Test Series: October, 2020

MOCK TEST PAPER

FINAL (OLD) COURSE: GROUP – II
PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) Statement of Profitability

Sales Value (`) P / V Ratio Contribution
Product
(%) (`)
A 2,50,000 50 1,25,000
B 4,00,000 40 1,60,000
C 6,00,000 30 1,80,000
Total 12,50,000 4,65,000
Less: Fixed Overheads 5,02,200
Profit / (Loss) (37,200)
Additional Sale Value of each Product
Product Sales Value (`)
A `74,400 (`37,200 ÷ 0.5)
B `93,000 (`37,200 ÷ 0.4)
C `1,24,000 (`37,200 ÷ 0.3)
Additional Total Sales Value maintaining the same Sale – Mix
= `37,200 ÷ 0.372*
= `1,00,000

Total Contribution
* Combined P / V Ratio =  100
Total Sales
Rs. 4,65,000
=  100
Rs.12,50,000
= 37.2%
(b) Product A & B are joint products and produced in the ratio of 1:2 from the same direct
material- C.

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 Production of 40,000 additional units of B results in production of 20,000 units of A.
Calculation of Contribution under existing situation
Particulars Amount (`) Amount (`)
Sales Value:
A – 2,00,000 units @ `25 per unit 50,00,000
B – 4,00,000 units @ `20 per unit 80,00,000 1,30,00,000
Less: Material- C (12,00,000 units@ `5 per 60,00,000
unit)
Less: Other Variable Costs 42,00,000
Contribution 28,00,000
Let Minimum Average Selling Price per unit of A is `X
Calculation of Contribution after acceptance of additional order of ‘B’
Particulars Amount (`) Amount (`)
Sales Value:
A – 2,20,000 units @ ` X per unit 2,20,000 X
B – 4,00,000 units @ `20 per unit 80,00,000
40,000 units @ `15 per unit 6,00,000 2,20,000 X +
86,00,000
Less: Material- C (12,00,000 units x 110%) @ 66,00,000
`5 per unit
Less: Other Variable Costs (`42,00,000 x 46,20,000
110%)
2,20,000 X –
Contribution 26,20,000
Minimum Average Selling Price per unit of A
Contribution after additional order of B = Contribution under existing production
 2,20,000 X – 26,20,000 = 28,00,000
 2,20,000 X = 54,20,000
54,20,000
 X = = `24.64
2,20,000
Minimum Average Selling Price per unit of A is `24.64
(c) Let Cx be the Contribution per unit of Product X.
Therefore Contribution per unit of Product Y =C y=4/5Cx = 0.8Cx
Given F1 + F2 = 1,50,000,

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 F1 = 1,800Cx (Break even volume × contribution per unit)
Therefore F 2 = 1,50,000 – 1,800Cx.
3,000Cx –F1 =3,000 × 0.8Cx – F2 or 3,000Cx – F1 =2,400 Cx-F2 (Indifference point)
i.e., 3,000Cx – 1,800Cx = 2,400Cx – 1,50,000 + 1,800C x
i.e., 3,000Cx = 1,50,000, Therefore C x = `50/- (1,50,000 / 3,000)
Therefore Contribution per unit of X = `50
Fixed Cost of X = F 1 = `90,000 (1,800 × 50)
Therefore Contribution per unit of Y is `50 × 0.8 = `40 and
Fixed cost of Y = F 2 = `60,000 (1,50,000 – 90,000)
The value of F 1 = `90,000, F 2 = `60,000 and X = `50 and `40
(d) Activities P and Q are called duplicate activities (or parallel activities) since they have
the same head and tail events. The situation may be rectified by introducing a
dummy either between P and S or between Q and S or before P or before Q (i.e.
introduce the dummy before the tail event and after the duplicate activity or Introduce
the dummy activity between the head event and the duplicate activity). Possible
situations are given below:

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 2. (a) (i) Calculation of ‘Total Labour Hours’ over the Life Time of the Product
‘Kitchen Care’
The average time per unit for 250 units is
Yx = axb
Y250 = 30 × 250 -0.3219
Y250 = 30 × 0.1691
Y250 = 5.073 hours
Total time for 250 units = 5.073 hours × 250 units
= 1,268.25 hours
The average time per unit for 249 units is
Y249 = 30 × 249 –0.3219
Y249 = 30 × 0.1693
Y249 = 5.079 hours
Total time for 249 units = 5.079 hours × 249 units
= 1,264.67 hours
Time for 250th unit = 1,268.25 hours – 1,264.67 hours
= 3.58 hours
Total Time for 1,000 units = (750 units × 3.58 hours) + 1,268.25 hours
= 3,953.25 hours
(ii) Profitability of the Product ‘Kitchen Care’
Particulars Amount (`) Amount (`)
Sales (1,000 units) 50,00,000
Less:Direct Material 18,50,000
Direct Labour (3,953.25 hours × `80) 3,16,260
Variable Overheads (1,000 units× `1,000) 10,00,000 31,66,260
Contribution 18,33,740
Less: Packing Machine Cost 5,00,000
Profit 13,33,740

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 (iii) Average ‘Target Labour Cost’ per unit
Particulars Amount (`)
Expected Sales Value 50,00,000
Less: Desired Profit (1,000 units × `800) 8,00,000
Target Cost 42,00,000
Less: Direct Material (1,000 units × `1,850) 18,50,000
Variable Cost (1,000 units × `1,000) 10,00,000
Packing Machine Cost 5,00,000
Target Labour Cost 8,50,000
Average Target Labour Cost per unit 850
(`8,50,000 ÷ 1,000 units)
(b) Primal
Minimize
Z = 2x1 − 3x2 + 4x 3
Subject to the Constraints
3x1 + 2x2 + 4x3 ≥ 9
2x1 + 3x2 + 2x3 ≥ 5
−7x1 + 2x2 + 4x3 ≥ − 10
6x1 − 3x2 + 4x3 ≥ 4
2x1 + 5x2 − 3x3 ≥ 3
−2x1 − 5x2 + 3x3 ≥ − 3
x 1, x 2, x 3 ≥ 0
Dual:
Maximize
Z= 9y1 + 5y2 − 10y3 + 4y4 + 3y5 − 3y6
Subject to the Constraints:
3y1 + 2y2 − 7y3 + 6y4 + 2y5 − 2y6 ≤ 2
2y1 + 3y2 + 2y3 − 3y4 + 5y5 − 5y6 ≤ − 3
4y1 + 2y2 + 4y3 + 4y4 − 3y5 + 3y6 ≤ 4
y1, y2, y3, y4, y5, y6 ≥ 0
By substituting y 5−y6= y7 the dual can alternatively be expressed as:

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 Maximize
Z =
9y1 + 5y2 − 10y3 + 4y4 + 3y7
Subject to the Constraints:
3y1 + 2y2 − 7y3 + 6y4 + 2y7 ≤ 2
−2y1 − 3y2 − 2y3 + 3y4 − 5y7 ≥ 3
4y1 + 2y2 + 4y3 + 4y4 − 3y7 ≤ 4
y1, y2, y3, y4 ≥ 0, y7 unrestricted in sign.
3. (a) Statement of Reconciliation - Budgeted Vs Actual Profit
Particulars `
Budgeted Profit 5,19,000
Less: Sales Volume Contribution Planning Variance (Adverse) 52,125
Less: Sales Volume Contribution Operational Variance (Adverse) 93,825
Less: Sales Price Variance (Adverse) 39,600
Less: Variable Cost Variance (Adverse) 29,700
Less: Fixed Cost Variance (Adverse) 15,000
Actual Profit 2,88,750

