TA No. of Pages: 7 Total Marks : 100. Question No: 1 is compulsory Answer any five from the rest. Workings should form part of the answers

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1 TA No. of Pages: 7 Total Marks : 100 No of Questions: 7 Time Allowed : 3 Hours Question No: 1 is compulsory Answer any five from the rest Workings should form part of the answers 1. (a) The following information is given by Z Ltd.: Margin of safety `1,87,500 Total cost `1,93,750 Margin of safety 7500 units Break even sales 2500 units Required: Calculate Profit, P/V Ratio, BEP Sales (in `) and Fixed Cost. (b) The selling price per unit of a product is `14. For the forthcoming period, the demand will be only 5,000 units. The fixed expenses at 50% activity (5,000 units) will be `30,000. The company is thinking of shutting down operations, in which case an additional amount of `2,000 will have to be incurred for shutting down and only `20,000 of the above fixed costs can be avoided. What should be the variable cost per unit to recommend a shut down? (c) A Project Manager has to manage various projects. For each project given below, you are required to advise him whether to use PERT or CPM and briefly state the reason: (i) Project K is yet to begin. The manager has recently successfully handled similar projects. He is able to break down the project into smaller modules and knows (ii) when he may comfortably finish each module. Project L has been sanctioned some fixed amount. Though the manager is familiar about what time it will take, he expects pressure towards the end to finish the project slightly earlier, by deploying additional resources of the company. (iii) Project M is new to the manager. He has never handled such a project. He can break up the project into smaller modules, but even then, he is not sure of their exact times. (iv) Project N has a limitation on the skilled workforce available. But the manager knows from earlier experience, the slack on each event in the project. He is confident of handling the bottleneck of labour. (v) Project O is a research project, bound to produce immense benefit to the company in future. PRIME/ME 37/FINAL 1

2 (d) A company produces three products A, B and C. The following information is available for a period: A B C Contribution* (Rupees per unit) *(Sales Direct materials) Machine hours required per unit of production: Hours Throughout accounting A B C ratio Machine % Machine % Machine % Estimated sales demand for A, B and C are 500 units each and machine capacity is limited to 6,000 hours for each machine. You are required to analyse the above information and apply theory of constraints process to remove the constraints. How many units of each product will be made? [4x 5=20Marks] 2. (a) AML Ltd. is engaged in production of three types of ice-cream products: Coco, Strawberry and Vanilla. The company presently sells 50,000 units of ` 25 per unit, Strawberry ` 20 per unit and Vanilla 60,000 ` 15 per unit. The demand is sensitive to selling price and it has been observed that every reduction of Re. 1 per unit in selling price, increases the demand for each product by 10% to the previous level. The company has the production capacity of 60,500 units of Coco, 24,200 units of Strawberry and 72,600 units of Vanilla. The company marks up 25% on cost of the product. The Company management decides to apply ABC analysis. For this purpose it identifies four activities and the rates as follows: Activity Ordering Delivery Shelf stocking Cost Rate ` 800 per purchase order ` 700 per delivery ` 199 per hour Customer support and assistance ` 1.10 p.u. sold. PRIME/ME 37/FINAL 2

3 The other relevant information for the products are as follows: Coco Strawberry Vanilla Direct Material p.u. (`) Direct Labour p.u. (`) No. of purchase orders No. of deliveries Shelf stocking hours Under the traditional costing system, store support costs are 30% of prime cost. In ABC these costs are coming under customer support and assistance. Required: (i) Calculate target cost for each product after a reduction of selling price required to achieve the sales equal to the production capacity. (ii) Calculate the total cost and unit cost of each product at the maximum level using traditiona l costing. (iii)calculate the total cost and unit cost of each product at the maximum level using activity based costing. (iv) Compare he cost of each product calculated in (i) and (ii) with (iii) and comment on it. (b) Explain the features of a balance score card. [12+4 = 16 Marks] 3. (a) The budgeted and actual cost data of M Ltd. for 6 months from April to September, 2012 are as under: Budget Actual Production units 16,000 14,000 Material cost ` 25,60,000 ` 41,60,000 (1,600 ` 1,600) (at ` 1,650) Labour cost ` 16,00,000 ` 15,99,840 (at ` 40 per hour) (@ ` 44 per hour) Variable overhead ` 3,00,000 ` 2,76,000 Fixed overhead ` 4,60,000 ` 5,80,000 In the first half of financial year , production is budgeted for 30,000 units, material cost per tonne will increase from last year s actual by ` 150, but it is proposed to maintain the consumption efficiency of 2012 as budgeted. Labour efficiency will be lower by 1% and labour rate will be ` 44 per hour. Variable and fixed overheads will go up by 20% over 2012 actuals. Prepare the Production Cost budget for the period April September, 2013 giving all the workings. (b) A hospital has to pay nurses for 40 hours a week. One nurse is assigned to one patient. The cost per hour for each of the nurses is given below: PRIME/ME 37/FINAL 3

