CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

CA INTER
COST & FM ECO
FAST TRACK BATCH

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

CA INTER
COST & FM ECO
REGULAR BATCH

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER

Cost
&
Management Accounting

ICAI
PAST YEAR QUESTIONS
By
CA. Namit Arora

This book is dedicated to my parents

Mr. Suresh Kumar Arora

&
Mrs. Raman Arora
 PREFACE TO THIS EDITION
This is a comprehensive book having thoroughly explained concepts with lucid
and systematic presentation of the subject matter. All attempts are made in this
book to keep concept easier to understand and remember with 100% coverage
of institute materials.
A special attention is given to presentation keeping in mind the
examination needs to the student. The book is primarily written exclusively for
CA - Inter.

For any suggestion please mail me at canamitarora@[Link]

A word to the students

My dear student, hard work is the key to success. Though smart work is
publicized in today’s world but to be smart, you have to work hard. So always be
attentive in class and have thorough revision after the class. It is also important
to be motivated and inspired for working hard. The key for success is:

“Work hard in class, be attentive, grab the concepts and

appear in all tests
&
Work smart during revision, select important questions for
next revision.”

ALL THE BEST

CA. NAMIT ARORA
 INDEX
S. NO. CHAPTER NAME PAGE NO. MARKS

1 MATERIALS 1.01 – 1.23 5 – 10

2 LABOUR OR EMPLOYEE COST 2.01 – 2.18 5 – 10

3 OVERHEADS OR INDIRECT COST 3.01 – 3.36 5 – 10

4 COST SHEET 4.1 – 4.7 5 – 10

5 JOB AND BATCH COSTING 5.1 – 5.6 5 – 10

6 CONTRACT COSTING 6.1 – 6.18 5 – 10

7 OPERATING OR SERVICE COSTING 7.1 – 7.20 5 – 10

8 PROCESS OR OPERATION COSTING 8.1 – 8.36 10

9 JOINT AND BY PRODUCTS 9.1 – 9.17 5 – 10

10 BUDGETARY CONTROL 10.1 -10.12 5 – 10

11 STANDARD COSTING 11.1 -11.20 5 – 10

12 MARGINAL COSTING 12.1 – 12.21 5 – 10

13 COST ACCOUNTING SYSYTEM 13.1 – 13.18 5 – 10

14 RECONCILIATION 14.1 – 14.11 5 – 10

15 ACTIVITY BASED COSTING 15.01 – 15.7 10

 CHAPTER - 1

MATERIALS
LEARNING OBJECTIVE

After studying this chapter you will be able to

 Understand the concept of materials.
 Understand its need and importance.
 Difference amongst the various methods of valuing material.
 Evaluate different methods of pricing material issues, material
received and material return.
 Understand the meaning and accounting treatment for normal
and abnormal loss of material.
 Understand the meaning and the accounting treatment of waste,
scrap, spoilage and defectives.
 MATERIALS 1.1

PAST YEAR QUESTIONS

PYQ 1
M/s Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
during 1997:
Average monthly market demand 2,000 Tubes
Ordering cost `100 per order
Inventory carrying cost 20% per annum
Cost of tubes `500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6 - 8 weeks
Compute from the above:
(1) Economic order quantity. If the supplier is willing to supply 1,500 units at a discount of 5%, is it
worth accepting?
(2) Maximum level of stock.
(3) Minimum level of stock.
(4) Re-order level.
[(5+2+2+1= 10 Marks) May 1998, Nov 2000]

Answer
2AO 2  *5,200  100
(1) EOQ = = = 102 tubes approx.
C 500  20%

*A = Annual usage of tubes = Normal usage per week × 52 week

= 100 tubes × 52 weeks = 5,200 tubes.

Statement Showing Net Benefit

Particulars `
(A) Cost (when order size 102 tubes)
Purchase Cost 5,200 tubes @ 500 per tube 26,00,000
Ordering Cost (5,200/102 × 100) 5,098
Carrying Cost (102 × 500 × ½ × 20%) 5,100
Total Cost (A) 26,10,198
(B) Cost (when order size 1,500 units)
Purchase Cost 5,200 tubes @ 475 (500 × 95%) per tube 24,70,000
Ordering Cost (5,200/1500 × 100) 347
Carrying Cost (1,500 × 475 × ½ × 20%) 71,250
Total Cost (B) 25,41,597
Net benefit (A- B) 68,601
*At EOQ, the total ordering cost & total carrying cost are always equal, but in the above answer there is a
marginal difference between the two figures because of approximation made in arriving at the figure of EOQ.
Advice: Yes, M/s Tubes Ltd. should accept the discount offer.
(2) Maximum Level of Stock = ROL + Re-order quantity -(Min. Usage x Min. Re-order Period)
= 1,600 tubes + 102 tubes - (50 tubes per week × 6 weeks)
= 1,402 tubes

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 MATERIALS 1.2

(3) Minimum Level of Stock = Re-order Level- (Normal Usage x Average Re-order Period)
= 1,600 tubes – (100 tubes per week × 7 weeks)
= 900 tubes
(4) Reorder Level = Maximum Consumption × Maximum Re-order Period
= 200 tubes per week × 8 weeks
= 1,600 tubes
*At EOQ, the total ordering cost & total carrying cost are always equal, but in the above answer there is a
marginal difference between the two figures because of approximation made in arriving at the figure of EOQ.

PYQ 2
A Factory uses 4,000 varieties of inventory. In terms of inventory and holding inventory usage, the following
information is compiled.
No. of varieties of % value of inventory % of inventory usage
% of item
inventory holding (average) (in end-product)
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.00 100 100
Classify the items of inventory as per ABC analysis with reasons.
[(6 Marks) Nov 1998]

Answer
Classification of the items of inventory as per ABC Analysis
% value of % of inventory
Category No. of items % of items inventory holding usage (in end-
(average) product)
A 15 0.375 50 85
B 110 2.750 30 10
C 3,875 96.875 30 5
Total 4,000 100.00 100 100
Reasons:
Category A: 15 numbers of inventory items should be classified as those of A category because of the
following reasons:
1. They constitute 0.375% of total number of varieties of inventory items handled by stores of factory.
This is the minimum as per the given classification in the table
2. The total usage of these items is 50% of total use value of inventory holding (average) which is
maximum according to the given table.
3. The consumption of these items is about 85% of usage in end product.
Category B: 110 number of inventory items should be classified as those of B category because of the
following reasons:
1. They constitute 2.750% of total number of varieties of inventory items handled by the stores of the
factory.
2. They require moderate investment of about 30% of total use value of inventory holding (average).
3. Their consumption is moderate about 10% of inventory usage in the end product.
Category C: 3,875 numbers of varieties of inventory items should be classified as those of category C because
of the following reasons:
1. They constitute 96.875% of total varieties of inventory items handled by stores of factory.
2. They require investment of 20% of total use value of average of average inventory holding.
3. Their consumption is minimum, i.e. just 5% of inventory usage in end product.

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 MATERIALS 1.3

PYQ 3
G Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a component X
which is purchased at `20. For every finished product, one unit of component is required. The ordering cost
is `120 per order and holding costs is 10% p.a.
You are required to calculate:
(i) Economic order quantity.
(ii) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to incur?
(iii) What is the minimum carrying cost, the company has to incur?
[(6 Marks) May 1999]

Answer
(i) Computation of Economic Ordering Quantity
2AO 2 4,000 units 12 120
EOQ = = = 2,400 units
C 20  10%
(ii) Calculation of extra cost
i. Ordering & carrying cost (when order size is 2,400 units i.e. at EOQ)

2AOC = 2  48,000  120  2.00 = `4,800

ii. Ordering & carrying cost (when order size is 4,000 units)

Ordering Cost = No. of orders × Cost per order

48,000
=  120 = `1,440
4,000

Carrying Cost = ROQ × ½ × C

= 4,000 × ½ × 2 = `4,000
Total ordering & carrying cost = 1,440 + 4,000 = `5,440
Extra cost (ii) - (i) = `5,440 - `4,800 = `640
(iii) Minimum Carrying Cost
The carrying or storage cost depends upon the size of the order. It will be minimum when the order
size is least.
In the question the two order sizes are 2,400 units and 4,000 units. Hence, 2,400 units is the least of
the two order sizes. At this size carrying cost will be minimum.
The minimum carrying cost in this case will be as under:
= ½ × 2,400 units × 10% of `20 = `2,400

PYQ 4
The Complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: Super
Grow and Nature's Own. The following information is collected:
Fertilizer
Particulars
Super Grow Nature's Own
Annual Demand 2,000 bags 1,280 bags
Annual relevant carrying cost per bag `480 `560
Relevant ordering cost per purchase order `1,200 `1,400
Required:
(1) Compute EOQ for Super Grow and Nature's Own.
(2) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual relevant
carrying costs for Super Grow and Nature's Own?

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 MATERIALS 1.4

(3) For the EOQ, Compute the number of deliveries per year for Super Grow and Nature's Own.
[(8 Marks) Nov 1999]

Answer
2AO
(1) EOQ =
C
2  2,0001,200
EOQ for Super Grow Fertilizer = = 100 bags
480
2  1,280 1,400
EOQ for Nature’s Own Fertilizer = = 80 bags
560

(2) Total annual relevant costs = Total annual relevant ordering costs + Total annual
relevant carrying costs
 2,000 bags 
Super Grow Fertilizer =  1,200  + (100 bags × ½ × 480)
 100 bags 
= `24,000 + `24,000 = `48,000
 1,280 bags 
Nature’s Own Fertilizer =  × 1,400  + (80 bags × ½ × 560)
 80 bags 
= `22,400 + `22,400 = `44,800

Annual requirement
(3) Number of deliveries per year = (Here, ROQ = EOQ)
ROQ
Super Grow Fertilizer = 2,000 ÷ 100 = 20 orders
Nature’s Own Fertilizer = 1,280 ÷ 80 = 16 orders

PYQ 5
A Company has the option to procure a particular material from two sources:
 Source I assures that defectives will not be more than 2% of supplied quantity.
 Source II does not give any assurrance, but on the basis of past experience of supplies received from
it, it is observed that defective percentage is 2.8%.
The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is lower by `100 as
compared to Source I. The defective units of mateiral can be rectified for use at a cost of `5 per unit.
You are required to find out which of the two sources is more economical.
[(8 Marks) May 2001]

Answer
Statement of Cost of Procurement of Material for a Lot Size of 1,000 Units
Particulars Source I Source II
Lot size (Given) 1,000 units 1,000 units
Percentage of defective units 2% 2.8%
Defective units 20 units 28 units
Additional price paid per lot `100 Nil
Cost of rectifying defective @ `5 per unit `100 `140
Total Relevant Cost `200 `140

On comparing the total relevant cost, we can say it is more economical to procure material from Source
II.

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 MATERIALS 1.5

PYQ 6
A Company manufactures a product from a raw material, which is purchased at `60 per kg. The company
incurs a handling cost of `360 plus freight of `390 per order. The incremental carrying cost of inventory of
raw material is `0.50 per kg per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is `9 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:
(a) Calculate the economic order quantity of raw materials.
(b) Advice, how frequently should orders for procurement be placed.
(c) If the company proposes to rationalise placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
[(10 Marks) Nov 2001]
Answer
2AO 2  40,000  750
(a) EOQ = = = 2,000 kgs
C 15
A = Annual usage of raw Material
= 1 unit of raw material gives 2.5 units of Finished Goods
Therefore, for 1,00,000 units of finished goods, material required
1,00,000
= = 40,000 Kgs
2.5
O = Ordering cost per order
= handling cost per order + freight per order
= `360 + `390 = `750
C = Carrying cost or holding cost of inventory per unit p.a.
= Carrying cost per unit p.a. + interest cost of investment in inventory per unit
p.a.
= (`0.50 per unit per month × 12 months) + `9 per kg p.a.
= `6 + ` 9 = `15 per kg p.a.

(b) Frequency of placing order/time interval between order

365 days or 12 months 12 months
= = = 0.6 month
* No. of orders 20 orders
Or
365 days
= = 18 days (approx.)
20 orders
Annual requirement 40,000 kgs
*No. of orders = = = 20 orders
EOQ 2,000 kgs

(c) Statement Showing % of Discount to be Negotiated for Placing Quarterly Orders

Particulars `
(A) Total ordering & carrying cost at EOQ (when order size 2,000 kgs)
Ordering Cost (40,000/2,000 × 750) 15,000
Carrying Cost (2,000 × ½ × 15) 15,000
Total Cost (A) 30,000

(B) Total ordering & carrying cost at quarterly orders (when order size 10,000 kg)
Ordering Cost (40,000/10,000 × 750) 3,000
Carrying Cost (10,000 × ½ × 15) 75,000

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 MATERIALS 1.6

Total Cost (B) 78,000

Extra Cost or Discount to be negotiated (B)-(A) 48,000
÷ Annual Requirement 40,000 kgs
Discount per kg `1.20
Purchase price per kg ` 60.00
 Discount   1.20 
% of Discount  100  or  100  2%
 Purchase price   60 

PYQ 7
The quarterly production of a company’s product which has a steady market is 20,000 units. Each unit of a
product requires 0.5 kg. of raw material. The cost of placing one order for raw material is `100 and the
inventory carrying cost is `2 per kg p.a. The lead time for procurement of raw material is 36 days and safety
stock of 1,000 kgs of raw materials is maintained by the company.
The company has been able to negotiate the following discount structure with the raw material
supplier:
Order Quantity (Kg) Discount
Upto 6,000 Nil
6,000 - 8,000 `400
8,000 - 16,000 `2,000
16,000 - 30,000 `3,200
30,000 - 45,000 `4,000
You are required to:
(a) Calculate the re-order point taking 30 days in a month.
(b) Prepare a statement showing the total cost of procurement and storage of raw materials after
considering the discount if the company elects to place one, two, four or six orders in the year.
(c) State the number of orders which the company should place to minimize the costs after taking EOQ
also into consideration.
[(8 Marks) May 2002]

Answer
(a) Re-order point = (Normal consumption per day × Normal lead time) + Safety stock
= [(40,000 kg/360 days) × 36 days] + 1,000 kg
= 4,000 kg + 1,000 kg = 5,000 kg

(b) Statement Showing the Total Cost of Procurement and Storage of Raw Materials
(After considering the discount)
Ordering Cost Storage Cost of
Order No. of Storage Cost
(No. of Orders Safety Stock Discount Total Cost
Size Orders (½ × ROQ × 2)
× `100) (1,000 × 2)
40,000 1 100 40,000 2,000 4,000 38,100
20,000 2 200 20,000 2,000 3,200 19,000
10,000 4 400 10,000 2,000 2,000 10,400
6,666.66 6 600 6,667 2,000 400 8,867

(c) Number of orders which the company should place to minimize the costs after taking EOQ also into
consideration is 20 orders each of size 2,000 kgs. The total cost of procurement and storage in this case
comes to `6,000, which is minimum.
Working Notes
1. Annual production of finished product 80,000 units
(20,000 units per quarter × 4 quarters)

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 MATERIALS 1.7

2. Raw material required for 80,000 units 40,000 kg

(80,000 units × 0.5 kg for production of one unit)

2  40,000 kg  100
3. EOQ 2,000 kg
2
4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg

Total cost = 2AOC + Safety stock × C

= 2  40,000  100  2 + 1,000 × 2 = 6,000

PYQ 8
A company manufactures 5,000 units of a product per month. The cost of placing an order is `100. The
purchase price of the raw material is `10 per kg. The re-order period is 4 to 8 weeks. The consumption of
raw materials varies from 100 kg to 450 kg per week, the average consumption being 275 kg. The carrying
cost of inventory is 20% per annum.
You are required to calculate:
(i) Re-order quantity (iv) Minimum level
(ii) Re-order level (v) Average stock level.
(iii) Maximum level
[(6 Marks) Nov 2007]

Answer
2AO 2  *14,300  100
(i) Re-order quantity (ROQ) = = = 1,196 kgs
C 10  20%
*Annual consumption of RM (A) = Average Consumption per week × 52 weeks
= 275 kgs × 52 weeks = 14,300 kgs
(ii) Re-order level (ROL) = Maximum usage × Maximum re-order period
= 450 kgs × 8 weeks = 3,600 kgs
(iii) Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 3,600 kgs + 1,196 kgs – (100 kgs × 4 weeks)
= 4,396 kgs
(iv) Minimum level = ROL – (Normal usage × Normal re-order period)
= 3,600 kgs. – (275 kgs × 6 weeks = 1,950 kgs
(v) Average stock level = ½ (Minimum level + Maximum level)
= ½ (4,396 kgs + 1,950 kgs) = 3,173 kgs
Or
= (Minimum level + ½ × ROQ)
= (1,950 kgs + ½ × 1,196 kgs) = 2,548 kgs

PYQ 9
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 `800 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year
basis. The company estimates that it costs `9,000 to place a single purchase order and about `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.

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 MATERIALS 1.8

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 `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 `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?
[(2+1+1+2+3=9 Marks) May 2004]

Answer
(i) Computation of economic order quantity (EOQ)

2AO 2  54,000  9,000

EOQ = = = 1,800 castings
C 300

(ii) Assuming a 15% risk of being out of stock

Safety stock = Safety stock for one day = 54,000/360 days = 150 castings
Re-order point = Safety Stock + (Average lead time × Average consumption per day)
= 150 + (6 Days ×150 castings per day) = 1,050 castings

(iii) Assuming a 5% risk of being out of stock

Safety stock = Safety stock for three days = 150 × 3 days = 450 castings
Re-order point = 450 castings + 900 castings = 1,350 castings

(iv) Total cost of ordering = (54,000/1,800) × `9,000 = `2,70,000

Total cost of carrying = (450 × 300) + (1,800 × ½ × 300) = `4,05,000

(v) (a) Computation of new EOQ :

2  54000  600
EOQ = = 300 castings
720
(b) Total number of orders to be placed in a year:
360days
= = 2 Days
 180orders

Each order is to be placed after 2 days while under old purchasing policy each order is placed after
12 days.
54,000
*No. of orders placed = = 180 orders
300

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 MATERIALS 1.9

PYQ 10
RST Limited has received an offer of quantity discount on its order of materials as under:
Price per tonne Tonnes number
`9,600 Less than 50
`9,360 50 and less than 100
`9,120 100 and less than 200
`8,880 200 and less than 300
`8,640 300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is `12,500 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 EOQ if there are no quantity discounts and the price per tonne is `10,500.
[(4+2=6 Marks) Nov 2004]

Answer
(i) Statement Showing Most Economical Purchase Level
Cost of
Ordering Cost Carrying Cost
Order No. of Orders Purchase
(No. of Orders (½ × ROQ × Total Cost
Size (A/ROQ) (500 × Price
× `12,500) Price × 25%)
per Tonne)
40 12.5 48,00,000 1,56,250 48,000 50,04,250
50 10 46.80,000 1,25,000 58,500 48,63,500
100 5 45,60,000 62,500 1,14,000 47.36,500
200 2.5 44,40,000 31,250 2,22,000 46,93,250
300 1.67 43,20,000 20,875 3,24,000 46,64,875
Most economical purchase level is 300 units having lower total cost.

2AO 2  500  12,500

(ii) EOQ = = = 69 tonnes
C 10,500  25%

PYQ 11
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 `1
Ordering cost `12 per order
Inventory carrying cost 24% p.a.
Normal lead time 15 days
Safety stock 30 days consumption
Required
(a) Re-order quantity
(b) Re-order level
(c) What should be the inventory level (ideally) immediately before the material order is received?
[(2+1+1=4 Marks) May 2005]

Answer
(a) Re-order quantity
2AO 2  12,000  12
EOQ = = = 1,095 units
C 1.00  24%

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 MATERIALS 1.10

(b) Re-order level

Re-ordering Level = Safety stock + Consumption during lead time
 12,000   12,000 
=  360  30   360  15
   
= 1,000 + 500 = 1,500 units

(c) Ideal Stock Level

Ideal Stock Level = ROL - Consumption during lead time
= 1,500 – 500 = 1,000 units

PYQ 12
PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a
component X which is purchased at `15 per unit. For every finished product, 2 units of component X
are required. The Ordering cost is `350 per order and the Carrying cost is 12% p.a.
Required:
(i) Calculate the economic order quantity for Component X.
(ii) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has
to incur?
(iii) What is the minimum carrying cost, the Company has to incur?
[(3+3+2= 8 Marks) May 1999, 2006]

Answer
2AO 2  12,48,000  350
(i) EOQ = = = 22,030 units
C 15  12%

Annual consumption = 52,000 units of FG × 2 units of X for 1 unit of FG × 12 month

= 12,48,000 units

(ii) Statement Showing Extra Cost:

Particulars `
(A) Ordering & carrying cost at EOQ (when order size 22,030 kgs)
Ordering Cost 12,48,000/22,030 × 350 19,828
Carrying Cost 22,030 units × ½ × 15 × 12% 19,827
Total Cost (A) 39,655

(B) Ordering & carrying cost (when order size 52,000 units)
Ordering Cost 12,48,000/52,000 × 350 8,400
Carrying Cost 52,000 units × ½ × 15 × 12% 46,800
Total Cost (B) 55,200
Extra Cost (B-A) 15,545

(iii) Minimum carrying cost = 22,030 units × ½ × 15 × 12% = 19,827

*At EOQ, the total ordering cost & total carrying cost are always equal, but in the above answer there is a
marginal difference between the two figures because of approximation made in arriving at the figure of EOQ.

PYQ 13
PQR Ltd. manufactures a special product, which requires 'ZED'. The following particulars were collected for
the year 2005-06:
Monthly demand of Zed : 7,500 units
Cost of placing an order : `500

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 MATERIALS 1.11

Re-order period : 5 to 8 weeks

Cost per unit : `60
Carrying cost : 10% p.a.
Normal usage : 500 units per week
Minimum usage : 250 units per week
Maximum usage : 750 units per week
Required:
(i) Re-order quantity (iv) Maximum stock level
(ii) Re- order level (v) Average stock level.
(iii) Minimum stock level
[(2×5= 10 Marks) Nov 2006]

Answer
2AO 2  26,000  500
(i) Re-order Quantity = = = 2,082 units
C 60  10%
A = Annual Requirement in units
= Normal usage per week × 52 weeks
= 500 units × 52 weeks = 26,000 units

(ii) Re-order level = Maximum re-order period × Maximum usage

= 8 Weeks × 750 units per week = 6,000 units.

(iii) Minimum stock level = Re order level – (Normal usage × Average re-order period)
= 6,000 – (500 units per week × 6.5weeks)
= 6,000 – 3,250 = 2,750 units

(iv) Maximum stock level = Re-order level + Re-order quantity – (Minimum usage ×
Minimum re-order period)
= 6,000 + 2,082 – (250 units per week × 5 weeks)
= 6,000 + 2,082 – 1,250 = 6,832 units

(v) Average stock level = ½ (Minimum stock + Maximum stock)

= ½ (2,750 + 6,832) = 4,791 units
Or
= ½ ROQ + Minimum stock
= ½ × 2,082 + 2,750 = 3,791 units

PYQ 14
The average annual consumption of a material is 18,250 units at a price of `36.50 per unit. The storage cost
is 20% on an average inventory and the cost of placing an order is `50. How much quantity is to be
purchased at a time?
[(2 Marks) May 2007]

Answer
2AO 2  18,250  50 18,25,000
EOQ = = = = 500 units
C 20% of 36.50 7.3

PYQ 15
ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its products is a
special bowl, disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10 pieces

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 MATERIALS 1.12

at a price of `50 per pack.

The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year.
The company purchases the bowl direct from manufacturer at `40 per pack within a three days lead time.
The ordering and related cost is `8 per order. The storage cost is 10% per annum of average inventory
investment.
Required
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when should the next order to be placed (Assuming that the company does maintain a
safety stock and that the present inventory level is 333 packs with a year of 360 working days).
[(2+1+3+ 1=8 Marks) May 2008]

Answer
2AO 2  40,000  8
(i) EOQ = = = 400 packs
C 40  10%
Annual Re quirement 40,000
(ii) No. of orders needed = = = 100 orders
EOQ 400

(iii) Total cost of ordering and carrying (at EOQ level):

= 2AOC = 2  40,000  8  4 = `1,600

(iv) Normal usage per day = 111 packs (40,000 packs /360 days)
Present inventory = 333 packs
Present inventory in terms of no. of days = 3 days consumption (333 packs/111 Packs per
day)
Normal lead time = 3 days

Since, Present inventory level is equal to normal lead time; next order should be placed
immediately to avoid stock out situation.

PYQ 16
The annual carrying cost of material ‘X’ is `3.6 per unit and its total carrying cost is `9,000 per annum. What
would be the Economic order quantity for material ‘X’, if there is no safety stock of material X?
[(2 Marks) Nov 2008]

Answer
C = `3.6 per unit per annum
Total carrying cost = ½ × EOQ × C
9,000 = ½ × EOQ × 3.60
9,000  2
EOQ = = 5,000 units
3.6
Assumption: Company follows EOQ policy

PYQ 17
The following information relating to a type of Raw material is available:
Annual demand 2000 units
Unit price `20.00
Ordering cost per order `20.00

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 MATERIALS 1.13

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) Nov 2009]

Answer
2AO
(i) EOQ =
C
2  2,000  20
=
20  10%(2%  8%)
80,000
= = 200 units
2

(ii) Total Annual Inventory Cost including purchase

Purchase cost (2,000units × `20 each) = `40, 000
Ordering Cost *10 orders ×20 per order = `200
Carrying cost (200 × ½ × 20 × 10%) = `200
Total annual inventory cost including purchase = `40,400

* No. of Order (2,000 ÷ 200) = 10 orders

PYQ 18
Re-order quantity of material ‘X’ is 5,000 kgs; Maximum level 8,000 kgs; Minimum usage 50 kgs per hour;
Minimum re-order period 4 days; daily working hours in the factory is 8 hours. You are required to calculate
the re-order level of material ‘X’.
[(2 Marks) May 2010]

Answer
Re-order level = Max level – ROQ + (Min lead time × Min consumption per day)
= 8,000 – 5,000 + [4 × 400 (50 kgs per hour × 8 hours per day)]
= 8,000 – 5,000 + 1,600
= 4,600 kg

PYQ 19
ABC Limited has received an offer of quantity discounts on its order of materials as under:

Price per tonne Tones

`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 tones the ordering cost per order is `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 EOQ, if there are no quantity discounts and the price per ton is `5,250.
[(5 Marks) Nov 2010]

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 MATERIALS 1.14

Answer
(i) Statement Showing Most Economical Purchase Level
Annual Total Ordering Total Carrying Material Total Cost
Order
Consumption Cost Cost Cost (Purchase +
Size
(in tonnes) (A/ROQ × 6,250) (½ × ROQ × Price × (500 × Price) Ordering +
(ROQ)
25%) Carrying)
500 40 78,125 24,000 24,00,000 25,02,125
(4,800 × 500)
500 50 62,500 29,250 23,40,000 24,31,750
(4,680 × 500)
500 100 31,250 57,000 22,80,000 23,68,250
(4560 × 500)
500 200 15,625 1,11,000 22,20,000 23,46,625
(4440 × 500)
500 300 10,417 1,62,000 21,60,000 23,32,417
(4320 × 500)
Most Economical order size is 300 units because at this level, the total cost is minimum i.e. `23,32,417

2AO 2 500  6,250

(ii) EOQ = =
C 5,250  25%
62,50,000
= = 69 tones
1,312.50

PYQ 20
KL Limited produces product ‘M’ which has a quarterly demand of 8,000 units. The product requires 3 kgs
quantity of material ‘X’ for every finished unit of product. The other information are follows:
Cost of material ‘X’ : `20 per kg.
Cost of placing an order : `1,000 per order
Carrying Cost : 15% per annum of average inventory
You are required:
(i) Calculate the Economics Order Quantity for material ‘X’.
(ii) Should the company accept an offer of 2 percent discount by the supplier, if he wants to supply the
annual requirement of material ‘X’ in 4 equal quarterly installments?
[(5 Marks) Nov 2012]

Answer
2AO 2  96,000  1,000
(i) EOQ = = = 8,000 Kg
C 20  15%

(ii) Statement of Evaluation

Particulars EOQ Quarterly
Purchase Price @ `20/`19.60/kg of 96,000 kg `19,20,000 `18,81,600
Ordering cost @ `1,000 per order 12 orders × `1,000 4 orders × `1,000
= `12,000 = `4,000
Carrying cost ROQ × ½ × Price × 15% 8,000 × ½ × 20 × 15% 24,000 × ½ × 19.60 ×15%
= `12,000 = `35,280
Total Cost `19,44,000 `19,20,880

Advise: Company should accept 2% discount offer (Net saving by acceptance is `23,120).

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 MATERIALS 1.15

Working Notes
(i) A = 1 unit of product ‘M’ requires 3 kgs of ‘X’
32,000 units product ‘M’ requires 96,000 kg of ‘X’
(3 kg × 32,000)

Annual demand of ‘M’ = 8,000 units × 4 quarters = 32,000 units

96,000
(ii) No. of orders at EOQ = = 12 orders
8,000

96,000
(iii) ROQ at 2% offer = = 24,000 kg
4 orders

PYQ 21
Primex Limited produces product ‘P’. It uses annually 60,000 units of a material ‘Rex’ costing `10 per unit.
Other relevant information are:
Cost of placing an order : `800 per order
Carrying cost : 15% p.a. of average inventory
Re-order period : 10 days
Safety stock : 600 units
The company operates 300 days in a year.

You are required to calculate:

(i) Economic Order Quantity for material ‘Rex’.
(ii) Re-order Level
(iii) Maximum Stock Level
(iv) Average Stock Level
[(5 Marks) Nov 2013]

Answer
2AO 2  60,000  800
(i) EOQ = = = 8,000 units
C 10  15%

(ii) Re-order Level (ROL) = Safety Stock + (Re-order period × Average consumption
per day)
 60,000 Units 
= 600 +  10 Days ×  = 2,600 units
 300 Days 

(iii) Maximum Stock Level = ROL + ROQ – (Re-order period × Average consumption per
day)
 60,000 Units 
= 2,600 + 8,000 –  10 Days × = 8,600 units
 300 Days 

(iv) Average stock level = ½ of ROQ + Safety stock

= ½ of 8,000 + 600 units = 4,600 units

PYQ 22
A company manufactures a product from a raw material, which is purchased at `80 per kg. The company
incurs a handling cost of `370 plus freight of `380 per order. The incremental carrying cost of inventory of
raw material is `0.25 per kg per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is `12 per kg per annum. The annual production of the product is 1,00,000 units

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 MATERIALS 1.16

and 2.5 units are obtained from one kg of raw material.

Required:
(a) Calculate the economic order quantity of raw materials.
(b) Advice, how frequently should order for procurement be placed.
(c) 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?
[(8 Marks) May 2014]

Answer
2AO 2 40,000  750
(a) EOQ = = = 2,000 kgs
C 15
Where,
A = Annual usage of raw Material
= 1 unit of raw material gives 2.5 units of Finished Goods
Therefore, for 1,00,000 units of finished goods, material required
1,00,000
= = 40,000 Kgs
2.5

O = Ordering cost per order = handling cost per order + freight per order
= `370 + `380 = `750

C = Carrying cost and holding cost of inventory per unit p.a.

= Carrying cost per unit p.a. + Interest cost of investment in inventory per unit
p.a.
= (`0.25 per kg per month × 12 months) + `12 per kg p.a.
= `3 + `12 = `15 per kg p.a.

(b) Frequency of placing order/time interval between order

365 days or 12 months 12 months
= = = 0.6 month
* No. of orders 20 orders
Or
365 days
= = 18 days (approx)
20 orders
Working Notes:
Annual requirement 40,000 kgs
*No. of orders = = = 20 Orders
EOQ 2,000 kgs

(c) Statement of % of Discount to be Negotiated for Placing Quarterly Orders

Particulars `
(A) Total ordering & carrying cost at EOQ (when order size 2,000 kgs)
Ordering Cost (40,000/2,000 × 750) 15,000
Carrying Cost (2,000 × 1/2 × 15) 15,000
Total Cost (A) 30,000

(B) Total ordering & carrying cost at quarterly orders (when order size 10,000 kg)
Ordering Cost (40,000/10,000 × 750) 3,000
Carrying Cost (10,000 × 1/2 × 15) 75,000
Total Cost (B) 78,000

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 MATERIALS 1.17

Extra Cost or Discount to be negotiated (B)-(A) 48,000

÷ Annual Requirement 40,000 kgs
Discount per kg `1.20
Purchase price per kg `80.00
 Discount   1.20 
% of Discount  100  or  100  1.50%
 Purchase price   80 

PYQ 23
Following details are related to a manufacturing concern:
Re-order Level 1,60,000 units
Economic Order Quantity 90,000 units
Minimum Stock Level 1,00,000 units
Maximum Stock Level 1,90,000 units
Average Lead Time 6 days
Difference between minimum and maximum lead time 4 days
Calculate:
(1) Maximum consumption per day
(2) Minimum consumption per day
[(5 Marks) Nov 2014]

Answer
(1) Maximum consumption per day:
Re-order level = Maximum re-order period × Max consumption per day
1,60,000 units = 8 days × Maximum consumption per day
1,60,000 units
Max consumption per day = = 20,000 units
8 days

(2) Minimum consumption per day:

Maximum stock level = Re-order level + Re-order quantity - (Min lead time ×
Minimum consumption per day)
1,90,000 units = 1,60,000 units + 90,000 units - (4 days × Minimum
consumption per day)
2,50,000 – 1,90,000 = 4 days × Minimum consumption per day
Minimum consumption = 15,000 units per day

Working notes:
Calculation of Minimum Lead Time:
Maximum lead time – Minimum lead time = 4 days
Or Maximum lead time = Minimum lead time + 4 days (i)
Average lead time = 6 days
Max lead time  Min lead time Min lead time  4 days  Min lead time
=
2 2
2 Minimum lead time + 4 Days = 6 days × 2 = 12 days
Minimum lead time = (12 days – 4 days) ÷ 2 = 4 days

PYQ 24
Supreme Limited is a manufacturer of energy saving bulbs. To manufacture the finished product one unit of
component ‘LED’ is required. Annual requirement of component ‘LED’ is 72,000 units, the cost being `300
per unit. Other relevant details for the year 2015-2016 are:

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 MATERIALS 1.18

Cost of placing an order : `2,250

Carrying cost of inventory : 12% per annum
Lead time:
Maximum : 20 days
Minimum : 8 days
Average : 14 days
Emergency purchase : 5 days
Consumption:
Maximum : 400 units per day
Minimum : 200 units per day
Average : 300 units per day
You are required to calculate:
(a) Re-order quantity
(b) Re-ordering level
(c) Minimum stock level
(d) Maximum stock level
(e) Danger level
[(5 Marks) Nov 2016]

Answer
2AO 2  72,000  2,250
(a) ROQ = = = 3,000 units
C 12% of 300

(b) Re-ordering Level = Maximum consumption × Maximum lead time

= 400 units × 20 days = 8,000 units

(c) Minimum Level = ROL – (Average consumption × Average lead time)

= 8,000 units – (300 units × 14 days) = 3,800 units

(d) Maximum Level = ROL + ROQ – (Minimum consumption × Minimum lead time)
= 8,000 units + 3,000 units – (200 units × 8 days)= 9,400 units

(e) Danger Level = Average consumption × Emergency delivery time

= 300 units × 5 days = 1,500 units
Or
= Minimum consumption × Emergency delivery time
= 200 units × 5 days = 1,000 units

PYQ 25
ASJ manufacturer produces a product which requires a component costing `1,000 per unit. Other
information related to the component are as under:
Usage of component 1,500 units per month
Ordering cost `75 per order
Storage cost rate 2% per annum
Obsolescence rate 1% per annum
Maximum usage 400 units per week
Lead time 6 - 8 weeks
The firm has been offered a quantity discount of 5% by the supplier on the purchase of component, if the
order size 6,000 units at a time.

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 MATERIALS 1.19

You are required to compute:

(i) Economic order quantity.
(ii) Re-order level and advise whether the discount offer be accepted by the firm or not.
[(5 Marks) May 2018]

Answer
2AO 2 1,50012  75
(i) EOQ = = = 300 units
C 1,000 3%

(ii) Evaluation of 5% discount offer

At EOQ (order At order size
Particulars
size 300 units) 6,000 units
Purchase cost 18,000 units @ `1,000/950 per unit 1,80,00,000 1,71,00,000
Ordering cost (A/ROQ × 75) 4,500 225
Carrying cost (ROQ × ½ × C) (C = 3% of 1,000/950) 4,500 85,500
Total cost 1,80,09,000 1,71,85,725
Advise: Accept the discount offer.

PYQ 26
M/S X private Limited is manufacturing a special product which requires a component “SKY BLUE” the
following particulars are available for the year ended 31st march, 2018:
Annual demand of “SKY BLUE” 12,000 units
Cost of placing an order `1,800
Cost per unit of “SKY BLUE” `640
Carrying cost per unit 18.75%

The company has been offered a quantity discount of 5% on purchase of “SKY BLUE” provided order size is
3,000 components a time.
You are required to compute:
(1) Economic order quantity.
(2) Advise whether the discount offer be accepted by the firm or not.
[(5 Marks) May 2018]

Answer
2AO 2 12,0001,800
(1) EOQ = = = 600 units
C 64018.75%

(2) Evaluation of 5% discount offer

At EOQ (order At order size
Particulars
size 600 units) 3,000 units
Purchase cost 12,000 units @ `640/608 per unit 76,80,000 72,96,000
Ordering cost (A/ROQ × 1,800) 36,000 7,200
Carrying cost (ROQ × ½ × C) (C = 18.75% of 640/608) 36,000 1,71,000
Total cost 77,52,000 74,74,200
Advise: Accept the discount offer.

PYQ 27
M/S SJ Private Limited manufactures 20,000 units of a product per month. The cost of placing an order is
`1,500. The purchase price of the raw material is `100 per kg. The re-order period is 5 to 7 weeks. The

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 MATERIALS 1.20

consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption being 250
kg. The carrying cost of inventory is 9.75% per annum.
You are required to calculate:
(i) Re-order quantity (iv) Minimum level
(ii) Re-order level (v) Average stock level.
(iii) Maximum level
[(5 Marks) Nov 2018]

Answer
2AO
(i) Re-order quantity (ROQ) =
C
2  13,000  1,500
= = 2,000 kgs
100  9.75%

A = Annual Requirement in units

= Normal usage per week × 52 weeks
= 250 kgs × 52 weeks = 13,000 kgs

(ii) Re-order level (ROL) = Maximum usage × Maximum re-order period

= 300 kgs × 7 weeks = 2,100 kgs
(iii) Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 2,100 kgs + 2,000 kgs – (200 kgs × 5 weeks)
= 3,100 kgs
(iv) Minimum level = ROL – (Normal usage × Normal re-order period)
= 2,100 kgs. – (250 kgs × 6 weeks) = 600 kgs
(v) Average stock level = ½ (Minimum level + Maximum level)
= ½ (600 kgs + 3,100 kgs) = 1,850 kgs
Or
= (Minimum level + ½ × ROQ)
= (600 kgs + ½ × 2,000 kgs) = 1,600 kgs

PYQ 28
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing company during
the month of April 2019:
Date Particulars Quantity (kg) Rate per kg
April 4 Purchase 3000 `16
April 8 Issue 1000
April 15 Purchase 1500 `18
April 20 Issue 1200
April 25 Return to supplier
(out of purchase made on April 15) 300
April 26 Issue 1000
April 28 Purchase 500 `17
Opening stock as on 01-04-2019 is 1000 kg @ `15 per kg. On 30th April, 2019 it was found that 50 kg of
material ‘CXE’ was fraudulently misappropriated by the store assistant and never recovered by the
company.
Required:
(1) Prepare a store ledger account under each of the following method of pricing the issue:

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 MATERIALS 1.21

A. Weighted Average Method, B. LIFO

(2) What would be the value of material consumed and value of closing stock as on 30 -04-2019 as
per these two methods?
[(10 Marks) May 2019]

Answer
(1) (A) Stores Ledger of Material CXE (Weighted Average Method)
Date Receipts Issues Balance
April Units Rate Value Units Rate Value Units Rate Value
1 - - - - - - 1000 15 15,000
4 3000 16 48,000 - - - 4000 15.75 63,000
8 - - - 1000 15.75 15,750 3000 15.75 47,250
15 1500 18 27,000 - - - 4500 16.50 74,250
20 - - - 1200 16.50 19,800 3300 16.50 54,450
25 - - Return 300 18 5400 3000 16.35 49,050
26 - - - 1000 16.35 16,350 2000 16.35 32,700
28 500 17 8,500 - - - 2500 16.48 41,200
30 - - Shortage 50 16.48 824 2450 16.48 40,376

(B) Stores Ledger of Material CXE (LIFO Method)

Date Receipts Issues Balance
April Units Rate Value Units Rate Value Units Rate Value
1 - - - - - - 1000 15 15,000
4 3000 16 48,000 - - - 1000 15 15,000
3000 16 48,000
8 - - - 1000 16 16,000 1000 15 15,000
2000 16 32,000
15 1500 18 27,000 - - - 1000 15 15,000
2000 16 32,000
1500 18 27,000
20 - - - 1200 18 21,600 1000 15 15,000
2000 16 32,000
300 18 5,400
25 - - Return 300 18 5400 1000 15 15,000
2000 16 32,000
26 - - - 1000 16 16,000 1000 15 15,000
1000 16 16,000
28 500 17 8,500 - - - 1000 15 15,000
1000 16 16,000
500 17 8,500
30 - - Shortage 50 17 850 1000 15 15,000
1000 16 16,000
450 17 7,650

(2) Value of Material Consumed and Closing Stock

Particulars Weighted Average LIFO
Opening stock as on 01.04.2019 15,000 15,000
Add: Purchase 83,500 83,500
Less: Return to supplier (5,400) (5,400)
Less: Abnormal loss (824) (850)
Less: Closing Stock as on 30.04.2019 (40,376) (38,650)
Value of Material Consumed 51,900 53,600

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 MATERIALS 1.22

PYQ 29
Surekha limited produces 4,000 litres of paints on quarterly basis. Each litre requires 2 kg of raw material.
The cost of placing one order for raw material is `40 and the purchasing price of raw material is `50 per kg.
The storage cost and interest cost is 2% and 6% per annum respectively. The lead time for procurement of
raw material is 15 days.

Calculate Economic Order Quantity and Total Annual Inventory Cost in respect of the above raw
material.
[(5 Marks) Nov 2019]

Answer
2AO 2 × 32,000 × 40
(iii) EOQ = =
C 50 × 8%(2% + 6%)
25,60,000
= = 800 Kgs
4

A = 4,000 litres × 4 Quarters × 2 kg of raw material

= 32,000 Kgs

(iv) Total Annual Inventory Cost including purchase

Annual inventory cost = Purchase cost + Carrying cost + Ordering cost

A
= Purchase quantity × Purchase price + ½ × EOQ × C + ×O
EOQ
32,000
= 32,000 kgs × `50 + ½ × 800 × 4 + × 40
800
= `16,00,000 + `1,600 + `1,600

= `16,03,200

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 MATERIALS 1.23

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y - -
5 Y Y - -
6 Y Y Y Y
7 Y Y Y Y
8 Y Y - -
9 Y Y Y Y
10 Y Y Y Y
11 Y Y Y Y
12 Y Y Y Y
13 Y Y Y -
14 Y Y - -
15 Y Y Y Y
16 Y Y - -
17 Y Y - -
18 Y Y Y -
19 Y Y Y Y
20 Y Y Y -
21 Y Y Y -
22 Y Y Y Y
23 Y Y Y -
24 Y Y Y Y
25 Y Y Y -
26 Y Y Y -
27 Y Y Y -
28 Y Y Y Y
29 Y Y - -

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 CHAPTER - 2

EMPLOYEE COST

OR

LABOUR COST
LEARNING OBJECTIVE

After studying this chapter you will be able to

 Understand the need of labour cost control.
 Understand the attendance and the payroll procedure.
 Describe the meaning and accounting treatment of idle time and
overtime.
 Understand the concept of labour turnover and the various
methods of computing the same.
 Understand various systems of wage payment and incentives.
 Describe the efficiency rating procedures.
 EMPLOYEE COST OR LABOUR COST 2.1

PAST YEAR QUESTIONS

PYQ 1
The management of Sunshine Ltd. wants to have an idea of the profit foregone as a result of labour turnover
last year. Last year sales accounted to `66,00,000 and the P/V ratio was 20%.
The total number of actual hours worked by the direct labour force was 3,45,000. As a result of the
delays by the personnel department in filling vacancies due to labour turnover 75,000 potentially productive
hours were lost. The actual direct labour hours included 30,000 hours attributable to training new recruits,
out of which half of the hours were unproductive.
The costs incurred consequent on labour turnover revealed on analysis the following:
Settlement cost due to leaving `27,420
Recruitment costs `18,725
Selection costs `12,750
Training costs `16,105
Assuming that the potential production lost due to labour turnover could have been sold at
prevailing prices, ascertain the profit foregone last year on account of labour turnover.
[(5 marks) May 1998]

Answer
Calculation of profit foregone as a result of labour turnover:
Contribution foregone 13,20,000 × 75,000 hours `3,00,000
3,30,000 hours
Settlement cost due to leaving `27,420
Recruitment cost `18,725
Selection cost `12,750
Training cost `16,105
Total profit foregone `3,75,000

Working:
Calculation of productive hours:
Total actual hours worked (including training new recruits) 3,45,000
Less: Unproductive hours 30,000 hours × 1/2 (15,000)
Total productive hours 3,00,000
Potentially productive hours lost 75,000
Note: Unproductive training hours are considered as normal feature of the company.

PYQ 2
Calculate the earnings of a worker under Halsey Plan and Rowan Plan from the following particulars:
(1) Hourly rate of wages guaranteed 50 paise per hour.
(2) Standard time for producing one dozen articles 3 hours.
(3) Actual time taken by the worker to produce 20 dozen articles 48 hours.
[(5 Marks) Nov 1998]

Answer
Computation of earnings of a worker under Halsey Plan:
Earnings = (AH × R) + 50% (SH – AH) × R = (48 × 0.50) + 50% (60 – 48) × 0.50
= `27.00

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 EMPLOYEE COST OR LABOUR COST 2.2
Computation of earnings of a worker under Rowan Plan:

Earning = (AH × R) + AH × (SH – AH) × R = (48 × 0.50) + 48 × (60 – 48) × 0.50

SH 60
= `28.80
*SH = Time allowed by the management for 20 dozen articles
= 3 hours × 20 dozen = 60 hours

PYQ 3
A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a
particular product is 4 hours. Mr. P, a machine man, has been paid wages under the Rowan Incentive Plan
and he had earned an effective hourly rate of `37.50 on the manufacture of that particular product.

What could have been his total earnings and effective hourly rate, had he been put on Halsey
Incentive Scheme (50%)?
[(5 Marks) Nov 1999]

Answer
The following equation can be made:

Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH

37.50 = [30 AH + AH/4 (4 - AH) × 30] ÷ AH
37.50 AH = 30 AH + AH/4 (4 - AH) × 30
7.50 AH = AH/4 (4 - AH) × 30
7.50 AH = AH (4 - AH) × 7.50
1 = 4 - AH
AH = 3 hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Total earnings = (AH × R) + 50% (SH – AH) × R
= (3 × 30) + 50% (4 – 3) × 30 = `105

Effective hourly rate = Total earning ÷ hours worked

= `105 ÷ 3 hours = `35

PYQ 4
The present output details of a manufacturing department are as follows:

Average output per week 48,000 units from 160 employees

Saleable value of output `6,00,000
Contribution `2,40,000

The Board of Directors plans to introduce more mechanization into department at a capital cost of
`1,60,000. The effect of this will be to reduce the number of employees to 120, and increasing the output per
individual employee by 60%.

To provide the necessary incentive to achieve the increased output, The Board intends to offer a 1%
increase on the piece work rate of `1 per units for every 2% increase in average individual output achieved.
To sell the increased output, it will be necessary to decrease the selling price by 4%.

Calculate the extra weekly contribution resulting from the proposed change and evaluate for the
Board’s information, the desirability of introducing the change.
[(10 Marks) Nov 2000]

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 EMPLOYEE COST OR LABOUR COST 2.3
Answer
Calculation of original selling price per unit and materials cost:
Total Amount Per Unit
Sale value of 48,000 units 6,00,000 12.5
Less: Contribution 2,40,000 5.00
Total variable cost 3,60,000 7.50
Less: labour cost @ `1 per unit on 48,000 units 48,000 1.00
Material cost 3,12,000 6.50
Calculation of proposed output:
Output of 160 employees = 48,000
48,000 units
 Output per employee = = 300 units
160 employees
Proposed output per employee = 300 units + 60% = 480 units
Proposed number of employees = 120 units
 Proposed output = 480 units × 120 employees
= 57,600 units
Calculation of proposed piece work rate:
Proposed increase in piece work rate = 1% per 2% increase in individual output
% increase in individual output = 60%
60%
 Proposed % increase in piece work rate = = 30%
2
 Proposed piece work rate = `1 per unit + 30% = `1.30 per unit

Calculation of proposed selling price per unit:

Existing selling price per unit = `12.50
Proposed selling price per unit = `12.50 – 4% = `12 per unit

Statement of Extra Weekly Contribution from Proposed Charge

Particulars Amount Amount
Proposed sales value (57,600 units × `12) 6,91,200
Less: Total variable cost:
Direct material cost @ `6.5 per unit on 57,600 units 3,74,400
Labour cost @ `1.30 per unit on 57,600 units 74,880 (4,49,280)
Proposed contribution 2,41,920
Less: Existing contribution (2,40,000)
Extra contribution 1,920

PYQ 5
From the following information, calculate Labour turnover rate and Labour flux rate:
No. of workers as on 01.01.2000 = 7,600 workers
No. of workers as on 31.12.2000 = 8,400 workers
During the year, 80 workers left while 320 workers were discharged. 1,500 workers were recruited
during the year of these, 300 workers were recruited because of exits and the rest were recruited in
accordance with expansion plans.
[(5 Marks) May 2001]

Answer
No. of separation 80  320 × 100
Separation method = × 100 =
Average no. of workers 8,000
= 5%

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 EMPLOYEE COST OR LABOUR COST 2.4

Replacement method = No. of workersreplaced × 100 = 300 × 100

Average no. of workers 8,000
= 3.75%

Flux method (Alt 1) = No. of separation  No. of replaced × 100= 400 300 × 100
Averageno. of workers 8,000
= 8.75%

New Accession method = No. of new accessions × 100 = 1,500  300 × 100
Averageno. of workers 8,000
= 15%

Accession method = No. of accessions × 100 = 1,500 × 100

Averageno. of workers 8,000
= 18.75%

Flux method (Alt 2) = No. of accessions No. of separation × 100= 1,500  400 × 100
Averageno. of workers 8,000
= 23.75%

*Average no of workers = 7,600  8,400 = 8,000 workers

2

PYQ 6
The management of Company are worried about their increasing labour turnover in the factory and before
analyzing the causes and taking remedial steps, they want to have an idea of the profit foregone as a result of
labour turnover in the last year.
Last year sales amounted to `83,03,300 and P/V ratio was 20 per cent. The total number of actual
hours worked by the direct labour force was 4,45,000. As a result of the delays by the personnel department
in filling vacancies due to labour turnover 1,00,000 potentially productive hours were lost. The actual direct
labour hours included 30,000 hours attributable to training on new recruits, out of which half of the hours
were unproductive.
The costs incurred consequent on labour turnover revealed, on analysis the following:
Settlement cost due to leaving `43,820 Recruitment Costs `26,740
Selecting costs `12,750 Training costs `30,490
Assuming that the potential production lost as a consequence of labour turnover could have
been sold at prevailing prices, find the profit foregone last year on account of labour turnover.
[(5 Marks) Nov 2001]

Answer
Statement Showing Profit Foregone on Account of Labour Turnover
Particulars Amount
Contribution Foregone (1,00,000 hours × `3.862 per hour) 3,86,200
Settlement Cost due to leaving 43,820
Recruitment Costs 26,740
Selection Costs 12,750
Training Costs 30,490
Profit Foregone 5,00,000
Working Notes:
1. Calculation of productive hours:
Actual hours worked 4,45,000

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 EMPLOYEE COST OR LABOUR COST 2.5
Less: Unproductive training hours (½ of 30,000 hours) (15,000)
Actual productive hours 4,30,000
2. Contribution earned per productive hours:
Sales value 83,03,300
Contribution (20% of 83,03,300) 16,60,660
Contribution per productive hour (16,60,660 ÷ 4,30,000) `3.862
Note: Unproductive training hours are considered as normal feature of the company.

PYQ 7
The finishing shop of a company employs 60 direct workers. Each worker is paid `400 as wages per week of
40 hours. When necessary, overtime is worked upto a maximum of 15 hours per week per worker at time
rate plus one-half as premium. The current output on an average is 6 units per man hour which may be
regarded as standard output.
If bonus scheme is introduced, it is expected that the output will increase to 8 units per man hour.
The workers will, if necessary, continue to work overtime upto the specified limit although no overtime
premium will be paid.
The company is considering introduction of either Halsey Scheme or Rowan Scheme of wage
incentive system. The budgeted weekly output is 19,200 units. The selling price is `11 per unit and the direct
material cost is `8 per unit. The variable overheads amount to `0.50 per direct labour hour and the fixed
overhead is `9,000 per week.
Prepare a statement to show the effect on the Company's weekly profit of the proposal to
introduce (a) Halsey Scheme, and (b) Rowan Scheme.
[(10 Marks) May 2002]

Answer
Statement Showing Effect on Profit
Particulars Present Halsey Rowan
Sales Value (`11 × 19,200) 2,11,200 2,11,200 2,11,200
Less: Direct Materials Consumed (`8 × 19,200) (1,53,600) (1,53,600) (1,53,600)
Direct Labour Cost (refer above workings) (36,000) (28,000) (30,000)
Variable OH @ `0.50 per direct labour hour (1,600) (1,200) (1,200)
Contribution 20,000 28,400 26,400
Less: Fixed Overheads (9,000) (9,000) (9,000)
Weekly Profit 11,000 19,400 17,400
Effect on Profit (Under scheme – Present) - +8,400 +6,400
Working:
Calculation of total wages under the present scheme:
400
Wage rate per hour per worker = = `10 per hour
40 hours

Overtime rate per hour = Normal rate per hour + 50% premium
= `10 + 50% of `10 = `15 per hour
Average current output per hour = 6 units

Hours to be worked = 19,200 units = 3,200 hours

6 units per hour

Total normal hours available in a week = No. of workers × Hours per week
= 60 workers × 40 hours = 2,400 hours
Overtime hour required to be worked = Hours worked – Normal hours availale

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 EMPLOYEE COST OR LABOUR COST 2.6
= 3,200 – 2,400 = 800 hours
Total wages (under present scheme) = Normal wages + Overtime wages
= (2,400 hours × `10) + (800 hours × `15)
= 36,000

Total wages under the proposed scheme:

Standard hours for 19,200 units = 19,200 units = 3,200 hours

6 units per hour
Actual hours for 19,200 units = 19,200 units = 2,400 hours
8 units per hour

Under Halsey:
Total wages = (AH × R) + 50% (SH – AH) × R
= (2,400 × 10) + 50% (3,200 – 2,400) × 10 = `28,000

Under Rowan:
Total wages = (AH × R) + AH × (SH – AH) × R
SH
= (2,400 × 10) + 2,400 × (3,200 – 2,400) × 10 = `30,000
3,200

PYQ 8
A Company is undecided as to what kind of wage scheme should be introduced. The following particulars
have been compiled in respect of three systems, which are under consideration of the management:

Workers A B C
Actual hours worked in a week 38 40 34
Hourly rate of wages `6 `5 `7.20
Production in units:
Product P 21 – 60
Product Q 36 – 135
Product R 46 25 –
Standard time allowed per unit of each product is:
P Q R
Minutes 12 18 30
For the purpose of piece rate, each minute is valued at `0.10. You are required to calculate the wages of
each worker under:
(i) Guaranteed hourly rates basis.
(ii) Piece work earnings basis but guaranteed at 75% of basic pay (guaranteed hourly rate) if his earnings
are less than 50% of basic pay.
(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.
[(9 Marks) Nov 2002]

Answer
(i) Computation of wages of each worker under guaranteed hourly rate basis
Workers Actual hours worked in a week Hourly rate Wages (AH × R)
A 38 `6.00 `228.00
B 40 `5.00 `200.00
C 34 `7.20 `244.80

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 EMPLOYEE COST OR LABOUR COST 2.7
(ii) Computation of wages of each worker under piece work earnings basis
Product A B C
P 21 × 1.20 - 60 × 1.20
Q 36 × 1.80 - 135 × 1.80
R 46 × 3.00 25 × 3.00 -
Total Wages `228.00 `75.00 `315.00
50% of Basic Pay `114.00 `100.00 `122.40
Applicable Wages As Per Piece Rate 75% of Basic As Per Piece Rate
Final Wages `228.00 `150.00 (75% of `200) `315.00

(iii) Computation of wages of each worker under Premium bonus basis

Total Wages
Workers SH AH Wage Rate (AH × R) + AH × (SH – AH) × R
SH
A 38 hours 38 hours `6.00 (38 × 6) + 38 × (38 – 38) × 6 = `228
38
B 12.50 hours 40 hours `5.00 (40 × 5) + *Nil = `200.00
(34 × 7.2) + 34 × (52.5 – 34) × 7.2 = `331.06
C 52.50 hours 34 hours `7.20 52.5

*Bonus can never be negative.

Working Notes:
1. Calculation of piece rate (Standard time per unit × `0.10):
P = `1.20 (12 minutes × `0.10)
Q = `1.80 (18 minutes × `0.10)
R = `3.00 (30 minutes × `0.10)

2. Calculation of time allowed to each worker:

Worker A = (21 × 12) + (36 × 18) + (46 × 30) = 2,280 minutes (i.e. 38 hours)
Worker B = 25 units × 30 minutes = 750 minutes (i.e. 12.5 hours)
Worker C = (60 × 12) + (135 × 18) = 3,150 minutes (i.e. 52.50 hours)

PYQ 9
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) `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 days
Number of working hours per day of each worker 8 hours
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 his assurance.
[(4+2+2 = 8 Marks) May 2004]

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 EMPLOYEE COST OR LABOUR COST 2.8
Answer
1. Computation of effective rate of earnings under the Halsey and Rowan schemes:

Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R

= (9,600 × `30) + 50% (12,087 – 9,600) × `30
= `3,25,305

Total earnings under Rowan scheme = (AH × R) + AH × (SH – AH) × R

SH
= (9,600 × `30) + 9,600 × (12,087 – 9,600) × `30
12,087
= `3,47,258.38
Effective rate under Halsey Plan = `33.89 per hour (`3,25,305 ÷ 9,600 hours)
Effective rate under Rowan Plan = `36.17 per hour (3,47,258.38 ÷ 9,600 hours)
Actual hours (AH) = 50 workers × 24 days × 8 hours per day
= 9,600 hours
Standard hours (SH) = 6,120 units × 1.975 hours per unit
= 12,087 hours

2. Savings to the ZED Ltd. in terms of direct labour cost per piece:
Direct labour cost per unit under time wages = 1.975 hours × `30 per hour
= `59.25 per unit
Direct labour cost per unit under Halsey Plan = `53.15 per unit (`3,25,305 ÷ 6,120 units)
Direct labour cost per unit under Rowan Plan = `56.74 (3,47,258.38 ÷ 6,120 units)
Savings of direct labour cost per unit under:
Halsey Plan = `6.10 (`59.25 – `53.15)
Rowan Plan = `2.51 (`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
`2,88,000 but the other scheme viz. Rowan fulfils the promise of 20% increase over the present earnings of
`2,88,000 by paying 20.58% in the form of bonus. Hence, Rowan Plan should be adopted.

