SCM Volume 4

ADVANCED
STRATEGIC COST
MANAGEMENT
Volume 4 [Part G, H]
For CA-CMA - Final Level
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PREFACE
Dear student,
Our study material is a joint compilation to supplement the Costing Subject of CA Final - New and Old
Syllabus and CMA Final Examinations.
We have made this material to bring all the connected concepts and questions together, which are
commonly relevant for all of such exams. However, there are some portions in this material, that are
relevant only for one particular exam and not for all. The segregation are given in detail in the contents
section of this book and are then further elaborated in the classroom while teaching.
In our urge to add more value, we continuously update our materials to make learning more easy,
convenient and time bound. In this process, we may have eliminated some questions and added new
ones.
Accordingly, we tend to modify the classroom explanations also, to ensure that the students are well
fitted for the exams.
If you find that you or your friends have done classes with the previous edition, you are requested
to not to compare your study materials or classes with this edition or this edition with the previous
ones or this edition with the next edition. Through previous editions, you may have solved few extra
questions in class but we assure that you don’t miss upon any new insertions.
The questions that we remove are covered through increased class explanations but for the new
insertions, we have created an online amendment course on our website at www.sjc.co.in where all
the necessary extract of new insertions in our material will be shared through video clips and pdf
attachments.
Currently, we have created the amendment course for CA Final New Syllabus Costing only, where we
add new insertions, as and when we teach in class. Through this online amendment course, you are
not going to miss anything form the upcoming editions. even if you are writing the exam after 2 years
or so of taking the classes.
For us, each one of you are equally important and your success is only our success.
Happy Learning!

Contents
CA Final-SCM CMA Final
Block Chapter Page No
New Old SCM SPM
VOLUME 1
CA Final Syllabus ✓ ✓
CMA Final Syllabus ✓ ✓
The Three Tier Preparation Model 11 ✓ ✓ ✓ ✓
How to Make Notes 12 ✓ ✓ ✓ ✓
The Day before CA Final Costing Exam 13 ✓
The Exam Hall Strategy 14 ✓ ✓ ✓ ✓
How to Study Theories 15 ✓ ✓ ✓ ✓
How to Approach a Question 16 ✓ ✓ ✓ ✓
Skillwise weightage in CA Final New Syllabus 17 – 18 ✓
1. ✓ ✓
Traditional vs Strategic Cost Management 19 – 40 ✓
2. ✓
Standard Costing ✓ 41 – 92 ✓
A 3. Performance Evaluation Models 93 – 152 ✓ ✓ ✓
4. Learning Curve Theory 153 – 169 ✓ ✓ ✓
5. Relevant Costing 170 – 219 ✓ ✓ ✓
B 6. Divisional Transfer Pricing 220 – 269 ✓ ✓ ✓
7. Linear Programming 270 – 296 ✓ ✓ ✓
VOLUME 2
8. CVP Analysis 297 – 321 ✓ ✓ ✓
9. Make or Buy Decisions 322 – 339 ✓ ✓ ✓
10. Key Factors 340 – 355 ✓ ✓ ✓
C 11. Sub Contracting 356 – 370 ✓ ✓ ✓
12. Other Areas of Decision Making & Service 371 – 400 ✓ ✓ ✓
Sector
13. Total Quality Management and Innovation 401 – 435 ✓ ✓ ✓ ✓
D 14. Theory of Constraints 436 – 444 ✓ ✓ ✓
15. Just in Time and Lean System 445 – 473 ✓ ✓ ✓
16. Activity Based Costing 474 – 491 ✓ ✓ ✓ ✓
17. Strategic Analysis of Operating Income 492 – 503 ✓ ✓ ✓ ✓
18. Target Costing 504 – 522 ✓ ✓ ✓ ✓
E 19. Life Cycle Costing 523 – 534 ✓ ✓ ✓
20. Pricing Strategies 535 – 563 ✓ ✓ ✓ ✓
21. Budgeting and Budgetary Control 564 – 600 ✓ ✓
22. Supply Chain Management 601 – 617 ✓ ✓ ✓

VOLUME 3 - For CA FINAL NEW SYLLABUS
1. Environmental Management Accounting 5 – 16 ✓
2. Cost Management for Specific Sector 17 – 23 ✓
F 3. Case Studies 24 – 100 ✓
4. Question Papers 101 – 116 ✓
VOLUME 4 - For CA FINAL OLD SYLLABUS and CMA FINAL
1. Simplex 5 – 22 ✓
2. Assignment 23 – 38 ✓ ✓
G 3. Transportation 39 – 58 ✓ ✓
4. Project Management : CPM & PERT 59 – 84 ✓ ✓
5. Simulation 85 – 99 ✓ ✓
6. Recap Theory Questions 100 – 212 ✓ ✓
7. Objective Questions for CMA 213 – 236 ✓ ✓
H 8. Question Papers 237 – 287 ✓ ✓ ✓
9. Z Table 288 ✓ ✓

Simplex
Class
WORK
Chapter 1
Simplex
1. APPLICABILITY OF SIMPLEX SOLUTION 6

2. BASIC STEPS IN SIMPLEX 6
3. CONSTRAINTS ARE OF LESS THAN 6
INEQUALITY TYPE
4. PROCEDURE TO BE FOLLOWED FOR INITIAL 7
SOLUTION
5. PROCEDURE TO BE FOLLOWED FOR 7
ITERATION
6. CONSTRAINTS ARE OF MORE THAN 8
INEQUALITY TYPE
7. CONSTRAINTS ARE OF EQUALITY TYPE 8
8. CONSTRAINTS ARE OF INEQUALITY X ≥ A 8
9. SPECIAL CASES 10
a. IDLE CAPACITY 10
b. MARGINAL VALUE or SHADOW PRICE or 10
OPPORTUNITY COST OF A RESOURCE
c. MARGINAL VALUE or SHADOW PRICE or 10
OPPORTUNITY COST OF A PRODUCT
d. SURPLUS RESOURCES 10
e. DEGENERACY 10
f. NO FEASIBLE SOLUTION: 11
g. MULTIPLE SOLUTIONS: 11
h. UNBOUNDED SOLUTION: 11
G Block
i. VARIABLE IS OF UNRESTRICTED SIGN 11
Advanced Strategic
Cost Management |5
Simplex
Class
WORK
1. APPLICABILITY OF SIMPLEX SOLUTION

No. of Products are more than or equal to two.
No. of Constraints are more than or equal to two.
2. BASIC STEPS IN SIMPLEX

The disadvantage of the graphical approach to linear programming is that it is limited
to problems having two variables only (since a graph is a two – dimensional diagram.
The simplex method can deal with any number of variables. The simplex method is an
extremely powerful method of analysis and yields a considerable amount of information,
apart from satisfying an objective. It analyses one solution after another until it
automatically signals that the optimum solution has been reached.
The following steps are used in solving:
Step 1: Formulate the LPP.
Step 2: Convert the inequalities into equalities using slack or surplus variables.
Step 3: Prepare the initial solution.
Step 4: Perform iterations on the initial solution till the optimal solution is reached.
3. CONSTRAINTS ARE OF LESS THAN INEQUALITY TYPE

The following steps are followed:
Step 1: Formulate the given problem.
Step 2: Make the inequalities in the constraints into equalities by adding a Slack Variable
in each constraint (say represented by S1, S2, S3, etc. for each inequality).
Slack Variables are introduced only in the inequality of less than type (i.e. ≤) to convert
inequality to equality.
For Objective function, the coefficient of slack variable is zero.
Step 3: Draw the initial solution.
1. Fixed ratio: Fixed ratios of non key rows.
G Block
2. Program variables or Basic Variables: Slack Variables or Artificial slack variables.

However, during iteration process, the surplus variable can become a program
variable.
3. Non – Basic variables: Other variables which are not basic variables
4. Cost or Profit per unit: Coefficients from the Z function of the corresponding
variables.
5. Quantity: The resource limitations (the RHS constants of the constraints).
6. Variables: All the variables with their coefficients from the Z function.
7. Replacement Ratios: Replacement ratios of all the rows.
6 |Advanced Strategic
Cost Management
Simplex
Class
WORK
4. PROCEDURE TO BE FOLLOWED FOR INITIAL

SOLUTION
(a) Enter all the constraint coefficients in the rows of the basic variables.
(b) Find the initial solution Net Evaluation Row (NER) by copying the column head
coefficients.
(c) Optimisation Condition:
For maximisation objective function: All NER elements should be zero or negative.
For minimisation objective function: All NER elements should be zero or positive.
(d) If the initial solution is not optimum, then prepare for iteration.
(e) Before starting the iteration, the following is to be done with initial solution:
a. Identify the key column (KC).
KC = Maximum NER for maximisation problems.
KC = Minimum NER for minimisation problems.
[If there is a tie, select any one of them.]
b. Calculate the replacement ratios for all the rows using the formula:
RR =
Quantity column elements of all rows
Corresponding KC ele
ement
c. Identify the key row (KR) by selecting the row with minimum RR (ignore negative
values and infinite value)
[If there is a tie select any one of them – see Degeneracy under special case]
d. Mark the Pivot or key element at the intersection of the key row and key column.
e. Calculate the fixed ratios for all the non KRs using the formula:
Non KR elements of the KC
Fixed Ratio =
Pivot element
(f) REMEMBER: In the iteration, KR’s variable is the outgoing variable and KC’s variable
is the incoming variable.
The quantity of incoming variable is the value of RR at which KR is identified.
5. PROCEDURE TO BE FOLLOWED FOR ITERATION

G Block
(a) Replace the outgoing variable with the incoming variable and write the
corresponding profit or cost per unit.
(b) Work out the following starting from the Qty column:
All key row element
For KR elements:
Pivot element
For non KR elements: Non KR elements – (corresponding Fixed Ratio x corresponding

KR elements)
Advanced Strategic
Cost Management |7
Simplex
Class
WORK
(c) Calculate Zj = ∑ (profit or cost elements x corresponding cost elements)

(d) Calculate the NER (Net Evaluation Row) elements for all the variables using formula:
NER = Column Head Coefficient – Zj
REMEMBER: The NER elements of the basic variables are always zero in any iteration.
(e) If all NER elements are negative or zero then the solution is optimal otherwise
reiterate the above solution using the same procedure as above starting from
identification of KC
6. CONSTRAINTS ARE OF MORE THAN INEQUALITY

TYPE
Initial Solution: Make the inequalities in the constraints into equalities by deducting
a Surplus Variable and adding an Artificial Slack Variable in each constraint (say Surplus
variable represented by S1, S2, S3, etc. and Artificial Slack Variable represented by A1, A2,
A3, etc. for each inequality).
Artificial Slack Variables are introduced only in the inequality of more than type (i.e. ≥) to
convert inequality to equality.
For Objective function, the coefficients of:
Surplus Variable - is zero.
Artificial Slack Variable – If Maximisation problem then “–M”
If Minimisation problem then “+M”
Where M denotes an infinite value.
Iterations: Check whether the above solution is optimum using the optimality condition.
If the initial solution is not optimal then iteration is to be done in the same way as done
for previous problem.
Hatch the columns of the discarded A’s because once driven out they do not re – inter
the solution.
G Block
7. CONSTRAINTS ARE OF EQUALITY TYPE

For the constraints of equality type introduce only Artificial Slack Variable. The co-efficient
of Artificial Slack Variable is to be selected in the same manner as is done in More than
type Inequalities.
8. CONSTRAINTS ARE OF INEQUALITY X ≥ A

In this case substitute x with x1 + a in all the equations and inequations.
Cost Management
Simplex
Class
WORK
Simplex Algorithm Flow Chart
START
INTRODUCE NECESSARY SLACK, SURPLUS AND AFRTIFICIAL

SLACK VARIABLES TO CONVERT INEQNS INTO EQNS AND
NEUTRALISE THEM IN OBJECTIVE FUNCTION
WRITE THE INITIAL SIMPLEX TABLE AND

CALCULATE THE NER (Cj - Zj)
IS THE PROBLEM
MAXIMISATION
OR MINIMISATION?
MINIMISATION MAXIMISATION
SELECT THE MOST
NEGATIVE NER AND SELECT THE LARGEST
DESIGNATE THE NER AND DESIGNATE
COLUMN AS KC THE COLUMN AS KC
DIVIDE THE CORRESPONDING QTY BY COEFFICIENT
IN THE KC IN R.R. COLUMN IN RHS. SELECT THE
ROW WITH SMALLEST NON NEGATIVE VALUE AND
CALL IT AS KR
DESIGNATE THE INTERSECTION

OF KC AND KR AS KEY ELEMENT
CALCULATE F.R. BY DIVIDING OTHER KC

ELEMENTS BY KEY ELEMENT
(1) DIVIDE ALL ELEMENTS OF THE KR BY KEY ELEMENT

(2) OBTAIN OTHER ROWS AS FOLLOWS: OLD ROW -(KR ELEMENTS X FR)
G Block
OBTAIN NER(Cj - Zj)
IS THE PROBLEM
MAXIMISATION OR
MINIMISATION?
THE SOLUTION IS OPTIMAL FOR MAXIMISATION IF

NER IS 0 OR -VE AND FOR MINIMISATION IF NER IS 0
OR +VE
STOP
Advanced Strategic
Cost Management |9
Simplex
Class
WORK
9. SPECIAL CASES
a. IDLE CAPACITY
The quantity elements against the slack variables in the optimal solution indicate the
idle capacity of the corresponding resource. The corresponding resource is called as
Non-binding Resource.
b. MARGINAL VALUE OR SHADOW PRICE OR OPPORTUNITY COST OF A

RESOURCE
The magnitude of the NER elements corresponding to the slack or surplus variables
in the optimal solution is called marginal value or shadow price or opportunity cost.
It represents the amount by which the profit is reduced or the cost is increased when
one unit of the resource become unavailable at the optimum level.
c. MARGINAL VALUE OR SHADOW PRICE OR OPPORTUNITY COST OF A

PRODUCT
The magnitude of the NER elements corresponding to a non basic variable which
represents a product in original problem is called opportunity cost of manufacturing
the product. It represents the amount by which the profit is reduced or the cost is
increased when one unit of such product is produced at the optimum level.
d. SURPLUS RESOURCES
The quantity elements against the surplus variables in the optimal solution indicate
the excess amount (quantity) of the corresponding resource used above the least
allowable value.
e. DEGENERACY
This occurs if there is a tie in the minimum RR or any RR becomes zero in any iteration.
If a solution is optimum where one of the basic variable has zero quantity.
If there is a tie in the minimum RR
G Block
(a) Select any of the minimum RRs to identify the KR. If the optimum solution is
reached, the problem is solved. If it is not, then there will be a 0 RR in the next
iteration.
(b) Select this 0 RR for the next iteration to identify the KR.
(c) If the 0 persists in the next iteration, select the least non – zero positive value of
RR to identify the KR and proceed with the solution.
Cost Management
Simplex
Class
WORK
If RR becomes zero
This may be due to quantity of any basic variable being zero.
(a) Select the zero RR to identify the KR.
(b) If zero persists in the next iteration, select the least non zero positive value of RR
to identify the KR.
f. NO FEASIBLE SOLUTION:
This happens when we get an artificial slack variable in the optimal solution with a
non – zero profit (-M) or cost (+M) per unit, or
When the quantity of basic variable become negative in any iteration.
Such problems cannot be solved.
In Graphical solution, this happens when the shaded area of constraints does not
meet at a common region.
g. MULTIPLE SOLUTIONS:
This happens when we get a 0 NER for a non – basic variable in the optimal solution.
To find an alternate solution, take this column as the KC and reiterate.
In Graphical solution, this happens when the maximum profit or minimum cost is
achieved at more than one extreme point of the feasible region.
h. UNBOUNDED SOLUTION:
This happens when at any stage the RRs become all negative. Such problems cannot
be solved.
In graphical solution, this happens when the feasible region is in an open unbounded
area.
i. VARIABLE IS OF UNRESTRICTED SIGN

Redefine the variable using x = (a – b)
G Block
Advanced Strategic
Cost Management | 11
Simplex
Class
WORK
1
Solve the following LPP using the simplex algorithm.

Maximise Z = 2x + 5y
Subject to x + 4y ≤ 24
3x + y ≤ 21
x+y≤9
x, y ≥ 0
Constraints are of ≤ Type
2
A firm manufactures transistors, resistors and carbon tubes with profit of ` 10, ` 6 and ` 4 per
100 units respectively. To produce a shipment of 100 units the times (hours) required are:
Transistors (x) Resistors (y) Carbon tubes (z) Max available

Engineering 1 1 1 100
Labour 10 4 5 600
Administration 2 2 6 300
(a) Find the number of shipments of each product to maximise profits and the maximum
profit.
(b) Find the idle capacity and the marginal value of the resources.
G Block
Constraints are of ≤ Type Idle Capacity and Marginal

Value
Cost Management
Simplex
Class
WORK
3
A gear manufacturing company makes two types of gears – A and B. Both gears are processed
on 3 machines, Hobbing, Shaping and Grinding. The time required by each gear and total
time available per week on each machine is as follows:
Machine Gear A (Hrs) Gear B (Hrs) Available Hours

Hobbing 3 3 36
Shaping 5 2 60
Grinding 2 6 60
Other data:
Selling price (`) 820 960
Variable cost (`) 780 900
Determine the optimum production plan and the maximum contribution by simplex method.
The initial solution table is given below:
Cj 40 60 0 0 0
Cj Variable Qty X1 X2 X3 X4 X5
0 X3 36 3 3 1 0 0
0 X4 60 5 2 0 1 0
0 X5 60 2 6 0 0 1
Constraints are of ≤ Type
4
G Block
Solve the following LPP using the simplex algorithm

Minimise Z = 8x + 10y
Subject to 8x + 4y ≥ 150
3x + 9y ≥ 100
x, y ≥ 0
Advanced Strategic
Simplex
Class
WORK
Constraints are of ≥ Type
5
Solve the following LPP using simplex algorithm

Minimise Z = 4x + 2y
Subject to 3x + y ≥ 27
-x –y ≤ -21
x + 2y ≥ 30
x, y ≥ 0
Also find the surplus resource.
Constraints are of ≥ Type Negative RHS
6
Solve the following LPP using simplex algorithm

Minimise Z = 3x1 – x2
Subject to 2x1 + x2 ≥ 2
x1+ 3 x2 ≤ 3
G Block
x2 ≤ 4
x1 , x2 ≥ 0
Constraints are of ≥ and ≤ Type
Cost Management
Simplex
Class
WORK
7

Maximise Z = 30x1 + 20x2
Subject to x1 + x2 ≤ 8
6x1 + 4x2 ≥ 12
5x1 + 8x2 = 20
x1 , x2 ≥ 0
Constraints are of = Type
8

Maximise Z = 10x + 9y + 8z
Subject to 2x + 3y + 5z ≤ 40
3x + 2y + 4z ≤ 60
5x + 3y + 1z ≤ 80
x≥5
y≥4
z≥3
G Block
Constraints are of x ≥ a Type
Advanced Strategic
Simplex
Class
WORK
9

Subject to x1 + 4x2 ≤ 8
x1+ 2x2 ≤ 4
x1 , x2 ≥ 0
Degeneracy
10
Three grades of coal A, B and C contains phosphorus and ash as impurities. In a particular
industrial process, fuel up to 100 ton (maximum) is required which could contain ash not
more than 3 % and phosphorus not more than 0.03 %. It is desired to maximise the profit
while satisfying these conditions. There is an unlimited supply of each grade. The percentage
of impurities and the profits of each grades are as follows:
Coal Phosphorus (%) Ash (%) Profit in ` (per ton)

A 0.02 3.0 12.00
B 0.04 2.0 15
C 0.03 5.0 14.00
You are required to formulate the linear programming model to solve it by using simplex
method to determine optimal product mix and profit.
G Block
Degeneracy Avoid negative pivot element
Cost Management
Simplex
Class
WORK
11
Given below is the relevant portion of the first iteration of a linear program under the simplex
method, using the usual notations.
X1 X2 S1 S2 S3
Contribution per
Quantity Basic variable 50 40 0 0 0
unit
150 S1 0 3 5 1 0 0
20 S2 0 0 1 0 1 0
296 S3 0 8 5 0 0 1
The following questions are to be answered independent of each other and based on the
iteration given above:
(i) Write the initial linear program with the objective functions and the inequations.
(ii) What is the opportunity cost of bringing one unit of x1 into the solution?
(iii) If we bring 4 units of x into the solution, by how much will the basic variables change?
1
(iv) What will be the change in the value of the objective function if 4 units of x2 are brought
into the solution?
(v) What will be the quantity of incoming variable?
Interpretation of Ready Solution
12
The simplex tableau for a maximisation problem of linear programming is given below:
G Block
Product Mix X1 X2 S1 S2 Quantity

X2 1 1 1 0 10
S2 1 0 -1 1 3
Cj 4 5 0 0
Zj 5 5 5 0
Zj – Cj 1 0 5 0
Advanced Strategic
Simplex
Class
WORK
Answer the following questions, giving reasons in brief:

(i) Is the above solution optimal?
(ii) Are there more than one optimal solution?
(iii) Is this solution degenerate?
(iv) Is this solution feasible?
(v) If s1 is slack in machine A (in hours) and s2 is slack in machine B (In hours), which of these
machines is being used to the full capacity when producing according to this solution?
(vi) A customer would like to have one unit of product x1 and is willing to pay in excess of
the normal price in order to get it. How much should the price be increased in order to
ensure no reduction of profit?
(vii) Machine B (associated with slack s2, in hours) has to be shut down for repairs for 2 hours
next week. What will be the effect on profits?
(viii) How many units of the two products x1 and x2 are being produced according to this
solution and what is the total profit?
(ix) Derive any one row of previous iteration.
13
Given below is an iteration in a simplex table for a maximization objective linear programming
product mix problem for products X1, X2 and X3.
Cj 6 4 10 0 0 0
Basic Variable Quantity X1 X2 X3 S1 S2 S3
0 S1 400 0 4/3 0 1 –1/3 0
G Block
6 X1 400 1 2/3 2 0 1/3 0

0 S3 400 0 5/3 0 0 –2/3 1
Zj 2400 6 4 12 0 2 0
Cj – Zj 0 0 –2 0 –2 0
Answer the following questions :

(i) Is the above solution feasible?
(ii) Perform one more iteration with X2 entering the solution to get a solution with the same
value for the objective function.
Cost Management
Simplex
Class
WORK
(iii) Indicate the shadow prices.

(iv) If customer is prepared to pay higher price for product X3 then by how much should the
price be increased so that the company profit remains unchanged?
(v) From the given table, derive any one original constraint inequality with the coefficients
of variable in their simplest whole number forms.
14
The following information is given relating to the simplex method of a linear program with
the usual notations.
Objective function:
Z = x1 + 5x2 ... . .. . .. . .. . .. . .. . .. . .. . (1)
Subject to:
6x1 + 8x2 ≤ 12 ... . .. . .. . .. . .. . .. . .. . (2)
5x1 +15x2 ≥ 10 .. . .. . .. . .. . .. . .. . .. (3)
x1, x2 ≥ 0 .. . .. . .. . .. . .. . .. . .. . .. . .. . .. (4)
Let S1 be the variable introduced to restate (2) as an equality and let S2 and A2 be variables to
restate (3) as an equality.
If the objective is to maximize Z,
(i) What will be the coefficients of S1, S2 and A2 in equation (1) and (3) restated as equality?
(ii) Identify the slack and surplus variables.
G Block
(iii) Which variables will form part of the initial solution? Why?
(iv) If the objective is to minimize Z what will be your answer to (i) above?
Advanced Strategic
Simplex
Class
WORK
15
Subject to 5x1 + 3x2 ≤ 20
2x1 + x2 ≥ 45
x1, x2 ≥ 0
Find Optimum Solution
No Feasible Solution
16
Maximise Z = x + x 1 2
Subject to 3x1 + 3x2 ≥ 24

–x1 + 3x2 ≥ 3
x1, x2 ≥ 0
Find Optimum Solution
Unbounded Solution
G Block
Cost Management
Simplex
Class
WORK
17
Solve the following LPP using simplex method

Minimise Z = 3x1 – 4x2
Subject to 2x1 – x2 ≥ 8
x1+ 4x2 ≤ 10
x2 ≥ 0
x1, Unrestricted in sign
Variable of Unrestricted Sign
G Block
Advanced Strategic
Simplex
Home
WORK
Q 1 Ex. Book No. Pg. No.
Solve the following using simplex method:

Maximise Z = 50x + 60y
Subject to 2x + 3y ≤ 1500
3x + 2y ≤ 1500
x ≤ 450
x,y ≥ 0
Constraints are of ≤ Type RR has an infinite value
Solve both graphically and by simplex method :

Subject to :
4x1 + 2x2 ≤ 16
3x1 – x2 ≤ 9
3x1 + x2 ≤ 9
x1, x2 ≥ 0
Constraints are of ≤ Type Degeneracy

G Block
Cost Management
Assignment
Class
WORK
Chapter 2
Assignment
1. OBJECTIVE 24
2. STEPS FOR HUNGARIAN RULE 24
3. IF NUMBER OF MINIMUM LINES THAT CAN 24
BE DRAWN IS LESS THAN THE ORDER OF
THE MATRIX
4. SPECIAL CASES 26
a. MAXIMISATION ASSIGNMENT PROBLEM 26
b. UNBALANCED ASSIGNMENT PROBLEM 26
joylawrenciandas50@gmail.com,8420517209 c. IMPLICATION OF DUMMY TASK 26
d. IMPLICATION OF DUMMY PERFORMER 26
e. PROHIBITED ASSIGNMENTS 26
f. AIRLINES IDLE TIME MINIMISATION 26
g. TRAVELLING SALESMEN COST MINIMISATION 27
G Block
Advanced Strategic
Assignment
Class
WORK
1. OBJECTIVE
The objective of an assignment algorithm is to determine the optimal assignment of
tasks amongst the performers. It seeks to minimise the total time taken by the assignees
to perform the tasks.
2. STEPS FOR HUNGARIAN RULE

Step 1: Check whether the given problem is a balanced assignment problem.
A problem is balanced if number of task to be assigned is equal to number of performers.
For unbalanced problems refer a situation later.
Step 2: Subtract the minimum value in each row from all the figures in that row. Subtract
the minimum value in each column from all the figures in that column.
Step 3: Find the minimum number of lines that can be drawn to cover all the zeros in the
matrix. This is done by drawing lines through the rows or columns containing the largest
number of zeros and repeating the process.
If the minimum number of lines that can be drawn is exactly equal to the order of the
matrix then the optimum solution can be derived directly as discussed in Step 4,
Step 4: Boxing the zeroes: Starting from the first row examine all the rows one after the
other to locate a row containing only one zero. Box that zero and draw a line through
the column containing the zero. After processing the rows apply the same process for
columns (if necessary) this time passing a line through the row containing the zero, till all
the zeros are either boxed or are covered by a line.
If no row or column containing only one zero can be located then box any zero arbitrarily
and draw two lines – one passing through the row and the other through the column of
the boxed zero. Repeat this process till all the zeros are either boxed or are covered by a
line.
If however, you are not able to box all the zeros even after applying the process as given
above, then it indicates that the lines drawn in the previous step to cover the zeros was
not the minimum. Recheck that step and then follow through.
3. IF NUMBER OF MINIMUM LINES THAT CAN BE DRAWN

G Block
IS LESS THAN THE ORDER OF THE MATRIX

In this case, apply the following procedure:
a. Locate the smallest uncovered element
b. Subtract this value from all the uncovered elements and add this value to the
junction elements.
c. Repeat these steps till the minimum number of lines that can be drawn to cover all
the zeros is exactly equal to the order of the matrix.
Cost Management
Assignment
Class
WORK
Flow Chart on Assignment
START
Balance the Problem
Reducing Rows
Reducing Columns
Drawing Lines
joylawrenciandas50@gmail.com,8420517209 Is no. of lines =

order of matrix ?
No
Adjustment
Select the least uncovered element and
a) Subtract it from all uncovered elements.
Yes
b) Add it to junction elements.
c) Do not touch the covered elements.
Drawing Lines
G Block
No Is the solution Yes

Boxing the zeros
optimum?
Optimum Assignment
STOP
Courtesy: Miss Anuradha Chitlangia
Advanced Strategic
Assignment
Class
WORK
4. SPECIAL CASES
a. MAXIMISATION ASSIGNMENT PROBLEM
The assignment algorithm is a minimisation algorithm. Some assignment problems,

however seek to maximise the profits that result from optimal use of resources. The
profit table in such problems is converted to a loss table by subtracting all the figures
in the profit table from the maximum in that table.
b. UNBALANCED ASSIGNMENT PROBLEM
If the number of tasks in an assignment problem is not equal to number of performers

then the problem is said to be unbalanced. To balance the problem we introduce
dummy tasks or dummy performers considering the time consumed for these
dummies to be 0. If it is a maximisation problem then first introduce the dummy and
then prepare the loss table.
c. IMPLICATION OF DUMMY TASK

When the number of performers exceeds the number of tasks, a dummy task is
introduced. The performer who is assigned this dummy task in the final solution,
will actually not be performing any task.
d. IMPLICATION OF DUMMY PERFORMER
When the number of performers falls short of the number of tasks, a dummy
performer is introduced. The task that is assigned to this dummy performer in the
final solution, will actually not be performed.
e. PROHIBITED ASSIGNMENTS
If an assignment is prohibited we consider the time taken to perform that task to be

infinitely large value. It is better to simply put a dash (“ – “) or “M” in the time of such
tasks.
f. AIRLINES IDLE TIME MINIMISATION

G Block
The airlines company has to run the different flights among the different destinations.
They have to arrange their employees or crew members in such a way that their total
cost will be minimised. For this purpose, the crew member has to join the duty from
a particular city or hometown or base. Their duty will be off when they will come
back to the same city for the purpose of sign off.
Now, in this total duty time there will be some idle time of crew members. If that idle
time is minimised then the total cost will be minimised. For this purpose, apply the
following steps:
Cost Management
Assignment
Class
WORK
1. Select a particular city as base or hometown and prepare the idle time matrix
2. Select another base or hometown and prepare the idle time matrix on that
basis.
3. Prepare the minimum idle time matrix by comparing the above two matrix in
step 1 and step 2.
4. Apply the rule of assignment to get the perfect combination or cost minimise
solution.
g. TRAVELLING SALESMEN COST MINIMISATION
The objective here is to minimise the cost and time of travelling salesmen in such a
way that all the clients are visited within a certain period of time, say 1 day.
Step 1: Apply rule of assignment to find the minimum cost or time.
Step 2: Check that whether all client have been visited in a single cycle or not in
the above allotment. If the objective has been achieved then the above solution is
optimum.
Step 3: If all the clients are not visited in the above allotment, then:
(a) Redraw the last optimal solution i.e. where no. of lines = no. of rows or columns.
(b) Start the first allotment with the second least cost i.e. Boxing not at zero but at
the next higher value than zero.
(c) Rest of the Boxing shall be done at zero only.
(d) Check whether all clients are visited in a single cycle or not in the above
allotment. If not, then start with the next higher value than in 3 (b) above and
so on.
G Block
Advanced Strategic
Assignment
Class
WORK
1
An accounts officer has four subordinates and four tasks. The time taken by the subordinates
to perform each task is given below. How would you assign these tasks?
T1 T2 T3 T4
S1 8 26 17 11
S2 13 28 4 26
S3 38 19 18 15
S4 19 26 24 10
Minimisation Objective
2
There are 5 tasks to be assigned among 5 machines. The table below gives the times in hours
required by each machine to perform any task. Find the optimal assignment.
T1 T2 T3 T4 T5
M1 9 3 4 2 10
M2 12 10 8 11 9
M3 11 2 9 0 6
M4 8 0 10 2 1
M5 7 5 6 2 9
G Block
Minimisation Objective Adjusting the elements
Cost Management
Assignment
Class
WORK
3
A solicitor’s firm employs typists on hourly piece – rate basis for their daily work. There are
five typists and their charges and speeds are different. Only one job is given to one typist and
the typist is paid for full hours even if he works for a fraction of an hour. Find the least cost
allocation for the following data:
Typist Charge (` per hr) Typing rate (pages per hr) Job No. of pages in the job
A 5 12 P 199
B 6 14 Q 175
C 3 8 R 145
D 4 10 S 298
E 4 11 T 178
Minimisation Objective Cost Matrix

4
The table below gives the sales revenue incurred by 5 salesmen operating in 5 districts. Find
the assignment pattern that maximises revenue.
D1 D2 D3 D4 D5
S1 32 38 40 28 40
S2 40 24 28 21 36
S3 41 27 33 30 37
S4 22 38 41 36 36
S5 29 33 40 35 39
G Block
Maximisation Objective Arbitrary Boxing - Multiple

Solution
Advanced Strategic
Assignment
Class
WORK
5
A study revealed that certain students were unable to attend classes on some subjects on
some days. The table below shows the number of absentees on the days of a week. Find the
optimal assignment such that the total number of students not attending are minimised.
Maths Economics Law Accounts

Monday 50 40 60 20
Tuesday 40 30 40 30
Wednesday 60 20 30 20
Thursday 30 30 20 30
Friday 10 20 10 30
Unbalanced Problem
6
The captain of a cricket team has to allot five middle batting positions to five batsmen. The
average runs scored by each batsman at these positions are as follows:
Batsman Batting positions

I II III IV V
P 40 40 35 25 50
Q 42 30 16 25 27
R 50 48 40 60 50
S 20 19 20 18 25
G Block
T 58 60 59 55 53
(i) Find the assignment of batsman to positions, which would give the maximum number of
runs.
(ii) Another batsman U with the following average runs in batting positions, is available to
play. Should he be included to play in the team? If so, who will be replaced by him?
Batting position I II III IV V

Average runs 45 52 38 50 49
Cost Management
Assignment
Class
WORK
(iii) If Batsman P is to be assigned only to Position IV, what will be the optimum assignment?
(iv) If Batsman P cannot be assigned to Position V, what will be the optimum assignment?
Maximisation, Unbalanced, Conditional,

Prohibited
7
Five managers of a company have been asked to rank five rooms in order of their preference.
The room are numbered 301 to 305. There are some managers who do not prefer certain
rooms at all. From the preference list given below find which manager should be assigned
which room so that their preference ranking is a minimum.
M1 M2 M3 M4 M5
302 302 303 302 301
303 304 301 305 302
304 305 304 304 304
301 305 303
302
Minimisation Objective Rank Matrix
8
G Block
Five swimmers are eligible to compete in a relay team which is to consist of four swimmers
swimming in four different swimming styles – back stroke, breast – stroke, free style and
butterfly. The time taken for the five swimmers – Anand, Bhaskar, Chandru, Dorai and Easwar
to cover a distance of 100 metres in various swimming styles are given below (in minutes:
seconds). Anand swims the back stroke in 1:09, the breast stroke in 1:15 and has never
competed in free style or butterfly. Bhaskar is a free style specialist averaging 1:01 for the 100
metres but can also swim the breast stroke in 1:16 and butterfly in 1:20. Chandru swims all
styles – back in 1:10, butterfly in 1:12, free style in 1:05 and breast stroke in 1:20. Dorai swims
only the butterfly in 1:11 while Easwar swims the back stroke in 1:20, the breast stroke in 1:16,
Advanced Strategic
Assignment
Class
WORK
the free style in 1:06 and the butterfly in 1:10. Which swimmers should be assigned to which
swimming style? Who should not be in the relay?
Unbalanced Problem Time Matrix
9
A city corporation has decided to carry out road repairs on 4 main roads on the city. The
government has agreed to make a special grant of ` 50 lacs towards the cost with the condition
that the repairs should be carried out at lowest cost. Five contractors have sent in their bids.
Only one road will be awarded to one contractor. The bids for cost of repairs (` in lacs) are
given below:
R1 R2 R3 R4
C1 9 14 19 15
C2 7 17 20 19
C3 9 18 21 18
C4 10 12 18 19
C5 10 15 21 16
You are informed that C2 should get R1 and C4 should get R2 to minimise costs.
(a) What is the minimum cost allocation?
(b) How much is the minimum discount that the eliminated contractor should offer for mer-
iting a contract?
(c) Independent of (b) above, if the corporation can negotiate to get a uniform discount rate
from each contractor, what is the minimum rate of discount so that the cost is within the
grant amount?
G Block
Conditional and Unbalanced Problem Interpretation

November, 2011
Cost Management
Assignment
Class
WORK
10
A manager was asked to assign tasks to operators (one task per operator only)so as to
minimise the time taken. He was given the matrix showing the hours taken by the operators
for the tasks.
First, he performed the row minimum operation. Secondly, he did the column minimum
operation. Then, he realised that there were 4 tasks and 5 operators. At the third step he
introduced the dummy row and continued with his fourth step of drawing lines to cover
zeros. He drew 2 vertical lines (under operator III and operator IV) and two horizontal lines
(aside task 4 and task 5). At step 5, he performed the necessary operation with the uncovered
element, since the number of lines was less than the order of matrix. After this, his matrix
appeared as follows:
Tasks Operators
I II III IV V
1 4 2 5 0 0
2 6 3 3 0 3
3 4 0 0 0 1
4 0 0 5 3 0
5 (dummy) 0 0 3 3 0
(i) What was the matrix after Step II? Based on such matrix, ascertain (ii) and (iii) given be-
low.
(ii) What was the most difficult task for operators I, II and V?
(iii) Who was the most efficient operator?
(iv) If you are not told anything about the manger’s errors, which operator would be denied
any task? Why?
(v) Can the manager go ahead with his assignment to correctly arrive at the optimum as-
signment, or should he start fresh after introducing the dummy task at the beginning?
Interpretation Based Problem

G Block
May, 2011
| 33
Advanced Strategic
Cost Management
Assignment
Class
WORK
11
Answer the following independent situations relating to an assignment problem with a

minimization adjective:
(i) Just after row and column minimum operations, we find that a particular row has 2 ze-
roes. Does this imply that the 2 corresponding numbers in the original matrix before any
operation equal? Why?
(ii) Under the usual notations, where a32 means the element at the intersection of the 3rd
row and 2nd column, we have in a 4 × 4 assignment problem, a24 and a32 figuring optimal
solution. What can you conclude about the remaining assignments? Why?
12
Find the minimum idle time assignment.
City A to City B
Flight No. Departure Arrival
A1 8 am 10 am
A2 6 pm 8 pm
City B to City A
B1 7am 9am
B2 7 pm 9 pm
G Block
Airlines Idle Time Minimisation
Cost Management
Assignment
Class
WORK
13
An airline operating seven days a week has the following time table. The crew must have a
minimum layover of 6 hours between flights. The crew can be based in either city. Obtain the
crew schedule (pairing of flights) that result in the minimum total layover time away from
home.
Flight Delhi to Calcutta

Departure Arrival
101 7.00 am 9.00 am
102 9.00 am 11.00 am
103 1.30 pm 3.30 pm
104 7.30 pm 9.30 pm
Flight Calcutta to Delhi

Departure Arrival
201 9.00 am 11.00 am
202 10.00 am 12.00 noon
203 3.30 pm 5.30 pm
204 8.00 pm 10.00 pm
Airlines Idle Time Minimisation
G Block
Advanced Strategic
Assignment
Class
WORK
14
Solve the following to minimise the cost per cycle of a travelling salesman:
Cost per trip (`)
From To
A B C D E
A - 3 6 2 3
B 3 - 5 2 3
C 6 5 - 6 4
D 2 2 6 - 6
E 3 3 4 6 -
Travelling Salesmen Cycle Optimisation

G Block
Cost Management
Assignment
Home
WORK
1
The secretary of a school is taking bids on the city’s four school bus routes. Four companies
have made the bids as detailed in the following table:
Bid for routes (in `)

Company
R1 R2 R3 R4
C1 4000 5000 - -
C2 - 4000 - 4000
C3 3000 - 2000 -
C4 - - 4000 5000
Each bidder can be assigned only one route. Determine the minimum cost of running the
four bus routes.
Prohibited Assignment
2
A company has four zones open and four managers are available for assignment. The zones
are not equal in sales potentials. It is estimated that a typical marketing manager operating in
each zone would bring in the following annual sales:
East West North South

Zones (`) 2,40,000 1,92,000 1,44,000 1,20,000
The four marketing managers are also different in ability. It is estimated that working under
same conditions their yearly sales would be as under:
G Block
Manager M 8
Manager N 7
Manager O 5
Manager P 4
Find optimum assignment for maximum sales.
Advanced Strategic
Assignment
Home
WORK
Maximisation Objective Sales Matrix

November, 2009
3
Four operators are to be assigned one of four jobs. The times needed by the operators are
given below:
J1 J2 J3 J4
O1 12 10 10 8
O2 14 12 15 11
O3 6 10 16 4
O4 8 10 9 7
(i) How should the manager assign the jobs so that the total time needed for all the jobs is
minimum?
(ii) If job J2 is not to be assigned to O2, what should be the assignment and the additional
time required?
Prohibited Assignment
G Block
Cost Management
Transportation
Class
WORK
Chapter 3
Transportation
1. OBJECTIVE 41
2. METHODS OF INITIAL SOLUTION 41
3. STEPS OF NORTH WEST CORNER RULE 41
4. STEPS OF LEAST COST METHOD 41
5. STEPS OF VOGEL’S APPROXIMATION 42
METHOD (VAM)
6. OPTIMALITY TEST (MODIFIED 42
joylawrenciandas50@gmail.com,8420517209 DISTRIBUTION METHOD)
7. INITIAL SOLUTION IS NOT THE OPTIMAL 43
SOLUTION – LOOP AND REALLOCATION
8. SPECIAL CASES 43
a. UNBALANCED TRANSPORTATION PROBLEM 43
b. DEGENERACY 43
c. DEGENERATES AT INITIAL SOLUTION 44
d. DEGENERATES AFTER REALLOCATION 44
e. INDEPENDENT CELL 44
f. MAXIMISATION TRANSPORTATION PROBLEM 44
g. PROHIBITED TRANSPORTATION 44
G Block
Advanced Strategic
Transportation
Class
WORK
Transportation Flow Chart
Start
Express the problem

in tabular form
Is it Balance the problem

a balanced No
by adding dummy
problem? row / dummy column
Yes
Is it Convert it into a minimization

Maximization Yes
problem by searching each element
problem? of the table from its heighest element
Find an initial solution

using NWC Rule, VAM
joylawrenciandas50@gmail.com,8420517209 method etc.
Remove degeneracy by Yes Is it

assigning to requisite degenerate?
number of cell
No
A revised solution is obtained by
Using cost coefficients of
considering cells with ‘NEGATIVE’
occupied cells, compute index
mark and determine the latest of the
online values: For now, i, uj = cij
amount (xij) held. Add this amount to
– v For column j, vj = cij – ui
the cell bearing ‘Plus’ sign and
assigning an arbitrary index
subtract from cell with ‘negative’ sign
value (say zero) to first row on
the right margin
Compute opportunity cost for

each occupied cell by using the
formula : ij = cij – (ui + vj)
Select the cell with smallest

opportunity cost. Draw a closed
G Block
Are all No loop which (i) begins and ends at

ij 0? the cell selected (ii) may pass over
both occupied and unoccupied cells
(iii) has alternating sign in the
Yes
route starting with ‘plus’ sign in the
chosen cell (iv) changed direction
The solution is optimal only at the occupied cells.
Stop
MODI method - Schematic Diagram
Cost Management
Transportation
Class
WORK
1. OBJECTIVE
A transportation problem belongs to a special class of Linear Programming where the
objective is to minimise the cost of transportation when there are alternative routes of
transporting goods from m origins to n destinations.
2. METHODS OF INITIAL SOLUTION

There are three methods to obtain the initial solution:
1. The North West Corner Rule
2. The Least Cost Method
3. Vogel’s Approximation Method (VAM)
3. STEPS OF NORTH WEST CORNER RULE

(a) Allocate the top left hand corner (North West Corner) with the minimum of the
availability and requirement.
(b) Proceed right along the row allocating successive cells till the row exhausts.
(c) Proceed downwards along the column allocating successive cells till the column
exhausts.
(d) Repeat the process till all rows and columns are exhausted.
Limitation of this method: It does not consider the cost of transportation from origin
to destination.
4. STEPS OF LEAST COST METHOD

In this method the cost of transportation from each origin to all the destinations are
taken into consideration. The following steps are followed:
G Block
(a) Locate the least cost cell and allocate as much as possible to that cell.
(b) Proceeding with progressively higher cost cells, repeat the process till all the rows
and columns are exhausted, hatching each row or column that is exhausted.
Note: If at any point there is a tie in the lowest cost cell then select the one where
maximum allocation is possible.
Advanced Strategic
Transportation
Class
WORK
5. STEPS OF VOGEL’S APPROXIMATION METHOD (VAM)

In this method also the cost of transportation from each origin to all the destinations are
taken into consideration. Unless otherwise mentioned, always use this method to find
the initial solution.
(a) Check whether the problem is balanced. If it isn’t then balance it by selecting a
dummy origin or a dummy destination.
(b) Find the difference between the least cost and the second most least cost for each
row and column. If there are two or more minimum equal costs then take the
difference as 0.
(c) Of these differences select the maximum to identify the rows and/or column.
Allocate the maximum possible to the cell having the least cost in this row and/or
column. If the row and/or column is exhausted then hatch it.
1. If there is a tie in the maximum differences then examine all the tied rows and
columns to identify the least cost.
2. If there is a tie in the least cost then select the cell where the maximum allocation
can be made.
(d) Repeat the process for the reduced table till all the rows and columns are exhausted.
6. OPTIMALITY TEST (MODIFIED DISTRIBUTION

METHOD)
This test is performed to determine whether the initial solution obtained is optimal. The
following steps are followed:
(a) Copy the shipping costs C for each cell where the allocations have been made.
(b) Find the (u+v) matrix by calculating values of U (for the rows) and V (for the columns)
such that for all the allocated cells C = U + V. Start by taking U = 0 for any row.
(c) Hatch off the allocated cells and find C for all the unallocated cells using the formula
C=U+V
G Block
(d) Find the Cell Evaluation Matrix or the ∆ matrix for all the unallocated cells using formula
∆ = C – (U + V)
(e) Determine whether the solution is optimal. If all the ∆’s are non negative (0 or positive)
then the solution is optimal. If the solution is not optimal then follow through the
next steps as discussed in VII below.
(f) To find out the least cost calculate the sum of the products of the optimum allocations
and their corresponding shipping costs.
Cost Management
Transportation
Class
WORK
7. INITIAL SOLUTION IS NOT THE OPTIMAL SOLUTION –

LOOP AND REALLOCATION
If the initial allocations are not optimal, the next iteration is obtained by the following
steps:
(a) Copy the latest allocation matrix and tick the cell having the most negative value of
∆ in the previous ∆ matrix.
(b) Obtain a loop with the ticked cell as one of the corners.
Loop: A loop is formed by moving horizontally or vertically and turning at right
angles such that there is an allocated cell at the corners of the loop. One may pass
through an allocated cell and if necessary jump over a path but the loop must be
closed.
(c) Reallocate the maximum possible to the ticked cell. This is done by putting a +ve
and a–ve sign. Add that amount to the allocations in all the cells with a +ve sign and
subtract that amount from the allocations in all the cells with a –ve sign.
(d) Now perform the optimality test to the reallocated matrix. If all the ∆’s are non
negative (0 or positive) then the reallocated solution is optimal.
(e) If the reallocated solution is not optimal then repeat the entire process of reallocation
till the optimal solution is reached.
8. SPECIAL CASES
a. UNBALANCED TRANSPORTATION PROBLEM
If the total availability differs from total requirement then the problem is unbalanced.
When this happens, introduce a dummy destination if the total availability exceeds
the total requirement and introduce a dummy origin if the total availability falls short
of the total requirement. The costs (minimisation problem) or profits (maximisation
problem) are taken as 0 for a cell in the dummy.
If in the final allocation there is an amount allocated to the dummy origin or
destination it indicates that the availability at that origin is surplus or the requirement
G Block
of that destination will not be met.
b. DEGENERACY
If at any stage there are less than (m + n – 1) allocations then the solution degenerates.
This may happen in the initial solution or after any reallocation.
Advanced Strategic
Transportation
Class
WORK
c. DEGENERATES AT INITIAL SOLUTION
Introduce infinitely small allocation “e” to the least cost independent cell to make
(m + n – 1) allocations. If there are two or more least cost independent cells then
select the cell having the lowest (or nearest to the lowest) cost in that row.
d. DEGENERATES AFTER REALLOCATION
If after reallocating it is found that the numbers of allocations has fallen short of
(m + n – 1) then introduce small allocation “e” to the unallocated, independent cell
having the least value of ∆ i.e. if the most negative cell has already been used as a
ticked cell then choose the next higher value, in the previous ∆ matrix. Start with the
most negative ∆ and progress upwards. If there is a tie in the least value of ∆ then
select any one of them.
e. INDEPENDENT CELL
A cell is said to be independent if it is not possible to form a loop with the cell as a
corner.
f. MAXIMISATION TRANSPORTATION PROBLEM
In some cases profits may be given and thus total profit has to be maximised. Such
questions are converted to a minimisation problem by preparing the Loss table and
then solved in usual way. The Loss table is prepared by subtracting all figures of the
profit table from the maximum value of the profit table. If the problem is unbalanced
then first introduce a dummy and then prepare the Loss table.
g. PROHIBITED TRANSPORTATION
Sometimes in a given transportation problem, some routes may not be available.

