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PAPER – 4:
COST AND MANAGEMENT
ACCOUNTING

QUESTIONS

PART I - Case Scenario based MCQs

Marginal Costing
1. Popular company produces various articles for student purposes. It has
been in industry since last 25 years. Company had a very humble start
but gained popularity over the years due to excellent quality products
which were sold at very competitive prices. Company has huge reserves
and feel that it is also obligated to give back to the society from which it
has grown.
Last year management decided to produce and supply special quality
school bags, water bottles, & geometry boxes to NGOs, at no price, as a
social responsibility. These articles were simple looking but were more
durable, that would not have wore-off easily and could have been used
for long-term.
This year management wants to add another dimension to this social
work. It approached charitable schools and government run schools and
offered them the supply of the same articles, at cost. This will help
students in these schools to get these things at a very low price
compared to market.
The variable costs are ` 100, ` 80, and ` 40 for school bags, water
bottles, and geometry boxes, respectively. These articles are made using
a single machine. 0.20 hours of machine operation is required for
manufacturing 1 unit of school bag. Similarly, machine hours required
for each units of water bottle and geometry box is 0.15 hours and 0.10

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hours, respectively. Fixed overhead related to machine is ` 7,40,000 per

year. Machine can operate for 8,000 hours in a year.
Company has decided to sell its 80% capacity production in markets.
Rest is divided amongst the 2 undergoing social works, equally.
All Schools requests these items in the ratio of [Link], as per their
demand by the school students.
Company wants to set a price for these articles to be offered to the
schools. Management has few questions they need the answers to. They
assigned the task to their team. Team made rough calculations but as
there were too many people on the team, each came up with different
answers. As a Chartered accountant, you have been approached.
Understand the case closely, find the correct answers and help
management to set a price.
Answer the following:
(i) What is allocated fixed cost per unit of School bags, water bottles,
and geometry boxes?
(a) 18.5, 13.875, 9.75
(b) 18.5, 13.875, 9.25
(c) 18.5, 13.785, 9.25
(d) 18.5, 13.785, 9.50
(ii) If the prices were ` 200, ` 160, and ` 100, what would be the
overall break-even point in units in relation to fixed cost allocated
to these supplies?
(a) 308.33 units
(b) 500 units
(c) 508.33 units
(d) 1,000 units
(iii) Find out the maximum number of units of each article that can be
given at the prices given in Part (ii).
(a) 61, 92, 154

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(b) 200, 300, 500

(c) 101, 152, 254
(d) 100, 150, 250
(iv) What will be the maximum units that can be supplied to the
schools of each article?
(a) 1103, 1645, 2726
(b) 1093, 1655, 2748
(c) 1185, 1777, 2962
(d) 1133, 1675, 2958
(v) What should be the correct price for each item as per the
management’s decision?
(a) 118.50, 93.875, 49.75
(b) 118.50, 93.785, 49.25
(c) 118.50, 93.785, 49.50
(d) 118.50, 93.875, 49.25
Process Costing
2. Knowing the hectic schedule of a student preparing for the examination,
a homemaker managing work from home or a new parent busy in
neonatal care, a freshly qualified professional (Mr. Rishi) entered into a
start-up business of manufacturing frozen foods.
The process majorly involve washing and cutting the vegetables (Process
I), blanching, cooling and mixing of ingredients with spices (Process II),
forming, frying and freezing the final product (Process III).
In Accounts, Mr. Rishi normally transfers the output of one process to
another process at cost but, being a young entrepreneur, he is
interested in knowing the profit made at each and every process. Thus, it
was decided to transfer the output of Process I and II to the next process
at cost plus 25%. Further, the output of Process III is also transferred to
finished stock at cost plus 33 1/3%.

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Following information is extracted from the books of Mr. Rishi for the
current year:

Process I Process II Process III Finished

(`) (`) (`) Stock
(`)
Opening stock 8,02,500 14,44,500 21,40,000 24,07,500
Direct materials 42,80,000 34,77,500 26,75,000 --
Direct wages 66,87,500 57,78,000 49,22,000 --
Factory overheads 51,36,000 38,52,000 35,57,750 --
Closing stock 10,70,000 17,12,000 20,86,500 26,75,000
Inter-process profit 2,14,000 5,35,000 10,70,000
included in opening NIL
stock

Stock in processes is valued at prime cost. The finished stock is valued at

the price at which it is received from Process III.
Mr. Rishi wants you to FIGURE OUT the following to analyse the profit
generated at each process:
(i) What is the transfer price value at which the output of Process I is
transferred to Process II?
(a) ` 1,97,95,000
(b) ` 39,59,000
(c) ` 1,58,36,000
(d) ` 1,69,06,000
(ii) What is the transfer price value at which the output of Process II is
transferred to Process III?
(a) ` 1,20,97,476
(b) ` 4,07,93,750
(c) ` 2,86,96,274
(d) ` 3,43,47,000

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(iii) What is the transfer price value at which the output of Process III is
transferred to Finished Stock?
(a) ` 5,40,88,500
(b) ` 3,98,91,140
(c) ` 2,94,44,860
(d) ` 6,93,36,000
(iv) What is the cost value at which the output of Process III is trans-
ferred to Finished Stock?
(a) ` 5,40,88,500
(b) ` 3,98,91,140
(c) ` 2,94,44,860
(d) ` 6,93,36,000
(v) What is the cost value of closing stock of Process III A/c?
(a) ` 20,86,500
(b) ` 15,64,884
(c) ` 3,98,91,140
(d) ` 5,21,616
Employee Cost and Direct Expenses
3. Phalsa Ltd. pays its workers on time-basis because their services cannot
be tangibly measured. The company’s normal working week includes 5
days of 8 hours each. Sometimes, the workers needs to work late at
night which was 3 nights of 3 hours each for the current week. The
average output produced per worker for the week is 120 units.
Information regarding incentive rate is as follows:
Rate of Payment Day shift: ` 320 per hour
Night shift: ` 450 per hour

However, this time-basis payment made workers lazy, making their

expected output lower. As workers started doing more of the night shifts

5 JANUARY 2025 EXAMINATION

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for higher earnings with minimal impact on the outputs, the company
decided to shift on to a system of payments on output basis.
Information regarding amended incentive rate is as follows:

Time-rate (as usual) : ` 320 per hour

Basic time allowed for 15 units : 5 hours
Piece-work rate : Add 15% to basic piece-rate

In the amended incentive system, the normal weekly working hours

remained the same while production increased to 135 units.
CALCULATE the labour cost per unit as per the existing incentive system,
along with the amended incentive system.
(a) ` 140.42 and ` 122.67 respectively
(b) ` 124.81 and ` 138.00 respectively
(c) ` 124.81 and ` 122.67 respectively
(d) ` 140.42 and ` 138.00 respectively
Overheads- Absorption Costing Method
4. Gaarmentz Ltd. run a sewing factory for medical garments. But, the
company suffers from the limiting factor i.e. labor. Each sewing machine
needs 100% attention of one person at a particular point of time to
operate it. The company has 8 number of alike sewing machines on
which 8 operators work separately. The following particulars are
furnished for a six months period:
Paid hours for all the 8 operators 9,594 hours
Effective working hours for all the 8 operators 9,360 hours
Average rate of wages per day of 8 hours per operator ` 110
Power consumed ` 60,125
Supervision and Indirect Labour ` 21,450
The following particulars are given for a year:
Insurance ` 4,68,000
Sundry Expenses ` 7,15,000

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Depreciation charged is 10% on the original cost of all the sewing

machines.
Repairs and Maintenance comes to 5% of the value of all the sewing
machines.
The original cost of all the sewing machines works out to ` 41,60,000
CALCULATE the Comprehensive Machine Hour Rate.
(a) ` 215.86
(b) ` 217.99
(c) ` 116.43
(d) ` 119.34
Cost Sheet
5. Following information is available for the month of March relating to
manufacturing of a product:

Particulars Amount (`)

Cost of Sales 37,51,540
Stock of Raw material as on 01 March
st
6,50,000
Direct Wages 11,44,000
Hire charges paid for Plant (indirect expenses) 3,24,740
Salary to office staff 1,78,750
Maintenance of office building 13,000
Depreciation on Delivery van 39,000
Warehousing charges 61,750
Stock of Raw material as on 31 March
st
1,95,000
Realisable value on sale of scrap 32,500

Factory overheads are 20% of the Prime cost.

