Test Series: April, 2014

MOCK TEST PAPER 2

FINAL COURSE: GROUP II
PAPER 5: ADVANCED MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a)

The following is a possible scorecard for Hard Rock Coconut

Financial Perspective
Customer Perspective
Internal Business

Innovation and Learning

(b)

Economic Value Added

Revenue per villa
% repeat customers
Number of customer complaints
Service rating of spa
Staff hours per guest
% cost spent for maintenance
Travel guide rank for restaurant
Employee retention
Number of new services offered

Statement Showing Manufacturing Cost and Buying Cost

(` in lakhs)
Yr

0
1
2
3
4

Present
Value
Factor a
10%

When the Component is

Manufactured
Cash
Outflows*

Present Value
of Cash
Outflows

Cash Outflows
(Cost of
Buying)

Present Value
of Cash
Outflows

1.000
0.909
0.826
0.751
0.683

4
6+2
7+2
8+2
10+2

4.000
7.272
7.434
7.510
8.196
34.412

9
10
11
14

8.181
8.260
8.261
9.562
34.264

When the Component is

Bought

Cash Outflows* means Capital Cost plus Manufacturing Cost plus Opportunity Cost.
The above statement shows that there is a saving in buying the component
amounting to `0.148 lakh (i.e. `34.412 lakhs 34.264 lakhs).

The Institute of Chartered Accountants of India

Hence, it is beneficial to buy the component from outside.

Note: It may be noted that the loss of ` 2 lakhs of cash inflow for each of the 4 years
due to inability of the firm to operate another machine when it manufactures the
component has to be treated as an opportunity cost.
(c)

Let x1, x2 and x3 be the number of acres allotted for cultivating radish, mutter and
potato respectively.
Objective function:
Since the average yield of radish is 1,500 kg per acre, and the selling price for radish
is `5/kg hence the selling amount which the agriculturist gets from one acre is`5 1,500 kg
Or,

`7,500

To produce 100 kg of radish, the manure cost is `12.50, so the manure cost per acre
will be-

`12.50 1,500 kg
100kg
Or,

`187.50

Labour cost per acre for radish`40 6 man days

Or,

`240

Profit per acre for radish`7,500 `187.50 `240

Or,

`7,072.50

Similarly, the selling price, manure cost, labour cost and profit per acre of land for
mutter and potato are also calculated and presented in the following tablePer Acre

Selling Price

Radish

Mutter

`7,500

`7,200

(`5 1,500 kg)

(`4 1,800 kg)

Potato

`6,000

(`5 1,200 kg)

Less: Manure
Cost

` 187.50
`12.50 1,500 kg

100kg

` 225
`12.50 1,800kg

100kg

` 187.50
`12.50 1,200kg

80kg

Less: Labour
Cost
Profit

` 240

` 200

` 240

( ` 40 6 man days)

` 7,072.50

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( ` 40 5 man days)

` 6,775

( ` 40 6 man days)

` 5,572.50

Since, the agriculturist wants to maximise the total profit, hence the objective function
of the problem is given byZ

7,072.50x1 + 6,775.00x2 + 5,572.50x3

The linear programming model for the problem:

Maximise
Z = 7,072.50x1 + 6,775.00x2 + 5,572.50x3
Subject to the Constraints:
x1 + x2 + x3

125

6x1 + 5x2 + 6x3

500

Where
(d)

x1, x2 ,x3

Journal Entries in Single Plan

S. No. Journal Entries

(i)

Debit
Credit
Amount (`) Amount (`)

Dr. Material Control A/c

Dr. or Cr. Material Price Variance A/c

Cr. Creditors A/c

(Being recording of Price Variance during
Purchase of Materials)
(ii)

Dr. WIP Control A/c

Dr. or Cr. Material Usage Variance A/c

Cr. Material Control A/c

(Being recording of Usage Variance at Standard

Cost of excess / under utilized Quantity)
(iii)

Dr. Wages Control A/c

Dr. or Cr. Labour Rate Variance A/c
Cr. Cash
(Being recording of Wages at Standard Rate)

2. (a)

Working for Finding Missing Figures

Cost Variance A

Cost Variance (A+B)

` 1,300 (A)

Yield Variance (A+B)

` 270 (A)

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Standard Cost and Actual Cost (Incomplete Information)

Raw
Material

A
B
Total

Standard Data

Actual Data

Qty.
(Kg.)
[SQ]

Price
(`)
[SP]

Amount
(`)
[SQ x SP]

Qty.
(Kg.)
[AQ]

Price
(`)
[AP]

Amount
(`)
[AQ x AP]

? ??
? ??
???

