PAPER – 12 : MANAGEMENT ACCOUNTING

SUGGESTED ANSWER
SECTION – A
1.
(i) (C)
(ii) (B)
(iii) (B)
(iv) (B)
(v) (A)
(vi) (C)
(vii) (A)
(viii) (C)
(ix) (B)
(x) (A)
(xi) (B)
(xii) (C)
(xiii) (B)
(xiv) (D)
(xv) (D)

SECTION – B
2. (a):
The distinction between Management Accounting and Financial Accounting is given below:
Basis for
Sl. Financial Accounting Management Accounting
Comparison
Financial Accounting classifies, analyses,
Management Accounting helps
records, and summarizes the financial
management to make effective
1 Purpose transactions of a particular period of the
decisions about the business.
company.
Management Accounting helps
Financial Accounting is prepared to reflect
management to take meaningful
2 Application true and fair picture of financial affairs.
steps and strategize.
The scope is pervasive, but not as much as
3 Scope The scope is much broader.
the management accounting.
Information
4 Quantitative. Quantitative and qualitative.
type
It is not dependent on management
accounting. Management Accounting is
basically decision making
accounting and depends on
5 Inter-
information created by Financial
dependence
Accounting as well as Cost
Accounting.

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 It is legally mandatory to prepare financial
accounts of all companies. (for example,
Management Accounting has no
6 Statutory Companies Act 2013 and relevant rules of
statutory requirement.
requirement Accounting Standards furnishes the
statutory requirements)
There’s no set format for
Financial accounting has specific formats
presenting information in
7 Format for presenting and recording information.
Management Accounting.
Mainly for potential investors as well as all
8 Users Only for management.
stakeholders.
The information presented is
9 Verifiable The information presented is verifiable. predictive and not immediately
Verifiable

2. (b):
1. Calculation of Cost Driver Rates
Calculation of the rate for each cost driver:
• Order Processing Rate:
= Total Order Processing Cost / Total Orders Processed
= ₹ 7,50,000 / 600 Orders
= ₹ 1,250 per order
• Machine Processing Rate:
= Total Machine Processing Cost / Total Machine Hours Worked
= ₹ 25,00,000 / 50,000 Machine Hours
= ₹ 50 per machine hour
• Product Inspection Rate:
= Total Product Inspection Cost / Total Inspection Hours
= ₹ 5,00,000 / 20,000 Inspection Hours
= ₹ 25 per inspection hour

2. Statement of Manufacturing Cost per Unit (Using Activity-Based Costing)

Robo- Robo-
Welder Painter
Particulars
(RW-1) (RP-2)
(D) (D)
A. Direct Costs per Unit
Direct Material Cost 700.00 800.00
Direct Labour Cost 720.00 960.00
Total Direct Cost per Unit 1,420.00 1,760.00
B. Overhead Costs (Allocation)
Order Processing (400 orders x ₹1,250) (200 orders x ₹1,250) 5,00,000 2,50,000
Machine Processing (22,500 hours x ₹50) (27,500 hours x ₹50) 11,25,000 13,75,000
Product Inspection (5,000 hours x ₹25) (15,000 hours x ₹25) 1,25,000 3,75,000
Total Overhead Cost 17,50,000 20,00,000
C. Overhead Cost per Unit
Budgeted Production Volume (Units) 6,400 7,700
Overhead Cost per Unit (Total Overhead / Production Volume) 273.44 259.74
D. Total Manufacturing Cost per Unit (A + C) 1,693.44 2,019.74

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3. (a):
Final Statement of Cost-Effective Decision
1. Component D: Buy all 3,000 units from the market as buying is cheaper than variable cost of
production.
2. Component B & C: Manufacture full requirements (3,500 and 2,000 units) in the Normal Shift.
3. Component A:
• Manufacture 1,375 units in Normal Shift (utilizing balance hours).
• Manufacture 1,500 units in Second Shift (utilizing exactly 3,000 hours to optimize step costs).
• Buy 125 units from the market.

Workings:
1. Analysis of Variable Costs & Ranking (Normal Shift)
First, we calculate the Variable Cost (VC) of making each unit in the normal shift and compare it with
the buying price to find the savings. We also identify the machine hours required per unit.

• Machine Hours per Unit = Direct Expenses ÷ ₹40 per hour.

• Variable Cost (VC) = Direct Material + Direct Labour + Direct Expenses.
• Saving = Buy Price - VC.

Particulars A B C D
Direct Material 120 140 150 120
Direct Labour 60 80 120 80
Direct Expenses 80 60 80 80
Total VC (Normal) 260 280 350 280
Buy Price 300 320 400 270
Saving by Making 40 40 50 (10)
Decision for D BUY ALL 3,000 units
Machine Hrs/ Unit 2 1.5 2 N/A
Saving per Hour ₹ 20 ₹ 26.67 ₹ 25 -
Ranking III I II -

Observation for Component D:

Since the Variable Cost of Making (₹ 280) is higher than the Buy Price (₹ 270), Component D should be
bought entirely regardless of capacity. This saves ₹ 10 per unit immediately.

