FINAL EXAMINATION SET - 2

MODEL ANSWERS TERM – DECEMBER 2024

PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)

1. Choose the correct option: [15 x 2=30]

(i) A company has forecast sales and cost of goods sold for the coming year as ₹25 lakhs
and ₹18 lakhs respectively. The inventory turnover has been taken as 9 times per year.
In case the inventory turnover increases to 12 times and the short-term interest rate
on working capital is taken as 10%, what will be the saving in cost?
a) ₹10,000
b) ₹20,000
c) ₹15,000
d) ₹5,000

(ii) The break-even point of a manufacturing company is ₹1,60,000. Fixed cost is ₹48,000.
Variable cost is ₹12 per unit. The PV ratio will be:
a) 20%
b) 40%
c) 30%
d) 25%

(iii) The higher the actual hours worked:

a) The lower the capacity usage ratio
b) The higher the capacity usage ratio
c) The lower the capacity utilization ratio
d) The higher the capacity utilization ratio

(iv) Ankit Ltd., operates throughput accounting system. The details of product A per unit
are as under: Selling Price: ₹75
Material Cost: ₹30
Conversion Cost:₹ 20
Time to bottleneck resources: 10 minutes
What is the throughput contribution per bottleneck resource per hour?
a) ₹270
b) ₹150
c) ₹120
d) ₹90

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
(v) Which of the following is not a primary activity of Value Chain?
a) Inbound Logistics
b) Operations
c) Services
d) Infrastructure

(vi) Kanban Japanese System under JIT approach ensures that

a) Continuous supply of inventory or product
b) Minimum and Maximum level of stock to be maintained
c) Inventory valuation
d) All of the above

(vii) Aderholt uses activity-based costing to allocate its overheads. The budgeted cost
expected for the Supervisor cost pool was:
Budgeted units: 5,000
Number of employees: 75
Budgeted Cost: ₹7,500
The actual costs incurred were:
Actual Units: 5,500
Actual Employees: 77
Actual cost: ₹8,085
What was the total variance for the pool?
a) ₹585 Adverse
b) ₹165 Favourable
c) ₹555 Favourable
d) ₹385 Adverse

(viii) Pareto analysis recognizes:

a) 80:20 Rule
b) 50:50 Rule
c) 20:80 Rule
d) None of the above

(ix) Cost of Rework is a cost related to:

a) Internal failure
b) Appraisal
c) Prevention
d) None of the above

(x) Which of the following is not a term normally used in value analysis?
a) Resale value

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
b) Use value
c) Esteem value
d) Cost value

(xi) The Objective Function of a LPP is Z = 3x₁+ 2x₂. If x₁= 10 and x₂= 5 then the value of
Z is –
a) 35
b) 40
c) 45
d) 50

(xii) When the total allocation of a Transportation Problem match with supply and
demand values, the solution is –
a) Non- degenerate
b) Feasible
c) Degenerate
d) None of the above

(xiii) Which of the following considers difference between least cost and the cost just before
least for each row and column while finding Basic Feasible Solution in
Transportation?
a) North West Corner Method
b) Least Cost Method
c) Vogel’s Approximation Method
d) Both (b) and (c) above

(xiv) Script Ends – is related to which type of programming language?

a) R Programming
b) SAS
c) Python
d) SPSS

(xv) Which of the following is related to Financial Data Analytics?

a) Value driver analytics
b) Financial ratio analytics
c) Predictive sales analysis
d) All of the above

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 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Answers:
i ii iii iv v vi vii viii ix x
d c d a d a b a a a
xi xii xiii xiv xv
b b b c d

SECTION – B
(Answer any 5 questions out of 7 questions given. Each question carries 14 marks.)

[5 x 14 = 70]
2. A review, made by the top management of Sweat and Struggle Ltd. which makes only one
product, of the result of the first quarter of the year revealed the following:

Sales in units 10,000

Loss ₹ 10,000
Fixed cost (for the year ₹1,20,000) ₹ 30,000
Variable cost per unit ₹8.00

The Finance Manager who feels perturbed suggests that the company should at least break-
even in the second quarter with a drive for increased sales. Towards this, the company should
introduce better packing which will increase the cost by ₹0.50 per unit.