24
30

???
???
? ??

???
70
? ??

30
???

???
???
???

Material Cost Variance A

0

= Standard Cost Actual Cost

= (SQA ` 24 AQA ` 30)

SQA
Material Yield Variance (A+B)

= 1.25 AQA
= Average Standard Price per unit of Standard Mix
[Total Standard Quantity (units) Total Actual Quantity
(units)]

`270 (A)

` 24 x SQ A + ` 30 x SQ B
=

SQ A + SQ B

[(SQA + SQB) (AQA+70)]

SQA = SQB as Standard Mix is in ratio 1:1

`270 (A)

` 24 x SQ A + ` 30 x SQ A
=

SQ A + SQ A

[(SQA + SQA) (AQA+70)]

`270 (A)
`270 (A)
AQA

= 27 [2 x SQA (AQA+70)]
= 27 [2 x 1.25 AQA (AQA+70)]
= 40 Kg.

As SQA

= 1.25 AQA
= 1.25 40 Kg.
= 50 Kg.

As SQB

= SQA
= 50 Kg.

Cost Variance (A+B)

1,300 (A)

= Standard Cost Actual Cost

= (50 Kg. ` 24 + 50 Kg. ` 30)
(40 Kg. ` 30 +70 Kg. APA)
= ` 40

APA

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Standard Cost and Actual Cost (Complete Information)

Raw
Mat.

A
B
Total

Qty.
(Kg.)
[SQ]

50
50
100

Standard Data
Price
Amount
(`)
(`)
[SP]
[SQ x SP]

24
30

1,200
1,500
2,700

Qty.
(Kg.)
[AQ]

40
70
110

Actual Data
Price
Amount
(`)
(`)
[AP]
[AQ x AP]

30
40

1,200
2,800
4,000

Std. Cost of
Actual Qty.
(`)
[AQ x SP]

960
2,100
3,060

Computation of Variances
Material Cost Variance
(A)
(B)
Total
Material Price Variance
Or
(A)
(B)
Total
Material Usage Variance

Or
(A)

=
=
=
=
=
=
=
=
=

Standard Cost Actual Cost

SQ SP AQ AP
` 1,200 ` 1,200
`0
` 1,500 ` 2,800
` 1,300 (A)
` 0 + ` 1,300 (A)
` 1,300 (A)
Standard Cost of Actual Quantity Actual Cost

= AQ SP AQ AP
=
=
=
=
=
=
=

AQ (SP AP)
40 Kg. (` 24.00 ` 30.00)
` 240 (A)
70 Kg. (` 30.00 ` 40.00)
` 700 (A)
` 240 (A) + ` 700 (A)
` 940 (A)

= Standard Cost of Standard Quantity for Actual

Output Standard Cost of Actual Quantity
= SQ SP AQ SP
= SP (SQ AQ)
= ` 24 (50 Kg. 40 Kg.)
= ` 240 (F)

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(B)
Total
Material Mix Variance

=
=
=
=
=

` 30 (50 Kg. 70 Kg.)

` 600 (A)
` 240 (F) + ` 600 (A)
` 360 (A)
Total Actual Quantity (units) (Average Standard Price
per unit of Standard Mix Average Standard Price per
unit of Actual Mix)

` 2,700 ` 3,060

= 110 Kg.

100 Kg. 110 Kg.

= ` 90 (A)
Material Yield Variance

= Average Standard Price per unit of Standard Mix

[Total Standard Quantity (units) Total Actual Quantity
(units)]

` 2,700
=
(100 Kg. 110 Kg.)
100 Kg.
= ` 270 (A)
Standard Output

= Standard Input Standard Loss

= 100 Kg. 10 Kg.
= 90Kg.

Actual Output

= 90 Kg.

(Actual Output and Standard Output are always equal numerically in any Material Variance
Analysis)

(b)

The condition for degeneracy is that the number of allocations in a solution is less
than m+n-1.
The given problem is an unbalanced situation and hence a dummy row is to be
added, since the column quantity is greater than that of the row quantity. The total
number of rows and columns will be 9 i.e. (5 rows and 4 columns). Therefore, m+n-1
(= 8), i.e. if the number of allocations is less than 8, then degeneracy would occur.