4 Nurse W X Y Patient K L M i. Find the nurse-patient combination to minimise cost to the hospital. ii. How much does each nurse earn per week? iii. Suppose that a new patient Z is admitted, and that a new nurse n is appointed. The new patient is charged ` 40 per hour by each of the existing nurses. The new nurse charges ` 50 per hour irrespective of the patient. What would be your revised calculations? iv. Comment on the new solution. [8+8=16 Marks] 4. (a) Optically Ltd. makes two kinds of products, P (lenses) and Q (swimming goggles) in divisions P and Q respectively. P is an input for Q and two units of P are needed to make one unit of Q. P `/u of P Q `/u of Q 25 (excluding P) Direct Materials 20 Direct Labour Variable Overhead External Demand (units) 3,000 3,000 Capacity (units) 7,000 2,500 Selling Price `/u (outside market) If Q buys P from outside, it has the following costs: For order quantity 2,499 or less `90 per unit for the entire quantity ordered. For order quantity 2,500 5,000 `80 per unit for the entire quantity ordered. For order quantity more than 5,000 `70 per unit for the entire quantity ordered. You are required to: (i) Evaluate the best strategies for Division P and Q. (ii) Briefly explain the concept of goal congruence.. (b) The following network and table are presented to you : Network Diagram: PRIME/ME 37/FINAL 4

5 Activity Normal Duration (Days) Normal Cost (`) Crash Duration (Days) Crash Cost (`) T 8 2, ,750 U 16 1, ,750 V 14 2, ,000 W 12 3, ,750 X 15 1, ,500 Y 10 2, ,860 Perform step by step crashing and reduce the project duration by 11 days while minimizing the crashing cost. What would be the cost of the crashing exercise? [8+8=16 Marks] 5. (a) A Company is operating 60% of its capacity with a turnover of `43.20 lacs. If the company works at 100% capacity, the sales cost relation is : Factory cost is two thirds of sales value. Prime cost is 75 % of factory cost. Administration and selling expenses (75 % variable) are 20 % of the sales value. Factory overhead will vary according to operating capacity as given below: Operating capacity(%) Factory overheads (` In lacs) The company has planned to operate at 80 % of its capacity. Moreover, it has received an export order and its execution will involve 40 % of the capacity. The prime cost of the order is estimated at ` 6.0 lacs and the shipping involved will be around ` 1.0 lac. Administration and selling expenses will be avoided on the export order. Taking the same percentage of profits as on the domestic sales, determine the minimum price to be quoted for the export order. (b) The following information relates to labour of x Ltd. Type of Labour Skilled Semi Skilled UnSkilled Total No. of workers in standard gang Standard rate per hour (Rs) Number of workers in actual gang Actual rate per hour (`) PRIME/ME 37/FINAL 5

6 In a 40 hours week, the gang produced 270 standard hours. The actual number of semi skilled workers is two times the actual number of unskilled workers. The rate variance of semi skilled workers is `160 (F). Find the following: (i) The number of workers in each category (ii) Total gang variance (iii) Total Sub efficiency variance (iv) Total labour rate variance (v) Total labour cost variance [8+8=16 Marks] 6. (a) A research project, to date, has cost a company ` 2,50,000 and is under review. It is anticipated that should the project be allowed to proceed, it will be completed in about one year and can be sold for ` 4,00,000. The following additional information is available: (i) Materials have just been received for ` 60,000. These are extremely toxic, and if not used in the project, have to be disposed of by special means at ` 15,000. (ii) Labour: ` 75,000. The men are highly skilled. If they are released from the Research Project, they may be transferred to the Works Department of the company and consequently the sales could increase by ` 1,50,000. The accountant estimates that the prime cost of those sales would be ` 1,00,000 and the overhead absorbed (all fixed) would amount to ` 25,000. (iii) Research staff: ` 1,60,000. A decision has already been taken that this will be the last major piece of research undertaken and consequently, when work on the project ceases, the staff involved will be made redundant. Redundancy and severance pay have been estimated at ` 25,000. (iv) Share of General Building Expenses : ` 35,000. The Managing Director is not sure what is included in this amount, but the accounts staff charge similar amounts each year to each department. You are required to advise whether the project should be allowed to proceed and explain the reasons for the treatment of each of amounts above in your analysis. (b) At a small store of readymade garments, there is one clerk at the counter who is to check bills, receive payments and place the packed garments into fancy bags. The arrival of customer at the store is random and service time varies from one minute to six minutes, the frequency distribution for which is given below: Time between arrivals (minutes) Service Time (in minutes) Frequency Frequency The store starts work at 11 a.m. and closes at 12 noon for lunch and the customers are served on the "first came first served basis". PRIME/ME 37/FINAL 6

