1 SCM

BCCA
INTRODUCTION
SYLLABUS STRUCTURE
Section A: Cost Management 20%

1. Cost Management
Section B: Strategic Cost Management Tools and Techniques 50%
2. Decisions Making Techniques
3. Standard Costing in Profit Planning
4. Activity Based Cost Management – JIT and ERP
5. Cost of Quality and Total Quality Management
Section C: Strategic Cost Management – Application of Statistical Techniques 30%
in Business Decisions (DM)
6. Application of Operation Research and Statistical Tools in Strategic Decision
Making
STRATEGIC COST MANAGEMENT
STRATEGIC
COST
MANAGEMENT ?
Strategic Cost Management is the process of reducing total costs while improving the strategic
position of business.
The basic goal of strategic cost management is to achieve sustainable competitive advantage through
product differentiation and cost leadership.
In order to achieve the above, cost have to be managed strategically.
1|Page CMA FINAL - SCM CA CMA RAVI KUMAR

BCCA
SOURCES FOR SUSTAINABILITY ADVANTAGE
PRODUCT DIFFERENTIATION
Product differentiation is a marketing strategy designed to distinguish a company's products or

services from the competition.
COST LEADERSHIP
In business strategy, cost leadership is establishing a competitive advantage by having the

lowest cost of operation in the industry.

BCCA
1.COST MANAGEMENT
CONCEPTS OF COST MANAGEMENT
1.1 Life Cycle Costing
1.2 Target Costing
1.3 Kaizen Costing
1.4 Value Analysis and Value Engineering
1.5 Throughput Costing
1.6 Business Process Re-engineering
1.7 Back – flush Accounting
1.8 Lean Accounting
1.9 Socio Economic Costing
1.10 Cost Control and Cost Reduction
1.1 LIFE CYCLE COSTING
Introduction:
Cost = ₹ 10,00,000
Cost = ₹ 3,00,000
Maintenance p.a = ₹ 30,000
Maintenance p.a = ₹ 50,000
Life = 10 Years
Life = 5 Years

BCCA
1. Meaning of Life Cycle Costing
a) Life Cycle Costing aims at cost ascertainment of a product, project etc. over its
b) projected life.
c) It is a system that accumulates the actual costs and revenues of product from its inception to
its abandonment.
d) Traces research, design and development costs for each individual product and compared with
product revenue.
2. Meaning of Product Life Cycle
Product Life Cycle is the time span from initial R&D to when customer servicing is no
longer offered for the product.
Example:
For motor vehicles, this time-span may range from 5 to 7 years.
3. Phases in Product Life Cycle

BCCA
QUESTION 1 (DEC 2018)
Wipro is examining the profitability and pricing policies of its Software Division. The Software Division
develops Software Packages for Engineers. It has collected data on three of its more recent packages
- (a) ECE Package for Electronics and Communication Engineers, (b) CE Package for Computer Engineers,
and (c) IE Package for Industrial Engineers.
Summary details on each package over their two year cradle to grave product lives are
Package Selling Price Number of Units Sold
Year 1 Year 2
ECE ₹250 2,000 8,000
CE ₹300 2,000 3,000
IE ₹200 5,000 3,000
Assume that no inventory remains on hand at the end of year 2. Wipro is deciding which product lines
to emphasize in its software division. In the past two years, the profitability of this division has been
mediocre.
Wipro is particularly concerned with the increase in R & D costs in several of its divisions. An analyst
at the Software Division pointed out that for one of its most recent packages (IE) major efforts had
been made to reduce R&D costs.
Last week, Amit, the Software Division Manager, decides to use Life Cycle Costing in his own division.
He collects the following Life Cycle Revenue and Cost information for the packages -Amount (Rs)
Particulars Package ECE Package EC Package IE
Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
Revenues 5,00,000 20,00,000 6,00,000 9,00,000 10,00,000 6,00,000
Costs:
R&D 7,00,000 - 4,50,000 - 2,40,000 -
Design of product 1,15,000 85,000 1,05,000 15,000 76,000 20,000
Manufacturing 25,000 2,75,000 1,10,000 1,00,000 1,65,000 43,000
Marketing 1,60,000 3,40,000 1,50,000 1,20,000 2,08,000 2,40,000
Distribution 15,000 60,000 24,000 36,000 60,000 36,000
Customer Service 50,000 3,25,000 45,000 1,05,000 2,20,000 3,88,000
Present a Product Life Cycle Income Statement for each Software Package. Which package is most
profitable and which is the least profitable? How do the three packages differ in their cost structure
(the percentage of total costs in each category)?
Solution:
Life Cycle Income Statement (in ₹000’s)
Particulars Package ECE Package EC Package IE
Y1 Y2 Total % Y1 Y2 Total % Y1 Y2 Total %
Revenues 500 2,000 2,500 100 600 900 1,500 100 1,000 600 1,600 100
Costs:
R&D 700 - 700 28 450 - 450 30 240 - 240 15
Design of 115 85 200 8 105 15 120 8 76 20 96 6
product
Manufacturing 25 275 300 12 110 100 210 14 165 43 208 13
Marketing 160 340 500 20 150 120 270 18 208 240 448 28
Distribution 15 60 75 3 24 36 60 4 60 36 96 6
Customer 50 325 375 15 45 105 150 10 220 388 608 38
Service
Total Cost 1,065 1,085 2,150 86 884 376 1,260 84 969 727 1,696 106
Profit 350 14 240 16 (96) (6)
BCCA
Package ECE is most profitable, while package IE is least profitable.
QUESTION 2 (JUNE 2017)

SRM Ltd. has developed a new product 'Kent' which is about to be launched into the market and
anticipates to sell 80,000 of these units at a sale price of ₹ 300 over the product's life cycle of four
years. Data pertaining to product 'Kent' are as follows:
Costs of Design and Development of Moulding ₹ 10,25,000
Dies and Other tools
Manufacturing costs ₹ 125 per unit
Selling costs ₹ 12,500 per year + ₹ 100 per unit
Administration costs ₹ 50,000 per year
Warranty expenses 5 replacement parts per 25 units at ₹ 10 per part, 1

visit per 500 units (cost ₹ 500 per visit)
Required:
Compute the product Kent's Life Cycle Cost.
Suppose SRM Ltd. can increase sales volume by 25% through 15% decrease in selling price, should
SRM Ltd. choose the lower price?
Solution:
Statement showing 'Kent's Life Cycle Cost (80,000 Units)
Particulars Amount (₹)
Costs of Design and Development of Moulds, Dies and other tools 10,25,000
Manufacturing Costs (₹125 × 80,000 units) 1,00,00,000
Selling Costs (₹100 × 80,000 units + ₹ 12,500 × 4) 80,50,000
Administration Costs (₹ 50,000 × 4) 2,00,000
Warranty :
(80,000 units / 25 units × 5 parts × ₹ 10) 1,60,000
(80,000 units / 500 units × 1 visit × ₹ 500) 80,000
Total cost 1,95,15,000
Statement showing 'Kent's Life Cycle Cost (1,00,000 Units)
Particulars Amount (₹)
Costs of Design and Development of Moulds, Dies and other tools 10,25,000
Manufacturing Costs (₹125 × 1,00,000 units) 1,25,00,000
Selling Costs (₹100 × 1,00,000 units + ₹ 12,500 × 4) 1,00,50,000

BCCA
Administration Costs (₹ 50,000 × 4) 2,00,000
Warranty:
(1,00,000 units / 25 units × 5 parts × ₹10) (1,00,000 units / 500 2,00,000

units × 1 visit × ₹ 500)
1,00,000
Total cost 2,40,75,000
Statement showing "Kent's Life Time Profit"
Particulars Amount (₹) Amount (₹)
80,000 units 100,000 units
Sales (80,000 × ₹ 300) (1,00,000 × ₹ 255) 2,55,00,000
2,40,00,000
Less : Total Cost 1,95,15,000 2,40,75,000
Profit 44,85,000 14,25,000
Decision: Reducing the, price by 15% will decrease profit by ₹ 30,60,000. Therefore, SRM Ltd.
should not cut the price.

Computation of Equivalent Annual Cost and Identification of Year to Replace the Machine
A & Co. is contemplating whether to replace an existing machine or to spend money on overhauling it. A
& Co. currently pays no taxes. The replacement machine costs ₹ 90,000 now and requires maintenance
of ₹ 10,000 at the end of every year for eight years. At the end of eight years it would have a salvage
value of ₹ 20,000 and would be sold. The existing machine requires increasing amounts of maintenance
each year and its salvage value fall each year as follows:
Year Maintenance Salvage
Present 0 40,000
1 10,000 25,000
2 20,000 15,000
3 30,000 10,000
4 40,000 0
The opportunity cost of capital for A & Co. is 15%.
When should the company replace the machine?
(Notes: Present value of an annuity of ₹ 1 per period for 8 years at interest rate of 15% : 4.4873;
present value of ₹ 1 to be received after 8 years at interest rate of 15% : 0.3269)

BCCA
Solution:
Calculation of Equivalent Annual Cost of New Machine Amount (₹)
Cost of New Machine 90,000
Add: Present value of annual maintenance cost for 8 years (₹ 10,000 × 4.4873) 44,873
1,34,873
Less: Present value of salvage value at the end of 8th year (₹20,000 × 0.3269) 6,538
Total present value of life cycle costs of new machine 1,28,335
Equivalent Annual cost = ₹ 1,28,335/4.4873 = ₹ 28,600
Calculation of Equivalent Annual cost in continuing with Existing Machine
1st Year Amount (₹ )
P.V. of salvage value at the beginning of 1st year 40,000
Add: P. V. of Maintenance cost (10,00/1.15) 8,696
48,696
Less: P.V. of salvage value at the end of the year (25,000/1.15) 21,739
26,957
Equivalent Annual cost at the end of 1st year (26,957 × 1.15) 31,000
2nd Year Amount (₹)
P.V. of salvage value at the beginning of 2nd year 25,000
42,391
Less: P.V. of salvage value at the end of the 2nd year (15,000/1.15) 13,043
29,348
Equivalent Annual cost at the end of 2nd year (29,348 × 1.15) 33,750
3rd Year Amount (₹)
P.V. of salvage value at the beginning of 3rd year 15,000
41,087

BCCA
Less: P.V. of salvage value at the end of the 3rd year (10,000/1.15) 8,696
32,391
Equivalent Annual cost at the end of 3rd year (32,391 × 1.15) 37,250
4th Year Amount (₹)
P.V. of salvage value at the beginning of 4th year 10,000
44,783
Less: P.V. of salvage value at the end of the 4th year Nil
44,783
Equivalent Annual cost at the end of 4th year (44,783 × 1.15) 51,500
Analysis: Since the equivalent annual cost of new machine is lesser than that of existing machine, it is
suggested to replace the existing machine with new machine. The equivalent annual cost of existing
machine is higher in all the four years as compared to new machine.

For a machine the financial data are given below:
Time (Year) 0 1 2 3 4
Outlay (Rs) 5000
Operating Costs (Rs) 1400 1500 1600 1700
Maintenance (Rs.) 300 400 500
Value if scrapped (Rs.) 3400 2000 800 600
The appropriate interest rate is 12% p.a. and the discount factor is as follows:
Year 0 1 2 3 4
12% Disc. Factor 1 0.893 0.797 0.712 0.636
Required: Determine the optimal length of replacement cycle.
Solution:
Year 0 1 2 3 4 Present Annuity Average PV

Value Factor
12% Disc Factor 1 0.893 0.797 0.712 0.636
1 -5000 2000 3214 0.893 3599
2 -5000 -1400 200 6091 1.69 3604
3 -5000 -1400 -1800 -1200 8539 2.402 3555
4 -5000 -1400 -1800 -2000 -1600 10126 3.038 3333
Decision: Better to replace at the end of year 4 as the average present value is the lowest.

BCCA
QUESTION 5
A2Z p.l.c supports the concept of tero technology or life cycle costing for new investment decisions
covering its engineering activities. The financial side of this philosophy is now well established and its
principles extended to all other areas of decision making. The company is to replace a number of its
machines and the Production Manager is torn between the Exe Machine, a more expensive machine with
a life of 12 years, and the Wye machine with an estimated life of 6 years. If the Wye machine is chosen
it is likely that it would be replaced at the end of 6 years by another Wye machine. The patter of
maintenance and running costs differs between the two types of machine and relevant data are shown
below:
Exe Wye
₹ ₹
Purchase price 19,000 13,000
Trade-in value/brake up/scrap 3,000 3,000
Annual repair costs 2,000 2,600
Overhaul costs ( at year 8) 4,000 ( at year 4) 2,000
Estimated financing costs averaged over machine life
10%p.a -Exe; 10% p.a. -Wye
You are required to: recommend with supporting figures, which machine to purchase, stating any
assumptions made.
Solution:
Calculation of Equated Annual Cost (EXE Machine)
Year Particulars Cash Flow PVAF/PVF @10% DCF
0 Purchase Price 19,000 1 19,000
1-12 Annual Repairs 2,000 6.814 13,624
8 Overhaul 4,000 0.466 1,864
12 Scrap Value (3,000) 0.318 (954)
Sum of discounted Cash flows 33,537
Equated Annual Cost (EAC) = 𝑺𝒖𝒎 𝒐𝒇 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒆𝒅 𝒄𝒂𝒔𝒉 𝒐𝒖𝒕𝒇𝒍𝒐𝒘 ÷ 𝑷𝑽𝑨𝑭
=𝟑𝟑, 𝟓𝟑𝟕 ÷ 𝟔. 𝟖𝟏𝟒
= ₹4,921
Calculation of Equated Annual Cost (WYE Machine)
Year Particulars Cash Flow PVAF/PVF @10% DCF

0 Purchase Price 13,000 1 13,000
1-12 Annual Repairs 2,600 4.36 11,336
8 Overhaul 2,000 0.68 1,360
12 Scrap Value (3,000) 0.56 (1680)
Sum of discounted Cash flows 24,016
Equated Annual Cost (EAC) = 𝑺𝒖𝒎 𝒐𝒇 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒆𝒅 𝒄𝒂𝒔𝒉 𝒐𝒖𝒕𝒇𝒍𝒐𝒘 ÷ 𝑷𝑽𝑨𝑭
=𝟐𝟒, 𝟎𝟏𝟔 ÷ 𝟒. 𝟑𝟔
= ₹5,508
As the Equated Annual Cost is less for Exe Machine, it is better to purchase the same.

BCCA
1.2 TARGET COSTING
Introduction:
Target costing popular among Japanese firms such as
1. It is a management technique wherein prices are determined by market conditions.

2. The company is a price taker rather than a price maker.
3. It aims at profit planning.
4. It is a part of management’s strategy to focus on cost reduction & effective cost management.
Advantages of Target costing:
1. Innovation
2. Competitive advantage.
3. Market driven management.
4. Cost reduction.

BCG Manufacturers sell their product at ₹ 1,000 per unit. Their competitors are likely to reduce the
price by 15%. BCG Manufacturers want to respond aggressively by cutting price by 20% and expect
that the present volume of 150000 units per annum will increase to 200000 units. BCGM want to earn
a 10% target profit on sales. Based on a detailed value engineering, the comparative position is given
below:
Particulars Existing (₹) Target (₹)
Direct Material Cost per unit 400 385
Direct Labour Cost per unit 55 50
Direct machinery costs per unit 70 60
Direct Manufacturing expenses per 525 425
unit
Manufacturing Overheads
No. of orders (₹ 80 per order) 22,500 21,250
Testing hours (₹ 2 per hour) 45,00,000 30,00,000
Units reworked (₹ 100 per unit) 12,000 13,000
Manufacturing overheads are allocated using relevant cost drivers. Other operating costs per unit for
the expected volume are estimated as follows:
Research and Design ₹ 50
Marketing and Customer Service ₹ 130
₹ 180
BCCA
Required:
Calculate target costs per unit and target costs for the proposed volume showing break up of
different elements.
Prepare target product profitability statement.
Solution:
i. Calculation of target cost per unit
Particulars ₹
Target Selling Price (1000 less 20%) 800
Less: Target Profit (80)
Target Cost per unit 720
Statement showing breakup of Target Cost per unit

Particulars ₹ ₹
Direct Materials 385
Direct Labour 50
Direct Machining Cost 60
Direct Manufacturing Cost 495
Add: Manufacturing Overheads
Ordering & Receiving (21,250 x 80)/2,00,000 8.5
Testing & Inspection (3,00,000 x 2)/2,00,000 30
Rework (13,000 x 100)/2,00,000 6.5 45
Total Manufacturing Cost 540
Add: Other Operating cost:
Research & Design 50
Marketing & Customer Service 130 180
Target Cost Per Unit 720
ii. Statement showing Target Product Profitability:
Particulars Per Unit (₹) 2,00,000 Units (₹)
Sales 800 16,00,00,000
Less: Cost of Goods Sold
Direct Materials (385) (7,70,00,000)
Direct Labour (50) (1,00,00,000)
Direct Machining Cost (60) (1,20,00,000)
Manufacturing Cost (45) (90,00,000)
Gross Margin 260 10,80,00,000
Less: Operating Cost
Research & Design (50) (1,00,00,000)
Marketing & Customer Service (130) (2,60,00,000)
Operating Profit 80 1,60,00,000
10 | P a g e CMA FINAL - SCM CA CMA RAVI KUMAR

BCCA
ABC Enterprises has prepared a draft budget for the next year follows:
Quantity 10,000 units
(₹)
Sales price per unit 30
Variable costs per unit:
Direct Materials 8
Direct Labour 6
Variable overhead (2 hrs × 0.50) 1
Contribution per unit 15
Budgeted Contribution 1,50,000
Budgeted Fixed costs 1,40,000
Budgeted Profit 10,000
The Board of Directors is dissatisfied with this budget, and asks working party to com up with alternate
budget with higher target profit figures.
The working party reports back with he following suggestions that will lead to budgeted profit of ₹
25,000. The company should spend ₹ 28,500 on advertising, & set the target sales price up to ₹ 32 per
unit. It is expected that the sales volume will also rise, inspite of the price rise, to 12,000 units.
In order to achieve the extra production capacity, however, the workforce must be able to reduce the
time taken to make each unit of the product. It is proposed to offer a pay and productivity deal in
which the wage rate per hour in increased to ₹ 4. The hourly rate for variable overhead will be
unaffected.
Ascertain the target labour time required to achieve the target profit.
Solution:
Particulars ₹ ₹
Target profit 25,000

Add: Fixed cost 1,40,000
Add: Additional Advertisement 28,500
Total contribution 1,93,500
Sales volume 12,000
Contribution per unit (₹ 1,93,500/12,000) 16.125
Target Selling price per unit 32.000
Less: Contribution per unit 16.125
Target variable cost p.u. 15.875
Less: Material cost p.u. 8.000
Labour + Variable overhead p.u. 7.875

BCCA
(1) Let revised labour time be x
Labour cost per hour = hour x ₹ 4 per hour = ₹ 4x
Variable overhead per hour = hour ₹ 0.5 per hour
Total labour & variable overhead per hour = 4.5x
Time required per unit = 7.875 = 4.5x (or), x = 1.75 hrs.
(2) Time required to achieve the target profit

1.75 hours per unit
So, for 12,000 units
= 12,000 × 1.75 hour
= 21,000 hours
QUESTION 8
You the manager of a paper mill (M Ltd) and have recently come across a particular type of paper,
which is being sold at substantially lower rate (by another company -ABC Ltd) than the price charged by
your ow mill. The value chain for one of tonne of such paper for ABC Ltd is follows,
ABC Ltd Merchant Printer Customer

ABC Ltd sells this particular paper to the merchant at the rate of ₹ 1,466 per tonne ABC Ltd pays for the
freight which amounts to ₹ 30 per tonne
Average returns and allowances amount to 4% of sales and approximately equal ₹ 60 per tonne.
The value chain of your company, through which the paper reaches the ultimate customer is similar to the
of ABC Ltd. However, your mill does not sell directly to the merchant, the latter receiving the paper from a
huge distribution center maintained by your company at Haryana. Shipment costs from the mill to the
Distribution Center amount to ₹ 11 per tonne while the operating costs in the Distribution Center have
been estimated to be ₹ 25 per tonne. The return on investments required by the Distribution Center for
the investments made amount to an estimated ₹ 58 per tonne.
You are required to compute the “Mill manufacturing Target Cost” for this particular paper
for your company. You
may assume that the return on the investment expected by your company equals Rs. 120 per tonne of
such paper.
Solution:
Computation of Target Cost
ABC Ltd selling price to the merchant 1,466
Less: freight paid by ABC Ltd 30
Less normal sales returns and allowances 60
Capital charge of M Ltd 120 210
Target cost 1256
Less: Shipment cost Distribution Centre 11
Operating cost in the Distribution Centre 25 36
Distribution centre capital charge 1220
Less: Target manufacturing cost of the Mill 58
1162

BCCA
QUESTION 9
Desktop Co. manufactures and sells 7,500 units of a product. The full Cost per unit is ₹100. The Company
has fixed Its price so as to earn a 20% return on an Investment of ₹ 9,00,000.
Required:
a. Calculate the Selling Price per unit from the above. Also, calculate the mark-up % on the Full Cost
per unit.
b. If the Selling Price as calculated above represents a mark- up% of 40% on Variable Cost per unit.
calculate the Variable Cost per unit.
c. Calculate the Company’s Income if it had changed the Selling Price to ₹115. At this price, the
Company would have sold 6,750 units.
d. In response to competitive pressures, the Company must reduce the price to ₹105 next year, in
order to achieve sales of 7,500 units. The company also plans to reduce its investment to ₹ 8,25,000.
If a 20% return on Investment should be maintained, what is the Target Cost per unit for the next
year?
Solution:
a. Computation of Selling Price and mark - up % on the Full Cost per unit
Target Sale Price per unit = Full Cost + Target Profit = ₹100 + 24 ₹124
So, Mark – up price is 24%
b. Computation of Variable Cost per unit:
Above sale Price ₹124 = VC + 40% thereon, i.e. 140% on VC. So, Var. Cost
₹124
= = ₹89
140%
c. Calculate the company’s Income if selling price are increased
Present Contribution at 7,500 units = (₹124 – ₹ 89) × 7,500 𝑢𝑛𝑖𝑡𝑠 =₹ 2,62,500
Revised Contribution at 6,750 units = (₹115 – ₹89) × 6,750 𝑢𝑛𝑖𝑡𝑠 = ₹ 1,75,500
₹ 87,000
Hence, Increase in Sale Price is not beneficial. due to reduction in Contribution by
₹ 87,000
d. Calculate the company’s Target Profit if selling price are reduced and Target cost
if investment is ₹ 8,25,000
8,25,000
Target Profit for next year = 7500𝑢𝑛𝑖𝑡𝑠 × 20% = ₹24
Target cost = 105 − 24 = ₹ 83/𝑢𝑛𝑖𝑡

BCCA
1.3 KAIZEN COSTING
Toyota’s experience of kaizen costing:
Toyota aggressively implemented kaizen costing to reduce costs in

a manufacturing phase.
(a) Kaizen goals have been set by top management.

