SJC Institute - Download our mobile app from    

45 Case Study Theory Questions for CA Final Costing

Download this by clicking on – Download E-BOOK link.

                                                                                                                                                                                              Special Question  – Altogether new for many of you!

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 is referred to as the ‘Drum’ as it determines the pace or ‘beat’ of the entire system. Decide how to Exploit the System’s Constraint(s), the constraint resource cannot be allowed to waste one moment of its capacity. This means that it should never be stopped waiting for parts and should not use capacity producing anything other than the parts required to fulfill sales orders. To ensure this we finitely schedule the Drum creating a Drum Schedule. The Drum schedule should maximise the Throughput of the Constraint and provide a detailed plan 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 that have to be met by the non-constraints in the system in order to meet the Drum Schedule and ultimately the shipping schedule. Understanding that we have to protect the constraint from lost capacity due to these breakdowns, a Buffer of time is used.  The Constraint buffer is a pre-determined length of time; we must release the order into the system before the order is due on the Drum Schedule. As all other resources have more capacity than the constraint (by definition), the effect of introducing parts a buffer time before they are due at the constraint is that work builds up in front of the constraint and protects it from breakdowns on preceding operations.

To ensure that too much inventory is not introduced into the system, it is important to start a 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 the Drum Schedule minus the Constraint Buffer time giving a schedule for material release into the 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 tied from the Drum to the Shipping Schedule. The rope length is a buffer of time to ensure the shipping 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 properly handled in implementation; otherwise non-constraint resources will slow down to protect themselves from perceived negative consequences of not being busy all the time. This will of course impact Throughput and delivery performance.


Watch Throughput Accounting Video on SJC Website for Practicals



Total Quality Management


Eight Dimensions of Quality

  1. Performance: Performance refers to a product’s primary operating characteristics. This dimension of quality involves measurable attributes; brands can usually be ranked objectively on individual aspects of performance.
  2. Features: Features are additional characteristics that enhance the appeal of the product or service to the user.
  3. Reliability: Reliability is the likelihood that a product will not fail within a specific time period. This is a key element for users who need the product to work without fail.
  4. Conformance: Conformance is the precision with which the product or service meets the specified standards.
  5. Durability: Durability measures the length of a product’s life. When the product can be repaired, estimating durability is more complicated. The item will be used until it is no longer economical to operate it. This happens when the repair rate and the associated costs increase significantly.
  6. Serviceability: Serviceability is the speed with which the product can be put into service when it breaks down, as well as the competence and the behavior of the serviceperson.
  7. Aesthetics: Aesthetics is the subjective dimension indicating the kind of response a user has to a product. It represents the individual’s personal preference.
  8. Perceived Quality: Perceived Quality is the quality attributed to a good or service based on indirect measures.


Question 1

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

  • Consistency of performance over
  • Primary product characteristic
  • Exterior finish of a product
  • Useful life of a product


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



(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.  State whether and why the following are valid or not for the successful implementation of TQM.

  • Some departments serve both the external and internal customers. These departments have been advised to focus on satisfying the needs of the external custom
  • Hold  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.




Point Valid/ Invalid Reason
(i) Invalid TQM   advocates   focus   to  be  given   on  both  external   and  internal customers. Hence, focus satisfying the needs of the external customers only will not be valid for the successful implementation of TQM.
(ii) Valid Training   at   the   beginning   would   improve   productivity   by   bringing standardization in work habits and eliminating variations in production.
(iii) Invalid For implementation of TQM, Management by Objectives should be eliminated as targets of production will encourage delivery of poor quality goods and thus will defeat the collective nature of TQM.
(iv) Invalid Appointing the head of each department as the responsible person is not valid for the successful implementation of TQM as Total Employee Involvement (TIE) principle is an important part of TQM.
(v) Invalid Documentation,  procedures  and awareness  of current best practice are essential in TQM implementation. If documentation and procedures 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 costing in each of the following independent situations:

  1. Company K produces one product. The overhead costs mainly consist of depreciation.
  2. Company L produces 5 different products using different production facilities.
  3. A consultancy firm consisting of lawyers, accountants and computer engineers provides management consultancy services to
  4. Company S produces two different labour intensive products. The contribution per unit in both products is very high. The BEP is very low. All the work is carried on efficiently to meet the target costs.



Sl. No Description Recommend

ABC  (Yes / No)

(i) K produces one product. Overhead is mainly depreciation. No      One  product  situation.  For  allocation of overhead, ABC is not required.

     ABC for cost reduction  not beneficial since most of the overhead is depreciation.

(ii) L produces 5 different products with

different facilities.

