FINAL EXAMINATION SET - 1

MODEL ANSWERS TERM – DECEMBER 2023

PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)

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

(i) Which of the following is not a term normally used in value analysis?
a. Resale value
b. Use value
c. Esteem value
d. Cost value

(ii) DMIADV is a methodology associated with

a. Pareto Analysis
b. PRAISE
c. Six Sigma
d. None of the above

(iii) XYZ Ltd. has the following alternative planned activity levels.
Level E F G
Total cost (`) 1,00,000 1,50,000 2,00,000
No. of units produced 5000 10000 15000

If fixed overhead remains constant, then fixed overhead cost per unit at Level E is:
a. ` 20
b. ` 15
c. `13.33
d. ` 10

(iv) A company has a breakeven point when sales are ` 3,20,000 and variable cost at that level of
sales are ` 2,00,000. How much would contribution margin increase or decrease if variable
expenses are dropped by `30,000?
a. Increase by 27.5%
b. Increase by 9.375%
c. Decrease by 9.375%
d. Increase by 37.5%

(v) H Group has two divisions, Division P and Division Q. Division P manufactures an item that
is transferred to Division Q. The item has no external market and 6000 units produced are
transferred internally each year. The costs of each division are as follows:
Division P Division Q
Variable Cost (`) 100 per unit 120 per unit
Fixed cost each year (`) 1,20,000 90,000

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Head Office management decided that a transfer price should be set that provides a profit of
`30,000 to Division P. What should be the transfer price per unit?
a. `145
b. `125
c. `120
d. `135

(vi) A company has the capacity of producing 80000 units and presently sells 20000 units at ` 100
each. The demand is sensitive to selling price and it has been observed that with every
reduction of ` 10 in selling price the demand is doubled. What should be the target cost if the
demand is doubled at full capacity and profit margin on sale is taken at 25%?
a. `75
b. `90
c. `25
d. `60

(vii) A factory can make only one of the three products X, Y or Z in a given production period. The
following information is given:
Per Unit ` X Y Z
Selling Price 1500 1800 2000
Variable Cost 700 950 1000
Assume that there is no constraint on resource utilization or demand and similar resources
are consumed by X, Y and Z. The opportunity cost of making one unit of Z is:
a. `850
b. `800
c. `1,800
d. `1,500

(viii) Twin Ltd. uses JIT and back flush accounting. It does not use a raw material stock control
account. During September 2021, 10000 units were produced and sold. The standard cost per
unit is ` 150 which includes materials of ` 60. During September 2021, ` 9,90,000 of conversion
costs were incurred. The debit balance in cost of goods sold account for September 2021 is:
a. ` 14,00,000
b. ` 14,80,000
c. ` 15,90,000
d. ` 16,20,000
(ix) The following figures are extracted from the books of a company:
Budgeted O/H ` 10,000 (Fixed ` 6,000, Variable ` 4,000)
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)

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

(x) Tableau is a –
a. Business Intelligence Tool
b. Visualisation Tool
c. Both (a) and (b)
d. None of the above

(xi) Which one of the following is a Key feature of SAS language?

a. Capability of handling data analysis related to Operations Research and Project
Management.
b. Capability of report formation with perfect graphs.
c. Capability to interact with multiple host systems
d. All the above

(xii) A feasible solution of LPP –

a. Must satisfy all the constraints simultaneously.
b. Need not satisfy all the constraints, only some of them.
c. Must be a corner point of the feasible region
d. All the above

(xiii) A PERT activity has an optimistic time of 3 days, pessimistic time of 15 days and an expected
time of 7 days. What is the most likely time of the activity?
a. 10 days
b. 6 days
c. 5 days
d. None of the above

(xiv) MR is
a. First order derivative of TC
b. Second order derivative of TR
c. First order derivative of TR
d. Second order derivative of TC

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

Answer:

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

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

SECTION – B
Answer any “5” Questions from Question No. 2 to Question No. 8 in Section “B”. Each Question Carries
14 marks. [5 x 14 = 70]

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

Core Making Melting and Moulding Cleaning and

Pouring Grinding
` ` ` `
Labour 10,000 16,000 6,000 4,500
Variable overheads 3,000 1,000 1,000 1,000
Fixed overhead 5,000 9,000 2,000 1,000
18,000 26,000 9,000 6,500
Labour and O.H
rate per direct 9.00 6.50 6.00 5.2
labour hour

