PRACTICE MANUAL

Final Course

PAPER : 5
ADVANCED MANAGEMENT
ACCOUNTING
PART-A

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

 This practice manual has been prepared by the faculty of the Board of Studies. The
objective of the practice manual is to provide teaching material to the students to enable
them to obtain knowledge and skills in the subject. In case students need any
clarifications or have any suggestions to make for further improvement of the material
contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for
the students. However, the practice manual has not been specifically discussed by the
Council of the Institute or any of its Committees and the views expressed herein may not
be taken to necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission in writing from the publisher.

Revised Edition : January, 2017

Website : www.icai.org

E-mail : bosnoida@icai.in

Committee / : Board of Studies

Department
ISBN No. :

Price : `

Published by : The Publication Department on behalf of The Institute of Chartered

Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi – 110 002

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

© The Institute of Chartered Accountants of India

 A WORD ABOUT PRACTICE MANUAL
The Board of Studies (BoS) has undertaken the step of developing Practice Manuals of all
subjects to help the students with better understanding of the subject through a mode of
questions and answers on different important topics and problems. Practice Manual and
Study Material of a particular subject complements each other and all the students are
expected to make holistic study of both to gain maximum benefit and acquire in-depth
knowledge of the subject. The Practice Manual in the subject of “Advanced Management
Accounting” has been developed by BoS taking primary input from question papers of
Institute’s earlier examinations over a number of years. It has been divided into sixteen
chapters, keeping close correspondence with the chapters of the Study Material so as to
make it an effective guidance material by providing clarification / solution to very important
topics / issues, both theoretical and practical, of different chapters.
The Practice Manual will serve as a revisionary help book towards preparing for final
examination of the Institute and help the students in identifying the gaps in the preparation
for the examination and developing strategic plan to bridge it. The Practice Manual contains
solutions to the questions which will act as a guide towards developing the skills of students
on framing appropriate answer to a question and thereby to help students to improve their
performance in the examination. The Practice Manual of “Advanced Management
Accounting” has been thoroughly revised to cater the need of home study and distance
learning approach in the Chartered Accountancy course. We would like to highlight some of
the unique features of this edition of the Practice Manual of the subject “Advanced
Management Accounting”.

 This Practice Manual remains divided into two parts for ease of handling by the
students. Part-A contains Chapters 1−9 and Part-B contains Chapters 10−16.
 Each chapter of the Practice Manual wherever possible has been divided into three
sections i.e. Section A: Theory Questions, Section B: Practical Questions and Section
C: Scenario Based Questions.
 This Practice Manual has about 400 practical questions apart from handpicked
theoretical and scenario based questions. All these questions have been compiled in
such a manner that it will cover basic concepts, practical concepts and all kinds of
adjustments required to address a question for extensive revision of the syllabus.
 Questions on emerging management accounting concepts like Activity Based Costing,
Just in Time, Pricing Strategy, Balanced Scorecard etc. have been strengthened with
introduction of new vivid questions and their solutions.

© The Institute of Chartered Accountants of India

  As a part of knowledge progression, some simple questions related with the topics like
Marginal Costing, Standard Costing etc. have been retained in the Practice Manual to
enhance the conceptual clarity to have a complete grasp on these topics to enable the
students to handle advanced level of questions.
 Important definitions, equations, formulae etc. have been given at the beginning of
each chapter for a quick recapitulation.
 Icon explanations have been given wherever possible for deeper understanding of
concepts.
 Presentation is the hallmark of this Practice Manual. Questions and solutions thereof
have been presented in a student’s friendly approach.
Every effort has been made to make the Practice manual error free, however if inadvertently
any error is present and found by readers they may send it to us immediately so that it can
be rectified at our end.
For any further clarification/ guidance, students are requested to send their queries at
deepak.gupta@icai.in

Happy Reading and Best Wishes!