(b) About 2 millions suggestions were received from Toyota
employees in 1 year. 95% of them were adopted.
(c) This is a prime example of employee empowerment
Cost Reduction:
(a) It refers to ongoing continuous improvement program that

focuses on the reduction of waste in the production process.
(b) It is a cost reduction technique.
(c) Kaizen costing is applied to products that are already in
production phase, whereas Target costing is applied when the
products are in development phase.
Difference between Kaizen Costing and Standard Costing
Kaizen Costing Standard Costing

It is used for cost Control. It is used for cost reduction.
The aim is to meet cost standards The aim is to achieve cost reduction targets
Employees are often viewed as the Employees are viewed as source to find
cause of problems solutions.
It is assumed that current It assumes continuous improvement
manufacturing conditions remains
unchanged.

BCCA
1.4 VALUE ANALYSIS AND VALUE ENGINEERING
• It is an approach to improve the value of a product, by

understanding components and their associated costs.
• It then seeks to find improvements to the components by either
reducing costs or increasing the value of product.
The rules Governing for Value Analysis
1. No cost can be removed if it compromises the quality of the product or it’s reliability.
2. Saleability is another issue that cannot be compromised.
3. Any activity that reduces the maintainability of the product, can lower the value.
Value:
𝐹𝑢𝑛𝑐𝑡𝑖𝑜𝑛
Value = 𝐶𝑜𝑠𝑡
Any attempt to improve the value of a product must considered 2 elements.
Use Value Esteem Value
Key success factors of Value Analysis
a. Gain approval of senior management.

b. Enlist a senior manager as a champion of the project.
c. Establish the Reporting Procedure.
d. Present the VA concept and objectives of the team to all the middle and senior managers.
e. Provide an office space and co-locate the team members.
f. Select the product for first study.
g. Train the team etc.

BCCA
1.5 THROUGHPUT COSTING
Chicken required per unit = 100 Grams
Demand-80 Units
Selling Price: ₹150 per unit
Raw Material Available = 10,000 Grams
Cost per kg = ₹500
Chicken required per unit = 200 Grams
Demand -100 Units Selling Price: ₹250 per unit
Calculation of contribution per unit of bottleneck
Particulars Burger Chicken Fry

Selling Price 150 250
Less: Material Cost 50 100
Contribution 100 150
Material Required per unit 100 grams 200 grams
Contribution per unit of Bottleneck 1 0.75
Optimum Mix:
Product Bottleneck Production Bottleneck Used Bottleneck

Available Balance
Burger 10,000 grams 80 Units 8,000 grams 2,000 grams
(80X100)
Chicken Fry 2,000 grams 10 Units 2000 grams -
(10X200)
Throughput accounting is defined as follows:
“A management accounting system which focuses on ways by which the maximum return per unit of
bottleneck activity can be achieved” -CIMA Terminology
Throughput- Excess of sale value over totally variable cost.

BCCA
Totally variable cost- Only Direct Material.
- Direct labour is not totally variable, unless piece rate wages are paid.
Bottleneck or constraint - Resource that limits output.
Throughput or cycle time - Time required to convert raw material into finished goods ready to be
shipped to customer. It includes
a. Material Handling
b. Production Processing
c. Inspection and Packaging
Formula:
𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 𝐶𝑜𝑠𝑡
Throughput Efficiency =
𝐴𝑐𝑡𝑢𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡
𝑇𝑖𝑚𝑒 𝑠𝑝𝑒𝑛𝑡
Throughput Time ratio = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑦𝑐𝑙𝑒 𝑇𝑖𝑚𝑒
Total Factory Cost = Except material costs, most factory costs are fixed these are called total
factory cost.
𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 𝐶𝑜𝑠𝑡
Return Per Factory Hour = 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡
Cost Per Factory Hour = 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐻𝑜𝑢𝑟
𝑅𝑒𝑡𝑢𝑟𝑛 𝑃𝑒𝑟 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐻𝑜𝑢𝑟

Throughput Accounting Ratio = 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐻𝑜𝑢𝑟
Throughput Costing, Absorption Costing & Marginal Costing:
Throughput Costing It assigns only direct material costs to the products.

Absorption Costing It assigns Variable & Fixed Cost
Marginal Costing It assigns only Variable Cost
Steps to increase Throughput:
1. Identify Bottleneck
2. Decide how to exploit bottleneck effectively.
3. Subordinate everything else to the decision made in step (2)
4. Increase Capacity of bottleneck with minimum capital input.
5. Identify new bottleneck and repeat the process.

BCCA
Zip Ltd. manufactures three products. The material cost, selling price and bottleneck resource details
per unit are as follows:
Particulars Product T Product C Product S
Selling Price (₹) 66 75 90
Material and other variable cost (₹) 24 30 40
Bottleneck resource time (minutes) 15 15 20
Budgeted factory costs for the period are ₹ 4,43,200. The bottleneck resource time available is
1,50,240 minutes per period.
Required:
(i) Company adopted throughput accounting and products are ranked according to ‘product return
per minute’. Select the highest rank product.
(ii) Calculate throughput accounting ratio and comment on it.
Solution:
(i) Calculation of Rank according to product return per minute.
Particulars T C S
Selling price 66 75 90
Less : Variable Cost 24 30 40
Throughput contribution (a) 42 45 50
Minutes per unit (b) 15 15 20
Contribution per minute (a) ÷ (b) 2.8 3 2.5
Ranking II I III
(ii) Calculation of Throughput Accounting ratio:
Particulars T C S
Factory cost per minute (₹ 2,21,600/75,120 2.95 2.95 2.95
minutes) (₹)
TA Ratio (Contribution per minute/Cost per minute) 0.95 1.02 0.85
Ranking based on TA ratio II I III
QUESTION 11
Cat Co makes a product using three machines – X, Y and Z. The product has to pass through all the
three machines.
The capacity of each machine is as follows:
X Y Z
Machine capacity per week (in units) 800 600 500
The demand for the product is 1,000 units per week. For every additional unit sold per week, profit
increases by `
50,000. Cat Co is considering the following possible purchases (they are not mutually exclusive):
Purchase 1 Replace machine X with a newer model. This will increase capacity to 1,100 units per week
and costs ` 60 Lakhs.

BCCA
Purchase 2 Invest in a second machine Y, increasing capacity by 550 units per week. The cost of this
machine would be ` 68 Lakhs.
Purchase 3 Upgrade machine Z at a cost of ` 75 Lakhs, thereby increasing capacity to 1,050 units.
Required:
Which is Cat Co’s best course of action under throughput accounting?
Solution:
Since the product has to pass through all the machines, machine capacity is the bottleneck.
Bottleneck resource in order of preference is firstly machine ‘Z’, secondly machine ‘Y’ and lastly machine
‘X’ because
the no. of units are in that order in the existing capacity.
Particulars X Y Z Demand
Current capacity per week 800 600 500* 1,000
Buy Z 800 600* 1,050 1,000
Buy Z & Y 800* 1,150 1,050 1,000
Buy Z, Y & X 1,100 1,150 1,050 1,000*
* = bottleneck resource
All the three machines to be purchased in the above order to meet the existing demand.
QUESTION 12
A factory has a key resource (bottleneck) of Facility A which is available for 31,300 minutes per week.
Budgeted factory costs and data on two products, X and Y, are shown below:
Product Selling Price/Unit Material Cost/Unit Time in Facility A
X Rs. 35 Rs. 20.00 5 minute
Y Rs. 35 Rs. 17.50 10 minutes
Budgeted factory costs per week:
₹
Direct labour 25,000
Indirect labour 12,500
Power 1,750
Depreciation 22,500
Space costs 8,000
Engineering 3,500
Administration 5,000
Actual production during the last week is 4,750 units of product X and 650 units of product
Y. Actual factory cost was Rs. 78,250.
Calculate:
(i) Total factory costs (TFC)
(ii) Cost per Factory Minute
(iii) Return per Factory Minute for both products
(iv) TA ratios for both products.
(v) Throughput cost per the week.
(vi) Efficiency ratio

BCCA
Solution:
(i) Total factory cost = Total of all costs except material
= 78,250
𝑇𝑜𝑡𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡 78250

(ii) Cost per factory minute = 𝑀𝑖𝑛𝑢𝑡𝑒𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒
=31300 = 2.5 𝑝𝑒𝑟 𝑚𝑖𝑛𝑢𝑡𝑒
(iii) Return per factory minute

35− 20
For Product X = 5
=3
35− 17.5
For Product Y = 10
= 1.75
𝑅𝑒𝑡𝑢𝑟𝑛 𝑃𝑒𝑟 𝑀𝑖𝑛𝑢𝑡𝑒
(iv) Throughput accounting ratio = 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝑚𝑖𝑛
3
For Product X = 2.5 = 1.2
1.75
For Product Y = = 0.7
2.5
(v) Throughput time = 4750x5 + 650x10
= 30,250 Minutes
𝑇ℎ𝑟𝑜𝑢𝑔ℎ 𝑝𝑢 𝑡𝐶𝑜𝑠𝑡
(vi) Efficiency % =
𝐴𝑐𝑡𝑢𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡
75,625
= 78,250 = 96.6%

BCCA
1.6 BUSINESS PROCESS RE-ENGINEERING
It refers to the fundamental rethinking and redesign of business processes to achieve improvement
in cost reduction, quality, service, speed and customers satisfaction.
Features of BPR:
i. Several jobs are considered into one
ii. Often workers make decisions
iii. The steps in the process are performed in a logical order
iv. Work is performed, where it makes most sense
v. Quality is built in.
1.7 BACK FLUSH ACCOUNTING
It is when you wait until the manufacture of a product has been completed, and then record all of the
related issue of material.
This system records the transaction only at the termination of the production and sales cycle. It is
usually employed in parallel with JIT.
JIT is a system where production is pulled by customer demand. Theoretically there are zero stocks.
1.8 LEAN ACCOUNTING
It is a general term used for the changes required to a company’s accounting to support
lean manufacturing and lean thinking.
Lean strategies focuses on producing more with less input. Thus, it seeks to eliminate waste throughout
the entire manufacturing process.
It is a management tool that focuses on reducing waste and maximizing customer value.
It is characterized by delivery.
1. The right product.

2. In the right quantity.
3. With the right quality (Zero defect)
4. At the expect time the customer needs it.
5. At the lowest possible cost.

BCCA
Lean Accounting V/S Standard Costing:
Lean Accounting Standard Costing

Quick, Simple and timely Complex and wasteful processes
Clear and easy to understand Difficult for people to understand
Provides information for effective decisions Leads to bad decisions
Enables value based pricing Enables Cost + pricing
Key components of lean accounting
i. Over production
ii. Waiting
iii. Transportation
iv. Extra processing
v. inventory
vi. Motion
vii. Defects
1.9 SOCIO ECONOMIC COSTING

Socioeconomics is the social science that studies how economic activity affects and is shaped by social
processes.
Examples of causes of socioeconomic impacts are new technologies, change in laws, ecological changes
and demographic changes.
Socio economic impact is a major predictor of business success.
1.10 COST CONTROL AND COST REDUCTION
Cost Control Cost Reduction

Efforts made towards achieving target or goal Effort made to achieve reduction in cost
It lacks dynamic approach It is a continuous improvement process
Focus on past and present Focus on present and Future
It is preventive function It is corrective function
Assumes the existing standards can not be Assumes no standards permanent.
challenged

BCCA
2. DECISION MAKING TECHNIQUES
CONCEPTS OF DECISION-MAKING TECHNIQUES
2.1 Marginal Costing

2.2 Transfer Pricing
2.1 MARGINAL COSTING
The cost of a product or process can be ascertained using different elements of cost using any of the
following two techniques viz.,
1. Absorption Costing
2. Marginal Costing
Absorption costing
Under absorption costing, all costs are identified with the manufactured products.
Marginal Costing
• Marginal costing is “the ascertainment of marginal costs and of the effect on profit of changes
in volume or type of output by differentiating between fixed costs and variable costs.”
• Marginal Cost is defined as “the amount at any given volume of output by which aggregate costs
are changed if the volume of output is increased or decreased by one unit.”
• Marginal Cost also means Prime Cost plus Variable Overheads.
Applications of Marginal Costing
a) Make or buy decisions,
b) Exploring foreign markets,
c) Accept an order or not,
d) Determination of selling price in different conditions,
e) Replace one product with some other product,
f) Optimum utilisation of labour or machine hours,
g) Evaluation of alternative choices,
h) Subcontract some of the production processes or not,
i) Expand the business or not,
j) Diversification,
k) Shutdown or continue,
Differences between Absorption Costing and Marginal Costing
Absorption Costing Marginal Costing
1. Both fixed and variable costs are considered for Only variable costs are considered for
product
product costing and inventory valuation.
costing and inventory valuation.
1 | P a g eC CMA FINAL - SCM CA CMA RAVI KUMAR

BCCA
2. Fixed costs are charged to the cost of production. Fixed costs are regarded as period costs..
3. Cost data are presented in conventional pattern. Cost data are presented to highlight the
total
contribution of each product.
4. The difference in the magnitude of opening stock The difference in the magnitude of opening
and closing stock affects the unit stock and closing stock does not affect the
cost of unit cost of
production due to the impact of related fixed cost. production.
5. In case of absorption costing the cost per unit In case of marginal costing the cost per unit
reduces, as the production remains the same, irrespective of the
production
as it is valued at variable cost.
Differential Cost Analysis

• Differential Cost is the change in the costs which results from the adoption of an alternative course
of action.
• Differential cost is referred to as incremental cost or decremental cost.
• Determination of differential cost is simple.
• When two levels of activities are being considered, the differential cost is obtained by subtracting
the cost at one level from the cost of another level.
• Differential cost analysis is made outside the accounting records.
• marginal costing excludes the entire fixed costs, some of the fixed costs may be taken into account
as being relevant for the purpose of differential cost analysis.
Application of Differential Costs
• Determination of most profitable levels of production and price.
• Determining the suitable price at which raw material may be purchased.
• Decision of adding a new product or business segment.
• Decision regarding alternative capital investment and plant replacement.
• Decision regarding change in method of production.
Contribution
• It is defined as the amount recovered towards fixed cost and profit.
• Contribution can be computed by subtracting variable cost from sales or by adding fixed costs and
profit.
Limiting Factor (or) Key Factor:
• Key factor can also be called as scarce factor.
• Indicates the limitation on the particular factor of production.
• P/V ratio or contribution ratio is association of two variables.
BCCA
• It is the ratio of Contribution to Sales.
Profit Volume Ratio (P/V Ratio) or Contribution Ratio
• P/V ratio or contribution ratio is association of two variables.
• It is the ratio of Contribution to Sales.
Break Even Point
• Break Even means the volume of production or sales where there is no profit or loss.
• In other words, Break Even Point is the volume of production or sales where total costs are equal
to revenue.
• Angle of Incidence
• Angle of Incidence is an angle formed at the intersection point of total sales line and total cost line.
Cash Break Even point
When break-even point is calculated only with those fixed costs which are payable in cash, such a break-
even point is known as cash break-even point.
Uses and applications of Break even Analysis (Or) Profit Charts (Or) Cost Volume Profit Analysis:
• Determination of comparative profitability of each product line, project or profit plan.
• Determination of optimum sales volume.
• Inter-firm comparison of profitability.
• Determination of sale price which would give a desired profit for break-even.
Margin of Safety
It is the sales point beyond the breakeven point. Margin of safety can be obtained by subtracting break
even sales from Total sales.
Income Statement:
Particulars Amount
Sales XXX
Less: Variable Cost (XXX)
Contribution XXX
Less: Fixed Cost (XXX)
Profit XXX
Formula:
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
1. PV Ratio = OR
𝑆𝑎𝑙𝑒𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Change in Profit
When Two levels are given, PV Ratio = Change in Sales
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
2. Break Even Point (₹) = 𝑃𝑉 𝑅𝑎𝑡𝑖𝑜
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
3. Break Even Point (Units) = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡
4. Sales Value to Earn Desired Profit = 𝑃𝑉 𝑅𝑎𝑡𝑖𝑜
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡
5. Sales Units to Earn Desired Profit =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡
6. Margin of Safety = Total Sales – Breakeven Sales (OR) 𝑃𝑉 𝑅𝑎𝑡𝑖𝑜
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 −𝑆h𝑢𝑡𝑑𝑜𝑤𝑛𝑐𝑜𝑠𝑡
7. Shut Down Sales (₹) = 𝑃𝑉 𝑅𝑎𝑡𝑖𝑜
BCCA
8. Shut Down Sales (Units) =
9. Indifference Point: It is the level at which the profits are same OR
The Level at which Costs are Same for two alternatives
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
Indifference point = 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
FOLLOWING CONCEPTS WE ARE GOING TO SEE IN APPLICATION OF PROBLEMS
1. Break Even Analysis

2. Evaluation of Order
3. Indifference Point
4. Optimum Mix / Limiting Factor
5. Pricing Strategy
6. Evaluation of Strategy
7. Make/Buy
8. Shutdown Point
9. Absorption v/s Marginal
10. Relevant Cost
11. Profitability Analysis
12. Evaluation of the Order
QUESTION 1 (BREAK EVEN ANALYSIS)

Accelerate Co. Ltd., manufactures and sells four types of products under the brand names of A, B, C
and D. The sales mix in value comprises 33 1/3%, 41 2/3%, 16 2/3% and 8 1/3% of products A,B,C and
D respectively. The total budgeted sales (100%) are ₹ 60,000 p.m. Operating Costs are:
Variable Costs:
Product A 60% of selling Price Product B 68% of selling Price Product C 80% of selling Price Product D
40% of selling Price
Fixed Costs: ₹14,700 p.m.
a) Calculate the break-even-point for the products on overall basis and
b) Also calculate break-even-point, if the sales mix is changed as follows the total sales per month
remaining the same.
(Mix: - A - 25% : B - 40% : C - 30%: D - 5%)
Solution:
a) Statement showing computation of break even point on overall basis:
A B C D TOTAL
Sales 20000 25000 10000 5000 60000

Variable cost 12000 17000 8000 2000 39000
Contribution 8000 8000 2000 3000 21000
Fixed cost 14700
Profit 6300

BCCA
P/V ratio 40% 32% 20% 60% 35%
Break even sales 14700/35% = 42000
b) Statement showing computation of break even point if the sales mix is changed
A B C D TOTAL
Sales 15000 24000 18000 3000 60000

Variable cost 9000 16320 14400 1200 40920
Contribution 6000 7680 3600 1800 19080
Fixed cost 14700
P/V ratio 40% 32% 20% 60% (19080/60000) x 100 = 31.8%
Break even sales 14700/31.8% = 46266
QUESTION 2 (EVALUATION OF RISK) (JUNE 2017)