3. (a)

(i) Calculation of Missing Figures:

Activity

12

Duration

EST

EFT

LST

LFT

Total
Float

Dij

Ei

Ei + Dij

Lj Dij

Lj

LST EST

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Activity

13
14
24
25
36
46
57
67
68
78
89

Duration

EST

EFT

LST

LFT

Total
Float

Dij

Ei

Ei + Dij

Lj Dij

Lj

LST EST

12
7
8
5
9
11
13
0
5
7
6

0
0
4
4
12
12
9
23
23
23
30

12
7
12
9
21
23
22
23

2
5
4
5
14
12
10
23

14
12
12
10
23
23
23
23

2
5
0
1
2
0
1
0
2
0
0

28
30

25
23

30
30

36

30

36

(ii) The Network for the given problem:

(iii) The Various Paths in the Network are:

1246789 with Duration 36 Days
125789 with Duration 35 Days
136789 with Duration 34 Days
124689 with Duration 34 Days
13689 with Duration 32 Days

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146789 with Duration 31 Days

14689 with Duration 29 Days
(iv) The Critical Path is 1246789 with Duration 36 Days.
(b)

Statement Showing Cost and Profit for the Next Year

Particulars

Existing
Volume, etc.

Volume, Costs,
etc. after 10%
Increase

(`)
5,00,000
2,50,000
1,00,000
40,000
1,10,000
60,000
50,000

Sale
Less: Direct Materials
Direct Labour
Variable Overheads
Contribution
Less: Fixed Cost#
Profit

Estimated
Sale, Cost,
Profit, etc.*

(`)
5,50,000
2,75,000
1,10,000
44,000
1,21,000
60,000
61,000

(`)
5,72,000
2,69,500
1,07,800
43,120
1,51,580
58,800
92,780

(*) for the next year after increase in selling price @ 4% and overall cost reduction by 2%.
( #)
Fixed Cost

Existing Sales Existing Marginal Cost 12.5% on `4,00,000

`5,00,000 `3,90,000 `50,000

`60,000

`92,780

x 100
Percentage Profit on Capital Employed equals to 23.19%
`4,00,000

Since the Profit of `92,780 is more than 23% of capital employed, the proposal of the
Sales Manager can be adopted.
4. (a)

Statement of Profit of 2011

Sales (units)

32,000

20,000

16,000

Total

24,000

92,000

120.00
14.40
14.40
28.80
57.60

456.00
87.20
70.40
140.80
298.40

(`In Lacs)

Sales
Direct Material
Direct Wages
Variable Overhead
Variable Cost

96.00
19.20
16.00
32.00
67.20

120.00
28.00
16.00
32.00
76.00

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120.00
25.60
24.00
48.00
97.60

Contribution
Fixed Overhead
Profit / (Loss)
Direct Labour Hours
per Unit
Direct Labour Hours
Required
(b)

28.80
32.00
(3.20)

44.00
32.00
12.00

22.40
48.00
(25.60)

62.40
28.80
33.60

157.60
140.80
16.80

Total

12.50

20.00

37.50

15.00

400,000

400,000

600,000

360,000

1,760,000

Total

Statement of Budget 2012 (After Impact of Inflation)

A

Sales (units)

32,000

20,000

16,000

24,000

92,000

132.00
15.84
17.28
34.56
67.68
64.32

501.60
95.92
84.48
168.96
349.36
152.24
142.40
9.84

(`In Lacs)

Sales
105.60
Direct Material
21.12
Direct Wages
19.20
Variable Overhead
38.40
Variable Cost
78.72
Contribution
26.88
Fixed Overhead (140.80+1.60)
Profit / (Loss)
Direct Labour Hours
Contribution
per
Labour Hour (`)
(c)

132.00
30.80
19.20
38.40
88.40
43.60

132.00
28.16
28.80
57.60
114.56
17.44

Total

400,000
6.72

400,000
10.90

600,000
2.91

360,000
17.87

1,760,000
8.65

Statement of Profit 2012 on the Basis of Proposals of Marketing Team

A

Sales (units)

28,800

18,000

19,200

Total

31,200

97,200

140.40
--140.40
20.59
22.46
44.93

529.92
6.34
523.58
95.71
91.58
183.17

(`In Lacs)

Sales
Less: Commission
Net Sales
Direct Material
Direct Wages
Variable Overhead

112.32
--112.32
19.01
17.28
34.56

118.80
--118.80
22.32
17.28
34.56

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158.40
6.34
152.06
33.79
34.56
69.12

Variable Cost
Contribution
Fixed Overhead
Profit / (Loss)
Labour
Hrs.
Required
Contribution
per
Labour Hours (`)

70.85
41.47

74.16
44.64

3,60,000
11.52

137.47
14.59

87.98
52.42

370.46
153.12
142.40
10.72

Total

3,60,000

7,20,000

4,68,000

1,908,000

12.40

2.03

11.20

Revised Position on the basis of the Proposal of Marketing Team and Product Mix
after taking into consideration the Inflation in Costs and Prices but subject to the
Constraint of Available Labour Hours.
A

Sales (units)

28,800

18,000

C*

16,000

D*

Total

24,000

86,800

132.00
--132.00
15.84
17.28
34.56
67.68
64.32

495.12
--495.12
85.33
80.64
161.28
327.25
167.87
142.40
25.47

(` In Lacs)

Sales
Less: Commission
Net Sales
Direct Material
Direct Wages
Variable Overhead
Variable Cost
Contribution
Fixed Overhead
Profit/(Loss)

Labour Hrs Required

Contribution
per
Labour Hour (`)
(*)

112.32
--112.32
19.01
17.28
34.56
70.85
41.47

118.80
--118.80
22.32
17.28
34.56
74.16
44.64

132.00
--132.00
28.16
28.80
57.60
114.56
17.44

Total

360,000
11.52

360,000
12.40

600,000
2.91

360,000
17.87

1,680,000

By following the strategy of Marketing Team, Contribution per Labour Hour

has reduced in case of Product C & D. Therefore strategy of Marketing Team
should be followed in Case of Product A&B only.

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5. (a)

The usual learning curve model is

y

axb

Average time per part for x parts

Time required for first part (100 minutes)

Cumulative number of parts

Learning coefficient and is equal to 0.322

Where

(learning rate 80%)

Calculation of total time for 40 parts:
y

100 (40) -0.322

log y =

log100 0.322 log40

log y =

log100 0.322 [3 log2 + log5]

log y =

2 0.322 [3 0.30103 + 0.69897]

log y =

1.484

antilog of 1.484

30.48 minutes

Total time for 40 Parts

40 Parts 30.48 minutes

1,219 minutes (A)

Calculation of total time for 60 parts:

y

100 (60) 0.322

log y =

log100 0.322 log60

log y =

log100 0.322 [2 log2 + log5 + log3]

log y =

2 0.322 [2 0.30103 + 0.69897 + 0.47712]

log y =

1.4274

antilog of 1.4274

26.75 minutes

60 Parts 26.75 minutes

1,605 minutes (B)

Total Time for 60 Parts

Calculation of total time for 41 to 60 parts (B) (A):

=

1,605 minutes 1,219 minutes

386 minutes
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(b)

(i) VTA receives a 10% Commission on each ticket

Commission per ticket
Variable Cost per ticket
Contribution per ticket

=
=
=
=
=

`900 (10% `9,000)

`900
`200
`900 `200
`700

Fixed Costs

`1,40,000 per month

(a)

Break-even Number of Tickets

(b)

Fixed Costs
Contribution per ticket
`1,40,000
`700 per ticket

200 tickets

When Target Operating Income

`70,000 per month

Quantity of Tickets required to be sold

`1,40,000 + `70,000
`700 per ticket

=
=

`2,10,000
`700

300 tickets

(ii) Under the New System, VTA would receive only `500 on the ` 9,000 per ticket.
Thus,
Commission per ticket

`500

Variable Cost per ticket

`200

Contribution per ticket

`500 `200

`300

Fixed Costs

`1,40,000 per month

Break-even Number of Tickets

`1,40,000
`300

=
Quantity of Tickets required to be sold

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467 tickets (rounded

up)

` 2,10,000
` 300

700 tickets

The `500 cap on the Commission paid per ticket causes the Break-even Point to
more than double (from 200 to 467 tickets) and
The Tickets required to be sold to earn `70,000 per month to also more than
double (from 300 to 700 tickets).
As would be expected, travel agents will react very negatively to the Dolphin
Airlines decision to change commission payments.
(c)

A necessary and sufficient condition for the existence of a feasible solution to the
transportation problem is that
m

a = b
i =1

j =1

Where
ai = quantity of product available at origin i.
bj = quantity of product available at origin j.
In other words, the total capacity (or supply) must equal total requirement (or
demand)
6. (a)

Ranking of Products When Availability of Time is the Key Factor

Products

Market Price (`)

150

146

140

130

Less: Variable Cost (`)

130

100

90

85

Contribution per unit (`)

20

46

50

45

Labour Hours per unit

3 hrs.

