www.purushottamaggarwal.com CALL 95 8280 8296 Page 1 CA Inter TOP “Category A Practical Questions” along with Solution For Nov 2020 Exam Nov Exams are on its way & every student feels fear from costing subject & students always remain tensed regarding his/her level of preparation. I know you need some helping hand . Here comes this pdf file which contains ―Important Questions For Nov 2020 Exam‖. Revising These Questions will ensure revision of more than 85% Concepts of Costing. It includes most ―Comprehensive‖ as well as ―Tricky‖ Questions to check your preparation level for Exam. Past 4 Attempts Trend has also been considered in deciding importance of chapters & topic therein in Exam. You also watch this vide :- https://www.youtube.com/watch?v=TsS6XDmbU3k Answer has been presented in ―Easy to Understand‖ Mode. Detailed explanation is also provided wherever required Take Its Print out & revise thoroughly all the questions. It will boost up your confidence & will also tell you. Join Telegram Channel of Purushottam Sir for updates - https://t.me/purushottamsircost
CA Inter TOP “Category A Practical Questions” along with Solution For Nov 2020 Exam
Nov Exams are on its way & every student feels fear from costing subject & students always remain tensed regarding his/her level of
preparation. I know you need some helping hand .
Here comes this pdf file which contains ―Important Questions For Nov 2020 Exam‖.
Revising These Questions will ensure revision of more than 85% Concepts of Costing.
It includes most ―Comprehensive‖ as well as ―Tricky‖ Questions to check your preparation level for Exam.
Past 4 Attempts Trend has also been considered in deciding importance of chapters & topic therein in Exam. You also watch this vide :- https://www.youtube.com/watch?v=TsS6XDmbU3k
Answer has been presented in ―Easy to Understand‖ Mode. Detailed explanation is also provided wherever required
Take Its Print out & revise thoroughly all the questions. It will boost up your confidence & will also tell you.
Join Telegram Channel of Purushottam Sir for updates -
Question 1 A cast iron foundry is importing forged steel moulds for making its castings. The moulds are of four different sizes A, B, C and D and the CIF values are US $ 4,140, 4,760, 6,340 and 7,875, respectively. Customs duty may be assumed at 45% and clearing charges 5% of CIF value. The number of castings that can be made out of each mould is: A 2,000, B 2,000, C 1,800, and D 1,500.
The weight of each casting out of A is 300 kg., B 400 kg., C 500 kg., and D 700 kg. The casting suffer a normal rejection of 10%. You are required to calculate the average cost of mould per tonne of saleable casting. (For conversion assume US $1 = Rs. 8.) Concept First of all, Learn the concept of FOB & CIF
Case 1 When Ram purchases goods from john and sells in India (Ram is Buyer)
Case 2 When Ram purchase goods in India and Sells to John (Ram is Seller)
Sequence of Expenditure incurred in foreign Sale case
Seller --- Ex Factory Cost ---Transport charges --- Custom Duty & Clearance charges --- Loading charges in Ship --- Freight of Ship --- Insurance during transit ---- Custom Duty paid by Buyer (Import) ---- Transport charges in foreign ----Goods in factory of Buyer
Seller shall always be responsible till goods reach port of his country.
Buyer shall always be responsible after goods reach port of buyer’s country.
Now Question Arise
“Who will be responsible for goods while in transit in ship” –This Question gave birth to FOB & CIF.
If terms are FOB it means Seller shall be responsible till goods reach port of seller’s country.
If terms are CIF it means buyer shall be responsible till goods reach port of buyer’s country.
Free on Board means seller shall be free from responsibility once goods reach port of seller country.
If terms are CIF
Seller is responsible for any loss till goods reach port of buyer’s country. In case of any loss during transit, seller shall bear loss. Seller shall pay all exp. till port of buyer
Seller is responsible for any loss till goods reach port of seller’s country. In case of loss during transit, seller shall not be responsible. Insurance and freight during shipment in ship shall be paid by buyer.
In Given Question terms are CIF, it means Seller is responsible for any loss till goods reach port of buyer’s country. So we need to calculate Landed Cost = CIF + Custom Duty (import) Solution St. Showing average cost of mould per tonne of saleable casting
A B C D TOTAL
CIF Values (US $) 4,140 4,760 6,340 7,875 23,115
Customs duty & clearing charges (50%)
2,070
2,380
3,170
3,937.50
11,557.50
Total Cost (US $) 6,210 7,140 9,510 11,812.50 34,672.50
Cost in Rupees (1$ = Rs. 8) --- A (Assumed)
49,680 57,120 76,080 94,500 2,77,380
Number of castings 2,000 2,000 1,800 1,500 -
Less 10% normal rejections 200 200 180 150 -
Number of saleable castings --- B (Assumed)
1,800 1,800 1,620 1,350 -
Weight of each casting (Kg) ----- C (Assumed)
300 400 500 700 -
Weight of saleable castings (in tonnes) – D (Assumed)
540 Tonnes
720 Tonnes
810 Tonnes
945 Tonnes
3,015 Tonnes
Cost per tonne (Rs.) – A / D 92 79.3 93.9 100 91.3
The average cost of mould per tonne of saleable casting is, therefore, Rs.91.3 approx.
Standard working Hours 8 hours per day of 5 days per week
Maximum capacity 60 employees
Actual Working 50 Employees
Actual hours expected to be worked per four week 8000 Hours
Standard hours expected to be earned per four week 9600 Hours
Actual Hours Worked in the four week Period 7500 Hours
Standard Hours earned in the four week period 8800 hours
The period is of 4 weeks.
Calculate Following Ratios
(i) Efficiency Ratio (ii) Activity Ratio (iii) Standard Capacity Usage Ratio (iv) Actual Capacity Usage Ratio (v) Actual Usage of Budgeted Capacity Ratio
Solution Following Data is available for ABC
Analysis Tech. Term
Standard working Hours
8 hours per day of 5 days per week
A worker “should” work for 5 days in a week and 8 hours in a day.
Maximum capacity 60 employees Max. 60 workers can work in this co.
Actual Working 50 Employees Actually 50 workers worked
Actual hours expected to be worked per four week
8000 Hours 50 workers “should” work for 8000 hours in this month. 50 Workers x 4 week x 5 days x 8 hours = 8000 Hours
Budgeted Hours
Standard hours expected to be earned per four week
9600 Hours If 60 workers work then those 60 workers “should” work for 9600 hours in this month. 60 Workers x 4 week x 5 days x 8 hours = 9600 Hours It is Maximum Hours
Maximum Hours
Actual Hours Worked in the four week Period
7500 Hours 50 workers “Actually” worked for 7500 hours in this month.
Question 3 Rs.AT‟ Ltd. furnishes the following store transactions for September, 20X8:
1-9-X8 Opening balance 25 units value Rs. 162.50 4-9- X8 Issues Req. No. 85 8 units 6-9- X8 Receipts from B & Co. GRN No. 26 50 units @ Rs. 5.75 per unit 7-9- X8 Issues Req. No. 97 12 units 10-9- X8 Return to B & Co. 10 units 12-9- X8 Issues Req. No. 108 15 units 13-9- X8 Issues Req. No. 110 20 units 15-9- X8 Receipts from M & Co. GRN. No. 33 25 units @ Rs. 6.10 per unit 17-9- X8 Issues Req. No. 121 10 units 19-9- X8 Received replacement from B & Co. GRN No. 38 10 units 20-9- X8 Returned from department, material of M & Co. MRR No. 4 5 units 22-9- X8 Transfer from Job 182 to Job 187 in the dept. MTR 6 5 units 26-9- X8 Issues Req. No. 146 10 units 29-9- X8 Transfer from Dept. ―A‖ to Dept. ―B‖ MTR 10 5 units 30-9- X8 Shortage in stock taking 2 units PREPARE the priced stores ledger on FIFO method and STATE how would you treat the shortage in stock taking.
Working Notes: 1. The material received as replacement from vendor is treated as freshsupply. 2. In the absence of information the price of the material received fromwithin on 20-9-X8 has been taken as the price of the earlier
issuemade on 17-9-X8. In FIFO method physical flow of the material isirrelevant for pricing the issues. 3. The issue of material on 26-9-X8 is made out of the material received from within. 4. The entries for transfer of material from one job and department to other on 22-9-X8 and 29-9-X8 are book entries for adjusting the
cost of respective jobs and as such they have not been shown in the stores ledger account. 5. The material found short as a result of stock taking has been writtenoff.
Stores Ledger of AT Ltd. for the month of September, 20X8 (FIFO Method)
RECEIPT ISSUE BALANCE
Date GRN no. Qty Rate Amount Requisition Qty Rate Amount Qty Rate Amount MRR no. Units (Rs.) (Rs.) no. Units (Rs.) (Rs.) Units (Rs.) (Rs.)
Sales: A – 100 units @ Rs.600 per unit; B – 120 units @ Rs.200 per unit. Apportion Joint Costs on the basis of:
(i) Physical Quantity of each product (ii) Contribution Margin method (iii) Determine Profit or Loss under both the methods
Concepts (i) Physical Quantity of each product
According to this method, The joint costs is to be distributed on the basis of weight or on the basis of quantity of various joint products i.e. Joint cost is distributed in ratio of quantity manufactured.
(ii) Contribution Margin Method
According to this method, Contribution margin method
Under this method, joint costs are divided into variable cost and fixed cost.
Variable cost portion of joint cost is divided among products on the basis of physical units (Quantity / Units Ratio)
Fixed cost portion of joint cost is divided among products on the basis of contribution ratio. Contribution = Sales – Total variable cost
Contribution Ratio =
x 100
(iii) Determine Profit or Loss under both these methods Solution W. Note 1:- Calculation of Total Joint cost
(d) Transport allowance Rs.50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA), only if works more than 9 hours a day otherwise no overtime allowance. If works for more than 9 hours a day then overtime is considered
after 8th hours.
(f) Work of holiday and Sunday Double of per day basic rate provided works atleast 4 hours. The holiday and Sunday basic is eligible for all allowances and statutory deductions.
(h) Earned leave & Casual leave These are paid leave.
(h) Employer‘s contribution to
Provident fund
12% of basic and DA
(i) Employer‘s contribution to
Pension fund
7% of basic and DA
The company normally works 8-hour a day and 26-day in a month. The company provides 30 minutes lunch break in between.
During the month of August 2020, Mr.Z works for 23 days including 15 th August and a Sunday and applied for 3 days of casual leave.
On 15th August and Sunday he worked for 5 and 6 hours respectively without lunch break.
On 5th and 13th August he worked for 10 and 9 hours respectively. During the month Mr. Z worked for 100 hours on Job no.HT200. You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200.
ANSWER :-
First of all we need to understand meaning and implication of lines given in question so we can understand each point from practical point of view
Line Given in Question Its meaning & Implication
Transport Allowance as Rs.50 per day of Actual Work If employees comes to Office then he shall be paid Rs.50 per day. This 50 rupees shall be paid even if it is Sunday, it is holiday. It also means that If employee does not come on any day in office then he shall not be paid this Rs.50
Overtime Line (Read from Question) If worker works for more than 9 hours in a day then he shall be eligible for overtime payment. Overtime rate = Twice the hourly rate (Basic salary Plus DA) Overtime = Actual time worked – 8 hours
Working on holiday (Read From Question) Holiday Means Sunday and Public Holiday e.g. 15th August. Overtime rate = Double per day basic Rate
Condition = Works at least 4 hours. Above Pymt shall be added in Basic as given in Question.
Earned Leave & Casual Leave. These are paid leaves Company allow some leaves in year for which salary is not deducted. It means if a worker takes CL then his salary shall not be deducted.
Out of Normal Working Days
On 5th Date – He worked for 10 hours – It means he is eligible for Overtime Payment – He shall be paid Overtime for 2 hours
On 13th August – He worked for 9 hours – It means he is not eligible for Overtime Payment since this is not more than 9 hours.
Extra Above Normal Working Days
On 15th August – He worked for 5 hours – it means he is eligible for ―Payment for working on holiday‖ since he worked more than 4 hours
On 23th August (Sunday) – he worked for 6 hours – It means he is eligible for ―Payment for working on holiday‖ since he worked more than 4 hours
Time Worked
Actual Worked Days 23 Days 21 days X 7.50 Hour Per Day + 10 Hour – 0.50 hour (Lunch Time) + 9 hour – 0.50 hour (Lunch Time) = 175.50 Hours
2 Days Extra Worked 2 Days 5 hours + 6 Hours = 11 Hour (Lunch Time not included in this as per Qn.)
Total 186.50 hour
Required Calculations
1. Overtime Rate per hour = Twice the hourly rate (Consider basic & DA)
= 2 x ( )
( ) = 2 x Rs.160 = Rs.320
(1) . Statement showing Earnings Per Day
Particulars Amount (Rs.)
Basic Salary Per Day Rs.1000
DA (20% of Basic Salary) Rs.200
HRA (16% of Basic Salary) Rs.160
Transport Allowance Rs.50
Employer‘s Contribution to PF (12% of Basic Salary Plus DA)
Rs.144
Employer‘s Contribution to Pension Fund (7% of Basic Salary Plus DA)
Rs.84
Total Earnings Per Day Rs.1638
(ii) Calculation of effective wage rate per hour of Mr. Z:
- Stainless Steel Faucet, 15 units @ Rs. 209 each On 27th August 2020: - 15mm GI Pipe, 35 units of (15 feet size) @ Rs. 628 each
- 20mm GI Pipe, 20 units of (15 feet size) @ Rs. 660 each
- Valve, 14 units @ Rs. 424 each Issues for the hostel job:
On 12th August 2020:
- 20mm GI Pipe, 2 units of (15 feet size)
- Other fitting materials, 18 units On 17th August 2020: - 15mm GI Pipe, 8 units of (15 feet size)
- Other fitting materials, 30 units On 28th August 2020: - 20mm GI Pipe, 2 units of (15 feet size)
- 15mm GI Pipe, 10 units of (15 feet size)
- Other fitting materials, 34 units
- Valve, 6 units On 30th August 2020: - Other fitting materials, 60 units
- Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ Rs.100 per hour (includes 12 hours overtime) Helper: 192 hours @ Rs.70 per hour (includes 24 hours overtime) Overtimes are paid at 1.5 times of the normal wage rate. Overheads:
Overheads are applied @ Rs.26 per labour hour.
