Beruflich Dokumente
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CA Final Costing
Amendment &
Revision Aids
COVERS ALL
NEW SUMS AND CONCEPTS
FROM LATEST ICAI MAT
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CONTENTS:
1 Revision Aids and Charts
2 Activity Based Costing and BEP
3 Activity Based Costing and Direct Product Profitability
4 Activity Based Costing and Customer Profitability Analysis
5 JIT Features and Back flush Costing Journal Entries and Practicals
6 Life Cycle Costing Practicals
7 PARETO ANALYSIS - Practicals
8 Budget Variance with Responsibility Accounting Statement
9 Budget with Inventory Control
10 Standard Costing - Selling Cost Variance
11 Standard Costing Profit Reconciliation New Variety
12 Standard Costing - Case Study Question on Critical Success Factor
13 Service Sector Utility Bills
14 Transfer Pricing Calculas Based Pricing
15 Multinational Transfer Pricing
16 Drum Buffer Rope Theory of Constraints
17 Profitability Analysis Growth, Price Recovery and Productivity Effect
18 Case Study Based Theory Questions
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Six Cs of Quality
Ps of Quality
PDCA Cycle
Incremental Approach
to Evaluate Quality Pro-
grammes
12 TOC or 5 Drum - Buffer - Rope Theory Three Perspective of TOC
Throughput Concept
Accounting
Synchronous Manufactur-
ing - Optimised Prodcution
Technology
MRP and MRP II
Throughput Accounting -
Constraint or Bottleneck
Optimisation
Overall profit Statement un-
der Throughput Accounting
13 Service Sector 5 Utility Services Break Even Point in Services
Airlines
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Unbounded Minimisation
and Maximisation Problems
Graphical Method
Steps to Solve
Crashing of Network
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1. While attempting a question on cost management, it is most essential to read the facts of the
question carefully.
2. After reading the facts of the question, concentrate whether the requirement is related
to decision-making or to profit and loss statement.
3. If the requirement is related to decision-making you should follow Relevant Cost Concept.
Decision-making will always show effect on profit ascertained by working out relevant gain and
relevant cost.
4. If the requirement is related to profit and loss statement, you should follow Total Cost
Concept. Profit and loss statement will always show the profit or loss which is ascertained by
working total revenue and total cost.
5. In some questions, sometimes requirement are given by number a, b, c, & so on. Then in such
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CHARTS
Other data:
Total Fixed Costs (Conventional) - Rs 48,000
Total Fixed Costs (ABC) - Rs 36500
Required:
1. Compute Break Even Point in units using Activity Based Analysis
2. Suppose that company could reduce the setup cost by Rs 75 setup and could re-
duce the number of engineering hours needed to 215. How many units must be
sold to break even in this cost?
Solution
2. Jigyasa India Ltd. (JIL) has 30 retail stores of uniform sizes Fruity and Sweety Retails across
the country. Mainly three products namely Butter Jelly, Fruits and Nuts and Icy Cool are sold
through these retail stores. JIL maintains stocks for all retail stores in a centralized warehouse.
Goods are released from the warehouse to the retail stores as per requisition raised by
the stores. Goods are transported to the stores through two types of vans i.e. normal and
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Warehouse Costs:
Average transportation cost of JIL per trip to any retail stores are as follows:
Normal Van Rs 3,200
Refrigerated Van Rs 4,900
The Chief Financial Manager asked his Finance Managers to calculate profitability based on three
products sold through Fruity and Sweety retail stores rather than traditional method of calculating
profitability.
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Solution
Direct Product Profitability Statement
Working Notes
1. Warehouse Related Costs
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Products Time in Retail Stores Cost per m3 per month Total Cost
Butter Jelly 1 Month `6.36 (`2.00 + `6.36
`4.36)
Fruits & Nuts 2 Months `2.00 `4.00
Icy-Cool 1 Month `6.36 `6.36
(`2.00 + `4.36)
3. Transportation Costs
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The companys policy is to give a discount of 5% on the selling price on orders for 50 units
or more, and to further give 8% discount on the undiscounted selling price if a customer uses
his own transport of collect the order. Assume that production levels are not altered by these
orders.
Required:
i. Analyse the profitability by comparing profit per unit for each customer
ii. Comment on the discount policy on delivery
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Analysis
Even though A has lower sales volume (30% lesser from B), it is contributing almost double
profit that is being contributed by B as overall discount offered to customer A is quite less.
Discount on delivery offered to customer B is `432 per unit. If transport for delivery is provided
to customer B then the cost would have been `70 per unit (10 deliveries ` 3,500 / 500 units),
which is lesser by `362. It may also be noted that delivery cost in case of customer A is only `50
per unit (`17,500 350 units). Hence, company needs to review discount policy on delivery
but significance of profitability of customer B should also be kept in mind while doing so.
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Required:
i. Prepare a Customer profitability statement that shows the profit from each customer and
each customer channel.
ii. Recommend some points to improve OMCCs profit.
Solution
Statement Showing Customer Profitability Analysis
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Even though Ox1 has lower sales volume (11% lesser from Ox2), it is contributing around 67% of
small stores profit as its order is for larger quantities and discount offered is very less.
OMCC is only just at breakeven point with small pharmaceuticals. To improve profit OMCC-
should:
i. Coordinate with Ox2 to increase order size and try to negotiate a smaller discount.
ii. Try to work with Ox1 to reduce expedited deliveries.
Large Pharmaceuticals
OMCC makes substantial profit from the large pharmaceuticals. Ox4 alone contributing around
55% of total customers profit and its order is for larger quantities. Therefore, Ox4 is most
favorable customer and may be given little extra attention. For Ox3, OMCC may have no op-
tions but to treat it as less profitable customer as Ox3 accounts more than 60% of sales.
D. JIT Features and Back flush Costing Journal Entries and Practicals
FEATURES OF JIT
(a) Pull System of Production: As against traditional Push system, here a product is not made
until the customer requests it and components are not made until they are required by the next
production stage.
(b) Minimum Inventory Level of Raw Materials, WIP and Finished Goods: The concept of
just-in-time inventory aims at reducing cost of inventory control and control of purchase and
supplies for production without running any risk of bottleneck being created in the production
flow. The inventory level is aimed at lowering to the absolute minimum and the safety stock is
eliminated.
In a full JIT system, virtually no inventory is held, that is no raw material inventory and no fin-
ished goods inventory is held, but there will be a small amount of WIP, say one tenth of a days
production.
