Simply Shiksha

CMA Final Strategic Cost Mgt.

Section-A
Question 1 is compulsory
1. Choose the correct answer: [15*2 = 30]

(1) ANC Co. manufactures and sells 7,500 units of a product. The full cost per unit is Rs. 100. The Company has
fixed Its price so as to earn a 30% return on an Investment of Rs. 7,00,000. Target selling price will be
(a) Rs. 120 (b) Rs. 130 (c) Rs. 128 (d) Rs. 210

(2) A Ltd. manufactures 4 products A,B,C & D with sales value mix of 33-1/3%, 41-2/3%, 16-2/3% & 8-1/3%
and variable cost of 60%, 68%, 80% & 40% of selling price respectively. Budgeted sale value is Rs.1,20,000.
Overall P/V ratio is
(a) 40% (b) 35% (c) 28% (d) 32%

(3) PN Company makes a single product which it sells at Rs.10 per unit. Fixed costs are Rs. 60,000 per month
and the product has a contribution to sales ratio of 40%. In a period when actual sales were Rs.1,70,000, the
Company’s margin of safety in units is:
(a) 2,000 units (b) 17,000 units (c) 15,000 units (d) 5,000 units

(4) A Company makes components and sells internally to its subsidiary and also to external market. The
external market price is Rs. 24 per component, which gives a contribution of 40% of sales. For external sales,
variable costs include Rs. 3.00 per unit towards distribution costs. This is, however not incurred in internal
sales. There are no capacity constraints. To maximize company’s profit, the transfer price to subsidiary should
be
(a) Rs. 24 (b) Rs. 21 (c) Rs. 11.40 (d) Rs. 14.40

(5) XYZ Ltd is a manufacturing company involved in the production of automobiles. Information from its last
budget period is as follows: Actual production 2, 75,000 Units Budgeted Production 2, 50,000 Units Actual
fixed production Overheads Rs.52, 60, 00,000 Budgeted fixed production Overheads Rs.50, 00, 00,000 Then
fixed overhead volume variance and expenditure variance will be:
(a) Rs.5,00,00,000 (A), Rs.2,60,00,000 (F)
(b) Rs.5,00,00,000 (F), Rs.2,60,00,000 (F)
(c) Rs.5,00,00,000 (F), Rs.2,60,00,000 (A)
(d) Rs.5,00,00,000 (A), Rs.2,60,00,000 (A)

(6) Which of the following would decrease unit contribution margin the most?
(a) 15% decrease in selling price
(b) 15% increase in variable costs
(c) 15% decrease in variable costs
“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
(d) 15% decrease in fixed costs

(7) AB company is a supermarket group that incurs the following costs:

(A)The bought-in price of the goods
(B) Inventory finance costs
(C) Self refilling costs
(D) Costs of repacking or ‘pack out’ prior to storage before sale
AB company’s calculating of direct product profit (DPP) would include
(a) Costs (A) and (C) only.
(b) All of the above cost except (b)
(c) All of the above costs except (d)
(d) All of the above costs.

(8) ABC Limited has current PBIT of Rs.19.20 lakhs on total assets of Rs.96 lakhs. The company has decided to
increase assets by Rs.24 lakhs, which is expected to increase the operating profit before depreciation by
Rs.8.40 lakhs. There will be a net increase in depreciation by Rs.4.80 lakhs. This will result in ROI
(a) to increase by 1% (b) to decrease by 1% (c) to decrease by 1.5% (d) to remain the same

(9) Marketing department of an organisation estimates that 40,000 of new mixers could be sold annually at a
price of Rs.60 each. To design, develop and produce these new mixers an investment of Rs.40,00,000 would
be required. The company desires a 15% return on investment (ROI). Given these data, the target cost to
manufacture, sell, distribute and service one mixer will be
(a)Rs. 37.50 (b) Rs.40.00 (c) Rs.45.00 (d) Rs.48.60

(10) The information relating to the direct material cost of a company is as follows: Standard price per unit Rs.
7.20 Actual quantity purchased in units 1600 Standard quantity allowed for actual production in units 1450
Material price variance on purchase (Favourable) Rs. 480 What is the actual purchase price per unit?
(a) Rs. 7.50 (b) Rs. 6.40 (c) Rs. 6.50 (d) Rs. 6.90

(11) Back flush costing is most likely to be used when

(a) Management desires sequential tracking of costs
(b) A Just-in-Time inventory philosophy has been adopted
(c) The company carries significant amount of inventory
(d) Actual production costs are debited to work-in-progress.