iv

© The Institute of Chartered Accountants of India

 Paper-5, Advanced Management Accounting
Statement Showing Topic-Wise Distribution of Examination Questions Along With Marks
Term of Examination
Chapter/ Topics (Part-A)
May 2012 Nov. 2012 May 2013 Nov. 2013 May 2014 Nov. 2014 May 2015 Nov. 2015 May 2016 Nov. 2016
Q M Q M Q M Q M Q M Q M Q M Q M Q M Q M
Chapter-1 Developments in 1(d) 5 1(c) 10 2(a) 8 2(c) 4 1(c) 5 7(c) 4 7(a) 4 1(a) 5 1(a) 5 1(c) 5
the Business 3(c) 5 6(b) 4 4(b) 8 6(a) 8 4(a) 8 6(a) 10 5(a) 8 1(b) 5 1(b) 5 2(a) 10
Environment
6(c) 4 7(a) 4 7(a) 4 7(b) 4 7(c) 4 7(d) 4 7(c) 4 2(a) 8 2(a) 8 5(b) 6
7(e) 4 4(a) 8 6(a) 8 7(d) 4 7(c) 4
7(a) 4
7(e) 4
Chapter-2 Decision Making 1(a) 5 1(a) 5 1(a) 5 1(a) 5 5(b) 8 7(b) 4 3(a) 12 7(d) 4 5(b) 8 1(b) 5
using Cost 1(c) 5 7(b) 4 1(d) 5 1(d) 5 2(a) 10 3(b) 8 1(d) 5 6(a) 8 4(a) 8
Concepts and CVP
4(a) 8 7(c) 4 5(a) 12 7(d) 4 1(a) 5 5(b) 9 3(b) 4
Analysis
5(a) 8 1(b) 5
Chapter-3 Pricing Decisions 3(a) 8 5(a) 12 1(b) 5 2(a) 4 7(a) 4 1(a) 5 1(a) 5 5(b) 4 2(b) 8 7(d) 4
7(c) 4 1(d) 5 7(d) 4 7(b) 4 7(e) 4 7(e) 4
Chapter-4 Budget & 6(a) 8 4(b) 4 2(b) 8 1(c) 5 6(a) 7 6(b) 6 2(a) 8 4(a) 8 3(b) 8 6(a) 8
Budgetary Control 7(d) 4 7(e) 4 7(c) 4 7(a) 4
Chapter-5 Standard Costing 2(b) 6 3(a) 9 3(b) 8 5(a) 8 3(a) 10 5(a) 7 6(b) 8 3(a) 8 4(a) 8 3(a) 8
Chapter-6 Costing of Service 7(e) 4 6(a) 7 × × 3(a) 12 × × 7(e) 4 × × × × 1(c) 5 5(a) 10
Sector 7(a) 4
Chapter-7 Transfer Pricing 2(a) 10 2(a) 11 7(e) 4 4(a) 12 5(a) 8 4(a) 10 1(c) 5 5(a) 12 3(a) 8 × ×

© The Institute of Chartered Accountants of India

 Term of Examination
Chapter/ Topics (Part-A)
May 2012 Nov. 2012 May 2013 Nov. 2013 May 2014 Nov. 2014 May 2015 Nov. 2015 May 2016 Nov. 2016
Q M Q M Q M Q M Q M Q M Q M Q M Q M Q M
Chapter-8 Uniform Costing × × 4(c) 4 6(c) 5 3(b) 4 × × × × × × × × × × 7(b) 4
and Inter-firm
Comparison
Chapter-9 Profitability 6(b) 4 × × 5(b) 4 × × 6(b) 5 1(b) 5 7(b) 4 1(d) 5 7(b) 4 1(a) 5
Analysis 7(b) 4

Note
‘Q’ represents question numbers as they appeared in the question paper of respective examination.
‘M' represents the marks which each question carries.
vi

© The Institute of Chartered Accountants of India

 PART-A
CONTENTS
(Chapters 10 to 16 of Advanced Management Accounting are in PART-B)

Chapter-1: Developments in the Business Environment

Basic Concepts.................................................................................................................... 1.1
Section–A .............................................................................................................................. 1.12
The Impact of Changing Environment on Cost and Management Accounting .... 1.12
Total Quality Management .............................................................................................. 1.13
Activity Based Cost Management ................................................................................... 1.21
Target Costing ................................................................................................................... 1.30
Life Cycle Costing ............................................................................................................. 1.34
Value Chain Analysis ........................................................................................................ 1.36
Cost Control Vs Cost Reduction .................................................................................... 1.42
Just in Time ........................................................................................................................ 1.45
Manufacturing Resource Planning ................................................................................. 1.47
Synchronous Manufacturing ........................................................................................... 1.49
Throughput Accounting/ Theory of Constraints ........................................................ 1.50
Section–B .............................................................................................................................. 1.52
Value Added/ Non Value Added Activities ................................................................. 1.52
Total Quality Management .............................................................................................. 1.53
Activity Based Costing ..................................................................................................... 1.62
Target Costing ................................................................................................................... 1.98
Life Cycle Costing ............................................................................................................. 1.111
Just In Time ....................................................................................................................... 1.122
JIT Production System > Backflush Costing System.................................................. 1.129
Theory of Constraints ...................................................................................................... 1.131