(c) Loyalty and Close Contact with Suppliers: To fulfill the above aims and objectives the
de- livery of components and materials as and when they are needed must have to be ensured.
The suppliers of components and materials are to be in close contact with the buyer so that
no much time is lost between placing of order and actual supplies. On the part of the suppliers
there should be guarantee for supply on time.
On-time delivery should not be the only criteria, the quality of components and materials must
be maintained and prices kept within reasonable limits. Long-term contracts with the supplies
are needed to achieve the objectives.
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(f) Flexible Work Cells: A work cell is a cluster or machine whereby a worker can move easily
to complete the entire production work all by himself. JIT system requires the manufacturing
work cells to be very flexible so that it can be changed as and when required as per customer
needs and specification without involving much time and cost.
(g) Production Line: Production process must be grouped by production line rather than by func-
tion in order to eliminate inventory movements between workstations and to speed flow.
(h) KANBAN Authorisation: A simple, infallible information system is required. Originally, the
Japanese used a system based on cards which were called KANBANS. There would be a small
container of components between each workstations with a Kanban card resting on top. When
the container was taken for use by the following workstation the card would be taken off and
left behind. This would be act as a trigger for the previous workstation to produce another
container of that component. Nowadays, computer systems are likely to be used instead of
cards but the basic simplicity of the system should not change.
(i) Zero Defects Policy: A get it right on first time approach and an aim of zero defects. Defect
cause breakdowns in the value chain, they stop the flow of production, create expensive rework
and lead to late deliveries to customers.
(j) Preventive Maintenance: For regularity in production flow, this system culminates the policy
of preventive maintenance i.e. to take measures to prevent the breakdown or defects before
they actually occur. For e.g. Painting the machines to prevent rust.
(k) Continuous Improvement KAIZEN: Kaizen is the Japanese term for continuous improve-
ment in all aspects of a companys performance at every level. As per JIT policy, an organization
must always be keen to innovate means to improve quality and reduce cost through regular
ef- forts and active participation of workers ideas.
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5. Give Back flush Costing Journal Entries in respect of the following transaction
i. Raw material purchased Rs 3,20,000
ii. Materials placed into production
iii. Actual Direct Labour Cost Rs 50,00
iv. Actual Overhead Cost Rs 4,50,000
v. Conversion Cost Applied Rs 4,70,000
vi. All units were completed and sold
vii. Variance is recognized
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6. Kumar Enterprises has decided to adopt JIT policy for materials. The following
effects of JIT are identified:
To implement JIT, the company has to modify its production and material receipt facilities at a
capital cost of ` 6,00,000. The new facilities will require a cash operating cost of ` 48,000 p.a.
Raw material stock holding will be reduced from ` 28,00,000 to ` 8,00,000.
The company can earn 15 % on its long term investments.
The company can avoid rental expenditure on storage facilities amounting to ` 30,000 p.a. Prop-
erty taxes and insurance amounting to ` 12,000 will be saved due to JIT programme.
Presently there are 7 workers in the stores department at a salary of ` 3,000 each per month.
After implementing JIT scheme, only 2 workers will be required in this department. Of the bal-
ance 5 workers, 3 will be transferred to other departments, while 2 workers employment will
be terminated.
Due to receipt of smaller lots of raw materials, there will be some disruption of production.
The costs of stock out will be ` 3,40,000 in the first year only. This Stock out costs can be
brought down from the second year onwards.
Determine the financial impact of the JIT policy. Is it advisable for the company to implement the JIT
policy.
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COSTS `
Interest on capital for modifying production facilities (` 6,00,000 x 15%) 90,000
Operating Costs of new production facilities 48,000
Stock out Costs (first year only)
Total 3,40,000
4,78,000
BENEFITS `
Interest on investments for released funds
( ` 28,00,000 ` 8,00,000 )x 15% 3,00,000
Savings in salary of 2 workers terminated
(` 3,000 x 12 months x 2) 72,000
Savings in Rental Expenditure 30,000
Savings In Property Tax and Insurance 12,000
Net Loss due to JIT policy ( first year) 64,000
Total 4,78,000
2. X Video Company sells package of blank video tapes to its customer. It purchases video tapes
from Y Tape Company @ ` 140 a packet. Y Tape Company pays all freight to X Video Company.
No incom- ing inspection is necessary because Y Tape Company has a superb reputation for
delivery of quality merchandise. Annual demand of X Video Company is 13,000 packages. X
Video Co. requires 15% an- nual return on investment. The purchase order lead time is two
weeks. The purchase order is passed through Internet and it costs ` 2 per order. The relevant
insurance, material handling etc ` 3.10 per package per year. X Video Company has to decide
whether or not to shift to JIT purchasing. Y Tape Company agrees to deliver 100 packages of
video tapes 130 times per year (5 times every two weeks) instead of existing delivery system
of 1,000 packages 13 times a year with additional amount of ` 0.02 per package. X Video Co.
incurs no stock out under its current purchasing policy. It is estimated X Video Co. incurs stock
out cost on 50 video tape packages under a JIT purchasing policy. In the event of a stock out, X
Video Co. has to rush order tape packages which costs ` 4 per package.
Comment whether X Video Company should implement JIT purchasing system.
Z Co. also supplies video tapes. It agrees to supply @ ` 136 per package under JIT delivery
system. If video tape purchased from Z Co., relevant carrying cost would be ` 3 per package
against ` 3.10 in case of purchasing from Y Tape Co. However Z Co. doesnt enjoy so sterling
a reputation for quality. X Video Co. anticipates following negative aspects of purchasing tapes
from Z Co. :
(a) To incur additional inspection cost of 5 paisa per package.
(b) Average stock out of 360 tapes packages per year would occur, largely resulting from
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Solution
Comparative Statement of cost for purchasing from Y Co Ltd under current policy &
JIT
Comments:
The comparative costs are as follows,
Under current policy ` 18,32,076.00
Under purchase under JIT ` 18,21,925.10
Under purchase from Z Co Ltd ` 17,79,460
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Required
Solution
Statement Showing Ks Life Cycle Cost (80,000 units)
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Decision
Reducing the price by 10% will decrease profit by 33% (`15,60,000). Therefore, PGIL should not cut
the price.
2. Y-Connections, China based firm, has just developed ultra-thintablet S-5 with few features like
the ability to open two apps at the same time. This tablet cost ` 5,00,000 to develop; it has
undergone extensive research and is ready for production. Currently, the firm is deciding on
plant capacity, which could cost either ` 35,00,000 or ` 52,00,000. The additional outlay
would allow the plant to increase capacity from 500 units to 750 units.The relevant data for the
life cycle of the tablet at different capacity level are as under:
Required:
Advise Y Connections, regarding the optimal plant capacity to install. The tablets life cycle is
two years. Ignore time value of money.
