INTERMEDIATE EXAMINATION SET 2

MODEL ANSWERS TERM – JUNE 2023

PAPER - 12
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.
Where considered necessary, suitable assumptions may be made and
clearly indicated in the answer.
Answer Question No. 1 and any five from Question No. 2, 3, 4, 5, 6, 7 and 8.

SECTION - A
(Compulsory)

1. (a)
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii)
a d b c c b b c d d a d
(b)
(i) (ii) (iii) (iv) (v) (vi) (vii)
False True False False True True True
(c)
(i) (ii) (iii) (iv) (v) (vi)
Return Master Flexible Budget Critical Probabilities Marginal
on Budget success costing
Equity factor(CSFs)

SECTION - B
(answer any five questions)

2. (a) Management accounting is an offshoot of financial accounting and has specific linkages
with cost accounting. Financial literature suggests that the beginning of management
accounting is linked with the requirement for accounting information to optimize
economic resources during the Industrial Revolution. The International Accounting
Federation (IFAC, 1998) has described the evolution of managerial accounting through
four phases.
 First stage (prior to 1950s).
 Second stage (1950s – 1965)
 Third stage (1965 – 1985).
 Fourth stage (1985 – till date)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Explanation of four stages and faces are given below:
(1) The first stage (prior to 1950) Cost determination and financial control, which is
also referred as the ‘classical era’ is the period where the focus was on cost determination
and financial control. At this stage, the development of managerial accounting was
oriented to determining costs and financial control of business processes. IFAC describes
this period of Management accounting as ‘the technical activity needed to achieve
organizational objectives’. Managerial accounting before the 1950s was mainly focused
on determining the cost of the product.
The second stage (1950-1965) is referred as the age of information for management
planning and control.
During this period the main focus of managerial accounting was to provide information
on planning and control issues. This phase is characterized by the use of traditional
accounting management techniques that support decision making and responsibility
accounting. Management accounting techniques such as: Standard Costs and Profitability
Analysis were introduced during this period. The second phase is described as
‘management activity, but in the role of staff’. During this period, the management was
focused on the company’s production process and internal analysis and paid less attention
to external business environment.
The third stage (1965 - 1985) is referred as reduction of waste of resource in business
operation.
Management accounting focussed on reduction of waste of resources in production
processes by eliminating ‘no-value activities’. During this period, Japan’s economic
progress and rapid technological developments contributed to the growth of global
competition. The priority for the companies was to adapt to the new business
environment. Companies began to seek both cost reduction and quality improvement at
the same time. The use of robotics and computer-controlled processes enabled companies
to improve their quality and in many cases impact on cost reduction.
The Fourth Stage (1985-2000) is refereed as Creation of value through effective
resource:
During this period, technological innovations were at the forefront, competition was
intensified, companies, as they were faced with major business uncertainties, and thus
made them focus on value creation through effective use of resources, which could be
achieved ‘with the use of technology that drives companies to create costumer value,
shareholder value, and organizational innovations’. The managerial accounting
techniques that dominated this period are: Activity-based Cost (ABC); Production just in
time (JIT); Target cost; balanced scorecard; Value chain analysis and strategic
management accounting.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING

The various tools and techniques that developed during each particular phase /stage
are given below:
Cost Information for Reduction of waste Creation of Value
Focus determination planning and of resource in through effective
and financial control Business operation resource use
control
Stages → 1760 -1950 1950 -1965 1965 -1985 1985 - till date
Methods ↓
Cost determination Standard cost
accounting
- developments
Cost Standard costing Marginal costing
determination Direct Costing Target costing
and accounting Records of cost Activity based
accounting costing
allocation of Activity based
indirect cost management
Uniform costing
Absorption costing
Application of
Budgeting discounted cash
Planning
flow
Transfer costing
Return on Responsibility Application of
Controlling investments (ROI) accounting Kaizen
ton -mile ratio Gentani system Just in time system
Kaizen costing
Life Cycle costing Value chain
analysis
Five Forces
Model
PEST, SWOT
analysis
Strategic Customer
analysis profitability
analysis
Competitor
analysis
Balanced
scorecard

