45 Case Study Theory Questions for CA Final Costing

45 Case Study Theory Questions for CA Final Costing

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Drum – Buffer –Rope – Theory of Constraints

When there is an internal constraint, there are very few resources (people, machines,equipment, materials) dictating the output of the system. The most limiting resource isreferred to as the ‘Drum’ as it determines the pace or ‘beat’ of the entire system. Decidehow to Exploit the System’s Constraint(s), the constraint resource cannot be allowed towaste one moment of its capacity. This means that it should never be stopped waiting forparts and should not use capacity producing anything other than the parts required to fulfillsales orders. To ensure this we finitely schedule the Drum creating a Drum Schedule. TheDrum schedule should maximise the Throughput of the Constraint and provide a detailedplan for just this one area. The Drum Schedule must be derived from the Shipping Schedule.

Subordinate everything else to the above decisions, there are a number of actions thathave to be met by the non-constraints in the system in order to meet the Drum Scheduleand ultimately the shipping schedule. Understanding that we have to protect theconstraint from lost capacity due to these breakdowns, a Buffer of time is used. TheConstraint buffer is a pre-determined length of time; we must release the order into thesystem before the order is due on the Drum Schedule. As all other resources have morecapacity than the constraint (by definition), the effect of introducing parts a buffer timebefore they are due at the constraint is that work builds up in front of the constraint andprotects it from breakdowns on preceding operations.

To ensure that too much inventory is not introduced into the system, it is important to starta new order only as the constraint finishes one. To ensure this, a Rope is tied to the first(gating) operation of the system. This is calculated by the date the order appears on theDrum Schedule minus the Constraint Buffer time giving a schedule for material release intothe system. We have now “choked” the release of work into the system.

To ensure the Shipping Schedule is met after meeting the Drum Schedule a rope is tiedfrom the Drum to the Shipping Schedule. The rope length is a buffer of time to ensure theshipping schedule is always met; this is called the shipping buffer.

This “choking” of release results in excess capacity being revealed in the non-constraints in



front of and behind the Drum. This can have negative ramifications and must be properlyhandled in implementation; otherwise non-constraint resources will slow down to protectthemselves from perceived negative consequences of not being busy all the time. This will ofcourse impact Throughput and delivery performance.

Watch Throughput Accounting Video on SJC Website for Practicals

Total Quality Management

Eight Dimensions of Quality

Performance: Performance refers to a product’s primary operating characteristics.1.This dimension of quality involves measurable attributes; brands can usually be rankedobjectively on individual aspects of performance.Features: Features are additional characteristics that enhance the appeal of the2.product or service to the user.Reliability: Reliability is the likelihood that a product will not fail within a specific3.time period. This is a key element for users who need the product to work without fail.Conformance: Conformance is the precision with which the product or service meets4.the specified standards.Durability: Durability measures the length of a product’s life. When the product can5.be repaired, estimating durability is more complicated. The item will be used until it isno longer economical to operate it. This happens when the repair rate and theassociated costs increase significantly.Serviceability: Serviceability is the speed with which the product can be put into6.service when it breaks down, as well as the competence and the behavior of theserviceperson.Aesthetics: Aesthetics is the subjective dimension indicating the kind of response a7.user has to a product. It represents the individual’s personal preference.Perceived Quality: Perceived Quality is the quality attributed to a good or service8.based on indirect measures.



Question 1

Quality products can be determined by using a few of the dimensions of quality. Identifythe following under the appropriate dimension:

Consistency of performance overPrimary product characteristicExterior finish of a product

Useful life of a product

Solution

Quality of Products with Appropriate Dimension

Sl. No Quality of Products (Examples) Dimension(i) Consistency of performance over time Reliability(ii) Primary product characteristics Performance(iii) Exterior finish of a product Aesthetics(iv) Useful like of a product Durability

Question 2

Classify the following items under appropriate categories of equality costs viz. Prevention

Costs, appraisal Cost, Internal Failure Costs and External Failure costs:

(i) Rework

(ii) Scrap

(iii) Warranty Repairs



(iv) Revenue loss

(v) Repair to manufacturing equipment

(vi) Discount on defective sale

(vii) Establishment of quality circles

(viii) Packaging inspection

Solution

(i) Rework —– Internal Failure(ii) Scrap —– Internal Failure(iii) Warranty Repairs —– External Failure(iv) Revenue Loss —– External Failure(v) Repairs to Manufacturing Equipment —– Internal Failure(vi) Discount on Defective Sales —– External Failure(vii) Establishment of Quality Circles —– Prevention Cost(viii) Packaging Inspection —– Appraisal Cost

Question 3

A Ltd. is going to introduce Total Quality Management (TQM) in its company. Statewhether and why the following are valid or not for the successful implementation of TQM.

Some departments serve both the external and internal customers. These departmentshave been advised to focus on satisfying the needs of the external customHold a training program at the beginning of a production cycle to ensure the implementation of TQM.Implement Management by Objectives for faster achievement of

Appoint the Head of each department as the person responsible to develop improvement strategies and performance measures.Eliminate wastage of time by avoiding documentation and procedures.



Solution

Point Valid/Invalid Reason

(i) InvalidTQM advocates focus to be given on both external and internal customers. Hence, focus satisfying the needs of the externalcustomers only will not be valid for the successful implementation ofTQM.

(ii) ValidTraining at the beginning would improve productivity by bringing standardization in work habits and eliminating variations inproduction.

(iii) InvalidFor implementation of TQM, Management by Objectives should beeliminated as targets of production will encourage delivery of poorquality goods and thus will defeat the collective nature of TQM.

(iv) InvalidAppointing the head of each department as the responsible person isnot valid for the successful implementation of TQM as TotalEmployee Involvement (TIE) principle is an important part of TQM.

(v) InvalidDocumentation, procedures and awareness of current best practiceare essential in TQM implementation. If documentation andprocedures are in place then only improvement can be monitored &measured and consequently deficiency can be corrected.

Activity Based Costing

Question 4

State with a brief reason whether you would recommend an activity based system of costingin each of the following independent situations:

Company K produces one product. The overhead costs mainly consist of depreciation.1.Company L produces 5 different products using different production facilities.2.A consultancy firm consisting of lawyers, accountants and computer engineers3.provides management consultancy services toCompany S produces two different labour intensive products. The contribution per unit4.



in both products is very high. The BEP is very low. All the work is carried on efficientlyto meet the target costs.

Solution

Sl.No Description Recommend

ABC (Yes / No) Reasons

(i)K produces oneproduct. Overhead ismainly depreciation.

No One product situation. For allocation of overhead, ABC is not required. ABC for cost reduction not beneficialsince most of the overhead is depreciation.

(ii)L produces 5 differentproducts withdifferent facilities.

Yes

Multi product situation. ABC isrequired for allocation of overhead. ABC is necessary for pricing. Cost drivers are likely to be different. Cost reduction may be possible. Production facilities are different.

(iii)Professional services– lawyers // accountants /computer engineers.

Yes

Variety of services. Hence ABC isrequired for cost allocation. Services are very different. ABC is necessary for pricing. Cost reduction possible.

(iv)

S produces 2different labourintensive products.High unitcontribution andefficient operations.

No

Different products, but labour intensive. Hence, overheadallocation based on readily traceable direct labour cost will be accurate. Hence,ABC not required for cost allocation. Low BEP level implies low level offixed cost as a % of sale price or as a% of total cost. Many fixed cost activity drivers arelikely to align with the direct labour costs.Hence not required for cost allocation. Efficient operation. Hence ABC notrequired even for cost reduction or ABCmanagement.



Question 5

State whether each of the following independent activities is value-added or non-value-added:

Polishing of furniture used by a systems engineer in a softwareMaintenance by a software company of receivables management software for a banking companPainting of pencils manufactured by a pencil factorCleaning of customers’ computer key boards by a computer repairProviding, brake adjustments in cars received for service by a car service

Solution

Sl.No Item Value Added /

Non Value Added

(i) Polishing furniture used by a Systems Engineer in a software firm.

