MTP_INTERMEDIATE_ Syllabus 2012_December 2017_Set1

PAPER 10- COST & MANAGEMENT ACCOUNTANCY

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
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Paper 10- Cost & Management Accountancy

Full Marks: 100 Time allowed: 3 Hours

Section - A

1. Answer Question No.1 which is compulsory carrying 25 Marks

(a) Answer the following [5 x 2 = 10]

(i) The standard wage rate is `40 per hour; Actual wage rate is `45 per hour,
standard time is 500 hours and actual hours worked is 480 hours. If wages paid for
505 hours then what will be the labour idle time variance?

(ii) Sales during the following months

2015-Oct ` 12,00,000
2015-Nov ` 14,00,000
2015-Dec ` 16,00,000
60% of sales are collected in the month after sales, 30% in the second month and
10% in the third month. What is the Budgeted collection from Debtors for
the month of Jan ‘2016?

(iii) The profit volume ratio of X Ltd. is 50% and the margin of safety is 40%. You are
required to calculate the net profit if the sales volume is `1,00,000.

(iv) Cash Received from Contracted is ` 12,80,000 which is 80% of work certification,
So What is the amount of work Certified?

(v) Company has invested ` 5,00,000 in machinery for manufacturing a Product in

Division X. Cost of Capital is 20%. The Profit from division X is ` 1,20,000 for the
year, Compute the Residual Income from Division X?

(b) Match the following [5 x 1 = 5]

Column ‘A’ Column ‘B’
1 Uniform Costing A Measures divisional performance
2 Escalation Clause B Contract Costing
3 Residual Income C Technique to assist inter-firm comparison.
4 Form – CRA – 2 D Form for filing Cost Audit Report with the Central
Government
5 Form – CRA – 4 E Form of intimation of appointment of cost auditor
by the company to Central Government

(c) List out the any five objectives of Cost Audit. [5]

x3
(d) The total cost function of a firm C = ( ) – 5x² + 28x + 10, where C is total cost and ‘x’
3
is the output. A tax @ ₹2/- per unit of output is imposed and the producer adds it to his
cost. If the demand function is given by P = 2530 - 5x, where ₹ ‘P’ is the price per unit
of output, Find the profit maximising output and the price at the level. [5]

Answer:

1. (a) (i) Idle Time Variance = Idle Hours x standard Hourly wage Rate
= (505 – 480) x `40
= `1000 (A)

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(ii) Collection from Debtors: - Jan -2016

= 10% of 12,00,000 + 30% of 14,00,000 + 60% of 16,00,000
= ₹15,00,000

Margin of Safety in `
(iii) Margin of Safety Ratio = × 100
Actual Sales
Margin of Safety in `
40 = × 100
` 1,00,000
Margin of Safety in ` = 40,000

Profit
Margin of Safety =
P / V Ratio
Profit
` 40,000 =
50%
Profit = ` 40,000 × 50% = ` 20,000.

12,80,000
(iv) Work Certified = = 16,00,000
80%

20
(v) Residual Income = 1,20,000 – (5,00,000 x ) = 20,000
100

(b)
Column ‘A’ Column ‘B’
1 Uniform Costing C Technique to assist inter-firm comparison.
2 Escalation Clause B Contract Costing
3 Residual Income A Measures divisional performance
4 Form – CRA – 2 E Form of intimation of appointment of cost
auditor by the company to Central Government
5 Form – CRA – 4 D Form for filing Cost Audit Report with the Central
Government

(c) Cost Audit has both general and social objectives. The general objectives can be
described to include the following:
• Verification of cost accounts with a view to ascertaining that these have been
properly maintained and compiled according to the cost accounting
system followed by the enterprise.
• Ensuring that the prescribed procedures of cost accounting records rules are duly
adhered to Detection of errors and fraud.
• Verification of the cost of each “cost unit” and “cost center” to ensure that these
have been properly ascertained.
• Determination of inventory valuation.
• Facilitating the fixation of prices of goods and services.

x3
(d) Given (C) = ( ) – 5x² + 28x + 10 + 2x
3
P = 2530 – 5x
Revenue = xp = 2530x – 5x2
x3
Profit = 2530x – 5x2 + 5x2 – 28x – 10 – ( ) – 2x
3
x3
=–( ) – 2502x – 10 – 2x
3
dp 3x 2
= – – 2500
dx 3

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X2 = 2500
x = 2500 = 50

dp2
= – 2, which is Negative
dx 2
∴ Maximum profit is at x = 50 units
Price 2530 – 5 x 50 = 2280.