7 Using Monte Carlo simulation technique, find average length of waiting line, average waiting time, average service time and total time spent by a customer in system. You are given the following set of random numbers, first twenty for arrivals and last twenty for service: [8+8=16 Marks] 7. Answer any four of the following: (a) An oil refinery can blend three grades of crude oil to produce quality A and quality B petrol. Two possible blending processes are available. For each production run, the older process uses 5 units of crude Q, 7 units of crude P and 2 units of crude R and produces 9 units of A and 7 units of B. The newer process uses 3 units of crude Q, 9 unit of crude P and 4 units of crude R to produce 5 units of A and 9 units of B. Because of prior contract commitments, the refinery must produce at least 500 units of A and at lease 300 units of B for the next month. It has,1,500 units of crude Q, 1,900 units of crude P and 1,000 of crude R. For each unit of A, refinery receives `60 while for each unit of B, it receives `90. Formulate the problem as linear programming model so as to maximize the revenue. (b) Explain the concept of Just In Time approach in a production process. (c) Will the initial solution for a minimization problem obtained by Vogel s Approximation Method and the Least Cost Method be the same? Why? (d) 6000 pen drives of 2 GB to be sold in a perfectly competitive market to earn `1,06,000 profit, whereas in a monopoly market only 1200 units are required to be sold to earn the same profit. The fixed costs for the period are ` 74,000. the contribution per unit in the monopoly market is as high as three fourths its variable cost. Determine the targets selling price per unit under each market condition. (e) What is uniform costing? Why is it recommended? [4x 4=16 Marks] PRIME/ME 37/FINAL 7

8 1) (a) (b) PRIME ACADEMY 37 th SESSION MODEL EXAM - FINAL ADVANCED MANAGEMENT ACCOUNTING SUGGESTED ANSWERS Sales = Margin of Safety (MOS) + Break Even Point (BEP) = 7, ,500 = 10, 000 Units MOS (%) = 7,500/10,000 = 75% Sales (Rs) = MOS / 75% = 1,87,500/75% = 2,50,000/- Profit = Sales (-) Total Cost = 2,50,000 (-) 1,93, 750 = 56, 250 PV Ratio = Profit/ MOS = 56,250/ 1,87,500 = 30% Contribution = Sales x PV Ratio = 75,000 Fixed Cost = Contribution (-) Profit = 75,000 56,250 =, 18,750 Break Even Sales = Fixed Cost / PV Ratio = 18,750 / 30% = 62,500 Savings due to shut down: Fixed expenses saved: 20,000 Less: shut down cost 2,000 18,000 If contribution from operation is less than 18,000, a shut down is recommended. i.e. Contribution per unit 18,000 < 5,000 i.e. contribution < 3.60 per unit i.e. Selling price Variable cost < 3.60 per unit or, Selling price -3.6 < Variable cost i.e < Variable cost or variable cost is more than (c) (i) K (ii) L (iii) M (iv) N (v) O CPM - No uncertainty regarding timing of activities CPM - Known timing; optional crashing required PERT - Unknown activity timing; probabilistic model is necessary CPM - Known activity timing; Limiting availability of skilled labour calls for resource smoothening PERT - Research project; uncertainty about of timing of activities. (d) Throughout Accounting ratio is highest for Machine 2. Machine 2 is the bottleneck Contribution per unit of bottleneck machine hour : Total Machine 2 hours available = 6,000 A B C i Contribution per unit ( ) ii Machine 2 hours iii. Contribution per Machine 2 hours 1

9 iv. (A / B) v. Ranking vi.. Maximum Demand vii. Machine 2 hours required: (B E) 7,500 1,500 3,000 Machine 2 hours allotted on the basis of ranking 1,500 1,500 3,000 Units ) (a) (i) Cost of products under target costing: Demand unit and selling price Coco Strawberry Vanilla Selling price Demand Selling price Demand Selling price Demand 25 50, , , , , , , , ,600 Target cost of each product after reduction in selling price Coco Strawberry Vanilla Selling price after reduction Profit marks up 25% on cost i.e. 20% on selling price Target cost of production (Per unit) (ii) Cost of product under traditional costing Coco Strawberry Vanilla Units 60,500 24,200 72,600 Material cost (8, 6, 5 per unit) Labour cost (5, 4,3 per unit) Prime cost Store support cost (30% of prime) Cost per unit

10 (iii) Cost of product under activity based costing Coco Strawberry Vanilla Units 60,500 24,200 72,600 Material cost (8,6,5 per unit) 4,84,000 1,45,200 3,63,000 Labour cost (5, 4, 3 per unit) 3,02,500 96,800 2,17,800 Prime cost 7,86,500 2,42,000 5,80,800 Ordering 800 (35, 30, 15) 28,000 24,000 12,000 Delivery 700 (112, 66, 48) 78,400 46,200 33,600 Shelf 199 (130, 150, 160) 25,870 29,850 31,840 Customer support 1.10` 66,500 26,620 79,860 Total cost 9,85,320 3,68,670 7,38,100 Cost per unit (iv) Comparative analysis of cost of production ( ) Coco Strawberry Vanilla (a) As per Target Costing (b) As per traditional costing (c) As per Activity Based costing (a) (c) (b) (c) Note: The cost of product of Strawberry is higher in ABC method in comparison to target costing and traditional methods. It indicated that actual profit under target costing is less than targeted. For remaining two products, ABC is most suitable. 3) (b) Balanced Score Card is a set of financial and non-financial measure relating to a company's critical success factors. It is approach, which provides information to management to assist in strategic policy formulation and achievement. It emphasizes the need to provide the user with a set of information, which addresses all relevant areas of performance in an objective and unbiased manner. As a management tool it helps companies to assess overall performance, improve operational processes and enable management to develop better plans for improvements. It offers managers a balanced view of their organization upon which they can further add-on. (a) Production Cost Budget (for 6 months ending 30th September, 2009) Total Cost per unit 30,000units Material cost ,00,000 Labour cost ,56,420 Variable overhead ,09,500 Fixed overhead ,96, ,02,61,920 Assumption: Here, difference in actual and standard time is also considered for calculating the lower efficiency i.e. 3.74% + 1% = 4.74% 3