Non-ValueAdded

(ii) Maintenance by a software company of receivables managementsoftware for a banking company. Value-Added

(iii) Painting of pencils manufactured by a pencil factory. Value-Added

(iv) Customers’ computer key board cleaning by a computer repair centre. Value-Added

(v) Providing brake adjustments in cars for repairs by a care servicestation. Value-Added

Target Costing> Kaizen Costing

Question 6

M. India Ltd. (MIL) is an automobile manufacturer in India and a subsidiary of1. Japanese automobile and motorcycle manufacturer Leon. It manufactures and sells acomplete range of cars from the entry level to the hatchback to sedans and has a



present market share of 22% of the Indian passenger car markets. MIL uses a systemof standard costing to set its budgets. Budgets are set semi-annually by the Financedepartment after the approval of the Board of Directors at MIL. The Financedepartment prepares variance reports each month for review in the Board of Directors meeting, where actual performance is compared with the budgetedfigures. Mr. Suzuki, group CEO of the Leon is of the opinion that Kaizen costing method should be implemented as a system of planning and control in theMIL.

Required

Recommend key changes vital to MIL’s planning and control system to support the adoptionof ‘Kaizen Costing Concepts’.

Solution

Kaizen Costing emphasizes on small but continuous improvement. Targets once set atthe beginning of the year or activities are updated continuously to reflect the improvementthat has already been achieved and that are yet to be achieved.

The suggestive changes which are required to be adopted Kaizen Costing concepts in MILare as follows:

Standard Cost Control System to Cost Reduction System: Traditionally Standard Costing system assumes stability in the current manufacturing process and standards areset keeping the normal manufacturing process into account thus the whole effort is on to meet performance cost standard. On the other hand Kaizen Costingbelieves in continuous improvements in manufacturing processes and hence, the goal isto achieve cost reduction target. The first change required is the standard setting methodology i.e. from earlier Cost Control System to Cost Reduction System.

Reduction in the periodicity of setting Standards and Variance Analysis: Under theexisting planning and control system followed by the MIL, standards are set semi-annually and based on these standards monthly variance reports are generated for analysis. But under Kaizen Costing system cost reduction targets are set for small periods say for aweek or a month. So the period covered under a standard should be reduced from semi-annually to monthly and the current practice of generating variance reports may be



continued or may be reduced to a week.

Participation of Executives or Workers in standard setting: Under the Kaizen Costingsystem participation of workers or executives who are actually involved in themanufacturing process are highly appreciated while setting standards. So the currentsystem of setting budgets and standards by the Finance department with the mere consentof Board of Directors required to be changed.

Question 7

ABC Ltd. is planning to introduce Kaizen Costing approach in its manufacturing plant.State whether and why the following are Valid or Not in respect of Kaizen Costing.

VP (Finance) is of the view that company has to make a huge initial investment tobring a large scale modification in production process.Head (Personnel) has made a point that introduction of Kaizen Costing does noteliminate the training requirement of emGeneral Manager (Manufacturing) firmly believes that only shop floor employees and workers’ involvement is prerequisite of Kaizen Costing approach.Manager (Operations) has concerns about creation of confusion among employees andworkers regarding their roles and degradation in quality of

Solution

Invalid: Kaizen Costing is the system of cost reduction procedures which involves making small and continuous improvements to the production processes rather than innovations or large-scale investmValid: The training of employees is very much a long-term and ongoing process in the

Kaizen costing approach. Training enhances the abilities of employees.

Invalid: Kaizen costing approach involves everyone from top management level to theshop floor employees. Every employee’s active participation is a must require

Invalid: Though the aim of Kaizen Costing is to reduce the cost but at the same time italso aims to maintain the quality. Kaizen costing also aims to bring the clarity inroles and responsibilities for all employees.



Life Cycle Costing

Question 8

Fiona is a news reporter and feature writer for an economic daily. Her assignment is to develop a feature article on ‘Product Life-Cycle Costing’, including interviews with the Chief Financial Officers (CFO) and Operating Managers. Fiona has been given aliberal budget for travel so as to research into company’s history, operations, and marketanalysis for the firm she selects for the article.

Required

Fiona has asked you to recommend industries and firms that would be good candidates forthe article. What would you advice? Explain your recommendations.

Solution

The product life cycle span the time from the initial R & D on a product to whencustomer service and support is no longer offered for that product.

Life Cycle Costing technique is particularly important when:

High percentage of total life-cycle costs are incurred before production begins and revenue are earned over several years andHigh fraction of the life cycle costs are locked in at the R & D and design stage

Fiona should identify those industries and then companies belonging to those industrieswhere above mentioned feature are prevalent. For example, Automobile and Pharmaceutical Industries companies like Tata Motors Ltd., Ranbaxy Laboratories Ltd.,and Dabur India Ltd. will be good candidates for study on product life cycle costing.

Cost Control Vs Cost Reduction



Question 9

Classify the following items under the more appropriate category: Category (CC) – CostControl Or Category (CR) – Cost Reduction:

(i) Costs exceeding budgets or standards are investigated.

(ii) Preventive function

(iii) Corrective function

(iv) Measures to standardize for increasing productivity

(v) Provision of proper storage facilities for materials.

(vi) Continuous comparison of actual with the standards set.

(vii) Challenges the standards set

(viii) Value analysis

Solution

Classification of Items under Cost Reduction (CR)/ Cost Control (CC)

Sl. No. Item CategoryCC/ CR

(i) Costs exceeding budgets or standards areinvestigated CC

(ii) Preventive function CC(iii) Corrective function CR(iv) Measures to standardize for increasing productivity CR(v) Provision of proper storage facilities for materials CC

(vi) Continuous comparison of actual with the standardsset CC



(vii) Challenges the standards set CR(viii) Value analysis CR

Value Chain Analysis- Porter’s Value Chain

Question 10

ABC Ltd. is engaged in business of manufacturing branded readymade garments. Ithas a single manufacturing facility at Ludhiana. Raw material is supplied by varioussuppliers.

Majority of its revenue comes from export to Euro Zone and US. To strengthen itsposition further in the Global Market, it is planning to enhance quality and provideassurance through long term warranty.

For the coming years company has set objective to reduce the quality costs in each of theprimary activities in its value chain.

Required

State the primary activities as per Porter’s Value Chain Analysis in the value chain of ABCLtd with brief description.

Solution

Primary activities are the activities that are directly involved in transforming inputs intooutputs and delivery and after-sales support to output. Following are the primary activitiesin the value chain of ABC Ltd.:-

Inbound Logistics: These activities are related to the material handling and warehousing. It also covers transporting raw material from the supplier to theplace of processing inside the factOperations: These activities are directly responsible for the transformation of raw material into final product for the delivery to the consumers.Outbound Logistics: These activities are involved in movement of finished goodsto the point of sales. Order processing and distribution are major part of these



activities.Marketing and Sales: These activities are performed for demand creation and customer solicitation. Communication, pricing and channel management aremajor part of these activities.Service: These activities are performed after selling the goods to the consuInstallation, repair and parts replacement are some examples of these activities.

Question 11

Examine the Validity of following statements along with the reasons:

The concepts, tools and techniques of value chain analysis apply only to all those organizations which produce and sell a producProcurement activities are included in the Primary activities as classified by Porter under value chain analysis cAs per Porter’s five forces model, bargaining power of buyers does influence theprofitability of an industry or mValue chain analysis in the strategic framework consists of single cost driver con

Solution

(i) Invalid

The concepts, tools and techniques of value chain analysis apply to organizationswhich produce and sell a product and also to organizations which provide a service.

(ii) Invalid

Procurement activities are included in the support activities rather than primaryactivities.

(iii) Valid

Bargaining power of buyers is one of the factor or force that influences the profitability of amarket or industry. More the bargaining power buyers have, more the pressure on theindustry to not increase the price of product or service. They may even have to reduce



the price sometimes.

(iv) Invalid

Value chain analysis in the strategic framework consists of multiple cost driversconcept. In value chain analysis, a set of unique cost drivers is identified for each valueactivity instead of single cost driver application at the overall firm level. Multiple costdrivers may be classified into Structural drivers and Executional drivers.

Question 12

Classify the following business activities into primary and support activities under valuechain analysis.

Material Handling and warehousing – PrimaryPurchasing of raw materials, supplies and other consumables – SupportOrder Processing and distribution – PrimarySelection, placement and promotion of employees – SupportInstallation, repair and parts replacement – PrimaryTransforming input into final products – PrimaryGeneral Management, Planning, finance, accounting – SupportCommunication, pricing and channel management – Primary

Just In Time

Question 13

Indian Petrons Ltd. (IPL) is a leading manufacturing company. Under increasing pressure to reduce costs, to contain inventory and to improve service, IPL’s Costing Department has recently undertaken a decision to implement a JIT System.

The management of IPL is convinced of the benefits of their changes. But Supplies Manager

Mr. Brian fears with the Costing Department’s decision. He said:

“We’ve been driven by suppliers for years … they would insist that we could only purchase



in thousands, that we would have to wait weeks, or that they would only deliver onMondays!”