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Solution
Workings
Statement Showing Variable Manufacturing Cost per unit
(000) ` / unit
Particulars of Costs 500 units 750 units
Sales 39,800 52,200
(`79,600 x 500) (`69,600 x 750)
Less:Variable Mfg. Cost 19,900 29,850
(`39,800 x 500) (`39,800 x 750)
Less:Variable Selling Cost 3,980 5,220
(`39,800 x 0.1) (`52,200 x 0.1)
Add: Salvage Value 625 900
Less: Cost of Plant 3,500 5,200
Net Profit 13,045 12,830
Development cost is sunk and is not relevant.
Advice
Based on the above Expected Profit statement which is purely based on financial
considerations firm may go for high price low volume i.e. 500 units level. However, non- financial
considerations are also given due importance as they account for actions that may not contribute
directly to profits in the short run but may contribute significantly to profits in long run. Here,
it is important to note that life cycle of product is two years and there is no significant difference
between the profits at both levels. In this scenario firm may opt the plant having high capacity not
only to increase its market share but also to establish a long term brand image.
Problem-22
Great Eastern Appliances Ltd. (GEAL) manufactures consumer durable products in a very
highly competitive market. GEAL is considering launching a new product Kitchen Care
into the market and gathered the following data:
Expected Market Price `5,000 per unit
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Required
(i) Calculate the expected total labour hours over the life time of the product Kitchen
Care.
(ii) Profitability of product Kitchen Care that GEAL will earn over the life time of
the product.
(iii) Average target labour cost per unit over the life time of the product if GEAL requires
average profit of ` 800 per unit, to achieve its long term objectives.
NOTE
250 -0.3219 = 0.1691, 249 -0.3219 =0.1693
Solution
(i) Calculation of Total Labour Hours over the Life Time of the Product
Kitchen Care
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ABC Ltd manufactures and sells seven products. The following data relates to the
latest period:
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Nicefit manufactures ready made garments by a simple process of cutting the clothes in
various shapes and then sewing the corresponding pieces together to form the finished
product.
The sewing Department and the cutting department report to the production manager who
along with Engineering Manager reports to the Director-Manufacturing. The Sales Manager,
Publicity Manager and the Credit Manger report to the Director-Marketing, who along with
Direct-Manufacturing reports to the Managing Director of the company.
The Accounts Department reports the following for the last quarter of 2012:
Budgeted Actual
(`) (`)
Bad debt Losses 5,000 3,000
Cloth used 31,000 36,000
Advertising 4,000 4,000
Audit fees 7,500 7,500
Credit reports 1,200 1,050
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Solution
Responsibility Accounting Reports
For the Production Manager
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8,000 8,000
1,200 1,050 150 (F)
5,000 3,000 2,000 (F)
14,200 12,050 2,150 (F)
50,200 48,950 1,250 (F)
NOTE
F denotes favourable variance while A denotes adverse variance.
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Sterling Works Ltd. has at the factory three production Departments, Machine Shop, Fabrication and
Assembly which are the responsibility of the shop Superintendent. The shop superintendent along
with Materials Manager, Planning Superintendent and Maintenance Engineer report to the Works
Manager at the factory. The office administration, sales and publicity come under the sales Manager
who along with the Works Manager report to the Managing Director of the Company. The following
data relating to a months performance are culled out from the books of the company:
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(i) Treating the Machine shop, Fabrication and Assembly as Cost Centres, prepare Cost Sheets
for each centre with the help of this addition information:
The shop superintendent devotes his time amongst Machine shop, fabrication and
Assembly in the ratio 4 : 3 : 4. Other Factory Overheads are absorbed on the basis of Direct
Labour in each Cost centre.
Office, Administration, Selling and Distribution Overheads are borne equally by the Cost
Centres.
(ii) Treating Machine shop, Fabrication and Assembly as Responsibility Centres prepare a
Responsibility Accounting report for the shop Superintendent.
Solution
(i) Cost Sheet for Machine Shop, Fabrication and Assembly Treating them as Cost
Centres
& Distribution
Overheads (W. N. 2)
Total Cost 11,010 11,035 9,710 9,837 10,620 10,696
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(ii) Responsibility Accounting Reports for The Machine Shop, Fabrication &
Assembly as Reasonability Centres
B. Fabrication
Material 460 470 10 A
Labour 600 620 20 A
Utilities 560 530 30 F
Total B 1,620 1,620 -----
C. Assembly
Materials 760 800 40 A
Labour 720 730 10 A
Utilities 470 410 60 F
Total C 1,950 1,940 10 F
Total (A+B+C) 5,590 5,600 10 A
NOTE
As shop superintendents office salaries and expenses included his salary also, it has been
assumed that these are not controlled by him, hence not included.
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Raw materials orders are placed the day the quantity on hand falls below the reorder point.
BIMLs suppliers are very trustworthy so that the given lead times are reliable.
The outstanding orders for raw materials A and C are due to arrive on the 10th and 4th
working day of the 6th period, respectively. Payments for all raw material orders are remitted
by the 10th day of the delivery.
Required
Determine the following items for raw materials A, B, and C for inclusion in the 6th period
report to management:
(i) Projected quantities (in Kg) to be issued to production.
(ii) Projected quantities (in Kg) ordered and the date (in terms of working days) the order is to be
placed.
(iii) The projected inventory balance (in Kg) at the end of the period. (iv) The payments for
purchases with due date.
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NOTE
Based on this experience and the projected sales, the BIML has budgeted production
of 48,000 units of X and 36,000 units of Y in the sixth period.
X= 52,500 40% + 45,000 18,000 = 48,000
Y = 27,000 40% + 42,000 16,800 = 36,000
Production is assumed to be uniform for both products within each four-week period.
(ii) / (iii)
Projected Inventory Activity and Ending Balance (Kg)
Particulars A B C
Average Daily Usage 6,600 1,200 2,700
Beginning Inventory 96,000 54,000 84,000
Orders Received:
NOTE
Ordered 90,000 Kg of A on fourth working day.
Order for 90,000 Kg of A ordered during fifth period received on tenth working day.
Order for 90,000 Kg of A ordered on fourth working day of sixth period received on four-
teenth working day.
Ordered 30,000 Kg of B on eighth working day.