Yes      Multi    product    situation.    ABC    is required 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  is required for cost allocation.

    Services are very different.

    ABC is necessary for pricing.

    Cost reduction possible.

(iv) S produces 2 different labour intensive products. High unit contribution and efficient operations. No      Different      products,      but      labour intensive. Hence, overhead allocation based   on   readily   traceable   direct labour cost will be accurate. Hence, ABC not required for cost allocation.

     Low  BEP  level  implies  low  level  of fixed cost as a % of sale price or as a

% of total cost.

     Many  fixed  cost  activity  drivers  are likely to align with the direct labour costs. Hence not required for cost allocation.

     Efficient  operation.  Hence  ABC  not required  even  for  cost  reduction  or ABC management.


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 software
  • Maintenance  by  a  software   company   of  receivables   management   software   for  a banking compan
  • Painting of pencils manufactured by a pencil factor
  • Cleaning of customers’ computer key boards by a computer repair
  • Providing, brake adjustments in cars received for service by a car service



Sl. No Item Value    Added    / Non Value Added
(i) Polishing  furniture  used  by  a  Systems  Engineer  in  a  software firm. Non-Value


(ii) Maintenance by a software company of receivables management software 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 service station. Value-Added


Target Costing> Kaizen Costing


Question 6

  1. M. India Ltd.  (MIL)  is  an  automobile  manufacturer  in India  and  a  subsidiary  of  Japanese automobile and motorcycle manufacturer Leon. It manufactures  and sells a complete 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 system of standard costing to set its budgets. Budgets are set semi-annually  by the Finance department  after the approval of the Board of Directors at MIL. The Finance department prepares variance reports each month for review in the  Board  of  Directors  meeting,  where  actual  performance  is  compared  with  the  budgeted figures.  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 the MIL.


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



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

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

Standard  Cost  Control  System  to  Cost  Reduction  System:  Traditionally  Standard  Costing system assumes stability in the current manufacturing  process and standards are set keeping the   normal   manufacturing   process   into   account   thus   the   whole   effort   is   on   to   meet performance cost standard. On the other hand Kaizen Costing believes in continuous improvements  in manufacturing  processes  and hence,  the goal is to 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  the existing 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 a week 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 Costing system participation  of workers or executives who are actually involved in the manufacturing  process are highly appreciated  while setting standards.  So the current system of setting budgets and standards by the Finance department with the mere consent of 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 to bring a large scale modification in production process.
  • Head (Personnel)  has  made  a  point  that  introduction  of  Kaizen  Costing  does  not eliminate the training requirement of em
  • General 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 and workers regarding their roles and degradation in quality of


  • 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 investm
  • Valid: 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 the shop 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 it also aims to maintain  the  quality.  Kaizen  costing  also  aims  to bring  the  clarity  in roles  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 a liberal budget for travel so as to research  into company’s  history, operations,  and market analysis  for the firm she selects for the article.


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



The product  life cycle  span  the time from the initial  R & D on a product  to when customer 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 and
  • High 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 industries where 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) – Cost Control 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



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


Sl. No. Item Category


(i) Costs     exceeding     budgets     or     standards     are investigated 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  standards set 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.  It has  a single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.

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

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


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



Primary activities are the activities that are directly involved in transforming inputs into outputs and delivery and after-sales support to output. Following are the primary activities in 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 the place of processing inside the fact
  • Operations: 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  goods to 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  are major part of these activities.
  • Service: These  activities  are  performed  after  selling  the  goods  to  the  consu
  • Installation, 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 produc
  • Procurement activities  are  included  in  the  Primary  activities  as  classified  by  Porter under value chain analysis c
  • As per  Porter’s  five  forces  model,  bargaining  power  of  buyers  does  influence  the profitability of an industry or m
  • Value chain analysis in the strategic framework consists of single cost driver con



(i)        Invalid

The  concepts,  tools  and  techniques  of  value  chain  analysis  apply  to  organizations which 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  primary activities.

(iii)      Valid

Bargaining power of buyers is one of the factor or force that influences the profitability of a market or industry. More the bargaining power buyers have, more the pressure on the industry  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  drivers concept. In value chain analysis, a set of unique cost drivers is identified for each value activity  instead  of single cost driver  application  at the overall  firm level. Multiple  cost drivers may be classified into Structural drivers and Executional drivers.


Question 12

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

  • Material Handling and warehousing – Primary
  • Purchasing of raw materials, supplies and other consumables – Support
  • Order Processing and distribution – Primary
  • Selection, placement and promotion of employees – Support
  • Installation, repair and parts replacement – Primary
  • Transforming input into final products – Primary
  • General Management, Planning, finance, accounting – Support
  • Communication, 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 on Mondays!”


