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Answer Paper
Cost Management Accounting Duration:75
Details: Test- 2 (Ch-2) Marks: 40
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Ans-1
When No Discount is Available
Annual requirement 1500 unit’s × 12 = 18,000 units
2×𝑈×𝑃 2×18,000×150 5400,000
EOQ =√ = √ 20%𝑜𝑓 𝑅𝑠 27 = √
𝑆 5.40
= 1000 Units
No. of orders per year = 18000 ÷ 1000 = 18
Orders if discount is given (original price – 2% discount)
Cost price = Rs27 – 0.54 = Rs 26.46
When 2% Price Discount is Available
No of orders to be placed: 18000 ÷ 1200 = 15 orders
Material carrying cost: 20% of Rs 26.46 = Rs5.292
Total cost without discount = ordering cost + carrying cost + purchase price
= 18 x 150 + ½ x 1000 x 5.40 + 18000 x 27
= 2700 + 2700 + 4, 86,000
= Rs 4, 91,400
Total cost with 2% discount = 15 x 150 + ½ x 1200 x 5.292 + 18000 x 26.46
= 2250 + 3175.20 + 4, 76,280
= Rs 4, 81,705.20
Since the total cost is less with 2% discount, the proposal may be accepted.
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(7 Marks)
Ans-2
𝟐𝑨𝑩 𝟐×𝟕.𝟖𝟎𝟎 𝒖𝒏𝒊𝒕𝒔×𝑹𝒔.𝟏𝟎𝟎
(i) EOQ = √ = √ = 𝟏𝟐𝟒. 𝟖𝟗 𝒐𝒓 𝟏𝟐𝟓 𝒖𝒏𝒊𝒕𝒔
𝑪 𝑹𝒔.𝟏𝟎𝟎
A = 150 tubes per week x 52 weeks = 7,800 units
C = Rs. 500 per tube x 20% = Rs. 100 per unit per year
(b) Statement showing comparative total cost when order is placed on EOQ basis and when it is placed on
quarterly basis, (supplying 1,500 units at 5 per cent discount)
Particulars When order is placed on
EOQ basis 1,500 units
1. Annual requirements (units) 7,800 7,800
2. Order size (in units) 125 1,500
3. No. of orders (1÷2) 62.4 5.2
4. Cost per order Rs 100 Rs 100
5. Total ordering cost (3×4) Rs 6,240 Rs 520
6. Cost per unit (tube) Rs 500 Rs 475
7. Cost of tubes (1×6) Rs 39,00,000 Rs 37,05,000
8. Average inventory (2/2) units 62.5 750
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9. Carrying cost per unit per annum Rs 100 Rs 95
10. Total carrying cost (8×9) Rs 6,250 Rs 71,250
11. Total costs (5+7+10) Rs 39,12,490 Rs 37,76,770
Since total costs are lower when discounts are offered, it is worth accepting to place order of 1,500 units on
quarterly basis.
(i) Re-order Level
Maximum ordering period (in weeks) x Maximum usage per week = 8 weeks x 200 tubes = 1,600 tubes
(ii) Maximum level of stock
Re-order level + Re-order quantity - (Minimum usage, in week x Minimum lead time in weeks)
= 1,600 tubes + 125 tubes - (50 tubes x 6 weeks) = 1,725 tubes – 300 tubes = 1,425 tubes
(iii) Minimum Level of stock
Re-order level - (Normal usage x Average lead time) = 1,600 tubes – (150 tubes x 7) = 550 tubes
(8 Marks)
Ans-3
Calculation of Standard Price
Value of Opening stock = 10 x Rs240 2,400
Add: Price variance, not yet transferred to Costing P & L A/c 20
Total value of 10 tons 2,420
∴ Standard price for issue per ton = Rs 242
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STORE LEDGER ACCOUNT
Material...................... Bin No....................... Maximum No.........................
Code............................ Location...................... Minimum No............................
Type and size............................... Folio.................................
Receipts Issues Balance
Date [Link]. Qty. Rate Amt. Date M.R.O. Qty. Rate Amt. Qty. Amt.(R
(Rs) No. (Rs) s)
(Rs)
1st Bal. - - - - - - - - 10 tons 2,400
Apr.
4th - 5 tons 260 1,300 - - - - - 15 tons 3,700
Apr.
- - - - - 5th - 3 tons 242 726 12 tons 2,974
Apr.
- - - - - 12th - 4 tons 242 968 8 tons 2,006
Apr.
13th - 3 tons 250 750 - - - - - 11 tons 2,756
Apr.
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- - - - - 19th - 4 tons 242 968 7 tons 1,788
Apr.
- - - - - 26th - 3 tons 242 726 4 tons 1,062
Apr.