2. Allocation of Normal Shift Capacity (12,000 Hours)

We allocate the 12,000 available hours based on the ranking
Units Total Hours Hours Units to Balance
Priority Product Hrs/Unit
Required Need Allocated Make Units
1 B 3,500 1.5 5,250 5,250 3,500 0
2 C 2,000 2.0 4,000 4,000 2,000 0
3 A 3,000 2.0 6,000 2,750 (Bal) 1,375 1,625
Total 15,250 12,000

• Balance Hours for A: 12,000 - 5,250 - 4,000 = 2,750 hours.

• Units of A in Normal Shift: 2,750 / 2 = 1,375 units.
• Remaining A to Produce: 3,000 - 1,375 = 1,625 units.
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3. Evaluation of Second Shift for Balance of Component A
We must decide whether to Make or Buy the remaining 1,625 units of A.
• Hours Required: 1,625 units x 2 hrs = 3,250 hours
• Second Shift Costs:
• Labour increases by 20% (₹60 to ₹72).
• New VC for A = 120 (Mat) + 72 (Lab) + 80 (Exp) = ₹272.
• Saving per unit vs Buy (₹300) = 300 - 272 = ₹28.
• Fixed Cost: ₹6,000 for every 1,000 hours or part thereof.

Optimization Analysis:
We analyze the fixed cost to see if we should produce all 1,625 units.
• Scenario 1: Make all 1,625 units (3,250 hours)
• Total Variable Saving: 1,625 x 28 = ₹45,500
• Fixed Cost: 3,250 hrs (need 4 slabs of 1,000 hrs)
• Additional Fixed cost = 4 x 6,000 = ₹24,000
• Net Benefit: 45,500 - 24,000 = ₹21,500

• Scenario 2: Limit to 3,000 hours (1,500 units) to avoid the 4th fixed cost slab.
• Total Variable Saving: 1,500 x 28 = ₹42,000
• Fixed Cost Steps: 3,000 hrs (need 3 slabs of 1000 hrs)
• Additional Fixed cost = ₹3 x 6,000 = ₹18,000
• Net Benefit: 42,000 - 18,000 = ₹24,000

Conclusion:
Scenario 2 yields a higher net benefit (₹24,000 vs ₹21,500).

• The incremental saving from the last 125 units (125x28 = ₹3,500) is less than the incremental fixed
cost to produce them (₹ 6,000).
• Therefore, manufacture 1,500 units in second shift (utilizing exactly 3,000 hours), and
• buy the last 125 units instead of making them in the second shift.

3. (b):
Part (i): Determination of Transfer Price for Division A
1. Calculation of Total Capital Employed (Investment)
The return on investment (ROI) is calculated on the total assets employed by the division.
• Fixed Assets: ₹ 5,00,000
• Current Assets (excluding Debtors): ₹ 3,00,000
• Debtors: ₹ 2,00,000
• Total Capital Employed: ₹ 5,00,000 + ₹ 3,00,000 + ₹ 2,00,000 = ₹ 10,00,000

2. Calculation of Required Return

• Target ROI: 28% on Capital Employed
• Required Return Amount: 28% of ₹ 10,00,000 = ₹ 2,80,000

3. Calculation of Total Cost

• Variable Cost: ₹ 10 per unit × 4,00,000 units = ₹ 40,00,000
• Annual Fixed Cost: ₹ 8,00,000
• Total Cost: ₹ 40,00,000 + ₹ 8,00,000 = ₹ 48,00,000
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4. Calculation of Transfer Price
• Total Sales Revenue Required = Total Cost + Required Return
• Total Revenue = ₹ 48,00,000 + ₹ 2,80,000 = ₹ 50,80,000
• Transfer Price per Unit = Total Revenue / Total Units
• Transfer Price = ₹ 50,80,000 / 4,00,000 units = ₹ 12.70 per unit

Part (ii): Impact of External Sales on Transfer Price

In this scenario, Division A has a dual role: selling internally and externally. The problem states that
Division A cannot increase output beyond 4,00,000 units, implying a capacity constraint.
1. Analysis of the External Sale
• Quantity sold externally: 20% of 4,00,000 = 80,000 units
• External Selling Price: ₹ 14 per unit
• Remaining capacity for internal transfer: 4,00,000 - 80,000 = 3,20,000 units

2. Calculation of Revised Transfer Price

Since the division still aims to achieve the same overall Return on Investment (ROI) of ₹ 2,80,000,
the profit earned from external sales will subsidize or affect the price charged to internal divisions.
• Target Total Revenue: ₹ 50,80,000 (as calculated in Part i)
• Less: Revenue from External Sales:
80,000 units × ₹ 14 = ₹ 11,20,000
• Revenue Required from Internal Sales:
₹ 50,80,000 - ₹ 11,20,000 = ₹ 39,60,000
• New Transfer Price per Unit:
• Revenue Required / Internal Units
₹ 39,60,000 / 3,20,000 units = ₹ 12.375 OR ₹ 12.38 per unit