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



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

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

–          make frequent deliveries  and

–          make supplies in the exact quantities as required

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


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 market skimming pricing policy for the launch of the product. This Software is currently in the Introduction  stage of its life cycle and is generating significant unit profits.



(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 its life cycle.

(ii)       Also suggest necessary strategies at this stage.



Following  acceptance  by early innovators,  conventional  consumers  start following  their lead. 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. The price needs to be lowered so that the product becomes  attractive to different market segments  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 Malware
  • Sourcing new market segments/ distribution channels.
  • Changing marketing strategy to increase dema
  • Lowering 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 be elastic.
  • ‘B’ is a new product for the company, but not for the market. B’s success is crucial for the company’s survival in the long term.
  • ‘C’ is a new product to the company and the market. It has an inelastic market. There needs to be an assured profit to cover high initial costs and the usual sources of capital have uncertainties blocking th
  • ‘D’ is a perishable item, with more than 80% of its shelf life over.



Situation Appropriate Pricing Policy
(i) ‘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 be elastic. Penetration Pricing
(ii) ‘B’ is a new product for the company, but not for the market. B’s success is crucial for the company’s survival in the long term. Market Price or Price Just

Below Market Price

(iii) ‘C’ is a new product to the company and the market. It has an inelastic market. There needs to be an assured profit to cover high initial costs and the unusual sources of capital have uncertainties blocking them. Skimming Pricing
(iv) ‘D’ is a perishable item, with more than 80% of its shelf life 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 independent situations:

  • Modern patented drug entering the mark
  • The 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  and launched good quality paper for printing at home and
  • A car  manufacturer  is  launching  an  innovative,  technologically  advanced  car  in  the highly priced seg




Situation Appropriate Pricing Policy
(i) Modern patented drug entering the market. Skimming Pricing
(ii) The latest version of a mobile phone is being launched by an established, financially strong company. Penetration Pricing
(iii) An established company has recently entered the stationery market segment and launched good quality paper for printing at home and office. Market Price
(iv) A car manufacturer is launching an innovative, technologically advanced car in the highly priced segment. Skimming Pricing



Zero Based Budgeting

Question  17

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

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. The activity 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 expectation can 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



  • The company has done  extensive  exercise  in year-I  that can be used  as a basis  for budgeting  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  is unable to substantiate his expectations into figures so Traditional Budgeting would be preferred against Zero Base Budgeti


  • Zero Base Budgeting would be appropriate as  ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas 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 spending cut-off level  (maximum  level  upto  which  spending  can  be  made).  In  an  organisation where  resources  are constrained  and budget  is allocated  on requirement  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 10 percent 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 of Component ‘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 price can 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, what will be the effect on the profits of the ‘Dx’ Division, the ‘Dz’ Division, and the company as a whole?
  • If the intermediate market price for Component ‘X’ is ` 35 per unit, is there any reason why the ‘Dx’ Division should sell to the ‘Dz’ Division for less than ` 35? Expla





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

Transfer Price = Variable Cost per unit + Lost Contribution Margin per unit on

Outside Sales



`21 + `14



Since the ‘Dx’ Division is operating at capacity, it will lose `14 in contribution margin for each 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 `35 is the intermediate  market price. That is, it would not be fair to charge the other Division more than the price being charged to regular customers. However, an upper limit is not really  relevant  in  this  situation  since  no  transfers  will  be  made  between  the  two Divisions.

(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  the company 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 price internally as it is now paying externally.

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

`35 less the avoided costs.


Uniform Costing and Inter Firm Comparison


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



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  or inform
  • A 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 fre
  • Bigger firms should take the lead towards sharing their experience and know- how with the smaller firm to enable the later to improve their performan
  • In case of accounting methods, principles, procedure and production method uniformity must be establishe



What is Uniform Costing? Why is it recommended?


It is not a distinct method of costing when several undertakings  start using the same costing principles or practices, they are said to be following uniform costing. Different concerns 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 helps in 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.



State the limitations of Uniform Costing.


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 a uniform costing system. Many firms do not wish to share such information with their competitors in the same indu
  • Small firms in an industry believe that uniform costing system is only meant for big and medium size firms, because they cannot afford
  • It induces monopolistic  trend  in the business,  due to which  prices  may  be increased artificially and supplies withhe


Question 22

What are the advantages of Uniform Costing?


