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Test Series: March, 2023
MOCK TEST PAPER – 1
FINAL COURSE: GROUP – II
PAPER – 5: STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
SUGGESTED ANSWERS/HINTS

1. (i) Usually, we notice a suit of prices of products being determined based on the cost of their
production, keeping a room for desired margin. In contrary to this, the then originated Japanese
concept tells us to estimate selling price at first place, to be determined based on the price the
market is currently willing to pay for a similar product. Thus, the prices here are not based on the
cost of their products rather costs have to be targeted and thus the name “Target Costing”. This
means once price is determined and profits are set aside, the remainder becomes the costs to be
achieved. In striving to reach the cost goal, myriad managerial techniques and tools like Value
Chain Analysis/ Value Reengineering, Six Sigma, are used. These techniques are used keeping
in mind the focus (i.e., to control cost in order to meet the target without compromising the quality
and value to be derived from the product). As such, various costs incurred with respect to product
like design cost, manufacturing cost, storage cost, transportation cost are destined to be
controlled.
Target Cost concept is very much relevant in KPA’ situation since it is considering to digitize its
business where competition is intense specifically with regards to the prices of similar products.
Since the products offered by Dreams Homes lack much differentiation, the unique selling point
of the firm can be to offer quality products at low prices. Further, E Commerce will mostly
require the firm to operate as per Just in Time (JIT) approach that will reduce inventory
maintenance burden and also reduce wastage, thereby controlling costs. Thus, Target Costing
and E Commerce go hand in hand.
We must also keep in mind that the firm can apply Target Costing concept to both its
manufactured products and the products purchased out-rightly. For the merchandise goods, KPA
can plan to control various fixed cost (i.e., storage and inspection cost) and variable cost (i.e.,
selling cost) incurred to handle such goods such that lower prices can appeal wider customer
base. Moreover, to achieve low costs for its supplied products, it will have to enter into long term
contracts with dedicated suppliers. Considering the E Market, the scope of its operations will
expand and therefore the demand may also increase. Thus, suppliers can funnel the discounts in
form of low prices only if a commitment for long term purchases is made by the firm.
(ii) Currently, KPA operates physical stores at which time inventories of raw materials, WIP and
finished products are maintained at the stores and in warehouses considering the demand
directly dependent upon the store locations. It has been blocking large assets in form of various
inventories piled up to coordinate its production and retail function.
The three forms of inventories related to products that Dream House manufactures are
maintained in a traditional manner which seems to be out of the place for an E Retailer. Dream
House forecasts demand based on its internal policies and historical trends. Today demand in
every sector of the market changes by leaps and bounds, so using historical data is not at all
recommended. Demand forecasts should be pulled by current market trends and prediction of
future market sentiments. For example, Corona Virus pandemic has drastically changed the face
of world, where demand for some products have taken a leap while some will continue sitting on

