SCM Pe LMR Questions
SCM Pe LMR Questions
SCM Pe LMR Questions
Dani Ki Costing
CA Final LMR
Q -BOOK
BY
CA Dani Khandelwal
Corporate Office:
723, Ecstasy, City of Joy, JSD Road, Near Station, Mulund (W), Mumbai - 400080
Whats app / Mobile : 9920443322 | Email : educare@coppergate.in
Website:- coppergateeducare.in
ABOUT US
ABOUT COPPERGATE EDUCARE
Coppergate Educare is the one stop solution for CA, CFA & all your international study
needs and its core activity lies in assisting students to make the right choice with regards
to pursuing education. At Coppergate, emphasis is laid on professional and participative
style of learning which not only inspires our people but helps them to act as our brand
ambassadors in their careers. We are passionate about teaching & consulting more and
more students and the positive changes we make to their lives.
PUBLISHED FOR
Coppergate Educare
723, Ectasy, City of Joy, JSD Road, Near Station, Mulund (W), Mumbai-400 080
Whatsapp/Mobile: 9920443322| Email: educare@coppergate.in
Website: - coppergateeducare.in
This book is meant for educational and learning purposes. The author of the book has
taken all reasonable care to ensure that the contents of the book do not violate any
existing copyright or other intellectual property rights of any person in any manner
whatsoever. In the event the author has been unable to track any source and if any
copyright has been inadvertently infringed, please notify the publisher in writing for
corrective action. All the images used in this book are for purpose of interactive and
better explanation of concepts and they are property of their respective artists/creators.
If in case unknowingly there has been violation of copyright related to the images used
in this book, write to us for corrective actions.
OUR OTHER VIDEO LECTURES
IPCC
Subject Professor Price Course
Costing Dani Khandelwal 8000 Full
LAW Khushboo Sanghavi 5000 Full
ITSM Bhavna Gargg 6000 Full
Accounts – 1 Deepak Jaggi 7500 Full
Accounts – 2 Deepak Jaggi 7500 Full
EIS – SM New Bhavna Gargg 6000 Full
FINAL
Subject Professor Price Course
Costing OR Dani Khandelwal 10000 Full
Costing OR Dani Khandelwal 5000 LMR
Costing OR NEW Dani Khandelwal 8000 Full
Costing OR Dani Khandelwal 7000 Crash
FR Deepak Jaggi 8000 Revision
Note :- Topic Wise Lectures are also available for same
FINAL
Subject Professor Price Course
Direct Tax Siddharth Surana 8000 Full
Direct Tax New Siddharth Surana 10000 Full
Audit Sanidhya Saraf 6500 Crash
SFM Manisha Ramuka 7500 Crash
Indirect Tax Mahesh Gour 11000 Full
Indirect Tax Farooq Haque 13000 Full
FR Manoj Gupta 5500 Full
ISCA Bhavna Gargg 6000 Full
Law Harsh Kachalia 7000 Full
AS – INDAS Israr Shaikh 6000 Full
FR Rahul Malkan 10000 Full
SFM Rahul Malkan 14000 Full
ISCA Jignesh Chedda 5500 Full
SFM Rahul Malkan 6500 Crash
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 1
INTRODUCTION TO STRATEGIC COST MANAGEMENT
CASE STUDY No 1
WONDER LTD. manufactures a single product, ZEST. The following figures relate
To ZEST for a one-year period:
The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year,
and actual fixed costs are the same as budgeted. There were no stocks of ZEST at the beginning of the
year.
In the first quarter, 220 units were produced and 160 units were sold.
Required:
(a) What would be the fixed production costs absorbed by ZEST if absorption costing is used?
(b) What would be the under/over-recovery of overheads during the period?
(c) What would be the profit using absorption costing?
(d) What would be the profit using marginal costing?
CASE STUDY No 2
Practical Questions
1. XYZ Ltd. has a production capacity of 2, 00,000 units per year. Normal capacity utilizationis
reckoned as 90%. Standard variable production costs are ₹11 per unit. The fixed costsare
₹3,60,000 per year. Variable selling costs are ₹3 perunit and fixed selling costs are₹2,70,000 per
year. The unit selling price is ₹20.
In the year just ended on 30th June, 2014, the production was 1,60,000 units and sales were
1,50,000 units. The closing inventory on 30th June was 20,000 units. The actual variable
production costs for the year were ₹ 35,000 higher than the standard.
1. Calculate the profit for the year
(a) By absorption costing method and
(b) By marginal costing method.
1
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 2
MODERN BUSINESS ENVIRONMENT
Cost of Control
+
Cost of Failure of Control
A better approach will be to calculate COQ in terms of money (converting the effort into money
and adding any other tangible costs like test environment setup).
The best approach will be to calculate COQ as a percentage of total cost. This allows for
comparison of COQ across projects or companies.
To ensure impartiality, an external person says the accountant must determine the Cost of Quality
of a project/ product rather than a person who is a core member of the project/ product team (Say,
someone from the Accounts Department).
2
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 3
Illustration
A company produces and sells a single product. The cost data per unit for the year 2017 is predicted as
below:
Particulars `
Direct Material 35
Direct Labour 25
Variable Overheads 15
Selling Price 90
The company has forecast that demand for the product during the year 2017 will be 28,000 units.
However, to satisfy this level of demand, production quantity will be increased?
There are no opening stock and closing stock of the product.
The stock level of material remains unchanged throughout the period.
The following additional information regarding costs and revenue are given:
12.5% of the items delivered to customers will be rejected due to specification failure and will
require free replacement. The cost of delivering the replacement item is ₹5 per unit.
20% of the items produced will be discovered faulty at the inspection stage before they are
delivered to customer.
10% of the direct material will be scrapped due to damage while in storage.
Due to above, total quality costs for the year areexpected to be ₹10,75,556.
1. To introduce training programmes for the workers which, the management of the company
believes, will reduce the level of faulty production to 10%. This training program will cost
₹4,50,000 per annum.
2. To avail the services of quality control consultant at annual charges of ₹50,000 which would
reduce the percentage of faulty items delivered to customers to 9.5%.
Required :
(i) PREPARE a statement of expected quality costs the company would incur if it accepts the
proposal. Costs are to be calculated using the four recognized quality costs heads.
(ii) Would you RECOMMEND the proposal? Give financial and non-financial reasons.
3
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 4
A company manufactures a single product, which requires two components. The company purchases one
of the components from two suppliers: X Limited and Y Limited. The price quoted by X Limited is ₹ 180
per hundred units of the component and it is found that on an average 3 per cent of the total receipt from
this supplier is defective. The corresponding quotation from Y Limited is ₹ 174 per hundred units, but the
defective would go up to 5 per cent. If the defectives are not detected, they are utilized in production
causing a damage of ₹ 180 per 100 units of the component.
The company intends to introduce a system of inspection for the components on receipt. The
inspection cost is estimated at ₹24 per 100 units of the component. Such an inspection will be able to
detect only 90 per cent of the defective components received. No payment will be made for components
found to be defective in inspection.
Required:
CASE STUDY No 5
Your company plans to operate department D at normal capacity next year producing one lakh units of
product P. Assuming no defective works, these units can be manufactured in 2.5 lakhs labour hours at a
cost of Re. 0.50 per hour. Factory overhead would amount to ₹1,50,000 of which ₹50,000 would be fixed.
Every unit requires five units of materials can be purchased in two qualities; a high quality at
₹1.05 per unit or a lower quality at Re.0.80 per unit.
Under expected conditions, using high quality materials, 10% of the work will be defective requiring
complete replacement of the materials, additional labour costs and variable overhead. Scrap materials
recovered from defective production could be sold at Re. 0.30 per unit of high quality material used.
As an alternative to this arrangement, the use of the lower quality material is being considered but this
would require an extra operation to be performed on it. An additional machine and tooling would be
needed at a cost of ₹ 3,000 per annum. The additional operation would take half an hour for each unit of
product P produced, not taking defective work into account.
It is estimated that 20% of the work would be defective all of which would require complete replacement.
Scrap material from the lower quality material could be sold for ₹ 5,000.
4
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 6
Thomson Ltd. makes and sells a single product; the unit specifications are as follows:
Thomson Ltd. requires to fulfill orders for 5,000 product units per period. There are no stocks of product
units at the beginning or end of the period under review. The stock level of material X remains unchanged
throughout the period.
Thomson Ltd. is planning to implement a Quality Management Programme (QPM). The following
additional information regarding costs and revenues are given as of now and after implementation of
Quality Management Programme.
5
Coppergate Educare-9920443322 CA Final LMR Question Book
Inspection and storage of Material X costs ₹ 1 per square metre No change in the unit rate
purchased.
Inspection during the production cycle, calibration checks on Reduction of 40% of the existing cost.
inspection equipment vendor rating and other checks cost
₹2,50,000 per period
Machine idle time is 20% of Gross machine hrs used Reduction to 12.5%
(i.e. running hour = 80% of gross/hrs)
The Total Quality Management Programme will have a reduction in Machine Run Time required per
product unit to 0.5 hr.
6
Coppergate Educare-9920443322 CA Final LMR Question Book
a. Prepare summaries showing the calculation of (i) Total production units (pre inspection),(ii)
Purchase of Materials X (square meters), (iii) Gross Machine Hours
b. In each case, the figures are required for the situation both before andafterthe implementation of
the Quality Management Programme so that orders for 5,000 product units can be fulfilled.
Prepare Profit and Loss Account for Thomson Ltd. for the period showing the profit earned bothbefore
and after the implementation of the Total Quality Programme.
CASE STUDY No 7
2. Queensland Furniture (QF) manufactures high-quality wooden doors within the forests of
Queensland since 1919. Management is having emphasize on creativity, engineering, innovation
and experience to provide customers with the door they desire, whether it is a standard design or a
one-of-a-kind custom door. The following information pertains to operations during Jan:
Required :
7
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 3
LEAN SYSTEM AND INNOVATION
8
Coppergate Educare-9920443322 CA Final LMR Question Book
1.6JUST IN TIME
CASE STUDY No 8
Question 11
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 incoming
inspection is necessary because Y tape Company has a superb reputation for delivery quality
merchandise. Annual demand of X Video Co. is 13,000 packages. X Video Co. requires 15% annual
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 Co. has to decide whether or not to shift 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 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.
Z Co. also supplies video tapes. It agrees to supply ₹ 136 per packages 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. doesn’t enjoy so sterling reputation for quality. X
Video Co. aanticipates following negative aspects of purchasing tapes from Z Co.
o Average stock out of 360 tapes packages per year would occur, largely resulting from late
deliveries. Z Co. cannot rush order at short notice, X Video Co. anticipates lost contribution
margin per package of ₹ 8 from stock out.
o Customer would likely return 2% of all packages due to poor quality of the tape and to handle this
return an additional cost of ₹25 per package.
CASE STUDY No 9
Illustration
KP Ltd. (KPL) manufactures and sells one product called “KEIA”. Managing Director is not happy with
its current purchasing and production system. There has been considerable discussion at the corporate
level as to use of ‘Just in Time’ system for “KEIA”. As per the opinion of managing director of KPL
Ltd.–
*Just-in-time system is a pull system, which responds to demand, in contrast to a push system, in which
stocks act as buffers between the different elements of the system such as purchasing, production and
sales. By using Just in Time system, it is possible to reduce carrying cost as well as other overheads”.