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 its
  • A costing system  devised  by mutual  consultation  and after considering  the difficulties and circumstances prevailing in different firms is readily adopted and successfully implem
  • It facilitates comparison  of cost figures  of various  firms to enable  the firms to identify 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 cost data with
  • Services of  cost  consultants  or  experts  may  be  available  jointly  to  each  firm  in  the industry by sharing their experiences and expense
  • Research and development  benefits of bigger firms may be made available  to smaller firms.
  • 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  or concession    in   the   matters   of   taxation,   exports,   subsidies,    duties   and   prices determination
  • Unhealthy competition  is  avoided  among  the  firms  in  the  same  industry  in  framing pricing policies and submitting tender
  • Prices fixed on the basis of uniform costing are representative of the whole industry and thus are
  • Uniform costing provides a basis for the comparative assessment of the performance of two firms in the same industry but in different se
  • It helps  the  Government  in  regulating  the  prices  of  essential  commodities  such  as bread, sugar, cement, steel etc.



Enumerate the objectives of Uniform Costing.


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 ba
  • Eliminates 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 othe
  • Provides Relevant Data: To provide relevant cost information/ data to the Government for fixing and regulating prices of the product
  • Ensures Standardisation: To bring standardisation  and uniformity  in the operation  of participating un
  • Reduces Cost: To reduce production, administration, selling and distribution costs, and to exercise control on fixed c


Inter-firm Comparison


What are the advantages of Inter-firm Comparison?



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 that remedial measures may be taken.
  • It ensures an unbiased specialized reporting on particular problems of the concer
  • It 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



What are the limitations of Inter-firm Comparison?


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

  • There is a fear of losing secrecy of the production method or some peculiar process or method 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 be reliable for the purpose of comp
  • Suitable 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 that vows 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  18 villas  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 tables for the public, is acceptable proud of its 4-star rating.


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



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


Financial Perspective Economic Value Added
Revenue per villa
Customer Perspective % repeat customers
Number of customer complaints
Internal Business Service rating of spa
Staff hours per guest
% cost spent for maintenance
Travel guide rank for restaurant
Innovation and Learning Employee retention
Number 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 insufficient attention. 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 discount vouchers based on their spend and buying patterns at supermarkets  in an attempt to earn the 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.



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 new strategy of improving  the customer  experience.  You should state three perspectives,  an objective and a performance measure for each one of the three perspectives.



Non- Financial Perspective Objective Performance Measure
Customer Perspective Increase the customer loyalty.



Or Retaining the existing customers.

Percentage of customers using loyalty cards.


No. of discount vouchers redeemed.

Internal Business


For customers to pay for goods in a reasonable time.




Paying proper attention to the customers and their product enquiries.


Provide necessary support to the existing loyal customers.

Time spent by customers in queuing to pay for products at a check out.


Time spent by customers care executives in handling customers queries.


No. of times home delivery made.

Learning and Growth Perspectives  To have qualified staffs able to meet the needs of the customers


Or Adding new products for new segments

No. of staff training days



No. 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 to take 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 quarte
  • How many days are taken to service a loan, how many loans have taken longer, what additional loans are to be released soon, et



(i) New Product tie up —  Innovation / Learning Perspective
(ii) Growth of Volume —  Financial Perspective
(iii) Time for Loan / Fresh Products —  Customer Perspective




Question 29

Your  Bank  Ltd.,  was  established  on the 30th   September,  1940  under  the provisions  of Co- 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 capital and since then the Bank has been growing continuously.  At present, Bank has large number of membership of individuals  from different  sections.  The Bank has 12 branches  in the NCT of Delhi. Bank offers ‘traditional  counter service’. Opening hours are designed  to coincide with local market days.

Board of Directors were worried from growing popularity of new style banks. These banks offer diverse range of services  such as direct access  to executive  management,  a single point 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 a balanced scorecard to achieve this goal.



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.



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 to its customers.  The  share  of  existing  customers  should  have  a high  importance  as it indicates 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 improve services offered to retain customers.


 Balanced Scorecard- Telecom Company

Question 30

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


Particulars Current




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


10% 8% At least 15%


Evaluate the performance of the company using Balance Scorecard approach.