PYQ 10
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 : `160 per hour
Late shift : `225 per hour
Average output per operator : 120 articles (49-hours week including 3 late shifts)

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) : `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

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 EMPLOYEE COST OR LABOUR COST 2.9
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 hours 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) Nov 2005]

Answer
Statement showing hours worked, weekly earnings, number of articles produced and labour cost per
article under various wage system
Hours Articles Labour Cost
Scheme Weekly Earning
Worked Produced per Article
Existing time rate 49 `8,425 120 70.21
Straight piece work 40 `8,640 135 64.00
Rowan system 40 `9,007.41 135 66.72
Halsey system 40 `8,600 135 63.70

Working Notes:
Calculation of weekly earning under:
Existing time rate = `8,425 (40 hours × `160) + (9 hours × `225)
Piece rate system = `8,640 (135 articles × *`64 per article)
*Basic rate per article = `53.33 (160 per hour ÷ 3 articles per hour)
Applicable piece rate = `64 (`53.33 + 20%)

Rowan premium system = (AH × R) + AH × (SH – AH) × R

SH
= (40 × `160) + 40 × (*67.50 – 40) × `160
67.50
= `9,007.41
*Standard hours (SH) = Basic time + 50%
Basic time = 15 articles in 5 hours
= 3 articles in 1 hour or 60 minutes
Standard time = 1 article in 20 minutes + 50%
= 30 minutes for 1 article
= 67.50 hours for 135 articles
Halsey premium system = (AH × R) + 50% (SH – AH) × R
= (40 × `160) + 50% (67.50 – 40) × `160
= `8,600

PYQ 11
Two workmen, A and B produce the same product using the same material. A is paid bonus according to
Halsey plan, while B is paid bonus according to Rowan plan. The time allowed to manufacture the product is
100 hours. A has taken 60 hours and B has taken 80 hours to complete the product. The normal hourly rate
of wages of workman A is `24 per hour. The total earnings of both the workers are same.
Calculate normal hourly rate of wages of workman B. [(5 Marks) May 2009]

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 EMPLOYEE COST OR LABOUR COST 2.10
Answer
A B
Time Allowed (Hours) 100 100
Time Taken(Hours) 60 80
Time Saved (Hours) 40 20

Let the rate of wages of the worker B is ` R Per hour

Normal Wages 1440 80

(Time taken × Hourly rate of wages) (60 × 24) (80 × R)
Bonus 480 16X
20
(50% × 40 × `24) ( × 80R)
100
Total 1,920 96R

According to the problem,

Total earning of A = Total earnings of B
1920 = 96R
1,920
R = = `20
96

Therefore, hourly rate of wages of the worker is `20 per hour

*Bonus = Time saved × 50% × Wage Rate

Time Taken
**Bonus = × Time saved × Wage Rate
Time Allowed

PYQ 12
Standard time for a job is 90 hours. The hourly rate of guaranteed wages is `50. Because of the saving in time
a worker A gets an effective hourly rate of wages of `60 under Rowan premium bonus system. For the same
saving in time.

Calculate the hourly rate of wages a worker B will get under Halsey premium bonus system
assuring 40% to worker.
[(3 Marks) Nov 2009]

Answer
The following equation can be made:

Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH

60 = [50 AH + AH/90 (90 - AH) × 50] ÷ AH
60 AH = 50 AH + AH/90 (90 - AH) × 50
10 AH = AH/90 (90 - AH) × 50
18 AH = AH (90 - AH)
18 = 90 - AH
AH = 72 hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:

Total earnings = (AH × R) + 40% (SH – AH) × R

= (72 × 50) + 40% (90 – 72) × 50 = `3,960

Effective hourly rate = Total earning ÷ hours worked

= `3,960 ÷ 72 hours = `55

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 EMPLOYEE COST OR LABOUR COST 2.11
PYQ 13
You are given the following information of a worker:
Name of worker : X
Ticket No. : 002
Work started : 01.04.11 at 8 am
Work finished : 05.04.11 at 12 noon
Work allotted : Production of 2,160 units
Work done and approved : 2,000 units
Time and units allowed : 40 units per hour
Wage rate : `25 per hour
Bonus : 40% of time saved
Worker X worked : 9 hours a day
Calculate the remuneration of the worker on the following basis:
(a) Halsey plan and
(b) Rowan plan
[(5 Marks) May 2011]

Answer
2,000 units
Time allowed = = 50 hours
40 units per hour
Time worked:
01.04.11 to 04.04.11 = 9 hours per day
05.04.11 = 4 hours
Total hours = 9 hours × 4 days + 4 hours × 1 day = 40 hours

Remuneration of worker X under:

(a) Halsey plan = (AH × R) + 40% (SH – AH) × R
= (40 × 25) + 40% (50 - 40) × 25 = `1,100
(b) Rowan plan = (AH × R) + AH × (SH – AH) × R
SH
= (40 × 25) + 40 × (50 – 40) × 25 = `1200
50

PYQ 14
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 and Separation method respectively. If
the number of workers replaced during 2nd quarter of the financial year 2012-13 is 36.
Find the following:
(a) The number of workers recruited and joined; and
(b) The number of workers left and discharged.
[(5 Marks) Nov 2012]

Answer
(a) No. of workers recruited & joined = 36 workers (Accessions)
(b) No. of workers left & discharged = 27 workers (Separations)

Working Notes:
(a) Calculation of average workers:-
Replacements = 8% of average workers = 36 workers
∴ Average workers = 36 ÷ 8% = 450 workers

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 EMPLOYEE COST OR LABOUR COST 2.12
(b) Number of worker separated = 6% of average workers
= 6% of 450 workers = 27 workers

(c) Number of Accessions = Total Movement – Workers separated

= 14% of 450 - 27 = 36 workers

PYQ 15
A skilled worker is paid a guaranteed wage rate of `120 per hour. The standard time allowed for a job is 6
hours. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan.
(a) Calculate his effective hourly rate of earning under Rowan Incentive Plan.
(b) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same
effective hourly rate of earnings, calculate the time in which he should complete the job.
[(8 Marks) May 2013]

Answer
Total Earning 700
(a) Effective Hourly Rate = = = `140 Per Hour
Actual Hours 5

Calculation of total earning under Rowan Incentive Plan:

Earning under Rowan Plan = (AH × R) + AH × (SH – AH) × R
SH
= (5 × 120) + 5 × (6 – 5) × 120
6
= 600 + 100 = `700

(b) Actual hours to maintain same effective rate under Halsey Incentive scheme (50%):

Effective rate under Halsey = [(AH × R) + 50% × (SH – AH) × R] ÷ AH

140 = [(AH × 120) + 50% × (6 – AH) × 120] ÷ AH
140 AH = 120 AH + 360 – 60 AH
80 AH = 360
∴ AH = 360 ÷ 80 = 4.5 hours

PYQ 16
The rate of change of labour force in a company during the year ending 31st march, 2013 was calculated as
13%, 8% and 5% respectively under 'Flux Method', 'Replacement Method', and 'Separation Method'. If the
number of workers separated during the year is 40.
You are required to calculate:
(a) Average number of workers on roll.
(b) Number of workers replaced during the year.
(c) Number of new accessions i.e. new recruitment.
(d) Number of workers at the beginning of the year.
[(8 Marks) Nov 2013]

Answer
(a) Average number of workers on roll:

Separations = 5% of average workers = 40 workers

∴ Average workers = 40 ÷ 5% = 800 workers

(b) Number of workers replaced = 8% of average workers

= 8% of 800 = 64 workers

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 EMPLOYEE COST OR LABOUR COST 2.13
(c) Number of new accessions:
[Link] separations  [Link] accessions
Flux Method = × 100
Average number of worker s
40 [Link] accessions
13% = × 100
800
No. of accessions = 13% of 800 – 40 = 64 workers
No. of accessions = No. of replacement + No. of new accessions
No. of new accessions = No. of accessions - No. of replacement
= 64 workers – 64 workers = Nil

(d) Number of workers at the beginning:

Let opening workers be x
Now,
Closing workers = Opening workers + Replacement + New accessions –
Separations
= x + 64 + Nil – 40 = x + 24
Average no of workers = [Opening workers + Closing workers] ÷ 2
800 = [x + x + 24] ÷ 2
∴ x (opening workers) = 788 workers

PYQ 17
Human Resources Department of A Ltd. computed labour turnover by replacement method at 3% for the
quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was made. The number of
workers at the beginning and end of the quarter was 990 and 1,010 respectively.
You are required to calculate the labour turnover rate by Separation Method and Flux Method.
[(5 Marks) Nov 2015]

Answer
Calculation of labour turnover rate:
Number of separations
Separation Method = × 100
Average number of wor ker s
50 wor ker s
= × 100 = 5%
1000 wor ker s

No of separations  No of accessions
Flux Method (Alternative 1) = × 100
Average number of wor ker s
50  70
= × 100 = 12%
1000

No of separations + No of replacemen ts
Flux Method (Alternative 2) = × 100
Average number of wor ker s
50 + 30
= × 100 = 8%
1000

Working Notes:
Average no of workers = (Opening workers + Closing workers) ÷ 2
= (990 + 1,010) ÷ 2 = 1000

Number of Separations = Opening + Accession - Closing

= 990 + 70 – 1,010 = 50 workers

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 EMPLOYEE COST OR LABOUR COST 2.14
Number of Accessions = Replaced + New Joined
= 3% of 1,000 + 40 = 70 workers

PYQ 18
RST Company Ltd. had computed labour turnover rates for the quarter ended 31st March, 2017 as 20%, 10%
and 5% under Flux method, Replacement method and Separation method respectively. If the number of
workers replaced during the quarter is 50, find out (i) Workers recruited and joined, (ii) Workers left and
discharged and (iii) Average number of workers on roll.
[(5 Marks) May 2017]

Answer
(i) Calculation of workers recruited and joined:

Number of accessions = Replaced + New Joined

= (10% + 5%) 15% of average workers
= 15% of 500 = 75 workers
Or
Number of accessions = Flux - Separated
= (20% - 5%) 15% of average workers
= 15% of 500 = 75 workers

(ii) Calculation of workers left and discharged:

Number of workers separated = 5% of average workers

= 5% of 500 = 25 workers

(iii) Calculation of average number of workers on roll:

Number of workers replaced = 10% of average workers = 50 workers

Therefore, Average workers = 50 ÷ 10% = 500 workers

PYQ 19
A skilled worker is paid a guaranteed wage rate of `150 per hour. The standard time allowed for a job is 50
hours. He gets an effective rate of wages of `180 under Rowan Incentive Plan due to saving in time. For the
same saving in time, calculate hourly rate of wages he will get, if he placed under Halsey Premium Scheme
(50%).
[(5 Marks) Nov 2017]

Answer
The following equation can be made:

Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH

180 = [150 AH + AH/50 (50 - AH) × 150] ÷ AH
30 AH = AH/50 (50 - AH) × 150
30 AH = AH (50 - AH) × 3
10 AH = AH (50 - AH)
∴ AH = 40 Hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Total earnings = (AH × R) + 50% (SH – AH) × R
= (40 × 150) + 50% (50 – 40) × 150 = `6,750

Effective hourly rate = Total earning ÷ hours worked

= `6,750 ÷ 40 hours = `168.75

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 EMPLOYEE COST OR LABOUR COST 2.15
PYQ 20
A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours. His wage rate is `5
per hour. Following additional information are also available:
Material cost of work `50
Factory overheads 100% of wages

Calculate the factory cost of work under the following methods of wage payment:
(i) Rowan Plan
(ii) Halsey Plan
[(5 Marks) May 2018]

Answer
Factory cost = Materials + Labour + Factory Overheads

(i) Under Rowan Plan = 50 + 93.75 + 93.75 = `237.50

(ii) Under Halsey Plan = 50 + 87.50 + 87.50 = `225

Working Note:
Earning of workers under Halsey’s and Rowan’s premium scheme:
Wages under Halsey = (AH × R) + 50% (SH – AH) × R
= (15 hours × 5) + 50% (20 – 15) × 5 = `87.50

Wages under Rowan = (AH × R) + AH × (SH – AH) × R

SH
= (15 hours × 5) + 15/20 (20 – 15) × 5 = `93.75

PYQ 21
Following data have been extracted from the books of M/s. ABC Private Limited:
Salary (each employee, per month) : `30,000
Bonus : 25% of Salary
Employer’s contribution to PF, ESI etc. : 15% of salary
Total cost at employees’ welfare activities : `6,61,500 per annum
Total leave permitted : 30 days
No. of employees : 175
Normal idle time : 70 hours per annum
Abnormal idle time (due to power failure) : 50 hours
Working days per annum : 310 days of 8 hours
You are required to calculate:
(i) Annual cost of each employee
(ii) Employee cost per hour
(iii) Cost of abnormal idle time per employee
[(5 Marks) Nov 2018]

Answer
(i) Statement of Annual Cost of Each Employee
Particulars Amount
Salary (30,000 × 12) 3,60,000
Bonus @ 25% of 3,60,000 90,000
Employer’s contribution to PF, ESI @ 15% of 3,60,000 54,000
Welfare cost per employee (6,61,500 ÷ 175) 3,780
Annual Cost of Each Employee 5,07,780

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 EMPLOYEE COST OR LABOUR COST 2.16
(ii) Employee cost per hour = Annual cost per employee ÷ Labour hours
= 5,07,780 ÷ [(310 days – 30 days) × 8 hours – 70 hours]
= 5,07,780 ÷ 2,170 hours
= `234

(iii) Cost of abnormal idle time per employee:

= Abnormal idle time per employee × cost per hour
= 50 × 234
= `11,700

PYQ 22
Zico Ltd. has its factory at two locations viz Nasik and Satara. Rowan plan is used at Nasik factory and Halsey
plan at Satara factory. Standard time and basic rate of wages are same for a job which is similar and is
carried out on similar machinery. Normal working hours is 8 hour per day in a 5 days week.
Job in Nasik factory is completed in 32 hours while at Satara factory it has taken 30 hours.
Conversion cost at Nasik and Satara are `5,408 and `4,950. Overheads account for `25 per hour.

Required:
(1) To find out the normal wage; and
(2) To compare the respective conversion costs.
[(10 Marks) Nov 2019]

Answer
(1) Calculation of Normal Wage:

Normal Wage = AH × R

Nasik = 32 hours × `120 = `3,840

Satara = 30 hours × `120 = `3,600

(2) Statement Showing Conversion Cost

Particulars Nasik (`) Satara (`)
Labour Cost 4,608 4,200
Overheads (32 Hours × `25) and (30 Hours × `25) 800 750
Conversion Cost 5,408 4,950

Working Note:
(a) Calculation of wage rate (R):

Using data of Nasik:

Conversion cost = Labour cost + Overheads

AH
5,408 = [AH × R + (SH - AH) × R] + Overheads
SH
32
5,408 = [32 × R + (40 - 32) × R] + (32 hours × 25)
40
5,408 – 800 = 38.4 R

R = `120

(b) Calculation of Labour Cost:

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 EMPLOYEE COST OR LABOUR COST 2.17
AH
Nasik = AH × R + (SH - AH) × R
SH
32
= 32 × `120 + (40 - 32) × `120 = `4,608
40

Satara = AH × R + 50% (SH - AH) × R

= 30 × `120 + 50% (40 - 30) × `120 = `4,200

(c) Standard Hours = 5 days × 8 hours per day = 40 hours

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 EMPLOYEE COST OR LABOUR COST 2.18

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
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22 Y Y Y Y

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 CHAPTER - 3

OVERHEADS
LEARNING OBJECTIVE

After studying this chapter you will be able to:

 Discuss the meaning of Overheads- Production, Administrative and
Selling & Distribution.
 Discuss the meaning and methods of allocation, apportionment
and absorption of overheads.
 Discuss the meaning and treatment of under-absorption and over-
absorption of overheads and apply the same in cost computation.
 State the accounting and control of administrative, selling and
distribution overheads.
 Discuss and apply the various methods to calculate overhead rate.
 Differentiate between direct costs and overheads.
 Identify, whether overheads are absorbed or over absorbed.
 Understand the meaning and computation of machine hour rate.
 OVERHEADS 3.1

PAST YEAR QUESTIONS

PYQ 1
A company has three production departments and two service departments. Distribution summary of
overheads is as follows:
Production Department:
A `13,600
B `14,700
C `12,800
Service Department:
X `9,000
Y `3,000
The expenses of service departments are charged on a percentage basis which is as follows:
A B C X Y
Department X 40% 30% 20% - 10%
Department Y 30% 30% 20% 20% -

Apportion the cost of Service Departments by using the Repeated Distribution method.
[(8 Marks) Nov 1998]

Answer
Distribution of Overheads (Repeated Distribution Method)
Production departments Service departments
Particulars Basis
A B C X Y
Total overheads 13,600 14,700 12,800 9,000 3,000
Apportionment of Expenses:
Department X 40:30:20:10 3,600 2,700 1,800 (9000) 900
Department Y 30:30:20:20 1,170 1,170 780 780 (3,900)
Department X 40:30:20:10 312 234 156 (780) 78
Department Y 30:30:20:20 23 23 16 16 (78)
Department X 40:30:20:10 6 5 3 (16) 2
Department Y 30:30:20 1 1 - - -
Total - 18,712 18,833 15,555 - -

PYQ 2
ABC Ltd. manufactures a single product and absorbs the production overheads at a pre determined rate of `10
per machine hour. At the end of financial year 1998-99, it has been found that actual production overheads
incurred were `6,00,000. It included `45,000 on account of 'written off' obsolete stores and `30,000 being the
wages paid for the strike period under an award.
The production and sales data for the year 1998-99 is as under:
Production:
Finished goods 20,000 units
Work-in-progress 8,000 units
(50% complete in all respects)
Sales:
Finished goods 18,000 units
The actual machine hours worked during the period were 48,000. It has been found that one third of the under
absorption of production overheads was due to lack of production planning and the rest was attributable to
normal increase in costs.

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 OVERHEADS 3.2
You are required to:
(i) Calculate the amount of under absorption of production overheads during the year 1998-99 and
(ii) Show the accounting treatment of under absorption of production overheads.
[(10 marks) Nov 1999]

Answer
(i) Computation of under absorption of Production Overheads:
Particulars Amount
Total production overheads actually incurred during the year 1998-99 6,00,000
Less: Written off obsolete stores (45,000)
Less: Wages paid for strike period (30,000)
Net production overheads actually incurred 5,25,000
Production overheads absorbed (48,000 hours × `10) 4,80,000
Under Recovery of production overheads 45,000

(ii) Accounting treatment of under-absorption of production overheads:

1. `15,000 (i.e., 45,000 × ⅓) of under absorbed overheads were due to lack of production planning.
This being abnormal should be debited to Costing Profit and Loss Account.

2. The balance of `30,000 (i.e., 45,000 × ⅔) of under absorbed overheads should be distributed over
work in progress, finished goods and cost of sales by using supplementary rate.

Supplementary OH Rate = Under Absorbed Overhead = 30,000

Equivalent Units 4,000 + 2,000 + 18,000
= `1.25 per unit

Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales:
Work-in-Progress (4,000 units × `1.25) 5,000
Finished goods (2,000 units × `1.25) 2,500
Cost of sales (18,000 units × `1.25) 22,500

Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 22,500 -
Finished Goods Control A/c Dr. 2,500 -
Work in Progress Control A/c Dr. 5,000 -
Costing Profit & Loss A/c Dr. 15,000 -
To Overhead Control A/c - 45,000
(Being under recovery of under absorbed oh recovered/charged)

PYQ 3
A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked
without an operator wholly engaged on it. The original cost of all these machines works out to `8 lakhs.
These particulars are furnished for a 6 month period:
Normal available hours per month 208
Absenteeism (without pay) hours per months 18
Leave (with pay) hours per months 20
Normal idle time (unavoidable) hours per month 10
Average rate of wages per day of 8 hours `20
Production bonus 15% on wages

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 OVERHEADS 3.3
Power and fuel consumption `9,000
Supervision & indirect labour `3,300
Electricity `1,200
The following particulars are on a yearly basis:
Repairs and maintenance 3% of value of machines
Insurance `42,000
Depreciation 10% of original cost
Other factory expenses `12,000
Allocated general management expenses `54,530
You are required to work out a comprehensive machine hour rate for the machine shop.
[(8 Marks) May 2000]

Answer
Computation of Comprehensive Machine Hour Rate for the “Machine Shop”
Particulars Amount
(A) Standing Charges:
Operators wages (Refer working note 1) 17,100
Production bonus (17,100 × 15%) 2,565
Supervision & indirect labour 3,300
Lighting and electricity 1,200
Insurance (42,000 × 6/12) 21,000
Depreciation (8,00,000 × 10% × 6/12) 40,000
Other sundry works expense (12,000 × 6/12) 6,000
General management expense allocated (54,530 × 6/12) 27,265
Total (A) 1,18,430
(B) Running Charges
Repairs and maintenance (8,00,000 × 3% × 6/12) 12,000
Power consumed 9,000
Total (B) 21,000
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 1,39,430
÷ Total machine hours ÷ 5,760
Machine Hour Rate `24.21

Working Notes:
(1) Normal available hours per month per operator are 208 Hours. Since there are in all 6 operators over 8
machines & machine can be worked without an operator being wholly engaged on it so at any point of
time maximum 6 machines can be operated & 2 machines will remain idle so, effective hours have been
calculated by taking only 6 machines into account. Absenteeism per month operator without pay are 18
hours. Hence, wages payable per operator per month for 190 hours.
20
Wages rate per operator per hour = = 2.50 per hour
8 Hours
Thus, wages of 6 operators for 6 months = 190 Hours × 6 Months × 6 Operators × 2.5
= `17,100

(2) Total effective productive hours available to the machine shop

Total hours available per month 208
Less: Hours when there is no production
Less: Absenteeism per month (18)
Less: Leave per month (20)
Less: Unavailable normal idle time per month (10)
Total & effective hours per month 160 hours
Total effective hours in 6 months (160 hours × 6 machines × 6 months) 5,760 hours

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 OVERHEADS 3.4
PYQ 4
The total overhead expenses of a factory are `4,46,380. Taking into account the normal working of the factory,
overhead was recovered in production at `1.25 per hour. The actual hours worked were 2,93,104.
How would you proceed to close the books of accounts, assuming that besides 7,800 units
produced of which 7,000 were sold, there were 200 equivalent units in work-in-progress?
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the
cost of indirect materials and indirect labour and the remaining 50% was due to factory inefficiency.
Also give the profit implication of the method suggested.
[(8 Marks) Nov 2000]
Answer
Calculation of Unabsorbed Overheads:
Particulars Amount
Actual overhead incurred 4,46,380
Less: overhead absorbed (OH recovery ` per hour × Actual hours worked)
`1.25 × 2,93,104 Hours 3,66,380
Unabsorbed OH 80,000

Unabsorbed OH on account of increase in cost (80,000 × 50%) 40,000

Unabsorbed OH on account of factory inefficiency (80,000 × 50%) 40,000

Treatment of Unabsorbed OH & its implication on Profit:

(i) The unabsorbed OH on account of increase in cost of indirect material & labour of `40,000 should be
adjusted in the cost books by applying positive supplementary rates.
Unbsorbed OH
Supplementary Rate =
Equivalent completed units of Production

Where, Equivalent completed units are as under:

Unit sold 7,000
Units in closing stock of Finished Goods (7,800-7,000) 800
Equivalent WIP units 200
Total Equivalent Completed Units 8,000 units
40,000
Supplementary Rate = = `5 per unit
8,000 Units

The unabsorbed OH of `40,000 should be applied by using supplementary rate of `5 per equivalent
completed unit proportionately on the basis of equivalent completed unit among Cost of Sales A/c, Stock of
Finished Goods A/c, & WIP A/c as under:
Equivalent completed Share of unabsorbed
Items Rate
units overheads
Cost of Sales A/c 7,000 `5 `35,000
Stock of Finished 800 `5 `4,000
WIP A/c 200 `5 `1,000
Total `40,000
The above treatments of unabsorbed OH will reduce the profit by `35,000, the amount by which the
cost of sales has been increased. Moreover, the value of stock of Finished Goods & WIP will increase by `4,000
& `1,000 respectively.

(ii) The unabsorbed OH of `40,000 due to factory inefficiency being in the nature of abnormal loss should
be changed to costing P/L A/c & thereby the profit would be reduced by `40,000.

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 OVERHEADS 3.5
PYQ 5
In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of 8 hours
and set up time of 20 hours.

The expense data relating to the machine are as under:

Cost of the machine `5,00,000

Life of machine 10 years
Estimated scrap value at the end of life `20,000
Repairs and maintenance per annum `60,480
Consumable stores per annum `47,520
Rent of building per annum (The machine occupies 1/6 of the area) `72,000
Supervisor's salary per month (Common to three machines) `6,000
Wages of operator per month per machine `2,500
General lighting charges per month allocated to the machine `1,000
Power per hour 25 units per hour at `2 per unit.

Power is required for productive purposes only. Set up time, though productive, does not require
power. The supervisor and operator are permanent. Repairs and maintenance and consumable stores vary
with the running of the Machine.

Calculate a two-tier machine hour rate for (a) set up time, (b) running time.
[(8 Marks) May 2002]

Answer
Statement Showing Two Tier Machine Hour Rate
Fixed Expenses per month Amount Basis Set up Running
Depreciation [(5,00,000 – 20,000) × 1/10 × 1/12] 4,000 20 : 180 400 3,600
Repairs & Maintenance (60,480 × 1/12) 5,040 Allocation - 5,040
Consumable Stores (47,520 × 1/12) 3,960 Allocation - 3,960
Building Rent (72,000 × 1/6 × 1/12) 1,000 20 : 180 100 900
Supervisor’s Salary (6,000 ÷ 3) 2,000 20 : 180 200 1,800
Wage of operator 2,500 20 : 180 250 2,250
General Lighting 1,000 20 : 180 100 900
Power (25 units × `2 per unit × 180 hours) 9,000 Allocation - 9,000
Total Cost - - 1,050 27,450
÷ Hours - - ÷ 20 ÷ 180
Machine Hour Rate - - `52.50 `152.50

PYQ 6
E-books is an online book retailer. The Company has four departments. The two sales departments are
Corporate Sales and Consumer Sales. The two support departments are Administrative (Human resources,
Accounting) and Information systems. Each of the sales department conducts merchandising and marketing
operations independently.

The following data are available for October, 2003:

Departments Revenues Number of Employees Processing Time used

(in minutes)
Corporate Sales `16,67,750 42 2,400
Consumer Sales `8,33,875 28 2,000
Administrative - 14 400
Information systems - 21 1,400

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 OVERHEADS 3.6
Cost incurred in each of four departments for October, 2003 are as follows:
Corporate sales `12,97,751
Consumers sales `6,36,818
Administrative `94,510
Information systems `3,04,720
The company uses number of employees as a basis to allocate Administrative costs and processing time
as a basis to allocate Information systems costs.
Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other support
departments. Use this ranking to allocate support costs based on the step-down allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal allocation method.
[((10 Marks) Nov 2003]

Answer
(i) Statement Showing Allocation of support department costs to the sales departments
(By using the Direct Method)
Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
Total overheads 12,97,751 6,36,818 94,510 3,04,720
Apportionment of Expenses:
Administrative Dept No. of 56,706 37,804 (94,510) -
(42:28) employees
Information system Processing 1,66,211 1,38,509 - (3,04,720)
(2,400:2,000) time
Total - 15,20,668 8,13,131 - -

(ii) Ranking of support departments based on percentage of their services rendered to other support
departments:

 21  100 
 Administration support department provides 23.077%   services to Information systems
 42  28  21 
support department. Thus 23.077% of `94,510 = `21,810

 Information system support department provides 8.33% of its services to Administration support
department. Thus 8.33% of `3,04,720 = `25,383.

Statement Showing Allocation of Support Departments Costs

(By using step-down allocation method)
Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
Total overheads 12,97,751 6,36,818 94,510 3,04,720
Apportionment of Expenses:
Administrative Dept No. of 43,620 29,080 (94,510) 21,810
(42:28:21) employees
Information system Processing 1,78,107 1,48,423 - (3,26,530)
(2,400:2,000) time
Total - 15,19,478 8,14,321 - -

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 OVERHEADS 3.7
(iii) An alternative ranking is based on the rupee amount of services rendered to other service departments,
using the rupee figures obtained under requirement (ii) This approach would use the following
sequence of ranking:

 Allocation of information systems overheads as first (`25,383 provided to administrative).

 Allocated administrative overheads as second (`21,810 provided to information systems).

(iv) Statement Showing the Allocation of Support Department Costs to the Sales Departments
(Using reciprocal allocation method/Equation method)
Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
Total overheads 12,97,751 6,36,818 94,510 3,04,720
Apportionment of Expenses:
Administrative Dept 42:28:21 56,425 37,617 (1,22,254) 28,212
Information system 24:20:4 1,66,466 1,38,722 27,744 (3,32,932)
Total - 15,20,642 8,13,157 - -

Working notes:
a. Percentage of services provided by each service department to other service department and sales
departments
Administrative to Information system = 21/91
Information system to Administrative = 4/48 or 1/12

b. Total cost of the support department (By using simultaneous equation method):
Let AD and IS be the total costs of support departments Administrative and Information systems
respectively. These costs can be determined by using the following simultaneous equations:

AD = `94,510 + 1/12 IS
IS = `3,04,720 + 21/91 AD

AD = `94,510 + 1/12 (`3,04,720 + 21/91 AD)

AD = `94,510 + `25,393 + 0.01923 AD
0.98077 AD = `1,19,903
AD = `1,22,254
IS = `3,04,720 + 21/91 × 1,22,254 = `3,32,932

PYQ 7
An engine manufacturing company has two production departments: (i) Snow mobile engine and (ii) Boat
engine and two service departments: (i) Maintenance and (ii) Factory office. Budgeted cost data and relevant
cost drivers are as follows:

Departmental cost:

Show mobile engine `6,00,000

Boat engine `17,00,000
Factory office `3,00,000
Maintenance `2,40,000
Cost drivers Factory office department: No. of employees

Snow mobile engine department 1,080 employees

Boat engine department 270 employees
Maintenance department 150 employees
1,500 employees

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 OVERHEADS 3.8
Cost drivers Maintenance department: No. of work orders

Snow mobile engine department 570 orders

Boat engine department 190 orders
Factory office department 40 orders
800 orders
Required:
(i) Compute the cost driver allocation percentage and then use these percentages to allocate the service
department cost by using direct method.
(ii) Compute the cost driver allocation percentage and then use these percentages to allocate the service
department costs by using non-reciprocal method/step method.
[(8 Marks) May 2005]

Answer
(i) Cost Driver Allocation Percentage
Factory office department Number of employees Percentage
Snow-mobile engine 1,080 80%
Boat engine 270 20%
Total 1,350 100%
Maintenance department Number of work orders Percentage
Snowmobile engine 570 75%
Boat engine 190 25%
Total 760 100

Statement of Allocation of Service Department Cost

(Using direct method)
Particulars Factory office Maintenance Snowmobile Boat engine
Departmental Cost 3,00,000 2,40,000 6,00,000 17,00,000
Factory office department (3,00,000) - 2,40,000 60,000
Maintenance department - (2,40,000) 1,80,000 60,000
Total - - 10,20,000 18,20,000

(ii) Cost Driver Allocation Percentage

Factory office department Number of employees Percentage
Snow mobile engine 1,080 72%
Boat engine 270 18%
Maintenance department 150 10%
Total 1,500 100%
Maintenance department Number of work orders Percentage
Snowmobile engine 570 75%
Boat engine 190 25%
Total 760 100

Statement of Allocation of Service Department Cost

(Using step down method)
Particulars Factory office Maintenance Snowmobile Boat engine
Departmental Cost 3,00,000 2,40,000 6,00,000 17,00,000
Factory office department (3,00,000) 30,000 2,16,000 54,000
Maintenance department - (2,70,000) 2,02,500 67,500
Total - - 10,18,500 18,21,500

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 OVERHEADS 3.9
PYQ 8
From the details furnished below you are required to compute a comprehensive machine hour rate:

Purchase price of the machine (depreciation @ 10% p.a.) `3,24,000

Normal working hours for the month 200 hours
(The machine works to only 75% of capacity)
Wages of Machine man `125 per day (of 8 hours)
Wages for a helper (machine attendant) `75 per day (of 8 hours)
Power cost for the month for the time worked `15,000
Supervision charges apportioned for the machine centre `3,000 for the month
Electricity & Lighting for the month `7,500
Repairs & maintenance (machine) including consumable stores `17,500 per month
Insurance of Plant & Building (apportioned) for the year `16,250
Other general expenses per annum `27,500

The workers are paid a fixed dearness allowance of `1,575 per month. Production bonus payable to
workers in terms of an award is equal to 33-⅓% 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) Nov 2005]

Answer
Statement Showing Comprehensive Machine Hour Rate
Particulars Amount
(A) Standing Charges:
Supervision charges 3,000
Electricity and lighting 7,500
Insurance of Plant and Building (16,250 × 1/12) 1,354
Depreciation (32,400 × 1/12) 2,700
Other general expense (27,500 × 1/12) 2,292
Total (A) 16,846
(B) Running Charges
Repairs and maintenance 17,500
Power 15,000
Wages of machine man (W.N. 2) (can be treated as fixed cost) 6,737
Wages of helper (W.N. 2) (can be treated as fixed cost) 4,945
Total (B) 44,182
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 61,028
÷ Total machine hours ÷ 150
Machine Hour Rate `406.85

Working Notes:

1. Effective machine working hours per month = 200 hour × 75% = 150 hours

2. Calculation of Labour Cost:

Particulars Machine Man Helper
Wages for 200 hours (`125 ÷ 8H) × 200H and (`75 ÷ 8H) × 200H 3,125 1,875
Dearness Allowance 1,575 1,575
4,700 3,450
Production bonus (33 – 1/3% of Basic plus D.A.) 1,567 1,150
Leave wages (10% of Basic plus D.A.) 470 345
Total labour cost 6,737 4,945

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 OVERHEADS 3.10
PYQ 9
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:
Particulars HR Maintenance Design
Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
Total 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)
Providers of services
Users of services
HR Maintenance Design
HR - - -
Maintenance 500 - -
Design 500 500 -
Machining 4,000 3,500 4,500
Finishing 5,000 4,000 1,500
Total 10,000 8,000 6,000
Required:
(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) Nov 2006]

Answer
(1) Statement Showing Re-apportionment of Service Departements Cost
(Using Direct Method)
Production department
Service department Basis Total
Machining Finishing
H.R. (4:5) 5,00,000 2,22,222 2,77,778
Maintenance (7:8) 4,60,000 2,14,667 2,45,333
Design (3:1) 7,00,000 5,25,000 1,75,000
Total 9,61,889 6,98,111

(2) Squence of re-apportioning:

As H.R. department serves large number of departements, so its cost should be first re apportioned
then overhead of maintenance departement should be re-apportioned and lastly overhead of design
department should be re-apportioned.

(3) Statement Showing Re-apportionment of Service Department Cost

(Using Direct Method)
Departments
Particulars
H.R. Maintenance Design Machining Finishing
Total Overhead 5,00,000 4,60,000 7,00,000 - -
Re-Apportionment:
H.R. (1:1:8:10) (5,00,000) 25,000 25,000 2,00,000 2,50,000
Maintenance (1:7:8) - (4,85,000) 30,313 2,12,187 2,42,500
Design (3:1) - - (7,55,313) 5,66,485 1,88,828
Total - - - 9,78,672 6,81,328

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 OVERHEADS 3.11
PYQ 10
A company has three production departments (M1, M2 and A1) and three service departments, 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 costs for the year are:

Indirect Wages Consumable Supplies
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
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 department 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:

Book Value of Area in Effective H.P. Direct Labour Capacity
Department
Machinery Square Feet Hours % Hour Machine Hrs
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 - - -
Engineering Service 36,000 2,500 10 - -
General Service 12,000 1,500 - - -

Required:
(i) Prepare an 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 service departments.

(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]

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 OVERHEADS 3.12
Answer
(i) Overhead Analysis Sheet
Production departments Service departments
Particulars Basis
M1 M2 A1 Stores ES GS
Indirect wages Allocation 46,520 41,340 16,220 8,200 5,340 7,520
Consumables Allocation 12,600 18,200 4,200 2,800 4,200 3,200
Depreciation Value 15,840 11,880 3,960 1,584 4,752 1,584
Insurance on:
Machine Value 2,880 2,160 720 288 864 288
Building (1/3 to M1) Area 1,080 648 864 216 270 162
Power H.P. % 3,240 2,268 324 - 648 -
Light Area 1,080 1,296 1,728 432 540 324
Rent Area 2,697 3,236 4,315 1,079 1,348 -
Notional rent 8% of 6,000 - - - - - 480
Total - 85,937 81,028 32,331 14,599 17,962 13,558

(ii) Allocation of Service Department Overheads

Production departments Service departments
Particulars Basis
M1 M2 A1 Stores ES GS
Total Overheads 85,937 81,028 32,331 14,599 17,962 13,558
Apportionment:
Stores Consumables 5,256 7,591 1,752 (14,599) - -
(126:182:42)
Engineering Dept Machine 7,983 9,979 - - (17,962) -
hours
General Service (4:5) 4,172 3,129 6,257 - - (13,558)
Labour hours
(20:15:30)
Total OH - 1,03,348 1,01,727 40,340 - - -

(iii) Calculation of recovery rate:

Particulars M1 M2 A1
Total OH 1,03,348 1,01,727 40,340
÷ Base of recovery
Machine hours 40,000 50,000 -
Labour hours - - 3,00,000
Recovery rate (per machine/labour hour) `2.5837 `2.0345 `0.1345

(iv) Absorbed overheads:

Particulars Product X Product Y
M1 @ `2.5837 per machine hour of 10/6 machine hours 25.84 15.50
M2 @ `2.0345 per machine hour of 4/14 machine hours 8.14 28.48
A1 @ `0.1345 per labour hour of 4/18 labour hours 0.54 2.42
Absorbed OH 34.52 46.40

Note: Machine Shops A and B have got the production capacity of both direct labour hours and machine hours.
It appears to reason that overhead absorption of Machine Shops. A and B should be based on machine hours
absorption overhead rate of Assembly shop should be based on labour hours.

PYQ 11
A machine shop cost centre contains three machines of equal capacities. Three operators are employed on
each machine, payable `20 per hour each. The factory works for forty eight hours in a week which includes 4

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 OVERHEADS 3.13
hours setup time. The work is jointly done by operators. The operators are paid fully for the forty-eight hours.
In addition, they are paid a bonus of 10 percent of productive time. Costs are reported for this company on the
basis of four-weekly period.
The company for the purpose of computing machine hour rate includes the direct wages of the
operator and also recoups overheads allocated to the machine. The following details of factory overheads
applicable to the cost centre are available
 Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is
`52,000
 Maintenance and repairs per week per machine is `60.
 Consumable stores per week per machine are `75.
 Power: 20 units per hour per machine at the rate of 80 paise per unit.
 Apportionment to the cost centre: Rent per annum `5,400, Heat and Light per annum `9,720 and
foreman's salary per annum `12,960.

Required
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate.
[(8 Marks) Nov 2007/ May 2015]

Answer
(i) Computation of Cost of Running One Machine for a Four Week Period
Particulars Amount
(A) Standing Charges:
Rent (5,400 × ⅓ × 4/52) 138.46
Heat and light (9,720 × ⅓ × /52)
4 249.23
Forman’s salary (12,960 × ⅓ × 4/52) 332.31
Depreciation (52,000 × 10% × 4/52) 400
Wages (48 hours × 4 weeks × `20 per hour × 3 operators per machine) 11,520
Bonus 10% of (44 hours × 4 weeks × `20 per hour × 3 operators) 1,056
Total Standing Charges (A) 13,696
(B) Running Expenses:
Repairs and maintenance (`60 × 4 weeks) 240
Consumable stores (`75 × 4 weeks) 300
Power (44 hours × 4 weeks × 20 units × .80) 2,816
Total Running expenses (B) 3,356
Total Expenses of one machine for four week (A+B) 17,052

(ii) Machine hour rate = Total Expenses for 4 weeks ÷ Effective Hours for 4 weeks
= 17,052 ÷ 176 hours (44 hours × 4 weeks)
= `96.89 per hour

PYQ 12
A machine was purchased from a manufacturer who claimed that his machine could produce 36.5 tonnes in a
year consisting of 365 days. Holidays, break-down, etc., were normally allowed in the factory for 65 days. Sales
were expected to be 25 tonnes during the year and the plant actually produced 25.2 tonnes during the year.
You are required to state (i) Rated capacity, (ii) Practical capacity, (iii) Normal capacity and (iv)
Actual capacity.
[(2 Marks) Nov 2008]

Answer
(i) Rated Capacity = 36.50 tonnes or 100%
(ii) Practical Capacity:

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 OVERHEADS 3.14
Number of working days in a year = 365 – 65 = 300 days
36.5 300
Practical capacity = = 30 tonnes or 89.19%
365
(iii) Normal Capacity = 25 tonnes or 68.49%
(iv) Actual Capacity = 25.2 tonnes or 69.04%

PYQ 13
You are the following information of the three machines of a manufacturing department of X Ltd.:
Preliminary estimates of expenses (per annum)
Total Machines
A B C
(`) (`) (`) (`)
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:

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 (square feet) 40,000 40,000 20,000
These are 12 holidays (plus 52 Sundays) in the year, of which two were on Saturday. The
manufacturing department works 8 hours in a day and Saturdays are half days. All machines work at 90%
capacity throughout the year and 2% is reasonable for breakdown.
Required:
Calculate predetermined machine hour rates for the above machines after taking into consideration the
following factors:
 An increase of 15% in the price of spare parts.
 An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
 20% general increase in wages rates.
[(8 Marks) May 2011]

Answer
W.N. 1 Calculation of Productive machine hours worked during the year
Total No. of days in one year 365
Less: Sundays 52
Less: Holidays other than Sundays and including 2 Saturdays 12
Working days 301
(a) Normal working days other than Saturdays 251
(b) Saturday (Out of 12 holidays 2 holidays were on Saturday) 50
(c) Normal working hours per day 8 hours
(d) Working hours on Saturdays 4 hours
(e) Total machine Hours available (251 × 8 hours) + (50 × 4 hours) 2,208 hours

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 OVERHEADS 3.15
(f) 10% Idle time (10% of 2,208 hours) 221 hours
(g) Productive Hours (2,208 - 221) 1987 hours
(h) Breakdown time (2% of 1,987 hours) 40 hours
(i) Actual Productive time per machine per annum (1987 - 40) 1,947 hrs

Machine Hour Rate

Machines
Particulars
A B C
Depreciation 7,500 7,500 5,000
Spare parts 4,600 5,750 2,875
(4,000 × 1.15) (4,000 × 1.15 × 1.25) (2,000 × 1.15 × 1.25)
Power (in the ratio of K.W. Rating) 15,000 10,000 15,000
Consumable Stores 3,000 2,500 2,500
Insurance of Machine 3,000 3,000 2,000
(In the ratio of Depreciation)
Indirect Labour (20,000 × 1.20) 6,000 9,000 9,000
(In the ratio of direct labour hours)
Building Maintenance Expenses 8,000 8,000 4,000
(In the ratio Floor space)
Rent & Rates (10,000 × 12) 48,000 48,000 24,000
(In the ratio of floor space)
Foreman Salary 80,000 80,000 80,000
(20,000 × 12 × 1.20)(1:1:1)
Attendant Salary 20,000 20,000 20,000
(5000 × 12 ×1.20)(1:1:1)
Total overhead 1,95,100 1,93,750 1,64,375
÷ Productive Machine Hours 1,947 1,947 1,947
Machine Hour rate 100.21 99.51 84.42
Note: Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost.

PYQ 14
X Ltd. recovers overheads at a pre-determined rate of `50 per man-day. The total factory overheads incurred
and the man-days actually worked were `79 lakhs and 1.5 lakhs days respectively. During the period 30,000
units were sold. At the end of the period 5,000 completed units were held in stock but there was no opening
stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period but
at the end of the period there were 10,000 uncompleted units which may be treated as 50% complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective
planning and the balances were attributable to increase in overhead cost.
How would unabsorbed overhead be treated in cost accounts?
[(8 Marks) Nov 2011]

Answer
Calculation of under or over absorption of overheard:
Absorbed OH = 1,50,000 × 50 = 75,00,000
Actual OH = 79,00,000
Under absorption = 79,00,000 – 75,0000 = 4,00,000
Treatment of unabsorbed overheads:
60% Abnormal = 2,40,000 charged to Profit and Loss A/c
40% Normal increase in OH costs = 1,60,000 charged to FG stock, WIP and COGS
Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units
= 1,60,000 ÷ 40,000 = `4 per unit

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 OVERHEADS 3.16
Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales:
Work-in-Progress (5,000 units × `4) 20,000
Finished goods (5,000 units × `4) 20,000
Cost of sales (30,000 units × `4) 1,20,000

Journal Entries
S. No. Particulars Dr. Cr.
1 Production OH Control A/c Dr. 79,00,000
To General Ledger Adjustment A/c 79,00,000
2 WIP of Sales A/c Dr. 75,00,000
To Production OH Control A/c 75,00,000
3 Cost of Sales A/c Dr. 1,20,000
Finished Goods Control A/c Dr. 20,000
WIP Control A/c Dr. 20,000
Costing P/L A/c Dr. 2,40,000
To Production OH control A/c 4,00,000

PYQ 15
A machine costing `10 lacs was purchased on 01.04.2011. The expected life of the machine is 10 years. At the
end of this period its scrap value is likely to be `10,000. The total cost of all the machines including new one
was `90 lacs.
The other information is given as follows:
(a) Working hours of the machine for the year was 4,200 including 200 non productive hours.
(b) Repairs and maintenance for the new machine during the year was `5,000.
(c) Insurance premium was paid for all the machines `9,000.
(d) New machine consumes 8 units of electricity per hour, the rate per unit being `3.75.
(e) The new machine occupies 1/10 area of the department. Rent of the department is `2,400 per
month.
(f) Depreciation is charged on straight line basis.
Compute machine hour rate for the new machine.
[(5 Marks) May 2012]

Answer
Machine Hour Rate
Particulars Amount
(A) Standing charges
Rent [(`2,400 × 12 months) × 1/10] 2,880
Depreciation (10 lacs – 10,000) × 1/10 years 99,000
* Insurance Premium (9,000 ÷ 90,00,000)× 10 lacs 1,000
Total (A) 1,02,880
(B) Running charges
Repairs & Maintenance 5,000
* Electricity ( 8 units × 4,000 hours × `3.75) 1,20,000
Total (B) 1,25,000
Total Cost (A + B) 2,27,880
Machine Hour Rate (Total cost ÷ Productive hours) `56.97
Note:
(a) Electricity expense assumed to be incurred on productive hours only i.e. 4,000 hours.
(b) Insurance premium assumed to be incurred on the basis of cost of machine & same basis has been used
for apportionment of expense.

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 OVERHEADS 3.17
PYQ 16
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.
Total Production Department Services Departments
Items
Amount X Y Z A B
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
Superintendence 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
Deprecation 2,70,000

The departmental data are also available:

Production Department Service Departments
Details
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
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Expenses charged to the service departments are to be distributed to other departments by the following
percentage:
Departments X Y Z A B
Department A 30 30 20 - 20
Department B 25 40 25 10 -
Prepare an overhead distribution statement to show total overhead of production department after
re-apportioning service departments overhead by using simultaneous equation method. Show all the
calculation to the nearest rupee.
[(8 Marks) Nov 2012]

Answer
Statement Showing Secondary Distribution
Production Service
Particulars Basis
X Y Z A B
Indirect Mat. Allocation 20,000 30,000 45,000 25,000 5,000
Indirect labour “ 45,000 50,000 70,000 60,000 35,000
Superintendent’s “ - - 96,000 - -
Fuel & Heat Radiator Sec. 1,500 3,000 4,500 3,750 2,250
Power Kwt. Hours 52,500 60,000 45,000 22,500 -
Rent & Rates Area 44,000 40,000 30,000 24,000 12,000
Insurance Capital Asset value 4,000 6,000 5,000 1,000 2,000
Meals charges No of Employees 12,000 14,000 24,000 6,000 4,000
Depreciation Capital Value 60,000 90,000 75,000 15,000 30,000
Total (Prim. Dist) 2,39,000 2,93,000 3,94,500 1,57,250 90,250
Apportionment:
Department A (30 : 30 : 20 : 20) 50,900 50,900 33,934 (1,69,668) 33,934
Department B (25 : 40 : 25 : 10) 31,046 49,674 31,046 12,418 (1,24,184)
Total OH - 3,20,946 3,93,574 4,59,480 - -

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 OVERHEADS 3.18
Working Note:
Calculation of adjusted expenses of service department by using Simultaneous Equation method:

Expenses of Department A = 1,57,250 + 10% of Expenses of B

Expenses of Department B = 90,250 + 20% of Expenses of A
Now:
Expenses of Department A = 1,57,250 + 10% (90,250 + 20% of A)
Expenses of Department A = 1,57,250 + 9,025 + 2% of A
98% of Expenses of A = 1,66,275

Expenses of Department A = 1,66,275 ÷ 98% = 1,69,668

Expenses of Department B = 90,250 + 20% of A = 1,24,184

PYQ 17
Calculate Machine Hour Rate from the following particulars:
Cost of machine : `25,00,000
Salvage value : `1,25,000
Estimated life of 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 @ `5 per unit per hour.
(ii) Cost of repairs and maintenance `26,000 per annum.
(iii) Chemicals required for operating the machine `2,600 per month.
(iv) Overheads chargeable to the machine `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 `18,500.
[(8 Marks) Nov 2013]

Answer
Statement of Machine Hour Rate
Particulars Amount
(A) Standing Charges:
Overhead chargeable (`18,000 × 12) 2,16,000
Insurance premium (2% of `25,00,000) 50,000
Operators salaries (2 × `18,500 × 12 × ¼) 1,11,000
Total (A) 3,77,000
(B) Running Charges:
Depreciation (25,00,000 – 1,25,000) × 2,407/25,000 2,28,665
Power ( 25 units × 2,407 hours × `5) 3,00,875
Repairs & Maintenance 26,000
Chemicals (`2,600 × 12) 31,200
Total (B) 5,86,740
Total Operating Cost (A + B) 9,63,740
÷ Productive hours ÷ 2,407
Machine Hour Rate `400.39

Working Notes:
Calculation of actual hours and productive hours:

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 OVERHEADS 3.19
Total working hours per annum 3,000
Less: hours required for maintenance (400)
Working hours after maintenance 2,600
Less: Setting-up hours (2,600 × 8/108) (193)
Actual hours/ Effective working hours 2,407

Assumptions as per suggested answer:

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 actually work.

Note: As this numerical problem does not specifically mention about the nature of setting- up 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.

PYQ 18
The following particulars refers to process used in the treatment of materials subsequently, incorporated in a
component forming part of an electrical appliance:

(i) The original cost of the machine used (Purchased in June 2008) was `10,000. Its estimated life is 10 years,
the estimated scrap value was `1,000, and the estimated working time per year (50 weeks of 44 hours) is
2200 hours of which machine maintenance etc., is estimated to take up 200 hours. No other loss of
working time expected setting up time, estimated at 100 hours, is regarded as productive time (Holiday
to be ignored).
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit. No
current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of `20 each time.
(iv) The estimated cost of maintenance per year is `1,200.
(v) Two attendants control the operation of machine together with five other machines. Their combined
weekly wages, insurance and employer’s contribution to holiday pay amount `120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount to
`2,000.
You are required to calculate machine hour rate of operating the machine.
[(5 Marks) May 2016]

Answer
Statement of Machine Hour Rate (1 Machine ; 1 Year)
Particulars Amount
(A) Standing Charges:
Depreciation [(10,000 – 1,000) ÷ 10 Years] 900
Attendants wages, insurance etc. (120 × 50 weeks × 1/6) 1,000
Departmental and works overhead 2,000
Total Standing Charges (A) 3,900
(B) Running Expenses:
Electricity (1900 hours × 16 units per hour × 0.09) 2,736
Chemical solution (`20 × 50 weeks) 1,000
Maintenance 1,200
Total Running expenses (B) 4,936
Total Expenses of one machine for four week (A+B) 8,836
÷ Productive Machine Hours (Running and setting up) ÷ 2000
Machine Hour Rate `4.418

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 OVERHEADS 3.20
PYQ 19
APP Limited is a manufacturing concern and recovers overheads at a pre-determined rate of `30 per man-day.
The total factory overheads incurred and the man-days actually worked were `51 lakhs and 1.5 lakhs days
respectively. During the period 50,000 units were sold. At the end of the period 5,000 completed units were
held in stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted
units at the beginning of the period but at the end of the period there were 10,000 uncompleted units which
may be treated as 50% complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective
planning and the balances were attributable to increase in overhead cost.

How would unabsorbed overhead be treated in cost accounts?

[(8 Marks) Nov 2017]

Answer
Calculation of under or over absorption of overheard:

Absorbed OH = 1,50,000 × 30 = 45,00,000

Actual OH = 51,00,000
Under absorption = 51,00,000 – 45,0000 = 6,00,000

Treatment of unabsorbed overheads:

60% Abnormal = 3,60,000 charged to Profit and Loss A/c

40% Normal increase in OH costs = 2,40,000 charged to FG stock, WIP and COGS

Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units

= 2,40,000 ÷ 60,000 = `4 per unit

Apportionment of unrecovered overheads (due to increase in overheads):

Work-in-Progress (5,000 units × `4) 20,000

Finished goods (5,000 units × `4) 20,000
Cost of sales (50,000 units × `4) 2,00,000

Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 2,00,000 -
Finished Goods Control A/c Dr. 20,000 -
Work in Progress Control A/c Dr. 20,000 -
Costing Profit & Loss A/c Dr. 3,60,000 -
To Overhead Control A/c - 6,00,000
(Being under recovery of under absorbed oh recovered/charged)

PYQ 20
Delta Ltd. Is a manufacturing concern having two production departments P1 and P2 and two service
departments S1 and S2. After making a primary distribution of factory overheads of all departments are as
under:
P1 = `4,02,000
P2 = `2,93,000
S1 = `3,52,000
S2 = `33,000

Overheads of service departments are apportioned as below:

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 OVERHEADS 3.21
P1 P2 S1 S2
Department S1 40% 50% - 10%
Department S2 50% 40% 10% -

A product ‘Z’ passes through all the two production departments – P1 and P2 and each unit of product
remain in process for 2 and 3 hours respectively. The material and labour cost of one unit of product ‘Z’ is `500
and `350 respectively. The company run for all 365 days of the year and 16 hours per day.
You are required to:
(1) To make secondary distribution of overheads of service departments by applying Simultaneous
Equation method and
(2) Determine the total cost of one unit of product Z.
[(8 Marks) May 2018]

Answer
(1) Statement Showing Secondary Distribution
Production Departments Service Departments
Particulars Basis
P1 P2 S1 S2
Overheads Primary 4,02,000 2,93,000 3,52,000 33,000
distribution
Apportionment:
Department S1 (40:50:10) 1,43,555 1,79,445 (3,58,889) 35,889
Department S2 (50:40:10) 34,445 27,555 6,889 (68,889)
Total Overheads 5,80,000 5,00,000 - -
÷ Production Hours 5,840 5,840 - -
Recovery rate per hour - 99.32 85.62 - -

Calculation of adjusted expenses of service department by using Simultaneous Equation method:

Expenses of Department S1 = 3,52,000 + 10% of Expenses of S2

Expenses of Department S2 = 33,000 + 10% of Expenses of S1

Now:
Expenses of Department S1 = 3,52,000 + 10% (33,000 + 10% of S1)
Expenses of Department S1 = 3,52,000 + 3,300 + 1% of S1
Expenses of Department S1 = 3,55,300 ÷ 99% = 3,58,889

Expenses of Department S2 = 33,000 + 10% of S1

= 33,000 + 10% of 3,58,889
= 33,000 + 35,889 = 68,889

Calculation of production hours = 365 × 16 hours = 5,840 hours

(2) Statement Showing Cost Per Unit of ‘Z’

Particulars Amount
Direct Materials 500
Direct Labour 350
Prime Cost 850
Production Overheads:
Department P1 (2 hours × 99.32) 198.64
Department P2 (3 hours × 85.62) 256.86
Total Cost 1,305.50

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 OVERHEADS 3.22
PYQ 21
RJS produces a single product and absorbs the production overheads at a pre determined rate. Information
relating to a period is as under:
Production overheads actually incurred `4,84,250
Overheads recovery rate at production `1.45 per hour
Actual hours worked 2,65,000 hours
Production:
Finished goods 17,500 units
Work-in-progress 5,000 units
(50% complete in all respects)
Sales:
Finished goods 12,500 units
At the end of the period, it was discovered that the actual production overheads incurred included `40,000 on
account of 'written off obsolete stores’ and wages paid for the strike period under an award.
It was also found that 30% of the under absorption of production overheads was due to production inefficiency
and the rest was attributable to normal increase in costs.
Required to calculate:
(1) The amount of under absorbed production overheads during the period.
(2) Show the accounting treatment of under absorption of production overheads and pass journal entry.
[(8 Marks) Nov 2018]

Answer
(1) Computation of under absorption of Production Overheads during the period:
Particulars Amount
Total production overheads actually incurred during the period 4,84,250
Less: Written off obsolete stores and wages paid for strike period (40,000)
Net production overheads actually incurred 4,44,250
Production overheads absorbed (2,65,000 hours × `1.45) 3,84,250
Under Recovery of production overheads 60,000

(2) Accounting treatment of under-absorption of production overheads:

a. `18,000 (i.e. 60,000 × 30%) of under absorbed overheads were due to lack of production
planning. This being abnormal should be debited to Costing Profit and Loss Account.

b. The balance of `42,000 (i.e. 60,000 × 70%) of under absorbed overheads should be distributed
over work in progress, finished goods and cost of sales by using supplementary rate.

Supplementary OH Rate (Positive) = Under Absorbed Overhead

Equivalent Units
= 42,000
12,500 + 5,000 + 2,500

= `2.10 per unit

Distribution of unabsorbed overheads of `42,000 over work-in-progress, finished goods and cost of sales:

Work-in-Progress (2,500 units × `2.10) 5,250

Finished goods (5,000 units × `2.10) 10,500
Cost of sales (12,500 units × `2.10) 26,250

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 OVERHEADS 3.23
Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 26,250 -
Finished Goods Control A/c Dr. 10,500 -
Work in Progress Control A/c Dr. 5,250 -
Costing Profit & Loss A/c Dr. 18,000 -
To Overhead Control A/c - 60,000
(Being under recovery of under absorbed oh recovered/charged)

PYQ 22
M/s. NOP Limited has its own power plant and generates its own power. Information regarding power
requirements and power used are as follows:
Production Departments Service Departments
Particulars
A B X Y
Needed capacity production (in hours) 20,000 25,000 15,000 10,000
Used during the quarter ended September 2018 16,000 20,000 12,000 8,000

During the quarter ended September 2018, cost for generating power amounted to `12.60 Lakhs out of which
`4.20 Lakhs was considered as fixed cost.

Service department X renders services to departments A, B and Y in the ratio of 6 : 4 : 2 whereas

department Y renders services to department A and B in the ratio of 4 : 1. The direct labour hours of
department A and B are 67,500 hours and 48,750 hours respectively.
Required:
(1) Prepare overheads distribution sheet.
(2) Calculate factory overhead per labour hour for department A and department B.
[(5 Marks) Nov 2018]

Answer
(1) Overheads Distribution Sheet
Production Departments Service Departments
Particulars Basis
A B X Y
Fixed overheads (4,20,000) Needed capacity 1,20,000 1,50,000 90,000 60,000
(20:25:15:10)
Variable overheads Used capacity 2,40,000 3,00,000 1,80,000 1,20,000
(12,60,000 – 4,20,000) (16:20:12:8)
Total overheads - 3,60,000 4,50,000 2,70,000 1,80,000
Apportionment of expenses of:
Department X 6:4:2 1,35,000 90,000 (2,70,000) 45,000
Department Y 4:1 1,80,000 45,000 - (2,25,000)
Total overheads - 6,75,000 5,85,000 - -

(2) Calculation of factory overhead per hour:

Department X = 6,75,000 ÷ 67,500 hours = `10 per hour
Department Y = 5,85,000 ÷ 48,750 hours = `12 per hour

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 OVERHEADS 3.24
PYQ 23
M/s. Zaina Private Limited has purchased a machine costing `29,14,800 and it is expected to have a
salvage value of `1,50,000 at the end of its effective life of 15 years. Ordinarily the machine is expected
to run for 4,500 hours per annum but it is estimated that 300 hours per annum will be lost for normal
repair & maintenance.

The other details in respect of the machine are as follows:

(a) Repair & maintenance during the whole life of the machine are expected to be `5,40,000.
(b) Insurance premium (per annum) 2% of the cost of the machine.
(c) Oil and lubricants required for operating the machine (per annum) `87,384.
(d) Power consumption: 10 units per hour @ `7 per unit. No power consumption during repair and
maintenance.
(e) Salary to operator per month `24,000. The operator devotes one-third of his time to the machine.

You are required to calculate comprehensive machine hour rate.

[(5 Marks) May 2019]

Answer
Machine Hour Rate
Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`29,14,800 – 1,50,000) × 1/15 years] 1,84,320
Insurance Premium (`29,14,800 × 2%) 58,296
Salary to Operator (`24,000 × 1/3 × 12) 96,000
Total (A) 3,38,616
(B) Running charges/ Variable costs
Repairs (`5,40,000 × 1/15 years) 36,000
Power (10 units × 4,200 hours × `7) 2,94,000
Oil and lubricants 87,384
Total (B) 4,17,384
Total Cost (A + B) 7,56,000
÷ Productive Machine Hours (4,500 - 300) ÷ 4,200
Machine Hour Rate `180.00

PYQ 24
ABS enterprise produces a product and adopts the policy to recover factory overheads applying blanket rate
based on machine hours. The cost records of the concern reveal following information:
Budgeted production overheads `10,35,000
Budgeted machine hours 90,000
Actual machine hours worked 45,000
Actual production overheads `8,80,000

Production overheads (actual) include –

Paid to worker as per court’s award `50,000
Wages paid for strike period `38,000
Stores written off `22,000
Expenses of previous year booked in current year `18,500

Production –

Finished goods 30,000 units

Sale of finished goods 27,000 units

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 OVERHEADS 3.25
The analysis of cost information reveals that ⅓ of the under absorption of overheads was due to defective
production planning and the balance was attributable to increase in costs.

