PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING

QUESTIONS
Limiting Factor
1. List out the basis for deciding the priority of selecting the best product in the different
circumstances stated below:
(i) When maximum sales (in value) is a limiting factor.
(ii) When raw-material is a limiting factor.
(iii) When labour hour is a limiting factor.
(iv) When there is a heavy demand for the product.
Break-even Point (Batches)
2. DRB Ltd. is a leading Home Appliances manufacturer. The company uses just-in- time
manufacturing process, thereby having no inventory. Manufacturing is done in batch size
of 100 units which cannot be altered without significant cost implications. Although the
products are manufactured in batches of 100 units, they are sold as single units at the
market price. Due to fierce competition in the market, the company is forced to follow
market price of each product. The following table provides the financial results of its four
unique products:
D1 D2 D3 D4 Total
Sales (units) 2,00,000 2,60,000 1,60,000 3,00,000
(`) (`) (`) (`) (`)
Revenue 26,00,000 45,20,000 42,40,000 32,00,000 145,60,000
Less: Material Cost 6,00,000 18,20,000 18,80,000 10,00,000 53,00,000
Less: Labour Cost 8,00,000 20,80,000 12,80,000 12,00,000 53,60,000
Less: Overheads 8,00,000 7,80,000 3,20,000 12,00,000 31,00,000
Profit / (Loss) 4,00,000 (1,60,000) 7,60,000 (2,00,000) 8,00,000
Since, company is concerned about loss in manufacturing and selling of two products so,
it has approached you to clear picture on its products and costs. You have conducted a
detailed investigation whose findings are below:
The overhead absorption rate of `2 per machine hour has been used to allocate overheads
into the above product costs. Further analysis of the overhead cost shows that some of it
is caused by the number of machine hours used, some is caused by the number of batches
produced and some are product specific fixed overheads that would be avoided if th e
product were discontinued. Other general fixed overhead costs would be avoided only by
the closure of the factory. Numeric details are summarized below:

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 2 FINAL (OLD) EXAMINATION: MAY, 2019

` `
Machine hour related……………………………………………………………… 6,20,000
Batch related……………………………………………………………………….. 4,60,000
Product specific fixed overhead:
D1…………………………………………………….10,00,000
D2……………………………………………………...1,00,000
D3………………………………………………..…… 2,00,000
D4………..…………………………………………….1,00,000…………. 14,00,000
General fixed overheads………………………………………………………. 6,20,000
31,00,000
The other information is as follows:-
D1 D2 D3 D4 Total
Machine Hours 4,00,000 3,90,000 1,60,000 6,00,000 15,50,000
Labour Hours 1,00,000 2,60,000 1,60,000 1,50,000 6,70,000
Required
(i) Prepare a profitability statement that is more useful for decision making than the profit
statement prepared by DRB Ltd.
(ii) Calculate the break-even volume in batches and also in approximate units for Product
‘D1’.
Flexible Budget
3. XEH Ltd. Had prepared fixed and flexible budget for the financial year 2017-18 as under:
Fixed Budget for full Flexible Budget for 75%
capacity level
(`) (`)
Sales 13,50,000 10,12,500
Direct Material 4,25,000 3,18,750
Direct Labour 1,85,000 1,38,750
Variable Overheads 2,15,000 1,61,250
Semi-Variable
3,65,000 3,23,750
Overheads
Profit 1,60,000 70,000
After the closing of the financial year 2017-18, total actual sales stood at `11,07,000 and
there was a favourable sales price variance of `17,000 (F).

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 3

Required
Prepare a flexible budget for the actual level of sales.
Pareto Analysis
4. The following information is given about the type of defects during a production period and
the frequencies of their occurrence in a spectacle manufacturing company:
Defect No. of items
End Frame not equidistant from the centre 10
Non-uniform grinding of lenses 60
Power mismatches 20
Scratches on the surface 110
Spots / Stains on lenses 5
Rough edges of lenses 70
Frame colours-shade differences 25
Required
Construct a frequency table so that a Pareto Chart can be constructed for the defect type.
Which areas should the company focus on?
Standard Costing
5. Sapporo Manufacturing Co. (SMC) is a leading consumer goods company. The budgeted
and actual data of SMC for the year 2017-18 are as follows:-
Particulars Budget Actual Variance
Sales / Production (units) 2,00,000 1,65,000 (35,000)
Sales (`) 21,00,000 16,92,900 (4,07,100)
Less: Variable Costs (`) 12,66,000 10,74,150 1,91,850
Less: Fixed Costs (`) 3,15,000 3,30,000 (15,000)
Profit 5,19,000 2,88,750 (2,30,250)
The budgeted data shown in the table is based on the assumption that total market size
would be 4,00,000 units but it turned out to be 3,75,000 units.
Required
Prepare a statement showing reconciliation of budget profit to actual profit through
marginal costing approach for the year 2017-18 in as much detail as possible.
Decision Making
6. A company manufactures three components, A, B and C. these components pas s through
machines P and Q. The machine hour capacity of Q is limited to 7,800 hours a month. The

