PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING

QUESTIONS

Current Purchase System Vs Just in Time System

1. United Video International Company (UVIC) sells package of blank video tapes to its
customer. It purchases video tapes from Indian Tape Company (ITC) @ ` 140 a
package. ITC pays all freight to UVIC. No incoming inspection is necessary because ITC
has a superb reputation for delivery of quality merchandise. Annual demand of UVIC is
13,000 packages. UVIC requires 15% annual return on investment. The purchase order
lead time is two weeks. The purchase order is passed through Internet and it costs ` 2
per order. The relevant insurance, material handling etc ` 3.10 per package per year.
UVIC has to decide whether or not to shift to JIT purchasing. ITC agrees to deliver 100
packages of video tapes 130 times per year (5 times every two weeks) instead of existing
delivery system of 1,000 packages 13 times a year with additional amount of ` 0.02 per
package. UVIC incurs no stock out under its current purchasing policy. It is estimated
UVIC incurs stock out cost on 50 video tape packages under a JIT purchasing policy. In
the event of a stock out, UVIC has to rush order tape packages which costs ` 4 per
package. Comment whether UVIC should implement JIT purchasing system.
Hindustan Tape Company (HTC) also supplies video tapes. It agrees to supply @ ` 136
per package under JIT delivery system. If video tape purchased from HTC, relevant
carrying cost would be ` 3 per package against ` 3.10 in case of purchasing from ITC.
However HTC. doesn’t enjoy so sterling a reputation for quality. UVIC anticipates
following negative aspects of purchasing tapes from HTC.
− To incur additional inspection cost of 5 paisa per package.
− Average stock out of 360 tapes packages per year would occur, largely resulting
from late deliveries. HTC cannot rush order at short notice. UVIC anticipates lost
contribution margin per package of ` 8 from stock out.
− Customer would likely return 2% of all packages due to poor quality of the tape and
to handle this return an additional cost of ` 25 per package.
Comment whether UVIC places order to HTC.
Decision Making – Make or Buy
2. Aditya Ltd. manufactures four products A-1, B-2, C-3 and D-4 in Gurgaon and one
product F-1 in Faridabad. Aditya Ltd. operates under Just-in-time (JIT) principle and does
not hold any inventory of either finished goods or raw materials.
Company has entered into an agreement with M Ltd. to supply 10,000 units per month of
each product produced from Gurgaon unit at a contracted price. Aditya Ltd. is bound to
supply these contracted units to M Ltd. without any fail. Following are the details related
with non contracted units of Gurgaon unit.

© The Institute of Chartered Accountants of India

 2 FINAL EXAMINATION: MAY, 2014

(Amount in `)
A-1 B-2 C-3 D-4
Selling Price per unit 360.00 285.00 290.00 210.00
Direct Labour @ ` 45 per hour 112.50 67.50 135.00 67.50
Direct Material M-1 @ ` 50 per kg. 50.00 100.00 --- 75.00
Direct Material M-2 @ ` 30 per litre. 90.00 45.00 60.00 ---
Variable Overhead (varies with labour hrs) 12.50 7.50 15.00 7.50
Variable Overhead (varies with machine hrs) 9.00 12.00 9.00 15.00
Total Variable Cost 274.00 232.00 219.00 165.00
Machine Hours per unit 3 hours 4 hours 3 hours 5 hours
Maximum Demand per month (units) 90,000 95,000 80,000 75,000
The products manufactured in Gurgaon unit use direct material M-1 and M-2 but product
F-1 produced in Faridabad unit is made by a distinct raw material Z. Material Z is
purchased from the outside market at ` 200.00 per unit. One unit of F-1 requires one unit
of material Z.
Material Z can also be manufactured at Gurgaon unit but for this 2 hours of direct labour,
3 hours of machine time and 2.5 litres of material M-2 will be required.
The Purchase manager has reported to the production manager that material M-1 and M-
2 are in short supply in the market and only 6,50,000 Kg. of M-1 and 6,00,000 litre of M-2
can be purchased in a month.
Required:
(i) Calculate whether Aditya Ltd. should manufacture material Z in Gurgoan unit or
continue to purchase it from the market and manufacture it in Faridabad unit.
(ii) Calculate the optimum monthly usage of Gurgaon unit’s available resources and
make decision accordingly.
(iii) Calculate the purchase price of material Z at which your decision in (i) can be
sustained.
Preparation of Flexible Budget
3. Satjuj Motors Ltd. had prepared fixed and flexible budget for the financial year 2013-14
as under:
Fixed Budget for full capacity Flexible Budget for 75% level
(`) (`)
Sales 13,50,000 10,12,500
Direct Material 4,25,000 3,18,750
Direct Labour 1,85,000 1,38,750

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 3

Variable Overheads 2,15,000 1,61,250

Semi-Variable Overheads 3,65,000 3,23,750
Profit 1,60,000 70,000
After the closing of the financial year 2013-14, total actual sales stood at ` 11,07,000
and there was a favourable sales price variance of ` 17,000 (F).
Required:
Prepare a flexible budget for the actual level of sales.
Standard Costing – Required Information from Given Inputs and Variances
4. S. Ltd. operates a system of standard costing in respect of one of its products which is
manufactured within a single cost centre, the following information is available:
For one unit of product the standard material input is 20 litres at a standard price of `2
per litre. The standard wage rate is `6 per hour and 5 hours are allowed to produce one
unit. Fixed production overhead is absorbed at the rate of 100% of direct wages cost.
During the month just ended the following occurred -
`
Actual Price (paid for material purchased) 1.95 per litre
Total Direct Wages Cost 1,56,000
Fixed Production Overhead 1,58,000

Variance Favourable Adverse

(`) (`)
Direct Material Price 8,000 -
Direct Material Usage - 5,000
Direct Labour Rate - 5,760
Direct Labour Efficiency 2,760 -
Fixed Production Overhead Expenditure - 8,000
Calculate the following for the month-
(i) Budgeted output in units.
(ii) Number of litres purchased.
(iii) Number of litres used above standard allowed.
(iv) Actual units produced.
(v) Actual hours worked.
(vi) Average actual wage rate per hour.

