CA (INTER-New Syllabus)

COST AND MANAGEMENT

ACCOUNTING

IMPORTANT QUESTIONS LIST

SUPER 111 QUESTIONS
MAY -25 EXAMS

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 Question 1

A company manufactures a product from a raw material, which is purchased

at Rs. 80 per kg. The company incurs a handling cost of Rs. 370 plus freight
of Rs. 380 per order. The incremental carrying cost of inventory of raw
material is Rs. 0.25 per kg per month. In addition, the cost of working capital
finance on the investment in inventory of raw material is Rs. 12 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:

(i) Calculate the economic order quantity of raw materials.

(ii) Advice, how frequently company should order for procurement be

placed.

(iii) 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?
Assume 360 days in a year.
[(10 Marks) May 2014]

Answer 1
(i) Economic Order Quantity:
EOQ = √(2 × A × Ca / Ci)
EOQ = √(2 × 40,000 × 750 / 15)
EOQ = 2,000 Kg
Where:
A = Annual Units required
A = 1,00,000 ÷ 2.5 = 40,000 Kg
Ca = Ordering Cost = 370 + 380 = Rs. 750
Ci = Carrying Cost = 12 + 3 = 15
(Incremental carrying cost = Rs. 0.25 per Kg per month)

(ii) Computation of Days for Placing Next Order

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 For 40,000 units → 360 days
For 2,000 units → ? days
Days required = (2,000 × 360) ÷ 40,000 = 18 days

Alternative Solution: Frequency of Placing Orders for Procurement:

Annual consumption (A) = 40,000 Kg
Quantity per order (E.O.Q) = 2,000 Kg
No. of orders per annum = A ÷ E.O.Q = 40,000 ÷ 2,000 = 20 orders
Frequency of placing orders (in days) = 360 ÷ 20 = 18 days

(iii) Percentage of Discount in the Price of Raw Materials to be Negotiated

Particulars On Quarterly On E.O.Q Basis

Basis
1. Annual Usage (in Kg.) 40,000 Kg 40,000 Kg
2. Size of the order 10,000 Kg 2,000 Kg
3. No. of orders (1 ÷ 2) 4 20
4. Cost of placing orders Rs. 3,000 Rs. 15,000
(No. of orders × Cost per order) (4 orders × Rs. (20 orders × Rs.
750) 750)
5. Inventory carrying cost Rs. 75,000 Rs. 15,000
(Average inventory × Carrying (10,000 Kg × ½ × (2,000 Kg × ½ ×
cost per unit) Rs. 15) Rs. 15)
6. Total Cost (4 + 5) Rs. 78,000 Rs. 30,000

When the order is placed on a quarterly basis, the ordering cost and carrying cost
increase by Rs. 48,000 (Rs. 78,000 – Rs. 30,000).
So, discount required = Rs. 48,000
Total annual purchase = 40,000 Kg × Rs. 80 = Rs. 32,00,000
Percentage of discount to be negotiated = (Rs. 48,000 ÷ Rs. 32,00,000) × 100 =
1.5%

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Question 2
Supreme Limited is a manufacturer of energy-saving bulbs. To manufacture
the finished product, one unit of component ‘LED’ is required. Annual
requirement of component ‘LED’ is 72,000 units, the cost being Rs. 300 per
unit. Other relevant details for the year 2015-2016 are:
Cost of placing an order Rs. 2,250
Carrying cost of inventory 12% per annum
Lead Time Days
Maximum 20 days
Minimum 8 days
Average 14 days
Emergency purchase 5 days

Consumption Units per day

Maximum 400 units per day
Minimum 200 units per day
Average 300 units per day

You are required to calculate:

(i) Re-order quantity
(ii) Re-ordering level
(iii) Minimum stock level
(iv) Maximum stock level
(v) Danger level
[(5 Marks) Nov 2016]
Answer
(i) Calculation of Re-order quantity:
EOQ = √(2 × A × Ca ÷ Ci)
EOQ = √(2 × 72,000 × 2,250 ÷ (300 × 12%))
EOQ = √(32,40,00,000 ÷ 36)
EOQ = √90,00,000
EOQ = 3,000 units

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 (ii) Calculation of Re-ordering level:
Re-ordering level = Maximum Re-order period × Maximum usage
= 20 days × 400 units per day
= 8,000 units

(iii) Calculation of Minimum stock level:

Minimum stock level = ROL - (Average Consumption × Average Lead time)
= 8,000 - (300 × 14)
= 8,000 - 4,200
= 3,800 units

(iv) Calculation of Maximum stock level:

Maximum stock level = ROL - (Minimum Consumption × Minimum Lead time) +
ROQ
= 8,000 - (200 × 8) + 3,000
= 8,000 - 1,600 + 3,000
= 9,400 units

(v) Calculation of Danger level:

Danger level = Minimum consumption × Emergency delivery time
= 200 units × 5 days
= 1,000 units

Question 3
ASJ manufacturer produces a product which requires a component costing
₹1,000 per unit. Other information related to the component are as under:
Details Values
Usage of component 1,500 units per month
Ordering cost ₹75 per order
Storage cost rate 2% per annum
Obsolescence rate 1% per annum
Maximum usage 400 units per week

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 Lead Time 6–8 weeks

The firm has been offered a quantity discount of 5% by the supplier on the
purchase of the component, if the order size is 6,000 units at a time.
You are required to compute:
(i) Economic Order Quantity (EOQ)
(ii) Re-order Level and advise whether the discount offer be accepted by the
firm or not.
[(5 Marks) May 2018]

Answer
(i) Annual usage of Components (A) = 1500 × 12 = 18,000 Units
Ordering Cost (O) = ₹75 per order
Carrying cost per unit per annum (C) i.e., Storage cost + Obsolescence cost =
2% + 1% = 3%
Calculation of Economic Order Quantity
EOQ = √(2 × A × O ÷ C)
= √(2 × 18,000 × ₹75 ÷ ₹1000 × 3%)
= 300 units

(ii) Re-Order level = (Maximum usage × Maximum lead time)

= 400 units × 8 weeks
= 3,200 units

Evaluation of Profitability of Different Options of Order Quantity

When EOQ is ordered
Particulars Calculation Amount (₹)
Purchase Cost (18,000 × 1,000) 1,80,00,000
Ordering Cost (A ÷ Q × O) (18,000 ÷ 300 × ₹75) 4,500
Carrying Cost (Q ÷ 2 × C × i) (300 ÷ 2 × ₹1,000 × 3%) 4,500
Total Cost 1,80,09,000

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 When Quantity Discount is accepted
Particulars Calculation Amount (₹)
Purchase Cost [18,000 × (1,000 – 5%)] 1,71,00,000
Ordering Cost (A ÷ Q × O) (18,000 ÷ 6,000 × ₹75) 225
Carrying Cost (Q ÷ 2 × C × i) (6,000 ÷ 2 × ₹950 × 3%) 85,500
Total Cost 1,71,85,725

So, Savings in cost = ₹8,23,275 (₹1,80,09,000 – ₹1,71,85,725)

Advice – The total cost of inventory is higher if EOQ is adopted. If we accept the
quantity discount of 5% offered by the supplier, ‘ASJ’ will save ₹8,23,275/-. Hence,
the company is advised to accept the quantity discount.

Question 4
M/s. X Private Limited is manufacturing a special product which requires a
component "SKY BLUE". The following particulars are available for the year
ended 31st March, 2021:
Particulars Details
Annual demand of "SKY BLUE" 12,000 Units
Cost of placing an order ₹ 1,800
Cost per unit of "SKY BLUE" ₹ 640
Carrying cost per annum 18.75%

The company has been offered a quantity discount of 5% on the purchases

of "SKY BLUE" provided the order size is 3,000 components at a time.
You are required to:
(i) Compute the Economic Order Quantity.
(ii) Advise whether the quantity discount offer can be accepted.
[(5 Marks) May 2018]

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 Answer:
Annual demand (A) = 12,000 units
Ordering Cost (O) = ₹ 1,800
Carrying cost per unit per annum (c × i) = ₹ 640 × 18.7596 = ₹ 120
(i) Calculation of Economic Order Quantity:
EOQ = √((2 × A × O) / (c × i))
EOQ = √((2 × 12,000 × ₹ 1,800) / ₹ 120) = 600 units
(ii) Evaluation of Profitability of Different Options of Order Quantity
Particulars When EOQ is When discount of 5% is
ordered accepted and order size is
3,000 units
Size of the 600 units 3,000 units
order
No. of orders 20 (12,000 ÷ 600) 4 (12,000 ÷ 3,000)
Total Purchase ₹ 76,80,000 (12,000 ₹ 72,96,000 (12,000 kgs × ₹
Cost kgs × ₹ 640) 608)
Total ordering ₹ 36,000 (₹ 1,800 × 20 ₹ 7,200 (₹ 1,800 × 4 orders)
cost orders)
Total carrying ₹ 36,000 (600 units × ₹ 1,71,000 (3,000 units × ½ × ₹
cost ½ × ₹ 640 × 18.75%) 608 × 18.7596)
Total Cost ₹ 77,52,000 ₹ 74,74,200

Note: Here, it is assumed that the carrying cost varies due to discount in the
purchase price. Alternatively, it may be assumed that the carrying cost per unit is
fixed and does not vary due to discount in purchase price. In such case the Total
carrying cost, for order size is 3000 units, shall be:
Carrying Cost = 3,000 units × ½ × ₹ 640 × 18.75% = ₹ 1,80,000
Advice: The total cost is lower if the company accepts an offer of 5% discount by
the supplier. The company is advised not to accept the EOQ.

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Question 5

The following are the details of receipt and issue of material ‘CXE’ in a
manufacturing company during the month of April 2019:
Date Particulars Quantity Rate per
(kg) kg (₹)
April Purchase 3000 16
4
April Issue 1000
8
April Purchase 1500 18
15
April Issue 1200
20
April Return to supplier (out of 300
25 purchase made on April 15)
April Issue 1000
26
April Purchase 500 17
28

Opening stock as on 01-04-2019 is 1000 kg @ ₹15 per kg. On 30th April, 2019
it was found that 50 kg of material ‘CXE’ was fraudulently misappropriated
by the store assistant and never recovered by the company.
Required: Prepare a store ledger account under each of the following
methods of pricing the issue: (A) Weighted Average Method, (B) LIFO
What would be the value of material consumed and value of closing stock
as on 30-04-2019 as per these two methods?
[(10 Marks) May 2019]

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 Answer
(A)Stores Ledger of Material CXE (Weighted Average Method)

Date Receipts Issues Balance

April
Units Rate Value Units Rate Value Units Rate Value

1 - - - - - - 1000 15 15,000

4 3000 16 48,000 - - - 4000 15.75 63,000

8 - - - 1000 15.75 15,750 3000 15.75 47,250

15 1500 18 27,000 - - - 4500 16.50 74,250

20 - - - 1200 16.50 19,800 3300 16.50 54,450

25 - - Return 300 18 5400 3000 16.35 49,050

26 - - - 1000 16.35 16,350 2000 16.35 32,700

28 500 17 8,500 - - - 2500 16.48 41,200

30 - - Shortage 50 16.48 824 2450 16.48 40,376

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

Date Receipts Issues Balance

April
Units Rate Value Units Rate Value Units Rate Value

1 - - - - - - 1000 15 15,000

4 3000 16 48,000 - - - 1000 15 15,000

3000 16 48,000

8 - - - 1000 16 16,000 1000 15 15,000

2000 16 32,000

15 1500 18 27,000 - - - 1000 15 15,000

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 2000 16 32,000
1500 18 27,000

20 - - - 1200 18 21,600 1000 15 15,000

2000 16 32,000
300 18 5,400

25 - - Return 300 18 5400 1000 15 15,000

2000 16 32,000

26 - - - 1000 16 16,000 1000 15 15,000

1000 16 16,000

28 500 17 8,500 - - - 1000 15 15,000

1000 16 16,000
500 17 8,500

30 - - Shortage 50 17 850 1000 15 15,000

1000 16 16,000
450 17 7,650

Value of material consumed and closing stock:

Material Consumed Closing Stock

Under Weighted Average 51,900 40,376

Under LIFO 53,600 38,650

Question 6
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.

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 (iii) How frequently should orders for procurement be placed under EOQ
model?
[(10 Marks) Nov 2020]
Answer
(i) Calculation of Economic Order Quantity (EOQ):
EOQ = √[(2 × Annual consumption × Ordering cost per order) ÷ Carrying cost per
unit p.a.]
EOQ = √[(2 × 27,000 units × ₹240 per order) ÷ (₹50 × 12.5%)]
EOQ = √[(2 × 27,000 × ₹240) ÷ ₹6.25]
EOQ = 1,440 units.

(ii) Calculation of the savings arising from switching over to EOQ:

Particulars Present System EOQ System

(a) Order size (units) 3,000 1,440
(b) No. of orders p.a. (27,000 ÷ a) 9 18.75
(c) Ordering cost p.a. [b × ₹240] ₹2,160 ₹4,500
(d) Carrying cost p.a. [a ÷ 2 × ₹6.25] ₹9,375 ₹4,500
(e) Total cost p.a. [c + d] ₹11,535 ₹9,000
(f) Savings from switching over ₹2,535

(iii) Calculation of Re-order Point:

Consumption per day = 27,000 ÷ 360 = 75 units per day
Re-order Point = 75 units per day × 12 days = 900 units.

(iv) Calculation of frequency of orders under EOQ model:

Frequency of orders = No. of days in a year ÷ No. of orders p.a.
Frequency of orders = 360 days ÷ 18.75 orders ≈ 19.2 days.

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Question 7
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 of 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
[(5 Marks) July 2021]
Answer

(i) Statement of Total Inventory Cost and Ranking of Items:

Item Units Unit Total % of Total Ranking
Code Cost Inventory Inventory
No. (₹) Cost (₹) Cost
101 25 50 1,250 16.67 2
102 300 01 300 4.00 6
103 50 80 4,000 53.33 1

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 104 75 08 600 8.00 4
105 225 02 450 6.00 5
106 75 12 900 12.00 3
Total 750 7,500 100.00

(ii) Classifying Items as per ABC Analysis of Inventory Control:

Basis for ABC Classification as % of Total Inventory Cost:
 15% & above -- ‘A’ items
 7% to 14% -- ‘B’ items
 6% & Less -- ‘C’ items
Ranking Item Total % of Total Category
Code Inventory Cost Inventory Cost
No. (₹)
1 103 4,000 53.33 A
2 101 1,250 16.67 A
Total A 5,250 70.00
3 106 900 12.00 B
4 104 600 8.00 B
Total B 1,500 20.00
5 105 450 6.00 C
6 102 300 4.00 C
Total C 750 10.00
Grand 7,500 100.00
Total

Question 8
XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the
production process and has provided the following data year ended on 31st
March, 2021:

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 Particulars Material A (₹) Material B (₹)
Opening stock as on 30,000 32,000
01.04.2020 Purchase during 90,000 51,000
the year Closing stock as on 20,000 14,000
31.03.2021

You are required to calculate:

The inventory turnover ratio of ‘Material A’ and ‘Material B’.
The number of days for which the average inventory is held for both
materials ‘A’ and ‘B’.
Based on above calculations, give your comments. (Assume 360 days in a
year.)
[(5 Marks) Dec 2021]

Answer
Statement Showing Inventory Turnover Ratio
Particulars Material Material
A B
Opening stock Add: Purchases Less: Closing stock 30,000 32,000
Materials consumed Average inventory (Opening 90,000 51,000
stock + Closing stock) ÷ 2
(20,000) (14,000)
Inventory turnover ratio (Materials consumed ÷
1,00,000 69,000
Average inventory)
25,000 23,000
Inventory holding period (360 ÷ IT Ratio)
4 times 3 times
90 days 120
days

Comment: The material turnover ratio of material A is higher than material B.

Hence, A is the fast moving material. Inventory Turnover Ratio indicates that how
much time a particular inventory is rotated during the year. Since, inventory
turnover ratio of A is higher than that of B; it indicates that A is fast moving. This
can be further verified by average inventory holding as it is lesser for A in
comparison to B. Attempt should be therefore made to reduce the amount of
capital locked up in B.

Question 9

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

Answer
Calculation of workers recruited and joined:
Number of accessions = Replaced + New Joined
= (10% + 5%) = 15% of average workers
= 15% of 500 = 75 workers
Or
Number of accessions = Flux - Separated
= (20% - 5%) = 15% of average workers
= 15% of 500 = 75 workers

Calculation of workers left and discharged:

Number of workers separated = 5% of average workers
= 5% of 500 = 25 workers

Calculation of average number of workers on roll:

Number of workers replaced = 10% of average workers
= 50 workers
Therefore, Average workers = 50 ÷ 10%
= 500 workers

Question 10
A worker takes 15 hours to complete a piece of work for which time allowed
is 20 hours. His wage rate is ₹5 per hour. The following additional
information is also available:

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 Item Amount (₹)
Material cost of work 50
Factory overheads 100% of wages

Calculate the factory cost of work under the following methods of wage
payments:
(i) Rowan Plan
(ii) Halsey Plan
[CA Inter May 2018, 5 Marks]
Answer:
Calculation of Factory Cost of Work:
Rowan Plan Halsey Plan
(₹) (₹)
Materials 50 50
Direct Wages (Refer W.N.) 93.75 87.50
Prime Cost 143.75 137.50
Factory Overheads (100% of Direct 93.75 87.50
Wages)
Factory Cost 237.50 225.00

Working Note:
Calculation of Direct Wages:
 Rowan Plan
= Time Taken × Rate per hour + (Time Saved ÷ Time Allowed) × Time Taken ×
Rate per hour
= 15 hours × 5 + (5 hours ÷ 20 hours) × 15 hours × 5
= ₹93.75
 Halsey Plan
= Time Taken × Time Rate + 50% of Time Saved × Time Rate
= 15 hours × 5 + (50% of 5 hours) × 5
= ₹87.50

Question 11

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 The following data have been extracted from the books of M/s. ABC Private
Limited:
Item Amount
(i) Salary (each employee, per month) ₹ 30,000
(ii) Bonus 25% of salary
(iii) Employer’s contribution to PF, ESI etc. 15% of salary
(iv) Total cost at employees’ welfare activities ₹ 6,61,500 per
annum
(v) Total leave permitted during the year 30 days
(vi) No. of employees 175
(vii) Normal idle time 70 hours per
annum
(viii) Abnormal idle time (due to failure of power 50 hours
supply)
(ix) Working days per annum 310 days of 8 hours

You are required to calculate:

(i) Annual cost of each employee
(ii) Employee cost per hour
(iii) Cost of abnormal idle time, per employee.
[CA Inter Nov 2018, 5 Marks]

Answer:
(i) Calculation of Annual Cost of each employee
Particulars Amount
(₹)
Salary (₹ 30,000 × 12) 3,60,000
Bonus (25% of salary) 90,000
Contribution to PF, ESI (15% of salary) 54,000
Cost of employees’ welfare activities (₹ 6,61,500 ÷ 175 3,780
employees)
Total Annual Cost of each employee 5,07,780

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 (ii) Calculation of Employee cost per hour
Particulars Hours
Working Hours (310 days × 8 hours) 2,480
Less: Employee leave hours (30 days × 8 hours) 240
Available working Hours 2,240
Less: Normal Idle Time 70
Effective Working Hours 2,170

Employee Cost per Hour = ₹ 5,07,780 ÷ 2,170 hours = ₹ 234

Note: It is assumed that 310 working days do not include leave days permitted to
the employees.

(iii) Cost of abnormal idle time, per employee

= ₹ 234 × 50 hours = ₹ 11,700

Question 12
Zico Ltd. has its factory at two locations viz Nasik and Satara. Rowan plan is
used at Nasik factory and Halsey plan at Satara factory. Standard time and
basic rate of wages are the same for a job which is similar and is carried out
on similar machinery. Normal working hours is 8 hours per day in a 5-day
week.
Job in Nasik factory is completed in 32 hours while at Satara factory it has
taken 30 hours. Conversion costs at Nasik and Satara are ₹ 5,408 and ₹
4,950. Overheads account for ₹ 25 per hour.
Required:
(i) To find out the normal wages; and
(ii) To compare the respective conversion costs.
[CA Inter Nov. 2019, 10 Marks]

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 Answer:
Calculation of Total labour costs at both the factories
Particulars Nasik Satara
Hours worked 32 hrs. 30 hrs.
Conversion Costs ₹ 5,408 ₹ 4,950
Less: Overheads ₹ 800 (₹ 25 × 32 hrs.) ₹ 750 (₹ 25 × 30 hrs.)
Labour Costs ₹ 4,608 ₹ 4,200

(i) Calculation of Normal Wage Rate:

Let wage rate be ₹ R per hour, which is the same for both the Nasik and Satara
factory.
Normal time allowed for completing the job is 40 hours, i.e., 8 hours per day × 5
days.
Normal wage rate can be found out taking total cost of either factory.
 Nasik: Rowan Plan
Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan
₹ 4,608 = Time taken × Rate per hour + (Time saved ÷ Time Allowed) × Time
taken × Rate per hour
₹ 4,608 = 32 hrs × R + [(40 − 32) ÷ 40] × 32 × R
₹ 4,608 = 32R + 6.4R
R = ₹ 120 per hour
OR
 Satara: Halsey Plan
Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
₹ 4,200 = Time taken × Time Rate + 50% of Time Saved × Time Rate
₹ 4,200 = 30 hrs × R + 50% of (40 hrs − 30 hrs) × R
₹ 4,200 = 30R + 5R
₹ 4,200 = 35R
R = ₹ 120 per hour

(ii) Comparative Statement of Respective Conversion Costs

Particulars Nasik (₹) Satara (₹)
Normal Wages 3,840 (₹ 120 × 32) 3,600 (₹ 120 × 30)
Bonus 768 (6.4 × ₹ 120) 600 (5 × ₹ 120)

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 Factory Overhead 800 750
Conversion Costs 5,408 4,950

Question 13
Following are the particulars of two workers 'R' and 'S' for a month:
Particulars R S
(i) Basic Wages (₹) 15,000 30,000
(ii) Dearness Allowance 50% 50%
(iii) Contribution to EPF (on basic wages) 7% 7.5%
(iv) Contribution to ESI (on basic wages) 2% 2%
(v) Overtime (hours) 20 -

The normal working hours for the month are 200 hours. Overtime is paid at
double the total of normal wages and dearness allowance. Employer's
contribution to State Insurance and Provident Fund are at equal rates with
employees' contributions.
Both workers were employed on jobs A, B, and C in the following
proportions:
Jobs A B C
R 75% 10% 15%
S 40% 20% 40%

Overtime was done on job 'A'. You are required to:

(i) Calculate ordinary wage rate per hour of 'R' and 'S'.
(ii) Allocate the worker's cost to each job 'A', 'B', and 'C'.
[(6 Marks) Nov 2020]

Answer
(i) Calculation of Net Wages paid to Worker ‘R’ and ‘S’

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 Particulars R (₹) S (₹)
Basic Wages 15,000.00 30,000.00
Dearness Allowance (DA) (50% of Basic 7,500.00 15,000.00
Wages)
Overtime Wages (Refer to Working Note 1) 4,500.00 ----
Gross Wages earned 27,000.00 45,000.00
Less: Provident Fund (7% × ₹ 15,000); (7.5% × ₹ (1,050.00) (2,250.00)
30,000)
Less: ESI (2% × ₹ 15,000); (2% × ₹ 30,000) (300.00) (600.00)
Net Wages paid 25,650.00 42,150.00