Pricing policy:
It is company‘s policy to price all orders based on achieving a profit margin of 25% on sales price.
You are required to
(a) CALCULATE the total cost of the job.
(b) CALCULATE the price to be charged from the customer.
ANSWER :-
(a) Calculation of Total Cost for the Job:
Particulars Amount (Rs.) Amount (Rs.)
Direct Material Cost:
- 15mm GI Pipe (Working Note- 1) 11,051.28
- 20mm GI Pipe (Working Note- 2) 2,588.28
- Other fitting materials (Working Note- 3) 3,866.07
W. Note 4 – Calculation of Cost of Stainless Steel
Date Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
12th Aug 6 204 1224
16th Aug 15 209 3135 21 207.5714 4359
30th Aug 15 207.5714 3113.57
Total 3113.57
W. Note 5 – Calculation of Cost of Valve
Date Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
12th Aug 8 404 3232
16th Aug 10 402 4020 18 402.8888 7252
27th Aug 14 424 5936 32 412.125 13188
28th Aug 6 412.125 2472.75 26 412.125 10715.25
Total 2472.75
Question 7
M Ltd. produces a product-X, which passes through three processes, I, II and III. In Process-III a by-product arises, which after further processing at a cost of Rs.85 per unit, product Z is produced. The information related for the month of August 2020 is as follows:
Process-I Process-II Process-III
Normal loss 5% 10% 5%
Materials introduced (7,000 units) 1,40,000 - -
Other materials added 62,000 1,36,000 84,200
Direct wages 42,000 54,000 48,000
Direct expenses 14,000 16,000 14,000
Production overhead for the month is Rs.2,88,000, which is absorbed as a percentage of direct wages. The scrapes are sold at Rs.10 per unit Product-Z can be sold at Rs.135 per unit with a selling cost of Rs.15 per unit No. of units produced: Process-I- 6,600; Process-II- 5,200, Process-III- 4,800 and Product-Z- 600 There is not stock at the beginning and end of the month. You are required to PREPARE accounts for:
Particulars Units Amt.(Rs.) Particulars Units Amt.(Rs.)
To Process-III A/c 600 21,000 By Product-Z 600 81,000
To Processing cost - 51,000
To Selling expenses - 9,000
600 81,000 600 81,000
Question 8 A company uses four raw materials A, B, C and D for a particular product for which the following data apply :–
Raw Material
Usage per unit of product (Kg.)
Re-order Quantity (Kg.)
Price per Kg. (Rs.)
Delivery period (in weeks) Re- order level (Kg.)
Minimum level (Kg.)
Minimum Average Maximum
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ? Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What would be the following quantities:–
(i) Minimum Stock of A? (ii) Maximum Stock of B? (iii) Re-order level of C?
(iv) Average stock level of A? (v) Re-order level of D? (vi) Minimum Stock level of D?
ANSWER :- Minimum stock of A Average consumption of FG = 550 + 1250 / 2 = 900 Units Formula 1:- Re-order level – (Average Usage × Average Lead Time)
= 60000 kg. – (900 units × 12 kg. × 3 weeks) = 27600 kg. Maximum stock of B Formula 1:- Re-order level – (Min. Consumption of raw material × Min. Lead Time) + Re-order quantity
= 70000 kg. – (550 units × 8 kg. × 5 weeks) + 8000 kg. = 56000 kg.
Re-order level of C Formula 1:- Maximum Lead Time × Maximum Usage of raw material
= 7 weeks × (1250 units × 6 kg.) = 52500 kg. OR Formula 2:- Minimum stock of C + (Average consumption × Average delivery time)
= 25500 kg. + [(900 units × 6 kg.) × 5 weeks] = 52500 kg. Average stock level of A
Formula 1:- ( )
=
= 43,200 Kg
W.N.1 Max. Level of A = Formula 1:- ROL + ROQ – Min. Usage of raw material X Min. Lead Time
= 60000 kg + 12000 kg – [ (550 units X 12Kg) X 2 week) = 58800 Kg Re-Order Level of D Formula 1:- Maximum Lead Time × Maximum Usage of raw material
= 3 weeks × (1250 units × 5 kg.) = 18750 kg. Minimum stock of D Average consumption of FG = 550 + 1250 / 2 = 900 Units Formula 1:- Re-order level – (Average Usage × Average Lead Time) = 18750 kg. – (900 units × 5 kg. × 2 weeks) = 9750 kg.
Question 9 Aditya Agro Ltd. produces edible oils of different varieties. The monthly demand pattern for the finished products are as follows:
Olive oil 3,000 Litre To produce one litre of Mustard oil, Soybean oil and Olive oil, 5 kg. of mustards, 6 kg. of soybeans and 4.5 kg. of olives are required respectively. There is no opening and closing stock of materials. Aditya Agro Ltd. can purchase the materials either from the farmers directly or from the wholesale market. The company can purchase any quantity of materials from the wholesale market but in case of purchase from the farmers, it has to purchase the minimum specified quantity of materials at a time. Following is the material-wise summary related with the purchase of materials:
Wholesale Market Farmers
Mustard: Minimum Quantity to be purchased Any quantity 13,50,000 kg. Purchase price per kg. (Rs.) 15.00 12.50
Goods & Service Tax (GST)* 2% ---
Transportation cost per purchase 6,000 15,000
Sorting and piling cost per purchase ---- 1,200
Loading cost per 50 kg. 10.00 5.00
Unloading cost per 50 kg. 2.00 2.00
Soybean: Minimum Quantity to be purchased Any Quantity 2,70,000 kg.
Purchase price per kg. (Rs.) 11.00 9.00
Goods & Service Tax (GST)** 4% ---
Transportation cost per purchase 9,000 12,000
Sorting and piling cost per purchase --- 800
Loading cost per 50 kg. 10.00 3.00
Unloading cost per 50 kg. 2.00 2.00
Olive: Minimum Quantity to be purchased Any Quantity 1,62,000 kg.
Purchase price per kg. (Rs.) 36.00 28.00
Goods & Service Tax (GST)*** 10%
Transportation Cost per purchase (Rs.) 3,000 11,000
Sorting and piling cost per purchase 1,800
Loading cost per 50 kg. 10.00 25.00
Unloading cost per 50 kg. 2.00 2.00
The company is paying 12.5% p.a. as interest to its bank for cash credit facility and Rs.100 per 100 kg. as rent to the warehouse. [*GST will be added with the purchase price of mustards; **GST will not be added with the purchase price of soybeans; ***GST will be added with the purchase price of olives.] You are required to 1. Calculate the purchase cost of each material
2. Calculate Economic Order Quantity of each material under the both options. 3. Recommend the best purchase option for the material ‗olive‘. Solution 1. Calculation of Purchase Cost per Kg. of Materials
Special note:- since purchase price is different under both wholesale market and farmers market hence purchase price shall be relevant cost for decision making. Calculation of total cost of material
Particulars Wholesale Market (Rs.) Farmers (Rs.)
Purchase Price 58,70,880 (1,62,000 kg X Rs.36.24) 50,77,080 (1,62,000 kg X Rs. 31.34)
Ordering cost 48,000 (10 orders X Rs. 4800) 11,000 (1 order X Rs. 11,000)
Carrying Cost (Avg. Inventory X Carrying cost per kg.)
46,368.77 (8384.95 X Rs. 5.53) 3,98,317.50 (81,000 kg X Rs. 4.9175)
Total cost 59,65,248.77 54,86,397.50
Best option is to buy Olives from farmers. ABC Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1:4. The sales department has estimated a demand of 5,00,000 units for the product for the year. To produce one unit of finished product, 4 units of material A is required. Stock position at the beginning of the year is as follows: Product X – 12,000 units Material A – 24,000 units Material B – 52,000 units To place an order the company has to spend Rs.15,000. The Company is financing its working capital using a bank cash credit @13% p.a. Product X is sold at Rs.1040 per unit. Material A & B is purchased at Rs.150 and Rs.200 respectively. Required: Compute Economic Order Quantity (EOQ):
a) If purchase order for the both materials is placed separately. b) If purchase order for the both materials is not placed separately.
Solution:- Working: Annual production of product X = Annual Demand – Opening Stock = 500000 units – 12000 units = 488000 units Annual requirement of raw material = Annual production x Material required per unit – Opening stock of material Material A = 488000 x 4 units – 24000 units = 1928000 units Material B = 488000 x 16 units – 52000 units = 7756000 units Computation of EOQ when PO of both the materials is placed separately.
Computation of EOQ when PO of both the materials is not placed separately.
EOQ (Material A & B) = √
= √
( )
= 108452 units
EOQ (Material A) =
= 21592 units
EOQ (Material B) =
= 86860 units
Weighted avg. purchase price of raw material =
= 190
Question 10 Two workers ‗A‘ and ‗B‘ produce the same product using the same material. Their normal wage rate is also the same. ‗A‘ is paid bonus according to Rowan scheme while ‗B‘ is paid bonus according to Halsey scheme. The time allowed to make the product is 50 hours. ‗A‘ takes 30 hours while ‗B‘ takes 40 hours to complete the product. The factory overhead rate is Rs.5 per person-hour actually worked. The factory cost of product manufactured by ‗A‘ isRs.3,490 and for product manufactured by ‗B‘ is Rs. 3,600. Required: (i) Compute the normal rate of wages. (ii) Compute the material cost. (iii) Prepare a statement comparing the factory cost of the product as made by two workers. Solution:- W.N. 1 Pl note material cost is not provided in question. Wage rate per hour is also not provided in question. Factory cost is provided in amount and we also know that factory cost is equal to sum total of direct material cost, direct labour cost and factory overhead cost. Let us assume M be the total material cost and W be the wage rate per hour then Statement showing factory cost of product is as follows:
Worker A (Rs.) Worker B (Rs.)
Material Cost M M
Wages Cost 30W 40W
Bonus 12W 5W
Factory overhead 30 hours x Rs. 5 = Rs. 150 40 hours x Rs. 5 = 200
Please note that we are given factory cost in amount in the question so equations shall be as under :- M+42W+150 = 3490 i.e. M+42W = 3340 M+45W+200 = 3600 i.e. M + 45W = 3400 On solving the both equation W =Rs. 20 per hour and M (Material Cost) = Rs. 2500
i. Normal rate of wages = Rs. 20 per hour ii. Cost of materails = Rs. 2500
iii. Comparative Statement of Factory Cost
Particulars Worker A Worker B
Material Cost 2500 2500
Wages 30 hours x Rs. 20 = 600 40 hours x Rs. 20 =800
Bonus 12 x Rs. 20 = 240 5 x Rs. 20 = 100
Factory Overheads 150 200
Factory Cost 3490 3600
Question 11
The following information is available from the financial books of a company having a normal production capacity of 60,000 units for the current year ended on 31 st March.
(i) Sales Rs.. 10,00,000 (50,000 units). (ii) There was no opening and closing stock of finished units. (iii) Direct Material and Direct Wages cost were Rs.. 5,00,000 and Rs.. 2,50,000 respectively. (iv) Actual Factory Expenses were Rs.. 1,50,000 of which 60% are fixed, (v) Actual Administrative Expenses related with production activities were Rs..45,000 which are completely fixed. (vi) Actual Selling and Distribution Expenses were Rs..30,000 of which 40% are fixed. (vii) Interest and dividends received Rs.. 15,000.
You are required to:
(a) Find out profit as per financial books for the current year ended on 31st March.
(b) Prepare Statement of Cost and Profit as per cost accounts for the current year ended on 31st March, 2013 assuming that the indirect expenses are absorbed on the basis of normal production capacity; and
(c) Prepare a statement reconciling profits shown by financial and cost books.
Solution:
TRADING AND PROFIT AND LOSS ACCOUNT FOR CURRENT YEAR ENDED ON 31ST MARCH
Particulars Rs. . Particulars Rs. .
To Direct Materials 5,00,000 By Sales (50,000 units) 10,00,000
To Direct Wages 2,50,000 By Interest and dividends 15,000
Question 12 Distinguish between Cost control and Cost reduction. (4 Marks, May 2004; November, 2004; November, 2006; November, 2011) Answer Cost Control and Cost Reduction: Cost control is operated through setting standards or targets and comparing actual performance therewith, with a view to identify deviation from standards or norms and taking corrective action in order to ensure that future performance conforms to standards or norms. Cost reduction is a continuous process of critical cost examination, analysis and discharge of standards. Each subject of business viz products, process, procedures, methods, origin, personnel etc is critically examined and reviewed with a view of improving the efficiency & effectiveness and reducing the costs. Even in an organization where efficient cost control is in operation, there is always room for cost reduction.
Question 13 State the unit of cost for the following industries
(a) Transport (b) Power (c) Hotel (d) Hospital (2 Marks, November, 2008, May, 2014)
Answer Industry Unit of Cost
(a) Transport – Per passenger k.m. or per tonne. k.m. (b) Power – Per Kilo – watt (kw) hour (c) Hotel – Per room day / or per meal (d) Hospital – Per patient – day
(a) Imputed Cost: These costs are notional costs which do not involve any cash outlay. Interest on capital, the payment for which is not actually made, is an example of Imputed Cost. These costs are similar to opportunity costs.