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
(b) i. 1. Activity rate = [(3 x ₹ 30,000) +₹ 9,000] ÷15,000
= ₹ 6.60 per invoice
2. Fixed activity rate = ₹ 90,000÷15,000
= ₹ 6.00 per invoice
3. Variable activity rate = ₹ 9,000÷15,000
= ₹ 0.60 per invoice
Activity availability = Activity usage + Unused activity
15,000 invoices = 12,500 invoices + 2,500 invoices

 Cost of resources supplied = Cost of activity used + Cost of unused activity

= ₹90,000 + (₹0.60 x 12,500)
= (₹6.60 x 12,500) + (₹6.00 x 2,500)
= ₹82,500 + ₹15,000
= ₹97,500
ii.
 Activity-based costing (ABC) is a costing method that identifies activities in
an organization and assigns the cost of each activity to all products and
services according to the actual consumption by each. Therefore, this model
assigns more indirect costs (overhead) into direct costs compared to
conventional costing.
a. ABC system is a very valuable tool of control. It offers a number of
advantages to the management and the following are the main
advantages:
(i) It brings accuracy and reliability of the costing data in
determination of the cost of the products.
(ii) It facilitates cause and effect relationship to exercise effective cost
control.
(iii) It provides necessary cost information to the management to take
decisions on any matter, relating to the business.
(iv) It is much helpful in fixing the cost and selling price of a product.
(v) It facilitates overhead costs allocate directly to the specific
product.
(vi) It enables to manage the activities rather than costs.
(vii) It helps to remove all types of wastages and inefficiencies.
(viii) It provides valuable information to evaluate on the relative
efficiencies of various plants and machinery.
(ix) Cost Driver Rates will help in significant impact on the
development of new products or modification of existing
products.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
 This will arise when the products manufactured by the manufacturing
companies are not standardized and labour hours are predominating. Further
a clear distinction between value added and non-value added activities are
difficult to make

3. (a) Let contribution to sales ratio of product Cee is C

(i)  Contribution/sales (%) = (0.33 × 40%) + (0.33 × 50%) + (0.33 × C) = 48%
0.33C = 0.48 – 0.132 – 0.65
0.183
C = = 54 %
0.33
Cee = 𝟓𝟒% (Balancing figure)
The total contribution/sales ratio for the revised sales mix is:
= (0.40 × 40% ) + (0.25 × 50% ) + (0.35 3 54% )
= 𝟒𝟕. 𝟒%
(30% × 2)+ (20% × 5)+ (25% × 3)
(ii) Weighted average contribution to Sales ratio= = 23.5%
10
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 (₹ 1,00,000)
Break even sales = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑡𝑜 𝑠𝑎𝑙𝑒𝑠 𝑟𝑎𝑡𝑖𝑜 (23.5%) = ₹ 𝟒, 𝟐𝟓, 𝟓𝟑𝟐

(b) Units sold = Sales÷ Selling Price per unit = ₹ 12,00,000 ÷ ₹ 40 = 30,000 units
Sales 40 12,00,000
Less: Variable Cost 30 9,00,000
Contribution 10 3,00,000
Less: Profit 1,00,000
Fixed Cost 2,00,000

Hence, total fixed cost in the new case = ₹ 200,000 + ₹ 300,000 = ₹ 500,000
Contribution in the New Case =New Fixed Cost+ Profits =5,00,000+1,00,000 =₹6,00,000
Since as per agreement the sale value is restricted to the old value that is ₹ 12,00,000.
Hence P/V Ratio will be:
₹ 6,00,000 ÷ ₹ 12,00,000 x 100 = 50%
The variable cost in the new case = ₹ 30 - ₹ 5 = ₹ 25
Variable Cost Ratio = 100 - P/V Ratio = (100 - 50) % = 50%
Computation of New Selling Price:
If VC is 50, then SP = ₹ 100
If VC is 1, then SP = ₹100÷50%
If VC is 25, then SP = 100÷50 % x ₹ 25 = ₹ 50 per unit