You are required:

(1) To find out the amount of under absorbed production overheads.
(2) To give the ways of treating it in cost accounts.
(3) To apportion the under absorbed overheads over the items.
[(10 Marks) Nov 2019]

Answer
(1) Computation of Amount of Under Absorption of Production Overheads
Particulars Amount
Total production overheads actually incurred 8,80,000
Less: Paid to worker as per court’s award (50,000)
Less: Wages paid for strike period (38,000)
Less: Stores written off (22,000)
Less: Expenses of previous year booked in current year (18,500)
Net production overheads actually incurred 7,51,500
Production overheads absorbed (10,35,000 ÷ 90,000 hours) × 45,000 hours 5,17,500
Under Recovery of production overheads 2,34,000

(2) Accounting treatment of under-absorption of production overheads:

(a) `78,000 (i.e., `2,34,000 × ⅓) of under absorbed overheads were due to defective production
planning. This being abnormal should be debited to Costing Profit and Loss Account.

(b) The balance of `1,56,000 (i.e., `2,34,000 × ⅔) of under absorbed overheads should be distributed
over finished goods and cost of sales by using supplementary rate.

Under Absorbed Overheads

Supplementary OH Rate =
Total Units
1,56,000
=
30,000
= `5.20 per unit

(3) Apportionment of Under Absorbed Overheads:

Distribution of unabsorbed overheads of `1,56,000 over finished goods and cost of sales:

Finished goods (3,000 units × `5.20) `15,600

Cost of sales (27,000 units × `5.20) `1,40,400

Journal Entries
Entries Dr. Cr.
Finished Goods Control A/c Dr. 15,600 -
Cost of Sales A/c Dr. 1,40,400 -
Costing Profit & Loss A/c Dr. 78,000 -
To Overhead Control A/c 2,34,000
(Being under recovery of under absorbed oh recovered/charged)

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 OVERHEADS 3.26

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y -
2 Y Y Y -
3 Y Y Y Y
4 Y Y Y -
5 Y Y Y Y
6 Y Y Y Y
7 Y Y Y Y
8 Y Y Y Y
9 Y Y Y -
10 Y Y Y Y
11 Y Y Y -
12 Y Y - -
13 Y Y Y -
14 Y Y Y -
15 Y Y Y -
16 Y Y Y Y
17 Y Y Y Y
18 Y Y Y -
19 Y Y Y -
20 Y Y Y -
21 Y Y Y Y
22 Y Y Y Y
23 Y Y Y -
24 Y Y - -

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 CHAPTER - 4

COST SHEET
&
UNIT COSTING
LEARNING OUTCOMES

When you have finished studying this chapter, you should be able to:

 Understand the meaning of prime cost, works cost, cost of

production, cost of goods sold and cost of sales.
 Classify and ascertain cost on the basis of function.
 Prepare cost sheet/statement for production of goods and
providing services.
 Prepare budgeted cost and income statement.
 Describe Unit costing method.
 Prepare and calculate the cost under Unit costing.
 COST SHEET & UNIT COSTING 4.1

PAST YEAR QUESTIONS

PYQ 1
Following information relate to a manufacturing concern for the year ended 31st March, 2018:

Raw Materials (opening) `2,28,000

Raw Material (closing) `3,05,000
Purchase of Raw Material `42,25,000
Freight Inwards `1,00,000
Direct wages paid `12,56,000
Direct wages outstanding at the end of the year `1,50,000
Factory Overheads 20% prime cost
Work-in-progress (opening) `1,92,500
Work-in-progress (closing) `1,40,700
Administrative Overheads (related to production) `1,73,000
Distribution expenses `16 per unit
Finished Stock (opening: 1,217 Units) `6,08,500
Sale of scrap of material `8,000

The firm produced 14,000 units of output during the year. The stock of finished goods at the
end of the year is valued at cost of production. The firm sold 14,153 units at a price of `618 per unit
during the year.

Prepare cost sheet of the firm.

[(10 Marks) May 2018]

Answer
Cost Sheet
Particulars Amount
Raw materials purchased 42,25,000
Add: Opening stock of raw materials 2,28,000
Add: Freight Inward 1,00,000
Less: Sale of scrap of materials (8,000)
Less: Closing stock of raw materials (3,05,000)
Materials consumed 42,40,000
Direct wages (12,56,000 + 1,50,000) 14,06,000
Prime Cost 56,46,000
Factory Overheads (20% of 56,46,000) 11,29,200
Add: Opening WIP 1,92,500
Less: Closing WIP (1,40,700)
Works Cost 68,27,000
Administrative Overheads 1,73,000
Cost of Production 70,00,000
Add: Opening Finished goods 6,08,500
Less: Closing Finished Goods [(70,00,000 ÷ 14,000) × 1,064 units] (5,32,000)
Cost of Goods Sold 70,76,500
Selling expenses (`16 × 14,153) 2,26,448
Cost of Sales 73,02,948
Profit (b.f.) 14,43,606
Sales (14,153 × 618) 87,46,554

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 COST SHEET & UNIT COSTING 4.2

Working Note:
Units in closing finished goods = Opening units + Units produced – Units sold
= 1,217 + 14,000 – 14,153 = 1,064 units

PYQ 2
Following details are provided by M/s ZIA Private Limited for the quarter ended 30 th September,
2018:

Direct Expenses `1,80,000

Direct Wages being 175% of Factory Overheads `2,57,250
Cost of Goods Sold `18,75,000
Selling and Distribution Overheads `60,000
Sales `22,10,000
Administration Overheads are 10% of Factory Overheads

Stock details as per Stock register:

30.06.2018 30.09.2018
Raw Materials `2,45,600 `2,08,000
Work-in-progress `1,70,800 `1,90,000
Finished Goods `3,10,000 `2,75,000

You are required to prepare a Cost Sheet showing:

(1) Raw Material Consumed
(2) Prime Cost
(3) Factory Cost
(4) Cost of Goods Sold
(5) Cost of Sales and Profit
[(10 Marks) Nov 2018]

Answer
Cost Sheet
Particulars Amount
Raw Materials Purchased (W.N.) 12,22,650
Add: Opening stock of Raw Materials 2,45,600
Less: Closing stock of Raw Materials (2,08,000)
Materials Consumed 12,60,250
Direct Wages 2,57,250
Direct Expenses 1,80,000
Prime Cost 16,97,500
Factory Overheads (2,57,250 ÷ 175%) 1,47,000
Add: Opening WIP 1,70,800
Less: Closing WIP (1,90,000)
Factory Cost 18,25,300
Administrative Overheads (10% of 1,47,000) 14,700
Add: Opening Finished Goods 3,10,000
Less: Closing Finished Goods (2,75,000)
Cost of Goods Sold 18,75,000
Selling and Distribution Overheads 60,000
Cost of Sales 19,35,000
Profit (b.f.) 2,75,000
Sales 22,10,000

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 COST SHEET & UNIT COSTING 4.3

Working Note:
Statement Showing Material Purchased
Particulars Amount
Cost Of Goods Sold 18,75,000
Add: Closing Finished Goods 2,75,000
Less: Opening Finished Goods (3,10,000)
Cost Of Production 18,40,000
Less: Administrative Overheads (14,700)
Factory Cost 18,25,300
Add: Closing WIP 1,90,000
Less: Opening WIP (1,70,800)
Gross Factory Cost 18,44,500
Less: Factory Overheads (1,47,000)
Prime Cost 16,97,500
Less: Direct Expenses (1,80,000)
Less Direct Wages (2,57,250)
Raw Material Consumed 12,60,250
Add: Closing Raw Materials 2,08,000
Less Opening Raw Materials (2,45,600)
Raw Materials Purchased 12,22,650

PYQ 3
M/s. Areeba Private Limited has a normal production capacity of 36,000 units of toys per annum. The
estimated costs of production are as under:
(a) Direct material `40 per unit
(b) Direct labour `30 per unit (subject to a minimum of `48,000 p.m.)
(c) Factory overheads:
Fixed `3,60,000 per annum
Variable `10 per unit
Semi variable `1,08,000 per annum up to 50% capacity and
additional `46,800 for every 20% increase in
capacity or any part thereof.
(d) Administrative overheads `5,18,400 per annum (fixed)
(e) Selling overheads `8 per unit
(f) Each unit of raw material yields scrap which is sold at the rate of `5 per unit.
(g) In year 2019, the factory worked at 50% capacity for the first three month but it was expected
that it would work at 80% capacity for the remaining nine month.
(h) During the first three months, the selling price per unit was `145.

You are required to:

(1) Prepare a cost sheet showing prime cost, works cost, cost of production and cost of sales.
(2) Calculate the selling price per unit for remaining nine month to achieve the total annual profit of
`8,76,600.
[(10 Marks) May 2019]

Answer
(1) Cost Sheet
Particulars First 3 Months Next 9 Months Total
Number of Units (W.N. 1) 4,500 21,600 26,100
Raw Materials @ `40 per unit 1,80,000 8,64,000 10,44,000
(22,500) (1,08,000) (1,30,500)

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 COST SHEET & UNIT COSTING 4.4

Less: Sale of Scrap of Material @ `5 per unit 1,57,500 7,56,000 9,13,500

Raw Materials Consumed 1,44,000 6,48,000 7,92,000
Direct Labour (W.N. 2) 3,01,500 14,04,000 17,05,500
Prime Cost
Factory Overheads: 90,000 2,70,000 3,60,000
Fixed 45,000 2,16,000 2,61,000
Variable @ `10 per unit 27,000 1,51,200 1,78,200
Semi Variable (W.N. 3) 4,63,500 20,41,200 25,04,700
Works Cost 1,29,600 3,88,800 5,18,400
Administrative Overheads 5,93,100 24,30,000 30,23,100
Cost of Production 36,000 1,72,800 2,08,800
Selling and Distribution OH @ `8 per unit 6,29,100 26,02,800 32,31,900
Cost of Sales

(2) Statement Showing Selling Price Per Unit

Particulars Amount
Sales Value for First Three Months (4,500 × 145) 6,52,500
Less: Cost of Sales for First Three Months (6,29,100)
Profit for First Three Months 23,400

Required Profit from Next Nine Months (8,76,600 – 23,400) 8,53,200

Cost of Sales for Next Nine Months 26,02,800
Sales Value for Next Nine months 34,56,000
÷ Number of Units for Next Nine Months ÷ 21,600
Selling Price Per Unit for Next Nine Months `160.00

Working Notes:
1. Calculation of production per annum:
50% for 3 months (36,000 units × 50% × 3/12) = 4,500 units
80% for 9 months (36,000 units × 80% × 9/12) = 21,600 units
Total production for the year = 26,100 units

2. Calculation of Labour cost:

First Three Months (4,500 × 30 or 48,000 × 3) whichever is higher = 1,44,000
Next Nine Months (21,600 × 30 or 48,000 × 9) whichever is higher = 6,48,000

3. Calculation of Semi-variable cost:

First Three Months (1,08,000 × 3/12) = 27,000
Next Nine Months [(1,08,000 + 46,800 + 46,800) × 9/12] = 1,51,200

Note:
1. Administrative overheads is assumed to be related to production.

PYQ 4
XYZ a manufacturing firm, has revealed following information for September, 2019 :
1st September 30th September
Raw Materials `2,42,000 `2,92,000
Works-in-progress `2,00,000 `5,00,000

The firm incurred following expenses for a targeted production of 1,00,000 units during the month:

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 COST SHEET & UNIT COSTING 4.5

Consumable stores and spares of factory `3,50,000

Research and development cost for process improvements `2,50,000
Quality control cost `2,00,000
Packing cost (secondary) per unit of goods sold `2.00
Lease rent of production asset `2,00,000
Administrative expenses (general) `2,24,000
Selling and distribution expenses `4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5,000 units

Defective output which is 4% of targeted production, realizes `61 per unit. Closing stock is valued at cost of
production (excluding administrative expenses). Cost of goods sold, excluding administrative expenses
amounts to `78,26,000. Direct employees cost is ½ of the cost of material consumed. Selling price of the
output is `110 per unit.

You are required to:

(1) Calculate the value of material purchased
(2) Prepare cost sheet showing the profit earned by the firm.
[(10 Marks) Nov 2019]

Answer
(1) Statement Showing Value of Material Purchased
Particulars Amount
Cost of Goods Sold (91,000 units) 78,26,000
Add: Closing Finished Goods [(78,26,000 ÷ 91,000 units) × 5,000 units] 4,30,000
Less: Opening Finished Goods (Nil)
Cost of Production 82,56,000
Add: Realizable Value from Sale of Defective Output (1,00,000 × 4% × `61) 2,44,000
Less: Research and Development Cost for Process Improvement (2,50,000)
Less: Quality Control Cost (2,00,000)
Factory Cost 80,50,000
Add: Closing WIP 5,00,000
Less: Opening WIP (2,00,000)
Gross Factory Cost 83,50,000
Less: Factory Overheads:
Consumable Stores and Spares of Factory (3,50,000)
Lease Rent of Production Asset (2,00,000)
Prime Cost 78,00,000
Less Direct Employee Cost [(78,00,000 ÷ 1.5) × 0.5] (26,00,000)
Raw Material Consumed 52,00,000
Add: Closing Raw Materials 2,92,000
Less Opening Raw Materials (2,42,000)
Raw Materials Purchased 52,50,000

(2) Cost Sheet

Particulars Amount
Raw Materials Purchased 52,50,000
Add: Opening stock of Raw Materials 2,42,000
Less: Closing stock of Raw Materials (2,92,000)
Materials Consumed 52,00,000
Add: Direct Employee Cost 26,00,000
Prime Cost 78,00,000

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 COST SHEET & UNIT COSTING 4.6

Add: Factory Overheads:

Consumable Stores and Spares of Factory 3,50,000
Lease Rent of Production Asset 2,00,000
Gross Factory Cost 83,50,000
Add: Opening WIP 2,00,000
Less: Closing WIP (5,00,000)
Factory Cost 80,50,000
Add: Quality Control Cost 2,00,000
Add: Research and Development Cost for Process Improvement 2,50,000
Less: Realizable Value from Sale of Defective Output (2,44,000)
Cost of Production 82,56,000
Add: Opening Finished Goods Nil
Less: Closing Finished Goods (4,30,000)
Cost of Goods Sold 78,26,000
Add: Administrative Expenses (General) 2,24,000
Add: Secondary Packing Cost (91,000 units × `2) 1,82,000
Add: Selling and Distribution Expenses 4,13,000
Cost of Sales 86,45,000
Profit (b.f.) 13,65,000
Sales (91,000 units × `110) 1,00,10,000

Working Note:
Calculation of number of units produced and sold:

Target Production = 1,00,000 units

Good Output = Target Output – Defective Output

= 1,00,000 units – 4% of 1,00,000
= 96,000 units

Units Sold = Good Output - Units in Closing Finished Goods

= 96,000 units – 5,000 units
= 91,000 units

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 COST SHEET & UNIT COSTING 4.7

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y

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 CHAPTER - 5

JOB AND BATCH COSTING

LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the difference between job costing and batch costing.
 Understand the concept of cost per job and cost per batch.
 Understand the method of computation of sales price or quotation
per job and per batch and per unit under the batch.
 Understand the concept of Economic Batch Quantity.
 JOB AND BATCH COSTING 5.1

PAST YEAR QUESTIONS

PYQ 1
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as under:
Job 1102 Job 1108
Selling price `1,07,325 `1,57,920
Profit as percentage on cost 8% 12%
Direct Materials `37,500 `54,000
Direct Wages `30,000 `42,000
It is the policy of the company to charge factory overheads as percentage on direct wages and selling
and administration overheads as percentage on factory cost.
The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order is `64,000 and `50,000 respectively. A profit of 20% on
sales is required.
You are required to compute:
(i) The rates of Factory overheads and Selling and Administration overheads to be charged;
(ii) The Selling price of the new order.
[(9 Marks) Nov 2002]

Answer
(i) Computation of rates of factory overheads and selling and administration overheads to be charged:
Let % of factory overheads to direct wages be F and % of selling and administrative overheads to factory cost
be A
Jobs Cost Sheet
Particulars Job 1102 Job 1108
Direct materials 37,500 54,000
Direct wages 30,000 42,000
Prime cost 67,500 96,000
Factory overheads 30,000F 42,000F
Factory cost 67,500+30,000F 96,000+42,000F
Selling and Administration overheads (67,500+30,000F)A (96,000+42,000F)A
Total cost (67,500+30,000F)(1+A) (96,000+42,000F)(1+A)

* Computation of total cost of jobs:

1,07,325
Total cost of Job 1102 when 8% is the profit on cost = × 100 = `99,375
108%
1,57,920
Total cost of Job 1108 when 12% is the profit on cost = × 100 = `1,41,000
112%

Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore, we
have the following equations:
(67,500 + 30,000F) (1 + A) = `99,375 (1)
(96,000 + 42,000F) (1 + A) = `1,41,000 (2)
Or
67,500 + 30,000F + 67,500 A + 30,000FA = `99,375
96,000 + 42,000F + 96,000 A + 42,000FA = `1,41,000
Or

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 JOB AND BATCH COSTING 5.2

30,000F + 67,500A + 30,000FA = `31,875 (3)

42,000F + 96,000A + 42,000FA = `45,000 (4)

On solving (3) and (4) we get:

A = 0.25 or 25% on factory cost
F = 0.40 or 40% on direct wages

(ii) Selling Price of the New Order:

Particulars Amount
Materials 64,000
Productive Wages 50,000
Prime Cost 1,14,000
Factory Overheads (40% Of 50,000) 20,000
Factory Cost 1,34,000
Selling And Admin Overheads (25% Of 1,34,000) 33,500
Total Cost 1,67,500
Profit (20% On Sales Or 25% On Cost) 41,875
Sale Price 2,09,375

PYQ 2
M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year 2014 are
given below:
Opening stock of materials `1,50,000
Closing stock of materials `2,00,000
Purchase of materials `18,50,000
Direct labour `9,50,000
Factory overheads `3,80,000
Administrative overheads `2,50,400
During 2015, the company has received an order from a car manufacturer where it estimates the cost
of materials and labour will be `8,00,000 and `4,50,000 respectively.
M.L. Auto Ltd. charges factory overhead as a percentage of direct labour and administrative
overheads as a percentage of factory cost based on previous year’s cost.
Cost of delivery of the components at customer’s premises is estimated at `45,000.

You are required to:

1. Calculate the overhead recovery rates based on actual cost of 2014.
2. Prepared a detailed cost statement for the order received in 2015 and the price to be quoted if company
wants to earn a profit of 10% on sales.
[(8 Marks) Nov 2015]

Answer
1. Calculation of overhead recovery rates based on actual cost of 2014:
Factory overhead 3,80,000
Factory overhead rate = × 100 = × 100 = 40%
Direct labour cost 9,50,000

Ad min overhead 2,50,400

Admin overhead rate = × 100 = ×100 = 8%
Factory cost 31,30,000

Working Note:
Factory cost = Opening stock of materials + Purchase of materials – Closing of
materials + Labour + Factory overhead

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 JOB AND BATCH COSTING 5.3

= 1,50,000 + 18,50,000 – 2,00,000 + 9,50,000 + 3,80,000

= 31,30,000

2. Statement of Cost and Price

Particulars `
Direct materials 8,00,000
Direct wages 4,50,000
Prime cost 12,50,000
Factory overheads @ 40% of 4,50,000 1,80,000
Factory cost 14,30,000
Administration overheads @ 8% of 14,30,000 1,14,400
Cost of goods sold 15,44,400
Cost of delivery 45,000
Cost of sales 15,89,400
Profit @ 10% of sales 1,76,600
Sales (15,89,400/90%) 17,66,000

PYQ 3
XYZ has obtained an order to supply 48,000 bearings per year from a concern on a steady basis. It is
estimated that it costs `.20 as inventory holding cost per bearing per month and that the set up cost per run
of bearing manufacture is `384.
You are required to:
(1) Compute optimum run size and number of runs for bearing manufacture.
(2) Compute the interval between two consecutive runs.
(3) Find out the extra cost incurred, if company adopts a policy to manufacture 8,000 bearings per run as
compared to optimum run size.
(4) Give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year.
[(10 Marks) Nov 2018]

Answer
2 DS 2 × 48,000 × 384
(1) Optimum Run size = =
C 12 × .20
= 3,919.18 bearings

Number of runs = Annual demand ÷ EBQ = 48,000 ÷ 3,919.18

= 12.247 runs

(2) Interval between two runs = 365 ÷ Number of Runs = 365 ÷ 12.247
= 29.80 days

(3) Computation of Extra Cost

Particulars At RBQ 8,000 At EBQ 3,919.18
Set up Cost (D/RBQ × S) 2,304 4,703
Carrying cost (RBQ × ½ × C) 9,600 4,703
Total Cost 11,904 9,406
Extra Cost - 2,498

(4) Opinion: Company should go with the EBQ (i.e. 3,919.18 bearings) having lower cost than RBQ
8,000 units.

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 JOB AND BATCH COSTING 5.4

PYQ 4
The following data presented by the supervisor of a factory for a job.
` per unit
Direct Material 120
Direct Wages @ `4 per hour 60
(Departments A - 4 hrs., B - 7 hrs., C - 2 hrs & D - 2 hrs)
Chargeable Expenses 20
Total 200

Analysis of the profit and loss account for the year ended 31st March, 2019:
Particulars ` Particulars `
Material 2,00,000 Sales 4,30,000
Direct Wages
Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000 50,000
Special store items 6,000
Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross profit c/d 1,30,000
4,30,000 4,30,000
Selling expenses 90,000 Gross profit b/d 1,30,000
Net profit 40,000
1,30,000 1,30,000
It is also to be noted that average hourly rates for all the four departments are similar.

Required:
(a) Prepare a job cost sheet.
(b) Calculate the entire revised cost using the above figures as the base.
(c) Add 20% profit on selling price to determine the selling price.
[(5 Marks) Nov 2019]

Answer
Job Cost Sheet
Particulars Amount
Direct Materials 120.00
Direct Wages:
Department A (4 hours × `4) 16.00
Department B (7 hours × `4) 28.00
Department C (2 hours × `4) 8.00
Department D (2 hours × `4) 8.00
Chargeable Expenses 20.00
Prime Cost 200.00
Overheads:
Department A @ 100% of direct wages 16.00
Department B @ 75% of direct wages 21.00
Department C @ 90% of direct wages 7.20
Department D @ 85% of direct wages 6.80

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 JOB AND BATCH COSTING 5.5

Works Cost 251.00

Selling Expenses @ 30% on works cost 75.30
Total Cost 326.30
Profit @ 20% on selling price or 25% on cost 81.575
Sales 407.875

Working note:
(1) Calculation of recovery rate of Overheads:
Overheads
Recovery rate of overheads = × 100
Direct Wages

12,000
Department A = × 100 = 100% of direct wages
12,000
6,000
Department B = × 100 = 75% of direct wages
8,000
9,000
Department C = × 100 = 90% of direct wages
10,000
17,000
Department D = , × 100 = 85% of direct wages
20,000

(2) Calculation of recovery rate of Selling Expenses:

Selling Expenses
Recovery rate of selling OH = × 100
Works Cost

= {90,000 ÷ (4,30,000 – 1,30,000)} × 100

= 30% of works cost

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 JOB AND BATCH COSTING 5.6

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y

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 CHAPTER - 6

CONTRACT COSTING
LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the meaning of fixed price and cost plus profit contract.
 Understand the meaning of notional profit, work in progress, work
certified, work uncertified and retention money.
 Understand the treatment of abnormal and normal loss in contract
costing.
 Understand the meaning and treatment of escalation clause in
contract costing.
 Prepare contract account, contractee’s account, general profit and
loss account and balance sheet.
 Understand the various methods of computation of profit under
contract costing.
 Under the concept of valuation of work in progress.
 Understand the treatment of actual loss and estimated loss.
 CONTRACT COSTING 6.1

PAST YEAR QUESTIONS

PYQ 1
Compute Notional Profit and Estimated Profit on a contract (which has been 80% complete) from the following
particulars:
Total expenditure to date `1,70,000
Estimated further expenditure to complete the contact `34,000
(Including contingencies)
Contract Price `3,06,000
Work certified `2,00,000
Work not certified `17,000
Cash received `1,63,200
[(5 Marks) May 1998]

Answer
Calculation of Notional Profit
Particulars `
Value of Work certified 2,00,000
Add: Cost of Work Uncertified 17,000
Less: Total expenditure to date (1,70,000)
Notional Profit 47,000

Calculation of Estimated Profit

Particulars `
Contract Price 3,06,000
Less: Total expenditure to date (1,70,000)
Less: Estimated further expenditure to complete the contract (34,000)
Estimated Profit 1,02,000

PYQ 2
A contractor commenced a building contract on October 1, 1997. The contract price is `4,40,000. The following
data pertaining to the contract for the year 1998-99 has been compiled from his books and is as under:
01.04.1998 Work-in-progress not certified 55,000
Material at site 2,000
1998 – 99 Expenses incurred:
Material issued 1,12,000
Wages paid 1,08,000
Hire of plant 20,000
Other expenses 34,000
31.03.1999 Material at site 4,000
Work-in-progress:
Not certified 8,000
Certified 4,05,000
The cash received represent 80% of work certified. It has been estimated that further costs to complete
the contract will be `23,000 including the materials at site as on March 31, 1999.
Determine the Notional profit on the contract for the year 1998-99 and prepare contract account
also calculate Estimated Profit.
[(8 Marks) Nov 1999]

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 CONTRACT COSTING 6.2

Answer
Contract A/c
Particulars ` Particulars `
To Opening WIP 55,000 By WIP:
To Opening materials 2,000 Work certified 4,05,000
To Materials 1,12,000 Work uncertified 8,000
To Wages 1,08,000 By Materials at site 4,000
To Hire of plant 20,000
To Other expenses 34,000
To Notional Profit 86,000
4,17,000 4,17,000

Estimated profit on completion of the contract:

Cost of the contract (to date) 3,27,000

Further cost of completing 23,000
Total Cost 3,50,000
Contract Price 4,40,000
Estimated profit (Contract price – Total cost) 90,000

PYQ 3
MNP Construction Ltd. commenced a contract on April 1, 1999. The total contract was for `17,50,000. Actual
expenditure in 1999-2000 and estimated expenditure in 2000-2001 are given below:

1999-2000 2000-2001
(Actual) (Estimated)

Materials issued 3,00,000 5,50,000

Labour: Paid 2,00,000 2,50,000
Outstanding at end 20,000 30,000
Plant Purchased 1,50,000 Nil
Expenses: Paid 75,000 1,50,000
Prepaid at end 15,000 Nil
Plant returned to store (historical cost) 50,000 1,00,000
(on 31.12.2000)
Material at site 20,000 50,000
Work certified 8,00,000 Full
Work uncertified 25,000 Nil
Cash received 6,00,000 Full

The plant is subject to annual depreciation @ 25% of WDV Cost. The contract is likely to be completed
on December 31, 2000.

Prepare the Contract A/c. Determine the Notional profit on the contract for the year 1999-2000
and also calculate Estimated Profit.
[(10 Marks) May 2000]

Answer
Working Notes:

Depreciation on plant returned = First part 25% of `1,00,000 + Second part 25% of `50,000
= 25,000 + 12,500
= 37,500

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 CONTRACT COSTING 6.3

Contract Account
For the period from 01.04.99 to 31.03.00
Particulars Amount Particulars Amount
To Materials issued 3,00,000 By WIP:
To Labour paid 2,00,000 Value of work certified 8,00,000
Add: Outstanding 20,000 2,20,000 Cost of work uncertified 25,000
To Depreciation on plant 37,500 By Materials at site 20,000
To Expenses paid 75,000
Less: Prepaid (15,000) 60,000
To Notional profit 2,27,500
8,45,000 8,45,000

Calculation of estimated profit:

Particulars Amount Amount
Contract price 17,50,000
Less: Total cost:
Cost to date (5,97,500)
Further estimated cost:
Materials at site 20,000
Depreciation on plant (1,00,000–25,000) × 25% × 9/12 14,063
Materials issued 5,50,000
Labour for the year:
Paid 2,50,000
Add: Closing Outstanding 30,000
Less: Opening Outstanding (20,000)
Expenses paid 1,50,000
Add: Opening prepaid 15,000
Less: Material at site (50,000) (9,59,063)
Estimated Profit 1,93,437

PYQ 4
Paramount Engineers are engaged in construction and erection of a bridge under a long-term contract. The
cost incurred upto 31.03.2001 was as under:
` In Lakhs
Fabrication
Direct Materials 280
Direct Labour 100
Overheads 60
440

Erection costs to date 110

550

The contract price is `11 crores and the cash received on account till 31.03.2001 was `6 crores. A
technical estimate of the contract indicates the following degree of completion of work:

Fabrication: Direct Material 70%

Direct Labour and Overheads 60%
Erection: 40%

You are required to calculate Notional Profit against this partly completed contract as at
31.03.2001 and Estimated Profit.
[(10 Marks) May 2001]

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 CONTRACT COSTING 6.4

Answer
Statement Showing Estimated Profit
Cost to date Further Costs
Particulars Total Cost
Completion % Amount Balance % Amount
Fabrication Costs:
Direct material 70 280.00 30 120.00 400.00
Direct labour 60 100.00 40 66.67 166.67
Overheads 60 60.00 40 40.00 100.00
Total fabrication 440.00 226.67 666.67
Erection cost 40 110.00 60 165.00 275.00
Total cost 550.00 391.67 941.67
Notional/Estimated Profit 92.48 65.85 158.33
Total 642.48 457.52 1100.00

Notional Profit = 92.48 Lakhs

Estimated Profit = 158.33 Lakhs

PYQ 5
A construction company undertook a contract at an estimated price of `108 lacs, which includes a budgeted
profit of `18 lacs.

The relevant data for the year ended 31.03.2002 are as under:

Materials issued to site `50,00,000

Direct wages paid `38,00,000
Plant hired `7,00,000
Site office costs `2,70,000
Materials returned from site `1,00,000
Direct expenses `5,00,000
Work certified `1,00,00,000
Progress payments received `72,00,000

A special plant was purchased specifically for this contract at `8,00,000 and after use on this contract till the
end of 31.03.2002, it was valued at `5,00,000. The cost of materials at site at the end of the year was estimated
at `18,00,000. Direct wages accrued as on 31.03.2002 was `1,10,000.

Prepare the Contract Account for the year ended 31st March, 2002.
[(6 Marks) Nov 2002]

Answer
Contract Account for the year ended 31st March, 2002
Particulars Amount Particulars Amount
To Materials issued 50,00,000 By WIP:
To Direct wages 38,00,000 Value of work certified 1,00,00,000
Add: Accrued 1,10,000 39,10,000 Cost of work uncertified -
To Plant hire 7,00,000 By Materials at site 18,00,000
To Site office costs 2,70,000 By Materials returned 1,00,000
To Direct expenses 5,00,000
To Depreciation of special plant 3,00,000
To Notional profit 12,20,000
1,19,00,000 1,19,00,000

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 CONTRACT COSTING 6.5

PYQ 6
Brock Construction Ltd. commenced a contract on November 1, 2003. The total contract was for `39,37,500.
Actual expenditure for the period November 1, 2003 to October 31, 2004 and estimated expenditure
for November 1, 2004 to March 31, 2005 are given below:
01.11.03 to 31.10.04 01.11.04 to 31.03.05
(Actuals) (Estimated)
Materials issued 6,75,000 12,37,500
Labour:
Paid 4,50,000 5,62,500
Prepaid 25,000 Nil
Outstanding Nil 2,500
Plant purchased 3,75,000 Nil
Expenses:
Paid 2,00,000 3,50,000
Outstanding 50,000 25,000
Plant returns to store 75,000 3,00,000
(Historical cost) (on 31.03.04) (on 31.03.05)
Work Certified 20,00,000 Full
Work Uncertified 75,000 Nil
Cash received 17,50,000 Full
Material at site 75,000 37,500
The plant is subject to annual depreciation @33-⅓% on written down value method. The contract is
likely to be completed on March 31, 2005.
Prepare the contract A/c. Determine the Notional profit on the contract for the year November,
2003 to October, 2004 and Estimated Profit.
[(10 Marks) Nov 2004]

Answer
Contract A/c
(01.11.03 to 31.03.04)
Particulars Amount Particulars Amount
To Materials issued 6,75,000 By WIP:
To Labour 4,50,000 Value of work certified 20,00,000
Less: Prepaid (25,000) 4,25,000 Cost of work uncertified 75,000
To Plant depreciation By Materials at site 75,000
(3,00,000 + 75,000 × 5/12) × 33-⅓% 1,10,417
To Expenses paid 2,00,000
Add: Outstanding 50,000 2,50,000
To Notional profit 6,89,583
21,50,000 21,50,000

Calculation of estimated profit:

Estimated profit = Contract price – Total cost (Total cost = cost to date + *further
estimated cost)
= 39,37,500 – (13,85,417 + 22,17,778) = 3,34,305

*Further estimated cost = Materials + Labour + Expenses + Depreciation

= (75,000 + 12,37,500 – 37,500) + (5,62,500 + 25,000 + 2,500) +
(3,50,000 - 50,000 + 25,000) + [(3,00,000 – 33-⅓%) × 5/12 × 33-⅓%]
= 22,17,778

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 CONTRACT COSTING 6.6

PYQ 7
RST Construction Ltd. commenced a contract on April 1st 2005. The total contract was for `49,21,875.
Actual expenditure for the period April 1, 2005 to March 31, 2006 and estimated expenditure
for April 1, 2006 to September 30, 2006 are given below:

Particulars 01.04.05 to 31.03.06 01.04.06 to 30.09.06

(Actuals) (Estimated)
Materials Issued 7,76,250 12,99,375
Labour : Paid 5,17,500 6,18,750
: Prepaid 37,500 -
: Outstanding 12,500 5,750
Plant Purchased 4,00,000 -
Expenses : Paid 2,25,000 3,75,000
: Outstanding 25,000 10,000
: Prepaid 15,000 -
Plant returns to Store (historical cost) 1,00,000 3,00,000
(On 30.09.05) (On 30.09.06)
Work certified 22,50,000 Full
Work uncertified 25,000 -
Cash received 18,75,000 -
Materials at site 82,500 42,500

The plant is subject to annual depreciation @ 25% on written down value method. The contract
is likely to be completed on September 30, 2006.

Prepare the contract A/c and also calculate Estimated Profit.

[(10 Marks) May 2006]

Answer
RST Construction Ltd.
Contract Account (01.04.05 to 31.03.06)
Particulars Amount Particulars Amount
To Material issued 7,76,250 By Materials at site 82,500
To Labour paid 5,17,500 By Work certified 22,50,000
Add: Outstanding 12,500 By Work uncertified 25,000
Less: Prepaid (37,500) 4,92,500
To Depreciation on plant 87,500
(3,00,000 + 1,00,000 × 6/12) × 25%
To Expense paid 2,25,000
Add: Outstanding 25,000
Less: Prepaid (15,000) 2,35,000
To Notional profit 7,66,250
23,57,500 23,57,500

Calculation of estimated profit:

Estimated profit = Contract price – Total cost (Total cost = cost to date + *further
estimated cost)
= 49,21,875 – (15,08,750 + 23,92,000) = 10,21,125
*Further estimated cost = Materials + Labour + Expenses + Depreciation
= (82,500 + 12,99,375 – 42,500) + (6,18,750 + 37,500 + 5,750 – 12,500)
+ (3,75,000 - 25,000 + 15,000 + 10,000) + [(3,00,000 – 25%) × 6/12 ×
25%] = 23,92,000

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 CONTRACT COSTING 6.7

PYQ 8
AKP Builders Ltd. commenced a contract on April 1, 2005. The total contract was for `5,00,000. Actual
expenditure for the period April 1, 2005 to March 31, 2006 and estimated expenditure for April 1, 2006 to
December 31, 2006 are given below:
2005-06 2006-07 (9 months)
(Actuals) (Estimated)

Material Issued 90,000 85,750

Labour:
Paid 75,000 87,325
Outstanding at the end 6,250 8,300
Plant 25,000 -
Sundry Expenses:
Paid 7,250 6,875
Prepaid at the end 625 -
Establishment charges 14,625 -

A part of the material was unsuitable and was sold for `18,125 (Cost being `15,000) and a part of plant
was scrapped and disposed off for `2,875. The value of plant at site on 31 March, 2006 was `7,750 and the
value of material at site was `4,250. Cash received on account to date was `1,75,000 representing 80% of the
work certified. The cost of work uncertified was valued at `27,375.

The contractor estimated further expenditure that would be incurred in completion of the
contract:
 The contract would be completed by 31st December, 2006.
 A further sum of `31,250 would have to be spent on the plant and the residual value of the plant
on the completion of the contract would be `3,750.
 Establishment charges would cost the same amount per month as in the previous year.
 `10,800 would be sufficient to provide for contingencies.

Prepare Contract Account and calculate Notional Profit and Estimated total profit on this
contract.
[(8 Marks) May 2007]

Answer
AKP Builders Ltd. Contract Account
(For the period 01.04.2005 to 31.03.2006)
Particulars Amount Particulars Amount
To Material issued 90,000 By Work in progress:
To Labour paid 75,000 Work certified 2,18,750
Add: Outstanding 6,250 81,250 Work uncertified 27,375
To Depreciation on plant 14,375 By Cost of materials sold 15,000
(25,000 – 2,875 – 7,750) (18,125 – 3,125)
To Sundry expenses paid 7,250 By Materials at site 4,250
Less: Prepaid (625) 6,625
To Establishment charges 14,625
To Notional profit 58,500
2,65,375 2,65,375

Estimated profit = Contract price – Total cost (cost to date + *further estimated cost +
provision for contingencies)
= 5,00,000 – 4,31,518.75 (1,87,625 + 2,33,093.75 + 10,800)
= 68,481.25

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 CONTRACT COSTING 6.8

*Further estimated cost = Materials + Labour + Sundry exps + Dep. + Establishment charges
= (85,750 + 4,250) + (87,325 + 8,300 - 6,250) + (6,875 + 625) + (7,750 +
31,250 - 3,750) + (14,625 × 9/12)
= 2,33,093.75

PYQ 9
PQR Construction Ltd. commenced a contract on April 1, 2009. The total contract was for `27,12,500. Actual
expenditure in 2009-10 and estimated expenditure in 2010-11 are given below:

Particulars 2009-10 2010-11

Actual Estimated
Materials issued 4,56,000 8,14,000
Labour paid 3,05,000 3,80,000
Labour outstanding at end 24,000 37,500
Plant purchased 2,25,000 -
Expenses paid 1,00,000 1,75,000
Expenses outstanding at the end - 25,000
Expenses prepaid at the end 22,500 -
Plant returned to stores 75,000 1,50,000
(at historical cost) (on 31.12.2010)
Materials at site 30,000 75,000
Work-in-progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 -
Cash received 10,00,000 Full

The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be completed
on December 31, 2010.

Required:
(i) Prepare the Contract A/c for the year 2009-10.
(ii) Estimate the profit on the contract for the year 2009-10.
[(8 Marks) Nov 2010]

Answer
(i) Contract A/c
For the period 01.04.09 to 31.03.10
Particulars Amount Particulars Amount
To Materials issued 4,56,000 By Work in progress:
To Labour: Work certified 12,75,000
Paid 3,05,000 Work uncertified 40,000
Add: O/s 24,000 3,29,000 By Material at site 30,000
To Depreciation of plant 45,000
(2,25,000 × 20%)
To Expenses:
Paid 1,00,000
Less: Prepaid (22,500) 77,500
To Notional profit 4,37,500
13,45,000 13,45,000

(ii) Calculation of Estimated Profit:

Particulars Cost to date Further estimated cost
Materials 4,26,000 7,69,000
(4,56,000 – 30,000) (30,000 + 8,14,000 – 75,000)
Labour 3,29,000 3,93,500

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 CONTRACT COSTING 6.9

(3,05,000 + 24,000) (3,80,000 – 24,000 + 37,500)

Depreciation 45,000 18,000
(2,25,000 × 20%) (1,50,000 – 20%) × 20% × 9/12)
Expenses 77,500 2,22,500
(1,00,000 – 22,500) (1,75,000 + 22,500 + 25,000)
Total 8,77,500 14,03,000

Estimated Profit = Contract price – Total cost

= 27,12,500 – (8,77,500 + 14,03,000) = 4,32,000

PYQ 10
A contractor commenced a contract on 01.07.11. The costing records concerning the said contract reveal the
following information as on 31.03.2012:
Particulars Amount
Material sent to site 7,74,300
Labour paid 10,79,000
Labour outstanding as on 31.03.12 1,02,500
Salary to Engineer (monthly) 20,500
Cost of plant sent to site (01.07.11) 7,71,000
Salary to Supervisor (monthly, 3/4 time devoted to contract) 9,000
Administration & other expenses 4,60,600
Prepaid Administration expenses 10,000
Material in hand at site as on 31.03.12 75,800

Plant used for the contract has an estimated life of 7 years with residual value at the end of life `50,000.
Some of material costing `13,500 was found unsuitable and sold for `10,000. Contract price was `45,00,000.
On 31.03.12 two third of the contract was completed. The architect issued certificate covering 50% of the
contract price and contractor has been paid `20,00,000 on account. Depreciation on plant is charged on
straight line basis.

Prepare Contract Account.

[(8 Marks) May 2012]

Answer
Contract Account
For the period 01.07.11 to 31.03.12
Particulars ` Particulars `
To Materials send to site 7,74,300 By Materials in hand 75,800
To Labour paid 10,79,000 By Cost of Materials sold 13,500
Add: Outstanding labour 1,02,500 11,81,500 By Works Cost c/d(b.f.) 26,39,600
To Engineer’s salary
(20,500 × 9 months) 1,84,500
To Supervisor’s salary 60,750
(9,000 × 9 month × 3/4)
To Administration 4,60,600
Less: Prepaid (10,000) 4,50,600
To Depreciation (WN 2) 77,250

27,28,900 27,28,900
To Works Cost b/d 26,39,600 By WIP:
To Notional Profit 2,70,300 Work Certified 22,50,000
Work uncertified (WN 1) 6,59,900
29,09,900 29,09,900

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 CONTRACT COSTING 6.10

Working Notes:

(1) Calculation of cost of work uncertified:

Contract Completed = ⅔ or 66-⅔%
Cost of ⅔ Contract = 26,39,600

3
∴ Cost of Work Uncertified = 26,39,600 × × 16-⅔% = 6,59,900
2

7,71,000−50,000 9
(2) Depreciation = × = 77,250
7 Years 12

PYQ 11
From the following particulars compute Notional Profit and Estimated Profit on a contract which has 80
percent competed:

Total Expenditure to date 8,50,000

Estimate further expenditure to compute the contract 1,70,000
Contract Price 15,30,000
Work Certificate 10,00,000
Work not certified 85,000
Cash received 8,16,000
[(4 Marks) Nov 2012]

Answer
Calculation of Notional Profit
Particulars `
Value of Work certified 10,00,000
Add: Cost of Work Uncertified 85,000
Less: Total expenditure to date (8,50,000)
Notional Profit 2,35,000

Calculation of Estimated Profit

Particulars `
Contract Price 15,30,000
Less: Total expenditure to date (8,50,000)
Less: Estimated further expenditure to complete the contract (1,70,000)
Estimated Profit 5,10,000

PYQ 12
M/s ABID Construction undertook a contract at a price of `171 lacs. The relevant data for the year ended 31st
march, 2014 are as under:

Material issued at site `77,00,000

Direct wages paid `33,00,000
Site office cost `5,50,000
Material return to store `1,75,000
Work certified `1,26,50,000
Work uncertified `2,25,000
Progress payment received `1,01,20,000
Prepaid site office cost as on 31.03.2014 `50,000
Direct wages outstanding as on 31.03.2014 `1,00,000
Material at site as on 31.03.2014 `1,10,000

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 CONTRACT COSTING 6.11

Additional Information:
(a) A plant was purchased for the contract at `8,00,000 on 01.12.2013.
(b) Depreciation @ 15% per annum is to be charged.
(c) Material which cost `1,30,000 was destroyed by fire.

Prepare:
(i) Contract Account for the year ended 31st March.
(ii) Account of Contractee.
(iii) Profit & Loss Account showing the relevant items.
(iv) Balance Sheet showing the relevant items.
[(8 Marks) May 2014]

Answer
(i) Contract Account
For the period from 01.04.2013 to 31.03.2014
Particulars Amount Particulars Amount
To Materials issued at site 77,00,000 By WIP:
To Direct Wages paid 33,00,000 Value of work certified 1,26,50,000
Add: Outstanding wages 1,00,000 Cost of work uncertified 2,25,000
To Site office cost 5,50,000 By Material return to store 1,75,000
Less: Prepaid site office cost (50,000) By Material destroyed by fire 1,30,000
To Depreciation on plant 40,000 By Material at site 1,10,000
(15% of 8,00,000) × 4/12
To Notional profit 16,50,000
1,32,90,000 1,32,90,000

(ii) Contractee’s Account

Particulars Amount Particulars Amount
To Balance c/d 1,01,20,000 By Bank A/c 1,01,20,000
1,01,20,000 1,01,20,000

(iii) Profit & Loss Account

Particulars Amount Particulars Amount
To Materials destroyed by fire 1,30,000 By Contract A/c 16,50,000
To Net Profit 15,20,000
16,50,000 16,50,000

(iv) Balance Sheet

Particulars Amount Particulars Amount
Net Profit 15,20,000 Plant 8,00,000
Outstanding wages 1,00,000 Less: Depreciation (40,000) 7,60,000
Materials at site 1,10,000
Prepaid site office cost 50,000
Work certified 1,26,50,000
Work uncertified 2,25,000
Less: Cash recd (1,01,20,000) 27,55,000
- -

PYQ 13
Z Limited obtained a contract No. 999 for `50 lacs. The following details are available in respect of this contract
for the year ended march 31, 2014:

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 CONTRACT COSTING 6.12

Materials purchased `1,60,000

Material issued from stores `5,00,000
Wages and salaries paid `7,00,000
Drawing and maps `60,000
Sundry expenses `15,000
Electricity charges `25,000
Plant hire expenses `60,000
Sub contract cost `20,000
Material return to store `30,000
Materials return to supplier `20,000

The following balances relating to the contract No 999 for the year ended on March 31, 2013 and March 31,
2014 are available:
As on 31st March 2013 As on 31st March 2014

Work certified 12,00,000 35,00,000

Work uncertified 20,000 40,000
Materials at site 15,000 30,000
Wages outstanding 10,000 20,000

The contractor receives 75% of work certified in cash.

Prepare Contract Account and Contractee’s Account.

[(8 Marks) Nov 2014]

Answer
Contract No.999 Account
For the period from 01.04.2013 to 31.03.2014
Particulars Amount Particulars Amount
To Work in progress b/d: By WIP:
Work certified 12,00,000 Work certified 35,00,000
Work uncertified 20,000 Work uncertified 40,000
To Material b/d 15,000 By Material return to store 30,000
To Material purchased 1,60,000 By Material return to supplier 20,000
To Material issued 5,00,000 By Material at site 30,000
To Wages paid 7,00,000
Add: Outstanding C.Y. 20,000
Less: Outstanding P.Y. (10,000) 7,10,000
To Drawing and maps 60,000
To Sundry expenses 15,000
To Electricity charges 25,000
To Plant hire charges 60,000
To Sub contract cost 20,000
To Notional profit 8,35,000
36,20,000 36,20,000

Contractee’s Account
Particulars Amount Particulars Amount
To Balance c/d 26,25,000 By Balance b/d 9,00,000
(12,00,000 × 75%)
By Bank A/c 17,25,000
(35,00,000 – 12,00,000) × 75%
26,25,000 26,25,000

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 CONTRACT COSTING 6.13

PYQ 14
PVK Constructions commenced a contract on 1st April, 2014. The total contract value was `1,00,00,000. The
contract is expected to be completed by 31st December, 2016. Actual expenditure during the period 1st April,
2015 to 31st March, 2016 and estimated expenditure for the period 1st April, 2016 to 31st December, 2016 are
as follows:

Actual Estimated
Details of Expenses
01.04.15 to 31.03.16 01.04.16 to 31.12.16
Materials issued 15,30,000 21,00,000
Direct Wages paid 10,12,500 12,25,000
Direct Wages outstanding 80,000 1,15,000
Plant purchased 7,50,000 -
Expenses paid 3,25,000 5,40,000
Prepaid expenses 68,000 -
Site office expenses 3,00,000 -

A part of material procured for the contract was unsuitable and was sold for `2,40,000 (cost being
`2,55,000) and a part of plant was scrapped and disposed off for `80,000. The value of plant at site on 31st
March, 2016 was `2,50,000 and the value of material at site was `73,000. Cash received on account to date
was `36,00,000 representing 80% of the work certified. The cost of work uncertified was valued at `5,40,000.

Estimated further expenditure for completion of the contract is as follows:

 A additional amount of `4,62,500 would have to be spent on the plant and the residual value of the plant
on the completion of the contract would be `67,500.
 Site office expenses would be the same amount per month as charged in the previous year.
 An amount of `1,57,500 would have to be incurred towards consultancy charges.

Prepare Contract Account and calculate estimated total profit on this contract.
[(8 Marks) Nov 2015]

Answer
PVK Construction Contract Account
(For the period 01.04.2015 to 31.03.2016)
Particulars Amount Particulars Amount
To Material issued 15,30,000 By Work in progress:
To Labour paid 10,12,500 Work certified 45,00,000
Add: Outstanding 80,000 10,92,500 (36,00,000 ÷ 80%)
To Depreciation on plant 4,20,000 Work uncertified 5,40,000
(7,50,000 – 80,000 – 2,50,000) By Cost of materials sold 2,55,000
To Expenses paid 3,25,000 By Materials at site 73,000
Less: Prepaid (68,000) 2,57,000
To Site office expenses 3,00,000
To Notional profit 17,68,500
53,68,000 53,68,000

Calculation of Estimated Profit

Particulars Amount Amount
Contract price 1,00,00,000
Less: Total cost:
Cost to date (45,00,000 + 5,40,000 – 17,68,500) (32,71,500)
Further estimated cost:

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 CONTRACT COSTING 6.14

Materials issued 21,00,000

Materials at site at 1st April, 2016 73,000
Depreciation on plant (2,50,000 + 4,62,500 - 67,500) 6,45,000
Direct Wages paid 12,25,000
Add: Closing Outstanding 1,15,000
Less: Opening Outstanding (80,000)
Expenses paid 5,40,000
Add: Opening prepaid 68,000
Site office expenses (3,00,000 ÷ 12 months) × 9 months 2,25,000
Consultancy charges 1,57,500 (50,68,500)
Estimated Profit 16,60,000

PYQ 15
XYZ Construction Company took a contract for construction of a stadium on 1st April, 2017 at a price of `160
Lakhs. The relevant information for the year ended 31st March, 2018 are as under:
Particulars Amount (‘000)
Material purchased for contract 6,800
Direct wages paid 3,450
Salaries 200
Direct wages prepaid at the end of the year 50
Salaries outstanding at the end of the year 100
Materials return to stores 150
Materials at site as on 31st March, 2018 175
Payment received from the contractee (80% of work certified) 9,440
Work done but not certified 500

A plant purchased for `12,00,000 on 1st November, 2017 and was in use at the site upto 31st March,
2018. Depreciation is to be charged on plant @15% per annum on straight line basis. Material costing `50,000
was stolen from the site.

You are required to:

(a) Prepare Contract Account for the year ended 31st March, 2018 showing the profit to be taken to Profit
& Loss Account.

(b) Prepare Balance Sheet showing the relevant items.

[(10 Marks) May 2018]

Answer
(a) Contract Account
For the period 01.04.17 to 31.03.18
Particulars ` (‘000) Particulars ` (‘000)
To Materials purchased 6,800 By WIP:
To Direct wages paid 3,450 Work Certified 11,800
Less: Prepaid (50) 3,400 (9,440 ÷ 80%)
To Salaries 200 Work uncertified 500
Add: Outstanding 100 300 By Materials returned 150
To Depreciation on plant 75 By Cost of materials stolen 50
(1,200 × 15% × 5/12) By Materials at site 175
To Notional Profit 2,100
12,675 12,675

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 CONTRACT COSTING 6.15

(b) Balance Sheet (relevant extract)

As on 31st march, 2018
Liabilities ` (‘000) Assets ` (‘000)
Capital - Plant at site (1,200 – 75) 1,125
Add: Profit (2,100 – 50 material loss) 2,050 Materials at site 175
Prepaid direct wages 50
Outstanding salary 100
WIP:
Work Certified 11,800
Work uncertified 500
Less: Cash received (9,440) 2,860
- -

PYQ 16
M/s. SD Private Limited commenced a contract on 1st July, 2017 and the company closes its account for the
year on 31st March every year. The following information relates to the contract as on 31st March 2018:

Material issued `9,48,000

Direct wages `4,57,200
Prepaid direct wages as on 31.03.2018 `1,08,000
Administration charges `7,20,000

A supervisor, who is paid `50,000 per month, has devoted two-third of his time to this contract. A plant
costing `7,85,270 has been on the site for 185 days, its working life is estimated at 9 years and its scrap value
is `75,000.

The contract price is `42,00,000. On 31.03.18 two-third of the contract was completed. The architect
issued certificate covering 50% of the contract price and contractor has been paid `15,75,000 on account.
Assuming 365 days in a year.

You are required to:

(a) Prepare Contract Account showing works cost.
(b) Calculate Notional Profit or Loss as on 31st March 2018.
[(5 Marks) Nov 2018]

Answer
(a) Contract Account (Showing Work Cost)
For the period 01.07.17 to 31.03.18
Particulars ` Particulars `
To Materials issued 9,48,000 By Work Cost 23,57,200
To Direct wages 4,57,200
Less: Prepaid wages (1,08,000) 3,49,200
To Supervisor’s salary
(50,000 × 9 month × 2/3) 3,00,000
To Administration charges 7,20,000
To Depreciation (WN. 2) 40,000
23,57,200 23,57,200

(b) Calculation of Notional Profit:

Notional Profit = Value of Work Certified + Cost of Work Uncertified – Work Cost
= 50% of 42,00,000 + 5,89,300 – 23,57,200
= 3,32,100

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 CONTRACT COSTING 6.16

Working Notes:

(1) Calculation of cost of work uncertified:

Contract Completed = ⅔
Cost of ⅔ contract = 23,57,200

∴ Cost of work uncertified = 23,57,200 × 3 × 16-⅔% = 5,89,300

2

(2) Depreciation = (7,85,270 – 75,000) ÷ 9 Years × 185 = 40,000

365

PYQ 17
A contractor prepares his accounts for the year ending 31 st March each year. He commenced a contract
on 1st September, 2018. The following information relates to contract as on 31 st March, 2019:

Material sent to site `18,75,000

Wages paid `9,28,500
Wages outstanding at end `84,800
Sundry expenses `33,825
Material returned to supplier `15,000
Plant purchased `3,75,000
Salary of supervisor `15,000 per month
(devotes ⅓ of his time on contract)
Material at site as on 31.03.2019 `2,16,800

Some of material costing `10,000 was found unsuitable and was sold for `11,200. On 31.12.2018
plant which costs `25,000 was transferred to some other contract and on 31.01.2019 plant which costs
`32,000 was returned to stores. The plant is subject to annual depreciation @15% on written down value
method.

The contract price is `45,00,000. On 31st March, 2019 two-third of the contract was completed.
The Architect issued certificate covering 50% of the contract price.

Prepare contract A/c and show the notional profit or loss as on 31 st March, 2019.
[(10 Marks) May 2019]

Answer
Contract Account
For the period 01.09.18 to 31.03.19
Particulars ` Particulars `
To Materials sent to site 18,75,000 By Material returned to supplier 15,000
To Wages paid 9,28,500 By Materials at site 2,16,800
Add: Outstanding wages 84,800 10,13,300 By Cost of Materials sold 10,000
To Sundry expenses 33,825 By Works Cost c/d(b.f.) 27,46,400
To Supervisor’s salary 35,000
(15,000 × 7 month × ⅓)
To Depreciation (WN 2) 31,075
29,88,200 29,88,200
To Works Cost b/d 27,46,400 By WIP:
To Notional Profit 1,90,200 Work Certified 22,50,000
Work uncertified (WN 1) 6,86,600
29,36,600 29,36,600

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 CONTRACT COSTING 6.17

Working Notes:

(1) Calculation of cost of work uncertified:

Contract Completed = ⅔ or 66-⅔%

Cost of ⅔ Contract = 27,46,400

3
∴ Cost of Work Uncertified = 27,46,400 × × 16-⅔% = 6,86,600
2

7 4
(2) Depreciation = 3,18,000 × 15% × + 25,000 × 15% × + 32,000 ×
12 12
5
15% ×
12
= 31,075

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 CONTRACT COSTING 6.18

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y - -
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y -
5 Y Y - -
6 Y Y Y Y
7 Y Y Y Y
8 Y Y Y Y
9 Y Y Y Y
10 Y Y Y Y
11 Y Y Y -
12 Y Y Y Y
13 Y Y Y Y
14 Y Y Y Y
15 Y Y Y -
16 Y Y Y -
17 Y Y Y Y

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 CHAPTER - 7

OPERATING COSTING
OR
SERVICE COSTING
LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the service sector and different services.
 Understand the concept of cost unit and cost per unit for various
services.
 Understand the concept of cost classification.
 Understand the commercial tonne kilometers and absolute tonne
kilometers.
 Understand to method of computation of operating cost, net
taking and total taking in respect of transport, hotel and lodges,
hospital, educational institute, IT, toll, financial institutes,
insurance and power generation services etc.
 OPERATING OR SERVICE COSTING 7.1

PAST YEAR QUESTIONS

PYQ 1
A transport service company is running five buses between two towns which are 50 kms apart. Seating
capacity of each bus is 50 passengers.
The following particulars were obtained from their books for April 1998:
Wages of drivers, conductors and cleaners `24,000
Salaries of office staff `10,000
Diesel oil and other oil `35,000
Repairs and maintenance `8,000
Taxation, insurance etc. `16,000
Depreciation `26,000
Interest and other expenses `20,000
Total `1,39,000
Actually, passengers carried were 75 per cent of seating capacity. All buses ran on all days of the
month. Each bus made one round trip per day.
Find out the cost per passenger-km.
[Nov 1998]

Answer
Operating Cost Sheet
(For the month of April 1998)
Particulars Amount
(A) Standing Charges:
Wages of drivers, conductors and cleaners 24,000
Salaries of office staff 10,000
Taxation, insurance etc. 16,000
Depreciation 26,000
Interest and other expenses 20,000
Total (A) 96,000
(B) Running Charges:
Diesel oil and other oil 35,000
Total (B) 35,000
(C) Maintenance Charges:
Repairs and maintenance 8,000
Total (C) 8,000
Total operating cost (A + B + C) 1,39,000
÷ Total tonne-kms 5,62,500
Cost per passenger-km `0.2471
Working Notes:
Total Passenger kms = No. of Buses × Distance × Round trip × Seating capacity × % of capacity
utilization × No. of days operated
= 5 Buses × 50 kms × 2 × 50 passengers × 75% × 30 days = 5,62,500

PYQ 2
A lorry starts with a load of 20 tonnes of goods from station A. It unloads 8 tonnes at station B and rest of
goods at station C. It reaches back directly to station A after getting reloaded with 16 tonnes of goods at
station C. The distance between A to B, B to C and then from C to A are 80 kms, 120 kms and 160 kms

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 OPERATING OR SERVICE COSTING 7.2

respectively.
Compute ‘Absolute tonnes km’ and ‘Commercial tonnes km’.
[Nov 1999]

Answer
Absolute tonne kms:
This is the sum total of tonnes – kms, arrived at by multiplying various distances by respective load
quantities carried as calculated below:
= 20 tonnes × 80 kms + 12 tonnes × 120 kms + 16 tonnes × 160 kms
= 5,600 tonnes km.
Commercial tonne kms:
This is computed by average load being multiplied by total distance travelled as calculated below:
= Average load × Total kms travelled
20  12  16
= tonnes × 360 kms = 5,760 tonnes km.
3

PYQ 3
A mineral is transported from two miners ‘A’ and ‘B’ and unloaded at plots in a railway station. Mine A is at a
distance of 10 kms and B is at a distance of 15 kms from railhead plots. A fleet of lorries of 5 tonnes carrying
capacity is used for the transport of mineral from the mines. Records reveal that the lorries average a speed
of 30 kms per hour when running and regularly take 10 minutes to unload at the railhead. At mine A loading
time averages 30 minutes per load while at mine B loading time averages 20 minutes per load.
Driver’s wages, depreciation, insurance and taxes are found to cost `9 per hour operated. Fuel, oil
tyres, repairs and maintenance cost `1.20 per km.
Draw up a statement, showing the cost per tonne kilometer of carrying mineral from each mine.
[Nov 2000]

Answer
Statement Showing Cost per Tonne-Km
Particulars Mine A Mine B
Fixed Expenses @ `9 per hour (9.00 × 80/60) (9.00 × 90/60)
12.00 13.50
Variable Expenses @ `1.20 per km (1.20 × 20 kms) (1.20 × 30 kms)
24.00 36.00
Operating Cost 36.00 49.50
÷ Effective tonne-kms ÷ 50 ÷ 75
Cost per tonne-km `0.72 `0.66
Working Notes:
1. Total operating time in 1 trip:
Mine A Mine B
Running time (mine to plot) 60 Mnt/30 Kms
× 10 Kms 60 Mnt/30 Kms
× 15 Kms
20 minutes 30 minutes
Loading time 30 minutes 20 minutes
Running time (plot to mine) 20 minutes 30 minutes
Unloading time 10 minutes 10 minutes
Total operating time in one trip 80 minutes 90 minutes
2. Effective tonnes km per trip: 5 tonnes × 10 kms + 5 tonnes × 15 kms +
Nil tonnes × 10 kms Nil tonnes × 15 kms
= 50 tonne kms = 75 tonne kms

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 OPERATING OR SERVICE COSTING 7.3

PYQ 4
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different directions for
transport of customer’s goods. The trucks run loaded with goods and return empty. The distance travelled,
number of trips made and the load carried per day by each truck are as under:
Truck no. One way distance No of round trips Load carried per trip
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last two years is as under:
Year Total distance travelled Maintenance Cost
1 1,60,200 `46,050
2 1,56,700 `45,175
The following are the details of expenses for the year under review:
Diesel : `10 per litre (Each litre gives 4 km mileage)
Drivers' salary : `2,000 per month.
License and taxes : `5,000 per annum per truck.
Insurance : `5,000 per annum for all the three vehicles.
Purchase price per truck : `3,00,000.
Life : 10 years.
Scrap value : `10,000 at the end of economic life.
Oil and sundries : `25 per 100 km run.
General Overhead : `11,084 per annum.
The vehicles operate : 24 days per month on an average.