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 4 FINAL (OLD) EXAMINATION: MAY, 2019

company is interested in fulfilling the market demand to retain its market share. The
following information is given:
A B C

Demand (units/ month) 1,200 1,200 1,500

Variable cost (` / unit) 187 215 111
Fixed cost (`/ unit) (at normal capacity utilization) 115 115 55
Hours per unit P 2 2 1½
Q 3 3 1
Component B has to be made by the company. There is a supplier available for
components A and C at ` 280 and ` 161 per unit respectively.
Required
(i) Which component(s) and in what quantities should be purchased to minimize costs?
(ii) From a financial perspective, what do you need to ensure in order to justify your
answer in (i) above?
Cost Plus Pricing
7. The budgeted cost data of a product manufactured by XYZ Co. Ltd. is furnished as below:
Budgeted units to be produced 2,00,000
Variable cost (`) 32 per unit
Fixed cost (`) 16 lacs
It is proposed to adopt cost plus pricing approach with a mark-up of 25% on full budgeted
cost basis.
However, research by the marketing department indicates that demand of the product in
the market is price sensitive. The likely market responses are as follows:
Selling price (` per unit) 44 48 50 56 60
Annual Demand (units) 1,68,000 1,52,000 1,40,000 1,28,000 1,08,000
Required
Analyse the above situation and determine the best course of action.
Transfer Pricing
8. AWB Ltd. has two divisions Division W and Division B. Division W produces product Z,
which it sells to external market and also to Division B. Divisions in the AWB Ltd. are
treated as profit centres and divisions are given autonomy to set transfer prices and to
choose their supplier. Performance of each division measured on the basis of target p rofit
given for each period.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 5

Division W can produce 1,00,000 units of product Z at full capacity. Demand for product Z
in the external market is for 70,000 units only at selling price of `2,500 per unit. To produce
product Z Division W incurs `1,600 as variable cost per unit and total fixed overhead of
`4,00,00,000. Division W has employed `12,00,00,000 as working capital, working capital
is financed by cash credit facility provided by its lender bank @ 11.50% p.a. Division W
has been given a profit target of `2,50,00,000 for the year.
Division B has found two other suppliers C Ltd and H Ltd. who are agreed to supply product
Z.
Division B has requested a quotation for 40,000 units of product Z from Division W.
Required
(i) Calculate the transfer price per unit of product Z that Division W should quote in order
to meet target profit for the year.
(ii) Calculate the two prices Division W would have to quote to Division B, if it became
AWB Ltd. policy to quote transfer prices based on opportunity costs.
Linear Programming
9. The manufacturing company has 100 kg of A, 180 kg of B and 120 kg of C ingredients
available per month. Company can use these materials to make three basic products
namely 5-10-5, 5-5-10 and 20-5-10, where the numbers in each case represent the
percentage of weight of A, B and C respectively in each of products. The cost of these raw
materials are as follows:
Ingredient Cost per Kg. (`)
A 64
B 16
C 40
Inert Ingredients 16
Selling price of these products are `32.60, `34.80, and `36.00 per Kg, respectively. There
is capacity restriction of the company product 5-10-5, so that company cannot produce
more than 30 Kg per month.
Required
Formulate this problem as an LP model to determine the productions (in Kg.) of each
product which will maximise its monthly profit.
Note: Formulate Only
Transportation Problem
10. Coupers Partners a leading CA firm has three managers. Each manager can work up to
176 hours during the next month, during which time three assignments must be completed.
Tax Accounting (TA) Assignment will take 143 hours, Tax Performance Advisory (TPA) will

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 6 FINAL (OLD) EXAMINATION: MAY, 2019