© The Institute of Chartered Accountants of India

 4 FINAL EXAMINATION: MAY, 2014

Hotel Service – Calculation of Tariff & Break-even Analysis

5. A Hotel having 50 single rooms is having 80% occupancy in normal season (8 months)
and 50% in off- season (4 months) in a year (take 30 days month).
Annual Fixed Expenses: ` Lakh
Salary of the Staff (excluding Room Attendant) 7.50
Repair & Maintenance 2.60
Depreciation on Building & Furniture 2.40
Other Fixed Expenses like Dusting, Sweeping etc. 3.25
Total 15.75

Variable Expenses (per Guest per Day): `

Linen, Laundry & Security Support 30.00
Electricity & Other Facilities 20.00
Misc Expenses like Attendant etc 25.00
Management wishes to make a Margin of 25% of Total Cost.
(i) Calculate the Tariff Rate per Room.
(ii) Calculate the Break Even Occupancy in Normal Season assuming 50% Occupancy
is Off-Season.
(iii) Management is proposing 10% cut in Tariff to improve Occupancy at 100% and
70% in Normal Season and Off-Season respectively. Give your views on it.
(iv) What is the minimum rise in Occupancy % to take care of risk of fall in Profit due to
Tariff-Cut?
Transfer Pricing
6. Eastern Company Ltd. has two Divisions namely Casnub Bogie Division (CBD) and
Wagon Division (WD). CBD manufactures Casnub Bogies and WD manufactures BOBN
type of Wagons. To manufacture a Wagon WD needs four Casnub Bogies. CBD is the
only manufacturer of the Casnub Bogies and supplies both WD and outside customers.
Details of CBD and WD for the coming financial year 2014-15 are as follows:
CBD WD
Fixed Costs (`) 9,20,20,000 16,45,36,000
Variable Cost per unit (`) 2,20,000 4,80,000*
Capacity per month (units) 320 12
* excluding transfer costs
Market research has indicated that the demands in the market for Eastern Company
Ltd.’s products at different quotations are as follows:

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 5

For Casnub Bogies: Quotation price of `3,20,000 no tender will be awarded, but demand
will increase by 30 Casnub Bogies with every `10,000 reduction in the unit quotation
price below `3,20,000.
For Wagons: Quotation price of `17,10,000 no tender will be awarded, but the demand
for Wagons will be increased by two Wagons with every `50,000 reduction in the unit
quotation price below `17,10,000.
Required:
(i) Calculate the unit quotation price of the Wagon that will maximise Eastern Company
Ltd.’s profit for the financial year 2014-15.
(ii) Calculate the unit quotation price of the Wagon that is likely to emerge if the
divisional managers of CBD and WD both set quotation prices calculated to
maximise divisional profit from sales to outside customers and the transfer price is
set at market selling (quotation) price.
[Note: If P = a – bQ then MR = a – 2bQ]
Direct Product Profitability (DPP)
7. Jigyasa India Ltd. (JIL) has 30 retail stores of uniform sizes ‘Fruity & Sweety Retails’
across the country. Mainly three products namely ‘Butter Jelly’, ‘Fruits & Nuts’ and ‘Icy
Cool’ are sold through these retail stores. JIL maintains stocks for all retail stores in a
centralised warehouse. Goods are released from the warehouse to the retail stores as
per requisition raised by the stores. Goods are transported to the stores through two
types of vans i.e. normal and refrigerated. These vans are to be hired by the JIL.
Costs per month of JIL are as follows:
(`)
Warehouse Costs:
Labour & Staff Costs 27,000
Refrigeration Costs 1,52,000
Material Handling Costs 28,000
Total 2,07,000
Head Office Cost:
Salary & Wages to Head Office Staff 50,000
Office Administration Costs 1,27,000
Total 1,77,000
Retail Stores Costs:
Labour Related Costs 33,000
Refrigeration Costs 1,09,000
Other Costs 47,000
Total 1,89,000

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 6 FINAL EXAMINATION: MAY, 2014

Average transportation cost of JIL per trip to any retail stores are as follows:
Normal Van `3,200
Refrigerated Van `4,900
The Chief Financial Manager asked his Finance managers to calculate profitability based
on three products sold through Fruity & Sweety retail stores rather than traditional
method of calculating profitability.
The following information regarding retail stores are gathered:
Butter Jelly Fruits & Nuts Icy Cool
No. of Cartons per cubic metre (m3) 42 28 40
No. of Items per cartons (units) 300 144 72
Sales per month (units) 18,000 4,608 1,152
Time in Warehouse (in months) 1 1.5 0.5
Time in Retail Stores (in months) 1 2 1
Selling Price per unit (`) 84 42 26
Purchase Price per unit (`) 76 34 22
Butter Jelly and Icy-Cool are required to be kept under refrigerated conditions.
Additional information:
Total Volume of All Goods Sold per month 40,000 m3
Total Volume of Refrigerated Goods Sold per month 25,000 m3
Carrying Volume of each van 64 m3
Required:
Calculate the Profit per unit using Direct Product Profitability (DPP) method.
Linear Programming – Graphic Method
8. Let us assume that you have inherited `1,00,000 from your father that can be invested in
a combination of only two stock portfolios, with the maximum investment allowed in either
portfolio set at `75,000. The first portfolio has an average rate of return of 10%, whereas
the second has 20%. In terms of risk factors associated with these portfolios, the first has
a risk rating of 4 (on a scale from 0 to 10), and the second has 9. Since you wish to
maximize your return, you will not accept an average rate of return below 12% or a risk
factor above 6. Hence, you then face the important question. How much should you
invest in each portfolio?
Formulate this as a Linear Programming Problem and solve it by Graphic Method.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 7

Transportation Problem – Optimum Solutions and Minimum Cost

9. The following matrix is a minimization problem for transportation cost. The unit
transportation costs are given at the right hand corners of the cells and the Δ ij values are
encircled.

D1 D2 D3 Supply

3 4 4
F1 500

9 6 7
F2 8 300 8 300

4 6 5
F3 0 8 200 200

Demand 300 400 300 1,000

Find the optimum solution (s) and the minimum cost.

Assignment Problem – Cost Minimization
10. A BPO company is taking bids for 4 routes in the city to ply pick-up and drop cabs. Four
companies have made bids as detailed below-
Bids for Routes (` )
Company / R1 R2 R3 R4
Routes
C1 4,000 5,000 − −
C2 − 4,000 − 4,000
C3 3,000 − 2,000 −
C4 − − 4,000 5,000

Each bidder can be assigned only one route. Determine the minimum cost that the BPO
should incur.
Critical Path Analysis – Preparation of Arrow Diagram & Analysis of Float
11. A project has the following time schedule:
Activity Duration Activity Duration
(in Weeks) (in Weeks)
1–2 4 5–7 8
1–3 1 6–8 1

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 8 FINAL EXAMINATION: MAY, 2014

2–4 1 7–8 2
3–4 1 8–9 1
3–5 6 8 – 10 8
4–9 5 9 – 10 7
5–6 4
(i) Draw the arrow diagram.
(ii) Identify critical path and find the total project duration.
(iii) Determine total, free and independent floats.
Program Evaluation and Review Technique – Updating of Network Diagram
12. A company had planned its operations as follows:
Activity Duration (Days) Activity Duration (Days)
1−2 7 4−7 19
2−4 8 3−6 24
1−3 8 5−7 9
3−4 6 6−8 7
1−4 6 7−8 8
2−5 16

(i) Draw the network and find the critical paths.