Order for 60,000 Kg of C ordered during fifth period received on fourth working day.
No orders for C would be placed during the sixth period.
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Calculation of Variances:
Since all the selling expenses have been related to sales units, only one variance can be calculated by
comparing the standard and actual selling costs as is shown in the schedule below:
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Illustration 22
X Manufacturing company takes over sales from the Selling Agents. In the first month of operation
of direct sales, the following costs have been incurred. Prepare the actual percentage of selling
cost on total sales, compare with the standard selling cost.
Compute the variances and offer your comments about the standards, which are based on actual for
the previous year, and performance of the Zonal offices.
1% 1.25% 1% 0.9% 1% 1%
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Comments : The above table shows that except for southern India and North western India
Zonal offices, actual sales expenses widely differ from budgeted selling expenses. However, the fol-
lowing points have to be noted:
(i) The standards are based on the actual expenses for the last year. Truly speaking they are not
standards and, therefore, they cannot provide realistic guidance for exercising control over
the selling expenses. Variances may be there because current years conditions might have
completely changed or circumstances which were applicable last year may have ceased to
become applicable now.
(ii) The causes of the variances cannot be correctly spelt out in the absence of details about the
Standard selling expenses. The details of actual selling expenses have been given but the
details of standard selling expenses have not been given. Salesmens salaries is a fixed charge,
variance may be there on account of increase in their salaries. Sales travelling expenses are of
a semi-variable nature. Less volume of sales might have resulted in less recovery of fixed sales
travelling expenses such as railway freight, hotel charges.
Problem-39
A company following standard marginal costing system has the following interim trading statement
for the quarter ending 30th June, 2013, which reveals a loss of ` 17,000, detailed below:
`
Sales 4,99,200
Closing Stock (at prime cost) 18,000
Direct Material 1,68,000
Direct Labour 1,05,000
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Required
Analyse the above and report to the management giving the reasons for the loss.
Solution
Working Note
*Equivalent units
(1,400 units / 80%)
Variable Overheads `42,000 30
1,400units
Manufacturing Cost (Variable) 210
Distribution Overheads `19,200 16
1,200units
Total Variable Cost 226
Contribution 190
Fixed Cost Factory Administration ` 1,20,000
Selling ` 40,000
` 40,000
2,00,000
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Natural Spices manufactures and distributes high-quality spices to gourmet food shops and top
quality restaurants. Gourmet and high-end restaurants pride themselves on using the freshest,
highest-quality ingredients.
Natural Spices has set up five state of the art plants for meeting the ever growing demand. The firm
procures raw material directly from the centers of produce to maintain uniform taste and quality.
The raw material is first cleaned, dried and tested with the help of special machines. It is
then carefully grounded into the finished product passing through various stages and packaged
at the firms ultraclean factory before being dispatched to customers.
The following variances pertain to last week of operations, arose as a consequence of managements
decision to lower prices to increase volume.
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Solution
(i) Gourmet and high-end restaurants recognises Natural Spices on the basis of its high quality
of spices. Therefore, quality is most critical success factor of Natural Spices. There are other
factors which cannot be ignore such as price, delivery options, attractive packing etc. But
all are secondary to the quality.
(ii) Deliberate action of cutting price to increase sales volume indicates that firm is intending
to expand its market to retail market and street shops which is price sensitive.
Problem-1
A public company responsible for the supply of domestic gas has been approached by several
prospective customers in a rural area adjacent to a high-pressure main. As a condition of its
license to operate as a utility, the company is obliged to respond positively to current needs
provided the financial viability of the company is not put at risk. New customers are charged
` 250 each for connection to the system.
Once a meter is installed, a standing charge of ` 10 per quarter is billed. Charges for gas are
levied at ` 400 per 1,000 metered units.
A postal survey of the area containing, according to the rating authority, 5,000 domestic units,
elicited a 40% response rate. 95% of those who responded confirmed that they wished
to become gas users and expressed their willingness to pay the connection charge.
Although it is recognized that a small percentage of those willing to pay for connection may
not actually choose to use gas, it is expected that the average household will burn 50 metered
units per month. There will be some seasonal differences.
The companys marginal cost of capital is 17% pa and supplies of bulk gas cost the company
` 0.065 per metered unit.
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Determine what the maximum capital project cost can be to allow the company to provide the
service required if wastage of 15% has to be allowed.
Solution
Working Notes
Cash Inflow
(`)
Rent (1,900 4 Quarters `10) 76,000
Add: Consumption Charge (11,40,000 `0.4) 4,56,000
Less: Cost of Company (13,41,176 `0.065) 87,176
Cash Inflow p.a. 4,44,824
One Time Connection Charge = `4,75,000 (`250 1,900 customers)
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Problem-13
Eastern Company Ltd. has two Divisions namely Casnub Bogie Division (CBD) and Wagon Di-
vision (WD). CBD manufactures Casnub Bogies and WD manufactures BOBN type of Wagons.
To manufacture a Wagon WD needs four Casnub Bogies. CBD is the only manufacturer of the
Casnub Bogies and supplies both WD and outside customers. Details of CBD and WD for
the coming financial year 2014-15 are as follows:
CBD WD
Fixed Costs (`) 9,20,20,000 16,45,36,000
Variable Cost per unit (`) 2,20,000 4,80,000*
Capacity per month (units) 320 12
Market research has indicated that the demands in the market for Eastern Company Ltd.s
products at different quotations are as follows-
For Casnub Bogies: Quotation price of `3,20,000 no tender will be awarded, but demand will
increase by 30 Casnub Bogies with every `10,000 reduction in the unit quotation price below
`3,20,000.
For Wagons: Quotation price of `17,10,000 no tender will be awarded, but the demand for
Wagons will be increased by two Wagons with every `50,000 reduction in the unit quotation
price below `17,10,000.
Required
(i) Calculate the unit quotation price of the Wagon that will maximise Eastern Company
Ltd.s profit for the financial year 2014-15.
(ii) Calculate the unit quotation price of the Wagon that is likely to emerge if the divisional
managers of CBD and WD both set quotation prices calculated to maximise divisional
profit from sales to outside customers and the transfer price is set at market selling
(quotation) price.
NOTE
If P = a bQ then MR = a 2bQ
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(ii) At CBD the Divisional Manager would ensure that Divisional Marginal Revenue should
be equal to Divisions Marginal Cost so that Profit can be Maximum.
