Solutions of Standard Costing

Ans.2
Working Notes
(1) For actual (standard) output of 85 kgs. Std. Input is 100 kgs.
100kgs 1700kgs
For actual output of 1,700 kgs. the Std. input = =2,000 kgs.
85kgs
(2) 2,000 kgs of standard input for an actual output of 1,700 kgs. Contains the Materials A and B in the proportion of
(40:60) i.e., 800 kgs. of A and 1,200 kgs. of Material B.

(3) Actual Material consumption for 1,700 kgs. of actual output (Kgs.)
Particulars Materials
A B
Stock on 1-9-2004 35 40
Add: Purchase during Sept. 2004 800 1,200
835 1,240
Less: Stock on 30-09-2004 5 50
Material consumed during Sept.2004 830 1,190

(4) Calculation actual purchase price per kg. of material

Rs.3400 Rs.3000
A = Rs.4.25 B = Rs.2.50
800kgs 1200kgs
Statement shoeing Standard and Actual Cost of Actual output
Material Standard Actual
Quantity Rate Amount Quantity Rate Amount
Kg. Rs. Rs. Kg. Rs. Rs.
A 800 4 3,200 35 4.00 140.00
830 3,378.75
795 4.25
B 1,200 3 3,600
40 3.00 120.00
1190
1150 2.50 2,875.00

2,020
2,000
Loss 320
300
Output 1,700
1,700 6,800 6,513.75

Calculation of Material Variances

(a) Material price variance
Actual quantity (Std. price – Actual Price)
A = [35 (4 – 4)] + [ 795 ( 4 – 4.25)] =Rs.198.75 (A)
B = [40 ( 3 – 3)] +[1,150 ( 3 – 2.50 )] =Rs. 575 (F) =Rs.376.25 (F)

(b) Material Usage variance

Std. rate (Std. quantity – Actual Quantity)
A = 4 (800 – 830) =Rs.120 (A)
B = 3 (1,200 – 1,190) =Rs. 30 (F) =Rs.90 (A)

(c) Material Yield Variance

Std. rate of output (Actual yield – Std. Yield)
=[Rs.6,800 x ( 1,700 kg. – 1,717 kg.)] =Rs.68 (A)
1,700

Actual std Output 85kgs

* Std. Yield = Actual input = 2020kgs 1717kgs
Std. Input 100kgs

(d) Material Mix Variance

Actual Quantity ( Std. cost of Std. mix per kg. – Std. cost of actual mix per kg. )
 Rs. 6800 Rs. 6890*
= 2020 kgs =Rs.22(A)
2000 kgs 2020 kgs
*[(830 kgs. x Rs.4)] + [(1,190 kgs x Rs.3 )] =Rs.6,890

(e) Total Materials Cost Variance

Std. Cost – Actual Cost
=Rs.6,800 – Rs.6,513.75 =Rs.286.25 (F)

Summary of Material variance (Rs.)

Price variance 376.25 (F)
Usage variance
1. Yield variance 68 (A)
2. Mix variance 22 (A) 90 (A)
Total Material cost variance 286.25 (A)

Ans. 3: Working Note:

Standard cost Actual cost Revised std.quantity
Component Qty. Rate Amount Qty. Rate Amount Oty.
Kg. Rs. Rs. Kg. Rs. Rs. Kg.

A 48 10 480 72 12 864 54
(B.F.)
B
112 30 224 108 8 864 126

Total Input 160 704 180 1728 180

(-) Loss 16(10%) 36
Total output 144 144 5,360 —

Solution
(i) Mix variance = Std. price (Revised Std. quantity – Actual quantity)
A: 10 × (54-72) = 180 (A)
B: 2 × (126-108) = 36 (F)
144 (A)
(ii) Yield variance = Std. price of yield (Actual yield – Std. yield for actual
mix)
880
= Rs. × (144 –180×90%) = Rs. 88 (A)
180
(iii) Price variance =Actual qty. (Std. price – Actual price.)
A: 72 × (10-12) = 144 (A)
B: 108 × (2-8) = 648 (A)
792 (A)
(iv) Total usage variance = Std. price (Std. qty. – Actual qty.)
A: 10 × (48-72) = 240 (A)
B: 2 × (112-108) = 8 (F)
232 (A)

Ans. 4: Take the good output of 182 kgs. The standard quantity of material required for 182 kg. of output
 182
is 100 202.22
90
Statement showing the standard and actual costs and standard cost of actual mix
Standard cost Actual cost Revised std.quantity
Component Qty. Rate Amount Qty. Rate Amount Oty.
Kg. Rs. Rs. Kg. Rs. Rs. Kg.
A (40% of 80.89 60 4,853.40 90 18 1,620 80
202.22 kg.)
B (60% of 121.33 30 3,639.90 110 34 3,740 120
202.22 kg.)
Total Input 202.22 8,493.30 200 5,360 200
(-) Loss 20.22 18
Total output 182.00 182 5,360 —

Standard yield in actual input is 90 % of 200 kg. i.e. 180 kg.

Variances :
(i) Price variance =Actual qty. (Std. price – Actual price.)
A: 90 × (60-18) = 3780 (F)
B: 110 × (30-34) = 440 (A)
3340 (F)
(ii) Total usage variance = Std. price (Std. qty. – Actual qty.)
A: 60 × (80.89-90) = 546.60 (A)
B: 30 × (121.33-110) = 339.90 (A)
206.70 (A)
(iii) Mix variance = Std. price (Revised Std. quantity – Actual quantity)
A: 60 × (80-90) = 600 (A)
B: 30 × (120-110) = 300 (F)
300 (A)
(iv) Yield variance = Std. price of yield (Actual yield – Std. yield for actual
mix)
8493.30 182
= Rs. × (182 – 200 ) = Rs. 93.30 (F)
182 202.22
(v) Total variance = Std. cost – Actual cost
= Rs. 8,493.30 – Rs. 5,360 = Rs. 3133.30 (F)
Note : (iii) and (iv) above are subparts of total usage variance
Proof : Price variance + Mix variance + Yield variance = Total variance
Rs. 3340 (F) + Rs.300 (A) + Rs. 93.30 (F) = Rs. 3133.30 (F)

Ans. 5: Working Notes :

(i) Since the actual output is 1,000 units, the standard quantity of materials required for the actual
output is 1,000 units × 4 kgs. = 4,000 kgs.
(ii) Statement showing computation of standard cost, standard cost of actual quantity and actual
cost.
 Material Std. cost Actual Std. qty Actual qty Std. cost Std. cost of Actual
per Kg. cost per in Kgs. in Kgs. (Std. qty actual qty. cost (Actual
Kg. × Std. (Actual qty. × Actual
price) qty. × Std. price)
Rs. Rs. Rs. price) Rs. Rs.
a b c d e = a×c f = a×d g = b×d

A 1.25 1.30 1,200 1,180 1,500 1,475 1,534

B 1.50 1.80 1,600 1,580 2,400 2,370 2,844
C 3.50 3.40 800 830 2,800 2,905 2,822
D 3.00 3.00 400 440 1,200 1,320 1,320
4,000 4,030 7,900 8,070 8,520
(iii) Standard cost per unit of the standard mix
Rs. 7,900
= 4,000 Kgs. = Rs.1.975

Rs.8070
(iv) Standard cost per unit of the actual mix = Rs.2.002
4030kgs
Variances:
(i) Price variance = Actual qty. (Std. price – Actual price)
= Rs.8,070 – Rs. 8,520 = Rs. 450 (A)
(ii) Mix variance = Total actual qty. (Std. cost per unit of
std.mix – Std. cost per unit of actual mix)
= 4,030 Kgs. (Rs. 1.975 – Rs. 2.002) = Rs. 110 (A)
(iii) Sub usage variance = Std. price per unit of std. mix (Total std. qty –
Total actual qty.)
= Rs. 1.975 (4,000 – 4,030) = Rs. 60.00 (A)
(iv) Total material cost variance = Std. cost – Actual cost
= Rs. 7,900 – Rs.8,520 = Rs. 620 (A)
Proof : Price variance + Mix variance + Sub-usage variance = Total variance
Rs. 450 (A) + Rs. 110 (A) + Rs. 60 (A) = Rs. 620 (A)
Note : ‘Mix variance’ and sub usage variance are sub-part of total usage variance which may
be calculated as below:
Usage variance = Std. price (Std. qty. – Actual qty.)
= Standard cost – Standard cost of actual quantity
= Rs. 7,900 – Rs. 8,070 = Rs. 170 (A)

Ans.6
Basic data for calculation of Labour variances
Category of Workmen Standard Actual
Weeks Rate Amount Weeks Rate Amount
Rs. Rs. Rs. Rs.
Skilled 3,000 60 1,80,000 2,560 65 1,66,400
Semi – Skilled 1,200 36 43,200 1,600 40 64,000
Unskilled 1,800 24 43,200 2,240 20 44,800
Total 6,000 2,66,400 6,400 2,75,200
Calculation of Labour variances
(1) Direct Labour Cost Variance
Std. cost for actual output – Actual Cost
=2,75,200 – 2,66,400 =Rs.8,800 (A)

(2) Direct Labour Rate Variance

Actual time (Std. rate – Actual rate)
Skilled = 2,560 (60 – 65) =Rs.12,800 (A)
Semi – Skilled =1,600 (36 – 40) =Rs. 6,400 (A)
Unskilled =2,240 (24 – 20) =Rs. 8,960 (F) =Rs.10,240(A)

(3) Direct Labour Efficiency Variance

Std. rate ( Std. time for actual output – Actual time)
Skilled =60(3,000 -2,560 ) =Rs.26,400 (F)
Semi – Skilled =36 (1,200 -1,600) =Rs.14,400 (A)
Unskilled =24 (1,800 – 2,240) =Rs.10,560(A) =Rs.1,440(F)
Direct Material efficiency Variance can be further analysed into:

(a) Direct Labour Mix Variance

Std. rate ( Revised Std. time – Actual time)
Skilled =60(3,200 -2,560 ) =Rs.38,400 (F)
Semi – Skilled =36 (1,280 -1,600) =Rs.11,520 (A)
Unskilled =24 (1,920 – 2,240) =Rs. 7,680 (A) =Rs.19,200 (F)
* Revised Std. time

Skilled =6,400 x 3,000 =3,200

6,000

Semi- skilled =6,400 x 1,200 =1,280

6,000

Unskilled =6,400 x 1,800 =1,920

6,000
(b) Direct Labour Revised Efficiency variance
Std. rate ( Std. time for actual output –Revised Std. time)
Skilled =60(3,000 -3,200 ) =Rs.12,000 (A)
Semi – Skilled =36 (1,200 -1,280) =Rs. 2,880 (A)
Unskilled =24 (1,800 – 1,920) =Rs. 2,880 (A) =Rs.17,760(A)
Summary of Labour variances (Rs.)
Rate variance 10,240 (A)
Efficiency variance
(a) Mix variance 19,200 (F)
(b) Revised efficiency variance 17,760 (A) 1,440 (F)
Direct Material cost variance 8,800 (A)

Ans. 7: In a 40 hour week, the standard gang should have produced 1,000 std. hours as
shown below:
Gang: -
Skilled 16 No. of workers × 40 hrs. 640
Semi - skilled 6 No. of workers × 40 hrs. 240
Unskilled 3 No. of workers × 40 hrs. 120
 1,000 hours

However, the actual output is 900 standard hours. Hence to find out the total labour cost
variance, the standard cost (or cost charged to production) is to be computed with reference to 900
standard hours. This is done in the following statement:
Statement showing the Standard cost, Actual cost and
Standard cost of Actual time for Actual output, i.e. 900
Standard hours.
Gang Standard cost Actual cost Standard cost of
Actual time
Hours Rate Amount Hours Rate Amount Hours Rate Amount
Rs. Rs. Rs. Rs. Rs Rs.
Skilled
600
900
1000 576 3 1,728 14×40 = 560 4 2,240 560 3 1,680

Semi-skilled
240
900
1000 216 2 432
9 × 40 = 360 3 1,080 360 2 720
Unskilled
120
900
1000 108 1 2 × 40 = 80 2 160 80 1 80
108
900 2.52 2,268 1,000 3.48 3,480 1,000 2.48 2,480

Variances:
(i) Rate variance = Actual time (Std. rate – Actual rate)
= (Standard cost of actual time – Actual cost)
= Rs. 2,480 – Rs.3,480 = Rs. 1,000 (A)
(ii) Gang variance = Total actual time ( Std. rate of std. gang–
Std. rate of actual gang)
= 1,000 (Rs. 2.52 – Rs. 2.48) = Rs. 40(F)
(iii) Sub-efficiency variance = Std. rate (Total std. time – Total actual time)
= Rs. 2.52 (900 hours – 1,000) = Rs. 252 (A)
(iv) Total labour cost variance = Std. labour cost – Actual labour cost
= Rs. 2,268 – Rs. 3,480 = Rs. 1,212 (A)
The gang composition variance may also be known as labour mix variance and is part of efficiency
variance which may be computed as under:
Efficiency variance = Std. rate (Std. time – Actual time)
= Standard cost – Std. cost of actual time
= Rs. 2,268 – Rs. 2,480 = Rs.212 (A)

Ans. 8: Standard cost charged to production Rs. 5,000

(1,000 units× 2.5 hours × Rs.2)
Actual wages paid Rs. 4,500
Actual wage rate per hour (Rs. 4500÷2000) Rs. 2.25
Std. wage rate per hour Rs. 2.00
Abnormal idle time (25% of 2,000 hours) 500 hrs.
Variances :
(i) Wage rate variance = Actual time (Std.rate – Actual rate)
 = 2,000 hours (Rs.2 – Rs.2.25) = Rs.500 (A)
(ii) Efficiency variance = Std. rate (Std.time – Actual time*)
Rs.2 (2,500 hrs. –1500 hrs.) = Rs. 2,000 (F)
(iii) Idle time variance = Idle time × Std.rate
= 500 hrs. × Rs. 2 = Rs. 1,000 (A)
(iv) Total variance = Std.labour cost – Actual labour cost
Rs. 5,000 – Rs. 4,500 = Rs. 500 (F)
*Actual time less idle time.

Ans.9
Basic data for Standard and actual labour cost of producing 1,000 articles of ‘A’ and standard cost of actual
labour hours
Standard Cost Actual Cost
Labour Hours Rate Amount Hours Rate Amount Std. cost of
Rs. Rs. Rs. Rs. actual
labour
hours (
Actual
hours x
Std. rate)Rs
Skilled 10,000 3.00 30,000 9,000 4.00 36,000 27,000
Semi – Skilled 8,000 1.50 12,000 8,400 1.50 12,600 12,600
Unskilled 16,000 1.00 16,000 20,000 0.90 18,000 20,000
Total 34,000 58,000 37,400 66,600 59,600

Calculation of Labour variances

(1) Labour Cost Variance
Std. cost – Actual Cost
=Rs.58,000 – Rs.66,600 =Rs.8,600 (A)

(2) Labour Rate Variance

Actual Hours (Standard rate – Actual rate)
OR

Std. cost of actual hours – Actual Cost

=Rs.59,600 – Rs.66,600 =Rs.7,000 (A)

(3) Labour Efficiency Variance

Std. rate of Std. mix (Total Std. hours for actual output – Total Actual hours)

Rs. 58000
= 34000  37400  =Rs.5,800(A)
34000

(4) Labour Mix Variance

Total actual hours ( Std. rate of standard mix – Std. rate of actual mix)

58000 59600
= 34000 =Rs.4,200(F)
34000 37400
Summary of Labour variances (Rs.)
Rate variance 7,000 (A)
Efficiency variance 5,800 (A)
Mix variance 4,200 (F)
Labour Cost variance 8,600 (A)
 Ans. 10: (i) Variable overhead variance:
= (Standard variable overhead – Actual variable overhead)
= (Rs. 2,40,000 – Rs. 2,00,000) = Rs. 40,000 (Favourable)
(Refer to Working note 1)
(ii) Variable overhead budget variance:
= (Budgeted variable overhead for actual hours – Actual variable overhead)
= Rs. 2,24,000 – Rs. 2,00,000 = Rs. 24,000 (Favourable)
(Refer to Working note 2)
(iii) Variable overhead efficiency variance:
= Standard variable overhead rate per hour [Std. hours for actual output – Actual hours]
= Rs. 2 [1,20,000 hours – 1,12,000 hours]
= Rs.2 × 8,000 hours = Rs. 16,000 (Favourable)
Working notes:
(1) Standard variable overhead
= Standard cost of actual output = 20,000 units × 6 hours × Rs. 2
= Rs. 2,40,000
(2) Budgeted variable overhead (for actual hours)

= 1,12,000 hours × Rs.2 = Rs.2,24,000

Ans. 11: Actual output = 9,000 units

Idle time = 5,000 hours
Production time (Actual) = 1,05,000 hours
Standard hours for actual production = 10 hours / unit 9,000 units = 90,000 hours.

Labour efficiency variance = 3,75,000 (A)

i.e. Standard rate (Standard Production time – Actual production time) = 3,75,000(A).

SR (90,000 – 1,05,000) = – 3,75,000

3,75,000
SR Rs. 25
15,000

(i) Idle time variance = 5,000 hours 25 Rs. / hour = 1,25,000. (A)
(ii) Standard Variable Overhead = Rs. 150 / unit
Standard hours = 10 hours / unit
Standard Variable Overhead rate / hour = 150 / 10 = Rs. 15 / hour
Total Variable Overhead variance = Standard Variable Overhead – Actual Variable Overhead
= Standard Rate Standard hours – Actual rate Actual hours

= (15) (10 9,000) – 16,00,000

= 13,50,000 – 16,00,000
Total Variable Overhead Variance = 2,50,000 (A)

(iii) Variable Overhead Expenditure Variance = (Standard Rate Actual Hours) – (Actual Rate Actual Hours)

= (15 1,05,000) – 16,00,000

= 15,75,000 – 16,00,000
 = 25,000 (A)
(iv) Variable Overhead Efficiency Variance = Standard Rate (Standard Hours for actual output – Actual hours for
Actual output)
= 15 (90,000 – 1,05,000)
= 15 (–15,000)
= 2,25,000 (A)
(b) Alternative Solution
Actual Output = 9,000 Units
Idle time = 5,000 hrs
Direct Wages Paid = 1,10,000 hours @ Rs. 22 out of which 5,000 hours being idle, were not recorded in production.
Standard hours = 10 per unit.
Labour efficiency variance = Rs. 3,75,000 (A)
or

Standard Rate (Standard Time – Actual Time) = – 3,75,000

Or Standard Rate = Rs 25/-
(i) Idle time variance = Standard Rate Idle time
25 5,000 = Rs 1,25,000 (A)
(ii) Standard Variable Overhead / unit = 150
150
Standard Rate = Rs.15/hour
10
Standard Quantity = 10 hours
Actual Variable Overhead = 16,00,000
Standard Variable Overhead = 150 9,000 = 13,50,000
Actual Variable Overhead = 16,00,000
Total Variable Overhead Variance = 2,50,000 (A)
(iii) Variable Overhead expenditure = Standard Variable Overhead for
actual hours – Actual Variable
Overhead
= (150 1,05,000) – 16,00,000
= 15,75,000 – 16,00,000
= 25,000 (A)
(iv) Variable overhead efficiency variance = Standard Variable Overhead for actual output –
Standard Variable Overhead for Actual hours)
= 15 (10 hours 90,000 units –
1,05,000)
= 15 (90,000 – 1,05,000)
= 15 (–15,000)
= 2,25,000 (A)

Ans.12: Computation of standard cost and actual cost

Standard Cost
Direct Materials (6,000 x Rs.12) 72,000
Direct Labour (6,000 x Rs.4.40) 26,400
Variable Overheads (6,000 x Rs.3) 18,000
Total standard Costs (a) 1,16,400
Actual Costs
Direct Materials (12,670meters x Rs.5.70)
 Direct Wages 72,219
Variable Overheads 27,950
Total Actual Costs (b) 20,475
Total Variance (a)-(b) 1,20,644
4,244,(A)

Computation of Missing figures

(1) Actual Labour hours
Standard variable overhead rate hour (Standard hours – Actual hours) = Rs.1,500 (A)
Rs.1,500 A =Rs.3 (6,000 x 1 hour – Actual hours)
Rs.1,500 A =Rs.18,000 –(Rs.3 x actual hours)
(Rs.3 x Actual hours) =Rs.18,000 + Rs.1,500
Actual hours =Rs.19,500 / 3 = 6,500 hours

(2) Actual Wage rate hour = Actual wages paid =Rs.27,950 =Rs.4.3
Total Actual hours 6,500 hours
Computation of Material Labour and Variable Overhead Variances
1. Material variances
(1) Material Cost Variance
Standard Cost- Actual Cost
=(Rs.72,000 – Rs.72,219) =Rs.219 (A)
(2) Material Price Variance
Actual Quantity of Material consumed (Std, price- Actual Price)
=12,670 meters (Rs.6- Rs.5.70) =Rs.3,801 (F)
(3) Material Usage Variance
Standard price (Standard Quantity –Actual Quantity)
=Rs.6 (12,000 metres -12,670 metres) =Rs.4,020 (A)
2. Labour Variances

(1) Labour Cost Variance

Standard Cost- Actual Cost
=(Rs.26,400 – Rs.27,950) =Rs.1,550 (A)
(3) Labour Rate Variance
Actual hours (Std. wage rate per hour- Actual wage rate per hour)
=6,500 hours (Rs.4.40- Rs.4.30) =Rs.650 (F)
(3) Labour Efficiency Variance
Standard rate per hour (Standard hours –Actual hours)
=Rs.4.40 (6,000 hours- 6,500 hours) =Rs.2,200 (A)
3. Variable Overhead Variances

(1) Total Variable overhead Variance

Standard Variable Overhead- Actual Variable Overhead
=Rs.18,000 – Rs.20,475 =Rs.2,475 (A)
(4) Variable overhead Efficiency Variance
Standard Variable overhead rate per hour (Std. hours for actual output-Actual hours)
=Rs.3 ( 6,000 – 6,500) =Rs.1,500 (A)
(3) Variable overhead Budget Variance
Budgeted variable overhead –Actual variable overhead)
=(Actual hours worked x Std. variable overhead per hour) – Actual variable overhead
=(6,500 x Rs.3 ) – Rs.20,475 =Rs.975 (A)
Note: (F) denoted Favourable Variance; (A) denoted Adverse Variance

Ans 13:
Working Notes :
1. Standard cost of raw-material consumed : Rs. Rs.
Total standard cost of ZED (1,000 units × Rs.21) 21,000
Less: Standard cost : Labour 8,000
 Overheads 1,600 9,600
Standard cost of raw materials used 11,400
2. Standard cost of raw–material per finished unit.

3. Standard quantity of raw - material per finished unit and total quantity of raw material
required:

Total quantity – 3.8 kg. × 1,000 units = 3,800 kgs.

4. Total material cost variance :
Actual cost of raw material Rs.10,000
Standard cost of raw material Rs.11,400
Total material cost variance Rs. 1,400 (F)
5. Actual quantity (A Q) of raw–material (in kgs):
Material usage variance = Standard rate (Standard quantity – Actual quantity). or, Rs. 600
(A) = Rs. 3 (3,800 Kgs. – AQ)
or, 3AQ = 12,000 kgs. or, AQ = 4,000 kgs.
(Material usage variance is as given in the question and standard quantity is as per (3)
above )
6. Actual rate of raw material per kg

7. Standard direct labour rate

Standard direct labour hours = 1,600 (given) Standard direct labour cost = Rs. 8,000 (given)

8. Actual labour cost and actual labour rate per hour:

Actual total cost of 1,000 units Rs. 21,070
1,000 units (Rs. 21 + Re. 0.07)
Less : Actual cost of material Rs. 10,000
Actual variable overheads Rs. 1,62 Rs. 11,620
Actual direct labour cost Rs. 9,450

9. Standard labour hours to produce one unit:

10. Standard labour cost per unit:

Standard labour cost per unit = 1.6 hours × Rs. 5 = Rs.8
11. Actual hourly rate of variable overheads

:
(a) Standard qu antity of raw material per unit of ZED : 3.8 kg. (Refer to working note 3).
(b) Standard direct labour rate per hour Rs. 5 (Refer to working note 7).
(c) Standard direct material cost per unit of ZED : Rs. 11.40 (Refer to working note 2 ) .
(d) Standard direct labour cost per unit of ZED: Rs. 8 (Refer to working note 10).
(e) Standard total material cost for the output: Rs. 11,400 (Refer to working note 1). (f) Actual
total direct labour cost for the output: Rs. 9,450 (Refer to working note 8). (g) Material price
variance = Total material cost variance – Material usage variance.
= Rs. 1,400 (favourable)* – Rs. 600 (Adverse)
(*Refer to working note 4)
= Rs. 2000 (Favourable)
Alternatively,
= Actual quantity (Standard rate – Actual rate)
= 4,000 units (Rs. 3 – Rs. 2.50)* (* Refer to working note 6)
= Rs. 2,000 (Favourable)
(h) Labour rate variance:
= Actual hours (Standard rate – Actual rate)
= 1,800 hours (Rs. 5 – Rs. 5.25)
= Rs. 450 (Adverse)
(i) Labour efficiency variance:
Standard rate (Standard hours – Actual hours)
= Rs. 5 per hour (1,600 hours – 1,800 hours) = Rs. 1,000 (Adverse)
(j) Variable overhead expenditure variance :
= Actual hours (Standard rate – Actual rate)
= 1,800 hours (Re. 1 – Re. 0.90)* = Rs. 180 (Favourable) (*Refer to working note)
(k) Variable overhead efficiency variance
= Standard rate (Standard hours – Actual hours)
= Re. 1 per hour (1,600 hours – 1,800 hours) = Rs. 200 (Adverse)

12000hrs
Ans. 14: Budgeted daily hours per day of June = 500hrs / day
24days
Actual available hours for June = 500 hours × 25 days = 12,500 hours
Calendar Variance = Std. fixed overhead rate per hr
(No. of hrs. in actualperiod– No. of hrs. in budgeted period)
= Re.0.50 (12,500 hours – 12,000 hours) = Rs. 250 (F)

Alternatively, this variance can be calculated by using number of days instead of hours. In that case,
overhead rate will be on per day basis.

Ans. 15:Actual output : 8,400 hours × 22days × 1.2 units per hour = 2,21,760 units.
Standard output per man hour: 1
Standard hours produced or std. hrs. for actual production :2,21,760 units×1 hr. = 2,21,760 hrs.
Budgeted hrs. in budgeted days: 8,000 hours × 20 days = 1,60,000 hours
Budgeted hours (capacity) in actual working days: 8,000 hrs. × 22 days = 1,76,000 hours
Actual hours worked: 8,400 hours × 22 days = 1,84,800 hours
Overheads as per budget: 8,000 hours × 20 days × Rs. 2 per hour = Rs.3,20,000
 Rs.
(a) Standard cost charged to production : 2,21,760 hours × Rs.2 4,43,520
(b) Actual hours worked × Standard rate : 1,84,800 hours × Rs.2 3,69,600
(c) Budgeted hours in actual days × Std. rate: 1,76,000 × Rs.2 3,52,000
(d) Overheads as per budget 3,20,000
(e) Actual overheads 3,25,000
Efficiency variance = Std.fixed overhead rate per hour (Std. hrs. for
production – Actual hrs.)
= Rs.2 (2,21,760 hours – 1,84,800 hours) = Rs.73,920 (F)
Capacity variance = Standard fixed overhead rate per hour (Actual capacity –
Budgeted capacity)
= Rs.2 (1,84,800 hours – 1,76,000 hours) = Rs.17,600 (F)
Calendar variance = Standard fixed overhead rate per hour (Budgeted hrs. in
actual days – Budgeted hrs. in budgeted days)
= Rs.2 (1,76,000 hours – 1,60,000 hours) = Rs.32,000 (F)
Volume variance = Standard fixed overhead rate per hour
(Actual volume in hrs. – Budgeted volume in hrs.)
= Rs.2 (2,21,760 hours – 1,60,000 hours) = Rs. 1,23,520(F)
Expenses variance = Budgeted expenses – Actual expenses
= Rs.3,20,000 – Rs.3,25,000 = Rs.5,000 (A)
Total variance = Overheads charged to production – Actual overheads
= Rs. 4,43,520 – Rs.3,25,000 = Rs. 1,18,520 (F)
OR
Rs.
Efficiency variance : (a – b) 73,920 (F)
Capacity variance : (b – c) 17,600 (F)
Calendar variance : (c – d) 32,000 (F)
Volume variance : (a – d) 1,23,520 (F)
Expense variance : (d – e) 5,000 (A)
Total variance : (a – e) 1,18,520 (F)

Ans. 16: (a)Total fixed overhead variance = Absorbed fixed overheads – Actual fixed overheads
= (5,200units× Rs. 2) – Rs. 10,200 = Rs.200 (F)
(b) Expenditure variance = Budgeted overheads–Actual overheads
= Rs. 10,000 – Rs. 10,200 = Rs. 200(A)
(c) Volume variance = Standard rate of absorption per unit ×
(Actual production – Budgeted production
= Rs.2 (5,200 units —5,000 units)=Rs. 400 (F)
This can be divided into capacity variance and efficiency variance as shown below :
Capacity variance = Standard rate of absorption per hour (Actual hours capacity – Budgeted
hours capacity)
= Re. 0.50 (20,100 hours – 20,000 hours) = Rs 50(F)
Efficiency variance = Standard rate of absorption per hour (Standard hours required – Actual hours)

= Re.0.50 (20,800 hours – 20,100 hours) = Rs.350 (F)

 Working Notes :
Rs.10000
Std. fixed overhead rate of absorption per unit = Rs.2
5000units
Rs.10000
Std. fixed overhead rate of absorption per hour: Re.0.50
5000units 4hrs.
Std. hours required for actual production: 5,200 units × 4 hours = 20,800 hours

Ans. 17:

Working Notes:

1) Budgeted output in units

40,000 man hours X 3.2 units per man hours = 1,28,000 units.

2) Standards variable overhead rate per unit

Rs, 1,02,400/1,28,000 units = Rs. 0.80 per unit

3) Standard variable overhead rate per man hour

Rs. 1,02,400/40,000 man hours = Rs. 2.56 per man hour

4) Standard fixed overhead rate per unit

Rs 32,000/1,28,000 units = Rs. 0.25 per unit

5) Actual Production units

43,000 man hours X 3 units per man hour = 1,29,000 units

Computation of variable Overhead variances:

i) Total Variable Overhead Variances

= Variable overhead recovered on actual output – Actual variable overhead
= (1,29,000 units X 0.80 P – Rs. 1,14,000) = Rs. 11,200 (A)

ii) Variable Overhead Expenditure Variance

= Budgeted variable overhead for actual hours – Actual Variable overhead
= (43,000 X 2.56 – Rs. 1,14,400) = Rs. 4,320 (A)

iii) Variable Overhead Efficiency Variance

= Standard variable overhead rate per hour (Standard hours for actual output- Actual hours)
= Rs. 2.56 (40,312.5 hours – 43,000 Hours) = Rs. 6,880 (A)

Computation on Fixed Overhead Variances:

i) Total Fixed Overhead Cost Variance
= Fixed overhead recovered on actual output – Actual fixed overhead
= (1,29,000 units – 0.25 P – Rs. 31,500) = Rs. 750 (F)

ii) Fixed Overhead Expenditure Variance

= Budgeted fixed overhead – Actual fixed overhead
= (Rs. 32,000 – Rs. 31,500) = Rs. 500 (F)

iii) Fixed Overhead Volume Variance

= Standard fixed overhead per unit (Actual output units – Budgeted output units)
= 0.25 P (1,29,000 – 1,28,000) = Rs. 250 (F)

iv) Fixed Overhead Efficiency Variance

= Standard fixed overhead rate per unit (Actual Quantity – Standard Quantity)
 = 0.25 P (43,000 hours X 3.2 units – 1,29,000 units) = Rs. 2,150 (A)

v) Fixed Overhead Capacity Variance

= Standard fixed overhead rate per hour (Actual capacity hours – Budgeted capacity hours in actual days)
= (Rs. 32,000/40,000 hours) (43,000 – 21 days X 2,000 hours) = Rs. 800 (F)

vi) Calendar Variance

= (Budgeted Days – Actual Days) Standard fixed overhead per day
= (20 days – 21 days) (Rs. 32,000/20 days) = Rs. 1,600 (F)

Computation of Total Overhead Variances

= Total variable overhead variances + Total fixed overhead variances
= Rs. 11,200 (A) + Rs. 750 (F) = Rs. 10,450

Ans. 18: Basic calculation:

Product Budgeted Actual Budgeted Actual Budgeted Actual Actual
price price quantity quantity sales quantity at sales
budgeted
sales
Price
a b c d (e)=a × c f=(a × d) g=(b × d)
Rs. Rs. Rs. Rs. Rs.
A 2.50 3.00 2,000 2,400 5,000 6,000 7,200
B 5.00 4.50 1,500 1,400 7,500 7,000 6,300
C 7.50 7.00 1,000 1,200 7,500 9,000 8,400
D 10.00 10.50 500 400 5,000 4,000 4,200
5,000 5,400 25,000 26,000 26,100

Computation of Variances :
Sales price variance = Actual quantity (Actual price – Budgeted price)
= Actual sales – Standard sales
= Rs.26,100 – Rs. 26,000 = Rs.100(F)
Sales volume variance = Budgeted price (Actual quantity – Budgeted quantity)
= Std. sales – Budgeted sales
= Rs.26,000 – Rs.25,000 = Rs.1,000 (F)
Total variance = Actual sales – Budgeted sales
= Rs.26,100 – Rs.25,000 = Rs.1,100 (F)

Average budgeted price per unit of budgeted mix:

Average budgeted price per unit of actual mix:

Hence, Sales mix variance = Actual total qty. (Budgeted price per unit of actual mix –
Budgeted price per unit of budgeted mix)
 = 5,400 units (Rs.4.815—Rs.5.00)
= Rs. 1,000 (A)
Sales quantity variance = Budgeted price per unit of budgeted mix
= (Actual total qty. – Budgeted total qty.)
= Rs.5 (5,400 – 5,000) = Rs. 2,000 (F)
Note: Instead of computing average price, one may use total figures to do away with the effect of
rounding off.
For example, in case of sales mix variance figures may be as under:

= Rs. 26,000 – Rs 27,000 = Rs.1,000 (A)

Ans. 19:
A. (a) Analysis of variances to show the effects on turnover :
B. Working Notes :
( 1 ) Budgeted sales :
Budgeted sales units at budgeted (or standard) prices.
Units Price Amount
Rs. Rs.
Bravo 5,000 100 5,00,000
Champion 4,000 200 8,00,000
Super 6,000 180 10,80,000
15,000 23,80,000
(2) Actual sales :
Actual sales units at actual prices
Units Price Amount
Rs. Rs.
Bravo 5,750 120 6,90,000
Champion 4,850 180 8,73,000
Super 5,000 165 8,25,000
15,600 23,88,000

(3) Standard sales:

Actual sales units at Budgeted (or Standard) prices.
Units Price Amount
Rs. Rs.
Bravo 5,750 100 5,75,000
Champion 4,850 200 9,70,000
Super 5,000 180 9,00,000
15,600 24,45,000
Computation of Variances :
(i) Sales price variance = Actual quantity (Actual price – Budgeted price)
or
Actual sales – Standard sales
 = Rs.23,88,000 – Rs.24,45,000 = Rs.57,000 (A)
(ii) Sales mix variance = Total actual quantity (Budgeted price of actual mix – Budgeted price of
budgeted mix

Rs.2445000 Rs.2380000
15600units
15600 15000

=Rs. 2475200 – Rs. 2380000 = Rs. 95200F

= Rs. 24,45,000 – Rs. 24,75,200 = Rs. 30,200 (A)
(iii) Sales quantity variance = Budgeted price of budgeted mix ×
(Total actual quantity – Total budgeted quantity)

Rs. 23,80,000
= 15,000 units ( 15,600 units – 15,000 units)

= Rs. 24,75,200 – Rs. 23,80,000 = Rs. 95,200 (F)

(iv) Total sales value variance = Actual sales – Budgeted sales
= Rs.23,88,000 – Rs.23,80,000 = Rs. 8,000 (F)
(b) Analysis of variances to show the effects on profit : Working
Notes :
(1) Budgeted margin per unit
Sales price Cost Margin
Rs. Rs. Rs.
Bravo 100 90 10
Champion 200 170 30
Super 180 130 50

(2) Actual margin per unit

 Computation of variances:
(i) Sale margin price variance
Actual quantity (Actual margin – Budgeted margin)
or
Actual profit – Standard profit
Rs. 3,96,000 – Rs. 4,53,000 = Rs. 57,000 (A)
(ii) Sales margin mix variance = Total actual quantity (Budgeted margin on actual mix –
Budgeted Margin on budgeted mix

= Rs. 4,53,000 – Rs. 4,88,800 = Rs. 35,800 (A)

(iii) Sales quantity variance
= Budgeted margin on budgeted mix (Total actual qty. – Total budgeted qty.)

= Rs. 4,88,800 – Rs. 4,70,000 = Rs. 18,800 (F)

(iv) Total sales margin variance = Actual profit – Budgeted profit
= Rs. 3,96,000 – Rs. 4,70,000 = Rs. 74,000 (A)

Ans. 20:Working Notes:

1. Statement of budgeted average contribution margin per unit for the year 1995:

Product different PC Budgeted contribution Budgeted sales Total budgeted

models margin per unit of each volume contribution
product margin
(Rs.) (Units) (Rs.)
PC 10,000 7,000 7,00,00,000
Portable PC 6,000 1,000 60,00,000
Super PC 40,000 2,000 8,00,00,000
10,000 15,60,00,000
Rs.15,60,00,000
Budgeted average contribution margin per unit =
10,000 units
= Rs.15,600
 Actual sales of - 3 PC models
2. Actual market share percentage = × 100
Actual industry sales

11,000 units
= × 100
68,750 units

= 16
Actual sales of Product
3. Actual sales mix percentage of product = × 100
Total Actual sale of 3 PC models
8,250 units
Actual sales mix percentage of product PC = × 100 = 75
11,000 units
1,650 units
Actual sales mix %age of product Portable PC = × 100 = 15
11,000 units

1,100 units
Actual sales mix %age of product Super PC = × 100 = 10
11,000 units
(i) Computation of individual product and total sales volume variance

Actual Budgeted Budgeted

Sales contribution
Sales
Sales =
Volume Volume margin per

in units in units
unit

Individual product sales volume variance:

PC = (8,250 units – 7,000 units) × Rs.10,000 = Rs.1,25,00,000 (Fav.)
Portable PC = (1,650 units – 1,000 units) × Rs.6,000 = Rs.39,00,000 (Fav.)
Super PC = (1,100 units – 2,000 units) × Rs.40,000 = Rs.2,60,00,000 (Adv.)
Total Sales Volume Variance = Rs.1,96,00,000 (Adv.)
(ii) Computation of total sales quantity variance:

Budgeted average
Total actual Total Budgeted
Total sales quantity variance = contribution margin
sales Unit Sales units
per unit

= (11,000 units – 10,000 units) × Rs.15,600 = Rs.1,56,00,000 (Fav.)

(iii) Computation of the market size and market share variance
1. Market size variance:

Budgeted average
Actual Industry Budgeted Industry
Budgeted market Share %age = Sales in units  Sales in units contribution margin

per unit

= 0.20 (68,750 units – 50,000 units) × Rs.15,600 = Rs.5,85,00,000 (Fav.)

2. Market share variance:
 Actual Total Budgeted average
Actual market Budgeted market
= Sales Volume Contribution margin
share percentage share percentagein units
per unit

= (0.16 – 0.20) × 68,750 units × Rs.15,600 = Rs.4,29,00,000 (Adv.)

(iv) Computation of individual product and total sales mix variances
1. Individual product and total sales mix variance:
Sales mix variance:
Budgeted
Actual sales Budgetedsales ActualTotal Budgetedaverage
Individual
mix %ageof  mix %ageof SalesVolume contribution
Contributi
on
product product in units margin
margin

PC*** = (0.75 – 0.70) × 11,000 units × (Rs.10,000 – Rs.15,600)

= Rs.30,80,000 (Adv.)
Super PC****= (0.10 – 0.20) × 11,000 units × (Rs.40,000 – Rs.15,600)
= Rs.2,68,40,000 (Adv.)
2. Total sales mix variance = rs.3,52,00,000 (Adv.)
* Refer to working note 1.
**Refer to working note 2.
***Refer to working note 3.
Note: Sales variances can also be calculated by using sales value approach.
(v) Comment on above results:
1. Favourable sales quantity variance of Rs.1.56 crores was because of growth in industry as a whole.
However the firm could not retain the budgeted market share of 20%. As a result the benefit of
increased market size i.e. Rs.5.85 crores is partly offset by loss due to fall in market share i.e.
Rs.4.29 crores.
2. Increase in the percentage sale of computers below-average budgeted margins and a decrease in
the percentage sale of computers above-average budgeted margins had resulted in the reduction of
operating profit by Rs.3.52 crores.
3. As a result of above, the operating profit of ‘Super Computers’ had been adversely affected by
Rs.1.96 crores due to sales variances.

Ans 21:Working Notes

1. Material data

Actual output 6,400 units

Standard data for actual output
Actual data for actual output
Quantity Price Amount Quantity Price Amount
Kgs. Per Kg. Rs. Kgs. Per Kg. Rs.
32,000 8 2,56,000 36,000 7.50 2,70,000

2. Labour data

Actual output 6,400 units

Standard data for actual output
Actual data for actual output
Labour Rate/hour Amount Labour Rate/hour Amount
 hours Rs. Rs. hours Rs. Rs.
32,000 8 2,56,000 36,000 7.50 2,70,000

3. Variable overheads data

Standard/Budgeted data Actual data

Budgeted variable overheads for 6,50,000 Actual variable overheads 6,48,000
actual hours (Rs.)
Actual Units 6,400
Actual Hours 65,000
Standard variable overhead Rs. 10
Rate/hour
Standard variable overhead rate/ Rs. 100
unit

4. Sales data

Budgeted data Actual data

Budgeted Actual
Sales Amount Sales Amount
Margin p.u. Margin p.u.
Units Rs. Units Rs.
Rs. Rs.
50 65
6,000 3,00,000 6,400 4,16,000
(Rs. 250 – Rs. 200) (Rs. 265 – Rs. 200)

1. Market Size Variance

= Budgeted market share percentage [Actual industry sales in units – Budgeted industry sales
in units]
Budgeted contribution margin per unit

= 0.12 [60,000 units – 6,000 units/12%] Rs. 50

= 0.12 [60,000 units – 50,000 units] Rs. 50 = Rs. 60,000 (F)

2. Market Share Variance

=[

=[0.106666 – 0.12] 60,000 units X 50

= (6,400 units – 7,200 units) Rs. 50 = Rs. 40,000 (A)

3. Gross Margin Sales Volume Variance

= (Actual quantity – Budgeted quantity) Budgeted margin per unit
= (6,400 units – 6,000 units) Rs. 50 = Rs. 20,000 (F)

4. Gross Margin Sales Price Variance

= (Actual margin per unit – Budgeted margin per unit) Actual quantity of units sold
= [(Rs. 65 – Rs. 50) 6,400] 6,400 units = Rs. 96,000 (F)

5. Direct Material Usage Variance

= (Standard quantity – Actual Quantity) Standard Price per kg.
= (32,000 kgs – 36,000 kgs.) Rs. 8 = Rs. 32,000 (A)

Direct Material Price Variance

= (Standard price/kg. – Actual price/kg.) Actual quantity of material used
= (Rs. 8 – Rs. 7.50) 3,600 kgs. = Rs. 18,000 (F)

6. Direct Labour Efficiency Variance

= (Standard labour hours – Actual labour hours) Standard rate per hour
= (64,000 hours – 65,000 hours) Rs. 6 = Rs. 6,000 (A)

Direct Labour Rate Variance

= (Standard labour rate per hour – Actual labour rate per hour) Actual time taken in hours
 = (Rs. 6 – Rs. 6.40) 65,000 hours = Rs. 26,000 (A)

7. Variable Overhead Efficiency Variance

= (Standard hours for actual output – Actual Hours) Standard variable overhead per hour
= (64,000 hours – 65,000 hours) Rs. 10 = Rs. 10,000 (A)

Variable Overhead Expense Variance

= Budgeted Variable Overhead – Actual Variable Overhead
= Rs. 6,50,000 – Rs. 6,48,000 = Rs. 2,000 (F)
Operating Statement
(Reconciling the budgeted contribution with actual contribution

Rs. Rs. Rs.

Budgeted Contribution 3,00,000
Gross margin sales volume variance 20,000 -
Gross margin sales price variance 96,000 - 1,16,000
4,16,000
Cost Variances
Material usage - 32,000
Material price 18,000 -
Labour efficiency - 6,000
Labour rate - 26,000
Variable overhead efficiency - 10,000
Variable overhead expense 2,000 -
20,000 74,000 54,000
Total Actual Contribution 3,62,000

Verification:
Actual Contribution
= Actual sales revenue – Actual variable costs
= Rs. 16,96,000 – [ RS. 2,70,000 (actual material cost) + Rs. 4,16,000 (actual labour cost) + Rs. 6,48,000 (actual variable
overheads)]
= Rs. 16,96,000 – Rs. 13,34,000 = Rs. 3,62,000

Ans.22:Working
(i) Normal / Budgeted hours =60,000 Direct Labour hours.
(ii) Budgeted output =60,000/ 12 =5,000 units
(iii) Budgeted fixed overhead rate =9,00,000 / 60,000
=Rs.15 per hour or 9,00,000 / 5,000 =Rs.180 per unit
(iv) standard cost and profit per unit (Rs.)
Direct materials (20kg X 10) 200
Direct labour (12 hrs. X 5.50) 66
Variable overheads (12 hrs. X 10) 120
Fixed Overheads (12 hrs. X 15) 180
Total 566
Selling price 600
Standard profit 34

(v) Actual profit (Rs.)

