Costing Marathon

CA Sunil Keswani

CA Intermediate

Costing Marathon

By CA Sunil Keswani

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CA Sunil Keswani

EMPLOYEE COST - CONCEPTS

1. Labour Turnover
It is the rate of change in labour force of an organisation. It can be calculated by following
ways:
!"#$%& () *%+,&,-.(/
(A) Separation Method = × 100
01%&,2% !(. () 4(&5%&6
!"#$%& () 7%+8,9%#%/-
(B) Replacement Method = × 100
01%&,2% !(. () 4(&5%&6
!"#$%& () :;+,/6.(/
(C) New Recruitment Method = 01%&,2% !(. × 100
() 4(&5%&6
(!(. () *%+,&,-.(/=!(. () ,9%66.(/6)
(D) Flux Method (with expansion) = × 100
01%&,2% !(. () 4(&5%&6
(!(. () *%+,&,-.(/=!(. () &%+8,9%#%/-)
(E) Flux Method (without expansion) = × 100
01%&,2% !(. () 4(&5%&6
?+%/./2=@8(6./2
(F) Average worker =
A
B,$("& C"&/(1%& 7,-%
(G) Equivalent Annual LTR = !(. × 365
() D,E6 ./ -F% +%&.(D

2. Statement of Profit foregone due to labour turnover

Particulars Amount
Contribution lost due to loss of productive hours
Additional rectification cost
Settlement cost due to leaving
Recruitment cost
Training cost
Profit foregone

3. Idle Time

Burden Pass to consumer

Total hour paid

Normal idle hour

By deducting them from
total hours and increasing
rate per hour
Idle Hours

Burden pass to owner

Hours worked Abnormal idle hours

By transferring them to P&L
A/c

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4. Statement of Wage Rate Calculation
Particulars Amount (`)
Basic Wages --
Dearness Allowance --
Bonus --
Commission --
Perquisite --
Overtime --
Any other allowances --
Employer contribution to PF/ESI etc. --
Gross Wages --
Effective Working Hours (Total hours – Normal Idle Hours) --
Wage rate per hour --

5. Net Wages or In-hand wages calculation

Particulars Amount (`)
Gross Wages --
(-) Employee contribution to PF/ESI etc. --
(-) Employer contribution to PF/ESI etc. --
(-) Tax deducted at source (TDS) --
(-) Professional Tax --
(-) Any other deduction --
Net Wages Payable --

6. Overtime
Ø It is hours worked over and above the normal working hours.
Ø According to Factories Act of 1948, a worker is entitled for overtime at double the rate
of his wages if he works more than 9 hours in a day or more than 48 hours in a week.

Overtime payment = Overtime hours ´ Overtime Rate

7. Overtime Rate & Overtime Premium

Ø The rate at which overtime hours are paid is known as overtime rate.
Ø Overtime premium is the extra amount of wages paid over the normal rate.
Ø Overtime Rate = Normal wage rate + Overtime Premium

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8. Treatment of Overtime Premium
Cause of Overtime Treatment
Resorted at the desire of the customer Overtime premium to be charged to the
specific customer
Resorted due to general pressure of work to Overtime premium to be charged to general
increase the output or irregularity in overheads
production
Resorted due to negligence or delay of a Overtime premium to be charged to the
particular department concerned department
Resorted due to abnormal reasons Overtime premium to be charged to costing
profit & loss account
Resorted due to shortage of labour in Inflate the wage rate and charge it to all
industry customers.

9. Wage Payment System

(A) Time Rate System
Wages = No. of hours worked ´ Rate per hour
(B) Piece Rate system
Wages = No. of units produced ´ Rate per unit (or Piece rate)

10. Incentive Plans

(A) Halsey Plan
Total Earnings = (H × R) + [50% × (S – H) × R]
(B) Halsey-wier Plan
Total Earnings = (H × R) + [33.33% × (S – H) × R]
(C) Rowan Plan
*GH
Total Earnings = (H × R) + '( ) × 𝐻 × 𝑅,
*
Where, H = Actual hours worked
R = Rate per hour
S = Standard hours or time allowed
(S – H) = Time saved

11. Effective Hourly Rate of Earning

C(-,8 4,2%6
Effective hourly rate of earning =
09-",8 F("&6 I(&5%D

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12. Beneficial Plan
Actual hours = 50% of Standard hours Halsey Bonus = Rowan Bonus
Actual hours > 50% of Standard hours Halsey Bonus < Rowan Bonus
Or Time Saved < 50% of Standard hours
Actual hours < 50% of Standard hours Halsey Bonus > Rowan Bonus
Or Time Saved > 50% of Standard hours

EMPLOYEE COST QUESTIONS

Question – 1
The cost accountant of SK Ltd. has computed labour turnover rates for the quarter ending 31st March
as 10%, 5% and 3% respectively under ‘Flux Method’, ‘Replacement Method’ and ‘Separation
Method’. If the number of workers replaced during the quarter is 30, find out the number of:
(a) workers recruited and joined; and
(b) workers left and discharged
(c) equivalent employee turnover rates for the year
(d) number of workers at the beginning of the quarter

Solution
!"."$ &'()*+','-./
Replacement Method - Labour turnover rate = 01'&*2' -3,4'& "$ 5"&6'&/ ´ 100
78
5 =
01'&*2' -3,4'& "$ 5"&6'&/
´ 100
Average number of workers = 600
!"."$ /'('*&*.9"-/
Separation Method - Labour turnover rate = 01'&*2' -3,4'& "$ 5"&6'&/ ´ 100
!"."$ /'('*&*.9"-/
3 = :88
´ 100
Number of separations (left and discharged) = 18
!"."$ /'(*&*.9"-/ ; !"."$ &'+&39.,'-./ & ="9-''
Flux Method - Labour turnover rate = 01'&*2' -3,4'& "$ 5"&6'&/
´ 100
>? ; !"."$ &'+&39.,'-./ & ="9-''
10 = :88
´ 100
Number of workers recruited & joined = 60 – 18 = 42

(a) number of workers recruited and joined = 42

(b) number of workers left and discharged = 18
(c) Equivalent Employee turnover rate
>8
Flux Method – Labour turnover rate = 7
´ 12 = 40%
@
Replacement Method – Labour turnover rate = 7 ´ 12 = 20%

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Separation Method – Labour turnover rate = 7 ´ 12 = 12%
A('-9-2;B)"/9-2
(d) Average workers = C
A('-9-2;B)"/9-2
600 = C
Closing = 1200 – Opening
Also, Closing workers = Opening workers + recruited & joined – left & discharged
1200 – Opening = Opening + 42 – 18
Opening workers = 588

Question – 2
SK Ltd. is engaged in BPO industry. One of its trainee executives in the Personnel department has
calculated labour turnover rate 24.92% for the last year using Flux method.

Following is the data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end
Data processor 540 1,080 60 1,560
Payroll Processors ? 20 60 40
Supervisors ? 60 — ?
Voice Agents ? 20 20 ?
Assistant Managers ? 20 — 30
Senior Voice Agents 4 — — 12
Senior Data Processors 8 — — 34
Team Leaders ? — — ?
Employees transferred from the Subsidiary Company
Senior Voice Agents — 8 — —
Senior Data Processors — 26 — —
Employees transferred to the Subsidiary Company
Team Leaders — — 60 —
Assistant Managers — — 10 —

At the beginning of the year there were total 772 employees on the payroll of the company. The
opening strength of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 :
3 : 2.

The company has decided to abandon the post of Team Leaders and consequently all the Team Leaders
were transferred to the subsidiary company. The company and its subsidiary are maintaining separate
set of books of account and separate Personnel Department.

You are required to calculate:

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(a) Labour Turnover rate using Replacement method and Separation method.
(b) Verify the Labour turnover rate calculated under Flux method by the trainee executive of the SK
Ltd.

Solution
Working Notes:
(i) Calculation of no. of employees at the beginning and end of the year
At the beg. Joined Left At the end Replacement Expansion
Data Processors 540 1,080 60 1,560 60 1,020
[40 + 60 - 20]
Payroll Proc. 80 20 60 40 20 -
Supervisors* 30 60 - 90 - 60
[30 + 60 – 0]
Voice Agents* 30 20 20 30 20 -
Ast. Managers* 20 20 10 30 10 10
Sr. Voice Agents 4 8 - 12 - 8
Sr. Data Processors 8 26 - 34 - 26
Team Leaders 60 - 60 - - -
Total 772 1,234 210 1,796 110 1,124
(*) At the beginning of the year:
Strength of Supervisors, Voice Agents and Asst. Managers =
[772 – {540 + 80 + 4 + 8 + 60} employees] or [772 – 692 = 80 employees]
𝟑 𝟑 𝟐
[{Supervisors- 𝟖𝟎 × = 30, Voice Agents- 𝟖𝟎 × = 30 & Asst. Managers- 𝟖𝟎 × = 20} employees]
𝟖 𝟖 𝟖
At the end of the year:
[Supervisor-(Opening- 30 + 60 Joining) = 90; Voice Agents- (Opening- 30 + 20 Joined – 20 Left) =
30]

(a) Calculation of Labour Turnover:

𝑵𝒐. 𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔 𝒓𝒆𝒑𝒍𝒂𝒄𝒆𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓
Replacement Method = × 𝟏𝟎𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒐.𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔 𝒐𝒏 𝒓𝒐𝒍𝒍
𝟏𝟏𝟎
= (𝟕𝟕𝟐;𝟏,𝟕𝟗𝟔)/𝟐 × 𝟏𝟎𝟎 = 8.57%

𝑵𝒐.𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔 𝒔𝒆𝒑𝒂𝒓𝒂𝒕𝒆𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓

Separation Method = × 𝟏𝟎𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒐.𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔 𝒐𝒏 𝒓𝒐𝒍𝒍
𝟐𝟏𝟎
= (𝟕𝟕𝟐;𝟏,𝟕𝟗𝟔)/𝟐 × 𝟏𝟎𝟎 = 16.36%

(b) Labour Turnover under Flux Method

𝑵𝒐.𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔 (𝒋𝒐𝒊𝒏𝒆𝒅 ; 𝒔𝒆𝒑𝒂𝒓𝒂𝒕𝒆𝒅) 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓
Flux Method = × 𝟏𝟎𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒐.𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔 𝒐𝒏 𝒓𝒐𝒍𝒍

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𝟏,𝟐𝟑𝟒;𝟐𝟏𝟎
= (𝟕𝟕𝟐;𝟏,𝟕𝟗𝟔)/𝟐 × 𝟏𝟎𝟎 = 112.46%

Labour Turnover calculated by the executive trainee of the Personnel department is incorrect as it has
not taken the No. of new recruitment while calculating the labour turnover under Flux method.

Question – 3
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 during the year 30 days
Number of employees 175
Normal idle time 70 hours per annum
Abnormal idle time (due to failure of power supply) 50 hours
Working days per annum 310 days of 8 hours
You are required to calculate:
1) Annual cost of each employee
2) Employee cost per hour
3) Cost of abnormal idle time, per employee

Solution
Calculation of effective hours
Total working hours (310 × 8) 2,480
Less: Leave days (30 × 8) __240
Available working hours 2,240
Less: Normal loss ___70
Effective working hours 2,170
Statement of employee cost per hour
Particulars Amount (`)
Salary (30,000 × 12) 3,60,000
Bonus (25% × 3,60,000) 90,000
Employees contribution to PF (15% × 3,60,000) 54,000
Employee welfare (6,61,500 ÷ 175) 3,780
Total Annual Cost (A) 5,07,780
Effective working hours (B) 2,170
Employee cost per hour (A ÷ B) 234
Cost of abnormal idle time per employee = `234 × 50 hours = `11,700

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Question – 4
A total of 108 labour hours have been put in a particular job card for repair work engaging a semi-
skilled and skilled labour (Mr. Deep and Mr. Sam respectively).

The hours devoted by both the workers individually on daily basis for this particular job are given
below:
Monday Tuesday Wednesday Thursday Friday
10.5 8.0 10.5 9.5 10.5
The skilled labour also worked on Saturday for 10 hours.

Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 5 hours on
Saturdays; the workers are however paid full wages for Saturday (8 hours for 5 hours worked).

Semi-skilled and skilled worker is paid ordinary wage @`400 and `600 respectively per day of 8
hours labour. Further, the workers are also paid dearness allowance @20%. Extra hours worked over
and above 8 hours are also paid at ordinary wage rate however, overtime premium of 100% of ordinary
wage rate is paid if a worker works for more than 9 hours in a day and 48 hours in a week.

You are required to compute the wages payable to Mr. Deep (semi-skilled) and Mr. Sam (skilled).

Solution
Calculation of total normal hours to be paid for Mr. Deep (Semi-skilled)
Day Actual Normal Extra Overtime Equivalent Total
hours hours Hours hours normal hours for normal
overtime worked hours
payable
A B C D=A–B E=D´2 F=B+C+
E
Monday 10.5 8 1 1.5 3 12
Tuesday 8 8 - - - 8
Wednesday 10.5 8 1 1.5 3 12
Thursday 9.5 8 1 0.5 1 10
Friday 10.5 8 1 1.5 3 12
Saturday - - - - - -
Total 49 40 4 5 10 54

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Calculation of total normal hours to be paid for Mr. Sam (Skilled)
Day Actual Normal Extra Overtime Equivalent Total
hours hours Hours hours normal hours for normal
overtime worked hours
payable
A B C D=A–B E=D´2 F=B+C+
E
Monday 10.5 8 1 1.5 3 12
Tuesday 8 8 - - - 8
Wednesday 10.5 8 1 1.5 3 12
Thursday 9.5 8 1 0.5 1 10
Friday 10.5 8 1 1.5 3 12
Saturday 10 5 3+1=4 1 2 11
Total 59 45 8 6 12 65
Note: Mr. Sam will be paid for equivalent 8 normal working hours at ordinary wage rate, though 5
hours of working is required on Saturday because in question it is mentioned that both condition of 9
hour per day and 48 hour a week has to be satisfied. Thus, only 1 hour of overtime over 9 hours will
be paid at overtime rate.
Wages Payable
Particulars Mr. Deep Mr. Sam
Basic wage per hour 400 ÷ 8 = 50 600 ÷ 8 = 75
Dearness allowance per hour @ 20% 10 15
Hourly wage rate 60 90
Total normal hours payable 54 65
Total wages payable 3,240 5,850

Question – 5
Calculate the earnings of S and K from the following particulars for a month and calculate the labour
cost to each job A, B and C.
S K
Basic Wages `100 `160
Dearness allowance 50% 50%
Contribution of provident fund (on basis wages) 8% 8%
Contribution of employee’s state insurance (on basic wages) 2% 2%
Overtime 10 hours ---
The normal working hours for the month are 200. Overtime is paid as double the total of normal wages
and dearness allowance. Employer’s contribution to state insurance and provident fund are at equal
rates of employee’s contribution. The two workers were employed on jobs A, B and C in the following
properties:

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A B C
Worker S 40% 30% 30%
Worker K 50% 20% 30%
Overtime was done on Job B.

Solution
Statement of wages
Particulars Worker S Worker K
Basic Wages 100 160
Dearness Allowance 50 80
Employer contribution to PF 8 12.80
Employer contribution to state insurance 2 3.20
(>88;@8)×C×>8 15 -
Overtime ) *
C88
Total 175 256
Statement of cost of Jobs
Particulars A B C
Overtime - 15 -
Bal. of Worker S’s wages 64 48 48
(160 in [Link])
Worker K’s Wages 128 51.20 76.80
(256 in [Link])
Total 192 114.20 124.80

Question – 6
A skilled worker in SK Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per
unit for a particular product is 4 hours. S, 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%)?

Solution
Let actual time taken by the worker S = H

Total wages in Rowan plan = (H × 30) + &$ " #! × (4 – H) × 30

%!"
(H × 37.50) = 30H + 30H – 7.5H2
22.5H = 7.5H2
H = 3 hours

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Total wages of workman in Halsey scheme = (3 × 30) + #" × (4 – 3) × 30 = `105
!""

Effective hourly rate of earnings under Halsey Plan = ()* = `35

'&!"#$%

Question – 7
Two workers ‘S’ and ‘K’ produce the same product using the same material. Their normal wage rate
is also the same. ‘S’ is paid bonus according to Rowan scheme while ‘K’ is paid bonus according to
Halsey scheme. The time allowed to make the product is 50 hours. ‘S’ takes 30 hours while ‘K’ takes
40 hours to complete the product. The factory overhead rate is `5 per person-hour actually worked.
The factory cost of product manufactured by ‘S’ is `3,490 and for product manufactured by ‘K’ is
`3,600.
Required:
(a) Compute the normal rate of wages
(b) Compute the material cost
(c) Prepare a statement comparing the factory cost of the product as made by two workers.

Solution
Let x be the cost of material and y be the normal rate of wages per hour
Statement of Factory Cost
Particulars Worker S Worker K
` `
Material x x
Wages 30y 40y
Bonus (A = 30y ´ 20/50) (B = 10y ´ 50%) 12y 5y
Overheads @ `5 per person hour worked 150 200
x + 42y + 150 x + 45y + 200
The following two equations can be made
x + 42y + 150 = `3,490 ….(i)
x + 45y + 200 = `3,600 ….(ii)
On subtracting equation (i) from equation (ii)
3y + 50 = 110
or 3y = 110 – 50
y = 60/3 = 20
On substituting the value of y in equation (i)
x + 840 + 150 = 3,490
or x = 3,490 – 990
or x = 2,500
Thus:

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(a) Normal Wage Rate is `20 per hour
(b) Cost of material used for the product is `2,500

(c) Statement of Cost

Particulars Worker S Worker K
Material 2,500 2,500
Wages 600 800
Bonus 240 100
Overheads @ `5 per person hour worked 150 200
3,490 3,600

Question – 8
Mr. S is working by employing 10 skilled workers. He is considering the introduction of some
incentive scheme - either Halsey Scheme (with 50% bonus) or Rowan Scheme - of wage payment for
increasing the labour productivity to cope with the increased demand for the product by 25%. He feels
that if the 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 and he has
accordingly given this assurance to the workers.

As a result of this assurance, the increase in productivity has been observed as revealed by the
following figures for the current month:
Hourly rate of wages (guaranteed) `2.00
Average time for producing 1 piece by one worker at the previous performance 2 hours
(This may be taken as time allowed)
No. of working day in the month 25
No. of working hours per day for each worker 8
Actual production during the month 1,250 units
Required:
(a) Calculate effective rate of earnings per hour under Halsey Scheme and Rowan Scheme.
(b) Calculate the savings to Mr. S in terms of direct labour cost per piece under the above schemes.
(c) Advice Mr. S about the selection of the scheme to fulfill his assurance.

Solution
Actual hours = 25 × 8 × 10 = 2000; Standard hours = 1,250 × 2 = 2,500; Wage rate = 2

(a) Earning under Halsey scheme = (2,000 × 2) + #" × (2,500 – 2,000) × 2 = `4,500
!""

Effective hourly rate of earnings under Halsey Plan = *(+)) = `2.25

'()))&!"#$%

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Earnings under Rowan plan = (2,000 × 2) + &$$ !"$$$ #!! × (2,500 – 2,000) × 2 = `4,800
% !"#$$ "
*(+))
Effective hourly rate of earnings under Rowan Plan = = `2.40
'()))&!"#$%
(b) Labour cost per piece under time wage system = 2 × 2 = `4

Labour cost per piece under Halsey = &"$%% = `3.60

!"#$%
Savings per piece under Halsey Scheme = 4 – 3.60 = `0.40

Labour cost per piece under Rowan = &"'%% = `3.84

!"#$%
Savings per piece under Rowan Scheme = 4 – 3.84 = `0.16
(c) As per above, it is better for Mr. S to adopt Halsey Scheme but since he has assured workers of
an average 20% increase over the present earnings, he will have to select Rowan Scheme as is
evident from the following:

Increase in earning under Halsey Scheme = #$'""%&%#$""" ! !"" = 12.5%

#$"""

Increase in earning under Rowan Scheme = #$'""%&%#$""" ! !"" = 20%

#$"""

Question – 9
A Company is undecided as to what kind of wage scheme should be introduced. The following
particulars have been compiled in respect of three workers. Which are under consideration of the
management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Production in units:
- Product S 210 - 600
- Product K 360 - 1350
- Product M 460 250 -
Standard time allowed per unit of each product is:
S K M
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at `1/-
You are required to calculate the wages of each worker under:
(a) Guaranteed hourly rate basis
(b) Piece rate earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earnings
are less than 50% of basic pay).
(c) Premium bonus basis where the worker received bonus based on Rowan scheme.

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Solution
(a) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours worked Hourly wage rate Wages (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400

(b) Computation of wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit Units Wages Units Wages Units Wages
S 15 210 3,150 - - 600 9,000
K 20 360 7,200 - - 1,350 27,000
M 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker-I, II and III will be
paid the wages as computed i.e. `24,150, `7,500 and `36,000 respectively.

(c) Computation of wages of each worker under Rowan scheme

Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken Saved rate per Earning
hour
I 402.5 380 22.5 40 15,00 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
Working Notes:
(1) Piece rate per unit
Product Standard time per Piece rate per Piece rate per unit
unit in minute minute
S 15 1 15
K 20 1 20
M 30 1 30

(2) Time allowed to each worker

Worker Product S Product K Product M Total hours
I 210 × 15 = 3,150 360 × 20 = 7,200 460 × 30 = 13,800 24,150÷60 = 402.5
II - - 250 × 30 = 7,500 7,500÷60 = 125
III 600 × 15 = 9,000 1,350 × 20 = 27,000 - 36,000÷60 = 600

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7?8
(3) Bonus of worker -I under Rowan = h8C.@8 × 22.5 × 40 = 850
>88
Bonus of worker -II under Rowan = >C@ × 25 × 50 = 1,000
@h8
Bonus of worker -III under Rowan = :88 × 60 × 60 = 3,240

Question – 10
SK Ltd. operates a boutique which works for various fashion houses and retail stores. It has employed
26 workers and pays them on time rate basis. On an average an employee is allowed 8 hours for
boutique work on a piece of garment. In the month of May 2021, two workers S and K were given 15
pieces and 21 pieces of garments respectively for boutique work. The following are the details of their
work:

S K
Work Assigned 15 pieces 21 pieces
Time Taken 100 hours 140 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is `60 per hour. AS per the
new wages agreement the workers will be paid `72 per hour w.e.f. 1st June 2021. At the end of the
month May 2021, the accountant of the company has wrongly calculated wages to these two workers
taking `72 per hour.
Required:
(i) Calculate the loss incurred due to incorrect rate selection.
(ii) Calculate the loss incurred due to incorrect rate selection, had Rowan scheme of bonus payment
followed.
(iii) Calculate the loss/savings if Rowan scheme of bonus payment had followed.

Solution
Basic Calculation
Particulars S K
Actual hours taken 100 hrs. 140 hrs.
Standard hours 15 × 8 = 120 hrs. 21 × 8 = 168 hrs.
Hours saved 20 hrs. 28 hrs.

(i) Statement of calculation of loss due to incorrect rate selection

Particulars S K
Wages due @ `60 (A) (100×60) + (20×60×50%) = (140×60) + (28×60×50%) =
6,600 9,240
Wages paid @ `72 (B) (100×72) + (20×72×50%) = (140×72) + (28×72×50%) =
7,920 11,088
Extra wages paid (B – A) 1,320 1,848

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(ii) Statement of calculation of loss due to incorrect rate selection under Rowan system
Particulars S K
>88 >h8
Wages due @ `60 (A) (100×60) + (20×60× ) =7,000 (140×60) + (28×60× ) = 9,800
>C8 >:?
>88 >h8
Wages paid @ `72 (B) (100×72) + (20×72×>C8) =8,400 (140×72) + (28×72×>:?) =11,760
Extra wages paid (B – A) 1,400 1,960

(iii) Statement of calculation of saving due to Rowan system

Particulars S K
Extra wages paid under Halsey 1,320 1,848
Extra wages paid under Rowan 1,400 1,960
Difference (loss) (80) (112)

Question – 11
In a mutual project, both Raj and Bhuvan are contributing their efforts, using identical materials. Raj
receives a bonus based on the Rowan plan, while the Halsey plan determines Bhuvan’s bonus. The
standard time allocated for the project is 150 hours. Raj completes the project in 90 hours, while
Bhuvan finishes it in 120 hours. The normal hourly wage rate for Raj is `30. The total earnings for
both workers are equal. Calculate the normal hourly wage rate to be paid to Bhuvan.
(a) `26.50 (b) `24.00
(c) `22.50 (d) `28.00

Question – 12
The board of the J Ltd. has been appraised by the General Manager (HR) that the employee attrition
rate int eh company has increased. The following facts has been presented by the GM (HR):
(1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60%
of the experienced workers. Time required by an experienced worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a defective unit
was `25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is `180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was `1,83,480
(6) Recruitment cost was `1,56,340
(7) Training cost was `1,13,180
You being an associate finance to GM (HR), has been asked the following questions:

Question – 1
How much quantity of output is lost due to labour turnover?
(a) 10,000 units
(b) 8,000 units
(c) 12,000 units
(d) 12,600 units

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Question – 2
How much loss in the form of contribution, the company incurred due to labour turnover?
(a) `4,32,000
(b) `4,20,000
(c) `4,36,000
(d) `4,28,000

Question – 3
What is the cost of repairing defective units.
(a) `75,000
(b) `15,000
(c) `50,00
(d) `25,000

Question – 4
Calculate the profit lost by the company due to increased labour turnover.
(a) `7,50,000
(b) `15,00,000
(c) `5,00,000
(d) `9,00,000

Question – 5
How much quantity of output is lost due to inexperience of the new worker?
(a) 1,000 units
(b) 2,600 units
(c) 2,000 units
(d) 12,600 units

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MATERIAL COST - CONCEPTS

1. Material Cost
It is one of the major element of cost in a manufacturing organisation. Thus, proper care is to
be taken for this cost.

2. Components of Material Cost

(A) Purchase Cost = No. of units purchased ´ Cost per unit
(B) Ordering Cost = No. of orders ´ Cost per order
0//",8 &%J".&%#%/-
No. of orders = [Always round off to the next digit]
?&D%& *.K%
LMN /NA /PA
Frequency of order = !(. () (&D%&6

(C) Carrying cost = Average quantity of goods ´ Carrying cost per unit per annum
?&D%& 6.K%
Average quantity =
A
?&D%& 6.K%
Average quantity with safety stock = Safety stock + A

3. Determination of Order Size

It should be at the level where material cost is minimum.
Determination of Order Size

Objective:
Using Formula Assume no discount exist
Minimize - OC + CC

Objective:
Using Tabular Format When Discount exist
Minimize – PC + OC + CC

4. Economic Order Quantity (EOQ)

It is that order size at which sum total of ordering cost and carrying cost is minimum.
A×0×?
EOQ = -
@

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Where, A = Annual requirement of raw material
O = Cost per order
C = Carrying cost per unit per annum

5. Important points for Calculation

(A) If carrying cost is given in % than such % is applied on purchase price per unit of
material.

(B) If number of order is in decimal than take to the next round off number
e.g. 3.4 to 4, 3.1 to 4, 3.7 to 4 etc.

(C) A = Raw material purchased quantity (Prefer) or Raw material consumed quantity
(I) Production units = Sale units + Closing stock FG – Opening stock FG
(II) Raw material consumption = Production units ´ Raw material consumption per unit
(III) Raw material purchase = RM consumption + Closing stock RM – Opening stock RM

6. Levels of Inventory
(A) Re-order level (ROL) = Maximum consumption ´ Maximum lead time
= Safety stock + (Average consumption ´ Average lead time)
= Minimum stock + (Average cons. ´ Average lead time)

(B) Maximum level = ROL + ROQ – (Minimum cons. ´ Minimum lead time)

(C) Minimum level = ROL – (Average consumption ´ Average lead time)

R./.#"# 8%1%8=R,;.#"# 8%1%8

(D) Average level =
A
7%G?&D%& J",/-.-E
= Minimum level + A

(E) Danger level = Average consumption ´ Emergency lead time

= Minimum consumption ´ Emergency lead time

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7. ABC Analysis
It stands for always better control analysis.
Category % Quantity % Value Control
A 10% 70% High
B 20% 20% Moderate
C 70% 10% Low

8. Inventory Turnover Ratio (ITR)

7,I #,-%&.,8 9(/6"#%D
ITR for raw material = = ___ times
01%&,2% &,I #,-%&.,8 J",/-.-E
@(6- () 2((D6 6(8D
ITR for finished goods = 01%&,2% )./.6F%D 2((D6 J",/-.-E = ___ times
LMN /NA /PA
Frequency or Inventory holding period (days) = SC7

9. Choice of Substitute Material

Select the material which has lowest cost per unit of finished goods
Material A Material B
Cost per kg `20 `25
Input-output ratio 200% 120%
Cost per unit of output `40 `30

10. Landing Cost of Material or Valuation of Material

Items Treatment
Trade Discount Deduct if not already deducted
Cash Discount Ignore
Subsidy/Grant/Incentive Deduct from material cost
Road tax/ Toll tax/ Add to material cost
IGST/CGST/SGST
(A) If ITC available Ignore
(B) If ITC not available Add to material cost
Custom Duty Add to material cost
Penalty / Fine / Demurrage Ignore
Insurance Add to material cost
Commission Add to material cost
Container Cost Add to material cost
Return value of container Deduct from material cost

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Shortage
(A) Normal Deduct quantity of normal loss from total
quantity
(B) Abnormal Transfer to P&L account

Ø GST is payable on net purchase price i.e. List price – Trade Discount

Ø Distribution of Freight or similar items – On the basis of quantity of material

Ø Distribution of GST, Custom duty or similar items – On the basis of value of material

11. Safety Stock Determination

It is determined at the level where sum total of stock out cost and carrying cost of safety
stock is minimum.

Carrying cost of safety stock = Safety stock unit ´ Carrying cost per unit per annum
Annual Stock out cost = Annual stock out units ´ Stock out cost per unit

12. Material Records

It can be done in two ways i.e. Perpetual system and Periodic system.

13. Preparation of Stores Ledger

(A) Material return from factory or production to stores
- Show as receipt at the price at which originally issued
- If price not known than at recent issue rate.
- To be issued first in FIFO or LIFO method

(B) Material return by stores to supplier or vendor

- Show as issued in stores ledger at the price at which originally purchased
- If original price not known than at recent issue rate.

(C) Transfer from one job to another

- No entry in stores ledger

(D) In case of normal loss, show as issue in quantity column only and thus price of balance
quantity increases.

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(E) In case of abnormal loss, show as issue as per the method prevailing and transfer the
same to costing P&L account.

(F) Material Consumed = Issue of material

Material consumed = Opening Stock + Purchases – Purchase return – Abnormal loss –
Closing stock

MATERIAL COST QUESTIONS

Question – 1
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order
is `240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs `50.

At present, the order size is 3,000 spare parts.

(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company’s cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?

Solution
(i) Annual requirement (A) = 27,000
Cost per order (O) = `240
Carrying cost per unit p.a. (C) = 50 × 12.5% = `6.25
C×0×A C×Ci,888×Ch8
EOQ = / =/ = 1,440 units
B :.C@

Statement of Cost
Particulars Order size = 3,000 Order size = 1,440
Purchase cost 27,000 × 50 = 13,50,000 27,000 × 50 = 13,50,000
Ordering cost Ci,888 Ci,888
× 240 = 2,160 𝑜𝑟18.75 𝑜𝑟 19 × 240 = 4,560
7,888 >,hh8

Carrying cost 7,888 >,hh8

× 6.25 = 9,375 × 6.25 = 4,500
C C
Total cost 13,61,535 13,59,060
Saving due to EOQ = `13,61,535 - `13,59,060 = `2,475
Ci,888
(ii) Re-order point = Maximum consumption × Maximum time = 7:8
× 12 = 900 units
Ci,888
(iii) Number of orders under EOQ Model = = 18.75 or 19
>,hh8
7:8
Frequency of order = = 18.94 days
>j

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Question – 2
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 material
(b) Advise, how frequently should orders for procurement be placed. (Assuming 360days in the
year)
(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?

Solution
(a) A = 1,00,000 ÷ 2.5 = 40,000 kg
O = 360 + 390 = `750
C = 9 + (0.5 × 12) = `15

EOQ = A ! # ! " =/C×h8,888×i@8 = 2,000 kg

! >@

(b) Number of orders to be placed = &655Q.0&+*3Q+E*-*5/&1O &-./*+E.0 =

h8,888
= 20 orders
#+,*+&'E)*&!"#A% C,888

7:8 7:8
Frequency of order = !". = = 18 days
"$ "&k'&/ C8

(c) Desired number of orders = 4

h8,888
\ desired order size = = 10,000 kg
h
Let new price = y
Statement of Cost
Costs Order Size = 2,000 Order Size = 10,000
Purchase Cost 40,000 × 60 = 24,00,000 40,000 × y = 40,000y
Ordering Cost h8,888 h8,888
× 750 = 15,000 × 750 = 3,000
C,888 >8,888

Carrying Cost C,888 >8,888

× 15 = 15,000 × 15 = 75,00
C C
Total Cost 24,30,000 40,000y + 78,000
Now to rationalize cost of both options, total cost should be same under both options.
\ 24,30,000 = 40,000y + 78,000
y = `58.80
\ Discount per unit = `60 – `58.80 = `1.20
>.C8
Discount % = × 100= 2%
:8

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Question – 3
The annual demand for an item of raw material is 4,000 units and the purchase price is expected to be
`90 per unit. The incremental cost of processing an order is `135 and the annual cost of storage is
estimated to be `12 per unit. Compute the optimal order quantity and total relevant cost of this order
quantity?

Suppose that `135 as estimated to be the incremental cost of processing an order is incorrect and
should have been `80. All other estimates are correct. Estimate the difference in cost on account of
this error?

Assume at the commencement of the period that a supplier offers 4,000 units at a price of `86. The
materials will be delivered immediately and placed in the stores. Assume that the incremental cost of
placing the order is zero and original estimate of `135 for placing an order for the economic batch is
correct. Analyze, should the order be accepted?

Solution
C×0×A C×h,888×>7@
EOQ = / =/ = 300 units
B >C

Number of orders = 4,000 ÷ 300 = 13.33 or 14 orders

Relevant cost of this order quantity:
Ordering cost [14 × 135] 1,890
Carrying cost [(300 ÷ 2) × 12] 1,800
Relevant cost 3,690

C×0×A C×h,888×?8
Revised EOQ = / =/ = 231 units
B >C

Number of orders = 4,000 ÷ 231 = 17.31 or 18 orders

Statement of Cost
Costs Order Size = 300 Order Size = 231
Ordering Cost 14 ´ 80 = 1,120 18 ´ 80 = 1,440
Carrying Cost 788 C7>
× 12 = 1,800 × 12 = 1,386
C C
Total Cost 2,920 2,826
Difference in cost on account of this error = 2,920 – 2,826 = `94

Statement of Evaluation of Offer

Costs Order Size = 300 Order Size = 4,000
Purchase Cost 4,000 × 90 = 3,60,000 4,000 × 86 = 3,44,000
h,888
Ordering Cost 14 ´ 135 = 1,890 ×0=0
h,888
Carrying Cost 788 h,888
× 12 = 1,800 × 12 = 24,000
C C
Total Cost 3,63,690 3,68,000

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This special offer at `86 per unit should not be accepted as its total cost is higher as compared to
original offer.

Question – 4
SK Ltd. manufactures a product S which requires two raw materials P and M in a ratio of 1:4. The
sales department has estimated a demand of 5,00,000 units for the product for the year. To produce
one unit of finished product, 4 units of material P is required.

Stock position at the beginning of the year is as below:

Product SK 12,000 units
Material P 24,000 units
Material M 52,000 units

To place an order the company has to spend `15,000. The company is financing its working capital
using a bank cash credit @ 13% p.a. Product SK is sold at `1,040 per unit. Material P and M are
purchased at `150 and `200 respectively.

Required: Compute economic order quantity (EOQ):

(a) If purchase order for both materials is placed separately
(b) If purchase order for both materials is not placed separately

Solution
Annual production of Product SK = Annual demand – Opening stock = 5,00,000 – 12,000 = 4,88,000
units
Annual requirement of raw material = (Annual Production × Material per unit) – Opening stock
Material P = (4,88,000 × 4) – 24,000 = 19,28,000 units
Material M = (4,88,000 × 16) – 52,000 = 77,56,000 units

C×0×A C×>j,C?,888×>@,888
(a) EOQ of Material P = / =/ = 54,462 units
B >7%×>@8

C×0×A C×ii,@:,888×>@,888
EOQ of Material M = / =/ = 94,600 units
B >7%×C88

C×0×A C×(>j,C?,888;ii,@:,888)×>@,888
(b) EOQ of Material P & M Combined = / =/ = 1,08,452 units
B >7%×>j8∗
>,8?,h@C×>j,C?,888
Material P quantity = = 21,592 units
j:,?h,888
>,8?,h@C×ii,@:,888
Material M quantity = = 86,860 units
j:,?h,888
(>@8×>j,C?,888);(C88×ii,@:,888)
*Price = = `190
(>j,C?,888;ii,@:,888)

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Question – 5
SK Ltd. has received an offer of quantity discounts on its order of materials as under:
Tons (No.) Price per tons (`)
Less than 250 6.00
250 and less than 800 5.90
800 and less than 2,000 5.80
2,000 and less than 4,000 5.70
4,000 and above 5.60
The annual requirement for the materials is 4,000 tons. The ordering cost per order is `6 and the
carrying cost is estimated at 20% per annum. You are required to compute the most Economic Order
Quantity presenting the relevant information in a tabular form.

Solution
Tons Price Order Purchase Ordering Carrying Cost Total
Size Cost Cost Cost
Less than 250 6 200 4,000×6 h888 C88 24,240
×6= × 20% × 6 = 120
C88 C
= 24,000
120
250 to 800 5.90 250 4,000×5.90 h888 C@8 23,844
× 6 = 96 × 20% × 5.9 = 148
C@8 C
= 23,600
800 to 2,000 5.80 800 4,000×5.80 h888 ?88 23,694
× 6 = 30 × 20% × 5.8 = 464
?88 C
= 23,200
2,000 to 5.70 2,000 4,000×5.70 h888 C888 23,952
× 6 = 12 × 20% × 5.7 =
C888 C
4,000 = 22,800
1,140
4,000 & 5.60 4,000 4,000×5.60 h888 h888 24,646
×6=6 × 20% × 5.6 =
h888 C
above = 22,400
2,240
Total cost is lowest at order size of 800. So, economic order quantity is 800 units.

Question – 6
A company uses three raw materials A, B and C for a particular product for which the following data
apply:
Raw Usage per Reorder Price per Delivery period Reorder Minimum
material unit Quantity Kg Min Average Max level level
(Kg) (Kg) (` ) (Kg) (Kg)
A 10 10,000 0.10 1 2 3 8,000
B 4 5,000 0.30 3 4 5 4,750
C 6 10,000 0.15 2 3 4 2,000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would
be the following quantities:

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(a) Minimum stock of A?
(b) Maximum stock of B?
(c) Re-order level C?
(d) Average stock level of A?

Solution
(a) Minimum stock of A = ROL – (Average lead time × Average consumption)
= 8,000 – (2× 200 × 10) = 4,000 kg
(b) Maximum stock of B = ROL + ROQ – (Min. lead time × Min. consumption)
= 4,750 + 5,000 – (3× 175 × 4) = 7,650 kg
(c) Re-order level of C = Max. lead time × Max. consumption
= 4 × 225 × 6 = 5,400 kg
mAn >8,888
(d) Average level of A = Minimum level + = 4,000 + = 9,000 kg
C C

Question – 7
M/s SK Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their
operation during the year:
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 the following from the above information:
(a) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount
of 5%, is it worth accepting?
(b) Maximum level of stock
(c) Minimum level of stock
(d) Reorder level

Solution
(a) A = 100 × 52 = 5,200 (We have to consider only consumption and not monthly demand)
O = `100
C = 20% × 500 = `100

EOQ = A ! # ! " =/C×@,C88×>88 = 102 tubes

! >88

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Statement of Evaluation of Offer
Costs Order Size = 102 Order Size = 1,500
Purchase Cost 5,200 × 500 = 26,00,000 5,200 × (500-5%) = 24,70,000
Ordering Cost @,C88 @,C88
= 50.98 𝑜𝑟 51 × 100 = 5,100 = 3.47 𝑜𝑟 4 × 100 = 400
>8C >,@88

Carrying Cost >8C >,@88

× 20% × 500 = 5,100 × 20% × 475 = 71,250
C C
Total Cost 26,10,200 25,41,650
Since the total cost is lower at order size of 1,500, thus it is recommended to accept the offer.
(b) Re-order level = Max. consumption × Max. lead time
= 200 × 8 = 1,600 tubes
(c) Minimum level = ROL – (Avg. lead time × Avg. Consumption)
= 1,600 – (100 × 7) = 900 tubes
(d) Maximum level = ROL + ROQ – (Minimum consumption × Minimum lead time)
= 1,600 + 102 – (50 × 6) = 1,402 tubes

Question – 8
A company buys in lots of 6,250 units which is a 3 month’s supply. The cost per unit is `2.40. Each
order costs `45 and inventory carrying cost is 15% of average inventory value.
Required:
(a) What is the total annual cost of existing inventory policy?
(b) How much money could be saved by employing the economic order quantity?
(c) If the company operates 250 days a year, the procurement time is 10 days and safety stock is
500 units. Find the reorder level, maximum level, minimum level and average inventory level.

Solution
A = 6,250 × 4 = 25,000
O = `45
C = 15% × 2.40 = `0.36
(a) At present, order size of company is equal to 6,250.
Total annual cost = Purchase cost + Ordering cost + Carrying cost
C@,888 :,C@8
= (25,000 × 2.40) + 8 :,C@8 × 459 + 8 × 0.369 = `61,305
C

(b) EOQ = A ! # ! " =/C×C@,888×h@ = 2,500 units

! 8.7:

Total annual cost = Purchase cost + Ordering cost + Carrying cost

C@,888 C,@88
= (25,000 × 2.40) + 8 C,@88 × 459 + 8 × 0.369 = `60,900
C

Saving due to EOQ = `61,305 – `60,900 = `405

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(c) Re-order level = (Avg. consumption × Avg. lead time) + Safety stock
C@,888
=8 × 109 + 500 = 1,500 units
C@8
Maximum level = ROL + ROQ – (Min. consumption × Min. lead time)
C@,888
= 1,500 + 2,500 - 8 × 109 = 3,000 units
C@8
Minimum level = ROL – (Avg. consumption × Avg. lead time)
C@,888
= 1,500 - 8 × 109 = 500 units
C@8
o9-. )'1') ; o*p. )'1') @88 ; 7,888
Average level = = = 1,750 units
C C

Question – 9
A company produces a product ‘AB’ by using two raw materials – ‘Material Ae’ and ‘Material Be’ in
the ratio of 5:3.

A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the
trend will continue for the entire year. The ratio of input and output is 8:5.

Other information about raw material Ae is as follows:

Purchase price `150 per kg
Re-order period 2 to 3 days
Carrying cost 12%

Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase if becomes
obsolete.

To place an order for material ‘Ae’ the company has to incur an administrative cost of `375 per order.
At present, material ‘Ae’ is purchased in a lot of 7,500 kgs to avail the discount on purchase. Company
works for 25 days in a month and production is carried out evenly.