There could be several reasons for this such as bad road conditions or strike, etc.
In such situations, there is a restriction on the route available for transportation.
To handle such type of a situation, a very large cost (or negative profit for the
maximisation problem) represented by ∞ or M is assigned to each of such routes
which are not available. Due to assignment of very large cost, such routes would
G Block
automatically be eliminated in the final solution. The problem is solved in its usual
way.
Cost Management
Transportation
Class
WORK
1
A company has factories at F1, F2, F3 and F4 and warehouses at W1, W2, W3, W4 and W5.
Find the initial solution using North West Corner Rule. The given matrix indicates the cost of
transportation from different factories to different warehouses.
Factories Warehouse Availability

W1 W2 W3 W4 W5
F1 16 18 20 23 19 150
F2 20 14 22 26 25 250
F3 22 12 18 16 17 300
F4 30 36 24 20 26 200
Requirement 180 270 150 180 120 900
Initial Solution North West Corner Rule

2
A company has factories A, B, C and warehouses D, E, F, G. The monthly capacities of the

factories are 38, 74, 68 units respectively and the monthly requirements at the warehouses
are 32, 36, 62, 50 units respectively. The unit shipping costs (in `) are given below. Find the
initial solution using Least Cost Method.
D E F G
A 5 3 6 2
B 4 7 9 1
C 3 4 7 5
G Block
Initial Solution Least Cost Allocation Method
Advanced Strategic
Transportation
Class
WORK
3
Consider Question 2 and draw the initial solution using VAM.
Initial Solution VAM
4
Consider Question 1 and draw the initial solution using VAM.
5
The costs of transportation from 5 origins to 6 destinations are given below. Obtain the initial
solution using VAM.
D1 D2 D3 D4 D5 D6 Avail
O1 4 6 9 2 7 8 10
O2 3 5 4 8 10 0 12
O3 2 6 9 8 4 13 4
O4 4 4 5 9 3 6 18
G Block
O5 9 8 7 3 2 14 20
Req 8 8 16 3 8 21
Cost Management
Transportation
Class
WORK
6
Consider Question 5 and obtain the optimal allocation and the minimum transportation cost.
Optimality Test
7
The Agri -products company has two factories at Vizag and Haridwar. There are four major
warehouses to which the finished products are sent at Gangtok, Pune, Surat and Patiala. The
company plans to locate an additional factory at either Jhumritalaiya or at Khandala. If the
following matrix gives the details of the shipping cost per unit, manufacturing capacities and
warehouse requirements, how would you go about choosing between the two proposed
locations, i.e. Jhumritalaiya and Khandala. Suggest.
Place Gangtok Pune Surat Patiala Capacity

Vizag 25 9 10 20 220
Haridwar 10 8 6 5 380
Jhumritalaiya 15 2 4 10 200
Khandala 9 7 7 5 200
Requirement 100 150 300 250
Full Solution Loop and Reallocation

G Block
8
A company has factories A, B and C and warehouses D, E, F and G. The monthly capacities
of the factories are 160, 150 and 190 units respectively. The monthly requirements at the
warehouses are 80, 90, 110 and 160 units respectively. The unit shipping costs (in `) are given
below. Find the optimal solution to the transportation problem.
Advanced Strategic
Transportation
Class
WORK
D E F G
A 42 48 38 37
B 40 49 52 51
C 39 38 40 43
Full Solution Unbalanced Problem and

Degeneracy
9
The initial solution of a transportation problem along with the unit cost of transportation
from each origin to destination is given below. You are required to arrive at the minimum
transportation cost by the VAM and check for optimality.
(Hint: Candidates may consider u = 0 at Row 1 for initial cell evaluation)
Optimality Test Degeneracy & Alternate

Solution
G Block
Cost Management
Transportation
Class
WORK
10
The following matrix is a minimisation problem for transportation costs. The unit transportation
costs are given at the right hand corners of the cells and the ∆ values are encircled.
Find the optimum solution and the minimum cost.
Optimality Test Unique Allocation

May 2011
11
A manufacturer of jeans is interested in developing an advertising campaign that will reach

four different age groups. Advertising campaigns can be conducted through TV, radio and
magazines. The following table gives the cost in paise per exposure for each of the age groups
according to the medium employed. In addition, the maximum exposure levels possible in
each of the media – TV, Radio and Magazines are 40, 30 and 20 million respectively. Also the
minimum desired exposures within each age group – 13 -18, 19-25, 26-35, and 36 and older
are 30, 25, 15 and 10 million respectively. The objective is to minimise the cost of attaining the
maximum exposure level in each age group.
G Block
Media 13-18 19-25 26-35 36 and older

TV 12 7 10 10
Radio 10 9 12 10
Magazines 14 12 9 12
(i) Formulate the above as a transportation problem and find the optimal solution.
(ii) Solve this problem if the policy is to provide at least 4 million exposures through TV in
the 13-18 age group and at least 8 million exposures through TV in the age group 19-25.
Advanced Strategic
Transportation
Class
WORK
Full Solution Conditional Allocation
12
The following table shows all the necessary information on the available supply to each
warehouse, the requirement of each market and the unit transportation cost from each
warehouse to each market:
Market
Warehouse I II III IV Supply
A 5 2 4 3 22
B 4 8 1 6 15
C 4 6 7 5 8
Required 7 12 17 9
The shipping clerk has worked out the following schedule from his experience:
12 units from A to II
1 unit from A to III
9 units from A to IV
15 units from B to III
7 units from C to I
1 unit from C to III
You are required to answer the following:
a. Check and see if the clerk has the optimal schedule.
b. Find the optimal schedule and minimum total shipping cost
c. If the clerk is approached by a carrier of route C to II, who offers to reduce his rate in the
hope of getting some business, by how much should the rate be reduced before the
G Block
clerk should consider giving him an order?

d. If the supply from warehouse B reduces to 11 units and simultaneously the requirement
of market III reduces to 13 units, find the ‘Optimal Transportation Schedule’.
e. Further, if supply from warehouse A also reduces to 19 units and simultaneously the re-
quirement of III reduces further to 10 units, will the optimal solution of part (iv) change?
Cost Management
Transportation
Class
WORK
Full Solution Conditional Allocation
13
A company has three factories manufacturing the same product and five agencies. The unit
shipping costs from each factory to any agency are given below. Find the production and
distribution schedules for profit maximisation.
Factories Production Cost / unit Maximum Capacity Shipping cost to Agencies

A1 A2 A3 A4 A5
F1 20 150 1 1 5 9 4
F2 22 200 9 7 8 3 6
F3 18 125 4 5 3 2 7
Demand to be met by agencies 80 100 75 45 125
Selling price of product at the agencies 30 32 31 34 29
Maximisation Objective Profit Matrix
14
A manufacturer must produce a product in sufficient quantity to meet contractual sales in

next months. The production capacity and unit cost of production vary from month to month.
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The product in one month maybe held for sale in later months but at an estimated storage
cost of ` 1 per unit per month. No storage cost is incurred for goods sold in the same month
in which they are produced. There is no opening inventory and none is desired at the end of
four months. The details are given in the following table. How much should the manufacturer
produce each month to minimise total cost?
Advanced Strategic
Transportation
Class
WORK
Month Contracted Sales Maximum production Unit cost of production

1 20 40 14
2 30 50 16
3 50 30 15
4 40 50 17
Prohibited Allocation
15
XYZ firm is facing a transportation problem and they have asked a consultant to provide a
solution to the same. The consultant has provided the following table as a solution for the
problem:
Distribution Centre
Factory Capacity u1
D1 D2 D3 D4
10 10 16 20
F1 300 300 u1 -5
9 4 3
16 6 17 25
F2 175 25 200 u2 0
1 3
8 21 10 15
F3 25 75 150 250 u3 -7
22
Demand 325 175 100 150 750
v1 v1 15 v2 6 v3 17 v4 22
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Since the consultant has not provided any post-optimality analysis, you have been asked to
do the same and hence, on the basis of the above solution, answer the following questions:
(i) Is the above solution feasible?
(ii) Is the above solution degenerate?
(iii) Is it optimal solution? Does it have more than one optimal solution? If yes, how many?
(iv) What is the opportunity cost of the transporting one unit from F1 to D4?
(v) If, due to some reason, the management is forced to transfer one unit from F2 to D4, then
what would be the rate of increase in cost per unit?
Cost Management
Transportation
Class
WORK
(vi) A transporter is offering a discount of 20% on the freight on the route F2 and D4 provided
at least 20 units are transported from this route. Should the management accept the of-
fer?
(vii) Due to some problem at F1 , its [production is reduced by two units. To compensate for
the loss, it is decided to increase the production at F2. Will such a decision lead to increase
the cost? If yes, what will be the increase in cost?
(viii) What if the production of F3 is increased by one unit and simultaneously demand of D2 is
increased by one unit. Will it lead to increase in cost? If yes, by what amount? Does it have
TRANSPORTATION PARADOX?
16
In a 3 x 4 transportation problem for minimizing costs, will the R2C1 cell (at the intersection
of the 2nd row and 1st column) always figure in the initial solution by the North West Corner
Rule? Why?
17
In a transportation problem for cost minimization, there are 4 rows indicating quantities
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demanded and this totals up to 1,200 units. There are 4 columns giving quantities supplied.
This totals up to 1,400 units. What is the condition for a solution to be degenerate?
Advanced Strategic
Transportation
Class
WORK
18
Find an optimum solution for the following shipping costs :
Showroom
Factory Capacity (unit)
S1 S2 S3
F1 4 3 7 200
F2 2 1 9 200
F3 6 4 5 200
Requirement (units) 200 200 200
Using Hungarian Rule
19
A project consists of four (4) major jobs, for which four (4) contractors have submitted tenders.
The tender amounts, in thousands of rupees, are given in the each cell. The initial solution of
the problem obtained by using Vogel’s Approximation Method is given in the Table below:
Contractors Job P Job Q Job R Job S

1
A 112.50 100.00 127.50 167.50
1
B 142.50 105.00 157.50 137.50
1
C 122.50 130.00 120.00 160.00
1
D 102.50 112.50 150.00 137.50
G Block
Required
Find the assignment, which minimizes the total cost of the project. Each contractor has to be
awarded one job only.
Using Hungarian Rule
Cost Management
Transportation
Home
WORK
1
The costs of transportation from 5 factories to 5 showrooms are given below. Obtain the
optimum allocation and the minimum cost.
S1 S2 S3 S4 S5 Avail
F1 73 40 9 79 20 8
F2 62 93 96 8 13 7
F3 96 65 80 50 65 9
F4 57 58 29 12 87 3
F5 56 23 87 18 12 5
Reqd 6 8 10 4 4
Full Solution Unique Loop
2
Following is the profit matrix based on four factories and three sales depots of the company.
S1 S2 S3 Avail
F1 6 6 1 10
F2 -2 -2 -4 150
F3 3 2 2 50
F4 8 5 3 100
Reqd 80 120 150
G Block
Determine the most profitable distribution schedule and the corresponding profit assuming,
no profit in case of surplus production.
Maximisation Objective Unbalanced
Advanced Strategic
Transportation
Home
WORK
3
A company produces a small component for all industrial products and distributes it to five
wholesalers at a fixed price of ` 2.50 per unit. Sales forecasts indicate that monthly deliveries
will be 3,000, 3,000, 10,000, 5,000 and 4,000 units to wholesalers 1,2,3,4, and 5 respectively.
The monthly production capabilities are 5,000, 10,000, 12,500 at plants 1, 2 and 3 respectively.
The direct costs of production of each unit are ` 1.00, ` 0.90 and ` 0.80 at plants 1,2 and 3
respectively. The transportation costs of shipping unit from a plant to a wholesaler are given
below:
Plant Wholesaler
1 2 3 4 5
1 0.05 0.07 0.10 0.15 0.15
2 0.08 0.06 0.09 0.12 0.14
3 0.10 0.09 0.08 0.10 0.15
Find how many components each plant supplies to each wholesaler in order to maximise
profit.
Maximisation Objective Profit Matrix and Remove

Decimals
4
A company wishes to determine an investment strategy for each of the next four years.
Five investment types have been selected. Investment capital has been allocated for each
of the coming four years and maximum investment levels have been established for each
investment type. An assumption is that amounts invested in any year will remain invested
until the end of the planning horizon of four years. The following table summarises the data
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for this problem. The values in the body of the table represent net return on investment of
one rupee up to the end of the planning horizon. For example, a rupee invested in investment
type B at the beginning of year 1 will grow to ` 1.90 by the end of the fourth year, yielding a
net return of ` 0.90. The objective in this problem is to determine the amount to be invested
at the beginning of each year in an investment type so as to maximise the net rupee return
for the four – year period.
Cost Management
Transportation
Home
WORK
Investment made at the Investment type Rupees available

beginning of year (Net Return Data) (‘000)
A B C D E
1 0.80 0.90 0.60 0.75 1.00 500
2 0.55 0.65 0.40 0.60 0.50 600
3 0.30 0.25 0.30 0.50 0.20 750
4 0.15 0.12 0.25 0.35 0.10 800
Maximum Investment 750 600 500 800 1000
(` in ‘000)
Solve the above transportation problem and get an optimal solution. Also calculate the net
return on investment for the planning horizon of four – year period.
Maximisation Objective Remove Decimals
5
Find the minimum transportation cost for the following:
D1 D2 D3 D4 D5 D6 Stock Available
F1 7 5 7 7 5 3 60
F2 9 11 6 11 - 5 20
F3 11 10 6 2 2 8 90
F4 9 10 9 6 9 12 50
Demand 60 20 40 20 40 40
It is not possible to transport any quantity from factory 2 to destination 5.

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Prohibited Allocation
Advanced Strategic
Transportation
Home
WORK
6
A leading firm has three auditors. Each auditors can work up to 160 hours during the next
month, during which time three projects must be completed. Project 1 will take 130 hours,
Project 2 will take 140 hours, and project 3 will take 160 hours. The amount per hour that can
be billed for assigning each auditor to each project is given in the following table:
Auditor Project 1 Project 2 Project 3

(`) (`) (`)
1 1,200 1,500 1,900
2 1,400 1,300 1,200
3 1,600 1,400 1,500
Formulate this as a transportation problem and find the optimal solution. Also find out
the maximum total billings during the next month.
Maximisation Objective
G Block
Cost Management
Project Management : CPM & PERT
Class
WORK
Chapter 4
1. NETWORK DIAGRAM 61
a. Activity: 61
b. Sequencing of Activities: 61
c. Event: 61
d. Numbering of Events (FULKERSON’s RULE): 61
e. Duplicating: 62
f. Dangling: 62
g. Dummy Activities: 62
2. PROJECT DURATION CALCULATION AND 62
CRITICAL PATH METHOD (CPM):
a. Duration 62
b. Path or Route 62
c. Critical Path 62
d. Project Duration or Duration of Critical Path 62
e. Forward Pass Calculation (Left to Right) 63
f. Backward Pass Calculation (Right to Left) 63
g. Earliest Finish time of an activity 63
h. Latest Start time of an activity 63
i. Slack 63
j. TOTAL FLOAT, FREE FLOAT, INDEPENDENT 64
FLOAT
3. UPDATING A NETWORK 64
4. PROJECT CRASHING 64
G Block
Process of Crashing 65
| 59
Advanced Strategic
Cost Management
Class
WORK
5. PROJECT EVALUATION AND REVIEW 66

TECHNIQUE (PERT)
a. Expected Time of activity 66
b. Expected Project Time 66
c. Variances and Standard Deviations: 66
d. To find the Probabilities of completion of 67
Project in the given time
e. To find the time of the project completion 67
when the probability is given
joylawrenciandas50@gmail.com,8420517209 f. Characteristics of Standard Normal Curve 68
6. TIME SCALED NETWORK 68
a. RESOURCE SMOOTHING 68
b. RESOURCE LEVELLING 69
G Block
Cost Management
Class
WORK
1. NETWORK DIAGRAM
It is a diagram showing sequential flow of activities from one event to another along with
the project duration.
The following important terms to be remembered before drawing a network diagram:
a. ACTIVITY:
Activity is a small work of a project which requires a certain time to complete and
must consume some resource for its completion.
Every activity must be well defined and should not overlap with each other.
The following is to be remembered for an activity:
1. Activities are denoted by a left to right arrow sign and are symbolised as a, b, c,
d, etc.
2. The length of arrow is of no significance and has no relation with the duration
of the activity.
3. Each activity can have only one arrow and one number and therefore cannot be
repeated.
4. Before an activity can be undertaken, all activities preceding it must be
completed.
5. When more than one activity terminates at one event, it means that no activity
emanating from that event can start unless all activities terminating there have
been completed.
b. SEQUENCING OF ACTIVITIES:
The above activities will occur in an order following the requirement of the project.
This is known as Sequencing of activity.
c. EVENT:
Event defines or shows the start and end of an activity. It does not consume any time
or resource. It is also called as Node. For an activity there is a head event and a tail
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event. All activities commence from a tail event and terminate at the head event.
When two or more activities start from the same event it is called a burst event and
when two or more activities end in the same event it is called a merge event.
d. NUMBERING OF EVENTS (FULKERSON’S RULE):
Events are numbered as 1,2,3,4..... , etc in such a way that the activity always move
from lower number to higher number event. A higher numbered event should be in
the vertical line or to the right of the lower numbered event.
Advanced Strategic
Class
WORK
e. DUPLICATING:
No two activities can have same head event and same tail event. This is called as
Duplicating.
f. DANGLING:
There can be only one start event and one end event of any project. Also all events
except the first and the last must have at least one activity entering and at least one
activity leaving. This is called as Dangling.
g. DUMMY ACTIVITIES:
Dummy activities are hypothetical activities which consume no resource or time. It is

required to complete the logical sequence in a network diagram. A dummy activity
is shown by a dashed arrow.
The errors of Duplicating and Dangling can be solved using dummy activities.
2. PROJECT DURATION CALCULATION AND CRITICAL
PATH METHOD (CPM):
a. DURATION
The time required to complete an activity is known as its duration. The duration of
an activity is written on its arrow sign.
b. PATH OR ROUTE
It is a combination of activities joining start and end point.
c. CRITICAL PATH
The critical path on a network is that sequence of activities which has the longest
duration. There may be more than one critical path in a project, each of which has
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the same longest duration.
d. PROJECT DURATION OR DURATION OF CRITICAL PATH
It is the minimum time required to complete the project. A project would complete
only if all the activities involved in it are complete. The minimum time required to
complete the project is the longest path from the start event to the end event.
Cost Management
Class
WORK
e. FORWARD PASS CALCULATION (LEFT TO RIGHT)
It is represented by letter ‘E’. Considering E = 0 for the initial event, we calculate E for
every event considering the terminating activities. E of an activity is written on its
Tail or Start Event
E of head event = E of tail event + Duration of the activity.
For convergent events, we take the maximum value of E.
E also stands for Earliest Start Time of an activity.
f. BACKWARD PASS CALCULATION (RIGHT TO LEFT)
It is represented by letter ‘L’. Considering L = E for the final event, we calculate L for
every event considering the emanating activities. L of an activity is written on its
Head or End Event
L of tail event = L of head event – Duration of the activity.
For divergent events, we take the minimum value of L.
L also stands for Latest Finish Time of an activity.
Note : For all critical path activities, the value of E and L would be equal.
g. EARLIEST FINISH TIME OF AN ACTIVITY
The time by which an activity can be scheduled to finish, at the earliest.

Earliest Finish time of an activity = Earliest Start time + Duration of activity
h. LATEST START TIME OF AN ACTIVITY
The time by which an activity can be scheduled to finish, at the latest.

Latest Start time of an activity = Latest Finish time – Duration of activity
i. SLACK
It means idle time of an event i.e. the time by which the event can be delayed without
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causing a delay in the project.

Slack of an event = L – E of an event.
Slack of Head Event = L – E of Head Event
Slack of Tail Event = L – E of Tail Event
Advanced Strategic
Class
WORK
j. TOTAL FLOAT, FREE FLOAT, INDEPENDENT FLOAT

(a) Total float: It implies the idle time in a path or in its non – critical activities. For
critical activities there will not be any idle time. In other words, the non – critical
activities in total can be delayed by some time without affecting or increasing
It can be computed in two different ways:
1. Total float = Latest Finish Time – Earliest Finish Time
= Latest Start Time – Earliest Start Time
2. As a time difference between critical and non – critical path.
(b) Free float: The time by which the actual completion of an activity can be
delayed without affecting the total float of succeeding activities.
Free Float = Total Float – Slack of Head Event
(c) Independent Float: The time by which the actual completion of an activity can
be delayed without affecting the total float of preceding activities.
Independent Float = Free float – Slack of Tail Event or 0 whichever is larger.
3. UPDATING A NETWORK
After a project has commenced revisions might have to be made to the project network.
Activity duration might have to be reviewed and revised as sometimes activities might
be completed before schedule or be delayed for various reasons. Periodic update of the
network may be required during the progress of the project.
4. PROJECT CRASHING
If costs are associated with activities it becomes pertinent to investigate the effect of the
increase or decrease in the total duration of a project on the total cost of the project. The
different types of times and costs involved are:
(a) Normal Time: The minimum time required to complete an activity at normal cost.
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(b) Crash Time: The minimum time required to complete an activity.

(c) Normal Cost: The direct cost of completing the activity in normal time.
(d) Crash Cost: The direct cost of completing the activity within the crash time.
(e) Cost Slope: The increase in cost for every unit of time saved by crashing the activity.
Crash Cost − Normal Cost
Cost Slope =
Normal Time − Crash Time
(f) Optimum Duration: The duration of the project corresponding to the optimum
cost.
Cost Management
Class
WORK
(g) Optimum Cost: The minimum possible cost to complete the project.
(h) Total Direct Cost: Total Normal cost + Total Crash cost
(i) Total Project Cost: Total Normal cost + Total Crash cost + Total Indirect cost
PROCESS OF CRASHING
1. Prepare the project network.
2. Find the critical path and the normal duration of the project.
3. Calculate the cost slope for all the activities given in the network.
4. First identify those activities on the critical path which have a cost slope less than
the indirect cost. The overall cost can be reduced only if the cost slope of the crashed
activity is less than the indirect cost.
5. Start by crashing that activity which has the least crashing cost slope and progress
with ones in order of increasing cost slopes (Keeping in mind that an activity can be
crashed only till its crash time).
6. If at any point there happens to be more than one critical path then select different
sets of activities such that crashing all the activities in each set reduces all the critical
paths at the same time.
To make the sets select an activity from each path. If the same activity exists in
any other path, put a dash there. If you cannot put a dash, discard that particular
combination. Crash that set which has the least total crashing cost.
7. Stop crashing if any one of the longest path is exhausted fully i.e. crashed till its crash
time.
8. Prepare a cost table which shows the direct crashing cost, the direct normal cost and
the total indirect cost for all the reduced project durations. The duration which gives
the least cost is the optimum project duration and the corresponding total cost is
the optimum project cost.
9. To find the Optimum cost of the project, stop crashing at the point where total
crashing cost is more than the indirect cost.
10. To find the Minimum Duration of the project, regardless of cost, continue crashing
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even if the crashing cost is more than the indirect cost. However, crashing will stop
the moment any one of the longest path is fully exhausted.
Advanced Strategic
Class
WORK
5. PROJECT EVALUATION AND REVIEW TECHNIQUE

(PERT)
PERT is more relevant for projects where there is a good measure of uncertainty in the
estimation of activity duration. Here, we obtain three estimates of activity duration:
1. The Optimistic Time Estimate: This is the shortest possible time in which an activity
can be completed. It is estimated under the best case situation and is denoted by to
2. The Pessimistic Time Estimate: This is the longest possible time in which an activity
can be completed. It is estimated under the worst case situation and is denoted by
tp
3. The Most Likely Time Estimate: This is the normal time in which an activity can be
completed. It is estimated under the most probable situation and is denoted by tm
From the above three estimates an average or expected time of activity is calculated for
any subsequent analysis.
a. EXPECTED TIME OF ACTIVITY

This is the duration of the activity found by calculating the weighted average of the
three time estimates and is given by:
to + 4tm + t p
Duration of activity = TE =
6
b. EXPECTED PROJECT TIME
This is the longest duration or the critical path duration and is found by adding the
expected times of the critical activities.
c. VARIANCES AND STANDARD DEVIATIONS:
1. Standard Deviation of an activity:

S.D. = (tp - to) / 6
2. Variance of an activity = (S.D.)2
3. Variance of the critical path: This is obtained by adding variances of all the
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activities on the critical path.

4. Standard Deviation of the Critical Path: This is obtained by the formula given
below and not by adding the SD’s of the critical path activities.
S. D. = variance of critical path
5. Variances of events for TE and TL

Sum of the variances along the path of TE and TL . If there are more than one
longest path then select one having a larger sum of variances.
Cost Management
Class
WORK
The Earliest time TE = the duration of the longest path leading to the event
from the start.
The Latest time TL = the duration of the longest path emanating from the
event to the end.
d. TO FIND THE PROBABILITIES OF COMPLETION OF PROJECT IN THE

GIVEN TIME
1. The time of completion of project for which the probability is required is
expressed as P(x)
2. To find the probability for a given value of x, first find z using the following
formula:
X − Tcp
Z =
Scp
Tcp = Expected Project Duration i.e. Duration of the critical path

Scp = Standard Deviation of the Project or Critical path.
3. The required probability of x would be the area under the curve for respective
value of z.
P(X) = A(Z).
e. TO FIND THE TIME OF THE PROJECT COMPLETION WHEN THE

PROBABILITY IS GIVEN
1. Find the value of z against the probability or area from the tables. The area
corresponding to P(X) is always the area to the left of the value Z.
A (Z) : This area is the probability of

Completing the project in given time X.
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2. Calculate the respective x using the following:

x – Tcp
Z=
Scp
Advanced Strategic
Class
WORK
f. CHARACTERISTICS OF STANDARD NORMAL CURVE
1. It is a symmetrical bell shaped curve.

2. The total area under the curve is 1.
3. Because of symmetry, the area to the left and the right of central axis are both
equal and is 0.5
4. The maximum value of Z for which area will be 0.5 on either side of axis can be
3.49
5. The area A(z) would mean area between z=0 and the given value of z.
6. Because of symmetry, A(-z) = A(z)
6. TIME SCALED NETWORK

In the network diagrams which we have considered, it has been stressed that the
length of the individual arrows has no relation to the duration of the activity which
arrow represented. It is of course possible to draw the arrows to a time scale, and this
can be a very useful method of presentation of networks. In such networks, Critical path
is arranged as a straight line with non critical activities above or below it. The dotted
horizontal lines represent floats in the activity and the dotted vertical lines represent
dummy activities.
a. RESOURCE SMOOTHING
It is a network technique used for smoothening peak resource requirement

during different periods of the project network. Under this technique the total
project duration is maintained at the minimum level. For example, if the duration
of a project is 15 days, then the project duration is maintained, but the resources
required for completing different activities of a project are smoothened by utilising
floats available on non critical activities. These non critical activities having floats
are rescheduled or shifted so that a uniform demand on resource is achieved. In
other words, the constraint in the case of resource smoothing operation would be
on the project duration time. Resource smoothing is a useful technique for business
managers to estimate the total resource requirements for various project activities.
G Block
In resource smoothing, the time scaled diagram of various activities and their
floats (if any), along with resource requirements are used. The periods of maximum
demand for resources are identified and non critical activities during these periods
are staggered by rescheduling them according to their floats for balancing the
resource requirements i.e. the activities having floats are shifted in such a way that
the demand for resources is smoothened out.
Cost Management
Class
WORK
b. RESOURCE LEVELLING
It is also a network technique which is used for reducing the requirement of a

particular resource due to its paucity. The process of resource levelling utilizes the
large floats available on non critical activities of the project and thus cuts down the
demand on the resource. In resource levelling, the maximum demand of a resource
should not exceed the available limit at any point of time. In order to achieve this,
non critical activities are rescheduled by utilising their floats. Sometimes, the use of
resource levelling may lead to increase in the completion time of the project.
G Block
Advanced Strategic
Class
WORK
1
Point out the errors in the network given below, going by the usual conventions while drawing
a network.
Space for Solution
2
Draw network diagrams for the following set of activities:
Activity A B C D E
Predecessor - A B B C,D
G Block
Network Diagram Duplicating
Cost Management
Class
WORK
3
Draw network diagram:
Activity A B C D E F G
Predecessor - - A A B B D,E
Network Diagram Dangling
4
Activity A B C D E F
Predecessor - - A,B C C D,E
Network Diagram Multiple Duplicating
5

G Block
Activity A B C D E F G H
Predecessor - - B B B D A,C,E E
Network Diagram Dummy introduces keeping H

in mind
Advanced Strategic
Class
WORK
6
Predecessor - - - A,B A,B C,D,E C,D,E
Network Diagram
7
Predecessor - - A B A,B A,B C
Network Diagram
8

G Block
Predecessor - A A A B,C C,D E,F
Network Diagram
Cost Management
Class
WORK
9
Prepare the network from the following activity data:
Activity A B C D E F G H I J K L M
Preceding - - A B,C D E B,C F F,G H,I B F,G,K J,L
Network Diagram
10
From the following set of activities, draw the project network. Calculate all floats. Find critical
path and calculate the longest duration of the project.
Activity 1-2 1-4 2-3 3-5 3-8 4-8 5-6 5-8 6-7 7-8 7-9 8-9 9-10
Duration (days) 4 36 2 15 10 2 4 9 9 9 8 20 20
Critical Path and Float Analysis
11
The number of days of total float (TF), earliest start times (EST) and duration in days are given
G Block
for some of the following activities:
Activity TF EST Duration

1-2 0 0
1-3 2
1-4 5
2-4 0 4
2-5 3 5
Advanced Strategic
Class
WORK
Activity TF EST Duration

3-6 2 12
4-6 0 12
5-7 3
6-7 23
6-8 2
7-8 0 23
8-9 30 6
(a) Draw the network

(b) List the paths with their corresponding durations and state when the project can be
completed.
Critical Path and Float Analysis Back Calculation
12
The following activities and their duration are given:
Activity 1-2 1-3 1-4 2-5 2-4 3-4 3-6 4-7 5-7 6-7 6-8 7-8
Duration 9 10 6 18 7 5 12 20 8 7 7 6
After 15 days of working the following is observed for the network of an erection job:
(i) Activities 1-2, 1-3, 1-4 and 3-4 were completed as scheduled.
(ii) Activity 2-4 is in progress and will take 3 more days for completion.
(iii) Activity 3-6 is in progress and will take 18 more days for completion.
(iv) Activity 4-7 will be completed 20 days from today.
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(v) Activity 6-7 will take 12 days to complete instead of the scheduled 7 due to some prob-
lem.
(vi) Activity 6-8 will take 5 days to complete instead of the scheduled 7 due to added work-
force.
Update the network in the light of the above information and determine the critical path and
revised project duration.
Cost Management
Class
WORK
Updating the Network Diagram
13
The following data pertains to the network given below. Crash the project to find the optimum
duration and the optimum project cost given that the indirect cost is ` 800 per day.
Activity 1-2 1-3 2-3 2-4 3-4

Normal time (days) 3 7 5 8 4
Crash time (days) 2 4 3 6 2
Cost slope (`/day) 700 200 100 200 400
Crashing the Project
14
The following data pertains to the network given below. The given times are in days and the
costs are in rupees. Crash the project to find the optimum duration and the optimum project
cost if the indirect cost is ` 160 per day.
Normal Crash
Activity Time Cost Time Cost
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1-2 3 360 2 400

2-3 6 1440 4 1620
2-4 9 2160 5 2380
2-5 7 1120 5 1600
3-4 8 400 4 800
4-5 5 1600 3 1770
5-6 3 480 2 760
7560
Advanced Strategic
Class
WORK
15
The following paths are given with their duration:
Paths Duration (in weeks)

1-2-5-8-9 15
1-3-5-8-9 11
1-3-4-7-8-9 15
1-3-4-6-7-8-9 15
(a) Draw a network diagram
(b) Give 3 different ways of reducing the project duration by 4 weeks.
16
A firm has been contracted to deliver extruding presses to a multinational company. The
contract price negotiated is contingent upon meeting a specified delivery time with a bonus
offered for early delivery. The firm has the following cost and time information:
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Time in weeks Cost in `

Activity To Tm Tp Crash Normal Crash
1-2 1 3 5 1 5000 9000
2-3 1 4 7 3 8000 14000
2-4 1 3 5 2 4000 6000
2-5 5 8 11 7 5000 6000
3-6 2 4 6 2 3000 5000
4-6 5 6 7 4 2000 3600
Cost Management
Class
WORK
5-7 4 5 6 4 10000 14000

6-7 1 3 5 1 7000 10600
Total normal cost 44,000
The contract terms provide the following contract amounts:
Delivery time (weeks) 16 15 14 13 12

Contract amount (rupees) 62,000 62,500 65,000 70,000 72,500
On the basis of this data what delivery schedule do you recommend the company to apply?
17
(a) Find the following areas under the standard normal curve:
A(1) A(2) A(1.96) A(0.33)
(b) Find the values of z corresponding to the following areas:
When A(z) = 0.1
When A(z) = 0.4
(c) Find the area under the curve for the following cases:
Between z= 1 and z=2
Between z= -1 and z=2
To the left of z= 0.33
To the right of z = 1.96
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Area under Normal Distribution Curve
Advanced Strategic
Class
WORK
18
A project is composed of activities having the following time duration in weeks:
Activity 1-2 1-3 1-4 2-5 3-5 4-6 5-6

Optimistic time 1 1 2 1 2 2 3
Most Likely time 1 4 2 1 5 5 6
Pessimistic time 7 7 8 1 14 8 15
(i) Draw the project network.

(ii) Find the expected duration and variance for each activity.
(iii) Calculate the standard deviation, the variance and the duration of the critical path.
(iv) What is the probability that the project will be completed:
a. Exactly on due date?
b. At least three weeks before than expected?
c. No more than three weeks later than expected?
(v) If the project due date is 18 weeks find the probability of not meeting the due date?
(vi) What due date has 90% and 40% chance of being met?
(vii) What is the chance of completing the activity 3-5 one week earlier than expected?
(viii) Find the event variances.
PERT Probability Calculation
19
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A project requires the following carpenters. Draw the time scaled network and smoothen the
demand for carpenters.
Activity 0-1 1-2 1-3 1-4 2-8 3-5 3-8 4-6 5-7 6-9 7-8 8-9 9-10
Duration 2 4 4 3 4 7 2 5 2 5 2 3 2
Carpenters - 2 4 - 6 - 4 4 2 2 - - -
Cost Management
Class
WORK
Time Scaled Network Resource Smoothing
20
The following details for a project are given:
Activity 1-2 1-3 1-4 2-6 3-5 5-6 4-6

Days 4 2 8 6 4 1 1
No. of men required per day 2 3 5 3 2 3 8
1. Draw network and find critical path.

2. What is the peak requirement of manpower? On which day it will occur?
3. If maximum labour available on any day is 10, when can the project be completed?
Time Scaled Network Resource Smoothing
G Block
Advanced Strategic
Home
WORK
1
Activity A B C D E F G H
Predecessor - - A A B B C,E D,F
Network Diagram Crossing
2
The activities involved in a computer installation project are given below. Draw the network.
Activity Preceding Activity

A Physical preparation None
B Organisational planning None
C Personnel selection B
D Equipment installation A
E Personnel training C
F Detailed system designing C
G File conversion F
H Establishment of standards F
I Program preparation H
J Program testing I
K Parallel operation D,E,G,J
L Finalising documentation I
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M Follow up K,L
Network Diagram
Cost Management
Home
WORK
3
Draw the network using the information given in the table below. Prepare the time schedule.
Find the critical path and calculate the longest duration of the project.
Activity 1-2 1-3 1-4 2-4 2-5 3-6 4-6 5-7 6-7 6-8 7-8 8-9
Duration (days) 4 12 10 8 6 8 10 10 0 8 10 6
Critical Path and Float Analysis
4
A company had planned its operations as follows:
Activity 1-2 2-4 1-3 3-4 1-4 2-5 4-7 3-6 5-7 6-8 7-8
Duration 7 8 8 6 6 16 19 24 9 7 8
(i) Draw the network and find the critical path.

(ii) After 15 days of working, the following progress is noted:
(a) Activities 1-2, 1-3, and 1-4 completed as per original schedule.
(b) Activity 2-4 is in progress and will be completed in 4 more days.
(c) Activity 3-6 is in progress and will need 17 more days to complete.
(d) The staffs at activity 3-6 are specialised. They are directed to complete 3-6 and
undertake an activity 6-7, which will require 7 days. This rearrangement arose due to
a modification in a specification.
(e) Activity 6-8 will be completed in 4 days instead of the originally planned 7 days.
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(f) There is no change in the other activities.

Update the network diagram after 15 days of start of work based on the assumption given
above. Indicate the revised critical paths along with their duration.
Updating the Network Diagram
Advanced Strategic
Home
WORK
5
Crash until you can
Normal Time
Activity Crash Time (days) Crash Cost (`) Normal Cost (`)
(days)
1-2 3 1 19000 15000
2-3 4 3 24000 18000
2-4 3 2 16000 14000
2-5 8 7 16000 15000
3-6 4 2 15000 13000
4-6 6 4 13000 12000
5-7 5 4 24000 20000
6-7 3 1 20600 17000
124000
6
For a network shown in figure, normal time, crash time and normal costs are given in the
table; construct the network by crashing it to optimum value and calculate the critical path,
project duration, activities with least cost slope and optimum project cost. Indirect cost is
given as ` 95 per day.
3
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6(4) 4(3)
3(2) 7(5)
1 2 4 5(4)
8(6)
5
Cost Management
Home
WORK
Table : Activity Relationship
Normal Crash
Activity
Time (Days) Cost (`) Time (Days) Cost (`)
1-2 3 300 2 400
2-3 6 480 4 520
2-4 7 2100 5 2500
2-5 8 400 6 600
3-4 4 320 3 360
4-5 5 500 4 520
7
The following table relates to a network:
Activity Normal Time (Days) Crash Time (Days) Normal Cost (Rs.) Crash Cost (Rs.)
1–2 5 4 30,000 40,000
2–3 6 4 48,000 70,000
2–4 8 7 1,25,000 1,50,000
2–5 9 6 75,000 1,20,000
3–4 5 4 82,000 1,00,000
4–5 7 5 50,000 84,000
The overhead cost per day is Rs. 5,000 and the contract includes a penalty clause of Rs. 15,000
per day if the project is not completed in 20 days.
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Required
(i) Draw the network and calculate the normal duration and its cost.
(ii) Find out:
(1) the lowest cost and the associated time.
(2) the lowest time and the associated cost.
Advanced Strategic
Home
WORK
The following is given in respect of a project:
Activity 1-2 1-3 1-4 2-6 3-4 3-5 3-7 4-6 5-6 5-7 6-8 7-8
Optimistic time 10 8 12 4 0 12 6 9 4 0 5 9
Most likely time 13 11 15 7 0 18 12 12 6 0 8 12
Pessimistic time 22 20 18 16 0 36 18 27 8 0 11 33
Find the following:

(a) The expected completion time of each activity.
(b) The earliest expected completion time, the latest expected completion time and float of
each activity.
(c) The critical path and the total project completion time.
(d) The standard deviation of the expected completion time for the critical activities only.
(e) The probability that the project will be completed in 41 weeks and 47 weeks.
PERT
G Block
Cost Management
Simulation
Class
WORK
Chapter 5
Simulation
1. BASICS
a. What is Simulation
b. Uses of Simulation Excercise
2. MONTE CARLO SIMULATION
a. Solution Steps with Reasoning
3. DIFFERENT VARIETIES
4. PROJECT CRASHING
a. Stock Simulation
joylawrenciandas50@gmail.com,8420517209 b. Service Line Simulation
c. Assembly Line Simulation
d. Demand and Supply Simulation
G Block
Advanced Strategic
Simulation
Class
WORK
1. DEFINITION OF SIMULATION
Simulation is a quantitative procedure which describes a process by developing a model
of that process and then conducting a series of organised trial and error experiments to
predict the behaviour of the process over time.
2. MONTE CARLO SIMULATION

It is the earliest method and uses random numbers to solve problems that depend on
probability. In situations where physical experimentation is not practicable and creation
of mathematical model is impossible, the Monte Carlo method is employed.
Step 1: Find cumulative frequencies or probabilities of the required variable and find
the random number intervals.
Step 2: Using random numbers select the specified number of variables.
Step 3: Taking these variables as the basis of calculation, determine the required data.
G Block
Cost Management
Simulation
Class
WORK
1
A bakery keeps stock of its popular brand of cakes. Daily demand based on past experience
is shown below. Using the random number sequence 48, 78, 19, 51, 56, 77, 15, 14, 68, 09
simulate the demand for the next 10 days and find the stock situation given that the bakery
decides to make 35 cakes a day and the stock is carried over to the next day. Find the average
daily demand on the basis of simulated data.
Daily demand 0 15 25 35 45 50
Probability 0.01 0.15 0.20 0.50 0.12 0.02
Stock Simulation
2
A company manufactures around 200 mopeds per day. Depending upon the availability of
raw materials and other conditions the daily production has been varying from 196 mopeds
to 204 mopeds and the probability distribution is given below:
Production per day 196 197 198 199 200 201 202 203 204
Probability 0.05 0.09 0.12 0.14 0.20 0.15 0.11 0.08 0.06
The finished mopeds are transported in a specially designed lorry that can accommodate 200
mopeds. Using the random numbers 82, 89, 78, 24, 53, 61, 18, 45, 04, 23, 50, 77, 27, 54, 10,
simulate the production pattern for 15 days and find:
(i) The average number of mopeds waiting in the factory.
(ii) The average number of empty spaces on the lorry.
G Block
Stock Simulation
Advanced Strategic
Simulation
Class
WORK
3
A car rental agency has collected the following data on the demand for five seater vehicles
over the past 50 days.
Daily demand 4 5 6 7 8
No. of days 4 10 16 14 6
The agency has only 6 cars currently.

(i) Use the following 5 random numbers to generate 5 days of demand for the rental agen-
cy. Random Nos: 15, 48, 71, 56, 90
(ii) What is the average number of cars rented per day for the 5 days?
(iii) How many rentals will be lost over the 5 days?
Demand and Supply Simulation

4
A dentist schedules all her patients for 30 minute appointments. The following table shows
the various types of dental jobs and the service time required for each type:
Category Filling Crowning Cleaning Extracting Checking

Time required (min) 45 60 15 45 15
Probability 0.40 0.15 0.15 0.10 0.20
Random numbers are given as 40, 82, 11, 34, 25, 66, 17, and 79. Simulate the dentist’s clinic for
four hours and determine the average waiting time for the patients. Assume that the patients
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arrive at the clinic exactly at their appointed times starting from 8.00 am.
Also represent the simulated data in a Time – Scale Diagram.
Service Line Simulation Time Scaled Diagram
Cost Management
Simulation
Class
WORK
5
With a view to improve the quality of customer services, a Bank is interested in making an
assessment of the waiting time of its customers coming to one of its branches located in a
residential area. This branch has only one teller’s counter.
The arrival rate of customers and the service rate of the teller are given below:
Time between 2 consecutive arrivals of customers 3 4 5 6 7

(minutes)
Probability 0.17 0.25 0.25 0.20 0.13
Service time by the teller (minutes) 3 4 5 6 7

Probability 0.10 0.30 0.40 0.15 0.05
You are required to simulate 10 arrivals of customers in the system starting from 11 am and
show the waiting time of the customers and idle time of the teller. Use the following sets
of random numbers for the 10 trials: (11,56), (23,79), (94,83), (83,02), (97,99), (83,10), (93,34),
(33,53), (49,94) and (37,97).
Service Line Simulation
6
At a small store of readymade garments, there is one clerk at the counter who is to check bills,
receive payments and place the packed garments into fancy bags. The arrival of customer at
the store is random and service time varies from one minute to six minutes, the frequency
distribution for which is given below:
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Time between arrivals

Frequency Service time (minutes) Frequency
(minutes)
1 5 1 1
2 20 2 2
3 35 3 4
4 25 4 2
5 10 5 1
6 5 6 0
Advanced Strategic
Simulation
Class
WORK
The store starts work at 11 a.m. and closes at 12 noon for lunch and the customers are served
on the “first came first served basis”.
Using Monte Carlo simulation technique, find average length of waiting line, average waiting
time, average service time and total time spent by a customer in system.
You are given the following set of random numbers, first twenty for arrivals and last twenty
for service:
64 04 02 70 03 60 16 18 36 38
07 08 59 53 01 62 36 27 97 86
30 75 38 24 57 09 12 18 65 25
11 79 61 77 10 16 55 52 59 63
Service Line Simulation Length of Line
7
Ramu and Raju are workers on a two station assembly line. The distribution of activity times
at their stations are:
Time in seconds 10 20 30 40 50 60 70 80
Time frequency for Ramu 4 6 10 20 40 11 5 4
Time frequency for Raju 4 5 6 7 10 8 6 4
Simulate the operation of the line for 8 given times. Assuming that Raju must wait until Ramu
completes the first item before starting work, will he have to wait to process any of the other
eight items? Explain your answer, based upon your simulation. Use the random numbers
given below:
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Random Nos. for Ramu 14 01 95 44 61 82 00 03

Random Nos. for Raju 36 76 55 25 97 41 13 34
Production Line Simulation
Cost Management
Simulation
Class
WORK
8
A publishing house has brought out a new monthly magazine, which sells at ` 37.50 per copy.
The cost of purchasing it is ` 30 per copy. A newsstand estimates the sales pattern of the
magazine as follows:
Demand 0 – 300 300 – 600 600 – 900 900 – 1200 1200 – 1500 1500 – 1800
Probability 0.18 0.32 0.25 0.15 0.06 0.04
The newsstand has contracted for 750 copies of the magazine per month from the publisher.
Unsold copies are returnable to the publisher who will take them back at cost less ` 4 per copy
for handling charges.
The newsstand manager wants to simulate the demand and profitability using the following
random numbers for simulation – 27, 15, 56, 17, 98, 71, 51, 32, 62, 83, 96, 69.
Required:
(a) Allocate random numbers to the demand pattern forecast by the newsstand.
(b) Simulate twelve months sales and calculate the monthly and annual profit or loss.
(c) Calculate the loss on lost sales.
9
The output of a production line is checked by an inspector for one or more of three different
types of defects called defect A, B and C. If defect A occurs, the item is scrapped. If defect B or
C occurs, the item must be reworked. The time required to rework a B defect is 15 minutes and
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the time required to rework a C defect is 30 minutes. The probabilities of an A, B and C defects
are 0.15, 0.20 and 0.10 respectively. For ten items coming off the assembly line, determine the
number of items without any defects, the number scrapped and the total minutes of rework
time.
Use the following random numbers:
Random Nos for defect A 48 55 91 40 93 01 83 63 47 52

Random Nos for defect B 47 36 57 04 79 55 10 13 57 09
Random Nos for defect C 82 95 18 96 20 84 56 11 52 03
Advanced Strategic
Simulation
Class
WORK
Production Line Simulation
10
A company trading in motor vehicle spares wishes to determine the levels of stock it should
carry for the items in its range. Demand is not certain and there is a lead – time for stock
replenishment. For an item the following information is obtained:
Demand (units per day) 3 4 5 6 7

Probability 0.1 0.2 0.3 0.3 0.1
(a) You are required to carry out a simulation run, over a period of ten days observing the
following: stock on hand at the beginning of the simulation exercise was 20 units. Place
an order for 15 units when present inventory plus any outstanding order falls below 15
units given that the lead – time for replenishment is 3 days (i.e. an order placed on day 1
will be available for the opening stock on day 5). The sequence of random numbers to be
used is:
Random Nos. 0 9 1 1 5 1 8 6 3 5
(b) Find the total cost of maintaining this inventory for ten days given:
Holding cost (per unit per day) = ` 0.20 and ordering costs (per order) = ` 5.00
Stock Simulation Inventory Maintenance Cost

G Block
11
Great book stores, a leading bookstore wishes to carry a book named ‘Cost management’
in stock. Demand is probabilistic and replenishment of stock takes 2 days (e.g. if an order is
placed on April 1, it will be delivered on April 3). The probabilities of demand are given:
Daily demand 0 1 2 3 4
Probability 0.05 0.10 0.30 0.45 0.10
Cost Management
Simulation
Class
WORK
Each time an order is placed, the store incurs an ordering cost of ` 10 per order. A carrying
cost of ` 0.50 per book per day is also incurred by the store. The inventory carrying cost is
calculated on the basis of stock at the end of each day.
The manager of the bookstore wishes to compare two options for inventory decisions –
Option 1: Order 5 books, when the inventory at the beginning of the day plus orders
outstanding is less than 8 books.
Option 2: Order 8 books, when the inventory at the beginning of the day plus orders
outstanding is less than 8 books.
Currently (beginning of the 1st day) the store has stock of 8 books plus 6 books ordered 2
days ago are expected to arrive the next day. Using Monte Carlo Simulation for 10 cycles,
recommend which option the manager should choose?
The following random numbers may be used – 89, 34, 78, 63, 61, 81, 39, 16, 13, 73. Assume
that the demand on any day can be met out of opening stock and quantities received during
the day.
Stock Simulation Inventory Maintenance Cost
12
A cake vendor buys pieces of cake every morning at `4.50 each by placing his order one day in
advance and sale them at `7.00each. Unsold cake can be sold next day at ` 2.00 per piece and
there after it should be treated as no value. The pattern for demand of cake is given below:
Fresh Cake:
Daily Sale 100 101 102 103 104 105 106 107 108 109 110
Probability .01 .03 .04 .07 .09 .11 .15 .21 .18 .09 .02
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One day old cake:
Daily Sale 0 1 2 3
Probability .70 .20 .08 .02
Use the following set of random numbers:
Fresh Cake 37 73 14 17 24 35 29 37 33 68
One day old cake 17 28 69 38 50 57 82 44 89 60
Advanced Strategic
Simulation
Class
WORK
The vendor adopts the following rule.

If there is no stock of cake with him at the end of previous day, he orders for 110 pieces
otherwise he orders 100 or 105 pieces whichever is nearest actual fresh cake sale on the
previous day. Starting with zero stock and a pending order of 105 pieces, simulate for 10 days
and calculate vendor’s profit.
Stock Simulation
13
A bakery bakes 100 cakes per day. The sale of cakes depends upon demand which has the
following distribution:
Sale of Cakes (Nos.) Probability
97 0.10
98 0.15
99 0.20
100 0.35
102 0.15
103 0.05
There is no carryover of inventory.

The following details are given:
`
Variable Production cost per cake 14
Selling price per cake 18
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Penalty attracted per unsold cake 3

Penalty attracted per unit of demand not met 1
Random Numbers to be used:

9, 98, 64, 98, 94, 01, 78, 10, 15, 19
(i) Estimate the profit/loss for the next ten days using the above random numbers and as-
suming 100 cakes are produced per day.
(ii) If the bakery decides to produce 97 cakes per day, will the profits as per (i) above increase
or decrease? Why?
Cost Management
Simulation
Class
WORK
Stock Simulation
14
The occurrence of rain in a city on a day is dependent upon whether or not it rained on the
previous day. If it rained on the previous day, then the rain distribution is given by:
Event No rain 1 cm rain 2 cm rain 3 cm rain 4 cm rain 5 cm rain

Probability 0.50 0.25 0.15 0.05 0.03 0.02
If it did not rain the previous day, then the rain distribution is given by:
Event No rain 1 cm rain 2 cm rain 3 cm rain

Probability 0.75 0.15 0.06 0.04
Simulate the city’s weather for 10 days and determine by simulation the total days without
rain as well as the total rainfall during the period. Use the following random numbers:
Random nos. 64 63 39 55 29 78 70 06 78 76
Assuming that for the first day of the simulation it had not rained the day before.
Weather Simulation
G Block
Advanced Strategic
Simulation
Home
WORK
1
A production line turns out about 50 trucks per day but for various reasons, this may fluctuate.
The production can be described by a probability distribution as follows:
Production/day 45 46 47 48 49 50 51 52 53 54 55
Probability 0.03 0.05 0.07 0.10 0.15 0.20 0.15 0.10 0.07 0.05 0.03
Finished trucks are transported by train at the end of the day. The capacity of the train is only
51 trucks. With the random numbers given below devise a simulation model for eight days.
Assuming that the trucks that are not shipped on a particular day will be shipped on the next
day, find the number of trucks waiting to be shipped and the number of empty spaces on the
trains.
Random nos. 37 35 63 25 50 71 95 16
Stock Simulation
2
A flight is scheduled to leave Mumbai for Goa at 9.00 am. Experience of the past gives the
pattern of delay as:
Delay in minutes 0 5 10 15 20 25 30
Probability of flight being delayed 0.4 0.25 0.15 0.1 0.05 0.03 0.02
Flight time between Mumbai and Goa varies as follows:

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Flight time in minutes 57 58 59 60 61 62 63

Probability of flight 0.1 0.2 0.3 0.3 0.05 0.03 0.02
Using simulation find the percentage of flights that will arrive in Goa at or later than 10.10 am.
Random numbers for delay time 20 74 94 22 93 45 44 16 04 32

Random numbers for flight time 03 62 61 89 01 27 49 50 90 98
Cost Management
Simulation
Home
WORK
Weather Simulation
3
A retailer deals in a perishable commodity. The data for the past 500 days show the following
Supply (kgs) 10 20 30 40 50
No. of days 40 50 190 150 70
Demand (kgs) 10 20 30 40 50
No. of days 50 110 200 100 40
The retailer buys the commodity at ` 20 per kg and sells it at ` 30 per kg. Any commodity
remaining at the end of the day has no saleable value. The loss (unearned profit) on any
unsatisfied demand is ` 8 per kg. Given the following pairs of random numbers simulate 6
days sales, demand and profit – (supply, demand) – (31,18), (63,84), (15,79), (07,32), (43,75),
(81,27).
4
The director of finance for a farm co – operative is concerned about the yields per acre from
this year’s crop. The probability distribution of the yields for the current weather conditions
is given below:
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Yield in kg per acre 120 140 160 180

Probability 0.18 0.26 0.44 0.12
She would like to see a simulation of yields she might expect over the next 10 years for
weather conditions similar to those she is now experiencing.
(a) Simulate the average yield she might expect per acre using the following random num-
bers:
Random nos. 20 72 34 54 30 22 48 74 76 02
Advanced Strategic
Simulation
Home
WORK
(b) She is also interested in the effect of market price fluctuations on the co – operative
farm’s revenue. She makes this estimate of per kg prices for the corn.
Price per kg (`) 2.00 2.10 2.20 2.30 2.40 2.50
Probability 0.05 0.15 0.30 0.25 0.15 0.10
Simulate the price she might expect to observe over the next 10 years using the random
numbers:
Random nos. 82 95 18 96 20 84 56 11 52 03
(c) Assuming that the prices are independent of the yields, combine the two simulations
and find the average revenue per acre that she might expect every year.
5
The management of ABC company is considering the question of marketing a new product.
The fixed cost required in the project is ` 4,000. Three factors are uncertain viz., the selling
price, the variable cost and the annual sales volume. The product has a life of only one year.
The management has he data on these three factors as under:
Selling price (`) Probability Variable cost (`) Probability Sales Volume (units) Probability
3 0.2 1 0.3 2,000 0.3
4 0.5 2 0.6 3,000 0.3
5 0.3 3 0.1 5,000 0.4
Consider the following ten columns of random numbers and simulate the average profit for
the above project:
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Selling Price 81 04 67 10 39 59 12 31 82 11
Variable Cost 32 46 25 40 68 66 64 86 89 98
Sales Volume 60 31 24 02 08 90 79 68 25 16
Profit Simulation
Cost Management
Simulation
Home
WORK
6
The frequency distribution of contribution per unit, annual demand and investment
requirement of a manufacturing company were found as below:
Contribution per unit (`) 3 5 7 9 10

Relative frequency 0.1 0.2 0.4 0.2 0.1
Annual demand (in ‘000 units) 20 25 30 35 40 45 50

Relative frequency 0.05 0.10 0.20 0.30 0.20 0.10 0.05
Required investment (` ‘000) 1750 2000 2500

Probability 0.25 0.50 0.25
Consider the random numbers 93, 03, 51, 59, 77, 61, 71, 62, 99, 15 for simulating 10 runs, to
estimate the percentage of Return on Investment (ROI = Cash inflow / investmentx 100) for
each run. Find the average ROI.
Return on Investment Simulation
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Advanced Strategic
Basic Cost Concepts
Chapter 1|
Basic Cost Concepts
1 Distinguish between “Marginal cost” and ‘Differential Cost”.