Calculation of ordinary wage rate per hour of Worker ‘R’ and ‘S’
Particulars R (₹) S (₹)
Gross Wages (Basic Wages + 22,500.00 45,000.00
DA) (excluding overtime)
Employer’s contribution to P.F. 1,350.00 2,850.00
and E.S.I.
Total 23,850.00 47,850.00
Ordinary wages Labour Rate 119.25 (₹ 23,850 ÷ 239.25 (₹ 47,850 ÷
per hour 200 hours) 200 hours)

(ii) Statement Showing Allocation of Workers Cost to Each Job

Worker Total Jobs A Jobs B Jobs C
Wages (₹) (₹) (₹)
Worker R
Ordinary Wages 23,850.00 17,887.50 2,385.00 3,577.50
(15:2:3)
Overtime 4,500.00 4,500.00 - -
Worker S
Ordinary Wages 47,850.00 19,140.00 9,570.00 19,140.00
(2:1:2)

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 Total 76,200.00 41,527.50 11,955.00 22,717.50

Working Note:
 Normal Wages are considered as basic wages.
 Overtime
= 2 × (Basic wage + D.A.) × 20 hours ÷ 200 hours
= 2 × ₹ 22,500 × 20 ÷ 200
= ₹ 4,500

Question 14
Z Ltd is working by employing 50 skilled workers. It is considering the
introduction of an incentive scheme – either Halsey Scheme (with 50%
Bonus) or Rowan Scheme of wage payment for increasing the labour
productivity to adjust with the increasing demand for its products by 40%.
The company 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 the company has
accordingly given assurance to the workers.
Because of this assurance, an increase in productivity has been observed
as revealed by the figures for the month of April, 2020:
Hourly rate of wages (guaranteed) ₹ 50
Average time for production one unit by one worker at the 1.975
previous performance (this may be taken as time allowed) hours
Number of working days in a month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120
units

Required:
(i) Calculate the effective increase in earnings of workers in percentage
terms under Halsey and Rowan scheme.
(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit
under both the schemes.
(iii) Advise Z Ltd about the selection of the scheme that would fulfil its

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 assurance of incentivising workers and also to adjust with the increase in
demand.
[(10 Marks) Jan 2021]

Answer
Working Notes:
1. Calculation of actual hours worked:
= 8 hrs. per day × 24 days per month × 50 workers
= 9,600 hours
2. Calculation of Standard time and Time saved:
Standard time allowed for actual output:
= 6,120 units × 1.975 hours
= 12,087 hours
Hence, Time saved:
= Time allowed - Time taken
= 12,087 - 9,600
= 2,487 hours
3. Calculation of wages under Halsey Scheme:
Total wages:
= (Hours worked × Rate per hour) + 50% (Time saved × Rate per hour)
= (9,600 hrs. × ₹ 50) + 50% (2,487 hrs. × ₹ 50)
= 4,80,000 + 62,175
= ₹ 5,42,175
Hence, Effective earning per hour:
= Total wages ÷ Actual hours
= ₹ 5,42,175 ÷ 9,600 hours
= ₹ 56.4765 per hour
4. Calculation of wages under Rowan Scheme:
Total wages:
= (Hour worked × Rate per hour) + (Time saved ÷ Time allowed) × (Hours
worked × Rate per hour)
= (9,600 hrs. × ₹ 50) + [(2,487 ÷ 12,087) × (9,600 × ₹ 50)]
= 4,80,000 + 98,764
= ₹ 5,78,764

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 Hence, Effective earning per hour:
= Total wages ÷ Actual hours
= ₹ 5,78,764 ÷ 9,600 hours
= ₹ 60.2879 per hour

(i) Calculate the effective increase in % earnings of workers:

(a) For Halsey Plan:
= [(₹ 56.4765 per hour - ₹ 50 per hour) ÷ ₹ 50 per hour] × 100
= 12.953%
(b) For Rowan Plan:
= [(₹ 60.2879 per hour - ₹ 50 per hour) ÷ ₹ 50 per hour] × 100
= 20.5758%

(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit:
Particulars Halsey Rowan
Plan Plan
Labour cost per unit at present ₹ 98.75 ₹ 98.75
[1.975 hrs. × ₹ 50 per hour]
Total wages under incentive scheme ₹ 5,42,175 ₹ 5,78,764
Actual Production (units) 6,120 6,120
Labour cost per unit under the scheme [b ÷ ₹ 88.59 ₹ 94.57
c]
Saving in cost per unit [a - d] ₹ 10.16 ₹ 4.18

(iii) Advise to Z Ltd about the selection of the scheme that would fulfil its
assurance:
The company had given the assurance to workers that their wages will increase
by 20% of their present earnings.
This assurance is fulfilled under Rowan Scheme, because earnings of workers
have increased by 20.5758%.
Hence, Rowan scheme should be selected.

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 Normal production = Actual total hours ÷ Hours per unit
= 9,600 ÷ 1.975
= 4,860 units (approx)
Production under incentive schemes = 6,120 units
% increase in production = [(6,120 - 4,860) ÷ 4,860] × 100
= 25.92%
Demand for our products has gone up by 40%, which will not get fulfilled.

Question 15
Following information is given of a newly setup organization for the year
ended on 31st March, 2021.
Details Number
Number of workers replaced during the period 50
Number of workers left and discharged during the period 25
Average number of workers on the roll during the period 500

You are required to:

(i) Compute the Employee Turnover Rates using Separation Method and
Flux Method.
(ii) Equivalent Employee Turnover Rates for (i) above, given that the
organization was setup on 31st January, 2021.
[(5 Marks) July 2021]

Answer
(i) Employee Turnover Rate
Using Separation method:
Number of employees Separated during the period ÷ Average number of
employees during the period on roll × 100
= 25 ÷ 500 × 100 = 5% (for 2 months)
Using Flux method:
(Number of employees Separated + Number of employees Replaced during the
period) ÷ Average number of employees during the period on roll × 100
= (50 + 25) ÷ 500 × 100 = 15% (for 2 months)

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 (ii) Equivalent Employee Turnover Rate per annum
Using Separate method:
5% × 12 months ÷ 2 months = 30%
Using Flux method:
15% × 12 months ÷ 2 months = 90%

Question 16
Here is the properly formatted content for direct use:

PQR Limited has replaced 72 workers during the quarter ended 31st March
2022. The labour rates for the quarter are as follows:

Method Rate
Flux method 16%
Replacement method 8%
Separation method 5%

You are required to ascertain:

(i) Average number of workers on roll (for the quarter),
(ii) Number of workers left and discharged during the quarter,
(iii) Number of workers recruited and joined during the quarter,
(iv) Equivalent employee turnover rates for the year.
[(5 Marks) May 2022]

Answer
(i) Turnover Ratio using Replacement method
Turnover Ratio = No. of workers replaced ÷ Avg. no. of workers × 100
∴ 8% = 72 ÷ Avg. no. of workers
∴ Average workers = 72 ÷ 8%
= 900 workers for the quarter

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 (ii) Turnover Ratio by Separation method
Turnover Ratio = No. of workers left and discharged ÷ Avg. no. of workers × 100
5% = X ÷ 900
∴ X = 5% × 900
∴ No. of workers left & discharged = 45 workers during the quarter

(iii) Flux Method

Flux Method = (No. of workers joined + No. of workers left) ÷ Avg. no. of workers ×
100
16% = (X + 45) ÷ 900
∴ 900 × 16% = X + 45
∴ 144 = X + 45
∴ 144 - 45 = X
∴ X = 99 workers
∴ No. of workers recruited & joined = 99 workers during the quarter

(iv) Equivalent employee turnover rates for the year

Note: Turnover rates are already given in the question for a quarter. We need to
just convert it into an annual rate as follows:
Flux Method = 16% × 4 = 64% p.a.
Replacement Method = 8% × 4 = 32% p.a.
Separation Method = 5% × 4 = 20% p.a.

Question 17
A skilled worker, in PK Ltd., is paid a guaranteed wage of ₹ 15.00 per hour in
a 48-hour week. The standard time to produce a unit is 18 minutes. During a
week, a skilled worker – Mr. ‘A’ has produced 200 units of the product. The
Company has taken a drive for cost reduction and wants to reduce its
labour cost.
You are required to:
(i) Calculate wages of Mr. ‘A’ under each of the following methods:
A. Time rate,
B. Piece-rate with a guaranteed weekly wage,
C. Halsey Premium Plan,
D. Rowan Premium Plan

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 (ii) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium
Plan, the company should follow.
[(6 Marks) Nov 2022]
Answer
Calculation of wages of Mr. ‘A’ under various methods:
(A) Time Rate:
Wages = Hours worked × Rate per hour
= 48 hours × 15 = ₹ 720
(B) Piece Rate with Guaranteed Weekly Wage:
Guaranteed Weekly Wages = 48 hours × 15 = ₹ 720
Piece Rate = ₹ 15 ÷ 60 minutes × 18 minutes
= ₹ 4.50 per piece
Piece Rate Wages = No. of pieces produced × Piece Rate
= 200 units × ₹ 4.50 = ₹ 900
(C) Halsey Premium Plan:
Time allowed = (200 units × 18 minutes) ÷ 60 minutes = 60 hours
Time saved = 60 − 48 hours = 12 hours
Wages = (Hours worked × Rate per hour) + 50% of (Time Saved × Rate per hour)
= (48 hours × 15) + 50% of (12 hours × 15)
= ₹ 720 + 90 = ₹ 810
(D) Rowan Premium Plan:
Wages = Basic Wages + [TS ÷ TA × Basic wages]
= ₹ 720 + [12 ÷ 60 × ₹ 720]
= ₹ 720 + 144 = ₹ 864

(ii) Suggestion about Bonus Plan:

As the company aims to reduce its labour cost, Halsey Premium Plan should be
followed.

Question 18

A machine shop cost centre 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 addition, they are paid a bonus of 10 per cent of

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 productive time. Costs are reported for this company on the basis of
thirteen four-weekly periods.
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 the original cost of the machine.
Original cost of each machine is ₹ 52,000.
 Maintenance and repairs: ₹ 60 per week per machine.
 Consumable stores: ₹ 75 per week per machine.
 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:
o Rent per annum: ₹ 5,400
o Heat and Light per annum: ₹ 9,720
o Foreman’s salary per annum: ₹ 12,960
o Other miscellaneous expenditure per annum: ₹ 18,000
Required:
CALCULATE the cost of running one machine for a four-week period.
[(8 Marks) May 2015]

Answer
Effective Machine hour for four-week period
= Total working hours − unproductive set-up time
= {(48 hours × 4 weeks) − (4 hours × 4 weeks)}
= (192 − 16 hours) = 176 hours.

(i) Computation of cost of running one machine for a four-week period

Particulars ₹ ₹
(A) Standing charges (per annum)
Rent 5,400
Heat and light 9,720

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 Foreman’s salary 12,960
Other miscellaneous expenditure 18,000
Standing charges (per annum) 46,080
Total expenses for one machine for four-week period 1,181.54
Wages (48 hours × 4 weeks × ₹ 20 × 3 operators) 11,520.00
Bonus {(176 hours × ₹ 20 × 3 operators) × 10%} 1,056.00
Total standing charges 13,757.54
(B) Machine Expenses
Depreciation 400.00
Repairs and maintenance (₹ 60 × 4 weeks) 240.00
Consumable stores (₹ 75 × 4 weeks) 300.00
Power (176 hours × 20 units × ₹ 0.80) 2,816.00
Total machine expenses 3,756.00
(C) Total expenses (A) + (B) 17,513.54

(ii) Machine hour rate

= ₹ 17,513.54 ÷ 176 hours
= ₹ 99.51

Question 19
APP Limited is a manufacturing concern and recovers overheads at a pre-
determined rate of ₹ 30 per man-day.
The following additional information of a period are also available for you:

Particulars Amount/Units
Total factory overheads incurred ₹ 51,00,000
Man-days actually worked 1,50,000
Sales (in units) 50,000
Stock at the end of the period:

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 Completed units 5,000
Incompleted units (50% completed) 10,000

There was no opening stock of finished goods and works in progress.

On analyzing the situation, it was discovered that 60% of the unabsorbed
overheads were due to defective planning, and the balance was attributable
to an increase in overhead costs.
How would you treat unabsorbed overheads in cost accounts?
[(8 Marks) Nov 2017]

Answer
Particulars Amount (₹)
Total factory overheads incurred 51,00,000
Less: Absorbed factory overheads (₹ 30 × 1,50,000) (45,00,000)
Under-absorption of Overheads 6,00,000

60% of ₹ 6,00,000 i.e. ₹ 3,60,000 would be transferred to the Costing P/L

Account.
40% of ₹ 6,00,000 i.e. ₹ 2,40,000 would be apportioned over sales units and stock
by using the supplementary overheads rate.
Supplementary overheads Rate:
₹ 2,40,000 ÷ (50,000 + 5,000 + 5,000) = ₹ 4
Particulars Amount (₹)
On Sales (50,000 units × ₹ 4) 2,00,000
On Finished Goods (5,000 units × ₹ 4) 20,000
On Work in Progress (10,000 × 50% × ₹ 4) 20,000
Total 2,40,000

Question 20
Delta Ltd. is a manufacturing concern having two production departments
P1 and P2 and two service departments S1 and S2. After making a primary
distribution of factory overheads, the total overheads of all departments are
as under:

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 Department Overheads (₹)
P1 4,02,000
P2 2,93,000
S1 3,52,000
S2 33,000

Overheads of service departments are reapportioned as below:

Service Department P1 (%) P2 (%) S1 (%) S2 (%)

S1 40 50 - 10
S2 50 40 10 -

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

Answer
(i)
Overheads of service cost centres Let S1 be the overhead of service cost centre
S1 and S2 be the overhead of service cost centre S2.
S1 = 3,52,000 + 0.10 S2
S2 = 33,000 + 0.10 S1
Substituting the value of S2 in S1 we get:
S1 = 3,52,000 + 0.10 (33,000 + 0.10 S1)
S1 = 3,52,000 + 3,300 + 0.01 S1
0.99 S1 = 3,55,300
S1 = ₹ 3,58,889

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 S2 = 33,000 + 0.10 × 3,58,889
= ₹ 68,889

Secondary Distribution Summary

Particulars Total (₹) P1 (₹) P2 (₹)
Allocated and Apportioned overheads 6,95,000 4,02,000 2,93,000
as per primary distribution
S1 3,58,889 1,43,556 1,79,445
S2 68,889 34,445 27,556
Total 5,80,001 5,00,001

(ii) Working for Overhead rate per hour

P1 P2
Total overheads cost (₹) 5,80,001 5,00,001
Production hours worked 5,840 5,840
Rate per hour (₹) 99.32 85.62

Calculation of per unit Total Cost of Product Z

Particulars ₹
Direct material 500.00
Direct labour 350.00
Prime cost 850.00
Production on overheads
P1 - 2 hours × ₹ 99.32 = 198.64
P2 - 3 hours × ₹ 85.62 = 256.86
Total cost 1,305.50

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Question 21
RSJ produces a single product and absorbs production overheads at a pre-
determined rate. Information relating to a period is as under:

Particulars Amount
Production overheads actually incurred ₹ 4,84,250
Overhead recovery rate at production ₹ 1.45 per hour
Actual hours worked 2,65,000 hours
Production:
Finished goods 17,500 units
Works-in-progress (50% complete in all respect) 5,000 units
Sales of finished goods 12,500 units

At the end of the period, it was discovered that the actual production
overheads incurred included ₹ 40,000 on account of ‘written off obsolete
stores' and wages paid for the strike period under an award.
It was also found that 30% of the under absorption of production overheads
was due to factory inefficiency and the rest was attributable to normal
increase in costs.
Required to calculate:
(i) The amount of under absorbed production overheads during the period.
(ii) Show the accounting treatment of under absorption of production
overheads and pass journal entry.
[(8 Marks) Nov 2018]

Answer
(i) Amount of under absorption of production overheads during the period:

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 Particulars Amount Amount
(₹) (₹)
Total production overheads actually incurred 4,84,250
during the period
Less: Expenses on account of obsolete store and 40,000
wages paid for the strike period
Net production overheads actually incurred 4,44,250
Less: Production overheads absorbed as per 3,84,250
machine hour rate (2,65,000 hours × ₹1.45)
Amount of under absorbed production overheads 60,000

(ii) Accounting treatment of under absorbed production overheads:

As 30% of the under absorbed overheads were due to factory inefficiency, this
being abnormal, hence should be debited to Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account = (60,000 × 30%)
= ₹ 18,000.
Balance of under absorbed production overheads should be distributed over
Works-in-progress, Finished goods, and Cost of sales by applying the
supplementary rate.
Amount to be distributed = (60,000 × 70%) = ₹ 42,000.
Supplementary rate = ₹ 42,000 ÷ 20,000 units = ₹ 2.10
(17,500 units + 1/2 of 5000 units)
Apportionment of under absorbed production overheads over WIP, Finished
goods and Cost of sales:
Particulars Equivalent completed Amount
units (₹)
Work-in-Progress (5,000 units × 2,500 5,250
50% × 2.10)
Finished goods (5,000 units × 5,000 10,500
2.10)
Cost of sales (12,500 units × 2.10) 12,500 26,250
Total 20,000 42,000

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 Journal Entry:
Particulars Dr. (₹) Cr. (₹)
WIP Control A/C 5,250
Finished Goods Control A/C 10,500
Cost of Sales A/C 26,250
Costing P/L A/C 18,000
To Overhead Control A/C 60,000

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

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 department X renders services to departments A, B, and Y in the
ratio of 6:4:2 whereas department Y renders services to department A and B
in the ratio of 4:1. The direct labour hours of department A and B are 67,500
hours and 48,750 hours respectively.
Required:
1. Prepare overheads distribution sheet.
2. Calculate factory overhead per labour hour for the dept. A and dept. B.
[(5 Marks) Nov 2018]

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 Answer

(1) Overheads Distribution Sheet

Item Basis Total Production Service

Amount Departments Departments
(₹)
A (₹) B (₹) X (₹) Y (₹)
Variable Horse 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
overheads Power
(₹ 12.60 hours
lakhs - ₹ used
4.20 lakhs)
Fixed Horse 4,20,000 1,20,000 1,50,000 90,000 60,000
Overheads power for
Capacity
productio
n
Total 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000
Overheads
Service As per (₹ 2,70,000) 1,35,000 90,000 45,000
dept X the ratio
allocated to given
A, B & Y 6:4:2
Service As per (₹ 1,80,000 + 1,80,000 45,000
dept Y the ratio 4,5000 = ₹
allocated to of 4:1 2,25,000)
A&B
Total 6,75,000 5,85,000
Overheads
of
Production
Departmen
ts:

(2) Calculation of Factory Overhead Per Labour Hour

Item Production Departments

A (₹) B (₹)
Total overheads 6,75,000 5,85,000
Direct labour hours 67,500 48,750
Factory overheads per hour 10 12

Question 23

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 M/s. Zaina Private Limited has purchased a machine costing ₹ 29,14,800 and
it is expected to have a salvage value of ₹ 1,50,000 at the end of its effective
life of 15 years. Ordinarily, the machine is expected to run for 4,500 hours
per annum but it is estimated that 300 hours per annum will be lost for
normal repairs & maintenance. The other details in respect of the machine
are as follows:

Details Amount
(i) Repair & Maintenance during the whole life of the machine are ₹ 5,40,000
expected to be
(ii) Insurance premium (per annum) 2% of the cost of the
machine
(iii) Oil and Lubricants required for operating the machine (per ₹ 87,384
annum)
(iv) Power consumption: 10 units per hour @ ₹ 7 per unit. No
power consumption during repair and maintenance.
(v) Salary to operator per month ₹ 24,000. The operator devotes
one-third of his time to the machine.

You are required to calculate the comprehensive machine hour rate.

[(5 Marks) May 2019]

Answer

Effective machine hours p.a. = 4,500 – 300 = 4,200 hours p.a.

Calculation of Comprehensive Machine Hour Rate

Amt. (₹) p.a.

Particulars
Repairs and Maintenance (₹ 5,40,000 ÷ 15 years) 36,000
Insurance (₹ 29,14,800 × 2%) 58,296
Oil and Lubricant 87,384
Power (4,200 hours × 10 units/hr. × ₹ 7) 2,94,000
Salary to Operator [(₹ 24,000 p.m. × 12 months) ÷ 3] 96,000
Depreciation (₹ 29,14,800 – ₹ 1,50,000 ÷ 15 years) 1,84,320
Total Cost p.a. 7,56,000
Comprehensive Machine Hour Rate [₹ 7,56,000 ÷ 4,200] 180

Question 24

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 the following information:

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 Details Amount (₹)
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 an increase in costs.

You are required:

(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.

[(10 Marks) Nov 2019]

Answer

(a) Working Note:

Computation of revenues (at listed price), discount, cost of goods sold, and
customer-level operating activities costs:

Particula A B C D E
r
Cases 9,360 14,200 62,000 38,000 9,800
sold: (a)
Revenues 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(at listed
price) (₹):
(b) {{a × ₹
54}}
Discount - 8,520 3,10,000 1,44,400 52,920
(₹): (c) {{a
×

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 Discount
per case}}
Cost of 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
goods
sold (₹):
(d) {{a × ₹
45}}
Customer-Level Operating Activities Costs:

Particular A B C D E
Order taking costs 6,000 10,000 12,000 10,000 12,000
(₹): (No. of
purchase × ₹ 200)
Customer visits 1,200 1,800 3,600 1,200 1,800
costs (₹): (No. of
customer visits × ₹
300)
Delivery vehicles 3,200 2,880 4,800 6,400 9,600
travel costs (₹):
(Kms travelled × ₹ 4
per km)
Product handling 18,720 28,400 1,24,000 76,000 19,600
costs (₹): {{a × ₹ 2}}
Cost of expediting - - - - 200
deliveries (₹): (No.
of expedited
deliveries × ₹ 100)
Total cost of 29,120 43,080 1,44,400 93,600 43,200
customer-level
operating
activities (₹)

(i) Computation of Customer Level Operating Income:

Particular A B C D E
Revenues 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(At list
price)
Less: - 8,520 3,10,000 1,44,400 52,920
Discount
Revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(At actual
price)
Less: Cost 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
of goods
sold
Gross 84,240 1,19,280 2,48,000 1,97,600 35,280

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 margin
Less: 29,120 43,080 1,44,400 93,600 43,200
Customer-
level
operating
activities
costs
Customer- 55,120 76,200 1,03,600 1,04,000 (7,920)
level
operating
income

(ii) Comments:

Customer D in comparison with Customer C:

Operating income of Customer D is more than that of Customer C, despite having

only 61.29% (38,000 units) of the units volume sold in comparison to Customer C
(62,000 units). Customer C receives a higher percentage of discount i.e. 9.26% (₹
5), while Customer D receives a discount of 7.04% (₹ 3.80). Though the gross
margin of Customer C (₹ 2,48,000) is more than Customer D (₹ 1,97,600), the
total cost of customer-level operating activities of Customer C (₹ 1,44,400) is
higher compared to Customer D (₹ 93,600). As a result, operating income is
higher for Customer D.