The Sales Manager has an alternative proposal. For the second quarter additional sales
promotion expenses can be increased to the extent of ₹5,000 and a profit of ₹5,000 can be
aimed at during the period with increased sales.
The Production Manager feels otherwise. To improve the demand, the selling price per unit
has to be reduced by 3%. As a result, the sales volume can be increased to attain a profit level
of ₹4,000 for the quarter.
The Manager Director asks you as a Cost Accountant to evaluate the three proposals and
calculate the additional sales volume that would be required in each case, in order to help
him to take a decision. [14]

Answer:
Calculation of selling price

Particulars (₹)
Variable cost (8 × 10,000) 80,000.00
Add : Fixed cost 30,000.00
Total cost 1,10,000.00
Profit (10,000.00)
Sales 1,00,000.00
Selling price (100000/10000) ₹ 10

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 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

Statement showing evaluation of alternatives and the number of units required to attain the
targets of respective managers.

Particulars Finance Manager Sales Manager Production Manager

i) Selling price (₹) 10.00 10.00 9.70
ii) Variable cost (₹) 8.50 8.00 8.00
iii) Contribution per unit (₹) 1.50 2.00 1.70
iv) Fixed cost (₹) 30,000.00 35,000.00 30,000.00
v)Target (₹) B.E.P Profit of ₹5000 Profit of ₹4000
(30000/1.5) (40000/2) (34000/1.7)
20,000.00 20,000.00 20,000.00
Additional units required 10,000.00 10,000.00 10,000.00

3. (a) XYZ Ltd which has a system of assessment of Divisional Performance on the basis of residual
income has two Divisions, Alpha and Beta. Alpha has annual capacity to manufacture
15,00,000 numbers of a special component that it sells to outside customers, but has idle
capacity. The budgeted residual income of Beta is ₹1,20,00,000 while that of Alpha is
₹1,00,00,000.

Other relevant details extracted from the budget of Alpha for the current year were
as follows

Particulars
Sale (outside customers) 12,00,000 units @ ₹180 per
unit
Variable cost per unit ₹160
Divisional fixed cost ₹80,00,000
Capital employed ₹7,50,00,000
Cost of Capital 12%

Beta has just received a special order for which it requires components similar to the
ones made by Alpha. Fully aware of the idle capacity of Alpha, beta has asked Alpha
to quote for manufacture and supply of 3,00,000 numbers of the components with a
slight modification during final processing. Alpha and Beta agree that this will
involve an extra variable cost of ₹5 per unit. Calculate the transfer price which Alpha
should quote to Beta to achieve its budgeted residual income. [7]

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 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Answer:

Contribution required at Budgeted Residual Income for Alpha

Fixed cost 80,00,000

Return on Capital Employed (7,50,00,000 × 12 %) 90,00,000
Residual Income of Alpha 1,00,00,000
Total Contribution required (Fixed Cost + Return on Cap. Emp. + 2,70,00,000
Residual Income)
Contribution derived from existing units= 12,00,000 × 20 = ₹2,40,00,000
Contribution (Residual) required on 3,00,000 units = ₹ 30,00,000
=2,70,00,000 – 2,40,00,000
Contribution per unit = 30,00,000 ÷ 3,00,000 = ₹10
Increase in Variable cost = ₹5
Transfer price = V.C + Desired Residual Contribution + Increase in = ₹175
VC = 160 + 10 + 5

(b) A2Z plc. supports the concept of tero technology or life cycle costing for new investment
decisions covering its engineering activities. The financial side of this philosophy is now well
established, and its principles extended to all other areas of decision making. The company is
to replace a number of its machines and the Production Manager is torn between the Exe
Machine, a more expensive machine with a life of 12 years, and the Wye machine with an
estimated life of 6 years. If the Wye machine is chosen it is likely that it would be replaced at
the end of 6 years by another Wye machine. The pattern of maintenance and running costs
differs between the two types of machine and relevant data are shown below:

Particulars Exe (₹) Wye (₹)

Purchase Price 19,000 13,000
Trade-in 3,000 3,000
value/breakup/scrap
Annual repair costs 2,000 2,600
Overhaul costs (at year 8) 4,000 (at year 4) 2,000

Estimated financing costs averaged over machine life 10% p.a - Exe; 10% p.a. – Wye.