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the shelves for a prolonged period. People are refraining themselves from going to stores and
online retailers like Amazon are reaping the benefits from this situation.
In the process of maintaining inventory, KPA is also building up too much safety stock which
takes up cost and space. The lead time of the firm is remarkably high relative to industry
standards, which is untenable in an E Environment. Failure to accommodate customers request
as per industry norms, means losing a large chunk of customers who do not want to wait.
Now when the firm is thinking of going digital, the scenario will be totally different. With the
switch over to ecommerce, production and purchase mechanism will also have to undergo a
drastic change. Just in time purchasing and production technique will put an end to the harrowing
task of inventory management. In this form of pull system, purchasing of merchandise goods and
production of in-house goods will be based on online customer demands and KPA will have to
accordingly coordinate with its suppliers to supply the right quantity of raw materials required at
the right time. JIT inventory management calls for having the inventory as and when needed also
taking care of massive holding cost suffered related to large build ups. The trick is to set up
plants in close proximity to chain of suppliers’ location to ensure several pick -ups each day rather
than holding on to bulks. ERP and other sources of electronic data interchange between supplier
and KPA will act as backbone in supporting the JIT activity. In this environment, Dream House
will also be able to reduce the lead time to deliver the ordered products from 4 weeks to around
2.5 weeks by streamlining the flow of information in entire supply chain.
For the products purchased from its suppliers, it is recommended that KPA should employ
vendor managed inventory technique. Under this, rather than firm controlling the inventory
management system, it is the suppliers who manage it. This is implemented by allowing the
suppliers of the firm to access the inventory information from all locations i.e., warehouse, retail
stores and distribution centers. They access the inventory data and then decide accordingly on
sending/ replenishing the inventories. For example, using the point of sales technology, data from
stores can flow to centralized database showing units sold and units in the stores, that can be
accessed by suppliers to anticipate demand and refill requirement in each store. Similarly, to
manage the inventory at warehouse, RFID (radio frequency identification) technique can be used
to pick up, process and ship the order. For an inbound shipment too, this technology can easily
scan the product information in seconds, leaving no room for human intervention. The access of
this real time data can be allowed to vendor, to manage KPA’ inventory.
In a nutshell, the onus and cost of inventory management passes on to the suppliers, thereby
underpinning the cost leadership strategy of KPA. Low cost of inventory management will
consequently reduce the overall cost of inventory and thus help, in achieving set cost targets.
(iii) The supply chain management system of KPA can be designed in the following manner:
a) As already known, E Commerce firms works on low inventories relative to physical stores,
therefore KPA is pondering about changing its inventory management technique. So, it is
time for the firm to focus on building strong collaborations with suppliers so that the lead
time of orders placed by KPA can be kept at minimum. Quality of the product offered by
such suppliers also cannot be overlooked anymore since E Sellers not only make speedy
shipments but also guarantee hassle free returns of the delivered product if their products
fail to meet the specifications given in their website. Strong tie up with suppliers will assist
the firm in meeting the ever-changing demand of its customers in this technological
landscape.

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b) Moreover, by implementing vendor managed inventory, as an effective SCM tool, much of
the onus of inventory management for its purchased products will shift onto suppliers.
c) For the in-house manufactured products, KPA needs to ensure that there is pool of
dedicated suppliers in the country who can supply expected materials on a timely basis.
Further, in the areas where there is dearth of such suppliers, it will have to arrange
transportation of the finished goods. To keep the overall cost of product low, it should abide
by the cost per touch inventory system (successfully employed by the prominent furniture
brand IKEA. It relies on the concept of passing the cost savings to its customers by putting
up their products together in easy to assemble packaging enabling their customers
themselves to select and pick up the product from the store. In a nutshell, less the produ cts
get touched in shipping and subsequent storage process less will be the overall cost of
product).
d) Most E Retailers maintain number of distribution centers close to their customer locations
such that the outbound logistics process works in a seamless fashion and customers end up
receiving their packages on the promised dates. For this to happen, KPA should be ready to
make large capital investments in setting up distribution centers in the densely populated
parts of Indian cities.
e) For the picking process of the goods in line with the order, it can make use of multi-faceted
robotics technology with some human participation. This technology can assist human
pickers in locating the required goods faster and with minimal error, thereby speeding up the
entire flow.
f) In the marketing section of supply chain, KPA should use skillful data scientists to pull
overwhelming data based on customer searches which can be analyzed to recommend
products most useful to them. Further it could resort to TV advertisements, public banners
and other prominent modes to propagate the digitization of its business.
2. “Pareto Analysis”
Model Sales % of Total Cumulative Model Cont. % of Cumulative
(`’000) Sales Total (`’000) Total Cont. Total %
Pareto Analysis Sales Pareto Analysis Contribution
A001 5,100 35.05% 35.05% B002 690 30.87% 30.87%
B002 3,000 20.62% 55.67% E005 435 19.47%* 50.34%
C003 2,100 14.43% 70.10% C003 300 13.42% 63.76%
D004 1,800 12.37% 82.47% D004 255 11.41% 75.17%
E005 1,050 7.22% 89.69% F006 195 8.73%* 83.90%
F006 750 5.15% 94.84% A001 180 8.05% 91.95%
G007 450 3.09% 97.93% G007 120 5.37% 97.32%
H008 225 1.55% 99.48% I009 45 2.01% 99.33%
I009 75 0.52% 100.00% H008 15 0.67% 100.00%
14,550 100.00% 2,235 100.00%
(*) Rounding - off difference adjusted.