You are required to calculate:

(a) Economic order quantity (EOQ) for material Ae
(b) Maximum stock level for Material Ae

Solution
(a) Annual raw material requirement = 50,000 ´ 12 ´ (8 ÷ 5) = 9,60,000 kg
Material requirement of Ae = 9,60,000 ´ (5 ÷ 8) = 6,00,000 kg
C×0×A C×:,88,888×7i@
EOQ = / =/ = 5,000 kg
B >C%×>@8

(b) Maximum level for material Ae = ROL + ROQ – (Min. consumption × Min. lead time)
= (Max. consumption × Max. time) + ROQ – (Avg. consumption × Avg. time)
:,88,888 :,88,888
=8 × 39 + 7,500 - 8 C@×>C × 29 = 9,500 kg
C@×>C

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Also, since material Ae is perishable in nature and will become obsolete after 3.5 days,
:,88,888
\ Maximum level = 8 × 3.59 = 7,000 kg
C@×>C
So maximum level will be minimum of the two values i.e. 7,000 kg and 9,500 kg.
\ Maximum level for material Ae = 7,000 kg

Question – 10
SK Ltd. produces a product ‘SK’ using a raw material P. To produce one unit of SK, 2 kg of P is
required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of SK
in the coming year. The following is the information regarding the raw material P:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product SK.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur `720 on paper and documentation work.
From the above information find out the followings in relation to raw material P:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]

Solution
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘P’:
Sales forecast of the product ‘SK’ 10,000 units
Less: Opening stock of ‘SK’ 900 units
Fresh units of ‘SK’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘SK (9,100 units × 2 kg) 18,200 kg.
Less: Opening Stock of ‘P’ 1,000 kg.
Annual demand for raw material ‘P’ 17,200 kg
𝟐×𝟏𝟕,𝟐𝟎𝟎×𝟏𝟕𝟐𝟎
(ii) EOQ = / 𝟏𝟑.𝟕𝟔% 𝒐𝒇 𝟏𝟐𝟓 = 1,200 kg

(iii) Re- Order level = (Maximum consumption per day × Maximum lead time)
𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏 𝒐𝒇 𝑺 𝟏𝟖,𝟐𝟎𝟎
=8 + 𝟐𝟎𝒌𝒈9 × 8 days = 8 + 𝟐𝟎𝒌𝒈9 × 𝟖𝒅𝒂𝒚𝒔= 560 kg
𝟑𝟔𝟒 𝟑𝟔𝟒
(iv) Minimum consumption per day of raw material ‘P’:

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Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So, minimum consumption per day will be
𝑴𝒊𝒏.𝑪𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏 ; 𝑴𝒂𝒙.𝑪𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏
Average Consumption =
𝟐
𝑴𝒊𝒏.𝑪𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏 ; 𝟕𝟎 𝒌𝒈
50 kg = 𝟐
Min. consumption = 100 kg – 70 kg = 30 kg.
(a) Re-order Quantity = EOQ – 200 kg = 1,200 kg – 200 kg = 1,000 kg
(b) Maximum Stock level = ROL + Re-order Quantity – (Min. consumption × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,440 kg.
(c) Minimum Stock level = ROL – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the When purchasing the
ROQ EOQ
I Order quantity 1,000kg 1,200kg
II No. of orders a year 𝟏𝟕,𝟐𝟎𝟎 𝟏𝟕,𝟐𝟎𝟎
= 17.2 or 18 orders = 14.33 or 15 orders
𝟏,𝟎𝟎𝟎 𝟏,𝟐𝟎𝟎

III Ordering cost 18 orders x `720 = 15 orders x `720 =

`12,960 `10,800
IV Average inventory 𝟏,𝟎𝟎𝟎 𝟏,𝟐𝟎𝟎
= 500kg = 600 kg
𝟐 𝟐
V Carrying cost 500kg x `17.2 = `8,600 600kg x `17.2 = 10,320
VI Total cost `21,560 `21,120
Extra Cost incurred due to not ordering EOQ = `21,560 - `21,120 = `440

Question – 11
XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process
and has provided the following data for the year ended on 31st March, 2021:
Particulars Material A (`) Material B (`)
Opening stock as on 1.04.2020 30,000 32,000
Purchases during the year 90,000 51,000
Closing stock as on 31.02.2021 20,000 14,000
(i) You are required to calculate:
a) The inventory turnover ratio of ‘Material A’ and ‘ Material B’
b) The number of days for which the average inventory is held for both materials ‘A’ and
‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year)

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Solution
(i) Calculation of Inventory Turnover Ratio
Particulars Material A Material B
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
Less: Closing Stock 20,000 14,000
Raw Material Consumed (A) 1,00,000 69,000
A('-9-2;B)"/9-2 78,888;C8,888 7C,888;>h,888
Average Stock 8 9 (B) = 25,000 = 23,000
C C C
Inventory Turnover Ratio (ITR) >,88,888 :j,888
= 4 times = 3 times
C@,888 C7,888
7:8 7:8
Number of days (360 ÷ ITR) = 90 days = 120 days
h 7

Question – 12
MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (`)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12
MM ltd. has adopted the policy of classifying the items constituting 15% or above to Total Inventory
Cost as “A” category, items constituting 6% or less of Total Inventory Cost as “C” category and the
remaining items as “B” category. You are required to:
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC analysis of Inventory Control adopted by
MM Ltd.

Solution Statement of Cost

Item Code Units Unit Total Cost % of Total Rank Category
Number Cost Cost
(` )
101 25 50 1,250 16.67% II A
102 300 01 300 4% VI C
103 50 80 4,000 53.33% I A
104 75 08 600 8% IV B
105 225 02 450 6% V C
106 75 12 900 12% III B
Total 7,500 100%

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Question – 13
SK & Co., an unregistered supplier under GST, purchased material from PK Ltd. which is registered
under GST. The following information is available for one lot of 5,000 units of material purchased:
Listed price of one lot `2,50,000
Trade discount @ 10% on listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @ 10%
(Will be given only if payment is made within 30 days.)
Toll Tax paid `5,000
Freight and Insurance `17,000
Demurrage paid to transporter `5,000
Commission and brokerage on purchases `10,000
Amount deposited for returnable containers `30,000
Amount of refund on returning the container `20,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons. The payment to the supplier was made within 21
days of the purchases. You are required to calculate cost per unit of material purchased by SK & Co.

Solution
Statement of calculation of cost per unit
Particulars Amount (`)
Listed price of materials (on lot) 2,50,000
Less: Trade discount @ 10% on listed price (25,000)
2,25,000
Add: CGST @ 6% of 2,25,000 13,500
Add: SGST @ 6% of 2,25,000 13,500
2,52,000
Add: toll tax 5,000
Add: Freight and insurance 17,000
Add: Commission and brokerage paid 10,000
Add: Cost of refundable containers (30,000 – 20,000) 10,000
2,94,000
Add: Other expenses (2,94,000 ÷ 98%) 6,000
Total cost of material (A) 3,00,000
Total quantity of material in one lot 5,000 units
Less: Normal loss @20% of 5,000 1,000 units
Net quantity of material (B) 4,000 units
Material cost per unit (A ÷ B) 75

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Note:
(a) GST is payable on net price i.e. listed price less trade discount
(b) Cash discounts is treated as interest and finance cost, hence it is ignored.
(c) Demurrage is penalty imposed by the transporter for delay in uploading or off-loading of
materials. It is an abnormal cost and thus, not included.

Question – 14
M/s SK Ltd trades in chairs. It stocks sufficient quantity of chairs of almost every variety. In year end,
the report of sales manager revealed that M/s SK experienced stock-out of chairs. The stock-out data
is as follows:
Stock-out of chairs No. of times
100 2
80 5
50 10
20 20
10 30
0 33
M/s SK loses `150 per unit due to stock-out and spends `50 per unit on carrying of inventory.
Determine optimum safest stock level.

Solution
Computation of probability of stock out
Stock-out (units) 100 80 50 20 10 0 Total
No. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00

Statement showing determination of Optimal Stock

Safety Expected Expected
Stock Stock-out annual stock out annual stock out Annual Total annual
Units units Prob. units costs holding cost expected cost
100 0 0 0 0 5,000 5,000
80 20 0.02 0.4 60 4,000 4,060
1.0 150
50 0.02
50 1.5 225 2,500 2,875
30 0.05
2.5 375
1.6 240
80 0.02
3 450
20 60 0.05 1,000 2,140
3 450
30 0.10
7.6 1,140

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1.8 270
90 0.02
3.5 525
70 0.05
10 4.0 600 500 2,195
40 0.10
2.0 300
10 0.20
11.3 1,695
100 0.02 2 300
80 0.05 4 600
50 0.10 5 750
0 0 2,700
20 0.20 4 600
10 0.30 3 450
18 2,700
It is recommended to maintain safety stock level of 20 units at which total cost is least i.e. `2,140.

Question – 15
A Ltd. produces a final product X, which requires two components, A and (b) The following are the
information related to both the components: Normal usage 50 per week, Maximum usage 75 per week,
Minimum usage 25 per week, Re-order quantity A:300, B:500, RE-order period A: 4 to 6 weeks B: 2
to 4 weeks, Re-order level for the component A is:
(a) 300 units (b) 150 units
(c) 450 units (d) 200 units

Question – 16
Mr. Vikas, a toy importer has understood the importance of manufacturing in India. He is backed up
by the new govt. policies that motivate him to manufacture in India. As per the custom department any
import made for the manufacturing under “Made in India”, custom duty will be refunded upto 80%.
Vikas decided not to import toy from China anymore, instead import raw material from Srilanka, for
the manufacturing of toys in India. Under an agreement of Govt. Of India with Srilankan Govt., any
import from Srilanka will receive tax benefits.

Vikas ordered material Xendga & material Zenga from Srilanka. Details are given below:
Srilankan Rupees (SLR)
Material Xendga (12,000 units ´ 125 SLR) 15,00,000
Material Zenga (8,000 units ´ 225 SLR) 18,00,000
Factory Cost 33,00,000
Add: Container cost 2,00,000
Add: Freight upto loading shipment on ship (paid by exporter) 50,000
F.O.B. 35,50,000
• Ocean Freight is $2,000
• Insurance is $1,500

When shipment reached India, it was unloaded at Chennai port. Vikas requested to put the goods in
custom port’s warehouse. Vikas due to cash crunch was not in a position to pay custom duty and

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therefore did not file the bill of exchange (B.O.E.). Custom authorities charged a penalty of INR
15,000.

Finally, after a month Vikas filled B.O.E. and paid custom duty of 20% on CIF value of the shipment.
IGST was also applicable @ 18% on the combined value of CIF & custom duty paid.

He spent further a sum of INR 12,500 to bring the imported goods to his factory. An inspection was
done on the goods and it was found that 5% of the goods were broken. This came to management as
a surprise because generally such rate of defects on imports is 8%.
Additional Information:
• Exchange rates:
1) 1 SLR = 0.25 INR
2) 1 USD = 75 INR
• IGST credits are available
• Containers were refunded at INR 38,000.
• Indian and Srilankan brokers were paid commission by Vikas on factory cost. Indian broker
charged 6% whereas Srilankan broker charged 12%.
• CIF (cost, insurance and Freight) includes F.O.B (Free on Board)., Insurance & Ocean freight.

You are required to answer the following questions:

Question – 1
What is the total cost of shipment to be recorded by Vikas?
(a) INR 13,17,000
(b) INR 13,04,500
(c) INR 13,54,500
(d) INR 13,32,500

Question – 2
What is the absorption rate of total cost per unit of Zenga?
(a) INR 90.28
(b) INR 84.44
(c) INR 93.62
(d) INR 85.77

Question – 3
What is the absorption rate of total cost per unit of Xendga?
(a) INR 52.01
(b) INR 54.24
(c) INR 58.13
(d) INR 68.65

Question – 4
Amount of refundable taxes?

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(a) INR 4,13,600
(b) INR 4,57,600
(c) INR 2,20,000
(d) INR 2,37,600

Question – 5
If loss of goods was 9% instead of 5%, what will be the amount that will be charged to statement of
profit & loss?
(a) INR 13,045
(b) INR 19,898.4
(c) INR 14,178.4
(d) INR 24,045

1 2 3 4 5
A A B A C

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OVERHEADS - CONCEPTS
1. Overheads
It is the total of indirect material, indirect labour and indirect expenses.

2. Steps for Overheads

(A) Estimation and Distribution
(B) Recovery Rate
(C) Under or Over Recovery

3. Types of Department
(A) Production Department – Involved in manufacturing of goods or services
(B) Service Department – Help production department in performing their services

4. Distribution
(A) Allocation
(B) Apportionment

5. Overheads Distribution

Primary Allocation &

Distribution Apportionment
Overheads Distribution

Direct distribution Distribute on the basis given in

method or Non- question or go by the nature of
reciprocal method department

(1) Distribute on the basis give

Secondary Step-Distribution in question or
Distribution method (2) First distribute dept. giving
maximum service
(1) Repeated distribution
method
Reciprocal method (2) Simultaneous Equation
Method
(3) Trial & Error Method

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6. Overheads Distribution Statement
Particulars Basis Production Department Service Department
A B X Y
Direct Cost Allocation NA NA ✔ ✔
Identified OHs Allocation ✔ ✔ ✔ ✔
Common OHs Apportion ✔ ✔ ✔ ✔
Total ✔ ✔ ✔ ✔
Cost of Dept. X Apportion ✔ ✔ (✔) ✔
Cost of Dept. Y Apportion ✔ ✔ ✔ (✔)
Total ✔ ✔ Nil Nil

7. Overheads Distribution Methods

(A) Direct Distribution Method
Expenses of service department will be distributed only to production departments irrespective
of the fact whether they provide service to each other or not.

(B) Step-Distribution Method or Non-Reciprocal Method or Step-Allocation Method

• This method is to be applied only if specifically provided in question.
• Once expenses of a particular department are distributed and becomes ‘0’ then there
should not be any other amount shown in that particular department column.
• If way of distribution is provided in question then always follow that e.g. first distribute
expenses of A then B, C and D.
• If no way is provided then first distribute the expenses of department which is providing
maximum % of service to other service departments and so on.

(C) Reciprocal Method

(i) Repeated Distribution Method – Start with any service department and distribute in all
departments. Distribute till the expenses of all service department becomes zero.
(ii) Simultaneous Equation Method – Calculate total expenses of service department using
equation and then distribute to all departments.
(iii) Trial and Error Method – Use repeated distribution method only in service department
to calculate its total expenses and then apportion to production department.

8. Important Points
Ø If no method is specified for secondary distribution then it is preferred to follow
simultaneous equation method.

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Ø Fixed expenses are apportioned on the basis of normal capacity.
Ø Variable expenses are apportioned on the basis of actual capacity.

9. Recovery Rate
Rate at which overheads are recovered/absorbed/charged
T"D2%-%D (1%&F%,D6
Recovery Rate = Pre-determined absorption rate =
T"D2%-%D &%9(1%&E $,6%

10. Type of Recovery Rate

T"D2%-%D ?1%&F%,D6
(A) Direct Material Cost % Method = × 100
T"D2%-%D R,-%&.,8 @(6-
T"D2%-%D ?1%&F%,D6
(B) Direct Labour Cost % Method = T"D2%-%D B,$("& @(6- × 100
T"D2%-%D ?1%&F%,D6
(C) Direct Prime Cost % Method = T"D2%-%D U&.#% @(6- × 100
T"D2%-%D ?1%&F%,D6
(D) Unit Cost Method = T"D2%-%D U&(D"9-.(/ V/.-6
T"D2%-%D ?1%&F%,D6
(E) Labour Hour Rate Method = T"D2%-%D B,$("& H("&6
T"D2%-%D ?1%&F%,D6
(F) Machine Hour Rate Method =
T"D2%-%D R,9F./% H("&6

11. Machine Hour Rate

It is applied in case of capital intensive units.
All overheads are divided into Fixed/Standing Charges and Variable/Running Charges
Particulars Amount
Fixed or Standing Expenses
Rent
Heat & light
Insurance
Wages
Depreciation (if fixed)
Total Fixed expenses (A)
Variable or Running Expenses
Power
Consumable stores
Depreciation (if variable)
Repair & Maintenance
Total Variable expenses (B)
Total Cost (A + B)

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Effective Machine Hours
Machine Hour Rate

12. Points to Remember (PTR)

(A)

If Life is given in Years –

Fixed
Depreciation
If Life is given in Hours -
Variable

(B) Effective Machine Hours = Total Machine Hours – Idle Hours

(C) Normal Idle Time – Hours during which work is not done e.g. maintenance, setup,
lunch etc.
(D) Unless otherwise provided, following points are to be assumed for setup hours:
• No electricity or power is used during set-up hours
• These hours are considered to be un-productive

13. Dual Recovery Rate/ Two-tier Machine Hour Rate

It is to be used in following situation:
(A) When question mention to use
(B) Job charge is for set-up and operation separately

In this case set-up hours are considered to be productive

For FC per machine hour – Use total hours (Production + Set-up)

FC per machine hour will remain same for both i.e. operation and set-up
VC will be computed separately for both production and set-up.

14. Type of Recovery Rate

?1%&F%,D6 () D%+,&-#%/-
(A) Departmental recovery rate =
T,6% 1,8"% () D%+,&-#%/-
?1%&F%,D6 () W,9-(&E
(B) Blanket or plant-wise recovery rate =
T,6% 1,8"% () W,9-(&E

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15. Under or Over Recovery of Overheads

Recovered OHs = RR ´ Actual Base Value

Actual Overheads = data from question

Actual OHs > Recovered Actual OHs < Recovered

OHs OHs

Under Recovered OHs Over Recovered OHs

16. Treatment of Over or Under Recovery of Overheads

Treatment of Overheads

Due to defective
planning or factory Due to seasonal Nature Due to change in price
of business level
inefficiency

Amount charge to P&L No Entry required

Under Recovery Under Recovery
Costing P&L A/c Dr. Balances are carried Cost of Sales A/c Dr.
To OHs Control A/c forward to next period FG ledger control A/cDr.
Over Recovery WIP ledger control A/ Dr.
OHs Control A/c Dr. To OHs Control A/c
To Costing P&L A/c

17. Supplementary Rate

V/D%&/?1%&7%9(1%&E
Supplementary rate =
:J".1,8%/- "/.-6 () WX

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OVERHEADS QUESTIONS
Question – 1
SK Ltd. has three production departments P1, P2 and P3 and two service departments S1 and S2. The
following data are extracted from the records of the Company for the month of October:
`
Rent and rates 62,500
General lighting 7,500
Indirect Wages 18,750
Power 25,000
Depreciation on machinery 50,000
Insurance of machinery 20,000
Other information:
P1 P2 P3 S1 S2
Direct Wages (`) 37,500 25,000 37,500 18,750 6,250
Horse power of machine used 60 30 50 10 --
Cost of machinery (`) 3,00,000 4,00,000 5,00,000 25,000 25,000
Floor Space (Sq. Ft.) 2,000 2,500 3,000 2,000 500
Number of light points 10 15 20 10 5
Production hours worked 6,225 4,050 4,100 -- --
Expenses of the service departments, S1 and S2 are reapportioned as below:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
Required:
(a) Compute overhead rate per production hour of each production department
(b) Determine the total cost of product X which is processed for manufacture in department P1,
P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is
`625 and direct labour cost is `375.

Solution
Overheads Distribution Summary
Item of Cost Basis of Apportionment P1 (`) P2 (`) P3 (`) S1 (`) S2 (`)
Direct Wages Allocation — — — 18,750 6,250
Rent and Rates Floor Area ([Link]) 12,500 15,625 18,750 12,500 3,125
General Lighting Light Point ([Link]) 1,250 1,875 2,500 1,250 625
Indirect Wages Direct Wages ([Link]) 5,625 3,750 5,625 2,812.5 937.5
Power H.P. of Machines ([Link]) 10,000 5,000 8,333 1,667 -
Dep. of Machine Value-Machine 12,000 16,000 20,000 1,000 1,000
([Link])
Insurance of Value-Machine 4,800 6,400 8,000 400 400
Machine ([Link])

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Item of Cost Basis of Apportionment P1 (`) P2 (`) P3 (`) S1 (`) S2 (`)
46,175 48,650 63,208 38,380 12,338
Cost of Dept. S1 Apportioned 8,003 12,004 16,006 (40,014) 4,001
Cost of Dept. S2 Apportioned 6,536 3,268 4,901 1,634 (16,339)
Total Overheads 60,714 63,922 84,115 - -
Prod. Hrs. Worked 6,225 4,050 4,100 - -
Rate per hour (`) 9.75 15.78 20.52
Overheads of service cost centres Let S1 be the overhead of service cost centre S1 and S2 be the
overheads of service cost centre S2.
S1 = 38,380 + 0.10 S2
S2 = 12,338 + 0.10 S1
Substituting the value of S2 in S1 we get
S2 = 38,380 + 0.10 (12,338 + 0.10 S1)
S1 = 38,380 + 1233.8 + 0.01 S1
0.99 S1 = 39,613.8
\ S1 = `40,014
\ S2= 12,338 + 0.10 ´ 40,014 = `16339.4
Cost of Product X (` )
Direct Material 625.00
Direct Labour 375.00
Prime Cost 1,000.00
Production on Overheads
P1 5 hours ´ `9.75 = 48.75
P2 3 hours ´ `15.78 = 47.34
P3 4 hours ´ `20.52 = 82.08 178.17
Factory Cost 1,178.17

Question – 2
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 Dept. Service Dept.
A B X Y
(Horse power hours)
Needed capacity production 20,000 25,000 15,000 10,000
Used during the month of May 16,000 20,000 12,000 8,000
During the quarter ended September 2018, costs for generating power amounted to `12.60 lakhs out
of which `4.20 lakhs was considered as fixed cost.

Service Dept. X renders service to A, B and Y in the ratio of [Link] whereas department Y renders
service to A and B in the ratio 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

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2) Calculate factory overhead per labour hour for the department A and B

Solution Overheads Distribution Sheet

Production
Total Service Department
Particulars Basis Department
Amount
A B X Y
Fixed 4,20,000 1,20,000 1,50,000 90,000 60,000
Overheads Needed cap.
([Link])
Variable Used capacity 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
Overheads ([Link])
Total 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000
-
Cost of Dept. X 6 : 4 : 2 1,35,000 90,000 (2,70,000) 45,000
Cost of Dept. Y 4: 1 1,80,000 45,000 - (2,25,000)
Total 6,75,000 5,85,000 - -
Labour hours 67,500 48,750
Fact. OH per
hr. `10 `12

Question – 3
SNS Trading Company has three Main Departments and two Service Departments. The data for each
department is given below:
Departments Expenses Area (in Sq. Number of
(` ) Mtr.) employees
Main Department:
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Department:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis of ‘Area in
Square Meters’ and ‘Number of Employees’ respectively:
You are required to:
(i) Prepare a statement showing the distribution of expenses of service departments to the main
departments using the “Step Ladder Method” of overhead distribution.
(ii) Compute the rate per hour of each Main Department, given that, the Purchase Department, Packing
Department and Distribution Department works for 12 hours a day, 24 hours a day and 8 hours a
day respectively. Assume that there are 365 days in a year and there are no holidays.

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Solution
(i) & (ii) Overheads Distribution Sheet
Particulars Basis Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
Expenses Allocation 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Maintenance Area 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Department ([Link])
Expenses
Personnel No. of Ees 1,04,000 2,21,000 91,000 - (4,16,000)
Department ([Link])
Expenses
Total 7,96,000 12,61,000 5,53,000 - -
Total Hours 12 × 365 24 × 365 8 × 365 = - -
= 4,380 = 8,760 2,920
Rate per
hour 181.74 143.95 189.38 - -
Working Note - 1
Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
Area (in sq. mtr.) 12 15 7 - 6
% of service rendered by
Maintenance Department 30% 37.50% 17.50% - 15%
Number of Employees 800 1700 700 200 -
% of service rendered by
Personnel department 23.53% 50% 20.59% 5.88%
The usual method used for ranking the support departments for Step Down Allocation Method is % of
Service rendered by one Service Department to another. Based on this, Maintenance Department
provides 15% (highest %) of service to Personnel Department. Thus, first maintenance department
expenses should be distributed first.

Question – 4
From the following data, work out the predetermined machine hour rates for Departments A and B of
a factory:
Preliminary estimates of expenses
Total (`) Dept. A (`) Dept. B (`)
Power 15,000 -- --
Spare Parts 8,000 3,000 5,000
Consumable stores 5,000 2,000 3,000
Depreciation on machinery 30,000 10,000 20,000

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Insurance on machinery 3,000 -- --
Indirect labour 40,000 -- --
Building maintenance 7,000 -- --
The final estimates are to be prepared on the basis of above figures after making into consideration
the following factors:
(a) An increase of 10 per cent in price of spare parts.
(b) An increase of 20 per cent in the consumption of spare parts for department B only.
(c) Increase in the straight line method of depreciation from 10 percent on the original value
machinery to 12 per cent.
(d) 15 per cent general increase in wage rates.
The following information is available:
Dept. A Dept. B
Estimated direct labour hours 80,000 1,20,000
Ratio of K.W. rating 3 2
Estimated machine hours 25,000 30,000
Floor Space (Sq. ft) 15,000 20,000

Solution
Statement of Cost
Particulars Basis Dept. A Dept. B
Power KW Rating - 3:2 9,000 6,000
Spare Parts w.n. 1 3,300 6,600
Consumable Stores Allocation 2,000 3,000
Dep. On machine w.n. 2 12,000 24,000
Insurance on Machine Value of machine - 1:2 1,000 2,000
Indirect Labour
DL Hours - 8:12 18,400 27,600
(40,000 + 15% = 46,000)
Building Maintenance Floor space - 15:20 3,000 4,000
Total (A) 48,700 73,200
Machine Hours (B) 25,000 30,000
Machine Hr. Rate (A÷B) 1.95 2.44
Working note - 1
Particulars Dept. A Dept. B
Spare parts 3,000 5,000
(+) Increase in price @10% 300 500
3,300 5,500
(+) Increase in consumption@20% - 1,100
Total 3,300 6,600

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Working note - 2
Particulars Dept. A Dept. B
Existing Depreciation (A) 10,000 20,000
Value of Machine (A ÷ 10%) 1,00,000 2,00,000
New Depreciation @ 12% 12,000 24,000

Question – 5
A manufacturing unit has purchased and installed a new machine at a cost of `24,90,000 to its fleet of
5 existing machines. The new machine has an estimated life of 12 years and is expected to realize
`90,000 as scrap value at the end of its working life.

Other relevant data are as follows:

(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant maintenance
work is carried out on weekends when production is totally halted. The estimated maintenance
hours are 416. During the production hours machine set-up and change over works are carried
out. During the set-up hours no production is done. A total 312 hours are required for machine
set-ups and change overs.
(ii) An estimated cost of maintenance of the machine is `2,40,000 pa.a
(iii) The machine requires a component to be replaced every week at a cost of `2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each operator is paid
`30,000 per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine consumes 60 units
per hour. During the maintenance the machine consumes only 10 units per hour. Rate of
electricity per unit of consumption is `6.
(vi) Departmental and general works overhead allocated to the operation during last year was
`5,00,000. During the current year it is estimated to increase by 10%.
Required to compute the machine hour rate.

Solution
Effective machine hours = 2,496 – 312 = 2,184 hours
Statement of Machine Hour Rate
Particulars Amount (`)
Fixed Expenses
Ch,j8,888wj8,888 2,00,000
Depreciation ) *
>C
Operator’s salary [30,000 × 3 × 12 × (1/6)] 1,80,000
Fringe Benefits (1,80,000 × 20%) 36,000
Department & General Overheads [5,00,00 × 110% × (1/6)] 91,667
Fixed expenses (A) 5,07,667
Variable Expenses

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Maintenance 2,40,000
7>C 1,24,800
Replacement cost 82,400 × 9
:
Electricity during production (2,496 ×60 × 6) 8,98,560
Electricity during maintenance (416 × 10 × 6) 24,960
Variable expenses (B) 12,88,320
Total expenses (A + B = C) 17,95,987
Effective machine hours (D) 2,184
Machine hour rate (C ÷ D) 822.34

Question – 6
Calculate Machine Hour Rate from the following particulars:
Cost of Machine - `25,00,000
Salvage Value - `1,25,000
Estimated life of the machine - 25,000 Hours
Working Hours (per annum) - 3,000 Hours
Hours required for maintenance - 400 Hours
Setting-up time required - 8% of actual working hours
Additional Information:
(a) Power 25 units @ `5 per unit per hour.
(b) Cost of repairs and maintenance `26,000 per annum.
(c) Chemicals required for operating the machine `2,600 per month.
(d) Overheads chargeable to the machine `18,000 per month.
(e) Insurance Premium (per annum) 2% of the cost of machine
(f) No. of operators - 02 (looking after three other machines also)
(g) Salary per operator per month `18,500

Solution
Let effective machine hours = y
\ set-up time = (0.08)y
Thus, y = 3,000 – 400 – (0.08)y
y = 2,407
Statement of Machine Hour Rate
Particulars Amount (`)
Fixed Expenses
Chemicals (2,600 × 12) 31,200
Overheads (18,000 × 12) 2,16,000
Insurance (25,00,000 × 2%) 50,000

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>?,@88 ×>C×C 1,11,000
Salary 8 9
h
Fixed expenses 4,08,200
Effective machine hours 2,407
Fixed expenses per machine hour 169.59
Variable Expenses per machine hour
C@,88,888w>,C@,888 95
Depreciation 8 9
C@,888
Repair & Maintenance (26,000 ÷ 2,407) 10.80
Power (25 × 5) 125
Machine hour rate 400.39

Question – 7
A machine shop has 8 identical machines manned by 6 operators. The machine cannot work without
an operator wholly engaged on it. The original cost of all the 8 machines works out to `32,00,000.
The following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time – hours per operator 10
Average rate of wages per day of 8 hours per operator `100
Production bonus estimated 10% on wages
Power consumed `40,250
Supervision and Indirect Labour `16,500
Lighting and Electricity `6,000
The following particulars are given for a year:
Insurance `3,60,000
Sundry work Expenses `50,000
Management Expenses allocated `5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables) 5% of the value of all the machines
Prepare a statement showing the comprehensive machine hour rate for the machine shop.

Solution
Effective machine hour = (208 × 6 × 6) – [(18 – 20 – 10) × 6] = 7,200
Statement of Machine Hour Rate
Particulars Amount (`)
Fixed Expenses
Wages [{(208 × 6 × 6) – (18 × 6)} × (100/8)] 92,250

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Particulars Amount (`)
Bonus (92,250 × 10%) 9,225
Supervision 16,500
Lighting and electricity 6,000
Insurance [3,60,000 × (6/12)] 1,80,000
Depreciation [32,00,000 × 10% × (6/12)] 1,60,000
Sundry work expenses [50,000 × (6/12)] 25,000
Management expenses allocated [5,00,000 × (6/12)] 2,50,000
Fixed expenses 7,38,975
Effective machine hours 7,200
Fixed expenses per machine hour 102.64
Variable Expenses per machine hour
: > 11.11
Repair & Maintenance 832,00,000 × 5% × >C × iC889
h8,C@8 5.59
Power 8 i,C88 9
Machine hour rate 119.34

Question – 8
USP Ltd. is the manufacturer of ‘double grip motorcycle tyres’. In the manufacturing process, it
undertakes three different jobs namely, Vulcanizing, Brushing and Striping. All of these jobs require
the use of a special machine and also the aid of a robot when necessary. The robot is hired from outside
and the hire charges paid for every six months is `2,70,000. An estimate of overhead expenses relating
to the special machine is given below:
• Rent for a quarter is `18,000
• The cost of the special machine is `19,20,000 and depreciation is charged @10% per annum on
straight line basis.
• Other indirect expenses are recovered at 20% of direct wages.
The factory manager has informed that in the coming year, the total direct wages will be `12,00,000
which will be incurred evenly throughout the year.

During the first month of operation, the following details are available from the job book:
Jobs Without the aid of the robot With the aid of the robot
Vulcanizing 500 400
Brushing 1000 400
Striping - 1200
You are required to:
(i) Compute the Machine Hour Rate for the company as a whole for a month (A) when the robot is
used and (B) when the robot is not used.
(ii) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanizing, Brushing and Striping.

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Solution
(i) Total machine hours = 500 + 1,000 + 400 + 400 + 1,200 = 3,500
Total machine hours with the use of robot = 400 + 400 + 1,200 = 2,000
Statement of Machine Hour Rate
Particulars Amount (`)
Rent (18,000 ÷ 3) 6,000
Depreciation [(19,20,000 ´ 10%) ÷ 12] 16,000
Indirect expenses [(12,00,000 ´ 20%) ÷ 12] 20,000
Total expenses 42,000
Total Machine Hours 3,500
Machine hours rate (42,000 ÷ 3500) 12
Add: Robot charges per machine hour [(2,70,000 ÷ 6) ÷ 2,000] 22.50
Machine hour rate with robot charges 34.50

(ii) Computation of Machine Hour Rate for the individual jobs

Particulars Vulcanizing Brushing Striping
OHs without robot 500 ´ 12 = 6,000 1,000 ´ 12 = 12,000 -
OHs with robot 400 ´ 34.50 = 13,800 400 ´ 34.50 = 13,800 1,200 ´ 34.50 = 41,400
Total 19,800 25,800 41,400
Machine hours 900 1,400 1,200
Machine hour rate 22 18.43 34.50

Question – 9
ABS Enterprises 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
The analysis of cost information reveals that 1/3 of the under absorption of overheads was due to
defective production planning and the balance was attributable to increase in costs.
You are required:

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(i) To find out the amount of under absorbed production overheads.
(ii) To give the ways of treating it in Cost Accounts
(iii) To apportion the under absorbed overheads over the items.

Solution
(i) Amount (`)
Total production overheads actually incurred during the period 8,80,000
Less: Amount paid to worker as per court order 50,000
Less: Expenses of previous year booked in current year 18,500
Less: Wages paid for the strike period under reward 38,000
Less: Obsolete material written off 22,000 (1,28,500)
7,51,500
Less: Production overheads absorbed (45,000 x `11.5) 5,17,500
Under recovered overheads 2,34,000
>8,7@,888
Budgeted machine hour rate = j8,888 x"3&/= `11.50 per hour

(ii) As one third of the under absorbed overheads i.e. `78,000 (`2,34,000 × 1/3) were due to defective
production policies, this being abnormal, hence should be debited to profit and loss account.

(iii) Amount of balance under absorbed overheads = `2,34,000 – 78,000 = `1,56,000

>,@:,888
Supplementary rate = = `5.20 per equivalent unit
78,888 3-9./

Amount (`)
Finished stock (27,000 units × 5.20) 1,40,400
Cost of sales (3,000 units × 5.20) _15,600
Total 1,56,000

Question – 10
SK engineering factory fabricates machine parts to customers. The factory commenced fabrication of
12 Nos. machine parts to customer’s specifications and the expenditure incurred on the job for the
week ending 21st August, is given below:
(` ) (`)
Direct materials (all items) 78.00
Direct labour (manual) 20 hours @ `1.50 per hour 30.00
Machine facilities:
Machine No. I : 4 hours @ `4.50 18.00
Machine No. II: 6 hours @ `6.50 39.00 57.00
Total 165.00
Overheads @ `0.80 per hour on 20 manual hours 16.00
Total cost 181.00

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The overhead rate of `0.80 per hour is based on 3,000 man hours per week; similarly, the machine
hour rates are based on the normal working of Machine Nos. I and II for 40 hours out of 45 hours per
week.

After the close of each week, the factory levies a supplementary rate for the recovery of full overhead
expenses on the basis of actual hours worked during the week. During the week ending 21st August,
the total labour hours worked was 2,400 and machine Nos. I and II had worked for 30 hours and 32½
hours respectively.

Prepare a cost sheet for the job for the fabrication of 12 Nos. machine parts duly levying the
supplementary rates.

Solution
Statement of Cost
Particulars ` `
Material 78
Labour 20 hours @ `1.50 30
Machine facilities:
Machine No. I: 4 hours @ `4.50 18
Machine No. II: 6 hours @ `6.50 39 57
Overheads 20 hours @ `0.80 per hour 16
181
Supplementary Rates
Overheads 20 hours @ `0.20 per hour 4
Machine facilities:
Machine No. I: 4 hours @ `1.50 6
Machine No. II: 6 hours @ `1.50 9 19
Total Cost 200
Working notes:
Overheads budgeted: 3,000 hours @ `0.80 = `2,400
Actual hours: 2,400 hours
Actual rate per hour `2,400/2,400 hours = `1
Supplementary charge `0.20 (`1 – 0.80) per hour
Machine facilities:

Machine No. I Machine No. II

Budgeted (40 × `4.50) = `180 (40 × `6.50) = `260
Actual number of hours 30 32½
Actual rate per hour `6 `8
Supplementary rate per hour `6 – `4.50 = `1.50 `8 – `6.50 = `1.50

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Question – 11
The accountant for Brilliant Tools Ltd applies overhead based on machine hours. The budgeted
overhead and machine hours for the year are 130,000 and 8,000, respectively. The actual overhead and
machine hours incurred were 137,500 and 10,000. The cost of goods sold and inventory data compiled
for the year is as follows: Direct Material 25,000 Cost of Goods Sold 225,000 Units: WIP 50,000 and
Finished Goods 75,000 What is the amount of over/underapplied overhead for the year?
(a) Overapplied by `25,000 (b) Underapplied by `25,000
(c) Overapplied by 32,500 (d) Underapplied by `32,500

Question – 12
Litto Limited is a manufacturing company which has as a machine shop cost center that contains three
machines of equal capacities. To operate these three machines nine operators are required i.e. three
operators on each machine. Operators are paid `20 per hour. The factory works for forty eight hours
in a week which includes 4 hours set up time. The work is jointly done by operators. The operators are
paid fully for the forty eight hours. In additions they are paid a bonus of 10 percent of productive time.
Costs are reported for this company on the basis of thirteen four-weekly period.

The company for the purpose of computing machine hour rate includes the direct wages of the operator
and also recoups the factory overheads allocated to the machines. The following details of factory
overheads applicable to the cost centre are available:
• Depreciation 10% per annum on original cost of the machine. Original cos tof each machine is
`52,000.
• Maintenance and repair per week per machine is `60.
• Consumables stores per week per machine are `75
• Power: 20 units per hour per machine at the rate of 80 paise per unit. No power is used during
the set-up hours.
• Apportionment to the cost centre: Rent per annum `5,400, Heat and Light per annum `9,720,
foreman’s salary per annum `12,960 and other miscellaneous expenditure per annum `18,000.

Question – 1
What is the effective machine hour for four-week period?
(a) 170 hours
(b) 176 hours
(c) 189 hours
(d) 192 hours

Question – 2
What is the bonus charges and power expenses for four-week period?
(a) `1,056 and `2,816
(b) `1,562 and `3,560
(c) `1,240 and `3,325
(d) `860 and `2,450

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Question – 3
What is the standing charges for four-week period?
(a) `12,357
(b) `10,450
(c) `13,757
(d) `14,226

Question – 4
What is the machine expenses for four-week period?
(a) `2,500
(b) `3,450
(c) `3,986
(d) `3,756

Question – 5
What is the machine hour rate?
(a) `99.51
(b) `92.25
(c) `105.22
(d) `86.90

1 2 3 4 5
B A C D A

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ACTIVITY BASED COSTING - CONCEPTS

1. Background of ABC

2. Cost Pool
It is the total cost of an activity.

3. Cost Driver
It is the base due to which cost changes

4. Steps in ABC
(A) Identify different activities
(B) Identify overheads related to activities
(C) Identify cost drivers
(D) Calculate activity cost driver rate (ACDR)
T"D2%-%D ?1%&F%,D6 () ,9-.1.-E
ACDR =
T"D2%-%D @(6- Y&.1%&
(E) Recover overheads based on ACDR

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ACTIVITY BASED COSTING QUESTIONS

Question – 1
PQR Pens Ltd. manufactures two products – ‘Gel Pen’ and ‘Ball Pen’. If furnishes the following data
for the year 2017:
Product Annual Output Total Machine Total number Total number
(Units) Hours of Purchase of set-ups
orders
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 costs 5,79,988
Purchase related costs 5,04,992
Calculate the overhead cost per unit of each Product – Gel Pen and Ball Pen on the basis of:
(i) Traditional method of charging overheads
(ii) Activity based costing method and
(iii) Find out the difference in cost per unit between both the methods.

Solution
(i) Calculation of cost under Traditional Approach:
y".*) "1'&x'*k/ >@,:8,888
Overheads rate per Machine hour = y".*) ,*+x9-' x"3&/= Ch,888;@h,888 = `20 per machine hour

Statement of Cost
Particulars Gel Pen Ball Pen
Overheads absorbed (A) 20 × 24,000 = 4,80,000 20 × 54,000 = 10,80,000
Units (B) 5,500 24,000
Overheads per unit (A ÷ B) 87.27 45

(ii) Statement showing Activity Based Cost

Activity Cost Pool Cost Driver Ratio Total Gel Pen Ball Pen
Amount (` ) (` )
(` )
Volume Related Machine Hour 24:54 4,75,020 1,46,160 3,28,860
Activity Costs

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Set-up Related No. of Set-ups 30:56 5,79,988 2,02,321 3,77,667
Costs
Purchase Related No. of Purchase 240:448 5,04,992 1,76,160 3,28,832
Costs Orders
Total Costs 5,24,641 10,35,359
Output (Units) 5,500 24,000
Cost per unit 95.39 43.13

(iii) Statement of Difference in Cost

Particulars Gel Pen Ball Pen
Overheads cost per unit (`) – Traditional Approach 87.27 45
Overheads Cost per unit (`) – ABC 95.39 43.13
Difference per unit -8.12 +1.87

Question – 2
SK Ltd. manufactures three types of products namely P, Q and R. The data relating to a period are as
under:
Particulars P Q R
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (`) 90 80 120
Production (units) 3,000 5,000 20,000
Currently the company uses traditional costing method and absorbs all production overheads on the
basis of machine hours. The machine hour rate of overhead is `6 per hour. Direct labour hour rate is
`20 per hour.

The company proposes to use activity based costing system and the activity analysis is as under:
Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analyzed as under:
Machine set up costs 20%
Machine operations costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:

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(i) Calculate the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
(ii) Calculate the cost per unit of each using activity based costing principles.

Solution
(i) Statement showing cost per unit – Traditional Method
Particulars P Q R
Direct material 90 80 120
Direct labour [(4, 12, 8 hours) ´ `20] 80 240 160
Production overheads [(10, 18, 14 hours) ´ `6] 60 108 84
Cost per unit 230 428 364

(ii) Total machine hours = (3,000 ´ 10) + (5,000 ´ 18) + (20,000 ´ 14) = 4,00,000
Total production overheads = 4,00,000 ´ `6 = `24,00,000
Particulars P Q R Total
A Production (units) 3,000 5,000 20,000
B Batch size (units) 150 500 1,000
C Number of batches (A ÷ B) 20 10 20 50
D Number of purchase order per batch 3 10 8
E Total purchase order (C ´ D) 60 100 160 320
F Number of inspections per batch 5 4 3
G Total inspections (C ´ F) 100 40 60 200

Statement of cost driver rate

Activity Overhead (`) Cost driver quantity Cost driver rate (`)
Setup 24,00,000 ´ 20% = 4,80,000 50 batches 9,600 per batch
Inspection 24,00,000 ´ 40% = 9,60,000 200 inspections 4,800 per inspection
Purchases 24,00,000 ´ 10% = 2,40,000 320 purchases 750 per purchase
Machine 24,00,000 ´ 30% = 7,20,000 4,00,000 machine 1.80 per machine hour
operations hours

Statement showing cost per unit – Activity Based Costing Method

Particulars P Q R
Production units 3,000 5,000 20,000
(`) (`) (`)
Direct material (90, 80, 120) 2,70,000 4,00,000 24,00,000

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Direct labour (80, 240, 160) 2,40,000 12,00,000 32,00,000
Machine related costs [(30,000, 90,000, 2,80,000) ´ 54,000 1,62,000 5,04,000
`1.80]
Setup costs [(20, 10, 20) ´ `9,600] 1,92,000 96,000 1,92,000
Inspection cost [(100, 40, 60) ´ `4,800] 4,80,000 1,92,000 2,88,000
Purchase related costs [(60, 100, 160) ´ `750] 45,000 75,000 1,20,000
Total Costs 12,81,000 21,25,000 67,04,000
Cost per unit (Total cost ÷ Units) 427 425 335.20

Question – 3
PQR Ltd. is engaged in the production of three products P, Q and R. The company calculates Activity
Cost Rates on the basis of Cost Driver capacity which is provided as below:
Activity Cost Driver Cost Driver Cost (`)
Capacity
Direct Labour Hours Labour Hours 30,000 Labour Hours 3,00,000
Production runs No. of Production 600 Production runs 1,80,000
runs
Quality Inspections No. of Inspections 8000 Inspections 2,40,000
The consumption of activities during the period is as under:
Activity/ Products P Q R
Direct Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500
You are required to:
(iv) Compute the cost allocated to each Product from each Activity.
(v) Calculate the cost of unused capacity for each activity
(vi) A potential customer has approached the company for supply of 12,000 units of net product ‘S’
to be delivered in lots of 1,500 units per quarter. This will involve an initial design cost of
`30,000 and per quarter production will involve the following:
Direct Material `18,000
Direct Labour hours 1,500 hours
No. of Production runs 15
No. of Quality Inspection 250
Prepare cost sheet segregating direct and indirect cost and compute the sales value per quarter of
product ‘S’ using ABC system considering a markup of 20% on cost.

