 more day (Total 2 less 1 day already crashed). 3–6 can be crashed for 4 days max, at this stage. Hence, Decision is to crash 3–6 on Path D, and 1–2 on Paths A and B, by 1 day.

` 300×1 day = ` 300

VI A, B, D

(a) Option for Crashing is 3–6 on Path D, 2–5 on Path A, and 4–6 on Path B, with Costs 320. (b) These Activities can be crashed at this stage for 3, 2, 3 days respectively. (c) Of the above, the least duration of 2 days is available for Crashing. (d) So, Decision is to crash 3–6 on Path D, 2–5 on Path A and 4–6 on Path B, by 1 day.

` 320×1 day = ` 320

VII “ Same as above. = ` 320 After this, no further Crashing is possible since Minimum Duration of Path A 15 days is reached.

5.Costs Table (All Costs in `) Stage Duration Normal Cost OH Cost Penalty Cost Cum.Crash Cost Total Cost Initial 22 days 6,000 22 × 150 = 3,300 3 × 80 = 240 Nil 9,540

I 21 days 6,000 21 × 150 = 3,150 2 × 80 = 160 100 9,410 II 20 days 6,000 20 × 150 = 3,000 1 × 80 = 80 100+100=200 9,280 III 19 days 6,000 19 × 150 = 2,850 Nil 200+100=300 9,150 IV 18 days 6,000 18 × 150 = 2,700 Nil 300+190=490 9,190 V 17 days 6,000 17 × 150 = 2,550 Nil 490+300=790 9,340 VI 16 days 6,000 16 × 150 = 2,400 Nil 790+320=1,110 9,510 VII 15 days 6,000 15 × 150 = 2,250 Nil 1,110+320=1,430 9,680

Answers: Costs of Normal Duration = ` 9,540. Least Cost = ` 9,150 and related Optimal Duration is 19 days. Question 4(a): Marginal Costing – Key Factor – Make or Buy 8 Marks A Company manufactures four products. The annual demand for Products, Selling Prices and Variable Production Costs are –




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Nov 2016.8

Products P Q R S Demand (Units) 1,20,000 1,86,000 1,71,000 99,000 Selling Price / Unit (`) 23.88 28.68 55.08 47.88 Direct Material / Unit (`) 10.08 13.20 30.48 24.96 Direct Labour / Unit (`) 4.08 4.08 6.72 6.36 Variable Overheads / Unit (`) 1.44 1.44 2.40 2.16 Other Data: • The Variable Overheads are absorbed on a machine hour basis at a rate of ` 1.20 per machine hour. • Fixed Overheads total ` 46,84,000 per annum. • Production Capacity available is 8,15,000 machine hours per annum. • Products P, Q and R can be bought–in at ` 21.36 per unit, ` 24 per unit and ` 48 per unit respectively. You are required to calculate the best Product Mix for the year and the resulting Optimal Profit.

Solution: Similar to Page 2.156, Q.No.11.11 [M 96]

1. Contribution Analysis Particulars P Q R S

(a) Sale Price p.u. 23.88 28.68 55.08 47.88(b) Own Variable Production Cost

Direct Materials Direct Labour Variable OH

10.08 4.08 1.44

13.20 4.08 1.44

30.48 6.72 2.40

24.96 6.36 2.16

Sub Total VC p.u. (Note) 15.60 18.72 39.60 33.48(c) Contribution p.u 8.28 9.96 15.48 14.40(d) Machine hours required per unit = VOH ÷ 1.2 ph 1.2 1.2 2 1.8 (e) Contribution per Machine hour, if made (c ÷ d) 6.90 8.30 7.74 8.00 (f) Rank (for own production) (based on Line e) IV I III IINote: On comparison of “Make Costs” with “Buying Costs” of P, Q, R, it is observed that “Make” Costs are lower, and hence, it is preferable to make all 3 items as first preference.

2. Machine Hours Requirement Analysis Particulars P Q R S Total

(a) Machine Hours required p.u. 1.2 1.2 2 1.8 (b) Budgeted Sale Quantity 1,20,000 1,86,000 1,71,000 99,000 (c) Budgeted Machine Hours required 1,44,000 2,23,200 3,42,000 1,78,200 8,87,400Observation: Total Requirement is 8,87,400 Machine Hours, but Production Capacity available is 8,15,000 Machine Hours. So there is a shortfall of 8,87,400 – 8,15,000 = 72,400 Hours. This means that either Product P or Q or R has to be purchased from outside.

