Additional Question Bank - Dec 2021

SCMPE
Additional Practical Questions - Dec 2021 Exams

Cellular Manufacturing
Question 1
It has been resolved that cellular manufacturing shall be adopted in order to improve
productivity, in the recent board meeting of Raptor Bearing and Shaft Limited. In favour of the
resolution, Mr. Nayak (the executive director) who is responsible for production and
operation function gave a briefing over different layouts of cells. The Managing Director, Mr.
Syal believes that each possible cell formation and layout need to be studied in advance by a
cross functional team.
Chief HR officer Mr. Mishra shown his concern over the utility of cellular manufacturing to
enhance productivity. In response to him, Mr. Nayak mentioned ‘Although scientific
management is quite an old theory of management pronounced by Frederick Winslow Taylor,
which analyses and synthesizes workflows with the objective of improving economic
efficiency, especially labour productivity; but still has relevance. This relevance multi-folds
when Time and Motion studies are considered in nexus with cellular manufacturing’.
Mr. Nayak constituted a cross-functional team with the term of reference stated in said board
resolution. You are also part of teams as a representative of Management Accounting Division.
The team started with the study of different possible layouts and machine cell designs. While
analysing the production flow it is observed that 5 different parts/ components (P101, P104,
P105, P107, and P108) are complexly involved in processing at 5 different machines (M2, M7,
M13, M13A, and M15).
Part-Machine Incident Matrix for Production Flow Analysis for the said product is given
below–
P101 P104 P105 P107 P108
M2 1*
M7 1# 1
M13 1* 1
M13A 1# 1
M15 1
Interpretation
(*) P101 requires processing at M2 and M13, whereas (#) P104 requires processing at M7 and
M13A.
Required
(i) DISCUSS the concern expressed by Mr. Mishra over the utility of cellular manufacturing.
(ii) EXPLAIN on utility of at-least three machine cell designs, which can be used.
(iii) FIND logical part families and machine groups based upon Part-Machine Incident Matrix
to showcase Machine-Part grouping using Rank Order Clustering Algorithm.
Answer
(i) Cellular manufacturing is a lean way to enhance productivity by improving (reducing)
the performance in the context of time and motion involved in the production.
BY CA ATUL AGARWAL (AIR-1)

AIR1CA Career Institute (ACI)
Page APQ.1
SCMPE Additional Practical Questions – Dec 21 Exams
Cellular manufacturing is an application of group technology in the manufacturing in

which all or a portion of a firm’s manufacturing system has been converted into
manufacturing cells.
Here is important to note that a manufacturing cell is a cluster of machines or processes
located in close proximity and dedicated to the manufacturing of a family of parts.
Cellular Manufacturing results in following benefits to improve productivity–
(a) Reduce setup times by using part family tooling and sequencing.
(b) Reduce flow times by reducing material handling and transit time and using
smaller batch sizes (even single piece flow – this also results in the requirement of
less floor space).
(c) Reduce lead time.
(d) Reduced work-in-process inventory.
(e) Better use of human resources. Hence, reduced direct labour but heightened sense
of employee participation.
(f) Better scheduling, easier to control, and automate.
(g) Increased use of equipment & machinery, hence reduced investment on
machinery & equipment.
Hence, concern expressed by Mr. Mishra, regarding the utility of cellular manufacturing
to enhance productivity is not material.
(ii) The Machine Cell Design can be classified based on the number of machines and the
degree to which the material flow is mechanized between the machines. The most
common designs are–
(a) Single Machine Cell consists of a machine plus supporting fixtures and tooling to
make one or more part families. This can be applied (useful) to work parts that
are made by one type of process such as turning or milling.
(b) Group Machine Cell with manual handling consists of more than one machine
used collectively to one or more part families and no provision for mechanical
part movement between machines. In this, human operators run the cell and
perform material handling.
Note– If the size of the part is huge or there is a large number of machines in the
cell, then regular handling crew may be required.
Preferable cell shape is U-shaped (single/few workers). U shape is useful in the
movement of multi-functional workers.
Since the design simply includes certain machines in the group and restrict their
use for specified part family hence often achieved without rearranging the process
type layout; So, bring the cost-saving (on rearranging) but lock-in material
handling benefits of group technology.
(c) Group Machine Cell with semi-integrated handling consists of more than one
machine used collectively to one or more-part families and uses a mechanical
handling system, such as conveyor, to move parts between machines in the cell.
Note– There may be in-line layout (identical or similar routing - machines are
laid along a conveyor to match the processing sequence) and loop layout (allows
parts to circulate in the handling system and permits different processing steps in
the different parts in the system).

Page APQ.2
(d) Flexible Manufacturing System is a highly automated machine cell in group

technology that combines automated processing stations with a fully integrated
material handling system.
(iii) Rank Order Clustering Algorithm to form machine-part groups–

Assign Binary Weight (BWj = 2n-j) to each column j of the matrix, where n =5 (the
number/ types of components). Calculate the Decimal Equivalent (DEi) of the binary
values of each row i using the formula:
Rank the rows in decreasing order of their DEi values i.e., largest value is ranked as 1.
j P101 P104 P105 P107 P108 DEi Rank
i
M2 1 16 2
M7 1 1 9 4
M13 1 1 18 1
M13A 1 1 12 3
M15 1 2 5
BWj 25-1 = 25-2 = 25-3 = 25-4 = 25-5 =
16 8 4 2 1
Now, Re-arrange the rows in the running order of the rankings.

Since further rearrangement is necessary, assign Binary Weight (BWi = 2m-i) to each
row i of the matrix, where m =5 (the number of machines). Calculate the Decimal
Equivalent (DEj) of the binary values of each column j using the formula:
Rank the columns in decreasing order of their DEj values i.e., the largest value is ranked
as 1.
j P101 P104 P105 P107 P108 BWi
i
M13 1 1 25-1= 16
M2 1 25-2= 8
M13A 1 1 25-3= 4
M7 1 1 25-4= 2
M15 1 25-5= 1
DEj 24 6 4 17 2
Rank 1 3 4 2 5
Now, Re-arrange the columns in the running order of the rankings.
Since further rearrangement is necessary, assign Binary Weight (BWj = 2n-j) to each
column j of the matrix, where n =5. Calculate the Decimal Equivalent (DEi) of the
binary values of each row i using the formula:

Page APQ.3
Rank the rows in decreasing order of their DEi values.

j P101 P107 P104 P105 P108 DEi Rank
i
M13 1 1 24 1
M2 1 16 2
M13A 1 1 6 4
M7 1 1 5 5
M15 1 8 3
BWj 25-1 = 25-2 = 25-3 = 25-4 = 25-5 =
16 8 4 2 1

Since further rearrangement is necessary, assign Binary Weight (BWi = 2m-i) to each
row i of the matrix, where m =5. Calculate the Decimal Equivalent (DEj) of the binary
values of each column j using the formula:
Rank the columns in decreasing order of their DEj values.

j P101 P107 P104 P105 P108 BWi
i
M13 1 1 25-1= 16
M2 1 25-2= 8
M15 1 25-3= 4
M13A 1 1 25-4= 2
M7 1 1 25-5= 1
DEj 24 20 3 2 1
Rank 1 2 3 4 5
Since the ranking is now neatly arranged in order, stop the process. We can now
identify the groupings.
Part Families and Machine Groups
Cluster/Cell Part Machine
I P101 and P107 M13, M2, and M15
II P104, P105, and P108 M13A and M7
Question 2
You are newly appointed management consultant with experience in Lean System. During
discussion at meeting, managing partner (Mr. Gupta) explain the assembly line workflow
process at RIO along with the machine part incident matrix. You quoted about your past
experience of implementing Cellular Manufacturing system. Mr. Gupta asks you to:
(i) FIND appropriate cells using suitable method.
(ii) COMMENT on the results, if any.
Note- Use “Rank Order Clustering method”.

Page APQ.4
Machine Shop RIO-042

Machine Part Incident Matrix
Part P1 P2 P3 P4 P5 P6
Machine
Mb 1 1
Mc 1 1 1
Md 1 1
Me 1 1 1
Mf 1 1 1
Answer
Assign Binary Weight (BWj = 2n-j) to each column j of the matrix, where n =6 (the number/
types of parts). Calculate the Decimal Equivalent (DEi) of the binary values of each row i
using the formula:
Rank the rows in decreasing order of their DEi values i.e., the largest value is ranked as 1.
j P1 P2 P3 P4 P5 P6 DEi Rank
i
Mb 1 1 10 4
Mc 1 1 1 7 5
Md 1 1 48 2
Me 1 1 1 11 3
Mf 1 1 1 52 1
BWj 26-1 = 26-2 = 26-3 = 26-4 = 26-5 = 26-6 =
32 16 8 4 2 1

Since further rearrangement is necessary, assign Binary Weight (BWi = 2m-i) to each row i of
the matrix, where m =5 (the number of machines). Calculate the Decimal Equivalent (DEj) of
the binary values of each column j using the formula:
Rank the columns in decreasing order of their DEj values i.e., the largest value is ranked as
1. [Break ties arbitrarily]
j P1 P2 P3 P4 P5 P6 BWi
i
Mf 1 1 1 25-1= 16
Md 1 1 25-2= 8
Me 1 1 1 25-3= 4
Mb 1 1 25-4= 2
Mc 1 1 1 25-5= 1

Page APQ.5
DEj 24 24 6 17 7 5
Rank 1 2 5 3 4 6

Since further rearrangement is necessary, assign Binary Weight (BWj = 2n-j) to each column j
of the matrix, where n =6. Calculate the Decimal Equivalent (DEi) of the binary values of each
row i using the formula:

j P1 P2 P4 P5 P3 P6 DEi Rank
i
Mf 1 1 1 56 1
Md 1 1 48 2
Me 1 1 1 7 4
Mb 1 1 6 5
Mc 1 1 1 13 3
26-1 = 26-2 = 26-3 = 26-4 = 26-5 = 26-6 =
BWj 32 16 8 4 2 1

Since further rearrangement is necessary, assign Binary Weight (BWi = 2m-i) to each row i of
the matrix, where m =5. Calculate the Decimal Equivalent (DEj) of the binary values of each
column j using the formula:
Rank the rows in decreasing order of their DEj values. [Break ties arbitrarily]
j P1 P2 P4 P5 P3 P6 BWi
i
Mf 1 1 1 25-1= 16
Md 1 1 25-2= 8
Mc 1 1 1 25-3= 4
Me 1 1 1 25-4= 2
Mb 1 1 25-5= 1
DEj 24 24 20 7 3 6
Rank 1 2 3 4 6 5
Since further rearrangement is necessary, assign Binary Weight (BWj = 2n-j) to each column j
of the matrix, where n =6. Calculate the Decimal Equivalent (DEi) of the binary values of each
row i using the formula:

Page APQ.6

j DEi Rank
i P1 P2 P4 P5 P6 P3
Mf 1 1 1 56 1
Md 1 1 48 2
Mc 1 1 1 14 3
Me 1 1 1 7 4
Mb 1 1 5 5
BWj 26-1 = 26-2 = 26-3 = 26-4 = 26-5 = 26-6 =
32 16 8 4 2 1
Since the ranking is now neatly arranged in order, stop the process. We can now identify
the cells.
Cell 1 P1, P2, P4 M f, M d
Cell 2 P5, P6, P3 Mc, Me, Mb
The following cells, as derived from the Rank Order Clustering Algorithm, shall be presented
to Mr. Gupta for consideration along with the below comments.
Cell 1 Cell 2
Part Family 1 Machine Group 1 Part Family 2 Machine Group 2
P1 Mf P5 Mc
P2 Md P6 Me
P4 P3 Mb
Comments
It is essential to understand that the cells are not totally independent. Since P4, which is
member of cell 1, needs processing in Mc. But machine Mc belongs to cell 2. So, some amount of
intercell movement/change will take place in this situation. In general, these moves may
become unavoidable in real life circumstances. There are various alternative ways of
eliminating intercell moves in a cellular manufacturing system like– redesigning the part so
that the machine belongs to other cell is no longer required for processing, subcontracting the
part/adding the necessary machines in the cell. The cell designer should evaluate the
consequences of each of these ways and take suitable measures/ways to minimise these
moves.