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

Materials required would cost ` 1 per casting after deducting scrap credits. The direct labour hour
per casting required for each department would be:
Core Making 0.09
Melting and pouring 0.15
Moulding 0.06
Cleaning and Grinding 0.06

Variable overheads would bear a normal relationship to labour cost in the melting and pouring
department and in the moulding department. In core making, cleaning and grinding however, the
extra labour requirements would not be accompanied by proportionate increases in variable
overhead. Variable overhead would increase by `1.20 for every additional labour hour in core
making and by 30 paise for every additional labour hour in cleaning and grinding. Standard wage
rates are in operation in each department and no labour variances are anticipated. To handle an
order as large as this, certain increases in factory overheads would be necessary amounting to ` 1,000
a month for all departments put together. Production for this order would be spread evenly over the
six months period.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
You are required to:
(a) Prepare a revised monthly labour and overhead cost budget, reflecting the addition of this
order.
(b) Determine the lowest price at which quotation can be given for 90,000 castings without
incurring a loss. [14]

Answer:

Computation of labour and overhead rate.

Core Melting & Moulding Cleaning &

making pouring grinding
Labour & overheads (`) 18,000.00 26,000.00 9,000.00 6,500.00
Labour & overheads per hour (`) 9.00 6.50 6.00 5.20
No. of hours 2,000.00 4,000.00 1,500.00 1,250.00
Variable overhead per hour (`) 1.50 0.25 0.67 0.80
Labour rate per hour (`) 5.00 4.00 4.00 3.60
Hours required for new order 1,350.00 2,250.00 900.00 900.00
Labour cost required for order (`) 6,750.00 9,000.00 3,600.00 3,240.00
Variable overhead cost for order (`) 1,620.00 563.00 600.00 270.00

Revised monthly labour and overheads cost budget reflecting the additions of the order
Core Melting & Moulding Cleaning & Total
making pouring grinding
` ` ` ` `
Labour 10,000.00 16,000.00 6,000.00 4,500.00
Labour for the order 6,750.00 9,000.00 3,600.00 3,240.00
16,750.00 25,000.00 9,600.00 7,740.00
Variable overheads 3,000.00 1,000.00 1,000.00 1,000.00
Variable overheads for the order 1,620.00 563.00 600.00 270.00
4,620.00 1,563.00 1,600.00 1,270.00
Fixed cost 5,000.00 9,000.00 2,000.00 1,000.00
Total 26,370.00 35,563.00 13,200.00 10,010.00 85,143.00
Add : additional fixed cost 1,000.00
Total: 86,143.00

Computation of total price for the order

` `
Material (15,000 × 1) 15,000.00
Labour & overheads (86,143 – 59,500) 26,643.00
41,643.00
Total price for the order (41,643 × 6) 2,49,858.00

3. (a) A Company with two manufacturing divisions is organised on profit centre basis. Division ‘A’
is the only source for the supply of a component that is used in Division B in the manufacture

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
of a product KLIM. One such part is used in each unit of the product KLIM. As the demand
for the product is not steady, Division B can obtain orders for increased quantities only by
spending more on sales promotion and by reducing the selling prices. The Manager of Division
B has accordingly prepared the following forecast of sales quantities and selling prices.
[7]

Sales units per day Average Selling price per unit of KLIM (`)
1,000 5.25
2,000 3.98
3,000 3.30
4,000 2.78
5,000 2.40
6,000 2.01

The manufacturing cost of KLIM in Division B is `3,750 for first 1,000 units and `750 per
1,000 units in excess of 1,000 units. Division A incurs a total cost of `1,500 per day for an
output to 1,000 components and the total costs will increase by `900 per day for every
additional 1,000 components manufactured. The Manager of Division A states that the
operating results of his Division will be optimised if the transfer price of the component is set
at `1.20 per unit and he has accordingly set the aforesaid transfer price for his supplies of the
component to Division A.

You are required to:

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

(b) A company has estimated the following demand level of its product: [7]
Sales Volume (units) 10000 12000 14000 16000 18000
Probability 0.10 0.15 0.25 0.30 0.20

It has assumed that the sales price of ` 6 per unit, marginal cost of ` 3.50 per unit, and fixed
costs of ` 34,000. What is the probability that:
(a) The company will break-even in the period?
(b) The company will make a profit of at least ` 10,000?