3. Make or Buy Decision Particulars P Q R

(a) Cost of Buying p.u. 21.36 24.00 48.00 (b) Variable Cost of Own Production 15.60 18.72 39.60 (c) Savings per unit, if made internally 5.76 5.28 8.40 (d) Machine Hours required p.u. 1.2 1.2 2 (e) Savings per Machine Hour 4.80 4.40 4.20 (f) Ranking (Preference for Production) I II III• Since Product R has least savings, it can be bought from outside to meet shortage of 72,400 hours.

• Quantity of R to be bought from outside = hours2

hours72,400= 36,200 units.

• Hence balance R to be produced internally = 1,71,000 – 36,200 = 1,34,800 units.

• Contribution on Sale of bought–in R = ` 55.08 – ` 48.00 = ` 7.08 p.u.




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Nov 2016.9

4. Computation of Best Product Mix and Optimal Profit Particulars P Q R S

(a) Quantity (Make) 1,20,000 units 1,86,000 units 1,34,800 units 99,000 units (b) Quantity (Buy) Nil Nil 36,200 units Nil (c) Contribution 1,20,000 units×` 8.28

= ` 9,93,600 1,86,000 units×` 9.96

= ` 18,52,560 (1,34,800 units×`15.48) + (36,200 units×` 7.08)

= ` 23,43,000

99,000 units×` 14.40 = ` 14,25,600

Total Contribution 66,14,760 Less:Fixed Costs (46,84,000)

Optimal Profit 19,30,760 Question 4(b): Simulation 8 Marks A Book–Store wishes to carry “Systems Analysis and Design” in stock. Demand is probabilistic and replenishment of stock takes 2 days (i.e. if an order is placed on March 1, it will be delivered at the end of the day on March 3.) The Probabilities of Demand are given below:

Demand of books (Daily) 0 1 2 3 4 Probability 0.05 0.10 0.30 0.45 0.10

Each time an order is placed, the Store incurs an Ordering Cost of ` 100 per order. The Store also incurs a Carrying Cost of ` 5 per Book per day. The Inventory Carrying Cost is calculated on the basis of Stock at the end of each day. The Manager of the Book–Store wishes to compare two options for his inventory decision: (i) Order 5 books, when the Inventory at the beginning of the day plus Orders outstanding is less than 8 books. (ii) Order 8 books, when the Inventory at the beginning of the day plus Orders outstanding is less than 8 books. Currently (beginning of the first day), the Store has stock of 8 books plus 6 books ordered 2 days ago are expected to arrive next day. Further, it can be assumed that the demand occurring during the day can be met out of stock received at the end of the day. Use the following two digit Random Numbers: 89, 34, 78, 63, 61, 81, 39, 16, 13, 73 Required: Using Monte–Carlo simulation for 10 days, recommend which option the Manager should choose? Solution: Same as Page 21.8, Q.No.8 [M 00]

1. Random Numbers Allocation Table for Demand Demand Probability Cumulative Probability Random Numbers

0 0.05 0.05 00 – 04 1 0.10 0.15 05 – 14 2 0.30 0.45 15 – 44 3 0.45 0.90 45 – 89 4 0.10 1.00 90 – 99

2. Simulation Table for Option A: Order 5 Books [Note: Column (c) to (h) in terms of units.]

Day R.No. Demand Opg Stock Order Qtty Receipt Qtty Qtty on Order Clg Stock (a) (b) (c) (d) (Units) (e) (Units) (f) (Units) (g) (h) = d + f – c 1 89 3 8 Nil Nil 6 5 2 34 2 5 Nil 6 Nil 9 3 78 3 9 Nil Nil Nil 6 4 63 3 6 5 Nil 5 3 5 61 3 3 Nil Nil 5 Nil 6 81 3 Nil 5 5 5 2 7 39 2 2 5 Nil 10 (5+5) Nil 8 16 2 Nil Nil 5 5 3 9 13 1 3 Nil 5 Nil 7 10 73 3 7 5 Nil 5 4 Total 4 Orders 39 units




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Nov 2016.10

For the above, Ordering Cost = 4 orders × ` 100 = ` 400.00, Carrying Cost = 39 units × ` 5 = ` 195. Total = ` 595

Note: Column (e) Order Quantity = 5 books, only if (g) + (h) of previous day is less than 8 books. Column (g) Quantity on Order is based on Column (e) and lead time of 2 days.