(b) Capitalised Cost: These are costs which are initially recorded as assets and subsequently treated as expenses.
State the types of cost in the following cases: (i) Interest paid on own capital not involving any cash outflow. (ii) Withdrawing money from bank deposit for the purpose of purchasing new machine for expansion purpose. (iii) Rent paid for the factory building which is temporarily closed (iv) Cost associated with the acquisition and conversion of material into finished product. (4 Marks, May, 2012)
Answer Type of costs
(i) Imputed Cost (ii) Opportunity Cost (iii) Shut Down Cost (iv) Product Cost
Question 16 Distinguish between cost control and cost reduction. (4 Marks, May, 2014) Answer Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining the costs in accordance with the established standards.
1. Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuously
2. Cost control seeks to attain lowest possible cost under existing conditions.
2. Cost reduction recognises no condition as permanent, since a change will result in lower cost.
3. In case of Cost Control, emphasis is on past and present
3. In case of cost reduction it is on present and future.
4. Cost Control is a preventive function 4. Cost reduction is a corrective function. It operates even when an efficient cost control system exists.
5. Cost control ends when targets are achieved
5. Cost reduction has no visible end.
Question 17 Identify the methods of costing for the following:
(i) Where all costs are directly charged to a specific job. (ii) Where all costs are directly charged to a group of products. (iii) Where cost is ascertained for a single product. (iv) Where the nature of the product is complex and method can not be ascertained. (4 Marks, November, 2014)
Question 18 IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. IPL Limited purchases 54,000 castings per year at a cost of Rs. 800 per casting. The castings are used evenly throughout the year in the production process on a 360-day-peryear basis. The company estimates that it costs Rs. 9,000 to place a single purchase order and about Rs. 300 to carry one casting in inventory for a year. The high carrying costs result from the need to keep the castings in carefully controlled temperature and humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of delivery time and percentage of their occurrence are shown in the following tabulation: Delivery time (days): 6 7 8 9 10 Percentage of occurrence: 75 10 5 5 5 Required:
(i) Compute the economic order quantity (EOQ). (ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety stock? The re-order
point? (iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock? The re-order
point? (iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year? (v) Refer to the original data. Assume that using process re-engineering the company reduces its cost of placing a purchase
order to only Rs. 600. In addition, company estimates that when the waste and inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is Rs. 720 per year. (a) Compute the new EOQ. (b) How frequently would the company be placing an order, as compared to the old purchasing policy? (9 Marks, May 2004)
Answer
(i) Computation of economic order quantity (EOQ) : (A) Annual requirement = 54,000 castings (C) Cost per casting = Rs. 800 (O) Ordering cost = Rs. 9,000 / order
(c i) Carrying cost per casting p.a. = Rs. 300
EOQ = √
= √
= 1800 castings
(ii) Safety stock
(Assuming a 15% risk of being out of stock) Safety stock for one day = 54,000/360 days = 150 castings
Re-order point = Minimum stock level + Average lead time Average consumption = 150 + 6 x 150 = 1,050 castings
(iii) Safety stocks: (Assuming a 5% risk of being out of stock) Safety stock for three days = 150 x 3 days = 450 castings
(iv) Total cost of ordering = (54,000/1,800) x Rs. 9,000 = Rs. 2,70,000 Total cost of carrying = (450 + ½ x 1,800) Rs. 300 = Rs. 4,05,000
(v) (a) Computation of new EOQ :
EOQ = √
= 300 castings
(b) Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days (1 year = 360 days). Under old purchasing policy each order is placed after 12 days.
Question 19 SK Enterprise manufactures a special product “ZE”. The following particulars were collected for the year 2004: Annual consumption 12,000 units (360 days) Cost per unit Rs. 1 Ordering cost Rs. 12 per order Inventory carrying cost 24% Normal lead time 15 days Safety stock 30 days consumption Required:
(i) Re-order quantity (ii) Re-order level (iii) What should be the inventory level (ideally) immediately before the material order is received? (4 Marks, May 2005)
Answer
(i) How much should be ordered each time i.e., Economic Order Quantity (EOQ)
EOQ = √
Where A is the annual consumption B is the ordering cost per order CS is the carrying cost per unit per annum
= √
( ) = √
= 1095.4 units or say 1,100 units.
(ii) When should the order be placed i.e., reordering level
Reordering level = *Safety stock normal lead time consumption
Reordering level = [
30 ] + [
15]
= 1,000500 = 1,500 units.
(iii) What should be the inventory level (ideally) immediately before the material ordered is received i.e. the Safety Stock.
Question 20 The following information relating to a type of Raw material is available: Annual demand 2000 units Unit price Rs. 20.00 Ordering cost per order Rs. 20.00 Storage cost 2% p.a. Interest rate 8% p.a. Lead time Half-month Calculate economic order quantity and total annual inventory cost of the raw material. (3 Marks, November 2009) Answer
EOQ = √
=√
( ) = √
= 200 units
Total Annual Inventory Cost Cost of 2,000 Units @ Rs.20 (2,000 × 20) = Rs. 40,000
No. of Order
= Rs.10
Ordering Cost 10 × 20 = Rs. 200
Carrying cost of Average Inventory
× 20 ×
= Rs. 200
= Rs. 40,400
Question 21 ABC Limited has received an offer of quantity discounts on its order of materials as under: Price per tonnes Tonnes (Rs.) Nos. 4,800 Less than 50 4,680 50 and less than 100 4,560 100 and less than 200 4,440 200 and less than 300 4,320 300 and above The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs. 6,250 and the stock holding cost is estimated at 25% of the material cost per annum. Required :
(i) Compute the most economical purchase level (ii) Compute E.O.Q. if there are no quantity discounts and the price per tonne is Rs. 5,250. (5 Marks, November 2010)
Answer
(i) Calculation of most economical purchase level:
No.of Orders Cost of Purchase Ordering Cost Carrying Cost Total Cost
(Q)
Units
(A/Q) (A x Cost/total) (A/Q x Rs. 6,250) (Q/2 x Price/tonne × 25%) Rs.
40 500/40= 12.5 500×4,800=
24,00,000
12.5X6,250 = 78,125
×4,800×.25= 24,000 25,02,125
50 500/50= 10 500 X 4,680 =
23,40,000
10X6,250 = 62,500
×4,680×.25 = 29,250 24,31,750
100 500/100 = 5 500 X 4,560 =
22,80,000
5X62,250 = 31,250
× 4,560×.25 = 57,000 23,68,250
200 500/200= 2.5 500×4,440=
22,20,000
2.5× 6,250=15,625
× 4,440×.25 =1,11,000 23,46,625
300 500/300=1.67 500 X 4,320 =
21,60,000
1.67 X 6,250 =
10,437.50
× 4,320×.25= 1,62,000 23,32,437.50
The total cost of purchase ordering cost and carrying cost of 500 tonnes is minimum Rs. 23,32,437.50 when the order size is 300 tonnes. Hence most economical purchase level is 300 tonnes.
(ii) EOQ = √
= √
= 69 tonnes
A is the annual requirement for the material. O is the ordering Cost per order C is the carrying Cost per unit per annum.
Question 22 Prepare a Store Ledger Account from the following transactions of XY Company Ltd. April, 2011 1 Opening balance 200 units @ Rs. 10 per unit. 5 Receipt 250 units costing Rs. 2,000 8 Receipt 150 units costing Rs. 1,275 10 Issue 100 units 15 Receipt 50 units costing Rs. 500 20 Shortage 10 units 21 Receipt 60 units costing Rs. 540 22 Issue 400 units The issues upto 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at FIFO. Shortage will be charged as overhead. (5 Marks, May 2011)
3. It often serves the purpose of a Store Requisition as it shown the complete schedule of materials required for a particular job i.e. it can replace stores requisition.
3. It cannot replace a bill of material.
4. It can be used for the purpose of quotation 4. It is useful in arriving historical cost only.
5. It helps in keeping a quantitative control on materials draw through stores Requisition.
5. It shows the material actually drawn from stores.
Question 24 A company manufactures a product from a raw material, which is purchased at Rs. 80 per kg. The company incurs a handling cost of Rs. 370 plus freight of Rs. 380 per order. The incremental carrying cost of inventory of raw material is Rs. 0.25 per kg per month. In addition, the cost of working capital finance on the investment in inventory of raw material is Rs. 12 per kg per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg. of raw material. Required:
(i) Calculate the economic order quantity of raw materials. (ii) Advise, how frequently company should order for procurement be placed. (iii) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of discount in the price of
raw materials should be negotiated? Assume 360 days in a year. (8 Marks, May, 2014)
Answer (i) Calculation of Economic Order Quantity (E.O.Q)
Annual requirement (usage) of raw material in kg. (A) =
=40,000kg.
Ordering Cost (Handling & freight cost) (O) = Rs. 370 + Rs. 380 = Rs. 750 Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital cost = (Rs.0.25 × 12 months) + Rs. 12 = Rs.15 per kg.
E.O.Q. = √
= √
= 2,000 kg.
(ii) Frequency of placing orders for procurement:
Annual consumption (A) = 40,000 kg. Quantity per order (E.O.Q) = 2,000 kg.
No. of orders per annum (
) =
= 20 orders
Frequency of placing orders (in days) =
= 18 days
(iii) Percentage of discount in the price of raw materials to be negotiated:
When order is placed on quarterly basis the ordering cost and carrying cost increased by Rs. 48,000 (Rs.78,000 - Rs. 30,000). So, discount required = Rs. 48,000 Total annual purchase = 40,000 kg. × Rs. 80 = Rs. 32,00,000
So, Percentage of discount to be negotiated =
100 = 1.5%
Question 25 ZED Limited is working by employing 50 skilled workers. It is considered the introduction of incentive scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour productivity to cope up the increasing demand for the product by 40%. It is believed that proposed incentive scheme could bring about an average 20% increase over the present earnings of the workers; it could act as sufficient incentive for them to produce more. Because of assurance, the increase in productivity has been observed as revealed by the figures for the month of April, 2004.
Hourly rate of wages (guaranteed) Rs. 30 Average time for producing one unit by one worker at the previous performance (This may be taken as time allowed) 1.975 hours Number of working days in the month 24 Number of working hours per day of each worker 8 Actual production during the month 6,120 units
Required: (i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme. (ii) Calculate the savings to the ZED Limited in terms of direct labour cost per piece. (iii) Advise ZED Limited about the selection of the scheme to fulfill their assurance. (8 Marks, May 2004)
Answer Working notes: 1. Computation of time saved ( in hours) per month :
= (Standard production time of 6,120 units – Actual time taken by the workers) = (6,120 units x 1.975 hours – 24 days x 8 hrs per day x 50 skilled workers) = (12,087 hours – 9,600 hours) = 2,487 hours
2. Computation of bonus for time saved hours under Halsey and Rowan schemes: Time saved hours = 2,487 hours (Refer to working note 1) Wage rate per hour = Rs. 30 Bonus under Halsey Scheme = ½ x 2,487 hours x Rs. 30 (with 50% bonus) = Rs. 37,305
(i) Computation of effective rate of earnings under the Halsey and Rowan schemes: Total earnings (under Halsey scheme) = Time wages + Bonus (Refer to working note 2) = 24 days x 8 hours x 50 skilled workers x Rs. 30 + Rs. 37,305 = Rs. 2,88,000 + Rs. 37,305 = Rs. 3,25,305 Total earnings (under Rowan scheme) = Time wages + Bonus (Refer to working note 2) = Rs. 2,88,000 + Rs. 59,258.38 = Rs. 3,47,258.38 Effective rate of earnings per hour (under Halsey Plan Rs. 33.89 (Rs. 3,25,305 ÷ 9,600 hrs.) Effective rate of earnings per hour (under Rowan Plan Rs. 36.17 (Rs. 3,47,258.38 ÷ 9,600 hrs)
(ii) Savings to the ZED Ltd. in terms of direct labour cost per piece: Rs. Direct labour cost (per unit) under time wages system 59.25 (1.975 times per unit × Rs. 30) Direct labour cost (per unit) under Halsey Plan 53.15 (Rs. 3,25,305 ÷ 6,120 units) Direct labour cost (per unit) under Rowan Plan 56.74 (Rs. 3,47,258.38 ÷ 6,120 units) Savings of direct labour cost under:
Halsey Plan Rs. 6.10
(Rs. 59.25 53.15)
Rowan Plan Rs. 2.51
(Rs. 59.25 56.74)
(iii) Advise to ZED Ltd : (about the selection of the scheme to fulfill assurance) Halsey scheme brings more savings to the management of ZED Ltd, over the present earnings of Rs. 2,88,000 but the other scheme viz Rowan fulfils the promise of 20% increase over the present earnings of Rs. 2,88,000 by paying 20.58% in the form of bonus. Hence Rowan Plan may be adopted.