© The Institute of Chartered Accountants of India

 Section–C .............................................................................................................................. 1.137
Total Quality Management .............................................................................................. 1.137
Activity Based Costing ..................................................................................................... 1.140
Target Costing .................................................................................................................. 1.144
Target Costing > Kaizen Costing ................................................................................... 1.144
Life Cycle Costing ............................................................................................................. 1.146
Cost Control Vs Cost Reduction .................................................................................... 1.148
Value Chain Analysis ........................................................................................................ 1.149
Just In Time ....................................................................................................................... 1.150
Chapter-2: Decision Making using Cost Concepts and CVP Analysis
Basic Concepts.................................................................................................................... 2.1
Section–A .............................................................................................................................. 2.8
CVP Analysis / Cost Concepts/ Decision Making ..................................................... 2.8
Section–B .............................................................................................................................. 2.18
CVP Analysis ..................................................................................................................... 2.18
Opportunity Cost .............................................................................................................. 2.34
Incremental Revenue/ Differential Cost....................................................................... 2.35
Cost Indifference Point .................................................................................................... 2.36
Relevant Costing ............................................................................................................... 2.40
Sales or Further Processing Decision ............................................................................ 2.51
Decision on Accepting / Quoting an Order ................................................................ 2.54
Make or Buy ....................................................................................................................... 2.65
Determination of Production Mix / Production Planning ........................................ 2.81
Decision on Subcontracting ............................................................................................ 2.122
Decision on Capacity Utilization .................................................................................... 2.134
Decision on Choice of Supplier / Customer ................................................................ 2.137
Marketing Decision ........................................................................................................... 2.147
Selling Strategy ................................................................................................................... 2.161
Labour Related Decisions ................................................................................................ 2.163

viii

© The Institute of Chartered Accountants of India

 Preventive Maintenance Vs Break–Down Maintenance ............................................ 2.173
Shut Down or Continue................................................................................................... 2.174
Miscellaneous ..................................................................................................................... 2.193
Section–C .............................................................................................................................. 2.199
Quantitative Vs Qualitative Factors ............................................................................... 2.199
Limiting Factor .................................................................................................................. 2.200
Cost Classification ............................................................................................................. 2.201
Chapter-3: Pricing Decisions
Basic Concepts.................................................................................................................... 3.1
Section–A .............................................................................................................................. 3.6
Pricing Policy/Strategy ..................................................................................................... 3.6
Pareto Analysis .................................................................................................................. 3.9
Section–B .............................................................................................................................. 3.12
Cost–Plus / Mark–up Pricing ......................................................................................... 3.12
Return on Investment Pricing ......................................................................................... 3.21
Pricing of New Product / Services ................................................................................ 3.24
Pricing–Different Scenario .............................................................................................. 3.31
Pareto Analysis .................................................................................................................. 3.42
Section–C .............................................................................................................................. 3.45
Pricing Policy/ Strategy .................................................................................................... 3.45
Chapter-4: Budget & Budgetary Control
Basic Concepts.................................................................................................................... 4.1
Formulae ............................................................................................................................... 4.4
Section–A .............................................................................................................................. 4.5
Zero Based Budgeting ...................................................................................................... 4.5
Miscellaneous ..................................................................................................................... 4.6
Section–B .............................................................................................................................. 4.8
Fixed and Flexible Budgets.............................................................................................. 4.8
Cash Budget ....................................................................................................................... 4.17

ix

© The Institute of Chartered Accountants of India

 Cash Budget & Budgeted Income Statement ............................................................... 4.23
Functional Budgets ........................................................................................................... 4.26
Principal Budget Factor.................................................................................................... 4.54
Budgeted Financials .......................................................................................................... 4.56
Key Factor .......................................................................................................................... 4.64
Inventory Control ............................................................................................................. 4.67
Budget Variance ................................................................................................................ 4.71
Budget Ratio....................................................................................................................... 4.74
Miscellaneous ..................................................................................................................... 4.78
Section–C .............................................................................................................................. 4.80
Preparation and Monitoring Procedures ....................................................................... 4.80
Zero Based Budgeting ...................................................................................................... 4.85
Chapter-5: Standard Costing
Basic Concepts.................................................................................................................... 5.1
Formulae ............................................................................................................................... 5.6
Reconciliations (Budgeted / Standard Profit / Actual Profit)............................. 5.18
Section–A .............................................................................................................................. 5.22
Variance Analysis .............................................................................................................. 5.22
Single Plan/ Partial Plan................................................................................................... 5.26
Section–B .............................................................................................................................. 5.27
Computation of Material Variances ............................................................................... 5.27
Computation of Labour Variances ................................................................................. 5.31
Computation of Overhead Variances ............................................................................ 5.36
Computation of Sales Variances ..................................................................................... 5.43
Computation of All Variances ........................................................................................ 5.54
Missing/ Required Information from Given Inputs and Variances ......................... 5.72
Factors Contributing to Change in Profit ..................................................................... 5.96
Computation of Variances and Reconciliation of Budgeted/ Standard Profit
with Actual Profit .............................................................................................................. 5.107