Customer E in comparison with Customer A:

Customer E is not profitable, while Customer A is profitable. Customer E receives

a discount of 10% (₹ 5.40), whereas Customer A doesn’t receive any discount.
Sales volumes of Customer A and E are almost the same. However, the total cost
of customer-level operating activities of Customer E is far higher (₹ 43,200) in
comparison to Customer A (₹ 29,120). This has resulted in a loss in the case of
Customer E.

Question 25

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

Details Amount (₹)

Direct Expenses 1,80,000
Direct Wages (being 175% of Factory Overheads) 2,57,250
Cost of Goods Sold 18,75,000
Selling and Distribution Overheads 60,000
Sales 22,10,000
Administration Overheads (10% of Factory Overheads) -

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 Stock details as per Stock register:

Stock 30.06.2018 (₹) 30.09.2018 (₹)

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

You are required to prepare a Cost Sheet showing:

1. Raw Material Consumed

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

Answer

Cost Sheet

Particulars Amount (₹)

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

Working Note

Statement Showing Material Purchased

Particulars Amount (₹)

Cost of Goods Sold 18,75,000

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

Question 26

M/s. Areeba Private Limited has a normal production capacity of 36,000

units of toys per annum.

The estimated cost of production is as under:

1. Direct Material:
Rs. 40 per unit
2. Direct Labour:
Rs. 30 per unit (subject to a minimum of Rs. 48,000 p.m.)
3. Factory Overheads:
(a) Fixed: Rs. 3,60,000 per annum
(b) Variable: Rs. 10 per unit
(c) Semi-variable: Rs. 1,08,000 per annum up to 50% capacity and
additional Rs. 46,800 for every 20% increase in capacity or any part
thereof.
4. Administrative Overheads:
Rs. 5,18,400 per annum (fixed)
5. Selling Overheads:
Rs. 8 per unit
6. Scrap:
Each unit of raw material yields scrap which is sold at the rate of Rs. 5
per unit.
7. Capacity Utilization (2019):
o 50% capacity for the first three months
o 80% capacity for the remaining nine months
8. Selling Price for First Three Months:
Rs. 145 per unit

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 You are required to:

(i) Prepare a Cost Sheet showing:

 Prime Cost
 Works Cost
 Cost of Production
 Cost of Sales

(ii) Calculate the selling price per unit for the remaining nine months to
achieve the total annual profit of Rs. 8,76,600.

[(10 Marks) May 2019]

Answer

(i) Cost Sheet of M/s. Areeba Pvt. Ltd. for the year 2019

Particulars 3 Months 9 Months Total

(50%) (80%)
Capacity utilisation 50% 80%
Production in Units [36,000 × [36,000 × 80% 26,100
50% × 3/12] × 9/12] =
= 4,500 21,600
Direct Material @ ₹ 40 1,80,000 8,64,000 10,44,000
per unit
Less: Scrap @ ₹ 5 per (22,500) (1,08,000) (1,30,500)
unit
∴ Net Materials 1,57,500 7,56,000 9,13,500
Consumed
Direct Wages @ ₹ 40 per 1,44,000 6,48,000 7,92,000
unit or ₹ 48,000 p.m.,
whichever is higher
∴ Prime Cost 3,01,500 14,04,000 17,05,500
Factory Overheads:
- Fixed 90,000 2,70,000 3,60,000
- Variable @ ₹ 10 per unit 45,000 2,16,000 2,61,000
- Semi-variable (see note 27,000 1,51,200 1,78,200
below)
Works Cost 4,63,500 20,41,200 25,04,700
Add: Administrative 1,29,600 3,88,800 5,18,400
Overheads
∴ Cost of Production 5,93,100 24,30,000 30,23,100
Selling Overheads @ ₹ 8 36,000 1,72,800 2,08,800
per unit
∴ Cost of Sales 6,29,100 26,02,800 32,31,900

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 Working Notes / Assumptions:

1. Calculation of Semi Variable Overheads:

o For 50% Capacity = 1,08,000 per annum
Hence, for first 3 months = (1,08,000 × 3/12) = ₹ 27,000
o For 80% Capacity = (1,08,000 + 46,800 + 46,800) = 2,01,600 per
annum
Hence, for last 9 months = (2,01,600 × 9/12) = ₹ 1,51,200

2. Alternatively, scrap of raw material can also be reduced from works cost.

3. Administrative overhead may alternatively be treated as a part of general

overheads. In that case, Works Cost as well as Cost of Production will be
same and Administrative overheads will be added along with Selling
overheads. However, cost of sales will remain the same.

(ii) Calculation of Selling Price for Nine Months Period

Particulars Amount (₹)

Total Cost of Sales from Cost Sheet 32,31,900
Add: Desired annual profit (given) 8,76,600
∴ Total Sales Value 41,08,500
Less: Sales value for first three months (₹ 145 × 4,500 units) (6,52,500)
∴ Sales Value to be realised in next nine months 34,56,000
∴ Selling price per unit (₹ 34,56,000 ÷ 21,600 units) 160

Question 27

XYZ, a manufacturing firm, has revealed the following information for

September, 2019:

Particulars 1st September (₹) 30th September (₹)

Raw Materials 2,42,000 2,92,000
Works-in-progress 2,00,000 5,00,000

The firm incurred the following expenses for a target production of 1,00,000
units during the month:
Particulars Amount
(₹)
Consumable Stores and spares of factory 3,50,000
Research and development cost for process improvements 2,50,000
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent of production asset 2,00,000
Administrative Expenses (General) 2,24,000

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 Selling and distribution Expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5000 units
Defective output (4% of targeted production), realizes ₹ 61 -
per unit
 Closing stock is valued at cost of production (excluding administrative
expenses).
 Cost of goods sold, excluding administrative expenses amounts to ₹
78,26,000.
 Direct employees' cost is ½ of the cost of material consumed.
 Selling price of the output is ₹ 110 per unit.

You are required to:

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

Answer

Cost Sheet of XYZ for the month of September: [Bottom to Top Approach]

Particulars Amount Amount (₹)

(₹)
Direct Material Consumed
Raw materials purchased (Bal. Fig.) 52,50,000
Add: Opening stock 2,42,000
Less: Closing stock (2,92,000) 52,00,000
Wages paid [78,00,000 × 0.50 / 1.50] (see 26,00,000
working below)
PRIME COST 78,00,000
Add: Factory Overheads
Consumable Stores and spares of factory 3,50,000
Lease rent of production asset 2,00,000 5,50,000
GROSS FACTORY COST 83,50,000
Add: Opening value of W-I-P 2,00,000
Less: Closing value of W-I-P (5,00,000)
NET FACTORY COST OF FG 80,50,000
Quality control cost 2,00,000
Research & development cost 2,50,000
Less: Amount realised by selling defective (2,44,000)
output
[1,00,000 units × 4% × ₹ 61 per unit]
COST OF PRODUCTION 82,56,000
Add: Opening stock of Finished goods NIL
Less: Closing stock of Finished goods (4,30,000)
[78,26,000 / 91,000 units × 5,000 units]
COST OF GOODS SOLD (Given) 78,26,000

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 Add: Selling & Distribution expenses 4,13,000
Add: Administrative expenses (General) 2,24,000
Add: Secondary packing [91,000 units × ₹ 2] 1,82,000
8,19,000
COST OF SALES 86,45,000
Sales Revenue [91,000 units × ₹ 110] 1,00,10,000
PROFIT (Balancing Figure) 13,65,000
Working Notes

1. Calculation of No. of units sold:

Particulars Units
Target Production 1,00,000
Less: Defective production @ 4% of 1,00,000 (4,000)
∴ Good units of FG produced 96,000
Add: Opening stock of FG NIL
Less: Closing stock of FG (5,000)
∴ Finished goods sold during the month 91,000

2. Procedure to solve this question:

 First prepare the blank format of cost sheet with relevant items.
 Write down the figures already given in the question.
 Start with COGS figure given in the question.
 Do the forward working from COGS and you will reach up to profits.
 Now do the reverse working from COGS. While doing the reverse
calculations, the items originally added in the cost sheet will get deducted,
and the items deducted in the cost sheet will get added. By this way, you will
reach up to Prime Cost.
 Prime cost of ₹ 78,00,000 consists of Material + Labour. Let's assume
material consumed as ₹ X and Wages as ₹ 0.5X. Hence, 1.5X = 78,00,000
and X = 52,00,000 and 0.5X = 26,00,000.
 Once we get the cost of material consumed, then again we do the reverse
calculations to get the cost of material purchased as a balancing figure.

Question 28

X Ltd. manufactures two types of pens 'Super Pen' and 'Normal Pen'.
The cost data for the year ended 30th September, 2019 is as follows:

Particulars (₹)
Direct Materials 8,00,000
Direct Wages 4,48,000
Production Overhead 1,92,000
Total 14,40,000

It is further ascertained that:

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 1. Direct materials cost in Super Pen was twice as much of direct material
in Normal Pen.
2. Direct wages for Normal Pen were 60% of those for Super Pen.
3. Production overhead per unit was at the same rate for both the types.
4. Administration overhead was 200% of direct labour for each.
5. Selling cost was ₹ 1 per Super Pen.
6. Production and sales during the year were as follows:
Particulars Production (No. of units) Sales (No. of units)
Super Pen 40,000 36,000
Normal Pen 1,20,000
7. Selling price was ₹ 30 per unit for Super Pen.

Prepare a Cost Sheet for 'Super Pen' showing:

(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit
[(10 Marks) Nov 2020]

Answer

(a) Preparation of Cost Sheet for Super Pen

No. of units produced = 40,000 units
No. of units sold = 36,000 units

Particulars Per unit Total (₹)

(₹)
Direct materials (Working note- (i)) 8.00 3,20,000
Direct wages (Working note- (ii)) 4.00 1,60,000
Prime cost 12.00 4,80,000
Production overhead (Working note- (iii)) 1.20 48,000
Factory Cost 13.20 5,28,000
Administration Overhead* (200% of direct 8.00 3,20,000
wages)
Cost of production 21.20 8,48,000
Less: Closing stock (40,000 units – 36,000 units) - (84,800)
Cost of goods sold i.e. 36,000 units 21.20 7,63,200
Selling cost 1.00 36,000
Cost of sales/ Total cost 22.20 7,99,200
Profit 7.80 2,80,800
Sales value (₹ 30 × 36,000 units) 30.00 10,80,000

Working Notes

(i) Direct material cost per unit of Normal pen = M

Direct material cost per unit of Super pen = 2M
Total Direct Material cost:
= 2M × 40,000 units + M × 1,20,000 units
Or, ₹ 8,00,000 = 80,000 M + 1,20,000 M

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 Or, M = ₹ 8,00,000 / 2,00,000 = ₹ 4
Therefore, Direct material Cost per unit of Super pen = 2 × ₹ 4 = ₹ 8

(ii) Direct wages per unit for Super pen = W

Direct wages per unit for Normal Pen = 0.6W
So, (W × 40,000) + (0.6W × 1,20,000) = ₹ 4,48,000
W = ₹ 4 per unit
(iii) Production overhead per unit:
= ₹ 1,92,000 ÷ (40,000 + 1,20,000)
= ₹ 1.20
Production overhead for Super pen:
= ₹ 1.20 × 40,000 units = ₹ 48,000

Note:
 Administration overhead is specific to the product as it is directly related to
direct labour as mentioned in the question and hence to be considered in cost
of production only.
 Assumption: It is assumed that in point (1) and (2) of the Question, direct
materials cost and direct wages respectively are related to per unit only.
 Note: Direct Material and Direct wages can be calculated in alternative ways.

Question 29

The following data are available from the books and records of Q Ltd. for the
month of April 2020:
 Direct Labour Cost = ₹ 1,20,000 (120% of Factory Overheads)
 Cost of Sales = ₹ 4,00,000
 Sales = ₹ 5,00,000

Accounts show the following figures:

Particulars 1st April, 2020 (₹) 30th April, 2020 (₹)

Inventory:
Raw Material 20,000 25,000
Work-in-progress 20,000 30,000
Finished Goods 50,000 60,000
Other details:
Selling Expenses 22,000
General & Admin. Expenses 18,000

You are required to prepare a cost sheet for the month of April 2020
showing:
1. Prime Cost
2. Works Cost
3. Cost of Production
4. Cost of Goods Sold
5. Cost of Sales and Profit earned

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 [(10 Marks) Jan 2021]

Answer

Q Ltd.
Cost Sheet for the month of April, 2020
(to be solved using bottom to top i.e. reverse approach)

Particulars Amount (Rs.)

Opening stock of raw material 20,000
Add: Purchases (Bal. fig.) 1,65,000
Less: Closing stock of raw material (25,000)
Raw Material Consumed 1,60,000
Add: Direct Labour (Given) 1,20,000
Prime Cost 2,80,000
Add: Factory Overheads (1,20,000 / 120%) 1,00,000
Gross Factory Cost / Work Cost 3,80,000
Add: Opening Work-in-Progress 20,000
Less: Closing Work-in-Progress (30,000)
Net Factory cost / Cost of Production 3,70,000
Add: Opening stock of Finished Goods 50,000
Less: Closing stock of Finished Goods (60,000)
Cost of Goods Sold 3,60,000
Add: Selling expenses 22,000
Add: General & Admin. expenses 18,000
Cost of Sales [starting point] - Given 4,00,000
Sales 5,00,000
Profit (Bal. fig.) 1,00,000

Working Note

1. Computation of the raw material consumed

Particulars ₹
Cost of Sales 4,00,000
Less: General and administration expenses (18,000)
Less: Selling expenses (22,000)
Cost of goods sold 3,60,000
Add: Closing stock of finished goods 60,000
Less: Opening stock of finished goods (50,000)

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 Cost of production/Gross works cost 3,70,000
Add: Closing stock of work-in-progress 30,000
Less: Opening stock of work-in-progress (20,000)
Works cost 3,80,000
Less: Factory overheads (₹ 1,20,000 / 120 × 100) (1,00,000)
Prime cost 2,80,000
Less: Direct labour (1,20,000)
Raw material consumed 1,60,000

2. Computation of the raw material purchased

Particulars ₹
Closing stock of Raw Material 25,000
Add: Raw Material consumed 1,60,000
Less: Opening stock of Raw Material (20,000)
Raw Material purchased 1,65,000

Question 30

DFG Ltd. manufactures leather bags for office and school purpose. The
following information is related with the production of leather bags for the
month of September 2019.

(i) Leather sheets and cotton cloths are the main inputs, and the estimated
requirement per bag is two meters of leather sheets and one meter of cotton
cloth. 2,000 meter of leather sheets and 1,000 meter of cotton cloths are
purchased at ₹3,20,000 and ₹15,000 respectively. Freight paid on purchases
is ₹8,500.
(ii) Stitching and finishing need 2,000 man hours at ₹80 per hour.
(iii) Other direct cost of ₹10 per labour hour is incurred.
(iv) DFG has 4 machines at a total cost of ₹22,00,000. Machine has a life of
10 years with a scrape value of 10% of the original cost. Depreciation is
charged on straight line method.
(v) The monthly cost of administrative and sales office staffs are ₹45,000
and ₹72,000 respectively. DFG pays ₹1,20,000 per month as rent for a 2400
sq.feet factory premises. The administrative and sales office occupies 240
sq. feet and 200 sq. feet respectively of factory space.
(vi) Freight paid on delivery of finished bags is ₹18,000.
(vii) During the month 35 kg. of leather and cotton cuttings are sold at ₹150
per kg.
(viii) There is no opening and closing stocks for input materials. There is
100 bags in stock at the end of the month.

Required:
PREPARE a cost sheet following functional classification for the month of
September 2019.

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 [(10 Marks) Dec 2021]

Answer

No. of bags manufactured = 1,000 units

Cost sheet for the month of September 2019
Particulars Total Cost Cost per
(₹) unit (₹)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
2. Direct wages (₹80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (₹10 × 2,000 hours) 20,000 20.00
4. Prime Cost 5,23,500 523.50
5. Factory Overheads:
Depreciation on machines 16,500 16.50
(₹22,00,000×90%) ÷ 120 months
Apportioned cost of factory rent 98,000 98.00
6. Works/Factory Cost 6,38,000 638.00
Less: Realisable value of cuttings (₹150×35 (5,250) (5.25)
kg.)
7. Cost of Production 6,32,750 632.75
Add: Opening stock of bags 0 0
Less: Closing stock of bags (100 bags × (63,275) (63.28)
₹632.75)
8. Cost of Goods Sold 5,69,475 632.75
9. Add: Administrative Overheads:
Staff salary 45,000 45.00
Apportioned rent for administrative office 12,000 12.00
10. Add: Selling and Distribution
Overheads:
Staff salary 72,000 80.00
Apportioned rent for sales office 10,000 11.11
Freight paid on delivery of bags 18,000 20.00
11. Cost of Sales 7,26,475 800.86

Apportionment of Factory Rent:

To factory building: ((₹1,20,000 ÷ 2400 sq. feet) × 1,960 sq. feet) = ₹98,000
To administrative office: ((₹1,20,000 ÷ 2400 sq. feet) × 240 sq. feet) = ₹12,000
To sales office: ((₹1,20,000 ÷ 2400 sq. feet) × 200 sq. feet) = ₹10,000

Question 31

PNME Ltd. manufactures two types of masks - 'Disposable Masks' and

'Cloth Masks'.

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 The cost data for the year ended 31st March, 2022 is as follows:

Particulars ₹
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 of Disposable Mask.
 Direct wages per unit for Disposable Mask were 60% of those for Cloth
Mask.
 Production overhead per unit was at the 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:
o Cloth Masks: 50,000
o Disposable 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

[(10 Marks) Nov 2022]

Answer

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- (i)) 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
OH)

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 Cost of production 18.00 9,00,000
Less: Closing stock (50,000 units – 45,000 units) - (90,000)
Cost of goods sold i.e. 45,000 units 18.00 8,10,000
Selling cost 2.00 90,000
Cost of sales/ Total cost 20.00 9,00,000
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 units + M × 1,50,000 units
Or, ₹ 12,50,000 = 1,00,000 M + 1,50,000 M
Or, M = ₹ 12,50,000 ÷ 2,50,000 = ₹ 5
Therefore, Direct material Cost per unit of Cloth Mask = 2 × ₹ 5 = ₹ 10
(ii) Direct wages per unit for Cloth Mask = W
Direct wages per unit for 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

(iii) Production overhead per unit = ₹ 4,00,000 ÷ (50,000+1,50,000) = ₹ 2

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 32

The following information is available from SN Manufacturing Limited's for

the month of April 2023.

Opening and closing inventories data: April 1 April 30

Stock of finished goods 2,500 units ?
Stock of raw materials ₹42,500 ₹38,600
Work-in-progress ₹42,500 ₹42,800

Other data are:

 Raw materials Purchased: ₹6,95,000
 Carriage inward: ₹36,200
 Direct wages paid: ₹3,22,800
 Royalty paid for production: ₹35,800
 Purchases of special designs, moulds and patterns (estimated life 12
Production cycles): ₹1,53,600
 Power, fuel and haulage (factory): ₹70,600
 Research and development costs for improving the production process
(amortized): ₹31,680
 Primary packing cost (necessary to maintain quality): ₹6,920

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  Administrative Overhead: ₹46,765
 Salary and wages for supervisor and foremen: ₹28,000

Other information:
 Opening stock of finished goods is to be valued at ₹8.05 per unit.
 During the month of April, 1,52,000 units were produced and 1,52,600
units were sold. The closing stock of finished goods is to be valued at
the relevant month's cost of production. The company follows the FIFO
method.
 Selling and distribution expenses are to be charged at 20 paisa per unit.
 Assume that one production cycle is completed in one month.

Required:
1. Prepare a cost sheet for the month ended on April 30, 2023, showing the
various elements of cost (raw material consumed, prime cost, factory
cost, cost of production, cost of goods sold, and cost of sales).
2. Calculate the selling price per unit if profit is charged at 20 percent on
sales.
[(10 Marks) May 2023]

Answer

Cost Sheet for the month of April 2023

Particulars Amount Amount
(₹) (₹)
Raw materials consumed:
Raw materials purchased 6,95,000
Add: Carriage inward 36,200
Add: Value of opening stock of raw materials 42,500
Less: Value of closing stock of raw materials (38,600) 7,35,100
Direct wages paid 3,22,800
Royalty paid for production 35,800
Amortised cost of special designs, moulds, and 12,800
patterns (₹1,53,600 ÷ 12)
Power, fuel, and haulage (factory)* 70,600
Prime Cost* 11,77,100
Salary and wages of supervisor and foremen 28,000
Gross Works Cost 12,05,100
Add: Opening stock of WIP 42,500
Less: Closing stock of WIP (42,800)
Factory/Works Cost 12,04,800
Research and development cost 31,680
Primary packing cost 6,920
Cost of Production 12,43,400
Add: Opening stock of finished goods (₹8.05 × 20,125
2,500 units)
Less: Value of closing stock [(2,500+152,000 - (15,542)

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 1,52,600) × (12,43,400 ÷ 152,000)]
Cost of Goods Sold 12,47,983
Add: Administrative overheads 46,765
Add: Selling and distribution expenses (₹0.20 × 30,520
1,52,600)
Cost of Sales 13,25,268
Add: Profit (20% on Sales or 25% on cost of 3,31,317
sales)
Sales value 16,56,585
Selling price per unit (₹16,56,585 ÷ 1,52,600 10.86
units)

Notes:
1. May be taken as part of Factory/Works cost; however, Total Factory Cost will
remain the same. If taken as part of factory cost, then Prime Cost will be ₹
11,06,500.

Question 33

XYZ Ltd. has obtained an order to supply 48,000 bearings per year from a
concern. On a steady basis, it is estimated that it costs ₹ 0.20 as inventory
holding cost per bearing per month and the set-up cost per run of bearing
manufacture is ₹ 384.

You are required to:

1. Compute the optimum run size and number of runs for bearing
manufacture.
2. Compute the interval between two consecutive runs.
3. Find out the extra costs to be incurred, if the company adopts a policy
to manufacture 8,000 bearings per run as compared to optimum run
size.
4. Give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year.
[(10 Marks) Nov 2018]

Answer
(a)
(i) Optimum batch size or Economic Batch Quantity (EBQ):
EBQ = √(2DS / C) = √(2 × 48,000 × 384 / 2.4) = 3919.18 or 3,920 units
Number of Optimum runs = 48,000 ÷ 3,920 = 12.245 or 13 run

(ii) Interval between 2 runs (in days) = 365 days ÷ 13 = 28 days

Or 365 ÷ 12.24 = 29.82 days

(iii) If 8,000 bearings are manufactured in a run:

Total cost = Set-up cost + Inventory holding cost
= 384 × (48,000 ÷ 8,000) + (8,000 ÷ 2) × 2.4
= 2304 + 9,600 = 11,904

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 Extra cost = (11,904 – 9,406) = ₹ 2,498/-

OR
Extra cost = (11,904 – 9,696) = ₹ 2,208/-
Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit
per annum
 Average Inventory = 3,920 units ÷ 2 = 1,960 units
 Carrying Cost per unit per annum = ₹ 0.2 × 12 months = ₹ 2.4
 Minimum Inventory Holding Costs = 1,960 units × ₹ 2.4 = ₹ 4,704
Total cost = Set-up cost + Inventory holding cost
= (12.245 × 384) + 4704 = ₹ 9,406 (approx.)

OR
Total cost = Set-up cost + Inventory holding cost
= (13 × 384) + 4704 = ₹ 9,696 (approx.)