Sales 28,32,000
Less: cost of sales;
Direct Material 10,50,000
Direct wages 3,10,000
Overheads 15,26,000 28,86,000
Actual profit (54,000)
Direct Material variances
DMCV = Standard Cost for actual output – Actual cost
=(4,800 X 200 )-10,50,000 =9,60,000-10,50,000 =Rs.90,000 (A)
DMPV = Actual qty. X ( standard rate – Actual rate)
=1,00,000 X (10-10.5) =Rs.50,000 (A)
DMUV = Std. rate X (std. qty. for actual output- actual qty.)
=10 x ( 4,800 X 20)-1,00,000 ) =10 X (96,000-1,00,000) =Rs.40,000 (A)

Direct Labour variances

DLCV = Standard Cost of actual output – Actual cost
=(4,800 X 12 X 5.50 )-3,10,000 =3,16,800-3,10,000 =Rs.6,800 (F)
DLRV = Actual Time X ( Standard rate – Actual rate)
=62,000 X (5.50-5) =Rs.31,000 (F)
DLEV = Std. Rate X (Std. Time. for actual output- actual Time)
=5.50 x ( 4,800 X 12)-62,000 ) =5.50 x (57,600-62,000) =Rs.24,200 (A)

Overhead variances
VOCV = Recovered variable Overheads – Actual variable Overheads
=(4,800 X 120 ) – 5,86,000 = 5,76,000 – 5,86,000 =Rs.10,000 (A)
FOCV = Recovered fixed overheads – Actual fixed overheads
=(4,800 X 180 ) – 9,40,000 =8,64,000 – 9,40,000 =Rs.76,000 (A)
FOEXPV = Budgeted fixed overheads – Actual fixed overheads
=9,00,000 – 9,40,000 =Rs.40,000 (A)
FOVV = Recovered fixed overheads – Budgeted fixed overheads
=8,64,000 – 9,00,000 =Rs.36,000 (A)
FOCAPV = Std. rate per hour (Actual time – budgeted time)
=15 X (62,000 – 60,000 ) =Rs.30,000 (F)
FOEFEV =Std. Rate per hour X (Std. time for actual output – Actual time)
=15 X (4,800 X 12) – 62,0000 =15 X (57,600 – 62,0000=15 X 4400 =Rs.66,000(A)

Sales Variances
Sales Value = Budgeted Sales – Actual Sales
Variance =( 5,000 X 600 ) -28,32,000 = Rs.30,00,000 – Rs.28,32,000 =1,68,000(A)
Sales Price = Actual qty. (Std. Price – Actual price)
Variance = 4,800 X ( 600 – 590) =Rs.48,000 (A)
Sales Volume = Std. Price X (Budgeted qty. – Actual qty.)
Variance =600 X ( 5,000 – 4,800) =Rs.1,20,000(A)
Loss of profit due to loss of sales volume = 200 X 34 =Rs.6,800 (A)

Ans. 23:Working Notes :

Rs.
( a ) Actual sales 2,22,750
Less : Price variance (Favourable) 6,750
Standard sales 2,16,000
Units sold 4,800
 ( d ) Standard direct wage rate is Rs.4.50 per hour.
Hence standard time per unit: Rs. 9 ÷ 4.50 hour = 2 hours
(e) Variable overheads :
Standard rate Rs.7.50 per hour
Variable overhead per unit: 2 hrs. × Rs.7.50 = Rs. 15
(Note : Alternatively, this may be calculated by adjusting variances as in other cases).

(f) Fixed overhead spent Rs.39,000

Less : Fixed overhead expense
variance (Adverse) Rs.1,500
Budgeted overheads Rs. 37,500

(g) Fixed overhead recovered: 4,800 units × Rs.7.50 = Rs.36,000

(h) Fixed overhead volume variance
Rs.36,000 – Rs.37,500 = Rs.1,500 (Adverse)
(i) Budgeted sales: 5,000 units × Rs.45 = Rs.2,25,000
(j) Standard sales: 4,800 units × Rs.45 = Rs.2,16,000
(k) Actual sales = Rs.2,22,750
(1) Sales volume variance: = Rs.9,000 (Adverse)
Rs. 2,16,000 – Rs.2,25,000
(m) Sales price variance:
Rs.2,22,750 – Rs.2,16,000 = Rs. 6,750 (Favourable)
(i) Original budget: Rs.
Budgeted sales : (A) (5,000 units × Rs.45) 2,25,000
 Budgeted costs
Direct material (5,000 units × Rs.6) 30,000
Direct wages (5,000 units × Rs.9) 45,000
Variable overheads (5,000 units × Rs.15) 75,000
Fixed overheads (5,000 units × Rs.7.50) 37,500
Total budgeted costs : (B) 1,87,500
Profit : (A) – (B) 37,500
(ii) Standard product cost sheet per unit
Rs.
Direct materials 6.00
Direct wages 9.00
Prime cost 15.00
Variable overheads 15.00
Fixed overheads 7.50
Total cost 37.50
Profit 7.50
Selling price 45.00
(iii) Statement showing Reconciliation of the original Budgeted Profit and the Actual
Profit.
Rs. Rs.
Budgeted profit 37,500
Less: Sales margin volume variance (Adverse)*
or loss of profit on sales volume variance
2
= Rs. 9000 × 16 % ** 1500
3
Standard profit 36,000
*Sales margin volume variance (Adverse)
(200 units × Rs.7.50 = Rs.1,500)

**Profit as % of selling price : Rs. 7.50 × %

Add: Sales price variance (Favourable) 6,750

42,750
Add: Favourable cost variances:
Wage rate 750
Variable overhead expenses 3,000 3,750
Less : Adverse cost variances 46,500
Material price 300
Material usage 600
Labour efficiency 2,250
Variable overhead efficiency 3,750
Fixed overhead expense 1,500 8,400
38,100
Less: Fixed overhead volume variance (Adverse) 1,500
[See working note (h)]
36,600
Ans. 24:Details of original and revised standards and actual achieved
Original standards Revised standards Actual

Fruit 400 Kgs Rs16 Rs6,400 400 Kgs Rs 19 Rs7,600 428 Kgs Rs 18 Rs7,704

Glucose 700 Kgs Rs10 Rs7,000 700 Kgs Rs12 Rs 8,400 742 Kgs Rs 12 Rs 8,904

Pectin 99 Kgs Rs 33.2 Rs 3286.8 99 Kgs Rs 33.2 Rs 3286.8 125Kgs Rs 32.8 Rs 4,100

Citric acid 1 Kg Rs 200 Rs 200 1 Kg Rs 200 Rs 200 1 Kg Rs 95 Rs 95

1,200 kgs Rs16,886.8 1,200 kgs Rs19,486.8 1,296 kgs Rs20,803

Labour Rs 585.0 Rs 585.0 Rs 600

1,200 kgs 17,471.8 1,200 kgs 20,071.8 1,296 kgs 21,403

Loss 36 kgs 36kgs 132

1,164kgs Rs 17,471.8 1,164kgs Rs 20,071.8 1,164 Kgs Rs 21,403

(i) Planning variances

*
Fruit extract (6,400 less 7,600) Rs 1,200(Adverse)
Glucose syrup (7,000 less 8,400) Rs1,400(Adverse)
Total Rs 2,600(Adverse)
* (Std qty Std price less Std qty Revised Std price)
(ii) Ingredients operating variances
Total (19,486.8 less 20,803) = Rs 1,316.2(Adverse)
Ingredients Price variance
(Revised Material Price – Actual Material Price) ( Actual Qty Consumed)
Variance in Rs
Fruit extract (19 – 18) 428 428(F)
Glucose syrup Nil
Pectin (33.2 – 32.8) 125 50(F)
Citric acid (200 – 95) 1 105(F)
583(F)
Usage variance
(Std Qty on Actual Production less Actual Qty on Actual Production) Revised Std Price/Unit

Rs Variance in Rs
Fruit extract (400 – 428) 19 532(A)
Glucose syrup (700 – 742) 12 504(A)
Pectin (99 – 125) 33.2 863.2(A)
Citric acid Nil
1,899.2(A)
(iii) Mix Variance
(Actual usage in std mix less Actual usage in actual mix ) std price

Variance in Rs
Fruit extract (432 – 428) 19 76(F)
 Glucose syrup (756 – 742) 12 168 (F)
Pectin (106.92 – 125) 33.2 600.3(A)
Citric acid (1.08 – 1) 200 16(F)
340.3 (A)
Yield variance
(Actual yield – Std yield from actual output) Std cost per unit of output

19486.8
= (1,164 – 1,296 0.97) = 1,558.9(A)
1164
Labour operating variance
585 – 600 = 15(A)
(iv) Total variance = Planning variance + Usage Variance + Price Variance + labour operating Variance.
Or Total Variance = (2,600) + ( 1,899.2 ) + 583 + (15) = 3931.2 (A).

Ans.26: Standard hours produced

Product X Product Y Total
Out put (units) 1,200 800
Hours per unit 8 12
Standard hours 9,600 9,600 19,200
Actual hours worked
100 workers 8 hours 22 days = 17,600
Budgeted hours per month
1,86,000/12 = 15,500

actual hours 17,600

Capacity Ratio = 100 = 113.55 %
Budgeted hours 15,500

Standard Hours Produced 19,200

Efficiency Ratio = 100 100 109.09%
Actual hours 17,600

Standard Hours Produced 19,200

Activity Ratio = 100 100 123.87%
Budget hours 15,500

Relationship : Activity Ratio = Efficiency Ratio Capacity Ratio

109.09 113.55
or 123.87 =
100

Ans: 27: (1) Capacity Ratio

= Actual working Hours

Budgeted working hours x 100
 = 25 days x 8 hours x 50 workers x 100 =117.65%
8,500 hours (i.e.,1,02,000/12)

(2) Activity Ratio

=Actual production in standard hours x 100

Budgeted hours

=(1,000 units x 5 hours) + (600 units x 10 hours) x 100 =129.41%

8,5000 hours

(3) Efficiency Ratio

=Standard hours for actual production x 100
Actual hours

=(1,000 units x 5 hours ) + (600 units x 10 hours) x 100 =110%

10,000 hours
Inter – relationship
Capacity Ratio x Efficiency Ratio =Activity Ratio
117.65% x 110% =129.41%

Ans. 28: Report to the Departmental Manager showing the cost ratios:
Standard hours produced 2112
(a) Efficiency Ratio = 100 110%
Actual hours worked 1920
Standard hours produced 2112
(b) Activity Ratio = 100 82.50%
Budgeted Std. Hours 2560
Budgeted Std. Hours 2560
(c) Standard Capacity usage Ratio = 100 80%
Maximum Possible Hours 3200
Actual hours worked 1920
(d) Actual Capacity utilisation Ratio = 100 75%
Budgeted hours 2560
24
(e) Calendar Ratio = 100 96%
25

(ii) Report to the Departmental Manager Setting out the analysis of variances

15360
Standard fixed overhead rate per hour = Rs.6
2560

A. Fixed Overheads Rs.

(a) Charged to production (2112 × 6) 12672
(b) Actual hours × Std. rate (1920 × 6) 11520
80
(c) Revised budgeted hours × Std. rate (24×8×16× ×6) 14746
100
(d) Original budgeted overheads 15360
(e) Actual overheads 16500

Variances:
Efficiency variance (a-b) 1152(F)
Capacity variance (b-c) 3226(A)
Calendar variance (c-d) 614(A)
Volume variance (a-d) 2688(A)
Expenditure variance (d-e) 1140(A)
Total variance 3828(A)

B. Variable overheads:
20840
Standard variable overhead rate per hour = =Rs.8
2560
(a) Charged to production (2112 × 8) 16896
(b) Actual hours × Std. rate (1920 × 8) 15360
(c) Actual overheads 14500

Variances:
Efficiency variance (a-b) 1536(F)
Expenditure variance (b-c) 860(F)
Total variance (a-c) 2396(F)

Working note:
Maximum possible hours (25×8×16) 3200
Budgeted hours: 3200 less 20% downtime 2560
Actual hours 1920
Budgeted standard hours 2560
Standard hours produced 5112
Budgeted working days 25
Actual working days 24

Ans. 29:
Maximum capacity in a budget period
= 50 employees × 8 hrs.×5 days×4 weeks
= 8,000 hrs.
Budgeted hours
40 employees ×8 hrs.×5 days×4 weeks
= 6,400 hrs.
Actual hrs. = 6,000 hrs. (from the sum) Standard hrs.
for actual output = 7,000 hrs.
Budget no. of days = 20 days = 20 days (4 weeks ´5 days) Actual no.
of days = 20-1 = 19 days

Standard Hrs
1. Efficiency ratio = 100 {(7000 6000) 100} 116.67%
Actual Hrs

2. Activity ratio = {(7,000÷6,400)×100} = 109.375%

3. Calendar Ratio = (Available working days ÷ budgeted working days) × 100
 = {(19÷20)×100} = 95%
4. Standard Capacity Usage Ratio =
(Budgeted hours ÷ Max. possible hours in the budgeted period) × 100
= {(6,400÷8,000)×100} = 80%
5. Actual Capacity Usage Ratio =
(Actual hours worked ÷ Maximum possible working hours in a period) × 100
= {(6,000÷8,000)×100} = 75%
6. Actual Usage of Budgeted Capacity Ratio = (Actual working
hours ÷ Budgeted hours) × 100
= {(6,000÷6,400)×100} = 93.75%

Ans.30:
(i) Dr. Material Control A/c
Dr. or Cr. Material Price Variance A/c
Cr. Creditors A/c
(Being price variance during purchase of
materials)
(ii) Dr. WIP Control A/c
Dr. or Cr. Material Usage Variance A/c
Cr. Material Control A/c
(Being recording of usage variance at
Standard cost of excess/under utilized
quantity)
(iii) Dr. Wages Control A/c
Dr. or Cr. Labour Rate Variance A/c
Cr. Cash
(Being entry to record wages at standard rate)

Ans. 31:(A) The cost sheet for 900 units will appear as under :

Cost Std. qty. Std. rate Std.cost

Rs.
Direct material 9,000 1.00 9,000
Direct labour 2,250 3.00 6,750
Overheads 2,250 6.00 13,500
29,250
(B) Calculation of variances:
Material price variance = 9,500 Pcs. (Re. 1.00 – Rs.1.10) = Rs. 950 (A)
Material usage variance = Re. 1.00 (9,000 pcs. – 9,500 pcs.) = Rs. 500 (A)
Labour rate variance = 2,475 hrs. (Rs. 3.00 – Rs. 3.50)
= Rs. 1,237.50 (A)
Labour efficiency variance = Rs. 3.00 (2,250 hrs. – 2,475 hrs.) = Rs. 675(A)
Overhead variances :
(a) Charged to production as per cost sheet Rs. 13,500 (b) Actual
 hours × Std. rate: 2,475 hrs. × Rs. 6 Rs. 14,850 (c)
Overheads as per budget Rs. 16,500
(d) Actual overheads Rs. 17,000
Efficiency variance : (a – b) Rs. 1,350 (A)
Capacity variance : (b – c) Rs.1,650 (A) (idle time)
Expense variance : (c – d) Rs. 500 (A)
Total variance : (a – d) Rs. 3,500 (A)
(C) The. journal entries for recording these transactions are as under
Dr. Cr.
Rs. Rs.
(i) Material Control A/c Dr. 11,000
To General Ledger Adjustment A/c 11,000
(Being the purchase value of 10,000
pieces of materials at Rs. 1.10 each)
(ii) Work-in-Progress A/c Dr. 10,450
To Material Control A/c 10,450
(Being the cost of 9,500 pieces of
materials actually issued to production
at the actual price of Rs. 1.10 each)
(iii) Work-in-Progress A/c Dr. 8,662.50
To Wages Control A/c 8,662.50

(Being the actual amount of direct

wages paid for 2,475 hours at Rs. 3.50 per hour
(iv) Work-in-Progress A/c Dr. 17,000
To Overhead Expense Control A/c 17,000
(Being the actual overhead expenses incurred)
(v) Finished Stock Control A/c Dr. 29,250
To Work-in-Progess A/c 29,250
(Being the standard cost of production
transferred to finished goods account)
(vi) Cost of Sales A/c Dr. 29,250
To Finished Stock Control A/c 29,250

(Being the standard cost of goods

sold transferred to Cost of Sales A/c)
After the basic transactions are posted, the materials control account will show the actual value of
stock of material in hand and the work-in-progress account will show a balance representing the
cumulative variances on all the accounts and closing balance of work-in- progress at standard cost.
The variances have already been analysed in Para (B) above and they will be carried to the respective
accounts pending investigation before being finally disposed off. In this problem we have assumed that
there is no closing balance of work-in- progress.
(D) The journal entries for transferring the variances to their respective
 accounts are as under
Rs. Rs. Material
price variance A/c Dr. 950.00
Material usage variance A/c Dr. 500.00
Labour rate variance A/c Dr. 1,237.50
Labour efficiency variance A/c Dr. 675.00
Overhead efficiency variance A/c Dr. 1,350.00
Overhead capacity variance A/c Dr. 1,650.00
Overhead expense variance A/c Dr. 500.00
To work-in-progress A/c 6,862.5
(E) The ledger accounts will appear as under:
Dr. Material Control A/c Cr.
Rs. Rs.
To Opening balance - By Work-in-Progress A/c 10,450
To General Ledger By Balance c/d 550
Adjustment A/c 11,000
11,000 11,000
Work-in-Progress Control A/c
Rs. Rs.
To Opening balance – By Finished stock control A/c 29,250.00
To Material control A/c 10,450.00 By material price variance A/c 950.00
To Wages control A/c 8,662.50 By material usage variance A/c 500.00
To Overheads control A/c 17,000.00 By labour rate variance A/c 1,237.50
By labour efficiency variance A/c 675.00
By overhead efficiency A/c
Variance A/c 1,350.00
By overhead capacity
Variance A/c . 1,650.00
By overhead expense
Variance A/c 500.00
36,112.50 36,112.50

Ans. 32:(A)Computation of variance:

(i) Material price variance: 8,600 pcs. (Rs. 2.15 – Rs. 2.50) = Rs. 3,010 (A) (ii) Material
usage variance: Rs. 2.15 (8,400 Pcs. – 8,600 Pcs.) = Rs. 430 (A)
[Standard requirement of materials = 2,800 units produced × 3 pcs. per unit = 8,400 pcs.]
(iii) Labour efficiency variance:
Dept. A: Standard time required = 2,800 pcs. × 2 hrs. = 5,600 hours. Dept. B: Standard
time required = 2,800 pcs. × 4 hrs. = 11,200 hours.

Variances :
Dept. A: 1.75 (5,600 – 5,200) = Rs. 700 (F) Dept. B: 1.50 (11,200 – 12,000) = Rs. 1,200 (A)
(iv) Overheads variances:
(i) Material Control A/c Dr. 18,490
Material price variance A/c Dr. 3,010
To Creditors A/c 21,500
(ii) Work-in-Progress Dept. A. A/c Dr. 18,060
Material usage variance A/c Dr. 430
To Material Control A/c 18,490
(iii) Work-in-progress Dept. A. A/c Dr. 9,800
To wages control A/c 9,800
(iv) Wages Control A/c Dr. 700
To Labour Efficiency Variance Dept A A/c 700
(v) Work-in-Progress Dept. B A/c. Dr. 16,800
Labour Efficiency Variance Dept. B A/c Dr. 1,200
To Wages Control A/c 18,000
(vi) Work-in-Progress Dept. A A/c Dr. 2,800
Overhead Capacity Variance Dept. A. A/c Dr. 400
To Overhead Efficiency Variance Dept. A. A/c 200
To Overhead Expense Control Dept. A A/c 3,000
(vii) Work-in-Progress Dept. B A/c Dr. 11,200
Overhead Efficiency Variance A/c Dr. 800
Overhead Expenses Variance A/c Dr. 500
To Overhead Control Dept. B A/c 12,500
(viii) Work-in-Progress Dept. B A/c Dr. 30,660
To Work-in-Progress Dept. A A/c 30,660
(Being the transfer at standard cost of finished
Production of Department A to Department B
for processing in Department B)
(ix) Finished Stock control A/c Dr. 58,660
To Work-in-Progress Dept. B A/c 58,660
Ans.33:All figures of Ans. 31are 5 times of Ans. 32

Ans. 34: Material – 1 Rate Variance = Standard cost of material purchased – Actual cost
= Rs24, 000 – Rs21, 600 = Rs2, 400 (F)
Material – 2 Quantity Variance = SR × SQ – SR × AQ
= Rs900 × 80 units – Rs75, 600
= Rs3, 600 (A)
Labour Spending Variance = SR × AH – AR × AH
= Rs24/per hour × 2300 hours – Rs51, 750
= Rs3, 450 (A)
Labour Efficiency Variance = SR × (SH – AH)
– 7200 = 24 (SH – 2300)
SH = 2000 Hrs.
Rs
Total Cost of material purchased 1,27,200
Less Purchase Value of Material – 2 1,05,600
Cost of material –1 21,600
Working Notes:
(1) Standard Cost of Material – 2 actually consumed in production = Rs72, 000 (Given)
Standard cost of Material – 2 per unit: 5 litres × Rs180 = Rs900
No of units produced = Rs72, 000 / Rs900 = 80 units
Total material – 1 used in production = Rs18, 000 (Given)
Add Closing Inventory = Rs6, 000 (Given)
Less Opening Inventory =0
Hence Standard Cost of Material – 1 purchased = Rs24, 000
(2) Standard Rate of Material -1 = Rs24, 000 / 1,000kg
= Rs24 per kg
Standard Cost of Material – 1 = Rs18, 000
Add favourable Quantity Variance = Rs1, 200
Material – 1 allowed = Rs19, 200
Standard quantity of Material – 1 allowed = Rs19, 200/Rs24= 800 Kg.
Standard quantity per unit = 800kg/80units = 10 kg
Standard purchase price for Material – 2 = (550liters × Rs180)= Rs99, 000
Add unfavourable Rate Variance = Rs6, 600
Actual cost Price of Material – 2 = Rs1, 05, 600
(3) Opening balance of Material – 2 = Rs18, 000
Add Standard Cost of Purchase (550 litres × Rs180) = Rs99, 000
Less Closing Balance = Rs41, 400
Material-2 Consumed at Standard cost = Rs75, 600

Ans. 35: (i) Budgeted Machine Hours:

We know that:

Std. fixed overhead Std. machine hoursBudgeted machined hours

Volume variance = for actual output
rate per hour for actual output

or Rs.80,000 (Fav.) = Rs.100 (11,300 – Y)

or 800 = 11,300 – Y
or Y = (11,300 – 800) hours
or Y = 10,500 hours
Hence budgeted machine hours for actual output are 10,500 hours.
(ii) Actual machine Hours: We know that:

Std. variable overhead Std. hours forActual hours

Efficiency variance = actual output  for actual output
rate per hour

or Rs.36,000 (Fav.) = Rs.60 (11,300 hours – X)

or 600 = 11,300 hours – X
or X = 10,700 hours.
Hence Actual machine hours are 10,700 hours.
(iii) Applied Manufacturing Overhead:
Applied Manufacturing overhead
Actual overhead incurred + Total Variance
= Rs.16,50,000 + Rs.30,000
(Refer to working note)
= Rs.16,80,000
Hence total applied manufacturing overhead are Rs.16,80,000.
 (iv) Total Amount of Fixed Overhead Cost:
We know that:
Spending variance = (Flexible budget for actual hours – Actual factory overhead incurred)
Rs.86,000 (Adv.) = 10,700 hours × Rs.60 + total amount of fixed overhead) – Rs.16,50,000)
Rs.86,000 (Adv.) = (Rs.6,42,000 + Total amount of fixed overhead cost (budgeted) – Rs.16,50,000)
Total amount of fixed overhead cost = Rs.10,08,000 – Rs.86,000 = Rs.9,22,000
Total amount of fixed overhead cost = Rs.9,22,000
Working note:
Given that:
Spending variance (Rs.) 86,000 (Adv.)
Efficiency variance (Rs.) 36,000 (Fav.)
Volume variance (Rs.) 80,000 (Fav.)
Therefore,
Total variance = Spending variance + Efficiency variance + Volume variance
= Rs.86,000 (Adv.) + Rs.36,000 (Fav.) + Rs.80,000 (Fav.)
= Rs.30,000 (Fav.)
Alternative approach:
Total factory overhead variance = {factory overhead applied - actual factory overhead incurred}
= (Std. hours for actual output × Budget rate per hour – Actual cost incurred)
= (11,300 hours × Rs.160 – Rs.16,50,000)
= Rs.1,58,000 (Fav.)
Under alternative approach, Applied Manufacturing Overhead and Total Amount of Fixed Overhead Cost would
come to Rs.18,08,000 and Rs.10,50,000. Budgeted and actual machine hours would come to 10,500 and 10,700.
Spending, Efficiency and Volume Variances would come to Rs.42,000 (Fav.), Rs.36,000 (Fav.) and Rs.80,000 (Fav.)
respectively.

Ans. 36: (1) Actual material cost incurred

Material cost variance = Standard cost of material of actual output – Actual material cost incurred
Standard variable of material Material cost
Or Actual material cost incurred =
of actual output variance

= (10,000 units × 2 units× Rs.15 + Rs.50,000)

= Rs.3,00,000 + Rs.50,000
(2) Standard cost of materials actually consumed
Material price variance = (Standard cost – Actual cost) Actual quantity consumed
Actual material Material price
Or Standard cost of materials actually consumed =
cost incurred variance

= Rs.3,50,000 – Rs.70,000 = Rs.2,80,000

(3) Labour efficiency variance (Refer to working note 1)
 Standard hours for Actual hours Standard rate
=
actual output worked per hour

= (10,000 units × 3 hours – 35,000 hours) Rs.20

= (Rs.6,00,000 – Rs.7,00,000) = Rs.1,00,000 (Adv.)
(4) Variable OH efficiency variance (Refer to working note 2)

Standard variable overhead StandardActual

= hours hours
rate per hour

= Rs.5 (30,000 hours – 35,000 hours) – Rs.25,000 (Adv.)

(5) Variable OH expenditure variance (Refer to working note 1)
Budgeted variable overhead Actual variable
=
for actual hours overhead

= (Rs.5 × 35,000 hours – Rs.2,00,000) – Rs.25,000 (Adv.)

(6) Fixed OH efficiency variance (Refer to working notes 1 & 2)
Standard fixed overhead Standard hour for Actual
=  actual ouput
rate per hour hours

= Rs.5 (30,000 hours – 35,000 hours) = Rs.25,000 (Adv.)

Fixed OH capacity variance (Refer to working notes 1 & 2)
Standard variable overhead Actual capacity Budgeted
= hours
rate per hour capacity hours

= Rs.5 (35,000 hours – 50,000 hours) = Rs.75,000 (Adv.)

(7) Fixed OH volume variance (Refer to working note 3)

Standard variable overhead Actual Budgeted

= output  output
rate per hour

50,000 hours
= Rs.15 10,000 units 
3 hours

= Rs.1,50,000 – Rs.2,50,000 = Rs.1,00,000 (Adv.)

Working notes:
1. Labour rate variance:
= (Standard rate per hour – Actual rate per hour) Actual hours (x)
Or Rs.50,000 = 20x – Rs.6,50,000
Or x = 35,000 hours
2. Standard hours = 10,000 units × 2 hours = 30,000 hours
30,000 hours 100
Budgeted hours = = 50,000 hours
60

Budgeted fixed overhead = Actual fixed overhead + Expenditure variance

= Rs.3,00,000 – Rs.50,000 = Rs.2,50,000
 Standard fixed overhead Rs.2,50,000
recovery rate per hour = = Rs.5 per hour
50,000 hours

Total overhead rate per hour = Rs.10

Variable overhead rate per hour = Rs.5 (Rs.10 – Rs.5)
3. Standard fixed overhead per unit = Rs.15 (3 hours × Rs.5/-)

Ans. 37: Working notes:

1. (a) Budgeted fixed overhead per unit:
= (Budgeted fixed overheads p.a / Budgeted output for the year)
= Rs.4,80,000 p.a. / 1,20,000 units = Rs.4 per unit.
(b) Budgeted fixed overhead hour:
= Budgeted fixed overhead per unit / Standard labour hours per unit
= Rs.4 / 2 hours = Rs.2 per hour
2. (a) Standard cost per unit:
Rs.
Direct material 20
(5 kg × Rs.4/- per kg)
Direct labour 6
(2 hours × Rs.3/- per hour)
Fixed overhead 4
(2 hours × Rs.2)
Total standard cost (per unit) 30
(b) Budgeted selling price per unit
Standard cost per unit 30
Standard profit per unit 10
(25% on slaes or 33 – 1/3% of standard cost)
Budgeted selling price per unit 40
3 (a) Actual output units for April, 2001:
Fixed overhead volume Variance
= Efficiency variance + Capacity variance
or (Budgeted output units – Actual output units) Budgeted fixed overhead p.u.
Rs.2,400 (Favourable) + Rs.4,000 (Adverse) = Rs.1,600 (Adverse)
or (10,000 units – x units) Rs.4 – Rs.1,600 (Adverse)
or (10,000 units – 400 units) = x (Actual output units)
or Actual output units = 9,600 units
(b) Actual fixed overhead expenses:
(budgeted fixed overhead – Actual fixed overhead) = Fixed overhead expenses variance
or (Rs.40,000 – x) = Rs.1,400 (Favourable)
 or x = Rs.40,000 – Rs.1,400
= Rs.38,600
4. (a) Actual sales quantity units: Sales volume variance
Actual sales Budgeted
= Budgeted margin per unit quantity units quantity units

= Rs.4,000 (Adverse) = Rs.10 (x – 10,000 units)

or 400 units = x – 10,000 units
or x (Actual sales quantity) = 9,600 units
(b) Actual selling price per units

Actual Selling Budgeted selling Actual

Sales price variance = Sales units
price per unit price per unit

or Rs.9,600 (Fav.) = (x – Rs.40) × 9,600 units

or Actual selling price per unit = Rs.41/-
5. (a) Actual quantity of material consumed:

Standard Actual Standard price

Material usage variance = quantity quantity per unit

or 6,400 (Adv.) = (9,600 units × 5 kgs.) Rs.4

or x kgs. = 49,600 kgs.
(actual quantity of material consumed)
(b) Actual price per kg:
Actual price per kg.:
Material price variance = (Standard price per kg – Actual price per kg) Actual quantity of material
consumed
-Rs.4,960 = (Rs.4 –Rs. y per kg.) 49,600 kg.
-0.1 = (Rs.4 – Rs. y per kg)
or y = Rs.4.10 per kg.
6. (a) Actual direct labour hour used:
Labour efficiency variance = (Standard hours – Actual hours) Standard rate per hour
Rs.3,600 (Favourable) = (9,600 units × 2 hours – p hours) Rs.3
Rs.3,600 (Favourable) = (19,200 hours – p hours) Rs.3
P hours = (19,200 hours – 1,200 hours) – 18,000 hours
(Actual direct labour hours)
(b) Actual direct labour hour rate:

Standard Actual rate Actual Direct

Labour rate variance = labour hours
rate per hour per hour

Rs.3,600 (Adverse) = (Rs.3 per hour – t per hour) 18,000 hours

or t = Rs.3 + Rs.0.20 – Rs.3.20 per hour
 (actual direct labour hour rate)
7. Actual fixed overheads:
Fixed overhead expense variance = Budgeted fixed overhead – Actual fixed overhead
or Rs.1,400 (Favourable) = 10,000 units × Rs.4 p.u. – Actual fixed overhead
or Actual fixed overhead = Rs.40,000 – Rs.1,400
or Actual fixed overhead = Rs.38,600
Annual financial Profit /Loss Statement
(for April, 2001)

Account Qty./ Hours Rate/Price Actual/ Value

(a) (b) (c) (d)=(b)×(c)
Sales: (A) 9,600 units 41 3,93,600
(Refer to working note 4)
Direct Materials 49,600 kgs. 4.10 per kg. 2,03,360
(Refer to working note 5)
Direct labour 18,000 hours 3,20 per hour 57,600
(Refer to working note 6)
Fixed Overheads 18,000 hours 2.14444 per hour 38,600
(Refer to working note 6 (a) and 7)
(Rs.38,600/18,000 hours)
(absorbed on direct labour hour basis)
Total costs: (B) 2,99,560
Profit : [(A) – (B)] 94,040

Ans: 38.
Working notes:
1. Direct material units in actual output (Units)
Output of units produced 7,620
Add: Closing WIP units (200 units x 50% complete) 100
Less: Opening WIP units (300 units x 100% complete) (300)
Total direct material units in actual output (work done)(i.e. units introduced) 7,420

2. Basic data of direct materials

Actual output units 7,420
Standard Data Actual Data
Standard quantity of S.P./ KG. Amount Actual qty. of A.P./KG. Amount
material Rs. Rs. material kgs. Rs. Rs.

11.130 24 2,67,120 11,224 23.75 2,66,570

(7,420 units x 1.5 kgs.)

3. Direct wages and overhead units in actual output (Units)

Output of units produced 7,620
Add: Closing WIP units (200 units x 40% complete) 80
Less: Opening WIP units (300 units x 60% complete) (180)
Total direct wages and overhead units in actual output (work done)(i.e. units introduced) 7,520
4. Basic data of direct wages
Actual output units 7,520
Standard Data Actual Data
Standard Labour S.W./ hour Amount Actual Labour hours A.W./ hour Amount
hours Rs. Rs. Rs. Rs.

22,560 400 90,240 22,400 4.30 96,320

(7,520 units x 3 hours)

5. Budgeted variable overhead per unit = Difference in factory overhead

Difference in output

= Rs.92,400 – Rs.81,600
(7,500 units – 6,000 units)

=Rs.7.20 per unit

6 Budgeted fixed overheads (Rs.)

Total overhead on 8,000 units (8,000 units x 12 0 96,000
Less: Variable overhead of 8,000 units @ Rs.7.20 per unit (57,600)
Budgeted fixed overheads 38,400

7. Basic data for variable overhead

Budgeted data Actual data
Budgeted variable overhead Rs.53,760 Actual variable overhead Rs.58,240
For actual hours (22,400 hours x Rs.2.40 Actual output units 7,520
Standard hours required per unit 3 Actual hours 22,400
Standard variable overhead rate p.u Rs.7.20 Actual variable overhead Rs.2.60
Recovery rate per hour
Standard variable overhead rate p.u. Rs.240

8. Basic data for fixed overhead

Standard / Budgeted data Actual data
Budgeted fixed overhead Rs.38,400 Actual fixed overhead Rs.38,200
(Rs.96,440 – Rs.58,240)
Budgeted output 8,000 units Actual output 7,520 units
Budgeted hours 24,000 Actual hours 22,400
Standard fixed overhead rate per hour Rs.1.60
Standard fixed overhead p.u Rs.4.80
Standard hours required p.u. 3

Computation of Variances:
Material variances
1. Material usage variance = (S.Q.-A.Q.) S.P.
= (11,130 kgs.-11,224 kgs.) Rs.24 =Rs.2,256 (A)

2. Material price variance = (S.P.-A.P.) A.Q

= (Rs.24-Rs.23.75) 11,224 kgs. =Rs.2,806 (F)

3. Material cost variance = (S.C.-A.C.)

= (Rs.2,67,120-Rs.2,66,570) =Rs.550 (F)

Labour variances
1. Labour efficiency variance = (S.H.-A.H.) S.R.
= (22,500 hours- 22,400 hours) Rs.4 =Rs.640 (F)

2. Labour rate variance = (S.R.-A.R.) A.H

= (Rs.4-Rs.4.3) 22,400 hours =Rs.6,720 (A)

3. Labour cost variance = (S.C.-A.C.)

= (Rs.90,240 - Rs.96,320) =Rs.6,080 (A)

Variable Overhead variances

1. Variable overhead ={ Budgeted variable overhead – Actual variable overhead}
Expenditure variance
= (Rs.53,760 – Rs.58,240) =Rs.4,480 (A)
2. Variable overhead =Standard variable {Standard hrs. – Actual hrs}
Efficiency variance overhead rate per hour
=Rs.2,40 (22,560 hrs – 22,400 hrs) =Rs.384 (F)

3. Total variable overhead cost variance = { Standard variable overhead –Actual variable overhead}

= (7,520 units x Rs.7.20 – Rs.58,240) =Rs.4,096 (A)

Fixed Overhead variances

1. Expenditure variance ={ Budgeted fixed overhead – Actual fixed overhead}

= (Rs.38,400 – Rs.38,200) =Rs.200 (F)

2. Volume variance = { Budgeted volume – Actual volume} Standard fixed overhead rare per
unit

=(8,000 units – 7,520 units) Rs.4.80 =Rs.2,304 (A)

3. Efficiency variance = { Standard hours for actual production –Actual hours} Standard fixed
overhead rate per hour

= 22,560 hours – 22,400 hours) Rs.1.60 =Rs.256 (F)

4.Capacity variance ={Budgeted hours – Actual Hours } standard fixed overhead rate per hour
= (24,000 hours – 22,400 hours ) Rs.1.60 =Rs.2,560 (A)

5.Total fixed overhead cost variance ={Fixed overhead recovered – Actual overhead}
={7,520 units x Rs.4.80 – Rs.38,200} =Rs.2,104 (A)

Ans. 39:
Statement of Equivalent Production in Units

Particulars Materials Wages & Overhead

% age Units %age Units
Units Completed 100% 9000 100% 9000
Closing W.I.P. 100% 900 50% 900
Equivalent Units 9900 9900

Material Variances
Standard qty for actual output ** Actual qty
x std price X actual price
Material A 19,800 @ 3 = 59,400 22,[email protected]* = 62,370
Material B 9,900 @ 4 = 39,600 10,889 @4.1* = 44,649
29,700 99,000 33,165 1,07,019

*Actual Cost / Actual Quantity

** Standard Quantity for actual output = ( std qty/ budgeted prod) x actual output
MCV = TSC – TAC
= 99,000 – 1,07,019 = 8,019 (A) MPV = AQ (SP – AP)
A = 22,275 (3 – 2.80) = 4,455 (F)
B = 10,890 (4 – 4.10) = 1,089 (A)
 3,366 (F)
MUV = SP (SQ – AQ)
A = 3 (19,800 – 22,275) = 7,425 (A)
B = 4 (9,900 – 10,890) = 3,960 (A)
11,385 (A)
MMV = SP (RSQ – AQ)
A = 3 {19,800 ÷ 29,700 × 33,165 – 22,275} = 495 (A)
B = 4 {9,900 ÷ 29,700 × 3,165 – 10,890} = 660 (F)
165 (F)
MYV = S. C Per Unit (S. O. For Actual Mix – A. O.)
= 99,000 ÷ 9,900 {9,900 ÷ 29,700 × 33,165 – 9,900}
= 10 (11.055 – 9,900) = 11,550 (A)
Labour Variances:
LCV = TSC – TAC
= 2,40,000 ÷ 12,000 × 9,450 – 1,91,250 = 2,250 (A)
LRV = AH (SR – AR)
= 48,000 {4 – (1,91,250 ÷ 48,000)} = 750 (F)
LITV = No. of Idle hours × SR
= 48,000 – (47,500 ÷ 4) = 1,200 (A)
LEV = SR (SH – AH)
= 4 {(60,000 ÷ 12,000) × 9,450 – 47,700} = 1,800 (A)
(ii) Variable Overhead Variances
VOC = Recovered Overheads – Actual Overheads
= 9,450 × 5 – 45,000 = 2,250 (F)

V.O (Exp.) V = Standard V.O. – Actual V.O.

= 47,700 × 1 – 45,000 = 2,700 (F)
V.O. (Eff.) V = Recovered Overheads – Standard Overheads
= 9,450 × 5 – 47,700 = 450 (A)
Fixed Overheads Variances
FOCV = Recovered Overheads – Actual Overheads
= (1,20,000 ÷ 12,000) × 9,450 – 1,20,900 = 94,500 – 1,20,900
= 26,400 (A)
F.O.(Exp.) V = Budgeted Overheads – Actual Overheads
= 1,20,000 – 1,20,900 = 900 (A)
FOVV = Recovered Overheads – Budgeted Overheads
= 95,500 – 1,20,000 = 25,500 (A)
Sales Variances
Sales Price Variance = Actual Unit Sold (SP – AP)
 = 9,000 {50 – (4,57,500 ÷ 9,000)} = 7,500 (F)
Sales Volume Variance (Contribution Loss)
= S. R. of Profit (Budgeted Qty. – Actual Qty.)
= (60,000 ÷ 12,000) (12,000 – 9,000) = 15,000 (A)

Ans 40:.
(a) sales Variance
Present Market size =60,000 units.

At 16% the share should have been = 60,000 x 16

100 =9,600 units.

Standard Gross Margin : SP Rs.53 – ( DM Rs.9 + DL Rs.24 + VO Rs.4 + FO Rs.12) = Rs.4

Budgeted Qty. Revised Budgeted Actual Qty. Booked Actual Qty. Std. Gross Margin
Qty Supplied (Rs.)
8,000 9,600 8,200 7,500 4

(Rs.)
Budgeted Qty. x Revised Actual Qty. Actual Qty. Actual G.M. Actual Qty.
Std. G.M. Budgeted Qty x Booked x Std. Supplied x supplied x
Std. G.M. G.M. Std.G.M. Actual G.M.
32,000 38,400 32,800 30,000 5 37,500

Market size variance 32,000 - 38,400 =6,400 F

Market share variance 38,400 – 32,800 =5,600 A
Sales volume variance 32,800 – 30,000 =2,800 A
Sales price variance 30,000 – 37,500 =7,500 F
Sales Margin Production Quantity Variance = (7500-8200)X4 = 2800 A

[Note: Since actual order received ≠ actual sales quantity, Market share variance will be on the basis of actual order
received and we will also calculate one further variance regarding inefficiency of production department about fulfilling
order quantity, Sales Margin Production Quantity Variance = (Actual sales quantity – Sales order quantity) × Std. margin
p.u. While calculating all other variance sales order quantity shall be ignored.]

(b) Direct Material Variances (Units)

Production 7,500 Std. requirement 7,200 units @ 1.5 kg. =10,800 kg.
- Op. Stock 600
+ Cl. Stock 300
Introduced 7200

Std. Qty. Actual Qty. S.P. Std. Qty. x Actual Qty. x AP Actual Qty. x
SP SP AP
Rs. Rs. Rs. Rs. Rs.
10,800 12,000 6 64,800 72,000 6/50 78,000

Usage Variance Rs.64,800 – Rs.72,000 =Rs.7,200 A

Price Variance Rs.72,000 – Rs.78,000 =Rs.6,000 A
Total Variance Rs.64,800 – Rs.78,000 =Rs.13,200 A

(c ) Direct Labour Variance

Production 7,500 Std. hours produced
75 7,230 x 4 = 28,920
Less: Op. Stock 600 x 100 450

60
Add: Cl. Stock 300 x 100 180
7,230
Std. Hours Actual Hours S.R. Std. Hrs. x Actual Hrs. x AR Actual Hrs. x
SR SR AR
Rs. Rs. Rs. Rs. Rs.
28,920 29,000 6 1,73,520 1,74,000 6 / 25 1,81,250

Efficiency Variance (1,73,520 – 1,74,000) =480 A

Rate Variance (1,74,000 – 1,81,250) =7,250 A
Total variance =7,730 A

(d) Variable Overheads Variance

Rs.
A =Charged to Production 28,920 Efficiency variance =Rs.80A
28,920 x 1

B =Std. Cost of Actual Hours 29,000 Expenditure variance =Rs.7,000 A

29,000 x 1

C =Actual Overheads 36,000

A – C Total V =Rs.7,080 A

(e) Fixed Overhead Variance

(Rs.)
A = Charged to Production 28,920 x 3 86,760
B = Std. Cost of Act. Hrs. 29,000 x 3 87,000
C = Budget 96,000
D = Actual 94,000
Efficiency Variance (86,760 – 87,000) =Rs.240 (A)
Volume Variance (86,760 – 94,000) =Rs.9,240 (A)

Ans. 41:
Rs.
(1) Budgeted contribution = Budgeted Profit + Budgeted Fixed 15,000 + 15,000 = 30,000
Cost
Plus Contribution quantity variance 1,800
Total Standard contribution 31,800
Standard Contribution per unit 3
Actual Sales Volume 10,600 units
(2) Actual Sales Volume 10,600 17 1,80,200
(3) Actual quantity of Raw Materials used
Standard consumption 10,600 5 2,000 Kgs.
400 2,000 kgs.
Add: Material Usage Variance
.2
Actual consumption 55,000 Kgs.
(4) Labour Efficiency variance
Standard labour cost for Standard hours (63,000 + 600) 63,600
Standard labour cost for actual hours 61,950
 Labour efficiency variance 1,650 F
(5) Actual variable overhead
Selling Overhead variance – Variable overhead Rs. 84,800  Rs. 1,800 = Rs. 83,000
(6) Variable Overhead efficiency variance
Actual hours (AH) 61,950 41,300 hours
1.5
Standard hours (SH) 60,600 4 42,400 hours
Standard rate per hour (SR) 63,600 Rs. 1.5
10,600 4
Efficiency variance SR (SH – AH) = 2 (42,400 – 41,300) = 2,200F
(7) Actual fixed overheads: Budgeted Overhead + Fixed Overhead
variance = 15,000 + 600 = Rs. 15,600.
(8) Operating profit variance
If budgeted profit is considered (15,000 – 7,000) = Rs. 8,000 adverse
If standard profit is considered (16,800 – 7,000) = Rs. 9,800 adverse

Ans. 42:

Where RSQ B = Revised Standard Quantity of ‘B’ = (Actual total qty of all DM used) ×
Standard Mix %age of ‘B’ and

SQ B = Standard quantity of DM ‘B’ for Actual Production = Standard quantity of all

DM allowed for actual output × Standard Mix %age of ‘B’
Since Standard Mix %age is the same for both ‘A’ and ‘B’ (1: 1) we have, Total Yield variance
for ‘A’ and ‘B’= T × (Std price of ‘A’ + Std price of ‘B’)
Where T = (Std qty of all DM allowed for actual output - Actual total qty of all DM used)× 0.5
As Total Yield variance for ‘A’ and ‘B’ is given as – Rs 270, we have
- Rs 270 = T × Rs 24 + T × Rs 30
Or T = - 5
Hence Yield Variance for ‘A’ = - 5 × 24 = - Rs 120 and
Yield variance for ‘B’ = - 5 × 30 = - Rs 150. Also

Similarly

(SQ B - RSQ B ) × 30 = - 150 or SQ B - RSQ B = - 5

Alternative 1
Let total actual quantity consumed; X kg. Then, Quantity of
A = X – 70
X X
RSQ = of A & of B. (Since the Mix ratio is 1:1)
2 2
The Standard input for both ‘A’ and ‘B’ will be 0.5X – 5
Since Cost Variance for ‘A’ is given to be nil, we have, (SP A SQ A) 
(AQ A AP A) = 0
i.e. 24 × (0.5 X – 5) – (X  70) 30 = 0

or X = 110 Kgs
Therefore Actual Input for ‘A’ = 110 – 70 = 40 Kgs

Alternative 2
Let the standard input of ‘A’ = X kg. Therefore, the total standard input for ‘A’ + ‘B’= 2X Actual input = (2X
+ 10) Kgs. Actual input for ‘A’ = (2X +10 – 70)= (2X – 60)Kgs Forming the equation for nil cost variance
of ‘A’.
Rs. 24 X – Rs. 30 (2X – 60) = 0

Or X = 50 Kgs. Using this quantity in the Cost Variance of ‘B’, the actual price per kg. of
‘B’ (AP B) will be ,
50 30 – 70 AP B =  1,300

Or AP B = Rs. 40.
Alternative 3
Let the actual input of ‘A’ =X
Then the total actual input = (X + 70). Therefore, RSQ of ‘A’ and ‘B’ each = 0.5X + 35
and Standard Input of ‘A’ and ‘B’ each = 0.5X +30.
Forming the equation for nil cost variance of ‘A’, we have,
24 × (0.5X + 30) – 30 × X = 0
Or X = 40 Kgs.
Standard Input will be 50 Kgs. Using this, quantity in the Cost Variance of ‘B’, the actual price per kg.
of ‘B’ (AP B) will be,
50 30 – 70 AP B =  1,300

Or AP B = Rs. 40.
Substituting various values for quantity and price, we get the following table.
(1) (2) (3) (4)
 Std. Price  Std. Price RSQ Std. Price  Actual Price 
SQ Actual Qty. Actual Qty.