11 Working Notes: I. Material cost Material consumption per unit = 1,600MT 16,000 = 0.10 MT Consumption for 30,000 units = 3,000 MT. Cost of 3,000 1,800 per MT = 54,00,000. II. Labour cost can be calculated as follows: Time required for 30,000 units = 75,000 hours Add: *(3.74% + 1%) = 4.74% for lower efficiency = 3,555 hours = 78,555 hours *3.74% = Difference in actual and standard hours Actual hours 100 = 1,360 hours 36,360 hours Labour cost = 78,555 hours 44 per hour = 34,56,420. III. Variable overhead Actual rate = 2,76,000 14,000 units = per unit Add: 20 = 3.94 New rate = Total variable overhead = 30, = 7,09,500 IV. Fixed overhead Actual = 5,80,000 Add: 20% = 1,16,000 = 6,96,000 (b) The initial matrix relating to nurse-patient combination is as under: Nurse Patients W X Y K L M After row operation, we get the following matrix: Column operation gives the same matrix as there is zero in each column Drawing lines to connect zeros we get: There are three lines as required by the order of matrix of three. Hence the solution is optimal. 4

12 Allocation of patients to nurses as under to minimize the cost The following is the table showing the patient-nurse combination, lowest total cost and the earnings of each nurse per week. Nurse Patient Cost per hour( ) Total cost/week Earnings of each nurse ( ) K W L X M Y Total minimum cost 1,600 1,600 (iii) With the introduction of a new patient and a new nurse, the original matrix of nurse-patient combinations will stand revised as under: Nurse Patients W X Y Z K L M N After Row operation we get the following matrix: After column operation, since there is zero column, the same matrix will be returned. Draw lines to connect zeros as under: There are four lines as required by the order of matrix of four Hence the solution is optimal. 5

13 Proceed to allocate the patients to nurses as under to minimize the cost The following is the table showing the patient-nurse combination, lowest total cost and the earnings of each nurse per week. Cost per Total cost/week Nurse Patient hour( ) Earnings of each nurse ( ) K W L X M Y N Z Total minimum cost 3, Nurse Patient Cost per hour Total cost/ Earnings of each Week ( ) Nurse ( ) K W L X M Y N Z 500 2,000 2,000 Total minimum cost 3,600 (iv) The cost of new nurse per hour is 50 in respect of any patient and the cost of the existing nurses for attending to the new patient is 40 per hour. Both these rates are greater than the values of other elements of existing nurse patient combination matrix. 4) (a) Optical Ltd manufactures P( lenses) and Q ( swimming goggles ). Division P has option to supply to Division Q or sell to outside market. Division Q has option to buy from Division P or purchase from outside market. However, both divisions have to work within their individual capacity. Variable Cost for product P in Division P = 60. Variable cost for product Q in Division Q ( excluding 2 Nos P's) = 80. Division P has better market price of its product P than the market price offered to Q division. Thus for maximizing profit of the organization P division should optimize its profit by selling maximum units to outside market. Contribution per unit for sale to outside for division P = 40 Contribution per unit for Div Q as follows : Sale price - Variable cost ( excluding lenses) = 330 6

14 Max Contribution per unit ( if procured from P div at its variable cost i.e 60) = 210 Min Contribution per unit ( if procured at 90 per unit from outside) = 150 Contribution per unit at transfer price of 70 i.e minimum market price = 190 Option 1: Division Q buys 5001 units from sells 3000 units to outside 100 Contribution Sale/ transfer per unit P Q 70 and meets its capacity. Division P Total in (000s) Div P :Sale of 3000 units to outside Div Q: Sale of 2500 units with P from Less : cost of rejection of one unit of product P Total Option 2: Division P sells 3000 units to outside market, transfer 4000 units to div Q and Division Q buys 1000 units from outside market to work within the capacity P Division agrees to a transfer price so that profitability of Q is not affected. To maintain the same profitability of Q, contribution required from 2000 units for Div Q is 400,000 i.e contribution per unit 200 i.e transfer price per unit of P is 65 per unit to make cost of lances 130 Under Option 1, both divisions worked dis-jointly without caring for capacity utilization resulting lower profitability of the organization. Under Option 2, both divisions worked with mutual advantages for optimizing their individual profits and overall profit for the organization has gone up by effective utilization of capacity. Product P from Division P fetches higher price from open market indicating good quality of product. Moreover, supply from P division is well assured in the long run which is the justification of establishment of two parallel divisions. Hence, Option 2 is suggested. (ii) Division functioning as profit centers strive to achieve maximum divisional profits, either by internal transfers or from outside purchase. This may not match with the organization s objective of maximum overall profits. Divisions may be commercial to advice overall objects objectives, where divisional decisions are in line with the overall best for the company, and this is goal congruence. Divisions at a disadvantage may be given due weight age while appraising their performance. Goal incongruence defeats the purpose of divisional profit centre system. 7