3. Simulation Table for Option B: Order 8 Books [Note: Column (c) to (h) in terms of units.] Day R.No. Demand Opg Stock Order Qtty Receipt Qtty Qtty on Order Clg Stock (a) (b) (c) (d) (Units) (e) (Units) (f) (Units) (g) (h) = d + f – c 1 89 3 8 Nil Nil 6 5 2 34 2 5 Nil 6 Nil 9 3 78 3 9 Nil Nil Nil 6 4 63 3 6 8 Nil 8 3 5 61 3 3 Nil Nil 8 Nil 6 81 3 Nil Nil 8 Nil 5 7 39 2 5 8 Nil 8 3 8 16 2 3 Nil Nil 8 1 9 13 1 1 Nil 8 Nil 8 10 73 3 8 Nil Nil Nil 5 Total 2 Orders 45 Units

For the above, Ordering Cost = 2 orders × ` 100 = ` 200, Carrying Cost = 45 units × ` 5 = ` 225. Total = ` 425

Result: Since Option B has a lower Total Cost, the Manager should order 8 Books. Question 5(a): Service Sector 10 Marks The Budget of a Hotel for the year 2016 shows following room occupancy:

Quarter January – March April – June July – September October – December Average Occupancy % 45 60 90 55 Revenue for the year is estimated to be ` 60,00,000 and arises from three Profit Centres namely Accommodation *45%, Restaurant 35% and Bar 20%. * Accommodation Revenue is earned from several different categories of guests each of which pays a different rate per room. The three Profit Centres have following percentage of margin: Accommodation (%) Restaurant (%) Bar (%) Revenue 100 100 100 Wages 20 30 15 Cost of Sale – 35 50 Direct Cost 10 30 15 80 5 70 Gross Margin 70 20 30 Fixed Cost for the Year is estimated to be ` 9,15,000. As a means of improving the budgeted profitability by 20%, the following two suggestions have been made: (i) To offer special two–night holidays at a reduced price of ` 250 per night. It is expected that those accepting the offer

would spend an amount equal to 40% of the Accommodation Charges in the Restaurant and 40% of the Accommodation Charges in the Bar.

(ii) To increase prices, Management is confident that there will be no drop in volume of sales if Restaurant Prices are increased by 7.50% and Bar Prices by 10%. Accommodation Prices would also need to be increased.

You are required to: 1. Calculate the Budgeted Profit. 2. How many two–night holidays would need to be sold each week in three quarters, totaling 39 weeks, when occupancy is

less, to achieve the Desired Profitability as per Suggestion (1)? 3. By what percentage the prices of Accommodation would need to be increased as per Suggestion (2), to achieve the

desired profitability?




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Nov 2016.11

Solution: Similar to Page 6.12, Q.No.7 [RTP]

1.Budgeted Profit Particulars Accommodation Restaurant Bar Total

(a) Revenue 45% × 60,00,000

= 27,00,000 35% × 60,00,000

= 21,00,000 20% × 60,00,000

= 12,00,000 60,00,000

Wages 20% × 27,00,000

= 5,40,000 30% × 21,00,000

= 6,30,000 15% × 12,00,000

= 1,80,000 13,50,000

Cost of Sales

Nil 35% × 21,00,000

= 7,35,000 50% × 12,00,000

= 6,00,000 13,35,000

Direct Cost 10% × 27,00,000

= 2,70,000 15% × 21,00,000

= 3,15,000 5% × 12,00,000

= 60,000 6,45,000

(b) Sub–Total Cost 8,10,000 16,80,000 8,40,000 33,30,000 (c) Gross Margin 18,90,000 4,20,000 3,60,000 26,70,000(d) Fixed Cost (9,15,000) (e) Budgeted Profit 17,55,000Note: Budgeted Profit can also be computed using Gross Margin % on Sales, instead of detailed computations as above.