Page APQ.7
OEE
Question 3
Lite-On Power Solution (LPS) is producing laptop power adaptors (charger) using specially
customised machine PA-C12. The management at LPS is highly concerned with the
productivity of such a machine, because this machine is engaged in an activity which is a
constraint function (bottleneck activity). Management at LPS constitutes a lean team with the
objective of identifying the various techniques which can be used in order to enhance the
overall productivity at LPS including the PA-C12 especially. PA-C12 is a human-operated
machine and took a standard time of 20 minutes to produce one power adaptor.
Up-till now
LPS is working in three shifts in the day for 6 days a week. Each shift is of 8 hours with a lunch
break of 30 minutes and two tea breaks of 15 minutes each. Shift change overtime is 30
minutes per shift. Preventive maintenance time per shift is 10 minutes. In a week downtime
was 6 hours of which 5 hours are due to breakdown maintenance and remaining hour on
account of power failure.
PA-C12 works through all three shifts. During the said week 306 adaptors were produced
using PA-C12, out which only 290 met the quality specification of the QC team.
Towards lean and way forward
In order to enhance the productivity of PA-C12, management at the advice of the lean team
decided to apply TPM. A three-member TPM team (which is part of a lean team) specifically
designated for PA-C12. As a result of efforts shift change over time reduced to 20 minutes.
Preventive maintenance time further increased by 5 minutes per shift, but this results in a
reduction of 4 hours in breakdown maintenance on a weekly basis. The worker agreed to the
arrangement of a reduction of 5 minutes in each of tea break and extending the lunch break to
35 minutes.
Management is positive with the improving culture, but anxious to know the benefit out of
TPM implementation and its performance in terms of improvement in productivity. TPM team
which is responsible for the productivity of PA-C12 identified that in the recent week post-
implementation of TPM, 320 adaptors were produced out of which 304 adaptors passed
quality check.
Required
(i) OEE can be the cornerstone of implementing TPM in Lite-On Power Solution? EXPLAIN.
(ii) ANALYSE the TPM performance in terms of effective use of PA-C12 at LPS using a
relevant approach.
Note: Take weekly data for calculation
Answer
(i) TPM (Total Productive Maintenance) is the system which, adds value by maintaining
and improving the production process and ensuring safety, quality, continuity through
man and machines. Productivity is all about the efficient and effective use of all
resources. In order to evaluate the TPM performance in terms of effective use of PA-
C12 at LPS, OEE (Overall Equipment Effectiveness) can be applied. OEE is a “best
practices” metric that identifies the percentage of available production time that is
productive in the true sense (with quality). OEE measured in terms of percentage. A

Page APQ.8
score of 100% represents “perfect production” with zero waste, zero defect, and zero
downtime.
OEE can be computed either as–
(Good Units x Ideal Cycle Time)/Planned Production Time
Or
(Availability) x (Performance) x (Quality)
Availability measures the run time as a percentage of planned production time. Run
time may be less than planned production time due to unplanned downtime. Unplanned
downtime arises on account of loss of production time due to abnormal downtime (like
breakdown or power failure etc.)
Performance measures the speed of work. It measures the relation between ideal cycle
time required for actual production and run time (time consumed for actual
production).
Quality can be defined as conformance to the need of customers. The product which
meets the quality criteria (such customer’s need) can be said, good count. Quality can be
measured as the percentage of good counts to the total counts (product produced or
output generated).
Seiichi Nakajima in his book, Introduction to TPM (originally published in 1984 and
later in 1988 translated into English) suggested that ideal values (World-Class OEE) for
the OEE component measures are:
 Availability rate in excess of 90 percent
 Performance efficiency rate in excess of 95 percent
 Quality rate in excess of 99 percent
Such levels of Availability, Performance and Quality would result an ideal OEE scores of
approximately 85 percent.
(ii) Analysis
TPM performance is positive in term of effective use of PA-C12 at LPS because Overall
Equipment Effectiveness (OEE) is improved from 84.79% to 86.61%. There is an
absolute increase of 1.82%, the relative increment is 2.15% (1.82% to 84.79%). Now
OEE is beyond the ideal rate of 85% suggested by Seiichi Nakajima. Hence, considering
OEE only (rather its individual components) it can be said that machine demonstrate the
world class performance. It is important to note that both performance and quality rate
are still lower than the ideal rate (world class performance), whereas availability rate
still persists beyond the ideal rate and upholding the OEE beyond ideal rate of 85%.
WORKINGS
OEE before TPM
OEE = Availability × Performance × Quality OEE Factors are calculated as follows–
1. Availability: NOT/NAT = (6,480/6,840) × 100 = 94.74 %
2. Performance: IOT/NOT = (6,120/6,480) × 100 = 94.44%
3. Quality: Good Units/Total Units = (290/306) × 100 = 94.77%
OEE = A × P × Q = 94.74% × 94.44% × 94.77% = 84.79%
Workings
1. Scheduled Time (total time) = 8,640 Minutes (6 days × 3 shifts × 8 hrs. × 60 mins.)
Page APQ.9
2. Planned Down Time = 1,800 minutes (100 minutes* × 6 days × 3 shifts)

[2 tea breaks × 15 minutes + 1 lunch break 30 minutes + shift change 30 minutes +
preventive maintenance 10 minutes = 100 minutes]
3. Net Available Time (NAT) = 8,640 – 1,800 = 6,840 minutes
4. Unplanned Downtime = 360 minutes*
[*breakdown maintenance (60 minutes × 5 hrs.) + power failure (60 minutes × 1
hr.)]
5. Net Operating Time (NOT) = Net Available Time – Unplanned Downtime NOT =
6,840 – 360 = 6,480 minutes
6. Ideal Operating Time (IOT): 306 total units × 20 mins. = 306 × 20 = 6,120 minutes
OEE after TPM
OEE = Availability × Performance × Quality OEE Factors are calculated as follows–
1. Availability: NOT/NAT = (6,900/7,020) × 100 = 98.29 %
2. Performance: IOT/NOT = (6,400/6,900) × 100 = 92.75%
3. Quality: Good Units/Total Units = (304/320) × 100 = 95.00%
OEE = A × P × Q = 98.29% × 92.75% × 95.00% = 86.61%
Workings
1. Scheduled Time (total time) = 8,640 Minutes (6 days × 3 shifts × 8 hrs. × 60 mins.)
2. Planned Down Time = 1,620 minutes (90 minutes* × 6 days × 3 shifts)
[2 tea breaks × 10 minutes + 1 lunch break 35 minutes + shift change 20 minutes +
preventive maintenance 15 minutes = 90 minutes]
3. Net Available Time (NAT) = 8,640 – 1,620 = 7,020 minutes
4. Unplanned Downtime = 120 minutes*
[*breakdown maintenance (60 minutes × 1 hrs.) + power failure (60 minutes × 1
hr.)]
5. Net Operating Time (NOT) = Net Available Time – Unplanned Downtime NOT =
7,020 – 120 = 6,900 minutes
6. Ideal Operating Time (IOT): 320 total units × 20 mins. = 320 × 20 = 6,400 minutes
Question 4
Sheetal Bearing Balls Limited (SBBL) is the famous name for bearing balls of different sizes.
Mr. Syal recently joined as Manager Production and Operations at Unit 3 of Ludhiana (in
Punjab) plant of the SBBL, wherein 10mm diameter steel ball bearings for bicycles are
manufactured. The plant is largely automated and lashed with the latest technology machines.
From Mr. Singh, Plant Accountant Mr. Syal come to know that since machines are of the latest
technology and workers are motivated due to the liberal workman policy of SBBL, hence
productivity and quality is and was never an issue, but availability is. Over lunch, when Mr.
Syal greets Mr. Kumar, Plant Head, he also expresses his worry over excessive downtime and
optimal use of limiting factors.
Mr. Syal, while navigating the ERP and reviewing the files & other documents handed over to
him, which was prepared and maintained by his predecessor; come across the OEE rate of

Page APQ.10
93.555% measured during last week for machine ‘107-10M-Bearing’ (which is limiting factor
– caused bottleneck activity) during a normal shift. Since the said machine has a high-
performance rate of 105%; hence Mr. Syal decided to dig deep into the composite OEE.
In the normal shift of 9 hours workers are allowed to take 2 short breaks of 15 minutes each
and a lunch break of 30 minutes. During such a normal shift, out of the total manufactured
27,216 bearing balls by said machine, only 272 balls are found defective.
Required
(i) DETERMINE the unplanned downtime witnessed by machine 107-10M-Bearing and
advise Mr. Syal, the best way-out to reduce the same (in brief).
(ii) MEASURE the Ideal Cycle Time to manufacture a single bearing ball.
(iii) APPLY, Goldratt’s five steps that can be applied to remove the bottleneck at the
Ludhiana plant of SBBL.
Answer
(i) Unplanned downtime of machine 107-10M-Bearing
Overall equipment effectiveness (OEE) is a quantitative metric for measuring the
productivity of individual equipment in a manufacturing plant. According to Seiichi
Nakajima who introduced OEE, it is capable to identify and measure the losses in a
manufacturing process through availability rate, performance rate, and quality rate.
OEE = Availability Rate × Performance Rate × Quality Rate
Quality Rate
Particulars Units
Output units – total count 27,216
Rejected units out of the above 272
Good units – good count (which met the quality criteria) (27,216 - 272) 26,944
Quality Rate (Good Counts/Total Counts) (26,944 units/27,216 units) = 99.00%
Since the quality rate is 99.00% and performance rate (105%), as well as overall
equipment effectiveness (93.555%), is also given in the case; hence availability rate can
be measure–
Availability Rate × 105.00% × 99.00% = 93.555%
The Availability rate is 90% i.e., run time [or net operating time (NOT)] / planned
production time [or net available time (NAT)]
Planned Production Time
Particulars Time in minutes
Total possible time (9 hours × 60 minutes) [scheduled time] 540
Less: Planned down time [scheduled loss]
Short breaks (2 breaks × 15 minutes) 30
Meal break (30 minutes) 30
Planned production time 480
Since the Availability rate is 90% and planned production time is 480 minutes, hence
run time shall be 432 minutes (run time / 480 minutes = 90.00%).