Question 26 The existing Incentive system of Alpha Limited is as under: Normal working week 5 days of 8 hours each plus 3 late shifts of 3 hours each Rate of Payment Day work: Rs. 160 per hour Late shift: Rs. 225 per hour
Average output per operator for 49-hours week i.e. including 3 late shifts 120 articles In order to increase output and eliminate overtime, it was decided to switch on to a system of payment by results. The following Information is obtained: Time-rate (as usual) : Rs. 160 per hour Basic time allowed for 15 articles : 5 hours Piece-work rate : Add 20% to basic piece-rate Premium Bonus : Add 50% to time. Required: Prepare a Statement showing hours worked, weekly earnings, number of articles produced and labour cost per article for one operator under the following systems: (a) Existing time-rate (b) Straight piece-work (c) Rowan system (d) Halsey premium system Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan Premium system, and Halsey premium system above and worker earns half the time saved under Halsey premium system. (8 Marks, November, 2005) Answer Table showing Labour Cost per Article
Method of payment Hours worked Weekly earnings Number of article produced
Labour cost per article
Existing time rate 49 Rs. 8,425.00 120 Rs. 70.21
Straight piece rate system 40 Rs. 8,640.00 135 Rs. 64.00
Rowan Premium System 40 Rs. 9,007.41 135 Rs. 66.72
Halsey Premium System 40 Rs. 8,600.00 135 Rs. 63.70
Working Notes: Existing time rate Weekly wages 40 hrs @ Rs. 160/hr = Rs. 6,400 9 hrs @ Rs. 225/hr = Rs. 2,025 Rs. 8,425 Piece Rate System Basic time: 5 hour for 15 articles. = Rs. 800 Cost of 15 articles at hourly rate of = Rs. 160/hr = Rs.960
Rate per article = Rs. 960 / 15 = Rs. 64 Earnings for the week = 135 articles × Rs. 64 = Rs. 8,640. Rowan Premium System Basic Time : 5 hours for 15 articles Add : 50% to time 7.5 hours for 15 articles
Time allowed for 135 articles = 67.5 hours Actual time taken for 135 articles = 40 hours
Earnings = (HW×RH) + [
HW RH]
= (40 hrs × Rs. 160) + [
40 Rs.160]
= Rs. 9,007.41 Halsey Premium System
Earnings = HW × RH +
(TA – HW) × RH
= 40× Rs. 160
(67.5 – 40) × Rs. 160 = Rs. 8,600.
Question 27 Discuss the treatment of Idle time and Overtime premium in Cost Accounting. (4 Marks, May 2006) Answer Treatment of Idle time and Overtime Premium in Cost Accounting
Normal idle time is treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal idle time is built into labour cost rates. In case of indirect workers, normal idle time is spread over all the products or jobs through the process of absorption of factory overheads.
Abnormal idle time cost is not included as a part of production cost and is shown as a separate item in costing Profit and Loss Account.
Management should aim at eliminating controllable idle time and on a long-term basis reduce even the normal idle time.
If overtime is resorted to at the desire of the customer, then overtime premium may b charged to the job directly.
If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department/cost centre.
Question 28 Enumerate the various methods of Time booking. (2 Marks, May 2007) Answer The various methods of time booking are: (a) Job ticket. (b) Combined time and job ticket. (c) Daily time sheet. (d) Piece work card. (e) Clock card.
Enumerate the remedial steps to be taken to minimize the labour turnover. (3 Marks, Nov 2007) Answer The following steps are useful for minimizing labour turnover: (a) Exit interview: An interview be arranged with each outgoing employee to ascertain the reasons of his leaving the organization. (b) Job analysis and evaluation: to ascertain the requirement of each job. (c) Organisation should make use of a scientific system of recruitment, placement and promotion for employees. (d) Organisation should create healthy atmosphere, providing education, medical and housing facilities for workers. (e) Committee for settling workers grievances.
Question 30 Distinguish between Job evaluation and Merit rating. (3 Marks, May 2008) Answer Job Evaluation and Merit Rating:
Job evaluation is the assessment of the relative worth of jobs within a company and merits rating are the assessment of the relative worth of the man behind the job.
Job evaluation and its accomplishment are means to set up a rational wage and salary structure where as merits rating provides a scientific basis for determining fair wages for each worker based on his ability and performance.
Job evaluation simplifies wage administration by bringing an uniformity in wage rates where as merits rating is used to determine fair rate of pay for different workers.
Question 31 Accountant of your company had computed labour turnover rates for the quarter ended 30th September, 2012 as 14%, 8% and 6% under Flux method, Replacement method andSeparation method respectively. If the number of workers replaced during 2nd quarter of the financial year 2012-13 is 36, find the following:
(i) The number of workers recruited and joined; and (ii) The number of workers left and discharged. (4 Marks, November 2012)
or, 100 (27 + No. of Accessions) = 6,300 or, No. of Accessions = 36 (i) The No. of workers recruited and Joined = 36 (ii) The No. of workers left and discharged = 27
Question 32 Discuss the treatment of under-absorbed and over-absorbed factory overheads in cost accounting. (4 Marks, May 2004; November 2010) (6 Marks, May 2006) (3 Marks, May 2010) Answer Treatment of under absorbed and over absorbed factory overheads in cost accounting: Factory overheads are usually applied to production on the basis of pre-determined rate
=
The possible options for treating under / over absorbed overheads are
Use supplementary rate in the case of substantial amount of under / over absorption
Write it off to the costing profit & loss account in the event of insignificant amount / or abnormal reasons.
Carry forward to next accounting period if operating cycle exceeds one year.
Question 33 A manufacturing unit has purchased and installed a new machine of Rs. 12,70,000 to its fleet of 7 existing machines. The new machine has an estimated life of 12 years and is expected to realise Rs. 70,000 as scarp at the end of its working life. Other relevant data are as follows: (i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for plant maintenance and 92
hours for setting up of plant. (ii) Estimated cost of maintenance of the machine is Rs. 25,000 (p.a.). (iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a week) at a cost of Rs.
400 each time. (iv) Four operators control operation of 8 machines and the average wages per person amounts to Rs. 420 per week plus 15% fringe
benefits. (v) Electricity used by the machine during the production is 16 units per hour at a cost of Rs. 3 per unit. No current is taken during
maintenance and setting up. (vi) Departmental and general works overhead allocated to the operation during last year was Rs. 50,000. During the current year it is
estimated to increase 10% of this amount. Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive. (5 Marks, May 2005)
Special chemical solution (40054)/2,200/ 2,292 9.82 9.42
Maintenance (25,000/2,200) 11.36
(25,000/2,292) 10.91
Machine Hour Rate 123.68 118.72
Question 34 From the details furnished below you are required to compute a comprehensive machine-hour rate:
Original purchase price of the machine (subject to depreciation at 10% per annum on original cost)
Rs. 3,24,000
Normal working hours for the month (The machine works to only 75% of capacity)
200 hours
Wages of Machine man Rs. 125 per day (of 8 hours)
Wages for Helper (machine attendant) Rs. 75 per day (of 8 hours)
Power cost for the month for the time worked Rs. 15,000
Supervision charges apportioned for the machine centre for the month Rs. 3,000
Electricity & Lighting for the month Rs. 7,500
Repairs & maintenance (machine) including Consumable stores per month
Rs. 17,500
Insurance of Plant & Building (apportioned) for the year Rs. 16,250
Other general expense per annum Rs. 27,500
The workers are paid a fixed Dearness allowance of Rs. 1,575 per month. Production bonus payable to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour-wage for debit to production. (14 Marks, May 2005)
Answer Computation of Comprehensive Machine Hour Rate
Per month(Rs.) Per hour(Rs.)
Fixed cost
Supervision charges 3,000
Electricity and lighting 7,500
Insurance of Plant and building (16,250×1/12) 1,354.17
Other General Expenses (27,500×1/12) 2,291.67
Depreciation (32,400×1/12) 2,700
16,845.84 112.31
Variable Cost
Repairs and maintenance 17,500 116.67
Power 15,000 100.00
Wages of machine man 44.91
Wages of Helper 32.97
Machine Hour rate (Comprehensive) Rs. 406.86
Effective machine working hour‘s p.m. 200 hrs. × 75% = 150 hrs. Wages per machine hour
Machine man Helper
Wages for 200 hours (Rs. 125× 25) Rs. 3,125
(Rs. 75× 25) Rs. 1,875
D.A. Rs. 1,575 Rs. 1,575
Rs. 4,700 Rs. 3,450
Production bonus (1/3 of above) 1,567 1,150
6,267 4,600
Leave wages (10%) 470 345
6,737 4,945
Effective wage rate per machine hour (150 hrs in all)
Rs. 44.91 Rs. 32.97
Question 35 RST Ltd. has two production departments: Machining and Finishing. There are three service departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as follows:
HR Rs.
Maintenance Rs.
Design Rs.
Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
5,00,000 4,60,000 7,00,000
The usage of these Service Departments‟ output during the year just completed is as follows: Provision of Service Output (in hours of service)
(i) Use the direct method to re-apportion RST Ltd.‘s service department cost to its production departments. (ii) Determine the proper sequence to use in re-apportioning the firm‘s service department cost by step-down method. (iii) Use the step-down method to reapportion the firm‘s service department cost. (7 Marks, November 2006)
Answer (i) Apportionment of Service Department Overheads amongst production departments using Direct Method:
Production Deptts. Service Deptts.
Machining Rs.
Finishing Rs.
HR Rs.
Maintenance Rs.
Design Rs.
Overhead as per primary distribution 5,00,000 4,60,000 7,00,000
A company has three production departments (M1, M2 and A1) and three service department, one of which Engineering service department, servicing the M1 and M2 only. The relevant information are as follows:
Product X Product Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14 Machine hours
A1 14 Direct Labour hours 18 Direct Labour hours
The annual budgeted overhead cost for the year are
Indirect Wages (Rs.)
Consumable Supplies (Rs.)
M1 46,520 12,600
M2 41,340 18,200
A1 16,220 4,200
Stores 8,200 2,800
Engineering Service 5,340 4,200
General Service 7,520 3,200
Rs. - Depreciation on Machinery 39,600 -Insurance of Machinery 7,200 -Insurance of Building 3,240 (Total building insurance cost for M1 is one third of annual premium -Power 6,480 -Light 5,400 -Rent 12,675 (The general service deptt. is located in a building owned by the company. It is valued at Rs. 6,000 and is charged into cost at notional value of 8% per annum. This cost is additional to the rent shown above) The value of issues of materials to the production departments are in the same proportion as shown above for the Consumable supplies. The following data are also available:
Department Book value Machinery (Rs.)
Area (Sq. ft.)
Effective H.P. hours %
Production Direct Labour hour
Capacity Machine hour
M1 1,20,000 5,000 50 2,00,000 40,000
M2 90,000 6,000 35 1,50,000 50,000
A1 30,000 8,000 05 3,00,000
Stores 12,000 2,000
Engg. Service
36,000 2,500 10
General Service
12,000 1,500
Required: (i) Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to departments. (ii) Allocate service department overheads to production department ignoring the apportionment of service department costs among
(iii) Calculate suitable overhead absorption rate for the production departments. (iv) Calculate the overheads to be absorbed by two products, X and Y. (15 Marks, May 2007) Answer
(i) Summary of Apportionment of Overheads (Rs.)
Items Basis of Apportion ment
Total Amount
Production Deptt. Service Deptt.
M1 M2 A1 Store Service
Engineeri ng Service
General Service
Indirect wages
Allocation given
1,25,140 46,520 41,340 16,220 8,200 5,340 7,520
Consumable stores
Allocation given
45,200 12,600 18,200 4,200 2,800 4,200 3,200
Depreciation Capital
value of machine
39,600 15,840 11,880 3,960 1,584 4,752 1,584
Insurance of Machine
Capital value of machine
7,200 2,880 2,160 720 288 864 288
Insurance on Building
to MI
Balance
area basis
3,240 1,080 648 864 216 270 162
Power HP Hr % 6,480 3,240 2,268 324 648
Light Area 5,400 1,080 1,296 1,728 432 540 324 Rent Area 12,675 2,535 3,042 4,056 1,014 1,268 760
Rent of general service
Direct 8% of 6,000
480 480
TOTAL 2,45,415 85,775 80,834 32,072 14,534 17,882 14,318
(ii) Allocation of service departments overheads
Service Deptt. Basis of Apportionment
Production Deptt. Service Deptt.
M1 M2 A1 Store Service
Engineering Service
General Service
Store Ratio of consumable value (126 :182 : 42)
5,232 7,558 1,744 (14,534)
Engineering service
In Machine hours Ratio of M1 and M2 (4 : 5)
7,948 9,934 (17,882)
General service LHR Basis 20 : 15 : 30 4,406 3,304 6,608 (14,318)
(iv) Statement showing overhead absorption for Product X and Y
Machine Deptt. Absorption Rate Product X Hours Rs. Product Y Hours Rs.
M1 2.584 10 25.84 6 15.50
M2 2.033 4 8.13 14 28.46
A1 .135 14 .54 18 2.43
34.51 46.39
Question 37 You are given the following information of the three machines of a manufacturing department of X Ltd.:
Preliminary estimates of expenses (per annum)
Total Machines
(Rs.) A (Rs.)
B (Rs.)
C (Rs.)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and the attendant control all the three machines and spend equal time on them) The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity throughout the year and 2% is reasonable for breakdown. You are required to : Calculate predetermined machine hour rates for the above machines after taking into consideration the following factors:
Effective capacity 90% of 2,208 1,987 (Rounded off) Less: Normal loss of time (Breakdown) 2% 40 (Rounded off) Effective running hour 1,947
(ii) Amount of spare parts is calculated as under:
A B C
Rs. Rs. Rs.
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% 1,150 575
Estimated cost 4,600 5,750 2,875
(iii) Amount of Indirect Labour is calculated as under:
Rs.
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000
(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost accounts.
Question 38 The following account balances and distribution of indirect charges are taken from the accounts of a manufacturing concern for the year ending on 31st March, 2012:
Item Total Amount Production Departments Service Departments
(Rs.) X (Rs.) Y (Rs.) Z (Rs.) A (Rs.) B (Rs.)
Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent's Salary 96,000 - - 96,000 - -
Fuel & Heat 15,000
Power 1,80,000
Rent & Rates 1,50,000
Insurance 18,000
Meal Charges 60,000
Depreciation 2,70,000
The following departmental data are also available:
Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of Assets (Rs.) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000
Expenses charged to the service departments are to be distributed to other departments by the following percentages:
X Y Z A B
Department A 30 30 20 - 20
Department B 25 40 25 10 -
Prepare an overhead distribution statement to show the total overheads of production departments after re-apportioning service departments' overhead by using simultaneous equation method.' Show all the calculations to the nearest rupee. (8 Marks, November 2012) Answer Primary Distribution of Overheads
Item Basis Total Amount (Rs.)