2(a). Gross Margin Per 2–Night holiday Particulars Accommodation Restaurant Bar Total

(a) Additional Revenue ` 250 × 2 Nights= ` 500 500× 40%= ` 200 500 × 40%=` 200 ` 900(b) Gross Margin per 2–Night Holiday 70% × 500 = ` 350 20%×200 = ` 40 30% × 200 =` 60 ` 450

2(b) Number of Two–Nights Holidays to be sold Particulars Result

(a) Desired Profit (` 17,55,000 + 20%) ` 21,06,000 (b) Target Contribution = Fixed Cost + Profit = 9,15,000 + 21,06,000 ` 30,21,000 (c) Additional Margin / Contribution required (30,21,000 – 26,70,000) ` 3,51,000

(d) Number of Special 2–Night Holidays to be sold =450

3,51,000 780

(e) Hence, Number of 2–Night Holidays to be sold per week = Weeks 39780

20

3. Required % Increase in Accommodation Prices

(a) Additional Contribution required = as calculated in WN 2b above ` 3,51,000 (b) Additional Contribution from Restaurant and Bar (since activity level is the same and price increases,

without increase in Variable Costs, any increase in Revenue = increase in Contribution) = (` 21,00,000 x 7.5%) + (` 12,00,000 x 10%)

` 2,77,500 (c) Hence, Additional Contribution required from Accommodation = (a – b) ` 73,500

(d) Required Increase in Room Rent, i.e. Accommodation = 27,00,000

73,500= 2.72%

Note: Alternatively, if it is assumed that Contribution Ratio (PV Ratio) remains the same after increase in price, (i.e. assumed proportionate increase in Variable Costs), the Room Rent has to be increased by 10.5%. Question 5(b): Theory of Constraints 6 Marks A Company produces three products A, B and C. The following information is available for a period:

Product A B C Throughout Accounting Ratio Contribution (` per unit) (Sales – Direct Materials) 30 25 15

Machine hours required per unit of production: Machine 1 10 hours 2 hours 4 hours 133.33% Machine 2 15 hours 3 hours 6 hours 200.00% Machine 3 5 hours 1 hours 2 hours 66.67%




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Nov 2016.12

Estimated Sales Demand for A, B and C are 500 units each and machine capacity is limited to 6,000 hours for each machine. You are required to analyze the above information and apply Theory of Constraints process to remove the constraints. How many units of each product will be made? Solution: Same as Page 12.3, Q.No.2 [N 08]

Note: TA Ratio is highest for ‘Machine 2’. So, ‘Machine 2’ is the bottleneck. Total ‘Machine 2’ hours available = 6,000 Particulars A B C

1. Throughput Contribution per unit (given) (`) 30 25 15 2. ‘Machine 2’ hours required per unit 15 3 6 3. Contribution per ‘Machine 2’ hour (1÷ 2) (`) 2 8.33 2.50 4. Ranking III I II 5. Maximum Sales Demand (units) 500 500 500 6. ‘Machine 2’ hours required (2 × 5) 7,500 1,500 3,000 7. ‘Machine 2’ hours allocated based on ranking (bal. fig) 1,500 (I Rank) 1,500 (II Rank) 3,000 8. Possible Output Quantity (7÷ 2) (units) 100 500 500 Question 6(a): Cash Budget 8 Marks From the information given below, prepare a Cash Budget of the Company for the first half of 2016, assuming that cost would remain unchanged. 1. Sales are both on Credit and for Cash, the latter being one–third of the former. 2. Realisation from Debtors are 25% in the month of sale, 60% in the following month and the balance in the month after that. 3. Company’s Policy of Selling Price is 25% over Cost. 4. Budgeted Sales of each month are purchased and paid for in the preceding month. 5. Rent Payable is ` 2,000 per month. 6. Sales Forecast for the different months are: 2015 – October ` 1,60,000; November ` 1,80,000; December ` 2,00,000.

2016 – January ` 2,20,000; February ` 1,40,000; March ` 1,60,000; April ` 1,50,000; May ` 2,00,000; June ` 1,80,000 and July ` 1,20,000

7. The Company has outstanding Debentures of ` 2 lakhs on 1st January carrying Interest at 15% per annum payable on the last date of each quarter on calendar year basis. 20% Debentures are due for redemption on 30 June 2016.

8. The Company has to pay Advance Tax of ` 54,000 in March. 9. Anticipated Office Costs for the six months are:

January ` 25,000, February ` 20,000, March ` 40,000, April ` 35,000, May ` 30,000 and June ` 45,000. 10. Opening Cash Balance is ` 10,000 on January 1, 2016. Solution: Refer Page 7.33, Q.No.23 [RTP]

1. Computation of Sales and Purchases Particulars Nov Dec Jan Feb March April May June July

(a) Sales during the Month 1,80,000 2,00,000 2,20,000 1,40,000 1,60,000 1,50,000 2,00,000 1,80,000 1,20,000

(b) Cash Sales 25% of (a) (Note 1)