30th - 4 tons 280 1,120 - - - - - 8 tons 2,182
Apr.
30th
Apr.
- - - - - - 3 tons 242 726 5 tons 1,456
12 3,170 17 4,114
Note: As the issues are priced at standard rate of Rs242 per ton the difference on account of
this policy, between actual and standard value of closing stock, would be transferred to Costing
Profit and Loss Account and would be debited to Material Price Variance.
Closing stock - Standard 5 tons @ Rs242 = Rs1,210
Actual 5 tons = Rs1,456
Difference (Adverse) = Rs 246
Material Control A/c Dr. 4,114
Material Price Variance A/c Dr. 246
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To Cost Ledger A/c 4,360
(10 Marks)
Ans-4
Computation of Total cost of material purchased of SKD Manufacturing Company-
Particulars Units (Rs.)
Listed Price of Materials 1,000 50,000
Less: Trade discount @ 10% on invoice price (5,000)
45,000
Add: CGST @ 6% of Rs. 45,000 2,700
Add: SGST @ 6% of Rs.45,000 2,700
50,400
Add: Toll Tax 1,000
Freight and Insurance 3,400
Commission and Brokerage Paid 2,000
Add: Cost of returnable containers:
Amount deposited Rs.6,000
Less: Amount refunded Rs.4,000 2,000
58,800
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Add: Other Expenses @ 2% of Total Cost 1,200
(Rs.58,800×2 / 98)
Total cost of material 60,000
Less: Shortage due to Normal Loss @ 20% 200 -
Total cost of material of good units 800 60,000
Cost per unit (Rs. 60,000/800 units) 75
Note:
1. GST is payable on net price i.e., listed price less discount.
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off-loading of materials. It is
an abnormal cost and not included.
4. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.
(7 Marks)
5. MCQs
Case study 1
1. Ans: b) 1,039 units
Explanation: EOQ is calculated as √ ((2 × A × O)/C), where A = 12,000 units, O = Rs. 540, and C = Rs. 12. This
results in EOQ = 1,039 units.
(1 Mark)
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2. Ans: b) Rs. 2,181
Explanation: The total cost with five fund transfers is Rs. 7, 34,652. The minimum total cost at EOQ (1,039
units) is Rs. 7, 32,471. The loss due to the bank’s limitation is Rs. 7, 34,652 - Rs. 7, 32,471 = Rs. 2,181.
(i) Calculation of optimum purchase order size or Economic Order Quantity (EOQ):
𝟐×𝐀 ×𝐎
EOQ = √ 𝐂
Where
A= Annual requirement for inventory = 1,000 units × 12 months = 12,000 units
O= Ordering cost = Rs. 540
C= Carrying cost per unit per annum = 20% × Rs. 60= Rs. 12
2 × 12,000units × 540
EOQ =√ Rs.12
1,29,60,000
=√ 12
= 1,039.23 or 1,039 units.
Calculation of order level to minimize total cost:
Annual Order No. of Ordering Average Carrying Carrying Purchase Purchase Total
requirement size orders Cost cost (Rs.) inventory Cost per cost (Rs.) cost per Cost (Rs.) Cost
(in per (A) unit @ (B) unit (Rs.) (C ) (A+B+C)
units) order 20%
(Rs.) (Rs.)
12000 1039 11.55 540 6237 519.5 12 6234 60 720,000 732,471
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2000 6 540 3240 1000 11.96 11960 59.80 717,600 732,800
4000 3 540 1620 2000 11.9 23800 59.50 714,000 739,420
6000 2 540 1080 3000 11.78 35340 58.90 706,800 743,220
8000 1.5 540 810 4000 11.68 46720 58.40 700,800 748,330
At order level of 1,039 units, the total cost to the company is least.
Calculation of amount of loss due to bank’s inability to process more than five fund transfer requests:
No. of orders 5
Purchase quantity per order (12,000 units÷ 5) 2,400 units
Cost per unit Rs. 59.80
(a) Ordering Cost (Rs.540×5 orders) Rs. 2,700
(b) Carrying Cost (20% of Rs. 59.80×1,200 units) Rs.14,352
(c ) Material Cost (Rs. 59.80 × 12,000 units) Rs. 7,17,600
Total Cost {(a)+(b)+(c)} Rs. 7,34,652
Less: Minimum cost at 1,039 units order level (Rs. 7,32,471)
Loss Rs. 2,181
(2 Marks)
3. Ans: b) 3,100 kgs
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Explanation:
The Maximum Level is calculated using the formula:
Maximum Level = Re-order Level + Re-order Quantity - (Minimum Re-order Period × Minimum
Consumption)
Substituting the values:
Maximum Level = 2,100 kgs + 2,000 kgs - (5 weeks × 200 kgs) = 3,100 kgs.