Required:
(i) Prepare an annual cost statement covering the fleet of three vehicles.
(ii) Calculate the cost per km run.
(iii) Determine the freight rate per tonne km to yield a profit of 10% on freight.
[Nov 2001]

Answer
(i) Annual Cost Statement of 3 Vehicles
Particulars Amount
(A) Fixed Expenses:
Driver’s salary (2,000 × 12 × 3) 72,000
Licence and taxes (5,000 × 3) 15,000
Insurance 5,000
Depreciation [(3,00,000 - 10,000) ÷ 10 Years] × 3 87,000
General overheads 11,084
Total (A) 1,90,084
(B) Variable Expenses:
Diesel (1,34,784 × 10 ÷ 4) 3,36,960
Oil and sundries (1,34,784 × 25 ÷ 100) 33,696
Total (B) 3,70,656
(C) Maintenance Expenses:
Variable maintenance cost (1,34,784 kms × 0.25) 33,696
Fixed maintenance cost 6,000
Total (C) 39,696
Total operating cost (A + B + C) 6,00,436

(ii) Calculation of cost per km run:

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 OPERATING OR SERVICE COSTING 7.4

Total annual cost of 3 trucks 6,00,436

= = `4.4548
Total distance travelled 1,34,784

(iii) Calculation of freight per tonne km:

Total operating cost = 6,00,436
Profit @ 10% on freight = 66,722
Total freight = 6,67,218

Total freight 6,67,218

Freight per tonne km = = = `1.27
Total tonne kms 5,25,312

WN:
(1) Total km travelled & effective tones km of load carried generated by 3 trucks annually:
One way No of round Total distance Load carried Total effective
Truck
distance trips per day per day per trip tonne kms
1 16 kms 4 128 kms 6 384
2 40 kms 2 160 kms 9 720
3 30 kms 3 180 kms 8 720
Total tonne kms per day 1,824
Total kms travelled by 3 trucks annually:
468 kms (128 + 160 + 180) × 24 days × 12 months = 1,34,784 kms
Total effective tonne km of load carried by 3 trucks annually:
1,824 tonne kms × 24 days × 12 months = 5,25,312 tonne kms

(2) Segregation of fixed & variable component of maintenance cost:

Difference in cost 46,050 - 45,175
Variable maintenance cost per km = =
Difference in distance 1,60,200 - 1,56,700
= `0.25 per km
Fixed maintenance cost = Total cost – Variable cost
= 46,050 – (1,60,200 kms × 0.25) = `6,000

PYQ 5
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) `5,000 per month per driver
Cleaner's salary payable (for all the 12 months) `3,000 per month per cleaner
(One cleaner has been employed for every five buses)
Licence fees, Taxes etc. `2,300 per bus per annum
Insurance premium `15,600 per bus per annum
Repairs and maintenance `16,400 per bus per annum
Purchase price of the bus `16,50,000 each bus

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 OPERATING OR SERVICE COSTING 7.5

Life of the bus 16 years

Scrap value `1,50,000
Diesel cost `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:
Distance from the school Bus Fee % of students availing facility
4 kms 25% of Full 15%
8 kms 50% of Full 30%
16 kms Full 55%
Ignore interest. Since the bus fee 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.
[May 2004]

Answer
(i) Statement showing the expenses of operating a single bus and the fleet of 25 buses
Particulars 1 Bus 25 Buses
(A) Standing Charges:
Driver’s salary 60,000 15,00,000
Cleaner’s 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 (A) 1,78,850 44,71,250
(B) Maintenance Charges:
Repairs and maintenance 16,400 4,10,000
Total (B) 16,400 4,10,000
(C) Running Charges: 14,20,800
Diesel 56,832
Total (C) 56,832 14,20,800
Total operating cost (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 = (2,52,082 ÷ 12) ÷ 354 students = `59.34
(b) 8 kms from the school = `59.34 × 2 = `118.68
(c) 16 kms from the school = `59.34 × 4 = `237.36
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 = 32 kms (16 kms × 2 trips)
Distance travelled per day by a bus = 128 kms (32 kms × 4 shifts)
Distance travelled during a month = 3,072 kms (128 kms × 24 days)
Distance travelled per year = 30,720 kms (3,072 × 10 months)
No of litres of diesel required = 3,072 litres (30,720 kms ÷ 10 kms)
Cost of diesel per bus per year = `56,832 (3,072 litres × `18.50)

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 OPERATING OR SERVICE COSTING 7.6

2. Calculation of number of 25% equivalent students per bus:

Bus capacity of 2 trips = 120 students
25% Fare students = 18 students (120 × 15%)
50% Fare students = 36 students (120 × 30%)
Full Fare students = 66 students (120 × 55%)\
Total 25% equivalent students = 18 + (36 × 2) + (66 × 4)
= 354 students

PYQ 6
In order to develop tourism, ABCL airline has been given permit to operate three flights in a week between X
and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The normal occupancy is
estimated at 60% throughout the year of 52 weeks. The one way fare is `7,200.
The costs of operation of flights are:
Fuel cost (variable) `96,000 per flight
Food served on board on non-chargeable basis `125 per passenger
Commission 5% of fare applicable for all Booking
Fixed cost:
Aircraft lease `3,50,000 per flight
Crew `72,000 per flight
Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the fare is reduced to
`6,720. Advise, whether this proposal should be implemented or not.
[May 2005]

Answer
(i) Statement Showing Net Operating Income per Flight
Particulars Amount Amount
Fare collection (96 × 7,200) 6,91,200
Variable costs:
Fuel 96,000
Commission 5% 34,560
Food (96 × 125) 12,000 1,42,560
Contribution per Flight (6,91,200 – 1,42,560) 5,48,640
Fixed costs:
Crew 72,000
Lease 3,50,000 4,22,000
Net Income per Flight (5,45,640 – 4,22,000) 1,26,640
60
*Number of passengers 160 × = 96 passengers
100

(ii) Statement Showing Net Operating Income per Flight at Reduced Fare
Particulars Amount Amount
Fare collection (108 × 6,720) 7,25,760
Variable costs:
Fuel 96,000
Commission 5% 36,288
Food (108 × 125) 13,500 1,45,788

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 OPERATING OR SERVICE COSTING 7.7

Contribution per flight (7,25,760 – 1,45,788) 5,79,972

Fixed costs:
Crew 72,000
Lease 3,50,000 4,22,000
Net Income per Flight (5,79,972 – 4,22,000) 1,57,972
There is an increase in net operating income by `31,332. Hence, the proposal is acceptable.

PYQ 7
Calculate total passenger kilometer from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day 8,
distances covered 20 kilometers (one side), capacity of bus 40 passengers, normally 80% of capacity utilized.
[Nov 2007]

Answer
Total Passengers km = No. of buses × Distance in one side trip × Two way × No. of days in a month
× No. of trips × capacity in each bus × capacity utilized
= 6 × 20 × 2 × 25 × 8 × 40 × 80% = 15,36,000 Passenger kms
Note: Trip is treated as round trip.

PYQ 8
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B and rest of
goods at station C. It reaches back directly to station A after setting reloaded with 18 tonnes of goods station
C. The distance between A to B, B to C and then from C to A are 270 kms, 150 kms and 325 kms respectively.
Compute Absolute tonnes km and Commercial tonnes km.
[May 2009]

Answer
Absolute tonne kms = A to B × tonnes + B to C × tonnes + C to A × tonnes
= 270 kms × 24 tonnes + 150 kms × (24 – 10) + 325 kms × 18 tonnes
= 6,480 + 2,100 + 5,850 = 14,430 tonnes km

Commercial tonne kms = Total distance × Average load

= (270 + 150 + 325) kms ×  24  14  18  tones = 13,907 tonnes km
 3 

PYQ 9
A transport company has been given a 40 kilometres long route to run 5 buses. The cost of each but is
`6,50,000. The buses will make 3 round trips per day carrying on average 80 percent passengers of their
seating capacity. The seating capacity of each bus is 40 passengers. The buses will run on an average 25 days
in a month.
The other information for the year 2010-11 are given below:
Garage rent `4,000 per month
Annual repairs and maintenance `22,500 each bus
Salaries of 5 drivers `3,000 each per month
Wages of 5 conductors `1,200 each per month
Manager’s salary `7,500 per month
Road tax, permit fee etc. `5,000 for a quarter
Office expenses `2,000 per month
Cost of diesel per litre `33
Kilometres run per litre for each bus 6 Kilometres

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 OPERATING OR SERVICE COSTING 7.8

Annual depreciation 15% of cost

Annual Insurance 3% of cost
You are required to calculate the bus fare to be charged from each passenger per kilometer, if
the company wants to earn a profit of 33-1/3 percent on taking (total receipts from passengers).
[May 2010]

Answer
Operating Cost Sheet
Particulars Amount
(A) Fixed Expenses:
Garage rent per month 4,000
Salaries of 5 drivers per month (3,000 × 5) 15,000
Wages of 5 conductors per month (1,200 × 5) 6,000
Manager’s salary per month 7,500
Road tax, permit fee etc. (5,000 × 4 ÷ 12) 1,667
Office expenses per month 2,000
Insurance per month (6,50,000 × 3% ÷ 12) × 5 8,125
Depreciation per month (6,50,000 × 15% ÷ 12) × 5 40,625
Total (A) 84,917
(B) Variable Expenses:
Repairs and maintenance (22,500 × 5 ÷ 12) 9,375
Diesel (30,000 × 33 ÷ 6) 1,65,000
Total (B) 1,74,375
Total operating cost (A + B) 2,59,292
Add: Profit @ 33-1/3% of taking 1,29,646
Taking 3,88,938
÷ Total passenger kms ÷ 9,60,000
Fare per passenger km `0.405
WN 1: Calculation of total traveling of 5 buses per month:
= No of round trips daily × Distance two way × No of days × No of buses
= 3 × 80 × 25 × 5 = 30,000 kms
WN 2: Calculation of passenger kms per month:
= No of kms travelled per month × Capacity occupied × No of passengers
= 30,000 × 40 × 80% = 9,60,000 kms

PYQ 10
A company runs a holiday home. For this purpose, it has hired a building at a rent of `10,000 per month
along with 5% of total taking. It has three types of suites for its customers viz. single room, double room and
triple room. Following information is given:
Type of suites Number of rooms Occupancy percentage
Single room 100 100%
Double room 50 80%
Triple room 30 60%
The rent of double room suite is to be fixed at 2.5 times of the single room suite and that of triple
room suite as twice of the double room suite.
The other expenses for the year 2006 are as follows:
Expenses `
Staff salaries 14,25,000
Room attendant’s wages 4,50,000

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 OPERATING OR SERVICE COSTING 7.9

Lighting, heating and power 2,15,000

Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000

Provide profit @ 20% on total taking and assume 360 days in a year. You are required to
calculate the rent to be charged for each type of suite.

Answer
Statement Showing Rent to be Charged
Particulars `
Staff salaries 14,25,000
Room attendant's wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Building rent:
Fixed 1,20,000
Variable @ 5% on taking 1,76,067
Total Cost 28,17,067
Add: Profit @ 20% on taking 7,04,266
*Total Taking 35,21,333
÷ Equivalent single room days ÷ 1,04,400
Rent for single room day `33.73
Rent for double room day (33.73 × 2.5) `84.32
Rent for triple room day (33.73 × 2.5 × 2) `168.65

Working Notes: Calculation of Taking:

*Total Taking = Operating cost (excluding rent on taking) + 5% for rent + 20% for profit
= `26,41,000 + 25% of total takings
75% of Taking = `26,41,000
Total Taking = `35,21,333

Calculation of equivalent single room suites:

Type of suites Room days Equivalent single room suites
Single room suite 100 × 360 ×100% = 36,000 36,000 × 1= 36,000
Double room suite 50 × 360 × 80% = 14,400 14,400 × 2.5 = 36,000
Triple room suite 30 × 360 × 60% = 6,480 6,480 × 5 = 32,400
Total equivalent single room days 1,04,400

PYQ 11
The following information relates to a bus operator:
Cost of the bus `18,00,000
Insurance charges 3% p.a.
Manager-cum accountant's salary `8,000 p.m.
Annual tax `50,000
Garage rent `2,500 p.m.
Annual repair and maintenance `1,50,000
Expected life of bus 15 years

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 OPERATING OR SERVICE COSTING 7.10

Scrap value at the end of 15 years `1,20,000

Driver's salary `15,000 p.m.
Conductor's salary `12,000 p.m.
Stationery `500 p.m.
Engine oil, lubricants (for 1,200 kms.) `2,500
Diesel and oil (for 10 kms.) `52
Commission to driver and conductor (shared equally) 10% of collections
Route distance 20 km long
The bus will make 3 round trips for carrying on an average 40 passengers in each trip. Assume 15%
profit on collections. The bus will work on an average 25 days in a month.
Calculate fare for passenger-km. [(8 Marks) Nov 2013]

Answer
Statement of Fare for Passenger-km
Particulars Amount
(A) Fixed Expenses:
Depreciation per month [(18,00,000 - 1,20,000) × 1/15 × 1/12] 9,333
Insurance per month [(18,00,000 × 3%) × 1/12] 4,500
Manager-cum accountant’s salary 8,000
Annual Tax for one month (50,000 × 1/12) 4,167
Garage Rent 2,500
Driver’s salary 15,000
Conductor’s salary 12,000
Total (A) 55,500
(B) Variable Expenses:
Repairs and maintenance (1,50,000 × 1/12) 12,500
Stationery (it may also be treated as fixed) 500
Diesel and oil (52/10 × 3,000 kms) 15,600
Engine oil, lubricants (2,500/1,200 × 3,000 kms) 6,250
Commission @ 10% of collections ‘WN’ 12,047
Total (B) 46,897
Total operating cost (A + B) 1,02,397
Add: Profit @ 15% of collections 18,070
Collections (WN 3) 1,20,467
÷ Total Passenger-kms ÷ 1,20,000
Fare for per passenger-km `1.004
WN 1: Calculation of total travelling of bus in one month:
= 2 × No of round trips daily × Distance one way × No of days
= 2 × 3 × 20 × 25 = 3,000 kms
WN 2: Calculation of passenger-kms per month:
= No of kms travelled per month × No of passengers
= 3,000 × 40 = 1,20,000 passenger-kms
WN 3: Calculation of collections:
Total collections = Operating cost (excluding commission on collections) + 10% for
commission + 15% for profit = 90,350 + 25% of collections
Collections = `1,20,467

PYQ 12
A mini-bus, having a capacity of 32 passengers, operates between two places – ‘A’ and ‘B’. The distance
between the place ‘A’ and ‘B’ is 30 km. The bus makes 10 round trips in a day for 25 days in a month. On an
average, the occupancy ratio is 70% and is expected throughout the year.

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 OPERATING OR SERVICE COSTING 7.11

The details of other expenses are as under:

Insurance `15,600 per annum
Garage Rent `2,400 per quarter
Road Tax `5,000 per annum
Repairs `4,800 per quarter
Salary of Operating Staff `7,200 per month
Tyres and Tubes `3,600 per quarter
Diesel (one litre is consumed for every 5 km) `13 per litre
Oil and Sundries `22 per 100 km run
Depreciation `68,000 per annum
Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit @ 25% on
total taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger
kilometer and one way fare per passenger. [(8 Marks) May 2015]

Answer
Operating Cost Statement
Particulars Amount
(A) Fixed Charges:
Insurance 15,600
Garage Rent (2,400 × 4 quarters) 9,600
Road Tax 5,000
Salary of Operating Staff (7,200 × 12 months) 86,400
Depreciation 68,000
Total (A) 1,84,600
(B) Variable Charges:
Diesel [(1,80,000 km ÷ 5 km) × 13] 4,68,000
Oil and Sundries [(1,80,000 km ÷ 100 km) × 22] 39,600
Total (B) 5,07,600
(C) Maintenance Charges:
Repairs (4,800 × 4 quarters) 19,200
Tyres and Tubes (3,600 × 4 quarters) 14,400
Total (C) 33,600
Total Operating Cost (A + B + C) 7,25,800
Add: Profit @ 25% of Taking 3,42,359
Add: Passenger Tax @ 22% Taking 3,01,275
Total Taking 13,69,434

Calculation of cost per passenger km and one way fare per passenger:

Total Operating Cost 7,25,800

Cost per passenger km = = = `0.18
Total Passenger Km 40,32,000

Total Taking 13,69,434

One way fare per passenger = × 30 km = × 30 km
Total Passenger Km 40,32,000
= `10.19

WN 1: Calculation of total travelling of bus in one year:

30 km × 2 sides × 10 trips × 25 days × 12 months = 1,80,000 kms

WN 2: Calculation of passenger-kms per year:

1,80,000 km × 32 passengers × 70% = 40,32,000 passenger-kms

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 OPERATING OR SERVICE COSTING 7.12

WN 3: Calculation of Taking:
Total taking = Operating cost + 25% for profit + 22% for passenger tax
= 7,25,800 + 47% of Total taking
Total Taking = `13,69,434

PYQ 13
‘RP’ Resort (P) Ltd. offers three types of rooms to its guests, viz. deluxe room, super deluxe room and luxury
suite.
You are required to ascertain the tariff to be charged to the customers for different types of
rooms on the basis of following information:
Type of Rooms Number of Rooms Occupancy
Deluxe Room 100 90%
Super Deluxe Room 60 75%
Luxury Suite 40 60%

Rent of ‘super deluxe’ room is to be fixed at 2 times of the ‘deluxe room’ and that of ‘luxury suite’ is
three times of ‘deluxe room’.
Annual expenses are as follows:

Particulars ` in Lakhs
Staff salaries 680.00
Lighting, heating and power 300.00
Repairs, maintenance and renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28

An attendant for each room was provided when the room was occupied and he was paid `500 per
day towards wages. Further depreciation is to be provided on building @ 5% on `900 lakhs, furniture and
fixtures @ 10% on `90 lakhs and air conditioners @ 10% on `75 lakhs.

Profit is to be provided @ 25% on total taking and assume 360 days in a year.
[(8 Marks) June 2015]
Answer
Statement Showing Tariff to be Charged
Particulars ` in Lakhs
Staff salaries 680.00
Lighting, heating and power 300.00
Repairs, maintenance and renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28
Room attendant's wages 286.20
Depreciation :
Building 5% on `900 lakhs 45.00
Furniture and fixtures 10% on `90 lakhs 9.00
Air conditioners 10% on `75 lakhs 7.50
Total Cost 1,666.98
Add: Profit @ 25% on taking 555.66

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 OPERATING OR SERVICE COSTING 7.13

Total Taking 2,222.64

÷ Equivalent single room days ÷ 90,720
Tariff for Deluxe Room `2,450
Tariff for Super Deluxe Room (2,450 × 2) `4,900
Tariff for Luxury Suite (2,450 × 3) `7,350

Working Notes:
Calculation of Attendant wages:
Wages = No of rooms occupied in a year × `500 per room per day
= 57,240 × `500
= `286.20 lakhs

Calculation of equivalent single room suites:

Name of Room Room Days Equivalent Deluxe Room p.a.
Deluxe Room 100 × 360 × 90% = 32,400 32,400 × 1= 32,400
Super Deluxe Room 60 × 360 × 75% = 16,200 14,400 × 2 = 32,400
Luxury Suite 40 × 360 × 60% = 8,640 6,480 × 3 = 25,920
Total 57,240 90,720

PYQ 14
Royal transport company has been given a 50 kilometre long route to run 6 buses. The cost of each bus is
`7,50,000. The buses will make 3 round trips per day carrying on an average 75 percent passengers of their
seating capacity. The seating capacity of each bus is 48 passengers. The buses will run on an average 25 days
in a month. The other information for the year 2016-17 is given below:
Garage Rent `6,000 per month
Annual Repairs & Maintenance `24,000 each bus
Salaries of 6 drivers `4,000 each per month
Wages of 6 conductors `1,600 each per month
Wages of 6 cleaners `1,000 each per month
Manager’s salary `10,000 per month
Road Tax, Permit fee, etc. `6,000 for a quarter
Office expenses `2,500 per month
Cost of diesel per litre `66
Kilometer run per litre for each bus 6 kilometres
Annual Depreciation 20% of cost
Annual Insurance 4% of cost
Engine oils & lubricants (for 1,000 kilometres) `2,000

You are required to calculate the bus fare to be charged from each passenger per kilometer
(upto four decimal points), if the company wants to earn profit of 33-⅓% on taking (total receipts from
passengers).
[(8 Marks) Nov 2016]

Answer
Operating Cost Sheet
Particulars Amount
(A) Fixed Expenses:
Garage rent (6,000 × 12) 72,000
Salaries of 6 drivers (4,000 × 6 × 12) 2,88,000
Wages of 6 conductors (1,600 × 6 × 12) 1,15,200
Wages of 6 cleaners (1,000 × 6 × 12) 72,000

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 OPERATING OR SERVICE COSTING 7.14

Manager’s salary (10,000 × 12) 1,20,000

Road tax, permit fee etc. (6,000 × 4) 24,000
Office expenses (2,500 × 12) 30,000
Depreciation (7,50,000 × 20% × 6) 9,00,000
Insurance (7,50,000 × 4% × 6) 1,80,000
Total (A) 18,01,200
(B) Variable Expenses:
Diesel (5,40,000 × 66 ÷ 6) 59,40,000
Engine oils & lubricants (2,000 ÷ 1,000) × 5,40,000 10,80,000
Total (B) 70,20,000
(C) Maintenance Expenses:
Repairs and maintenance (24,000 × 6) 1,44,000
Total (C) 1,44,000
Total operating cost (A + B + C) 89,65,200
Add: Profit @ 33-⅓% of taking 44,82,600
Taking 1,34,47,800
÷ Total passenger kms ÷ 1,94,40,000
Fare per passenger km `0.6918

WN 1: Calculation of total traveling of 5 buses per annum:

= No of round trips daily × Distance two way × No of days × No of buses × 12
= 3 × 100 × 25 × 6 × 12
= 5,40,000 kms

WN 2: Calculation of passenger kms per annum:

= No of kms travelled per annum × Capacity occupied × No of passengers
= 5,40,000 × 48 × 75%
= 1,94,40,000 kms

PYQ 15
A group of ‘Health Care Services’ has decided to establish a Critical Care Unit in a metro city with an
investment of `85 Lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and 10 more beds, if
required, can be added.
Building rent `2,25,000 per month
Manager salary (Number of manager-03) `50,000 per month each
Nurses salary (Number of nurses-24) `18,000 per month each
Ward boy’s salary (Number of ward boys-24) `9,000 per month each
Doctor’s payment (based on number of patients attended) `5,50,000 per month
Food to laundry services (Variable) `39,53,000
Medicines to patients (Variable) `22,75,000 per year
Administration overheads `28,00,000 per year
Depreciation on equipments 15% per annum on original cost
It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were
occupied and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of `950 per bed to accommodate the flow of patients.
However, this never exceeded the normal capacity of 50 beds on a day.

Find out:
(a) Profit per Patient day, if the hospital charges on an average `2,500 per day from each patient.
(b) Breakeven point per patient day (make calculation on annual basis).
[(10 Marks) May 2018]

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 OPERATING OR SERVICE COSTING 7.15

Answer
(a) Statement Showing Profit Per Patient Day
Particulars Amount
(A) Variable Cost:
Food and laundry Services 39,53,000
Medicines to Patients 22,75,000
Doctor’s Payment (5,50,000 × 12) 66,00,000
Hire Charges of Beds (250 × 950) 2,37,500
Total (A) 1,30,65,500
(B) Fixed Expenses:
Building Rent (2,25,000 × 12) 27,00,000
Manager’s Salary (3 × 50,000 × 12) 18,00,000
Nurse’s Salary (24 × 18,000 × 12) 51,84,000
Ward Boy’s Salary (24 × 9,000 × 12) 25,92,000
Administration Overheads 28,00,000
Depreciation on Equipment (15% of 85,00,000) 12,75,000
Total (B) 1,63,51,000
Total cost (A + B) 2,94,16,500
Collection from patients (2,500 × 14,600 patient days) 3,65,00,000
Profit (Collection – Total cost) 70,83,500
Profit per patient day (Profit ÷ Patient days) 485.17

(b) Calculation of BEP for the hospital:

BEP = Fixed cost ÷ Contribution per patient day
= 1,63,51,000 ÷ 1,605.10 = 10,186.90 patient days
Working Notes:
1. Calculation of number of Patient days:
= (50 beds × 200 days) + (30 beds × 105 days) + (20 beds × 60
days) + 250 beds = 14,600

2. Calculation Contribution per patient day:

Contribution = Sales – Variable cost
= 3,65,00,000 – 1,30,65,500 = 2,34,34,500
Contribution per patient day = 2,34,34,500 ÷ 14,600 = 1,605.10

PYQ 16
A company wants to outsource the operation of its canteen to a contractor. The company will provide space
for cooking, free electricity and furniture in the canteen. The contractor will have to provide lunch to 300
workers of which 180 are vegetarian (Veg) and the rest are non-vegetarian (Non-Veg). In the case of non-veg
meals, there will be a non-veg item in addition to the veg items. A contractor who is interested in the contract
has analysed the cost likely to be incurred. His analysis is given below:
Cereals `8 per plate
Veg items `5 per plate
Non-veg items `15 per plate
Spices `1 per plate
Cooking oil `4 per plate
One cook salary `13,000 per month
Three helpers salary `7,000 per month each
Fuel (two commercial cylinder per month) `1,000 each
On an average the canteen will remain open for 25 days in a month. The contractor wants to charge

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 OPERATING OR SERVICE COSTING 7.16

the non-veg meals at 1.50 times of the veg meals.

You are required to calculate:

(a) The price per meal (veg and non-veg separately) that contractor should quote if he wants a profit of
20% on his takings.
(b) The price per meal (veg and non-veg separately) that a worker will be required to pay if the company
provides 60% subsidy for meals out of welfare fund.
[(8 Marks) May 2018]

Answer
(a) Statement Showing Price Per Meal Quoted By Contractor
Particulars Amount
(A) Variable Cost:
Cereals (7,500 × 8) 60,000
Veg items (7,500 × 5) 37,500
Cooking oil (7,500 × 4) 30,000
Spices (7,500 × 1) 7,500
Non-veg items (3,000 × 15) 45,000
Total (A) 1,80,000
(B) Fixed Cost:
Salary of cook 13,000
Salaries of helpers (7,000 × 3) 21,000
Fuel (1,000 × 2) 2,000
Total (B) 36,000
Total Cost (A + B) 2,16,000
Add: Profit @ 20% on taking or 25% on cost 54,000
Total Takings 2,70,000
÷ Equivalent Veg-meals (4,500 + 1.5 × 3,000) ÷ 9,000
Price meal per meal (Veg) ` 30
Price meal per meal (Non-veg) (1.5 × 30) ` 45

(b) Price per meal payable by worker:

Veg Meal = 30 – 60% = ` 12
Non-veg Meal = 45 – 60% = ` 18

Working Notes:
1. Calculation of number of meals per month:
= Veg Meals + Non-veg Meals
= 180 workers × 25 days + 120 workers × 25 days
= 4,500 + 3,000 = 7,500

PYQ 17
M/s XY Travels has been given a 25 km long route to run an air-conditioned Mini Bus. The cost of bus is
`20,00,000. It has been insured at 3% p.a. while annual road tax amounts to `36,000. Annual repairs will be
`50,000 and the bus is likely to last for 5 years. The driver's salary will be `2,40,000 per annum and the
conductor's salary will be `1,80,000 per annum in addition to 10% of takings as commission (to be shared by
the driver and the conductor equally). Office and administration overheads will be `3,18,000 per annum.
Diesel and oil will be `1,500 per 100 km. The bus will make 4 round trips carrying on an average 40
passengers on each trip. Assuming 25% profit on takings, and the bus will run on an average 25 days in a
month.
You are required to:

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 OPERATING OR SERVICE COSTING 7.17

(a) Prepare operating cost sheet (for the month).

(b) Calculate fare to be charged per passenger km.
[(10 Marks) Nov 2018]

Answer
(a) Operating Cost Sheet (for the month)
Particulars Amount
(A) Standing Charges:
Depreciation (20,00,000 ÷ 5 Years × 1/12) 33,333
Insurance [(20,00,000 × 3%) ÷ 12] 5,000
Annual Tax for (36,000 ÷ 12) 3,000
Driver’s salary (2,40,000 ÷ 12) 20,000
Conductor’s salary (1,80,000 ÷ 12) 15,000
Office and administration overheads (3,18,000 ÷ 12) 26,500
Total (A) 1,02,833
(B) Running Charges:
Diesel and oil (1,500/100 × 5,000 kms) 75,000
Commission @ 10% of collections ‘WN’ 28,000
Total (B) 1,03,000
(C) Maintenance Charges:
Repairs (50,000 × 1/12) 4,167
Total (C) 4,167
Total operating cost (A + B + C) 2,10,000
Add: Profit @ 25% of collections 70,000
Total Takings (WN 3) 2,80,000

(b) Calculation of fare to be charged per passenger-km:

Fare per passenger km = Total Takings ÷ Total Passenger-kms
= 2,80,000 ÷ 2,00,000 = ` 1.40

WN 1: Calculation of total travelling of bus in one month:

= 2 × No of round trips daily × Distance one way × No of days
= 2 × 4 × 25 × 25 = 5,000 kms

WN 2: Calculation of passenger-kms per month:

= No of kms travelled per month × No of passengers
= 5,000 × 40 = 2,00,000 passenger-kms

WN 3: Calculation of Takings:
Total takings = Operating cost (excluding commission on takings) + 10% for
commission + 25% for profit
= 1,82,000 + 35% of takings
Total Takings = `2,80,000

PYQ 18
X Ltd. distributes its goods to a regional dealer using single lorry. The dealer pr emises are 40 kms away
by road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on
the outward journey and empty on return journey.
The following information is available:
Diesel consumption 8 km per litre
Diesel cost `60 per litre

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 OPERATING OR SERVICE COSTING 7.18

Engine oil `200 per week

Driver’s wages (fixed) `2,500 per week
Repairs `600 per week
Garage rent `800 per week
Cost of lorry (excluding cost of type) `9,50,000
Life of lorry 1,60,000 kms
Insurance `18,200 per annum
Cost of tyres `52,500
Life of tyres 25,000 kms
Estimated sale value of the lorry at end of its life is `1,50,000
Vehicle license cost `7,800 per annum
Other overheads cost `41,600 per annum
The lorry operates 5 days a week

Required:
(1) A statement to show the total cost of operating the vehicle for the four week period analysed
into Running cost and Fixed cost.
(2) Calculate the vehicle operating cost per km and per tonne km. (assume 52 weeks in a year.)
[(10 Marks) May 2019]

Answer
(1) Statement Showing Total Cost of Operating
(For the four weekly period)
Particulars Amount
(A) Fixed Costs:
Driver’s wages (2,500 × 4) 10,000
Garage rent (800 × 4) 3,200
Insurance (18,200 × 4/52) 1,400
Vehicle license (7,800 × 4/52) 600
Other overheads (41,600 × 4/52) 3,200
Total (A) 18,400
(B) Running Costs:
Diesel (3,200 Kms × 60/8) 24,000
Engine oil (200 × 4) 800
Repairs (600 × 4) 2,400
Cost of tyres 6,720
Depreciation [{(9,50,000 – 1,50,000) ÷ 1,60,000 Kms} × 3,200 Kms] 16,000
Total (B) 49,920
Total operating cost (A + B) 68,320

(2) Vehicle cost per kilometer = Total cost ÷ Total Kms

= 68,320 ÷ 3,200 kms = `21.35

Cost per tonne kilometer = Total cost ÷ Total tonne kms

= 68,320 ÷ 16,000 kms = `4.27

Working notes:
1. Distance travelled in 4 weeks period:
40 kms one way × 2 (return) × 2 trips × 5 days × 4 weeks = 3,200 kms

2. Total tonne kilometers = 1,600 kms × 10 + 1,600 kms × Nil = 16,000

3. Tyres cost = (52,500  25,000 kms) × 3,200 kms = `6,720

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 OPERATING OR SERVICE COSTING 7.19

PYQ 19
A hotel is being run in a hill station with 200 single rooms. The hotel offers concessional rates during six off-
season months in a year. During this period, half of The full room rent is charged. The management’s profit
margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the
year ending 31st March, 2019:
(1) Occupancy during the season is 80% while in the off-season it is 40%.
(2) Total investment in the hotel is `300 lakhs of which 80% relates to Building and the balance to
Furniture and other Equipment.
(3) Room attendants are paid `15 per room per day on the basis of occupancy of rooms in a months.
(4) Expenses:
Staff Salary (excluding that of room attendants) `8,00,000
Repairs to Buildings `3,00,000
Laundry Charges `1,40,000
Interior Charges `2,50,000
Miscellaneous Expenses `2,00,200
(5) Annual depreciation is to be provided on Building @ 5% and 15% on Furniture and other Equipments
on straight line method.
(6) Monthly lighting charges are `110, except in four months in winter when it is `30 per room and this
cost in on the basis of full occupancy for a month.

You are required to workout the room rent chargeable per day both during the season and the off-
season months using the foregoing information. (Assume a month to be of 30 days and winter season to
be considered as part off-season).
[(10 Marks) Nov 2019]

Answer
Statement Showing Per Day Chargeable Rent
Particulars `
Staff Salary 8,00,000
Repairs to Building 3,00,000
Laundry Charges 1,40,000
Interior Charges 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation:
On Building (`300 lakhs × 80% × 5%) 12,00,000
On Furniture (`300 lakhs × 20% × 15%) 9,00,000
Room attendant's wages:
In Season (200 rooms × 80% × 30 days × 6 months × `15) 4,32,000
In Off-Season (200 rooms × 40% × 30 days × 6 months × `15) 2,16,000
Lighting charges:
Season (200 rooms × 80% × 6 months × `110) 1,05,600
Off-Season & Non Winter (200 rooms × 40% × 2 months × `110) 17,600
Off-Season & Winter (200 rooms × 40% × 4 months × `30) 9,600
Total Cost 45,71,000
Add: Profit @ 20% on Room rent or 25% on Cost 11,42,750
Total Rent to be Charged 57,13,750
÷ Equivalent Off-Season room days ÷ 72,000
Rent for one room per day in Off-Season `79.3576
Rent for one room per day in Season (`79.3576 × 2) `158.7152
Working Notes:
Equivalent Off –Season room days = 200 × 80% × 30 days × 6 months × 2 (double of Off-Season) +
200 × 40% × 30 days × 6 months × 1
= 28,800 × 2 + 14,400 × 1 = 72,000 Room days

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 OPERATING OR SERVICE COSTING 7.20

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y -
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y -
5 Y Y Y Y
6 Y Y - -
7 Y Y - -
8 Y Y - -
9 Y Y Y -
10 Y Y Y Y
11 Y Y Y Y
12 Y Y Y -
13 Y Y Y Y
14 Y Y Y -
15 Y Y Y Y
16 Y Y Y Y
17 Y Y Y -
18 Y Y Y Y
19 Y Y Y Y

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 CHAPTER - 8

PROCESS & OPERATION

COSTING
LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the meaning normal cost per unit.
 Understand the treatment of abnormal loss, normal loss and
abnormal gain in process costing.
 Understand the meaning and treatment of opening and closing
work in progress in process costing.
 Prepare process account, abnormal gain account, abnormal loss
account and normal loss account.
 Understand the various methods of valuation of work in progress
in process costing.
 Under the concept of equivalent production.
 Understand the treatment inter process profit.
 PROCESS & OPERATION COSTING 8.1

PAST YEAR QUESTIONS

PYQ 1
The following data relate to process Q:
(a) Opening work-in-process 4,000 units
Degree of completion:
Materials 100% `24,000
Labour 60% `14,400
Overheads 60% `7,200
(b) Received during the month of April, 1998 from process P 40,000 units `1,71,000
(c) Expenses incurred in process Q during the months:
Materials `79,000
Labour `1,38,230
Overheads `69,120
(d) Closing work-in-process 3,000 units
Degree of completion:
Materials 100%
Labour & Overheads 50%
(e) Units scrapped 4,000
units
Degree of completion:
Materials 100%
Labour & Overheads 80%
(f) Normal loss 5% of current
input
(g) Spoiled goods realized `1.50 each on sale.
(h) Completed units are transferred to warehouse.
You are required to prepare:
(A) Equivalent units statement.
(B) Statement of cost per equivalent unit for each cost element i.e., material, labour and overheads and
total costs.
(C) Process Q Account.
(D) Any other necessary account.
Assume:
1. FIFO method is used by the company.
2. The cost of opening WIP is fully transferred to next process.
[(12 Marks) May 1998]

Answer
(A) Statement of Equivalent Production
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 4,000 - - 40 1,600
Units Introduced:
Used for Completed Units 33,000 100 33,000 100 33,000
Used for Closing WIP 3,000 100 3,000 50 1,500
Normal Loss 2,000 - - - -
Abnormal Loss 2,000 100 2,000 80 1,600
Total 44,000 - 38,000 - 37,700

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 PROCESS & OPERATION COSTING 8.2

(B) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 1,71,000 + 79,000 – 3,000 = 2,47,000 38,000 6.50
Labour 1,38,230 37,700 3.67
Overheads 69,120 37,700 1.83
Total cost per unit 12.00

(C) Process Q Account

Particulars Units ` Particulars Units `
To Opening WIP 4,000 45,600 By Normal loss 2,000 3,000
To Process P A/c 40,000 1,71,000 By Abnormal Loss 2,000 21,800
To Materials 79,000 By Next Process A/c 37,000 4,50,400
To Labour 1,38,230 By Closing WIP 3,000 27,750
To Overhead 69,120
44,000 5,02,950 44,000 5,02,950

(D) Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost Materials 33,000 6.50 2,14,500
Labour, Overhead 34,600 5.50 1,90,300
(33,000 + 1,600)
Add: Cost of Opening WIP 45,600
(Used in completed units) 4,50,400

Closing WIP Materials 3,000 6.50 19,500

Labour, Overhead 1,500 5.50 8,250
27,750

Abnormal Loss Materials 2,000 6.50 13,000

Labour, Overhead 1,600 5.50 8,800
21,800

Abnormal Loss A/c

Particulars Units ` Particulars Units `
To Process Q A/c 2,000 21,800 By Cash A/c 2,000 3,000
By Profit and Loss A/c 18,800
2,000 21,800 260 21,800

PYQ 2
Following information is available regarding Process A for the month of February’ 1999:
Production Records:
Units in process as on 01.02.1999 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.02.1999 6,000
(All materials used, 33-⅓% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.02.1999
Materials `6,000
Labour `1,000

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 PROCESS & OPERATION COSTING 8.3

Overhead `1,000
Total `8,000
Cost during the month
Materials `25,600
Labour `15,000
Overhead `15,000
Total `55,600
Presuming that average method of inventory is used, prepare:
(i) Statement of equivalent production.
(ii) Statement showing cost for each element.
(iii) Statement of apportionment of cost.
(iv) Process cost account for Process A.
[(12 Marks) May 1999]

Answer
Statement of Equivalent Production
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Units Completed 14,000 100 14,000 100 14,000
Closing WIP 6,000 100 6,000 33-⅓ 2,000
Total 20,000 - 20,000 - 16,000

Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 6,000 + 25,600 = 31,600 20,000 1.58
Labour 1,000 + 15,000 = 16,000 16,000 1.00
Overheads 1,000 + 15,000 = 16,000 16,000 1.00
3.58

Statement of Apportionment of Cost

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials, 14,000 3.58 50,120
Labour, Overhead
Closing WIP Materials 6,000 1.58 9,480
Labour, Overhead 2,000 1.00 + 1.00 4,000
13,480

Process Account
Particulars Units ` Particulars Units `
To Opening WIP 4,000 8,000 By Completed Units 14,000 50,120
To Materials 16,000 25,600 By Closing WIP 6,000 13,480
To Labour 15,000
To Overhead 15,000
20,000 63,600 20,000 63,600

PYQ 3
The following information is given in respect of Process No 3 for the month of January, 2001.
(a) Opening stock 2,000 units
Direct materials I `12,350 Direct Materials II `13,200
Direct Labour `17,500 Overheads `11,000

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 PROCESS & OPERATION COSTING 8.4

(b) Transferred from Process No 2 20,000 units @ `6/unit

(c) Transferred to Process No 4 17,000 units
(d) Expenditure incurred in process No 3:
Direct Materials `30,000
Direct Labour `60,000
Overheads `60,000
(e) Scrap 1,000 units
Direct Materials 100% Direct Labour 60%
Overheads 40%
(f) Normal Loss 10% of production
(g) Scrapped units realized `4 per units
(h) Closing Stock 4,000 units
Direct Materials 80% Direct Labour 60%
Overheads 40%
Prepare Process No 3 Account using average price method, along with necessary supporting
statements.
[(10 Marks) May 2001]

Answer
Process Account
Particulars Units ` Particulars Units `
To Opening WIP 2,000 54,050 By Normal Loss 1,800 7,200
To Process 2 A/c 20,000 1,20,000 By Process 4 A/c 17,000 2,81,822
To Direct Materials II 30,000 By Closing WIP 4,000 48,290
To Direct Labour 60,000
To Overhead 60,000
To Abnormal Gain 800 13,262
22,800 3,37,312 22,800 3,37,312
WN:
Statement of Equivalent Production (Average Cost Method)
Total Materials I Materials II Labour Overhead
Particulars
Units % Unit % Unit % Unit % Unit
Units Transferred 17,000 100 17000 100 17,000 100 17,000 100 17,000
Normal loss 1,800 - - - - - - - -
Closing WIP 4,000 100 4,000 80 3,200 60 2,400 40 1,600
Less: Abnormal Gain (800) 100 (800) 100 (800) 100 (800) 100 (800)
Total 22,000 - 20,200 - 19,400 - 18,600 - 17,800

Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials I 12,350 + 1,20,000 – 7,200 = 1,25,150 20,200 6.1955
Materials II 13,200 + 30,000 = 43,200 19,400 2.2268
Labour 17,500 + 60,000 = 77,500 18,600 4.1667
Overheads 11,000 + 60,000 = 71,000 17,800 3.9888
16.5778

Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred Materials I, II, Labour, Overhead 17,000 16.5778 2,81,822

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 PROCESS & OPERATION COSTING 8.5

Abnormal Gain Materials I, II, Labour, Overhead 800 16.5778 13,262

Closing WIP Materials I 4,000 6.1995 24,782

Materials II 3,200 2.2268 7,126
Labour 2,400 4.1667 10,000
Overhead 1,600 3.9888 6,382
48,290
Note:
Normal loss given is 10% of production. Here production therefore means those units which come upto the
sate of inspection. In that case, opening stock plus receipt minus closing stock of WIP will represent units of
production (2,000 units + 20,000 units – 4,000 units). In such case, the unit of production comes to 18,000 unit
and hence 1,800 units as normal loss units.

PYQ 4
A product passes through two processes. The output of Process I becomes the input of Process II and the output
of Process II is transferred to warehouse. The quantity of raw materials introduced into Process is 20,000 kgs
at `10 per kg. The cost and output data for the month under review are as under:
Process I Process II
Direct materials `60,000 `40,000
Direct labour `40,000 `30,000
Production overheads `39,000 `40,250
Normal loss 8% 5%
Output (kgs) 18,000 17,400
Loss realisation per unit `2.00 `3.00
The company's policy is to fix the selling price of the end product in such a way as to yield a Profit of
20% on selling price.
Required:
(a) Prepare the Process Accounts.
(b) Determine the Selling price per unit of the end product.
[Nov 2002]

Answer
(a) Process I Account
Particulars Units ` Particulars Units `
To Materials Introduced 20,000 2,00,000 By Normal Loss 1,600 3,200
To Direct Materials 60,000 (8% @ `2.00 per unit)
To Direct Labour 40,000 By Process II Account 18,000 3,28,500
To Production Overhead 39,000 By Abnormal Loss A/c 400 7,300
20,000 3,39,000 20,000 3,39,000

TotalCost  Sale of Scrap of Normal Loss Units 3,39,000  3,200

Normal Cost Per Unit = = = 18.25 per unit
Total Units  Normal Loss Units 20,000  1,600

Process II Account
Particulars Units ` Particulars Units `
To Process I Account 18,000 3,28,500 By Normal Loss 900 2,700
To Direct Materials 40,000 (5% @ `3.00 per unit)
To Direct Labour 30,000 By Finished Stock A/c 17,400 4,43,700
To Production Overhead 40,250 @ `25.50 per unit
To Abnormal Gain 300 7,650
18,300 4,46,400 18,300 4,46,400

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 PROCESS & OPERATION COSTING 8.6

TotalCost  Sale of Scrap of Normal Loss Units

Normal Cost Per Unit =
Total Units  Normal Loss Units
4,38,750  2,700
= = `25.50 per unit
18,000  900

(b) Determination of selling price of the end product

Cost per unit of output of process II = `25.50
25.50
Sales price per unit = × 100 = `31.875
80

PYQ 5
From the following information for the month of October 2003, prepare Process III Account:
Opening WIP in Process III : 1,800 units at `27,000
Transfer from Process II : 47,700 units at `5,36,625
Transferred to Warehouse : 43,200 units
Closing WIP of Process III : 4,500 units
Units scrapped : 1,800 units
Direct material added in Process III : `1,77,840
Direct Wages : `87,840
Production overheads : `43,920

Degree of completion:

Opening Stock Closing Stock Scrap

Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%

The normal loss in the process was 5% of the production and scrap was sold @ `6.75 per unit.
[(10 Marks) Nov 2003]

Answer
Statement of Equivalent Production (FIFO Method)
Materials A Materials B Labour & OH
Particulars Units
% Eq. Unit % Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 1,800 - - 20 360 40 720
Units Introduced:
Used for Completed Units 41,400 100 41,400 100 41,400 100 41,400
Used for Closing WIP 4,500 100 4,500 70 3,150 50 2,250
Normal Loss 2,250 - - - - - -
Less: Abnormal Gain (450) 100 (450) 100 (450) 100 (450)
Total 49,500 - 45,450 - 44,460 - 43,920

Statement of Cost
Elements Cost Equivalent Units Cost Per Unit
Materials A 5,36,625 – 15,187 = 5,21,438 45,450 11.4728
Materials B 1,77,840 44,460 4.00
Labour 87,840 43,920 2.00
Overheads 43,920 43,920 1.00
18.4728

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 PROCESS & OPERATION COSTING 8.7

Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost Materials A 41,400 11.4728 4,74,973
Materials B 41,760 4.00 1,67,040
Labour, Overhead 42,120 2.00 + 1.00 1,26,360
Add: Cost of Opening WIP 27,000
(Used in completed units) 7,95,373

Closing WIP Materials A 4,500 11.4728 51,628

Materials B 3,150 4.00 12,600
Labour, Overhead 2,250 2.00 + 1.00 6,750
70,978

Abnormal Gain All 450 18.4728 8,313

Process III Account

Particulars Units ` Particulars Units `
To Opening WIP 1,800 27,000 By Normal Loss 2,250 15,187
To Process II Account 47,700 5,36,625 (5% of 45,000 units)
To Direct Materials 1,77,840 By Process IV A/c 43,200 7,95,373
To Direct Labour 87,840 By closing WIP 4,500 70,978
To Production Overhead 43,920
To Abnormal Gain 450 8,313
49,950 8,81,538 49,950 8,81,538
Working note
Production units = Opening units + Units transferred from process II - Closing units
= 1,800 units + 47,700 units - 4,500 units = 45,000 units

PYQ 6
From the following information for the month ending October, 2005, prepare Process Cost Accounts for
Process III.

Use First-in-first-out (FIFO) method to value equivalent production.

Direct materials added in Process III (Opening WIP) 2,000 units at `25,750
Transfer from Process II 53,000 units at `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 `1,97,600
Direct wages `97,600
Production Overheads `48,800

Degree of completion:
Opening Stock Closing Stock Scrap
Material 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 `3 per unit.
[(14 Marks) Nov 2005]

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 PROCESS & OPERATION COSTING 8.8

Answer
Process III Account
Particulars Units ` Particulars Units `
To Opening WIP 2,000 25,750 By Normal Loss 2,500 7,500
To Process II Account 53,000 4,11,500 By Process IV A/c 48,000 7,19,750
To Direct Materials 1,97,600 By closing WIP 5,000 61,500
To Direct Labour 97,600
To Production Overhead 48,800
To Abnormal Gain 500 7,500
55,500 7,88,750 55,500 7,88,750

Working Notes: Statement of Equivalent Production (FIFO Method)

Materials A Materials B Labour & OH
Particulars Units
% Eq. Unit % Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 2,000 - - 20 400 40 800
Units Introduced:
Used for Completed Units 46,000 100 46,000 100 46,000 100 46,000
Used for Closing WIP 5,000 100 5,000 70 3,500 50 2,500
Normal Loss 2,500 - - - - - -
Less: Abnormal Gain (500) 100 (500) 100 (500) 100 (500)
Total 55,000 - 50,500 - 49,400 - 48,800

Statement of Cost
Elements Cost Equivalent Units Cost Per Unit
Materials A 4,11,500 – 7,500 = 4,04,000 50,500 8.00
Materials B 1,97,600 49,400 4.00
Labour 97,600 48,800 2.00
Overheads 48,800 48,800 1.00
15.00

Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost Materials A 46,000 8.00 3,68,000
Materials B 46,400 4.00 1,85,600
Labour, Overhead 46,800 2.00 + 1.00 1,40,400
Add: Cost of Opening WIP 25,750
(Used in completed units) 7,19,750

Closing WIP Materials A 5,000 8.00 40,000

Materials B 3,500 4.00 14,000
Labour, Overhead 2,500 2.00 + 1.00 7,500
61,500

Abnormal Gain Materials A, B, 500 15.00 7,500

Labour, Overhead

Note:
Normal loss (NL) = 5% of production
= 5% of 50,000 (2,000 + 53,000 - 5,000)
= 2,500 units

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 PROCESS & OPERATION COSTING 8.9

PYQ 7
A Company produces a component, which passes through two processes. During the month of April,
2006, materials for 40,000 components were put into Process I of which 30,000 were completed and
transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost
and 50% complete as to labour and overheads cost.
The Process I costs incurred were as follows:
Direct Materials `15,000
Direct Wages `18,000
Factory Overheads `12,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished
goods stores. There was a normal loss with no salvage value of 200 units in Process II. There were
1,800 units, remained unfinished in the process with 100% complete as to material and 25% complete
as regard to wages and overheads. No further process material costs occur after introduction at the
first process until the end of the second process, when protective packing is applied to the completed
components.

The process and packing costs incurred at the end of the Process II were:
Packing Materials `4,000
Direct Wages `3,500
Factory Overheads `4,500

Required:
(i) Prepare Statement of Equivalent Production, Cost Per unit and Process I A/c
(ii) Prepare State of Equivalent Production, Cost per Unit and Process II A/C
[(10 Marks) May 2006]

Answer
Statement of Equivalent Production (Process I)
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Transfer to Process II 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000
Total 40,000 - 40,000 - 35,000

Statement of Cost (Process I)

Elements Cost Equivalent Units Cost Per Unit
Direct Materials 15,000 40,000 0.37500
Direct Wages 18,000 35,000 0.51429
Factory Overheads 12,000 35,000 0.34286
Total cost per unit 1.23215

Statement of Apportionment of Cost (Process I)

Particulars Elements Eq. Units Cost Per Unit Total
Transfer to Process II Materials, Labour, 30,000 1.23215 36,964
Overhead

Closing WIP Materials 10,000 .375 3,750

Labour, Overhead 5,000 .51429 + .34286 4,286
8,036

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 PROCESS & OPERATION COSTING 8.10

Process I Account
Particulars Units ` Particulars Units `
To Direct Materials 40,000 15,000 By Process II A/c 30,000 36,964
To Direct Labour 18,000 By Closing WIP 10,000 8,036
To Overhead 12,000
40,000 45,000 40,000 45,000

Statement of Equivalent Production (Process II)

Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Normal Loss 200 - - - -
Units Completed 28,000 100 28,000 100 28,000
Closing WIP 1,800 100 1,800 25 450
Total 30,000 - 29,800 - 28,450

Statement of Cost (Process II)

Elements Cost Equivalent Units Cost Per Unit
Direct Materials 36,964 29,800 1.2404
Direct Wages 3,500 28,450 0.1230
Factory Overheads 4,500 28,450 0.1582
1.5216

Statement of Apportionment of Cost (Process II)

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed All 28,000 1.5216 42,605
Add: Packing Expenses 4,000
(Only at completed units) 46,605
Closing WIP Materials 1,800 1.2404 2,233
Labour, Overhead 450 .1230 + .1582 126
2,359

* `4,000 represents packing cost. This cost is incurred on completion of units at the end of Process II.
Completed units are then transferred to finished stock. This cost is thus, charged to finished stock.

Process II Account
Particulars Units ` Particulars Units `
To Process I A/c 30,000 36,964 By Normal loss 200 -
To Direct Labour 3,500 By Finished Stock 28,000 46,605
To Overhead 4,500 By Closing WIP 1,800 2,359
To Packing Materials 4,000
30,000 48,964 30,000 48,964

PYQ 8
A Chemical Company carries on production operation in two processes. The material first passes 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 40,000 kgs
(Material 100% and conversion 50% complete)
Work completed quantity 1,60,000 kgs
Closing work-in-progress quantity 30,000 kgs

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 PROCESS & OPERATION COSTING 8.11

(Material 100% and conversion two-third complete)

Material input cost `75,000
Processing cost `1,02,000
Opening work-in-progress cost
Materials cost `20,000
Processing cost `12,000
Normal process loss in quantity may be assumed to be 20% of material input. It has no realizable value.
Any quantity of Product 'A' can be sold for `1.60 per kg. Alternatively, it can be transferred to Process II for
further processing and then sold as Product 'AX' for `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:

Input of 1,20,000 Kgs of Product ‘A’ Input of 1,60,000 Kgs of Product ‘A’
Materials Cost `1,32,000 `1,76,000
Processing Cost `1,20,000 `1,40,000

Required
(a) 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.
(b) Is it processing 1,20,000 kgs of Product 'A' further?
(c) 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) Nov 2006]

Answer
(a)
Statement of Equivalent Production (Average Cost Method)
Materials Processing Cost
Particulars Total Units
% Unit % Unit
Units Completed 1,60,000 100 1,60,000 100 1,60,000
Normal loss 40,000 - - - -
Abnormal Loss 10,000 100 10,000 100 10,000
Closing WIP 30,000 100 30,000 ⅔ 20,000
Total 2,40,000 - 2,00,000 - 1,90,000

Statement of Cost
Elements Cost Equivalent Units Cost Per Unit
Materials 20,000 + 75,000 = 95,000 2,00,000 0.475
Processing Cost 12,000 + 1,02,000 = 1,14,000 1,90,000 0.60
1.075

Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials and Processing cost 1,60,000 1.075 1,72,000

Abnormal Loss Materials and Processing cost 10,000 1.075 10,750

Closing WIP Materials 30,000 0.475 14,250

Processing cost 20,000 0.60 12,000
26,250

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 PROCESS & OPERATION COSTING 8.12

(b) Evaluation of further processing of 1,20,000 kgs of Product A:

Calculation of Incremental Cost:
Further Material Cost = 1,32,000
Further Processing Cost = 1,20,000
Total Incremental Cost = 2,52,000
Calculation of Incremental revenue:
Sales Value of AX (2,40,000 kgs × 2) = 4,80,000
(Input of 1 kg of A provides 2 kgs of AX)
Sales Value of A (1,20,000 kgs × 1.60) = 1,92,000
Total Incremental Revenue = 2,88,000
Incremental Benefit (2,88,000 – 2,52,000) = 36,000
Company should further process 1,20,000 kgs of Product A having incremental net benefit.