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
4. (a) Statement showing contribution per unit and per labour hour
Particulars P Q R S
Selling Price per unit (₹) 350 345 280 230
Variable Cost per unit (₹) 330 310 180 185
Contribution per unit (₹) 20 35 100 45
Labour Hours per unit 3 4 2 3
Contribution per labour hour (₹) 6.67 8.75 50 15
Ranking IV III I II

(i) Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
24,000 P 3 -
Q 4 13,000*
R 2 5,600*
S 3 5,400*
24,000
* R = (2800x2) =5600, S = (1800x3) = 5400,
Therefore, [24000 hours – (5600+5400)] = 13000 hours is allocated to product Q.
As maximum allocation is (3500 units x 4) = 14000 hours.

Statement showing Transfer Price per unit of Product S

Total Labour Hours require for S (2,000 units x 3 hours per unit) 6,000
Hours derived from Product Q (1,500 units x 4 hours per unit) 6,000
Variable manufacturing cost for Product ‘S’ (2,000x₹185) = ₹3,70,000
Contribution foregone/Opportunity Cost of Product Q (1,500 x ₹35) ₹52,500
₹4,22,500
Hence Transfer Price per unit (₹4,22,500  2,000 units) = ₹211.25

(ii) Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
32,000 P 3 7,000
Q 4 14,000
R 2 5,600
S 3 5,400
32,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Statement showing Transfer Price per unit of Product S
Total Labour Hours require for S (2,000 units x 3 hours per unit) 6,000
Hours derived from Product P (2,000 units x 3 hours per unit) 6,000
Variable manufacturing cost for Product ‘S’ (2,000x₹185) = ₹3,70,000
Contribution foregone/Opportunity Cost of Product PQ (2,000 x ₹20) ₹40,000
₹4,10,000
Hence Transfer Price per unit ( ₹ 4,10,000  2,000 units) = ₹ 205.00

(b) Contribution required at Budgeted Residual Income

Fixed cost ₹80,00,000
Profit on ₹7,50,00,000x 12% =₹ 90,00,000
Residual Income = ₹ 1,00,00,000
Total Contribution required = ₹ (80,00,000+90,00,000+1,00,00,000)
= ₹ 2,70,00,000
Contribution derived from existing units = 12,00,000 x ₹20=₹2,40,00,000
Contribution required on 3,00,000 units = ₹2,70,00,000 - ₹ 2,40,00,000 = ₹ 30,00,000
Contribution per unit = ₹30,00,000 / 3,00,000 units = ₹ 10
Increase in Variable Cost = ₹5
Transfer price = Variable Cost + Desired Residual Income + Increase in Variable Cost
= ₹160+₹10+₹5
=₹175

5. (a) (i) Taxable Income = ₹15 lac ÷ (1- 0.30)

= ₹ 21,42,857 or ₹ 21.43 lacs
 Operating Income = Taxable Income + Interest
= ₹21,42,857 +₹10,00,000
= ₹31,42,857 or ₹ 31.43 lacs
 EVA = EBIT (1-Tax Rate) – WACC × Invested Capital
= ₹ 31,42,857 (1 – 0.30) – 13% × ₹ 95,00,000
= ₹ 22,00,000 – ₹12,35,000
= ₹ 9,65,000
 EVA Dividend = ₹95,00,000 ÷ 6,00,000 = ₹ 1.6083
(ii)
𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
 By definition (DuPont), ROI= × = 𝑀𝑎𝑟𝑔𝑖𝑛 ×
𝑆𝑎𝑙𝑒𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
 25% = 10% × 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Therefore, the turnover must be 2.5 times.
𝑠𝑎𝑙𝑒𝑠
Since, the 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠
₹ 1200000
2.5 𝑡𝑖𝑚𝑒𝑠 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠
Therefore, 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠 = ₹ 4,80,000
 Residual Income (RI) = Operating income - Minimum required operating
income
Given, 𝑀𝑎𝑟𝑔𝑖𝑛 = 10%
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
We know 𝑀𝑎𝑟𝑔𝑖𝑛 (10%) = 𝑆𝑎𝑙𝑒𝑠
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
=
₹ 12,00,000
= ₹ 12,00,000 x 10%
Therefore, the 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 = ₹ 1,20,000
Residual Income (RI) = ₹ 120,000 − (18% × ₹ 480,000)
= ₹ 120,000 − ₹ 86,400
= ₹ 𝟑𝟑, 𝟔𝟎𝟎