A 24 50 = 24 55 = 1320 24 40 = 960 30 40 = 1200

1200

B 30 50 = 30 55 = 1650 30 70 = 2100 40 70 = 2800

1500

2700 2970 3060 4000

(1) – (2) (2) – (3) (1) – (3) (3) – (4) (1) – (4)

Yld variance Mix variance Usage variance Price variance Cost variance

A 1200  1320 = 1320  960 = 1200  960 = 960  1200 = 1200  1200 =
120(A) 360(F) 240(F) 240(A) 0

B 1500  1650 = 1650  2100 = 1500  2100 = 2100  2800 = 1500  2800 =
150(A) 450(A) 600(A) 700(A) 1300(A)

270A) 90A) 360A) 940A) 1300A)

Actual Output = 90 Kgs.

(Actual output and standard o utput are always equal numerically in any material variance analysis)
Standard output = Standard input – Standard loss or 100 – 10 = 90 Kgs.

Ans. 43: Working Notes

a) Computation of Standard Price per kg of Material

Let ‘x’ be the standard price per kg
Direct material price variance = Rs. 15,750 (A) (given)
A.Q. (S.P. – A.P.) = DMVP
63,000 kgs (x – 3.25) = -15,750
63,000 x – 2,04,750 = -15,750
63,000x = 1,89,000
x = 1,89,000 / 63,000 = 3
∴ Standard price per kg of material is Rs. 3

b) Computation of Standard Quantity of material for actual output

Let ‘x’ be the standard quantity
Direct material usage variance = Rs. 27,000 (A) (given)
S.P. (S.Q. – A.Q.) = DMUV
3(x – 63,000) = -27,000
3x – 1,89,000 = -27,000
3x = 1,62,000
x = 1,62,000/ 3 = 54,000

∴ Standard Quantity for actual output is 54,000 kgs.

c) Computation of Standard Labours hours per unit

Let ‘x’ be the Standard labour hours per unit
D.L. rate variance + D.L. efficiency variance =D.L. Cost Variance
Rs. 6,840 (A) + Rs. 10,800 (F) = Rs. 3,960 (F)
Direct labour cost variance = Rs. 3,960 (F) (given)
Standard cost of Standard hours – Actual cost of actual hours = Rs. 3,960 (F)
(x X Rs.6) – (Rs. 2,12,040 = Rs. 3,960 (F)
6x = Rs. 2,16,000
x = 2,16,000 / 6 = 36,000
 ∴ Standard hours for actual output is 36,000 hours
Standard hours per unit = 36,000 hours/ 18,000 units = 2 hrs.

d) Computation of Actual Hours per unit

Let ‘x’ be actual hours
Direct labour efficiency variance = Rs. 10,800 (F) (given)
(Standard hours – Actual hours) Std. rate = DLEV
[(18,000 units X 2) – x] Rs. 6 = Rs. 10,800 (F)
2,16,000 – 6x = 10,800
6x = 2,16,000 – 10,800
x = 34,200

∴ Actual labour hours are 34,200 for actual output

Actual labour hours per unit = 34,200 hrs / 18,000 units = 1.9 hrs.

e) Computation of Standard variable overhead per hour

Budgeted fixed overheads – Actual fixed overheads = Fixed overhead expense variance
Let Budgeted fixed overheads be ‘x’
FOEV = Rs. 25,000 (A) (given)
x – Rs. 3,25,000 = Rs. 25,000 (A)
x = 3,25,000 – 25,000 = 3,00,000

∴ Budgeted fixed overheads is Rs. 3,00,000

Standard fixed overhead rate per unit = Rs. 3,00,000/ 20,000 units = Rs. 15 per unit Standard
fixed overhead rate per hour = Rs. 15 / 2 hours = Rs. 7.50 per hour

f) Computation of Budgeted selling price per unit

Let ‘x’ be the budgeted selling price per unit
Sales price variance = Rs. 45,000 (F) (given)
Actual quantity (Actual selling price – Budgeted selling price) = Sales price variance
18,000 units (Rs. 67.50 – y) = Rs. 45,000 (F)
12,15,000 – 18,000y = 45,000
18,000y = 12,15,000 – 45,000
y = 11,70,000 / 18,000 = 65

∴ Budgeted selling price is Rs. 65 per unit.

Budgeted Sales Actual Sales
Quantity Price Amount Quantity Price Amount
(Units) (Rs. p.u.) Rs. (Units) (Rs. p.u.) Rs.
20,000 65 13,00,000 18,000 67.50 12,15,000

Statement showing Standard Cost per unit and Budgeted Profit for 20,000 units.
Particulars Per Unit For 20,000 Units
Sales (a) 65 13,00,000
Costs:
Direct Material 9 1,80,000
Direct Labour 12 2,40,000
Variable Overhead 16 3,20,000
Fixed Overhead 15 3,00,000
Total Cost (b) 52 10,40,000
Standard Gross Margin 13 2,60,000

(ii) Computation of sales gross margin volume and fixed overheads volume variances
Sales Gross Margin Volume Variance
= Standard Margin per unit (Actual Quantity – Budgeted Quantity)
= Rs. 13 (18,000 units – 20,000 units) = Rs. 26,000 (A)
Fixed Overhead Volume Variance
= Standard fixed overhead rate per unit (Actual output – Budgeted output)
 = Rs. 15 (18,000 units – 20,000 units) = Rs. 30,000 (A)

Operating Statement Reconciling the Budgeted Profit with Actual Profit (Rs.)
Budgeted Profit (20,000 units X Rs. 13 p.u.) 2,60,000
Sales Margin Volume Variance 26,000 (A)
Standard Profit 2,34,000
Sales Price Variance 45,000 (F)
2,79,000
Cost Variances: Favourable Adverse
Direct Material Price Variance - 15,750
Direct Material Usage Variance - 27,000
Direct Labour Rate Variance - 6,840
Direct Labour Efficiency Variance 10,800 -
Variable Overheads Expense Variance - 3,420
Variable Overheads Efficiency Variance 14,400 -
Fixed Overheads Expense Variance - 25,000
Fixed Overheads Volume Variance - 30,000
25,200 1,08,010 82,810 (A)
Actual Profit 1,96,190

Ans: 44:
Reconciliation Statement of Actual profit and Standard profit. (Rs)

Budgeted Profit (10,000 @ Rs.32) 3,20,000

Less: Sales volume variance (Adverse) (Rs.32 (8,000-10,000) 64,000
Standard profit (8,000 units @ Rs.32) 2,56,000

Cost Variances: Adverse Favourable

1. Direct Materials
(i) Price variance 16,500(Rs.20-Rs.24) 66,000
(ii) Usage Variance Rs.20 (16,000-16,500) 10,000
2. Direct labour
(i) Labour rate variance 1,70,000(Rs.2.00-Rs.2.04) 6,800
(ii) Labour efficiency variance Rs.2 (1,60,000-1,66,000) 12,000
(iii) Idle time variance (Rs.2.00 x 4,0000 8,000
3. Variable Overheads (Rs.8 x 8,000) – Rs.60,000 4,000
4. Fixed Overheads
(i) Expenses variance (Rs.20 x 10,000) –Rs.1,84,000 16,000
(ii) Efficiency variance Rs.20 (8,000 – 8,300) 6,000
(iii) Capacity variance Rs.20 (8,300 – 10,000) 34,000
Total 1,42,800 20,000
Less: Net Adverse variance 1,22,800
Actual profit for the period 1,33,200

Ans. 45: (b)

Working notes:
Ravi Richard Rahim Roop Singh
(i) Standard sales units : 1,875 2,250 2,875 1,500
Sales quota Rs. 400
(ii) Standard selling expenses per unit (Rs.) 120 110 100 150
(Std. selling expenses/Std. sales units)
(iii) Actual sales units : 2,000 2,500 2,625 1,300
Actual sales÷Rs. 400
(iv) Actual selling costs Rs. Rs. Rs. Rs.
Daily allowance 16,000 14,000 18,000 20,000
 Conveyance allowances 30,000 27,000 27,000 45,000
Salaries 80,000 80,000 80,000 80,000
Free samples 9,000 7,500 5,375 8,000
Postage & stationery 8,000 9,000 10,000 6,000
Other expenses 9,000 5,000 4,000 10,000
Commission on sales 48,000 50,000 52,500 26,000
Corporate sales office expenses 60,000 75,000 1,05,000 52,000
Total actual selling cost 2,60,000 2,67,500 3,01,875 2,47,000
(v) Standard selling cost 2,40,000 2,75,000 2,62,500 1,95,000
(Actual units sold ×
Std. selling expenses per unit)
Since all the selling expenses have been related to sales units, only one variance can be calculated
by comparing the standard and actual selling costs as is shown in the schedule below:
Schedule showing the selling cost variances by salesman
Rs. Rs. Rs. Rs. Total (Rs.)
Standard Selling
expenses (Refer to Working Note (v)) 2,40,000 2,75,000 2,62,500 1,95,000 9,72,500
Actual selling
expenses (Refer to Working Note (iv)) 2,60,000 2,67,500 3,01,875 2,47,000 10,76,375
Selling cost variance (20,000) 7,500 (39,375) (52,000) (1,03,875) (A)
(F) (A) (A) (A)
A = Adverse
F = Favourable

Ans 46:
Statement showing the computation of standard cost of production of shirts

Lot no. Units Cost per Total standard

(Dozen) Dozen cost( Rs.)
45(UK) 1,700 531.00 9,02,700
46(US) 1,200 477.60 5,73,120
47(CAN) 1,000 531.00 5,31,000
Total 20,06,820

Cost per Dozen of 46 (US) lot. (Rs.)

Material cost 100% 264.00

Conversion cost 80%(80%of Rs.267) 213.60
Total 477.60

Statement of material used and its variance

Lot no. Output Std. Qty Total Total Variation

Dozen per Dozen Std. qty. Actual Qty.
( Mtrs.) ( Mtrs.) ( Mtrs.)
45(UK) 1,700 24 40,800 40,440 360(F)
46(US) 1,200 24 28,800 28,825 25(A)
47(CAN) 1,000 24 24,000 24,100 100(A)
Total 93,600 93,365 235(F)

Statement of labour hour worked and its variance

Lot no. Output Std.labour Total labour Total actual Variation

Dozen hour per hours labour hours (Hours)
Dozen
45(UK) 1,700 3 5,100 5,130 30(A)
46(US) 960 3 2,880 2,980 10(A)
(1200×0.8)
47(CAN) 1,000 3 3,000 2,890 20(F)
Total 10,980 11,000 20(A)

Calculation of variances

(1) Material price variance

actual quantity (standard rate –actual rate)
= (95,000 metres *Rs. 11)-Rs.10,64,000
= Rs.10,45,000-Rs. 10,64,000 =Rs. 19,000(A)
(2) Labour rate variance
actual hour (Std. rate per hour – actual rate per hour )
= 11,000 (Rs. 49-Rs.50) = Rs.11,000(A)
(3) Variable overhead efficiency variance
Std. variable overhead rate per hour (Std.hour –actual hour)
= Rs. 24(10980-11,000) = Rs. 480 (A)
(4) Fixed overhead volume variance
Std. fixed overhead rate per hour (Std.hour for actual output–Budgeted hour)
= Rs. 16(10980-48000×3/12) = Rs. 16,320(A)

Working Notes :
(1) standard variance overhead rate per hour
= 40*60/100 = Rs.24
(2) standard fixed overhead rate per hour

= Rs. 40*40/100= Rs. 16

Ans: 47.

1. Sales variances
(5) Sales Volume Margin Variance
(Std. Margin on actual Sales – Budgeted Margin)
=(Rs.25,000 units x Rs.6) – (36,000 units x Rs.6)
=(Rs.1,50,000 – Rs.2,16,000) =Rs.66,000 (A)

(6) Sales Price Variance

(Actual Sales at actual price – Actual Sales at Std. Price)
=(25,000 Units x Rs.51.50)-(25,000 units x Rs.50)
=(Rs.12,87,500 – Rs.12,50,000) =Rs.37,500 (F)

2. Material variances
(1) Material Price Variance
(Std Cost of Material Used- Actual Material Cost
=(96,000 kgs x Rs.2) – (96,000 kg. x Rs.2.25)
=(Rs.1,92,000 – Rs.2,16,000) =Rs.24,000(A)

(3) Material Usage Variance

Std Material cost of Actual production- Std. Cost of Material used)
=(1,00,000 kgs. x Rs.2) – (96,000 Kgs. x Rs.2)
=(Rs.2,00,000 – Rs.1,92,000) =Rs.8,000 (F)

3. Labour Variances
(1) Labour Wages Rate Variance
(Actual Labour hrs. at Std. rate- Actual Labour Wages)
=(1,60,000 hrs x Rs.4) – (1,60,000 hrs. x Rs.4.10)
=(Rs.6,40,00 – Rs.6,56,000) =Rs.16,000 (A)
 (2) Labour Efficiency Variance
Std. Labour Wages for actual production –Actual Labour hours worked at Std. rate)
=(1,50,000 hrs. x Rs.4) –(1,54,000 hrs. xRs.4)
=(Rs.6,00,000 – Rs.6,16,000) =Rs.16,000 (A)

(3) Idle Time variance

(6,000 hrs. x Rs.4 variance) =Rs.24,000 (A)

4. Variable Overhead Variances

(1) Total Variable overhead Variance
(Allowed Expenditure for actual hours-Actual variable overheads)
=Rs.(1,84,000 – Rs.1,82,000) =Rs.2,800 (F)
(2) Variable overhead Efficiency Variance
( Allowed Expenditure for Std. hours- Allowed Expenditure for actual hours)
=(Rs.1,50,000 hrs. x Rs.1.20)- 1,54,000 hrs. x Rs.1.20)
=(Rs.1,80,000 – Rs.1,84,800) =Rs.4,800 (A)
5. Fixed Overhead Variances
(1) Fixed Overhead Expenditure variance
(Budgeted Expenditure – Actual Expenditure)
=(Rs.1,44,000 – Rs.1,50,000) =Rs.6,000 (A)
(2) Fixed Overheads Efficiency variance
(Std. hours of production x Std. fixed overhead recovery rate per hour)-(Actual hours worked x
Fixed overhead recovery rate per hour)
=(Rs.1,50,000 hrs. x Re.0.80)-(1,54,000 hrs. x Re.0.80)
=(Rs.1,20,000 – Rs.1,23,200) =Rs.3,200(A)
(3) Fixed Overhead Capacity variance
(Actual hours worked x Fixed overhead recovery rate per hour)-(Std. Fixed overhead recovery r
rate per hour x Budgeted capacity hours)
=(1,54,000 hrs. x 0.80)-(Re.0.80 x 1,80,000 hrs.)
=(Rs.1,23,200 – Rs.1,44,000) =Rs.20,800(A)
A. Std. Variable Overhead Rate per hour.
= Std. Variable Overheads
Total Std. hours

=(30,000 units x Rs.12)-Rs.1,44,000 =Rs.1.20

1,80,000 units

B. Std Fixed Overheads rate per hour

=Budgeted Overheads
Budgeted hours
=Rs.1,44,000 / 1,80,000 hrs. =Rs.0.80

Statement of actual profit / loss for the second quarter of the year (Rs.)
Direct Material (96,000 [email protected]) 2,16,000
Direct Wages (1,60,000 hrs. ‘ Rs.4.10) 6,56,000
Overhead 3,32,000
Total Cost 12,04,000
Sales Revenue (25,000 units @ 51.50) 12,87,500
Actual Profit 83,500

Operating Statement reconciling the budgeted profit with actual profit (Rs.)
Particulars Reference to Variance Actual
working note
Favourable Adverse
Budgeted profit (36,000 units x Rs.6) - - - 2,16,000
1. Sales – Volume Margin Variance (1) - 66,000 -
Price Variance (2) 37,500 - -
Profit before adjustment of Cost Variances 1,87,500
II Material - Price (1) - 24,000
- Usage (2) 8,000 -
III. Labour - Rate (1) - 16,000
-Efficiency (2) - 16,000
-Idle time (3) - 24,000
IV. V. Overheads -Expenditure (1) 2,800 -
-Efficiency (2) - 4,800
V. F. Overheads -Expenditure (1) - 6,000
- Efficiency (2) - 3,200
-Capacity (3) - 20,800 1,04,000
Actual Profit 10,800 1,14,800 83,500

Ans. 48:

Overhead Expenses Schedule

Expenses Budget: 120 Std. Hours Actual: 156 Hours
Rate per hour Expenses Rate per hour Expenses
Rs. Rs. Rs. Rs.
Indirect material 0.40 48 0.50 78
Indirect labour 0.60 72 0.60 94
Maintenance 0.40 48 0.45 70
Power 0.30 36 0.32 50
Sundries 0.30 36 0.29 45
Total variable
2.00 240 2.16 337
overheads
Fixed overheads
2.00 240 250
Total overheads
480 587
Actual output = 12,160 units.
Hence standard hours produced or std. hours for actual production

=
Computation of variances:

A. Fixed expenses
(a) Charged to production (152 hours × Rs. 2 per hours) Rs. 304
(b) Fixed expenses as per budget Rs. 240
(c) Actual fixed overheads Rs. 250
Volume variance = Fixed overhead recovery rate (Actual volume in std. hrs. – Budgeted
volume in standard hrs.)
= Rs.2 (152 – 120) = Rs.64 (F)
Expenses variance = (Budgeted expenses – Actual expenses)
= Rs.240 – Rs.250 = Rs. 10 (A)
Total variance = (Fixed overheads absorbed – Actual fixed overheads)
= Rs.304 – Rs.250 = Rs.54 (F) Or
Volume variance: (a – b) Rs.64 (F)
Expenses variance: (b – c) Rs. 10 (A)
Total variance : (a – c) Rs.54 (F)

B. Variable expenses
(a) Charged to production: (152 hours × Rs.2) Rs.304
 (b) Actual expenses Rs.337
Variable overhead cost variance (a – b) Rs.33 (A)

Ans. 49: Basic Data:

(1) Statement showing standard and actual costs of material for 1,000 units of output and standard cost of actual
input

Standard Cost Actual cost Standard cost of actual input =

(Actual quantity × Standard
price)

Ma Qty. Price Amount Qty. Price Amount Actual Standard Amount

Qty. Price/kg

Kg. Rs. Rs. Kg. Rs. Rs. Kg. Rs. Rs.

A 12,000 10 1,20,000 11,000 11 1,21,000 11,000 10 1,10,000

B 5,000 6 30,000 5,200 5.50 28,600 5,200 6 31,200

1,50,000 1,49,600 1,41,200

1,000 units
Standard yield (units) = × 16,200 kg. = 952.941764 units approx.
17,000 Kg.

(2) Statement showing standard and actual labour cost of 1,000 units produced and standard cost of actual labour
hrs.
Hours Rate Amount Hours Rate Amount Hours Rate Amount
p.h. p.h. p.h.
Rs. Rs. Rs. Rs. Rs. Rs.
5,000 3 15,000 5,500 3.1818 17,500 5,500 3 17,500
(3) Overheads
Fixed overheads (Rs.) Budgeted Actual
Hours 38,500 39,000
Output 5,500 5,500
Standard time p.u. (hrs.) 1,100 1,000
Standard fixed overheads p.u. (Rs.) 5
Standard fixed overhead rate p.h. (Rs.) 35
Computation of material variances (Refer to Basic data 1): 7
Computation of material variances (Refer to Basic data (1):
Material cost variance = Standard cost – Actual cost
= Rs.1,50,000 – Rs.1,59,500 = Rs.9,500 (Adv.)
Material price variance = Actual quantity (Std. price – Actual price)
= 12,000 kg (Rs.10 – Rs.11) + 5,000 kg (Rs.6 – Rs.5.50)
= Rs.12,000 (Adv.) + Rs.2,500 (Fav.)
= Rs.9,500 (Adv.)
Material usage variance = Standard price (Standard quantity – Actual quantity)
 = Rs.10 (12,000 kg – 11,000 kg) + Rs.6(5,000 kg–5,200 kg)
= Rs.10,000 (Fav.) + Rs.1,200 (Adv.)
= Rs.8,800 (Fav.)
Std. price of Std. price of
Material mix variance = Total actual quantity
Std. mix per kg 16,200 kg

Rs.1,50,000 Rs.1,41,200
= 16,200 kg
17,000 kg 16,200 kg

= Rs.1,741.18 (Fav.)
Material yield variance = Std. Rate (Actual yield – Std. Yield
= Rs.150 (1,000 units – 952.9411764 units)
= Rs.7058.82
Material purchase price variance:
= Actual quantity of material purchased (Std. Price per kg. – Actual price per kg)
= 12,000 kg (Rs.10 – Rs.11) + 5,000 kg (Rs.6 – Rs.5.50)
= Rs.12,000 (Adv.) + Rs.2,500 (Fav.)
= Rs.9,500 (Adv.)
Computation of labour variances (Refer to basic data 2):
Labour cost variance = (Standard cost – Actual cost)
= Rs.15,000 – Rs.17,500 = Rs.2,500 (Adv.)
Labour rate variance = Actual hrs. (Std. Rate – Actual rate)
= 5,500 (Rs.3 – Rs.3.1818)
= Rs.1,000 (Adv.)
Labour efficiency variance = Std. rate p.h. (Std. Hours – Actual hours)
= Rs.3 (5,000 hrs. – 5,500 hrs.)
= Rs.1,500 (Adv.)
Computation of fixed overhead variance:
Total fixed overhead variance:
= Fixed overhead absorbed – Actual fixed overhead
= 1,000 units × Rs.35 – Rs.39,000
= Rs.35,000 – Rs.39,000 = Rs.4,000 (Adv.)
Fixed overhead expenditure variance:
= Budgeted fixed overhead – Actual fixed overhead
= Rs.38,500 – Rs.39,000 = Rs.500 (Adv.)
Fixed overhead volume variance:
= Std. Fixed overhead rate per unit (Actual output – Budgeted output)
= Rs.35 (1,000 units – 1,000 units) = Rs.3,500 (Adv.)
Efficiency variance:
= Std. fixed overhead rate per unit (Actual output – Budgeted output)
 = Rs.35 (1,000 units – 1,000 units) = Rs.3,500 (Adv.)

Ans. 50: (i) Working Notes:

1. Standard quantity and cost of raw material required for actual output
Actual output of EXE (units)
Standard output per kg. of raw material (units)
Standard quantity of raw material required for actual output (kgs.)
(4,680 units / 12 units)
Standard cost of 390 kgs. of raw material at Rs.60 per kg. (Rs.)
2. Basic data for the computation of labour variances:
Standard labour data for actual Actual data
output
Std. Time hours Rate Amount Standard Actual Rate Amount
p.h. cost of cost p.h.
actual hours
hours
2,340 5 11,700 12,000 240 4.80 1,152
(4,680 units ×½ hr.) 320 5.20 1,664
1,840 5.00 9,200
2,340 11,700 12,000 2,400 12,016
3. Basic data for the computation of fixed overhead variances:

Budgeted / Std. data Actual data

Budgeted fixed overhead (Rs.) 24,400 Actual fixed overhead (Rs.) 19,800
(for 1 week)

Budgeted hours 2,400 Actual labour hours 2,400

(60 workers×40 hrs. per week) Actual output (units) 4,680

Budgeted output (units) 4,800

Std. rate p.h. (Rs.) 8.50

Std. rate p.u. (Rs.) 4.25

(i) Computation of labour and overhead (variances):
Labour cost variance: (Refer to working Note 2)
= (Std. cost of labour – Actual cost of labour)
= Rs.11,700 – Rs.12,016 = Rs.316 (Adverse)
Labour rate variance:
= Actual hours (Std. rate – Actual rate)
= Rs.12,000 – Rs.12,016
= Rs.16 (Adv.)
Labour efficiency variance:
 = Standard rate per hr. (Std. hours – Actual hours paid)
= (Rs.11,700 – Rs.12,000) = Rs.300 (Adv.)
= Total fixed overhead cost variance:
= (Fixed overhead absorbed – Actual fixed overhead)
= [(4,680 units × Rs.4.25) – Rs.19,800]
= Rs.19,890 – Rs.19,800 = Rs.90 (Fav.)
Fixed overhead volume variance:
= Std. fixed overhead rate per unit [Actual output – Budgeted output]
= Rs.4.25 (4,680 units – 4,800units)
= Rs.510 (Adv.)
Fixed overhead expenditure variance:
= [Budgeted fixed overhead – Actual fixed overhead]
= [Rs.20,400 – Rs.19,800] – Rs.600 (Fav.)
(ii) Statement showing total standard cost, standard profit and actual profit for the week.
Sales Rs. Rs.
4,680 units × Rs.15 70,200
Less: Standard cost of :
Direct material 23,400
Direct labour 11,700
Overheads 19,890 54,990
(4,680 × Rs.4.25)
(Refer to working notes 1 to 3)
Standard Profit 15,210
Less: Adjustment for variance:
Raw Material:
Price variance : 800 (A)
Usage variance : 600 (A) 1,400 (A)
Labour:
Rate Variance : 16 (A)
Efficiency variance : 300 (A) 316 (A)
Overhead:
Expenditure variance: 600 (F)
Volume variance: 510 (F) 90 (F) 1,626
Actual Profit 13,584

Ans.51:
Sales variances (Sales Value Method)
Budgeted Calculations:
Budgeted Sales Actual Sales
Product Qty. Rate Amount Qty. Rate Amount Actual
Units Rs. Rs. Units Rs. Rs. quantity×
Budgeted price
Rs.
A 10,000 12 1,20,000 11,000 11.50 1,26,500 1,32,000
B 6,000 15 90,000 5,000 15.10 75,500 75,000
C 8,000 9 72,000 9,000 8.55 76,950 81,000
24,000 2,82,000 25,000 2,78,950 2,88,000
Computation of sales variances :
(1) Sales value variance = Actual sales – Budgeted sales
= Rs. 2,78,950 – Rs. 2,82,000
= Rs. 3,050 (A)
(2) Sales price variance = Actual quantity (Actual price – Budgeted price)
= Rs. 2,78,950 – Rs. 2,88,000

= Rs. 9,050 (A)

(3) Sales volume variance = Budgeted price (Actual Qty. –Budgeted Qty.)
= Rs. 2,88,000 – Rs. 2,82,000
= Rs. 6,000 (F)
(4) Sales mix variance = Total actual qty. (Budgeted price of actual mix –
Budgeted price of budgeted mix)

=
= 25,000 units (Rs. 11.52 – Rs. 11.75)
Rs. 5,750 (A)
(5) Sales quantity variance = Budgeted price of budgeted mix (Total actual
quantity – Total budgeted qty.)
= Rs. 11.75 (25,000 – 24,000)
= Rs. 11,750 (F)
Check
Sales value variance = Sales price variance + Sales volume variance
Rs. 3,050 (A) = Rs. 9,050 (A) + Rs. 6,000 (F)
Sales volume variance = Sales mix variance + Sales quantity variance
Rs. 6,000 (F) = Rs. 5,750 (A) + Rs. 11,750 (F)
Alternative solution (sales margin method)

Basic calculations :
Budgeted margin Actual margin Actual quantity ×
Budgeted margin
Product Qty. Rate Amount Qty. Rate Amount
Units Rs. Rs. Units Rs. Rs. Rs.
A 10,000 5 50,000 11,000 4.50 49,500 55,000
B 6,000 6 36,000 5,000 6.10 30,500 30,000
 C 8,000 3 24,000 9,000 2.55 22,950 27,000
24,000 1,10,000 25,000 1,02,950 1,12,000
Computation of variances:
Sales margin variance = Actual margin – Budgeted margin
= Rs. 1,02,950 – Rs. 1,10,000
= Rs. 7,050 (A)
Sales price margin variance = Actual quantity (Actual margin – Budgeted margin)
= Rs. 1,02,950 – Rs. 1,12,000 = Rs. 9,050 (A)
Sales margin mix variance = Total actual quantity (Budgeted margin of actual mix –Budgeted
margin of budgeted mix

Material Variances:
Basic Calculations
Standard and actual costs of material for actual output i.e. 11,000 units of A, 5,000 units of
B and 9,000 units of C and standard cost of actual input material.
Material Standard cost Actual cost Actual quantity ×
standard price
Qty Rate Amount Qty. Rate Amount
Units Rs. Rs. Units Rs. Rs.
X 51,000* 2 1,02,000 54,000 1,09,620 1,08,000
Y 74,000** 1 74,000 72,000 73,000 72,000
1,25,000 1,76,000 1,26,000 1,82,620 1,80,000
* 11,000 × 2 + 5,000 × 4 + 9,000 × 1 = 51,000
**11,000 × 3 + 5,000 × 1 + 9,000 × 4 = 74,000.

Computation of variances :
Material cost variance = Standard cost – Actual cost
= Rs. 1,76,000 – 1,82,620 = Rs. 6,620 (A)
Material price variance = Actual quantity (Standard price – Actual price)
= Rs. 1,80,000 – Rs. 1,82,620 = Rs. 2,620 (A)
Material mix variance = Total quantity (Standard price of standard mix – Standard price of
actual mix
Check:
Material cost variance = Material price variance + Material mix variance
+ Material yield variance
Rs. 6,620(A) = Rs. 2,620(A) + Rs. 2,592(A) + Rs. 1,408(A)

Ans. 52
(i) Reconciliation statement showing which factor has contributed change in profit
(Rs. in lacs)
Favourable Adverse
Increase in contribution
due to increase in volume
(Rs.280 lacs – Rs.240 lacs) 40 —
(Refer to working note 3)
Sales price variance 140
(Refer to working note 3)
Material usage variance 52
(Refer to working note 4)
Material price variance — 0
(Refer to working note 4)
Direct labour rate variance — 28
(Refer to working note 4)

Direct labour efficiency variance 36 —

(Refer to working note 4)
Fixed overhead expenditure variance
(Refer to working note 3) — 140
268 168
Total change in profit 100

160 lakhs
= = Rs. 800 lakhs
Rs. 240 lakhs
100
Rs. 1200 lakhs

Break-even sales (Year 2)

 300 lakhs
(Refer to working note 3) = = Rs. 962.50 lakhs
Rs. 480 lakhs
100
Rs. 1540 lakhs
(iii) Percentage increase in selling price needed over the sales value of year 2 to
earn a margin of safety of 45% in year 2
P/V ratio = (Rs. 480 lacs/Rs. 1,540 lacs) × 100 = 31.169%

If Margin of safety to be earned is 45% then Break-even point should be 55%

Revised contribution = 1,540 lacs × 35.4193% = 545.45 lacs
Present contribution = Rs. 480 lacs
Increase in selling price required = Rs. 65.45 lacs (Rs. 545.45 lacs – Rs. 480 lacs)

Working notes:
1. Budgeted sales in year 2
If actual sales in year 2 is Rs. 110 then budgeted sales is Rs. 100.

3. Statement of figures extracted from working results of a company

(Figure in lacs of Rs.)
Year 1 Year 2 Year 2 Total
Actual (Budgeted) Actual Variance
(a) (b) (c) d = (c) – (b)

Sales : (A) 1,200 1,400 1,540 140 (Fav.)

 (Refer to working note 1)
Variable costs :
Direct material 600 700 648 52 (Fav.)
(Refer to working note 2)
Direct wages and
variable overhead 360 420 412 8 (Fav.)
(Refer to working note 2)

Total variable costs : (B) 960 1,120 1,060 60(Fav.)

Contribution (C) = {(A) – (B)} 240 280 480 200 (Fav.)
Less : Fixed cost 160 160 300 140 (Adv.)
Profit 80 120 180 60(Fav)

Total variable costs : (B) 960 1,120 1,060 60(Fav.)

Contribution (C) = {(A) – (B)} 240 280 480 200 (Fav.)
Less : Fixed cost 160 160 300 140 (Adv.)
Total variable costs : (B) 960 1,120 1,060 60(Fav.)
Contribution (C) = {(A) – (B)} 240 280 480 200 (Fav.)
Less : Fixed cost 160 160 300 140 (Adv.)
Profit 80 120 180 60(Fav)

(4) (i) Data for Material variances :

Standard data for actual output Actual data
Quantity Rate per Amount Quantity Rate per Amount
of material m/t of material m/t
m/t m/t
Rs. Rs. Rs. Rs.
5,83,333 120 700 lacs 5,40,000 120 648 lacs
Material price variance = (Standard rate – Actual rate ) Actual quantity = Nil
Material usage variance = (Standard quantity - Actual quantity) Standard rate per m/t
= (5,83,333 – 5,40,000) Rs.120 = Rs. 52 lacs (Fav.)
(ii) Data for labour variances overhead variances
Standard data for actual output Actual data
Labour Rate per Amount Labour Rate per Amount
hours hour hours hour
Rs. Rs. Rs. Rs.
87,50,000 4.80 4.20 lacs 80,00,000 5.15 412 lacs
Labour rate variance = (Standard rate – Actual rate) Actual labour hours
= (Rs.4.80 – Rs.5.15) 80,00,000 = Rs. 28 lacs (Adv.)
Labour and variable overhead efficiency variance :
= {Standard labour hours – Actual labour hours} × Standard rate per hour

= {87,50,000 – 80,00,000} Rs. 4.80 = Rs. 36 lacs (Adv.)

Ans. 53: Basic Calculations
Equivalent Production in Units
Particulars Direct Material Labour & Overhead
Units completed 100 % 6,000 100 % 6,000
Work-in-progress 100 % 600 50 % 300
Total Equivalent Units 6,600 6,300

(a) Direct Material Variances

Actual
Standard output 6,600 units output 6,600
Material
units
Qty. Rate (Rs.) Amount (Rs.) Qty. (kg) Rate (Rs.) Amount (Rs.)
A 13,200 3 39,600 14,850 2.90* 43,065
B 6,600 4 26,400 7,260 4.098* 29,750
19,800 66,000 22,110 72,815

*(Actual Cost/ Actual Quantity)

DMCV = Standard Cost for actual output – Actual Cost

= 66,000 – 72, 815 = Rs. 6,815 (A)
DMPV = Actual Qty. (Std, Rate – Actual Rate)
A = 14,850 (3 – 2.90) = 1,485 (F)
B = 7,260 (4 - 4.098) = 710 (A)
775 (F)
DMUV = Std. Rate (Std. Qty. for actual output – Actual Qty.)
A = 3 (13,200 – 14,850) = 4,950 (A)
B = 4 (6,600 – 7,260) = 2,640 (A)
7,590 (A)
DMMV = Std. Rate (Revised Std. Qty. – Actual Qty.)
A = 3
= 3 (14,740 – 14,850) = 330 (A)
B = 4
= 4 (7,370 – 7,260) = 440 (F)
110 (F)

DMYV = Std. Cost per Unit (Std. output for actual mix – Actual output)
= 66,000
= 10 (7,370 -6,600) = Rs. 7,700 (A)

(b) Direct Labour Variances

DLCV = Std. Cost for Actual Output – Actual Cost

= (6,300 X 20) – 1,27,500 = Rs. 1,500 (A)

DLRV = Actual Time (Std. Rate – Actual Rate)

= 32,000 [ = Rs. 500 (F)

ITV = Std. Rate X Idle Hours

= 4 X 200 = Rs. 800 (A)

DLEV = Std. Rate (Std. Time for actual production – Actual time worked)
= 4 [(6,300 X5) – 31,800]
= 4 (31,500 – 31,800) = Rs. 1,200 (A)

(c) Variable Overhead Variances

VOC = Recovered Overheads – Actual Overheads

 = 6,300 X 5 – 30,000
= 31,500 – 30,000 = Rs. 1,500 (A)

VOEXPV = Std. Variable Overheads – Actual Variable Overheads.

= (31,800 X 1) – 30,000
= 31,800 – 30,000 = Rs. 1,800 (F)
VOEEFV = Recovered Overheads – Standard Overheads
= 1 X (31,500 -31,800) = Rs. 300 (A)

(d) Fixed Overhead Variances

FOCV = Recovered Fixed Overheads – Actual Fixed Overheads

= (6,300 X 10) – 80,600
= 63,000 – 80,600 = Rs. 17,600 (A)

FOEXPV = Budgeted Fixed Overheads – Actual Fixed Overheads

= (8,000 X 10) – 80,600 = Rs. 600 (A)

FOVV = Recovered Fixed Overhead – Budgeted Fixed Overhead

= 63,000 – 80,000 = Rs. 17,000 (A)

Fixed Overhead Volume Variances may be segregated into the following:

FOEFFV = Std. Rate (Std. time for actual production – Actual time booked)
= 2 (31,500 – 31,800) = Rs. 600 (A)

FOITV = Std. Rate per hour X Idle hours

= 2 X 200 = Rs. 400 (A)
FOCAPV = Std. Rate per hour (Actual time – Budgeted time)
= 2 (32,000 – 40,000) = Rs. 16,000 (A)

(e) Sales Variances

SPV = Actual Qty. (Std. Price – Actual Price)

= 6,000 = Rs. 5,000 (F)

Sales Volume Variance (Contribution loss) :

= Std. Rate of profit (Budgeted Qty. – Actual Qty.)
= 5 (8,000 – 6,000) = Rs. 10,000 (A)

Operating Statement showing the Reconciliation between Budgeted and Actual Profit for the Month
(Rs.)

Budgeted Profit (8,000 X Rs. 5) Rs. Price 40,000

Sales Variances 5,000 (F)
Volume 10,000 (A)
Total 5,000 (A) 5,000 (A)

Cost Variances:
Direct Materials
Price 775 (F)
Yield 7,700 (A)
Mix 110 (F)
Direct Wages
Rate 500 (F)
Efficiency 1,200 (A)
Idle Time 800 (A)
Variable Overheads
Expense 1,800 (F)
Efficiency 300 (A)
Fixed Overheads
Expense 600 (A)
Efficiency 600 (A)
Idle Time 400 (A)
Capacity 16,000 (A)
Total Cost Variances 24,415 (A) 24,415 (A)
Actual Profit 10,585

Ans:54:Computation of Variances
(a) Material Price variance
Material Qty. Purchase Std. Price Rs. Actual Price Std. cost Rs. Actual Cost Price Variance
(1) Kg. (2) (3) Rs.(4) (2x3)=5 Rs. (2x4)=(6) Rs. (5-6)=(7)
A 9,000 10.00 10.25 90,000 92,250 2,250 (A)
B 5,000 3.00 2.75 15,000 13,750 1,250 (F)
1,05,000 1,06,000 1,000 (A)

(b) Material Usage Variance

Material Std. Qty. for Actual Qty. Std. Price Std. Cost of Std. Cost of Usage Variance
(1) actual output (3) (4) Std. Qty. Actual (5-6)=(7)
(2) (2x4)=5 (4x5)=6
A 8,000 7,800 10 80,000 78,000 2,000 (F)
B 4,000 4,300 3 12,000 12,900 900 (A)
92,000 90,900 1,100 (F)

(C ) Labour Rate Variance

Actual Hours Std. Rate Actual Rate Std. Wage Actual Wages Rate Variance
(1) (2) (3) (4)=(1x2) (5)=(1x3) (6)=(4-5)
Rs. Rs. Rs. Rs. Rs.

4200 3 2,875 12,600 12,075 525 (F)

(d) Labour Efficiency Variance

Std. Hours Actual Hours Std. Rate Std. Cost of Std. Cost. Of Efficiency
for actual (2) (3) Std. Hours Actual Hours Variance
output Rs. (4)=(1x3) (5)=(2x3) (6)=(5-6)
(1) Rs. Rs. Rs.
4,000 4,200 3 12,000 12,600 600 (A)

Overhead Variances
Basic calculations

(a) Budgeted overheads for November = 10,800 X 25 =Rs.22,500

12
(b) Std. hours produced for November = 800 units X 5 hrs per unit=4,000
(c ) Fixed production overheads per hour = 25/5=5
(d) Recovered overhead = 4,000 X 5 =Rs.20,000
(e) Actual overheads = Rs.23,500
(f) Standard overheads = 4,200 X 5 =Rs.21,000

Variances
Overhead Cost variance
=Recovered Overheads- Actual Overheads
=20,000-23,5000 =Rs.3,500 (A)
Overhead Expenditure Variance
=Budgeted Overheads-Actual overheads
=22,500-23,500 =Rs.1,000 (A)
Overheads Volume variance
=Recovered Overheads-Budgeted Overheads
=20,000-22,500 =Rs.2,500 (A)
Overhead Volume Variance may be segregated into:
(a) Overhead Capacity Variance
=( Std. Overhead rate per hour) X (Actual hours-Budgeted hours)
= Standard Overheads-Budgeted Overheads
=21,000-22,500 =Rs.1,500 (A)
(b) Overhead Revised Capacity variance
= ( Std. rate per hour ) X (Std. hrs. produced – Actual hours)

Or

= Recovered overheads- Std. overheads

=20,000-21,000 =Rs.1,000 (A)

(ii) Operating Statement (Rs.)

