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About the Author I-5
Preface to Fourth Edition I-7
Chapter-heads I-9
CHAPTER ONE
COST CONCEPTS
1.1 Present Business Environment 1
1.2 Cost, Expense and Loss 2
1.3 Cost concepts 2
1.3-1 Product and Period Costs 2
1.3-2 Common and Joint Costs 3
1.3-3 Short-run and Long-run Costs 3
1.3-4 Past and Future Costs 3
1.3-5 Controllable and Non-controllable Costs 3
1.3-6 Replacement and Historical Costs 3
1.3-7 Escapable and Unavoidable Costs 4
1.3-8 Out of Pocket and Book Costs 4
1.3-9 Imputed and Sunk Costs 4
1.3-10 Relevant and Irrelevant Costs 4
1.3-11 Opportunity and Incremental (Differential) Costs 4
1.3-12 Conversion Cost 5
1.3-13 Committed Cost 5
1.3-14 Shutdown and Abandonment Costs 5
1.3-15 Urgent and Postponable Costs 5
1.3-16 Marginal Cost 5
1.3-17 Notional Cost 5
1.4 Classification of Costs 5
1.5 Classification based on financial nature of costs 6
1.5-1 Financial Costs 6
1.5-2 Non-financial Costs 6
1.6 Elementwise classification of costs 6
1.6-1 Direct Costs (Traceable Costs) 6
1.6-2 Indirect Costs (Common Costs) 6
1.7 Functional classification of costs 7
1.7-1 Production Cost 7
I-11
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1.7-2 Administration Cost 7
1.7-3 Selling and Distribution Cost 7
1.7-4 Research and Development Costs 7
1.8 Classification for exercising control over costs 7
1.8-1 Engineered Cost 7
1.8-2 Managed Cost 8
1.8-3 Capacity Cost 8
1.9 Classification based on cost behaviour 8
1.9-1 Variable Cost 8
1.9-2 Fixed Cost 8
1.9-3 Semi-variable cost or Semi-fixed cost 9
1.9-4 Diagrammatic presentation of cost behaviour 9
1.9-5 Importance of behaviourwise cost classification 11
1.10 Techniques for separation of costs 11
1.10-1 Industrial Engineering Method 11
1.10-2 Account Inspection Method 12
1.10-3 High and Low Method 12
1.10-4 Scattergraph Method 14
1.10-5 Visual fit Method 15
1.10-6 Least squares or simple linear regression analysis method 15
1.11 Multiple Regression Analysis 17
1.12 Assumptions in Regression Analysis 18
1.13 Precautions in using Regression Analysis 18
1.14 Research and Development Costs 18
1.15 Allocation of Common Costs 19
1.16 Criteria for common cost allocation 19
EXAMINATION QUESTIONS 20
PROBLEMS AND SOLUTIONS 20
CHAPTER TWO
MARGINAL COSTING
2.1 Methods of Costing 24
2.2 Absorption Costing 24
2.2-1 Growing importance of overheads 25
2.2-2 Criteria for absorption of overheads 25
2.2-3 Over and under recovery of overheads 25
2.2-4 Advantages of Absorption costing 25
2.2-5 Limitations of Absorption costing 26
2.3 Marginal Costing 26
2.3-1 Marginal cost 26
2.3-2 Marginal costing : Definition and Meaning 26
2.3-3 Contribution 27
CONTENTS I-12
PAGE
2.3-4 Formulae used in Marginal Costing 27
2.3-5 Features of Marginal Costing 29
2.3-6 Arguments in favour of Marginal Costing 30
2.3-7 Criticism against Marginal Costing 30
2.3-8 Marginal Costing vs. Absorption Costing 31
2.4 Practical application of Marginal Costing technique 33
2.5 Key or limiting factors analysis 33
2.5-1 Analysis when only one limiting factor 34
2.5-2 Analysis when more than one limiting factor 34
2.5-3 Key factor control 34
2.6 Profit Planning 39
2.7 Optimising Product Mix 41
2.8 Contribution Analysis 44
2.9 Make or buy decisions 45
2.9-1 Consideration in make or buy decisions 45
2.9-2 Procedure 45
2.10 Price fixation 48
2.11 Discontinuance of Product 51
2.12 Diversification of product line 54
2.13 Accept or reject new order and Sub-contracting 56
2.14 Temporary cessation of operations or close down 58
EXAMINATION QUESTIONS 62
PROBLEMS AND SOLUTIONS 62
CHAPTER THREE
BREAK-EVEN AND CVP ANALYSIS
3.1 Break-even Analysis : Introduction 187
3.2 Methods of determination of Break-even Point 187
3.2-1 Graphical Method 187
3.2-2 Algebraic Methods 191
3.3 Profit-Volume Ratio 193
3.3-1 How to improve P.V. Ratio 194
3.3-2 Limitations of P.V. Ratio 194
3.4 Margin of Safety 195
3.5 Angle of Incidence 196
3.6 Assumptions and limitations of Break-even analysis and Break-evencharting 196
3.7 Impact of selling price, Fixed cost and Variable cost on P.V. Ratio,Break-even point and Margin of Safety 197
3.8 Curvilinear Break-even Analysis 198