Section - B

(Cost & Management Accounting – Methods & Techniques and Cost Records and Cost Audit)
Answer any three questions from the following Each question carries 17 marks

2. (a) From the following particulars furnished by M/s. Starlight Co. Ltd. Find out (i) Material
cost variance; (ii) Material usage variance and (iii) Material price variance.
Value of Material purchased ₹ 9,000 units
Quality of Material purchased 3000 units
Standard quantity of materials required per tonne of Finished product 25 units
Standard rate of material ₹ 2 per units
Opening Stock Nil
Closing Stock of material 500 units
Finished production during the period 80 tonnes
[12]

(b) Write any three reasons for disagreement of Financial Profits with Cost Profits? [5]

Answer:

2. (a) Material consumed = Quantity of material purchased - Closing stock of materials

= 3000 units - 500 units
= 2500 units

Value of material purchased

Actual rate of material =
Quantity of material purchased
` 9,000
=
3,000
= ` 3 per unit

Standard Quantity for actual output = 25 units x 80 tonnes

= 2000 units

(i) Material Cost Variance

= Standard Cost - Actual Cost
= (Standard Price x Standard Quantity) – (Actual Price x Actual Quantity)
= (` 2 x 2000 units) - (` 3 x 2500 units)
= ` 4,000 - ` 7,500
= ` 3,500 (A)

(ii) Material Usage Variance

= Standard Price (Standard Quantity - Actual Quantity)
= ` 2 (2000 units - 2500 units)
= ` 2 (-500 units)
= ` 1,000 (A)

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(iii) Material Price Variance

= Actual Quantity x (Standard Price - Actual Price)
= 2500 x (` 2 - ` 3)
= 2500 x (- ` 1)
= ` 2,500 (A)

(b) Reasons for difference in profits of cost and financial accounts:

(i) Items shown in Financial Accounts: There are a number of items which are
included in financial accounts but do not find place in cost accounts. They
may be items of income or expenses, the former increases the profit and latter
reduces the profit.
A. Purely Financial Charges
(a) Loss arising from the sale of fixed assets.
(b) Loss on sale of investments, discount on debentures, etc.
(c) Interest on bank loan, mortgage and debentures.
(d) Expenses of companies ‗Share Transfer Office‘.
B. Appropriation of Profits
(a) Donations and Charities
(b) Income Tax
(c) Dividend Paid
(d) Transfer to Reserves
C. Writing off Intangible and Fictitious Assets
(a) Goodwill
(b) Patents & Copyrights
(c) Advertisement
(d) Preliminary Expenses
D. Pure Financial Incomes
(a) Rent received or Profit on Sale of Fixed Assets
(b) Share transfer fee received
(c) Interest received on Bank Deposits
(d) Dividend received etc.
(ii) Items shown only in Cost Accounts: There are certain items which are included in
cost accounts and not in financial accounts. Such items are very few. E.g.
Interest on capital employed, rent for own premises etc.
(iii) Over or Under Absorption of Overheads. Overheads are absorbed in Cost
Accounts on a certain predetermined estimated basis and in Financial
Accounts, actual amounts incurred are recorded. If there is any over or under
absorption it leads to difference in the profits of both sets of books.

3. (a) A manufacturer with overall (interchangeable among the products) capacity of

1,00,000 machine hours has been so far producing a standard mix of 15,000 units of
product A, 10,000 units of product B and C each. On experience, the total
expenditure exclusive of his fixed charges is found to be ₹ 2.09 lakhs and the cost
ratio among the product approximately 1, 1.5, 1.75 respectively per unit.