(a) Sales (800 X Rs.200) 1,60,000
Less: std. Cost of Sales (800 X Rs.155) 1,24,000
Standard profit 36,000
(b) Variances Favourable Adverse
Materials
Price - 1,000
Usage 1,100 -
Direct Labour
Rate 525 -
Efficiency - 600
Fixed Overheads
Expenditure - 1,000
Capacity 1,500 (A)
Efficiency 1,000 (A) - 2,500
1,625 5,100 3,475 (A)
( c) Actual Profit 32,525

(iii) In the solution given the price variance has been calculated at the point of purchase. In case it is calculated at the
point of issue the variance will be as follows: (Rs.)
A 7,800 X (10-10.25) 1,950 (A)
B 4,300 X ( 3-2.75) 1,075 (F)
875 (A)
Present variance 1,000 (A)
Hence difference
125
Actual profit as in (ii) above
32,525
Price variance difference
125
Actual profit as per question
32,650

Ans: 55:
Statement showing the computation of standard cost per unit (Rs.)
Particulars Actual 960 units Variance (-) Standard Standard
Adv. (+) Fav. 960 units cost per unit
Direct Material 792 (-)24 768 0.80
Direct Wages 1,192 (-) 40 1,152 1.20
Variable overhead 1,940 (-) 20 1,920 2.00
Fixed overhead 1,040 (-) 40 1,000 1.04
Total Cost 4,964 (-)124 4,840 5.04
Profit 976 (+)56 920 0.96
5,940 (+)180 5,760 6.00
Balancing figure
Original Budget and Flexible budget for sales achieved (Rs.)
Particulars Standard Cost Original budget Flexible budget
(per unit) (1,000 units) (960 units)
Direct Material 0.80 800 768
Direct Wages 1.20 1,200 1,152
Variable overhead 2.00 2,000 1,920
Fixed overhead 1.04 1,040 1,040
Cost of Sales 5.04 5,040 4,880
Profit 0.96 960 880
Sales 6.00 6,000 5,760

Ans: 56:
(i) Flexible budget for May 2004
Units Original Budget Flexible Budget Actuals may Variance
20,000 for May 2004 2004
18,000 18,000
1 2 3 4 5
Sales Variable costs 24,00,000 21,60,000 22,00,000 40,000 F
Direct Materials 6,00,000 5,40,000 5,20,000 20,000 F
Direct Labour 8,00,000 7,20,000 7,56,000 36,000 A
Factory Overheads 2,00,000 1,80,000 1,84,000 4,000 A
Selling overheads 3,00,000 2,70,000 2,88,000 18,000 A
Total 19,00,000 17,10,000 17,48,000 38,000 A
Contribution (A) 5,00,000 4,50,000 4,52,000 2,000 F
Fixed Cost
Factory overheads
1,00,000 1,00,000 1,16,000 16,000 A
Selling overheads 2,00,000 2,00,000 1,84,000 16,000 F
Total (B)
3,00,000 3,00,000 3,00,000 -
Profit (A-B)
Volume variance 2,00,000 1,50,000 1,52,000 2,000 F
Net Loss 2,00,000 - 50,000 A
-1,50,000 (48,000)

(ii) Variance Analysis

(1) Sales Std. Price =Rs.24 lakhs /20,000 =Rs.120

Std. profit =Rs.2 lakhs / 20,000 =Rs.10
Actual quantity =18,000 and standard price =Rs.120
Turnover on Std. Price =18,000 X 120 =Rs.21,60,000
Actual turnover is given at Rs.22 lakhs.
: Price Variance =40,000 (F)
Std. Qty X Std. Profit =20,000 X 10 =Rs.2 lakhs
Actual Qty .X Std. Profit =18000 X 10 =Rs.180 lakhs
Quantity Variance =Rs.20,000 A
(2) Direct Materials
Std. Cost =Rs.6,00,000/20,000 =Rs.30
Actual Qty.=18,000 AQ X SC =18,000 X 30 =Rs.5,40,000
Total Actual Cost =Rs.5,20,000
Material Price Variance =Rs.20,000 (F)
(3) Direct Wages
Std. Time per unit =1,00,000/20,000 =5 hours
Std. hourly rate =8,00,000/1,00,000 =Rs.8/hr.
Std. Hours produced =18,000 units X 5 hrs. =90,000 hrs.
Std. Hours=90,000 Actual Hours=95,000 Std. Rate Rs.8
(a) Std. Hrs. X Std. rate =90,000 X 8. =Rs.7,20,000
(b) Actual Hrs. X Actual Rate =Rs.7,56,000
© Actual Hrs. X Std. Rate =95,000 X 8 =Rs.7,60,000
Efficiency variance =(a)-( c)=Rs.40,000 (A)
 Rate Variance =( c) –(b)=Rs.4,000 (F)
(4) Factory Variable overheads:
Std. Rate =Rs.2,00,000/1,00,000 =Rs.2/hr.
(a) Charged to production =90,000 X2 =Rs.1,80,000
(b) Std. cost of actual hours =95,000 X 2 =Rs.1,90,000
(c ) Actual overheads =Rs.1,84,000
(a) – (b) =Rs.10,000 (A) Being efficiency variance
(b) – (c ) =Rs.6,000 (F) Being expense variance
(5) Selling variable overheads:
Std. Rate =Rs.3,00,000/20,000 =Rs.15 / unit
(a) Std. cost of output =18,000 X 15 =Rs.2,70,00
(b) Actual overheads =2,88,000
Adverse Variance =18,000
(6) Factory overheads- Fixed:
Std. Rate = Rs.1,00,000/1,00,000 =Re.1/hr.
(a) Std. cost of output of 90,000 =Rs.90,000
(b) Std. cost of actual hours. (95,000) =Rs.95,000
(c ) Budgeted =Rs.1,00,000
(d) actual
Efficiency variance : (a) – ( b) =Rs.5,000 (A)
Capacity variance : (b) – ( c) =Rs.5,000 (A)
Expenses variance : (c )- (d) =Rs.16,000 (A)
(7) Selling overheads : Fixed:
Standard =Rs.2 lakhs / 20,000 =Rs.10 per unit
(a) Std. cost of output =18,000 x 10 =Rs.1,80,000
(b) Budget =Rs.2,00,000
(c )Actual =Rs.1,84,000
Volume variance = (a) – (b) =Rs.20,000 (A)
Expense variance = (b)-( c) =Rs.16,000 (F)

Ans: 57:Working Notes:

1. Sales Variances
(1) Sales Volume Margin Variance
(Actual Sales Volume – Budgeted Volume ) x Standard Margin
=(22,000 units – 20,000 units) x Re.1 =Rs.2,000 (F)
(2) Sales Margin Price Variance
Actual Sales Volume x (Actual Selling Price – Budgeted Selling Price)
=(14,000 units (Rs.5 – Rs.5) + ( 8,000 units x (Rs.4.75 – Rs.5) =Rs.2,000 (A)

2. Material Variances
(1) Material Price Variance
(Std. Price – Actual Price) x Actual Quantity
A : (0.30 – 0.20) x 16,000 kg. =Rs.1,600 (F)
B : (0.70 – 0.80) x 10,000 kg. =Rs.1,000 (A) =Rs.600 (F)

(2) Material Mix Variance

Total Actual Quantity (S.C. of Std. mix per kg. – S.C. of actual mix per kg.)

Rs.10000 Rs.11800
= 26000kg 20000kg 26000kg

=Rs.1,200 (F)
(3) Material Yield Variance
Std. rate per kg. of output (Actual Yield – Std. Yield )
= 0.50 ( 24,000 kg. – 26,000 kg.) =Rs.1,000 (A)
(3) Labour Variance
(1) Labour Rate Variance
(Std. rate p.h. – Actual rate p.h. ) x Actual hours
Skilled Labour : (Rs.3 – Rs.2.95 ) x 13,000 hrs. =Rs.650(F)
 Unskilled Labour : (Rs.2.50 – Rs.2.60 ) x 6,300 hrs. =Rs.630(A) =Rs.20(F)
(2) Labour Efficiency Variance
(Std. hrs. for Actual output – Actual hours ) x Std. rate p.h.
Skilled Labour : (Rs.10,800 hrs-12,000 hrs.) x Rs.3 =Rs.3,600 (A)
Unskilled Labour : (6,240 hrs. – 6,300 hrs.) x Rs.2.50 =Rs.150 (A) =Rs.3,750 (A)
(3) Idle Time Variance
(Idle hours x Standard Wage rate p.h)
Skilled Labour : 1,000 hours x Rs.3 =Rs.3,000 (A)
(4) Variable Overhead Variance
(1) Variable Overhead Expenditure Variance
(Variable Overhead recovered on actual output – Actual Variable Overhead)
= (24,000 units x Re.0.50) – Rs.15,000 =Rs.3,000 (A)
(5) Fixed Overhead Variances
(1) Fixed Overhead Expenditure Variance
(Budgeted Expenditure – Actual Expenditure)
= (Rs.20,000 – Rs.18,020) =Rs.1,980 (F)
(2) Fixed Overhead Volume Variance
(Budgeted Volume – Actual Volume ) x Std. rate per unit
= (20,000 units – 24,000 units ) x Re.1 =Rs.4,000 (F)

Statement reconciling Actual Profit and Budgeted Profit

Particulars Reference to Variance Actual
working note
Favourable Adverse
Budgeted profit - 20,000
(as per Budgeted income statement)
1.Sales Variances
Sales Volume Margin Variance (1) 2,000
Sales Volume Margin Variance (2) - 2,000

Profit before adjustment of Cost Variances 20,000

II Material - Price (1) 600 -
- Mix (2) 1,200 -
- Yield (3) - 1,000
III. Labour Variance
- Rate (1) 20 -
-Efficiency (2) - 3,750
-Idle time (3) - 3,000
IV. V. Overheads -Expenditure (1) - 3,000

V. F. Overheads -Expenditure (1) 1,980 -

-Volume (2) 4,000 -
7,800 10,750 2,950
Actual Profit 17,050

Ans. 58: (1) Statement showing the amount of sales target fixed and the actual amount of contribution earned.

(Rs.’000)

Zonal Sales Officers A B C D

Commission earned 29.9 23.5 24.5 25.8
Actual sales:
(Commission earned / 5%) 598 470 490 516
Sales price variance 4 (F) 6 (A) 5 (A) 2 (A)
Sales volume variance 6 (A) 26 (F) 15 (F) 8 (F)
 Sales target / Budgeted sales 600 450 480 510
Standard cost of sales target 500 375 400 425
Standard margin/ Budgeted margin 100 75 80 85
Sales margin mix variance 14 (A) 8 (F) 17 (F) 3 (A)
Sales price variance 4 (F) 6 (A) 5 (A) 2 (A)
Actual margin 90 77 92 80

Note: As there is no information about sales margin quantity variances, therefore for calculating actual
contribution the same has been assumed to be zero.
(2) Statement to evaluate the performance of zonal sales officers

Zonal Sales Officers

S. No. Base factor to A B C D
evaluate performance
Efficiency towards the
target sales:
1. (a) Whether target No Yes Yes Yes
achieved
(b) Actual sales to 99.67 104.44 102.98 101.18
Target sales ratio 598 100 470 100 490 100 516 100
(Actual / target) (%)
600 450 480 510
(c) Ranking IV I II III
2. (a) Contribution 90 77 92 80
earned (in Rs.’000)
(b) Ranking II IV I III
3.. (a) Standard margin/ 16.67 16.67 16.67 16.67
sales target ratio
(b) Actual margin / 15.05 16.38 18.78 15.50
Actual sales ratio (%)
(c) Ranking IV II I III

Recommendation:
A review of performance of four officers based on three based factors, shows that the performance of officer C is the
best.

Ans. 69:Kitchen King’s Score card should describe its product differentiation strategy. The key points that
should be included in its balance score card are
Financial Prospective – Increase in operating income by charging higher margins on Maharaja.
Customer Prospective – Market share in high-end kitchen range market and customer satisfaction.
Internal business perspectives: Manufacturing quality, order delivery time, on time delivery and new
product feature added.
Learning and Growth prospective: Development time for designing new end product and improvement
in manufacturing process.
Operative Income:
(Amount in 000
Rs.)
2003 2004
Revenue (40000×1000:
42000×1100) 40000 46200
 Direct Material 12000 13530
Conversion cost 10000 11000
Selling and Customer service 7200 7250
Total cost 29200 31780
Operative Income 10800 14420
Change in operating Income 36, 20,000 (F)
A. Growth Component
(a) Revenue effect = Output Price in 2003{Actual units sold in 04 – Actual units sold in 03}
= Rs.1, 000 (42,000 units – 40,000 units)
= Rs.20, 00,000 (F)
(b) The cost effect = Input price in 2003{Actual units of input to produce 2003 output less Actual units
of input which would have been used to produce year 2004 output on the basis of 2003}
(i) Direct Material = Rs.100 [1, 20,000sqft – 1, 20,000sqft × 42000 units]
40000 units
= Rs.6, 00,000 (A)
(ii) Conversion cost and selling and customer service will not change since adequate capacity
exists in 2003 to support 2004 output and customers.
Hence variance
Conversion cost = 200(50000 – 50000) = 0
S & Customer Service = 25000(300 – 300) = 0
Increase in operating effect of Growth component is Rs14, 00,000 (F)
B. Price recovery Component:
(i) Revenue effect = Actual output in 2004 [Selling price per unit in 2004 less Selling price per unit in
2003]
= 42,000units (Rs.1, 100 – Rs1, 000) = Rs.42, 00,000 (F)
(ii) Cost effect = Unit of input based on 2003 actual that would have been used to produce 2004
output {Input prices per unit in 2003 less Input prices per unit in 2004}
(a) Direct material = 1, 26,000sqft (Rs.100/sqft – Rs.110/sqft)
= Rs.12, 60,000 (A)
(b) Conversion Cost = 50,000 units (Rs.200/unit –Rs.220/unit)
= Rs.10, 00,000 (A)
(c) S & Custr Service = 300 customers (Rs.24, 000 –Rs.25,000)
= Rs.3,00,000 (A)
= Rs.25, 60,000 (A)
Increase in Operating income due to Price Recovery is Rs.16, 40,000 (F) {Rs.42, 00,000 – Rs.25, 60,000}
(C) Productivity Component
Productivity component = Input Prices in 04 {Actual units of input which would have been used to
produce year 2004 output on the basis of 2003 actual less Actual Input}
(i) Direct Material: Rs.110/sqft (1, 26,000 units – 1, 23,000 units) = Rs.3, 30,000(F)
(ii) Conversion Cost: Rs.200/unit (50,000 units – 50,000 units) = 0
(iii) Selling & Customer = Rs.25, 000 (300 customers – 290 customers)
= Rs.2,50,000 (F)
= Rs. 5,80,000 (F)
The change in operating income from 2003 to 2004 is analyzed as follows:
(Amount in 000 Rs.)
2003 Growth component Price recovery Cost effect of productivity component 2004
Revenue 40000 2000 (F) 4200 (F) ------------ 46200
Cost 29200 600 (A) 2560 (A) 580 (F) 31780
Operating
Income 10800 1400(F) 1640 (F) 580 (F) 14420
 Solutions of Target Costing,
-1- Value Chain Analysis

Ans. 7:
Maximum capacity 80,000 units
Presented sales 20,000 units @ `100 p.u.
Selling price/unit Demand
100 20,000
90 40,000
80 80,000 = Full capacity
∴Target cost/unit = 80 –25% of sales
= 80- 20 = 60 p.u.
(b) At present
Variable cost/unit = 40% of cost i.e. 75 = `30
∴Fixed cost/unit = 100 –25% = 75
COS 75
Less: Variable cost/unit 30
Fixed cost 45 p.u. Total fixed
cost 45×80,000 = 36 lakhs
∴Add full capacity target cost = `60/unit ×80,000 units
= `48 lakhs
Total estimate cost
Fixed cost 36 lakhs
Variable cost (80,000 ×40) 24 lakhs
60 lakhs
∴Required. Cost reduction following value engineering is `12 lakhs.

(e) Rate of return 15% Profit p.u. 25% of 80 = 20/unit

Profit before tax = 20×80,000 = 16 lakhs
ROCE = (PBI/Investment)
∴Investment = (PBI/ROCE) = 16 lakhs/15% = `10666667.

Ans. 8:
Target profit 25,000
Add: Fixed cost 1,40,000
Add: Additional Advertisement 28,500
(a) Total contribution 1,93,500
(b) Required. Sales volume 12,000
contribution/unit (a¸b) 16.125
Target Selling price/unit 32
Less: Contribution/unit 16.125
Target variable cost p.u. 15.875

Less: material cost p.u. 8.000

Labour + Variable overhead 7.875
Labour: x hr. @ 4
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 -2-

Variable overhead x hr. @ 0.5

∴4.5x = 7.875
x (hr.) 1.75
Time/unit 1.75
Present _ 2.00
Time reduced 0.25 hr.

Ans. 9
(i) Cost of product as per Target Costing
Coco Stawberry Vanilla
Selling Price per unit 23.00 18.00 13.00
Less: Markup (25% of cost or 20% of 4.60 3.60 2.60
selling Price)
Target Cost per unit (`) 18.40 14.40 10.40

(ii) Cost of product as per Traditional Costing

Coco Stawberry Vanilla
Maximum Volume (units) 60,500 24,200 72,600
` ` `
Material 8.00 6.00 5.00
Labour 5.00 4.00 3.00
Prime Cost 13.00 10.00 8.00
Store Support (30% of Prime Cost) 3.90 3.00 2.40
Total Cost per unit 16.90 13.00 10.40
Total Cost 10,22,450 3,14,600 7,55,040

(iii) Cost of product as per Activity Based Costing

Coco Stawberry Vanilla
Maximum Volume (units) 60,500 24,200 72,600
` ` `
Material 8.00 6.00 5.00
Labour 5.00 4.00 3.00
Prime Cost 13.00 10.00 8.00
Overheads (Working Note-2) 3.29 5.23 2.17
Total Cost per unit 16.29 15.23 10.17
Total Cost 9,85,320 3,68,670 7,38,100

(iv) Comparision in Cost of each product under each method

Coco Stawberry Vanilla
As per Target Costing 18.40 14.40 10.40
As per Traditional Costing 16.90 13.00 10.40
As per Activity based Costing 16.29 15.23 10.17

Comment: Since cost of Strawberry is high in ABC costing in comparison to target costing and traditional
methods, it is indicating that actual profit under target costing is less than targeted.

Working Note-1 :

Coco Stawberry Vanilla

Current Selling Price per unit (`) 25.00 20.00 15.00
Current Sales (units) 50,000 20,000 60,000
Selling Price (`) 24.00 19.00 14.00
Revised Sales (units) 55,000 22,000 66,000
Selling Price (`) 23.00 18.00 13.00
Revised Sales (units) (upto production capacity) 60,500 24,200 72,600

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 -3-

Working Note-2 :

Coco Stawberry Vanilla

Ordering Cost (35/30/15 @ 800) 28,000 24,000 12,000
Delivery Cost (112/66/48 @ 700) 78,400 46,200 33,600
Shelf Stocking (130/150/160 @ 199) 25,870 29,850 31,840
Customer Support 66,550 26,620 79,860
(60,500/24,200/72,600 @ 1.1)
TOTAL COST 1,98,820 1,26,670 1,57,300
No. of units 60,500 24,200 72,600
Cost per unit 3.29 5.23 2.17
Note: On calculation of total overhead costs under traditional & ABC system, costs are same i.e. `4,82,790,
hence we will ignore the line “In ABC these costs are coming under customer support and assistance.” written
in question.

Ans. 10:
(a) (i) The target cost of each product after reduction is computed as follows:
Product Present Price Proposed Price Target Cost (`)
(`) (`) (with 25% Margin)
A 180 175 140
B 175 170 136
C 130 125 100
D 180 175 140

(ii) Statement showing cost/unit of Driver as per ABC

Cost Amount Driver No. Cost/unit of

Driver
Set-ups 26,250 Production runs 105* `250.00
Stores receiving 18,000 Requisition 400** `45.00
Inspection/Quality 10,500 Production runs 105 `100.00
Handling/Dispatch 23,100 Orders 210 `110.00
Machine Department 52,130 Machine Hrs. 6,500 `8.02

* Production runs = (600/20) + (500/20) + (400/20) + (600/20) = 105

** Requisitions = 100 for each product or 400 total
Machine hours = 2,400 + 1,500 + 800 + 1,800 = 6,500 hours.
Statement showing Total Cost and Cost Per Unit as per ABC

Item A B C D
` ` ` `
Direct Material 24,000 25,000 12,000 36,000
Direct Labour 16,800 10,500 5,600 12,600
Set-up 7,500 6,250 5,000 7,500
Stores receiving 4,500 4,500 4,500 4,500
Inspection/Quality 3,000 2,500 2,000 3,000
Handling/Dispatch 6,600 5,500 4,400 6,600
Machine Dept. Cost 19,248 12,030 6,416 14,436

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 -4-

Total Cost 81,648 66,280 39,916 84,636

Output (Units) 600 500 400 600
Cost per unit 136.08 132.56 99.79 141.06
(iii) Comparison of Actual Cost and Target Cost

Cost A B C D
` ` ` `
Actual 136.08 132.56 99.79 141.06
Target 140.00 136.00 100.00 140.00
Difference (-) 3.92 (-) 3.44 (-) 0.21 (+) 1.06

Comment:
The total actual cost of A, B and C product is less than the target cost so there is no problem in
reducing the cost of these product by `5 from the present price. It will increase the profitability of
the company but the cost of D is slightly more than the target cost, it is therefore, suggested
that the company should either control it or redesign it.

Ans. 11: Working Notes:

Particulars P Q
(a) Production/Sales Quantity (units) 1,00,000 50,000
(b) Batch Size (units) 1000 500
(c) No. of batches 100 100
(d) Set up time per batch (hours) 30 36
(e) Total set up hours (c d) (hours) 3,000 3,600
(f) Machine set up cost (`) 4,62,000
(g) Cost driver per machine set up hour
4,62,000
= `70
6,600
(h) Testing time per unit 5 hours 9 hours
(i) Total testing time (a h) (hours) 5,00,000 4,50,000
(j) Testing cost
`23,75,000
(k) Cost driver per testing hour
23,75,000
= `2.50
9,50,000

(a) Computation of full cost per unit using Activity Based Costing:

Particulars Basis P Q
Direct material Direct 42,00,000 30,00,000
Direct labour Direct 15,00,000 10,00,000
Direct machine cost Direct 7,00,000 5,50,000
Machine set up cost 3,000 hours @ `70 2,10,000
3,600 hours @ `70 2,52,000
Testing cost 5,00,000 hours @ `2.50 12,50,000

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 -5-

4,50,000 hours @ `2.50 11,25,000

Engineering cost Allocated 8,40,000 14,10,000
Total cost (`) 87,00,000 73,37,000
Cost per unit (`) 87.00 146.74

(b) Mark up on full cost basis for Product P:

Particulars Per unit
Selling price 100.05
Less: Full cost 87.00
Mark up 13.05
Percentage of mark up on full cost = 13.05 /87 = 15 %
(c) Target cost of Product P after new design is implemented

Target price (given) 86.25

86.25 ×15 11.25
Mark-up
115
Target cost per unit (`) 75.00

(d) Statement of cost for new design of P

Particulars Basis Cost P.U. Total Cost
Direct Material Decreased by `5 p.u. 37.00 37,00,000
Direct Labour Decreased by `2 p.u. 13.00 13,00,000
Direct Machining cost No change as machine is 7.00 7,00,000
dedicated
Machine set up cost 100 set up 28 hours `70 1.96 1,96,000
Testing cost 1,00,000 units `2.5 4 hours 10.00 10,00,000
Engineering cost No change 8.40 8,40,000
Total cost 77.36 77,36,000

The target cost is `75 p.u. and estimated cost of new design is `77.36 p.u.
The new design does not achieve the target cost set by Computo Ltd. Hence the target mark
up shall not be achieved.
(e) Possible Management Action:
Value engineering and value analysis to reduce the direct material costs.
Time and motion study in order to redefine the direct labour time and related costs.
Exploring possibility of cost reduction in direct machining cost by using appropriate
techniques.
Identification of non-value added activities and eliminating them in order to reduce
overheads.
The expected selling price based on estimated cost of `77.36 per unit is (`77.36 + 15%)
`88.96. Introduce sensitivity analysis after implementation of new design to study the sales
quantity changes in the price range of `
86.25 to `88.96.

Ans. 12:

P1 P2

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 -6-

`/unit `/unit
Material 407.5 292.1
Overhead-Material handling 85×1.2 = 102 46×1.2 = 55.2
Assembly Management 40×3.2 = 128 40×1.9 = 76
Machine insertion 48×0.7 = 33.6 31×0.7 = 21.7
Manual insertion 36×2.1 = 75.6 25×2.1= 31.5
Quality testing 1.4×25 = 35 1.1×25 = 27.5
Present cost 781.70 504.00
Target cost 680.00 390.00

Revised P1 Revised P2
`/unit `/unit
Direct material 381.20 263.10
Overhead:
Material handling (71×1.2) = 85.2 (39×1.2) = 46.8
Assembly hour (21×40) = 84.0 (1.6×40) = 64.0
Machine inspection (59×0.7) = 41.3 (29×0.7) = 20.30
Manual inspection (12×2.10) = 25.2 (10×2.10) = 21.00
Electronics (1.2×25) = 30.00 (0.9×25) = 22.50
Estimated cost 646.90 437.70
Target cost 680.00 390.00
Achieved not achieved

Ans. 24: Machine X-Life 12 years

Year Cost Discount Discounted
` Factor Cost `
Purchase price 0 19,000 1.00 19,000
Overhead cost 8 4,000 0.47 1,880
Trade-in-value 12 (3,000) 0.32 (960)
Annual repair cost 1-12 2,000 6.81 13,620
33,540
Annualized equivalent =`33,540 / 6.81=`4,925

Machine W-Life 6 years

Year Cost Discount Discounted
` Factor Cost `
Purchase price 0 13,000 1.00 13,000
Overhead cost 4 2,000 0.68 1,360
Trade-in –value 6 (3,000) 0.56 (1,680)
Annual repair cost 1-6 2,600 4.36 11,336
24,016
Annualized equivalent `24,601 / 4.36=`5,508
Recommendation : Purchase machine ‘X’
Assumptions:
a. Same performance, capacity and speed.
b. No. inflation.
c. 12 year-estimates are as accurate as 6 – year estimates.
d. Cash flow at the year end.

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 -7-

Ans. 25: The cost driver rates are as follows:

Product design = `250 per design hour (`2m/8000 hours)
Purchasing = `50 per purchase order (`200000/4000 orders)
Production (excluding depreciation) = `100 per machine hour ((`1 500000-`300000)/ 12000 hours)
Packing =`20 per cubic meter (`400000/ 20000)
Distribution =`5 per kg (`600000/ 120000)
The activity –based overhead cost per unit is as follows:
(`)
Product design (400 design hours at `250 per hour=`100000
Divided by life –cycle output of 5000 units) 20.00
Purchasing (5 purchase orders at 50 units per order costing
A total of `250 per output of 250 units) 1.00
Production (0.75 machine hours at `100 per machine hour) 75.00
Depreciation (Asset cost over life cycle of 4 years= 16 quarters
Depreciation at `8000 per quarter divided by life cycle
Output of 5000 units) 25.60
Packing (0.4 cubic meters at `20) 8.00
Distribution (3 kg at `5) 15.00
Total costs 144.60

Ans. 26: The total cost consists of the installation cost plus electrical charges for 5 years.
(i) So total cost for Electric immersion heater =`160 + 200X5 =`1160
(ii) Total cost for a gas boiler =`760 + `80X5 =`1160
Hence, on the total cost basis, both the equipments have equal preference, and the housewife can choose
any one. Let us now calculate the present value of money for each of the two possibilities.
Year PV factor @ Electric Immersion heater Gas Boiler
9% p.a
Operating Cost ` Discounted Cost ` Operating Cost Discounted
` Cost `
0 1.0000 160 160.00 760 760.00
1 0.9174 200 183.48 80 73.39
2 0.8417 200 168.34 80 67.33
3 0.7722 200 154.44 80 61.78
4 0.7084 200 141.68 80 56.67
5 0.6499 200 129.98 80 51.99
Total Cost=937.92 Total Cost
(`938,say) =1071.16
(`1071 say)
On the basis of present value @ 9% p.a over a period of five years, the total cost of Electric immersion heater
is `938 and that of a Gas boiler is `1071. Hence, the housewife is advised to purchase an electric immersion
heater.
If the equipment are to be considered for a period of 8 years, then
Total cost for electrical immersion heater =`160+200X8 =`1760
Total cost for gas boiler =`760+`80X8 =`1400
Hence, the housewife will be advised to purchase a gas boiler.
Year PV factor @ Electric Immersion heater Gas Boiler
9% p.a
Operating Cost ` Discounted Cost ` Operating Cost Discounted
` Cost `
6 0.5963 200 119.26 80 47.70
7 0.5470 200 109.40 80 43.76
8 0.5019 200 100.38 80 40.15
329.04 (329,say) 131.61 (`132
say)

Present value in case of electric immersion heater

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 -8-

= P.V. over five years + P.V. over next three years =`938+`329 =`1267
Present value in case of gas boiler =`1071+`132 =`1203
Hence, over a 8 years period, the present value of a gas boiler is less.
On the basis of total cost as well as present value of money, gas boiler is cheaper over 8 years period, hence
the housewife is advised to purchase a gas boiler.

Ans. 27: Relevant Operating Cash outflow p.a. if part X 248 is outsourced
Purchase Cost (Cash outflow) (a) 50000
Relevant Cash inflow from outsourcing:
Direct materials 22000
Direct Labour 11000
Variable Overhead 7000
Product and Process engineering 4000
Rent 1000
Total Cash Savings (b) 45000
Net Cash Outflow (a) - (b) (5000)
Net Present Value of cash inflow if part is outsourced
Particulars Year Amount ` P.V. factor @ 12% P.V `
Disposal value of machine 0 15000 1000 15000
Cash Outflow due to outsourcing 1 5000 0.893 (4465)
2 5000 0.797 (3985)
3 5000 0.712 (3560)
4 5000 0.636 (3180)
5 5000 0.567 (2835)
NPV (3025)
Analysis : Since the NPV is negative , it is desirable to manufacture the part internally.
Notes:
(1) Equipment depreciation is a non- cash cost item. Therefore, it is not relevant.
(2) Product and process engineering cost being avoidable hence relevant for the entire period of
outsourcing i.e. for 5 years.
(3) Allocated rent is irrelevant but rent saved (i.e, `1000) is relevant.
(4) Allocated general plant overhead is irrelevant.

(ii) Sensitivity analysis with respect to quantity is desirable:

If demand for the part decreases vendor is willing to supply a lower quantity at the same price (`
50/-).
If the part is continued to be made internally, the costs would not decrease quite fast with lower
quantities because of fixed costs.
Net cash outflows of outsourcing will be smaller if lower quantities of the part are demanded. But if
the demand increase, it would be preferable to make the part – in – house.

Non – financial factors:

Will the units of part required be delivered on schedule?
Will quality be maintained?
Can suggested modifications be really accommodated?
Will the subcontractor remain in business for next five years?

(iii) As the outsourcing of part X – 248 will start from July ‘1998, the bonus of Gemini enterprises based on
the accounting income, which Mr. Sen wishes to maximise will remain unchanged for the year 1997 - 98

Ans. 28: Evaluation of Alternative proposals

Alternative I :Repairs to existing machine: (`)
Cost of Repairs 19000 X 50 / 100 =`9500
Equivalent annual cost for 5 years (9500 / 3.791) 2506
Add: Running and Maintenance cost p.a net of tax (20000 X 50 / 100) 10000
Present value of cash outflows p.a 12506

Alternative II : Replace the old machine

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 -9-

Purchase cost of new machine 49000

Less: sale proceeds of old machine 5000
Net: Cash Outflow 44000
Equivalent annual cost for 10 years (44000 / 6.145) 7160
Add: Running and maintenance cost p.a. net of tax (14000 X 50 / 100) 7000
14160
Less : Tax Saving on depreciation (49000 / 10 ) X 50 / 100 2450
Present value of cash outflow p.a. 11710
Analysis : From the above analysis it is observed that alternative II i.e., replacement of old machine with a
new machine is more profitable, since the cash outflow p.a. will decrease by `796 (i.e. `12506 – `11710 ) if
old machine is replaced with new machine.

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 TRANSFER PRICING
U

Ans 9
(i) In this case there are two options available –
(a) Sell at the sub assembly stage (after completion of Div. A) @
Rs. 2000/-
Incremental cost in Div. A Rs 1,200/-
Contribution Rs 800/-
(b) Sell at the final product stage Rs. 3,000
Cost at Div. A and Div. B Rs(1200+1500) Rs 2,700
Contribution Rs 300
Therefore it is profitable to sell at the subassembly stage because of higher contribution, provided there is
a market.
Hence, if there is market at intermediate stage, first priority is to sell intermediary (sub
assembly).Therefore, 800 units should be sold as sale of intermediary.
The balance capacity available of (1000 – 800) = 200 units should be transferred to B and B should
complete the assembly and sell as final product, since the company can earn Rs. 300 per unit for each unit
of such sale.
(ii) If B Div. receives the subassembly at market price of Rs. 2,000, plus its own incremental cost of Rs. 1,500
will give total cost of Rs. 3,500, thereby yielding a loss of Rs. 3500 – Rs. 3000 = Rs. 500 per unit, whereas
the company makes a profit of Rs. 300 per unit.
In order to keep the manager of Div. B motivated, the profit earned of Rs. 300 per unit should be shared
between A and B. Hence transfer price will be variable cost of Div. A + 50% of profit earned in the final
product = 1200 + 150 = Rs. 1,350
(iii) Both Div. A and the Company make higher contribution by selling to intermediate market. If the market
demand increases to 1,000 units, the full quantity should be sold outside as intermediary and nothing
should be transferred to Div. B

Ans.10:
Transfer Price is Rs. 4,500 for each consulting day.
Profit mark-up = 150%
Let cost = x
150
Profit = x × = 1.5x
100
Cost + profit = Transfer price
x + 1.5x = 4,500
2.5x = 4,500
x = 1,800
∴Cost = Rs. 1,800
and profit = 1.5x = 1.5×1,800 = Rs. 2,700

Variable cost (80%) = Rs. 1,800× 80% = Rs. 1,440

Fixed cost (20%) = Rs. 1,800 ×20% = Rs. 360.

Scenario (i):
Every consultancy team is fully engaged. There is no idle time or spare capacity. Hence, transfer
price = Marginal cost plus opportunity cost
Marginal cost = Rs. 1,440
Saving for internal work = Rs. 200
Net Marginal Cost = Rs. 1,240
Opportunity cost is the lost contribution.
Lost contribution = Contribution from external client
= Fee charged from external client – Variable cost
= Rs. (4,500 – 1,440)
= Rs. 3,060.
∴Transfer price = Rs. 1,240 + 3,060
= Rs. 4,300 per consulting day per team.

Scenario (ii):
One team is idle. Idle time has no opportunity cost. Variable cost for internal work is Rs. 1,240
per consulting day. Second team is busy. Hence opportunity cost is relevant in case of second
team. Hence charge of second team is Rs. 4,300 per consulting day per team.
Average of charge of two teams = Rs. (1,240 + 4,300) / 2
= Rs. 2,770 per consulting day per team.

Scenario (iii):
New client offers a fee of Rs. 15,84,000
Duration: 5 days of 48 weeks ×2 teams = 480 days
Fee per day 15,84,000 / 480 = Rs. 3,300
Variable cost = Rs. 1,440
Contribution Rs. (3,300 – 1,440) = Rs. 1,860

Fee for consulting day for internal work:

Variable cost = Rs. 1,240
Contribution lost = Rs. 1,860
Fee to be charged = Rs. 3,100 per consulting day per team.

Ans.11:

100% capacity 4,000 tones (Maximum)

Distribution market 2,000 Tones
Processing unit 2,000 Tones

80% capacity 3,200 tones

Market 2,000 Tones
Processing unit 12,00 Tones

(a) 80% capacity – price Rs. 400 per ton (Rs.)

Particulars Basic unit Particulars Processing unit
Sales (3,200 * 400) 12,80,000 (24,000 * 40) 9,60,000
Raw materials (3,200 * 70) 2,24,000 Tr. Price (1,200 * 4,80,000
Variable cost (3,200 * 140) 4,48,000 400) 2,04,000
Fixed overhead (1,200 * 170)
3,00,000 1,20,000
9,72,000 8,04,000
Profit 3,08000 1,56,000
Total profit of the company = Rs. 4, 64,000

(b) 100% capacity – price Rs. 400 per ton (Rs.)

Particulars Basic unit Particulars Processing
unit
Sales (4,000 X 400) 16,00,000 (4000 X 320) 12,80,000
Raw materials (4,000 X 70) 2,80,000 Tr. Price (2,000 X 400) 8,00,000
Variable cost (4,000 X 140) 5,60,000 (2,000 X 170) 3,40,000
Fixed overheads 3,00,000 1,20,000
14,00,000 12,60,000
Profit 4,60,000 20,000
Total Profit of the Company = Rs. 4,80,000
(c ) 80% capacity- Market price @ Rs.360 & Transfer price to processing @ Rs. 400 per tonne
(Rs)
Particulars Basic unit Particulars Processing unit
Sales
(2,000 X 360) + (1,200 X 400) 12,00,000 (24,000 X 40)
Raw materials (3,200 X 70) 2,24,000 Tr. Price (1,200 X 400) 9,60,000
Variable Cost (3,200 X 140) 4,48,000 (1,200 X 170) 4,80,000
Fixed overheads 3,00,000 2,04,000
9,72,000
1,20,000
8,04,000
Profit 2,28,000 1,56,000
Total Profit of the Company = Rs. 3,84,000

(d) 100% capacity- Price Rs. 360 per tonne (Rs.)

Particulars Basic unit Particulars Processing units
Sales (4,000 X 360) 14,40,000
Raw material (4,0000 X 70) 2,80,000 Tr Price (2,000 X 360) 12,80,000
Variable overheads (4,000 X 140) 5,60,000 (2,000 X 170) 7,20,000
Fixed overheads 3,00,000 3,40,000
11,40,000
1,20,000
11,80,000
Profit 3,00,000 1,00,000
Total profit o the Company = 4,00,000

Comments :
At Rs. 400 per tonne, the processing unit will not be interested in buying more than 1,200 tonnes because the
profitability of the processing unit will be reduce from Rs. 1,56,000 to Rs. 2,000.
When the market price reduce to Rs. 360 per tonne the processing unit will not be interested in purchasing more than
1,200 tonnes because at this level it can maintain the same level of profit.
Even if the price is reduced to Rs.360 for the processing unit, it may not be interested in buying more than 1,200
tonnes as its profitability will be reduced from Rs.1,56,000 to Rs.1,00,000.
When the market price reduced to Rs.360 per tonne and the transfer price is maintained at Rs.400, the processing
unit may get its suppliers of 1,200 tonnes via open market at the price less than Rs.400 per tonne. This will increase
the profitability of the processing unit but reduced the profitability of the basic unit.
Thus the present policy market price for transfer pricing does not offer incentive to the processing unit. Hence cost
plus method should be restored to.

Ans. 12

(i) (a) At 80% level (in Rs)

-Textile unit -Process house

Sales (4,00,000 × 6) 24,00,000 Sales(1,50,000/100) × 825 12,37,500
Less Less
Raw material (4,00,000
× 3) 12,00,000 Transfer Price (1,50,000 × 6) 9,00,000
Variable cost (4,00,000
× 1.2) 4,80,000 Variable cost (1,500
× 80) 1,20,000
Fixed cost 4,12,000 Fixed cost 1,00,000
Profit 3,08,000 Profit 1,17,500

Overall profit = 3,08,000 + 1,17,500 = Rs 4,25,500

At 100% level

Sales (5,00,000 × 6) 30,00,000 Sales (2,50,000/100) × 725 18,12,500

Less Less
Raw material (5,00,000 × 3) 15,00,000 Transfer Price (2,50,000
× 6) 15,00,000

Variable cost (5,00,000

× 6,00,000 Variable cost 2,00,000
1.2)
Fixed cost 4,12,000 Fixed cost 1,00,000
Profit 4,88,000 Profit 12,500

Overall profit = 4,88,000+12,500 = Rs 5,00,500

 (b) At 80% level (market price 5.60 and transfer price 6/-) (in Rs)

Textile unit Process house

Sale (2,50,000 × 5.6) 1400000

(1,50,000 × 6.0) 900000

23,00,000
Less
Raw material (4,00,000 × 3) 12,00,000

Variable cost (4,00,000

× 1.2) 4,80,000
Fixed cost 4,12,000
Profit 2,08,000 Profit 1,17,500

Overall profit = 2,08,000+1,17,500 =Rs 3,25,500

(c) Sales 100% level at (5.60) (in Rs)

Sale (5,00,000 × 5.6) 28,00,000 Sales(2,50,000 × 725) 18,12,500

Less Less

Raw material (5,00,000

× 3) 15,00,000 Transfer Profit (2,50,000
× 5.6) 14,00,000

Variable cost (5,00,000 × 1.20) 6,00,000 Variable cost (2,500 × 2,00,000

80)
Fixed cost 4,12,000 Fixed cost 1,00,000
Profit 2,88,000 Profit 1,12,500

Overall profit = 2,88,000 + 1,12,500 =4,00,500

(ii) Comments on the profitability of processing units:-

Transfer price (Rs) Profit (Rs)

(a) 80% capacity 6.00 1,17,500
100% capacity 6.00 12,500
(b) 80% capacity 6.00 1,17,500
(c) 100% capacity 5.60 1,12,500

Processing house will not be interested to buy more than 1,50,000 meters from textile units.

Ans.: 13 (Rs.)
Particulars BRITE LITE TITE
Selling Price 300 60 700
Variable costs 150 40 590
Contribution 150 20 110
Alternative I
Division AD
(Rs)
Contribution
(15,000 units of BRITE X Rs.150) 22,50,000
(40,000 units of LITE X Rs.20) 8,00,000
Total Contribution 30,50,000
Fixed Expenses 20,00,000
Profit (a) 10,50,000

Division CD
(Rs)
Contribution (5,000 units of TITE X Rs.110) 5,50,000
Fixed Expenses 4,00,000
Profit (b) 1,50,000
Overall profit of the company (a + b) Rs.12,00,000
Alternative II
Division AD
(Rs)
Contribution
(15,000 units BRITE outside customer @ Rs.150) 22,50,000
(5,000 units of BRITE Division CD @ 150) 7,50,000
(20,000 units of LITE (limited capacity) @ Rs.20) 4,00,000
Total contribution 34,00,000
Fixed expenses 20,00,000
Profit (a) 14,00,000

Division CD
Extra cost of labour Rs.50 and variable cost Rs.640
Hence contribution Rs.700 - Rs.640 = Rs.60
(Rs)
Contribution (5,000 units @ Rs.60) 300,000
Fixed Expenses 400,000
Loss (b) 100,000
Overall profit of the company (a-b) 13,00,000

Alternative III
Division AD
Price of BRITE to CD reduced by Rs.50
Hence Contribution/unit Rs.250 – Rs.150 = Rs.100
(Rs)
Contribution
(15,000 units of BRITE outside party @ Rs150) 22,50,000
(5,000 units of BRITE to CD @ Rs100) 5,00,000
(20,000 units of LITE to capacity @ Rs20) 4,00,000
Total contribution 31,50,000
Fixed expenses 20,00,000
Profit (a) 11,50,000
Division CD
BRITE from AD Rs.250 contribution Rs.700-Rs.590 = Rs.110 per unit
Lobour and overhead Rs.340, Variable costs Rs.590 (Rs.)
Contribution (5,000 units @ Rs.110) 5,50,000
Fixed expenses 4,00,000
Loss (b) 1,50,000
Overall profit of the company (a+b) Rs.13,00,000

Alternative 1V
Division AD (Rs.)
Contribution
(15,000 units BRITE outside customer @ Rs.150) 22,50,000
(10,000 units of BRITE to CD @ Rs.250 i.e., contribution @ Rs.100) 10,00,000
Total contribution 32,50,000
Fixed expenses 20,00,000
Profit (a) 12,50,000

Division CD (Rs.)
Contribution
(10,000 units with BRITE of AD @ Rs.110) 11,00,000
(2,000 units with imported component @ Rs.110) 2,20,000
Total contribution 13,20,000
Fixed expenses 11,70,000
Profit (b) 1,50,000
Overall profit of the company (a+b) Rs.14,00,000
Recommendation on best alternative
Alternative (iv) seems to be the best because it leads to the maximum profit of Rs. 1400000 for the company. But
management should consider whether stopping the production of Lite altogether will, in any way, be detrimental to
company’s interests.
Negotiated price of Rs. 240 per unit.
The price of Rs. 240 per unit will be acceptable to AD because it will lead to a contribution of Rs. 22.50 per hour i.e.
(Rs. 240-Rs.150)÷4 hours. If this proposal is not accepted AD will have to produce Lite which will yield a
contribution of only Rs. 20 per hour, i.e. (Rs. 60-Rs.40)÷1 hour.

Ans.: 14: Alternative I

U

AJ Rs. DJ Rs.
Sales : outside (18,000x15) 2,70,000 Sales (2,000 x 105) 2,10,000
DJ (2,000x10) 20,000 Variable Costs (2,000 x 99) 1,98,000
Total 2,90,000 Contribution 12,000
Less V. Costs( 20,000x8.50) 1,70,000 Interest 1,000
Net Contribution 1,20,000 Net Contribution 11,000
Total Group contribution =Rs.1,31,000
Alternative II
Sales : (20,000x15) 3,00,000 Sales (2,000 x 105) 2,10,000
Variable costs(20,000x8.50) 1,70,000 Variable Costs (2,000 x104) 2,08,000
Contribution 1,30,000 Contribution 2,000
Interest 1,000
Net Contribution 1,000
Total Group contribution = Rs.1,31,000

Alternative III
Sales : (20,000x15) 3,00,000 Sales (2,000 x 105) 2,10,000
Variable costs(20,000x8.50) 1,70,000 Variable Costs (2,000x 104) 2,08,000
Contribution 1,30,000 Contribution 2,000
Interest 1,000
Net Contribution 1,000
Total Group contribution = Rs.1,31,000

Alternative IV
Sales : (22,000x15) 3,30,000 Sales (2,000 x 105) 2,10,000
Variable costs 1,87,000 Variable Costs(2,000 x 104) 2,08,000
Over time 4,000 1,91,000 Contribution 2,000
Contribution 1,39,000 Interest 1,000
Net Contribution 1,000
Total Group contribution = Rs.1,40,000

Comments:
Alternative 1: AJ can supply part 35 to DJ at Rs.10 because the variable cost is Rs.8.50 only and
by this transaction a contribution of Rs.1.50 is available. But the overall contribution which
would have been Rs.13,000 if the part has been sold to outside buyers, would come down to
Rs.1,20,000. DJ however, will earn a net contribution of Rs.11,000. Thus the divisional
performance of AJ will go down and that of DJ will boost up at the cost of AJ.
Alternative 2: AJ will maintain its performance but DJ’s performance will be reduced to a
contribution of Rs.1,000 only.
Alternative 3: AJ will maintain its performance but DJ’s performance will be reduced to a
contribution of Rs.1,000 only. In these three cases the group income will not change but the
performance of the individual divisions will vary.
Alternative 4: AJ’s performance will boost up but DJ’s performance will remain at the low level
.DJ cannot show better performance except at the cost of AJ. Hence AJ should not reduce the
price particularly when it has an assured market for part 35 at Rs.15 each.