9
Coppergate Educare-9920443322 CA Final LMR Question Book
KPL is dependent on contractual labour which has efficiency of 95%, for its production. The labour has to
be paid for minimum of 4,000 hours per month to which they produce 3,800 standard hours.
For availing services of labour above 4,000 hours in a month, KPL has to pay overtime rate which is 45%
premium to the normal hourly rate of ₹110 per hour. For avoiding this overtime payment, KPL in its
current production and purchase plan utilizes full available normal working hours so that the higher
inventory levels in the month of lower demand would be able to meet sales of month with higher demand
level. KPL has determined that the cost of holding inventory is ₹70 per month for each standard hour of
output that is held in inventory.
KPL has forecast the demand for its products for the first six months of year 2018 as follows:
1. All other production costs are either fixed or are not driven by labour hours worked.
2. Production and sales occur evenly during each month and at present there is no stock at the
end of Dec’17.
3. The labours are to be paid for their minimum contracted hours in each month irrespective of
any purchase and production system.
Required :
Comments
Though KPL is saving ₹41,017 by changing its production system to Just-in-time but it has to consider
other factors as well before taking any final call which are as follows:-
(i) KPL has to ensure that it receives materials from its suppliers on the exact date and at the
exact time when they are needed. Credentials and reliability of supplier must be thoroughly
checked.
(ii) To remove any quality issues, the engineering staff must visit supplier’s sites and examine
their processes, not only to see if they can reliably ship high-quality parts but also to provide
them with engineering assistance to bring them up to a higher standard of product.
10
Coppergate Educare-9920443322 CA Final LMR Question Book
(iii) KPL should also aim to improve quality at its process and design levels with the purpose of
achieving “Zero Defects” in the production process.
(iv) KPL should also keep in mind the efficiency of its work force. KPL must ensure that labour’s
learning curve has reached at steady rate so that they are capable of performing a variety of
operations at effective and efficient manner. The workforce must be completely retrained and
focused on a wide range of activities.
CASE STUDY No 10
1. XYZ 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.
a. VP (Finance) is of the view that company has to make a huge initial investment to bring a large
scale modification in production process.
b. Head (Personnel) has made a point that introduction of Kaizen Costing does not eliminate the
training requirement of employees.
c. General Manager (Manufacturing) firmly believes that only shop floor employees and
workers’ involvement is prerequisite of Kaizen Costing approach.
d. Manager (Operations) has concerns about creation of confusion among employees and
workers regarding their roles and degradation in quality of production.
2. (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 leveltothe 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.
11
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 4
COST MANAGEMENT TECHNIQUES
12
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 11
Even Forward Ltd. is manufacturing and selling two products: Splash and
(i) Sales planned for year will be ₹ 7.20 lakhs in the case of Splash and ₹ 3.50 lakhs inthe case of
Flash.
(ii) To meet competition, the selling price of Splash will be reduced by 20% and that ofFlash by 12 ½
%.
(iii) Break- even is planned at 60% of the total sale of each product.
(iv) Profit for the year to be achieved is planned as ₹ 69,120 in the case of Splash and ₹ 17,500 in the
case of Flash. This would be possible by launching a cost reduction programme and reducing the
present annual fixed expenses of₹ 1,35,000 allocated as ₹ 1,08,000 to Splash and ₹ 27,000 to
Flash.
You are required to present the proposal in financial terms giving clearly the following information:
Number of units to be sold of Splash and Flash to break-even as well as the total number of units of
Splash and Flash to be sold during the year.
CASE STUDY No 12
Sterling Enterprises has prepared a draft budget for the next year as follows:
Quantity 10,000
units
Sales price per unit 30
Variable costs per unit:
Direct Materials 8
Direct Labour 6
Variable overhead
(2hrs x Re. 0.50) 1
Contribution per unit 15
Budgeted Contribution 15,00,00
Budgeted Fixed costs 14,00,00
Budgeted Profit 10,000
The Board of Directors is dissatisfied with this budget, and asks a working party to come with an alternate
budget with higher target profit figures. The working party reports back with the following suggestions
that will lead to a budgeted profit of ₹25,000. The company should spend ₹ 28,500 on advertising, & to
13
Coppergate Educare-9920443322 CA Final LMR Question Book
the target sales price up to ₹ 32 per unit. It is expected that the sales volume will also raise, in spite of the
price rise, to 12,000 units. In order to achieve the extra production capacity, however, the work force must
be able to reduce the time taken to make each unit of the product. It is proposed to offer a pay and
productivity deal in which the wage rate per hour in increased to ₹ 4. The hourly rate for variable
overhead will be unaffected. Ascertain the target labour time required to achieve the target profit.
CASE STUDY No 13
IBM Ltd. Manufactures and sells computers peripherals to several retail outlets throughout the country.
Amar is the manager of the printer division. Its two largest-selling printers are P1 & P2.
The manufacturing cost of each printer is calculated using IBM’s activity based costing system. IBM has
one direct manufacturing cost category (direct materials) and the following five indirect manufacturing
cost pools.
Product P1 P2
A foreign competitor has introduced products very similar to P1 and P2. Given their announced selling
prices, to maintain the company’s market share and profits. Amar estimated the P1 to have manufacturing
cost of approximately ₹ 680 and P2 to have a manufacturing cost of approximately ₹ 390. He calls a
meeting of product designers and manufacturing personnel at the printer division. They all agreed to have
the ₹ 680 and₹ 390 figures become target costs for designed version of P1 and P2 respectively. Product
designers examine alternative ways of designing printer with comparable performance but lower costs.
14
Coppergate Educare-9920443322 CA Final LMR Question Book
They come up with the following revised designs for P1 and P2 (termed P1 – REV and P2 – REV,
respectively)
CASE STUDY No 13
Required :
CASE STUDY No 14
Should the company make this investment? Workings should form part of your answer.
Note: The present value of Re. 1 at 10% discount rate is as follows:-
Year 1 2 3 4 5 6 7 8 9 10
P.V. 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39
15
Coppergate Educare-9920443322 CA Final LMR Question Book
The present value (at 10% discount rate) of an annuity of Re. 1 payable each year for different year’s is as
follows :-
Year 1 2 3 4 5 6 7 8 9 10
P.V. 0.91 1.74 2.49 3.17 3.79 4.35 4.87 5.33 5.76 6.14
CASE STUDY No 15
Modern Enterprises Ltd. is considering the purchase of a new computer system for its Research and
Development Division, which would cost ₹ 35 lakhs. The operation and maintenance costs (excluding
depreciation) are expected to be ₹ 7 lakhs per annum. It is estimated that the useful life of the system
would be 6 years, at the end of which the disposal value is expected to be ₹ 1 lakh
The tangible benefits expected from the system in the form of reduction in design and draughtsmanship
costs would be ₹ 12 lakhs per annum. Besides, the disposal of used drawing office equipment and
furniture, initially, is anticipated to net ₹ 9 lakhs.
Capital expenditure in research and development would attract 100% write-off for tax purpose. The gains
arising from disposal of used assets may be considered tax-free. The company’s effective tax rate is 50%.
The average cost of capital to the company is 12%. The present value factors at 12% discount rate are:
Year PVF
1 0.892
2 0.79
3 0.711
4 0.63
5 0.56
6 0.50
After appropriate analysis of cash flows, please advise the company of the financial viability of the
proposal.
16
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 16
PARETO ANALYSIS
Pareto Analysis is a rule that recommends focus on the most important aspects of the decision making in
order to simplify the process of decision making. It is based on the 80: 20 rule that was a phenomenon
first observed by Vilfredo Pareto, a nineteenth century Italian economist. He noticed that 80% of the
wealth of Milan was owned by 20% of its citizens. This phenomenon, or some kind of approximation of it
say, (70: 30 etc.) can be observed in many different business situations. The management can use it in a
number of different circumstances to direct management attention to the key control mechanism or
planning aspects. It helps to clearly establish top priorities and to identify both profitable and unprofitable
targets.
It provides the mechanism to control and direct effort by fact, not by emotions. It helps to clearly establish
top priorities and to identify both profitable and unprofitable targets. Pareto analysis is useful to:
Pareto analysis may be applicable in the presentation of Performance indicators data through selection of
representative process characteristics that truly determine or directly or indirectly influence or conform
the desired quality or performance result or outcome. The Pareto Analysis is generally applicable to the
following business situations:
17
Coppergate Educare-9920443322 CA Final LMR Question Book
Pricing of a Product
Customer
Quality Control Profitability
Analysis
Application of
Pareto Analysis
Pricing of a Product
In the case of a firm dealing with multi products, it would not be possible for it to analyse cost-
profit-price-volume relationships for all of them. In practice, in case of such firm approximately
20% of products may account for about 80% of total sales revenue. Pareto Analysis is used for
analyzing the firm estimated sales revenues from various products and it might indicate that
approximately 80% of its total sales revenue is earned from about 20% of its products.
Such analysis helps the top management to delegate the pricing decision for approximately 80%
of its products to the lower levels of management, thus freeing themselves to concentrate on the
pricing decisions for products approximately 20% which are essential for the company’s survival.
Thus, a firm can adopt more sophisticated pricing methods for small proportion of products that
jointly accounts for approximately 80% of total sales revenue. For the remaining 80% of the
products which account for 20% of total sales revenue the firm may use cost based pricing
method.
18
Coppergate Educare-9920443322 CA Final LMR Question Book
Instead of analyzing products, customers can be analysed for their relative profitability to the
organization.
Again, it is often found that approximately 20% of customers generate 80% of the profit. There
will always be some customers who are less profitable than others, just as some products are less
profitable than others.
Such an analysis is useful tool for evaluation of the portfolio of customer profile and decision
making such as whether to continue serving a same customer group, what is the extent of
promotion expenses to be incurred.
Another application of Pareto analysis is in stock control where it may be found that only a few of
the goods in stock make up most of the value. In practice, approximately 20% of the total
quantity of stock may account for about 80% of its value. The outcome of such analysis is that by
concentrating on small proportion of stock items that jointly accounts for 80% of the total value, a
firm may well be able to control most of monetary investment in stocks.
In Activity Based Costing it is often said that 20% of an organization cost drivers are responsible
for 80% of the total cost. By analyzing, monitoring and controlling those cost drivers that cause
most cost, a better control and understanding of overheads will be obtained.
Quality Control
Pareto analysis seeks to discover from an analysis of defect report or customer complaints which
“vital few” causes are responsible for most of the reported problems.
Often, 80% of reported problems can usually be traced to 20% of the various underlying causes.
By concentrating once efforts on rectifying the vital 20%, one can have the greatest immediate
impact on product quality.
The Pareto Analysis indicates how frequently each type of failure (defect) occurs The purpose of
the analysis is to direct management attention to the area where the best returns can be achieved
by solving most of quality problems, perhaps just with a single action.
CASE STUDY No 17
Concept Illustration:
The following data of manufacture and sale is obtained from Veer Ltd for the 12 months ending 31 st
December.
Product A B C D E F Total
Contribution (₹) 500 200 1,500 75 100 125 2,500
Note: Re-arrange the products in descending order of Contribution, and find out the cumulative
Contribution Percentage.