You are required to: recommend with supporting figures, which machine to purchase, stating
any assumptions made. [7]

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 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Answer:

Computation of present value of outflows and equivalent annual costs

Particulars Working Exe machine Working Wye machine

(₹) (₹) (₹) (₹)
Initial cost 19,000.00 13,000.00
Less: Present Value of Scrap (3000 × 957.00 (3000 × 1,692.00
at the end of the life 0.319) 0.564)
Net Cost 18,043.00 11,308.00
Add: Present value of total (2000 × 13,624.00 (2600 × 11,320.00
annual repair costs 6.812) 4.354)
Add: Overhaul costs (4000 × 1,864.00 (2000 × 1,366.00
0.466) 0.683)
P.V. of Total Cost 33,531.00 23,994.00
Capital recovery factor (1 ÷ 6.812) 0.1468 (1 ÷ 4.354) 0.2297
Equivalent annual cost 4,922.35 5,511.42

Recommendation: As the equivalent annual cost is less for Exe machine, it is better to purchase the
same.
Working Note
1. Present Value Factors @ 10%: Year4 =0.683; Year6 =0.564; Year8=0.466; Year12=0.319
2. Compounded Present Value (PVAF) @ 10%: 8 years = 4.354; 12 years = 6.812

4. (a) H Ltd. manufactures three products. The material cost, selling price and bottleneck resource
details per unit are as follows:
Particulars Product X Product Y Product
Z
Selling Price (₹) 66 75 90
Material and other variable cost (₹) 24 30 40
Bottleneck resource timeline (minutes) 15 15 20

Budgeted factory costs for the period are ₹2,21,600. The bottleneck resources time available is
75,120 minutes per period.
Required:
(i) Company adopted throughput accounting and products are ranked according to ‘product
return per minute’. Select the highest rank product.
(ii) Calculate throughput accounting ratio (TA Ratio) and comment on it. [7]

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 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

Answer:

(i) Calculation of Rank according to product return per minute

Particulars X Y Z
Selling Price 66 75 90
Less: Variable cost 24 30 40
Throughput contribution (a) 42 45 50
Minutes per unit (b) 15 15 20
Contribution per minute [(a) ÷ (b)] 2.8 3 2.5
Ranking II I III
Comments: Product Y with a contribution of 3 per minute ranks the highest.

(ii) Calculation of throughput accounting ratio

Particulars X Y Z
Factory cost per minute (₹) 2.95 2.95 2.95
( ₹2,21,600 ÷ 75,120 minutes)
TA ratio 0.95 1.02 0.85
(Contribution per minute ÷ Cost per minute)
Ranking based on TA ratio II I III

Comments: TA Ratio of Product Y is greater than 1 whereas TA Ratios of Product X and

Product Z are less than 1. It is beneficial to maximise the production of Y and minimise the
production of Z and X.

(b) Discuss the significance of lean accounting. [7]

Answer:
Lean accounting uses a method that categorizes costs by value stream rather than by department. This
approach “provides the basis for sound management decisions”. The researchers define value stream
accounting as “tracking revenue and the associated variable costs required to generate those sales.” It
is experienced that value stream costing includes a simpler cost collection method and reduces the
number of cost centers. They also list features of value stream accounting as:
● Costs calculated weekly
● No distinction made between direct or indirect costs – all costs of the value stream are
considered direct costs
● Value stream costs include labour, materials, production support, machines and equipment, operation
support, facilities and maintenance
● Value stream costing provides a more accurate picture by elimination of unnecessary costs outside
control of value stream managers
Lean accounting groups together costs that fall outside of the value stream as “business sustaining costs”
that do not get included in value stream costs. This, in turn, helps the businesses to find better price
points for products and do further research into high-cost areas. The bottom line is that Lean accounting

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Directorate of Studies, The Institute of Cost Accountants of India
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MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
can help business leaders quickly know if they are heading in the right direction or need to make a
change.
Three principles guide Lean Accounting and form the foundation for all of accounting’s work and
interaction
with the organization:
i. Customer value: Delivering the relevant and reliable information in a timely manner to all users of
the information inside the organization.
ii.Continuous improvement: Improving accounting processes, cross-functional business processes and
the information used inside the business for analysis and decision making.
iii.Respect for people: Adopting a learning attitude by seeking to understand root causes of business
problems and issues in a cross-functional, collaborative manner.
Lean Accounting facilitates the changes that are required to a company’s accounting, control,
measurement, and management processes to support lean manufacturing and lean thinking.

5. The summarized results of a company for the two years ended 31st December 2022 and 2023
are given below: -
Year 2023 2022
Particulars ₹ lacs ₹ lacs
Sales 770 600
Direct Materials 324 300
Direct Wages 137 120
Variable Overheads 69 60
Fixed Overheads 150 80
Profit 90 40

As a result of re-organisation of production methods and extensive advertisement campaign use,

the company was able to secure an increase in the selling prices by 10% during the year 2023 as
compared to the previous year. In the year 2022, the company consumed 1,20,000 Kgs. of raw
materials and used 24,00,000 hours of direct labour. In the year 2023, the corresponding figures
were 1,35,000 kgs of raw materials and 26,00,000 hours of direct labour.
You are required to:
Use information given for the year 2022 as the base year information to analyze the results of the
year 2023 and to show in a form suitable to the management the amount each factor has
contributed by way of price, usage and volume to the change in profit in 2023.
[14]
Answer:

Statement of Variances
Sl Description Workings ₹ lacs
1 Sales Variances
a Sales price variance 770 – {770 × (100/110)} = 70(F) 70 (F)
b Sales volume variance {770 × (100/110)} - 600 = 100(F) 100(F)
Sales value variance 770 – 600 = 170(F) 170(F)
d % of increase in Volume = (100÷600) × 100 = 16.67%

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STRATEGIC COST MANAGEMENT

2 Material Variances
a Key computations
Material price in 2022 = (30000000)/120000 = ₹250
Material expected to be used in 2023 = (120000/600) × 700 = 140000 Kgs
Standard Material Cost for 2023 = 140000 × ₹250 = ₹350 Lacs
Material price in 2023 = (32400000)/135000 = ₹ 240
b Material cost variance 350 – 324 = 26 (F) 26(F)
c Material volume 16.67% of Consumption for 2014 50(A)
variance = 300 × 16.67% = 50(A)
d Material usage variance SP (SQ-AQ) 250(140000-135000) = 12,50,000 12.50(F)
e Material price variance AQ(SP-AP)
135000(250-240) = 1350000 13.50(F)

3 Labour Variances
a Key computations
Labour hours expected to be used in 2023 = (2400000/600) × 700 = 2800000
Labour rate of 2022 = (12000000)/(2400000) = ₹5 per hour
Standard labour cost for 2015 = 2800000 × 5 = ₹140 lacs
Labour rate of 2023 = (13700000)/(2600000) = ₹5.269 per hour
b Labour cost variance 140 -137 = 3 (F) 3(F)

Sl Description Workings ₹lacs

c Labour volume variance 16.67% of Consumption for 2022 20(A)
= 120 × 16.67% = 20(A)
d Labour efficiency SR (SH-AH)
variance 5*(2800000-2600000) = 10,00,000 10.00(F)
e Labour rate variance AH(SR-AR)
2600000(5 - 5.269) 7.00(A)
= 6,99,400(A) i.e. say 7 lacs(A)
4 Variable Overhead Variances
a Key computations
Standard variable overheads = ₹60 + (₹60 × 16.67%) = ₹70
Standard variable overheads rate per labour hour = ₹ 60 /24 = ₹2.5
VOH rate of 2023 = (6900000)/(2600000) = ₹2.65 per hour
b VOH cost variance 70 - 69 = 1(F) 1(F)
c VOH volume variance 16.67% of Consumption for 2014 10(A)
= 60 × 16.67% = 20(A)
d VOH efficiency variance SR (SH-AH) 2.5(2800000 - 2600000)
= 5,00,000 5(F)

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STRATEGIC COST MANAGEMENT

e VOH expenditure AH(SR-AR)

variance 2600000(2.50 – 2.65) 4(A)
= 3,90,000(A) i.e. say 4 lacs(A)
5 FOH cost variance 150 – 80 = 70(A) 70(A)

(ii) Reconciliation Statement

Serial Description Favourable Adverse Rupees

1 Profit for 2022 40.00
2 Variances
A Sales
Price 70.00
Volume 100.00
Sub Total 170.00 170.00(F)

Serial Description Favourable Adverse Rupees

1 Profit for 2022 40.00
2 Variances
B Material
Volume 50.00
Usage 12.50
Price 13.50
Sub Total 26.00 50.00 24.00(A)
C Labour
Volume 20.00
Efficiency 10.00
Price 7.00
Sub Total 10.00 27.00 17.00(A)
D Variable Overheads
Volume 10.00
Efficiency 5.00
Expenditure 4.00
Sub Total 5.00 14.00
9.00(A)
E Fixed Overheads 70.00 70.00(A)
F Total 211.00 161.00 50.00(F)
3 Profit for 2023 90.00

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STRATEGIC COST MANAGEMENT
6. (a) An equipment under breakdown has five repair jobs to make it operative again. The
Maintenance Manager of the organisation has assigned five mechanics of his department to do
the jobs. The estimated time (hours) for each of the mechanics to carry out the jobs are given
in the following table:
Time required (Hours) to complete the Repair jobs
Mechanic A B C D E
I 7 5 9 8 11
II 9 12 7 11 10
III 8 5 4 6 9
IV 7 3 6 9 5
V 4 6 7 5 11
Assuming that each mechanic can be assigned to only one job, determine the minimum time
assignment. [7]
Answer:
Table showing supplied data

Time required (Hours) to complete the Repair jobs

Mechanic A B C D E
I 7 5 9 8 11
II 9 12 7 11 10
III 8 5 4 6 9
IV 7 3 6 9 5
V 4 6 7 5 11

Minimum element of a row of the above table is subtracted from every element of that row and it is
done for each row. The result is shown in the Table below.