Ans.: 15:
 Statement showing profitability of two divisions at two different levels of output
using different transfer prices
No. of bottles 8,00,000 12,00,000
Rs. Rs.
Sales value (Packed Product) : (A) 91,20,000 1,27,80,000
Less : Costs
Product Manufacturing Division 64,80,000 96,80,000
Bottle Manufacturing Division 10,40,000 14,40,000
Total costs : (B) 75,20,000 1,11,20,000
Profit :{(A) – (B)} 16,00,000 16,60,000
Profit pro-rated to Bottle Mfg. Division and Product
Mfg. Division.
Share of Bottle Manufacturing Division:
16,00,000 × 10,40,000/75,20,000 2,21,276
16,60,000 × 14,40,000/1,11,20,000 2,14,964
Balance profit relates to Product Mfg. Division 13,78,724 14,45,036
16,00,000 16,60,000
Rs. Rs.
Transfer prices of bottles
Costs 10,40,000 14,40,000
Profit as computed above 2,21,276 2,14,964
Total price 12,61,276 16,54,964
Transfer price per bottle Rs. 1.577 Rs. 1.379
From the above computations, it is observed that shared profit relative to the cost involved is Rs.
2,21,276 (Re. 0.2766 per bottle) at 8,00,000 production level and Rs. 2,14,964 (Re. 0.179 per
bottle) at 12,00,000 production level. The profit of Product Mfg. Division is Rs.13,78,724
(Rs.1.723 per bottle) at 8,00,000 production level and Rs.
14,45,036 (Rs. 1.2042 per bottle) at 12,00,000 production level.

Profitability based on market price

No. of bottles 8,00,000 12,00,000
Bottle Mfg. Division Rs. Rs.
Market price 14,00,000 20,00,000
Less: Cost 10,40,000 14,40,000
Profit (i) 3,60,000 5,60,000
Product Mfg. Division
Sales 91,20,000 1,27,80,000
Less: Bottle cost 14,00,000 20,00,000
Product cost 64,80,000 96,80,000
Profit (ii) 12,40,000 11,00,000
Total profit : (i) + (ii) 16,00,000 16,60,000

Profit based on Profit based on

cost (Rs.Lakhs) Market price (Rs.Lakhs)
Production level Bottle Product Bottle Product
Mfg. Div. Mfg. Div. Mfg. Div. Mfg. Div.
8,00,000 bottles 2.21 13.79 3.60 12.40
12,00,000 bottles 2.15 14.45 5.60 11.00
Observations:
 1. Market price methods gives a better profitability to Bottle Mfg. Division at both the
production levels.
2. Market price method gives a lower profitability to Product Mfg. Division as compared to Bottle
Mfg. Division.
3. Under Cost-based method, there is a better profit at lower level of production in Bottle
Mfg. Division. However in Product Mfg. Division 12,00,000 production level gives a higher
profit. But in Market price method, the position is quite reverse.

Ans. 16 (i) Statement of contribution

(a) When component is purchased by Division B from outside (Rs.)
Division A Nil
Division B Sales (2000x 400) 8,00,000
Less: Cost of Purchase (2000x 200) 400000
Variable costs (200x 150) 300000 3,80,000 1,00,000
Company’s total contribution 1,00,000

(b) When component is purchased from Division A by Division B (Rs.)

Division A
Sales (2000x 220) 4,40,000
Less: Variable costs (2000x 190) 7,00,000 60,000
Division B
Sales (2000x 400) 8,00,000
Less: Variable Costs:
Purchase cost in Division A (2000x 220) 440000
Variable cost in Division B (2000x 150) 300000 7,40,000 60,000
Company’s total contribution 1,20,000

Thus, it will be beneficial for the company as a whole to ask Division B to buy the component
from Division A.
(ii) Statement of total contribution if Division A could be put to alternative use:
Division A:
Contribution from alternative use of facilities
Division B: 30,000
Sales (2000x 400) 8,00,000
Less: Variable costs:
Cost of purchase (2000x 400) 400000
Division B (2000x 150) 300000 7,00,000 1,00,000
Company’s total contribution 1,30,000

Since, the company’s contribution when component is purchased from outside, shows as
increase of Rs.30,000 as compared to when there is inter departmental transfer. Hence, it will be
beneficial to purchase the component from outside.

(iii) Statement of total contribution when component is available from outside at Rs. 185
Division A: Nil
Division B:
Sales (2000x 400) 8,00,000
Less: Variable costs:
Cost of purchase (2000x 185) 370000
Division B (2000x 150) 300000 6,70,000 1,30,000
Company’s total contribution 1,30,000
If the component is purchased by Division B from Division A, the contribution is only
Rs.1,20,000 as calculated under above. Hence it will be beneficial to buy the component from
outside.
(iv) Fixations of transfer price
(a) When there are no alternative uses of production facilities of Dept. A:
In such a case the variable cost i.e. Rs.190 per component will be charged.
(b) If facilities of Division A can be put to alternative uses:
(Rs.)
Variable cost 190
Opportunity cost 15
Transfer price 205

(c) If market price gets reduced to Rs.185 and there is no alternative use of facilities of Division
A. the variable cost of Rs.190 per component should be charged.

Ans.17U For the budgeted level of activities and expenses of LD the various costs and prices can
U

be worked out as follows:

(Rs.)
Total overheads 7,56,000
Less: Variable overheads 4,20,000
Fixed overheads per year 3,36,000

LXU
U
LY
U

Variable overheads 4,20,000 x 90,000U

U
4,20,000 x 1,20,000
U

2,10,000 2,10,000
1,80,000 2,40,000

Fixed overheads per year 3,36,000 x 90,000U

U
3,36,000 x 1,20,000U
U

At the budgeted level of activities 2,10,000 2,10,000

1,44,000 1,92,000

The costs and selling prices of the products of LD for normal sale to outside parties will be as
under: (Rs.per kg.)
Particulars LX LY
Direct material 36 28
Direct wages 30 20
Variable overheads 60 40
Total Variable cost: 126 88
Fixed costs 48 32
Total costs 174 120
Add: Mark-up 50% 87 60
Selling price 261 180

Labour hours calculated as under:

Particulars LX LY
Direct wages 30 20
Wages rate (Rs./hr.) 5 5
Direct labour hr. 6 4

Committed production of LY of 6,000 kg. would involve labour of 6000 x 4 = 24,000

Balance labour available for:
 Production of LX = 42,000-24,000 = 18,000 Hrs.
Production of LY = 18,000 hrs. / 6 DLH = 3,000 Kg.

Cost estimate of KX it KD purchase Lx from LD at normal prices

(Rs.)
Cost of LX 261
Processing materials & Wage costs 30
Variable Overheads 4
Total Variable Cost 295

Profit Statement of LD & KD

(1) Transfer price based on total cost
LD Rs. KD Rs.
Sales LX (3000 x 261) 7,83,000 Sales KX (2000 x 300) 6,00,000
LY (6000 x 180) 10,80,000
Total Sales 18,63,000
Variable cost Variable cost (2000 x 295) 5,90,000
LX (2000 x 122) 2,44,000
(1000 x 126) 1,26,000
LY (6000 x 88) 5,28,000
Total variable cost
8,98,000
Fixed costs Fixed cost 1,00,000
3,36,000
Total costs Total cost 6,90,000
Profit 12,34,000 Loss (-)90,000
6,29,000

Total profit for the company = 6,29,000 – 90,000 =Rs.5,39,000

(ii) Transfer price based on total Cost after adjustment for selling expenses
LD Rs. KD Rs.
Sales LX (2000 x 257) 5,14,000 Sales (2000 x 300) 6,00,000
(1000 x 261) 2,61,000
LY (6000 x 180) 10,80,000
Total Sales 18,55,000
Less: Costs as above 12,34,000 Total costs (690000-4 x 2000) 6,82,000
Profit 6,21,000 Less (-)82,000

(iii) Total profit to the company =6,21,000-82,000 =Rs.5,39,000

LD Rs. KD Rs.
Sales LX (2000 x 122) 2,44,000 Sales KX (2000 x 300) 6,00,000
(1000 x 261) 2,61,000
LY (6000 x 180) 10,80,000 Variable cost (2000 x 156) 3,12,000
Fixed costs 1,00,000
Total Sales 15,85,000 Total costs 4,12,000
Less: Total Costs as above 12,34,000
Profit 3,51,000 Profit 1,88,000

(iv) Total profit for the Company =3,51,000 + 1,88,000 =Rs.5,39,000

LD Rs. KD Rs.
Sales LX (3000 x 152) (a) 3,04,000 Sales KX (2000 x 300)(a) 6,00,000
(Including Rs.30 oT)
 (3000 x261) 7,83,000
LY (6000 x 180) 10,80,000 Variable cost (2000 x 186) 3,72,000
Total Sales 21,67,000 1,00,000
Variable cost
LX (2000 x 152) 3,04,000
(3000 x 126) 3,78,000
LY (6000 x 88) 5,28,000
12,10,000
Total variable cost
3,36,000
Fixed costs
Total costs (b) 15,46,000 Total costs (b) 4,72,000
Profit (a-b) 6,21,000 Profit (a-b) 1,28,000
Total profit for the company =6,21,000 + 1,28,000 Rs.7,49,000

Ans.18 (i) Department ‘A’

By product BYEA Production 3000 Tonnes (Rs.)
Sales Income (30% of 3000 Tonnes @ Rs.200) 1,80,000
(70% of 3000 Tonnes @ Rs.1200) 25,20,000
Total 27,00,000

(ii) Department ‘B’

Production of RESP (3000 x 200,i.e.,600000 litres) (Rs.)
Sales (600000 litres @ Rs.15) (a) 90,00,000
Costs: Opportunity Cost of BYEA 27,00,000
Variable Costs (600000 @ Rs.4) 24,00,000
Fixed Costs 12,00,000
Total (b) 63,00,000
Profit (a-b) 27,00,000

(iii) Department ‘C’ (ltrs.)

Production of POTS (600000 x 1.6) 9,60,000
5% wastage 48,000
9,12,000

(a) Sales
Pack (ML) % Litres No.of packs Price/Pack Sales Value
Rs. Rs
200 75 6,84,000 34,20,000 2.50 85,50,000
300 25 2,28,000 7,60,000 3.50 26,60,000
Total 9,12,000 1,12,10,000

(b) Costs
(Rs.)
RESP (600000 x 15) 90,00,000
Mfg. Cost (912000 x 1.50) 13,68,000
Total 1,03,68,000

Profit (a-b) 8,42,000

(iv) Total Profit under the existing arrangement
A-27,00,000 + B-27,00,000 + C-8,42,000 =Rs.62,42,000
Under the new proposal
(Ltrs.)
Total quantity of RESP purchased (3000 x 120) 3,60,000
Production of POTs (360000 x 1.60) 5,76,000
Amount of Saleable POTs (576000 x 95/100) 5,47,200

(a) Sales
Pack (ML) % Litres No.of packs Price/Pack Sales Value
Rs. Rs
200 75 4,10,400 2,05,200 2.50 51,30,000
300 25 1,36,800 4,56,000 3.50 15,96,000
Total 5,47,200 67,26,000

(b) Costs (Rs.)

RESP (360000 x 6.25) 22,50,000
Mfg. Cost (547200 x 1.50) 8,20,000
Fixed Overhead of Dept. B 12,00,000 42,70,800

Profit (a)- (b) 24,55,200

Analysis : Since under the new proposal profit gets lowered from Rs.62,42,000 to Rs.24,55,200
the proposal is not acceptable.

Ans.19. The transfer price will be notional revenue to S and notional cost to T.
(a) S will continue to produce more output until the costs of further production exceed the
transfer price revenue.
(b) T will continue to want to receive more output from S until its net revenue from further
processing is not sufficient to cover the incremental transfer price costs.

Output Units Division S Incremental Cost Division T Incremental Costs

Rs. Rs.
600 - -
700 100 300
800 140 280
900 160 250
1000 200 220
1100 250 200
1200 350 150

Since S will continue to produce more output if the transfer price exceeds the incremental
costs of production, a price of at least Rs.200 per 100 units (Rs. 2 per unit ) is required to
‘persuade’ the manager of S of produce as many as 1,000 units, but a price in excess of
Rs.250 per 100 units would motivate the manager of S to produce 1,100 units (or more).
By a similar argument, T will continue to want more output from S if the incremental revenue
exceed the transfer costs from S. If T wants 1,000 units the transfer price must be less than
Rs.220 per 100 units. How ever, if the transfer price is lower than Rs.200 per 100 units, T
will ask for 1100 units from S in order to improve its divisional profit further.
In summary
(a) The total company profit I maximised at 1,000 units of output.
(b) Division S will, want to produce 1,000 units, no more and no less, if the transfer price is
between Rs.2 and Rs.2.50(Rs.200 to Rs.250 per 100 units).
 (c) Division T will want to receive and process 1,000 units, no more and no less, if the
transfer price is between Rs.2 and Rs.2.20
(d) A transfer price must therefore be selected in the range Rs.2.00 to Rs.2.20 per
unit(exclusive).
Thus, if a price of Rs.2.10 per unit is selected, profits at 1,000 units of output would be;
(Rs.)
Particulars Division S Division T Total
Sales/Net revenue 2,100 4,000 4,000
Costs 1,200 2,100 1,200
Profit 900 1,900 2,800

At a transfer price of Rs.2.10 any increase in output above 1,000 units, or shortfall in output
below this amount, would reduce the profits of company as a whole, but also the divisional
profits of S and T.

Ans.20. (a)The problem

The overall company interest is obviously to produce 1,400 units which will given the maximum
profit. The problem is to fix the transfer price (TP) with which both X and Y will find 1,400 units
to be the optimum output for them severally.
Let us analyse and examine the incremental costs at X and the incremental revenue at Y
Level of output Incremental Cost for Incremental Net Company profit
X revenue for Y Rs.
1,000 - - 3,100
1,100 100 300 3,300
1,200 120 240 3,420
1,300 130 190 3,480
1,400 150 170 3,500
1,500 180 130 3,450
1,600 220 80 3,310

A price of at least Rs. 150 per 100 units (Rs.1.50 per unit) is required to induce the manager of X
to produce as many as 1,400 units; but the price must not exceed Rs.180 per 100 units, for in that
event X would like to produce 1,500 units (or more)
Similarly, Y will keep producing so long as the incremental revenues exceed the transfer cost
from X. in order that Y wants 1,400 units, the TP must be lower than Rs.170 per 100units; but it
shall not be lower than Rs.130,for Y will then ask for 1,500 units from X to increase his (Y’s)
divisional profit further.
If the TP is selected at Rs.1.60 per unit, profits at 1,400 units of output would be
(Rs.)
Particulars X Y Company
Sales / Net revenue 2,240 4,900 4,900
Costs 1,400 2,240 1,400
Profit 840 2,660 3,500

At a TP of Rs.1.60 any increase in output above 1,400 units or shortfall in output below this level
would reduce the profits of the company as a whole and also the divisional profits of X and y.
With Rs.1.60 as TP, neither X or Y will like to deviate from 1,400 units, which incidentally is
also wanted y the corporate Management.

Ans. 21. (i) Calculation of transfer price to be quoted by Alfa to Beta based on residual
income
(Rs.)
Fixed Costs 80
Return on capital employed (Rs.750 lakhs x 12/100) 90
Residual income desired 100
Total 270
Desired contribution per unit =Selling price p.u.-Variable cost p.u. =Rs.180- Rs.60 =Rs.20
p.u.
Total desired contribution =12,00,000 units x Rs.20 p.u =Rs.240 lakhs
Minimum contribution to be earned from sale of additional 3 lakh units.

Rs.270 lakhs-Rs.240 lakhs =Rs30 lakhs.

Contribution p.u. on additional 3,00,000 units =Rs.30,00,000/3,00,000 units = 10 p.u.

Variable cost of modification per unit =Rs.5

Hence, the minimum transfer price per unit to be quoted will be

=Rs.160 + 10 + 5 =Rs.175
(ii) If Beta can buy from outside at less than the variable cost of manufacture, Rs.165, than only
the decision to transfer at the price of Rs.175 will become sub-optimal for the group as a whole.

Ans.22. Working Notes:

(i) Computation of Sales revenue from Foam Division
(Rs.)
Sales of Foam Division to outside customers (Rs.1,600-Rs.200) 1,400
Less: Variable Mfg. Costs (Rs.1,200-Rs.200) 1,000
400
Mark-up on outside Sale (Rs.400/Rs.1000)x 100=40%
Transfer Price of Foam to Upholstery Division 280
Sales of Foam Division to outside Customers 1,400
Total 1,680
(ii) Variable Mfg. Cost of Upholstery Division (Rs.’000)
=(Rs.680-Rs.200 + Rs.280) =Rs.760

(iii) Computation of Traceable Administration Expenses ( Rs.’000)

Divisions Foam Carpets Upholstery Total
Given Administration expenses 134 116 172 422
Less: Common expenses (10%
of Gross Profit) 40 40 50 130
Traceable Administration
Expenses 94 76 122 292

(iv) Computation of Traceable Selling Expenses ( Rs.’000)

Divisions Foam Carpets Upholstery Total
Given Selling expenses 202 210 232 644
Less: Common expenses (2.5%
of Sales) 40 30 30 100
Traceable Selling Expenses 162 180 202 544

(a) Revised operating statement (using Contribution approach) (Rs.000)

Divisions Foam Carpets Upholstery Total

Sales Revenue 1,680 1,200 1,200 4,080
Less: Variable Mfg. Costs 1,200 700 760 2,660
Contribution (i)
Traceable Costs: 480 500 440 1,420
Fixed Mfg. Costs
Admn. Expenses - 100 20 120
Selling Expenses 94 76 122 292
Total (ii) 162 180 202 544
Operating Income (i)-(ii) 256 356 344 956
Less: Common expenses 224 144 96 464
Net Income of the Company 230
234

(b) (i) Computation of contribution Margin (Rs.’000)

Contribution X 100
U

Contribution Margin Ratio % = Sales

(Ranks)
Foam (Rs.480/Rs.1680) x100 28.57% III
Carpets (Rs.500/Rs.1200) x 100 41.67% I
Upholstery (Rs.440/Rs.1200) x 100 36.67% II

(ii) Computation of Net Contribution Ratio (Rs.’000)

Net Contribution Ratio (%) = Net Contribution X 100

U

Sales

Foam (Rs.224/Rs.1680) x100 13.33% III

Carpets (Rs.144/Rs.1200) x 100 12% I
Upholstery (Rs.96/Rs.1200) x 100 8% II

It is observed from the above analysis that foam Division’s Manager argument I correct when we
look at the calculation given above which shows that even though contribution margin ratio of
Foam Division is lower, the divisions ranking is higher based on the Net Contribution Ration.

The use of contribution approach for reporting is more realistic for assessing the performance of
various divisions as it considers variable and traceable costs only and avoids common costs while
finding out profitability. This approach enables the management to rightly interpret the
information. Further, pricing of internal transfers at market price will give due credit to specific
profits centre i.e. transferor.

Ans. 23
U

The desired rate of return is 28% on investments. Investments include: (i)

Fixed assets after depreciation
(ii) Net working capital.
In the question, current assets and debtors are given but current liabilities and creditors are not
indicated. Therefore, these are assumed to have nil value.
Investments
Fixed assets 5,00,000
Net working capital Rs.
Current assets 3,00,000
Debtors 2,00,000 5,00,000
Total investments 10,00,000
The desired rate of return is 28%
The profit margin will be Rs. 280000
Budgeted volume 400000unit
 Rs.
Profit margin per unit (Rs. 280000 ÷ 400000 units) 0.70
Fixed cost per unit 2.00
Variable cost per unit 10.00
Transfer price per unit 12.70

Ans.24 (i) Profit =20% return on average assets employed

Average assets (Rs.Lakhs)
Sundry Debtors 2
Inventories 5
Plant & equipment 5
Total 12

Profit =Rs.12,00,000 x 20 /100 =Rs.2,40,000

(2) Budgeted sales revenue (2,00,000 units of component X) (Rs.Lakhs)
Fixed cost 5.00
Variable cost (2,00,000 units @ Rs.1) 2.00
Profit 2.40
Total Sales 9.40

Selling price per unit of component X =Rs.9,40,000/2,00,000 units =Rs.4.70 per unit
Options in hand with Division A
Option 1 -Sell 1,50,000 units in market and transfer 50,000 units to Division B
Option 11 -Sell only 1,50,000 units in market.
Statement of profitability of Division A under two options (Rs.)
Particulars Option-I Option-II
Sales (1,50,000 units @ Rs.4.70) 7,05,000 7,05,000
Transfer to Division-B (50,000 units @ Rs.2) 1,00,000 -
Total Sales revenue 8,05,000 7,05,000
Less: variable overhead 2,00,000 1,50,000
Contribution 6,05,000 5,55,000
Less: Fixed Cost 5,00,000 4,75,000
Profit (a) 1,05,000 80,000
Capital employed (b) 12,00,000 10,00,000
Return on capital employed (a)/(b)X100 8.75% 8%

Analysis : From the analysis of the above it is observed that under Option-I, Division A’s, Profit
and ROCE is increased by Rs.25,000 and 0.75% respectively. Hence Option-I is suggested for
Division-A.

Ans. 25
(i) The company as a whole will not benefit if Division C bought the component from an outside supplier at
Rs.135/- per unit.
Rs.
Purchase cost from outside supplier 1,35,000
(1,000 units × Rs.135 per unit)
Less: Saving in variable cost of division
A by reducing Division’s output 1,20,000
(1,000 units × Rs.120 per unit)
 Net cost (benefit) to the company as a whole 15,000
The company as a while will not benefit, as it will be required to incur an additional cost of Rs.15,000 if
Division C bought the component from outside supplier.
(ii) The company will be benefited if C purchased the component from an outside supplier and Division A uses
the facilities for other activities.
Rs. Rs.
Purchase cost from outside supplier 1,35,000
(1,000 units × Rs.135)
Less: Saving in variable cost of Division A for the units 1,20,000
purchased by Division C from outside
(1,000 units × Rs.120 per unit)
Cash operating saving of Division A for the use of facilities 18,000
U
1,38,000
U

for other activities

Net cost (benefit) to the company as a whole (3,000)
U

It is advisable that Division C should purchase the component from outside sources as this decision will
benefit the company by Rs.3,000.
(iii) The company will be benefited if C purchase the component from an outside supplier and there is no
alternative use of Division A’s facilities.
Rs.
Purchase cost from outside supplier 1,15,000
(1,000 units × Rs.115)
Less: Saving in variable cost of Division A by reducing division’s 1,20,000
output
(1,000 units × Rs.120) U
.
Net cost (benefit) to the company (5,000)
U

It is advisable that the Division C should buy the component from outside as this decision will benefit the
company by Rs.5,000.

Ans 26 (i) Working notes:

1. Contribution per hour of Super-chips and Okay-chips:
Super-chips Okay-chips
Selling price per unit (Rs.) 600 120
Less: Variable cost per unit (Rs.) 300 80
Contribution per unit (Rs.) 300 40
Hours required per unit 2 0.5
Contribution per hour 150 80
(Rs.300/2 hrs) (Rs.40/0.5 hrs)
2. Details of hours utilized in meting the demand of 15,000 units of Super-chips and utilizing the
remaining hours for Okay-chips out of available hours of 50,000 per annum:
Rs.
Hours utilized for manufacturing 15,000 units of Super-chips 30,000
(15,000 units × 2 hours)
Hours utilized for manufacturing 40,000 units of Okay-chips 20,000
U

(40,000 units × 0.5 hours)

 50,000
U

3. Contribution of a process control unit (using an imported complex circuit board):

Rs.
Selling price per unit: (A) 1,400
Variable costs
Circuit board (Imported) 600
Other parts 80
Labour cost (5 hours × Rs.100) 500
Total variable costs: (B) 1,180
Contribution per unit (Rs.) : [(A) – (B)] 220
4. Contribution of process control unit (using a Super-chips):
Rs.
Selling price per unit: (A) 1,400
Variable costs
Super-chip 300
(Material + Labour costs)
Other parts 80
Labour (6 hours × Rs.100) 600
Total variable costs: (B) 980
Contribution per unit (Rs.) : [(A) – (B)] 420
5. Incremental contribution per unit of a process control unit, when instead of using imported
complex circuit board Super-chip is used:
Rs.
Incremental contribution per unit (Rs.420 – Rs.220) (Refer to W. N. 3&4) 200
(ii) Super-chips to be transferred to Mini Computer Division to replace Circuit Boards:
Out of 50,000 available hours 30,000 hours are utilized for meeting the demand of 15,000 unit of
Super-chips, the rest 20,000 hours may be used for manufacturing 40,000 Okay-chips, which yields a
contribution of Rs.40 per unit or Rs.80/- per hour (Refer to working note 1) or a contribution of Rs.160
per two equivalent hours.
In case the company decides to forego the manufacturing of 20,000 units of Okay-chips in favour of
5,000 additional units of Super-chips to be used by Mini-Computer division (instead of complex
imported Circuit Board) for manufacturing process control units. This decision would increase the
existing contribution of Mini-computer Division by Rs.200/- per two-equivalent hours (Refer to working
note 5).
Hence the entire requirement of 5,000 units of Super-chips be produced and transferred to Mini-
Computer Division.
(ii) Minimum transfer price of Super-chip to Mini Computer Division:
Variable cost of a Super-chip + Opportunity cost of foregoing the production
of an Okay-chip and using craftsmen time for
Super-chip
= Rs.300 + 2 hours × Rs.80
= Rs.460
(iii) Super –chips to be produced for the production of 12,000 units of process control units:
After meeting out the order of 15,000 Super-chips per year, the concern is left out with 20,000 hours.
Use of Super-chips for control units production would increase the existing contribution of Mini-
 Computer Division by Rs.200/- per unit. Out of the remaining 20,000 craftsmen hours, 10,000 units of
Super-chips can be made, which may be used for the production of 10,000 process control units.

Ans 27
(i) Statement of the overall profit of the company
(By harvesting 2,000 kgs of oil seeds, processing it into edible oil & selling the same in 2 kg cans)
Harvesting Oil Mill Marketing Total Rs.
Division Division Division
Output of each 2,000 kgs of 1,000 kgs. of 500 cans of 2
department oil seed oil produced kg each
Total costs
Variable cost (Rs.) : (A) 5,000 10,000 1,875 16,875
(2,000 kgs × (1,000 kgs × (500 ×
Rs.2.50) Rs.10) Rs.3.75)
Fixed cost (Rs.): (B) 10,000 7,500 4,375 21,875
(2,000 kgs × (1,000 kgs × (500 ×
Rs.5) Rs.7.50) Rs.8.75)
Total cost (Rs.): (C) = 15,000 17,500 6,250 38,750
[(A)+(B)]
Sales revenue (Rs.): (D) 75,000
(500 cans × Rs.150)
Profit (Rs.) [(D) – (C)] 36,250
(ii) Working note:
(a) Total Contribution = (Sales revenue – total variable cost)
= Rs.75,000 – Rs.16,875 = Rs.58,125
(b) Amount of shared contribution in relation to variable costs:
Rs.5,000
Harvesting Division = Rs.58,125 × = Rs.17,222
Rs.16,875

Rs.10,000
Oil Mill Division = Rs.58,125 × = Rs.34,445
Rs.16,875

Rs.1,875
Marketing Division = Rs.58,125 × = Rs.6,458
Rs.16,875
Computation of Transfer Price (for internal transfers) under the following pricing methods:
(1) Shared contribution in relation to variable costs:
Transfer price from harvesting Division to Oil Mill Division
= Variable cost of Harvesting Division + Shared contribution of Harvesting Division in relation to
variable costs
= Rs.5,000 + Rs.17,222 (Refer to working note 2) = Rs.22,222
Transfer price from Oil Mill Division to Marketing Division
= Transfer price from Harvesting Division to Oil Mill Division + Variable cost of Oil Mill
Division + Shared contribution of Oil Mill Division in relation to variable costs
(Refer to working note 2)
= Rs.22,222 + Rs.10,000 + 34,445
 = Rs.66,667
(2) Market price:
Transfer price from Harvesting Division to Oil Mill Division
= Market price of 2,000 kgs of Oil seeds transferred to Oil Mill Division
= 2,000 kgs. × Rs.12.50 = Rs.25,000
Transfer price from Oil Mill Division to Marketing Division
= Market price of 1,000 kgs of edible oil
= 1,000 of kgs × Rs.62.50 – Rs.62,500
(iii) Statement of profitability (under different transfer prices method)

From Harvesting From Oil Mil to From Marketing

Division to Oil Marketing Division Division to market
Mill Division (500 cans of 2
Kgs.)
Rs. Rs. Rs.
Shared contribution method
Transfer price: 22,222 66,667 75,000
(Refer to (1) above)
Less: Transfer price __ 22,222 66,667
(Refer to (ii) above)
Less: Variable cost 5,000 10,000 1,875
Less: Fixed cost 10,000 7,500 4,375
(Refer to (i) above)
Profit 7.222 26,945 2,083
Market price method
Transfer price 25,000 62,500 75,000
(Refer to (2) above)
Less: Transfer in price __ 25,000 62,500
(Refer to (ii) above)
Less: Variable cost 5,000 10,000 1,875
(Refer to (ii) above)
Less: Fixed cost 10,000 7,500 4,375
(Refer to (i) above)
Profit 10,000 20,000 6,250
Decision: Divisional Manager of Harvesting Division would prefer the use of market price method for
transferring 2,000 kgs of oil seeds to Oil Mill Division because its usage increases the profit by Rs.2,778
(Rs.7,222) over the shared contribution method.
Whereas Oil Mill Division manager would prefer the use of shared contribution method over the market
price method because its use would increase its profit by Rs.6,945 (Rs.26,945 – Rs.20,000). Similarly
Marketing Divisional Manager would be benefited to the extent of Rs.4,167 (Rs.6,250 – Rs.2,083) by using
market price method.

Ans 28
(i) Statement of profitability of Division X
No. of components Transfer price for the Total cost of Profit / (Loss) (Rs.)
component to components (Rs.)
Department Y@
 Rs.90 per unit
(a) (b) (c) (d) = {(b) – (c)}
5,000 4,50,000 5,62,500 (1,12,500)
10,000 9,000 9,00,000 __
15,000 13,50,000 12,37,500 1,12,500
20,000 18,00,000 15,75,000 1,25,000
25,000 22,50,000 19,12,500 3,37,500
30,000 27,00,000 22,50,000 4,50,000
Statement of profitability of Division Y
No. of Sale Component Manufacturing Total cost Profit/(Loss)
Components revenue on cost cost in
average (Transfer division Y
price basis price) to
Dept. Y
Rs. Rs. Rs. Rs. Rs.
(a) (b) (c) (d) (e)={(c)+(d)} (f)={(b)-(e)}
5,000 19,68,750 4,50,000 14,06,250 18,56,250 1,12,500
10,000 29,85,000 9,00,000 16,87,500 25,87,500 3,97,500
15,000 37,12,500 13,50,000 19,68,750 33,18,750 3,93,750
20,000 41,70,000 18,00,000 22,50,000 40,50,000 1,20,000
25,000 45,00,000 22,50,000 25,31,250 47,81,250 (2,81,250)
30,000 45,00,000 27,00,000 28,12,500 55,12,500 (9,90,000)
(ii) Profitability of the company as a whole
(a) At 30,000 units level, at which Division X’s net profit is maximum Rs.
Profit of Division X 4,50,000
Profit of division Y (9,00,000)
U

Operating profitability / (Loss) of the company (5,40,000)

U

(b) At 10,000 units level, at which Division Y’s net profit is maximum Rs.
Profit of division X NIL
Profit of division Y 3,97,500
U

Operating profitability of the company 3,97,500

U

(iii) Profitability of the company, if it is not organised on profit centre basis

No. of Sales Cost of Manufacturing Total cost Profit/

components revenue on component cost in (Loss)
average to division X division Y
basis
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
(a) (b) (c) (d) (e)={(c) + (f)={(b)–(e)}
(d)}
5,000 19,68,750 5,62,500 14,06,250 19,68,750 -
10,000 29,85,000 9,00,000 16,87,500 25,87,500 3,97,500
15,000 37,12,500 12,37,500 19,68,750 32,06,250 5,06,250
20,000 4170,000 15,75,000 22,50,000 38,25,000 3,45,000
25,000 45,00,000 19,12,500 25,31,250 44,43,750 56,250
 30,000 45,22,500 22,50,000 28,12,500 50,62,500 (5,40,000)

The level of output, the company will earn maximum profit, if the company is not organized on profit centre basis
is 15,000 components.

Ans.29. Statement showing contribution P.U. of ranking (Rs.)

Particulars Product
A B C D
Market Price P.U. 150 146 140 130
Less: Variable Production Cost P.U 130 100 90 85
Contribution P.U. 20 46 50 45
Labour hours P.U. 3 4 2 3
Contribution per labour hour (i)/(ii) 6.67 11.5 25 15
Ranking IV III I II

(i) Allocation of 20,000 labour hours

C (2,300 units x 2 L.H.) 4,600
D (1,600 units x 3 L.H.) 4,800
B (2,500 units x 4 L.H.) 10,000
A (Balance) (200 units x 3 L.H.0 600
20,000

Product D can be transferred to Division Y, but the maximum Quantity that might be required for
transfer is 2,500 units of D.
Time required for 2,500 units of D =2,500 units x 3 L.H =7,500 L.H
2,500 units of Product D for Division Y can be met by sacrificing as follows:
(Labour hours)
Product A (200 units x 3 L.H.) 600
Product B (Balance) (1,725 units x 4 L.H.) 6,900
7,500

Transfer price to be charged by Division Z to Division y on supply of 2,500 units of product

D.
(Rs.)
Variable cost (2,500 units x Rs.85) 2,12,500
Add: opportunity cost of contribution foregone
Product A (200 units x Rs.20) 4,000
Product B (1,725 units x Rs.46) 79,350
Transfer Price 2,95,850
Transfer Price P.U. (Rs.2,95,850 / 2,500 units) 118.34

(ii) Allocation of 30,000 Labour Hours

C (2,300 units x 2 L.H.) 4,600

D (1,600 units x 3 L.H.) 4,800
B (2,500 units x 4 L.H.) 10,000
A (2,800 units x 3 L.H.) 8,400
Idle Labour (Balance) 2,200
Total 30,000

2,500 units of Product D for Division Y can be met by sacrificing as follows:

Idle labour hour 2,200
Product A (1,725 units x 3 L.H.) 5,300
Total 7,500

Calculation of transfer price (Rs.)

Variable cost (2,500 units x Rs.85) 2,12,500
Opportunity cost of Contribution foregone of Product A (1,767 units x Rs.20) 35,340
2,47,840
Transfer price P.U. (Rs.2,47,840 / 2,500 units) 99.14

Ans. 30
Working Notes:
(i) Hours required to meet maximum demand:
External sales Hours reqd. Total Hrs. per unit
(i) (ii) (iii) = (i) × (ii)
X 800 units 3 2,400
Y 500 units 4 2,000
Z 300 units 2 U
600
Total U
5,000
(ii) Contribution per unit:
Product X Y Z
Rs. Rs. Rs.

Selling price 48 46 40
Less : Variable cost U
33 24
U U
28

Contribution per unit : (A) 15 22 12

Labour hours required per unit : (B) 3 4 2

Contribution per hour (Rs) : (A) / (B) 5 5.5 6

Ranking III II I

(a) If only 3,800 hours are available in Division A.

300 units of Z (maximum), which will take* 600 hrs.
500 units of Y (maximum), which will take 2,000 hrs.
400 units of X to use remaining hrs. 1,200 hrs.
U
3,800 hrsU.

*Note: Labour hours required per unit are given in the question. If 300 units of Y are to be
transferred to ‘B’ division, then 1,200 hours will have to be used for production of
Y instead of X. It means Division A will sacrifice production of
400 units of X, which are yielding Rs. 5 per hr. Given above is the optimum
mix for Division A for 3,800 hrs. If 300 units of Y are to be transferred to ‘B’ division
with time constraint of 3,800 hours, then additional 300 units of Y will have to be
produced sacrificing the production of 400 units of X which is yielding contribution.

Transfer price Rs.

(i) Variable cost of Y 24.00
Opportunity cost
 (ii) Contribution relating to ‘X’ forgone for
producing additional units of Y
(4 hrs × Rs. 5*) 20.00
U
44.00
*Y takes 4 hours and in each hour production of X would have generated contribution of
Rs. 5.
(b) If 5,600 hours are available
Maximum time required to meet
external sales (Refer to Working note 1) 5,000 hrs.
Hours now available 5,600 hrs.
(i) It means 600 hrs can be easily used for the production of Y and transfer price will be variable
cost only
i.e. (600 hrs. 4 hrs) × Rs. 24 Rs. 3,600
Note: Y takes 4 hours per unit
(ii) For producing additional 150 units,
production of X will be disturbed.
Variable costs
(i) 150 units of X @ Rs. 24 Rs. 3,600
Opportunity cost
(ii) Contribution of ‘X’ units
forgone (600 hrs. × Rs. 5) Rs. 3,000* 6,600
Total price for 300 units 10,200
Average transfer price should be Rs. 34 per unit
*Contribution per hr. of X forgone.

Ans.31. (1) Maximum hours required to meet the present outside market requirement
Maximum sales units Hours required per Total hours
unit
Vx 900 3 2,700
X1 300 2 600
Xt 600 4 2,400
Maximum total hours required to meet the outside market requirement
5,700

(2) Contribution per unit, per hour and ranking (Rs.)

Product V X X
Selling price per units 24 23 20
Less: Variable cost per unit 17 12 14
Contribution per unit 7 11 6
Labour hours required per unit 3 2 4
Contribution per hour 2.33 5.5 1.5
Ranking II I III

(3) Utilisation of 4,800 available hours according to ranking (hours)

300 units of products X1 (300 units x 2 hours) 600
900 units of products Vx (300 units x 3 hours) 2,700
375 units of products Xt (300 units x 4 hours) 1,500
Total hours 4,800

(a) computation of transfer price for each unit of Vx if total labour hours available in
Department x are 4,800
 According to the ranking 4,800 available hours are utilized to produce 300 units of X 900
units of Vx and 375 units of X. The aforesaid product mix would give rise to optimum mix
for optimum profit.

In case 400 units of Vx are to be supplied to Department y in addition to existing outside sale
then the production of product X is to be curtailed partially and the hours thus obtained will
be utilized for the production of 400 additional units of Vx. The new product mix will be as
follows:
(Hours)
300 units of products X1 (300 units x 2 hours) 600
1,300 units of products Vx (1,300 units x 3 hours) 3,900
75 units of products Xt (75 units x 4 hours) 300
Total hours 4,800

Computation of transfer price per unit (Rs.)

Variable cost of one unit of Vx 17.00
Contribution foregone (opportunity cost) per unit due to the curtailment of Xt(3
hours x Rs.1.5) 4.50
Transfer price per unit 21.50

(b) Computation of transfer price for each unit of Vx, if total labour hours available in
Department x are 6,200
Hours required to meet the present outside market requirement 5,700
Remaining hours available for producing 400 additional units of Vx 500
After meeting the present outside market requirement (6,200 hours -5,700 hours)
Computation of transfer price per unit: (Rs.)
Total variable cost on the production of 166.67 units of Vx 2,833
(500 hours / 3 hours) @ Rs.17 per unit by utilizing 500 remaining available
hours
Total variable cost of 233.33.units of Vx @ Rs.17 per unit 3,967
(400 units – 166.67 units) produced by curtailing the production of Xt
product to the tune of 700 hours.
Contribution foregone (opportunity cost ) on the diversion of 700 hours of 1,050
Production of Xt for producing 233.33 units of Vx (700 hours x Rs.1.50)
Total cost for producing 400 additional units of Vx 7,850
Transfer price for one unit of Vx (Rs.7,850 / 400 units) 19,625

Ans. 32U (i) Statement of contribution

U

(a) When component is purchased by Division B from outside (Rs.)

Division A Nil
Division B Sales (2000x 400) 8,00,000
Less: Cost of Purchase (2000x 200) 400000
Variable costs (200x 150) 300000U
3,80,000 1,00,000
Company’s total contribution 1,00,000

(b) When component is purchased from Division A by Division B (Rs.)

Division A
Sales (2000x 220) 4,40,000
Less: Variable costs (2000x 190) 7,00,000 60,000
Division B
Sales (2000x 400) 8,00,000
Less: Variable Costs:
Purchase cost in Division A (2000x 220) 440000
Variable cost in Division B (2000x 150) 300000
U
7,40,000 60,000
Company’s total contribution 1,20,000

Thus, it will be beneficial for the company as a whole to ask Division B to buy the component
from Division A.
(ii) Statement of total contribution if Division A could be put to alternative use:
Division A:
Contribution from alternative use of facilities
Division B: 30,000
Sales (2000x 400) 8,00,000
Less: Variable costs:
Cost of purchase (2000x 400) 400000
Division B (2000x 150) 300000 U
7,00,000 1,00,000
Company’s total contribution 1,30,000

Since, the company’s contribution when component is purchased from outside, shows as
increase of Rs.30,000 as compared to when there is inter departmental transfer. Hence, it will be
beneficial to purchase the component from outside.

(iii) Statement of total contribution when component is available from outside at Rs.185.
Division A: Nil
Division B:
Sales (2000x 400) 8,00,000
Less: Variable costs:
Cost of purchase (2000x 185) 370000
Division B (2000x 150) 300000 U
6,70,000 1,30,000
Company’s total contribution 1,30,000

If the component is purchased by Division B from Division A, the contribution is only

Rs.1,20,000 as calculated under
(2) above. Hence it will be beneficial to buy the component from outside.
(v) Fixations of transfer price
(a) When there are no alternative uses of production facilities of Dept. A:
In such a case the variable cost i.e. Rs.190 per component will be charged.
(b) If facilities of Division A can be put to alternative uses: (Rs.)
Variable cost 190
Opportunity cost 15
Transfer price 205

(c) If market price gets reduced to Rs.185 and there is no alternative use of facilities of
Division A. the variable cost of Rs.190 per component should be charged.

Ans. 33
U

Fastners Limited
(a) Present profitability of individual shops and overall profitability
Particulars Welding shop Painting shop
Qty. Rate Value Qty
 Less: Variable cost : (B) 1,14,000 (9600 units × Rs.20) 1,92,000
(12,000 units × 9.50)
Contribution : {(A) – (B)} 30,000 48,000
Less: Fixed cost 25,000 30,000
Profit 5,000 18,000
Overall profit for the company (Rs. 5,000 + Rs. 18,000) = Rs. 23,000
(b) (i) When painting shop purchases all its requirement from open market at a price
of Rs. 10 per unit
Welding shop Painting shop
Qty. Unit Rate Val Qty Rate Value
Rs. ue Unit Rs. Rs.
R
Sale 2,400 12.00 28,800 9,600 25.00 2,40,000
Less: Variable cost 2,400 9.50 22,800 9,600 18.00* 1,72,800
Contribution 6,000 67,200
Less: Fixed cost 25,000 30,000
Profit/(Loss) (19,000) 37,200
Overall profit for the company Rs. 37,200 – Rs. 19,000 = Rs. 18,200
*It is given in the question that cost of painting including transfer price from welding shop is Rs.
20 per unit. The transfer price from welding shop is Rs. 12 per unit. Therefore, the variable cost
of Rs. 8 (Rs. 20 – Rs. 12) is incurred by painting shop exclusively. The painting shop will be
purchasing its requirement from open market at Rs. 10 per unit. Therefore, the variable cost per
unit in painting shop will be Rs. 18 (Rs. 10 + Rs. 8). This point should be noted carefully.
(b) (ii) When all the requirements of painting shop is met by transfer from welding shop at
a transfer price of Rs. 10 per unit
Welding shop Painting shop
Qty. Rate Value Qty Rate Value
Unit Rs. Rs. Unit Rs. Rs.
Sale in the open
market 2,400 12.00 28,800 9,600 25.00 2,40,000
Transfer to painting
shop 9,600 10.00 96,000
Total sales 12,000 1,24,800
Less:Variable cost (12,000 units×Rs.9.50) 1,14,000 (9,600 units×Rs.18) 1,72,800
Contribution 10,800 67,200
Less: Fixed cost 25,000 30,000
Profit/(Loss) (14,200) 37,200

Overall profit of the company = Rs. 37,200 – Rs. 14,200 = Rs. 23,000
For the purpose of comparison, the results of the three alternatives are summarised below:
Welding shop Painting shop
Rs. Rs.
 Profit under (i) 5,000 18,000
Profit/(Loss) under (b)(i) (19,000) 37,200
Profit/(Loss) under (b)(ii) (14,200) 37,200
Rs.
The overall profit under (a) 23,000
b(i) 18,200
b(ii) 23,000
Alternative (b)(ii) should be accepted due to the following reasons:
(a) It gives a maximum overall profit of Rs. 23,000. The discussion is confined to either b(i) or
b(ii).
(b) Each shop is treated as a separate cost centre and not a profit centre.
(c) The policy of overall goal congruence of the company is followed.
Ans. 34
U

Neither selling price nor total sales is given. Division A of Better Margins Ltd. expects a return
of 25% on average assets employed i.e., Rs. 12,00,000.
Total sales will be: Rs.
(a) Profit (25% of 12,00,000)
(b) Fixed overhead
(c) Variable cost (2,00,000 × Re. 1)
Total sales 9,00,000
Sales per unit (Rs. 9,00,000 ÷ 2,00,000 units) Rs. 4.50

Transfer to Division B Sale to outside and

sale to outside parties parties only
Sales (units) 2,00,000 1,40,000
Rs. Rs.
Sales value (1,40,000 units @ Rs. 4.50) 6,30,000 6,30,000
(60,000 units @ Rs. 2.25) 1,35,000 Nil
7,65,000 6,30,000
Less: Variable cost
(Re. 1 per unit) 2,00,000 1,40,000
Contribution 5,65,000 4,90,000
Less: Fixed overhead U
4,00,000 3,60,000 *
Net profit 1,65,000 1,30,000
Average assets employed 12,00,000 10,00,000
Return on investment 13.75% 13.00%
If the component is transferred to Division B as well as sold to outside parties, it is more
profitable as the contribution, net profit and return on investment is more than the existing
proposal. Therefore selling the components to Division B at Rs. 2.25 per unit is in the overall
interest of the company.
*Reduction in selling and administration expenses (fixed in nature) by Rs. 40,000.
Ans. 35
U

Statement showing the contribution to profit for each assuming that all estimates and budgets
materialised as expected
 Sales Centre (S) Rs. Rs. Rs.
New Board Sold
– Selling price 35,000
– Purchase price 29,000
Gross margin 6,000
Less: Second hand boat
Part-exchange of old boat 16,000
Broker’s Price 15,000
Less: Repairs 1,200 (13,800) 2,200
Contribution 3,800
Brokerage Centre (B)
Second-hand boat sold 19,000
Less: Paid to Centre S 13,800
Paid to Centre R 1,200 15,000
Contribution 4,000
Repair Centre (R)
Sales to Centre B 1,200
Less: Materials 300
Direct labour variable cost U
360 660
Contribution 540

(ii) Assuming Additional Costs It is noticed that all estimates and budgets are materialised except
that repairs undertaken by R took an extra 10 hours and Rs. 100 of materials due to a problem not
noticed by B or R.
R is responsible for giving correct repair costs and, therefore, he has to bear the additional cost:
Rs. Rs.
Repair Centre (R)’s contribution 540
Less: Extra cost of materials 100
Extra D.L. variable cost (10 hrs × Rs. 6) 60 160
Revised contribution 380 U

However, full details are not given in the question. ‘B’ is a middleman passing on R’s costs to S
and as such should not bear additional costs. Had the item been noticed originally then S would have
paid the cost and perhaps it should be passed back. This would be particularly so if R had
insufficient opportunity for a complete inspection. In that case extra cost should be:
Rs.
Material 100
Labour (10 hrs. × Rs. 15) 150
250
Reduced contribution of S = Rs. 3,800 – Rs. 250 = Rs. 3,550
Rs. Original
contribution of R 540
Add.: Saving in variable cost
[10 hrs × (Rs. 15 – Rs. 6)] 90
Increased contribution of R 630
Note: Other solutions are equally acceptable if well argued and logically justified.