19
Coppergate Educare-9920443322 CA Final LMR Question Book
Cumulative Cumulative
Contribution Contribution Contribution
Product (₹) (₹) (%)
C 1,500 1,500 60%
A 500 2,000 80%
B 200 2,200 88%
F 125 2,325 93%
E 100 2,425 97%
D 75 2,500 100%
Total 2,500
Observation: On analysis it is found that 80% of the Total Contribution is earned by two Products C and
A. Hence, these products should be carefully monitored and nurtured, through careful attention to
branding and promotion. The other products should be investigated to see whether their Contribution can
be improved through increased prices, reduced costs, increased sales volume, etc.
CASE STUDY No 18
Illustration
Generation 2050 Technologies Ltd. develops cutting-edge innovations that are powering the next
revolution in mobility and has nine tablet smart phone models currently in the market whose previous
year financial data is given below:
Required :
a. Using the financial data, carry out a Pareto ANALYSIS (80/20 rule) of Sales and Contribution.
20
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 5
COST MANAGEMENT FOR SPECIFIC SECTOR
CASE STUDY No 19
A Multinational company runs a Public Medical Health Center. For this purpose, it has hired a building at
a rent of ₹ 10,000 per month with 5% of total taking. Health center has three types of wards for its
patients namely. General ward, Cottage ward and Deluxe ward. State the rent to be charged to each bed-
day for different type of ward on the basis of the following information;
1. The number of beds of each type is General ward 100, Cottage ward 50, Deluxe ward 30.
2. The rent of cottage ward bed is to be fixed at 2.5 times of the General ward bed and that of
Deluxe ward bed as twice of the Cottage ward bed.
3. The occupancy of each type of ward is as follows:
General ward 100%, Cottage ward 80% and Deluxe ward 60%. But, in General ward there were
occasions when beds are full, extra beds were hired at a charges of ₹ 20 per bed. The total hire
charges for the extra beds incurred for the whole year amount to ₹ 12,000.
4. The Health center engaged a heart specialist from outside and on an average fees paid to him was
₹ 15,000 per trip. He makes three trips in the whole year.
5. The other expenses for the year were as under:
(₹ )
Salary of Supervisors, Nurses, Ward Boys 4,25,000
Repairs and Maintenance 90,000
Salary of Doctors 13,50,000
Food Supplied to Patients 40,000
Laundry Charges for their Bed Linens 80,500
Medicines Supplied 74,000
Cost of Oxygen, X-Ray etc. (other than directly borne for treatment of 49,500
Patients)
General Administration Charges 63,500
CASE STUDY No 20
A manufacturing company runs its boiler on furnace oil obtained from X oil company and Y oil company
whose depots are situated at a distance of 24 kms and 16 kms from the factory site.
Transportation of furnace oil is made by company’s own tank Lorries (two) of 8 ton capacity each.
Onward trips are made only with full load and the Lorries return empty. The filling time take an average
of 40 minutes for X Oil Company and 30 minutes for Y Oil Company. The empty time in the factory is
only 40 minutes for each. The average speed of Lorries work out is 24 km per hour.
The varying operating charges average 80 paisa per km covered and fixed charges gives an
incidence of ₹ 7.50 per hour of operation.
Calculate the transportation cost per ton-km for each source of furnace oil.
21
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 21
Illustration 10
BHG Toll Plaza Ltd built a 60 km. long highway and now operates a toll plaza to collect tolls from
passing vehicles using the same. The company has invested ₹ 600 crore to build the road and has
estimated that a total of 60 crore vehicles will be using the highway during the 10 years toll collection
tenure. Toll Operating and Maintenance cost for the month of April 20X7 are as follows:
(i) Salary to –
o Collection Personnel (3 Shifts and 4 persons per shift) - ₹ 150 per day per person
o Supervisor (2 Shifts and 1 person per shift) - ₹ 250 per day per person
o Security Personnel (3 Shifts and 2 persons per shift) - ₹ 150 per day per person
o Toll Booth Manager (2 Shifts and 1 person per shift) - ₹ 400 per day per person
Required:
(ii) Calculate the toll rate per vehicle (assume there is only one type of vehicle).
CASE STUDY No 22
Illustration 11
The loan department of a bank performs several functions in addition to home loan application processing
task. It is estimated that 25% of the overhead costs of loan department are applicable to the processing of
home-loan application. The following information is given concerning the processing of a loan
application:Direct professional labour:
(₹)
Loan processor monthly salary: 80,000
(4 employees @ ₹ 20,000 each)
Loan department overhead costs (monthly)
Chief loan officer's salary 5,000
Telephone expenses 750
Depreciation Building 2,800
Legal advice 2,400
Advertising 400
Miscellaneous 650
Total overhead costs 12,000
22
Coppergate Educare-9920443322 CA Final LMR Question Book
You are required to compute the cost of processing home loan application on the assumption that one
hundred home loan applications are processed each month.
CASE STUDY No 23
Illustration 9
Following are the data pertaining to InfoTech Pvt. Ltd, for the year 20X6 - X7
Amount (₹)
Salary to Software Engineers (5 persons) 15,00,000
Salary to Project Leaders (2 persons) 9,00,000
Salary to Project Manager 6,00,000
Repairs & maintenance 3,00,000
Administration overheads 12,00,000
The company executes a Project XYZ, the details of the same as are as follows:
Project duration – 6 months
One Project Leader and three Software Engineers were involved for the entire duration of the project,
whereas Project Manager spends 2 months efforts, during the execution of the project.
Travel expenses incurred for the project - ₹ 1,87,500
Two Laptops were purchased at a cost of ₹ 50,000 each, for use in the project and the life of the same is
estimated to be 2 years
Prepare Project cost sheet.
23
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 6
DECISION MAKING
LEARNING OUTCOMES
Analyse product mix decisions, including circumstances where linear programming methods are
needed to identify ‘optimal’ solutions
Discuss the nature of risk and uncertainly and the attitudes to risk by decision makers
24
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 24
Paints Ltd. manufactures 2,00,000 tins of paint at normal capacity. It incurs the following manufacturing
costs per unit:
(₹)
Direct material ....................................... 7.80
Direct labour ………………………………….. 2.10
Variable overhead ………………………………….. 2.50
Fixed overhead ………………………………….. 4.00
Production cost / unit …………………………………... 16.40
Each unit is sold for ₹ 21, with an additional variable selling overhead incurred at ₹ 0.60 per unit.
During the next quarter, only 10,000 units can be produced and sold. Management plans to shut down the
plant estimating that the fixed manufacturing cost can be reduced to ₹ 74,000 for the quarter.
When the plant is operating, the fixed overheads are incurred at a uniform rate throughout the year.
Additional costs of plant shut down for the quarter are estimated at ₹ 14,000.
Required :
(i) To advise whether it is more economical to shut down the plant during the quarter rather than
operate the plant.
(ii) Calculate the shut down point for the quarter in terms of numbering units.
CASE STUDY No 25
G Ltd. produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The selling price of
product is ₹ 8 per unit. The variable cost is 75% of sales price per unit. The fixed cost is ₹ 3,50,000. The
company is continuously incurring losses and management plans to shut-down the plant. The fixed cost is
expected to be reduced to ₹ 1,30,000. Additional costs of plant shut-down are expected at ₹ 15,000.
Should the plant be shut-down? What is the capacity level of production of shut-down point?
25
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 26
3. If AIC Limited operates its plant at normal capacity it produces 2,00,000 units from the plant ‘C’.
The unit cost of manufacturing at normal capacity is as under:
(₹)
Direct material ....................................... 65
Direct labour ………………………………….. 30
Variable overhead ………………………………….. 33
Fixed overhead ………………………………….. 7
Production cost / unit …………………………………... 135
Direct labour cost represents the compensation to highly-skilled workers, who are permanent employees
of the company. The company cannot afford to lose them. One labour hour is required to complete one
unit of the product.
The company sells its product for ₹ 200 per unit with variable selling expenses of ₹ 16 per unit. The
company estimates that due to economic down turn, it will not be able to operate the plant at the normal
capacity, at least during the next year. It is evaluating the feasibility of shutting down the plant
temporarily for one year.
If it shuts down the plant, the fixed manufacturing overhead will be reduced to
₹ 1,25,000. The overhead costs are incurred at a uniform rate throughout the year. It is also estimated that
the additional cost of shutting down will be ₹ 50,000 and the cost of re-opening will be ₹ 1,00,000.
Required :
Calculate the minimum level of production at which it will be economically beneficial to continue to
operate the plant next year if 50% of the labour hours can be utilized in another activity, which is
expected to contribute at the rate of ₹ 40 per labour hour. The additional activity will relate to a job which
will be off-loaded by a sister company only if the company decides to shut down the plant.
(Assume that the cost structure will remain unchanged next year. Ignore income tax and time value of
money)
26
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 27
Question
Tiptop Textiles manufactures a wide range of fashion fabrics. The company is considering whether to add
a further product the “Superb” to the range. A market research survey recently undertaken at a cost of
₹.50,000 suggests that demand for the “Superb” will last for only one year, during which 50,000 units
could be sold at ₹18 per unit. Production and sale of “Superb” would take place evenly throughout the
years. The following information is available regarding the cost of manufacturing “Superb”.
Raw Materials: Each “Superb” would require 3 types of raw material Posh, Flash and Splash. Quantities
required, current stock levels and cost of each raw material are shown below. Posh is used regularly by
the company and stocks are replaced as they are used. The current stock of Flash is the result of
overbuying for an earlier contract. The material is not used regularly by Tiptop Textiles and any stock that
was not used to manufacture “Superb” would be sold. The company does not carry a stock of Splash and
the units required would be specially purchased.
₹ ₹ ₹
Posh 1 1,00,000 2.10 2.50 1.80
Flash 2 60,000 3.30 2.80 1.10
Splash 0.5 0 - 5.50 5.00
Labour: Production of each “Superb” would require a quarter of an hour of skilled labour and two hours
of unskilled labour. Current wage rates are ₹3 per hour for skilled labour and ₹2 per hour for unskilled
labour. In addition, one foreman would be required to devote all his working time for one year in
supervision of the production of Superb. He is currently paid an annual salary of ₹15,000. Tiptop Textiles
is currently finding it very difficult to get skilled labour. The skilled workers needed to manufacture
“Superb” would be transferred from another job on which they are earning a contribution surplus of ₹1.50
per labour hour, comprising sales revenue of ₹10.00 less skilled labour wages of ₹3.00 and other variable
costs of ₹5.50. It would not be possible to employ additional skilled labour during the coming year.
Because the company intends to expand in the future, it has decided not to terminate the services of any
unskilled worker in the foreseeable future. The foreman is due to retire immediately on an annual pension
of ₹6,000 payable by the company. He has been prevailed upon to stay on for a further year and to defer
his pension for one year in return for his annual salary.
27
Coppergate Educare-9920443322 CA Final LMR Question Book
Straight line depreciation has been charged on each machine for each year of its life. Tiptop Textiles owns
a number of MT 4 machines, which are used regularly on various products. Each MT 4 is replaced as
soon as it reaches the end of its useful life. MT 7 machines are no longer used and the one which would
be used for “Superb” is the only one the company now has. If it was not used to produce “Superb”, it
would be sold immediately.
Overheads: A predetermined rate of recovery for overhead is in operation and the fixed overheads are
recovered fully from the regular production at ₹3.50 per labour hour. Variable overhead costs for
“Superb” are estimated at ₹1.20 per unit produced.