[May 1999]
Answer
Marginal cost represents the increase or decrease in total cost which occurs with a small
change in output say, a unit of output. In Cost Accounting variable costs represent
marginal cost.
Differential cost is the change (increase or decrease) in the total cost (variable as well as
fixed) due to change in the level of activity, technology or production process or method
of production.
The main point which distinguishes marginal cost and differential is that in the case of
differential cost variable as well as fixed cost. i.e. both costs change due to change in
the level of activity, whereas under marginal costing only variable cost changes due to
change in the level of activity.
2 Write short notes on Period Costs and Product Costs. Why should product cost be computed?
[May 1999]
Answer
Period Costs are costs which are not assigned to the products but are charged against
the revenue of the period in which they are incurred. Under absorption costing, Non-
manufacturing costs like Selling and Distribution costs are recognized as period costs.
These costs are not included in inventory valuation.
Product costs are costs which are assigned to the product and are included in inventory
valuation. These are also called as Inventoriable costs. Under absorption costing, all
manufacturing costs are recognized as product costs.
The purpose of computing product costs are as under:
(a) Preparation of financial statements with focus on inventory valuation.
(b) Pricing of product
(c) Cost plus contracts with government agencies where the focus is on reimbursement
of costs specifically assigned to the particular job or contract.
H Block

Cost Management
Basic Cost Concepts
3 Explain the concept of discretionary costs. Give three examples.

[Nov 1999]
Answer
Discretionary costs can be explained with the help of following two important
features:—
(i) They arise from periodic (usually yearly) decisions regarding the maximum outlay to
be incurred.
(ii) They are not tied to a clear cause and effect relationship between inputs and outputs.
Examples of discretionary costs includes: advertising, public relations, executive

training, teaching, research, health care and management consulting services. The note
worthy feature of discretionary costs is that mangers are seldom confident that the
“correct” amounts are being spent.
4 Discuss, how control may be exercised over discretionary costs.

[Nov 1999]
Answer
To control discretionary costs control points/parameters may be established. But these
points need to be devised individually. For research and development function to
control discretionary costs, dates may be established for submitting major reports to
management. For advertising and sales promotion, such costs may be controlled by pre-
setting targets. In the case of employees benefits, discretionary costs may be controlled
by calling a meeting of employees union and making them aware that the company
would meet only the fixed costs and the variable costs should be met by them.
5 Distinguish between Committed and Discretionary Fixed Costs.

[May 1996, May 1999]
Answer
Committed Fixed Costs Discretionary Fixed Costs
These are costs that arise from the These are incurred as a result of manage-
possession of plant, building, equipment ment’s discretion and is not tied to a clear
(e.g. depreciation, rent, insurance, etc) or cause and effect relationship between
a basic organization (e.g. salaries of staff ) inputs and outputs.
These are unavoidable in nature. These are avoidable in nature.
It remains fixed from year to year. It changes from year to year without dis-
turbing the long term objectives.
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Advanced Strategic
Basic Cost Concepts
6 What do you understand by opportunity cost? Comment on the use of opportunity cost for
the purpose of:—
(i) decision-making and
(ii) cost control
[May 2001]
Answer
Opportunity cost is the value of benefit sacrificed in favour of an alternative course of
action. In other words, it is the revenue foregone by not making the best alternative use.
These are also called as Imputed or Hypothetical or Implicit Costs.
These costs are never incorporated into formal accounting systems because they do not
incorporate cash receipts or cash outflows.
They are very relevant while examining alternative proposals or objects. For instance,
when deciding whether or not to allocate to a project it is highly desirable to consider if
the money could produce a better or worse return if invested elsewhere.
If there are more than one alternative then opportunity cost is the maximum of benefits
foregone.
(i) Decision making – Opportunity costs apply to the use of scarce resources, where
resources are not secure, there is no sacrifice from the use of these resources. Where
a course of action requires the use of scarce resources, it is necessary to incorporate
the lost profit which will be foregone from using scarce resources.
If resources have no alternative use only the additional cash flow resulting from the
course of action should be included in decision making as relevant cost.
(ii) Cost control – The conventional variance analysis will report an adverse usage
variance and adverse sales volume variance. However, the failure to achieve the
budgeted optimum level of output may be due to inefficient usage of scarce
resources. The foregone contribution should therefore be charged to the manger
responsible for controlling the usage of scarce resources and not to the sales
manager because the failure to achieve the budgeted sales is due to the failure to
use scarce resources efficiently.
Thus if resources are scarce, the usage variance should reflect the acquisition cost
plus budgeted contribution per unit of the scarce resources. If the lost sales is made
good in subsequent periods, the real opportunity cost will consists of lost interest
arising from delay in receiving the net cash-flows and not the foregone contribution.
7 State three applications of direct costing.

[May 2001]
Answer
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Three applications of direct costing are as follows:

(a) Stock valuation

Cost Management
Basic Cost Concepts
(b) Minimum quantity to be produced to recover pattern or mould cost,

(c) Close down decisions – like closing down of a department or shop.
8 How has the composition of manufacturing costs changed during recent years? How has
this change affected the design of cost accounting systems?
Answer
Traditionally, manufacturing companies classified the manufacturing costs to be allocated
to the products into (a) direct materials. (b) direct labour and (c) indirect manufacturing
costs. In the present day context, characterised by intensive global competition, large
scale automation of manufacturing process, computerization and product diversification
to cater to the changing consumer tastes and preferences has forced companies to refine
their costing systems to provide better measurement of the overhead costs used by
different cost objects.
Accordingly, manufacturing costs are classified in to three broad categories as under:—
(i) Direct cost – As many total costs relating to cost objects as feasible are classified
into direct cost. The objective is to trace as many costs as possible in to direct
and to reduce the amount of costs classified into indirect because the greater the
proportion of direct costs the greater the accuracy of the cost system.
(ii) Indirect cost pools – Increase the number of indirect cost pools so that each of
these pools is more homogeneous. In a homogeneous cost pool, all the costs will
have the same cause-and-effect relationship with the cost allocation base.
(iii) Use cost-and-effect criterion for identifying the cost allocation base for each
indirect cost pool – The change in the classification of manufacturing costs as above
has lead to the development of Activity Based Costing (ABC). Activity Based Costing
refines a costing system by focusing on individual activities as the fundamental
cost objects. An activity is an event, task or unit of work with a specified purpose
as for example, designing, set up, etc. ABC system calculates the costs of individual
activities and assigns costs to cost objects such as products or services on the basis
of the activities consumed to produce the product or provide the service.
9 Cost may be classified in a variety of ways according to their nature and the information
needs of the management. – Explain
[Nov 1996, Nov 1997, RTP, May 1997]
Answer
The classification of cost is as under:
i. By Element: Material, Labour and Overhead.
ii. By Cost Centre: Direct and Indirect.
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iii. By Behaviour: Fixed, Variable and Semi Variable.

iv. By Function: Production, Administration, Research and Development, Selling and
Distribution.
Advanced Strategic
Basic Cost Concepts
v. By Controllability: Controllable and Non Controllable.

vi. By Normality: Normal and Abnormal.
10 Distinguish between cost reduction and cost control.

[RTP, Nov 2001]
Answer
Particulars Cost Reduction Cost Control
1. Permanence Permanent, Real and genuine Could be a temporary saving
savings in cost also
2. Nature of Saving Saving in Cost per unit Saving either in Total Cost or
Cost per unit
3. Nature of process If presumes the existence of It does not focus on costs
concerned potential savings in independent of revenue nor
norms or standards and there- considers product attributes as
fore it is a corrective process. given. It is a wholistic control
process.
4. Performance It is not concerned with main- The process involves setting
Evaluation tenance of performance ac- up a target, investigating
cording to standards. variances and taking remedial
measures to correct them.
5. Nature of Continuous process of critical Control is achieved through
standards examination, includes analysis compliance with standards.
and challenge of standards. Standards by themselves are
not examined.
6. Dynamism Fully dynamic approach. Lacks dynamism when com-
pared to cost reduction.
7. Coverage Universally applicable to all Limited applicability to those
areas of business. Does not de- items of cost for which stand-
pend upon standards, though ards can be set.
target amounts may be set.
8. Nature of Costs Emphasis here is partly on Emphasis on present and past
present costs and largely on behaviour of costs.
future costs.
9. Analysis To find out substitute ways and Competitive analysis of actual
new means. results with established norms.
10. Nature of Function Corrective Action-operates Preventive Function – Costs
even when efficient cost are optimized before they are
control systems exist. There incurred.
is room for reduction in the
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achieved costs.

Cost Management
Basic Cost Concepts
Particulars Cost Reduction Cost Control

11. Tools and Value Engineering. Work Study, Budgetary Control and Stand-
Techniques Standardisation and Simplifica- ard Costing.
tion, Variety Reduction.
Quality Measurement and Re-
search, Operations Research,
Market Research, Job Evalua-
tion and Merit Rating Improve-
ment in Design,
Mechanisation and Automa-
tion.
11 Distinguish between cost reduction and cost management.

[May 2002]
Answer
Particulars Cost Reduction Cost Management
Meaning It is the permanent reduction in It is a system that establishes link-
the unit cost of goods or services ages between costs and revenues
without affecting their quality or and relates them with the product
suitability for their intended use. to maximize Firm’s profits.
Objective Critical examination of each aspect Optimal utilization of resources to
of business and their analysis and enhance the operating income of
review to improve the efficiency the business entity.
and effectiveness so as to reduce
costs through techniques of value
Analysis. Work study, standardisa-
tion etc.
Nature of It presumes the existence of con- It does not focus on costs inde-
process cealed potential savings in norms pendent of revenue nor considers
or standards and therefore it is a product attributes as given. It is a
corrective process. wholisti control process.
12 State various approaches for cost reduction.

Answer
The possibilities of reducing the cost of a product in the applications of cost reduction
methods. The lines of approach in laying out a cost reduction plan are suggested below:
(a) Product Design:- Cost reduction starts with the design of the product. Product
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design being first step in manufacturing of a product, the impact of any economy or
cost reduction effected their stage will be felt through out the manufacturing life of
the product. Design is therefore the most important field where cost reduction may
be attempted.
Advanced Strategic
Basic Cost Concepts
Efficient designing for a new product or improving the design for an existing product,
reduces cost in the following manner:-
(i) Material Cost :- Cheaper substitute, higher yield and less quantity and varieties
of materials, cause reduction in cost.
(ii) Labour Cost :- Reduced time of operation and increased productivity reduce
cost.
(iii) Cost of jigs, tools and fixtures are to minimized.
(iv) Standardisation and simplification in variety increases productivity and reduces
costs.
(b) Organisation :- It is not possible to measure the extent of cost reduction resulting
from an improvement in organisation nevertheless, economies are bound to be
achieved if the following considerations are looked into :-
(i) Definition of each function and responsibility.
(ii) Proper assignment of task and delegation of responsibility to avoid overlapping
(iii) A suitable channel of communication between various management level.
(iv) Co-operation and closed relationship between the various executives.
(v) Removal of doubts and fiction.
(vi) Encouragement to employees for cost reduction suggestion.
(c) Factory Lay Out Equipment :-
A cost reduction programme should study the factory layout and the utilization of
the existing equipment to determine whether there is any scope of cost reduction
by elimination of wastage of men, materials and maximum utilization of the facilities
available.
The necessity for replacement of Plants, introduction of new techniques or expansion
of facilities should be considered and various alternative explored with a view to
reducing costs.
(d) Production Plan Programme and Method:-
Production control ensures proper planning of work by installing and efficient
procedure and programme ordering correct machine and proper utilization of
materials, manpower and resources so that there is no waste of time and money due
to wait for components, men, material etc. An efficient cost reduction programme
should examine the following points relating to production control.
(i) Whether wastage of manpower and material is kept to the minimum
(ii) Whether there is any scope for reducing idle capacity.
(iii) Whether the procedures for the control of stores and maintenance services are
efficient.
(iv) Whether labour wastage may be reduced and productivity increased by
eliminating faulty production method, plant layout and designs or introducing
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incentive schemes.
(v) Whether there is scope for reduction of over head, whether a budgetary control
system is in operation to ensure the control over overhead costs.

Cost Management
Basic Cost Concepts
13 A large company makes a variety of tools for use in the course of manufacture of its products
and also repairs them during the course of manufacture of its products. Discuss the treatment
of costs of tools in pricing of the company’s products and outline the procedure to control
such costs.
[RTP]
Answer
The accounting treatment of various type of tools are:
(i) Special Purpose tools – the entire cost including its repair cost is charged to the job
for which it is made.
(ii) Tools for Standard Production – The life of such tools are determined in terms of
hours or units of output and charged to jobs accordingly.
The repair cost of such tools shall be charged on the same basis.
Procedure to Control Costs:
(i) A plan should be devised for classification of all tools.
(ii) The location of each tool or set of tools may be determined so that their movement
can be tracked and also the inventory thereof can be taken at periodical intervals.
(iii) Maintain proper documentation of issue of tools to any department or a job.
(iv) Analysis of hours for which tools have been used during a period should be made at
regular intervals.
(v) Depreciation of tools should be computed and charged to the jobs on an equitable
basis.
14 What is a Responsibility Center? What are its types?

[RTP, Nov 1994, May 1998]
Answer
It is an activity centre of a business organization entrusted with a special task. It is a
unit of function of a business organization headed by an executive responsible for its
performance.
Types of Responsibility Centers:
(1) Cost Centre – A Centre for which a standard amount of cost is predetermined and
used for control whose primary responsibility is cost reduction and cost control.
(2) Revenue Centre – A centre devoted to raising revenue only whose duty is to look
after the task of generating sales revenue.
(3) Profit Centre – A centre whose performance is measured in terms of income earned
and cost incurred i.e. profit earning.
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(4) Investment Centre – A centre responsible for earning profits and also for asset
utilization.
Advanced Strategic
Activity Based Costing
Chapter 2|
1 What is activity based costing?

[May 2000]
Answer
It focuses on activities as the fundamental cost objects and uses the costs of these
activities as building blocks for compiling the costs of other objects.
According to CIMA, it is defined as “Cost attribution to cost units on the basis of benefits
received from indirect activities i.e. ordering, setting-up, assuring quality etc”. Under
activity based costing costs are accumulated for each activity as a separate cost object.
The collected costs are applied to products based on the benefits received from various
activities. The final product costs are built up from the costs of the specific activities
undergone. In the first stage the activity driven overhead cost is charged to activity based
cost pools and in the second stage cost driver based rates are derived to charge cost to
product lines. The cost driver based rates are based on activities.
Activities based costing can be used for:
(a) Pricing of products;
(b) Design and development of new products.
2 What are the benefits and weakness of ABC?

Answer
ABC is more expensive than the traditional system. So a cost-benefit analysis is desirable.
Benefits:
a. In ABC managers focus attention on activities rather than products because activities
in various departments may be combined and costs of similar activities ascertained
e.g. quality control, handling of materials, repairs to machines, etc.
b. Because costs are identified with activities and then allocated to products or services,
based on appropriate cost drivers, more accurate product/service costs result.
c. Managers manage activities and not products. Change in activities lead to changes
in costs. Therefore, if the activities are managed well, costs will fall and resulting
products will be more competitive.
d. To manage activities better and to make wiser economic decisions, managers need
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to identify the relationships of causes (activities) and effects (costs) in a more detailed
and accurate manner. ABC focuses on this aspect.

Cost Management
e. ABC highlights problem areas that deserve management’s attention and more
detailed analysis. The ABC systems are useful in setting priorities for managerial
attention and action.
Limitations:
a. ABC fails to encourage managers to think about changing work processes to make
business more competitive.
b. ABC does not conform to generally accepted accounting principles in some areas.
c. Using ABC for short-run decisions may sometimes prove costly in the long run.
d. ABC does not encourage the identification and removal of constraints creating
delays and excesses.
e. Accounting under ABC system is not possible as activity wise ledgers are not
recognized.
3 How activity based cost system can be installed and operated?

Answer
The motives for pursuing an ABC implementation, or at least if investigating its feasibility,
must be established at the outset. Most commonly these will be:
1. To improve product costing where a belief exists that existing methods undercost
some products and overcost others; or
2. To identify non-value-adding activities in the production process which might be a
suitable focus for attention or elimination.
In practice, the former is the most quoted goal, even though the latter may be more
appropriate. This is especially so for firms which are highly labour intensive and which do
not have a great diversity of products in their range, and where allocation of overhead
based on direct labour hours may already function efficiently.
Direct costs, like materials and direct labour, are easily assigned directly to products.
Some indirect costs, particularly those selling costs which are product specific (e.g.,
advertising), may be directly assigned to the product too. The remaining indirect costs
are those which are problematical and provide the focus for ABC, with resource costs
indirectly assigned to the cost object via cost pools and activity drivers.
A number of distinct practical stages in the ABC implementation are as follows:
1. Staff training : The co-operation of the workforce is critical to the successful
implementation of ABC. The are closest to the process and most aware of the
problems. Staff training should be, as far as possible, jargon-free, and create an
awareness of the purpose of ABC. It should be non-threatening in nature, stressing
that increased efficiencies resulting from a successful implementation will mean
rewards not redundancies. The need for the co-operation of staff in the concerted
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team effort, for mutual benefit, must be emphasized throughout the training activity.
Advanced Strategic
2. Process specification : Informal, but structured, interviews with key members

of personnel will identify the different stages of the production process, the
commitment of resources to each, processing times and bottlenecks. The interviews
will yield a list of transactions which may, or may not, be defined as ‘activities’ at a
subsequent stage, but in any case provide a feel for the scope of the process in the
entirety.
3. Activity definition : The problem must be kept manageable at this stage, despite
the possibility of information overload from new data, much of which is in need
of codification. The listed transactions must be rationalized in order to aggregate
those in similar categories and eliminate those deemed immaterial. The resultant
cost pools will likely have a number of different events, or drivers, associated with
their incurrence.
4. Activity driver selection : A single driver covering all of the transactions grouped
together in the ‘activity’ probably does not exist. Multiple driver models could be
developed if the data were available, but cost-benefit analysis has rarely shown
these to be desirable. The intercorrelation of probably be so strong as to suggest that
it really does not matter which one is selected. This argument might be employed
to avoid the costly collection of data items otherwise not monitored. Nor easily
accessible.
5. Costing: A single representative activity driver can be used to assign costs from
the activity pools to be cost objects.. If, for example, the number of engine set-ups
has been identified as a driver of process costs and the total set-up cost ` 40,000
for a company producing four products (A, B, C, D) then the number of set-ups per
product can be used to assign these costs. It product A requires 2 set-ups; B4 set-
ups; C24 and D10, then the average cost per set-up of ` 40,000/40 set ups = ` 1,000,
a misleading figure taken at face value, which does not imply the different demands
of the set up resource made by the different products. However, total set-up costs
can be distributed to product groups in proportion to use, i.e., A : ` 2,000, B : ` 4,000,
C: ` 24,000 and D : ` 10,000 and then assigned to individual units of product in
proportion to the total level of output.
This procedure can then be repeated for all material activities.
4 What are the areas in which activity based information is used for decision making?
[Nov 2000]
Answer
The areas in which Activity based information is used for making are as under:
(i) Pricing
(ii) Market segmentation and distribution channels
(iii) Make-or-buy decisions and outsourcing
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(iv) Transfer pricing

(v) Plant closed down decisions
(vi) Evaluation of offshore production

Cost Management
(vii) Capital Investment decisions

(viii) Product line profitability.
5 How ABC system supports corporate strategy?

Answer
ABC supports corporate strategy in many ways such as:—
(i) ABC system can effectively support the management by furnishing data, at
the operational level and strategic level. Accurate product costing will help the
management to compare the profits of various customers, product lines and to
decide on price strategy etc.
(ii) Information generated by ABC system can also encourage management to redesign
the products.
(iii) ABC system can change the method of evaluation of new process technologies,
to reduce setup times, rationalization of plant lay out in order to reduce or lower
material handling cost, improve quality etc.
(iv) ABC system will report on the resource spending.
(v) ABC analysis helps managers’ focus their attention and energy on improving
activities and the actions allow the insights from ABC to be translated into increased
profits.
(vi) Performance base accurate feedback can be provided to cost centre managers.
(vii) Accurate information on product costs enables better decisions to be made on
pricing, marketing, product design and product mix.
6 Why are conventional product costing systems more likely to distort product costs in highly
automated plants? How do activity-based costing systems deal with such a situation?
Answer
The conventional product cost system was in vogue when companies manufactured
narrow range of products, overhead costs were relatively small and distortions arising
from inappropriate overhead allocations were not significant. It used volume measures
like direct labour hours or machine hours for charging overhead costs to products. In
the case of a company using highly automated plant, direct labour is a small fraction
of cost when compared with overheads (because of higher amount of depreciation). In
case where such a company is multi product, overheads which are large in proportion
to direct labour are influenced by number of set up, inspection, number of purchases
etc. In these circumstances, the volume based method of recovery of overheads is no
longer appropriate and such a measure will report inaccurate product costs. Hence, the
traditional system of costing was found to over cost high volume products and under
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cost low volume products.

Activity Based Costing (ABC) system aims at refining the costing system used in automated
plants in the following manner:
Advanced Strategic
a. ABC systems trace more costs as direct costs.

b. ABC systems create homogeneous cost pools linked to different activities.
c. For each activity cost pool, ABC systems seek a cost allocation base that has a cause
and effect relationship with costs in the cost pool.
7 Differentiate between ‘Value-added’ and ‘Non-value-added’ activities in the context of

Activity based costing. Give examples of Value-added and Non-value-added activities.
Answer
A value added activity is an activity that customers perceive as adding usefulness to the
product or service they purchase. In other words, it is an activity that, if eliminated, will
reduce the actual utility or usefulness which customers obtain from using the product
or service. For example, painting a car in a company manufacturing cars or a computer
manufacturing company making computers with preloaded software.
A non-value added activity is an activity where there is an opportunity of cost reduction
without reducing the product’s service potential to the customer. In other words, it is an
activity that, if eliminated, will not reduce the actual or perceived value that customers
obtain by using the product or service. For example, storage and moving of raw materials,
reworking or repairing of products, etc.
Value-added activities enhance the value of products and services in the eyes of the
organisation’s customers while meeting its own goals. Non-value added activities on the
other hand do not contribute to customer-perceived value.
8 Give two examples for each of the following categories in activity based costing:
(i) Unit level activities
(ii) Batch level activities
(iii) Product level activities
(iv) Facility level activities.
Answer
(i) Unit level
(a) Use of indirect materials
(b) Inspection or testing of every item produced or say every 100th item produced
(c) Indirect consumable
(ii) Batch level
(a) Material ordering
(b) Machine set up costs
(c) Inspection of products – like first item of every batch
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(iii) Product level

(a) Designing the product
(b) Producing parts to a certain specification

Cost Management
(c) Advertising costs, if advertisement is for individual products

(iv) Facility level
(a) Maintenance of buildings
(b) Plant security
(c) Production manager’s salaries
(d) Advertising campaigns promoting the company
9 “Cost can be managed only at the point of commitment and not at the point of incidence.
Therefore, it is necessary to manage cost drivers to manage cost.” Explain the statement with
reference to structural and executional cost drivers.
[Nov 2007]
Answer
A firm commits costs at the time of designing the product and deciding the method
of production. It also commits cost at the time of deciding the delivery channel (e.g.
delivery through dealers or own retail stores). Costs are incurred at the time of actual
production and delivery. Therefore, no significant cost reduction can be achieved at the
time when the costs are incurred. Therefore, it is said that costs can be managed at the
point of commitment.
Cost drivers are factors that drive consumption of resources. Therefore, management of
cost drivers is essential to manage costs.
Structural cost drivers are those which can be managed by effecting structural changes.
Examples of structural cost drivers are scale of operation, scope of operation (i.e. degree of
vertical integration), complexity, technology and experience or learning. Thus, structural
cost drivers arise from the business model adopted by the company.
Executional cost drivers can be managed by executive decisions, examples of executional
cost drivers are capacity utilization, plant layout efficiency, product configuration and
linkages with suppliers and customers. It is obvious that cost drivers can be managed
only at the point of structural and operating decisions, which commit resources to
various activities.
10 What is the fundamental difference between Activity Based Costing System (ABC) and
Traditional Costing System? Why more and more organisations in both the manufacturing
and non-manufacturing industries are adopting ABC?
[Nov 2007]
Answer
In the traditional system of assigning manufacturing overheads, overheads are first
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allocated and apportioned to cost centres (production and support service cost centres)
and then absorbed to cost objects (e.g. products). Under ABC, overheads are first
assigned to activities or activity pools (group of activities) and then they are assigned to
cost objects.
Advanced Strategic
Thus, ABC is a refinement over the traditional costing system. Usually cost centres include
a series of different activities. If different products create different demands on those
activities, the traditional costing system fails to determine the product cost accurately.
In that situation, it becomes necessary to use different rates for different activities or
activity pools.
The following are the reasons for adoption of ABC by manufacturing and non-
manufacturing industries:
(i) Fierce competitive pressure has resulted in shrinking profit margin. ABC helps to
estimate cost of individual product or service more accurately. This helps to formulate
appropriate marketing / corporate strategy.
(ii) There is product and customer proliferation. Demand on resources by products
/ customers differ among product / customers. Therefore, product / customer
profitability can be measured reasonably accurately, only if consumption of resources
can be traced to each individual product / customer.
(iii) New production techniques have resulted in the increase of the proportion of
support service costs in the total cost of delivering value to customers. ABC improves
the accuracy of accounting for support service costs.
(iv) The costs associated with bad decisions have increased substantially.
(v) Reduction in the cost of data processing has reduced the cost of tracking resources
consumption to large number of activities.
11 Write short notes on Activity Based Management (ABM)

Answer
In focus on the management of activities as the route to improving value to the customers,
ABM involves activity analysis and performance measurement. Activity Based Costing
serves as the major source of information in ABM. The process focuses on improvement
of business by re-engineering the way the business is conducted and by continuously
improving the effectiveness of the organisation. The activities can almost be seen as
the building blocks of the process. Certain constraints, such as shortage of funds or
capacity, may exist which limits the firm’s potential of profit-earning capabilities. ABM
also evaluates these constraints in order to overcome, as far as possible, the constraints
and to maximise the return to the shareholders. Activity Based Budgeting is used as one
of the tools in ABM.
12 Write short notes on Activity Based Budgeting (ABB)

Answer
Brimson and John defines Activity-Based Budgeting as the process of planning and
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controlling the expected activities for the organisation to derive a cost-effective budget
that meets forecast workload and agreed strategic goals. An activity-based budget is a
quantitative expression of the expected activities of the firm, reflecting management’s

Cost Management
forecast of workload and financial and non-financial requirements to meet agreed

strategic goals and planned changes to improve performance.
Thus, the Key Elements of ABB are:
a. Type of work/activity to be performed;
b. Quantity of work/activity to be performed; and
c. Cost of work/activity to be performed.
ABB focuses on the activity/business processes. Resources required are determined
on the expected activities and workload. The objective is to bring in efficiency into
the system. So, in the process of budget preparation, many key questions, need to be
addressed and properly answered.
13 Differentiate between ABC and ABM.

Answer
The ABC refers to the technique for determining the cost of activities and the output
that those activities produce. The aim of ABC is to generate improved cost data for use in
managing a company’s activities.
The ABM is a much broader concept. It refers to the management philosophy that focuses
on the planning, execution and measurement of activities as the key to competitive
advantage.
14 State with a brief reason whether you would recommend an activity based system of costing
in each of the following independent situations:
1. Company K produces one product. The overhead costs mainly consist of depreciation.
2. Company L produces 5 different products using different production facilities.
3. A consultancy firm consisting of lawyers, accountants and computer engineers provides
management consultancy services to clients.
4. Company S produces two different labour intensive products. The contribution per unit
in both products is very high. The BEP is very low. All the work is carried on efficiently to
meet the target costs.
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Advanced Strategic
Answer
Recommend ABC
Sl. No Description Reasons
(Yes / No)
(i) K produces one No One product situation. For allocation of
product. Overhead overhead, ABC is not required.
is mainly depreci- ABC for cost reduction not beneficial since
ation. most of the overhead is only depreciation.
(ii) L produces 5 differ- Yes Multi product situation. ABC is required for
ent products with allocation of overhead. ABC is necessary for
different facilities. pricing.
Cost drivers are likely to be different. Cost
reduction may be possible. Production
facilities are different.
(iii) Professional ser- Yes Variety of services. Hence ABC is required
vices – lawyers / for cost allocation.
accountants / com- Services are very different. ABC is necessary
puter engineers. for pricing.
(iv) No S produces 2
different labour
Different products, but labour intensive.
Hence, overhead allocation based on
intensive products. readily traceable direct labour cost will be
High unit contribu- accurate.
tion and efficient Hence, ABC not required for cost allocation.
operations. Low BEP level implies low level of fixed cost
as a % of sale price or as a
% of total cost.
Many fixed cost activity drivers are likely to
align with the direct labour costs. Hence
not required for cost allocation.
Efficient operation. Hence ABC not re-
quired even for cost reduction or ABC
15 State whether each of the following independent activities is value-added or non-value-
added:
a. Polishing of furniture used by a systems engineer in a software firm
b. Maintenance by a software company of receivables management software for a
banking company.
c. Painting of pencils manufactured by a pencil factory.
d. Cleaning of customers’ computer key boards by a computer repair centre.
e. Providing, brake adjustments in cars received for service by a car service station.
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Cost Management
Answer
Value Added / Non
Sl. No Item
Value Added
(i) Polishing furniture used by a Systems Engineer in a software Non-Value
firm. Added
(ii) Maintenance by a software company of receivables manage- Value-Added
ment software for a banking company.
(iii) Painting of pencils manufactured by a pencil factory. Value-Added
(iv) Customers’ computer key board cleaning by a computer repair Value-Added
centre.
(v) Providing brake adjustments in cars for repairs by a care service Value-Added
station.
H Block
Advanced Strategic
Budgeting, Performance Measurement andTheory of Constraints
Chapter 3|
Budgeting, Performance
Measurement and Theory of
Constraints
1 What is Zero Base budgeting?

[May 2007]
Answer
It is an expenditure control device where each divisional head has to justify the
requirement of funds for each head of expenditure and prepare the budget accordingly,
without reference to past budget or achievements.
It is an operating planning and budgeting process which requires each manager to justify
his entire budget requests in detail from scratch i.e. zero base.
2 What are the steps in Zero Base Budgeting?
[May 1993, Nov 2007, Nov 2010]
Answer
The Zero Base Budgeting involves the following steps:
(i) Corporate objectives should be established and laid down in details.
(ii) Decide about the extent to which the techniques of ZBB is to be applied.
(iii) Identify those areas where decisions are required to be taken.
(iv) Develop decision programmes and rank them in order of preferences.
(v) Preparation of budget, that is translating decision packages into practicable units/
items and allocating financial resources.
3 What are the advantages and limitations of Zero base Budgeting?

[Nov 2004]
Answer
Advantages of ZBB:
(i) It provides a systematic approach for evaluation of different activities and ranks
them in order of preference for allocation of scare resource.
(ii) It ensures that the various functions undertaken by the organisation are critical for
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the achievement of its objectives and are being performed in the best way.
(iii) It provides an opportunity to the management to allocate resources for various
activities only after having a thorough cost-benefit analysis.

Cost Management
(iv) The area of wasteful expenditure can be easily identified and eliminated.
(v) Departmental budgets are closely linked with corporate objectives.
(vi) The technique can also be used for the introduction and implementation of the
system of ‘management by objective’.
Limitations of ZBB:
(i) Various operational problems are likely to be faced in implementing the technique.
(ii) The full support of top management is required.
(iii) It is time consuming as well as costly.
(iv) It requires proper trained managerial staff.
4 In each of the following independent situations, state with a brief reason whether ‘Zero
Based Budgeting’ (ZBB) or ‘Traditional Budgeting’ (TB) would be more appropriate for year II.
(i) A company producing a certain product has done extensive ZBB exercise in year I. The
activity level is expected to marginally increase in year II.
(ii) The sale manager of a company selling three products has intuitive feeling that in year
II, sales will increase for one product and decrease for the other two. His expectation can
not be substantiated with figures.
(iii) The top management would like to delegate responsibility to the functional managers
for their results during year II.
(iv) Resources are heavily constrained and allocation for budget requirements is very strict.
[Nov 2013]
Answer
(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
H Block
where resources are constrained and budget is allocated on requirement basis, Zero
Base Budgeting is more appropriate method of budgeting.
Advanced Strategic
5 What do you mean by a flexible budget? Give an example of an industry where this type of
budget is typically needed?
[May 2008]
Answer
A flexible budget is a budget which, by recognizing the difference between fixed, semi-
variable and variable costs, is designed to change in relation to the level of activity
attained.
E.g. seasonal products , industries influenced by change in fashion, Industries which keep
on introducing new products / new designs.
6 Write short notes on Rolling Budgets.

Answer
Rolling budgets can be particularly useful when future events cannot be forecast reliably.
A rolling budget is defined as ‘a budget continuously updated by adding a further
accounting period (month or quarter) when the earliest accounting period has expired.
Its use is particularly beneficial where future costs and/ or activities cannot be forecast
accurately.’
For example a budget may initially be prepared for January to December, year 1. At the
end of the first quarter, i.e., at the end of March, year 1, the first quarter’s budget is deleted.
A further quarter is then added to the end of the remaining budget, for January to March,
year 2. The remaining portion of the original budget is updated in the light of current
conditions. This means that managers have a full year’s budget always available and the
rolling process forces them to continually plan ahead. A system of rolling budgets is also
known as continuous budgeting.
7 What is Performance Budgeting? Differentiate between Traditional Budgeting and

Performance Budgeting. What are the steps in Performance Budgeting?
Answer
Performance Budgeting provide a meaningful relationship between estimated inputs
and expected outputs as an integral part of the budgeting system. A performance
budget is one which presents the purposes and objectives for which funds are required,
the costs of the programmes proposed for achieving those objectives, and quantities
data measuring the accomplishments and work performed under each programme. Thus
performance budgeting is a technique of presenting budgets for costs and revenues in
terms of functions. Programmes and activities are correlating the physical and financial
aspect of the individual items comprising the budget.
Traditional budgeting vs. Performance budgeting
H Block
i. The traditional budgeting gives more emphasis on the financial aspect than the
physical aspects or performance. Performance budgeting aims at establishing a
relationship between the inputs and the outputs.

Cost Management
ii. Traditional budgets are generally prepared with the main basis towards the objects
or items of expenditure i.e. it highlights the items of expenditure, namely, salaries,
stores and materials, rates rents and taxes and so on. In the PB latter the emphasis
is more on the functions of the organisation, the programmes to discharge these
function and the activities which will be involved in undertaking these programmes.
Steps in Performance Budgeting:
According to the Administrative Reforms Commission (ARC) the following steps are the
basic ones in Performance Budgeting:—
(a) establishing a meaningful functional programme and activity classification of
government operations;
(b) bring the system of accounting and financial management in accord with this
classification
(c) evolving suitable norms, yardsticks, work units of performance and units costs,
wherever possible under each programme and activity for their reporting and
evaluation.
The Report of the ARC use the following terms in an integrated sequence:
The team ‘function’ is used in the sense of ‘objective’. For achieving objectives ‘programmes’
will have to be evolved. In respect of time horizon, it is essentially a replacement of
traditional annual fiscal budgeting by a more output-oriented, but still an annual,
exercise.
For an enterprise that wants to adopt PB, it is thus imperative that:
(a) the objectives of the enterprise are spelt out in concrete terms.
(b) the objectives are then translated into specific functions, programmes, activities
and tasks for different levels of management within the realities of fiscal; constraints
;
(c) realistic and acceptable norms, yardsticks or standards and performance indicators
should be evolved and expressed in quantifiable physical units.
(d) a style of management based upon decentralised responsibility structure should be
adopted, and
(e) an accounting and reporting system should be developed to facilities monitoring,
analysis and review of actual performance in relation to budgets.
8 “Because a single budget system is normally used to serve several purposes, there is a
danger that they may conflict with each other”. Do you agree? Discuss.
[May 2005]
Answer
H Block
A single budget system may be conflicting in planning and motivation, and planning
and performance evaluation roles as below:
Advanced Strategic
(i) Planning and motivation roles – Demanding budgets that may not be achieved
may be appropriate to motivate maximum performance but they are unsuitable for
planning purposes. For these, a budget should be a set based on easier targets that
are expected to be met.
(ii) Planning and performance evaluation roles – For planning purposes budgets are
set in advance of the budget period based on an anticipated set of circumstances
or environment. Performance evaluation should be based on a comparison of active
performance with an adjusted budget to reflect the circumstance under which
managers actually operated.
9 “Balanced score card and performance measurement system endeavours to create a blend
of strategic measures, outcomes and drive measures and internal and external measures”.
Discuss the statement and explain the major components of a balanced score card.
Answer
The balanced score card translates an organization’s mission and strategy into
a comprehensive set of performance measures that provides the framework for
implementing its strategy. The balanced score card does not focus solely on achieving
financial objectives. It is an approach, which provides information to management to
assist in strategic policy formulation and achievement. It emphasizes the need to provide
the user with a set of information, which addresses all relevant areas of performance
in an objective and unbiased manner. As a management tool it helps companies to
assess overall performance, improve operational processes and enables management to
develop better plans for improvements.
Major components of a balanced scorecard – The components of balanced score cards
varies form business to business. A well designed balanced scorecard combines financial
measures of post performance with measures of firm’s drivers of future performance. The
specific objectives and measures of an organization-balanced scorecard can be derived
from the firm’s vision and strategy. Generally, balanced score card has the following four
perspectives from which a company’s activity can be evaluated.
(i) Financial perspective – Financial perspective measures the results that the
organization delivers to its stakeholders. The measures are: operating income,
revenue growth, revenues from new products, gross margin percentage, cost
reduction in key areas, economic value added, return on investment.
(ii) Customer perspective – The customer perspective considers the business through
the eyes of customers, measuring and rejecting upon customer satisfaction. The
measures are: - market share. customer satisfaction, customer retention percentage,
time taken to fulfil customer’s requests.
(iii) Internal business perspective – The internal perspective focuses attention on
the performance of the key internal processes, which drive the business such as
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innovative process, operation process and post-sales services.

Cost Management
(iv) Learning & growth perspective – The measure are:- employee education & skills
levels, employee turnover ratio, information system availability, percentage of
employee suggestion implemented etc.
10 “In many organisations, initiatives to introduce balanced score card failed because efforts
were made to negotiate targets rather than to build consensus.”
Elucidate the above statement.
[Nov 2007]
Answer
Balanced score card is a set of financial and non-financial measures relating to a company’s
critical success factors. It is an approach which provides information to management
to assist in strategy implementation. Therefore, the components to be included in the
balanced score card must flow from strategy. The targets should be measurable and must
flow from strategy and corporate plan of the company. It is necessary that managers
should agree to the components and targets because in absence of a consensus,
managers may not commit to the targets established by the top management / the
board of directors. Moreover, the functions are interdependent and results in one
functional area/perspective (e.g. innovation and learning) have direct bearing on the
results in other functional area/perspective (e.g. customer perspective). Therefore, it is
not sufficient that individual managers agree to their targets. Successful implementation
requires that the top management builds an overall consensus on the components and
targets of the balanced score card. Negotiation undermines the fundamental principle
that the components and targets should flow from strategy. As a result, an approach to
establish targets through negotiation defeats the very purpose of balanced score card.
11 Write short notes on Optimised Production Technology.

Answer
Goldratt and Cox advocated a new approach to production management called
Optimised Production Technology. It is based on the principle that profits are expanded
by increasing the throughput of the plant i.e. rate at which raw material are turned into
sales. The most widely developed management accounting system developed for this
purpose is known as Throughput Accounting. The system determines what prevents
throughput (Sales – Direct Materials cost) being higher by distinguishing between
bottleneck and non bottleneck resources.
12 What are the rules for synchronous manufacturing as proposed in TOC.
Answer
The rules of production scheduling as laid down by Goldratt are as follows:
H Block
1. Do not balance the capacity – balance the flow.

2. The level of utilisation of a non bottleneck resource is determined not by its own
potential but by some other constraint in the system.
Advanced Strategic
3. Utilisation and activation of the resource are not the same.

4. An hour lost at a bottleneck is an hour lost for the entire system.
5. An hour saved at a non bottleneck is a mirage.
6. Bottlenecks govern both throughput and inventory in the system.
7. The transfer batch may not and many times should not be equal to the process
batch.
8. A process batch should be variable both along its route and time.
9. Priorities can be set only by examining the system constraints.
13 How performance measurement is done as per TOC?

Answer
To adequately measure a firm’s performance, two sets of measurements must be used
– one from the financial point of view and the other from the operations point of view:
Financial Measurements
1. Net Profit
2. Return on Investment
3. Cash Flow
Operational Measurements
1. Throughput: the rate at which money is generated by the system
2. Investment: all the money that the organisation invested in purchasing the things
it intends to sell.
3. Operating Expenses: all the money that the organisation spends to turn inventory
into throughput.
The TOC emphasizes on operational measurements rather than financial measurements.
14 Write short notes on Throughput Accounting.

Answer
The TOC was picked up and included into an accounting system in UK where it is known
as Throughput Accounting by ‘Galloway and Waldron’.
Throughput Accounting is a method of performance measurement which relates
production and other costs to throughput. Throughput Accounting product costs relate
to usage of key resources by various products.
It assumes that a manager has a given set of resources available. These comprise the
existing buildings, capital equipment and labour force. Using these resources, purchased
materials and components must be processed to generated sales revenue. To achieve
H Block
this, maximum amount of throughput is required with the financial definition.

The other costs are deemed time related rather than fixed.

Cost Management
Throughput is influenced by:

a. Selling price
b. Direct purchase price
c. Usage of direct materials
d. Volume of throughput
Constraints on throughput:
a. the existence of an uncompetitive selling price
b. the need to deliver on time to particular customers
c. the lack of product quality and reliability
d. the lack of reliable materials suppliers
e. the existence of shortage of production resources.
H Block
Advanced Strategic
Relevant Costing, Marginal Costing and Decision Making
Chapter 4|
Relevant Costing, Marginal
Costing and Decision Making
1 Explain with one example each that sunk cost is irrelevant in making decisions, but irrelevant
costs are not sunk costs.
[May 2001]
Answer
Sunk cost is a historical cost incurred in the past. In other words it is a cost of a resource
already acquired. Future decisions in respect of this resource will not be affected by it. For
example, book value of machinery. Hence sunk costs are irrelevant in decision making.
Irrelevant costs are not necessary sunk costs. For example, when a comparison of two
alternative production methods using the same material quantity is made, then direct
material cost is not affected by the decision but this material cost is not sunk cost.
2 Explain the concept of relevancy of cost by citing three examples each of relevant costs and
non-relevant costs.
[Nov 2008]
Answer
A relevant cost is a future cost which differs between alternatives. It can also be defined
as any cost which is affected by decisions at hand. For any decision for an offer, usually
the following costs are considered as relevant :
a. Differential or Variable Costs
b. Avoidable or Discretionary Fixed Costs
c. Opportunity Costs
The following costs are irrelevant costs for decision making –
a. Historical or Sunk Costs
b. Committed Fixed Costs
c. Apportioned Fixed Costs
A relevant cost is a future cash outflow arising as a direct consequence of the decision
under review because it is assumed that in the long run, future profits will be maximised
if the cash profits of the company is maximised.
Hence all non cash expenditures are irrelevant costs, such as,
a. Depreciation
H Block
b. Notional rent or interest

c. All overheads absorbed. Fixed OH absorption is irrelevant as they are not incurred
at the same rate that they are absorbed.

Cost Management
3 What is margin of Safety? How can margin of safety be improved?

[May 1999]
Answer
Margin of Safety – Margin of safety is the excess of sales over the break-even sales.
It may also be considered as the excess of production over break-even point. It can
be expressed in value as well as in percentage. The size of margin of safety shows the
strength of the business. Small size of margin of safety indicates that the firm has large
fixed expenses and is more vulnerable to changes in sales. In other words, if the margin
of safety is large, a slight fall in sales may not affect the business very much but when it
is small then a slight fall in sales may adversely affect the business.
Margin of safety is also immensely useful for making inter-firm comparison. This is being
done by calculating their margin of safety ratio.
Measures for improving margin of safety:
Margin of safety can be improved by taking the following measures:—
(i) Increasing the selling price, provided the demand is inelastic so as to absorb the
increased prices.
(ii) Reduction in fixed expenses.
(iii) Reduction in variable expenses
(iv) Increasing the sales volume provided capacity is available.
(v) Substitution or introduction of a product mix such that more profitable lines are
introduced.
4 What are the limitations of a break-even chart?

[May 1999]
Answer
The limitations of break even chart are as follows:
(1) While preparing a break-even chart, it is assumed that revenue and costs can be
represented with the help of straight lines. It may not always be true.
(2) The preparation of a break-even chart requires the segregation of semi-variable costs
into fixed and variable components. It may not always be possible to segregate semi-
variable costs into fixed and variable elements accurately. There may be situations
when semi-variable costs cannot be split.
(3) A break-even chart assumes that selling price and variable cost per unit are constant
at all levels of activity. It may not always be true. Selling price as well as variable cost
may either increase or decrease with the change in volume. Fixed costs also tend to
vary beyond a certain output.
H Block
(4) When a firm produces a number of products the apportionment of fixed expenses
over various products may be different and often it may be done arbitrarily.
(5) A Break-even chart assumes that business condition will not change.
Advanced Strategic
(6) A break-even chart does not consider the amount of capital employed in the
business, a very important factor for determining profitability of a concern.
5 Discuss the relationship between Angle of incidence. Break-even Level and Margin of Safety.
Answer
Angle of Incidence – It is the angle between total sales line and total cost line drawn in
the case of break-even. It provides useful information about the rate at which profits are
being made. The larger the angle, the higher the rate of profit or vice-versa.
Break-even level – It is that level of sales (or production) at which the sales revenue
exactly equals total costs, both variable and fixed. In other words, it is the level of activity
at which the firm neither earns a profit nor suffers a loss.
Margin of safety – It is the difference between total sales and sales at break-even point.
In other words margin of safety is the amount of sales above the break-even point. If
there is a fall in the sales to the extent of margin of safety, the firm will not be in a loss
situation.
Relationship between Angle of Incidence, Break-even level and Margin of Safety:
(i) If the break-even point is low and angle of incidence is large. The margin of safety
is large and the business enjoys financial stability. A low break-even point indicates
that the business could be run profitably even if there is a fall in sales, unless the
sales are very low.
(ii) If the break-even point is low and angle of incidence is small, the conditions are the
same as in (i) above except that the rate of profit earning capacity is not so high as in
(i).
(iii) If the Break-even point is high and angle of incidence is small, the margin of safety is
low. The business is very vulnerable, even a small reduction in activity may result is a
loss.
(iv) If the break-even point is high and angle of incidence is large, this shows that the
margin of safety is low; the business is likely to incur losses through a small reduction
in activity. However, after the break-even point, the business makes the profit at a
high rate.
6 Mention any four important factors to be considered in Marginal Costing Decisions.

[Nov 1999]
Answer
Important factors to be considered in “Marginal Costing Decisions” are as follows:
(i) Whether the product or production makes a contribution,
H Block
(ii) In the selection alternatives, additional fixed costs if any should be considered.
(iii) The continuity of demand after new decision and its impact on selling price are to
be considered.

Cost Management
(iv) Non-cost factors such as the need to keep labour force intact and governmental
attitude are also to be taken into account.
7 Briefly explain the methods of separating semi-variable costs into their fixed and variable
elements.
[May 2000]
Answer
Semi-variable costs as the name suggests are partly fixed and partly variable. The
methods for separating the semi-variable costs into their fixed and variable elements
have been discussed briefly as under:
(i) Graphical method – Under this method, a large number of observations regarding
the total costs at different levels of output are plotted on a graph with the output
on the X-axis and the total cost on the Y-axis. Then, draw by judgment, a line of “best
fit”, which passes through all or most of the points is drawn. The point at which this
line cuts the Y-axis indicates the total fixed cost component in the total cost. If a line
is drawn at this point parallel to the X-axis, this indicates the fixed cost. The variable
cost at any level of output, is derived by deducting this fixed cost element from the
total cost.
(ii) High points and low points method – Under this method, the difference between
the total cost at highest and lowest volume is divided by the difference between
the sales value at the highest and lowest volume. The quotient thus obtained gives
the rate of variable cost in relation to sales value. The fixed cost is the remainder; i.e.,
total cost minus variable cost.
(iii) Comparison by period or level of activity method – Under this method, the
variable cost per unit may be determined by comparing two levels of output with
the amount of expenses at those levels. Since the fixed element does not change,
therefore the variable elements of cost may be ascertained with the help of the
following formula:
Change in the amount of expenses
Change in Quantity
(iv) Least square method – This is the best method of separating semi-variable costs
into their fixed and variable elements. It is a statistical method and is based on
finding out a line of best fit for a number of observations. The method uses the linear
equation y = mx + c; where ‘m’ represents the variable element of cost per unit, ‘C’
represents the total fixed cost, ‘y’ represents the total cost, ‘x’ represents the volume
of output. The total cost is thus split into fixed and variable elements by solving this
equation.
(v) Analytical method – An attempt is made under this method to judge empirically
the proportion of semi-variable cost and fixed cost. The degree of variability is
H Block
determined for each item of semi-variable cost. Once this has been done, the
method is easy to apply.
Advanced Strategic
8 “Cost is not the only criterion for deciding in favour of shut down” – Briefly explain.
[May 2000]
Answer
Cost is not only criterion for deciding in the favour of shut down. Non-cost factors worthy
of consideration in this regard are as follows:
(i) Interest of workers, if the workers are discharged, it may become difficult to get skilled
workers later, on reopening of the factory. Also shut-down may create problems,
(ii) In the face of competition it may difficult to re-establish the market for the product.
(iii) Plant may become obsolete or depreciate at a faster rate or get rusted. Thus, heavy
capital expenditure may have to be incurred on re-opening.
9 Explain, how Cost Volume Profit (CVP) - based sensitivity analysis can help mangers cope
with uncertainty.
[Nov 2000]
Answer
Sensitivity analysis focuses on how a result will be changed if the original estimates or
the underlying assumptions change.
Cost Volume Profit (CVP) – based sensitivity analysis can help mangers to provide answers
to the following questions to cope with uncertainty.
(1) What will be the profit if the sales mix changes from that originally predicted?
(2) What will be the profit if fixed costs increase by 10% and variable costs decline by
5%?
The use of spreadsheet packages has enabled mangers to develop CVP computerised
models which can answer the above questions. Managers can now consider alternative
plans by keying the information into a computer, which can quickly show changes both
graphically and numerically. Thus mangers can study various combinations of changes in
selling prices, fixed costs, variable costs and product mix, and can react quickly without
waiting for formal reports from the accountant. In this manner the use of CVP based
sensitivity analysis can help mangers to cope up with uncertainty.
10 Enumerate the limitations of using the marginal costing technique.