The balanced scorecard is a method which displays organisation’s performance into four dimensions   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  of performance  of the company using Balance Scorecard approach as follows:


  • Financial Perspective:  Operating  ratio  and  average  revenue  will  be covered  in this prospective Company  is unable  to achieve  its target of reducing  operating  ratio to 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 has increased from ` 210 to ` 225 but remains short of targeted ` 250. This is also one of the 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 more paid 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 long
  • Internal Business  Perspective:  Establishing  customer  relationship  centres  will  be covered under this perspective. Company has established 80 relationship centres in the current  period  exceeding  its target  of 50 (250-200)  to cater  to the needs  of existing consumers  as  well  as  soliciting  new  consumers.  This  shows  the  seriousness  of  the company towards the consumer satisfaction and would help them in the long run .
  • Learning and Growth Perspective: Employee training programmes are covered under this perspective. Company   had   set  a  target   to  cover   at  least   15%   employee   under   its  training programmes but covered only 10%. This could hurt capabilities of the employees which are needed for long term growth of the organisation 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 sources where 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 a shopping mall so that members  after working  out, can conveniently  shop,  dine, pick up their children from enrichment classes or go to the cinema.

Peter and Albert, the owners, pride themselves  for providing a customized  / tailored program by taking into account a person’s medical history, present fitness level, fitness goals, fitness interests and offer many other small amenities that might be difficult to get in a 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 style equipment. Peter and Albert  take care of most of the routine  operations,  along with a small permanent staff, and temporary staff.



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

(ii)       Construct  a ‘Balance  Scorecard’  for Fitness  Solution.  (2 measures  for each  of the 4 perspectives are sufficient)



(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 this industry and entry barriers are not high.

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




Operating expenses relative to budget
Cash flow
Total daily operating revenue


Turnover rate among members
Customer satisfaction rate


Number of employee complaints
Number of equipment not available on average day (due to maintenance)
Innovation and


Number of new equipment put into service
Number 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 Complaints
  • Patient Satisfaction Survey
  • Flight Cancellation Rate
  • On-time Performance of an Airline
  • Number of Grants Awarded to a Healthcare unit
  • Outstanding Loan Balances / Deposit Balances of a Banking Company
  • Employee Turnover Rate of a Healthcare unit
  • Patient Referral Rate
  • Non-interest Income of a Banking Company
  • Lost of Bag Reports per 5,000 Passengers



Statement Showing “Balance Scorecard Perspectives for Different Business Sectors”


              Health Care                           Airlines                  Banking              Banking
Weekly Patient Complaints Internal Operating


Patient Satisfaction Survey Customer Service & Satisfaction
Flight Cancellation Rate Customer Service

& Satisfaction

On-time Performance of an Airline Internal Operating


Number of Grants Awarded to a

Healthcare unit

Learning and


Outstanding Loan Balances / Deposit Balances of a Banking Company Financial


Employee Turnover Rate of a

Healthcare unit

Learning and


Patient Referral Rate Customer Service & Satisfaction
Non-interest Income of a Banking




Lost of Bag Reports per 5,000


Customer Service

& Satisfaction


Question  33

In the context of a balanced scorecard, identify the perspectives  of the following independent 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 reach of more number of students and absentees.
(iii) Computer Manufacturing Company Set up service centres is all major cities for after sales support.
(iv) Government Taxation


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




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/ Optimal Solution)


Question 34

The following information is given relating to the simplex method of a linear program with the 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  be variables to restate (3) as an equality.




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?



(i)       Working

Introducing Slack/ Surplus/ Artificial Variables

In Case of Maximization…


Z = x1 + 5×2  + 0s1 + 0s2 – MA2 … (1)
Subject to:  


6×1  + 8×2 + s1









… (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, 0 and – M respectively.


For Equation (3)

Coefficients of s1, s2, and A2 are 0, –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 of the 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 unit vector.

If s2  is included in the basis, the elements of the s2  will be 0 and –1 and thus not a unit vector.  This is contrary  to the non-negativity  restriction  i.e. all variables  must  have a positive 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  not represent any quantity relating to the decision problem and must not be present in the final solution (if at all they do, it represents  a situation of infeasibility).  Accordingly, in the initial tableau we will place Aalong 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, 0 and M respectively.


For Equation (3)

Coefficients of s1, s2, and A2 are 0, –1 and 1 respectively.



Question 35

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


Cj 6 4 10 0 0 0
















0 S1 400 0 4/3 0 1 -1/3 0
6 X1 400 1 2/3 2 0 1/3 0
0 S3 400 0 5/3 0 0 -2/3 1
Zj 2,400 6 4 12 0 2 0
Cj – 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 the same value for the objective
  • Indicate the shadow pr
  • If customer is prepared to pay higher price for product X3 then by how much should the price be increased so that the company’s profit remains unchanged?
  • From the given table, derive any one original constraint inequality with the coefficients of variables in their simplest whole number