(c) Cost of processing of 40,000 kgs of Product A:

Sales Value 40,000 kgs of Product A (40,000 kgs × 1.60) = 64,000
Incremental Cost to Process 40,000 kgs A
Incremental Materials Cost (1,76,000 – 1,32,000) = 44,000
Incremental Processing Cost (1,40,000 – 1,20,000) = 20,000
Total = 1,28,000
Production of AX = 80,000 kgs
Minimum selling price (1,28,000 ÷ 80,000 kgs) = `1.60 per kg

PYQ 9
Following details are related to the work done in Process 'A' of XYZ Company during the month of March, 2007:
Opening work-in-progress 2,000 units
Materials `80,000
Labour `15,000
Overheads `45,000
Materials introduced in Process ‘A’ 38,000 units
Materials `14,80,000
Direct labour `3,59,000
Overheads `10,77,000
Units scrapped 3,000 units
Degree of completion:
Materials 100%
Labour and overheads 80%
Closing work-in-progress 2,000 units
Degree of completion:
Materials 100%
Labour and overhead 80%
Units finished and transferred to Process ‘B’ 35,000 units
Normal loss to total input including opening work-in-progress 5%
Scrapped units fetch `20 per unit
You are required to prepare
1. Statement of equivalent production;
2. Statement of cost;
3. Statement of distribution cost; and
4. Process ‘A’ Account, Normal and Abnormal Loss Accounts. [May 2007]

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 PROCESS & OPERATION COSTING 8.13

Answer
1. Statement of Equivalent Production (Average Cost Method)
Materials Processing Cost
Particulars Total Units
% Unit % Unit
Units Completed 35,000 100 35,000 100 35,000
Normal loss 2,000 - - - -
Abnormal Loss 1,000 100 1,000 80 800
Closing WIP 2,000 100 2,000 80 1,600
Total 40,000 - 38,000 - 37,400

2. Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 80,000 + 14,80,000 – 40,000 = 15,20,000 38,000 40.00
Labour 15,000 + 3,59,000 = 3,74,000 37,400 10.00
Overheads 45,000 + 10,77,000 = 11,22,000 37,400 30.00
80.00

3. Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials, Labour, Overheads 35,000 80.00 28,00,000

Abnormal Loss Materials 1,000 40.00 40,000

Labour, Overheads 800 10.00 + 30.00 32,000
72,000
Closing WIP Materials 2,000 40.00 80,000
Labour, Overheads 1,600 10.00 + 30.00 64,000
1,44,000

4. Process A Account
Particulars Units ` Particulars Units `
To Opening WIP 2,000 1,40,000 By Normal Loss 2,000 40,000
To Direct Materials 38,000 14,80,000 By Process B A/c 35,000 28,00,000
To Direct Labour 3,59,000 By Abnormal Loss A/c 1,000 72,000
To Overhead 10,77,000 By Closing WIP 2,000 1,44,000
40,000 30,56,000 40,000 30,56,000

PYQ 10
BC Limited manufactures a product 'ZX' by using the process namely RT. For the month of May’ 2007, the
following data are available:
Process RT
Material introduced 16,000 units
Transfer to next process 14,400 units
Work in process:
At the beginning of the month (⅘ completed) 4,000 units
At the end of the month (⅔ completed) 3,000 units
Cost records:
Work in process at the beginning of the month
Material `30,000
Conversion cost `29,200
Cost during the month:
Materials `1,20,000
Conversion cost `1,60,800

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 PROCESS & OPERATION COSTING 8.14

Normal spoiled units are 10% of goods finished output transferred to next process. Defects in these
units are identified in their finished state. Material for the product is put in the process at the beginning of the
cycle of operation, whereas labour and other indirect cost flow evenly over the year. It has no realisable value
for spoiled units.
Required
1. Statement of equivalent producing (Average cost method);
2. Statement of cost and distribution of cost;
3. Process accounts.
[(8 Marks) Nov 2007]

Answer
1. Statement of Equivalent Production (Average Cost Method)
Total Materials Conversion Cost
Particulars
Unit % Unit % Unit
Normal loss 1,440 - - - -
Units Completed 14,400 100 14,400 100 14,400
Abnormal Loss 1,160 100 1,160 100 1,160
Closing WIP 3,000 100 3,000 ⅔ 2,000
Total 20,000 - 18,560 - 17,560

[Link] of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 30,000 + 1,20,000 = 1,50,000 18,560 8.0819
Conversion Cost 29,200 + 1,60,800 = 1,90,000 17,560 10.82
18.9019

3. Process RT Account
Particulars Units ` Particulars Units `
To Opening WIP 4,000 59,200 By Normal Loss 1,440 -
To Direct Materials 16,000 1,20,000 By Next Process A/c 14,400 2,72,188
To Conversion Cost 1,60,800 By Abnormal Loss A/c 1,160 21,926
By Closing WIP 3,000 45,886
20,000 3,40,000 20,000 3,40,000

Working Notes:
Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials, Conversion Cost 14,400 18.9019 2,72,188

Abnormal Loss Materials, Conversion Cost 1,160 18.9019 21,926

Closing WIP Materials 3,000 8.0819 24,246

Conversion Cost 2,000 10.82 21,640
45,886

PYQ 11
JK Ltd. produces a product “AZE”, which passes through two processes viz. process I and process II. The output
of each process is treated as the raw material of the next process to which it is transferred and output of the
second process is transferred to finished stock. The following data related to December’ 2007:
Process I Process II
25,000 units introduced at a cost of `2,00,000 -
Material consumed `1,92,000 `96,020

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 PROCESS & OPERATION COSTING 8.15

Direct labour `2,24,000 `1,28,000

Manufacturing expenses `1,40,000 `60,000
Normal wastage of input 10% 10%
Scrap value of normal wastage (per unit) `9.90 `8.60
Output in Units 22,000 20,000
Required:
1. Prepare Process I and Process II account.
2. Prepare Abnormal effective/wastage account as the case may be each process.
[(8 Marks) May 2008]

Answer
Process I Account
Particulars Qty ` Particulars Qty `
To Units introduced 25,000 2,00,000 By Normal Wastage 2,500 24,750
To Materials 1,92,000 By Abnormal Loss 500 16,250
To Direct Labour 2,24,000 By Process II A/c 22,000 7,15,000
To Manufacturing Exp 1,40,000
25,000 7,56,000 25,000 7,56,000
7,56,000  24,750
Normal Cost per unit = = 32.50 per unit
25,000  2,500

Abnormal Loss A/c

Particulars Units ` Particulars Units `
To Process I A/c 500 16,250 By Cash A/c 500 4,950
By Profit and Loss A/c 11,300
500 16,250 500 16,250

Process II Account
Particulars Qty ` Particulars Qty `
To Process I A/c 22,000 7,15,000 By Normal Wastage 2,200 18,920
To Materials 96,020 By Finished Stock 20,000 9,90,000
To Direct Labour 1,28,000
To Manufacturing Exp 60,000
To Abnormal Gain 200 9900
22,200 10,08,920 22,200 10,08,920
9,99,020  18,920
Normal Cost per unit = = 49.50 per unit
22,000  2,200

Normal loss A/c

Particulars Unit Amount Particulars Unit Amount
To Process I A/c 2,500 24,750 By Abnormal Gain A/c 200 1,720
To Process II A/c 2,200 18,920 By Sales (I) A/c 2,500 24,750
By Sales (II) A/c 2,000 17,200
4,700 43,670 4,700 43,670

Abnormal Gain A/c

Particulars Units ` Particulars Units `
To Normal Loss A/c 200 1,720 By Process II A/c 200 9,900
To Profit and Loss A/c 8,180
200 9,900 200 9,900

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 PROCESS & OPERATION COSTING 8.16

PYQ 12
A product passes from Process I and Process II. Materials issued to Process I amounted to `40,000, labour
`30,000 and manufacturing overheads were `27,000. Normal loss was 3% of input as estimated but 500 more
units of output of Process I were lost due to the carelessness of workers. Only 4,350 units of output were
transferred to Process II. There were no opening stocks. Input raw material issued to Process I were 5,000
units. You are required to show Process I account.
[(3 Marks) Nov 2008]

Answer
Process I A/c
Particulars Units Amount Particulars Units Amount
To Materials 5,000 40,000 By Normal Loss A/c 150 -
To labour 30,000 By Abnormal Loss A/c 500 10,000
To manufacturing OH 27,000 By Process II A/c 4,350 87,000
5,000 97,000 5,000 97,000
Working Notes:
Normal Cost Per Unit = 40,000 30,000 27,000 = `20 per units
5,000  150

Note: In the absence of any information, sale value of scrap of normal loss units is assumed to be NIL.

PYQ 13
XP Ltd. furnished you the following information relating to process II.

(i) Opening work-in-progress NIL

(ii) Units introduced 42,000 units @ `12
(iii) Expenses debited to the process:
Direct material `61,530
Labour `88,820
Overheads `1,76,400
(iv) Normal loss in the process 2% of input
(v) Closing work-in-process 1,200 units
Degree of completion:
Materials 100%
Labour 50%
Overhead 40%
(vi) Finished output 39,500 units
(vii) Degree of completion of abnormal loss:
Materials 100%
Labour 80%
Overhead 60%
(viii) Units scraped as normal loss were sold at `4.50 per unit.
(ix) All the units of abnormal loss were sold at `9 per unit.
Prepare:
(a) Statement of equivalent production.
(b) Statement showing the cost of finished goods, abnormal loss and closing work-in-progress.
(c) Process II account and abnormal loss account.
[(8 Marks) Nov 2009]

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 PROCESS & OPERATION COSTING 8.17

Answer
Process RT Account
Particulars Units ` Particulars Units `
To Units Introduced 42,000 5,04,000 By Normal Loss A/c 840 3,780
To Direct Materials 61,530 By Abnormal Loss A/c 460 8,294
To Labour 88,820 By Finished Goods 39,500 7,98,880
To Overhead 1,76,400 By Closing WIP 1,200 19,796
42,000 8,30,750 42,000 8,30,750

Statement of Equivalent Production

Materials Labour Overhead
Particulars Units
% Eq. Unit % Eq. Unit % Eq. Unit
Normal Loss 840 - - - - - -
Units Completed 39,500 100 39,500 100 39,500 100 39,500
Abnormal Loss 460 100 460 80 368 60 260
Closing WIP 1,200 100 1,200 50 600 40 480
Total 42,000 - 41,160 - 40,468 - 40,256

Statement of Cost
Elements Cost Equivalent Units Cost Per Unit
Materials 5,04,000 + 61,530 – 3,780 = 5,61,750 41,160 13.648
Labour 88,820 40,468 2.1948
Overhead 1,76,400 40,256 4.382
20.2248

Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total

Units Completed Materials, Labour and OH 39,500 20.2248 7,98,880

Abnormal Loss Materials 460 13.648 6,278

Labour 368 2.1948 807
Overheads 276 4.382 1,209
8,294

Closing WIP Materials 1,200 13.648 16,377

Labour 600 2.1948 1,316
Overheads 480 4.382 2,103
19,796

Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process II A/c 460 8,295 By Cash @ `9 per unit 460 4,140
By Costing P & L A/c - 4,155
460 8,295 460 8,295

PYQ 14
Pharma Limited produces product ‘Glucodin’ which passes through two processes before it is completed and
transferred to finished stock. The following data relates to March, 2010:
Details Process I Process II Finished Stock
Opening Stock 1,50,000 1,80,000 4,50,000
Direct materials 3,00,000 3,15,000 -

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 PROCESS & OPERATION COSTING 8.18

Direct Wages 2,24,000 2,25,000 -

Factory overheads 2,10,000 90,000 -
Closing Stock 74,000 90,000 2,25,000
Inter process profit included in Opening stock NIL 30,000 1,65,000
Output of process I is transferred to Process II at 25 percent profit on the transfer price, whereas
output of process II is transferred to finished stock at 20 percent on transfer price. Stock in process is valued
at prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month
is `28,00,000.
You are required to prepare Process I A/c, Process II A/c, and Finished Stock A/c showing the profit
element at each stage.
[(8 Marks) May 2010]

Answer
Process I A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 1,50,000 1,50,000 - By Process II 10,80,000 8,10,000 2,70,000
To Materials 3,00,000 3,00,000 - A/c
To Wages 2,24,000 2,24,000 -
Prime Cost 6,74,000 6,74,000 -
- Closing Stock (74,000) (74,000) -
6,00,000 6,00,000 -
To Factory OH 2,10,000 2,10,000 -
Total Cost 8,10,000 8,10,000 -
To Profit 2,70,000 - 2,70,000
10,80,000 8,10,000 2,70,000 10,80,000 8,10,000 2,70,000

Process II A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 1,80,000 1,50,000 30,000 By Finished 22,50,000 15,15,000 7,35,000
To Process I A/c 10,80,000 8,10,000 2,70,000 Stock A/c
To Materials 3,15,000 3,15,000 -
To Wages 2,25,000 2,25,000 -
Prime Cost 18,00,000 15,00,000 3,00,000
- Closing Stock (90,000) (75,000) *(15,000)
17,10,000 14,25,000 2,85,000
To Factory OH 90,000 90,000 -
Total Cost 18,00,000 15,15,000 2,85,000
To Profit 4,50,000 - 4,50,000
22,50,000 15,15,000 7,35,000 22,50,000 15,15,000 7,35,000
3,00,000
Profit element in closing stock = × 90,000 = 15,000
18,00,000

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 4,50,000 2,85,000 1,65,000 By Sales 28,00,000 16,48,500 11,51,500
To Process II 22,50,000 15,15,000 7,35,000 A/c or
- Closing Stock (2,25,000) (1,51,500) *(73,500) Costing p
COGS 24,75,000 16,48,500 8,26,500 & L A/c
To Profit 3,25,000 - 3,25,000
28,00,000 16,48,500 11,51,500 28,00,000 16,48,500 11,51,500

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 PROCESS & OPERATION COSTING 8.19

7,35,000
Profit element in closing stock = × 2,25,000 = 73,500
22,50,000

PYQ 15
Following information is available regarding Process A for the month of October 2010:

Production record:

Opening work-in-process 40,000 units

(Materials 100% complete, 25% complete labour & overheads)
Units introduced 1,80,000 units
Units completed 1,50,000 units
Units in process on 31.10.2010 70,000 units
(Materials 100% complete, 50% complete labour & overheads)

Cost record:
Opening WIP:
Materials `1,00,000
Labour `25,000
Overheads `45,000
Cost incurred during the month:
Materials `6,60,000
Labour `5,55,000
Overheads `9,25,000

Assure that FIFO method is used for WIP inventory valuation.

You are required to prepare:

(1) Statement of Equivalent Production.
(2) Statement showing Cost for each element.
(3) Statement of apportionment of Cost.
(4) Process A Account.
[(8 Marks) Nov 2010]

Answer
(1) Statement of Equivalent Production
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 40,000 - - 75 30,000

Units Introduced:
Used for Completed Units 1,10,000 100 1,10,000 100 1,10,000
Used for Closing WIP 70,000 100 70,000 50 35,000
Total 2,20,000 - 1,80,000 - 1,75,000

(2) Statement Showing Cost for each Element

Elements Cost Equivalent Units Cost Per Unit
Materials 6,60,000 1,80,000 3.66667
Labour 5,55,000 1,75,000 3.17143
Overheads 9,25,000 1,75,000 5.28571
Total Cost Per Unit 12.12381

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 PROCESS & OPERATION COSTING 8.20

(3) Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost Materials 1,10,000 3.66667 4,03,333
Labour, Overhead 1,40,000 8.45714 11,84,000

Add: Cost of Opening WIP 1,70,000

(Used in completed units) 17,57,333

Closing WIP Materials 70,000 3.66667 2,56,667

Labour, Overhead 35,000 8.45714 2,96,000
5,52,667

(4) Process A Account

Particulars Units ` Particulars Units `
To Opening WIP 40,000 1,70,000 By Process B A/c 1,50,000 17,57,333
To Units Introduced 1,80,000 6,60,000 By Closing WIP 70,000 5,52,667
To Labour 5,55,000
To Overhead 9,25,000
2,20,000 23,10,000 2,20,000 23,10,000

PYQ 16
The following details are available of Process X for August 2011.
(1) Opening work-in process 8,000 units
Degree of completion and cost:
Materials (100%) `63,900
Labour (60%) `10,800
Overheads (60%) `5,400
(2) Input 1,82,000 units at `7,56,900
(3) Labour paid `3,28,000
(4) Overheads incurred `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 `8 per unit to be adjusted in direct material cost.
You are required to compute, assuming that average method of inventory is used:
(a) Equivalent production,
(b) Cost per unit.
[(8 Marks) Nov 2011]

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 PROCESS & OPERATION COSTING 8.21

Answer
(a) Statement of Equivalent Production
Materials Conversion Cost
Particulars Input Particulars Output
% Unit % Unit
Opening WIP 8,000 Transf. to next Process 1,58,000 100 1,58,000 100 1,58,000
Fresh Units 1,82,000 Normal Loss 15,200 - - - -
(8 % of 1,90,000)
Abnormal Gain (1,200) 100 (1,200) 100 (1,200)
Closing WIP (given) 18,000 100 18,000 70 12,600
Total 1,90,000 Total 1,90,000 - 1,74,000 - 1,69,400

(b) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 63,900 + 7,56,900 – 1,21,600 (15,200 × 8) 1,74,800 4.00
= 6,99,200
Labour 10,800 + 3,28,000 = 3,38,800 1,69,400 2.00
Overhead 5,400 + 1,64,000 = 1,69,400 1,69,400 1.00
7.00

PYQ 17
A product passes through two processes A and B. During the year 2011, the input to process A of basic raw
material was 8,000 units @ `9 per unit. Other information for the year is as follows:
Details Process A Process B
Output units 7,500 4,800
Normal loss (% to input) 5% 10%
Scrap value per unit (`) 2 10
Direct wages (`) 12,000 24,000
Direct expenses (`) 6,000 5,000
Sales value per unit (`) 15 25
Total overheads `17,400 were recovered as percentage of direct wages. Selling expenses were `5,000.
These are not allocable to the processes. 2/3 of the output of Process A was passed on to the next process and
the balance was sold. The entire output of Process B was sold. Prepare Process A and B Accounts.

[(8 Marks) May 2012]

Answer
Process A Account
Particulars Units ` Particulars Units `
To Raw Materials 8,000 72,000 By Normal Loss A/c 400 800
To Direct Wages 12,000 By Abnormal Loss A/c 100 1,250
To Direct Expenses 6,000 By Process B A/c 5,000 62,500
To Overheads 5,800 By Profit & Loss A/c 2,500 31,250
(17,400 × 12/36) 8,000 95,800 8,000 95,800

95,800  800
Normal Cost Per Unit = = `12.50
8,000  400

Note:
(i) Processes assumed to be not a responsibility centre. Hence units sold in market have been transferred
to profit & loss A/c on cost.
(ii) Sales expenses are not allocable to the processes, it would be debited in profit & loss A/c.

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 PROCESS & OPERATION COSTING 8.22

Process B Account
Particulars Units ` Particulars Units `
To Process A A/c 5,000 62,500 By Normal Loss A/c 500 5,000
To Direct Wages 24,000 By Profit & Loss A/c 4,800 1,04,640
To Direct Expenses 5,000
To Overheads 11,600
(17,400 × 24/36)
To Abnormal Gain 300 6,540
5,300 1,09,640 5,300 1,09,640
1,03,100  5,000
Normal Cost Per Unit = = `21.80
5,000  500

PYQ 18
ABX Company Ltd provide the following information relating to Process B:
(i) Opening Work-in-progress : Nil
(ii) Units Introduced : 45,000 units @ `10 per unit
(iii) Expense debited to the process:
Direct material : `65,500
Labour : `90,800
Overhead : `1,80,700
(iv) Normal loss in the process : 2% of Input
(v) Work-in-progress : 1,800 units
Degree of completion:
Materials : 100%
Labour : 50%
Overhead : 40%
(vi) Finish output : 42,000 units
(vii) Degree of completion of a abnormal loss:
Material : 100%
Labour : 80%
Overhead : 60%
(viii) Units scrapped as normal loss were sold : at `5 per units.
(ix) All the units of abnormal loss were sold : at `2 per units.

You are required to prepare:

(A) Statement of equivalent production.
(B) Statement showing the cost of finished goods, abnormal loss and closing balance of work-in-progress.
(C) Process B account and abnormal loss account.
[(10 Marks) May 13]

Answer
(A) Statement of Equivalent Production
Materials Labour Overhead
Particulars Units
% E. Units % E. Units % E. Units
Normal Loss (45,000 × 2%) 900 - - - - - -
Finished Output 42,000 100 42,000 100 42,000 100 42,000
Units in WIP 1,800 100 1,800 50 900 40 20
Abnormal Loss (b.f.) 300 100 300 80 240 60 180
Total 45,000 - 44,100 - 43,140 - 42,900

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 PROCESS & OPERATION COSTING 8.23

(B) Statement Showing the Cost of Finished Goods, Abnormal Loss & Closing WIP
Particulars Elements Equivalent Units Cost Per Unit `
1. Finished Goods All (M, L, OH) 42,000 17.9042 7,51,976

2. Abnormal Loss Materials 300 11.5873 3,477

Labour 240 2.1048 505
Overheads 180 4.2121 758
4,740
3. Closing WIP Materials 1,800 11.5873 20,857
Labour 900 2.1048 1,894
Overheads 720 4.2121 3,033
25,784

(C) Process B A/c

Particulars Units ` Particulars Units `
To Units Introduced 45,000 4,50,000 By Normal Loss 900 4,500
To Direct Materials 65,500 By Finished Output 42,000 7,51,976
To Labour 90,800 By Abnormal Loss 300 4,740
To Overheads 1,80,700 By WIP Closing 900 25,784
45,000 7,87,000 45,000 7,87,000
Abnormal Loss A/c
Particulars Units ` Particulars Units `
To Process B A/c 300 4,740 By Cash @ `2 p.u. 300 600
By P/L A/c 4,140
300 4,740 300 4,740

Working Notes: Statement of Cost Per Unit

Elements Equivalent Units Cost of Element Cost Per Unit
Materials 44,100 4,50,000 + 65,500 - 4,500 = 5,11,000 `11.5873
Labour 43,140 90,800 `2.1048
Overhead 42,900 1,80,700 `4.2121
Total Cost Per Unit `17.9042

PYQ 19
M J Pvt. Ltd. produces a product “SKY” which passes through two processes, viz. Process A and Process B. The
details for the year ending 31st March, 2014 are as follows:
Process A Process B
40,000 units introduced at a cost of `3,60,000 -
Materials Consumed `2,42,000 `2,25,000
Direct Wages `2,58,000 `1,90,000
Manufacturing Expenses `1,96,000 `1,23,720
Output in Units 37,000 27,000
Normal Wastage of Input 5% 10%
Scrap Value (per unit) `15 `20
Selling Price (per unit) `37 `61
Additional Information:
(a) 80% of the output of Process A, was passed on to the next process and the balance was sold. The
entire output of Process B was sold.
(b) Indirect expenses for the year was `4,48,080.
(c) It is assumed that Process A and Process B are not responsibility centre.

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 PROCESS & OPERATION COSTING 8.24

Required:
(i) Prepare Process A and Process B Account.
(ii) Prepare Profit & Loss Account showing the net profit/net loss for the year.
[(8 Marks) May 2014]

Answer
(i) Process A Account
Particulars Units ` Particulars Units `
To Units Introduced 40,000 3,60,000 By Normal Loss 2,000 30,000
To Materials Consumed 2,42,000 (5% @ `15 per unit)
To Direct Wages 2,58,000 By Abnormal Loss A/c 1,000 27,000
To Manufacturing Exps 1,96,000 By Process B Account 29,600 7,99,200
By Profit and Loss A/c 7,400 1,99,800
40,000 10,56,000 10,000 10,56,000
Total cost  scrap of normal loss 10,56,000 30,000
Normal cost per unit = = = `27.00
Total units normal loss units 40,000 2,000

Process B Account
Particulars Units ` Particulars Units `
To Process A Account 29,600 7,99,200 By Normal Loss 2,960 59,200
To Materials Consumed 2,25,000 (10% @ `20 per unit)
To Direct Wages 1,90,000 By Profit and Loss A/c 27,000 12,96,000
To Manufacturing Exps 1,23,720
To Abnormal Gain 360 17,280
29,960 13,55,200 29,960 13,55,200
Total cost  scrap of normal loss 13,37,920 59,200
Normal cost per unit = = = `48.00
Total units normal loss units 29,600 2,960

(ii) Profit and Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 7,400 1,99,800 By Sales:
To Process B A/c 27,000 12,96,000 Process A 7,400 2,73,800
To Indirect Expenses 4,48,080 Process B 27,000 16,47,000
To Abnormal Loss A/c 12,000 By Abnormal Gain A/c 10,080
(27,000 – 1,000 (17,280 – 360 units×20)
units×15) By Net Loss 25,000
34,400 19,55,880 34,400 19,55,880

PYQ 20
The following information relate to process A:
(1) Opening work-in process 8,000 units at `75,000
Degree of completion:
Materials 100%
Labour and Overhead 60%
(2) Input 1,82,000 units at `7,37,500
(3) Labour paid `3,40,600
(4) Overheads incurred `1,70,300
(5) Units scrapped 14,000
Degree of completion:
Material 100%

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 PROCESS & OPERATION COSTING 8.25

Labour and overhead 80%

(6) Closing work-in-process 18,000 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 5% of total input including opening work-in-process
(9) Scrap value is `5 per unit to be adjusted out of direct material cost.

You are required to compute on the basis FIFO method:

(a) Equivalent production,
(b) Cost per unit.
(c) Value of Units transferred to next process.
[(8 Marks) Nov 2014]

Answer
(a) Statement of Equivalent Production
Materials Labour & OH
Particulars Units
% E. Units % E. Units
Opening units:
Used for Completed Units 8,000 - - 40 3,200
Current Units:
Used for Completed Units 1,50,000 100 1,50,000 100 1,50,000
Used for Closing WIP 18,000 100 18,000 70 12,600
Normal Loss 9,500 - - - -
(1,90,000 × 5%)
Abnormal Loss 4,500 100 4,500 80 3,600
Total 1,90,000 - 1,72,500 - 1,69,400

(b) Statement of Cost Per Unit

Elements Cost Equivalent Units Cost Per Unit
Materials 7,37,500 - 47,500 (9,500 × 5)
Labour = 6,90,000 1,72,500 4.0000
Overhead 3,40,600 1,69,400 2.0106
1,70,300 1,69,400 1.0053
Total Cost Per Unit 7.0159

(c) Statement Showing Value Units Transferred to Next Process

Particulars Elements Equivalent Units Cost Per Unit `
Current period work Materials 1,50,000 4.00 6,00,000
Labour and OH 1,53,200 2.0106 + 1.0053 4,62,036

Add: Cost of Opening WIP 75,000

Value of Units Transferred 11,37,036

PYQ 21
The following information is furnished by ABC Company for Process – II of its manufacturing activity for the
month of April 2015:

(1) Opening work-in process Nil

(2) Units transferred from Process – I 55,000 units at `3,27,800

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 PROCESS & OPERATION COSTING 8.26

(3) Expenses debited to Process – II:

Consumables `1,57,200
Labour `1,04,000
Overheads `52,000
(4) Units transferred to Process – III 51,000 units
(5) Closing WIP 2,000 units
Degree of completion:
Consumables 80%
Labour 60%
Overheads 60%
(6) Units scrapped 2,000 units
(7) Scrapped units were sold at `5 per unit
(8) Normal loss 4% of units introduced

You are required to

(a) Prepare a Statement of Equivalent Production.
(b) Determine the cost per unit.
(c) Determine the value of WIP and units transferred to Process – III.
[(8 Marks) Nov 2015]

Answer
(a) Statement of Equivalent Production
Materials 1 Material 2 Labour & OH
Particulars Units
% E. Units % E. Units % E. Units
Normal Loss (55,000 × 4%) 2,200 - - - - - -
Units transferred to Process - III 51,000 100 51,000 100 51,000 100 51,000
Units in Closing WIP 2,000 100 2,000 80 1,600 60 1,200
Less: Abnormal Gain (200) 100 (200) 100 (200) 100 (200)
Total 55,000 - 52,800 - 52,400 - 52,000

(b) Statement of Cost Per Unit

Elements Cost Equivalent Units Cost Per Unit
Materials 1 3,27,800 - 11,000 (2,200 × 5) = 3,16,800 52,800 6.00
Materials 2 1,57,200 52,400 3.00
Labour 1,04,000 52,000 2.00
Overhead 52,000 52,000 1.00
12.00

(c) Statement Showing Value of WIP and Units Transferred to Process – III
Particulars Elements Equivalent Units Cost Per Unit `
1. Closing WIP Materials 1 2,000 6.00 12,000
Materials 2 1,600 3.00 4,800
Labour 1,200 2.00 2,400
Overheads 1,200 1.00 1,200
20,400

2. Transferred to Process-III All (M, L, OH) 51,000 12.00 6,12,000

PYQ 22
KMR Limited produces product AY, which passes through three processes ‘XM’, ‘YM’ and ‘ZM’. The output of
process ‘XM’ and ‘YM’ is transferred to next process at cost plus 20% each on transfer price and the output of

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 PROCESS & OPERATION COSTING 8.27

process ‘ZM’ is transferred to finished stock at a profit of 25% on transfer price. The following information are
available in respect of the year ending 31st March, 2017:
Details Process XM Process YM Process ZM Finished Stock
Opening Stock 30,000 54,000 80,000 90,000
Materials 1,60,000 1,30,000 1,00,000 -
Wages 2,50,000 2,16,000 1,84,000 -
Manufacturing Overheads 1,92,000 1,44,000 1,33,000 -
Closing Stock 40,000 64,000 78,000 1,00,000
Inter process profit included in Op. Stock NIL 8,000 20,000 40,000
Stock in process is valued at prime cost. The finished stock is valued at the price at which it is received
from process ‘ZM’. Sales of the finished stock during the period was `28,00,000.
You are required to prepare:
(i) All process accounts and
(ii) Finished Stock A/c showing profit element at each stage.
[(8 Marks) May 2017]

Answer
(i) Process XM A/c
Particulars Cost Profit Total Particulars Cost Profit Total
To Balance b/d 30,000 - 30,000 By Process YM 5,92,000 1,48,000 7,40,000
To Materials 1,60,000 - 1,60,000 A/c
To Wages 2,50,000 - 2,50,000
Prime Cost 4,40,000 - 4,40,000
- Closing Stock (40,000) - (40,000)
4,00,000 - 4,00,000
To Man. OH 1,92,000 - 1,92,000
Total Cost 5,92,000 - 5,92,000
To Profit - 1,48,000 1,48,000
5,92,000 1,48,000 7,40,000 5,92,000 1,48,000 7,40,000

Process YM A/c
Particulars Cost Profit Total Particulars Cost Profit Total
To Balance b/d 46,000 8,000 54,000 By Process 10,72,758 4,52,242 15,25,000
To Process XM 5,92,000 1,48,000 7,40,000 ZM A/c
To Materials 1,30,000 - 1,30,000
To Wages 2,16,000 - 2,16,000
Prime Cost 9,84,000 1,56,000 11,40,000
- Closing Stock (55,242) *(8,758) (64,000)
9,28,758 1,47,242 10,76,000
To Man. OH 1,44,000 - 1,44,000
Total Cost 10,72,758 1,47,242 12,20,000
To Profit - 3,05,000 3,05,000
10,72,758 4,52,242 15,25,000 10,72,758 4,52,242 15,25,000
1,56,000
Profit element in closing stock = × 64,000 = 8,758
11,40,000

Process ZM A/c
Particulars Cost Profit Total Particulars Cost Profit Total
To Balance b/d 60,000 20,000 80,000 By Finished 14,91,258 11,00,742 25,92,000
To Process YM 10,72,758 4,52,242 15,25,000 Stock A/c

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 PROCESS & OPERATION COSTING 8.28

To Materials 1,00,000 - 1,00,000

To Wages 1,84,000 - 1,84,000
Prime Cost 14,16,758 4,72,242 18,89,000
- Closing Stock (58,500) *(19,500) (78,000)
13,58,258 4,52,742 18,11,000
To Man. OH 1,33,000 - 1,33,000
Total Cost 14,91,258 4,52,742 19,44,000
To Profit - 6,48,000 6,48,000
14,91,258 11,00,742 25,92,000 14,91,258 11,00,742 25,92,000
4,72,242
Profit element in closing stock = × 78,000 = 19,500
18,89,000

(ii) Finished Stock A/c

Particulars Cost Profit Total Particulars Cost Profit Total
To Balance b/d 50,000 40,000 90,000 By Sales 14,83,725 13,16,275 28,00,000
To Process ZM 14,91,258 11,00,742 25,92,000 A/c or
- Closing Stock (57,533) *(42,467) (1,00,000) Costing p &
COGS 14,83,725 10,98,275 25,82,000 L A/c
To Profit - 2,18,000 2,18,000
14,83,725 13,16,275 28,00,000 14,83,725 13,16,275 28,00,000
11,00,742
Profit element in closing stock = × 1,00,000 = 42,467
25,92,000

PYQ 23
ABC Ltd. produces an item which is completed in three processes – X, Y and Z. the following information is
furnished for the month of March, 2018:
Opening work-in process 5,000 units
Materials `35,000
Labour `13,000
Overheads `25,000
Units introduced into process X 55,000 units
Materials `20,20,000
Labour `8,00,000
Overheads `13,30,000
Units scrapped 5,000 units
Degree of completion:
Material 100%
Labour and overhead 60%
Closing work-in-process 5,000 units
Degree of completion:
Material 100%
Labour and overhead 60%
Units finished and transferred to Process Y 50,000 units
Normal loss is 5% of total input including opening work-in-process, scrap units fetch `20 per unit.
Presuming average method of inventory is used, prepare:
(1) Statement of Equivalent production,
(2) Statement of Cost for each element,
(3) Statement of distribution of cost,

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 PROCESS & OPERATION COSTING 8.29

(4) Abnormal loss account.

[(8 Marks) May 2018]
Answer
(1) Statement of Equivalent Production
Materials Conversion Cost
Particulars Input Particulars Output
% Unit % Unit
Opening WIP 5,000 Transfer to Process Y 50,000 100 50,000 100 50,000
Fresh Units 55,000 Normal Loss 3,000 - - - -
(5% of 60,000)
Abnormal Loss 2,000 100 2,000 60 1,200
Closing WIP 5,000 100 5,000 60 3,000
Total 60,000 Total 60,000 - 57,000 - 54,200

(2) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 35,000 + 20,20,000 – 60,000 (3,000 × 20) 57,000 35.00
= 19,55,000
Labour 13,000 + 8,00,000 = 8,13,000 54,200 15.00
Overhead 25,000 + 13,30,000 = 13,55,000 54,200 25.00
75.00

(3) Statement of Distribution of Cost

Particulars Elements Equivalent Units Cost Per Unit `
Units transferred All (M, L, OH) 50,000 75.00 37,50,000
to Process Y

Abnormal Loss Materials 2,000 35.00 70,000

Labour & OH 1,200 40.00 48,000
1,18,000

Closing WIP Materials 5,000 35.00 1,75,000

Labour & OH 3,000 40.00 1,20,000
2,95,000

(4) Abnormal Loss A/c

Particulars Units ` Particulars Units `
To Process X A/c 2,000 1,18,000 By Cash @ `20 p.u. 2,000 40,000
By P/L A/c 78,000
2,000 1,18,000 2,000 1,18,000

PYQ 24
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process – Process P,
Process Q and Process R. the following data relating to cost and output is obtained from the books for the
month of April, 2017:
Particulars Process P Process Q Process R
Direct Materials 38,000 42,500 42,880
Direct Labour 30,000 40,000 50,000

Production overheads of `90,000 were recovered as a percentage of direct labour. 10,000 kg of raw material
@ `5 per kg. was issued to Process P. There was no stock of material or work in process. There is normal
wastage, in processing of 10%. The scrap value of wastage is `1 per kg.

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 PROCESS & OPERATION COSTING 8.30

The entire output of each process transferred to next process and finally to warehouse as Process P =
9,000 kg, Process Q = 8,200 kg and Process R = 7,300 kg.
The company fixes selling price of the end product in such a way so as to yield a profit of 25% on selling price.

Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product.
[(10 Marks) May 2018]

Answer
1. Process P Account
Particulars Units ` Particulars Units `
To Input 10,000 50,000 By Normal Loss 1,000 1,000
To Direct Materials 38,000 (10% of 10,000 units)
To Direct Labour 30,000 By Process Q Account @ 9,000 1,39,500
To Manufacturing OH 22,500 `15.50 per unit
(75% of 30,000)
10,000 1,40,500 10,000 1,40,500

Total Cost  Realisable Value of Normal Loss Units

Cost per unit of completed units =
Inputs Units  Normal Loss Units
= 1,40,500 - 1,000/10,000 - 1,000 = `15.50

2. Process Q Account
Particulars Units ` Particulars Units `
To Process P A/c 9,000 1,39,500 By Normal Loss 900 900
To Direct Materials 42,500 (10% of 9,000 units)
To Direct Labour 40,000 By Process R Account @ 8,200 2,54,200
To Manufacturing OH 30,000 `31.00 per unit
(75% of 40,000)
To Abnormal Gain 100 3,100
9,100 2,55,100 9,100 2,55,100

Cost per unit of completed units = 2,52,000 - 900/9,000 - 900 = `31.00

3. Process R Account
Particulars Units ` Particulars Units `
To Process Q A/c 8,200 2,54,200 By Normal Loss 820 820
To Direct Materials 42,880 (10% of 8,200 units)
To Direct Labour 50,000 By Abnormal Loss A/c 80 4,160
To Manufacturing OH 37,500 By Finished Goods @ 7,300 3,79,600
(75% of 50,000) `52.00 per unit
8,200 3,84,580 8,200 3,84,580

Cost per unit of completed units = 3,84,580 - 820/8,200 - 820 = `52.00

4. Selling price of end product = Cost per unit + Profit @ 25% on Sales or 1/3 on Cost
= 52.00 + 52.00 × 1/3 = `69.33
Working note:
Calculation of recovery rate of overheads:
Total Overheads 90,000
Recovery rate = × 100 = × 100
Total Labour Cost 1,20,000
= 75% of labour cost

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 PROCESS & OPERATION COSTING 8.31

PYQ 25
Following detail have been provided by M/s AR Enterprises:
 Opening work-in process 3,000 units (70% complete)
 Units introduced during the year 17,000 units
 Cost of process (for the period) `33,12,720
 Transferred to next process 15,000 units
 Closing work-in-process 2,200 units (80 complete)
 Normal loss is estimated at 12% of total input including opening work-in-process
 Scrap realize `50 per unit (100% complete)

Using FIFO method, compute:

(1) Equivalent production,
(2) Cost per equivalent unit.
[(5 Marks) Nov 2018]

Answer
(1) Statement of Equivalent Production
Materials, Labour & OH
Particulars Units
% E. Units
Opening Units:
Used to produce Units transferred to Next Process 3,000 30 900
Current Units:
Used to produce Units transferred to Next Process 12,000 100 12,000
Normal loss (12% of 20,000) 2,400 - -
Abnormal loss 400 100 400
(3,000 + 17,000 – 2,400 - 15,000 – 2,200)
Closing WIP 2,200 80 1,760
Total 20,000 - 15,060

(2) Statement of Cost Per Equivalent Unit

Elements Cost Equivalent Units Cost Per Unit
Materials, Labour and Overheads 33,12,720 – 2,400 × 50 15,060 212.00
= 31,92,720

PYQ 26
A company manufacturing chemical solution that passes through a number of processes uses FIFO method to
value WIP and Finished goods. At the end of the month of September, a fire occurred in the factory and some
papers containing records of the process operations for the month were destroyed. The company desires to
prepare process account for the month during which the fire occurred. Some information could be gathered
as to operating activities as under:
 Opening work-in process at the beginning of the month of 1,100 litres, 40% complete for labour and 60%
for overheads. Opening WIP was valued at `48,260.
 Closing WIP at the end of the month was 220 litres, 40% complete for labour and 30% for overheads.
 Normal loss is 10% of input and total losses during the month were 2,200 litres partly due to fire damage.
Assume degree of completion of abnormal loss is 100%.
 Output sent to Finished goods warehouse was 5,900 litres.
 Losses have a scrap value of `20 per litre.
 All raw materials are added at the commencement of the process.
 The cost per equivalent unit (litre) is `53 for the month consisting:
Raw materials `35
Labour `8

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 PROCESS & OPERATION COSTING 8.32

Overheads `10
Total `53
You are required to:
(1) The quantity (in litres) of raw materials input during the month.
(2) Calculate the quantity (in litres) of normal loss and abnormal loss/gain experienced in the month.
(3) Calculate the value of raw materials, labour and overheads added to the process during the month.
(4) Prepare process account for the month.
[(8 Marks) Nov 2018]

Answer
(1) Calculation of quantity of raw materials input during the month:
Raw materials input = Output of Finished goods + Closing WIP + Losses – Opening WIP
= 5,900 + 220 + 2,200 – 1,100 = 7,220 litres

(2) Calculation of quantity of normal loss and abnormal loss or gain:

Normal loss = 10% of Input
= 10% of 7,220 = 722 litres
Abnormal loss = Actual loss – Normal loss
= 2,200 – 722 = 1,478 litres

(3) Statement of Material, Labour and Overheads added during the month
Particulars Materials Labour Overheads
Cost per equivalent units 35 8 10
Number of equivalent units 6,498 7,026 6,784
Cost of equivalent units 2,27,430 56,208 67,840
Add: Scrap value of normal loss units (722 × 20) 14,440 - -
Total value added 2,41,870 56,208 67,840

(4) Process A/c

Particulars Units ` Particulars Units `
To Opening WIP 1,100 48,260 By Normal Loss 722 14,440
To Materials 7,220 2,41,870 By Finished Output 5,900 3,12,340
To Labour 56,208 (4,800 × 35 + 5,460 × 8 +
To Overheads 67,840 5,240 × 10 + 48,260)
By Abnormal Loss 1,478 78,334
(1,478 × 53)
By WIP Closing 220 9,064
(220×35 + 88×8 + 66×10)
8,320 4,14,178 8,320 4,14,178

Working Note: Statement of Equivalent Production

Materials Labour Overheads
Particulars Units
% E. Units % E. Units % E. Units
Opening Units:
Used for Completed Units 1,100 - - 60 660 40 440
Current Units:
Used for Completed Units 4,800 100 4,800 100 4,800 100 4,800
Normal loss 722 - - - - - -
Abnormal loss 1,478 100 1,478 100 1,478 100 1,478
Closing WIP 220 100 220 40 88 30 66
Total 8,320 - 6,498 - 7,026 - 6,784

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 PROCESS & OPERATION COSTING 8.33

PYQ 27
KT Ltd. produces a product EMM which passes through two processes before it is completed and transferred
to finished stock. The following data relate to May 2019:

Process Finished Stock

Particulars
A (`) B (`) (`)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock - 1,000 4,000
Output of Process A is transferred to Process B at 25% profit on the transfer price and output of Process
B is transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at prime cost.
Finished stock is valued at the price at which it is received from Process B. Sales during the period are `75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each
stage.
[(10 Marks) May 2019]

Answer
Process A A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 5,000 5,000 - By Process B A/c 28,800 21,600 7,200
To Materials 9,000 9,000 -
To Wages 5,000 5,000 -
Prime Cost 19,000 19,000 -
- Closing Stock (2,000) (2,000) -
Prime Cost 17,000 17,000 -
To Factory OH 4,600 4,600 -
Process Cost 21,600 21,600 -
To Profit @ 25% 7,200 - 7,200
on transfer price
28,800 21,600 7,200 28,800 21,600 7,200

Process B A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 5,500 4,500 1,000 By Finished 61,675 41,550 20,125
To Process A A/c 28,800 21,600 7,200 Stock A/c
To Materials 9,500 9,500 -
To Wages 6,000 6,000 -
49,800 41,600 8,200
- Closing Stock (2,490) (2,080) *(410)
Prime Cost 47,310 39,520 7,790
To Factory OH 2,030 2,030 -
Process Cost 49,340 41,550 7,790
To Profit @ 20% 12,335 - 12,335
on transfer price
61,675 41,550 20,125 61,675 41,550 20,125

* Stock reserve in closing stock of Process B = 8,200/49,800 × 2,490 = 410

* Stock reserve in closing stock of FG = 20,125/61,675 × 5,000 = 1,639

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 PROCESS & OPERATION COSTING 8.34

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 10,000 6,000 4,000 By Costing P & L 75,000 44,189 30,811
To Process B A/c 61,675 41,550 20,125 A/c
- Closing Stock (5,000) (3,361) *(1,639)
COGS 66,675 44,189 22,486
To Profit (b.f.) 8,325 - 8,325
75,000 44,189 30,811 75,000 44,189 30,811

PYQ 28
A product passes through two distinct processes before completion. Following information are available in
this respect:
Process 1 Process 2
Raw materials used 10,000 units -
Raw material cost (per unit) `75 -
Transfer to next process/Finished goods 9,000 units 8,200 units
Normal loss (on inputs) 5% 10%
Direct wages `3,00,000 `5,60,000
Direct expenses 50% of direct wages 65% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realisable value of scrap (per unit) `13.50 `145

8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing
stock of work-in-progress.

Prepare:
(1) Process 1 and process 2 account
(2) Finished goods account
(3) Normal loss account
(4) Abnormal loss account
(5) Abnormal gain account
[(10 Marks) Nov 2019]

Answer
(1) Process 1 Account
Particulars Units ` Particulars Units `
To Raw Materials 10,000 7,50,000 By Normal Loss A/c 500 6,750
To Direct Wages 3,00,000 (5% @ `13.50 per unit)
To Direct Expenses 1,50,000 By Process 2 A/c 9,000 12,01,500
(50% of Direct Wages) @ `133.50 per unit
To Manufacturing OH 75,000 By Abnormal Loss A/c @ 500 66,750
(25% of Direct Wages) `133.50 per unit
10,000 12,75,000 10,000 12,75,000

Total Cost − Sale value of Normal Loss Units 12,75,000 − 6,750

NCPU =
Total Units−Normal Loss Units
=
10,000 − 500
= `133.50 p.u.

Process 2 Account
Particulars Units ` Particulars Units `
To Process 1 A/c 9,000 12,01,500 By Normal Loss A/c 900 1,30,500
To Direct Wages 5,60,000 (10% @ `145 per unit)
To Direct Expenses 3,64,000 By Finished Goods A/c 8,200 21,04,667
(65% of Direct Wages)

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 PROCESS & OPERATION COSTING 8.35

To Manufacturing OH 84,000 @ `256.67 per unit

(15% of Direct Wages)
To Abnormal Gain A/c 100 25,667
@ `256.67 per unit
9,100 22,35,167 9,100 22,35,167

Total Cost − Sale value of Normal Loss Units 22,09,500 − 1,30,500

NCPU = Total Units−Normal Loss Units
= 9,000 − 900
= `256.67 p.u.

(2) Finished Goods Account

Particulars Units ` Particulars Units `
To Process 2 A/c 8,200 21,04,667 By Profit & Loss A/c 8,000 20,53,333
By Balance c/d 200 51,334
8,200 21,04,667 8,200 21,04,667

(3) Normal Loss Account

Particulars Units ` Particulars Units `
To Process 1 A/c 500 6,750 By Cash A/c:
To Process 2 A/c 900 1,30,500 Process 1 500 6,750
Process 2 800 1,16,000
By Abnormal Gain A/c 100 14,500
1,400 1,37,250 1,400 1,37,250

(4) Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process 1 A/c 500 66,750 By Cash A/c 500 6,750
By Costing P/L A/c 60,000
500 66,750 500 66,750

(5) Abnormal Gain Account

Particulars Units ` Particulars Units `
To Normal Loss A/c 100 14,500 By Process 2 A/c 100 25,667
To Costing P/L A/c 11,167
100 25,667 100 25,667

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 PROCESS & OPERATION COSTING 8.36

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y -
3 Y Y Y Y
4 Y Y Y -
5 Y Y Y Y
6 Y Y Y -
7 Y Y Y Y
8 Y Y Y -
9 Y Y Y -
10 Y Y Y Y
11 Y Y Y Y
12 Y Y - -
13 Y Y Y Y
14 Y Y Y -
15 Y Y - -
16 Y Y Y Y
17 Y Y Y -
18 Y Y Y -
19 Y Y Y Y
20 Y Y Y Y
21 Y Y Y -
22 Y Y Y Y
23 Y Y Y -
24 Y Y Y -
25 Y Y Y -
26 Y Y Y Y
27 Y Y Y -
28 Y Y - -

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 CHAPTER - 9

JOINT PRODUCTS
&
BY PRODUCTS
LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the difference among the joint products, co–products
and by-products.
 Understand the concept of pre-separation cost and post separation
cost.
 Understand the method of apportionment of joint cost.
 Understand the concept of further processing decision.
 Understand the treatment of by-products.
 JOINT PRODUCTS & BY PRODUCTS 9.1

PAST YEAR QUESTIONS

PYQ 1
Two products P and Q are obtained in a crude form and require further processing at a cost of `5 for P and `4
for Q per unit before sale. Assuming a net margin of 25 per cent on cost, their sale prices are fixed at `13.75
and `8.75 per unit respectively. During the period, the joint cost was `88,000 and the outputs were:
P 8,000 units
Q 6,000 units
Ascertain the joint cost per unit.
[(5 Marks) May 1998]

Answer
Statement Showing Joint Cost Per Unit
Pariculars Product P Product Q
Output (in units) 8,000 units 6,000 units
Sales value @ `13.75/ `8.75 per unit 1,10,000 52,500
Less: Profit @ 25% of cost or 20% of sales 22,000 10,500
Less: Further processing cost @ `5/ `4 per unit 40,000 24,000
Expected joint cost 48,000 18,000
Actual joint cost in proportion of expected joint cost 64,000 24,000
(in proportion of 48 : 18)
Joint cost per unit `8 `4

PYQ 2
The Sunshine Oil Company purchases crude vegetable oil. It does refining of the same. The refining process
results in four products at the split-off point viz. M, N, O and P.
Product O is fully processed at the split-off point. Products M, N and P can be individually further
refined into ‘Super M’, ‘Super N’ and ‘Super P’. In the most recent month (October, 1999), the output at split-
off point was:
Product M 3,00,000 gallons
Product N 1,00,000 gallons
Product O 50,000 gallons
Product P 50,000 gallons
The joint cost of purchasing the crude vegetable oil and processing it were `40,00,000. Sunshine had
no beginning or ending inventories. Sales of product O in October were `20,00,000. Total output of products
M, N and P was further refined and then sold. Data related to October, 1999 are as follows:
Further Processing Costs Sales
‘Super M’ `80,00,000 `1,20,00,000
‘Super N’ `32,00,000 `40,00,000
‘Super P’ `36,00,000 `48,00,000
Sunshine had the option of selling products M, N and P at the split-off point. This alternative would
have yielded the following sales for the October, 1999 production:
Product M `20,00,000
Product N `12,00,000
Product P `28,00,000
You are required to answer:
(1) How the joint cost of `40,00,000 would be allocated between each product under each of the following
methods:

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 JOINT PRODUCTS & BY PRODUCTS 9.2
(i) Sales value at split-off;
(ii) Physical output (gallons); and
(iii) Estimated net realisable value.
(2) Could Sunshine have increased its October, 1999 operating profits by making different decisions about
the further refining of products M, N, or P? Show the effect of any change you recommend on operating
profits.
[(12 Marks) Nov 1999]

Answer
(1) Apportionment of Joint Cost:
(i) Statement of apportionment of joint costs (Sales value at split-off method)
Products Sales value at split of point Joint cost allocated
20,00,000 × 40,00,000 = 10,00,000
M 20,00,000 80,00,000

N 12,00,000 12,00,000 × 40,00,000 = 6,00,000

80,00,000

O 20,00,000 20,00,000 × 40,00,000 = 10,00,000

80,00,000
P 28,00,000 28,00,000 × 40,00,000 = 14,00,000
80,00,000
Total 80,00,000 40,00,000

(ii) Statement of apportionment of joint costs (Physical output method)

Products Physical output Joint cost allocated
3,00,000 × 40,00,000 = 24,00,000
M 3,00,000 5,00,000

N 1,00,000 1,00,000 × 40,00,000 = 8,00,000

5,00,000

O 50,000 50,000 × 40,00,000 = 4,00,000

5,00,000
P 50,000 50,000 × 40,00,000 = 4,00,000
5,00,000
Total 5,00,000 40,00,000

(iii) Statement of apportionment of joint costs (NRV method)

Products Sales value FPC NRV Joint cost allocated
40,00,000 × 40,00,000 = 20,00,000
M 1,20,00,000 80,00,000 40,00,000 80,00,000

N 40,00,000 32,00,000 8,00,000 8,00,000 × 40,00,000 = 4,00,000

80,00,000

O 20,00,000 - 20,00,000 20,00,000 × 40,00,000 = 10,00,000

80,00,000
P 48,00,000 36,00,000 12,00,000 12,00,000 × 40,00,000 = 6,00,000
80,00,000
Total 2,28,00,000 1,48,00,000 80,00,000 40,00,000

(2) Further Processing Decision:

Products Incremental revenue Incremental cost Situation Decision
M 1,20,00,000 – 20,00,000 = 1,00,00,000 80,00,000 IR > IC Yes
N 40,00,000 – 12,00,000 = 28,00,000 32,00,000 IR < IC No
P 48,00,000 – 28,00,000 = 20,00,000 36,00,000 IR < IC No

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 JOINT PRODUCTS & BY PRODUCTS 9.3
Decision:
The above table shows that further processing of products N and P results in the decrease of the operating
profit by `20,00,000. Hence, M/S Sunshine should not go for further processing of its N and P products. If these
products are not processed further, it would increase the operating profits of the company for the month of
October, 1999 by `20,00,000.

PYQ 3
Inorganic Chemicals purchases salt and processes it into more refined products such as Caustic Soda, Chlorine
and PVC (Polyvinyl chloride). During the month of April, 2000, Inorganic Chemicals purchased Salt for
`10,00,000. Conversion costs of `15,00,000 were incurred upto the split off point, at which time two saleable
products were produced viz. Caustic soda and Chlorine. Chlorine can be further processed in PVC. The April
production and sales information is as follows:
Production (tonnes) Sales Quantity (tonnes) Selling price (per tonne)
Caustic Soda 1,200 1,200 `1,250
Chlorine 800 - -
PVC 500 500 `5,000
All 800 tonnes of Chlorine were further processed at an incremental cost of `5,00,000 to yield 500
tonnes of PVC. There were no by products or scrap from this further processing of Chlorine. There were no
beginning or ending inventories of Caustic Soda, Chlorine or PVC in April.
There is an active market for Chlorine. Inorganic Chemicals could have sold all its April production of
Chlorine at `1,875 a tonne.
Required
1. To calculate how the joint cost of `25,00,000 would be allocated between Caustic Soda and Chlorine under
each of the following methods:
a. Sales value at split off;
b. Physical measure (ton); and
c. Estimated NRV.
2. What is the gross margin percentage of Caustic soda and PVC under the three above methods in
requirement?
3. Lifetime Swimming Pool Products offers to purchase 800 tonnes of Chlorine in May, 2000 at `1,875 at
tonne. This sale would mean that no PVC would be produced in May. How would accepting the offer affect
May’s operating income?
[(15 Marks) May 2000]

Answer
1. Statement Showing Allocation of Joint Cost
Joint Products
Particulars
Caustic Soda Chlorine
a. Allocation of joint cost on the basis of sale value at split off point: (1,200 × 1,250) (800 × 1,875)
Sale Value of production at split off (production × sales price) 15,00,000 15,00,000
Share of joint cost of `25,00,000 in ratio (15 : 15) 12,50,000 12,50,000

b. Allocation of joint cost on ten basis of physical measure:

Output at split off point 1,200 tonnes 800 tonnes
Share of joint cost of `25,00,000 in ratio (12 : 8) 15,00,000 10,00,000

c. Allocation of joint cost on the basis of estimated NRV:

Sale Value of production after further processing (1,200 × 1,250) (500 × 5,000)
(output after further processing × sales price) 15,00,000 25,00,000
Less: Further processing cost - 5,00,000
Net Realizable Value (NRV) 15,00,000 20,00,000
Share of joint cost of `25,00,000 in ratio (15 : 20) 10,71,429 14,28,571

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 JOINT PRODUCTS & BY PRODUCTS 9.4
2. Statement of Gross Margin Percentage
Basic of Apportionment of Joint Cost
Particulars Sale Value at split off Physical measure Estimated NRV
C. Soda PVC C. Soda PVC C. Soda PVC
Sale Value of output after 15,00,000 25,00,000 15,00,000 25,00,000 15,00,000 25,00,000
further processing
Less: Joint Cost 12,50,000 12,50,000 15,00,000 10,00,000 10,71,429 14,28,571
Less: Further Processing - 5,00,000 - 5,00,000 - 5,00,000
Cost (PVC only)
Gross Margin 2,50,000 7,50,000 NIL 10,00,000 4,28,571 5,71,429
Gross Margin %
16.67% 30% 0% 40% 28.57% 22.86%
(Margin ÷ Sales)× 100

3. Analysis of Life Swimming Pool Products

Sale value of 500 tons of PVC @ `5,000 per tonne 25,00,000
Less: Sale Value of 800 tons of Chlorine 15,00,000
Incremental Revenue 10,00,000
Cost of further processing chlorine into PVC 5,00 000
Increase in net income due to further processing of chlorine into PVC 5,00,000
On the basis of above analysis we find that there is a reduction of operating income in the month of May
by `5,00,000 when the company accept the after of “Lifetime Swimming Pool Products”. Hence, the offer
should not be accepted.

PYQ 4
In a chemical manufacturing company, three products A, B and C emerge at a single split off stage in
department P. Products A is further processed in department Q, product B in department R and product C in
department S. There is no loss in further processing of any of the three products.
The cost data for a month are as under:
Cost of raw materials introduced in department P `12,68,800
Direct Wages:
Department P `3,84,000
Department Q `96,000
Department R `64,000
Department S `36,000
Factory overheads of `4,64,000 are to be apportioned to the departments on direct wages basis. During
the month under reference, the company sold all three products after processing them further as under:
Products A B C
Output sold (in kg) 44,000 40,000 20,000
Selling price per kg `32 `24 `16
There are no opening or closing stocks. If these products were sold at the split off stage that is without
further processing the selling prices would have been `20, `22 and `10 each per kg respectively for A, B and
C.
Required:
(i) Prepare a statement showing the apportionment of joints cost to joint products.
(ii) Present a statement showing product-wise and total profit for the month under reference as per the
company’s current processing policy.
(iii) What processing decision should have been taken to improve the profitability of the company?
(iv) Calculate the product-wise and total profit arising from your recommendation in (iii) above.
[(12 Marks) May 2002]

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 JOINT PRODUCTS & BY PRODUCTS 9.5
Answer
(i) Statement showing the apportionment of Joint Cost to Joint Products
Joints Products
Particulars
‘A’ ‘B’ ‘C’
Sale value of output at split off point (44,000 × 20) (40,000 × 22) (20,000 × 10)
(production in kg × sales price) 8,80,000 8,80,000 2,00,000
Share of joint cost of `19,60,000 (in 88:88:20) 8,80,000 8,80,000 2,00,000
Calculation of joint cost (expenses incurred in department P):
Cost of raw materials = 12,68,800; Direct wages = 3,84,000
Factory overheads
Factory overheads = × Wages of Department P
Total wages
4,64,000
= × 3,84,000 = 3,07,200
3,84,000  96,000  64,000  36,000

Joint Cost = 12,68,800 + 3,84,000 + 3,07,200 = 19,60,000

(ii) Statement Showing Product-wise and Total Profit Under Existing Policy
Products
Particulars Total
‘A’ ‘B’ ‘C’
Sale value after further processing (44,000 × 32) (40,000 × 24) (20,000 × 16)
(output × sales price per unit) 14,08,000 9,60,000 3,20,000 26,88,000
Less: Joint cost 8,80,000 8,80,000 2,00,000 19,60,000
Less: Further processing cost 1,72,800 1,15,200 64,800 3,52,800
Profit 3,55,200 (35,200) 55,200 3,75,200
Calculation of further processing cost:
Department Q = Direct wages + Factory overheads
4,64,000
= 96,000 + × 96,000 = 1,72,800
5,80,000
Department R = Direct wages + Factory overheads
4,64,000
= 64,000 + × 64,000 = 1,15,200
5,80,000
Department S = Direct wages + Factory overheads
4,64,000
= 36,000 + × 36,000 = 64,800
5,80,000

(iii) Statement Showing Further Processing Decision

Products Incremental revenue Incremental cost Situation Decision
A 14,08,000 – 8,80,000 = 5,28,000 1,72,800 IR > IC Yes
B 9,60,000 – 8,80,000 = 80,000 1,15,200 IR < IC No
C 3,20,000 – 2,00,000 = 1,20,000 64,800 IR > IC Yes

(iv) Product-wise and Total Profit Arising Based on the Recommendation

Products
Particulars Total
‘A’ ‘B’ ‘C’
Sale value (44,000 × 32) (40,000 × 22) (20,000 × 16)
(output × sales price per unit) 14,08,000 8,80,000 3,20,000 26,08,000
Less: Joint cost 8,80,000 8,80,000 2,00,000 19,60,000
Less: Further processing cost 1,72,800 - 64,800 2,37,600
Profit 3,55,200 Nil 55,200 4,10,400

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 JOINT PRODUCTS & BY PRODUCTS 9.6
PYQ 5
ABC Ltd. operates a simple chemical process to convert a single material into three separate items, referred to
here as X, Y and Z. All three end products are separated simultaneously at a single split-off point.
Product X and Y are ready for sale immediately upon split-off without further processing or any other
additional costs. Product Z, however is processed further before being sold. There is no available market price
for Z at the split-off point. The selling prices quoted here are expected to remain the same in the coming year.

During 2002-03, the selling prices of the items and the total amounts sold were:
X 186 tons sold for `1,500 per ton
Y 527 tons sold for `1,125 per ton
Z 736 tons sold for `750 per ton
The total joint manufacturing costs for the year were `6,25,000. An additional `3,10,000 was spent to
finish product Z. There were no opening inventories of X, Y or Z.

At the end of the year, the following inventories of complete units were on hand:
X 180 tons
Y 60 tons
Z 25 tons
There was no opening or closing work-in-progress.

Required:
i. Compute the cost of inventories of X, Y and Z for Balance Sheet purposes and cost of goods sold for
Income Statement purpose as of March 31, 2003, using:
(a) Net realizable value (NRV) method of joint cost allocation.
(b) Constant gross-margin percentage method of joint cost allocation NRV.
ii. Compare the gross-margin percentages for X, Y and Z using two methods given in requirement (i).
[(10 Marks) May 2003]

Answer
i. (a) Statement Showing Cost of Inventories of X, Y, Z and COGS
(By Using NRV Method)
Products
Particulars
X Y Z
(A) Allocation of joint cost:
Final sale value of total production (366 × 1,500) (587 × 1,125) (761 × 750)
(output × sales price per unit) 5,49,000 6,60,375 5,70,750
Less: Further processing cost - - 3,10,000
Net realizable value (NRV) 5,49,000 6,60,375 2,60,750
Joint cost allocated 2,33,398 2,80,748 1,10,854
(B) Computation of total cost:
Joint cost 2,33,398 2,80,748 1,10,854
Further processing cost - - 3,10,000
Total cost 2,33,398 2,80,748 4,20,854
(C) Valuation of inventories 2,33,398 × 180 2,80,748 × 60 4,20,854 × 25
366 587 761
1,14,786 28,697 13,826
(D) Valuation of COGS 2,33,398 × 186 2,80,748 × 527 4,20,854 × 736
366 587 761
1,18,612 2,52,051 4,07,028

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 JOINT PRODUCTS & BY PRODUCTS 9.7
(b) Statement Showing Cost of Inventories of X, Y, Z and COGS
(By Using Constant Gross Margin Percentage Method)
Products
Particulars
X Y Z
(A) Allocation of joint cost:
Final sale value of total production 5,49,000 6,60,375 5,70,750
Less: Margin @ 47.4756% 2,60,641 3,13,517 2,70,967
Less: Further processing cost - - 3,10,000
Joint cost allocated 2,88,359 3,46,858 (10,217)
(B) Computation of total cost:
Joint cost 2,88,359 3,46,858 (10,217)
Further processing cost - - 3,10,000
Total cost 2,88,359 3,46,858 2,99,783
(C) Valuation of inventories 2,88,359 × 180 3,46,858 × 60 2,99,783 × 25
366 587 761
1,41,816 35,454 9,848
(D) Valuation of COGS 2,88,359 × 186 3,46,858 × 527 2,99,783 × 736
366 587 761
1,46,543 3,11,404 2,89,935

Calculation of constant gross margin:

Final sales value of production (5,49,000 + 6,60,375 + 5,70,0750) 17,80,125
Less: Further processing cost 3,10,000
Less: Joint cost 6,25,000
Gross margin 8,45,125
Gross margin percentage (8,45,125 / 17,80,125) × 100 47.4756%

ii. Statement Showing Gross Margin Percentage

Products
Particulars
X Y Z
(A) Under NRV method:
Sale value (186 × 1,500) (527 × 1,125) (736 × 750)
2,79,000 5,92,875 5,52,000
Less: COGS 1,18,612 2,52,051 4,07,028
Gross Margin 1,60,388 3,40,824 1,44,972
Gross Margin % 57.4867% 57.4867% 26.2630%
(B) Under Gross Const. Margin method:
Sale value 2,79,000 5,92,875 5,52,000
Less: COGS 1,46,543 3,11,404 2,89,935
Gross Margin 1,32,457 2,81,471 2,62,065
Gross Margin % 47.4756% 47.4756% 47.4756%

PYQ 6
A company produces two joint products X and Y, from the same basic materials. The processing is completed
in three departments. Materials are mixed in department I. At the end of this process, X and Y get separated.
After separation X is completed in the department II and Y is finished in department III.
During a period 2,00,000 kgs of raw material were processed in department I at a total cost of
`8,75,000, and the resultant 60% becomes X and 30% becomes Y and 10% normally lost in processing.
In department II, ⅙ of the quantity received from department I is lost in processing. X is further
processed in department II at a cost of `1,80,000.
In department III, further new material is added to the material received from department I and weight

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 JOINT PRODUCTS & BY PRODUCTS 9.8
mixture is doubled, there is no quantity loss in the department and further processing cost (with material cost)
is `1,50,000.
The details of sales during the year:
Product X Product Y
Quantity sold (kgs) 90,000 1,15,000
Sales price per kg (`) 10 4
There were no opening stocks. If these products are sold at split-off-point the selling price of X and Y
would be `8 and `4 per kg respectively.
Required
(i) Prepare a statement showing the apportionment of joint cost to X and Y in proportion of sales value at
split off point.
(ii) Prepare a statement showing the cost per kg of each product indicating joint cost, processing cost and
total cost separately.
(iii) Prepare a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product X and Y, give your comment that
products should be further processed or not.
[(2+3+2+2 = 9 Marks) May 2005]

Answer
Computation of Quantity Produced
Particulars Department I Department II Department III
Input (in kgs) 2,00,000 1,20,000 60,000
Weight (lost) or added (20,000) (20,000) 60,000
Total output 1,80,000 1,00,000 1,20,000
Note: Output of department I has been transferred to departments II and III in proportion of 6 : 3. Production
of X at separation point 1,20,000 kgs and of Y 60,000 kgs, while production of X after further processing
1,00,000 kgs and of Y 1,20,000 kgs.