(iv) To save cost the company should run at optimum batch size i.e. 3,920 Units.
It saves ₹ 2,498 or 2208. Run size should match with the Economic production
run of bearing manufacture. When managers of a manufacturing operation make
decisions about the number of units to produce for each production run, they must
consider the costs related to setting up the production process and the costs of
holding inventory.

Question 34

The following data is presented by the supervisor of a factory for a Job:

₹ per unit
Direct Material 120
Direct Wages @ ₹4 per hour
(Departments A-4 hrs, B-7 hrs, C-2 hrs & D-2 hrs) 60
Chargeable Expenses 20
Total 200

Analysis of the Profit and Loss Account for the year ended
31st March, 2019

Material 2,00,000 Sales 4,30,000

Direct Wages
Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000
Special Store items 6,000
Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000

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 Dept. D 17,000
44,000
Gross Profit c/d 1,30,000
Total 4,30,000 4,30,000
Gross 1,30,000
Profit b/d
Selling Expenses 90,000
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.
[(5 Marks) Nov 2019]

Answer

Job Cost Sheet

Customer Details ———— Job No. _______________________
Date of commencement ———— Date of completion ————————

Particulars Amount
(₹)
Direct materials 120
Direct wages:
Deptt. A ₹ 4.00 × 4 hrs. ₹ 16.00
Deptt. B ₹ 4.00 × 7 hrs. ₹ 28.00
Deptt. C ₹ 4.00 × 2 hrs. ₹ 8.00
Deptt. D ₹ 4.00 × 2 hrs. ₹ 8.00
Chargeable expenses 20
Prime cost 200
Overheads
Deptt. A = ₹ 12,000 / ₹ 12,000 × 100 = 100% of ₹ 16 ₹ 16.00
Deptt. B = ₹ 6,000 / ₹ 8,000 × 100 = 75% of ₹ 28 ₹ 21.00
Deptt. C = ₹ 9,000 / ₹ 10,000 × 100 = 90% of ₹ 8 ₹ 7.20
Deptt. D = ₹ 17,000 / ₹ 20,000 × 100 = 85% of ₹ 8 ₹ 6.80
Total Overheads 51.00
Works cost 251.00
Selling expenses = ₹ 90,000 / ₹ 3,00,000 × 100 = 30% of 75.30
works cost
Total cost 326.30
Profit (20% profit on selling price = 25% of total cost) 81.58

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 Selling price 407.88

Question 35

In a manufacturing company, the overhead is recovered as follows:

Factory Overheads: a fixed percentage basis on direct wages and
Administrative overheads: a fixed percentage basis on factory cost.
The company has furnished the following data relating to two jobs
undertaken by it in a period.
Job 1 (₹) Job 2 (₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Selling price 3,33,312 2,52,000
Profit percentage on total cost 12% 20%

You are required to:

(i) Compute the percentage recovery rates of factory overheads and

administrative overheads.
(ii) Calculate the amount of factory overheads, administrative overheads and
profit for each of the two jobs.
(iii) Using the above recovery rates, determine the selling price to be quoted
for job 3. Additional data pertaining to Job 3 is as follows:

Job 3 (₹)
Direct materials 68,750
Direct wages 22,500
Profit percentage on selling price 15%

[(10 Marks) May 2022]

Answer

(i) Computation of percentage recovery rates of factory overheads and

administrative overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and
administrative overheads recovery rate as percentage of factory cost be A.
Factory Cost of Jobs:
Direct materials + Direct wages + Factory overhead
For Job 1 = ₹ 1,08,000 + ₹ 84,000 + ₹ 84,000F

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 For Job 2 = ₹ 75,000 + ₹ 60,000 + ₹ 60,000F
Total Cost of Jobs:
Factory cost + Administrative overhead
For Job 1 = (₹ 1,92,000 + ₹ 84,000F) + (₹ 1,92,000 + ₹ 84,000F) A = ₹ 2,97,600
For Job-2 = (₹ 1,35,000 + ₹ 60,000F) + (₹ 1,35,000 + ₹ 60,000F) A = ₹ 2,10,000
The value of F & A can be found using following equations:
1,92,000 + 84,000F + 1,92,000A + 84,000AF = ₹ 2,97,600 ………eqn (i)
1,35,000 + 60,000F + 1,35,000A + 60,000AF = ₹ 2,10,000 ………eqn (ii)
Multiply equation (i) by 5 and equation (ii) by 7:
9,60,000 + 4,20,000F + 9,60,000A + 4,20,000AF = ₹ 14,88,000 …eqn (iii)
9,45,000 + 4,20,000F + 9,45,000A + 4,20,000AF = ₹ 14,70,000 …eqn (iv)
Subtracting equations:
15,000 + 15,000A = ₹ 18,000
15,000 A = 18,000 – 15,000
A = 0.20
Now putting the value of A in equation (i) to find the value of F:
1,92,000 + 84,000F + (1,92,000 × 0.20) + (84,000 F × 0.20) = ₹ 2,97,600
Or
1,92,000 + 84,000F + 38,400 + 16,800 F = ₹ 2,97,600
1,00,800 F = 67,200
F = 0.667
On solving the above relations:
F = 0.667 and A = 0.20
Hence, percentage recovery rates of:
 Factory overheads = 66.7% or 2/3 of wages
 Administrative overheads = 20% of factory cost
Working note:
Total Cost = Selling price / (100% + Percentage of profit)
For Job 1 = ₹ 3,33,312 / (100% + 12%) = ₹ 2,97,600
For Job 2 = ₹ 2,52,000 / (100% + 20%) = ₹ 2,10,000

(ii) Statement of jobs, showing amount of factory overheads, administrative

overheads and profit:
Job 1 (₹) Job 2 (₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
Factory overheads 56,000 40,000
2/3 of direct wages
Factory cost 2,48,000 1,75,000
Administrative overheads 49,600 35,000
20% of factory cost
Total cost 2,97,600 2,10,000
Profit (12% & 20%) 35,712 42,000
Selling price 3,33,312 2,52,000

(iii) Selling price of Job 3

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 (₹)
Direct materials 68,750
Direct wages 22,500
Prime cost 91,250
Factory overheads (2/3 of Direct Wages) 15,000
Factory cost 1,06,250
Administrative overheads (20% of factory cost) 21,250
Total cost 1,27,500
Profit margin (balancing figure) 22,500
Selling price 1,50,000

Question 36

PQR Pens Ltd. manufactures two products - 'Gel Pen' and 'Ball Pen'. It
furnishes the following data for the year 2017:
Product Annual Total Total number Total
Output Machine of Purchase number of
(Units) Hours orders set-ups
Gel Pen 5,500 24,000 240 30
Ball 24,000 54,000 448 56
Pen

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.

[(10 Marks) May 2018]

Answer
(i)
Statement Showing Overhead Cost per unit “Traditional Method”

Gel Pen (₹) Ball Pen (₹)

Units 5,500 24,000
Overheads (₹) 4,80,000 10,80,000
(Refer to W.N.) (20 x 24,000 hrs.) (20 x 54,000 hrs.)
Overhead Rate per 87.27 (₹ 4,80,000 / 45 (₹ 10,80,000 /
unit (₹) 5,500 units) 24,000 units)

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 Working Notes:
Overhead Rate per Machine Hour
= Total Overhead incurred by the Company / Total Machine Hours
= ₹ 4,75,020 + 5,79,988 + 5,04,992 / 24,000 hours + 54,000 hours
= ₹ 15,60,000 / 78,000 hours
= ₹ 20 per machine hour

(ii) Statement Showing “Activity Based Overhead Cost”

Activity Cost Ratio Total Gel Pen Ball Pen

Cost Pool Driver Amoun (₹) (₹)
t (₹)
Volume Machine 24:54 4,75,02 1,46,16 3,28,860
Related hours 0 0
Activity
Costs
Setup No. of 30:56 5,79,98 2,02,32 3,77,667
Related Setups 8 1
Costs
Purchase No. of 240:44 5,04,99 1,76,16 3,28,832
Related Purchas 8 2 0
Costs e Orders
Total Cost 5,24,64 10,35,35
1 9
Output 5,500 24,000
(units)
Unit Cost 95.39 43.13
(Overheads
)

(iii)
Gel Pen Ball Pen
(₹) (₹)
Overheads Cost per unit (₹) (Traditional 87.27 45.00
Method)
Overheads Cost per unit (₹) (ABC) 95.39 43.13
Difference per unit -8.12 +1.87

(Volume related activity cost, set up related costs and purchase related cost can
also be calculated under Activity Base Costing using Cost driver rate. However,
there will be no changes in the final answer.)

Question 37

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 M/s. HMB Limited is producing a product in 10 batches each of 15000 units
in a year and incurring following overheads their on:

Amount (₹)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800
The prime costs for the year amounted to ₹ 3,01,39,000.
The company is using currently the method of absorbing overheads on the
basis of prime cost. Now it wants to shift to activity-based costing.
Information relevant to Activity drivers for a year are as under:

Activity Driver Activity Volume

No. of purchase orders 1500
Maintenance hours 9080
No. of set-ups 2250
No. of inspections 2710

The company has produced a batch of 15000 units and has incurred ₹
26,38,700 and ₹ 3,75,200 on materials and wages respectively.
The usage of activities of the said batch are as follows:

Materials orders 48 orders

Maintenance hours 810 hours
No. of set-ups 40
No. of inspections 25

You are required to:

(i) find out cost of product per unit on absorption costing basis for the said
batch.
(ii) determine cost driver rate, total cost and cost per unit of output of the
said batch on the basis of activity based costing.

[(10 Marks) Nov 2018]

Answer

Working Note:
Overhead Absorption Rate = (51,79,300 ÷ 3,01,39,000) × 100 = 17.18%

(i) Cost of Product Under Absorption Costing

Item of Cost Amount (₹)

Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900

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 Overheads: (51,79,300 ÷ 3,01,39,000) × 30,13,900 5,17,930
Total Cost 35,31,830
Units 15,000
Cost per unit 235.46

(ii) Cost driver rate, total cost and cost per unit on the basis of activity-
based costing method Absorption Costing
Calculation of Cost Driver rate:
Activity ₹. Activity Cost Driver
Volume Rate
Material 22,50,000 1500 1500
Procurement
Maintenance 17,30,000 9080 190.53
Setup 6,84,500 2250 304.22
Quality Control 5,14,800 2710 189.96

Calculation of total Cost and cost per unit:

Item of Cost Amount (₹)

Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
Material Purchase (22,50,000 ÷ 1,500 × 48) 72,000
Maintenance (17,30,000 ÷ 9,080 × 810) 1,54,328
Setup (6,84,500 ÷ 2,250 × 40) 12,169
Quality Control (5,14,800 ÷ 2,710 × 25) 4,749
Total Cost 32,57,146
Unit 15,000
Cost per unit 217.14

Question 38

MNO Ltd. manufactures two types of equipment A and B and absorbs

overheads on the basis of direct labour hours. The budgeted overheads and
direct labour hours for the month of March 2019 are ₹ 15,00,000 and 25,000
hours respectively. The information about the company's products is as
follows:
Equipment
A B
Budgeted Production Volume 3,200 units 3,850 units
Direct Material Cost ₹ 350 per unit ₹ 400 per unit
Direct Labour Cost
A: 3 hours @ ₹ 120 per hour ₹ 360
B: 4 hours @ ₹ 120 per hour ₹ 480

Overheads of ₹ 15,00,000 can be identified with the following three major

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 activities:
 Order Processing: ₹ 3,00,000
 Machine Processing: ₹ 10,00,000
 Product Inspection: ₹ 2,00,000
These activities are driven by the number of orders processed, machine
hours worked and inspection hours respectively. The data relevant to these
activities is as follows:

Orders Machine Hours Inspection

Processed Worked Hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000

Required:
(i) Prepare a statement showing the manufacturing cost per unit of each
product using the absorption costing method assuming the budgeted
manufacturing volume is attained.
(ii) Determine cost driver rates and prepare a statement showing the
manufacturing cost per unit of each product using activity based costing,
assuming the budgeted manufacturing volume is attained.
(iii) MNO Ltd.'s selling prices are based heavily on cost. By using direct
labour hours as an application base, calculate the amount of cost distortion
(under costed or over costed) for each equipment.
[(10 Marks) May 2019]

Answer

(i) Overheads application base: Direct labour hours

Equipment A (₹) Equipment B (₹)

Direct material cost 350 400
Direct labour cost 360 480
Overheads 180 240
890 1120

Pre-determined rate =
Budgeted overheads = ₹ 15,00,000 / Budgeted direct labour hours 25,000 hours =
₹ 60

(ii) Estimation of Cost-Driver rate

Activity Overhead cost Cost-driver level Cost driver

(₹) rate (₹)
Order 3,00,000 600 Orders 500
processing processed

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 Machine 10,00,000 50,000 Machine 20
processing hours
Inspection 2,00,000 15,000 Inspection 10
hours
Equipment A (₹) Equipment B (₹)

Direct material cost 350 400

Direct labour cost 360 480
Prime Cost (A) 710 880
Overhead Cost
Order processing 400: 200 2,00,000 1,00,000
Machine processing 22,500: 27,500 4,50,000 5,50,000
Inspection 5,000: 15,000 50,000 1,50,000
Total overhead cost 7,00,000 8,00,000
(Overheads cost per unit for each overhead can also be calculated)

A (₹) B (₹)
Per unit cost
7,00,000 / 3,200 (B)-A 218.75
8,00,000 / 3,850 (B)-B 207.79
Unit manufacturing cost (A+B) 928.75 1,087.79

(iii) Calculation of Cost Distortion

Equipment A Equipment B
(₹) (₹)
Unit manufacturing cost–using direct 890.00 1,120.00
labour hours as an application base
Unit manufacturing cost-using activity 928.75 1,087.79
based costing
Cost distortion -38.75 32.21

Question 39

PQR Ltd has decided to analyse 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 A B C D E
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price (₹) 54 54 54 54 54
Actual Selling Price (₹) 54 53.40 49 50.20 48.60
Number of Purchase 30 50 60 50 60
Orders

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 Number of Customers 4 6 12 4 6
visits
Number of Deliveries 20 60 120 80 40
Kilometers travelled 40 12 10 20 60
per delivery
Number of expedite 0 0 0 0 2
Deliveries

Its 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 ₹ 2.00 per case sold
Expedited deliveries ₹ 100 per such delivery

You are required to:

1. Compute the customer level operating income of each of five retail
customers by using the Cost Driver rates.
2. Examine the results to give your comments on Customer 'D' in
comparison with Customer 'C' and on Customer 'E' in comparison with
Customer 'A'.
[(10 Marks) Nov 2019]

Answer

Working note:

Computation of revenues (at listed price), discount, cost of goods sold and
customer level operating activities costs:

Particular Customers
A B C D E
Cases 9,360 14,200 62,000 38,000 9,800
sold: (a)
Revenues 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(at listed
price) (₹):
(b) {(a) ×
₹ 54}
Discount - 8,520 3,10,000 1,44,400 52,920
(₹): (c)
{(a) ×
Discount
per case}
(14,200 × (62,000 × (38,000 × (9,800 ×

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 ₹ 0.6) ₹ 5) ₹ 3.80) ₹ 5.40)
Cost of 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
goods
sold (₹):
(d) {(a) ×
₹ 45}

Customer level operating activities costs

Particular A B C D E
Order taking costs 6,000 10,000 12,000 10,000 12,000
(₹): (No. of
purchase × ₹ 200)
Customer visits 1,200 1,800 3,600 1,200 1,800
costs (₹) (No. of
customer visits ×
₹ 300)
Delivery vehicles 3,200 2,880 4,800 6,400 9,600
travel costs (₹)
(Kms travelled by
delivery vehicles ×
₹ 4 per km.)
Product handling 18,720 28,400 1,24,000 76,000 19,600
costs (₹) {(a) × ₹ 2}
Cost of expediting - - - - 200
deliveries (₹) {(No.
of expedited
deliveries × ₹
100)}
Total cost of 29,120 43,080 1,44,400 93,600 43,200
customer level
operating
activities (₹)

(i) Computation of Customer level operating income

Particular A (₹) B (₹) C (₹) D (₹) E (₹)

Revenues 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(At list
price)
(Refer to
working
note)
Less: - 8,520 3,10,000 1,44,400 52,920
Discount
(Refer to

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 working
note)
Revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(At actual
price)
Less: 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
Cost of
goods
sold
(Refer to
working
note)
Gross 84,240 1,19,280 2,48,000 1,97,600 35,280
margin
Less: 29,120 43,080 1,44,400 93,600 43,200
Customer
level
operating
activities
costs
(Refer to
working
note)
Customer 55,120 76,200 1,03,600 1,04,000 (7,920)
level
operating
income

(ii) Comments
Customer D in comparison with Customer C:
Operating income of Customer D is more than of Customer C, despite having only
61.29% (38,000 units) of the units volume sold in comparison to Customer C
(62,000 units). Customer C receives a higher percent of discount i.e. 9.26% (₹ 5)
while Customer D receives a discount of 7.04% (₹ 3.80). Though the gross margin
of customer C (₹ 2,48,000) is more than Customer D (₹ 1,97,600) but total cost of
customer level operating activities of C (₹ 1,44,400) is more in comparison to
Customer D (₹ 93,600). As a result, operating income is more in case of Customer
D.
Customer E in comparison with Customer A:
Customer E is not profitable while Customer A is profitable. Customer E receives
a discount of 10% (₹ 5.4) while Customer A doesn’t receive any discount. Sales
Volume of Customer A and E is almost same. However, total cost of customer
level operating activities of E is far more (₹ 43,200) in comparison to Customer A
(₹ 29,120). This has resulted in occurrence of loss in case of Customer E.

Question 40

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 ABC Ltd. manufactures three products X, Y, and Z using the same plant and
resources. It has given the following information for the year ended on 31st
March, 2020:

Particulars X Y Z
Production Quantity (units) 1,200 1,440 1,968
Cost per unit:
Direct Material (₹) 90 84 176
Direct Labour (₹) 18 20 30

Budgeted direct labour rate was ₹ 4 per hour and the production overheads,
shown in table below, were absorbed to products using direct labour hour
rate. Company followed Absorption Costing Method. However, the company
is now considering adopting Activity Based Costing Method.

Activity Budgeted Cost Driver Remarks

OH (₹)
Material 50,000 No. of Orders Order size was 25
Procurement units for each
product.
Set-up 40,000 No. of All the three products
Production are produced in
Runs production runs of 48
units
Quality 28,240 No. of Done for each
Control Inspections production Run.
Maintenance 1,28,000 Maintenance Total maintenance
Hours hours were 6,400 and
was allocated in the
ratio of 1:1:2 between
X, Y & Z.

Required:
1. Calculate the total cost per unit of each product using the Absorption
Costing Method.
2. Calculate the total cost per unit of each product using Activity Based
Costing Method.
[(10 Marks) Jan 2021]

Answer

(1) Calculate of cost per unit using the Absorption Costing Method:
Calculation of Overhead Recovery Rate per Hour:

Particulars X Y Z Total
(a) Production Quantity (units) 1,200 1,440 1,968
(b) Direct Labour cost per unit (₹) 18 20 30

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 (c) Labour hours per unit [b / 4] 4.5 5 7.5
(d) Total labour hours [a x c] 5,400 7,200 14,760 27,360
(e) Budgeted overheads (₹) 2,46,240
(f) OH recovery rate per hr. [e / d] 9.00

Calculation of total cost per unit:

Particulars X Y Z
(a) Direct Material per unit (₹) 90 84 176
(b) Direct Labour cost per unit (₹) 18 20 30
(c) Prime Cost per unit (₹) [a + b] 108 104 206
(d) Labour hours per unit [b / 4] 4.5 5 7.5
(e) OH cost per unit [d x 9] 40.50 45 67.50
(f) Total cost per unit (₹) [c + e] 148.50 149.00 273.50

(2) Calculate of cost per unit using the Activity Based Costing Method:

Calculation of Cost Drivers:

Particulars X Y Z Total
(a) Production Quantity (units) 1,200 1,440 1,968
(b) No. of orders [a / 25] rounded off 48 58 79 185
(c) No. of production runs [a / 48] 25 30 41 96
(d) No. of inspections [same as (c)] 25 30 41 96

Calculation of total cost per unit:

Particulars Bud. Cost Driver X Y Z

OH (₹)
Material 50,000 No. of 12,973 15,676 21,351
Procurement Orders [48 :
58 : 79]
Set-up 40,000 No. of 10,417 12,500 17,083
Production
Runs [25 :
30 : 41]
Quality 28,240 No. of 7,354 8,825 12,061
control Inspections
[25 : 30 : 41]
Maintenance 1,28,000 Maintenance 32,000 32,000 64,000
Hours [1 : 1 :
2]
Total OH 2,46,240 (a) 62,744 69,001 1,14,495
Production (b) 1,200 1,440 1,968

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 Quantity
(units)
OH cost per (a) / (b) 52.29 47.92 58.18
unit
Prime cost WN (1) 108.00 104.00 206.00
p.u.
Total cost OH + Prime 160.29 151.92 264.18
p.u. cost

Student Note: For calculating no. of orders, we actually need the data related to
input raw material quantity purchased. However, in absence of such information, it
is calculated based on the production quantity.

Question 41

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 year 2020-21 for
each product line:
Drugs Types
A B C
Revenues (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 560 810 630
placed (in nos.)
Number of deliveries 950 1,000 850
received
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 Total Cost Cost-allocation base

activity (₹)
Drug Drug Licence fee 5,00,000 To be distributed in
Licence fee ratio 2:3:5 between
A, B and C
Ordering Placing of orders 8,30,000 2,000 purchase
for purchases orders
Delivery Physical delivery 18,20,000 2,800 deliveries
and receipt of
goods
Shelf Stocking of 32,40,000 4,500 hours of shelf-
stocking goods stocking time
Customer Assistance 28,20,000 4,70,000 units sold
Support provided to
customers

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 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 situations as above

[(10 Marks) Dec 2021]

Answer

(i) (a)
Statement of Operating income and Operating income as a percentage of
revenues for each product line
(When support costs are allocated to product lines on the basis of cost of goods
sold of each product)

Drug A Drug B (₹) Drug C (₹) Total (₹)

(₹)
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods 41,44,500 68,16,750 1,20,63,750 2,30,25,000
sold (COGS):
(B)
Support cost 16,57,800 27,26,700 48,25,500 92,10,000
(40% of
COGS): (C)
Total cost: (D) 58,02,300 95,43,450 1,68,89,250 3,22,35,000
= {(B) + (C)}
Operating 16,47,700 16,31,550 17,35,750 50,15,000
income: E =
{(A)-(D)}
Operating 22.12% 14.60% 9.32% 13.46%
income as a %
of revenues:
(E/A) × 100

Working notes:
1. Total support cost:

₹
Drug Licence Fee 5,00,000
Ordering 8,30,000

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 Delivery 18,20,000
Shelf stocking 32,40,000
Customer support 28,20,000
Total support cost 92,10,000

2. Percentage of support cost to cost of goods sold (COGS):

Total support cost = (Total support cost / Total cost of goods sold) × 100
= (₹ 92,10,000 / ₹ 2,30,25,000) × 100 = 40%

3. Cost for each activity cost driver:

Activity Total cost Cost allocation Cost driver rate

(₹) base (₹)
Ordering 8,30,000 2,000 purchase ₹ 415 per purchase
orders order
Delivery 18,20,000 2,800 deliveries ₹ 650 per delivery
Shelf-stocking 32,40,000 4,500 hours ₹ 720 per stocking
hour
Customer 28,20,000 4,70,000 units ₹ 6 per unit sold
support sold

(b) Statement of Operating income and Operating income as a percentage of

revenues for each product line
(When support costs are allocated to product lines using an activity-based costing
system)

Drug A (₹) Drug B (₹) Drug C (₹) Total (₹)

Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost & Goods sold 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug Licence Fee 1,00,000 1,50,000 2,50,000 5,00,000
Ordering cost* 2,32,400 3,36,150 2,61,450 8,30,000
(560:810:630)
Delivery cost* 6,17,500 6,50,000 5,52,500 18,20,000
(950:1000:850)
Shelf stocking cost* 6,48,000 9,00,000 16,92,000 32,40,000
(900:1250:2350)
Customer Support cost* 10,51,200 9,01,800 8,67,000 28,20,000
(175200:150300:144500)
Total cost: (B) 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income C: {(A) 6,56,400 14,20,300 29,38,300 50,15,000
- (B)}
Operating income as a % 8.81% 12.71% 15.78% 13.46%
of revenues

(ii) Comparison on the basis of operating income as per the percentage (%)

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 of revenue:
(a) When support costs are allocated to product lines on the basis of cost of goods
sold of each product

Drug A Drug B Drug C Total

(₹) (₹) (₹) (₹)
Operating income as a 22.12% 14.60% 9.32% 13.46%
% of revenues
On comparing the operating income as a % of revenue of each product, Drug A is
the most profitable product line, though its revenue is least but with highest units
sold.
(b) When support costs are allocated to product lines using an activity-based
costing system

Drug A Drug B Drug C Total

(₹) (₹) (₹) (₹)
Operating income as a 8.81% 12.71% 15.78% 13.46%
% of revenues

On comparing the operating income as a % of revenue of each product, Drug C is

the most profitable product line, though its unit sold is least but with highest
revenue.