MR of a Casnub Bogies = MC of Manufacturing a Casnub Bogies
3,20,000 2(10,000/ 30) Q = 2,20,000
Q = 150 units
Selling Price of a Casnub Bogie P is
P = 3,20,000 (10,000/ 30) 150
= `2,70,000
CBD will earn Maximum Profit when it will Quote `2,70,000 to the Outside Market.
Since, Outside Market Quotation is Transfer Price as well, so Transfer Price to WD will be
`2,70,000 and it forms part of WDs Marginal Cost.
At WD, Division Manager would ensure that Divisional Marginal Revenue should be equal
to Divisions Marginal Cost so that Profit can be Maximum.
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Q = 3.00 units
Quotation Price of a Wagon P should be:
P = `17,10,000 25,000 3.00
= `16,35,000
The unit Quotation Price of Wagon that emerges as a result of Market Based Transfer
Pricing is `16,35,000.
Amount (TWD)
Direct Material* 440.00
Direct Labour (3 hours) 120.00
Variable Overheads 40.00
(*) purchased from domestic market.
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The following are the direct / indirect tax structure in India and Taiwan:
Required
From the above information, Calculate:
NOTE
i. For Duty and Tax calculation, consider arms length price only.
ii. Ignore the DTAA and other tax provisions.
iii. Conversion Rate 1 INR = 0.50 TWD
Solution
(i) The minimum price at which CECDC can transfer component LX to CIPL is Variable
Cost per unit plus Corporate Tax attributable to per unit of component LX
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Amount (`)
Market Price of component LX (Indian Market) 1,490.00
Less: Import Duty (750 TWD 2 10%) 150.00
Less: Shipment Cost 10.00
Total 1,330.00
Maximum Transfer Price that CIPL can pay to CECDC for every unit of component LX is
`1,330 or 665 TWD.
(iii) Profitability Statement for the Group (TWD 000)
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Working Notes
W.N.-1
Corporate Tax Attributable to per unit of Component LX (TWD)
Amount
Profit per unit (750 TWD 440 TWD 120 TWD 40 TWD 30 TWD) 120
Corporate tax per unit (25% on 120 TWD) 30
W.N.-2
Calculation of Corporate Tax paid by CIPL (` 000)
Amount
Sales Revenue (1,75,000 units `11,000) 19,25,000
Less: Variable Costs:
Component LX (3,50,000 units 750 TWD `2) 5,25,000
Other Variable Costs (1,75,000 units ` 6,315) 11,05,125
Less: Import Duty 10% of (3,50,000 units 750 TWD `2) 52,500
Less: Shipment Cost (3,50,000 units `10) 3,500
Less: Fixed Overheads
Office and Administrative Overheads 11,800
Selling and Distribution Overheads 25,800
Taxable Profit 2,01,275
Tax Payable @30% 60,382.50
W.N.-3
Calculation of Corporate Tax paid by CECDC (TWD)
Amount
Profit per unit (750 TWD 440 TWD 120 TWD 40 TWD 30 TWD) 120
No. of units to be sold 5,00,000
Total Profit ( 120 TWD 5,00,000 units) 6,00,00,000
Corporate Tax @ 25% 1,50,00,000
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Required
(i) Prepare a financial appraisal for the impact of the proposal by the Japanese
manufacturer to supply components for Printers and Scanners to Indian subsidiary of
SCI. [Present your solution in Indian Currency and its equivalent.]
(ii) Identify other issues that would be considered by the SCI in relation to this proposal.
NOTE
While doing this problem use the only information provided in the problem itself and ignore
the actual taxation rules or treaties prevails in the above mentioned countries
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(i) Impact of the Proposal by the Japanese Manufacturer to Supply Components for
Printers and Scanners to the Indian Subsidiary of the SCI.
On SCI Group
Particulars Amount (`)
Saving from Indian Subsidiary 60,12,270
Loss from Chinese Subsidiary 48,17,000
Net Benefit to SCI Group 11,61,270
From the above analysis it can be seen that the proposal from the Japanese manufacturer
in India is beneficial for the SCI as it give a net benefit of ` 11,61,270.
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Solution:
Reconciliation of Operating Profit from 2013-14 to 2014-15
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Problem-1
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.
Solution
Quality of Products with Appropriate Dimension
Problem-2
Classify the following items under appropriate categories of equality costs viz. Prevention
Costs, appraisal Cost, Internal Failure Costs and External Failure costs:
(i) Rework
(ii) Scrap
(iii) Warranty Repairs
(iv) Revenue loss
(v) Repair to manufacturing equipment
(vi) Discount on defective sale
(vii) Establishment of quality circles
(viii) Packaging inspection
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Problem-3
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.
Solution
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Problem-4
State with a brief reason whether you would recommend an activity based system of costing
in each of the following independent situations:
(i) Company K produces one product. The overhead costs mainly consist of depreciation.
(ii) Company L produces 5 different products using different production facilities.
(iii) A consultancy firm consisting of lawyers, accountants and computer engineers provides
management consultancy services to clients.
(iv) 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.
Solution
Sl. No Description Recommend Reasons
ABC (Yes / No)
(i) K produces one prod- No One product situation. For alloca-
uct. Overhead is mainly tion of overhead, ABC is not required.
depreciation.
ABC for cost reduction not benefi-
cial since most of the overhead is de-
preciation.
(ii) L produces 5 different Yes Multi product situation. ABC is re-
products with different quired for allocation of overhead.
facilities. ABC is necessary for pricing.
Cost drivers are likely to be differ-
ent.
Cost reduction may be possible.
Production facilities are different.
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Solution
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Required
Recommend key changes vital to MILs planning and control system to support the adoption
of Kaizen Costing Concepts.
Solution
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 as-
sumes stability in the current manufacturing process and standards are set keeping the nor-
mal 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 manu-
facturing 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.
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Problem-7
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.
Solution
(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.
(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 employees 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.
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Problem-8
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 companys 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.
Solution
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.
Problem-9
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.
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Solution
Classification of Items under Cost Reduction (CR)/ Cost Control (CC)
Problem-10
Required
State the primary activities as per Porters Value Chain Analysis in the value chain of ABC Ltd
with brief description.
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Problem-11
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 Porters five forces model, bargaining power of buyers does influence the
profitability of an industry or market.
(iv) Value chain analysis in the strategic framework consists of single cost driver concept.
Solution
(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.
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6. Classify the following business activites 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
(ix) Communication, pricing and channel management - Primary
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Problem-12
Indian Petrons Ltd. (IPL) is a leading manufacturing company. Under increasing pressure to
reduce costs, to contain inventory and to improve service, IPLs 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 Departments decision. He said:
Weve 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. Brians view point correct and why?