(i) Statement of Apportionment of Joint Cost

(Using Sales Value at Split-off-point Method)
Particulars Product X Product Y
Sales value at split-off-point (1,20,000 × 8) (60,000 × 4)
9,60,000 2,40,000
Share of joint cost of `8,75,000 (in 4:1) 7,00,000 1,75,000

(ii) Statement of Cost Per Kg (for Final Output)

Particulars Product X Product Y
7,00,000 1,75,000
= 7.00 = 1.4583
Joint cost per kg 1,00,000 1,20,000
1,80,000 1,50,000
Further processing cost per kg = 1.80 = 1.250
1,00,000 1,20,000
8,80,000 3,25,000
Total cost per kg = 8.80 = 2.7083
1,00,000 1,20,000

(iii) Statement of Profit

Particulars Product X Product Y
Sales (units sold × sales price per unit) (90,000 × 10) (1,15,000 × 4)
9,00,000 4,60,000
Less: Total cost @ 8.80/ 2.7083 (90,000 × 8.80) (1,15,000 × 2.7083)
7,92,000 3,11,458
Profit 1,08,000 1,48,542

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 JOINT PRODUCTS & BY PRODUCTS 9.9
(iv) Profitability Statement
(When Products are Sold Before and After Further Processing)
Particulars Product X Product Y
(A) When total output sold at split-off-point:
Sales Value (units produced × sales price per unit) (1,20,000 × 8) (60,000 × 4)
9,60,000 2,40,000
Less: Joint cost 7,00,000 1,75,000
Profit 2,60,000 65,000
(B) When total output sold after further processing:
Sales Value (units produced × sales price per unit) (1,00,000 × 10) (1,20,000 × 4)
10,00,000 4,80,000
Less: Joint cost 7,00,000 1,75,000
Less: Further processing cost 1,80,000 1,50,000
Profit 1,20,000 1,55,000
Whether product should be further processed No Yes

PYQ 7
A Company produces two joint products P and Q in 70 : 30 ratio from basic raw materials in department A.
The input output ratio of department A is 100 : 85. Product P can be sold at the split of stage or can be
processed further at department B and sold as product AR. The input output ratio is 100 : 90 of department B.
The department B is created to process product P only and to make it product AR.
The selling prices per kg are as under:
Product P `85
Product Q `290
Product AR `115
The production will be taken up in the next month.
Raw materials 8,00,000 Kgs
Purchase price `80 per Kg
Department A Department B
(In Lakh) (In Lakh)
Direct materials 35.00 5.00
Direct labour 30.00 9.00
Variable overheads 45.00 18.00
Fixed overheads 40.00 32.00
Total 150.00 64.00
Selling Expenses:
Product P `24.60 lakh
Product Q `21.60 lakh
Product AR `16.80 lakh
Required
(i) Prepare a statement showing the apportionment of joint costs.
(ii) State whether it is advisable to produce product AR or not.
[(8 Marks) May 2007]

Answer
Input in Department A = 8,00,000 kgs
Yield = 85%
Therefore Output = 85% of 8,00,000 kgs = 6,80,000 kgs
Ratio of output for P and Q = 70 : 30

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 JOINT PRODUCTS & BY PRODUCTS 9.10
Product of P = 70% of 6,80,000 kgs = 4,76,000 kgs
Product of Q = 30% of 6,80,000 kgs = 2,04,000 kgs

* Calculation of joint cost:

Raw materials (8,00,000 kgs × `80) = 640 lakh
Process cost of department A = 150 lakh
Joint cost = 790 lakh

(i) Statement Showing Apportionment of Joint Cost

Product AR Product Q
Particulars
(` in Lakh) (` in Lakh)
Sales value at split-off-point (P and Q) (4,76,000 × 85) (2,04,000 × 290)
404.60 591.60
Less: Selling expenses if sold at split-off-point (24.60) (21.60)
Net sales at split-off-point 380.00 570.00
Share of joint cost of *`790 lakh (in 380 : 570) 316.00 474.00

(ii) Statement Showing Further Processing Decision

Incremental Revenue (` in Lakh) Incremental Cost (` in Lakh) Situation Decision
492.66 – 404.60 = 88.06 64 + 16.80 – 24.60 = 56.20 IR > IC Yes

Calculation of output of product AR:

Output = 90% of 4,76,000 kgs = 4,28,400 kgs

Sales = 4,28,400 kgs. × `115 = 492.66 Lakhs

PYQ 8
A company manufactures one main product (M1) and two by-products B1 and B2 for the month of January
2013, following details are available:

Total Cost upto Separation Point `2,12,400

Particulars M1 B1 B2
Cost after separation - `35,000 `24,000
No. of units produced 4,000 1,800 3,000
Selling price per units `100 `40 `30
Estimated net profit as percentage to sales value - 20% 30%
Estimated selling expenses as percentage to sales value 20% 15% 15%

There are no beginning or closing inventories.

Prepare statement showing:

I. Allocation of joint cost; and
II. Product-wise and overall profitability of the company for January 2013.
[(8 Marks) May 2013/May 2015]

Answer
I. Statement of Allocation of Joint Cost
Particulars B1 B2
Sales @ `40/`30 per unit 72,000 90,000
Less: Estimated profit @ 20%/30% 14,400 27,000
Less: Estimated selling expenses @ 15% on sales 10,800 13,500

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 JOINT PRODUCTS & BY PRODUCTS 9.11
Less: Further estimated cost (cost after separation) 35,000 24,000
Joint Cost 11,800 25,500
Total Joint Cost 2,12,400
Less: Joint cost allocable to B1 11,800
Less: Joint cost allocable to B2 25,500
Joint Cost allocable to M1 1,75,100

II. Product-wise & Overall Profitability Statement

Particulars M1 B1 B2 Total
Sales 4,00,000 72,000 90,000 5,62,000
Less: Selling expenses @ 20%/15%/15% 80,000 10,800 13,500 1,04,300
Less: Cost after separation Nil 35,000 24,000 59,000
Less: Joint cost 1,75,100 11,800 25,500 2,12,400
Profit 1,44,900 14,400 27,000 1,86,300

PYQ 9
SV Chemicals Limited processes 9,00,000 kgs of raw material in a month purchased at `95 per kg in
department X. The input output ratio of department X is 100 : 90. Processing of material result in two joint
products being produced ‘P1’ and ‘P2’ in the ratio of 60 : 40. Product ‘P1’ can be sold at the split of stage or can
be processed further at department Y and sold as a new product ‘YP1’. The input output ratio of department Y
is 100 : 95. Department Y is utilized only for further processing of product ‘P1’ to product ‘YP1’.
Individual departmental expenses are as follows:
Department X Department Y
(In Lakh) (In Lakh)
Direct materials `95.00 `14.00
Direct labour `80.00 `27.00
Variable overheads `100.00 `35.00
Fixed overheads `75.00 `52.00
Total `350.00 `128.00

Further, selling expenses to be incurred on three products are:

Product ‘P1’ `28.38 lakh
Product ‘P2’ `25.00 lakh
Product ‘YP1’ `19.00 lakh

The selling prices per kg are as under:

Product ‘P1’ `110
Product ‘P2’ `325
Product ‘YP1’ `150

You are required to:

(1) Prepare a statement showing the apportionment of joint costs in the ratio of value of sales, net of selling
expenses.
(2) Statement showing profitability at split off point.
(3) Statement of profitability of ‘YP1’
(4) Would you recommend further processing of ‘P1’?
[(8 Marks) June 2015]

Answer
Input in Department X = 9,00,000 kgs
Yield = 90%

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 JOINT PRODUCTS & BY PRODUCTS 9.12
Therefore Output = 90% of 9,00,000 kgs = 8,10,000 kgs
Ratio of output for ‘P1’ and ‘P2’ = 60 : 40
Product of ‘P1’ = 60% of 8,10,000 kgs = 4,86,000 kgs
Product of ‘P2’ = 40% of 8,10,000 kgs = 3,24,000 kgs

(1) Statement Showing Apportionment of Joint Cost

Product ‘P1’ Product ‘P2’
Particulars
(` in Lakh) (` in Lakh)
Sales value at split-off-point (4,86,000 × 110) (3,24,000 × 325)
534.60 1,053.00
Less: Selling expenses if sold at split-off-point (28.38) (25.00)
Net sales at split-off-point 506.22 1,028.00
Share of joint cost of *`1,205 lakh (in 506.22 : 1,028) 397.59 807.41

* Calculation of joint cost:

Raw materials (9,00,000 kgs × `95) = 855 lakh
Process cost of department X = 350 lakh
Joint cost = 1,205 lakh

(2) Statement of Profitability at Split Off Point

Product ‘P1’ Product ‘P2’
Particulars
(` in Lakh) (` in Lakh)
Sales value at split-off-point (4,86,000 × 110) (3,24,000 × 325)
534.60 1,053.00
Less: Selling expenses if sold at split-off-point (28.38) (25.00)
Less: Joint Cost (397.59) (807.41)
Profit 108.63 220.59

(3) Statement of Profitability of ‘YP1’

Product ‘YP1’
Particulars
(` in Lakh)
Sales value (4,61,700 × 150) 692.55
Less: Further processing cost in department Y (128.00)
Less: Selling expenses if sold after further processing (19.00)
Less: Joint Cost (397.59)
Profit 147.96
Calculation of output of product ‘YP1’:
Output = 95% of 4,86,000 kgs = 4,61,700 kgs

(4) Further Processing Decision: Product ‘P1’ should be sold after further processing as product ‘YP1’
having higher profit.

PYQ 10
A factory producing article A also produces a by-product B which is further processed into finished product.

The joint costs of manufacture are given below:

Material `5,000
Labour `3,000
Overheads `2,000
`10,000

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 JOINT PRODUCTS & BY PRODUCTS 9.13
Subsequent costs are given below:
A B
Material `3,000 `1,500
Labour `1,400 `1,000
Overheads `600 `500
`5,000 `3,000

Selling Price:
Product A `16,000
Product B `8,000

Estimated profits on selling prices:

Product A 25%
Product B 20%

Assume that selling and distributing expenses are in proportion of sales prices. Show how you
would apportion joint costs of manufacture and prepare a statement showing cost of production of A and
B.
[(8 Marks) May 2016]

Answer
Statement Showing Apportionment of Joint Cost
Particulars Article A By-product B
Sales value 16,000 8,000
Less: Profit @ 25% of 16,000 & 20% of 8,000 4,000 1,600
Less: Selling expenses (400 in 16 : 8) 267 133
Less: Subsequent cost 5,000 3,000
Joint cost 6,733 3,267

* Calculation of selling expenses:

Selling expenses = Total sales – Total profit – Total subsequent cost – Total joint cost
= (16,000 + 8,000) – (4,000 + 1,600) – (5,000 + 3,000) – 10,000
= 400

Statement Showing Cost of Production

Particulars Article A By-product B
Joint cost 6,733 3,267
Subsequent cost 5,000 3,000
Cost of Production 11,733 6,267

PYQ 11
A Ltd produces ‘M’ as a main product and gets two by products ‘P’ and ‘Q’ in the course of processing. Following
information are available for the month of October 2017:

Particulars M P Q
Cost after separation - `60,000 `30,000
No. of units produced 4,500 2,500 1,500
Selling price per units `170 `80 `50
Estimated net profit as percentage to sales value - 30% 25%

The joint cost upto separation point amounts to `2,50,000. Selling expenses amounting to 85,000 are to be
apportioned to the three products in the ratio of sales units. There are no beginning or closing inventories.

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 JOINT PRODUCTS & BY PRODUCTS 9.14
Prepare statement showing:
(i) Allocation of joint cost;
(ii) Product-wise and overall profitability and
(iii) Advise the company regarding results if the by product ‘P’ is not further processed and is sold at the
point of separation at `60 per unit without incurring selling expenses.
[(8 Marks) Nov 2017]

Answer
(i) Statement of Allocation of Joint Cost
Particulars P Q
Sales @ `80/`50 per unit 2,00,000 75,000
Less: Estimated profit @ 30%/25% 60,000 18,750
Less: Estimated selling 85,000 in (4,500 : 2,500 : 1,500) 25,000 15,000
Less: Further estimated cost (cost after separation) 60,000 30,000
Joint Cost 55,000 11,250
Total Joint Cost 2,50,000
Less: Joint cost allocable to P 55,000
Less: Joint cost allocable to Q 11,250
Joint Cost allocable to M 1,83,750

(ii) Product-wise & Overall Profitability Statement

Particulars M P Q Total
Sales 7,65,000 2,00,000 75,000 10,40,000
Less: Selling expenses 45,000 25,000 15,000 85,000
Less: Cost after separation Nil 60,000 30,000 90,000
Less: Joint cost 1,83,750 55,000 11,250 2,50,000
Profit 5,36,250 60,000 18,750 6,15,000

(iii) Further processing decision in respect of by product ‘P’:

Reduction in revenue = 2,500 units (`80 - `60) = `50,000
Reduction in cost = Further processing cost + Selling expenses
= 60,000 + 25,000 = `85,000

Decision: Since, reduction in cost is higher than reduction in revenue therefore, By product ‘P’ should be sold
at split of stage (by following such decision company can increase its income by `35,000).

PYQ 12
A Factory is engaged in the production of a chemical BOMEX and in the course of its manufacture, a by- product
CROMEX is produced which after further processing has commercial value. For the month of April 2019, the
following are the summarised cost data.
Joint Expenses Separate Expenses
BOMEX CROMEX
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling price per unit 100 40
Estimated profit per unit on sale of CROMEX 5
No. of units produced 2,000 2,000

The factory uses net realizable value method for apportionment of joint cost to by-products.

You are required to prepare statements showing:

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 JOINT PRODUCTS & BY PRODUCTS 9.15
(1) Joint cost allocable to CROMEX.
(2) Product wise and overall profitability of the factory for April 2019.
[(5 Marks) May 2019]

Answer
(1) Statement of Allocation of Joint Cost to CROMEX
Particulars Amount (`) Amount (`)
Number of units produced 2,000 2,000
Sale price per unit `100 `40
Sales value 2,00,000 80,000
Less: Separate cost 36,000 28,000
Net realizable value 1,64,000 52,000
Joint Cost `1,80,000 in 1,64,000 : 52,000 1,36,667 43,333

(2) Product-wise & Overall Profitability Statement

Particulars BOMEX CROMEX Total
Sales value 2,00,000 80,000 2,80,000
Less: Separate cost 36,000 28,000 64,000
Less: Joint cost 1,36,667 43,333 1,80,000
Profit 27,333 8,667 36,000

PYQ 13
A factory produces two, ‘A’ and ‘B’ from a single process. The joint processing costs during a particular month
are:
Direct material `30,000
Direct labour `9,600
Variable overheads `12,000
Fixed overheads `32,000

Sales: A – 100 units @ `600 per unit; B – 120units @ `200 per unit.

Apportion joints costs on the basis of:

(1) Physical quantity of each product.
(2) Contribution margin method, and
(3) Determine profit or loss under both the methods.
[(5 Marks) Nov 2019]

Answer
(1) Statement Showing Apportionment of Joint Cost
(Based on Physical Quantity Method)
Particulars Product A Product B
Number of units 100 120
Apportionment of Joint Cost `83,600 in 100 : 120 `38,000 `45,600

(2) Statement Showing Apportionment of Joint Cost

(Based on Contribution Margin Method)
Particulars Product A Product B
Number of units 100 120
(A) Variable Joint Cost `51,600 in 100 : 120 `23,455 `28,145
Sales `60,000 `24,000
Less: Variable joint cost `23,455 `28,145
Contribution `36,545 (`4,145)

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 JOINT PRODUCTS & BY PRODUCTS 9.16
(B) Fixed Joint Cost `32,000 to Product A only `32,000 -
(C) Total Joint Cost (A) + (B) `55,455 `28,145

(3) Statement Showing Profit under Both Methods

Particulars Product A Product B
(1) Profit under physical quantity method:
Sales 60,000 24,000
Less: Joint cost 38,000 45,600
Profit/ (loss) `22,000 (`21,600)

(2) Profit under contribution margin method:

Sales 60,000 24,000
Less: Joint cost 55,455 28,145
Profit/ (loss) `4,545 (`4,145)

Working note:
Variable joint cost = Direct material + Direct wages + Variable overheads
= `30,000 + `9,600 + `12,000 = `51,600

Total joint cost = Variable joint cost + Fixed overheads

= `51,600 + `32,000 = `83,600

Note: Fixed cost is apportioned to product A only because product B has negative contribution.

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 JOINT PRODUCTS & BY PRODUCTS 9.17

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y
5 Y Y Y Y
6 Y Y Y Y
7 Y Y Y -
8 Y Y Y Y
9 Y Y Y Y
10 Y Y Y Y
11 Y Y Y Y
12 Y Y Y Y
13 Y Y Y Y

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 CHAPTER - 10

BUDGET AND BUDGETARY

CONTROL
LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the objectives and importance of budgeting and
budgetary control.
 Understand the advantages and disadvantages of budgetary
control.
 Difference between various types of budgets.
 Understand the process of preparation of budgets.
 Prepare fixed and flexible budget.
 BUDGET AND BUDGETARY CONTROL 10.1

PAST YEAR QUESTIONS

PYQ 1
Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd:
Month : January February 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 kg @ `10 per kg
Material Y : 6 kg @ `15 per kg
Material on hand on January 1,2009 was 19,000 kg of material X and 29,000 kg 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 : ¾ hour for one of finished product
Budgeted direct labour cost : `10,89,000 for the first quarter of 2009
Actual data for the quarter one ended on March 31, 2009 is as under:
Actual production quantity : 40,000 units
Direct material cost
Material X : 1,65,000 kg @ `10.20 per kg
Material Y : 2,38,000 kg @ `15.10 per kg
(Purchase cost based on materials actually issued to production)
Actual direct labour hours worked : 32,000 hours
Actual direct labour cost : `13,12,000
Required:
1. Prepare the following budgets:
a. Monthly production quantity budget for the quarter one.
b. Monthly raw material consumption quantity budget from January, 2009 to April, 2009.
c. Materials purchase quantity budget for the quarter one.
2. Compute the following variances:
a. Material cost variance
b. Material price variance
c. Material usage variance
d. Direct labour cost variance
e. Direct labour rate variance
f. Direct labour efficiency variance
[(6 + 9 = 15 Marks) May 2009]

Answer
1. Various Budgets:
a. Production Budget for Quarter One (in Quantity)
Particulars (in units) January February March April
Budgeted Sales (in units) 10,000 12,000 14,000 15,000
Add: Expected Closing Stock 2,400 2,800 3,000 3,000
(20% of sales of next month)
Less: Opening Stock (2,700) (2,400) (2,800) (3,000)
Budgeted Production 9,700 12,400 14,200 15,000

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 BUDGET AND BUDGETARY CONTROL 10.2
Total Budgeted Production for the Quarter 1 = (9,700 + 12,400 + 14,200) = 6,300 units

b. Raw Material consumption quantity budget from January to April 2009

Budgeted Production Material X @ 4 kg per Material Y @ 6 kg per
Month
(Units) unit (Kg) unit (Kg)
January 9,700 38,800 58,200
February 12,400 49,600 74,400
March 14,200 56,800 85,200
April 15,000 60,000 90,000
Total 51,300 2,05,200 3,07,800

c. Raw Material Purchase Quantity Budget for the Quarter One

Particulars (in Unit) X Y
Raw Material Consumption for Quarter One 1,45,200 2,17,800
(9,700 + 12,400 + 14,200) × 4 kg/6kg
Add: Closing Stock 30,000 45,000
(50% of Next Month Requirement) (50% of 15,000 × 4kg) (50% of 15,000 × 6 kg)
Less : Opening Stock of Raw Material (19,000) (29,000)
Materials to be Purchased 1,56,200 2,33,800

2. Calculation of various variances:

a. Material cost variance = (SQ × SP) – (AQ × AP) = 52,00,000 – 52,76,800
= 76,800 A
b. Material price variance = (AQ × SP) – (AQ × AP) = 52,20,000 – 52,76,800
= 56,800 A
c. Material usage variance = (SQ × SP) – (AQ × SP) = 52,00,000 – 52,20,000
= 20,000 A
d. Labour cost variance = (SH × *SR) – (AH × AR)
= (40,000 units × ¾ hour × `40) – 13,12,000
= 12,00,000 – 13,12,000 = 1,12,000 A
e. Labour rate variance = (AH × SR) – (AH × AR)
= (32,000 hours × `40) – 13,12,000
= 12,80,000 – 13,12000 = 32,000 A
f. Labour efficiency variance = (SH × SR) - (AH × SR)
= (40,000 units × ¾ hour × `40) – 12,80,000 = 80,000 A
Working:
(a) Material Analysis Table
Materials SQ × SP RQ × SP AQ used × SP AQ used × AP
X 40,000 units × 4 kg × `10 1,61,200 × `10 1,65,000 × `10 1,65,000 × `10.20
Y 40,000 units × 6 kg × `15 2,41,800 × `15 2,38,000 × `15 2,38,000 × `15.10
Total 52,00,000 52,39,000 52,20,000 52,76,800
Revised Quantity = Total actual quantity used in standard mix ratio
Total Actual quantity used = 1,65,000 + 2,38,000 = 4,03,000 kg
Standard mix ratio = 4:6
Revised Quantity of X = (4 ÷ 10) × 4,03,000 = 1,61,200 kg
Revised Quantity of Y = (6 ÷ 10) × 4,03,000 = 2,41,800 kg

(b) Budgeted hours for quarter one = Budget Production × Budgeted Time per unit
= 36,300 units × ¾ hours per unit = 27,225 hours

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 BUDGET AND BUDGETARY CONTROL 10.3
*SH/ Standard Hours = Budgeted labour cost ÷ Budgeted labour hours
= 10,89,000 ÷ 27,225 = `40

PYQ 2
AK Limited produces and sells a single product. Sales budget for calendar year 2012 by quarters is as under:

Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000

The year is expected to open with an inventory of 6,000 units of finished products and close with
inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter’s sales
demand plus 30% of the following quarter demand. The budgeted selling price per unit is `40.

The standard cost details for one unit of the product are as follows:
Variable Cost : `34.50 per unit.
Fixed Overheads : 2 hours 30 minutes @ `2 per hour

Fixed overheads are based on a budgeted production volume of 1,10,000 direct labour hours for the year, fixed
overheads are evenly distributed through-out the year.

You are required to:

(i) Prepare Quarterly Production Budget for the year.
(ii) In which quarter of the year, company expected to achieve break-even point.
[(5 Marks) May 2012]

Answer
(i) Production Budget (Quarterly)
Particular IQ II Q III Q IV Q
70% of current quarter 12,600 15,400 17,500 18,900
30% of following quarter 6,600 7,500 8,100 7,400 (b.f.)
Production (in units) 19,200 22,900 25,600 *26,300

*Production in Quarter IV = Total production – Production upto III quarter

= 94,000 – 67,700 = 26,300 units

Total production = Units to be sold + Closing inventory – Opening inventory

= (18,000 + 22,000 + 25,000 + 27,000) + 8,000 – 6,000
= 94,000 units

Production upto Quarter III = 19,200 + 22,900 + 25,600 = 67,700 units

Fixed cost 2,20,000

(ii) B.E.P. (in units) = = = 40,000 units
Conttribution P.U. 5.50

Calculation of fixed cost = 1,10,000 labour hours × `2 per hour = 2,20,000

Contribution per unit = Sale price per unit – Variable cost per unit
= 40 – 34.50 = `5.50 p.u.
In second quarter company is expected to achieve break - even point i.e. 40,000 units (18,000 + 22,000).

PYQ 3
Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year 2013 as detailed
below:

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 BUDGET AND BUDGETARY CONTROL 10.4
` per unit
Direct Material 50
Direct Labour 20
Variable Overhead 15
Direct Expenses 6
Selling Expenses (20% Fixed) 15
Factory Expenses (100% Fixed) 7
Administration Expenses (100% Fixed) 4
Distribution Expenses (85% Variable) 12
Total 129

Prepare an expense budget for the production of 15,000 units and 18,000 units.
[(8 Marks) May 13]

Answer
Expenses Budget
Particulars 20,000 unit 15,000 unit 18,000 unit
(A) Variable Cost:
Direct Materials @ `50 per unit 10,00,000 7,50,000 9,00,000
Direct Labour @ `20 per unit 4,00,000 3,00,000 3,60,000
Variable Overhead @ `15 per unit 3,00,000 2,25,000 2,70,000
Direct Expenses @ `6 per unit 1,20,000 90,000 1,08,000
Total (A) 18,20,000 13,65,000 16,38,000
(B) Fixed Cost:
Factory Expenses (`7 × 20,000 units) 1,40,000 1,40,000 1,40,000
Administration Expenses (`4 × 20,000 units) 80,000 80,000 80,000
Total (B) 2,20,000 2,20,000 2,20,000
(C) Semi Variable Cost:
Selling Expenses:
Variable @ `12 per unit 2,40,000 1,80,000 2,16,000
Fixed (`3 × 20,000) 60,000 60,000 60,000
Distribution Expenses:
Variable @ `10.20 per unit (85% of `12) 2,04,000 1,53,000 1,83,600
Fixed (`1.80 × 20,000 units) 36,000 36,000 36,000
Total (C) 5,40,000 4,29,000 4,95,600
Total Expenses (A + B + C) 25,80,000 20,14,000 23,53,600

PYQ 4
RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold at a
price of `200 per unit. The cost structure at 50% level of activity is as under:

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 Expenses (80% Variable) `10 per unit
Office and Administrative Expenses (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 profit at respective levels.
[(8 Marks) Nov 2014]

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 BUDGET AND BUDGETARY CONTROL 10.5
Answer
Expenses Budget of RST Ltd
Per Unit 30,000 36,000
Particulars
(`) units (`) units (`)
(A) Sales 200.00 60,00,000 72,00,000
(B) Variable Cost:
Direct Material (`75 + 10%) 82.50 24,75,000 29,70,000
Direct Wages (`25 + 10%) 27.50 8,25,000 9,90,000
Variable Overhead (`25 + 10%) 27.50 8,25,000 9,90,000
Direct Expenses (`15 + 10%) 16.50 4,95,000 5,94,000
Variable Factory Expenses (`20 × 75% + 10%) 16.50 4,95,000 5,94,000
Variable Selling and Distribution Expenses 8.80 2,64,000 3,16,800
(`10 × 80% + 10%)
Total (B) 179.30 53,79,000 64,54,800
(C) Contribution (A - B) 20.70 6,21,000 7,45,200
(D) Fixed Cost:
Office and Administration Expenses - 1,72,500 1,72,500
(`5 × 100% × 30,000 units + 15%)
Factory Expenses - 1,72,500 1,72,500
(`20 × 25% × 30,000 units + 15%)
Selling and Distribution Expenses - 69,000 69,000
(`10 × 20% × 30,000 units + 15%)
Total (D) - 4,14,000 4,14,000
Net Profit (C - D) - 2,07,000 3,31,200

PYQ 5
XYZ company is drawing a production plan for its two products XML and YML for the year 2015-16. The
company’s policy is to maintain a closing stock of finished goods at 25% of the anticipated volume of the sales
of the succeeding month.
The following are the estimated data for two products:
XML YML
Budgeted production in units 2,00,000 1,50,000
Direct material per unit `220.00 `280.00
Direct labour per unit `130.00 `120.00
Other manufacturing expenses `4,00,000 `5,00,000
The estimated units to be sold in the first 4 months of the year 2015-16 are as under:
April May June July
XML 8,000 10,000 12,000 16,000
YML 6,000 8,000 9,000 14,000
Prepare:
(i) Production Budget (Month wise)
(ii) Production Cost Budget (for first quarter of the year)
[(5 Marks) May 2015]

Answer
(i) Production Budget
Product XML
Particulars April May June
Budgeted Sales (in units) 8,000 10,000 12,000
Add: Expected Closing Stock (25% of sales of next month) 2,500 3,000 4,000
Less: Opening Stock (2,000) (2,500) (3,000)
Total Production 8,500 10,500 13,000

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 BUDGET AND BUDGETARY CONTROL 10.6
Product YML
Particulars April May June
Budgeted Sales (in units) 6,000 8,000 9,000
Add: Expected Closing Stock (25% of sales of next month) 2,000 2,250 3,500
Less: Opening Stock (1,500) (2,000) (2,250)
Total Production 6,500 8,250 10,250

(ii) Production Cost Budget

Particulars XML YML
No of units expected to be produced during first quarter 32,000 25,000
Direct material @ `220/ `280 per unit 70,40,000 70,00,000
Direct labour @ `130/ `120 per unit 41,60,000 30,00,000
Other manufacturing expenses @ `2 / `3.33 per unit 64,000 83,333
Total Production Cost 1,12,64,000 1,00,83,333

Note: Other manufacturing expenses are apportioned on the basis of no of units, one student may apportion
these expenses on the basis of period i.e. `1,00,000 for quarter first in case of XML.

PYQ 6
XY Co. Ltd manufactures two products viz. X and Y and sells them through two divisions, East and West. For
the purpose of Sales budget to the Budget Committee, following information has been made available for the
year 2014 – 2015:
Budgeted Sales Actual Sales
Product
East Division West Division East Division West Division
X 400 units at `9 600 units at `9 500 units at `9 700 units at `9
Y 300 units at `21 500 units at `21 200 units at `21 400 units at `21

Adequate market studies reveal that product X is popular but under priced. It is expected that if the
price of X is increased by `1, it will find a ready market. On the other hand, Y is overpriced and if the price of Y
is reduced by `1, it will have more demand in the market. The company management has agreed for the
aforesaid price changes. On the basis of these price changes and the reports of salesmen, following estimates
have been prepared by the Divisional Managers:

Percentage increase in sales over budgeted sales:

Product East Division West Division

X + 10% + 5%
Y + 20% + 10%

With the help of the intensive advertisement campaign, following additional sales (over and above the above
mentioned estimated sales by Divisional Managers) are possible:

Product East Division West Division

X 60 units 70 units
Y 40 units 50 units

You are required to prepare Sales Budget 2015 – 2016 after incorporating above estimates and
also show the Budgeted Sales and Actual Sales of 2014 – 2015.
[(8 Marks) Nov 2015]

Answer
Working notes:
Calculation of budgeted sales of product X for 15 -16 in units

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 BUDGET AND BUDGETARY CONTROL 10.7
East division = (400 units + 10%) + 60 units = 500 units
West division = (600 units + 5%) + 70 units = 700 units

Calculation of budgeted sales of product Y for 15 -16 in units

East division = (300 units + 20%) + 40 units = 400 units

West division = (500 units + 10%) + 50 units = 600 units

Sales Budget
Product X
Budgeted Sales 15 -16 Budgeted Sales 14 -15 Actual Sales 14 – 15
Particulars
East West East West East West
No of units to be sold 500 units 700 units 400 units 600 units 500 units 700 units
Sale price per unit `10 `10 `9 `9 `9 `9
Sales in (`) `5,000 `7,000 `3,600 `5,400 `4,500 `6,300
Product Y
Budgeted Sales 15 -16 Budgeted Sales 14 -15 Actual Sales 14 – 15
Particulars
East West East West East West
No of units to be sold 400 units 600 units 300 units 500 units 200 units 400 units
Sale price per unit `20 `20 `21 `21 `21 `21
Sales in (`) `8,000 `12,000 `6,300 `10,500 `4,200 `8,400

PYQ 7
You are given the following data of a manufacturing concern:
Particulars Amount
Variable expenses (at 50% capacity)
Materials 48,00,000
Labour 51,20,000
Others 7,60,000

Semi variable expenses (at 50% capacity)

Maintenance and repairs 5,00,000
Indirect labour 19,80,000
Sales department salaries 5,80,000
Sundry administrative expenses 5,20,000

Fixed expenses
Wages and salaries 16,80,000
Rent, rates and taxes 11,20,000
Depreciation 14,00,000
Sundry administrative expenses 17,80,000

The fixed expenses remain constant for all levels of production. Semi variable expenses remain
constant between 45% and 65% of capacity whereas it increases by 10% between 65% and 80% capacity of
20% between 80% and 100 % capacity.

Sales at various levels are as under:

At 75% capacity `2,40,00,000

At 100% capacity `3,20,00,000

You are required to prepare flexible budget at 75% and 100% capacity.
[(8 Marks) May 2017]

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 BUDGET AND BUDGETARY CONTROL 10.8
Answer
Flexible Budget
Capacity Levels
Particulars
50% (`) 75% (`) 100% (`)
(A) Sales - 2,40,00,000 3,20,00,000

(B) Variable Expenses:

Material 48,00,000 72,00,000 96,00,000
Labour 51,20,000 76,80,000 1,02,40,000
Others 7,60,000 11,40,000 15,20,000
Total (B) 1,06,80,000 1,60,20,000 2,13,60,000

(C) Semi Variable Expenses

Maintenance and repairs 5,00,000 5,50,000 6,00,000
Indirect labour 19,80,000 21,78,000 23,76,000
Sales department salaries 5,80,000 6,38,000 6,96,000
Sundry administrative expenses 5,20,000 5,72,000 6,24,000
Total (C) 35,80,000 39,38,000 42,96,000

(D) Fixed Cost:

Wages and salaries 16,80,000 16,80,000 16,80,000
Rent, rates and taxes 11,20,000 11,20,000 11,20,000
Depreciation 14,00,000 14,00,000 14,00,000
Sundry administrative expenses 17,80,000 17,80,000 17,80,000
Total (D) 59,80,000 59,80,000 59,80,000
Total Cost (B + C + D) 2,02,40,000 2,59,38,000 3,16,36,000
Net Profit (A - D) - (19,38,000) 3,64,000

PYQ 8
AB manufacturing company manufactures two products A and B. both products use a common raw materials
“C”. The raw material “C” is purchased at the rate of `45 per kg. from the market. The company has made
estimates for the year ended 31st March, 2018 (the budgeted period) as under:
Product A Product B
Sales in units 36,000 16,700
Finished goods stock increased by year end in units 860 400
Post-production rejection rate (%) 3 5
Material “C” per computed unit, net of wastage 4 kg 5 kg
Material “C” wastage in % 5 4

Additional information available is as under:

 Usage of raw material “C” is expected to be at constant rate over the period.
 Annual cost of holding one unit of raw material “C” in stock is 9% of the material cost.
 The cost of placing an order is 250 per order.

You are required to:

(a) Prepare functional budgets for the year ended 31st March, 2018 under the following categories:
i. Production budget for product A and B in units.
ii. Purchase budget for raw material “C” in kg and value.

(b) Calculate economic order quantity (EOQ) in kg for raw material “C”.
[(8 Marks) Nov 2018]

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 BUDGET AND BUDGETARY CONTROL 10.9
Answer
(a) (i) Production Budget for Quarter One (in Quantity)
Particulars (in units) Product A Product B
Sales (in units) 36,000 16,700
Add: Increase in Closing Stock 860 400
Budgeted Production after rejection 36,860 17,100
Add: Post rejection @ 3%/5% 1,140 900
[(36,860÷97%) × 3%] [(36,860÷95%) × 5%]
Budgeted Production before rejection 38,000 18,000

(a) (ii) Raw Material Purchase “C”

Particulars Product A Product B
Budgeted Production in units 38,000 18,000
Raw Material Consumption for one unit 4 kg 5 kg
Materials to be Purchased net of wastage 1,52,000 90,000
Add: Post rejection @ 5%/4% 8,000 3,750
[(1,52,000÷95%) × 5%] [(90,000÷96%) × 4%]
Materials to be Purchased 1,60,000 93,750
Materials to be Purchased in kg (1,60,000 + 93,750) 2,53,750
Materials to be Purchased in value @ `45 of 2,53,750 `1,14,18,750

2AO 2 × 2,53,750 × 250

(b) Economic order quantity = = = 5,597.07 kgs
C 45 × 9%

PYQ 9
An electronic gadget manufacture was prepared sales budget for the next few months. In this respect, following
figures are available:
Month : January February March April May
Sales (units) : 5,000 6,000 7,000 7,500 8,000
To manufacture an electronic gadget, a standard cost of `1,500 is incurred and it is sold through dealers at an
uniform price `2,000 per gadget to customers. Dealers are given a discount of 15% on selling.
Apart from other materials, two units of batteries are required to manufacture a gadget. The company
wants to hold stock of batteries at the end of each month to cover 30% of next month’s production and to hold
stock of manufactured gadget to cover 25% of the next month’s sale.
3,250 units of batteries and 1,200 units of manufactured gadgets were in stock on 1st January.
Required:
(1) Prepare production budget (in units) for the month of January, February, March and April.
(2) Prepare purchase budget for batteries (in units) for the month of January, February and March and
calculate profit for the quarter ending on March.
[(10 Marks) Nov 2018]

Answer
(1) Production Budget in Units
Particulars January February March April
Budgeted Sales (in units) 5,000 6,000 7,000 7,500
Add: Desired Closing Stock 1,500 1,750 1,875 2,000
(25% of sales of next month)
Less: Opening Stock (1,200) (1,500) (1,750) (1,875)
Budgeted Production (in Gadget) 5,300 6,250 7,125 7,625

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 BUDGET AND BUDGETARY CONTROL 10.10
(2) Raw Material Purchase Budget in Batteries
Particulars January February March April
Consumption of batteries @ unit per gadget 10,600 12,500 14,250 15,250
(5,300 × 2) (6,250 × 2) (7,125 × 2) (7,625 × 2)
Add: Desired Closing Stock 3,750 4,275 4,575 -
(30% of sales of next month)
Less: Opening Stock (3,250) (3,750) (4,275) -
Budgeted Purchase (in Batteries) 11,100 13,025 14,550 -

Statement Showing Profit

Particulars January February March Total
Number of units sold 5,000 6,000 7,000 18,000
Sales @ `2,000 per Gadget 1,00,00,000 1,20,00,000 1,40,00,000 3,60,00,000
Less: Discount @ 15% of sales (15,00,000) (18,00,000) (21,00,000) (54,00,000)
Less: Standard cost @ `1,500 per Gadget (75,00,000) (90,00,000) (1,05,00,000) (2,70,00,000)
Profit 10,00,000 12,00,000 14,00,000 36,00,000

PYQ 10
PJ Ltd manufactures hockey sticks. It sells the products at `500 each and makes a profit of `125 on each stick.
The company is producing 5,000 sticks annually by using 50% of its machinery capacity.

The cost of each stick is as under:

Direct Material `150

Direct Wages `50
Works Overheads `125 (50% fixed)
Selling Expenses `50 (25% variable)

The anticipation for the next year is that cost will go up as under:

Fixed Charges 10%

Direct Wages 20%
Direct Material 5%

There will not be any change in selling price. There is an additional order for 2,000 sticks in the next year.

Calculate the lowest price that can be quoted so that the company can earn the same profit as it
earned in the current year?
[(10 Marks) Nov 2019]

Answer
Statement Showing Lowest Sale Price
Particulars Amount (`)
Direct Material (7,000 units × `150 × 105%) 11,02,500
Direct Wages (7,000 units × `50 × 120%) 4,20,000
Works Overheads:
Variable (7,000 units × `125 × 50%) 4,37,500
Fixed (5,000 units × `125 × 50% × 110%) 3,43,750
Selling Expenses:
Variable (7,000 units × `50 × 25%) 87,500
Fixed (5,000 units × `50 × 75% × 110%) 2,06,250
Total Cost 25,97,500
Add: Profit (5,000 units × `125) 6,25,000

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 BUDGET AND BUDGETARY CONTROL 10.11
Total Sales Value 32,22,500
Less: Sale Value of 5,000 units (5,000 units × `500) (25,00,000)
Sales Value of 2,000 units of additional offer 7,22,500
÷ Number of units ÷2,000
Lowest Sale Price `361.25

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 BUDGET AND BUDGETARY CONTROL 10.12

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y
5 Y Y Y Y
6 Y Y Y Y
7 Y Y Y -
8 Y Y Y -
9 Y Y Y Y
10 Y Y Y Y

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 CHAPTER - 11

STANDARD COSTING
LEARNING OBJECTIVE

After studying this chapter you should be able to:

 Understand the meaning of standard cost and variances.
 Understand the concept of capacity with reference to product cost
sheet.
 Understand the difference between controllable and
uncontrollable variances.
 Compute variances related to material, labour, overhead and sales.
 Understand the reporting pattern which may be adopted for
control and decision making purpose.
 Understand the meaning of disposition of variances.
 Understand the advantages and disadvantages of standard costing
and variance analysis.
 STANDARD COSTING 11.1

PAST YEAR QUESTIONS

PYQ 1
KPR Limited operates a system of standard costing in respect of one of its product which is manufactured
within single cost centre.
The Standard Cost Card of a product is as under:
Unit cost (`)
Direct Material 5 kg @ `4.20 21.00
Direct labour 3 hours @ `3.00 9.00
Factory overhead `1.20 per labour hour 3.60
Total manufacturing cost 33.60
The production schedule for the month of June, 2007 required completion of 40,000 units. However
40,960 units were completed during the month without opening and closing work-in-process inventories.
Purchases during the month of June 2007, 2,25,000 kg of material at the rate of `4.50 per kg.
Production and Sales records for the month showed the following actual results.
Material used 2,05,600 kg
Direct labour 1,21,200 hours
Labour cost incurred `3,87,840
Total factory overhead cost incurred `1,00,000
Sales 40,000 units
Selling price to be so fixed as to allow a mark-up of 20 percent on selling price.
Required:
(i) Calculate material variances based on consumption of material.
(ii) Calculate labour variances and the total variance for factory overhead.
(iii) Prepare Income statement for June, 2007 showing actual gross margin.
(iv) An incentive scheme is in operation in the company whereby employees are paid a bonus of 50% of
direct labour hour saved at standard direct labour hour rate. Calculate the Bonus amount.
[(15 Marks) Nov 2007]

Answer
(i) Material Variances:
Material Cost Variance = (SQ × SP) – (AQ × AP)
= (40,960 units × 5 kgs. × `4.20) – (2,05,600 kgs. × `4.50)
= 65,040 A
Material Price Variance = (AQ × SP) – (AQ × AP)
(based on consumption) = (2,05,600 kgs. × `4.20) – (2,05,600 kgs. × `4.50)
= 61,680 A
Material Usage Variance = (SQ × SP) - (AQ × SP)
= (40,960 units × 5 kgs. × `4.20) - (2,05,600 kgs. × `4.20)
= 3,360 A
(ii) Labour Variances:
Labour Cost Variance = (SH × SR) – (AH × AR)
= (40,960 × 3 hours × `3.00) – (`3,87,840) = 19,200 A
Labour Rate Variance = (AH × SR) – (AH × AR)
= (1,21,200 hours × `3.00) - (`3,87,840) = 24,240 A
Labour Efficiency Variance = (SH × SR) – (AH × SR)

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 STANDARD COSTING 11.2
= (40,960 × 3 hours × `3.00) - (1,21,200 hours × `3.00)
= 3,63,600 - 3,68,640
= 5,040 F

Overhead Total Variance = (SH × SR) – (AH × AR)

= (40,960 × 3 hours × `1.20) – (`1,00,000)
= 47,456 F

(iii) Statement of Income

Particulars `
Sales (40,000 units × `42) 16,80,000
Less: Standard COGS (40,000 units × `33.60) (13,44,000)
Standard Gross Margin 3,36,000
Less : Adverse Variances: (61,680)
Materials Price Variance (3,360)
Materials Usage Variance (24,240)
Labour Rate Variance
Add : Favourable Variances: 5,040
Labour Efficiency Variance 47,456
Overhead Variance
Actual Gross Margin 2,99,216

(iv) Bonus = 50% of time saved × Standard direct labour rate

= 50% (SH – AH) × `3 = 50% (1,22,880 – 1,21,200) × `3 = 2,520

*SH = 40,960 units × 3 hours = 1,22,880 hours

PYQ 2
TQM Ltd. has furnished the following information for the month ending 30th June, 2007:
Master Budget Actual Variance
Units produced and sold 80,000 72,000
Sales (`) 3,20,000 2,80,000 40,000 (A)
Direct material (`) 80,000 73,600 6,400 (F)
Direct wages (`) 1,20,000 1,04,800 15,200 (F)
Variable overheads (`) 40,000 37,600 2,400 (F)
Fixed overhead (`) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200

The Standard costs of the products are as follows:

Direct materials (1 kg at the rate of `1 per kg) `1.00

Direct wages (1 hour at the rate of `1.50) `1.50
Variable overhead (1 hour at the rate of `0.50) `0.50

Actual results for the month showed that 78,400 kg of material were used and 70,400 labour hours were
recorded.

Required:
(i) Prepare Flexible budget for the month and compare with actual results.
(ii) Calculate Material, Labour, Sales Price, Variable overhead and Fixed overhead expenditure variances
and Sales Volume (Profit) variance.
[(15 Marks) May 2008]

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 STANDARD COSTING 11.3
Answer
(i) Flexible Budget
Particulars Budget for 72,000 units Actual for 72,000 units Difference
Direct Materials 72,000 73,600 1,600 A
Direct Labour 1,08,000 1,04,800 3,200 F
Variable OH 36,000 37,600 1,600 A
Fixed OH 40,000 39,200 800 F
Total cost 2,56,000 2,55,200 800 F
Sales 2,88,000 2,80,000 8,000 A
Profit 32,000 24,800 7,200 A

(ii) Calculation of Various Variance:

(a) Material Variance :

Material Price Variance = (AQ × SP) - (AQ × AP)
= (78,400 kg × `1.00) – 73,600 (given) = 4,800 F
Material Usage Variance = (SQ × SP) - (AQ × SP)
= (72,000 kg × `1.00) – (78,400 kg × `1.00) = 6,400 A
Material Cost Variance = (SQ × SP) – (AQ × AP)
= 72,000 - 73,600 = 1,600 A

(b) Labour Variance :

Labour Rate Variance = (AH × SR) – (AH × AR)
= (70,400 hours × `1.5) - 1,04,800 (given) = 800 F
Labour Efficiency Variance = (SH × SR) – (AH × SR)
= (72,000 hours × `1.5) – (70,400 hours × `1.5) = 2,400 F
Labour Cost Variance = (SH × SR) – (AH × AR)
= (72,000 hours × `1.5) - 1,04,800 = 3,200 F

(c) Overhead Expenditure Variance :

Variable OH Exp. Variance = (AH × SR) – (AH × AR)
= (70,400 hours × `0.50) – 37,600 (given) = 2,400 A
Fixed OH Exp. Variance = Budgeted Fixed OH – Actual Fixed OH
= 40,000 - 39,200 (given) = 800 F

(d) Sales Variance :

Sales Price Variance = (AQ × Standard Sales Price) – (AQ × Actual Sales Price)
= (72,000 units × `4) – 2,80,000(given) = 8,000 A
Sales Vol. (Profit) Variance = Standard Profit per unit (Budgeted Quantity – Actual Quantity)
= `0.50 × (80,000 – 72,000) = 4,000 A

PYQ 3
UV Ltd. presents the following information for November 2008:
Budgeted production of product P = 200 units.
Standard consumption of Raw materials = 2 kg per unit of P.
Standard price of material A = `6 per kg.
Actually, 250 units of P were produced and material A was purchased at `8 per kg and consumed at 1.8 kg per
unit of P.
Calculate the material variances.
[(3 Marks) Nov 2008]

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 STANDARD COSTING 11.4
Answer
Material Cost Variance = (SQ × SP) - (AQ × AP)
= (250 units × 2 kg × `6) - (250 units × 1.8 kg × `8) = 600 A

Material Usage Variance = (SQ × SP) - (AQ × SP)

= (250 units × 2 kg × `6) - (250 units × 1.8 kg × `6) = 300 F

Material Price Variance = (AQ × SP) - (AQ × AP)

= (250 units × 1.8 kg × `6) - (250 units × 1.8 kg × `8) = 900 A

PYQ 4
Following details relating to product X during the month of April, 2009 are available:
Standard materials cost per unit of X : Materials 50 kg @ `40.00 per kg
Actual production : 100 units
Actual material cost : `42.00 per kg
Material price variance : `9,800 (Adverse)
Material usage variance : `4,000 (Favourable).

Calculate the actual quantity of material used during the month April, 2009.
[(2 Marks) May 2009]

Answer
Material price variance = (AQ × SP) - (AQ × AP) = AQ (SP - AP)
-9,800 = AQ (40 - 42) = - 2 AQ
AQ = 9,800 ÷ 2 = 4,900 kg

PYQ 5
The following information is available from the cost records of Vatika & Company for the month of August,
2009:
Material purchased : `1,05,600 for 24,000 kg
Material consumed : 22,800 kg
Actual wages paid : `29,700 for 5,940 hours
Unit produced : 2,160 units
Standard rates and prices are:
Direct material rate : `4.00 per kg
Direct labour rate : `4.00 per hour
Standard input : 10 kg for one unit.
Standard requirement : 2.5 hours per unit.

Calculate all material and labour variances for the month of August, 2009.
[(8 Marks) Nov 2009]

Answer
(a) Material Variance:

Material Price Variance = (AQP × SP) - (AQP × AP)

(based on purchase) = (24,000 kg × 4.00) – 1,05,600 = 9,600 A

Material Usage Variance = (SQ × SP) - (AQ × SP)

= (2,160 × 10 kg × `4.00) - (22,800 kg × `4.00) = 4,800 A

Material Cost Variance = MUV + MPV

= 9,600 A + 4,800 A = 14,400 A

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 STANDARD COSTING 11.5
(b) Labour Variance :
Labour Rate Variance = (AH × SR) – (AH × AR)
= (5,940 hours × `4.00) - 29,700 (given) = 5,940 A

Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (2,160 × 2.5 hours × `4.00) – (5,940 hours × `4.00)
= 2,160 A

Labour Cost Variance = (SH × SR) – (AH × AR)

= (2,160 × 2.5 hours × `4.00) – 29,700 = 8,100 A

PYQ 6
Gama Ltd. has furnished the following standard cost data per unit of production:
Material 10 kg @ `10 per kg
Labour 6 hours @ `5.50 per hour
Variable overhead 6 hours @ `10 per hour
Fixed overhead `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 following:
Material used 50,000 kg at a cost of `5,25,000
Labour paid `1,55,000 for 31,000 hours worked.
Variable overheads `2,93,000
Fixed overhead `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) Nov 2011]

Answer
(i) Material Cost Variance = (SQ × SP) – (AQ × AP)
= (4,800 units × 10 kg × `10) – 5,25,000 = 45,000 A
(ii) Labour Cost Variance = (SH × SR) – (AH × AR)
= (4,800 units × 6 hours × `5.50) – 1,55,000 = 3,400 F
(iii) Fixed OH Cost Variance = (SH × SR) – (AH × AR)
= (4,800 units × 6 hours × `15) – 4,70,000 = 38,000 A
Budgeted OH 4,50,000
*SR = = = `15
Budgeted hours 30,000

(iv) Variable OH Cost Variance = (SH × SR) – (AH × AR)

= (4,800 units × 6 hours × `10) – 2,93,000 = 5,000 A

PYQ 7
SJ Ltd. has furnished the following information:
Standard overhead absorption rate per unit `20
Standard rate per hour `4
Budgeted production 12,000 units
Actual production 15,560 units
Actual overheads were `2,95,000 (`62,500 fixed)
Actual hours 74,000

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 STANDARD COSTING 11.6
Overheads are based on the following flexible budget:
Production (units) 8,000 10,000 14,000
Total Overheads (`) 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 2012/2015]

Answer
(i) Variable Overhead Efficiency = (SH × SR) - (AH × SR)
= 2,33,400 - 2,22,000 = 11,400 F

Variable Expenditure Variable = (AH × SR) - (AH × AR)

= 2,22,000 - 2,35,500 = 10,500 A

(ii) Fixed Overhead Efficiency = (SH × SR) - (AH × SR)

= 77,800 – 74,000 = 3,800 F

Fixed OH Capacity Variance = (AH × SR) - (BH × SR)

= 74,000 - 60,000 = 14,000 F
Working Notes:
For variable overheads:
SH × SR = 15,560 units × 5 hours per unit × `3 per hour
= 2,33,400
AH × SR = 74,000 hours × `3 per hour = 2,22,000
AH × AR = 2,95,000 - 62,500 = 2,32,500
For fixed overheads:
SH × SR = 15,560 units × 5 hours × `1 per hour = 77,800
AH × SR = 74,000 × `1 per hour = 74,000
BH × BR = 12,000 units × 5 hours per unit × `1 per hour
= 60,000
Standard OH (variable + fixed) = `20 per unit
S tan dard overhead per unit 20.00
Standard hours per unit = =
S tan dard rate per hour 4.00
= 5 hours per unit
Difference in exp ense
Budgeted variable cost per unit =
Difference in units
2,10,000  1,80,000
= = `15.00 per unit
10,000  8,000

15.00
Standard variable overhead per hour = = `3 per hour
5 hours

Standard fixed overhead per hour = Total Standard OH per hour – Standard Variable OH
per hour
= 4.00 - 3.00 = `1 per hour

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 STANDARD COSTING 11.7
PYQ 8
The standard labour employment and the actual labour engaged in a 40 hours week for a job are as under:
Standard Actual
Category of workers No. of Wage rate No. of Wage rate
workers per hour ` Workers per hour `
Skilled 65 45 50 50
Semi- skilled 20 30 30 35
Unskilled 15 15 20 10
Standard output : 2,000 units
Actual output : 1,800 units
Abnormal Idle Time : 2 hours in the week.
Calculate:
(i) Labour Cost Variance
(ii) Labour Efficiency Variance
(iii) Labour Idle Time Variance
[(6 Marks) Nov 2012]

Answer
(i) Labour Cost Variance = (SH × SR) – (AH × AR)
= 1,35,000 – 1,50,000 = 15,000 A
(ii) Labour Efficiency Variance = (SH × SR) – (AHW × SR)
= 1,35,000 – 1,31,100 = 3,900 F
(iii) Labour Idle Time Variance = (AHW × SR) – (AH × SR)
= 1,31,100 – 1,38,000 = 6,900 A
Working Notes:
Basic Calculations
Category of workers SH × SR AHW × SR AH ×SR AH ×AR
Skilled 3,600 × 65/100 × 45 50 × 38 × 45 50 × 40 × 45 50 × 40 × 50
Semi Skilled 3,600 × 20/100 × 30 30 × 38 × 30 30 × 40 × 30 30 × 40 × 35
Unskilled 3,600 × /100 × 15
15 20 × 38 × 15 20 × 40 × 15 20 × 40 × 10
Total 1,35,000 1,31,100 1,38,000 1,50,000

Total Standard time for 2,000 units = (65 + 20 +15) workers × 40 hrs = 4,000 hours
4,000 hrs
Standard hours for 1,800 units = × 1,800 units = 3,600 hours
2,000 units

PYQ 9
Following are the details of the product Phomex for the month of April 2013:
Standard quantity of material required per unit : 5kg
Actual output : 1,000 units
Actual cost of materials used : `7,14,000
Material price variance : `51,000 F
Actual price per kg of material is found to be less than standard price per kg of material by `10
You are required to calculate:
(i) Actual quantity and Actual price of materials used
(ii) Material Usage Variance
(iii) Material Cost Variance
[(5 Marks) May 2013]

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 STANDARD COSTING 11.8
Answer
(i) Calculation of Actual quantity:
Materials Price Variance = (AQ × SP) – (AQ × AP)
AQ × (SP - AP) = AQ × 10 (given) = 51,000
AQ = 5,100 kg

Calculation of Actual price:

Actual Material Cost 7,14,000
Actual price = =
Actual Quantity 5,100 kg
= `140 per kg

(ii) Materials Usage Variance = (SQ × SP) - (AQ × SP)

= (1,000 units × 5 kg × `150) – (5,100 kg × `150)
= 7,50,000 - 7,65,000 = 15,000 A

*SP = AP + `10 = `140 + `10 = `150 per kg

(iii) Material Cost Variance = MUV + MPV

= 15,000 A + 51,000 F = 36,000 F

PYQ 10
Calculate Efficiency and Capacity ratio from the following figures:
Budgeted production 80 units
Actual production 60 units
Standard time per unit 8 hours
Actual hours worked 500
[(2 Marks) Nov 2007]

Answer
Standard hours for actual prodcution
Efficiency ratio = × 100
Actual hours worked
480 hours
= × 100 = 96%
500 hours

Actual hours worked

Capacity Ratio = × 100
Budgeted hours
500 hours
= × 100 = 78.125%
640 hours

Workings:

SH for actual Production = 60 units × 8 hours = 480 hours

Budgeted hours = 80 units × 8 hours = 640 hours

PYQ 11
Calculate efficiency and activity ratio from the following data:

Capacity ratio 75%

Budgeted output 6,000 units
Actual output 5,000 units
Standard Time per unit 4 hours
[(2 Marks Nov) 2009]

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 STANDARD COSTING 11.9
Answer
Actual output in terms of s tan dard hours
Efficiency Ratio = × 100
Actual workinghours
5,000 units  4 hours per unit 20,000 hours
= × 100 = × 100
18,000 hours 18,000 hours
= 111.11%

Activity Ratio = Capacity ratio × Efficiency Ratio

= 75% × 111.11% = 83.33%

Working:
Actual hours
Capacity Ratio = × 100
Budgeted hours
AH AH
75% = =
6,000 units  4 hours per unit 24,000 hours
AH = 18,000 hours

PYQ 12
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:
Direct material 10 kg @ `45 per kg `450
Direct labour 8 hours @ `50 per hour `400
Variable overhead 8 hours @ 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:
Direct materials 8,900 kg @ `46 per kg `4,09,400
Direct labour 7,000 hours @ `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
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance
[(8 Marks) Nov 2013]

Answer
(i) Material Usage Variance = (SQ × SP) - (AQ × SP)
= (9,000 kg × `45) - (8,900 kg × `45)
= `4,05,000 – `4,00,500 = 4,500 F

(ii) Material Price Variance = (AQ × SP) – (AQ × AP)

= (8,900 kg × `45) – (8,900 kg × `46)
= `4,00,500 – `4,09,400 = 8,900 A

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 STANDARD COSTING 11.10
(iii) Material Cost Variance = (SQ × SP) – (AQ × AP)
= (9,000 kg × `45) – (8,900 kg × `46)
= `4,05,000 – `4,09,400 = 4,400 A

(iv) Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (9,000 kg× 8 hrs/10 kg × `50) - (7,000 hrs × `50)
= `3,60,000 - `3,50,000 = 10,000 F

(v) Labour Rate Variance = (AH × SR) – (AH × AR)

= `3,50,000 – `3,64,000 = 14,000 A

(vi) Labour Cost Variance = (SH × SR) – (AH × AR)

= `3,60,000 – `3,64,000 = 4,000 A

(vii) Variable OH Cost Variance = (SH × SR) – (AH × AR)

= (9,000 kg × 8 hours/10 kg × `10) – `72,500 = 500 A

(viii) Fixed OH Cost Variance = (SH × SR) – (AH × AR)

= (9,000 kg × 1/10 kg × `200) – `1,92,000 = 12,000 A

PYQ 13
XYZ Co. Ltd. provides the following information:
Particulars Standard Actual
Production in units 4,000 3,800
Working Days 20 21
Fixed Overhead `40,000 `39,000
Variable Overhead `12,000 `12,000

You are required to calculate the following overhead variance:

(a) Variable Overhead Variance
(b) Fixed Overheads Variances
(i) Expenditure Variance
(ii) Volume Variance
[(8 Marks) May 2014]

Answer
(a) Variable Overhead Variance = Standard Variable OH for 3,800 units – Actual Variable OH
= (Actual production × SR) – 12,000
= (3,800 units × 3) – 12,000
= 600 A

(b) Fixed Overhead Variances:

(i) Expenditure Variance = Budgeted Fixed OH – Actual Fixed OH

= 40,000 – 39,000 = 1,000 F

(ii) Volume Variance = (Actual Production - Budgeted Production) × SR

= (3,800 – 4,000) × 10 = 2,000 A

Working Notes:
Budgeted Variable OH 12,000
1. Standard rate of Variable OH = =
Budgeted Pr oduction 4,000 Units
= `3 per unit

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 STANDARD COSTING 11.11
Budgeted Fixed OH 40,000
2. Standard rate of Fixed OH = =
Budgeted Pr oduction 4,000 Units
= `10 per unit

PYQ 14
The following information has been provided by a company:

No of units produced and sold 6,000 units

Standard labour rate per hour `8
Standard hours required for 6,000 units ?
Actual hours required 17,094 hours
Labour efficiency 105.3%
Labour rate variance `68,376 A

You are required to calculate:

(i) Actual labour rate per hour
(ii) Standard hours required for 6,000 units
(iii) Labour efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit
[(8 Marks) June 2015]

Answer
(i) Actual labour rate per hour:
Labour rate variance = (AH × SR) - (AH × AR) = 68,376 A
= (17,094 × 8) – (17,094 × AR) = 68,376 A
17,094 AH = 1,36,752 + 68,376
AH = 2,05,128 ÷ 17,094
= `12 per hour

(ii) Standard hours required for 6,000 units

Labour efficiency ratio = SH ÷ AH
105.3% = SH ÷ 17,094
SH = 17,094 × 105.3% = 18,000 hours

(iii) Labour efficiency variance:

Labour efficiency variance = (SH × SR) - (AH × SH)
= (18,000 × 8) – (17,094 × 8) = 7,248 F

(iv) Standard labour cost per unit:

Standard labour cost per unit = (SH × SR) ÷ No of units
= (18,000 × 8) ÷ 6,000 units = `24 per unit

(v) Standard labour cost per unit:

Actual labour cost per unit = (AH × AR) ÷ No of units
= (17,094 × 12) ÷ 6,000 units = `34.188/unit

PYQ 15
X Associates undertake to prepare income tax returns for individuals for a fee. They use the weighted average
method and actual costs for the financial reporting purposes. However, for internal reporting, they use a
standard costs system. The standards, based on equivalent performance, have been established as follows:

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 STANDARD COSTING 11.12
Labour per return 5 hrs @ `40 per hour
Overhead per return 5 hrs @ `20 per hour
For March 2015 performance, budgeted overhead is `98,000 for standard labour hours allowed.