The fixed charges comes to ₹ 2 per unit. When the unit selling prices are ₹ 6.25 for A, ₹
7.5 for B and ₹ 10.5 for C. He incurs a loss.

Mix-I Mix-II Mix-III

A 18,000 15,000 22,000
B 12,000 6,000 8,000
C 7,000 13,000 8,000

As a management accountant what mix will you recommend? [12]

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(b) Vishnu Ltd. manufactures and sells product ‘PT’. The company estimates the following
demand for product ‘PT’ for the year 2014-2015:
Quarter Units
I 20,000
II 22,000
III 25,000
IV 33,000

The production department will manufacture 80% of the current quarter’s sales and
20% of the following quarter’s sales. The anticipated and desired stock position for
the year 2014- 2015 is as follows:
Anticipated stock as on April 1, 2014 4,000 units
Desired stock as on March 31, 2015 5,000 units

The standard cost per unit of the product based on a budgeted production
volume of 3,00,000 hrs is as follows:
Direct materials 2 kgs @ `20 `40
Direct labour 3 hrs @ `20 `60
Variable overhead 3 hrs @ `10 `30
Fixed overhead 3 hrs @ `12 `36

Expected selling price of the product is `210. You are required to prepare a quarter-
wise production budget for 2014-2015, showing the number of units to be produced
and total cost of direct materials, direct labour, variable overheads and fixed
overheads. [5]

Answer:

3. (a) Let variable cost per unit of A, B, C be ₹ X, ₹ 1.5X and ₹1.75X respectively.

A = 15,000 x X 15,000 X
B = 10,000 x 1.5 X 15,000 X
C = 10,000 x 1.75 X 17,500 X
Total variable cost 47,500 X

So, we can say,

47,500 X = 2,09,000
or, X = 4.4
Variable cost per unit of A = X = ₹ 4.4
Variable cost per unit of B = 1.5 (4.4) = ₹ 6.6
Variable cost per unit of C = 1.75 (4.4) = ₹ 7.7

Statement showing computation of loss at present mix

Particulars A (`) B (`) C (`) Total (`)

I. Selling price 6.25 7.50 10.50
II. Variable cost 4.40 6.60 7.70
III. Contribution 1.85 0.90 2.80
IV. No. of units at present mix 15,000 10,000 10,000
V. Total contribution 27,750 9,000 28,000 64,750
VI. Fixed cost 70,000
VII. Loss 5,250

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Computation of Profit/ (loss) at Mix I:

Particulars A (`) B (`) C (`) Total (`)
I. No. of units 18,000 12,000 7,000
II. Contribution per unit 1.85 0.90 2.80
III. Total contribution 33,300 10,800 19,600 63,700
IV. Fixed cost 70,000
V. Loss 6,300

Computation of Profit/ (loss) at Mix II:

Particulars A (`) B (`) C (`) Total (`)
I. No. of units 15,000 6,000 13,000
II. Contribution per unit 1.85 0.90 2.80
III. Total contribution 27,750 5,400 36,400 69,550
IV. Fixed cost 70,000
V. Loss 450

Computation of Profit/ (loss) at Mix II:

Particulars A (`) B (`) C (`) Total (`)
I. No. of units 22,000 8,000 8,000
II. Contribution per unit 1.85 0.90 2.80
III. Total contribution 40,700 7,200 22,400 70,300
IV. Fixed cost 70,000
V. Loss 300

As management accountant, one should recommend Mix III because there is profit
of ₹300 against loss at other mixes including present mix.

