CMA Intermediate · Management Accounting · Introduction to Management Accounting
Kaveri Foods Ltd. introduces a management accounting system costing Rs 6,00,000 per year. It is expected to cut wastage by 4% of annual material cost of Rs 90,00,000 and save Rs 1,20,000 in administrative costs. What is the net annual benefit of the system?
Benefits are 4% of Rs 90,00,000, which is Rs 3,60,000, plus Rs 1,20,000 of administrative savings, totalling Rs 4,80,000. Against the Rs 6,00,000 cost, the net result is a Rs 1,20,000 loss, so the system is not justified on cost-benefit grounds.
- ARs 1,20,000 loss
- BRs 1,20,000 gainCorrect
- CRs 3,60,000 gain
- DRs 7,20,000 gain
Explanation
Wastage saving = 4% x 90,00,000 = Rs 3,60,000. Add admin saving Rs 1,20,000 to get Rs 4,80,000 total benefit. Net = 4,80,000 - 6,00,000 = Rs 1,20,000 loss. So the system fails the cost-benefit test; the gain option wrongly flips the sign.
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