Table – 1 showing reduced matrix after Row operation

Time required (Hours) to complete the Repair jobs

Mechanic A B C D E
I 2 0 4 3 6
II 2 5 0 4 3
III 4 1 0 2 5
IV 4 0 3 6 2
V 0 2 3 1 7

Now the minimum element of a column of the above table is subtracted from every element
of that column and it is done for each column. The result is shown in the Table below.

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STRATEGIC COST MANAGEMENT
Table – 2 showing reduced matrix after Column operation

Time required (Hours) to complete the repair jobs

Mechanic A B C D E
I 2 2
II 2 3
III 4 1
IV 4 5
V 0 0

Here we find that the minimum number of horizontal and vertical straight lines required to cover all the
zero elements of the matrix = 4 ≠ Order (5) of the matrix. Hence the solution is non-optimal.

Thus, a new matrix table is formed as described in the following lines.

Minimum of all the elements which are not covered by the horizontal and vertical lines, drawn already,
is found to be 1. This is subtracted from all the uncovered elements and added to the elements at the
junction cells where a horizontal and a vertical line have intersected. Such cells are (V – B), (V – C) &
(V – E). The result is shown in the next Table.

Table – 3 showing improved matrix (Optimal)

Time required (Hours) to complete the repair jobs

Mechanic A B C D E
I
II
III
IV
V

Here we find that the minimum number of horizontal or vertical straight lines required to cover all the
zero elements of the matrix = 5 = Order (5) of the matrix. Hence the solution is optimal

Now to make the assignments we start examining the rows one by one to see if there is any row with a
single zero. Here the 1st row is having single zero at the cell (I – B). So we make an assignment here
by putting a square boundary around the numerical figure zero at this cell. Correspondingly we check
the column of this assigned cell to find if there is any other zero in it. We find a zero at the cell (IV – B)
and we cross it out indicating no further assignment against B is possible. Similar activity is performed
for the remaining rows, too and we get assignment at the cells (II – C), (III – D), (IV – E). and (V – A)
The resultant matrix with assignments is shown in the Table below:

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MODEL ANSWERS TERM – DECEMBER 2024
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STRATEGIC COST MANAGEMENT
Table – 4 showing Optimal Assignments

Time required (Hours) to complete the Repair jobs

Mechanic A B C D E
I 1 0 4 1 4
II 1 5 0 2 1
III 4 1 0 0 3
IV 4 0 3 4 0

V 0 3 4 0 6

Thus, the optimal solution is –

Repair job Assigned to Time required
Mechanic (Hours)
A V 4
B I 5
C II 7
D III 6
E IV 5
Total - 27

So the minimum time required to complete all the Repair Jobs = 27 hours.

(b) Patients arriving at a village dispensary are treated by a doctor on a first-come-first-served

basis. The inter-arrival time of the patients is known to be uniformly distributed between 0 and
80 minutes, while their service time is known to be uniformly distributed between 15 and 40
minutes. It is desired to simulate the system and determine the average time a patient has to be in
the queue for getting service and the proportion of time the doctor would be idle.

Carry out the simulation using the following sequences of random numbers. The numbers have
been selected between 00 and 80 to estimate inter-arrival times and between 15 and 40 to estimate
the service times required by the patients.

Series 1 07 21 12 80 08 03 32 65 43 74
Series 2 23 37 16 28 30 18 25 34 19 21

[7]

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Directorate of Studies, The Institute of Cost Accountants of India
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MODEL ANSWERS TERM – DECEMBER 2024
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STRATEGIC COST MANAGEMENT
Answer:

Simulated Inter-arrival & Service Times and Calculation of Patient's Waiting time & Doctor's
Idle time

Patient Inter
No. Entry time Service Time Service Waiting Idle time
arrival time Service
in to the Random No. Start time of of doctor
Random End time
queue (minutes) time patient (minute)
No.
(minutes)
(minutes)
1 07 8.07 A.M 23 8.07 A.M 8.30 A.M - 7
2 21 8.28 A.M 37 8.30 A.M 9.07 A.M 2 -
3 12 8.40 A.M 16 9.07 A.M 9.23 A.M 27 -
4 80 10.00 A.M 28 10.00 A.M 10.28 A.M - 37
5 08 10.08 A.M 30 10.28 A.M 10.58 A.M 20 -
6 03 10.11 A.M 18 10.58 A.M 11.16 A.M 47 -
7 32 10.43 A.M 25 11.16 A.M 11.41 A.M 33 -
8 65 11.48 A.M 34 11.48 A.M 12.22 P.M - 7
9 43 12.31 P.M 19 12.31 P.M 12.50 P.M - 9
10 74 1.45 P.M 21 1.45 P.M 2.06 P.M - 55
Total 129 115