45,000 50,000 55,000 35,000 40,000 37,500 50,000 45,000

(c) Credit Sales 75% of (a) (Note 1)

1,35,000 1,50,000 1,65,000 1,05,000 1,20,000 1,12,500 1,50,000 1,35,000

(d) Colln from Drs • 25% in current

Month 33,750 37,500 41,250 26,250 30,000 28,125 37,500 33,750

• 60% in next month 81,000 90,000 99,000 63,000 72,000 67,500 90,000

• Balance 15% next month 20,250 22,500 24,750 15,750 18,000 16,875




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Nov 2016.13

Particulars Nov Dec Jan Feb March April May June July Total Drs Colln 1,51,500 1,47,750 1,17,750 1,15,875 1,23,000 1,40,625

(e) Cost (Note 2) 1,76,000 1,12,000 1,28,000 1,20,000 1,60,000 1,44,000 96,000 (f) Purchases 1,12,000 1,28,000 1,20,000 1,60,000 1,44,000 96,000

Note 1: Since Cash Sales = 1/3rd of Credit Sales, Ratio of Cash: Credit Sales is 1:3, i.e. 25% : 75%.

Note 2: Profit = 25% on Cost = 1/4th on Cost = 1/5th on Sales. So, Cost = 4/5th on Sales.

2. Cash Budget for the First Half of 2016 Particulars January February March April May June

A. Opening Balance 10,000 77,500 1,10,250 44,500 875 (2,125)B. Receipts:

Cash Sales Collection from Debtors

55,000

1,51,500

35,000

1,47,750

40,000

1,17,750

37,500

1,15,875

50,000

1,23,000

45,000

1,40,625 Total Receipts 2,06,500 1,82,750 1,57,750 1,53,375 1,73,000 1,85,625

C. Payments Purchase 1,12,000 1,28,000 1,20,000 1,60,000 1,44,000 96,000 Rent 2,000 2,000 2,000 2,000 2,000 2,000 Debenture Int. (2,00,000×15%× 3/12) 7,500 7,500 Redemption of Deb. (2,00,000 × 20%) 40,000 Advance Tax 54,000 Office Cost 25,000 20,000 40,000 35,000 30,000 45,000

Total Payments 1,39,000 1,50,000 2,23,500 1,97,000 1,76,000 1,90,500D. Closing Balance [A + B – C] 77,500 1,10,250 44,500 875 (2,125) (7,000)Note: It is assumed that suitable arrangements will be made for handling forecast negative Cash Balances. Question 6(b): Transportation 8 Marks The following Table shows all the necessary information on the available supply from each Warehouse, requirement of each Market and the Unit Transportation Cost (in `) from each warehouse to each market.

Warehouse Market Supply in units I II III IV

A 5 2 4 3 22 B 4 8 1 6 15 C 4 6 7 5 8

Requirement units 7 12 17 9 The Shipping Clerk has worked out the following schedule from his experience.

Units 12 1 9 15 7 1 From – Warehouse A A A B C C To – Market II III IV III I III

Required – 1. Check if the Clerk has made the Optimal Schedule. 2. Find the Optimal Schedule and Minimum Total Shipping Cost. 3. Carrier of Route C to II, offers to transport the entire supply of Warehouse C at a reduced price. By how much

should the rate be reduced before the Clerk should consider giving him business? Solution: Same as Page 17.11, Q.No.5 [N 99]




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Nov 2016.14

Solution: Initial Basic Feasible Solution is determined as under from the data given above. Place I II III IV Requirement In the above IBFS,

• Number of allocated cells is 6. • m + n – 1 (i.e. Rows + Columns –

1) = 3 + 4 – 1 = 6. Hence, there is no degeneracy. This

can be tested for optimality.

A 5

12 2

14

93

22

B 4

8

151

6 15

C 7 4

6

17

5 8

Demand 7 12 17 9 45 Note: Cost Differences have not been computed since the Clerk’s allocation is taken as the IBFS. OPTIMALITY TEST: Table 1 = U + V for allocated cells computed as below:

U & V 4 – 7 = – 3 2 – 4 = – 2 0 (base) 3 – 4 = – 1

4 – 0 = 4 5

122

14

9 3

1 – 0 = 1 4

8

151

6

7 – 0 = 7 74

6

17

5

Table 2 = U + V for Unallocated Cells Table 3 = Net Evaluation Table (NET) = Table 1 – Table 2 for Unallocated Cells

4 + (–3) = 1 5 – 1 = 4 1 + (–3) = –2 1 + (–2) = –1 1 + (–1) = 0 4 – (–2) = 6 8 – (–1) = 9 6 – 0 = 6

7 + (–2) = 5 7 + (–1) = 6 6 – 5 = 1 5 – 6 = –1

There is one negative element in the NET, hence scheduling by the Clerk is not optimal. Selected Quantity = 1, being the least of the quantity allocated to the Negative Corners of the Loop

4 +ve –ve 6 9 6 1 –ve +ve Corner –1

ABFS–1: The new U + V for Allocated Cells is computed from the above.

