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Total marks: 100 marks

All questions are compulsory
Total Time : 3 Hours
(Topics : Full O.R. [except 2 newly introduced chapters] + Activity Based Costing & Service Sector)
Question 1: (a) Advocates of traditional Costing argue that ABC simply provides a different picture , rather than a more accurate
picture, of product costs . Discuss.
(b) Some advocates of ABC claim that it provides information suitable for decision making .Discuss.
(c) What are the benefits of Activity Based Management?

(8 Marks)

Question 2: An airline company operates a single aircraft from station A to Station B. It is licensed to operate
3 flights in a week each way thereby making a total of 312 flights in a year. While the seating capacity of the aircraft is 160
passengers, the average number of passengers actually caused per flight is 120 only. The fare charged per passenger for one
way flight is Rs.8000. The cost data are as under:
Variable fuel costs per flight
Rs.1,60,000
Food served on board the flight (not charged to passengers)
Rs.200 per passenger
Commission paid to travel agents (on an average 80% of the seats are booked through

travel agents
Fixed annual lease costs allocated to each flight

5% if fare

Fixed ground and landing charges

Fixed salaries of flight crew allocated to each flight

Rs.400000 per flight

Rs.100000 per flight
Rs.60000 per flight

Required:
(i)

Compute the operating income on each one-way flight between stations A and B.

(ii) The company has been advised that in case the fare is reduced to Rs.7500 per flight per passenger, the average
number of passengers per flight will increase to 132. Should this proposal be implemented? Show your calculations.
(7 Marks)
Question 3: Amar and Naveen
architects, have been using a simplified costing system in which all professional labour
costs are included in a single direct cost category professional labour and all overhead costs are included in a single indirect cost
category, professional support, and allocated to jobs by using professional labour hours as the allocation base. Consider two
clients: Host Restaurant, which required 25 hours of design work for a new addition, and Pizza Hut, which required plans for a
new floor that took 40 hours to draw. The firm has two partners, who each earn a salary of Rs.1,50,000 a year, and four
associates, who each earn Rs. 60,000 per year. Each professional has 1,500 billable hours per year. The professional support is
Rs. 10,80,000, which consists of Rs.7,00,000 of design support and Rs.3,80,000 of staff support. Host Restaurant job
required five hours of partner time and 20 hours of associate time. Pizza Hut job required 30 hours of partner time and 10 hours of
associate time.
Required:
(i)

Prepare job cost sheets for Host Restaurant and Pizza Hut using a simplified costing system with one direct and one
indirect cost pool.

(ii) Prepare job cost sheets for the two clients, using an activity based costing system with two direct cost categories
partner labour and associate labour and two indirect cost categories design support and staff support. Use
professional labour in Rupees as the cost allocation base for design support and professional labour hours for staff support.
(iii) Determine the amount by which each job was under or overcosted, using the simplified costing system. (9 Marks)

Question 4: HAL is an aircraft manufacturer that has introduced a new airplane model. It expects the plane to cost Rs.
150,000,000 to manufacture (not including development cost) but their products have historically exhibited an
85% experience curve. Assuming the same experience rate will apply to this product.
1.
2.

Compute the cost of computing the each of the first five planes
the average cost per plane to produce the first 25 planes

(4 Marks)

Question 5: The following table gives the activities in a construction project and other relevant information.
Activity

Immediate Predecessor

CA. Parag Gupta

Time (Days)

Ph.: +91 9891 432 632

Direct Cost (Rs.)

Paraggupta_ca@yahoo.co.in

Costing & O.R.

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Normal

Crash

Normal

Crash

60

90

150

250

38

60

150

250

100

100

115

175

D, B, E

100

240

Indirect cost vary as follows

Days

15

14

13

12

500
400
250
Cost (Rs) 600
(i) Draw an arrow diagram for the project
(ii)

11

10

175

100

75

50

35

25

Determine the optimum project duration.

(10 Marks)

Question 6: The Production Manager at Gemini Machines Limited has been asked to present information about the
times and costs for the development of a new machine that the company may choose to manufacture. The Managing
Director requires accurate time and cost estimates since the project will involve a fixed-fee contract offering no provisions
for later re-negotiation, even in the event of modifications.
Activity

Preceding
activities

Duration
(weeks)

Cost
(Rs. 000)

Obtain engineering quotes

Sub-contract specifications

A, J

Purchase of raw materials

24

Construct prototype

15

Final drawings

Fabrication

30

Special machine study

12

Sub-contract work

B, E

40

Preliminary design

Vendor evaluation

C, D

The Production Manger has been asked to identify the critical activities, to determine the shortest project duration and to
provide a week-by-week cost schedule. Required:
(a) Draw a network to represent the inter-relationships between the activities indicated, and insert earliest and latest
event times throughout.
(b) Determine the critical path and the shortest possible duration of the project.
(c)

Assuming each activity commences at the earliest start date, and that for each activity the cost is incurred evenly
over its duration, construct a week -by-week schedule of cash flows.
The project is to be financed by Rs. 50,000 available initially, a further Rs. 50,000 available at the start of week 9 and
the final Rs. 50,000 available from week 20.
Identify any particular problems and suggest solutions.