A Co. currently operating at 80% capacity has the following; profitability particulars:
Particulars Amount (Rs) Amount (Rs)
Sales 12,80,000
Costs:
Direct Materials 4,00,000
Direct labour 1,60,000
Variable Overheads 80,000
Fixed Overheads 5,20,000 11,60,000
Profit 1,20,000
An export order has been received that would utilise half the capacity of the factory. The order has
either to be taken in full and executed at 10% below the normal domestic prices, or rejected totally.
The alternatives available to the management are given below:
a) Reject order and Continue with the domestic sales only, as at present;
b) Accept; order, split capacity equally between overseas and domestic sales and turn away excess
domestic demand;
c) Increase capacity so as to accept the export order and maintain the present domestic sales by:
A. buying an equipment that will increase capacity by 10% and fixed cost by ₹40,000 and
B. Work overtime at one and a half the normal rate to meet balance of required capacity.
C. Prepare comparative statements of profitability and suggest the best.
Solution:
Statement showing Profit under different alternatives:
80% 100% 130% capacity
capacity capacity
Sales (WN 1) 1280000 15,20,000 20,00,000

BCCA
Variable cost:
Material 400000 500000 650000

Direct labour 160000 200000 260000
Variable OHs 80000 100000 130000
Overtime premium (WN 3) 20000

640000 800000 1060000
Contribution 640000 720000 940000
Fixed cost (520000) (520000) (560000)
Profit 120000 200000 380000

Working Note 1:
Calculation of Sales for Different Alternatives Alternative 1 (continue with Domestic Sales only) Sales
@ 80% capacity = 12,80,000
Alternative 2
(Split capacity equally between overseas and domestic sales) Domestic Sales @ 50% capacity =
12,80,000/80*50% = ₹8,00,000 Overseas Sales = 12,80,000/80*50*(100-10)% = ₹7,20,000
Total Sales = ₹15,20,000
Alternative 3
(Increase capacity to accept Export Order) Domestic Sales @ 80% Sales = ₹12,80,000
Overseas Sales @ 50% Capacity = ₹7,20,000 Total = 20,00,000
Working Note 2:
Calculation of Overtime Premium under Alternative 3
Direct Labor Cost @ 80% capacity = ₹1,60,000
Direct Labour cost @20% capacity = 1,60,000/80*20 = ₹40,000 Overtime premium = 40000*0.5 =
₹20,000
QUESTION 3 (INDIFFERENCE) (DEC 2017)

A practicing Cost and Management Accountant now spends ₹0.90 per K.M. on taxi fares for his client’s
work. He is considering two other alternatives the purchase of a new small car or an old bigger car.
Item New Small Car Old Bigger Car
Amount (₹) Amount (₹)

Purchase price 35,000 20,000
Sale price after 5 years 19,000 12,000
Repairs and servicing per annum 1,000 1,200
Taxes and insurance p.a. 1,700 700

Petrol consumption per liter(k.m.) 10 7
Petrol price per liter 3.5 3.5

BCCA
He estimates that he does 10,000 Km annually. Which of the three alternatives will be cheaper? If his
practice expands he has to do 19,000 Km p.a. where will the cost of the two cars break even and why?
Ignore interest and Income-tax.
Solution:
Particulars Taxi New Smaller Car Old bigger Car

A. Fixed Cost
Depreciation Nil 3,200 [35,000- 1600 [20,000-

19000/5] 12000/5]
Repairs Nil 1,000 1,200
Taxes Nil 1,700 700
Total 5,900 3,500
Variable cost per km 0.9 0.35 [3.5/10] 0.5 [3.5/7]

B. Variable cost for 10,000 kms 9,000 3,500 5,000
C. Variable cost for 19,000 kms 17,100 6,650 9,500

D. Total Cost for 10,000 kms 9,000 9,400 8,500
[A+B]
E. Total Cost for 19,000 kms 17,100 12,550 13,000
[A+C]
a. At 10000 KMS old bigger car is cheaper than the other two alternatives.
b. At 19000 KMS it is better and cheaper to purchase the new smaller car.
The Cost of Two cars break even at Indifference Point Indifference point
= (Change in fixed cost / Change in variable cost per unit)
= 5900−3500 = 16,000 kms
QUESTION 4 (INDIFFERENE POINT) (DEC 2017)

Your company wants to buy one machine. Two al ternative models are available — A and B. The
following information are available with respect to them:
Particulars Model A Model B
Output p.a. 10,000 10,000
Fixed costs p.a. (₹) 30,000 16,000
Profit at 100% capacity (₹) 30,000 24,000
Both the machines will produce identical products. The annual market demand for the product is 10,000
units @ ₹ 10 per unit.
Required:
(i) The level of sales at which both are equally profitable;
(ii) The range of sales at which one is more profitable than the other.
Solution:
Particulars A B
₹ ₹
Sales @ ₹ 10 1,00,000 1,00,000

BCCA
Contribution 60,000 40,000
P/V ratio 60% 40%
Contribution/unit 6 4
Variable cost/unit 4 6
BEP 5,000 units 4,000 units
(i) For A: 4x + 30,000
B: 6x + 16,000
4x + 30,000 = 6x + 16,000; Solving X = 7,000 units
(ii) At 7,000 units both are equally profitable. BEP of A and B being 5,000 units and 4,000 units,
Machine B is more profitable below 7,000 units, and A will be more profitable above 7,000 units.
A: Range of production 7,0 00 to 10,000 units
B: Range of production 4,000 to 6,999 units
QUESTION 5 (OPTIMUM MIX)

Something More Ltd. is considering adding to its product line. After a lot of deliberations between the
sales and production personnel, it is decided that products P, Q and R would be the most desirable
additions to be company’s product range on account of the technical competency, marketing potential
and production flexibility as regards these products. In fact P, Q and R can all be made on the same
kind of plant as that already in use and therefore as regards production, all products can be readily
interchanged. However, it is considered necessary to build further plant facilities to cater for
additional production. In this connection the following data are relevant:
Products (Per Unit) P Q R
Direct Materials 100 120 90
Direct Labour 50 70 90
Variable Overheads 50 130 100
Selling Price 350 420 370

Demand in units per cost period (on the basis of the above 200 125 750
selling price)
Machine Hours required per units of production 15 5 3
It is felt that initially extra plant facilities can be built to operate at the following five different levels
of activity, viz., 1,800; 2,300; 2,800; 3,300 and 3,800 machine hours per cost period. The fixed
overhead costs for a cost period relevant to these five different levels of activity are estimated at
Rs. 15,000; Rs.20,000; Rs. 26,000; Rs.33,000 and 39,000 respectively.
You are required to advise, with supporting figures, the product or products to be manufactured and
in what quantities at each of the five contemplated levels of activity in order to maximize the profits
at each level and also indicate the level of activity that would seem most desirable to be pursued for
such maximization of profits.
Solution:
Statement showing contribution per machine hour and determination of priority for profitability

BCCA
Particulars P Q R
Selling Price 350 420 370
Variable Cost
Direct Material 50 70 90
Variable Overheads 50 130 100
Total Variable cost 200 320 280
Contribution per unit 150 100 90

Contribution per machine hour 10 20 30
[150/15] [100/5] [90/3]
Statement Showing optimum mix and profit of the 5 levels and determination of capacity to be
pursued for maximization of profit:
P Q R
Level of
Activity Cont Total Fixed Profit
Hours Units rib. H U C H U C Contrib. Cost Rs.
Rs. Rs. Rs.
1800 - - - - - - 1800 600 54000 54000 15000 39000
2300 - - - 50 10 1000 2250 750 67500 68500 20000 48500
2800 - - - 550 110 11000 2250 750 67500 78500 26000 52500
3300 425 28.33 4250 625 125 12500 2250 750 67500 84250 33000 51250
3800 925 61.67 9250 625 125 12500 2250 750 67500 89250 39000 50250
From the above computation it is evident that 2800hour capacity level of activity is to be pursued
to maximize profit.
QUESTION 6 (OPTIMUM PRODUCTION MIX) (JUNE 2017)

The following particulars are extracted from the records of Ajanta Works Limited:
Particulars Product A Product B
Selling price per unit ₹ 1,000.00 ₹ 1,200.00
Consumption of Material Kg. 20.00 Kg. 30.00
Material cost ₹ 100.00 ₹ 150.00
Direct wages ₹150.00 ₹ 100.00
Direct expenses ₹ 50.00 ₹ 60.00
Machine Hours used 3 2
BCCA
Overhead Expenses:
Fixed ₹ 50.00 ₹ 100.00
Variable ₹ 150.00 ₹ 200.00
Note: Direct wages per hour is₹ 50.00 Required:
a. Comment on the profitability of each product (both use the same raw material) when:
i. Total sales potential in units is limited
ii. Total sales potential in value is limited
iii. Raw Material is in short supply, and
iv. Production Capacity (in terms of Machine Hours) is the limiting factor.
b. Assuming raw material as the key factor, availability of which is 10000 Kg., and maximum sales
potential of each product being 3500 units, find out the product mix which will yield the maximum
profit.
Solution:
Marginal Cost Statement of Ajanta Works Limited
Particulars Cost Per Unit (₹)
A B
Selling Price 1000 1200
Direct Materials 100 150
Direct Wages 150 100
Direct Expenses 50 60
Variable Overheads 150 200
Marginal Cost 450 510
Contribution Margin 550 690
P/V Ratio 55% 57.50%
Contribution per Kg of material 27.5 23.0
Contribution per Machine Hour 183 345
a. The comments based on the above statement are as follows:
(i) When total sales potential in units is a limiting factor, Product B is more profitable, as it is
making a larger contribution margin per unit as compared to A.
(ii) When total sales potential in value is a limiting factor, Product B is still more profitable, as its
P/V ratio is more than that of A.
(iii) When Raw Material is in short supply, A is more profitable as its contribution in per kg, of
material is more than that of Product B.
(iv) When production capacity is limited, B is more profit table as it makes larger contribution per
machine hour than A.
(v) (Note: Best position is reached when contribution per unit of key factor is maximum.)
b. Contribution per kg. of materials of A is more than that of B. So, 10,000 kg. ÷ 20 kg. = 500 units of
A will only be produced and sold.
QUESTION 7 (OPTIMUM PRODUCTION MIX)

As a part of its rural upliftment programme, the Government has put under cultivation a farm of 96
hectors to grow tomatoes of four varieties: Royal Red, Golden Yellow, Juicy Crimson and Sunny Scarlet.
Of the total, 68 hectors are suitable for all four varieties, but the remaining 28 hectors are suitable
for growing only Golden Yellow and Juicy Crimson. Labour is available for all kinds of farm work and

BCCA
there is no constraint. The market requirement is that all four varieties of tomato must be produced
with a minimum of 1,000 boxes of any one variety.
The farmers engaged have decided that the area devoted to any crop should be in terms of complete
hectors and not in fractions of a hector. The other limitation is that not more than 22,750 boxes of
any one variety should be produced. The following data are relevant.
Annual Yield Royal Red Golden Yellow Juicy Crimson Sunny Scarlet
Boxes per hector 350 100 70 180
Costs Rs. Rs. Rs. Rs.
Direct:
Material per hector 476 216 196 312
Labour:
Growing per hector Harvesting

896 608 371 528
packing per box 3.60 3.28 4.40 5.20
Transport per box 5.20 5.20 4.00 9.60
Market price per box 15.38 15.87 18.38 22.27
Fixed Overheads Per Annum:

Growing 11,200
Harvesting 7,400
Transport 7,200
General Administration 10,200
Find out:
1. within the given constraints, the area to be cultivated with each variety of tomatoes, if the largest
total profit has to be achieved.
2. The amount of such profit in rupees.
A nationalized bank has come forward to help in the improvement programme of the 28 hectors in which
only Golden Yellow and Juicy Crimson will grew, with a loan of Rs. 5,000 at a very nominal interest of
6% per annum. When this improvement is carried out, there will be a saving of Rs. 1.25 per box in the
harvesting cost of Golden Yellow and the 28 hectors will become suitable for growing Royal Red in
addition to the existing Golden Yellow and Juicy Crimson varieties. Assuming that other constraints
continue, find the maximum total profit that would be achieved when the improvement programme is
carried out.
Solution:
WN 1: Statement Showing Ranking based on Contribution per hectare
Particulars Royal Red Golden Yellow Juicy Crimson Sunny Scarlet
No. of boxes per hectare 350 100 70 180
Market Price 15.38 15.87 18.38 22.27

A. Sales 5383 1587 1288.6 4008.6
BCCA
Less: Variable Cost
direct material 476 216 196 312
Growing cost per hectare 896 608 371 528

Harvesting and packing 1260 328 308 936
Transport 1820 520 280 1728
B. Total Variable Cost 4452 1672 1155 3504
C. Contribution (A-B) 931 (85) 133.6 504.6
D. Rank 1 4 3 2
WN 2: Statement showing hectares required for minimum and maximum production

Particulars Royal Red Golden Yellow Juicy Crimson Sunny Scarlet
Minimum Production 1000 1000 1000 1000

Hectares Required for 3 10 14 6
minimum production
Maximum Production 22750 22750 22750 22750
Hectares Required for 65 228 325 127
maximum production
Maximum hectares that can be 68 96 96 68
allotted before improvement
Maximum hectares that can be 96 96 96 68
allotted after improvement
i. Statement showing Optimum mix and Profit at that mix

Particulars Royal Red Golden Yellow Juicy Crimson Sunny Scarlet Total
Hectares required 3 10 14 6 33
minimum production
Remaining land 59 Nil 4 Nil 63
apportioned (68-3-6) (28-10-14)
Total Hectares 62 10 18 6 96
allotted
ii) Contribution per 931.00 (85.00) 133.60 504.60
hectare
iii) Total contribution 57,722.00 (850.00) 2,404.80 3,027.60 62,304.40
iv) Fixed cost 36,000.00
v) Profit 26,304.40
ii.Statement showing optimum mix after the improvement programme and computation of profit

BCCA
Particulars Royal Red Golden Yellow Juicy Crimson Sunny Scarlet Total
Hectares required 3 10 14 6 33
minimum
production
Remaining land 62 Nil Nil 1 63
apportioned (28-14-10-3) (68-6-61)
+ (65-3-1)
Total Hectares 65 10 14 7 96
allotted
ii) Contribution per 931.00 40 133.60 504.60
hectare [-85+(1.25 x
100)]
iii) Total 60,515.00 400.00 2,404.80 3,532.20 66,852.00
contribution
iv) Fixed cost 36,300.00
[36000+(50
00 x 6%)]
v) Profit 30,552.00
QUESTION 8 (PRICING STRATEGY)

Bathing care Ltd. manufactures and sells soaps under the brand name - Elite, Lovely, Fresh and Janata.
The Janata soap is very popular as it is of good quality and at the same time reasonably priced. The
company produces and sells per annum on an average 50,000 cakes of Elite, 1,00,000 cakes of Lovely,
75,000 cakes of fresh and 2,00,000 cakes of Janata at a unit selling price of Rs.3.50, Rs.3.00, Rs.2.50
and Rs.1.5 respectively.
At this level of production and sales the unit cost of a cake of each brand of soap is as follows:
(Expressed in Paise)
Elite Lovely Fresh Janata
Direct Material 50 40 35 45
Direct Labour 20 20 15 10
Production Expenses:
Variable 10 10 5 5
Fixed 20 25 20 20
Administrative Expenses:
Fixed 30 40 25 30
Variable 15 5 10 5
Selling & Distribution Expenses:

BCCA
Fixed 80 60 45 10
Variable 45 20 25 5
Total Cost 270 220 180 130
The co. has lot of unutilised capacity and there is ample scope for improving production and sales
volumes. Bathing Care Ltd. has built a name for its products in the market and with proper sales effort
it should be possible to sell whatever is produced by the co., the production manager sees no problems.
The sales manager puts up a bold scheme for almost quadrupling the present profits of the company.
1. An exclusive advertising campaign has to be undertaken to produce and sell Janata Soaps and it is
estimated at Rs.4,85,000.
2. At the same time the selling price of Janata Soap should be reduced to Rs. 1. By adopting this sales
strategy the sales manager is confident that he is able to double the present sales volume of Janata
Soap and with each 1 lack increase of Janata Soap he would be able to push 30,000 cakes of Elite,
70,000 of lovely, 50,000 of fresh in the market. You are required to find out the profit at present
and profit if the sales managers scheme is implemented.
Solution:
Statement showing computation of profit at the current Mix:
Particulars Elite Lovely Fresh Janata Total
a)Selling Price per unit 3.50 3.00 2.50 1.50
b)Variable Cost per unit
Direct Material 0.50 0.40 0.35 0.45
Direct Labour 0.20 0.20 0.15 0.10
Production Expense 0.20 0.25 0.20 0.20
Administrative Overhead 0.15 0.05 0.10 0.05
Selling & Distribution 0.45 0.20 0.25 0.05

Overhead
c)Contribution per unit 2.10 2.05 1.60 0.80
d)Total Contribution 1,05,000 2,05,000 1,20,000 1,60,000 5,90,000
(2.10 x (2.05 x 1,00,000) (1.60 x 75,000) (0,.80 x

50,000) 2,00,000)
e) Fixed Cost per unit
Production Expense 0.20 0.25 0.20 0,20
Administrative Overhead 0.30 0.40 0,25 0.30

BCCA
Selling & Distribution 0.80 0.60 0.45 0.10
Overhead
f)Total Fixed Cost 65.000 1,25,000 67,500 1,20,000 3,77,500
(1.30 x (1.25 x 1,00,000) (0.90 x 75,000) (0.60 x

50,000) 2,00,000)
g) Profit 40,000 80,000 52,000 40,000 2,12,500
Statement showing computation of profit by adopting Sales Manager’s scheme:
Particulars Elite Lovely Fresh Janata Total
a) Existing Sales 50,000 1,00,000 75,000 2,00,000

(Units)
b) Incremental Sales 1,10,000 2,40,000 1,75,000 4,00,000
(Units) [50,000 + [1,00,000 + [75,000 + [2,00,000 x 2]
(30000 x 2)] (70000 x 2)] (50,000 x 2)]
c) Revised 2.10 2.05 1.60 0.30
Contribution per unit [0.80 – 0.50]
d)Total Contribution 2,31,000 4,92,000 2,80,000 1,20,000 11,23,000

[bxc]
e) Existing Fixed 3,77,500
Cost
f) Incremental Fixed 4,85,000
Cost
g) Profit 2,60,500
QUESTION 9 (EVALUATION OF STRATEGY)

a) The profit for the year of Push On Ltd. work out to 12.5% of the capital employed and the
relevant figures are as under:
Particulars Amount (Rs.)
Sales 5,00,000
Direct Material 2,50,000
Direct labour 1,00,000
Variable overheads 40,000
Capital employed 4,00,000
The new sales manager who has joined the company recently estimates for the next year a profit of
about 23% on the capital employed provided the volume of sales is increased by 10% and simultaneously

BCCA
there is an increase in Selling Price of 4% and an overall cost reduction in all the elements of cost by
2%.
Find out by computing in detail the cost and profit for next year, whether the proposal of sales manager
can be adopted.
b) Details about the single product marketed by a company are as under
Per Unit Amount (Rs.)
Selling Price 100
Direct Material 60
Direct Labour 10
Variable Overheads 10
No. of units sold in the year 5.035. Pursuant to an agreement reached with the Employee’s union, there
would be next year a 10% increase in wages across the board for all those directly engaged in
production.
Work out:
How many more units have to be sold next year to maintain the same quantum of profit?
Or else, by what percentage the Selling Price has to be raised to maintain the same P/V ratio.
Solution:
a) Working Note 1: Computation of Fixed Cost
Particulars Amount
Sales 5,00,000
Less: Profit 50,000
[4,00,000 x 12.5%]
Total Cost 4,50,000
Less: Variable Cost

Direct Labour 1,00,000
Variable Overhead 40,000
Fixed Cost 60,000
Statement showing computation of profit obtained on adopting the sales manager’s proposal
Particulars Amount
Sales 5,72,000
[5,00,000 x 110% x 104%]
Less: Variable Cost 4,20,420

[3,90,000 x 110% x 98%]

BCCA
Less: Fixed Cost 58,800
[60,000 x 98%]
Profit 92,780
Capital Employed 4,00,000
Proposed ROCE 92780

𝑋 100 = 23.195%
400000
Expected ROCE 23%
From the above calculation, it is evident that Proposed ROCE is greater than Expected ROCE.
Therefore the Proposal of Sales manager is adoptable
b) Working Note 1: Calculation of Contribution & PV Ratio for current year
Particulars Amount
Selling Price 100

Less:
Direct Material 60
Direct Labour 10
Total Variable Cost 80
Contribution Per Unit 20
Total Contribution 1,00,700 [5035 x 20]
PV Ratio 20%
Working Note 2: Calculation of Contribution for next year

Particulars Amount
Selling Price 100
Less:
Direct Material 60
Direct Labour 11 [10 x 110%]
Total Variable Cost 81
Contribution Per Unit 19
i. No. of units to be sold in next year to maintain same profit

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 1007000
= = = 5300
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑛𝑡𝑟𝑢𝑏𝑢𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 19
𝑆𝑒𝑙𝑙𝑖𝑛𝑔𝑃𝑟𝑖𝑐𝑒−𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑠𝑡
ii. New Selling price to maintain same PV Ratio = = 0.20
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒

BCCA
Selling Price – 81 = 0.2 Selling Price Selling Price = 101.25
Increase in Selling Price = 101.25 – 100 = 1.25
1.25
Increase in Selling Price % = 1.25% [ 𝑋 100]
100
QUESTION 10 (MAKE/BUY)
Household Equipment’s Ltd. is producing kitchen equipment from five components three of which are
made using general purpose machines and two by manual labour. The data for the manufacture of the
equipment is as follows:
Components A B C D E Total
Machines hours reqd. 10 14 12 36 hrs

per unit
Labour hours reqd. 2 1 3hrs
per unit
Variable cost per 32 54 58 12 4 160

unit (in Rs.)
Fixed cost per unit 48 102 116 24 36 316
(apportioned) Rs.
Total component 80 156 174 36 30 476
cost Rs.
Assembly cost/unit Rs.40
(all variable)
Selling price/unit Rs.600
The marketing department of the company anticipates 50% increase in demand during the next period.
General purpose machinery used to manufacture. A, B and C is already working to the maximum capacity
of 4752 hours and there is no possibility of increasing this capacity during the next period. But labour
is available for making components D and E and also for assembly according to demand. The management
is considering the purchase of one of the components A, B or C from the market to meet the increase
in demand. These components are available in the market at the following prices:
Components A: Rs. 80 Components B: Rs. 160 Components C: Rs. 125
Required:
a) Profit made by the company from current operations.
b) If the company buys any one of the components A,B or C, what is the extent of additional capacity
that can be created?
c) Assuming 50% increase in demand during the next period, which component should the company buy
from the market?
d) The increase in profit, if any, if the component suggested in (c) is purchased from the market
Solution:
a) Calculation of Profit made by the company from current operations
Machine Hours required for unit of finished product = 36 hours
Existing Machine Capacity = 4,752 hours
No. of units currently being produced = 4752/36 = 132 units

BCCA
Selling price per unit = ₹600
Variable cost per unit = 160 + 40 = ₹ 200
Contribution per unit = ₹ 400
Total Contribution = 400 x 132 = ₹ 52,800
Fixed Cost = 132 x 316 = ₹ 41,712
Profit = 52800-41712 = ₹ 11,088
b) Calculation of Additional Capacity that can be created if components are bought from outside
If A is bought, No of units that can be manufactured = 4752/(14+12) = 182.76 units
Increase in capacity = 182.76 – 132 = 50.76 units
Percentage increase in capacity = 50.76/132 = 38.46%
If B is bought, No of units that can be manufactured = 4752/(10+12) = 216 units
Increase in capacity = 216 – 132 = 84 units
Percentage increase in capacity = 84/132 = 63.64%
If C is bought, No of units that can be manufactured = 4752/(14+10) = 198 units
Increase in capacity = 198 – 132 = 66 units
Percentage increase in capacity = 66/132 = 50%
c) Excess buying cost of Product A per hour = 80-32/10 = ₹4.8
Excess buying cost of Product B per hour = 160-54/14 = ₹7,571
Excess buying cost of Product C per hour = 125-58/12 = ₹5.583
A is cheaper to buy. But the increase in capacity will not be sufficient to meet the expected
demand for next year. Therefore, we shall try to buy the next cheaper component. i.e., C and by
buying it the increase in capacity will be exactly equal to the demand for our product during the
next year. Hence, component ‘C’ should be bought from the market.
d) Calculation of Increase in Profit is Component C is bought from outside
No. of units produced if C is bought from outside = 198 units
Selling Price per unit = ₹ 600
Variable cost per unit = 200+125-58 = ₹ 267
Contribution per unit = ₹ 333
Total Contribution = ₹ 65,934
Fixed Cost = ₹ 41,712
Profit = ₹ 24,222
Existing Profit = ₹ 11,088
Increase in Profit = ₹ 13,134
QUESTION 11 (SHUTDOWN POINT) (DEC 2017)
The management of W Ltd., which is now operating at 50% capacity, expects that the volume of sales
will drop below the present level of 5,000 units p er month. The operating statement prepared for
monthly sales shows:
Particulars ₹
Sales (5,000 units at ₹ 3 per unit) 15,000
Less: Variable Costs at ₹ 2 per unit 10,000
Contribution 5,000
Fixed Overheads 5,000

BCCA
Net Profit Nil
It is proposed that the company should suspend pro duction until market conditions improve. The
General Manager estimated that a minimum of fixed cost (shut down costs) amounting to ₹ 2,000 would
be necessary in any event.
Required:
(i) Advise Management at what level of sales it could think of suspending production.
(ii) If the sales price is ₹ 2.80, what should be the level of sales for shut down decision.
Solution:
(i) If selling price is ₹ 3 per unit
Shutdown Point = 𝑋 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
5,000−2,000
= 𝑋3
2−3
= 3,000 𝑋 3
= ₹ 9,000 (or) 3,000 units
(ii) If the selling Price is reduced to ₹ 2.80

Shutdown Point = 𝑋 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐e
5,000−2,000
= 𝑋 2.8
2.8−2
= 3,750 𝑋 2.8
= ₹ 10,500 (or) 3,750 units
QUESTION 12 (ABSORPTION V/S MARGINAL)
ABC Ltd. manufactures only one product.

The following information relates to April and May
1986:
(i) Budgeted costs and selling prices:
April May
Variable manufacturing cost per unit ₹ 2.00 ₹2.20
Total fixed manufacturing cost
(based on budgeted sales of 25,000 units
per month) (₹) 40,000 44,000
Total fixed marketing cost (based on budgeted sales
of 25,000 units per month) (₹) 14,000 15,400
Selling price per unit (₹) 5.00 5.50
(ii) Actual production and sales achieved: units units
Production 24,000 24,000
Sales 21,000 26,500

BCCA
a) There was no stock of finished goods at the beginning of April 1986. There was no wastage or loss
of finished goods during either April or May 1986.
b) Actual costs incurred corresponded to those budgeted for each month.
Required:
Calculate the relative effects on the monthly operating profits of applying the following methods:
(i) Absorption costing and
(ii) Marginal costing.
Solution:
(i) Profit under Absorption Costing
Particulars April May
₹ ₹
Variable Manufacturing cost 48000 52800
Fixed Manufacturing cost 38400 42240
(40000/25000 x 24000) (44000/25000 x 24000)
Total production cost 86400 95040
(+) Op. Stock -- 10800
86400 105840
(-) Cl. Stock 10800 1980
(86400 x 3/24) (95040 x 5/24)
Production cost of goods sold 75600 103860
(+) Under recovery (40000 – 1600 1760
38400) (40000-38400) (44000-42240)
77200 105620
(+) Marketing costs 14000 15400
91200 121020
Profit 13800 24730
Sales 105000 145750
(ii) Profit under Marginal Costing
Particulars April May
Units ₹ Units ₹
I Sales 105000 145750
II Variable Cost
Manufacturing 48000 52800
(+) Op. Stock -- 6000
48000 58800
(-) Cl. Stock 6000 42000 1100 57700
III Contribution 63000 88050
IV Fixed Cost 54000 59400
V Profit 9000 28650
QUESTION 13 (RELEVENT COSTING)

(a) A machine which originally cost ₹12,000 has an estimated life of 10 years and it depreciated at the
rate of ₹1,200 per year. It has been unused for some time, however, as expected production orders
did not materialise.
A special order has now been received which would require the use of the machine for two months.

BCCA
The current net realisable value of the machine is ₹8,000. If it is used for the job, its value is expected
to fall to ₹7,500. The net book value of the machine is ₹8,400. Routine maintenance of the machine
currently costs ₹40 per month. With use, the cost of maintenance and repairs would increase to ₹60
per month.
What would be the relevant cost of using the machine for the order so that it can be charged as the
minimum price for the order?
(b) X Ltd. has been approached by a customer who would like a special job to be done for him and is
willing to pay ₹22,000 for it. The job would require the following materials:
Materials Total units Units already Book Value of Realisable Replacement
required in stock units in stock Value Cost
₹/unit ₹/unit ₹/unit
A 1,000 0 — — 6
B 1,000 600 2 2.5 5
C 1,000 700 3 2.5 4
D 200 200 4 6 9
(i) Material B is used regularly by X Ltd. and if stocks were required for this job, they would need
to be replaced to meet other production demand.
(ii) Materials C and D are in stock as the result of previous excess purchase and they have a
restricted use. No other use could be found for material C but material D could used in another
job as substitute for 300 units of material which currently cost ₹5 per unit (of which the company
has no units in stock at the moment.)
What are the relevant costs of material, in deciding whether or not to accept the contract? Assume all
other expenses on this contract to be specially incurred besides the relevant cost of material is ₹550.
Solution:
(a) Computation of relevant cost of using the machine for the order
Particulars Calculation Amount (₹)

Fall in sale value, if used (8000-7500) 500.00
Incremental maintenance cost [(60-40) x 2] 40.00
540.00
(b) Computation of relevant cost of the job
Particulars Calculation Amount (₹)

A (1000x6) 6,000.00
B (1000x5) 5,000.00
C [(700x2.5) + (300x4)] 2,950.00
D (300x5) 1,500.00
15,450.00
Add: other expenses 550.00
₹ 1,6000.00
As the revenue from the order, which is more than the relevant cost of ₹16000 the order
should be accepted
QUESTION 14 (RELEVENT COSTING) (DEC 2022)

BCCA
The Officers’ Recreation Club of a large public sector undertaking has a cinema theater for the
exclusive use of themselves and their families. It is a bit difficult to get good motion pictures for show
and so pictures are booked as and when available.
The theater has been showing the picture ‘Blood Bath’ for the past two weeks. This picture, which is
strictly for adults only has been a great hit and the manager of the theater is convinced that the
attendance will continue to be above normal for another two weeks, if the show of ‘Blood Bath’ is
extended. However, another popular movie, eagerly looked forward to by both adults and children
alike, ‘Appu on the Airbus’ is booked for next two weeks. Even if ‘Blood Bath’ is extended the theater
has to pay the regular rental on ‘Appu on the Airbus’ as well.
Normal attendance at theater is 2,000 patrons per week, approximately one fourth of whom are
children under the age of 12. Attendance of ‘Blood Bath’ has been 50% greater than the normal total.
The manager believes that this would taper off during the second two weeks, 25% below that of the
first two weeks, during the third week and 33 1/3 % below that of the first two weeks, during the
fourth week. Attendance for ‘Appu on the Airbus’ would be expected to be normal throughout its run
regardless of the duration.
All runs at the theater are shown at a regular price of ₹2 for adults and ₹1.20 for children lower than
12. The rental charge for ‘Blood Bath’ is ₹900 for one week or ₹1,500 for two weeks. For ‘Appu on the
Airbus’ it is ₹ 750 for one week or ₹ 1,200 for two weeks. All other operating costs are fixed - ₹4,200
per week, except for the cost of potato wafers and cakes, which average 60% of their selling price.
Sales of potato wafers and cakes regularly average ₹1.20 per patron, regardless of age.
The Manager can arrange to show ‘Blood Bath’ for one week and ‘Appu on the Airbus’ for the following
week or he can extend the show of ‘Blood Bath’ for two weeks or else he can show ‘Appu on the Airbus’
for two weeks as originally booked.
Show by computation, the most profitable course of action he has to pursue.
Solution:
Statement showing evaluation of alternatives
Particulars Blood bath Blood bath & Appu on the Appu on the
airbus airbus
₹ ₹ ₹
No. of spectators
Adults:
Third week 3,000 x 75% 2,250.00 2,250.00 1,500.00
fourth week 3,000 x 2/3 2,000.00 1,500.00 1,500.00
4,250.00 3,750.00 3,000.00
Children:
Third week 500.00
fourth week 500.00 500.00
500.00 1,000.00
Total spectators: 4,250.00 4,250.00 4,000.00
Revenue:
By sale of tickets 8,500.00 8,100.00 7,200.00
(3,000 x 2 + 1000 x 1.2)
Add: contribution from snacks 2,040.00 2,040.00 1,920.00
10,540.00 10,140.00 9,120.00
Less: Incremental cost 1,500.00 900.00
BCCA
9,040.00 9,240.00 9,120.00
It is found that the net revenue is more at the option of running blood bath and Appu on the
Air bus a week each. It must be chosen.
QUESTION 15 (PROFITABILITY ANALYSIS – SERVICE INDUSTRY)

A local Government authority owns and operates a leisure centre with numerous sporting facilities,
residential accommodation, a cafeteria and a sports shop. The summer season lasts for 20 weeks
including a peak period of 6 weeks corresponding to the school holidays. The following budgets have
been prepared for the next summer season:
Accommodation:
60 single rooms let on a daily basis.
35 double rooms let on a daily basis at 160% of the single room rate.
Room rate:
Fixed costs ₹29,900.
Variable costs ₹ 4 per single room per day and ₹6.40 per double room per day
Sports centre:
Residential guests each pay ₹ 2 per day and casual visitors ₹ 3 per day for the use of facilities.
Sports Shop:
Estimated contribution ₹1 per person per day.
Fixed costs ₹ 8,250.
Cafeteria:
Estimated contribution ₹ 1.50 per person per day.
During the summer season the centre is open7 day a week and the
Following activity levels are anticipated.
Double rooms fully booked for the whole season.
Single rooms fully booked for the peak period but at only 80%
Capacity during the rest of the season.
30 casual visitors per day on average.
You are required to:
a. Calculate the charges for single and double rooms assuming that the authority wishes to make a ₹
10,000 profit on accommodation.
b. Calculate the anticipated total profit for the leisure centre as a whole for the season.
c. Advise the authority whether an offer of ₹2,50,000 form a private leisure company to operate the
centre for five years is worth while, assuming that the authority uses a 10% cost of capital and
operations continue as outlined above.
Solution:
Computation of usage of room days
Particulars ₹ ₹
Single room
(60x7x6) 2,520.00
(60x7x14x80%) 4,704.00
7,224.00
BCCA
Double room (35x7x20) 4,900.00
i) Total sale value of accommodation
Variable cost
Single room (7224x4) 28,896.00
Double room (4900x6.4) 31,360.00 60,256.00
Fixed cost 29,900.00
Required profit 10,000.00
100,156.00
Let ‘S’ be the room rent of single room and 1.6’S’ is the rent of double room Therefore 7224S +
4900(1.6S) = 100516
7224S + 7840S = 100516 = S = 6.65
Double room rent =(6.65x1.6) = 10.64
(ii) Statement showing computation of total profit to leisure centre
Particulars Calculation ₹ ₹
a. Accommodation 10,000.00
b. sports centre:
Total [(7224x2)+(4900x2x2)+(30x7x20x3)] 46,648.00
Less: fixed 15,500.00 31,148.00
c. Sports Shop:
Contribution [(7224x1)+(4900x2x1)+(30x7x20x1)] 21,224.00
Less: fixed 8,250.00 12,974.00
d. cafeteria
Contribution [(7224x1.5)+(4900x2x1.5)+(30x7x20x1.5)] 31,836.00
Less: fixed 12,750.00 19,086.00
73,208.00
(iii) Present values

Present value compound factor @ 10% for 5 years 3.79
P.V. of profit for 5 years (73208x3.7906) ₹ 277,500.00
As the present value of profit for 5 years is ₹ 277500, which is more than the lease rent of ₹
250000, it is not worthwhile to give leisure centre for lease
QUESTION 16 (EVALUTION OF ORDER) (JUNE 2017)
A manufacturing company currently operating at 80% capacity has received an export order from
Middle East, which will utilise 40% of the capacity of the factory. The order has to be either taken in
full and executed at 10% below the current domestic prices or rejected totally.
The current sales and cost data are given below.
Sales ₹ 16.00 lakhs
Direct Material ₹ 5.80 lakhs
Direct Labour ₹ 2.40 lakhs
Variable Overheads ₹ 0.60 lakhs
Fixed Overheads ₹ 5.20 lakhs
The following alternatives are available to the management:
a. Continue with domestic sales and reject the export order.
b. Accept the export order and allow the domestic market to starve to the extent of excess of
demand.

BCCA
c. Increase capacity so as to accept the export order and maintain the domestic demand by
i. Purchasing additional plant and increasing 10% capacity and there by increasing fixed
overheads by ₹65,000 and
ii. Working overtime at one and half time the normal rate to meet balance of the required
capacity.
You are required to evaluate each of the above alternatives and suggest the best one.
Solution:
Statement showing computation of profit at different alternatives: (₹ in Lakh)
Particulars I II III
Present Sales 40% - Foreign 40% - Foreign
80% 60% - Domestic 80% - Domestic
I. Sales (₹) 16 19.2 23.2
(7.2 + 12) (7.2+16)
II. Variable Cost (₹)
Direct Material (₹) 5.8 7.25 8.70
Direct Labour (₹) 2.4 3.00 3.60
Variable Overheads (₹) 0.6 0.75 0.90
Overtime Premium (₹) -- -- 0.15
8.80 11.00 13.35
III Contribution (₹) 7.20 8.20 9.85
IV Fixed Cost (₹) 5.20 5.20 5.85
(5.20 + 0.65)
V Profit (₹) 2.00 3.00 4.00
From the above computation, it was found that the profit is more at the III alternative i.e. accepting
the foreign order fully and maintaining the present domestic sales, it is the best alternative to be
suggested.

Force Ltd. is a manufacturer of a fire fighting equipment which consists of five components three of
which are made using general purpose machines and two by manual labour. The data for the
manufacture of the equipment are as follows:
Components F O R C E Total
Machine hours required pe r unit 20 28 24 72 hrs
Labour hours required per unit 2 1 3 hrs
Variable cost per unit ₹ 64 108 116 24 8 320
Fixed cost per unit (apportioned) ₹ 96 204 232 48 72 632
Total component cost ₹ 160 312 348 72 60 952
Assembly cost/unit (all variable) ₹ 80
Selling price/unit ₹ 1,200
The marketing department of the company anticipates 50% increase in demand during the next period.
General purpose machinery used to manufacture. F, O and R are already working to the maximum
capacity of 9,504 h ours and there is no possibility of increasing this capacity during the next period.
But labour is available for making components C and E and also for assembly according to demand. The
management is considering the purchase of one of the components F, O o r R from the market to meet
the increase in demand. These components are available in the market at the following prices:
BCCA
Component F: ₹ 160
Component O: ₹ 320
Component R: ₹ 250
Required:
(i) Profit made by the company from current operations.
(ii) If the company buys any one of the components F, O or R, what is the extent of additional capacity
that can be created?
(iii) Assuming 50% increase in demand during the next period, which component should the company buy
from the market?
(iv) The increase in profit, if any, if the component suggested in (iii) is purchased from the market.
Solution:
(i) Statement showing profit at current operations:
Particulars Calculation ₹
SP 1200
Variable Cost 320+80 400
Contribution 800
Number of units 9504/72 Units 132
Total contribution 1,05,600
Fixed Cost 83,424
Profit 22,176
(ii) If the company buys any one of the components F, O or R, what is the extent of
additional capacity
Particulars F 0 R
₹ ₹ ₹
Buying cost 160 320 250
Variable Cost 64 108 116
Extra buying cost 96 212 134
Excess buying cost per hour 4.8 7.571 5.583
It is better to buy component F from the market because excess buying cost per machine hour is less.
Computation of additional capacity created if components are bought from outside:
If F is bought:
Number of units that can be manufactured (9504/52) 182.76 units
Increase in capacity (182.76 - 132/132 x 100) 38.46%
If O is bought:
Number of units (9504/44) 216
Increase in capacity ( 216 - 132 / 132 x 100) 63.64%
If R is bought:
Number of units 9504/48 198
Increase in capacity (198 - 132 /132 x 100) 50%
(iii) F is cheaper to buy. But the increase in capacity will not be sufficient to meet the expected
demand for next year. Therefore, we shall try to buy the next cheaper component, i.e., R and by
buying it t he increase in capacity will be exactly equal to the demand for our product during the
next year. Hence, component ‘R’ should be bought from the market.
(iv) Statement showing computation of profit by buying R from outside :
BCCA
(i) No. of units (9504 / 48) Units 198
(ii) Selling price ₹1200
(iii) Variable Cost (400-116 + 250) ₹534
(iv) Contribution ₹666
(v) Total Contribution ₹131868
(vi) Fixed Cost ₹83424
(vii) Profit ₹48444
Less: Existing Profit ₹22176
Increase in profit ₹26268

A company manufactures two types of herbal product, A and B. Its budget shows profit figures after
apportioning the fixed joint cost of ₹ 15 lakh in the proportion of the numbers of units sold. The budget
for 2018 indicates:
Particulars A B
Profit (₹) 1,50,000 30,000
Selling price per unit (₹) 200 120
P/V Ratio (%) 40 50
Required to advise on the best option among the following, if the company expects that the number of
units to be sold would be equal.
(i) Due to change in manufacturing process, the joint fixed cost would be reduced by 15% and the
variable cost would be increased by 7%.
(ii) Price of A could be increased by 20% as it is expected that the price elasticity of demand would
be unity over the range of price.
(iii) Simultaneous introduction of both the options, viz. (i) and (ii) above.
Solution:
Contribution of A = 40% x 200 = 80
Contribution of B = 50% x 120 = 60.
Average contribution per unit, considering equal units of both = (80 + 60)/2 = 70
𝑇𝑜𝑡𝑎𝑙𝐹𝑖𝑥𝑒𝑑𝐶𝑜𝑠𝑡+ 𝑃𝑟𝑜𝑓𝑖𝑡
Total units of production =
70
15,00,000 + 1,80,000
=
70
=24,000
Of which 12000 of A and 12000 of B
Evaluation of Option:
(i)
Particulars A B
Selling price/u 200 200 120 120
Variable Cost /u 120 128.4 60 64.20