15 (b) X= W= 12 Y= T = 8 U = 16 V = Paths: TUVY = 48 days (critical path) WXY days T U V Y Crash days possible Crash cost-normal cost Crashing cost/day Step I crash V 5 days Step II crash U 5 days Step III Crash Y- 1 day Minimum cost of crashing exercise ( ) = 1805 (for 11 days) ) (a) Capacity 80% 40% (Domestic sale) (Export order) in lakhs Sales Value Prime cost (50% of Sales Value ie., 2/3 * 75% Fixed Cost (Factory Overheads, as given) Administration and selling variable (20%*75% = 15% of Sales Value) -fixed 3.60 Shipping 1.00 Total Cost Profit 5.76 Add: Profit (Domestic Capacity = 10% of 1.24 Sales. Hence 11.11% on Cost) Minimum Export price

16 (b) SR SH SRSH SR RSH SRRSH SR AH SRAH AR AH ARAH Skill Semi-Skill Unskilled Sub-efficiency Variance Workings Note: Standard hours produced = 270 Standard Mix: = 30 Actual hrs = 40 9 = 360 hrs. Actual hrs in Standard Ratio = 360 4: 3: 2: Gang Variance Rate Variance 350 (A) 120 (F) 40 (A) Cost Variance = 270 (A) Skilled Semi-skilled Unskilled = 4 = 3 = = 160 = 120 = 80 [(Standard Rate = Actual Rate) Actual hrs.]= Rate Variance Semi-skilled = 160 (3 2) Actual hrs = 160 Actual hrs = 160 (for semi-skilled) Actual Semi-skilled = 2 (Unskilled actual) 160 = 2 (Unskilled) Unskilled hrs (actual) = (160 2) =80 Total Actual = 360 Actual hrs skilled = 360 ( ) = = 120 Actual Hrs. Skilled Semi-skilled Unskilled hr week = 3 = 4 =

17 No. of Workers (i) Skilled =3, Semi-skilled=4, Unskilled=2 (ii) (iii) (iv) Gang Variance: = (Actual Hrs in Standard Ratio Actual Hrs in Actual Ratio) Standard Rate = = 120 (F) Sub-efficiency Variance: = Standard Rate (Standard Hrs Actual Hrs in Standard Ratio) = = 350 (A) Total Labour Rate Variance: = Actual Hrs (Standard Rate Actual Rate) = = 40 (A) (v) Labour Cost Variance: = (Standard Rate Standard Hrs Actual Rate Actual Hrs.) = = 270 (A) 6. (a) Research Project Particulars Relevancy Reason Amount 000 Project cost till date Not Relevant Sunk Cost -- Sale price of the project Relevant Incremental revenue/opportunity gain 400 Cost of materials Not relevant Sunk Cost -- received Cost of disposal of Relevant Avoidable/opportunity cost 15 materials Cost of labour Not relevant Common costs -- Contribution lost on the alternative use Relevant Opportunity cost [(Sales (Prime cost- labour)] (125) Absorbed Fixed Not Relevant Sunk cost -- overheads Cost of Research Staff Relevant Incremental/out of pocket (160) Redundancy & Not relevant Common Costs -- Severance pay Share of general Not relevant Sunk cost -- Building expenses Total incremental 130 inflow if the project is proceeded with Decision: Better to continue the project. 10

18 (b) From the frequency distribution of arrivals and service times, probabilities and cumulative probabilities are first worked out as shown in the following table: Time Between arrivals Frequency Probability Cum. Prob Service time Frequency Probability Total The random numbers to various intervals have been allotted in the following table: Time Between arrivals Random Nos allotted Random Nos allotted service Probability time Probability Simulation Work Sheet Cum. Prob 11

19 7) Average queue length = No. of customers in waiting line No. of arrivals = = 1.3 Average waiting time per customer = = 2.8 minutes Average service time = = 2.7 minutes Time a customer spends in system = = 5.5 minutes. (a) Maximize Z = 60 (9x 1 + 5x 2 ) + 90 (7x 1 + 9x 2 ) = 1170x x2 Subject to 9x 1 + 5x commitment for A 7x1 + 9x commitment for B 5x1 + 3x availability of Q 7x1 + 9x availability of P 2x1 + 4x availability of R and x1 0, x 2 0. (b) Just in Time in Production Process 1. Products, Spare pars/materials are received directly at production floor. Inspection is completed before delivery of materials. 2. Setup time is minimized while also reducing long production runs. There by eliminating defectives, scrap and product obsolescence. 3. Work-in-progress is reduced by use of kanban card or working cells or both. 4. Workers are trained on a variety of machines, allowed to stop machines when they identify a problem, fix it or call the repair team and adequately compensated. 5. Supporting systems such as administration, accounting and cost reporting are suitably modified to shift from the conventional mode to the improved JIT requirements. (c) (d) (e) The initial solution need not be same under both methods. Vogel s Approximation Method uses the differences between the minimum and the next minimum costs for each row and column. This is the penalty or opportunity cost of not utilizing the next best alternative. The highest penalty is given the 1 st preference. This need not be the lower cost. Vogel s Approximation Method will result in a more optimal solution than least cost. They will be the same only when the maximum penalty and the minimum cost coincide Perfect Competition Monopoly Units 6,000 1,200 Contribution (1,06, ,000) 1,80,000 1,80,000 Contribution per units Variable Cost per unit Variable Cost per unit 200 Selling Price per unit Uniform Costing is not a distinct method of costing when several undertakings start using the same costing principles or practices, they are said to be following uniform costing. Different concerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good and helps in mutual cost control and cost reduction. Hence, it is recommended that a uniform method of costing should be adopted by the member units of an industry. 12