3. Conclusion
• Effect: The transfer price charged to other divisions will decrease from ₹ 12.70 to ₹ 12.38 (approx).

4. (a):
Calculation of Contribution per Child:
Amount
Particulars
(₹)
Revenue per trip per child 4,000
Less: Variable Costs
- Train fare 1,700
- Meals 300
- Craft Materials 600
Total Variable Costs 2,600
Contribution per Child 1,400

1. Calculate "Average" Step Costs per Child

We convert the step costs into an approximate variable cost per child to use in the standard formula.
• Room Rent: ₹760 for 4 children = ₹190 per child.
• Transport: ₹1,200 for 6 children = ₹200 per child.
• Total Estimated Variable Cost (EVC):
• Pure Variable (Food, Fare, Craft ): ₹ 2,600
• Approx. Room Cost: ₹ 190
• Approx. Transport Cost: ₹ 200
• Total EVC: ₹ 2,990
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2. Calculate "Effective" Contribution
• Revenue per Child: ₹ 4,000
• Less: Total Approx. VC: ₹ 2,990
• Approx. Contribution: ₹ 1,010 per child.

3. Apply Standard BEP Formula

• Fixed Cost: ₹ 5,18,130
• Estimated BEP = Fixed Cost / Approx. Contribution
• The minimum number of children required to:
Break-Even Point = ₹5,18,130 / ₹1,010 = 513
The minimum number of children required to cross the Break-Even Point = 514

4. (b):
Part (I): Evaluation of the Proposal (Lid Based) (Cost per 1,000 Lids)
Objective: To determine the net cost of producing 1,000 lids in-house and compare it to the market purchase
price.
1. Material Input:
• Lids required: 1,000
• Tins per lid: 1 / 5 = 0.2
• Total tins required: 1,000 x 0.2 = 200 tins

2. Calculation of Net Cost per 1,000 Lids:

Amount
Particulars Calculation
(₹)
A. Incremental Costs
Opportunity Cost of Tins 200 tins x ₹8 1,600
Conversion Cost 1,000 lids x (₹ 50/100) 500
Gross Cost 2,100
B. Less: Recovery from Scrap
Input Weight (Tins) 200 tins x 1 kg 200 kg
Less: Output Weight (Lids) 1,000 lids x 0.12 kg (120 kg)
Scrap Weight (Off-cuts) 80 kg
Recovery Value 80 kg x ₹5 (400)
C. Net Cost per 1,000 Lids 1,700

3. Decision:
• Net Cost per Lid: ₹ 1,700 / 1,000 = ₹1.70
• Market Purchase Price: ₹2.00
• Conclusion: Since the cost to make a lid in-house (₹ 1.70) is lower than the cost to buy it (₹ 2.00), the
proposal is financially viable and should be ACCEPTED.

Part (II): Statement of Estimated Monthly Savings

Objective: To quantify the total financial benefit considering the production constraint of 15,000 scrapped
tins.
1. Production Volume:
• Maximum lids producible: 15,000 tins x 5 = 75,000 lids
• Balance lids to be purchased: 1,00,000 - 75,000 = 25,000 lids

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2. Calculation of Savings:
Particulars Calculation Amount (₹)
A. Present Cost (Status Quo)
Purchase of 1,00,000 Lids 1,00,000 x ₹2.00 2,00,000
Less: Revenue from Scrap Tins 15,000 x ₹8.00 (1,20,000)
Net Cost (Current) 80,000
B. Proposed Cost
Purchase of 25,000 Lids 25,000 x ₹2.00 50,000
Cost of 75,000 Internal Lids 75,000 x ₹1.70 1,27,500
Gross Proposed Cost 1,77,500
Less: Scrap Tin Revenue 15,000 tins x ₹8.00 1,20,000
Net Cost (Proposed) 57,500
C. Net Monthly Savings (A) - (B) 22,500

Recommendation:
The Company should accept the proposal to convert scrapped tins into lids, as it will generate a net monthly
saving of ₹ 22,500.