Production Departments Service Departments
X (Rs.) Y (Rs.) Z (Rs.) A (Rs.) B (Rs.)
Indirect Material Actual 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour Actual 2,60,000 45,000 50,000 70,000 60,000 35,000
Total overheads 11,74,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250
Re-distribution of Overheads of Service Department A and B Total overheads of Service Departments may be distributed using simultaneous equation method Let, the total overheads of A = a and the total overheads of B= b A = 1,57,250 + 0.10 b (i) or, 10a – b = 15,72,500 [(i) x10] b = 90,250 + 0.20 a (ii) or, -0.20a + b = 90,250 10a - b = 15,72,500 -0.20a + b = 90,250 9.8a = 16,62,750 a = 1,69,668 Putting the value of a in equation (ii), we get b = 90,250 + 0.20 x 1,69,668 b = 1,24,184 Secondary Distribution of Overheads
Total overhead as per primary distribution 2,39,000 2,93,000 3,94,500
Service Department A (80% of 1,69,668) 50,900 50,900 33,934
Service Department B (90% of 1,24,184) 31,046 49,674 31,046
Total 3,20,946 3,93,574 4,59,480
Question 39 Calculate Machine Hour Rate from the following particulars: Cost of Machine - Rs. 25,00,000 Salvage Value - Rs. 1,25,000 Estimated life of the machine - 25,000 Hours Working Hours (per annum) - 3,000 Hours Hours required for maintenance - 400 Hours Setting-up time required - 8% of actual working hours Additional Information:
(i) Power 25 units @ Rs. 5 per unit per hour. (ii) Cost of repairs and maintenance Rs. 26,000 per annum. (iii) Chemicals required for operating the machine Rs. 2,600 per month. (iv) Overheads chargeable to the machine Rs. 18,000 per month. (v) Insurance Premium (per annum) 2% of the cost of machine (vi) No. of operators - 02 (looking after three other machines also) (vii) Salary per operator per month Rs. 18,500 (8 Marks, November 2013)
Answer Computation of Machine Hour Rate
Particulars Setting-up time is „Unproductive‟ (Machine hour2,407*)
Setting-up time is „Productive‟ (Machine hour2,600)
* (Hours) Working Hours 3,000 Less: Maintenance hours 400
2,600 Less: Setting-up hours 193
Actual working hours (
100 ) 2,407
Assumptions: 1. Working hours (i.e. 3,000 hours) are inclusive of maintenance and setting-up time. 2. It is assumed that no power is consumed by the machine during unproductive hours i.e. during maintenance
and unproductive setting-up hours. 3. Depreciation is calculated on the basis of estimated life of the machine hours. Hence per unit machine hour
rate of depreciation will be same.
Note: As this numerical problem does not specifically mention about the nature of settingup time; means whether setting-up time is unproductive or productive is not clear. The problem can be solved assuming setting-up time either as productive or as unproductive. The question may be solved based on logical assumption regarding the nature of settingup time (i.e. unproductive or productive) and for furnishing any one or both the situation.
Question 40 As of 31st March, 2008, the following balances existed in a firm‟s cost ledger, which is maintained separately on a double entry basis:
During the next quarter, the following items arose:
Rs.
Finished Product (at cost) 2,25,000
Manufacturing overhead incurred 85,000
Raw material purchased 1,25,000
Factory wages 40,000
Indirect labour 20,000
Cost of sales 1,75,000
Materials issued to production 1,35,000
Sales returned (at cost) 9,000
Materials returned to suppliers 13,000
Manufacturing overhead charged to production 85,000
You are required to prepare the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-inprogress Control A/c, Finished Stock Ledger Control A/c, Manufacturing Overhead Control A/c, Wages Control A/c, Cost of Sales A/c and the Trial Balance at the end of the quarter. (15 Marks, May 2008) Answer Cost Ledger Control Account
Dr. Cr.
Rs. Rs.
To Store Ledger Control A/c 13,000 By Opening Balance 6,85,000
To Balance c/d 9,42,000 By Store ledger control A/c 1,25,000
By Manufacturing Overhead Control A/c 85,000
By Wages Control A/c 60,000
9,55,000 9,55,000
Stores Ledger Control Account Dr. Cr.
Rs. Rs.
To Opening Balance 3,00,000 By WIP Control A/c 1,35,000
To Cost ledger control A/c 1,25,000 By Cost ledger control A/c (Returns) 13,000
By Balance c/d 2,77,000
4,25,000 4,25,000
WIP Control Account Dr. Cr.
Rs. Rs.
To Opening Balance 1,50,000 By Finished Stock Ledger Control A/c 2,25,000
To Wages Control A/c 40,000 By Balance c/d 1,85,000
To Opening Balance 2,50,000 By Cost of Sales 1,75,000
To WIP Control A/c 2,25,000 By Balance c/d 3,09,000
To Cost of Sales A/c (Sales Return) 9,000
4,84,000 4,84,000
Manufacturing Overhead Control Account Dr. Cr.
Rs. Rs.
To Cost Ledger Control A/c 85,000 By Opening Balance 15,000
To Wages Control A/c 20,000 By WIP Control A/c 85,000
By Under recovery c/d 5,000
1,05,000 1,05,000
Wages Control Account Dr. Cr.
Rs. Rs.
To Transfer to Cost Ledger Control A/c 60,000 By WIP Control A/c 40,000
By Manufacturing Overhead Control A/c
20,000
60,000 60,000
Cost of Sales Account Dr. Cr.
Rs. Rs.
To Finished Stock Ledger Control A/c 1,75,000 By Finished Stock Ledger Control A/c (Sales return) 9,000
By Balance c/d 1,66,000
1,75,000 1,75,000
Trial Balance
Rs. Rs.
Stores Ledger Control A/c 2,77,000
WIP Control A/c 1,85,000
Finished Stock Ledger Control A/c 3,09,000
Manufacturing Overhead Control A/c 5,000
Cost of Sales A/c 1,66,000
Cost ledger control A/c -- 9,42,000
9,42,000 9,42,000
Question 41 A manufacturing company has disclosed a net loss of Rs. 2,13,000 as per their cost accounting records for the year ended March 31, 2009. However, their financial accounting records disclosed a net loss of Rs. 2,58,000 for the same period. A scrutiny of data of both the sets of books of accounts revealed the following information:
(iii) Depreciation charged in financial accounts 70,000
(iv) Depreciation charged in cost accounts 80,000
(v) Interest on investments not included in cost accounts 20,000
(vi) Income-tax provided in financial accounts 65,000
(vii) Transfer fees (credit in financial accounts) 2,000
(viii) Preliminary expenses written off 3,000
(ix) Over-valuation of closing stock of finished goods in cost accounts 7,000
Prepare a Memorandum Reconciliation Account. (7 Marks, May 2009) Answer Memorandum Reconciliation Account
Particulars Rs. Particulars Rs.
To Net loss as per costing books 2,13,000 By Administrative overhead over absorbed in costs 3,000
To Factory overheads under absorbed 5,000 By Depreciation over charged in cost books (80,000 – 70,000)
10,000
To Income tax not provided in cost books 65,000 By Interest on investments not included in cost books
20,000
To Preliminary expenses written off in financial books 3,000 By Transfer fees not considered in cost books 2,000
To Over-valuation of Closing Stock of finished goods in cost books
7,000 By Net loss as per financial books 2,58,000
2,93,000 2,93,000
Question 42 What are the main advantages of Integrated accounts? (2 Marks, May 2010), (4 Marks, May 2012) Answer Integrated Accounts is the name given to a system of accounting, whereby cost and financial accounts are kept in the same set of books. There will be no separate sets of books for Costing and Financial records. Integrated accounts provide or meet out fully the information requirement for Costing as well as for Financial Accounts. Advantages: The main advantages of Integrated Accounts are as follows: (a) No need for Reconciliation- The question of reconciling costing profit and financial profit does not arise, as there is one figure of
profit only. (b) Less efforts- Due to use of one set of books, there is a significant extent of saving in efforts made. (c) Less Time consuming- No delay is caused in obtaining information as it is provided from books of original entry. (d) Economical process- It is economical also as it is based on the concept of ―Centralisation of Accounting function‖.
A manufacturing company has disclosed a net loss of Rs. 8,75,000 as per their cost accounting records for the year ended March 31, 2010. However, their financial accounting records disclosed a net loss of Rs. 7,19,250 for the same period. A scrutiny of the data of both the sets of books of accounts revealed the following information:
Rs.
(i) Factory overheads over-absorbed 47,500
(ii) Administration overheads under-absorbed 32,750
(iii) Depreciation charged in Financial Accounts 2,25,00
(iv) Depreciation charged in Cost Accounts 2,42,250
(v) Interest on investments not included in Cost Accounts 62,750
(vi) Income Tax provided in Financial Accounts 7,250
(vii) Transfer fees (credit in Financial Accounts) 12,500
(viii) Preliminary expenses written off 27,500
(ix) Under-valuation of opening stock in Cost Accounts 6,250
(x) Under valuations of closing stock in Cost Accounts‘ 17,500
Finished products: Entire output is sold at a profit of 12% on actual cost from work-in-progress. Other information:
Rs
Wages incurred 29,40,000
Overhead incurred 95,50,000
Income from Investment 4,00,000
Loss on sale of fixed assets 8,40,000
Shortage in stock taking is treated as normal loss. You are require to prepare:
(i) Stores control account; (ii) Work-in-progress control account; (iii) Costing Profit and Loss account; (iv) Profit and Loss account and (v) Reconciliation statement (12 Marks, May 2011)
Answer Stores Leger Control Account
Dr. Cr.
Rs Rs
To Balance b/d 12,60,000 By Work-in-progress control A/c 67,20,000
To General ledger adjustment A/C 67,20,000 By Overhead control A/c 8,40,000
To Work-in progress Control A/c 33,60,000 By Overhead control A/c (Shortage) 2,52,000
By Balance c/d 35,28,000
1,13,40,000 1,13,40,000
W.I.P Control A/c
Dr. Cr.
Rs Rs
To Balance b/d 25,20,000 By Stores ledger control A/c 33,60,000
To Stores ledger control A/c 67,20,000 By Costing P&L A/c (Cost of Sales) (Balancing figure) 1,58,88,000
To Direct wages Control A/c 25,20,000
To Overhead control A/c 90,08,000 BY Balance c/d 15,20,000
2,07,68,000 2,07,68,000
Costing Profit and Loss A/c
Dr. Cr.
Rs Rs Rs
To W.I.P Control A/c 1,58,88,000 By General Ledger Adj. A/c 1,58,88,000
To opening stock : Stores 12,60,000 By Sales 1,77,94,560
W.I.P 25,20,000 37,80,000 By Income from investment 4,00,000
To Purchases 67,20,000 By Closing stock:
To Wages 29,40,000 Stores 35,28,000
W.I.P 15,20,000 50,48,000
To Overhead 95,50,000 By Loss 5,87,440
To Loss on sale of fixed assets
8,40,000
2,38,30,000 2,38,30,000
Reconciliation Statement
Rs Rs
Profit as per Cost Accounts 19,06,560
Add: Income from investments 4,00,000
23,06,560
Less : Loss on sale of fixed assets 8,40,000
Under absorption of overheads (working note) 20,54,000 28,94,000
Loss as per Financial Accounts 5,87,440
Working Notes: Overhead Control Account
Dr. Cr.
Rs Rs
To General Ledger Adj. A/c 9550000 By W.I.P control A/c 90,08,000
To Stores Ledger Control A/c 252000 By Balance c/d (under absorption of overheads)
20,54,000
To Stores ledger control A/c 8,40,000
To Wages control A/c Indirect wages (Rs 29,40,000-25,20,000)
4,20,000
1,10,62,000 1,10,62,000
Question 45 R Limited showed a net loss of Rs 35,400 as per their cost accounts for the year ended 31st March, 2012. However, the financial accounts disclosed a net profit of Rs 67,800 for the same period. The following information were revealed as a result of scrutiny of the figures of cost accounts and financial accounts: (Rs)
(i) Administrative overhead under recovered 25,500
(ii) Factory overhead over recovered 1,35,000 (iii) Depreciation under charged in Cost Accounts 26,000 (iv) Dividend received 20,000 (v) Loss due to obsolescence charged in Financial Accounts 16,800 (vi) Income tax provided 43,600 (vii) Bank interest credited in Financial Accounts 13,600 (viii) Value of opening stock:
In Cost Accounts 1,65,000 In Financial Accounts 1,45,000
(ix) Value of closing stock: In Cost Accounts 1,25,500 In Financial Accounts 1,32,000
(x) Goodwill written-off in Financial Accounts 25,000 (xi) Notional rent of own premises charged in Cost Accounts 60,000 (xii) Provision for doubtful debts in Financial Accounts 15,000 Prepare a reconciliation statement by taking costing net loss as base. (8 Marks, November 2012)
Answer Statement of Reconciliation
Sl. No. Particulars Amount (Rs) Amount (Rs)
Net loss as per Cost Accounts (35,400)
Additions
1. Factory O/H over recovered 1,35,0002.
2. Dividend Received 20,000
3. Bank Interest received 13,600
4. Difference in Value of Opening Stock (1,65,000 – 1,45,000) 20,000
5. Difference in Value of Closing Stock (1,32,000 – 1,25,500) 6,500
6. Notional Rent of own Premises 60,000 2,55,100
Deductions
1. Administration O/H under recovered 25,500
2. Depreciation under charged 26,000
3. Loss due to obsolescence 16,800
4. Income tax Provided 43,600
5. Goodwill written-off 25,000
6. Provision for doubtful debts 15,000 (1,51,900)
Net Profit as per Financial A/cs 67,800
Question 46 EPS is a Public School having 25 buses each plying in different directions for the transport of its school students. In view of large number of students availing of the bus service, the buses work two shifts daily both in the morning and in the afternoon. The buses are garaged in the school. The workload of the students has been so arranged that in the morning, the first trip picks up senior students and the second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour later the second trip takes the senior students home. The distance travelled by each bus, one way is 16 kms. The school works 24 days in a month and remains closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12 months in a year.