20 SI No. of Pages: 2 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs Question No.1 Compulsory. Answer any 5 Questions from the rest 1. ABC Co. Has newly implemented an ERP package by scrapping off its legacy systems. The company has appointed you as an ERP implementation review consultant. Answer the following questions: a) What are the objectives of doing a post implementation review? When should the implementation review happen? (5 Marks) b) Explain the activities that are to be undertaken during the Post implementation review? (5 Marks) c) What are the expectations and fears arising out of an ERP implementation? (6 Marks) d) Write short notes on (i) Development Evaluation (ii) Operation evaluation (2 x 2 = 4 Marks) 2. a) State any 6 reasons as to why organizations fail to achieve system development objectives? (6 Marks) b) Write short notes on system development team (6 Marks) c) List out the various fact-finding techniques during the requirement analysis or the system analysis phase. (4 Marks) 3. a) List out any ten threats to a computerized environment. (5 Marks) b) Distinguish between emergency plan and back up plan (5 Marks) c) Explain the following terms as provided by the Information Technology Act a. Public Key b. Originator c. Hacking (3x2= 6 Marks) 4. a) Explain any 6 business risks involved in ERP implementation. (6 Marks) b) You are newly appointed as the IS Auditor of ABC Company. List out the various areas you would want to examine in your new position. (Scope of an IS Audit) (5 Marks) c) What do you mean by data back-up? Explain the various techniques. (5 Marks) PRIME/ME 37/FINAL 1

21 5. a) Explain the terms entropy and negative entropy (8 Marks) b) Write short notes on Business Impact Analysis. What activities are to be performed during this stage? (5 Marks) c) Write short notes on: (i) Big Bang approach of ERP implementation (ii) Phased Implementation approach of ERP implementation (iii) Parallel implementation approach of ERP implementation (3x1=3 Marks) 6. a) What is Capability Maturity Model? Explain its 5 stages (6 Marks) b) What are audit trails? How can an audit trail help to achieve security objective? (6 Marks) c) What is the procedure to apply for a license to issue electronic signature certificates, under Section 22, Information Technology (Amendment) Act, 2008? (4 Marks) 7. a) Explain the following terms: i. Spoofing attack ii. Piggybacking iii. Back door (2x3= 6 Marks) b) Write a short note on Transaction Processing system (6 Marks) c) What is integrated test facility? (4 Marks) PRIME/ME 37/FINAL 2

22 PRIME ACADEMY 37 TH SESSION MODEL EXAM - FINAL INFORMATION SYSTEM CONTROL AND AUDIT SUGGESTED ANSWERS 1 A) Post implementation review should establish if the new system has met the following: business objectives and deliverables e.g. producing predicted savings and benefits user expectations e.g. user friendly, good response time technical requirements e.g. capable of expansion, easy to operate and maintain Lessons learned during PIR can be used to improve the organization s development process. Timing of PIR: Ideally to be conducted after any changes and tuning that are necessary to achieve a stable system have been completed, any significant problems have had a chance to surface and system users have become familiar with it. If there are obvious and significant problems with a new system, a PIR may need to be undertaken sooner in order to identify the nature of the problems and to recommend a suitable course of action. B) Activities to be undertaken: During a PIR, the team should, according to their terms of reference, review: The main functionality of the operational system against the User Requirements Specification; System performance and operation; The development techniques and methodologies employed; Estimated time-scales and budgets, and identify reasons for variations; Changes to requirements, and confirm that they were considered, authorized and implemented in accordance with change and configuration management standards; Set out findings, conclusions and recommendations in a report for the authorizing authority to consider. Review the Business Case on which the system was originally based to confirm that all the anticipated benefits, both tangible and intangible, have been delivered. This will involve investigating the reasons due to which benefits where not achieved, and involve recommendations for remedial action. C) The following issues should be considered when judging the effectiveness either of a PIR, or to form the basis for the auditor to undertake one. Interview business users in each functional area covered by the system, and assess their satisfaction with, and overall use of, the system Interview security, operations and maintenance staff and, within the context of their particular responsibilities, assess their reactions to the system. Based on the User Requirements Specification, determine whether the system s requirements have been met and if not identify the reasons for the same. Confirm that the previous system has been de-commissioned or establish the reason(s) why it remains in use. Confirm that adequate internal controls have been built into the system, adequately documented, and operational Confirm that an adequate Service Level Agreement has been drawn up and implemented. Identify and report on any area where service delivery either falls below the level specified. Confirm the adequacy of back-up and restoration mechanism according to the user requirement. Review the Business Case and determine whether anticipate benefits have been achieved, any unplanned benefits have been identified, costs are in line with those estimated, benefits and costs are falling with the anticipated time-frame. 1