(ii) After 15 days of working, the following progress is noted:
(a) Activities 1 − 2, 1 − 3 and 1 − 4 completed as per original schedule.
(b) Activity 2 − 4 is in progress and will be completed in 4 more days.
(c) Activity 3 − 6 is in progress and will need 17 more days to complete.
(d) The staff at activity 3 − 6 are specialised. They are directed to complete 3 − 6
and undertake an activity 6 − 7, which will require 7days. This rearrangement
arose due to a modification in a specialisation.
(e) Activity 6 − 8 will be completed in 4 days instead of the originally planned 7
days.
(f) There is no change in the other activities.
Update the network diagram after 15 days of start of work based on the assumption
given above. Indicate the revised critical paths along with their duration.

© The Institute of Chartered Accountants of India

 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 9

Simulation of a Cash Flow Problem

13. ABC Co-operative Bank receives and disburses different amount of cash in each month.
The bank has an opening cash Balance of `15 crores in the first month. Pattern of
receipts and disbursements from past data is as follows:
Monthly Cash Receipts Monthly Cash Disbursements
(` in Crores) Probability (` in Crores) Probability
30 0.20 33 0.15
42 0.40 60 0.20
36 0.25 39 0.40
99 0.15 57 0.25
Simulate the cash position over a period of 12 months.
Required:
(i) Calculate probability that the ABC Cooperative Bank will fall short in payments.
(ii) Calculate average monthly shortfall.
(iii) If ABC bank can get an overdraft facility of ` 45 crores from other Nationalized
banks. What is the probability that they will fall short in monthly payments?
Use the following sequence (row-wise) of paired random numbers.
1778 4316 7435 3123 7244 4692 5158 6808 9358 5478 9654 0977
Application of Learning Curve – Pricing of Product & Learning Curve Rate Not Given
14. Marketing manager of Arnav Ltd. has conducted a market research on the price-demand
relationship for its consumer durable product ‘Leo-9’. Leo-9 is a recently launched
product. The price-demand pattern will be as follows:
Price per unit (`) Demand (units)
11,100 1,000
10,700 2,000
9,600 3,000
8,700 4,000
Leo-9 is produced in batches of 1,000 units. Production manager of Arnav Ltd. has also
researched and studied the production pattern and has believe that 50% of the variable
manufacturing cost would have learning and experience curve effect. This learning &
experience curve effect will be continued upto 4,000 units of production at a constant
rate. But after 4,000 units of production, unit variable manufacturing cost would be equal
to the unit cost at the 4th batch. The manufacturing unit cost of the first batch will be
`4,400 of which only 50% is subjected to learning and experience curve effect. The
average unit variable cost of all 4 batches will be `4,120.

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 10 FINAL EXAMINATION: MAY, 2014

Required:
(i) Calculate the rate of learning that has been expected by the Production manager.
(ii) Calculate the price at which Arnav Ltd. should sell the Leo-9 in order to maximise its
contribution.
Note:
log0.93 = -0.0315, log2 = 0.3010, 2-0.1047 = 0.9299, 3-0.1047 = 0.8913, 4-0.1047 = 0.8649
Balance Score Card – Identification of Scorecard Perspectives
15. Identify Balance Scorecard Perspectives from the following potential measures observed
in different business sectors.
(i) Weekly Patient Complaints
(ii) Patient Satisfaction Survey
(iii) Flight Cancellation Rate
(iv) On-time Performance of an Airline
(v) Number of Grants Awarded to a Healthcare unit
(vi) Outstanding Loan Balances / Deposit Balances of a Banking Company
(vii) Employee Turnover Rate of a Healthcare unit
(viii) Patient Referral Rate
(ix) Non-interest Income of a Banking Company
(x) Lost of Bag Reports per 5,000 Passengers
Miscellaneous
16. Marine Diesel Ltd. (MDL) manufactures and sells Diesel Engine. Company appoints Mr.
Philips to coordinate shipments of the Diesel Engine from the factory to distribution
warehouses located in various parts of the India so that goods will be available as orders
are received from customers. MDL is unsure how to classify his annual salary of
`6,00,000 in its cost records. The company’s cost analyst says that Mr. Philips’s salary
should be classified as manufacturing cost; the finance controllers says that it should be
classified as selling cost; and the managing director says that it does not matter which
way Mr. Philips’s salary cost is classified. Which view point is correct and why?
17. Indian Petrons Ltd. (IPL) is a leading manufacturing company. Under increasing pressure
to reduce costs, to contain inventory and to improve service, IPL’s Costing Department
has recently undertaken a decision to implement a JIT System.
The management of IPL is convinced of the benefits of their changes. But Supplies
Manager Mr. Brian fears with the Costing Department’s decision. He said:

© The Institute of Chartered Accountants of India

 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 11

“We’ve been driven by suppliers for years ... they would insist that we could only
purchase in thousands, that we would have to wait weeks, or that they would only deliver
on Mondays!”

Is Mr. Brian’s view point correct and why?

18. “Coefficients in the objective function and the constraint equations must be completely
known and they should not change during the period of study.”
- Elucidate the above statement in respect of linear programming.
19. Write a short note on alternate solution in “transportation problem”.
20. Classify the following fixed cost as normally being either committed or discretionary.
(i) Depreciation on assets
(ii) Advertising
(iii) Research
(iv) Employees Training

SUGGESTED ANSWERS/HINTS

1. (i) Comparative ‘Statement of Cost’ for Purchasing from ITC under ‘Current
Policy’ & ‘JIT’
Particulars Current Policy JIT
(`) (`)
Purchasing Cost 18,20,000 18,20,260
(13,000 Packages × `140) (13,000 Packages × `140.02)
Ordering Cost 26.00 260.00
(`2 × 13 Orders) (`2 ×130 Orders)
Opportunity/Carrying 10,500.00 1,050
Cost (1/2 × 1,000 Packages × ` (1/2 × 100 Packages × `
140 × 15%) 140.02 × 15%)
Other Carrying Cost 1,550.00 155.00
(Insurance, Material (1/2 × 1,000 Packages × `3.10) (1/2 × 100 Packages × `3.10)
Handling etc)
Stock Out Cost --- 200
(50 Packages × `4.00)
Total Relevant Cost 18,32,076 18,21,925
Comments: As may be seen from above, the relevant cost under the JIT
purchasing policy is lower than the cost incurred under the existing system. Hence,
a JIT purchasing policy should be adopted by the company.