The details of expenses for the year 2003-2004 are as under: Driver‘s salary –payable for all the 12 months Rs 5,000 per month per driver Cleaner‘s salary payable for all the 12 months (one cleaner has been employed for every five buses) Rs 3,000 per month per cleaner Licence Fees, Taxes etc. Rs 2,300 per bus per annum Insurance Premium Rs 15,600 per bus per annum Repairs and Maintenance Rs 16,400 per bus per annum Purchase price of the bus Rs 16,50,000 each Life of the bus 16 years Scrap value Rs 1,50,000 Diesel Cost Rs 18.50 per litre Each bus gives an average of 10 kms per litre of diesel. The seating capacity of each bus is 60 students. The seating capacity is fully occupied during the whole year. The school follows differential bus fees based on distance travelled as under: Students picked up and Bus fee Percentage of students dropped within the range of availing this facility distance from the school 4 kms 25% of Full 15% 8 kms 50% of Full 30% 16 kms Full 55% Ignore interest. Since the bus fees has to be based on average cost, you are required to:
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year. (ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 kms from the school; (b) Students coming from a distance of upto 8 kms from the school; and (c) Students coming from a distance of upto 16 kms from the school. (10 Marks, May 2004)
Answers
(i) EPS Public School Statement showing the expenses of operating a single bus and the fleet of 25 buses for a year Particulars Per bus per annum (Rs) Fleet of 25 buses per annum (Rs) Running costs : (A) Diesel (Refer to working note 1 ) 56,832 14,20,800 Repairs & maintenance costs : (B) 16,400 4,10,000 Fixed charges : Driver‘s salary 60,000 15,00,000 Cleaners salary 7,200 1,80,000 Licence fee, taxes etc. 2,300 57,500 Insurance 15,600 3,90,000 Depreciation 93,750 23,43,750 Total fixed charges : ( C ) 1,78,850 44,71,250 Total expenses: (A + B + C) 2,52,082 63,02,050
(ii) Average cost per student per month in respect of students coming from a distance of : a) 4 kms. from the school
(Rs 2,52,082 / 354 students x 12 months) (Refer to working note 2) Rs 59.34
b) 8 kms from the school (Rs 59.34 x 2) Rs118.68 c) 16 kms from the school (Rs 59.34 x 4) Rs237.36
Working notes : 1. Calculation of diesel cost per bus:
No. of trips made by a bus each day : 4 Distance travelled in one trip both ways (16 kms x 2 trips) : 32 kms Distance travelled per day by a bus (32 kms x 4 shifts) : 128 kms Distance travelled during a month (128 kms x 24 days) : 3,072 kms Distance travelled per year (3,072 kms x 10 months) : 30,720 kms No. of litres of diesel required per bus per year (30,720 kms / 10 km) : 3,072 litres Cost of diesel per bus per year (3,072 litres x Rs 18.50) : Rs 56,832
2. Calculation of number of students per bus:
Bus capacity of 2 trips : 120 students 1/4th fare students (15% x 120 students) : 18 students ½ fare 30% students (equivalent to 1/4th fare students) : 72 students Full fare 55% students (equivalent to 1/4th fare students) : 264 students Total 1/4th fare students : 354 students
Question 47 XYZ Auto Ltd. is in the business of selling cars. It also sells insurance and finance as part of its overall business strategy. The following information is available for the company.
Physical Units Sales Value Sales of Cars 10,000 Cars Rs 30,000 lacs Sales of Insurance 6,000 Policies Rs 1,500 lacs Sales of Finance 8,000 Loans Rs 19,200 lacs The Revenue earnings from each line of business before expenses are as follows: Sale of Cars 3% of Sales value Sale of Insurance 20% of Sales value Sale of Finance 2% of Sales value The expenses of the company are as follows: Salesman salaries Rs 200 lacs Rent Rs 100 lacs Electricity Rs 100 lacs Advertising Rs 200 lacs Documentation cost per insurance policy Rs 100 Documentation cost for each loan Rs 200 Direct sales expenses per car Rs 5,000 Indirect costs have to be allocated in the ratio of physical units sold.
Required: (i) Make a cost sheet for each product allocating the direct and indirect costs and also showing the product wise profit and total profit. (ii) Calculate the percentage of profit to revenue earned from each line of business. (8 Marks, May 2006) Answer Product Cost Sheet
Total
Cars Insurance Finance
Sales units 10,000 6,000 8,000
Sales value (Rs in lakhs) 30,000 1,500 19,200
Revenue earnings 3% 20% 2%
Revenue earned (Rs in lakhs) 1,584 900 300 384
Direct costs (Rs in lakhs) 522 500 (5,000 × 10,000) 6 (100 × 6,000) 16 (200 × 8,000)
Indirect costs (allocated in the ratio of physical units sold) 0.4167:0.25:0.3333
Salesman salaries (Rs in lakhs) 200
Rent (Rs in lakhs) 100
Electricity (Rs in lakhs) 100
Advertising (Rs in lakhs) 200
600 250 150 200
Total costs 1,122 750 156 216
Profits (Revenue – Total cost) 462 150 144 168
% of Profits to revenue earned 29.17% 16.67% 48% 43.75%
Question 48 State the method of costing that would be most suitable for (a) Oil refinery (b) Bicycle manufacturing (c) Interior decoration (d) Airlines company (2 Marks, November 2008) Answer Industry Method of Costing (a) Oil Refinery – Process costing (b) Bicycle manufacturing – Multiple costing (c) Interior decoration – Job costing (d) Airlines – Operating costing
Question 49 Pokemon Chocolates manufactures and distributes chocolate products. It purchases Cocoa beans and processes them into two intermediate products:
These two intermediate products become separately identifiable at a single split off point. Every 500 pounds of cocoa beans yields 20 gallons of chocolate - powder liquor base and 30 gallons of milk-chocolate liquor base. The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milkchocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milkchocolate liquor base yields 340 pounds of milk chocolate. Production and sales data for October, 2004 are:
Cocoa beans processed 7,500 pounds
Costs of processing Cocoa beans to split off point (including purchase of beans) = Rs 7,12,500 Production Sales Selling price Chocolate powder 3,000 pounds 3,000 pounds Rs 190 per pound Milk chocolate 5,100 5,100 Rs 237.50 per pound The October, 2004 separable costs of processing chocolate-powder liquor into chocolate powder are Rs 3,02,812.50. The October 2004 separable costs of processing milk-chocolate liquor base into milk-chocolate are Rs 6,23,437.50. Pokemon fully processes both of its intermediate products into chocolate powder or milkchocolate. There is an active market for these intermediate products. In October, 2004, Pokemon could have sold the chocolate powder liquor base for Rs 997.50 a gallon and the milk-chocolate liquor base for Rs 1,235 a gallon. Required: (i) Calculate how the joint cost of Rs 7,12,500 would be allocated between the chocolate powder and milk-chocolate liquor bases
under the following methods: (a) Sales value at split off point (b) Physical measure (gallons) (c) Estimated net realisable value, (NRV) and (d) Constant gross-margin percentage NRV.
(ii) What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor bases under each of the methods in requirements (i) ?
(iii) Could Pokemon have increased its operating income by a change in its decision to fully process both of its intermediate products ? Show your computations. (13 Marks, November 2004)
Answer (i) Comparison of alternative joint-cost allocation methods
Sales value at split-off point method
Chocolate powder liquor base Milk chocolate liquor base Total
(iii) Further processing of Chocolate powder liquor base into Chocolate powder (calculations in Rs)
Incremental revenue ( 5,70,000 – (997.50 300)) 2,70,750 Incremental costs 3,02,812.50 Incremental operating income (32,062.50) Further processing of Milk chocolate liquor base into milk chocolate (calculations in Rs) Incremental revenue(12,11,250 – 5,55,750) 6,55,500 Incremental cost 6,23,437.50 Incremental operating income 32,062.50 The above computations show that Pokemon Chocolates could increase operating income by Rs 32,062.50 if chocolate liquor base is sold at split off point and milk chocolate liquor base is processed further.
Question 50 From the following Information for the month ending October, 2005, prepare Process Cost accounts for Process III. Use First-in-fist-out (FIFO) method to value equivalent production. Direct materials added in Process III (Opening WIP) 2,000 units at Rs 25,750 Transfer from Process II 53,000 units at Rs 4,11,500 Transferred to Process IV 48,000 units Closing stock of Process III 5,000 units Units scrapped 2,000 units Direct material added in Process III Rs 1,97,600 Direct wages Rs 97,600 Production Overheads Rs 48,800 Degree of completion:
Opening Stock Closing Stock Scrap Materials 80% 70% 100% Labour 60% 50% 70% Overheads 60% 50% 70% The normal loss in the process was 5% of production and scrap was sold at Rs 3 per unit. (14 Marks, November 2005) Answer Process III Process Cost Sheet Period (FIFO Method) Op. Stock : 2000 units Introduced : 53000 units Statement of Equivalent Production
Item Units Item Units Material A Material B Labour & OHs.
Op stock 2,000 Work on op WIP 2,000 - - 400 20 800 40
Process II transfer
53,000 Introduced & completed during the period (48,000 – 2000)
46,000 46,000 100 46,000 100 46,000 100
48,000
Normal Loss (2000+53000 – 5000) x 5%
2,500 - - - - - -
55,000 Cl WIP 5,000 5,000 100 3,500 70 2,500 50
55,500 51,000 49,900 49,300
Ab. Gain 500 500 100 500 100 500 100
55,000 50,500 49,400 48,800
Statement of Cost for each Element
Element of cost Cost (Rs) Equivalent Production. Cost per unit Rs
Material A Transfer from previous. Process 4,11,500
Less: Scrap value of Normal Loss 2500 × Rs 3 7,500
4,04,000 50,500 8
Material B 1,97,600 49,400 4
Wages 97,600 48,800 2
Overheads 48,800 48,800 1
7,48,000 15
Process Cost Sheet (in Rs) Op WIP (for completion) Mat B 400×Rs 4 = 1,600
Wages 800× Rs 2 = 1,600 OHs. 800× Rs 1 = 800
4,000 Introduced and completely processed during the period 46,000× Rs 15 = Rs 6,90,000 Closing WIP Mat A 5,000×8 = 40,000 Mat B 3,500×4 = 14,000 Wages 2,500×2 = 5,000 OHs 2,500×1 = 2,500 61,500 Abnormal Gain 500× Rs 15 = 7,500
Process III A/c
Units Amount (Rs) Units Amount (Rs)
To bal b/d 2,000 25,750 By Normal Loss 2,500 7,500
To Process II A/c 53,000 4,11,500 By process IV A/c (6,90,000 + 4,000 + 25,750) 48,000 7,19,750
To Direct Material 1,97,600 By bal C/d 5,000 61,500
Question 51 A Chemical Company carries on production operation in two processes. The material first pass through Process I, where Product ‗A‘ is produced. Following data are given for the month just ended: Material input quantity 2,00,000 kgs. Opening work-in-progress quantity (Material 100% and conversion 50% complete) 40,000 kgs. Work completed quantity 1,60,000 kgs. Closing work-in-progress quantity (Material 100% and conversion two-third complete) 30,000 kgs. Material input cost Rs 75,000 Processing cost Rs 1,02,000 Opening work-in-progress cost Material cost Rs 20,000 Processing cost Rs 12,000 Normal process loss in quantity may be assumed to be 20% of material input. It has no realisable value. Any quantity of Product ‗A‘ can be sold for Rs 1.60 per kg. Alternatively, it can be transferred to Process II for further processing and then sold as Product ‗AX‘ for Rs 2 per kg. Further materials are added in Process II, which yield two kgs. of product ‗AX‘ for every kg. of Product ‗A‘ of Process I. Of the 1,60,000 kgs. per month of work completed in Process I, 40,000 kgs are sold as Product ‗A‘ and 1,20,000 kgs. are passed through Process II for sale as Product ‗AX‘. Process II has facilities to handle upto 1,60,000 kgs. of Product ‗A‘ per month, if required. The monthly costs incurred in Process II (other than the cost of Product „A‟) are: 1,20,000 kgs. of Product „A‟ input 1,60,000 kgs. of Product „A‟ input
Rs Rs Materials Cost 1,32,000 1,76,000 Processing Costs 1,20,000 1,40,000 Required: (i) Determine, using the weighted average cost method, the cost per kg. of Product ‗A‘ in Process I and value of both work completed
and closing work-in-progress for the month just ended. (ii) Is it worthwhile processing 1,20,000 kgs. of Product ‗A‘ further? (iii) Calculate the minimum acceptable selling price per kg., if a potential buyer could be found for additional output of Product ‗AX‘ that
could be produced with the remaining Product ‗A‘ quantity. (14 Marks, November 2006) Answer (i) Process I
Statement of equivalent production
Inputs Output Equivalent output
Particulars Units Kg. Particulars Units Kg. Material Conversion
% Units Kg. % Units Kg.
Opening W.I.P. 40,000 Normal loss 40,000
New material introduced 2,00,000 Units introduced & completed 1,60,000 100 1,60,000 100 1,60,000
(ii) Statement showing comparative data to decide whether 1,20,000 kg. of product „A‟ should be processed further into „AX‟.