take 154 hours, and Global Compliance & Reporting (GCR) will take 176 hours. The
amount per hour that can be billed for assigning each manager to each assignment is given
below:
Assignment
Manager TA TPA GCR
(`) (`) (`)
C1 1,800 2,250 2,850
C2 2,100 1,950 1,800
C3 2,400 2,100 2,250
Required
Formulate this as a transportation problem and find the optimal solution. Also find out the
maximum total billings during the next month.
Note: A manager may be involved in more than one assignment.
PERT and CPM
11. State the Validity of following statements along with the reasons:
(i) Two activities have common predecessor and successor activities. So, they can have
common initial and final nodes.
(ii) In respect of any activity whether real or dummy, the terminal node should bear a
number higher than the initial node number.
(iii) The difference between the latest event time and the earliest event time is termed as
free float.
(iv) For every critical activity in a network, the earliest start and the earliest finish time as
well as the latest finish time and the latest start time are the same.
(v) The optimal duration of a project is the minimum time in which it can be completed.
(vi) Resource leveling aims at smoothening of the resource usage rate without changing
the project duration.
Simulation
12. Finance Controller of Dunk Limited has drawn the following projections with probability
distribution:
Wages &
Raw Material Other Variable Sales
Overheads
` in 000 Probability ` in 000 Probability ` in 000 Probability
08 – 10 0.2 11 – 13 0.3 34 – 38 0.1
10 – 12 0.3 13 – 15 0.5 38 – 42 0.3

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 7

12 – 14 0.3 15 – 17 0.2 42 – 46 0.4

14 – 16 0.2 46 – 50 0.2
Opening cash balance is `40,000 and fixed cost is estimated at `15,000 per month.
Required
Simulate cash flow projection and expected cash balance at the end of the sixth month.
Use the following single digit random numbers.
Raw Material 431046
Wages & Other Variable Overheads 279189
Sales 066028
Learning Curve
13. Marketing manager of AV Ltd. has conducted a market research on the price-demand
relationship for its consumer durable product ‘K-2’. K-2 is a recently launched product. The
price-demand pattern will be as follows:
Price per unit (`) Demand (units)
11,100 1,000
10,700 2,000
9,600 3,000
8,700 4,000
K-2 is produced in batches of 1,000 units. Production manager of AV Ltd. has also
researched and studied the production pattern and has believe that 50% of the variable
manufacturing cost would have learning and experience curve effect. This learning &
experience curve effect will be continued upto 4,000 units of production at a constant rate.
But after 4,000 units of production, unit variable manufacturing cost would be equal to the
unit cost at the 4 th batch. The manufacturing unit cost of the first batch will be `4,400 of
which only 50% is subjected to learning and experience curve effect. The average unit
variable cost of all 4 batches will be `4,120.
Required
(i) Calculate the rate of learning that has been expected by the Production manager.
(ii) Calculate the price at which AV Ltd. should sell the K-2 in order to maximise its
contribution.
Note
log0.93 = -0.0315, log2 = 0.3010, 2 -0.1047 = 0.9299, 3-0.1047 = 0.8913, 4-0.1047 = 0.8649

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 8 FINAL (OLD) EXAMINATION: MAY, 2019

14. State whether the learning curve theory can be applied to the following indepen dent
situations briefly justifying your decision:
(i) A labour intensive sculpted product is carved from the metal provided to the staff. The
metal is sourced from different suppliers since it is scarce. The alloy composition of
the input metal is quite different among the suppliers.
(ii) Pieces of hand-made furniture are assembled by the company in a far off location.
The labourers do not know anything about the final product which utilizes their work.
As a matter of further precaution, rotation of labour is done frequently.
(iii) Skilled workers have been employed for a long time. The company has adequate
market for the craft pieces done by these experts.
(iv) A company funds that it always has an adverse usage of indirect material. It wants to
apply learning curve theory to improve the way standards have been set.
Target Costing
15. A toy company ‘T’ expects to successfully launch Toy Z based on a film character. T must
pay 15% royalty on the selling price to the film company. ‘T’ targets a selling price of ` 100
per toy and profit of 25% selling price.
The following are the cost data forecast:
`/toy
Component A 8.50
Component B 7.00
Labour: 0.4 hr. @ ` 60 per hr 24.00
Product specific overheads 13.50
In addition, each toy requires 0.6 kg of other materials, which are supplied at a cost of
` 16 per kg with a normal 4% substandard quality which is not usable in the manufacture.
Required
Determine if the above cost structure is within the target cost. If not, what should be the
extent of cost reduction?
Cost Classification
16. ANZB Financial Services Limited is an Indian banking and financial services company
headquartered in Chennai, Tamil Nadu. Apart from lending to individuals, the company
grants loans to micro, small and medium business enterprises. Listed below are several
costs incurred in the loan division of ANZB Financial Services Limited.
(i) Remuneration of the loan division manager.
(ii) Cost of Printer Paper, File Folders, View Binders, Ink, Toner & Ribbons used in the
loan division.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 9

(iii) Cost of the division’s MacBook Pro purchased by the loan division manager last year.
(iv) Cost of advertising in business newspaper by the bank, which is allocated to the loan
division.
Cost Classification
Controllable by the loan division Direct cost of the loan Sunk Cost
manager division
Uncontrollable by the loan Indirect Cost of the loan Out of Pocket
division manager division Cost
Required
For each Cost, indicate which of the above mentioned Cost Classification best describe
the cost.
Note
More than one classification may apply to the same cost item.