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Diagram Showing “Sales and Contribution”

Recommendations
Pareto Analysis is a rule that recommends focus on most important aspects of the decision making in
order to simplify the process of decision making. The very purpose of this analys is is to direct
attention and efforts of management to the product or area where best returns can be achieved by
taking appropriate actions.
Pareto Analysis is based on the 80/20 rule which implies that 20% of the products account for 80% of
the revenue. But this is not the fixed percentage rule; in general business sense, it means that a few of
the products, goods or customers may make up most of the value for the firm.
In present case, five models namely A001, B002, C003, D004 account for 80% of total sa les where as
80% of the company’s contribution is derived from models B002, E005, C003, D004 and F006.
Models B002 and E005 together account for 50.34% of total contribution but having only 27.84% share
in total sales. So, these two models are the key models and should be the top priority of management.
Both C003 and D004 are among the models giving 80% of total contribution as well as 80% of total
sales so; they can also be clubbed with B002 and E005 as key models. Management of the company
should allocate maximum resources to these four models.
Model F006 features among the models giving 80%of total contribution with relatively lower share in
total sales. Management should focus on its promotional activities.
Model A001 accounts for 35.05% of total sales with only 8.05% share in total contribution. Company
should review its pricing structure to enhance its contribution.
Models G007, H008 and I009 have lower share in both total sales as well as contribution. Company
can delegate the pricing decision of these models to the lower levels of management, thus freeing
themselves to focus on the pricing decisions for key models.

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3. (i) Balanced Score Card
Perspectives Objective Measures Targets Initiatives
Financial
EVA (`Millions) ▪ Grow EVA ▪ Absolute ▪ `1,435 ▪ Repay `500 Million of debt
Million ▪ Reduce working capital
▪ Improve profit through top
line growth and cost
reduction
Working Capital ▪ Reduce ▪ Reduce ▪ `300 Million ▪ MIS on inventory and
working inventory reduction debtors on real-time basis
capital and debtors (`170 + ▪ Weekly short meetings on
by 5 days `130) inventory and debtors to
each monitor and initiate
actions to achieve targets
Customer
New Products ▪ Increase ▪ As a % to ▪ From x % to ▪ Meet existing customers
over 2022 Sales y% with new product offerings
▪ Meet new customers and
find out their requirements
▪ Participate in exhibitions
On time ▪ Increase ▪ % of ▪ From x % to ▪ Strengthen production
Delivery over 2022 deliveries on y% planning and control
time to total process
deliveries ▪ Leverage IT systems for
accurate and timely
information flow on
orders, delivery dates
Internal
Process
Manpower ▪ Increase ▪ As agreed ▪ From XX to ▪ Training of employees
Productivity output per under the YY ▪ Improved communication
man per long-term ▪ Improved supervision
day settlement
Cost Reduction ▪ Reduce ▪ Raw ▪ `500 Million ▪ Alternate sources for raw
cost of material Reduction material
Production costs ▪ Improve yields through
▪ Outsourcing value engineering
costs ▪ Make or buy on certain
▪ Overheads high-cost outsourced
components
▪ Reduction in travel costs
(use video conferencing),
▪ Monitor other costs to
save
New Product ▪ For ▪ Reduction in ▪ By 2 ▪ Form a task force
Approval by expediting time taken months ▪ Weekly progress
Customer approval of for approval monitoring by CEO
“NP”
▪ Use of PERT/CPM tools

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Learning and
Growth
Train senior ▪ To keep ▪ Timeline ▪ By MMYY ▪ Specific training
technical staff pace with (e.g., Dec ▪ Participation in
in new changing 24) seminars on new
technologies technologie
technologies
(products for s and to de
defense, risk
exposure to
aerospace)
few sectors
Explore ▪ Future ▪ Timeline ▪ By MMYY ▪ Appoint a consultant
possibilities for growth (e.g., Jun ▪ To look at possible
tie-ups Through 24) partner
on products for products ▪ Prepare a road map to
Electric for Electric achieve the objective
Vehicles. Vehicles