Answer:

(a) (a) Profit at each level of output

(i) Statement showing profit of division A

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Sale per day (units) Sale value Units × `1.20 Cost Profit/(loss)
(`) (`) (`)
1000 1200 1500 (300)
2000 2400 2400 -
3000 3600 3300 300
4000 4800 4200 600
5000 6000 5100 900
6000 7200 6000 1200

(ii) Statement showing profit of division B

No of units Selling Price Sales Transfer Other Total Profit /
per Unit Price Manufacturing Cost Cost (Loss)
(`) (`) (`) (`) (`) (`)
1 2 3 4 5 6 7
Derivation (1 × 2) (4 + 5) (3 – 6)
1000 5.25 5250 1200 3750 4950 300
2000 3.98 7960 2400 4500 6900 1060
3000 3.30 9900 3600 5250 8850 1050
4000 2.78 11120 4800 6000 10800 320
5000 2.40 12000 6000 6750 12750 (750)
6000 2.01 12060 7200 7500 14700 (2640)

(b) (i) Profit of the company at the output level where division A’s net profit is maximum
Profit of Division A is maximum, i.e. `1,200/- at the output level of 6,000 units
At the level of 6,000 units:
Profit of Division A = `1,200
Profit of Division B = (-) `2,640
Profit of the Company = (-) `1,440

(ii) Profit of the company at the output level where division B’s net profit is maximum
Profit of Division B is maximum, i.e. ` 1,060 at the output level of 2,000 units
At the level of 2,000 units:
Profit of Division A = ` Nil
Profit of Division B = `1,060
Profit of the Company = `1,060

(c) Profit when the company is not organized on profit centre basis
Units Division A (`) Division B (`) Total (`)
1000 (300) 300 —
2000 — 1060 1060
3000 300 1050 1350
4000 600 320 920
5000 900 (750) 150
6000 1200 (2640) (1440)
Maximum profit of `1,350 accrues at the output level of 3000 units which may be chosen.
(Explanatory Comment: The problem throws light as to how to make use of the principles
of transfer pricing for profit planning, both internally as also externally)

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

(b) (a) Probability of Break-even for the period

In order to break-even, the company must earn enough total contribution to cover its
fixed costs. The contribution is ` 2.50 per unit (i.e. 6 - 3.5).
Break-even Sales = (Fixed Cost ÷ Contribution per Unit) =
= (34,000 ÷ 2.50) = 13,600 units
Contribution required/Contribution per unit = ` 34,000/`2.50 = 13600 units
The probability that sales will equal or exceed 13,600 units is the probability that sales
will be 14,000, 16,000 or 18,000 units which is (0.25 + 0.30 + 0.20) = 0.75 or 75%.

(b) Probability of earning Profit of `10,000

Contribution Needed = (Profit Needed + Fixed Cost) = (10,000 + 34,000) = `44,000
Desired Sales = (Contribution Needed ÷ Contribution per Unit) = (44,000 ÷ 2.50) = 17,600 units

The probability that sales will equal or exceed 17,600 units is the probability that sales will be 18,000
units which is 0.20 or 20%

4. (a) Modern Co produces 3 products, A, B and C, details of which are shown below: [7]
Particulars A B C
Selling price per unit (`) 120 110 130
Direct material cost per unit (` ) 60 70 85
Variable overhead (` ) 30 20 15
Maximum demand (units) 30,000 25,000 40,000
Time required on the bottleneck resource (hours per unit) 5 4 3
Resources (hours per unit) 12 10 15
There are 3,20,000 bottleneck hours available each month.
Required:
Calculate the optimum product mix based on the throughput concept.

(b) Narrate the principles, practices, and tools of lean accounting. [7]

Answer:

(a) Step1: Computation of Rate per Factory Hour

Serial Particulars A B C
1 Selling price per unit (`) 120 110 130
2 Direct material cost per unit (`) 60 70 85
3 Throughput per unit (`) (1 – 2) 60 40 45
4 Time required on the bottleneck resource (hours per unit) 5 4 3
5 Return per Factory Hour (`) (3 ÷ 4) 12 10 15
6 Ranking (on the basis of 5) II III I

Step 2: Allocation of Hours according to Ranking

Description Hours Allocated Balance
Total of Bottleneck Hours Available 3,20,000
Hours allocated for C (40,000 units × 3 hours per unit) [Rank I] 1,20,000
Hours allocated for A (30,000 units × 5 hours per unit) [Rank II] 1,50,000 2,70,000