BCCA
Contribution/u 80 71.6 60 55.80
Contribution for 12000 units 859200 669600
Total Contribution 1528800
Fixed Cost 15,00,000 x 85% = 12,75,000
Profits 1528800-1275000 = 2,53,800
(ii) Volume for A originally = 12,000.
Since price elasticity of demand = 1, for 20 % increase in unit selling price, there will be a drop
in demand by 20 %, i.e. 20% of 12,000 = 2400.
Revised sales quantity for A at increased price = 12000 - 2400 = 9600
Particulars A B
Selling price/u 200 240 120
Variable Cost /u 120 120 60
Contribution/u 80 120 60
Contribution for 9600 units For 12000 units 1152000 720000
Total Contribution 1872000
Fixed Cost 15,00,000
Profits 1872000-1500000 = 3,72,000
(iii) Simultaneous introduction of both:
Particulars A B
Selling price/u 200 240 120 120
Variable Cost /u 120 128.4 60 64.20
Contribution/u 80 111.6 60 55.80
Contribution for 9600 units For 12000 1071360
units 669600
Total Contribution 17,40,960
Fixed Cost 15,00,000 x 85% = 12,75,000
Profits 1740960-1275000 = 465960
Decision: Option (iii) has the maximum profits and should be chosen.
A regional audit firm offers audit, tax and consulting services. The segmented profit and loss position
for the next year shows the following position:
Audit (₹) Tax (₹) Consulting (₹)
1. Revenues 60,000 1,00,000 1,20,000
Costs:
Service-level 50,000 60,000 70,000
Facility-level (apportioned) 10,000 12,000 16,000
c) Total 60,000 72,000 86,000
3. Operating Profit (1-2) Nil 28,000 34,000
Partners are concerned about the profitability of their audit business and contemplate to close it down.
In the event of closure of audit service, it might do more tax work. If audit service is discontinued, 50
per cent of the facility costs associated with auditing would be saved. More tax work would increase
tax revenues by 45 per cent, but tax service-level costs would also increase by 45 per cent.
Required:
BCCA
a) Determine whether the firm should drop auditing service and the impact on its closure on profit.
Assume that audit centre facility level costs can be allocated to two other centres based on
revenues. Compare Profitability of Tax and Consulting Services before and after closure of Audit
Centre.
b) What other considerations are important to drop auditing service?
Solution:
a) Whether to drop auditing service and the impact on profits:
Item of Cost/ Revenue Incremental impact
Revenue loss from Audit -60000
Savings in facility level costs +5000
Decrease in Service Level cost (Audit), considered avoidable +50,000
Increase in Tax Service Revenue by 45% +45000
Increase in service level cost for Tax Service -27000
Cumulative Impact +13000
Decision: Close the Audit function and improve Tax Service.
Tax Consulting
Before After Before After
(v) Revenue 100000 145000 120000 120000
Costs:
Service- level 60000 87000 70000 70000
Facility -level 12000 14736 16000 18264
(vi) Total Costs 72000 101736 86000 88264
Operating Profits (i – ii) 28000 43264 34000 31736
Total operating profits before dropping: 28000+34000 = 62000
Total operating profits after dropping Audit function: 43264+31736 = 75000
Impact = 13,000
(b) Other important considerations for dropping Audit function:
i. The Audit function is not unprofitable or with Nil profit as shown in the question. Its revenues
less its service level costs and avoidable facility level costs are 60,000 - 50,000 - 5000 =
5000. Hence, it is only due to allocated overhead that Audit function appears to be a non
contributor.
ii. While the release of Audit function strengthens the Tax Service, the overall impact being ₹
13,000 increase in profits, it is a major risk that the firm will be taking, since it is an audit
firm.
iii. In the medium to long term, it could lose other potential clients who may go elsewhere to have
more diversified services.
iv. The firm should try to improve its costs and increase its fees to have more comfortable
profits.

BCCA
The profit for The Forward Look Ltd. works out to 12.5% of the capital employed and the relevant
figures are as under:
Sales 5,00,000
Variable Overheads 40,000
Capital employed 4,00,000
The new Sales Manager who has recently joined the Company estimates for the next year a profit of
about 23% on the capital employed provided the volume of Sales is increased by 10% and simultaneously
there is an increase in Selling Price of 4% and an overall cost reduction in all the elements of cost by
2%.
Verify the contention of the Sales Manager by computing in detail the cost and profit for the next
year and state whether his proposal can be adopted by the management.
Solution:
Computation of Fixed Cost:
Particulars ₹ ₹
Annual Sales 5,00,000
Less: Profit (4,00,000 X 12.5%) (50,000)
Total Cost 4,50,000
Less: Variable Cost
Direct Material 2,50,000
Variable Overheads 40,000 (3,90,000)
Fixed Cost 60,000
Statement showing Profit obtained upon adopting the Sales Manager’s proposal:
Revised Sales: Rs. 5,00,000 x 110% x 104% 5,72,000
Less: Variable Cost: Rs. 3,90,000 x 110% x 98% (4,20,420)
Contribution 1,51,580
Less: Fixed Cost Rs. 60,000 x 98% (58,800)
Profit 92,780
Percentage of Profit on Capital Employed = (Rs. 92,780 /4,00,000) × 100 = 23.195 > 23% Conclusion:
The Sales Manager’s proposal can be adopted.
XYZ Ltd. produces three products. The cost data are as under:
Particulars X Y Z
Direct Materials Direct Labour: Rs.64 Rs.152 Rs.117
Dept. Rate per hour (Rs) Hrs. Hrs. Hrs.

1 5 18 10 20
2 6 5 4 6.5
3 4 10 5 20
Variable overheads Rs.16 Rs.9 Rs.24

BCCA
Fixed overheads Rs. 4,00,000 per annum
The budget was prepared at a time, when market was sluggish. The budgeted quantities and
selling prices are as under:
Product Budged Quantity Selling price (Rs.) unit
X 9750 270
Y 7800 280
Z 7800 400
Later the market improved and the sale quantities could be increased by 20% for product X and 25%
each for products Y and Z. The Sales Manager confirmed that the increased quantities could be
achieved at the prices originally budgeted. The Production Manager has stated that the output cannot
be increased beyond the budgeted level due to limitation of direct labour hours in Department 2.
Required:
(i) Set optimal product mix.
(ii) State profit under optimal product mix.
Solution:
Particulars ₹ ₹ ₹
Budged Quantity (units) 9750 7800 7800
Selling price (p.u.): (i) 270 280 400
Variable cost (p.u.):
Direct materials 64 152 117
Direct labour 160 94 219
Variable overheads 16 9 24
Total variable cost (p.u.) (ii) 240 255 360
Contribution (p.u) (Rs.) (i) – (ii) 30 25 40
Statement of optima product mix and profit.
Products : X Y Z Total
Contribution (p.u) : (Rs.) (a) 30 25 40
Direct labour hours in (b) 5 4 6.5
Dept.2
Contribution per hr: (a) /(b) 6 6.25 6.15
Ranking III I II
Optimal product mix units (c) 5655 9750 9750
(28275 (39000 hrs) (63375 hrs
hrs.)
Total contribution (Rs.) (a)x(c) 169650 243750 390000 803400
Less: Fixed cost (Rs.) (400000)
Optimal profit 403400
Working Notes
(1) Total hours available in Department 2
Products (a) Units (b) Hrs.(p.u.) (c) Total hrs.
(d) = (b) x (c)
X 9,750 5 48,750
Y 7,800 4 31,200
Z 7,800 6.5 50,700

BCCA
Total available hrs. for budgeted production 1,30,650
(2) Maximum Sales Quantities of Products (under improved market conditions)
Products Units Increase Total number of
in percentage units
X 9,750 20 11,700
Y 7,800 25 9,750 x 4 = 39,000
Z 7,800 25 9,750x6.5=63,375
Required hours for Y+Z 1,02,375
Hours available for X : 1,30,650 – 1,02,375 = 28,275
Production for X 28,275 ÷ 5 = 5655 units

BCCA
2.3 TRANSFER PRICING
TRANSFER PRICING
Transfer pricing is one of the tools in the hands of management for measuring the performance of
divisions or departments.
A ‘Transfer Price’ is that notional value at which goods and services are transferred between divisions
in a decentralized organisation. Transfer prices are normally set for intermediate products, which are
goods, and services that are supplied by the selling division to the buying division. In large organisations,
each division is treated as a ‘profit center’. Their profitability is measured by fixation of ‘transfer
price’ for inter divisional transfers.
Objectives of Inter Company Transfer Pricing
• To evaluate the current performance and profitability of each individual unit

• To improve the profit position
• To assist in decision making
• For accurate estimation of earnings on proposed investment
Methods of Transfer Pricing
There are several methods of fixation of ‘Transfer Price’. They are discussed below.
1. Pricing based on cost.
a) Actual cost
b) Cost plus
c) Standard cost
d) Marginal cost
2. Market price as transfer price.
3. Negotiated pricing.
4. Pricing based on Opportunity cost.

BCCA
QUESTION 1
Your company fixes the inter-divisional transfer prices for its products on the basis of cost, plus a
return on investment in the division. The Budget for Division A for 1981-82 appears as under:
Fixed Assets 5,00,000
Current assets 3,00,000
Debtors 2,00,000
Annual Fixed Cost of the Division 8,00,000
Variable Cost per unit of Product 10
Budgeted Volume 4,00,000 units per year
Desired ROI 28%
Determine the transfer price for Division A
Solution:
Particulars Calculation Rs.
Variable Cost 10.00
Fixed Cost per unit 8,00,000 ÷ 4,00,000 2.00
10,00,000 × 28%
required Return 0.70
4,00,000
Total cost or Transfer price 12.70

A company is organized into two divisions, namely X and Y, and produces three products A, B and C.
Data per unit are:
A B C
Market price (Rs.) 240 230 200
Variable costs (Rs) 168 120 140
Direct Labour (hours) 4 5 3
Maximum sales potential (units) 1600 1000 600
Division Y has a demand for 600 units of product B for its use. If Division X cannot supply the
requirement, Division Y can buy a similar product from market at Rs. 224 per unit.
Required:
What should be the transfer price of 600 units of B for Division Y, if the total direct labour- hours
available in Division X are restricted to 15000?

BCCA
Solution:
Particulars A B C
Less : Variable costs (Rs.) 168 120 140
Contribution p.u (i) 72 110 60
Direct labour hours p.u. (ii) 4 5 3
Contribution per D.L.H. (i)/(ii) 18 22 20
Rank III I II
Production Max. Sales Hrs/Unit Production Hours used Balance hours

A 1000 5 1000 5000 10000
B 600 3 600 1800 8200
C 1600 4 1600 6400 1800
Spare hours available in Division X = 1800 hrs
Division X can produce Product B in 1800 spare hours
= 1800 hrs/5 hrs. pu = 360 units of product B
Balance units of Products B required by Division Y = 600 units – 360 units = 240 units Labour hours
required for 240 units of Product B = 240 units x 5 hrs. per unit = 1200 hours.
Opportunity contribution of A per hr. = Rs. 18
Calculation of Minimum Transfer Price p.u. Rs.

Variable cost (600 units × Rs. 120) 72000
Opportunity cost of contribution (1200 hrs × Rs. 18) 21600
lost Amount to be recovered 93600
Transfer price p.u. (Rs.) (Rs. 93600 / 600 units) 156
QUESTION 3
Transferor Ltd. has two processes Preparing and Finishing. The normal output per week is 7,500 units
(Completed) at a capacity of 75% Transferee Ltd. had production problems in preparing and requires
2,000 units per week of prepared material for their finishing processes.
The existing cost structure of one prepared unit of Transferor Ltd. at existing capacity Material Rs.
2.00 (variable 100%)
Labour Rs. 2.00 (Variable 50%)
Overhead Rs. 4.00 (variable 25%)
The sale price of a completed unit of Transferor Ltd is Rs.16 with a profit of Rs.4 per unit. Construct
the effect on the profits Transferor Ltd., for six months (25 weeks) of supplying units to Transferee
Ltd. With the following alternative transfer prices per unit:
(i) Marginal Cost
(ii) Marginal Cost + 25%
(iii) Marginal Cost + 15% Return on capital (assume capital employed Rs.20 lakhs)
(iv) Existing Cost
(v) Existing Cost + a portion of profit on the basis of (preparing cost / Total Cost) x Unit Profit
(vi) At an agreed market price of Rs.8.50 Assume no increase in fixed cost.
BCCA
Solution
Transferred units 25 x 2000 = ₹50000

Existing profit 7500 x 25 x 4 =₹750000
Effect on profit if transfer price is
(i) Marginal Costing

₹
Material 2.00
Labour 1.00
OHs 1.00
Total 4.00
At this transfer price there is no effect on profit of transferor ltd.
(ii) Profit = 50000
(iii) Price per unit = 4 + {(2000000 x 15% x 0.5)/50000} = 7
Under this method profit of transferor ltd is increases by 150000 i.e., 50000 x (7-4)
(iv) Profit increases by 50000 x (8-4) = 200000
(v) Transfer Price

{8 + (8/12) 4} = 10.67
Marginal Cost = (4.00)
Profit = 6.67
Profit increases by 50000 x 6.67 = ₹ 333500/-
(vi) Transfer price = 8.50
Profit increase by 4.5 x 50000 = ₹ 2,25,000
QUESTION 4
AB Ltd. has two manufacturing divisions, A and B, operating as profit centres. A has a production
capacity of 3500 units of product A per month, but presently, it produces 2000 units for a special
customer S, @ a selling price of ₹ 400 per unit (which will not accept partial supply) and 1000 units for
B. S has an agreement with AB that A shall not supply to the external market at any price lower than
that to S, or it can supply to the market at any price after discontinuing supplies to S. Division B does
some further work on A, incurs a variable processing cost of ₹220 per unit to produce its product B.
The monthly fixed costs of Division A are ₹ 2,00,000. The monthly fixed costs of B are₹ 1,50,000.
Division A’s raw material cost is ₹150 per unit and its variable manufacturing costs are ₹ 100 per unit.
Variable selling overhead of ₹ 50 per unit of A and ₹ 70 per unit of B are incurred for sales other than
transfers.
A had been selling to the outside market at a price of ₹460 per unit. Due to competition, it has to
reduce its price to ₹380 per unit on the entire supplies if it has to sell any quantity above 2000 units.
At ₹380/unit, its entire output can be sold. B has an outside market price of ₹ 800 per unit and can
BCCA
sell up to 2500 units. If A does not supply to B, a close substitute is available in the market for purchase
by B at ₹ 380, on which some additional work costing ₹ 40 per unit has to be done to make it comparable
to A. Assume that B will accept partial supply from A and that both divisions have complete autonomy
in deciding their strategy and they have the knowledge of costs/revenues/supply conditions in each
other’s divisions.
Required:
Using figures relevant for the following questions and calculations for the monthly period:
(i) Find out the optimal strategy for A - how much to produce each month, how much to supply to
external market and how much to supply to B and at what minimum cost to maximize its
Divisional profits.
(ii) What would be the range of transfer price per unit and the quantity that Manager of A will
try to successfully negotiate with the Manager of B?
(iii) What would be the range of transfer price that the Manager of B would consider to negotiate
with A?
(iv) As the top management person, what would you quote as the appropriate transfer price to be
fair to A and B in their performance evaluation?
Solution:
Strategy for A:
Strategy I:
Sell 2000 units to S at 400 ₹/u and 1500 units outside @ 460 ₹/u
1. Contributions: 100x2000 200,000
2. Contribution (outside) 160 x 1500 240,000

3. Total Contribution for 3500 units (1+2) 440,000
4. Less: Fixed Cost 200,000
5. Profit (3-4) 240,000
Strategy II:
Sell 1500 units to B at 380/unit and 2000 units outside at 460/u
1. Contribution B: 380-250 excluding selling cost = 130x1500 195,000

2. Contribution outside = 160 x 2000 320,000
3. Total Contribution (1+2) 515,000
4. Less: Fixed Cost 200,000
5. Profit (3-4) 315,000
Selling all 3500 units only to B or only outside are less profitable than the above two options and are
rejected. Select Strategy II for A.
B can get an equivalent product outside at ₹ 380, but has to incur additional costs up to ₹420. A can
negotiate anything between 380 and₹ 420The Manager of B knows that A will save on the external
sales’ variable selling overhead. What is Rs. 380 for A from outside selling price (380-300 = 80) is
equivalent of Rs. 330 from B (contribution = 330-250 = 80).
BCCA
Manager of B will negotiate between ₹330 per unit to ₹420 per unit, beyond
which B will not pay.
Top Management:
At 380 transfer price, A saves Rs. 50 on selling overhead. B saves Rs. 40 on reworking. Hence, at 375,
A saves Rs. 45 and B also saves Rs. 45. Hence Rs. 375 will be a fair cost.
Alternatively,
As top management, the price to be decided will be midway between 380 and 420, which is 400, equally
fair to A and B.
QUESTION 5
XY Co. has Profit Centre Divisions X and Y, making products X and Y respectively. Each unit of Y requires
one unit of X and Y can sell a maximum of 50,000 units in the external market at a selling price of ₹
150 per unit. X has the capacity to produce 1,00,000 units of X. The variable cost per unit is 12. Fixed
costs are ₹ 7,20, 000. X can sell the following quantities in the external market:
Price per unit (₹) Demand Units
18 84,000
20 76,000
22 70,000
24 64,000
26 54,000 or less
Assume no stock to build up for X or Y.
Y can purchase its requirement from the external market at ₹ 22 per unit, but has to incur a bulk
transportation cost of ₹1,50,000 for any quantity, which will not be incurred on transfers from X.
Required:
(i) Assuming no demand from Y, what will be the best strategy for X?
(ii) What will be the minimum transfer price that X will agree to if X has to supply 50,000 units to
Y? What price will Y offer as the maximum?
(iii) If Y is acceptable to partial supplies, what will be X’s best strategy under no
(iv) compulsion to transfer, but with the option to transfer as many units that it wants to? What
will be the quantity that X will agree to transfer and the corresponding price, assuming both
divisions agree to share the benefits of transfer equally?
(v) What is the best strategy of the company? Will the company’s overall strategy differ from the
individual divisions’ strategy? Compute the benefits/disadvantages/indifference between the
divisional best and company best strategies.
Present relevant calculations to substantiate all your answers.

BCCA
Solution:
Variable cost is constant at ₹ 12. Hence the value that will give the maximum contribution
will be relevant.
Price per unit Demand Units Contbn ₹/u Contbn Value
18 84,000 6 5,04,000
20 76,000 8 6,08,000
22 70,000 10 7,00,000
24 64,000 12 7,68,000
26 54,000 14 7,56,000
(i) The optimal strategy for X would be to manufacture 64000 units for external demand in the
absence of demand from Y.
(ii) If X has to supply 50,000 units to Y, then, it can supply only 50,000 units for external sales at ₹
26. Contribution from external sales will be ₹ 14 × 50,000 = 7,00,000
(iii) Minimum contribution from Y will be 56,000 for 50,000 units. Hence, X will transfer at a minimum
price of ₹ 12 + (56,000/50,000) = 13.12 or ₹ 13 so that it is able to maintain the contribution from
its optimal strategy.
However, if X is strong enough, it can demand a price of ₹ 22 which Y will be paying to outside
suppliers. Y will not pay anything more than 22 + 1,50,000/50,000, i.e., 25 ₹ /unit.
(iv) If X can choose, X will supply 64000 units for external demand and supply 36000 units to Y. Y will
have to incur transport even for the 14000 units it purchases from outside. Hence it will not pay
anything above ₹ 22. X will not accept anything below ₹ 13. Benefits to be shared equally between
X and Y = 22 – 13 = 9 per unit. Hence Transfer price per unit will be ₹ 13 + 4.5 = ₹ 17.5, so that Y
benefits by ₹ 4.5 and X also gets additional ₹ 4.5 contribution per unit transferred. Quantity
transferred will be 36,000 units.
(v) For the company as a whole, it is incurring a variable cost of ₹ 22 plus transport of ₹ 3
= ₹ 25 for every unit of Y purchased. Contribution of X as per best strategy = ₹ 13. Hence, for the
company, best strategy will be to transfer 50,000 units to Y and sell 50,000 units to external sales.
Contribution lost by sub optimal strategy in Div X will be 68,000 = [768000 - (50000 ×14)]
Gain by transfer
= transport of 1,50,000 + savings in purchase cost (22 – 13) × 50,000
= ₹ 1,50,000 + 450,000. = ₹ 600,000.
Net gain = - 68,000 + 6,00,000 = 5,32, 000.