SUGGESTED ANSWERS/ HINTS

1. Limiting Factor
Case Basis for Selecting Priority of Product
If maximum sales (in value) is a limiting Profit Volume Ratio
factor
If raw material is a limiting factor Contribution per unit of raw material
required to produce one unit of a product
If labour hour is a limiting factor Contribution per unit of labour hour
required to produce one unit of a product
If there is a heavy demand for the Profit Volume Ratio
product
2. (i) Statement of Profitability of DRB Ltd
Products (Amount in `)
D1 D2 D3 D4 Total
Sales 26,00,000 45,20,000 42,40,000 32,00,000 1,45,60,000
Direct Materials 6,00,000 18,20,000 18,80,000 10,00,000 53,00,000
Direct Wages 8,00,000 20,80,000 12,80,000 12,00,000 53,60,000
Overheads (W.N.2):
Machine Related 1,60,000 1,56,000 64,000 2,40,000 6,20,000
Batch Related 1,00,000 1,30,000 80,000 1,50,000 4,60,000

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 10 FINAL (OLD) EXAMINATION: MAY, 2019

Contribution 9,40,000 3,34,000 9,36,000 6,10,000 28,20,000

Product Specific 10,00,000 1,00,000 2,00,000 1,00,000 14,00,000
Fixed Overheads
Gross Profit (60,000) 2,34,000 7,36,000 5,10,000 14,20,000
General Fixed Overheads 6,20,000
Profit 8,00,000
(ii) Break-even Point
Total Sale Value of Product ‘D 1’ = `26,00,000
Total Contribution of Product ‘D 1’ = `9,40,000
Specific Fixed Overheads (Product D 1) = `10,00,000
Specific Fixed Cost
Break-even Sales (`) = xTotal Sales Value
Total Contribution
`10,00,000
= x`26,00,000
`9,40,000
= `27,65,957.45
`27,65,957.45
Break-even Sales (units) = = 2,12,766 units
`13.00
However, production must be done in batches of 100 units. Therefore, 2,128 batches
are required for break even. Due to the production in batches, 34 units (2,128 batches
× 100 units – 2,12,766 units) would be produced extra. These 34 units would add
extra cost `282.20 (34 units × `8.3*). Accordingly, break-even units as calculated
 `282.20 
above will increase by 22 units  .
 `13.00 

 `6,00,000  `8,00,000  `1,60,000  `1,00,000 

(*)  
 2,00,000 units 
Break-even units of product ‘D 1’ is 2,12,788 units (2,12,766 units + 22 units).
Workings
W.N.-1
Calculation Showing Overhead Rates
Overhead’s Related Overhead Total No. of Overhead Rate
Factors Cost (`) Units of Factors (`)
[a] [b] [a] / [b]
Machining Hours 6,20,000 15,50,000 hrs. 0.40
Batch Production 4,60,000 9,200 batches 50.00

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 11

W.N.-2
Statement Showing - Overhead Costs Related to Product
Particulars D1 D2 D3 D4
Machining hrs. ` 1,60,000 ` 1,56,000 ` 64,000 ` 2,40,000
related overheads (4,00,000 hrs (3,90,000 hrs (1,60,000 hrs × (6,00,000 hrs ×
× `0.40) × `0.40) `0.40) `0.40)
Batch related `1,00,000 `1,30,000 `80,000 `1,50,000
overheads (2,000 batches (2,600 batches (1,600 batches (3,000 batches
× `50) × `50) × `50) × `50)

3. Working Notes
(1) Calculation of Actual Sales at Budgeted Prices
(`)
Actual Sales at Actual Price 11,07,000
Less: Sales Price Variance (F) 17,000
Actual Sales at Budgeted Prices 10,90,000
ActualSalesat BudgetedPrices
Activity Level = ×100
BudgetedSalesat FullCapacity
` 10,90,000
= ×100
`13,50,000
= 80.74…%
(2) Segregation of Fixed & Variable Cost Element from Semi-Variable Overheads
Overheadat Full Capacity -Overheadat 75% Capacity
Variable Overhead =
DifferenceinActivityLevel
` 3,65,000- ` 3,23,750
=
25
= `1,650
Fixed Overhead = Total SV Overheads at 100% Level – Variable
Overheads at 100% level
= `3,65,000 – (`1,650 × 100)
= `2,00,000
Flexible Budget at 80.74% Activity Level
(Amount in `)
Sales 10,90,000

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 12 FINAL (OLD) EXAMINATION: MAY, 2019