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

Solution

“For successful operation of JIT inventory system, the suppliers chosen must be willing to make frequent deliveries in small lots. Rather than deliver a week’s or a month’smaterial at one time, suppliers must be willing to make deliveries several times a day andin the exact quantities specified by the buyer.”

It is described in the problem that suppliers are not willing to

– make frequent deliveries and

– make supplies in the exact quantities as required

Accordingly Mr. Brian’s doubt is correct on successful implementation of JIT System.

Pricing Policy/ Strategy

Question 14

Rapid Heal Tech Ltd. (RHTL) is a leading IT security solutions and ISO 9001 certified company. The solutions are well integrated systems that simplify IT security management across the length and depth of devices and on multiple platforms. RHTL has recently developed an Antivirus Software and company expects to have life cycle of less than one year. It was decided that it would be appropriate to adopt a marketskimming pricing policy for the launch of the product. This Software is currently in theIntroduction stage of its life cycle and is generating significant unit profits.



Required

(i) Explain, with reasons, the changes, if any, to the unit selling price that could occur when the Software moves from the Introduction stageto Growth stage of itslife cycle.

(ii) Also suggest necessary strategies at this stage.

Solution

Following acceptance by early innovators, conventional consumers start following theirlead. New competitors are likely to now enter the market attracted by the opportunities for large scale production and profit. RHTL may wish to discourage competitors from entering the market by lowering the price and thereby lowering the unit profitability. Theprice needs to be lowered so that the product becomes attractive to different marketsegments thus increasing demand to achieve the growth in sales volume.

Strategies at this stage may include the following

Improving quality and adding new features such as Data Theft Protection, Parental Control, Web Protection, Improved Scan Engine, Anti Spyware, Anti MalwareSourcing new market segments/ distribution channels.Changing marketing strategy to increase demaLowering price to attract price-sensitive buyers.

Question 15

State the appropriate pricing policy in each of the following independent situations:

‘A’ is a new product for the company and the market and meant for large scale production and long term survival in the market. Demand is expected to beelastic.



‘B’ is a new product for the company, but not for the market. B’s success is crucial forthe company’s survival in the long term.‘C’ is a new product to the company and the market. It has an inelastic market. Thereneeds to be an assured profit to cover high initial costs and the usual sources of capitalhave uncertainties blocking th‘D’ is a perishable item, with more than 80% of its shelf life over.

Solution

Situation Appropriate PricingPolicy

(i)‘A’ is a new product for the company and the market andmeant for large scale production and long term survivalin the market. Demand is expected to be elastic.

Penetration Pricing

(ii)‘B’ is a new product for the company, but not for themarket. B’s success is crucial for the company’s survivalin the long term.

Market Price or Price JustBelow Market Price

(iii)‘C’ is a new product to the company and the market. Ithas an inelastic market. There needs to be an assuredprofit to cover high initial costs and the unusual sourcesof capital have uncertainties blocking them.

Skimming Pricing

(iv) ‘D’ is a perishable item, with more than 80% of its shelflife over. Any Cash Realizable Value*

(*) this amount decreases every passing day.

Question 16

State the most appropriate pricing policy to be adopted in the following independentsituations:

Modern patented drug entering the markThe latest version of a mobile phone is being launched by an established, financially

strong company.



An established company has recently entered the stationery market segment andlaunched good quality paper for printing at home andA car manufacturer is launching an innovative, technologically advanced car in the highly priced seg

Solution

Situation Appropriate PricingPolicy

(i) Modern patented drug entering the market. Skimming Pricing

(ii) The latest version of a mobile phone is being launchedby an established, financially strong company. Penetration Pricing

(iii)An established company has recently entered thestationery market segment and launched good qualitypaper for printing at home and office.

Market Price

(iv)A car manufacturer is launching an innovative,technologically advanced car in the highly pricedsegment.

Skimming Pricing

Zero Based Budgeting

Question 17

In each of the following independent situations, state with a brief reason whether ‘ZeroBased

Budgeting’ (ZBB) or ‘Traditional Budgeting’ (TB) would be more appropriate for year II.

A company producing a certain product has done extensive ZBB exercise in year I. Theactivity level is expected to marginally increase in year II.

The sale manager of a company selling three products has intuitive feeling that in year



II, sales will increase for one product and decrease for the other two. His expectationcan not be substantiated with figu

The top management would like to delegate responsibility to the functional managers for their results during year II.

Resources are heavily constrained and allocation for budget requirements is very

Solution

The company has done extensive exercise in year-I that can be used as a basis forbudgeting in year-II by incorporating increase in costs / revenue at expected activity level. Hence, Traditional Budgeting would be more appropriate for the company in year-II.

In Traditional Budgeting system budgets are prepared on the basis of previous year’s budget figures with expected change in activity level and corresponding adjustment in the cost and prices. But under Zero Base Budgeting (ZBB) the estimations or projections are converted into figures. Since, sales manager isunable to substantiate his expectations into figures so Traditional Budgeting wouldbe preferred against Zero Base Budgeti

Zero Base Budgeting would be appropriate as ZBB allows top-level strategic goalsto be implemented into the budgeting process by tying them to specific functionalareas of the organization, where costs can be first grouped, then measured against previous results and current expectation

Zero Base Budgeting allocates resources based on order of priority up to the spendingcut-off level (maximum level upto which spending can be made). In an organisation where resources are constrained and budget is allocated onrequirement basis, Zero Base Budgeting is more appropriate method of budgeting.



Transfer Pricing –

Question 18

Fox-2-Tec Ltd (F2TL) has Division ‘Dx’ and Division ‘Dz’ with full profit responsibility. The Division ‘Dx’ produces Component ‘X’ which it sells to ‘outside’customers only. The Division ‘Dz’ produces a product called the ‘Z’ which incorporates Component ‘X’ in its design. ‘Dz’ Division is currently purchasing 2,500 units of Component ‘X’ per year from an outside supplier at a cost of ` 35 per unit, less a 10percent quantity discount. ‘Dx’ Division can sell its entire Component ‘X’ to outside customers at the normal ` 35 price. Costs associated with manufacturing of a unit ofComponent ‘X’ are as follows:

Variable Expenses ` 21

Fixed (based on a capacity of 25,000 units per year) ` 9

F2TL’s new managing director agrees for internal transfer if an acceptable transfer pricecan be worked out. Accordingly, he requires solution of following questions:-

If the ‘Dz’ Division purchases 2,500 units of Component ‘X’ per year from the ‘Dx’ Division, what price should control the transfers? Why?Refer to your computations in (1). What is the lower limit and the upper limit for a transfer price? Is an upper limit relevant in this situation?If the ‘Dx’ Division meets the price that the ‘Dz’ Division is currently paying to its supplier and sells 2,500 units of Component ‘X’ to the ‘Dz’ Division each year, whatwill be the effect on the profits of the ‘Dx’ Division, the ‘Dz’ Division, and the companyas a whole?If the intermediate market price for Component ‘X’ is ` 35 per unit, is there any reasonwhy the ‘Dx’ Division should sell to the ‘Dz’ Division for less than ` 35? Expla

Solution



(i) The transfer price should be `35 per unit, the regular price charged to othercustomers.

TransferPrice =

Variable Cost per unit + Lost ContributionMargin per unit onOutside Sales

==

`21 + `14`35

Since the ‘Dx’ Division is operating at capacity, it will lose `14 in contribution margin foreach outside sale given up in favor of sales to the ‘Dz’ Division (` 35 – ` 21 = `14).

(ii) The lower limit is `35, the price obtained in (1). The upper limit is also `35, since `35is the intermediate market price. That is, it would not be fair to charge the other Divisionmore than the price being charged to regular customers. However, an upper limit is notreally relevant in this situation since no transfers will be made between the twoDivisions.

(iii) The price being paid to the outside supplier, net of the quantity discount, is only`31.50.

If this price is met by the ‘Dx’ Division, then profits in the ‘Dx’ Division and in thecompany as a whole will drop by `8,750 per year.

Minimum Transfer Price `35

Outside Supplier’s Price `31.50

Loss in Contribution Margin per unit `3.50

No. of units per year 2,500

Total Loss in Profits `8,750



Profits in the ‘Dz’ Division will remain unchanged, since it will be paying the same priceinternally as it is now paying externally.

(iv) Yes, if costs can be avoided as a result of the inside business. The price would thenbe

`35 less the avoided costs.