(b) Production Budget for 2014-2015

Particulars Q-I Q-II Q-III Q-IV Total
80% of current quarter sales demand (units) 16,000 17,600 20,000 26,400 80,000
20% of the following quarter (units) 4,400 5,000 6,600 5,000 21,000
20,400 22,600 26,600 31,400 1,01,000

Production Cost
Particulars Q-I Q-II Q-III Q-IV Total
Units to be produced 10,400 22,600 26,600 31,400 1,01,000
(`) (`) (`) (`) (`)
Material - `40 8,16,000 9,04,000 10,64,000 12,56,000 40,40,000
Labour - `60 12,24,000 13,56,000 15,96,000 18,84,000 60,60,000
Variable Overhead - `30 6,12,000 6,78,000 7,98,000 9,42,000 30,30,000
Fixed overhead [Note # 1] 9,00,000 9,00,000 9,00,000 9,00,000 36,00,000
35,52,000 38,38,000 43,58,000 49,82,000 1,67,30,000

Working # 1 : Fixed overhead

Fixed Overhead = 3,00,000 hrs x₹12 = ₹36,00,000
Therefore, fixed overhead per quarter = ₹36,00,000/ 4 = ₹9,00,000

4. (a) M/s Mysore Petro Ltd. showed a net loss of ` 2,08,000 as per their financial accounts for
the year ended 31st March, 2012. The Cost accounts, however, disclosed a net loss of
` 1,64,000 for the same period. The following information was revealed as a result of
the scrutiny of the figures of both the sets of books.

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1) Factory overhead under recovered 3,000

2) Administration overhead over recovered 2,000
3) Depreciation charged in financial books 60,000
4) Depreciation recovered in costs 65,000
5) Interest on investment not included in costs 10,000
6) Income-tax provided 60,000
7)Transfer fee(in financial Books) 1,000
8) Stores adjustment(credit in financial books) 1,000
Prepare Reconciliation Statement. [7]

(b) A product goes through three processes from a single input material. At the end of
the process I, an intermediate A, which cannot be further processed, also emerges.
At the end of process II, another intermediate product, B, also emerges, which
cannot be processed further. The main product results at the end of process III. The
prices of these products have been frozen by the Government, subject to
escalation only for raw material price and labour rate variations. During a period,
while the price control was in force, the material cost had gone up by ₹ 15 per kg.
and the labour rates increased by Re. 0.80 per labour hour. Given the following
information, on inputs and related outputs, you are required to determine the
amount of claim for price escalation, for each of the intermediary products A and B
and the product and the total claim-

Process Input (kg.) Output (kg.) Labour hours

Process I 2,000 1,600 16,000
Process II 1,440 1,200 18,000
Process III 880 800 16,000
[10]

Answer:

4. (a) Statement Showing Reconciliation of Profit Shown by Cost and Financial Accounts
Particulars Amount (₹) Amount (₹)
Profit as per Financial Accounts (2,08,000)
Add: Under recovery of factory overheads 3,000
Income tax 60,000 63,000
(1,45,000)
Less: Over recovery of Administration OH 2,000
Over recovery of depreciation 5,000
Interest on investments considered in Financial A/c 10,000
Transfer fee 1,000
Stores adjustment 1,000 19,000
Loss as per Cost Accounts 1,64,000

(b) (i) Computation of material input at different stages of Process

(1) Input required for Main Product at different stages of process

Input in Process III = 880 Kg.

Input in Process II = [ 8801,200
×1,440
] = 1,056 Kg.

Input in Process I = [ 1,056 × 2,000

1,600
] = 1,320 Kg.

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(2) Input required for Intermediate Product 'A'

Output of A from Process I = 1,600 – 1,440 = 160 Kgs.

Input required for this output = [160 × 2,000
1,600
] = 200 Kg.

(3) Input required for Intermediate Product

Output of B from Process II = 1,200 – 880 = 320 Kgs.

Input required for this output in Process II = [
320 ×1,440
1,200
]
= 384 Kg.

Input required for this output in Process I = [

384 × 2,000
1,600
]
= 480 Kg.