Question 42

Star Limited manufacture three products using the same production

methods. A conventional product costing system is being used currently.
Details of the three products for a typical period are :

Product Labour Hrs. Machine Hrs. Materials per Volume in

Per unit Per unit Unit (₹) Units
AX 1.00 2.00 35 7,500
BX 0.90 1.50 25 12,500
CX 1.50 2.50 45 25,000

Direct Labour costs ₹ 20 per hour and production overheads are absorbed
on a machine hour basis. The overhead absorption rate for the period is ₹ 30
per machine hour.
Management is considering using Activity Based Costing system to
ascertain the cost of the products. Further analysis shows that the total
production overheads can be divided as follows :

Particulars %
Cost relating to set-ups 40

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 Cost relating to machinery 10
Cost relating to material handling 30
Cost relating to inspection 20
Total production overhead 100

The following activity volumes are associated with the product line for the
period as a whole. Total activities for the period :
Product No. of set- No. of movements of No. of
ups Materials Inspections
AX 350 200 200
BX 450 280 400
CX 740 675 900
Total 1,540 1,155 1,500

Required :
(i) Calculate the cost per unit for each product using the conventional
method.
(ii) Calculate the cost per unit for each product using activity based costing
method.
[(10 Marks) May 2022]

Answer

Working Notes :
WN1 - Key Details :

Particulars AX BX CX Total
(a) Volume in Units 7,500 12,500 25,000
(b) Machine Hours per unit 2.00 1.50 2.50
(c) Total machine hours [ a x b 15,000 18,750 62,500 96,250
]
(d) Total overheads (₹) [ 28,87,500
96,250 x 30 ]

WN2 - Activity wise details of overheads :

Particulars % Amount (₹)

Cost relating to set-ups 40 11,55,000
Cost relating to machinery 10 2,88,750
Cost relating to material handling 30 8,66,250
Cost relating to inspection 20 5,77,500
Total production overhead 100 28,87,500

(i) Calculation of the cost per unit for each product using the conventional
method :

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 Particulars AX BX CX
(a) Materials per unit (₹) 35 25 45
(b) Labour Hours per unit 1.00 0.90 1.50
(c) Labour cost per unit [ b x 20 ] (₹) 20 18 30
(d) Machine Hours per unit 2.00 1.50 2.50
(e) Overheads per unit [ d x 30 ] (₹) 60 45 75
(f) Product cost per unit [ a + c + e ] (₹) 115 88 150

(ii) Calculation of the cost per unit for each product using ABC method :

Particulars Total AX BX CX
(a) Cost relating to set- 11,55,000 2,62,500 3,37,500 5,55,000
ups apportioned using
no. of set-ups in the
ratio 350 : 450 : 740
(b) Cost relating to 2,88,750 45,000 56,250 1,87,500
machinery apportioned
using total machine
hours in the ratio
15000 : 18750 : 62500
(c) Cost relating to 8,66,250 1,50,000 2,10,000 5,06,250
material handling
apportioned using no.
of material movements
as 200 : 280 : 675
(d) Cost relating to 5,77,500 77,000 1,54,000 3,46,500
inspection apportioned
using no. of inspections
as 200 : 400 : 900
(e) Total overheads [ a 28,87,500 5,34,500 7,57,750 15,95,250
to d ]
(f) Volume in Units 7,500 12,500 25,000
(g) Overheads per unit 71.27 60.62 63.81
[e/f]
(h) Materials per unit 35 25 45
(₹)
(i) Labour cost per unit 20 18 30
[ b x 20 ] (₹)
(f) Total cost per unit [ 126.27 103.62 138.81
g + h + i ] (₹)

Question 43

Beta Limited produces 50,000 Units, 45,000 Units and 62,000 Units of
product 'A', 'B' and 'C' respectively. At present the company follows
absorption costing method and absorbs overhead on the basis of direct

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 labour hours. Now, the company wants to adopt Activity Based Costing.
The information provided by Beta Limited is follows:

Product A Product B Product C

Floor Space Occupied 5,000 Sq.Ft. 4,500 Sq.Ft. 6,200 Sq.Ft.
Direct Labour Hours 7,500 Hours 7,200 Hours 7,800 Hours
Direct Machine Hours 6,000 Hours 4,500 Hours 4,650 Hours
Power consumption 32% 28% 40%

Overhead for year are as follows:

Overhead ₹
Rent & Taxes 8,63,500
Electricity Expenses 10,66,475
Indirect labour 13,16,250
Repair & Maintenance 1,28,775
33,75,000

Required:
(i) Calculate the overhead rate per labour hour under Absorption Costing.
(ii) Prepare a cost statement showing overhead cost per unit for each
product - 'A', 'B' and 'C' as per Activity based Costing.
[(5 Marks) May 2023]

Answer

(i) Calculation of Overhead rate per hour

Total Overheads
Total hours
33,75,000 ÷ 22,500 = ₹ 150 per hour

(ii) Statement showing overhead cost per unit as per Activity Based Costing

Overheads Cost Driver Total Product Product Product

A B C
Rent & Taxes Floor space 8,63,500 2,75,000 2,47,500 3,41,000
(50:45:62)
Electricity Power 10,66,475 3,41,272 2,98,613 4,26,590
Consumption
(32:28:40)
Indirect labour Labour hours 13,16,250 4,38,750 4,21,200 4,56,300
(75:72:78)
Repair & Machine hours 1,28,775 51,000 38,250 39,525
Maintenance (600:450:465)
Total Cost 33,75,000 11,06,022 10,05,563 12,63,415
Units 50,000 45,000 62,000
Cost per Unit 22.12 22.35 20.38

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Question 44

The following information relates to a bus operator:

Description Amount
Cost of the bus ₹ 18,00,000
Insurance charges 3% p.a.
Manager-cum accountant’s salary ₹ 8,000 p.m.
Annual Tax ₹ 50,000
Garage Rent ₹ 2,500 p.m.
Annual repair & maintenance ₹ 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ₹ 1,20,000
Driver’s salary ₹ 15,000 p.m.
Conductor’s salary ₹ 12,000 p.m.
Stationery ₹ 500 p.m.
Engine oil, lubricants (for 1200 kms.) ₹ 2,500
Diesel and oil (for 10 kms.) ₹ 52
Commission to driver and conductor 10% of collections

Route distance: 20 km long

The bus will make 3 round trips for carrying on the average 40 passengers
in each trip. Assume 15% profit on collections. The bus will work on the
average 25 days in a month.

Calculate fare for passenger-km.

Answer

Statement of Operating Costs & Revenues per month

Particulars Computation ₹ ₹
Standing Charge
Depreciation ((18,00,000 – 1,20,000)/15) 9,333.33
× 1/12
Insurance 18,00,000 × 3% × 1/12 4,500
Manager cum given 8,000
Accountants Salary
Road tax 50,000 × 1/12 4,166.67

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 Garage rent given 2,500
Total 28,500
Maintenance
Charge
Repairs & 1,50,000/12 12,500 12,500
Maintenance

Running Cost

Particulars Computation ₹
Drivers salary given 15,000
Conductors salary given 12,000
Stationery given 500
Engine oil, lubricants 3,000 km / 1,200 km = ₹ 2,500 6,250
Diesel oil 3,000 km / 10 km = ₹ 52 15,600
49,350

Total operating cost (excluding commission) = 90,350

Add: commission (10% on collection) = 12,047
Total cost = 1,02,397
Add: Profit = .15% = 18,070
Total takings = 1,20,467

Working Note:
No. of passengers = 40 (given)
No. of km. per month = 1 Bus × 3 Trips × 2 ways × 20 km. × 25 days
= 3,000 km p.m.
Passenger km. p.m. = 40 × 3,000 = 1,20,000
It is given that profit = 15% of takings &
Commission = 10% of takings.

Hence,
Total Operating Costs = 100% - 15% - 10% = 75% of total taking.
Total Takings = 90,350/75% = 1,20,467.
Now, Commission & Profits are taken at 10% & 15% respectively on total takings.
Fare per Passenger Km. = 1,20,467 / 1,20,000 = ₹ 1.00

Question 45

A mini-bus, having a capacity of 32 passengers, operates between two

places - 'A' and 'B'. The distance between the place 'A' and place 'B' is 30
km. The bus makes 10 round trips in a day for 25 days in a month. On an
average, the occupancy ratio is 70% and is expected throughout the year.
The details of other expenses are as under:

Expense Amount (₹)

Insurance 15,600 Per annum

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 Garage Rent 2,400 Per quarter
Road Tax 5,000 Per annum
Repairs 4,800 Per quarter
Salary of operating staff 7,200 Per month
Tyres and Tubes 3,600 Per quarter
Diesel: (one litre is consumed for every 5 km) 13 Per litre
Oil and Sundries 22 Per 100 km run
Depreciation 68,000 Per annum

Passenger tax @ 22% on total taking is to be levied and bus operator

requires a profit of 25% on total taking.
Prepare operating cost statement on the annual basis and find out the cost
per passenger kilometer and one way fare per passenger.

Answer

Operating Cost Statement

Particulars Total Cost Per annum (₹)

A. Fixed Charges:
Insurance 15,600
Garage rent (₹ 2,400 × 4 quarters) 9,600
Road Tax 5,000
Salary of operating staff (₹ 7,200 × 12 months) 86,400
Depreciation 68,000
Total (A) 1,84,600
B. Variable Charges:
Repairs (₹ 4,800 × 4 quarters) 19,200
Tyres and Tubes (₹ 3,600 × 4 quarters) 14,400
Diesel (₹ 1,80,000 km ÷ 5 km × 13) 4,68,000
Oil and Sundries (₹ 1,80,000 km ÷ 100 km × 22) 39,600
Total (B) 5,41,200
Total Operating Cost (A+B) 7,25,800
Add: Passenger tax (Refer to WN-1) 3,01,275
Add: Profit (Refer to WN-1) 3,42,359
Total takings 13,69,434

Calculation of Cost per passenger kilometre and one way fare per
passenger
Cost per Passenger-Km.
Cost per Passenger-Km = Total Operating Cost ÷ Total Passenger-Km
= 7,25,800 ÷ 40,32,000 Passenger-Km
= 0.18

One way fare per passenger

One way fare per passenger = Total Takings ÷ Total Passenger-Km × 30 Km
= 13,69,434 ÷ 40,32,000 Passenger-Km × 30 Km

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 = 10.20

Working Notes
1. Let total takings be X, then Passenger tax and profit will be as follows:
X = 7,25,800 + 0.22X + 0.25X
X - 0.47X = 7,25,800
X = 7,25,800 ÷ 0.53 = 13,69,434
Passenger tax = 13,69,434 × 0.22 = 3,01,275
Profit = 13,69,434 × 0.25 = 3,42,359

2. Total Kilometres to be run during the year

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

3. Total passenger Kilometres

= 1,80,000 km × 32 passengers × 70%
= 40,32,000 Passenger-Km

Question 46

‘RP’ Resorts (P) Ltd. offers three types of rooms to its guests, viz deluxe
room, super deluxe room, and luxury suite. You are required to COMPUTE
the tariff to be charged to the customers for different types of rooms on the
basis of the following information:

Types of Room Number of Rooms Occupancy

Deluxe Room 100 90%
Super Deluxe Room 60 75%
Luxury Suite 40 60%

Rent of ‘super deluxe’ room is to be fixed at 2 times of ‘deluxe room’ and

that of ‘luxury suite’ is 3 times of ‘deluxe room’. Annual expenses are as
follows:

Particulars Amount (₹ lakhs)

Staff salaries 680.00
Lighting, Heating, and Power 300.00
Repairs, Maintenance, and Renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28

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

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 Profit is to be provided @ 25% on total taking, and assume 360 days in a
year.

Answer

Operating cost statement of ‘RP’ Resort (P) Limited

Particulars Cost per annum (₹ in lakhs)

Staff Salaries 680.00
Room Attendant’s Wages (refer W.N-3) 286.20
Lighting, Heating & Power 300.00
Repairs, Maintenance & Renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior Decoration 75.00
Sundries 30.28
Depreciation (refer W.N-4):
- Building 45.00
- Furniture & Fixture 9.00
- Air Conditioners 7.50
Total cost for the year 1,666.98

Computation of profit:

Let ₹ x be the rent for deluxe room.

Equivalent deluxe room days are 90,720 (refer W.N-2).
Total takings = ₹ 90,720x
Profit is 25% of total takings.
Profit = 25% of ₹ 90,720x = ₹ 22,680x
Total takings = Total Cost + Profit
₹ 90,720x = ₹ 16,66,98,000 + ₹ 22,680x
₹ 90,720x – ₹ 22,680x = ₹ 16,66,98,000
₹ 68,040x = ₹ 16,66,98,000
X = ₹ 16,66,98,000 / ₹ 68,040 = ₹ 2,450

Rent to be charged for Deluxe room ₹ 2,450

Rent to be charged for Super deluxe room ₹ 4,900
Rent of deluxe room × 2 = ₹ 2,450 × 2
Rent to be charged for Luxury suite ₹ 7,350
Rent of Super Deluxe room × 1.5 = ₹ 4,900 × 1.5

Working Notes:

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 1. Computation of Room Occupancy
Type of Room No. of rooms × no. of days × Room
occupancy % days
Deluxe Room 100 rooms × 360 days × 90% 32,400
occupancy
Super Deluxe 60 rooms × 360 days × 75% occupancy 16,200
Room
Luxury Suite 40 × 360 days × 60% occupancy 8,640
Total 57,240

2. Computation of equivalent deluxe room days:

Rent of ‘super deluxe’ room is to be fixed at 2 times of ‘deluxe room’ and luxury
suite is 3 times of ‘deluxe room’. Therefore equivalent room days would be:

Type of Room Room days Equivalent deluxe room days

Deluxe Room 32,400 × 1 32,400
Super Deluxe Room 16,200 × 2 32,400
Luxury Suite 8,640 × 3 25,920
Total 90,720

3. Computation of room attendant’s wages:

Room occupancy days × ₹ 500 per day
= 57,240 days × ₹ 500 = ₹ 286.20 lakhs

4. Computation of Depreciation per annum:

Particulars Cost (₹) Rate of Depreciation

Depreciation (₹)
Building 900,00,000 5% 45,00,000
Furniture & 90,00,000 10% 9,00,000
Fixtures
Air Conditioners 75,00,000 10% 7,50,000

Question 47

Royal Transport Company has been given a 50 kilometre long route to run 6
buses. The cost of each bus is ₹ 7,50,000. The buses will make 3 round trips
per day carrying on an average 75% passengers of their seating capacity.
The seating capacity of each bus is 48 passengers. The Buses will run on an
average 25 days in a month. The other information for a year 2016–2017 is
given below:

Expense Details Amount Frequency

Garage Rent ₹ 6,000 per month
Annual Repairs and Maintenance ₹ 24,000 each bus

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 Salaries of 6 Drivers ₹ 4,000 each per
month
Wages of 6 Conductors ₹ 1,600 each per
month
Wages of 6 Cleaners ₹ 1,000 each per
month
Manager’s Salary ₹ 10,000 per month
Road Tax, Permit Fee, etc. ₹ 6,000 for a quarter
Office Expenses ₹ 2,500 per month
Cost of Diesel per litre ₹ 66 -
Kilometres run per litre for each bus 6 -
kilometres
Annual Depreciation 20% of cost -
Annual Insurance 4% of cost -
Engine Oils & Lubricants (for 1000 ₹ 2,000 -
km)
Wages of 6 Cleaners ₹ 1,000 each per
month

Calculate the Bus Fare to be charged from each Passenger per Kilometre
(up to four decimal points), if the Company wants to earn profit of 33.33% on
Takings (Total Receipts from Passengers).

Answer

1. Number of Passengers
Number of Passengers = 48 × 75% = 36
Number of Kilometres p.a. = 6 buses × 3 trips × 2 ways × 50 kms × 25 days ×
12 months = 5,40,000
Total Number of Passenger-Kms p.a. = 36 × 5,40,000 = 1,94,40,000

2. Statement of Operating Costs and Revenues p.a.

Particulars Computation ₹
Garage Rent 6,000 per month × 12 months 72,000
Repairs & 24,000 p.a. per bus × 6 buses 1,44,000
Maintenance
Drivers’ Salary 4,000 per month × 6 Drivers × 12 2,88,000
months
Conductors’ Wages 1,600 per month × 6 Conductors × 1,15,200
12 months
Cleaners’ Wages 1,000 per month × 6 Cleaners × 12 72,000
months
Managers’ Salary 10,000 per month × 12 months 1,20,000
Road Tax, Permit Fee, 6,000 per quarter × 4 quarters 24,000
etc.
Office Expenses 2,500 per month × 12 months 30,000

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 Diesel 5,40,000 km ÷ 6 km × ₹ 66 per litre 59,40,000
Depreciation 7,50,000 × 6 buses × 20% 9,00,000
Insurance 7,50,000 × 6 buses × 4% 1,80,000
Engine Oil and 5,40,000 km × ₹ 2,000 ÷ 1,000 km 10,80,000
Lubricants
Total Operating ₹ 89,65,200
Costs
Add: Profit Margin 33.33% of Takings ₹ 44,82,600
Total Takings ₹
1,34,47,800

3. Fare per Passenger-Km

Fare per Passenger-Km = ₹ 1,34,47,800 ÷ 1,94,40,000 = ₹ 0.6918
So, One-Way Fare per Passenger = 50 km × ₹ 0.6918 = ₹ 34.59

Question 48

A group of ‘Health Care Service’ has decided to establish a Critical Care Unit
in a metro city with an investment of Rs. 85 lakhs in hospital equipments.
The unit’s capacity shall be of 50 beds and 10 more beds, if required, can be
added.
Other information for a year are as under:

Rs.
Building Rent 2,25,000 per month
Manager’s Salary 50,000 per month to
each one
(Number of Managers – 03)
Nurses’ Salary 18,000 per month to
each Nurse
(Number of Nurses – 24)
Word boy’s Salary 9000 per month per
person
(Number of word boys -24)
Doctor’s Payment 5,50,000 per month
(Paid on the basis number of patients attended
and time spent by them)
Food and laundry services (Variable) 39,53,000 per year
Medicines to patients (Variable) 22,75,000 per year
Administrative Overheads 28,00,000 per year
Depreciation on equipment’s 15% per annum on
original cost

It was reported that for 200 days in a year 50 beds were occupied, for 105
days 30 beds were occupied and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of Rs. 950 per bed to accommodate

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 the flow of patients. However, this never exceeded the normal capacity of 50
beds on any day.

Find out:
i. Profit per patient day, if hospital charges on an average Rs. 2,500 per day
from each patient.
ii. Break even point per patient day (Make calculation on annual basis)

Answer

(i) Total equivalent single room suites

Nature of Occupancy ( Room Equivalent single room suites
suite days) ( Room – days)
Single room 36,000 36,000
suites
(100 rooms × 360 days (36,000 × 1 )
× 100%)
Double rooms 14,400 36,000
suites
(50 rooms × 360 days (14,400 × 2.5)
× 80%)
Triple rooms 6,480 32,400
suites
(30 rooms × 360 days (6,480 × 5)
× 60%)
1,04,400
(ii) Statement of total cost:

(Rs.)
Staff salaries 14,25,00,000
Room attendant’s wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
Building rent
{ ( Rs. 10,00,000 × 12 months ) + 5% on 1,20,00,000 + 5% on total
total taking} takings
Total cost 26,41,00,000 + 5% on total
takings

Profit is 20% of total takings.

∴ Total takings = Rs. 26, 41, 00,000 + 25% (5% + 20%) of total takings
Let x be rent for single rooms suite.
Then 1, 04,400 x = 26, 41, 00,000 + 0.25 × 1, 04,400 x.
Or, 1, 04,400x = 26, 41, 00,000 + 26,100x

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 Or, 78,300x = 26, 41, 00,000
Or, x = 3,373

(iii) Rent to be charged for single room suite = Rs. 3,373

Rent for double rooms suites = Rs. 3,373 × 2.5 = Rs. 8,432.5
Rent for triple rooms suites = Rs. 3,373 × 5 = Rs. 16,865

Question 49

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

Assuming 25% profit on takings and considering that the bus will run on an
average 25 days in a month, you are required to:

(i) prepare operating cost sheet (for the month).

(ii) calculate fare to be charged per passenger km.

Answer

(i) Statement showing the Operating Cost per Passenger-km.

Yearly Monthly
(₹.) (₹.)
(A) Standing Charges:
Insurance Charge ₹. 20,00,000 × 3% 60,000 5,000
Road Tax 36,000 3,000
Depreciation (20,00,000/5) 4,00,000 33,333.33
Total 4,96,000 41,333.33
(B) Maintenance Charges:
Annual Repairs 50,000 4,166.67
Office and administration overheads 3,18,000 26,500
Total 3,68,000 30,666.67
(C) Running Cost/Charges:
Driver’s Salary 2,40,000 20,000

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 Conductor’s Salary 1,80,000 15,000
Diesel & Oil ( 60,000 × 1,500 ÷ 100 ) 9,00,000 75,000
Total 13,20,000 1,10,000
Total (A+B+C) Cost before commission and 21,84,000 1,82,000
profit
Commission (33,60,000 × 10%) (working note 3,36,000 28,000
2)
Profit (33,60,000 × 25%) (working note 2) 8,40,000 70,000
Takings (working note 1) 33,60,000 2,80,000

(ii) Fare per Passenger-km.