Page APQ.11
Since unplanned downtime is the difference between run time and planned production
time, hence unplanned downtime of machine 107-10M-Bearing is 48 minutes.
Particulars Time in minutes
Planned production time 480
Less: Run time (actual time taken) 432
Unplanned Downtime 48
Advise–
In order to reduce the unplanned downtime, preventive maintenance shall be practiced
either before or after each shift; and the shine (out of 5S) principle shall be adopted by
the workman as part of the TPM initiative. It is expected that the time spends on
preventive maintenance will be less than the current unplanned downtime of 48
minutes.
(ii) Ideal Cycle Time to manufacture a single bearing ball
Performance rate can be computed by dividing standard time required [or ideal
operating time] with run time. Since performance rate (105%) is given in the case and
run time (432 minutes) computed above; hence the standard time required to
manufacture 27,216 bearing balls is 453.6 minutes (standard time required / 432
minutes = 105.00%)
So, standard time required to manufacture a single bearing ball (i.e., ideal cycle time) is
1 (one) second (453.6 minutes × 60 / 27,216 balls) i.e., 60 bearing balls per minute.
(iii) Goldratt’s five steps to remove the bottleneck at Ludhiana plant of SBBL
Goldratt’s theory of constraints describes the following mentioned five steps process of
identifying and taking steps to remove the bottlenecks that restrict output.
1. Identifying the System Bottlenecks, likewise, at unit 3 of Ludhiana plant of SBBL,
107-10M-Bearing is limiting factor hence activity performed through/using this
equipment is bottleneck activity.
2. Exploit the Bottlenecks – Limiting factor (Bottleneck’s activity capacity) must be
fully utilised and that too optimally. Currently the overall equipment effectiveness
is already 93.555%, attention on the possibility to enhance the same is needful.
(Like preventive maintenance shall be practiced to avoid unplanned downtime.
Similarly for each production units, way-out depends upon the limiting factor of
that unit.)
3. Non-bottleneck activities are subordinate – Bottleneck activity should set up the
pace for non-bottleneck activities. Production units shall plan their production
keeping respective limiting factors at the centre point, because even if the efficiency
of non-bottleneck enhanced; same may be worthless due to scarcity of limiting
factor (bottleneck activity).
4. Elevate the bottleneck – Eliminate the bottleneck by enhancing the capacity and
efficiency. Major change (business reengineering) or continuous minor change
(kaizen) may do.
Note – There will always be one bottleneck in the system, if such bottleneck is
eliminated then a new constraint emerges as a bottleneck. Hence this process
continuous. Ultimately improvement is a never-ending continues process.

Page APQ.12
5. Repeat the process – Apply step 1 to new bottleneck activity which emerges at
different production units of Ludhiana plant of SBBL and repeat the process.

Page APQ.13
Throughput Accounting
Question 5
Testy Food Court (TFC) is renowned local name all age of foodies for authentic taste and
aroma. TFC has two divisions Bake Studio and Hot Serve. Both the divisions are working
independently in two different kitchens of same hall building. Mr. Palash and her daughter
Avnee manages the business, whereas son Subodh who is Chartered Accountant by profession
also support the business with management consultancy.
Bake Studio division produces cup-cake. Cup-cake is baked in specially designed ovens and
owing to lack of ovens and space in same; oven machines are considered as the bottleneck
resource. Each cake requires 0.30 oven hours if oven is at 350 oC. 500 oven hours are available
each month. Each cup-cake is sold for ₹30. The direct material cost per cake is ₹15. All other
cost of operating ovens per month is ₹22,500.
Hot Serve runs like café with reading facility and produces only two products on alternate day
basis, hot chocolate and latte which pass through two processes, beating and preparing.
There are one chef and one helper apart from 3 waiters. Ms. Avnee herself manages the
counter. Café starts at 10 AM in morning and remain open till 8 in evening. Idea is to customer
focus; each cup of coffee is prepared separately at order and in accordance with specification.
The requirement of time for each unit is expresses in matrix below–
Process\Product Hot Chocolate Latte
Beating 9.5 Minutes 7.5 Minutes
Preparing 9 Minutes 6.8 Minutes
Beating and Preparation process witness average downtime of 1.5 hours and 2.5 hours
respectively on account of lunch hour of helper and chef and requisite cleaning of kitchen to
maintain hygiene etc. The costs and revenue for each unit of Hot Chocolate and Latte are given
below–
Particulars Hot Chocolate Latte
Direct Materials 40 30
Direct Labour 20 22
Variable Overhead 10 8
Absorbed Fixed Cost 10 5
Total Cost 80 65
Selling Price 100 80
Required
TFC recently adopt the back-flush costing system with a raw material inventory control
account and throughput accounting on Subodh’s advice.
(i) DESCRIBE the feature (in brief) which distinguishes back-flush accounting from other
systems?
(ii) COMPUTE the cup-cakes’ throughput accounting ratio and INTERPRET the results.
(iii) If maximum possible sale in a day for hot chocolate and latte is 50 and 62 cups
respectively, then PREPARE the daily production plan that would maximise the
contribution, use both throughput and traditional approaches. Also, DISCUSS
appropriateness of both approaches.
Answer

Page APQ.14
(i) Backflush accounting

Back-flush accounting helps in implementing JIT system. It reduces the number of
accounting entries by delaying the recording of cost until event take place, in case of JIT
even when goods are moved as finished inventory or sold; hence save costs and time.
(ii) Throughput return per oven hour
(sales - direct material cost)/Usage of bottleneck resource ( ₹30 – 15) / 0.30 hours i.e.,
₹50 per oven hour
Operating cost per oven hour
(total operating cost/ bottleneck resource i.e., hrs. available ₹22,500/ 500 hrs. i.e., ₹45
per oven hour
Throughput accounting ratio
(Throughput return per hour/cost per hour)
₹50 per oven hour / ₹45 per oven hour i.e., 1.11 times
Interpretation
Throughput accounting ratio is simply a relation between earning revenue and
incurring cost in terms of bottle-neck, usually per unit of bottleneck activity.
Throughput accounting ratio of any product if greater than one, then signify profitable
business and in case ratio is less than one it means organisation loses money every time
such product is produced.
In case of cup-cake unit of bake studio, throughput accounting ratio is 1.11 times which
signifies business of baking cup-cakes is profitable because return is ₹1.11 to every
rupee of cost.
(iii) Maximum available time for each of process (in minutes)
Process Total time* Downtime# Available Time
Beating 600 90 510
Preparing 600 150 450
*10 Hours (morning 10 to evening 8) @ 60 minutes # 1.5 hours & 2.5 hours @ 60
minutes
Maximum possible units of hot chocolate and latte can be served.
Process\Product Hot Chocolate Latte
Beating 510/9.5 Minutes = 53.68 510/7.5 Minutes = 68
Preparing 450/9 Minutes = 50 450/6.8 Minutes = 66.17
In case of both the products number of units are higher in case of beating process in
comparison to preparing process. Hence, time available for beating process is not
binding constrain, the limiting factor or constrain is preparing process. Hence, decision
of maximising contribution shall be based upon time available for preparing process.
Throughput approach - Maximising the contribution per minute in preparing process.
Material Cost 40 30
Throughput Contribution 60 50

Page APQ.15
Time required in preparing process (In Minutes) 9 Minutes 6.8 Minutes

Contribution per minute of preparing process 6.66 7.35
Ranking II I
Serve 3 Cups (balancing 62 Cups
figure)
Daily Production Plan
Amount of
Product Units @ Time @ Contribution (₹)
Hot 27
Chocolate 3 9 minutes (balance fig.)* 60 per unit 180
Latte 62 (maximum 6.8 minutes 421.6 50 per unit 3,100
consumption)
Total 448.6 (450) 3,280
*Balancing figure – after serving 62 cups of latte, 28.4 minutes left and @ 9 minute per
cup only 3 cups of hot chocolate can be completely prepared. There will be idle time of
1.4 minute.
Traditional approach - Maximising the contribution per minute in preparing process
Total Variable Cost 70 60
Contribution 30 20
Time required in preparing process (In Minutes) 9 Minutes 6.8 Minutes
Contribution per minute of preparing process 3.33 2.94
Ranking I II
Serve 50 Cups Nil
Daily Production Plan (under traditional system)

Product Units @ Time @ Amount of
Contribution (In ₹)
Hot 50
Chocolate (maximum 9 minutes 450 30 per unit 1,500
consumption)
Latte Nil 6.8 minutes Nil 20 per unit Nil
Total 450 1,500
Discussion
Marginal Costing gained importance in first half of 20th century, especially in 1930’s
and 40’s, then labour cost used to be variable largely of completely, because there were
casual workers. But circumstance and labour laws has been changed significantly since
then, now the labour/workforce is largely permanent, not if the regular in nature, hence
labour cost no longer remain variable cost. Especially in shorter period let’s say
decision making for 3-6 months. Labour contracts used to have termination clause,
which usually have provision of notice etc. Throughput approach gives importance to
this substance and consider only material cost as real variable cost. Hence, rather

Page APQ.16
considering the contribution after deduction of all variable cost, it computes throughput
contribution by reducing material cost from revenue. Hence, use of throughput costing
can make decision more relevant because it considers the true nature of cost.
Therefore, Critical aspects, which management accountant need to focus are–
 Is decision really short term or not? and
 True nature of variable overhead.
At this Point, it is important to note that the marginal costing approach requires only
variable costs to be used to calculate contribution. If only material costs are variable,
then only those costs should be used in the calculation of contribution. So, there should
be no difference the two systems in this respect.
Overall, decision of maximisation of contribution can be taken using either of
traditional or throughput contribution. However, appropriateness of selection
among these two techniques depends on the variability of labour and variable
overheads, which in turn depends on the time horizon of the decision.

Page APQ.17
Life Cycle Costing & EMA

Question 6
In WM Ltd. the ‘OB’ equipment is about to be replaced either by ‘CF’ system or by an ‘OF’
system.
Finance costs 12% a year and the other estimated costs are as follows:
CF OF
(₹) (₹)
Initial Cost 28,000 40,000
Annual Operating Costs 24,000 p.a. 18,000 p.a.
Required
If the company expected the new system (either CF or OF) to last at least for 12 years, which
system should be chosen? COMMENT.
Answer
Calculation of Life-cycle Costs
CF OF
(₹) (₹)
Initial Cost 28,000 40,000
Add: Present value of annual 1,48,656 1,11,492
operating costs over the life-time (₹ 24,000 x 6.194) (₹ 18,000 x 6.194)
Total Life Cycle Costs 1,76,656 1,51,492
The annuity factor of 12% finance costs for 12 years is 6.194.

Analysis
When we compare only the initial cost, we will tend to purchase CF system, for its cheap
acquisition cost. But when we compare the total life-cycle costs, the OF system is most
preferable, for its lowest total life-cycle costs.
Question 7
Sheetal Paper Mart (SPM) is in process of getting ISO 14001:2004 Environmental
Management Systems (revised ISO 14001:2015) certification. SPM is selling eco-friendly and
wheat straw-based paper of different sizes (A3, A4, and A5) and GSM under the brand ‘Prime’.
Prime is a famous name among both commercial and household consumers.
For purpose of getting certified, a cross-functional team is constituted, which is responsible ‘to
improve the environmental impact & image of SPM as eco-friendly enterprise and
control environmental cost’, which collects the following particulars relating to the H1 and
H2 (first and second half of the relevant fiscal year respectively)
Disposing of the toxic material costs ₹1.2 crores to SPM in H2 which is 20% lesser than what
was spent during H1. Committee responsible for formulating policy matters on environment-
related aspects in SPM has departmental budget of ₹6 lakhs p.a., in H1 the utilisation rate was
80% and in H2 it was 110%.