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Solution
(i) Statement of Cost Driver Rate
Activity Amount Cost driver (B) Cost Driver Rate (A÷B)
(A)
Direct Labour Hours 3,00,000 30,000 Labour Hours `10 per labour hour
Production runs 1,80,000 600 Production runs `300 per production run
Quality Inspections 2,40,000 8000 Inspections `30 per inspection

Statement of Cost
Particulars P Q R Total
Direct labour 10 × 10,000 10 × 8,000 10 × 6,000
hour = 1,00,000 = 80,000 = 60,000 2,40,000
Production run 300 × 200 300 × 180 300 × 160
= 60,000 = 54,000 = 48,000 1,62,000
Quality 30 × 3,000 30 × 2,500 30 × 1,500
inspection = 90,000 = 75,000 = 45,000 2,10,000
Total Cost 2,50,000 2,09,000 1,53,000 6,12,000

(ii) Statement of Cost of Unused Capacity

Activity Total Cost Cost Charged to Products Unused Cost
Direct Labour Hours 3,00,000 2,40,000 60,000
Production runs 1,80,000 1,62,000 18,000
Quality Inspections 2,40,000 2,10,000 30,000

(iii) Statement of Cost

Particulars Amount (`)
Direct material 18,000
78,888 3,750
Direct expenses (design cost) 8>C,888 × 1,5009
Prime Cost 21,750
Add: Overheads
Direct labour hours (1,500 × 10) 15,000
Production run (15 × 300) 4,500
Quality inspection (250 × 30) 7,500
COS 48,750
Add: Profit (48,750 × 20%) 9,750
Sales 58,500

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Question – 4
SK is a global brand created by SK Ltd. The company manufactures three range of beauty soaps i.e.
SK-Gold, SK-Pearl, and SK-Diamond. The budgeted costs and production for the month of March,
2021 are as follows:
SK-Gold SK-Pearl SK-Diamond
Production of 4,000 3,000 2,000
soaps (Units)
Resources per Qty Rate Qty Rate Qty Rate
Unit:
- Essential Oils 60 ml `200 / 100 ml 55 ml `300 / 100 ml 65 ml `300 / 100
ml
- Cocoa Butter 20 g `200 / 100 g 20 g `200 / 100 g 20 g `200 / 100 g
- Filtered Water 30 ml `15 / 100 ml 30 ml `15 / 100 ml 30 ml `15 / 100 ml
- Chemicals 10 g `30 / 100 g 12 g `50 / 100 g 15 g `60 / 100 g
- Direct Labour 30 Min. `10 / hour 40 Min. `10 / hour 60 Min. `10 / hour
SK Ltd. followed an Absorption Costing System and absorbed its production overheads, to its products
using direct labour hour rate, which were budgeted at `1,98,000.

Now, SK Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:
Particulars (`) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations
The number of machine operators per unit of production are 5, 5, and 6 for SK-Gold, SK-Pearl, and
SK-Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg
respectively (ii) Mass of output produced is equivalent to the mass of input materials taken together.)

You are requested to:

(i) Prepare a statement showing the unit costs and total costs of each product using the absorption
costing method.
(ii) Prepare a statement showing the product costs of each product using the ABC approach.
(iii) State what are the reasons for the different product costs under the two approaches?

Solution
(i) Statement of calculation of labour hours
SK– Gold SK– Pearl SK– Diamond Total
Prod. of soaps (units) 4,000 3,000 2,000 9,000
(A)

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Direct labour (min.) 30 40 60 -
(B)
Direct labour hours 2,000 2,000 2,000 6,000
[(A×B)÷60]
z3k2'.'k "1'&x'*k/ >,j?,888
Overhead rate per direct labour hour = z3k2'.'k )*4"3& x"3&/ = = `33 per direct labour hour
:,888

Statement of cost
SK – Gold SK – Pearl SK – Diamond
Essential oils C88×:8 788×@@ 788×:@
= 120 = 165 = 195
>88 >88 >88
Cocoa Butter C88×C8 C88×C8 C88×C8
= 40 = 40 = 40
>88 >88 >88
Filtered water >@×78 >@×78 >@×78
= 4.50 = 4.50 = 4.50
>88 >88 >88
Chemicals 78×>8 @8×>C :8×>@
=3 =6 =9
>88 >88 >88
Material cost per unit 167.50 215.50 248.50
Direct labour per unit >8×78 >8×h8 >8×:8
=5 = 6.67 = 10
:8 :8 :8
Overheads per unit 77×78 77×h8 77×:8
= 16.50 = 22 = 33
:8 :8 :8
Total cost per unit 189.00 244.17 291.50
Number of units 4,000 3,000 2,000
Total costs 7,56,000 7,32,510 5,83,000

(ii) Calculation of Cost Driver

Activity Amount(`) Cost driver quantity (B) Cost
(A) Driver
Rate (A ÷
B)
Forklifting 58,000 Gold – [{(60×0.8)+20+30+10}×4,000]=4,32,000 0.06 per
Pearl – [{(55×0.8)+20+30+12}×3,000]=3,18,000 gram
Diamond – [{(65×0.8)+20+30+15}×2,000]=2,34,000
Total weight = 9,84,000
Supervising 60,000 h,888×78 10 per
Gold - = 2,000
:8
7,888×h8
machine
Pearl - = 2,000 hour
:8
C,888×:8
Diamond - = 2,000
:8
Total machine hours= 6,000
Utilities 80,000 Gold – 5×4,000 = 20,000 1.70 per
Pearl – 5×3,000 = 15,000 machine
Diamond – 6×2,000 = 12,000 operation
Total operations = 47,000

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Statement of cost
SK – Gold SK – Pearl SK – Diamond
Material cost per unit 167.50 215.50 248.50
Direct labour per unit >8×78 >8×h8 >8×:8
=5 = 6.67 = 10
:8 :8 :8
Foklifting cost per unit 0.06×108 = 6.48 0.06×106 = 6.36 0.06×117 = 7.02
Supervising cost per unit >8×78 >8×h8 >8×:8
=5 = 6.67 = 10
:8 :8 :8
Utilities cost per unit 1.705 = 8.50 1.70×5 = 8.50 1.70×6 = 10.20
Total cost per unit 192.48 243.70 285.72
Number of units 4,000 3,000 2,000
Total costs 7,69,920 7,31,100 5,71,440

(iii) Comments: The difference in the total costs under the two systems is due to the differences in
the overheads borne by each of the products. The Activity Based Costs appear to be more precise.

Question – 5
PQR Ltd. has decided to analyze the profitability of its 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:
Particulars Customers
A B C D E
Number of cases sold 9360 14200 62000 38000 9800
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
It’s five activities and their cost drivers are:
Activity Cost Driver
Order taking `200 per purchase order
Customer visits `300 per each visit
Deliveries `4.00 per delivery km travelled
Product Handling `2.0 per case sold
Expedited deliveries `100 per each such delivery

You are required to:

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(i) Compute the customer level operating income of each of five retail customers by sing the cost
driver rates.
(ii) Examine the results to give your comments on Customer ‘D’ in comparison with Customer ‘C’
and on Customer ‘E’ in comparison with Customer ‘A’.

Solution
(i) Statement of operating income
Particulars Customer Customer Customer Customer Customer
A B C D E
Units 9,360 14,200 62,000 38,000 9,800
Revenue 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
[54 × No. of units]
(-) Discount - 8,520 3,10,000 1,44,400 52,920
[(List price – Actual
price) × No. of units]
Net revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(-) Order taking 6,000 10,000 12,000 10,000 12,000
[200×No. of purch. order]
(-) Customer visit 1,200 1,800 3,600 1,200 1,800
[300×No. of visit]
(-) Deliveries 3,200 2,880 4,800 6,400 9,600
[4 × km travel × No. of
deliveries]
(-) Production handling 18,720 28,400 1,24,000 76,000 19,600
[2 × No. of units]
(-) Expedited deliveries - - - - 200
[100×No. of delivery]
(-) COGS 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
[45 × No. of units]
Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)

(ii) Separate disclosure of revenue helps us to identify the relationship between discount and sales
quantity.
Customer Quantity Discount Discount %
A 9,360 - 0%
C 62,000 5 5÷54 = 9.25%
D 38,000 3.80 3.80÷54 = 7.03%
E 8,775 5.40 5.40÷54 = 10%

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Customer D gets lower discount as compared to Customer C. It may be due to lower quantity
purchased by customer D as compared to Customer C.
Customer E gets higher discount as compared to Customer A. Customer E discount is higher in-
spite of ordering comparative lower quantity and its reason should be further explored.

Question – 6
A drug store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. due to
some constraints, it has decided to go for only one product line of drugs. It has provided the following
data for the year 2020-21 for each product line:
Drug Types
A B C
Revenue (in `) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in `) 41,44,500 68,16,750 1,20,63,750
Number of purchase orders placed (in 560 810 630
nos)
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Units sold (in nos) 1,75,200 1,50,300 1,44,500
Following additional information is also provided:
Activity Description of Activity Total Cost (`) Cost-allocation base
Drug License fee Drug License fee 5,00,000 To be distributed in ratio
[Link] between A, B and
C
Ordering Placing of orders for 8,30,000 2,000 purchase orders
purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of goods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-
stocking time
Customer Support Assistance provided to 28,20,000 4,70,000 units sold
customers
You are required to:
(i) Calculate the operating income and operating income as a percentage (%) of revenue of each
product line if:
a) All the support costs (other than cost of goods sold) are allocated in the ratio of cost of goods
sold
b) All the support costs (Other than cost of goods sold) are allocated using activity-based costing
system.
(ii) Give your opinion about choosing the product line on the basis of operating income as a
percentage (%) of revenue of each product line under both the situation as above.

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Solution
(i) (a) Statement of operating income
Particulars Drug A Drug B Drug C Total
Revenue (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
COGS 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Gross Margin 33,05,500 43,58,250 65,61,250 1,42,25,000
(-) Operating cost (in 16,57,800 27,26,700 48,25,500 92,10,000
COGS Ratio)
Operating Income (B) 16,47,700 16,31,550 17,35,750 50,15,000
Operating income % (B 22.12% 14.60% 9.32% 13.46%
÷ A)

(i) (b) Statement of Cost

Particulars Cost (`) (A) Cost Driver (B) Cost per cost driver
(A÷B)
Ordering 8,30,000 2,000 purchase order `415 per purchase order
Delivery 18,20,000 2,800 deliveries `650 per delivery
Shelf stocking 32,40,000 4,500 hours of shelf `720 per hour of shelf
stocking time stocking time
Customer support 28,20,000 4,70,000 units sold `6 per unit sold

Statement of operating income

Particulars Drug A Drug B Drug C
Revenue (A) 74,50,000 1,11,75,000 1,86,25,000
COGS 41,44,500 68,16,750 1,20,63,750
Gross Margin (B) 33,05,500 43,58,250 65,61,250
Drug License Fee (in 1,00,000 1,50,000 2,50,000
[Link])
Ordering cost 415 ´ 560 = 415 ´ 810 = 415 ´ 630 =2,61,450
2,32,400 3,36,150
Delivery cost 650 ´ 950 = 650 ´1000 = 650 ´ 850 =
6,17,500 6,50,000 5,52,500
Shelf Stocking cost 720 ´ 900 = 720 ´1250 = 720 ´2350 =
6,48,000 9,00,000 16,92,000
Customer support 6 ´ 175200 = 6 ´ 150300 = 6 ´ 144500 =
10,51,200 9,01,800 8,67,000
Operating cost (C) 26,49,100 29,37,950 36,22,950
Operating income (B– 6,56,400 14,20,300 29,38,300
C=D)

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Operating income % 8.81% 12.71% 15.78%
(D÷A)

(ii) When the operating costs are distributed on the basis of cost of goods sold, Drug A has the highest
level of operating income percentage because lesser operating cost share is distributed to it.

Activity based costing shows that Drug C uses the large amount of operating cost resources than
the other two drugs and simultaneously generates the highest level of revenue and thus operating
income percentage is maximum in case of Drug C.

Question – 7
One of Pintu Company’s cost pools is parts administration. The budgeted overhead cost for that cost
pool was `4,00,000 and the expected activity was 4,000 part types. The actual overhead cost for the
cost pool was `4,20,000 at an actual activity of 5,000 part types. The activity rate for that cost pool
was:
(a) `80 per part type (b) `100 per part type
(c) `105 per part type (d) `84 per part type

Question – 8
‘Humara – Apna’ bank offers three products, viz. deposits, Loans and Credit Cards. The bank has
selected 4 activities for a detailed budgeting exercise, following activity based costing method.
The bank wants to know the product wise total cost per unit for the selected activities, so that price
may be fixed accordingly. The following information is made available to formulate the budget:
Activity Present Cost (`) Estimation for the budget period
ATM Services:
(a) Machine Maintenance 4,00,000 All fixed, no change
(b) Rents 2,00,000 Fully fixed, no change
(c) Currency replenishment cost 1,00,000 Expected to double during budget
7,00,000 (This activity is driven by no. of ATM
transactions)
Computer Processing 5,00,000 Half this amount is fixed and no change is
expected.
The variable portion is expected to
increase to three times the current level.
(This activity is driven by the number of
computer transactions)
Issuing Statements 18,00,000 Presently, 3 lakh statements are made. In
the budget period, 5 lakh statements are
expected.
For every, increase of one lakh statement,
one lakh rupees is the budgeted increase.

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(This activity is driven by the number of
statements)
Computer Inquiries 2,00,000 Estimated to increase by 80% during the
budgeted period.
(This activity is driven by telephone
minutes)
The activity drivers and their budgeted quantities are given below:
Activity Drivers Deposits Loans Credit Cards
No. of ATM transactions 1,50,000 - 50,000
No. of Computer Processing Transactions 15,00,000 2,00,000 3,00,000
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts and 14,000 credit card
accounts.

Question – 1
The budgeted rate for ATM service activity is:
(a) `4
(b) `2
(c) `1
(d) `0.50

Question – 2
The budgeted rate for computer processing activity is:
(a) `4
(b) `2
(c) `1
(d) `0.50

Question – 3
The budgeted rate for issuing statement activity is:
(a) `4
(b) `2
(c) `1
(d) `0.50

Question – 4
The budgeted rate for computer inquiries activity is:
(a) `4
(b) `2
(c) `1
(d) `0.50

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Question – 5
Total cost for credit cards as per activity based costing is:
(a) `3,90,000
(b) `8,40,000
(c) `15,60,000
(d) `29,30,000

1 2 3 4 5
A D A D B

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COST SHEET - CONCEPTS

1. Cost Sheet
It is a statement which shows the break-up and build-up of costs for a particular period
(functional classification).

2. Statement of Cost/Cost Sheet

Particulars Total Cost per
Cost (`) unit (`)
Opening stock of Raw Material
Add: Purchases
Less: Closing stock of Raw Material
Add: Carriage/Freight inward
Less: Raw material purchase return
Less: Sale value of scrap of raw material
Direct Material Consumed
Add: Direct labour cost
Ø Wages
Ø Bonus
Ø Allowances
Ø Overtime
Ø Employer contribution to PF/ESI/SSS
Ø Any other benefit
Add: Direct expenses or chargeable expenses
Ø Royalty for production
Ø Cost of utilities such as power & fuel, steam etc.
Ø Fee for technical know-how
Ø Cost of product/service specific design or drawing
Ø Cost of product/service specific software
Ø Amortized cost of moulds, patterns, patents etc.
Ø Job charges paid to job workers
Ø Hire charges paid for hiring specific equipment
Ø Other expenses which are directly related with
production
Prime Cost
Add: Factory/Work Overheads
Gross Factory/Work Cost

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Particulars Total Cost per
Cost (`) unit (`)
Add: Opening stock of WIP
Less: Closing stock of WIP
Net Factory/Work cost
Add: Quality control cost
Add: Research and Development cost
Add: Administrative overheads (related to production)
Add: Packing cost (primary)
Less: Credit for recoveries/Scrap/Defectives/By-Product
Cost of Production
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of Goods Sold
Add: Administrative overheads (general)
Add: Selling and distribution overheads
Add: Interest on borrowed funds
Cost of Sales
Add: Profit
Sales

3. Points to Remember (PTR)

(A) Loss or Gain

By reducing quantity
Loss or Gain

Normal Charge to consumer and increasing price per

unit

Abnormal Charge to owner By transferring to P&L

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(B) Certain expenses not appear in cost sheet:
Ø Goodwill or preliminary expenses written off
Ø Income tax
Ø Loss on sale of assets or investment
Ø Cost pertaining to or arising out of a pandemic e.g. COVID-19
Ø Penalty, fines, damages etc.

(C) Work = Factory

Work Overheads = Factory Overheads
Work Cost = Net Factory Cost

(D) Cost of goods available for sale = Opening stock of FG + Cost of Production (COP)

(E) Cost of goods processed during the period = Opening WIP + GFC

4. Treatment of Expenses
Expenses Treatment
Haulage Factory OHs
Stores Related Expenses Factory OHs
Stores Consumed = Opening + Purchases – Closing
Warehouse or Godown Expenses Selling & Distribution OHs
Loose tools written off Factory OHs
Bank charges Administration OHs
Salesmen commission Selling & Distribution OHs
Cost of Samples Selling & Distribution OHs
Audit Fee Administration OHs
General Expenses Administration OHs
Counting House Salaries Administration OHs
Production planning expenses in office Administration OHs related to Prod.
Director’s fees Administration OHs
Fee for exhibition participation Selling & Distribution OHs
Pollution control expenses Factory OHs

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Carriage on raw material return Factory OHs
Bad Debts Ignore
Packaging
(A) Primary Packaging Add after NFC
(B) Secondary Packaging Selling & Distribution OHs

GST
(A) GST Output Add after sales value
(B) GST Input
(C) ITC Available Ignore
(D) ITC Not Available Add to the cost of item to which it relates

Custom Duty Add to the cost of item to which it relates

Discount
(A) Trade Discount Deduct if not already deducted
(B) Cash Discount Ignore
(C) Other discount or discount on sales Selling & Distribution OHs

Waste/Scrap
(A) Scrap for which amount is received on sale
(1) Related to raw material Deduct from raw material consumed
(2) Arises during production Deduct after NFC
(B) Scrap for which disposal cost is to be Add to factory OHs
incurred

Defectives
(a) Sold as it is at discount Deduct after NFC

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(b) Goods are rectified by incurring Add rectification cost to Factory OHs
rectification cost

5. Administration Overheads
If administration overheads is ___% of NFC or If administration overheads is ` ___ per unit
produce then in both situation consider them as related to production.

6. Conversion Cost
It is the cost to convert raw material into finished goods. It is sum total of direct labour, direct
expenses and factory overheads.

7. Valuation of Stock
Stock can be valued either on FIFO basis or LIFO basis or Weighted average method. Unless
otherwise provided FIFO method will be used for valuation of stock.
According to FIFO Method,
Value of cl. stock of raw material = "#$%&' $) *+, #+'-*.+/ 0%*12+3-4
5+, #+'-*.+/ 0%*12+3- 6%+&'.'7
× 𝐶𝑙. 𝑠𝑡𝑜𝑐𝑘 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑢𝑛𝑖𝑡𝑠

Value of closing stock of finished goods = 8$3' $) 9*$4%1'.$&

:&.'3 0*$4%1-4
× 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 𝑓𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑔𝑜𝑜𝑑𝑠 𝑢𝑛𝑖𝑡𝑠

According to Weighted Average Method,

5; 0%*12+3-<=0. ?'$1@ $) 5;
Value of cl. stock of raw material = 5; 0%*12+3- %&.'3<=0. 3'$1@ 5; %&.'3
× 𝐶𝑙. 𝑠𝑡𝑜𝑐𝑘 𝑟𝑎𝑤 𝑚𝑎𝑡. 𝑢𝑛𝑖𝑡𝑠
8$3' $) 9*$4%1'.$& < =0. 3'$1@ AB
Value of closing stock of finished goods = :&.'3 0*$4%1-4<=0. 3'$1@ AB %&.'3
× 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 𝐹𝐺 𝑢𝑛𝑖𝑡𝑠

For raw material,

Raw material consumed units = Op. stock RM units + RM Purchase units – Cl. stock RM
For finished goods,
Finished goods units sold = Op. stock FG units + FG units produced – Cl. stock FG units

If there is NIL Opening stock

@(6- () U&(D"9-.(/ @(6- () X((D6 *(8D
Cost per unit of finished goods = =
V/.-6 +&(D"9%D V/.-6 *(8D

8. Calculation of per unit data and vice versa

(A) For calculating per unit data
Ø Divide all values by Units Produced upto cost of production
Ø Divide all values by Units Sold from COGS and onwards

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(B) If factory overheads or administration overheads (production related) per unit is given
then multiply it with number of units produced to get total value.
(C) If administration overheads (general) and selling and distribution overheads per unit is
given then multiply it with number of units sold to get total value.

9. Recovery Rate
It is the rate which is used to recover/absorb/charge overheads from the products being
manufactured or services being provided.
Unless otherwise provided, following basis will be used for recovery of overheads:
Factory overheads Direct Labour
Administration overheads NFC or work cost
Selling and distribution overheads NFC or work cost

10. Change in Cost Effects

Total Cost = No. Of units ´ Cost per unit

Total VC Total FC
Quantity Effect Yes No
Price Effect Yes Yes

Relation between:
(A) Quantity and Variable cost : Direct relation
(B) Price and Variable cost : Direct relation
(C) Price and Fixed cost : Direct relation
(D) Wages and Efficiency : Indirect relation

Unless otherwise provided, following points are to be assumed:

(a) VC per unit will remain same
(b) Total FC will remain same
(c) All direct cost are considered to be variable in nature
(d) All overheads are considered to be fixed in nature

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COST SHEET QUESTIONS

Question – 1
SK ltd. has the following expenditures for the year ended 31st March:
Particulars Amount (`) Amount (`)
Raw materials purchased 10,00,00,000
GST paid on the above purchases @18% (eligible for 1,80,00,000
input tax credit)
Freight inwards 11,20,600
Wages paid to factory workers 29,20,000
Contribution made towards employees’ PF and ESI 3,60,000
Production bonus paid to factory workers 2,90,000
Royalty paid for production 1,72,600
Amount paid for power & fuel 4,62,000
Amount paid for purchase of moulds and patterns (life 8,96,000
is equivalent to two years production)
Job charges paid to job workers 8,12,000
Stores and spares consumed 1,12,000
Depreciation on:
Factory building 84,000
Office building 56,000
Plant & Machinery 1,26,000
Delivery vehicles 86,000 3,52,000
Salary paid to supervisors 1,26,000
Repairs & maintenance paid for:
Plant & Machinery 48,000
Sales office building 18,000
Vehicles used by directors 19,600 85,600
Insurance premium paid for:
Plant & Machinery 31,200
Factory building 18,100
Stock of raw materials & WIP 36,000 85,300
Expenses paid for quality control check activities 19,600
Salary paid to quality control staffs 96,200
Research & development cost paid for improvement in 18.200
production process
Expenses paid for pollution control and engineering & 26,600
maintenance

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Expenses paid for administration of factory work 1,18,600
Salary paid to functional managers:
Production control 9,60,000
Finance & accounts 9,18,000
Sales & Marketing 10,12,000 28,90,000
Salary paid to General Manager 12,56,000
Packaging cost paid for:
Primary packing necessary to maintain quality 96,000
For re-distribution of finished goods 1,12,000 2,08,000
Wages of employees engaged in distribution of goods 7,20,000
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,20,000
Performance bonus paid to sales staff 1,80,000
Value of stock as on 1st April of last year
Raw materials 18,00,000
Work-in-process 9,20,000
Finished goods 11,00,000 38,20,000
st
Value of stock as on 31 March of current year
Raw materials 9,60,000
Work-in-process 8,70,000
Finished goods 18,00,000 36,30,000
Amount realized by selling of scrap and waste generated during manufacturing process is `86,000.
From the above data you are required to prepare statement of cost for the year ended 31st March,
showing (i) prime cost, (ii) factory cost, (iii) cost of production, (iv) cost of goods sold and (v) cost of
sales.

Solution
Particulars Amount (`)
Opening stock of raw material 18,00,000
Add: Raw material purchases 10,00,00,000
Less: Closing stock of raw material (9,60,000)
Add: Freight inwards 11,20,600
Raw material consumed 10,19,60,600
Direct Labour:
Wages paid to factory workers 29,20,000
Contribution to PF & ESI 3,60,000
Production bonus paid to factory workers 2,90,000 35,70,000
Direct Expenses:

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Royalty paid for production 1,72,600
Amount paid for power & fuel 4,62,500
Amortised cost of moulds and patterns 4,48,000
Job charges paid to job workers 8,12,000 35,70,000
Prime Cost 10,74,25,200
Factory overheads:
Stores and spares consumed 1,12,000
Depreciation on factory building 84,000
Depreciation on plant & machinery 1,26,000
Repairs & maintenance for plant & machinery 48,000
Insurance premium paid for plant & machinery 31,200
Insurance premium paid for factory building 18,100
Insurance premium paid for stock of raw material 36,000
Salary paid to supervisors 1,26,000
Expenses paid for pollution control 26,600 6,07,900
Gross Factory cost 10,83,33,100
Add: Opening WIP 9,20,000
Less: Closing WIP (8,70,000)
Net Factory cost 10,80,83,100
Quality control cost:
Expenses paid for quality control check 19,600
Salary paid to quality control staff 96,200 1,15,800
Research and development cost paid 18,200
Administrative overheads related to production
Expenses paid for administration 1,18,600
Salary paid to production control manager 9,60,000 10,78,600
Less: Realisable value on sale of scrap (86,000)
Add: Primary packaging cost 96,000
Cost of production 10,93,05,700
Add: Opening stock of finished goods 11,00,000
Less: Closing stock of finished goods (18,000,000)
Cost of goods sold 10,86,05,700
Administrative overheads:
Depreciation on office building 56,000
Repairs & maintenance paid for vehicles for 19,600
directors
Salary paid to manager-finance and accounts 9,18,000
Salary paid to general manager 12,56,000
Fee paid to auditors 1,80,000

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Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,20,000 27,69,600
Selling and distribution overheads
Repairs & maintenance paid to sales office 18,000
building
Salary paid to manager – sales & marketing 10,12,,000
Performance bonus paid to sales staffs 1,80,000
Depreciation on delivery vehicles 86,000
Packaging cost paid for re-distribution 1,12,000
Wages of employees engaged in distribution of 7,20,000 21,28,000
goods
Cost of Sales 11,35,03,300

Question – 2
From the following particulars, you are required to prepare monthly cost sheet of SK Ltd.:
Amount (`)
Opening Inventories
- Raw materials 12,00,000
- Work-in-process 18,00,000
- Finished goods (10,000 units) 9,60,000
Closing inventories
- Raw materials 14,00,000
- Work-in-process 16,04,000
- Finished goods ?
Raw material purchased 1,44,00,000
GST paid on raw materials purchased (ITC available) 7,20,000
Wages paid to production workers 36,64,000
Expenses paid for utilities 1,45,600
Office and administration expenses paid 26,52,000
Travelling allowance paid to office staffs 1,21,000
Selling expenses 6,46,000
Machine hours worked – 21,600 hours
Machine hour rate - `8.00 per hour
Units sold – 1,60,000
Units produced 1,94,000
Desired profit – 15% on sales

Solution
Cost sheet of SK Ltd. for month of …..
Units produced – 1,94,000
Units sold – 1,60,000

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Particulars (₹) Cost per unit (₹)
Raw materials purchased 1,44,00,000
Add: Opening value of raw materials 12,00,000
Less: Closing value of raw materials (14,00,000)
Materials consumed 1,42,00,000 73.19
Wages paid to production workers 36,64,000 18.89
Expenses paid for utilities 1,45,600 0.75
Prime Cost 1,80,09,600 92.83
Factory overheads (₹ 8 × 2,600 hours) 1,72,800
Add: Opening value of W-I-P 18,00,000
Less: Closing value of W-I-P (16,04,000)
Cost of Production 1,83,78,400 94.73
Add: Value of opening finished stock 9,60,000
Less: Value of closing finished stock (41,68,120)
(₹ 94.73 × 44,000)
Cost of Goods Sold 1,51,70,280 94.81
Office and administration expenses paid 26,52,000 16.58
Travelling allowance paid to office staffs 1,21,000 0.75
Selling expenses 6,46,000 4.04
Cost of Sales 1,85,89,280 116.18
Add: Profit 32,80,461 20.50
Sales 2,18,69,741 136.68

Question – 3
The following data relates to manufacturing of a standard product during the month of the March:
Particulars Amount (in `)
Stock of Raw material as on 01-03 80,000
Work in progress as on 01-03 50,000
Purchase of raw material 2,00,000
Carriage inwards 20,000
Direct wages 1,20,000
Cost of special drawing 30,000
Hire charges paid for Plant 24,000
Return of Raw Material 40,000
Carriage on return 6,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500
Salary to office staff 25,000
Maintenance of office building 2,000
Depreciation on Delivery Van 6,000

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Warehousing charges 1,500
Stock of Raw material as on 31-03 30,000
Stock of Work in Progress as on 31-03 24,000
• Store overheads on material are 10% of material consumed.
• Factory overheads are 20% of the prime cost
• 10% of the output was rejected and a sum of `5,000 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were rectified at
an additional expenditure which is equivalent to 20% of proportionate direct wages.
• The total output was 8,000 units during the month.
You are required to prepare a cost sheet for the above period showing the:
(i) Cost of raw material consumed
(ii) Prime cost
(iii)Work cost
(iv) Cost of production
(v) Cost of sales

Solution Cost Sheet

Particulars Amount (`)
Opening stock of raw material 80,000
Add: Raw material purchases 2,00,000
Add: Carriage inward 20,000
Less:Return of raw material (40,000)
Less:Closing stock of raw material (30,000)
Raw Material consumed 2,30,000
Direct wages 1,20,000
Direct Expenses: Cost of special drawing 30,000
Hire charges paid for plant 24,000 54,000
Prime Cost 4,04,000
Stores Overheads (10% × 2,30,000) 23,000
Carriage on return of raw material 6,000
Factory overheads (20% × 4,04,000) 80,800
Rectification cost of defectives (1,20,000 × 90% × 10% × 20%) 2,160
Gross Factory Cost 5,15,960
Add: Opening WIP 50,000
Less: Closing WIP (24,000)
Net Factory Cost 5,41,960
Less:Scrap sale (5,000)
Cost of Production/COGS 5,36,960
Administration Overheads:

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Legal charges 2,500
Salary to office staff 25,000
Maintenance of office building 2,000 29,500
Selling & Distribution Overheads:
Expenses for participation in industrial exhibition8,000
Warehousing charges 1,500
Depreciation on Delivery Van 6,000 15,500
Cost of Sales 5,81,960

Question – 4
A fire occurred in the factory premises on October 31. The accounting records have been destroyed.
Certain accounting records were kept in another building. They reveal the following for the period
September 1 to October 31:
(a) Direct materials purchased `2,50,000
(b) Work in progress inventory (1 Sep) `40,000
(c) Direct material inventory (1 Sep) `20,000
(d) Finished goods inventory (1 Sep) `37,750
(e) Indirect manufacturing costs 40% of conversion cost
(f) Sales revenue `7,50,000
(g) Direct Manufacturing labour `2,22,250
(h) Prime costs `3,97,750
(i) Gross margin percentage based on revenues 30%
(j) Cost of goods available for sale `5,55,775
The cost is fully covered by insurance. The insurance company wants to know the historical cost of
the inventories as the basis for negotiating a settlement, although the settlement is actually to be based
on replacement cost, not historical cost.
Required:
(a) Finished goods inventory 31 October
(b) Work in process inventory 31 October
(c) Direct material inventory 31 October

Solution
Statement of cost and sales
Particulars Amount
Opening stock of material 20,000
Add: Purchases 2,50,000
Less: Closing stock of material(bal. fig.) (94,500)
Direct material consumed (bal. fig.) 1,75,500
Add: Direct Labour 2,22,250
Add: Direct Expenses -
Prime Cost (given) 3,97,750

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Particulars Amount
Add: Factory Overheads (working note-1) 1,48,167
Gross Factory Cost 5,45,917
Add: Opening WIP 40,000
Goods Processed during the period 5,85,917
Less: Closing WIP(bal. fig.) (67,892)
Net Factory Cost/COP (bal. fig.) 5,18,025
Add: Opening stock of FG 37,750
Cost of goods available for sale (given) 5,55,775
Less: Closing stock of FG(bal. fig.) (30,775)
Cost of goods sold 5,25,000
Add: Administration Overheads -
Add: Selling & Distribution Overheads -
Cost of Sales (Bal. fig.) 5,25,000
Add: Profit (7,50,000 ´ 30%) 2,25,000
Sales 7,50,000
Working note - 1
Let factory overheads = x
Thus, x = 40% (2,22,250 + 0 + x)
x = 1,48,167

Question – 5
The following figures are available from the books of SK Co. for the year 31st March:
` `
Materials: Profit for the year 12,180
Stock on 1st April 2,000 Selling overhead 10,500
st
Stock on 31 March 4,000 Factory overhead 9,000
Purchases 20,000 Administration overhead 8,400
Wages 15,000
(a) Prepare a cost sheet showing prime cost, work cost, cost of production, cost of sales and sales.
(b) In April, the factory receives an order for a job which will require materials `2,400 and wages
`1,500. Ascertain the sale price of the job if the factory intends to earn a profit 10% higher than
the percentage of profit earned in year ending on 31st March. Assume that the factory overhead has
gone up by 16(2/3)% and selling overhead has gone down by 20% after 31st March. Further assume
that factory overhead is recovered as a percentage of the wages and administration and selling
overhead as a percentage of works cost.

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Solution
Statement of Cost and Profit
Particulars Amount (`)
Opening stock of material 2,000
Add: Purchases 20,000
Less: Closing stock of material (4,000)
Direct material consumed 18,000
Add: Direct wages 15,000
Prime cost 33,000
Add: Factory overhead 9,000
GFC/NFC/COP/COGS 42,000
Add: Administration overhead 8,400
Add: Selling overhead 10,500
Cost of Sales 60,900
Add: Profit 12,180
Sales 73,080
Calculation of Recovery Rates
(j,888;>:.:::::::%)
Factory overheads as % of direct wages = × 100 = 70% of direct wags
>@,888
?,h88
Administration overheads as % of NFC = hC,888 × 100 = 20% of NFC
(>8,@88wC8%)
Selling overheads as % of NFC = × 100 = 20% of NFC
hC,888
(>C,>?8;>8%)
Profit as % of Cost of sales = × 100 = 22% of Cost of sales
:8,j88

Statement of calculation of selling price of Job

Particulars Amount (`)
Direct Material 2,400
Direct wages 1,500
Prime Cost 3,900
Add: Factory overheads (70% × 1,500) 1,050
GFC/NFC/COP/COGS 4,950
Add: Administration overheads (20% × 4,950) 990
Add: Selling overheads (20% × 4,950) 990
Cost of sales 6,930
Add: Profit (22% × 4,950) 1,525
Sales 8,455

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Question – 6
A factory incurred the following expenditure during the year:
`
Direct material consumed 12,00,000
Manufacturing wages 7,00,000
Manufacturing overheads:
Fixed 3,60,000
Variable 2,50,000 6,10,000
25,10,000
In the next year, following changes are expected in production and cost of production.
(a) Production will increase due to recruitment of 60% more workers in the factory.
(b) Overall efficiency will decline by 10% on account of recruitment of new workers.
(c) There will be an increase of 20% in fixed overhead and 60% in variable overhead.
(d) The cost of direct material will be decreased by 6%.
(e) The company desire to earn a profit of 10% on selling price.
Ascertain the cost of production and selling price.

Solution
Let existing production units 100
Add: Increase due to recruitment of worker(100 × 60%) 60
160
Less: Decline due to efficiency (160 × 10%) 16
New Production units 144

Statement of cost and sale

Particulars Working Amount (`)
Direct material 144 94 16,24,320
C12,00,000 × × D
100 100
Direct wages 144 100 11,20,000
C7,00,000 × × D
100 90
Prime Cost 27,44,320
(+) Fixed manufacturing overheads 120 4,32,000
C3,60,000 × D
100
(+) Variable manufacturing overheads 144 160 5,76,000
C2,50,000 × × D
100 100
Cost of Sales 37,52320
(+) Profit (Bal. fig.) 4,16,924
Sales (37,52,320 ÷ 90%) 41,69,244

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Question – 7
A factory’s normal capacity is 1,20,000 units per annum. The estimated costs of production are as
under:
(a) Direct material `3 per unit; direct labour `2 per unit (Subject to a minimum of `12,000 p.m.)
(b) Indirect expenses—Fixed `1,60,000 per annum: Variable `2 per unit; Semi-variable `60,000
upto 50% capacity and additional `20,000 for every 20% increase in capacity.
(c) Each unit of raw material yields scrap which is sold at the rate of 20 paise per unit.
The factory worked at 50% capacity for the first three months but it was expected that it would work
@ 80% capacity for the remaining 9 months. During the first three months, the selling price per unit
was `12. What should be the price in the remaining nine months to produce a total profit of `2,18,000?

Solution Statement of Cost

Particulars First 3 months Bal. 9 months
Level of operation 50% 80%
Units @8 7 ?8 j
1,20,000 × >88 × >C = 1,20,000 × >88 × >C = 72,000
15,000
Direct material @ `3 p.u. 45,000 2,16,000
Direct wages 15,000 × 2 72,000 × 2
E 𝑜𝑟 F 36,000 E 𝑜𝑟 F 1,44,000
12,000 × 3 12,000 × 9
Fixed expenses 7 j
1,60,000 × >C = 40,000 1,60,000 × >C = 1,20,000
Variable expenses @ `2 p.u. 30,000 1,44,000
Semi-variable expenses 7 j
60,000 × >C = 15,000 (60,000 + 20,000 + 20,000) × >C
= 75,000
(-) Scrap @ `0.20 p.u. (3,000) (14,400)
Total Cost 1,63,000 6,84,600
Statement of Calculation of Selling Price for Remaining 9 Months
Sales for first 3 months (15,000 ´ 12) 1,80,000
Less: Cost for first 3 months 1,63,000
Profit for first 3 months 17,000
Annual Target profit 2,18,000
Profit require from remaining 9 months 2,01,000
Add: Cost for remaining 9 months 6,84,600
Sales for remaining 9 months 8,85,600
Units for remaining 9 months 72,000
Selling price for remaining 9 months 12.30

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Question – 8
PNME Ltd. manufactures two types of masks – ‘disposal Masks’ and ‘Cloth Masks’. The cost data for
the year ended 31st March, 2022 is as follows:
`
Direct materials 12,50,000
Direct wages 7,00,000
Production Overhead 4,00,000
Total 23,50,000
It is further ascertained that:
- Direct material cost per unit of cloth Mask was twice as much of direct material cost per unit od
disposal Mask
- Direct wages per unit for Disposal Mask were 60% of those for Cloth Mask
- Production overhead per unit was at same rate for both the types of the masks
- Administration overhead was 50% of Production overhead for each type of mask
- Selling cost was `2 per cloth mask
- Selling price was `35 per unit of cloth mask
- No. of units of cloth masks sold – 45,000
- No. of units of Production of
o Cloth Masks : 50,000
o Disposal Masks : 1,50,000
You are required to prepare a cost sheet for cloth masks showing:
(i) Cost per unit and total cost
(ii) Profit per unit and total profit

Solution
Preparation of Cost Sheet for Cloth Masks
No. of units produced = 50,000 units
No. of units sold = 45,000 units
Particulars Per unit (₹) Total (₹)
Direct materials (Working note (ii)) 10.00 5,00,000
Direct wages (Working note (ii)) 5.00 2,50,000
Prime cost 15.00 7,50,000
Production overhead (Working note (iii)) 2.00 1,00,000
Factory Cost 17.00 8,50,000
Administration Overhead* (50% of Production 1.00 50,000
Overhead)
Cost of production 18.00 9,00,000
Less: Closing stock (50,000 units – 45,000 units) – (90,000)
Cost of goods solid i.e. 45,000 units 18.00 8,10,00
Selling cost 2.00 90,000
Cost of sales/Total cost 20.00 9,00,000

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Profit 15.00 6,75,000

Sales value (₹ 35 × 45,000 units) 35.00 15,75,000
Working Notes:
(i) Direct material cost per unit of Disposable Mask = M
Direct material cost per unit of Cloth Mask = 2M
Total direct material cost = (2M ´ 50,000) + (M ´ 1,50,000)
12,50,000 = M ´ 2,50,000
M = 12,50,000 ÷ 2,50,000 = `5
Thus, direct material cost per unit of cloth mask = 2 ´ 5 = `10
(ii) Direct wages per unit of Cloth Mask = W
Direct wages per unit Disposable Mask = 0.6W
So, (W × 50,000) + (0.6W × 1,50,000) = ₹ 7,00,000
W = ₹ 5 per unit
Therefore, Direct material Cost per unit of Cloth Mask = ₹ 5
h,88,888
(iii) Production overhead per unit = (@8,888;>,@8,888) = `5
Production overhead for Cloth Mask = ₹ 2 × 50,000 units = ₹ 1,00,000
*Administration overhead is related to production overhead in the question and hence to be considered
in cost of production only.

Question – 9
The following details are given to you:
Raw material consumed `2,40,000
Factory overheads ¾ of direct wages
Quality control cost and research and development cost 20% of factory cost
Cost of production `7,50,000
The amount of direct wages will be:
(a) `2,50,000 (b) `2,20,000
(c) `2,00,000 (d) `3,00,000

Question – 10
M Ltd. is producing a single product and may expand into product diversification in next one to two
years. M Ltd. is amongst a labour-intensive company where majority of processes are done manually.
Employee cost is a major cost element in the total cost of the company. The company conventionally
uses performance parameters Earnings per manshift (EMS) to measure cost paid to an employee for a
shift of 8 hours, and Output per manshift (OMS) to measure an employee’s output in a shift of 8 hours.

The Chief Manager (Finance) of the company has emailed you few information related to the last
month. The email contains the following data related to the last month:

During the last month, the company has produced 2,34,000 tonnes of output. Expenditures for the last
months are:

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(i) Raw materials consumed `50,00,000

(ii) Power consumed 13,000 Kwh @ `8 per Kwh to run the machines for production.
(iii) Diesels consumed 2,000 litres @ `93 per litre to run power generator used as alternative or
backup for power cuts.
(iv) Wages & salary paid – `6,40,00,000
(v) Gratuity & leave encashment paid – `64,20,000
(vi) Hiring charges paid for HEMM- `30,00,000. HEMM are directly used in production.
(vii) Hiring charges paid for cars used for official purpose – `66,000
(viii) Reimbursement of diesel cost for the cars – `22,000
(ix) The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the time of
dispatch) – `12,000
(xi) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at the time
of dispatch) and factory premises is `8,000 and `18,000 per month respectively.
(xii) TA/ DA and hotel bill paid for sales manager- `36,000
(xiii) The company has 1,800 employees works for 26 days in a month.

You are asked to calculate the followings:

Question – 1
What is the amount of prime cost incurred during the last month:
(a) `7,54,20,000
(b) `7,57,10,000
(c) `7,56,06,000
(d) `7,87,10,000

Question – 2
What is the total and per shift cost of production for last month:
(a) `7,87,10,000 and `336.37 respectively
(b) `7,87,10,000 and `1,681.84 respectively
(c) `7,87,28,000 and `1,682.22 respectively
(d) `7,87,28,000 and `336.44 respectively

Question – 3
What is the value of administrative cost incurred during the last month:
(a) `92,400
(b) `88,000
(c) `1,48,400
(d) `1,44,000

Question – 4
What is the value of selling and distribution cost and total cost of sales:
(a) `36,000 & `7,88,76,400 respectively

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(b) `56,000 & `7,88,76,400 respectively

(c) `36,000 & `7,88,72,000 respectively
(d) `56,000 & `7,88,72,000 respectively

Question – 5
What is the value EMS and OMS for the last month:
(a) `1,504.70 & 5 tonnes respectively
(b) `1,367.52 & 5 tonnes respectively
(c) `1,504.70 & 4.37 tonnes respectively
(d) `1,367.52 & 4.37 tonnes respectively

1 2 3 4 5
D C A B A

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JOB & BATCH COSTING - CONCEPTS

1. Job Costing
Ø It is that form of specific order costing under which each job is treated as a cost unit and
costs are accumulated and ascertained separately for each job.
Ø In other words, it is that form of specific order costing which applies where work is
undertaken according to customer’s requirement.
Ø It is generally used in industries where production is not on continuous basis, rather it
is only when order from customers are received according to their specifications e.g.
printing press, repair shop, etc.
Ø In this method cost of each job is computed by preparing the Job Cost Sheet.