Uniform Costing and Inter Firm Comparison

Question-19

What are the requisites for the installation of a Uniform Costing system?

Answer

Essential requisites for the installation of Uniform Costing are as under:

The firm in the industry should be willing to share or furnish relevant data orinformA spirit of co-operation and mutual trust should prevail among the participating

Mutual exchange of ideas, methods used, special achievement made, research and know- how etc. should be freBigger firms should take the lead towards sharing their experience and know- howwith the smaller firm to enable the later to improve their performanIn case of accounting methods, principles, procedure and production methoduniformity must be establishe

Question-20

What is Uniform Costing? Why is it recommended?



Answer

It is not a distinct method of costing when several undertakings start using the samecosting principles or practices, they are said to be following uniform costing. Differentconcerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good and helpsin mutual cost control and cost reduction. Hence, it is recommended that a uniform method of costing should be adopted by the member units of an industry.

Question-21

State the limitations of Uniform Costing.

Answer

Limitations of Uniform Costing are:

Sometimes it is not possible to adopt uniform standards, methods and procedures of costing in different firms due to differing circumstances in which they operate. Hence, the adoption of uniform costing becomes difficult in such firms.Disclosure of cost information and other data is an essential requirement of auniform costing system. Many firms do not wish to share such information with theircompetitors in the same induSmall firms in an industry believe that uniform costing system is only meant for bigand medium size firms, because they cannot affordIt induces monopolistic trend in the business, due to which prices may beincreased artificially and supplies withhe

Question 22

What are the advantages of Uniform Costing?

Answer



The advantages accruing from the use of Uniform Costing System are as follows:

The management of each firm will be saved from the exercise of developing and introducing a costing system of itsA costing system devised by mutual consultation and after considering thedifficulties and circumstances prevailing in different firms is readily adopted andsuccessfully implemIt facilitates comparison of cost figures of various firms to enable the firms toidentify their weak and strong points besides controlling costs.Optimum achievement of efficiency is attempted by all the firms by utilising the experience of other concerns in the industry.Standing in the industry of each firm will be known by making a comparison of its costdata withServices of cost consultants or experts may be available jointly to each firm in the industry by sharing their experiences and expenseResearch and development benefits of bigger firms may be made available to smallerfirms.It helps in the reduction of labour turnover, as a uniform wage system is the pre- condition of a uniform costing system.It helps Trade Associations in negotiating with the Government for any assistance orconcession in the matters of taxation, exports, subsidies, duties and prices determinationUnhealthy competition is avoided among the firms in the same industry in framing pricing policies and submitting tenderPrices fixed on the basis of uniform costing are representative of the whole industryand thus areUniform costing provides a basis for the comparative assessment of the performanceof two firms in the same industry but in different seIt helps the Government in regulating the prices of essential commodities such as bread, sugar, cement, steel etc.

Question-23

Enumerate the objectives of Uniform Costing.



Answer

The main objectives of Uniform Costing are as follows:

Facilitates Comparison: To facilitate the comparison of costs and performances of different units in the same industry; it provides objective baEliminates Unhealthy Competition: To eliminate unhealthy competition among the different units of an industry.Improves Efficiency: To improve production capacity level and labour efficiency by comparing the production costs of different units with each otheProvides Relevant Data: To provide relevant cost information/ data to theGovernment for fixing and regulating prices of the productEnsures Standardisation: To bring standardisation and uniformity in the operation of participating unReduces Cost: To reduce production, administration, selling and distribution costs,and to exercise control on fixed c

Inter-firm Comparison

Question-24

What are the advantages of Inter-firm Comparison?

Answer

The main advantages of Inter-firm Comparison are:

Such a comparison gives an overall view of the industry as a whole to its members.The present position of the industry, progress made during the past and the future of the industry.It helps a concern in knowing its strengths or weaknesses in relation to others so thatremedial measures may be taken.It ensures an unbiased specialized reporting on particular problems of the concerIt develops cost consciousness among members of the indu



It helps Government in effecting price regulatio

It helps to improve the quality of products manufactured and to reduce the cost of production. It is thus advantageous to the industry as well as to the

Question-25

What are the limitations of Inter-firm Comparison?

Answer

The following are the limitations in the implementation of a scheme of Inter-firmComparison:

There is a fear of losing secrecy of the production method or some peculiar process ormethod among the top managem.Middle management is usually not convinced with the utility of such a comparison.

In the absence of a suitable cost accounting system, the figures supplied may not bereliable for the purpose of compSuitable basis for comparison may not be availabl

Balanced Scorecard- Resort

Question 26

“Hard Rock Coconut” is an exclusive resort located in a famous Island of Pacific Ocean thatvows to isolate its guests from the hustle and bustle of everyday life. Its leading principle is“all contemporary amenity wrapped in old-world charisma”. Each of the resort’s 18villas has a separate theme like Castle, Majestic, Ambassador, Royal Chateau, Coconut,Lemon, Balinese etc and guests often ask for a specific villa when they make reservations. Villas are Ideal for families or friends travelling together and these villas feature luxurious accommodation spanning two floors. Since it is located within a 300-acre estate on white sand beach, the resort offers its guests a wide variety of outdoor activities such as horseback riding, hiking, diving, snorkeling, sailing, golf and so on.Guests could also while away the day relaxing in the pool and availing themselves of the



resort’s world-famous spa “Hard Coco Spa”. The dining room, which only has three tablesfor the public, is acceptable proud of its 4-star rating.

Required

Develop a Balanced Scorecard for “Hard Rock Coconut”. It is sufficient to give twomeasures in each of the four perspectives.

Solution

The following is a possible Balanced Scorecard for “Hard Rock Coconut”

Financial Perspective Economic Value AddedRevenue per villa

Customer Perspective % repeat customersNumber of customer complaints

Internal Business Service rating of spaStaff hours per guest% cost spent for maintenanceTravel guide rank for restaurant

Innovation and Learning Employee retentionNumber of new services offered

Balanced Scorecard- Supermarket

Question 27

ABC Ltd. has supermarkets located in most towns and cities. Over the last few years,profits have fallen. ABC Ltd. has recognized that customer care has been paid insufficientattention. ABC Ltd. has now realized the importance of the customer experience at its



supermarkets.

ABC Ltd. has introduced a loyalty card scheme that rewards customers with discountvouchers based on their spend and buying patterns at supermarkets in an attempt to earnthe loyalty of its customers.

The management of ABC Ltd. is considering the introduction of a Balanced Scorecard approach to manage the performance of its stores.

Required

Recommend an objective and a suitable performance measure for each of three non-financial perspectives of a Balanced Scorecard that ABC Ltd. could use to support its newstrategy of improving the customer experience. You should state three perspectives, anobjective and a performance measure for each one of the three perspectives.

Solution

Non- FinancialPerspective Objective Performance Measure

Customer Perspective

Increase the customer loyalty. Or Retaining the existingcustomers.

Percentage of customers usingloyalty cards.OrNo. of discount vouchersredeemed.

Internal BusinessPerspectives

For customers to pay forgoods in a reasonable time. OrPaying proper attention to thecustomers and their productenquiries.OrProvide necessary support tothe existing loyal customers.

Time spent by customers inqueuing to pay for products at acheck out.OrTime spent by customers careexecutives in handlingcustomers queries.OrNo. of times home deliverymade.



Learning and GrowthPerspectives

To have qualified staffs ableto meet the needs of thecustomers Or Adding new products fornew segments

No. of staff training days orNo. of schemes launched

Balanced Scorecard- Banking Company

Question 28

Classify the following measures under appropriate categories in a Balanced Scorecard for a banking company which excels in it s home loan products:

A new product related to life insurance is being considered for a tie up with the successful housing loan disbursements.e.g. every housing loan applicant to be advised to take a life policy or compelled totake a fire insurance policy.How different sectors of housing loans with different interest rates have been sanctioned, their volumes of growth in the past 4 quarteHow many days are taken to service a loan, how many loans have taken longer, whatadditional loans are to be released soon, et

Solution

(i) New Product tie up — Innovation / Learning Perspective(ii) Growth of Volume — Financial Perspective

(iii) Time for Loan / FreshProducts — Customer Perspective



Question 29

Your Bank Ltd., was established on the 30th September, 1940 under the provisions ofCo- operative Societies Act by the eminent professionals to encourage self-help, thrift,cooperation among members. Bank was issued Banking License under Banking Regulation Act, 1949 on October 25, 1986 to carry out the Banking Business within the national capitaland since then the Bank has been growing continuously. At present, Bank has large numberof membership of individuals from different sections. The Bank has 12 branches in theNCT of Delhi. Bank offers ‘traditional counter service’. Opening hours are designed tocoincide with local market days.