FIND OUT the value of Raw Material purchased with the help of
Statement of Cost.
(a) ` 10,40,000

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(b) ` 14,95,000
(c) ` 26,39,000
(d) ` 34,91,540
Joint Products and By products
6. ICT Ltd. belongs to pharmaceutical industries. The chemical process that
ICT Ltd. operates convert one compound into three category of
medicines viz. BetaTab, Folick and TegriCap. Though BetaTab and Folick
are already converted to final product at split-off point, Tegricap needs
further processing along with addition of new compound with it.
The market for BetaTab and Folick is highly active, thus the production is
sold at split-off point, however, Tegricap can be sold only after further
processing.
Following information is provided for the current year:

Products Quantity sold (tons) Selling price per ton (`)

BetaTab 372 7,500
Folick 1,054 5,625
TegriCap 1,472 3,750

The selling price is expected to remain the same for coming years.
The total joint manufacturing costs till split-off point is ` 62,50,000 and
the amount spent for further processing w.r.t. Tegricap is ` 31,00,000
The details regarding closing inventories are as follows:

Products Completed units (tons)

BetaTab 360
Folick 120
TegriCap 50

You are required to COMPUTE the joint cost allocated to BetaTab, Folick
and TegriCap using Net realizable value (NRV) method.
(a) BetaTab- ` 15,65,481, Folick - ` 33,26,647 and TegriCap -
` 13,57,872

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(b) BetaTab - ` 23,33,985, Folick - ` 28,07,478 and TegriCap -

` 11,08,537
(c) BetaTab - ` 19,27,533, Folick - ` 23,18,570 and TegriCap -
` 20,03,897
(d) BetaTab - ` 11,08,537, Folick - ` 28,07,478 and TegriCap -
` 23,33,985
Marginal Costing
7. Ms. Gauri has the business of selling pens. She has setup this pen
retailing for over 10 years with good profit volume ratio. Her average
cost from the retailing is ` 11.25 per unit if she sells 16,000 units and is
` 11 per unit if she sells 20,000 units.
For the current month, she also charged ` 5,000 towards depreciation
and the rental payment due.
The excess of sales revenue over the variable costs is ` 3.333 per unit.
You are required to CALCULATE Break-even Point (in units), Cash Break-
even Point (in units) and Profit Volume Ratio.
(a) Break-even Point- 6,000 units, Cash Break-even Point- 6,000 units
and Profit Volume Ratio- 33.33%
(b) Break-even Point- 6,000 units, Cash Break-even Point- 4,500 units
and Profit Volume Ratio- 25%
(c) Break-even Point- 4,500 units, Cash Break-even Point- 4,500 units
and Profit Volume Ratio- 33.33%
(d) Break-even Point- 4,500 units, Cash Break-even Point- 4,500 units
and Profit Volume Ratio- 25%
PART-II Descriptive Questions
Material Cost
8. Ani Ltd. uses 6 kg. of Material ‘EXE’ to produce 1 finished unit of Product
‘EME’. The current demand of Product ‘EME’ is 16,000 units quarterly. 1
kg. of Material ‘EXE’ costs ` 40. The cost relating to quotations,
documentation works, employee cost directly attributable to the
procurement of material, every-time the order is made, is ` 2,000. The

9 JANUARY 2025 EXAMINATION

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cost of fund invested in inventories, cost of storage, insurance cost, etc.

is estimated to be 15% per annum of average inventory.
You are required the following:
(i) CALCULATE the Economic Order Quantity for Material ‘EXE’.
(ii) COMMENT, should Ani Ltd. accept an offer of 2.5% discount by the
supplier of Material ‘EXE’, if supply of the annual requirement of
the Material is made in 4 equal installments?
Employee Cost and Direct Expenses
9. AeBee Publishers works for various educational institutes for editing,
binding, printing of various books and magazines on job work basis.
Currently, the company has employed 30 workers and pays them on
hour rate basis for each job assigned. To complete one of the process of
binding, the average time allowed to an employee is 8 hours for a 10
pages magazine.
In the month of March, two employees ‘Cee’ and ‘Dee’ were given 21
and 30 units of magazines respectively for binding work. The following
are the details of the work assigned:

Particulars ‘Cee’ ‘Dee’

Work assigned 21 units 30 units
Time taken 78 hours 114 hours

The existing rate of wages is ` 60 per hour along with bonus as per
Halsey System.
However, a new wage agreement has been signed between the
employees and the company where, employees will be paid ` 65 per
hour with effect from the April month. But, inadvertently, for the month
of March, the accountant of the company paid the wages to these
employees considering rate of wages as ` 65 per hour.
You are required to CALCULATE the following:
(i) Amount of loss that the company has incurred due to incorrect
rate selection in the month of March.

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(ii) Loss incurred by the company due to incorrect rate selection if it

had followed Rowan scheme of bonus payment.
(iii) Amount that could have been saved if Rowan Scheme of bonus
payment were followed.
Overheads- Absorption Costing Method
10. Han Ltd. sells three products namely ‘A’, 'B' and ‘C’. The following
information is available regarding sales, costs and activity for the year
ended 31st March:

Particulars A B C
Sales (`) 60,00,000 90,00,000 54,00,000
Cost of Sales (`) 30,00,000 78,00,000 27,00,000
Area of storage ([Link].) 72,000 1,08,000 36,000
Number of parcels sent 2,40,000 3,00,000 2,10,000
Number of invoices sent 60,000 90,000 1,44,000

Selling and Distribution overheads and the basis of allocation are as

follows :

Fixed Cost Amount Basis of allocation

(`) to Products
Rent and Insurance 6,00,000 Square feet
Depreciation 2,70,000 Parcel
Salesman's salaries & expenses 11,40,000 Sales Volume
Administrative wages and 9,00,000 No. of Invoices
salaries
Variable Costs:
Packing wages & materials ` 4.80 per parcel
Commission 2.40% of sales
Stationery ` 1.80 per invoice

Finance Manager of the Company has recommended to discontinue the

Product 'C' since it's sales is less compared to other products.