2. Batch Costing
Ø It is that form of specific order costing which applies where similar articles are
manufactured in batches either for sale or use within the undertaking.
Ø Each batch of output is a cost unit and is costed separately.
Ø The total batch cost divided by number of units produced in a batch gives cost per unit.
Ø It is generally undertaken in case of pharmaceutical production, shoes, garments, etc.

3. Economic Batch Quantity (EBQ)

It is that batch size at which sum total of ordering cost and carrying cost is minimum.
A×0×*
EBQ = -
@

Where, A = Annual requirement of raw material

S = Set-up cost per batch
C = Carrying cost per unit per annum

0
Number of set-up = (Always round off to next complete value)
T,-9F Z",/-.-E

Total Set-up cost = No. of setup ´ Cost per set-up

T,-9F J",/-.-E
Average quantity =
A
Total carrying cost = Average quantity ´ Carrying cost per unit per annum

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JOB & BATCH COSTING QUESTIONS

Question – 1
The following data presented by the supervisor of a factory for a Job.
`per unit
Direct material 120
Direct wages @ `4 per hour 60
(Department A-4 hrs., B-7hrs, C-2hrs & D-2hrs)
Chargeable Expenses 20
Total 200

Analysis of the Profit and Loss Account for the year ended 31st March 2019
` `
Material used 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 Stores 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:
(i) Prepare a Job Cost Sheet
(ii) Calculate the entire revised cost using the above figures as the base.
(iii) Add 20% profit on selling price to determine the selling price.

Solution
Working Notes:
Overhead recovery rate on overall basis:

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hh,888
Overhead recovery rate = CD,DDD = `3.52
{ |
F

Statement of calculation of recovery rates

Particulars Working Recovery Rate
Dept. A 12,000 `4 per direct labour hour
12,000
8 4 9
Dept. B 6,000 `3 per direct labour hour
8,000
8 4 9
Dept. C 9,000 `3.60 per direct labour
10,000 hour
8 4 9
Dept. D 17,000 `3.40 per direct labour
20,000 hour
8 4 9
Selling exp. As % 90,000 30% of NFC
× 100
of NFC 2,00,000 + 50,000 + 6,000 + 44,000

Statement of calculation of cost and selling price of Job

Particulars Working Amount (`)
Material 120
Wages 60
Chargeable expenses 20
Prime Cost 200
(+) Overheads Dept. A = 4 × 4.00 = 16
Dept. B = 7 × 3.00 = 21
Dept. C = 2 × 3.60 =
7.20
Dept. D = 2 × 3.40 =
6.80 51
GFC\NFC 251
(+) Selling expenses 30% × 251 75.30
Total Cost 326.30
Add: Profit 407.88 ´ 20% 81.58
Selling price 326.30 ÷ 80% 407.88

Question – 2
In a manufacturing company, factory overheads are charged as fixed percentage basis on direct labour
and office overheads are charged on the basis of percentage of factory cost. The following information
are available related to the year ending 31st March:

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Product A Product B
Direct materials `19,000 `15,000
Direct Labour `15,000 `25,000
Sales `60,000 `80,000
Profit 25% on cost 25% on sales price
You are required to find out:
(a) The percentage of factory overheads on direct labour
(b) The percentage of office overheads on factory cost

Solution
Let factory OH % on Direct labour = x
Let administration OH % on net factory cost = y
Statement of Cost
Product A Product B
Sales 60,000 80,000
Profit 12,000 [(60,000 × (25/125)] 20,000 (80,000 × 25%)
Total Cost 48,000 60,000

Statement of Cost
Product A Product B
Direct Material 19,000 15,000
Direct labour 15,000 25,000
Prime cost 34,000 40,000
Factory OHs 150x 250x
NFC/COP/COGS 34,000 + 150x 40,000 + 250x
(+) Admin. OH 340y + 1.5xy 400y + 2.5xy
COS 34,000 + 150x +340y + 1.5xy 40,000 + 250x + 400y + 2.5xy

\34,000 + 150x + 340y + 1.5xy = 48,000 _______(1)

& 40,000 + 250x + 400y + 2.5xy = 60,000 _______(2)
Multiply equation (1) by 2.5 and equation (2) by 1.5 and subtract them, we get
85,000 + 375x + 850y + 3.75xy = 1,20,000
±60,000 ± 375x ± 600y ± 3.75xy = ±90,000
We get,
25,000 + 250y = 30,000
y = 20
Put value of y = 20 in equation (1),

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34,000 + 150x + 340(20) + 1.5x(20) = 48,000

x = 40
Thus, Factory OH % on direct labour = 40% and administration OH % on factory cost = 20%

Question – 3
In a factory following the Job Costing Method, an abstract from the work-in-progress as at 30th June
was prepared as under:
Job No. Materials Direct Labour Labour Factory overheads
` Hours ` applied
115 1,325 400 hrs 800 640
118 810 250 hrs 500 400
120 765 237.5 hrs 475 380
`2,900 `1,775 `1,420
Materials used in July were as follows:
Material requisition no. Job No. Cost (`)
54 118 300
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720
3,535
A summary of labour hours deployed during July is as under:
Job No. Number of hours
Shop A Shop B
115 25 25
118 90 30
120 75 10
121 65 --
124 20 10
275 75
Indirect labour: Waiting for material 20 10
Machine Breakdown 10 5
Idle Time 5 6
Overtime Premium 6 5
316 101
A shop credit slip was issued in July that material issued under Requisition No. 54 was returned back
to stores as being not suitable. A material transfer note issued in July indicated that material issued
under Requisition No. 55 for Job 118 was directed to Job 124.
The hourly rate in shop A per labour hour is `3 per hour while at shop B, it is `2 per hour. The factory
overhead is supplied at the same rate as in June. Job 115, 118 and 120 were completed in July.

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You are asked to compute the factory cost of the completed jobs. It is the practice of the management
to put a 10% on the factory cost to cover administration and selling overheads and invoice the job to
the customer on a total cost plus 20% basis. What would be the invoice price of these jobs?

Solution
Factory cost statement for completed jobs
Month Job No. Material Direct labour Factory OHs Factory cost
June 115 1,325 800 640 2,765
July 115 - 125 100 225
Total 1,325 925 740 2,990
June 118 810 500 400 1,710
July 118 515 330 264 1,109
Total 1,325 830 664 2,819
June 120 765 475 380 1,620
July 120 665 245 196 1,106
Total 1,430 720 576 2,726

Invoice price of job

Job No. 115 (`) 118 (`) 120 (`)
Factory cost 2,990.00 2,819.00 2,726.00
Administration and selling OHs @ 299.00 281.90 272.60
10% of factory cost
Total cost 3,289.00 3,100.90 2,998.60
Profit (20% of total cost) 657.80 620.18 599.72
Invoice Price 3,946.80 3,721.08 3,598.32
Indirect labour costs have been included in the factory overhead which has been recovered as 80% of
the labour cost.

Question – 4
AUX ltd. has an annual demand from a single customer for 60,000 Covid-19 Vaccines. The customer
prefers to order in the lot of 15,000 vaccines per order. The production cost of vaccine is `5,000 per
vaccine. The set-up cost per production run of Covid-19 vaccines is `4,800. The carrying cost is `12
per vaccine per month.
You are required to:
(i) Find the most Economical Production Run
(ii) Calculate the extra cost that company incurs due to production of 15,000 vaccines in a batch.

Solution

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(i) Annual demand = A = 60,000 vaccines

Set-up cost per run = S = `4,800
Carrying cost per unit per annum = C = `12 × 12 = `144
C×0×} C×:8,888×h,?88
Economic Batch Quantity = / =/ = 2,000 vaccines
B >hh

(ii) Statement of Cost

Particulars Batch size = 2,000 vaccines Batch size = 15,000
vaccines
Set-up cost :8,888 :8,888
× 4,800 = 1,44,000 × 4,800 = 19,200
C,888 >@,888

Carrying cost C,888 >@,888

× 144 = 1,44,000 × 144 = 10,80,000
C C
Total Cost 2,88,000 10,99,200
Extra cost = `10,99,200 – `2,88,000 = `8,11,200

Question – 5
A jobbing factory has undertaken to supply 300 pieces of a component per month for the ensuing six
months. Every month a batch order is opened against which materials and labour hours are booked at
actual. Overheads are levied at a rate per labour hour. The selling price contracted for is `8 per piece.
From the following data calculate the cost and profit per piece of each batch order and overall position
of the order for 1,800 pieces.
Month Batch output Material cost Direct wages Direct labour
(` ) (`) hours
January 310 1150 120 240
February 300 1140 140 280
March 320 1180 150 280
April 280 1130 140 270
May 300 1200 150 300
June 320 1220 160 320
The other details are:
Month Chargeable Direct labour
expenses (`) hours
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

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Solution
Statement of Cost and Profit per batch
Particulars Jan. Feb. March April May June Total
Batch output (in units) 310 300 320 280 300 320 1,830
Sale value (`) 2,480 2,400 2,560 2,240 2,400 2,560 14,640
Material cost (`) 1,150 1,140 1,180 1,130 1,200 1,220 7,020
Direct wages (`) 120 140 150 140 150 160 860
Chargeable expenses* (`) 589 687 687 662 736 785 4,146
Total cost (`) 1,859 1,967 2,017 1,932 2,086 2,165 12,026
Profit per batch (`) 621 433 543 308 314 395 2,614
Total cost per unit (`) 6.00 6.56 6.30 6.90 6.95 6.77 6.57
Profit per unit (`) 2.00 1.44 1.697 1.10 1.05 1.23 1.43
Overall position of the order for 1,200 units
Sales value of 1,800 units @ `8 per unit `14,400
Total cost of 1,800 units @ `6.57 per unit `11,826
Profit `2,574
y".*) Bx*&2'*4)' ~p('-/'/ i8,>h8
*Chargeable Expenses Rate = = C?,:88 = `2.452448 per labour hour
y".*) k9&'+. )*4"3& x"3&/
It is assumed that recovery rate is based on overall 6 months period. Other way is to compute
recovery rate for each month and then compute the cost.

Question – 6
Language Achievers, a renowned institute specializing in TOEFL preparation, has secured a
spacious hall for 20,000 on weekly basis with a seating capacity of 250 students. The instructor,
highly qualified and experienced, is compensated generously with an honorarium of 1,500 per
lecture. Additionally, he receives reimbursement for travel expenses of ₹200 per day along with
refreshments costing 1,500 per week to ensure his comfort and focus during teaching sessions.
Administrative and miscellaneous expenses, covering essential utilities and materials are, 500 per
week. Language Achievers has meticulously planned its curriculum, scheduling batches of 2 lectures
per day, 5 days a week for 30 weeks, ensuring comprehensive coverage of the TOEFL syllabus.
Required:
(i) Calculate the total cost per batch.
(ii) Determine the minimum fee per student in a batch to cover costs, if the batch is fully occupied.
(iii) Calculate the fee to be charged from. each student if batch is 80% filled and institute aims to
achieve a profit margin of 25% on the fee.

Solution
(i) Calculation of Total cost per batch
Particulars Amount (₹)
Hall Charges (₹20,000 × 30) 6,00,000

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Honorarium of instructor (₹1,500 × 2 × 5 × 30) 4,50,000

Reimbursement of travel expenses (₹200 × 5 × 30) 30,000
Refreshment (₹1,500 × 30) 45,000
Administrative and miscellaneous expenses (₹500 × 30) 15,000
Total Cost 11,40,000
No. of Batches 1
Total cost per batch 11,40,000
(ii) Minimum fee per student in a batch to cover costs
!"#$%&'"(#&)*+&,$#'- !!"#$"$$$
= = = ₹4,560
.#/0*1#(&)*+&,$#'- %&$
(iii) Number of Students if batch is 80% filled
= 250 students × 80% = 200 students
Total Fee to be recovered to achieve 25% profit margin on the fee
= ₹11,40,000 + (₹11,40,000 × 1/4th of sales or 1/3rd of the cost) = ₹15,20,000
Fee per student = !"#$%&'((&F(*&+$#,- = !"#$%#%%% = ₹7,600
.#/0(1#2&F(*&+$#,- $%%

Question – 7
A FMCG company has an annual demand of 50,000 units for its specific product whose setting up
cost per batch is `10,000 and carrying cost per unit per month is `1. What is the Economic Batch
Quantity?
(a) 7,071 units (b) 10,000 units
(c) 12,641 units (d) 9,129 units

Question – 8
ABC Manufacturing allocates its factory overhead costs based on machine hours. The total estimated
overhead cost for the year is `6,00,000, and the company expects to use 30,000 machine hours. During
the year, job A used 300 machine hours. What amount of overhead costs should be allocated to this
job?
(a) `4,000 (b) `6,000
(c) `10,000 (d) `8,000

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COST ACCOUNTING SYSTEM - CONCEPTS

1. Cost Accounting System
Cost Accounting System

Both Cost and Financial

Integrated System Accounts are prepared Only 1 P&L Account
together

Cost Accounts
(Costing P&L A/c)
Cost & Financial Accounts
Non-Integrated System
are prepared separately
Financial Accounts
(P&L A/c)

2. Various ledgers to be prepared:

Stores Ledger Control Account
Par3culars ` Par3culars `
To Balance b/d (opening stock) - By CLC A/c (Purchase return) -
To CLC A/c (Purchase) - By WIP LC A/c (Mat. Issued) -
To CLC A/c (Carriage inward) - By Prod. OH Control A/c (IM) -
To WIP LC A/c (Material Return) - By Admin. OH Control A/c (IM) -
To Cosang P&L A/c (Ab. Gain) - BY S&D OH Control A/c (IM) -
By Cosang P&L A/c (Ab. Loss) -
By Balance c/d (Closing stock) -
- -

Wages Control Account

Par3culars ` Par3culars `
To CLC A/c (wages incurred) - By WIP LC A/c (DW) -
By Prod. OH Control A/c (IW) -
By Admin. OH Control A/c (IW) -
BY S&D OH Control A/c (IW) -
By Cosang P&L A/c (Ab. Idle ame) -
- -

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OHs Control Account

Par3culars ` Par3culars `
To CLC A/c (OHs incurred) - By WIP LC/FGLC/COS A/c -
To SLC A/c (IM) - (OHs recovered) -
To Wages Control A/c (IW) - By Bal. C/d or Cosang P&L A/c -
To Bal. C/d or Cosang P&L A/c - (Under recovered)
(Over Recovered)
- -

Work-in-Progress Ledger Control Account

Par3culars ` Par3culars `
To Bal. b/d (Opening WIP) - By FGLC A/c (NFC) -
To SLC A/c (RM consumed) - By Cosang P&L A/c (Ab. Loss) -
To Wages control A/c (DW) - By Bal. S/c (Cl. WIP) -
To Prod. OH Control A/c -
(OHs recovered) -
To FGLC A/c (FG Return)
- -

Finished Goods Ledger Control Account

Par3culars ` Par3culars `
To Balance b/d (Opening FG) - By COS A/c (COGS) -
To WIP LC A/c (NFC) - By Cosang P&L A/c (Ab. Loss) -
To Admin. OH Control A/c - By WIP LC A/c (FG Return) -
(Admin. OH related to Producaon) By Balance C/d (Closing FG) -
- -

Cost of Sales Account

Par3culars ` Par3culars `
To FGLC A/c (COGS) - By Cosang P&L A/c (COS) -
To Admin. OH Control A/c - By FGLC A/c (Goods return) -
To S&D OH Control A/c -
- -

Cos3ng P&L Account

Par3culars ` Par3culars `
To Cost of Sales A/c (COS) - By CLC A/c (Sales) -
To CLS A/c (Sales return) - By Abnormal profit -
To Abnormal loss - By CLC A/c (Loss) -
To CLC A/c (Profit) -
- -

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3. Reasons for Reconciliation

(A) Items shown only in financial accounts
(B) Items shown only in cost accounts
(C) Under or over recovery of overheads in cost accounts
(D) Different basis for valuation of stock
(E) Basis of Depreciation

Format of reconciliation statement

(When starting point is taken as profit as per P&L accounts)
Particulars (+) Amount (-) Amount
Profit as per P&L Accounts ü -
(+) Expenses in P&L only ü -
(-) Income in P&L only - ü
(+) Appropriations in P&L only ü -
(+) Under recovered OHs in cost accounts ü -
(-) Over recovered OHs in cost accounts - ü
(+) Under valued opening stock in cost accounts ü -
(-) Over valued opening stock in cost accounts - ü
(+) Over valued closing stock in cost accounts ü -
(-) Under valued closing stock in cost accounts - ü
(-) Expenses in cost accounts only - ü
Total ü ü
Profit as per cost Account ü -
*In case of loss, the amount will appear in minus column

4. Points to Remember (PTR)

(A) In case of no information then use non-integrated method
(B) Treatment of Overheads
Transfer to P&L A/c – If due to factory inefficiency
Show as Balance c/d - If seasonal nature
(C) Normal loss is transferred to Production OH control A/c
(D) If question asked to prepare reconciliation and there is no additional item then under-
over recovery of overhead is carried forward to prepare reconciliation.
(E) Administration overheads is assumed to be related to production if question is silent.

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COST ACCOUNTING SYSTEM QUESTIONS

Question – 1
Journalize the following transactions assuming the cost and financial accounts are integrated:
Particulars Amount (`)
Direct Materials issued to production `5,58,000
Allocation of Wages (Indirect) `7,50,000
Factory Overheads (Over absorbed) `2,25,000
Administrative Overheads (Under absorbed) `1,55,000
Deficiency found in stock of Raw material (Normal) `2,00,000

Solution
Journal Entries
Particular Dr. (`) Cr. (`)
(i) WIP Ledger Control A/c Dr. 5,88,000
To Stores Ledger Control A/c 5,88,000
(ii) Factory Overhead Control A/c Dr. 7,50,000
To Wages Control A/c 7,50,000
(iii) Factory Overheads Control A/c Dr. 2,25,000
To Costing P&L A/c 2,25,000
(iv) Costing P&L A/c Dr. 1,55,000
To Administrative Overheads Control A/c 1,55,000
(v) Factory Overheads Control A/c Dr. 2,00,000
To Stores Ledger Control A/c 2,00,000

Question – 2
The following balances were extracted from a Company’s ledger as on 30th June, 2018
Debit (`) Credit (`)
Raw material 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
9,13,250 9,13,250
The following transactions took place during the quarter ended 30th September, 2018:
`
Factory overheads – allocated to work-in-progress 1,36,350
Goods finished – at cost 13,76,200
Raw material purchased 12,43,810

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Direct wages – allocated to work-in-progress 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 materials losses – inventory audit 6,000
Work-in-progress rejected (with no scrap value) 12,300
Customer’s returns (at cost) of finished goods 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c

Solution
Raw Material Control A/c
To Balance B/d 2,82,450 By General Ledger Adj. A/c 27,200
To General Ledger Adj. A/c 12,43,810 By Work in Progress Control A/c 13,60,430
By Costing P&L A/c (Loss) 6,000
By Balance c/d (Balance figure) 1,32,630
15,26,260 15,26,260
Work in Progress Control A/c
To Balance b/d 2,38,300 By Finished goods Control A/c 13,76,200
To Raw material control A/c 13,60,430 By Costing P&L A/c 12,300
To Wages control A/c 2,56,800 By Balance c/d (Balancing 6,03,380
To Factory OH control A/c 1,36,350 Figure)
19,91,880 19,91,880
Finished Stock Ledger Control A/c
To Balance b/d 3,92,500 By Cost of Sales A/c 14,56,500
To Work in Progress Control A/c 13,76,200 By Balance c/d (Bal. Fig.) 3,58,100
To General Ledger Adjustment A/c 45,900
18,14,600 18,14,600
General Ledger Adjustment A/c
To Bal. c/d (Bal. fig.) 25,68,910 By Balance B/d 9,13,250
To Raw material control A/c 27,200 By Raw material control a/c 12,43,810
By Wages control A/c 2,56,800
By Factory OH control A/c 1,36,350
By Finished Goods Control A/c 45,900
9,55,000 25,96,110

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Question – 3
A company operates on historic job cost accounting system, which is not integrated with the financial
accounts. At the beginning of a month, the opening balances in cost ledger were:
` (in lakhs)
Stores Ledger Control Account 80
Work-in-progress Control Account 20
Finished goods Control Account 430
Building Construction Account 10
Cost Ledger Control Account 540
During the month, the following transactions took place:
Materials - Purchased 40
Issued to production 50
Issued to maintenance 6
Issued to building construction 4
Wages - Gross wages paid 150
Indirect wages 40
For building construction 10
Works Overheads - Actual amount incurred (excluding items shown above)160
Absorbed in building construction 20
Under absorbed 8
Royalty paid 5
Selling, distribution and administration overheads 25
Sales 450
At the end of the month, the stock of raw material and work-in-progress was `55 lakhs and `25 lakhs
respectively. The loss arising in the raw material account is treated as factory overheads. The building
under construction was completed during the month. Company’s gross profit margin is 20% on sales.
Prepare the relevant control accounts to record the above transactions in the cost ledger of the company.

Solution
Stores Ledger Control A/c (SLC)
To Balance b/d 80 By Work-in-progress 50
To Cost Ledger Control (Purchased) 40 By Works Overhead 6
By Building Construction 4
By Factory Overhead (B/F) 5
By Balance c/d 55
120 120
Work in Progress Control A/c (WIP)
To Balance b/d 20 By Finished Goods Ledger Control 333
To Stores Ledger Control 50 (B/F)

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To Wages Control 100 By Balance c/d 25

To Factory Overhead 183
To Cost Ledger Control 5
(Royalty) (Note 2)
358 358
Finished Goods Control A/c (FGC)
To Balance b/d 430 By Cost of Sales (Note 3) 360
To WIP (Finished Goods Produced in By Balance c/d 403
the Month) 333
763 763
Building Construction A/c
To Balance b/d 10 By Cost Ledger Control 44
To Stores Ledger Control 4 (Capitalized as Building)
To Wages Control 10
To Works Overheads 20
44 44
Cost Ledger Control A/c (CLC)
To Building Construction 44 By Balance b/d 540
To Costing P & L A/c 450 By Stores Ledger Control 40
To Balance c/d 483 By Wages Control A/c 150
By Work Overhead 160
By WIP (Royalty) 5
By SDA Overheads 25
By Costing P & L A/c 57
977 977
Factory/Works Overhead A/c
To Stores Ledger Control 5 By Building Construction 20
To Wages Control 40 By WIP (B/F) 183
To Cost Ledger Control 160 By Costing P & L A/c – Under 8
To Stores Ledger Control 6 Absorption (Note – 1)
211 211
Wages Control A/c
To Cost Leger Control (Gross Wages) 150 By WIP (Direct Wages) (B/F) 100
By Factory Overheads (Indirect Wages)
By Building Construction A/c 40
10
150 150

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S & D Admin. Overheads Control A/c

To Cost Ledger Control 25 By Cost of Sales 25
25 25
Cost of Sales A/c
To Finished Goods Ledger Control 360 By Costing P & L A/c 385
To SDA Overheads 25
385 385
Costing P & L A/c
To Cost of Sales 385 By Cost Ledger Control Sales 450
To Factory Overhead 8
To Cost Ledger Control Net Profit 57
450 450
Trial Balance at the End of the Month
Stores Ledger Control 55
Work in Progress 25
Finished Goods Ledger Control 403
Cost Ledger Control 483
Total 483 483
Note:
1. Work Overhead Under-Absorbed: There are 3 methods of treatment of under-absorption of works
overheads. There was no opening balance in works overheads Ac Under-absorption of `8 lakhs is
4% of `205 lakhs total. It is a negligible amount. Adoption of supplementary rate is not required.
Hence, it has been transferred to the debit of costing P & L A/c.
2. Royalty Paid `5 Lakhs: Assumed that it has been paid on the basis of production. Then it is a
direct expense which is port of prime cost. Hence, it has been debited to WIP control A/c.
3. Sales 450
Less: G. P. 20% on sales 90
Cost of sales 360

Question – 4
A fire destroyed some accounting records of a company. You have been able to collect the following
from the spoilt papers/records and as a result of consultation with accounting staff in respect of
January:
(i) Incomplete Ledger Entries
Raw Material A/c
` `
Beginning Inventory 32,000

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Work in Progress A/c

` `
Beginning Inventory 9,200 Finished Stock 151000

Creditors A/c
` `
Closing Balance 19,200 Opening Balance 16400

Manufacturing Overheads A/c

` `
Amount Spent 29,600

Finished Goods A/c

` `
Opening Inventory 24,000 Closing Inventory 30000
(ii) Additional Information:
(a) The cash book showed that `89,200 have been paid to creditors for raw material
(b) Ending inventory of work in progress included material `5,000 on which 300 direct labour
hours have been booked against wages and overheads
(c) The job card showed that workers have worked for 7,000 hours. The wage rate is `10 per
labour hour.
(d) Overhead recovery rate was `4 per direct labour hour.
You are required to complete the above accounts in the cost ledger of the company.

Solution
Raw Material Control A/c
To Balance b/d 32,000 By Work-in-progress 53,000
To Creditors 92,000 By Balance c/d (B/F) 71,000
1,24,000 1,24,000
Work in Progress Control A/c (WIP)
To Balance b/d 9,200 By Finished Goods Ledger Control 1,51,000
To Raw Material Control (B/F) 53,000 By Balance c/d
To Wages Control (7,000 × 10) 70,000 Material 5,000
To Manufacturing Overhead 28,000 Wages (300×10) 3,000
Overheads (300×4) 1,200 9,200
1,60,200 1,60,200

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Creditors A/c
To Bank 89,200 By Balance b/d 16,400
To Balance c/d 19,200 By Material (Purchase) (B/F) 92,000
1,08,400 1,08,400
Manufacturing Overheads A/c
To Amount Spent 29,600 By Work-in-progress (7,000×4) 28,000
By P&L (B/F) 1,600
29,600 29,600
Finished Goods A/c
To Opening inventory 24,000 By Cost of Sales (B/F) 1,45,000
To Work-in-progress 1,51,000 By Closing Inventory 30,000
1,75,000 1,75,000

Question – 5
R Ltd. showed a Net profit of `3,60,740 as per their cost accounts for the year ended 31st March, 2021.
The following information was revealed as a result of scrutiny of the figures from the both sets of
accounts.
Sr. No. Particulars (`)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600
Required to prepare a reconciliation statement showing the profit as per financial records.

Solution
Reconciliation Statement
Particulars + (`) - (` )
Profit as per cost accounts 3,60,740 -
Add: Over recovered selling OHs 10,250 -
Less: Over valued closing stock in cost accounts - 7,300
Add: Rent received credited in financial accounts 5,450 -
Less: Bad Debts provided in financial accounts - 3,250
Less: Income tax provided in financial accounts - 15,900
Less: Loss on sale of capital assets in financial accounts - 5,800
Less: Under recovered administration overheads in cost - 3,600
3,76,440 35,850

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Profit as per financial account 3,40,590 -

Question – 6
The following information has been obtained from financial accounting and cost accounting records.
Financial Accounting (`) Cost Accounting (`)
(i) Factory overhead 94,750 90,000
(ii) Administrative overhead 60,000 57,000
(iii) Selling overhead 55,000 61,000
(iv) Opening stock 17,500 22,500
(v) Closing stock 12,500 15,000
Required: Indicate under-recovery and over-recovery and their effects on cost accounting profit.
[Note: You are not required to prepare reconciliation statement]

Solution
Financial Cost Difference Under/Over Effect on Net effect
Accounting Accounting ( )
` recovery cost on cost
(` ) (` ) accounting accounting
profit profit*
Factory 94,750 90,000 4,750 Under- Increased To be
overheads recovery reduced or
deducted
Administrative 60,000 57,000 3,000 Under- Increased To be
overheads recovery reduced or
deducted
Selling 55,000 61,500 -6,500 Over- Decreased To be
overheads recovery added
Opening stock 17,500 22,500 -5,000 Over Decreased To be
valuation added
Closing stock 12,500 15,000 -2,500 Over Increased To be
valuation reduced or
deducted
*Taking cost accounting profit as base

Question – 7
The profit and loss account of ABC Ltd. for the year ended 31st March, 2021 is given below:
Profit and Loss Account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales 15,00,000
To Direct Wages 3,50,000 (15,000 units)
To Factory overheads 2,60,000 By Dividend 9,000
received
To Administrative overheads 1,05,000

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To Selling overheads 85,000

To loss on sale of 2,000
investments
To Net Profit 57,000
15,09,000 15,09,000
• Factory overheads are 50% fixed and 50% variable
• Administrative overheads are 100% fixed
• Selling overheads are completely variable
• Normal production capacity of ABC Ltd. is 20,000 units
• Indirect expenses are absorbed in the cost accounts on the basis of normal production capacity.
• Notional rent of own premises charged in cost accounts is amounting to `12,000.
You are required to:
(i) Prepare a cost sheet and ascertain the Profit as per cost Records for the year ended 31st March,
2021.
(ii) Reconcile the profit as per Financial records with Profit as per Cost Records.

Solution
(i) Cost Sheet
Particulars Amount
Raw material consumed 6,50,000
Direct wages 3,50,000
Prime Cost 10,00,000
C,:8,888×@8%
Add: Fixed factory overheads 8 × 15,0009 97,500
C8,888
Add: Variable factory overheads (2,60,000 × 50%) 1,30,000 2,27,500
Add: Notional rent of own premises 12,000
GFC/NFC/COP/COGS 12,39,500
>,8@,888 78,750
Add: Administrative overheads 8 C8,888 × 15,0009
Add: selling & Distribution overheads 85,000
Cost of Sales 14,03,250
Add: Profit (Balancing figure) 96,750
Sales 15,00,000

(ii) Reconciliation Statement

Particulars + (`) - (` )
Profit as per P&L Account 57,000 -
Add: Under recovered factory overheads (2,60,000 – 32,500 -
2,27,500)
Less: Notional rent of own premises - 12,000

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Add: Under recovered administrative overheads (1,05,000 – 26,250 -

78,750)
Add: Loss on sale of investment 2,000 -
Less: Dividend received - 9,000
Total 1,17,750 21,000
Profit as per Cost Account 96,750 -

Question – 8
The financial books of a company reveal the following data for the year ended 31st March, 2021:
Particulars `
Opening Stock:
Finished goods 625 units 53,125
Work-in-process 46,000
01.04.2020 to 31.03.2021
Raw materials consumed 8,40,000
Direct labour 6,10,000
Factory overheads 4,22,000
Administration overheads (production related) 1,98,000
Dividend paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest received 38,000
Rent received 46,000
Sales 12,615 units 22,80,000
Closing stock: Finished goods 415 units 45,650
Work-in-process 41,200
The cost records provide as under:
Ø Factory overheads are absorbed at 70% of direct wages
Ø Administration overheads are recovered at 15% of factory cost
Ø Selling and distribution overheads are charged at `3 per unit
Ø Opening stock of finished goods is valued at `120 per unit
Ø The company values work-in-process at factory cost for both Financial and Cost Profit Reporting.

Required:
(a) Prepare a statement for the year ended 31st March, 2021. Show
Ø The profit as per financial records
Ø The profit as per costing records
(b) Prepare a statement reconciling the profit as per costing records with the profit as per Financial
Records.

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Solution
(a) Statement of Profit as per Financial Records
Particulars ` Particulars `
To Opening stock of Finished goods 53,125 By Sales 22,80,000
To work-in-process 46,000 By Closing stock of Finished 45,650
Goods
To Raw materials consumed 8,40,000 By Work-in-process 41,200
To Direct labour 6,10,000 By Rent received 46,000
To Factory overheads 4,22,000 By Interest received 38,000
To Administration overheads 1,98,000
To Selling & Distribution overheads 72,000
To Dividends paid 1,22,000
To Bad Debts 18,000
To Profit 69,725
24,50,850 24,50,850
Units produced = Units sold + Closing stock – opening stock = 12,615 + 415 – 625 = 12,405

Statement of Profit as per Costing Records

Particulars `
Raw material consumed 8,40,000
Direct labour 6,10,000
Prime cost 14,50,000
Factory overheads (6,10,000×70%) 4,27,000
Factory cost 18,77,000
Add: Opening WIP 46,000
Less: Closing WIP (41,200)
Factory cost of goods purchased 18,81,800
Add: Administration overheads (15% × 18,81,800) 2,82,270
Cost of Production 21,64,070
Add: Opening stock (625 × 120) 75,000
C>,:h,8i8 (72,397)
Less: Closing stock 8 × 4159
>C,h8@

Cost of goods sold 21,66,673

Selling and distribution overheads (12,615 × 3) 37,845
Cost of sales 22,04,518
Profit (Bal. fig.) 75,482
Sales 22,80,000

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(b) Reconciliation Statement

Particulars + (`) - (` )
Profit as per cost accounts 75,482 -
Add: Over absorbed administration overheads 84,270 -
Add: Over-valued opening stock of finished 21,875 -
goods
Add: Interest received 38,000 -
Add: Rent received 46,000 -
Add: Factory overheads over absorbed 5,000 -
Less: Selling & distribution overheads under - 34,155
recovered
Less: closing stock overvalued - 26,747
Less: Dividend - 1,22,000
Less: Bad debts - 18,000
2,70,627 2,00,902
Profit as per financial accounts 69,725 -
Note – It is assumed that administration overheads are related to production.

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SERVICE COSTING - CONCEPTS

1. Service Costing
It can be internally or externally.
Industries will have high fixed cost than variable cost
Requires huge investment and comparatively less variable cost

2. Cost Unit
The terms in which costs are expressed.
Where only one unit is
Single Cost Unit involved e.g. kg, dozen
etc.
Cost Unit
Where more than 1 units
Multiple or Composite are involved
Cost Unit e.g. passenger-km, ton-
km etc.
3. Cost Unit
(A) Absolute Ton-km = Actual kms ´ Actual tons
(B) Commercial Ton-km = Actual kms ´ Average tons

4. Effective Cost Unit = Total units – Normal loss units

5. Total Cost

Fixed or Standing Charges E.g. rent, insurance, salary,

depreciation (if fixed) etc.
Total Cost

Variable or Running E.g. petrol/oil, lubricants,

depreciation (if variable)
Charges
etc.

E.g. tyres and tubes, repair

Maintenance & maintenance, servicing
cost etc.

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C(-,8 9(6-
6. Cost Per Unit =
:))%9-.1% 9(6- "/.-

7. Points To Remember (PTRs)

(A) Petrol, oil and similar charges are always on the basis of actual km travel

(B) Treatment of Depreciation

Life based on years Fixed in nature

Depreciation
Life based on some
Variable in nature
variable base e.g. Kms

(C) Treatment of Distance

Distance travel =
20 km trip 20 kms
Mr. X travels

20 km round trip Distance travel =

40 kms

(D) Calculation of Service Cost

Service cost of Rs. 4,000 a2er every 3000 kms.
If actual kms travel; = 3,500; If actual kms travel; = 8,500;
No. of service = 3500/3000 = 1.17 or 1 No. of service = 8500/3000 = 2.83 or 2
Cost = 4000 ´ 1 = 4,000 Cost = 4000 ´ 2 = 8,000

(E) In case of different charges for different categories of service, use the concept of
equivalent unit of services.

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SERVICE COSTING – QUESTIONS

Question – 1
Mr. S owns a bus which runs according to the following schedule:
(a) Delhi to Panchkula and back, the same day
Distance covered: 150 kms one way
Number of days run each month: 8
Seating capacity occupied 90%
(b) Delhi to Mathura and back, the same day
Distance covered: 120 kms one way
Number of days run each month: 10
Seating capacity occupied 85%
(c) Delhi to Alwar and back, the same day
Distance covered: 270 kms one way
Number of days run each month: 6
Seating capacity occupied 100%
(d) Following are the other details:
Cost of the bus `6,00,000
Salary of the driver `2,800 p.m.
Salary of the conductor `2,200 p.m.
Salary of the part-time accountant `200 p.m.
Insurance of the bus `4,800 p.a.
Diesel consumption 4 kms per litre `6 per litre
Road tax `1,500 p.a.
Lubricant oil `10 per 100 kms
Permit fee `315 p.m.
Repairs and maintenance `1,000 p.m.
Depreciation of the bus @ 20%p.a.
Seating capacity of the bus 50 persons
Passenger tax is 20% of the total takings. Calculate the bus fare to be charges from each passenger to
earn a profit of 30% on total takings. The fares are to be indicated per passenger for the journeys:
(i) Delhi to Panchkula; (ii) Delhi to Mathura; and (iii) Delhi to Alwar

Solution
Calculation of Passenger Kms
No. × Kms × Passenger = Passenger Kms
Delhi – Panchkula 1 × 150 × 2 × 8 × 50 × 90% = 1,08,000
Delhi – Mathura 1 × 120 × 2 × 10 × 50 × 85% = 1,02,000

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Delhi – Alwar 1 × 270 × 2 × 6 × 50 × 100% = 1,62,000

Total 3,72,000
Kms travel = (1 × 150 × 2 × 8) + (1 × 120 × 2 × 10) + (1 × 270 × 2 × 6) = 8,040 kms
Statement of Operating Cost
Particulars Amount (`)
Fixed Cost:
Depreciation (6,00,000 × 20% × 1/12) 10,000
Driver salary 2,800
Conductor Salary 2,200
Accountant salary 200
Insurance (4,800 × 1/12) 400
Road Tax (1,500 × 1/12) 125
Permit Fee 315
Total Fixed Cost (A) 16,040
Variable Cost:
Diesel [8,040 × (6/4)] 12,060
Lubricating oil [8,040 × (10/100)] 804
Total Variable Cost (B) 12,864
Maintenance Cost:
Repair & Maintenance 1,000
Total Maintenance Cost (B) 1,000
Total Cost (A + B + C) 29,904
(+) Passenger tax (59,808 × 20%) 11,962
(+) Profit (59,808 × 30%) 17,942
Total Takings (29,904 ÷ 50%) 59,808
Effective Passenger km 3,72,000
Takings per effective passenger km 0.16
Fares per passenger for the journey
Delhi to Panchkula = 150 × 0.16 = `24
Delhi to Mathura = 120 × 0.16 = `19.20
Delhi to Alwar = 270 × 0.16 = `43.20

Question – 2
SK is a public school having five buses each plying on different directions for the transport of its
school students. In view of a large number of students available of the bus service the buses work two
shifts daily both in the morning and in afternoon. The buses are garaged in the school. The work load
of the students has been so arranged that in the morning the first trip picks up the senior students and
the second trip plying an hour later picks up the junior students. Similarly, in the afternoon the first
trip picks the junior students and an hour later the second trip takes the senior student home.

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The distance travelled by each bus one way is 8 kms. The school works 25 days in a month and remains
closed for the vacation in May, June and December. Bus fee however is payable by the students for all
the 12 months of the year.
The details of expenses for a year are as under:
Drivers’ salary `450 per month per driver
Cleaners’ salary `350 per month
(Salary payable for 12 months and one cleaner employed for all the five buses)
License fee, taxes etc. `860 per bus per annum
Insurance `1,000 per bus p.a.
Repairs and maintenance `3,500 per bus p.a.
Purchase price of bus (life 12 years) `1,50,000 each
Scrap value `30,000
Diesel cost `2.00 per litre
Each bus gives an average mileage of 4 km per liter of diesel.
Seating capacity of each bus is 50 students. The seating capacity is fully occupied during the whole
year. Students picked up and dropped within a range upto 4 km of distance from the school are
charged half fare and fifty percent of students travelling in each trip are in this category. Ignore
interest since the charges are to be based on average cost.
You are required to:
(a) Prepare a statement showing the expenses of operating a single bus and the fleet of five buses
for a year.
(b) Work out the average cost per student per month in respect of
(i) Students coming from a distance of upto 4 km from the school and
(ii) Students coming from a distance of beyond 4 km from the school
Solution
(a) Statement of Cost
Particulars 1 bus 5 buses
Driver salary 450 × 12 = 5,400 5,400 × 5 = 27,000
Cleaner salary 4,200 ÷ 5 = 840 350 × 12 = 4,200
License etc. 860 860 × 5 = 4,300
Insurance 1,000 1,000 × 5 = 5,000
Repair & Maintenance 3,500 3,500 × 5 = 17,500
Depreciation (1,50,000 – 30,000)÷12 = 10,000 10,000 × 5 = 50,000
Diesel (w.n. – 1) 7,200 7,200 × 5 = 36,000
Total 28,800 1,44,000
Working note 1
Number of round trips in a day = 8
Total kms in a day = 8 × 8 = 64

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Total kms per annum = 64 × 25 × 9 = 14,400

Diesel cost per annum per bus = 14,400 × (2/4) = `7,200
(b) Number of students from whom bus fee is receivable = 100
Half fee students per bus = 100 × 50% = 50
Full fee students per bus = 100 × 50% = 50
Full fee students equivalent to half fee students = 50 × 2 = 100
Total equivalent half fee students = 50 + 100 = 150
Total cost per bus per annum = `28,800
Total cost per bus per month = 28,800 ÷ 12 = `2,400
Total cost per month per half fee students = 2,400 ÷ 150 = `16
Total cost per month per full fee students = 16 × 2 = `32

Question – 3
A company is considering three alternative proposals for conveyance facilities for its sales personnel
who have to do considerable travelling, approximately 20,000 kms every year. The proposal are as
follows:
(i) Purchase and maintain its own fleet of cars. The average cost of a car is `1,00,000
(ii) Allow the executive use his own car and reimburse expenses at the rate of `1.60 paise per
kilometer and also bear insurance costs.
(iii) Hire cars from an agency at `20,000 per year per car. The company will have to bear costs of
petrol, taxes and tyres.
The following further details are available:
Petrol `0.60 per km
Repairs and maintenance `0.20 per km
Tyre `0.12 per km
Insurance `1,200 per car per annum;
Taxes `800 per car per annum
Life of the car: 5 years with annual mileage of 20,000 kms
Resale value: `20,000 at the end of the fifth year
Work out the relative costs of three proposals and rank them.
Solution
Particulars Own car Executive car Hire car
Fixed Cost:
Depreciation [(1,00,000 – 20,000) ÷ 5] 16,000 - -
Insurance 1,200 1,200 -
Taxes 800 - 800
Hire charges - - 20,000
Total Fixed cost 18,000 1,200 20,800

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Particulars Own car Executive car Hire car

Kms travel 20,000 20,000 20,000
Fixed cost per km (A) 0.90 0.06 1.04
Variable Cost per km:
Petrol 0.60 - 0.60
Repair & Maint. 0.20 - -
Tyres 0.12 - 0.12
Reimbursement - 1.60 -
Total variable cost per km (B)
Total cost per km (A + B) 1.82 1.66 1.76
Rank III I II

Question – 4
Mr. SK now spends `0.90 per km on taxi for his clients’ work. He is considering two other alternatives,
the purchase of a new nano car or an old innova car. The estimated cost figures are:
Items New Car Old Car
Purchase price 35,000 20,000
Sale price, after 5 years 19,000 12,000
Repairing and servicing, per annum 1,000 1,200
Taxes and Insurance per annum 1,700 700
Petrol consumption per litre 10 km 7 km
Petrol price per litre 3.50 3.50
He estimates that he goes 10,000 km annually. Which of the three alternatives will be cheaper? If his
practice expands and he has to go 19,000 km per annum, what should be his decision? At how many
kms per annum will the cost of the two cars break even and why? Assume petrol only as variable cost.
Ignore interest and income tax.
Solution
Statement of operating cost
Particulars New Car Old Car Taxi
Fixed cost:
Depreciation (35,000–19,000)÷5 = 3,200 (20,000–12,000)÷5 = 1,600 -
Repairs 1,000 1,200 -
Taxes and 1,700 700 -
Insurance
Total Fixed cost (A) 5,900 3,500 -
Variable Cost:
Petrol 10,000 × (3.50/10) = 3,500 10,000 × (3.50/7) = 5,000 -
Fare - - 0.90×10,000 =
9,000

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Total Variable cost (B) 3,500 5,000 9,000

Total cost (A + B) 9,400 8,500 9,000
\ Recommended to purchase old Innova car for travel upto 10,000 kms.
Statement of operating cost
Particulars New Car Old Car Taxi
Total Fixed cost 5,900 3,500 -
Total variable cost 19,000 × (3.50/10)=6,650 19,000 × (3.50/7)=9,500 0.90×19,000 = 17,100
Total cost 12,550 13,000 17,100
\ Recommended to purchase New car for travel upto 19,000 kms.
Let at ‘y’ kms, cost of the two options will become equal.
Total cost of New car = Total cost of Old car
5,900 + (y)(3.5/10) = 3,500 + (y)(3.5/7)
y = 16,000 kms

Question – 5
Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is at distance
of 15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet of lorries having carrying
capacity of 4 tonnes is used to transport coal from the mines. Records reveal that average speed of the
lorries is 40 kms per hour when running and regularly take 15 minutes to unload at the rail hear. At
Mine X average loading time is 30 minutes per load, while at mine Y average loading time is 25
minutes per load.