Annual consumption= 250 kgs × 52 weeks = 13,000 kgs
𝟐×𝐀×𝐎
Re-order quantity or EOQ =√ 𝐂
A = Annual Consumption = 13,000 kgs
O = Ordering cost= Rs. 1,500
C = carrying Cost per kg=Rs.100 ×19.75%=Rs.9.75
2 × 13,000 kgs × Rs.1,500
EOQ =√ Rs.9.75
3,90,00,000
=√ =2,000 kgs
9.75
1. Re-order level= Maximum re-order period × Maximum consumption
7 weeks × 300 kgs = 2,100 kgs
2. Maximum level = Re-order level + Re-order Quantity -(Minimum re-order period× Minimum
consumption)
=2,100kgs + 2,000 kgs – (5 weeks × 200 kgs) =3,100 kgs
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3. Minimum level = Re-order level – (Average re-order period × Average consumption)
= 2,100 kgs – (6 weeks × 250 kgs) =600kgs
Maximum level+Minimum level
4. Average stock level = 2
3,100+600
= =1,850 kgs
2
Or
𝐑𝐎𝐐
= Minimum level +
𝟐
2,000 kgs
= 600 kgs + = 1,600 Kgs
2
(2 Marks)
4. Ans: a) Rs. 3, 88,500
Explanation: The value of closing stock is calculated as follows:
• 1, 00,000 liters @ Rs. 3.03 = Rs. 3, 03,000
• 30,000 liters @ Rs. 2.85 = Rs. 85,500
Total = Rs. 3, 88,500
(1 Marks)
5. Ans: c) Rs. 1, 40,000
Explanation: Under the LIFO method, profit is calculated as:
• Cost of Goods Sold = Rs. 7, 80,000
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• General Administrative Cost = Rs. 25,000
• Total Cost = Rs. 8, 05,000
• Sales Value = Rs. 9, 45,000
Profit = Rs. 9, 45,000 - Rs. 8, 05,000 = Rs. 1, 40,000
(i) FIFO Method
Particulars Amount in Rs
(a) Value of inventory on june 30:
1,00,000 litres @Rs.3.03 3,03,000
30,000 litres @ Rs 2.85 85,500
Value of closing stock 3,88,500
(b) Cost of Goods sold for June:
Opening stock 3,00,000
Purchase : June 1 5,70,000
June 30 3,03,000
11,73,000
Less: Closing stock ( as valued above) (3,88,500)
Cost of Goods Sold in June 7,84,500
(c) Profit or Loss for June:
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Cost of Goods Sold 7,84,500
Add: General Administration cost 25,000
Total cost 8,09,500
Sales value 9,45,000
Profit 1,35,500
(ii) Weighted Average Method:
(a) Value of Closing stock:
1,30,000 Litres @ Rs.3 per litres 3,90,000
The rate for valuing Closing Stock has been worked out as follows:
Rate on receipt of first purchase:
(1,00,000 litres ×Rs.3)+(2,00,000 litres×Rs.2.85) Rs. 8,70,000
1,00,000 litres+2,00,000 litres
3,00,000 litres
= Rs. 2.90
Balance after issue:30,000 Liters:
(30,000 litres×Rs.2.90)+(1,00,000 litres×Rs.3.03) Rs. 3,90,000
30,000 litres+1,00,000 liters
1,30,000 litres
= Rs. 3
(b) Cost of Goods sold Amount in Rs
Opening stock(1,00,000× Rs. 3) 3,00,000
Purchase :
June 1 5,70,000
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June 30 3,03,000
11,73,000
Less: Value of Closing Stock (as above) (3,90,000)
Cost of Goods Sold 7,83,000
(C) Profit for June:
Cost of goods Sold 7,83,000
Add: General Administration Cost 25,000
8,08,000
Sales value 9,45,000
Profit 1,37,000
(iii) LIFO Method:
(a) Value of Closing Stock: It is presumed that purchase of 30thjune could not have been issued. Therefore,
closing stock of 1, 30,000litres would have included 1, 00,000 liters purchased on 30thJune and 30,000 liters
from opening stock. Therefore,
Particulars Amount in Rs
30,000 liters @ Rs.3 90,000
1,00,000 liters @Rs.3.03 3,03,000
3,93,000
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(b) Cost of goods sold: Rs 11, 73,000 – Rs 3, 93,000 = Rs 7, 80,000
(c) Profit for the month of June:
Particulars Amount in Rs
Cost of Goods Sold 7,80,000
Add: General Administration Cost 25,000
Total cost 8,05,000
Sales value 9,45,000
Profit 1,40,000
(2 Marks)
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