Ans. 36:
U

(a) (i) AB sells product at external market

Selling price (Rs.) 30 45 60
Less Variable cost 18 18 18
 Contribution (per unit) 12 27 42
Demands (units) 60,000 40,000 20,000
Total contribution 7,20,000 10,80,000 8,40,000

Optimal output is 40,000 units at a selling price of Rs.45

AB transfer at Rs.42 to XY division then contribution of XY

Selling price (Rs.) 120 135 150
Less Variable cost V+TP
(42+60) 102 102 102
Contribution (per unit) 18 33 48
Demands (units) 15,000 10,000 5,000
Total contribution 2,70,000 3,30,000 2,40,000

Manager will choose out put level 10,000 units at a selling price of Rs.135.

Overall profit when transfer made at Rs.42

Division AB contribution on 10,000 units [42 – (18 -3)] = 2,70,000
Division XY contribution 10,000 (135 – 102) = 3,30,000
Total contribution = 6,00,000
Division AB contribution from external market sale 10,80,000
Total profit 16,80,000

(ii) AB transfer at variable cost

Selling price (Rs.) 120 135 150
Less Variable cost (15+60) 75 75 75
Contribution (per unit) 45 60 75
Demands (units) 15,000 10,000 5,000
Total contribution 6,75,000 6,00,000 3,75,000

Optimal is 15,000 units at the rate of 120 per unit.

If AB transfer at Variable cost (Rs.15) then no contribution will be generated by AB division

XY division choose 15,000 units level gives contribution 15,000 × 45 = 6,75,000

Division AB contribution from external market sale = 10,80,000
Total contribution = 17,55,000

(iii) Contribution AB division by selling 10,000 units to new external market at Rs.32
and XY division purchasing at Rs.31.

Contribution (32 – 18) × 10,000 = 1,40,000

XY contribution [135 – (31 + 60)] = 4,40,000
Division AB contribution from external market sale = 10,80,000
Total contribution = 16,60,000

Ans. 37 (a) The variable costs per unit of output of sale outside the company are Rs.11 for the
U

intermediate product and rs.49(Rs.10 for A+Rs.39 for B) for the final product. Note that selling
and packing expenses are not incurred by the supplying division for the transfer of the
intermediate product. It is assumed that the company has sufficient capacity to meet the demand
at the various selling prices.

Optional output of intermediate product for sale on external market.

Selling Price (Rs.) 20 30 40
Unit contribution (Rs.) 9 19 29
Demand (units) 15,000 10,000 5,000

Total contribution (Rs.) 1,35,000 1,90,000 1,45,000

Optimal output is 10,000 units at a selling price of Rs.30.
Optimal output for final product
Selling Price (Rs.) 80 90 100
Unit contribution (Rs.) 31 41 51
Demand (units) 7,200 5,000 2,800

Total contribution (Rs.) 2,23,200 2,05,000 1,42,800

Optimal output is 7200 unit at a selling price of Rs.80.
Optimal output of Division B based on a transfer price of Rs.29.
Division B will regard the transfer price as a variable cost. Therefore, total variable cost per unit
will be Rs.68(i.e.,29+39) and Division B’s contribution will be as follows:
Selling Price (Rs.) 80 90 100
Unit contribution (Rs.) 12 22 32
Demand (units) 7,200 5,000 2,800

Total contribution (Rs.) 86,400 1,10,000 89,600

The manager of Division B will choose an output level of 5,000 units at a selling price of Rs.90.
This is sub-optimal for the company as a whole. Profit for the company as a whole from the sale
of the final product are reduced from Rs.2,23,200 (72,00 units) to Rs.2,05,000 (5000 units).
Rs.2,05,000 profits would be allocated as follows:

Division A Rs.95,000 (5000 units at Rs.19 i.e.,Rs.29-Rs.10)

Division b Rs.1,10,000

(b) At a transfer price of Rs.12 the variable cost per unit produced in Division B contribution will
be as follows:

Selling Price (Rs.) 80 90 100

Unit contribution (Rs.) 29 39 49
Demand (units) 7,200 5,000 2,800

Total contribution (Rs.) 2,08,800 1,95,000 1,37,200

The manager of Division B will choose an output level of 7200 units and a selling price of
Rs.80.This is the optimum output level for the company as a whole. Division A would obtain a
contribution of Rs.14,400 (7200 units @ Rs.2 (I.e.,Rs.12-Rs.10) from internal transfers of the
intermediate product whereas Division B would obtain a contribution of Rs.2,08,800 from
converting the intermediate product and selling as a final product. Total contribution for the
company as a whole would be Rs.2,23,200. Note that Division A would also earn a contribution
of Rs.1,90,000 from the sale of the intermediate product to the external market.
Ans. 38:

Opticals Ltd manufactures P( lenses) and Q ( swimming goggles ).

Division P has option to supply to Division Q or sell to outside market.
Division Q has option to buy from Division P or purchase from outside market.
However, both divisions have to work within their individual capacity.
Variable Cost for product P in Division P = Rs 60.
Variable cost for product Q in Division Q ( excluding 2 Nos P's) = Rs 80.
Division P has better market price of its product P than the market price offered to Q
division.
For maximizing profit of the organization : Rs
P division should optimise its profit by selling maximum units to outside market.
Contribution per unit for sale to outside for division P 40
Contribution per unit for Div Q as follows :
Sale price - Variable cost ( excluding lenses) 330
Max Contribution per unit ( if procured from P div at its variable cost i.e Rs 60) 210
Min Contribution per unit ( if procured at Rs 90 per unit from outside) 150
Contribution per unit at transfer price of Rs 70 i.e minimum market price 190
Option 1 : Division Q buys 5001 units from market @ Rs 70 and meets its capacity. Division P
sells 3000 units to outside market @ Rs 100
Contrib. Contribution in
Sale / Transfer
/unit thousand rupees
 Rs P Div Q Div Total
DivP :Sale of 3000 units to outside market @ Rs 100 40 120 120
DivQ: Sale of 2500 units with P from market @ Rs 70 190 475 475
Less : cost of rejection of one unit of product P -0.07 -0.07
Total 120 474.93 594.93
Option 2 : Division P sells 3000 units to outside market, transfer 4000 units to div Q and
Division Q buys 1000 units from outside market to work within the capacity
P Division agrees to a transfer price so that profitability of Q is not affected. To maintain the same
profitability of Q, contribution required from 2000 units for Div Q is Rs 400,000 i.e contribution per unit
Rs 200 i.e transfer price per unit of P is Rs 65 per unit to make cost of lences Rs 130
Contrib Contribution in
Sale / Transfer
/unit thousand rupees
 - 11 -

Rs P Div Q Div
Total
Div P : Sale of 3000 units to outside market 40 120 120
Div P : Transfer of 4000 units to div Q at Rs 65 5 20 20
Div Q :Sale of 2000 units with P from P div @ Rs 65 200 400 400
Div Q : Sale of 500 units with P from market @ Rs 90 150 75 75
Total 140 475 615
Under Option 1, both divisions worked dis-jointly without caring for capacity utilization resulting
lower profitability of the organization.
Under Option 2, both divisions worked with mutual advantages for optimizing
their
individual profits and overall profit for the organization has gone up by effective
utilization of capacity.
Product P from Division P fetches higher price from open market indicating good quality of
product. Moreover, supply from P division is well assured in the long run which is the
justification of establishment of two parallel divisions.
Hence, Option 2 is
suggested.
(ii) Division functioning as profit centers strive to achieve maximum divisional
profits, either by internal transfers or from outside purchase. This may not
match with the organisation’s objective of maximum overall profits. Divisions
may be commercial to advice overall objects objectives, where divisional
decisions are in line with the overall best for the company, and this is
goal congruence. Div isions at a disadvantage may be given due weightage
while appraising their performance. Goal incongruence defeats the purpose of
divisional profit centre system.
(b) 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.

Ans. 39
U

(a) Div A B B
Rs. / unit Rs. / unit Rs. / unit
Direct Material (Other than A) 50 24
Direct Labour 25 14
Variable Overhead (Production) 20 2
Variable Production Cost (excl. A) 95 40 40
From A 144
From Outside ____ 160
Variable production Cost / unit 184 200
Selling Price
From outside 160 300
Less: Selling Overhead 13 26
 - 12 -

Net Selling Price (outside) 147 274

Net Selling Price to B 144
Net Selling Price to S 250

Net Selling Price (outside) 147 274 274

Variable Production Cost − 95 − 184 − 200
Contribution / unit (outside) 52 90 74

(Sale to B & S respectively) 144 250 250

Variable Production Cost − 95 − 184 − 200
Contribution / unit 49 66 50

Best strategy
A = Maximise Production; Sell maximum no. of units @ 18,000 × 52 = 9,36,000
52 / unit (outside)

(To B) remaining units 2,000 × 49 = 98,000

Total Contribution for A 10,34,000

Best strategy for B:

Maximise contribution / unit by selling outside and procuring from A 90 / unit
Contribution × 2,000 units
Balance units can yield contribution of either 74/ unit for outside or Rs. 50 / unit to S Ltd.
Production Capacity = 28,000.

Option I Option II
Outside Sales Sales to S Outside Sales × contribution /
unit
20,000 × 74 = 14,80,000 6,000 × 50 = 3,00,000 24,000 × 74 = 17,76,000

2,000 × 90 = 1,80,000 2,000 × 90 = 1,80,000

16,60,000 3,00,000

Total Contribution (16,60,000 + 3,00 ,000)19,60,000 19,56,000

(B) Choose Option I i.e. get 2,000 units from A, sell 6,000 units to S and 20,000 to outside.
Make 28,000 units @ full capacity. Total Contribution Rs19,60,000.
If A and B are allowed to act independent of the group synergy,
Rs.
Total contribution A – 10,34,000
B – 19,60,000
Total contribution for X Ltd. 29,94,000
Cost from X Ltd.’s Perspective

Variable Cost of production Div A Rs. 95

Div B
Variable cost of production other than A 40 40
A supplied by Division 95
A – Variable Cost
 - 13 -

A purchased ____ 160

135 200

Option I Outside 26,000 units Option II

Outside 20,000 × (274 – 135) 27,80,000 20,000 (274 – 135) 27,80,000

2,000 × (274 – 200) 1,48,000 6,000 (274 – 200) 4,44,000
22,000
S Ltd. 6,000 units (250 – 200) 3,00,000 _________
32,28,000 32,24,000

Choose Option I
Contribution = Rs. 32,28,000 for X Ltd. as a whole
Transfer (2,000 units)
Make A transfer all output to B. Sell 6,000 units of B to S and 22,000 units to out side market.
This will make X Ltd. better off by 32,28,000 – 29,94,000 = Rs 2,34,000

(i.e. 18,000 units of A sold to outside increases contribution to A by 3 Rs. / unit and decreases
contribution to B by 16 Rs. / unit Net negative effect = 13 × 18,000
= Rs.2,34,000).

Ans. 40: (i) Division A’s best strategy – 2011

Maximum Manufacturing capacity = 50,000 units
Per unit External Spl order Transfer to B Transfer to
Market partially B full
Demand (units) 30,000 15,000 < 45,000 45,000
Selling price 65 55 55 60
Variable Prod cost 35 35 35 35
Variable Selling cost 10 - - -
Total Variable cost 45 35 35 35
Contribution Rs. 20 20 20 25
Transfer to B in full gives maximum contribution. Hence, 45,000 units to be
transferred.
Balance 5000 will be sold to the external market.
Partial fulfilment of Special order will not be possible.

Statement of profitability for best strategy in 2011 :

Rs
Transfer 45000 units to B @ Rs 60 Per Unit : Contribution : 25 x 45000
11,25,000
Supply to external market : Contribution : 20 x 5000 units 100000
Total Contribution 12,25,000
Annual fixed cost Rs 4,30,000
Step fixed cost Rs 2,00,000
Fixed selling costs Rs 50,000 6,80,000
Profit in 2011 5,45,000
(ii) Company’s best strategy for 2010
 - 14 -

For Division A External Special B – Partial B - Full

Market Order
Variable cost 45 35 35 35
Price 65 55 45 50
Contribution to Division A 20 20 10 15
Margin for Division B 5 0
It is clear from the above table that the Company will have more profitability if A
first satisfies external market demand and special order and then supply to B.
As quantity for special order and transfer is more than 10,000 units, Div A will
always opt for fixed cost of 50,000 instead of variable selling cost of Rs 5 / unit.
The company’s strategy for Division A’s production, sales/ Transfer will be :
External Special B– Total
Market Order Partial
Strategy I : A’s sale/ transfer (units) 25,000 10,000 5,000 40,000
Contribution of A & B ( Rs laks) 5.00 2.00 0.75 7.75
Fixed Cost Rs Lakhs( 4.30 + 5.80
1.00 +0.5)
Net for company – Rs lakhs 1.95
Strategy II : from A ( units) 25000 10000 15000 50,000
Contribution of A & B : RS Lakhs 5.0 2.00 2.25 9.25
Fixed Cost Rs Lakhs ( 4.30 + 6.80
2.00 +0.5)
Net for company Rs. Lakhs 2.45
Thus, the strategy II will be the one for the Company for the year 2010.

(iii) B’s negotiating range in 2011 :

Upper limit: The effective price of Rs. 60 for procurement from outside source.
Lower Limit : Minimum price A will look for
i.e Variable cost + Maximum possible contribution from other source +
additional fixed cost
= Rs ( 35 + 20 + ( 50000/45,000) = Rs 56.11
Thus, Price range for negotiation without changing A’s strategy is Rs 56.11 to
Rs 60 per unit.

Ans.: 41
U

(a) (i) Contribution per unit against sale to outside = Rs ( 200-120-20) = Rs 60

In case of transfer, good units and rejected units are in proportion of 9:1
In case of transfer, contribution per good unit = Rs (190 – 120) = Rs 70
In case of transfer, contribution per rejected unit = Rs (150 – 120-100) = Rs -70
Thus, effective contribution per unit of transfer = Rs (70 x 0.9 – 70x 0.1) = Rs 56

As contribution per unit against outside sale is higher, the best strategy should be to
sell maximum number of unit to outside marker.

Contribution from outside market from sale of 900 units = Rs 54,000 {Rs.(900 x 60)}
 - 15 -

Contribution from transfer of 300 units to B {Rs (300 x 56)} = Rs 16,800

Total Contribution from best strategy = Rs 70,800

(ii) If B’s demand is 540 units, total production required (540 /0.9) = 600 units.

Taking outside market demand of 600, it is within production capacity of 1200 units.
Now contribution from 600 units of outside sale Rs (600 x 60 ) = Rs 36,000
Contribution from rejected 60 units Rs (60 x – 70) = Rs (4,200)
= Rs 31,800

To keep same level of contribution as in (i), the contribution required from transfer of
540 unit to B (Rs 70,800 – 31,800) = Rs 39,000

Thus, contribution required per unit Rs 39,000 /540 = Rs 72.22

Hence price to be charged p. u. against transfer to
B Rs (120 + 72.22) = Rs 192.2

Alternative Solution:
Let x be the number of units sold outside and y be the number of units sold to B,
before B returns 10% as defectives.

Then, x + y = 1,200, is the limitation on production capacity of A.

Department A
Outside to B
Rs. Rs.
Selling Prices 200 190
Variable Cost – Production 120 120
Variable Cost – Sale ___20 ___--
Total Variable Cost 140 120
Contribution 60 70
Contribution on x units sold outside = 60x
1
Out of y units to B, 10% = 10 y. 1 = .1y is returned to A. If A scraps, amount got =
30 per unit.

If A reworks and sells, it gets 150 – 100 = 50/unit.

∴Decision to reworks all defectives. i.e. (.1) (y)
Contribution on good units of B = 0.9y × 70 = 63y
Contribution on reworked units of B = (.1) (y) × 50 = 5y
Amount of material lost on manufacture of defectives to B =12y(.1)(y)×120
∴Contribution on y gross units transferred to B = 56y
63y + 5Y – 12y
Total contribution earned by A = 60x +
56y
Where x + y = 1200

To maximize contribution, maximize units sold outside.

∴900 units – sell outside.

Balance 300÷1,200 units (gross transfer to B, of which B gives back defectives)

Contribution: Rs.60 (900) + Rs.56 (300)

= Rs.54,000 + Rs.16,800
 - 16 -

Contribution = Rs.70,800
Fixed Cost = Rs.36,000
(i) Profit = Rs.34,800

(ii) Outside demand = 600 units

Contribution = 600 × Rs.60 = Rs.36,000
Balance to be got = Rs.34,800
= Rs.70,800

Out of Rs.34,800, defectives of B will give

Rs. 3,000 60 × 50
Rs. 31,800 charge to B for 540 units

Contribution to be obtained from 540 units of B = Rs. 31,800

Add: Production cost of 600 units @ 120/- = Rs. 72,000
Amount changed for 540 units = Rs.1,03,800

∴Price to be charged to B = 1,03,800÷540 = 192.22

Per good unit transferred, to maintain the same level of profit as in (a).

Ans 42: B will not pay A anything more than 13, because at 13, it will incur additional cost of
Rs.2/- to modify it, 13 + 2 = 15, the outside cost.
A B C
Outside Transfer
sale to B & C
Divisional variable cost of 7 7 19 25
production
Transfer from A 13 13
Modification 2
Total Variable Cost of production 7 7 34 38
Selling Price 15 13 40 50
Contribution 8 6 6 12

Option for C, Purchase all units from A @ 13: Any other option is costlier.
A B C
 - 17 -

Maximum external demand 3,750 5,000 4,000

Exiting capacity 5,000 2,500 2,500
Maximum capacity that can 5,000 1,250 2,250
be added
Total maximum that can be 10,000 3,750 4,750
produced
Additional fixed cost on 24,000 6,000 18,700
expansion
Units that must be
24,000÷6 6,000÷6 18,700÷6
sold/transfer to get this
= 4,000 = 1,000 = 1,558.33
amount as contribution
External demand not -
covered by existing capacity
Decision Expand make Expand make Do not expand
10,000 units 2,500 + 1,250 make only 2,500
3,750 – outside = 3,750 units units.
3,750 –B
2,500 – C

A B C
Outside Transfer
sale to B & C
Units 3,750 3,750 + 3,750 2,500
2,500 =
6,250
Contribution / unit 8 6 6 12
Contribution (Rs.) 30,000 37,500 22,500 30,000
67,500 22,500 30,000
Additional Fixed Cost 24,000 6,000 -
Net revenue addition 43,500 16,500 30,000
Individual strategy is the company’s best strategy.
 - 18 -

Ans. 43
 - 19 -

Manager of division X will sell 14,000 units outside at 110 Rs. per unit and earn contribution of Rs.
3.50 lakhs.

Excess capacity of 6,000 units can be offered to Y at a price between 70 (the variable
manufacturing cost at X) and Rs. 95 (the maximum amount to equa l outside
contribution). But Y can get the material outside @ 85. So, y will not pay to X anything above
(Rs.85 – 6) = Rs. 79 to match external available price.

X will be attracted to sell to Y only in the range of 71 – 79 Rs. per unit at a volume of
6,000 units.

At Rs. 70, X will be indifferent, but may offer to sell to Y to use idle capacity.

Z will not buy from Y at anything above 135. If X sells to Y at 70 per unit, Y can sell to Z at 134
and earn no contribution, only for surplus capacity and if units transferred by X to Y at Rs. 70
per unit.

Y Z
Sell 4,000 units to Z at 134 Buy 4,000 units from y at
(Indifferent) 134 (attracted)
Provided X sells to
Y at Rs. 70 per unit Sell 4,000 units to Z at 135 (willingly Indifferent, since market
for a contribution of Re. 1) price is also 135

For buying from X at 71 – 79 price range, Y will be interested in selling to Z only at prices
136 – 143, which will not interest Z.

Thus Y will sell to Z only if X sells to Y at Rs. 70 per unit and Y will supply to Z maximum
4,000 units.

Ans. 44: Capacity of X division = 7000 units

X has the following option to sell following number of units:

Option Domestic Market Export Transfer Hiring out (equivalent unit)

I 6000 800 200
II 5000 800 l200
III 5000 2000
IV 5000 800 400 800
According to the condition given in (iii) for procurement policy of Y,
For 7000 units, maximum amount Y is agreeable to pay at market rate i.e Rs 900 per unit
= 7000 x Rs 900 = Rs 63,00,000
If X transfers l200 units to Y, It has to incur expenses for 5800 units from market =
= 5800 x Rs 920 = Rs 53,36,000
It means for l200 units from X, Y will pay = Rs ( 63,00,000 – 53,36, 000)
 - 20 -

= Rs 9,64,000 = Rs 803.33 per unit

If X transfers 2000 units to Y and Y buys 5000 units,, Y can pay to X only
= Rs ( 63,00,000 – 5000 X 920) = Rs l7,00,000 = Rs 850.00 per unit
If transfer of less than l000 units to Y, X can claim transfer price of Rs 900 per unit
Realization ( Rs)
Option I 6000 x l000 + 800 x 900 + 200 x 900 Rs 69,00,000
Option II 5000 x ll20 + 800 x 900 + l200 X 803.33 Rs 72,84,000
Option III 5000 x ll20 + 2000 x 850 Rs 73,00,000
Option IV 5000 x ll20+ 800 x 900 + 400 x 900 plus Rs 66,80,000 plus
contribution from hiring out
Above table shows that Option III is preferable in comparison to Option I and II .
If Option III for X, transfer price will br Rs 850.00 per unit.
For taking a decision on option IV, contribution from equivalent unit from hiring out has to
be compared with contribution from minimum sales realization of Rs 775 because sales
realization of Rs 775 per unit from equivalent 800 units gives the amount of Rs
6,20,000 which makes up the gap between option III and option IV. In that case, transfer
price will be Rs 900 per unit.
 Solutions of transportation
Ans. 6
(a)
20 -- ---- 20
3 9 6
20 20 --- 40
4 4 6
--- 30 30 60
8 3 5

120
40 50 30

(ii) Initial allocation under NW corner rule is as above.

Initial cost: 20×3 = 60
20×4 = 80
20×4 = 80
30×3 = 90
30×5 = 150
460
(a)
20 -- ---- 20 3
3 9 6
20 20 --- 40 0 0 2
4 4 6
--- 30 30 60 2 2 2
8 3 5

40 50 30

1 1 1

4 1 1

1 1

Initial solution 20×3 = 60

20×4 = 80
50×3 = 150
20×6 = 120
10×5 = __100
__460

Checking for optimality

3
U1 = 0
4 6
U2 = 1
3 5
U3 = 0
V1 =3 v2 = 3 v3 = 5
 Ui+ vj
3 5 0

4 1

3
0
3 3 5

ij = Cij- (ui-vj)

6 1
0
5
ij > 0 Solution is optimal

Conclusion:
The solution under VAM is optimal with a zero in R2C2 which means that the cell C2R2 which means
that the cell C2R2 can come into solution, which will be another optimal solution. Under NWC rule
the initial allocation had C2R2 and the total cost was the same Rs. 460 as the total cost under
optimal VAM solution. Thus, in this problem, both methods have yielded the optimal solution under
the 1st allocation. If we do an optimality test for the solution, we will get a zero for ij in C3R2
indicating the other optimal solution which was obtained under VAM.

Ans. 8
The new transportation costs table, which consists of both production and transportation costs, is given in following
table.
Store
P Q R S Supply
A 2+2=4 4+2=6 6+2=8 11+2=13 50
B 10+3=13 8+3=11 7+3=10 5+3=8 70
Factories C 13+1=14 3+1=4 9+1=10 12+1=13 30
D 4+5=9 6+5=11 8+5=13 3+5=8 50
Demand 25 35 105 20 200
185

Since the total supply of 200 units exceeds the total demand of 185 units by 200-185 =15 units of product, there fore a
dummy destination (store) is added to absorb the excess supply. The associated cost coefficients in dummy store are
taken as zero as the surplus quantity remains lying in the respective factories and is, in fact, not shipped at all. The
modified table is given below. The problem now becomes a balanced transportation one and it is a minimization
problem.
We shall now apply Vogel’s Approximation method to fine an initial solution.
 P Q R S Dummy Supply Difference
A 25 5 20 13 0 50/25/20/0 42225
4 6 8
B 13 11 70 8 0 70/0 822222
10
C 14 30 10 13 0 30/0 46____
4
D 9 11 15 20 15 50/35/15/0 811335
13 8 0
Demand 25/0 35/5/0 105/85/15/0 20/0 15/0 200
Difference 5 2 2 0 0
5 2 2 0 -
5 5 2 0 -
- 5 2 0 -
- - 2 0 -
The initial solution is shown in above table. It can be seen that 15 units are allocated to dummy store from factory D.
This
means that the company may cut down the production by 15 units at the factory where it is uneconomical. We will now
test the optimality of the solution. The total number of allocations is 8 which is equal to the required m+n-1 (=8)
allocation.
Introduce ui’s, vj’ s, i= (1,2,- - - - -4) and j =(1,2,- - - -5) ∆ij=cij-(ui+vj) for allocated cells. We assume that u4 =0 and
remaining
uj’s, vj’s and ∆ij’s are calculated below”
P Q R S Dummy Supply Ui
A 25 5 20 13 0 50 U1= -5
4 6 8 +10 +5
B 13 11 70 8 0 70 U2 =
+7 +3 10 +3 +3
C 14 30 10 13 0 30 U3 = -7
+1 4 +4 +12 +7
D 9 11 15 20 15 50 U4 = 0
0 0 13 8 0
Demand 25 35 105 20 15
Vj V1=9 2 2 0 0
Please not that figures in top left hand corners of the cell represent the cost and the one in the bottom right hand
corner
the nonofbasic cell are the values of ∆ij=cij-[(ui+vj)]
Since opportunity cost in all the unoccupied cells is positive, therefore initial solution is an optimal solution also. The
total
cost (transportation and production together) associated with this solution is
Total cost = 4×25+6×5+8×20+10×70+4×30+13×15+8×20+0×15
= 100+30+160+700+120+195+160
= Rs.1,465/-
Ans.9:
The given problem is an unbalanced transportation problem since the availability of trailers
(= 10+4+6+5=25) is less than the requirement (=13+10+6+6=35). Therefore, it is first converted into a balanced
problem
by adding a dummy terminal with an availability of 10 trailers and cost elements for various plants as zero. The
problem
becomes as given below.
Plants
Terminals A B C D Availability
U 20 36 10 28 10
V 40 20 45 20 4
W 75 35 45 50 6
X 30 45 40 25 5
Dummy 0 0 0 0 10
Requirement 13 10 6 6
The objective of the company is to minimize transportation cost. To achieve this objective, let us find an initial feasible
solution by applying Vogel’s Approximation Method to the above matrix.

Plants
Terminals A B C D Availability Difference
U 3 6 1
20 36 10 28 10/4/1/0 10/10/8/8
V 4
40 20 45 20 4/0 0/0/0/-
W 6
75 35 45 50 6/0 10/10/15/15
X 5
30 35 40 25 5/0 5/5/5/5
Dummy 10
0 0 0 0 10/0 0/-/-/-
Requirement 13/3/0 10/6/0 6/0 6/1/0
Difference 20 20 10 20
10 15 30 5
10 15 0 5
10 0 - 5

The initial solution is as given below which is tested for optimality.

 Plants
Terminals A B C D Availability
U 3 6 1
20 36 10 28 10
V 4
40 20 45 20 4
W 6
75 35 45 50 6
X 5
30 35 40 25 5
Dummy 10
0 0 0 0 10
Requirement 13 10 6 6

The number of allocation is 7 which is one less than the required m+n-1 (=8) allocations. Introduce a very small quality
e
in the least cost independent cell (Dummy, B0. Let us also introduce uj, vj; I- (1,2 – 5) j = (1,2,3,4) such that ∆ij =
cij-(u1+vj)
for allocation cells. We assume that u1=0 and remaining ui’s, vj’s and ∆ij’’s are calculated as
below:

Terminals A B C D ui’s
U 3 +θ 16 6 1 -θ
20 36 10 28 0
V 20 4 -θ 35 -8 +θ
40 20 45 20 0
W 40 6 20 7
75 35 45 50 15
X 13 18 33 5
30 35 40 25 -3
Dummy 10 -θ e +θ 10 -8
0 0 0 0 -20
vj’s 20 20 10 28

Since some of the ∆ij’’s are negative, the above solution is not optimal. Introduce in the cell (V,D) with the most
negative
∆ij an assignment θ. And the reallocated solution as obtained from above is given below. The values of ui’s and vj’’s
and
∆ij’’s also calculated.
 Terminals A B C D ui’s
U 4 16 6 8
20 36 10 28 0
V 20 3 35 1
40 20 45 20 0
W 40 6 20 15
75 35 45 50 15
X 5 10 25 5
30 35 40 25 5
Dummy 9 1 10 0
0 0 0 0 -20
vj’s 20 20 10 20 -20
Since all Ij’s for non basic cells are positive, therefore, the solution obtained above is an optimal one. The
allocation of terminals to plants and their cost is given below.
Terminal Plant Cost
U A 4 × Rs.20 = Rs.80
U C 6 × Rs.10 = Rs.60
V B 3 × Rs.20 = Rs.60
V D 1 × Rs.20 = Rs.20
W B 6 × Rs.35 = Rs.210
X D 5 × Rs.25 = Rs.125
= Rs.555

Ans. 10:
Answer
(a) The problem may be treated as an assignment problem. The solution will be the same even if prices
are halved. Only at the last stage, calculate the minimum cost and divide it by 2 to account for fall in oil
prices.
A B C
X 15 9 6
Y 21 12 6
Z 6 18 9
Subtracting Row minimum, we get

A B C
X 9 3 0
Y 15 6 0
Z 0 12 3

Subtracting Column minimum,

 A B C

No of lines required to cut Zeros = 3

Cost / u Units Cost Revised
Cost
Allocation: X B 9 10 90 45
Y C 6 10 60 30
Z A 6 10 60 30
210 105
Minimum cost = 105 Rs.

Alternative Solution I
Least Cost Method

X–BY–CZ–A

Test for optimality

No. of allocation = 3
No. of rows m =3, no. of column = 3
 m+n–1=3+3–1=5
2 very small allocation are done to 2 cells of minimum costs, so that , the following table is got :
A B C

10 e
X 15 9 6

Y 21 12 10 6

Z 10 6 18 e 9

m +n–1=5
Now testing for optimality
ui
9 e
0
6
0
6 e
0
vj 6 9 6
ui + vj for unoccupied cells

A B C
X 6 - -
Y 6 9 -
Z - 9 -

Diff = Cij – (ui + vj)

A B C
X 9 - -
Y 15 3 -
Z - 9 -

All Δij > 0, Hence this is the optimal solution.

 Original Costs Reduced Costs Qty. Cost
due to Oil Price
X–B 9 4.5 10 45
Y–C 6 3 10 30
Z–A 6 3 10 30
105
Total cost of transportation is minimum at Rs.105

Alternative Solution II

No. of rows + no. of column – 1

m+n–1=5
No. of allocation = 3
 Hence add ‘e’ to 2 least cost cells so that

Now m + n – 1 = 5
Testing for optimality, ui, vj table
A B C ui
X 4.5 e
0
Y 3
0
Z 3 e
0
vj 3 4.5 3
ui + vj for unoccupied cells

3 - -
3 4.5 -
- 4.5 -

Cij u i+vj
7.5 - - 3 - -
11.5 6 - 3 4.5 -
- 9 - - 4.5 -
Δij = Cij – (ui + vj)

4.5 - -
11.5 1.5 -
8.5 4.5 -
All Δij > 0. Hence the solution is optimal.

Qty. Cost/u Total Cost

X–B 10 4.5 45
Y–C 10 3 30
Z–A 10 3 30
Total minimum cost at revised oil prices 105
Ans.11:
The concept tested in this problem is Degeneracy with respect to the transportation problem. Total of rows
and columns = (4 + 5) = 9. Hence, the number of allocations = 9
– 1 = 8. As the actual number of allocation is 7, a ‘zero’ allocation is called for. To resolve this, an
independent cell with least cost should be chosen. R4C2 has the least
cost (cost = 3), but this is not independent. The next least cost cell R4C3 (cost = 5) is
independent.

9 2 5 6 2

C1 C2 C3 C4 C5 Total

8 6 4
0R1 18
11 2 8 6 2

10
0R2 10
9 9 12 9 6

8
2R3 8
7 6 3 7 7

2 0 2
0R4 4
9 3 5 6 11

Total 12 8 8 8 4 40

Forming Equations through allocated cells

Basic equation Setting R1 = 0 other values

R1 + C2 = 2 Setting R1 = 0, C2 = 2

R1 + C4 = 6 C4 = 6

R1 + C5 = 2 C5 = 2

R2 + C1 = 9 R2 = 0

R3 + C3 = 3 R3 =  2

R4 + C1 = 9 C1 = 9

R4 + C3 = 5 C3 = 5

R4 + C4 = 6 R4 = 0

Evaluate unallocated cells

R1C1 = 11  0  9 = 2 R3C1 = 7 + 2  9 = 0

R1C3 = 8  0  5 = 3 R3C2 = 6 + 2  2 = 6

R2C2 = 9  0  2 = 7 R3C4 = 7 + 2  6 = 7

R2C3 = 12  0  5 = 7 R3C5 = 7 + 2  2 = 7

R2C4 = 9  0  6 = 3 R4C2 = 3  0  2 = 1

R2C5 = 6  0  2 = 4 R4C5 = 11  0  2 = 9

Since all the evaluation is 0 or +ve, the optimal solution is obtained.

Optimal cost = (8 2) + (6 6) + (4 2) + (10 9) + (8 3) + (2 9) + (0 5) + (2 

6) = 16 + 36 + 8 + 90 + 24 + 18 + 10 + 12 = Rs. 204.
Note: As regards allocation of the zero values, the solution to the above problem is also obtained by
allocating the zero value in other independent cells such as R1C3, R2C2, R2C3, R3C1, R3C2, R3C4,
 R3C5. In such situation there will be one more iteration.

Ans. 12
The optimum distribution for this company to minimize shipping costs
Availabilities = 160 +150 +190 = 500
Requirements = 80 +90 +110 +160 = 440
Availabilities –Requirement = 500 – 440 = 60

Therefore, a dummy warehouse H is introduced, and initial solution is obtained below by

VAM in just one table.
D E F G H Available Diff.
160 e
A 42 48 38 37 0 160/0 37/1/1/1
80 10 60
B 40 49 52 51 0 150/90/10/0 48*/9/11*/1
90 100
C 39 38 40 43 0 190/100/0 38/1/1/3
Reg. 80/0 90/0 110/10/0 160/0 60/0
Diff. 0 0 0 0 0
1 10* 2 6* 0

since there are only 6 (one less than m+n –1) allocations, an infinitesimally small allocation e is placed
in the least cost and independent cell (1, 5). This solution is tested for optimality below. (N.B.: if
allocations were m +n –2 we would place two e’s, e ,
whiche2 are virtually zero in the 2 least cost independent cells). This device enables us to
apply to optimality test on (m +n –1) allocations.
Vj
37 0 0
40 52 0 0
38 40 –12
Vj 40 50 52 37 0

40 50 52 (ui + vj) matrix

50 37
28 25 –12

2 –2 –14
–1 14
11 18 12 Δ ij m atrix

Since there are –ve Äij ‘s the initial solution is not optimal. Reallocation is done below by ticking the
most -ve Äij cell (1, 3) and involving it in the loop.

θ mx
 √ 160 e Note that the maximum that can be
tansferred to the ticked cell is e. Since e is
e−θ =0 80 10 60
infinitestimally small it leaves other corner
min 10 − θ = 0 90 100 allocations unaffected. (Intermediate i.e.
=e non corner allocations are never altered in
the process of reallocations).

e 160
Reallocation
80 10 60
90 100

This solution is tested for optimally below :

38 37 38
40 52 0 52
38 40 40
-12 -2 0 -1 -52

26 36 –14
50 51 (ui+vj) matrix)
28 39 –12

16 12 14
–1 0 Δ j matrix
11 4 12

Since there are –ve ΔØ, this solution too is not optimal. Reallocation is done below :
10 − θ = 0 160
θmax = min
90 − θ = 0 80 √ 10–θ 60

90–θ 100+θ

e 160
80 10 60 Reallocation
80 110

Since there are –ve Δij this solution too is not optimal. Reallocation is done below.
This solution is tested for optimality below:
u i

38 37 –13
40 49 0 0
0 -3 8 40 –11

Vi 40 49 51 50 0
 27 26 –13
51 50 ( v i + v j)
29 39 –11

15 12 13
1 1 Δ ij m a t rix
10 4 11

Since all Δij’s are +ve, this solution is optimal.

j

Ans. 15:

The initial solution is found by VAM below:

Factory Godown Availability Diff.
1 2 3 4 5 6
1 7 20 5 7 7 5 40 3 60/40/0 2/4/0

2 10 9 11 10 6 11 ∞ 5 20/10/0 1/3

3 11 10 30 6 20 2 40 2 8 90/70/30/0 0/4/2/5

4 50 9 10 9 6 9 12 50/0 3/0

Demand 60 20 40 20 40 40
50 0 10 0 0 0
0 0
Diff. 2 5 0/1 4 3 2

The above initial solution is tested for optimality. Since there are only 8 allocations and we
require 9(m+n-1 =9) allocations, we put a small quantity in the least cost independent cell
(2, 6) and apply the optimality test. Let u= 0 and then we 3
calculate remaining ui and v
vj ui
Factory Godowns
1 2 3 4 5 6
1 7 20 40
5 7 7 5 3 -2
2 10 10 e
9 11 6 11 ∞ 5 0
3 30 20 40
11 10 6 2 2 8 0
4 50
9 10 9 6 9 12 0
Vj 9 7 6 2 2 5

Now we calculate Δij = cij – (ui +vj) for non basic cells which are given in the table below:

0 3 7 5
4 9 ∞
2 3 3
3 3 4 7 7
Δ ij matrix
 Since all Δij are positive, the initial solution found by VAM is an optimal solution. The final
allocations are given below:
Factory to Godown Unit Cost Value
1 2 20 5 100
1 6 40 3 120
2 1 10 9 90
2 3 10 6 60
3 3 30 6 180
3 4 20 2 40
3 5 40 2 80
4 1 50 9 450
Total cost Rs. = 1,120
The above solution is not unique because the opportunity cost of cell (1,2) is zero. Hence alternative
solution exists. Students may find that the alternative solution is as given below:
Factory to Godown Unit Cost Value
1 1 10 7 70
1 2 20 5 100
1 6 30 3 90
2 3 10 6 60
2 6 10 5 50
3 3 30 6 180
3 5 40 2 80
3 4 20 2 40
4 1 50 9 450
Total cost (Rs.) 1,120

Ans. 16
The given problem is a balanced minimization transportation problem. The objective of the company is to minimize the
cost. Let us find the initial feasible solution using Vogel’s Approximation method
(VAM)
Outlets
Plants A B C D Capacity Difference
X 400 300 700/300/0 2200
4 6 8 6
Y 50 350 400/50/0 1200
3 5 2 5
Z 400 200 600/200/0 2240
3 9 6
Requirement 400/0 450/400/0 350/0 500/300/0
Difference 0 1 4 0
0 1 - 0
- 1 - 0
The initial feasible solution obtained by VAM is given below:
 Outlets
Plants A B C D Capacity
X 400 300 700
4 6 8 6
Y 50 350 400
3 5 2 5
Z 400 200 600
3 9 6 5
Requirement 400 450 350 500

Since the number of allocations = 6= (m+n-1), let us test the above solution for optimality. Introduce ui (i=1,2,3) and vj
(1,2,3,4) such that ∆ij= Cij –(ui+vj) for allocated cells. We assume u1=0, and rest of the ui’s, vj’s and ∆ij’s are calculated
as
below:
Outlets
Plants A B C D Ui
X 0 400 5 300 0
4 6 8 6
Y 0 50 350 0 -1
3 5 2 5
Z 400 4 4 200 -1
3 9 6 5
Vj 4 6 3 6
On calculating ∆i j’s for non-allocated cells, we found that all the ∆ij≥0, hence the initial solution obtained above is
optimal.
The optimal allocations are given below.
Plants Outlet Units Cost Total Cost
X →B 400 × 6 = 2,400
X →D 300 × 6 = 1,800
Y →B 50 × 5 = 250
Y →C 350 × 2 = 700
Z →A 400 × 3 = 1,200
Z →D 200 × 5 = 1,000
7,350

The minimum cost = 7,350 thousand rupees.

Since some of the ∆ij’s = 0, the above solution is not unique. Alternative solutions
exist.

Ans.17:
The given problem is a transportation problem. The profit matrix for various factories and sales counters is calculated
below:
 Factory Sales Centres Capacity (kgms)
1 2 3
A 3 2 4 100
B 0 -1 1 20
C 4 3 5 60
D 2 1 3 80
Demand (kgms) 120 140 60
Since this is an unbalanced transportation problem (demand > capacity), let us introduce a dummy factory with profit
as
Rs.0 per unit for various sales centres and capacity equal to sixty units. The resulting matrix would be as
below:
Factory Sales Centres Capacity (kgms)
1 2 3
A 3 2 4 100
B 0 -1 1 20
C 4 3 5 60
D 2 1 3 80
Dummy 0 0 0 60
Demand (kgms) 120 140 60

The above profit matrix can be converted into a loss matrix by subtracting all its elements from the highest payoff of
the
matrix i.e. 5. The loss matrix so obtained is given below:
Factory Sales Centres Capacity (kgms)
1 2 3
A 2 3 1 100
B 5 6 4 20
C 1 2 0 60
D 3 4 2 80
Dummy 5 5 5 60
Demand (kgms) 120 140 60

The initial solution is obtained by applying Vogel’s approximation method.

Factory Sales Centres Capacity Difference
1 2 3
A 100
2 3 1 100/0 11-
B 20
5 6 4 20/0 111
C 60
1 2 0 60/0 1--
D 20 60
 3 4 2 80/60/0 111
Dummy 60
5 5 5 60/0 000
Demand 120/20/0 140/120/60/0 60/0
Difference 1 1 1
1 1 -
2 1 -

The solution obtained by VAM is as given below:

Factory Sales Centres Ui
1 2 3
A 100 0 E
2 3 1 3
B 0 20 0
5 6 4 6
C 0 0 60
1 2 0 2
D 20 60 0
3 4 2 4
Dummy 1 60 2
5 5 5 5
Vj -1 0 2

Since all ∆ij ≥ 0 for the non allocated cells, hence the solution given by above matrix is optimal. The optional solution
for
the given problem is given below:
From Factory To Sales Centre Quantity Profit per unit Total Profit (Rs.)
(Rs.)
A 1 100 3 300
B 2 20 -1 -20
C 3 60 5 300
D 1 20 2 40
D 2 60 1 60
Dummy 2 60 0 0
Total Profit = 660
(Note: since some of the ∆ij’s are equal to zero, alternative solutions also exist.)

Ans.18:
The given problem is an unbalanced transportation problem which is converted into a balanced on by adding a
dummy
investment as given below:
 Year Net Return data (in paise) of Investment Dummy Amount
Payable
P Q R S
1 95 80 70 60 0 70
2 75 65 60 50 0 40
3 70 45 50 40 0 90
4 90 40 40 30 0 30
Maximum 40 50 60 60 20
Investment

The values in the table represent net return on investment of one rupee till the end of the fourth year. The objective of
the
company is to maximize the net return. For achieving this objective, let us convert this maximization problem into
minimization problem by subtracting all the elements of the above payoff matrix from the highest payoff i.e. 95, and
apply
Vogel’s approximation method for finding the initial feasible solution.