(b) MAGNA CARTA LTD received an order for 16 units of a new fountain pen called the
DENIMA. The first unit required 40 direct labour hours. The production schedule is
subject to 80% learning effect which implies that for every doubling of production the
cumulative average labour hour would be 80% of the previous and the total would be the
multiplied effect of the number of units produced and the cumulative average labour hour.
The table shown below shows the effect of 80% learning effect.

Production (units) Cumulative Average labour hour Total labour hour

1 40 40
2 32 (0.80×40) 64
4 25.6 (0.80×32) 102.40
8 20.48 (0.80×25.6) 163.843
16 16.384 (0.80×20.48) 262.144

Computation of total cost for the initial order of 16 units:

₹
Material (30 ×16) 480.00
Direct labour (262.144 [as calculated in above table] × 6) 1572.86
Variable overheads (0.5 × 262.144) 131.07
Fixed overhead apportioned (5 × 262.144) 1310.72
Total cost 3494.65

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING

6. (a) Cash Budget for the 3 Months Ending 30th June 2023 (Amount in ₹ )
Particulars April May June
Opening Balance (A) 6,000 3,950 3,000
Add: Receipts : (B)
Cash Sales 1,600 1,700 1,800
Collection from debtors [see note(i)] 13,050 13,950 14,850
Advance for sale of vehicles - - 9,000
Dividends from Investments - - 1,000
Total (A+B) 20,650 19,600 29,650
Less: Payments :
Materials 9,600 9,000 9,200
Wages [see note (ii)] 3,150 3,500 3,900
Overheads 1,950 2,100 2,250
Instalment of Plant & Machinery 2,000 2,000 2,000
Preference dividend - - 10,000
Total (C) 16,700 16,600 27,350
Closing Balance (A+B-C) 3,950 3,000 2,300

Working Notes:
(i) Computation of Collection from Debtors (Amount in ₹)

Month Total Sales Credit Sales Feb Mar Apr May June
Feb 14,000 12,600 --- 6,300 6,300 --- ---
Mar 15,000 13,500 --- --- 6,750 6,750 ---
Apr 16,000 14,400 --- --- --- 7,200 7,200
May 17,000 15,300 --- --- --- --- 7,650
13,050 13,950 14,850
(ii) Wages payment in each month is to be taken as three-fourths of the current month
plus one-fourth of the pre-vious month.

(b) (i) Budgetary Control is defined as “the establishment of budgets, relating the
responsibilities of executives to the requirement of a policy, and the continuous
comparison of actual with budgeted results either to secure by individual action the
objective of that policy or to provide a base for its revision.” Budgetary control is
intimately connected with budgets. The Chartered Institute of Management

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Accountants, London defines ‘Budgetary control; as “the establishment of budgets,
relating the responsibilities of executive to the requirements of a policy and the
continuous comparison of actual with budgeted results either to secure by individual
action the objectives of that policy or to provide a firm basis for its revision”. The
process of budgetary control is set up with the objective to closely monitor whether
or not the actual sales and expenses are in line with the financial plan.

Objectives of Budgetary Control:

Budgeting is a forward planning. It serves basically as a tool for management
control; it is rather a pivot of any effective scheme of control. The objectives of
budgeting may be summarized as follows:
 Planning: Planning has been defined as the design of a desired future position
for an entity and it rests on the belief that the future position can be attained
by uninterrupted management action.
 Co-ordination: Budgeting plays a significant role in establishing and
maintaining coordination
 Measurement of Success: Budgets present a useful means of informing
manager how well they are performing in meeting targets they have
previously helped to set.
 Motivation: Budget is always considered a useful tool for encouraging
manager to complete things in line with the business objectives.
 Communication: A budget serves as a means of communicating information
within a firm.
 Control: Control is essential to make sure that plans and objectives laid down
in the budget are being achieved.