Additional information:
Drivers’ wages, depreciation, insurance and taxes, etc. `12 per hour
Operated Fuel, oil tyres, repairs and maintenance, etc. `1.60 per km

You are required to prepare a statement showing the cost per tonne kilometer of carrying coal from
each mine ‘X and ‘Y’.

Solution
Calculation of Ton Kms
No. × Kms × Ton = Ton Kms
Plot to X 1 × 15 × 0 = 0
X to plot 1 × 15 × 4 = 60
Total = 60
Kms travel = (1 ×1 5) + (1 × 15) = 30

Calculation of Ton Kms

No. × Kms × Ton = Ton Kms
Plot to Y 1 × 20 × 0 = 0

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Y to Plot 1 × 20 × 4 = 80
Total = 80
Kms travel = (1 × 20) + (1 × 20) = 40

Statement to time (in minutes)

Particulars X Y
Travel time 30×(60/40) = 45 40×(60/40) = 60
Loading time 30 25
Unloading time 15 15
Total time 90 100

Statement of operating cost

Particulars X Y
Fixed cost 90×(12/60) = 18 100×(12/60) = 20
Variable cost 1.60×30 = 48 1.60×40 = 64
Total Cost 66 84
Ton-Kms 60 80
Total cost per ton-km 1.10 1.05

Question – 6
SK Transport Ltd. charges `90 per ton for its 6 tons truck lorry load from city ‘A’ to city ‘B’. The
charges for the return journey are `84 per ton. No concession or reduction in these rates is made for
any delivery of goods at intermediate station ‘C’. In January, the truck made 12 outward journeys for
city ‘B’ with full load out of which 2 ton were unloaded twice in the way at city ‘C’. The truck carried
a load of 8 tons in its return journey for 5 times but once caught by police and `1,200 was paid as fine.
For the remaining trips the truck carried full load out of which all the goods on load were unloaded
once at city ‘C’.
The distance from city ‘A’ to city ‘C’ and city ‘B’ are 140 kms and 300 kms respectively. Annual fixed
cost and maintenance charges are `60,000 and `12,000 respectively. Running charges spent during
January, are `2,944. You are required to find out the cost per absolute ton-km and the profit for
January.
Solution
Calculation of Ton Kms
No. × Kms × Ton = Ton Kms
A to B 10 × 300 × 6 = 18,000
A to C 2 × 140 × 6 = 1,680
C to B 2 × 160 × 4 = 1,280
B to A 5 × 300 × 8 = 12,000
B to C 1 × 160 × 6 = 960

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C to A 1 × 140 × 0 = 0
B to A 6 × 300 × 6 = 10,800
Total = 44,720
Statement of operating cost
Particulars Amount (`)
Fixed charges (60,000 ÷ 12) 5,000
Maintenance charges (12,000 ÷ 12) 1,000
Running charges 2,944
Total Cost 8,944
Ton-Km 44,720
Total cost per ton-km 0.20
Statement of Profit
Particulars Amount (`)
Revenue:
Outward 10 × 6 × 90 = 5,400
2 × 6 × 90 = 1,080
Return 5 × 8 × 84 = 3,360
1 × 6 × 84 = 504
6 × 6 × 84 = 3,024 13,368
Less: Total cost (8,944)
Less: Fine & Penalties (1,200)
Profit 3,224

Question – 7
A transport company has a fleet of three trucks of 10 tonnes, capacity each plying in different directions
for transport of customer goods. The trucks run loaded with goods and return empty. The distance
travelled, number trips made and the load carried per day by each truck are as under:
Truck No. One way No. of trips Load carried per trip
distance (Km) per day per day (tonnes)
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance traveled during the last two years is as under:
Year Total distance Maintenance cost
traveled `
1 1,60,200 46,050
2 1,56,700 45,175
The following are the details of expenses for the last year under review:
Diesel : `10 per litre. Each liter gives 4 km per litre of diesel on
average

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Driver Salary : `2,000 per month

License and taxes : `5,000 per annum per truck
Insurance : `5,000 per annum for all 3 vehicles
Purchase price per truck : `3,00,000, Life 10 years, Scrap value at the end of life \
is `10,000
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:
(a) Prepare an Annual Cost Statement covering the fleet of three vehicles
(b) Calculate the cost per Km run
(c) Determine the freight rate per tonne km to yield a profit of 10% on freight
Solution
Calculation of Ton Kms
Truck No. No. × Kms × Ton = Ton Kms
1 1 × 16 × 4 × 24 × 12 × 6 = 1,10,592
1 1 × 16 × 4 × 24 × 12 × 0 = 0
2 1 × 40 × 2 × 24 × 12 × 9 = 2,07,360
2 1 × 40 × 2 × 24 × 12 × 0 = 0
3 1 × 30 × 3 × 24 × 12 × 8 = 2,07,360
3 1 × 30 × 3 × 24 × 12 × 0 = 0
Total = 5,25,312
Total kms travelled = 1,34,784 kms
(a) Statement of Operating Cost
Particulars Amount (`)
Fixed Cost:
Driver salary (2,000 × 12 × 3) 72,000
License and tax (5,000 × 3) 15,000
Insurance 5,000
(7,88,888w>8,888) 87,000
Depreciation ) × 3*
>8
General overheads 11,084
Total Fixed Cost (A) 1,90,084
Variable Cost:
Diesel [1,34,784 × (10/4)] 3,36,960
Oil & Sundries [1,34,784 × (25/100)] 33,696
Total Variable Cost (B) 3,70,656
Maintenance Cost:

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Particulars Amount (`)

Maintenance Cost (working note – 1) 39,696
Total Maintenance Cost (B) 39,696
Total Cost (A + B + C) 6,00436
Working Note 1
•9$$'&'-+' 9- .".*) +"/. h:,8@8wh@,>i@
Variable maintenance cost per km = •9$$'&'-+' 9- 6,/
= >,:8,C88w>,@:,i88 = `0.25
Fixed maintenance cost = Total cost – Variable cost = 45,175 – (1,56,700)(0.25) = `6,000
Maintenance cost = Fixed cost + variable cost = 6,000 + (1,34,784)(0.25) = `39,696

y".*) +"/. :,88,h7:

(b) Total cost per km = = >,7h,i?h = `4.45
€,/

:,88,h7:
(c) Cost per ton-km 8@,C@,7>C9 = 1.143
Profit per ton-km (1.27 × 10%) = 0.127
Freight per ton-km (1.143 ÷ 90%) = 1.270

Question – 8
SK Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more
beds can be added, if required.
Rent per month - `75,000
Supervisors (2 persons) - `25,000 per month – each
Nurse (4 persons) - `20,000 per month – each
Ward Boys (4 persons) - `5,000 per month – each
Doctors paid `2,50,000 per month – paid on the basis of number of patients attended and the time
spent by them.
Other expenses for the year are as follows:
Repair (Fixed) - `81,000
Food to patients (variable) - `8,80,000
Other services to patients (variable) - `3,00,000
Laundry charges (variable) - `6,00,000
Medicines (variable) - `7,50,000
Other fixed expenses - `10,80,000
Administration expenses allocated - `10,00,000
It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25 beds are
occupied.

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The hospital hired 750 beds at a charge of `100 per bed per day, to accommodate the flow of patients.
However, this does not exceed more than 5 extra beds over and above the normal capacity of 35 beds
on any day.
You are required to:
(a) Calculate profit per paitent day, if the hospital recovers on an average `2,000 per day from
each patient.
(b) Find out breakeven point for the hospital.
Solution
(a) Effective bed days = (150 × 35) + (80 × 25) + 750 = 8,000
Statement of Profit
Particulars Amount (`)
Variable Cost:
Doctor cost (2,50,000 × 12) 30,00,000
Food to patients 8,80,000
Other services to patients 3,00,000
Laundry charges 6,00,000
Medicines 7,50,000
Bed Charges (750 × 100) 75,000
Total Variable Cost (A) 56,05,000
Fixed Cost:
Rent (75,000 × 12) 9,00,000
Supervisor (25,000 × 12 × 2) 6,00,000
Nurse (20,000 × 12 × 4) 9,60,000
Ward boys (5,000 × 12 × 4) 2,40,000
Repair 81,000
Other fixed expenses 10,80,000
Administration expenses 10,00,000
Total Fixed Cost (B) 48,61,000
Total Cost (A + B) 1,04,66,000
Revenue (8,000 × 2,000) 1,60,00,000
Profit 55,34,000
@@,7h,888
Profit per patient day = = `691.75
?,888

(b) Contribution = Revenue – Variable cost = `1,60,00,000 – `56,05,000 = `1,03,95,000

>,87,j@,888
Contribution per patient day = = `1,299.375
?,888
•9p'k +"/. h?,:>,888
Break-even point = B"-.&943.9"- ('& (*.9'-. k*‚ = >,Cjj.7i@ = 3,741 patient days

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Question – 9
RST Toll Plaza Limited built an 80-kilometer-long highway between two cities and operates a toll
plaza to collect tolls from passing vehicles using the highway. The company has estimated that 50,000
light weight, 12,000 medium weight and 10,000 heavy weight vehicles will be using the highway in
one month in outward journey and the same number for return journey.

As per government notification, vehicles used for medical emergencies, Members of Parliament, and
essential services are exempt from toll charges. It is estimated that 10% of light weight vehicles will
pass the highway for such use.

It is the policy of the company that if vehicles return within 24 hours of their outward journey, the toll
fare will be reduced by 25 percent automatically. It is estimated that 30% of chargeable light weight
vehicles return within the specified time frame.

The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight vehicles and
that of heavy weight vehicles as 2 times of the medium weight vehicles.

The toll and maintenance cost for a month is `59,09,090. The company requires a profit of 10% over
the total cost to cover interest and other costs.

Required:
(i) Calculate the toll rate for each type of vehicle if concession facilities are not available on the
return journey.
(ii) Calculate the toll rate that will be charged from light weight vehicles if a return journey
concession facility is available, assuming that the revenue earned from light weight vehicles
calculated in option (i) remains the same.

Solution
Working Notes:
(1) Calculation of equivalent number of light vehicles
Type of vehicles Monthly traffic Return traffic Ratio (C) Equivalent light
(A) (B) weight
[(A+B)´C]
Light weight 45,000* 45,000 1 90,000
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,50,000
*50,000 light vehicles less 10% exempted vehicles.

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(2) Calculation of equivalent number of light weight vehicles

Type of vehicles Monthly Return traffic (B) Ratio (C) Equivalent light
traffic (A) weight
[(A+B)´C]
Light weight 45,000* 41,625 1 86,625
(45,000 – [45,000
´ 30% ´ 25%)]
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,46,625

y".*) +"/. ." +"1'& (@j,8j,8j8;>8%) :@,88,888

(i) Toll rate per vehicle = ~ƒ391*)'-. .‚(' "$ 1'x9+)'/ = C,@8,888
= C,@8,888
= `26
Toll rate for light weight vehicle = `26
Toll rate for medium weight vehicle = `26 ´ 2.5 = `65
Toll rate for heavy weight vehicle = `26 ´ 5 = `130

(ii) Revenue from light weight vehicle in (i) above = 90,000 vehicles ´ `26 = `23,40,000
C7,h8,888
New toll rate to maintain the same revenue from Light weight vehicle = = `27.01
?:,:C@
Rate to be charged from 13,500 light weight vehicles = 27.01 ´ 0.75 = `20.26

Toll to be charged from light weight vehicles if concession applicable

Revenue share in light vehicles = 90,000 ´ 26 = `23,40,000
Suppose rate is x,
then outward journey 45,000 x;
return journey (45,000 – 30% of 45,000) + 13,500(x – 0.25)
45,000x + 31,500x + 13,500(0.75x) = 23,40,000
Toll rate to be charged from light weight vehicles: 86,625x = 23,40,000
X = `27.01
Rate to be charged from 76,500 light weight vehicles @ `27.01; revenue will be `20,66,494
Rate to be charged from 13,500 light weight vehicles = 27.01 ´ 0.75 = 20.26
Revenue will be `2,73,506

Question – 10
Following are the data pertaining to SK Pvt. Ltd. for the year:
Particulars Amount (`)
Salary to Software Engineers (5 persons) 15,00,000
Salary to Project Leader (2 persons) 9,00,000
Salary to Project Manager 6,00,000
Repairs & Maintenance 3,00,000
Administration Overheads 12,00,000
The company executes a Project PK, the details of the same are as follows:

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Project duration – 6 months

One Project Leader and three Software Engineers were involved for the entire duration of the
project, whereas Project Manager spends 2 months’ efforts, during the execution of the Project.
Travel expenses incurred for the project – `1,87,500
Two laptops were purchased at a cost of `50,000 each, for use in the project and the life of the same
is estimated to be 2 years.
Prepare project cost sheet.

Solution
Project Cost Sheet
Particulars Amount
Salary of software engineer (15,00,000 ´ 3/5 ´ 6/12) 4,50,000
Salary of project leader (9,00,000 ´ ½ ´ 6/12) 2,25,000
Salary of project manager (6,00,000 ´ 2/12) 1,00,000
Total salary 7,75,000
Travel expenses 1,87,500
Depreciation (50,000 ´ 2 ´ ½ ´ 6/12) 25,000
Overheads (50% ´ 7,75,000) 3,87,500
Total Project cost 13,75,000
Working Note:
Total overheads = 3,00,000 + 12,00,000 = `15,00,000
Total Salary = 15,00,000 + 9,00,000 + 6,00,000 = `30,00,000
A1'&x'*k/ >@,88,888
Overheads recovery rate = × 100 = 78,88,888 × 100 = 50% of salary
}*)*&‚

Question – 11
A lodging home is being run in a small hill station with 50 single rooms. The home 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, (assume a month to be of 30 days):
(a) Occupancy during the season is 80%, while in the off season is 40% only:
(b) Expenses: `
(1) Staff Salary (excluding room attendants) 2,75,000
(2) Repairs to Buildings 1,30,500
(3) Laundry & Linen 40,000
(4) Interior and Tapestry 87,500
(5) Sundry Expenses 95,400
(c) Annual depreciation is to be provided for buildings at 5% and on furniture and equipments at 15%
on straight line basis:
(d) Room attendants are paid `5 per room day on the basis of occupancy of the rooms in a month

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(e) Monthly lighting charges are `120 per room, except in four months of winter when it is `30 per
room and this cost is on the basis of full occupancy for a month, and
(f) Total investment in the home is `100 lakhs of which `80 lakhs relate to buildings and balance for
furniture and equipments.
You are required to compute the room rent per day both during the season and off season.

Solution
Computation of Effective room days
Season = (50 rooms ´ 80 / 100) ´ (6 ´ 30) days = 7,200
Off-season = (50 rooms ´ 40 / 100) ´ (6 ´ 30) days = 3,600
10,800
Computation of Total Cost `
(1) Salary 2,75,000
(2) Repairs 1,30,500
(3) Laundry and Linen 40,000
(4) Interior Decoration 87,500
(5) Depreciation
-Building (5% of 80,00,000) 4,00,000
-Furniture & equipment (15% of 20,00,000) 3,00,000 7,00,000
Sundry Expenses 95,400
(6) Attendant’s Salary (10,800 ´ 5) 54,000
(7) Lighting Charges
- Season (7,200 days ´ `4) [`120 p.m. means `4 per day] 28,800
- Off-Season
Winter [3,600 ´ 4/6] ´ ` 1 [`30 p.m. means Re.1 per day] (4 months) 2,400
Balance (3,600 ´ 2/6) ´ `4 (2 months) 4,800
Total Cost 14,18,400
Computation of Total Revenue `
Total Cost 14,18,400
(+) Profit (20% of revenue) (14,18,400 ´ 20/80) - 3,54,600
Total Revenue 17,73,000
Assume Rent per room per day during Season is `X & during off season is `X/2
Hence, total annual revenue = 7,200 X + 3,600 [X/2] = 9,000 X
Now, 9,000 X = `17,73,000
X = 197 Hence, Rent per room per day
During Season = X = `197
During off-season = [X/2] = `[197/2] = `98.50

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Question – 12
ABC Bank is having a branch which is engaged in processing of ‘Vehicle Loan’ and ‘Education Loan’
applications in addition to other services to customers. 30% of the overhead costs for the branch are
estimated to be applicable to the processing of ‘Vehicle Loan’ applications and ‘Education Loan’
applications each.

Branch is having four employees at a monthly salary of `50,000 each, exclusively for processing of
Vehicle Loan applications and two employees at a monthly salary of `70,000 each, exclusively for
processing of Education Loan applications.

In addition to above, following expenses are incurred by the Branch:

• Branch Manager who supervises all the activities of branch, is paid at `90,000 per month.
• Legal charges, Printing & stationery and advertising expenses are incurred at `30,000, `12,000
and `18,000 respectively for a month.
• Other expenses are `10,000 per month.
You are required to:
(a) Compute the cost of processing a Vehicle Loan application on the assumption that 496 Vehicle
Loan applications are processed each month.
(b) Find out the number of Education Loan applications if the total processing cost per Education
Loan Application is same as in the Vehicle loan Application as computed in (i) above.

Solution
Particulars Vehicle Loan Education Loan Total (`)
Applications (`) Applications (`)
Employee Cost 50,000 ´ 4 = 70,000 ´ 2 = 1,40,000 3,40,000
2,00,000
Apportionment of branch 27,000 27,000 54,000
manager’s salary
Legal charges, printing & 18,000 18,000 36,000
stationary and advertising
Other expenses 3,000 3,000 6,000
Total cost 2,48,000 1,88,000 4,36,000
y".*) +"/. C,h?,888
(a) Cost of processing vehicle loan application = !"."$ *(()9+*.9"-/ = = `500
hj:
y".*) +"/.
(b) Cost of processing education loan application = !"."$ *(()9+*.9"-/
>,??,888
500 = !"."$ *(()9+*.9"-/
>,??,888
No. of applications = = 376
@88

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Question – 13
Parth Ltd. operates in insurance business. Previous year, the company launched a new term insurance
policy called ‘Max Jivan’ and incurred the following expenditure throughout the year:
Particulars Amount (`)
Claim management cost 52,82,000
Facilities cost 6,49,82,000
Employees cost 2,25,18,000
Cost of marketing the policy 19,30,71,000
Policy development cost 4,86,50,000
Policy issuance cost 4,10,05,000
Policy servicing cost 13,40,65,500
Sales support expenses 4,44,80,000
Office administration cost 6,67,20,000
IT Cost 30,71,90,000
Postage and logistics 4,50,36,000
You are required to ascertain the cost of the policy ‘Max Jivan’ segregated into four main activities
namely (a) Marketing and Sales support (b) Operations (c) I.T. Cost and (d) Support functions.
(a) Marketing and Sales support- `23,75,51,000, Operations - `22,90,02,500, I.T. Cost-
`30,71,90,000 and Support functions- `19,92,56,500
(b) Marketing and Sales support- `28,62,01,000, Operations- `22,53,88,500, I.T. Cost-
`30,71,90,000 and Support functions- `15,42,20,500
(c) Marketing and Sales support- `28,62,01,000, Operations- `18,03,52,500, I.T. Cost-
`30,71,90,000 and Support functions- `19,92,56,500
(d) Marketing and Sales support- `24,17,21,000, Operations- `22,48,32,500, I.T. Cost-
`30,71,90,000 and Support functions- `19,92,56,500

Question – 14
A LMV Pvt. Ltd., operates cab/car rental service in Delhi/NCR. It provides its service to the offices of
Noida, Gurugram and Faridabad. At present it operates CNG fueled cars but it is also considering to
upgrade these into Electric vehicles (EV). The details related with the owning of CNG & EV propelled
cars are as tabulated below:
Particulars CNG Car EV Car
Car purchase price (`) 9,20,000 15,20,000
Govt. subsidy on purchase of car (`) - 1,50,000
Life of the car 15 years 10 years
Residual value (`) 95,000 1,70,000
Mileage 20 km/kg 240 km per charge
Electricity consumption per full charged - 30 Kwh
CNG cost per Kg (`) 60 -
Power cost per Kwh (`) - 7.60
Annual Maintenance cost (`) 8,000 5,200

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Annual insurance cost (`) 7,600 14,600

Tyre replacement cost in every 5 year (`) 16,000 16,000
Battery replacement cost in every 8 years (`) 12,000 5,40,000
Apart from the above, the following are the additional information:
Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (`) 20,000 p.m.
Garage rent per car (`) 4,500 p.m.
Share of office and administration cost per car (`) 1,500 p.m.
You have been approached by the management of A LMV Pvt. Ltd. for consultation on the two options
of operating the cab service. The expected questions that may be asked by the management are as
follows:

Question - 1
What would be the depreciable value of CNG car and EV car respectively?
(a) `13,50,000 and `14,40,000
(b) `15,20,000 and `8,25,000
(c) `8,25,000 and `14,40,000
(d) `8,25,000 and `12,00,000

Question – 2
What would be the monthly cost of fuel and electricity for an CNG and EV care respectively?
(a) `4,500 and `1,425
(b) `1,500 and `4,500
(c) `1,525 and `1,450
(d) `1,525 and `1,425

Question – 3
What would be the total cost to be incurred for replacement of tyres for CNG and EV care respectively?
(a) `32,000 and `24,000
(b) `12,000 and `32,000
(c) `32,000 and `16,000
(d) `16,000 and `12,000

Question – 4
What would be the total cost to be incurred for replacement of battery for CNG and EV car
respectively?
(a) `5,40,000 and `12,000
(b) `12,000 and `5,40,000
(c) `2,00,000 and `12,000
(d) `1,00,000 and `2,00,000

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Question – 5
What would be the operating cost of vehicle per month per car for both CNG and EV options?
(a) `36,627.78 and `43,708.33
(b) `36,627.78 and `48,523.26
(c) `48,523.26 and `28,150.29
(d) `48,523.26 and `28,510.29

1 2 3 4 5
D A C B A

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PROCESS COSTING - CONCEPTS

1. Process Costing
It is used in case of industries where output is obtained by passing through multiple process
i.e. output of one process becomes the input for subsequent process until finished goods are
obtained.

2. Normal Loss
It is a loss which is unavoidable in nature.
Units of such loss are shown on the credit side of process account at scrap value.
Draft Normal Loss Account
Particulars Units Amount Particulars Units Amount
To Process I A/c - - By Cash A/c (Process – I)* - -
To Process II A/c - - By Cash A/c (Process – II) - -
By Abnormal Gain A/c** - -
- - - -

3. Abnormal Loss
It is a loss which is avoidable in nature.
Units of such loss are shown on the credit side of process account at NCPU.
Draft Abnormal Loss Account
Particulars Units Amount Particulars Units Amount
To Process I A/c - - By Cash A/c (Process – I)* - -
To Process II A/c - - By Cash A/c (Process – II) - -
By Costing P&L A/c - -
- - (Balancing Figure) - -
* Units will be sold at scrap value only being a damaged unit.

4. Abnormal Gain
It is unexpected production during normal conditions.
Units of such gain are shown on the debit side of process account at NCPU.
Draft Abnormal Gain Account
Particulars Units Amount Particulars Units Amount
To Normal Loss A/c* - - By Process I A/c - -
To Costing P&L A/c - -
(Balancing Figure)
- - - -

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* The abnormal gain units valued at scrap will be shown here since only the actual profit is
to be taken to costing P&L account.

5. Process Account
Draft Process Account
Particulars Units Amount Particulars Units Amount
To Previous Process A/c - - By Normal Loss A/c -
To Material - - (weight loss)
To Labour - By Normal loss A/c - -
To Factory OHs - (having scrap value)
To Toxic Waste A/c - By Normal loss A/c -
To Abnormal Gain A/c - - (requiring cost to be
incurred)
By Abnormal loss A/c - -
By Next Process A/c - -
(Tfd.)
By Costing P&L A/c - -
(sold)
By Finished Goods A/c - -

C(-,8 9(6- G *9&,+ 1,8"% () !(&#,8 8(66

Normal cost per unit (NCPU) =
C(-,8 "/.-6G!(&#,8 8(66 "/.-6

6. Treatment of Royalty
- Debit the amount of royalty on the basis of normal production units
- Excess or less payment of royalty will be adjusted in abnormal loss or gain account
- In Royalty account only final amount on actual units produced will be payable.

7. Process Account with raw material stock

(a) Opening units of raw material stock along with its value will be debited to the process
account.
(b) Closing units of raw material stock along with its value will be credited to the process
account.
(c) Opening and closing stock of raw material should be adjusted while computing normal
cost per unit of the process.
Normal cost per unit =
C(-,8 @(6-(./98"D%6 (+. &,I #,-.)G@8(6./2 &,I #,-. 9(6-G*9&,+ 1,8"% () !&. 8(66 "/.-6
C(-,8 V/.-6(./98"D%6 (+. &,I #,-.)G@8(6./2 &,I #,-. "/.-6G!(&#,8 8(66 "/.-6

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8. Process Account with finished goods stock

(a) A separate process account is prepared for each process.
(b) Opening units of finished goods along with its value will be debited to the process stock
account.
(c) Closing units of finished goods stock along with its value will be credited to the process
stock account.
(d) All the goods produced by the process will be transferred to process stock account.

9. Process Account with WIP stock

(a) Opening units of WIP along with its value will be debited to the process account.
(b) Closing units of WIP along with its value will be credited to the process account.

10. Valuation of WIP

(a) Calculate equivalent units of production for each element of cost i.e. material, labour
and overheads by preparing statement of equivalent units.
(b) Calculate cost per equivalent unit for each element of cost i.e. material, labour and
overheads.
(c) Calculate the value of WIP by multiplying the equivalent units of WIP along with cost
per equivalent unit.

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11. Methods of WIP Stock Valuation

FIFO Method W. Average Method

Ist Process

Opening WIP

Introduced & Complete

Normal Loss

Abnormal Loss

Closing WIP

FIFO Method W. Average Method

Subsequent Process or

Double Material Questions

Opening WIP

Introduced & Complete

Normal Loss

Abnormal loss

Closing WIP

12. Inter Process Profit

Transfer goods from one process to other on cost plus profit basis.

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PROCESS COSTING – QUESTIONS

Question – 1
SK Ltd. produces a product-X, which passes through three processes, I, II and III. In Process-III a by-
product arises, which after further processing at a cost of `85 per unit, product Z is produced. The
information related for the month of April 2021 is as follows:
Process-I Process-II Process-III
Normal loss 5% 10% 5%
Materials introduced (7,000 units) 1,40,000 - -
Other materials added 62,000 1,36,000 84,200
Direct wages 42,000 54,000 48,000
Direct expenses 14,000 16,000 14,000
Production overhead for the month is `2,88,000, which is absorbed as a percentage of direct wages.
The scrapes are sold at `10 per unit
Product-Z can be sold at `135 per unit with a selling cost of `15 per unit
No. of units produced:
Process-I- 6,600; Process-II- 5,200, Process-III- 4,800 and Product-Z- 600
There is not stock at the beginning and end of the month.
You are required to prepare accounts for:
(i) Process-I, II and III
(ii) By-product process.

Solution
(i) Process- I Account
Particulars Units Amount(`) Particulars Units Amount(`)
By Normal loss
To Material 7,000 1,40,000 350 3,500
(7,000 × 5% × `10)
By Abnormal loss A/c
To Other Material -- 62,000 50 2,545
(50 × `50.9022)
By Process II A/c
To Direct Wages -- 42,000 6,600 3,35,955
(6,600 × `50.9022)
To Direct Exp. -- 14,000
To Prod. OHs
(200% × -- 84,000
`42,000)
7,000 3,42,000 7,000 3,42,000
7,hC,888w7,@88 7,7?,@88
Cost per unit = = = `50.9022
i,888w7@8 :,:@8

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Process- II Account
Particulars Units Amount(`) Particulars Units Amount(`)
By Normal loss
To Process-I A/c 6,600 3,35,955 660 6,600
(6,600 × 10% × `10)
By Abnormal loss A/c
To Other Material -- 1,36,000 740 80,149
(740 × `108.3089)
By Process III A/c
To Direct Wages -- 54,000 5,200 5,63,206
(5,200 × `108.3089)
To Direct Exp. -- 16,000
To Prod. OHs
(200% × -- 1,08,000
`54,000)
6,600 6,49,955 6,600 6,49,955
:,hj,j@@w:,:88 :,h7,7@@
Cost per unit = = = `108.3089
:,:88w::8 @,jh8
Process- III Account
Particulars Units Amount(`) Particulars Units Amount(`)
By Normal loss
To Process-II A/c 5,200 5,63,206 260 2,600
(5,200 × 5% × `10)
By Product X A/c
To Other Material -- 84,200 4,800 8,64,670
(4,800 × `180.1396)
By By-Product Z A/c
To Direct Wages -- 48,000 600 21,000
[600 × (135-85-15)]
To Direct Exp. -- 14,000
To Prod. OHs
(200% × -- 96,000
`48,000)
To Ab. Gain
(460 ×
`180.1396)
5,660 8,88,270 5,660 8,88,270
?,8@,h8:wC,:88wC>,888 i,?>,?8:
Cost per unit = = = `180.1396
@,C88wC:8w:88 h,7h8

(ii) By-Product Process Account

Particulars Units Amount(`) Particulars Units Amount(`)
To Process-III A/c 600 21,000 By Product Z A/c 600 81,000
To Processing cost -- 51,000

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To Selling exp. -- 9,000

600 81,000 600 81,000

Question – 2
A Manufacturing unit manufactures a product ‘XYZ’ which passes through three distinct Processes –
X, Y and Z. The following data is given:
Process X Process Y Process Z
Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000
• The total production overhead of `15,750 was recovered @ 150% of direct wages.
• 15,000 units at `2 each were introduced to process ‘X’.
• The output of each process passes to the next process and finally, 12,000 units were transferred to
Finished Stock Account from Process ‘Z’.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal output Value of Scrap per unit (`)
X 6% 1.10
Y ? 2.00
Z 5% 1.00
You are required to:
(i) Find out the percentage of wastage in process ‘Y’, given that the output of process ‘Y’ is
transferred to Process ‘Z’ at `4 per unit.
(ii) Prepare Process accounts for the three processes X, Y and Z.

Solution
(i) Let normal loss units in process Y = y
y".*) B"/.w}+&*( 1*)3' "$ -"&,*) )"//
Normal cost per unit of Process Y = y".*) 3-9./w!"&,*) )"// 3-9.
@C,:>8wC‚
4= >h,>88w‚

56,400 – 4y = 52,610 – 2y
2y = 3,790
y = 1,895
>,?j@
Thus, Normal loss % of process Y = >h,>88 × 100 = 13.44%

(ii) Process X Account

Particulars Units Amount Particulars Units Amount
To Units Introduced 15,000 30,000 By Normal loss A/c 900 990

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To Material - 2,600 (15,000 × 6% × 1.10)

consumed
To Labour - 4,000 By Process Y A/c 14,100 41,610
To Overheads - 6,000
(4,000 × 150%) 15,000 42,600 15,000 42,600
hC,:88wjj8 h>,:>8
Normal cost per unit = >@,888wj88 = >h,>88 = `2.95106

Process Y Account
Particulars Units Amount Particulars Units Amount
To Process X A/c 14,100 41,610 By Normal loss A/c 1,895 3,790
To Material - 2,250 (Part (i))
consumed
To Labour - 3,500 By Process Z A/c 12,205 48,820
To Overheads - 5,250
(3,500 × 150%) 14,100 52,610 14,100 52,610

Process Z Account
Particulars Units Amount Particulars Units Amount
To Process Y A/c 12,205 48,820 By Normal loss A/c 610 610
To Material - 2,000 (12,205 × 5% × 1)
consumed
To Labour - 3,000 By Finished Stock A/c 12,000 59,725
To Overheads - 4,500 (12,000 × 4.97715
(3,000 × 150%)
To Abnormal Gain 405 2,015
A/c
(405 × 4.97715) 12,610 60,335 12,610 60,335
@?,7C8w:>8 @i,i>8
Normal cost per unit = >C,C8@w:>8 = >>,@j@ = `4.97715

Question – 3
Meta Company Ltd. is engaged in the production of product ‘Trio’ which passes through two
different processes Process P and Process Q. Other information obtained from books of account for
the year is as follows:
Particulars Process P Process Q
Raw material used 10,000 -
Raw material cost per unit `80 -
Direct wages `52,000 `78,000
Direct expenses `8,600 `11,100
Selling price per unit of output `130 `190

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Production overheads of `3,00,000 are recovered as percentage of direct wages.

Actual output of the two processes was:

P-9,200 units and Q-6,400 units. 3/4thof the output of Process P was passed on to the Process Q and
the balance was sold. The entire output of process Q was sold.

Management & Selling expenses during the year were `1,70,000. These are not allocable to the
processes.

The normal loss of the two processes, calculated on the input of every process was:
Process P- 6% and Process Q-10%

The Loss of Process P was sold at `5 per unit and that of Q at `8 per unit. Assume that Process P
and Process Q are not the responsibility centres.

You are required to prepare:

(i) Process P Account
(ii) Process Q Account
(iii) Abnormal Loss and Abnormal Gain Account
(iv) Costing Profit & Loss Account

Solution
(i) Process P Account
Particulars Units Amount Particulars Units Amount
To Material 10,000 8,00,000 By Normal loss 600 3,000
To Wages 52,000 By Process Q 6,900 7,17,600
(9,200 ´ ¾)
To Direct expenses 8,600 By Costing Profit 2,300 2,39,200
& Loss
(9,200 ´ ¼)
To Production 1,20,000 By Abnormal loss 200 20,800
Overheads
(3,00,000 ´ 2/5)
10,000 9,80,600 10,000 9,80,600
j,?8,:88w7,888
Cost per unit = = `104 per unit
>8,888w:88

(ii) Process Q Account

Particulars Units Amount Particulars Units Amount
To Process P A/c 6,900 7,17,600 By Normal loss 690 5,520
To Wages 78,000 By Costing P&L 6,400 10,11,200
To Direct expenses 11,100

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To Production 1,80,000
Overheads
(3,00,000 ´ 3/5)
To Abnormal gain 190 30,020
7,090 10,16,720 7,090 10,16,720
j,?:,i88w@,@C8
Cost per unit = = `158 per unit
:j88w:j8

(iii) Abnormal Loss Account

Particulars Units Amount Particulars Units Amount
To Process P 200 20,800 By Bank 200 1,000
By Costing P&L 19,800
200 20,800 200 20,800

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
To Normal loss 190 1,520 By Process Q 190 30,020
To Costing P&L 28,500
190 30,020 190 30,020

(iv) Costing P&L Account

Particulars Amount Particulars Amount
To Process P 2,39,200 By Sales
To Process Q 10,11,200 P = 2,300 ´ 130 2,99,000
To Abnormal loss 19,800 Q = 6,400 ´ 190 12,16,000
To Selling expenses 1,70,000 By Abnormal gain 28,500
To Net profit 1,03,300
15,43,500 15,43,500

Question – 4
SK Ltd. processes product Z through two distinct processes – Process I and process II. On completion
, it is transferred to finished stock. From the following information for the current year, prepare Process
I and Process II and Finished Stock A/c.
Particulars Process – I Process - II
Raw materials used 7,500 units -
Raw materials cost per unit `60 -
Transfer to next process/finished stock 7,050 units 6,525 units
Normal loss (on inputs) 5% 10%
Direct wages `1,35,750 `,129,250
Direct expenses 60% of direct wages 65% of direct wages
Manufacturing overheads 20% of direct wages 15% of direct wages

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Realisable value of scrap per unit `12.50 `37.50

6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no opening
or closing stock of work-in-process.

Solution
Process I Account
Qty. Amount Qty. Amount
To Raw material 7,500 4,50,000 By Normal Loss 375 4.688
To Direct wages 1,35,750 (5%×7,500´12.5)
To Direct expenses 81,450 By Abnormal Loss 75 7,259
(60% of direct wages) (75 ´ 96.7947)
To Manufacturing OHs 27,150 By Process II A/c 7,050 6,82,403
(20% of direct wages) (7,050 ´ 96.7947)
7,500 6,94,350 7,500 6,94,350

Planned output – Process I = 7,500 – 375 = 7,125 units

Actual output = 7,050 units
Abnormal loss = (7,125 units – 7,050 units) 75 units.
:,jh,7@8wh,:??
Cost per unit = i,>C@
= `96.7947
Process II Account
Qty. Amount Qty. Amount
To Process I 7,050 6,82,403 By Normal loss (10%) 705 26,438
To Direct wages 1,29,250 (7,050 ´ 10% ´ 37.5)
To Direct Expenses 84,013 By Finished Stock A/c 6,525 9,13,824
(65% of direct wages) (6,525 ´ 140.096
To Manufacturing OHs 19,387
To Abnormal gain 180 25,209
(180 ´ 140.096) 7,230 9,40,262 7,230 9,40,262

Planned output of Process II = 7,050 – 705 = 6,345 units

j,>@,8@7wC:,h7?
Cost per unit = = `140.096
:,7h@

Abnormal gain = Actual output – Planned output = 6,525 – 6,345 = 180 units
Finished Stock Account
Qty. Amount Qty. Amount
To Process II 6,525 9,13,824 By Cost of Sales A/c 6,000 8,40,298
By Balance c/d 525 73,526
6,525 9,13,824 6,525 9,13,824

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Income Statement
Amount Amount
To Cost of Sales 8,40,298 By Abnormal Gain 18,459
(6,000 ´ 140.096) [180 ´ (140.0496 – 37.5)]
To Abnormal loss 6,322 By Sales 9,66,343
[75 ´ (96.7947 – 12.50)] (8,40,298 ´ 115%)
To Net Profit 1,38,182
9,84,802 9,84,802

Question – 5
With the help of the following information, prepare Process Account, giving full working notes:
Opening stock of work in progress: 1,000 units at `10,000
Degree of completion: Material 100%, Labour 50%, Overhead 40%
Introduced during the process: 10,000 units at `37,800
Wages: `17,840
Overheads: `8,840
Scrap 1,500 units
Degree of Completion: Materials 100%, Labour 80%, Overheads 60%
Closing work in progress: 1,000 units
Degree of completion: Materials 100%, Labour 60%, Overheads 50%
Normal loss 10% of total input
Scrap value `2 per unit

Solution
Statement of Equivalent Production
Material Labour Overheads
Input Output
% Units % Units % Units
Op. WIP 1,000 Op. WIP 1,000 - - 50 500 60 600
Introduced &
Input 10,000 Complete 7,500 100 7,500 100 7,500 100 7,500
Transferred 8,500
Normal Loss 1,100 - - - - - -
(11,000×10%)
Abnormal
Loss 400 100 400 80 320 60 240
(1500 - 1100)
Closing WIP 1,000 100 1,000 60 600 50 500
11,000 11,000 8,900 8,920 8,840

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Statement of Cost per Equivalent Unit

Particulars Material Labour Overheads
Cost 37,800 17,840 8,840
Less: Normal Scrap (1,100 × 2) (2,200) - -
Total 35,600 17,840 8,840
Equivalent Units 8,900 8,920 8,840
Cost per equivalent unit 4 2 1

Statement of distribution of cost

Element of Cost per
Particulars Cost Equivalent units unit Cost Total Cost
Opening WIP Material - 4 -
Labour 500 2 1,000
Overheads 600 1 600 1,600
Introduced Material 7,500 4 30,000
& Complete Labour 7,500 2 15,000
Overheads 7,500 1 7,500 52,500
Abnormal Loss Material 400 4 1,600
Labour 320 2 640
Overheads 240 1 240 2,480
Closing WIP Material 1,000 4 4,000
Labour 600 2 1,200
Overheads 500 1 500 5,700

Process Account
Particulars Units Amount Particulars Units Amount
To Opening WIP 1,000 10,000 By Normal Loss A/c 1,100 2,200
To Material 10,000 37,800 By Abnormal loss A/c 400 2,480
To Labour - 17,840 By Next Process A/c 8,500 64,100
To Overheads - 8,840 (52,500+1,600+10,000)
By closing WIP 1,000 5,700
11,000 74,480 11,000 74,480

Question – 6
The following data is related to Process S for August:
(a) Opening WIP 8,000 units
Material (100%) `63,900
Labour (60%) `10,800
Overheads (60%) `5,400
(b) Input of 1,82,000 units `7,56,900
(c) Labour paid `3,28,000
(d) Overheads incurred `1,64,000
(e) Units scrapped 14,000 units

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Degree of Completion: Material 100%; Labour & Overheads 50%

(f) Closing WIP 18,000 units
Degree of Completion: Material 100%; Labour & Overheads 70%
(g) 1,58,000 units were completed and transferred to next process
(h) Normal loss is 8% of total input
(i) Scrap value is `8 per unit
You are required to prepare Process A/c and other relevant account assuming average method is
used.

Solution
Statement of Equivalent Production
Material Labour Overheads
Input Output
% Units % Units % Units
Complete &
Op. WIP 8,000 Transferred 1,58,000 100 1,58,000 100 1,58,000 100 1,58,000
Input 1,82,000 Normal Loss 15,200 - - - - - -
(1,90,000×8%)
Abnormal Gain (1,200) 100 (1,200) 100 (1,200) 100 (1,200)
(14000 - 15200)
Closing WIP 18,000 100 18,000 70 12,600 70 12,600
1,90,000 1,90,000 1,74,800 1,69,400 1,69,400

Statement of Cost per Equivalent Unit

Particulars Material Labour Overheads
Cost 7,56,900 3,28,000 1,64,000
Add: Opening WIP cost 63,900 10,800 5,400
Less: Normal Scrap (15,200 × 8) (1,21,600) - -
Total 6,99,200 3,38,800 1,69,400
Equivalent Units 1,74,800 1,69,400 1,69,400
Cost per equivalent unit 4 2 1

Cost of next process account = 1,58,000 ´ (4 + 2 + 1) = `11,06,000

Cost of closing WIP = (18,000 ´ 4) + (12,600 ´ 2) + (12,600 ´ 1) = `1,09,800
Cost of abnormal gain = 1,200 ´ (4 + 2 + 1) = `8,400

Process S Account
Particulars Units Amount Particulars Units Amount
To Opening WIP 8,000 80,100 By Normal Loss A/c 15,200 1,21,600
To Material 1,82,000 7,56,900 By Next Process A/c 1,58,000 11,06,000
To Labour - 3,28,000 By closing WIP 1,800 1,09,800
To Overheads - 1,64,000
To Abnormal Gain 1,200 8,400
1,91,200 13,37,400 1,91,200 13,37,400

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Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
To Normal loss A/c 1,200 9,600 By Process S A/c 1,200 8,400
(1,200 ´ 8) By Costing P&L A/c - 1,200
1,200 9,600 1,200 9,600

Normal Loss Account

Particulars Units Amount Particulars Units Amount
To Process S A/c 15,200 1,21,600 By Abnormal Gain A/c 1,200 9,600
By Bank A/c 14,000 1,12,000
15,200 1,21,600 15,200 1,21,600

Question – 7
A company produces a component, which passes through two processes. During the month of April,
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 cost 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 materials 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 Material `4,000
Direct Wages `3,500
Factory Overheads `4,500
Required:
(a) Prepare statement of equivalent production, cost per unit and Process I A/c.
(b) Prepare statement of equivalent production, cost per unit and Process II A/c.