Workings
Basic Workings
2,00,000units
Budgeted Market Share (in %) = = 50%
4,00,000units
1,65,000units
Actual Market Share (in %) = = 44%
3,75,000units
Budgeted Contribution = `21,00,000 – `12,66,000
= `8,34,000
Rs.8,34,000
Average Budgeted Contribution (per unit) = = `4.17
Rs.2,00,000
Rs.21,00,000
Budgeted Sales Price per unit = = `10.50
2,00,000
Rs.16,92,900
Actual Sales Price per unit = = `10.26
1,65,000

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 Rs.12,66,000
Standard Variable Cost per unit = = `6.33
2,00,000
Rs.10,74,150
Actual Variable Cost per unit = = `6.51
1,65,000
Calculation of Variances
Sales Variances:……….
Volume Contribution Planning* = Budgeted Market Share % × (Actual
Industry Sales Quantity in units –
Budgeted Industry Sales Quantity in
units) × (Average Budgeted
Contribution per unit)
= 50% × (3,75,000 units – 4,00,000
units) × `4.17
= ` 52,125 (A)
(*) Market Size Variance
Volume Contribution Operational** = (Actual Market Share % – Budgeted
Market Share %) × (Actual Industry
Sales Quantity in units) ×
(Average Budgeted Contribution per
unit)
= (44% – 50%) × 3,75,000 units × 4.17
= ` 93,825 (A)
(**) Market Share Variance
Price = Actual Sales – Standard Sales
= Actual Sales Quantity × (Actual Price
– Budgeted Price)
= 1,65,000 units × (`10.26 – `10.50)
= `39,600 (A)
Variable Cost Variances:……….
Cost = Standard Cost for Production – Actual
Cost
= Actual Production × (Standard Cost
per unit– Actual Cost per unit)
= 1,65,000 units × (`6.33 – `6.51)
= `29,700(A)

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 Fixed Cost Variances:……….
Expenditure = Budgeted Fixed Cost – Actual Fixed
Cost
= `3,15,000 – `3,30,000
= `15,000 (A)

 Fixed Overhead Volume Variance does not arise in a Marginal Costing system
(b) The Δ ij matrix or Cij – (ui + vj) matrix, where C ij is the cost matrix and (u i + vj) is the
cell evaluation matrix for unallocated cell.
The Δ ij matrix has one or more ‘Zero’ elements, indicating that, if that cell is brought
into the solution, the optional cost will not change though the allocation changes.
Thus, a ‘Zero’ element in the Δ ij matrix reveals the possibility of an alternative
solution.
4. (a) 1. Projected Raw Material Issues (Kg):
‘N’ ‘O’ ‘P’
‘L’ (48,000 units-Refer Note) 60,000 24,000 ---
‘M’ (36,000 units-Refer Note) 72,000 - 54,000
Projected Raw Material Issues 1,32,000 24,000 54,000
Note:
− Based on this experience and the projected sales, the DTSML has budgeted
production of 48,000 units of ‘L’ and 36,000 units of ‘M’ in the sixth period.
= 52,500 x 40% + 45,000 – 18,000 = 48,000
= 27,000 x 40% + 42,000 – 16,800 = 36,000
− Production is assumed to be uniform for both products within each four-week
period.
2. and 3. Projected Inventory Activity and Ending Balance (Kg):
‘N’ ‘O’ ‘P’
Average Daily Usage 6,600 1,200 2,700
Beginning Inventory 96,000 54,000 84,000
Add: Orders Received:
Ordered in 5th period 90,000 - 60,000
Ordered in 6th period 90,000 - -
Sub Total 276,000 54,000 144,000