Cj 6 4 10 0 0 0 Min. Ratio
CB Basic Variable Quantity X1 X2 X3 S1 S2 S3
0 S1 400 0 4/3 0 1 –1/3 0 300
6 X1 400 1 2/3 2 0 1/3 0 600
0 S3 400 0 5/3 0 0 –2/3 1 240
Zj = 6 4 12 0 2 0
Cj − 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 Basic


Quantity X1 X2 X3 S1 S2 S3
0 S1 80 0 0 0 1 1/5 –4/5
6 X1 240 1 0 2 0 3/5 –2/5
4 X2 240 0 1 0 0 –2/5 3/5
Zj = 6 4 12 0 2 0
Cj − 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 at least 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 S2 instead 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 row X1 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


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




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




2X1  + 3X2  + 4X3        ≤      1,200



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


Cj 30 40 20 0 0 0
CB Basic

Variable (B)

Value of Basic

Variables b (=XB)

x y z s1 s2 s3
30 x 250 1 0 -26/16 10/16 -12/16 0
40 y 625 0 1 31/16 -7/16 10/16 0
0 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 according to this solution?
  • How much would you be prepared to pay for another hour of capacity each on machine KA-07, machine KB-27, and machine KC-49?
  • If the company wishes to expand the production capacity, which of the three resources should be given priority?
  • What happens  if  16  machine  hours  are  lost  due  to  some  mechanical  problem  in machine KB-27?
  • A customer would like to have one unit of product z and is willing to pay higher price for z in order to get it. How  much  should  the price  be increased  so that the company’s profit remains unchanged?
  • A new product is proposed to be introduced which would require processing  time of 4 hours 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?



(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
CB Basic

Variable (B)

Value of Basic

Variables b (=XB)

x y z s1 s2 s3
30 x 250 1 0 -26/16 10/16 -12/16 0
40 y 625 0 1 31/16 -7/16 10/16 0
0 s3 125 0 0 11/16 -3/16 1/8 1
Zj = 30 40 115/4 5/4 5/2 0
Cj – 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 is strictly negative.  Alternate  optimal solution (s) exist when either of non-basic  variables  has a zero Cj − Zj.


Non Basic Variables z s1 s2
Cj – 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 s3
Quantity 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 being produced.

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-49 are being  `5/4,  `5/2  and  `0, respectively,  these  are  the maximum  prices  one  would  be prepared 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 of y 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  of 35/4 rupee. Thus, the price for z should be increased  by at least 35/4 rupee to ensure  no reduction 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 a rate 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 intersection of

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


The Initial solution obtained by the North-West Corner Rule in transportation  need not always contain the R2C1  cell. In the North-West  Corner Rule the first allocation is made at R1C1  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 contrary if resources  at first column i.e. C1 is exhausted first then the next allocation will be at R1C2.

For example the resource availability at first row (R1) is 1,500 units and the demand in first column (C1) is 1,000 units. In this case resource availability of first row (R1) will be exhausted 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-West Corner 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 giving quantities supplied. This totals up to 1,400 units. What is the condition for a solution to be degenerate?


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

the column  quantity  is greater  than that of the row quantity.   The total number  of rows and columns  will be 9 i.e. (5 rows and 4 columns).  Therefore,  m+n-1 (= 8), i.e. if the number  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 by transportation methods.



The assignment  problem  is special  case of transportation  problem;  it can also be solved by transportation  method.  But the solution  obtained  by applying  this method  would be severely degenerate.This  is because the optimality test in the transportation method requires 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 to remove degeneracy,  n-1* number of dummy allocations  will be required in order to proceed with the transportation  method. Thus, the problem of degeneracy  at each solution makes the transportation  method computationally inefficient for solving an assignment problem.


Question 40

In an assignment problem to assign jobs to men to minimize the time taken, suppose that one man does not know how to do a particular job, how will you eliminate this allocation from the 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 high the 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 original matrix before any operation were equal? Why?
  • Under the usual notation,  where a32  means  the element  at the intersection  of the 3rd row and 2nd  column, we have, in a 4 × 4 assignment. What can you conclude about the remaining assignments? Why?



(i)     Under the Hungarian Assignment  Method, the prerequisite to assign any job is that each row and column must have a zero value in its corresponding  cells. If any row or column does not have any zero value then to obtain zero value, each cell values in the row or 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 have two or more cells having same minimum value then these row or column will have more than one zero. However, having two zeros does not necessarily imply two equal values in the original  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  row operation 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 cell then the corresponding  row and column  become  unavailable  for further  allocation.  Hence,  these corresponding row and column are crossed mark to show unavailability. In the 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 have common initial and final node
  • In respect  of  any  activity  whether  real  or  dummy,  the  terminal  node  should  bear  a number higher than the initial node numbe
  • The difference between the latest event time and the earliest event time is termed as free
  • For every critical activity in a network, the earliest start and the earliest finish time as well 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.