Less:
Direct Material (`4,25,000 × 80.74..%) 3,43,148
Direct Labour (`1,85,000 × 80.74..%) 1,49,370
Variable Overheads (`2,15,000 × 80.74..%) 1,73,593
Semi-Variable Overheads
Variable Cost (`1,650 × 80.74..) [W.N.-2] 1,33,222
Fixed Cost [W.N.-2] 2,00,000
Profit 90,667
4. Statement Showing “Pareto Analysis of Defects”
Defect Type No. of Items % of Total Cumulative
Items Total
Scratches on the surface 110 36.67% 36.67%
Rough edges of lenses 70 23.33% 60.00%
Non-uniform grinding of lenses 60 20.00% 80.00%
Frame colours-shade 25 8.33% 88.33%
differences
Power mismatches 20 6.67% 95.00%
End frame not equidistant from 10 3.33% 98.33%
the centre
Spots/ Strain on lenses 5 1.67% 100.00%
300 100.00%
The company should focus on eliminating scratches on the surface, rough edges of lenses
and grinding of lenses related defects which constitute 80% portion, according to Pareto
Theory.
5. Statement of Reconciliation - Budgeted Vs Actual Profit
Particulars `
Budgeted Profit 5,19,000
Less: Sales Volume Contribution Planning Variance (Adverse) 52,125
Less: Sales Volume Contribution Operational Variance (Adverse) 93,825
Less: Sales Price Variance (Adverse) 39,600
Less: Variable Cost Variance (Adverse) 29,700
Less: Fixed Cost Variance (Adverse) 15,000
Actual Profit 2,88,750

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Workings
Basic Workings
2,00,000units
Budgeted Market Share (in %) =
4,00,000units
= 50%
1,65,000units
Actual Market Share (in %) =
3,75,000units
= 44%
Budgeted Contribution = `21,00,000 – `12,66,000
= `8,34,000
`8,34,000
Average Budgeted Contribution (per unit) =
`2,00,000
= `4.17
`21,00,000
Budgeted Sales Price per unit =
`2,00,000
= `10.50
`16,92,900
Actual Sales Price per unit =
`1,65,000
= `10.26
`12,66,000
Standard Variable Cost per unit =
`2,00,000
= `6.33
`10,74,150
Actual Variable Cost per unit =
`1,65,000
= `6.51
Calculation of Variances
Sales Variances:
Volume Contribution Planning* = Budgeted Market Share % × (Actual Industry
Sales Quantity in units – Budgeted Industry Sales
Quantity in units) × (Average Budgeted
Contribution per unit)
= 50% × (3,75,000 units – 4,00,000 units) × `4.17
= 52,125 (A)

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 14 FINAL (OLD) EXAMINATION: MAY, 2019

(*) Market Size Variance

Volume Contribution Operational** = (Actual Market Share % – Budgeted Market
Share %) × (Actual Industry Sales Quantity in
units) × (Average Budgeted Contribution per unit)
= (44% – 50 %) × 3,75,000 units × `4.17
= 93,825 (A)
(**) Market Share Variance
Price = Actual Sales – Standard Sales
= Actual Sales Quantity × (Actual Price – Budgeted
Price)
= 1,65,000 units × (`10.26 – `10.50) = 39,600 (A)
Variable Cost Variances:
Cost = Standard Cost for Production – Actual Cost
= Actual Production × (Standard Cost per unit –
Actual Cost per unit)
= 1,65,000 units × (`6.33 – `6.51)
= `29,700(A)
Fixed Cost Variances:
Expenditure = Budgeted Fixed Cost – Actual Fixed Cost
= `3,15,000 – `3,30,000
= `15,000 (A)


Fixed Overhead Volume Variance does not arise in a Marginal Costing system

6. (i) Statement Showing “Ranking for Manufacturing”

A B C
(`) (`) (`)
Demand 1,200 1,200 1,500
Buy Price 280 ××× 161
Less: Variable Cost 187 215 111
Saving in Cost per unit 93 ××× 50
Hrs. Required -“Q” 3 3 1
Saving in Cost per machine hour 31 ××× 50
Ranking III I II

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Statement Showing “Optimum Production Plan”

Product Units Machine Machine Hrs. Balance
Hrs./ Unit Required Hrs.
B 1,200 3 3,600 4,200
C 1,500 1 1,500 2,700
A (Balance) 900* 3 2,700 ---
2,700 hrs. 
*  
 3hrs. 

Balance quantity of A, 300 units to be purchased from outside.