(12) A company produces two joint products, P and V. In a year, further processing costs beyond split-off point
spent were Rs. 8,000 and Rs. 12,000 for 800 units of P and 400 units of V respectively. P sells at Rs. 25 and V

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
sells at Rs. 50 per unit. A sum of Rs. 9,000 of joint cost were allocated to product P based on the net
realization method. What were the total joint cost in the year?
(a) Rs. 20,000 (b) Rs. 10,000 (c) Rs.15,000 (d) None of these

(13) ABC Ltd. has developed a new product just complete the manufacture of first four units of the product.
The first unit took 2 hours to manufacture and the first four units together took 5.12 hours to produce. The
Learning Curve rate is
(a) 83.50% (b) 80.00% (c) 75.50% (d) None of (a), (b) or (c)

(14) No. Units Sold Per Day 500 Sales Price Rs.25 Direct Materials Cost per unit Rs.10 Other Factory Costs per
Day Rs.6000 No. Hours of bottleneck used per day 8 The Return per Factory Hour for product is
(a) Rs.925 (b) Rs.938 (c) Rs.883 (d) Rs.750

(15) NPL Ltd. Uses a JIT system and back flush accounting. It does not use a raw material stock control account
During May, 8000 units were produced and sold. The standard cost per unit is Rs.100; this includes materials
of Rs.45. During May, Rs.4,80,000 of conversion costs were incurred. The debit balance on cost of goods sold
account for May was
(a) Rs.8,00,000 (b) Rs.8,40,000 (c) Rs.8,80,000 (d) Rs.9,20,000

Section-B
Answer any five questions out of seven questions given. Each question carries 14 marks. [5 x 14 = 70]

2. (a) XYZ Ltd. produces three products. The cost data are as under:
Particulars X Y Z
Direct Materials Rs. 64 Rs. 152 Rs. 117
Direct labour:
Dept-1: Rs. 5 per hour 18 hours 10 hours 20 hours
Dept-2: Rs. 6 per hour 5 hours 4 hours 6.5 hours
Dept-3: Rs. 4 per hour 10 hours 5 hours 20 hours
Variable OH Rs. 16 Rs. 9 Rs. 24
Fixed overheads Rs. 4,00,000 per annum

The budget was prepared at a time, when market was sluggish. The budgeted quantities and selling prices are
as under:
Product Budgeted Quantity SP per unit (Rs.)
X 9,750 270
Y 7,800 280
Z 7,800 400

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
Later the market improved and the sale quantities could be increased by 20% for product X and 25% each for
products Y and Z. The Sales Manager confirmed that the increased quantities could be achieved at the prices
originally budgeted. The Production Manager has stated that the output cannot be increased beyond the
budgeted level due to limitation of direct labour hours in Department 2.
Required:
(i) Set optimal product mix.
(ii) State profit under optimal product mix. [8]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

2. (b) A company manufactures two types of herbal product, A and B. Its budget shows profit figures after
apportioning the fixed joint cost of Rs. 15 lakhs in the proportion of the numbers of units sold. The budget for
2018 indicates:
Particulars A B
Profit Rs. 1,50,000 30,000
SP Per unit Rs. 200 120
PV Ratio % 40 50

Required to advise on the best option among the following, if the company expects that the number of units
to be sold would be equal.
(i) Due to change in manufacturing process, the joint fixed cost would be reduced by 15% and the variable
cost would be increased by 7%.
(ii) Price of A could be increased by 20% as it is expected that the price elasticity of demand would be unity
over the range of price.
(iii) Simultaneous introduction of both the options, viz. (i) and (ii) above. [6]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