  • Invalid


Reason:  As  per  the  rules  of  network  construction,   parallel  activities  between  two events, without intervening  events, are prohibited.  Dummy activities  are needed when two or more activities  have same initial and terminal  events. Dummy  activities  do not consume time or resources.

  • Valid


Reason:  As  per  the  conventions  adopted  in  drawing  networks,  the  head  event  or terminal 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  is termed as slack of an event. Free float is determined  by subtracting  head event slack from the total float of an activity.

  • Invalid

Reason:  For  every  critical  activity  in a network,  the earliest  start  time  and  the latest start 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 is minimum.

  • Valid


Reason: Resource leveling is a network technique used for reducing the requirement of a particular resource due to its paucity or insufficiency within a constraint on the project duration.  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 independent situations briefly justifying your decision:

  • A labour intensive sculpted product is carved from the metal provided to the staff. The metal is sourced from different suppliers since it is scarce. The alloy composition of the input metal is quite different among the suppl
  • Pieces of hand-made furniture are assembled by the company in a far off location. The labourers do not know anything about the final product which utilizes their work. As a matter of further precaution, rotation of labour is done fre
  • Skilled workers  have  been  employed  for  a  long  time.  The  company  has  adequate market for the craft pieces done by these expe
  • A company funds that it always has an adverse usage of indirect material. It wants to apply learning curve theory to improve the way standards have been se


  • ‘Learning Curve Theory’ will not be applicable as alloy combination of the input metal is quite different among  the suppliers  hence learning  experience  with one type of metal may not be beneficial for the workers to deal with other metal with separate alloy com
  • ‘Learning Curve Theory’ will not be applicable  as in this situation rotation of labour is done frequently, labours will not be able to get the benefit of learning  and apply their learning. 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 time learning  curve theory can not be
  • ‘Learning Curve  Theory’  will not be applicable  as indirect  materials  are the materials 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 controlled through 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 use appropriate average learning rate on activities, so that he may forecast costs and prices for certain levels of activity.


  • A set of very experienced people feed data into the computer for processing  inventory records  in the factory.  The manager  wishes  to apply 80% learning  rate on data entry 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 to use 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 manager wants to apply an average learning rate for these workers.


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


The learning  curve does not apply to very experienced  people  for the same job, since time taken  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 tried befor
  • The workers are shifted  even before  completion  of one unit of work.  Hence  learning rate 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 auto
  • Learning curve theory helps in setting standards.
  • Learning curve helps in pricing decis
  • Experienced workmen are more prone to learning effe



Valid or Invalid


Sl. No. Situation Valid or Not


(i) Learning curve theory applies to a division of a company which is fully automated Not Valid It can be very effective in labour oriented industry but not in fully automated company.
(ii) Learning curve theory  helps in setting standards Valid If budgets and standards are set without considering the learning effect, meaning less variances are likely to occur. The learning curve is quite helpful in setting standards in learning phase.
(iii) Learning curve helps in pricing decisions Valid The use of cost data adjusted for learning effect helps in development of advantageous pricing policy.
(iv) Experienced workmen are more prone to learning effect Not Valid Activities being performed by experienced workmen, who are thoroughly familiar with those activities, will not be subject to learning effect.

Life Saving  – Resources List on

 Click on Resources > E- library > CA > Final

  1. Comparative Study of LP Methods
  2. Assignment Rule
  3. Transportation Algorithm
  4. Simplex Method
  5. Relevant Costing – Full Concepts
  6. Standard Costing Formula
  7. Decision Making – Comparative Study
  8. How to approach any question
  9. List of Important Theory Questions
  10. Sleeping Capsule Book

Click on Resources > Video Library > Costing

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



Detailed Chapter wise – Snapshot of Amendment Cum Revision
Chapter Name Marks Revision Contents – Theory and Practicals
New (Amendments) Old (Existing)



Activity Based Costing






Break Even with ABC Traditional Cost System Vs Activity Based System
Direct Product Profitability  Based Variance Analysis of Activity Based Cost
Customer Profitability Analysis Based
Case Study Based Applicability of ABC


Target Costing




Value Chain Analysis for Cost Reduction Steps in Target Costing
Case Study Based Value Analysis Value Engineering and Value Analysis
Kaizen Costing


Pricing Policies (External)




Pareto Analysis – Practical Questions Return on Investment Pricing Calculations
Case Study Based Pricing Strategies Selection Cost Sheet Based Questions
Calculas Based Optimum Price Determination