[May 2001]
Answer
Marginal costing is defined as the ascertainment of marginal cost and of the effect on
profit of changes in volume or type of output by differentiating between fixed costs and
variable costs.
H Block

Cost Management
Limitations of Marginal Costing Techniques:

The limitations of using the marginal costing technique are as follows:
(1) It is difficult to classify exactly the expenses into fixed and variable category. Most of
the expenses are neither totally variable nor wholly fixed.
(2) Contribution itself is not a guide unless it is linked with the key factor.
(3) Sales staff may mistake marginal cost for total cost and sell at a price; which will result
in loss or low profits. Hence, sales staff should be cautioned while giving marginal
cost.
(4) Overheads of fixed nature cannot altogether be excluded particularly in large
contracts, while valuing the work-in-progress. In order to show the correct position
fixed overheads have to be included in work-in-progress.
(5) Some of the assumptions regarding the behaviour of various costs are not necessarily
true in a realistic situation. For example, the assumption that fixed cost will remain
static throughout is not correct.
11 Briefly discuss on curvilinear CVP analysis.

[Nov 2001]
Answer
In CVP analysis, the usual assumption is that the total sales line and variable cost line
will have linear relationship, that is, these lines will be straight lines. However, in actual
practice it is unlikely to have a linear relationship for two reasons, namely:
(i) after the saturation point of existing demand, the sales value may show a downward
trend.
(ii) the average unit variable cost declines initially, reflecting the fact that, as output
increase the firm will be able to obtain bulk discounts on the purchase of raw
materials and can also benefit from division of labour. When the plant is operated at
further higher levels of output, due to bottlenecks and breakdowns the variable cost
per unit will tend to increase. Thus the law of increasing costs may operate and the
variable cost per unit may increase after reaching a particular level of output.
In such cases, the contribution will not increase in linear proportion i.e. based on
the phenomenon of diminishing marginal productivity, the total cost lie will not be
straight, as assumed but will be of curvilinear shape. This situation will give rise to
two break even points. The optimum profit is earned at the point where the distance
between sales and total cost is the greatest.
Loss TC
TR
Curvilinear - CVP
H Block
Profit
Advanced Strategic
12 “Use of absorption costing method for the valuation of finished goods inventory provides
incentive for over-production.” Elucidate the statement.
[May 2002]
Answer
When absorption costing method is used, production fixed overheads are charged to
products and are included in product costs. Consequently, the closing stocks are valued
on total cost (including fixed overheads) basis. The net effect is that the charge of fixed
overheads to P/L account gets reduced, if the closing stock is greater than the opening
stock. This situation has the effect of inflating the profit for the period.
Where stock levels are likely to fluctuate significantly, profits may be distorted if calculated
on absorption costing basis. If marginal costing is used, since the fixed costs are charged
off to P/L account as period cost, such a situation will not arise. The impact of using
absorption costing on profits can be summarised as under:
(a) When sales are equal to production, profits will be the same under absorption
costing and marginal costing.
(b) If production is higher than sales, the absorption costing will post higher profits that
marginal costing.
(c) If sales are in excess of production, absorption costing will show lower profits than
marginal costing.
Since profit calculation in absorption costing can produce strange result, the managers
may deliberately alter the stock levels to influence the profits if absorption costing is
used. Hence, it is true to say that if absorption costing method is used managers have the
incentive to over produce to show better result.
13 Enumerate the factors involved in decisions relating to expansion of capacity.

[May 2001]
Answer
The factors involved in decisions relating to expansion of capacity are enumerated as
below:
(i) Additional fixed overheads involved should be considered.
(ii) Possible decrease in selling price due to increased production capacity.
(iii) Whether the demand id sufficient to absorb the increased production.
14 Discuss the role of costs in product-mix decisions.

Answer
All types of cost involved in cost accounting system are useful in decision making. The
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cost which plays a major role in product mix decision is the relevant cost. Costs to be
relevant should meet the following criteria:

Cost Management
(i) The costs should be expected as future costs.

(ii) The costs differ among the alternatives course of action.
While making decision about product mix using the facilities and other available
resources, the end results should always aim at profit minimisation. Variable costs are
relevant costs in product mix decisions and consequently contribution plays a major role
in minimisation of profit. In addition to the relevancy of costs, the other factors and costs
that should be taken into account at the time of deciding the products mix are:
(i) The available production capacity
(ii) The limiting factor(s)
(iii) Contribution per unit of the limiting factor
(iv) Market demand for the products.
(v) Opportunity costs
15 State the relative economics of the “make vs. buy” decision in management control.
[Nov 2001]
Answer
Generally for taking a make vs. buy decision comparison is made between the supplier’s
price and the marginal cost of making plus the opportunity cost. Make vs. buy decision is
a strategic decision, and, therefore, both short-term as well as well as long-term thinking
about various cost and other aspects needs to be done.
A company generally buys a component instead of making it under following situations:
(1) If it costs less to buy rather than to manufacture it internally;
(2) If the return on the necessary investment to be made to manufacture is not attractive
enough;
(3) If the company does not have the requisite skilled manpower to make;
(4) If the concern feels that manufacturing internally will mean additional labour
problem;
(5) If adequate managerial manpower is not available to take charge of the extra work
of manufacturing;
(6) If the component shows much seasonal demand resulting in a considerable risk of
maintaining inventories;
(7) If transport and other infrastructure facilities are adequately available;
(8) If the process of making is confidential or patented;
(9) If there is risk of technological obsolescence for the component such that it does not
encourage capital investment in the component.
H Block
Advanced Strategic
16 Is it justifiable to sell at a price below marginal cost at any time? Mention the circumstances
in which it is justifiable.
[May 2008]
Answer
It is justifiable to sell at a price below marginal cost for a limited period.
The circumstances may be:
(i) Where materials are of perishable nature.
(ii) Where stocks have been accumulated in large quantities and the market prices have
fallen. This will save the carrying cost of stocks, e.g., electronic goods – market prices
fall due to quick obsolescence or advanced technological replenishment.
(iii) It is essential to reduce the prices to such an extent in order to popularize a new
product.
(iv) Where such reduction enables the firm to boost the sales of other products having
larger profit margin.
17 What are the major areas of decision-making in which differential costing is used?
joylawrenciandas50@gmail.com,8420517209 [May 2008]
Answer
Differential costing can be used for all short, medium and long term decisions. When
two levels of activities are being considered, or while choosing between competing
alternatives differential cost analysis is essential. The differential cost is useful for decision
making in the following areas:
(a) Capital expenditure decisions
(b) Make or buy decision
(c) Production planning
(d) Sales mix decision
(e) Production or product decision
(f) Change in level or nature of an activity.
18 State the characteristic features of a database created for operational control and decision
making.
[Nov 2008]
Answer
The characteristic features of a data-base created for operational control and decision
making are as under:
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(i) There should be a file structure that facilitates the association of one internal record
with other internal records.
(ii) There should be cross functional integration of files.

Cost Management
(iii) Independence of program / data file for ease of updating and maintenance of data
base.
(iv) There must be common standards throughout with respect to data definitions,
record formats and other data descriptions.
(v) A data dictionary should be available.
19 What are the applications of incremental cost techniques in making managerial decisions?
[May 2000]
Answer
Incremental cost technique: It is a technique used in the preparation of ad-hoc
information in which only cost and income differences between alternative courses of
action are taken into consideration. This technique is applicable to situations where fixed
costs alter.
The essential pre-requisite for making managerial decisions by using incremental cost
technique, is to compare the incremental costs with incremental revenues. So long as the
incremental revenue is greater than incremental costs, the decision should be in favour
of the proposal.
Applications of incremental cost techniques in making managerial decisions:
The important areas in which incremental cost analysis could be used for managerial
decision making are as under:
(i) Introduction of a new product
(ii) Discontinuing a product, suspending or closing down a segment of the business
(iii) Whether to process a product further or not
(iv) Acceptance of an additional order form a special customer at lower than existing
price
(v) Opening of new sales territory and branch.
(vi) Optimizing investment plan out of multiple alternatives.
(vii) Make or buy decisions
(viii) Submitting tenders
(ix) Lease or buy decisions
(x) Equipment replacement decisions
(xi) Transfer Pricing decisions.
(xii) Purchasing vs Lease financing decisions.
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Advanced Strategic
20 Write short notes on Product Distribution Decisions.

[Nov 1990]
Answer
The objective of distribution is getting the right goods to the places at the right time for
the optimal cost. The basic output of a distribution system is that the customers should
get the delivery of their orders in minimum number of days keeping in mind the cost of
deliveries.
The decision making tools for this purpose are – (a) Linear Programming (Transportation
Models) (b) Inventory Models.
21 Briefly explain the relevant considerations involved in taking managerial decisions in
respect of choosing a channel of distribution for a product.
[Nov 1990]
Answer
The relevant considerations are:
(1) Type of product – Large manufacturers of consumer goods may find it profitable
to sell their products direct to consumers through their own retail or chain stores.
For certain other products, normal route of manufacture to wholesaler and then to
retailer may be used.
(2) Type of market – In the seller’s market, the product or service should be distributed
at the least cost. In a buyer’s market the product should penetrate the market by
adopting cost effective channels of distribution since the competition would be
intense.
(3) Industry Practices – Any firm in any industry will have to follow the industry
practices in deciding the channel of distribution.
22 It is prudent to hold large inventories in an inflationary economy. Comment.

[Nov 2005]
Answer
In an inflationary situation, prices rise rapidly and the firm may decide to buy large
quantities immediately and hold inventories anticipating further increase in prices.
However it is not prudent to hold large inventories even in an inflationary situation due
to the following reasons:
(i) Increase in stockholding costs like interest on capital, wastages, etc.
(ii) Possible availabilities of cheaper substitutes at a later date in future.
(iii) Possible new sources of supply at a competitive rate.
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(iv) Possibility of fall in prices.

Therefore, even in an inflationary condition, it is sufficient if the firm hold the normal
level of inventory in order to operate its business without incurring stock out costs.

Cost Management
TQM, Value Chain Analysis and Business Process Reengineering
Chapter 5|
TQM, Value Chain Analysis and
Business Process Reengineering
1 What are the critical success factors of TQM?

[Nov 2009]
Answer
The critical success factors of TQM are:
a. Focus on customer needs.
b. Everyone in the organisation should be involved.
c. Focus on continuous improvement.
d. Design quality in product and production process.
e. Effective performance measurement system.
f. Rewards and performance measurements should be renewed.
g. Appropriate training and education to everyone to understand the aim of TQM.
2 What are the six Cs for successful implementation of TQM?

Answer
(i) Commitment – If a TQM culture is to be developed, so that quality improvement
becomes normal part of everyone’s job, a clear commitment, from the top must be
provided. Without this all else fails.
(ii) Culture – Training lies at the centre of effecting a change -in culture and attitudes.
Negative perceptions must be changed to encourage individual contributions.
(iii) Continuous improvement – TQM is a process, not a program, necessitating that we
are committed in the long term to the never ending search for ways to do the job
better.
(iv) Co-operation – The on-the-job experience of all employees must be fully utilized
and their involvement and co-operation sought in the development of improvement
strategies and associated performance measures.
(v) Customer focus – Perfect service with zero defects in all that is acceptable at either
internal or external levels.
(vi) Control – Documentation, procedures and awareness of current best practice are
essential if TQM implementations are to function appropriately The need for control
mechanisms is frequently overlooked, in practice.
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Advanced Strategic
3 Explain four P’s of Quality improvement principles.

[Nov 2009]
Answer
The Four P’s quality improvement principles are as below:
(a) People – It will quickly become apparent that some individuals are not ideally suited
to the participatory process. Lack of enthusiasm will be apparent from a generally
negative approach and a tendency to have prearranged meeting which coincide
with the meetings of TQM teams.
(b) Process – The rhetoric and inflexibility of a strict Deming approach will often have a
demotivating effect on group activity.
(c) Problem – Experience suggests that the least successful groups are those
approaching problems that are deemed to be too large provide meaningful solutions
within a finite time period.
(d) Preparation – A training in the workings of Deming- like processes is an inadequate
preparation for the efficient implementation of a quality improvement process.
Note: Deming Process is founded by W. Edwards Deming in the 1950’s who proposed that
business processes should be analysed and measured to identify sources of variations that
cause products to deviate from customer requirements. He recommended that business
processes be placed in a continuous feedback loop so that managers can identify and
change parts of the process that need improvements. The process can be implemented
through a cycle know as PDCA Cycle (i.e. Plan, Do, Check and Act).,
4 Quality products can be determined by using a few of the dimensions of quality. Identify the
following under the appropriate dimension:
(i) Consistency of performance over time.
(ii) Primary product characteristics.
(iii) Exterior finish of a product
(iv) Useful life of a product.
Answer
Quality of Products with Appropriate Dimension
Sl. Quality of Products (Examples) Dimension
(i) Consistency of performance over time Reliability

(ii) Primary product characteristics Performance
(iii) Exterior finish of a product Aesthetics
(iv) Useful like of a product Durability
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Cost Management
5 Classify the following items under appropriate categories of equality costs viz. Prevention
Costs, appraisal Cost, Internal Failure Costs and External Failure costs:
1. Rework
2. Scrap
3. Warranty Repairs
4. Revenue loss
5. Repair to manufacturing equipment
6. Discount on defective sale
7. Establishment of quality circles
8. Packaging inspection
Answer
(i) Rework ----- Internal Failure

(ii) Scrap ----- Internal Failure
(iii) Warranty Repairs ----- External Failure
(iv) Revenue Loss ----- External Failure
(v) Repairs to Manufacturing Equipment ----- Internal Failure
(vi) Discount on Defective Sales ----- External Failure
(vii) Establishment of Quality Circles ----- Prevention Cost
(viii) Packaging Inspection ----- Appraisal Cost
6 A Ltd. is going to introduce Total Quality Management (TQM) in its company. State whether
and why the following are valid or not for the successful implementation of TQM.
(i) Some departments serve both the external and internal customers. These departments
have been advised to focus on satisfying the needs of the external customers.
(ii) Hold a training program at the beginning of a production cycle to ensure the
implementation of TQM.
(iii) Implement Management by Objectives for faster achievement of TQM.
(iv) Appoint the Head of each department as the person responsible to develop improvement
strategies and performance measures.
(v) Eliminate wastage of time by avoiding documentation and procedures.
Answer
Valid/In-
Point Reason
valid
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(i) Invalid TQM advocates focus to be given on both external and internal cus-
tomers. Hence, focus satisfying the needs of the external customers
only will not be valid for the successful implementation of TQM.
Advanced Strategic
(ii) Valid Training at the beginning would improve productivity by bringing

standardization in work habits and eliminating variations in produc-
tion.
(iii) Invalid For implementation of TQM, Management by Objectives should be
eliminated as targets of production will encourage delivery of poor
quality goods and thus will defeat the collective nature of TQM.
(iv) Invalid Appointing the head of each department as the responsible person is
not valid for the successful implementation of TQM as Total Employee
Involvement (TIE) principle is an important part of TQM.
(v) Invalid Documentation, procedures and awareness of current best practice
are essential in TQM implementation. If documentation and proce-
dures are in place then only improvement can be monitored & meas-
ured and consequently deficiency can be corrected.
7 What steps are involved in value chain analysis approach for assessing competitive
advantages?
Answer
Most corporations define their mission as one of creating products and services. In
contrast, the other companies are acutely aware of the strategic importance of individual
activities within their value chain, They are concentrating on those activities that allow
them to capture maximum value for their customers and themselves. These firms use
the value chain analysis approach to better understand which segments, distribution
channels, price points, product differentiation, selling prepositions and value chain
configuration will yield them the greatest competitive advantage.
The way the value chain approach helps these organizations to assess competitive
advantage includes the use of following steps of analysis:
(i) Internal cost analysis – to determine the sources of profitability and the relative
cost positions of internal value creating processes;
(ii) Internal differentiation analysis – to understand the sources of differentiation
with internal value-creating process; and
(iii) Vertical linkage analysis – to understand the relationships and associated costs
among external suppliers and customers in order to maximize the value delivered
to customers and to minimize the cost.
The value chain approach used for assessing competitive advantages is an integral
part of the strategic planning process. Like strategic planning, value chain analysis is
a continuous process of gathering, evaluating and communicating information for
business decision-making.
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Cost Management
8 State the limitations of value chain analysis.

Answer
Value chain analysis is neither an exact science nor it is easy. It is more ‘’art’’ than preparing
precise accounting reports. There are several limitations to the implementation and
interpretation of value chain analysis.
(a) First, the internal data on costs, revenues and assets used for value chain analysis are
derived from one period’s financial information. For long term strategic decision-
making, changes in cost structures, market prices and capital investments from one
period to the next may alter the implications of value chain analysis. Organisations,
should ensure that the value chain analysis is valid for future periods. Otherwise, the
value chain analysis must be repeated under new conditions.
(b) Identifying stages in an industry’s value chain is limited by the ability to locate at
least one firm that participates in a specific stage. Breaking a value stage into two
or more stages when an outside firm does not compete in these stages is strictly
judgement.
(c) Finding the costs, revenues and assets for each value chain activity sometimes
presents serious difficulties. There is much experimentation underway that may
provide better approaches. Having at least one firm operate in each value chain
activity helps to identify external prices for goods and services transferred between
value chains. For intermediate products or services with no external or competitive
market information, transfer prices must be estimated on the basis of the best
information available.
(d) Isolating cost drivers for each value-creating activity, identifying value chain
linkages across activities, and computing supplier and customer profit margins
present serious challenges. The use of full cost assumes that the full capacity of the
value chain activity’s facilities is used to derive the costs. Plant and manufacturing
personnel and vendors of equipment are good sources for capacity information.
They can also be helpful in estimating the current or replacement cost of the assets.
Independent companies, for valuation services for assets must exist.
(e) Despite the calculational difficulties, experience indicates that performing value
chain analysis can yield firms invaluable information for their competitive situation,
cost structure, and linkages with suppliers and customers.
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Advanced Strategic
9 Differentiate between Traditional Management Accounting and Value Chain Analysis in a

strategic framework.
[Nov 2010]
Answer
Traditional Management
Value Chain Analysis
Accounting
It focuses on internal infor- It focuses on external informations.
mations.
Application of single cost Application of multiple cost drivers i.e. structural and
driver at the overall firm level executional are taken for each value added activity.
is taken.
It assumes that cost reduc- Exploits linkages throughout the value chain i.e. within
tion must be found in the firm, with suppliers and customers.
value added process.
Insights for strategic deci- Identity cost driver at the individual activity level and
sions somewhat limited in develop cost / differentiation advantage either by
traditional management controlling those drivers better than competitors by
accounting. reconfiguring the value chain.
10 How can value analysis achieve cost reduction?

[Nov 2009]
Answer
Value analysis can do cost reduction in the following manner:
a. By identifying and removing unnecessary components in a product which had
utility earlier.
b. By introducing component substitution at a lesser cost without affecting the quality
of the product.
c. By simplifying the product design.
d. By introducing alternative methods with less cost but improved efficiency.
11 What are 3 R’S of Re-Engineering?

Answer
Redesign, retooling and reorchestrating form the key components of BPR that are essential
for an organization to focus on the outcome that it needs to achieve. The outcome pursued
should be an ambitious outcome (as for instance, are a 24 hour delivery to any customer
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anywhere in the world, approval of mortgage loans within 60 minutes of application.

Or ability to have an-line access to a patient’s medical records no matter where they
are in any major city in the world). These types of visionary goals require rethinking the

Cost Management
way most organizations do business, careful redesign, They will additionally need very
sophisticated supporting information systems and a transformation from a traditional
organizational structure to a network type organization.
In resuming, the whole process of BPR in order to achieve the above mentioned expected
results is based on key steps-principles which include redesign, retool, and reorchestrate.
Each step-principle embodies the actions and resources as presented in the table below.
REDESIGN RETOOL REORCHESTRATE
• Simplify • Networks Synchronize
• Standardize • Intranets • processes
• Empowering • Extranets • IT
• Employeeship • WorkFlow • Human resources
• Groupware
• Measurements
12 Compare TQM and Reengineering.

Answer
joylawrenciandas50@gmail.com,8420517209 TQM BPR
Case for action Assumed to be necessary Compelling
Goals Small-scale improvements in Outrageous
many places with cumulative
effects
Scope and focus Attention to tasks, steps, and Select but broad business
processes across the board processes
Degree of change Incremental and continual Order of magnitude and peri-
odic
Senior manage- Important up front Intensive throughout
ment involvement
Role of information Incidental Cornerstone
technology
H Block
Advanced Strategic
13 ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a
single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.
Majority of its revenue comes from export to Euro Zone and US. To strengthen its position
further in the Global Market, it is planning to enhance quality and provide assurance through
long term warranty.
For the coming years company has set objective to reduce the quality costs in each of the
primary activities in its value chain.
Required
State the primary activities as per Porter’s Value Chain Analysis in the value chain of ABC Ltd
with brief description.
Answer
Primary activities are the activities that are directly involved in transforming inputs
into outputs and delivery and after-sales support to output. Following are the primary
activities in the value chain of ABC Ltd.:-
1. Inbound Logistics: These activities are related to the material handling and
warehousing. It also covers transporting raw material from the supplier to the place
of processing inside the factory.
2. Operations: These activities are directly responsible for the transformation of raw
material into final product for the delivery to the consumers.
3. Outbound Logistics: These activities are involved in movement of finished goods
to the point of sales. Order processing and distribution are major part of these
activities.
4. Marketing and Sales: These activities are performed for demand creation and
customer solicitation. Communication, pricing and channel management are major
part of these activities.
5. Service: These activities are performed after selling the goods to the consumers.
Installation, repair and parts replacement are some examples of these activities.
14 Examine the Validity of following statements along with the reasons:
(i) The concepts, tools and techniques of value chain analysis apply only to all those
organizations which produce and sell a product.
(ii) Procurement activities are included in the Primary activities as classified by Porter under
value chain analysis concept.
(iii) As per Porter’s five forces model, bargaining power of buyers does influence the
(iv) profitability of an industry or market.
(v) Value chain analysis in the strategic framework consists of single cost driver concept.
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Cost Management
Answer
(i) Invalid
The concepts, tools and techniques of value chain analysis apply to organizations
which produce and sell a product and also to organizations which provide a service.
(ii) Invalid
Procurement activities are included in the support activities rather than primary
activities.
(iii) Valid
Bargaining power of buyers is one of the factor or force that influences the profitability
of a market or industry. More the bargaining power buyers have, more the pressure
on the industry to not increase the price of product or service. They may even have
to reduce the price sometimes.
(iv) Invalid
Value chain analysis in the strategic framework consists of multiple cost drivers
concept. In value chain analysis, a set of unique cost drivers is identified for each value
activity instead of single cost driver application at the overall firm level. Multiple cost
drivers may be classified into Structural drivers and Executional drivers.
15 Classify the following business activities into primary and support activities under value
chain analysis.
(i) Material Handling and warehousing – Primary
(ii) Purchasing of raw materials, supplies and other consumables – Support
(iii) Order Processing and distribution - Primary
(iv) Selection, placement and promotion of employees - Support
(v) Installation, repair and parts replacement – Primary
(vi) Transforming input into final products – Primary
(vii) General Management, Planning, finance, accounting - Support
(viii) Communication, pricing and channel management - Primary
H Block
Advanced Strategic
Pricing
Chapter 6|
Pricing
1 Rapid Heal Tech Ltd. (RHTL) is a leading IT security solutions and ISO 9001 certified company.
The solutions are well integrated systems that simplify IT security management across
the length and depth of devices and on multiple platforms. RHTL has recently developed
an Antivirus Software and company expects to have life cycle of less than one year. It was
decided that it would be appropriate to adopt a market skimming pricing policy for the
launch of the product. This Software is currently in the Introduction stage of its life cycle and
is generating significant unit profits.
Required
(i) Explain, with reasons, the changes, if any, to the unit selling price that could occur when
the Software moves from the Introduction stageto Growth stage of its life cycle.
(ii) Also suggest necessary strategies at this stage.
Answer
Following acceptance by early innovators, conventional consumers start following their
lead. New competitors are likely to now enter the market attracted by the opportunities
for large scale production and profit. RHTL may wish to discourage competitors from
entering the market by lowering the price and thereby lowering the unit profitability.
The price needs to be lowered so that the product becomes attractive to different market
segments thus increasing demand to achieve the growth in sales volume.
Strategies at this stage may include the following
(i) Improving quality and adding new features such as Data Theft Protection, Parental
Control, Web Protection, Improved Scan Engine, Anti Spyware, Anti Malware etc.
(ii) Sourcing new market segments/ distribution channels.
(iii) Changing marketing strategy to increase demand.
(iv) Lowering price to attract price-sensitive buyers.
2 State the appropriate pricing policy in each of the following independent situations:
(i) ‘A’ is a new product for the company and the market 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. B’s success is crucial for the
company’s survival in the long term.
(iii) ‘C’ is a new product to the company and the market. It has an inelastic market. There
H Block
(iv) needs to be an assured profit to cover high initial costs and the usual sources of capital
have uncertainties blocking them.
(v) ‘D’ is a perishable item, with more than 80% of its shelf life over.

Cost Management
Pricing
Answer
Situation Appropriate Pricing Policy
(i) ‘A’ is a new product for the company and the mar- Penetration Pricing
ket 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 Market Price or Price Just
the 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 mar- Skimming Pricing
ket. It has an inelastic market. There needs to be an
assured profit to cover high initial costs and the un-
usual sources of capital have uncertainties blocking
them.
(iv) ‘D’ is a perishable item, with more than 80% of its Any Cash Realizable Value*
shelf life over.
(*) this amount decreases every passing day.
3 State the most appropriate pricing policy to be adopted in the following independent
situations:
(i) Modern patented drug entering the market.
(ii) The latest version of a mobile phone is being launched by an established, financially
strong company.
(iii) An established company has recently entered the stationery market segment and
launched good quality paper for printing at home and office.
(iv) A car manufacturer is launching an innovative, technologically advanced car in the
highly priced segment.
Answer
Situation Appropriate Pricing Policy
(i) Modern patented drug entering the market. Skimming Pricing
(ii) The latest version of a mobile phone is being Penetration Pricing
launched by an established, financially strong
company.
(iii) An established company has recently entered the Market Price
stationery market segment and launched good
quality paper for printing at home and office.
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(iv) A car manufacturer is launching an innovative, Skimming Pricing

technologically advanced car in the highly priced
segment.
Advanced Strategic
Service Sector
Chapter 7|
Service Sector
1 Explain features of service organizations which may create problems for the applications of
Activity Based Costing.
[May 2005]
Answer
Service organizations predominantly have indirect costs and are hence ideal for
implementation of ABC. However, the following features of service organizations may
create problems for application of ABC –
(1) Production and consumption of many services are inseparable. Hence the specific
costs of rendering each service cannot be ascertained with reasonable accuracy.
Also, difficulties are faced in apportionment of common expenses incurred over
various services.
(2) Most services are intangible. This creates problems in the identification of appropriate
cost driver in respect of each activity or service rendered.
(3) Service outputs vary from day to day. Hence the quantity of cost driver has to be
carefully determined by recording, observing and averaging out the service outputs
over a considerable period of time.
(4) Pricing strategies depend on customer in case of service organization. Such ad hoc
pricing strategies may render the application of ABC system infructuous.
(5) Many service organisations have not previously had a costing system and much
of the information required to set up a ABC system will be non-existent. Therefore
introduction of ABC may be expensive.
2 Write a brief note on Pricing in Service Sector.

[Nov 2003, Nov 2005]
Answer
The different methods used are:
(1) Supply and Labour Billing – Service companies such as appliance repair shops,
automobile repair shops arrive at prices by using two computations, one for labour
and other for materials and parts.
(2) Pure Labour Billing – If materials and parts are not part of service being performed,
then only direct labour costs are used as basis for determining price.
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(3) Cost plus pricing – with a cost based approach, a mark up percentage is used to
cover overhead costs and profit margin, in addition to the direct costs of labour,
material and parts.

Cost Management
Service Sector
(4) Service oriented based billing – Using ABC techniques, Direct Labour and Overhead
costs are ascertained. The desired margin is added to determine the service charges.
3 Discuss with examples, the basic costing methods to assign costs to services.
[May 2007]
Answer
a. Job costing method – The cost of a particular service is obtained by assigning costs
to a distinct identifiable service. e.g. Job Costing method is used in service sectors –
like Accounting Firm, Advertisement campaign.
b. Process Costing method – Cost of a service is obtained by assigning costs to
masses of similar unit and then computing cost per unit on an average basis. e.g.
Retail banking, postal delivery, credit card etc.
c. Hybrid method – Combination of both (a) & (b) above.
4 What do you understand by standard load in transportation service?

Answer
In case of transport companies, the calculation of tonne-kilometres gets complicated
when the goods to be transported are of varying bulk (i.e. quantity) and weight.
In such a case, standard load is computed as a cost unit by multiplying the respective
weight and quantity.
Therefore, it is the total weight which a lorry would carry. This unit takes into consideration
both the quantity and the weight and is most appropriate for distribution of transport
costs over the different departments of the company.
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Advanced Strategic
Standard Costing
Chapter 8|
Standard Costing
1 Explain the procedure for setting up physical or quantity standards for material and labour.
[Nov 1990]
Answer
MATERIAL QUANTITY STANDARDS:
The following procedure is usually followed for setting material quantity standards:
(a) Standardisation of products – Detailed specifications, blueprints, norms for normal
wastage etc., of products along with their designs are settled.
(b) Product classification – Detailed classified list of products to be manufactured are
prepared.
(c) Standardisation of material – Specifications, quality, etc., of materials to be used in
the standard products are settled.
(d) Preparation of bill of materials – A bill of material for each product or part showing
the symbol or code, description and quantity of each material to be used is prepared.
(e) Test runs – Sample or test runs under regulated conditions may be useful in setting
quantity standards in a precise manner.
LABOUR QUANTITY STANDARDS:
The following are the steps involved in setting labour quantity standards:
(a) Standardisation of product, as explained above.
(b) Product classification, as defined earlier.
(c) Standardisation of methods: Selection of proper machines to use proper sequence
and method of operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations
to be performed is prepared.
(e) Time and motion study is conducted for selecting the best way of completing the
job or motions to be performed by workers and the standard time which an average
worker will take for each job.
(f) The operator is given training to perform the job or operations in the best possible
manner.
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Cost Management
Standard Costing
2 “Calculation of variances in standard costing is not an end in itself, but a means to an end.”
Discuss.
[May 1999]
Answer
The crux of standard costing lies in variance analysis. Standard costing is the technique
whereby standard costs are predetermined and subsequently compared with the
recorded actual costs. It is a technique of cost ascertainment and cost control. It establishes
predetermined estimates of the cost of products and services based on management’s
standards of efficient operation. It thus lays emphasis on “what the cost should be”.
These should be costs are when compared with the actual costs. The difference between
standard cost and actual cost of actual output is defined as the variance. The variance
in other words in the difference between the actual performance and the standard
performance. The calculations of variances are simple. A variance may be favourable or
unfavourable. If the actual cost is less than the standard cost, the variance is favourarable
but if the actual cost is more than the standard cost, the variance will be unfavourable.
They are easily expressible and do not provide detailed analysis to enable management
of exercise control over them. It is not enough to know the figures of these variances from
month to month. We infact are required to trace their origin and causes of occurrence for
taking necessary remedial steps to reduce / eliminate them.
A detailed probe into the variance particularly the controllable variances help the
management to ascertain:
(i) the amount of variance
(ii) the factors or causes of their occurrence
(iii) the responsibility to be laid on executives and departments and
(iv) corrective actions which should be taken to obviate or reduce the variances.
Mere calculation and analysis of variances is of no use. The success of variance analysis
depends upon how quickly and effectively the corrective actions can be taken on the
analysed variances. In fact variance gives information. The manager needs to act on the
information provided for taking corrective action. Information is the means and action
taken on it is the end. In other words, the calculation of variances in standard costing is
not an end in itself, but a means to an end.
3 Describe three distinct groups of variances that arise in standard costing.

[May 2000]
Answer
The three distinct groups of variances that arise in standard costing are:
(i) Variances of efficiency – These are the variance, which arise due to efficiency or
inefficiency in use of material, labour etc.
(ii) Variances of prices and rates – These are the variances, which arise due to changes
H Block
in procurement price and standard price.

(iii) Variances due to volume – These represent the effect of difference between actual
activity and standard level of activity.
Advanced Strategic
Standard Costing
4 “Overhead variances should be viewed as interdependent rather than independent”.

Explain.
Answer
The operations of a firm are so inter linked that the level of performance in one area
of operation will affect the performance in other areas. Improvements in one area
may lead to improvements in other areas. A sub-standard performance in one area
may be compensated by a favourable performance in another area. Because of such
interdependency among activities in the firm, the managers should not jump to
conclusions merely based on the label of variances namely favourable or unfavourable.
They should remember that there is a room for trade off amongst variances. Hence,
variances need to be viewed as ‘attention directors’ rather than problem solvers. Thus, a
better picture will be captured when overhead variance are not viewed in isolation but
in an integrated manner.
5 Write short notes on

(a) Ideal Standards
(b)
(c)
Normal Standards
Basic or Bogey Standards
(d) Current Standards
Answer
(a) Ideal Standards – These represent the level of performance attainable when prices
for material and labour are most favourable, when the highest output is achieved
with the best equipment and layout and when the maximum efficiency in utilisation
of resources results in maximum output with minimum cost.
These type of standards are criticised on three grounds:
(i) Since such standards would be unattainable, no one would take them seriously.
(ii) The variances disclosed would be variances from the ideal standards. These
would not, therefore, indicate the extent to which they could have been
reasonably and practically avoided.
(iii) There would be no logical method of disposing of these variances.
(b) Normal Standards – These are standards that may be achieved under normal
operating conditions.
The normal activity has been defined as “the number of standard hours which will
produce at normal efficiency sufficient goods to meet the average sales demand
over a term of years”.
These standards are, however, difficult to set because they require a degree of
forecasting.
H Block
(c) Basic Or Bogey Standards – These standards are used only when they are likely to
remain constant or unaltered over a long period.

Cost Management
Standard Costing
According to this standard, a base year is chosen for comparison purposes in the
same way as statisticians use price indices.
Since basic standards do not represent what should be attained in the present
period, current standards should also be prepared if basic standards are used. Basic
standards are, however, well suited to businesses having a small range of products
and long production runs.
Basic standards are set, on a long-term basis and are seldom revised.
When basic standards are in use, variances are not calculated as the difference
between standard and actual cost. Instead, the actual cost is expressed as a
percentage of basic cost. The current cost is also similarly expressed and the two
percentages are compared to find out how much the actual cost has deviated from
the current standard. The percentages are next compared with those of the previous
periods to establish the trend of actual and current standard from basic cost.
(d) Current Standards – These standards reflect the management’s anticipation of
what actual costs will be for the current period.
These are the costs which the business will incur if the anticipated prices are paid for
the goods and services and the usage corresponds to that believed to be necessary
to produce the planned output.
The variances arising from expected standards represent the degree of efficiency in
usage of the factors of production, variation in prices paid for materials and services
and difference in the volume of production.
6 Differentiate between Standard Costing and Budgetary Control.

[RTP, Nov 1997]
Answer
Standard Costing Budgetary Control
It is a system of accounting where It is a planning exercise made by the
predetermined costs are used for analysis management in setting budgets for the
of variances and control of the entire forthcoming period and analysis of actual
organizations. with the budgeted figures and corrective
action is initiated if any deviations are
identified.
Standard may be expressed both in quan- Budgets are mainly expressed in
titative and monetary measures. monetary terms.
It is concerned with ascertainment and It is concerned with the overall profitabili-
control of costs. ty and financial position of the concern.
Any variance – adverse or favourable is It puts emphasis more on excess over the
investigated. budget.
H Block
It is determined for each element of cost. It is determined for a specific period.
Advanced Strategic
Standard Costing
Standard Costing Budgetary Control

It is introduced primarily to ascertain the It is introduced to state in figures as ap-
efficiency and effectiveness of cost per- proved plan of action relating to a par-
formance. ticular period.
Standards are usually limited to manufac- Budgets are set for all departments in the
turing activities only. organization.
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Cost Management
Target and Life Cycle Costing
Chapter 9|
Target and Life Cycle
Costing
1 Discuss the procedure to implement a target costing system.

Answer
A target costing initiative requires the participation of several departments. Because there
are so many participants in the process from so many departments, some of whom have
different agendas in regard to what they want the program to produce. Design projects
can be delayed by squabbling or by an inability to drive down design or production
costs in a reasonably efficient manner. This delay may lead to serious cost overruns in the
cost of the design team itself, which can lead to abrupt termination of the entire targets
costing system by the management team. However, these problems can be mitigated
or completely eliminated by ensuring that the steps listed here are completed when the
target costing system is first installed:
1. Create a project charter: The target costing effort should begin with a document,
approved by senior management, that describes its goals and what it is authorized
to do. This document, known as the project charter, is essentially a subset of the
corporate mission statement and related goals as they pertain to the target costing
initiative. Written approval of this document by the senior management group
provides the target costing effort with a strong basis of support and direction in all
subsequent efforts.
2. Obtain a management sponsor: The next step is to obtain the strongest possible
support from a management sponsor. This should be an individual who is well
positioned near the top of the corporate hierarchy, believes strongly in the goals
of target costing, and will support the initiative in all respects–obtaining funding,
lobbying other members of top management, working to eliminate road blocks,
and ensuring that other problems are overcome in timely manner. This person is
central to the success of target costing.
3. Obtain a budget: The target costing program requires funds to ensure that one
or more well-staffed design teams can complete target costing tasks. The funding
should be cased on a formal allocation of money through the corporate budget,
rather than a parsimonious suballocation grudgingly granted by one or more
departments. In the first case the funds are unreservedly given to the target costing
effort, whereas in the latter case, they can be suddenly withdrawn by a department
manager manager who is not is not fully persuaded of the need for target costing or
H Block
who suddenly finds a need for the money elsewhere.

4. Assign a strong team manager: Because the typical target costing program
involves so many people with different backgrounds and represents so many
Advanced Strategic
parts of a company, it can be difficult to weld the group together into a smoothly
functioning team focused on key objectives. The best way to ensure that the team
functions properly is to assign to the effort a strong team manager skilled in dealing
with management, the use of project tools, and working with a diverse group of
people. This manager should be a full-time employee, so that his or her complete
attention can be directed toward the welfare of the project.
5. Enroll full-time participants: A target costing team member puts the greatest
effort into the program when he or she is focused only target costing. Thus, it is
essential that as many members of the term as possible be devoted to it full-time
rather than also trying to fulfil other commitment elsewhere the company at the
same time. This may call for the replacement of these individuals in the departments
they are leaving so that there are no emergencies requiring their sudden withdrawal
back to their ‘’home ’’departments to deal with other work problems. It may even be
necessary to permanently assign them to a target costing program, providing them
with a single focus on ensuring the success of the target costing program because
their livelihood are now tied to it.
6. Use project management tools: Target costing can be a highly complex effort
especially for high-cost products with many features and components. To ensure
that the project stays on track, the team should use all available project management
tools, such as Microsoft Project (for tracking the completion of specific tasks), a
company database containing various types of costing information, and a variety of
product design tools.
All these items require assured access to many corporate database, as well as a
budget for whatever computing equipment is needed to access this data.
The main focus of the step described in this section is to ensure the fullest possible
support for target costing by all available means—management, money and staff.
Only when all these elements are in place and concentrated on the goals at hand
does a target costing program have the greatest chance for success.
2 What is Target Costing and what are the stages to the methodology?
[Nov 2000]
Answer
Target Costing is a management tool used for reducing a product cost over its entire life
cycle. It is driven by external Market factors. Marketing management prior to designing
and introducing a new product determines a target market price. This target price is set at
a level that will permit the company to achieve a desired market share and sales volume.
A desired profit margin is then deducted to determine the target maximum allowable
product cost. Target costing also develops methods for achieving those targets and
means to test the cost effectiveness of different cost-cutting scenarios.
Stages to the methodology:
H Block
(1) Conception (planning) Phase – Under this stage of life cycle, competitors products
are to be analysed, with regard to price, quality, service and support, delivery and
technology. The features which consumers would like to have like consumer value

Cost Management
etc. established. After preliminary testing, the company may be asked to pinpoint a
market niche, it believes, is under supplied and which might have some competitive
advantage.
(2) Development phase – The design department should select the most competitive
product in the market and study in detail the requirement of material, manufacturing
process along with competitors cost structure. The firm should also develop
estimates of internal cost structure based on internal cost of similar products being
produced by the company.
If possible the company should develop both the cost structures (competitors and
own) in terms of cost drivers for better analysis and cost reduction.
(3) Production phase – This phase concentrates its search for better and less expensive
products, cost benefit analysis in different features of a product priority wise, more
towards less expensive means of production, as well as production techniques etc.
3 It is said that implementation of the target costing technique requires intensive marketing
research. Explain why intensive marketing research is required to implement target costing
technique.
[Nov 2007]
Answer
Target cost is the difference between estimated selling price of a proposed product with
specified functionality and quality and the 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 needs
to understand what value target customers will assign to different attributes and different
aspects of quality. This requires use of techniques like value engineering and value
analysis. Intensive marketing research is required to understand customer preferences
and the value they assign to each attribute and quality parameter. This insight is required
to be developed must before the product is introduced. The company plays within the
space between the maximum attributes and quality that the company can offer and the
minimum acceptable to target customers.
Therefore in absence of intensive marketing research, the target costing technique
cannot be used effectively.
4 Discuss, how target costing may assist a company in controlling costs and pricing of
products.
[Nov 2008]
Answer
Target costing may assist control of costs and pricing of product as under:
H Block
(i) Target costing considers the price that ought to be charged by a company to achieve
a given market share.
(ii) Target costing should take life cycle costs in to consideration.
Advanced Strategic
(iii) If there is a gap between the target cost and expected cost, ways and means of
reducing or eliminating it can be explored.
(iv) The target cost may be used for controlling costs by comparison.
5 List the steps involved in Target Costing approach to pricing.

[May 2003, Nov 2006]
Answer
The main steps are:
Step 1: Identify the market requirements as regards design, utility, and need for a new
product or improvements of existing product.
Step 2: Set Target selling price based on customer’s expectations and sales forecasts.
Step 3: Set Target Production Volume based on relationships between price and
volume.
Step 4: Establish Target Profit Margin for each product, based on the company’s long
term profit objectives, projected volumes, course of action, etc.
Step 5: Set Target cost or Allowable cost per unit for each product. Target cost is the
difference between Target SP and Target Profit Margin.
Step 6: Determine Current Cost of producing the new product, based on available
resources and conditions.
Step 7: Set Cost Reduction targets in order to reduce the current cost to the target
cost.
Step 8: Analyse the cost reduction target into various components and identify cost
reduction opportunities using Value Engineering and Value Analysis and Activity Based
Costing.
Step 9: Achieve Cost Reduction and Target Profit by Effective Implementation of cost
reduction decisions.
Step 10: Focus on further possibilities of cost reduction i.e. continuous improvement
program.
6 Define Value Engineering and Value Analysis. What are the issues that need to be dealt with
during a value engineering review.
[May 1993, May 1996, May 2000]
Answer
Value Engineering involves searching for opportunities to modify the design of each
H Block
component or part of a product to reduce cost, but without reducing the functionality
or quality of the product.

Cost Management
Value Analysis entails studying the activities that are involved in producing the product to
detect non value adding activities that may be eliminated or minimized to save costs, but
without reducing the functionality or quality of the product. Non value added activities
are those which if eliminated, would not affect the value or utility of product or service
to customers.
Some issues analysed during Value Engineering are:
1. Elimination of unnecessary functions from the production process.
2. Elimination of unnecessary product qualities.
3. Design minimization.
4. Better product design to suit manufacturing process.
5. Substitution of parts.
6. Search for better way of doing things.
7 What is the relationship between Target Costing and Life Cycle Costing?
Answer
Target costing and life cycle costing can be regarded as relatively modern advances in
management accounting, so it is worth first looking at the taken by conventional costing.
Typically, conventional costing attempts to work out the cost of producing an item
incorporating the costs of resources that are currently used or consumed. Therefore, for
each unit made the classical variable costs of material direct labour and variable overheads
are included (the total of these is the marginal cost of productional, together with a
share of the fixed production costs. The fixed production costs can be included using
a conventional overhead absorption rate or they can be accounted for using activity-
based costing (ABC). ABC is more complex but almost certainly more accurate. However,
whether conventional overhead treatment or ABC is used the overheads incorporated
are usually based on the budgeted overheads for the current period.
Once the total absorption cost of units has been calculated, a mark-up (or gross gross
profit percentage) is used to determine the selling price and the profit per unit. The
mark-up is chosen so that if the budgeted sales are achieved, the organization should
make a profit.
There are two flaws in this approach:
1. The product’s price is based on its cost, but no one might want to buy at that price.
The product might incorporate features which customers do not value and therefore
do not want to pay for, and competitors’ products might be cheaper, or at least offer
better value for money. This flaw is addressed by target costing.
2. The costs incorporated are the current costs only. They are marginal costs plus a share
of the fixed costs for the current accounting period. There may be other important
H Block
costs which are not part of these categories, but without which the goods could not
have been made. Examples include the research and development costs and any
close down costs incurred at the end of the product’s life. Why have these costs been
Advanced Strategic
excluded, particularly when selling prices have to be high enough to ensure that the
product makes a profit. To make a profit, total revenue must exceed total costs in the
long term.
8 Write short notes on Kaizen Costing.

Answer
Kaizen costing is a process wherein a product undergoes cost reduction even when it is
already on the production stage. In Japanese terminology, it means Ways of Continuous
Improvement (‘KAI” = Continuous, “Zen” = Improvement). The cost minimization can
include strategies in effective waste management, continuous product improvement or
better deals in the acquisition of raw materials.
Yashihuro Moden defines kaizen costing as ‘’the maintenance of present cost levels for
products currently being manufactured via systematic efforts to achieve the desired cost
level.’’ The word kaizen is a Japanese word meaning continuous improvement.
Moden has described two types of kaizen costing :
• Asset and organisation specific kaizen costing activities planned according to the
exigencies of each deal
• Product model specific costing activities carried out in special projects with added
emphasis on value analysis
Kaizen costings is applied to products that are already in production phase. Prior to
kaizen costing, when the products are under development phase, target costing is
applied.
‘Kaizen costing is based on the belief that nothing is ever perfect, so improvements
and reductions in the variable costs are always possible’.
9 What is Product Life-cycle Costing? Describe its characteristics and benefits.

Answer
Product life cycle costing is an approach used to provide a long-term picture of product
line profitability, feedback on the effectiveness of the life cycle planning and cost data
to clarify the economic impact on alternatives choices in the design, engineering phase
etc. It is also considered as a way to enhance the control of manufacturing costs. It is
important to track and measure costs during each stage of a product’s life cycle.
Characteristics:
(i) Product life cycle costing involves tracing of costs and revenues of each product
over the several calendar periods throughout their entire life cycle.
(ii) Product life cycle costing traces research and design and development costs and
H Block
total magnitude of these costs for each individual product and compared with
product revenue.
(iii) Report generation for costs and revenues.

Cost Management
Benefits:
(i) The product life cycle costing results in earlier actions to generate revenue or to
lower cost than otherwise might be considered.
(ii) Better decision should follow from a more accurate and realistic assessment of
revenues and costs, at least within a particular life cycle stage.
(iii) Product life cycle thinking can promote long-term rewarding in contrast to short-
term profitability rewarding.
(iv) It provides an overall framework for considering total incremental costs over the life
span of a product.
10 What is total-life-cycle costing approach? Why is it important?

Answer
Life cycle costing estimates, tracks and accumulates the costs over a product’s entire
life cycle from its inception to abandonment or from the initial R & D stage till the final
customer servicing and support of the product. It aims at tracing of costs and revenues on
product by product basis over several calendar periods throughout their life cycle. Costs
are incurred along the product’s life cycle starting from product’s design, development,
manufacture, marketing, servicing and final disposal. The objective is to accumulate all
the costs over a product life cycle to determine whether the profits earned during the
manufacturing phase will cover the costs incurred during the pre and post manufacturing
stages of product life cycle.
Importance:
Product life cycle costing is important for the following reasons:
(i) When non-production costs like costs associated with R & D, design, marketing,
distribution and customer service are significant, it is essential to identify them
for target pricing, value engineering and cost management. For example, a poorly
designed software package may involve higher costs on marketing, distribution and
after sales service.
(ii) There may be instances where the pre-manufacturing costs like R & D and design are
expected to constitute a sizeable portion of life cycle costs. When a high percentage
of total life cycle costs are likely to be so incurred before the commencement of
production, the firm needs an accurate prediction of costs and revenues during the
manufacturing stage to decide whether the costly R & D and design activities should
be undertaken.
(iii) Many costs are locked in at R & D and design stages. Locked in or Committed
costs are those costs that have not been incurred at the initial stages of R & D and
design but that will be incurred in the future on the basis of the decisions that have
H Block
already been taken. For example, the adoption of a certain design will determine
the product’s material and labour inputs to be incurred during the manufacturing
stage. A complicated design may lead to greater expenditure on material and labour
costs every time the product is produced. Life cycle budgeting highlights costs
Advanced Strategic
throughout the product life cycle and facilitates value engineering at the design
stage before costs are locked in.
Total life-cycle costing approach accumulates product costs over the value chain. It is
a process of managing all costs along the value chain starting from product’s design,
development, manufacturing, marketing, service and finally disposal.
11 What are the phases in Product Life Cycle?

Answer
The length of product life cycle is governed by the rate of technological change, market
acceptance and competition.
The different phases in Product life cycle are:
(1) Introduction Phase (Childhood Phase) – Here sales volume is low. Prices are high
to cover the initial promotional costs. No profits are earned due to heavy initial costs.
Negligible competition is faced.
(2) Growth Phase (Adulthood Phase) – Here sales volume rises at increasing rate.
High price of products are retained except in the case where competitors enter the
market, prices may be reduced. Profits from the product increase at a rapid pace.
(3) Maturity Phase (Manhood phase) – Here sales volume rises at a decreasing rate.
Prices fall closer to cost due to effect of competition. Normal rate of profits are earned
from the products as costs and prices are normalized.
(4) Decline Phase (Old Age and Death) – Here sales level starts decreasing and gap
between price and cost is further reduced. No sales promotion is done as product
is no longer in demand. Competition also starts disappearing due to withdrawal of
products.
12 What are the costs that you would include in product life cycle cost?
[May 2007]
Answer
The costs are included in different stages of the product life cycle :
Development phase – R & D cost / Design cost.
Introduction phase – Promotional cost / Capacity costs.
Growth phase / Maturity – Manufacturing cost / Distribution costs / Product support
cost.
Decline / Replacement phase – Plants reused / sold / scrapped / related costs.
H Block

Cost Management
13 Explain the various stages in Product Life Cycle.