Decision: Option (iii) has the maximum profits and should be chosen.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
3. (a) A regional audit firm offers audit, tax and consulting services. The segmented profit and loss position for
the next year shows the following position:

Partners are concerned about the profitability of their audit business and contemplate to close it down. In the
event of closure of audit service, it might do more tax work. If audit service is discontinued, 50 per cent of the
facility costs associated with auditing would be saved. More tax work would increase tax revenues by 45 per
cent, but tax service-level costs would also increase by 45 per cent.
Required:
(a) Determine whether the firm should drop auditing service and the impact on its closure on profit. Assume
that audit centre facility level costs can be allocated to two other centres based on revenues. Compare
Profitability of Tax and Consulting Services before and after closure of Audit Centre.
(b) What other considerations are important to drop auditing service? [12]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

3. (b) What is Target Cost? How would you determine it? [4]
Ans.
Target Cost:
Target Cost is the cost at which a proposed product with specified functionality and quality must be produced
to generate a desired level of profitability at its anticipated selling price. Target cost is Target selling price less
the required profit margin The target selling price is the price that is dictated by competition in case there are
comparable products, or the perceived value that a customer will pay for the product in case there is no
competition. The desired profit level is fixed by the seller. The difference between the selling price and the
profit margin represents the target cost to be achieved by design or cost reduction or by economies of scale
or by other means.

Determination of Target Cost:

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
The market requirement is identified regarding design, utility, need for the product. Target selling price is
determined based on customer expectation and sales forecast. Target production volume is set based on price
volume relationship. Target profit margin is established based on the company’s long term profit objectives,
projected volumes, course of action, etc. The target cost or allowable cost is determined as the target selling
price minus the target profit margin.

4. (a) Prism Ltd. has decided to adopt JIT policy for materials. The following effects of JIT policy are identified:
(i) To implement JIT, the company has to modify its production and material receipt facilities at a capital cost
of Rs. 2,00,000. The new machine will require a cash operating cost Rs. 2,16,000 p.a. The capital cost will be
depreciated over 10 years.
(ii) Raw material stockholding will be reduced from Rs. 40,00,000 to Rs. 15,00,000.
(iii) The company can earn 12% on its long-term investments.
(iv) The company can avoid rental expenditure on storage facilities amounting to Rs. 66,000 per annum.
Property Taxes and Insurance amounting to Rs. 44,000 will be saved due to JIT programme.
(v) Presently there are 7 workers in the Store department at a salary of Rs. 10,000 each per month. After
implementing JIT scheme, only 4 workers will be required in this department. Balance 3 workers’ employment
will be terminated.
(vi) Due to receipt of smaller lots of Raw Materials, there will be some disruption of production. The costs of
stockouts are estimated at Rs. 1,54,000 per annum.
(vii) Since the supplier is new having no reputation as yet in the market, an additional inspection cost of Rs.
12,000 p.a. has to be incurred.
Required:
Determine the financial impact of the JIT policy. Is it advisable for the company to implement JIT system? [7]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
4. (b) Discuss the phases of Value Analysis. [7]
Ans.
Value Analysis may consist of the following seven phases.
(i) Origination: The phase of origination starts with the identification of a project to undertake value analysis.
After selecting the project, a project team consisting of experts from various fields and departments is
constituted.
(ii) Information: The second phase is that of collecting relevant information. In this phase, the relevant facts
relating to specifications, drawings, methods, materials, etc. are collected. Costs are, also, ascertained for
each of the elements that are being studied.
(iii) Functional Analysis: Then follows the important phase of functional analysis. After familiarisation with the
relevant facts & figures, a functional analysis is carried out to determine the functions and uses of the product
and its components. The cost and importance of each function are identified. A value index is computed on
the basis of cost benefit ratio for each of the functions. A list of the functions is prepared wherein the
functions are arranged in decreasing order of their value.
(iv) Innovation: This is the creative phase concerned with the generation of new alternatives to replace or
remove the existing ones. The objective is to produce ideas and to formulate alternative means and methods
for accomplishing the essential functions and improving the value of the element under consideration.
Creative problem-solving techniques are utilized to discover alternatives that will provide essential or required
functions at the lowest possible cost.
(v) Evaluation: During the stage of evaluation, each and every alternative is analysed and the most promising
alternatives are selected. These alternatives are further examined for economic and technical feasibility. The
alternatives finally selected must be capable of performing the desired functions satisfactorily. They must
meet the standards of accuracy, reliability, safety, maintenance and repairs, environmental effects, and so on.
(vi) Choice: In this phase, the decision makers choose the best of alternatives. The programs and action plans
are then developed to implement the chosen alternative.
(vii) Implementation: The chosen alternative is put to the actual use with the help of the programs and action
plans. The progress of implementation is continuously monitored and followed up to ensure that the desired
results are achieved.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
5.