23 Review trends in transaction throughput and growth in storage use to identify the anticipated growth of the system is in line with that forecast. D) Development evaluation: Evaluation of the development process is primarily concerned with whether the system was developed on schedule and within budget. It requires schedules and budgets to be established in advance and the records of actual performance and cost be maintained. However due to the uncertainty and mystique associated with system development, they are not subjected to traditional management control procedures. Operation evaluation: The evaluation of the information system's operation pertains to whether the hardware, software and personnel are capable to perform their duties and they do actually perform them so. Operation evaluation is relatively straightforward if evaluation criteria are established in advance. Operation evaluation answers such questions: Are all transactions processed on time? Are all values computed accurately? Is the system easy to work with and understand? Is terminal response time within acceptable limits? Are reports processed on time? Is there adequate storage capacity for data? 2 A) Some reasons are Lack of senior management support for and involvement in information systems development. Shifting user needs: Constant changes results in more requests for systems development & new project which serves as a challenge to the development team Difficulty in defining the requirements, specifications, and objectives for development of strategic systems where the decision making is unstructured Personnel are not as familiar with the new technology Lack of standard project management and systems development methodologies Overworked or under-trained development staff. Resistance to change: People have a natural tendency to resist change, when they perceive that the project will result in personnel cutbacks such as downsizing Lack of user participation in the development efforts to define their requirements Inadequate testing and user training. B) System Development team Several people in the organisation are responsible for systems development. Their roles are as follows: The top management level steering committee consists of a group of key IS services users that acts as a review body for IS plans and applications development. The steering committee ensures that ongoing systems development activities are consistently aimed at satisfying the information requirements of managers and users within the organisation. If the project appears worthwhile to the steering committee, it becomes the responsibility of the IS department to develop it successfully. A project management team generally consisting of both computer professionals and key users is appointed to coordinate development activities of the system. Systems analysts are assigned to determine user requirements, design the system and assist in development and implementation activities. Systems designers take a lead role during the design, development and implementation stages. In end-user developed systems, the end-user seeks guidance from information centre personnel while developing the system. Some organisations require the information 2

24 centre to certify the final system as a quality assurance measure. C) Various fact-finding techniques, which are used by the system analyst for determining these needs/ requirements, are briefly discussed below: Document Document means manuals, input forms, output forms, diagrams of how the current system works, organisation charts, job descriptions, program codes for the applications associated with the current system, etc. Documents are a very good source of information about user needs and the current system. They are easy to collect, convey a lot of information and provide relatively objective data. The analyst should ensure that the documents which he is collecting are current, accurate and contain up-todate information. Questionnaires Interviews Users and managers are asked to complete questionnaire about the information system when the traditional system development approach is chosen. The main strength of questionnaires is that a large amount of data can be collected through a variety of users quickly. Also, if the questionnaire is skill fully drafted, responses can be analysed rapidly with the help of a computer. The data gathered through interviews often provide systems developer with a complete picture of the problems and opportunities. Interviews also give analyst the opportunity to note user reaction first-hand and to probe for further information. Observation In prototyping approaches, observation plays a central role in requirement analysis. Only by observing how users react to prototypes of a new system, the system can be successfully developed. In the traditional approach, observation is not always mandatory. But it is desirable in most instances. The analyst should visit the user site to watch how the work was taking place. Such a surprise visit often helps the analyst in getting a clear picture of the user s environment and to determine why a request for a new system was submitted. 3) A) Threats to a computerized environment Power Loss Communication failure Disgruntled Employees Errors Malicious Code Abuse of access privileges by employees Natural disasters Social engineering Theft or destruction of computing resources Downtime due to technology failure Fire, etc 3

25 B) Systematic risk Unavoidable, would remain no matter what technology is used Can be reduced by designing management control process. Mitigation through investment in technology is not possible. For example the probability of power outage is not dependant on the industry but is dependant on external factors. Unsystematic risk Avoidable, peculiar to a technology or application and can be mitigated The management should consider whether the additional payment to mitigate the risk is justifiable considering the possibility of loss that may or may not occur. The answer lies in identification of whether the overall risk exposure of the organisation is coming down because of the additional investment. For example one can use a computer system with automatic mirroring to reduce the exposure to loss rising out of data loss in the event of failure of host computer. C) Public key Originator Hacking the key of a key pair used to verify a digital signature and listed in the Digital Signature Certificate a person who sends, generates, stores or transmits any electronic message or causes any electronic message to be sent, generated, stored or transmitted to any other person but does not include an intermediary the act of destroying or deleting or altering any information residing in a computer resource or diminishing its value or utility, or affecting it injuriously in spite of knowing that such action is likely to cause wrongful loss or damage the public or that person. 4) A) Some of the business risks faced by organizations when they migrate to real-time, integrated ERP systems: All the organization s data is stored in a single database and transaction processing happens within one application system, there is a risk of single point of failure. Reengineering or redesigning business processes may bring about significant personnel and organizational structures changes. Users job role changes from traditional roles to new roles with greater access to enterprise information in real time. The point of control shifts from the back-end financial processes to the front-end point of creation. An online, real-time system environment requires a continuous business environment capable of utilizing the new capabilities of the ERP application and responding quickly to any problem requiring of re-entry of information. Change management is important because users should accept the new system and understand that their actions or inaction have a direct impact upon other users. Considerable training is essential to ensure that the users are more diligent and efficient in the performance of their duties. Inexperience with implementing and managing distributed computing technology may pose significant challenges. Increased remote access by users and outsiders and high integration among application functions allow increased access to application and data. Organization accustomed to in-house legacy systems may find they have to rely on external help. If increased dependency on external services is not properly managed, it could introduce an element of security and resource management risk that may expose the organizations to greater risk. 4