Page APQ.18
Environmental audits earlier used to conduct on a half-yearly basis, but management decided
to reduce the frequency to quarter each, in the mid of such year. Each such audit cost ₹8 lakhs
to SPM. In the H2 SPM extends the production capacity and installed the new plant &
machinery which has put to use cost of ₹77.25 crores, this is the premium version of the plant
and machine due to its capability to reduce the generation of waste. Erection and other
installation costs including dry-run were ₹65 lakhs and the same for all versions. The standard
version has on-board cost of ₹76.20 crores.
SPM is practicing the recycling policy, which was formulated around three years ago; for the
scrap, it generates in its plant. The review of the recycling policy is pending for the last 12
months. The cost incurred during the fiscal year was ₹2.75 crores, spent in alignment to scrap
generated during the year. The policy document also states– ‘zero discharge of waste/scrap
into the environment, in order to be true-sense eco-friendly enterprise’.
In H2 contamination test was performed which cost ₹4 lakhs to SPM. The monitoring cost
incurred during the year was ₹78 lakhs; in H2 this was double then H1.
Required
(i) PREPARE the environmental cost statement as per the classification suggested by
‘Hanson and Mendoza’.
(ii) ANALYSE the elements of environmental cost at SPM.
(iii) EVALUATE whether the cross-functional team is successful in serving their ‘terms of
reference’.
Note- Clearly State the assumptions (if any).
Annexure
Scrap Generated (during the year)
Quarter First Second Third Fourth

Scrap generated and recycled 1,572 MT 1,428 MT 1,114 MT 886 MT
Answer
(i) Sheetal Paper Mart
Environmental Cost Statement
H1 H2
Particulars Amount (in % to Amount (in % to
lakhs) total lakhs) total
Environmental Prevention Costs
Creating Environment policies 2.4 0.68 3.3 0.96
[(6/2) × 0.8] [(6/2) × 1.1]
Investment in protective equipment - - 40# 11.58
[(7,725 – 65) – 7,620]
Sub-Total (a) 2.4 0.68 43.3 12.54
Environmental Detection Costs
Monitoring 26 7.40 52 15.06
(78 in the ratio of 1:2)
Performing Contamination test - - 4 1.16

Page APQ.19
Environmental Audit 8 2.28 16 4.63

[1 × 8] [2 × 8]
Sub-Total (b) 34 9.68 72 20.85
Environmental Internal Failure Costs
Recycling Scrap 165 46.95 110 31.86
(275 in the ratio of 3:2)
Disposing of Toxic Material 150 42.69 120 34.75
Sub-Total (c) 315 89.64 230 66.61
Grand Total (a + b + c) 351.4 100 345.3 100
# Since the details regarding useful economic life of the newly erected plant and the machine
is not given, hence the entire incremental cost recognised in H2 only (when put to use);
despite the benefit will arise over the useful economic life in form of a reduction in generation
of waste.
(ii) Analysis
The environmental cost incurred in H2 (₹345.3 lakhs) is comparatively less than what
was incurred in H1 (₹351.4 lakhs). Environmental internal failure costs reduced in H2
(₹230 lakhs) in comparison to H1 (₹315 lakhs), but still a substantial component of total
environmental costs (66.61% in H2 against 89.64% in H1). The reduction of
environmental internal failure costs is the outcome of increased environmental
prevention costs (12.54% in H2 against 0.68% in H1) and environmental detection costs
(20.85% in H2 against 9.68% in H1).
Note – Since the policy document also states ‘zero discharge of waste/scrap into the
environment, in order to be true-sense eco-friendly enterprise’ hence there are no
environmental external failure costs.
(iii) Evaluation
Apart from getting the certificate, the cross-functional team has terms of reference ‘to
improve the environmental impact & image of SPM as eco-friendly enterprise and
control environmental cost’
In the context of controlling environmental cost, the team attained a reasonable
reduction in total environmental cost, impact in this environmental cost statement (over
H1 and H2) seem low because the incremental cost due to purchase of premium version
of plant and machine is charged in H2, which will benefit in form reduced waste over the
useful economic life.
In the context of improving the image of SPM as an eco-friendly enterprise, the
policy document which in practice also states– ‘zero discharge of waste/scrap into the
environment, in order to be true-sense eco-friendly enterprise’ and same is also visible
through environmental cost statement as there are no environmental external failure
costs
In the context of improving the environmental impact, SPM able to generate low
waste in H2 (2,000 MT) in comparison of H1 (3,000 MT) just by installing new plant and
machine which produce less waste, increased monitoring, and audits.
Hence it can be concluded that the team is successfully serving the terms of
reference.

Page APQ.20
Decision Making
Question 8
ZAINA Private Limited is a manufacturing company of electrical equipment. The company is
facing the possibility of a strike by its direct production workers engaged on the assembly of
one of its machines. The Trade Union is demanding an increase of 8% backdated to the
beginning of its financial year (1st April), but the company expects that if a strike takes place,
it will last four weeks after which the Union will settle for an increase of 6% similarly
backdated.
The Machine whose production (Ceiling Fans) would be affected by the strike is sold to
distributors at a discount of 25% from the current recommended selling price of ₹ 2,000. The
estimated costs for the Ceiling Fans are:
Particulars Fixed Cost (₹) Variable Cost (₹)

Production 8,00,000 1,200 Per Ceiling Fan
Distribution 3,00,000 80 Per Ceiling Fan
Total Cost 11,00,000 1,280 Per Ceiling Fan
Direct labour comprises 60% of the variable production cost. The budgeted output is 30,000
Ceiling Fans in 50 working weeks per year. If the strike takes place, the following situations
are expected by the company:
(a) Maintenance staff, whose wages are included in the fixed production costs, would used
to carry out an overhaul of the conveyor system using materials worth ₹ 50,000. This
work would otherwise be undertaken by an outside contractor at a cost including
materials ₹ 1,50,000.
(b) Sales of 500 Ceiling Fans would be lost to completion. The balance that could ordinarily
have been produced during the strike period, could however, be sold, but these ceiling
fans would have to be produced in overtime working which would be at an efficiency
rating of 80% of the normal. This would also entail additional fixed costs of ₹ 40,000 and
wage payments at time and one-half.
Required
(i) CALCULATE the profit or loss with and without strike.
(ii) Taking, purely economic point of view, ADVISE the management to allow the strike to go
ahead, rather than agree to the Union's demand.
(iii) LIST-Any two factors, not considered in yours above evaluation that may have adverse
financial effects for the company, if the strike were to take place.
Answer
(i) Statement Showing the Profit or Loss with and without Strike
Without Strike (increase of 8% With Strike (increase of 6% Incremental
backdated) (A) backdated) (B) (A)-(B)
Sales 30,000 units Sales (strike period) 1,900 units 500 units
(30,000 × 4/50 - 500)
Sales (normal period)- 27,600 units
(30,000 × 46/50)
₹ ₹

Page APQ.21
Sales 6,00,00,000 Sales (strike period) 28,50,000 19,50,000

(30,000 units × (1,900 × 2,000 × 75%)
2,000) Sales (normal period) 5,52,00,000
(27,600 × 2,000)
Less: Variable 1,44,00,000 Less: Variable 1,41,60,000 2,40,000
Production Cost Ex. Production Cost Ex.
Labour (30,000 units Labour
× 1,200 × 40%) (29,500 units × 1,200
× 40%)
Less: Variable 24,00,000 Less: Variable 23,60,000 40,000
Distribution Cost Distribution Cost
(30,000 units × 80) (29,500 units × 80)
Less: Labour Cost 2,33,28,000 Less: Labour Cost 2,10,64,320 22,63,680
(30,000 units × (27,600 units × 1,200
1,200 × 60% × 1.08) × 60% × 1.06)
Less: Labour Cost N.A. Less: Labour Cost 27,18,900 (27,18,900)
Strike Pdn. Strike Pdn. (1,900
units/0.80 × 1,200
× 60% × 1.06 × 1.5)
Less: Additional N.A. Less: Additional Fixed 40,000 (40,000)
Fixed Cost (labour) Cost (labour)
Less: Maintenance 1,50,000 Less: Maintenance 50,000 1,00,000
Cost Cost
Less: Fixed Cost 11,00,000 Less: Fixed Cost 11,00,000 0
Profit/ (Loss) 1,86,22,000 Profit/ (Loss) 1, 65,56,780 20,65,220
(ii) If there is no strike, it will yield a financial advantage of ₹20,65,220. Therefore, from a
purely economic point of view, management should accept union’s demand.
(iii) These factors, not considered in above evaluation, that may have adverse effects, if the
strike were to take place are:
 There will be knock on effect of wage increase and all other workers will start
demanding it.
 Customers gone to competitors may not even return.
 Loss of goodwill.
 Behavioural effects after strike period and their impact on work.
 Strain in relation between trade union, labour, and management.
Question 9
Murat District Cooperative Bank (M-DCB) was established in the year 1909, the 111-year-old
district cooperative bank has become the oldest among the around 375 district banks in the
country. Since M-DCB was established more than a century ago, hence has a traditional style of
working; but bank now realise the need for change especially in its products; to survive and
sustain the existing customer base, even to grow further. In the recent meeting of top-level
management at M-DCB, a major discussion took place regarding the functionalities of the bank
account it offers to business customers. However, no resolution has been adopted, and similar
Page APQ.22
agenda will be discussed again in the next board meeting. The summary from the discussion
that took place at the meeting are as under–
The executive head of the overall banking operation gave a briefing to board members about
the existing features of bank account for business customers (BC). He mentioned that
currently bank charges rupees 2.36 (₹2 + taxes) for each transaction at the branch (such as a
deposit into the account, withdrawal from the account, electronic payments, and transfers),
whereas its competitors or newly designed commercial banks offers such transactions to the
business customers free of cost. Further, recent market research suggests if M-DCB does not
revamp features of the bank account to business customers then it will lose 15% of existing
business customers.
Currently, the bank pays interest @ 2% p.a. to the customer on any balance in the account and
charge interest @ 14% p.a. on overdrawn accounts. Currently, the bank has a base of 18 lakhs
business customers, who makes nearly 140 such transactions in a month period. Half of the
business customers maintain the average credit balance of ₹1,20,000 each and the remaining
half have overdrawn with an average debit balance of ₹45,000 each.
GM responsible for CASA operations suggested the rate of interest on credit balances shall
increase by 1% p.a. and business customers shall be charged with the fixed annual account
maintenance cost of ₹3,000 (taxes extra), to be paid in monthly instalments; in lieu of charges
for transactions, to increase the base of business customers by 10%.
GM responsible for Customer Relations suggestion business customers shall not be charged
for transactions and at the same time, no interest shall be paid on credit balance if any
maintained by the business customers if M-DCB willing to increase business customers by
20%.
Required
ADVISE the Board of Directors (purely based on financial perspective), whether to change the
features of the account for a business customer or not. Presume the tendency of both old and
new customers regarding nature of balance and number of transactions expected to remain
the same.
Annex the calculation to support your advice and state the assumptions clearly (if any).
Answer
M-DCB has three possible courses of action, including status quo (keeping the features as it is)
and making changes as per suggestions of GM-CASA Operations or GM-Customer Relation.
Considering the calculation of annual income shown in annexures (I, II, and III) based upon
below mentioned assumptions, it is advisable to the Board of Directors to change the features
of account for the business customer and adopt the suggestion of GM - CASA operations,
because it results in maximum annual income to M-DCB.
Assumptions – While making the calculation it is assumed that:
1. Interest @ 14% p.a. will continue to be charged on an overdrawn account with debit
balances.
2. Change in business customer base corresponding to change in features of the account,
will not result in any change in staffing, administration cost, or resource planning.
3. Transactions take place throughout the year without the time value of money.
4. Customer those who close or open the account, do same on day 1 of the year (at the
opening of the year)

Page APQ.23
Annexure I - Statement of annual income - status quo (keeping the feature as it is)
Head Details Amount
(₹ In Lakhs)
Transaction (18 lakh business customers - 2.70 lakh lost business customers)
Charges × (140 transactions × 12 months) × ₹2 per transactions 51,408.00
Interest 50% of (18 lakh business customers – 2.70 lakh lost business 48,195.00
Income customers) × ₹45,000 per customer × 14%
Interest 50% of (18 lakh business customers – 2.70 lakh lost business (18,360.00)
Expenses customers) × ₹1,20,000 per customer × 2%
Annual income 81,243.00
Annexure II - Statement of annual income - suggestions of GM-CASA Operations

Head Details Amount
(₹ In Lakhs)
Transaction (18 lakh business customers + 1.8 lakh new business customers) 59,400.00
Charges × ₹3,000 per customer
Interest 50% of (18 lakh business customers + 1.8 lakh new business 62,370.00
Interest 50% of (18 lakh business customers + 1.8 lakh new business (35,640.00)
Annexure III - Statement of annual income – suggestions of GM-Customer Relation

Head Details Amount
(₹ In Lakhs)
Transaction (18 lakh business customers + 3.6 lakh new business customers) Nil
Charges × ₹0 per customer
Interest 50% of (18 lakh business customers + 3.6 lakh new business 68,040.00
Interest 50% of (18 lakh business customers + 3.6 lakh new business (Nil)
Question 10
Felicity Ltd. is a chemical manufacturing company. It has received a special project that needs
to be completed executed 3 months from the time it is accepted. The management has to
communicate its acceptance or rejection of the project within few days. They have approached
you, the management accountant to work out the costing for this project. Following is the
information available:
1. Financing:
The company would require a short-term overdraft of ₹5,00,000 immediately in order to
execute the project. Bank charges an interest of 10% per annum on this overdraft. This
overdraft facility would be needed for the duration of the project, that is 3 months and
would be repaid in full at the end of the period.