For the decision-making, incremental costs based on relevant costs and opportunity costs are usually
computed.
You are required to compute such a cost sheet of “Superb” with all details of materials, labour, overhead
etc., substantiating the figures with necessary explanations.
CASE STUDY No 28
Question
The Aylett and Co., Ltd has been offered a contract, if accepted would significantly increase next year’s
activity levels. The contract requires the production of 20,000 kg. of product X and specifies a contract
price of ₹100 per kg. The resources used in the production of each kg. Of X include the following:
28
Coppergate Educare-9920443322 CA Final LMR Question Book
Grade 1 labour is highly skilled and although it is currently under-utilized in the firm it is Aylett’s policy
to continue to pay grade 1 labour in full. Acceptance of the contract would reduce the Idle time of grade 1
labour. Idle time payments are treated as nonproduction overheads.
Grade 2 is unskilled labour with a high turnover and may be considered a variable cost.
The costs to Aylett of each type of labour are:
Grade 1 ₹.4 per hour
Grade 2 ₹.2 per hour
The materials required to fulfill the contract would be drawn from those materials already in stock.
Materials A are widely used within the firm and any usage for this contract will necessitate replacement.
Materials B were purchased to fulfill an expected order that was not received, if material B is not used for
the contract, it will be sold. For accounting purpose FIFO is used. The various values and costs for A and
B are:
A B
PerUnit Per Litre
₹ ₹
Book value 8 30
Replacement cost 10 32
Net realisable value 9 25
CASE STUDY No 29
A single recovery rate for fixed factory overheads is used throughout the firm even though some fixed
production overheads could be attributed to single products or Departments. The overhead is recovered
per productive labour hour and initial estimates of next year’s activity, which excludes the current
contract, show fixed production overheads of ₹6,00,000 and productive labour hours of 3,00,000.
Acceptance of the contract would increase fixed production overheads by ₹2,28,000. Variable production
overheads are accurately estimated at ₹3/- per productive hour.
Acceptance of the contract would be expected to encroach on the sale and production of another product,
Y which is also made by Aylett Ltd. it is estimated that sales of Y, would then decreases by 5,000 units in
the next year only. However this forecast reduction in sales of Y would enable attributable fixed factory
overheads of ₹58,000 to be avoided. Information on Y is as follows:
Per unit
Sales price ₹70
Labour - Grade 2 4 hours
Materials - relevant variable costs ₹12
29
Coppergate Educare-9920443322 CA Final LMR Question Book
All activity undertaken by Aylett is job costed using full, absorption, costing in order to derive a profit
figure for each contract if the contract for X is accepted it will be treated as a separate job for routine
costing purpose. The decision to accept or reject the contract will be taken in sufficient time to enable its
estimated, effects to be incorporated in the next year’s budgets and also in the calculations carried out to
derive the overhead recovery rate to be used in the forthcoming year.
Required:
CASE STUDY No 30
Question
An item of finished goods inventory that cost ₹200 per unit to make is facing the danger of becoming
obsolete. There are two following alternative ways of disposing it of:
Sell the stock to P for ₹200; or to Q for ₹216. Q’s place is twice as far away as that of P though due to
favorable transport conditions the delivery time will be the same. The cost accountant has prescribed the
following cost estimates for delivery:
P– Petrol and oil ₹10, wages ₹12, share of licence, insurance and depreciation
(based on mileage)₹14
Q– Petrol and oil ₹20, wages ₹12, share of licence, insurance and depreciation ₹28.
You are required to recommend whether the stock should be sold to P or Q.
CASE STUDY No 31
A company had nearly completed a job relating to construction of specialised equipment, when it
discovered that the customer had gone out of business. At this stage, the position of the job was as under:
(₹)
Original cost estimate 1,75,200
Costs incurred so far 1,48,500
Costs to be incurred 29,700
Progress payment received from original customer 1,00,000
After searches, a new customer for the equipment has been found. He is interested to take the equipment,
if certain modifications are carried out. The new customer wanted the equipment in its original condition,
but without its control device and with certain other modifications. The costs of these additions and
modifications are estimated as under:
30
Coppergate Educare-9920443322 CA Final LMR Question Book
(1) The direct materials required for the modification are in stock and if not used for modification of
this order, they will be used in another job in place of materials that will now cost ₹ 2,250.
(2) Department A is working normally and hence any engagement of labour will have to be paid at
the direct – wage rate of ₹ 120 per man day.
(3) Department B is extremely busy. Its direct wages rate is ₹ 100 per man day and it is currently
yielding a contribution of ₹3.20 per rupee of direct wages.
(4) Supervisory overtime payable for the modification is ₹ 1,050.
(5) The cost of the control device that the new customer does not require is ₹ 13,500. If it is taken
out, it can be used in another job in place of a different mechanism. The latter mechanism has
otherwise to be bought for ₹ 10,500. The dismantling and removal of the control mechanism will
take one man day in department A.
(6) If the convention is not carried out, some of the materials in the original equipment can be used in
another contract in place of materials that would have cost ₹ 12,000. It would have taken 2 man
days of work in department A to make them suitable for this purpose. The remaining materials
will realize ₹ 11,400 as scrap. The drawings.Whichare included as part of the job can be sold for
₹ 1,500.
You are required to calculate the minimum price, which the company can afford to quote forthe new
customer as stated above.
CASE STUDY No 32
Question
Sales Profit
₹ ₹
First Period 14,433 385
Second Period 18,203 1,139
31
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 33
Anuradha Enterprises manufactures and sells black phenyl worth ₹ 20,000, white phenyl worth ₹ 25,000,
scented phenyl worth ₹ 10,000 and naphthaiene balls worth ₹ 5,000 every month. The firm’s total fixed
costs per month are ₹ 14,700. The variable costs are: on black phenyl 60%, on white phenyl 68%, on
scented phenyl 80% and on naphthalene balls 40%.
The proprietress, Ms. Anuradha Shah, being basically a science graduate, wonders at what combined sales
volume she really start earning profit. Please help her in arriving at such a sales volume.
CASE STUDY No 34
Question
Zed Ltd. manufactures two products P and Q and sells them at ₹ 215 and ₹ 320 per unit respectively. The
variable costs per unit are as under:
Product Product
P Q
Raw Materials: (₹) (₹)
Material - X 22.00 28.00
Material - Y 8.00 32.00
Direct Wages (₹ 6 per labour hour):
Department - A 36.00 54.00
Department - B 18.00 36.00
Department - C 54.00 -
Department - D - 72.00
Variable Overheads 23.00 14.30
The company procures raw materials against import license. The company operates at single shift a day of
8 hours for 300 days in a year. The number of workmen engaged is 30, 16, 18 and 24 in departments A,
B, C and D respectively.
Neither the workers are subject to transfer from one department to another nor is any new recruitment
possible at present. Fixed costs are ₹ 12,000 per month.
32
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 35
The relevant data of X Ltd. for its three products A, B and C is as under:
A B C
Direct Material (₹/Unit) 260 300 250
Direct Labour (₹/Unit) 130 270 260
Variable Overheads (₹ Unit) 110 230 180
Selling Price (₹/Unit) 860 1,040 930
Machine Hours Required (Per Unit) 12 6 3
The estimated fixed overheads at four different levels of 3,600; 6,000; 8,400; and 10,800 machine hours
are ₹ 1,00,000; ₹ 1,50,000; ₹ 2,20,000 and ₹ 3,00,000 respectively.
The maximum demand of A, B and C in a cost period are 500; 300 and 1,800 units respectively.
You are required to find out
(1) the most profitable product mix at each level and
(2) the level of activity where the profit would be maximum.
Question
CASE STUDY No 36
Question
(a) Alcos Ltd., manufactures and sells four types of products under the brand names A, B, C and D. The
sales mix in value comprises 33-1/3%, 41-2/3%, 16-2/3% and 8-1/3% of A, B, C and D respectively. The
total budgeted sales (100%) are ₹ 60,000 per month.
Operating costs are:
Variable costs:
(b) It has been proposed to change the sales mix as follows, the total sales per month remaining
₹ 60,000.
33
Coppergate Educare-9920443322 CA Final LMR Question Book
A 25%
B 40%
C 30%
D 5%
CASE STUDY No 37
V.C. Ltd. makes and sells two products, P and Q. The budgeted selling price of P is ₹ 1,800 and that of Q
is ₹ 2,160. Variable costs associated with producing and selling the P are ₹ 900 and with Q ₹ 1,800.
Annual fixed production and selling costs of V.C. Ltd. are ₹ 88,000.
The company has two production/ sales options. The P and Q can be sold either in the ratio of two P to
three Q or in the ratio of one P to two Q.
Required :
CASE STUDY No 38
N.P. Ltd. produces two products P and Q. The draft budget for the next month is as under:
P Q
Budgeted Production and Sales (units) 40,000 80,000
Selling Price ₹ / unit 25 50
Total Costs ₹ / unit 20 40
Machine Hours / unit 2 1
Maximum Sales Potential (units) 60,000 1,00,000
The fixed expenses are estimated at ₹ 9,60,000 per month. The company absorbs fixed overheads on the
basis of machine hours which are fully utilized by the budgeted production and cannot be further
increased.
When the budget was discussed, the Managing Director stated that the product mix should be altered to
yield optimum profit.
The Marketing Director suggested that he would introduce a new Product–C, each unit of which will take
1.5 machine hours. However, a processing vat involving a capital outlay of ₹ 2,00,000 is to be installed
for processing Product –C. The additional fixed overheads relating to the processing vat was estimated at
₹ 60,000 per month. The variable cost of Product- C was estimated at ₹ 21 per unit.
34
Coppergate Educare-9920443322 CA Final LMR Question Book
Required :
(i) Calculate the profit as per draft budget for the next month.
(ii) Revise the product mix based on data given for P and Q to yield optimum profit.
(iii) The company decides to discontinue either Product- P or Q whichever is giving lower profit and
proposes to substitute Product- C instead. Fix the selling price of product- C in such a way as to
yield 15% return on additional capital employed besides maintaining the same overall profit as
envisaged in (ii) above.
CASE STUDY No 39
Future Ltd. manufactures product N using one unit each of three components named P, Q & R and sells it
at ₹ 37.50 per unit. It has two divisions. In production division it produces all the types of components by
using its full capacity of 42,000 machines hours in assembly division the remaining job is performed by
the workers manually before N is ready for sale:
Product N is manufactured in batches of 100 units and the data relating to the current production per batch
are:
Variable
Machine Cost Fixed Cost Total Cost
Hours (₹) (₹) (₹)
Production Division:
Component - P 15 375 150 525
Component - Q 25 450 175 625
Component - R 30 450 450 900
Assembly Division:
Assembly - 800 325 1,125
2,075 1,100 3,175
For the next year the company has estimated that its sale would go up by 50% more than the present sales
and probably even by 75% if the production capacity is made available.
The machine capacity cannot be increased during the next year even though the workers in the assembly
division can be increased as per requirement without any increase in fixed costs. To meet the increased
demand, production can be taken up and processed in assembly division by procuring the components
from the open market. The company has received the following price quotations for the purchase of
components:
P Q R
Price offered per component
(₹) 5.55 7.00 8.40
35
Coppergate Educare-9920443322 CA Final LMR Question Book
Required
CASE STUDY No 40
Agro caps Ltd., engaged in manufacturing agricultural machinery, is preparing its annual budget for the
coming year. The company has a metal pressing capacity of 20,000 hours, which will be insufficient for
manufacture of all requirements of components A, B, C and D.