Fare per Passenger-km. = Total Collection/Takings ÷ Total Passenger-km
(Working note 3)
= 33,60,000 ÷ 24,00,000 = ₹. 1.40
OR
Fare per Passenger-km. (monthly) = 2,80,000 ÷ 2,00,000 = ₹. 1.40

Working note:
1. Cost before commission (10%) and profit (25%) is 21,84,000 which is 65%
of total takings.
So total takings is (21,84,000 ÷ 65) × 100 = ₹ 33,60,000.
2. Commission is 10% of ₹ 33,60,000 = ₹ 3,36,000 and Profit is 25% of ₹
33,60,000 = ₹ 8,40,000.
3. Total Km is 4 Round Trips × Days in a month × Month = (4 × 2 × 25 × 25 ×
12) = 60,000 km.
Passenger Km = 60,000 km × 40 passenger = 24,00,000.

Question 50

A hotel is being run in a Hill station with 200 single rooms. The hotel offers
concessional rates during six off-season months in a year. During this
period, half of the full room rent is charged. The management’s profit
margin is targeted at 20% of the room rent. The following are the cost
estimates and other details for the year ending 31st March, 2019:

(i) Occupancy during the season is 80% while in the off-season it is 40%.

(ii) Total investment in the hotel is ₹ 300 lakhs of which 80% relates to
Buildings and the balance to Furniture and other Equipment.

(iii) Room attendants are paid ₹ 15 per room per day on the basis of
occupancy of rooms in a month.

(iv) Expenses:
• Staff salary (excluding that of room attendants) ₹ 8,00,000
• Repairs to Buildings ₹ 3,00,000
• Laundry Charges ₹ 1,40,000
• Interior Charges ₹ 2,50,000

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 • Miscellaneous Expenses ₹ 2,00,200

(v) Annual Depreciation is to be provided on Buildings @ 5% and 15% on

Furniture and other Equipments on straight line method.

(vi) Monthly lighting charges are ₹ 110, except in four months in winter when
it is ₹ 30 per room and this cost is on the basis of full occupancy for a
month.

You are required to work out the room rent chargeable per day both during
the season and the off-season months using the foregoing information.
(Assume a month to be of 30 days and winter season to be considered as
part of off-season).

Answer

Important workings :

Particulars Full Off Total

Season Season
1. Calculation of Room Days
Occupied :
(a) No. of rooms in the hotel 200 200
(b) No. of days [ 6 months x 30 180 180
days ]
(c) Occupancy Ratio 80% 40%
(d) Room days occupied [ a x b 28,800 14,400
xc]
(e) Weightage for rent 100% 50%
(f) Equivalent room days [ d x e ] 28,800 7,200 36,000
2. Room Attendant's Salary :
[ WN 1(d) x ₹ 15 per room per 4,32,000 2,16,000 6,48,000
day ]
3. Lighting Charges : Full Off Off
Season Season Season
Non-winter Non- Winter
winter
(a) Winter / Non-winter 6 2 4
(b) No. of Months 6 2 4
(c) No. of Rooms 200 200 200
(d) Occupancy Ratio 80% 40% 40%
(e) No. of room months occupied 960 160 320
[b x c x d]
(f) Rate per room per month if ₹ 110 ₹ 110 ₹ 30
occupied
(g) Lighting charges [ e x f ] 1,05,600 17,600 9,600

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 Cost Sheet for the Year :

Particulars ₹
Room attendants salary [ WN 2 above ] 6,48,000
Lighting charges [ WN 3(g) above ] [ 1,05,600 + 17,600 + 9,600 ] 1,32,800
Staff salary (excluding that of room attendants) 8,00,000
Repairs to Buildings 3,00,000
Laundry Charges 1,40,000
Interior Charges 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation on Building [ 300 lakhs x 80% x 5% ] 12,00,000
Depreciation on Furniture & Equipment [ 300 lakhs x 20% x 15% 9,00,000
]
∴ Total cost per annum 45,71,000
Add : Profit @ 20% of room rent i.e. 25% of cost 11,42,750
∴ Total room rent i.e. revenue per annum 57,13,750

Calculation of Room Rent Chargeable Per Day :

Rent per equivalent room day = Total Revenue / Equivalent Room Days
= 57,13,750 / 36,000 = ₹ 158.72 (approx)
Rent per room per day for full season period = ₹ 158.72 x 100% = ₹ 158.72
(approx)
Rent per room per day for off season period = ₹ 158.72 x 50% = ₹ 79.36 (approx)

Question 51

SEZ Ltd. built a 120 km. long highway and now operates a toll road to collect
tolls. The company has invested ₹ 900 crore to build the road and has
estimated that a total of 120 crore vehicles will be using the highway during
the 10 years toll collection tenure. The other costs for the month of “June
2020” are as follows:

(i) Salary:
 Collection personnel (3 shifts and 5 persons per shift) - ₹ 200 per day
per person.
 Supervisor (3 shifts and 2 persons per shift) - ₹ 350 per day per person.
 Security personnel (2 shifts and 2 persons per shift) - ₹ 200 per day per
person.
 Toll Booth Manager (3 shifts and 1 person per shift) - ₹ 500 per day per
person.
(ii) Electricity - ₹ 1,50,000
(iii) Telephone - ₹ 1,00,000
(iv) Maintenance cost - ₹ 50 lakhs
(v) The company needs 30% profit over total cost.

Required:

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 1. Calculate cost per kilometre.
2. Calculate the toll rate per vehicle.

Answer

(a) Statement of Cost

Particulars (₹)
A. Apportionment of (₹ 900 crore × 1 / 10 years × 1 / 7,50,00,000
capital cost 12 months)
B. Other Costs
Salary to Collection (3 Shifts × 5 persons per shift × 90,000
Personnel 30 days × ₹ 200 per day)
Salary to Supervisor (3 Shifts × 2 persons per shift × 63,000
30 days × ₹ 350 per day)
Salary to Security (2 Shifts × 2 persons per shift × 24,000
Personnel 30 days × ₹ 200 per day)
Salary to Toll Booth (3 Shifts × 1 person per shift × 45,000
Manager 30 days × ₹ 500 per day)
Electricity 1,50,000
Telephone 1,00,000
C. Maintenance cost 50,00,000
Total (A + B + C) 8,04,72,000

(1) Calculation of cost per kilometre:

Total Cost = ₹ 8,04,72,000 / Total km. = 8,04,72,000 / 120 km. = ₹ 6,70,600

(2) Calculation of toll rate per vehicle:

Total Cost + 25% profit = ₹ 8,04,72,000 + ₹ 2,41,41,600 / Vehicles per month = ₹
10.46

Working:
Vehicles per month = Total estimated vehicles / 10 years × 1 month / 12 months
= 120 crore / 10 years × 1 month / 12 months = 1 Crore vehicles

Question 52

ABC Health care runs an Intensive Medical Care Unit. For this purpose, it
has hired a building at a rent of ₹ 50,000 per month with the agreement to
bear the repairs and maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be

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 accommodated when the situation demands. Though the unit is open for
patients all the 365 days in a year, scrutiny of accounts for the year 2020
reveals that only for 120 days in the year, the unit had the full capacity of
100 patients per day and for another 80 days, it had, on an average only 40
beds occupied per day. But, there were occasions when the beds were full
and extra beds were hired at a charge of ₹ 50 per bed per day. This did not
come to more than 5 beds above the normal capacity on any one day. The
total hire charges for the extra beds incurred for the whole year amounted to
₹ 20,000.
The unit engaged expert doctors from outside to attend on the patients and
the fees were paid on the basis of the number of patients attended and time
spent by them which on an average worked out to ₹ 30,000 per month in the
year 2020.

The permanent staff expenses and other expenses of the unit were as
follows :

Particulars ₹
2 Supervisors each at a per month salary of 5,000
4 Nurses each at a per month salary of 3,000
2 Ward boys each at a per month salary of 1,500
Other Expenses for the year were as under :
Repairs and Maintenance 28,000
Food supplied to patients 4,40,000
Caretaker and other services for patients 1,25,000
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Cost of Oxygen etc. other than directly borne for treatment of 75,000
patients
General Administration Charges allocated to the unit 71,000

Required :

(i) What is the profit per patient day made by the unit in the year 2020, if the
unit recovered an overall amount of ₹ 200 per day on an average from each
patient.

(ii) The unit wants to work on a budget for the year 2021, but the number of
patients requiring medical care is a very uncertain factor. Assuming that
same revenue and expenses prevail in the year 2021 in the first instance,
work out the number of patient days required by the unit to break even.

Answer

Working Note:

Calculation of No. of Patient Days p.a.:

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 Particulars Patient days
120 days x 100 patients 12,000
80 days x 40 patients 3,200
Extra beds [ 20,000 / 50 ] 400
Total patient days p.a. 15,600

(i) Profitability Statement: [ For 15,600 Patient Days ]

Particulars Total p.a. Per patient day

(₹) (₹)
(a) Revenue [ 15,600 x ₹ 200 ] 31,20,000 200.00
(b) Variable Costs:
Doctors fees [ 30,000 p.m. x 12 3,60,000
months ]
Food supplied to patients 4,40,000
Caretaker and other services for 1,25,000
patients
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Hire charges for extra beds 20,000
Sub-total (b) 13,65,000 87.50
(c) Contribution [ a - b ] 17,55,000 112.50
(d) Fixed Costs:
Rent [ 50,000 p.m. x 12 months ] 6,00,000
Supervisors salary [ 5,000 p.m. x 12 x 1,20,000
2]
Nurses salary [ 3,000 p.m. x 12 x 4 ] 1,44,000
Ward boys salary [ 1,500 p.m. x 12 x 2 36,000
]
Repairs and Maintenance 28,000
Cost of Oxygen etc. 75,000
General Administration Charges 71,000
Sub-total (d) 10,74,000 68.85
(e) Profit [ c - d ] 6,81,000 43.65

(ii) Calculation of Break Even Point (BEP):

BEP = Total Fixed Cost / Contribution per patient day

= 10,74,000 / 112.50
= 9,547 patient days (approx)

Question 53

Paras Travels provides mini buses to an IT company for carrying its

employees from home to office and dropping back after office hours. It runs

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 a fleet of 8 mini buses for this purpose. The buses are parked in a garage
adjoining the company’s premises. Company is operating in two shifts (one
shift in the morning and one shift in the afternoon). The distance travelled
by each mini bus one way is 30 kms. The company works for 20 days in a
month.
The seating capacity of each mini bus is 30 persons. The seating capacity is
normally 80% occupied during the year. The details of expenses incurred for
a year are as under:

Particulars
Driver’s salary ₹ 20,000 per driver
per month
Lady attendant’s salary (mandatorily required ₹ 10,000 per
for each mini bus) attendant per month
Cleaner’s salary (One cleaner for 2 mini buses) ₹ 15,000 per cleaner
per month
Diesel (Avg. 8 kms per litre) ₹ 80 per litre
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes ₹ 5,080 per mini bus
per month
Garage rent paid ₹ 24,000 per month
Repair & maintenance including engine oil and ₹ 2,856 per mini bus
lubricants (for every 5,760 kms)
Purchase Price of mini bus ₹ 15,00,000 each
Residual life of mini bus 8 Years
Scrap value per mini bus at the end of residual ₹ 3,00,000
life

Paras Travels charges two types of fare from the employees. Employees
coming from a distance of beyond 15 kms away from the office are charged
double the fare which is charged from employees coming from a distance of
up-to 15 kms. away from the office. 50% of employees travelling in each trip
are coming from a distance beyond 15 kms. from the office. The charges are
to be based on average cost.

You are required to:

(i) Prepare a statement showing expenses of operating a single mini bus for
a year.
(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance up to 15 kms. from the office.
(b) Employees coming from a distance beyond 15 kms. from the office.

Answer

(a) (i) Statement of Expenses of operating a mini bus in a year

Particulars Rate (₹) Per Bus per

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 annum (₹)
(A) Standing Charges:
Driver’s salary 20,000 2,40,000
p.m
Lady attendant’s salary 10,000 1,20,000
p.m
Average Cleaner’s salary (50%) 15,000 90,000
p.m
Insurance charge 30,000 30,000
p.a
License fee, taxes etc. 5,080 p.m 60,960
Average Garage Rent 24,000 36,000
p.m
Depreciation {(15,00,000 – 3,00,000) ÷ 8} 1,50,000 1,50,000
p.a
(B) Maintenance Charges:
Repairs & maintenance including engine oil 28,560 28,560
and lubricants (Working Note 1) p.a
(C) Operating Charges:
Diesel (Working Note 2) 5,76,000
Total Cost (A + B + C) 13,31,520
Cost per month 1,10,960

(ii) Average cost per employee per month:

A. Employee coming from distance of up to 15 km
Cost per month = ₹ 1,541.11
B. Employee coming from a distance beyond 15 km
Cost = ₹ 3,082.22
* Considering half fare employees as a base:
Full fare employees (12 × 2) = 24 employees

Add: Half fare employees (Working Note 3) = 12 employees

Total Equivalent number of employees per month = 36 employees
Total Equivalent number of employees per month (morning + afternoon shift of
company) = 72 employees

Working Notes
1. Calculation of Repairs and maintenance cost of a bus:
Distance travelled in a year:
(4 trips × 2 shifts × 30 km × 20 days × 12 months)
Distance travelled per annum: 57,600 km
Repairs and maintenance cost per Bus per annum: ₹ 28,560
2. Calculation of diesel cost per bus per annum:
Distance travelled in a year = 57,600 km
Diesel cost per Bus per annum = ₹ 5,76,000
3. Calculation of equivalent number of employees per bus:
o Seating capacity of a bus = 30 employees

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 o Occupancy (80% of capacity) = 24 employees
o Half fare employees (50% of 24 employees) = 12 employees
o Full fare employees (50% of 24 employees) = 12 employees

[Note: Total Equivalent number of employees per month (morning +

afternoon shift of company) can also be calculated considering full fare
employees as a base. In that case, the number will be 36. Then fare for
employees coming from distance beyond 15 km will be ₹ 3,082.22 and
employees coming from distance up to 15 km will be ₹ 1,541.11.]

Question 54

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 expense 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:

(i) Compute the cost of processing a Vehicle Loan application on the

assumption that 496 Vehicle Loan applications are processed each month.

(ii) Find out the number of Education Loan Applications processed, if the
total processing cost per Education Loan Application is same as in the
Vehicle Loan Application as computed in (i) above.

Answer

Particulars Vehicle loan Education loan Total (₹)

Applications Application (₹)
(₹)
Employee Cost 2,00,000 1,40,000 3,40,000
(₹ 50,000 × 4) (₹ 70,000 × 2)
Apportionment of 27,000 27,000 54,000
Branch manager’s

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 salary
Legal charges, Printing 18,000 18,000 36,000
& stationery and
Advertising expenses
Other expenses 3,000 3,000 6,000
Total cost 2,48,000 1,88,000 4,36,000

(i) Computation of cost of processing a vehicle loan application:

Total Cost ÷ No. of applications
₹ 2,48,000 ÷ 496 = ₹ 500

(ii) Computation of no. of Education loan Processed

Total Cost = No. of applications × Processing cost per application
₹ 1,88,000 = No. of applications × ₹ 500
No. of education loan applications = ₹ 1,88,000 ÷ ₹ 500 = 376 applications

Question 55

RST Toll Plaza Limited built an 80-kilometre-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

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 earned from light weight vehicles calculated in option (i) remains the same.

Answer

Working Notes

(1) Calculation of equivalent numbers of Light weight vehicles (when no

concession is provided on return journey)

Type of Monthly Return Ratio Equivalent light

vehicle traffic (A) traffic (B) (C) weight [(A + B) ×
C]
Light 45,000* 45,000 1 90,000
weight
Medium 12,000 12,000 2.5 60,000
weight
Heavy 10,000 10,000 5 1,00,000
weight
2,50,000
*50,000 light vehicles less 10% exempted vehicles

(2) Calculation of equivalent numbers of Light weight vehicles (when

concession is provided on return journey)

Type of Monthly Return traffic Ratio Equivalent light

vehicle traffic (A) (B) (C) weight [(A + B) ×
C]
Light 45,000* 41,625 [45,000 1 86,625
weight - (45,000 ×
30% × 25%)]
Medium 12,000 12,000 2.5 60,000
weight
Heavy 10,000 10,000 5 1,00,000
weight
2,46,625

(i) Calculation of toll rate for each type of vehicle:

Total cost to cover ÷ Equivalent type of vehicles
(₹ 59,09,090 + 10% of ₹ 59,09,090) ÷ 2,50,000 equivalent vehicles (Refer working
note 1)
= 65,00,000 ÷ 2,50,000 = ₹ 26
Toll rate for:

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  Light weight vehicle = ₹ 26
 Medium weight vehicle = ₹ 26 × 2.5 = ₹ 65
 Heavy weight vehicle = ₹ 26 × 5 = ₹ 130

(ii) Calculation of toll rate for each type of vehicle:

Revenue earned from Light weight vehicle in (i) above
= 90,000 vehicles × ₹ 26 = ₹ 23,40,000
New toll rate to maintain the same revenue from Light weight vehicle
= ₹ 23,40,000 ÷ 86,625 (Refer working note-2) = ₹ 27.01
Light weight vehicle = ₹ 27.01
Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75 = 20.26

Alternative presentation
(ii) Toll rate 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 = ₹
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 55(a)

M J Pvt. Ltd. produces a product "SKY" which passes through two

processes, viz. Process-A and Process-B. The details for the year ending
31st March, 2014 are as follows:

Particulars Process A Process - B

40,000 Units introduced at a cost of 3,60,000 -
Material Consumed 2,42,000 2,25,000
Direct Wages 2,58,000 1,90,000
Manufacturing Expenses 1,96,000 1,23,720
Output in Units 37,000 27,000
Normal Wastage of Input 5% 10%
Scrap Value (per unit) 15 20
Selling Price (per unit) 37 61

Additional Information
(a) 80% of the output of Process-A was passed on to the next process and
the balance was sold. The entire output of Process-B was sold.

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 (b) Indirect expenses for the year was 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility
centres.

Required:
(i) Prepare Process-A and Process-B Account.
(ii) Prepare Profit & Loss Account showing the net profit / net loss for the
year.

Answer

Process-A Account

Particulars Units Amount (₹) Particula Units Amount

rs (₹)
To Input 40,000 3,60,000 By Normal 2,000 30,000
wastage
(2,000
units × ₹
15)
To Material --- 2,42,000 By 1,000 27,000
Abnormal
loss A/c
(1,000
units × ₹
27)
To Direct --- 2,58,000 By 29,600 7,99,200
wages Process-B
(29,600
units × ₹
27)
To --- 1,96,000 By Profit & 7,400 1,99,800
Manufacturin Loss A/c
g Exp. (7,400
units × ₹
27)
40,000 10,56,000 40,000 10,56,000

Cost per unit

= (10,56,000 – 30,000) ÷ (40,000 units – 2,000 units)
= 27 per unit
Normal wastage
= 40,000 units × 5% = 2,000 units
Abnormal loss
= 40,000 units – (37,000 units + 2,000 units) = 1,000 units
Transfer to Process-B
= 37,000 units × 80% = 29,600 units
Sale

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 = 37,000 units × 20% = 7,400 units

Process-B Account
Particulars Units Amount Particular Units Amount
(₹) s (₹)
To Process- 29,600 7,99,200 By Normal 2,960 59,200
A A/c wastage
(2,960
units × ₹
20)
To Material --- 2,25,000 By Profit & 27,000 12,96,000
Loss A/c
(27,000
units × ₹
48)
To Direct --- 1,90,000
Wages
To --- 1,23,720
Manufacturin
g Exp.
To Abnormal 360 17,280
Gain A/c
(360 units x
48)
29,960 13,55,200 29,960 13,55,200

Cost per unit

= (13,37,920 – 59,200) ÷ (29,600 units – 2,960 units)
= 48 per unit
Normal wastage
= 29,600 units × 10% = 2,960 units
Abnormal gain
= (27,000 units + 2,960 units) – 29,600 units = 360 units

Profit & Loss Account

Particulars Amount Particulars Amount
(₹) (₹)
To Process-A A/c 1,99,800 By Sales:
To Process-B A/c 12,96,000 - Process-A (7,400 units 2,73,800
× ₹ 37)
To Abnormal loss 12,000 - Process-B (27,000 units 16,47,000
A/c × ₹ 61)

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 To Indirect 4,48,080 By Abnormal gain 10,080
Expenses
By Net loss 25,000
19,55,880 19,55,880

Working Notes
Normal Wastage (Loss) Account
Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Process- 2,000 30,000 By Abnormal 360 7,200
A A/c Gain A/c (360
units × ₹ 20)
To Process- 2,960 59,200 By Bank 4,600 82,000
B A/c (Sales)
4,960 89,200 4,960 89,200

Abnormal Loss Account

Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Process- 1,000 27,000 By Bank A/c 1,000 15,000
A A/c (1,000 units ×
₹ 15)
By Profit & --- 12,000
Loss A/c
1,000 27,000 1,000 27,000

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
(₹) (₹)
To Normal 360 7,200 By Process- 360 17,280
loss A/c (360 B A/c
units × ₹ 20)
To Profit & 10,080
Loss A/c
360 17,280 360 17,280

Question 55(b)

The following information relates to Process A:

Details Values
(i) Opening Work-in-Progress 8,000 units at ₹ 75,000
Degree of Completion:
Material 100%

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 Labour and Overhead 60%
(ii) Input 1,82,000 units at ₹ 7,37,500
(iii) Wages Paid ₹ 3,40,600
(iv) Overheads Paid ₹ 1,70,300
(v) Units Scrapped 14,000 units
Degree of Completion (Scrapped):
Material 100%
Wages and Overheads 80%
(vi) Closing Work-in-Progress 18,000 units
Degree of Completion (Closing
WIP):
Material 100%
Wages and Overheads 70%
(vii) Units Completed and 1,58,000 units
Transferred
(viii) Normal Loss 5% of total input (including WIP)
(ix) Scrap Value ₹ 5 per unit (adjusted in material
cost)

Requirements (FIFO Basis):

1. Equivalent Production
2. Cost Per Unit
3. Value of Units Transferred to Next Process

Answer

(ii) Computation of Cost per Unit

Particulars Materials Labour Overheads

(₹) (₹) (₹)

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 Input of Materials 7,37,500 - -
Expenses - 3,40,600 1,70,300
Total 7,37,500 3,40,600 1,70,300
Less: Sale of Scrap (9,500 (47,500) - -
units × ₹ 5)
Net cost 6,90,000 3,40,600 1,70,300
Equivalent Units 1,72,500 1,69,400 1,69,400
Cost Per Unit 4.0000 2.0106 1.0053
Total cost per unit = ₹ (4.0000 + 2.0106 + 1.0053) = ₹ 7.0159

(iii) Value of Units Transferred to Next Process

Particulars Amount (₹) Amount (₹)

Opening W-I-P 75,000
Add: Labour (3,200 units × ₹ 2.0106) 6,434
Overhead (3,200 units × ₹ 1.0053) 3,217 84,651
New introduced (1,50,000 units × ₹ 7.0159) 10,52,385
11,37,036

Question 55(c)

The following information is furnished by ABC Company for Process - II of

its manufacturing activity for the month of April 2023:
(i) Opening Work-in-Progress – Nil
(ii) Units transferred from Process I – 55,000 units at ₹ 3,27,800
(iii) Expenditure debited to Process – II:
Consumables ₹ 1,57,200
Labour ₹ 1,04,000
Overhead ₹ 52,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP – 2,000 units (Degree of completion):
Consumables 80%
Labour 60%
Overhead 60%
(vi) Units scrapped - 2,000 units, scrapped units were sold at ₹ 5 per unit
(vii) Normal loss – 4% of units introduced

You are required to:

(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit
(iii) Determine the value of Work-in-Process and units transferred to Process
– III

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 Answer

(i) Statement of Equivalent Production

Input Units Output Units Equivale Materia Consumabl Labour &

Details Particula nt l- A* es Overhea
rs Producti ds
on
% Units % Units % Units
Units 55,00 Units 51,00 100 51,000 10 51,000 10 51,000
transferr 0 transferre 0 0 0
ed from d to
Process- Process-
I III
Normal 2,200 - - - - - -
loss (4%
of
55,000)
Closing 2,000 100 2,000 80 1,600 60 1,200
W-I-P
Abnormal (200) 100 (200) 10 (200) 10 (200)
Gain 0 0
55,00 55,00 52,800 52,400 52,000
0 0
*Material A represent transferred-in units from process-I

(ii) Determination of Cost per Unit

Particulars Amount Units Per Unit
(₹) (₹)
(i) Direct Material (Consumables):
Value of units transferred from 3,27,800
Process-I
Less: Value of normal loss
(2,200 units × ₹ 5) (11,000)
3,16,800 52,800 6.00
(ii) Consumables added in Process- 1,57,200 52,400 3.00
II
(iii) Labour 1,04,000 52,000 2.00
(iii) Overhead 52,000 52,000 1.00
Total Cost per equivalent unit 12.00

(iii) Determination of value of Work-in-Process and units transferred to

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 Process-III

Particulars Units Rate Amount

(₹) (₹)
Value of Closing W-I-P:
Material from Process-I 2,000 6.00 12,000
Consumables 1,600 3.00 4,800
Labour 1,200 2.00 2,400
Overhead 1,200 1.00 1,200
20,400
Value of units transferred to Process- 51,000 12.00 6,12,000
III

Question 55(d)

KMR Ltd. produces product AY, which passes through three processes
‘XM’, ‘YM’, and ‘ZM’. The output of process ‘XM’ and ‘YM’ is transferred to
the next process at cost plus 20 percent each on transfer price and the
output of process ‘ZM’ is transferred to finished stock at a profit of 25
percent on transfer price. The following information are available in respect
of the year ending 31st March, 2017:

Process- Process- Process- Finished

XM (₹) YM (₹) ZM (₹) Stock (₹)
Opening Stock 30,000 54,000 80,000 90,000
Material 1,60,000 1,30,000 1,00,000 -
Wages 2,50,000 2,16,000 1,84,000 -
Manufacturing 1,92,000 1,44,000 1,33,000 -
Overheads
Closing Stock 40,000 64,000 78,000 1,00,000
Inter process Nil 8,000 20,000 40,000
profit included in
Opening Stock

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

the price at which it is received from process ‘ZM’. Sales of the finished
stock during the period was ₹ 28,00,000.