Page APQ.24
2. Materials:
Felicity Ltd. has a stock of inventory of 5,000 kg on hand that is not of immediate use. It
can be sold as scrap in the market at ₹250 per kg. The special project requires 3,000 kg of
this inventory which can be replaced at the current market price of ₹300 per kg.
3. Labour:
(a) All skilled workers currently work full time in their respective departments, there
are no idle hours. For this special project, 5 workers would be needed from other
departments. They would totally devote 2,000 hours of labour time to this project.
The cost of labour per hour is ₹300. Since their working hours have been diverted to
this project, the production in the other departments cannot be met. Hence, the
company would incur a loss of contribution of ₹1,00,000 for these 2,000 hours.
Alternatively, the company can outsource the labour for this special project at a total
cost of ₹625,000. The management will opt for the more cost-effective option as the
quality of both in-house manufacturing and outsourcing is the same.
(b) Overtime payment to inspection supervisor, who checks the final products would be
₹25,000. This would be incurred irrespective of whether the labour is in-house or
outsourced.
4. Machine X-2.1”
This project would require the use of an existing machine X-2.1”. Depreciation of X- 2.1” is
₹40,000 per annum. The variable operating cost of X-2.1” for the three-month period
would be ₹3,00,000. At present, X-2.1” is operating at full capacity. By diverting it
exclusively for the special project would cost the company a loss of contribution of
₹1,00,000 for the three-month period.
5. Administration overheads include apportionment cost of ₹25,000 and an incremental
cost (incurred specifically due to the acceptance of the project) of ₹10,000.
6. Total revenue that the company can earn from the project is ₹20,00,000.
Required
COMMENT whether the special project should be accepted or not. Also give a complete
ANALYSIS of the special project cost based on the principles of relevant costing.
Answer
Special Project Cost
Item of Cost Comments/Working Amount (₹)
Project financing: Interest of overdraft Interest @10% on overdraft of 12,500
₹5,00,000 for 3 months
[10% × ₹5,00,000 × (3 months/12
months)] (Refer note 1)
Materials (Refer note 2) 7,50,000
Labour
Outsourced labour cost (Refer note 3) 6,25,000
Overtime paid to inspection supervisor (Refer note 4) 25,000
Overheads (Refer note 5)
(a) Operating cost of machinery for 3 months 3,00,000
special project

Page APQ.25
(b) Opportunity cost of diverting X- Contribution lost ₹1,00,000 for 3 1,00,000

2.1” machine months
Administration overheads Incremental cost (Refer note 6) 10,000
Total cost for accepting the project 18,22,500
Comment
Revenue to be earned from the project is ₹20,00,000 while the cost of accepting the project
would be ₹18,22,500. The project can yield a surplus of ₹1,77,500. Therefore, the special
project can be accepted.
Notes
Note 1: Project financing for 3 months through overdraft of ₹5,00,000 at interest of 10%
per annum.
This is a relevant cost since it is an incremental cost to be incurred only if the project is
accepted. The incremental cost is the interest to be paid on the overdraft of ₹5,00,000 for 3
months. At the end of three months, the overdraft will be repaid in full, therefore there will be
no further incremental cost.
Note 2: Material cost
The company already has material worth 5,000 kg in its inventory. This is a sunk cost that has
already been incurred. Materials requirement for this project is 3,000 kg which can be sourced
from the current inventory of 5,000 kg. This material could have been sold as scrap at ₹250
per kg. However, since 3,000 kg of this material can be used for this project, the sale proceeds
from the scrap sale of 3,000 kg would be the opportunity cost that has to be accounted for.
This is the cash inflow forgone if the project is accepted.
Replacement cost of 3,000 kg at ₹300 per kg would be irrelevant since there is no need to buy
this material, it is already in inventory. Also the material has no further immediate use, so
there is no need to replace it.
Note 3: Labour cost – cost of in-house production vs cost of outsourcing the work for the
project
Five skilled workers from other departments would need to devote 2,000 hours for this
project. They are paid at ₹300 per hour. They are fully working in their respective
departments and are not idle. The cost of labour of these 5 workers for 2,000 hours would be a
relevant cost for the project.
Total hours by 5 skilled workers = 2,000 hours
Rate per hour = ₹300 per hour
Labour cost for in house skilled workers= 2,000 hours × ₹300 per hour = ₹6,00,000
To this, the loss of contribution for diverting the skilled workers’ hours for the project
represents an opportunity cost that is a relevant cost. This is the revenue forgone if the project
is undertaken.
Total labour cost for in house production
= cost of skilled workers + contribution lost (opportunity cost)
= ₹6,00,000 + ₹1,00,000 = ₹7,00,000
The cost of outsourcing the work for this project is ₹6,25,000. Since the quality of work is the
same under both options it is cost effective to outsource the labour for this special project.
Therefore, the relevant cost for the special project is ₹6,25,000.

Page APQ.26
Note 4: Overtime paid to inspection supervisor

Overtime paid to inspection supervisor specially for this project is an incremental cost, a
relevant cost.
Note 5: Machine X-2.1”
The operating cost of X-2.1” ₹3,00,000 is an incremental cost, therefore a relevant cost. The
depreciation of ₹40,000 per annum on it is a sunk cost and hence not relevant.
This machine X-2.1” works at full capacity, no idle time. Hence the contribution loss of
₹1,00,000 for the three-month period due to this diversion will be an opportunity cost that has
to be accounted for. This is revenue forgone if the project is accepted.
Note 6: Administrative overhead
Allocation of administrative overhead of ₹25,000 is not a relevant cost since this is a sunk cost
already incurred. Incremental administrative cost of ₹10,000 incurred specifically for the
project is a relevant cost and hence has to be accounted for.
Question 11
Micro-Guard Industries Limited (MGIL) is a renowned company for a unique range of
thoughtfully-engineered products, designed to provide simplified solutions and upscale your
home interiors. MGIL engaged in the manufacturing of Power Systems, Batteries, Wires &
Cables, Switch Gears & Modular Switches etc. But MGIL is largely famous for its wide range of
Voltage Stabilizers. Each product is manufactured in a separate division.
While planning regarding voltage stabilizers division (VSD) for the first half of the fiscal year
20-21 amid the outbreak of COVID-19, the board get through a report from internal expert
committee pertaining to crystal series of voltage stabilizers which says– ‘due to restricted
availability of the input factors (on account of lock-down by the government), only 40,000
crystal voltage stabilizers (CVS) is expected to manufactured and sold during the first half of
fiscal, against the normal capacity of 75,000 per quarter; that too at ₹1,600/- per CVS’. At
normal capacity level it incurs the following cost to manufacture and sell single unit of CVS–
Particulars Amount ( )
Direct material 575
Direct labour 215
Variable overhead 310
Fixed overhead 300
Cost per unit 1,400
One of the directors suggested– ‘since migrant workers moved to their home states and
expected to come back in 3-5 months’ time hence it is better to temporary discontinue (lock-
out) the production for the first half of fiscal’. Another director support him by stating– ‘it will
give the opportunity to our suppliers (or retailers) to clear the old stock available with them’.
On the reference by the board, you (chief management accountant at MGIL) provide an
estimate to management that 1/3rd fixed overhead at a normal capacity level is unavoidable
and additional cost due to discontinue (lock-out) of plant for 6 months and resumption
thereafter is ₹ 35 lacs.
Required
You are required to ADVISE the management–

Page APQ.27
(i) Shall they continue the production of CVS or temporary discontinue (lock-out) for the
first half of the fiscal year? (consider monetary aspects)
(ii) The qualitative factors which need to consider, while deciding either discontinue (lock-
out) or continue.
(iii) What are the minimum number of CVS that VSD needs to manufacture and sell; in order
to economically justify the continuation of the production?
Answer
(i) The loss in case of temporary discontinue is ₹185 lakhs which is less than the loss in
case of continuing the production of CVS (i.e., ₹250 lakhs), hence considering
monetary aspects it is advised to discontinue (lock-out) the production of CSV for the
first half of the fiscal year 2020-21.
Comparative Cost and Benefit for the first half of the fiscal year 2020-21
Continue – 40,000 units Dis-continue (Lock-out)
Particulars Amount in ₹ Particulars Amount in ₹
Contribution 200 Lakhs Additional Cost 35 Lakhs
( ₹500×40,000units) (resumption)
Fixed Cost 450 Lakhs Fixed Cost (unavoidable) 150 Lakhs
Loss 250 Lakhs Cost 185 lakhs
Working note 1 – Contribution per unit

Particulars Amount in ₹
Sale Price 1,600
Variable Cost (575+215+310) 1,100
Contribution 500
Working note 2 – Fixed Cost & Avoidable Component

Particulars Amount in ₹
Total Fixed Cost for the first half [(75,000×2) units ×300] 450 Lakhs
Unavoidable (1/3rd) 150 Lakhs
Balance - Avoidable (2/3rd) 300 Lakhs
(ii) Qualitative factors, while deciding either discontinue (lock-out) or continue.

(a) Government advisory regarding lock-down and lock-in – MGIL is legally bound
to observe and comply with government advisories regarding lock-down and lock-
in.
(b) Customer relations – Discontinuing the production, even temporary may cause
adverse reactions from customers, they may move to another product or brand
which capable to substitute CVS. Further as per the director's opinion old stock will
be cleared during such period, this may cause a loss of reputation.
(c) Supplier relations – The trade relation with suppliers of VSD/MGIL may turn
bitter if supply halted. May also cause a loss of goodwill. Although the director
argued that supplier can sell the old stock available with them, but it is nowhere
mentioned that whether all the supplier or retailer have a requisite amount of stock
in order to cater the need of their customers.