Board of Directors were worried from growing popularity of new style banks. These banksoffer diverse range of services such as direct access to executive management, a singlepoint of contact to coordinate all banking needs, appointment banking to save time, free online banking services 24/7, free unlimited ATM access etc.

It has now been decided that the bank will focus on “What Customers Want” and will use abalanced scorecard to achieve this goal.

Required

Produce, for each of the three non-financial perspectives of a ‘Balanced Scorecard’, an objective and a performance measure that the bank could use with appropriate reason.

Solution

Internal Business Process Perspective

Objective: Cross-sell Products

Measure: Products Purchased per customer

Reason: Cross-selling, or encouragement customers to purchase additional products e.g.insurance, forex etc. is a measure of customer satisfaction. Only if a service is perceived as highly satisfactory the service would be repeated/ additional products or services would be accepted.



Learning and Growth Perspective

Objective: Increase the Number of New Products or Services Sold

Measure: Number of Customers Buying the New Products/ New Services

Reason: Long term financial success requires bank to create new products / services (e.g. internet banking, ATM access) that will meet emerging needs of current / future customers such as 24/7 banking.

Customer Perspective

Objective: Increase Customer Loyalty

Measure: Number of Accounts Closed or Closure Request Received

Reason: Customer loyalty describes the extent to which bank maintains durable relations toits customers. The share of existing customers should have a high importance as itindicates about image and reputation. Closure request is not a good sign for bank. Bank should investigate reasons for the same and take appropriate actions to improveservices offered to retain customers.

Balanced Scorecard- Telecom Company

Question 30

Standard Telecom Ltd. is a leading cellular service provider having a global presence. Itaims to be the most innovative and trusted telecom company in the world. To achieve thisaim, it is constantly working on its overall functioning. It is trying to adopt bestmanagements practices in the world. Following are some information related to the company’s performance for a particular period:



Particulars CurrentYear

BaseYear Target

Operating Ratio 60% 54% Reduce it to 50%Average Revenue per user ` 225 ` 210 Increase it to `250Unresolved Consumer Complaints 27,500 25,000 Reduce it by 20%Customer Relationship Centres 280 200 Take the total to 250Employee Coverage under TrainingProgramme

10% 8% At least 15%

Required

Evaluate the performance of the company using Balance Scorecard approach.

Solution

The balanced scorecard is a method which displays organisation’s performance into fourdimensions namely financial, customer, internal and innovation. The four dimensions acknowledge the interest of shareholders, customers and employees taking into account of both long-term and short-term goals. The detailed analysis ofperformance of the company using Balance Scorecard approach as follows:

Financial Perspective: Operating ratio and average revenue will be covered inthis prospective Company is unable to achieve its target of reducing operating ratioto 50% instead it has increased to 60%. Company is required to take appropriate steps to control and manage its operating expenses. Average revenue per user hasincreased from ` 210 to ` 225 but remains short of targeted ` 250. This is also one ofthe reasons of swelled operating ratio. Company can boost up its average revenue per user either by increasing the price of its services or by providing morepaid value added services.

Customer Perspective: Service complaints will be covered under this perspective.The company had set a target of reducing unresolved complaints by 20% instead unresolved complaints have risen by 10%[(27,500-25,000)/(25,000) × 100]. It shows dissatisfaction is increasing among the consumers which would



adversely impact the consumer’s general perception about the company and company may lose its consumers in longInternal Business Perspective: Establishing customer relationship centres will be covered under this perspective. Company has established 80 relationship centres inthe current period exceeding its target of 50 (250-200) to cater to the needs ofexisting consumers as well as soliciting new consumers. This shows the seriousness of the company towards the consumer satisfaction and would help themin the long run .Learning and Growth Perspective: Employee training programmes are coveredunder this perspective. Company had set a target to cover at least 15% employee under its training programmes but covered only 10%. This could hurtcapabilities of the employees which are needed for long term growth of theorganisation necessary to achieve the objectives set in the previous three perspectives.People or the human resource of the company is one of the three principle sourceswhere organisational learning and growth comes.

Balanced Scorecard- Fitness Centre

Question 31

Fitness Solution is a family owned fitness club, founded in 2010 by Peter and Albert with traditional style equipment. Club commenced operations in February 2011 within ashopping mall so that members after working out, can conveniently shop, dine, pick uptheir children from enrichment classes or go to the cinema.

Peter and Albert, the owners, pride themselves for providing a customized / tailoredprogram by taking into account a person’s medical history, present fitness level, fitnessgoals, fitness interests and offer many other small amenities that might be difficult to get ina larger Fitness Centre. They believe –

“Each individual is unique and requires a specialized program plan which should be customized and tailored to his/her needs.”

They have a number of loyal members even though they offer the traditional styleequipment. Peter and Albert take care of most of the routine operations, along with a



small permanent staff, and temporary staff.

Required

(i) Identify at least three ‘Critical Success Factors’ for Fitness Solution.

(ii) Construct a ‘Balance Scorecard’ for Fitness Solution. (2 measures for each of the4 perspectives are sufficient)

Solution

(i) Fitness Solution’s main Critical Success Factors are

(a) Developing and maintaining a high level of customer satisfaction.

(b) Offering facilities that are not much below that offered by competition.

(c) Keeping a tight cap on costs as there is considerable competitive pressure in thisindustry and entry barriers are not high.

(ii) The following is a possible Balance Scorecard for Fitness Solution

FinancialPerspective

Operating expenses relative to budgetCash flowTotal daily operating revenue

CustomerPerspective

Turnover rate among membersCustomer satisfaction rate

InternalPerspective

Number of employee complaintsNumber of equipment not available on average day (due tomaintenance)

Innovation andLearning

Number of new equipment put into serviceNumber of staff participating in training courses



Balanced Scorecard- Miscellaneous

Question 32

Identify Balance Scorecard Perspectives from the following potential measures observed in different business sectors (Healthcare/ Airlines/ Banking).

Weekly Patient ComplaintsPatient Satisfaction SurveyFlight Cancellation RateOn-time Performance of an AirlineNumber of Grants Awarded to a Healthcare unitOutstanding Loan Balances / Deposit Balances of a Banking CompanyEmployee Turnover Rate of a Healthcare unitPatient Referral RateNon-interest Income of a Banking CompanyLost of Bag Reports per 5,000 Passengers

Solution

Statement Showing “Balance Scorecard Perspectives for Different BusinessSectors”

Health Care Airlines Banking Banking

Weekly Patient Complaints Internal OperatingEfficiency — —

Patient Satisfaction Survey Customer Service& Satisfaction — —

Flight Cancellation Rate — Customer Service& Satisfaction —

On-time Performance of anAirline — Internal Operating

Efficiency —



Number of Grants Awarded to aHealthcare unit

Learning andGrowth — —

Outstanding Loan Balances /Deposit Balances of a BankingCompany

— — FinancialStrength

Employee Turnover Rate of aHealthcare unit

Learning andGrowth — —

Patient Referral Rate Customer Service& Satisfaction — —

Non-interest Income of aBankingCompany

— — FinancialStrength

Lost of Bag Reports per 5,000Passengers — Customer Service

& Satisfaction —

Question 33

In the context of a balanced scorecard, identify the perspectives of the followingindependent situations:

Sl. No. Organisation Target Parameter Perspective(i) Courier Company 100% on-time delivery of priority dispatches.

(ii) Tuition Centre Set up class-on-internet facility for better reachof more number of students and absentees.

(iii)ComputerManufacturingCompany

Set up service centres is all major cities forafter sales support.

(iv) Government TaxationDepartment

Ensure Computer training to all officers abovea certain rank to improve their capabilities.

Solution



Identification of Perspectives of Independent Situation – ‘Balance Scorecard’

Sl. No. Organization Perspective(i) Courier Company Customer Perspective(ii) Tuition Centre Learning and Growth Perspective(iii) Computer Manufacturing Company Internal Business Perspective(iv) Government Taxation Department Learning and Growth Perspective

Simplex Method – Miscellaneous Concepts

(Slack/ Surplus Variable, Shadow Price, Feasible/ Alternate Solution/ OptimalSolution)

Question 34

The following information is given relating to the simplex method of a linear program withthe usual notations.