(ii) Computation of labour hours required to process each of products at different stages
of process Labour hours per Kg. of output in each process (`)

Process I (16,000/1,600) 10
Process II (18,000/1,200) 15
Process III (16,000/800) 20

Labour hours required: (hours)

(a) Main Product

Process III (800 x 20) 16,000
Process II (880 x 15) 13,200
Process I (1,056 x 10) 10,560
Total 39,760
(b) Product 'A' (intermediate)
Process I (160 × 10) 1,600

(c) Product 'B' (intermediate)

Process II (320 × 15) 4,800
Process I (384 × 10) 3,840
8,640

Statement of claim for escalation for increase in material and labour

Product Material Labour Total

Qty/Kg. Escalation @ Hours Escalation @ ` Escalation
` 15/Kg.(`) 0.80/ hr. (`) Claim (`)
Main Product 1,320 19,800 39,760 31,808 51,608
Product A (Intermediate) 200 3,000 1,600 1,280 4,280
Product B (Intermediate) 480 7,200 8,640 6,912 14,112
Total 2,000 30,000 50,000 40,000 70,000

The total escalation claim of ` 70,000 can be made on the Government for increase
in rates of material and labour used in the production process

5. (a) Trimake Limited makes three main products, using broadly the same production
methods and equipment for each. A conventional product costing system is used at
present, although an Activity Based Costing (ABC) system is being considered.
Details of the three products, for typical period are:

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Labour Hours Machine Hours Material Volumes

Per unit per unit Per unit Units
Product X ½ 1½ ₹ 20 750
Product Y 1½ 1 ₹ 12 1,250
Product Z 1 3 ₹ 25 7,000

Direct labour costs ₹6 per hour and production overheads are absorbed on a
machine hour basis. The rate for the period is ₹ 28 per machine hour.
You are required:
(i) to calculate the cost per unit for each product using conventional methods.

Further analysis shows that the total of production overheads can be divided as
follows:
%
Costs relating to set-ups 35
Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
Total production overhead 100%

The following activity volumes are associated with the product line for the period as a
whole.
Total activities for the period
Number of Set-ups Number of movements Number of
of materials Inspections
Product X 75 12 150
Product Y 115 21 180
Product Z 480 87 670
670 120 1,000
You are required:
ii) To calculate the cost per unit for each product using ABC principles [12]

(b) XYZ Ltd which has a system of assessment of Divisional Performance on the basis of
residual income has two Divisions, Alfa and Beta. Alfa 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 Alfa is ₹ 1,00,00,000. Other relevant details extracted from the
budget of Alfa for the current years 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 Alfa. Fully aware of the idle capacity of Alfa, beta has asked Alfa to
quote for manufacture and supply of 3,00,000 numbers of the components with a
slight modification during final processing. Alfa and Beta agree that this will involve an
extra variable cost of ₹ 5 per unit.

You are required to calculate,

I. Calculate the transfer price which Alfa should quote to Beta to achieve its
budgeted residual income.

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II. Also indicate the circumstances in which the proposed transfer price may result in
a sub optimal decision for the Company as a whole. [5]

Answer:

5. (a)
(i) Computation of cost per unit using Conventional Methods:
Total Overheads ₹
X = 750 × 1.5 × 28 31,500
Y = 1250 × 1 × 28 35,000
Z = 7000 × 3 × 28 5,88,000
6,54,500

Computation of cost
Particulars X Y Z
₹ ₹ ₹
Materials 20 12 25
Labour 3 9 6
Overheads 42 28 84
Factory Cost 65 49 115

(ii) Under ABC Costing

Setup Machine Machine Inspection Total

Cost Cost Handling Cost Expenses
Costs (`) 2,29,075 1,30,900 98,175 1,96,350 6,54,500
Cost Driver No. of Machine hours No. of No. of
setups movement of Inspections
materials
Cost driver 341.90 5.6 818.125 196.35
rates (₹ ) (229075/670) (130900/23375) (98,175/120) (196350/1000)

Cost per unit under ABC costing

Particulars X Y Z
₹ ₹ ₹ ₹ ₹ ₹
Materials 20.00 12.00 25.00
Labour 3.00 9.00 6.00
Overheads
Setup Cost 34.19 31.45 23.44
Machine cost 8.40 5.60 16.80
Machine Handling Cost 13.09 13.74 10.17
Inspection Cost 39.27 94.95 28.27 79.06 18.79 69.20
Total Cost 117.95 100.06 100.20