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 Less: Issues 132,000 24,000 54,000
Projected ending inventory balance 144,000 30,000 90,000
Note:
− Ordered 90,000 Kg of ‘N’ on fourth working day.
− Order for 90,000 Kg of ‘N’ ordered during fifth period received on tenth working
day.
− Order for 90,000 Kg of ‘N' ordered on fourth working day of sixth period
received on fourteenth working day.
− Ordered 30,000 Kg of ‘O’ on eighth working day.
− Order for 60,000 Kg of ‘P’ ordered during fifth period received on fourth
working day.
− No orders for ‘P’ would be placed during the sixth period.
4. Projected Payments for Raw Material Purchases:
Raw Day/Period Day/Period Quantity Amount Day/Period
Material Ordered Received Ordered Due (`) Due
‘N’ 20th/5th 10th /6th 90,000 Kg 90,000 20th/6th
‘P’ 4th/5th 4th /6th 60,000 Kg 60,000 14th/6th
‘N’ 4th/6th 14th /6th 90,000 Kg 90,000 4th/7th
‘O’ 8th/6th 13th /7th 30,000 Kg 60,000 3rd/8th
(b) Following acceptance by early innovators, conventional consumers start followin g
Situation Appropriate Pricing Policy

(i) ‘A’ is a new product for the company and the market Penetration Pricing
and meant for large scale production and long term
survival in the market. Demand is expected to be
elastic.
(ii) ‘B’ is a new product for the company, but not for the Market Price or Price Just
market. B’s success is crucial for the company’s Below Market Price
survival in the long term.
(iii) ‘C’ is a new product to the company and the market. Skimming Pricing
It has an inelastic market. There needs to be an
assured profit to cover high initial costs and the
unusual sources of capital have uncertainties
blocking them.

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 (iv) ‘D’ is a perishable item, with more than 80% of its Any Cash Realizable
shelf life over. Value*
(*) this amount decreases every passing day.
5. (a) (i) Total Direct Labour Cost for first 8 batches based on learning curve of 90%
(when the direct labour cost for the first batch is `55,000)
The usual learning curve model is
y = axb

Where
y = Average Direct Labour Cost per batch
for x batches
a = Direct Labour Cost for first batch
x = Cumulative No. of batches produced
b = Learning Coefficient /Index

y = ` 55,000 × (8) –0.152

= ` 55,000 × 0.729
= ` 40,095
Total Direct Labour Cost for first 8 batches
= 8 batches × ` 40,095
= ` 3,20,760
Total Direct Labour Cost for first 7 batches based on learning curve of 90%
(when the direct labour cost for the first batch is ` 55,000)
y = ` 55,000 × (7) –0.152
= ` 55,000 × 0.744
= ` 40,920
Total Direct Labour Cost for first 7 batches
= 7 batches × ` 40,920
= ` 2,86,440
Direct Labour Cost for 8th batch
= ` 3,20,760 – ` 2,86,440
= ` 34,320

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 (ii) Statement Showing “Life Time Expected Contribution”
Particulars Amount (`)
Sales (`102 × 16,000 units) 16,32,000
Less: Direct Material and Other Non Labour Related 8,00,000
Variable Costs (`50 × 16,000 units)
Less: Direct Labour * 5,95,320
Expected Contribution 2,36,680
(*) Total Labour Cost over the Product’s Life
= `3,20,760 + (8 batches × `34,320)
= `5,95,320
(iii) In order to achieve a Profit of `5,00,00,000 the Total Direct Labour Cost over
the Product’s Lifetime would have to equal `3,32,000.
Statement Showing “Life Time Direct Labour Cost”
Particulars Amount (`)
Sales (`102 × 16,000 units) 16,32,000
Less: Direct Material and Other Non Labour Related 8,00,000
Variable Costs
(`50 × 16,000 units)
Less: Desired Life Time Contribution 5,00,000
Direct Labour 3,32,000
Average Direct Labour Cost per batch for 16 batches is `20,750 (`3,32,000 /
16 batches).
Total Direct Labour Cost for 16 batches based on learning curve of r% (when
the direct labour cost for the first batch is ` 55,000)
y = ` 55,000 × (16) b
` 20,750 = ` 55,000 × (16) b
0.3773 = (16) b
log 0.3773 = b × log 2 4
log 0.3773 = b × 4 log 2
 logr 
log 0.3773 =   × 4 log 2
 log2 
log 0.3773 = log r 4