4 hrs.

2 hrs.

3 hrs.

Contribution per Labour Hour

6.67

11.50

25.00

15.00

IV

III

II

Maximum Demand (units)

2,800

2,500

2,300

1,600

Total No. of Hours

8,400

10,000

4,600

4,800

Allocation of 20,000 Hours on the Basis

of Ranking

600*

10,000

4,600

4,800

Ranking

(*) Balancing Figure

Note: Time required to meeting the demand of 2,500 units of Product D for Division
Y is 7,500 hrs. This requirement of time viz. 7,500 hrs for providing 2,500 units of
Product D for Division Y can be met by sacrificing 600 hours of Product A (200 units)
and 6,900 hours of Product B (1,725 units).

13

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Transfer Price

(b)

Variable Cost + Opportunity Cost

`85 +

(6,900 hrs. `11.5 + 600 hrs. `6.66)

2,500 units

` 85 +

`79,350 + ` 4,000
2,500units

`85 + `33.34

`118.34

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.
(c)

Statement Showing Selling Price

Perfect Competition

Units
Contribution (`1,06,000 + `74,000)
Contribution per unit

6,000
1,80,000
30
---

Variable Cost per unit `150

3
Variable Cost per unit
Selling Price per unit

200
230

Monopoly

1,200
1,80,000
150
200
--350

(d)

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.

7. (a)

Target cost is the difference between estimated selling price of a proposed product
with specified functionality and quality and the target margin. This is a cost
14

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management technique that aims to produce and sell products that will ensure the
target margin. It is an integral part of the product design. While designing the
product, the company needs to understand what value target customers will assign
to different attributes and different aspects of quality. This requires use of techniques
like value engineering and value analysis. Intensive marketing research is required
to understand customer preferences and the value they assign to each attribute and
quality parameter. This insight is required to be developed must before the product
is introduced. The company plays within the space between the maximum attributes
and quality that the company can offer and the minimum acceptable to target
customers. Therefore in absence of intensive marketing research, the target costing
technique cannot be used effectively.
(b)

Standard, ex post: After the event. An ex post budget, or standard, is set after the
end of a period of activity, when it can represent the optimum achievable level of
performance in the conditions which were experienced. Thus the budget can be
flexed, and standards can reflect factors such as unanticipated changes in
technology and in price levels. This approach may be used in conjunction with
sophisticated cost and revenue modelling to determine how far both the plan and the
achieved results differed from the performance that would have been expected in the
circumstances which were experienced.
Standard, ex ante: Before the event. An ex ante budget or standard is set before a
period of activity commences

(c)

Committed Fixed Cost / Discretionary Fixed Cost

Committed Fixed Cost

Discretionary Fixed Cost

(i) Salary and Wage increase.

(ii) New Advertisement Cost.

(iii) Rents payable for the next 6 months.

(iv) Legal Fees for filing for patent rights.
(d)

It is a network technique used for smoothening peak resource requirement during

different periods of the project network. Under this technique the total project
duration is maintained at the minimum level. For example, if the duration of a project
is 15 days, then the project duration is maintained, but the resources required for
completing different activities of a project are smoothened by utilising floats
available on non critical activities. These non critical activities having floats are
rescheduled or shifted so that a uniform demand on resources is achieved. In other
words, the constraint in the case of resource smoothing operation would be on the
project duration time. Resource smoothing is a useful technique or business
managers to estimate the total resource requirements for various project activities.
In resources smoothing, the time-scaled diagram of various activities and their floats
(if any), along with resource requirements are used. The periods of maximum
demand for resources are identified and non critical activities during these periods
15

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are staggered by rescheduling them according to their floats for balancing the
resource requirements.
(e)

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.

16

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