(11 Marks)

Question 7: A Car Hire company has one car at each of 5 depots a, b, c, d and e. A customer in each of the 5
towns A, B, C, D and E requires a car. The distance (i n miles) between the deposits (origins) and the towns
CA. Parag Gupta

Ph.: +91 9891 432 632

Paraggupta_ca@yahoo.co.in

Costing & O.R.

Worlds largest CA Final students consultancy group: http://groups.yahoo.com/group/costingbyparaggupta

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(destination) where the customers are (is given in the following distance matrix).

How the cars should be assigned to the customers so as to minimize the distance traveled.

(7 Marks)

Question 8: A company developed and manufactured a new machine. The manufacture of the first machine
took 800 direct labour hours. The direct wages rate is Rs.20 per hour. The company experienced a learning
curve effect of 80% (index is 0.3219). The first piece was used as a demonstration piece and was not
intended for sale. On the basis of the demonstration, the company obtained an order for the manufacture of
20 machines. The direct material cost is Rs. 16,000 per machine. The variable over head rate is Rs.25 per
direct labour hour. The fixed overheads on absorption costing amounted to Rs.40 per direct labour hour. The
selling price is to include a profit margin of 20% on selling price. Subsequently, after the delivery of the
20 machines, the company received a repeat order for supply of 30 machines.
Required:
(i)
(ii)

Calculate the selling price per machine of the first lot of 20 machines.
What reduction in selling price can the company allow in respect of the repeat order?

(9 Marks)

Question 9: Priyanshu Enterprise has three factories at location A, B and C which supplies three ware houses
located at D, E and F. Monthly factory capacities are 10, 80 and 15 units, respectively. Monthly warehouse
requirements are 75, 20 and 50 units respectively. Unit shipping costs (in Rs.) are given here.
Factory

Warehouse
D

The penalty costs for not satisfying demand at the warehouses D, E and F are Rs. 5, Rs. 3 and Rs.2 per unit
respectively. Determine the optimal distribution for Priyanshu, using VAM algorithms.
(7 Marks)
Question 10: Let us assume that you have inherited Rs. 100,000 from your fatherinlaw that can be invested in a
combination of only two stock portfolios, with the maximum investment allowed in either portfolio set at Rs. 75,000. The
first portfolio has an average return of 10%, whereas the second has 20%. In terms of risk factor's associated with
these portfolios, the first has a risk rating of 4 (on a scale from 0 to 10), and the second has 9. Since you want to maximize
your return, you will not accept an average rate of return below 12% or a risk factor above 6. Hence, you then face the
important question. How much should you invest in each portfolio? Formulate this as a linear programming problem
and solve it by graphic method.
(10 Marks)
Question 11: (a) ABC Ltd. trade in a perishable commodity. Each day ABC receive supplies of the goods from a
wholesaler but the quantity supplied is a random variable, as is subsequent retail customer demand for the
commodity. Both supply and demand are expressed in batches of 50 units and over the past working year (300 days).
ABC have kept records of supplies and demands. The results are given in the following table:

CA. Parag Gupta

Ph.: +91 9891 432 632

Paraggupta_ca@yahoo.co.in

Costing & O.R.

Worlds largest CA Final students consultancy group: http://groups.yahoo.com/group/costingbyparaggupta

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ABC Ltd. buys the commodity at Rs. 6 per unit and sells at Rs. 10 a unit. At present unsold units at the end of the day are
worthless and there are no storage facilities. ABC estimates that each unit of unsatisfied demand on any day costs than
Rs. 2. Using the following random numbers.
8

(i)

Simulate six days trading and estimate annual profit.

(ii)

Return the exercise to estimate the value of storage facilities.

5
(8 Marks)

(b) Define a simulation model. What is Monte Carlo simulation?

Question 12:

(4 Marks)

Hotel Galaxy analysed previous 5 years data for preparation of budget for year 2009

Average occupancy during off-season i.e Nov to April remains below 60%.
Revenue Contribution from 3 profit centres : Accommodation : 50%, Restaurant : 30%, Bar 20%
The three Profit Centres have the following pattern of contribution %:
Revenue

Accommodation
100

Restaurant
100

Bar
100

Wages

25

20

15

Direct Cost

15

50

45

Contribution

60

30

40

Estimated Revenue for the current year is Rs 60 lakhs, Fixed cost Rs 10.00 lakhs.
To improve Return on Capital Employed of 110 lakhs, following two suggestions have been made :
A.

An offer of two-nights reduced price @ Rs 1600 during off-season ( Nov April ). It is expected
that occupants under this offer will spend 30% of accommodation charge in restaurant and
15% in the bar.

B.

To increase restaurant & bar prices by 15% and also increase the room rent
( assuming that there will be no change in occupancy). You are

required to calculate the following ( before tax) :

(i)

Expected Return on Capital Employed under the budget

(ii) How many two-night offers are to be sold as in proposal A to increase ROCE by
4%.
(iii) How much increase in room rent is required under proposal B to get same ROCE
as in (ii).

CA. Parag Gupta

Ph.: +91 9891 432 632

Paraggupta_ca@yahoo.co.in

(6 Marks)

Costing & O.R.

Worlds largest CA Final students consultancy group: http://groups.yahoo.com/group/costingbyparaggupta