(b)
I. Contribution required at Budgeted Residual Income ₹
Fixed cost 80,00,000
Profit on 7,50,00,000 x 12 % 90,00,000
Residual Income 1,00,00,000
Total Contribution required. 2,70,00,000

Contribution derived from existing units = 12,00,000 x 20 = ₹ 2,40,00,000

Contribution required on 3,00,000 units = 2,70,00,000 – 2,40,00,000 = ₹ 30,00,000
Contribution per unit = 30,00,000 / 3,00,000 = ₹ 10
Increase in Variable cost = ₹ 5

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∴ Transfer price = V.C + Desired Residual Income + Increase in VC

= 160 + 10 + 5
= ₹ 175

II. If Beta can buy from outside at less than the Variable cost of manufacture, i.e.₹
165, then only the decision to transfer price of ₹ 175, will be sub-optimal for the
group as whole.

6. (a) As per Cost Audit Record Rules, state the functions of the following industries.
i) Telecommunication Industry
ii) Pharmaceuticals Industry
iii) Petroleum Industry
iv) Electricity Industry [8]

(b) List out Annexure required to be attached along with Form CRA-3 by the Cost
Auditors? [9]

Answer:

6. (a) (i) Telecommunication Industry:

"Telecommunication Activities" means any act, process procedure, function,
operation, technique, treatment or method employed in relation to telecasting,
broadcasting, telecommunicating voice, text, picture, information, data or
knowledge through any mode or medium and includes intermediate and allied
activities thereof and these activities would, inter alia, include the following
services or activities, including such services that required license or registration
with the Ministry of Communications and information Technology, Government of
India, namely :-
(1) Basic Telephone Services;
(2) National Long Distance Services;
(3) International Long Distance Services;
(4) Cellular Mobile Telephone Services;
(5) Wireless Local Loop (WLL) (Fixed or Mobile) Telephone Services;
(6) Very Small Aperture Terminal Services:
(7) Public Mobile Radio Trunk Services;
(8) Global Mobile Personal Communication Services;
(9) Internet or Broadband or Wireless Access service;
(10) Infrastructure Provider (IP- 1);
(11) Passive Telecom Infrastructure including Telecom Tower Facilities;
(12) Cable Landing Stations; and
(13) Any other related, allied, intermediate or support services in relation to
telecommunication activities not indicated above.

(ii) Pharmaceuticals Industry:

"Pharmaceutical Activities" means production, processing, or manufacturing of
bulk drugs of formulations and includes the meaning assigned to them under the
Drugs (Prices Control) Order 1995 as amended from time to time, or included
under Chapters 29 and 30 of the Central Excise Tariff Act, 1985 (5 of 1986), and
further includes the intermediate products and articles or allied products thereof.

(1) "Bulk drugs" means any pharmaceutical, chemical, biological or plant

product including its salts, esters, stereoisomers and derivatives, which are
used as such or as an ingredient in any formulation and shall include any bulk
drug included in any bona fide Allopathic, Ayurvedic, Homeopathic, Sidha or
Unani (Tibb) systems of medicine;

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(2) "Formulations" means any medicine processed out of or containing one or

more bulk drugs with or without the use of any pharmaceutical aids for
internal or external use of or in the diagnosis, treatment, mitigation or
prevention of disease in human beings or animals and shall include any
medicine included in any bona fide Allopathic, Ayurvedic, Homeopathic,
Sidha or Unani (Tibb) systems of medicine;

(iii) Petroleum Industry:

"Petroleum Activities" means production, processing manufacturing or mining of
crude oil, gases [including Natural Gas, Compressed Natural Gas, Liquefied
Petroleum Gas and regasified gases, etc. as defined in the Petroleum and Natural
Gas Regulatory Board Act, 2006 (19 of 2006)] or Biogas or any other petroleum
products, or included under Chapter 27 of the Central Excise Tariff Act, 1985 (5 of
1986), including the intermediate products and articles or allied products or
activities thereof and includes storage, transportation or distribution of crude oil or
gases or biogas or any or all of the petroleum products.