The following additional information pertains to the month of March 2015:

Details of Returns
March 1 Return in process (25% complete) 200 numbers
Return started in March 825 numbers
March 31 Return in process (80% complete) 125 numbers
Cost Data
March 1 Return in process:
Labour `12,000
Overheads `5,000
March 1 to 31 Current period cost:
Labour (4,000 hours) `1,78,000
Overheads `90,000

You are required to compute:

(a) For each element, equivalent units of performance and the actual cost per equivalent unit.
(b) Actual cost of return-in-process on March 31.
(c) The standard cost per return.
(d) The labour rate and labour efficiency variance as well as overhead volume and overhead expenditure
variance.
[(8 Marks) May 2016]

Answer
(a) Statement of Equivalent Units of Performance
(Weighted Average Method)
Labour Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Return Processed (200 + 825 - 125) 900 100 900 100 900
Closing Return-in-process 125 80 100 80 100
Total 1,025 - 1,000 - 1,000

Statement of Actual Cost Per Equivalent Unit

Elements Cost (Previous + Current) Eq. Units Cost Per Unit
Labour 12,000 + 1,78,000 = 1,90,000 1,000 190.00
Overheads 5,000 + 90,000 = 95,000 1,000 95.00
Actual Cost Per Equivalent Unit 285.00

(b) Actual cost of return-in-process on March 31= Equivalent units × Cost Per Unit
= 100 units × `285
= `28,500

(c) The standard cost per return = Labour cost per unit + Overhead cost per unit
= 5 hours × `40 + 5 hours × `20
= `300 per unit

(d) Variances:
Labour Rate Variance = (AH × SR) – (AH × AR)
= (4,000 hours × 40) – `1,78,000
= 18,000 A

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 STANDARD COSTING 11.13
Labour Efficiency Variance = (SH × SR) – (AH × SR)
= (950 units × 5 hrs × `40) – (4,000 hrs × `40)
= 30,000 F

Overhead Volume Variance = Standard Overheads – Budgeted Overheads

= (950 returns × `100) – `98,000
= 3,000 A

Overhead Expenditure Variance = Budgeted Overheads – Actual Overheads

= `98,000 – `90,000
= 8,000 F
Working notes:
1. Calculation of Equivalent Production during current month:

Production during current month = Total equivalent production – opening equivalent production
= 1,000 units – 50 units (200 × 25%) = 950 units

2. Calculation of budgeted production for March:

Budgeted production for March = Budgeted Overheads ÷ Overheads per unit

= `98,000 ÷ `100 (5 hours × `20) = 980 units

PYQ 16
The following information available from the cost records of a company for the month of July’ 2016:

(1) Materials purchased 22,000 pieces `90,000

(2) Materials consumed 21,000 pieces
(3) Actual wages paid for 5,150 hours `25,750
(4) Fixed Factory overhead incurred `46,000
(5) Fixed Factory overhead budgeted `42,000
(6) Units produced 1,900
(7) Standard rates and prices are:
Direct material `4.50 per piece
Standard input 10 pieces per unit
Direct labour rate `6 per hour
Standard requirement 2.5 hour per unit
Overheads `8 per labour hour

You are required to calculate the following variances:

(a) Material price variance

(b) Material usage variance
(c) Labour rate variance
(d) Labour efficiency variance
(e) Fixed overhead expenditure variance
(f) Fixed overhead efficiency variance
(g) Fixed overhead capacity variance.
[(8 Marks) Nov 2016]

Answer
(a) Material Price Variance = (AQ purchased × SP) – (AQ purchased × AP)
(based on purchase/single plan) = (22,000 × `4.5) – `90,000 = 9,000 F

(b) Material Usage Variance = (SQ × SP) - (AQ × SP)

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 STANDARD COSTING 11.14
= (1,900 × 10 × `4.5) - (21,000 × `4.5)
= `85,500 – `94,500 = 9,000 A

(c) Labour Rate Variance = (AH × SR) – (AH × AR)

= (5,150 × `6) - `25,750 = 5,150 F

(d) Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (1,900 × 2.5 × `6) - (5,150 × `6) = 2,400 A

(e) Fixed OH Expenditure Variance = Budgeted Fixed OH – Actual Fixed OH

= `42,000 – `46,000 = 4,000 A

(f) Fixed OH Efficiency Variance = (SH × SR) – (AH × SR)

= (1,900 × 2.5 × `8) – (5,150 × `8) = 3,200 A

(g) Fixed OH Capacity Variance = (AH × SR) – (BH × SR)

= (5,150 × `8) – `42,000 = 800 A

PYQ 17
AB Ltd. has furnished the following data:
Particulars Budget Actual, July’16
No. of working days 25 27
Production in units 20,000 22,000
Fixed Overheads (`) 30,000 31,000

Budgeted fixed overhead rate is `1.00 per hour. In July’16, the actual hours worked were 31,500.

Calculate the following variances in relation to fixed overheads:

(a) Efficiency Variance (b) Capacity Variance (c) Calendar Variance
(d) Volume Variance (e) Expenditure Variance.
[(5 Marks) May 2017]

Answer
(a) Fixed OH Efficiency Variance = (SH × SR) – (AH × SR)
= (33,000 × `1) – (31,500 × `1) = 1,500 F

(b) Fixed OH Capacity Variance = (AH × SR) – (CH × SR)

= (31,500 × `1) – (32,400 × `1) = 900 A

(c) Fixed OH Calendar Variance = (CH × SR) – (BH × SR)

= (32,400 × `1) – `30,000 = 2,400 F

(d) Fixed OH Volume Variance = (SH × SR) – (BH × SR)

= (33,000 × `1) – `30,000 = 3,000 F

(e) Fixed OH Expenditure Variance = (BH × SR) – (AH × AR)

= `30,000 – `31,000 = 1,000 A

Working notes:

Budgeted hours (BH) = `30,000 ÷ `1 per hour = 30,000 hours

Standard hour per unit = 30,000 hours ÷ 20,000 units = 1.5 hour
Standard hour for actual output (SH) = 22,000 units × 1.5 hours = 33,000 hours
Calendar hours (CH) = (30,000 hours × 27/25 days) = 32,400 hours

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 STANDARD COSTING 11.15
PYQ 18
XYZ Limited produces an article and uses a mixture of material X and Y. The standard quantity and price of
materials for one unit of output as under:
Materials Quantity Price (`)
X 2,000 kg 1.00 per kg
Y 800 kg 1.50 per kg

During a period, 1,500 units were produced. The actual consumption of materials and prices are given below:
Materials Quantity Price (`)
X 31,00,000 kg 1.10 per kg
Y 12,50,000 kg 1.60 per kg

Calculate:
(1) Standard cost for actual output;
(2) Material Cost Variance;
(3) Material Price Variance;
(4) Material Usage Variance.
[(8 Marks) Nov 2017]

Answer
(1) Standard cost for actual output = Standard cost of materials X and Y for 1,500 units of
output
= SQ × SP = `48,00,000

(2) Material Cost Variance = (SQ × SP) – (AQ × AP)

= `48,00,000 – `54,10,000 = `6,10,000 A

(3) Material Price Variance = (AQ × SP) – (AQ × AP)

= `49,75,000 - `54,10,000 = `4,35,000 A

(4) Material Usage Variance = (SQ × SP) – (AQ × SP)

= `48,00,000 – `49,75,000 = `1,75,000 A

Working notes:
1. Basic calculation
Materials SQ × SP RQ × SP AQ × SP AQ × AP
X 30,00,000 × `1.00 31,07,143 × `1.00 31,00,000 × `1.00 31,00,000 × `1.10
Y 12,00,000 × `1.50 12,42,857 × `1.50 12,50,000 × `1.50 12,50,000 × `1.60
Total `48,00,000 `49,71,429 `49,75,000 `54,10,000

2. SQ of input for actual output:

Materials X = 1,500 units × 2,000 kg = 30,00,000 kgs

Materials Y = 1,500 units × 800 kg = 12,00,000 kgs

3. RQ (Revised Quantity) of actual input:

Materials X = (31,00,000 + 12,50,000) × 20/28 = 31,07,143 kgs

Materials Y = (31,00,000 + 12,50,000) × 8/28 = 12,42,857 kgs

PYQ 19
A company planned to produce 2,000 units of a product in a week of 40 hours by employing 65 skilled workers.
Other relevant information are as follows:

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 STANDARD COSTING 11.16
 Standard wage rate : `45 per hour
 Actual production : 1,800 units
 Actual number of workers employed : 50 workers in a week of 40 hours
 Actual wage rate : `50 per hour
 Abnormal time loss : due to machine breakdown 100 hours

You are required to calculate:

(1) Labour cost, rate, idle time and efficiency variances.
(2) Reconcile the variances.
[(5 Marks) May 2018]

Answer
(1) Labour Cost Variance = (SH × SR) – (AH × AR)
65 × 40
= × 1,800 × `45 – (50 × 40 × `50)
2,000
= 5,300 F

Labour Rate Variance = (AH × SR) – (AH × AR)

= (50 × 40 × `45) - (50 × 40 × `50) = 10,000 A

Labour Efficiency Variance = (SH × SR) – (AHW × SR)

= (2,340 × `45) - (2,000 – 100) × `45 = 19,800 F

Labour Idle Time Variance = (AHW × SR) – (AH × SR)

= (2,000 × `45) - (1,900 × `45) = 4,500 A

(2) Reconciliation :
Labour Cost Variance = Labour Rate variance + Labour Efficiency variance +
Idle time variance
= 10,000 A + 19,800 F + 4,500 A = 5,300 F

PYQ 20
Beta ltd. is manufacture Product N. This is manufactured by mixing two materials namely Material P and
Material Q. The standard cost of mixture is as under:
Material P : 150 ltrs. @ `40 per ltr.
Material Q : 100 ltrs. @ `60 per ltr.
Standard loss expected : 20% of total input during production

The cost records for the period exhibit following consumption:

Material P : 140 ltrs. @ `42 per ltr.
Material Q : 110 ltrs. @ `56 per ltr.
Quantity produced : 195 ltrs.

Calculate:
(1) Material Cost Variance
(2) Material Usage Variance
(3) Material Price Variance
[(5 Marks) May 2018]
Answer
(1) Material Cost Variance = (SQ × SP) – (AQ × AP)
= `11,700 – `12,040 = 340 A

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 STANDARD COSTING 11.17
(2) Material Usage Variance = (SQ × SP) - (AQ × SP)
= `11,700 – `12,200 = 500 A

(3) Material Price Variance = (AQ × SP) – (AQ × AP)

= `12,200 – `12,040 = 160 F

Working notes:
Analysis Table
Materials SQ × SP AQ × SP AQ × AP
P 146.25 ltrs. × `40 140 ltrs. × `40 140 ltrs. × `42
Q 97.50 ltrs. × `60 110 ltrs. × `60 110 ltrs. × `56
Total `11,700 `12,200 `12,040

(a) SQ of input for actual output

Total input = 195 ltrs. ÷ 80% = 243.75 ltrs.
Materials P = 243.75 ltrs. × 150/250 = 146.25 ltrs.
Materials Q = 243.75 ltrs. × 100/250 = 97.50 ltrs.

PYQ 21
A manufacturing concern has provided following information related to fixed overheads:
Particulars Standard Actual
Output in a month 5,000 4,800
Working days in a month 25 23
Fixed Overhead `5,00,000 `4,90,000

Compute:
(1) Fixed Overheads Variance
(2) Fixed Overheads Expenditure Variance
(3) Fixed Overheads Volume Variance
(4) Fixed Overheads Efficiency Variance
[(5 Marks) Nov 2018]

Answer
(1) Fixed Overhead Variance = Standard Fixed OH – Actual Fixed OH
5,00,000
= × 4,800 – `4,90,000 = 10,000 A
5,000

(2) Fixed OH Expenditure Variance = Budgeted Fixed OH – Actual Fixed OH

= `5,00,000 – `4,90,000 = 10,000 F

(3) Fixed OH Volume Variance = Standard Fixed OH – Budgeted Fixed OH

= `4,80,000 – `5,00,000 = 20,000 A

(4) Fixed OH Efficiency Variance = Standard Fixed OH – Standard Fixed OH for AH

= SH × SR – AH × SR
5,00,000
= `4,80,000 – × 23 Days = 20,000 F
25 Days

Note: In the absence of actual hours, we used calendar hours as actual hours in above solution.

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 STANDARD COSTING 11.18
PYQ 22
Following data is available for ABC Ltd:
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 8,000 hours
Standard hours expected to be earned per four weeks 9,600 hours
Actual hours worked in the four week period 7,500 hours
Standard hours earned in the four week period 8,800 hours.
The related period is of 4 weeks.

Calculate the following ratios:

(1) Efficiency Ratio,
(2) Activity Ratio,
(3) Standard Capacity Usage Ratio,
(4) Actual Capacity Usage Ratio,
(5) Actual Usage of Budgeted Capacity Ratio.
[(10 Marks) May 2019]

Answer
Maximum Capacity in a budget period = 60 Employees × 8 Hours × 5 Days × 4 Weeks
= 9,600 Hours
Budgeted Hours = 50 Employees × 8 Hours × 5 Days × 4 Weeks
= 8,000 Hours
Actual Hours = 7,500 Hours (given)
Standard Hours for Actual Output = 8,800 Hours

S tan dard Hours 8,800 Hours

(1) Efficiency Ratio = × 100 = × 100
Actual Hours 7,500 Hours
= 117.33%

S tan dard Hours 8,800 Hours

(2) Activity Ratio = × 100 = × 100
Budgeted Hours 8,000 Hours
= 110.00%

Budgeted Hours
(3) Standard Capacity Usage Ratio = × 100
Max. Possible Hoursin Budget Period
8,000 Hours
= × 100 = 83.33%
9,600 Hours

Actual Hours Worked

(4) Actual Capacity Usage Ratio = × 100
Max. Possible Working Hoursin a Period
7,500 Hours
= × 100 = 78.125%
9,600 Hours

Actual Working Hours

(5) Actual Usage of Bgt Capacity Ratio = × 100
Budgeted Hours
7,500 Hours
= × 100 = 93.75%
8,000 Hours

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 STANDARD COSTING 11.19
PYQ 23
The standard cost of a chemical mixture is as follows:
60% of Material A @ `50 per kg
40% of Material B @ `60 per kg
A standard loss of 25% on output is expected in production. The cost records for a period has shown the
following usage:
540 kg of Material A @ `60 per kg
260 kg of Material B @ `50 per kg
The quantity processed was 680 kilograms of good product.

From the above given information calculate:

(1) Material Cost Variance
(2) Material Price Variance
(3) Material Usage Variance
(4) Material Mix Variance
(5) Material Yield Variance
[(10 Marks) Nov 2019]

Answer
(1) Material Cost Variance = (SQ × SP) – (AQ × AP)
= `45,900 – `45,400 = `500 F

(2) Material Price Variance = (AQ × SP) – (AQ × AP)

= `42,600 - `45,400 = `2,800 A

(3) Material Usage Variance = (SQ × SP) – (AQ × SP)

= `45,900 – `42,600 = `3,300 F

(4) Material Mix Variance = (RQ × SP) – (AQ × SP)

= `43,200 – `42,600 = `600 F

(5) Material Yield Variance = (SQ × SP) – (RQ × SP)

= `45,900 – `43,200 = `2,700 F
Working notes:
a. Basic Calculation
Materials SQ × SP RQ × SP AQ × SP AQ × AP
A 510 × `50 480 × `50 540 × `50 540 × `60
B 340 × `60 320 × `60 260 × `60 260 × `50
Total `45,900 `43,200 `42,600 `45,400

b. SQ of input for actual output:

Input – Loss = Output
Input – 25% Output = Output
Input = 125% Output
Input of Raw Material = 125% × 680 kgs of Good Product = 850 kgs
Materials A = 850 kgs × 60% = 510 kgs
Materials B = 850 kgs × 40% = 340 kgs
c. RQ (Revised Quantity)of actual input:
Materials A = 800 kgs × 60% = 480 kgs
Materials B = 800 kgs × 40% = 320 kgs

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 STANDARD COSTING 11.20

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3 TO 5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y
5 Y Y Y Y
6 Y Y Y Y
7 Y Y Y Y
8 Y Y Y -
9 Y Y Y Y
10 Y Y Y Y
11 Y Y - -
12 Y Y Y Y
13 Y Y Y Y
14 Y Y Y Y
15 Y Y Y Y
16 Y Y Y Y
17 Y Y Y Y
18 Y Y Y Y
19 Y Y Y -
20 Y Y Y -
21 Y Y Y Y
22 Y Y Y Y
23 Y Y Y Y

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 CHAPTER - 12

MARGINAL COSTING

LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to:
 Understand the difference between absorption costing and
marginal costing.
 Understand the concept of contribution and contribution to sales
ratio.
 Understand the method of computation of break-even point (BEP),
both mathematically and also with the help of graph.
 Understand the basic limitations of break even analysis.
 Understand the method of computation of margin of safety (MOS).
 Understand the concept of key factor or limiting factor, shut down
point, cost BEP or indifference point, sales mix etc.
 Understand the concept of angle of incidence.
 Understand the concept of cost volume profit (CVP) analysis.
 MARGINAL COSTING 12.1

PAST YEAR QUESTIONS

PYQ 1
A company has fixed cost of `90,000, Sales `3,00,000 and Profit of `60,000.
Required:
(i) Sales volume if in the net period, the company suffered a loss of `30,000.
(ii) What is the margin of safety for a profit of `90,000?
[(3 Marks) May 2008]

Answer
(i) Calculation of sales volume if there is loss of `30,000:
Fixed cost  Loss 90,000  30,000
Sales = × 100 = × 100
PV ratio 50%
= `1,20,000
(ii) Calculation of margin of safety for profit of `90,000:
Pr ofit 90,000
Margin of Safety = × 100 = × 100
PV ratio 50%
= `1,80,000
WN:
(a) Contribution = Fixed Cost + Profit
= `90,000 + `60,000 = `1,50,000

Contribution
(b) P/V Ratio = × 100
Sales Value
1,50,000
= × 100 = 50%
3,00,000

PYQ 2
PQ Ltd. reports the following cost structure at two capacity levels:
(100% capacity) (75% capacity)
2,000 units 1,500 units
Production overhead I `3 per unit `4 per unit
Production overhead II `2 per unit `2 per unit
If the selling price, reduced by direct material and labour is `8 per unit, what would be its break-even point?
[(3 Marks) Nov 2008]

Answer
Fixed cost 6,000
BEP (in units) = = = 1,000 units
Contribution per unit 6
WN:
(i) Production overhead I:
In case of 2,000 units = 2000 × 3 = `6,000
In case of 1,500 units = 1500 × 4 = `6,000
Hence, production overhead I is fixed i.e. `6,000.
(ii) Production overhead II:

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 MARGINAL COSTING 12.2
At both levels = `2 per unit
Hence, production overhead II is variable production overhead i.e. `2 per unit.
(iii) Contribution: = Selling price reduced by material & labour - Variable production overhead
= `8 - `2 = `6

PYQ 3
ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable production cost
are `40 per unit and the variable selling expenses are `12 per sold unit. The budgeted fixed production
expenses were `24,00,000 per annum and the fixed selling expenses were `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 @ `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 statement of cost and profit for the year ended 31st March, 2008:

(1) On the basis of marginal costing,

(2) On the basis of absorption costing.
[(8 Marks) Nov 2008]

Answer
(1) Income Statement (Under Marginal Costing)
Particulars `
Sales (3,10,000 units @ `80) 2,48,00,000

Variable production cost (3,20,000 units @ `40) 1,28,00,000

Add: Opening Stock (40,000 units @ `40) 16,00,000
1,28,00,000
Less: Closing stock × 50,000 units (20,00,000)
3,20,000
Variable cost of goods sold 1,24,00,000
Variable selling cost (3,10,000 units @ `12) 37,20,000
Variable Cost of Sales 1,61,20,000
Contribution (Sales - Variable cost of goods sold) 86,80,000
Less: Fixed cost:
Production 24,00,000
Selling 16,00,000 (40,00,000)
Profit (Contribution – Fixed Cost) 46,80,000

(2) Income Statement (Under Absorption Costing)

Particulars `
Sales (3,10,000 units @ `80) 2,48,00,000
Production costs:
Variable (3,20,000 units @ `40) 1,28,00,000
Fixed (3,20,000 units @ `6 19,20,000
Cost of Goods Produced 1,47,20,000
Add: Opening stock (40,000 Units @ `46*) 18,40,000
1,47,20,000 (23,00,000)
Less: Closing stock × 50,000 units
3,20,000

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 MARGINAL COSTING 12.3
Cost of Goods Sold 1,42,60,000
Selling expenses:
Variable (3,10,000 units @ `12) 37,20,000
Fixed 16,00,000
Total cost 1,95,80,000
Unadjusted Profit (Sales – Total Cost) 52,20,000
Less: Under recovery of fixed overheads (24,00,000 – 19,20,000) (4,80,0000)
Profit under absorption costing 47,40,000

Working Notes:
Fixed production overhead recovery rate = Fixed production overheads ÷ Capacity
= 24,00,000 ÷ 4,00,000 units = `6 per unit

PYQ 4
Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to product Z during
the quarter II of the financial year 2009-10 will be `2,80,000.
Calculate the sales revenue required to achieve a quarterly profit of `70,000.
[(3 Marks) May 2009]

Answer
Fixed cost  Desired profit 2,80,000  70,000
Sales revenue required = =
PV ratio 28%
3,50,000
= = `12,50,000
28%
WN:
P/V ratio = 28%
Quarterly fixed Cost = `2,80,000
Desired Profit = `70,000

PYQ 5
A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margins
per unit is `40 for J and `20 for K. Fixed costs are `6,16,000 per month.
Compute the break-even point.
[(2 Marks) Nov 2009]

Answer
Fixedcost 6,16,000
BEP in units = =
Compositecontribution per unit 31.429
= 19,600 units (11,200 units of J and 8,400 units of K)
WN:
Composite contribution per unit = [(40 × 4 units of J) + (20 × 3 units of K)] ÷ 7 units
= 31.429

PYQ 6
Following information are available for the year 2008 and 2009 of PIX Limited:
Year 2008 2009
Sales `32,00,000 `57,00,000
Profit/(Loss) (`3,00,000) `7,00,000
Calculate:
(a) P/V ratio,
(b) Total fixed cost, and

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 MARGINAL COSTING 12.4
(c) Sales required to earn a profit of `12,00,000.
[(8 Marks) May 2010]

Answer
Change in profit 7,00,000 - (3,00,000)
(a) P/V Ratio = × 100 = × 100 = 40%
Change in sales 57,00,000 - 32,00,000
(b) Fixed cost = contribution – profit (by using data of 2009)
= (57,00,000 × 40%) – 7,00,000 = `15,80,000

Fixed cost  Desired profit 15,80,000 12,00,000

(c) Desired Sales = = = `69,50,000
PV ratio 40%

PYQ 7
MNP Ltd. sold 2,75,000 units of its product at `37.50 per unit. Variable costs are `17.50 per unit
(manufacturing costs of `14 and selling cost of `3.50 per unit). Fixed costs are incurred uniformly
throughout the year and amount to `35,00,000 (including depreciation of `15,00,000). There are 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 `2,50,000.
(iv) Estimate the sales level to achieve an after-tax income (PAT) of `2,50,000. Assume 40% corporate
Income Tax rate.
[(8 Marks) Nov 2010]

Answer
Fixed cost 35,00,000
(i) Break even sales level quantity = =
Contribution per unit 37.50  17.50
= 1,75,000 units.

Fixed cost (excluding depreciation)

Cash BEP (in Quantity) =
Contribution per unit
35,00,000  15,00,000
= = 1,00,000 units.
37.50  17.50

Contribution 37.50  17.50

(ii) P/V ratio = × 100 = × 100
Sales 37.50
= 53.33%

Fixed cost  Desired EBIT

(iii) No. of units must be sold =
Contribution per unit
35,00,000  2,50,000
= = 1,87,500 units.
20.00

Fixed cost  Desired Pr ofit Before Tax

(iv) Desired Sales level (`) =
PV ratio
35,00,000  4,16,667
= = `73,43,750
53.33%

WN:
Desired PAT = `2,50,000

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 MARGINAL COSTING 12.5
Tax rate = 40%
Desired PAT 2,50,000
Desired Profit before tax = =
(1  t ) (1  0.40)
= `4,16,667

PYQ 8
The P/V Ratio of Delhi Ltd. is 50% and margin of safety is 40%. The company sold 500 units for `5,00,000.
You are required to calculate:
(i) Break even point, and
(ii) Sales in units to earn a profit of 10% on sales.
[(5 Marks) Nov 2011]

Answer
(i) BEP = 60% of sales [sales – MOS (40% of sales)]
= 60% of `5,00,000 = `3,00,000

Fixed cos t  Desired profit 1,50,000  100 per unit

(ii) Sales in units = =
Contribution per unit 500
1,50,000
= = 375 units
400 per unit for fixed cost

WN:
(a) Fixed cost = PV Ratio × BEP sales
= 50% × `3,00,000 = `1,50,000

(b) Contribution per unit = PV Ratio × sale price per unit

= 50% × `1,000 (`5,00,000 ÷ 500 units) = `500

(c) Desired profit per unit = 10% of sales price per unit
= 10% of `1,000 = `100

PYQ 9
The following are related to LM Limited for the year ending 31st March, 2012: Sales 24,000 units @ `200 per
unit, PV 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 `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) Nov 2012]

Answer
(i) Fixed Cost = Contribution at BEP sales
= 25% of `24,00,000 = `6,00,000
WN:
BEP Sales = 50% of sales
= 50% of (24,000 × `200)
= 50% of `48,00,000 = `24,00,000

(ii) Profit earned for the Year = Contribution – Fixed cost

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 MARGINAL COSTING 12.6
= 25% of `48,00,000 – `6,00,000
= `12,00,000 – `6,00,000 = `6,00,000

(iii) Units to be sold to earn a target profit of `11,00,000:

Fixed cost  T arg et profit 6,00,000  11,00,000
= =
Cont n per unit 25% 200
= 34,000 units

(iv) No. of units to be sold to earn a net income of 25% of cost (20% of sales):
Fixed cost  Desired profit 6,00,000  20% of sales
= =
Contribution per unit 25% of 200
6,00,000  20% of 200 per unit 6,00,000
= = = 60,000 units
50 50  40

(v) Selling price per unit if revised BEP is reduced by 4,000 units:
Existing BEP = 50% of 24,000 units = 12,000 units

Hence, Revised BEP = 12,000 - 4,000 = 8,000 units

At BEP, Sales Value = Variable Cost + Fixed Cost

= 8,000 units × `150 (75% of `200) + `6,00,000
= `12,00,000 + `6,00,000
At BEP, Sales Value = `18,00,000

Sales value for 8,000 units = `18,00,000

Sales price per unit = `18,00,000 ÷ 8,000 units = `225

PYQ 10
MFN Limited started is operation in 2011 with the total production capacity of 2,00,000 units. The following
data for two years is made available to you:
2011 2012
Sales units 80,000 1,20,000
Total cost (`) 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is expected to continue in
2013 as well. Selling price is `40 per unit.
You are required to calculate:
(i) Break-Even Point (in units).
(ii) Profit at 75% of the total capacity in 2013.
[(5 Marks) May 2013]

Answer
Fixed Cost 12,00,000
(i) Break Even Point (in units) = =
Cont n P.U. 12
= 1,00,000 units

(ii) Profit at 75% of total capacity:

Profit = (No. of units sold × Contn per unit) – Fixed cost
= (2,00,000 × 75% × `12) - 12,00,000
= `6,00,000
Working Note:

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 MARGINAL COSTING 12.7
(a) Calculation of Contribution per unit:
Contribution per unit = Selling price per unit – Value cost per unit
= `40 – `28 = `12

Increasein Cost 45,60,000  34,40,000

Variable cost per unit = =
Increasein units 1,20,000  80,000
= `28 per unit
(b) Calculation of Fixed cost:
Fixed Cost = Total cost – Variable cost
= 34,40,000 – (80,000 × 28) (by using data of 2011)
= 12,00,000

PYQ 11
SHA Limited provides the following trading results:
Year Sales Profit
2012-13 `25,00,000 10% of Sale
2013-14 `20,00,000 8% of Sale
You are required to calculate:
(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is `30,00,000
(iv) Sale, when desired profit is `4,75,000
(v) Margin of Safety at a profit of `2,70,000
[(5 Marks) May 2014]

Answer
(i) Calculation of Fixed Cost (by using data of year 2012-13):
Fixed cost = Contribution – profit = (Sales × PV Ratio) - 10% of Sale
= (`25,00,000 × 18%) - 10% of `25,00,000 = `2,00,000

(ii) Calculation of Break Even Point:

Fixed Cost 2,00,000
BEP = = = `11,11,111.11
PV Ratio 18%

(iii) Calculation of Amount of profit, if Sale is `30,00,000:

Profit = Contribution - Fixed Cost
= `30,00,000 × 18% - 2,00,000 = `3,40,000

(iv) Sales, when desired profit is `4,75,000:

Fixed Cost  Desired Pr ofit 2,00,000  4,75,000
Sales = =
PV Ratio 18%
= `37,50,000

(v) Margin of Safety at a profit of `2,70,000:

Pr ofit 2,70,000
MOS = = = `15,00,000
PV Ratio 18%

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 MARGINAL COSTING 12.8
Working Note:
(i) Calculation of PV Ratio:
Difference in Pr ofit
PV Ratio = × 100
Difference in Sales
10% of 25,00,000  8 % of 20,00,000 90,000
= × 100 = × 100
25,00,000  20,00,000 5,00,000
= 18%
PYQ 12
ABC Limited started is operation in the year 2013 with the total production capacity of 2,00,000 units. The
following information, for two years, are made available to you:
2013 2014
Sales units 80,000 1,20,000
Total cost (`) 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is anticipated that it will
remain unchanged in 2015 also. Selling price is `40 per unit.
Calculate:
(a) Variable cost per unit.
(b) Profit Volume ratio.
(c) Break-Even Point (in units).
(d) Profit if the firm operates at 75% of the capacity.

[(5 Marks) May 2015]

Answer
Increasein Cost 45,60,000  34,40,000
(a) Variable cost per unit = =
Increasein Units 1,20,000  80,000
= `28 per unit
Contribution per unit 40 28
(b) Profit Volume ratio = × 100 = × 100
Sale price per unit 40
= 30%
Fixed Cost 12,00,000
(c) Break Even Point (in units) = = = 1,00,000 units
Cont n P.U. 12

(d) Profit at 75% of total capacity:

Profit = (No. of units sold × Contn per unit) – Fixed cost
= (2,00,000 × 75% × `12) - 12,00,000 = `6,00,000
Working Note:
Fixed Cost = Total cost – Variable cost (by using data of 2013)
= 34,40,000 – (80,000 × 28) = 12,00,000

PYQ 13
SL Limited is engaged in manufacture of tyres. Analysis of income statement indicated a profit of `150 Lakhs
on a sales volume of 50,000 units. The fixed costs are `850 Lakhs which appears to be high. Existing selling
price is `3,400 per unit. The company is considering to revise the target profit to `350 Lakhs.
You are required to compute:
(i) Break even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.

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 MARGINAL COSTING 12.9
(iii) Profit with 15% increase in selling price and drop in sales volume by 10%
(iv) Volume to be achieved to earn target profit at revised selling price as calculated in (iii) above, if
reduction of 8% in the variable costs and `85 Lakhs in the fixed cost is envisaged.
[(8 Marks) June 2015]

Answer
Fixed Cost 850 Lakhs
(i) Break even point (in units) = = = 42,500 Units
Contribution Per Unit 2,000

Break even point (in rupees) = BEP in Units × Sales Price Per Unit
= 42,500 × `3,400 = `1,445 Lakhs

Fixed Cost  T arget Pr ofit 850 Lakhs  350 Lakhs

(ii) Sales to earn target profit = =
Contribution Per Unit 2,000
= 60,000 Units

(iii) Revised Profit = Revised Contribution – Fixed Cost

= [`2,510 × 45,000 units (50,000 – 10%)] - 850 Lakhs
= `279.5 Lakhs

Revised Fixed Cost  T arget Pr ofit

(iv) Volume to earn target profit =
Revised Contribution Per Unit
765 Lakhs  350 Lakhs
= = 42,524.79 Units
2,622

Working Note:
(a) Calculation of Contribution per unit and PV Ratio:
Contribution = Fixed Cost + Profit
= 850 Lakhs + 150 Lakhs = 1,000 Lakhs

Contribution Per Unit = Total Contribution ÷ No of units

= 1,000 Lakhs ÷ 50,000 units = `2,000 per unit

(b) Calculation of Revised Contribution with 15% increase in sale price:

Revised Contribution = Revised Sale Price – Variable Cost
= (3,400 + 15%) – 1,400 = `2,510 per unit

(c) Calculation of Revised Variable Cost per unit, Revised Contribution per unit and Fixed Cost:
Revised Variable Cost = Variable Cost – 8%
= 1,400 – 8% = `1,288 per unit
Revised Contribution per unit = (3,400 + 15%) – 1,288 = `2,622 per unit
Revised Fixed Cost = 850 Lakhs – 85 Lakhs = `765 Lakhs

PYQ 14
A company gives the following information:
Margin of safety : `3,75,000
Total cost : `3,87,500
Margin of safety in units : 15,000 units
Break even sales in units : 5,000 units
You are required to calculate:
(i) Selling price per unit, (ii) Profit, (iii) Profit/Volume ratio, (iv) Break even sales (in `), (v) Fixed cost
[(5 Marks) Nov 2015]

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 MARGINAL COSTING 12.10
Answer
M arg in of safety in rupees 3,75,000
(i) Selling price per unit = =
M arg in of safety in units 15,000
= `25

(ii) Profit = Total sales – Total cost

= [(15,000 + 5,000) × 25] – 3,87,500 = `1,12,500

Pr ofit 1,12,500
(iii) Profit/Volume ratio = × 100 = × 100
M arg in of safety in rupees 3,75,000
= 30%

(iv) Break even sales in rupees = Break even point in units × sale price per unit
= 5,000 units × 25 = `1,25,000

(v) Fixed cost = Break even point in rupees × PV ratio

= 1,25,000 × 30% = `37,500

PYQ 15
A dairy product company manufacturing baby food with a shelf life of one year furnishes the following
information:
(i) On 1st January, 2016, the company has an opening stock of 20,000 packets whose variable cost is `180
per packet.
(ii) In 2015, production was 1,20,000 packets and the expected production in 2016 is 1,50,000 packets.
Expected sales for 2016 is 1,60,000 packets.
(iii) In 2015, fixed cost per unit was `60 and it is expected to increase by 10% in 2016. The variable cost is
expected to increase by 25%. Selling price for 2016 has been fixed at `300 per packet.
You are required to calculate the Break-even volume in units for 2016.
[(5 Marks) May 2016]

Answer
Fixed cost  Contribution from opening units
Break-even-point (in units) = Opening units +
Contribution per current period unit
79,20,000  120  20,000
= 20,000 units +
300  225
= 93,600 Units

Note: Since, shelf life of the product is one year only, hence, opening stock is to be sold first.

Working notes:
Fixed cost (2015) = 1,20,000 packets × `60 per unit = `72,00,000

Fixed cost (2016) = `72,00,000 + 10% = `79,20,000

Variable cost (2016) = `180 + 25% = `225 per unit

Contribution (2015) = `300 - `180 = `120 per unit

PYQ 16
The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture of a
toy. The following information is available:

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 MARGINAL COSTING 12.11
Particulars Process A (`) Process B (`)
Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed cost per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (next year, in units) 4,00,000 4,00,000
Suggest:
1. Which process should be chosen?
2. Would you change your answer as given above, if you were informed that the capacities of the two
processes are as follows: A - 6,00,000 units; B - 5,00,000 units? Why?
[(4 Marks) May 2016]

Answer
1. Profit (Process A) = Contribution – Fixed cost
= 4,00,000 units × `8 (`20 - `12) – `30,00,000 = `2,00,000

Profit (Process B) = Contribution – Fixed cost

= 4,00,000 units × `6 (`20 - `14) – `21,00,000 = `3,00,000

Suggestion: Process B should be chosen as it gives more profit.

2. Profit (Process A) = Contribution – Fixed cost

= 6,00,000 units × `8 (`20 - `12) – `30,00,000 = `18,00,000

Profit (Process B) = Contribution – Fixed cost

= 5,00,000 units × `6 (`20 - `14) – `21,00,000 = `9,00,000

Suggestion: Process A should be chosen as it will give more profit.

Note: It is assumed that capacity produced equals sales.

PYQ 17
The following figures are available from the records of ABC Company as at 31st March:
2015 (` in Lakhs) 2016 (` in Lakhs)
Sales 200 250
Profit 30 45
Calculate:
1. The P/V ratio and total fixed expenses.
2. The break-even level of sales.
3. Sales required to earn a profit of `70 lakhs.
[(5 Marks) Nov 2016]

Answer
Increase in Pr ofit 45  30
1. Profit Volume ratio = × 100 = × 100 = 30%
Increase in Sales 250  200

Fixed Cost = Contribution – Profit (by using data of 2015)

= 200 Lakhs × 30% – 30 Lakhs = `30,00,000

Fixed Cost 30,00,000

2. Break Even Point = =
PV Ratio 30%
= `1,00,00,000

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 MARGINAL COSTING 12.12
Fixed Cost  Pr ofit 30 Lakhs 70Lakhs
3. Required Sales = =
PV Ratio 30%
= `3,33,33,333

PYQ 18
A company has introduced a new product and marketed 20,000 units. Variable cost of the product is `20 per
units and fixed overheads are `3,20,000.
You are required to:
1. Calculate selling price per unit to earn a profit of 10% on sales value, BEP and Margin of Safely?
2. If the selling price is reduced by the company by 10%, demand is expected to increase by 5,000 units,
then what will be its impact on Profit, BEP and Margin of Safety?
3. Calculate Margin of Safety if profit is `64,000.
[(8 Marks) Nov 2016]

Answer
1. Sales:
Let Sale price per unit be ‘x’
Sale price × no of units = Variable cost per unit × no of units + Fixed cost + Profit
20,000 x = 20 × 20,000 + 3,20,000 + 10% of 20,000 x
20,000 x = 4,00,000 + 3,20,000 + 2,000 x
x = 7,20,000 ÷ 18,000 = `40 per unit
Break-even-point = Fixed cost ÷ Contribution per unit
= 3,20,000 ÷ 20 = 16,000 units
Margin of safety = Total sales unit – BEP units
= 20,000 units – 16,000 units = 4,000 units

2. Impact on Profit, BEP and MOS:

Impact on profit:
Existing profit = Sales – Variable cost – Fixed cost
= 20,000 units × 40 – 20,000 units × 20 – 3,20,000
= 80,000
Revised profit = Sales – Variable cost – Fixed cost
= 25,000 units × 36 (40 – 10%) – 25,000 units × 20 – 3,20,000
= 80,000
Though there is no impact on the total profit amount but the rate of profit is decreased from 10% to
8.89% (80,000/9,00,000 × 100).

Impact on BEP:
Revised BEP = Fixed cost ÷ Contribution per unit
= 3,20,000 ÷ 16 (36 - 20) = 20,000 units
Impact on MOS:
The Break-even point is increased by 4,000 units (20,000 units – 16,000 units).

Revised MOS = Total sales unit – BEP units

= 25,000 units – 20,000 units = 5,000 units
Margin of safety is increased by 1,000 units (5,000 units – 4,000 units).

3. Margin of Safety when, profit `64,000:

Margin of safety = Profit ÷ Contribution per unit
= 64,000 ÷ 20 = 3,200 units

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 MARGINAL COSTING 12.13
PYQ 19
The following information was obtained from the records of a manufacturing unit:
Particulars (`) (`)
Sales 80,000 units @ `25 per unit 20,00,000
Materials consumed 8,00,000
Variable overheads 2,00,000
Labour charges 4,00,000
Fixed overheads 3,60,000 17,60,000
Net profit 2,40,000

Calculate:
1. The number of units by selling which the company will neither lose nor gain anything.
2. The sales needed to earn a profit of 20% on sales.
3. The extra units which should be sold to obtain the present profit if it is proposed to reduce the selling
price by 20% and 25%.
4. The selling price to be fixed to bring down its Break-even Point to 10,000 units under present
conditions.
[(8 Marks) May 2017]

Answer
1. Break-even-point (in units) = Fixed cost ÷ Contribution per unit
= 3,60,000 ÷ 7.50 = 48,000 units

Fixed cost
2. Required sales (in units) =
Contribution per unit  Pr ofit per unit
3,60,000
= = 1,44,000 units
7.50  20% of 25.00
or `36,00,000

3. Calculation of Extra units to be sold:

No. of units sold with 20% decrease in sales price
Fixed cost  Pr ofit
=
Re vised contribution per unit
3,60,000  2,40,000
= = 2,40,000 units
2.50
Extra units to be sold = 2,40,000 – 80,000 = 1,60,000 units

No. of units sold with 20% decrease in sales price

Fixed cost  Pr ofit
=
Re vised contribution per unit
3,60,000  2,40,000
= = 4,80,000 units
1.25
Extra units to be sold = 4,80,000 – 80,000 = 4,00,000 units

4. Selling price per unit to bring down its BEP to 10,000 units:
At BEP, Sales Value = Variable Cost + Fixed Cost
= 10,000 units × `17.50 + `3,60,000 = `5,35,000

Sales value for 10,000 units = `5,35,000

Sales price per unit = `5,35,000 ÷ 10,000 units = `53.50

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 MARGINAL COSTING 12.14
PYQ 20
A company, with 90% Capacity utilization, is manufacturing a product and makes a sale of `9,45,000 at `30
per unit. The cost data is as under:
Materials `9 per unit
Labour `7 per unit
Semi variable cost (including variable cost `4.25 per unit) `2,10,000
Fixed cost is `94,500 upto 90% level of output (capacity). Beyond this, an additional amount of `15,000 will
be incurred.
You are required to calculate:
(3) Level of output at break-even point,
(4) Number of units to be sold to earn a net income of 10% of sales and
(5) Level of output needed to earn a profit of `1,41,375.
[(8 Marks) Nov 2017]

Answer
(1) Break-even-point (in units) = Fixed cost ÷ Contribution per unit
= `1,70,625 ÷ `9.75 = 17,500 units

Break-even-point (in `) = 17,500 units × `30 = `5,25,000

Fixed cost
(2) Required sales (in units) =
Contribution per unit  Pr ofit per unit
1,70,625
= = 25,277.78 units
9.75  10% of 30

Fixed cost  Pr ofit

(3) Required sales (in units) =
Contribution per unit
1,70,625  1,41,375
= = 32,000 units
9.75

Note: 32,000 units is higher than 90% activity level (31,500 units), therefore now fixed cost will be
`1,85,625 (`1,70,625 + `15,000)
Fixed cost  Pr ofit
Required sales (in units) =
Contribution per unit
1,85,625  1,41,375
= = 33,538.46 units
9.75
Or `15,77,308
Working notes:
Existing level of sales = `9,45,000 ÷ `30 = 31,500 units
(90% capacity level)

Fixed cost in semi variable cost = Total semi variable cost – variable cost
= `2,10,000 – 31,500 × `4.25 = `76,125

Fixed cost = `94,500 + `76,125 = `1,70,625

Contribution per unit = `30 - `9 - `7 - `4.25 = `9.75

PYQ 21
A company is producing an identical product in two factories. The following are the details in respect of both
factories:

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 MARGINAL COSTING 12.15
Particulars Factory X Factory Y
Sales price per unit (`) 50 50
Variable cost per unit (`) 40 35
Fixed cost (`) 2,00,000 3,00,000
Depreciation included in above fixed cost (`) 40,000 30,000
Sales in units 30,000 20,000
Production capacity (units) 40,000 30,000
You are required to determine:
(1) Break even point (BEP) each factory individually.
(2) Cash break even point for each factory individually.
(3) BEP for company as a whole, assuming the present product mix is in sales ratio.
(4) Consequence on profit and BEP if product mix is changed to 2 : 3 and total demand remain same.
[(8 Marks) May 2018]

Answer
(1) Individual BEP:
Factory X = Fixed cost ÷ Contribution per unit
= 2,00,000 ÷ 10 (50 - 40) = 20,000 units
Factory Y = 3,00,000 ÷ 15 (50 - 35) = 20,000 units

(2) Individual Cash BEP:

Factory X = Cash fixed cost ÷ Contribution per unit
= 1,60,000 ÷ 10 (50 - 40) = 16,000 units
Factory Y = 2,70,000 ÷ 15 (50 - 35) = 18,000 units

(3) BEP as a whole: = Total fixed cost ÷ Composite contribution per unit
= (2,00,000 + 3,00,000) ÷ 12 (10 × 3/5 + 15 × 2/5)
= 41,667 units

(4) BEP as a whole:

Total demand original = 30,000 of X + 20,000 of Y = 50,000 units
Revised sales X = 50,000 × 2/5 = 20,000 units
Revised sales Y = 50,000 × 3/5 = 30,000 units
Existing Profit = Contribution – Fixed cost
= (30,000 × 10 + 20,000 × 15) – (2,00,000 + 3,00,000)
= `1,00,000
Revised Profit = (20,000 × 10 + 30,000 × 15) – (2,00,000 + 3,00,000)
= `1,50,000

Consequence on Profit = Increase in Profit by `50,000

Revised BEP = Total fixed cost ÷ Revised composite contribution per unit
= (2,00,000 + 3,00,000) ÷ 13 (10 × 2/5 + 15 × 3/5)
= 38,462 units
Consequence on BEP = Decrease in BEP by 3,205 units

PYQ 22
Following figures have been extracted from the books of M/s. RST Private Limited:

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 MARGINAL COSTING 12.16
Year Sales Profit
2016-17 `4,00,000 15,000 (loss)
2017-18 `5,00,000 15,000 (profit)
You are required to calculate:
(1) Profit Volume Ratio
(2) Fixed Costs
(3) Break Even Point
(4) Sales required to earn a profit of `45,000
(5) Margin of Safety in financial year 2017-2018.
[(5 Marks) May 2018]

Answer
(1) Calculation of PV Ratio:
Difference in Pr ofit 30,000
PV Ratio = × 100 = = 30%
Difference in Sales 1,00,000

(2) Calculation of Fixed Cost (by using data of year 2017-18):

Fixed cost = Contribution – profit
= 5,00,000 × 30% - 15,000 = `1,35,000

(3) Calculation of Break Even Point:

Fixed Cost 1,35,000
BEP = = = `4,50,000
PV Ratio 30%

(4) Sales required to earn `45,000:

Fixed Cost  Desired Pr ofit 1,35,000 + 45,000
Sales = =
PV Ratio 30%
= `6,00,000

(5) Margin of Safety in financial year 2017-2018:

Pr ofit 15,000
MOS = = = `50,000
PV Ratio 30%

PYQ 23
PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of 2,000 pieces. The cost
accountant has presented following information for the year to the management:

Particulars (`) (`)

Sales 1,500 pieces @ `1,800 per piece 27,00,000
Direct Materials 5,94,200
Direct Labour 4,4,2600
Overheads (40% Fixed) 11,97,000 22,33,800
Net profit 4,66,200

Evaluate the following options:

1. If the selling price is increased by `200, the sales will come down to 60% of the total annual capacity.
Should the company increase its selling price?
2. The company can earn a profit of 20% on sales if the company provide TIEPIN with readymade suit. The
cost of each TIEPIN is `18. Calculate the sales to earn a profit @20% on sales.
[(10 Marks) May 2018]

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 MARGINAL COSTING 12.17
Answer
(1) Statement Showing Evaluation of Option 1
Particulars (`) (`)
Sales 1,200 pieces (2,000 × 60%) @`2,000 (1,800 + 200) per piece 24,00,000
Less: Variable Cost:
Direct Materials (5,94,200 × 1,200/1,500) 4,75,360
Direct Labour (4,42,600 × 1,200/1,500) 3,54,080
Variable Overheads (11,97,000 × 60% × 1,200/1,500) 5,74,560 (14,04,000)
Contribution 9,96,000
Less: Fixed Overheads (11,97,000 × 40%) (4,78,800)
Profit 5,17,200

Yes company should increase its selling price having higher profit.

(2) Calculation of sales to earn 20% profit with TIEPIN option:

Fixed Cost + Pr ofit 4,78,800 + 20% Sales
Sales = =
Re vised PV Ratio 34%
= `34,20,000 or 1,900 units

Working Note:
Calculation of Revised PV Ratio:
Re vised Contribution 612
Revised PV Ratio = × 100 = × 100 = 34%
Sales 1,800

Revised contribution per unit = Sale price – Variable cost per unit including TIEPIN
= 1,800 – {(5,94,200 + 4,42,600 + 11,97,000 × 60%) ÷ 1,500 units} – 18
= 1,800 – 1,170 – 18
= 612

PYQ 24
A manufacturing concern was operating at margin of safety of 40% in the year 2018 and was selling its
product at `75 per unit. Variable cost ratio was 80% and fixed cost amounted to `5,40,000.
In the year 2019, the concern anticipates an increase in the variable costs and fixed cost by 15%
and 5% respectively.
You are required to:
Find out the selling price to be fixed in the year 2019 keeping in view that concern is willing to maintain
same P/V ratio as it was in the year 2018.
[(5 Marks) Nov 2018]

Answer
Variable cost (2018) = `75 × 80% = `60 per unit
Variable cost (2019) = `60 + 15% = `69 per unit

Sale Price to maintain same PV Ratio = `69 ÷ 80% = `86.25 per unit

PYQ 25
A manufacturing company is providing a product ‘A’ which is sold in the market at `45 per unit. The
company has the capacity to produce 40,000 units per year. The budget for the year 2018-2019 projects a
sale of 30,000 units.

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 MARGINAL COSTING 12.18
The cost of each unit are expected as under:
Materials `12
Wages `9
Overheads `6
Margin of safety is `4,12,500.

You are required to:

(1) Calculate fixed cost and break-even point.
(2) Calculate the volume of sales to earn profit of 20% on sales.
(3) If management is willing to invest 10,00,000 with the expected return of 20%, calculate units to be sold
to earn this profit.
(4) Management expects additional sales if the selling price is reduced to `44. Calculate units to be sold to
achieve the same profit as desired in above (3).
[(10 Marks) Nov 2018]

Answer
(1) Fixed cost = BEP sales × P/V ratio
= `9,37,500 × 40% = `3,75,000
Break-even point = Total sales – Margin of safety
= 30,000 units × `45 – `4,12,500 = `9,37,500

P/V ratio = (Contribution ÷ Sales) × 100

= [{45 – (12 + 9 + 6)} ÷ 45] × 100
= (18 ÷ 45) × 100 = 40%

Fixed Cost + Pr ofit

(2) Sales to earn 20% on sales =
P / V Ratio
3,75,000 +20% Sales
=
40%
= `18,75,000 or 41,667 units

Fixed Cost + Pr ofit

(3) Sales in units =
Contribution p. u.
3,75,000 +20% on 10,00,000
= = 31,945 units
18

(4) Calculation of units to be sold to earn same profit as in (3) with revised sale price:
Fixed Cost + Pr ofit
Revised sales =
Re vised Contribution p. u.
3,75,000 +2,00,000
= = 33,824 units
17

PYQ 26
M/s Gaurav Private Limited is manufacturing and selling two products 'BLACK' and 'WHITE' at selling price
of `20 and `30 respectively.

The following sales strategy has been outlined for the financial year 2019-20:
(a) Sales planned for the year will be `81,00,000 in the case of 'BLACK' and `54,00,000 in the case of
'WHITE'.

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 MARGINAL COSTING 12.19
(b) The selling price of 'BLACK' will be reduced by 10% and that of 'WHITE' by 20%.
(c) Break-even is planned at 70% of the total sales of each product.
(d) Profit for the year to be maintained at `8,26,200 in the case of 'BLACK' and `7,45,200 in the case of
'WHITE'. This would be possible by reducing the present annual fixed cost of `42,00,000 allocated as
`22,00,000 to 'BLACK' and `20,00,000 to 'WHITE'.

You are required to calculate:

(1) Number of units to be sold of 'BLACK' and 'WHITE' to Break even during the financial year 2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (d) above.
[(5 Marks) May 2019]

Answer
(1) Statement Showing Break Even Sales in Units during 2019-20
Particulars Black White
Planned sales in ` 81,00,000 54,00,000
BEP sales in ` (70% of planned sales) 56,70,000 37,80,000
÷ Sale price revised (`20 – 10% and `30 – 20%) ÷ 18 ÷ 24
BEP sales in units 3,15,000 1,57,500

(2) Statement Showing Reduction in Fixed Cost

Particulars Black White
Profit to be maintained 8,26,200 7,45,200
Margin of Safety (30% of sales) 24,30,000 16,20,000
Profit volume ratio (Profit ÷ MOS) 34% 46%
Present fixed cost 22,00,000 20,00,000
Fixed cost revised (BEP × PV ratio) 19,27,800 17,38,800
Reduction in fixed cost 2,72,200 2,61,200

PYQ 27
When volume is 4,000 units, average cost is `3.75 per unit. When volume is 5,000 units, average cost is `3.50
per unit. The break-even point is 6,000 units.