BCCA
A company is organized into two divisions, namely X and Y, and produces three products A, B and
C. Data per unit are:
A B C
Variable costs (Rs) 168 120 140
Direct Labour (hours) 4 5 3
Maximum sales potential (units) 1600 1000 600
Division Y has a demand for 600 units of product B for its use. If Division X cannot supply the
requirement, Division Y can buy a similar product from market at Rs. 224 per unit.
Required:
What should be the transfer price of 600 units of B for Division Y, if the total direct labour- hours
available in Division X are restricted to 15000?
Solution:
Product
Particulars A B C
Less : Variable costs (Rs.) 168 120 140
Contribution p.u (i) 72 110 60
Direct labour hours p.u. (ii) 4 5 3
Contribution per D.L.H. (i)/(ii) 18 22 20
Rank III I II
Production Max. Sales Hrs/Unit Production Hours used Balance hours

A 1000 5 1000 5000 10000
B 600 3 600 1800 8200
C 1600 4 1600 6400 1800
• Spare hours available in Division X = 1800 hrs
• Division X can produce Product B in 1800 spare hours = 1800 hrs/5 hrs. pu = 360 units of product B
• Balance units of Products B required by Division Y = 600 units – 360 units = 240 units Labour
hours required for 240 units of Product B = 240 units x 5 hrs. per unit = 1200 hours.
• Opportunity contribution of A per hr. = Rs. 18
Calculation of Minimum Transfer Price p.u. Rs.

Variable cost (600 units ×Rs. 120) 72000
Opportunity cost of contribution lost (1200 hrs×Rs. 18) 21600
Amount to be recovered 93600
Transfer price p.u. (Rs.) (Rs. 93600 / 600 units) 156

BCCA
3. STANDARD COSTING
DEFINITION
Standard costing is a method of costing to measure the performance of an activity by

a) Comparing actual costs with standard costs
b) Analysis of variances, and
c) reporting of variances for investigation and appropriate action
STANDARD COSTING INVOLVING FOLLOWING STEPS
a) Setting up of standards
b) Ascertainment of actual costs,
c) Comparison of actual and standard costs to determine variances,
d) Investigation of variances and taking appropriate action thereon wherever necessary, and
e) Disposition of variances suitably by transfer to costing P&L a/c or by absorption to output, as
required
LEARNING OBJECTIVES
a) Material Cost Variances

b) Labour Cost Variances
c) VOH Cost Variances
d) FOH Cost Variances
e) Sales Variances
MAIN USES OF STANDARD COSTING SYSTEM
a) Cost Control
b) Determination of Selling Price
MATERIAL COST VARIANCE
Material (1) (2) (3) (4)
SQ x SP (₹) RAQ x SP (₹) AQ x SP (₹) AQ x AP (₹)

BCCA
Material Cost Variance = (1) – (4) = Standard Cost – Actual Cost
Material Price Variance = (3) – (4)
Material Usage Variance = (1) – (3)
Material Mix Variance = (2) – (3)
Material Yield Variance = (1) – (2)
QUESTION 1
The standard cost of a chemical mixture is as follows:
40% material A at Rs. 20 per kg.
60% material B at Rs. 30 per kg.
A standard loss of 10% of input is expected in production.
The cost records for a period showed the following usage:
90 kg material A at a cost of Rs. 18 per kg. 110 kg material B at a cost of Rs. 34 per kg.
The quantity produced was 182 kg. of good product.
Calculate all material variances.
Solution
Working Note 1 - Calculation of Standard Quantity (SQ)
Particulars Input Output
Given 100 90
? 182
𝟏𝟖𝟐
Standard Quantity (SQ) = 𝑿 𝟏𝟎𝟎 = 𝟐𝟎𝟐. 𝟐𝑲𝒈𝒔
𝟗𝟎
SQ of A = 80.88 kgs
SQ of B = 121.32 kgs
Working Note 2 - Calculation of Revised Actual Quantity (RAQ)
Actual Quantity (AQ) of A = 90 kgs
Actual Quantity (AQ) of B = 110 kgs
Total Actual Quantity = 200 kgs
RAQ of A = 200 x 40% = 80 kgs
RAQ of B = 200 x 60% = 120 kgs
Calculation of Material Variances
Material (1) (2) (3) (4)

A 80.88 x 20 = 1618 80 x 20 = 1600 90 x 20 = 1800 90 x 18 = 1620
B 121.32 x 30 = 3640 120 x 30 = 3600 110 x 30 = 3300 110 x 34 = 3740

BCCA
Total 5258 5200 5100 5360
Material Cost Variance = (1) – (4) = 102 Adverse
Material Price Variance = (3) – (4) = 260 Adverse
Material Usage Variance = (1) – (3) = 158 Favorable
Material Mix Variance = (2) – (3) = 100 Favorable
Material Yield Variance = (1) – (2) = 58 Favorable
QUESTION 2
The standard cost of a chemical mixture is as follows:
60% of material A @ Rs 50 per kg 40% material B @ 60 per kg
A standard loss of 25% on output is expected in production.
The cost Records for a period has shown the following usage.
540 kg of material A @ 60 per kg 260 kg of Material b @ 50 per kg
The quantity processed was 680 kilograms of good product.
From the above given information Calculate:
i. Material Cost Variance

ii. Material Price Variance
iii. Material Usage Variance
iv. Material Mix Variance
v. Material Yield Variance
Solution:
Given 125 100
? 680
𝟔𝟖𝟎
Standard Quantity (SQ) = 𝒙 𝟏𝟐𝟓 = 𝟖𝟓𝟎𝑲𝒈𝒔
𝟏𝟎𝟎
SQ of A = 510 kgs
SQ of B = 340 kgs
Working Note 2 - Calculation of Revised Actual Quantity (RAQ)
Actual Quantity (AQ) of A = 540 kgs
Actual Quantity (AQ) of B = 260 kgs
Total Actual Quantity = 800 kgs
RAQ of A = 800 x 60% = 480 kgs
RAQ of B = 800 x 40% = 320 kgs

BCCA
Material (1) (2) (3) (4)
A 510 x 50 = 25,500 480 x 50 = 24,000 540 x 50 = 27,000 540 x 60 = 32,400
B 340 x 60 = 20,400 320 x 60 =19,200 260 x 60 = 15,600 260 x 50 = 13,000
Total 45,900 43,200 42,600 45,400
Material Cost Variance = (1) – (4) = 500 Favorable
Material Price Variance = (3) – (4) = 2800 Adverse
Material Usage Variance = (1) – (3) = 3300 Favorable
Material Mix Variance = (2) – (3) = 600 Favorable
Material Yield Variance = (1) – (2) = 2700 Favorable
QUESTION 3
Beta Ltd. is manufacturing Product N. This is manufactured by mixing two materials namely Material P
and Material Q.
The Standard Cost of Mixture is as under:
Material P 150 ltrs. @ ₹ 40 per ltr. Material Q 100 ltrs. @ ₹ 60 per ltr.
Standard loss @ 20 of total input is expected during production.
The cost records for the period exhibit following consumption:
Material P 140 ltrs. @ ₹ 42 per ltr,
Material Q 110 ltrs. @ ₹ 56 per ltr,
Quantity produced was 195 ltrs.
Calculate:
(i) Material Cost Variance
(ii) Material Usage Variance.
(iii) Material Price Variance.
Solution:
Given 100 80
? 195
195
Standard Quantity (SQ) = 80
x 100 = 243.75ltrs
243.75
SQ of A = 250 𝑥 150 = 146.25 𝑙𝑡𝑟𝑠
243.75
SQ of B = 250 𝑥 100 = 97.5 𝑙𝑡𝑟𝑠
Material (1) (3) (4)
SQ x SP (₹) AQ x SP (₹) AQ x AP (₹)
A 146.25 x 40 = 5,850 140 x 40 = 5,600 140 x 42 = 5,880

BCCA
B 97.5 x 60 = 5,850 110 x 60 = 6,600 110 x 56 = 6,160
Total 11,700 12,200 12,040
Material Cost Variance = (1) – (4) = 340 Adverse
Material Price Variance = (3) – (4) = 160 Favorable
Material Usage Variance = (1) – (3) = 500 Adverse
LABOUR COST VARIANCE (WITHOUT IDLE TIME)
Labour (1) (2) (3) (4)
SH x SR (₹) RAH x SR (₹) AH x SR (₹) AH x AR (₹)
Skilled
Semi skilled
Unskilled
Labour Cost Variance = (1) – (4)
Labour Rate Variance = (3) – (4)
Labour Efficiency Variance = (1) – (3)
Labour Mix Variance = (2) – (3)
Labour Yield Variance = (1) – (2)
LABOUR COST VARIANCE (WITH IDLE TIME)
Labour (1) (2) (3) (4) (5)
SH x SR (₹) RAH x SR (₹) Net AH x SR (₹) AH X SR (₹) AH x AR (₹)
Skilled
Semi skilled
Unskilled
Labour Cost Variance = (1) – (5) = Standard Cost – Actual Cost

Labour Rate Variance = (4) – (5)
Labour Gross Efficiency Variance = (1) – (4)
Labour Efficiency Variance = (1) – (3)
Labour Idle time Variance = (3) – (4)
Labour Mix Variance = (2) – (3)
Labour Yield Variance = (1) – (2)

BCCA
QUESTION 4
The standard labour employment and the actual labour engaged in a week for a job are as
under:
Skilled Semi-skilled Unskilled
workers workers Workers
Standard no. of workers in the 32 12 6

gang
Actual no. of workers employed 28 18 4
Standard wage rate per hour 3 2 1
Actual wage rate per hour 4 3 2

During the 40 hours working week, the gang produced 1,800 standard labour hours of work.
Calculate:
(a) Labour Cost Variance (b) Labour Rate Variance (c) Labour Efficiency Variance
(d) Labour Mix Variance (e) Labour Yield Variance
Solution:
Working 1 – Calculation of Standard hours (SH)
1800
SHs of Skilled worker = 𝑥 32 = 1152
50
1800
SHs of Semi skilled worker = 50 𝑥 12 = 432
1800
SHs of Unskilled worker = 50 𝑥 6 = 216
Working 2 – Calculation of Actual hours (AH)
AHs of Skilled worker = 28 x 40 = 1120
AHs of Semi skilled worker = 18 x 40 = 720
AHs of Unskilled worker = 4 x 40 = 160
Working 3 – Calculation of Revised Actual hours (RAH)
Total Actual hours = 1120 + 720 + 160 = 2000
2000
RAH of Skilled worker = 50
𝑥 32 = 1280
2000
RAH of Semi skilled worker = 50
𝑥 12 = 480
2000
RAH of Unskilled worker = 𝑥 6 = 240
50
Calculation of Labour Variances
Labour (1) (2) (3) (4)
SH x SR (₹) RAH x SR (₹) AH x SR (₹) AH x AR (₹)
Skilled 1152 x 3 = 3456 1280 x 3 = 3840 1120 x 3 = 3360 1120 x 4 = 4480
Semi skilled 432 x 2 = 864 480 x 2 = 960 720 x 2 = 1440 720 x 3 = 2160
Unskilled 216 x 1 = 216 240 x 1 = 240 160 x 1 = 160 160 x 2 = 320
Total 4536 5040 4960 6960
Labour Cost Variance = (1) – (4) = 2424 Adverse

BCCA
Labour Rate Variance = (3) – (4) = 2000 Adverse
Labour Efficiency Variance = (1) – (3) = 424 Adverse
Labour Mix Variance = (2) – (3) = 80 Favourable
Labour Yield Variance = (1) – (2) = 504 Adverse
QUESTION 5
The standard output of a Product 'DJ' is 25 units per hour in manufacturing department of a Company
employing 100 workers. In a 40 hours week, the department produced 960 units of product 'DJ' despite
5% of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were ₹
6.20, ₹
6.00 and ₹ 5.70 respectively to Group 'A' consisting 10 workers, Group 'B' consisting 30 workers and
Group 'C' consisting 60 workers. The standard wage rate per labour is same for all the workers. Labour
Efficiency Variance is given ₹ 240 (F).
You are required to compute:
a) Total Labour Cost Variance.
b) Total Labour Rate Variance.
c) Total Labour Gang Variance.
d) Total Labour Yield Variance, and
e) Total Labour Idle Time Variance.
Solution:
Working note 1: calculation of standard hours
Actual Output = 960 units
Standard output per one hour for 100 workers = 25 units
960
Standard hours = 𝑥 100 = 3840𝐻𝑟𝑠
25
3840
SHs of Group A = 100 𝑥 10 = 384𝐻𝑟𝑠
3840
SHs of Group B = 100 𝑥 30 = 1152𝐻𝑟𝑠
3840
SHs of Group C = 100 𝑥 60 = 2304𝐻𝑟𝑠
Working 2 – Calculation of Actual hours (AH)
AHs of group A = 10 x 40 = 400 hrs
AHs of group B = 30x 40 = 1200 hrs
AHs of group C = 60x 40 = 2400 hrs
Working 3 – Calculation of Net Actual hours (Net AH)
Net AHs of group A 400 hrs x 95% = 380 hrs
Net AHs of group B 1200 hrs x 95% = 1140 hrs
Net AHs of group C 2400 hrs x 95% = 2280hrs
Working 4 – Calculation of Revised actual hours (RAH)
Total actual hours = 4,000 x 95% = 3,800 hrs
3800
RAH of Group A = 100
𝑥 10 = 380 ℎ𝑟𝑠
3800
RAH of Group B = 𝑥 30 = 1140 ℎ𝑟𝑠
100
3800
RAH of Group c = 100 𝑥 60 = 2280 ℎ𝑟𝑠

BCCA
Working 5 – Calculation of Standard Rate per hour

Labour efficiency variance = ₹240 F
SH x SR – Net AH x SR = 240
3,840 x SR – 3,800 x SR = 240
Standard wage rate per hour =₹6
Calculation of Labour Variances

Labour (1) (2) (3) (4) (5)
SH x SR (₹) RAH x SR (₹) Net AH x SR AH x SR (₹) AH x AR (₹)
(₹)
Group A 384 x 6 = 2,304 380 x 6 = 2,280 380 x 6 = 2,280 400 x 6 = 2,400 400 x 6.2 = 2,480
Group B 1,152 x 6 = 1,140 x 6 = 1,140x6 = 6,840 1,200 x 6 =7,200 1,200 x 6 = 7,200

6,912 6,840
Group C 2,304 x 2,280 x 6 = 2,280 x 6 = 2,400 x 6 =14,400 2,400x5.7

6=13,824 13,680 13,680 =13,680
Total 23,040 22,800 22,800 24,000 23,360
Labour Cost Variance = (1) – (5) = 320 Adverse

Labour Rate Variance = (4) – (5) = 640 Favorable
Labour Efficiency Variance = (1) – (3) = 240 Favorable
Labour gang/mix Variance = (2) – (3) = 0
Labour Yield Variance = (1) – (2) = 240 Favorable
Labour Idle time Variance = (3) – (4) = 1200 Adverse
OVERHEAD COST VARIANCE
Variable Overhead Cost Variance

Hours Basis (1) SH x SR (2) AH x SR (3) AH x AR/AVOH
Output Basis (1) AO x SR (2) SO x SR (3) AO x AR/AVOH
Variable OH Cost Variance = (1) – (3) = Standard Cost – Actual Cost

Variable OH Expenditure Variance = (2) – (3)
Variable OH Efficiency Variance = (1) – (2)
Fixed Overhead Cost Variance
Hours Basis (1) SH x SR (2) AH x SR (3) PFOH (4) BFOH (5) AH x AR/AFOH
Output Basis (1) AO x SR (2) SO x SR (3) PFOH (4) BFOH (5) AO x AR/AFOH

BCCA
FOH Cost Variance/ Under or Over Absorption/Standard Cost – Actual Cost/OH absorbed – OH
Incurred = (1) – (5)
FOH Expenditure Variance = (4) – (5)
FOH Volume Variance = (1) – (4)
FOH Calendar Variance = (3) – (4)
FOH Capacity Variance = (2) – (3)
FOH Efficiency Variance = (1) – (2)

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻
Possible fixed overhead = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐷𝑎𝑦𝑠
𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐷𝑎𝑦𝑠
Standard FOH Rate Per Unit = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡
Standard FOH Rate Per Hour = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
QUESTION 6
Find the Fixed overhead cost variance from the following data:
Budgeted FOH = ₹ 1,50,000 Budgeted Days = 25
Standard Output Per Hour = 1
Unit Budgeted Hours Per Day = 6,000 hrs
Actual FOH = ₹ 1,56,000
Actual Days = 27
Actual Hours = 6,300
Actual Output Per Hour = 0.9 units
Solution:
Working 1 – Calculation of Possible fixed overheads (PFOH)

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻 150000
Possible fixed overhead = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐷𝑎𝑦𝑠
𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐷𝑎𝑦𝑠 = 25
𝑥 27 = ₹162000
Working 2 – Calculation of Actual Hours, Actual Output, Standard hours and Standard Output
Actual Hours = 6,300 x 27 = 1,70,100 Hours
Actual Output = 1,70,100 x 0.9 = 1,53,090 Units
Standard Hours = 1,53,090 x 1 = 1,53,090 Hours
Standard Output = 1,70,100 x 1 = 1,70,100 Units
Working 3 – Calculation of Standard Rate Per Unit and Standard Rate Per Hour
Budgeted Hours = 6,000 x 25 = 1,50,000 Hours
Budgeted Output = 1,50,000 x 1 = 1,50,000 Units

Standard FOH Rate Per Unit = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡 = 150000𝑢𝑛𝑖𝑡𝑠 = 1 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

BCCA
Standard FOH Rate Per Hour = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
= 15000ℎ𝑟𝑠 = 1 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
Hours Basis (1) (2) (3) (4) (5)
SH x SR AH x SR PFOH BFOH AFOH
1,53,090 x 1 = 1,70,100 x 1 = 1,62,000 1,50,000 1,56,000

1,53,090 1,70,100
Output Basis (1) (2) (3) (4) (5)
AO x SR SO x SR PFOH BFOH AFOH
1,53,090 x 1 = 1,70,100 x 1 = 1,62,000 1,50,000 1,56,000

1,53,090 1,70,100
FOH Cost Variance/ Under or Over Absorption/Standard Cost – Actual Cost/OH absorbed – OH
Incurred = (1) – (5) = ₹ 2,910 Adverse
QUESTION 7
The following information was obtained from the records of a manufacturing unit using standard
costing system.
Standard Actual
Production 4,000 units 3,800 units
Working days 20 21
Fixed Overhead Rs. 40,000 Rs. 39,000
Variable Overhead Rs.12,000 Rs. 12,000

You are required to calculate the following overhead variance:
(a) Variable overhead variance
(b) Fixed overhead variances
(I) Expenditure variances
(II)Volume variance
Solution:
(a) Variable Overhead Variances
Variable Overhead Cost Variance = Standard cost – Actual Cost
= AO x SR – Actual variable overhead

3800
= 4000 𝑥 12000 − 12000 = ₹600 𝐴𝑑𝑣𝑒𝑟𝑠𝑒
(b) Fixed Overhead Variances
(i) Expenditure Variance = Budgeted Fixed Overhead - Actual Fixed Overhead
= ₹ 40000 - ₹ 39000 = ₹ 1000 Favorable

BCCA
(ii) Volume Variance = AO x SR - Budgeted Fixed Overhead
3800
= 𝑥 40000 − 40000 = ₹2000 𝐴𝑑𝑣𝑒𝑟𝑠𝑒
4000
QUESTION 8
Premier Industries has a small factory where 52 workers are employed on an average for 25 days a
month and they work 8 hours per day. The normal down time is 15%. The firm has introduced standard
costing for cost control. Its monthly budget for November, 2020 shows that the budgeted variable
and fixed overhead are ₹ 1,06,080 and ₹ 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the end
of the month:
Actual hours worked 8,100 hrs.
Actual production expressed in standard hours 8,800 hrs.
Actual Variable Overheads ₹ 1,02,000
Actual Fixed Overheads ₹ 2,00,000
You are required to calculate:
a) Variable Overhead Variances:
i. Variable overhead expenditure variance.
ii. Variable overhead efficiency variance.
b) fixed Overhead Variances:
i. Fixed overhead budget variance.
ii. Fixed overhead capacity variance.
iii. Fixed overhead efficiency variance.
c) Control Ratios:
i. Capacity ratio.
ii. Efficiency ratio.
iii. Activity ratio.
Solution:
Working 1 - Calculation of standard rate for variable overhead variances
Total No. of hours = 52workers x 25days x 8 hrs - 15% down time
= 10,400 – 1,560 = 8,840 hrs
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑂𝐻 ′ 𝑠 1,06,080
Standard Rate = 𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠
= 8840
= ₹12 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
(i) Variable Overhead Cost Variance
Hours basis (1) (2) (3)
SH x SR AH x SR AH x AR/AVOH
8800x 12 8100x 12 -
Total 1,05,600 97,200 1,02,000

(a) Variable OH Expenditure Variance = (2) – (3) = 4800 Adverse
(b) Variable OH Efficiency Variance = (1) – (2) = 8400 Favorable
Working 2 - Calculation of standard rate for fixed overhead variances

Total no of hours = 52workers x 25days x 8 hrs - 15% down time
= 10,400 – 1,560 = 8,840 hrs

BCCA
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑂𝐻 ′ 𝑠 2,21,000
Standard Rate = = = ₹25 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 8840

Hours (1) (2) (3) (4) (5)
Basis SH x SR AH x SR PFOH BFOH AFOH
8800 x 25 = 8,100 x 25 = - 2,21,000 2,00,000
2,20,00 2,02,500
FOH Expenditure Variance = (4) – (5) = ₹ 21,000 favorable
FOH Capacity Variance = (2) – (4) = ₹ 18,500 adverse
FOH Efficiency Variance = (1) – (2) = ₹ 17,500 favorable
Control ratios
𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠
(a) Capacity Ratio = 𝐵𝑢𝑑𝑔𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠 𝑥 100
8100
= 8840 𝑥 100 = 91.63%
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐻𝑜𝑢𝑟𝑠
(b) Efficiency Ratio = 𝑥 100
𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠
8800
= 8100 𝑥 100 = 108.64%
𝑆𝑡𝑎𝑛𝑎𝑟𝑑𝐻𝑜𝑢𝑟𝑠
(c) Activity Ratio = 𝑥 100
𝐵𝑢𝑑𝑔𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
8800
= 𝑥 100 = 99.55%
8840
QUESTION 9
ABC Ltd. has furnished the following information regarding the overheads for the month of
June 2020:
(i) Fixed Overhead Cost Variance ₹ 2,800 (Adverse)
(ii) Fixed Overhead Volume Variance ₹ 2,000 (Adverse)
(iii) Budgeted Hours for June, 2020 2,400 hours
(iv) Budgeted Overheads for June,2020 ₹ 12,000
(v) Actual rate of recovery of overheads ₹ 8 Per Hour
From the above given information Calculate:

a. Fixed Overhead Expenditure Variance
b. Actual Overheads Incurred
c. Actual hours for actual production
d. Fixed Overhead Capacity Variance
e. Standard hours for Actual Production
f. Fixed Overhead Efficiency Variance

BCCA
Solution:
a. Fixed Overhead Expenditure Variance
FOH Cost Variance = FOH Volume Variance + FOH Expenditure Variance
FOH Expenditure Variance = FOH Cost Variance - FOH Volume Variance
FOH Expenditure Variance = - 2800 – (-2000) = - ₹ 800
b. Actual overheads incurred
FOH Expenditure variance = BFOH – AFOH - 800 = 12,000 – AFOH
AFOH = ₹ 12,800
c. Actual hours for actual production
AFOH = ₹ 12,800
Actual rate of recovery of overheads = ₹ 8 per hour
Actual Hours = 12,800/8 = 1600 hrs
d. Fixed Overhead Capacity Variance
SR per hour = BFOH/BHs = 12,000/2,400 = ₹ 5
FOH Capacity Variance = AH x SR – BFOH
= 1600 x 5 – 12,000 = ₹ 4,000
e. Standard hours for Actual Production
FOH Cost Variance = SH x SR – AFOH - 2,800 = SH x 5 – 12,800
SHs = 2,000
f. FOH Efficiency Variance
FOH Efficiency Variance = SH x SR – AH x SR
= 2,000 x 5 – 1,600 x 5
= ₹ 2,000

An Engineering Co. manufactures a single product whose standard cost structure is as follows:
Direct materials: 24 kg at ₹ 30 per kg 72.00
Direct Labour : 6 hours at ₹ 4 per hour 24.00
Factory Overheads : 6 hours at ₹ 0.75 per hour 4.50
Total 100.50
The factory overheads are based on the following flexible budget:
Capacity 80% 90% 100% 100%
Production (units) 6,000 6,750 7,500 8,250
Overheads (₹) 29,250 3,150 33,750 36,000
Actual data for the month of January, 2018:
Budgeted production 7,500 units
Materials used 19,240 kg at ₹ 31 per kg
Direct labour 46,830 hours at ₹ 4.20 per hour
Actual factory overheads ₹ 36,340
Production completed 7,620 units
Details of Work-in-Progress:
Opening: 120 units, materials fully supplied, 50% converted.
Closing: 100 units, materials fully supplied, 50% converted.
Required:
(i) Effective or Equivalent Production for each element of cost.

BCCA
(ii) Calculate:
(a) Material variances (cost, price and usage)
(b) Labour variances (cost, rate of pay and efficiency)
(c) Overhead variances (expenditure and volume variance, efficiency and capacity variance)
Solution
i. Statement of Equivalent Production

Units Material Labour and Overheads
% Units % Units
Opening Work-in-Progress 120 --- --- 50 60
Completely processes during the 7,500 100 7,500 100 7,500
month
Closing Work-in-Progress 100 100 100 50 50
7,720 7,600 7,610
Some required data (computed)
Material:
Standard Quantity: 7,600 @ 2.40 kg = 18,240 kg
Standard Value: 18,240 kg @ ₹ 30 = ₹ 5,47,200
Labour:
Standard Hours: 7,610 @ 6 hours = 45,660 hours
Standard Wages: 45,660 @ ₹ 4 per hour = ₹ 1,82,640
𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠 46830
Standard Production = 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐻𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = 6
= 7805𝑈𝑛𝑖𝑡𝑠
Budgeted Production = 7,500Units
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 33750
Standard rate per unit = = = ₹450
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 7500
Standard Overheads (or overheads recovered) = 7,610 @ ₹ 4.50 = ₹ 34,245
Actual cost of materials: 19,240 kg @ ₹ 31 = ₹ 5,96,440 Actual Wages: 46,830 hr @ ₹ 4.20 =
₹ 1,96,686
ii. Statement of Variances
a) Material cost variance: (SC - AC) = (₹ 5,47,200 - 5,96,440) = ₹ 49,240 (A) which
can be analyzed into:
o Material price variance: (SP - AP) AQ = (30 - 31) x 19,240 = ₹ 19,240 (A)
o Material usage variance: (SQ - AQ) SP = (18,240 - 19,240) x ₹30 = ₹30,000 (A)
b) Labour cost variance: (SC - AC) = (₹ 1,82,640 - 1,96,686) = ₹ 14,046 (A) which can
be further analyzed as follows:
o Rate variance: (SR - AR) AT = (4.00 - 4.20) 46,830 = ₹ 9,366 (A)
o Efficiency variance: (AP - SP) SR = (7,610 - 7,805) x ₹ 24 = ₹ 4,680 (A)
c) Factory O.H. cost variance: Std. O.H. - Actual O.H. = ₹34,245 - 36,340 = ₹2,095
(A) which can be analyzed as follows:
o Expenditure or Budgeted variance: Budgeted O.H. - Actual O.H.
₹ 33,750 - 36,340 = ₹ 2,590 (A)
o Volume variance: SR (AP - BP) = ₹ 4.5 (7,610 - 7,500) = ₹ 495 (F)
d) Volume variance can be further divided as follows:
o Efficiency variance: SR (AP - SP) = ₹ 4.50 (7,610 - 7,805) = ₹ 877.50 (A)
o Capacity variance: SR (SP - BP) = ₹ 4.50 (7,805 - 7,500) = ₹ 1372.50 (F)

BCCA
One kilogram of product ‘K’ requires two chemical A and B. The following were the details of product
‘K’ for the month of June 2018:
(i) Standard mix ratio is 1:1
(ii) Actual input of chemical ‘B’ 70 kilograms
(iii) Actual price per kilogram of Chemical ‘A’ Rs. 15
(iv) Standard normal loss 10% of total input.
(v) Materials cost variance total Rs. 650 adverse and the same was fully attributable to Chemical
‘B’.
(vi) Materials yield variance total Rs. 135 adverse.
Required:
Compute all missing variances and complete the Variance Report.
Solution:
SP x SQ SPR x SQ SP x AQ AQ x AP
A 12X? 12X? 12X? ?X15
B 15X? 15X? 15X70 70X?
i) Let the total actual input be X kgs. Therefore applying the Standard Mix Ratio, the Revised
Standard Quantity of Chemicals A and B each would be 0.5 kgs.
ii) Total YIELD VARIANCE of 135 adverse can be split according to the ratio of SP x SQ.
iii) Since inputs are equal the ratio will be that of price i.e. 4:5. Hence YIELD VARIANCE of A is
60 Adverse and B is Rs. 75 Adverse.
iv) Substituting yield variance we get SQ of A & B each as 50 kgs.
A = 12 X (SQ – 0.5X) = -60 SQ-0.5X = .5 SQ=0.5X-5
Similarly for B SQ= 0.5X-5
v) total actual input = X kgs. : Actual input of A = (X-70)
vi) Material Cost Variance of A = Nil (i.e. SPSQ-AQAP)=0 i.e., 12X(05.X-5) – 15X(X-70) Solving this
X = 110
Therefore, Revised Standard Quantity of A and B each is 55 kg and Standard Quantity of A and B
each is 50 Kgs.
Material cost variance of B = Rs. 650 Adverse
i.e. (15X50) – 70XAP = -650 750 – 70AP = -650, 70AP = 1400, AP = 20
The final variance report is as follows
SP x SQ SPR x SQ SP x AQ AQ x AP
A 600 660 480 600
B 750 825 1050 1400
Total 1350 1485 1530 2000
Yield Mix Variance Usage Variance Price Variance Cost Variance

A 60A 180F 120F 120A 0
B 75A 225A 300A 350A 650A
Total 135A 45A 180A 470A 650A

BCCA
Fifteen workers (10 Type I workers and 5 Type II workers) work in a production process during a
month of 25 working days. Each Type I worker is expected to produce 8 units per day and Type II
worker is expected to produce 12 units per day. They work on the regular shift from 9:00 a.m. to 5
p.m. and have a tea break between 10:30 to 10:45
a.m. and 3:00 to 3:15 p.m. and also have a lunch break from 1:00 to 1:30 p.m. The actual production
was 1800 units by Type I workers and 1200 units by Type II workers. The standard wage rate per
hour were `50 and `60 for Type I and Type II workers, respectively and corresponding actuals were
60 and 70, respectively. During the month, 16 hours were lost actually for both types of workers,
which is also as per expectation for waiting for materials and inspection.
Required:
Calculate the following:
(i) Standard labour cost for the month
(ii) Labour cost variance
(iii) Labour efficiency variance
(iv) Idle time variance
Indicate (A) or (F) to denote whether the variances are adverse or favourable
Solution:
Type I Type II Total

Available/m (hrs) 10 workers x 25 days/m x 8 5 workers x 25 days/m x
hrs/day (bet 9 to 5) = 8hrs/day
2000hrs = 1000hrs
Units per day 8 12

per worker
Hours/unit 8/8 = 1 hr/u 8 hrs/12 units = 2/3

= 0.67 hrs/unit
Actual 1800 1200
production (u)
Std hrs for 1800 x 1 = 1800 1200x2/3 = 800
actual
production
Standard rate/hr 50 60
Std cost of 1800x50 = 90,000 800 x 60 =48,000 138,000
production
Actual hours paid 2000 hours 1000hrs
Actual rate 60 70
Actual cost 120,000 70,000 190,000

BCCA
Labour cost variance 52,000 (A)
Efficiency variance (1800-2000) x 50 (800-1000) x 60 22,000(A)
= 10,000(A) = 12000(A)
Idle time Nil Nil
variance (Since
normal waiting
and break are
included in
standard labour
hours)
(Standard production hours per day = 8 (normal breaks and waiting time have to be include in the
standard)
No. of days per month = 25.
Standard hours per month = 25 x 8 = 200 hours per worker x 10 workers = 2000 hours.)
QUESTION 13 (

BCCA
4. ABC, JIT AND ERP
ACTIVITY BASED COSTING (ABC)
Activity based costing:
The CIMA terminology defines ABC as a cost attribution to cost units on the basis of benefit
received from indirect activities.
Process for computation of ABC problems:
Identify what Caliculate the cost Trace the cost into

Identify the Cost
causes/Drives it per driver the units produced
Terms in Activity based costing

Activity: An activity means an aggregate of closely related tasks.
E.g. Customer order processing, assembling, packing, advertising.
Resource: Resources are elements that are used for performing the Activities.
E.g. Order receiver, telephone, computers, material, labour, equipment, office supplies etc.
Activity Cost pool: Cost is amount paid for resource consumed by the activity. It is also known as
activity cost pool.
E.g. Salaries, printing & stationary, telephone bill etc.
Cost object: It refers to an item for which cost measurement is required .

E.g. a product, a service, or a customer
Cost driver: Any element that would cause a change in the cost of activity.
For e.g. number of setups, number of order etc.
Cost driver may be involved two parts:

1. Resource cost driver
2. Activity cost driver
For Example:
Activity Resources Cost Pool Cost Driver

Consulting Consultant, Employee cost, Level of Consultant, Time
Computer Maintenance Cost Spent
Laser printing Printing staff, Colour Cost, No. of Pages Printed, Font
Printer Maintenance,
Printing cost
Accounting Administration Salaries No of times accounts
administration Staff producer

BCCA
Customer service Telephone, Staff Telephone Bill,
Frequency of order, No of
Salaries
orders, Time spent on a
project
Research & Staff, Equipment Salaries, Material No of research project, Time
Development cost spent on a project
The cost drivers for various functions i.e., production, marketing, research and
development are given below
Production Number of units
Number of set-ups
Marketing Number of sales personnel
Number of sales orders
Research & Development Number of research projects
Personnel hours spend on projects
Technical complexities of the projects
Customer service Number of service calls
Number of products serviced
Hours spend on servicing products
Steps in ABC system
1. Identify the chosen cost objects
2. Identify the different activities
3. Identifying the direct cost of products
4. Relating the overhead to the activities
5. Spreading the support activities across the primary activities
6. Determining the activity cost drivers
7. Calculating the activity cost driver rates
8. Computing the total cost of products or cost objects
Advantages of Activity Based costing
1. It provides more accurate product costing.
2. It improves the quality of information available for decision making.
3. It is easiest way to allocate overhead in the product.
4. It helps to identify the activities that can be eliminated.
5. ABC translates cost in to a language that people can understand
Limitations of Activity Based costing
1. More time consuming to collect data.
2. Cost of buying, implementing and maintaining activity based system.
3. In some cases, the establishment of cause and effect relationship between cost driver and costs
not be a simple affair.
4. ABC does not conform to generally accepted accounting principles in some areas.
Traditional vs Activity Based costing
1. In the traditional system cost analysis is done by product. In ABC managers focus attention on
activities.
2. Managers manage activities and products. Changes in activities lead to changes in costs. Therefore,
if the activities are managed well, costs will fall and resulting products will be more competitive.

BCCA
3. Traditional costing can lead to understanding or over costing of products or services. A poor quality
of cost information causes management to make poor decisions for pricing, product emphasis, make
or buy etc . ABC differs from the traditional system only in respect of allocations of overheads or
indirect costs.
QUESTION 1
The budgeted overheads and cost driver volumes of XYZ are as follows.
Cost pool/ Budgeted Cost driver Budgeted volume
activity overheads (Rs)
Material 5,80,000 No. of orders 1,100

procurement
Material 2,50,000 No. of movements 680
handling
Set-up 4,15,000 No. of set ups 520
Maintenance 9,70,000 Maintenance hours 8,400
Quality control 1,76,000 No. of inspection 900
Machinery 7,20,000 No. of machine hours 24,000
The company has produced a batch of 2600 components of AX-15 , its material cost was Rs 1,30,000
and labour cost Rs 2,45,000 . The usage activities of the said batch as follows. Material orders – 26,
maintenance hours -690, material movements- 18 , inspection – 28 , set ups – 25, machine hours – 1800
Calculate – cost driver rates that are used for tracing appropriate amount of overheads to the
said batch and ascertain the cost of batch of components using activity based costing.
Solution:
Calculation of cost driver rate:
Activity Activity cost Cost driver Cost Driver Cost Driver Rate
No
Material 5,80,0000 No. of orders 1100 527
Procurement
Material 2,50,000 No. of 680 367
handling Movements
Set-up 4,15,000 No. of setups 520 798
Maintenance 9,70,000 Maintenance 8400 115
Hours
Quality Control 1,76,000 No. of 900 195
inspections
Machinery 7,20,000 No. of machine 24000 30
hours
Statement showing cost of batch of components AX-15
Particulars Amount₹
BCCA
Material Cost 1,30,000
Labour 2,45,000
Prime cost 3,75,000
(+) Overheads: 13,702
Material Orders(26x527)
Material Handling(18x367) 6,606
Set-up(25x798) 19,950
Maintenance hrs (690x115) 79,350

Quality Control (28x195) 5,460
Machine hrs (1800x30) 54,000
Total Cost 5,54,068
QUESTION 2
A company produces four products, viz. P, Q, R, and S. The data relating to production activity are as
under
Product Quantity of Material Direct labour Machine hours Direct labour
production cost/unit Rs hours/unit /unit cost/ unit Rs
P 1,000 10 1 0.50 6
Q 10,000 10 1 0.50 6
R 1,200 32 4 2.00 24
S 14,000 34 3 3.00 18
Production overheads are as under:

1) Overheads applicable to machine oriented activity: 1,49,700
2) Overheads relating to ordering materials 7,680

3) Set up costs 17,400
4) Administration overheads for spare parts 34,380
5) Material handling costs 30,294
The following further information have been compiled:

Product No. of set up No. of materials orders No. of times No. of spare parts
materials
handled
P 3 3 6 6
Q 18 12 30 15
R 5 3 9 3

BCCA
S 24 12 36 12
Required:
a. Select a suitable cost driver for each item of overhead expense and calculate the cost per unit of
Cost Driver.
b. Using the concept ABC, compute the factory cost per unit of each product.
Solution:
(i) Calculation of cost per unit of cost driver
Activity Activity Cost driver Cost driver No Cost driver Rate
cost
Machine 1,49,700 Machine hours 49,900 ₹ 3 per hour
oriented
Ordering 7,680 Material orders 30 ₹ 256 per order
materials
Set up costs 17,400 No of setups 50 ₹ 348 per set up
Administration 34,380 No of spare parts 36 ₹ 955 per spare part
overheads for
spare parts
Material 30,380 No of times 81 ₹ 374 per material
handling costs material handled handling
(ii) Statement showing computation of factory cost per unit of each product
Particulars P Q R S
Material cost 10,000 1,00,000 38,400 4,76,000
(+) Direct labour 6000 60,000 28,800 52,000

Prime Cost 16,000 1,60,000 67,200 7,28,000
(+) Overheads
Machine Oriented 1,500 15,000 7,200 1,26,000
Ordering material 768 3,072 768 3,072
Setup cost 1,044 6,264 1,740 8,352
Spare parts 5,730 14,325 2,865 11,460
Material handling cost 2,244 11,220 3,366 13,464
Factory Cost 27,286 2,09,881 83,139 8,90,348
No of units 1,000 10,000 1,200 14,000
Factory cost per unit 27.286 20.881 69.2825 63.5960

Relevant data relating to Trident Industries Limited are:
BCCA
Particulars Products
P Q R Total
Production and Sales (Units) 60,000 40,000 16,000
Raw Material Usage (in Units) 10 10 22
Raw Material Costs (₹) 50 40 22 24,76,000
Direct Labour Hours 2.5 4 2 3,42,000
Machine Hours 2.5 2 4 2,94,000
Direct Labour Costs (₹) 16 24 12
No. of Production Runs 6 14 40 60
No. of Deliveries 18 6 40 64
No. of Receipts 60 140 880 1080
No. of Production Orders 30 20 50 100
Overheads: ₹
Set-up 60,000
Machines 15,20,000
Receiving 8,70,000
Packing 5,00,000
Engineering 7,46,000
The Company operates a JIT inventory policy and receives each component once per production run.
Required:
(i) Compute the product cost based on direct labour hour recovery rate of overheads.
(ii) Compute the product cost using Activity Based Costing.
Solution:
i) Computation of overhead rate based on direct labour hour hours
P 60,000 2.5 150000
Q 40,000 4 160000
R 16,000 2 32000
Total 342000
Total Overheads = 60,000 + 15,20,000 + 8,70,000 + 5,00,000 + 7,46,000 = 36,96,000
Overhead rate per direct labour hour = 36,96,000/3,42,000 = 10.807 = 10.81Product Cost based on
direct labour recovery rate:

Particulars P Q R
Raw Material 50 40 22
Overheads @ ₹ 10.81 per hour
2.5 × 10.81 27.03
4 × 10.81 43.24
2 × 10.81 21.62
ii) Cost Driver Rates:

BCCA
Nature of Overhead Total Quantity Activity Driver Cost Driver Rate ₹/
Overhead cost (₹) of activity unit of Cost driver
Driver
Set-up 60,000 60 Production Runs 1000
Machines 15,20,000 294000 Machine Hours 5.17
Receiving 8,70,000 1080 No. of Receipts 805.56
Packing 5,00,000 64 No. of Deliveries 7812.5
Engineering 7,46,000 100 No. of Production 7460
Orders
Total
Overhead allocation to products based on Activity Based Costing: (Total Value for Production units
Basis)
Based on the whole production figures,
Particulars P Q R
Production units Raw Material Direct Labour 60,000 40,000 16,000
30,00,000 16,00,000 3,52,000
9,60,000 9,60,000 1,92,000
Overheads Set-up @ ₹ 1000 per hour production
run 6000
1000x6 14,000
1000x14 40,000
1000x40
Machines @ ₹ 5.17 per machine hour
2.5x60,000x5.17 7,75,500 4,13,600
2x40,000x5.17 3,30,880
4x16,000x5.17
Receiving @ 805.56 per receipt 60x805.56
140x805.56 48,333.60 1,12,778.40
880x805.56 7,08,892.80
Packing @ 7812.5 per delivery 18x7812.5
6x7812.5 1,40,625 46,875
40x7812.5 3,12,500
Engineering @ 7460 per production order 30 x
7460 2,23,800 1,49,200
20 x 7460 3,73,000
50x7460
Total Overhead Cost 11,94,258.60 7,36,453.40 17,65,272.80
Total Cost 51,54,258.60 32,96,453.40 23,09,272.80
Note: Depreciation, being apportionment of non-cash capital cost, is ignored in decision- making. Tax
saving on Depreciation is not considered in the above analysis.

