CA Inter Cost & Mgmt

Note: Insufficient Data Provided

The question as presented is a sub-part of a larger problem. The numerical data required to compute the profit lost due to labour turnover — such as actual production achieved, standard/budgeted production capacity, selling price per unit, and cost per unit — has not been included in the question stem. The following is the complete methodology a student must apply once the data is available.

Concept: Profit Lost Due to Labour Turnover

Labour turnover causes a loss of production because new/replacement workers take time to reach standard efficiency, and during separations and replacements, machine and labour time is lost. If this lost production could have been sold, the firm forgoes contribution/profit on those units.

Step 1 — Calculate Potential Production Lost

Potential Production Lost = Budgeted (Normal) Production – Actual Production achieved during the year

Alternatively, if efficiency data is given: Lost units = (Standard output of experienced workers – Actual output of new/replacement workers) × Number of such workers × Time period

Step 2 — Calculate Profit Per Unit (or Contribution Per Unit)

If the question provides Selling Price per unit and Total Cost per unit:
Profit per unit = Selling Price per unit – Total Cost per unit

If marginal costing approach is intended:
Contribution per unit = Selling Price per unit – Variable Cost per unit

Step 3 — Calculate Profit Lost

Profit Lost = Potential Production Lost (units) × Profit per unit (or Contribution per unit)

Important Note for Exam: In CA Intermediate Cost Accounting questions on labour turnover, the 'cost of labour turnover' includes both preventive costs (welfare, training, HR activities) and replacement costs (recruitment, induction, learning curve losses). The profit lost on account of production foregone is part of the replacement cost / consequential loss.

Once the accompanying data (production figures, selling price, cost structure) is provided, apply the three steps above to arrive at the final answer. Always state the final profit lost figure clearly in ₹.

(i) Break-Even Sales

Using the Marginal Costing approach, since Fixed Costs remain constant between two periods, the change in profit divided by change in sales gives the P/V Ratio (Profit-Volume Ratio).

P/V Ratio = Change in Profit ÷ Change in Sales
= [11,20,000 − (−3,80,000)] ÷ [2,40,00,000 − 1,80,00,000]
= 15,00,000 ÷ 60,00,000 = 25%

Variable Cost Ratio = 100% − 25% = 75%

Fixed Costs (using 2023-24 data):
Contribution = 2,40,00,000 × 25% = ₹60,00,000
Fixed Costs = Contribution − Profit = 60,00,000 − 11,20,000 = ₹48,80,000

Verification (2022-23): Contribution = 1,80,00,000 × 25% = ₹45,00,000; Profit = 45,00,000 − 48,80,000 = ₹(3,80,000) ✓

Break-Even Sales = Fixed Costs ÷ P/V Ratio
= 48,80,000 ÷ 25% = ₹1,95,20,000

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(ii) Required Sales in 2024-25 to Earn Profit of ₹15,00,000

In 2024-25, variable costs increase by 5% while selling price remains unchanged.

New Variable Cost Ratio = 75% × 1.05 = 78.75%
New P/V Ratio = 100% − 78.75% = 21.25%

New Fixed Costs = 48,80,000 − 4,80,000 = ₹44,00,000

Required Sales = (Fixed Costs + Desired Profit) ÷ New P/V Ratio
= (44,00,000 + 15,00,000) ÷ 21.25%
= 59,00,000 ÷ 0.2125
= ₹2,77,64,706 (approx.)

The sales volume required in 2024-25 to earn a profit of ₹15,00,000 is ₹2,77,64,706.

Feedback Control and Feedforward Control are two distinct approaches to budgetary control systems that differ fundamentally in their timing and methodology.

Feedback Control System is a reactive approach that measures actual performance against budgeted or standard benchmarks and identifies variances after they have already occurred. The control mechanism works on the principle of exception reporting—actual results are compared with budgeted results, variances are calculated, and corrective actions are initiated to bring performance in line with the budget. This system is useful for identifying performance gaps and understanding why deviations happened. However, since it operates retrospectively, the damage or loss has already been incurred by the time corrective measures are taken. Feedback control relies on historical data and reports generated periodically (monthly, quarterly) to trigger management action. Examples include variance analysis on sales, costs, or production efficiency after the reporting period ends.

Feedforward Control System, by contrast, is a proactive approach that attempts to prevent deviations from occurring in the first place. This system monitors external and internal inputs, environmental factors, and leading indicators before actual operations commence. It uses forecasting, trend analysis, and prediction models to anticipate potential problems and take corrective action beforehand. Feedforward control is forward-looking and based on forecasts of future conditions rather than past actuals. It involves continuous monitoring of variables such as market conditions, raw material prices, labor availability, and demand forecasts, allowing management to adjust plans and operations pre-emptively. This approach is more effective in preventing losses or inefficiencies.

Key Differences: Feedback control is backward-looking (historical), while feedforward is forward-looking (predictive). Feedback control detects and corrects problems after occurrence, whereas feedforward prevents problems before they arise. Feedback control is less costly to implement but less effective in prevention. Feedforward requires sophisticated forecasting systems but provides better control by minimizing adverse impacts.

Practical Application: Most effective budgetary control systems use both approaches—feedforward mechanisms to set realistic budgets and prevent major deviations, combined with feedback controls to monitor performance and make course corrections. For instance, a company might use feedforward control by adjusting production schedules based on demand forecasts, while simultaneously using feedback control through monthly variance reports to identify operational inefficiencies.