Solution
JIT Inventory System
For successful operation of JIT inventory system, the suppliers chosen must be willing
to make frequent deliveries in small lots. Rather than deliver a weeks or a months 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. Brians doubt is correct on successful implementation of JIT System.
Problem-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.
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Problem-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. Bs success is crucial for
the companys survival in the long term.
(iii) C is a new product to the company and the market. It has an inelastic market. There
needs to be an assured profit to cover high initial costs and the usual sources of capital
have uncertainties blocking them.
(iv) D is a perishable item, with more than 80% of its shelf life over.
Solution
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Problem-3
State the most appropriate pricing policy to be adopted in the following independent situa-
tions:
(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.
Solution
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Problem-3
Required
Identify the possibilities of introducing a Zero Based Budgeting system for Division T, A and RD.
Solution
Discretionary costs are those that are incurred, typically each year, in an amount that
is approved as part of the normal budget process. However, there is no clear relation-
ship between the volume of services and the amount of cost that must be incurred. Manager
must decide and justify the level that is deemed to be appropriate. This justification is to be
made a fresh without making reference to previous level of spending in his/her department.
Zero based budgeting is undoubtedly most effective in terms of discretionary costs. The
bottom line of a zero based budgeting is that it is important to understand what types
of objectives are being accomplished by discretionary cost centers and what resources
being devoted to accomplishing various objectives. This will allows a prioritization,
so that organization can evaluate the likely impact of substantial increase or decrease
in the resources allocated to the discretionary center.
Accordingly, ZBB has extensive potential application to the division T, A and RD.
Problem-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.
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Solution
(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 years
budget figures with expected change in activity level and corresponding adjustment in
the cost and prices. But under Zero Base Budgeting (ZBB) the estimations or projections are
converted into figures. Since, sales manager is unable to substantiate his expectations into
figures so Traditional Budgeting would be preferred against Zero Base Budgeting.
(iii) Zero Base Budgeting would be appropriate as ZBB allows top-level strategic goals
to be implemented into the budgeting process by tying them to specific functional areas
of the organization, where costs can be first grouped, then measured against previous
results and current expectations.
(iv) Zero Base Budgeting allocates resources based on order of priority up to the spending
cut-off level (maximum level upto which spending can be made). In an organisation
where resources are constrained and budget is allocated on requirement basis, Zero
Base Budgeting is more appropriate method of budgeting.
Transfer Pricing -
Problem-16
Fox-2-Tec Ltd (F2TL) has Division Dx and Division Dz with full profit responsibility. The Divi-
sion 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 sup-
plier 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
F2TLs new managing director agrees for internal transfer if an acceptable transfer price can
be worked out. Accordingly, he requires solution of following questions:-
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Solution
(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 outside sells
= ` 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 Suppliers 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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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.
Question-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 prin-
ciples 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.
Question-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. 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.
(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.
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Question-4
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.
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Answer
Inter-firm Comparison
Question-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.
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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.
Problem-1
Hard Rock Coconut is an exclusive resort located in a famous Island of Pacific Ocean that
vows to isolate its guests from the hustle and bustle of everyday life. Its leading principle is all
contemporary amenity wrapped in old-world charisma. Each of the resorts 18 villas has a
separate theme like Castle, Majestic, Ambassador, Royal Chateau, Coconut, Lemon, Balinese
etc and guests often ask for a specific villa when they make reservations. Villas are Ideal for
families or friends travelling together and these villas feature luxurious accommodation
spanning two floors. Since it is located within a 300-acre estate on white sand beach, the
resort offers its guests a wide variety of outdoor activities such as horseback riding, hiking,
diving, snorkeling, sailing, golf and so on. Guests could also while away the day relaxing in the
pool and availing themselves of the resorts world-famous spa Hard Coco Spa. The din-
ing room, which only has three tables for the public, is acceptable proud of its 4-star rating.
Required
Develop a Balanced Scorecard for Hard Rock Coconut. It is sufficient to give two measures
in each of the four perspectives.
Solution
The following is a possible Balanced Scorecard for Hard Rock Coconut
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ABC Ltd. has supermarkets located in most towns and cities. Over the last few years, profits
have fallen. ABC Ltd. has recognized that customer care has been paid insufficient attention.
ABC Ltd. has now realized the importance of the customer experience at its supermarkets.
ABC Ltd. has introduced a loyalty card scheme that rewards customers with discount vouchers
based on their spend and buying patterns at supermarkets in an attempt to earn the loyalty
of its customers.
The management of ABC Ltd. is considering the introduction of a Balanced Scorecard
approach to manage the performance of its stores.
Required
Recommend an objective and a suitable performance measure for each of three non-financial
perspectives of a Balanced Scorecard that ABC Ltd. could use to support its new strategy of
improving the customer experience. You should state three perspectives, an objective and
a performance measure for each one of the three perspectives.
Solution
Internal Business For customers to pay for goods Time spent by customers in queuing
in a reasonable time. to pay for products at a check out.
Perspectives
Or Or
Paying proper attention to the Time spent by customers care ex-
customers and their product en- ecutives in handling customers que-
quiries. ries.
Or Or
Provide necessary support to No. of times home delivery made.
the existing loyal customers.
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Problem-3
Classify the following measures under appropriate categories in a Balanced Scorecard for
a banking company which excels in it s home loan products:
(i) A new product related to life insurance is being considered for a tie up with the
successful housing loan disbursements.
e.g. every housing loan applicant to be advised to take a life policy or compelled to take
a fire insurance policy.
(ii) How different sectors of housing loans with different interest rates have been sanctioned,
their volumes of growth in the past 4 quarters.
(iii) How many days are taken to service a loan, how many loans have taken longer, what
additional loans are to be released soon, etc.
Solution
Problem-4
Your Bank Ltd., was established on the 30th September, 1940 under the provisions of
Co- operative Societies Act by the eminent professionals to encourage self-help, thrift, coop-
eration among members. Bank was issued Banking License under Banking Regulation Act,
1949 on October 25, 1986 to carry out the Banking Business within the national capital and
since then the Bank has been growing continuously. At present, Bank has large number of
membership of individuals from different sections. The Bank has 12 branches in the NCT
of Delhi. Bank offers traditional counter service. Opening hours are designed to coincide
with local market days.
Board of Directors were worried from growing popularity of new style banks. These banks offer
diverse range of services such as direct access to executive management, a single point of
contact to coordinate all banking needs, appointment banking to save time, free online
banking services 24/7, free unlimited ATM access etc.