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You are required to PREPARE the profitability statement of each product,

showing the percentage of profit/ (loss) on sales for each product, and
also EXAMINE the recommendation of Finance Manager.
Cost Sheet
11. IC Ltd. manufactures two types of phone covers, one is ‘plastic’ phone
cover and another is ‘silicon’ phone cover.
The cost data relating to the manufacturing of both the phone covers
for the year ended 31stMarch is provided below:

Particulars Amount (`)

Direct Materials 1,00,00,000
Direct Wages 56,00,000
Production Overhead 32,00,000
Total 1,88,00,000

Other information relating to the production of the phone covers is as

follows:
• Direct material cost per unit of ‘silicon’ phone cover was twice than
that of ‘plastic’ phone cover.
• Direct wages per unit for ‘plastic’ phone cover were 60% of those
for ‘silicon’ phone cover.
• Production overhead per unit was at same rate for both the type of
phone covers.
• Administration overhead being part of cost of production was 50%
of Production overhead.
• Selling cost and Selling Price of ‘silicon’ phone cover were ` 8 and
` 140 per unit respectively.
• No. of units of ‘silicon’ phone covers sold- 90,000
• No. of units of Production of -
‘silicon’ phone cover: 1,00,000
‘plastic’ phone cover: 3,00,000

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You are required to PREPARE a cost sheet for ‘silicon’ phone cover
showing Cost and Profit (per unit and Total).
Cost Accounting Systems
12. Following information is extracted as a result of scrutiny of the figures
from both the financial accounts and cost accounts of CK Ltd. for the
year ending 31st March:
Particulars Amount
(`)
Net Profit (as per cost accounts) 57,71,840
Under recovery of selling overheads in cost accounts 1,16,800
Under valuation of closing stock in cost accounts 1,64,000
Rent received credited in financial accounts 87,200
Bad debts provided in financial accounts 52,000
Income tax provided in financial accounts 2,54,400
Under recovery of administration overheads in cost 1,50,400
accounts
You are required to PREPARE a Statement of Reconciliation showing the
profit as per financial records.
Batch Costing
13. Phonick Ltd. accepted an order to supply 2,000 units per month of
Product ‘E’ for the third quarter of the year. Each monthly batch order
records the actual costs of materials and labour. Overheads are charged
at a rate per labour hour. The selling price is established at ` 15 per unit.
Information relating to Material, Labour and Overheads is provided
below:
Month Batch Material Labour Overheads Total
Output Cost Cost Labour
(Numbers) (`) (`) (`) Hours
October 2,500 12,500 5,000 24,000 8,000
November 3,000 18,000 6,000 18,000 9,000
December 2,000 10,000 4,000 30,000 10,000
Labour is paid at the rate of ` 2 per hour.

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CALCULATE the cost and profit per unit of each batch order along with
the overall position of the order for 6,000 units.
Joint Products and By products
14. JPBP Ltd. manufactures two joint products A and B simultaneously from
the same process. The process produces another product C which is
recovered incidentally from the material used in the manufacture of A
and B.
The expenditures incurred up to the point of separation i.e. split-off
point are ` 14,82,000. As the joint products are capable of being
measured in the same units, joint costs are allocated on the basis of
physical unit.
Though the joint products A and B are saleable at split-off point, these
can also be further processed and sold at a higher market price, with
some sales promotion efforts. However, product C can be sold only after
further processing.
The management is of the view that, as the net realisable value of the
product C at split off point is too small, the value may be deducted from
the joint production cost.
The relevant details of the products are as follows:

Particulars Product A Product B Product C

Output (kg.) 16,250 8,125 1,625
Selling price at the split-off 72 80 -
point (per kg.) (`)
Further processing cost (per 16 20 8
kg.) (`)
Further marketing cost (per 8 8 4
kg.) (`)
Selling price after further 112 104 24
processing (per kg.) (`)

14 JANUARY 2025 EXAMINATION

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You are required the following:

(i) DETERMINE the profit/ (loss) of each joint product if these are sold
without further processing.
(ii) WHETHER joint products be processed further? Decide on the
basis of incremental profit/ (loss).
Service Costing
15. Roshan Travels provide bus facility to a College for carrying its students
from home to College and dropping them back at home after study
hours. The travel company runs a fleet of 6 buses for this purpose and
park them in the college premises.
The information regarding bus running is as follows:
(I) The College operates in two shifts (one in the morning and one in
the afternoon).
(II) The distance travelled by each bus one way is 20 kms.
(III) The students need to attend the college for 30 days in a month.
(IV) The seating capacity of each bus is 30 persons.
(V) The seating capacity is normally 80% occupied during the year.
The information regarding expenses incurred for a year is as follows:

Particulars Amount
Driver and attendant salary ` 60,000 per person per month
Cleaner’s salary (One cleaner for 2 ` 30,000 per cleaner per
buses) month
Diesel (Avg. 8 kms per litre) ` 160 per litre
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes ` 10,160 per bus per month
Parking charges paid ` 36,000 per month
Repair & maintenance including ` 5,712 per bus
engine oil and lubricants (for
every 5,760 kms)

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Purchase Price of each bus ` 30,00,000

Residual life of each bus 8 Years
Scrap value per bus at the end of ` 6,00,000
residual life

Students coming from a distance of beyond 10 kms away from the

College are charged double the fare than that from students coming
from a distance of up-to 10 kms. away from the College. 50% of
students travelling in each trip are coming from a distance beyond 10
kms. from the College. The charges are to be based on average cost.
You are required to:
(i) PREPARE a statement showing expenses of operating a single bus
for a year.
(ii) CALCULATE the average cost per student per month in respect of:
(a) Students coming from a distance up-to 10 kms. from the
College.
(b) Students coming from a distance beyond 10 kms. from the
College.
Standard Costing
16. Banku manufacturing Ltd. is engaged in producing a item named ‘ABC’.
It produces ‘ABC’ in a batch of 100 kgs. Standard material inputs
required for 100 kgs. of ‘ABC’ are as below:

Material Quantity (in kgs.) Rate per kg. (in `)

A 50 110
B 30 320
C 30 460

During the month of April, 2024, actual production was 50,000 kgs. of
‘ABC’ for which the actual quantities of material used for a batch and the
prices paid thereof are as under:

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Material Quantity (in kgs.) Rate per kg. (in `)

A 60 115
B 25 330
C 20 405

You are required to CALCULATE the following variances based on the

above given information for the month of April, 2024 for Banku
manufacturing Ltd.:
(i) Material Cost Variance;
(ii) Material Price Variance;
(iii) Material Usage Variance;
(iv) Material Mix Variance;
(v) Material Yield Variance.
Marginal Costing
17. XYZ Ltd. is a company involved in production and construction
specialised equipment and machines on the demand of customers. The
company received an order for construction of a specialised machine, it
had nearly completed this job relating to construction of a specialised
machine, when it discovered that the customer had gone out of
business. At this stage, the position of the job was as under:

(`)
Original cost estimate 27,50,000
Costs incurred so far 24,80,000
Costs to be incurred 3,70,000
Progress payment received from original customer 15,50,000

After searches, a new customer for the machine has been found. He is
interested to take the machine, if certain modifications are carried out.
The new customer wanted the machine in its original condition, but
without its AI device and with certain other modifications. The costs of
these additions and modifications are estimated as under:

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Direct Materials (at cost) ` 1,05,000

Direct Wages Dept.: X 35 men days
Dept.: Y 55 men days
Variable Overheads 30% of Direct Wages in each Dept.
Delivery Costs ` 15,500

Fixed overheads will be absorbed at 50% of direct wages in each

department.
The following additional information is available:
(1) The direct materials required for the modification are in stock and if
not used for modification of this order, they will be used in another
job in place of materials that will now cost ` 1,50,000.
(2) Department X is working normally and hence any engagement of
labour will have to be paid at the direct wage rate of ` 1,000 per man
day.
(3) Department Y is extremely busy. Its direct wages rate is ` 1,200 per
man day and it is currently yielding a contribution of ` 3 per rupee of
direct wages.
(4) Additional supervisory required for the modification cost ` 80,000.
(5) The cost of the AI device that the new customer does not require is `
1,35,000. If it is taken out, it can be used in another job in place of a
different mechanism. The latter mechanism has otherwise to be
bought for ` 1,05,000. The dismantling and removal of the control
mechanism will take 5 man day in department X.
(6) If the conversion is not carried out, some of the materials in the
original machine can be used in another contract in place of materials
that would have cost ` 2,00,000. It would have taken 5 men days of
work in department X to make them suitable for this purpose. The
remaining materials will realize ` 1,50,000 as scrap. The drawings,
which are included as part for the job can he sold for ` 45,000.