Budget Variance with Responsibility Accounting Budget Ratios
Budget Variance with Performance and Summary Budgeting Cash Budgets
Budget with Inventory Control and Stock levels
Applications of Zero Based Budgeting






Standard Costing












Standard Costing  – Selling Cost Variances WIP Effect
Profit Reconciliation – New Variety with Marginal costing Profit Reconciliation – all varieties
Case Study Based Question on CSF Mix, Yield, Capacity,Efficiency, Market Size, Market Share Variance
Chart of Standard Costing Formulas Missing Figures Problem
Planning, Operating and Traditional Variances
Standard Cost Determination Based on Learning Curve
Single Plan and Partial Plan Accounting Features
6 Balanced Score Card and Profitability 5 Case Study Based Questions on Perspectives and KPI Identification Four Perspectives of Score Card with examples
Profitability Analysis into Growth, Price Recovery and Productivity / Cost Leadership, Product Differentiation and Market Share


Relevant Costing




Chart of Relevant Costing Concepts Different Approaches of Evaluation
Concept of Minimum Price
Relevant Cost of Material, Labour, Overheads and Depreceiation




Transfer Pricing








Calculas Based Optimum Price Determination Cost Centre and Profit Centre Disticnction
International Taxation Based Questions Goal Congruency – Meaning and Importance
Case Study Based Questions Transfer Price based on Opportunity Cost/ Goal Congruency
Strategy Based Questions
Dual Tariff, Shared Profit Transfer Pricing




CVP Analysis








Probability Based Break Even Analysis Break Even Point and Potential Break Even Point
Sensitivity Analysis Combined Break Even Point for multi products
Multiple Break even Point for slab fixed costs
Indifference Point for evaluation of alternatives
Shut Down Point for Shutdown or Continue decision




Decision Making








Chart of Decision Making Make or Buy – Using Relevant Costing or Indifference Point
List of Tips to Read the Questions Key Factor/ Principle Budgeting Factor – Different Situations
Sub Contracting – with Incremental Fixed Costs
Export Offers – Using Incremental Approach
Any other – using Relevant Costing Approach





Total Quality Management







Four Types of Quality Cost
Six Sigma
Six C’s of Quality
P’s of Quality
PDCA Cycle
Incremental Approach to Evaluate Quality Programmes




TOC or Throughput Accounting








Drum – Buffer – Rope Theory Concept Three Perspective of TOC
Synchronous Manufacturing – Optimised Prodcution Technology
Throughput Accounting – Constraint or Bottleneck Optimisation
Overall profit Statement under Throughput Accounting
13 Service Sector 5 Utility Services Break Even Point in Services



Just In Time



5 Backflush Costing Journal Entries Just In time Features
Kanban Authorisation
Backflush Costing System
Practical Problems based on Incremental Approach


Life Cycle Costing


Practical Questions based on Profitability Statement Theory on Phases in Product Life Cycle
Practical Question Based on Learning Curve



LP Formulation and Graph 8 Comparative Study of LP Methods Chart Conditions of LP
Unbounded Minimisation and Maximisation Problems
Graphical Method




Situations of Constraints
Steps to Solve
Sensitivity Analysis – Interpretations






10 Chart of Hungarian Rule Hungarian Rule Steps
Special Cases Implication
Airlines Idle Time Minimisation
Travelling Salesman Cycle Optimisation




Transportation Chart of VAM and Optimality Test Initial Solution Methods – NWCR, LCAM, VAM
Steps to solve full problem
Special Cases Implication
Sensitivity Analysis – Interpretations
Solving Transportation Problem by Hungarian Rule





Project Management





Errors in Network
Time Schedule and Float Analysis
Updating the Network
Crashing of Network
PERT – S.D., Variance, Expected Time, Probability of Completion
Resource Allocation Table








8 Cakes – Simulation
Dentist Chamber – Simulation
Bank or Service Counter Simulation
Assembly Line Simulation
Inventory Control – Book Store Simulation with Lost demand






Learning Curve






Applicability of LCT
Relationship expressed in Learning Curve Theory
Direct Prediction
Use of Learning Curve Equation
Use of Learning Curve Table
Pricing and Standard Cost Computation using LCT
Determining the values where learning stops
23 Theory Exclusives List of Theory Questions and Case study based Questions Sleeping Capsule Book


September 12, 2016

1 responses on "45 Case Study Theory Questions for CA Final Costing"

Leave a Message

Copyright © SJC Institute LLP

Our Courses are not available for booking through pendrives in the city, where our Franchisee Centre operates. Check Contact us page for the list of Centres. Dismiss