(ii) Buy from outside suppliers and / or use a partial second shift.
A B C D
(₹) (₹) (₹) (₹)
Requirement (in units) 2,000 3,500 1,500 2,800
Variable Cost
Direct Materials 37 27 25 44
Direct Wages 10 8 22 40
Direct Expenses 10 20 10 60
Fixed Overhead 5 4 11 20
Total Production Cost 62 59 68 164
Direct expenses relate to the use of the metal presses which cost ₹ 10 per hour, to operate. Fixed
overheads are absorbed as a percentage of direct wages.
Supply of all or any part of the total requirement can be obtained following prices, each delivered to the
factory-
Component (₹)
A……………………………………………………. 60
B……………………………………………………. 59
C……………………………………………………. 52
D……………………………………………………. 168
36
Coppergate Educare-9920443322 CA Final LMR Question Book
Second shift operations would increase direct wages by 25 percent over the normal shift and fixed
overhead by ₹ 500 for each 1,000 (or part thereof) second shift hours worked.
Required :
(i) Which component, and in what quantities should be manufactured in the 20,000 hours of press
time available?
(ii) Whether it would be profitable to make any of the balance of components required on a second
shift basis instead of buying them from outside suppliers.
CASE STUDY No 41
CVP Analysis
The profit for the year of Garena Ltd. works out to 12.5% of the capital employed and
The relevant figures are as under:
Sales………………………………………………………………. ₹ 5,00,000
Direct Materials…………………………………………….. ₹ 2,50,000
Direct Labour…………………………………………………. ₹ 1,00,000
Variable Overheads……………………………………….. ₹ 40,000
Capital Employed…………………………………………… ₹ 4,00,000
The new Sales Manager who has joined the company recently estimates for next year a profit of about
23% on capital employed, provided the volume of sales is increased by 10% and simultaneously there is
an increase in Selling Price of 4% and an overall cost reduction in all the elements of cost by 2%.
Required :
Find out by computing in detail the cost and profit for next year, whether the proposal of Sales Manager
can be adopted.
37
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 6
DECISION MAKING
DECISION - MAKING - IN - DKC - FORMAT
PAGE - NO - DKC NAME OF CHAPTER
ICAI - MODULE AS PER DKC - LIVE BOOK
NEW - SYLLABUS S.N.
38
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 42
Illustration
The company has begun Activity Based Costing of fixed costs and has presently identified two cost
drivers, viz. production runs and engineering hours. Of the total fixed costs presently at ₹ 96,000, after the
above, ₹ 72,100 remains to be analyzed. There are changes as proposed above for the next production
period for the same volume of output.
Required :
(i) How many units and in how many production runs should Catalyst Ltd. produce in the changed
scenario in order to break-even?
(ii) Should Catalyst Ltd. continue to break up the remaining fixed costs into activity based costs?
Why?
6.6 C.V.P
CASE STUDY No 43
Example
The selling price of a product for the next accounting period is ₹ 110 and the variable cost is estimated to
be ₹70 per unit. The budgeted fixed costs for the period are
₹1,63,500. Estimated sales for the period are 5,000 units, and it is assumed that the probability
distribution for the estimated sales quantity is normal with a standard deviation of 125 units. The selling
price, variable cost and total fixed cost are assumed to be certain. What is the probability of profits being
greater than ₹40,000?
39
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 44
Illustration
Expert Roadways Services Pvt. Ltd. is planning to run a fleet of 15 buses in Birpur City on a fixed route.
Company has estimated a total of 2,51,85,000 passenger kilometers per annum. It is estimated buses to
have 100% load factor. Buses are purchased at a price of ₹ 44, 00,000 per unit whose scrape value at the
end of 5 years life is ₹ 5,50,000. Seating capacity of a bus excluding a Driver’s seat is 42. Each bus can
give a mileage of 5 kmpl. Average cost of fuel is ₹ 66 per liter. Cost of Lubricants & Sundries per 1,000
km would be ₹ 3,300. Company will pay ₹ 27,500 per month to Driver and two attendants for each bus.
Other annual charges per bus: Insurance ₹ 55,000, Garage Charges ₹ 33,000, Repairs & Maintenance
₹ 55,000. Route Permit Charges up to 20,000 km is ₹ 5,500 and ₹ 2,200 for every additional 5,000 km or
part thereof.
Required :
(i) CALCULATE a suggested fare per passenger/km taking into account markup on cost @20% to
cover general overheads and sufficient profit.
(ii) The Transport Sector of Birpur is highly regulated. The Government has fixed the fare @ ₹ 1.35
for next 2 years COMMENT on the two year’s profitability taking into consideration the inflation
rate of 8%.
Note: A Route permit charge is not subject to inflation.
CASE STUDY No 45
Illustration
Recently, Ministry of Health and Family Welfare along with Drug Control Department havecome hard on
health care centers for charging exorbitant fees from their patients. HumanHealth Care Ltd. (HHCL), a
leading integrated healthcare delivery provider company is feelingpinch of measures taken by authorities
and facing margin pressures due to this. HHCL isoperating in a competitive environment so; it’s difficult
to increase patient numbers also. Management Consultant of the company has come out with some plan
for cost control andreduction.
HHCL provides treatment under package system where fees is charged irrespective of days a patient stays
in the hospital. Consultant has estimated 2.50 patient days per patient. He wants to reduce it to 2 days. By
doing this, consultant has targeted the general variable cost of ₹ 500 per patient day. Annually 15,000
patients visit to the hospital for treatment.
Medical Superintendent has some concerns with that of Consultant’s plan. According to him, reducing the
patient stay would be detrimental to the full recovery of patient. They would come again for admission
thereby increasing current readmission rate from 3% to 5%; it means readmitting 300 additional patients
per year. Company has to spend ₹ 25,00,000 more to accommodate this increase in readmission. But
Consultant has found bless in disguise in this. He said every readmission is treated as new admission so it
would result in additional cash flow of ₹ 4,500 per patient in the form of admission fees.
40
Coppergate Educare-9920443322 CA Final LMR Question Book
Required :
(i) CALCULATE the impact of Management Consultant’s plan on profit of the company.
(ii) Also COMMENT on result and other factors that should be kept in mind before taking any
decision.
CASE STUDY No 46
Illustration
Aditya Ltd. manufactures four products A-1, B-2, C-3 and D-4 in Gurgaon and one product F-1
inFaridabad. Aditya Ltd. operates under Just-in-time (JIT) principle and does not hold anyInventory of
either finished goods or raw materials.
Company has entered into an agreement with M Ltd. to supply 10,000 units per month of each product
produced from Gurgaon unit at a contracted price. Aditya Ltd. is bound to supply these contracted units to
M Ltd. without any fail. Following are the details related with non-contracted units of Gurgaon unit.
(Amount in ₹)
The product manufactured in Gurgaon unit use direct material M-1 and M-2 but product F-1 produced in
Faridabad unit is made by a distinct raw material Z. Material Z is purchased from the outside market at
₹ 200.00 per unit. One unit of F-1 requires one unit of material Z.
Material Z can also be manufactured at Gurgaon unit but for these 2 hours of direct labour, 3 hours of
machine time and 2.5 litres of material M-2 will be required.
The Purchase manager has reported to the production manager that material M-1 and M-2 are in short
supply in the market and only 6,50,000 Kg. of M-1 and 6,00,000 litre of M-2 can be purchased in a
month.
41
Coppergate Educare-9920443322 CA Final LMR Question Book
Required :
(i) CALCULATE whether Aditya Ltd. should manufacture material Z in Gurgaon unit or continue to
purchase it from the market and manufacture it in Faridabad unit.
(ii) CALCULATE the optimum monthly usage of Gurgaon unit’s available resources and make
decision accordingly.
(iii) CALCULATE the purchase price of material Z at which your decision in (i) can be sustained.
CASE STUDY No 47
Illustration
Raw material 𝑅1 (highly toxic) will be needed to complete the AT Industries’ special job. XL Polymers
purchased the 𝑅1 two weeks ago for ₹7,500 for a job ‘A’ that recently was completed. The 𝑅1 currently in
stock is the excess from that job and XL Polymers had been planning to dispose of it. XL Polymers
estimates that it would cost them ₹1,250 to dispose of the𝑅1 . Current replacement cost of 𝑅1 is ₹6,000.
Special job will require 250 hours of labour 𝐺1 and 100 hours of labour 𝐺2 . XL Polymers pays their
𝐺1 and𝐺2 employees ₹630 and ₹336 respectively for 42 hours of work per week.
XL Polymers anticipates having excess capacity of 150 [𝐺1 ] and 200 [𝐺2 ] labour hours in the coming
week. XL Polymers can also hire additional 𝐺1 and 𝐺2 labour on an hourly basis; these part-time
employees are paid an hourly wage based on the wages paid to current employees.
Suppose that material and labour comprise XL Polymers’ only costs for completing the special job.
Required :
CALCULATE the ‘Minimum Price’ that XL Polymers should bid on this job?
42
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 48
Illustration
Rabi Ltd. is considering the discontinuance of Division C. The following information is given:
The rates of variable costs are 90% of the normal rates due to the current volume of operation. There is
adequate market demand.
For any lower volume of operation the rates would go back to the normal rates.
Facilities released by discontinuing Division C cannot be used for any other purpose.
Required :
6.25 LPP
CASE STUDY No 49
Illustration
A company manufactures two products. Each product passes through two departments A and B before it
becomes a finished product. The data for the year are as under:
Maximum Quantity of Direct Materials available is 17,000 kgs. Each product requires 2 kg.Of Direct
Materials. The Purchase Price of direct materials is ₹5/ kg.
43
Coppergate Educare-9920443322 CA Final LMR Question Book
Required :
(ii) In view of the aforesaid production capacity constraints, the company has decided to produce
only one of the two products during the year. Which of the two products should be produced and
sold in the year to maximize profit? State the number of units of that product and relevant
contribution.
6.31
CASE STUDY No 50
44
Coppergate Educare-9920443322 CA Final LMR Question Book
P 6,800 0 2,44,800 IV
Q* 4,171 4,381 2,85,967 -
R 0 8,089 2,50,759 III
S 3,700 4,800 2,82,000 II
T 4,250 4,250 2,84,750 I
Note (*)
Combination Q (4,171, 4,381) is not possible as it is satisfying three conditions out of above four
Conditions. To produce combination Q (4,171, 4,381), requirement of the material will be 17,104 Kgs.
(2 Kg x 4,171 units + 2 Kg x 4,381 units). However, material is available 17,000 Kgs. Accordingly, this
combination is not possible.
45
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER- 7
PRICING DECISION
CHAPTER -9
DIVISIONAL TRANSFER PRICING
CASE STUDY No 51
Your company fixes the Inter-divisional transfer prices for its products on the basis of cost, plus a return
on investment in the division. The Budget for Division A for 1998-99 appears as under:
Investment in Division A
₹
Fixed Assets 5,00,000
Current Assets 3,00,000
Debtors 2,00,000
CASE STUDY No 52
For an annual sales of 40,000 units of Impex.Fixed overhead is ₹ 5,50,000. The variable cost per unit is
₹ 60. Capital employed in fixed assets is ₹ 8,00,000 and in current assetsare 50% of net sales (i.e. sales
less discount). The company sells goods at 20% discount on the maximum retail price (M.R.P.), which is
₹ X per unit. The company wants to earn a return of 25% before lax on capital employed in fixed and
current assets.