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 0.3773 = r 4
4
r = 0.3773
r = 78.37%
(b) Calculation showing Rates for each Activity
Activity Activity Activity No. of Activity
Cost Driver Units Rate
[a] of Activity [a] / [b]
(`) Driver [b] (`)
Providing ATM 1,00,000 No. of ATM Transactions 2,00,000 0.50
Service
Computer 10,00,000 No. of Computer Transactions 25,00,000 0.40
Processing
Issuing 8,00,000 No. of Statements 5,00,000 1.60
Statements
Customer 3,60,000 Telephone Minutes 6,00,000 0.60
Inquiries

Calculation showing Cost of each Product

Activity Checking Accounts Personal Loans Gold Visa
(`) (`) (`)
Providing 90,000 --- 10,000
ATM Service (1,80,000 tr. x 0.50) (20,000 tr. x 0.50)
Computer 8,00,000 80,000 1,20,000
Processing (20,00,000 tr. x 0.40) (2,00,000 tr. x 0.40) (3,00,000 tr. x 0.40)
Issuing 4,80,000 80,000 2,40,000
Statements (3,00,000 st. x 1.60) (50,000 st. x 1.60) (1,50,000 st. x 1.60)
Customer 2,10,000 54,000 96,000
Inquiries (3,50,000 min. x 0.60) (90,000 min. x 0.60) (1,60,000 min. x 0.60)
Total Cost [a] `15,80,000 `2,14,000 `4,66,000
Units of 30,000 5,000 10,000
Product [b]
Cost of each 52.67 42.80 46.60
Product [a] /
[b]

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 6. (a) Working Notes
1. No. of Customer = 1,900
(5,000 × 40% × 95%)
2. Consumption of Gas = 11,40,000 Metered units
(1,900 × 50 mt.× 12 months)
Gas Supply = 13,41,176 Metered units
{11,40,000 × (100  85)}
3. Cash Inflow
(`)
Rent (1,900 × 4 Quarters × `10) 76,000
Add: Consumption Charge (11,40,000 × `0.4) 4,56,000
Less: Cost of Company (13,41,176 × `0.065) 87,176
Cash Inflow p.a. 4,44,824
One Time Connection Charge = `4,75,000
(`250 × 1,900 customers)
Maximum Capital Project Cost
(Can be to allow the company to provide the service required)
By Following the Concept of Perpetuity
(Investment − `4,75,000) × 17% = `4,44,824
 Investment = `30,91,612
(b) The objective of the given problem is to identify the preferences of marriage parties
about halls so that hotel management could maximize its profit.
To solve this problem first convert it to a minimization problem by subtracting all the
elements of the given matrix from its highest element. The matrix so obtained which is
known as loss matrix is given below-
Loss Matrix/Hall
Marriage Party 1 2 3 4
A 0 2,500 X X
B 5,000 0 5,000 12,500
C 7,500 0 10,000 5,000
D 0 5,000 X X

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 Now we can apply the assignment algorithm to find optimal solution. Subtracting the
minimum element of each column from all elements of that column-
Loss Matrix/Hall
Marriage Party 1 2 3 4
A 0 2,500 X X
B 5,000 0 0 7,500
C 7,500 0 5,000 0
D 0 5,000 X X

The minimum number of lines to cover all zeros is 3 which is less than the order of
the square matrix (i.e.4), the above matrix will not give the optimal solution.
Subtracting the minimum uncovered element (2,500) from all uncovered elements
and add it to the elements lying on the intersection of two lines, we get the following
matrix-
Loss Matrix/Hall
Marriage Party 1 2 3 4
A 0 0 X X
B 7,500 0 0 7,500
C 10,000 0 5,000 0
D 0 2,500 X X

Since the minimum number of lines to cover all zeros is 4 which is equal to the order
of the matrix, the below matrix will give the optimal solution which is given below-
Loss Matrix/Hall
Marriage Party 1 2 3 4
A 0 0 X X
B 7,500 0 0 7,500
C 10,000 0 5,000 0
D 0 2,500 X X