[N.B – The above table is prepared on the basis of the assumption that the dispensary opened at 8.00
A.M]
Average time a patient has to be in the queue for getting service = 129/10 = 12.9 minutes
Doctor is there in the dispensary from 8.00 A.M to 2.06 P.M i.e. for 6 hours & 6 minutes = 366 minutes.

During this period, he is idle for 115 minutes. So proportion of time the doctor is idle = 115/366 = 0.314.

7. The following table gives data on normal time & cost as well as crash time & cost for a project.
You need to draw the Network diagram and identify the Critical Path.
Also find out the Normal duration of the project and the corresponding Total Cost associated
with it.
Crash the relevant activities systematically and determine the optimum completion time of the
project. Also determine the corresponding cost when it is given that the Indirect Cost is ₹100
per day.

Activity Normal Crash

Time (days) Cost (₹) Time (days) Cost (₹)
1—2 6 600 4 1,000
1—3 4 600 2 2,000
2—4 5 500 3 1,500
2—5 3 450 1 650
3—4 6 900 4 2,000
4—6 8 800 4 3,000
5—6 400 2 1,000
4
6—7 3 450 2 800
[14]

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

Answer:

The network for normal activity times indicates project duration of 22 days with critical path 1-2-4-6-
7. It is shown below

Total Cost associated with it is given as (Normal Direct Cost + Indirect Cost for 22 Days @ ₹100 per
Day) Normal Direct Cost = (600 + 600 + 500 + 450 + 900 + 800 + 400 + 450) = ₹4700
Indirect Cost = 22 × 100 = ₹2200
Required Total Cost = 4700 + 2200 = ₹6900

1st Stage of Crashing

Cost slope of each of the Critical Activities of the Network diagram is calculated and ranked as below.

Critical Activity Cost Slope = Rank as per ascending

order of Cost Slope
1-2 (1000 – 600)/ (6 – 4) = ₹200 per day 1
2–4 (1500 – 500)/ (5 – 3) = ₹500 per day 3
4–6 (3000 – 800)/ (8 – 4) = ₹550 per day 4
6–7 (800 – 450)/ (3 – 2) = ₹350 per day 2

As Cost Slope of Activity 1 – 2 is minimum, crashing is to be started from this Activity. Maintaining
criticality of the existing Critical Path, Activity 1 – 2 is crashed by 1 Day.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
New Network Diagram is shown above. It is having Duration of 21 Days and the associated Total Cost
is given as TC = Normal Direct Cost + Indirect Cost (for 21 Days @ ₹100 per Day) + Cost of Crashing
Activity 1-2 by 1 Day
= 4700 + 21 × 100 + 1 × 200 = ₹7000
It is seen that other activities too have become Critical. Now there are two Critical Paths given by 1 –
2 – 4 – 6 – 7 as well as 1 – 3 – 4 – 6 – 7

2nd Stage of Crashing

Cost Slopes of each of the new Critical Activities are calculated as below.
Cost Slope of Activity 1 – 3 = (2000 – 600)/ (4 – 2) = ₹700 per Day & that of 3 – 4 = (2000 – 900)/ (6-
4) =₹550/- per Day.

As there are more than one Critical Path, parallel Crashing is necessary for some of the activities to
maintain criticality of the existing Critical Paths. Various options of Crashing and their corresponding
Cost Slopes are shown below.

Options Possible Crash (Days) Cost Slope (₹/ Day) Rank

Activities (1 - 2) & (1 - 3) 1* 200 + 700 = 900 4
Activities (1 - 2) & (3 - 4) 1* 200 + 550 = 750 3
Activities (2 - 4) & (1 - 3) 2 500 + 700 = 1200 6
Activities (2 - 4) & (3 - 4) 2 500 + 550 = 1050 5
Activity (4 – 6) 4 550 2
Activity ( 6 – 7) 1 350 1

* Though as per the supplied data activities (1-3) & (3-4) can be crashed by 2 days each, but (1 – 2)
cannot be crashed more than 1 Day after 1st stage of Crashing.