Alternative: (Total Cost Based)

Working Note:
1. Production of Lids from Scrap:
• Available Scrapped Tins = 15,000 tins
• Lids per Tin = 5 lids
• Total Lids Produced = 15,000 x 5 = 75,000 lids

2. Calculation of Scrap (Off-cuts):

• Total Weight Input (Tins) = 15,000 tins x 1 kg = 15,000 kg
• Total Weight Output (Lids) = 75,000 lids x 0.120 kg = 9,000 kg
• Weight of Off-cuts = 15,000 - 9,000 = 6,000 kg

Part (I): Evaluation of the Proposal

Comparative Cost Statement (Monthly Basis)
Option A: Status Quo Option B: Proposal
Particulars
(Buy All) (Make + Buy Bal.)
A. Requirements
Total Requirement of Lids 1,00,000 1,00,000
(-) Produced Internally Nil (75,000)
Balance to be Purchased 1,00,000 25,000
B. Cost Analysis (₹)
Cost of Purchase (@ ₹2/lid) 2,00,000 50,000
Conversion Cost (@ ₹0.50/lid) (75,000 x 50/100) Nil 37,500
(B) Total Direct Outflow 2,00,000 87,500
C. Revenue / Opportunity (₹)
Sale of Scrapped Tins (@ ₹8/tin) (1,20,000) Nil
Sale of Off-cuts (@ ₹5/kg) (6,000 kg x 5) Nil (30,000)
(C) Total Recovery (1,20,000) (30,000)
D. Net Cost to Company (B - C) 80,000 57,500

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Conclusion:
The Net Cost under the Proposal (₹ 57,500) is lower than the Status Quo (₹ 80,000). Therefore, the proposal
is financially viable.

Part (II): Statement of Estimated Savings

Incremental Savings Analysis
Amount
Particulars Computation
(₹)
(A) Benefits (Inflows)
Savings in Purchase Cost of Lids 75,000 lids x ₹ 2.00 1,50,000
Revenue from Sale of Off-cuts 6,000 kg x ₹ 5.00 30,000
Total Benefits 1,80,000
(B) Costs (Outflows)
Loss of Revenue from Scrapped Tins 15,000 tins x ₹ 8.00 1,20,000
Conversion Costs 75,000 lids x ₹ 0.50 37,500
Total Costs 1,57,500
(C) Net Monthly Savings (A) - (B) 22,500
(D) Annual Savings ₹ 22,500 × 12 2,70,000

Recommendation:
The company should ACCEPT the proposal as it results in a net monthly saving of ₹ 22,500 (Annual
Savings: ₹ 2,70,000) while fulfilling 75% of the lid requirement internally.

5. (a):
1. Budgeted profit (for 2024–25)
SP/unit Cost/unit Profit/unit Total Profit
Product Budgeted units
(₹) (₹) (₹) (₹)
X 25,000 40 28 12 3,00,000
Y 20,000 60 48 12 2,40,000
Z 15,000 80 64 16 2,40,000

• Total Budgeted Profit = 3,00,000 + 2,40,000 + 2,40,000 = ₹ 7,80,000

2. Actual profit (for 2024–25)

Actual SP Actual Cost Profit/unit Total Profit
Product Actual units
(₹) (₹) (₹) (₹)
X 20,000 42 30 12 2,40,000
Y 22,000 56 50 6 1,32,000
Z 16,000 81 63 18 2,88,000

• Total Actual Profit = 2,40,000 + 1,32,000 + 2,88,000 = ₹ 6,60,000

Profit Variance Analysis Let:

• Standard profit/unit = Standard SP − Standard Cost
• Actual profit/unit = Actual SP − Actual Cost

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Decompose total profit variance into:
1. Cost variance
2. Sales price variance
3. Sales volume variance

1. Cost variance (on actual quantity at standard SP)

Cost variance = [(Std cost−Actual cost)×Actual qty]
• X: (28 − 30) × 20,000 = (−2) × 20,000 = ₹ 40,000 (A)
• Y: (48 − 50) × 22,000 = (−2) × 22,000 = ₹ 44,000 (A)
• Z: (64 − 63) × 16,000 = 1 × 16,000 = ₹ 16,000 (F)

Cost variance:
Total = −40,000 − 44,000 + 16,000 = ₹ 68,000 (Adverse)

2. Sales price variance (on actual quantity)

Sales price variance = [(Actual SP−Std SP)×Actual qty]
• X: (42 − 40) × 20,000 = 2 × 20,000 = ₹ 40,000 (F)
• Y: (56 − 60) × 22,000 = (−4) × 22,000 = ₹ 88,000 (A)
• Z: (81 − 80) × 16,000 = 1 × 16,000 = ₹ 16,000 (F)

Net sales price variance:

Total = 40,000 − 88,000 + 16,000 = ₹ 32,000 (Adverse)

3. Sales volume variance (at standard profit per unit)

Sales volume variance = [(Actual qty−Budget qty)×Std profit/unit]

Standard profit per unit:

• X: 40 − 28 = 12
• Y: 60 − 48 = 12
• Z: 80 − 64 = 16

Now:
• X: (20,000 − 25,000) × 12 = (−5,000) × 12 = ₹ 60,000 (A)
• Y: (22,000 − 20,000) × 12 = 2,000 × 12 = ₹ 24,000 (F)
• Z: (16,000 − 15,000) × 16 = 1,000 × 16 = ₹ 16,000 (F)

Net sales volume variance:

Total = −60,000 + 24,000 + 16,000 = ₹ 20,000 (Adverse)

Reconciliation
Total profit variance:
• Budgeted profit − Actual profit
= 7,80,000 − 6,60,000 = ₹ 1,20,000 (Adverse)

Sum of component variances:

• Cost variance (A) ₹ 68,000
• Sales price variance (A) ₹ 32,000
• Sales volume variance (A) ₹ 20,000
Total = 68,000 + 32,000 + 20,000 = ₹ 1,20,000 (Adverse)
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5. (b):
Material Variances for Chem Co Ltd.
Working Note 1: Standard Input for Actual Output
Since standard yield = 75%, the standard input required to produce 1,800 kg output is: Standard Input
= Actual Output/Standard Yield %=1,800/0.75=2,400 kg
Standard Mix for 2,400 kg input:

Standard Mix Quantity Standard Standard

Material
% (kg) Price (₹/kg) Cost (₹)
A 80% 1,920 50 96,000
B 20% 480 100 48,000
Total 2,400 1,44,000

Working Note 2: Actual Cost Calculation

Actual Price Actual Cost
Material Actual Qty (kg)
(₹/kg) (₹)
A 1,400 60 84,000
B 600 90 54,000
Total 2,000 1,38,000

(I) Material Price Variance Formula:

MPV = (Standard Price−Actual Price) × Actual Quantity
Amount
Material (SP - AP) × Actual Qty
(₹)
A (50 - 60) = -10 × 1,400 14,000 (A)
B (100 - 90) = 10 × 600 6,000 (F)

Total Material Price Variance = ₹ 8,000 (Adverse)

Working Note 3: Revised Standard Quantities (for Mix Variance)

To calculate mix variance, restate the actual total input (2,000 kg) in standard proportions:
Revised Standard Qty
Standard Mix
Material (kg)
%
(for 2,000 kg input)
A 80% 1,600
B 20% 400
Total 2,000

(II) Material Mix Variance Formula:

MMV = (Revised Std Qty − Actual Qty) × Standard Price

Amount
Material (Revised Std Qty - Actual Qty) × Standard Price
(₹)
A (1,600 - 1,400) = 200 × 50 10,000 (F)
B (400 - 600) = -200 × 100 20,000 (A)

Total Material Mix Variance = ₹ 10,000 (Adverse)

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(III) Material Yield Variance
= (Standard Quantity for Actual Output – Actual Quantity in standard Proportion) × Standard Rate
Material A = (1920 – 1600) × 50 = 16000 (F)
Material B = (480 – 400) × 100 = 8000 (F)
₹ 24,000 (Favourable)
Calculation of Standard Quantities
Standard Input for Actual Output (1,800 kg):
Standard Input=1,800/0.75=2,400 kg

Standard Quantities (SQ):

• Material A: 2,400 × 80% = 1,920 kg
• Material B: 2,400 × 20% = 480 kg

Revised Standard Quantities (RSQ) for Actual Input (2,000 kg):

• Material A: 2,000 × 80% = 1,600 kg
• Material B: 2,000 × 20% = 400 kg

Alternative:
Material Yield Variance
Step 1:
Calculate Standard Output for Actual Input
Standard Output=Actual Total Input × Standard Yield %=2,000×0.75 = 1,500 kg
Step 2:
Calculate Standard Cost per kg of Output
Std Cost per kg =Total Std Cost for Actual Output/Actual Output
=1,44,000/1,800=₹80 per kg
Step 3:
Calculate Yield Variance Formula:
Yield Variance = (Actual Output−Std Output for Actual Input) × Std Cost per kg
= (1,800−1,500) × 80 = 300×80 = ₹24,000
Material Yield Variance = ₹ 24,000 (Favourable)

Alternative Presentation:
Working Note 1:
Variance Analysis -
(I) (II) (III) (IV)
Material
SP × SQ SP × RSQ SP × AQ AP × AQ
50 × 1,920 50 × 1,600 50 × 1,400 60 × 1,400
A
= 96,000 = 80,000 = 70,000 = 84,000
100 × 480 100 × 400 100 × 600 90 × 600
B
= 48,000 = 40,000 = 60,000 = 54,000
Total 1,44,000 1,20,000 1,30,000 1,38,000

Where:
• SP = Standard Price per kg
• SQ = Standard Quantity for Actual Production
• RSQ = Revised Standard Quantity (for actual total input)
• AQ = Actual Quantity used
• AP = Actual Price per kg
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 Calculation of Variances:
Material A Material B Total
Variance Type Formula
(₹) (₹) (₹)
96,000 − 80,000 48,000 − 40,000
Material Yield Variance (I) − (II)
= 16,000 (F) = 8,000 (F) 24,000 (F)

80,000 − 70,000 40,000 − 60,000

Material Mix Variance (II) − (III)
= 10,000 (F) = 20,000 (A)
10,000 (A)