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Hours allocated for B (Being the balance) [Rank III] 50,000

Step 3: Optimum Product MIX

No. of units of B that can be made in balance hours = (50,000 hours ÷ 4 hours per unit) = 12,500
units.
Therefore, Optimum Product MIX:
A = 30,000 units
B = 12,500 units
C= 40,000 units

(b)
Sl. Principles Practices Tools of lean accounting
1 Lean & Continuously eliminates ● Value stream mapping; current & future state
simple waste from the transactions, ● Kaizen (lean continuous improvement).
business processes, reports, and ● PDCA (Planning, Doing, Checking and
accounting other accounting methods Acting) problem solving
2 Accounting Management control & ● Performance Measurement Linkage Chart;
processes continuous improvement linking metrics for cell/process, value streams,
that support plant & corporate reporting to the business
lean strategy, target costs, and lean improvement
transformati ● Value stream performance boards containing
on break- through and continuous improvement
projects
● Box scores showing value stream performance
Cost management ● Value stream costing
● Value stream income statements
Customer & supplier  Target costing
value and cost management
3 Clear & Financial reporting ● “Plain English” financial statements Simple,
timely largely cash-based accounting
communica Visual reporting of Primary reporting using visual performance
tion of financial & non- financial boards; division, plant, value stream, cell/ process
information performance measurements in production, product design, sales/marketing,
administration, etc.
Decision-making Incremental cost & profitability analysis
using value stream costing and box scores
4 Planning Planning & budgeting ● Hoshin policy deployment. (Hosin Kanri
from a lean (also called Policy Deployment is a method
perspective for ensuring that a company’s strategic goals
drive progress and action at every level within
that company. This method eliminates the
waste that comes from inconsistent direction
and poor communication). Sales, operations,
& financial planning (SOFP)
Impact of lean ● Value stream cost and capacity analysis

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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STRATEGIC COST MANAGEMENT
improvement ● Current state & future state value stream
maps
● Box scores showing operational, financial,
and capacity changes from lean
improvement.
● Plan for financial benefit from the lean
changes
Capital planning  Incremental impact of capital expenditure on
value stream box-score. Often used with 3P
approaches. (Production Preparation
Process)
Invest in people ● Performance measurements tracking
continuous improvement participation,
employee satisfaction & cross- training Profit
sharing
5 Strengthen Internal control based on  Transaction elimination matrix
internal lean operational controls  Process maps showing controls and SOX
accounting risks. (A SOX control is a rule that prevents
control and detects error within a process cycle of
financial reporting. These controls fall under
the Sarbanes-Oxley Act of 2002 (SOX). SOX
is a U.S. federal law requiring all public
companies doing business in the United States
to comply with the regulation).
Inventory valuation  Simple methods to value inventory without
the requirement for perpetual inventory
records and product costs can be used when
the inventory is low and under visual control.

5. (a) S.V. Ltd. manufactures BXE by mixing three raw materials. For every batch of 100Kg. of
BXE, 125 Kg. of raw materials are used. In April 2021, 60 batches were prepared to produce
an output of 5,600 Kg. of BXE. The standard and actual particulars for April 2021 are as
under: [7]

Standard Actual
Quantity of raw
Raw material Mix % Price per kg Mix % Price per kg materials purchased
kg
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate relevant material variances.

(b) Vinak Ltd. has furnished you the following information for the month of February, 2017.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Budget Actual
Output ( Units) 30,000 32,500
Hours 30,000 33,000
Fixed Overhead `45,000 ` 50,000
Variable overhead 60,000 68,000
Working days 25 26
Calculate Variances. [7]

Answer:

(a) Standard Production = (60 batches ×100 units per batch) = 6,000 units
Standard Raw Material for 6,000 units = (60 batches ×125 kg) = 7,500 kg
Standard Loss = (7,500 - 6,000) = 1,500 kg
Actual Production = 5,600 units
Standard Mix for 60 batches (i.e., 6,000 units)

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

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

Material Yield Variance = (Standard Price of Standard Mix for Actual Production – Standard Price

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Directorate of Studies, The Institute of Cost Accountants of India
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MODEL ANSWERS TERM – DECEMBER 2023
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STRATEGIC COST MANAGEMENT
of Standard Mix for Standard Production)
= (98,000 – 1,05,000) = ` 7,000 (A)
Material Mix Variance = Standard Price of Standard Mix for Standard Production – Standard
Price of Actual Mix for Actual Production
= (1,05,000 – 1,12,500) = ` 7,500 (A)