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 12 FINAL EXAMINATION: MAY, 2014

(ii) ‘Statement of Cost’ for Purchasing from HTC under ‘JIT’

Particulars JIT
(`)
Purchasing Cost 17,68,000
(13,000 Packages × `136)
Ordering Cost 260.00
(`2 ×130 Orders)
Opportunity / Carrying Cost 1,020
(1/2 × 100 Packages × ` 136 × 15%)
Other Carrying Cost 150.00
(Insurance, Material Handling etc) (1/2 × 100 Packages × `3.00)
Inspection Cost 650
(13,000 Packages × `0.05)
Stock Out Cost 2,880
(360Packages × `8.00)
Customer Return Cost 6,500
(13,000 Packages × 2% × `25.00)
Total Relevant Cost 17,79,460
Comments: The comparative costs are as follows:
Under Current Policy `18,32,076
Under Purchase under JIT from ITC `18,21,925
Under Purchase under JIT from HTC `17,79,460
Packages should be bought from HTC under JIT as it is the cheapest.
2. (i) Manufacturing Cost of Material Z, if Manufactured in Gurgaon unit
Amount (`)
Direct Labour (2 hours × `45) 90.00
Direct Material M-2 (2.5 litre × `30) 75.00
Variable Overhead, Varies with Labour Hours (2hours × `5) 10.00
Variable Overhead, Varies with Machine Hours (3hours × `3) 9.00
Total Variable Cost 184.00
The purchasing cost of material Z from the outside market is `200, which is more
than the cost to manufacture it in Gurgaon unit. Hence, it will be beneficial for the
Aditya Ltd. to manufacture material Z in Gurgaon unit itself.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 13

(ii) Monthly Requirement of Direct Material M-1 & M-2

For Contracted units
A-1 B-2 C-3 D-4 Total
Units to be Supplied to M Ltd. (units) 10,000 10,000 10,000 10,000 40,000
Direct Material M-1 (in Kg) [W.N.-1] 10,000 20,000 --- 15,000 45,000
Direct Material M-2 (in Litre) [W.N.-2] 30,000 15,000 20,000 --- 65,000
For Non-Contracted units
A-1 B-2 C-3 D-4 Total
Demand in Outside Market (units) 90,000 95,000 80,000 75,000 3,40,000
Direct Material M-1 (in Kg) [W.N.-1] 90,000 1,90,000 --- 1,12,500 3,92,500
Direct Material M-2 (in Litre) [W.N.-2] 2,70,000 1,42,500 1,60,000 --- 5,72,500

Availability and Demand Comparison

Direct Material M-1 Direct Material M-2
(in Kg) (in Litre)
Availability in Market 6,50,000 6,00,000
Requirement 4,37,500 6,37,500
(45,000+3,92,500) (65,000+5,72,500)

Material M-2 is a limiting factor as its availability is less than its requirement to
produce contracted as well as for non-contracted units.
To optimum usage of resources available in Gurgaon unit, prioritisation of
production of products is necessary. The following is the comparison table of
product A-1, B-2, C-3 and Z. Product D-4 is not taken into comparison as material
M-2 is not required to produce product D-4.
Calculation of Contribution per litre of M-2
A-1 B-2 C-3 Z
Contribution per unit (W.N-3 & 4) ` 86.00 ` 53.00 ` 71.00 ` 16.00
Quantity of Material M-2 per unit 3 litre 1.5 litre 2 litre 2.5 litre
Contribution per litre of M-2 ` 28.67 ` 35.33 ` 35.50 ` 6.40
Rank III II I IV
Since, contribution per unit of material Z is lowest as compared to other products
consuming material M-2. Material –Z cannot be manufactured under the given
resource constraint. Hence only existing products of Gurgaon units should be
manufactured.

© The Institute of Chartered Accountants of India

 14 FINAL EXAMINATION: MAY, 2014

Optimum Production Plan

Product No. of Units Quantity of M-2 Required Balance Availability of M-2
(in Litre) (in Litre)
C-3 90,000 1,80,000 4,20,000
(90,000 units × 2 litre) (6,00,000 – 1,80,000)
B-2 1,05,000 1,57,500 2,62,500
(1,05,000 units × 1.5 litre) (4,20,000 – 1,57,500)
A-1 87,500* 2,62,500 0
(87,500 units × 3 litre) (2,62,500 – 2,62,500)

(*) Units that can be produced with the help of available quantity of M-2 i.e. 2,62,500 litre.
(iii) Decision in requirement (i) will be changed as material Z cannot be manufactured in
Gurgaon unit as noted in requirement (ii). The minimum purchase price of material Z
at which decision taken in (i) above can be sustained is calculated as below:
Amount (`)
Existing Purchase Price 200.00
Add: Market Price to be increased by [W.N.-5] 55.68
Total 255.68
Working Notes
(1) Quantity of M-1 required per unit of production
A-1 B-2 D-4
Cost per unit `50 `100 `75
Rate per Kg. `50 `50 `50
Quantity per unit of Production 1Kg. 2Kg. 1.5Kg.
(2) Quantity of M-2 required per unit of production
A-1 B-2 C-3
Cost of per unit `90 `45 `60
Rate per Kg. `30 `30 `30
Quantity per unit of Production 3 litre 1.5 litre 2 litre
(3) Contribution per unit (`)
A-1 B-2 C-3 D-4
Selling Price per unit 360 285 290 210
Less: Variable Cost per unit 274 232 219 165
Contribution per unit 86 53 71 45

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 15

(4) Contribution (Benefit) per unit of Material Z

(`)
Purchasing Cost per unit 200
Less: Cost of Manufacture 184
Contribution per unit 16
(5) The next best product to material Z is A-1 {as calculated in (ii) above} which
has a contribution of `28.67 per litre of M-2 which is `22.27 (`28.67 – `6.40)
higher than the contribution per litre of M-2 for material Z. Material Z required
2.5 litre of M-2, therefore, purchase price of material Z would have to `55.68
(2.5 litre × `22.27) higher than the existing market price.
3. Working Notes
(1) Calculation of Actual Sales at Budgeted Prices
(`)
Actual Sales at Actual Price 11,07,000
Less: Sales Price Variance (F) 17,000
Actual Sales at Budgeted Prices 10,90,000