Alternative I – To sell product „A‟ after Process – I Rs
Sales 1,20,000 1.60 1,92,000
Less: Cost from Process I 1,20,000 1.075 1,29,000 Gain 63,000 Alternative II – Process further into „AX‟
Sales 2,40,000 2.00 4,80,000
Less: Cost from Process I 1,20,000 1.075 = Rs 1,29,000 Material in Process II = Rs 1,32,000 Processing cost in Process II = Rs 1,20,000 3,81,000 Gain 99,000 Hence company should process further It will increase profit by 99,000 – 63,000 = Rs 36,000
(iii) Calculation of minimum selling price/kg: Cost of processing remaining 40,000 kg. further Rs
Material 1,76,000 1,32,000 44,000 Processing cost 1,40,000 – 1,20,000 20,000
Cost from process I relating to 40,000 kg. ‗A‘ (40,000 1.075) 43,000 Benefit foregone if 40,000 kg. ‗A‘ are further processed 40,000 (1.60 – 1.075) 21,000 Total cost 1,28,000
Additional quantity of product ‗AX‘ (40,000 2) 80,000
Question 52 The following details are available of Process X for August 2011: (1) Opening work-in-progress 8,000 units
Degree of completion and cost: Material (100%) Rs 63,900 Labour (60%) Rs 10,800 Overheads (60%) Rs 5,400
(2) Input 1,82,000 units at Rs 7,56,900 (3) Labour paid Rs 3,28,000 (4) Over heads incurred Rs 1,64,000 (5) Units scrapped 14,000
Degree of completion: Material 100% Labour and overhead 80%
(6) Closing work-in-process 18000 units Degree of completion: Material 100% Labour and overhead 70%
(7) 1,58,000 units were completed and transferred to next process. (8) Normal loss is 8% of total input including opening work-in-process (9) Scrap value is Rs 8 per unit to be adjusted in direct material cost You are required to compute, assuming that average method of inventory is used:
(i) Equivalent production, and (ii) Cost per unit (8 Marks, November 2011)
Answer (i) Statement of Equivalent Production
Particulars Units Material Labour and Overhead % Units % Units Production units completed 1,58,000 100 1,58,000 100 1,58,000 Normal Loss 8% of (1,82,000 + 8,000) 15,200 - - - - Closing WIP 18,000 100 18,000 70 12,600 Total 1,91,200 - 1,76,000 - 1,70,600 Less : Abnormal Gain 1,200 100 1,200 100 1,200 Total 1,90,000 1,74,800 1,69,400
Total cost per unit = 4+2+1 = Rs 7.00 Note: The treatment of scrap can be done alternatively as follows and rest of the problem (Calculation of Cost per Equivalent units and Statement of Cost) can be solved accordingly. Statement of Equivalent Production:
Output Materials Labour Overheads
Units % Units % Units % Units
Units to Next process 1,58,000 100 1,58,000 100 1,58,000 100 1,58,000
Closing WIP 18,000 100 18,000 70 12,600 70 12,600
Abnormal gain (1,200) 100 (1,200) 80 (960) 80 (960)
Equivalent Units 1,74,800 1,74,800 1,69,640 1,69,640
Normal Loss = 8% of (Opening WIP + New Inputs) = 8% of (8,000+1,82,000) = 15,200 Units
Question 53 Gama Ltd. has furnished the following standard cost data per' unit of production:
* Material 10 kg @ Rs 10 per kg. * Labour 6 hours @ Rs 5.50 per hour * Variable overhead 6 hours @ Rs. 10 per hour. * Fixed overhead Rs 4,50,000 per month (Based on a normal volume of 30,000 labour hours.)
The actual cost data for the month of August 2011 are as follows: * Material used 50,000 kg at a cost of Rs 5,25,000. * Labour paid Rs 1,55,000 for 31,000 hours worked * Variable overheadsRs 2,93,000 * Fixed overheads Rs 4,70,000 * Actual production 4,800 units.
Calculate: (i) Material cost variance. (ii) Labour cost variance. (iii) Fixed overhead cost variance. (iv) Variable overhead cost variance. (8 Marks, November 2011)
Answer Budgeted Production 30,000/6 = 5,000 units Budgeted Fixed Overhead Rate = 4,50,000 ÷ 5,000
= Rs 90 per unit 1. MCV = Total Standard Cost for Actual Output – Total Actual Cost
[MCV- Material Cost Variance, LCV- Labour Cost Variance, FOCV- Fixed Overhead Cost Variance, VOCV- Variable Overhead Cost Variance]
Question 54 SJ Ltd. has furnished the following information: Standard overhead absorption rate per unit Rs 20 Standard rate per hour Rs 4 Budgeted production 15,000 units Actual production 15,560 units Actual overheads were Rs 2,95,000 out of which Rs 62,500 fixed . Actual hours 74,000 Overheads are based on the following flexible budget Production (units) 8,000 10,000 14,000 Total Overheads (Rs) 1,80,000 2,10,000 2,70,000 You are required to calculate the following overhead variances (on hour‟s basis) with appropriate workings:
(i) Variable overhead efficiency and expenditure variance (ii) Fixed overhead efficiency and capacity variance. (8 Marks, May 2012)
Answer Workings:
(i) Variable overhead rate per unit = Difference in total overheads at two levels/ Difference in out- put at two level
= (2,70,000 2,10,000) /(14,000-10,000) = 60,000/ 4,000 = Rs 15 per unit
(ii) Fixed overhead = 2,70,000 (14000 15) = Rs60,000 (iii) Standard Fixed Overhead Rate per Hour = 4 - 3 = 1 (iv) Standard Hour Per Unit = Standard hours rate per unit / standard overhead rate per hour = 20 ÷ 4 = 5 hours (v) Actual Variable Overhead = 2,95,000 – 62,500= 2,32,000 (vi) Actual Variable Overhead per Hour = 2,32,500/74,000= 3.1419
(vii) Budgeted hours = 15,000 5 = 75,000 hours (viii) Standard variable overhead rate per hour
= 74,000 75,000 = 1,000 (A) Standard Fixed overhead rate per hour is calculated with the help of budgeted hours and the Fixed overhead efficiency and expenditure variance is calculated as follows: Standard fixed overhead rate per hour = Fixed overheads/budgeted hours= 60,000 ÷ 75,000 = Rs0.80 per hour
Question 55 SP Limited produces a product 'Tempex' which is sold in a 10 Kg. packet. The standard cost card per packet of 'Tempex' are as follows: Rs Direct materials 10 kg @ Rs 45 per kg 450 Direct labour 8 hours @ Rs 50 per hour 400 Variable Overhead 8 hours @ Rs 10 per hour 80 Fixed Overhead 200
1,130 Budgeted output for the third quarter of a year was 10,000 Kg. Actual output is 9,000 Kg. Actual cost for this quarter are as follows : Rs Direct Materials 8,900 Kg @ Rs 46 per Kg. 4,09,400 Direct Labour 7,000 hours @ Rs 52 per hour 3,64,000 Variable Overhead incurred 72,500 Fixed Overhead incurred 1,92,000 You are required to calculate : (i) Material Usage Variance (ii) Material Price Variance (iii) Material Cost Variance (iv) Labour Efficiency Variance
A company produces single product which sells for Rs 20 per unit. Variable cost is Rs 15 per unit and Fixed overhead for the year is Rs 6,30,000. Required: (a) Calculate sales value needed to earn a profit of 10% on sales. (b) Calculate sales price per unit to bring BEP down to 1,20,000 units. (c) Calculate margin of safety sales if profit is Rs 60,000. (3 Marks, November 2007) Answer
(a) Suppose sales units are x then S = V + F + P S = Sales V = Variable Cost F = Fixed Cost P = Profit 20x = 15x + 6,30,000 + 2x 20x – 17x = 6,30,000
x
2,10,000 units
Sales value = 2,10,000 20 = Rs 42,00,000
(b) Sales price to down BEP 1,20,000 units
S = v +
S = 15 +
Rs.20.25.
(c) M S Sales =
where p/v =
X 100
X 100 = 2,40,000 OR
X100 = 25%
Question 57 ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable production costs are Rs 40 per unit and the variable selling expenses are Rs 12 per sold unit. The budgeted fixed production expenses were Rs 24,00,000 per annum and the fixed sellingexpenses were Rs 16,00,000. During the year ended 31st March, 2008, the company worked at 80% of its capacity. The operating data for the year are as follows: Production 3,20,000 units Sales @ Rs 80 per unit 3,10,000 units Opening stock of finished goods 40,000 units Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses are recovered on the basis of period. You are required to prepare Statements of Cost and Profit for the year ending 31st March, 2008: (i) On the basis of marginal costing (ii) On the basis of absorption costing. (8 Marks, November 2008) Answer (i) Statement of Cost and Profit under Marginal Costing for the year ending 31st March, 2008 Output = 3,20,000 units
Variable cost of production of 3,10,000 units 1,24,00,000
Add: Variable selling expenses @ Rs 12 per unit 37,20,000 1,61,20,000
Contribution (sales – variable cost) 86,80,000
Less: Fixed production cost 24,00,000
Fixed selling expenses 16,00,000 40,00,000
Actual profit under marginal costing 46,80,000
(ii) Statement of Cost and Profit under Absorption Costing for the year ending 31st March, 2008
Output = 3,20,000 units
Particulars Amount (Rs ) Amount (Rs )
Sales: 3,10,000 units @ Rs 80 2,48,00,000
Less: Cost of sales: Variable cost of production (3,20,000 @ Rs 40) 1,28,00,000
Add: Fixed cost of production absorbed 3,20,000 units @ Rs 6 (1) 19,20,000
1,47,20,000
Add: Opening Stock: 40,000
18,40,000
1,65,60,000
Less: Closing Stock: 50,000
23,00,000
Production cost of 3,10,000 units 1,42,60,000
Selling expenses:
Variable: Rs 12 3,10,000 units 37,20,000
Fixed 16,00,000 1,95,80,000
Unadjusted profit 52,20,000
Less: Overheads under absorbed: (2)
Fixed production overheads 4,80,000
Actual profit under absorption costing 47,40,000
Workings:
1. Absorption rate for fixed cost of production =
= Rs 6 per unit.
2. Fixed production overhead under absorbed = Rs (24,00,000 – 19,20,000) = Rs 4,80,000.
Question 58 Answer of the following: Following information are available for the year 2008 and 2009 of PIX Limited: Year 2008 2009 Sales Rs 32,00,000 Rs 57,00,000 Profit/(Loss) (Rs 3,00,000) Rs 7,00,000
Calculate –(a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of Rs 12,00,000 (3 Marks, May 2010) Answer
(a) P/V Ratio =
100
=
( ) 100
=
100 = 40%
(b) Total fixed cost = Total contribution - Profit = (Sales × P/V ratio) – Profit
= ( 57,00,000
) Rs 7, 00,000
= Rs 22, 80,000 – Rs 7, 00,000 =Rs 15, 80,000 (c) Contribution required to earn a profit of Rs 12, 00,000 = Total fixed cost + Profit required =Rs 15, 80,000 + 12, 00,000 =Rs 27, 80,000
Required Sales =
=
=Rs 69, 50,000
Question 59 MNP Ltd sold Rs 2,75,000 units of its product atRs 37.50 per unit. Variable costs are Rs 17.50 per unit (manufacturing costs of Rs 14 and selling cost Rs 3.50 per unit). Fixed costs are incurred uniformly throughout the year and amount to Rs 35,00,000 (including depreciation of Rs 15,00,000). There is no beginning or ending inventories. Required: (i) Estimate breakeven sales level quantity and cash breakeven sales level quantity. (ii) Estimate the P/V ratio. (iii) Estimate the number of units that must be sold to earn an income (EBIT) of Rs 2,50,000. (iv) Estimate the sales level achieve an after-tax income (PAT) of Rs 2,50,000. Assume 40% corporate Income Tax rate. (8 Marks, November 2010) Answer
Break even Sales Quantity =
=
= 175000 units
(i) Cash Break even Sales Qty=
=
=1,00,000 units.
(ii) P/V ratio =
100 =
100 = 53.33 %
No. of units that must be sold to earn an Income (EBIT) of Rs 2,50,000
Total Sales to earn an EBIT level of Rs 2,50,000 =
=
=
= Rs 70,31,250.
No. of units to earn an income (EBIT) level of Rs 2,50,000 is =
=
= 1,87,500 units.
(iv) Sales level to achieve an after tax EBIT of Rs 2,50,000 =
=
= 73,43,750
Alternative: After Tax Income (PAT) = Rs 2,50,000 Tax rate = 40%
Desired level of Profit before tax =
100
= Rs 4,16,667
Estimate Sales Level =
=
= Rs 73,43,750/-
Question 60 The following figures are related to LM Limited for the year ending 31st March, 2012 : Sales - 24,000 units @ Rs 200 per unit; P/V Ratio 25% and Break-even Point 50% of sales. You are required to calculate: (i) Fixed cost for the year (ii) Profit earned for the year (iii) Units to be sold to earn a target net profit of Rs 11,00,000 for a year. (iv) Number of units to be sold to earn a net income of 25% on cost. (v) Selling price per unit if Break-even Point is to be brought down by 4,000 units. (8 Marks, November 2012) Answer Break- even point (in units) is 50% of sales i.e. 12,000 units. Hence, Break- even point (in sales value) is 12,000 units × Rs 200 = Rs 24,00,000
or Fixed Cost = Rs 24,00,000 × 25% = Rs 6,00,000 So Fixed Cost for the year is Rs 6,00,000
(ii) Contribution for the year = (24,000 units × Rs 200) × 25%= Rs 12,00,000 Profit for the year = Contribution – Fixed Cost = Rs 12,00,000 - Rs 6,00,000 = Rs 6,00,000
(iii) Target net profit is Rs 11,00,000 Hence, Target contribution = Target Profit + Fixed Cost = Rs11,00,000 + Rs 6,00,000 = Rs 17,00,000 Contribution per unit = 25% of Rs 200 = Rs 50 per unit
No. of units =
= 34,000 unit
So, 34,000 units to be sold to earn a target net profit of Rs 11,00,000 for a year.