Objective function:

Z = x1 + 5×2 → (1)

Subject to:

6×1 + 8×2 ≤ 12 → (2)

5×1 +15×2 ≥ 10 → (3)

x1, x2 ≥ 10 → (4)

Let s1 be the variable introduced to restate (2) as an equality and let s2 and A2 bevariables to restate (3) as an equality.

Required



If the objective is to maximize Z,

What will be the coefficients of s1, s2 and A2 in equation (1) and (3) restated as equality?Identify the slack and surplus variab

Which variables will form part of the initial solution? Why?

If the objective is to minimize Z what will be your answer to (i) above?

Solution

(i) Working

Introducing Slack/ Surplus/ Artificial Variables

In Case of Maximization…

Z = x1 + 5×2 + 0s1 +0s2 – MA2 … (1)

Subjectto:

6×1 + 8×2 + s1

=

12

… (2)

5×1 + 15×2 –s2+ A2 = 10 … (3)

x1, x2, s1, s2, A2 ≥ 0 … (4)

For Equation (1)

Coefficients of s1, s2, and A2 are , 0 and – M respectively.



For Equation (3)

Coefficients of s1, s2, and A2 are , –1 and 1 respectively.

(ii) s1 is Slack Variable and s2 is Surplus Variable.

(iii) In any Maximisation problem, this tableau must satisfy the following requirements:

– All the Slack Variables (and thus Surplus Variables as well) must form part ofthe initial solution mix (basis).

– The table must contain as many rows as there are constraints.

– The elements in the columns of variables appearing in the basis must form a unitvector.

If s2 is included in the basis, the elements of the s2 will be 0 and –1 and thus not a unitvector. This is contrary to the non-negativity restriction i.e. all variables must have apositive value. This problem is solved by adding an Artificial Variable (denoted by Ai) to the equation, that is, a variable that has a positive value. Artificial variables do notrepresent any quantity relating to the decision problem and must not be present in the finalsolution (if at all they do, it represents a situation of infeasibility). Accordingly, in the initialtableau we will place A2 along with s1 to eliminate the impact of them first.

(iv) Working

Introducing Slack/ Surplus/ Artificial Variables

In Case of Minimization…

Z = x1 + 5×2 + 0s1 + 0s2 + MA2 … (1)

Subject to:

6×1 + 8×2 + s1 = 12 … (2)



5×1 + 15×2 – s2+ A2 = 10 … (3)

x1, x2, s1, s2, A2 ≥ 0 … (4)

For Equation (1)

Coefficients of s1, s2, and A2 are , 0 and M respectively.

For Equation (3)

Coefficients of s1, s2, and A2 are , –1 and 1 respectively.

Question 35

Given below is an iteration in a simplex table for a maximization objective linearprogramming product mix problem for products X1, X2 and X3.

Cj 6 4 10 0 0 0BasicVariable

Quantity

X1

X2

X3

S1

S2

S3

0 S1 400 0 4/3 0 1 -1/3 06 X1 400 1 2/3 2 0 1/3 00 S3 400 0 5/3 0 0 -2/3 1Zj 2,400 6 4 12 0 2 0Cj – Zj 0 0 -2 0 -2 0



Answer the following questions:

Is the above solution feasible?

Perform one more iteration with X2 entering the solution to get a solution with thesame value for the objectiveIndicate the shadow pr

If customer is prepared to pay higher price for product X3 then by how much shouldthe price be increased so that the company’s profit remains unchanged?From the given table, derive any one original constraint inequality with the coefficientsof variables in their simplest whole number

Solution

Workings

Cj 6 4 10 0 0 0Min.RatioCB Basic

Variable Quantity X1 X2 X3 S1 S2 S3

0 S1 400 0 4/3 0 1 –1/3 0 3006 X1 400 1 2/3 2 0 1/3 0 6000 S3 400 0 5/3 0 0 –2/3 1 240Zj = 6 4 12 0 2 0Cj − Zj 0 0 –2 0 –2 0

(i) Yes, because the given solution has no artificial variables in the basic column.

(ii) Perform one more iteration with X2:



Cj 6 4 10 0 0 0

CB BasicVariable Quantity X1 X2 X3 S1 S2 S3

0 S1 80 0 0 0 1 1/5 –4/56 X1 240 1 0 2 0 3/5 –2/54 X2 240 0 1 0 0 –2/5 3/5Zj = 6 4 12 0 2 0Cj − Zj 0 0 –2 0 –2 0

(iii) Shadow Price is `0, `2 and `0 (or any other given monetary unit) for Constraint 1, Constraint 2 and Constraint 3 respectively and same has been obtained from row Cj −Zj.

(iv) Cj − Zj for X3 being –2, production of each unit of X3 would cause a reduction of`2 (or any other given monetary unit). Thus, the price for X3 should be increased by atleast two rupee per unit to ensure no reduction of profits.

(v) Original Constraint Inequality with the coefficient of variables:

Let us consider the given iteration is the 2nd one. The first iteration (I1) must have had S2instead of X1. Row X1 of I2 has been computed by dividing the S2 row of I1 by 3. S2 of I1(in Identity Matrix) would have been 1. Now it is 1/3. Working backwards, we multiply rowX1 of I2 by 3 to get Row S2 of I1.

Original Row S2 [X1 of I2 × 3]:

(1X1 + 2/3X2 + 2X3) × 3 ≤ 400 x 3



Or

3X1 + 2X2 + 6X3 ≤ 1,200

Similarly Original Row S1 [S1 of I2 + X1 of I2]:

(0X1 + 4/3X2 + 0X3) + (1X1 + 2/3X2 + 2X3) ≤ 400 + 400

Or

X1 + 2X2 + 2X3 ≤ 800

Similarly Original Row S3 [S3 of I2 + 2 × X1 of I2]:

0X1 + 5/3X2 + 0X3 + (1X1 + 2/3X2 + 2X3) × 2 ≤ 400 + 400 × 2

Or

2X1 + 3X2 + 4X3 ≤ 1,200

Question-36

Given below is an iteration in a simplex table for a maximization objective linearprogramming product mix problem for products x, y and z. Each of these products isprocessed in three machines KA-07, KB-27 & KC-49 and each machine has limited availablehours.

Cj 30 40 20 0 0 0



CB BasicVariable (B)

Value of BasicVariables b (=XB) x y z s1 s2 s3

30 x 250 1 0 -26/16 10/16 -12/16 040 y 625 0 1 31/16 -7/16 10/16 00 s3 125 0 0 11/16 -3/16 1/8 1

s1, s2 and s3 are slack variables for machine KA-07, KB-27 and KC-49 respectively.

Answer the following questions, giving reasons in brief:

Does the table above give an ‘Optimal Solution’?

Are there more than one ‘Optimal Solution’ / ‘Alternate Optimal Solution’?Is this solution ‘Feasible’?Is this solution ‘Degenerate’?

Write down the ‘Objective Function’ of the problem.

Write the ‘Optimal Product Mix’ and ‘Profit’ shown by the above solut

Which of these machines is being used to the full capacity when producing accordingto this solution?How much would you be prepared to pay for another hour of capacity each on machineKA-07, machine KB-27, and machine KC-49?

If the company wishes to expand the production capacity, which of the three resourcesshould be given priority?

What happens if 16 machine hours are lost due to some mechanical problem inmachine KB-27?A customer would like to have one unit of product z and is willing to pay higher pricefor z in order to get it. How much should the price be increased so that thecompany’s profit remains unchanged?A new product is proposed to be introduced which would require processing time of 4hours on machine KA-07, 2 hours on machine KB-27 and 4 hours on machine KC-49. It



would yield a profit of `12 per unit. Do you think it is advisable to introduce this product?

Solution

(i) Yes, the given solution is optimal because all Cj − Zj are less than, or equal to, zero.

Cj 30 40 20 0 0 0

CBBasicVariable(B)

Value of BasicVariables b(=XB)

x y z s1 s2 s3

30 x 250 1 0 -26/16 10/16 -12/16 040 y 625 0 1 31/16 -7/16 10/16 00 s3 125 0 0 11/16 -3/16 1/8 1Zj = 30 40 115/4 5/4 5/2 0Cj – Zj 0 0 -35/4 -5/4 -5/2 0

(ii) No, because for each of the non – basic variables z, s1 and s2, the Cj − Zj isstrictly negative. Alternate optimal solution (s) exist when either of non-basic variables has a zero Cj − Zj.

Non Basic Variables z s1 s2Cj – Zj -35/4 -5/4 -5/2

(iii) Yes, because the given solution has no artificial variable in the basis.

