Test Series: March, 2018

MOCK TEST PAPER

FINAL (OLD) COURSE: GROUP – II
PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) The following is a possible scorecard for “North Garden”

Financial Perspective Economic Value Added
Revenue per villa
Customer Perspective % repeat customers
Number of customer complaints
Internal Business Service rating of spa
Staff hours per guest
% cost spent for maintenance
Travel guide rank for restaurant
Innovation and Learning Employee retention
Number of new services offered
(b) Statement Showing Manufacturing Cost and Buying Cost
(` in lakhs)
Year Present When the Component is When the Component is
Value Factor Manufactured Bought
@ 10%
Cash Present Value of Cash Outflows Present Value of
Outflows* Cash Outflows (Cost of Buying) Cash Outflows

0 1.000 4 4.000 - -
1 0.909 6+2 7.272 9 8.181
2 0.826 7+2 7.434 10 8.260
3 0.751 8+2 7.510 11 8.261
4 0.683 10+2 8.196 14 9.562
34.412 34.264

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).
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.

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 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 table-
Per Acre Radish Mutter Potato
Selling Price `7,500 `7,200 `6,000
(`5 × 1,500 kg) (`4 × 1,800 kg) (`5 × 1,200 kg)
Less: Manure Cost ` 187.50 ` 225 ` 187.50
 `12.50 × 1,500 kg   `12.50  1,800kg   `12.50  1,200kg 
     
 100kg   100kg   80kg 
Less: Labour Cost ` 240 ` 200 ` 240
( ` 40 × 6 man days) ( ` 40 × 5 man days) ( ` 40 × 6 man days)
Profit ` 7,072.50 ` 6,775 ` 5,572.50
Since, the agriculturist wants to maximise the total profit, hence the objective function of the
problem is given by-
Z = 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 + x 2 + x 3 ≤ 125
6x1 + 5x2 + 6x3 ≤ 500
Where x1, x2 , x 3 ≥ 0
(d) Journal Entries in Single Plan
S. No. Journal Entries Debit Credit
Amount (`) Amount (`)
(i) Dr. Material Control A/c √
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 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 = 0
Cost Variance (A+B) = ` 1,300 (A)
Yield Variance (A+B) = ` 270 (A)
Standard Cost and Actual Cost (Incomplete Information)
Raw Standard Data Actual Data
Material Qty. Price Amount Qty. Price Amount
(Kg.) (`) (`) (Kg.) (`) (`)
[SQ] [SP] [SQ x SP] [AQ] [AP] [AQ x AP]
A ? ?? 24 ??? ??? 30 ???
B ? ?? 30 ??? 70 ??? ???
Total ??? ? ?? ? ?? ???
Material Cost Variance A = Standard Cost – Actual Cost
0 = (SQA × ` 24 – AQA × ` 30)
SQA = 1.25 AQA
Material Yield Variance (A+B) = Average Standard Price per unit of Standard Mix ×
[Total Standard Quantity (units) – Total Actual Quantity
(units)]
 ` 24 x SQ A + ` 30 x SQ B 
` 270 (A) =  ×
 SQ A + SQ B 
[(SQA + SQB) – (AQA+70)]
SQA = SQB as Standard Mix is in ratio 1:1
 ` 24 x SQ A + ` 30 x SQ A 
` 270 (A) =   ×
 SQ A + SQ A 
[(SQA + SQA) – (AQA+70)]
` 270 (A) = 27 × [2 x SQA – (AQA+70)]
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 `270 (A) = 27 × [2 x 1.25 AQA – (AQA+70)]
AQA = 40 Kg.

As SQA = 1.25 AQA

= 1.25 × 40 Kg.
= 50 Kg.

As SQB = SQA
= 50 Kg.

Cost Variance (A+B) = Standard Cost – Actual Cost

1,300 (A) = (50 Kg. × ` 24 + 50 Kg. × ` 30) –
(40 Kg. × ` 30 +70 Kg. × APA)
APA = ` 40
Standard Cost and Actual Cost (Complete Information)
Raw Standard Data Actual Data Std. Cost of
Mat. Qty. Price Amount Qty. Price Amount Actual Qty.
(Kg.) (`) (`) (Kg.) (`) (`) (`)
[SQ] [SP] [SQ x SP] [AQ] [AP] [AQ x AP] [AQ x SP]

A 50 24 1,200 40 30 1,200 960

B 50 30 1,500 70 40 2,800 2,100
Total 100 2,700 110 4,000 3,060
Computation of Variances
Material Cost Variance = Standard Cost – Actual Cost
= SQ × SP – AQ × AP
(A) = ` 1,200 – ` 1,200
= `0
(B) = ` 1,500 – ` 2,800
= ` 1,300 (A)
Total = ` 0 + ` 1,300 (A)
= ` 1,300 (A)
Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
= AQ × SP – AQ × AP
Or
= AQ × (SP – AP)
(A) = 40 Kg. × (` 24.00 – ` 30.00)
= ` 240 (A)