18 JANUARY 2025 EXAMINATION

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COST AND MANAGEMENT ACCOUNTING

You are required to CALCULATE the minimum price, which the company
can afford to quote for the new customer as staled above.
Budgets and budgetary control
18. BT Ltd. achieves sale of ` 73,12,500 with COGS of 40% while operating at
75% of its normal capacity during the current financial year.
The information relating to Administration, Selling and Distribution costs
is given below:
Administration costs:
Office salaries ` 11,70,000
General expenses 5 per cent of COGS
Depreciation ` 97,500
Rates and taxes ` 1,13,750
Selling costs:
Salaries 8 per cent of sales
Travelling expenses 5 per cent of COGS
Sales office expenses 2.5 per cent of COGS
General expenses 2.5 per cent of COGS
Distribution costs:
Wages ` 1,95,000
Rent 1 per cent of sales
Other expenses 10 per cent of COGS
Considering some of the expenses like office salaries, depreciation, rates
and taxes, and wages, to remain the same irrespective of the level of
activity, as these expenses are fixed in nature, PREPARE flexible
administration, selling and distribution costs budget, operating at 85%,
100% and 115% of normal capacity.

19 JANUARY 2025 EXAMINATION

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Miscellaneous
19. (a) DISCUSS advantages of Marginal Costing.
(b) LIST DOWN certain financial expenses and income included in
Financial Accounts only.
(c) DISCUSS the treatment of By-product cost in joint cost accounting
when they are of small total value.

(d) DISCUSS normal and abnormal Process Loss and ENUMERATE their
treatment in Cost Accounts.

SUGGESTED ANSWERS/HINTS

Note: Figures are rounded off to the nearest figures to remove approximation
error, wherever required.

1. (i) (b) Fixed overhead = 740000

Total machine hours = 8000 hours

Fixed OH per hour= ` 92.5

Fixed OH per unit of:

• School bag = 0.20 x 92.5 = ` 18.5

• Water bottle = 0.15 x 92.5 = ` 13.875

• Geometry box = 0.10 x 92.5 = ` 9.25

(ii) (d) Hours allocated = 8000 x 10% = 800 hours

Fixed overhead allocated = 800 x 92.5 = ` 74,000

Contribution:

• Bag = 200-100 = 100

• Bottle = 160-80=80

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• Geometry = 100- 40 = 60

Composite contribution = 100 x 2/10 + 80 x 3 / 10 + 60

x 5/10 = ` 74

Overall breakeven point for this assignment is = fixed cost

allocated/composite contribution = 74,000/74 = 1,000 units

(iii) (b) 1000 units are to be distributed in the ratio of [Link]

Bag = 200 units, bottle = 300 units, geometry = 500 units

(iv) (c) Total hours = 800 hours

let total no of units = X

Supply: bag 2/10 x X; bottle 3/10 x X; geometry 5/10 x X

Hours: (2X/10) x 0.20 + (3X/10) x 0.15 + (5X/10) x 0.10 = 800

hours

X = 5925

Units of :

• Bag = 2/10 x 5925 = 1185

• Bottle = 3/10 x 5925 = 1777.5 or 1777

• Geometry = 5/10 x 5925 = 2962.5 or 2962

(v) (d) Correct price is AT COST.

COST = Marginal Cost Per Unit + Fixed Overhead

Cost Allocated Per Unit

Bag Bottle Geometry

Variable cost per unit 100 80 40

Fixed cost per unit 18.5 13.875 9.25

Total 118.5 93.875 49.25

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 2.

22
Particulars Cost Profit Total Particulars Cost Profit Total (i)
(a)
(`) (`) (`) (`) (`) (`)

Opening 8,02,500 − 8,02,500 Process II 1,58,36,000 39,59,000 1,97,95,000

*Transfer price
Stock A/c
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(Transfer)*

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Direct 42,80,000 − 42,80,000 Closing 10,70,000 − 10,70,000
Material stock

Direct 66,87,500 − 66,87,500

Process I Account

Wages

Prime Cost 1,17,70,000 − 1,17,70,000

Manufactur- 51,36,000 − 51,36,000

ing
Overheads

Total cost 1,69,06,000 − 1,69,06,000

Costing 39,59,000 39,59,000

Profit and
Loss A/c**

= (Total Cost - Closing Stock) (1 + 25%)

1,69,06,000 39,59,000 2,08,65,000 1,69,06,000 39,59,000 2,08,65,000
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 23
(ii)
Cost Profit Total Particulars Cost Profit Total
Particulars

(b)
(`) (`) (`) (`) (`) (`)

Opening 12,30,500 2,14,000 14,44,500 By Process III 2,86,96,274 1,20,97,476 4,07,93,750

Stock A/c
(Transfer)**
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Process I 1,58,36,000 39,59,000 1,97,95,000 Closing 14,77,726 2,34,274 17,12,000

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A/c stock*

Direct -

* Cost of Closing Stock =

34,77,500 34,77,500
Material
Process II Account

Direct -
57,78,000 57,78,000
Wages
= ` 1,97,95,000

Prime Cost 2,63,22,000 41,73,000 3,04,95,000

` 2,63,22,000
Manufactur-

�` 3,04,95,000� x
ing - 38,52,000
38,52,000
Overheads

Total cost 3,01,74,000 41,73,000 3,43,47,000

= (1,69,06,000 - 10,70,000) x 1.25

Costing - 81,58,750 81,58,750

Profit and
Loss A/c***

3,01,74,000 1,23,31,750 4,25,05,750 3,01,74,000 1,23,31,750 4,25,05,750

**Profit on transfer = (1,69,06,000 - 10,70,000) x .25 = ` 39,59,000
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` 17,12,000 = ` 14,77,726

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COST AND MANAGEMENT ACCOUNTING

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 24
(iii)
Particulars Cost Profit Total Particulars Cost Profit Total
(`) (`) (`) (`) (`) (`)

(d)
Opening 16,05,000 5,35,000 21,40,000 By Finished 3,98,91,140 2,94,44,860 6,93,36,000
Stock Stock A/c**
(Transfer)
**Transfer price
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Process II 2,86,96,274 1,20,97,476 4,07,93,750 Closing 15,64,884 5,21,616 20,86,500

©The Institute of Chartered Accountants of India

A/c stock*

Direct 26,75,000 -- 26,75,000

Material

Direct 49,22,000 -- 49,22,000

Process III Account

Wages

Prime Cost 3,78,98,274 1,26,32,476 5,05,30,750

Manufactur-
ing 35,57,750 -- 35,57,750
Overheads

Total cost 4,14,56,024 1,26,32,476 5,40,88,500

Costing - 1,73,34,000 1,73,34,000

Profit and
Loss A/c***
= (Total Cost - Closing Stock) (1 + 25%)

4,14,56,024 2,99,66,476 7,14,22,500 4,14,56,024 2,99,66,476 7,14,22,500

= (3,43,47,000 - 17,12,000) x 1.25 = ` 4,07,93,750
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***Profit on transfer = (3,43,47,000 - 17,12,000) x .25 = ` 81,58,750

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3,78,98,274
�` 5,05,30,750� x
`
* Cost of Closing Stock = ` 20,86,500

= ` 15,64,884
**Transfer price = (Total Cost - Closing Stock) (1 + 33 1/3%)
= (5,40,88,500 - 20,86,500) x (1 + 33 1/3%)
= ` 6,93,36,000
***Profit on transfer = (5,40,88,500 - 20,86,500) x 33 1/3%
= ` 1,73,34,000
(iv) (b) Refer part (iii) above.
(v) (b) Refer part (iii) above.
3. (a) Calculation of existing labour cost per unit (time basis)
Normal weekly hours = 5 days x 8 hours = 40 hours
Night shift hours = 3 nights x 3 hours = 9 hours
Average production per week = 120 units

Weekly wages:
Normal shift (40 hours × ` 320) ` 12,800
Night shift (9 hours × ` 450) ` 4,050
Total wages ` 16,850
` 16,850
Labour cost per unit = �120 units�
= ` 140.42
Calculation of amended labour cost per unit (piece basis)
15 units are produced in 5 hours
Therefore, to produce 135 units, hours required is
5 hours
�15 units� x 135 units = 45 hours.
Labour cost of producing 135 units:
At basic time rate (45 hours × ` 320) = ` 14,400

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Add: Bonus @ 15% on basic Piece rate

` 14,400
[� � x 15%] x 135 units = ` 2,160
135 units
Earning for the week ` 16,560
` 16,560
Labour cost per unit = �135 units�
= ` 122.67
4. (d) Computation of Comprehensive Machine Hour Rate
Particulars Amount for
six months
(`)
Operators' wages paid [(9,594 hrs./ 8 hrs.) x 1,31,918
` 110]
Power consumed 60,125
Supervision and indirect labour 21,450
Insurance (` 4,68,000/2) 2,34,000
Sundry expenses (` 7,15,000/2) 3,57,500
Depreciation {(` 41,60,000 × 10%)/2} 2,08,000
Repair and maintenance {(5% × ` 41,60,000)/2} 1,04,000
Total Overheads for 6 months 11,16,993
Comprehensive Machine Hour Rate 119.34
` 11,16,993
= �9,360 hours�

5. (a) Statement of Cost for the month of March

Particulars Amount Amount
(`) (`)
Cost of Material Consumed:
Raw materials purchased 10,40,000**
Add: Opening stock of raw materials 6,50,000
Less: Closing stock of raw materials (1,95,000) 14,95,000
Direct Wages 11,44,000

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Prime Cost 26,39,000*

Hire charges paid for Plant (indirect 3,24,740
expenses)
Factory overheads (20% of Prime cost) 5,27,800 8,52,540
Works/ Factory Cost 34,91,540
Less: Realisable value on sale of scrap (32,500)
Cost of Production/ Cost of Goods Sold 34,59,040
Administrative overheads:
Maintenance of office building 13,000
Salary paid to Office staff 1,78,750 1,91,750
Distribution overheads:
Depreciation on delivery van 39,000
Warehousing charges 61,750 1,00,750
Cost of Sales 37,51,540

(Reverse calculation to be done to find out the value of Raw

materials purchased)
* Prime Cost + 3,24,740 + 20% of Prime Cost = 34,91,540
1.2 Prime Cost = 34,91,540 - 3,24,740 = 31,66,800
Prime Cost = 26,39,000
** Raw materials purchased = 14,95,000 - 6,50,000 + 1,95,000
= 10,40,000
6. (b) Calculation of total production of BetaTab, Folick and TegriCap

Products Quantity Quantity of closing Total

sold (tons) inventories (tons) production
(1) (2) (3) (4) = [(2) + (3)]
BetaTab 372 360 732
Folick 1,054 120 1,174
TegriCap 1,472 50 1,522

Calculation of Net Realisable Value (at split-off point)

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Products Total (`)

BetaTab Folick TegriCap
Total Production 732 1,174 1,522
(tons) (A)
Selling price per ton 7,500 5,625 3,750
(`) (B)
Final sales value of 54,90,000 66,03,750 57,07,500 1,78,01,250
total production (`)
[(A) x (B)]
Less: Additional - - (31,00,000) (31,00,000)
cost (`)
Net realisable 54,90,000 66,03,750 26,07,500 1,47,01,250
value (`)
(at split-off point)

Joint cost allocated using Net Realisable Value (at split-off point):
Total Jointcost
× NetRealisable Valueof each product
Total Net Realisable Value
` 62,50,000
BetaTab =� � x ` 54,90,000
` 1,47,01,250

= ` 23,33,985
` 62,50,000
Folick =� � x ` 66,03,750
` 1,47,01,250

= ` 28,07,478
` 62,50,000
TegriCap =� � x ` 26,07,500
` 1,47,01,250

= ` 11,08,537
Change inTotal cost
7. (b) Variable cost per unit =
Change in units
(` 11 x 20,000 units) - (` 11.25 x 16,000 units)
=� �
20,000 units - 16,000 units

` 2,20,000 - ` 1,80,000
=�
4,000 units
� = ` 10

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Fixed cost = Total Cost – Variable cost (at 20,000 units level)
= (` 11 x 20,000 units) – (` 10 x 20,000 units)
= ` 20,000
Fixed Costs
(i) Break-even Point (in units) = �Contribution per unit*�
` 20,000
=� �
` 3.333

= 6,000 units
* Contribution is the excess of sales revenue over the
variable costs.
Cash Fixed Costs**
(ii) Cash Break-even Point (in units) = �Contribution per unit�
` 20,000 - ` 5,000
=� �
` 3.333

= 4,500 units
** depreciation and other non-cash fixed costs are excluded
from the fixed costs to compute cash break-even point.
Contributionperunit
(ii) P/V Ratio =
Salepriceperunit
` 3.333
=� �
` 10 + ` 3.333

= 25%
8. Annual demand of material ‘EXE’
= 16,000 units (per quarter) x 4 (No. of Quarter in a year) x 6 kg. (for
every finished product)
= 3,84,000 kg.
(i) Calculation of Economic Order Quantity (EOQ) for material ‘EXE’

2 x Annual demand x ordering cost

EOQ =
Carrying cost per unit per annum

2x3,84,000kg.x ` 2,000
= = 16,000 kg.
` 40x15%

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(ii) Evaluation of Cost under different options of ‘order quantity’.

Particulars When EOQ is When discount of

ordered 2.5% is accepted and
supply is in 4 equal
installments
Order size 16,000 kg. 96,000 kg.
3,84,000 kg.
=
4
No. of orders 24 4
3,84,000 kg.
=
16,000 kg.
Purchase Cost ` 40 ` 39
per kg. {` 40 - (` 40 × 2.5%)}
Total Purchase ` 1,53,60,000 ` 1,49,76,000
Cost (A) (3,84,000 kg. x ` 40) (3,84,000 kg. x ` 39)
Ordering Cost ` 48,000 ` 8,000
(B) (24 orders x ` 2,000) (4 orders x ` 2,000)
Carrying Cost ` 48,000 ` 2,80,800
(C)
x 15% x ` 40 = 96,000 kg. x 15% x ` 39
16,000 kg.
=
2 2
Total Cost (A + ` 1,54,56,000 ` 1,52,64,800
B + C)

COMMENT – The total cost is lower if Ani Ltd. accept an offer of

2.5% discount by the supplier, when supply of the annual
requirement of material ‘EXE’ is made in 4 equal installments.
9.