Required :
46
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 53
Required :
Determine the unit selling price under two strategies mentioned below. Assume that the organization’s
Tax rate is 40%-
CASE STUDY No 53 A
Division A is a profit centre, which produces four products P, Q, R and S. Each product is sold in the
external market also. Data for the period is as follows:
P Q R S
Market Price per unit (₹) 350 345 280 230
Variable Cost of Production per
unit 330 310 180 185
Labour Hours Required per unit 3 4 2 3
Product S can be transferred to Division B but the maximum quantity that might be required for transfer
is 2,000 units of S.
P 3,000 units
Q 3,500 units
R 2,800 units
S 1,800 units
Division B can purchase the same product at a slightly cheaper price of ₹ 225 per unit instead of receiving
transfers of product S from Division A.
What should be transfer price for each unit for 2,000 units of S, if the total labour hours available in
Division A are:
47
Coppergate Educare-9920443322 CA Final LMR Question Book
AB Cycles Ltd. has 2 divisions. A and B which manufacture bicycle. Division A produces bicycle frame
and Division B assembles rest of the bicycle on the frame. There is a market for sub-assembly and the
final product. Each division has been treated as a profit centre. The transfer price has been set at the long-
run average market price. The following data are available to each division:
Required:
i. If Division A’s maximum capacity is 1,000 p.m. and sales to the intermediate are now 800 units,
should 200 units be transferred to B on long-term average price basis.
ii. What would be the transfer price, if manager of Division B should be kept motivated?
iii. If outside market increases to 1,000 units, should Division A continue to transfer 200 units to
Division B or sell entire production to outside market?
CASE STUDY No 54
SV Ltd. manufactures a product which is obtained basically from a series of mixing operations. The
finished product is packaged in the company-made glass bottles and packed in attractive cartons.
The company is organized into two independent divisions viz. one for the manufacture of the end-product
and the other for the manufacture of glass bottles. The product manufacturing division can buy all the
bottle requirements from the bottle manufacturing division.
The General Manager of the bottle manufacturing division has obtained the following quotations from the
outside manufacturers for the supply of empty bottles.
A cost analysis of the bottle manufacturing division for the manufacture of empty bottles reveals the
following production costs:
48
Coppergate Educare-9920443322 CA Final LMR Question Book
The production cost and sales value of the end product marketed by the product manufacturing division
are as under:
There has been considerable discussion at the corporate level as to the use of proper price for transfer of
empty bottles from the bottle manufacturing division to product manufacturing division. This interest is
heightened because a significant portion of the Divisional General Manager’s salary is in incentive bonus
based on profit centre results.
As the corporate management accountant responsible for defining the proper transfer prices for the supply
of empty bottles by the bottle manufacturing division to the product manufacturing division, you are
required to show for the two levels of volumes of 8,00,000 and 12,00,000 bottles, the profitability by
using (i) market price and (ii) shared profit relative to the costs involved basis for the determination of
transfer prices. The profitability position should be furnished separately for the two divisions and the
company as a whole under each method. Discuss also the effect of these methods on the profitability of
the two divisions.
CASE STUDY No 55
A company has two Divisions, Division ‘A’ and Division ‘B’. Division ‘A’ has a budget of selling
2,00,000 nos. of a particular component ‘x’ to fetch a return of 20% on the average assets employed.
The following particulars of Division ‘A’ are also known:
However, there is constraint in Marketing and only 1,50,000 units of the component ‘x’can be directly
sold to the Market at the proposed price.
It has been gathered that the balance 50,000 units of component ‘x’ can be taken up by Division ‘B’
Division ‘A’ wants a price of ₹ 4 per unit of ‘x’ but Division ‘B’ is prepared to pay ₹ 2 per unit of ‘x’.
Division ‘A’ has another option in hand, which is to produce only 1,50,000 units of component ‘x’. This
will reduce the holding of assets by ₹ 2 lakhs and fixed overhead by ₹ 25,000.
You are required to advise the most profitable course of action for Division ‘A’.
49
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 56
The two manufacturing divisions of a company are organized on profit centre basis. Division X is the
only source of a component required by Division Y for their product ‘P’. Each unit of P requires one unit
of the said component. As the demand of the product is not steady, orders for increased quantities can be
obtained by manipulating prices.
The manufacturing cost (excluding the cost of the component from Division X) of P in Division Y is₹
14,06,250 on first 5,000 units and ₹ 56.25 per unit in excess of 5,000 units.
Division X incurs a total cost of ₹ 5,62,500 per day for an output upto 5,000 components and the total
costs will increase by ₹ 3,37,500 per day for every additional 5,000 components manufactured. The
Manager of Division X has set the transfer price for the component at ₹ 90 per unit to optimize the
performance of his Division.
Required:
(i) Prepare a divisional profitability statement at each level of output, for Division X and Y
separately:
(ii) Find out the profitability of the company as a whole at the output level where:
(a) Division X’s net profit is maximum;
(b) Division Y’s net profit is maximum.
(iii) Find out at what level of output, the company will earn maximum profit, if the company is not
organized on profit centre basis.
CASE STUDY No 57
A company is engaged in the manufacture of edible oil. It has three divisions as under:
(i) Harvesting oil seeds and transportation thereof to the oil mill.
(ii) Oil Mill, which processes oil seeds and manufactures edible oil.
(iii) Marketing Division, which packs the edible oil in 2 kg. Containers for sale at ₹ 150 each
container.
50
Coppergate Educare-9920443322 CA Final LMR Question Book
The Oil Mill has a yield of 1,000 kgs of oil from 2,000 kg of oil seeds during a period. The
Marketing Division has a yield of 500 cans of edible oil of 2 kg each from every 1,000 kg of oil. The net
weight per can is 2 kgs of oil.
The cost data for each division for the period are as under:
Harvesting Division ₹
Variable cost per kg of oil seed 2.50
Fixed cost per kg of oil seed 5.00
Marketing Division ₹
Variable cost per can of 2 kg of oil 3.75
Fixed cost per can of 2 kg of oil 8.75
The fixed costs are calculated on the basis of the estimated quantity of 2,000 kg of oil seeds harvested,
1,000 kg of processed oil and 500 cans of edible oil packed by the aforesaid divisionsrespectively during
the period under review. The other oil mills buy the oil seeds of same quality at ₹ 12.50 per kg in the
market. The market price of edible oil processed by the oil mill, if sold without being packed in the
marketing division is ₹ 62.50 per kg of oil.
Required:
(i) Compute the overall profit of the company of harvesting 2,000 kg if oil seeds, processing it into
edible oil and selling the same in 2 kg cans as estimated for the period under review.
(ii) Compute the transfer prices that will be used for internal transfers from (1) Harvesting Division
to Oil Mill Division and (2) from Oil Mill Division to Marketing Division under the following
pricing methods:
(1) Shared contribution in relation to variable costs; and
(2) Market price.
(iii) Which transfer pricing method will each divisional manager prefer to use?
CASE STUDY No 58
Tycoon Ltd. has two manufacturing departments organized into separate profit centers known as Textile
unit and Process House. The Textile unit has a production capacity of 5 lacsmetres cloth per month, but at
present its sales is limited to 50% to outside market and 30% to process house.
The transfer price for the year 2014 was agreed at ₹ 6 per metre. This price has been fixed in line with the
external wholesale trade price on 1st January, 2014. However, the price of yam declined, which was the
raw material of textile unit, with effect, that wholesale trade price reduced to ₹ 5.60 per metre with effect
from 1st June, 2014. This price was however not made applicable to the sales made to the processing
house of the company. The textile unit turned down the processing house request for revision of price.
The Process house refines the cloth and packs the output known as brand Rayon in bundles of 100 metres
each. The selling price of the Rayon is ₹ 825 per bundle. The process house has a potential of selling a
51
Coppergate Educare-9920443322 CA Final LMR Question Book
further quantity of 1,000 bundles of Rayon provided the overall prices is reduced to ₹ 725 per bundle. In
that event it can buy the additional 1,00,000metres of cloth from textile unit, whose capacity can be fully
utilized. The outside market has no further scope.
(i) Prepare statement showing the estimated profitability for June, 2014 for Textile unit and Process
house and company as a whole on the following basis:
(a) At 80% and 100% capacity utilization of the Textile unit at the market price (external
wholesale trade price on 1st January, 2014) and the transfer price to the Processing house of
₹ 6 per metre.
(b) At 80% capacity utilization of the Textile unit at the market price of ₹ 5.60 per metre and
the transfer price to the Processing house of ₹ 6 per metre.
(c) At 100% capacity utilization of the Textile unit at the market price of ₹ 5.60 per metre and
the transfer price to the Processing house of ₹ 5.60 per metre.
(ii) Comment on the effect of the company’s transfer pricing policy on the profitability of processing
house.
CASE STUDY No 59
The cost of production and sales of 80,000 units per annum of product ‘I’ are:
The fixed portion of capital employed is ₹12 lacs and the varying portion is 50% of sales turnover.
Required :
Determine the selling price per unit to earn a return of 12% net on capital employed (net of Tax @ 40%).
52
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 60
APV Ltd. has developed a new product which is about to launched into the market. The variable cost of
selling the product is ₹ 17 per unit. The marketing department has estimated that at a sale price of ₹ 25,
annual demand would be 10,000 units. However, if the sale price is set above ₹ 25, sales demand would
fall by 500 units for each ₹ 0.50 increase above ₹ 25. Similarly, if the price is below ₹ 25, demand would
increase by 500 units for each ₹ 0.50 stepped reduction in price below ₹ 25.
Required :
Determine the price which would maximize APV Ltd.’s profit in the next year.
CASE STUDY No 61
Transfer Pricing
Maryanne Ltd. has two divisions Division A and Division B. Division A produces product Z, which it
sells to external market and also to Division B. Divisions in the Maryanne 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 profit given for each period.
Division A 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 A
incurs ₹ 1,600 as variable cost per unit and total fixed overhead of ₹ 4,00,00,000. Division A 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 A has been given a profit target of ₹ 2,50,00,000 for the year.
Division B has found two other suppliers R Ltd and S Ltd. who are agreed to supply product Z.
Division B has requested a quotation for 40,000 units of product Z from Division A.
Required :
a. CALCULATE the transfer price per unit of product Z that Division A should quote in order to meet
target profit for the year.
b. CALCULATE the two prices Division A would have to quote to Division B, if itBecame Maryanne
Ltd. policy to quote transfer prices based on opportunity costs.
53
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 7
PRICING DECISION
CHAPTER -9
DIVISIONAL TRANSFER PRICING
CASE STUDY No 62
This model determines the level of production up to which production can be continued.
(ii) The Basic Price equation, which is used to determine the Price where Profit is Maximum. The
equation is written as:
P = a – bQ
54
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE STUDY No 63
Illustration 1
The budgeted cost data of a product manufactured by Ayudhya Ltd. is furnished as below:
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:
Required :
ANALYSE the above situation and DETERMINE 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 markup 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.
CASE STUDY No 64
Illustration 2
Bosch Ltd. Has developed a special product. Details are as follows. The Product will have a life cycle of
5000 units. It is estimated that market can absorb first 4500 units at ₹64 per unit then the product will
enter the decline stage of its life cycle.