(ii) 1. Revenue Centre

A revenue center is strictly defined as an organizational unit that is
responsible for the generation of revenues and has no control over setting
selling prices or budgeting costs. In a revenue center, performance evaluations
are limited because the manager has control over only one item: revenues.
The importance of revenue centre is to analyse the comparison between actual
performance (as well as in any other area that has revenue control) with
budgeted performance to determine variances from expectations. Budgeted
and actual revenues may differ because of either volume of units sold or price
of units sold. To compare budgeted and actual revenues, the price and volume
components of revenue must be distinguished from one another.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
2. Investment Center
An investment center is an organizational unit whose manager is responsible
for managing revenues and current expenses.
The investment center is particularly appropriate for those cases where
investment decisions must be made very rapidly in order to take advantage of
changes in local business conditions. This is a particularly important issue for
those companies in rapidly expanding markets, or where consumer needs
change rapidly, where waiting for investment approval from a central
authority may result in lost sales.
In addition, the center’s manager has the authority to acquire, use, and dispose
of plant assets to earn the highest feasible rate of return on the center’s asset
base. Many investment centers are independent, free standing divisions or
corporate subsidiaries.

7. (a) (i) Sales Value Variance= Actual Value of Sales – Standard Value of Sales
Total Actual Value of Sales = ₹ 3,200 + ₹ 1,800
= ₹ 5,000
Total Standard Value of Sales = ₹1,800 + ₹3,200 = ₹ 5,000 Sales Value Variance
= (₹5,000 – ₹ 5,000) = Nil
(ii) Sales Price Variance= Actual Quantity Sold× (Actual Price – Standard Price)
Product A → 800 × (₹4 – ₹ 3) = ₹ 800 Favourable
Product B→ 600 × (₹3–₹4) = ₹ 600 Unfavourable
Total Sales Price Variance = ₹(800-600) = ₹ 200 Favourable
(iii) Sales Volume Variance= Standard Price× (Actual Units – Standard Units) Product A
→ ₹ 3× (800 – 600) = ₹ 600 Favourable
Product B→ ₹4 × (600–800) = ₹ 800 Unfavourable Total Sales Volume Variance
= ₹(600 – 800) = ₹200 Unfavourable.

(b) It is important to note that in addition to the usual procedures used to solve standard cost
problems, equivalent production (FIFO) must be calculated. The equivalent production
determined by the FIFO method will be used to calculate the standard materials and
standard labour allowed. Two variances (price and quantity) must be determined for
materials, and two variances (rate and efficiency) must be determined for labour.

With the results of equivalent production as calculated above the variances are to be
calculated as follows;

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Calculation of Equivalent Production for Materials and Labour by the FIFO
Method:
Materials:
Work in process, May 1: 200 units (all materials added last period) 0
Units started and finished during May (6,400 – 200) 6,200
Work in process, May 31: 600 units (all materials added) 600
Total equivalent production—materials 6,800

Labour:
Work in process, May 1: 200 units (80% of labour required) 160
Units started and finished during May 6,200
Work in process, May 31: 600 units (80% labour added) 480
Total equivalent production—labour 6,840

Determining the Materials and Labour Variances:

Materials Variances
Materials price variance = (Actual Price – Standard Price) × Actual quantity
= (₹ 5.90 - ₹ 6.00)
= ( ₹ 5.90 - ₹ 6.00) × 20,900
= ₹ 2,090 (F)

Materials Quantity variance = (Actual Quantity –Standard Quantity)×Standard Price

= [20,900 – (6,800 × 3)] × ₹6.00
= [20,900 – 20,400] x ₹ 6.00
= ₹3,000 (A)
Note: ₹ 1,23,310 ÷ 20,900 = ₹5.90 per kg.