[Nov 2003]
Answer
The various stages in Product Life Cycle are:
(i) Market research – It identifies the products which customers want, how much
they are prepared to pay for it and how much quantity they intend to buy.
(ii) Specification – It provides details such as required life; maximum permissible
maintenance costs, manufacturing costs, units required, delivery date, expected
performance of the product.
(iii) Design – Proper drawings and process schedules are defined.
(iv) Prototype manufacture – Prototype may be used to develop the product and
eventually to demonstrate that it meets the requirements of the specifications.
(v) Development – Testing and changing to meet the requirements after the initial
run as a product when first made rarely meets the specification.
(vi) Tooling – Tooling up for production means building a production line, building
expensive jigs, buying the necessary tool and equipments.
(vii) Manufacture – It involves the purchase of raw material and components, use of
labour to make and assemble the product.
(viii) Selling – Stimulating and creating demand for the product when the product is
available for sale.
(ix) Distribution – The product should be distributed to the sales outlets and to the
customers.
(x) Product support – The manufacturer or supplier should make sure that spares and
expert servicing facilities are available for the entire life of the product.
(xi) Decommissioning or Replacement – When a manufacturing product comes to
an end, the plant used to build the product must be sold, scrapped, or replaced in
way that is acceptable to the society.
14 M. India Ltd. (MIL) is an automobile manufacturer in India and a subsidiary of Japanese
automobile and motorcycle manufacturer Leon. It manufactures and sells a complete range
of cars from the entry level to the hatchback to sedans and has a present market share of
22% of the Indian passenger car markets. MIL uses a system of standard costing to set its
budgets. Budgets are set semi-annually by the Finance department after the approval of the
Board of Directors at MIL. The Finance department prepares variance reports each month
for review in the Board of Directors meeting, where actual performance is compared with
the budgeted figures. Mr. Suzuki, group CEO of the Leon is of the opinion that Kaizen costing
method should be implemented as a system of planning and control in the MIL.
H Block
Required
Recommend key changes vital to MIL’s planning and control system to support the adoption
of ‘Kaizen Costing Concepts’.
Advanced Strategic
Answer
Kaizen Costing emphasizes on small but continuous improvement. Targets once
set at the beginning of the year or activities are updated continuously to reflect the
improvement that has already been achieved and that are yet to be achieved.
The suggestive changes which are required to be adopted Kaizen Costing concepts in
MIL are as follows:
Standard Cost Control System to Cost Reduction System: Traditionally Standard Costing
system assumes stability in the current manufacturing process and standards are
set keeping the normal manufacturing process into account thus the whole effort is
on to meet performance cost standard. On the other hand Kaizen Costing believes in
continuous improvements in manufacturing processes and hence, the goal is to achieve
cost reduction target. The first change required is the standard setting methodology i.e.
from earlier Cost Control System to Cost Reduction System.
Reduction in the periodicity of setting Standards and Variance Analysis: Under the existing
planning and control system followed by the MIL, standards are set semi-annually and
based on these standards monthly variance reports are generated for analysis. But under
Kaizen Costing system cost reduction targets are set for small periods say for a week or a
month. So the period covered under a standard should be reduced from semi-annually
to monthly and the current practice of generating variance reports may be continued or
may be reduced to a week.
Participation of Executives or Workers in standard setting: Under the Kaizen Costing system
participation of workers or executives who are actually involved in the manufacturing
process are highly appreciated while setting standards. So the current system of setting
budgets and standards by the Finance department with the mere consent of Board of
Directors required to be changed.
15 ABC Ltd. is planning to introduce Kaizen Costing approach in its manufacturing plant. State
whether and why the following are Valid or Not in respect of Kaizen Costing.
(i) VP (Finance) is of the view that company has to make a huge initial investment to bring
a large scale modification in production process.
(ii) Head (Personnel) has made a point that introduction of Kaizen Costing does not
eliminate the training requirement of employees.
(iii) General Manager (Manufacturing) firmly believes that only shop floor employees and
workers’ involvement is prerequisite of Kaizen Costing approach.
(iv) Manager (Operations) has concerns about creation of confusion among employees
and workers regarding their roles and degradation in quality of production.
Answer
H Block
(i) Invalid: Kaizen Costing is the system of cost reduction procedures which involves
making small and continuous improvements to the production processes rather
than innovations or large-scale investment.

Cost Management
(ii) Valid: The training of employees is very much a long-term and ongoing process in
the Kaizen costing approach. Training enhances the abilities of employees.
(iii) Invalid: Kaizen costing approach involves everyone from top management level
to the shop floor employees. Every employee’s active participation is a must
requirement.
(iv) Invalid: Though the aim of Kaizen Costing is to reduce the cost but at the same time
it also aims to maintain the quality. Kaizen costing also aims to bring the clarity in
roles and responsibilities for all employees.
16 Fiona is a news reporter and feature writer for an economic daily. Her assignment is to
develop a feature article on ‘Product Life-Cycle Costing’, including interviews with the Chief
Financial Officers (CFO) and Operating Managers. Fiona has been given a liberal budget for
travel so as to research into company’s history, operations, and market analysis for the firm
she selects for the article.
Required
Fiona has asked you to recommend industries and firms that would be good candidates for
the article. What would you advice? Explain your recommendations.
Answer
The product life cycle span the time from the initial R & D on a product to when customer
service and support is no longer offered for that product.
Life Cycle Costing technique is particularly important when:
(i) High percentage of total life-cycle costs are incurred before production begins and
revenue are earned over several years and
(ii) High fraction of the life cycle costs are locked in at the R & D and design stages.
Fiona should identify those industries and then companies belonging to those
industries where above mentioned feature are prevalent. For example, Automobile and
Pharmaceutical Industries companies like Tata Motors Ltd., Ranbaxy Laboratories Ltd.,
and Dabur India Ltd. will be good candidates for study on product life cycle costing.
17 Classify the following items under the more appropriate category: Category (CC) – Cost
Control Or Category (CR) – Cost Reduction:
(i) Costs exceeding budgets or standards are investigated.
(ii) Preventive function
(iii) Corrective function
(iv) Measures to standardize for increasing productivity
(v) Provision of proper storage facilities for materials.
H Block
(vi) Continuous comparison of actual with the standards set.

(vii) Challenges the standards set
(viii) Value analysis
Advanced Strategic
Answer
Classification of Items under Cost Reduction (CR)/ Cost Control (CC)
Sl. No. Item Category CC/ CR
(i) Costs exceeding budgets or standards are investigated CC
(ii) Preventive function CC
(iii) Corrective function CR
(iv) Measures to standardize for increasing productivity CR
(v) Provision of proper storage facilities for materials CC
(vi) Continuous comparison of actual with the standards set CC
(vii) Challenges the standards set CR
(viii) Value analysis CR
H Block

Cost Management
Transfer Pricing
Chapter 10|
Transfer Pricing
1 “Transfer pricing is a widely debated and contested topic” – Discuss,

[Nov 1999]
Answer
Usually a conflict between a division of the company and the company as a whole is faced
by the management of decentralized units when products or services are exchanged
among different divisions of the company. Such a conflict becomes more significant
in the case of those concerns where profitability is used as criteria for evaluating the
performance of each division.
The essence of decentralization is reflected in the freedom to make decisions. Under
such a set up it is expected. That the top management should not interfere with the
decision making process of its subordinates beading different units. In other words,
management of decentralized units is given autonomy with regard to decision-making.
In this system top management is expected to preserve ‘autonomy in decision making’.
The management of such companies also expects that each division should not only
achieve its own objective – necessary for evaluating the performance but should also
achieve the objective of goal congruence.
A divisional head in a company under aforesaid set up is free to use a price as a transfer
price for goods and services, which may provide incentive. Such a transfer price may
fail to achieve the objective of ‘Goal congruence’ (which means a perfect congruence
between division’s goal and the goal of the company. In case of failure of a division to
achieve the objective of ‘Goal congruence’ the management of the company may dictate
their transfer price. Such a interference of management of the company is usually the
main basis of conflict between a division and the company as a whole.
Further this conflict is aggravated if the management advocates the transfer of goods
and services at cost. As such, the transfer price will not reflect a good picture about the
performance of the transferring division. The profitability of the transferring division will
not be known by the use of such a transfer price.
Each division appreciates the transfer of its goods/services at usual selling price/market
price so as to arrive at the correct return / profitability figure, used for measuring the
performance.
There is no incentive to the transferring division if goods and services are transferred at
variable cost.
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Advanced Strategic
Transfer Pricing
2 What should be the basis of transfer pricing, if unit variable cost and unit selling price are
not constant?
[Nov 1999]
Answer
If unit variable cost and unit selling price were 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 produce its output at a level less than its full capacity and in all such cases a
transfer price may be imposed centrally.
3 What will be the marketable transfer pricing procedure regarding the goods transferred
under the following conditions (each condition is independent of the other)?
(i) When division are not captives of internal divisions and the divisions are free to do
business both internally and externally and when there are reasonably competitive
external markets for the transferred products.
(ii) If the external market for the transferred good is not reasonably competitive.
Answer
Marketable Transfer Pricing Procedure
(i) When division are not captives of internal divisions and the divisions are free to do
business both internally and externally and when there are reasonably competitive
external markets for the transferred products, then the most suitable transfer price
would be, the market price, as it generally leads to optimal decisions.
(ii) In case, the external market for the transferred good is not reasonable competitive,
following two situations may arise in this case:
If there is idle capacity – Under this situation opportunity cost will be zero hence
minimum transfer price should be equal to the additional outlay costs incurred upto the
point of transfer (sometimes approximated by variable costs).
If there is no idle capacity – Under this situation opportunity cost should be added to
outlay costs for determining minimum transfer price.
4 Discuss the potential for maximization of income by a multinational through the use of
transfer pricing mechanism.
Answer
H Block
The potential for maximization of income by a multinational through the use of transfer
pricing mechanism is based on the successful implementation of the following steps:

Cost Management
Transfer Pricing
(i) Transfer pricing may be set relatively higher for affiliates in relatively high-tax
countries that purchase inputs from affiliates located in relatively low-tax countries.
(ii) Transfer prices to affiliates in countries which are subject to import duties for goods
or services purchase may be set low so as to avoid host country taxes.
(iii) Transfer prices to an affiliate in a country that is encountering relatively high inflation
may be set relatively high to avoid some of the adverse effects of local currency
devaluation that are related to the high inflation.
(iv) Transfer prices may be set high for goods and services purchased by an affiliate
operating in a country that has imposed restriction on the repatriation of income to
foreign companies.
(v) Transfer prices may be set low for an affiliate that is trying to establish a competitive
advantage over a local company either to break into a market or to establish a higher
share of the company’s business.
5 Indicate the possible disadvantages of treating divisions as profit centres.

[Nov 2001]
Answer
The Possible disadvantages of treating divisions as profit centres are as follows:
(1) Divisions may compete with each other and may take decisions to increase profits at
the expense of other divisions thereby overemphasizing short term results.
(2) It may adversely affect co-operation between the divisions and lead to lack of
harmony in achieving organizational goals of the company. Thus it is hard to achieve
the objective of goal congruence.
(3) It may lead to reduction I the company’s overall total profits.
(4) The cost of activities, which are common to all divisions, may be greater for
decentralized structure than centralized structure. It may thus result in duplication
of staff activities.
(5) Top management looses control by delegating decision making to divisional
managers. There are risks of mistakes committed by the divisional managers, which
the top management, may avoid.
(6) Series of control reports prepared for several departments may not be effective from
the point of view of top management.
(7) It may under utilize corporate competence.
(8) It leads to complications associated with transfer pricing problems.
(9) It becomes difficult to identity and defines precisely suitable profit centres.
(10) It confuses division’s results with manager’s performance.
H Block
Advanced Strategic
Transfer Pricing
6 What are some goals of a ‘transfer-pricing’ system in an organization?

[Nov 2002, May 2006]
Answer
The goals of transfer pricing are that it should:
(1) provide information that motivates divisional managers to take good economic
decisions which will improve the divisional profits and ultimately the profits of the
company as a whole.
(2) provide information which will be useful for evaluating the divisional performance.
(3) seek to achieve goal congruence.
(4) ensure that divisional autonomy is not undermined.
7 What are various methods of Transfer Pricing?

[May 1998, Nov 2005]
Answer
The method of transfer pricing depends on whether the transferor is a cost centre or
a profit centre. If it is a cost centre then transfer will take place at cost (may or may not
include fixed cost). If it is a profit centre then transfer will take place at a sale price. For the
determination of selling price, different techniques are available:
A. Absorption Costing Pricing – The transfer price comprises of (Actual prime costs +
Overhead recovered + Mark up).
B. Marginal Costing Pricing – Here transfer price is = Variable Costs + Contribution.
C. Pricing at Market Price – The transfer prices of goods and services are based on
competitive market prices.
D. Pricing at Bargained or Negotiated Price – Each decentralised unit is considered as
an independent unit and transfer price are arrived at by negotiations or bargaining
between the buying division and the selling division. This system fosters a business
like attitude amongst the divisions of the company.
8 What do you mean by dual rate transfer pricing system?

Answer
This system uses two separate transfer prices to price each inter divisional transaction.
(a) The transferring division is credited with the full cost plus a markup on each
transaction. This price is intended to approximate the market price of the goods
or services transferred. The mark up provides the transferring division sufficient
contribution to recover its fixed costs and report profits. This price is used even if the
intermediate product is not marketable.
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(b) The recipient division is debited with the Marginal cost of the transfers. Alternatively,
the relevant costs may be substituted for the Marginal costs. The use of Relevant
costs will automatically lead into optimal decision making from the company view
point.

Cost Management
Transfer Pricing
This means that the selling division is allowed to earn profit and the receiving division
has the correct information in order to make the correct selling decision to maximize the
group’s profit. The difference between the two prices will be debited to a group account
named transfer price adjustment account.
At the end of the year, the profits of the two divisions and hence of the group will be
overstated to the extent of the price difference. In order to correct this the total amount
in the transfer price adjustment account must be subtracted from the two profits to
arrive at the correct profit for the group as a whole.
9 Write short notes on Two Part Transfer Pricing System.

Answer
In this system, all transfers are made at marginal cost but the supplying division charges
the receiving division a fixed fee for the privilege of obtaining the transfers at a low price.
The fixed fee should cover the supplying division’s fixed costs and allow it to earn an
adequate profit. This system also has a number of drawbacks, two of which are –
1. The supplying division has no incentive to supply units swiftly as quantum of profit
cannot be increased.
2. The profit is made whenever the fixed fee is transferred.
10 Fox-2-Tec Ltd (F2TL) has Division ‘Dx’ and Division ‘Dz’ with full profit responsibility. The
Division ‘Dx’ produces Component ‘X’ which it sells to ‘outside’ customers only. The Division
‘Dz’ produces a product called the ‘Z’ which incorporates Component ‘X’ in its design. ‘Dz’
Division is currently purchasing 2,500 units of Component ‘X’ per year from an outside
supplier at a cost of ` 35 per unit, less a 10 percent quantity discount. ‘Dx’ Division can sell
its entire Component ‘X’ to outside customers at the normal ` 35 price. Costs associated with
manufacturing of a unit of Component ‘X’ are as follows:
Variable Expenses ` 21
Fixed (based on a capacity of 25,000 units per year) ` 9
F2TL’s new managing director agrees for internal transfer if an acceptable transfer price can
be worked out. Accordingly, he requires solution of following questions:-
(i) If the ‘Dz’ Division purchases 2,500 units of Component ‘X’ per year from the ‘Dx’ Division,
what price should control the transfers? Why?
(ii) Refer to your computations in (1). What is the lower limit and the upper limit for a
transfer price? Is an upper limit relevant in this situation?
(iii) If the ‘Dx’ Division meets the price that the ‘Dz’ Division is currently paying to its supplier
and sells 2,500 units of Component ‘X’ to the ‘Dz’ Division each year, what will be the
effect on the profits of the ‘Dx’ Division, the ‘Dz’ Division, and the company as a whole?
(iv) If the intermediate market price for Component ‘X’ is ` 35 per unit, is there any reason
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why the ‘Dx’ Division should sell to the ‘Dz’ Division for less than ` 35?
Explain.
Advanced Strategic
Transfer Pricing
Answer
(i) The transfer price should be `35 per unit, the regular price charged to other customers.
Since the ‘Dx’ Division is operating at capacity, it will lose `14 in contribution margin
for each outside sale given up in favor of sales to the ‘Dz’ Division (` 35 – ` 21 = `14).
Transfer Price = Variable Cost per unit + Lost Contribution Margin per unit on
= `21 + `14
= `35
(ii) The lower limit is `35, the price obtained in (1). The upper limit is also `35, since `35
is the intermediate market price. That is, it would not be fair to charge the other
Division more than the price being charged to regular customers. However, an upper
limit is not really relevant in this situation since no transfers will be made between
the two Divisions.
(iii) The price being paid to the outside supplier, net of the quantity discount, is only
`31.50. If this price is met by the ‘Dx’ Division, then profits in the ‘Dx’ Division and in
the company as a whole will drop by `8,750 per year.
Minimum Transfer Price `35
Outside Supplier’s Price
31.50 `
Loss in Contribution Margin per unit
3.50 `
No. of units per year 2,500
Total Loss in Profits `8,750
Profits in the ‘Dz’ Division will remain unchanged, since it will be paying the same
price internally as it is now paying externally.
(iv) Yes, if costs can be avoided as a result of the inside business. The price would then
be `35 less the avoided costs.
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Cost Management
MRP, MRP-II, ERP and JIT
Chapter 11|
MRP, MRP-II, ERP and
JIT
1 Write short notes on Computer-Aided Manufacturing.

Answer
The manufacturing process is carried out by a range of machinery that, together with
its concomitant software, comes under the collective heading of computer–aided
manufacturing (CAM).
Maximum elements of CAM are computer numerical control (CNC) and robotics.
CNC machines are programmable machine tools. These are capable of performing a
number of machining tasks, e.g. cutting, grinding, moulding, bending etc.
A program stores all the existing manufacturing activities and set-up instructions for a
particular machine or bank of machines, providing facility of changing its configuration
in a matter of seconds via the key board; changes to existing configurations and new
configurations are easily accommodated. CNC therefore offers great flexibility, and
reduces set-up times.
Human operators will tire and are error prone. CNC machines are able to repeat the same
operation continuously in identical manner, with high accuracy level.
For Example the car producer, found that the time taken to completely retool car body
panel jigs in their intelligent body assembly system (IBAS) fell from 12 months to less
than 3 months by reprogramming the process machinery by reprogramming the process
machinery by computer and using computerized jig robots.
2 How MRP developed into ERP?

Answer
Material requirements planning (MRP) and manufacturing resource planning (MRPII) are
predecessors of enterprise resource planning (ERP), a business information integration
system. The development of these manufacturing coordination and integration methods
and tools made today’s ERP systems possible. Both MRP and MRPII are still widely used,
independently and as modules of more comprehensive ERP systems, but the original
vision of integrated information systems as we know them today began with the
development of MRP and MRPII in manufacturing.
H Block
MRP ( and MRPII ) evolved from the earliest commercial database management package
developed by Gene Thomas at IBM in the 1960s. The original structure was called BOMP (
bill-of-materials processor ), which evolved in the next generation into a more generalized
Advanced Strategic
tool called DBOMP (Database Organization and Maintenance Program). These were run
on mainframes, such as IBM/360.
Joseph Orlicky developed Material Requirements Planning (MRP) in response to the
TOYOTA Manufacturing Program. The first company to use MRP was Black & Decker
in 1964, with Dick Alban as project leader. In 1983 Oliver Wight developed MRP
into manufacturing resource planning (MRP II). Orlicky’s book is entitled The New Way of
Life in Production and Inventory Management (1975). By 1975, MRP was implemented in
150 companies. This number had grown to about 8,000 by 1981. In the 1980s, Joe Orlicky’s
MRP evolved into Oliver Wight’s manufacturing resource planning (MRP II) which brings
master scheduling, rough-cut capacity planning, capacity requirements planning, S&OP
in 1983 and other concepts to classical MRP. By 1989, about one third of the software
industry was MRP II software sold to American industry ($1.2 billion worth of software).
The vision for MRP and MRPII was to centralize and integrate business information in a
way that would facilitate decision making for production line managers and increase the
efficiency of the production line overall. In the 1980s, manufacturers developed systems
for calculating the resource requirements of a production run based on sales forecasts.
In order to calculate the raw materials needed to produce products and to schedule the
purchase of those materials along with the machine and labor time needed, production
managers recognized that they would need to use computer and software technology
to manage the information. Originally, manufacturing operations built custom software
programs that ran on mainframes.
Material requirements planning (MRP) was an early iteration of the integrated information
systems vision. MRP information systems helped managers determine the quantity and
timing of raw materials purchases. Information systems that would assist managers with
other parts of the manufacturing process, MRPII, followed. While MRP was primarily
concerned with materials, MRPII was concerned with the integration of all aspects of the
manufacturing process, including materials, finance and human relations.
Like today’s ERP systems, MRPII was designed to tell us about a lot of information by
way of a centralized database. However, the hardware, software, and relational database
technology of the 1980s was not advanced enough to provide the speed and capacity
to run these systems in real-time, and the cost of these systems was prohibitive for most
businesses. Nonetheless, the vision had been established, and shifts in the underlying
business processes along with rapid advances in technology led to the more affordable
enterprise and application integration systems that big businesses and many medium
and smaller businesses use today (Monk and Wagner).
3 What is MRP and what are its objectives and benefits?

[May 2004]
Answer
It is a management information system providing a basis for production decisions when
H Block
what is manufactured has a composite structure and when lead items are important
features. Obviously, the ability of the system to deliver what is required in the correct
place at the correct time will be dependent on the quality of information which is put
into the computer model.

Cost Management
Aims of material requirement planning :

1. Determine for final products namely, what should be produced and at what time.
2. Ascertaining the required units of production of sub-assemblies.
3. Determining the requirement for materials based on an up-to-date bill of materials
file (BOM).
4. Computing inventories, WIP, batch sizes and manufacturing and packaging lead
times.
5. Controlling inventory by ordering bought-in components and raw materials in
relation to the order received or forecast rather than the more usual practice of
ordering from stock-level indicators.
Benefits:
Detailed forecast of the inventory position is highlighted period by period.
4 What are the important data requirements to operate material requirement planning
system?
Answer
The important files and records required to implement an MRP system are:
1. The Master Production schedule : This schedule specifies the quantity of each
finished unit of products to be produced, and the time at which each unit will be
required.
2. The Bill of Material file : The bill of material file specifies the sub-assemblies,
components and materials required for each finished good.
3. The Inventory file : This maintains details of items in hand for each sub-assemblies,
components and materials required for each finished goods.
4. The Routing file : This file specifies the sequence of operations required to
manufacture components, sub-assemblies and finished goods.
5. The Master parts file : This file contains information on the production time of
sub-assemblies and components produced internally and lead times for externally
acquired items.
5 Write note on MRP – II.

Answer
When the scope of MRP-1 is developed further which includes
1. Planning of raw material
2. Planning of component & sub-assemblies
3. Compute the other resources e.g. machine or labour capacity
H Block
4. To create a full integrated plan for management then it is known as Manufacturing

resources planning (MRP-2)
Advanced Strategic
MRPII (also written MRP-2) adds the MRP schedule into a capacity planning system and
then builds the information into a production schedule. It is also seen as a link between
strategic planning and manufacturing control. The sequence of events is as follows:
From that document, a manufacturing, plan is developed based upon inputs from
purchasing & production. Adjustments may be necessary to allow for production rates.
Possible inventory levels in seasonal trades & the size of the workforce. The manufacturing
plan leads into a detailed master production schedule which is akin to the original
philosophy of MRP already outlined.
6 What do you mean by ERP? Name six benefits of ERP in an enterprise

[May 2004, Nov 2006]
Answer
Enterprise resource planning (ERP) software attempts to integrate all departments and
functions across a company into a single computer system that can serve all those different
departments’ particular needs. In fact ERP combines all computerized departments
together with the help of a single integrated software that runs off a single database so
that various departments can more easily share information and communicate with each
other
Benefits of ERP:
a. Product costing.
b. Inventory management.
c. Distribution and delivery of products.
d. E-commerce.
e. Automatic control of quality.
f. Sales service.
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g. Improved production planning.

h. Quick response to change in market condition.
i. Competitive edge by improving business process.

Cost Management
7 Explain the main features on ‘Enterprise Resource Planning.’

[Nov 2007]
Answer
Some of the major features of “Enterprise Resource Planning” (ERP) areas are as follows:
(i) ERP facilitates company-wide integrated information system covering all functional
areas like manufacturing, selling and distribution, payables, receivables, inventory
etc.
(ii) It performs core activities and increases customer services thereby augmenting
the corporate image.
(iii) ERP bridges the information gap across organization.
(iv) ERP provides complete integration of systems.
(v) It is a solution for better project management.
(vi) It allows automatic induction of latest technologies like electronic fund transfer
(EFT), Electronic Data Interchange (EDI), Internet, Intranet, Video Conferencing,
E-commerce etc.
(vii) ERP eliminates most business problems like material shortage, productivity
enhancements, customer service, cash management etc.
(viii) It provides business intelligence tools.
8 Define JIT Production and JIT Purchasing.

Answer
The CIMA Official Terminology defines JIT as -
A system whose objective is to produce or procure products or components as and
when they are required by a customer or for use, rather than for inventory. A just in time
system is a ‘pull’ system which responds to demand, in contrast to a ‘push’ system, in
which inventory acts as a buffer between the different elements of the system, such as
purchasing, production and sales.
JIT Production is defined as a production system which is driven by demand for finished
products whereby each component on a production line is produced only when needed
for the next stage.
JIT Purchasing is defined as a purchasing system in which material purchases are
contracted so that the receipt and usage of material to the maximum extent possible,
coincide.
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Advanced Strategic
9 Discuss about Time Analysis under JIT.

Answer
In many Western organizations in the past it took several months to make a product
from start to finish, despite the fact that if worked on continuously it could be made in
say, two days. The difference in time is largely due to non value adding time like set up
time, movement time, waiting time and inspection time. It is apparent that value is only
added to the product during the actual processing time. These have been estimated to
represent as little as 10% of the total manufacturing lead time in many companies and
thus up to 90% of production time adds costs and no value.
The objective of JIT is to organize the production system in such a way that the
manufacturing lead time becomes equal to process time.
Manufacturing Lead time = Setup time + Movement Time + Process Time + Waiting Time
+ Inspection Time.
10 What are the advantages and disadvantages of JIT?

[May 2007]
Answer
Just-in-time inventory concept aims at giving the following advantages:
1. Drastic reduction in investment on inventories can be achieved.
2. Total cost of operations can be reduced substantially.
3. Quality of components and materials can be maintained with the help of quality
control system.
4. Storage cost can be saved to the maximum.
5. Loss due to evaporation, sublimation, deterioration, obsoletion, pilferage, theft can
be brought to the minimum.
6. Cost of inventory accounting can also be reduced.
7. Prices of components and materials can be kept within reasonable limits with the
help of long-term contracts with the suppliers.
8. Production flow can be maintained un-interrupted on the guarantee of on time
supplies being given by the suppliers.
The following disadvantages may also come up:
1. A break in the flow of supplies for a very short period shall lead to stoppage of
production due to stock out.
2. Un-mended wrong supply may either spoil the production or cause its stoppage.
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3. The concept cannot be applied in practice, if reliability of the suppliers is not there.
4. Requirement at every moment is to be carefully assessed and ordered for. This
requires a continuous vigilance on the operations.

Cost Management
5. Materials produced seasonally may be scarce in the market in off-season, thus

rendering regular on-time delivery very difficult on the part of the suppliers.
6. A problem in any part of the production line will halt the entire system, as earlier
workstations will not receive the pull signals and later stations will not have their
pull signals answered.
11 Write short notes on Accounting for Pull System – Back Flush Costing and discuss the
problems associated with it.
Answer
Traditional cost accounting systems track the sequence of raw materials and components
moving through the production systems, and as a consequence are called ‘sequential
tracking systems’. As JIT system is different, it requires own cost accounting system. The
absence of stock makes choices about inventory valuation systems unnecessary and the
rapid conversion of direct material into cost of goods sold simplifies the cost accounting
system. The approach is known as back flush accounting.
Backflush accounting delays the recording of costs until after the events have taken place,
then standard costs are used to work backwards to ‘flush’ out the manufacturing costs.
The event that triggers the records kept in backflush accounting is the sale of goods.
This is the system used by TOYOTA in its UK factory. In true Japanese style it manipulates
employees to behave in a certain way. First, employees must concentrate on achieving
sales because cost of sales is the trigger – nothing gets recorded until the sale is made.
Second, there is no benefit in producing goods for inventory. In traditional systems,
which have a finished goods inventory, managers can increase profit by producing more
goods than are sold in a period because an increase in finished goods inventory reduced
the cost of sales in traditional financial accounts.
The back flush accounting model cannot be applied in all organizations. It can only be
applied where a JIT type system is in operation.
The advantages of it is that it is less time consuming and less expensive than traditional
system.
The disadvantages may be that with JIT, defects must be eliminated if the system is
to work and so no accounts for this will exist in backflush accounting whereas they are
required in traditional system. Similarly, JIT system practices no WIP policy as a result of
which backflush accounting also does not report WIP Inventory. This can be countered
by claiming, quite rightly, immateriality. If only one tenth of one day’s production is held
in work in progress then it is immaterial. It can also be claimed that it is immaterial if the
work in progress does not change from one period to the next as opening and closing
inventory will cancel each other out.
H Block
Backflush accounting can be criticized because of the lack of information that it provides.
Some argue, quite rightly, that in reality it is impossible to eliminate all inventory as a truck
arriving with raw material creates inventory until it is moved to and used in production. If
Advanced Strategic
back flush accounting is used in a system where a substantial amount of inventory is held,
a physical stock take will be needed, because the system does not record the quantity of
inventory, instead, it is derived on paper by the difference between the standard cost of
material in the goods sold and the amount of materials purchased. This must be checked
by a physical stock take from time to time.
12 Explain, how the implementation of JIT approach to manufacturing can be a major source
of competitive advantage.
[Nov 2008]
Answer
JIT provides competitive advantage in the following ways:
(i) Stocks of raw materials and finished goods are eliminated, stock holding costs are
avoided.
(ii) JIT aims at elimination of non-value added activities and elimination of cost in this
direction will improve competitive advantage.
(iii) It affords flexibility to customer requirements where the company can manufacture
customized products and the competitive advantage is thereby improved.
(iv) It focuses the direction of performance based production of high quality product.
(v) It minimize waiting times and transportation costs.
13 How does the JIT approach help in improving an organisation’s profitability?
[May 2007]
Answer
JIT approach helps in the reduction of costs/increase in prices as follows:
(i) Immediate detection of defective goods being manufactured so that early correction
is ensured with least scrapping.
(ii) Eliminates/reduces WIP between machines within working cell.
(iii) OH costs in the form of rentals for inventory, insurance, maintenance costs etc. are
reduced.
(iv) Higher product quality ensured by the JIT approach leads to higher premium in the
selling price.
(v) Detection of problem areas due to better production/scrap reporting/labour tracing
and inventory accuracy lead to reduction in costs by improvement.
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Cost Management
14 Indian Petrons Ltd. (IPL) is a leading manufacturing company. Under increasing pressure
to reduce costs, to contain inventory and to improve service, IPL’s Costing Department has
recently undertaken a decision to implement a JIT System.
The management of IPL is convinced of the benefits of their changes. But Supplies Manager
Mr. Brian fears with the Costing Department’s decision. He said:
“We’ve been driven by suppliers for years ... they would insist that we could only purchase in
thousands, that we would have to wait weeks, or that they would only deliver on Mondays!”
Is Mr. Brian’s view point correct and why?
Answer
“For successful operation of JIT inventory system, the suppliers chosen must be willing to
make frequent deliveries in small lots. Rather than deliver a week’s or a month’s material
at one time, suppliers must be willing to make deliveries several times a day and in the
exact quantities specified by the buyer.”
It is described in the problem that suppliers are not willing to
- make frequent deliveries and
- make supplies in the exact quantities as required
Accordingly Mr. Brian’s doubt is correct on successful implementation of JIT System.
H Block
Advanced Strategic
Uniform Costing and Inter Firm Comparison
Chapter 12|
Uniform Costing and
Inter Firm Comparison
1 What are the requisites for the installation of a Uniform Costing system?
Answer
Essential requisites for the installation of Uniform Costing are as under:
(i) The firm in the industry should be willing to share or furnish relevant data or
information.
(ii) A spirit of co-operation and mutual trust should prevail among the participating
firms.
(iii) Mutual exchange of ideas, methods used, special achievement made, research and
know- how etc. should be frequent.
(iv) Bigger firms should take the lead towards sharing their experience and know- how
with the smaller firm to enable the later to improve their performance.
(v) In case of accounting methods, principles, procedure and production method
uniformity must be established.
2 What is Uniform Costing? Why is it recommended?

Answer
It is not a distinct method of costing when several undertakings start using the same
costing principles or practices, they are said to be following uniform costing. Different
concerns in an industry should adopt a common method of costing and apply uniformly
the same principles and techniques for better cost comparison and common good and
helps in mutual cost control and cost reduction. Hence, it is recommended that a uniform
method of costing should be adopted by the member units of an industry.
3 State the limitations of Uniform Costing.

Answer
Limitations of Uniform Costing are:
(i) Sometimes it is not possible to adopt uniform standards, methods and procedures
of costing in different firms due to differing circumstances in which they operate.
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Hence, the adoption of uniform costing becomes difficult in such firms.

(ii) Disclosure of cost information and other data is an essential requirement of a
uniform costing system. Many firms do not wish to share such information with their
competitors in the same industry.

Cost Management
(iii) Small firms in an industry believe that uniform costing system is only meant for big
and medium size firms, because they cannot afford it.
(iv) It induces monopolistic trend in the business, due to which prices may be increased
artificially and supplies withheld.
4 What are the advantages of Uniform Costing?

Answer
The advantages accruing from the use of Uniform Costing System are as follows:
(i) The management of each firm will be saved from the exercise of developing and
introducing a costing system of its own.
(ii) A costing system devised by mutual consultation and after considering the difficulties
and circumstances prevailing in different firms is readily adopted and successfully
implemented.
(iii) It facilitates comparison of cost figures of various firms to enable the firms to identify
their weak and strong points besides controlling costs.
(iv) Optimum achievement of efficiency is attempted by all the firms by utilising the
experience of other concerns in the industry.
(v) Standing in the industry of each firm will be known by making a comparison of its
cost data with others.
(vi) Services of cost consultants or experts may be available jointly to each firm in the
industry by sharing their experiences and expenses.
(vii) Research and development benefits of bigger firms may be made available to
smaller firms.
(viii) It helps in the reduction of labour turnover, as a uniform wage system is the pre-
condition of a uniform costing system.
(ix) It helps Trade Associations in negotiating with the Government for any assistance
or concession in the matters of taxation, exports, subsidies, duties and prices
determination etc.
(x) Unhealthy competition is avoided among the firms in the same industry in framing
pricing policies and submitting tenders.
(xi) Prices fixed on the basis of uniform costing are representative of the whole industry
and thus are reliable.
(xii) Uniform costing provides a basis for the comparative assessment of the performance
of two firms in the same industry but in different sectors.
(xiii) It helps the Government in regulating the prices of essential commodities such as
bread, sugar, cement, steel etc.
5 Enumerate the objectives of Uniform Costing.

Answer
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The main objectives of Uniform Costing are as follows:

(i) Facilitates Comparison: To facilitate the comparison of costs and performances of
different units in the same industry; it provides objective basis.
Advanced Strategic
(ii) Eliminates Unhealthy Competition: To eliminate unhealthy competition among

the different units of an industry.
(iii) Improves Efficiency: To improve production capacity level and labour efficiency by
comparing the production costs of different units with each other.
(iv) Provides Relevant Data: To provide relevant cost information/ data to the
Government for fixing and regulating prices of the products.
(v) Ensures Standardisation: To bring standardisation and uniformity in the operation
of participating units.
(vi) Reduces Cost: To reduce production, administration, selling and distribution costs,
and to exercise control on fixed costs.
6 What are the advantages of Inter-firm Comparison?

Answer
The main advantages of Inter-firm Comparison are:
(i) Such a comparison gives an overall view of the industry as a whole to its members.
The present position of the industry, progress made during the past and the future
of the industry.
(ii) It helps a concern in knowing its strengths or weaknesses in relation to others so
that remedial measures may be taken.
(iii) It ensures an unbiased specialized reporting on particular problems of the concern.
(iv) It develops cost consciousness among members of the industry.
(v) It helps Government in effecting price regulation.
(vi) It helps to improve the quality of products manufactured and to reduce the cost of
production. It is thus advantageous to the industry as well as to the society.
7 What are the limitations of Inter-firm Comparison?

Answer
The following are the limitations in the implementation of a scheme of Inter-firm
Comparison:
(i) There is a fear of losing secrecy of the production method or some peculiar process
or method among the top management..
(ii) Middle management is usually not convinced with the utility of such a comparison.
(iii) In the absence of a suitable cost accounting system, the figures supplied may not be
reliable for the purpose of comparison.
(iv) Suitable basis for comparison may not be available.
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Cost Management
Learning Curve
Chapter 13|
Learning Curve
1 Explain the concept ‘Learning curve’. How can it be applied for Cost management?
[May 2007]
Answer
The first time when a new operation is performed, both the workers and the operating
procedures are untried. As the operation is repeated and the workers become more
familiar with work, labour efficiency increases and the labour cost per unit declines. This
process continues for some time and a regular rate of decline in cost per unit can be
established. This rate can be used to predict future labour costs. The learning process
starts from the point when the first unit comes out of the production line. In other words
‘Learning curve’ is a function that measures how labour hours per unit decline as units
of production increase because workers are learning and becoming better at their jobs.
Cost Management Application:
a. Learning curve is useful in analysing cost volume profit relationship. The company
can set low price of its product to generate high demand. As the production
increases, cost per unit drops.
b. It helps in budgeting and profit planning.
c. It enables the company in price fixation. In particular, the company can fix a lower
price for repeat orders.
d. It helps the design engineers to take suitable decisions based on expected rates of
improvement.
e. It helps in price negotiations.
f. It is useful in setting standards and in performance evaluation.
2 What are the distinctive features of learning curve theory in manufacturing environment?
Explain the learning curve ratio.
[Nov 2007]
Answer
As the production quantity of a given item is doubled, the cost of the item decreases at a
fixed rate. This phenomenon is the basic premise on which the theory of learning curve
has been formulated. As the quantity produced doubles, the absolute amount of cost
increase will be successively smaller but the rate of decrease will remain fixed. It occurs
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due to the following distinctive features of manufacturing environment:

(i) Better tooling methods are developed and used.
Advanced Strategic
Learning Curve
(ii) More productive equipments are designed and used to make the product.
(iii) Design bugs are detected and corrected.
(iv) Engineering changes decrease over time.
(v) Earlier teething problems are overcome.
(vi) Rejections and rework tend to diminish over time.
In the initial stage of a new product or a new process, the learning effect pattern is so
regular that the rate of decline established at the outset can be used to predict labour
cost well in advance. The effect of experience on cost is summarized in the learning curve
ratio or improvement ratio.
Learning curve ratio = Average labour cost of first N units / Average labour cost of first
2N units
For example, if the average labour cost for the first 500 units is ` 25 and the average
labour cost for the first 1,000 units is ` 20, the learning curve ratio is (` 20/25) or 80%.
Since the average cost per unit of 1,000 units is ` 20, the average cost per unit of first
2,000 units is likely to be 80% of ` 20 or ` 16
3 State whether the learning curve theory can be applied to .the following independent
situations briefly justifying your decision:
(i) A labour intensive sculpted product is carved from the metal provided to the staff. The
metal is sourced from different suppliers since it is scarce. The alloy composition of the
input metal is quite different among the suppliers.
(ii) Pieces of hand-made furniture are assembled by the company in a far off location. The
labourers do not know anything about the final product which utilizes their work. As a
matter of further precaution, rotation of labour is done frequently.
(iii) Skilled workers have been employed for a long time. The company has adequate market
for the craft pieces done by these experts.
(iv) A company funds that it always has an adverse usage of indirect material. It wants to
apply learning curve theory to improve the way standards have been set.
Answer
(i) ‘Learning Curve Theory’ will not be applicable as alloy combination of the input
metal is quite different among the suppliers hence learning experience with one
type of metal may not be beneficial for the workers to deal with other metal with
separate alloy composition.
(ii) ‘Learning Curve Theory’ will not be applicable as in this situation rotation of labour
is done frequently, labours will not be able to get the benefit of learning and apply
their learning. Hence, learning curve theory can not be applied.
(iii) ‘Learning Curve Theory’ will not be applicable as in this situation as workers are
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skilled and employed for a long time, they have already achieved maximum level
of expertise by taking advantage of learning. Hence, at this point of time learning
curve theory can not be applied.

Cost Management
Learning Curve
(iv) ‘Learning Curve Theory’ will not be applicable as indirect materials are the materials
which are not used directly in the production (not directly proportionate with
volume of output) and usually used machines (e.g. lubricants, spares parts etc.)
with less human interactions. Adverse usage of indirect materials can be controlled
through proper monitoring and appropriate standard settings and not from applying
learning curve theory.
4 The following information is provided by a firm. The factory manager wants to use
appropriate average learning rate on activities, so that he may forecast costs and prices for
certain levels of activity.
(i) A set of very experienced people feed data into the computer for processing inventory
records in the factory. The manager wishes to apply 80% learning rate on data entry
and calculation of inventory.
(ii) A new type of machinery is to be installed in the factory. This is patented process and the
output may take a year for full fledged production. The factory manager wants to use a
learning rate on the workers at the new machine.
(iii) An operation uses contract labour. The contractor shifts people among various jobs
once in two days. The labour force performs one task in 3 days. The manager wants to
apply an average learning rate for these workers.
Required
Advise to the manager with reasons on the applicability of the learning curve theory on the
above information.
Answer
The learning curve does not apply to very experienced people for the same job, since
time taken can never tend to become zero or reduce very considerably after a certain
range of output. This is the limitation of the learning curve.
(i) Data entry is a manual job so learning rate theory may be applied. Calculation of
inventory is a computerized job. Learning rate applies only to manual labour.
(ii) Learning rate should not be applied to a new process which the firm has never tried
before.
(iii) The workers are shifted even before completion of one unit of work. Hence learning
rate will not apply.
5 State whether and why the following are valid or not for learning curve theory:
(i) Learning curve theory applies to a division of a company which is fully automated.
(ii) Learning curve theory helps in setting standards.
(iii) Learning curve helps in pricing decisions.
(iv) Experienced workmen are more prone to learning effect.
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Advanced Strategic
Learning Curve
Answer
Valid or Invalid
Sl.
Situation Valid or Not Reason
No.
(i) Learning curve theory Not Valid It can be very effective in labour
applies to a division of a oriented industry but not in fully
company which is fully automated company.
automated
(ii) Learning curve theory Valid If budgets and standards are set
helps in setting standards without considering the learning
effect, meaning less variances are
likely to occur. The learning curve is
quite helpful in setting
standards in learning phase.
(iii) Learning curve helps in Valid The use of cost data adjusted for
pricing decisions learning effect helps in development
of advantageous pricing policy.
(iv) Experienced workmen are Not Valid Activities being performed by ex-
more prone to learning perienced workmen, who are thor-
effect oughly familiar with those activities,
will not be subject to learning rate.
6 What is McDonaldisation concept?

Answer
Ray Kroc (1902–1984), the genius behind the franchising of McDonald’s restaurants, was
a man with big ideas and grand ambitions. But even Kroc could not have anticipated the
astounding impact of his creation.
A computer programmer compiled a visualization of all the McDonald’s locations in
America and reported that it is impossible to get farther than 107 miles from a McDonald’s.
“There are McDonald’s everywhere. There’s one near you, and there’s one being built
right now even nearer to you.” Soon, if McDonald’s goes on expanding at its present rate,
there might even be one in your house. You could find Ronald McDonald’s ( is a clown
character used as the primary mascot of the McDonald’s fast-food restaurant chain)
boots under your bed. And maybe his red wig, too.
McDonaldization is a term used by sociologist George Ritzer in his book The
McDonaldization of Society (1993).
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He explains that a Society or a Manufacturing Organisation or a Service Organisation

adopts the characteristics of a fast-food restaurant.

Cost Management
Learning Curve
The process of McDonaldization can be summarized as the way in which “the principles
of the fast-food restaurant that are coming to dominate more and more sectors of
American society as well as of the rest of the world”.
Ritzer highlighted four primary components of McDonaldization:
• Efficiency– Minimisation of Time
It implies the optimal method for accomplishing a task. In this context, Ritzer has a very
specific meaning of “efficiency”. In the example of McDonald’s customers, it is the fastest
way to get from being hungry to being full. Efficiency in McDonaldization means that
every aspect of the organization is geared toward the minimization of time. McDonalds
had been pioneer in developing innovative machineries and process flows that are
exclusively for saving production time.
• Calculability– Quantity Matters Over Quality
The objective of an organization should be quantifiable (e.g., sales) rather than subjective
(e.g., taste). McDonaldization developed the notion that quantity equals quality, and that
a large amount of product delivered to the customer in a short amount of time is the
same as a high quality product. This allows people to quantify how much they’re getting
versus how much they’re paying.
Organizations want consumers to believe that they are getting a large amount of product
for not a lot of money. Workers in these organizations are judged by how fast they are
instead of the quality of work they do.
• Predictability– Standard Practices and Services
It is being referred here as standardized and uniform services. “Predictability” means
that no matter where a person goes, they will receive the same service and receive the
same product every time when interacting with the McDonaldized organization. This
also applies to the workers in those organizations. Their tasks are highly repetitive, highly
routine, and predictable.
• Control– Intervention of technologies
Standardized and uniform employees, replacement of human by non-human
technologies.
Now, its not just the fast food chains that are following these principles in order to copy
and paste the success of Mc Donalds, as these processes spread to other parts of the
society, modern society’s new social and cultural characteristics are created.
Mc Journalism –
Junk-journalism, defined here as inoffensive and trivial news served up in palatable
portions, is an example of Mcdonaldization. Another example could be McUniversities,
which features modularized curricula, delivering degrees in a fast-track pick-and-mix
fashion to satisfy all tastes. The diminished quality of these products can only be disguised
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by extensive advertising which constantly repackages them to look new.
Advanced Strategic
Learning Curve
The concept was introduced long back by our most popular channel – AAJ TAK – with
its tag line – SAB SE TEZ, telecasting 100 Big news of the day in an episode of 100 hours.
Have you installed Times of India App? It keeps reporting in single liners for everyday
incident. An earthquake in Kolkata at 7.20pm was reported in the APP as a news at
7.22pm.
Recently, the shift in the concept is by using only 60 words. Its powered by App based
journalism start up named – INSHORT.
Mc Education –
It has been argued by a westerner that an example of the phenomenon of McDonaldization
can be seen in education, where there is seen to be increasing similarity between that
of Western classrooms and the rest of the world. McDonaldization has fundamentally
changed the higher education system. Whereas examinations were once marked
individually by lecturers, tests are now largely marked by computer, increasing the
efficiency for lecturers.
Moreover, students education is now valued on the basis of a standardised grade rather
than an overview of their progress and achievements throughout Higher Education.
Ritzer, further argues that McDonaldisation had a profound effect on the development
of MOOCs (massive online open courses). Firstly, it is not possible to create a new MOOC
every single time; hence a basic structure is created and subsequently altered, thus
creating an element of predictability for students. Moreover, the role of the teacher has
been simplified and replaced with non-human instruction which in turn prevents the
opportunity for creative mutual engagement between teacher and student.
Our website- www.sjc.co.in is also an instance of McEducation principles.
Response of McDonald’s
The response from McDonald’s, expressed by its representatives in the United Kingdom,
is that Ritzer, like other commentators, uses the company’s size and brand recognition to
promote ideas that do not necessarily relate to the company’s business practices.
7 What are 5 S of JIT ?

Answer
5S is the name of a workplace organization method that uses a list of five Japanese
words: seiri, seiton, seiso, seiketsu, and shitsuke. Transliterated into Roman script, they
all start with the letter “S”. The list describes how to organize a work space for efficiency
and effectiveness by identifying and storing the items used, maintaining the area and
items, and sustaining the new order. The decision-making process usually comes from a
dialogue about standardization, which builds understanding among employees of how
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they should do the work.

In some quarters, 5S has become 6S, the sixth element being safety.

Cost Management
Learning Curve
The 5 S
There are five 5S phases: They can be translated from the Japanese as “sort”, “set in order”,
“shine”, “standardize”, and “sustain”. Other translations are possible.
Sort
• Remove unnecessary items and dispose of them properly.
• Make work easier by eliminating obstacles.
• Reduce chances of being disturbed with unnecessary items.
• Prevent accumulation of unnecessary items.
• Evaluate necessary items with regard to cost or other factors.
• Remove all parts or tools that are not in use.
• Segregate unwanted material from the workplace.
• Need fully skilled supervisor for checking on regular basis.
• Don’t put unnecessary items at the workplace & define a red-tagged area to keep
those unnecessary items.
• Waste removal.
Set In Order
• Arrange all necessary items so that they can be easily selected for use.
• Prevent loss and waste of time by arranging work station in such a way that all
tooling / equipment is in close proximity
• Make it easy to find and pick up necessary items
• Ensure first-in-first-out FIFO basis
• Make work flow smooth and easy
• All of the above work should be done on regular basis
Shine
• Clean your workplace completely
• Use cleaning as inspection
• Prevent machinery and equipment deterioration
• Keep workplace safe and easy to work
• Keep workplace clean and pleasing to work in
• When in place, anyone not familiar to the environment must be able to detect any
problems within 50 feet in 5 secs.
Standardize
• Standardize the best practices in the work area.
• Maintain high standards in workplace organization at all times.
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• Maintain orderliness. Maintain everything in order and according to its standard.

• Everything in its right place.
• Every process has a standard.
Advanced Strategic
Learning Curve
Sustain
• To keep in proper working order.
• Also translates as “do without being told”.
• Perform regular audits.
• Training and discipline.
• Training is goal-oriented process. Its resulting feedback is necessary monthly.
The Origins of 5 S
5S was developed in Japan and was identified as one of the techniques that enabled Just
in Time manufacturing.
Two major frameworks for understanding and applying 5S to business environments
have arisen, one proposed by Osada, the other by Hirano, Hirano provided a structure
for improvement programs with a series of identifiable steps, each building on its
predecessor. As noted by John Bicheno, Toyota’s adoption of the Hirano approach was
‘4S’, with Seiton and Seiso combined.
Variety of 5 S Applications
5S methodology has expanded from manufacturing and is now being applied to a
wide variety of industries including health care, education, and government. Visual
management and 5S can be particularly beneficial in health care because a frantic search
for supplies to treat an in-trouble patient (a chronic problem in health care) can have dire
consequences.
5 S in Lean Product & Process Development
The output of engineering and design in a lean enterprise is information, the theory
behind using 5S here is “Dirty, cluttered, or damaged surfaces attract the eye, which
spends a fraction of a second trying to pull useful information from them every time we
glance past. Old equipment hides the new equipment from the eye and forces people to
ask which to use.
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Cost Management
Linear Programming
Chapter 14|
Linear Programming
1 What is Linear Programming? What are the conditions for its applicability? State its
applications and limitations.
[Nov 2000, May 2007]
Answer
Linear Programming is a mathematical technique for determining the optimal allocation
of resources and obtaining a particular objective, when there are alternative uses of
resources. The resources may be as materials, machines, manpower, time or various
inputs. The objective may be profit maximisation or cost minimization.
Conditions for a linear programming problem:
The term linear programming problem defines a particular class of programming
problems which should meet the following conditions:
(a) There must be decision variables or processes which the decision maker may use at
different levels. These decision variables must be non – negative.
(b) The decision maker must have a maximisation (profit) or minimization (cost)
objective that he wishes to achieve. Further, the decision maker should be able to
describe his objective by using a linear function involving decision variables.
(c) The action of the decision maker must be constrained that is the decision variables
must be operated at levels which do not violate the limitations placed on the
decision variables.
(d) The decision variables must be interrelated and must be expressed in terms of linear
mathematical equations or inequalities.
Applicability or uses of linear programming:
Linear programming can be used to find optional solutions under constraints.
(a) In production – Product mix under capacity constraints to minimise costs/maximise
profits along with marginal costing, Inventory management to minimise holding
cost, warehousing / transporting from factories to warehouses, etc.
(b) Sensitivity Analysis – By providing a range of feasible solutions to decide on
discounts on selling price, decisions to make or buy.
(c) Blending – Optional blending of raw materials under supply constraints.
(d) Finance – Portfolio management, interest/receivables management.
(e) Advertisement mix – In advertising campaign – analogous to production
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management and product mix.