From the above ranking Crashing of (6-7) by 1 Day is suggested. Due to this project duration will be
20 Days and associated Total Cost = Normal Direct Cost + Indirect Cost for 20 Days @ ₹100 per Day+
Crashing Cost of Activity (1 – 2) by 1 Day @ ₹200 per Day + Crashing Cost of Activity (6 – 7) by 1
Day @ ₹350 per Day = 4700 + 20 × 100 + 1 × 200 + 1 × 350 = ₹7250

3rd Stage of Crashing

After 2nd Stage of Crashing, no new Critical Path emerged. So the options remain same as in the 2nd
Stage with the exception of Activity (6 – 7) which is totally crashed in the 2nd Stage.

From the above list of Ranking, Activity (4 – 6) is having lowest Cost Slope. Thus it is crashed by 4
days now. New Network having project duration of 16 Days is shown below.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

Total Cost of the Project = Normal Direct Cost + Indirect Cost (for 16 Days @ ₹100/ Day) + Crashing
Cost [for Activity (1 – 2) by 1 Day @ ₹200/ Day + for Activity (6 – 7) by 1 Day @ ₹350/ Day + for
Activity (4 – 6) by 4 Days @ ₹550/ Day] = 4700 + 1600 + 200 + 350 + 550 × 4 = ₹9050

4th Stage of Crashing

After 3rd Stage of Crashing, no new Critical Path emerged. So the options remain same as in the 2nd
Stage with the exception of Activities (6 – 7) and (4 – 6) which are fully crashed in the 2nd and 3rd
Stages.

From the above list of Ranking, Activity (1 – 2) and (3 – 4) together is having lowest Cost Slope. Thus
both are crashed by 1 day now. New Network having project duration of 15 Days is shown below.

Total Cost of the Project = Normal Direct Cost + Indirect Cost (for 15 Days @ ₹100/ Day) + Crashing
Cost [for Activity (1 – 2) by 1 Day @ ₹200/ Day + for Activity (6 – 7) by 1 Day @ ₹350/ Day + for
Activity (4 – 6) by 4 Days @ ₹550 per Day + for Activities (1 – 2) & (3 – 4) together by 1 Day @₹
750/Day] = 4700 + 1500 + 200 + 350 + 550 × 4 + 750 = ₹9700

5th Stage of Crashing

Though after 4th Stage of Crashing no new Critical Paths emerged, but the Activity (1 – 2) has been
crashed fully.
Thus the options remaining are as follows.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
Options Possible Crash (Days) Cost Slope (`/ Day) Rank
Activities (2 - 4) & (1 - 3) 2 500 + 700 = 1200 2
Activities (2 - 4) & (3 - 4) 1* 500 + 550 = 1050 1

* Though Activity (2 - 4) can be crashed by 2 Days but after 4th Stage, (3 – 4) has only 1 Day of
Crashing left. As Cost Slope of Activities (2 – 4) & (3 – 4) taken together is least, both are crashed by
1 Day and the new network diagram is shown below. It shows project duration of 14 Days.

Total Cost of the Project = Normal Direct Cost + Indirect Cost (for 14 Days @ ₹100/ Day) + Crashing
Cost [for Activity (1 – 2) by 1 Day @ ₹200/ Day + for Activity (6 – 7) by 1 Day @ ₹350/ Day + for
Activity (4 – 6) by 4 Days @ ₹550/ Day + for Activities (1 – 2) & (3 – 4) together by 1 Day @₹ 750/Day
+ for Activities (2 – 4) & (3 – 4) together by 1 Day @ ₹1050/ Day]
= 4700 + 1400 + 200 + 350 + 550 X 4 + 750 + 1050 = ₹10650

6th Stage of Crashing

After 5th Stage of Crashing no new Critical Paths emerged. So the available option as per the table
above is to crash (2 – 4) and (1 – 3) together and they can be crashed by 1 Day because after 5th Stage
only 1 Day of crashing is available for Activity (2 – 4). The new Network diagram having project
duration of 13 Days is shown below

Total Cost of the Project = Normal Direct Cost + Indirect Cost (for 13 Days @ ₹100/ Day) + Crashing
Cost [for Activity (1 – 2) by 1 Day @ ₹200/ Day + for Activity (6 – 7) by 1 Day @ ₹350/ Day + for
Activity (4 – 6) by 4 Days @ ₹550 per Day + for Activities (1 – 2) & (3 – 4) together by 1 Day @₹
750/Day + for Activities (2 – 4) & (3 – 4) together by 1 Day @
₹1050/ Day + for Activities + for Activities (2 – 4) & (1 – 3) by 1 Day @ ₹1200/ Day]

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
= 4700 + 1300 + 200 + 350 + 550 X 4 + 750 + 1050 + 1200 = ₹11750

From the diagram it is clear that all the paths of the Network Are Critical. Also activities of the path 1
– 2 – 4 – 6- 7 are each fully crashed. Thus no further crashing of the Network is possible.