70,000 − 84,000 60,000 − 54,000

Material Price Variance (III) − (IV)
= 14,000 (A) = 6,000 (F)
8,000 (A)

6. (a):
Flexible Budget at 60% and 80% Capacity
(All figures in ₹ Lakhs, except per unit data)
Sl. Particulars 50% Capacity 60% Capacity 80% Capacity
1 Production (Units) 5,00,000 6,00,000 8,00,000
2 Sales Revenue (Units × SP) 5,000 5,880 7,600
3 Variable Costs:
Material Cost 2,500 3,060 4,200
Labour Cost (₹150/unit) 750 900 1,200
Variable Factory OH (₹90/unit) 450 540 720
Variable Admin OH (₹50/unit) 250 300 400
4 Total Variable Cost 3,950 4,800 6,520
5 Contribution (2 – 4) 1,050 1,080 1,080
6 Fixed Costs:
Fixed Factory OH 300 300 300
Fixed Admin OH 250 250 250
7 Total Fixed Cost 550 550 550
8 Net Profit (5 – 7) 500 530 530
Comments:
Both capacity levels yield the same net profit of ₹530 Lakhs. From a pure profitability perspective,
there is no financial benefit to increase capacity from 60% to 80%. Hence the company should
operate at 60% capacity.

Working Note 1:
Determination of Production Volumes
Full Capacity Calculation:
100% Capacity = 5,00,000 / 50% = 10,00,000 units
Production at Required Levels:
• At 60% Capacity: 10,00,000 × 0.60 = 6,00,000 units
• At 80% Capacity: 10,00,000 × 0.80 = 8,00,000 units
Revised Costs and Prices at Different Capacities
Particulars 50% Capacity 60% Capacity 80% Capacity
Units Produced 5,00,000 6,00,000 8,00,000
Material Cost/Unit ₹500 ₹510 (500 + 2%) ₹525 (500 + 5%)
Selling Price/Unit ₹1,000 ₹980 (1000 - 2%) ₹950 (1000 - 5%)
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Alternative Solution
Flexible Budget at Different Capacity Levels
(All figures in ₹ Lakhs except per unit figures)
Sl. Particulars 50% Capacity 60% Capacity 80% Capacity
1 Production (units) 5,00,000 6,00,000 8,00,000
2 Material Cost
Cost per unit (₹) 500 500+10 = 510 500+25 = 525
Total Cost (₹ Lakhs) 2,500 3,060 4,200
3 Labour Cost
Cost per unit (₹) 150 150 150
Total Cost (₹ Lakhs) 750 900 1,200
4 Variable Overheads
Factory @ ₹90/unit 450 540 720
Administration @ ₹50/unit 250 300 400
Sub-total 700 840 1,120
5 Total Variable Cost (2+3+4) 3,950 4,800 6,520
6 Fixed Overheads
Factory 300 300 300
Administration 250 250 250
Sub-total 550 550 550
7 Total Cost of Production (5+6) 4,500 5,350 7,070
8 Selling Price per unit (₹) 1,000 980 950
9 Total Sales Revenue (₹ Lakhs) 5,000 5,880 7,600
10 Profit (9 - 7) (₹ Lakhs) 500 530 530

Comments:
Both capacity levels yield the same net profit of ₹530 Lakhs. From a pure profitability perspective, there is
no financial benefit to increase capacity from 60% to 80%. Hence the company should operate at 60%
capacity.

Working Note 1:
Determination of Production Volumes
Full Capacity Calculation:
100% Capacity = 5,00,000 / 50% = 10,00,000 units
Production at Required Levels:
• At 60% Capacity: 10,00,000 × 0.60 = 6,00,000 units
• At 80% Capacity: 10,00,000 × 0.80 = 8,00,000 units

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6. (b):
(i) Schedule of Cash Collections Expected (April, May, June 2025)
(₹ in Lakhs)
Source of Collection April 2025 May 2025 June 2025
From February Sales (₹120)
2nd month credit (20%) 24 - -
From March Sales (₹160)
1st month credit (55%) 88 - -
2nd month credit (20%) - 32 -
From April Sales (₹200)
Cash sales (25%) 50 - -
1st month credit (55%) - 110 -
2nd month credit (20%) - - 40
From May Sales (₹200)
Cash sales (25%) - 50 -
1st month credit (55%) - - 110
From June Sales (₹200)
Cash sales (25%) - - 50
Total Cash Collections 162 192 200

(ii) Additional Collections if 1-Month Credit Enforced Strictly

(₹ in Lakhs)
Month 1-Month Delay (New) 2-Month Delay (Old) Additional Collection (Net)
April 32 (March Sale) 24 (February Sale) (32 - 24) = 8
May 40 (April Sale) 32 (March Sale) (40 - 32) = 8
June 40 (May Sale) 40 (April Sale) (40 - 40) = 0