(f) Assignment of personnel to jobs and resource allocation problems.
Advanced Strategic
Linear Programming
However, the validity will depend on the manager’s ability to establish a proper linear
relationship among variables considered.
Limitations of linear programming:
(a) Existence of non – linear equations: The primary requirement of linear
programming is that the objective function and constraint function should be linear.
Practically, linear relationships do not exist in all cases.
(b) Interaction between variables – Linear Programming fails in a situation where non
– linearity in the equations emerges due to joint interactions between some of the
activities like total measure of effectiveness or total usage of some resource.
(c) Fractional Values – In linear programming problems, fractional values are permitted
for the decision variables. However, many decision problems require the solution for
decision variable to be in non-fractional values. Rounding-off the values obtained
by linear programming techniques may not result in an optimal solution in such
cases.
(d) Knowledge of co-efficient of the equations – It may not be possible to state all co-
efficient in the objective function and constraints with certainty. Also, variables in
most cases are random variables with an individual probability distribution for the
values.
2 What are the steps for obtaining a Graphical Solution of a Linear Programming Problem
along with the formulation.
Answer
Step 1: Define an Objective Function – it is generally denoted by the letter Z. It is a
linear equation that has to be maximised or minimised.
Step 2: Identify the Constraints – These are a set of linear equalities or inequalities that
express the restrictions on the resources. The solution to the problem must satisfy all the
constraints.
Step 3: Graphical Solution:
(a) Convert the inequations of constraints into equations.
(b) Plot the equations on the plane of graph.
(c) Obtain the feasible region and ensure that it is bounded.
(d) Construct matrix E of the extreme points and matrix C from the co – efficient of
the objective function.
(e) Find matrix product EC. For maximisation select row having the largest element
and for minimisation select row having the smallest element.
(f ) The objective function is optimised corresponding to the same row elements.
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A multiple solution to the problem may exist. The optimised value of Z, however, remains
the same.

Cost Management
Simplex
Chapter 15|
Simplex
1 Special Cases in Simplex Method?

Answer
1. Idle or Slack Capacity in a resource. The quantity elements against the slack
variables in the optimal solution indicate the idle capacity of the corresponding
resource.
2. Marginal Value or Shadow Price or Opportunity Cost of a Resource: The
magnitude of the NER elements corresponding to the slack or surplus variables in
the optimal solution is called marginal value or shadow price or opportunity cost. It
represents the amount by which the profit is reduced or the cost is increased when
one unit of the resource become unavailable at the optimum level.
3. Marginal Value or Shadow Price or Opportunity Cost of producing a product:
The magnitude of the NER elements corresponding to a non basic variable which
represents a product in original problem is called opportunity cost of manufacturing
the product. It represents the amount by which the profit is reduced or the cost is
increased when one unit of such product is produced at the optimum level.
4. Surplus Resource Consumed Over Minimum Requirement: The quantity
elements against the surplus variables in the optimal solution indicate the excess
amount of the corresponding resource used above the least allowable value.
5. Degeneracy: This means that the solution cannot be proceeded further. It occurs if
there is a tie in the minimum RR or any RR becomes zero in any iteration.
If there is a tie in the minimum RR – This degeneracy can be removed by:
(a) Select any of the minimum RRs to identify the KR. If the optimum solution is
reached, the problem is solved. If it is not, then there will be a 0 RR in the next
iteration.
(b) Select this 0 RR for the next iteration to identify the KR.
(c) If the 0 persists in the next iteration, select the least non – zero positive value of
RR to identify the KR and proceed with the solution.
If RR becomes zero – This degeneracy can be removed by:
This may be due to quantity of any basic variable being zero.
(a) Select the zero RR to identify the KR.
(b) If zero persists in the next iteration, select the least non zero positive value of RR
to identify the KR.
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In graphical solution this happens when a point with x = 0 or y = 0 gives the minimum
profit or minimum cost
Advanced Strategic
Simplex
6. MULTIPLE SOLUTIONS: This happens when we get a 0 NER for a non – basic variable
in the optimal solution. To find an alternate solution, take this column as the KC and
reiterate.
In Graphical solution, this happens when the maximum profit or minimum cost is
achieved at more than one extreme point of the feasible region.
7. UNBOUNDED SOLUTION:
This happens when at any stage the RRs become all negative. Such problems cannot
be solved.
In graphical solution, this happens when the feasible region is in an open unbounded
area.
8. NO FEASIBLE SOLUTION: This happens when we get an artificial slack variable in
the optimal solution with a non-zero profit (-M) or cost (+M) per unit, or When the
quantity of basic variable become negative in any iteration. Such problems cannot
be solved.
In Graphical solution, this happens when the shaded area of constraints does not
meet at a common region.
2 Given below is an iteration in a simplex table for a maximization objective linear programming
product mix problem for products x, y and z. Each of these products is processed in three
machines KA-07, KB-27 & KC-49 and each machine has limited available hours.
Cj 30 40 20 0 0 0
Basic Variable Value of Basic Varia-
CB x y z s1 s2 s3
(B) bles b (=XB)
30 x 250 1 0 -26/16 10/16 - 0
40 y 625 0 1 31/16 -7/16 10/16 0
0 s3 125 0 0 11/16 -3/16 1/8 1
s1, s2 and s3 are slack variables for machine KA-07, KB-27 and KC-49 respectively.
Answer the following questions, giving reasons in brief:
(i) Does the table above give an ‘Optimal Solution’?
(ii) Are there more than one ‘Optimal Solution’ / ‘Alternate Optimal Solution’?
(iii) Is this solution ‘Feasible’?
(iv) Is this solution ‘Degenerate’?
(v) Write down the ‘Objective Function’ of the problem.
(vi) Write the ‘Optimal Product Mix’ and ‘Profit’ shown by the above solution.
(vii) Which of these machines is being used to the full capacity when producing according to
this solution?
(viii) How much would you be prepared to pay for another hour of capacity each on machine
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(ix) KA-07, machine KB-27, and machine KC-49?

(x) If the company wishes to expand the production capacity, which of the three resources
should be given priority?

Cost Management
Simplex
(xi) What happens if 16 machine hours are lost due to some mechanical problem in machine
KB-27?
(xii) A customer would like to have one unit of product z and is willing to pay higher price for
z in order to get it. How much should the price be increased so that the company’s profit
remains unchanged?
(xiii) A new product is proposed to be introduced which would require processing time of 4
hours on machine KA-07, 2 hours on machine KB-27 and 4 hours on machine KC-49. It
would yield a profit of `12 per unit. Do you think it is advisable to introduce this product?
Answer
(i) Yes, the given solution is optimal because all Cj − Zj are less than, or equal to, zero.
Cj 30 40 20 0 0 0
Basic Value of Basic
CB x y z s1 s2 s3
Variable (B) Variables b (=XB)
30 x 250 1 0 -26/16 10/16 -12/16 0
40 y 625 0 1 31/16 -7/16 10/16 0
0 s3 125 0 0 11/16 -3/16 1/8 1
Zj = 30 40 115/4 5/4 5/2 0
Cj – Zj 0 0 -35/4 -5/4 -5/2 0
(ii) No, because for each of the non - basic variables z, s1 and s2, the Cj − Zj is strictly
negative. Alternate optimal solution (s) exist when either of non-basic variables has
a zero Cj − Zj.
Non Basic Variables z s1 s2
Cj – Zj -35/4 -5/4 -5/2

(iii) Yes, because the given solution has no artificial variable in the basis.
(iv) No, solution is not degenerate as none of the basic variables has zero quantity.
Basic Variables x y s3
Quantity 250 625 125
(A solution degenerates if the Quantity of one or more basic variables is zero)
(v) Maximize Z = 30x + 40y + 20z
(vi) According to the given solution, 250 units of x and 625 units of y are being produced.
The total profit is `32,500 (250 units × `30 + 625 units × `40).
(vii) Machine KA-07 and KB-27 are being used to the full capacity because, the slack
variable s1 and s2 corresponding to them has a zero value in the solution.
(viii) The shadow price of hours on machine KA-07, machine KB-27 and machine KC-49
are being `5/4, `5/2 and `0, respectively, these are the maximum prices one would
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be prepared to pay for another hour of capacity for these three machines.
(ix) Machine KB-27 may be given priority as its shadow price is the highest.
Advanced Strategic
Simplex
(x) When 16 hours are lost, then production of x would increase by 12 units and that of
y would decrease by 10 units and the total profit decrease by `40.
(xi) Cj − Zj for z being -35/4, production of each unit of z would cause a reduction of 35/4
rupee. Thus, the price for z should be increased by at least 35/4 rupee to ensure no
reduction of profits.
(xii) Shadow prices of times on machines KA-07, KB-27 and KC-49 are `5/4, `5/2 and `0.
Production of a unit of the proposed new product would, therefore, reduce profit by
`10 [(4 hrs. × `5/4) + (2 hrs. × `5/2) + (4 hrs. × `0)].
Since the product would yield a profit of `12, it would result in a net increase in profit at
a rate of `2 per unit. It is advisable, therefore to introduce it.
H Block

Cost Management
Assignment
Chapter 16|
Assignment
1 What are the steps for Hungrarian Rule of Assignment?

Answer
The objective of an assignment algorithm is to determine the optimal assignment of
tasks amongst the performers. It seeks to minimise the total time taken by the assignees
to perform the tasks.
Step 1: Check whether the given problem is a balanced assignment problem.
A problem is balanced if number of task to be assigned is equal to number of performers.
For unbalanced problems refer a situation later.
Step 2: Subtract the minimum value in each row from all the figures in that row. Subtract
the minimum value in each column from all the figures in that column.
Step 3: Find the minimum number of lines that can be drawn to cover all the
zeros in the matrix. This is done by drawing lines through the rows or columns containing
the largest number of zeros and repeating the process.
If the minimum number of lines that can be drawn is exactly equal to the order of the
matrix then the optimum solution can be derived directly as discussed in Step 4,
Step 4: Boxing the zeroes: Starting from the first row examine all the rows one after the
other to locate a row containing only one zero. Box that zero and draw a line through
the column containing the zero. After processing the rows apply the same process for
columns (if necessary) this time passing a line through the row containing the zero, till all
the zeros are either boxed or are covered by a line.
If no row or column containing only one zero can be located then box any zero arbitrarily
and draw two lines – one passing through the row and the other through the column of
the boxed zero. Repeat this process till all the zeros are either boxed or are covered by a
line.
If however, you are not able to box all the zeros even after applying the process as given
above, then it indicates that the lines drawn in the previous step to cover the zeros was
not the minimum. Recheck that step and then follow through.
In case, the number of lines that can be drawn is less than the order of the matrix
then apply the following procedure:
H Block
a. Locate the smallest uncovered element

b. Subtract this value from all the uncovered elements and add this value to the
junction elements.
Advanced Strategic
Assignment
c. Repeat these steps till the minimum number of lines that can be drawn to cover all
the zeros is exactly equal to the order of the matrix.
2 Special Cases in Assignment Method of Linear Programming:

Answer
1. Maximisation Assignment Problem
The assignment algorithm is a minimization algorithm. Some assignment problems,
however seek to maximise the profits that result from optimal use of resources. The
profit table in such problems is converted to a loss table by subtracting all the figures
in the profit table from the maximum in that table.
2. Unbalanced Assignment Problem
If the number of tasks in an assignment problem is not equal to number of performers
then the problem is said to be unbalanced. To balance the problem we introduce
dummy tasks or dummy performers considering the time consumed for these
dummies to be 0. If it is a maximisation problem then first introduce the dummy and
then prepare the loss table.
3. Implication of Dummy Task
When the number of performers exceeds the number of tasks, a dummy task is
introduced. The performer who is assigned this dummy task in the final solution,
will actually not be performing any task.
4. Implication of Dummy Performer
When the number of performers falls short of the number of tasks, a dummy
performer is introduced. The task that is assigned to this dummy performer in the
final solution, will actually not be performed.
5. Prohibited Assignment
If an assignment is prohibited we consider the time taken to perform that task to be
infinitely large value. It is better to simply put a dash (“ – “) or “M” in the time of such
tasks.
3 Explain following statement

Assignment problem is special case of transportation problem; it can also be solved by
transportation methods.
Answer
The assignment problem is special case of transportation problem; it can also be solved
by transportation method. But the solution obtained by applying this method would
be severely degenerate.This is because the optimality test in the transportation method
requires that there must be m+n-1 allocations/assignments. But due to the special
structure of assignment problem of order n × n, any solution cannot have more than n
H Block
assignments. Thus, the assignment problem is naturally degenerate. In order to remove

degeneracy, n-1* number of dummy allocations will be required in order to proceed with
the transportation method. Thus, the problem of degeneracy at each solution makes the
transportation method computationally inefficient for solving an assignment problem.

Cost Management
Assignment
4 In an assignment problem to assign jobs to men to minimize the time taken, suppose that
one man does not know how to do a particular job, how will you eliminate this allocation
from the solution?
Answer
In an assignment minimization problem, if one task cannot be assigned to one person,
introduce a prohibitively large cost for that allocation, say M, where M has a high the value.
Then, while doing the row minimum and column minimum operations, automatically
this allocation will get eliminated.
5 Answer the following independent situations relating to an assignment problem with a

minimization objective:
(i) Just after row and column minimum operations, we find that a particular row has 2
zeroes. Does this imply that the 2 corresponding numbers in the original matrix before
any operation were equal? Why?
(ii) Under the usual notation, where a32 means the element at the intersection of the 3rd
row and 2nd column, we have, in a 4 × 4 assignment. What can you conclude about the
remaining assignments? Why?
Answer
(i) Under the Hungarian Assignment Method, the prerequisite to assign any job is that
each row and column must have a zero value in its corresponding cells. If any row
or column does not have any zero value then to obtain zero value, each cell values
in the row or column is subtracted by the corresponding minimum cell value of
respective rows or columns by performing row or column operation. This means if
any row or column have two or more cells having same minimum value then these
row or column will have more than one zero. However, having two zeros does not
necessarily imply two equal values in the original assignment matrix just before
row and column operations. Two zeroes in a same row can also be possible by two
different operations i.e. one zero from row operation and one zero from column
operation.
(ii) The order of matrix in the assignment problem is 4 × 4. The total assignment
(allocations) will be four. In the assignment problem when any allocation is made
in any cell then the corresponding row and column become unavailable for further
allocation. Hence, these corresponding row and column are crossed mark to show
unavailability. In the given assignment matrix two allocations have been made in
a24 (2nd row and 4th column) and a32 (3rd row and 2nd column). This implies that
2nd and 3rd row and 4th and 2nd column are unavailable for further allocation.
Therefore, the other allocations are at either at a11 and a43 or at a13 and a41.
H Block
Advanced Strategic
Transportation
Chapter 17|
Transportation
1 State the methods in which initial feasible solution can be arrived at in a transportation
problem.
[Nov 2008]
Answer
The methods by which initial feasible solution can be arrived at in a transportation model
are as under:
(a) North West Corner Method.
(b) Least Cost Method.
(c) Vogel’s Approximation Method (VAM).
2 What are the steps in initial solution by North West Corner Rule for a LP Transportation
problem?
Answer
(a) Allocate the top left hand corner (North West Corner) with the minimum of the
availability and requirement.
(b) Proceed right along the row allocating successive cells till the row exhausts.
(c) Proceed downwards along the column allocating successive cells till the column
exhausts.
(d) Repeat the process till all rows and columns are exhausted.
Limitation of this method: It does not consider the cost of transportation from origin
to destination.
3 What are the steps in initial solution by Least Cost Method for a LP Transportation problem?
Answer
In this method the cost of transportation from each origin to all the destinations are
taken into consideration. The following steps are followed:
(a) Locate the least cost cell and allocate as much as possible to that cell.
(b) Proceeding with progressively higher cost cells, repeat the process till all the rows
H Block
and columns are exhausted, hatching each row or column that is exhausted.
Note: If at any point there is a tie in the lowest cost cell then select the one where
maximum allocation is possible.

Cost Management
Transportation
4 What are the steps in initial solution by Vogel’s Approximation Method for a LP Transportation
problem?
Answer
In this method also the cost of transportation from each origin to all the destinations are
taken into consideration. Unless otherwise mentioned, always use this method to find
the initial solution.
(a) Check whether the problem is balanced. If it isn’t then balance it by selecting a
dummy origin or a dummy destination.
(b) Find the difference between the least cost and the second most least cost for each
row and column. If there are two or more minimum equal costs then take the
difference as 0.
(c) Of these differences select the maximum * to identify the rows and/or column.
Allocate the maximum possible to the cell having the least cost** in this row and/or
column. If the row and/or column is exhausted then hatch it.
* If there is a tie in the maximum differences then examine all the rows and columns
to identify the least cost.
** If there is a tie in the least cost then select the cell where the maximum allocation
can be made.
(d) Repeat the process for the reduced table till all the rows and columns are exhausted.
5 Special Cases in the Transportation Method of Linear Programming.

Answer
1. Unbalanced Transportation Problem
If the total availability differs from total requirement then the problem is unbalanced.
When this happens, introduce a dummy destination if the total availability exceeds
the total requirement and introduce a dummy origin if the total availability falls short
of the total requirement. The costs (minimization problem) or profits (maximisation
problem) are taken as 0 for a cell in the dummy.
If in the final allocation there is an amount allocated to the dummy origin or
destination it indicates that the availability at that origin is surplus or the requirement
of that destination will not be met.
2. Degeneracy in Transportation Problem
If at any stage there are less than (m + n – 1) allocations then the solution degenerates.
This may happen in the initial solution or after any reallocation.
Degenerates at Initial Solution:
H Block
Introduce infinitely small allocation “e” to the least cost independent cell to make (m
+ n – 1) allocations. If there are two or more least cost independent cells then select
the cell having the lowest (or nearest to the lowest) cost in that row.
Advanced Strategic
Transportation
Degenerates after reallocation:

If after reallocating it is found that the numbers of allocations has fallen short of (m +
n – 1) then introduce small allocation “e” to the unallocated, independent cell having
the least value of ∆ i.e. if the most negative cell has already been used as a ticked
cell then choose the next higher value, in the previous ∆ matrix. Start with the most
negative ∆ and progress upwards. If there is a tie in the least value of ∆ then select
any one of them.
3. Independent Cell
A cell is said to be independent if it is not possible to form a loop with the cell as a
corner.
4. Maximisation Transportation Problem
In some cases profits may be given and thus total profit has to be maximised. Such
questions are converted to a minimization problem by preparing the Loss table and
then solved in usual way. The Loss table is prepared by subtracting all figures of the
profit table from the maximum value of the profit table. If the problem is unbalanced
then first introduce a dummy and then prepare the Loss table.
5. Prohibited Transportation
Sometimes in a given transportation problem, some routes may not be available.
There could be several reasons for this such as bad road conditions or strike, etc.
In such situations, there is a restriction on the route available for transportation.
To handle such type of a situation, a very large cost (or negative profit for the
maximisation problem) represented by ∞ or M is assigned to each of such routes
which are not available. Due to assignment of very large cost, such routes would
automatically be eliminated in the final solution. The problem is solved in its usual
way.
6 In a 3 x 4 transportation problem for minimizing costs, will the R2C1 cell (at the intersection
of the 2nd row and 1st column) always figure in the initial solution by the North West Corner
Rule? Why?
Answer
The Initial solution obtained by the North-West Corner Rule in transportation need not
always contain the R2C1 cell. In the North-West Corner Rule the first allocation is made at
R1C1 cell and then it only moves towards R2C1 cell when the resources at the first row i.e.
R1 is exhausted first than the resources of first column i.e. C1. On the contrary if resources
at first column i.e. C1 is exhausted first then the next allocation will be at R1C2.
For example the resource availability at first row (R1) is 1,500 units and the demand in
first column (C1) is 1,000 units. In this case resource availability of first row (R1) will be
exhausted to the extent of the demand in first column (C1) first and then the remaining
H Block
resource availability at first row (R1) will be used to meet the demand of the second
column (C2). In this example cell R2C1 will not come in initial solution obtained by the
North-West Corner Rule.

Cost Management
Transportation
7 In a transportation problem for cost minimization, there are 4 rows indicating quantities
demanded and this totals up to 1,200 units. There are 4 columns giving quantities supplied.
This totals up to 1,400 units. What is the condition for a solution to be degenerate?
Answer
The condition for degeneracy is that the number of allocations in a solution is less than
m + n – 1. The given problem is an unbalanced situation and hence a dummy row is to
be added, since the column quantity is greater than that of the row quantity. The total
number of rows and columns will be 9 i.e. (5 rows and 4 columns). Therefore, m + n – 1 (=
8), i.e. if the number of allocations is less than 8, then degeneracy would occur.
H Block
Advanced Strategic
CPM and PERT
Chapter 18|
CPM and PERT
1 What are the different kinds of floats in a network?

Answer
(a) Total float: It implies the idle time in a path or in its non – critical activities. For
critical activities there will not be any idle time. In other words, the non – critical
activities in total can be delayed by some time without affecting or increasing the
project duration.
It can be computed in two different ways:
Total float = Latest Finish Time – Earliest Finish Time

= Latest Start Time – Earliest Start Time
(b) Free float: The time by which the actual completion of an activity can be delayed
without affecting the total float of succeeding activities.
Free Float = Total Float – Slack of Head Event

(Slack implies L- E of the event)
(c) Interfering Float – The idle time which if consumed in completion of an activity, it
is sure to affect the start of succeeding activity.
Interfering Float = Total Float – Free Float.

(d) Independent Float: The time by which the actual completion of an activity can be
delayed without affecting the total float of preceding activities.
Independent Float = Free float – Slack of Tail Event or 0 whichever is larger.

(Slack implies L- E of the event)
For Critical activities, there would never be any float in their completion.
2 How Projects are Crashed? Explain.

Answer
If costs are associated with activities it becomes pertinent to investigate the effect of the
increase or decrease in the total duration of a project on the total cost of the project. The
different types of times and costs involved are:
H Block
(a) Normal Time: The minimum time required to complete an activity at normal cost.
(b) Crash Time: The minimum time required to complete an activity.
(c) Normal Cost: The direct cost of completing the activity in normal time.

Cost Management
CPM and PERT
(d) Crash Cost: The direct cost of completing the activity within the crash time.
(e) Cost Slope: The increase in cost for every unit of time saved by crashing the activity.
(f) Optimum Duration: The duration of the project corresponding to the optimum
cost.
(g) Optimum Cost: The minimum possible cost to complete the project.
(h) Total Direct Cost: Total Normal cost + Total Crash cost
(i) Total Project Cost: Total Normal cost + Total Crash cost + Total Indirect cost
1. Prepare the project network.
2. Find the critical path and the normal duration of the project.
3. Calculate the cost slope for all the activities given in the network.
4. First identify those activities on the critical path which have a cost slope less than
the indirect cost. The overall cost can be reduced only if the cost slope of the crashed
activity is less than the indirect cost.
5. Start by crashing that activity which has the least crashing cost slope and progress
with ones in order of increasing cost slopes (Keeping in mind that an activity can be
crashed only till its crash time).
6. If at any point there happens to be more than one critical path then select different
sets of activities such that crashing all the activities in each set reduces all the critical
paths at the same time.
To make the sets select an activity from each path. If the same activity exists in
any other path, put a dash there. If you cannot put a dash, discard that particular
combination. Crash that set which has the least total crashing cost.
7. Stop crashing if any one of the longest path is exhausted fully i.e. crashed till its crash
time.
8. Prepare a cost table which shows the direct crashing cost, the direct normal cost and
the total indirect cost for all the reduced project durations. The duration which gives
the least cost is the optimum project duration and the corresponding total cost is
the optimum project cost.
9. To find the Optimum cost of the project, stop crashing at the point where total
crashing cost is more than the indirect cost.
10. To find the Minimum Duration of the project, regardless of cost, continue crashing
even if the crashing cost is more than the indirect cost. However, crashing will stop
the moment any one of the longest path is fully exhausted.
3 Write short notes on Resource Smoothing and Levelling.

Answer
H Block
Resource Smoothing:
It is a network technique used for smoothening peak resource requirement during
different periods of the project network. Under this technique the total project duration
Advanced Strategic
CPM and PERT
is maintained at the minimum level. For example, if the duration of a project is 15 days,
then the project duration is maintained, but the resources required for completing
different activities of a project are smoothened by utilising floats available on non critical
activities. These non critical activities having floats are rescheduled or shifted so that
a uniform demand on resource is achieved. In other words, the constraint in the case
of resource smoothing operation would be on the project duration time. Resource
smoothing is a useful technique for business managers to estimate the total resource
requirements for various project activities.
In resource smoothing, the time scaled diagram of various activities and their floats (if
any), along with resource requirements are used. The periods of maximum demand for
resources are identified and non critical activities during these periods are staggered
by rescheduling them according to their floats for balancing the resource requirements
i.e. the activities having floats are shifted in such a way that the demand for resources is
smoothened out.
Resource Levelling:
It is also a network technique which is used for reducing the requirement of a particular
resource due to its paucity. The process of resource levelling utilizes the large floats
available on non critical activities of the project and thus cuts down the demand on the
resource. In resource levelling, the maximum demand of a resource should not exceed
the available limit at any point of time. In order to achieve this, non critical activities are
rescheduled by utilising their floats. Sometimes, the use of resource levelling may lead to
increase in the completion time of the project.
4 Write short notes on distinction between PERT and CPM.

[Nov 2000]
Answer
The PERT and CPM models are similar in terms of their basic structure, rationale and mode
of analysis. However, there are certain distinctions between PERT and CPM networks
which are enumerated below:
(1) CPM is activity oriented i.e. CPM network is built on the basis of activities. Also results
of various calculations are considered in terms of activities of the project. On the
other hand, PERT is even oriented.
(2) CPM is a deterministic model i.e. it does not take into account the uncertainties
involved in the estimation of time for execution of a job or an activity. It completely
ignores the probabilistic element of the problem. PERT, however, is a probabilistic
model. It uses three estimates of the activity time; optimistic, pessimistic and most
likely, with a view to take into account time uncertainty. Thus, the expected duration
for each activity is probabilistic and expected duration indicates that there is fifty
percent probability of getting the job done within that time.
H Block
(3) CPM lays dual emphasis on time and cost and evaluates the trade-off between
project cost and project item. By deploying additional resources, it allows the critical
path project manager to manipulate project duration within certain limits so that

Cost Management
CPM and PERT
project duration can be shortened at an optimal cost. On the other hand, PERT is
primarily concerned with time. It helps the manger to schedule and coordinate
various activities so that the project can be completed on scheduled time.
(4) CPM is commonly used for those projects which are repetitive in nature and where
one has prior experience of handling similar projects. PERT is generally used for those
projects where time required to complete various activities are not known as prior.
Thus, PERT is widely used for planning and scheduling research and development
project.
5 What do you mean by a dummy activity? Why is it used in networking?

[May 2008]
Answer
Dummy activity is a hypothetical activity which consumes no resource or time. It is
represented by dotted lines and is inserted in the network to clarify an activity pattern
under the following situations.
(i) To make activities with common starting and finishing events distinguishable i.e. to
remove duplicate errors.
(ii) To identify and maintain the proper precedence relationship between activities that
are not connected by events i.e. to remove dangling errors.
(iii) To bring all “loose ends” to a single initial and single terminal event.
6 State the validity of following statements along with the reasons:

(i) Two activities have common predecessor and successor activities. So, they can have
common initial and final nodes.
(ii) In respect of any activity whether real or dummy, the terminal node should bear a
number higher than the initial node number.
(iii) The difference between the latest event time and the earliest event time is termed as free
float.
(iv) For every critical activity in a network, the earliest start and the earliest finish time as
well as the latest finish time and the latest start time are the same.
(v) The optimal duration of a project is the minimum time in which it can be completed.
(vi) Resource leveling aims at smoothening of the resource usage rate without changing
Answer
(i) Invalid
Reason: As per the rules of network construction, parallel activities between two events,
H Block
without intervening events, are prohibited. Dummy activities are needed when two or
more activities have same initial and terminal events. Dummy activities do not consume
time or resources.
Advanced Strategic
CPM and PERT
(ii) Valid
Reason: As per the conventions adopted in drawing networks, the head event or terminal
node always has a number higher than that of initial node or tail event.
(iii) Invalid
Reason: The difference between the latest event time and the earliest event time is
termed as slack of an event. Free float is determined by subtracting head event slack
from the total float of an activity.
(iv) Invalid
Reason: For every critical activity in a network, the earliest start time and the latest start
time is same and also the earliest finish time and the latest finish time is same.
(v) Invalid
Reason: The optimum duration is the time period in which the total cost of the project is
minimum.
(vi) Valid
Reason: Resource leveling is a network technique used for reducing the requirement of
a particular resource due to its paucity or insufficiency within a constraint on the project
duration. The process of resource leveling utilize the large floats available on non- critical
activities of the project and cuts down the demand of the resource.
H Block

Cost Management
Simulation
Chapter 19|
Simulation
1 What is simulation? What are the steps in simulation?

Answer
Simulation is a quantitative procedure which describes a process by developing a model
of that process and then conducting a series of organized trial and error experiments to
product the behaviour of the process over time.
Steps in the simulation process:
(i) Define the problem and system you intend to simulate.
(ii) Formulate the model you intend to use.
(iii) Test the model, compare with behaviour of the actual problem environment.
(iv) Identify and collect data to test the model.
(v) Run the simulation.
(vi) Analyse the results of the simulation and, if desired, change the solution you are
evaluating.
(vii) Rerun the simulation to tests the new solution.
(viii) Validate the simulation i.e., increase the chances of valid inferences.
2 How would you use the Monte Carlo Simulation method in inventory control?
[May 2008]
Answer
Monte Carlo Simulation is the earliest mathematical Model of real situations in inventory
control:
The steps involved in carrying out Monte Carlo simulation are:
Step 1 : Define the problem and select the measure of effectiveness of the problem that
might be inventory shortages per period.
Step 2 : Identify the variables which influence the measure of effectiveness significantly
for example, number of units in inventory.
Step 3 : Determine the proper cumulative probability distribution of each variable
selected with the probability on vertical axis and the values of variables on
horizontal axis.
Step 4 : Get a set of random numbers.
H Block
Step 5 : Consider each random number as a decimal value of the cumulative probability
distribution with the decimal enter the cumulative distribution plot from
the vertical axis. Project this point horizontally, until it intersects cumulative
Advanced Strategic
Simulation
probability distribution curve. Then project the point of intersection down into
the vertical axis.
Step 6 : Then record the value generated into the formula derived from the chosen
measure of effectiveness. Solve and record the value. This value is the measure
of effectiveness for that simulated value. Repeat above steps until sample is large
enough for the satisfaction of the decision maker.
H Block

Cost Management
Objective Questions
Chapter 7
Objective Questions
SCM JUNE 2017
(i) Stock Control data for Material P are: The total fixed cost and variable cost per
Annual usage: 3600 units; Cost per unit: unit are:
`100/-. Cost of placing an order: `40; Total Fixed Cost (`) Variable Cost per
Stockholding Cost: 20% of the overall unit (`)
stock volume; Lead time: One month (a) 2,000 7.00
The EOQ based on the above data is:
(b) 2,000 8.50
(a) 210 units
(b) 175 units
(c) 3,000 7.00
(d) 3,000 8.50
(c) 90 units
(iv) A company makes a single product
(d) 120 units which it sells at `10 per unit. Fixed costs
(ii) Which of the following would take place are `48,000 per month and the prod-
if a company is able to reduce its variable uct has a contribution to sales ratio of
cost? 40%. In a period when actual sales were
`1,40,000, the company’s margin of safe-
Contribution Margin - Break-Even Point
ty in units was
(a) Increase Increase
(a) 2000
(b) Decrease Decrease
(b) 3000
(c) Increase Decrease
(c) 3500
(d) Decrease Increase
(d) 4000
(iii) The following details relate to Product
P-1 of a manufacturing company: (v) The following tasks are associated with
ABC system:
Level of activity (units) 1000 2000 I. Allocation of costs to products
Cost per unit (`):
II. Identification of cost pools
Direct materials 4.00 4.00
III. Identification of cost drivers
Direct labour 3.00 3.00
IV. Calculation of pool rates
H Block
Production Overheads 3.50 2.50

Selling Overheads 1.00 0.50 The proper order of the preceding tasks
11.50 10.00 is:
Advanced Strategic
Objective Questions
(a) III, II, IV, I (b) A Just-in-Time inventory philoso-

(b) I, II, III, IV phy has been adopted
(c) III, IV, II, I (c) The company carries significant

amount of inventory
(d) IV, III, II, I
(d) Actual production costs are debited
(vi) A company has the capacity of produc- to work-in-progress
tion of 80000 units and presently it sells
20000 units at ` 100 each. The demand is (ix) The preparation and use of standard
sensitive to selling price and it has been cost, their comparison with actual costs
observed that every reduction of ` 10 and the measurement and analysis of
in selling price the demand is doubled. variances to originating causes is de-
What should be the target cost at full ca- fined as:
pacity it profit margin on sales is taken at (a) Marginal Costing
25%? (b) Standard Costing
(a) ` 58 lakhs (c) Throughput Costing
(b) ` 52 lakhs (d) Kaizen Costing
(c) ` 48 lakhs
(x) The following are cost data for two
(d) ` 50 lakhs alternative ways of processing the
(vii) The information relating to the direct clerical work for legal cases brought
material cost of a company is as follows: before the district court:
Semi- Fully
Standard price per unit ` 7.20 automatic automatic
Actual quantity purchased in 1600 Monthly fixed
units costs (`):
Standard quantity allowed for 1450 Occupancy 15,000 15,000
actual production in units Maintenance 5,000 10,000
Material price variance on ` 480 contract
purchase (Favourable) Equipment lease 25,000 1,00,000
Unit variable cost
What is the actual purchase price per
(per report) (`)
unit?
Supplies 80 20
(a) `7.50 Labour 60 20
(b) `6.40
The cost indifference point will be:
(c) `6.50
(a) 800 cases
(d) `6.90
(b) 850 cases
(viii) Backflush costing is most likely to be
used when: (c) 750 cases
H Block
(a) Management desires sequential (d) 700 cases

tracking of costs

Cost Management
Objective Questions
SCM DEC 2017
(i) The following figures are extracted from company has decided to increase as-
the books of a company: sets by`24 lakhs, which is expected to
Budgeted O/H ` 10,000 (Fixed ` 6,000, increase the operating profit before de-
Variable `4,000) preciation by `8.40 lakhs. There will be
a net increase in depreciation by `4.80
Budgeted Hours 2000 lakhs. This will result in ROI
Actual O/H `10,400 (Fixed ` 6,100, (a) to increase by 1%
Variable ` 4,300)
(b) to decrease by 1%
Actual Hours 2100
(c) to decrease by 1-5%
Variable O/H cost variance and Fixed
O/H cost variance will be: (d) to remain the same
(a) 100 (A) and 200 (A) (v) For a Learning Curve percentage of 72%,
the time to be taken to complete the 4th
(b) 100 (F) and 200 (F) unit of a 12-unit job involved in the as-
(c) 100 (A) and 200 (F) sembly line, if the initial unit requires 80
hours, will be
(d) 200 (A) and 100 (F)
(a) 43.50 hrs
(ii) A company produces a product which
is sold at a price of ` 80. Its Variable (b) 41.47 hrs
cost is ` 32. The company’s Fixed cost (c) 46.71 hrs
is`11,52,000 p.a. The company operates
at a margin of safety of 40%. The total (d) 40.95 hrs
sales of the company is: (vi) Marketing department of an organisa-
(a) 4,000 units tion estimates that 40,000 of new mix-
ers could be sold annually at a price of
(b) 40,000 units `60 each. To design, develop and pro-
(c) 30,000 units duce these new mixers an investment
of `40,00,000 would be required. The
(d) 20,000 units
company desires a 15% return on invest-
(iii) The P/V ratio of a firm dealing in Electri- ment (ROI). Given these data, the target
cal equipment is 50% and the margin of cost to manufacture, sell,distribute and
safety is 40%. BEP of the firm at a sales service one mixer will be
volume of ` 50,00,000 will be
(a) ` 37.50
(a) ` 25,00,000
(b) ` 40.00
(b) ` 35,00,000
(c) ` 45.00
(a) ` 30,00,000
(d) ` 48.60
H Block
(b) ` 36,00,000
(vii) When you wait until the manufacture of
(iv) ABC Limited has current PBIT of `19.20 a product has been completed and then
lakhs on total assets of` 96 lakhs. The record all of the related issuances of in-
Advanced Strategic
Objective Questions
ventory from stock that were required to (d) `14.70

create the product, it is called (x) A company uses traditional standard
(a) Forensic Accounting costing system. The inspection and set-
(b) Back-flush Accounting up costs are actually `1,760 against a
budget of ` 2,000. ABC system is being
(c) Tax Accounting implemented and accordingly the num-
(d) Lean Accounting ber of batches is identified as the cost
driver for inspection and set up. The
(vii) Match the following:
budgeted production is 10,000 units in
(A) Dr. Deming believes (1) Common causes batches of 1,000 units whereas actually
(B) Ishikawa (2) To prevent 9,000 units were produced in 11 batch-
development defect es. The cost per batch under ABC system
(C) Type of variation is (3) Cause & effect will be
due to diagram
(a) ` 160
(D) Crosby’s objective of (4) Histogram
quality (b) ` 200
(c) `180
The correct order is
(d) ` 220
(a) A-3, B-2, C-1, D-4
(b) A-2, B-3, C-4, D-1
(c) A-2, B-3, C-1, D-4
(d) A-4, B-3, C-1, D-2
(ix) Sab Ltd. fixes the inter-divisional trans-
fer prices for its products on the basis of
cost plus a return on investment in the
division. The budget for division X for
2016-17 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 product 10
Budgeted Volume 400000 units per year
Desired R.O.I. 28%
Transfer price for division X is
H Block
(a) `12.70
(b) `10.70
(c) `8.70

Cost Management
Objective Questions
SCM
MTP JUNE 2017 SET 1
(i) A company has the capacity of produc- safety are 25% and 50% respectively.
tion of 80,000 units and presently sells What is the total fixed cost of the com-
20,000 units at ` 100 each. The demand pany?
is sensitive to selling price and it has (a) ` 2,50,000
been observed that with every reduc-
tion of ` 10 in selling price the demand is (b) ` 2,00,000
doubled. What should be the target cost (c) ` 3,00,000
at full capacity if profit margin on sale is
(d) ` 1,00,000
taken as 25%?
(v) A company has 2,000 units of an ob-
(a) ` 75
solete item which are carried in inven-
(b) ` 90 tory at the original purchase price of `
(c) ` 60 30,000. If these items are reworked for
` 10,000, they can be sold for ` 18,000.
(d) ` 25 Alternatively, they can be sold as scrap
(ii) If the direct labour cost is reduced by for ` 3,000 in the market. In a decision
20% with every doubling of output, model used to analyze the reworking
what will be the cost of labour for the proposal, the opportunity cost should
sixteenth unit produced as an approxi- be taken as:
mate percentage of the cost of the first (a) ` 8,000
unit produced?
(b) ` 12,000
(a) 51.2%
(c) ` 3,000
(b) 40.96%
(d) ` 10,000
(c) 62%
(vi) The total cost of manufacturing a com-
(d) None of these ponent is as under at a capacity of 50,000
(iii) A company determines its selling price units of production:
by marking up variable costs 60%. In
addition,the company uses frequent Prime cost 10.00
selling price mark down to stimulate Variable overheads 2.40
sales. If the mark down average 10%, Fixed Overheads 4.00
what is the company’s contribution 16.40
margin ratio?
The selling price is ` 21 per unit. The
(a) 30.6%
variable selling and administrative
(b) 44% expenses is 60 paise per component
(c) 86.4% extra. During the next quarter only
H Block
10,000 units can be produced and

(d) None of these sold. Management plans to shut down
(iv) B Ltd. Has earned net profit of ` 1 lakh, the plant estimating that the fixed
and its overall P/V ratio and margin of manufacturing cost can be reduced to
Advanced Strategic
Objective Questions
` 74,000 per quarter. When the plant Time on bottleneck resources 10

is operating, the fixed overheads are minutes,The return per hour for product
incurred at a uniform rate throughout X is:
the year. Additional costs of plant (a) ` 210
shutdown for the quarter are estimated
at ` 14,000. (b) ` 300
The shut down pint for the quarter in (c) ` 180
units of product will be: (d) ` 90
(a) ` 25,000 (ix) The information relating to the direct
(b) ` 14,000 material cost of a company is as under:
(c) ` 11,000 Standard price per unit 3.60
(d) ` 20,000 Actual quantity purchased in 1,600
units
(vii) A company manufactures two products
using common material handling facility. Standard quantity allowed for 1.450
The total budgeted material handling actual production in units
cost is ` 60,000. The other details are: Material price variance on 240
joylawrenciandas50@gmail.com,8420517209 Product Product
purchase (favourable)
X Y What is the actual purchase price per
Number of units 30 30 unit?
produced
(a) ` 3.45
Material moves per 5 15
product line (b) ` 3.75
Direct labour hour per 200 200 (c) ` 3.20
unit
(d) ` 3.25
Under activity based costing system the (x) If the time taken to produce the first unit
material handling cost to be allocated to of a product is 4000 hrs, what will be
product X (per unit) would be: the total time taken to produce the 5th
(a) ` 1,000 to 8 th unit of the product, when a 90%
learning curve applies?
(b) ` 500
(a) 10,500 hours
(c) ` 1,500
(b) 12,968 hours
(d) ` 2,500
(c) 9,560 hours
(viii)
A company operates throughput
accounting system. The details of (d) 10,368 hours
product X per unit are as under.
Selling Price ` 50
H Block
Material Cost ` 20
Conversion cost ` 15

Cost Management
Objective Questions
SCM
MTP JUNE 2017 SET 2
(i) A company has forecast sales and cost of method. What were the total joint cost
sales for the coming year as ` 25 lakhs in the year?
and `18 lakhs respectively. (a) ` 20,000
The inventory turnover has been taken (b) `10,000
as 9 times per year. In case the inventory
turnover increases to 12 times and the (c) ` 15,000
short term interest rate on working (d) None of these
capital is taken as 10%, what will be
(v) A company is to market a new product.
saving in cost?
It can produce up to 1,50,000 units of
(a) ` 10,000 this product. The following are the esti-
(b) ` 20,000 mated cost data:
(c) ` 15,000 Variable
Fixed Cost
Cost
(d) ` 5,000
(ii) Which of the following would decrease
For production up 8,00,000 60%
to 75,000 units `
unit contribution margin the most? Exceeding 75,000 12,00,000 50%
(a) 15% decrease in selling price units
(b) 15% increase in variable costs Sale price is expected to be ` 25 per unit.
(c) 15% decrease in variable costs How many units must the company sell
(d) 15% decrease in fixed costs to break even?
(iii) When allocating service department (a) 1,00,000 units
costs to production departments, the (b) 1,11,000 units
method that does not consider different
cost behavior patterns is the (c) 1,27,000 units
(a) Step method (d) 75,000 units
(b) Reciprocal method (vi) The following details relate to two com-
peting companies, Alps and Himalayas,
(c) Single-rate method for identical projects:
(d) Dual-rate method. I. The net present value (NPV) of Alps
(iv) A company produces two joint products, is ` 20,000 and its internal rate of
P and V. In a year, further processing return (IRR) is 18%.
costs beyond split-off point spent were II. For the same life period, Himalayas’
` 8,000 and ` 12,000 for 800 units of P estimated cash flows are:
H Block
and 400 units of V respectively. P sells at

` 25 and V sells at ` 50 per unit. A sum
of `9,000 of joint cost were allocated to
product P based on the net realization
Advanced Strategic
Objective Questions
Year ` ‘000 The company will be able to produce and

sell 4,000 units in a month irrespective
0 (450)
of the selling price. The selling price and
1 300
variable cost per unit are independent
2 200 of each other. The specific fixed cost
3 100 relating to this product is ` 20,000. The
probability that the monthly net profit
And its cost of capital is 15%.
of the product will be = ` 1,20,000 is
Which one of the following combinations
(a) 0.2525
is correct concerning the NPV and the
IRR of the two projects? (b) 0.4512
Projects (c) 0.3825
Alps Himalayas (d) 0.3075
(A) Higher NPV Higher IRR (ix) In calculating the life cycle costs of a
product, which of the following items
(B) Higher NPV Lower IRR
would be included?
(C) Lower NPV Higher IRR
A. Planning and concept design costs
(D) Lower NPV Lower IRR
(vii) Nulook Ltd. Uses a JIT system and back
B. Preliminary and detailed design
costs
flush accounting. It does not use a raw
C. Testing costs
material stock control account During
May, 8000 units were produced and D. Production costs
sold. The standard cost per unit is `100; E. Distribution costs
this includes materials of `45. During
May, `4,80,000 of conversion costs were (a) All of the above
incurred.The debit balance on cost of (b) D and E
goods sold account for May was
(c) B, D and E
(a) ` 8,00,000
(d) D
(b) ` 8,40,000
(x) Back flush costing is most likely to be
(c) ` 8,80,000 used when
(d) ` 9,20,000 (a) Management desires sequential
(viii) A company has estimated the selling tracking of costs
prices and the variable costs of one of its (b)
A Just-in-Time inventory
products as under: philosophy has been adopted
Selling price
Variable (c) The company carries significant
Probability Probability cost (per amount of inventory
(per unit)
unit)
0.25 60 0.25 30 (d) Actual production costs are debited

H Block
to work-in-progress.
0.45 75 0.40 45
0.30 90 0.35 60

Cost Management
Objective Questions
SCM
MTP DEC 2017 SET 1
(i) A Ltd., developing a new product, makes (iv) A particular job required 800 kgs of
a model for testing and goes for regular material – P.
production. From past experience of 500 kgs. of the particular material is
similar models, it is known that a 90% currently in stock.
learning curve applies. If the time taken
to make the model is 300 hours, what The original price of the material – P
will be the total time taken to produce was `300 but current resale value of the
3rd to 4th unit of the product? same has been determined as `200. If
the current replacement price of the
(a) 540 hours material – P is `0.80 per kg., the relevant
(b) 486 hours cost of the material – P required for the
(c) 432 hours job would be:
(d) None of the above (a) `640
(ii) ABC Ltd., has current PBIT of `19.20 (b) `440

Lakhs on total assets of `96 Lakhs. The
(c) `300
company proposes to increase assets (d) None of these
by `24 Lakhs, which is estimated to in-
crease operating profit before deprecia- (v) A company determines its selling price
tion by `8.40lakhs-a net increase in De- by making up variable costs 60%. In ad-
preciation by `4.80Lakhs. This will result dition,the company uses frequent sell-
in ROI. ing price mark down to stimulate sales. If
the markdown average 10%, what is the
(a) To decrease by 1 % company’s contribution margin ratio?
(b) To increase by 1% (a) 30.6%
(c) To remain same (b) 44%
(d) None of the above (c) 86.4%
(iii) The selling price of the single product (d) None of these
manufactured by a company is fixed at
`1500 per unit. In the coming year, 500 (vi) A company has 2000 units of an obso-
units of the product are likely to be sold. lete item which are carried in inventory
If the total value of investments of the at the original purchase price of `30,000.
company is `15 lakhs and it has a target If these items are reworked for `10,000,
ROI of 15%, the target cost would be: they can be sold for `18,000. Alternative-
ly, they can be sold as scrap for `3,000
(a) `9.30 in the market.In a decision model used
(b) `9.50 to analyze the reworking proposal, the
H Block
(c) `1050 opportunity cost should be taken as:
(d) None of these (a) ` 8,000

(b) ` 12,000
Advanced Strategic
Objective Questions
(c) ` 3,000 (a) 83.50%

(d) ` 10,000 (b) 80.00%
(vii) A company has estimated the selling (c) 75.50%
prices and the variable costs of one of its (d) None of (a), (b) or (c)
products as under :
(x) ANKIT LTD., operates Throughput Ac-
Selling Variable counting System. The details of product
Probability price (per Probability cost (per
unit) unit)
A per unit are as under:
0.25 60 0.25 30 Selling Price ` 75

0.45 75 0.40 45 Material Cost ` 30
0.30 90 0.35 60 Conversion Cost ` 20
The company will be able to produce and Time to bottleneck resources 10 minutes
sell 4,000 units in a month irrespective The return per hour for product A is
of the selling price. The selling price and
variable cost per unit are independent (a) `270
of each other. The specific fixed cost (b) `150
relating to this product is `20,000. The
(c) `120
probability that the monthly net profit
of the product will be = `1,20,000 is (d) `90
(a) 0.2525
(b) 0.4512
(c) 0.3825
(d) 0.3075
(viii)
When allocation service department
cost to production departments, the
cost behavior patterns is the
(a) Step method
(b) Reciprocal method
(c) Single rate-method
(d) Dual rate-method
(ix) ASHLIN LTD., has developed a new prod-
uct just complete the manufacture of
first four units of the product. The fist
unit took 2 hours to manufacture and
the first four units together took 5.12
H Block
hours to produce. The Learning Curve

rate is

Cost Management
Objective Questions
SCM
MTP DEC 2017 SET 2
(i) A company has a capacity to make (a) To decrease by 1%

4,00,000 units of a product. It has noted (b) To increase by 1%
from market conditions that at a price
of ` 50 per unit, it can sell 1,00,000 units (c) To remain the same
but the demand would double for each (d) None of these
` 5 fall in the selling price. A minimum
(iv) A company makes components and
margin of 25% is required. The target
sells internally to its subsidiary and also
cost for the company should be:
to external market. The external market
(a) ` 50 price is `24 per component, which gives
(b) ` 40 a contribution of 40% of sales. For exter-
nal sales, variable costs include `1.50 per
(c) ` 30 unit for distribution costs. This is, how-
(d) ` 20 ever not incurred in internal sales. There
(ii) Division A of a company manufactures are no capacity constraints. To maximize
a single product and the following data company profit, the transfer price to
are provided: subsidiary should be:
Sales = 25,000 units (a) ` 9.60
Fixed Cost = `4,00,000 (b) ` 12.90
Depreciation = `2,00,000 (c) ` 14.40
Residual Income = `30,000 (d) None of these
Net Assets = `10,00,000 (v) A company operates throughput ac-

counting system. The details of product
Head Office assesses divisional X per unit are as under:
performance by the method of Resudual
Income and uses cost of capital of 12% Selling Price ` 50
(a) `25 Material Cost ` 20
Conversion Cost ` 15
(b) `30
(c) `35 Time on bottleneck resources 10 minutes
(d) None of these. The return per hour for product X is
(iii) ABC Ltd., has correct PBIT of `1920 Cr. (a) `210
on total assets of `96 Cr. The company (b) `300
proposes to increase assets by `24 Cr.,
which is estimated to increase operat- (c) `180
H Block
ing profit before Depreciation by `8.4 (d) `90