(iv) Electricity Industry:

"Electricity Activities" means any act, process, procedure, function, operation,
technique, treatment or method employed in relation to generation of electricity
from any source of energy and includes transformation, transmission, distribution
or supply of electricity by any mode, or medium and further includes intermediate
and allied activities thereof.

(b) List of the annexure need to be furnished along with Form CRA - 3:

Annexure has been reclassified into four parts as under:

Part-A
General Information,
General Details of Cost Auditors
Cost Accounting Policy
Product/Service Details -for the company as a whole

Part-B For Manufacturing Sector

Quantitative Information
Abridged Cost Statement
Details of Materials Consumed
Details of Utilities Consumed
Details of Industry Specific Operating Expenses

Part-C For Service Sector

Quantitative Information
Abridged Cost Statement
Details of Materials Consumed
Details of Utilities Consumed
Details of Industry Specific Operating Expenses

Part-D
Product and Service Profitability Statement
Profit Reconciliation
Value Addition and Distribution of Earnings
Financial Position and Ratio Analysis
Related Party Transactions
Reconciliation of Indirect taxes.

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Section - C

(Economics for managerial decision making)

Answer any two from the following each question carries 12 marks

7. (a) What are factors influencing price of a product? [6]

1
(b) Cost = 400x – 10 x2 + x3, Calculate
3
(i) Output at which Marginal Cost is minimum
(ii) Output at which Average Cost is minimum
(iii) Output at which Marginal Cost = Average Cost. [6]

Answer:

7. (a) Companies develop pricing strategies after considering a variety of factors. Your
product or service prices impact your profitability as well as the perception of your
brand in the marketplace. Setting prices that are too high can prevent customers
from buying your products. If you set prices too low, you could miss out on additional
profits.

Value
The value customers perceive in your product is an important factor. If you charge
₹10 for a product that customers generally feel is worth ₹5 or ₹6, you may not get
enough volume to generate suitable profits. In the same way, if customers see more
value than what you charge, you could miss out. However, giving customers a good
deal means having them feel like they go more than they paid for.

Profit Margin Goals

Some companies simply determine how much profit they want to make on products.
If the norm in an industry is a 30 percent mark-up, you might set prices that give you a
30 percent profit. A challenge with this approach is that if your costs increase, you
would have to increase the prices you charge to customers to maintain your profit
margin goals.

Competitors
In highly competitive industries, it is common to study the price points of competitors.
You can set prices that are relatively in line with competitors — with flexibility to go
higher or lower, as needed. If you want to attract customers and undercut the
competition, setting prices 5 to 10 percent below competing companies makes
sense.

Quality
Customers typically perceive that your price says something about the quality of your
products. If you market you brand and products as top quality, a higher price point
that matches adds consistency. Promoting a premium product at a low-end price
may confuse customers, and more importantly, it is impractical to have the top
product or service without paying to get it. If you produce or acquire a great
product, you would need a higher market price to cover its costs.

Financial Objectives
In general, your emphasis on revenue or profits impacts your approach to pricing. If
you are trying to generate revenue and cash in the short-run, discounted prices is
common. To achieve long-term profits by optimizing margins, you need higher price
points and customers that become loyalty to your business.

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dc
(b) (i) Marginal Cost = = 400 - 20x + x2 (say, y)
dx
In order that MC is minimum first derivate must be equal to zero and 2nd derivate
must be positive.
dy
∴ = 2x - 20 => 2x = 20
dx
x = 10
d2 y
= 2, which is positive. It is minimum at x = 10.
dx 2