ActualSales at BudgetedPrices
Activity Level = ×100
BudgetedSales at FullCapacity
` 10,90,000
= ×100
` 13,50,000
= 80.74…%
(2) Segregation of Fixed & Variable Cost Element from Semi-Variable Overheads
Overheadat Full Capacity -Overheadat 75% Capacity
Variable Overhead =
Difference in Activity Level

` 3,65,000- ` 3,23,750
=
25
= `1,650
Fixed Overhead = Total Other Overheads at 100% Level – Variable
Overheads at 100% level
= `3,65,000 – (`1,650 × 100)
= `2,00,000

© The Institute of Chartered Accountants of India

 16 FINAL EXAMINATION
N: MAY, 2014

Flexiblee Budget at 80.74..%

8 Activvity Level
(Amount in `)
`
Sales 10,90,0000
Less:
Direct Material (`4,225,000 × 80.744..%) 3,43,1148
Direct Labour (`1,855,000 × 80.74..%) 1,49,3370
Variable Overheadss (` 2,15,000 × 80.74..%) 1,73,5593
Semi-V
Variable Overrheads
Variable Cost (`1,6550 × 80.74..) [W
W.N.-2] 1,33,2222
Fixed Cost
C [W.N.-2] 2,00,0000
Profit 90,6667
4. Computation of Req
quirements of
o Question
Budgetted output in
n units
Fixed Overhead
O Expenditure Variance
= Budgeted
B Fixeed Overheadss – Actual Fixxed Overheadds
`8,000 (A) = Budgeted
B Outpput × (`6 × 5 hrs.)
h – `1,58,0000
Budgeted Ouutput = 5,000
5 units
Number of litres pu
urchased
Material Price Variannce = Actual
A Quantitty × (Std. Pricce – Actual P
Price)
`8,000 (F) = No.
N of litres puurchased × (``2 – `1.95)
No. of litres purchased
= 1,60,000
1 litress
Number of litres ussed above staandard allow
wed
Material Usage Variaance = Standard
S Price × (Standardd Quantity – A
Actual Quantity)
`5,000 (A) = `2
` × (Standardd Quantity – 1,60,000 litress)
Standard Quantity = 1,57,500
1 litress
No. of litres above Standard = 1,60,000
1 litress – 1,57,500 litres
l
= 2,500
2 litres
Actual units producced
Labour Cost Variancce = Rate
R Variancee + Efficiencyy Variance
= `5,760
` (A) + `2,760
` (F)
= `3,000
` (A)

© The Institute of Chartered Accountants of India

 PAPE
ER – 5 : ADVA
ANCED MANAG
GEMENT ACC
COUNTING 17

Labour Cost Variancce = Standard

S Cost – Actual Coost
`3,000 (A) = Actual
A Output × (` 6 × 5 hrss.) – `1,56,0000
Actual Outpuut = 5,100
5 units
Actual hours workeed
Labour Efficiency Vaariance = Standard
S Ratee × (Standardd Hours – Acttual Hours)
`2,760 (F) = `6
` × (5,100 unnits × 5 hrs. – Actual Hourss)
Actual Hourss = 25,040
2 hours
Averag
ge actual wag
ge rate per hour
Labour Rate Variancce = Actual
A Hours × (Standard Rate
R – Actuall Rate)
`5,760 (A) = 25,040
2 hours × (`6 – Actuaal Rate)
Actual Rate = `6.23...per
` houur
5. (a) Vaariable Cost per
p Room-Dayy = `75
(`30 + `20 + `25)
Tootal Occupanccy = 12,600 Room
m-Days
(50 × 30 × 8 × 0.8 + 50 × 300 × 4 × 0.5)
Tootal Variable Cost
C = `9.45 lakhs
(12,600 Room
m-Days × `75)
Fixxed Cost = `15.75 lakhss
Tootal Cost = `25.20 lakhss
(`9.45 lakhs + `15.75 lakhss)
Proofit (25% of Total
T Cost) = `6.30 lakhs
(25% of `25.220 lakhs)
Taariff per Day = `250.00
[(`25,20,000 + `6,30,000) / 12,600 Room-D
Days]
(b) Coontribution per Day = `175.00
(`250 − `75)
BE
EP (Room–Daay) = 9,000 Room--Days
(`15,75,000 / `175)
Duuring Off Seasson for 4 monnths
Roooms Occupieed = 3,000 Days
(50 × 30 × 4 × 0.5)

© The Institute of Chartered Accountants of India

 18 FINAL EXAMINATION: MAY, 2014

For BEP,
Occupancy During Normal Period = 6,000 Days i.e.
(50% of Total Capacity in Normal Season)
(c) If 10% Discount is allowed,
Tariff = `225 per Room-Day
Contribution per Room-Day = `150 (`225 − `75)
(with tariff cut)
Total Occupancy = 16,200 Room-Days
(50 × 30 × 8) + (50 × 30 × 4 × 0.7)
Total Contribution for the year = `24.30 lakhs
(16,200 Room-Days × `150)
Fixed Cost (unchanged) = `15.75 lakhs
Profit = `8.55 lakhs
As the Proposal increases the Profit, it may be accepted.
(d) To maintain the Same Profit,
Contribution Required = `22.05 lakhs
With New Tariff,
Contribution per day = `150
Number of Room-Days Occupied = 14,700 Room-Days
(`22,05,000 / 150)
Increase % in Occ. Required = 16.67 %
[(14,700 – 12,600) / 12,600]
6. (i) Assumed Quotation Price ‘P’, Quantity ‘Q’
The Marginal Cost of a ‘Wagon’ is `13,60,000
(`2,20,000 × 4 Casnub Bogies + `4,80,000)
Demand Function for a ‘Wagon’
P = `17,10,000 – (`50,000 / 2) × Q
Revenue (R) = Q x [17,10,000 – 25,000 × Q]
= 17,10,000 Q – 25,000 Q 2
Marginal Revenue (MR) = 17,10,000 – 50,000 Q
Marginal Cost (MC) = 13,60,000