Alternative:
Additional Collections if 1-Month Credit Enforced Strictly
March Sales (₹160L) - Made before April
• Original policy applies: 55% in April + 20% in May
• But: If applying the new policy to March sales collection happening in April/May, then:
• The 20% scheduled for May (₹32L) is brought forward to April
• Additional collection in April: ₹32L

April Sales (₹200L) - Made from April

• Old policy: 55% in May (₹110L) + 20% in June (₹40L)
• New strict policy: 75% in May (₹150L) + 0% in June
• The 20% (₹40L) that would have been collected in June is brought forward to May
• Additional collection in May: ₹40L

May Sales (₹200L) - Made from April

• Old policy: 55% in June (₹110L) + 20% in July (₹40L)
• New strict policy: 75% in June (₹150L) + 0% in July
• The 20% (₹40L) that would have been collected in July is brought forward to June
• Additional collection in June: ₹40L

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7. (a):
(i) DuPont Analysis - Return on Equity (ROE)
Three-Step DuPont Formula
ROE=Net Profit Margin × Asset Turnover × Equity Multiplier
Step 1:
Net Profit Margin
Net Profit Margin=PAT / Sales=70,000/12,00,000=0.0583=5.83%
Step 2:
Asset Turnover Ratio
Asset Turnover=Sales / Total Assets=12,00,000/8,00,000=1.50 times
Step 3:
Equity Multiplier (Financial Leverage)
Equity Multiplier = Total Assets/Shareholder’s Equity
= 8,00,000/4,00,000 = 2.00 times
ROE Calculation
ROE=5.83%×1.50×2.00 = 17.50%

Analysis:
Shareholders earn 17.50% return on their investment

Alternative Calculation:
ROE=PAT/Shareholder’s Equity=70,000/4,00,000 = 17.50%

Analysis:
Shareholders earn 17.50% return on their investment

Working Notes
WN 1: Calculation of Net Profit After Tax (PAT)
Amount
Particulars
(₹)
Net Operating Income (before tax) 1,20,000
Less: Tax @ 25% (30,000)
Net Operating Income (after tax) = NOPAT 90,000
Less: Interest Expenses (after tax) (20,000)
Net Profit After Tax (PAT) 70,000

Economic Value Added (EVA)

EVA = NOPAT − (Capital Employed × WACC)
Calculation
Amount
Particulars
(₹)
NOPAT (Net Operating Profit After Tax) 90,000
Less: Capital Charge (₹6,00,000 × 10%) (60,000)
Economic Value Added (EVA) 30,000

Interpretation
EVA = ₹30,000 (Positive)
Sagar Limited is creating shareholder value. The company generates ₹30,000 in excess returns over and
above the minimum required return (WACC of 10%). This indicates efficient utilization of capital and value
creation for shareholders.
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(ii) Relationship Between DuPont ROE and EVA
• ROE of 17.50% exceeds WACC of 10% by 7.50 percentage points.
• This spread of 7.5% indicates positive value creation, which is confirmed by positive EVA ₹30,000 in
absolute value after meeting all capital costs

7. (b):
CS LLP - Sailing Boat Contract Analysis
Profit/Contribution Analysis
Amount
Particulars
(₹)
Contract Price (Revenue) 1,10,000
Less: Relevant Variable Costs (1,02,120)
Contribution to Profit 7,880
Less: Fixed Overheads (Allocated) (9,360 hrs × ₹ 0.50) 4,680
Net Profit
Note:The question asks "Calculate the profit / loss", and usually, that means the bottom-
line figure. Showing both Contribution (₹7,880) and Net Profit (₹3,200) is the ultimate
answer. 3,200

Contribution (useful for the "short of work" decision/Marginal costing) and the Net Profit
(satisfying the literal "Calculate Profit"/Absorption costing).

Relevant (Variable) Costs for 90 Boats

Amount
Cost Element Calculation
(₹)
Direct Materials 90 boats × ₹666.67 60,000
Direct Labour 9,360 hours × ₹4 37,440
Variable Overhead 9,360 hours × ₹0.50 4,680
Total Relevant Cost 1,02,120

Working Notes
WN 1: Calculation of Labour Hours (Initial 30 Boats)
Amount
Particulars Calculation
(₹)
Variable Overhead Given 3,000
Rate per labour hour Given 0.50
Total Labour Hours (30 boats) ₹3,000 ÷ ₹0.50 6,000 hours

Average time per boat (initial 30 boats) = 6,000 ÷ 30 = 200 hours per boat

WN 2: Learning Curve Calculation (80% Rate)

Concept: With an 80% learning curve, when cumulative output doubles, the average time per unit becomes
80% of the previous average.
Cumulative Average Time Calculation:
Cumulative Average Time per Unit
Calculation
Units (Hours)
30 boats Given (base) 200.00
60 boats 200 × 0.80 160.00
120 boats 160 × 0.80 128.00