(b) Calculation of Fixed OH Variances using hourly rate:

SRSH (1) SRAH (2) SRRBH (3) SRBH (4) ARAH (5)
1.5 × 32500 1.5 × 33000 1.5 × 31200
48750 49500 46800 45000 50000
BFO 45000
SR = = = 1.5
BH 30000
RBH 25 -------------- 30000
26 -------------- ?
SH 30000 --------------- 30000
32500 ------------- ?
Fixed Overhead Efficiency Variance : 1 – 2 = 750 (A)
Fixed Overhead Capacity Variance : 2 – 3 = 2700
Fixed Overhead Calendar Variance : 3 – 4 = 1800
Fixed Overhead Volume Variance : 1 – 4 =3750
Fixed Overhead Budget Exp. Variance: 4 – 5 = 5000 (A)
Fixed Overhead Cost Variance: 1 – 5 = 1250(A)
Calculation of Variable OH’s Variance:
SRSH (1) SRAH (2) ARAH (3)
2 × 32500 2 × 33000
65000 66000 68000
BVOHd 60000
SR = = =2
BH' s 30000

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

SRAH = Atd Cost of Actual Variable Overhead’s
ARAH = Actual Cost of actual Variable Overhead’s
A) Variable Overhead Efficiency Variance 1 – 2 =1000 (A)
B) Variable Overhead Budget/Exp Variance 2 – 3 = 2000 (A)
C) Variable Overhead Cost Variance 1 – 3 = 3000(A)

6. (a) Mr. Lal is on a low cholesterol diet. During lunch at the office canteen he always chooses
between two particular types of meal – Type A and Type B. the table below lists the amount of
protein, carbohydrates and vitamins each meal provides along with the amount of cholesterol
(which he is trying to minimize). He needs at least 200 grams of protein, 960 grams of
carbohydrates and 40 grams of vitamins for lunch each month. Over this time period, how
many days should he have Type A meal and how many days the Type B meal so that he gets
adequate amount of protein, carbohydrates and vitamins and at the same time minimizes his
cholesterol intake. Formulate LPP.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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STRATEGIC COST MANAGEMENT
[7]
Type A meal Type B meal
Protein (Grams) 8 16
Carbohydrates (Grams) 60 40
Vitamins (Grams) 2 2
Cholesterol (Milli grams) 60 50

(b) Patients arriving at a village dispensary are treated by a doctor on a first-come-first-served

basis. The inter-arrival time of the patients is known to be uniformly distributed between 0
and 80 minutes, while their service time is known to be uniformly distributed between 15 and
40 minutes. It is desired to simulate the system and determine the average time a patient has
to be in the queue for getting service and the proportion of time the doctor would be idle.

Carry out the simulation using the following sequences of random numbers. The numbers
have been selected between 00 and 80 to estimate inter-arrival times and between 15 and 40
to estimate the service times required by the patients. [7]

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

Answer:

(a) Let x1 be the no. of units of type A meal

Let x2 be the no. of units of type B meal
Objective function minimize Z = 60x1 + 50x2

Subject to the constraints

8x1 + 16x2 ≥ 200:
60x1 + 40x2 ≥ 960:
2x1 + 2x2 ≥ 40.
x1≥ 0, x2≥ 0

(b) Simulated Inter-arrival & Service Times and Calculation of Patient's Waiting time & Doctor's Idle time
Patient Inter arrival Entry time in Service Time Service Service Waiting time Idle time of
No. time Random to the queue Random No. Start time End time of patient doctor
No. (minutes) (minutes) (minutes) (minutes)
1 07 8.07 A.M 23 8.07 A.M 8.30 A.M - 7
2 21 8.28 A.M 37 8.30 A.M 9.07 A.M 2 -
3 12 8.40 A.M 16 9.07 A.M 9.23 A.M 27 -
4 80 10.00 A.M 28 10.00 A.M 10.28 A.M - 37
5 08 10.08 A.M 30 10.28 A.M 10.58 A.M 20 -
6 03 10.11 A.M 18 10.58 A.M 11.16 A.M 47 -
7 32 10.43 A.M 25 11.16 A.M 11.41 A.M 33 -
8 65 11.48 A.M 34 11.48 A.M 12.22 P.M - 7
9 43 12.31 P.M 19 12.31 P.M 12.50 P.M - 9
10 74 1.45 P.M 21 1.45 P.M 2.06 P.M - 55