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 19

Profit is Maximum where Marginal Revenue (MR) equals to Marginal Cost (MC)
17,10,000 – 50,000 Q = 13,60,000
Q = 7.00 units
By putting the value of ‘Q’ in Demand Function, value of ‘P’ is obtained.
P = 17,10,000 – (50,000/ 2) × Q
= 17,10,000 – 25,000 × 7.00
= `15,35,000
At `15,35,000 unit Quotation Price of a Wagon the Eastern Company Ltd.’s Profit
will be Maximum.
(ii) At CBD the Divisional Manager would ensure that Divisional Marginal Revenue
should be equal to Division’s Marginal Cost so that Profit can be Maximum.
MR of a Casnub Bogies = MC of Manufacturing a Casnub Bogies
3,20,000 – 2(10,000/ 30) × Q = 2,20,000
Q = 150 units
Selling Price of a Casnub Bogie ‘P’ is
P = 3,20,000 – (10,000/ 30) × 150
= `2,70,000
CBD will earn Maximum Profit when it will Quote `2,70,000 to the Outside Market.
Since, Outside Market Quotation is Transfer Price as well, so Transfer Price to WD
will be `2,70,000 and it forms part of WD’s Marginal Cost.
At WD, Division Manager would ensure that Divisional Marginal Revenue should be
equal to Division’s Marginal Cost so that Profit can be Maximum.
MR of a Wagon = MC of Manufacturing a Wagon
17,10,000 – 50,000 × Q = (`2,70,000 × 4 Casnub Bogies) + `4,80,000
Q = 3.00 units
Quotation Price of a Wagon ‘P’ should be:
P = `17,10,000 – 25,000 × 3.00
= `16,35,000
The unit Quotation Price of Wagon that emerges as a result of Market Based
Transfer Pricing is `16,35,000.

© The Institute of Chartered Accountants of India

 20 FINAL EXAMINATION: MAY, 2014

7. Direct Product Profitability (DPP) Statement

(Amount in `)
Butter Jelly Fruits & Nuts Icy Cool
Selling Price per unit 84.00 42.00 26.00
Less: Purchase Price per unit 76.00 34.00 22.00
Gross Profit …(A) 8.00 8.00 4.00
Direct Product Costs:
Warehouse Costs per m3 [W.N.-1] 7.46 2.07 3.73
Retail Stores Costs per m3 [W.N.-2] 6.36 4.00 6.36
Transportation Costs [W.N.-3] 76.56 50.00 76.56
Total DPP costs per m3 90.38 56.07 86.65
Items per m3 [W.N.-4] 12,600 4,032 2,880
Cost per item …(B) 0.007 0.014 0.030
Direct Product Profit …(A) - (B) 7.993 7.986 3.97
Working Notes
(1) Warehouse Related Costs
General Costs (`) Cost Related with
Refrigerated Goods (`)
Labour & Staff Costs 27,000 ---
Refrigeration Costs --- 1,52,000
Material Handling Costs 28,000 ---
Total 55,000 1,52,000
Volume of Goods Sold 40,000 m3 25,000 m3
Cost per m3 per month 1.38 6.08

Products Time in Warehouse Cost per m3 per month Total Cost

(`) (`)
Butter Jelly 1 Month 7.46 7.46
(1.38 + 6.08)
Fruits & Nuts 1.5 Months 1.38 2.07
Icy-cool 0.5 Months 7.46 3.73
(1.38 + 6.08)

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 21

(2) Retail Stores Related Costs

General Costs Cost Related with
(`) Refrigerated Goods (`)
Labour Related Costs 33,000 ---
Refrigeration Costs --- 1,09,000
Other Costs 47,000 ---
Total 80,000 1,09,000
Volume of Goods Sold 40,000 m3 25,000 m3
Cost per m3 per month 2.00 4.36

Products Time in Retail Stores Cost per m3 per month Total Cost
Butter Jelly 1 Month `6.36 `6.36
(`2.00 + `4.36)
Fruits & Nuts 2 Months `2.00 `4.00
Icy-Cool 1 Month `6.36 `6.36
(`2.00 + `4.36)

(3) Transportation Costs

Normal Van Refrigerated Van
Costs Costs
Cost per trip `3,200 `4,900
Volume of Van 64 m3 64 m3
Cost per m3 per trip `50.00 `76.56
(4) No. of Items per m3
Products No. of No. of Items per No. of Items per m3
Cartons (m3) Cartons (units)
Butter Jelly 42 300 12,600
(42 × 300)
Fruits & Nuts 28 144 4,032
(28 × 144)
Icy - Cool 40 72 2,880
(40 × 72)
8. Let x and y be the amount to be invested in first and second stock portfolio respectively.
Objective function:
The average rate of return for first portfolio is 10% and for second portfolio, it is 20%.
Since the company wishes to maximize the return from investment, the objective function
is as given below:
Maximise Z = 0.10x + 0.20y

© The Institute of Chartered Accountants of India

 22 FINAL EXAMINATION: MAY, 2014

Condition-1:
The maximum amount available for investment is ` 1,00,000.
Hence, x+y ≤ 1,00,000
Condition-2:
Further, the maximum investment allowed in either portfolio set is ` 75,000.
Therefore, x ≤ 75,000 and
y ≤ 75,000
Condition-3:
The first portfolio has a risk rating of 4 (on a scale from 0 to 10) and the second has 9.
The company will not accept a risk factor above 6.
Therefore, 4x + 9y ≤ 6(x + y)
Or − 2x + 3y ≤ 0
Condition-4:
Further, the company will not accept an average rate of return below 12%.
Hence, 0.10x + 0.20y ≥ 0.12(x + y)
Or − 0.02x + 0.08y ≥ 0
Condition-5:
Also, x, y ≥ 0
The linear programming model for the given problem can now be formulated as follows:
Maximise
Z = 0.10 x + 0.20 y
Subject to the Constraints:
x+y ≤ 1,00,000
x ≤ 75,000
y ≤ 75,000
− 2x + 3y ≤ 0
− 0.02x + 0.08y ≥ 0
Where x, y ≥ 0

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 23

The problem is solved graphically below:

Intersection Points:
The point of intersection for the lines
− 2x + 3y = 0 and
x + y = 1,00,000 is given by Intersection Point R (60,000, 40,000)
The point of intersection for the lines
x = 75,000 and
x + y = 1,00,000 is given by Intersection Point Q (75,000, 25,000)
Similarly, the lines
x = 75,000 and
− 0.02x + 0.08y = 0 Intersect at Point P (75,000, 18,750)

Thus, the feasible region is bounded by SRQP and feasible points are S (0, 0); R
(60,000, 40,000); Q (75,000, 25,000) and P (75,000, 18,750).