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 (B) = 70 Kg. × (` 30.00 – ` 40.00)
= ` 700 (A)
Total = ` 240 (A) + ` 700 (A)
= ` 940 (A)
Material Usage Variance = Standard Cost of Standard Quantity for Actual
Output – Standard Cost of Actual Quantity
= SQ × SP – AQ × SP
Or
= SP × (SQ – AQ)
(A) = ` 24 × (50 Kg. – 40 Kg.)
= ` 240 (F)
(B) = ` 30 × (50 Kg. – 70 Kg.)
= ` 600 (A)
Total = ` 240 (F) + ` 600 (A)
= ` 360 (A)
Material Mix Variance = 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

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 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 Duration EST EFT LST LFT Total
Float
Dij Ei Ei + Dij Lj − Dij Lj LST− EST

1–2 4 0 4 0 4 0
1–3 12 0 12 2 14 2
1–4 7 0 7 5 12 5
2–4 8 4 12 4 12 0
2–5 5 4 9 5 10 1
3–6 9 12 21 14 23 2
4–6 11 12 23 12 23 0
5–7 13 9 22 10 23 1
6–7 0 23 23 23 23 0
6–8 5 23 28 25 30 2
7–8 7 23 30 23 30 0
8–9 6 30 36 30 36 0
(ii) The Network for the given problem:

(iii) The Various Paths in the Network are:

1–2–4–6–7–8–9 with Duration 36 Days
1–2–5–7–8–9 with Duration 35 Days
1–3–6–7–8–9 with Duration 34 Days
1–2–4–6–8–9 with Duration 34 Days
1–3–6–8–9 with Duration 32 Days
1–4–6–7–8–9 with Duration 31 Days
1–4–6–8–9 with Duration 29 Days
The Critical Path is 1–2–4–6–7–8–9 with Duration 36 Days.

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 (b) Statement Showing Cost and Profit for the Next Year
Particulars Existing Volume, Costs, etc. Estimated Sale,
Volume, etc. after 10% Increase Cost, Profit, etc.*
(`) (`) (`)
Sale 5,00,000 5,50,000 5,72,000
Less: Direct Materials 2,50,000 2,75,000 2,69,500
Direct Labour 1,00,000 1,10,000 1,07,800
Variable Overheads 40,000 44,000 43,120
Contribution 1,10,000 1,21,000 1,51,580
Less: Fixed Cost# 60,000 60,000 58,800
Profit 50,000 61,000 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 
Percentage Profit on Capital Employed equals to 23.19%  x 100 
 `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) Customer Wise Profitability Statement and Overall Profitability Statement
SN. Particulars P M W Total `
A Sales (net proceeds) –Table 1 241,288 237,500 272,812 751,600
B Variable Cost of Goods Sold 1,50,000 1,42,500 1,87,500 4,80,000
C Assignable- Marketing and
Administration Cost - Table 2
• Order Taking and Processing 1,200 600 4,500 6,300
• Sale Return Processing 150 - 1,200 1,350
• Billing Cost 200 100 750 1,050
• Customer Visit 800 - 4,000 4,800
Total Assignable Marketing and 2,350 700 10,450 13,500
Administration Cost
D Assignable- Distribution Cost - Table 2
• Expedited / Rush Orders 250 - 1,250 1,500
• Delivery Costs 8,000 4,000 - 12,000
• Inventory Carrying Cost 10,000 9,500 12,500 32,000
Total Assignable Distribution Cost 18,250 13,500 13,750 45,500
E Non- Assignable Fixed Cost - - - 100,000

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 F Total Costs (B+C+D+E) 170,600 156,700 211,700 639,000
G Net Profit (Step A - F) 70,688 80,800 61,112 112,600
H Profit % of Sales (G / A) 29% 34% 22% 15%

Workings
Table 1: Customer Sales Analysis - Revenue Analysis
All figures in `
Particulars P M W Total `
Sales {Sale Units × Sale Price (gross)} 2,50,000 2,37,500 3,12,500 8,00,000
Less: Sale Return (Step 1 × Return%) 1,250 - 31,250 32,500
Net Sales 2,48,750 2,37,500 2,81,250 7,67,500
Less: Cash Discount 7,462 - 8,438 15,900
Net Proceeds 2,41,288 2,37,500 2,72,812 7,51,600
Final Collections vs Original Sale 97% 100% 87% 94%

Table 2: Assignable Marketing, Administrative and Distribution Costs

All figures in `
Particulars P M W Total
Order Taking and Processing 1,200 600 4,500 6,300
(# of orders × cost per order)
Expedited / Rush Orders 250 - 1,250 1,500
(# of orders × cost per order)
Delivery Costs 8,000 4,000 - 12,000
(Distance in km. × cost per km)
Sale Return Processing 150 - 1,200 1,350
(# of returns × cost per return)
Billing Cost 200 100 750 1,050
(# of invoices × cost per invoice)
Customer Visit 800 - 4,000 4,800
(#of customer visits × cost per visit)
Inventory Carrying Cost 10,000 9,500 12,500 32,000
(# of units × inventory carrying cost p.u.)