It has now been decided that the bank will focus on What Customers Want and will use
a balanced scorecard to achieve this goal.
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Solution
Internal Business Process Perspective
Objective: Cross-sell Products
Measure: Products Purchased per customer
Reason: Cross-selling, or encouragement customers to purchase additional products e.g. insur-
ance, forex etc. is a measure of customer satisfaction. Only if a service is perceived as highly
satisfactory the service would be repeated/ additional products or services would be ac-
cepted.
Learning and Growth Perspective
Objective: Increase the Number of New Products or Services Sold
Measure: Number of Customers Buying the New Products/ New Services
Reason: Long term financial success requires bank to create new products / services (e.g.
internet banking, ATM access) that will meet emerging needs of current / future custom-
ers such as 24/7 banking.
Customer Perspective
Objective: Increase Customer Loyalty
Measure: Number of Accounts Closed or Closure Request Received
Reason: Customer loyalty describes the extent to which bank maintains durable relations to
its customers. The share of existing customers should have a high importance as it indicates
about image and reputation. Closure request is not a good sign for bank. Bank should investigate
reasons for the same and take appropriate actions to improve services offered to retain
customers.
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Problem-5
Standard Telecom Ltd. is a leading cellular service provider having a global presence. It aims
to be the most innovative and trusted telecom company in the world. To achieve this aim, it is
constantly working on its overall functioning. It is trying to adopt best managements prac-
tices in the world. Following are some information related to the companys performance
for a particular period:
Required
Evaluate the performance of the company using Balance Scorecard approach.
Solution
The balanced scorecard is a method which displays organisations performance into four dimen-
sions namely financial, customer, internal and innovation. The four dimensions acknowledge the
interest of shareholders, customers and employees taking into account of both long-term and
short-term goals. The detailed analysis of performance of the company using Balance Score-
card approach as follows:
(i) Financial Perspective: Operating ratio and average revenue will be covered in this
prospective. Company is unable to achieve its target of reducing operating ratio to
50% instead it has increased to 60%. Company is required to take appropriate steps to
control and manage its operating expenses. Average revenue per user has increased from
` 210 to ` 225 but remains short of targeted ` 250. This is also one of the reasons of
swelled operating ratio. Company can boost up its average revenue per user either by
increasing the price of its services or by providing more paid value added services.
(ii) Customer Perspective: Service complaints will be covered under this perspective. The
company had set a target of reducing unresolved complaints by 20% instead
unresolved complaints have risen by 10%[(27,500-25,000)/(25,000) 100]. It shows
dissatisfaction is increasing among the consumers which would adversely impact the
consumers general perception about the company and company may lose its
consumers in long run.
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Problem-6
Fitness Solution is a family owned fitness club, founded in 2010 by Peter and Albert with tradi-
tional style equipment. Club commenced operations in February 2011 within a shopping mall
so that members after working out, can conveniently shop, dine, pick up their children from
enrichment classes or go to the cinema.
Peter and Albert, the owners, pride themselves for providing a customized / tailored pro-
gram by taking into account a persons medical history, present fitness level, fitness goals, fitness
interests and offer many other small amenities that might be difficult to get in a larger Fitness
Centre. They believe
Each individual is unique and requires a specialized program plan which should be customized
and tailored to his/her needs.
They have a number of loyal members even though they offer the traditional style equipment.
Peter and Albert take care of most of the routine operations, along with a small permanent
staff, and temporary staff.
Required
(i) Identify at least three Critical Success Factors for Fitness Solution.
(ii) Construct a Balance Scorecard for Fitness Solution. (2 measures for each of the 4
perspectives are sufficient)
Solution
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Solution
Statement Showing Balance Scorecard Perspectives for Different Business Sec-
tors
Health Care Airlines Banking
Weekly Patient Complaints Internal Operating --- ---
Efficiency
Patient Satisfaction Survey Customer Service & --- ---
Satisfaction
Flight Cancellation Rate --- Customer Service ---
& Satisfaction
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Problem-8
In the context of a balanced scorecard, identify the perspectives of the following independent
situations:
Solution
Identification of Perspectives of Independent Situation - Balance Scorecard
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Objective function:
Z = x1 + 5x2 (1)
Subject to:
6x1 + 8x2 12 (2)
5x1 +15x2 10 (3)
x1, x2 10 (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.
Required
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.
(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?
Solution
(i) Working
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All the Slack Variables (and thus Surplus Variables as well) must form part of the initial
solution mix (basis).
The table must contain as many rows as there are constraints.
The elements in the columns of variables appearing in the basis must form a unit vector.
If s2 is included in the basis, the elements of the s2 will be 0 and 1 and thus not a unit vec-
tor. This is contrary to the non-negativity restriction i.e. all variables must have a positive
value. This problem is solved by adding an Artificial Variable (denoted by Ai ) to the equation,
that is, a variable that has a positive value. Artificial variables do not represent any quantity
relating to the decision problem and must not be present in the final solution (if at all they
do, it represents a situation of infeasibility). Accordingly, in the initial tableau we will place A2
along with s1 to eliminate the impact of them first.
(iv) Working
Subject to:
6x1 + 8x2 + s1 = 12 ................... (2)
5x1 + 15x2 -s2 + A2 = 10 ....................(3)
x1, x2, s1, s2, A2 0 ......................(4)
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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
6 X1 400 1 2/3 2 0 1/3 0
0 S3 400 0 5/3 0 0 -2/3 1
Zj 2,400 6 4 12 0 2 0
Cj - Z j 0 0 -2 0 -2 0
Solution
Workings
C j 6 4 10 0 0 0 Min.
CB Basic Variable Quantity X1 X2 X3 S1 S2 S3 Ra-
tio
0 S1 400 0 4/3 0 1 1/3 0 300
6 X1 400 1 2/3 2 0 1/3 0 600
0 S3 400 0 5/3 0 0 2/3 1 f240
Zj = C Bi Xj 6 4 12 0 2 0
Cj - Zj 0 0 2 0 2 0
(i) Yes, because the given solution has no artificial variables in the basic column.
(ii) Perform one more iteration with X 2:
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Cj - Zj 0 0 2 0 2 0
(iii) Shadow Price is `0, `2 and `0 (or any other given monetary unit) for Constraint 1,
Constraint 2 and Constraint 3 respectively and same has been obtained from row
Cj - Zj .