(iv) No, solution is not degenerate as none of the basic variables has zero quantity.



Basic Variables x y s3Quantity 250 625 125

(A solution degenerates if the Quantity of one or more basic variables is zero)

(v) Maximize Z = 30x + 40y + 20z

(vi) According to the given solution, 250 units of x and 625 units of y are beingproduced.

The total profit is `32,500 (250 units × `30 + 625 units × `40).

(vii) Machine KA-07 and KB-27 are being used to the full capacity because, the slack variable s1 and s2 corresponding to them has a zero value in the solution.

(viii) The shadow price of hours on machine KA-07, machine KB-27 and machine KC-49are being `5/4, `5/2 and `0, respectively, these are the maximum prices one would beprepared to pay for another hour of capacity for these three machines.

(ix) Machine KB-27 may be given priority as its shadow price is the highest.

(x) When 16 hours are lost, then production of x would increase by 12 units and that ofy would decrease by 10 units and the total profit decrease by `40.



(xi) Cj − Zj for z being -35/4, production of each unit of z would cause a reduction of35/4 rupee. Thus, the price for z should be increased by at least 35/4 rupee to ensure noreduction of profits.

(xii) Shadow prices of times on machines KA-07, KB-27 and KC-49 are `5/4, `5/2 and `0.Production of a unit of the proposed new product would, therefore, reduce profit by `10

[(4 hrs. × `5/4) + (2 hrs. × `5/2) + (4 hrs. × `0)].

Since the product would yield a profit of `12, it would result in a net increase in profit at arate of `2 per unit. It is advisable, therefore to introduce it.

Transportation– Basic Concepts

Question 37

In a 3 x 4 transportation problem for minimizing costs, will the R2C1 cell (at the intersectionof

the 2nd row and 1st column) always figure in the initial solution by the North West CornerRule? Why?

Solution

The Initial solution obtained by the North-West Corner Rule in transportation need notalways contain the R2C1 cell. In the North-West Corner Rule the first allocation is made atR1C1 cell and then it only moves towards R2C1 cell when the resources at the first row i.e. R1 is exhausted first than the resources of first column i.e. C1. On the contraryif resources at first column i.e. C1 is exhausted first then the next allocation will be atR1C2.

For example the resource availability at first row (R1) is 1,500 units and the demand in firstcolumn (C1) is 1,000 units. In this case resource availability of first row (R1) will beexhausted to the extent of the demand in first column (C1) first and then the remaining



resource availability at first row (R1) will be used to meet the demand of the second column(C2). In this example cell R2C1 will not come in initial solution obtained by the North-WestCorner Rule.

Question 38

In a transportation problem for cost minimization, there are 4 rows indicating quantities demanded and this totals up to 1,200 units. There are 4 columns givingquantities supplied. This totals up to 1,400 units. What is the condition for a solution to bedegenerate?

Solution

The condition for degeneracy is that the number of allocations in a solution is less thanm+n-1. The given problem is an unbalanced situation and hence a dummy row is to beadded, since

the column quantity is greater than that of the row quantity. The total number of rowsand columns will be 9 i.e. (5 rows and 4 columns). Therefore, m+n-1 (= 8), i.e. if thenumber of allocations is less than 8, then degeneracy would occur.

Assignment Problem – Basic Concepts

Question 39

Explain following statement

Assignment problem is special case of transportation problem; it can also be solved bytransportation methods.



Solution

The assignment problem is special case of transportation problem; it can also be solvedby transportation method. But the solution obtained by applying this method would beseverely degenerate.This is because the optimality test in the transportation methodrequires that there must be m+n-1 allocations/assignments. But due to the special structure of assignment problem of order n × n, any solution cannot have more than n assignments. Thus, the assignment problem is naturally degenerate. In order toremove degeneracy, n-1* number of dummy allocations will be required in order toproceed with the transportation method. Thus, the problem of degeneracy at each solutionmakes the transportation method computationally inefficient for solving an assignmentproblem.

Question 40

In an assignment problem to assign jobs to men to minimize the time taken, suppose thatone man does not know how to do a particular job, how will you eliminate this allocationfrom the solution?

Solution

In an assignment minimization problem, if one task cannot be assigned to one person, introduce a prohibitively large cost for that allocation, say M, where M has a highthe value. Then, while doing the row minimum and column minimum operations, automatically this allocation will get eliminated.

Question 41

Answer the following independent situations relating to an assignment problem with a minimization objective:

Just after row and column minimum operations, we find that a particular row has 2 zeroes. Does this imply that the 2 corresponding numbers in the originalmatrix before any operation were equal? Why?



Under the usual notation, where a32 means the element at the intersection of the3rd row and 2nd column, we have, in a 4 × 4 assignment. What can you concludeabout the remaining assignments? Why?

Solution

(i) Under the Hungarian Assignment Method, the prerequisite to assign any job is thateach row and column must have a zero value in its corresponding cells. If any row orcolumn does not have any zero value then to obtain zero value, each cell values in the rowor column is subtracted by the corresponding minimum cell value of respective rows or columns by performing row or column operation. This means if any row or column havetwo or more cells having same minimum value then these row or column will have morethan one zero. However, having two zeros does not necessarily imply two equal values in theoriginal assignment matrix just before row and column operations. Two zeroes in a same row can also be possible by two different operations i.e. one zero from rowoperation and one zero from column operation.

(ii) The order of matrix in the assignment problem is 4 × 4. The total assignment(allocations) will be four. In the assignment problem when any allocation is made in any cellthen the corresponding row and column become unavailable for further allocation. Hence, these corresponding row and column are crossed mark to show unavailability. Inthe given assignment matrix two allocations have been made in a24 (2nd row and 4th column) and a32 (3rd row and 2nd column). This implies that 2nd and 3rd row and 4th and 2nd column are unavailable for further allocation.

Therefore, the other allocations are at either at a11 and a43 or at a13 and a41.

PERT/ CPM – Basic Concepts

Question 42

State the validity of following statements along with the reasons:



Two activities have common predecessor and successor activities. So, they can havecommon initial and final nodeIn respect of any activity whether real or dummy, the terminal node should bear a number higher than the initial node numbeThe difference between the latest event time and the earliest event time is termed asfreeFor every critical activity in a network, the earliest start and the earliest finish time aswell as the latest finish time and the latest start time are the same.The optimal duration of a project is the minimum time in which it can be com

Resource leveling aims at smoothening of the resource usage rate without changing the project duration.

Solution

Invalid

Reason: As per the rules of network construction, parallel activities between twoevents, without intervening events, are prohibited. Dummy activities are needed when twoor more activities have same initial and terminal events. Dummy activities do notconsume time or resources.

Valid

Reason: As per the conventions adopted in drawing networks, the head event orterminal node always has a number higher than that of initial node or tail event.

Invalid

Reason: The difference between the latest event time and the earliest event time istermed as slack of an event. Free float is determined by subtracting head event slack fromthe total float of an activity.

Invalid



Reason: For every critical activity in a network, the earliest start time and the lateststart time is same and also the earliest finish time and the latest finish time is same.

Invalid

Reason: The optimum duration is the time period in which the total cost of the project isminimum.

Valid

Reason: Resource leveling is a network technique used for reducing the requirement of aparticular resource due to its paucity or insufficiency within a constraint on the projectduration. The process of resource leveling utilize the large floats available on non-critical activities of the project and cuts down the demand of the resource.

Application of Learning Curve

Question 43

State whether the learning curve theory can be applied to .the following independentsituations briefly justifying your decision:

A labour intensive sculpted product is carved from the metal provided to the staff. Themetal is sourced from different suppliers since it is scarce. The alloy composition ofthe input metal is quite different among the supplPieces of hand-made furniture are assembled by the company in a far off location. Thelabourers do not know anything about the final product which utilizes their work. As amatter of further precaution, rotation of labour is done freSkilled workers have been employed for a long time. The company has adequatemarket for the craft pieces done by these expe



A company funds that it always has an adverse usage of indirect material. It wants toapply learning curve theory to improve the way standards have been se

Solution

‘Learning Curve Theory’ will not be applicable as alloy combination of the input metalis quite different among the suppliers hence learning experience with one type ofmetal may not be beneficial for the workers to deal with other metal with separatealloy com‘Learning Curve Theory’ will not be applicable as in this situation rotation of labour isdone frequently, labours will not be able to get the benefit of learning and apply theirlearning. Hence, learning curve theory can not be app‘Learning Curve Theory’ will not be applicable as in this situation as workers are skilled and employed for a long time, they have already achieved maximum level of expertise by taking advantage of learning. Hence, at this point of timelearning curve theory can not be‘Learning Curve Theory’ will not be applicable as indirect materials are thematerials which are not used directly in the production (not directly proportionate with volume of output) and usually used machines (e.g. lubricants, spares parts et)with less human interactions. Adverse usage of indirect materials can be controlledthrough proper monitoring and appropriate standard settings and not from applying learning curve theory.