You are required to prepare:

(i) All process accounts and
(ii) Finished stock account showing profit element at each stage.

Answer

(i) Process ‘XM’ Account

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Dr. Cost (₹) Profit Total (₹) Cr. Cost (₹) Profit Total (₹)
(₹) (₹)
To Opening 30,000 – 30,000 By 5,92,000 1,48,000 7,40,000
Stock Process
‘YM’ A/c
(Transfer)
To Material 1,60,000 – 1,60,000
To Wages 2,50,000 – 2,50,000
Total 4,40,000 – 4,40,000
Less: Closing 40,000 – 40,000
Stock
Prime Cost 4,00,000 – 4,00,000
To 1,92,000 – 1,92,000
Manufacturing
Overheads
Total Cost 5,92,000 – 5,92,000
To Costing – 1,48,000 1,48,000
Profit and
Loss A/c
(20% on
transfer price
or 25% on
cost)
5,92,000 1,48,000 7,40,000 5,92,000 1,48,000 7,40,000

Process ‘YM’ Account

Dr. Cost (₹) Profit (₹) Total (₹) Cr. Cost (₹) Profit Total
(₹) (₹)
To 46,000 8,000 54,000 By 10,72,758 4,52,24 15,25,0
Opening Proce 2 00
Stock ss
‘ZM’
A/c
(Trans
fer)
To Process 5,92,000 1,48,000 7,40,000
‘XM’ A/c
To Material 1,30,000 – 1,30,000

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To Wages 2,16,000 – 2,16,000
Total 9,84,000 1,56,000 11,40,000
Less: 55,242 8,758 64,000
Closing
Stock
Prime 9,28,758 1,47,242 10,76,000
Cost
To 1,44,000 – 1,44,000
Manufactur
ing
Overheads
Total Cost 10,72,758 1,47,242 12,20,000
To Costing – 3,05,000 3,05,000
Profit and
Loss A/c
(20% on
transfer
price or
25% on
cost)
10,72,758 4,52,242 15,25,000 10,72,758 4,52,24 15,25,0
2 00

(ii) Finished Stock Account

Dr. Cost Profit Total Cr. Cost Profit Total

(₹) (₹) (₹) (₹) (₹) (₹)
To 50,000 40,000 90,000 By 14,83,7 13,16,2 28,00,0
Openin Costing 25 75 00
g Stock P&L A/c
(Transf
er)
To 14,91,2 11,00,7 25,92,0
Process 58 42 00
‘ZM’ A/c
Total 15,41,2 11,40,7 26,82,0
58 42 00
Less: 57,533 42,467 1,00,00
Closing 0
Stock
14,83,7 10,98,2 25,82,0
25 75 00
To – 2,18,00 2,18,00
Costing 0 0
Profit
and
Loss

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 A/c
(Profit,
Balanci
ng
Figure)
14,83,7 13,16,2 28,00,0 14,83,7 13,16,2 28,00,0
25 75 00 25 75 00

Calculation of Unrealized Profit on Closing Stock

 Process ‘XM’ = Nil
 Process ‘YM’ = ₹1,56,000 × ₹64,000 / ₹11,40,000 = ₹8,758
 Process ‘ZM’ = ₹4,72,242 × ₹78,000 / ₹18,89,000 = ₹19,500
 Finished Stock = ₹11,00,742 × ₹1,00,000 / ₹25,92,000 = ₹42,467
Note: Unrealized profit on closing finished stock can also be calculated on the
basis of Average cost.

Question 55(e)

ABC Ltd. produces an item which is completed in three processes - X, Y,

and Z. The following information is furnished for process X for the month of
March, 2018:

Opening work-in-progress (5,000 units):

Materials ₹ 35,000
Labour ₹ 13,000
Overheads ₹ 25,000

Units introduced into process X (55,000 units):

Materials ₹ 20,20,000
Labour ₹ 8,00,000
Overheads ₹ 13,30,000

Units scrapped: 5,000 units

Degree of completion:

Materials Labour & Overheads

100% 60%

Closing work-in-progress (5,000 units):

Degree of completion:

Materials Labour & Overheads

100% 60%

Units finished and transferred to Process Y: 50,000 units

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 Normal loss: 5% of total input (including opening works-in-progress).
Scrapped units fetch ₹ 20 per unit.

Presuming that average method of inventory is used, prepare:

(i) Statement of Equivalent production
(ii) Statement of Cost for each element
(iii) Statement of distribution of cost
(iv) Abnormal loss account
Answer

(i) Statement of Equivalent Production

Input Units Output Units Equivale

nt
productio
n
Material Units Labour & Units
(%) Overhead
s (%)
Opening 5,000 Complete 50,000 100 50,000 100 50,000
WIP d and
transferre
d to
Process
'Y'
Units 55,000 Normal 3,000 -- -- -- --
introduce loss (5%
d of 60,000
units)
Abnormal 2,000 100 2,000 60 1,200
loss
Closing 5,000 100 5,000 60 3,000
WIP
60,000 57,000 54,200

(ii) Statement of Cost

Details Cost at the Cost Total Equivalent Cost

beginning added (₹) cost (₹) Units per
of process unit
(₹) (₹)
Material 35,000 20,20,000 20,55,000
Less: Value (3,000 units
of normal × ₹ 20)
loss
(60,000)
19,95,000 57,000 35

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 Labour 13,000 8,00,000 8,13,000 54,200 15
Overheads 25,000 13,30,000 13,55,000 54,200 25
Total 73,000 41,50,000 41,63,000 75

(iii) Statement of Distribution of Cost

Details (₹)
Completed and transferred to Process-Y (50,000 units × ₹ 75) 37,50,000
Abnormal Loss:
Materials (2,000 units × ₹ 35) 70,000
Wages (1,200 units × ₹ 15) 18,000.00
Overheads (1,200 units × ₹ 25) 30,000.00
1,18,000
Closing WIP:
Materials (5,000 units × ₹ 35) 1,75,000
Wages (3,000 units × ₹ 15) 45,000
Overheads (3,000 units × ₹ 25) 75,000
2,95,000

(iv) Abnormal Loss Account

Particulars Units Amount Particulars Units Amount

To Process- 2,000 1,18,000 By Cost 2,000 40,000
X A/c Ledger
Control A/c
By Costing - 78,000
Profit & Loss
A/c
2,000 1,18,000 2,000 1,18,000

Question 56

A Company manufacturing chemical solution that passes through a number

of processes uses FIFO method to value Work-in-Process and Finished
Goods. At the end of month of September, a fire occurred in the factory and
some papers containing records of the process operations for the month
were destroyed. The Company desires to prepare process accounts for the
month during which the fire occurred. Some information could be gathered
as to operating activities as under:

 Opening Work-in-Process at the beginning of the month of 1,100 litres -

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 40% complete for labour and 60% complete for Overheads. Opening
Work-in-Process was valued at ₹ 48,260.
 Closing Work-in-Process at the end of the month was 220 litres, 40%
complete for Labour and 30% complete for Overheads.
 Normal loss is 10% of input and total losses during the month were
2,200 litres partly due to firm damage. Assume degree of completion of
abnormal losses is 100%.
 Output sent to Finished Goods Warehouse was 5,900 litres.
 Losses have a scrap value of ₹ 20 per litre.
 All Raw Materials are added at the commencement of the process.
 The Cost per equivalent Unit (litre) is ₹ 53 for the month consisting:
₹
Raw Material 35
Labour 8
Overheads 10
Total 53

Requirements:
(i) Calculate the quantity (in litres) of Raw Material input during the month.
(ii) Calculate the quantity (in litres) of Normal Loss and Abnormal loss/Gain
experienced in the month.
(iii) Calculate the values of Raw Materials, Labour and Overheads added to
the process during the month.
(iv) Prepare the Process Account for the month.

Answer

(i) Calculation of Raw Material inputs during the month:

Quantities Process Litres Quantities Process Litres

Entering Leaving
Opening WIP 1,100 Transfer to Finished 5,900
Goods
Raw material input 7,220 Process Losses 2,200
(balancing figure)
Closing WIP 220
8,320 8,320

(a) (ii) Calculation of Normal Loss and Abnormal Loss/Gain

Litres
Total process losses for month 2,200
Normal Loss (10% input) 722
Abnormal Loss (balancing figure) 1,478

(a) (iii) Calculation of values of Raw Material, Labour and Overheads added
to the process:

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 Material Labour Overheads
Cost per equivalent unit ₹ 35 ₹8 ₹ 10
Equivalent units (litre) 6,498 7,026 6,784
Cost of equivalent units ₹ ₹ ₹ 67,840
2,27,430 56,208
Add: Scrap value of normal loss ₹ 14,440 -- --
(722 units × ₹ 20)
Total value added ₹ ₹ ₹ 67,840
2,41,870 56,208

Statement of Equivalent Units (litre):

Input Units Output Units Equival Mater (% Labo (%) Overhe (%)
Details Details ent ial ) ur ads
Product
ion
Openin 1,100 Units
g WIP complet
ed:
- 1,100 -- 660 60 440 40
Openin
g WIP
Units 7,220 - Fresh 4,800 4,800 100 4,800 100 4,800 100
introdu inputs
ced (balanci
ng
figure)
Normal 722 -- -- --
Loss
Abnorm 1,478 1,478 100 1,478 100 1,478 100
al Loss
Closing 220 220 100 88 40 66 30
WIP
8,320 6,498 7,026 6,784

Calculation of Closing WIP:

 Material: 220 × 35 = ₹ 7,700
 Labour: 220 × 40% × 8 = ₹ 704
 Overheads: 220 × 30% × 10 = ₹ 660
 Total: ₹ 9,064

(iv) Process Account

Particulars Litres Amount Particulars Litres Amount (₹)

(₹)
To Opening WIP 1,100 ₹ 48,260 By Finished 5,900 ₹ 3,12,700

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 goods
To Raw Materials 7,220 ₹ 2,41,870 By Normal 722 ₹ 14,440
loss
To Wages -- ₹ 56,208 By Abnormal 1,478 ₹ 78,334
loss
To Overheads -- ₹ 67,840 By Closing 220 ₹ 9,064
WIP
To Other Expenses -- ₹ 360
(balancing figure)
Total 8,320 ₹ 4,14,538 Total 8,320 ₹ 4,14,538

Question 57

A company manufactures one main product (M₁) and two by-products B₁

and B₂. For the month of January 2013, following details are available:
Total Cost up to separation Point Rs. 2,12,400

M₁ B₁ B₂
Cost after separation - Rs. Rs.
35,000 24,000
No. of units produced 4,000 1,800 3,000
Selling price per unit Rs. Rs. 40 Rs. 30
100
Estimated net profit as percentage to - 20% 30%
sales value
Estimated selling expenses as 20% 15% 15%
percentage to sales value

There are no beginning or closing inventories.

Prepare statement showing:
(i) Allocation of joint cost; and
(ii) Product-wise and overall profitability of the company for January 2013.

Answer

(i) Statement showing allocation of Joint Cost

Particulars B₁ B₂
No. of units Produced 1,800 3,000
Selling Price Per unit (Rs.) 40 30
Sales Value (Rs.) 72,000 90,000
Less: Estimated Profit (B₁ -20% & B₂ -30%) (14,400) (27,000)
Cost of Sales 57,600 63,000
Less: Estimated Selling Expenses (B₁ -15% & B₂ - (10,800) (13,500)
15%)
Cost of Production 46,800 49,500

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 Less: Cost after separation (35,000) (24,000)
Joint Cost allocated 11,800 25,500

(ii) Statement of Profitability

Particulars M₁ (Rs.) B₁ B₂
(Rs.) (Rs.)
Sales Value (A) 4,00,000 (4,000 × Rs. 72,000 90,000
100)
Less:- Joint Cost 1,75,100 (2,12,400 - 11,800 25,500
11,800 - 25,500)
- Cost after separation - 35,000 24,000
- Selling Expenses (M₁ - 80,000 10,800 13,500
20%, B₁-15% & B₂-15%)
(B) 2,55,100 57,600 63,000
Profit (A – B) 1,44,900 14,400 27,000

Overall Profit = Rs. 1,44,900 + Rs. 14,400 + Rs. 27,000 = Rs. 1,86,300

Question 58

SV chemicals Limited processes 9,00,000 kgs. of raw material in a month

purchased at ₹ 95 per kg in department X. The input output ratio of
department X is 100 : 90. Processing of the material results in two joint
products being produced ‘P₁’ and ‘P₂’ in the ratio of 60 : 40. Product ‘P₁’ can
be sold at split off stage or can be further processed in department Y and
sold as a new product ‘YP₁’. The input output ratio of department Y is 100 :
95. Department Y is utilized only for further processing of product ‘P₁’ to
product ‘YP₁’. Individual departmental expenses are as follows:

Dept. X (₹ lakhs) Dept. Y (₹ lakhs)

Direct Materials 95.00 14.00
Direct Wages 80.00 27.00
Variable Overheads 100.00 35.00
Fixed Overheads 75.00 52.00
Total 350.00 128.00

Further, selling expenses to be incurred on three products are:

Particulars Amount (₹ in lakhs)

Product ‘P₁’ 28.38
Product ‘P₂’ 25.00

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 Product ‘YP₁’ 19.00

Selling price of the products ‘P₁’ and ‘P₂’ at split off point is ₹ 110 per kg and
₹ 325 per kg respectively. Selling price of new product ‘YP₁’ is ₹ 150 per kg.

You are required to:

(i) PREPARE a statement showing apportionment of joint costs, in the ratio
of value of sales, net of selling expenses.
(ii) PREPARE a Statement showing profitability at split off point.
(iii) PREPARE a Statement of profitability of ‘YP₁’.
(iv) DETERMINE that would you recommend further processing of P₁?

Answer

Working Notes:
Input output ratio of material processed in Department X = 100:90

Particulars Quantity (Kg)

Material input 9,00,000
Less: Loss of material in process @ 10% of 9,00,000 kgs (90,000)
Output 8,10,000

Output of department X is product ‘P₁’ and ‘P₂’ in the ratio of 60 : 40.

Output P₁ = 60×8,10,000/100=4,86,000 kgs.

Output P₂ = 40×8,10,000100=3,24,000 kgs.

Statement showing ratio of net sales

Product P₁ P₂ Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (₹) 110.00 325.00
Sales Value (₹ in lakhs) 534.60 1,053.00 1,587.60
Less: Selling Expenses (₹ in lakhs) (28.38) (25.00) (53.38)
Net Sales (₹ in lakhs) 506.22 1,028.00 1,534.22
Ratio 33% 67% 100.00

Computation of Joint Costs

Particulars Amount (₹ Lakhs)

Raw Material input 9,00,000 kgs @ ₹ 95 per kg 855.00
Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00

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 (i) Statement showing apportionment of joint costs in the ratio of net sales

Particulars Amount (₹ in lakhs)

Joint cost of P₁ – 33% of ₹ 1,205 lakhs 397.65
Joint cost of P₂ – 67% of ₹ 1,205 lakhs 807.35
Total 1,205.00

(ii) Statement showing profitability at split off point

Product P₁ P₂ Total
Net Sales Value (₹ in lakhs) – [A] 506.22 1,028.00 1,534.22
Less: Joint costs (₹ in lakhs) (397.65) (807.35) (1,205.00)
Profit (₹ in lakhs) [A] – [B] 108.57 220.65 329.22

Alternative Presentation

Product P₁ P₂ Total
Sales Value (₹ in lakhs) – [A] 534.60 1,053.00 1,587.60
Less: Joint costs (₹ in lakhs) 397.65 807.35 1,205.00
Selling Expenses 28.38 25.00 53.38
Total Cost [B] 426.03 832.35 1,258.38
Profit (₹ in lakhs) [A] – [B] 108.57 220.65 329.22

(iii) Statement of profitability of product ‘YP₁’

Particulars YP₁
Sales Value (₹ in lakhs) (Refer working note) [A] 629.55
Less: Cost of P₁ 397.65
Cost of Department Y 128.00
Selling Expenses of Product ‘YP₁’ 19.00
Total Costs [B] 544.65
Profit (₹ in lakhs) [A] – [B] 84.90

Working Note:

Computation of product ‘YP₁’

 Quantity of product P₁ input used = 4,86,000 kgs
 Input output ratio of material processed in Department Y = 100 : 95

Particulars Quantity (Kg)

Material input 4,86,000
Less: Loss of material in process @ 5% of 4,86,000 (24,300)
Output 4,61,700
 Sales Value of YP₁ = 4,61,700 kgs @ ₹ 150 per kg = ₹ 692.55 lakhs

(iv) Determination of profitability after further processing of product P₁ into

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 product YP₁

Particulars (₹ in lakhs)
Profit of Product ‘P₁’ {refer (ii) above} 108.57
Profit of Product ‘YP₁’ {refer (iii) above} 84.90
Decrease in profit after further processing 23.67

Based on the above profitability statement, further processing of product P₁

into YP₁ should not be recommended.

Question 59

A factory producing article A also produces a by-product B which is further

processed into finished product. The joint cost of manufacture is given
below:

Material ₹ 5,000
Labour ₹ 3,000
Overhead ₹ 2,000
Total ₹ 10,000

Subsequent cost in ₹ are given below:

A B
Material 3,000 1,500
Labour 1,400 1,000
Overhead 600 500
Total 5,000 3,000

Selling prices are

A ₹ 16,000
B ₹ 8,000
Estimated profit on selling prices is 25% for A and 20% for B.
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 A and B.

Answer

Apportionment of Joint Costs

Particulars A (₹) B (₹)

Selling Price 16,000 8,000
Less: Estimated profit 4,000 1,600
(25% of ₹16,000) (20% of ₹8,000)
Cost of sales 12,000 6,400

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 Less: Selling & Distribution exp. 267 133
(Refer working note) (₹ 400 × 2/3) (₹ 400 × 1/3)
Less: Subsequent cost 5,000 3,000
Share of Joint cost 6,733 3,267

So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 :

3267

Statement showing Cost of Production of A and B

Working Note: Calculation of Selling and Distribution Expenses

Particulars (₹)
Total Sales Revenue (₹ 16,000 + ₹ 8,000) 24,000
Less: Estimated Profit (₹ 4,000 + ₹ 1,600) (5,600)
Cost of Sales 18,400
Less: Cost of production:
- Joint Costs (10,000)
- Subsequent costs (₹ 5,000 + ₹ 3,000) (8,000)
Selling and Distribution expenses (Balancing figure) 400

Question 60

A Ltd. produces 'M' as a main product and gets two by-products - 'P' and 'Q'
in the course of processing.
Following information are available for the month of October, 2017:

M P Q
Cost after separation - ₹ 60,000 ₹ 30,000
No. of units produced 4500 2500 1500
Selling price (per unit) ₹ 170 ₹ 80 ₹ 50
Estimated Net profit to sales - 30% 25%

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 The joint cost of manufacture up to separation point amounts to ₹ 2,50,000.
Selling expenses amounting to ₹ 85,000 are to be apportioned to the three
products in the ratio of sales units.
There is no opening and closing stock.

Prepare the statement showing:

(i) Allocation of joint cost.
(ii) Product wise overall profitability and
(iii) Advise the company regarding results if the by product 'P' is not further
processed and is sold at the point of separation at ₹ 60 per unit without
incurring selling expenses.

Answer

(i) Statement showing allocation of Joint Cost

Particulars P Q
No. of units Produced 2,500 1,500
Selling Price Per unit (₹) 80 50
Sales Value (₹) 2,00,000 75,000
Less: Estimated Profit (P-30% & Q-25%) (60,000) (18,750)
Cost of Sales 1,40,000 56,250
Less: Selling Expenses (Refer Working note-1) (25,000) (15,000)
Cost of Production 1,15,000 41,250
Less: Cost after separation (60,000) (30,000)
Joint Cost allocated 55,000 11,250

(ii) Statement of Profitability

Particulars M (₹) P (₹) Q (₹)

Sales Value (A) 7,65,000 2,00,000 75,000
(4,500 × ₹170)
Less: Joint Cost 1,83,750 55,000 11,250
Less: Cost after separation - 60,000 30,000
Less: Selling Expenses 45,000 25,000 15,000
Net Profit (B) 2,28,750 1,40,000 56,250
Profit (A - B) 5,36,250 60,000 18,750

Overall Profit = ₹ 5,36,250 + ₹ 60,000 + ₹ 18,750 = ₹ 6,15,000

(iii) If the by-product P is not further processed and is sold at the point of
separation

Particulars Amount (₹)

Sales value at the point of separation 1,50,000
(2,500 units × ₹ 60)
Less: Joint cost 55,000

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 Profit 95,000
Profit after further processing 60,000
Incremental Profit 35,000

Conclusion: If the by-product P is sold at the point of separation, it will give an

additional profit of ₹ 35,000 to the company. Hence, the company should sell by-
product P without further processing.