Labour Variances
Labour Rate Variance = (Actual Rate - Standard Rate) × Actual hours
= (₹7.70 – ₹7.50) × 27,100
= ₹5,420 (A)
Labour Efficiency Variance = (Actual Hours – Standard Hours) × Standard Rate
= [27,100 – (6,840 × 4)] × ₹7.50
= ₹1,950 (F)
Note: ₹2,08,670 ÷ ₹7.70 = 27,100 hours

The Manager (Cost) should write a ‘Report’ to the MD showing the above variance
calculations.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING

8. (a) (i) The Minimax Criterion

s1 s2 s3 s4 Row Max
a1 5 10 18 25 25
a2 8 7 12 23 23
a3 21 18 12 21 21 Minimax
a4 30 22 19 15 30

(ii) The Laplace Criterion

Assume equal probabilities (1/4) as there are four states of nature.

s1 s2 s3 s4 EV= ∑ 𝑃(𝑋𝑖 ) × 𝑋𝑖 Figures in ₹ thousand
1
a1 5 10 18 25 (5 + 10 + 18 + 25) = 14.5 ₹ 14,500
4
1
a2 8 7 12 23 (8 + 7 + 12 + 23) = 12.5 ₹ 12,500
4
1
a3 21 18 12 21 (21 + 18 + 12 + 21) = 18.0 ₹ 18,000
4
1
a4 30 22 19 15 (30 + 22 + 19 + 15) = 21.5 ₹ 21,500
4

Since it is a cost minimisation problem, decision a2 would be selected which

implicates the lowest cost of ₹ 12500.

(iii) The Savage Criterion

This criterion posits the formulation of a regret matrix. The regret matrix is
determined by subtracting 5, 7, 12, and 15 from columns 1 to 4, respectively. And
so the following regret matrix is got.

s1 s2 s3 s4 Row Max
a1 0 3 6 10 10
a2 3 0 0 8 8 Minimax
a3 16 11 0 6 16
a4 25 15 7 0 25

13
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL ANSWERS TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING

(iv) The Hurwicz Criterion

The following table summarizes the computation
Alternative Row Min Row Max α (Row Min) + (1-α) (Row Max)
a1 5 25 25 -20α1
a2 7 23 23 -16α
a3 12 21 21 - 9α
a4 15 30 30 -15α
The decision maker will have to decide upon the appropriate α. And thus he can
decide upon the optimum alternative.

(b) i. Expected Value of Perfect Information (EVPI) is the maximum amount that is worth
paying for additional information in an uncertain situation, calculated by comparing
the expected value of a decision if the information is acquired against the expected
value in the absence of the information. It is calculated by comparing the expected
value of a decision if the information is acquired against the expected value in the
absence of the information.

ii. Expected value in the absence of the information = ₹ 1,500

𝐸𝑉 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 1 = (0.2 × ₹ 80,000) + (0.4 × ₹ 50,000) – (0.4 × ₹ 5,000)
= ₹ 34,000
𝐸𝑉 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 2 = (0.2 × ₹60,000) + (0.4 × ₹25,000) + (0.4 × ₹10,000) =
₹ 26,000
Project 1 would be chosen on the basis if EV without perfect information. With
perfect information, this decision would be changed to Project 2 if market research
indicates weak demand.
𝐸𝑉 𝑤𝑖𝑡ℎ 𝑝𝑒𝑟𝑓𝑒𝑐𝑡 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛: (0.2 × ₹ 80,000) + (0.4 × ₹ 50,000)
+ (0.4 × ₹ 10,000)
= ₹ 𝟒𝟎, 𝟎𝟎𝟎
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 = ₹(40,000 – 34,000) – ₹4,500 𝑐𝑜𝑠𝑡 =
₹ 𝟏, 𝟓𝟎𝟎

1α(5) + (1-α)(25) = α5+ 25 -25α = 25 -20α. And so forth (for the remaining values in the column).

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Directorate of Studies, The Institute of Cost Accountants of India