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Total 129 115
[N.B – The above table is prepared on the basis of the assumption that the dispensary opened at
8.00 A.M]
Average time a patient has to be in the queue for getting service = 129/10 = 12.9 minutes
Doctor is there in the dispensary from 8.00 A.M to 2.06 P.M i.e. for 6 hours & 6 minutes = 366
minutes.
During this period, he is idle for 115 minutes. So proportion of time the doctor is idle = 115/366 =
0.314.
7. (a) The following table gives the activities and other relevant information related to “Making of a loaf”.
Activity Preceded by Elapsed Time (Minutes)
A - Weigh ingredients - 1
B - Mix ingredients A 3
C - Dough rising time B 60
D - Prepare tins - 1
E - Pre-heat oven - 10
F - Knock back dough and place in tins C&D 2
G - 2nd dough rising time F 15
H - Cooking time E&G 45
Draw a Network diagram. Also find the Earliest and Latest Times of each Event of the
Network. Identify the different paths of the Network and their corresponding durations.
Which path is critical? Find the time required to complete the job.
[7]
(b) The usual Learning Curve model is Y = axb where
Y is the average time per unit for x units and ‘a’ is the time for first unit
x is the cumulative number of units
b is the learning coefficient and is equal to (log 0.8)/(log 2) = –0.322 for a learning rate of 80%
Given that a = 10 hours, you are required to Calculate:
(i) The average time for 20 units.
(ii) The total time for 30 units.
(iii) The time for units 31 to 40.
Given that log 2 = 0.301, Antilog of 0.5811 = 3.812
log 3 = 0.4771, Antilog of 0.5244 = 3.345.
log 4 = 0.6021, Antilog of 0.4841 = 3.049. [7]

Answer:
(a)

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

The Earliest expected Time and the Latest allowable Time of each event is determined by using the
methods of Forward Pass and Backward Pass respectively.
The formula used in the calculation of Earliest expected Event Time is Ej = Ei + tij & for Merge
Events Ej = Max (Ei + tij)
As per the standard procedure of Forward Pass E1 = 0
E2 = E1 + t12 = 0+1 = 1, E3 = E2 + t23 = 1+3 = 4, E4 = Max. [(E3 + t34), (E1 + t14)] = Max.
[(4+60), (0+1)] = 64 E5 = E4 + t45 = 64+2 = 66, E6 = Max. [(E5 + t56), (E1 + t16)] = Max.
[(66+15), (0+10)] = Max. [81, 10] = 81 E7 = E6 + t67 = 81+45 = 126
These values are shown in the upper one of the two quadrants drawn in each circle to represent
events.
The formula used in the calculation of Latest allowable. Event Time is Li = Lj – tij & for Burst
Events Li = Min. (Lj – tij)
As per the standard procedure of Backward Pass L = E for the last event. Thus L7 = E7 = 126
L6 = L7 – t67 = 126 – 45 = 81, L5 = L6 – t56 = 81 – 15 = 66, L4 = L5 – t45 = 66 – 2 = 64, L3 =
L4 – t34 = 64 – 60 = 4,
L2 = L3 – t23 = 4 – 3 = 1, L1 = Min. [(L2 – t12), (L4 – t14) & (L6 – t16)] = Min. [(1-1),
(64-1) & (81-10)] = 0
These values are shown in the lower one of the two quadrants drawn in each circle to represent
events. From the above diagram, different paths of the Network and their corresponding durations
are as follows –
1. A – B – C – F – G – H or 1 – 2 – 3 – 4 – 5 – 6 -- 7 & Duration = 1+3+60+2+15+45 = 126 Minutes
2. D – F – G – H or 1 – 4 – 5 - 6 – 7 & Duration = 1+2+15+45 = 63 Minutes
3. E – H or 1 – 6 – 7 & Duration = 10+45 = 55 Minutes
Of the above three, the duration of the path A – B – C – F - G – H is maximum. So this is the
CRITICAL PATH. Time required to make the loaf is 126 Minutes. (This is the project completion
time)

[Note: In this example, there is a clear sequence of events that have to happen in the right order. If any
of the events on the critical path is delayed, then the bread will not be ready as soon. However, tasks
D (prepare tins) and E (heat the oven) can be started at any time as long as they are done by the latest
time in the following node.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
So, we can see that the oven could be switched on as early as time 0, but we can work out that it
could be switched on at any time before 71 – any later than this and it won’t be hot enough when
the dough is ready for cooking. There is some ‘float’ available for tasks D and E as neither is on the
critical path.]