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Solution
Statement of Equivalent Production and Cost per Unit for Process I
Input Output Material Labour Overheads
% Units % Units % Units
Input 40,000 Introduced & 30,000 100 30,000 100 30,000 100 30,000
Complete
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000
Cost 15,000 18,000 12,000
Cost per unit 0.375 0.514286 0.342857

Statement of apportionment of cost for Process I

Particulars Element of Equivalent Cost per Cost Total Cost
Cost units unit
Introduced & Material 30,000 0.375 11,250
Complete Labour 30,000 0.514286 15,429
Overheads 30,000 0.342857 10,286 36,965
Closing WIP Material 10,000 0.375 3,750
Labour 5,000 0.514286 2,571
Overheads 5,000 0.342857 1,714 8,035

Process I Account
Particulars Units Amount Particulars Units Amount
To Material 40,000 15,000 By Process II A/c 30,000 36,965
To Labour - 18,000 By Closing WIP 10,000 8,035
To Overheads - 12,000

40,000 45,000 40,000 45,000

Statement of Equivalent Production and cost per unit for Process II

Material –
Input Output Material - 1 2 Labour Overheads
% Units % Units % Units % Units
Introduced &
Input 30,000 Complete 28,000 100 28,000 100 28,000 100 28,000 100 28,000
Normal Loss 200 - - - - - - - -
Closing WIP 1,800 100 1,800 - - 25 450 25 450
30,000 30,000 29,800 28,000 28,450 28,450

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Cost 36,965 4,000 3,500 4,500

Cost per unit 1.2404 0.1429 0.123 0.1582
Statement of apportionment of cost for Process II
Element of Equivalent Cost per
Particulars Cost units unit Cost Total Cost
Introduced &
Complete Material – 1 28,000 1.2404 34,732
Material – 2 28,000 0.1429 4,000
Labour 28,000 0.123 3,445
Overheads 28,000 0.1582 4,429 46,606
Closing WIP Material – 1 1,800 1.2404 2,233
Material – 2 - 0.1429 -
Labour 450 0.123 55
Overheads 450 0.1582 71 2,359
Process II Account
Particulars Units Amount Particulars Units Amount
To Process I A/c 30,000 36,965 By Normal loss A/c 200 -
To Packing Material - 4,000 By Finished Goods A/c 28,000 46,606
To Labour - 3,500 By Closing WIP 1,800 2,359
To Overheads - 4,500
30,000 48,965 30,000 48,965

Question – 8
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.
Particulars Process A Process B Finished Stock
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.

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Solution
Process A Account
Particulars Cost Profit Total Particulars Cost Profit Total
To Opening stock 5,000 - 5,000 By Process B A/c 21,600 7,200 28,800
To Direct material 9,000 - 9,000
To Direct wages 5,000 - 5,000
19,000 - 19,000
(-) Closing stock (2,000) - (2,000)
17,000 - 17,000
To Factory OHs 4,600 - 4,600
21,600 - 21,600
To Profit - 7,200 7,200
21,600 7,200 28,800 21,600 7,200 28,800

Process B Account
Particulars Cost Profit Total Particulars Cost Profit Total
To Opening stock 4,500 1,000 5,500 By F. Stock A/c 41,550 20,125 61,675
To Process A A/c 21,600 7,200 28,800
To Direct material 9,500 - 9,500
To Direct wages 6,000 - 6,000
41,600 8,200 49,800
(-) Closing stock (2,080) (410) (2,490)
39,520 7,790 47,310
To Factory OHs 2,030 - 2,030
41,550 7,790 49,340
To Profit - 12,335 12,335
41,550 20,125 61,675 41,550 20,125 61,675
?,C88
Profit element in closing stock = hj,?88×2,490 = `410

Finished Stock Account

Particulars Cost Profit Total Particulars Cost Profit Total
To Opening stock 6,000 4,000 10,000 By Costing P&L A/c 44,233 30,767 75,000
To Process B A/c 41,550 20,125 61,675
47,550 24,125 71,675
(-) Closing stock (3,317) (1,683) (5,000)
44,233 22,442 66,675
To Profit (Bal. fig) - 8,325 8,325
44,233 30,767 75,000 44,233 30,767 75,000

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Ch,>C@
Profit element in closing stock = i>,:i@×5,000 = `1,683

Question – 9
In X Ltd. 500 units of raw material were introduced in Process I . The actual output and normal loss
of the respective processes are:
Output Normal loss on output
Process I 450 units 10%
Process II 340 units 20%
Process III 270 units 25%
The abnormal effective in Process III is _____ units.
(a) 10 (b) 15
(c) 20 (d) 25

Question – 10
Arnav Ltd. manufactures chemical solutions used in paint and adhesive products. Chemical solutions
are produced in different processes. Some of the processes are hazardous in nature which may results
in fire accidents.

At the end of the last month, one fire accident occurred in the factory. The fire destroyed some of the
paper files containing records of the process operations for the month.

You being an associate to the Chief Manager (finance), are assigned to prepare the process accounts
for the month during which the fire occurred. From the documents and files of other sources, following
information could be retrieved:

Opening work-in-process at the beginning of the month was 500 litres, 80% complete for labour and
60% complete for overheads. Opening work-in-process was valued at `2,78,000.

Closing work-in-process at the end of the month was 100 litres, 20% complete for labour and 10%
complete for overheads.

Normal loss is 10% of input(fresh) and total losses during the month were 800 litres partly due to the
fire damage.

Output transferred to finished goods was 3,400 litres

Losses have a scrap value fo `20 per litre

All raw material are added at the commencement of the process.

The cost per equivalent unit is `660 for the month made up as follows:

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Raw material `300; labour `200; Overheads `160.

The company uses FIFO method to value work-in-process and finished goods. The following
information are required for managerial decisions:

Question – 1
How much quantity of raw material introduced during the month?
(a) 4,300 litres
(b) 3,500 litres
(c) 4,200 litres
(d) 3,800 litres

Question – 2
The quantity of normal loss and abnormal loss are:
(a) Normal loss – 380 litres and abnormal loss – 420 litres
(b) Normal loss – 350 litres and abnormal loss – 450 litres
(c) Normal loss – 430 litres and abnormal loss – 370 litres
(d) Normal loss – 420 litres and abnormal loss – 380 litres

Question – 3
Value for raw material added to the process during the month is:
(a) `10,10,000
(b) `10,33,600
(c) `10,18,400
(d) `10,20,000

Question – 4
Value of labour and overhead in closing Work-in-process are:
(a) `4,000 & `1,600 respectively
(b) `20,000 & `16,000 respectively
(c) `16,000 & `9,000 respectively
(d) `13,200 & `6,600 respectively

Question – 5
Value of output transferred to finished goods is:
(a) `22,57,200
(b) `20,06,400
(c) `22,44,000
(d) `19,27,.200

1 2 3 4 5
D A B A C

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JOINT & BY-PRODUCT - CONCEPTS

1. Multiple Output

2. Meaning of Basic Terms

3. Treatment of By-Product

Option – 1
Treat similar to Normal loss
BP of small value
Treatment of BP

Option – 2
Consider it as miscellaneous income and
show in credit side of costing P&L A/c

BP of considerable value Treat as JP or MP i.e. calculate share of

or BP requires FPC JC for this

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4. Methods of Apportionment of Joint Cost (JC)

(A) Reverse Cost Method
Particulars Product A Product B
Sale value - -
Less: Profit - -
Total Cost - -
Less: Selling expenses - -
Work Cost - -
Less: Further Processing cost - -
Share of Joint Cost
If total joint cost is not matching with value given in question then distribute actual joint cost
given in question in the share of joint cost calculated from above statement.

If data of profit is given for only one product then prepare above table for one product after
that share of JC of other product = Total JC – Share of JC from above table for one product.

(B) Physical Unit Method – Distribute on the basis of physical units produced

(C) Sale value at split off method – Distribute on the basis of sale value at split off of
units produced.

(D) Sale value after FPC method – Distribute on the basis of sale value after FPC of units
produced.

(E) Net Realizable Value (NRV) Method – Distribute on the basis of NRV
NRV = Sale after FPC – Selling Expenses – FPC

(F) Contribution Margin Method

- Distribute variable cost on the basis of units produced
- Distributed fixed cost on the basis of contribution
- If any product has zero or negative contribution than FC will not be distributed for that
product.

(G) Average Cost Method

C(-,8 [(./- @(6-
Average cost =
C(-,8 V/-.6 ,- *%+%&,-.(/ U(./-

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5. Decision Regarding Further Processing

Compare Incremental Revenue with Incremental Cost
If Incremental revenue > Incremental cost - Yes further process
If Incremental revenue < Incremental cost - Not to further process

Incremental revenue = Sale after FPC – Sale at split off

Incremental cost = FPC + Increase in any other cost – Decrease in any other cost

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JOINT & BY-PRODUCT – QUESTIONS

Question – 1
A company’s plant processes 6,750 units of a raw material in a month to produce two products ‘M’
and ‘N’. The process yield is as under:
Product M 80%
Product N 12%
Process loss 8%
The cost of raw material is `80 per unit.
Processing cost is `2,25,000 of which labour cost is accounted for 66%. Labour is chargeable to
products ‘M’ and ‘N’ in the ratio of 100:80.

Prepare a comprehensive cost statement for each product showing:

(i) Apportionment of joint cost among products ‘M’ and ‘N’ and
(ii) Total cost of the products ‘M’ and ‘N’.

Solution
Total joint cost = Raw material cost + Processing cost = (6,750 × 80) + 2,25,000 = `7,65,000
Total labour cost = 2,25,000 × 66% = `1,48,500
Joint cost other than labour cost = 7,65,000 – 1,48,500 = `6,16,500
Statement of Joint Cost Apportionment
Particulars Product M Product N
Labour Cost 82,500 66,000
(1,48,500 in 100:80)
Cost other than labour cost 5,36,087 80,413
(6,16,500 in 80:12)
Share of Joint Cost 6,18,587 1,46,413
Statement of Total Cost
Particulars Product M Product N
Raw material cost 4,69,565 70,435
(5,40,000 in 80:12)
Labour Cost 82,500 66,000
(1,48,500 in 100:80)
Other Processing Cost 66,522 9,978
(76,500 in 80:12)
Share of Joint Cost 6,18,587 1,46,413

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Question – 2
A factory producing article P also produces a by-product Q 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
Subsequent costs are given below:
P Q
Material `3,000 `1,500
Labour 1,400 1,000
Overheads 600 500
5,000 3,000
Selling prices are: P – `16,000 and Q – `8,000
Estimated profits margin on selling prices are 25% for P and 20% for Q.
Assume that selling and distribution 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 P and Q.

Solution
Statement of Cost
Particulars Product P Product Q
Sales 16,000 8,000
Less: Profit 16,000×25% = 4,000 8,000×20% = 1,600
Total Cost 12,000 6,400
Less: Selling expenses (w.n. – 1) 267 133
Work Cost 11,733 6,267
Less: Further Processing Cost 5,000 3,000
Share of Joint Cost 6,733 3,267
Working Note-1
Total sales = Total Joint Cost + Total Further Processing Cost + Total Selling Expenses + Total
Profit
24,000 = 10,000 + 8,000 + Total Selling Expenses + 5,600
Total Selling Expenses = `400
Ratio of sales = 16,000 : 8,000 = 2:1
Selling expenses of P = 400 × (2/3) = `267
Selling expenses of Q = 400 × (1/3) = `133

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Statement of Cost of Production

Particulars Product P Product Q
Joint Cost:
Material (5,000 in 6,733:3,267) 3,367 1,633
Labour (3,000 in 6,733:3,267) 2,020 980
Overheads (2,000 in 6,733:3,267) 1,347 653
Further Processing Cost:
Material 3,000 1,500
Labour 1,400 1,000
Overheads 600 500
Cost of Production 11,733 6,267

Question – 3
The SK Oil company purchase crude vegetable oil. It does refining of the same. The refining process
results in four products at the split off point: M, N, O & P.
Product O is fully processed at the split off point. Product M, N, & P can be individually further refined
into ‘Super M’, ‘Super N’ and ‘Super P’. In the most recent month (October), 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 the purchasing the crude vegetable oil and Processing it were `40,00,000. SK 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 are as follows:
Further processing cost
Product to make super products 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
SK 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, production:
Product M `20,00,000
Product N `12,00,000
Product P `28,00,000
You are required to answer:
(a) How the joint cost of `40,00,000 would be allocated between each product under the following
methods
(i) Sales value at split off point

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(ii) Physical output (gallon)

(iii) Estimated net realizable value
(b) Could SK have increased its October operating profits by making different decisions about the
further refining of product M, N or P? Show the effect of any change you recommend on
operating profits.

Solution
(a) (i) Statement of Cost (`in lakhs)
Particulars Product M Product N Product O Product P
Sale value at split off 20 12 20 28
Share of Joint Cost 10 6 10 14
(40 in [Link])
(a) (ii) Statement of Cost (`in lakhs)
Particulars Product M Product N Product O Product P
Physical Output 3 1 0.50 0.50
Share of Joint Cost 24 8 4 4
(40 in [Link].5:0.5)
(a) (iii) Statement of Cost (`in lakhs)
Particulars Product M Product N Product O Product P
Sale value after FPC 120 40 20 48
Less: Further Processing cost 80 32 - 36
Less: Selling expenses - - - -
Net Realizable Value 40 8 20 12
Share of Joint Cost 20 4 10 6
(40 in [Link])
(b) Statement of Incremental Profit/(Loss) (`in lakhs)
Particulars Product M Product N Product P
Sales after FPC 120 40 48
Less: Sale at Split off 20 12 28
Incremental Sales 100 28 20
Less: Further Processing Cost 80 32 36
Incremental Profit/(Loss) 20 (4) (16)
Thus, it is recommended that Product M should be further processed into Super M and Product N & P
should be sold at split off point without any further processing. With this suggestion, company’s
operating profit will rise by `20,00,000 as the existing losses of `4,00,000 and `16,00,000 will get
cut down.

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Question – 4
SK Ltd. is engaged in the production of Buttermilk, Butter and Ghee. It purchases processed cream
and let it through the process of churning until it separates into buttermilk and butter. For the month
of May, 2021, SK Ltd. purchased 50 kilolitre processed cream @ `100 per 1,000 ml. Conversion cost
of `1,00,000 were incurred up-to the split off point, where tow saleable products were produced i.e.
buttermilk and butter. Butter can be further processed into Ghee.

The May, 2021 production and sales information is as follows:

Products Production (in Sales Quantity (in Selling price per
Kilolitre/tonne) Kilootire/tonne) litre/kg (`)
Buttermilk 28 28 30
Butter 20 - -
Ghee 16 16 480
All 20 tonne of butter were further processed at an incremental cost of `1,20,000 to yield 16 Kilolitre
of Ghee. There was no opening or closing inventories of buttermilk, butter or ghee in May, 2021.

Required:
(i) Show how joint cost would be apportioned between Buttermilk and Butter under estimated net
realizable value method.
(ii) MP Ltd. offers to purchase 20 tonne of butter in June at `360 per kg. In case SK Ltd. accepts
this offer, no Ghee would be produced in June. Suggest whether SK Ltd. shall accept the offer
affecting its operating income or further process butter to make Ghee itself?

Solution
(i) Total Joint Cost = Processed cream cost + conversion cost
= (50 × 1,000 × 100) + 1,00,000 = `51,00,000
Statement of Joint Cost
Particulars Buttermilk Amount (`) Butter Amount (`)
Sales Value 30×28×1,000 = 8,40,000 16×1,000×480 = 76,80,000
Less: Post split-off cost - (1,20,000)
Net Realizable Value 8,40,000 75,60,000
Apportionment of Joint Cost of 5,10,000 45,90,000
`51,00,000 in ratio of 1:9

(ii) Statement of Incremental Profit or Loss

Particulars (` )
Revenue from Ghee 16 × 1,000 ×480 = 76,80,000
(-) Revenue from Butter 20 × 1,000 × 360 = 72,00,000
Incremental Revenue 4,80,000

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(-) Further processing cost 1,20,000

Incremental Profit 3,60,000
The operating income of SK Ltd. will be reduced by `3,60,000 in June if it sells 20 tonne of Butter
to MP Ltd., instead of further processing of Butter into Ghee for sale. Thus, SK Ltd. is advised not
to accept the offer and further process butter to make Ghee itself.

Question – 5
A company produces two products A and B, through a joint production process. The total joint
production cost incurred is as under:
Material `20,000
Labour `10,000
Variable overheads `6,000
Fixed overheads `24,000

Product A and B can be sold for `20 per unit and `15 per unit respectively at split off point. The
produced quantities are Product A-2,000 units and Product B – 4,000 units.
(i) You are required to calculate the joint production cost allocation for each product using the:
(a) Physical unit method.
(b) Contribution margin method.
(ii) Product B can be further processed by incurring expenditure of `12,000. Loss in further
processing is 2%. It can be sold @ `18 per unit. Explain the impact on profitability if Product
B is further processed.

Solution
(i) (a) Total Joint Cost = 20,000 + 10,000 + 6,000 + 24,000 = `60,000
C,888
Share of Joint cost of Product A = 60,000 × :,888 = `20,000
h,888
Share of Joint cost of Product B = 60,000 × :,888 = `40,000

(b) Total Variable cost = 20,000 + 10,000 + 6,000 = `36,000

Total Fixed cost = `24,000
Statement of Cost
Particulars Product A Product B
Sales Value (A) 2,000 ´ 20 = 40,000 4,000 ´ 15 = 60,000
Variable Cost (B) 12,000 24,000
[36,000 in quantity ratio 2:4]
Contribution (A – B) 28,000 36,000
Fixed cost (C) 10,500 13,500
[24,000 in 28:36]
Share of Joint Cost (B + C) 22,500 37,500

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(ii) Statement of Profit of Product B

Particulars Amount
Units produced and sold 98% of 4,000 units 3,920
Selling price per unit 18
Sales value after FPC 70,560
Sales value at split off 60,000
Incremental revenue 10,560
Less: Further processing cost 12,000
Incremental loss after further processing (1,440)
Thus, there is a net loss of `1,440 if the Product B is further processed and sold.

Question – 6
ABC Company produces a Product ‘X’ that passes through three processes: R, S and T. Three types of
raw materials, viz., J, K and L are used in the ratio of [Link] in process R. The output of each process
is transferred to next process. Process loss is 10% of total input in each process. At the stage of output
in process T, a by-product ‘Z’ is emerging and the ratio of the main product ‘X’ to the by-product ‘Z’
is 80:20. The selling price of product ‘X’ is `60 per kg.

The company produced 14,580 kgs of product ‘X’.

Material price: Material K @ `15 per kg; Material K @ `9per kg.
Material L @ `7 per kg. Process costs are as follows:
Process Variable cost per kg (`) Fixed cost of input (`)
R 5.00 42,000
S 4.50 5,000
T 3.40 4,800
The by-product ‘Z’ cannot be processed further and can be sold at `30 per kg at the split-off stage.
There is no realizable value of process losses at any stage.

Required:
Present a statement showing the apportionment of joint costs on the basis of the sales value of product
‘X’ and by-product ‘Z’ at the split-off point and the profitability of product ‘Z’ and by-product ‘Z’.

Solution
Working Note:
(1) Let total raw material in Process R of raw material R be 100
Process Input Loss Output
R 100 100 ´ 10% = 10 90
S 90 90 ´ 10% = 9 81
T 81 81 ´ 10% = 8.10 72.90
Thus, for input of 100 units in process R, output of 72.90 units is obtained from process T.
Actual output of X = 14,580 units
80% of output of Process T = 14,580 units

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Output of process T = 14,580 ÷ 80% = 18,225

>?,CC@
Input of process R = × 100 = 25,000 kgs
iC.j

(2) Calculation of Joint cost

Process Inputs Variable costs Fixed cost Total cost
R 25,000 25,000 ´ 5 = 1,25,000 42,000 1,67,000
S 22,500 22,500 ´ 4.5 = 1,01,250 5,000 1,06,250
T 20,250 20,250 ´ 3.4 = 68,850 4,800 73,650
3,46,900
Raw material J = 10,000 ´ 15 = `1,50,000
Raw material K = 10,000 ´ 9 = `90,000
Raw material L = 5,000 ´ 7 = `35,000
`2,75,000
Add: Processing cost (as above) `3,46,900
Total joint cost `6,21,900

(i) Statement showing apportionment of joint cost

Particulars Product X By-Product Z Total
Units 14,580 3,465
Selling price (`) 60 30
Sales value (`) 8,74,800 1,09,350 9,84,150
Share of joint cost 5,52,800 69,100 6,21,900
(`6,21,900 in ratio of
sales value)

(ii) Statement of profitability

Particulars Product X By-Product Z Total
Sales value (`) 8,74,800 1,09,350 9,84,150
(-) Share of joint cost (5,52,800) (69,100) (6,21,900)
Profit 3,22,000 40,250 3,62,250

Question – 7
Mayura Chemicals Ltd. buys a particular raw material at `8 per litre. At the end of the processing in
Department-1, this raw material splits-off into products X, Y and Z. Product X is sold at the split-off
point, with no further processing. Products Y and Z require further processing before they can be sold.
Product Y is processed in Department-2, and Product Z is processed in Department-3. Following is a
summary of the costs and other related data for the year 2019-20:
Particulars Department
1 2 3
Cost of Raw Material `4,80,000 - -
Direct Labour `70,000 `4,50,000 `6,50,000

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Manufacturing Overhead `48,000 `2,10,000 `4,50,000

Products
X Y Z
Sales (litres) 10,000 15,000 22,500
Closing inventory (litres) 5,000 - 7,500
Sale price per litre (`) 30 64 50
There were no opening and closing inventories of basic raw materials at the beginning as well as at
the end of the year. All finished goods inventory in litres was complete as to processing. The company
uses the Net-realizable value method of allocating join costs.
You are required to prepare:
(iii) Schedule showing the allocation of joint costs
(iv) Calculate the cost of goods sold of each product and the cost of each item in Inventory
(v) A comparative statement of Gross Profit

Solution
(i) Statement of allocation of joint cost
Particulars Product X Product Product Z Total
Y
Units sold 10,000 15,000 22,500
Add: Closing stock (A) 5,000 - 7,500
Units Produced (B) 15,000 15,000 30,000
Selling price per unit (C) 30 64 50
Sale value of Prod. (B × C) 4,50,000 9,60,000 15,00,000 29,10,000
Less: Additional cost - 6,60,000 11,00,000 17,60,000
Net realizable value 4,50,000 3,00,000 4,00,000 11,50,000
Share of joint cost (D) 2,34,000 1,56,000 2,08,000 5,98,000
(5,98,000 in NRV ratio)

(ii) Statement of calculation of cost of goods sold and inventory

Particulars Product X Product Y Product Z Total
Share of joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs - 6,60,000 11,00,000 17,60,000
Less: Cost of C,7h,888×@,888 - >7,8?,888×i,@88 (4,05,000)
=
>@,888 78,888
inventories
(78,000) = (3,27,000)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000

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(iii) Statement of calculation of gross profit

Particulars Product X Product Y Product Z Total
Units sold 10,000 15,000 22,500
Selling price per unit 30 64 50
Sales 3,00,000 9,60,000 11,25,000 23,85,000
Less: Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000
Profit / (loss) 1,44,000 1,44,000 1,44,000 4,32,000

Question – 8
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 off 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
Deptt. A (`Lacs) Deptt. B (`Lacs)
Direct materials 35.00 5.00
Direct labour 30.00 9.00
Variable overhead 45.00 18.00
Fixed overheads 40.00 32.00
Total 150.00 64.00
Selling Expenses `in lacs
Product P 24.60
Product Q 21.60
Product AR 16.80
Required:
(i) Prepare a statement showing the apportionment of joint costs if Joint Costs are apportioned in
the proportion of NRV at Split-off point.
(ii) State whether it is advisable to produce product AR or not.

Solution
(a) Input in Department A = 8,00,000 units
Output in Department A = 8,00,000 × 85% = 6,80,000 units

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Output of Product P = 6,80,000 × (70/100) = 4,76,000 units

Output of Product Q = 6,80,000 × (30/100) = 2,04,000 units
Statement of Joint Cost
Particulars Amount (`in lakhs)
Raw Material (8,00,000 × 80) 640
Direct materials 35
Direct labour 30
Variable overheads 45
Fixed overheads 40
Total Joint Cost 790
Statement of Apportionment of Joint Cost (`in lakhs)
Particulars Product P Product Q
Sale at split off 4.76 × 85 = 404.60 2.04 × 290 = 591.60
Less: Selling expenses 24.60 21.60
Net realizable value at split off 380 570
Share of Joint Cost 316 474
(790 in 38:57)
(b) Statement of Evaluation of Proposal
Particulars Amount (`in lakhs)
Sales after further processing cost (w.n.-1) 492.66
(-) Sale at split off 404.60
Incremental sales 88.06
(-) Further processing cost 64
(+) Savings in selling expenses (24.60 – 16.80) 7.80
Net Benefit 31.86
Since there is net benefit, thus it is recommended to further process Product P into Product AR.
Working note – 1
Input in Department B = 4,76,000 units
Output in Department B i.e. Product AR = 4,76,000 × 90% = 4,28,400 units
Sale value after further processing cost = 115 × 4.284 lakhs = `492.66 lakhs

Question – 9
In case of joint products, the main objective of accounting of the cost is to apportion the joint costs
incurred up to the split off point. For cost apportionment one company has chosen Physical Quantity
Method. Three joint products ‘A’, ‘B’ and ‘C’ are produced in the same process. Up to the point of
split off the total production of A, B and C is 60,000 kg, out of which ‘A’ produces 30,000 kg and joint
costs are Rs. 3,60,000. Joint costs allocated to product A is
(a) `1,20,000 (b) `60,000
(c) `1,80,000 (d) `2,00,000

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Question – 10
eSalt is the biggest producer of sodium hydroxide in India. This main product of the company has a
strong reactivity with other organic compounds. It is highly versatile and is alkaline in nature.
However, the basic material required for the production of this product is salt along with the electricity.

The manufacturing process involve electrolysis which produces Halogen as co-product. Modern use
of Halogen is widespread. However, the common use is in disinfection like for purifying drinking
water or swimming pool water. It is also an important ingredient of toothpaste. Thus, the company’s
management affirmed the simultaneous production of Halogen.

During the previous financial year, the company purchased the base material of `5,34,000. For the
current year, company decided to increase the production by 2 times. Due to increased production, the
total conversion cost hiked to 3 times. Last year, the conversion cost accounted to `8,01,000 up to the
point at which two products i.e. sodium hydroxide and Halogen are separated.

The production and sales information for current year is provided as below:
Sodium hydroxide Halogen
Production/ Sales (in tonne) 24,030 16,020
Selling price per tonne (`) 100 150

During the current year, the management of the company pointed the extensive use of Vinly which can
be produced by further processing Halogen. Having selling price of `250 per tonne higher than that
of the Halogen, it was decided not to sell Halogen and further process it into Vinly. The incremental
processing cost took `8,01,000 producing 10,012.50 tonnes of Vinyl.

You are required to figure out the following for managerial decision:

Question – 1
For the current year, the amount of base material purchased and th conversion cost up to the point at
which two products i.e. Sodium hydroxide and Halogen are separated would be:
A. base material `10,68,000 and conversion cost `24,03,000
B. base material `10,68,000 and conversion cost `16,02,000
C. base material `16,02,000 and conversion cost `24,03,000
D. base material `24,03,000 and conversion cost `16,02,000

Question – 2
Joint cost to be apportioned between Sodium hydroxide and Halogen as per the physical unit method
would be:
A. Sodium hydroxide `24,03,000 and Halogen `10,68,000
B. Sodium hydroxide `10,68,000 and Halogen `16,02,000
C. Sodium hydroxide `16,02,000 and Halogen `24,03,000

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D. Sodium hydroxide `24,03,000 and Halogen `16,02,000

Question – 3
Joint cost to be apportioned between Sodium hydroxide and Halogen as per the sales value at split- off
point method would be:
A. Sodium hydroxide `20,02,500 and Halogen `20,02,500
B. Sodium hydroxide `16,02,000 and Halogen `24,03,000
C. Sodium hydroxide `24,03,000 and Halogen `16,02,000
D. Sodium hydroxide `10,68,000 and Halogen `20,02,500

Question – 4
Joint cost to be apportioned between Sodium hydroxide and Halogen as per the estimated net realisable
value method would be:
A. Sodium hydroxide `23,44,390 and Halogen `16,60,610
B. Sodium hydroxide `17,16,429 and Halogen `22,88,571
C. Sodium hydroxide `22,88,571 and Halogen `17,16,429
D. Sodium hydroxide `16,60,610 and Halogen `23,44,390

Question – 5
Considering that the decision relating to further processing Halogen is not approved, suggest whether
this would be in favour of the management by calculating incremental revenue/loss from further
processing Halogen into Vinyl.
A. Incremental loss would be `16,02,000, thus the decision of not further processing Halogen is
correct.
B. Incremental loss would be `8,01,000, thus the decision of not further processing Halogen is correct.
C. Incremental revenue would be `8,01,000, thus the decision relating to further processing Halogen
needs to be approved.
D. Incremental revenue would be `16,02,000, thus the decision relating to further processing Halogen
needs to be approved.

1 2 3 4 5
C D A B C

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MARGINAL COSTING - CONCEPTS

1. Marginal Costing

Marginal Costing

Marginal vs
CVP Analysis Decision Making
Absorption

Sales xx
(-) Variable cost xx
Contribution xx
(-) Fixed Cost xx
Profit xx

2. Contribution = Sales – Variable Cost = Fixed Cost + Profit

3. Profit Volume (PV) Ratio or Contribution Ratio

Ø This ratio doesn’t change with change in level of output
Ø This ratio changes with change in either selling price per unit or variable cost per unit

@(/-&.$"-.(/ *,8%6G\,&.,$8% @(6-6 W.;%D 9(6-=U&().-

Ø PV Ratio = × 100 = × 100 = × 100
*,8%6 *,8%6 *,8%6

Ø PV Ratio = 100 – Variable Cost Ratio

@F,/2% ./ @(/-&.$"-.(/ @F,/2% ./ U&().-

Ø PV Ratio = × 100 = × 100
@F,/2% ./ *,8%6 @F,/2% ./ *,8%6

4. Break-even point (BEP)

Ø It is the level of sales at which there is neither any profit nor any loss
Ø In other words, it is the level of sales at which contribution is just able to recovery FC.
W.;%D @(6-
o Break-even Point (units of sale) =
@(/-&.$"-.(/ +%& "/.-

W.;%D @(6-
o Break-even Point (in sales value) =
U/\ 7,-.(
= Break-even point units × Selling price per unit

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5. Cash Break-even Point

Ø It is level of sales at which cash profit or loss is zero.
@,6F W.;%D @(6-
o Cash Break-even Point (units of sale) =
@(/-&.$"-.(/ +%& "/.-

@,6F W.;%D @(6-

o Cash Break-even Point (in sales value) =
U/\ 7,-.(

6. Required sales for a given level of profit

W.;%D 9(6-=Y%6.&%D +&().-
Sales to earn desired profit (units) =
@(/-&.$"-.(/ +%& "/.-

W.;%D 9(6-=Y%6.&%D +&().-

Sales to earn desired profit (in `) = U/\ 7,-.(

7. Margin of Safety (MOS)

It is the level of sales over and above break-even sales
Margin of Safety (in `) = Actual sales – Break-even sales

Margin of Safety (in units) = Actual sale units – Break-even sales units

R,&2./ () 6,)%-E
Margin of safety (in %) =
C(-,8 *,8%6
× 100

Margin of Safety (in %) = 100% - Break-even Sales %

U&().-
Margin of safety (in `) = U/\ 7,-.(

U&().-
Margin of safety (in units) = @(/-&.$"-.(/ +%& "/.-

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8. Points to Remember (PTRs)

(A) If fixed cost per unit is given then multiply it with the level of units at which such
fixed cost per unit was computed.
(B) Apply price effect of Total FC and never apply on FC per unit

9. Dual Selling price or Dual variable cost questions

- It will lead to generation of dual contribution per unit
Steps to solve
- Find both contribution per unit
- First calculate total contribution from 1st option which will be sold first.
- Recover the required value (FC or Profit etc.) from this and then calculate the balance
required value.

10. Composite or Overall BEP

This concept is used when company deals in multiple products.
Particulars Prod. A Prod. B Prod. C Total
Sales - - - -
(-) Variable cost - - - -
Contribution - - - -
(-) Fixed Cost -
Profit -

o Overall Contribution per unit = Weighted average of contribution per unit

C(-,8 @(/-&.$"-.(/
= C(-,8 V/.-6

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C(-,8 @(/-&.$"-.(/
o Overall P/V Ratio = Weighted average of P/V Ratio = × 100
C(-,8 *,8%6

W.;%D @(6-
o Overall Break-even Point (in units) =
?1%&,88 @(/-&.$"-.(/ U%& "/.-

W.;%D @(6-
o Overall Break-even Point (in `) =
?1%&,88 U/\ 7,-.(

𝑩𝒓𝒆𝒂𝒌G𝒆𝒗𝒆𝒏 𝒔𝒂𝒍𝒆𝒔
11. Activity level % at BES = × 𝟏𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑺𝒂𝒍𝒆𝒔 𝒂𝒕 𝟏𝟎𝟎% 𝒍𝒆𝒗𝒆𝒍

𝑨𝒗𝒐𝒊𝒅𝒂𝒃𝒍𝒆 𝒇𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕

12. Shut down point =
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝒐𝒓 𝑷𝑽 𝑹𝒂𝒕𝒊𝒐

13. Cost with regard to decision making

Cost with regard to decision making

Relevant cost Which changes with Consider for decision

change in decisions making

Which doesn't change Ignore for decision

Irrelevant cost with change in making
decisions

14. Make vs Buy

Relevant Cost
Relevant Cost

Spare Capacity Exist

= VC + Additional FC
Relevant cost
Spare capacity not exist = VC + Additional FC + Opportunity
Cost

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Relevant Cost > Purchase

Recommend to BUY
cost
Relevant Cost Vs Purchase
Cost
Relevant Cost < Purchase
Recommend to Make
cost

15. Dropping an existing product for new product

Existing Profits

Existing Profits > New Not to drop existing

New Profits

Profits product
Vs

Drop existing product

Existing Profits < New and include new
Profits
product

16. Key factor or limiting factor

It is the factor which is limited in its availability
Decision will be taken on the basis of contribution per unit of key factor

Key Factor Basis of Decision

Sales (in units) Contribution per unit
Sales (in `) P/V Ratio
Material Contribution per unit of material
Labour hour Contribution per labour hour
Machine hour Contribution per machine hour

17. Indifference Level

Level at which cost of two options will be equal
Y.))%&%/9% ./ W.;%D 9(6-
Indifference level =
Y.))%&%/9% ./ 1,&.,$8% 9(6- +%& "/.-

OR Total cost of option (i) = Total cost of option (ii)

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(VC1)(Q) + FC1 = (VC2)(Q) + FC2

Solve and find Q i.e. indifference level

Level Recommendation
Actual quantity > Indifference level Select option having variable cost per unit is low
Actual quantity < Indifference level Select option where fixed cost is low
Actual quantity = Indifference level Select any option

In case if there are three 3 options, then compute as follows:

(a) Case 1 & 2
(b) Case 2 & 3
(c) Case 1 & 3

18. Income statement under Marginal Costing

Particulars Amount
Revenue (A) -
Direct Material -
Direct Labour -
Direct expenses -
Variable manufacturing overheads -
Variable GFC/NFC/COP -
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Variable COGS -
Add: Variable administration overheads -
Add: Variable selling & distribution overheads -
Variable COS (B) -
Contribution (A – B) -
Less: Fixed manufacturing overheads -
Less: Fixed administration overheads -
Less: Fixed selling & distribution overheads -
Profit -

19. Income statement under Absorption Costing

Particulars Amount
Revenue (A) -
Direct Material -
Direct Labour -
Direct expenses -

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Particulars Amount
Variable manufacturing overheads -
Fixed manufacturing overheads -
GFC/NFC/COP -
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
COGS -
Add: Fixed & Variable administration overheads -
Add: Fixed & Variable selling & distribution overheads -
COS -
Add: Under absorbed fixed manufacturing overheads -
Less: Over absorbed fixed manufacturing overheads -
Total Cost (B) -
Profit/(loss) (A – B) -

20. Profit of Marginal and Absorption differ due to difference in the stock values under
both methods
Particulars Amount
Profit as per Marginal Costing -
(+) Opening stock under valued in Marginal -
(-) Closing stock under valued in Marginal -
Profit as per Absorption Costing -

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MARGINAL COSTING – QUESTIONS

Question – 1
AZ company has prepared its budget for the production of 2,00,000 units. The variable cost per unit is
`16 and fixed cost is `4 per unit. The company fixes its selling price to fetch a profit of 20% on total
cost.
You are required to calculate:
(i) Present break-even sales (in ` and in quantity)
(ii) Present profit-volume ratio
(iii) Revised break-even sales in Rs and the revised profit-volume ratio, if it reduces its selling price
by 10%.
(iv) What would be revised sales in quantity and the amount, if a company desires a profit increase
of 20% more than the budgeted profit and selling price is reduced by 10% as above in point (iii).

Solution
(i) Present Fixed cost = 4 ´ 2,00,000 = `8,00,000
Present Profit = Total cost ´ 20% = (16 + 4) ´ 20% = `4
Present Selling price = Cost + Profit = (16 + 4) + 4 = `24
Contribution = Selling price – Variable cost = 24 – 16 = `8
•9p'k +"/. ?,88,888
Present Break-even sales units = = = 1,00,000 units
B"-.&943.9"- ('& 3-9. ?
Present Break-even sales value = 1,00,000 ´ 24 = `24,00,000

B"-.&943.9"- ?
(ii) Present profit-volume ratio = 100 = Ch 100 = 8.33%
}'))9-2 (&9+'

(iii) New Selling price per unit = 24 – 10% = `21.60

New contribution per unit = 21.60 – 16 = `5.60
@.:8
Revised PV ratio = C>.:8 100 = 25.93%
?,88,888
Revised break-even sales = = `30,85,229
C@.j7%

(iv) Required profit = Existing profit ´ 120% = (4 ´ 2,00,000) ´ 120% = `9,60,000

m'ƒ39&'k (&"$9.;•9p'k +"/. j,:8,888;?,88,888
Required sales quantity = = = 3,14,286 units
B"-.&943.9"- ('& 3-9. @.:8
Required sales value = 3,14,286 ´ 21.60 = ` 67,88,578

Question – 2
The sales turnover and profit of M/s SK Ltd. during the two years 2017 and 2018 were as follows:
Year Sales (`) Profit (`)
2017 4,50,000 60,000
2018 5,10,000 75,000

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You are required to calculate:

(a) Profit-Volume Ratio
(b) Sales at which company will neither lose nor gain anything
(c) Sales required to earn a profit of `1,20,000
(d) The profit made when sales are `7,50,000
(e) Minimum level of sales where the company needs not to close the production if unavoidable
fixed cost is `1,00,000.

Solution
Bx*-2' 9- „&"$9. i@,888w:8,888 >@,888
(a) P/V Ratio = × 100= @,>8,888wh,@8,888 × 100= :8,888 × 100= 25%
Bx*-2' 9- }*)'/

(b) Contribution for Year 2017 = 4,50,000 × 25%

Fixed cost + Profit = 1,12,500
Fixed cost + 60,000 = 1,12,500
Fixed cost = `52,500
•9p'k B"/. @C,@88
Break-even sales (in `) = = = `2,10,000
„/… m*.9" C@%
•9p'k B"/.;•'/9&'k „&"$9. @C,@88;>,C8,888
(c) Desired sales (in `) = „/… m*.9"
= C@%
= `6,90,000

(d) Given, Sales = `7,50,000

Profit = Contribution – Fixed Cost = (7,50,000 × 25%) – 52,500 = `1,35,000
•9p'k +"/. >,88,888
(e) Minimum required sales = = = `4,00,000
„/… m*.9" C@%

Question – 3
R Ltd. produces and sells 60,000 units of product 'AN', at its Noida Plant. The selling price of the
product is `15 per unit. The variable cost is 80% of selling price per unit. Fixed cost during this period
is `4,20,000. The company is continuously suffering losses, and management plans to shut down the
Noida Plant.
The fixed cost is expected to be reduced by `2,50,000. Additional costs of plant shut down are
expected at `25,000. You are required to comment on:
(i) Whether the Noida plant be shut down?
(ii) Find the shut-down point in units.

Solution
(i) Statement of Profit
Particulars If plant is continued (`) If plant is shut down (`)
Selling price 15 per unit -
Less: Variable cost 12 per unit -
Contribution 3 per unit -
Capacity 60,000 units -
Total contribution 60,000 ´ 3 = 1,80,000 -

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Less: Fixed cost 4,20,000 1,70,000

Less: Additional fixed cost - 25,000
Loss (2,40,000) (1,95,000)
Since the loss of Noida plant exceeds shut down cost, it is better to shut down the plant.

y".*) $9p'k +"/.w}x3. k"5- +"/. h,C8,888w>,j@,888

(ii) Shut down point = = = 75,000 units
B"-.&943.9"- ('& 3-9. 7

Question – 4
SK Ltd. has furnished the following data for the two years:
2017 2018
Sales `8,00,000 ?
Profit/volume ratio (P/V Ratio) 50% 37.5%
Margin of safety sales as % of total sales 40% 21.875%
There has been substantial savings in the fixed cost in the year 2018 due to the restructuring process.
The company could maintain its sales quantity level of 2017 in 2018 by reducing the selling price. You
are required to calculate the following:
(a) Sales for 2018 in `
(b) Break-even sales for 2018 in `
(c) Fixed cost for 2018

Solution
(a) Year 2017
Variable cost ratio = 100 – P/V Ratio = 10 – 50% = 50%
Variable cost = Sales × Variable cost ratio = 8,00,000 × 50% = `4,00,000
Year 2018
Since there is no change in sales quantity and no information has been provided for change in
variable cost per unit.
\Variable cost of Year 2018 = Variable Cost of Year 2017 = `4,00,000
Variable cost ratio = 100 – P/V Ratio = 100 – 37.5% = 62.5%
…*&9*4)' +"/.
= 62.5%
}*)'/
Sales = Variable cost ÷ 62.5%
Sales = 4,00,000 ÷ 62.5% = `6,40,000
(b) Breakeven sales (in %) = 100 – Margin of Safety (in %) = 100 – 21.875% = 78.125%
Breakeven sales = 6,40,000 × 78.125% = `5,00,000
•9p'k B"/.
(c) Breakeven sales = „/… m*.9"

Fixed cost = Breakeven sales × P/V Ratio = 5,00,000 × 37.5% = `1,87,500

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Question – 5
A company manufactures two types of herbal product S and K. Its budget shows profit figures after
apportioning the fixed joint cost of `15 lacs in proportion of the numbers of units sold. The budget
for 2022, indicates:
S K
Profit (`) 1,50,000 30,000
Selling price / unit (`) 200 120
P/V Ratio (%) 40 50
Required:
Compute the best option among the following, if the company expects that the number of units to be
sold would be equal.
(a) Due to exchange in a manufacturing process, the joint fixed cost would be reduced by 15% and
the variables would be increase by 7½%.
(b) Price of S could be increase by 20% as it is expected that the price elasticity of demand would be
unity over the range of price.
(c) Simultaneous introduction of both the option, viz. (a) and (b) above.