Page APQ.28
(d) Employee/Worker relations – One of the directors mentioned that migrant

workers moved to their home states and expected to come back in 3-5 months. It is
important to identify– how much of the workforce at VSD is migrant and what is the
duration of lock-down announced by the government, is there any relaxation in the
same (for example working with 1/3 or 1/2 capacity)? VSD also need to consider
guideline and term of the agreement with workers, in regard to the compensation
they will get, if it is decided to lock-out (temporarily discontinue the production).
Apart from this, staff (or workers) morale is also an important factor to consider.
(e) Timing of shutdown – Timing (when to lock and unlock) and duration of lock- out,
both are important form preview of VSD, because the kind of product in which
MGIL deals either in demand during the relevant season or near festival season
(during sales and bonanzas).
(f) Whether discontinuing a segment have adverse effects on the sale of other
products – CVS is a complementary product to other models sold by VDS and
product sold by MGIL. Hence, impact of discontinuing the production of CVS on sale
of these relate products need to be considered.
(iii) In order to economically justify the decision of continuing the production, VSD need to
manufacture and sell such number of CVS; so that loss (if continued) shall be less than or
equal to the loss/ cost of ₹185 lakhs (which is due to discontinue (lock- out) of plant for
the first half of fiscal 2020-21).
So, let presume ‘x’ is such number of CSV
450 Lakhs – (₹500 × ’x’) ≤ 185 Lakhs
⇒ 500x ≥ 265 Lakhs
x ≥ 53,000 Units
Hence, VSD need to manufacture and sell at least 53,000 units of CVS; in order to
economically justify the continuation of the production.

Page APQ.29
Pricing
Question 12
Aditya Heavy Engineering Ltd. (AHEL) produces its only product A7. To manufacture a unit of
A7, variable cost of ₹2,20,000 is incurred. Market research has indicated that at a selling price
of ₹ 5,10,000 no order will be received, but the demand for A7 will be increased by two units
with every ₹5,000 reduction in the unit selling price below ₹5,10,000.
Required
Determine the unit selling price for A7 that will maximize the profit of AHEL
Answer
To determine the unit selling price for A7 that will maximize the profit of AHEL,
We assume that: Selling Price per unit of A7 is ‘P’, and Quantity Demanded is ‘Q’
The Marginal Cost of a unit of A7 is ₹2,20,000
Price Equation for ‘A7’
P = a – bQ
P = 5,10,000 – (5,000 / 2) × Q
Revenue (R) = Q × [5,10,000 – 2,500 × Q]
= 5,10,000 Q – 2,500 Q2
Marginal Revenue (MR) = a – 2bQ
= 5,10,000 – 2 × (5,000 / 2) × Q
= 5,10,000 – 5,000 Q
Marginal Cost (MC) = 2,20,000
Profit is Maximum where Marginal Revenue (MR) equals to Marginal Cost (MC)
5,10,000 – 5,000 Q = 2,20,000
Q = 58 units
By Putting the Value of ‘Q’ in Price Equation, Value of ‘P’ is Obtained
P = 5,10,000 – (5,000/ 2) × Q
= 5,10,000 – 2,500 × 58 units
= 3,65,000
At Selling Price of ₹3,65,000 AHEL’s Profit will be Maximum.
Question 13
A customer wants to buy a System for a single year (after which it will be scrapped) with plans
to use it for 2,500 hrs.
Cost Structure (similar products):
Particulars System-X System-X2
Operating Cost/hour ₹5 ₹7.50
Probability of System Crash 10% 0.5%
Price ₹37,500 ?

Page APQ.30
Find the TEV for the System-X2 if the cost of a System Crash to the buyer is ₹1,00,000.
Answer
TEV =
Particulars ₹
Operating Cost - ₹6,250
2,500 hrs. × (₹5.00 - ₹7.50)
System Crash Savings ₹9,500
₹1,00,000 × (10.00% - 0.50%)
Price of Next Best Alternative ₹37,500
TEV ₹40,750
Question 14
Zutus Ltd. is a leading Indian Pharmaceutical company which is a fully integrated, global
healthcare provider. With in-depth domain expertise in the field of healthcare, it has strong
capabilities across the spectrum of the pharmaceutical value chain. Zutus has earned
reputation worldwide amongst pharmaceutical companies for providing comprehensive and
complete healthcare solutions.
One of the drugs, Rifmn is an antibiotic used to treat contagious disease “Tbis”. Rifmn is a
patented medicine. The patent for which is now going to expire, and several other competitors
are expected to enter in the market for selling the medicine using the same components of
chemicals, under different other name. In order to reposition itself in the market, the company
is reviewing its pricing policy considering the market change and other threat.
The market research for Rifmn indicates that for every ₹4 decrease in price, demand would be
expected to increase by 8,000 batches, with maximum demand for Rifmn being one million
batches.
Each batch of Rifmn is currently made of using chemical salts:
Salt X: 367.50 gm at ₹0.08 per gm
Salt Y: 301.50 gm at ₹0.40 per gm
Each batch of Rifmn requires 30 minutes of machine time to make and the variable running
costs for machine time are ₹40 per hour. The fixed production overhead cost is expected to be
₹35 per batch for the period, based on a budgeted production level of 3,00,000 batches.
The skilled workforce who has been working on Rifmn until now are being shifted onto the
production of Zutus company’s new antiviral drug (injection) for Viral Disease-19 which costs
millions of to develop. Zutus has obtained patent for this revolutionary drug and it is expected
to save millions of lives all across the world. The launch of this drug is excitedly anticipated all
over the world, while its demand in unknown and no other similar specific drug exists. The
average labor cost (outsourcing) of each batch of Rifmn is ₹38.60.
The management of Zutus considers that pricing decision of Rifmn should be based on each
batch.
Required
(i) CALCULATE the optimum (profit-maximizing) selling price for Rifmn and the resulting
annual profit which Zutus will make from charging this price.

Page APQ.31
(ii) RECOMMEND the pricing strategy for launching of new antiviral drug.
[Note– If P = a - bQ, then MR = a - 2bQ]
Answer
(i) Demand function
b = change in price/change in quantity b = ₹4/8,000 units = 0.0005
The maximum demand for Rifmn is 10,00,000 units, so where P = 0, Q = 10,00,000, so ‘a’
is established by substituting these values for P and Q into the demand function:
0 = a – (0.0005 × 10,00,000)
0 = a – 500
Therefore, a = 500
Demand function is therefore: P = 500 – 0.0005Q
Marginal cost
Total ₹
Salt X 367.50g × ₹0.08 29.40
Salt Y 301.50g × ₹0.40 120.60
Labour Given in ques 38.60
Machine running cost (30/60 × ₹40.00) 20
Total marginal cost per batch 208.60
Marginal revenue function: MR = a – 2bQ

Equate MC and MR and insert the values for 'a' and 'b' from demand function in step 1
⇒ 208.60 = 500 – (2 × 0.0005 × Q)
Solve the MR function (to determine optimum quantity, Q)
⇒ 208.60 = 500 – 0.001Q
⇒ 0.001Q = 291.4
⇒ Q = 291,400 batches
Calculate the optimum price
⇒ P = 500 – (0.0005 × 291,400)
⇒ P = ₹354.30
Calculate Profit
₹
Revenue (2,91,400 batches × ₹354.3) 10,32,43,020
Less: Variable costs (2,91,400 batches × ₹208.60) 6,07,86,040
Less: Fixed costs (3,00,000 batches × ₹35) 1,05,00,000
Profit 3,19,56,980
(ii) Firms often use different pricing strategies when their products are first launched into
the market. The most two common approaches are price skimming and penetration
pricing.
In penetration pricing, low price is charged initially, thought behind this is that low
price will make the product accessible to large number of buyers, so high sales will
compensate the low price being charged getting the benefits of economy of scale. This
Page APQ.32
approach works best when customers are price sensitive, R & D and marketing expenses
are low, or when competitors will quickly enter the market.
In this case, medicines are highly inelastic in nature so any reduction in price will not
increase the demand of the drug, which clearly indicates that market penetration pricing
will not help.
Skimming Pricing refers to charging high price initially than lower the prices. High
price in the early stage of the product’s life cycle is expected to generate high initial cash
flows, which will help the company to recover high development cost. This would enable
the company to take advantage of unique nature of the product.
In present case, the unique nature of drug, entry barrier (since company has taken
patent) requires huge initial investment and considering this market skimming pricing
strategy would be more favorable pricing strategy. However, this strategy only works as
long as drug is protected by patent.
In addition, a drug firm is required to consider the expected reactions from national
price controllers who in turn may be influenced by political factors and public opinion.

Page APQ.33
Value Added/Non Value Added
Question 15
Glen Electronics manufactures a wide range of electronic heaters and geysers. Glen was a
popular name among retailers and customers, but it keeps on losing the market share; the
major reason is emerging competitors are offering economical product customers with similar
features and quality. The market where-in Glen operating is price sensitive, hence adding
more features and establish itself as a premium brand is not the option. The only possible
choice left with glen is to reduce prices for that it needs to reduce the cost to maintain the
profit margin.
A cost management committee was constituted to study the scenario and recommend the
solution to the board of directors. The committee based upon their study suggests a 3- phase
solution, out of which phase one is ‘stress on enhancing manufacturing cycle efficiency from
its current level of 62.50%’. The committee collects the following data with help from the
office of the Chief Management Accountant–
 Current batch wait time before the order getting process is 4 days.
 The time spent working on the products (batch processing time) is currently 20 days.
 Total time spent by the products waiting –to be processed, moved, inspected, and
delivered (batch queue time) is currently 6 days.
 Currently, the time spent on making sure that the products are not defective (batch
inspection time) is double that time spent in transferring products between workstations
(batch move time).
The Board of directors based upon the committee’s report decided to apply cellular
manufacturing to reduce unnecessary move time. Based upon decision tasks are allocated to
concerned functional managers.
Managers and workers showed their resistance by stating – “we are not convinced that
cellular manufacturing reduces motions on the production floor”. Some workers even
mentioned they are not aware of what is current batch inspection time and batch move time.
Required
You are deputy to management accountant and was part of the committee, hence board
approached you to convince the managers and workers as part for change management.
(i) CALCULATE current batch inspection time and batch move time.
(ii) CALCULATE manufacturing cycle time, and how much is non-value-added time? (in
term of days)
(iii) CALCULATE revised manufacturing cycle efficiency if both batch inspection time and
batch move time cut down to half of the current level and other elements remain
constant.
(iv) What makes cellular manufacturing capable to reduce motions on the production floor
and how benefit the workers? EXPLAIN.
Answer
(i) Batch Inspection Time and Batch Move Time
It is given in the question that currently– MCE is 62.50%,
Batch process time is 20 days, and Batch queue time is 6 days.

Page APQ.34
Let presume batch move time ‘x’ then batch inspection time will be ‘2x’ because
currently double then batch move time.
Hence,
Solving linear equation

⇒ 20 days + x + 2x + 6 days = 20 days/0.6250
⇒20 days + x + 2x + 6 days = 32 days
⇒ 3x + 26 days = 32 days
⇒ 3x = 32 days − 26 days
⇒ 3x = 6 days
⇒ x = 2 days
So, Batch move time (x) is 2 days and Batch inspection time (2x) is 4 days
(ii) Manufacturing Cycle Time and Non-Value-Added Time (in days)
⇒Manufacturing cycle time = 20 days/0.6250

⇒Manufacturing cycle time = 32 days
Or
Manufacturing cycle time includes all form of time a product spends (in manufacturing
department).
Hence, Manufacturing cycle time = 20 days + 2 days + 4 days + 6 days = 32 days
Non-Value Added Time is that component of manufacturing cycle time which does not
lead to any value creation directly.
Hence, Non-value added time = 32 days – 20 days i.e., 12 days
Or
2 days + 4 days + 6 days = 12 days
Note – if the discussion is regarding customer response time then non-value added
time also includes wait time before the order getting processed.
(iii) Revised Manufacturing Cycle Efficiency if both batch inspection time and batch move
time cut down to half of the current level and other elements remains constant.
Hence,
Batch process time is 20 days, Batch queue time is 6 days,
Revised batch move time is 1 day (half of 2) and
Revised batch inspection time is 2 days (half of 4).
⇒MCERevised = .6897 or 68.97%

Page APQ.35
Improvement is recorded from 62.50% to 68.97%, on account of cut down of batch

inspection time and batch move time to half of current level.
(iv) Cellular manufacturing capable to reduce motions on the production floor. Cellular
manufacturing is a lean way to enhance productivity by improving the performance in
the context of time and motion involved in the production.
Cellular manufacturing is an application of group technology in manufacturing in
which all or a portion of a firm’s manufacturing system has been converted into
manufacturing cells (a cluster of machines or processes located in close proximity and
dedicated to the manufacturing of a family of parts). In this manner cellular
manufacturing results in the reduction of move time by reducing material handling
(through integrated cell) and transit time and using smaller batch sizes (even single
unit).
Hence motion (movement) of material (& product) and worker on production is
reduced on the production floor. This may also result in reduced queue time because
batch size is small even single piece flow in some cases. This is beneficial to the worker
as well in two ways, apart from enhancing the productivity for organisation; first, due to
less motion, fatigue will also be less to the worker after working in a shift of the same
tenure (if he is a piece-rate worker get more wages) and second since he is working on
more than one machine and part hence may feel more empowered. So cellular
manufacturing leads to win-win situation wherein organisation benefits reduced direct
labour cost and the worker has heightened sense of participation.