Calculate:
(1) Variable Cost per unit
(2) Fixed Cost and
(3) Profit Volume Ratio.
[(5 Marks) Nov 2019]

Answer
(1) Variable Cost per unit:
Change in Cost 5,000 × 3.50 − 4,000 × 3.75
Variable cost per unit = =
Change in Units 5,000 − 4,000

17,500 − 15,000
= = `2.50 per unit
1,000

(2) Fixed Cost:

Fixed cost = Total Cost – Variable Cost
= 4,000 × `3.75 – 4,000 × `2.50 (using 4,000 units as base)
= `15,000 – `10,000
= `5,000

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 MARGINAL COSTING 12.20
(3) Profit Volume Ratio:

Fixed Cost
Profit Volume Ratio = × 100
BEP Sales

5,000
= × 100 = 25%
20,000

Working Note:
BEP sales = Fixed Cost + Variable Cost
= 5,000 + 6,000 units × `2.50 = `20,000

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 MARGINAL COSTING 12.21

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3 TO 5 FINAL
1 Y Y - -
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y -
5 Y Y Y Y
6 Y Y Y Y
7 Y Y Y Y
8 Y Y Y -
9 Y Y Y Y
10 Y Y Y Y
11 Y Y Y Y
12 Y Y Y Y
13 Y Y Y Y
14 Y Y Y Y
15 Y Y Y Y
16 Y Y Y Y
17 Y Y Y -
18 Y Y Y Y
19 Y Y Y Y
20 Y Y Y Y
21 Y Y Y Y
22 Y Y - -
23 Y Y Y Y
24 Y Y - -
25 Y Y Y Y
26 Y Y Y Y
27 Y Y Y Y

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 CHAPTER - 13

COST RECORDS
OR
COST ACCOUNTING SYSTEM

LEARNING OBJECTIVE

After studying this chapter, you should be able to

 Differentiate between integrated and non-integrated systems of
accounting.
 Identify the ledgers maintained by financial as well as cost departments.
 Understand the reasons for differences between financial and cost
accounts.
 Should be in a position to write the various journal entries for both
integrated and non-integrated systems of accounting.
 COST RECORDS OR COST ACCOUNTING SYSTEM 13.1

PAST YEAR QUESTIONS

PYQ 1
The following balances were extracted from a company's ledger as on 31st December 1997:
Name of Account Dr. Cr.
Raw materials control A/c 48,836 -
Work in progress Control A/c 14,745 -
Finished Stock Ledger Control A/c 21,980 -
Cost ledger control A/c - 85,561
Total 85,561 85,561
Further transactions took place during the following quarter as follows:
Direct wages 18,370
Factory overhead allocated to WIP 11,786
Goods Finished at cost 36,834
Raw materials purchased 22,422
Cost of goods sold 42,000
Raw materials issued to production 17,000
Raw materials credited by suppliers 1,000
Inventory audit raw material losses 1,300
WIP rejected (with no scrap value) 1,800
Customer's return (at cost) of finished goods 3,000
Prepare all the ledger accounts in cost ledger.
[(10 Marks) Nov 1998]

Answer
Raw Material Control A/c
Particulars Amount Particulars Amount
To Bal b/d 48,836 By WIP A/c 17,000
To Cost Ledger Control A/c 22,422 By Cost Ledger Control A/c 1,000
By Cost Ledger Control A/c (Loss) 1,300
By Bal c/d 51,958
71,258 71,258
Wages Control A/c
Particulars Amount Particulars Amount
To Cost Ledger Control A/c 18,370 By WIP A/c 18,370
18,370 18,370
Factory Overheads Control A/c
Particulars Amount Particulars Amount
To Cost Ledger Control A/c 11,786 By WIP A/c 11,786
11,786 11,786
Work-in-Process Control A/c
Particulars Amount Particulars Amount
To Bal b/d 14,745 By Finished Stock Control A/c 36,834
To Factory OH Control A/c 11,786 By Cost Ledger Control A/c
To Wages Control A/c 18,370 (Rejected) 1,800
To Raw Material Control A/c 17,000 By Bal c/d 23,267
61,901 61,901

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.2
Finished Stock Control A/c
Particulars Amount Particulars Amount
To Bal b/d 21,980 By Cost of Sales 42,000
To Work-in-Progress Control A/c 36,834 By Bal c/d 19,814
To Cost of Sales (Return) 3,000
61,814 61,814

Cost of Sales A/c

Particulars Amount Particulars Amount
To Finished Goods Control A/c 42,000 By Finished Goods Control A/c 3,000
By Bal c/d 39,000
42,000 42,000

Cost Ledger Control A/c

Particulars Amount Particulars Amount
To Raw Material Control A/c 1,000 By Bal b/d 85,561
(Returns) By Raw Material Control A/c 22,422
To Raw Materials Control A/c (Loss) 1,300 By Wages Control A/c 18,370
To WIP Control A/c (Rejected) 1,800 By Factory OH Control A/c 11,786
To Bal c/d 1,34,039
1,38,139 1,38,139

PYQ 2
Pass journal entries in the cost books (non-integrated system) for the following transactions:
(i) Issue of Materials : Direct `5,50,000, Indirect `1,50,000
(ii) Allocation of wages : Direct `2,00,000, Indirect `40,000
(iii) Under/over absorbed overheads : Factory (over) `20,000
Administration (under) `10,000
[(8 Marks) Nov 2007]

Answer
Journal Entries
S. No. Entries Dr. Cr.
(i) Work-in-progress Ledger Control A/c Dr. 5,50,000 -
Factory Overhead Control A/c Dr. 1,50,000 -
To Stock Ledger Control Account - 7,50,000
(Being issue of materials)
(ii) Work-in-progress Ledger Control A/c Dr. 2,00,000 -
Factory Overhead Control A/c Dr. 40,000 -
To Wages Control A/c - 2,40,000
(Being Allocation of wages)
(iii) a Factory Overhead Control A/c Dr. 20,000 -
To Costing P/L A/c - 20,000
(Being Factory overhead over adjusted)
(iv) b Costing P/L A/c Dr. 10,000 -
To Administrative O/H control A/c - 10,000
( Being Administration O/H under absorbed)

PYQ 3
BPR Limited keeps books on integrated accounting system. The following balances appear in the books as on
April 1, 2002:

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.3
Name of Account Dr. Cr.
Stores Ledger control A/c 40,950 -
Work in progress Control A/c 38,675 -
Finished Stock Ledger Control A/c 52,325 -
Bank A/c - 22,750
Creditors A/c - 18,200
Fixed Assets A/c 1,47,875 -
Debtors A/c 27,300 -
Share Capital A/c - 1,82,000
Provision for Depreciation A/c - 11,375
Provision for Doubtful Debts A/c - 3,725
Production Overheads Outstanding A/c - 6,250
Prepaid Administration Overheads A/c 9,975 -
Profit & Loss A/c - 72,800
Total 3,17,100 3,17,100

The transactions for the year ended March 31, 2003 were as given below:

Direct Wages 1,97,925

Indirect Wages 11,375 2,09,300
Purchase of materials (on credit) 2,27,500
Materials issued to production 2,50,250
Materials issued for repairs 4,550
Goods finished during the year (at cost) 4,89,125
Credit Sales 6,82,500
Cost of Goods sold 5,00,500
Production overheads absorbed 1,09,200
Production overheads paid during the year 91,000
Production overheads outstanding at the end of year 7,775
Administration overheads paid during the year 27,300
Selling overheads incurred 31,850
Payment to Creditors 2,29,775
Payment received from Debtors 6,59,750
Depreciation of Machinery 14,789
Administration overheads outstanding at the end of year 2,225
Provision for doubtful debts at the end of the year 4,590

Write up accounts in the integrated ledger of BPR Limited and prepare a Trial Balance.
[(10 Marks) Nov 2003]

Answer
Stores Ledger Control A/c
Particulars Amount Particulars Amount
To Bal b/d 40,950 By WIP Ledger Control A/c 2,50,250
To Creditors 2,27,500 By Production Overhead Control A/c 4,550
By Bal c/d 13,650
2,68,450 2,68,450

Wages Control A/c

Particulars Amount Particulars Amount
To Bank A/c (19,7,925 + 11,375) 2,09,300 By WIP Ledger Control A/c 1,97,925
By Production Overhead Control A/c 11,375
2,09,300 2,09,300

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.4
Production Overhead Control A/c
Particulars Amount Particulars Amount
To Stores Ledger Control A/c 4,550 By WIP Ledger Control A/c 1,09,200
To Wages Control A/c 11,375 By Profit & Loss A/c 14,039
To Bank A/c (91,000 – 6,250) 84,750 (Under recovery)
To Production OH outstanding 7,775
To Provision for depreciation 14,789
1,23,239 1,23,239

Work-in-Progress Ledger Control A/c

Particulars Amount Particulars Amount
To Bal b/d 38,675 By Finished Goods Control A/c 4,89,125
To Production Overhead Control A/c 1,09,200 By Bal c/d 1,06,925
To Wages Control A/c 1,97,925
To Stores Ledger Control A/c 2,50,250
5,96,050 5,96,050

Administration Overheads Control A/c

Particulars Amount Particulars Amount
To Prepaid Administration OH A/c 9,975 By Finished Goods Control A/c 39,500
To Bank A/c 27,300
To Admin OH outstanding A/c 2,225
39,500 39,500

Finished Goods Control A/c

Particulars Amount Particulars Amount
To Balance b/d 52,325 By Cost of Sales A/c 5,00,500
To WIP Ledger Control A/c 4,89,125 By Balance c/d 80,450
To Administration OH Control A/c 39,500
5,80,950 5,80,950

Selling Overheads Control A/c

Particulars Amount Particulars Amount
To Bank A/c 31,850 By Cost of Sales A/c 31850

31,850 31,850

Cost of Sales A/c

Particulars Amount Particulars Amount
To Finished Goods Control A/c 5,00,500 By Sales A/c 5,32,350
To Selling overhead A/c 31,850
5,32,350 5,32,350

Sales A/c
Particulars Amount Particulars Amount
To Cost of sales A/c 5,32,350 By Debtors A/c 6,82,500
To Profit & Loss A/c 1,50,150

6,82,500 6,82,500

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.5
Production Overheads Outstanding A/c
Particulars Amount Particulars Amount
To Bank A/c 6,250 By Balance b/d 6,250
To Balance c/d 7,775 By Production overhead A/c 7,775
14,025 14,025
Prepaid Administration Overheads A/c
Particulars Amount Particulars Amount
To Balance b/d 9,975 By Administration overhead A/c 9,975
9,975 9,975
Provision for Depreciation A/c
Particulars Amount Particulars Amount
To Balance c/d 26,164 By Balance b/d 11,375
By Production overhead A/c 14,789
26,164 26,164
Provision for Doubtful Debts A/c
Particulars Amount Particulars Amount
To Balance c/d 4,590 By Balance b/d 3,725
By Profit & Loss A/c 865
4,590 4,590
Debtors A/c
Particulars Amount Particulars Amount
To Balance b/d 27,300 By Bank A/c 6,59,750
To Sales A/c 6,82,500 By Balance c/d 50,050
7,09,800 7,09,800

Profit & Loss A/c

Particulars Amount Particulars Amount
To Provision for doubtful debts 865 By Balance b/d 72,800
To Production overhead 14,039 By Sales A/c 1,50,150
To Balance c/d 2,08,046
2,22,950 2,22,950

Creditors A/c
Particulars Amount Particulars Amount
To Bank 2,29,775 By Balance b/d 18,200
To Balance c/d 15,925 By Production overhead A/c 2,27,500
2,45,700 2,45,700

Bank A/c
Particulars Amount Particulars Amount
To Debtors A/c 6,59,750 By Balance b/d 22,750
By Direct wages 1,97,925
By Indirect wages 11,375
By Production overhead A/c 91,000
(84,750 + 6,250)
By Administration overhead A/c 27,300
By Selling overhead A/c 31,850
By Creditors A/c 2,29,775
By Balance c/d 47,775
6,59,750 6,59,750

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.6
Trial Balance
(As on March 31st 2003)
Name of Account Dr. Cr.
Stores Ledger control A/c 13,650 -
Work in progress Control A/c 1,06,925 -
Finished Stock Ledger Control A/c 80,450 -
Bank A/c 47,775 -
Creditors A/c - 15,925
Fixed Assets A/c 1,47,875 -
Debtors A/c 50,050 -
Share Capital A/c - 1,82,000
Provision for Depreciation A/c - 26,164
Provision for Doubtful Debts A/c - 4,590
Factory Overheads Outstanding A/c - 7,775
Administration Overhead Outstanding A/c - 2,225
Profit & Loss A/c - 2,08,046
Total 4,46,725 4,46,725

PYQ 4
The following figures have been extracted from the cost records of a manufacturing unit:
Stores:
Opening balance 32,000
Purchases of materials 1,58,000
Transfer from work-in-progress 80,000
Issues to work-in-progress 1,60,000
Issues to repairs 20,000
Deficiencies found in stock-taking 6,000
Work-in-progress:
Opening balance 60,000
Direct wages applied 65,000
Overheads applied 2,40,000
Closing balance of WIP 45,000
Entire output is sold at a profit of 10% on actual cost from work-in-progress.
Wages incurred 70,000
Overhead incurred 2,50,000
Items not included in cost records:
Income from investment 10,000
Loss on sale of capital assets 20,000
Draw up Store Control account, Work-in-progress Control account, Costing Profit and Loss
account, Profit and Loss account and Reconciliation statement.
[(13 Marks) May 2005]

Answer
Stores Ledger Control Account
Particulars Amount Particulars Amount
To Balance b/d 32,000 By WIP Ledger Control A/c 1,60,000
To Cost Ledger Control A/c 1,58,000 By Work Overhead Control A/c 20,000
To Work in progress Control A/c 80,000 By Costing P/L A/c 6,000
(assumed abnormal)
By Balance c/d 84,000
2,70,000 2,70,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.7
Work in Progress Ledger Control Account
Particulars Amount Particulars Amount
To Balance b/d 60,000 By Stores Control A/c 80,000
To Stores Ledger Control A/c 1,60,000 By Costing Profit and Loss A/c 4,00,000
To Direct Wages Control A/c 65,000 (i.e., cost of sales)
To Works Overhead Control A/c 2,40,000 By Balance c/d 45,000
5,25,000 5,25,000
Works Overhead Control Account
Particulars Amount Particulars Amount
To Cost Ledger Control A/c 2,50,000 By WIP Ledger Control A/c 2,40,000
To Store Ledger Control A/c 20,000 By Costing Profit & Loss A/c 35,000
To Wages Control A/c 5,000 (under recovery)
2,75,000 2,75,000
Costing Profit & Loss Account
Particulars Amount Particulars Amount
To WIP Control A/c 4,00,000 By Cost Ledger Control A/c 4,40,000
To Works Overhead Control A/c 35,000 (4,00,000 + 10%)
To Stores Ledger Control A/c 6,000 By Loss 1,000
4,41,000 4,41,000

Recording of transaction in financial books:

Profit & Loss Account

Particulars Amount Particulars Amount
To Opening stock: By Sales 4,40,000
Stores 32,000 By Closing stock:
WIP 60,000 92,000 Stores 84,000
To Purchases 1,58,000 WIP 45,000 1,29,000
To Wages incurred 70,000 By Income from investment 10,000
To Overheads incurred 2,50,000 By Loss 11,000
To Loss on sale of capital asset 20,000
5,90,000 5,90,000

Reconciliation statement
Particulars `
Loss as per Cost Accounts (1,000)
Add: Income from investment recorded in financial accounts 10,000
Less: Loss on sale of capital assets only (20,000)

Loss as per Financial Accounts (11,000)

PYQ 5
As of 31st March, 2008, the following balances existed in a firm’s cost ledger, which is maintained separately
on a double entry basis:
Name of Account Dr. Cr.
Stores Ledger Control A/c 3,00,000 -
Work in progress Control A/c 1,50,000 -
Finished Stock Ledger Control A/c 2,50,000 -
Manufacturing Overhead Control A/c - 15,000
Cost Ledger Control A/c - 6,85,000
Total 7,00,000 7,00,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.8
During the next quarter, the following items arose:
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-in-
progress Control A/c, Finished Stock Ledger Control A/c, Manufacturing Overheads 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
Stores Ledger Control Account
Particulars Amount Particulars Amount
To Balance b/d 3,00,000 By WIP Ledger Control A/c 1,35,000
To Cost Ledger Control A/c 1,25,000 (Materials issued)
(Materials purchased) By Cost Ledger Control A/c 13,000
(Materials returned to supplier)
By Balance c/d 2,77,000
4,25,000 4,25,000

Wages Control Account

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 60,000 By WIP Ledger Control A/c 40,000
(40,000 + 20,000) (Direct wages)
By Manufacturing OH Control A/c 20,000
(indirect labour)
60,000 60,000

Manufacturing Overhead Control Account

Particulars Amount Particulars Amount
To Wages Control A/c 20,000 By Balance b/d 15,000
(Indirect labour) By WIP Ledger Control A/c 85,000
To Cost Ledger Control A/c 85,000 (OH charges to production)
(Overhead incurred) By Balance c/d 5,000
1,05,000 1,05,000

Cost Ledger Control A/c

Particulars Amount Particulars Amount
To Stores Ledger Control A/c 13,000 By Bal b/d 6,85,000
(Materials returned to suppliers) By Stores Ledger Control A/c 1,25,000
To Bal c/d 9,42,000 (Materials purchased)
By Manufacturing OH Control A/c 85,000
(overhead incurred)
By Wages Control A/c 60,000
(40,000 + 20,000)
9,55,000 9,55,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.9
Work in Progress Control Account
Particulars Amount Particulars Amount
To Balance b/d 1,50,000 By Finished Stock Control A/c 2,25,000
To Wages Control A/c (direct wages) 40,000 (finished product at cost)
To Stores Ledger Control A/c 1,35,000 By Balance c/d 1,85,000
(Materials issued)
To Manufacturing OH Control A/c 85,000
4,10,000 4,10,000

Finished Stock Ledger Control Account

Particulars Amount Particulars Amount
To Balance b/d 2,50,000 By Cost of Sales A/c 1,75,000
To WIP Ledger Control A/c 2,25,000 By Balance c/d 3,09,000
(Finished product at cost)
To Cost of Sales A/c 9,000
(Sales return at cost)
4,84,000 4,84,000

Cost of Sales Account

Particulars Amount Particulars Amount
To Finished Stock Control A/c 1,75,000 By Finished Stock Control A/c 9,000
By Balance c/d 1,66,000
1,75,000 1,75,000

Trial Balance
Name of Account Dr. Cr.
Stores Ledger Control A/c 2,77,000 -
Work in progress Ledger 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
Total 9,42,000 9,42,000

PYQ 6
You are given the following information of the cost department of a manufacturing company:
Stores:
Opening Balance 12,60,000
Purchases 67,20,000
Transfer from work-in-progress 33,60,000
Issue to work-in-progress 67,20,000
Issue to repairs and maintenance 8,40,000
Shortage found in stock taking 2,52,000
(Shortage in stock taking is treated as normal loss)
Work-in-progress:
Opening Balance 25,20,000
Direct wages applied 25,20,000
Overhead applied 90,08,000
Closing Balance 15,20,000
Finished products: Entire output is sold at a profit of 12% on actual cost from work-in-progress.

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.10
Other information:
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
You are required 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 Ledger Control A/c
Particulars Amount Particulars Amount
To Balance b/d 12,60,000 By WIP Ledger Control A/c 67,20,000
To Cost Ledger Control A/c 67,20,000 By Overhead Control A/c 8,40,000
To WIP Ledger Control A/c 33,60,000 By Overhead Control A/c 2,52,000
By balance c/d 35,28,000
1,13,40,000 1,13,40,000

WIP Ledger Control A/c

Particulars Amount Particulars Amount
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 (b.f.) 1,58,88,000
To Wages Control A/c 25,20,000 By balance c/d 15,20,000
To Overhead Control A/c 90,08,000
2,07,68,000 2,07,68,000

Costing P & L A/c

Particulars Amount Particulars Amount
To WIP Ledger Control A/c 1,58,88,000 By Cost Ledger Control A/c 1,77,94,560
To Overhead Control A/c 20,54,000 (Sales: 1,58,88,000 + 12%)
By Cost Ledger Control A/c 1,47,440
(Net Loss)
1,79,42,000 1,79,42,000

Overhead Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 95,50,000 By WIP Ledger Control A/c 90,08,000
To Stores Ledger Control A/c 8,40,000 By Costing P & L A/c 20,54,000
To Stores Ledger Control A/c 2,52,000
To Wages Control A/c 4,20,000
1,10,62,000 1,10,62,000

Reconciliation Statement between Costing Profit and Financial Profit

Loss as per Cost records 1,47,440
Add: Loss on sale of Fixed Asset 8,40,000
Less: Income from Investments 4,00,000
Loss as per Financial records 5,87,440

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.11
Financial P & L A/c
Particulars Amount Particulars Amount
To Opening Stock: By Sales 1,77,94,560
Raw Material 12,60,000 By Closing Stock:
WIP 25,20,000 Raw Material 35,28,000
To Purchased of Raw Materials 67,20,000 WIP 15,20,000
To Wages incurred 29,40,000 By Income from Investments 4,00,000
To Overhead incurred 95,50,000 By Net Loss 5,87,440
To Loss on Sale of Fixed Asset 8,40,000
2,38,30,000 2,38,30,000

PYQ 7
The following information has been extracted from the cost records of a manufacturing company:
Stores:
Opening balance 9,000
Purchase 48,000
Transfer from WIP 24,000
Issue to work-in-process 48,000
Issue for repairs 6,000
Deficiency found in stock 1,800
Work-in-process:
Opening balance 18,000
Direct wages applied 18,000
Overhead charged 72,000
Closing balance 12,000
Finished Production: Entire production is sold at a profit of 10% on cost from Work-in-process.
Wages paid 21,000
Overhead incurred 75,000
Draw the Stores Ledger Control A/c, Work-in-progress Control A/c, Overheads Control A/c and
Costing Profit and Loss A/c.
[(8 marks) Nov 2011/May 2017]

Answer
Stores Ledger Control A/c
Particulars Amount Particulars Amount
To Balance b/d 9,000 By WIP Ledger Control A/c 48,000
To Cost Ledger Control A/c 48,000 By Overhead Control A/c 6,000
To WIP Ledger Control A/c 24,000 By Overhead Control A/c 1,800
(Deficiency assumed normal) 25,200
By Balance c/d
81,000 81,000

WIP Ledger Control A/c

Particulars Amount Particulars Amount
To Opening balance 18,000 By Stores Ledger Control A/c 24,000
To Stores Ledger Control A/c 48,000 By Costing Profit & Loss A/c 1,20,000
To Wages Control A/c 18,000 By Balance c/d 12,000
To Overhead Control A/c 72,000
1,56,000 1,56,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.12
Overhead Control A/c
Particulars Amount Particulars Amount
To Cost Ledger Control A/c 75,000 By WIP Ledger Control A/c 72,000
To Stores Ledger Control A/c 6,000 By Costing P & L A/c 13,800
To Stores Ledger Control A/c 1,800
To Wages Control A/c 3,000
85,800 85,800

Costing P/L A/c

Particulars Amount Particulars Amount
To WIP Ledger Control A/c 1,20,000 By Cost Ledger Control A/c 1,32,000
To Overhead Control A/c 13,800 (1,20,000 + 10%)
By Cost Ledger Control A/c 1,800
(Loss)
1,33,800 1,33,800

Wages Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 21,000 By WIP Ledger Control A/c 18,000
By Overhead Control A/c 3,000
21,000 21,000
Note: This question is solved on the basis of Non Integrated Method of accounting, alternatively student
can solve this problem by using Integrated Method of accounting.

PYQ 8
Journalise the following transactions assuming cost and financial accounts are integrated:
(i) Materials issued:
Direct `3,25,000
Indirect `1,15,000
(ii) Allocation of wages (25% indirect) `6,50,000
(iii) Under/Over absorbed overheads:
Factory (Over) `2,50,000
Administration (Under) `1,75,000
(iv) Payment to Sundry Creditors `1,50,000
(v) Collection from Sundry Debtors `2,00,000
[(5 Marks) Nov 2013]

Answer
Journal Entries
S. No. Entries Dr. Cr.
(i) Work-in-progress Ledger Control A/c Dr. 3,25,000 -
Factory Overhead Control A/c Dr. 1,15,000 -
To Stores Ledger Control A/c - 4,40,000
(Being issue of direct and indirect materials)
(ii) Work-in-progress Ledger Control A/c Dr. 4,87,500 -
Factory Overhead Control A/c Dr. 1,62,500 -
To Wages Control A/c - 6,50,000
(Being allocation of direct and indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,50,000 -
To Costing P/L A/c - 2,50,000
(Being factory overhead over absorbed)
Costing P/L A/c Dr. 1,75,000 -

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.13
To Administration Overhead Control A/c - 1,75,000
(Being administration overhead under absorbed)
(iv) Sundry Creditors Dr. 1,50,000 -
To Cash A/c - 1,50,000
( Being payments made to sundry creditors)
(v) Cash A/c Dr. 2,00,000 -
To Sundry Debtors - 2,00,000
( Being collection received from sundry debtors)

PYQ 9
Following information has been extracted from the cost records of XYZ Pvt. Ltd:
Stores:
Opening balance 54,000
Purchase 2,88,000
Transfer from WIP 1,44,000
Issue to work-in-process 2,88,000
Issue for repairs 36,000
Deficiency found in stock 10,800

Work-in-process:
Opening balance 1,08,000
Direct wages applied 1,08,000
Overhead charged 4,32,000
Closing balance 72,000

Finished Production:
Entire production is sold at a profit of 15% on cost from Work-in-process.
Wages paid 1,26,000
Overhead incurred 4,50,000

Draw the Stores Ledger Control A/c, Work-in-progress Control A/c, Overheads Control A/c and
Costing Profit and Loss A/c.
[(8 marks) Nov 2014]

Answer
Stores Ledger Control A/c
Particulars Amount Particulars Amount
To Balance b/d 54,000 By WIP Ledger Control A/c 2,88,000
To Cost Ledger Control A/c 2,88,000 By Overhead Control A/c 36,000
To WIP Ledger Control A/c 1,44,000 By Overhead Control A/c 10,800
(Deficiency assumed normal) 1,51,200
By Balance c/d
4,86,000 4,86,000
WIP Ledger Control A/c
Particulars Amount Particulars Amount
To Opening balance 1,08,000 By Stores Ledger Control A/c 1,44,000
To Stores Ledger Control A/c 2,88,000 By Costing Profit & Loss A/c 7,20,000
To Wages Control A/c 1,08,000 By Balance c/d 72,000
To Overhead Control A/c 4,32,000
9,36,000 9,36,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.14
Overhead Control A/c
Particulars Amount Particulars Amount
To Cost Ledger Control A/c 4,50,000 By WIP Ledger Control A/c 4,32,000
To Stores Ledger Control A/c 36,000 By Costing P & L A/c 82,800
To Stores Ledger Control A/c 10,800
To Wages Control A/c 18,000
5,14,800 5,14,800
Costing P/L A/c
Particulars Amount Particulars Amount
To WIP Ledger Control A/c 7,20,000 By Cost Ledger Control A/c 8,28,000
To Overhead Control A/c 82,800 (Sales: 7,20,000 + 15%)
To Cost Ledger Control A/c 25,200
(Profit)
8,28,000 8,28,000
Wages Control A/c
Particulars Amount Particulars Amount
To Cost Ledger Control A/c 1,26,000 By WIP Ledger Control A/c 1,08,000
By Overhead Control A/c 18,000
1,26,000 1,26,000

PYQ 10
The following information is available from a company's records for March, 2016:

(a) Opening balance of Creditors Account `25,000

(b) Closing balance of Creditors Account `40,000
(c) Payment made to Creditors `5,80,000
(d) Opening balance of Stores Ledger Control Account `40,000
(e) Closing balance of Stores Ledger Control Account `65,000
(f) Wages paid (for 8,000 hours) 20% relate to indirect workers `4,00,000
(g) Various indirect expenses incurred `60,000
(h) Opening balance of WIP Control Account `50,000
(i) Inventory of WIP at the end includes:
Material worth `35,000
Labour hours booked 400 hours
(j) Budgeted:
Overhead cost `20,80,000
Labour hours 1,04,000
(a) Factory overhead is charged to production at budgeted rate based on direct labour hours.

You are required to prepare Creditors A/c, Stores Ledger Control A/c, WIP Control A/c, Wages
Control A/c and Factory Overhead Control A/c.
[(8 marks) May 2016]

Answer
Creditors A/c
Particulars ` Particulars `
To Cash or Bank A/c 5,80,000 By Balance b/d 25,000
To Balance c/d 40,000 By Stores Ledger Control A/c 5,95,000
(Balancing figure)
6,20,000 6,20,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.15
Stores Ledger Control A/c
Particulars ` Particulars `
To Balance b/d 40,000 By Work-in-progress Control A/c 5,70,000
To Creditors A/c 5,95,000 (Balancing figure)
(Purchase: figure from creditor A/c) By Balance b/d 65,000
6,35,000 6,35,000

Work-in-progress Ledger Control A/c

Particulars ` Particulars `
To Balance b/d 50,000 By Finished Goods Control A/c (b.f.) 10,05,000
To Stores Ledger Control A/c 5,70,000 By Balance c/d:
To Wages Control A/c 3,20,000 Material `35,000
To Factory Overhead Control A/c 1,28,000 Labour (400 hrs × `50) `20,000
Overheads (400 hrs × `20) `8,000 63,000
10,68,000 10,68,000

Wages Control A/c

Particulars ` Particulars `
To Bank A/c 4,00,000 By WIP Ledger Control A/c 3,20,000
(8,000 hours × 80% × 50)
By Factory Overhead Control A/c 80,000
(8,000 hours × 20% × 50)
4,00,000 4,00,000

Factory Overhead Control A/c

Particulars ` Particulars `
To Bank A/c 60,000 By WIP Ledger Control A/c 1,28,000
To Wages Control A/c 80,000 (6,400 hrs × `20)
By Costing P/L A/c 12,000
(Under-absorbed Overheads)
1,40,000 1,40,000

Working notes:
1. Direct Labour Hour Rate = Labour Cost ÷ Labour Hour
= `4,00,000 ÷ 8,000 hours = `50 per hour

2. Factory Overhead Rate = Budgeted Factory Overheads ÷ Budgeted Labour Hours

= `20,80,000 ÷ 1,04,000 = `20 per hour

PYQ 11
The following balances were extracted from a company's ledger as on 30th June 2018:
Name of Account Dr. Cr.
Raw materials control A/c 2,82,450 -
Work in progress control A/c 2,38,300 -
Finished stock control A/c 3,92,500 -
General ledger adjustment A/c - 9,13,250
Total 9,13,250 9,13,250

The following transactions took place during the quarter ended 30th September, 2018:
Factory overhead - allocated to WIP 1,36,350
Goods Finished at - cost 13,76,200
Raw materials purchased 12,43,810

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.16
Direct wages - allocated to WIP 2,56,800
Cost of goods sold 14,56,500
Raw materials - issued to production 13,60,430
Raw materials - credited by suppliers 27,200
Raw material losses – inventory audit 6,000
WIP rejected (with no scrap value) 12,300
Customer's return (at cost) of finished goods 45,900
You are required to prepare:
(1) Raw material control A/c
(2) Work-in-progress control A/c
(3) Finished stock control A/c
(4) General ledger adjustment A/c
[(10 Marks) Nov 2018]

Answer
Raw Material Control A/c
Particulars Amount Particulars Amount
To Balance b/d 2,82,450 By WIP A/c 13,60,430
To General Ledger Adjustment A/c 12,43,810 By General Ledger Adjustment A/c 27,200
By General Ledger Adjustment A/c 6,000
(Loss)
By Balance c/d (Bal. figure) 1,32,630
15,26,260 15,26,260

Work-in-Process Control A/c

Particulars Amount Particulars Amount
To Balance b/d 2,38,300 By Finished Stock Control A/c 13,76,200
To Raw Material Control A/c 13,60,430 By General Ledger Adjustment A/c 12,300
To Wages Control A/c 2,56,800 (Rejected)
To Factory OH Control A/c 1,36,350 By Balance c/d (Bal. figure) 6,03,380
19,91,880 19,91,880

Finished Stock Control A/c

Particulars Amount Particulars Amount
To Balance b/d 3,92,500 By Cost of Sales 14,56,500
To Work-in-Progress Control A/c 13,76,200 By Balance c/d (bal. figure) 3,58,100
To Cost of Sales (Return) 45,900
18,14,600 18,14,600

General Ledger Adjustment A/c

Particulars Amount Particulars Amount
To Raw Material Control A/c 27,200 By Balance b/d 9,13,250
(Returns) By Raw Material Control A/c 12,43,810
To Raw Materials Control A/c (Loss) 6,000 By Wages Control A/c 2,56,800
To WIP Control A/c (Rejected) 12,300 By Factory OH Control A/c 1,36,350
To Balance c/d 25,04,710
25,50,210 25,50,210

PYQ 12
Journalise the following transactions in the cost books under non- integrated system of accounting:

(a) Credit Purchase of Material `27,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.17
(b) Manufacturing overheads charged to production `6,000
(c) Selling and Distribution overheads recovered from Sales `4,000
(d) Indirect wages incurred `8,000
(e) Material returned from production to stores `9,000
[(5 Marks) Nov 2019]

Answer
Journal Entries
S. No. Entries Dr. Cr.
(a) Store Ledger Control A/c Dr. 27,000 -
To Cost Ledger Control A/c - 27,000
(b) Work-in-progress Ledger Control A/c Dr. 6,000 -
To Manufacturing Overhead Control A/c - 6,000
(c) Cost of Sales A/c Dr. 4,000 -
To Selling & Distribution Overhead Control A/c - 4,000
(d) Wages Control A/c Dr. 8,000 -
To Cost Ledger Control A/c - 8,000
(e) Store Ledger Control A/c Dr. 9,000 -
To Work-in-progress Ledger Control A/c - 9,000

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 COST RECORDS OR COST ACCOUNTING SYSTEM 13.18

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3 TO 5 FINAL
1 Y Y Y Y
2 Y Y Y -
3 Y Y Y Y
4 Y Y Y Y
5 Y Y Y -
6 Y Y Y -
7 Y Y Y Y
8 Y Y Y Y
9 Y Y Y -
10 Y Y Y Y
11 Y Y Y Y
12 Y Y Y Y

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 CHAPTER - 14

RECONCILIATION
STATEMENT
LEARNING OBJECTIVE

When you have finished studying this chapter, you should be able to
 Understand the reasons of difference in profit between financial
accounts and cost accounts.
 Understand the concept of reconciliation statement.
 Understand the method of preparation of reconciliation statement.
 Understand the concept of memorandum reconciliation account.
 Understand the method of preparation of memorandum
reconciliation account.
 Understand the advantages, disadvantages and need of
reconciliation statement.
 Understand the method of preparation of accounts under cost
books with the help of financial accounts and reconciliation
statement.
 RECONCILIATION STATEMENT 14.1

PAST YEAR QUESTIONS

PYQ 1
The financial books of a company reveal the following data for the year ended 31st March, 2002:
Opening stock:
Finished goods (875 units) 74,375
Work-in-process 32,000
During the year (01.04.01 to 31.03.02):
Raw materials consumed 7,80,000
Direct Labour 4,50,000
Factory overheads 3,00,000
Goodwill written off 1,00,000
Administration overheads 2,95,000
Dividend paid 85,000
Bad Debts 12,000
Selling and Distribution Overheads 61,000
Interest received 45,000
Rent received 18,000
Sales (14,500 units) 20,80,000
Closing stock:
Finished goods (375 units) 41,250
Work-in-process 38,667
The cost records provide as under:
 Factory overheads are absorbed at 60% of direct wages.
 Administration overheads are recovered at 20% of factory cost.
 Selling and distribution overheads are charged at `4 per unit sold.
 Opening stock of finished goods is valued at `104 per unit.
 The company values work-in-process at factory cost for both Financial and Cost Profit reporting.
Required:
(i) Prepare statements for the year ended 31st March, 2002 to show
 The profit as per financial records
 The profit as per costing records.
(ii) Present a statement reconciling the profit as per costing records with the profit as per Financial
Records?
[(15 Marks) May 2002]

Answer
(i) (a) Financial Profit and Loss A/c
Particulars Amount Particulars Amount
To Opening stock: By Sales (14,500 units) 20,80,000
WIP 32,000 By Closing stock:
Finished goods (875 units) 74,375 WIP 38,667
To Raw material consumed 7,80,000 Finished goods (375 units) 41,250
To Direct labour 4,50,000

To Gross profit 8,23,542

21,59,917 21,59,917

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 RECONCILIATION STATEMENT 14.2
To Factory overheads 3,00,000 By Gross profit 8,23,542
To Goodwill written off 1,00,000 By Interest received 45,000
To Administrative overheads 2,95,000 By Rent received 18,000
To Bad debts 12,000
To Selling & Distribution overheads 61,000
To Dividend Paid 85,000
To Net Profit 33,542
8,86,542 8,86,542

(a) (b) Cost Sheet showing Costing P/L (Production 14,000 units)
Particulars Amount
Direct Material 7,80,000
Direct labour 4,50,000
Prime Cost 12,30,000
Factory overhead (60% of direct wages) 2,70,000
Add: Opening WIP 32,000
Less: Closing WIP (38,667)
Factory Cost 14,93,333
Administrative overhead (20% of factory cost) 2,98,667
Cost of Production 17,92,000
Add: Opening finished goods (`104 × 875 units) 91,000
Less: Closing Stock of finished goods (W.N. 2) (48,000)
Cost of Goods Sold 18,35,000
Selling & distribution overheads (`4 × 14,500 units) 58,000
Cost of sales 18,93,000
Profit (balancing figure) 1,87,000
Sales 20,80,000

(ii) Reconciliation Statement

Particulars Amount Amount
Profit as per Cost Records (Cost Sheet) 1,87,000
Add: Interest Received 45,000
Rent Received 18,000
Administration OH over recovered (2,98,667 – 2,95,000) 3,667
Opening stock overvalued (91,000 – 74,375) 16,625 83,292

Less: Goodwill written off 1,00,000

Dividend 85,000
Bad debts 12,000
Factory OH under recovered (3,00,000 – 2,70,000) 30,000
Selling & distribution OH under recovered (61,000 – 58,000) 3,000
Closing stock over valued (48,000 – 41,250) 6,750 (2,36,750)
Profit as per Financial Records 33,542

Working note:
(1) Number of units produced = Units sold + Closing finished units – Opening finished units
= 14,500 + 375 - 875 = 14,000 units

Cost of Production
(2) Value of closing finished goods = × Closing finished goods units
Units Produced
17,92,000
= × 375 = `48,000
14,000

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 RECONCILIATION STATEMENT 14.3
PYQ 2
A manufacturing company disclosed a net loss of `3,47,000 as per their cost accounts for the year ended March
31, 2003. The financial accounts however disclosed a net loss of `5,10,000 for the same period.

The following information was revealed as a result of scrutiny of the figures of both the sets of
accounts:

(a) Factory overheads under-absorbed 40,000

(b) Administration overheads over-absorbed 60,000
(c) Depreciation charged in financial accounts 3,25,000
(d) Depreciation charged in cost accounts 2,75,000
(e) Interest on investments not included in cost accounts 96,000
(f) Income-tax provided 54,000
(g) Interest on loan funds in financial accounts 2,45,000
(h) Transfer fees (credited in financial books) 24,000
(i) Stores adjustment (credited in financial books) 14,000
(j) Dividend received 32,000

Prepare a Memorandum Reconciliation Account.

[(8 Marks) May 2003]

Answer
Memorandum Reconciliation Account
Particulars Amount Particulars Amount
To Net Loss as per Cost books 3,47,000 By Admin. OH over recovered 60,000
To Factory OH under absorbed 40,000 By Interest on investment 96,000
To Depreciation under charged 50,000 By Transfer fees 24,000
To Income Tax 54,000 By Stores adjustment 14,000
To Interest on loan 2,45,000 By Dividend received 32,000
By Net loss as per Financial books 5,10,000
7,36,000 7,36,000

PYQ 3
The following is the Trading and Profit & Loss Account of Omega Limited:
Particulars Amount Particulars Amount
To Materials consumed 23,01,000 By Sales (30,000 units) 48,75,000
To Direct wages 12,05,750 By Finished goods stock 1,30,000
To Production Overheads 6,92,250 (1,000 units)
To Administration Overheads 3,10,375 By Work-in-progress:
To Selling & Distribution Overheads 3,68,875 Materials 55,250
To Preliminary Expenses written off 22,750 Wages 26,000
To Goodwill written off 45,500 Production OH 16,250 97,500
To Fines 3,250 By Dividends received 3,90,000
To Interest on Mortgage 13,000 By Interest on bank deposits 65,000
To Loss on Sale of machine 16,250
To Taxation 1,95,000
To Net Profit for the year 3,83,500
55,57,500 55,57,500

Omega Limited manufactures a standard unit. The Cost Accounting records of Omega Ltd show the
following:
(a) Production overheads have been charged to work-in-progress at 20% on Prime cost.
(b) Administration overheads have been recovered at `9.75 per finished unit.

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 RECONCILIATION STATEMENT 14.4
(c) Selling & distribution overheads have been recovered at `13 per unit sold.
(d) The under or over-absorption of overheads have not been transferred to costing P/L A/c.

Required:
(1) Prepare a Costing Profit & Loss account, indicating net profit.
(2) Prepare control accounts for production overheads, administration overheads and selling & distribution
overheads.
(3) Prepare a statement reconciling the profit disclosed by cost records with that shown in financial
accounts.
[(15 Marks) Nov 2005]

Answer
(1) Costing Profit & Loss A/c
Particulars Amount Particulars Amount
To Direct Materials Consumed 23,01,000 By Sales 48,75,000
To Direct Wages 12,05,750 By Closing Stock:
To Factory Overheads 7,01,350 Finished Goods (W.N.) 1,42,350
To Administration Overheads 3,02,250 WIP 97,500
To Selling & Distribution Overheads 3,90,000
To Costing Net profit 2,14,500
51,14,850 51,14,850
Working note:
(a) Factory expenses = 20% of prime cost
= 20% (23,01,000 + 12,05,750) = `7,01,350

(b) Administration overheads = `9.75 × 31,000 units = `3,02,250

(a) Selling & Distribution OH = `13 × 30,000 units = `3,90,000

(b) Number of units produced = Units sold + Units in closing finished goods
= 30,000 + 1,000 = 31,000 units

Cost of Production
(c) Value of closing finished goods = × Closing finished goods units
Units Produced
44,12,850
= × 1,000 = `1,42,350
31,000

(d) Cost of production = 23,01,000 + 12,05,750 + 7,01,350 – 97,500 + 3,02,250

= `44,12,850

(2) Production Overhead Account

Particulars Amount Particulars Amount
To Balance b/d 6,92,250 By WIP A/c 7,01,350
To Balance c/f 9,100
7,01,350 7,01,350

Administration Overhead Account

Particulars Amount Particulars Amount
To Balance b/d 3,10,375 By Finished Goods A/c 3,02,250
By Balance c/f 8,125
3,10,375 3,10,375

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 RECONCILIATION STATEMENT 14.5
Selling & Distribution Overhead Account
Particulars Amount Particulars Amount
To Balance b/d 3,68,875 By Cost of Sales A/c 3,90,000
To Balance c/d 21,125
3,90,000 3,90,000

(3) Reconciliation Statement

Particulars Amount Amount
Profit as per Cost Records 2,14,500
Add: Over recovery of factory overheads 9,100
Over recovery of S & D overheads 21,125
Dividend received 3,90,000
Interest on bank deposits 65,000 4,85,225

Less: Under recovery of Administration overheads 8,125

Preliminary expenses w/o 22,750
Goodwill written w/o 45,500
Fine debited in Financial books 3,250
Interest on Mortgage 13,000
Loss on sale of machine 16,250
Tax paid 1,95,000
Overvaluation of closing stock (1,42,350 – 1,30,000) 12,350 (3,16,225)
Profit as per Financial Records 3,83,500

PYQ 4
A manufacturing company has disclosed a net loss of `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 `2,58,000 for
the same period.
A security of data of both the sets of books of accounts revealed the following information:
Details Amount
(a) Factory overheads under absorbed 5,000
(b) Administration overheads over absorbed 3,000
(c) Depreciation charged in financial accounts 70,000
(d) Depreciation charged in cost accounts 80,000
(e) Interest on investments not included in cost accounts 20,000
(f) Income tax provided in financial accounts 65,000
(g) Transfer fees (credit in financial accounts) 2,000
(h) Preliminary expenses written off 3,000
(i) 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 Amount Particulars Amount
To Net Loss as per Cost Books 2,13,000 By Admin. OH over recovered 3,000
To Factory OH under absorbed 5,000 By Depreciation over charged 10,000
To Income Tax 65,000 (80,000 – 70,000)
To Preliminary expenses w/o 3,000 By Interest on investment 20,000
To Over valuation of closing stock 7,000 By Transfer fees 2,000
By Net loss as per Financial Books 2,58,000
2,93,000 2,93,000

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 RECONCILIATION STATEMENT 14.6
PYQ 5
A manufacturing company has disclosed a net loss of `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 `7,91,250 for
the same period.
A scrutiny of the data of both the sets of books of accounts revealed the following information:
Details Amount
(i) Factory overheads over-absorbed 47,500
(ii) Administration overheads under-absorbed 32,750
(iii) Depreciation charged in Financial Accounts 2,25,000
(iv) Depreciation charged in Cost Accounts 2,42,250
(v) Interest on investment 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 valuation of closing stock in Cost Accounts 17,500

Prepare a Memorandum Reconciliation A/c.

[(8 marks) Nov 2010]

Answer
Memorandum Reconciliation Account
Particulars Amount Particulars Amount
To Net Loss as per Cost Books 8,75,000 By Factory OH over recovered 47,500
To Admin. OH under absorbed 32,750 By Depreciation over charged 17,250
To Income Tax 7,250 By Interest on investment 62,750
To Preliminary expenses w/o 27,500 By Transfer fees 12,500
To Under valuation of opening stock 6,250 By Under valuation of closing stock 17,500
By Net loss as per Financial Books 7,91,250
9,48,750 9,48,750

PYQ 6
R Limited showed a net loss of `35,400 as per their cost accounts for the year ended 31st March, 2012.
However, the financial accounts disclosed a net profit of `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:

(1) Administrative overhead under recovered 25,500

(2) Factory overhead over recovered 1,35,000
(3) Depreciation under charged in Cost Accounts 26,000
(4) Dividend received 20,000
(5) Loss due to obsolescence charged in Financial Accounts 16,800
(6) Income tax provided 43,600
(7) Bank interest credited in Financial Accounts 13,600
(8) Value of opening stock:
In Cost Accounts 1,65,000
In Financial Accounts 1,45,500
(9) Value of closing Stock:
In Cost Accounts 1,25,000
In Financial Accounts 1,32,000

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 RECONCILIATION STATEMENT 14.7
(10) Goodwill written- off in Financial Accounts 25,000
(11) Notional rent of own premises charged in Cost Accounts 60,000
(12) Provision for doubtful debts in Financial Accounts 15,000

Prepare a reconciliation statement by taking costing net loss as base.

[(8 Marks) Nov 2012]

Answer
Reconciliation Statement
Particulars ` `
Loss as per Cost Records (35,400)

Add: Factory overhead over recovered 1,35,000

Dividend received 20,000
Bank interest credited in financial A/c 13,600
Opening stock overvalued in cost A/c (1,65,000 – 1,45,500) 19,500
Closing stock undervalued in cost A/c (1,32,000 – 1,25,000) 7,000
Notional rent charged in cost A/c 60,000 2,55,100

Less: Administrative overheads under recovered 25,500

Depreciation under charged in cost A/c 26,000
Loss due to obsolescence in Financial A/c 16,800
Income Tax provided 43,600
Goodwill w/o in financial A/c 25,000
Provisions for doubtful debt in financial A/c 15,000 (1,51,900)

Profit as per Financial Books 67,800

PYQ 7
A manufacturing company has disclosed net loss of `48,700 as per their cost accounting records for the year
ended 31st March, 2014. However their financial accounting records disclosed net profit of `35,400 for the
same period.

A scrutiny of data of both the sets of books of accounts revealed the following informations:

(i) Factory overheads under absorbed `30,500

(ii) Administrative overheads over absorbed `65,000
(iii) Depreciation charged in financial accounts `2,25,000
(iv) Depreciation charged in cost accounts `2,70,000
(v) Income tax provision `52,400
(vi) Transfer fee (credited in financial accounts) `10,200
(vii) Obsolescence loss charged in financial accounts `20,700
(viii) Notional rent of own premises charged in cost accounts `54,000
(ix) Value of opening stock:
(a) In cost accounts `1,38,000
(b) In financial accounts `1,15,000
(x) Value of closing stock:
(a) In cost accounts `1,22,000
(b) In financial accounts `1,12,500

Prepare a Memorandum Reconciliation Account by taking costing loss as base.

[(5 Marks) May 2014]
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 RECONCILIATION STATEMENT 14.8
Answer
Memorandum Reconciliation Account
Particulars ` Particulars `
To Net loss as per Costing Books 48,700 By Admin OH over absorbed 65,000
To Factory OH under absorbed 30,500 By Depreciation over charged 45,000
To Income tax provision 52,400 (2,70,000 - 2,25,000)
To Obsolescence loss 20,700 By Transfer fee 10,200
To Closing stock over valued 9,500 By Notional rent 54,000
To Net profit as per Financial Books 35,400 By Opening stock over valued 23,000
1,97,200 1,97,200

PYQ 8
The Trading and Profit and Loss Account of a company for the year ended 31.03.2016 is as under:
Particulars Amount Particulars Amount
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing stock (2,000 units) 1,50,000
To Factory expenses 9,50,000 By Dividend received 20,000
To Administrative expenses 4,80,200
To Selling expenses 2,50,000
To Preliminary expenses written off 50,000
To Net Profit 1,79,800
63,70,000 63,70,000

In the Cost Accounts:

(i) Factory expenses have been allocated to production at 20% of Prime Cost.
(ii) Administrative expenses absorbed at 10% of factory cost.
(iii) Selling expenses charged at `10 per unit sold.

Prepare the Costing Profit and Loss Account of the company and reconcile the Profit/Loss with the
profit as shown in the Financial Accounts.
[(8 Marks) Nov 2016]

Answer
Costing Profit & Loss A/c
Particulars Amount Particulars Amount
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing stock (2,000 units) 2,26,431
To Factory overheads 8,92,000
To Administration overheads 5,35,200
To S & D Expenses (50,000 × 10) 5,00,000
To Net profit 39,231
64,26,431 64,26,431

Working notes:
1. Factory overheads in costs = 20% of Prime cost
= 20% of (26,80,000 + 17,80,000) = 8,92,000
2. Administrative overheads = 10% of Factory cost
= 10% of (26,80,000 + 17,80,000 + 8,92,000) = 5,35,200
Cost of production
3. Valuation of closing stock =  Units in Closin g stock
Units produced

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 RECONCILIATION STATEMENT 14.9
26,80,000  17,80,000  8,92,000  5,35,200
=  2,000 = 2,26,431
52,000

4. Units produced = Units sold + Closing units – Opening units

= 50,000 + 2,000 – Nil = 52,000

Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Accounts 39,231
Add: Administrative expenses over recovered (5,35,200 – 4,80,200) 55,000
Selling expenses over recovered (5,00,000 – 2,50,000) 2,50,000
Dividend received 20,000 3,25,000

Less: Factory expenses under recovered (9,50,000 – 8,92,000) 58,000

Closing stock over valued in costs (2,26,431 – 1,50,000) 76431
Preliminary expenses written off 50,000 (1,84,431)
Profit as per Financial Accounts 1,79,800

PYQ 9
GK Limited showed a net loss of `2,43,300 as per their financial accounts for the year ended 31st March, 2018.
However, cost accounts disclosed a net loss of `2,48,300 for the same period. On scrutinizing both the set of
books of accounts, the following information were revealed:
(a) Works overheads over recovered 30,400
(b) Selling overheads under recovered 20,300
(c) Administrative overhead under recovered 27,700
(d) Depreciation over charged in cost accounts 35,100
(e) Bad debts w/off in financial accounts 15,000
(f) Preliminary Exp. w/off in financial accounts 5,000
(g) Interest credited during the year in financial accountants 7,500

Prepare a reconciliation statement reconciling losses shown by financial and cost accounts by taking
costing net loss as base.
[(5 marks) Nov 2018]

Answer
Reconciliation Statement
Particulars Amount Amount
Loss as per Cost Records (2,48,300)

Add: Factory overhead over recovered 30,400

Depreciation over charged in cost accounts 35,100
Interest credited during the year in financial accounts 7,500 73,000

Less: Selling overheads under recovered 20,300

Administrative overheads under recovered 27,700
Bad debts w/off in financial accounts 15,000
Preliminary Exp. w/off in financial accounts 5,000 (68,000)

Profit as per Financial Books (2,43,300)

PYQ 10
M/s Abid Private Limited disclosed a net profit of `48,408 as per cost books for the year ending 31st March
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 RECONCILIATION STATEMENT 14.10
2019. However, financial accounts disclosed net loss of `15,000 for the same period. On scrutinizing both
the set of books of accounts, the following information was revealed:
Works Overheads under recovered in Cost Books 48,600
Office Overheads over recovered in Cost Books 11,500
Dividend received on Shares 17,475
Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800
Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000

Prepare a Memorandum Reconciliation Account.

[(5 Marks) May 2019]

Answer
Memorandum Reconciliation Account
Particulars ` Particulars `
To Works overhead under recovered 48,600 By Net profit as per Costing Books 48,408
To Provision for doubtful debts 17,800 By Admin overheads over recovered 11,500
To Obsolescence loss 17,200 By Dividend received 17,475
To Stores adjustments 35,433 By Interest on fixed deposits 21,650
By Depreciation over recovered
(35,000 - 30,000) 5,000

By Net loss as per Financial Books 15,000

1,19,033 1,19,033

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 RECONCILIATION STATEMENT 14.11

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3 TO 5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y
5 Y Y Y -
6 Y Y Y -
7 Y Y Y -
8 Y Y Y Y
9 Y Y Y -
10 Y Y Y -

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 CHAPTER - 15

ACTIVITY BASED COSTING

LEARNING OBJECTIVE

After studying this chapter you will be able to:

 Discuss problem of traditional costing system.
 Discuss usefulness of Activity Based Costing (ABC).
 Discuss Cost Allocation under ABC.
 Discuss Different level of activities under ABC.
 Understand stages, advantages, and limitations of ABC.
 Discuss various requirements in ABC implementation.
 Explain the concept of Activity Based Management (ABM).
 Explain the concept of Activity Based Budgeting (ABB).
 ACTIVITY BASED COSTING 15.1

PAST YEAR QUESTIONS

PYQ 1
PQR pens Ltd. manufactures two products ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data for the year
2017:

Annual Output Total Machine Total Number of Total Number of

Product
(Units) Hours Purchase Orders Set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56

The annual overheads are as under:

Particulars `
Volume related activity costs 4,75,020
Set up related cost 5,79,988
Purchase related cost 5,04,992

Calculate the overhead cost per unit of each Product: Gel Pen and Ball Pen on the basis of:

(1) Traditional method of charging overheads

(2) Activity based costing method and
(3) Find out the difference in cost per unit between both the methods.
[(10 Marks) May 2018]

Answer
(1) Statement Showing Overhead Cost per unit “Traditional Method”
Particulars Gel Pen Ball Pen
Overheads @ `20 per machine hour `4,80,000 `10,80,000
(24,000 × 20) (54,000 × 20)
Number of units 5,500 24,000
Overheads Cost Per Unit `87.27 `45.00

Overheads Recovery Rate = Annual Overheads ÷ Annual Machine Hours

= (4,75,020 + 5,79,988 + 5,04,992) ÷ (24,000 + 54,000)
= `15,60,000 ÷ 78,000
= `20 per machine hour

Note: Overheads is recovered on the basis of Machine Hours (as per ICAI suggested answer).

(2) Statement Showing Overhead Cost per unit “Activity Based Costing”
Activity Cost Pool Cost Driver Ratio Amount Gel Pen Ball Pen
Volume related activity costs Machine Hours 24 : 54 4,75,020 1,46,160 3,28,860
Set up related cost No. of Setups 30 : 56 5,79,988 2,02,321 3,77,667
Purchase related cost No. of Purchase Orders 240 : 448 5,04,992 1,76,160 3,28,832
Total Cost 5,24,641 10,35,359
÷ Total Units 5,500 24,000
Overheads Cost Per Unit `95.39 `43.14

Note: Machine hours is used as Cost driver of volume related activity cost (as per ICAI suggested answer).

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 ACTIVITY BASED COSTING 15.2
(3) Difference in overheads cost per unit under both methods
Particulars Gel Pen Ball Pen
Overheads cost per unit (Traditional method) `87.27 `45.00
Overheads cost per unit (Activity based cost) `95.39 `43.14
Difference in overheads cost per unit - `8.12 + `1.86

PYQ 2
M/s HMB Limited is producing a product in 10 batches each of 15,000 units in a year incurring the following
overheads their on:
Particulars (`)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800

The prime cost for the year amounted to `3,01,39,000. The company is using currently the method of
absorbing overheads on the basis of prime cost. Now it wants to shift to activity based costing.

Information relevant to activity drivers for a year are as under:

Activity Driver Activity Volume
No. of purchase orders 1,500
Maintenance hours 9,080
No. of set-ups 2,250
No. of inspections 2,710

The company has produced a batch of 15,000 units and has incurred `26,38,700 and `3,75,200 on
materials and wages respectively.

The usage of activities of the said batch are as follows:

Activity Driver Activity Volume
Material orders 48
Maintenance hours 810
No. of set-ups 40
No. of inspections 25

You are required to:

(1) Find out cost of product per unit on absorption costing basis for the said batch.
(2) Determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of activity
based costing.
[(10 Marks) Nov 2018]

Answer
(1) Statement Showing Unit Cost Using Absorption Costing Method
Particulars (`)
Direct Material 26,38,700
Direct Labour 3,75,200
Prime Cost 30,13,900
Production Overhead @ 17.1847% of Prime Cost 5,17,930
Total Cost 35,31,830
Number of units 15,000
Cost Per Unit `235.46

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 ACTIVITY BASED COSTING 15.3
Calculation of overhead rate:
Overheads Recovery Rate = (Total Overheads ÷ Total Prime Cost) × 100
= [(22,50,000 + 17,30,000 + 6,84,500 + 5,14,800) ÷ 3,01,39,000] × 100
= 17.1847 % of Prime Cost

(2) Statement Showing Unit Cost and Total Cost Using ABC Method
Particulars (`)
Direct Material 26,38,700
Direct Labour 3,75,200
Prime Cost 30,13,900
Production Overhead:
Material procurement (`1,500 × 48 orders) 72,000
Maintenance (`190.53 × 810 hours) 1,54,329
Set-up (`304.22 × 40 set-ups) 12,169
Quality control (`189.96 × 25 inspections) 4,749
Total Cost 32,57,147
Number of units 15,000
Cost Per Unit `217.14

Statement Showing Determination of Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material procurement `22,50,000 Material orders 1,500 `1,500 per order
Maintenance `17,30,000 Maintenance hours 9,080 `190.53 per hour
Set-up `6,84,500 No. of set-ups 2,250 `304.22 per set-up
Quality control `5,14,800 No. of inspections 2,710 `189.96 per inspection

PYQ 3
MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour
hours. The budgeted overheads and direct labour hours for the month of March 2019 are `15,00,000 and
25,000 hours respectively.

The information about the company’s products is as follows:

Particulars Equipment A Equipment B
Budgeted Production volume 3,200 units 3,850 units
Direct material cost `350 per unit `400 per unit
Direct labour cost:
Y : 3 hours @ `120 per hour `360 -
Z : 4 hours @ `120 per hour - `480

Overheads of `15,00,000 can be identified with three major activities:

Order Processing `3,00,000

Machine Processing `10,00,000
Product Inspection `2,00,000

These activities are driven by number of orders processed, machine hours worked, and inspection hours,
respectively. The data relevant to these activities is as follows:
Equipments Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000

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 ACTIVITY BASED COSTING 15.4
Required:
(1) Prepare a statement showing the manufacturing cost per unit of each product using the absorption
costing method assuming the budgeted manufacturing volume is attained.
(2) Determine cost driver rates and prepare a statement showing the manufacturing costs of each product
using activity based costing, assuming the budgeted manufacturing volume is attained.
(3) MNO Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application base,
calculate the amount of cost distortion (under-costed or over-costed) for each equipment.
[(10 Marks) May 2019]

Answer
(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method
Particulars Equipment A Equipment B
Direct material cost `350 `400
Direct labour cost `360 `480
Overheads @ `60 per hour `180 `240
Manufacturing cost per unit `890 `1,120

Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours

= `15,00,000 ÷ 25,000 hours = `60 per hour

Total labour hours = 3,200 units of A × 3 hours + 3,850 units of B × 4 hours

= 25,000 hours

(2) Statement Showing Determination of Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Order processing `3,00,000 Orders processed 600 `500 per order
Machine processing `10,00,000 Machine hours 50,000 `20 per machine hour
Inspection `2,00,000 Inspection hours 20,000 `10 per inspection hour

Statement Showing Unit Manufacturing Cost Using ABC Method

Particulars Equipment A Equipment B
Direct material cost `350 `400
Direct labour cost `360 `480
Overheads per unit (W.N.) `218.75 `207.79
Manufacturing cost per unit `928.75 `1,087.79

(3) Statement Showing Cost Distortion

Particulars Equipment A Equipment B
Unit manufacturing cost:
Using direct labour hours as an application base 890 1,120
Using activity based costing 928.75 1,087.79
Cost distortion (-) 38.75 + 32.21

Working note:
Calculation of overheads cost per unit under ABC costing
Overheads A B
Order processing @ `500 per order of 400/200 orders `2,00,000 `1,00,000
Machine processing `20 per machine hour of 22,500/27,500 hours `4,50,000 `5,50,000
Inspection `10 per inspection hour of 5,000/15,000 hours `50,000 `1,50,000
Total overheads `7,00,000 `8,00,000
÷ Number of units ÷ 3,200 ÷ 3,850
Overhead per unit `218.75 `207.79

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 ACTIVITY BASED COSTING 15.5
PYQ 4
PQR Ltd has decided to analyse the profitability of it’s five new customers. It buys soft drink bottles in cases
at `45 per case and sells them to retail customers at a list price of `54 per case. The data pertaining to five
customers are given below:
Customers
Particulars
A B C D E
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price ` 54 54 54 54 54
Actual Selling Price ` 54 53.40 49 50.20 48.60
Number of Purchase Orders 30 50 60 50 60
Number of Customers Visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers Travelled Per Delivery 40 12 10 20 60
Number of Expediate Deliveries 0 0 0 0 2

Its five activities and their cost drivers are:

Activity Cost Driver
Order taking `200 per purchase order
Customer visits `300 per customer visit
Deliveries `4.00 per delivery km travelled
Product handling `2.00 per case sold
Expedited deliveries `100 per each such delivery

Required:
(1) Compute the customer level operating income of each of five retail customers by using the Cost
Driver rates.
(2) Examine the result to give your comments on customer ‘D’ in comparison with customer ‘C’ and on
customer ‘E’ in comparison with customer ‘A’.
[(10 Marks) Nov 2019]

Answer
(1) Computation of Customer Level Operating Income
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Cases sold 9,360 14,200 62,000 38,000 9,800
Revenue at list price @ `54 p.u. 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Less: Discount - 8,520 3,10,000 1,44,400 52,920
Revenue net of discount 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
Less: COGS @ `45 p.u. 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
Gross Margin 84,240 1,19,280 2,48,000 1,97,600 35,280
Less: Customer level operating 29,120 43,080 1,44,400 93,600 43,200
activities cost (W.N.)
Customer Level Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)

(2) Comment on the results:

Customer D and Customer C:

Customer D is the most profitable customer, despite having only 61.29% of the unit volume of
customer C. The main reason is that C receives a `5 per case discount while customer D receives only a `3.80
discount per case.

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 ACTIVITY BASED COSTING 15.6
Customer E and Customer A:

Customer E is loss making, in comparison with the small customer A being profitable. Customer E
received a discount of `5.40 per case, makes more frequent orders, requires more customer visits, more
product handling cost and requires more delivery kms. in comparison with customer A, also Customer E
requires expediate deliveries.

Working note:
Computation of customer level operating activities costs:
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Order taking costs (`) 6,000 10,000 12,000 10,000 12,000
(No. of purchase orders × `200)
Customer visits costs (`) 1,200 1,800 3,600 1,200 1,800
(No. of customer visits × `300)
Delivery costs (`) 3,200 2,880 4,800 6,400 9,600
(*Kms travelled × `4.00 per km.)
Product handling costs (`) 18,720 28,400 1,24,000 76,000 19,600
(Number of case sold × `2.00)
Cost of expediting deliveries (`) - - - - 200
(No. of expedited deliveries × `100)

Total cost of customer level operating activities 29,120 43,080 1,44,400 93,600 43,200

* Kms travelled = Number of deliveries × Kilometres travelled per delivery

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 ACTIVITY BASED COSTING 15.7

SUGGESTED REVISION
PYQ OBSERVATION PN 1 2 3-5 FINAL
1 Y Y Y Y
2 Y Y Y Y
3 Y Y Y Y
4 Y Y Y Y
.

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

CA INTER
COST & FM ECO
FAST TRACK BATCH

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

CA INTER
COST & FM ECO
REGULAR BATCH

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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 CA INTER COST PAST YEAR QUESTIONS BY CA NAMIT ARORA SIR

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