Solution
Working Notes:
1) Contribution per unit of S = 200 × 40% = `80
⸫Variable cost per unit of S = 200 – 80 = `120
Contribution per unit of K = 120 × 50% = `60
⸫Variable cost per unit of K = 120 – 60 = `60

2) Let units sold of S & K = y

Contribution = Fixed cost + Profit
80y + 60y = 15,00,000 + 1,50,000 + 30,000
140y = 16,80,000
y = 12,000
⸫Units sold of each product = 12,000

(a) Statement of Profit

Particulars Amount (`)
Contribution of S [{200 – (120 + 7.5%)} × 12,000] 8,52,000
Contribution of K [{120 – (60 + 7.5%)} × 12,000] 6,66,000
Total contribution 15,18,000
Less: Fixed Cost (15,00,000 – 15%) 12,75,000
Profit 2,43,000

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(b) Existing total sales of S = 12,000 × 200 = `24,00,000

New Selling price of S = 200 + 20% = `240
New quantity of S = 24,00,000 ÷ 240 = 10,000 units
Statement of Profit
Particulars Amount (`)
Contribution of S [(240 – 120) × 10,000] 12,00,000
Contribution of K [(120 – 60) × 12,000] 7,20,000
Total contribution 19,20,000
Less: Fixed Cost 15,00,000
Profit 4,20,000

(c) Statement of Profit

Particulars Amount (`)
Contribution of S [{240 – (120 + 7.5%)} × 10,000] 11,10,000
Contribution of K [{120 – (60 + 7.5%)} × 12,000] 6,66,000
Total contribution 17,76,000
Less: Fixed Cost (15,00,000 – 15%) 12,75,000
Profit 5,01,000
A comparison of increase in profit figures under above three options clearly indicates that the option
(c) is the best as it has the highest profit of `5,01,000.

Question – 6
SK a zero sugar cold drink manufacturing Indian company, is planning to establish a subsidiary
company in Nepal to produce coconut flavored juice. Based on the estimated annual sales of 60,000
bottles of the juice, cost studies produced the following estimates for the Nepalese subsidiary:
Total Annual Costs (`) Percent of total annual cost which is
variable
Material 2,70,000 100%
Labour 1,97,000 80%
Factory Overheads 1,20,000 60%
Administration Expenses 52,000 35%
The Nepalese production will be sold by manufacturer’s representative who will receive a commission
of 9% of the sale price. No portion of the Indian office expenses is to be allocated to the Nepalese
subsidiary. You are required to:
(i) Compute the sale price per bottle to enable the management to realize an estimated 20% profit
on sale proceeds in Nepal
(ii) Calculate the break-even point in rupees value sales and also in number of bottles for the
Nepalese subsidiary on the assumption that the sale price is `14 per bottle.

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Solution
(i) Computation of Sale Price Per Bottle
(`)
Variable Cost:
Material 2,70,000
Labour (`1,97,000 × 80%) 1,57,600
Factory Overheads (`1,20,000 × 60%) 72,000
Administrative Overheads (`52,000 × 35%) 18,200
Total (A) 5,17,800
Fixed Cost:
Labour (`1,97,000 × 20%) 39,400
Factory Overheads (`1,20,000 × 40%) 48,000
Administrative Overheads (`52,000 × 65%) 33,800
Total (B) 1,21,200
Total Cost without commission (A + B) 6,39,000
Add: Commission (9% 0f `9,00,000) 81,000
Add: Profit (20% of `9,00,000) 1,80,000
Sales Proceeds (6,39,000 ÷ 71%) (C) 9,00,000
No. of bottles (D) 60,000
Selling price per bottle (C ÷ D) 15

(ii) Statement of calculation of break-even point

Particulars Amount (`)
Sale price per bottle 14.00
@,>i,?88 8.63
(-) Variable cost per bottle 8 :8,888 9
(-) commission per bottle (14 × 9%) 1.26
Contribution per bottle 4.11
Break-even point (in number of bottles) >,C>,C88
= 29,489
h.>>
Break-even point (in sales value) 29,489 × 14 = 4,12,846

Question – 7
SK Ltd. manufacture and sales its product S-9. The following figures have been collected from cost
records of last year for the product S-9:
Elements of Cost Variable Cost Portion Fixed Cost
Direct Material 30% of Cost of Goods Sold -
Direct Labour 15% of Cost of Goods Sold -
Factory Overheads 10% of Cost of Goods Sold `2,30,000

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General & Administration Overheads 2% of Cost of Goods Sold `71,000

Selling & Distribution Overhead 4% of Cost of Sales `68,000
Last Year 5,000 units were sold at `185 per unit. From the given data find the followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in %)
(d) Profit if the sales were 10% less than the actual sales.
(Assume that administration overheads are related with production activity)

Solution
Working Notes:
(i) COGS = {(DM - 0.3COGS) + (DL - 0.15COGS) + (FOH - 0.10COGS + `2,30,000)
+ (G&AOH - 0.02COGS + `71,000)}
COGS = 0.57 COGS + `3,01,000
𝟑,𝟎𝟏,𝟎𝟎𝟎
COGS = 𝟎.𝟒𝟑
= `7,00,000
(ii) COS = COGS + (S&DOH - 0.04COS + `68,000)
COS = `7,00,000 + (0.04 COS + `68,000)
𝟕,𝟔𝟖,𝟎𝟎𝟎
COS = = `8,00,000
𝟎.𝟗𝟔
(iii) Calculation of Variable Costs:

Direct Material (0.3 × `7,00,000) ` 2,10,000

Direct Labour (0.15 × `7,00,000) ` 1,05,000
Factory Overhead (0.10 × `7,00,000) ` 70,000
General & Administration OH (0.02 × `7,00,000) ` 14,000
Selling & Distribution OH (0.04 × `8,00,000) ` 32,000
` 4,31,000
(iv) Calculation of total Fixed Costs:
Factory Overhead- ` 2,30,000
General & Administration OH ` 71,000
Selling & Distribution OH ` 68,000
` 3,69,000
𝑺𝒂𝒍𝒆𝒔 w 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 (𝟏𝟖𝟓×𝟓,𝟎𝟎𝟎)w𝟒,𝟑𝟏,𝟎𝟎𝟎
(v) P/V Ratio = × 100 = × 𝟏𝟎𝟎= 53.41%
𝑺𝒂𝒍𝒆𝒔 𝟏𝟖𝟓×𝟓,𝟎𝟎𝟎
𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 𝟑,𝟔𝟗,𝟎𝟎𝟎
(a) Break-Even Sales = = = `6,90,882
𝑷/𝑽 𝒓𝒂𝒕𝒊𝒐 𝟓𝟑.𝟒𝟏%

(b) Profit earned during the last year = (Sales – Total Variable Costs) – Total Fixed Costs
= (`9,25,000 - `4,31,000) - `3,69,000 = `1,25,000
𝑺𝒂𝒍𝒆𝒔 w 𝑩𝒓𝒆𝒂𝒌𝒆𝒗𝒆𝒏 𝟗,𝟐𝟓,𝟎𝟎𝟎w𝟔,𝟗𝟎,𝟖𝟖𝟐
(c) Margin of Safety (%) = × 100 = × 𝟏𝟎𝟎 = 25.31%
𝑺𝒂𝒍𝒆𝒔 𝟗,𝟐𝟓,𝟎𝟎𝟎

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(d) Profit if sales were 10% less than the actual sales
= 90% (`9,25,000 - `4,31,000) - `3,69,000 = `75,600

Question – 8
SK Ltd. manufactures and sells a single product X whose selling price is `100 per unit and the variable
cost is `60 per unit.
(a) If the Fixed Costs for this year are `24,00,000 and the annual sales are at 60% margin of safety,
Calculate the rate of return on sales, assuming an income tax level of 40%.
(b) For the next year, it is proposed to add another product line Y whose selling price would be `150
per unit and the variable cost `100 per unit. The total fixed costs are estimated at `28,00,000.
The sales mix of X : Y would be 5 : 3. Compute the breakeven sales in units for both the products.

Solution
(a) Contribution per unit = Selling price – Variable cost = `100 – `60 = `40
•9p'k B"/. Ch,88,888
Break-even point = `B"-.&943.9"- ('& 3-9. = = 60,000 units
h8

Break-even sale (in %) = 100 – Margin of safety = 100 - 60% of sales = 40% of sales
z&'*6w'1'- /*)'/ 9- 3-9./ h8
= >88
0+.3*) /*)'/ 3-9./
:8,888
= 0.40
0+.3*) /*)' 3-9./
Actual sale units = 1,50,000 units

Particulars `
Sales Value (1,50,000 × 100) 1,50,00,000
Less: Variable cost (1,50,000 × 60) 90,00,000
Contribution 60,00,000
Less: Fixed cost 24,00,000
Profit 36,00,000
Less: Income tax @ 40% 14,40,000
Net Return 21,60,000
C>,:8,888 14.40%
Rate of net return on sales 8>,@8,88,888 × 1009

(b) Contribution per unit of Product X = 100 – 60 = `40

Contribution per unit of Product Y = 150 – 100 = `50
@ 7
Overall contribution per unit = 840 × ?9 + 850 × ?9 = `43.75
•9p'k +"/. C?,88,888
Overall Break-even point = A1'&*)) B"-.&943.9"- ('& 3-9. = = 64,000 units
h7.i@

Break-even point of Product X = 64,000 × 5/8 = 40,000 units

Break-even point of Product Y = 64,000 × 3/8 = 24,000 units

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Question – 9
LR Ltd. is considering two alternative methods to manufacture product it intends to market. The two
methods have a maximum output of 50,000 units each and produce identical items with a selling price
of `25 each. The costs are:
Method – I Method – II
Semi-Automatic Fully automatic (`)
(` )
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000
You are required to calculate:
(i) Cost Indifference Point in units. Interpret your results.
(ii) The Break-even point of each method in terms of units

Solution
(i) Let cost indifference units = y
Thus, Total cost of Method – I = Total cost of Method – II
1,00,000 + 15y = 3,00,000 + 10y
5y = 2,00,000
y = 40,000
At y = 40,000 units, cost of the two methods will be equal.
If quantity produced is more than 40,000 units than option where variable cost per unit is low i.e.
Method - II will have greater benefits in term of cost. If quantity produced is less than 40,000
units than option with lowest fixed cost i.e. Method – I will have greater benefits in terms of total
cost.
(ii) Statement of Break-even point
Particulars Method – I Method - II
Contribution per unit (A) 25 – 15 = 10 25 – 10 = 15
Fixed cost (B) 1,00,000 3,00,000
Break-even point (in units) (B÷A) 10,000 20,000

Question – 10
Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
Capacity utilization (%) 90 60
Sales (`) 63,00,000 48,00,000
Variable Cost (`) 39,60,000 22,50,000
Fixed Cost (`) 13,00,000 15,00,000
Assuming that the proposal is implemented, calculate:

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(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of `60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of `60,00,000, what percentage
of increase in selling price is required to sustain an increase of 5% in fixed overheads.

Solution
(i) Statement of Profit (`in lakhs)
Particulars Plant A Plant B Total
Sales 63÷90% = 70 48÷60% = 80 150
(-) Variable Cost 39.6÷90% = 44 22.5÷60% = 37.50 81.50
Contribution 26 42.50 68.50
(-) Fixed Cost 13 15 28
Profit 13 27.50 40.50

B"-.&943.9"- :?,@8,888
Overall P\V Ratio = × 100 = >,@8,88,888 × 100 = 45.67%
}*)'/
•9p'k B"/. C?,88,888
Overall Break-even point (in `) = A1'&*)) „\… m*.9" = = `61,30,939
h@.:i%
z&'*6w'1'- /*)'/ :>,78,j7j
Break-even point capacity = y".*) }*)'/ *. >88% )'1') × 100 = >,@8,88,888 × 100 = 40.87%
(ii) Sales at 80% level = 1,50,00,000 × 80% = `1,20,00,000
Profit = Contribution – Fixed Cost = (1,20,00,000 × 45.67%) – 28,00,000 = `26,80,400
•9p'k B"/.;•'/9&'k „&"$9. C?,88,888;:8,88,888
(iii) Desired Sales = = = `1,92,68,867
A1'&*)) „\… m*.9" h@.:i%

(iv) Increase in fixed cost = 28,00,000 × 5% = `1,40,000

>,h8,888
\ Percentage increase in selling price = >,jC,:?,?:i × 100 = 0.726%

Question – 11
A dairy product company manufacturing baby food with a shelf life of one year furnishes the following
information:
(i) On 1st January, 2019, the company has an opening stock of 20,000 packets whose variable cost
is `180 per packet.
(ii) In 2018, production was 1,20,000 packets and the expected production in 2019 is 1,50,000
packets. Expected sales for 2019 is 1,60,000 packets.
(iii) In 2018, fixed cost per unit was `60 and it is expected to increase by 10% in 2019. The variable
cost is expected to increase by 25%. Selling price for 2019 has been fixed at `300 per packet.
You are required to calculate the Break-even volume in units for 2019.

Solution
Total fixed cost for year 2019 = 1,20,000´ 60 ´ 110% = `79,20,000

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Contribution per unit upto first 20,000 units (Opening stock units) = 300 – 180 = `120
Contribution per unit beyond 20,000 units (After sale of opening stock) = 300 – (180 ´ 125%) = `75
Total contribution on first 20,000 units = `20,000 ´ 120 = `24,00,000
Thus, fixed cost recovered from initial sale of 20,000 units = `24,00,000
Balance fixed cost to be recovered = `79,20,000 – `24,00,000 = `55,20,000

Units to be sold for recovery of additional fixed cost = ""#$%#%%% = 73,600 units
!"
Thus, Break-even point = 20,000 + 73,600 = 93,600 units

Question – 12
JC Ltd. has a production capacity of 80,000 units per year. Presently a company produces 60,000
units. Its cost structure is as under:
Material Cost ₹6 per unit
Labour Cost ₹4 per unit
Variable overheads ₹2 per unit
Total fixed cost ₹3,00,000 per annum. Present selling price ₹20 per unit in the month of January,
2024 company received an offer from a Japanese client to supply 20,000 units at a price of ₹14 per
unit with the additional shipping cost of ₹8,000.
Required:
(i) On the basis of changes in the profit, advice to the company, whether the offer should be
accepted or not?
(ii) Will your advice be different, if the customer is local one?
(iii) If Japanese client offer for supply of 30,000 units to a price of ₹14 (part supply of order not
accepted) and shipping cost treated as variable cost, analyze the impact on the profit of JC
Ltd., if order accepted.

Solution
(i) Statement Showing “Cost and Profit under Both Situation”
Particulars Existing Production After Offer
(60,000 units) (₹) (80,000 units) (₹)
Sales
Existing (60,000 × ₹20) 12,00,000 12,00,000
Offer (20,000 × ₹14) - 2,80,000
Total Sales 12,00,000 14,80,000
Less: Direct Materials @ ₹6 3,60,000 4,80,000
Direct Labour @ ₹4 2,40,000 3,20,000
Variable Overheads @ ₹2 1,20,000 1,60,000
Contribution 4,80,000 5,20,000
Less: Additional Shipping cost – 8,000
Less: Fixed Cost 3,00,000 3,00,000
Profit 1,80,000 2,12,000
Since the Profit has increased by ₹32,000, the proposal of the Japanese client should be accepted

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(ii) Yes, the advice will be different, if the customer is local one since the company is currently
selling at ₹20 in local market and therefore, selling at discounted price of ₹14 may impact its
local market.

(iii) Statement Showing “Cost and Profit”

Particulars After Offer
(80,000 units) (₹)

Sales
Existing (50,000 × ₹20) 10,00,000
Offer (30,000 × ₹14) 4,20,000
Total Sales 14,20,000
Less: Direct Materials @ ₹6 4,80,000
Direct Labour @ ₹4 3,20,000
Variable Overheads @ ₹2 1,60,000
Additional Shipping cost (₹8,000/20,000 units) × 30,000 units 12,000
Contribution 4,48,000
Less: Fixed Cost 3,00,000
Profit 1,48,000
If offer of Japanese client to supply 30,000 units at a price of ₹14 is accepted, the Profit will decrease
by ₹32,000 from the current level.

Question – 13
Moon Ltd. produces products ‘X’, ‘Y’ and ‘Z’ and has decided to analyse it’s production mix in respect
of these three products – ‘X’, ‘Y’ and ‘Z’.
You have the following information:
X Y Z
Direct materials (`) per unit 160 120 80
Variable overheads (`) per unit 8 20 12
Direct labour:
Departments: Rate per hour (`) Hours per unit Hours per unit Hours per unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11
From the current budget, further details are as below:
X Y Z
Annual production at present (in units) 10,000 12,000 20,000
Estimated selling price per unit (`) 312 400 240
Sales department estimate of possible sales 12,000 16,000 24,000
in the coming year (in units)

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There is a constraint on supply of labour in Department-A and its manpower cannot be increase beyond
its present level.
Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the total contribution from the best possible product

Solution
Present supply of labour hours in Department-A
= (10,000 × 6) + (12,000 × 10) + (20,000 × 5) = 2,80,000 labour hours
Statement of Contribution
Particulars X Y Z
Selling price per unit 312 400 240
(-) Direct material per unit 160 120 80
(-) Labour cost per unit
Department A 4×6 = 24 4×10 = 40 4×5 = 20
Department B 8×6 = 48 8×15 = 120 8×11 = 88
(-) Variable overheads per unit 8 20 12
Contribution per unit 72 100 40
Labour hours per unit 6 10 5
Contribution per labour hour 12 10 8
Rank I II III
Statement of Product Mix and Contribution
Product Units Labour hours Labour Hours Contribution
per unit consumed
X 12,000 6 72,000 72,000×12 = 8,64,000
Y 16,000 10 1,60,000 1,60,000×10 = 16,00,000
Z 48,000÷5 = 5 (Bal. fig.) 48,000 48,000×8 = 3,84,000
9,600
37,600 2,80,000 28,48,000

Question – 14
ABC Ltd. is a well-known company for producing baby care products. The company produces and
sells two variants of organic shampoo for children: "Baby Rose" and "Baby Lily". The sales and
cost data for both products are provided below:
Particulars Baby Rose Baby Lily
Current demand and Sales (Number of bottles) 4,000 3,000
Production Capacity (Number of bottles) 7,500 6,000
Selling Price per bottle (₹) 600 750
Variable Costs per bottle:
- Direct Materials (₹20 Per litre) 160 200
- Other Variable Costs 270 350

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The fixed costs amount to ₹5,00,000 and ₹4,50,000 for Baby Rose and Baby Lily respectively. The
Production Manager has informed that 1,00,000 litres of material is available for production. A
dealer has approached the company and proposed to purchase both products at the existing selling
prices, which are to be produced by utilizing the remaining unused material. However, he has
insisted that all the bottles must be packed with eco-friendly packaging, which will result in an
additional cost of ₹10 per bottle for the company. Presently, the company is not using eco-friendly
material for packing of bottles.

Required:
Prepare a detailed statement showing the overall contribution and profit of the company after
acceptance of the dealer's proposal.

Solution
Particulars Baby Baby Total
Rose Lily
(₹) (₹) (₹)
Selling price per bottle 600 750 –
Less: Direct Materials 160 200 –
Other variable costs 270 350 –
Contribution per bottle Before additional packaging 170 200 –
Contribution per bottle per unit of raw material Before
additional packaging 21.25 20
Ranking on the basis of Contribution per bottle per unit
of raw material I II

Particulars Current Additional Additional Total

Sales Sales of Sales of
(WN2) Baby Rose Baby Lily
(3,500 (1,000
bottles) bottles)
(₹) (₹) (₹) (₹)
Selling price per bottle – 600 750 –
Less: Direct Materials – 160 200 –
Other variable costs – 270 350 –
Additional packaging – 10 10
Contribution per unit – 160 190 –
Total Contribution 12,80,000 5,60,000 1,90,000 20,30,000
Less: Fixed Cost 9,50,000 – – 9,50,000
Profit 3,30,000 5,60,000 1,90,000 10,80,000

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WN1
Baby Rose Baby Lily
Raw Material used per unit of bottle (a) 8 litres 10 litres
(₹160/ ₹20) (₹200/ ₹20)
Current Demand and Sales (b) 4,000 bottles 3,000 bottles
Total Raw Material used (c = a × b) 32,000 litres 30,000 litres

WN2
Statement showing the current contribution and profit of the company
Particulars Baby Rose Baby Total
Lily
(₹) (₹) (₹)
Selling price per bottle 600 750 –
Less: Direct Materials 160 200 –
Other variable costs 270 350 –
Contribution per bottle Before additional 170 200 –
packaging
Contribution per bottle per unit of raw material 21.25 20
Before additional packaging
Total Contribution Before additional packaging 6,80,000 6,00,000 12,80,000
Less: Fixed Cost 5,00,000 4,50,000 9,50,000
Profit 1,80,000 1,50,000 3,30,000

WN3
Raw Material available after current sales = 1,00,000 litres – 62,000 litres = 38,000 litres
Since the contribution per unit of Baby Rose is higher than Baby Lily, the company will produce
and sale Baby Rose shampoo to the dealer.

Number of units that can be produced in 38,000 litres = 38,000 litres/8 litres = 4,750 bottles
However, the Production capacity of Baby Rose is 7,500 bottles, only 3,500 bottles can be produced.
Raw materials used in 3,500 bottles = 8 litres × 3,500 bottles = 28,000 litres
Remaining material = 10,000 litres
Number of Baby Lily that can be produced in 10,000 litres = 10,000 litres/10 litres = 1,000 bottles

Question – 15
The profit for the year of SK Ltd. works out to 12.5% of the capital employed and the relevant figures
are as under:
Sales `5,00,000
Direct Materials `2,50,000
Direct Labour `1,00,000
Variable Overheads `40,000
Capital Employed `4,00,000

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The new Sales Manager who has joined the company recently estimates for next year a profit of about
23% on capital employed, provided the volume of sales is increased by 10% and simultaneously there
is an increase in selling price of 4% and an over cost reduction in all the elements of cost by 2%.
Required:
Find out by computing in details the cost and profit for the next year, whether the proposal of sales
manager can be adopted.

Solution
Statement of Calculation of Fixed Overheads
Particulars Amount
Sales 5,00,000
(-) Profit (4,00,000 × 12.5%) 50,000
Total Cost 4,50,000
(-) Direct material 2,50,000
(-) Direct labour 1,00,000
(-) Variable overheads 40,000
Fixed overheads 60,000
Statement of Profit (Proposed Situation)
Particulars Amount
>>8 >8h 5,72,000
Sales [5,00,000 ×>88× >88 ]
>>8 j? 4,20,420
(-) Variable cost [(2,50,000 + 1,00,000 + 40,000) × >88 × >88]
Contribution 1,51,580
j? 58,800
(-) Fixed Overheads (68,000 × >88)
Profit 92,780
jC,i?8
Profit as % of capital employed = h,88,888×100 = 23.195%
Since the profit as % of capital employed is increasing, thus it is recommended to accept the proposal.

Question – 16
SK Ltd. manufactures three different products and the following information has been collected form
the books of accounts:
Products
S K M
Sales Mix 35% 35% 30%
Selling price `300 `400 `200
Variable cost `150 `200 `120
Total Fixed costs `18,00,000
Total Sales `60,00,000

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The company has currently under discussion, a proposal to discontinue the manufacture of product M
and replace it with Product J, when the following results are anticipated:
Products
S K J
Sales Mix 50% 25% 25%
Selling price `300 `400 `300
Variable cost `150 `200 `150
Total Fixed costs `18,00,000
Total Sales `64,00,000
Required:
(i) Compute the PV ratio, total contribution, profit and Break-even sales for the existing product mix.
(ii) Compute the PV ratio, total contribution, profit and Break-even sales for the proposed product mix.

Solution
(i) Computation of PV ratio
Products
S K M
Selling price 300 400 200
Less: Variable cost 150 200 120
Contribution per unit 150 200 80
PV ratio 50% 50% 40%
Overall PV Ratio = Weighted average PV ratio = (50 × 0.35) + (50 × 0.35) + (40 × 0.30) = 47%
Total Contribution = Sales × Overall PV Ratio = 60,00,000 × 47% = `28,20,000
Total Profit = Contribution – Fixed Cost = 28,20,000 – 18,00,000 = `10,20,000
•9p'k B"/. >?,88,888
Break-even Sales = „1'&*)) „… m*.9" = = `38,29,787
hi%

(ii) Computation of PV ratio

Products
S K J
Selling price 300 400 300
Less: Variable cost 150 200 150
Contribution per unit 150 200 150
PV ratio 50% 50% 50%
Overall PV Ratio = Weighted average PV ratio = (50 × 0.50) + (50 × 0.25) + (50 × 0.25) = 50%
Total Contribution = Sales × Overall PV Ratio = 64,00,000 × 50% = `32,00,000
Total Profit = Contribution – Fixed Cost = 32,00,000 – 18,00,000 = `14,00,000
•9p'k B"/. >?,88,888
Break-even Sales = „1'&*)) „… m*.9" = = `36,00,000
@8%

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Question – 17
SK Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned
as 90%. Standard variable production costs are `11 per unit. The fixed costs are `3,60,000 per year.
Variable selling costs are `3 per unit and fixed selling costs are `2,70,000 per year. The unit selling
price is `20.

In the year just ended on 31stMarch, 2019, the production was 1,60,000 units and sales were 1,50,000
units. The closing inventory on 31st March was 20,000 units. The actual variable production costs for
the year were `35,000 higher than the standard.
(a) Calculate the profit for the year
(i) By absorption costing method and
(ii) By marginal costing method
(b) Explain the difference in the profits

Solution
Working Note
Particulars Year 2019
Opening stock (Bal. fig.) 10,000
(+) Production 1,60,000
(-) Sales 1,50,000
Closing Stock 20,000
(a) Income Statement under Absorption Costing
Particulars Amount
Sales (A) 1,50,000×20 = 30,00,000
Variable Production Cost 1,60,000×11 = 17,60,000
Under Recovered Variable Prod. Cost 35,000
Fixed Production 7,:8,888
×1,60,000 = 3,20,000
C,88,888×j8%

GFC/NFC/COP 21,15,000
(+) Op. Stock FG 10,000×(11 + 2) = 1,30,000
(-) Cl. Stock FG C>,>@,888
×20,000 = 2,64,375
>,:8,888

COGS 19,80,625
(+) Variable Selling Cost 1,50,000×3 = 4,50,000
(+) Fixed Selling Cost 2,70,000
COS 27,00,625
(+) Under Recovered Fixed Prod. Cost 3,60,000 – 3,20,000 = 40,000
Total Cost (B) 27,40,625
Profit (A – B) 2,59,375

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Income Statement under Marginal Costing

Particulars Year 2019
Sales (A) 1,50,000×20 = 30,00,000
Variable Production Cost 1,60,000×11 = 17,60,000
Under recovered variable Prod. Cost 35,000
Variable GFC/NFC/COP 17,95,000
(+) Op. Stock FG 10,000×11 = 1,10,000
(-) Cl. Stock FG >i,j@,888
× 20,000 = 2,24,375
>,:8,888

Variable COGS (B) 16,80,625

(+) Variable Selling cost 1,50,000×3 = 4,50,000
Variable COS (B) 21,30,625
Contribution (A – B) 8,69,375
(-) Fixed Production Cost 3,60,000
(-) Fixed Selling Cost 2,70,000
Profit 2,39,375

(b) The difference in profit is due to the valuation of stock in both methods.

Question – 18
Mefttal Ltd. is currently operating at 60% of its total capacity which is 1.5 times than the previous
year. The total capacity of the company is 2,00,000 units.

Other information relating to the production is provided below:

(i) The total cost of production for the current year is `59,28,000, and for the previous year, it was
`44,72,000.
(ii) No changes are anticipated in the cost structure for the upcoming years.
(iii) Selling price is `52 per unit and is expected to remain the same in the coming years.
You are required to calculate Break-Even Point (in units)
(a) 1,20,000 units (b) 40,000 units
(c) 80,000 units (d) 1,00,000 units

Question – 19
A garment manufacturer has been producing and selling T-shirts exclusively for Indian market. His T-
shirts are made of a specific material which is eco-friendly. It means that T-shirts are bio-degradable
in soil after it becomes unsuitable for use.

This invention has been applauded throughout the country. Owner, Vikas, registered for the patent
rights for his invention so that no one else could use it. Vikas feels that this invention will also be liked

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in foreign markets, and thus plans to expand his business outside India. He feels that US market is the
first foreign market he should tap into.

Current cost structure (each T-shirt):

Direct material 90
Direct labour 60
Special service 80
(Used in T-shirt making, 50% fixed)
Fixed overhead 50
Administration overhead (fixed) 20
Total cost per T-shirt 300
(+) Profit margin 200
Selling price in India 500

There is no limitation of any resources in India. Vikas is able to sell 80,000 T-shirts each year. He is
currently working at 80% of his total capacity.

After searching for potential customers in US, Vikas received an inquiry for 30,000 units from a
wholesale distributor in California. As per the inquiry, order will be placed if price per T-shirt is
reasonable and the order has to be satisfied in full.

Vikas decided to send a quote and the order was placed by the foreign client, on the same day. Vikas,
without a second thought accepted the order, but did not feel the need to extend the manufacturing
capacity; therefore he decided forgo a few Indian clients.

This foreign order also required special packaging. It is spent at 20% of the total prime cost per T-shirt.
The production was done quickly and foreign consignment was transported to custom port via services
from a carriage agency. It charged `80,000 for 1 truck, whose capacity was 500 kg, to transport whole
of the consignment. Truck was 20% vacant after loading the consignment.

Bill of lading was filed and a professional fee of `25,000 for filing this was paid to a Chartered
accountant. Custom port also charged `80 per kg per day to handle the material, storing it in
warehouse, and for loading the goods on ship.

The shipping company, which was booked by Vikas for taking the consignment to US, got delayed
due to bad weather. Stock was held at port for 5 days and on 6th day it was loaded on ship. Shipping
company charged `2,800/ 10kg of goods. Insurance was charged flat at `1,11,000. There is no custom
duty on such exports. Answer the following questions:

Question – 1
Vikas had sufficient funds in his hands but he still raised a short-term working capital loan @ 6.5%
p.a. for the satisfaction of this foreign order because he found a one time investment opportunity which
was giving him 9.25% returns. Foreign order was accepted on 1st June and loan was taken on the same

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day. Repayment of the loan will be made on 1st September. Calculate net cash outflow due to this
export order. Which of the following is correct?
(a) `73,91,000
(b) `75,47,750
(c) `74,76,500
(d) `71,06,000

Question – 2
What would have been the minimum price that Vikas could have quoted per T-shirt in US dollars?
(exchange rate on 1st June, $1 = `83.86)
(a) $ 4.23
(b) $ 4.20
(c) $ 4.17
(d) $4.05

Question – 3
Payment from foreign client was received on 8th October when exchange rate was `86 for each US
$. Calculate the profit earned from this export order if actual quoted price was $4.90 per T-shirt. Select
the correct amongst following:
(a) `40,65,500
(b) `41,51,000
(c) `39,94,250
(d) `44,36,000

Question – 4
What is the net cash Inflow from this export order?
(a) `55,36,000
(b) `51,65,500
(c) `52,51,000
(d) `50,94,250

Question – 5
What is the Incremental benefit from this export order?
(a) `19,94,250
(b) `21,51,000
(c) `20,65,500
(d) `24,36,000

1 2 3 4 5
B A C D A

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BUDGET & BUDGETARY CONTROL - CONCEPTS

1. Types of budget
(A) Master Budget – Summary budget of en<re organiza<on

(B) Period – Wise Budget

Long term budget – Beyond 3 years
Short term budget – 1 to 3 years
Current budget – Upto 1 year

(C) Fixed Budget – Doesn’t change with change in units or output

(D) Flexible Budget – Can be changed with change in units or output

(E) FuncCon wise Budget

Sales Budget
Produc<on Budget
Material Consump<on Budget
Material Purchase Budget
Labour Budget
Overheads Budget
Capital budget
Cash Budget
Plant U<liza<on Budget
Research & Development Cost Budget

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2. Type of Costs

3. Total Cost = No. of units ´ Cost per unit

4. QuanCty & Price Effect

Total Variable Cost Total Fixed Cost

QuanCty Effect Yes No

Price Effect Yes Yes

5. Points to Remember (PTRs)

Unless otherwise provided, following assump<ons are to be taken
- VC per unit will remain same
- Total Fixed cost will remain same
- All direct cost are assumed to be variable
- All overheads are assumed to be fixed

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P
Wages ∝ and Efficiency ∝ Output
:)).9.%/9E

6. DistribuCon of Semi-Variable Cost

Y.))%&%/9% ./ 9(6-
Variable cost per unit out of SVC = Y.))%&%/9% ./ "/.-6
Fixed cost out of SVC = Total cost – Total variable cost

7. Sales Budget
Product Units Selling price per unit Sales
A - - -
B - - -
C - - -
Total - -

8. ProducCon Budget
ParCculars Product A Product B Product C
Sales - - -
(+) Closing Stock - - -
(-) Opening Stock - - -
ProducCon units - - -

9. Raw Material ConsumpCon Budget

Product Prod. QuanCty RM consumpCon per unit Total RM ConsumpCon
A - - -
B - - -
C - - -
- - -

10. Raw Material Purchase Budget

ParCculars January February March
Raw Material Consumed - - -
(+) Closing Stock - - -
(-) Opening Stock - - -
Raw Material Purchased - - -

11. Labour Budget

ParCculars Product A Product B Product C

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ProducCon Units - - -
Direct labour hour per unit - - -
Total Labour hours - - -
Total Labour cost @ Rs. __ per hour - - -

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BUDGET & BUDGETARY CONTROL – QUESTIONS

Question – 1
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 stocks annually by using 50% of its machinery capacity.
The cost of each stick is as under:
Direct material `150
Direct wages `50
Work 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?

Solution
Statement of calculation of selling price
Particulars Amount (`)
Direct Material [(150 + 5%) × 7,000] 11,02,500
Direct Wages [(50 + 20%) × 7,000] 4,20,000
Variable Works Overhead [125 × 50% × 7,000] 4,37,500
Fixed Works Overhead [125 × 50% × 5,000 × 110%] 3,43,750
Variable Selling Expenses [50 × 25% × 7,000] 87,500
Fixed Selling Expenses [50 × 75% × 5,000 × 110%] 2,06,250
Total Cost 25,97,500
Add: Desired Profit (125 × 7,000) 8,75,000
Total Sales Value 34,72,500
Less: Existing Sales from 5,000 units [5,000 × 500] 25,00,000
Sales value to be obtained from remaining 2,000 units (A) 9,72,500
Sale units (B) 2,000
Selling price per unit (A ÷ B) 486.25

Question – 2

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During the FY 2020-21, SK Limited has produced 60,000 units operating at 50% capacity level. The
cost structure at the 50% level of activity is as under:
(`)
Direct material 300 per unit
Direct wages 100 per unit
Variable overheads 100 per unit
Direct Expenses 60 per unit
Factory expenses (25% fixed) 80 per unit
Selling and Distribution expenses (80% variable) 40 per unit
Office and administrative expenses (100 % fixed) 20 per unit
The company anticipates that in FY 2021-22, the variable costs will go up by 20% and fixed costs will
go up by 15%. The selling price per unit will increase by 10% to `880. Required:
(i) Calculate the budgeted profit/loss for the FY 2020-21.
(ii) Prepare an expense budget on marginal cost basis for the FY 2021-22 for the company at 50%
and 60% level of activity and find out the profits at respective levels.

Solution
(i) Calculation of Budgeted Profit for the year FY 2020-21
60,000 Units
Per Unit Total
Sales (A) 800.00 4,80,00,000
Variable Cost
Direct material 300.00 1,80,00,000
Direct wages 100.00 60,00,000
Variable overheads 100.00 60,00,000
Direct expenses 60.00 36,00,000
Variable factory exp. (80´75%) 60.00 36,00,000
Variable selling exp. (40´80%) 32.00 19,20,000
Total Variable cost (B) 652 3,91,20,000
Fixed Cost
Office and admin. Exp. (100%) - 12,00,000
Fixed factory exp. (25%) - 12,00,000
Fixed selling & dist. Exp. (20%) - 4,80,000
Total Fixed cost (C) - 28,80,000
Total cost (B+C = D) - 4,20,00,000
Profit (A – D) - 60,00,000
(ii) Expenses Budget for the year FY 2021-22 at 50% & 60% level
60,000 units 72,000 units
Per Unit Total Per Unit Total
Sales (A) 880 5,28,00,000 880 6,33,60,000
Variable Cost
Direct material 360.00 2,16,00,000 360.00 2,59,20,000

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Direct wages 120.00 72,00,000 120.00 86,40,000

Variable overheads 120.00 72,00,000 120.00 86,40,000
Direct expenses 72.00 43,20,000 72.00 51,84,000
Variable factory exp. (80´75%) 72.00 43,20,000 72.00 51,84,000
Variable selling exp. (40´80%) 38.40 23,04,000 38.40 27,64,800
Total Variable cost (B) 782.40 4,69,44,000 782.40 5,63,32,800
Fixed Cost
Office and admin. Exp. (100%) - 13,80,000 - 13,80,000
Fixed factory exp. (25%) - 13,80,000 - 13,80,000
Fixed selling & dist. Exp. (20%) - 5,52,000 - 5,52,000
Total Fixed cost (C) - 33,12,000 - 33,12,000
Total cost (B + C = D) - 5,02,56,000 - 5,96,44,800
Profit (A – D) - 25,44,000 - 37,15,200

Question – 3
The Accountant of KPMR Ltd. has prepared the following budget for the coming year 2022 for its two
products ‘AYE’ and ‘ZYE’:
Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in `) Amount (in `)
Selling price per unit 200 180
Direct material per unit 80 70
Direct labour per unit 40 35
Variable overhead per unit 20 25
Fixed overhead per unit 10 10
After reviewing the above budget, the management has called the marketing team for suggesting some
measures for increasing the sales. The marketing team has suggested that by promoting the products
on social media, the sales quantity of both the products can be increased by 5%. Also, the selling price
per unit will go up by 10%. But this will result in increase in expenditure on variable overhead and
fixed overhead by 20% and 5% respectively for both the products.

You are required to prepare flexible budget for both the products:
(i) Before promotion on social media
(ii) After promotion on social media

Solution
(i) Flexible Budget (Before promotion)
Particulars Product AYE Product ZYE Total
Sales 4,000 ´ 200 = 8,00,000 3,000 ´ 180 = 5,40,000 13,40,000
Less: Direct 4,000 ´ 80 = 2,40,000 3,000 ´ 70 = 2,10,000 4,50,000
Material
Less: Direct labour 4,000 ´ 40 = 1,60,000 3,000 ´ 35 = 1,05,000 2,65,000

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Less: Variable OHs 4,000 ´ 20 = 80,000 3,000 ´ 25 = 75,000 1,55,000

Less: Fixed OHs 4,000 ´ 10 = 40,000 3,000 ´ 10 = 30,000 70,000
Profit 2,80,000 1,20,000 4,00,000

(ii) Flexible Budget (After promotion)

Particulars Product AYE Product ZYE Total
Sales 4,200 ´ 220 = 9,24,000 3,150 ´ 198 = 6,23,700 15,47,700
Less: Direct 4,200 ´ 80 = 3,36,000 3,150 ´ 70 = 2,20,500 5,56,500
Material
Less: Direct labour 4,200 ´ 40 = 1,68,000 3,150 ´ 35 = 1,05,000 2,73,000
Less: Variable OHs 4,200 ´ 24 = 1,00,800 3,150 ´ 25 = 1,10,250 2,11,050
Less: Fixed OHs 40,000 + 5% = 42,000 30,000 + 5% = 31,500 73,500
Profit 2,77,200 1,56,450 4,33,650

Question – 4
PSV Ltd. manufactures and sells a single product and estimated the following related information for
the period November, 2020 to March, 2021.
Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Opening Stock of Finished 7,500 3,000 9,000 8,000 6,000
goods (in Units)
Sales (in Units) 30,000 35,000 38,000 25,000 40,000
Selling Price per unit (in `) 10 12 15 15 20
Additional information:
• Closing stock of finished goods at the end of march, 2021 is 10,000 units
• Each unit of finished output requires 2kg of Raw Material ‘A’ and 3kg of Raw Material ‘B’.
You are required to prepare the following budgets for the period November, 2020 to March 2021 on
monthly basis:
(i) Sales budget (in `)
(ii) Production Budget (in units) and
(iii) Raw material budget for raw material ‘A’ and ‘B’ separately (in units)

Solution
(i) Sales Budget
Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Sales (in Units) 30,000 35,000 38,000 25,000 40,000
Selling Price per unit (in `) 10 12 15 15 20
Sales Value 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000

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(ii) Production Budget

Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Sales Units 30,000 35,000 38,000 25,000 40,000
Add: Closing Stock Units 3,000 9,000 8,000 6,000 10,000
Less: Opening Stock Units (7,500) (3,000) (9,000) (8,000) (6,000)
Production Units 25,500 41,000 37,000 23,000 44,000

(iii) Raw Material ‘A’ Budget

Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Production Units 25,500 41,000 37,000 23,000 44,000
Raw material consumption per 2 2 2 2 2
unit
Raw Material Consumption 51,000 82,000 74,000 46,000 88,000

Raw Material ‘B’ Budget

Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Production Units 25,500 41,000 37,000 23,000 44,000
Raw material consumption per 3 3 3 3 3
unit
Raw Material Consumption 76,500 1,23,000 1,11,000 69,000 1,32,000

Question – 5
AB manufacturing Company manufactures two products A and B. Both Products use a common Raw
Material ‘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 budget period) as under:
Product A Product B
Sales in Units 36,000 16,700
Finished goods stock increase by year-end (in Units) 860 400
Post-production Rejection Rate (%) 3 5
Material ‘C’ per completed 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 a 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:

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(i) Prepare Functional Budgets for the year ended 31st March, 2018 under the following categories:
a) Production Budget for Products A and B in Units
b) Purchase Budget for Raw Material ‘C’ in kg and value.
(ii) Calculate the Economic Order Quantity (EOQ) in kg for Raw Material ‘C’.

Solution
(i) Production Budget (in units) for the year ended 31st March 2018
Particulars Product A Product B
Budgeted sales (units) 36,000 16,700
Add: Increase in closing stock 860 400
No. of good units to be produced 36,860 17,100
Post production rejection rate 3% 5%
Post production good units rate 100% – 3% = 97% 100% - 5% = 95%
No. of units to be produced 36,860 ÷ 97% = 38,000 17,100 ÷ 95% = 18,000

(ii) Purchase budget (in kgs and value) for Material C

Particulars Product A Product B
No. of units to be produced 38,000 18,000
Usage of Material C per unit of 4 kg 5 kg
production
Material needed for production 1,52,000 kg 90,000 kg
Wastage % of Material C 5% 4%
Good usage % of Material C 100% - 5% = 95% 100% - 4% = 96%
Material to be purchased (in kg) 1,52,000÷95% = 1,60,000 90,000÷96% = 93,750
Rate per kg of Material C `45 `45
Total Purchase cost 1,60,000×45 = 72,00,000 93,750×45 = 42,18,750
Total purchase cost = 72,00,000 + 42,18,750 = `1,14,18,750
(iii) A = 1,60,000 + 93,750 = 2,53,750 kg
O = `250
C = `45 × 9% = `4.05
C×0×A C×C,@7,i@8×C@8
EOQ = / =/ = 5,597 kg
B h.8@

Question – 6
A Limited has furnished the following information for the months from 1st January to 30th April, 2023:
January February March April
Number of working days 25 24 26 25
Production (in units) per working day 50 55 60 52

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Raw material purchases (% by weights 21% 26% 30% 23%

to total of 4 months)
Purchase price of raw material (per kg) `10 `12 `13 `11
Quantity of raw material per unit of product: 4 kg
Opening stock of raw material on 1st January: 6,020 kg. (Cost `63,210)
Closing stock of raw material on 30th April: 5,100 kg.
All the purchases of material are made at the start of each month.
Required:
(i) Calculate the consumption of raw material (in kgs) month-by-month and in total
(ii) Calculate the month-wise quantity and value of raw materials purchased
(iii) Prepare the priced stores ledger for each month using the FIFO method.