Particulars ‘Cee’ ‘Dee’

No. of binding work assigned (units) 21 30
Hour allowed per magazine (Hours) 8 8
Total hours allowed (Hours) 168 240
Hours Taken (Hours) 78 114
Hours Saved (Hours) 90 126

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(i) Calculation of loss incurred due to incorrect rate selection

(While calculating loss only excess rate per hour has been taken)
Particulars ‘Cee’ ‘Dee’ Total
(`) (`) (`)
Basic Wages 390 570 960
(78 Hrs. ×` 5) (114 Hrs. × ` 5)
Bonus (as per Halsey 225 315 540
Scheme) (50% of 90 Hrs. (50% of 126 Hrs.
(50% of Time Saved × × ` 5) × ` 5)
Excess Rate)
Excess Wages Paid 615 885 1,500

(ii) Amount of loss if Rowan scheme of bonus payment were

followed
Particulars ‘Cee’ ‘Dee’ Total (`)
(`) (`)
Basic Wages 390.00 570.00 960.00
(78 Hrs. × ` (114 Hrs. × ` 5)
5)
Bonus (as per Rowan Scheme) 208.93 299.25 508.18
Time Taken 78 114
( × Time Saved x Excess Rate ) =( × 90 × ` 5) =( × 126 × ` 5)
Time Allowed 168 240
Excess Wages Paid 598.93 869.25 1,468.18

(iii) Calculation of amount that could have been saved if Rowan

Scheme were followed
Particulars ‘Cee’ ‘Dee’ Total (`)
(`) (`)
Wages paid under Halsey Scheme 615.00 885.00 1,500.00
Wages paid under Rowan Scheme 598.93 869.25 1,468.18
Difference (Savings) 16.07 15.75 31.82

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10. Profitability statement of each product for the year ended

31st March
Particulars Total (`) Products
A (`) B (`) C (`)
Sales 2,04,00,000 60,00,000 90,00,000 54,00,000
Variable Costs:
Cost of sales 1,35,00,000 30,00,000 78,00,000 27,00,000
Commission @ 4,89,600 1,44,000 2,16,000 1,29,600
2.40% of sales
Packaging wages 36,00,000 11,52,000 14,40,000 10,08,000
and materials @
` 4.80 per parcel
Stationery @ 5,29,200 1,08,000 1,62,000 2,59,200
` 1.80 per invoice
Total Variable 1,81,18,800 44,04,000 96,18,000 40,96,800
Costs
Contribution 22,81,200 15,96,000 (6,18,000) 13,03,200
(sales - variable
cost)
Fixed costs:
Rent and 6,00,000 2,00,000 3,00,000 1,00,000
insurance
Depreciation 2,70,000 86,400 1,08,000 75,600
Salesman’s salary 11,40,000 3,35,294 5,02,941 3,01,765
and expenses
Administrative 9,00,000 1,83,674 2,75,510 4,40,816
wages and salaries
Total Fixed Costs 29,10,000 8,05,368 11,86,451 9,18,181
Profit or loss (6,28,800) 7,90,632 (18,04,451) 3,85,019
(Contribution –
Fixed costs)
Percentage of (3.08)% 13.18% (20.05)% 7.13%
profit or loss on
sales (%)

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Recommendation of finance manager is not correct. Product ‘C’ should

not be discontinued as it is profitable.
11. Preparation of Cost Sheet for ‘silicon’ phone covers
No. of units produced = 1,00,000 units
No. of units sold = 90,000 units

Particulars Per unit Total

(`) (`)
Direct Materials (Working note- (i)) 40.00 40,00,000
Direct Wages (Working note- (ii)) 20.00 20,00,000
Prime Cost 60.00 60,00,000
Production Overhead (Working note- (iii)) 8.00 8,00,000
Factory Cost 68.00 68,00,000
Administration Overhead (50% of 4.00 4,00,000
Production Overhead)
Cost of Production 72.00 72,00,000
Less: Closing stock (1,00,000 units – - (7,20,000)
90,000 units)
Cost of Goods Sold i.e. 90,000 units 72.00 64,80,000
Selling cost 8.00 7,20,000
Cost of Sales/ Total Cost 80.00 72,00,000
Profit 60.00 54,00,000
Sales Value (` 140 × 90,000 units) 140.00 1,26,00,000

Working Notes:
(i) Direct material cost per unit of ‘plastic’ phone cover = M
Direct material cost per unit of ‘silicon’ phone cover = 2M
Total Direct Material Cost = 2M × 1,00,000 units + M × 3,00,000
units
Or, ` 1,00,00,000 = 2,00,000 M + 3,00,000 M

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` 1,00,00,000
Or, M = = ` 20
5,00,000
Therefore, Direct material Cost per unit of ‘silicon’ phone cover = 2
× ` 20 = ` 40
(ii) Direct wages per unit for ‘silicon’ phone cover = W
Direct wages per unit for ‘plastic’ phone cover = 0.6W
So, (W x 100,000) + (0.6W x 3,00,000) = ` 56,00,000
Or, 1,00,000 W + 1,80,000 W = ` 56,00,000
` 56,00,000
Or, W = = ` 20 per unit
2,80,000
Therefore, Direct wages per unit of ‘silicon’ phone cover = ` 20
` 32,00,000
(iii) Production overhead per unit = = `8
(1,00,000 + 3,00,000)
Production overhead for ‘silicon’ phone cover = ` 8 × 1,00,000
units = ` 8,00,000
12. Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per
financial records)

Particulars (`) (`)

Net Profit as per Cost Accounts 57,71,840
Add: Under valuation of closing stock in 1,64,000
cost accounts
Rent received credited in financial 87,200 2,51,200
accounts
60,23,040
Less: Under recovery of selling 1,16,800
overheads in cost accounts
Bad debts provided in financial accounts 52,000

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Income tax provided in financial accounts 2,54,400

Under recovery of administration 1,50,400 5,73,600
overheads in cost accounts
Profit as per Financial Accounts 54,49,440

13. Statement of Cost and Profit per unit of each batch order
October November December Total

a) Batch Output (Nos.) 2,500 3,000 2,000 7,500

b) Sales Value (@ ` 15 (`) (`) (`) (`)
per unit) 37,500 45,000 30,000 1,12,500
Cost
Material 12,500 18,000 10,000 40,500
Wages 5,000 6,000 4,000 15,000
Overheads (working note) 7,500 6,000 6,000 19,500
c) Total 25,000 30,000 20,000 75,000
d) Profit per batch (b) 12,500 15,000 10,000 37,500
– (c)
e) Cost per unit (c) ÷ 10 10 10
(a)
f) Profit per unit (d) 5 5 5
÷ (a)

Overall Position of the Order for 6,000 Units

Particulars Amount (`)

Sales value (6,000 units × ` 15) 90,000
Less: Total cost (6,000 units × ` 10) 60,000
Profit 30,000

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Working Note:
Calculation of overhead per hour

Particulars October November December

i. Labour hours:
Labour cost ` 5,000 ` 6,000 ` 4,000
= 2 2 2
Labour rates per hour
= 2,500 hrs. = 3,000 hrs. = 2,000 hrs.
ii. Overhead per
hour:
Total Overheads ` 24,000 ` 18,000 ` 30,000
= 8,000 hrs. 9,000 hrs. 10,000 hrs.
Total labour hour
=`3 =`2 =`3
iii. Overhead for the ` 7,500 ` 6,000 ` 6,000
batch (i) × (ii)

14. Workings -
1. Product C is produced incidentally from the material used in
the manufacture of A and B, thus, Product C is a By-product.

Per unit
(`)
Selling price after further processing (per kg.) (`) 24
Less: Further Processing Cost (per kg) 8
Further Marketing Cost (per kg) 4
12

Calculation of Joint Cost to be borne by By-product C

Joint Costs to be borne by By-product C = Output (kg.) x ` 12
= 1,625 kg. × ` 12
= ` 19,500
2. Allocation of joint cost among joint products (on the basis of
physical units) (given)
16,250
Product A: (` 14,82,000 - ` 19,500) x � � = ` 9,75,000
24,375

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Product B: (` 14,82,000 - ` 19,500) x � ` 4,87,500

8,125
�=
24,375

(i) Statement of Profit/ (Loss) if joint products are sold

without processing
Particulars Product A Product B Total
(a) Output (kg.) 16,250 8,125
(b) Selling price at the
split-off point (per kg.)
(`) 72 80
(c) Sales Value (a) x (b) 11,70,000 6,50,000 18,20,000
(d) Allocation of joint
costs 9,75,000 4,87,500 14,62,500
(e) Profit at the point of
separation (c)-(d) 1,95,000 1,62,500 3,57,500

(ii) Further processing decision

Particulars Product A Product B

(`) (`)
(a) Selling price at split off 72 80
(b) Selling price after further
112 104
processing
(c) Incremental revenue (b)-(a) 40 24
(d) Further processing cost 16 20
(e) Further Marketing Cost 8 8
(f) Incremental cost (d)+(e) 24 28
(g) Incremental profit/ (loss) per 16 (4)
kg (c)-(f)
(h) Total Incremental profit/ ` 16 x (` 4) x
(loss) 16,250 kg 8,125 kg
` 2,60,000 (` 32,500)

Therefore, Product A should be processed further as they give

incremental profit. On the other hand, Product B should be sold at

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split-off point as they suffer incremental losses after further

processing.
15. (i) Statement of Expenses of operating a single bus for a year

Particulars Rate Per Bus per

(`) annum (`)
(A) Standing Charges:
Driver and attendant 60,000 p.m 7,20,000
salary
Average Cleaner’s salary 30,000 p.m 1,80,000
(50%)
Insurance charge 60,000 p.a. 60,000
License fee, taxes etc. 10,160 p.m. 121,920
Average Parking Charges 36,000 p.m 72,000
Depreciation {(30,00,000 – 3,00,000 3,00,000
6,00,000) ÷ 8} p.a.
(B) Maintenance Charges:
Repairs & maintenance 5,7120 p.a. 5,7120
including engine oil and
lubricants (Working Note 1)
(C) Operating Charges:
Diesel (Working Note 2) 11,52,000
Total Cost (A + B + C) 26,63,040
Cost per month 2,21,920

(ii) Average cost per students per month:

A. Student coming from distance of up-to 10 km

Total cost per month ` 2,21,920

= = 72*
= ` 3,082.22
Total no. of equivalent student

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B. Student coming from a distance beyond 10 km

= ` 3,082.22 × 2 = ` 6,164.44

* Considering half fare students as a base

Full fare students (12 × 2) 24 students
Add: Half fare students (Working Note 3) 12 students
Total Equivalent number of students per month 36 students
Total Equivalent number of students per month 72 students
(morning + afternoon shift)
Working Notes:
1. Calculation of Repairs and maintenance cost of a bus:
Distance travelled in a year:
(4 trips × 2 × 20 km. × 30 days × 12 months)
Distance travelled p.a.: 57,600 km.
Repairs and maintenance cost per Bus per annum:
57,600 km.
= × ` 5,712 per bus
5,760 km

= ` 57,120 per annum

2. Calculation of diesel cost per bus per annum:
Distance travelled in a year = 57,600 km
Diesel cost per Bus per annum:
57,600 km.
= × ` 160
8 Km
= ` 11,52,000
3. Calculation of equivalent number of students per bus:
Seating capacity of a bus 30 students
Occupancy (80% of capacity) 24 students
Half fare students (50% of 24 students) 12 students
Full fare students (50% of 24 students) 12 students

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16. (i)
Material SQ* × SP AQ** × SP AQ** × AP RSQ*** × SP
(`) (`) (`) (`)
A 27,50,000 33,00,000 34,50,000 26,24,600
(25,000 kg. (30,000 kg. (30,000 kg. (23,860 kg.
× ` 110) × ` 110) × ` 115) × ` 110)
B 48,00,000 40,00,000 41,25,000 45,82,400
(15,000 kg. (12,500 kg. (12,500 kg. (14,320 kg.
× ` 320) × ` 320) × ` 320) × ` 320)
C 69,00,000 46,00,000 40,50,000 65,87,200
(15,000 kg. × (10,000 kg. (10,000 kg. (14,320 kg.
` 460) × ` 460) × ` 405) × ` 460)
Total 1,44,50,000 1,19,00,000 1,16,25,000 1,37,94,200

* Standard Quantity of materials for actual output :

50 kgs.
A = ×50,000 kgs.=25,000 kgs.
100 kgs
30 kgs.
B = × 50,000 kgs. = 15,000 kgs.
100 kgs
30 kgs.
C = × 50,000 kgs. = 15,000 kgs.
100 kgs

** Actual Quantity of Material used for actual output:

60 kgs.
A = ×50,000 kgs.=30,000 kgs.
100 kgs

25 kgs.
B = ×50,000 kgs.=12,500 kgs.
100 kgs

20 kgs.
C = ×50,000 kgs.=10,000 kgs.
100 kgs

***Revised Standard Quantity (RSQ):

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50 kgs.
A = ×52,500 kgs.=23,860 kgs.
110 kgs

30 kgs.
B = ×52,500 kgs.=14,320 kgs.
110 kgs

30 kgs.
C = ×52,500 kgs.=14,320 kgs.
110 kgs

(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. ×
Actual Price)
Or = (SQ × SP) – (AQ × AP)

A = ` 27,50,000 - ` 34,50,000 = ` 7,00,000 (A)

B = ` 48,00,000 - ` 41,25,000 = ` 6,75,000 (F)
C = ` 69,00,000 - ` 40,50,000 = ` 28,50,000 (F)
= ` 28,25,000 (F)

(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= (AQ × SP) – (AQ × AP)

A = ` 33,00,000 - ` 34,50,000 = ` 1,50,000 (A)

B = ` 40,00,000 - ` 41,25,000 = ` 1,25,000 (A)
C = ` 46,00,000 - ` 40,50,000 = ` 5,50,000 (F)
= ` 2,75,000 (F)

(iii) Material Usage Variance = Std. Price (Std. Qty. – Actual Qty.)
Or = (SQ × SP) – (AQ × SP)

A = ` 27,50,000 - ` 33,00,000 = ` 5,50,000 (A)

B = ` 48,00,000 - ` 40,00,000 = ` 8,00,000 (F)
C = ` 69,00,000 - ` 46,00,000 = ` 23,00,000 (F)
= ` 25,50,000 (F)

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(iv) Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
Or = (RSQ × SP) – (AQ × SP)

A = ` 26,24,600 - ` 33,00,000 = ` 6,75,400 (A)

B = ` 45,82,400 - ` 40,00,000 = ` 5,82,400 (F)
C = ` 65,87,200 - ` 46,00,000 = ` 19,87,200 (F)
= ` 18,94,200 (F)

(v) Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
Or = (SQ × SP) – (RSQ × SP)

A = ` 27,50,000 - ` 26,24,600 = ` 1,25,400 (F)

B = ` 48,00,000 - ` 45,82,400 = ` 2,17,600 (F)
C = ` 69,00,000 - ` 65,87,200 = ` 3,12,800 (F)
= ` 6,55,800 (F)

17. Statement of Minimum Price Which the Company Can Afford to

Quote for the New Customer

(`) (`)
Cost to be incurred to bring the machine in its 3,70,000
original condition
Direct Material (Replacement Value) 1,50,000
Direct Wages
Dept. X: (35 men days × ` 1,000) 35,000
Dept. Y: (55 men days × ` 1,200) 66,000
Opportunity Cost of Contribution Lost by 1,98,000 2,99,000
Dept. Y (`66,000 × `3)
Variable Overheads [30%×(`35,000+` 66,000)] 30,300
Delivery Costs 15,500
Additional Supervisory required for 80,000
modification
Saving Due to Alternative Use of AI Device

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Bought Out Price 1,05,000

Less: Dismantling & Removal Cost (5 men day 5,000
× `1,000)
Less: Variable Cost (30% × ` 5,000) 1,500 (98,500)
Net Loss on Material Cost Savings (W.N.) 1,93,500
Opportunity Cost of Remaining Materials 1,50,000
which can be sold as scrap
Opportunity Cost of Sale of Drawings 45,000
Total Minimum Price which may be quoted 12,34,800

Working Note

(`)
Loss on Material Cost Saving of Machine 2,00,000
Less: Conversion Cost (5 men days × `1,000) 5,000
Less: Variable Cost (30% × `5,000) 1,500
Net Loss on Material Cost Saving of Machine 1,93,500

18. Flexible Budget of BT Ltd.

Particulars 75% 85% 100% 115%

(`) (`) (`) (`)
Sales 73,12,500 82,87,500 97,50,000 1,12,12,500
COGS (40% of
29,25,000 33,15,000 39,00,000 44,85,000
Sales)
Administration
Costs:
Office Salaries 11,70,000 11,70,000 11,70,000 11,70,000
(fixed)
General expenses
1,46,250 1,65,750 1,95,000 2,24,250
(5% of COGS)
Depreciation (fixed) 97,500 97,500 97,500 97,500
Rent and rates 1,13,750 1,13,750 1,13,750 1,13,750
(fixed)

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(A) Total Adm. Costs 15,27,500 15,47,000 15,76,250 16,05,500

Selling Costs:
Salaries (8% of
5,85,000 6,63,000 7,80,000 8,97,000
sales)
Travelling expenses
1,46,250 1,65,750 1,95,000 2,24,250
(5% of COGS)
Sales office (2.5% of
73,125 82,875 97,500 1,12,125
COGS)
General expenses
73,125 82,875 97,500 1,12,125
(2.5% of COGS)
(B) Total Selling
8,77,500 9,94,500 11,70,000 13,45,500
Costs
Distribution Costs:
Wages (fixed) 195,000 195,000 195,000 195,000
Rent (1% of sales) 73,125 82,875 97,500 1,12,125
Other expenses
2,92,500 3,31,500 3,90,000 4,48,500
(10% of COGS)
(C) Total
5,60,625 6,09,375 6,82,500 7,55,625
Distribution Costs
Total Costs (A + B
29,65,625 31,50,875 34,28,750 37,06,625
+ C)

19. (a) Advantages of Marginal Costing:

1. Simplified Pricing Policy: The marginal cost remains
constant per unit of output whereas the fixed cost remains
constant in total. Since marginal cost per unit is constant
from period to period within a short span of time, firm
decisions on pricing policy can be taken.
2. Proper recovery of Overheads: Overheads are recovered in
costing on the basis of pre-determined rates. If fixed
overheads are included on the basis of pre-determined rates,
there will be under- recovery of overheads if production is
less or if overheads are more. There will be over- recovery of
overheads if production is more than the budget or actual

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expenses are less than the estimate. This creates the problem
of treatment of such under or over-recovery of overheads.
Marginal costing avoids such under or over recovery of
overheads.
3. Shows Realistic Profit: Advocates of marginal costing
argues that under the marginal costing technique, the stock
of finished goods and work-in-progress are carried on
marginal cost basis and the fixed expenses are written off to
profit and loss account as period cost. This shows the true
profit of the period.
4. How much to produce: Marginal costing helps in the
preparation of break-even analysis which shows the effect of
increasing or decreasing production activity on the
profitability of the company.
5. More control over expenditure: Segregation of expenses as
fixed and variable helps the management to exercise control
over expenditure. The management can compare the actual
variable expenses with the budgeted variable expenses and
take corrective action through analysis of variances.
6. Helps in Decision Making: Marginal costing helps the
management in taking a number of business decisions like
make or buy, discontinuance of a particular product,
replacement of machines, etc.
7. Short term profit planning: It helps in short term profit
planning by B.E.P charts.
(b) Items included in Financial Accounts only-
(A) Purely Financial Expenses:
(i) Interest on loans or bank mortgages
(ii) Expenses and discounts on issue of shares, debentures
etc.
(iii) Other capital losses i.e., loss by fire not covered by
insurance etc.

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(iv) Losses on the sales of fixed assets and investments

(v) Income tax, donations, subscriptions
(vi) Expenses of the company’s share transfer office, if any.
(B) Purely Financial Income
(i) Interest received on bank deposits, loans and
investments
(ii) Dividends received
(iii) Profits on the sale of fixed assets and investments
(iv) Transfer fee received
(v) Rent receivables.
(c) By-product cost, when they are of small total value, can be
dealt in cost accounting in the following ways:
When the by-products are of small total value, the amount realised
from their sale may be dealt in any one the following two ways:
1. The sales value of the by-products may be credited to the
Costing Profit and Loss Account and no credit be given in
the Cost Accounts. The credit to the Costing Profit and Loss
Account here is treated either as miscellaneous income or as
additional sales revenue.
2. The sale proceeds of the by-product may be treated as
deductions from the total costs. The sale proceeds in fact
should be deducted either from the production cost or from
the cost of sales.
(d) There are two types of material losses viz. (i) Normal loss and
(ii) Abnormal loss.
(i) Normal Process Loss: It is also known as normal wastage. It
is defined as the loss of material which is inherent in the
nature of work. Such a loss can be reasonably anticipated
from the nature of the material, nature of operation, the
experience and technical data. It is unavoidable because of
nature of the material or the process. It also includes units

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withdrawn from the process for test or sampling.

Treatment in Cost Accounts: The cost of normal process
loss in practice is absorbed by good units produced under
the process. The amount realised by the sale of normal
process loss units should be credited to the process account.
(ii) Abnormal Process Loss: It is also known as abnormal
wastage. It is defined as the loss in excess of the pre-
determined loss (Normal process loss). This type of loss may
occur due to the carelessness of workers, a bad plant design
or operation, sabotage etc. Such a loss cannot obviously be
estimated in advance. But it can be kept under control by
taking suitable measures.
Treatment in Cost Accounts: The cost of an abnormal
process loss unit is equal to the cost of a good unit. The total
cost of abnormal process loss is credited to the process
account from which it arises. Cost of abnormal process loss is
not treated as a part of the cost of the product. In fact, the
total cost of abnormal process loss is debited to costing
profit and loss account.

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