Table 1 = U + V for allocated cells computed as below: U & V 4 – 2 = 2 2 – 0 = 2 4 – 0 = 4 3 – 0 = 3

(base) 0 5

122

1+1 = 24

9 – 1 = 8 3

1 – 4 = –3 4

8

151

6

5 – 3 = 2 74

6

7

0 + 1 = 1 5

Table 2 = U + V for Unallocated Cells Table 3 = Net Evaluation Table (NET) = Table 1 – Table 2 for Unallocated Cells

0 + 2 = 2 5 – 2 = 3 –3 + 2 = –1 –3 + 2 = –1 –3 + 3 = 0 4 – (–1) = 5 8 – (–1) = 9 6 – 0 = 6

2 + 2 = 4 2 + 4 = 6 6 – 4 = 2 7 – 6 = 1 Conclusion: All elements in the NET are non–negative, hence the revised allocation is optimal and unique. The optimal allocation and cost is – Place I II III IV Minimum Cost = Total of above = ` 104.

To consider the Carrier of Route C to II for business, this Cost should be ≤ Cost of Carrier of Routes C to I and C to III (which are presently Allocated Cells / Routes.) So, the Carrier of Route C to M–2 has to bring down his rate by ` 2 from the present ` 6 (to make it equal to ` 4) [Note: Alternative treatments exist.]

A 12×2=24 2×4=8 8×3=24

B 15×1=15

C 7×4=28 1×5=5




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Nov 2016.15

Question 7(a): Standard Costing – Budget Ratios 4 Marks A Company manufactures two products X and Y. Product X requires 5 hours to produce while Y requires 10 hours. In a month of 25 effective working days of 8 hours a day, 1,000 units of X and 600 units of Y were produced. The Company employs 50 workers in the Production Department to produce X and Y. The Budgeted Hours are 1,02,000 for the year. Calculate Capacity Ratio, Activity Ratio and Efficiency Ratio. Also establish their inter–relationship. Solution: Similar to Page 1.25, Q.No.10 [N 04] Note: Budget Ratios are computed using FOH Variance Chart, as under –

FOH Cost item

Col.(1): AO × SR = SH × SR

Col.(2): SO × SR = AH × SR

Col.(3): PFOH = PH × SR

Col. (4):BFOH = BH × SR

Col.(5): AFOH

Time Factor therein SH AH PH BH –

(1,000 uts × 5 hrs) + (600 uts × 10 hrs) =

11,000 hrs

25 days×8 hrs×50 men = 10,000 hrs

N.A in this question.

12

1,02,000=8,500 hrs N.A

Efficiency Ratio =AHSH

=Col.(2)Col.(1)

=hrs10,000

hrs11,000=110.00% × Capacity Ratio =

BHAH

=Col.(4)Col.(2)

=hrs8,500

hrs10,000=117.65%

Volume or Activity Ratio=BHSH

=Col.(4)Col.(1)

=hrs8,500

hrs11,000= 129.42% (or 110.00% × 117.65%)

Relationship: Activity Ratio= Efficiency Ratio × Calendar Ratio (if any) × Capacity Ratio = 110.00% × 117.65% = 129.42% Question 7(b)–(e): Theory Questions – Various Topics 4 Marks

Question Reference 7(b): State the Limitations of Uniform Costing. Refer Page 15.3, Q.No.6 [N 13] 7(c): Briefly explain the principles associated with Synchronous

Manufacturing. Refer Page 13.10, Q.No.27 [M 10, N 12]

7(d): Enumerate the uses of Pareto Analysis. Refer Page 3.13, Q.No.35 [N 08, N 11] 7(e): Distinguish clearly between the Skimming Pricing Policy and

Penetration Pricing Policy. Refer Page 3.9, Q.No.24, 25

[Various Previous Exam Question]




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