(ii) Rationale for each of the above perspectives:

a. EVA has been included under “Financial Perspective” as this is what the company intends to
drive the same and it is a good measure of shareholder value as it takes into consider ation
cost of equity which a normal profitability metric ignores. Working Capital is included, as an
improvement in the working capital measure would affect cost of capital and hence EVA.
b. New products and improvements in delivery times have been included under “Customer
Perspective” as these have to be driven to achieve the sales volumes beyond normal
industry growth. This will ultimately improve sales, profits and hence EVA.
c. Manpower productivity and cost reduction have been included under “Interna l Perspective”
as these have to be monitored and further efforts taken to reduce other costs to achieve the
cost reduction planned to finally achieve the profits required to deliver the EVA.
d. As the balanced score card is just not a short-term measure, initiatives on new products,
technologies and new markets have been included in the “Learning and Growth”
perspectives to plan for long term sustained growth and to ensure that the company stays
relevant in a changing business environment.
(iii) EVA Calculations
Particulars 2022 (Est.) Budget 2023
` Million ` Million
PAT 1,610 2,170
Add: Interest adjusted for tax {Interest × (1-0.3)} 140 140
NOPAT 1,750 2,310
Capital Employed (see assumptions below)
Equity (14%) 3,000 3,000
Reserves 1,000 2,250
Debt (10%) 2,000 2,000
Cost of Capital
Equity (14%) 420 420