Fixed cost will be ₹40,000 over the life cycle of the product. The labour rate and both of these costs will
not change throughout the product life cycle.
55
Coppergate Educare-9920443322 CA Final LMR Question Book
The first batch of 100 units will take 1,000 labour hours to be produce. There will be an 80% learning
curve that will continue until 2,500 units have been produce batches after this level will each take the
same amount of time as the 25th batch size will always be 100 units.
Required :
CALCULATE average selling price of the final 500 units that will allow the company to earn a total
profit of ₹80,000 from the product if average time for 24 batches is 359.40 hours.
(Note: - Learning Coefficient -0.322 for learning rate of 80%)
The Values of logs have been given for calculation purpose:
Log 2= 0.30103, Log 3= 0.47712, Log 5= 0.69897; antilog of 2.534678=342.51, antilog of
2.549863=353.70 antilog of 2.555572 =359.40 antilog 2.567698= 369.57
CASE STUDY No 65
Example
Division A Produces goods at cost at a cost of ₹ 10 P.U and transfers the goods to division B Which has
additional cost of ₹ 5 P.U Division B Sells externally at 16 P.U The company has of policy of setting
transfer prices at cost + 20%
Calculate:-
i. Profit of each division and the overall profit the company made.
ii. Write a brief analysis of result.
Example
CASE STUDY No 66
A Manufacturer of cornflakes has two divisions, one producing the cornflakes and another packaging
division that manufactures cartons from outside vendors would be:
Number of Cartons ₹
5,000 77,000
8,000 95,000
Production cost incurred by the packaging division for similar volume of cartons:
Number of Cartons ₹
5,000 75,000
8,000 80,000
56
Coppergate Educare-9920443322 CA Final LMR Question Book
The Production and sale of the final product, cornflakes are as below:
As Appropriate transfer pricing policy is being framed. As the corporate management accountant
calculate-
i. The transfer pricing based on (1) share profit relative to cost method and (2) Market method.
ii. Discuss the effect of both methods on the profitability of divisions.
CASE STUDY No 67
Example
A company has division A producing three products called X, Y, Z Each product can be sold in the open
market in the following manner.
Maximum external sales are X 800 units, Y 500 units Z 300 Units All Figures in ₹
Particulars X Y Z
Product Y Can be transferred to division B, but the maximum quantity that might be required for transfer is
300 units of Y.
Division B could buy similar product in the open market at a price of 45 P.U
i. What Should be the transfer price per unit for 300 units of Y, if the total labour hours available
with division A are:
(a) 13,000 hours (b) 8,000 hours and (C) 12,000 hours
ii. Indicate the transfer pricing range that can promote goal congruence.
57
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 8
PERFORMANCE MEASUREMENT AND EVOLUTION
CASE STUDY No 68
Action Plan manufactures normally product 8000 units of their product in a month, in their machine shop.
For the month of January, they had planned for a production of 10,000 units. Owing to a sudden
cancellation of contract in the middle of January they could only produce 6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine shop and the Foreman
of the shop is paid 10% of the savings as bonus when in any month the indirect manufacturing cost
Incurred is less than the budgeted provision.
The foreman has put in a claim that he should be paid a bonus of₹88.50 for the month of January. The
works manager wonders how anyone can claim a bonus when the company has lost a sizeable contract.
The relevant figures are as under:
₹ ₹ ₹
Do you agree with the work Manger? Is the foreman entitled to any bonus for the performance in
January? Substantiate your answer with facts and figures.
58
Coppergate Educare-9920443322 CA Final LMR Question Book
Star telecom Ltd is 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 practice in the world. Following are some
information related to the company’s performance for a particular period.
The Balance Scorecard is a method which displays organization’s performance into four dimensions
namely Financial Customer, Internal and Innovation. The four dimentions 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 Scorecard 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 remain
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 prospective: 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% [( 27,500-25000)/(25000 X 100] it shows dissatisfaction is
increasing among the consumers which would adversely Impact the consumer’s general
perception about the company and company may lose its consumers in long run.
iii. Internal Business Perspective: Establishing customer relationship centers will be covered under
this perspective. Company has established 80 relationship centers in the current period exceeding
its target of 50 (250-200) to cater to the needs of existing consumers as well as soliciting new
consumers this shows the seriousness of the company towards the consumers. This shows the
seriousness of the company towards the consumer satisfaction and would help them in long run.
iv. Learning and growth perspective: Employee training programmers are covered under this
prospective.
Company had set a target to cover at least 15% employee under its training programmes but
covered only 10%.This could hurt capabilities of the employee which are needed for long term
growth of the organization necessary to achieve the objectives set in the previous three
perspectives. People or the Indraprastha resource of the company is one of the three principle
source where organizational learning and growth comes.
59
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 10
STRATEGIC ANALYSIS OF OPERATING INCOME
CASE STUDY No 69
1. Bank of NZ operated for years under the assumptions that profitability can be increased by increasing
Rupee volumes. But that has not been the cases. Cost analysis has revealed the following.
The following annual information on three products was also made available.
Required:
A company product dour product viz. P, Q, R, and S. The data relating to production activity are as under:
60
Coppergate Educare-9920443322 CA Final LMR Question Book
Required:
I. Select a suitable cost driver for each item of overhead expense and calculate the cost per unit of
cost driver.
II. Using the concept of Activity Bases Costing, compute the factory cost per unit of each product.
G-2020 LTD is a manufacturer of a range of goods. The cost Structure of its different products is as
follows:
G-2020 Ltd. was absorbing overheads on the basis of direct labourhours A newly appointed management
accountant has suggested that the company should introduce ABC System and has identified cost drivers
and cost pools as follows:-
61
Coppergate Educare-9920443322 CA Final LMR Question Book
Required:
A manufacturing organization has four different customers A, B, C and D. A single product is sold to
them at different prices because of trade discount offered. Data is given for cost per unit of business
activity. You are required to prepare customer profitability statement.
Customers A B C D
62
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER -11
Budgetary Control
A factory which experts to operate 7,000 hours, i.e., at 70% level of activity, furnishes details of expenses
as under:
The Semi-Variable expenses go up by 10% between 85% and 95% activity and by 20% above 95%
activity. Construct a flexible budget for 80, 90 and 100 percent activities.
A single product Company estimated its sales for the next year quarter wise as under:
Quarter Sales(Units)
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 10,000units and the company expects to maintain the closing stock
of finished goods at 16,250 units at the end of the year. The production pattern in each quarter is based on
80% of the sales of current quarter and 20% of the sales of the next quarter.
The opening stock of raw materials in the beginning of the year is 10,000kg.and the closing stock at the
end of the year is required to be maintained at 5,000kg. Each unit of finished output requires 2 Kg. of raw
materials.
The company proposes to purchase the entire annual requirement of raw materials in the first three
quarters in the proportion and at the prices given below:
63
Coppergate Educare-9920443322 CA Final LMR Question Book
You are required to present the following for the next year, quarter wise:
1) Production budget (In Units)
2) Raw material consumption budget (in quantity)
3) Raw material purchase budget (in quantity & values)
4) Priced stores ledger card of the raw material using First in First out method
November December
Required:
64
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER - 12
Standard Costing
CASE STUDY NO.75
To obtain an output of 100 units of product X, 800 kgs of material is required at a budgeted price of ₹5
per kg. During the month, the actual output was 500 units. The actual material consumption was 4,400
kgs @ ₹5.30 per kg. You are required to calculate various material cost variances.
Question
Question
To produce 100 units of a product, 3 types of workers are required as per following standards.
65
Coppergate Educare-9920443322 CA Final LMR Question Book
Part A
During September 2005 following were the details of labour hours recorded for the output of 1600 units.
M star ltd. uses standard costing system in manufacturing of its single product 'MGO'. The standard cost
per unit of 'MGO' is as follows.
During July, 2013, 6,000 units of M were procured and the related data are as under:
You are required to compute the missing figures and work out all the relevant variances.
XYZ Ltd. has furnished you the following for the month of August:
Budget Actual
66
Coppergate Educare-9920443322 CA Final LMR Question Book
The budget output of a single product manufacturing company for 2013-14 was 5,000 units. The financial
results in respect of the actual output of 4,800 units achieved during the year were as under:-
The standard direct wage rate is₹4.50 per hour and the standard variable overhead rate is ₹7.50 per hour.
The cost accounts recorded the following variances for the year:-
Young Chin Limited uses standard and marginal costing system. If provides the following details for the
year 2012-13 relating to its production, cost and sales:
Particulars Budget Actual
The sales budget is based on the expectation of the company’s estimate of market share of
67
Coppergate Educare-9920443322 CA Final LMR Question Book
12 %.The entire industry's sales of the same product for the year 2012-13, is 2,40,000 units.
a) Prepare a statement reconciling the budgeted contribution with actual contribution on the basis
of important material variances, labourvariances,overhead variances and sales variances.
b) Compute market size variance and market share variance also.
(₹)
Budgeted Profit 1,00,000
Usage -- 6,400
Direct Labour Rate -- 3,600
Efficiency 3,600 --
Capacity -- 4,000
68
Coppergate Educare-9920443322 CA Final LMR Question Book
Profit 25 % on sales
You are required to prepared the Annual Financial Profit/ Loss Statement for April, 2013 in the following
format:
Sarron Products Ltd. Produces and sell a single product. Standard cost card per unit product is as follows:
Amt(₹)
A fixed production overhead has been absorbed on the expected annual output of 25,200 units produced
evenly throughout the year. During the month of December 2013, the following were the actual results
for an actual production of 2,000 units:
69
Coppergate Educare-9920443322 CA Final LMR Question Book
The material price variance is extracted at the time of receipt of materials. Material
purchasewere A 20,000 kg @ ₹5.25 per kg; B 11,500 kg @₹5.70 per kg.
Required:
70
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER 12
STANDARD COSTING
LEARNING OUTCOMES
Interpret Variance
Apply Standard Costing Methods including the Reconciliation of Budgeted and Actual Profit
Margins
Explain the wider issues involved in changing mix e.g. Cost, Quality, and Performance
Measurement issues
Use Variance Analysis to assess how future Performance of an organization can be improved
71
Coppergate Educare-9920443322 CA Final LMR Question Book
CASE SCENARIO
Natural Spices manufactures and distributes high-quality spices to gourmet food shops and
topQualityrestaurants. Gourmet and high-end restaurants pride themselves on using the freshesthighest-
quality ingredients.
Natural Spices has set up five state of the art plants of 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 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 firm’s ultraclean
factory before being dispatched to customers.
Required:
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 markets to retail market and street shops which is price sensitive.
Purchase Price Variance is clearly indicating that firm has purchased raw material at lower
price which may be indicating cost cutting and stretching resources.
It appears that firm is intending to expand its market to retail market and street shops by not
only reducing the price but also compromising its quality which is opposing its current
strategy of high quality.
Management should monitor the trends of variances on regular basis and take appropriate
action in case of evidence of permanent decline in quality. Here, customer feedback is also
very important.
72
Coppergate Educare-9920443322 CA Final LMR Question Book
Illustration
N & S Co. (NSC) is a multiple product manufacturer. NSC produces the unit and all overhead are
associated with the delivery of units to its customers.