(b) Identification of Bottleneck: Installation of cameras is the bottleneck in the operation cycle. The
annual capacity for manufacturing and installation are given to be 750 camera units and 500
camera units respectively. Actual capacity utilization is 500 camera units, which is the maximum
capacity for the installation process. Although, Z can additionally manufacture 250 camera units,
it is constrained by the maximum units that can be installed. Therefore, the number of units
manufactured is limited to 500 camera units, subordinating to the bottleneck installation
operation. Therefore, Z should focus on improving the installation process.

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5. (a) The usual learning curve model is
y = axb
Where
y = Average time per part for x parts
a = Time required for first part (100 minutes)
x = Cumulative number of parts
b = Learning coefficient and is equal to –0.322
(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
y = antilog of 1.484
y = 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
y = antilog of 1.4274
y = 26.75 minutes
Total Time for 60 Parts = 60 Parts × 26.75 minutes
= 1,605 minutes (B)
Calculation of total time for 41 to 60 parts (B) – (A):
= 1,605 minutes –1,219 minutes
= 386 minutes
(b) (i) STC receives a 10% Commission on each ticket = ` 900 (10% × ` 9,000)
Commission per ticket = ` 900
Variable Cost per ticket = ` 200
Contribution per ticket = ` 900 − ` 200
= ` 700
Fixed Costs = ` 1,40,000 per month
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 Fixed Costs
(a) Break-even Number of Tickets =
Contribution per ticket

`1,40,000
=
`700 per ticket

= 200 tickets
(b) When Target Operating Income = ` 70,000 per month
`1,40,000  `70,000
Quantity of Tickets required to be sold =
`700 per ticket
`2,10,000
=
`700
= 300 tickets
(ii) Under the New System, STC 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
`1,40,000
Break-even Number of Tickets =
`300
= 467 tickets (rounded up)
` 2,10,000
Quantity of Tickets required to be sold =
` 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.
6. (a) Ranking of Products When Availability of Time is the Key Factor
Products A B C D
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
Ranking IV III I 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
(*) Balancing Figure
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 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).
Transfer Price = Variable Cost + Opportunity Cost
(6,900 hrs. `11.5  600 hrs.  `6.66)
= `85 
2,500 units
`79,350  ` 4,000
= ` 85 
2,500units
= `85 + `33.34
= `118.34
(b) (i) The current cost and profit per unit are calculated as below:
Cost Component Units Actual Cost p.a. for Actual Cost
10,000 racks (`) per rack (`)
Revenue 10,000 racks 75,00,000 750
Direct Material 5,20,000 sq. ft. 20,00,000 200
Direct Labour 1,00,000 hrs. 10,00,000 100
Machine Setup 15,000 hrs. 1,50,000 15
Mechanical Assembly 200,000 hrs. 30,00,000 300
Total Cost 61,50,000 615
Profit 13,50,000 135

Therefore, the current cost is ` 615 p.u. while the profit is ` 135 p.u. Machine setup is the
time required to get the machines and the assembly line ready for production. In this case,
15,000 hours spent on setting up does not add value to the storage racks directly. Hence, it
is a non-value add activity.
(ii) New sale price per rack is ` 675 per unit. The profit per unit needs to be maintained at `135
per unit. Hence, the new target cost per unit = new selling price per unit – required profit per
unit = ` 675 - ` 135 = ` 540 per unit.
7. (a) 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.

(b) 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
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 (ii) High fraction of the life cycle costs are locked in at the R & D and design stages.
F 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., Sun Pharmaceutical Industries Ltd., and Dabur India Ltd. will be
good candidates for study on product life cycle costing.
(c) Statement Showing Selling Price
Perfect Competition Monopoly
Units 6,000 1,200
Contribution (` 1,06,000 + ` 74,000) 1,80,000 1,80,000
Contribution per unit 30 150
 4 --- 200
Variable Cost per unit  `150  
 3 

Variable Cost per unit 200 ---

Selling Price per unit 230 350

(d) (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 employee’s active participation is a must requirement.
(iv) Invalid
Though the aim of Kaizen Costing is to reduce the cost but at the same time it also aims to
maintain the quality. Kaizen costing also aims to bring the clarity in roles and responsibilities
for all employees.
(e) The given problem is a balanced minimization assignment problem.
The minimum time elements in row 1, 2 and 3 are 70, 50 and 110 respectively. Subtract these
elements from all elements in their respective row. The reduced matrix is shown below-
A B C
1 30 15 0
2 0 20 60
3 0 10 20

The minimum time elements in columns A, B and C are 0, 10, and 0 respectively. Subtract these
elements from all the elements in their respective columns to get the reduced time matrix as
shown below-

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 A B C
1 30 5 0
2 0 10 60
3 0 0 20

The minimum number of horizontal and vertical lines to cover all zeros is 3, which is equal to the
order of the matrix.
The Pattern of assignments among software professionals and programs with their respective
time (in minutes) is given below-

Program Software Professionals Time (in Minutes)

1 C 70
2 A 50
3 B 120
Total 240

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