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Reserves (14%) 140 315
Debt {10% × (1-0.3)} 140 140
Cost of Capital 700 875
EVA (NOPAT – Cost of Capital) 1,050 1,435
Assumptions
For 2022 estimated, Capital Employed is opening equity, reserves and debt. Similarly, for budget
2023, for calculating Capital Employed, opening equity, reserves have been considered.
Economic and accounting depreciation were assumed to be the same.
4. (a) (i) Valid, target costing is applied where the price is market determined and in the existence of
competitive environment. In monopoly market, a firm is a price maker hence, target costing
method is not applicable to a monopoly market.
(ii) Valid, in case of target costing the aim is to confine the total cost to set target. To achieve
this target cost figure, non-value added activities are eliminated and hence ignored.
(b) For each day, ‘N’ spends `360 per clerk (`90 per hr. × 4 hrs.). Therefore, ‘N’ spends `1,080 per
day to employ three clerks. Annually, this outlay amounts to `2,59,200 (`1,080 per day × 240
days).
Over five years, the outlay would be `12,96,000. If the WCMS is implemented, the initial cost is
`1,25,000. If we add the annual cost of `36,000, the total cost over five years amounts to
`3,05,000. Since one clerk will be needed as well, ‘N’ has to incur `4,32,000 over five years to
pay clerk (`4,32,000 = `90 × 4 hrs. × 1 clerk × 240 days × 5 years). Therefore, the total cost of
this option is `7,37,000.
Accordingly, there is cost saving of `5,59,000 from WCMS implementation.
Relevant Non-Financial Considerations
The WCMS may be a lot more efficient, but more rigid. For instance, what if, a student forgets to
bring his/ her card or transaction failure due to connectivity issue, and may not have enough cash
to pay. Automated systems may be less able to handle these situations. Having clerks may add
an aspect of flexibility and a human aspect that is hard to quantify.
Conclusion
Obviously, WCMS option is more cost effective for ‘N’ because there is a cost saving of
`5,59,000. But, non- financial factors should also be taken into consideration.
OR
Statement of Total Contribution
Sales Price Variable Contribution Sales Volume Total
p.u. (`) Cost p.u. (`) p.u. (`) (units) (`) Contribution (`)
(1) (2) (3) = (1) − (2) (4) (5) = (3) × (4)
27.50 17.00 10.50 7,500 78,750
27.00 17.00 10.00 8,000 80,000
26.50 17.00 9.50 8,500 80,750
26.00 17.00 9.00 9,000 81,000
25.50 17.00 8.50 9,500 80,750
25.00 17.00 8.00 10,000 80,000
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24.50 17.00 7.50 10,500 78,750
24.00 17.00 7.00 11,000 77,000
From the above statement it is quite apparent that the contribution would be maximum at a sale
price of `26 per unit and sales demand of 9,000 units.
(c) (i) Should the Division X reduce the selling price by ` 20 per unit…?
Statement Showing ‘Impact of Selling Price Reduction’
Particulars `
Incremental Revenue
Additional Sales Revenue (9,600 units × ` 180) 17,28,000
Loss of Revenue (30,000 units × ` 20) (6,00,000)
Total (A) 11,28,000
Incremental Cost
Component Purchase Costs (9,600 units × ` 35) 3,36,000
 9,600 units × ` 16,80,000  5,37,600
Other Variable Costs  
 30,000 units 
 9,600 units × ` 2,70,000  86,400
Variable Marketing Costs  
 30,000 units 
Total (B) 9,60,000
Savings/ (Loss) …(A) - (B) 1,68,000
Comment
Above incremental analysis clearly indicates that the reduction of Selling Price by ` 20 per
unit shall be accepted as it increases the Profit of the concern by ` 1,68,000.
(ii) Should the Division Y be willing to supply 39,600 units to Division X…?
Statement Showing ‘Minimum Average Transfer Price’ per component (39,600)
Particulars `
Variable Cost 15.00
Loss of Contribution* [14,600 units × (` 50 - ` 15 - ` 3)/ 39,600 units] 11.80
Transfer Price 26.80
(*) Division Y has surplus capacity to the extent of 25,000 units, for additional 14,600 units
the Transfer Price must consider the Division Y’s Variable Costs of Manufacturing the
Component plus the Lost Contribution Margin (that will result from losing outside sales).
Company’s Perspective
Particulars `
Market Price per component 35.00
Relevant Cost for Transfer per component (from above) 26.80
Saving per component 8.20
Units 39,600
Total Savings 3,24,720
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Comment
It is not in the interest of the Division Y to transfer 39,600 units to Division X at Price below
the Minimum Average Transfer Price based on Opportunity Cost. However, from the
Concern’s Perspective, internal transfer between Divisions is beneficial as each unit to be
transferred is offering a saving of ` 8.20.
5. (a) For the same quantity, sales value will reduce by 8% of (1,00,000 units × ` 150) = ` 12 lakhs.
For maintaining the same amount of profit, cost also has to be reduced by ` 12 lakhs, which can
be achieved as under –
Particulars ` in lakhs
Savings: Reduction in Wages 6.00
(Due to higher labour productivity, wages will be 30/1.25 = ` 24.00 lakhs)
Elimination of Wastage of Materials = 1% of ` 50 lakhs 0.50
Savings in Packaging Cost (given) 1.35
Savings in Maintenance Cost (given) 0.80
Sub-Total Savings …(A) 8.65
Loss in Disposal of Old Machine (`3 lakhs – `2.25 lakhs) 0.75
Difference in Depreciation (`10 lakhs – `3 lakhs) × 10% 0.70
Cost of Capital Investment (`10 lakhs × 12%) 1.20
Sub-Total Costs …(B) 2.65
Effective Cost Reduction before considering removal of supervisors 6.00
…(A) – (B)
Additional reduction required for meeting Target Cost, by removing supervisors 6.00
(`12 lakhs – `6 lakhs)

Hence,
Number of Supervisors to be Removed = `6 lakhs / `1.20 lakhs = 5 Supervisors
(b) (i) In participative budgeting, subordinate managers create their own budget and these budgets
are reviewed by senior management. Such budget communicates a sense of respo nsibility
to subordinate managers and fosters creativity. This is also called bottom up approach
(sometime referred as participative approach).
As the subordinate manager creates the budget, it might be possible that the budget’s goals
become the manager’s personal goal, resulting in greater goal congruence. In addition to
the behavioural benefits, participative budgeting also has the advantage of involving
individuals whose knowledge of local conditions may enhance the entire planning process.
The participative budget described here appears participative in name only. In virtually
every instance, the participative input is subject to oversight and discussion by sales
manager. Some amount of revision is also common. However, excessive and arbitrary
review that substitutes a top-down target for a bottom-up estimate makes a deceit process.
Such a gutting appears to be the case in EWPL. J’s statement indicates a very autocratic
style. The revision process also seems to be arbitrary and capricious. There is little
incentive for the salesgirls to spend much time and effort in projecting the true expected
sales because they know that the target would be revised again and J’s estimate will
prevail. This situation creates an interesting discussion about the costs and benefits of
participative budgeting and gives rise to game playing and slack.