1 2
(ii) Average Cost = 400 - 10x + x (y say)
3
dy 2
= -10 + x = 0
dx 3
30
=> x = = 15
2
d2 y 2
= > 0.
dx 2 3
.'. Average Cost is minimum of output at x = 15
1 2
(iii) Output at which Marginal Cost = Average Cost 400 - 20x + x2 = 400 - 10x + x
3
1 2
Or, - 20x + 10x + x2 - x =0
3
2 2
Or, - 10x + x =0
3
- 30x + 2x 2
Or, =0
3
Or, 2x2 – 30x = 0
Or, 2x (x – 15) = 0
Or, x – 15 = 0
∴ x = 15

8. (a) Calculate the trend values by the method of least squares from the data given below
and estimate the sales for the year 2014.
Year 2010 2011 2012 2013 2014
Sales(` Lakhs) 70 74 80 86 90
[8]

50
(b) The Average Cost function (AC) for a certain commodity is given by AC =2x – 1+
x
in terms of output x, find the output for which (i) Average cost is increasing (ii)
Average cost is decreasing (iii) Find the total cost (iv) Marginal Cost. [4]

Answer:

8. (a)
Calculation of Trend values by Least Squares Method
Year (t) Sales Y Time deviation (X) XY X2 Trend values Yc
2010 70 -2 -140 4 69.6
2011 74 -1 -74 1 74.8
2012 80 0 0 0 80.0
2013 86 +1 +86 1 85.2
2014 90 +2 + 180 4 90.4
N=5 ΣY = 400 ΣX = 0 ΣXY= 52 ΣX2 =10 ΣYc = 400

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Equation of Trend line = Yc = a + bX => Yc = a + (t - 2012)

Since X = 0, a = ΣY/N = 80
b = ΣXY/ ΣX2 = 5.2
The equation of Straight line would be Y = 80 + 5.2X. The value of Y when X = 2014 or in
terms of deviation X = +5
Y2014 = 80+(5.2 x 5) = 80 + 26 = 106
Trend value for 2010 = 80 + (2010 - 2011) x 5.2 = 69.6
Similarly trend values for 2011, 2012 etc have been calculated.

(b) In order to a function is said to be increasing (or) decreasing its derivation must be
zero.
dy
= 2 – 50x2= 0
dx
50
=> 2 – ( 2 ) = 0
2x
=> 2x2 – 50 = 0
=> x2 – 25 = 0
∴x=+5
When x > 5 it is increasing
When x < 5 it is decreasing
50
Total Cost = (2x – 1 + ) x = 2x2 – x + 50
x
dy
Marginal Cost = (2x2 – x + 50) = 4x – 1
dx

9. (a) A manufacturer can sell “x” items per month, at price P=200 – 2x. Manufacturer’s cost
of production ₹ Y of ‘X’ items is given by Y= 2x + 2000. Find no. of items to be produced to
yield maximum profit p.m. [7]

(b) A manufacturer can sell “x” items (x > 0) at a price of (330 – x) each; the cost of
producing ‘x’ items is ₹ x² + 10x + 12. How many items should he sell to make the
maximum profit? Also determine the maximum profit. [5]

Answer:

9. (a) Units = x
Price = 200 - 2x
Revenue (R) = Px = 200x - 2x2

Cost (C) = 2x + 2000

Profit (z) = 200x - 2x2 - 2x - 2000
-2x2 + 198x - 2000
dz
= -4x + 198 = 0
dx
-4x = -198
X = 198/4 = 49.5
d2 z
= - 4 which is Positive
dx 2
d2 z
=<0
dx 2
Profit is maximum at x = 49.5 units

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(b) Given price (P) = 330 – x

Cost (C) = x2 + 10x + 12
Output = x > 0
Revenue (R) = Px = 330x – x2
Profit = R – C = 330x – x2 – x2 + 10x – 12
= 320x – 2x2 – 12 (say y)

In order that maximum profit is attained

dy
= 0, and
dx
dy 2
= Positive
dx 2
dy
= 320 – 4x = 0
dx
⇒– 4x = - 320
x = 80
d2 y
= –4, which is negative.
dx 2

Therefore profit is maximum at x = 80 units

Maximum profit = 320 (80) – 2(80)2 –12
= 12,788.

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