Page APQ.36
Standard Costing & Budgetary Control
Question 16
Well-known Footwear (WF) is a shop that focuses on shoes for various sports and activities
like jogging, cricket, tennis, and hockey. Budgeted profit for the WF is calculated considering
an average selling price of ₹ 500 per pair of shoes and an average cost of ₹ 350 per pair of
shoes. The supervisor of the WF has discretion in staffing and in setting prices. Usually, the WF
is staffed for 650 hrs. per month at a budgeted rate of ₹ 125 per hr. In addition to this base
wages, sales staff gets a payment equal to 5.5% of takings. Moreover, staffing levels are not
expected to change in response to “little” changes in shoe sales. For Sep’2020, the WF had
budgeted sales of 2,250 pairs of shoes and 650 staffing hrs. Actual results for Sep’2020 were
as follows:
Pairs of shoes sold 2,500
Revenue 12,00,000
Less: Cost of shoes 8,25,000
Less: Staff – additional payment 66,000
Less: Staff – base wages @₹ 125 per hour 78,125
Profit ₹ 2,30,875
Note- “little” changes in shoe sales specified as ± 12%.
Required
(i) PREPARE a reconciliation statement of budgeted profit to actual profit.
(ii) COMMENT on supervisor’s performance.
Answer
(i) Reconciliation Statement Budgeted and Actual Profit (Sep’2020)
Budgeted profit 1,94,375
Sales volume variance (F) 30,625
Sales price variance (A) 50,000
Shoe cost variance (F) 50,000
Staff cost variance -commission (F) 2,750
Staff cost variance -base wage (F) 3,125
Actual profit ₹2,30,875
(ii) Comment
The performance seems good. It shows that the supervisor of the WF passed on a 5.7%
decrease in shoe cost to customers (same is also revealed through the entirely offsetting
of the shoe cost variance and price variance), i.e. shoe costs decreased by ₹20 per pair,
from a standard cost of ₹350 per pair to an actual cost ₹330 per pair. Additionally, the
selling price decreased by ₹20 per pair, from a standard price of ₹500 per pair to an
actual price of ₹480 per pair. In turn, the reduction in the selling price appeared to
produce a favourable sales volume variance and a reasonable increase in profit.
Since the reduction in the selling price, staff commissions also were lower than
budgeted. Moreover, the ₹50,000 reduction in revenue led to 0.055 × ₹50,000 = ₹2,750
less in commission costs.
Page APQ.37
Lastly, staffing was 25 hours under budget, leading to a savings of 25 × ₹125 = ₹3,125.
Therefore, the supervisor attained an increase in sales with lesser staff hours.
Overall, it appears that the manager has done a great job of making revenue and
controlling costs.
Workings
Statement Showing Budgeted and Actual Profit (Sep’2020)
Budgeted Data Actual Data
Units (pairs of shoes) 2,250 2,500
Price per pair of shoes ₹500.00 ₹480.00
Cost per pair of shoes ₹350.00 ₹330.00
Commission rate ₹27.50 ₹26.40
(5.5% of ₹500) (5.5% ₹480)
Contribution ₹122.50 ₹123.60
Revenue ₹11,25,000 ₹12,00,000
Less: Cost of shoes 7,87,500 8,25,000
Less: Staff – additional payment (commission) 61,875 66,000
Less: Staff – base wages 81,250 78,125
Profit ₹1,94,375 ₹2,30,875
Computation of variances
Total Profit Variance = ₹2,30,875 – ₹1,94,375 = ₹36,500 (F)
Sales Contribution Volume Variance = Std Contribution – Budgeted Contribution
= ₹122.50 × 2,500 – ₹122.50 × 2,250
= ₹3,06,250 – ₹2,75,625 = ₹30,625 (F)
Sales Price Variance = Actual Revenue – Standard Revenue
= ₹480 × 2,500 – ₹500 × 2,500
= ₹12,00,000 – ₹12,50,000 = ₹50,000 (A)
Shoe Cost Variance * = ₹350 × 2,500 – ₹330 × 2,500
= ₹8,75,000 – ₹8,25,000 = ₹50,000 (F)
Staff Cost Variance- commission* Staff = ₹27.50 × 2,500 – ₹26.40 × 2,500
Cost Variance (base wage) = ₹68,750 – ₹66,000 = ₹2,750 (F)
= ₹81,250 – ₹78,125 = ₹3,125 (F).
(*) Note- The cost variance (for both shoe and staff-commission) equal to the difference
between the standard cost and the actual cost.
Question 17
The following are 2 types of monthly control report of a CA firm showing gross collection (in
₹’000). The budgeted collection for the year ending on 31 March are ₹4,14,00,000 in total.
Type-X
‘Gross Collection’ Report for July

Page APQ.38
Activity Budget Most Recent Forecast for the Expected

year Variance
Accounting 16,560 17,250 690 (F)
Auditing 10,350 8,280 2,070 (A)
Taxation 14,490 13,386 1,104 (A)
Type-Y
Activity Monthly Cumulative

Budget Actual Variance Budget Actual Variance
Accounting 2,415 2,622 207 (F) 6,210 6,486 276 (F)
Auditing 1,380 966 414 (A) 3,450 2,691 759 (A)
Taxation 1,725 1,587 138 (A) 3,450 3,105 345 (A)
Required
IDENTIFY the type of control system for both types of report.
Answer
Type-X indicates to a feedforward control system. A feedforward control system operates by
comparing budgeted results against a forecast. So that, corrective action can be taken to avoid
expected adverse variances.
Type-X
Activity Budget Most Recent Forecast for Expected
the year Variance
Accounting 16,560 17,250 690 (F)
Auditing 10,350 8,280 2,070 (A)
Taxation 14,490 13,386 1,104 (A)
Total 41,400 38,916 2,484 (A)
Type-Y reveals feedback control system. A feedback control system identifies variances that
has already taken place, by comparing the actual historical results with the budgeted results.
Type-Y
Activity Monthly Cumulative
Budget Actual Variance Budget Actual Variance
Accounting 2,415 2,622 207 (F) 6,210 6,486 276 (F)
Auditing 1,380 966 414 (A) 3,450 2,691 759 (A)
Taxation 1,725 1,587 138 (A) 3,450 3,105 345 (A)
Total 5520 5175 345 (A) 13110 12282 828 (A)
Note- Both Feedback and Feedforward Controls may coexist in the same system, but the t wo
designs function in very different ways.

Page APQ.39
Learning Curve & Miscellaneous
Question 18
DK International is developing a new product. During its expected life, 16,000 units of the
product will be sold for ₹ 102 per unit.
Production will be in batches of 1,000 units throughout the life of the product.
The direct labour cost is expected to reduce due to the effects of learning for the first eight
batches produced. Thereafter, the direct labour cost will remain constant at the same cost per
batch as in the 8th batch.
The direct labour cost of the first batch of 1,000 units is expected to be ₹ 55,000 and a 90%
learning effect is expected to occur. The direct material and other non-labour related variable
costs will be ₹ 50 per unit throughout the life of the product.
There are no fixed costs that are specific to the product.
The learning index for a 90% learning Curve = - 0.152; 8-0·152 = 0.729; 7-0·152 = 0.744
Required
(i) CALCULATE the expected direct labour cost of the 8th batch.
(ii) CALCULATE the expected contribution to be earned from the product over its lifetime.
(iii) CALCULATE the rate of learning required to achieve a lifetime product contribution of
₹5,00,000, assuming that a constant rate of learning applies throughout the product's
life.
Answer
(i) Total Direct Labour Cost for first 8 batches based on learning curve of 90% (when the
direct labour cost for the first batch is ₹55,000)
The usual learning curve model is
y = axb
Where
y = Average Direct Labour Cost per batch for x batches
a = Direct Labour Cost for first batch
x = Cumulative No. of batches produced
b = Learning Coefficient/Index
y = ₹ 55,000 × (8) –0.152
= ₹ 55,000 × 0.729
= ₹ 40,095
Total Direct Labour Cost for first 8 batches
= 8 batches × ₹ 40,095
= ₹ 3,20,760
Total Direct Labour Cost for first 7 batches based on learning curve of 90% (when the
direct labour cost for the first batch is ₹ 55,000)
y = ₹ 55,000 × (7) –0.152
= ₹ 55,000 × 0.744
= ₹ 40,920
Total Direct Labour Cost for first 7 batches
= 7 batches × ₹ 40,920

Page APQ.40
= ₹ 2,86,440
Direct Labour Cost for 8th batch
= ₹ 3,20,760 – ₹ 2,86,440
= ₹ 34,320
(ii) Statement Showing “Life Time Expected Contribution”
Particulars Amount (₹)
Sales (₹102 × 16,000 units) 16,32,000
Less: Direct Material and Other Non Labour Related Variable Costs 8,00,000
(₹50 × 16,000 units)
Less: Direct Labour * 5,95,320
Expected Contribution 2,36,680
(*) Total Labour Cost over the Product’s Life

= ₹3,20,760 + (8 batches × ₹34,320)
= ₹5,95,320
(iii) In order to achieve a Profit of ₹5,00,00,000 the Total Direct Labour Cost over the
Product’s Lifetime would have to equal ₹3,32,000.
Statement Showing “Life Time Direct Labour Cost”
Particulars Amount (₹)
Sales (₹102 × 16,000 units) 16,32,000
Less: Direct Material and Other Non Labour Related Variable Costs 8,00,000
(₹50 × 16,000 units)
Less: Desired Life Time Contribution 5,00,000
Direct Labour 3,32,000
Average Direct Labour Cost per batch for 16 batches is ₹20,750 (₹3,32,000/16 batches).
Total Direct Labour Cost for 16 batches based on learning curve of r% (when the direct
labour cost for the first batch is ₹ 55,000)
y = ₹ 55,000 × (16)b
₹ 20,750 = ₹ 55,000 × (16)b
0.3773 = (16)b
log 0.3773 = b × log 24
log 0.3773 = b × 4 log 2
log 0.3773 =
log 0.3773 = log r4

0.3773 = r4
r =
r = 78.37%
Question 19
Identify the correct pair of statement→
A During ___________ stage there is space for all, competitors and firms (i) Diversification