© The Institute of Chartered Accountants of India

 Reconciliation of Budgeted/ Standard Profit with Actual Profit with Given
Variances............................................................................................................................. 5.144
Reconciliation of Budgeted Profit with Actual Profit with Given Budgeted
Profit & Loss Account and Actual Profit & Loss Account ....................................... 5.155
Information Required, Given Reconciliation between Budgeted/ Standard Profit
with Actual Profit .............................................................................................................. 5.160
Standard– Marginal Costing ............................................................................................ 5.170
Single Plan/Partial Plan .................................................................................................... 5.182
Incomplete Ledger, Computation of Variances ........................................................... 5.183
Planning & Operational Variances, Controllable and Non Controllable
Variances............................................................................................................................. 5.188
Variance Analysis in Activity Based Costing ................................................................ 5.195
Section–C .............................................................................................................................. 5.196
Interpretation of Variances.............................................................................................. 5.196
Chapter-6: Costing of Service Sector
Basic Concepts.................................................................................................................... 6.1
Section–A .............................................................................................................................. 6.2
Methods/ Characteristics ................................................................................................. 6.2
Section–B .............................................................................................................................. 6.5
Utility Service Agencies .................................................................................................... 6.5
Road Transport ................................................................................................................. 6.6
Air Transport ..................................................................................................................... 6.12
Travel Agency .................................................................................................................... 6.19
Hotels/ Lodges.................................................................................................................. 6.20
Hospitals & Health Clinics .............................................................................................. 6.33
Chapter-7: Transfer Pricing
Basic Concepts.................................................................................................................... 7.1
Section–A .............................................................................................................................. 7.3
Transfer Pricing– Methods .............................................................................................. 7.3
Transfer Pricing– Miscellaneous ..................................................................................... 7.4

xi

© The Institute of Chartered Accountants of India

 Section–B .............................................................................................................................. 7.7
Transfer Price– Shared Contribution / Market Price Method .................................. 7.7
Transfer Pricing Based on Opportunity Cost............................................................... 7.11
Negotiated Transfer Price ................................................................................................ 7.26
Transfer Pricing Decision– Different Capacity Levels ............................................... 7.28
Transfer Pricing Decision– Different Demand Levels ............................................... 7.32
Pricing Model ..................................................................................................................... 7.42
Multinational Transfer Pricing ........................................................................................ 7.44
Transfer Pricing– Miscellaneous ..................................................................................... 7.50
Section–C .............................................................................................................................. 7.67
Transfer Pricing– Basic Concepts .................................................................................. 7.67
Optimum Decision Making Vs Performance Evaluation .......................................... 7.68
Chapter-8: Uniform Costing and Inter-firm Comparison
Basic Concepts.................................................................................................................... 8.1
Section–A .............................................................................................................................. 8.2
Uniform Costing System .................................................................................................. 8.2
Inter–firm Comparison .................................................................................................... 8.4
Chapter-9: Profitability Analysis- Product Wise/ Segment Wise/
Customer Wise
Basic Concepts.................................................................................................................... 9.1
Section–A .............................................................................................................................. 9.3
Profitability Analysis ......................................................................................................... 9.3
Balanced Scorecard ........................................................................................................... 9.4
Section–B .............................................................................................................................. 9.9
Profitability Analysis– Product Wise/ Direct Product Profitability ......................... 9.9
Profitability Analysis– Customer Wise/ Customer Profitability Analysis................ 9.15
Profitability Analysis– Miscellaneous ............................................................................. 9.22
Section–C .............................................................................................................................. 9.29
Balanced Scorecard– Resort ............................................................................................ 9.29

xii

© The Institute of Chartered Accountants of India

 Balanced Scorecard– Supermarket ................................................................................. 9.30
Balanced Scorecard– Banking Comapny ....................................................................... 9.31
Balanced Scorecard– Credit Card Comapny ............................................................... 9.33
Balanced Scorecard– Telecom Comapny ...................................................................... 9.33
Balanced Scorecard– Fitness Centre .............................................................................. 9.35
Balanced Scorecard– Miscellaneous ............................................................................... 9.36

xiii

© The Institute of Chartered Accountants of India