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WN 3: Total Labour Hours Calculation
Production Level Units Average Hours/Unit Total Hours
First 30 boats 30 200 6,000
First 120 boats (30 + 90) 120 128 15,360
Incremental (90 boats) 90 - 9,360

WN 4: Cost per Labour Hour

Labour cost per hour = Direct Labour ÷ Total hours = ₹24,000 ÷ 6,000 hours = ₹4 per hour WN 5: Direct
Material per Boat
Material per boat = ₹20,000 ÷ 30 boats = ₹666.67 per boat

8. (a):
Swadist Ltd. - Strategic Decision Analysis
Given Pay-off Matrix (₹)
N1 N2 N3
Strategy
(High Increase) (No Change) (Decrease)
S1 (Revolutionary product, high price) 7,00,000 3,00,000 1,50,000
S2 (Moderate change, small price increase) 5,00,000 4,50,000 0
S3 (Small price change) 3,00,000 3,00,000 2,00,000

(i) Maximin Criterion

Minimum Payoff
Strategy
(₹)
S1 1,50,000 (N3)
S2 0 (N3)
S3 2,00,000 (N3)
Decision
Select Strategy S3 – It guarantees a minimum profit of ₹2,00,000 regardless of market conditions.

(ii) Maximax Criterion

Maximum Payoff
Strategy
(₹)
S1 7,00,000 (N1)
S2 5,00,000 (N1)
S3 3,00,000 (N1 or N2)

Decision
Select Strategy S1 – It offers the highest potential profit of ₹7,00,000 if market responds favorably.

(iii) Laplace Criterion

Probability for each state = 1/3 (since 3 states of nature)
Total Payoff Average Payoff
Strategy N1 N2 N3
(₹) (₹)
S1 7,00,000 3,00,000 1,50,000 11,50,000 3,83,333
S2 5,00,000 4,50,000 0 9,50,000 3,16,667
S3 3,00,000 3,00,000 2,00,000 8,00,000 2,66,667

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Calculations:
• S1: (7,00,000 + 3,00,000 + 1,50,000) ÷ 3 = ₹3,83,333
• S2: (5,00,000 + 4,50,000 + 0) ÷ 3 = ₹3,16,667
• S3: (3,00,000 + 3,00,000 + 2,00,000) ÷ 3 = ₹2,66,667
Decision
Select Strategy S1 – It provides the highest average expected value of ₹3,83,333.
(iv) Hurwicz Criterion [α = 0.4]
Coefficient of optimism (α) = 0.4
Coefficient of pessimism (1 - α) = 0.6
Max Payoff Min Payoff Weighted Payoff
Strategy
(₹) (₹) (₹)
(0.4 × 7,00,000) + (0.6 × 1,50,000)
S1 7,00,000 1,50,000
= 2,80,000 + 90,000 = 3,70,000
(0.4 × 5,00,000) + (0.6 × 0)
S2 5,00,000 0
= 2,00,000 + 0 = 2,00,000
(0.4 × 3,00,000) + (0.6 × 2,00,000)
3,00,000 2,00,000
S3 = 1,20,000 + 1,20,000 =2,40,000

Decision
Select Strategy S1 – It provides the highest weighted value of ₹3,70,000 under the realism criterion.

8. (b):
Characteristics of Responsibility Reporting:
1. Reports should fit the organization chart, that is, the report should be addressed to the individual
responsible for the items covered by it, who, in turn, will be able to control those costs under his
jurisdiction. Managers must be educated to use the results of the reporting system.
2. Report should be prompt and timely. Prompt issuance of a report requires that cost records be
organized so that information is available when it is needed.
3. Reports should be issued with regularity. Promptness and regularity are closely tied up with the
mechanical aids used to assemble and issue reports.
4. Reports should be easy to understand. Often, they contain accounting terminology that managers with
little or no accounting training find difficult to understand, and vital information may be incorrectly
communicated. Therefore, accounting terms should be explained or modified to fit the user. Top
management should have some knowledge of the kind of items chargeable to an account as well as
the methods used to compute overhead rates, make cost allocations and analyze variances.
5. Reports should convey sufficient but not excessive details. The amount and nature of the details
depend largely on the management level receiving the report. Reports to management should neither
be flooded with immaterial facts nor so condensed that management lacks vital information essential
to carrying out its responsibilities.
6. Reports should give comparative figures, i.e., a comparison of actual with budgeted figures or of
predetermined standards with actual results and the isolation of variances.
7. Reports should be analytical. Analysis of underlying papers, such as time tickets, scraps tickets, work
orders, and materials requisitions, provide reasons for poor performance which might have been due
to power failure, machine breakdown, an inefficient operator, poor quality of materials, or many other
similar factors.
8. Reports should be stated in physical units as well as in terms of money since monetary information
may give a foreman not trained in the language of the accountant a certain amount of difficulty.
9. Reports may tend to highlight departmental efficiencies and inefficiencies, results, achieved future
goals or targets.
_________________________
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