[14]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
6. (a)

[8]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.
6. (b) ABC Company is considering the question of marketing a new product. The fixed cost required in the
project is Rs. 4,000. Three factors are uncertain viz., the selling price, variable cost and annual sales volume.
The product has a life of only one year. The management has the data on these three factors as under:

Selling Price Probability Variable cost Probability Sales volume Probability

3 0.2 1 0.3 2000 0.3
4 0.5 2 0.6 3000 0.3
5 0.3 3 0.1 5000 0.4

Consider the following sequence of thirty random numbers: (81,32,60), (04,46,31), (67,25,24), (10,40,02),
(39,68, 08), (59,66,90), (12,64,79), (31,86,68), (82,89,25), (11,98,16). Simulate the average profit for the above
project on the basis of 10 trials. [6]
Ans.
7. (a) A Company manufactures 3 products which are processed through 3 different production stages. The
time required to manufacture one unit of each of the three products and the daily capacity of the stages are
given in the following table:

State Time/ Unit in Minutes Capacity in

Minutes
Product-1 Product-2 Product-3
1 1 2 1 430
2 3 - 2 460
3 1 4 - 420
Profit/ Unit Rs. 3 Rs. 2 Rs. 5

(i) Set the data in a simplex table.

(ii) Find the optimum solution [8]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

7. (b) A firm produces four products. There are four operators who are capable of producing any of these four
products. The processing time varies from operator to operator. The firm records 8 hours a day and allows 30
minutes for lunch. The processing time in minutes and the profit for each of the product are given below:

Operator Products
A B C D
1 15 9 10 6
2 10 6 9 6
3 25 15 15 9
4 15 9 10 10
Profit (Per Unit) 8 6 5 4

Find the optimum assignment of product to operators to maximize profits. [6]

Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

8. (a) Joy Givers and Milan Toys are the two toy manufacturers who always compete with each other to
increase their respective market shares. For both the companies the Marketing team work with close
coordination with the Design team and always come out with attractive toys which are normally in great
demand. To meet the demand, they have various strategic options like working for 8 hours a day, 12 hours a
day, 16 hours a day, 24 hours a day, subcontracting etc. which will ultimately increase the market share. Joy
Givers have decided not to go for all the above-mentioned options and set up the following payoff matrix in
which the percentage increase in market share is given against different strategies of Milan Toys:

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

Use Principle of Dominance to find the Optimal Strategies of the two manufacturers and the value of the
Game. [7]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”
 Simply Shiksha
CMA Final Strategic Cost Mgt.

8. (b) The following table relates to the tourist arrivals in India during 2015 to 2021:
Year 2015 2016 2017 2018 2019 2020 2021
Tourist Arrival 18 20 23 25 24 28 30
(Lakhs)

Fit a Straight Line trend by the Method of Least Squares and estimate the number of tourists that would arrive
in the year 2025. [7]
Ans.

“Its not that we can teach books better than others, but we can surely teach a better way of learning”