It is noticed that the Total Cost of the Project kept on increasing all along. This has happened due to the
fact that the rate of decrease of Indirect Cost is much lower than the rate of increase of Direct Cost for
Crashing. Hence optimum duration of the project cannot be obtained and rather minimum possible
duration is obtained and that value is 13 Days. Associated Total Cost of project is ₹11750.

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

STRATEGIES Milan Toys

of
Joy Givers Working 8 Working 12 Working 16 Subcontracting
hrs/day hrs/day hrs/day
Working 12 8 10 9 14
hrs/day
Working 16 10 11 8 12
hrs/day
Working 24 13 12 14 13
hrs/day
Use Principle of Dominance to find the Optimal Strategies of the two manufacturers and the
value of the Game. [7]

Answer:
Joy Givers is the Maximising player with strategies represented along the rows and Milan Toys is
the Minimising Player with strategies represented along the columns. For ease of representation we
consider the respective strategies of Joy Givers as J1, J2 & J3 and those of Milan Toys as M1, M2 &
M3.

STRATEGIES of Milan Toys

Joy Givers M1 M2 M3 M4
J1 8 10 9 14
J2 10 11 8 12
J3 13 12 14 13

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT
All the elements of 4th Column are either greater than or equal to the corresponding elements of
the 1st Column. So 4th Column’s strategy (M4) is dominated by the 1st Column’s strategy (M1).
Hence M4 is ignored. The new matrix is given below.

STRATEGIES Milan Toys

Joy Givers M1 M2 M3
J1 8 10 9
J2 10 11 8
J3 13 12 14

All the elements of 1st Row are less than the corresponding elements of the 3rd Row. Thus, strategy
of 1st Row
i.e. J1 is dominated by the strategy of the 3rd Row i.e. J3 and ignored. The reduced matrix becomes:
-
STRATEGIES Milan Toys
Joy Givers M1 M2 M3
J2 10 11 8
J3 13 12 14

Apparently first two rules of dominance cannot be applied to either of the rows or columns of the
above matrix, but if the average of the elements of the strategies M2 and M3 be taken then we get
a matrix shown below.

STRATEGIES Milan Toys

Joy Givers M1 [M2 + M3]/2
J2 10 (11 + 8)/2 = 9.5
J3 13 (12 + 14)/2 = 13

So the elements of the strategy M1 are either more or equal to the average of the corresponding
elements of M2 and M3. Hence M1 is dominated by M2 and M3. Thus, M1 is deleted and the reduced
matrix is as below

STRATEGIES of Milan Toys Row

Joy Givers M2 M3 Minimum

J2 11 8 8
J3 12* 14 12=Maximin
Column Maximum 12=Minimax 14

So Maximin value = 12 = Minimax value. Hence there exists a Saddle Point at the junction J 3M2
Thus, optimal strategy of Joy Giver is J3 that is “Working 24 hours /day” and that for Milan Toys
is M2 that is “Working 12 hours/day”. Value of the Game = 12 (which means a 12% increase in
market share for Joy Givers)

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 16 SYLLABUS 2022
STRATEGIC COST MANAGEMENT

(b) Calculate the Seasonal Indices for the following quarterly data in certain units. Appropriate
method for finding the Indices has to be decided by you with due explanation

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

2020 39 21 52 81
2021 45 23 63 76
2022 44 26 69 75
2023 53 23 64 84
[7]
Answer:
The values in any quarter do not reveal any definite tendency to change. Thus there is no appreciable
trend in the given dataset. So it is decided to use Method of Simple Average (Quarterly) to find out the
Seasonal Indices. Also a Multiplicative Model is assumed for the data.
Calculations for Seasonal Index

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
2020 39 21 52 81 -
2021 45 23 63 76 -
2022 44 26 69 75 -
2023 53 23 64 84 -
Total 181 93 248 316 838
Arithmetic 45.25 23.25 62 79 209.5
Mean
Seasonal Index 86.4 44.4 118.4 150.8 400

Calculations
Arithmetic Mean for any Quarter = Total for that quarter /4, Grand Average = Total of the Arithmetic
Means /4.
Seasonal Index for any Quarter = (Arithmetic Mean of that Quarter / Grand Average) x100

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Directorate of Studies, The Institute of Cost Accountants of India