3.9 Cost-Volume-Profit Analysis 209
3.9-1 Procedure 209
3.9-2 Practical applications 210
3.9-3 Limitations of CVP Analysis 210
I-13 CONTENTS
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3.10 Profit-Volume Chart 210
3.11 CVP analysis with change in selling price 212
3.12 CVP analysis in Multi product situations 212
3.13 CVP analysis under conditions of uncertainty 214
3.14 Practical application of Linear Programming technique 218
3.15 Simulated Break-even Point Analysis (SIMBEP) 219
EXAMINATION QUESTIONS 220
PROBLEMS AND SOLUTIONS 221
CHAPTER FOUR
BUDGETING AND BUDGETARY CONTROL
4.1 Introduction 256
4.2 Budget 256
4.3 Budgeting 256
4.4 Budgetary Control 256
4.5 Forecast vs. Budget 256
4.6 Requirements of a sound budgeting system 257
4.7 Advantages of Budgeting 258
4.8 Problems in Budgeting 258
4.9 Budgeting Process 259
4.10 Specifications and communication of organisational objectives 260
4.11 Determination of key success factors 260
4.12 Establishment of clear lines of authority and responsibility 260
4.13 Establishment of Budget centres 260
4.14 Determination of Budget Period 260
4.15 Establishment of Budget Committee 260
4.16 Appointment of Budget Controller 261
4.17 Preparation of Budget Manual 261
4.18 Preparation of Sales or Revenue Budget 262
4.19 Preparation of other Budgets 262
4.19-1 Production Budget 262
4.19-2 Plant Utilisation Budget 262
4.19-3 Direct Materials Budget 262
4.19-4 Direct Labour Budget 262
4.19-5 Manufacturing Expenses Budget 262
4.19-6 Administrative Expenses Budget 263
4.19-7 Selling and Distribution Expense Budget 263
4.19-8 Research and Development Budget 263
4.19-9 Capital Expenditure Budget 263
4.19-10 Manpower Budget 263
4.19-11 Marketing Expenditure Budget 263
4.19-12 Capital Budget 263
4.20 Preparation of Master Budget 263
CONTENTS I-14
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4.21 Negotiation of budgets 264
4.22 Co-ordination and review of budget 264
4.23 Acceptance and communication of budgets 264
4.24 Budget Monitoring 264
4.25 Flexible Budgeting 270
4.25-1 Steps in preparation 270
4.25-2 Importance 271
4.25-3 Disadvantages 271
4.26 Zero-base Budgeting (ZBB) 275
4.26-1 Requisites for implementation 275
4.26-2 Features 276
4.26-3 ZBB vs. Traditional Budgeting 276
4.26-4 Benefits 276
4.26-5 Criticism 277
4.27 Programme Budgeting (PPBS) 277
4.27-1 PPBS vs. Conventional Budgeting 278
4.27-2 Stages in PPBS 278
4.27-3 Advantages 279
4.28 Performance Budgeting 279
4.28-1 Requisites 280
4.28-2 Performance Budgeting vs. Traditional Budgeting 280
4.28-3 Performance Budgeting vs. Programme Budgeting 280
4.28-4 Steps in implementation 280
4.28-5 Purposes 281
4.28-6 Requirements for introduction 281
EXAMINATION QUESTIONS 281
PROBLEMS AND SOLUTIONS 282
CHAPTER FIVE
STANDARD COSTING AND VARIANCE ANALYSIS
5.1 Standard Costing : Meaning and definition 347
5.2 Objectives of Standard Costing 347
5.3 Terminology on standards 348
5.4 Types of standards 349
5.5 Setting standards 349
5.6 Responsibility for setting standards 349
5.7 Standard Cost Card 350
5.8 Problems in setting standard costs 350
5.9 Advantages of standard costing 351
5.10 Criticism on Standard costing 351
5.11 Standard cost vs. Estimated Cost 352
5.12 Standard Costing vs. Budgetary Control 352
5.13 Variance Analysis 353
I-15 CONTENTS
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5.14 Material Variances 353
5.15 Labour Variances 357
5.16 Variable Overhead Variances 361
5.17 Fixed Overhead Variances 363
5.18 Sales Variances 366
5.18-1 Sales Variances based on profit 367
5.18-2 Sales Variances based on turnover 370
5.19 Profit Variances 373
5.20 Revision of standards 378
5.21 Revision variance 378
5.22 Planning and Operational Variances 379
5.23 Benefits and problems of planning and operating variances 381
5.24 Interpretation of Variances 381
5.24-1 Causes of Variances 381
5.24-2 Reasons of cost variances 381
5.24-3 Interdependence between variances 382
5.25 Investigation of Variances 382
5.26 Techniques of investigation of variances 383
5.26-1 Heuristics 383
5.26-2 Trend Analysis 383
5.26-3 Statistical Control Charts 384
5.26-4 Decision Tree Approach 386
5.26-5 Decision Theory Approach (Game Theory) 387
5.27 Economics of control of variances 389
EXAMINATION QUESTIONS 390
PROBLEMS AND SOLUTIONS 391
CHAPTER SIX
DIFFERENTIAL, OPPORTUNITY AND RELEVANT COSTING
6.1 Differential Costing 466
6.1-1 Characteristics 466
6.1-2 Differential Cost Analysis 466
6.1-3 Marginal Costing vs. Differential Costing 467
6.1-4 Cost Indifference Point 467
6.1-5 Use of Differential Cost Analysis in Investment Decisions 468
6.2 Opportunity Costing 471
6.2-1 Examples for Opportunity Cost concept 472
6.3 Relevant Costing 473
6.3-1 Features 473
6.3-2 Analysis of relevant cost with other cost concepts 473
EXAMINATION QUESTIONS 476
PROBLEMS AND SOLUTIONS 477
CONTENTS I-16
PAGE
CHAPTER SEVEN
COSTING IN SERVICE SECTOR
7.1 Meaning and Definition 520
7.2 Service cost units 520
7.3 Service cost analysis 520
7.4 Application of Service costing 521
7.4-1 Internal service departments 521
7.4-2 Service organisations 521
7.5 Service costing vs. Output costing 521
7.6 Operating cost statements 521
7.7 Transport costing 522
7.8 Hotel costing 526
7.9 Canteen costing 527
7.10 Power house costing 529
7.11 Hospital costing 531
PROBLEMS AND SOLUTIONS 533
CHAPTER EIGHT
JOINT PRODUCTS AND BY-PRODUCTS
8.1 Introduction 561
8.2 Joint Products 561
8.3 Accounting of Joint Costs 561
8.4 Co-products 562
8.5 By-products 563
8.6 Joint Product vs. By-Product 563
8.7 Scrap vs. By-Product 563
8.8 Waste 563
8.9 Joint costs - Problems in Accounting 564
8.10 Objectives for allocation of Joint Costs 564
8.11 Methods of accounting for Joint Products 564
8.11-1 Physical Units Method 564
8.11-2 Market Value Method 564
8.11-3 Average Unit Cost Method 565
8.11-4 Survey Method 565
8.11-5 Standard Cost Method 565
8.11-6 Contribution Margin Method 565
8.11-7 Direct Allocation Method 565
8.12 Methods of accounting for By-products 567
8.12-1 Cost Methods 567
8.12-2 Non-cost or Sales Value Method 567
8.13 Selection of appropriate method 568
PROBLEMS AND SOLUTIONS 578
I-17 CONTENTS
PAGE
CHAPTER NINE
PRICING STRATEGIES
9.1 Introduction 610
9.2 Economic theory of pricing 610
9.3 Elasticity of Demand 610
9.4 Types of Markets 611
9.5 Price determination under imperfect market conditions 612
9.6 Pricing Policy 613
9.6-1 Aims and objectives of pricing policy 613
9.7 Pricing decision process 614
9.8 Role of costs in pricing 615
9.9 Pricing methods 615
9.10 Cost based or Cost plus pricing 615
9.10-1 Arguments in favour of cost plus pricing 618
9.10-2 Arguments against cost plus pricing 619
9.11 Marginal Cost Pricing 620
9.11-1 Arguments in favour of Marginal Cost Pricing 621
9.11-2 Arguments against Marginal Cost Pricing 621
9.12 Pricing for target rate of return 623
9.13 Added value method of pricing 625
9.14 Differential Cost Pricing 627
9.15 Going Rate Pricing 628
9.16 Standard Cost Pricing 629
9.17 Opportunity Cost Pricing 629
9.18 Administered Pricing 629
9.18-1 Objectives of Administered Pricing 630
9.19 Customary Pricing 630
9.20 Export Pricing 630
9.21 Methods of Export Pricing 630
9.21-1 Cost plus Pricing 630
9.21-2 Marginal Cost Pricing 631
9.21-3 Incremental or Differential Cost Pricing 631
9.22 Critical analysis of export pricing methods 631
9.23 Strategies in product pricing 633
9.24 Pricing strategies for new products 634
9.24-1 Skimming and Penetration Pricing policies 634
9.25 Pricing established products 636
9.25-1 Product life cycle in pricing established products 636
9.25-2 Symptoms of competitive degeneration 637
9.26 Price discrimination 637
9.27 Target Pricing 637
CONTENTS I-18
PAGE
9.28 Product line pricing 638
9.28-1 Range of products 638
9.28-2 Related optional products 638
9.28-3 Captive products 639
9.29 Discounts and discounting 639
9.30 Pricing in inflation 640
9.31 Pricing when inputs are in short supply 642
9.32 Pricing during recession 644
9.33 Price cutting 645
9.34 Non-financial factors in pricing 646
9.35 Experience curve in product pricing 647
9.36 Product life cycle pricing strategies 647
9.37 Pitfalls in product pricing 647
9.38 Limiting factors in Product pricing 648
9.39 Management Accountant�s role in product pricing 648
EXAMINATION QUESTIONS 649
PROBLEMS AND SOLUTIONS 650
CHAPTER TEN
RESPONSIBILITY ACCOUNTING AND DIVISIONALPERFORMANCE MEASUREMENT
10.1 Responsibility Accounting : Definition 702
10.2 Meaning 702
10.3 Basic principles 703
10.4 Basic process in implementation 704
10.5 Responsibility reporting 705
10.6 Centres of control 706
10.7 Cost centre 706
10.8 Revenue centre 707
10.9 Responsibility centre 707
10.10 Profit centre 707
10.10-1 Advantages and disadvantages of profit centre 708
10.11 Investment centre 709
10.12 How to implement Responsibility Accounting ? 713
10.13 Benefits of Responsibility Accounting 713
10.14 Difficulties in implementation 714
10.15 Organisational aspects of Responsibility Accounting 714
10.16 Responsibility centre performance measurement 714
10.17 Arguments in favour of decentralised profit responsibility 715
10.18 Arguments against decentralised profit responsibility 715
10.19 Cost of decentralisation 716
10.20 Cost benefit analysis for decentralisation 716
I-19 CONTENTS
PAGE
10.21 Methods for measuring divisional performance 717
10.21-1 Return on Investment method 717
10.21-2 Residual Income Method 719
10.21-3 Other measures of divisional performance 720
10.22 Criteria for measurement of divisional profit 721
10.23 Divisional Performance Reporting 721
10.24 Non-financial control measures 721
10.25 Measuring managerial performance 724
10.26 Sub-optimisation 725
10.27 Strategic Business Units 726
10.27-1 Strategic decision making 726
10.27-2 Classification of SBUs 727
10.27-3 Management of an SBU 727
10.28 Contingency Theory of Management 727
10.28-1 Meaning 727
10.28-2 Contingency framework for Management Accounting 728
10.29 Agency Theory of Employment 728
10.29-1 Meaning 728
10.29-2 Important features of the model 728
10.29.3 Applications of the model in Management Accounting 729
10.29-4 Limitations 729
EXAMINATION QUESTIONS 729
PROBLEMS AND SOLUTIONS 730
CHAPTER ELEVEN
TRANSFER PRICING
11.1 Transfer Pricing: Necessity 744
11.2 Transfer Pricing Methods 745
11.2-1 Pricing at cost 745
11.2-2 Standard cost plus lump sum 746
11.2-3 Market prices 746
11.2-4 Prorating the overall contribution 747
11.2-5 Dual pricing 748
11.2-6 Negotiated prices 748
11.3 Transfer pricing - A general rule 749
11.4 Guiding principles in fixing transfer prices 749
11.5 Benefits of transfer pricing policy 749
11.6 International Transfer Pricing 756
EXAMINATION QUESTIONS 756
PROBLEMS AND SOLUTIONS 757
CONTENTS I-20
PAGE
CHAPTER TWELVE
COST OF LABOUR TURNOVER, STRIKE AND ECONOMICSOF TRAINING & DEVELOPMENT
12.1 Labour Turnover 793
12.2 Measurement of labour turnover 793
12.3 Causes of labour turnover 793
12.3-1 Avoidable causes 793
12.3-2 Unavoidable causes 794
12.4 How to reduce labour turnover ? 794
12.5 Cost of labour turnover 795
12.5-1 Preventive costs 796
12.5-2 Replacement costs 796
12.6 Treatment of cost of labour turnover 797
12.7 Cost benefit analysis of training and development 799
PROBLEMS AND SOLUTIONS 810
CHAPTER THIRTEEN
COST CONTROL AND COST REDUCTION
13.1 Introduction 828
13.2 Importance of Cost control and Cost reduction 828
13.3 Cost control 829
13.4 Cost reduction 829
13.5 Cost control vs. Cost reduction 830
13.6 Cost control process 830
13.7 Cost control in individual cost elements 831
13.8 Cost reduction process 832
13.9 Precautions in implementation of cost reduction programme 833
13.10 Planning for cost reduction 834
13.10-1 Crash Programmes 834
13.10-2 Planned Programmes 834
13.11 Long-range and Short-range Programmes 835
13.12 Management Accountants� role 835
13.13 Control Accounting and Decision Accounting 835
13.14 Methods and techniques for Cost control and Cost reduction 836
13.15 Value Analysis and Engineering 836
13.15-1 Impact of Value engineering on profit 836
13.15-2 Distinction between Value engineering and Value analysis 836
13.15-3 Benefits of value analysis 837
13.16 Economics of Maintenance 837
13.16-1 Break-down maintenance 838
13.16-2 Preventive maintenance 838
13.16-3 Optimum maintenance 838
I-21 CONTENTS
PAGE
13.17 Control of Waste, Scrap, Spoilage, Defectives 841
13.17-1 Waste control 841
13.17-2 Scrap control 841
13.17-3 Spoilage control 841
13.17-4 Defectives control 841
13.17-5 Accounting treatment 842
13.18 Improvement in material handling systems 843
13.19 Plant layout study and Plant location 843
13.20 Economics of multi-shift working 844
13.21 Reducing finance costs 844
13.22 Accident prevention 845
13.23 Production planning and control 845
13.23-1 Steps in Production planning 845
13.23-2 Production Programming 845
13.23-3 Production schedules 845
13.24 Factory automation 845
13.25 Budgetary control 846
13.26 Standard Costing 846
13.27 Cost-Volume-Profit Analysis 846
13.28 Product mix optimisation 846
13.29 Management Information System 847
13.30 Organisation charts, manuals and surveys 847
13.31 Cost-effectiveness analysis 847
13.31-1 Steps for evaluation of Cost-effectiveness 848
13.31-2 Problems in Cost-effectiveness analysis 848
13.32 Cost benefit analysis 848
13.33 Capacity Management 849
13.34 Rationalisation 849
13.35 Standardisation, Modularisation and Variety reduction 849
13.36 Detection and remedy of bottlenecks and imbalance in productionfacilities 850
13.37 Increased productivity 850
13.38 Key factor control 850
13.39 Energy Audit 850
13.40 Rectification of unbalanced plants 850
13.41 Studies at work place 851
13.41-1 Time and Motion Study 851
13.41-2 Method Study 851
13.41-3 Work Study 852
13.41-4 Activity Sampling 852
13.41-5 Work simplification 852
13.42 Wage incentive system 852
CONTENTS I-22
PAGE
13.43 Management Audit and Efficiency Audit 852
13.43-1 Management Audit 853
13.43-2 Efficiency Audit 854
13.44 Feed back control systems 855
13.44-1 Basic components 855
13.44-2 Basic principles 855
13.45 Feed Forward control system 856
13.45-1 Definition 856
13.45-2 Basic components 856
13.45-3 Examples 856
EXAMINATION QUESTIONS 857
PROBLEMS AND SOLUTIONS 858
CHAPTER FOURTEEN
ACTIVITY BASED COSTING
14.1 Introduction 864
14.2 Inadequacies of traditional methods of overhead absorption 864
14.3 Concept of ABC 865
14.4 Kaplan and Cooper�s approach to ABC 865
14.5 Cost drivers and Cost pools 865
14.6 Main activities and its cost drivers 866
14.7 Allocation of overheads under ABC 867
14.8 Characteristics of ABC 868
14.9 How to develop an ABC system ? 868
14.10 Steps to develop ABC System 868
14.11 How to implement ABC system ? 869
14.12 Benefits from adaptation of ABC system 869
14.13 How ABC system supports corporate strategy ? 870
14.14 When to use ABC ? 870
14.15 Activity Accounting 875
EXAMINATION QUESTIONS 875
PROBLEMS AND SOLUTIONS 875
CHAPTER FIFTEEN
LIFE CYCLE COSTING
15.1 Product Life Cycle Costing : Meaning 886
15.2 Phases in product life cycle 886
15.3 Characteristics of Product life cycle 888
15.4 Product life cycle and cost control 888
15.5 Experience curve in Product life cycle costing 888
15.6 Project life cycle costing 889
15.7 What are project life cycle costs ? 889
15.8 Categories of Project life cycle costs 890
I-23 CONTENTS
PAGE
15.9 Hidden costs 890
15.10 Optimisation project life cycle costs 891
EXAMINATION QUESTIONS 895
PROBLEMS AND SOLUTIONS 895
CHAPTER SIXTEEN
TARGET COSTING
16.1 Need for cost management 902
16.2 Types of Cost Accounting systems 902
16.3 Definition of Target costing 902
16.4 Meaning of Target costing 902
16.5 Nature of Target costing 904
16.6 Target costing methodology 904
16.7 Methods of establishment of target costs 907
16.7-1 Subtraction method 907
16.7-2 Addition method 908
16.7-3 Integrated method 908
16.8 Attributable costing 908
16.9 Backflush Accounting 908
16.9-1 Advantages 909
EXAMINATION QUESTIONS 909
PROBLEMS AND SOLUTIONS 910
CHAPTER SEVENTEEN
KAIZEN
17.1 Introduction 911
17.2 Concept 911
17.3 Philosophy 911
17.4 Procedure for implementation 912
17.5 Evaluation 912
17.6 Benefits 913
17.7 Reasons for failure 913
17.8 Kaizan costing 913
CHAPTER EIGHTEEN
COST OF QUALITY AND TQM
18.1 Definition of quality 915
18.2 Classification of quality costs 915
18.3 Cost of conformance 915
18.3-1 Prevention Costs 915
18.3-2 Appraisal Costs 916
18.4 Cost of Non-conformance 916
18.4-1 Cost of Internal Failure 916
18.4-2 Cost of External Failure 916
CONTENTS I-24
PAGE
18.4-3 Cost of exceeding requirements 916
18.5 Cost of lost opportunity 916
18.6 Optimisation of quality costs 916
18.7 Quality cost reporting 917
18.8 Analysis of quality costs 919
18.9 Total Quality Management 919
18.9-1 Core concepts of TQM 919
18.9-2 Benefits of TQM 921
EXAMINATION QUESTIONS 924
PROBLEMS AND SOLUTIONS 925
CHAPTER NINETEEN
CAPACITY MANAGEMENT
19.1 Capacity Management: Meaning 927
19.2 Capacity planning 927
19.3 Factors affecting the capacity of resources 928
19.4 Economics of scale (Economics of mass production) 929
19.5 Impact of Government policy on capacity decisions 930
19.6 Capacity Determination 930
19.7 Levels of activity 930
19.8 Relevant range of activity 931
19.9 Approaches for capacity determination and utilisation 932
19.10 Analysis of actual production in relation to installed capacity 933
19.11 Rectification of imbalance in production facilities 933
EXAMINATION QUESTIONS 933
CHAPTER TWENTY
PRODUCTIVITY
20.1 Introduction 934
20.2 Productivity : Meaning and definition 934
20.3 Misconceptions in measuring productivity 935
20.4 Measurement of productivity 935
20.5 Ratios for measurement of productivity 936
20.6 Productivity Index 936
20.7 Total Productivity Index 937
20.8 Productivity of Labour 937
20.8-1 Methods to measure labour productivity 937
20.8-2 Factors influencing labour productivity 937
20.9 Productivity of Materials 938
20.10 Productivity of Capital 939
20.10-1 Capital productivity vs. Labour productivity 939
20.11 Productivity of other factors 940
20.12 Productivity of Management resources 940
I-25 CONTENTS
PAGE
20.13 Importance of human factor in productivity drive 941
20.14 Productivity and Profitability 941
20.15 Higher productivity and reduced cost 941
20.16 Productivity and quality 941
20.17 Productivity and cost effectiveness 941
20.18 Advantages of higher productivity 942
20.19 Causes of low productivity 943
20.20 Concurrent ideas criticising productivity concept 944
20.21 Formulation of productivity objectives 944
20.22 Productivity and Added value concept 945
20.23 Productivity plan 945
20.24 Productivity audit 945
EXAMINATION QUESTIONS 946
CHAPTER TWENTY-ONE
JUST IN TIME
21.1 Introduction 947
21.2 Aims and objectives of JIT 947
21.3 Features of JIT 948
21.4 Methodology in implementation of JIT 948
21.5 Benefits in adaptation of JIT 954
21.6 JIT - Empirical Studies 954
21.7 Vendor development 954
21.7-1 Definition 954
21.7-2 Methodology 954
21.7-3 Strategies 955
21.7-4 Advantages 955
EXAMINATION QUESTIONS 955
CHAPTER TWENTY-TWO
MRP I, MRP II, ERP AND WORLD CLASS MANUFACTURING
22.1 Materials Requirement Planning (MRP I) 956
22.1-1 Definition 956
22.1-2 Meaning 956
22.1-3 Aims 956
22.1-4 Features 956
22.1-5 Methodology 957
22.1-6 Method of operation 958
22.1-7 Benefits 958
22.1-8 Requirements for implementation of MRP I 958
22.2 Manufacturing Resource Planning (MRP II) 960
22.2-1 Definition 960
22.2-2 Aims 960
CONTENTS I-26
PAGE
22.2-3 Evolution 960
22.2.4 Essential elements 960
22.3 Enterprise Resource Planning (ERP) 960
22.3-1 Definition 960
22.3-2 MIS and ERP 960
22.4 World Class Manufacturing 961
22.4-1 Meaning 961
22.4-2 Principles 961
EXAMINATION QUESTIONS 962
CHAPTER TWENTY-THREE
BALANCED SCORECARD AND BENCHMARKING
23.1 Balance Scorecard 963
23.1-1 Introduction 963
23.1-2 Drawbacks of traditional financial measures 963
23.1-3 Attributes of good performance measurement system 964
23.1-4 Concept of BSC 964
23.1-5 Four perspectives of BSC 964
23.1-6 How to implement BSC ? 966
23.2 Benchmarking 967
23.2-1 Concept 967
23.2-2 Benchmarking Process 968
23.2-3 Implications for Indian industry in benchmarking 969
23.2-4 Types of benchmarking 970
EXAMINATION QUESTIONS 970
CHAPTER TWENTY-FOUR
BUSINESS PROCESS OUTSOURCING AND VALUECHAIN MANAGEMENT
24.1 Business Process Outsourcing (BPO) 971
24.1-1 Introduction 971
24.1-2 Concept 971
24.1-3 Major areas 971
24.1-4 Advantage of BPO 972
24.1-5 Types of Outsourcing 973
24.1-6 Essentials for success 973
24.1-7 Drawbacks in Outsourcing 973
24.1-8 Reasons for failure 973
24.1-9 Outsourcing vs. Contracting 974
24.1-10 Outsourcing vs. Business Process Outsourcing 974
24.2 Value Chain Management 974
24.2-1 Introduction 974
I-27 CONTENTS
PAGE
24.2-2 Meaning 974
24.2-3 VCM architecture 974
24.2-4 Methodology 974
24.2-5 Advantages 975
EXAMINATION QUESTIONS 975
CHAPTER TWENTY-FIVE
BUSINESS PROCESS RE-ENGINEERING AND SYNERGY
25.1 Business Process Re-engineering (BPR) 976
25.1-1 Introduction 976
25.1-2 Definition 976
25.1-3 Meaning 976
25.1-4 BPR Methodology 977
25.2 Synergy 979
25.2-1 Meaning 979
25.2-2 Characteristics of synergy 979
25.2-3 Negative synergy 979
25.2-4 Synergy as a part of management 979
25.2-5 Synergistic effect of organisation 980
25.2-6 Types of synergy 980
25.2-7 Start-up and operating synergy 980
25.2-8 Possible opportunities for synergy 981
CHAPTER TWENTY-SIX
MANAGEMENT INFORMATION SYSTEMS ANDINFORMATION ECONOMICS
26.1 Management Information Systems : Definition 984
26.2 Scope of MIS 984
26.3 Planned and unplanned MIS 985
26.4 Top-down and Bottom-up Information Systems 986
26.5 MIS Information - Timescale 986
26.6 Transaction Processing 986
26.7 MIS and Levels of Management 987
26.7-1 Operational level MIS 987
26.7-2 Tactical level MIS 988
26.7-3 Strategic level MIS 988
26.8 Integration of MIS structure 990
26.9 Limitations of MIS 990
26.10 Framework for MIS design 990
26.11 Programmed and Non-programmed decisions 991
26.12 Database concept 991
26.13 Decision Support Systems 992
26.13-1 Where to apply DSS ? 993
CONTENTS I-28
PAGE
26.14 Executive Information Systems 993
26.15 Database Management Systems 993
26.15-1 Categories of DBMS 994
26.16 Decision Support Packages 994
26.17 Information Economics : Meaning 995
26.18 Processing Management Accounting Information 995
26.19 Quality of Information 996
26.20 Value of Information 998
26.21 Desirable properties of Management Accounting Information 998
26.22 Uncertainty and Management Accounting Information 999
26.23 Impact of Information Technology on Management Accounting 1000
EXAMINATION QUESTIONS 1001
CHAPTER TWENTY-SEVEN
MARKETING AND DISTRIBUTION COST ANALYSIS
27.1 Introduction 1002
27.2 Marketing and Physical distribution costs 1002
27.2-1 Order getting costs 1002
27.2-2 Order filling costs 1002
27.3 Comparison of Management Accounting for Production andmarketing activities 1003
27.4 Problems in Management Accounting for Marketing 1004
27.5 Conceptual differences between Financial Accounting and Marketing 1005
27.6 Marketing Cost Analysis 1006
27.7 Distribution Cost Analysis 1006
27.8 Techniques of Management Accounting in Marketing and Physicaldistribution 1007
27.8-1 Market segmentation 1007
27.8-2 Physical Distribution Management 1008
27.8-3 Cost benefit analysis of advertising 1010
27.8-4 Channel decisions 1011
27.8-5 Warehouse decisions 1011
27.8-6 Transport decisions 1012
27.8-7 Cost of credit 1013
27.8-8 Cost of Salesman 1013
27.8-9 Evaluation of Salesman�s performance 1014
27.8-10 Depot numbers and Depot location decisions 1015
27.8-11 Setting an advertising budget 1016
PROBLEMS AND SOLUTIONS 1017
I-29 CONTENTS
PAGE
CHAPTER TWENTY-EIGHT
STRATEGIC MANAGEMENT ACCOUNTING
28.1 Strategic Management : Introduction 1029
28.2 Strategy: Definition and Meaning 1029
28.3 Elements in Business Strategy 1029
28.4 Hierarchy of Strategy 1030
28.5 Strategic Management Process 1030
28.6 Key concepts in Strategic Management 1031
28.7 Strategic planning 1031
28.8 Formulating strategic plans 1032
28.9 Steps in Strategic planning 1032
28.10 Approaches in strategic planning 1033
28.11 Strategic Management Accounting : Introduction 1033
28.12 Definition of Strategic Management Accounting 1033
28.13 Analysing definitions 1034
28.14 Real meaning of the concept 1034
28.15 Major competitive forces influencing business strategy 1034
28.16 What information should Strategic Management Accounting provide ? 1035
28.17 Factors affecting Strategic decision making 1035
28.18 Competitive advantage and Strategic cost analysis 1035
28.19 Costing product characteristics or attributes 1037
28.20 Strategic Cost Analysis 1037
28.21 Price experience 1039
28.22 Volume and Demand 1039
28.23 Return on competitive position 1039
28.24 Resources, cash flow and portfolios 1039
28.25 Strategic Management Accounting and Competitive Position Analysis 1039
28.26 Sales and Market share 1039
28.27 Profits and Return on sales 1040
28.28 Volume and unit cost 1041
28.29 Unit prices 1041
28.30 Cashflow, Liquidity and Resource availability 1043
28.31 Analysis of the future 1043
28.32 Competitive Advantage 1044
28.33 Competitive Intelligence 1044
28.33-1 Meaning 1044
28.33-2 Types of Intelligence gathering 1044
28.33-3 Elements of Competitive Intelligence 1045
28.33-4 Objectives of Competitive Intelligence Programmes 1045
28.33-5 How to introduce Competitive Intelligence ? 1045
CONTENTS I-30
PAGE
CHAPTER TWENTY-NINE
LEARNING CURVE THEORY
29.1 Introduction 1046
29.2 What is Learning Curve ? 1046
29.3 Phases in Learning Curve 1046
29.4 Graphical representation of Learning Curve 1047
29.5 Learning Curve Applications 1050
29.6 Factors affecting Learning Curve 1052
29.7 Experience Curve 1054
EXAMINATION QUESTIONS 1057
PROBLEMS AND SOLUTIONS 1058
CHAPTER THIRTY
LINEAR PROGRAMMING
30.1 Introduction 1074
30.2 Practical applications of L.P. Technique 1074
30.3 Assumptions 1075
30.4 Steps in LP 1076
30.5 Constraints 1076
30.6 Limitations of LP Technique 1076
30.7 Formulation of LP Problems 1076
30.8 Graphical solution 1080
30.9 Advantages of Graphical solution 1081
30.10 Disadvantages of Graphical solution 1081
30.11 Simplex Method 1082
30.12 Mixed Limitations 1086
30.13 Valuation of slack variables 1088
30.14 Minimisation problems 1089
30.15 when ≥ constraints exists in the problem 1091
30.16 No feasible solution 1091
30.17 Method of conversion to Dual problems 1092
30.18 Sensitivity Analysis 1093
EXAMINATION QUESTIONS 1093
CHAPTER THIRTY-ONE
NETWORK ANALYSIS (PERT AND CPM)
31.1 Introduction 1113
31.2 Objectives of Network Analysis 1113
31.3 Stages in Network analysis 1113
31.4 Characteristics of a project 1114
31.5 Drawing a network diagram 1114
31.6 Dummy activities 1115
I-31 CONTENTS
PAGE
31.7 Steps in drawing PERT Diagram 1118
31.8 PERT and CPM : Comparison 1118
31.9 Advantages of PERT 1119
31.10 Disadvantages of PERT 1119
31.11 Steps in drawing CPM diagram 1119
31.12 Critical Path, Event Times and Floats 1119
31.13 Earliest event times and latest event times 1121
31.14 Finding the critical path 1123
31.15 Float 1123
31.16 Uncertain Activity Durations 1124
EXAMINATION QUESTIONS 1131
PROBLEMS AND SOLUTIONS 1132
CHAPTER THIRTY-TWO
ASSIGNMENT PROBLEMS
32.1 Introduction 1170
32.2 Stages in Assignment algorithm 1170
32.3 Unbalanced Assignment Problem 1175
32.4 Maximise the objective function 1178
PROBLEMS AND SOLUTIONS 1181
CHAPTER THIRTY-THREE
TRANSPORTATION PROBLEMS
33.1 Introduction 1204
33.2 Applications 1204
33.3 Conditions to use transportation algorithm 1204
33.4 Stages in transportation algorithm 1204
33.5 Matrix representation 1204
33.6 The Initial Solution 1205
33.7 North-West Corner Method 1205
33.8 Low Cost First 1207
33.9 Stepping-Stone Method 1207
33.10 Vogel�s Approximation Method 1211
33.11 Modified Distribution Method 1213
33.12 Degeneracy in Transportation 1216
33.13 Unequal supply and Demand in transportation problems 1216
33.14 Practical application of Transportation Linear Programming 1217
EXAMINATION QUESTIONS 1217
PROBLEMS AND SOLUTIONS 1218
CHAPTER THIRTY-FOUR
SIMULATION
34.1 Definition and meaning 1251
34.2 Advantages and Disadvantages 1251
CONTENTS I-32
PAGE
I-33 CONTENTS
EXAMINATION QUESTIONS 1257
PROBLEMS AND SOLUTIONS 1258
CHAPTER THIRTY-FIVE
INVENTORY CONTROL MODELS
35.1 Introduction 1277
35.2 Direct material cost : Meaning 1277
35.3 Inventory : Meaning and classification 1280
35.4 Requirements of material stock control 1280
35.5 Waste, Scrap, Spoilage, Defectives 1281
35.5-1 Waste control 1281
35.5-2 Scrap control 1281
35.5-3 Spoilage control 1281
35.5-4 Defectives control 1281
35.5-5 Accounting treatment 1282
35.6 Economic Order Quantity 1283
35.7 Fixation of Inventory levels 1286
35.8 ABC Analysis 1288
35.9 VED Analysis 1291
35.10 FNSD Analysis 1291
35.11 Pareto Analysis (80 : 20 Rule) 1291
35.12 Two Bin System 1291
35.13 Perpetual Inventory System 1291
35.14 Continuous stock taking 1292
35.15 Periodic stock taking system 1292
35.16 Input-Output Ratio 1293
35.17 Stock Turnover Ratio 1293
35.18 Just in time - Inventory management 1294
35.19 Just in time - Supply Chain Management 1295
EXAMINATION QUESTIONS 1295
PROBLEMS AND SOLUTIONS 1295
LATEST PROBLEMS AND SOLUTIONS 1311
MATHEMATICAL TABLES 1413
SYLLABUS FOR CA FINAL (COST MANAGEMENT) 1421
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