Page APQ.41
are focusing on keeping up with customer demand and not looking

into the future.
B When the buyer has more access to information then he/she can (ii) Centralised
possibly switch products or even perhaps backwards integrate and
make the products themselves. ___________ power would decrease.
C A health insurance firm moving into the operating fitness centre is (iii) Maturity
an example of _______________________ strategy.
D Lower switching costs mean that ___________ will have more power. (iv) Supplier’s
E Major product differentiation and__________ is usually considered a (v) Growth
barrier to entry.
F A___________organisation has many levels of management, (vi) Buyers
vests decision-making authority at the top.
G The___________is a high-level position and helps capture the (vii) Branding
organisation’s fundamental purpose.
H A wine producer that uses grapes grown in its own winery is an (viii) Mission
example of _________________________ .
I The life cycle stage ___________ is characterised by slower growth, (ix) Vertical
increased buyer power, supply meeting demand, and a shift Integration
towards efficiency.
J _________ helps management to report on the achievement of (x) KPIs
strategic goals/objectives.
Answer
Correct Pair
A B C D E F G H I J
(v) (iv) (i) (vi) (vii) (ii) (viii) (ix) (iii) (x)

Page APQ.42
Transfer Pricing
Question 20
Alpha and Beta are two divisions of the Active Multinational Ltd. (AML). The Division Alpha
manufactures auto components which it sells to other divisions and external customers.
The Division Beta has designed a new product, Product BZ, and has asked Division Alpha to
supply the auto component, Component AX, that is needed in the new product. Each unit of
Product BZ will require one Component AX. This Component will not be sold by Division Alpha
to external customers. Division Alpha has quoted a transfer price to Division Beta of ₹40 for
each unit of Component AX.
It is the policy of the company to reward managers based on their individual division's return
on capital employed.
Division Alpha produces the Component AX in batches of 1,000 units. The maximum capacity
is 8,000 Components per month. Variable costs amount to ₹ 12 per component. Fixed costs
per month are ₹60,000.00 which is specifically incurred to produce Component AX.
Product BZ will be produced in batches of 1,000 units in Division Beta. The maximum
customer demand is 8,000 units of Product BZ. Variable costs will be ₹8 per unit plus the cost
of component AX. Fixed costs of ₹90,000.00 are to be incurred specifically to produce Product
BZ.
The head of Division Beta has given the following forecast:
Demand Selling price per unit (₹)

2,000 units 120
4,000 units 100
5,000 units 90
6,000 units 82
7,000 units 70
8,000 units 65
Required
(a) CALCULATE, based on a transfer price of ₹40 per Component AX, the monthly profit that
would be earned as a result of selling Product BZ by (Here the situation is governed by
the actions of the manager of Division Beta) :
(i) Division Beta
(ii) Division Alpha
(iii) Company as a whole
(b) FIND out the profit maximizing output from the sale of Product BZ for the Active
Multinational Ltd.
(c) CALCULATE, using the marginal cost of Component AX as the transfer price, the monthly
profit that would be earned as a result of selling Product BZ by
(i) Division Alpha
(ii) Division Beta
(iii) Company as a whole

Page APQ.43
(d) The Operation Head of the company requires internal transfer between the divisions at
marginal cost from the overall company's perspectives. If marginal cost is used as the
transfer price the manager of the Division Alpha will not be motivated as there will be
no incentive to the division to transfer components internally.
What transfer pricing policy would you SUGGEST to help the company to overcome the
conflict between optimum decision making and performance evaluation?
Answer
(a) The situation is governed by the actions of the manager of Division Beta. Based on a
transfer price of ₹40 per component, the variable cost per unit of Product BZ will be
₹48.
Demand Selling Price Variable Cost Contribution Total Contribution

p.u. (₹) p.u. (₹) p.u. (₹) (₹’000)
2,000 120 48 72 144
4,000 100 48 52 208
5,000 90 48 42 210
6,000 82 48 34 204
7,000 70 48 22 154
8,000 65 48 17 136
Division Beta will produce 5,000 units of Product BZ and will therefore order 5,000 of
component AX from Division Alpha.
Particulars Alpha (₹’000) Beta (₹’000) AML (₹’000)

Revenue 200 450 450
Less: Variable Costs 60 240 100
Less: Fixed Costs 60 90 150
Profit 80 120 200
(b) The situation for the group should be judged using the total marginal costs of the
divisions. This will give a variable cost per Product BZ of ₹20.
Demand Selling Price Variable Cost Contribution Total Contribution

p.u. (₹) p.u. (₹) p.u. (₹) (₹’000)
2,000 120 20 100 200
4,000 100 20 80 320
5,000 90 20 70 350
6,000 82 20 62 372
7,000 70 20 50 350
8,000 65 20 45 360
(c) Statement Showing Monthly Profit (transfer price = marginal cost of AX)
Particulars Alpha (₹’000) Beta (₹’000) AML (₹’000)

Revenue 72 492 492
Less: Variable Costs 72 120 120
Less: Fixed Costs 60 90 150
Profit -60 282 222

Page APQ.44
The profit maximising output is 6,000 units of Product BZ using marginal cost of
component AX as the transfer price. This will earn a total monthly profit for the AML
Group ₹2,22,000.
(d) Transfer at marginal cost is unsuitable for performance evaluation since they do not
provide an incentive for the supplying division to transfer goods and services internally.
This is because they do not contain a profit margin for the supplying division. Top
Management’s intervention may be necessary to instruct the supplying division to meet
the receiving division's demand at the marginal cost of the transfers. Thus, divisional
autonomy will be undermined. Transferring at cost plus a mark-up creates the opposite
conflict. Here, the transfer price meets the performance evaluation requirement but will
not induce managers to make optimal decisions. To resolve the above conflicts the
following transfer pricing methods have been suggested:
Dual Rate Transfer Pricing System
The supplying division records transfer price by including a normal profit margin
thereby showing reasonable revenue. The purchasing division records transfer price at
marginal cost thereby recording purchases at minimum cost. This allows for better
evaluation of each division’s performance. It also improves co-operation between
divisions, promoting goal congruence and reduction of sub-optimization of resources.
Two Part Transfer Pricing System
This pricing system is again aimed at resolving problems related to distortions caused
by the full cost-based transfer price. Here,
Transfer price = marginal cost of production + a lump-sum charge (two part to pricing).
While marginal cost ensures recovery of additional cost of production related to the
goods transferred, lump-sum charge enables the recovery of some portion of the fixed
cost of the supplying division. Therefore, while the supplying division can show better
profitability, the purchasing division can purchase the goods at lower rate compared to
the market price.
Question 21
A company has two divisions A and B, making products A and B respectively. One unit of A is
an input for each unit of B. B has a production capacity of 45,000 units and ready market.
Other information available regarding Division A are:
Capacity (production units) 50,000
Maximum External Sales 30,000
Fixed Cost upto 30,000 units. Beyond 30,000 units- It increases by 50,000 430,000
for every additional 10,000 units
Variable Manufacturing Cost p.u. 55
Variable Selling Cost p.u. (external sales) 10
Variable Selling Cost p.u. (special order/transfer to B) 5
Selling Price p.u. (external market) 80
Selling Price (special sales) 70
B can buy the input A from outside at a slightly incomplete stage at ₹45 p.u. and will incur
subcontracting charges of ₹30 p.u. to match it to the stage at which it receives goods from

Page APQ.45
Division A. Division B is willing to pay a maximum of ₹75 p.u. if Division A supplies its entire
demand of 45,000 units. If Division A supplies lesser quantity, Division B is willing to pay only
₹70 p.u.
Division A has also received a special order for 15,000 units which it needs to either accept in
full or reject. Division A may choose to avoid variable selling cost of ₹5 p.u. on transfer to B or
special order, by incurring a fixed overhead of ₹50,000 p.a. instead.
(i) What is the best strategy for Division A? Show the profitability of that option.
(ii) What will the range of transfer price be under if the best strategy is chosen?
Answer
(i) What is the best strategy for Division A?
With a production capacity of 50,000 units, Division A has to find an optimum mix of
sales between external sales, internal transfer to Division B and special order. Division B
requires 45,000 units. Division A can supply the entire 45,000 units to Division B for
which transfer price is ₹75 p.u. or can supply lower quantity for which transfer price is
₹70 p.u.
As production increases, certain cost components would also change. Changes to cost of
production and selling expenses are discussed below.
(1) Selling expenses: It is given that for special orders or internal transfers, Division A
can either bear a variable selling cost of ₹5 p.u. or choose to incur a fixed cost of
₹50,000 p.a.
Working out the indifference point, the selling cost will be the same at 10,000
units (at what point will No. of units × ₹5 = ₹50,000; No. of units = 10,000). For
any transfer or sale below 10,000 units, it makes sense to bear the variable cost of
₹5 p.u. Over 10,000 units it makes sense to bear the fixed cost of ₹50,000.
Even If Division A chooses to cater entirely to external sales of 30,000 units, the
balance 20,000 units will be used to cater to either the special order or as internal
transfer to Division B or can even be both (special order 15,000 units and internal
transfer 5,000 units). Since in any case sale will be more than 10,000 units,
Division A can opt to bear the fixed cost of ₹50,000.
(2) Since A is working at full capacity i.e. 30,000 units are produced. Fixed cost is
₹430,000 that would increase by ₹50,000 for every extra 10,000 units produced
over 30,000 units. Hence total fixed cost will be 530,000.
To arrive at the optimum mix, Division A will calculate the contribution received per
unit under the various options.
Statement of Contribution per unit
Particulars External Special Transfer to Transfer to
Sale Order B < 45,000 B
Upto 30,000 15,000 units 45,000
units units units
Selling Price …(a) 80 70 70 75
Less: Variable Cost …(b)
(i) Manufacturing 55 55 55 55
(ii) Selling & Dist. 10 0 0 0
Contribution …(a) – (b) 15 15 15 20

Page APQ.46
Hence, transfer to division B of 45,000 units yields the highest contribution. This leaves
a balance capacity of 5,000 units with Division A, whose maximum capacity is given to
be 50,000 units. This is insufficient to meet the special order of 15,000 units
Hence, Division A will utilize the balance 5,000 units to cater to external sales.
Therefore, the optimum production mix would be:
Transfer to Division B 45,000 units and external sales 5,000 units.
Profitability Statement of Division A
Particulars Figures in ₹
Contribution from
(a) Transfer to Division B (45,000 units × ₹20) 9,00,000
(b) External Sales (net of selling expense) (5,000 units × ₹15) 75,000
Total Contribution from Sales …(i) 9,75,000
Manufacturing Fixed Cost 5,30,000
Selling Fixed Cost 50,000
Total Fixed Costs …(ii) 5,80,000
Profit Earned …(i) – (ii) 3,95,000
(ii) Range of transfer price under the best strategy.

As explained above, the best strategy for Division A would be to sell 45,000 units to
Division B and 5,000 units externally.
Minimum Transfer Price
= Marginal Cost per unit + Additional Outlay per unit + Opportunity Cost per unit
If 45,000 units are not transferred to Division B then next best alternative would be
either sell 30,000 units to external market, sell 15,000 units to special order and
transfer 5,000 units to Division B (partial transfer) or sell 30,000 units to external
market and transfer 20,000 units to Division B (partial transfer); all cases yielding
contribution of ₹ 15 per unit. This is the opportunity cost for Division A for choosing the
best strategy.
In all above options (best strategy and other alternatives) Division A will work on full
capacity and outlay on manufacturing fixed cost and selling cost will be the same.
Therefore, impact of additional outlay on the minimum transfer price per unit will be nil.
Therefore, Minimum Transfer Price that Division A will Demand
= ₹ 55 + ₹ 15
= ₹ 70
Maximum Transfer Price Division B is willing to pay (given) = ₹ 75
This would be range in which Transfer Price will be negotiated.

Page APQ.47

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