(b) (i) Y = aXb

Y = 10(20)-0.322
Taking logarithm on both sides
Log Y = log 10 + log 20(-0.322)
Log Y = log 10 – (0.322) log 20
= 1 – (0.322) log 20
= 1 – (0.322) × (1.3010)
= 1 – 0.41892 = 0.5811
Log Y = 0.5811
Y = Anti log (0.5811) = 3.812 hrs (average time for 20 units)

(ii) Log Y = log 10 + log 30(-0.322)

Log Y = 1 – (0.322) × (1.4771)
= 1 – (0.4756) = 0.5244
Y = anti log (0.5244) = 3.345 hrs (average time for 30 units)
Total time for 30 units = 3.345 × 30 = 100.35 hrs

(iii) Log Y = log 10 + log40(-0.322)

= 1 – (0.322) × (1.6021) Log Y = 0.4841
Y = anti log (0.4841) = 3.049 hrs
Total time for 40 units = 40 × 3.049 = 121.96 hrs
Time from 31 to 40 units = 121.96 – (100.35) = 21.61 hrs

𝟏𝟓 𝟐 𝟑
8. (a) Solve the Game using Domine Principle [ 𝟔 𝟓 𝟕] [7]
−𝟕 𝟒 𝟎

(b) Find trend values of the following year wise data of Goods carried by a fleet of trucks of a
Transport Company having pan India network using the Moving Average Method. [Assume
a 4 yearly cycle]
[7]
Year 1975 1976 1977 1978
Goods carried (Tons) 2204 2500 2360 2680
Year 1979 1980 1981 1982
Goods carried (Tons) 2424 2634 2904 3098
Year 1983 1984 1985 1986
Goods carried (Tons) 3172 2952 3248 3172

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Answer:

(a)
15 2 3
A= [ 6 5 7]
−7 4 0
B1 B2 B3 Row Minimum
A1 15 2 3 2
A2 6 5 7 5
A3 -7 4 0 -7
Column Maximum 15 5 7

To check,
Minimax = Maximin
Min {15,5,7} = Max {2, 5, -7}
5 = 5
Saddle point exist at (A2, B2)
It is a pure strategy game.
Pure Strategy for A = A2
Pure Strategy for B = B2
Value of the game = 5
i.e., expected gain to A = 5/-
expected loss of B = 5/-

(b) Calculations for 4 Yearly Moving Average Trend values

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

17
Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
1984 2952 6253.5 3126.75
12544 3136
1985 3248 - - - -
1986 3172 - - - -

Method of calculation –
1st entry of Column (3) = Sum of the entries in Column (2) for the period 1975 to 1978 =
2204+2500+2360+2680 and it is placed in between the years 1976 & 1977 i.e., at the middle of the
first 4 year period under consideration.

2nd entry of Column (3) = Sum of the entries in Column (2) for the period 1976 to 1979 =
2500+2360+2680+2424 and it is placed in between the years 1977 & 1978 i.e., at the middle of the
second 4 year period under consideration.

3rd entry of Column (3) = Sum of the entries in Column (2) for the period 1977 to 1980 =
2360+2680+2424+2634 and it is placed in between the years 1978 & 1979 i.e., at the middle of the
third 4 year period under consideration.

Thus it is clear that except the first entry, each of the other entries are made by omitting the first
value of the previous period and adding the value against the new year taken into consideration. This
way all the other entries of column (3) are made. As none of these entries appear against a particular
year, they are called “Not centred” values.

Similarly, in case of column (5) except the first entry, each of the other entries are made by omitting
the first value considered for the previous calculation and adding a new value from the column (4)
values. It is shown below.

1st entry of Column (5) = Sum of the first two entries of column (4) = 2436 + 2491 = 4927

2nd entry of Column (5) = Sum of the second & third entries of column (4) = 2491 + 2524.5 = 5015.5

3rd entry of Column (5) = Sum of the third & fourth entries of column (4) = 2524.5 + 2660.5 = 5185
Other entries of Column (5) are made using the same method.

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Directorate of Studies, The Institute of Cost Accountants of India