(ii) Statement Showing “Conditions for Justification (i)”
Product A Product C
Buy Price < 337 Or > 142
Variable Cost > 130 Or < 130
7. Analysis of Cost plus Pricing Approach
The company has a plan to produce 2,00,000 units and it proposed to adopt Cost plus
Pricing approach with a markup of 25% on full budgeted cost. To achieve this pricing policy,
the company has to sell its product at the price calculated below:
Qty. 2,00,000 units
Variable Cost (2,00,000 units × ` 32) 64,00,000
Add: Fixed Cost 16,00,000
Total Budgeted Cost 80,00,000
Add: Profit (25% of ` 80,00,000) 20,00,000
Revenue (need to earn) 1,00,00,000
 ` 1,00,00,000 
Selling Price per unit   50 p.u.
 2,00,000 units 

However, at selling price ` 50 per unit, the company can sell 1,40,000 units only, which is
60,000 units less than the budgeted production units.
After analyzing the price-demand pattern in the market (which is price sensitive), to sell all
the budgeted units market price needs to be further lowered, which might be lower than
the total cost of production.
Statement Showing “Profit at Different Demand & Price Levels”
I II III IV Budgeted
Qty. (units) 1,68,000 1,52,000 1,40,000 1,28,000 1,08,000

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 16 FINAL (OLD) EXAMINATION: MAY, 2019

` ` ` ` `
Sales 73,92,000 72,96,000 70,00,000 71,68,000 64,80,000
Less: Variable Cost 53,76,000 48,64,000 44,80,000 40,96,000 34,56,000
Total Contribution 20,16,000 24,32,000 25,20,000 30,72,000 30,24,000
Less: Fixed Cost 16,00,000 16,00,000 16,00,000 16,00,000 16,00,000
Profit (`) 4,16,000 8,32,000 9,20,000 14,72,000 14,24,000
Profit
5.96 12.87 15.13 25.84% 28.16%
(% on total cost)

Determination of the Best Course of Action

(i) Taking the above calculation and analysis into account, the company should produce
and sell 1,28,000 units at ` 56. At this price company will not only be able to achieve
its desired mark up of 25% on the total cost but can earn maximum contribution as
compared to other even higher selling price.
(ii) If the company wants to uphold its proposed pricing approach with the budgeted
quantity, it should try to reduce its variable cost per unit for example by asking its
supplier to provide a quantity discount on the materials purchased.
8. (i) Transfer Price per unit of Product Z that Division W Should Quote in order to
meet Target Profit
Quotation for the 40,000 units of product Z should be such that meet Division W’s
target profit and interest cost on working capital. Therefore the minimum quote for
product Z will be calculated as follows:
Particulars Amount (`)
Target Profit (given for the year) 2,50,00,000
Add: Interest Cost on Working Capital (`12,00,00,000 @11.5%) 1,38,00,000
Required Profit 3,88,00,000
Add: Fixed Overhead 4,00,00,000
Target Contribution 7,88,00,000
Less: Contribution Earned --- External Sales 5,40,00,000
{60,000 units × (`2,500 – `1,600)}
Contribution Required – Internal Sales 2,48,00,000
Contribution per unit of Product Z (`2,48,00,000 ÷ 40,000 units) 620
Transfer Price of Product Z to Division B 2,220
(Variable Cost per unit + Contribution per unit)

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 17

(ii) The Two Transfer Prices Based on Opportunity Costs

For the 30,000 units (i.e. maximum capacity – maximum external market demand) at
variable cost of production i.e. `1,600 per unit.
For the next 10,000 units (i.e. external market demand – maximum possible sale) at
market selling price i.e. `2,500 per unit.
9. Let the P1, P2 and P3 be the three products to be manufactured. Then the data are as
follows:
Product ingredients
Products A B C Inert Ingredients
P1 5% 10% 5% 80%
P2 5% 5% 10% 80%
P3 20% 5% 10% 65%
Cost per kg (`) 64 16 40 16
Cost of Product P1
= 5% × `64 + 10% × `16 + 5% × `40 + 80% × `16
= `19.60 per kg
Cost of Product P2
= 5% × `64 + 5% × `16 + 10% × `40 + 80% × `16
= `20.80 per kg.
Cost of Product P3
= 20% × `64 + 5% × `16 + 10% × `40 + 65% × `16
= `28.00 per kg.
Let x1, x2, and x 3 be the quantity (in kg) of P 1, P2, and P3 respectively to be manufactured.
The LP problem can be formulated:
Objective function:
Maximise Z = (Selling Price - Cost Price) × Quantity of Product
= (`32.60 − `19.60) x 1 + (`34.80 − `20.80) x 2 + (`36.00 − `28) x 3
= 13x1 + 14 x 2 + 8 x 3
Subject to Constraints:
1/20 x 1 +1/20 x2 + 1/5 x3 ≤ 100
Or x1 + x2 + 4 x3 ≤ 2,000
1/10 x 1 + 1/20 x2 + 1/20 x3 ≤ 180
Or 2x1 + x2 + x3 ≤ 3,600