© The Institute of Chartered Accountants of India

 24 FINAL EXAMINATION: MAY, 2014

Value of the objective function at the above mentioned feasible points is calculated
below:
Point Co-Ordinates of the corner Value of the objective function
points of the feasible region Z = 0.10 x + 0.20 y
(value of x and y)
S (0, 0) ` NIL
R (60,000, 40,000) ` 14,000
Q (75,000, 25,000) ` 12,500
P (75,000, 18,750) ` 11,250
We find that the value of the objective function is maximum `14,000 at point R (60,000, 40,000).
Hence, there should be investment of ` 60,000 in first portfolio and investment of
` 40,000 in second portfolio to achieve the maximum return of `14,000.
9. As we know Δij values are given for unallocated cells. Hence, the remaining cells
represent the allocated cells which is 5 and equal to m + n -1 (no. of columns + no of rows – 1).
Now we fill up the allocated cells with allocated units.
Allocation, other than Δij cells
Cell Demand in Supply in Maximum Possible Allocation
Corresponding Corresponding Allocation
Column Row (Minimum of
Demand and Supply)
R1C1 300 500 300 300
100 200
R1C2 100 100
(400 – 300 in R2C2) (500 – 300 in R1C1)
100 100
R1C3 100 100
(300 – 200 in R3C3) (200 – 100 in R1C2)

D1 D2 D3 Supply

3 4 4
F1 300 100 100 500

9 6 7
F2 8 300 8 300

4 6 5
F3 0 8 200 200

Demand 300 400 300 1,000

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 25

This solution is optimal since all Δij values are either zero or positive. However alternative
solution exists as at R3C1 the Δij value is zero. For the other optimal solution, a loop is
created as follows-
D1 D2 D3

F1 300 100 100

-200 +200
F2 300

F3 200
+200 -200

Re-allocation table is as below-

D1 D2 D3
F1 100 100 300
F2 300
F3 200

Minimum Cost-
Allocation Alternative-I Alternative-II
R1C1 900 300
(3 × 300) (3 × 100)
R1C2 400 400
(4 × 100) (4 × 100)
R1C3 400 1,200
(4 × 100) (4 × 300)
R2C2 1,800 1,800
(6 × 300) (6 × 300)
R3C3 1,000 ---
(5 × 200)
R3C1 --- 800
(4 × 200)
Total 4,500 4,500

© The Institute of Chartered Accountants of India

 26 FINAL EXAMINATION: MAY, 2014

10. Step 1
Reducing minimum from each column element (figure in ’000s)-
R1 R2 R3 R4
C1 1 1 − −
C2 − 0 − 0
C3 0 − 0 −
C4 − − 2 1

Step 2
Reducing minimum from each row element (figure in ’000s)-
R1 R2 R3 R4
C1 0 0 − −
C2 − 0 − 0
C3 0 − 0 −
C4 − − 1 0

Step 3
Draw the minimum number of lines to cover all zeros.
R1 R2 R3 R4
C1 0 0 − −
C2 − 0 − 0
C3 0 − 0 −
C4 − − 1 0

The minimum number of lines covering all zeroes is 4 which is equal to the order of the
matrix, hence, the above matrix will give the optimal solution. Specific assignments in
this case are as shown below:
Company Route (`)
C1 R1 4,000
C2 R2 4,000
C3 R3 2,000
C4 R4 5,000
Total 15,000
The minimum cost is ` 15,000.

© The Institute of Chartered Accountants of India

 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 27

11. (i) The Arrow Diagram for the given data:

(ii) The Critical Paths are 1 – 3 – 5 – 7 – 8 – 9 – 10 and 1 – 3 – 5 – 7 – 8 – 10.

Total Project Duration is 25 Weeks.
(iii) The Total, Free and Independent Floats are computed in the following table:
EST EFT LST LFT Slack Slack Total Free Ind.
of of Float Float Float
Duration

Tail Head
Event Event

Dij Ei Ei Lj Lj Li Lj LST Total Free

Activity

+ − − − − Float Float
Dij Dij Ei Ej EST − −
Slack of Slack of
Head Tail
Event Event
1–2 4 0 4 8 12 0 8 8 0 0
1–3 1 0 1 0 1 0 0 0 0 0
2–4 1 4 5 12 13 8 8 8 0 0*
3–4 1 1 2 12 13 0 8 11 3 3
3–5 6 1 7 1 7 0 0 0 0 0
4–9 5 5 10 13 18 8 0 8 8 0
5–6 4 7 11 12 16 0 5 5 0 0
5–7 8 7 15 7 15 0 0 0 0 0

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 28 FINAL EXAMINATION: MAY, 2014

6–8 1 11 12 16 17 5 0 5 5 0
7–8 2 15 17 15 17 0 0 0 0 0
8–9 1 17 18 17 18 0 0 0 0 0
8 – 10 8 17 25 17 25 0 0 0 0 0
9 – 10 7 18 25 18 25 0 0 0 0 0
(*) Being negative, the independent float is taken to be equal to zero.
12. The network for the given problem:

Various Paths of the network are as follows:

Path Duration (Days)
1–2–5–7–8 40
(7 + 16 + 9 + 8)
1–2–4–7–8 42
(7 + 8 + 19 + 8)
1–4–7–8 33
(6 + 19 + 8)
1–3–4–7–8 41
(8 + 6 + 19 + 8)
1–3–6–8 39
(8 + 24 + 7)

Critical Path is 1 – 2 – 4 – 7 – 8 with duration of 42 days.

The new formulation of the problem is as follows:
(i) Activities 1 – 2, 1 – 3 and 1 – 4 need 7 Days, 8 Days and 6 Days respectively as per
Original Programme.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 29

(ii) Activity 2 – 4 needs 12 Days (15 + 4 − 7) instead of Original Programme of 8 Days.

(iii) Activity 3 – 6 needs 24 Days (15 + 17 − 8) as per Original Schedule.
(iv) New Activity 6 – 7 needs 7 Days.
(v) Activity 6 – 8 needs lesser duration of 4 Days instead of Original Planned 7 Days.
(vi) Activities 2 – 5, 3 – 4, 4 – 7, 5 – 7, 7 – 8 need 16 Days, 6 Days, 19 Days, 9 Days, 8
Days respectively as per Original Schedule.
The new network based on the above listed activities will be as follows:

Various Paths of revised network are as follows:

Path Duration (Days)
1–2–5–7–8 40
(7 + 16 + 9 + 8)
1–2–4–7–8 46
(7 + 12 + 19 + 8)
1–4–7–8 33
(6 + 19 + 8)
1–3–4–7–8 41
(8 + 6 + 19 + 8)
1–3–6–7–8 47
(8 + 24 + 7 + 8)
1–3–6–8 36
(8 + 24 + 4)

Critical Path is 1 – 3 – 6 – 7 – 8 with duration of 47 Days.