Year Loss Matrix – Investment type Dummy Amount Difference

Available
P Q R S

1 40 30
0 15 25 3 9 70/30/0 15/10 _ _
5 5

2 20 20
20 30 35 4 9 40/20/0 10/5/5/10
5 5

3 40 50 10/40/20
/0/0
25 50 45 5 9 90/50/0
5 5

4 10 20
35 55 55 6 9 30/20/0 10/3/0
5 5

Maximum 40/0 50/20/0 60/40/0 60/10/0 20/0

Investment

Difference 20 15 10 10 0

- 15 10 10 0

- 20 10 10 0

- - 10 10 0
solution obtained by VAM is as given below
 Year Loss Matrix – Investment type Dummy Amount
Available
P Q R S

1 40 30
0 15 25 35 95 70

2 20 20
20 30 35 45 95 40

3 40 50
25 50 45 55 95 90

4 10 20
35 55 55 65 95 30

Maximum 40/0 50/20/0 60/40/0 60/10/0 20/0

Investment

This initial solution is tested for optimality. There are 8 (=m+n-1) independent allocations. Let us introduce ui, vj,
i=(1,2,3,4);
= (1,2,3,4,5 such that Dij = cij = (ui+vj) for allocation cell. We assume u1 = 0 and remaining u1’s vj’s and Dij’s are
calculated.

Year Loss Matrix – Investment type Dummy Amount

Available
P Q R S

1 40 30 5 5 35
0 15 25 35 95 0

2 5 20 20 0 20
20 30 35 45 95 15

3 0 10 40 50 10
25 50 45 55 95 25

4 0 5 10 20
35 55 55 65 95 35

vj’s 0 15 20 30 60

On calculating Aijs for non-allocated cells, we found that their values are positive, hence the initial solution obtained
above
is optimal. The optimal allocations are given below:
Year Invest in Net Return
1 Invest Rs 40 lacs in investment P 0.95xRs.40 lacs = Rs. 38,00,000
 Rs 30 lacs in investment Q 0.80xRs.30 lacs = Rs. 24,00,000
2 Invest Rs 20 lacs in investment Q 0.65xRs.20 lacs = 13,00,000
Rs 20 lacs in investment R 0.60xRs.20 lacs = 12,00,000

3 Invest Rs 40 lacs in investment R 0.50xRs.40 lacs = Rs. 20,00,000

Rs 50 lacs in investment S 0.40xRs.50 lacs = Rs. 20,00,000
4 Invest Rs.10 lacs in investment S 0.30xRs.10 lacs = Rs.3,00,000
Total Rs.130,00,000

Ans. 19:
The given information can be tabulated in following transportation problem:
Profit Capacity in
Sales offices units
Plant 1 2 3 4 5
1 9 11 6 5 5 150
2 -1 3 1 9 1 200
3 8 9 10 14 4 125
Demand 80 100 75 45 125

Where entries in the cells of the above table indicate profit per unit received by selling one
unit of item from plant i (1 =1,2,3) to the sales office (i=1,2,3,4,5). The profit per unit is
calculated using the following formula.

Profit = sales price –(production cost +Shipping cost)

The objective of the company is to maximize the profit. For achieving this objective, let us
convert this maximization problem into minimization problem by subtracting all the elements
of the above payoff matrix from the highest payoff i.e. Rs. 14.

Loss matrix
Sales offices Capacity in
units
Plant 1 2 3 4 5
1 5 3 8 9 9 150
2 15 11 13 5 13 200
3 6 5 4 0 10 125
Demand 80 100 75 45 125
The problem is an unbalanced transportation problem since capacity (=475 units) is 50 units
more than the demand. Hence a dummy sales office is added with cost equal to zero for all
plants and demand equal to 50 units. Now, let us apply Vogel’s Approximation method to
the resultant balanced matrix for finding the initial feasible solution.
 Sales offices
Plant 1 2 3 4 5 Dummy Capacity Difference
1 50 100
0 150/50/0 3/3/2/2/4
5 3 8 9 9
2 25 125 50 200/150/125/0 5/11/2/2/2/2
0
15 11 13 5 13
5 75 45

3 6 5 4 0 10 0 125/80/5/0 0/4/1/1/4/4

Demand 80/30 100/0 75/0 45/0 125/0 50/0

/25/0
differ 1 2 4 5 1 0
1 2 4 -- 1 0
1 2 4 -- 1 --
1 2 -- -- 1 --
1 -- -- -- 1 --

The initial solution obtained by VAM is given below which is tested for optimality.

Plant 1 2 3 4 5 Dummy Capacity

in units
1 50 100
5 3 8 9 9 0 150
2 25 125 50
11 13 5 13 0 200
15
3 5 75 45
6 6 4 0 10 6 125
Demand
in units 80 100 75 45 125 50

These are m +n –1 =8 independent allocations. Let us now introduce ui, vj, I = (1,2,3); j =
(1,2-----6) such that ∆ ij = Cij –(ui +vj) for allocation cells. We assume u2 = 0 and remaining
ui’s vj’s and ∆ij’s are calculated as below:

Sales offices
Plant 1 2 3 4 5 Dummy Ui’s
1 50 100 5 10 6 10
5 8 9 0 -10
3 9
2 25 -θ -2 10 -4 + 125 50
13 θ 13 0 0
15 11 5
3 5 +θ 1 75 45 -6 9
6 5 4 θ 10 0 -9
0
Vj’s 15 13 13 9 13 0
 Since some of the Δij’s are negative, therefore, the above solution is not optimal. Introduce in
the cell (2,4) with the most negative Δij, an assignment. The value of θ and reallocated
solution as obtained from above is given below. The reallocated solution is again tested for
optimally. Hence, the values ui’s vj’s and Δij’s are again calculated.

Sales offices
Plant 1 2 3 4 5 Dummy Ui’s
1 50 100 5 10 2 6
5 8 9 9 0 -6
3
2 4 2 4 25 125 50
15 11 13 5 13 0 0
3 30 1 75 20 2 5
6 5 4 0 10 0 -5
Vj’s 11 9 9 5 13 0

Since all Δij’s for non-basic cells are positive, therefore, the solution obtained above is an
optimal one. The allocation of plants to sales officers and their profit amount is given below:

Plant Sales units profit per profit

Office unit
1 1 50 9 450
1 2 100 11 1,100
2 4 25 9 225
2 5 125 1 125
2 Dummy 50 0 0
3 1 30 8 240
3 3 75 10 750
3 4 20 14 280
Total 3,170

Ans.20:

Convert the given profit matrix into a loss matrix by subtracting each element of the matrix from the
highest value viz.44.The resulting loss matrix is as follows:

Loss Matrix

Customer
------------------------------------------------
Factory A B C D supply

P 4 19 22 11 100
Q 0 9 14 14 30
R 6 6 16 14 70
Demand 40 20 60 30 150/200

The loss matrix, obtained as above is an unbalanced one, We introduce a dummy column to
make it a balanced one.
 Loss Matrix

Customers
______________________________________
Factory A B C D Dummy Supply

P 4 19 22 11 0 100
Q 0 9 14 14 0 30
R 6 6 16 14 0 70
Demand 40 20 60 30 50 200/200

By using Vogal’s approximation method, the following initial feasible solution is found

Customers
Factory A B C D Dummy Supply

P 10 60 30 e 100

4 19 22 11 0
--------------------------------------------------------------------------------------------------------------
Q 30 30

0 9 14 14 0
----------------------------------------------------------------------------------------------------------------
R 20 50 70

6 6 16 14 0
-----------------------------------------------------------------------------------------------------------------
Demand 40 20 60 30 50 200/200

Since the number of allocation’s in the initial feasible solution are 6 and for applying
optimality test they should be equal to (m+n-1)=7, therefore we enter a very small
assignment equal to e in the minimum cost so that no loop is formed.

Let us introduce the variables Ui and Vj such that Ui + Vj = Cij for allocated cells.
We thus have the following relations:

U1 + V1 = 4 U2 + V1 = 0
U1 + V3 = 22 U3 + V2 = 6
U1 + V4 = 11 U3 + V5 = 0
U1 + V5 + 0
Put U1 = 0,we get
V1 = 4;V3 = 22; V4 = 11; V5 = 0; U3 = 0;V2 = 6 and U2 = (-4)

Compute: Cij – (Ui + Vj) for non-allocated cells.

U1V2 =19 - (0 + 6) = 13
U2V2 = 9 - (- 4 + 6) =7
U2V3 = 14 - ( - 4 + 22) = (-4)
U2V4 = 14 - (- 4 + 11) = 7
U2V5 = 0 - (- 4 + 0) = 4
U3V1 = 6 - (0 + 4) = 2
U3V3 = 16 - (0 + 22) = (-6)
U3V4 = 14 - (0 + 11) = 3

Since the value of Cij - (Ui + Vj)is negative in two cells therefore the initial solution is not
optimal, Introduce an assignment 0 in the cell U3V3 and construct a loop shown as below,
after adjusting.

Customers

Factory A B C D Dummy Supply Ui

---------------------------------------------------------------------------------------------------------------------------
-----
P 10 60-0 30 e+0 100 U1 = 0

4 19 22 11 0
30
Q 30 U2 =
(-4)
0 9 14 14 0
20 0 50-0
R 70 U3 = 0
6 6 16 14 0

Demand 40 20 60 30 50 200/200

Vj V1= 4 V2 = 6 V3 = 22 V4 =11 V5 = 0

Maximum value of 0 = 50

Apply optimality test once again. Introduce Ui and Vj’s and determine their values

Compute Cij - (Ui + Vj) for non-allocated cells, since it comes out to be negative for U2V3 cell,
therefore we repeat the aforesaid process by introducing 0 in U2V3 cell, the minimum value
0f 0 is 10.
 Customers

Factory A B C D Dummy Supply Ui

P 10+ 10- 30 50 100 U1=0

4 19 22 11 0
0
Q 30- 30 U2=(-4)

0 9 14 14 0

R 20 50 70 U3 = ( -
6)

6 6 16 14 0

Demand 40 20 60 30 50 200/ 200

V1 V1=4 V2=12 V3=22 V4=11 V5=0

The second improved solution obtained is as under:

Apply optimality test to the solution once again after determining the values of Ui and Vj.
Since Cij - (Ui + Vj) for non-allocated cell is positive, therefore the following solution is optimal
one.

Customers

Factory A B C D Dummy Supply Ui

---------------------------------------------------------------------------------------------------------------------------
---
P 20 30 50 100 U1=0

4 19 22 11 0
10

Q 20 30 U2=(-4)

0 9 14 14 0

R 20 50 70 U3=(-2)

6 6 16 14 0

Demand 40 20 60 30 50 200/200
 Vj V1=4 V2=8 V3=18 V4+11 V5=0

Transferring the solution to the original profit matrix, we get;

Customers

Factory A B C D Dummy Supply

-------------------------------------------------------------------------------------------------
P 20 30 50 100

40 25 22 33 0

Q 20 10 30

44 35 30 30 0

R 20 50 70

38 38 28 30 0

Demand 40 20 60 30 50

Maximum profit
=20 Rs.40+30Rs.33+20*Rs.44+10*Rs.30+20*Rs.38+50*Rs.28+50*Rs.0
=Rs.800+Rs.990+Rs.880+Rs.300+Rs.760+Rs.1,400
=Rs.5,130

Ans. 21
The given information can be tabulated in following transportation problem:
Project
Auditor 1 2 3 Time available
(Hours)
(Rs.) (Rs.) (Rs.)
1 1,200 1,500 1,900 160
2 1,400 1,300 1,200 160
3 1,600 1,400 1,500 160
Time
Required 130 140 160
(Hours)

The given problem is an unbalanced transportation problem. Introducing a dummy project to

balance it, we get
 Project
Auditor 1 2 3 Dummy Time
available
(Hours)
1 1,200 1,500 1,900 0 160
2 1,400 1,300 1,200 0 160
3 1,600 1,400 1,500 0 160
Time 130 140 160 50 480
Required
(hrs.)

The objective here is to maximize total billing amount of the auditors. For achieving this
objective, let us convert this maximization problem into a minimization problem by
subtracting all the elements of the above payoff matrix from the highest payoff i.e. Rs. 1900.
Project
Auditor 1 2 3 Dummy Time available
1 700 400 0 1900 160
2 500 600 700 1900 160
3 300 500 400 1900 160
Time 130 140 160 50 480
required
(Hrs)

Now, let us apply Volgel’s Approximation Method to the above matrix for finding the initial
feasible solution.

Project (Figure of payoff’s in Rs. 00’s)

Auditor 1 2 3 Dummy Time Difference
Available
160
1 7 4 0 19 160/0 4/-/-/-
110 50
2 5 6 7 19 160/50/0 1/1/13/13
130 30
3 3 5 4 19 160/30/0 1/2/14/-
Time 130/0 140/110/0 160/0 50/0
Required

Difference 2/2/-/- 1/1/1/1 4/-/- 0/0/0

The initial solution is given below. It can be seen that it is a degenerate solution since the
number of allocation is 5. In order to apply optimality test, the total number of allocations
should be 6 (= m + n -1). To make the initial solution a non-degenerate, we introduce a very
small quantity in the least cost independent cell which is cell of Auditor 3, Project 3.
 Project
Auditor 1 2 3 Dummy Time Available
160
1 7 4 0 19 160
110 50
2 5 6 7 19 160
130 30 e
3 3 5 4 19 160
Time 130 140 160 50
Required
Introduce ui’s and vj’s such that ∆ij = Cij– (ui+vj) (for I, = 1 to 3; j = 1,2,3, dummy). To
determine the values of ui’s and vj’s we assume that u3 = 0, values of other variables i.e. ui’s,
vj’s and … are calculated as follows:
Project
Auditor 1 2 3 Dummy Uj’s
1 8 3 160 5
7 4 0 19 U1=-4
2 1 110 2 50
5 6 7 19 U2=1

3 130 30 e 1
3 5 4 19 U3=0

Vj’s v1=3 v2= 5 v3=4 v4=18

Since all for non basic cells are positive, therefore the initial solution obtained above is
optimal. The allocation of projects to auditors and their billing amount is given below: Here
an auditor may be involved in more one project as apparent from the following solutions.

Auditor Project Billing amount (Rs.)

1 3 160xRs. 1900 = 3,04,000
2 2 110xRs. 1300 = 1,43,000
3 1 130xRs. 1600 = 2,08,000
3 2 30xRs. 1400 = 42,000
Total billing = 6,97,000

Hence, the maximum total billing during the next month will be Rs. 6,97,000
 -1-

Some solutions of Assignment

Ans. 1:
I II III IV
1 16 52 34 22
2 26 56 8 52
3 76 38 36 30
4 38 52 48 20
Step 1:
Subtract the smallest element of each row from every element of the corresponding row
I II III IV
1 0 36 18 6
2 18 48 0 44
3 46 8 6 0
4 18 32 28 0
Step 2: Subtract the smallest element of each column from every element in that column
I II III IV
1 0 28 18 6

2 18 40 0 44
3 46 0 6 0
4 18 24 28 0
Step 3: Drew minimum number of horizontal and vertical lines to cover all the zeros

I II III IV

1 0 28 18 6

2 18 40 0 44

3 46 0 6 0

4 18 24 28 0

The optimal assignment is

1 ─ I = 16
2 ─ III = 8
3 ─ II = 38
4 ─ IV = 20
82 hours
Minimum time taken = 82 hours

Ans. 2:

(a) Consider the following assignment problem:

Division

N E W S

A 14 20 11 19
 -2-

B 12 10 15 9
Marketing Executives
C 16 19 18 15

D 17 13 15 14

Step 1
Select the minimum element of first row and subtract it from all the elements of the row. On
repeating the step with all the rows of the above matrix, we get the following

Division
N E W S

A 3 9 0 8

B 3 1 6 0
Marketing Executives
C 1 4 3 0

D 4 0 2 1
Step 2

Select the minimum element of first column and subtract it from all the elements of the
column. On repeating this step with all the columns of the above matrix; we get the following
Division

N E W S

A 2 9 0 8
B 2 1 6 0
Marketing Executives
C 0 4 3 0
D 3 0 2 1
Step 3
On drawing the minimum number of lines in the above matrix, so as to cover at the zeros,
we get the following matrix. Division

N E W S

A 2 9 0 8
B 2 1 6 0
Marketing Executives
C 0 Ā 3 0

D 3 0 2 1
Since the minimum number of lines drawn under the step is equal to number of marketing
executives or number of divisions, therefore we go over to the final step for determining the
required optimal solution.

Step 4
For determining the optimal solution scan each row in turn for a single uncovered zero in it,
encircle it and pass a line in its column.
Division
 -3-

N E W S

A 2 9 0 8
B 2 1 6 0
Marketing Executives
C 0 4 3 0

D 3 0 2 1

The optimal assignment obtained in this case is as under:

Marketing Division Cost

Executive Rs.
A W 11
B S 09
C N 16
D E 13
Total minimum cost 49

Ans. 5:
Using the information that the factory works effectively 7 hours (=420 minutes) a day and the time required by each
operator for producing each of the products, we obtain the following production and profit
matrices:
Production Matrix (units) Profit Matrix (in Rs.)
Operator Product Operator Product
A B C D A B C D
P 70 42 30 35 P 210 84 120 35
Q 60 84 140 105 Q 180 168 560 105
R 70 60 42 42 R 210 120 168 42
S 21 42 28 28 S 63 84 112 28

In order to apply the assignment algorithm for minimizing losses, let us first convert this profit matrix to a loss matrix by
subtracting all the elements of the given matrix from its highest element which is equal to Rs.560. The matrix so
obtained
is given below:
Operator Product
A B C D
P 350 476 440 525
Q 380 392 0 455
R 350 440 392 518
S 497 476 448 532

Now apply the assignment algorithm to the above loss matrix. Subtracting the minimum element of each row from all
elements of that row, we get the following matrix:

Operator Product
 -4-

A B C D
P 0 126 90 175
Q 380 392 0 455
R 0 90 42 168
S 49 28 0 84

Now subtract the minimum element of each column from the elements of that column to get the following
matrix:
Operator Product
A B C D
P 0 98 90 91
Q 380 364 0 371
R 0 62 42 84
S 49 0 0 0

Draw the minimum number of lines to cover all zeros. The minimum number of lines to cover all zeros is three which is
less than the order of the square matrix (i.e.4) thus the above matrix will not give the optimal solution. Subtract the
minimum uncovered element (=62) from all uncovered elements and add it to the elements lying on the intersection of
two
lines, we get the following matrix:

Operator Product
A B C D
P 0 36 90 29
Q 380 302 0 309
R 0 0 42 22
S 111 0 62 0

The minimum number of lines which cover all zeros is 4 which is equal to the order of the matrix, hence, the above
matrix
will give the optimal solution. Specific assignments in this case are as below:

Operator Product
A B C D
P 0 36 90 29
Q 380 302 0 309
R 0 0 42 22
S 111 0 62 0

Operator Product Profit (Rs.)

P A 210
Q C 560
R B 120
S D 28
Total Profit (Rs.) 918

Ans. 8:
(i)
 -5-

4 12 16 8
20 28 32 24
36 44 48 40
52 60 64 56

Subtracting minimum element – each row.

0 8 12 4
0 8 12 4
0 8 12 4
0 8 12 4

Subtracting minimum element – each column,

0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0

Minimum no. of lines to cover all zeros = 4 = order of matrix. Hence optional
assignment is possible.
Minimum cost = 4 + 28 + 48 + 56 = 136.
= AR 1 + BR2 + CR3 + DR4
Since all are zeros, there are 24 solutions to this assignment problem.
Viz. A B C D
R1 R2 R3 R4
R2 R3 R4 R1
R3 R4 R1 R2
R4 R1 R2 R3
R1 R3 R4 R2 etc.
A can be assigned in 4 ways, B in 3 ways for each of A’s 4 ways.
(ii) SP – VC = 100 Rs.
A B C D
R1 96 88 84 92
R2 80 72 68 76
R3 64 56 52 60
R4 48 40 36 44
Subtracting the highest term
0 8 12 4
16 24 28 20
32 40 44 36
48 56 60 52
Subtracting minimum term of each row.
0 8 12 4
 -6-

0 8 12 4
0 8 12 4
0 8 12 4
Which is the same as the earlier matrix
Maximum contribution = Rs. (96 + 72 + 52 + 44) = Rs. 264.
Alternative Solution:

Maximisation of contribution is same as minimizing cost. Hence, same assignments as in

(i) will be the optional solution.

Maximum Contribution Rs. (400 – 136) = Rs. 264

(iii) (a) The relative cost of assigning person i to region r does not change by addition or subtraction of a
constant from either a row, or column or all elements of the matrix.
(b) Minimising cost is the same as maximizing contribution. Hence, the assignment solution will be
the same, applying point (i) above.
(c) Many zero’s represent many feasible least cost assignment. Here, all zeros mean maximum
permutation of a 4 4 matrix, viz. 4 3 2 1 = 24 solutions are possible.

Ans. 9:
Reducing minimum from each column element (figure in ’000s)
Step 1 Step 2

R1 R2 R3 R4 R1 R2 R3 R4

C1 1 1 C1 0 0

C2 0 0 C2 0 0

C3 0 0 C3 0 0

C4 2 1 C4 1 0

Number of lines to connect all zeros nos. is 4 which is optional.

Alternatively you may also reduce the minimum from each row.

Step 1 Step 2

R1 R2 R3 R4 R1 R2 R3 R4

C1 0 1 C1 0 1

C2 0 0 C2 0 0

C3 1 0 C3 0 0

C4 0 1 C4 0 0

Number of lines to connect all zeros nos. is 4 which is optional.

All diagonal elements are zeros and are chosen. The minimum cost is Rs.15,000 C 1 – R1 4,000; C2 – R 2
4,000; C3 – R3 2,000; C4 – R 4 5,000; (Total) = 15,000.

Ans.10:
Let us first formulate the preference ranking assignment problem.
MANAGERS
Room No. M1 M2 M3 M4 M5
 -7-

301 – 4 2 – 1
302 1 1 5 1 2
303 2 – 1 4 –
304 3 2 3 3 3
305 – 3 4 2 –
We have to find an assignment so that total preference ranking is minimum. In a cell (-) indicates
that no assignment is to be made in that particular cell. Let us assign a very large ranking value M to
all such cells.
Step 1 : From each row, subtract the minimum element of that row, from all the elements of that row
to get the following matrix.
MANAGERS

Room No M1 M2 M3 M4 M5
301 M 3 1 M 0
302 0 0 4 0 1
303 1 M 0 3 M
304 1 0 1 1 1
305 M 1 2 0 M
Draw the minimum number of lines in the above table to cover all zeros. In this case the number of
such lines is five, so the above matrix will give the optimal solution. The assignment is made as below:

MANAGERS
Rooms No. M1 M2 M3 M4 M5
301 M 3 1 M 0
302 0 0 4 0 1
303 1 M 0 3 M
304 1 0 1 1 l
305 M 1 2 0 M
Thus, the assignment is
M1 → 302, M2 → 304, M3 → 303, M4 → 305, M5 → 301
and the total minimum ranking = 1 + 2 + 1 + 2 + 1 = 7

Ans. 11:
Dummy machine (M5) is inserted to make it a balanced cost matrix and assume i ts installation cost to be
zero. Cost of install at cell M3 (J) and M2 (L) is very high marked as é.
J K L M N
M1 18 22 30 20 22
M2 24 18 é 20 18
M3 é 22 28 22 14
M4 28 16 24 14 16
M5 (Dummy) 0 0 0 0 0
Step 1
Subtract the minimum element of each row from each element of that row

J K L M N
 -8-

M1 0 4 12 2 4
M2 6 0 é 2 0
M3 é 8 14 8 0

M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0

Step 2
Subtract the minimum element of each column from each element of that column
J K L M N
M1 0 4 12 2 4
M2 6 0 é 2 0
M3 é 8 14 8 0
M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0

Step 3
Draw lines to connect the zeros as under:

J K L M N
M1 0 4 12 2 4
M2 6 0 é 2 0
M3 é 8 14 8 0
M4 14 2 10 0 2
M5 (Dummy) 0 0 0 0 0

There are five lines which are equal to the order of the matrix. Hence the solution is
optimal. We may proceed to make the assignment as under:

J K L M N
M1 0 4 12 2 4

M2 6 0 e 2 0

M3 e 8 14 8 0

M4 14 2 10 0 2

M5 (Dummy) 0 0 0 0 0

The following is the assignment which keeps the total cost at minimum:

Machines Location Costs Rs.

M1 J 18
M2 K 18
 -9-

M3 N 14
M4 M 14
M5 (Dummy) L 0
Total 64

Ans. 12:
Since the Executive Director of the 5 star hotel is interested in maximizing the revenue of the hotel, therefore,
the objective of the given problem is to identify the preferences of marriage parties about halls so that hotel
management could maximize its profit. To solve this problem first convert it to a minimization problem by
subtracting all the elements of the given matrix from its highest element which is equal to Rs. 10,000. The
matrix so obtained which is known as loss matrix is given below:

Loss matrix/Hall
Marriage party 1 2 3 4

A 0 1000 M M
B 2000 0 2000 5000
C 3000 0 4000 2000
D 0 2000 M M

Now apply the assignment algorithm to the above loss matrix. Subtracting the minimum element of each
column from all elements of that column, we get the following matrix.

Loss matrix/Hall
Marriage party 1 2 3 4

A 0 1000 M M
B 2000 0 0 3000
C 3000 0 2000 0
D 0 2000 M M

The minimum number of lines to cover all zeros is 3 which is less than the order of the square matrix (i.e. 4),
the above matrix will not give the optimal solution. Subtracting the minimum uncovered element (= 1000) from
all uncovered elements and add it to the elements lying on the intersection of two lines, we get the following
matrix

Marriage party 1 2 3 4

A 0 0 M M
B 3000 0 0 3000
C 4000 0 2000 0
D 0 1000 M M

Since the minimum number of lines to cover all zeros is 4 which is equal to the order of the matrix, the
above matrix will give the optimal solution which is given below:

Marriage party 1 2 3 4

A 0 0 M M
B 3000 0 0 3000
C 4000 0 2000 0
D 0 1000 M M
 - 10 -

and the optimal schedule is :

Revenue (Rs.)
Marriage party A → Hall 2 9,000
B → Hall 3 8,000
C → Hall 4 8,000
D → Hall 1 10,000
Total 35,000

Ans. 14:
The following matrix gives the cost incurred if the typist (i = A, B, C, D, E) executes the job (j = P, Q, R, S,
T).
Job
Typist P Q R S T
A 85 75 65 125 75
B 90 78 66 132 78
C 75 66 57 114 69
D 80 72 60 120 72
E 76 64 56 112 68

Subtracting the minimum element of each row from all its elements in turn, the above matrix reduces
to
Job
Typist P Q R S T
A 20 10 0 60 10
B 24 12 0 66 12
C 18 9 0 57 12
D 20 12 0 60 12
E 20 8 0 56 12
Now subtract the minimum element of each from all its elements in turn, and draw minimum number of lines horizontal
or
vertical so as to cover all zeros . All zeros can be covered by four lines as given
below:
2 2 0 4 0
6 4 0 10 2
0 1 0 1 2
2 4 0 4 2
2 0 0 0 2

Since there are only 4 lines (<5) to cover all zeros, optimal assignments cannot be made. The minimum uncovered
element is 2.
We subtract the value 2 from all uncovered elements. Add this value to al junction values and leave the other
elements
undisturbed. The revised matrix to obtained is given below:
2 2 2 4 0
4 2 0 8 0
0 1 2 1 2
0 2 0 2 0
2 0 2 0 2
 - 11 -

Since the minimum no. of lines required to cover al the zeros is only 4(<5), optimal assignment cannot be made at this
stage also.
The minimum uncovered element is 1, repeating the usual process again, we get the following
matrix.
2 1 2 8 0
4 1 0 7 0
0 0 2 0 2
0 1 0 1 0
3 0 3 0 3

Since the minimum number of lines to cover all zeros is equal to 5, is this matrix will give optimal solution? The optimal
assignment is made in the matrix below:
Typist P Q R S T
A 2 1 2 3 0
B 4 1 0 7 0
C 0 0 2 0 2
D 0 1 0 1 0
E 3 0 0 0 3

Cost ( Rs.)
Thus typist A is given job 75 T :
Thus typist B is given job 66 R :
Thus typist C is given job 66 Q :
Thus typist D is given job 80 P :
Thus typist E is given job S 112
Total Rs.399
Note: In case the above solution is not unique. Alternate solution also exists.
Ans. 17:
(a) Sum of the proportion = (8 + 7 + 5 + 4) = 24
Assuming Rs. 1,000 as one unit, the effective matrix is as follows:
Effective Matrix
Managers
East West North South
Z (8/24) 240 = 80 (8/24) 192 = 64 (8/24) 144 = 48 (8/24) 20 = 40
N (7/24) 240 = 70 (7/24) 192 = 56 (7/24) 144 = 42 (7/24) 120 = 35
O (5/24) 240 = 50 (5/24) 192 = 40 (5/24) 144 = 30 (5/24) 120 = 25
P (4/24) 240 = 40 (4/24) 192 = 32 (4/24) 144 = 24 (4/24) 120 = 20

Convert the maximization problem to minimization problem

The resultant loss matrix is as follows:
Loss Matrix
Managers East West North South
M 0 16 32 40
 - 12 -

N 10 24 38 45
O 30 40 50 55
P 40 48 56 60

Row operation
Managers East West North South
M 0 16 32 40
N 0 14 28 35
O 0 10 20 25
P 0 8 16 20

Column operation
Managers East West North South
M 0 8 16 20
N 0 6 12 15
O 0 2 4 5
P 0 0 0 0

Managers East West North South

M 0 6 14 18
N 0 4 10 13
O 0 0 2 3
P 2 0 0 0

Managers East West North South

M 0 2 10 14
N 0 0 6 9
O 4 0 2 3
P 6 0 0 0

Managers East West North South

M 0 2 8 12
N 0 0 4 7
O 4 0 0 1
P 8 2 0 0

Assignment Sales
Rs.
M – East
N – West
O – North
P – South
 - 13 -

1,86,000

Ans. 20
The initial matrix relating to nurse-patient combination is as under:
Nurse Patients
W X Y
K 10 10 30
L 30 10 20
M 20 30 20
Deducting the lowest element of each row from the other elements of the same row, we get
the following matrix:
0 0 20
20 0 10
0 10 0
We deduct the lowest element of each column from the other elements of the same column.
Since there is zero in each column, the same matrix will be returned.
Draw lines to connect zeros as under:

0 0 20
20 0 10
0 10 0
There are three lines as required by the order of matrix of three.
Hence the solution is optimal.
Allocation of patients to nurses as under to minimize the cost

0 0
20 0
0 10
K W 10 400 400
L X 10 400 400
M Y 20 800 800
Total minimum cost 1600
(iii) With the introduction of a new patient and a new nurse, the original matrix of nurse-patient
combinations will stand revised as under:

Nurse Patients
W X Y Z
K 10 10 30 40
L 30 10 20 40
M 20 30 20 40
N 50 50 50 50
 - 14 -

Deducting the lowest element of each row from the other element of the same
row, we get the following matrix:

0 0 20 30
20 0 10 30
0 10 0 20
0 0 0 0
Deduct the lowest element of each column from the other elements of the
same column. Since there is zero in each column, the same matrix will be returned.
Draw lines to connect zeros as under:
0 0 20 30
20 0 10 30
0 10 0 20
0 0 0 0

There are four lines as required by the order of matrix of four

Hence the solution is optimal.
Proceed to allocate the patients to nurses as under to minimize the cost.
0 0 20
20 0 10
0 10 0
0 0 0

K W 10 400 400
L X 10 400 400
M Y 20 800 800
N Z 50 2000 2000
Total minimum cost 3600
(iv) The cost of new nurse per hour is Rs. 50 in respect of any patient and the cost of the existing
nurses for attending to the new patient is Rs. 40 per hour. Both these rates are greater than
the values of other elements of existing nurse-

patient combination matrix. Thus the new nurse row and new patient column
will have a higher value than the element of the existing matrix. Hence the new nurse can
be allocated to the new patient without having to redo the assignment exercise.
Hence we need not to a fresh assignment. N will be assigned to patient Z at 50/ hr is Rs.
2000/ week.
This will be the extra minimum cost to the hospital i.e. 2000 + 1600 = 3600.
 Some solutions of Learning Curve

Ans. 6 (i) Actual learning curve rate is 80%.

Time taken to produce the first machine = 600 hours
Average time taken to produce two machines = 600 80% hours
= 480 hours.
Cumulative time taken to produce two machines = 480 2 hours
= 960 hours.
Time taken to produce the second machine = (960  600)hours
= 360 hours.
(ii) Actual learning curve rate is 90%.
Time taken to produce the first machine = 600 hours
Average time taken to produce two machines = 600 90% hours
= 540 hours.
Cumulative time taken to produce two machines = 540 2 hours
= 1080 hours.
Time taken to produce the second machine = (1080  600) hours
= 480 hours.
The time taken to produce the second machine is lower at 80% learning rate and
hence 80% learning rate shows faster learning rate.

Ans. 10: (i) Rs/u

1st unit Avg/u after 4 th at
Variable Cost 2000 2000
Labour 1000 810
Target Contribution 1500
Price to be quoted 4310 (Rs./u)
(ii) No, the company cannot quote this price for varying products because the learning
curve Ratio does not apply to non-repeated jobs. Each product will carry a different
price according to its direct labour hours.

Ans. 13:
5,000 units 20,000 units

Material 1,50,000 6,00,000

Direct Labour 1,00,000 2,56,000
Refer to W Note i
Variable Overhead 50,000 2,00,000
Total Variable Cost 3,00,000 10,56,000
Fixed Cost 1,50,000 1,50,000
Total Cost 4,50,000 12,06,000
Total cost / unit 90 60.3
Sales 100 5,000 5,00,000 5,00,000
15,000 x(assumed selling price) 15,000 x
(Total Sales less Total Cost) = Profit 50,000 15,000 x – 7,06,000

Or minimum selling price = 50.4(refer to Working Note ii)

Working Note: I

Units Hours
 5,000 5,000
10,000 10,000 1 .8 = 8,000 hours
20,000 20,000 1 .8 .8 = 12,800 hours
Working Note: II
15,000 x – 7,06,000 > 50,000

15,000 x > 7,56,000

or x > 50.4

Alternative Solution:
Total cost / unit of capacity 20,000 = 60.3
Weighted average selling price > 80.4
5,000 100  15,000 x
i.e. > 60.3
20,000
= 5,00,000 + 15,000 x > 60.3 20,000

= 15,000 x > 12,06,000 – 5,00,000

Or
15,000 x > 7,06,000
x > 47.06
Minimum price to cover production Cost = 47.06
Minimum price to cover same amount of profit = 50.40 (refer to W orking Note 1)
Working Note 1
( 47.06 + 50.04) 15,000 units

= Rs. 50,000

Ans. 14: Units Average/ hrs/u.

1 2,000
2 1,600
4 1,280
8 1,024
Material Cost / u = 10,000
Variable cost = 2,000
Variable Cost = 12,000
Option I
If both the orders came together, learning rate 80% applies and 8 units can be
made, with average time of 1,024 hours per unit.
Cost to PQ:
Variable cost excl. labour = Rs.12,000
Labour cost 1,024 hrs × 4 Rs./hr = Rs. 4,096
= Rs.16,096
 In this case,

Y X
Selling Price p. u. Rs.17,200 Rs.16,500 → (under option I)
Variable Cost p. u. Rs.16,096 Rs.16,096
Contribution p. u. Rs.1,104 Rs.404
No. of units 4 4
Contribution (Rs.) 4416 1616 6032
Option II
If X Ltd supplies its labour. 80% learning curve will apply to 4 units each of PQ & X.
Hence: hrs/ u = 1280
Y X
Selling Price Rs.17,200 Rs.14,000
Variable Cost (excl. labour) Rs.12,000 Rs.12,000
Labour cost:
1280 × 4 Rs.5,120

1280 × 1 . Rs.1280
Total Variable Cost Rs.17,120 Rs.13,280
Contribution Rs.80 Rs.720
Units 4 4
Contribution (Rs.) 320 2,880 3,200
PQ should not take labour from X Ltd. It should choose option I.

Ans. 16: Working notes :

(1) By the theory of learning curve

YX = KX5 ……………………… (i)
Here X is the cumulative number of units or lots produced, Y is the
cumulative average unit time of those X units. K is the average time of the
first unit or lot, s is the improvement exponent or the learning coefficient or
the index of learning.

Taking log on both sides of relation (i) we have

Log YX = log K + s log X ……………(ii)

(2) Time required for 30 units order (when the time required for the first unit
is 40 hours)

Log 40 + (-0.322) log 30 = 1.6021 + (- 0.322) (1.4771) = 1.6021 –

0.4756
= 1.1264
Anti log of 1.1264 = 13.38
Hence hours required
Per unit = 13.38

Total time required for 30 units = 30 units x 13.38 hours = 401.40

(3) Time required for 50 units order (When the time required for first unit is
40 hours)
 log 40 + (-0.322) log 50 = 1.6021 + (-0.322) 1.6990
= 1.055
Anti log of 1.055 = 11.35
Hence hours required per unit 11.35 hours
Total time required for 50 units = 11.35 x 50 units = 567.5 hours

(4) Fixed overhead recovery rate per labour hour

Total labour hours 2,000

10 men x 25 days x 8 hours
Less : 25% downtime (in hours) 500
_____
Total effective hours 1,500
Total fixed overheads per month (Rs.) 7,500
Fixed overhead recovery rate per labour hour (Rs) 5
(Rs. 7,500/1,500 hours)

(i) Computation of cost per unit of the first order of 30 units

Rs.
Direct material cost 1,800.00
(30 units x Rs. 60)
Direct labour cost 2,408.40
(401.4 hours x Rs. 6)
Variable overheads 401.40
(401.40 hours x Re 1)
Fixed overheads 2,007.00
(401.4 hours x Rs. 5)
Total cost of 30 units 6,616.80
Cost per unit 220.56
(Rs. 6,616.80/30 units)

(ii) Cost per unit, when a repeat order for 20 units is also placed.
Rs.
Direct material cost 1,200.00
(20 units x Rs. 60)
Direct labour 996.60
(567.5 hours – 401.40 hours) x Rs. 6
Variable overheads 166.10
(1.66.1 hours x Re 1)
Fixed overheads 830.50
(166.1 hours x Rs. 5)
________
Total cost of 20 additional units 3,193.20

Cost per unit 159.66

(Rs. 3,193.20/20 units)

Price to be quoted to yield a profit of 25% on selling price

If selling price is Rs. 100 then profit is Rs. 25 and cost is Rs. 75
 Hence selling price per unit = 100 x 159.66
75

= Rs. 212.88

Ans. 18 (i) Price per unit for first order of 100 units
Rs Rs
Direct material 500.00
Direct labour Dept A 20 Hrs @ 10 = 200 800.00
Dept B 40 Hrs @ 15 = 600
Variable Overhead 20% of Rs 800 160.00
Fixed Overhead Dept A 20 Hrs @ 8 = 160 360.00
Dept B 40 Hrs @ 5 = 200
Total cost 1,820.00
Profit 25% 455.00
Selling price per 2,275.00
unit

(ii) Price per unit for second order of 60 units

Learning will be applicable only in department B.
Cumulative output becomes 100 units + 60 units = 160 units i.e 1.6 times for which
learning is 86.1 % from the tables.
Therefore Total Hrs for 160 units = 160 units 40 .861 = 5,510.4 Hrs
Therefore Hrs for 60 units = Hrs for 160 units less Hrs for 100 units
Or 5510.4 less 40 100 = 1510.4 Hrs
1510.4
Therefore Hrs per unit = = 25.17
60
Calculation of selling price per unit
Rs
Direct materials 500.00
Direct labour Dept A 20 Hrs @ 10 = 200 577.55
Dept B 25.17 Hrs @ 15 = 377.55
Variable Overhead 20% of 577.55 115.51
Fixed Overhead Dept A 20 Hrs @8= 160 285.85
Dept B 25.17 Hrs @5=125.85
Total cost 1,478.91
Profit 25% 369.73
Selling price per unit 1,848.64
(iii) Price per unit for third order of 40 units
Cumulative output becomes 100 + 60 + 40 = 200 units i.e. 2 times for which learning is
80% from the table
Total Hrs for 200 units = 200 40 .80 = 6,400 Hrs
Hrs for 40 units = Hrs for 200 units less Hrs for 160 units
Or 6,400 less 5510.4 = 889.6 Hrs
889.6
Therefore Hrs per unit = = 22.24
40
Calculation of selling price per unit
Rs
Direct materials 500.00
Direct labour Dept A 20 Hrs @ 10 = 200.00 533.60
Dept B 22.24 @ 15 = 333.60
Variable Overhead 20% of 533.60 106.72
Fixed Overhead Dept A 20 Hrs @ 8 = 160 271.20
Dept B 22.24 Hrs @ 5 = 111.20
Total cost 1,411.52
Profit 25% 352.88
Selling price per unit 1,764.40
 Sol of PERT CPM -1-

Ans. 12
(i) The required network is given below:

(ii) Critical path : B,E,F =7+7+6 = 20 days

Ans. 13
The network is constructed as given in figure below:

(i) The TE’s and TL’s for various events computed on the network are as follows:
Event No.: 1 2 3 4 5 6 7 8 9 10
TE 0 4 1 5 7 11 15 17 18 25
TL 0 12 1 13 7 17 15 17 18 25

(ii) Activity floats are computed using the following formula:

Float = TL (Head event) – TE (Tail event) – Duration
Activity Duration TE (Tail Event) TL(Head Event) Float
1-2 4 0 12 8
1-3 1 0 1 0
2-4 1 4 13 8
3-4 1 1 13 11
3-5 6 1 7 0
 -2-

4-9 5 5 18 8
5-6 4 7 16 5
5-7 8 7 15 0
6-8 1 11 17 5
7-8 2 15 17 0
8-9 1 17 18 0
8-10 8 17 25 0
9-10 7 18 25 0
Critical path is given by all those activities which have zero floats. Along the zero float activities, there are two such
critical paths:
(i) 1 → 3 → 5 → 7 → 8 → 9 → 10
(ii) 1 → 3 → 5 → 7 → 8 → 10
The project duration is 25 weeks.

Ans. 16(i)

A D F = 16+ 10+12 = 38
B E F = 20+ 6+ 12= 38
(ii) A-C –E- F = 16+8 +6 +12 = 42 Critical Path

(iii) Total float and free float for each activity

(iii) Total float and free float for each activity

Activity Normal Earliest Time Latest Time Float Free

Time start finish start finish total
Days
A 16 0 16 0 16 0 0
B 20 0 20 4 24 4 4
C 8 16 24 16 24 0 0
D 10 16 26 20 30 4 4
E 6 24 30 24 30 0 0
F 12 30 42 30 42 0 0

Ans. 18
20  20
(a) Z = 0; Probability = 0.50
4
 -3-

18  20
(b) Z = –0.50; Probability = 0.31
4
24  20
(c) Z = 1; Probability = 0.84
4

Ans. 19

Tcp = 60 S.D. = 9 = 3.

60 + 3 × 2.3 = 67 weeks (Answer)

Ans. 21
The required network is drawn below:

(i) From the above network, it can be noted that the critical path is 1 – 2 – 4 – 6 – 8.
(ii) Expected cost of construction of the plant = (5 + 3 + 4 + 9 + 2 + 12 + 20 + 7 + 14 + 4) millions of Rs.
= Rs.80 million
(iii) Expected time required to build the plant = 4 + 6 + 9 + 1 = 20 months.
(iv) It is given that the time required for one activity is independent of the time and cost of any other activity and variations
are expected to follow normal distribution, the S.D.
Hence, the variance of the expected time is determined by summing the variance of critical activities and is = 1 + 2 + 5
+ 1 = 9.
Standard Deviation of the expected time = √9 = 3 months.

Ans. 24 The earliest expected completion time, latest allowable completion time and slack time for each event is:-
2
Event te Earliest Earliest Latest Latest Slack
(I – j) start finish start finish
1–2 2 4 0 04 0 4 0
1–3 3 5 0 5 16 21 16
2–4 01 20 4 24 4 24 0
2–5 10 20 4 24 14 34 10
3–4 2 3 5 08 21 24 16
3–6 4 8 5 13 24 32 19
4–5 4 10 24 34 24 34 0
4–6 2 6 24 30 26 32 2
5 –7 1 8 34 42 34 42 0
6–7 8 10 30 40 32 42 2
 -4-

-
The critical path is 1 2 4 5 7 = 42
Variance of project time
2=2+1+4+1=8
2
Therefore, = 8 and scheduled time T5 = 38

38  42 4
Z= == - 1.41
8 8
From table on normal curve, the area of Z = 1.41 is given as 0.4207
Therefore the probability of completion of the project by the scheduled time = (0.5 – 0.4207) =
7.93%

Ans. 25

Calculation of expected time and variance of each activity:

Activity Optimistic Most likely Pessimistic Expected Variance
Days Days Days Duration
12 4 10 16 10 4
13 3 6 9 6 1
14 4 7 16 8 4
25 5 5 5 5 0
35 8 11 32 14 16
46 4 10 16 10 4
56 2 5 8 5 1

The network diagram is as under:

According to probability values given in the question probability is 11.9% To obtain 95% confidence level:

Critical Path: 1-3 3-5 5-6

Duration (days) 6 14 5 = 25 days
 -5-

Standard deviation: 1 + 16 + 1 = 18
18 = 4.24

Probability that the project will be completed five days earlier:

20  25
Z= = 1.18
4.24
According to probability values given in the question probability is 11.9%
To obtain 95% confidence level:

X  25
1.65=
4.24
X – 25 = 6.996
X = 32 days

Ans. 26:

2
2 t p  t0
i. Activity to tm tp Expected Variance σ 6

----------------------------------------------- duration
(in weeks) te = (t0 + 4tm + tp) / 6

1-2 3 6 15 7 4
1-3 2 5 14 6 4
1-4 6 12 30 14 16
2-5 2 5 8 5 1
2-6 5 11 17 11 4
3-6 3 6 15 7 4
4-7 3 9 27 11 16

Critical Path 1-2-6-7

Expected project duration = (7+11+18)=36 week
(iv)
Probability of project completion in 38 weeks
o = 4 + 4 +16 = 24
o = 24 = 4.90
o
 -6-

38 - 36 2s
Z = -------- = --------- = 0.41
4.9 4.9
Value of Z = 0.41 in Z tables is 0.1591
P(Z) = 0.5+ 0.1591
Probability of project completion in 38 weeks is 66%

(v) Project duration (say x weeks) with 95% chances of completion:

x - 36
1.65 = ---------
4.9
or 8.085 = x - 36
or x = 44 weeks

Ans. 27:
The earliest and latest expected time for each event is calculated by considering the expected time of each activity as
shown in the table below:
Activity t0 tm tp te = (t0 + 4tm + tp) / 6 2
t p  t0
(i – j) σ2
6

1-2 2 2 14 4 4
1-3 2 8 14 8 4
1-4 4 4 16 6 4
2-5 2 2 2 2 0
3-5 4 10 28 12 16
4-6 4 10 16 10 4
5-6 6 12 30 14 16

(a) The project network is drawn below:

(i) Critical Path is : 1 – 3- 5 – 6

(ii) The expected duration and variance of each activity is shown in the table above.
The expected project length is the sum of the duration of critical activities. Hence,
Expected project Length = 8 + 12 + 14 = 34 months
 -7-

(iii) Variance of the project length is the sum of the variances of critical activities.
Variance of project length = σ² = 4 + 16 + 16 = 36 months
Therefore, Standard Deviation = σ = √36 = 6
(iv) Probability that the project will be completed at lest 8 months earlier than the expected time of 34 months is
given by
(34  8)  34
Prob. Z TsTe = Prob.[Z ≤ - 1.33]
σe 6

But Z = -1.33 from the normal distribution table is 0.0918.