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(ii) In top down approach, budget figures will be imposed on sales personnel by senior
management and sales personnel will have a very little participation in the budget process.
Such budget will not interest them since it ignores their involvement altogether. While in
bottom up approach, each sales person will prepare their own budget. These budgets will be
combined and reviewed by seniors with adjustment being made to coordinate the needs and
goals of overall company. Proponents of this approach is that salespersons have the best
information of customer’s requirements, therefore they are in the best position in setting the
sales goal of the company. More importantly, salespersons who have role in setting
these goals are more motivated to achieve these goals. However, this approach is time-
intensive and very costly when compared with top down approach. In order to achieve
personal goals, participants may also engage in politics that create budgetary slack and
other problems in the budget system.
Since both top down and bottom up approaches are legitimate approaches, so EWPL can
use combination of both. Seniors know the strategic direction of the company and the
important external factors that affect it, so they might prepare a set of planning guidelines
for the salesgirls. These guidelines may include forecast of key economic variables and
their potential impact on the EWPL, plans for introducing and advertising a new product and
some broad sales targets etc. With these guidelines, salesgirls might prepare their individual
budget. These budgets need to be reviewed to validate the uniformity with the EWPL’s
objectives. After review, if changes are to be made, the same should be discussed with
salesgirls involved.
6. (a) (i) AB Compounds has the opportunity to utilize 10 units of non-moving chemical as input to
produce 10 units of a product demanded by one of its customers. The minimum unit price to
be charged to the customer would be–
Cost Component Cost per unit of product (`)
Cost of Material 350
(Realizable value = `3,500 / 10 units of chemical)
Out of Pocket Expenses 50
Other Material Cost 80
Minimum Unit Price that can be charged 480
Therefore, the minimum unit price that can be charged to the customer, without incurring
any loss is `480 per unit of product. As explained below in point (ii), allocated overhead
expenses and labor cost are sunk costs that have been ignored while calculating the
minimum unit price to be charged.
(ii) Analysis
(a) Cost of Material: Relevant and hence included at realizable value. AB Compounds has
10 units of non-moving chemical input that has a book value of `2,400, realizable
value of `3,500 and replacement cost of `4,200. Realizable value of `3,500 would be
the salvage value of the chemical had it been sold by AB Compounds instead of using
it to meet the current order. This represents an opportunity cost for the firm and hence
included while pricing the product. Book value would represent the cost at which the
inventory has been recorded in the books, a sunk cost that has been ignored.
Replacement cost of `4,200 would be the current market price to procure 10 units of
the input chemical. This would be relevant only when the inventory has to be
replenished after use. This chemical is from the non-moving category, that means that