Cr., and a net increase in Depreciation by (vi) The information relating to the direct
`4.8 Cr. Thiswill be result in ROI: material cost of a company is as under:
Advanced Strategic
Objective Questions
Standard price per unit 3.60 Sale price is expected to be `25 per unit.
How many units must the company sell
Actual quantity purchased in 1,600
to break even?
units
Standard quantity allowed for 1.450 (a) 1,00,000 units
actual production in units (b) 1,11,000 units
Material price variance on 240 (c) 1,27,000 units
purchase (favourable)
(d) 75,000 units
What is the actual purchase price per
(ix) SUVAM Ltd., has the capacity of produc-
unit?
tion of 80,000 units and presently sells
(a) `3.45 20,000 units at `100 each. The demand
(b) `3.75 is sensitive to selling price and it has
been observed that with every reduc-
(c) `3.20 tion of `10 in selling price, the demand is
(d) `3.25 doubled. What should be the target cost
at full capacity if profit margin on sale is
(vii) In calculating the life cycle costs of a
taken as 25%?
product, which of the following item
(a) `67.50
would be included?
A) Planning and concept design costs (b) `60.00
B) Preliminary and detailed design (c) `45.00
costs (d) None of the above
C) Testing costs (x) A company makes and sells a single
D) Production costs product. The selling price and marginal
revenue equations are:
E) Distribution costs
Selling Price = `50 - `0.001X
(a) All of the above
Marginal Revenue = `50 - `0.002X
(b) D and E
Where X is the product the company
(c) B, D and E
makes. The variable cost amount to 20
(d) D per unit and the fixed costs are `1,00,000.
(viii) A company is to market a new product. In order to maximize the profit, the
It can produce up to 1,50,000 units of selling price should be
this product. The following area the es-
(a) `25
timated cost data:
(b) `30
Fixed Cost Variable
Probability (c) `35
(`) Cost
For production 8,00,000 60% (d) `40
up to 75,000 uts.
H Block
Exceeding 75,000 1,20,000 50%

units

Cost Management
Objective Questions
SCM
MTP JUNE 2018 SET 1
(i) If the first time you perform a job takes (a) 15% decrease in selling price
60 minutes, how long will the eighth job (b) 15% increase in variable costs
take if you are on an 80% learning curve?
(c) 15% decrease in variable costs
(a) 48 minutes
(d) 15% decrease in fixed costs
(b) 30.72 minutes
(v) A company determines its selling price
(c) 31 minutes by making up variable costs 60%. In ad-
(d) None of the above dition,the company uses frequent sell-
(ii) NPL Ltd. Uses a JIT system and back flush ing price mark down to stimulate sales. If
accounting. It does not use a raw mate- the mark down average 10%, what is the
rial stock control account During May, company’s contribution margin ratio?
8000 units were produced and sold. (a) 30.6%
The standard cost per unit is `100; this (b) 44%
includes materials of `45. During May,
(c) 86.4%
`4,80,000 of conversion costs were in-
curred. (d) None of these
The debit balance on cost of goods sold (vi) Back flush costing is most likely to be
account for May was used when
(a) `8,00,000 (a) Management desires sequential
(b) `8,40,000 tracking of costs
(c) `8,80,000 (b) A Just-in-Time inventory philoso-
phy has been adopted
(d) `9,20,000
(c) The company carries significant
(iii) The single price of the selling product amount of inventory
manufactured by a company is fixed at
`1500 per unit. In the coming year, 500 (d) Actual production costs are debited
units of the product are likely to be sold. to work-in-progress.
If the total value of investments of the (vii) A company produces two joint products,
company is `15 lakhs and it has a target P and V. In a year, further processing
ROI of 15%, the target cost would be: costs beyond split-off point spent were
(a) ` 9.30 ` 8,000 and ` 12,000 for 800 units of P
and 400 units of V respectively. P sells
(b) ` 9.50 at` 25 and V sells at ` 50 per unit. A sum
(c) ` 1050 of ` 9,000 of joint cost were allocated to
(d) None of these product P based on the net realization
H Block
method. What were the total joint cost

(iv) Which of the following would decrease in the year?
unit contribution margin the most?
Advanced Strategic
Objective Questions
(a) ` 20,000
(b) ` 10,000
(c) `15,000
(d) None of these
(viii)
When allocation service department
cost to production departments, the
cost behavior patterns is the
(a) Step method
(b) Reciprocal method
(c) Single rate-method
(d) Dual rate-method
(ix) ABC Ltd. has developed a new product
just complete the manufacture of first
four units of the product. The fist unit
took 2 hours to manufacture and the
first four units together took 5.12 hours
to produce. The Learning Curve rate is
(a) 83.50%
(b) 80.00%
(c) 75.50%
(d) None of (a), (b) or (c)
(x) No. Units Sold Per Day 500
Sales Price `25
Direct Materials Cost per unit `10
Other Factory Costs per Day `6000
No. Hours of bottleneck used per day 8
The Return per Factory Hour for product
is
(a) `925
(b) `938
(c) `883
(d) `750
H Block

Cost Management
Objective Questions
SCM
MTP JUNE 2018 SET 2
(i) B Ltd. Has earned net profit of ` 1 lakh, doubled. What should be the target cost
and its overall P/V ratio and margin of at full capacity if profit margin on sale is
safety are 25% and 50% respectively. taken as 25%?
What is the total fixed cost of the com- (a) `75
pany?
(b) ` 90
(a) `2,50,000
(c) ` 60
(b) `2,00,000
(d) ` 25
(c) ` 3,00,000
(v) A company has 2,000 units of an obso-
(d) ` 1,00,000 lete item which are carried in inventory
(ii) A company determines its selling price at the original purchase price of ` 30,000.
by marking up variable costs 60%. In ad- If these items are reworked for `10,000,
dition,the company uses frequent sell- they can be sold for `18,000. Alternative-
ing price mark down to stimulate sales. If ly, they can be sold as scrap for ` 3,000 in
the mark downaverage 10%, what is the the market. In a decision model used to
company’s contribution margin ratio? analyze the reworking proposal, the op-
(a) 30.6% portunity cost should be taken as:
(b) 44% (a) ` 8,000
(c) 86.4% (b) ` 12,000
(d) None of these (c) ` 3,000
(iii) If the direct labour cost is reduced by (d) `10,000

20% with every doubling of output, (vi) A company manufactures two products
what will be the cost of labour for the using common material handling facili-
sixteenth unit produced as an approxi- ty. The total budgeted material handling
mate percentage of the cost of the first cost is `60,000. The other details are:
unit produced?
Product Product
(a) 51.2% X Y
(b) 40.96% Number of units 30 30

produced
(c) 62%
Material moves per 5 15
(d) None of these product line
(iv) A company has the capacity of produc- Direct labour hour 200 200
tion of 80,000 units and presently sells per unit
20,000 units at ` 100 each. The demand
H Block
is sensitive to selling price and it has Under activity based costing system the
been observed that with every reduc- material handling cost to be allocated to
tion of `10 in selling price the demand is product X (per unit) would be:
Advanced Strategic
Objective Questions
(a) ` 1,000 (c) 9,560 hours

(b) ` 500 (d) 10,368 hours
(c) ` 1,500 (ix) A company operates throughput ac-
(d) ` 2,500 counting system. The details of product
X per unit are as under.
(vii) The total cost of manufacturing a com-
ponent is as under at a capacity of 50,000 Selling Price ` 50
units of production: Material Cost ` 20
Conversion cost ` 15
Prime cost 10.00
Variable overheads 2.40 Time on bottleneck resources 10 minutes
Fixed Overheads 4.00 The return per hour for product X is:
16.40
(a) ` 210
The selling price is ` 21 per unit. The (b) `300
variable selling and administrative
expenses is 60 paise per component (c) ` 180
extra. During the next quarter only (d) `90
10,000 units can be produced and
(x) The information relating to the direct
sold. Management plans to shut down material cost of a company is as under:
the plant estimating that the fixed
manufacturing cost can be reduced to Standard price per unit 3.60
` 74,000 per quarter. When the plant Actual quantity purchased in units 1,600
is operating, the fixed overheads are
Standard quantity allowed for actual
incurred at a uniform rate throughout
production in units 1.450
the year. Additional costs of plant
shutdown for the quarter are estimated Material price variance on purchase
at ` 14,000. (favourable) 240
The shut down pint for the quarter in What is the actual purchase price per
units of product will be: unit?
(a) ` 25,000 (a) ` 3.45
(b) ` 14,000 (b) ` 3.75
(c) ` 11,000 (c) ` 3.20
(d) ` 20,000 (d) ` 3.25
(viii) 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?
H Block
(a) 10,500 hours

(b) 12,968 hours

Cost Management
Objective Questions
SCM
RTP JUNE 18
(i) Which of the following is not a term nor- (c) Penetration pricing
mally used in value analysis? (d) Target costing
A. Resale value
B. Use value A. (a) and (b) only
C. Esteem value B. (a), (b) and (c) only
D. Cost value C. (b) and (c) only
(ii) Which of the following is not suitable for D. (a), (c) and (d) only
a JIT production system?
E. (a), (b), (c) and (d)
A. Batch production
(vi) A company has estimated the selling
B. Jobbing production prices and variable costs of one of its
C. Process production products as follows:
D. Service production Selling price per unit Variable cost per unit
(iii) Which of the following is NOT a method ` Probability ` Probability
of transfer pricing? 40 0.30 20 0.55
A. Cost plus transfer price 50 0.45 30 0.25
B. Internal price transfer price 60 0.25 40 0.20
C. Market-based transfer price The company will be able to supply 1,000
D. Two part transfer price units of its product each week irrespective
of the selling price. Selling price and
(iv) When is market skimming pricing ap- variable cost per unit are independent
propriate? of each other.The probability that the
A. If demand is very elastic weekly contribution will exceed `20,000
is ______________%(round to the
B. If the product is new and different
nearest whole %)
C. If there is little chance of achieving
(A) 40%
economies of scale
(B) 42%
D. If demand is inelastic
(C) 45%
E. If there is little competition and
high barriers to entry (D) 55%
(v) Which of the following is a recognised (vii) The shadow price of skilled labour for
method of arriving at the selling price CBV limited is currently `8 per hour.
What does this mean?
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for the products of a business?

(a) Life cycle pricing A. The cost of obtaining additional
skilled labour resources is `8 per
(b) Price skimming hour
Advanced Strategic
Objective Questions
B. There is a hidden cost of `8 for Actual cost `8,085

each hour of skilled labour actively What was the total variance for the
worked setups?
C. Contribution will be increased A. ` 585 Adverse
by `8 per hour for each extra
hour of skilled labour that can be B. ` 165 Favourable
obtained C. ` 5550 Favourable
D. Total costs will be reduced by `8 D. ` 385 Adverse
for each additional hour of skilled
(x) P operates an activity based costing
labour that can be obtained
(ABC) system to attribute its overhead
(viii) An organisation is considering the costs costs to cost objects.In its budget for the
to be incurred in respect of a special year ending 31August 2017, the compa-
order opportunity. The order would ny expected to place a total of 2,895 pur-
require 1,250 kgs of material D. This is chase orders at a total cost of `110,010.
a material that is readily available and This activity and its related costs were
regularly used by the organisation on its budgeted to occur at a constant rate
normal products. There are 265 kgs of throughout the budget year,which is
material D in stock which cost `795 last
week. The current market price is `3.24
divided into 13 four-week periods.Dur-
ing the four-week period ended 30
per kg. Material D is normally used to June 2016, a total of 210 purchase or-
make product X. Each unit of X requires ders were placed at a cost of `7,650.
3 kgs of material D, and if material D is
The over-recovery of these costs for the
casted at `3 per kg, each unit of X yields a
four-week period was:
contribution of `15. The relevant cost of
material D to be included in the costing A. ` 330
of the special order isnearest to: B. ` 350
A ` 3,990 C. ` 370
B ` 4,050 D. ` 390
C ` 10,000 (xi) A manufacturing company recorded the
D ` 10,300 following costs in October for Product X:
(ix) Aderholt uses activity based costing to Direct materials ` 20,000
allocate its overheads. The budgeted Direct labour 6,300
cost/expected for the Supervisor cost
pool was: Variable production overhead 4,700
Fixed production overhead 19,750
Budgeted units 5,000
Variable selling costs 4,500
Number of employees 75
Fixed distribution costs 16,800
Budgeted cost `7,500
Total costs incurred for Product X 72,050
H Block
The actual costs incurred were:

During October 4,000 units of Product
Actual units 5,500 X were produced but only 3,600 units
Actual employees 77 were sold.

Cost Management
Objective Questions
At the beginning of October there was D. ` 375

no inventory. (xiv) A company has 2,000 units of an obso-
The value of the inventory of Product lete item which are carried in inventory
X at the end of October using at the original purchase price of `30,000.
throughput accounting was: If these items are reworked for `10,000,
A ` 630
they can be sold for `18,000. Alternative-
ly, they can be sold as scrap for `3,000 in
B ` 1,080 the market. In a decision model used to
C ` 1,100 analyze the reworking proposal, the op-
portunity cost should be taken as:
D ` 2,000
(a) `8,000
(xii) A company operates a standard ab-
sorption costing system. The budg- (b) `12,000
eted fixed production overheads for (c) `3,000
the company for the latest year were
`330,000 andbudgeted output was
(d) `10,000
220,000 units. At the end of the compa- (xv) The time taken to produce the first unit
ny’s financial year the total of the fixed of a product is 4000 hrs, what will be
production overheads debited to the
Fixed Production Overhead Control Ac-
the total time taken to produce the 5th
to 8th unit of the product, when a 90%
count was `260,000 and the actual out- learning curve applies?
put achieved was 200,000 units. (a) 10,500 hours
The under/over absorption of overheads (b) 12,968 hours
was
(c) 9,560 hours
A. ` 40,000 over absorbed
(d) 10,368 hours
B. ` 40,000 under absorbed
C. ` 70,000 over absorbed
D. ` 70,000 under absorbed
(xiii) Company B uses a throughput account-
ing system. The details of product X per
unit are as follows:
Selling price `50
Material cost `16
Conversion costs `20
Time on bottleneck resource 8 minutes
The return per hour for product X is:
A. ` 105
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B. ` 225
C. ` 255
Advanced Strategic
Objective Questions
SPM
SPM JUNE 2017
(i) Risk Management Strategies are (a) 2,3

(a) Avoid Risk, Reduce Risk, Retain Risk, (b) 4,5
Combine Risk (c) 1,4
(b) Transfer Risk, Share Risk and Hedge (d) None of the above
Risk
(iv) Which one of the following is not a
(c) Both (a) and (b) measure related to Balanced Score Card?
(d) None of the above (a) Financial
(ii) The necessary condition for equilibrium (b) Customer Satisfaction
position of a firm is
(c) Internal Processes
(a) MC>MR
(d) Gap Analysis
(b) MC> Price
(c) MC = MR
(v) Performance will be a product of
(a) Efficiency and Utilization
(d) MC = AC
(b) Utilization and Productivity
(iii) The Cost function of a firm is given by
C = x3 - 4x2 + 7x. Find at what level of (c) Efficiency and Productivity
output the average cost is minimum and (d)
Efficiency, Utilization and
what would be the minimum average Productivity
cost.
SPM DEC 2017

i) _______is the uncertainty of the pur- (iii) In which discipline supply chain concept
chasing power of the monies to be re- was originated?
ceived, in the future? (A) Production
(A) Market risk (B) Operation
(B) Physical risk (C) Marketing
(C) Purchasing power risk (D) Logistics
(D) Interest rate risk (iv) Under perfect competition and at the
(ii) Unsystematic risk relates to point of equilibrium of firm
(A) Market risk (A) MC curve must be falling
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(B) Inherent risk (B) MC curve must be rising

(C) Beta; (C) MR curve must be falling
(D) Interest rate risk (D) None of the above

Cost Management
Objective Questions
(v) Financial risk arises out of ___________ (C) The nature of financial transaction
(A) Increased competition (D) Both (B) and (C)
(B) Conduct of business and investment
SPM
MTP JUNE 2017 SET 1
(i) Which of the following is not the per- (v) As per Altman’s model, if the value of
spective of Balanced Score Card? z-score of a firm is more than 2.99, it
(A) Customer perspective will be:
(B) Financial perspective (A) Non-failed or non-distressed firm
(C) Political perspective (B) Failed or distressed firm
(D) Learning and growth perspective (C) Mixture of failed and non-failed
elements
(ii) The program which encompasses
the planning and management of (D) None of the above
all activities involved in sourcing,
procurement, conversion and logistics
management activities, is called:
(A) Supply Chain Management
(B) Customer Relationship
Management
(C) Total Quality Management
(D) None of the above.
(iii) If Cost Function is C=3/5 x+15/4 , the
cost when output is 5 units will be:
(A) 6.80
(B) 6.75
(C) 6.20
(D) 6.25
(iv) Which of the following is a cause for cor-
porate distress?
(A) Fraud by Management
(B) Working Capital Problems
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(C) Mismanagement
(D) All of the above.
Advanced Strategic
Objective Questions
SPM
MTP JUNE 2017 SET 2
(i) The components of the Stewart Cycle or (iii) Which of the following is not the ele-
PDCA are: ment/ parameter of NCAER model of
(A) Plan-Do-Check-Act corporate distress prediction?
(B) Plan-Define-Check-Act (A) Net worth position
(C) Plan-Do-Control-Act (B) Outstanding liability position
(D) Program-Do-Check-Act (C) Net working capital position
(ii) The risk which is concerned with the (D) Cash profit position
general economic climate (such as (iv) The type of benchmarking, which is con-
growth rate of income, characteristics cerned with the development of core
of the labour force, level of foreign debt competencies that will help sustained
outstanding etc.) within the country, is competitive advantage, is called:
termed as: (A) Global Benchmarking
(A) Country Risk
(B) Strategic Benchmarking
(B) Political Risk (C) Internal Benchmarking
(C) Economic Risk (D) Competitive Benchmarking
(D) Social Risk
SPM
MTP DEC 2017 SET 1
(i) The 5 S’s concepts in Quality Manage- (C) price elasticity of demand
ment are: (D) None of the above.
(A) SEIRI, SETOIN, SEISO, SEIKETSU, (iii) Which of the following are not the el-
SHITSKUE ement/ parameter of NCAER model of
(B) SEIRI, SEITON, SEISO, SEIKETSU, corporate distress prediction?
SHITSUKE (A) Net worth position
(C) SEIRI, SETOIN, SEISO, SEIKESTU, (B) Outstanding liability position
SHITSUKE
(C) Net working capital position
(D) SIERI, SETOIN, SEISO, SEIKETSU,
SHITSUKE. (D) Cash profit position.
(ii) The rate of change in the demand due to (iv) The risk which arises primarily due to de-
viation from planned normal function-
H Block
the change in the income is called:

ing of system, procedures, technology,
(A) income elasticity of demand human failure, omission or commission
(B) cross elasticity of demand of errors, is called:

Cost Management
Objective Questions
(A) Currency Risk spective of Balanced Score Card?

(B) Industry Risk (A) Customer perspective
(C) Operational Risk (B) Financial perspective
(D) Callability Risk (C) Political perspective
(v) Which of the following is not the per- (D) Learning and growth perspective
SPM
MTP DEC 2017 SET 2
(i) A successful TQM program incorporates (a) 2200 – 3x

all of the following except : (b) 1100 – 3x
(a) continuous improvement (c) 1100 – 2x
(b) employment involvement (d) 2200 – 2x
(c) benchmarking (iv) As per Altman’s model, if the value of
(d)
centralized decision making z-score of a firm falls between 1.81 and
authority. 2.99,then the firm will be:
(ii) The risk which refers to the possibilities (a) Non-failed firm
of loss due to factors such as religious (b) Failed firm
fanaticism, ethnic polarization, dissatis-
faction among the people as a result of (c) Mixture of failed and non-failed
wide disparity in income distribution, or elements
regionalism, is called: (d) None of the above.
(a) Social Risk (v) The type of benchmarking, which is con-
(b) External Risk cerned with the development of core
competencies that will help sustained
(c) Political Risk competitive advantage, is called:
(d) Country Risk. (a) Global Benchmarking
(iii) The revenue function of a firm given by (b) Strategic Benchmarking
xR = (2200-3x)X/2, the firm’s marginal
revenue function will be: (c) Internal Benchmarking
(d) Competitive Benchmarking.
SPM
RTP JUNE 2018
(i) The financial performance analysis other creditors who have no access to
H Block
which is undertaken by the outsiders the internal records of the company, is

of the business, namely investors, cred- called:
it agencies, government agencies, and (a) Internal analysis;
Advanced Strategic
Objective Questions
(b) External analysis; (b) Relatively elastic demand;

(c) Horizontal Analysis; (c) Perfectly Inelastic demand;
(d) Vertical Analysis. (d) Perfectly Elastic Demand.
(ii) Which of the following is a cause for cor- (vii) A French economist Cournot analyzed a
porate distress? special case of competitive business be-
(a) Fraud by Management; haviour with only two firms in an Indus-
try. It is called:
(b) Working Capital Problems;
(a) Oligopoly
(c) Mismanagement;
(b) Monopoly
(d) All of the above.
(c) Duopoly
(iii) Six Sigma has two key methodologies.
These are: (d) None of the above.
(a) DMAIC and DMADV; (viii) The risk which is primarily influenced
by the level of financial gearing, interest
(b) DMADC and DMADV; cover, operating leverage, and cash flow
(c) DMAIC and DMADC; adequacy, is called:
(d) DMAII and DMADV. (a) Financial risk;
(iv) Who has prompted the phrases, Zero (b) Business risk;
Defects ? (c) External risk;
(a) Walter A. Shewhart; (d) Exchange risk.
(b) Philip Crosby; (ix) Which of the following are not the el-
(c) Peter Drucker; ement/ parameter of NCAER model of
corporate distress prediction?
(d) F. W. Taylor.
(a) Net worth position
(v) One of the exceptions of Law of Demand
is described by Sir Robert Giffen. He said (b) Outstanding liability position
that even though the price, for necessary (c) Net working capital position
goods rise, the demand for them will not
decrease. These goods are called: (d) Cash profit position.
(a) Prestigious goods; (x) The type of benchmarking, which is con-

cerned with the development of core
(b) Speculative goods; competencies that will help sustained
(c) Giffen goods; competitive advantage, is called:
(d) None of the above. (a) Global Benchmarking
(vi) If the proportionate change in the price (b) Strategic Benchmarking
is more than the proportionate change (c) Internal Benchmarking
in the demand, it is called:
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(d) Competitive Benchmarking.

(a) Relatively inelastic demand;

Cost Management
Question Papers
Chapter 8
Question Papers
CA Final AMA (Old) Novemver 2017

Total No. of Questions - 7 Total No. of Printed Pages - 23
Time Allowed - 3 Hours Maximum Marks - 100
AKN
Answers to questions are to be given only in English except in the case of candidates who
have opted for Hindi Medium. If a candidate has not opted for Hindi Medium, his/her
answers in Hindi will not be valued.
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
In case, any candidate answers extra question(s) or sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra questions(s) answered shall be ignored. Working
notes should form part of the respective answers.
Wherever necessary, candidates may make appropriate assumptions and clearly state them.
No statistical or other table will be provided with this question paper.
1. (a) AB company produces three products X, Y and Z by using Indigenous and Imported
raw materials. The relevant information available from the records of the Company
is as under :
[5 marks]
Product X Product Y Product Z
Selling price in ` per unit 425 380 500
Direct materials in ` per unit 180 160 190
Direct Labour @ ` 40 per hour 100 80 120
Variable Overheads @ ` 12 per labour hour 30 24 36
Maximum Sales Potential (in units) 1,500 2,500 2,500
The Company also has an agreement to supply 1,000 units of Product X to a vendor
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which has to be executed. Out of direct materials, 60 % is imported raw material and
it is purchased at ` 24 per kg.
Advanced Strategic
Question Papers
Prepare a statement showing Contribution of these three products assuming

availability of imported raw materials is restricted to 24,000 kgs per year.
(b) The simplex tableau for a maximization problem of linear programming is given
below :
[4 marks]
Product
cj x1 x2 s1 s2 Quantity
Mix
5 x2 1 1 1 0 10
0 S2 1 0 –1 1 3
Cj 4 5 0 0
zj’ 5 5 5 0 50
Cj – Zj –1 0 –5 0
Answer the following questions giving reasons in brief:

(i) If s1 is slack in machine A (in hours/week) and s2 is slack in machine B (in hours/
week), which of these machines is being used to the fullest capacity ?
(ii) A customer would like have to one unit of product x1 and is willing to pay more
than the normal price in order to get it. How much should the price be increased
in order to maintain same level of profit ?
(iii) Machine A (associated with slack s1 in hours week) has to be shut down for
repairs for 2 hours next week. What will be the effect on profits ?
(iv) How much would you be prepared to pay for another hour (per week) of
machine A and machine B ?
(c) RST Co. manufactures products purely carried out by labour. It has 25 direct workers
who work for 25 days a month of 8 hours a day. However, the company may resort
to overtime if required, at one and half the normal rate of wages. The company has
received an order of 8,000 units of a new product at a price of ` 160 to be executed
within 30 days. The contract stipulates a penalty of ` 10,000 per day for delivery
beyond 30 days. It is estimated that at the current level of efficiency, each unit
requires one hour for the first 2,000 units. Company expects 90% learning curve for
this type of work. The cost data is as under: [5 marks]
Direct materials ` 75 per unit

Direct labour (1 hour/unit) ` 30 per unit
Variable overhead ` 12 per direct labour hour
Fixed overhead ` 1,20,000 per month
(Fixed overheads are to be incurred evenly throughout the month)

H Block

Cost Management
Question Papers
Calculate:
(i) Overtime hours if the option of overtime is exercised to avoid the penalty.
(ii) The cost and profit under both the options i.e. to pay the penalty by working in
normal hours or to work overtime to avoid penalty.
(d) MK international Ltd. has developed a new product ‘RIO’ which is to be launched
soon. The company anticipates to sell 1,25,000 of these units at a sale price of `
400 per unit over the product life cycle of three years. The other data pertaining to
Product RIO are as under :
[6 marks]
Research and development cost ` 32,50,000

Manufacturing cost per unit ` 175
Fixed manufacturing cost per year ` 12,75,000
Marketing cost per unit (including 4% `90
commission on sales)
Fixed marketing cost per year ` 6,72,000
Administration cost ` 6,60,000 per year
Warranty expenses 4 replacement parts per 50 units at
` 30 per part
Calculate:
(i) The life cycle cost of the product ‘RIO’
(ii) The revised life cycle cost if the MK international Ltd. increases sales by 12%
through 5% reduction in sale price along with increase in fixed manufacturing
cost by ` 1,20,000 per year.
(iii) Should the company go for reduction in sale price ?
2. (a) XYZ chemical company has three plants located in a state. The daily chemical pro-
duction at each plant is as follows : [6 marks]
Plant-1 : 12 million litres
Plant-II : 2 million litres
Plant-Ill: 20 million litres
Each day, company must fulfil the needs of its four distribution centres. Minimum
requirements at each centre are as follows :
Distribution centre 1 : 14 million litres
Distribution centre 2 : 10 million litres ,
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Cost in hundreds of rupees of shipping one million litres from each plant to each
distribution centre is given in the following table :
Advanced Strategic
Question Papers
Distribution Centre
Plant D1 D2 D3 D4
P1 2 3 11 7
P2 1 0 6 1
P3 5 8 15 9
Required :
(i) Find initial basic feasible solution for given transportation problem by using
Vogel’s approximation method if the object is to minimize the total cost.
(ii) Is this the degenerate solution ?
(b) A small project consisting of eight activities has the following characteristics: [10
marks]
Activity Time (Weeks)
Optimistic Pessimistic Most likely
1–2 4 12 8
1–3 3 5 4
1–4 4 8 6
2–5 4 6 5
3–5 3 3 3
4–6 7 11 9
5–6 6 12 9
5–7 5 9 7
6–7 3 5 4
Required :
(i) Draw the project network and find out the critical path and expected completion
time.
(ii) Calculate the standard deviation and variance of the project.
(iii) What is the probability of the project completion at least 2 weeks earlier than
the expected time ?
(iv) If the project due date for completion is 27 weeks, what is the probability of not
meeting the due date ?
(v) If the project manager wants to be 90% sure of the completion, how many
weeks before the due date should he commence the project ?
Value of Z1.155 = 0.3759, Z0.58 = 0.2190, NT(Z)0.40 = 1.28
H Block

Cost Management
Question Papers
3. (a) Company produces three products P, Q and R for which the standard cost per unit
and quantities produced are as under : [10 marks]
Products P Q R
Units produced and sold 36,000 48.000 96,000
Direct material cost per unit (`) 60 48 45
Direct labour cost per unit (`) 30 24 18
Machine hours per unit (hours) 0.50 0.40 0.30
Total production overheads are absorbed on machine hour basis. The rate is ` 60 per
machine hour.
The Company has analysed its operations and determined that five activities act as
cost drivers for overheads. Data relating to five activities are given below :
Cost of each activity as % of
Activity Area Cost driver
total production overhead cost
Store receiving Number of requisitions 25%
Machine set up Number of set ups 20%
Machine running Machine hours worked 25%
Packing Packing time in hours 16%
Storage Area in square metres 14%
The investigation into the production overhead activities for the period revealed the
following :
Activity P Q R
Number of requisitions 1.200 1,500 3,900
Number of machine set ups 60 120 320
Packing hours 3,000 4,800 10.200
Storage (Sq metres) 10,800 12,000 19,200
Required :
(i) Calculate total production overheads.
(ii) Prepare product cost statement showing per unit cost under traditional
absorption costing method.
(iii) Calculate the cost driver rates.
(iv) Prepare product cost statement showing per unit cost under activity based
costing method.
(v) What is the difference in costs due to adoption of traditional absorption costing
H Block
method and activity based costing method ?
Advanced Strategic
Question Papers
(b) MN Ltd. is a confectionery company and it sells confectionery items. Past data of
demand per day with frequency is given below : [6 marks]
Demand (in kgs) 0 5 10 15 20 25

No. of days 4 22 16 42 10 6
The company has scope to meet 12 kg demand per day. The life of the product is
one day. It will be produced according to demand. It cannot hold as inventory. The
contribution is ` 10 per kg.
Using the following random numbers, simulate 10 days demand for the confectionery
items.
35, 52, 90, 1.3, 23, 73, 34, 57, 35, 83
Required :
Allocate random numbers and simulate for 10 days.
(ii) Calculate average demand of confectionery items per day fulfilled.
(iii) Calculate amount of loss (Due to not fulfilling the demand).
4. (a) UV Limited manufactures a product ZED. It currently operates at 70% capacity. It has
received an export order which will utilize 50% of the capacity of the factory. The
order has to be either taken in full or rejected totally. The order has to be executed
at a price of ` 86 per unit . and company has to incur additional cost of packing and
forwarding of ` 2.50 per unit on the goods exported. Commission @ 3% will be pay-
able to overseas agent. [8 marks]
Other information available is as under :
Sale value 63,000 units @ ` 95 per unit ` 59,85,000

Direct materials @ ` 42.10 per unit ` 26,52,300
Variable manufacturing overheads ` 4,41,000
Variable selling & distribution overheads (including 2% commission ` 4,34,700
on domestic sales)
Fixed overheads ` 6,75,000
P/V ratio 20%
Following three alternatives are available to the management:

(i) Continue with the current domestic sale and reject the export order.
(ii) Accept the export order by reducing the domestic sale.
(iii) Increase the capacity by 10% by installing a new machine costing ` 2,50,000.
Fixed overheads will increase by ` 96,000. Opportunity cost of investment is
15%.
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Overtime is to be paid at one and a half time the normal rate to meet the balance of
the required capacity.

Cost Management
Question Papers
Required:
(i) Prepare Statement of profitability for each of the above three alternatives.
(ii) Which is the best alternative in terms of profitability ?
(b) MH hotel has a capacity of 50 rooms, each of which can accommodate one or two
guests. Guests staying in hotel are provided with free facilities like sports centre, kids
zone, swimming pool etc. The details in the budget for the year ending 31 -3-2018
are narrated below :
[8 marks]
(i) Standard room rent of ` 3,500 per night during high season i.e. May, June, July,
December and January and for the remaining months (low season) standard
room rent of 1,800 per night will be charged.
(ii) Average room occupancy per night during high season is 80% and during low
season is 50%.
(iii) The hotel is registered with number of internet based hotel providers. It is
expected that subject to capacity available, an average of 15 rooms per night
can be sold through them. These bookings will be in addition to the occupancy
level stated in point (ii). The internet service provider will pay 60% of the
standard booking rate.
(iv) Variable cost per room night will be ` 1,075 per room night.
(v) Fixed cost will be ^ 12,00,000 per month. However, when occupancy is 100%,
fixed cost will increase by ` 9,000 per night.
Prepare budgeted profitability statement for the year ending 31-03-2018 showing
the details of revenue, costs and profits.
5. (a) S. Ltd. produces and sells a single product. The product is ‘ manufactured by mixing
two raw materials Q and R. The standard cost data of the product is as follows : [8
marks]
Raw material input: Q 3kg @ ` 18.00 per kg ` 54.00

R 7Kg @ ` 6.00 per kg i ` 42.00
Raw material cost per kg of input ` 96.00
Yield 96%
Raw material cost per kg of output ` 100
Fixed production overheads per kg of output ` 8.00
Total standard cost per kg of output ` 108.00
H Block
Advanced Strategic
Question Papers
The budgeted and actual data are as follows :

Budgeted data Actual data
Sales 72,000 kg Sales 71,000 kg
Production 70,000 kg Production 69,000 kg
Opening 2,000 kg Cost per kg of Q ` 18.10
Inventory (valued at standard Cost per kg of R ` 5.80
cost)
Selling price per kg ` 200 Selling price per kg ` 203.00
Fixed production ` 5,60,000 Fixed production ` 5,08,000
overheads overheads
incurred
Input of Q 2,21,000 kg
Input of R 4,79,000 kg
The fixed production overhead absorption rate is based on the budgeted production.
Calculate Sales price variance, Sales volume variance. Material price variance,
Material mix variance, Material yield variance, Fixed overhead expenditure variance
and Fixed overhead volume variance.
(b) A company manufactures two products X and Y. The current pattern of sales of
Product X and Product Y is in the ratio of 5 : 3. The budgeted data for the quarter
ending 30-09-2017 is as under : [8 marks]
Particulars Product X Product Y
Direct material cost per ` 161 ` 176
unit
Direct labour cost per unit ` 75 ` 90
Variable overheads per ` 30 ` 50
unit
Commission on sales 4% of selling price 5% of selling price
P/V ratio 20% 16%
Stock as on 1-7-2017 1,400 units 1,050 units
The annual fixed overheads amounts to ` 25,36,000 and it is assumed to be occurred

evenly throughout the year. The Company desires profit of ` 4,50,000 per quarter.
Closing stock is to be maintained at 20% of the budgeted sales.
Required :
(i) Calculate sales quantity to be sold during quarter ending 30-09-2017.
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(ii) Prepare production budget in units for the quarter ending 30-09-2017.

Cost Management
Question Papers
6. (a) ABC miners operates two divisions, one in Japan and other in United Kingdom (U.K.).
Mining Division is operated in Japan which is rich in raw emerald.
The other division is United Kingdom Processing Division. It processes the raw
emerald into polished stone fit for human wearing.
The cost details of these divisions are as follows : [8 marks]
Division Japan Mining Division United Kingdom Processing Division
Per carat of raw emerald Per carat of polished emerald
Variable Cost 2,500 Yen 150 Pound
Fixed Cost 5,000 Yen 350 Pound
Several polishing companies in Japan buy raw emerald from other local Mining
Companies at 9,000 Yen per carat. Current Foreign Exchange Rate is 50 yen = 1 Pound.
Income Tax rates are 20% and 30% in Japan and the United Kingdom respectively.
It takes 2 carats of Raw Yellow emerald to yield 1 carat of Polished Stone. Polished
emerald sell for 3,000 Pounds per carat.
Required:
(i) Compute the transfer price for 1 carat of raw emerald transferred from Mining
Division to the Processing Division under two methods - (a) 200% of Full Costs
and (b) Market Price.
(ii) 1,000 carats of raw emerald are mined by the Japan Mining Division and then
processed and sold by the U.K. Processing Division. Compute the after tax
operating income for each division under both the Transfer Pricing Methods
stated above in (i).
(b) JC Company produces electronic product and factory is working in Special Economic
Zone (SEZ). The expected capacity utilization is 60% and turnover for the year 2016-
17 is ` 660 lakh. If the company works at 100% capacity, the sales cost relationship
will be as follows :
Factory cost : 65 per cent of sales value
Prime cost : 75 per cent of factory cost
Selling and administrative cost : 20% of sales value and being 80% variable
The factory overheads will vary according to operating capacity in the following
manner:
Operating capacity 60% 80% 100% 120%

Factory overheads (` in lakhs) 155.25 164.00 178.75 214.50
The Government of India gives 10% subsidy on the export order amount and it is
expected that currency fluctuation trends will be positive by 8% in next financial
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year.
Advanced Strategic
Question Papers
The Company receives an offer from abroad for a value of ` 150 lakhs. The prime
cost of this order is estimated at ` 96 lakhs and selling and administrative expenses
applicable to this order is ` 7,20,000. The order will occupy 40% of the capacity of
the plant. To complete the export order, quality maintenance cost of ` 1,20,000 will
also be incurred.
The Marketing Director estimates that the company’s own sales will increase to 80%
of the capacity by the time of materialization of new order. The factory overheads
will increase by ` 50.50 lakhs (for increase from 80% to 120% capacity).
The maximum demand in local market can be extended up to 120% with export
order. The export order cannot accepted partly.
Required :
(i) Prepared a profitability statement at the capacity level of 60%, 80% and 100%.
(ii) Should the company accept the export order ? [8 marks]
7. Answer any Four out of the following Five questions : [4 × 4 = 16]
(a) (i) Define Pricing Strategy
(ii) State the Market Entry Strategies of pricing applicable in the following situations:
(1) Inelastic demand
(2) Mass Production
(3) Assured profit
(4) Elastic demand
(b) Explain the following terms in relation to Simplex method of Linear Programming
problem:
(i) Multiple optimal solution
(ii) Infeasible solution.
(iii) Degeneracy
(iv) Unbounded solution
(c) Identify the type of cost in each of the following independent situations. Also state
whether it is relevant or irrelevant.
(i) A company has invested ` 50 lakh in a project. Company could have earned ` 4
lakh by investing the amount in Government securities.
(ii) Company has purchased a new machine for ` 50 lakh and entered into three
year maintenance contract at ` 25,000 per year.
(iii) A special drilling machine has to be hired on monthly charges of ` 50,000 for
two months for the Construction project.
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Cost Management
Question Papers
(iv) There are 15 skilled workers in the production department of X Ltd. currently
under utilized. It is the policy of the company to continue to pay skilled workers
at ` 15,000 per month in full. Acceptance of the new project will reduce the idle
time of skilled workers.
(d) State with reason whether the following statements are true or false in relation to
assignment problem :
(i) There cannot be multiple optimal solutions in an assignment problem.
(ii) In 4 x 6 minimisation problem, we can solve it by introducing one dummy row
in given matrix.
(iii) In a problem relating to sales maximization, we have to convert the given matrix
into minimization by subtracting lowest element among all the elements of
given matrix from all the elements of that matrix.
(iv) When there is a restriction of assignment in a particular cell, then we put M to
avoid assignment in that cell.
(e) Classify the following items under appropriate categories of quality costs viz.
Prevention cost, Appraisal cost, Internal failure cost and External failure cost.
(i) Reinspection of product reworked.
(ii) Testing of material of special nature from outside laboratory.
(iii) Employee time spent on reviewing and assessing the quality of output regarding
material supplied.
(iv) Customer survey for assessing the feedback on quality of product sold.
(v) Calibration of testing equipment
(vi) Warranty claim processing
(vii) Repurchase of components to create replacements
(viii) Loss of customer due to supply of low quality product.
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Advanced Strategic
Question Papers
CA Final AMA Old Course - May 2018

Total No. of Questions - 7 Total No. of Printed Pages - 23
Time Allowed - 3 Hours Maximum Marks - 100
EML
Answers to questions are to be given only in English except in the case of candidates who
have opted for Hindi Medium. If a candidate who has not opted for Hindi Medium, his/her
answers in Hindi will not be valued.
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
In case, any candidate answers extra question(s)/sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored. Working
notes should form part of the respective answers.
Wherever necessary, candidates may make appropriate assumptions and clearly state them.
No statistical or other table will be provided with this question paper.
1. (a) X Company manufactures Key Rings that are printed with the logos of 5 the various
companies. Each Ring is priced at ` 10. The costs are as follows: [5]
Cost Driver Unit Variable Cost (`) Level of Cost Driver
Direct cost 5.00 -
Setups 450.00 40
Engineering hours 10.00 500
Other Data:
Total fixed cost (conventional) ` 96,000
Total fixed cost (ABC) ` 73,000
Required :
(i) To compute the Break-even-point in units using activity-based analysis.
(ii) Suppose that company could reduce the setup cost by ` 150 per setup and
could reduce the number of engineering hours needed to 430. How many units
must be sold to break-even in this situation ?
(b) GTC Limited, manufacturer of ‘ORA’ a leading brand of hair dye are planning the
media mix for the next year with-in their advertisement budget of ` 45 lakhs. The
characteristics of target audience for ‘ORA’ and weightage for each are as follows:
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[5]

Cost Management
Question Papers
Characteristics Weightage (%)

Age Over 40 years 45
Monthly income Over ` 25,000 30
Education Graduate & above 25
The audience characteristics for the three magazines under considerations, cost per
insertion and total readership are as under
Magazine A Magazine B Magazine C
Characteristics
(%) (%) (%)
Age Over 40 years 50 60 30
Monthly income Over ` 25,000 45 50 40
Education Graduate & above 40 35 50
Cost per insertion (`) 75,000 1,25,000 45,000
Readership (in lakhs) 18 25 12
The company has already decided that at least 12 insertions in Magazine A, 18

insertions in magazine B are necessary to create an impact whereas Magazine C
should have not more than 8 insertions.
Formulate a linear programming model for the given problem to maximize the
expected effective exposure.
(c) Nova Limited manufactures two products ‘Super’ and ‘Bright’. The selling price and
cost data are as under : [5]
Super Bright
Selling price per unit (`) 384 525
Direct material per unit (`) 158 240
Direct labour @ ` 40 per hour
Department A 60 80
Department B - 100
Department C 80 -
Variable overhead per unit (`) 32 45
The company operates a single shift of 8 hours/day for 300 days in a year and the
number of workers in each department are as under :
Department A 78 workers
Department B 54 workers
Department C 48 workers
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The employees cannot be increased nor can they be transferred from one department
to another.
Required:
Advanced Strategic
Question Papers
Calculate the number of units of each product that can be manufactured to yield
maximum profit.
(d) Century Electrical Company manufactures fans. As a first step to focus on quality
improvements, the company has compiled the following operating data for the year
ending 31.03.2018 : [5]
Cost of Quality Amount in `

Re-inspecting Rework 3,25,600
Training 3,75,500
Warranty Repairs 8,62,500
Line Inspection 2,12,500
Downtime 1,84,000
Design Engineering 3,62,800
Product Testing Equipment 4,15,800
Litigation costs to defend allegations of defective products 2,90,500
Recording and reporting defects 2,67,600
Supplier evaluation 2,96,800
Storing and disposing waste 1,72,000
Product liability insurance 1,08,000
Expediting 3,27,000
Procedure verification 2,54,000
Recalls 3,42,000
Required:
Classify the costs into cost of quality categories and determine the total amount
being spent on each category.
2. (a) A division of XY Company produces two types of products, whose selling price and
cost data are as follows : [8]
Product A Product B
Selling price (` per unit) 200 280
Material cost (` per unit) 80 100
Variable conversion cost (` per unit) 20 60
Maximum Sales Potential (units) 75,000 35,000
Production per Machine hours (units) 3.125 2.5
Maximum capacity hours are 30,000. Total fixed overheads are ` 42 lakhs.
The stock of work-in-progress and finished goods are negligible because the
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company uses just-in-time system.

Required :

Cost Management
Question Papers
(i) Determine the optimal product mix using marginal costing.

(ii) Calculate the throughput accounting ratio for each product and rank the
products for manufacture.
(iii) Based on the concept of throughput accounting, compute the product mix to
yield maximum profit.
Show calculations up to two decimal points.
(b) Joy Limited a toy manufacturing company is going to launch two new battery
operated toys in the market. Both the products will be manufactured in Division BT.
The estimated data are as under : [8]
Toy A Toy B
Annual Production (units) 48000 72000
Direct Material (` per unit) 126 158
Direct labour (` 60 per hour) 30 40
Factory overheads (60% variable) are 80% of direct wages. Administrative overheads
(100% fixed) are 10% of factory cost. Selling overheads (50% fixed) are ` 12 and ` 18
per unit of Toy A and Toy B respectively.
The fixed capital investment in the Division BT is ` 30 lakhs. Gross working capital
requirement is equivalent to 20% of cost of sales and current liabilities are 10 % of
total cost of production. 15% return on capital employed is expected.
Required:
Fix selling price of Toy A and Toy B so that contribution per labour hour is same for
both the products.
Show amount to the nearest Rupee.
3. (a) There are two profit centres namely Division A and Division Bin XY Ltd . Division A
produces four products P, Q, R and S. Each product is sold in the external market also.
The relevant data for Division A are as follows : [8]
P Q R S
Market price per unit (`) 700 690 560 460
Variable cost of production per unit (`) 660 620 360 370
Labour hours required per unit (Hours) 6 8 4 6
The maximum sales in the external market are :

P: 3,000 units
Q: 3,500 units
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R: 2,800 units
S : 1,800 units
Advanced Strategic
Question Papers
Product S can be transferred to Division B also but the maximum quantity that might
be required for transfer is 2,200 units of S.
Division B can also purchase the same product at a price of ` 420 per unit from
market instead of receiving transfers of product S from Division A.
(a) You are required to calculate the transfer price for each unit for 2,200 units of
product S, if the total labour hours available in Division A are :
(i) 48,000 hours
(ii) 64,000 hours
(b) Whether is it profitable for Division B to get transfer 2,200 units of products S
from Division A in above (a) situation ?
Show calculation of units to nearest unit and rest up to two decimal points.
(b) JK Limited manufactures three Products D, E and F each requiring similar material,
labour and production facilities. Trading results of the company for the year ending
March, 2018 are as under: [8]
(Amount in `)
Total D E F
Sales 38,50,000 13,90,000 30,20,000 82,60,000
Variable Cost:
Material 10,78,000 6,25,500 9,06,000 26,09,500
Labour 9,24,000 4,86,500 6,04,000 20,14,500
Overheads 7,39,200 2,91,900 4,83,200 15,14,300
Total variable cost 27,41,200 14,03,900 19,93,200 61,38,300
Contribution 11,08,800 (13,900) 10,26,800 21,21,700
Fixed overheads 12,60,000
Profit 8,61,700
Product E, despite best efforts, does not show any good prospect to yield reasonable
margins and it is not possible to raise its price so as to make it profitable. The
company has decided to discontinue its production w.e.f. 1st April 2018. Products D
and F have good potential to grow and the market can easily absorb the increased
production. The company has decided to raise the production of Products D and F
by diverting the 60% labour of Product E to Product D and balance 40% to Product F.
Following additional information is available for the year beginning April 2018:
(A) Total Direct wage bill for the year would be at the same level as for the year
ending 31.03.2018. Material cost per unit will increase by 5%, however variable
overheads per unit will remain same. Fixed overheads would increase by `
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96,500.
(B) Selling price per unit of Product D will increase by 4% and of Product F by 5%.

Cost Management
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Required :
(i) Prepare budget for the next year beginning April 2018 in the format as detailed
above.
(ii) Compare and analyse the budget for the year 2018 and 2019 highlighting main
features. Show calculation of Amount to the nearest Rupee.
(iii) To advise the management on comparative contribution/ profitability if 60%
labour of Product E is transferred to Product F instead of Product D as above
and balance 40 % to Product D instead of Product F. Show calculations up to
three decimal points. Give detailed reasoning for your advice.
4. (a) A company is manufacturing 50 products of various types. For the year ended 31st
March 2018, the manufacturing overheads, for all the products are as follows : [10]
`
Machine operating expenses 1,00,000
Machine maintenance expenses 20,000
Wages of technicians 68,000
Wages of store receiving men 28,000
Wages of dispatch staff 32,000
2,48,000
Total 2,000 direct labour hours were worked and paid @ ` 9.60 per hour in the
Company during the year.
Traditionally, The company was absorbing the overheads on the basis of direct labour
hours. Now the company is going to change the distribution system of overheads
on the basis of Activity Based Costing (ABC) and the following significant activities
were identified :
(i) Receiving material consignments from suppliers.
(ii) Setting up machines for production runs.
(iii) Quality inspections and
(iv) Dispatching goods to customers.
(A) Machine operating and machine maintenance are apportioned as:
Material Stores 15%, Manufacturing Setup 70% and Goods dispatched
15% .
(B) Amount of Technician’s wages was apportioned as:
Machine maintenance 30% with break-up as (A) above and balance 70%
Technician’s wages between Machine for Production Runs and Quality
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Inspection in the ratio of 4: 3.