Question 44

The following information is provided by a firm. The factory manager wants to useappropriate average learning rate on activities, so that he may forecast costs and prices forcertain levels of activity.

A set of very experienced people feed data into the computer for processing inventoryrecords in the factory. The manager wishes to apply 80% learning rate on dataentry and calculation of inventory.

A new type of machinery is to be installed in the factory. This is patented process and



the output may take a year for full fledged production. The factory manager wants touse a learning rate on the workers at the new m

An operation uses contract labour. The contractor shifts people among various jobs once in two days. The labour force performs one task in 3 days. The managerwants to apply an average learning rate for these workers.

Required

Advise to the manager with reasons on the applicability of the learning curve theory onthe above information.

Solution

The learning curve does not apply to very experienced people for the same job, since timetaken can never tend to become zero or reduce very considerably after a certain range of output. This is the limitation of the learning curve.

Data entry is a manual job so learning rate theory may be applied. Calculation of inventory is a computerized job. Learning rate applies only to manual labour.

Learning rate should not be applied to a new process which the firm has never triedbefor

The workers are shifted even before completion of one unit of work. Hence learningrate will not apply.

Question 45

State whether and why the following are valid or not for learning curve theory:

Learning curve theory applies to a division of a company which is fully autoLearning curve theory helps in setting standards.Learning curve helps in pricing decisExperienced workmen are more prone to learning effe



Solution

Valid or Invalid

Sl.No. Situation

Valid orNotValid

Reason

(i)Learning curve theory applies to adivision of a company which is fullyautomated

Not ValidIt can be very effective in labouroriented industry but not in fullyautomated company.

(ii) Learning curve theory helps insetting standards Valid

If budgets and standards are setwithout considering the learningeffect, meaning less variances arelikely to occur. The learningcurve is quite helpful in settingstandards in learning phase.

(iii) Learning curve helps in pricingdecisions Valid

The use of cost data adjusted forlearning effect helps indevelopment of advantageouspricing policy.

(iv) Experienced workmen are moreprone to learning effect Not Valid

Activities being performed byexperienced workmen, who arethoroughly familiar with thoseactivities, will not be subject tolearning effect.

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Comparative Study of LP Methods1.Assignment Rule2.Transportation Algorithm3.Simplex Method4.Relevant Costing – Full Concepts5.Standard Costing Formula6.Decision Making – Comparative Study7.How to approach any question8.



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Throughput Accounting,1.Crashing,2.Simplex Basics,3.Transfer Pricing – Main Concepts,4.Standard Costing – Concepts,5.Marginal Costing – Evolution.6.

REVISION CHECK LIST

Detailed Chapter wise – Snapshot of Amendment Cum RevisionChapter Name Marks Revision Contents – Theory and Practicals

New (Amendments) Old (Existing)

1

Activity BasedCosting

10

Break Even with ABC Traditional Cost System VsActivity Based System

Direct Product Profitability Based

Variance Analysis of ActivityBased Cost

Customer Profitability AnalysisBasedCase Study Based Applicabilityof ABC

2

Target Costing

5

Value Chain Analysis for CostReduction Steps in Target Costing

Case Study Based ValueAnalysis

Value Engineering and ValueAnalysisKaizen Costing

3

PricingPolicies(External)

5

Pareto Analysis – PracticalQuestions

Return on Investment PricingCalculations

Case Study Based PricingStrategies Selection Cost Sheet Based Questions

Calculas Based Optimum PriceDetermination



4

Budget

8

Budget Variance withResponsibility Accounting Budget Ratios

Budget Variance withPerformance and SummaryBudgeting

Cash Budgets

Budget with Inventory Controland Stock levelsApplications of Zero BasedBudgeting

5

StandardCosting

10

Standard Costing – SellingCost Variances WIP Effect

Profit Reconciliation – NewVariety with Marginal costing

Profit Reconciliation – allvarieties

Case Study Based Question onCSF

Mix, Yield, Capacity,Efficiency,Market Size, Market ShareVariance

Chart of Standard CostingFormulas Missing Figures Problem

Planning, Operating andTraditional VariancesStandard Cost DeterminationBased on Learning CurveSingle Plan and Partial PlanAccounting Features

6BalancedScore CardandProfitability

5

Case Study Based Questionson Perspectives and KPIIdentification

Four Perspectives of Score Cardwith examples

Profitability Analysis intoGrowth, Price Recovery andProductivity / Cost Leadership,Product Differentiation andMarket Share

7

RelevantCosting

8

Chart of Relevant CostingConcepts

Different Approaches ofEvaluationConcept of Minimum PriceRelevant Cost of Material,Labour, Overheads andDepreceiation



8

TransferPricing

10

Calculas Based Optimum PriceDetermination

Cost Centre and Profit CentreDisticnction

International Taxation BasedQuestions

Goal Congruency – Meaning andImportance

Case Study Based QuestionsTransfer Price based onOpportunity Cost/ GoalCongruencyStrategy Based QuestionsDual Tariff, Shared ProfitTransfer Pricing

9

CVP Analysis

5

Probability Based Break EvenAnalysis

Break Even Point and PotentialBreak Even Point

Sensitivity Analysis Combined Break Even Point formulti productsMultiple Break even Point forslab fixed costsIndifference Point for evaluationof alternativesShut Down Point for Shutdownor Continue decision

10

DecisionMaking

10

Chart of Decision Making Make or Buy – Using RelevantCosting or Indifference Point

List of Tips to Read theQuestions

Key Factor/ Principle BudgetingFactor – Different SituationsSub Contracting – withIncremental Fixed CostsExport Offers – UsingIncremental ApproachAny other – using RelevantCosting Approach

11

Total QualityManagement

5

Four Types of Quality CostSix SigmaSix C’s of QualityP’s of QualityPDCA CycleIncremental Approach toEvaluate Quality Programmes



12

TOC orThroughputAccounting

5

Drum – Buffer – Rope TheoryConcept Three Perspective of TOC

Synchronous Manufacturing –Optimised ProdcutionTechnologyMRP and MRP IIThroughput Accounting –Constraint or BottleneckOptimisationOverall profit Statement underThroughput Accounting

13 Service Sector 5Utility Services Break Even Point in Services

Airlines

14

Just In Time

5

Backflush Costing JournalEntries Just In time Features

Kanban AuthorisationBackflush Costing SystemPractical Problems based onIncremental Approach

15

Life CycleCosting

Practical Questions based onProfitability Statement

Theory on Phases in ProductLife Cycle

Practical Question Based onLearning Curve

16

LPFormulationand Graph

8

Comparative Study of LPMethods Chart Conditions of LP

FormulationUnbounded Minimisation andMaximisation ProblemsGraphical Method

17

Simplex

Situations of ConstraintsSteps to SolveSensitivity Analysis –Interpretations



18

Assignment

10

Chart of Hungarian Rule Hungarian Rule StepsSpecial Cases ImplicationAirlines Idle Time MinimisationTravelling Salesman CycleOptimisation

19

Transportation

Chart of VAM and OptimalityTest

Initial Solution Methods –NWCR, LCAM, VAMSteps to solve full problemSpecial Cases ImplicationSensitivity Analysis –InterpretationsSolving Transportation Problemby Hungarian Rule

20

ProjectManagement

8

Errors in NetworkTime Schedule and FloatAnalysisUpdating the NetworkCrashing of NetworkPERT – S.D., Variance, ExpectedTime, Probability of CompletionResource Allocation Table



21

Simulation

8

Cakes – SimulationDentist Chamber – SimulationBank or Service CounterSimulationAssembly Line SimulationInventory Control – Book StoreSimulation with Lost demand

22

LearningCurve

Applicability of LCTRelationship expressed inLearning Curve TheoryDirect PredictionUse of Learning Curve EquationUse of Learning Curve TablePricing and Standard CostComputation using LCTDetermining the values wherelearning stops

23 TheoryExclusives

List of Theory Questions andCase study based Questions Sleeping Capsule Book

Documents

45 Case Study Theory Questions for CA Final Costing