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 Optimal Schedule is-
Marriage Party Hall Revenue (`)
A 2 22,500
B 3 20,000
C 4 20,000
D 1 25,000
Total 87,500
7. (a) If unit variable cost and unit selling price are not constant then the main problem that
would arise while fixing the transfer price of a product would be as follows:
There is an optimum level of output for a firm as a whole. This is so because there is
a certain level of output beyond which its net revenue will not rise. The ideal transfer
price under these circumstances will be that which will motivate these managers to
produce at this level of output.
Essentially, it means that some division in a business house might have to prod uce
its output at a level less than its full capacity and in all such cases a transfer price
may be imposed centrally.
(b) Direct Product Profitability (DPP) is ‘Used primarily within the retail sector, and
involves the attribution of both the purchase price and other indirect costs such as
distribution, warehousing, retailing to each product line. Thus a net profit, as
opposed to a gross profit, can be identified for each product. The cost attribution
process utilises a variety of measures such as warehousing space, transport time to
reflect the resource consumption of individual products.’
Benefits of Direct Product Profitability:
(i) Better Cost Analysis - Cost per product is analysed to know the profitability of a
particular product.
(ii) Better Pricing Decision- It helps in price determination as desired margin can be
added with the actual cost.
(iii) Better Management of Store and Warehouse Space- Space Cost and Benefit
from a product can be analysed and it helps in management of store and
warehouse in profitable way.
(iv) The Rationalisation of Product Ranges etc.
(c) Target cost is the difference between the estimated selling price of a proposed
product with specified functionality and quality and target margin. This is a cost
management technique that aims to produce and sell products that will ensure the
target margin. It is an integral part of the product design. While designing the
product the company allocates value and cost to different attributes and quality.
Therefore, they use the technique of value engineering and value analysis. The

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 target cost is achieved by assigning cost reduction targets to different operations
that are involved in the production process. Eventually, all operations do not achieve
the cost reduction targets, but the overall cost reduction target is achieved through
team work. Therefore, it is said that target costing fosters team work.
(d) (i) The company has done extensive exercise in year-I that can be used as a basis
for budgeting in year-II by incorporating increase in costs / revenue at expected
activity level. Hence, Traditional Budgeting would be more appropriate for the
company in year-II.
(ii) In Traditional Budgeting system budgets are prepared on the basis of previous
year’s budget figures with expected change in activity level and corresponding
adjustment in the cost and prices. But under Zero Base Budgeting (ZBB) the
estimations or projections are converted into figures. Since, sales manager is
unable to substantiate his expectations into figures so Traditional Budgeting
would be preferred against Zero Base Budgeting.
(iii) Zero Base Budgeting would be appropriate as ZBB allows top-level strategic
goals to be implemented into the budgeting process by tying them to specific
functional areas of the organization, where costs can be first grouped, then
measured against previous results and current expectations.
(iv) Zero Base Budgeting allocates resources based on order of priority up to the
spending cut-off level (maximum level upto which spending can be made). In an
organisation where resources are constrained and budget is allocated on
requirement basis, Zero Base Budgeting is more appropriate method of
budgeting.
(e) Random Number Assignment
Daily Demand Days Probability Cumulative Random No.
Probability Assigned
4 4 0.08 0.08 00 − 07
5 10 0.20 0.28 08 − 27
6 16 0.32 0.60 28 − 59
7 14 0.28 0.88 60 − 87
8 6 0.12 1.00 88 − 99
Simulation Table
Day Random No. Demand No. of Cars on Rent Lost
Rent
1 15 5 5 ---
2 48 6 6 ---

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 3 71 7 6 1
4 56 6 6 ---
5 90 8 6 2
Total 29 3

 29Cars 
Average no. of Cars Rented are 5.8  
 5 
Rental Lost equals to 3 Cars

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