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it is not used regularly in production process and hence need not be replenished after
use. Therefore, replacement cost is also ignored for pricing.
(b) Labour Cost: Not relevant and hence excluded from pricing. It is given in the problem
that this order would be met by permanent employees of the firm. Permanent
employee cost is a fixed cost that AB Compounds would incur irrespective of whether
this order is produced or not. No additional labour is being employed to meet this
order. Therefore, this cost is a sunk cost, excluded from pricing.
(c) Allocated Overhead Expenses: These expenses have been incurred at another Cost
Centre, typical example would be office and administration costs. Such costs are fixed
in nature that would be incurred irrespective of whether this order is produced or not.
Therefore, this cost is a sunk cost, excluded from pricing.
(d) Out of Pocket Expenses: These are expenses that are incurred to meet the production
requirement of this order. These are additional variable expenses, that need to be
included in pricing.
(e) Other Material Costs: These are expenses that are incurred to meet the production
requirement of this order. These are additional variable expenses, that need to be
included in pricing.
(iii) Advice on Pricing Policy
Under perfect competition conditions, AB Compounds can have no pricing policy of its own,
here sellers are price takers. It cannot increase its price beyond the current market price.
The firm can only decide on the quantity to sell and continue to produce as long as the
marginal cost is recovered. When marginal cost exceeds the selling price, the firm starts
incurring a loss.
Since AB Compounds cannot control the selling price individually in the market, it can adopt
the going rate pricing method. Here it can keep its selling price at the average level charged
by the industry. This would yield a fair return to the firm. An average selling price would help
the firm attract a fair market share in competitive conditions.
(b) (i) Revised budgeted hours
A learning curve is geometric with the general form Y = ax b
Whereas–
Y = cumulative average time per unit or batch.
a = time taken to produce initial quantity.
x = the cumulative units of production or, if in batches, the cumulative number of batches
b = the learning index or coefficient
Time taken to paint 6 th unit is 13.08 hours i.e. (91.38 – 78.30) (See working note 1 & 2)
Time required to paint unit 6 th onward = 13.08 hours (because learning curve will cease
post 6th unit)
Revised budgeted time required to paint 15 buses = 78.3 hours (for first 5) + 13.08 hours ×
10 units (next 10 – 6th to 15th) = 78.3 hours + 130.8 hours = 209.10 hours
Working note 1 - Time required for painting first 6 buses
Y = 20 × (6)-0.152
Log Y = Log 20 – 0.152 × Log 6
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Log Y = Log 20 – 0.152 × Log (2×3)
Log Y = Log 20 – 0.152 × (Log 2 + Log 3)
Log Y = 1.3010 – 0.152 × (0.3010 + 0.4771)
Log Y = 1.3010 – 0.152 × (0.7781)
Log Y = 1.3010 – 0.1183
Log Y = 1.1827
Y = antilog of 1.1827
Y = 15.23 hours
Time required for painting first 6 buses is 91.38 hours (15.23 hours × 6 buses)
Working note 2 - Time required for painting first 5 buses
Y = 20 × (5)-0.152
Log Y = Log 20 – 0.152 × Log 5
Log Y = 1.3010 – 0.152 × (0.6990)
Log Y = 1.3010 – 0.1062
Log Y = 1.1948
Y = antilog of 1.1948
Y = 15.66 hours
Time required for painting first 5 buses is 78.3 hours (15.66 hours × 5 buses)
(ii) Control Ratios
▪ Activity Ratio measures the level of activity attained over a period by expressing
number of standard hours required for actual production as percentage of the budgeted
hours, as follows–

= (16,200/ 15,500) × 100 = 104.52%

104.52% signify that FMW is need to work 4.52% extra than what it budgeted for to
manufacture what actually it manufactured.
▪ Capacity Ratio indicates the actual utilisation of budgeted hours. It is a measure
which express actual working hour as percentage of budget hours (or maximum
possible number of working hours).

= (15,000/ 15,500) × 100 = 96.77%

96.77% signify that FMW actually worked for 96.77 hours against every 100 possible
hours.
Or Budgeted Capacity is utilised up to 96.77% and 3.23% capacity remains unutilised.

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Note –
Instead of formula used above, Capacity Usage Ratio can also be measured using
below mentioned formula–

▪ Calendar Ratio is a measure where actual number of working days are expressed as
number of working days during budgeted period.

= (25/26) × 100 = 96.15%

▪ Efficiency ratio indicates the degree of efficiency attained in production. It is
expressed in term of standard hours for actual production as a percentage of the actual
hours spent in producing that work.

= (16,200/ 15,000) × 100 = 108%

108% signify that efficiency is 108% or task for which 108 hours is available finished in
100 hours.
Working Notes 1 - Calculation of standard hours for actual production
No. of men Total
Sr. No. of Unit
Product hour required Standard
No. produced
per unit Hours
1 Seat handle (B-SH-101) 1,200 6 7,200
2 Seat cover (B-SC-102) 750 12 9,000
Total standard hours for actual production 16,200
Working Notes 2 - Calculation of monthly budgeted hours
Annual budgeted hour =1,86,000
Monthly budgeted hour = 1,86,000 hours/ 12 months= 15,500
Working Notes 3 - Calculation of actual hours for actual production
Sr. No. Particulars Quantum in No.
1 No. of days production function worked 25
2 No. of hour in day 8
3 No. of worker in division 75
Total actual hours for month 15,000
Note – All calculations are on monthly basis.

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