PAPER 8 - COST ACCOUNTING

SUGGESTED ANSWERS
SECTION – A
1.

(i) (B)
(ii) (C)
(iii) (B)
(iv) (B)
(v) (D)
(vi) (B)
(vii) (C)
(viii) (A)
(ix) (C)
(x) (B)
(xi) (C)
(xii) (D)
(xiii) (A)
(xiv) (D)
(xv) (B)

SECTION – B

2. (a)
Cost and Profit Statement as on 31st March, 2025

Particulars Amount (₹)

Materials consumed:
Opening stock + Purchases - Closing stock
₹ 80,000 + 34,00,000 –1,30,000 33,50,000
Direct labour 16, 00,000
Prime Cost 49,50,000

Factory Overheads (60% of direct labour cost) 9,60,000

Gross Factory Cost 59,10,000
Add: Opening work-in-progress 1,20,000
Less: Closing work-in-progress 1,80,000
Factory Cost 58,50,000
Cost of Production 58,50,000
Add: Opening stock of finished goods 3,60,000
Less: Closing stock of finished goods 2,20,000

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 Cost of Goods Sold 59,90,000
Administration overheads (6% of sales) 5,40,000
Selling & distribution expenses (12% of sales) 10,80,000
Cost of Sales 76,10,000

Net Profit (Sales – Cost of Sales) 13,90,000

Sales 90,00,000

2. (b)

(i) Let D x be the cost of material and D y be the normal rate of wages per hour.
Vikas Shiv
Material costs (D) X X
Labour costs:
Time allowed 50 50
Less: Time taken 30 40
Time saved 20 10
Time wages [Time taken × 30y 40y
HR] 30
× 20y = 12y 50% of 10y = 5y
50
Add: Bonus
Total wages (D) 42y 45y
Overhead costs (D) 300 400
Factory costs (D) x+ 42y + 300 x+ 45y + 400
Given,
x+ 42y + 300 = 14,560 …………………………..(1)
x+ 45y + 400 = 15,200 …………………………..(2)

from (2) – (1), 3y = 540, i.e., y = 180

From (1), x = 14,260 – 42 × 180 = 6,700
Therefore, Material cost = D 6,700 and wages rate per hour = D 180

Amount of Bonus to:

Vikash : 12 × 180 = D 2,160
Shiv: 5 × 180 = D 900

(ii) Comparative statement of factory cost of the product by the two workmen
Vikas (D) Shiv (D)
Material costs 6,700 6,700
Wages 42 × 180 45 × 180 =
= 7,560 8,100
Prime costs 14,260 14,800
Add: Factory overhead @ D 10 per hour 300 400
Factory costs 14,560 15,200

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3. (a)
Departmental Distribution Summary
Items Basis of Total Production Departments Service Departments
Apportionment
X Y Z Maintenance Stores
(₹) (₹) (₹) (₹) (₹) (₹)
Indirect Allocation 85,000 19,000 24,000 4,000 30,000 8,000
Materials
Indirect Wages Allocation 79,000 18,000 22,000 6,000 20,000 13,000
Power & Light Kilowatt Hours 1,20,000 40,000 44,000 16,000 15,000 5,000
(200 : 220 : 80 :
75 : 25)
Depreciation Value of Assets 40,000 10,000 12,000 8,000 6,000 4,000
(1 month) (5 : 6 : 4 : 3 : 2)
Insurance Value of Assets 20,000 5,000 6,000 4,000 3,000 2,000
Rent & Rates Area 56,000 16,000 16,000 12,000 8,000 4,000
Meal Charges No. of 60,000 18,000 24,000 6,000 8,000 4,000
Employees
4,60,000 1,26,000 1,48,000 56,000 90,000 40,000
Maintenance — 45,000 27,000 18,000
Department
Stores — 16,000 16,000 8,000
Department
Total Overheads 4,60,000 1,87,000 1,91,000 82,000

3. (b)
Books of ABC Ltd.
Costing Profit and Loss Account
(For the year ended on 31st March, 2025)
Amount Amount
Particulars Particulars
(₹) (₹)
To Materials (5,48,000–12,800) 5,35,200 By Sales 12,00,000
To Direct wages 2,94,800
(3,02,000–7,200)
Prime Cost 8,30,000
To Factory overheads 1,66,000
(20% of Prime Cost)
Works Cost 9,96,000
To Administration overheads 74,400
(24,800×3)
Cost of Production 10,70,400
(–)Closing stock 34,529
(10,70,400×800/24,800)
Cost of Goods Sold 10,35,871
To Selling & distribution 96,000
overheads (24,000×4)
Cost of Sales 11,31,871
To Profit b/f 68,129
12,00,000 12,00,000

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 Reconciliation Statement
Particulars Amount Amount
(₹) (₹)
Profit as per Cost Accounts 68,129
Add : Dividend excluded in cost accounts 3,600
Over absorption of factory overheads 4,000
[1,66,000– (1,66,000-4,000)]
Over absorption of selling & distribution overheads 6,000
(96,000–90,000) 13,600
81,729
Less : Under absorption of administration overheads 2,080
(76,480–74,400)
Over valuation of finished stock in cost records 2,529
(34,529 – 32,000)
Preliminary expenses not included in cost records 12,000 16,609
Net Profit as per Financial Accounts 65,120

4. (a)
Machine Shop No. XYZ-II
(Component 'Diamond')
(i) Batch size: 100 components Total Cost per component
Batch cost (₹)
(₹)
Setting up costs:
Wages (3 hours @ ₹ 12 per hour) 36
Machine expenses (3 hours @ ₹ 72 per hour) 216
252 2.52
Production Costs:
Material (100 @ ₹10) 1,000
Wages (100 units × 6 minutes × ₹ 12/60) 120
Machine expenses (100 units × 6 min. × ₹ 72/60) 720
Total Production Cost 1,840 18.40
Total Setting up and Production Costs 2,092 20.92
(ii) Batch size: 150 components
Setting up Costs 252 1.68
Production Costs:
Material (150 @ ₹10) 1,500
Wages (150 × 6 × ₹12/60) 180
Machine expenses (150 × 6 × ₹72/60) 1,080
Total Production Cost 2,760 18.40
Total Setting up and Production Costs 3,012 20.08
(iii) Batch size: 200 Components
Setting up costs 252 1.26
Production Costs:
Material (200 @ ₹10) 2,000
Wages (200 ×6 × ₹12/60) 240
Machine expenses (200×6× ₹72/60) 1,440
Total Production Cost 3,680 18.40
Total Setting up and Production Costs 3,932 19.66

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4. (b)
PQR Ltd.'s Contract Account
(at the end of 1st year on 31st March, 2024)
Particulars ₹ Particulars ₹
To Materials Used 7,87,500 By Work-in-Progress 18,75,000
To Wages Paid 4,50,000 (16,87,500*100/90)
To Overhead Expenses 1,12,500
To Notional Profit c/d 5,25,000

18,75,000 18,75,000

To Profit & Loss A/c 1,57,500 By Notional Profit b/d 5,25,000

(D 5,25,000*1/3*90%)
To Work-in-Progress 3,67,500
(Reserve)
5,25,000 5,25,000

Contractee's Account
Particulars ₹ Particulars ₹
To Balance c/d 16,87,500 By Bank A/c 16,87,500
16,87,500 16,87,500

PQR Ltd.'s Contract Account

(On completion of contract in the 2nd year on 31st March, 2025)
Particulars ₹ Particulars ₹
To Work-in-Progress 15,07,500 By Contractee’s A/c 45,00,000
(18,75,000 - 3,67,500)
To Materials Used 11,25,000
To Wages Paid 9,00,000
To Overhead Expenses 2,25,000
To Profit & Loss A/c 7,42,500
(Transfer) 45,00,000 45,00,000

Contractee's Account
Particulars ₹ Particulars ₹
To Contract A/c 45,00,000 By Balance b/d 16,87,500
By Bank A/c 26,25,000
By Balance c/d 1,87,500

45,00,000 45,00,000

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5. (a)
Apportionment of Joint Expenses

Particulars X (₹) Y (₹)

Sales Value (Given) 32,000 48,000
Less: Estimated profit on sales 6,400 14,400
Total Cost of Sales 25,600 33,600
Less: Post-separation cost 9,600 14,400
Selling Expenses 6,400 9,600
Pre-Separation cost of X and Y 9,600 9,600

Working: Joint Expenses of GPT= ₹1,36,000-(9,600+ 9,600) = ₹ 1,16,800

Comparative Profit and Loss Statement

Particulars GPT (₹) X (₹) Y (₹) Total (₹)
1. Sales 3,28,000 32,000 48,000 4,08,000
2. Cost of sales:
Pre-Separation cost 1,16,800 9,600 9,600 1,36,000
Post-Separation cost - 9,600 14,400 24,000
Selling Expenses 65,600 6,400 9,600 81,600
Total Cost of Sales 1,82,400 25,600 33,600 2,41,600
3. Profit (1)-(2) 1,45,600 6,400 14,400 1,66,400
Working: Selling Expenses of Product GPT = 20%*3,28,000 = ₹ 65,600

5. (b)
Product Actual Production (units)Units per St. Hr. Standard Hrs. (for actual output)
X 48,000 10 4,800
Y 76,000 8 9,500
Total = 14,300

(i) Direct Labour Rate Variance = (SR – AR) * AT

= (₹ 0.50 – 0.60) * 15,000 = ₹ 1,500 (A)
(ii) Direct Labour Idle Time Variance = Abnormal Idle Time * SR
= 750 Hours * ₹ 0.50 = ₹ 375 (A)
Working Note: Calculation of Abnormal Idle Time –
Unbudgeted holidays = 700 Hours
Machine breakdown (500 * 1/10) = 50 Hours
Total = 750 Hours
(iii) Direct Labour Efficiency Variance = (ST – AT excluding abnormal idle time) * SR
= (14,300 – 14,250) * ₹ 0.50 = ₹ 25 (F)
(iv) Direct Labour Total Variance:
Standard Cost - 14,300 Hours @ ₹ 0.50 = ₹ 7,150
Actual Cost - 15,000 Hours @ ₹ 0.60 = ₹ 9,000
Direct Labour Total Variance = ₹ 1,850 (A)

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6.
Calculation of Present Contribution and Profit
Present variable cost per unit: Amount in ₹
Raw materials 20.00
Conversion cost 15.00
Dealer’s margin 5.00
Total = 40.00
Contribution per unit = Selling price – Variable cost
= ₹ 50 – 40 = ₹ 10

Total Contribution = ₹ 10 * 1,50,000 units = ₹ 15,00,000

In both the suggestions, fixed cost remains unchanged. Therefore, the present profit of ₹ 7,00,000 (i.e. ₹
15,00,000 – 8,00,000) can be maintained by having the total contribution at the present level i.e. ₹
15,00,000.

(i) Reducing Selling Price by 4%:

New Selling price = ₹ 48 (₹ 50 - ₹ 2)
New Dealer’s margin = ₹ 4.80 (10% of ₹ 48)
New Variable cost = ₹ 39.80 (₹ 20 + 15 + 4.80)
New Contribution per unit = ₹ 8.20 (₹ 48 – 39.80)

Sales (in units) required to maintain present level of profit:

= Total Contribution / Contribution Per Unit
= ₹ 15,00,000 / ₹ 8.20 = 1,82,927 units

Alternative Solution: Assumption that Dealer’s Margin remains ₹ 5 per unit.

New Selling price = ₹ 48 (₹ 50 - ₹ 2)
Dealer’s margin =₹5
Variable cost = ₹ 40 (₹ 20 + 15 + 5)
New Contribution per unit = ₹ 8 (₹ 48 – 40)

Sales (in units) required to maintain present level of profit:

= Total Contribution / Contribution Per Unit
= ₹ 15,00,000 / ₹ 8 = 1,87,500 units

(ii) Increasing Dealer’s Margin by 20%:

New Dealer’s margin = ₹ 6 (₹ 5 + 20% of ₹ 5)
New Variable cost = ₹ 41 (₹ 20 + 15 + 6)
New Contribution per unit = ₹ 9 (₹ 50 – 41)

Sales (in units) required to maintain present level of profit:

= Total Contribution / Contribution Per Unit
= ₹ 15,00,000 / ₹ 9 = 1,66,667 units

Recommendation:
The Man Ltd. should accept the second suggestion because in this case, company earns the same level of
contribution/profit by selling less number of units.

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7. (a)
Production Budget for the year ending 31st March, 2025
Particulars Product – R Product – S
Sales 30,000 1,50,000
Add: Closing stock 2,800 4,700
32,800 1,54,700
Less: Opening stock 1,800 4,200
Production (kg) 31,000 1,50,500

Materials Purchase Budget

(For the year ending 31st March, 2025)
Particulars X Y Z Total
Materials required for product-R in
the ratio of 4:4:2 12,400 12,400 6,200 31,000
Materials required for product-S in
the ratio of 3:5:2 45,150 75,250 30,100 1,50,500
Total requirement 57,550 87,650 36,300
Add: Closing stock 3,600 7,500 24,500
61,150 95,150 60,800
Less: Opening stock 4,500 4,000 22,000
Purchases (kg) 56,650 91,150 38,800
Cost per kg 20 16 12
Total Purchase Cost (₹) 11,33,000 14,58,400 4,65,600 = ₹30,57,000

7. (b)
Direct Expenses:
As per CAS–10, Direct Expenses are the 'Expenses relating to manufacture of a product or rendering a
service, which can be identified or linked with the cost object other than direct material cost and direct
employee cost.'
General Principles of Measurement:
(i) Emphasizes traceability for identification of Direct Expenses.
(ii) Details the determination of Direct Expenses for bought-out resources, other than those incurred for
such resources, and one-time payments.
(iii) Addresses amortization of lump-sum expenses based on estimated output or benefit.
(iv) Stresses materiality, excluding finance costs from Direct Expenses, and avoiding imputed costs.
(v) Discusses treatment of standard costs, variances, subsidies, abnormal portions, penalties, and
recoveries.

8. (a)
Essentials of a Good Cost Accounting System:
(i) Cost accounting system should be tailor made, practical, simple and capable of meeting the
requirement of a business concern.
(ii) The data to be used by the cost accounting system should be accurate, otherwise it may distort the
output of the system.
(iii) Necessary co-operation and participation of executives from various departments of the concern is
essential for developing a good system of cost accounting.
(iv) The cost of installing and operating the system should not be too high and ultimately pass the cost-
benefit analysis test.

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(v) The system of costing should not sacrifice the utility by introducing meticulous and unnecessary
details.
(vi) A carefully phased programme should be prepared by using network analysis for the introduction of
the system.
(vii) Management should have a faith in the costing system and should also provide a helping hand for its
development and success.

8. (b)
Meaning of ABC Analysis:
ABC Analysis, also known as Pareto Analysis, is a technique used in inventory management to categorize
items based on their significance.
ABC analysis is named after the Pareto Principle, which states that roughly 80% of the effects come from
20% of the causes. In the context of inventory management, it means that a small percentage of items often
contribute to a significant portion of the total value.
Under ABC analysis, the materials stocked may be classified into a number of categories according to their
importance, i.e., their value and frequency of replenishment during a period. The first category (also known
as group ‘A’ items) may consist of only a small percentage of total items handled but combined value may
be a large portion of the total stock value. The second category, naming it as group ‘B’ items, may be
relatively less important. In the third category, consisting of group ‘C’ items, all the remaining items of stock
may be included which are quite large in number but their value is not high.

Advantages of ABC Analysis (Any Three):

(i) Closer and stricter control of those items which represent a major portion of total stock value is
maintained.
(ii) Investment in inventory can be regulated and funds can be utilized in the best possible manner. ‘A’
class items are ordered as and when need arises, so that the working capital can be utilized in a best
possible way.
(iii) With greater control over the inventories, savings in material cost can be realised.
(iv) It helps in maintaining enough safety stock for ‘C’ category items.
(v) Scientific and selective control helps in the maintenance of high stock turnover ratio.

8 (c)
Objectives of CAS-8:
The objective of this Standard (CAS-8) is to bring uniformity and consistency in the principles and methods
of determining the cost of utilities with reasonable accuracy.

Scope of CAS-8:
CAS-8 is applied to cost statements which require classification, measurement, assignment, presentation and
disclosure of cost of utilities including those requiring attestation.

For determining the cost of production to arrive at an assessable value of excisable utilities used for captive
consumption, CAS-4 on Cost of Production for captive Consumption shall apply. This standard shall not be
applicable to the organisations primarily engaged in generation and sale of utilities. This standard does not
cover issues related to the ascertainment and treatment of carbon credits, which shall be dealt with in a
separate standard.

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