Solution
(i) Calculation of consumption for Raw Material (in kgs) month by month and total
Particulars Jan Feb March April Total
No. of working cays 25 24 26 25 -
Production (per day) 50 55 60 52 -
Production 1,250 1,320 1,560 1,300 5,430
Raw material consumed (in kgs) 5,000 5,280 6,240 5,200 21,720

Calculation of Raw Material Purchased

Purchased Kg
Closing stock on 30th April 5,100
Add: Raw material consumed 21,720
Less: Opening stock on 1st January (6,020)
Raw material purchased 20,800

(ii) Calculation of month wise quantity and value of raw materials purchased
Month Purchase quantity (Kgs) Price (`) Value (`)
January 20,800 ´ 21% = 4,368 10 43,680
February 20,800 ´ 26% = 5,408 12 64,896
March 20,800 ´ 30% = 6,240 13 81,120
April 20,800 ´ 23% = 4,784 11 52,624
Total 20,800 2,42,320

(iii) Stores Price Ledger by using FIFO Method

Receipts Issues Balance
Month
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
Jan - - - - - - 6,020 10.5 63,210
6,020 10.5 63,210
Jan 4,368 10 43,680 - - -
4,368 10 43,680
Jan - - - 5,000 10.5 52,500 1,020 10.5 10,710

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4,368 10 43,680
1,020 10.5 10,710
Feb 5,408 12 64,896 - - - 4,368 10 43,680
5,408 12 64,896
1,020 10.5 10,710 108 10 1,080
Feb - - -
4,260 10 42,600 5,408 12 64,896
108 10 1,080
March 6,240 13 81,120 - - - 5,408 12 64,896
6,240 13 81,120
108 10 1,080
March - - - 5,408 12 64,896 5,516 13 71,708
724 13 9,412
5,516 13 52,624
April 4,784 11 52,624 - - -
4,784 11 71,708
316 13 4,108
April - - - 5,200 13 67,600
4,784 11 52,624

Question – 7
An electronic gadget manufacturer has prepared sales budget for the next few months. In this respect,
following figures are available:
Month Electronic gadgets’ sales
January 5,000 units
February 6,000 units
March 7,000 units
April 7,500 units
May 8,000 units

To manufacture an electronic gadget, a standard cost of `1,500 is incurred and it is sold through dealers
at an uniform price of `2,000 per gadget to customers. Dealers are given a discount of 15% on selling
price.

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 gadgets 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:
(i) Prepare production budget (in units) for the month of January, February, March and April
(ii) Prepare purchase budget for batteries (in units) for the month of January, February and March
and calculate profit for the quarter ending on March.

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Solution
(i) Production Budget
Particulars January February March April
Budgeted Sales 5,000 6,000 7,000 7,500
Add: Closing Stock 1,500 1,750 1,875 2,000
Less: Opening Stock (1,200) (1,500) (1,750) (1,875)
Production 5,300 6,250 7,125 7,625
Working Notes:
(1) Closing stock of January = 25% × 6,000 = 1,500
Closing stock of February = 25% × 7,000 = 1,750
Closing stock of March = 25% ×7,500 = 1,875
Closing stock of April = 25% × 8,000 = 2,000
(2) Opening stock of February, March and April are taken as equal to closing stock of respective
previous month.

(ii) Material Purchase Budget

Material A
Particulars
January February March
Raw material consumption @2 per gadget 10,600 12,500 14,250
Add: Closing Stock 3,750 4,275 4,575
Less: Opening Stock (3,250) (3,750) (4,275)
Raw Material Purchase 53,500 53,000 44,000
Working Notes:
(1) Closing stock of material of January = 30% × 12,500 = 3,750
Closing stock of material of February = 30% × 14,250 = 4,275
(2) Raw Material consumption of Material for Month of April = 7,625 × 2 = 15,250
Closing stock of material of March of Material = 30% × 15,250 = 4,575
(3) Opening stock for material for month of February and March are taken as equal to closing stock
of respective previous month.
Statement Showing Profit
Particulars January February March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling price per unit `2,000 `2,000 `2,000 `2,000
Less: Discount @15% of selling price `300 `300 `300 `300
Less: Standard cost of manufacturing `1,500 `1,500 `1,500 `1,500
Profit (B) `200 `200 `200 `200
Total Profit (A × B) `10,00,000 `12,00,000 `14,00,000 `36,00,000

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Question – 8
SK Ltd. Produces and sells a single product. Sales budget for the calendar year 2019 by quarter is as
under:
Quarter No. of units to be sold
I 12,000
II 15,000
III 16,500
IV 18,000
The year is expected to open with an inventory of 4,000 units of finished product and close with an
inventory of 6,500 units.
Production is customarily scheduled to provide for two-thirds of the current quarter’s sales demand
plus one third of the following quarter’s demand. Thus, production anticipates sales volume by about
one month.
The standard cost details for one unit of the product is as follows:
Direct materials 10 lbs. @ 50 paise per lb.
Direct labour 1 hour 30 minutes @ `4 per hour.
Variable overheads 1 hour 30 minutes @ `1 per hour.
Fixed overheads 1 hour 30 minutes @ `2 per hour based on a budgeted volume of 90,000 direct
labour hour for the year.
(i) Prepare a production budget for 2019, by quarters, showing the number of units to be produced,
and the total costs of direct labour, variable overheads and fixed overheads.
(ii) If the budgeted selling price per unit is `17, what would be the budgeted profit for the year as
a whole?
(iii) In which quarter of the year is the company expected to breakeven?

Solution
(i) Production Budget
Particulars Quarter - 1 Quarter – 2 Quarter – 3 Quarter – 4 Total
Sales units 12,000 15,000 16,500 18,000 61,500
Production
2/3 of current month 8,000 10,000 11,000 12,000 41,000
1/3 of next month 5,000 5,500 6,000 6,500* 23,000
Production 13,000 15,500 17,000 18,500 64,000
*This value of 6,500 units is computed as balancing figure.
Working Note -
Annual total production = Sales + closing stock – Opening stock = 61,500 + 6,500 – 4,000 = 64,000
Production for Quarter - 4 = Total production – production of first three quarters
= 64,000 – 13,000 – 15,500 – 17,000 = 18,500

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Statement of Cost
Particulars Quarter - 1 Quarter – 2 Quarter – 3 Quarter – 4 Total
Production units 13,000 15,500 17,000 18,500 64,000
Direct material (10 × 0.5 = 5 p.u.) 65,000 77,500 85,000 92,500 3,20,000
Direct labour (1.5 × 4 = 6 p.u.) 78,000 93,000 1,02,000 1,11,000 3,84,000
Variable Ohs (1.5 × 1 = 1.5 p.u.) 19,500 23,250 25,500 27,750 96,000
1,80,000
Fixed overheads 45,000 45,000 45,000 45,000
(90,000×2)

(ii) Statement of profit

Particulars Amount
Sales (17 × 61,500) 10,45,500
(7,C8,888;7,?h,888;j:,888) 7,68,750
Less: Variable cost ) × 61,500*
:h,888

Contribution 2,76,750
Less: Fixed costs 1,80,000
Profit 96,750
•9p'k B"/. >,?8,888
(iii) Breakeven point = B"-.&943.9"- ('& 3-9. = G,HI,HCD = 40,000 units
{ |
IJ,CDD

Particulars Quarter - 1 Quarter – 2 Quarter – 3 Quarter – 4

Sales units 12,000 15,000 16,500 18,000
Cumulative Sales units 12,000 27,000 43,500 61,500
\ Breakeven will be achieved in quarter 3.

Question – 9
SK Ltd. manufactures two products using two types of materials and one grade of labour. Shown below
is an extract from the company’s working papers for the next month’s budget:
Product-A Product-B
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed per unit of product 3 5

Material-X and Material-Y cost `4 and `6 per kg and labours are paid `25 per hour. Overtime
premium is 50% and is payable, if a worker works for more than 40 hours a week. There are 180 direct
workers.

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The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct workers
in actually manufacturing the products is 80%. In addition the non-productive down-time is budgeted
at 20% of the productive hours worked.

There are four 5-days weeks in the budgeted period and it is anticipated that sales and production will
occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product-A = 400 units; Product-B = 200 units;
Material-X = 1,000 kgs; Material-Y = 500 kgs.
The anticipated closing stocks for budget period are as below:
Product-A 4 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption
Required to calculate the Material Purchase Budget and the Wages Budget for the direct workers,
showing the quantities and values, for the next month.

Solution
Number of days in budget period = 4 weeks × 5 days = 20 days
Number of units to be produced
Product-A Product-B
(units) (units)
Budgeted Sales 2,400 3,600
C,h88 3-9./ 7,:88 3-9./
Add: Closing stock 8 × 4 𝑑𝑎𝑦𝑠9 8 × 5 𝑑𝑎𝑦𝑠9 480 900
C8 k*‚/ C8 k*‚/
Less: Opening stock 400 200
2,480 4,300

(i) Material purchase budget

Material-X (kg) Material-Y (kg)
Material required:
12,400 9,920
Product-A
(2,480 units x 5 kg) (2,480 units x 4 kg)
12,900 25,800
Product-B
(4,300units x 3 kg) (4,300units x 6kg)
25,300 35,720
Add: Closing Stock
C@,788 62 7@,iC8 3-9./ 12,650 10,716
8 C8 k*‚/ × 10 𝑑𝑎𝑦𝑠9 8 × 6 𝑑𝑎𝑦𝑠9
C8 k*‚/
Less: Opening stock 1,000 500
Quantity to be purchased 36,950 45,936
Rate per kg. of material `4 `6
Total cost `1,47,800 `2,75,616

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(ii) Wages Budget

Product-A (Hours) Product-B (Hours)
Units to be produced 2,480 units 4,300 units
Standard hours allowed per unit 3 5
Total standard hours allowed 7,440 21,500
Productive hours required for i,hh8 x"3&/ C>,@88 x"3&/
= 9,300 = 26,875
production ?8% ?8%
1,860 hours 5,375 hours
Add: Non-Productive down time
(20% of 9,300 hours) (20% of 26,875 hours)
Hours to be paid 11,160 32,250
Total Hours to be paid = 43,410 hours (11,160 + 32,250)
Hours to be paid at normal rate = 4 weeks × 40 hours × 180 workers = 28,800 hours
Hours to be paid at premium rate = 43,410 hours – 28,800 hours = 14,610 hours
Total wages to be paid = (28,800 hours × `25) + (14,610 hours × `37.5)
= `7,20,000 + `5,47,875 = `12,67,875

Question – 10
The following extract is taken from the overhead budget of X:
Budgeted activity 50% 75%
Budgeted overhead (`) 30,00,000 40,00,000
What would be the budgeted overhead for 60% level of activity:
(a) `32,00,0000 (b) `34,00,000
(c) `30,00,000 (d) `36,00,000

Question – 11
SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23
commencing on 1st April, 2022, production will be constrained by direct labour. It is estimated that
only 12,000 hours of direct labour hours will be available in each month.

For market reasons, production of either of the two garments must be at least 25% of the production
of the other. Estimated cost and revenue per garment are as follows:
Shirt (`) Short (`)
Sales price 60 44
Raw materials
Fabric @12 per metre 24 12
Dyes and cotton 6 4
Direct labour @8 per hour 8 4
Fixed Overhead @4 per hour 4 2
Profit 18 22
From the month of July 2022 direct labour will no longer be a constraint. The company expects to be
able to sell 15,000 shirts and 20,000 shorts in July 2022. There will be no opening stock at the
beginning of July 2022.

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Sales volumes are expected to grow at 10% per month cumulatively thereafter throughout the year.
Following additional information is available:
• The company intends to carry stock of finished garments sufficient to meet 40% of the next
month’s sale from July 2022 onwards.
• The estimated selling price will be same as above.

Question – 1
The contribution per labour hour for shirt and short is:
(a) `22 and `24 respectively
(b) `22 and `48 respectively
(c) `44 and `24 respectively
(d) `44 and `48 respectively

Question – 2
The number of shirts to be manufactures is:
(a) 4,000
(b) 8,000
(c) 12,000
(d) 16,000

Question – 3
The number of shorts to be manufactures is:
(a) 4,000
(b) 8,000
(c) 12,000
(d) 16,000

Question – 4
The amount of sales for shirt for month of august is:
(a) `9,00,000
(b) `9,90,000
(c) `8,80,000
(d) `9,68,000

Question – 5
The number of units to be manufactured of short for august is:
(a) 21,600
(b) 28,800
(c) 22,880
(d) 25,168

1 2 3 4 5
B A D B C

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STANDARD COSTING - CONCEPTS

1. Basic Terms
Budget Standard Actual

Kya Socha tha Kya Hona Chahiye Tha Kya Ho gGaya

2. Always calculate standard data on the basis of actual output

3. Variances

+ve Favourable = (F)

Variances

-ve Adverse = (A)

4. Material Variance

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5. Material Cost Variance (MCV)

MCV = Standard cost – Actual Cost

6. Material Price Variance (MPV)

MPV = (SP – AP) ´ Actual quantity

7. Material Usage Variance (MUV)

MUV = (SQ – AQ) ´ SP

8. Material Mix Variance (MMV)

MMV = (RSQ – AQ) ´ SP

9. Material Yield Variance (MYV)

MYV = (SQ – RSQ) ´ SP
MYV = (AY – SY) ´ Standard cost per unit of output

10. Actual Quantity

Actual quantity purchased
(Prefer for exam)
Actual Quantity

Actual quantity consumed opening stock + Purchases

- Closing Stock

* If opening stock rate is not given then consider it at standard price

* Unless otherwise provided, FIFO method is used

11. Total Hours paid

Burden Pass to
Normal idle hour
Total hour paid

consumer
Idle Hours
Abnormal idle Burden pass to
hours owner
Hours worked

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12. Labour Variances

13. Labour Cost Variance (LCV)

LCV = Standard cost – Actual cost

14. Labour Rate Variance (LRV)

LRV = (SR – AR) ´ Actual hours paid

15. Labour Efficiency Variance (LEV)

LEV = (SH – Actual hours worked) ´ SR

16. Labour Idle Time Variance

Idle time variance = Idle hours ´ SR

17. Labour Mix Variance (LMV)

LMV = (RSH – AH worked) ´ SR

18. Labour Yield Variance (LYV)

LYV = (SH – RSH) ´ SR
LYV = (AY – SY) ´ Standard cost per unit of output

19. Variable OHs Variance

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20. Variable OH Cost Variance (VOCV)

VOCV = Recovered OHs – Actual OHs

21. Variable OH Expenditure Variance (VOEV)

VOEV = (Recover Rate – Actual Rate) ´ Actual hours worked

22. Variable OH Efficiency Variance (VOEFV)

VOEFV = (SH – Actual hours worked) ´ Recovery Rate

23. Fixed OHs Variance

- This is based on hours paid
- Fixed OHs are estimated in advance
- Based on estimated OHs, recovery rate is computed
- Based on Recovery rate, OHs are recovered
- Actual OHs are paid

24. Fixed OH Cost Variance (FOCV)

FOCV = Recovered OHs – Actual OHs

25. Fixed OH Expenditure Variance (FOEV)

FOEV = Budgeted OHs – Actual OHs

26. Fixed OH Volume Variance (FOVV)

FOVV = Recovered OHs – Budgeted OHs

27. Fixed OH Efficiency Variance (FOEFV)

FOEFV = (Standard hours – Actual Hours) ´ Recovery Rate

28. Fixed OH Capacity Variance (FOCPV)

FOCPV = (Actual Hours – Revised budgeted hours) ´ Recovery Rate

29. Fixed OH Calendar Variance (FOCLV)

FOCLV = (Revised budgeted hours – Budgeted hours) ´ Recovery Rate

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30. Budget Ratios

*-,/D,&D F("&6
Efficiency Ratio = × 100
09-",8 F("&6
*-,/D,&D F("&6
Activity Ratio = T"D2%-%D F("&6 × 100
09-",8 I(&5./2 D,E6 7%1.6%D $"D2%-%D F("&6
Calendar Ratio = T"D2%-%D 4(&5./2 Y,E6 × 100 = T"D2%-%D F("&6
× 100
09-",8 F("&6
Actual usage of Budgeted Capacity Ratio =
T"D2%-%D F("&6
× 100
T"D2%-%D F("&6
Standard Capacity Ratio = R,;.#"# +(66.$8% F("&6 ./ $"D2%- × 100
09-",8 F("&6
Actual Capacity Usage Ratio = × 100
R,;.#"# +(66.$8% I(&5./2 F("&6

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STANDARD COSTING – QUESTIONS

Question – 1
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:
(i) Material cost variance
(ii) Material price variance
(iii) Material usage variance
(iv) Material mix variance
(v) Material yield variance

Solution
Basic Calculation
Standard Actual Revised
Particulars Std.
Quantity Rate Amount Quantity Rate Amount Quantity
850 × 60% 800 × 60%
Material A 50 25,500 540 60 32,400
= 510 = 480
850 × 40% 800 × 40%
Material B 60 20,400 260 50 13,000
= 340 = 320
Input 850 45,900 800 45,400 800
680 × 25%
(-) Loss 120
= 170
Output 680 680
Calculation of Variances
(i) Material Cost Variance = Standard Cost – Actual cost
A = 25,500 – 32,400 =` 6,900 (A)
B = 20,400 – 13,000 =` 7,400 (F)
MCV = ` 500 (F)
1. Material Price Variance = (SP – AP) ´ AQ
A = (50 – 60) ´ 540 =` 5,400 (A)

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B = (60 – 50) ´ 260 =` 2,600 (F)

MPV = ` 2,800 (A)
2. Material Usage (or Quantity) Variance = (SQ – AQ) ´ SP
A = (510 – 540) ´ 50 =` 1,500 (A)
B = (340 – 260) ´ 60 =` 4,800 (F)
MUV = ` 3,300 (F)
3. Material Mix Variance = (RSQ - AQ) ´ SP
A = (480 – 540) ´ 50 =` 3,000 (A)
B = (320 – 260) ´ 60 =` 3,600 (F)
MMV = ` 600 (F)
4. Material Yield Variance = (SQ - RSQ) ´ SP
A = (510 – 480) ´ 50 =` 1,500 (F)
B = (340 – 320) ´ 60 =` 1,200 (F)
MYV = ` 2,700 (F)
OR Material Yield Variance (MYV)
= (Actual yield – St. yield) ´ St. cost per unit of output
:?8 h@,j88
= )680 − 8?@8 × 8009* ´ 8 9= `2,700 (F)
:?8

Question – 2
SK Ltd. manufactures SK by mixing three raw materials. For each batch of 100 kg of SK, 125 kg of
raw material are used. In June 60 batches are prepared to produce an output of 5600 kg of SK. The
standard and actual particulars for June are as follows:
Raw Standard Actual Quantity of raw material
materials Mix % Price per kg (`) Mix % Price per kg (`) purchased
X 50 20 60 21 5000
Y 30 10 20 8 2000
Z 20 5 20 6 1200
Calculate all variances.

Solution Basic Calculation

Revised Std.
Particulars Standard Actual Quantity
Quantity Rate Amount Quantity Rate Amount
7,000 × 50% 7,500 × 60% 7,500 × 50%
Material X 20 70,000 21 94,500
= 3,500 = 4,500 = 3,750
7,000 × 30% 7,500 × 20% 7,500 × 30%
Material Y 10 21,000 8 12,000
= 2,100 = 1,500 = 2,250

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7,000 × 20% 7,500 × 20% 7,500 × 20%

Material Z 5 7,000 6 9,000
= 1,400 = 1,500 = 1,500
60×125 7,500
Input 7,000 98,000 1,15,500
= 7,500
5,600 × (1/4)
(-) Loss 1,900
= 1,400
Output 5,600 5,600

Calculation of Variances
1. Material Cost Variance = Standard Cost – Actual cost
X = 70,000 – 94,500 =` 24,500 (A)
Y = 21,000 – 12,000 =` 9,000 (F)
Z = 7,000 – 9,000 =` 2,000 (A)
MCV = ` 17,500 (A)
2. Material Price Variance = (SP – AP) ´ AQ
X = (20 – 21) ´ 4,500 =` 4,500 (A)
Y = (10 – 8) ´ 1,500 =` 3,000 (F)
Z = (5 – 6) ´ 1,500 =` 1,500 (A)
MPV = ` 3,000 (A)
Material Price Variance = (SP – AP) ´ AQ
(On purchase qty.) X = (20 – 21) ´ 5,000 =` 5,000 (A)
Y = (10 – 8) ´ 2,000 =` 4,000 (F)
Z = (5 – 6) ´ 1,200 =` 1,200 (A)
MPV = ` 2,200 (A)
3. Material Usage (or Quantity) Variance = (SQ – AQ) ´ SP
X = (3,500 – 4,500) ´ 20 =` 20,000 (A)
Y = (2,100 – 1,500) ´ 10 =` 6,000 (F)
Z = (1,400 – 1,500) ´ 5 =` 500 (A)
MUV = ` 14,500 (A)
4. Material Mix Variance = (RSQ - AQ) ´ SP
X = (3,750 – 4,500) ´ 20 =` 15,000 (A)
Y = (2,250 – 1,500) ´ 10 =` 7,500 (F)
Z = (1,500 – 1,500) ´ 5 =` NIL
MMV = ` 7,500 (A)
5. Material Yield Variance = (SQ - RSQ) ´ SP
X = (3,500 – 3,750) ´ 20 =` 5,000 (A)
Y = (2,100 – 2,250) ´ 10 =` 1,500 (A)

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Z = (1,400 – 1,500) ´ 5 =` 500 (A)

MYV = ` 7,000 (A)
OR Material Yield Variance (MYV)
= (Actual yield – St. yield) ´ St. cost per unit of output
>88 j?,888
= )5,600 − 8>C@ × 7,5009* ´ 8 @,:88 9= `7,000 (A)

Question – 3
Following data is extracted from the books of SK Ltd. for the month of May, 2021:
(i) Estimation-
Particulars Quantity (kg) Price(`) Amount (`)
Material – A 800 ? -
Material – B 600 30.00 18,000
-
Normal loss was expected to be 10% of total input materials.
(ii) Actuals-
1,480 kg of output produced
Particulars Quantity (kg) Price(`) Amount (`)
Material – A 900 ? -
Material – B ? 32.50 -
59,825
(iii) Other information-
Material cost variance = `3,625 (F)
Material price variance = `175 (F)
You are required to calculate:
(i) Standard price of Material-A
(ii) Actual quantity of Material–B
(iii) Actual price of Material-A
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance

Solution
(i) Material cost variance = Standard cost – Actual cost
3,625 (F) = Standard cost – 59,825
3,625 = Standard cost – 59,825
Standard cost = 63,450

>,h?8
Total standard input required for actual output = = 1,645 kg
j8%

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?88
Standard quantity of material A = (?88;:88) × 1,645 = 940 kg
:88
Standard quantity of material B = (?88;:88) × 1,645 = 705 kg

Standard cost of Material A + Standard cost of Material B = 63,450

(SQA × SPA) + (SQB × SPB) = 63,450
(940 × SPA) + (705 × 30) = 63,450
hC,788
SPA = jh8
Standard price of material A = `45

(ii) Material price variance = (AQ × SP) – (AQ × AP)

175 (F) = (AQ × SP) – 59,825
175 = (AQ × SP) – 59,825
AQ × SP = 60,000
(AQA × SPA) + (AQB × SPB) = 60,000
(900 × 45) + (AQB × 30) = 60,000
>j,@88
AQB =
78
Actual quantity of material B = 650 kg

(iii) Given, AQ × AP = 59,825

(AQA × APA) + (AQB × APB) = 59,825
(900 × APA) + (650 × 32.50) = 59,825
7?,i88
APA = j88
Actual price of material A = `43

(iv) Total actual input quantity = 900 + 650 = 1,550 kg

?88
Revised standard quantity of material A = (?88;:88) × 1,550 = 886 kg
:88
Revised standard quantity of material A = (?88;:88) × 1,550 = 664 kg

(v) Material Mix Variance = (RSQ – AQ) × SP

Material A = (886 – 900) × 45 = `630 (A)
Material B = (664 – 650) × 30 = `420 (F)
`210 (A)

Question – 4
A gang of workers normally consists of 30 skilled workers, 15 semi-skilled workers and 10 unskilled
workers. They are paid at standard rate per hour as under:

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Skilled `70
Semi-skilled `65
Unskilled `50
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During
the week ended 31st March, 2019, the gang consisted of 40 skilled, 10 semi-skilled and 5 unskilled
workers. The acutal wages paid were at the rate of `75, `60 and `52 per hour respectively. Four hours
were lost due to machine breakdown and 1,600 units were produced.
Calculate the following variances showing clearly adverse (A) or favorable (F)
(i) Labour Cost Variance (ii) Labour Rate Variance
(iii) Labour Efficiency Variance (iv) Labour Mix Variance
(v) Labour Idle Time variance

Solution
Basic Calculation
Standard (1,600 units) Actual (1,600 units) Revised
Particulars
Quantity Rate Amount Quantity Rate Amount Std. Qty.
h8×78 j:8
×1600 = 40×40 = ×1980
Skilled C,888 70 67,200 75 1,20,000 >,i:8
960 1,600 = 1,080
h8×>@ h?8
×1600 = 40×10 = ×1980
Semi-skilled C,888 65 31,200 60 24,000 >,i:8
480 400 = 540
h8×>8 7C8
×1600 = 40×5 = ×1980
Unskilled C,888 50 16,000 52 10,400 >,i:8
320 200 = 360
Total 1,760 1,14,400 2,200 1,54,400 1,980

Particulars Hours Paid Idle Hours Hours Worked

Skilled 40 × 40 =1,600 40 × 4 = 160 1,600 – 160 = 1,440
Semi-skilled 40× 10 = 400 10 × 4 = 40 400 – 40 = 360
Unskilled 40× 5 = 200 5 × 4 = 20 200 – 20 = 180
Total 22,00 220 1,980
Calculation of Variances
(i) Labour Cost Variance = Standard Cost – Actual cost
Skilled = 67,200 – 1,20,000 =` 52,800 (A)
Semi-skilled = 31,200 – 24,000 =` 7,200 (F)
Unskilled = 16,000 – 10,400 =` 5,600 (F)
LCV = ` 40,000 (A)
(ii) Labour Rate Variance = (SR – AR) ´ AH paid
Skilled = (70 – 75) × 1,600 =` 8,000 (A)
Semi-Skilled = (65 – 60) × 400 =` 2,000 (F)

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Unskilled = (50 – 52) × 200 =` 400 (A)

LRV = ` 6,400 (A)
(iii) Labour Efficiency Variance = (SH – AH worked) ´ SR
Skilled = (960 – 1,440) × 70 =` 33,600 (A)
Semi-Skilled = (480 – 360) × 65 =` 7,800 (F)
Unskilled = (320 – 180) × 50 =` 7,000 (F)
LEV = ` 18,800 (A)
(iv) Labour Mix Variance = (RSH – AH worked) ´ SR
Skilled = (1,080 – 1,440) × 70 =` 25,200 (A)
Semi-Skilled = (540 –360) × 65 =` 11,700 (F)
Unskilled = (360 – 180) × 50 =` 9,000 (F)
LMV = ` 4,500 (A)
(v) Idle Time Variance = Idle Hours ´ SR
Skilled = 160 × 70 =` 11,200 (A)
Semi-Skilled = 40 × 65 =` 2,600 (A)
Unskilled = 20 × 50 =` 1,000 (A)
Idle time variance = ` 14,800 (A)

Question – 5
The standard output of product ‘DJ’ is 25 units per hour in manufacturing department of a company
employing 100 workers. In a 40 hours week, the department produced 960 units of product ‘DJ’ despite
5% of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were
`6.20, `6.00 and `5.70 respectively to group ‘A’ consisting 10 workers, Group ‘B’ consisting 30
workers and Group ‘C’ consisting 60 workers. The standard wage rate per labour is same for all the
workers. Labour Efficiency Variance is given `240 (F).
You are required to calculate:
(i) Total Labour Cost Variance
(ii) Total Labour rate Variance
(iii) Total Labour Gang Variance
(iv) Total Labour Yield Variance, and
(v) Total Labour Idle Time Variance

Solution
Labour Efficiency Variance = (SH – AH worked) × SR
>88
240 (F) = )8960 × 9 − {(10 + 30 + 60) × (40 − 5%)}* × 𝑆𝑅
C@
240 = (3,840 – 3,800) × SR
SR = `6

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Particulars Standard (960 units)

Quantity Rate Amount
Labour >88 6 23,040
960 × = 3,840
C@

Actual data (960 units)

No. of Hours paid Wage rate Wages Idle hours Hours worked
workers
10 10×40 = 400 6.20 2,480 400×5% = 20 400 – 20 = 380
30 30×40 = 1,200 6 7,200 1,200×5% = 60 1,200 – 60 = 1,140
60 60×40 = 2,400 5.70 13,480 2,400×5% = 2,400 – 120 = 2,280
120
Total 4,000 23,360 200 3,800

Calculation of Variances
(i) Labour Cost Variance = Standard Cost – Actual cost
= 23,040 – 23,360 = `320 (A)
(ii) Labour Rate Variance = (SR – AR) ´ AH paid
= [(6 – 6.20) ×400] + [(6 – 6)×1,200] + [(6 - 5.70)×2,400] = `640 (F)
(iii) Labour Gang Variance = (RSH – AH worked) ´ SR
= (3,800 – 3,800) × 6 = Nil
(iv) Labour Yield Variance = (Actual yield – St. yield) ´ St. cost per unit of output
j:8 C7,8h8
= )960 − 87,?h8 × 3,8009* ´ 8 9= `240 (F)
j:8

(v) Idle Time Variance = Idle Hours ´ SR

= 200 × 6 = `1,200 (A)

Question – 6
SK Ltd. had prepared the following estimation for the month of January:
Quantity Rate (`) Amount (`)
Material – A 800 kg 90.00 72,000
Material – B 600 kg 60.00 36,000
Skilled Labour 1,000 hours 75.00 75,000
Unskilled Labour 800 hours 44.00 35,200
Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected
labour hours was also estimated.

At the end of the month the following information has been collected from the cost accounting
department:

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The company has produced 1,480 kg finished product by using the followings:
Quantity Rate (`) Amount (`)
Material – A 900 kg 86.00 77,400
Material – B 650 kg 65.00 42,250
Skilled Labour 1,200 hours 71.00 85,200
Unskilled Labour 860 hours 46.00 39,560
You are required to calculate:
(a) Material cost variance
(b) Material price variance
(c) Material mix variance
(d) Material yield variance
(e) Labour cost variance
(f) Labour efficiency variance
(g) Labour yield variance

Solution
Basic Calculation for material
Revised Std.
Particulars Standard Actual Qty.
Quantity Rate Amount Quantity Rate Amount
? ?
Material A ×1,644 = 939 90 84,510 900 86 77,400 ×1,550=886
>h >h
: :
Material B ×1,644 = 705 60 42,300 650 65 42,250 ×1,550=664
>h >h
1,480 ÷ 90% = 1,550
Input 1,26,810 1,550 1,19,650
1,644
(-) Loss 164 70
Output 1,480 1,480

Basic Calculation for labour

Standard Actual Revised
Particulars
Quantity Rate Amount Quantity Rate Amount Std. Qty.
>,>>@
>,888 ×2,060
Skilled ×2,008 = 1,115 75 83,625 1,200 71 85,200 C,88?
>,?88
= 1,144
?j7
?88 ×2,060
Unskilled ×2,008 = 893 44 38,852 860 46 39,560 C,88?
>,?88
= 916
>?88×8.j@×>,h?8
Total >,h88×8.j8 1,22,477 2,060 1,24,760 2,060
= 2,008

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Calculation of Variances
(a) Material Cost Variance = Standard Cost – Actual cost
A = 84,510 – 77,400 =` 7,110 (F)
B = 42,300 – 42,250 =` 50 (F)
MCV = ` 7,160 (F)
(b) Material Price Variance = (SP – AP) ´ AQ
A = (90 – 86) ´ 900 =` 3,600 (F)
B = (60 – 65) ´ 650 =` 3,250 (A)
MPV = ` 350 (F)
(c) Material Mix Variance = (RSQ - AQ) ´ SP
A = (886 – 900) ´ 90 =` 1,260 (A)
B = (664 – 650) ´ 60 =` 840 (F)
MMV = ` 420 (A)
(d) Material Yield Variance = (SQ - RSQ) ´ SP
A = (939 – 886) ´ 90 =` 4,770 (F)
B = (705 – 664) ´ 60 =` 2,460 (F)
MYV = ` 7,230 (F)
OR Material Yield Variance (MYV)
= (Actual yield – St. yield) ´ St. cost per unit of output
>,h?8 >,C:,?>8
= )1,480 − 8>,:hh × 1,5509* ´ 8 9= `7,251 (F)
>,h?8
(e) Labour Cost Variance = Standard Cost – Actual cost
Skilled = 83,625 – 85,200 =` 1,575 (A)
Unskilled = 38,852 – 39,560 =` 708 (A)
LCV = ` 2,283 (A)
(f) Labour Efficiency Variance = (SH – AH worked) ´ SR
Skilled = (1,115 – 1,200) × 75 =` 6,376 (A)
Unskilled = (893 – 860) × 44 =` 1,452 (F)
LEV = ` 4,924 (A)
(g) Labour Yield Variance = (SH - RSH) ´ SR
Skilled = (1,115 – 1,144) × 75 =` 2,176 (A)
Unskilled = (893 – 916) × 44 =` 1,012 (A)
LYV = ` 3,188 (A)
OR Labour Yield Variance (LYV)
= (Actual yield – St. yield) ´ St. cost per unit of output
>,h?8 >,CC,hii
= )1,480 − 8C,88? × 2,0609* ´ 8 9= `3,171 (A)
>,h?8

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Question – 7
A company operates a standard costing system and showed the following data for the month of March:
Actual Budgeted
No. of working days 22 20
Man-hours 4,300 4,000
Overhead rate per hour - `0.50
Hours per unit of output - 10
Fixed overhead incurred `1,800 -
No. of units produced 425 -
Calculate:
(a) Overhead cost variance (b) Budget variance
(c) Volume variance (d) Capacity variance
(e) Calendar variance (f) Efficiency variance

Solution
Basic Calculations:
Budgeted Hours Recovery Rate Budgeted Overheads
4,000 0.50 4,000×0.50 = 2,000
Revised Budgeted Actual Hours Actual Overheads
Hours
h,888 4,300 1,800
× 22 = 4,400
C8
Standard Hours Recovery Rate Recovered Overheads
10 × 425 = 4,250 0.50 2,125
Calculation of Variances
(a) F. O. Cost Variance = Recovered overhead – Actual overhead
= 2,125 – 1,800 = `325 (F)
(b) Budget Variance = Budgeted overhead – Actual overhead
= 2,000 – 1,800 = `200 (F)
(c) Volume Variance = Recovered overhead – Budgeted overhead
= 2,125 – 2,000 = `125 (F)
(d) Capacity Variance = (Actual Hrs. – Revised Budgeted Hrs.) × Recovery Rate
= (4,300 – 4,400) × 0.50 = `50 (A)
(e) Calendar Variance = (Revised Budgeted Hrs. – Budgeted Hours) ´ Recovery Rate
= (4,400 – 4,000) ´ 0.50 = `200 (F)
(f) Efficiency Variance = (Std. Hrs. – Actual Hrs.) × Recovery Rate
= (4,250 – 4,300) × 0.50 = `25 (A)

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Question – 8
A manufacturing concern has provided following information related to fixed overheads:
Standard Actual
Output in a month 5,000 units 4,800 units
Working days in a month 25 days 23 days
Fixed overheads `5,00,000 `4,90,000
Compute:
(i) Fixed overhead variance
(ii) Fixed overhead expenditure variance
(iii) Fixed overhead volume variance
(iv) Fixed overhead efficiency variance

Solution
Basic Calculations:
Budgeted Days Recovery Rate Budgeted Overheads
25 5,00,000 ÷ 25 = 20,000 5,00,000
Actual Days Actual Overheads
23 4,90,000
Standard Days Recovery Rate Recovered Overheads
C@ 20,000 4,80,000
× 4,800 = 24
@,888

Calculation of Variances
(a) F. O. Cost Variance = Recovered overhead – Actual overhead
= 4,80,000 – 4,90,000 = `10,00 (A)
(b) Expenditure Variance = Budgeted overhead – Actual overhead
= 5,00,000 – 4,90,000 = `10,000 (F)
(c) Volume Variance = Recovered overhead – Budgeted overhead
= 4,80,000 – 5,00,000 = `20,000 (A)
(d) Efficiency Variance = (Std. days – Actual days) × Recovery Rate
= (24 – 23) × 20,000 = `20,000 (F)

Question – 9
PQR Alloys Ltd. uses a standard costing system.
Budgeted information for the year:
Budgeted output 84,000 units
Variable factory overhead per unit `16
Standard time for one unit of output 0.80 machine hour
Fixed factory overheads `6,72,000
Actual results for the year:
Actual output 87,600 units

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Variable overhead efficiency variance `67,200 (A)

Actual fixed factory overheads `7,05,000
Actual variable factory overheads `14,37,000
Required:
Calculate the following variances clearly indicating Adverse (A) or Favorable (F)
(a) Variable factory overhead expenditure variance
(b) Fixed factory overhead expenditure variance
(c) Fixed factory overhead efficiency variance
(d) Fixed factory overhead capacity variance

Solution
Basic Calculations
Standard Actual
Particulars Hrs. Rate Amount Hrs. Rate Amount
` ` ` `
>h7i,888
Variable =
70,080 20 14,01,600 73,440 i7,hh8 14,37,000
Expenses 19.567

Budgeted Units Recovery Rate Budgeted Overheads

:,iC,888 6,72,000
84,000´0.8 = 67,200 = 10
:i,C88

Actual Units Actual Overheads

73,440 7,05,000
Standard Units Recovery Rate Recovered Overheads
87,600´0.8 = 70,080 10 7,00,800
…*&9*4)' $*+."&‚ "1'&x'*k ('& 3-9. >:
Standard rate per hour = }.*-k*&k .9,' $"& "-' 3-9. "$ "3.(3. = 8.? = `20
Variable OH efficiency variance = (Standard hours – Actual hours) ´ Standard rate per hour
- 67,200 = [(87,600 ´ 0.8) – Actual hours] ´ 20
-67,200 = (70,080 – Actual hours) ´ 20
Actual hours = 73,440

(a) Variable factory OH expenditure variance = (Standard rate – Actual Rate)´Actual hours
= (20 – 19.567) ´ 73,440 = `31,800 (F)
(b) Fixed factory OH expenditure variance = Budgeted OHs – Actual OHs
= 6,72,000 – 7,05,000 = `33,000 (A)
(c) Fixed factory OH efficiency variance = (Standard hours – Actual hours) ´ Recovery rate
= (70,080 – 73,440) ´ 10 = `33,600 (A)
(d) Fixed factory OH capacity variance = (Actual hours – Budgeted hours) ´ Recovery rate
= (73,440 – 67,200) ´ 10 = `62,400 (F)

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Question – 10
ABC Ltd. has furnished the following information regarding the overheads for the month of June 2020:
(i) Fixed overhead cost variance `2,800 (Adverse)
(ii) Fixed overhead volume variance `2,000 (Adverse)
(iii) Budgeted Hours for June, 2020 2,400 hours
(iv) Budgeted Overheads for June, 2020 `12,000
(v) Actual rate of recovery of overheads `8 per hour
From the above given information calculate:
(v) Fixed overhead expenditure variance
(vi) Actual overheads incurred
(vii) Actual hours for actual production
(viii) Fixed overhead capacity variance
(ix) Standard hours for actual production
(x) Fixed overhead efficiency variance

Solution
Computation of required variances for June 2020:
1. Overheads expenditure variance = Overhead Cost Variance – Overheads Volume variance
= `2,800(A) - `2,000(A) = - `2,800 – (- `2,000) = - `800 = `800 (A)
2. Actual Overheads incurred = Budgeted Overhead - Overhead Expenditure Variance
= `12,000 - `800(A) = `12,000 – (- `800) = `12,000 + `800 = `12,800
0+.3*) A1'&x'*k/ Œ-+3&&'k >C,?88
3. Actual hours for actual production = 0+.3*) m*.' "$ m'+"1'&‚ A1'&x'*k „'& •"3& = = 1,600 hours
?

4. Overheads Capacity Variance = Std rate of OH rate (Actual hrs for actual production – Budgeted
hours)
= `5 ´ (1,600 – 2,400) = `5 ´ (- 800) = `4,000 Adverse
z3k2'.*&‚ A1'&x'*k/ >C,888
* Standard rate of Overhead recovery = = C,h88 x"3&/ = `5 per hour
z3k2'.'k x"3&/

5. Volume Variance = Std. rate of OHs recovery (Standard hours for actual production – Budgeted
hours)
or, `2,000(A) = `5 [Std. hrs. – 2,400 hours]
C,888
or, Std. hrs. – 2,400 hours = - @
or, Std. hrs. – 2,400 hours = - 400 hours
or, Std. hrs. = 2,400 hours - 400 hours
Standard hours for actual production = 2,000 hours
6. Fixed overhead efficiency variance = (Std. hours for AO – Actual Hrs.) × SR
= (2,000 – 1,600) × 5 = 2,000 (F)
Or
Fixed overhead efficiency variance = Volume variance – Capacity Variance
= `2,000(A) - `4,000(A) = - `2,000 – (- `4,000) = - `2,000 + `4,000 = `2,000 (F)

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Question – 11
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 week 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 four weeks. Calculate the following Ratios:
(i) Efficiency ratio
(ii) Activity ratio
(iii) Standard capacity usage ratio
(iv) Actual capacity usage ratio
(v) Actual usage of Budgeted capacity ratio

Solution
Working Notes:
(1) Max. capacity in a budget period = 60 employees × 8 hrs. × 5 days × 4 weeks = 9,600 hrs.
(2) Budgeted hours = 50 employees × 8 hrs. × 5 days × 4 weeks = 8,000 hrs.
(3) Actual hours = 7,500 hrs. (given)
(4) Standard hours for actual output = 8,800 hours
Calculation of ratios:
}.*-k*&k •"3&/ ?,?88
(i) Efficiency ratio = × 100 = i,@88 × 100 = 117.33%
0+.3*) •"3&/

}.*-k*&k •"3&/ ?,?88

(ii) Activity ratio = z3k2'.'k •"3&/× 100 = ?,888 × 100 = 110%

z3k2'.'k •"3&/ ?,888

(iii) Standard Capacity Usage ratio = o*p. × 100 = j,:88 × 100 = 83.33%
("//94)' x"3&/ 9- 43k2'. ('&9"k
0+.3*) •"3&/ i,@88
(iv) Actual capacity usage ratio = o*p. × 100 = j,:88 × 100 = 78.125%
("//94)' 5"&69-2 x"3&/ 9- ('&9"k

0+.3*) x"3&/ i,@88

(v) Actual usage of budgeted capacity ratio = z3k2'.'k •*‚/× 100 = ?,888 × 100 = 93.75%

Question – 12
The following information is given:
Budgeted production 12,000 units
Budgeted variable overhead `2,40,000
Standard time for one unit of output 2 hours

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Actual production 11,800 units

Actual overhead incurred `2,44,000
Actual hours worked 23,200 hours
What is ‘Variable Overhead Efficiency Variance?
(a) `4,000 (A) (b) `6,000 (A)
(c) `2,000 (F) (d) `4,000 (F)

Question – 13
K Ltd. is a manufacturer of a single product A. 8,000 units of the product A has been produced in the
month of March 2024. At the beginning of the year a total 1,20,000 units of the product-A has been
planned for production. The cost department has provided the following estimates of overheads:
Particulars Amount (`)
Fixed 12,00,000
Semi-variable 1,80,000
Variable 6,00,000
Semi-variable charges are considered to include 60 per cent expenses of fixed nature and 40 per cent
of variable character.

The records of the production department shows that the company could have operated for 20 days but
there was a festival holiday during the month.

The actual cost data for the month of March 2024 are as follows:
Particulars Amount (`)
Fixed 1,10,000
Semi-variable 19,200
Variable 48,000
The cost department of the company is now preparing a cost variance report for managerial information
and action. You being an accounts officer of the company are asked to calculate the following
information for preparation of the variance report:

Question – 1
What is the amount of variable overhead cost variance for the month of March 2024:
(a) `10,200 (A)
(b) `10,400 (A)
(c) `10,800 (A)
(d) `10,880 (A)

Question – 2
What is the amount of fixed overhead volume variance for the month of March:
(a) `9,000 (F)
(b) `9,000 (A)

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CA Sunil Keswani

(c) `21,800 (A)

(d) `11,000 (A)

Question – 3
What is the amount of fixed overhead expenditure variance for the month of March:
(a) `21,520 (A)
(b) `21,500 (A)
(c) `21,400 (A)
(d) `21,480 (A)

Question – 4
What is the amount of fixed overhead calendar variance for the month of March:
(a) `5,400 (A)
(b) `5,450 (A)
(c) `5,480 (A)
(d) `5,420 (A)

Question – 5
What is the amount of fixed overhead cost variance for the month of March:
(a) `43,220 (A)
(b) `43,300 (A)
(c) `43,200 (A)
(d) `43,380 (A)

1 2 3 4 5
D C A B A

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