During the year the following Cost Drivers were identified for all products:
Advanced Strategic
Question Papers
(i) 980 materials consignments were received from suppliers

(ii) 1,020 production runs were setup.
(iii) 640 Quality inspections were carried out and
(iv) 420 orders were dispatched to customers.
The following information is available for X, Y and Z products only for the year:
Product X Product Y Product Z
Direct Materials (`) 960 2,320 1,440
Direct labour hours worked 25 480 50
Materials consignments received 42 24 28
Production Runs 16 18 12
Quality inspections 10 8 18
Orders (goods) dispatched 22 85 46
Quantity produced 560 12,800 2,400
Required:
(a) (i) Calculate per unit cost of product X, Y and Z, using Direct Labour hour
absorption rate of overheads.
(ii) Calculate per unit cost of product X, Y and Z using ABC system for rate
of overheads.
(b) Brown Limited has decided to analyse the profitability of its four retail
customers. It buys product ‘Jelly’ at ` 218 per case and sells to them at list
price less discount. The data pertaining to four customers are :
Customers
A B C D
No. of cases sold 7,580 38,350 78,520 15,560
List selling price ` 250 ` 250 ` 250 ` 250
Actual selling price ` 245 ` 236 ` 228 ` 232
No. of sale visits 6 12 16 10
No. of purchase orders 12 18 35 24
No. of delivery Kilometres 280 350 450 400
It’s four activities and cost drivers are :

Activity Cost driver rate
Sale visits ` 750 per sale visit
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Order taking ` 800 per purchase order

Deliveries ` 10.50 per delivery km travelled

Cost Management
Question Papers
Product handling cost ` 2.50 per case sold

Required:
Compute the customer level operating income of each of four customers.
Comment on the results and discount policy.
5. (a) RFH Limited produces a product LEO for which the company has an assured market.
The output for 2018 has been budgeted at 2,10,000 units at 80 % capacity utilization.
The cost sheet based on budgeted output (per unit) is as follows : [10]
(`)
Selling price 500
Less: Direct material 205
Component X 54
Direct labour @ ` 48 per hour 96
Factory overheads (60% fixed) 65
Selling overheads (70% variable) 30
Administrative overheads (100% fixed) 10
Factory overheads are absorbed on direct labour hour basis.
RFH Limited at present manufactures component X, two units of which is required
for the manufacture of one unit of product LEO. The cost details for 1,000 units of
component X are as follows :
Direct material ` 12,200
Direct labour ` 9,600
Variable overheads ` 3,200
Fixed overheads ` 2,000
Component X can be brought from outside market at ` 26 per unit with minimum
order of 78,000 units per annum.
To utilize the idle capacity and improve the profitability of the company, the following
independent proposals were put up before the board of directors of the company ;
(A) An order has been received from abroad for 48,000 units of product RIO at a
price of ` 466 per unit. Order can not be accepted partly. The cost data are :
Direct material ` 239 per unit, direct labour 3 hours per unit, variable factory
overheads are chargeable on the basis of direct labour hours. Variable selling
overheads will increase by ` 2 per unit.
(B) Rent out the released capacity at ` 6 per hour.
(C) Manufacture component Z which has an assured market. Company can sell
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any number of units produced. Each unit of component Z requires 0.40 direct
labour hour and will generate a contribution of ` 2.50 per unit.
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Question Papers
Required:
(i) Prepare a statement of profitability under marginal costing. Show amount in
Lakhs of Rs. with two decimal points.
(ii) Whether the component X should be manufactured or purchased from outside
assuming there is no use of idle capacity.
(iii) Assuming Company has decided to buy component X from outside; which
proposal for the use of idle/spare capacity will you select ? Find out the increase
in profits due to acceptance of those proposals.
(b) A company trading in motor vehicles spare parts wishes to determine the level of
stock, it should carry for one of its costly item Z. Demand is not certain and lead time
for stock replenishment is 2 days. (i.e. order is placed at the end of the day one, will
arrive at the end of day three and will be available for day four) The probabilities of
demand are given below : [6]
Demand (Units/day) Probability
15 0.25
16 0.20
17 0.15
18 0.18
19 0.12
20 0.10
Carrying cost (per unit per day) ` 2.40

Ordering cost (per order) ` 150
Stock out cost (per unit) ` 125
Inventory carrying cost is calculated on the basis of average stock held per day. Stock
in hand at the beginning of the simulation exercise was 52 units. Manager wants to
order 50 units when present inventory plus any outstanding order falls below 50
units.
Required :
Using monte carlo simulation for 10 days, find out the total cost of inventory for the
simulated period taking the following sequence of random numbers :
49 39 94 16 81 60 92 63 13 73
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6. (a) The time and cost estimate and precedence relationship of the different activities
constituting a project are given below : [8]
Immediate
Activity Normal Crash
Predecessor
Time Time
Cost (`) Cost (`)
(days) (days)
A None 8 50,000 7 62,500
B None 8 90,000 6 1,20,000
G B 10 1,50,000 8 1,85,000
D B 12 1,80,000 10 2,20,000
E A 14 1,96,000 14 1,96,000
F A 11 1,08,000 9 1,29,000
G F 5 96,000 3 1,16,000
H C, E, G 9 1,25,000 8 1,40,000
I F 10 75,500 8 99,500
The contract includes a penalty of ` 12,500 per day over 30 days. The indirect cost
per day of project is ` 10,500.
Required:
(i) Draw the project network and indicate the critical path,
(ii) Find the normal duration and cost of the project.
(iii) Optimum duration and associated cost.
(iv) Lowest time and associated cost.
(b) Given below is an iteration in a simplex table for a maximization objective linear
programming product mix problem for products X, Y and Z. Each of these products is
processed in three machines KA-07, KB-27 and KC-49 and each machine has limited
available hours. [8]
Cj → 30 40 20 0 0 0
CB Basis Value of basic X Y Z S1 S2 S3
Variable Variables b (= XB)
(B)
30 X 250 1 0 -26/16 10/16 -12/16 0
40 Y 625 0 1 31/16 -7/16 10/16 0
0 s3 125 0 0 11/16 -3/16 1/8 1
S1, S2 and S3 are slack variables for machine KA-07, KB-27 and KC-49 respectively.
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Cost Management
Question Papers
Answer the following questions, giving appropriate reasons in brief:

(i) Does the above table give an ‘Optimal Solution’ ?
(ii) Is there more than one ‘Optimal Solution’/ ‘Alternative optimal Solution’ ?
(iii) Is this solution feasible ?
(iv) Is this solution ‘degenerate’ ?
(v) Write down the ‘objective function’ of the problem.
(vi) Write the ‘optimal product mix’ and ‘profit’ shown by the above solution.
(vii) Which of these machines are being used to the full capacity when producing
according to this solution ?
(viii) If the company wishes to expand the production capacity, which of three
resources should be given priority ?
(ix) What happens if 16 machine hours are lost due to some mechanical problems
in Machine KB-27 ?
(x) A customer would like to have one unit of product Z and is willing to pay higher
price for Z in order to get it. How much should the price be increased so that the
company’s profit remains unchanged ?
7. Answer any four out of the following five questions : [4 × 4 = 16]
(a) YAM Ltd. a manufacturing company is going to implement JIT system. You are
required to state with reasons whether the following recommendations are valid or
invalid :
(i) Introduction of piece rate system of payment of wages to workers.
(ii) It has been decided to introduce Kanban Card and Machine cells together in
order to reduce the defective products.
(iii) Use of highly automated and costly machines to the full capacity.
(iv) Employ those workers who can operate and maintain single machine so that
the work can be done effectively.
(b) Define Degeneracy and Prohibited routes.
(c) Discuss the role of central body in inter firm comparison.
(d) What are the essential requirements for implementing performance budgeting ?
(e) Explain the various standards and their significance. (Any four)
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CMA Final SCM June 2017

June 2017 P-15(SCMD)
Syllabus-2016
Strategic Cost Management - Decision Making
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.
Answer Question No. 1 in Section A, which is compulsory, carrying 20 marks.
Further, answer any 5(five) Questions from Section B, each carrying 16 marks.
Section A (20 marks)
1. Choose the most appropriate answer to the following questions giving justification. Each
question carries 2 (two) marks. 2 x10 = 20
(i) Stock Control data for Material P are:
Annual usage: 3600 units; Cost per unit: ` 100/-; Cost of placing an order: ` 40;
Stockholding Cost: 20% of the overall stock volume; Lead time: One month The EOQ
based on the above data is:
(a) 210 units
(b) 175 units
(c) 90 units
(d) 120 units
(ii) Which of the following would take place if a company is able to reduce its variable
cost?
Contribution Margin Break-Even Point
(a) Increase Increase
(b) Decrease Decrease
(c) Increase Decrease
(d) Decrease Increase
(iii) The following details relate to Product P-l of a manufacturing company:
Level of activity (units) 1000 2000

Cost per unit (`):
Direct materials 4.00 4.00
Direct labour 3.00 3.00
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Production Overheads 3.50 2.50

Selling Overheads 1.00 0.50
11.50 10.00
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Question Papers
The total fixed cost and variable cost per unit are:
Variable Cost per unit
Total Fixed Cost (`)
(`)
(a) 2,000 7.00
(b) 2,000 8.50
(c) 3,000 7.00
(d) 3,000 8.50
(iv) A company makes a single product which it sells at ` 10 per unit. Fixed costs are
` 48,000 per month and the product has a contribution to sales ratio of 40%. In a
period when actual sales were ` 1,40,000, the company’s margin of safety in units
was:
(a) 2000
(b) 3000
(c) 3500
(d) 4000
(v) The following tasks are associated with ABC system:
I. Allocation of costs to products
II. Identification of cost pools
III. Identification of cost drivers
IV. Calculation of pool rates
The proper order of the preceding tasks is:
(a) III, II, IV, I
(b) I, II, III, IV
(c) III, IV, II, I
(d) IV, III, II, I
(vi) A company has the capacity of production of 80000 units and presently it sells 20000
units at ` 100 each. The demand is sensitive to selling price and it has been observed
that every reduction of ` 10 in selling price the demand is doubled. What should be
the target cost at full capacity it profit margin on sales is taken at 25%?
(a) ` 58 lakhs
(b) ` 52 lakhs
(c) ` 48 lakhs
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(d) ` 50 lakhs

Cost Management
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(vii) 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) ` 6.50
(d) ` 6.90
(viii) 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
(ix) The preparation and use of standard cost, their comparison with actual costs and
the measurement and analysis of variances to originating causes is defined as:
(a) Marginal Costing
(b) Standard Costing
(c) Throughput Costing
(d) Kaizen Costing
(x) The following are cost data for two alternative ways of processing the clerical work
for legal cases brought before the district court:
Semi-automatic Fully automatic
Monthly fixed costs (`):
Occupancy 15,000 15,000
Maintenance contract 5,000 10,000
Equipment lease 25,000 1,00,000
Unit variable cost (per report) (`)
Supplies 80 20
Labour 60 20
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The cost indifference point will be:

(a) 800 cases
(b) 850 cases
(c) 750 cases
(d) 700 cases
Section-B
Answer any five questions.
Each Question carries 16 Marks. 16 x 5 = 80
2. (a) What is Value Chain? How does it help modern cost management? 2+4=6
(b) (i) What are the problems of Traditional Costing arising out of volume-based cost
allocation to products?
(ii) How can Activity-Based Costing help refining such costing system? 1+3=4
(c) (i) What are relevant costs and relevant revenues?
(ii) In making repetitive decisions using relevant costs and benefits, should a
decision maker be aware of several pitfalls? If so, mention a few and briefly
explain them.
2+4=6
3. (a) Accelerate Co. Ltd., manufactures and sells four types of products under the brand
names of A, B, C and D. The sales mix in value comprises 33 1/3%, 41 2/3%, 16 2/3%
and 8 1/3% of products A, B, C and D, respectively. The total budgeted sales (100%)
are ` 60,000 p.m. Operating Costs are— Variable costs: Product A 60% of selling
price, Product B 68% of selling price, Product C 80% of selling price, Product D 40%
of selling price; Fixed costs: ` 14,700 p.m.
Required:
Calculate the break-even-point for the products on overall basis. 8
(b) A2Z p.l.c supports the concept of tero technology or life cycle costing for new
investment decisions covering its engineering activities. The financial side of this
philosophy is now well established and its principles extended to all other areas
of decision making. The company is to replace a number of its machines and the
Production Manager is tom between the Exe Machine, a more expensive machine
with a life of 12 years, and the Wye machine with an estimated life of 6 years. If the
Wye machine is chosen, it is likely that it would be replaced at the end of 6 years
by another Wye machine. The pattern of maintenance and running costs differs
between the two types of machine and relevant data are shown below:
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Exe Wye
Purchase price ` 19,000 ` 13,000
Trade-in value/breakup/scrap ` 3,000 ` 3,000
Annual repair costs ` 2,000 ` 2,600
Overhaul costs (at year 8) ` 4,000 (at year 4) ` 2,000
Estimated financing costs averaged over 10% p.a. 10% p.a.
machine life
Required: Recommend with supporting figures, which machine to purchase, stating

any assumptions made? 8
4. (a) SRM Ltd. has developed a new product ‘Kent’ which is about to be launched into the
market and anticipates to sell 80,000 of these units at a sale price of ` 300 over the
product’s life cycle of four years. Data pertaining to product ‘Kent’ are as follows:
Costs of Design and Development ` 10,25,000

of Moulding Dies and Other tools
Manufacturing costs ` 125 per unit
Selling costs
` 12,500 per year + ` 100 per unit
Administration costs
` 50,000 per year
Warranty expenses 5 replacement parts per 25 units at ` 10 per
part, 1 visit per 500 units (cost ` 500 per visit)
Required:
(i) Compute the product Kent’s Life Cycle Cost.
(ii) Suppose SRM Ltd. can increase sales volume by 25% through 15% decrease in
selling price, should SRM Ltd. choose the lower price? 8
(b) BCG Manufacturers sell their product at ` 1,000 per unit. Their competitors are likely
to reduce the price by 15%. BCG Manufacturers want to respond aggressively by
cutting price by 20% and expect that the present volume of 150000 units per annum
will increase to 200000 units. BCGM want to earn a 10% target profit on sales. Based
on a detailed value engineering, the comparative position is given below:
Particulars Existing (`) Target (`)
Direct Material Cost per unit 400 385
Direct Labour Cost per unit 55 50
Direct machinery costs per unit 70 60
Direct Manufacturing expenses per unit 525 425
Manufacturing Overheads
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No. of orders (` 80 per order) 22,500 21,250

Testing hours (` 2 per hour) 45,00,000 30,00,000
Units reworked (` 100 per unit) 12,000 13,000
Advanced Strategic
Question Papers
Manufacturing overheads are allocated using relevant cost drivers. Other operating
costs per unit for the expected volume are estimated as follows:
Research and Design ` 50

Marketing and Customer Service ` 130
` 180
Required:
(i) Calculate target costs per unit and target costs for the proposed volume
showing break up of different elements.
(ii) Prepare target product profitability statement. 4+4=8
5. (a) A manufacturing company currently operating at 80% capacity has received an ex-
port 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:
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:
(I) Continue with domestic sales and reject the export order.
(II) Accept the export order and allow the domestic market to starve to the extent
of excess of demand.
(III) 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.
Required:
Evaluate each of the above alternatives and suggest the best one. 6
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(b) The following particulars are extracted from the records of Ajanta Works Limited:
Particulars Product A Product B
Selling price per unit ` 1,000.00 ` 1,200.00
Consumption of Material Kg. 20.00 Kg. 30.00
Material cost ` 100.00 ` 150.00
Direct wages ` 150.00 ` 100.00
Direct expenses ` 50.00 ` 60.00
Machine Hours used 3 2
Overhead Expenses:
Fixed ` 50.00 ` 100.00
Variable ` 150.00 ` 200.00
Note: Direct wages per hour is ` 50.00 Required:

(i) Comment on the profitability of each product (both use the same raw material)
when:
(I) Total sales potential in units is limited
(II) Total sales potential in value is limited
(III) Raw Material is in short supply, and
(IV) Production Capacity (in terms of Machine Hours) is the limiting factor.
(ii) Assuming raw material as the key factor, availability of which is 10000 Kg., and
maximum sales potential of each product being 3500 units, find out the product
mix which will yield the maximum profit. 4 + 6 = 10
6. (a) Nikee Ltd. manufactures and sells one variety of sports-shirt in India. Noted football
clubs and supporters of these clubs are the main customers. Nikee’s products show
some rectifiable defects. These problems can generally be detected and repaired
during internal inspection at a cost of ` 15 per unit.
During 2016, 50000 shirts were produced and sold. After inspection defect was
detected in respect of 5% of output. Inspection cost is ` 25 per shirt. After sales,
customers reported defects in respect of 6% of output. These shirts were received
back from customers at a transportation cost of ` 8 per unit. Because of negative
publicity due to defects, there would be loss of sales in 2017 to the extent of 5% of
external failures.
Required:
i. Analyse costs of quality showing separately (with workings) the:
(I) Inspection or appraisal cost
(II) Internal failure cost
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(III) External failure cost

(IV) Opportunity cost due to external failure, and
(V) Total costs of quality
Advanced Strategic
Question Papers
ii. If the selling price per shirt is ` 250 and variable cost is 60% of sales, fixed cost
` 5,50,000 p.a., prepare a statement showing profitability of the product during
2016. 6+2=8
(b) You are given the following estimates for next year’s budgeted sales and costs of
single product produced by Bee Ltd.:
Selling Price ` 12
Sales demand: Units Probability
3200 0.50
4000 0.30
5000 0.20
` Probability
Variable cost per unit 5.00 0.3
6.00 0.5
7.00 0.2
Fixed cost for the period: ` 20,000
Required:
i. Expected value of sales for the period.
ii. Expected variable cost and contribution for the period.
iii. Expected profit or loss for the budget period. 2+4+2=8
7. (a) XYZ Auto-manufacturing company has to prepare a design of its latest model of mo-
torcycle. The various activities to be performed to prepare a design are as follows:
Activity Description of activity Preceding activity
A Prepare drawing -
B Carry out cost analysis A
C Carry out financial analysis A
D Manufacture tools C
E Prepare bill of material B, C
F Receive material D, E
G Order sub-accessories E
H Receive sub-accessories G
I Manufacture components F
J Final assembly I, H
K Testing and shipment J
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Prepare an appropriate network diagram. 8

(b) In a processing industry two products A and B are made involving two operations.
The production of B also results in a by-product C. The product A can be sold at a

Cost Management
Question Papers
profit of ` 3 per unit and B at a profit of ` 8 per unit. The by-product C has a profit of
` 2 per unit. Forecast shows that upto 5 units of C can be sold. The company gets 3
units of C for each unit of B produced. The manufacturing times are 3 hours per unit
for A on each of the operation one and two and 4 hours and 5 hours per unit for B on
operation one and two, respectively. Because the product C results from producing
B, no time is used in producing C. The available times are 18 hours and 21 hours of
operation one and two respectively. The company desires to know how much of A
and B should be produced keeping C in mind to make the highest profit.
Required:
Formulate LP model for this problem. 8
8. Write short notes on any four of the following: 4 x 4 = 16
(a) Variants of Backflush Accounting
(b) Transfer Pricing
(c) Principles of Total Quality Management (TQM)
(d) Learning Curve Theory
(e) Simulation Technique
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CMA Final SPM June 2017

June 2017 P-20(SPBV)
Syllabus 2016
Strategic Performance Management and Business Valuation
This paper has been divided into two Sections, viz, Section A and Section B.
Section - A (50 marks)
Answer Question No. 1 which is compulsory and any two from the rest of this Section.
1. Choose the Correct Option from amongst the four alternatives given, with justification/
workings. 1 mark will be for the correct choice and 1 mark will be for the justification/
workings. 2 x 5=10
(i) Risk Management Strategies are
(a) Avoid Risk, Reduce Risk, Retain Risk, Combine Risk
(b) Transfer Risk, Share Risk and Hedge Risk
(c) Both (a) and (b)
(d) None of the above
(ii) The necessary condition for equilibrium position of a firm is
(a) MC >MR
(b) MC> Price
(c) MC = MR
(d) MC = AC
(iii) The Cost function of a firm is given by C = x3 – 4x2 + 7x. Find at what level of output
the average cost is minimum and what would be the minimum average cost.
(a) 2,3
(b) 4,5
(c) 1,4
(d) None of the above
(iv) Which one of the following is not a measure related to Balanced Score Card?
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(a) Financial
(b) Customer Satisfaction

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(c) Internal Processes

(d) Gap Analysis
(v) Performance will be a product of
(a) Efficiency and Utilization
(b) Utilization and Productivity
(c) Efficiency and Productivity
(d) Efficiency, Utilization and Productivity
2. (a) What do you mean by ‘Customer Relationship Management’ (CRM)? List the advan-
tages and benefits of ‘Customer Relationship Management’. 4+6=10
(b) What is ‘Bench Marking’? Describe briefly the different types of ‘Bench Marking’.
2+8=10
 1
3. (a) The Cost Function of a particular firm is C =   x 3 − 5x2 + 75x + 10 .
3
(i) Find at which level the Marginal Cost attains its minimum.
(ii) What is the marginal cost at this level? 4+4=8
(b) Following is the extract of a Balance Sheet of a company as on 31st March, 2017:
Liabilities ` Assets `
Equity Share Capital (` 100) 4,00,000 Fixed Assets 10,00,000
Reserves & Surplus 2,25,000 Trade Investment 2,00,000
12% Debentures 3,00,000 Stock 1,25,000
10% Bank Loan 2,00,000 Debtors 75,000
Current Liabilities 3,00,000 Preliminary Expenses 25,000
14,25,000 14,25,000
Additional Information:
(i) Net Sales for 2016-17 were ` 20,00,000
(ii) Price-Eamings Ratio is ` 10
(iii) Dividend Pay-out Ratio is 50%
(iv) Dividend per Share in 2016-17 is ` 20
(v) Corporate Tax Rate is 50%
Using Altman’s Model of Corporate Distress Prediction, calculate the Z-Score of the
company and interpret the result. 12
4. (a) What is the essence of ERM? What is the actual need for implementing ERM? 5+5=10
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(b) What is ‘OLAP’? Write a brief note on ‘OLAP’. 5+5=10
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Section - B (50 marks)

5. Choose the Correct Option from amongst the four alternatives given, with justification/
workings. 2 x 5 = 10
(i) It is assumed that M. Ltd., would realize ` 40 million from the liquidation of its assets.
It pays ` 20 millions to its creditors and Preference Shareholders in full and final
settlement of their claims. If the number of Equity Shares of M. Ltd. is 2 million, the
Liquidation per Share would be:
(a) ` 1 per Share
(b) ` 10per Share
(c) ` 12 per Share
(d) ` 15 per Share
(ii) Assume that the following details are given for a company:
Sales- ` 1,00,000; Costs- ` 75,000; Depreciation- ` 20,000; Tax-35%;
Change in Net Working Capital- ` 1,000; Change in Capital Spending- ` 10,000.
The Free Cash Flow to Firm (FCFF) for the given data would be:
(a) ` 10,000
(b) ` 12,250
(c) ` 13,500
(d) ` 15,000
(iii) Shyam Ltd. has announced issue of warrants on 1 : 1 basis for its equity share holders.
The Exchange ratio is 1.00. The current market price of the stock is ` 10 and warrants
are convertible at an exercise price of ` 11.71 per share. Warrants are detachable and
are trading at ` 3. What is the minimum price of this warrant?
(a) ` 3.00
(b) Zero
(c) ` 1-71
(d) ` 2-00
(iv) Given: The growth rate in the dividends is expected to be 8%. The Beta of the stock
is 1.60 and the return on the market index is 13%.
The required rate of return would be:
(a) 14%
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(b) 16%
(c) 18%
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(v) Given: The risk-free rate is 5.5%; the market price of risk = 7% and the company’s
Beta = 1.2.
The Cost of Equity would be
(a) 11%
(b) 13.9%
(c) 15.2%
(d) 16.3%
6. (a) P Ltd. is considering buying the business of Q Ltd., the final accounts of which for the
last 3 years ended 31st December is.
(Figures in `)
Particulars 2014 2015 2016
Sales 2,00,000 1,90,000 2,24,000
Material Consumed 1,00,000 95,000 1,12,000
Business Expenses 80,000 80,000 82,000
Depreciation 12,000 13,000 14,000
Net Profit 8,000 2,000 16,000
Balance Sheet as at 31st December

(Figures in `)
Particulars 2013 2014 2015 2016
Fixed Asset (at cost) 1,00,000 1,20,000 1,40,000 1,80,000
Less: Depreciation 70,000 82,000 95,000 1,09,000
30,000 38,000 45,000 71,000
Stock-in-trade 16,000 17,000 18,500 21,000
Sundry Debtors 21,000 24,000 26,000 28,000
Cash in hand and Bank 32,000 11,000 28,000 13,200
Prepaid Expenses 1,000 500 2,000 1,000
Total Assets 1,00,000 90,500 1,19,500 1,34,200
Equity Capital 50,000 50,000 70,000 70,000

Share Premium - - 5000 5,000
General Reserve 16,000 24,000 26,000 42,000
Debentures 20,000 - - -
Sundry Creditors 11,000 13,000 14,000 14,000
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Accrued Expenses 3,000 3,500 4,500 3,200

Total Liabilities 1,00,000 90,500 1,19,000 1,34,200
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P Ltd. wishes the offer to be based upon trading cash flows rather than book profits.
Trading Cash Flow means Cash received from Debtors less Cash Paid to Creditors
and for Business Expenses excluding Depreciation, together with an allowance for
average annual expenditure on Fixed Assets of ` 15,000 per year.
The actual expenditure on Fixed Assets is to be ignored, as is any cash receipt or
payment out on the issue or redemption of Shares or Debentures. P Ltd. wishes the
Trading Cash Flow to be calculated for each of the years 2014, 2015 and 2016 and
for these to be combined using weights of 25% for 2014, 35% for 2015 and 40% for
2016 to give an Average Annual Trading Cash Flow. P Ltd. considers that the Average
Annual Cash Flow should show a return of 10% on its investment.
You are required to calculate:
(i) Trading Cash Flow for each of the years 2014, 2015 and 2016
(ii) Weighted Average Annual Trading Cash Flow and
(iii) Value of the business 12
(b) Following is the Profit & Loss Account and Balance Sheet for M/s. X Ltd.
(` in Lakh)
2015 2016
Turnover 652 760
Pre-tax accounting profit 134 168
Taxation 46 58
Profit after tax 88 110
Dividends 30 36
Retained earnings 58 74
Balance Sheet extracts are as follows:

(` in Lakh)
2015 2016
Fixed Assets 240 312
Net Current Assets 260 320
Total 500 632
Equity Shareholders Funds 390 472
Medium and Long-term Bank Loan 110 160
The Company’s performance in regard to turnover had increased by 17% along with
increase in pre-tax profit by 25% but shareholders are not satisfied by the Company’s
preference in the last 2 years. You are required to calculate the economic value
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added, as suggested by M/s. Trump & Co., USA, so that reasons of non-satisfaction
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You are also given:

Particulars 2015 2016
Pre-tax Cost of Debt 9% 10%
Cost of Equity 15% 17%
Tax rate 35% 35%
Interest Expenses `8 ` 12
8
7. (a) The following information is provided related to the acquiring firm, Sun Ltd. and the
target firm Moon Ltd.
Particulars Sun Ltd. Moon Ltd.
Profits after Tax ` 2,000 Lakh ` 4,000 Lakh
Number of Shares outstanding 200 Lakh 1,000 Lakh
P/E Ratio (times) 10 5
Required:
(i) What is the swap ratio based on the current market prices?
(ii) What is the EPS of Sun Ltd., after the acquisition? 10
(b) X Ltd. is considering a takeover of Y Ltd. The particulars of the two companies are
given below:
Particulars X Ltd. Y Ltd.
Earnings after Tax (EAT) in ` 20,00,000 10,00,000
Equity Shares (Nos.) 10,00,000 10,00,000
EPS 2 1
P/E Ratio (times) 10 5
Required:
(i) What is the market value of each company before merger?
(ii) Assuming that the management of X Ltd. estimates that the shareholders of Y
Ltd. will accept an offer of one share of X Ltd. for four shares of Y Ltd. If there are
no synergic effects, what is the market value of the Post-merger X Ltd.? Are the
shareholders of X Ltd. better off than they were before the merger?
(iii) Due to synergic effects, the management of X Ltd. estimates that the earnings
will increase by 20%. What is the new Post-merger EPS and the Price per Share?
Will the shareholders be better-off or worse-off? 10
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8. (a) A company has a capital base of ` 3 crores and has earned profits of ` 33 lakhs.
Return on Investment of the particular industry to which the company belongs is
12-5%. If the services of a particular executive are acquired by the company, it is ex-
pected that the profits will increase by ` 7.5 lakhs over and above the target profit.
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Determine the amount of maximum bid price for that particular executive and the
maximum salary that could be offered to him.
Particulars `
Capital Base 3,00,00,000
Actual Profit 33,00,000
Target Profit (` 3 crores x l2-5%) 37,50,000
10
(b) R Ltd. is intending to acquire S Ltd. (by merger) and the following information are
available in respect of both the companies:
Particulars R Ltd. S Ltd.
Total Current Earnings (`) 2,50,000 90,000
No. of Outstanding Shares 50,000 30,000
Market Price per Share (`) 21 14
(i) What is the present EPS of both the companies?

(ii) If the proposed merger takes place, what would be the new earnings per share
for R Ltd. (assuming the merger takes place by exchange of Equity Shares and
the Exchange Ratio is based on the Current Market Price)? Assume no synergy
impact. 10
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Class
WORK
CMA Final SCM - Dec 2017

P-15(SCMD)
Syllabus 2016
Strategic Cost Management - Decision Making
Answer Question No. 1 in Section A, which is compulsory, carrying 20 marks.
Further, answer any 5 (five) Questions from Section B, each carrying 16 marks.
Section-A
(20 marks)
1. Choose the most appropriate answer to the following questions giving justification. Each
question carries 2 (two) marks. 2 × 10 = 20
(i) The following figures are extracted from the books of a company:
Budgeted O/H ` 10,000 (Fixed ` 6,000, Variable ` 4,000)
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)
(ii) 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 is:
(a) 4,000 units
(b) 40,000 units
(c) 30,000 units
(d) 20,000 units
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Class
WORK
(iii) The P/V ratio of a firm dealing in Electrical equipment is 50% and the margin of
safety is 40%.;BEP of the firm at a sales volume of ` 50,00,000 will be
(a) ` 25,00,000
(b) ` 35,00,000
(c) ` 30,00,000
(d) ` 36,00,000
(iv) ABC Limited has current PBIT of ` 19.20 lakhs on total assets of ` 96 lakhs. The
company has decided to increase assets by ` 24 lakhs, which is expected to increase
the operating profit before depreciation by ` 8.40 lakhs. There will be a net increase
in depreciation by ` 4.80 lakhs. This will result in ROI
(a) to increase by 1%
(b) to decrease by 1 %
(c) to decrease by 1.5%
(d) to remain the same
(v) For a Learning Curve percentage of 72%, the time to be taken to complete the 4th
unit of a 12-unit job involved in the assembly line, if the initial unit requires 80 hours,
will be
(a) 43.50 hrs
(b) 41.47 hrs
(c) 46.71 hrs
(d) 40.95 hrs
(vi) 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
(vii) When you wait until the manufacture of a product has been completed and then
record all of the related issuances of inventory from stock that were required to
create the product, it is called
(a) Forensic Accounting
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(b) Back-flush Accounting

(c) Tax Accounting
(d) Lean Accounting

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Class
WORK
(viii) Match the following:
(A) Dr. Deming believes (1) Common causes

(B) Ishikawa development (2) To prevent defect
(C) Type of variation is due to (3) Cause & effect diagram
(D) Crosby’s objective of quality (4) Histogram
The correct order is

(a) A-3, B-2, C-1, D-4
(b) A-2, B-3, C-4, D-1
(c) A-2, B-3, C-1, D-4
(d) A-4, B-3, C-1, D-2
(ix) Sab Ltd. 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 X for 2016-17
appears as under:
`
Fixed Assets
Current Assets
5,00,000
3,00,000
Debtors 2,00,000
Annual Fixed cost of the Division 8,00,000
Variable cost per unit of product 10
Budgeted Volume 400000 units per year
Desired R.O.I 28%
Transfer price for division X is

(a) ` 12.70
(b) ` 10.70
(c) ` 8.70
(d) ` 14.70
(x) A company uses traditional standard costing system. The inspection and set-up costs
are actually ` 1,760 against a budget of ` 2,000. ABC system is being implemented
and accordingly the number of batches is identified as the cost driver for inspection
and set up. The budgeted production is 10,000 units in batches of 1,000 units
whereas actually 9,000 units were produced in 11 batches. The cost per batch under
ABC system will be
(a) ` 160
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(b) ` 200
(c) ` 180
(d) ` 220
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Class
WORK
Section-B
Answer any five questions.
Each Question carries 16 Marks. 16 × 5 = 80
2. (a) What do you understand by ‘quality’ in the context of Quality Cost Management?
Explain. 8
(b) Why would you classify costs of quality into different groups? Enumerate them and
give suitable examples where possible. 4+4=8
3. (a) The Stock Control Policy of Vidhata Co. is that each stock is ordered twice a year, the
quantum of each order being one-half of the year’s forecast demand. The Materials
Manager, however, wishes to introduce a policy in which for each item of stock, Re-
order Levels and EOQ are calculated. For one of the items X, the following information
are available:
Forecast Annual Demand 3,600 units
Cost per unit `100
Cost of Placing an order ` 40
Stockholding Cost 20% of the average stock value
Buffer Stock to cover fluctuations in demand 100 Nos.
Required:
If the new policy is adopted, calculate for stock item X,
(i) Re-order Level that would be set by the Materials Manager.
(ii) Anticipated reduction in value of the average stock investment.
(iii) Anticipated reduction in total inventory costs in the first and subsequent years.
2 + 3 + (3 + 2) = 10
(b) The management of W Ltd., which is now operating at 50% capacity, expects that
the volume of sales will drop below the present level of 5,000 units per month. The
operating statement prepared for monthly sales shows:
` `
Sales (5,000 units at ` 3 per unit) 15,000
Less: Variable Costs at ` 2 per unit 10,000
Fixed Overheads 5.000 15.000
Net Profit Nil
It is proposed that the company should suspend production until market conditions
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improve. The General Manager estimated that a minimum of fixed cost (shut down
costs) amounting to ` 2,000 would be necessary in any event.

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Class
WORK
Required:
(i) Advise Management at what level of sales it could think of suspending
production.
(ii) If the sales price is ` 2.80, what should be the level of sales for shut down
decision?
3+3=6
4. (a) The following data are obtained from the records of a company:
Year 1 (`) Year 2 (`)
Sales 80,000 1,00,000
Profit 10,000 15,000
Required:
(i) Calculate Break-even Point
(ii) Profit or Loss when sales amount to ` 60,000, and
(iii) Required sales for level of profit of ` 20,000. 4+2+2=8
(b) Your company wants to buy one machine. Two alternative models are available — A
and B. The following information are available with respect to them:
Model A Model B
Output p.a. 10,000 10,000
Fixed costs p.a. (`) 30,000 16,000
Profit at 100% capacity (`) 30,000 24,000
Both the machines will produce identical products. The annual market demand for
the product is 10,000 units @ ` 10 per unit.
Required:
(i) The level of sales at which both are equally profitable;
(ii) The range of sales at which one is more profitable than the other. 4+4=8
5. (a) Zip Ltd. manufactures three products. The material cost, selling price and bottleneck
resource details per unit are as follows:
Particulars Product T Product C Products

Selling Price (`) 66 75 90
Material and other variable cost (`) 24 30 40
Bottleneck resource time (minutes) 15 15 20
H Block
Budgeted factory costs for the period are ` 4,43,200. The bottleneck resource time
available is 1,50,240 minutes per period.
Advanced Strategic
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Required:
(i) Company adopted throughput accounting and products are ranked according
to ‘product return per minute’.
Select the highest rank product.
(ii) Calculate throughput accounting ratio and comment on it. 3+3=6
(b) Force Ltd. is a manufacturer of a fire fighting equipment which consists of five
components three of which are made using general purpose machines and two by
manual labour. The data for the manufacture of the equipment are as follows:
Components F O R C E Total
Machine hours required per unit 20 28 24 72 hrs
Labour hours required per unit 2 1 3 hrs
Variable cost per unit ` 64 108 116 24 8 320
Fixed cost per unit (apportioned) ` 96 204 232 48 72 632
Total component cost ` 160 312 348 72 60 952
Assembly cost/unit (all variable) ` 80
Selling price/unit ` 1,200
The marketing department of the company anticipates 50% increase in demand

during the next period. General purpose machinery used to manufacture. F, O and
R are already working to the maximum capacity of 9,504 hours and there is no
possibility of increasing this capacity during the next period. But labour is available
for making components C and E and also for assembly according to demand. The
management is considering the purchase of one of the components F, O or R from
the market to meet the increase in demand. These components are available in the
market at the following prices:
Component F: ` 160 Component O : ` 320 Component R : ` 250
Required:
(i) Profit made by the company from current operations.
(ii) If the company buys any one of the components F, O or R, what is the extent of
additional capacity that can be created?
(iii) Assuming 50% increase in demand during the next period, which component
should the company buy from the market?
(iv) The increase in profit, if any, if the component suggested in (iii) is purchased from
the market. 2+3+2+3=10
6. (a) Wipro is examining the profitability and pricing policies of its Software Division.
H Block
The Software Division develops Software Packages for Engineers. It has collected
data on three of its more recent packages — (i) ECE Package for Electronics and
Communication Engineers, (ii) CE Package for Computer Engineers, and (iii) IE
Package for Industrial Engineers.

Cost Management
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Summary details on each package over their two-year cradle to grave product lives
are:
Package Selling Price Number of units sold
Year 1 Year 2
ECE ` 250 2,000 8,000
CE ` 300 2,000 3,000
IE ` 200 5,000 3,000
Assume that no inventory remains on hand at the end of year 2. Wipro is deciding
which product lines to emphasize in its software division. In the past two years, the
profitability of this division has been mediocre.
Wipro is particularly concerned with the increase in R & D costs in several of its
divisions. An analyst at the Software Division pointed out that for one of its most
recent packages (IE), major efforts had been made to reduce R & D costs. Last week,
Amit, the Software Division
Manager, decides to use Life Cycle Costing in his own division. He collects the
following Life Cycle Revenue and Cost information for the packages (in `):
Particulars Package ECE Package CE Package IE
Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
Revenues 5,00,000 20,00,000 6,00,000 9,00,000 10,00,000 6,00,000
Costs:
R&D 7,00,000 — 4,50,000 — 2,40,000 —
Design of Product 1,15,000 85,000 1,05,000 15,000 76,000 20,000
Manufacturing 25,000 2,75,000 1,10,000 1,00,000 1,65,000 43,000
Marketing 1,60,000 3,40,000 1,50,000 1,20,000 2,08,000 2,40,000
Distribution 15,000 60,000 24,000 36,000 60,000 36,000
Customer Service 50,000 3,25,000 45,000 1,05,000 2,20,000 3,88,000
Required:
Prepare a Product Life Cycle Income Statement for each Software Package.
Which package is most profitable and which is the least profitable? How do the
three packages differ in their cost structure (the percentage of total costs in each
category)? 6+2+2=10
(b) A practicing Cost and Management Accountant now spends ` 0.90 per K.M. on taxi
fares for his client’s work. He is considering two other alternatives - the purchase of
a new small car or an old bigger car.
Item New Small Car Old Bigger Car
H Block
(`) (`)
Purchase Price 35,000 20,000
Sale Price after 5 years 19,000 12,000
Advanced Strategic
Question Papers
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Item New Small Car Old Bigger Car

Repairs and servicing per annum 1,000 1,200
Taxes and insurance p.a. 1,700 700
Petrol consumption per litre (k.m.) 10 7
Petrol price per litre 3.5 3.5
He estimates that he will travel 10000 K.M. annually.

Required:
Which of the three alternatives will be cheaper? If his practice expands and he has
to travel 19,000 K.M. per annum will the cost of the two cars break even and why?
Ignore interest and Income tax. 6
7. (a) Draw a network from the following activities. Find the critical path and total duration
of the project. 8
Activity Immediate predecessor activity Duration (days)
A — 10
B A 5
C A 4
D A 7
E B,C 6
F C,D 4
G E,F 7
(b) A company produces products P, Q and R from three raw materials A, B and C. One
unit of product P requires 2 units of A and 3 units of B. One unit of product Q requires
2 units of B and 5 units of C and one unit of product R requires 3 units of A, 2 units of
B and 4 units of C. The company has 8 units of material A, 10 units of B and 15 units of
C available to it. Profits per unit of product P, Q and R are ` 3, ` 5 and ` 4 respectively.
(i) Formulate the problem mathematically.
(ii) Write the Dual problem. 4+4=8
8. Write short notes on any four of the following: 4 × 4 = 16

(a) Usefulness of Pareto Analysis
(b) Seven Principles of BRR
(c) Four P’s of TQM
(d) Lean Accounting
H Block
(e) Value Engineering

Cost Management
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CMA Final SPM and BV - Dec 2017

P-20(SPBV)
Syllabus 2016
Strategic Performance Management and Business Valuation
This paper has been divided into two Sections, viz, Section A and Section B.
Section - A : Strategic Performance Management
(50 marks)
1. Choose the correct option from amongst the four alternatives given: 2 × 5 = 10
(i) is the uncertainty of the purchasing power of the monies to be received, in the
future?
(A) Market risk
(B) Physical risk
(C) Purchasing power risk
(D) Interest rate risk
(ii) Unsystematic risk relates to
(A) Market risk
(B) Inherent risk
(C) Beta
(D) Interest rate risk
(iii) In which discipline supply chain concept was originated?
(A) Production
(B) Operation
(C) Marketing
(D) Logistics
(iv) Under perfect competition and at the point of equilibrium of firm
(A) MC curve must be falling
(B) MC curve must be rising
H Block
(C) MR curve must be falling

(D) None of the above
Advanced Strategic
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(v) Financial risk arises out of

(A) Increased competition
(B) Conduct of business and investment
(C) The nature of financial transaction
(D) Both (B) and (C)
2. (a) (i) What is Benchmarking?
(ii) Briefly describe any two types of benchmarking.
(iii) Identify difficulties in implementation of benchmarking. 3+4+3=10
(b) (i) What are the characteristics of Enterprise Resource Planning (ERP)?
(ii) What are the reasons for the failure of ERP? 4+6=10
3. (a) A manufacturer can sell ‘X’ items (X > 0) at a price of (330 - X) each; the cost of
producing
‘X’ items is ` (X2 + 10X + 12). How many items should he sell to make the maximum
profit? Also determine the maximum profit. 8
(b) Using Altman’s Model (1968) of Corporate Distress Prediction, calculate the Z-score
of S & Co. Ltd., whose five accounting ratios are given as below and comment on its
financial position.
The five variables are:
(i) Working Capital to Total Assets = 25%
(ii) Retained Earnings to Total Assets = 30%
(iii) EBIT to Total Assets = 15%
(iv) Market Value of Equity Shares to Book Value of Total Debt =150%
(v) Sales to Total Assets = 2 times. 12
4. (a) Briefly explain the term “Enterprise Risk Management” (ERM). What are the basic
needs for implementation of ERM? 4+6= 10
(b) What is Risk Mapping? Briefly explain. State the benefits of Risk Mapping.
5+5=10
Section - B Business Valuation (50 marks)
5. Choose the correct option from amongst the four alternatives given, with justification/
workings. 2 × 5 = 10
H Block
(i) If a company has a P/E ratio of 20 and a ROE (Return On Equity) of 15%, then the
Market to Book Value Ratio is

Cost Management
Question Papers
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(A) 3 times
(B) 3%
(C) cannot be calculated from the given information
(D) None of the above
(ii) Assume that in a stock market the CAPM is working. A company has presently beta
of 0.84 and its going to finance its new project through debt. This would increase its
debt/equity ratio to 1.56 from the existing 1.26. Due to increased debt/equity ratio,
the company’s beta would
(A) increase
(B) decrease
(C) remain unchanged
(D) nothing can be concluded
(iii) Identify which of the following is not a financial liability?
(A) X Ltd. has 1 lakh `10 ordinary shares issued.
(B) X Ltd. has 1 lakh 8% ` 10 redeemable preference shares issued.
(C) X Ltd. has ` 2,00,000 of 6% bond issued.
(D) Both (A) and (B)
(iv) X Ltd.’s share beta factor is 1.40. The risk free rate of interest on government securities
is 9%. The expected rate of return on the company equity shares is 16%. The cost of
equity capital based on CAPM is
(A) 15-8%
(B) 16%
(C) 18-8%
(D) 9%
(v) A firm current assets and current liabilities are ` 1,600 and ` 1,000 respectively. How
much can it borrow on a short-term basis without reducing the current ratio below
1.25?
(A) ` 1,000
(B) ` 1,200
(C) ` 1,400
(D) ` 1,600
6. (a) Alpha India Ltd., is trying to buy Beta India Ltd., Beta India Ltd., is a small bio-
H Block
technology firm that develops products that are licensed to major pharmaceutical
firms. The development costs are expected to generate negative cash flows of `
10 lakhs during the first year of the forecast period. Licensing fee is expected to
generate positive cash flows of ` 5 lakhs, ` 10 lakhs, ` 15 lakhs and ` 20 lakhs during
Advanced Strategic
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WORK
2-5 years respectively. Due to the emergence of competitive products, cash flows
are expected to grow annually at a modest 5% after the fifth year. The discount rate
for the first five years is estimated to be 15% and then drop to 8% beyond the fifth
year. Calculate the value of the firm.
Given: The discount rate @ 15% will be:
Year 1 2 3 4 5
Discount Rate 0.869 0.756 0.6575 0.572 0.497
10
(b) Z Ltd., has an issued and paid-up capital of 50,000 shares of ` 100 each. The
company declared a dividend of ` 12-50 lakhs during the last five years and expects
to maintain the same level of dividends in the future. The control and ownership of
the company is lying in the few hands of Directors and their family members. The
average dividend yield for the listed companies in the same line of business is 18%.
Calculate the value of 3000 shares in the company. 10
7. (a) A Ltd., is considering the acquisition of B Ltd., with stock. Relevant financial
information is given below:
Particulars A Ltd. B Ltd.
Present earnings (`) 7.5 Lakhs 2.5 Lakhs
Equity (no. of shares) 4.0 lakhs 2.0 Lakhs
EPS (`) 1.875 1.25
P/E ratio 10 5
Answer the following questions:

(i) What is the market price of each company?
(ii) What is the market Capitalization of each company?
(iii) If the P/E of A Ltd., changes to 7.5, what is the market price of A Ltd.?
(iv) Does market value of A Ltd., change?
(v) What would be the exchange ratio based on Market Price? (Take the revised
price of A Ltd.) 2 x 5 = 10
(b) The shareholders of A Co. Ltd., have voted in favour of a buyout offer from B Co. Ltd.
Information about each firm is given here below. Moreover, A Co. Ltd.’s shareholders
will receive one share of B Co. Ltd. Stock for every three shares they hold in A Co. Ltd.
Particulars B Co. Ltd. A Co. Ltd.
Present earnings (in `) 6.75 3.00
H Block
EPS (in `) 3.97 5.00

Number of share (Lakhs) 1.70 0.60
P/E ratio 20 5

Cost Management
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(i) What will the EPS of B Co. Ltd., will be after the merger? What will the PE ratio if
the NPV of the acquisition is zero?
(ii) What must B Co. Ltd. feel would be the value of the synergy between these
firms? 10
8. (a) A company has a capital base of ` 1 crore and has a earned profits to the tune of `
11,00,000. The Return on Investment (ROI) of the particular industry to which the
company belongs is 12.5%. If acquired by a company, it is expected that the profits
will increase by ` 2,50,000 over and above the target profit. Determine the amount
of maximum bid price for that particular executive and the maximum salary that
could be offered to him. 10
(b) Q Ltd. wants to acquire R Ltd. and has offered a swap ratio of 1 : 2 (0.5 shares for every
one share of R Ltd.).
Following information is provided:
Particulars Q Ltd. R Ltd.
Profit after tax (`) 18,00,000 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (`) 3 2
P/E Ratio 10 times 7 times
Market price per share (`) 30 14
Required:
(i) The number of equity shares to be issued by Q Ltd., for acquisition of R Ltd.
(ii) What is the EPS of Q Ltd., after the acquisition?
(iii) Determine the equivalent earnings per share of R Ltd.
(iv) What is the expected market price per share of Q Ltd., after the acquisition,
assuming its P/E multiple remains unchanged?
(v) Determine the market value of the merged firm. 2 × 5 = 10
H Block
Advanced Strategic
AREA UNDER STANDARD NORMAL CURVE
Proportion of area under the standard normal curve
Between z = 0 and the given value of z
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0 .0000 .0040 .0080 .0120 .0160 .0199 .0239 .0279 .0319 .0359
0.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0714 .0753
0.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026 .1064 .1103 .1141
0.3 .1179 .1217 .1255 .1293 .1331 .1368 .1406 .1443 .1480 .1517
0.4 .1554 .1591 .1028 .1664 .1700 .1736 .1772 .1808 .1844 .1879
0.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123 .2157 .2190 .2224
0.6 .2257 .2291 .2324 .2357 .2389 .2422 .2454 .2486 .2517 .2549
0.7 .2580 .2611 .2642 .2673 .2703 .2734 .2764 .2794 .2823 .2852
0.8 .2881 .2910 .2939 .2967 .2995 .3023 .3051 .3078 .3106 .3133
0.9 .3159 .3186 .3212 .3238 .3264 .3289 .3375 .3340 .3365 .3389
1.0 .3413 .3438 .3461 .3485 .3508 .3531 .3554 .3577 .3599 .3621
1.1 .3643 .3665 .3686 .3708 .3729 .3749 .3770 .3790 .3810 .3830
1.2 .3849 .3869 .3888 .3907 .3925 .3944 .3962 .3980 .3997 .4015
1.3 .4032 .4049 .4066 .4082 .4099 .4115 .4131 .4147 .4162 .4177
1.4 .4192 .4207 .4222 .4236 .4251 .4265 .4279 .4292 .4306 .4319
1.5 .4332 .4345 .4357 .4370 .4382 .4394 .4406 .4418 .4429 .4441
1.6 ..4452 .4463 .4474 .4484 .4495 .4505 .4515 .4525 .4535 .4545
1.7 .4554 .4564 .4573 .4582 .4591 .4599 .4608 .4616 .4625 .4633
1.8 .4641 .4649 .4656 .4664 .4671 .4678 .4686 .4693 .4699 .4706
1.9 .4713 .4719 .4726 .4732 .4738 .4744 .4750 .4756 .4761 .4767
2.0 .4772 .4778 .4783 .4788 .4793 .4798 .4803 .4808 .4812 .4817
2.1 .4821 .4826 .4830 .4834 .4838 .4842 .4846 .4850 .4854 .4857
2.2 .4861 .4864 .4868 .4871 .4875 .4878 .4841 .4884 .4887 .4890
2.3 .4893 .4896 .4898 .4901 .4904 .4906 .4909 .4911 .4913 .4916
2.4 .4918 .4920 .4922 .4925 .4927 .4929 .4931 .4932 .4934 .4936
2.5 .4938 .4940 .4941 .4943 .4945 .4946 .4948 .4949 .4951 .4952
2.6 .4953 .4955 .4956 .4957 .4959 .4960 .4961 .4962 .4963 .4964
2.7 .4965 .4966 .4967 .4968 .4969 .4970 .4971 .4972 .4973 .4974
2.8 .4974 4975 .4976 .4977 .4977 .4978 .4979 .4979 .4980 .4981
2.9 .4981 .4982 .4982 .4983 .4984 .4984 .4985 .4985 .4986 .4986
3.0 .4987 .4987 .4987 .4988 .4988 .4989 .4989 .4989 .4990 .4990
3.1 .4990 .4991 .4991 .4991 .4992 .4992 .4992 .4992 .4993 .4993
3.2 .4993 .4993 .4994 .4994 .4994 .4994 .4994 .4995 .4995 .4995
3.3 .4995 .4995 ,4995 .4996 .4996 .4996 .4996 .4996 .4996 .4997
3.4 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4998

Cost Management

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ADVANCED

For CA-CMA - Final Level

Contact No. .............................................................................................................................................................................................

S J C Registration No. :.........................................................................................................................................................................

© SJC Institute LLP

This file belongs only to students registered in this course.

This file belongs only to students registered in this course.

This file belongs only to students registered in this course.

This file belongs only to students registered in this course.

1. APPLICABILITY OF SIMPLEX SOLUTION 6

i. VARIABLE IS OF UNRESTRICTED SIGN 11

1. APPLICABILITY OF SIMPLEX SOLUTION

2. BASIC STEPS IN SIMPLEX

3. CONSTRAINTS ARE OF LESS THAN INEQUALITY TYPE

2. Program variables or Basic Variables: Slack Variables or Artificial slack variables.

4. PROCEDURE TO BE FOLLOWED FOR INITIAL

5. PROCEDURE TO BE FOLLOWED FOR ITERATION

For non KR elements: Non KR elements – (corresponding Fixed Ratio x corresponding

(c) Calculate Zj = ∑ (profit or cost elements x corresponding cost elements)

6. CONSTRAINTS ARE OF MORE THAN INEQUALITY

7. CONSTRAINTS ARE OF EQUALITY TYPE

8. CONSTRAINTS ARE OF INEQUALITY X ≥ A

Simplex Algorithm Flow Chart

INTRODUCE NECESSARY SLACK, SURPLUS AND AFRTIFICIAL

WRITE THE INITIAL SIMPLEX TABLE AND

DESIGNATE THE INTERSECTION

CALCULATE F.R. BY DIVIDING OTHER KC

(1) DIVIDE ALL ELEMENTS OF THE KR BY KEY ELEMENT

OBTAIN NER(Cj - Zj)

THE SOLUTION IS OPTIMAL FOR MAXIMISATION IF

b. MARGINAL VALUE OR SHADOW PRICE OR OPPORTUNITY COST OF A

c. MARGINAL VALUE OR SHADOW PRICE OR OPPORTUNITY COST OF A

i. VARIABLE IS OF UNRESTRICTED SIGN

Solve the following LPP using the simplex algorithm.

Constraints are of ≤ Type

Transistors (x) Resistors (y) Carbon tubes (z) Max available

Constraints are of ≤ Type Idle Capacity and Marginal

Machine Gear A (Hrs) Gear B (Hrs) Available Hours

Constraints are of ≤ Type

Solve the following LPP using the simplex algorithm

Constraints are of ≥ Type

Solve the following LPP using simplex algorithm

Constraints are of ≥ Type Negative RHS

Solve the following LPP using simplex algorithm

Constraints are of ≥ and ≤ Type

Solve the following LPP using the simplex algorithm

Constraints are of = Type

Solve the following LPP using the simplex algorithm

Constraints are of x ≥ a Type

Solve the following LPP using the simplex algorithm

Coal Phosphorus (%) Ash (%) Profit in ` (per ton)

Degeneracy Avoid negative pivot element

Interpretation of Ready Solution

Product Mix X1 X2 S1 S2 Quantity

Answer the following questions, giving reasons in brief:

6 X1 400 1 2/3 2 0 1/3 0

Answer the following questions :

(iii) Indicate the shadow prices.

Interpretation of Ready Solution

Interpretation of Ready Solution