(iv) Net desired total Sales (Number of unit x Selling price) be , then desired profit is 25%
on Cost or 20% on Sales i.e. 0.2
Desired Sales =
=
or, 0.25 = 6,00,000 + 0.2
or, 0.05 = 6,00,000
or, = Rs 1,20,00,000
No. of units to be sold =
= 60,000 units
(v) If Break- even point is to be brought down by 4,000 units then Break-even point will be
12000 units – 4000 units = 8000 units Fixed Cost = Rs 6,00,000
Required Contribution per unit
= Rs 75
Selling Price =
= Rs 300 per unit
Hence, selling price per unit shall be Rs 300 if Breakeven point is to be brought down by 4,000 units.
Question 61 Zed Limited sells its product at Rs 30 per unit. During the quarter ending on 31st March, 2014, it produced and sold 16,000 units and suffered a loss of Rs 10 per unit. If the volume of sales is raised to 40,000 units, it can earn a profit of Rs 8 per unit. You are required to calculate:
(i) Break Even Point in Rupees. (ii) Profit if the sale volume is 50,000 units.
(iii) Minimum level of production where the company needs not to close the production if unavoidable fixed cost is Rs 1,50,000. (4 Marks, November, 2014)
Question 62 Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd. : Month : Jan. Feb. March April May June Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000 Finished goods inventory at the end of each month is expected to be 20% of budgeted sales quantity for the following month. Finished goods inventory was 2,700 units on January 1, 2009. There would be no work-in-progress at the end of any month. Each unit of finished product requires two types of materials as detailed below: Material X : 4 kgs @ Rs 10/kg Material Y : 6 kgs @ Rs 15/kg Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next month‘s production. Budgeted direct labour hour per unit of finished product is ¾ hour. Budgeted direct labour cost for the first quarter of the year 2009 is Rs 10,89,000. Actual data for the quarter one, ended on March 31, 2009 is as under: Actual production quantity : 40,000 units Direct material cost (Purchase cost based on materials actually issued to production) Material X : 1,65,000 kgs @ Rs 10.20/kg Material Y : 2,38,000 kgs @ Rs 15.10/kg Actual direct labour hours worked : 32,000 hours Actual direct labour cost : Rs 13,12,000 Required : (a) Prepare the following budgets: (i) Monthly production quantity for the quarter one. (ii) Monthly raw material consumption quantity budget from January, 2009 to April, 2009. (iii) Materials purchase quantity budget for the quarter one. (b) Compute the following variances : (i) Material cost variance (ii) Material price variance (iii) Material usage variance (iv) Direct labour cost variance (v) Direct labour rate variance (vi) Direct labour efficiency variance (May 2009, 15 Marks)
Answer (a) (i) Production Budget for January to March 2009 (Quantitative) Jan Feb Mar April Budgeted Sales 10,000 12,000 14,000 15,000 Add: Budgeted Closing Stock 2,400 2,800 3,000 3,000 (20% of sales of next month) 12,400 14,800 17,000 18,000 Less: Opening Stock 2,700 2,400 2,800 3,000 Budgeted Output 9,700 12,400 14,200 15,000 Total Budgeted Output for the Quarter ended March 31, 2009 = (9,700 + 12,400 + 14,200) = 36,300 units. (ii) Raw Material Consumption Budget (in quantity)
Month Budgeted Output (Units) Material „X‟ @ 4 kg per unit (Kg) Material „Y‟ @ 6 kg per unit (Kg)
Jan 9,700 38,800 58,200
Feb 12,400 49,600 74,400
Mar 14,200 56,800 85,200
Apr 15,000 60,000 90,000
Total 2,05,200 3,07,800
(iii) Raw Materials Purchase Budget (in quantity) for the Quarter ended (March 31,2009)
Material X (kg) Material Y (kg)
Raw material required for production 1,45,200 2,17,800
Add: Closing Stock of raw material 30,000 45,000
1,75,200 2,62,800
Less: Opening Stock of raw material 19,000 29,000
Material to be purchased 1,56,200 2,33,800
Alternative Solution (iii) Raw Materials Purchase Budget (in quantity) for the Quarter ended (March 31,2009) Material X
Jan Feb Mar Total
Raw material required for production (x) 38,800 49,600 56,800 1,45,200
Add: Closing stock of raw material 24,800 28,400 30,000 83,200
63,600 78,000 86,800 2,28,400
Less: Opening stock of raw material X 19,000 24,800 28,400 72,200
Materials to be purchased X 44,600 53,200 58,400 1,56,200
Raw Materials Purchase Budget (in quantity) for the Quarter ended (March 31,2009) Material Y
Jan Feb Mar Total
Raw material required for production(Y) 58,200 74,400 85,200 2,17,800
Budgeted direct labour hours = 36,300 × ¾ hrs. = 27,225 hours
Standard or Budgeted labour rate per hour =
=
= Rs 40
Standard labour hours for actual output: = 40,000 units × ¾ hour = 30,000 hours
Actual labour hour rate =
= Rs 41
Direct Labour Efficiency Variance = Standard Rate × (Std. hrs – Actual hrs.) = Rs40 × (30,000 – 32,000) = Rs80,000 (A) Direct Labour Rate Variance = Actual hrs. × (Std. Rate – Actual Rate) = 32,000 × (40 – 41) = Rs32,000 (A) Direct Labour Cost Variance = (Std. rate × Std. hrs.) – (Actual rate × Actual hrs.) = (40 × 30,000) – (41 × 32,000) = 12,00,000 – 13,12,000 = 1,12,000 (A) Verification: Direct Labour Cost Variance = Direct Labour Efficiency Variance + Direct Labour Rate Variance = Rs80,000 (A) + Rs32,000 (A) = 1,12,000 (A)
Question 63 RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold at a price of Rs 200 per unit. The cost structure at the 50% level of activity is as under:
Rs
Direct Material 75 per unit
Direct Wages 25 per unit
Variable Overheads 25 per unit
Direct Expenses 15 per unit
Factory Expenses (25% fixed) 20 per unit
Selling and Distribution Exp. (80% variable) 10 per unit
Office and Administrative Exp. (100% fixed) 5 per unit
The company anticipates that the variable costs will go up by 10% and fixed costs will go up by 15%. You are required to prepare an Expense budget, on the basis of marginal cost for the company at 50% and 60% level of activity and find out the profits at respective levels. (8 Marks, November, 2014)
Question 64 Deluxe Limited undertook a contract for Rs. 5,00,000 on 1st July, 2012. On 30th June, 2013, when the accounts were closed, the following details about the contract were gathered:
1. If increase in material-price & wage-rate is below 5% - No escalation amount shall be given.
2. If increase in material-price & wage-rate is equal to 5% - No escalation amount shall be given.
3. If increase in material-price & wage-rate is more than 5% - Yes escalation amount shall be given.
Escalation amount to be given in case 3 shall be ―25% of the increase in the cost of materials and wages beyond 5%‖
Question 65 M/s. Bansals Construction Company Ltd. took a contract for Rs. 60,00,000 expected to be completed in three years. The following particulars relating to the contract are available:
2011 2012 2013
(Rs.) (Rs.) (Rs.)
Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
Cartage 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 —
Plant costing Rs. 3,00,000 was bought at the commencement of the contract. Depreciation was to be charged at 25% per annum, on the written down value method. The contractee pays 75% of the value of work certified as and when certified, and makes the final payment on completion of the contract. You are required to make a contract account for three years and total estimated profit/loss from the contract. Solution Answer Rectified Contract A/c for year 2011
Particulars Amt (Rs.) Particulars Amt (Rs.)
To Materials issued 6,75,000
To Wages 6,20,000 By Work-in-progress c/d :
To Cartage 30,000 Work certified Rs. 13,50,000
To Other expenses 30,000 Work uncertified Rs. 15,000 13,65,000
Work certified 13,50,000 Work certified Rs 45,00,000
Work uncertified 15,000 13,65,000 Work uncertified Rs75,000 45,75,000
To Plant – Dep. 56,250
To Materials 10,50,000
To Wages 9,00,000
To Cartage 90,000
To Other expenses 75,000
To Notional profit (Costing P&L A/c) 10,38,750
4575000 4575000
Contract A/c for year 2013
Particulars Amt (Rs.) Particulars Amt (Rs.)
To Work-in-progress b/d:
Work certified 45,00,000 By Contractee‘s A/c (contract price) 60,00,000 Work uncertified 75,000 45,75,000 By Costing P&L A/c 3,66,188
To Plant – Dep. 42188
To Materials 9,00,000
To Wages 7,50,000
To Cartage 75,000
To Other expenses 24,000
63,66,188 63,66,188
Costing P& L A/c
Date Particulars Amount (Rs.) Date Particulars Amount (Rs.)
2011 To Contract Account (Notional Loss) 65,000 2012 By Contract Account (Notional Profit) 10,38,750
2013 To Contract Account (Notional Loss) 3,66,187
2013 To Estimated Profit 6,07,563
10,38,750 10,38,750
Question 66 The Excel Ltd. make and sell two products,V4 and V2. Both products are manufactures through two consecutive process-making and packing raw materials is input at the commencement of the making process. The following estimated information is available for the period ending 31 March.
40% of fixed costs are product specific, the remainder are company fixed costs. Fixed Costs will remain un-changed throughout a wide activity range.
Product information V4 V2
Production time per unit
Making (minutes) 5.25 5.25
Packing (minutes) 6 4
Production sales (units) 5,000 3,000
Selling price per unit(Rs.) 150 180
Direct material per unit (Rs.) 30 30
(iii) Conversion costs are absorbed by products using estimated time based rates.
Required:
(a) Using the above information. Calculate unit costs for each product, analysed as relevant.
(b) Comment on a management suggestion that the production and sale of one of the product should not proceed in the period ending 31 March.
(c) Additional information is gathered for the period ending 31 March has follows:
(i) The proportion of product specific conversion costs (variable and fixed) are analysed as follows: Making Process: moulding (60%); trimming (40%)
Packing Process; conversion (70%), Packing material (30%)
(ii) The making process consist of two consecutive activities, mounding and trimming. The moulding variable and product fixed cost conversion costs are incurred in proportion to the temperate required in the moulds. The trimming conversion variable and product fixed costs are incurred in proportion to the consistency of the material. The variable and Product fixed packing process conversion cost are incurred in proportion to the time required for each product. Packing materials (which are part of the variable packing cost) requirements depends on the complexity of packing specified for each product.
(iii) An investigation into the effect of the cost drivers on costs has indicated that the proportions in which the total product specific conversion costs are related to V4 and V2 are as follows:
(i) Company fixed costs is apportioned to product at an overall average rate per product unit based on the estimated figures.
Required: Calculate amended unit costs for each product where activity based costing is used and company fixed costs are apportioned as detailed above.
Solution:-
Statement of cost Pool (Activity Based Costing)
Overhead Amount Basis No. of Activity Cost per Activity (Rs)
Making Cost
Variable Cost 350000 Making Time 42000 8.33
Avoidable FC 84000 Making Time 42000 2.00
Unavoidable FC 126000 Making Time 42000 3.00
Packing Cost
Variable Cost 280000 Packing Time 42000 6.66
Avoidable FC 56000 PackingTime 42000 1.33
Unavoidable FC 84000 PackingTime 42000 2.00
W.Note 1 Calculation of Making Time (minutes)
V4 = 5000 units x 5.25 minute = 26250 minutes
V2 = 3000 units x 5.25 minute = 15750 minutes
Total Making Time = 42000 minutes
W. Note 2 Calculation of Packing Time (Minutes)
V4 = 5000 units x 6 minute = 30000 minutes
V2 = 3000 units x 4 minute = 12000 minutes
Total Packing Time = 42000 minutes
Statement of cost
Particulars V4 V2
DMC (5000 units x Rs.30), (3000 units x Rs. 30) 150000 90000
A bank offers three products, viz., deposits, Loans and Credit Cards. The bank has selected 4 activities for a detailed budgeting exercise, following activity based costing methods. The bank wants to know the product wise total cost per unit for the selected activities, so that prices may be fixed accordingly. The following information is made available to formulate the budget:
Activity Present Cost (Rs)
Estimation for the Budget Period
(i) ATM Service
(a) Machine Maintenance 4,00,000 (all fixed, no change)
(b) Rents 2,00,000 (fully fixed, no change)
(c) Currency Replenishment Cost 1,00,000 (expected to double during budget period)
7,00,000 (This activity is driven by no. of ATM transaction)
(ii) Computer Processing 5,00,000 (Half this amount is fixed and no change is expected) (The variable portion is expected to increase to three times the current level) This activity is driven by the number of Computer transactions.
Issuing Statement 18,00,000 Presently 3 lacs statement are made. In the budget period, 5 lac statements are expected. For every increase of one lac statement, one lacs rupees is the budget increase (this activity is driven by the number of statements).
Customer Inquiries 2,00,000 Estimated to increase by 80% during the budget period. (This activity is driven by telephone minutes).
The activity drivers and their budgeted quantifies are given below:
Deposits Loans Credit Cards
No. of ATM Transactions No. of Computer Processing Transactions No. of Statements to be issued Telephone Minutes
1.50.000 15,00,000 3,50,000 3,60,000
- 2,00,000 50,000 1,80,000
50,000 3,00,000 1,00,,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000 Credit Card Accounts. Required:
(ii) Calculate the budgeted rate for each activity. (iii) Prepare the budgeted cost statement activity wise. (iv) Find the budgeted product cost per account for each product using (i) and (ii) above.
Solution Working Note 1: Calculation of Activity cost in budgeted period:
