May 2018 CA Final Costing Paper Analysis By CA Rakesh Agrawal

General Comments:

  1. Under new syllabus (SCM), a student has to solve one compulsory question of 20 marks and four more questions of 20 marks each. Under the old syllabus (AMA), a student had to solve one compulsory question of 20 marks (4 Question x 5 Marks) and five more questions of 16 marks each. Hence, under the new syllabus, the length of the question paper is reduced.
  2. Under old syllabus, majority students used to complain that the time of 3 hours is insufficient to solve the entire question paper. It was true. Now, a student will be able to easily solve the entire question paper under old syllabus. It is a welcome change for the benefit of students.
  3. The general opinion of student community about May 2018 paper is that it was an easy paper under new syllabus and difficult paper under old syllabus.
  4. ICAI didn‟t stick to their marking pattern, which was announced. I mean to say the chapter wise weightage of marks announced by ICAI was not reflected in the question paper.
  5. First question was expected to be a case study, but it was not so in May 2018
  6. The pattern of Mock Test issued by ICAI and the actual paper of May 2018 is substantially different. The expectation was that the paper will be a mixture of theory and practical questions. However, it turned out to be almost the entire practical questions. Again, majority students love to solve the practical questions over theory questions.
  7. ICAI study material doesn't cover much of the practical questions. However, I had covered the entire theory of ICAI module in the classroom and also sufficient number of practical questions, using my past experience. I want my students to tackle any type of question paper with confidence.
  8. I request students, not to form any opinion about the pattern of question paper, just from one exam. It is likely to change and ICAI may include case study and other theory questions in the future examinations. Be ready to face anything. After atleast 4 to 5 exams, we will be able to form a better opinion.

Question Analysis:

Question 1:

This question was based on “Divisional Transfer Pricing” from Chapter No. 9

  1. Electrical division won't be willing to supply at 18, because it has no surplus capacity and it can sell in the outside market at a much higher price of 25.
  2. From the overall point of view of the company, it is beneficial to supply switches @ 18. Company will earn a contribution of 22 on sale of night lamp as against a contribution of 9 on sale of switches. It will lead to goal congruence.
  3. The acceptable range of transfer price shall be minimum price required by Electrical division and maximum affordable price for Household division. It should be between 25 to 40. Please refer page number 51 of volume II of our classroom notes, for minimum and maximum range of price.
  4. Please refer page number 56 of volume II, to understand the ways of resolving the conflict in transfer pricing.

Question 2 :

This question was based on “TOC” and “TA” – i.e. Chapter No. 2 (page 29 & 30). It is very similar to the concept of “Key Factor” – discussed in Chapter No. 6 (page 164), of our classroom notes. According to me, it was a very simple question as compared to the marks allotted.

  1. You have to just calculate the contribution per unit of each product. That is selling price minus variable cost per unit.
  2. Now you have to calculate contribution per furnace hour and decide the ranking i.e. relative profitability.
  3. Contribution per furnace hour of Normal Grade Steel is ` 70. Now, you need to calculate the desired contribution for Super Grade and Good Grade using ` 70 per furnace hour x no. of furnace hours. Add this contribution to their respective variable cost per unit, to get the revised selling price.

Question 3:

This question was based on “Standard Costing” – i.e. Chapter No. 12 (page 202 – reconciliation of profit). Though the question was simple, but the wordings were confusing.

  1. There are two approaches to prepare reconciliation statement i.e. Absorption Costing Approach and Marginal Costing Approach. You can use any one, according to me. Sales price variance, Material price variance and Labour rate variance is NIL. You may refer page no. 233 of our notes, for relevant cost approach. We will have to wait and see how ICAI solves part (b) of the question.
  2. You have to offer a general comment for not using scare resources. Use opportunity cost approach.

Question 4:

  1. This question is also based on “Standard Costing” – i.e. Chapter No. 12. It uses the concept of Market Size & Market Share Variance. Refer page 199 of the said chapter for this concept. You have to calculate the impact of each factor in the improvement of profit. Use contribution approach.
  2. This question is based on “Product Life Cycle Costing” – i.e. Chapter 4 and page no. 118. In part (i) you have to just calculate total sales and total cost for the entire lifetime of the product to ascertain the profit. In part (ii) you have to express the R&D and design cost as a % of total cost. In part (iii) the wordings of the question seems to be wrong. This question should start with the word “If an analysis reveals…..” In such case, majority cost is locked at the beginning stage of the product in designing the product itself. In my opinion, we should use „Penetration Pricing Policy‟ to recover this cost faster. ICAI answer is awaited.

Question 5:

  1. This question is based on “Cost of Quality” – i.e. Chapter No. 2, page no. 25. In part (i) if we will reject the proposal on financial perspective. However, we may accept it using non-financial perspective. Part (ii) deals with zero defect policy i.e. „Six Sigma‟ policy. Part (iii) is not understandable and we will wait for ICAI opinion.
  2. This question is based on “Decision Making” – i.e. Chapter 6. It is a very simple question on decision making. In part (i) we get contribution per bottle as ` 0.48 and contribution per hour as ` 19.20. Whereas, contribution per toy is ` 6 and contribution per hour is ` 96. Incremental profit of manufacture of moulded toys is ` 1,40,000 [ (6 x 40,000) – 1,00,000 ]. We can fulfill both the orders within available 10,000 hours and hence we should accept the order of toys. In part (ii) we can compare incremental profit of additional 1,00,000 bottles with additional profit of 40,000 toys. Manufacture of toys is more profitable than manufacture of bottles. In part (iii) we should calculate Cost BEP between own manufacture and subcontracting. It comes to 1,562.5 hours or 25,000 toys.

Question 6:

  1. This question is based on the concept of “Overall Equipment Effectiveness (OEE)” – i.e. Chapter No. 3, page no. 88. In part (i) we have to just give the formula of OEE for measuring TPM. In Part (ii) we have to calculate OEE. In Part (iii) we have to comment on OEE comparing it with the world class performance of around 85%.
  2. This is a very simple question based on the concept of “Activity Based Costing (ABC) – i.e. Chapter 10. the income is not correctly measured at present. It can be measured better by using ABC approach. One can calculate the revised operating income for each division.
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