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 30 FINAL EXAMINATION: MAY, 2014

13. Random No. Coding

Monthly Cash Receipts (`Crores) Monthly Cash Disbursements (`Crores)
Cash Probability Cumulative R.N. Cash Probability Cumulat. R.N.
30 0.20 0.20 00 − 19 33 0.15 0.15 00 − 14
42 0.40 0.60 20 − 59 60 0.20 0.35 15 − 34
36 0.25 0.85 60 − 84 39 0.40 0.75 35 − 74
99 0.15 1.00 85 − 99 57 0.25 1.00 75 − 99
Simulation Sheet
Opening Receipt Total Payment Closing
Month (` in Random (` in (` in Random (` in (` in
Crores) Numbers Crores) Crores) Numbers Crores) Crores)

1 15 17 30 45 78 57 (12)
2 (12) 43 42 30 16 60 (30)
3 (30) 74 36 06 35 39 (33)
4 (33) 31 42 09 23 60 (51)
5 (51) 72 36 (15) 44 39 (54)
6 (54) 46 42 (12) 92 57 (69)
7 (69) 51 42 (27) 58 39 (66)
8 (66) 68 36 (30) 08 33 (63)
9 (63) 93 99 36 58 39 (3)
10 (3) 54 42 39 78 57 (18)
11 (18) 96 99 81 54 39 42
12 42 09 30 72 77 57 15
(i) In 12 months, the bank falls Short of Cash in 10 months to meet payment.
Thus, Probability of Shortfall is 0.83 (10/12).
(ii) Total Shortfall of ` 399 Crores over 10 months.
Average monthly Shortfall during 10 months is `39.9 Crores.
(iii) With an Overdraft Facility of `45 Crores, there will be a Shortfall in 5 months
(4,5,6,7,8). Therefore, Probability will be 0.42 (5/12).
14. (i) Variable cost per unit that will be effected by learning and experience curve is
`2,200 (`4,400 – 50% of ` 4,400).

© The Institute of Chartered Accountants of India

 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 31

Let, ‘r’ be the learning curve rate.

No. of Batch (x) Cumulative Average Cost per unit (y)
1 2,200
2 2,200 r
4 2,200 r2
If 2,200 r2 = `1,920 (`4,120 – 50% of ` 4,400)
r2 = 0.8727
r = 0.934
Therefore, Learning Curve Effect = 93% (rounded off)
(ii) Calculation of Optimum Price
Price Demand Variable Variable Total Contribution Total
per unit (units) Cost Cost Variable per unit Contribution
per unit * per unit ** Cost
[W.N.] per unit
(`) (`) (`) (`) (`) (`)
11,100.00 1,000 2,200.00 2,200.00 4,400.00 6,700.00 67,00,000
10,700.00 2,000 2,046.00 2,200.00 4,246.00 6,454.00 1,29,08,000
9,600.00 3,000 1960.86 2,200.00 4,160.86 5,439.14 1,63,17,420
8,700.00 4,000 1,902.78 2,200.00 4,102.78 4,597.22 1,83,88,880

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

© The Institute of Chartered Accountants of India

 32 FINAL EXAMINATION: MAY, 2014

y = axb
Where,
y = Cumulative average unit costs
a = Average cost of the first unit
x = Cumulative number of batches
b = Log of learning ratio ÷ Log of 2
= log 0.93 ÷ log 2
= −0.0315 ÷ 0.3010
= −0.1047
15. Statement Showing Balance Scorecard Perspectives for Different Business Sectors
Health Care Airlines Banking
Weekly Patient Complaints Internal Operating --- ---
Efficiency
Patient Satisfaction Survey Customer Service --- ---
& Satisfaction
Flight Cancellation Rate --- Customer Service ---
& Satisfaction
On-time Performance of an --- Internal Operating ---
Airline Efficiency
Number of Grants Awarded to Learning and --- ---
a Healthcare unit Growth
Outstanding Loan Balances / --- --- Financial
Deposit Balances of a Banking Strength
Company
Employee Turnover Rate of a Learning and --- ---
Healthcare unit Growth
Patient Referral Rate Customer Service --- ---
& Satisfaction
Non-interest Income of a --- --- Financial
Banking Company Strength
Lost of Bag Reports per 5,000 --- Customer Service ---
Passengers & Satisfaction
16. Selling Costs would include all costs necessary to secure customer orders and get the
finished product into the hands of customers.
The responsibility of Mr. Philips as described in the problem is coordination of shipments
of Diesel Engines from the factory to distribution warehouses and same would appear to
fall in this class. Accordingly, the finance controller is correct in his view point that the
salary cost should be classified as selling cost.

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 PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING 33

17. JIT Inventory System

“For successful operation of JIT inventory system, the suppliers chosen must be willing to
make frequent deliveries in small lots. Rather than deliver a week’s or a month’s material
at one time, suppliers must be willing to make deliveries several times a day and in the
exact quantities specified by the buyer.”
It is described in the problem that suppliers are not willing to
‐ make frequent deliveries and
‐ make supplies in the exact quantities as required
Accordingly Mr. Brian’s doubt is correct on successful implementation of JIT System.
18. In linear programming problem, coefficients in the objective function and the constraint
equations must be completely known and they should not change during the period of
study. They should be known constraints. In practical situation, it may not be possible to
state all coefficients in the objective function and constraints with certainty. Furthermore,
these coefficients may actually be random variables, each with an underlying probability
distribution for the values. Such problems cannot be solved using linear programming.
19. Alternate Solution in ‘Transportation Problem’
The Δ ij matrix or Cij – (ui + vj) matrix, where Cij is the cost matrix and (ui + vj) is the cell
evaluation matrix for unallocated cell. The Δ ij matrix has one or more ‘Zero’ elements,
indicating that, if that cell is brought into the solution, the optimum cost will not change
though the allocation changes.
Thus, a ‘Zero’ element in the Δ ij matrix reveals the possibility of an alternative solution.

20. Committed Cost / Discretionary Cost

S. No. Fixed Costs Committed / Discretionary

(i) Depreciation on assets Committed Cost

(ii) Advertising Discretionary Cost
(iii) Research Discretionary Cost
(iv) Employees Training Discretionary Cost

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