Amt Amt
Required:
Illustration
City International Co. is multiproduct firm and operates standard costing and budgetary
control system. During the month of June firm launched a new product. An extract from
performance report prepared by Sr. Accountant is as follows:
Sr. Accountant prepared performance report for new product on certain assumptions but later On he
realized that this new product has similarities with other existing product of the company.
Accordingly, the rate of learning should be 80% and that the learning would cease after 15 units. Other
budget assumptions for the new product remain valid.
The original budget figures are based on the assumptions that the labour has learning rate of 90% and
learning will cease after 20 units, and thereafter the time per unit will be the same as The time of the final
unit during the learning period, i.e. the 20th unit. The time taken for 1st unit Is 10 hours.
Required:
Show the variances that reconcile the actual labour figures with revised budgeted figures in as much detail
as possible.
Note:
The learning index values for a 90% and a 80% learning curve are – 0.152 and – 0.322
Respectively.
[log 2 = 0.3010, log 3 = 0.47712, log 5 = 0.69898, log 7 = 0.8451, antilog of 0.6213 = 4.181, Antilog of
0.63096 = 4.275]
73
Coppergate Educare-9920443322 CA Final LMR Question Book
Solution
Working Note
The usual learning curve model is
Y = ax b
Where
b = Learning coefficient
W.N.1
Time required for first 15 units based on revised learning curve of 80%
(when the time required for the first unit is 10 hours)
y = 10 X (15)−0.322
Log y = Log 10 – 0.322 X log 15
Log y = Log 10 – 0.322 X log (5 X 3)
Log y = Log 10 – 0.322 X [log 5 + log 3]
Log y = 1 – 0.322 X [0.6987 + 0.47712]
Log y = 0.6213
y = antilog of 0.6213
y = 4.181 hrs
Total time for 15 units = 15 units X 4.181 hrs
= 62.72 hrs
Time required for first 14 units based on revised learning curve of 80%
(when the time Required for the first unit is 10 hours)
y = 10 X (14)−0.322
Log y = Log 10 – 0.322 X log 14
Log y = Log 10 – 0.322 X log (2 X 7)
Log y = Log 10 – 0.322 X [log 2 + log 7]
Log y = 1 – 0.322 X [0.3010 + 0.8451]
Log y = 0.63096
y = antilog of 0.63096
y = 4.275 hrs
Total time for 14 units = 14 units X 4.275 hrs
= 59.85 hrs
74
Coppergate Educare-9920443322 CA Final LMR Question Book
Total time for next 10 units = 28.70 hrs [(62.72 - 59.85) hours X 10 units]
Total time for 25 units = 62.72 hrs + 28.70 hrs
= 91.42 hrs
W.N.2
₹ 1,19,288
=
Standard Rate 𝟏𝟖𝟎.𝟕𝟒 𝒉𝒓𝒔
= ₹660.00 per hr
₹ 79,704
=
Actual Rate 𝟏𝟏𝟖.𝟎𝟖 𝒉𝒓𝒔
W.N.3
Computation of Variance
Labour Rate Variances = Actual Hrsx(Std Rate – Actual Rate)
= 118.08 hrs x (₹660.00 –₹675.00)
= ₹1,771.20 (A)
Labour Efficiency Variance = Std. Rate x (Std. hrs – Actual hrs)
= ₹ 660 x (91.42 hrs – 118.08 hrs)
= ₹ 17,595.60 (A)
Amt
75
Coppergate Educare-9920443322 CA Final LMR Question Book
Traditional approach to variance analysis is to compute variance based on total cost for
production inputs and total standard cost applied to the production output. This is ambiguous, when inputs
are limited. Failure to use limited inputs properly leads not only to increasedacquisition cost but also to a
lost contribution. Therefore, it is necessary to consider the lostcontribution in variance analysis. When
this approach is used, price or expenditure variances are not affected.
Illustration
Osaka Manufacturing Co. (OMC) is a leading consumer goods company. The budgeted and actual data of
OMC for the year 2016-17 are as follows-
The budgeted data shown in the table is based on the assumption that total market size would be 4,00,000
unit 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 2016-17 in as much detail as possible.
Illustration
Queensland Chemicals (QC) manufacturer high-quality chemicals C-1, C-2 and C-3. Extracts from the
budget for last year are given below.
76
Coppergate Educare-9920443322 CA Final LMR Question Book
The actual direct labour cost per hour was ₹ 150. Actual variable overhead cost per direct labour hour
was ₹ 20. QC follows just in time system for purchasing and production and does not hold any inventory
Required:
PREPARE the Sales Mix Variance and Sales Quantity variance in terms of contribution.
Solution
Variance Interpretation
The sales quantity variance and the sales mix variance describes how the sales volume
Contribution variance has been affected by a change in the total quantity of sales and a change in the
relative mix of products sold.
From the figures arrived for the sales quantity contribution variance,we can observe that the increase in
total quantity sold would have gained an additional contribution of ₹ 2,124,600, if the actual sales volume
had been in the budgeted sales proportion.
The sales mix contribution variance shows that the variation in the sales mix resulted in a curtailment in
profit by₹570,600. The change in the sales mix has resulted in a relatively higher proportion of sales Of
C-2 which is the chemical that earns the lowest contribution and a lower proportion of C-1 which earn a
contribution significantly higher. The relative increase in the sale of C-3 however, which has highest unit
contribution, has partially offset the switch in mix to C-2.
ANZ Ltd. Has provided the following summarized result for two years
Year ended
(₹ in lacs)
31.03.2016 31.03.2017
Sales 3,000 3,277.50
Material 2,000 2,357.50
Variable Overheads 500 525.00
Fixed Overheads 300 367.50
Profit 200 27.50
During the year ended 31-3-2017 sale price has increased by 15% whereas material and
Overhead prices have increased by 15% and 5% respectively.
77
Coppergate Educare-9920443322 CA Final LMR Question Book
Required:
(i) Analyse the variances of revenue and each element of cost over the year in order to bring out
the reasons for the change in profit.
(ii) Present a profit reconciliation statement starting from profits 2015-16. Showing the factors
responsible for the change in profits in 2016-17.
78
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER 13
LINEAR PROGRAMMING PROBLEM
CASE STUDY NO.89
A manufacturer produces two produces two products A and B, and has his machines in operation for 24
hours a day. Production of A requires 2 hours Production of B requires 8 hours of processing in machine
M1 and 2 hours in machine M2.The manufacturer earns a profit of ₹ 5 on each unit of A and ₹ 2 on each
unit of B. How many units of each product should be produced in a day in order to achieve maximum
profit ?
CASE STUDY NO 90
A Ltd. makes 2 products, Tables (T) and Chairs (C), which must be processed through Assembly (A) and
Finishing (F) departments Assembly has 60 hours available per week, finishing can handle upto 48 hours
a week.
Manufacture of one table requires 4 hours of assembly and 2 hours in finishing. Each chair requires 2
hours in assembly and 4 hours in finishing.
Profit is ₹ 80 per table and ₹ 60 per chair. Choose the best combination of chairs and tables to produced to
maximum profit.
1. Formulate the Linear Programming model equations.
2. Present graphically.
3. What is the maximum profit?
A Sports Club is engaged in the development of their players by feeding them certain minimum amount
of Vitamins (say A, B and C). In addition to their normal division view of this, two types of products
X and Y are purchased from the market. The contents of Vitamin constituents per unit are shown in the
following table :
Minimum
Vitamins Vitamin contents in requirement for each
Constituents products player
X Y
A 36 06 108
B 03 12 36
C 20 10 100
79
Coppergate Educare-9920443322 CA Final LMR Question Book
A dealer wishes to purchase a number of fans and sewing machines. He has only ₹ 5,760 to invest and has
space utmost for ₹ 20 items. A fan costs him ₹ 360 and a sewing machine ₹ 240 His expectation is that he
can sell a fan at a profit of ₹ 22 and a sewing machine at a profit of ₹ 18 Assuming that he can sell all the
items that he can buy, how should he invest his money in order to maximize his profit ? Formulate this
problem as a linear programming problem and then use graphical method to solve it.
A firm manufacture two products A and B on which profits earned per units are ₹ 3 and ₹ 4 respectively.
Each product is processed on two machines M1 and M2. The product A requires one minute of processing
time on M1 and two minutes on M2 while B requires one minute on M1 and one minute on M2 . Machine
M1 is available for use for not more than 7 hours 30 minutes, while M 2 is available for 10 hours during
any working day. Formulate LP model for this problem.
A company produces two products X and Y, each of which requires processing in three machines. The
first machine can be used at most 70 hours; the second machine at most 40 hours; and the third machine at
most 90 hours. The product X requires 2 hours on machine 1,1 hour on machine 2, and 1 hour on machine
3; the product Y requires 1 hour each on machines 1 and 2, and 3 hours on the third machine. The profit is
₹ 50 per unit of X and ₹ 30 per unit of Y. Formulate LP model for this problem.
A company produces two types of presentation goods A and B that require gold and silver. Each unit of
type A requires 3 gms.of silver and 1 gm. Of gold while that of B requires 1 gm. Of silver and 2 gms. of
gold. The company can procure 9 gms of silver and 8 gms of gold. If each unit of type A brings a profit of
₹ 40 and that of type B ₹ 50, determine the number of units of each type that the company should produce
to maximize the profit. What is the maximum profit ?
80
Coppergate Educare-9920443322 CA Final LMR Question Book
CHAPTER 12
LEARNING CURVE THEORY
CASE STUDY NO.96
A company has 10 direct workers, who work for 25 days a month of 8 hours per day. The estimated down
time is 25% of the total available time. The company received an order for a new product.The first unit of
the new product requires 40 direct labour hours to manufacture the product. The company expects 80%
(index is -0.322) learning curve for this type of work. The company uses standard absorption costing and
the cost data are as under:
(i) Calculate the cost per unit of the first order of 30 units.
(ii) It the company receives a repeat order for 20 units, what price will be quoted to yield a profit
of 25% on selling price?
An electronics firm which has developed a new type of fire-alarm system has been asked – to quote for a
prospective contract. The customer requires separate price quotations for each of the following possible
order :
First 100
Second 60
Third 40
81
Coppergate Educare-9920443322 CA Final LMR Question Book
A customer has asked your company to prepare a bid on supplying 800 units of a new product.
Production will be in batches of 100 units. You estimate that costs for the first batch of 100 units will
average ₹ 100 a unit. You also expect that a 90% learning curve will apply to the cumulative labour cost
on this contract.
Required:
CYZ CO., has observed that a 90% learning curve ratio applies to all labour related costs each time a new
model enters production. It is anticipated that 320 units will be manufacture during 1999. Direct labour
cost for the first lot of 10 units amounts to 1,000 hours at ₹ 8 per hour. Variable overhead cost is assigned
to products at the rate of ₹ 2 per direct labour hour. You are required to determine:
i) Total Labour and labour related costs to manufacture 320 units of output
ii) Average cost of (a) the first 40 units produced (b) the first 80 units, (c) the first 100 units.
iii) Incremental cost of (a) units 41 – 80 and (b) units 101 – 200.
82
Prof. Siddharth Surana
Corporate Office:
723, Ecstasy, City of Joy, JSD Road, Near Station, Mulund (W), Mumbai - 400080
Whats app / Mobile : 9920443322 | Email : educare@coppergate.in
Website:- coppergateeducare.in