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 18 FINAL (OLD) EXAMINATION: MAY, 2019

1/20 x 1 + 1/10 x2 + 1/10 x3 ≤120

Or x1 + 2x2 + 2x3 ≤ 2,400
x1 ≤ 30
and x1 , x2 , x3 ≥ 0
10. The given information can be tabulated in following transportation problem -
Assignment Time
Manager TA TPA GCR Available
(`) (`) (`) (Hours)
C1 1,800 2,250 2,850 176
C2 2,100 1,950 1,800 176
C3 2,400 2,100 2,250 176
Time Required 143 154 176
(Hours)
The given problem is an unbalanced transportation problem. Introducing a dummy
assignment to balance it, we get-
Manager Assignment Time
TA TPA GCR Dummy Available
(`) (`) (`) (`) (Hours)
C1 1,800 2,250 2,850 0 176
C2 2,100 1,950 1,800 0 176
C3 2,400 2,100 2,250 0 176
Time Required 143 154 176 55 528
(Hours)
The objective here is to maximize total billing amount of the auditors. For achieving this
objective, let us convert this maximization problem into a minimization problem by
subtracting all the elements of the above payoff matrix from the highest payoff i. e. `2,850.
Manager Assignment Time
TA TPA GCR Dummy Available
(`) (`) (`) (`) (Hours)
C1 1,050 600 0 2,850 176
C2 750 900 1,050 2,850 176
C3 450 750 600 2,850 176
Time Required 143 154 176 55 528
(Hours)

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 19

Now, let us apply VAM method to the above matrix for finding the initial feasible
solution.
Manager Assignment Time Difference
TA TPA GCR Dummy Avail.
(`) (`) (`) (`) (Hours)
176
1,050 600 0 2,850 176/0 600 - -
C1

121 55
750 900 1,050 2,850 176/55/0 150, 150 1,950
C2

143 33
450 750 600 2,850 176/33/0 150, 300, 2,100
C3
Time 143/0 154/121/0 176/0 55/0
528
Required
300 150 600 0
Difference

300 150 -- 0
- 150 - 0

The initial solution is given below. It can be seen that it is a degenerate solution since the
number of allocation is 5. In order to apply optimality test, the total number of allocations
should be 6 (m + n -1). To make the initial solution a non-degenerate, we introduce a very
small quantity in the least cost independent cell which is cell of C3, GCR.
Manager Assignment
TA TPA GCR Dummy
(`) (`) (`) (`)
C1 176
1,050 600 0 2,850

C2 121 55
750 900 1,050 2,850

C3
450 143 750 33 600 e 2,850

Let us test the above solution for optimality-

(ui + vj) Matrix for Allocated / Unallocated Cells
ui
-150 150 0 2,100 -600
600 900 750 2,850 150

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 20 FINAL (OLD) EXAMINATION: MAY, 2019

450 750 600 2,700 0

vj 450 750 600 2,700

Now we calculate ij = Cij – (ui + vj) for non basic cells which are given in the table below-
ij Matrix

1,200 450 750

150 300
150

Since, all allocations in ∆ij = Cij –(ui+vj)are non negative, the allocation is optimal. The
allocation of assignments to managers and their billing amount is given below:
Manager Assignment Billing Amount
C1 Global Compliance & Reporting (GCR) `5,01,600
(176 hrs. × `2,850)
C2 Tax Performance Advisory (TPA) `2,35,950
(121 hrs. × `1,950)
C3 Tax Accounting (TA) `3,43,200
(143 hrs. × `2,400)
C3 Tax Performance Advisory (TPA) `69,300
(33 hrs. × `2,100)
Total Billing `11,50,050
11. (i) Invalid
Reason: As per the rules of network construction, parallel activities between two
events, without intervening events, are prohibited. Dummy activities are needed when
two or more activities have same initial and terminal events. Dummy activities do not
consume time or resources.
(ii) Valid
Reason: As per the conventions adopted in drawing networks, the head event or
terminal node always has a number higher than that of initial node or tail event.
(iii) Invalid
Reason: The difference between the latest event time and the earliest event time is
termed as slack of an event. Free float is determined by subtracting head event slack
from the total float of an activity.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 21