State with brief reason whether you would recommend an Activity Based Costing system is each
of the following independent situations:

BCCA
1. A consultancy firm consisting of Lawyers. Accountants and Computer Engineers provides
management consultancy services to clients.
2. Company X produces one product. The overhead costs mainly consist of Depreciation.
3. Company Z produces two different labour intensive products. The contribution per unit in both
products is very high. The BEP is very low. All the work is carried on efficiently to meet target
costs.
4. Company Y produces 4 different products using different production facilities.
Solution:
i. ABC system uses the cost of activities as the basis for assigning cost of services to jobs which
provides more accurate cost information for services. Hence ABC can be used for the consultancy
firm.
ii. ABC is needed by organizations for product costing where there is a great diversity in product
range. Since company X produces only one product, ABC is not necessary. Moreover overhead
consists of mainly depreciation. ABC is not required.
iii. Company Z is highly labour intensive and does not have a great diversity of products. All work is
carried out efficiently, hence ABC is not required. Moreover Target costs are achieved, N VA
activities have already been identified and eliminated.
iv. There is diversity in product range which use different amounts of OH resources as different
production facilities are involved. ABC improves product costing by avoiding over or under costing
of products. ABC system is recommended.
JUST IN TIME (JIT)
JUST-IN-TIME (JIT)
Just in time (JIT) is a ‘pull’ system of production,
Demand-pull enables a firm to produce only what is
required. This means that stock levels can be kept to a
minimum.
The JIT Strategy
JIT approach to inventory can often cut costs
significantly
Advantages of Just-In-Time System
i. Just-in-time manufacturing keeps stock holding costs to a bare minimum.
ii. Just-in-time manufacturing eliminates waste.
iii. High quality products and greater efficiency can be derived.
iv. Constant communication with the customer results in high customer satisfaction.
v. Over production is eliminated, when just-in-time manufacturing is adopted.
Disadvantages:
i. Re-working very difficult.
ii. There is a high reliance on suppliers.
iii. The organization would not be able to meet an unexpected increase in orders.
iv. Transaction costs would be relatively high
BCCA

Prism Ltd. has decided to adopt JIT policy for materials. The following effects of JIT policy
are identified:
1. To implement JIT, the company has to modify its production and material receipt facilities at a
capital cost of Rs. 2,00,000. The new machine will require a cash operating cost Rs. 2,16,000 p.a.
The capital cost will be depreciated over 10 years.
2. Raw material stockholding will be reduced from Rs. 40,00,000 to Rs. 15,00,000.
3. The company can earn 12% on its long-term investments.
4. The company can avoid rental expenditure on storage facilities amounting to Rs. 66,000 per annum.
Property Taxes and Insurance amounting to Rs. 44,000 will be saved due to JIT programme.
5. Presently there are 7 workers in the Store department at a salary of Rs. 10,000 each per month.
After implementing JIT scheme, only 4 workers will be required in this department. Balance 3
workers’ employment will be terminated.
6. Due to receipt of smaller lots of Raw Materials, there will be some disruption of production. The
costs of stockouts are estimated at Rs. 1,54,000 per annum.
7. Since the supplier is new having no reputation as yet in the market, an additional inspection cost of
Rs. 12,000 p.a. has to be incurred.
Required:
Determine the financial impact of the JIT policy. Is it advisable for the company to implement JIT
system?
Solution:
Cost-Benefit Analysis of JIT policy.
Costs Rs. Benefits Rs.
Interest on capital for 24000 Interest on investment on released 300000
funds
modifying production facilities 216000 (Rs. 40,00,000 – Rs. 15,00,000) x
(Rs. 2,00,000 x 12%) 12%
Operating Costs of new Nil Saving in salary of 3 workers 360000
production facilities terminated
Depreciation of new production 154000 (Rs. 10,000 x 12 months x 3)
facilities
Stock-Outs costs (given) 12000 Saving in rental Expenditure 66000
Inspection cost
Saving in Property Tax & Insurance 44000
Net benefit due to JIT policy 364000
Total 770000 Total 770000

Conclusion: The JIT policy may be implemented, as there is a Net Benefit of Rs. 82000 per annum.
QUESTION 6
B Ltd. has decided to adopt JIT policy for materials. The following effects of JIT policy are
identified-

BCCA
a. To implement JIT, the company has to modify its production and material receipt facilities at a
capital cost of ₹10,00,000. The new machine will require a cash operating cost ₹1,08,000 p.a. The
capital cost will be depreciated over 5 years.
b. Raw material stockholding will be reduced from ₹40,00,000 to ₹10,00,000.
c. The company can earn 15% on its long-term investments.
d. The company can avoid rental expenditure on storage facilities amounting to ₹33,000 per annum.
Property Taxes and insurance amounting to ₹22,000 will be saved due to JIT programme.
e. Presently there are 7 workers in the store department at a salary of ₹5,000 each per month. After
implementing JIT scheme, only 5 workers will be required in this department. Balance 2 workers’
employment will be terminated.
f. Due to receipt of smaller lots of Raw Materials, there will be some disruption of production. The
costs of stockouts are estimated at ₹77,000 per annum.
Determine the financial impact of the JIT policy. Is it advisable for the company to implement JIT
system₹
Solution:
Cost-Benefit Analysis of JIT policy
Cost Amount₹ Benefit Amount₹
Interest on capital for 1,50,000 Interest on investment on released 4,50,000
modifying production funds (₹40,00,000-₹10,00,000)
facilities ×15%
(₹10,00,000×15%)
Operating Costs of new 1,08,000 Saving in salary of 2 workers 1,20,000
production facilities terminated
(₹5,000×12 months×2)
Depreciation of new Nil Saving in rental Expenditure 33,000
production
Facilities
Stock-Outs Costs (given) 77,000 Saving in Property Tax & Insurance 22,000
Conclusion:
The JIT policy may be implemented, as there is a Net Benefit of ₹2,90,000 per annum.
Note: Depreciation, being apportionment of capital cost, is ignored in decision-making, Tax Saving on
Depreciation is not considered in the above analysis.
ENTERPRISE RESOURCE PLANNING (ERP)
Enterprise Resource Planning (ERP)

Enterprise resource planning software or ERP attempts to integrate all departments and functions
across a company into a single computer system that can serve all those different departments
particular needs.
Features of Enterprise Resource Planning
i. ERP perform core activities and increases customers service.
ii. ERP bridge the information gap across organisations.
iii. ERP provides complete integration of system not only across departments but also across
companies under the same management.

BCCA
iv. ERP is the solution for better project management.
v. ERP eliminates most business problems like materials shortages, productivity enhancements,
customer service, cash management, inventory problems, quality problems, prompt delivery etc.
BENCH MARKING
Bench Marking
Traditionally control involves comparison of the actual results with an established standard or target.
The practice of setting targets using external information is known as ‘Bench marking’.
Benchmark is the continuous process of enlisting the best practices in the world.
The different types of Benchmarking are:
1. Product Benchmarking (Reverse Engineering)
2. Competitive Benchmarking
3. Process Benchmarking
4. Internal Benchmarking
5. Strategic Benchmarking
6. Global Benchmarking
Stages in the process of Bench Marking
The process of benchmarking involves the following stages:
Stage Description
1 Planning -
a. Determination of Benchmarking goal statement,
b. Identification of best performance
c. Establishment of the benchmarking or process improvement team, and
d. Defining the relevant benchmarking measures
2 Collection of Data and Information
3 Analysis of the findings based on the data collected in Stage
4 Formulation and implementation of recommendations
5 Constant monitoring and reviewing
Pre-requisites of Bench Marking
1. Commitment
2. Clarity of Objectives
3. Appropriate Scope
4. Resources
5. Skills
6. Communication

BCCA
5. COST OF QUALITY AND TQM
TOTAL QUALITY MANAGEMENT (TQM)
Total Quality Management is a philosophy of continuously improving the quality of all the products and
processes in response to continuous feedback for meeting the customers’ requirements
Total Quality involves everyone and all activities in the company (Mobilizing the whole
organization
to achieve quality continuously and economically)
Quality Understanding and meeting the customers’ requirements. (Satisfying the customers
first time
every time)
Management Quality can and must be managed (Avoid defects rather than correct them)
Steps in Total Quality Management:
Step 1: Identification of customers/customer groups:
Through a team approach (a technique called Multi-Voting), the Firm should identify major customer
groups. This helps in generating priorities in the identification of customers and critical issues in the
provision of decision-support information.
Step 2: Identifying customer expectations
Once the major customer groups are identified, their expectations are listed. The question to be
answered is - What does the customer expect from the Firm?
Step 3: Identifying customer decision-making requirements and product utilities
By identifying the need to stay close to the customers and follow their suggestions, a decision- support
system can be developed, incorporating both financial and non-financial and non-financial information,
which seeks to satisfy user requirements. Hence, the Firm finds out the answer to - What are the
customer’s decision-making requirements and product utilities? The answer is sought by listing out
managerial perceptions and not by actual interaction with the customers.
Step 4: Identifying perceived problems in decision-making process and product utilities
Using participative processes such as brainstorming and multi-voting, the Firm seeks to list out its
perception of problem areas and shortcomings in meeting customer requirements. This will list out
areas of weakness where the greatest impact could be achieved through the implementation of
improvements. The Firm identifies the answer to the question - What problem areas do we perceive
in the decision-making process?
Step 5: Comparison with other Firms and benchmarking
Detailed and systematic internal deliberations allow the Firm to develop a clear idea of their own
strengths and weaknesses and of the areas of most significant deficiency. Benchmarking exercise
allows the Firm to see how other Companies are coping with similar problems and opportunities.

BCCA
Step 6: Customer Feedback
Steps 1 to 5 provide a information base developed without reference to the customer. This is rectified
at Steps 6 with a survey of representative customers, which embraces their views on perceived
problem areas. Interaction with the customers and obtaining their views helps the Firm in correcting
its own perceptions and refining its processes.
Steps 7 & 8: Identification of improvement opportunities and implementation of Quality
Improvement Process
The outcomes of the customer survey, benchmarking and internal analysis, provides the inputs for
Steps 7 and 8, i.e. the identification of improvement opportunities and the implementation of a formal
improvement process. This is done through a six-step process called PRAISE, for short.
SIX SIGMA
Six Sigma has two key methodologies: DMAIC and DMADV, both inspired by W. Edwards Deming’s Plan-
Do-Check- Act Cycle: DMAIC is used to improve an existing business process, and DMADV is used to
create new product or process designs for predictable, defect-free performance.
DMAIC
Basic methodology consists of the following five (5) steps:
1) Define the process improvement goals that are consistent with customer demands and enterprise
strategy.
2) Measure the current process and collect relevant data for future comparison.
3) Analyze to verify relationship and causality of factors. Determine what the relationship is, and
attempt to ensure that all factors have been considered.
4) Improve or optimize the process based upon the analysis using techniques like Design of
Experiments.
5) Control to ensure that any variances are corrected before they result in defects. Set up pilot runs
to establish process capability, transition to production and thereafter continuously measure the
process and institute control mechanisms.
DMIADV
Basic methodology consists of the following five steps:
1) Define the goals of the design activity that are consistent with customer demands and enterprise
strategy.
2) Measure and identify CTQs (critical to qualities), product capabilities, production process
capability, and risk assessments.
3) Analyze to develop and design alternatives, create high-level design and evaluate design capability
to select the best design.
4) Design details, optimize the design, and plan for design verification. This phase may require
simulations.
5) Verify the design, set up pilot runs, implement production process and handover to process owners.

BCCA
Some people have used DMAICR (Realize). Others contend that focusing on the financial gains realized
through Six Sigma is counter-productive and that said financial gains are simply by products of a good
process improvement.
QUALITY COSTS
Cost of Quality
a) The reason quality has gained such prominence is that organizations have gained an understanding
of the high cost of poor quality.
b) Quality affects all aspects of the organization and has dramatic cost implications.
c) However, quality has many other costs, which can be divided into two categories
Cost of quality
1st 2nd
Categories Categories
The second category consists of

It consists of costs necessary for the cost consequences of poor
achieving high quality, which are quality,
called quality control costs. These
are of two types which are called quality failure
costs. These include
external internal
prevention appraisal
failure failure
costs costs
costs costs
Hence, we can tabulate the above details with suitable examples as below:
Prevention costs Ensuring the failures do not happen

(are all costs incurred inExample:
the process of preventing Quality training
poor quality from occurring) Quality circles
Statistical process control activities
System Development for prevention
Quality improvement

BCCA
Appraisal costs Checking for failures
(are incurred in the process Example:
of uncovering defects) Testing and inspecting materials
Final product testing and inspecting
WIP testing and inspecting
Package inspection
Depreciation of testing equipment
Internal failure costs Keeping defective products from falling into the hands of customers
(are associated with Example:
discovering poor product Cost of Scrap (net of realization)
quality before the product Cost of Spoilage
reaches the customer site.) Cost of Rework
Down time due to defect in quality
Retesting
External failure cost Costs of defects discovered by the customers
(are incurred when inferior Example:
products are delivered to Cost of field servicing
customers) Cost of handling complaints
Warranty repairs
Lost sales
Warranty replacements

Nikee Ltd. manufactures and sells one variety of sports-shirt in India. Noted football clubs and
supporters of these clubs are the main customers. Nikee's products show some rectifiable defects.
These problems can generally be detected and repaired during internal inspection at a cost of ₹ 15 per
unit.
During 2016, 50000 shirts were produced and sold. After inspection defect was detected in respect
of 5% of output. Inspection cost is ₹25 per shirt. After sales, customers reported defects in respect
of 6% of output. These shirts were received back from customers at a transportation cost of ₹8 per
unit. Because of negative publicity due to defects, there would be loss of sales in 2017 to the extent
of 5% of external failures.
Required:
a. Analyse costs of quality showing separately (with workings) the:
i. Inspection or appraisal cost
ii. Internal failure cost
iii. External failure cost
iv. Opportunity cost due to external failure, and
v. Total costs of quality
b. If the selling price per shirt is ₹250 and variable cost is 60% of sales, fixed cost ₹5,50,000 p.a.,
prepare a statement showing profitability of the product during 2016.

BCCA
Solution:
Statement of Costs of Quality
Particulars ₹
(a) Inspection or Appraisal Cost ( ₹ 25 × 50,000 shirts) 12,50,000
(b) Internal failure (re -work) cost (5% × 50,000 × ₹ 15) 37,500
(c) External failure cost (i.e., transportation + re-work cost) [6% × 50,000 × (₹ 39,000
8 + 15)]
(d) Opportunity cost (i.e., loss of contribution) [10% × (5% × 50,000) × (₹ 250 × 25,000
40%)]
Total Quality Cost 13,51,500
Profitability statement
Particulars ₹
Sales (50,000 × ₹ 250) 1,25,00,000
Less: Variable Cost (60%) 75,00,000
Contribution 50,00,000
Less: Quality Cost (as above) 13,51,500
Contribution, net of quality costs 36,48,500
Less: Fixed Cost 10,00,000
Net Profit 26,48,500

The following is the information regarding turnover and quality cost of a company.
i. Sales revenue Rs. 10,000,000; net income Rs. 10,00,000
ii. During the year, customers returned 30000 units needing repair. Repair cost averages Rs. 7 per
unit.
iii. Six inspector are employed, each earning an annual salary of Rs. 25,000. These six inspectors
are involved only with final section (Production acceptance).
iv. Total scrap is 30000 units. All scrap is quality related. The cost of scrap is about Rs. 15 per unit.
v. Each year, approximately 150000 units are rejected in final inspection. Of these units, 80 per
cent can be recovered through rework. The cost of rework is Rs. 3.00 per unit.
vi. A customer cancelled an order that would have increased the profits by Rs. 2,50,000. The
customer’s reason for cancellation was poor product performance. The accounting and marketing
departments agree that the company loses at least this much during the year for the same
reason.
vii. The company employs five full time employees in its complaint department. Each earns Rs. 20,000
a year.
viii. The company gave sales allowances totaling Rs. 1,30,000 due to substandard products being sent
to the customer.
ix. The company requires all new employees to take in three hour Quality- Training programme. The
estimated cost for the programme is Rs. 80,000.
x. Inspection of the final product requires testing equipmenet. The annual cost operating and
manufacturing this equipment is Rs. 1,20,000.

BCCA
Required:
Prepare a simple quality cost report classifying costs by rational category.
Solution:
Particulars Quality Costs Percentage of sales

1) Prevention costs
Quality training 80,000 0.8%
2) Appraisal costs:
Product inspection 150,000
Test equipment 120,000
270,000 2.7%
3) Internal failure costs:
Scrap 450,000
Rework 360,000
810,000 8.1%
4) External failure costs:
Repair 210,000
Order cancellation 250,000
Customer complaints 100,000
Sales allowance 130,000
690,000 6.9%
Total quality costs (1 to 4) 1,850,000 8.5%

1 SCM

Uploaded by

Copyright:

Available Formats

1 SCM

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1 SCM

Uploaded by

Copyright:

Available Formats

BCCA

Section A: Cost Management 20%

STRATEGIC COST MANAGEMENT

In order to achieve the above, cost have to be managed strategically.

1|Page CMA FINAL - SCM CA CMA RAVI KUMAR

SOURCES FOR SUSTAINABILITY ADVANTAGE

Product differentiation is a marketing strategy designed to distinguish a company's products or

In business strategy, cost leadership is establishing a competitive advantage by having the

2|Page CMA FINAL - SCM CA CMA RAVI KUMAR

1.1 Life Cycle Costing

1.2 Target Costing

1.3 Kaizen Costing

1.4 Value Analysis and Value Engineering

1.5 Throughput Costing

1.6 Business Process Re-engineering

1.7 Back – flush Accounting

1.8 Lean Accounting

1.9 Socio Economic Costing

1.10 Cost Control and Cost Reduction

1.1 LIFE CYCLE COSTING

1|Page CMA FINAL - SCM CA CMA RAVI KUMAR

longer offered for the product.

For motor vehicles, this time-span may range from 5 to 7 years.

3. Phases in Product Life Cycle

2|Page CMA FINAL - SCM CA CMA RAVI KUMAR

QUESTION 2 (JUNE 2017)

Manufacturing costs ₹ 125 per unit

Selling costs ₹ 12,500 per year + ₹ 100 per unit

Administration costs ₹ 50,000 per year

Warranty expenses 5 replacement parts per 25 units at ₹ 10 per part, 1

Statement showing 'Kent's Life Cycle Cost (80,000 Units)

Particulars Amount (₹)

Manufacturing Costs (₹125 × 80,000 units) 1,00,00,000

Selling Costs (₹100 × 80,000 units + ₹ 12,500 × 4) 80,50,000

Administration Costs (₹ 50,000 × 4) 2,00,000

(80,000 units / 25 units × 5 parts × ₹ 10) 1,60,000

(80,000 units / 500 units × 1 visit × ₹ 500) 80,000

Total cost 1,95,15,000

Statement showing 'Kent's Life Cycle Cost (1,00,000 Units)

Particulars Amount (₹)

Manufacturing Costs (₹125 × 1,00,000 units) 1,25,00,000

Selling Costs (₹100 × 1,00,000 units + ₹ 12,500 × 4) 1,00,50,000

4|Page CMA FINAL - SCM CA CMA RAVI KUMAR

(1,00,000 units / 25 units × 5 parts × ₹10) (1,00,000 units / 500 2,00,000

Total cost 2,40,75,000

Statement showing "Kent's Life Time Profit"

Particulars Amount (₹) Amount (₹)

80,000 units 100,000 units

Sales (80,000 × ₹ 300) (1,00,000 × ₹ 255) 2,55,00,000

Less : Total Cost 1,95,15,000 2,40,75,000

Profit 44,85,000 14,25,000

QUESTION 3 (DEC 2022)

5|Page CMA FINAL - SCM CA CMA RAVI KUMAR

Calculation of Equivalent Annual Cost of New Machine Amount (₹)

Cost of New Machine 90,000

Total present value of life cycle costs of new machine 1,28,335

Equivalent Annual cost = ₹ 1,28,335/4.4873 = ₹ 28,600

Calculation of Equivalent Annual cost in continuing with Existing Machine

1st Year Amount (₹ )

P.V. of salvage value at the beginning of 1st year 40,000