Let us consider the given iteration is the 2nd one. The first iteration (I1) must have had S2 in-
stead of X1. Row X1 of I2 has been computed by dividing the S2 row of I1 by 3. S2 of I1 (in Identity
Matrix) would have been 1. Now it is 1/3. Working backwards, we multiply row X1 of I2 by 3 to
get Row S2 of I1.
Or
3X1 + 2X2 + 6X3 1,200
Or
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Or
2X1 + 3X2 + 4X3 1,200
Problem-3
Given below is an iteration in a simplex table for a maximization objective linear program-
ming 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.
C j 30 40 20 0 0 0
CB Basic Value of Basic x y z s1 s2 s3
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Solution
(i) Yes, the given solution is optimal because all C j - Zj are less than, or equal to, zero.
C j 30 40 20 0 0 0
CB Basic Value of Basic 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 = C Bi Xj 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.
(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
(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
be prepared to pay for another hour of capacity for these three machines.
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(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.
(Problem-1)
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?
Solution
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 resource avail-
ability at first row (R 1) 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.
Problem-2
In a transportation problem for cost minimization, there are 4 rows indicating quantities de-
manded 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?
Solution
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
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Problem-1
Solution
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 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.
Problem-2
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?
Solution
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.
Problem-3
Answer the following independent situations relating to an assignment problem with a minimiza-
tion 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?
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Solution
(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.
Problem-1
(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
the project duration.
Solution
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Problem-1
State whether the learning curve theory can be applied to .the following independent situa-
tions 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.
(ill) 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.
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(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
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.
(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.
Problem-2
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.
Solution
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
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(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.
Problem-3
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.
Solution
Valid or Invalid
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4. Optimality Test The point of the boundary of NER (or ) should be 0 or No. of lines drawn = Order of should be 0 or +ve
common region is put in the negative for maximum obj or Matrix
Objective function to check the NER should be 0 or positive
maximum / minimum value of minimum Obj
Z.
5. If optimality test Try another boundary point of Iteration by making that Adjustment with uncovered Reallocation by way of loop
not satisfied the common region column as KC, where condition element starting form the cell where is
is not satisfied and the variable most negative
of KC would enter into the
solution
6. No Feasible (Not feasible) When there is an artificial slack Not feasible if no. of line > Not feasible if total availability
Solution variable in optimal solution or order of matrix or Boxing not is not matching with the total
Quantity of basic variables are being done in each row or requirement
all negative column
10. Degeneracy When any of main / basic vari- M + n 1 > No. of allocations
(solution cannot able has quantity = 0 (This would not complete the
(0,y1)
be proceeded Indication of quantity of (u + v) Matrix.
further) basic variable will be 0 can be Introduce e (e 0) to the least
(x2,0) obtained from Replacement cost unallocated independent
(x1,0) ratio of previous iteration, cell
where there is a tie between 2
When any of main variable is 0
minimum Replacement Ratios
in the optimum solution
(Tie to be broken by selecting
any RR).
11. Formulation Objective function & con- Objective and constraints along Matrix showing cost / time in Matrix showing cost / time and
straints with slack / Surplus / Artificial row and columns requirement and availability of
slack variable and their co- each column and row respec-
efficients tively.
13. Conditional Remove that row and column Allocate by way of loop to the
Allocation and apply steps on remaining conditional cell.
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Relevant Costing
Relevant Cost Irrelevant Cost
Future cost influencing a decision. Varies from situation to situation & cant Cost which are not influenced by any decision and thus have no impact on any decision.
last longer, applicable only for short term. In opportunity approach opportunity cost is E.g.: Sunk / Historical Cost, Committed FC.
considered as relevant cost. E.g.: Variable cost, Avoidable FC, Opp. Cost.
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START
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
IS THE PROBLEM
MAXIMISATION OR
MINIMISATION?
STOP
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6 Mat. Rework Cost Var.: Labour Idle Time Var.: FOH Idle Time Variance: Market Size Variance: Market Size Variance:
(Std Rewrk cost for Act (Std. Abnrml Idle tm - Act. (Std. Idle Tm - Act. Idle Tm) (Act. Industry Sales ut - (Act. Industry Sales ut -
Output - Act. Rewrk cost) Abnrml Idle tm) x Std x Std FOH/hr Bud. Industry sales ut) x Bud. Industry sales ut) x
Rate/hr Bud share% x Std. Wtd. Avg Bud sales% x Std. Wtd. Avg
Price/ut. Profit/ut.
(For Ab. Idle Time)
7 Mat. Scrap realisation FOH Efficiency Variance: Market Share Variance: Market Share Variance:
Variance: (Std. Hrs for Act. Output - (Act. Share% - Bud. Share%) (Act. Share% - Bud. Share%)
(Act. Scrap Rlsn-Std Scrp Act. Prdctv hrs) x Std. x Act. Industry Sales x Std. x Act. Industry Sales x Std.
Rlsn for Act. Out put) Rate/hr. Wtd. Avg Price/ut. Wtd. Avg Profit/ut.
9 Check: 1= 2+3; 3= 4+5; Check: 1= 2+3 ; 3= 4+5 Check: 1= 2+3 ; 3= 4+5+6 Check: 1= 2+3 Check: 1= 2+3 ; Check: 1=2+3+4 Check: 1= 2+3 ;3= 4+5; Check: 1= 2+3 ;3= 4+5;
8=1+6+7 3= 4+5+6+7 5= 6+7 5= 6+7
A) Emergency Purchase A) Std. Hrs produced is out A) Can vary with output A) Marginal Approach: No A) 3 points analysis. A) Cost is constant A) Product Cost = Variable A) Product Cost = Variable
Effect. put measure for multiple produced, then no VOH Eff. FOH Vol Var. at Std. Cost Cost + Fixed Cost Cost
Additional Price over act. products. Var.
Purchase Price should be B) FOH Ratios: B) Profit Price Variance Period Cost = Selling Cost. Period Cost = Fixed Cost.
charged to Production B) Where no. of employees 1. Vol. Ratio= AO/BO = Sales Price Variance.
Manager. given take Man-Hrs. 2. Cal. Ratio= Act days/Bud B) Margin = Profit = SP-VC- B) Margin =Cont. = SP-VC
B) Single Plan: Closing st. at Days. FC
std price. & MPV on C) Std. Ab. Idle Time is 3. Capa. Ratio= AH/BH in
Purchase Qty. always "0" ; ITV is adverse. act days.
Partial Plan: Closing st. at 4. Eff. Ratio= SH for AO/AH
actual price. & MPV on Qty.
consumed. (1 = 2 x 3 x 4)
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