Students may please note that the values for the Prob. For a Z value correspond tot e shaded area as shown in the
diagram below:

Thus, the probability of completing the project within 26 months is 9.18%.

(v) If the project due date is 38 months, then the probability of not meeting the due date is given by
T  Te (38  34)
Prob. Z s = Prob.[Z > 0.67]
σe 6

But Z = 0.67 from the normal distribution is 0.2514.

Thus, the probability of not meeting the due date is 25.14%.

Ans. 28:
The required network is drawn below:

The expected time marked in the above network diagram for various activities is calculated in the table below:
Activity Time (in weeks) Expected 2
t p  t0
2
 -8-

Optimistic Most likely Pessimistic time (weeks)

(to) (tm) (tp) te = (t0 + 4tm
+ tp ) / 6
1-2 3 3 3 3 0
2-3 3 6 9 6 1
2-4 2 4 6 4 4/9
3-5 4 6 8 6 4/9
4-6 4 6 8 6 4/9
5-6 0 0 0 0 0
5-7 3 4 5 4 1/9
6-7 2 5 8 5 1
(i) Variance of each of the activities has been calculated in the last column of the above table.
(ii) Critical path is given by 1 – 2 – 3 – 5 – 6 – 7 and the expected project length is 20 weeks.
(iii) Variance of the critical path = σ² = 0 + 1 + 4/9 + 0 + 1 = 22/9 = 2.444
Mean = x = 20 weeks

To calculate the probability of completing the project in 23 weeks, we will first calculate the normal Z as
below:

Dx 23  20
Z= = = 1.92
2.444

P (x < 23) = P (z < 1.92) = 0.9726 (from the normal table)

Thus, the probability that the project will be completed in 23 weeks is 97.26%.

Ans. 29:
The network for the given problem is drawn below:

17.67

17.83 22.83
2 17.83 3 5 7 9
1 19

67
16.
17 8
4 6

20
 -9-

In the table below, we have calculated the expected duration and variance of each activity.

Activity Time Expected Variance

duration {(b-a) 6}2
Optimistic Most Likely Pessimistic
{(a+4m+b) 6}
a m b
17.83 3.36
1-2 14 17 25
17.83 1.36
2-3 14 18 21 15.17
20
2-4 13 15 18
-
2-8 16 19 28 19 4
3-4 - - - 17
-
3-5 15 18 27 17.67
4-6 13 17 21 -
-
5-7 - - - 22.83 17.36
5-9 14 18 20 16.67
20.08
6-7 - - -
6-8 - - -
7-9 16 20 41
8-9 14 16 22

Variance paths are:

1-2-3-5-7-9 77.49
1-2-3-5-9 72.33
1-2-3-4-6-7-9 75.49
1-2-3-4-6-8-9 69.33
1-2-8-9 54.5
1-2-4-6-8-9 66.67
1-2-4-6-7-9 72.83

Hence the critical path is 1-2-3-5-7-9 with duration of 77-49 days or 78 days approximately.

Variances of various activities on critical path have been calculated in the last column of the above
table.

Hence standard deviation of critical path = 26.08 = 5.12

Now we want to find out that within how many days the project should be completed so as to
provide 95% probability of break even.

Z0.95 = 1.65
 - 10 -

Hence, 1.65 = {(D-77.49) 5.12}

Or, D = 1.65 5.12+77.49 = 85.94 or 86 days

The fixed cost of the project is Rs. 8 lakhs and the variable cost is Rs. 9,000 per day.

Thus, amount to bid = Rs. 8 lakhs+ Rs. 9,000 86

= Rs. 8 lakhs + Rs. 7,74,000
= Rs. 15,74,000

Ans. 34:
(a) Critical Paths:
All are critical paths:
(i) 1–2–5–6 2+8+5 = 15
(ii) 1–3–5–6 3+7+5 = 15
(iii) 1 – 4 – 5 – 6 4+6+5 = 15
(iv) 1 – 3 – 4 – 5 – 6 3+1+6+5 = 15
(i) Choose 5 – 6, common path; Crash by 1 day
(ii) Choose: 1 – 2, 1 – 3, 1 – 4
Or
(iii) Choose: 1 – 2, 3 – 5, 4 – 5
Or
(iv) Choose: 2 - 5 , 3 – 5, 4 – 5 Or
(v) Choose: 1 – 3, 1 – 4, 2 - 5
Ans. 35:
(i) Assuming that the duration of activity 3 – 5 is 4 weeks.
The various critical paths are:
1-2-5-8-9 15 weeks
1-3-4-7-8-9 15 weeks
1-3-4-6-7-8-9 15 weeks
1-3-5-8-9 15 weeks
(ii) Note: Since the duration for activity 3-5 is not specified it is open for you to assume the duration.
Depending upon the duration assume three possibilities emerge.
1. If the duration assumed is more than 4 weeks then that path (13, 35, 58, 89) alone will be critical. In
that case you can choose any of the activity in the critical path.
2. If the duration assumed is exactly 4 weeks then it will be one of the 4 critical paths and the various
possibilities are given below.
3. If the duration assumed is less than 4 weeks then the solution should be based on 3 of the critical
paths namely 12,589, 1346789 and 134789. This has 16 combinations.
Reduce in the following ways, the project duration is. Since all the paths are critical, reduction is
possible by combining activities. The activities can be independent, common to few paths and
common to all the paths. The various categories are as follows:
1. Common to all the paths. 8-9
2. Independent : Combination 1. 1-2,3-5,4-6 and 4-7.
Combination 2. 2-5,3-5,4-6 and 4-7.
 - 11 -

Combination 3. 1-2,3-5,4-7, 6-7.

Combination 4. 2-5,3-5,4-7, 6-7.
3. Activities common to two of the paths.
Combination 1. 1-2,1-3.
Combination 2. 1-3,2-5.
Combination 3. 3-4,5-8.
Combination 4. 5-8,7-8.
4. Activities common to two of the paths and two independent activities.
Combination 1. 1-2,3-4,3-5.
Combination 2. 1-2,3-5,7-8.
Combination 3. 2-5,3-4,3-5.
Combination 4. 2-5,3-5,7-8.
Combination 5. 4-6,4-7,5-8.
Combination 6. 4-7,5-8,6-7.
(Any three of the above combination.)

Ans. 36:
(i) Project network based on the given activities is as under :

(ii) A review of the above network clearly shows that there are four paths 1 – 4 – 5; 1 – 2 –5 ; 1 –2 – 3 – 5;&
1 – 3 – 5 of duration 10 days; 11 days; 13 days and 4 days respectively. The longest path of 13 days
viz,. 1 – 2 – 3 – 5 is the critical path of the drawn network.

(iii) The optimum duration of a project is that duration of the project for which the total cost (direct & indirect)
will be minimum. The cost corresponding to optimal duration is known as resultant cost of the project.
To determine optimum duration and resultant cost of the project based on the given activities we
proceed as follows:

Activity Normal Crash Normal Crash Cost slope

Time Time Cost Cost per day
(days) (days) Rs. Rs Rs.

1–2 4 3 1,500 2,000 500

1–3 2 2 1,000 1,000 --

1–4 5 4 1,875 2,250 375

 - 12 -

2–3 7 5 1,000 1,500 250

2–5 7 6 2,000 2,500 500

3–5 2 1 1,250 1,625 375

4–5 5 4 1,500 2,125 625

Total direct cost 10,125

The normal total cost (direct & Indirect) of completing the project in 13 days is :

Normal direct cost : (Rs) 10,125

Indirect cost 6,500

13 days x Rs. 500
______
Total normal cost : (Rs) 16,625

To determine the optimum duration and resultant cost we crash activities on the critical path by properly
selecting them as under :

Activities 1–2 2–3 3–5

No. of available crash days 1 2 1

Cost slope per day (Rs) 500 250 375

Indirect cost per day (Rs) 500 500 500

Saving in cash -- 250 125

Ranking -- 1 2

The above ranking clearly shows that we should select the activity 2 – 3 and crash it for one day, as it
results in maximum saving of Rs. 250 per day.

Let us crash 2 – 3 by 2 days.

Rs.
Normal direct cost 10,125

Cost slope (2 days x Rs. 250) 500

Indirect cost (11 days x Rs. 500) 5,500

______
Total cost 16,125

After crashing the activity 2 – 3 we are left with the following paths as under :

1–2 2–3 3–5 of 11 days duration

1–2 2–5 of 11 days duration

1–4 4–5 of 10 days duration

1–3 3–5 of 4 days duration

1 – 2 is a common activity in the first two paths with cost slope of Rs. 500/- per day. There is no profit or
loss in crashing this actively. Hence crash it by one by.

Rs.
Normal direct cost 10,125
 - 13 -

Total cost slope (Rs. 500 + 1 day x Rs. 500) 1,000

Indirect cost (10 days x Rs. 500) 5,000

______
Total cost 16,125

Now we have the following four paths are as under :

1–2 2–3 3–5 of 10 days duration

1–2 2–5 of 10 days duration

1–4 4–5 of 10 days duration

1–3 3–5 of 4 days duration

To reduce the duration of project further, we are required to select the activities on all the three paths.
These activities may be 3 – 5, 2 – 5, and 1 – 4. if all of these activities are crash by even 1 day each, then
the total increase in cost would be (Rs. 375 + Rs. 500 + Rs. 375) or Rs. 1,250/- for saving Rs. 500. At this
stage, we stop the process of crashing.

Hence optimal project duration 10 days

Resultant project cost/optimal cost : (Rs) 16,125

Ans. 38:
(i) The required network is given below:

The various paths in the network are:

1 – 2 – 4 – 5 with project duration = 16 days
1 – 4 – 5 with project duration = 17 days
1 – 3 – 4 – 5 with project duration = 20 days
The critical path is 1 → 3 → 4 → 5. The normal length of the project is 20 days and minimum project length is 12
days.
(ii) Since the present schedule consumers more time than the minimum project length, the duration can be reduced by
crashing some of the activities. Also, since the project duration is controlled by the activities lying on the critical path,
the duration of some of the activities lying on critical path can be reduced. It is given that overhead cost is Rs.60 per
day.
Step I: First, the crashing cost of activity (3, 4) being minimum, the duration of this activity can be compressed from
10 days to 9 days. The total cost for 19 day’s schedule
= Rs.15 + Rs.19 × 60 = Rs.1,155
 - 14 -

Step II: Since the critical path remains unchanged, the duration of activity (3, 4) can be further reduced from 9 days
to 8 days resulting in an additional cost of Rs.15 so that total cost for 18 days schedule = Rs.30 + Rs.60 × 18 = Rs.30
+ Rs.1,080 = Rs.1,110.
Step III: Continue this procedure till the minimum project length schedule. The calculations are given below:
Normal Job crashed Crashing Cost (Rs.) Overhead Total
Project cost @ Cost.
length (days) Rs.60 / day (Rs.)
20 -- -- 20×60 1,200
19 3–4 1 × 15 = 15 19×60 1,155
18 3–4 2 × 15 = 30 18×60 1,110
17 3–4 3 × 15 = 45 17×60 1,065
16 4–5 3×15+1×40 = 85 16×60 1,045
15 3–4, 1–4 4×15+1×40+1×30= 130 15×60 1,030
14 1–3, 1–4, 2–4 130+1×30+1×25+1×10=195 15×60 1,035
13 1–3, 1–4, 2–4 195+1×25+1×30+1×10=260 13×60 1,040
12 1–3, 1–4, 1–2 260+25+30+20=335 12×60 1,055
(iii) Since the total cost starts increasing from 14 days duration onwards, the minimum total cost of Rs.1,030 for the
optimum project duration of 15 days occurs for optimum duration of each job as given below:
Job: (1,2) (1,3) (1,4) (2,4) (3,4) (4,5)
Optimum: 9 8 14 5 6 1

Duration (day)

Path 1 → 2 → 4 → 5 = 9 + 5 + 1= 15 days
Path 1 → 4 → 5 = 14 + 1 = 15 days
Path 1 → 3 → 4 → 5 = 8 + 6 + 1 = 15 days.
Hence, the optimum duration of the project is 15 days.

Ans. 39 :
(a) (i) Net work diagram
 - 15 -

Critical Path is 1-2-5-6-7-8 = 32 weeks

Associated Cost = 4220 + 32×50 = 5820

(ii) Total floats

Activity Duration Early start Latest Early Latest Total
weeks start finish finish float
1-2 3 0 0 3 3 0
2-3 3 3 4 6 7 1
2-4 7 3 5 10 12 2
2-5 9 3 3 12 12 0
3-5 5 6 7 11 12 1
4-5 0 10 12 10 12 2
5-6 6 12 12 18 18 0
6-7 4 18 18 22 22 0
6-8 13 18 19 31 32 1
7-8 10 22 22 32 32 0

(iii) Calculation of crashing

Activity Nt Nc Ct Cc Slop =
(Cc-Nc) / (Nt-Ct)
1-2 3 300 2 400 100
2-3 3 30 3 30 0
2-4 7 420 5 580 80
2-5 9 720 7 810 45
3-5 5 250 4 300 50
4-5 0 0 0 0 0
5-6 6 320 4 410 45
 - 16 -

6-7 4 400 3 470 70

6-8 13 780 10 900 40
7-8 1000 9 1200 200
10

The critical path activities are 1-2 2-5 5-6 6-7 7-8
Slope 100 45 45 70 200
Two activities cost slope cost is minimum (2-5 and 5-6) but activity 5-6 is common
and critical, it also continuing so reduce by 2 weeks, then reduce activity 2 -5 by one week.
Activity From-to Project durations Cost
I 5-6 6-4 weeks 32-2 = 30 4220 + (2×45) + (30×50) = 5810
II 2-5 9-8 30-1 = 29 4220+90+(1×45)+(29×50) = 5805
After this reduction now two paths are critical 1-2-3-5-6-7 = 28 and 1-2-5-6-7 = 28
So 1-2 3-5 6-7
2-5
Slope cost 100 50+45=95 70
As cost per week for every alternative is greater than Rs.50 (overhead cost p er week). Therefore, any
reduction in the duration of project will increase the cost of project completion. Therefore, time for
projects is 29 weeks, minimum cost is Rs.5805.

Answer 40:
The network is given below:

(i) The critical path of the project is A C E G or 1-2-3-4-6-7 with normal duration of 25 days.
The minimum duration of the project is 18 days.

(ii) The cost slope for various activities is given below:

Activity Normal Crash Normal cost Crash cost Cost slope (Rs.)
Duration duration (Rs.) (Rs.)
 - 17 -

A (1-2) 7 5 500 900 900  500

200
75
600  400
B (2-4) 4 2 400 600 100
42
C (2-3) 5 5 500 500 N.A.
1,000  800
100
D (2-5) 6 4 800 1,000 64
1,000  700
100
E (4-6) 7 4 700 1,000 74
1,400  800
200
54
F (5-6) 5 2 800 1,400
1,600  800
G (6-7) 6 4 800 1,600 400
64
Total 4,500

Step –1: Various paths of the network are given below:

1-2-3-4-6-7 With duration = 25 days
1-2-4-6-7 With duration = 24 days
1-2-3-5-6-7 With duration = 23 days
1-2-5-6-7 With duration = 24 days

In order to determine the cost of completing the project in 21 days, let us crash that activity on the
critical path, which has minimum cost slope. It can be seen that the minimum cost slope of
Rs.100 corresponds to activity E (4-6) and it lies on the critical path. Hence, we crash activity E (4
–6) by 1 day at an additional cost of Rs. 100.

Step- 2: Various paths now are:

1-2-3-4-6-7 With duration = 24 days
1-2-4-6-7 With duration = 23 days
1-2-4-6-8 With duration = 23 days
1-2-4-6-9 With duration = 24 days

An examination of the above four paths clearly points out that there are two critical paths namely
1-2-3-4-6-7 and 1-2-5-6-7, each with duration = 24 days. To reduce the project duration by three
days more, there are following possible combination of activities.

1. Crash activities 4-6 on the path 1-2-3-4-6-7 and 5-6 on the path 1-2-5-6-7 by one day each at
an addition cost of Rs. 100 +Rs. 200 = Rs. 300.

2. Crash activities 4-6 on path 1-2-3-4-6-7 and 2-5 on path 1-2-5-6-7 by one day each at an
additional cost of Rs. 100 +Rs. 100 = Rs. 200

3. Crash activity 1-2 by one day at an additional cost of Rs. 200.

It can be observed that the additional cost of reducing the project duration by one day in
combination 2 as well as combination 3 is Rs. 200. Hence any of these two can be selected for
crashing. However, since crashing activity 1-2 by 1 day reduces the duration of all the paths by1
day, we will crash it by I day. The project duration becomes = 23 days at an additional cost = Rs.
200.
 - 18 -

Step 3: Crash activity 1-2 by 1 day further, it would reduce the project duration to 22 days at an
additional cost = Rs. 200.
Step 4: Activity 1-2 can not be crashed further. So, we now select the combination 2 stated above
for crashing. Crash activities 4-6 and 2-5 by one day each at an additional cost of Rs. 100 +Rs.
100 = Rs. 200.

Hence, in order to complete the project in 21 days, an additional cost of Rs. 100 +Rs. 200 +Rs.
200 +Rs. 200 = Rs. 700 will be incurred.
The normal cot of completing the project in 25 days =Rs. 4,500.
Hence, the percentage increase in cost to complete the project in 21 days
Rs.700
= 100 = 15.5%.
Rs.4,500

Answer 42
The requires network based on the given activities and duration is drawn below :

The critical path of the network is 1-3-4-5-6 i.e. B-E-G-H. The duration of the project is 14 weeks.

E=4
L=6
2
A C E = 14
4 D E=9 3 L = 14
3 L=9 6
1
4 3
E=0 B H
L=0 E 2 G
2 5
7 F
3 E = 11
2 L = 11
E=7
L=7

The time scale diagram for various activities along the resource accumulation table showing the
number of workers required on each day are drawn on next page.

C(2)
3 7

A(4) D(4)
2
4 3 2

B(2) E(6) G(3) H(4)

1 3 4 5 6
7 2 2 3

F(3)

2 2
 - 19 -

Crew size

1 2 3 4 5 6 7 8 9 10 11 12 13 14
6 6 6 6 8 8 8 9 9 3 3 4 4 4
-2 -2 -2 +2 +2 +2
6 6 6 6 6 6 6 9 9 3 3 6 6 6

It can be seen that the demand on the resources is not even. On the 8th and 9th week, the demand
of workers is as high as 9 whereas on the 10th and 11th week, it is only three. If 9 workers are to be
hired for the entire project duration of 14 weeks, then during most of the days they will be idle. We
will attempt to re-schedule our activities in such away so as to utilize the workers in a fairly uniform
manner.
As can be seen from the above network diagram, activity C has a float of 7 weeks and activity
F has a float of 2 weeks. The maximum demand on the resources occurs during 5th week to 7th
week. (i.e. 8 workers) and during 8th to 9th week (i.e. 9 workers). We will shift activity C by seven
weeks so that it starts on 12th week instead of 5ht week. This reduces the demand of the workers
from 8 to 6 during 5th to 7th weeks. The modified resource requirements are shown in the last row
of the above table.

Activity F has a float of two weeks. It is shifted by two weeks so that it starts on 10th week instead
of 9th workers required earlier. The modified resource accumulation table is given:
Crew size

1 2 3 4 5 6 7 8 9 10 11 12 13 14
6 6 6 6 8 8 8 9 9 3 3 4 4 4
-3 -3 +3 +3
6 6 6 6 6 6 6 9 9 6 6 6 6 6

It is evident from the last row of the above table that there is a uniform demand of 6 workers
throughout the duration of the project.

Ans. 46:
The network diagram is drawn below:

E= 4
L=4
2

4 8

E=0 4
L=0 1 6
6 5 E = 14
L = 14
4 E=8
3 L=8

4
3

E=3
L=4
 - 20 -

The critical path is 1-2-4-5. The total floats of all the activities are calculated below:

Activity Duration Total float

1-2 4 0
1-3 3 1
1-4 6 2
2-4 4 0
2-5 8 2
3-4 4 1
3-5 4 7
4-5 6 0

(b) The resource allocation table is given below:

Starting day 1st 4th 5th 9th 10th 13th 18th 21st
Equipment X job done (1,2) (1,2) (2,4) (4,5) (4,5)
No. of men required day 30 30 30 30 30
completed 4 4 8 18 18
Equipment Y Job done (1,3) (3,4) (3,4) (3,5) (3,5)
No. of men required 20 20 20 20 20
Day completed 3 12 12 21 21
Equipment Z Job done (1,4) (1,4) (1,4) (2,5) (2,5)
No. of men required 20 20 20 20 20
Day completed 9 9 9 17 17
Total no. of men 50 50 50 40 40 50 50 20

Explanation:
This is basically a problem of resource-leveling whereby the main constraint would be on the
resources. It the maximum demand on any resource is not to exceed a certain limit, the activities
will have to be rescheduled so that the total demand on the resources at any time will be within the
limit and consequent the project duration time is exceeded. The criterion to be followed in such a
case is to delay the job with a large float. In this way we tend to absorb the float and cutdown the
demand on the resource. If two or more jobs are competing
Ans. 47:

Paths Duration
1-2-5-7-8 7+16+9+8 = 40
 - 21 -

1-2-4-7-8 7+12+19+8 = 46
1-4-7-8 6+19+8 = 33
1-3-4-7-8 8+6+19+8 =41
1-3-6-7-8 8+24+7+8 =47
1-3-6-8 8+24+4 = 36

Critical path = 1-3-6-7-8 = 47 days

 Some solutions of simulation
-1-

Ans. 6
The numbers 00-99 are allocated in proportion to the probabilities associated with each event as given below:

Daily Demand Probability Cumulative Random Numbers

Probability Allocated
0 0.01 0.01 00-00
10 0.20 0.21 01-20
20 0.15 0.36 21-35
30 0.50 0.86 36-85
40 0.12 0.98 86—97
50 0.02 1.00 98-99

Let us simulate the demand for the next 10 days using the given random numbers in order to find out the stock
position if the owner of the bakery decides to make 30 breads every day. We will also estimate the daily average
demand for the bread on the basis of simulated data.

Day Random Number Simulated Demand Stock if 30 breads

are prepared every
day
1 48 30 0
2 78 30 0
3 19 10 20
4 51 30 20
5 56 30 20
6 77 30 20
7 15 10 40
8 14 10 60
9 68 30 60
10 9 10 80
Total 220

Daily average demand of the basis of simulated data = 22

Ans. 7:
The random numbers are established as in Table below:

Production probability cumulative Random number

Per day probability
196 0.05 0.05 00-04
197 0.09 0.14 05-13
198 0.12 0.26 14-25
199 0.14 0.40 26-39
200 0.20 0.60 40-59
201 0.15 0.75 60-74
202 0.11 0.86 75-85
203 0.08 0.94 86-93
204 0.06 1.00 94-99
 -2-

Based on the 15 random numbers given we simulate the production per day as above in table 2
below.

Random No. Estimated No. of mopeds waiting No. of empty

Production spaces in the lorry
Per day
Opening current current Total
Balance excess short waiting
Production production

1 82 202 -- 2 -- 2 ---
2 89 203 2 3 --- 5 ---
3 78 202 5 2 --- 7 ---
4 24 198 7 -- 2 5 ---
5 53 200 5 --- -- 5 --
6 61 201 5 1 --- 6 ---
7 18 198 6 --- 2 4 ---
8 45 200 4 --- -- 4 ---
9 04 196 4 --- 4 0 ---
10 23 198 0 --- 2 0 2
11 50 200 0 -- -- -- ---
12 77 202 0 2 -- 2 ---
13 27 199 2 --- 1 1 ---
14 54 200 1 -- -- 1 ---
15 10 197 1 --- 3 _-- __2
Total 42 __4

42
Average number of mopeds waiting = = 2.80
15
4
Average number of empty spaces in lorry = = 0.266
15
Ans. 8:
If the numbers 00-99 are allocated in proportion to the probabilities associated with each
category of work, then various kinds of dental work can be sampled, using random number
table :-

Type Probability Random Numbers

Filling 0.40 00-39

Crown 0.15 40-54
Cleaning 0.15 55-69
Extraction 0.10 70-79
Checkup 0.20 80-99

Using the given random numbers, a work sheet can now be completed as follows :-

FUTURE EVENTS

PATIENT SCHEDULED ARRIVAL RN CATEGORY SERVICE TIME

1 8.00 40 Crown 60 minutes

2 8.30 82 Checkup 15 minutes
3 9.00 11 Filling 45 minutes
4 9.30 34 Filling 45 minutes
 -3-

5 10.00 25 Filling 45 minutes

6 10.30 66 Cleaning 15 minutes
7 11.00 17 Filling 45 minutes
8 11.30 79 Extraction 45 minutes

Now, let us simulate the dentist’s clinic for four hours starting at 8.00 A.M.

STATUS

Time Event Number of the patient Patients

being served (time to go) waiting

1st
8.0 patient arrives 1st(60) -
nd
8.30 2 “ arrives 1st(30) 2nd
st
9.00 1 departs
rd
3 “ arrives 2nd(15) 3rd
nd
9.15 2 departs 3rd (45) -
th
9.30 4 “ arrives 3rd (30) 4th
rd
10.00 3 departs
th
5 “ arrives 4th (45) 5th
th
10.30 6 “ arrives 4th (15) 5th & 6th
th
10.45 4 departs 5th (45) 6th
th
11.00 7 “ arrives 5th (30) 6th & 7th
th
11.30 5 departs
th
8 “ arrives 6th (15) 7th & 8th
th
11.45 6 departs 7th (45) 8th
12.00 End 7th (30) 8th
12.30 - 8th (45) -

The dentist was not idle during the entire simulated period :-
The waiting times for the patients were as follows :-

Patient Arrival Service Starts Waiting (Minutes)

1 8.00 8.00 0
2 8.30 9.00 30
3 9.00 9.15 15
4 9.30 10.00 30
5 10.00 10.45 45
6 10.30 11.30 60
7 11.00 11.45 45
8 11.30 12.30 60
Total 285

285
The average waiting time of a patient was = 35.625 minutes.
15

Ans. 9: Random allocation tables are as under:

Time Arrival Arrivals Random Time Service Service Random
(Mts) (Proba.) cumulative No. (Mts) (Proba.) Cumulative No.
Probability allocated Probability allocated

1 0.05 0.05 00-04 1 0.10 0.10 00-09

 -4-

2 0.20 0.25 05-24 2 0.20 0.30 10-29

3 0.35 0.60 25-59 3 0.40 0.70 30-69
4 0.25 0.85 60-84 4 0.20 0.90 70-89
5 0.10 0.95 85-94 5 0.10 1.00 90-99
6 0.05 1.00 95-99

Simulation of ten trails:

R. No. Arrival Mts. Time Start R. No. Time Mts. Finish Waiting Time
Time
Clerk Passanger
60 4 9.04 9.04 09 1 9.05 4
16 2 9.06 9.06 12 2 9.08 1
08 2 9.08 9.08 18 2 9.10
36 3 9.11 9.11 65 3 9.14 1
38 3 9.14 9.14 25 2 9.16
07 2 9.16 9.16 11 2 9.18
08 2 9.18 9.18 79 4 9.22
59 3 9.21 9.22 61 3 9.25 1
53 3 9.24 9.25 77 4 9.29 1
03 1 9.25 9.29 10 2 9.31 _ 4
Total 6 6
In half an hour trial, the clerk was idle for 6 minutes and the passengers had to wait for 6 minutes.

Ans. 10:
From the frequency distribution of arrivals and service times, probabilities and cumulat ive probabilities are
first worked out as shown in the following table:

Time
Cum. Service Cum.
between Frequency Probability Frequency Prob.
Prob. Time Prob.
arrivals
1 5 0.05 0.05 1 1 0.10 0.10
2 20 0.20 0.25 2 2 0.20 0.30
3 35 0.35 0.60 3 4 0.40 0.70
4 25 0.25 0.85 4 2 0.20 0.90
5 10 0.10 0.95 5 1 0.10 1.00
6 5 0.05 1.00 6 0 0.00 1.00
Total 100 10
The random numbers to various intervals have been allotted in the following table:
Time between Probability Random Service Time Probability Random
arrivals numbers numbers
allotted allotted
 -5-

1 0.05 00-04 1 0.10 00-09

2 0.20 05-24 2 0.20 10-29
3 0.35 25-59 3 0.40 30-69
4 0.25 60-84 4 0.20 70-89
5 0.10 85-94 5 0.10 90-99
6 0.05 95-99 6 0.00 -

Simulation Work Sheet

Random Time till Arrival Service Random Service Service Clerk Customer Time Length
Number next Time begins number time Ends Waiting waiting spend by of
arrival a.m. a.m. a.m. time Time customer waiting
in system line
64 4 11.04 11.04 30 3 11.07 04 - 3 -
04 1 11.05 11.07 75 4 11.11 - 2 6 1
02 1 11.06 11.11 38 3 11.14 - 5 8 2
70 4 11.10 11.14 24 2 11.16 - 4 6 2
03 1 11.11 11.16 57 3 11.19 - 5 8 2
60 4 11.15 11.19 09 1 11.20 - 4 5 2
16 2 11.17 11.20 12 2 11.22 - 3 5 2
18 2 11.19 11.22 18 2 11.24 - 3 5 2
36 3 11.22 11.24 65 3 11.27 - 2 5 1
38 3 11.25 11.27 25 2 11.29 - 2 4 1
07 2 11.27 11.29 11 2 11.31 - 2 4 1
08 2 11.29 11.31 79 4 11.35 - 2 6 1
59 3 11.32 11.35 61 3 11.38 - 3 6 1
53 3 11.35 11.38 77 4 11.42 - 3 7 1
01 1 11.36 11.42 10 2 11.44 - 6 8 2
62 4 11.40 11.44 16 2 11.46 - 4 6 2
36 3 11.43 11.46 55 3 11.49 - 3 6 2
27 3 11.46 11.49 52 3 11.52 - 3 6 1
97 6 11.52 11.52 59 3 11.55 - - 3 -
86 5 11.57 11.57 63 3 12.00 2 - 3 -
20 57 54 6 56 26

Number of customers in waiting line 26

Average queue length = = 1.3
Number of arrivals 20

56
Average waiting time per customer = 2.8 minutes
20

54
Average service time = 2.7 minutes
20

Ans. 11:
Cumulative frequency distribution for Ramu is derived below. Also fitted against it are the eight given random
numbers. In parentheses are shown the serial numbers of random numbers.
 -6-

10 4 01 (2) 00 (7) 03 (8)

20 10
30 20 14 (1)
40 40
50 80 44 (4) 61 (5)
60 91 82 (6)
70 96 95 (3)
80 100

Thus the eight times are: 30, 10, 70, 50, 60, 10 and 10 respectively.
Like wise we can derive eight times for Raju also.

Col-1 Col-2 Col-3 (2× Col-2)

10 4 8
20 9 18
30 15 30 25 (4)
40 22 44 36 (1) 34 (8) 41 (6)
50 32 64 55 (3) 56 (7)
60 40 80 76 (2)
70 46 92
80 50 100 97 (5)

(Note that cumulative frequency has been multiplied by 2 in column 3 so that all the given random numbers are
utilized).
Thus, Raju’s times are: 40, 60, 50, 30, 80 40, 50 and 40 seconds respectively.
Ramu’s and Raju’s times are shown below to observe for waiting time, if any.

1 2 3 4
Ramu Cum. Times Raju Initial Raju’s cumulative time with 30 seconds
included
30 30 40 70
10 40 60 130
70 110 50 180
50 160 30 210
50 210 80 290
60 270 40 330
10 280 70 400
10 290 40 440

Since col. 4 is consistently greater than Co.2, no subsequent waiting is involved.

Ans. 12: The numbers 00-99 are allocated in proportion to the probabilities associated with each
event. If it rained on the previous day, the rain distribution & the random no allocation are given
below:
 -7-

Event Probability Cumulative Random

Probability numbers
Assigned
No rain 0.50 0.50 00-49
1 cm rain 0.25 0.75 50-74
2 cm rain 0.15 0.90 75-89
3 cm rain 0.05 0.95 90-94
4 cm rain 0.03 0.98 95-97
5 cm rain 0.02 1.00 98-99

Table 1 – Rain on previous day

Similarly, if it did not rain the previous day, the necessary distribution and the random number
allocation is given below:
Event Probability Cumulative Random
Probability numbers
Assigned
No rain 0.75 0.75 00-74
1 cm rain 0.15 0.90 75-89
2 cm rain 0.06 0.96 90-95
3 0.04 1.00 96-99

Table 2- No rain on previous day

Let us now simulate the rain fall for 10 days using the given random numbers. For the first day it is
assumed that it had not rained the day before:

Day Random Numbers Event

1 67 No rain (from table 2)
2 63 No rain (from table 2)
3 39 No rain (from table 2)
4 55 No rain (from table 2)
5 29 No rain (from table 2)
6 78 1 cm rain (from table 2)
7 70 1 cm rain (from table 1)
8 06 No rain (from table 1)
9 78 1 cm rain (from table 2)
10 76 2 cm rain (from table 1)

Hence, during the simulated period, it did not rain on 6 days out of 10 days. The total rain fall during
the period was 5 cm.

Ans.13:
The probabilities of occurrence of A, B and C defects are 0.15, 0.20 and 0.10 respectively. So, tile
numbers 00-99 are allocated in proportion to the probabilities associated with each of the three
defects
Defect-A Defect-B Defect-C
Exists Random Exists? Random Exists? Random
Numbers numbers numbers
Assigned assigned
assigned
Yes 00-14 yes 00-19 yes 00-09
No 15-99 No 20-99 no 10-99
 -8-

Let us now simulate the output of the assembly line for 10 items using the given random numbers in
order to determine the number of items without any defect, the number of items scrapped and the
total minutes of rework time required:
Item RN for RN for RN for whether Rework
Remarks
No. defect A defect B defect C any defect time (in
Exists minutes)
1 48 47 82 none -- --
2 555 36 95 none -- --
3 91 57 18 none -- --
4 40 04 96 B 15 --
5 93 79 20 None -- --
6 01 55 84 A -- Scrap
7 83 10 56 B 15 ---
8 63 13 11 B 15 ---
9 47 57 52 None -- --
10 52 09 03 B,C 15+30 =45 --
During the simulated period, 5 out of the ten items had no defects, one item was scrapped and 90
minutes of total rework time was required by 3 items.

Answer 14:
The question is not happily worded, if we go by the language of the question, the following solution can be worked
out:
First of all, random numbers 00-99 are allocated in proportion to the probabilities associated with demand as given
below:

Demand Probability Cum. Probability Random Nos.

0 0.05 0.05 00-04
1 0.10 0.15 05-14
2 0.30 0.45 15-44
3 0.45 0.90 45-89
4 0.10 1.00 90-99

Based on the ten random numbers given, we simulate the demand per day in the table given below.
It is given that stock n hand = 8 and stock on order = 6 (expected next day). Let us now consider both the options
stated in the question.
Option A: Order 5 Books, when the inventory at the beginning of the day plus orders outstanding is less than 8
books:

Day Random Sales Op. Qty. Qty. Total Closing

No. Demand Stock in Order Recd. At Qty. on Stock
hand end of order
the day
1 89 3 8 - - 6 5
2 34 2 5 - 6 - 9
3 78 3 9 - - - 6
4 63 3 6 5 - 5 3
 -9-

5 61 3 3 - - 5 0
6 81 3 0 0
7 39 2
8 16 2
9 13 1
10 73 3

Now on day 6, there is stock out position since 5 units will be received at the end of the day and demand occurring
during the day can not be met. Hence, it will into be possible to proceed further and we will have to leave the answer
at this stage.

Random Sales Opening Qty. Qty. Total Closing

No. Demand Stock in Order Recd. At Qty. on Stock
hand end of order
the day
1 89 3 8 -- -- 6 5
2 34 2 5 -- 6 -- 9
3 78 3 9 -- -- -- 6
4 63 3 6 8 -- 8 3
5 61 3 3 -- -- 8 0
6 81 3 0 -- 8 --
7 39 2
8 16 2
9 13 1
10 73 3

Now on day 6, there is stock out position since 8 units will be received at the end of the day and demand occurring
during the day can not be met. Hence, it is not possible to proceed further and we may leave the answer at this
stage.
Alternatively, if we assume that the demand occurring during the day can be met out of stock received at the end of
the day, the solution will be as follows:
Stock in hand = 8 and stock on order = 6 (expected next day)

Random Sales Opening Qty. Qty. Total Closing

No. Demand Stock in Order Recd. At Qty. on Stock
hand end of order
the day
1 89 3 8 -- -- 6 5
2 34 2 5 -- 6 -- 9
3 78 3 9 -- -- -- 6
4 63 3 6 5 -- 5 3
5 61 3 3 -- -- 5 0
6 81 3 0 5 5 5 2
7 39 2 2 5 -- 10 0
8 16 2 0 -- 5 5 3
9 13 1 3 -- 5 -- 7
10 73 3 7 5 -- 5 4
 - 10 -

Carrying Cost = 39 × 0.50 = Rs.19.50

Ordering Cost = 4 × 10 = Rs.40.00
Total Cost = Rs.59.50
Option B: Order 8 Books, when the inventory at the beginning of the day plus orders outstanding is less than 8
books:

Random Sales Opening Qty. Qty. Total Closing

No. Demand Stock in Order Recd. At Qty. on Stock
hand end of order
the day
1 89 3 8 -- -- 6 5
2 34 2 5 -- 6 -- 9
3 78 3 9 -- -- -- 6
4 63 3 6 8 -- 8 3
5 61 3 3 -- -- 8 0
6 81 3 0 -- 8 -- 5
7 39 2 5 8 -- 8 3
8 16 2 3 -- -- 8 1
9 13 1 1 -- 8 -- 8
10 73 3 8 -- -- -- 5

Carrying Cost = 45 × 0.50 = Rs.22.50

Ordering Cost = 2 × 10 = Rs.20.00
Total Cost = Rs.42.50
Since Option B has lower cost, Manager should order 8 books.
Ans.15
Demand (Tons) Probability Cumulative Probability Random Nos. Allocated
1 0.15 0.15 00-14
2 0.30 0.45 15-44
3 0.45 0.90 45-89
4 0.10 1.00 90-99
Option-I
RN Demand Opening Receipts Closing Op.Stock Order Cl.Stock on
Stock Stock on Order Order
88 3 8 - 5 - - 6
41 2 5 6 9 - - -
67 3 9 - 6 - 5 5
63 3 6 - 3 5 - 5
48 3 3 - 0 5 5 10
74 3 0 5 2 5 5 10
27 2 2 - 0 10 - 10
16 2 0 5 3 5 - 5
11 1 3 5 7 - 5 5
64 3 7 - 4 5 - 5
49 3 4 - 1 5 5 10
21 2 1 5 4 5 - 5
 - 11 -

44
(Rs.)
No of order placed 5
Ordering cost (5x1000) 5,000
Closing Stock 44
Carrying cost (44x50) 2,200
Total 7,200

Option-II
RN Demand Opening Receipts Closing Op.Stock Order Cl.Stock on
Stock Stock on Order Order
88 3 8 - 5 - - 6
41 2 5 6 9 - - -
67 3 9 - 6 - 8 8
63 3 6 - 3 8 - 8
48 3 3 - 0 8 - 8
74 3 0 8 5 - 8 8
27 2 5 - 3 8 - 8
16 2 3 - 1 8 - 8
11 1 1 8 8 - - -
64 3 8 - 5 - 8 8
49 3 5 - 2 8 - 8
21 2 2 - 0 8 - 8
47

(Rs.)
No of orders 3 Ordering cost 3 x 1000 3,000
Closing stock 47 Carrying cost 47x50 2,350
Total 5,350

Analysis: Since the cost of inventory is less in Option II, it is suggested to implement.

Ans. 16
(i) Allocation of random numbers
Demand Probability Cumulative probability Allocated RN
0<300 0.18 0.18 00—17
300 < 600 0.32 0.50 18—49
600 < 900 0.25 0.75 50—74
900 < 1200 0.15 0.90 75—89
1200 <1500 0.06 0.96 90—95
1500 < 1800 0.04 1.00 96—99

(ii) Simulation: twelve months sales, monthly and annual profit/loss

Month RN Demand Sold Return Profit Loss on Net Loss on
on return (Rs.) lost
sales (Rs.) units
(Rs.)
 - 12 -

1 27 450 450 300 3375 12000 2175

2 15 150 150 600 1125 2400 -1275
3 56 750 750 -- 5625 -- 5625
4 17 150 150 600 1125 2400 -1275
5 98 1650 750 -- 5625 --- 5625 900
6 71 750 750 -- 5625 -- 5625
7 51 750 750 -- 5625 -- 2175
8 32 450 450 300 3375 1200 5625
9 62 750 750 -- 5625 -- 5625 300
10 83 1050 750 -- 5625 -- 5625 900
11 96 1650 750 -- 5625 -- 5625
12 69 750 750 -- 5625 5625
54000 7200 46800 2100

(iii) Loss on lost sale 2100×7.5 = Rs15750.

Ans. 17
The demand and supply patterns yield the following probability distribution. The numbers 00-99 are
allocated in proportion to the probabilities associated with each event.

Availability Prob. Cum. Random Demand Prob. Cum. Random

(Kg.) Prob. Numbers (Kg) Prob. number
allocated allocated
10 0.08 0.08 00-07 10 0.10 0.10 00-09
20 0.10 0.18 08-17 20 0.22 0.32 10-31
30 0.38 0.56 18-55 30 0.40 0.72 32-71
40 0.30 0.86 56-85 40 0.20 0.92 72-91
50 0.14 1.00 86-99 50 0.08 1.00 92-99

Let us simulate the supply and demand for the next six days using the given random numbers in order to find the
profit if the cost of the commodity is Rs.20 per kg, the selling price is Rs.30 per kg, loss on any unsatisfied demand
is Rs.8 per kg and unsold commodities at the end of the day have no saleable value.

Day Random Supply Random Demand Buying Selling Loss for Profit
no. availability no. cost cost unsatisfied
Rs. Rs. demand
1 31 30 18 20 600 600 -- --
2 63 40 84 40 800 1200 -- 400
3 15 20 32 40 400 600 160 40
4 07 10 32 30 200 300 160 -60
5 43 30 75 40 600 900 80 220
6 81 40 27 20 800 600 -- -200

During the simulated period of six days, the net profit of the retailer is
= (400 + 40 + 220) – (60 + 200)
 - 13 -

= 660 – 260
= Rs.400

Ans. 19:
Random No. Coding Table - Receipts
Amount (Rs. In crores) Probability Cum. Probability Random No. Interval
30 0.20 0.20 00-19
42 0.40 0.60 20-59
36 0.25 0.85 60-84
99 0.15 1.00 85-99

Random No. Coding Table - Payments

Amount (Rs. In crores) Probability Cum. Probability Random No. Interval
33 0.15 0.15 00-14
60 0.20 0.35 15-34
39 0.40 0.75 35-74
57 0.25 1.00 75-99

Simulation Table
Week Op.Balance Receipts Payments Cl.Balance
Random Amount Random Amount
No. (in crores) No. (in crores)
1 15 17 30 78 57 -12
2 -12 43 42 16 60 -30
3 -30 74 36 35 39 -33
4 -33 31 42 23 60 -51
5 -51 72 36 44 39 -54
6 -54 46 42 92 57 -69
7 -69 51 42 58 39 -66
8 -66 68 36 8 33 -63
9 -63 93 99 58 39 -3
10 -3 54 42 78 57 -18
11 -18 96 99 54 39 42
12 42 9 30 77 57 15

(i) Probability is = 10 ÷ 12 = 0.83

(ii) Total Shortfall is Rs. 399 crores. Therefore average shortfall is 399 ÷ 12 = Rs. 33.25 crores
Alternatively, average shortfall is 399 ÷ 10 = Rs. 39.90 crores

(iii) There will be a shortfall in 5 months i.e. 4,5,6,7,8. therefore the probability is 5 ÷ 12 = 0.42