26 Extensive interfaces and data conversions from legacy systems and other commercial software are often necessary. The exposures of data integrity, security and capacity requirements for ERP are therefore often much higher. Specialist expertise is required to effectively audit and control an ERP environment. The relative complexity of ERP systems has created specialization such that each specialist may know only a relatively small fraction of the entire ERP s functionality in a particular core module. Single sign on reduces the security administration effort associated with administrating web-based access to multiple systems, but simultaneously introduces additional risk in that an incorrect assignment of access may result in inappropriate access to multiple systems. As enterprise applications are opened to external suppliers and customers, the need for data integrity becomes paramount. Where personal information is captured, the organization may have to adhere to the privacy and confidentiality requirements imposed by various laws. B) The scope of the audit covers examination and evaluation of adequacy and effectiveness of internal controls over data, application systems, technology, facilities and people. The auditor examines the following: Mission statement and goals & objectives for information systems security and activities. Risk assessment and managing risks associated with information systems. IS strategies, implementation plans, mechanism to monitor progress IS budgets and variance analysis Compliance with IS policies, guidelines, procedures Major contracts, approval mechanism, monitoring compliance to contract Performance measurement against SLAs (Service Level Agreement) Internal audit reports, previous audit reports, vulnerability assessment and penetration testing report and compliance report. BCP and DRP plan, test results of these plans. Compliance with legal and statutory requirements. Personnel management appointment, promotions, background screening, access rights, termination, training etc. C) Backup is the process of making additional copies of data which can be used to restore the original data after a catastrophe or a data loss event. Type of backup Full back up Differential backup Incremental backup Mirror backup Meaning Every backup generation contains every file in the backup set. Though this type of backup facilitates easy restoration, it involves huge disk space and time Only files that changed since the last full back up are backed up now. This is faster and economical compared to full backup. Restoration involves restoring last full backup and then the incremental backup. Here only files that have changed since the last incremental or differential or full backup are backed up. This also saves a lot of backup time and space. However restoration is tough as it involves recovery from every incremental backup. Same as full backup except that files are not zipped or Password protected. It is used to create an exact copy of the data. 5

27 5). A) Risk assessment is the analysis of threats to resources (assets) and the determination of the amount of protection necessary to adequately safeguard the resources, so that vital systems, operations, and services can be resumed to normal status in the minimum time in case of a disaster. Risk assessment is important for disaster planning and contingency planning. Risk assessment is a useful technique to assess the risks involved in the event of unavailability of information, to prioritize applications, identify exposures and develop recovery scenarios. B) Business Impact Analysis (BIA) is essentially a means of systematically assessing the potential impacts resulting from various events or incidents. It enables the business continuity team to identify critical systems, processes and functions, assess the economic impact of incidents and disasters that result in a denial of access to the system, services and facilities, and assess the length of time business units can survive without access to the system, services and facilities. Activities performed during this stage are: Identify organizational risks - This includes single point of failure and infrastructure risks. The objective is to identify risks and opportunities and to minimize potential threats that may lead to a disaster. Identify critical business processes. Identify and quantify threats/ risks to critical business processes both in terms of outage and financial impact. Identify dependencies and interdependencies of critical business processes and the order in which they must be restored. Determine the maximum allowable downtime for each business process. (vi.) Identify the type and the quantity of resources required for recovery e.g. tables chairs, faxes, photocopies, safes, desktops, printers, etc. Determine the impact to the organization in the event of a disaster, e.g. financial reputation, etc. The required information gathered through questionnaires, workshops, interviews and examination of documents is presented as a report to the steering committee. This report is used as a basis for identifying systems and resources required to support the critical services provided by information processing and other services and facilities. C) ERP implementation approaches i) Big bang approach All modules at all location are implemented at the same time. Characteristics of this approach include no need for temporary interfaces, limited requirement to maintain legacy software, cross-module functionality and overall cost if no contingencies arise. ii) Phased implementation This involves implementing in a single location at a time. Benefits of this approach include: a smoothing of resource requirements, an ability to focus on a particular module, availability of existing legacy systems as a fall-back, reduced risk, the knowledge gained with each phase and the usefulness of demonstrable working system. iii) Parallel implementation This approach involves both ERP and an existing system running together for a period of time. Its attributes include: having a basis of comparison; existing system serves as backup; rewires more computing and human resources. On the other hand it is more costly; existing system may not be properly maintained during the period; and reengineering not supported by existing systems. 6