(iv) Invalid
Reason: For every critical activity in a network, the earliest start time and the latest
start time is same and also the earliest finish time and the latest finish time is same.
(v) Invalid
Reason: The optimum duration is the time period in which the total cost of the project
is minimum.
(vi) Valid
Reason: Resource leveling is a network technique used for reducing the requirement
of a particular resource due to its paucity or insufficiency within a constraint on the
project duration. The process of resource leveling utilize the large floats available on
non-critical activities of the project and cuts down the demand of the resource.
12. Allocation of Random Numbers
Raw Material Wages & Sales
Other Variable
Overheads
Mid Cum. Random Mid Cum. Random Mid Cum. Random
Point Prob. Nos. Point Prob. Nos. Point Prob. Nos.
9 0.2 0−1 12 0.3 0−2 36 0.1 0
11 0.5 2−4 14 0.8 3−7 40 0.4 1−3
13 0.8 5−7 16 1.0 8−9 44 0.8 4−7
15 1.0 8−9 48 1.0 8−9
Simulation Table
(` in 000)
Month Raw Wages & Sales Fixed Net Cash Cash
Material Other V.O Cost Flow Balancing
(Opening `40
thousand)
1 11 12 36 15 -2 38
2 11 14 44 15 +4 42
3 9 16 44 15 +4 46
4 9 12 36 15 0 46
5 11 16 40 15 -2 44
6 13 16 48 15 +4 48

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 22 FINAL (OLD) EXAMINATION: MAY, 2019

13. (i) Variable cost per unit that will be effected by learning and experience curve is `2,200
(`4,400 – 50% of ` 4,400) .
Let, ‘r’ be the learning curve rate.
No. of Batch (x) Cumulative Average Cost per unit (y)
1 2,200
2 2,200 r
4 2,200 r2
If 2,200 r 2 = `1,920 (`4,120 – 50% of ` 4,400)
r2 = 0.8727
r = 0.934
Therefore, Learning Curve Effect = 93% (rounded off)
(ii) Calculation of Optimum Price
Price Demand Variable Variable Total Contribution Total
per unit (units) Cost Cost Variable per unit Contribution
per unit * per unit** Cost per
[W.N.] unit

(`) (`) (`) (`) (`) (`)

11,100.00 1,000 2,200.00 2,200.00 4,400.00 6,700.00 67,00,000
10,700.00 2,000 2,046.00 2,200.00 4,246.00 6,454.00 1,29,08,000
9,600.00 3,000 1960.86 2,200.00 4,160.86 5,439.14 1,63,17,420
8,700.00 4,000 1,902.78 2,200.00 4,102.78 4,597.22 1,83,88,880

(*) This represents variable cost part which is affected by the learning and experience curve
effect.
(**) This represents variable cost part which is not affected by the learning and experience
curve effect.
Working Note [W.N.]
Variable Cost per unit
Output in Average Cost of x – 0.1047 Cumulative Average
Batches (x) the First Unit (a) Cost per unit (y)
1 2,200 1.0000 2,200.00
2 2,200 0.9299 2,046.00
3 2,200 0.8913 1,960.86
4 2,200 0.8649 1,902.78
y = axb

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 23

Where,
y = Cumulative average unit costs
a = Average cost of the first unit
x = Cumulative number of batches
b = Log of learning ratio ÷ Log of 2
= log 0.93 ÷ log 2
= −0.0315 ÷ 0.3010
= −0.1047
14. (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.
15. Statement Showing Target Cost “Z”
` / Toy
Target Selling Price 100.00
Less: Royalty @15% 15.00
Less: Profit @ 25% 25.00
Target Cost 60.00
Statement Showing Cost Structure “Z”
` / Toy
Component A 8.50
Component B 7.00

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 24 FINAL (OLD) EXAMINATION: MAY, 2019

Labour (0.40 hr. × ` 60 per hr.) 24.00

Product Specific Overheads 13.50
Other Material (0.6 kg / 96% × `16) 10.00
Total Cost of Manufacturing 63.00
Total Cost of Manufacturing is ` 63 while Target Cost is ` 60. Company “T” should make
efforts to reduce its manufacturing cost by ` 3 to achieve Target Selling Price of `100.
16. Cost Incurred – Cost Classification
S. Cost Incurred Classification Classification Classification
No. 1 2 3
(i) Remuneration of the Uncontrollable by Direct cost of the Out of Pocket
loan division the loan division loan division. Cost
manager. manager.
(ii) Cost of Printer Paper, Controllable by the Direct cost of the Out of Pocket
File Folders, View loan division loan division. Cost
Binders, Ink, Toner & manager.
Ribbons used in the
loan division.
(iii) Cost of the division’s Controllable by the Direct cost of the Sunk Cost
MacBook Pro loan division loan division.
purchased by the loan manager.
division manager last
year.
(iv) Cost of advertising in Uncontrollable by Indirect Cost of the Out of Pocket
business newspaper the loan division loan division. Cost
by the bank, which is manager.
allocated to the loan
division.

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