Working Note

1. Apportionment of Selling Expenses among M, P, and Q

Product/By-product Selling Expenses Calculation Amount (₹)

Product M ₹ 85,000 ÷ 17 × 9 45,000
By-product P ₹ 85,000 ÷ 17 × 5 25,000
By-product Q ₹ 85,000 ÷ 17 × 3 15,000

Question 61

A Factory is engaged in the production of chemical Bomex and in the

course of its manufacture a by-product Cromex is produced which after
further processing has a commercial value. For the month of April 2019 the
following are the summarised cost data:

Joint Separate Expenses

Expenses (₹) (₹)
Bomex Cromex
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling Price per unit 100 40
Estimated profit per unit on 5
sale of Cromex
Number of units produced 2,000 2,000

The factory uses net realisable value method for apportionment of joint cost
to by-products.
You are required to prepare statements showing:
(i) Joint cost allocable to Cromex
(ii) Product wise and overall profitability of the factory for April 2019.

Answer

(i) Statement Showing Joint Cost Allocation to ‘Cromex’

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 Particulars Cromex (₹)
Sales (₹ 40 × 2,000 units) 80,000
Less: Post Split Off Costs (4,000+18,000+6,000) (28,000)
Less: Estimated Profit (₹ 5 × 2,000 units) (10,000)
Joint cost allocable 42,000

(ii) Statement Showing Product Wise and Overall Profitability

Particulars Bomex (₹) Cromex (₹) Total (₹)

Sales 2,00,000 80,000 2,80,000
Less: Share in Joint Expenses (1,38,000)* (42,000) (1,80,000)
Less: Post Split Off Costs (36,000) (28,000) (64,000)
Profit 26,000 10,000 36,000

(*) 1,80,000 – 42,000

Question 62

A Factory produces two products, 'A' and 'B' from a single process. The
joint processing costs during a particular month are:

Direct Material ₹30,000

Direct Labour ₹9,600
Variable Overheads ₹12,000
Fixed Overheads ₹32,000
Sales: A - 100 units @ ₹600 per unit; B - 120 units @ ₹200 per unit.

I. Apportion joint costs on the basis of:

(i) Physical Quantity of each product.
(ii) Contribution Margin method, and
II. Determine Profit or Loss under both the methods.

Answer

Total Joint Cost

Amount (₹)
Direct Material 30,000
Direct Labour 9,600
Variable Overheads 12,000
Total Variable Cost 51,600
Fixed Overheads 32,000
Total joint cost 83,600

Apportionment of Joint Costs:

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 Product-A Product-B
I.
(i) Apportionment of Joint Cost on ₹ 38,000 ₹ 45,600
the basis of ‘Physical Quantity’
( ₹ 83,600 / (100 ( ₹ 83,600 / (100
+ 120 units) × + 120 units) ×
100 ) 120 )
(ii) Apportionment of Joint Cost on
the basis of ‘Contribution Margin
Method’:
- Variable Costs (on basis of ₹ 23,455 ₹ 28,145
physical units)
( ₹ 51,600 / (100 ( ₹ 51,600 / (100
+ 120 units) × + 120 units) ×
100 ) 120 )
Contribution Margin 36,545 -4,145
( ₹ 600 × 100 – ( ₹ 200 × 120 –
23,455 ) 28,145 )
Fixed Costs* 32,000
Total apportioned cost ₹ 55,455 ₹ 28,145

II. (iii) Profit or Loss:

When Joint cost apportioned on basis of physical units

Product- Product-
A B
A. Sales Value ₹ 60,000 ₹ 24,000
B. Apportioned joint cost on basis of ‘Physical ₹ 38,000 ₹ 45,600
Quantity’
A-B Profit or (Loss) 22,000 (21,600)

When Joint cost apportioned on basis of ‘Contribution Margin Method’

Product- Product-
A B
C. Apportioned joint cost on basis of ‘Contribution ₹ 55,455 ₹ 28,145
Margin Method’
A-C Profit or (Loss) ₹ 4,545 ₹ (4,145)

Note:
 The fixed cost of ₹ 32,000 is to be apportioned over the joint products A and B
in the ratio of their contribution margin but contribution margin of Product B is
Negative so fixed cost will be charged to Product A only.

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 Question 63

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'.

Answer

Comprehensive Cost Statement

Particulars Total Cost Product-M Product-N

(₹) (₹) (₹)
No. of units produced 5,400 units 810 units
Cost of raw material (₹ 80 × 5,40,000
6,750 units)
Processing cost:
- Labour cost (₹ 2,25,000 × 1,48,500
66%)
- Other costs (₹ 2,25,000 - 76,500
1,48,500)
Total joint cost 7,65,000

(i) Apportionment of Joint Costs Between the Joint Products

Labour Cost in the Ratio of 100:80

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 Particulars Product-M (₹) Product-N (₹)
Labour cost (1,48,500 × 100 / 180) 82,500
Labour cost (1,48,500 × 80 / 180) 66,000

Other Joint Costs (Including Material) in the Ratio of Output (5,400:810)

Particulars Product-M (₹) Product-N (₹)

Other costs (6,16,500 × 5,400 / 6,210) 5,36,087
Other costs (6,16,500 × 810 / 6,210) 80,413

(ii) Total Product Cost

Particulars Product-M (₹) Product-N (₹)

Total joint cost 6,18,587 1,46,413

Notes:
1. No. of units produced of Product M: 6,750 units × 80% = 5,400 units
2. No. of units produced of Product N: 6,750 units × 12% = 810 units

Question 64
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
Manufacturing Overhead ₹ 48,000 ₹ 2,10,000 ₹ 4,50,000

Products
X Y Z

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 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 joint costs.
You are required to prepare:
(i) Schedule showing the allocation of joint costs.
(ii) Calculate the Cost of goods sold of each product and the cost of each
item in Inventory.
(iii) A comparative statement of Gross profit.
Answer
(i) Statement of Joint Cost Allocation of Inventories of X, Y, and Z
Products X (₹) Y (₹) Z (₹) Total (₹)
Final sales value 4,50,000 9,60,000 15,00,000 29,10,000
of total (15,000 x (15,000 x (30,000 x ₹
production ₹ 30) ₹ 64) 50)
(Working Note
1)
Less: -- 6,60,000 11,00,000 17,60,000
Additional cost
Net Realisable 4,50,000 3,00,000 4,00,000 11,50,000
Value
Joint cost 2,34,000 1,56,000 2,08,000 5,98,000
allocated

(ii) Calculation of Cost of Goods Sold and Closing Inventory

Products X (₹) Y (₹) Z (₹) Total (₹)
Allocated joint 2,34,000 1,56,000 2,08,000 5,98,000
cost

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 Add: Additional -- 6,60,000 11,00,000 17,60,000
costs
Cost of 2,34,000 8,16,000 13,08,000 23,58,000
Goods Sold
(COGS)
Less: Cost of 78,000 -- 3,27,000 4,05,000
closing (COGS x (COGS x
inventory 100/3%) 25%)
Cost of 1,56,000 8,16,000 9,81,000 19,53,000
Goods Sold

(iii) Comparative Statement of Gross Profit

Products X (₹) Y (₹) Z (₹) Total (₹)
Sales 3,00,000 9,60,000 11,25,000 23,85,000
revenue (10,000 x ₹ (15,000 x ₹ (22,500 x ₹
30) 64) 50)
Less: Cost 1,56,000 8,16,000 9,81,000 19,53,000
of goods
sold
Gross Profit 1,44,000 1,44,000 1,44,000 4,32,000

Working Notes
1. Total Production of Three Products for the Year 2019-2020
Products Quantity Quantity of Total Closing
Sold in Closing Production Inventory
Litres Inventory (4) = (2) + (3) Percentage
in Litres (%) = (3)/(4)
X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
Z 22,500 7,500 30,000 25
2. Joint Cost Apportioned to Each Product
Joint cost apportioned = Total Joint Cost / Total Net Realisable Value x Net
Realisable Value of Each Product

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  Joint Cost of Product X
5,98,000 / 11,50,000 x 4,50,000 = 2,34,000
 Joint Cost of Product Y
5,98,000 / 11,50,000 x 3,00,000 = 1,56,000
 Joint Cost of Product Z
5,98,000 / 11,50,000 x 4,00,000 = 2,08,000
Question 65
OPR Ltd. purchases crude vegetable oil. It does refining of the same. The
refining process results in four products at the split-off point - S, P, N, and
A. Product ‘A’ is fully processed at the split-off point. Product S, P, and N
can be individually further refined into SK, PM, and NL respectively. The
joint cost of purchasing the crude vegetable oil and processing it were ₹
40,000. Other details are as follows:
Product Further Sales at split- Sales after further
processing costs off point (₹) processing (₹)
(₹)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 -

You are required to identify the products which can be further processed for
maximizing profits and make suitable suggestions.
Answer
Statement of Comparison of Profits before and after further processing
S (₹) P (₹) N (₹) A (₹) Total (₹)
A. Sales at split 20,000 12,000 28,000 20,000 80,000
off point
B. Apportioned 10,000 6,000 14,000 10,000 40,000
Joint Costs (Refer
Working Note)
C. Profit at split- 10,000 6,000 14,000 10,000 40,000
off point

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 D. Sales after 1,20,000 40,000 48,000 - 2,08,000
further processing
E. Further 80,000 32,000 36,000 - 1,48,000
processing cost
F. Apportioned 10,000 6,000 14,000 - -
Joint Costs (Refer
Working Note)
G. Profit if further 30,000 2,000 (-) - -
processing (D – E 2,000
+ F)
H. Increase/ 20,000 -4,000 - - -
decrease in profit 16,000
after further
processing (G –
C)

Suggested Product to be further processed for maximising profits:

On comparing the figures of "Profit if no further processing" and "Profits if further
processing," one observes that OPR Ltd. is earning more after further processing
of Product S only i.e., ₹ 20,000. Hence, for maximizing profits, only Product S
should be further processed, and Product P, N, and A should be sold at split-off
point.

Working Note
Apportionment of joint costs on the basis of Sales Value at split-off point:
Apportioned joint cost =
(Total joint cost ÷ Total Sales value at split-off point) × Sales value of each
product

Where:
Total Joint cost = ₹ 40,000
Total sales at split off point (S, P, N, and A) = 20,000 + 12,000 + 28,000 + 20,000
= ₹ 80,000
 Share of S in joint cost = ₹ 40,000 ÷ ₹ 80,000 × ₹ 20,000 = ₹ 10,000
 Share of P in joint cost = ₹ 40,000 ÷ ₹ 80,000 × ₹ 12,000 = ₹ 6,000

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  Share of N in joint cost = ₹ 40,000 ÷ ₹ 80,000 × ₹ 28,000 = ₹ 14,000
 Share of A in joint cost = ₹ 40,000 ÷ ₹ 80,000 × ₹ 20,000 = ₹ 10,000

Alternative Solution
Decision for further processing of Product S, P, and N
Products S (₹) P (₹) N (₹)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point 20,000 12,000 28,000
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost 80,000 32,000 36,000
Profit/ loss arising due to further 20,000 (-) (-)
processing 4,000 16,000

Suggested Product to be further processed for maximising profits:

On comparing the figures of "Profit if no further processing" and "Profits if further
processing," one observes that OPR Ltd. is earning more after further processing
of Product S only i.e., ₹ 20,000. Hence, for maximizing profits, only Product S
should be further processed, and Product P, N, and A should be sold at split-off
point.

Question 66
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
40:40:20 in process
R. The output of each process is transferred to the 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'.

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 Material price: Material J @ ₹15 per kg; Material K @ ₹9 per 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
'X' and by-product 'Z'.
Answer
Working Notes:
1. Calculation of Input of Raw Material
Let assume total raw material in Process R be 100%
∴ Output of Process T will be equal to:

Input R 100%

- 10% Normal Loss ₹ 10

Input S ₹ 90%

- 10% Normal loss ₹9

Input T 81%

- 10% Normal loss ₹ 8.1

Output of T 72.9%

Actual output of X = 14,580 units

Which is 80% of the total output
∴ Output of Process T:
14580 / 80% = 18,225

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 ∴ Input of Process R:
18225 / 72.9% = 25,000 kgs

Alternative presentation for Calculation of Input in Process R, S, and T

Working Notes:

Process T (Kg.)
To Input (Transfer from 20,250 By Normal loss 2,025
process S)
By Output Product X 14,580
By output of by- 3,645
product Z
20,250 20,250
Process S (Kg.)
To Input (Transfer from 22,500 By Normal loss 2,250
process R) (10%)
By Transfer to 20,250
process T
22,500 22,500
Process R (Kg.)
To Input 25,000 By Normal loss (10%) 2,500
By Transfer to process S 22,500
25,000 25,000

2. Calculation of Joint Cost

Process Inputs Variable Variable Fixed Total
cost per cost (₹) Cost (₹) Cost (₹)
kg
R 25,000 5 1,25,000 42,000 1,67,000
S 22,500 4.5 1,01,250 5,000 1,06,250

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 T 20,250 3.4 68,850 4,800 73,650
Total 2,75,000 51,800 3,46,900
Raw Material Cost
Material Calculation Cost (₹)
J 10,000 x 15 1,50,000
K 10,000 x 9 90,000
L 5,000 x 7 35,000
Total 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 By-Product Total
X Z
Units 14,580 3,645
Selling price (₹) 60 30
Sales Value (₹) 8,74,800 1,09,350 9,84,150
Apportioned Joint Cost (₹ 5,52,800 69,100 6,21,900
6,21,900)

(ii) Statement of Profitability

Particulars Product X By-Product Z Total
Sales Value 8,74,800 1,09,350 9,84,150
Joint Cost (Apportioned) (5,52,800) (69,100) (6,21,900)
Profit 3,22,000 40,250 3,62,250

Question 67
X Y Z Limited is drawing a production plan for its two products—Product
‘xml’ and Product ‘yml’ for the year 2015-16. The company’s policy is to

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 maintain closing stock of finished goods at 25% of the anticipated volume of
sales of the succeeding month.
The following are the estimated data for the two products:
xml yml
Budgeted Production (in units) 2,00,000 1,50,000
Direct Material (per unit) ₹ 220 ₹ 280
Direct Labour (per unit) ₹ 130 ₹ 120
Direct Manufacturing Expenses ₹ 4,00,000 ₹ 5,00,000
The estimated units to be sold in the first four months of the year 2015-16
are as under:
April May June July
xml 8,000 10,000 12,000 16,000
yml 6,000 8,000 9,000 14,000
Prepare:
(i) Production Budget (Month wise)
(ii) Production cost Budget (for first quarter of the year)

Answer
(i) Production Budget of Product ‘xml’ and ‘yml’ (monthwise in units)

Particulars April May June Total

xml yml xml yml xml yml xml yml
Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000
Add: Closing 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
Stock
(25% of next
month’s sale)
Less: 2,000* 1,500* 2,500 2,000 3,000 2,250 7,500 5,750
Opening
Stock
Production 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000
Units

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 Opening stock of April is the closing stock of March, which is as per company’s
policy 25% of next month’s sale.
(ii) Production Cost Budget (for first quarter of the year)
Elements Rate (₹) Amount (₹) Amount (₹)
Direct Material 220 70,40,000
280 70,00,000
Direct Labour 130 41,60,000
120 30,00,000
Manufacturing Overhead 64,000
(₹ 4,00,000 ÷ 2,00,000 × 32,000)
(₹ 5,00,000 ÷ 1,50,000 × 25,000) 83,333
Total 1,12,64,000 1,00,83,333

Question 68
XY Co. Ltd. manufactures two products, viz. X and Y and sells them through
two divisions, East and West. For the purpose of Sales Budget to the
Budget Committee, following information has been made available for the
year 2014–2015:
Product Budgeted Actual
East West East West
Division Division Division Division
X 400 units at 600 units at 500 units at 700 units at
₹9 ₹9 ₹9 ₹9
Y 300 units at 500 units at 200 units at 400 units at
₹ 21 ₹ 21 ₹ 21 ₹ 21

Adequate market studies reveal that Product X is popular but under priced.
It is expected that if the Price of X is increased by ₹ 1, it will find a ready
market. On the other hand, Y is overpriced and if the Price of Y is reduced
by ₹ 1, it will have more demand in the market. The Company Management
has agreed for the aforesaid price changes. On the basis of these price

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 changes and the reports of salesmen, following estimates have been
prepared by the Divisional Managers:
Percentage Increase in Sales over Budgeted Sales
Product East Division West Division
X + 10% +5%
Y + 20% + 10%

With the help of intensive Advertisement Campaign, following additional

sales (over and above the above mentioned estimated sales by Divisional
Managers) are possible:
Product East Division West Division
X 60 units 70 units
Y 40 units 50 units

You are required to prepare Sales Budget for 2015–2016 after incorporating
above estimates and also show the Budgeted Sales and Actual Sales of
2014–2015.

Answer
1. Sales Budget for Year 2015-2016
Particulars East West Total
Division Division
Product X
Budgeted Quantity of 2015– 500 700 1,200
2016 (Note -1)
Price for 2015–2016 (9+1) ₹ 10 ₹ 10
Budgeted Sales Value for ₹ 5,000 ₹ 7,000 ₹
2015–2016 12,000
Product Y
Budgeted Quantity of 2015– 400 600 1,000
2016 (Note -2)

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 Price for 2015–2016 (21–1) ₹ 20 ₹ 20
Budgeted Sales Value for ₹ 8,000 ₹ 12,000 ₹
2015–2016 20,000

Note: 1 Budgeted Sales Quantity (X)

East West
Budgeted Quantity of 2014-2015 400 600
Add: Increase due to price change (10% & 5%) 40 30
Add: Increase due to Advertisement 60 70
Total 500 700

Note: 2 Budgeted Sales Quantity (Y)

East West
Budgeted Quantity of 2014-2015 300 500
Add: Increase due to price change (20% & 10%) 60 50
Add: Increase due to Advertisement 40 50
Total 400 600

Question 69
You are given the following data of a manufacturing concern:
Variable Expenses (at 50% capacity): ₹
Materials 48,00,000

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 Labour 51,20,000
Others 7,60,000
Semi-variable expenses (at 50% capacity): ₹
Maintenance and Repairs 5,00,000
Indirect Labour 19,80,000
Sales Dept. Salaries 5,80,000
Sundry Administrative Expenses 5,20,000
Fixed Expenses: ₹
Wages & Salaries 16,80,000
Rent, Rates and Taxes 11,20,000
Depreciation 14,00,000
Sundry Administrative Exp. 17,80,000

The fixed expenses remain constant for all levels of production. Semi-
variable expenses remain constant between 45% and 65% of capacity,
whereas it increases by 10% between 65% and 80% capacity and by 20%
between 80% and 100% capacity.
Sales at various levels are as under:
Capacity Sales (₹)
75% 2,40,00,000
100% 3,20,00,000

Prepare a flexible budget at 75% and 100% capacity.

Answer

Preparation of Flexible Budget

50% (₹) 75% (₹) 100% (₹)

A. Sales Given 2,40,00,000 3,20,00,000

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 B. Costs:
(i) Variable Expenses:
Materials 48,00,000 72,00,000 96,00,000
Labour 51,20,000 76,80,000 1,02,40,000
Others 7,60,000 11,40,000 15,20,000
1,06,80,000 1,60,20,000 2,13,60,000
(ii) Semi-Variable
Expenses:
Maintenance and Repairs 5,00,000 5,50,000 6,00,000
Indirect Labours 19,80,000 21,78,000 23,76,000
Sales Dept. salaries 5,80,000 6,38,000 6,96,000
Sundry Administrative 5,20,000 5,72,000 6,24,000
Expenses
35,80,000 39,38,000 42,96,000
(iii) Fixed Expenses:
Wages & Salaries 16,80,000 16,80,000 16,80,000
Rent, Rates and Taxes 11,20,000 11,20,000 11,20,000
Depreciation 14,00,000 14,00,000 14,00,000
Sundry Administrative 17,80,000 17,80,000 17,80,000
Expenses
59,80,000 59,80,000 59,80,000
Total Cost {(i) + (ii) + (iii)} 2,02,40,000 2,59,38,000 3,16,36,000
C. Profit/ (Loss) {(A) – (B)} (19,38,000) 3,64,000

Note: At 75% and 100% capacity level, the semi-variable costs increased by 10%
and 20% respectively.

Question 70
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

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 made estimates for the year ended 31st March, 2018 (the budget period) as
under:

Products
A B
Sales in Units 36,000 16,700
Finished Goods Stock Increase by year-end (in 860 400
Units)
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:
(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".

Answer
(i) (A) Production Budget (in units) for the year ended 31st March 2018
Product A Product B
Budgeted sales (units) 36,000 16,700
Add: Increase in closing stock 860 400

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 No. of good units to be produced 36,860 17,100
Post production rejection rate 3% 5%
No. of units to be produced 38,000 18,000
(36,860 ÷ 0.97) (17,100 ÷ 0.95)

(B) Purchase budget (in kgs and value) for Material C

Product A Product B
No. of units to be produced 38,000 18,000
Usage of Material C per unit 4 kg 5 kg
Material needed for production 1,52,000 kg 90,000 kg

Materials to be purchased
1,60,000 kg 93,750 kg
(1,52,000 ÷ 0.95) (90,000 ÷ 0.96)

Total quantity to be purchased: 2,53,750 kg

Rate per kg of Material C: ₹45
Total purchase price: ₹1,14,18,750

(ii) Calculation of Economic Order Quantity for Material C

EOQ = √(2 × 2,53,750 × ₹250 ÷ 45 × 9%)
EOQ = √(12,68,75,000 ÷ 4.05)
EOQ = 5,597 kg (Approx.)

Question 71
An electronic gadget manufacturer has prepared sales budget for the next
few months. In this respect, following figures are available:
Months Electronic gadgets' sales
January 5000 units
February 6000 units

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 March 7000 units
April 7500 units
May 8000 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.
3250 units of batteries and 1200 units of manufactured gadgets were in
stock on 1st January.
Required:
1. (i) Prepare production budget (in units) for the month of January,
February, March, and April.
2. (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.

Answer
(i) Preparation of Production Budget (in Units)
January February March April May
Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing 1,500 1,750 1,875 2,000
stock (25% of
next month’s
sales)
Less: Opening (1,200) (1,500) (1,750) (1,875)
Stock
Production of 5,300 6,250 7,125 7,625
electronic
Gadgets

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 (ii) Preparation of Purchase Budget
Consumption/production January February March April
of Batteries (@ 2 per
Gadget)
Production of Batteries 10,600 12,500 14,250 15,250
Add: Closing Stock (30% 3,750 4,275 4,575
of next month’s
production)
Less: Opening Stock 3,250 3,750 4,275
Purchase of Batteries 11,100 13,025 14,550

Statement Showing Profit

Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per ₹. 2,000 ₹. 2,000 ₹. 2,000 ₹. 2,000
unit*
Less: Discount 300 300 300 300
@15% of selling
price
Less: Standard 1,500 1,500 1,500 1,500
cost of
Manufacturing per
gadget Cost
Profit (B) (selling 200 200 200 200
Price-discount-
cost)
Total Profit (A × B) ₹. ₹. ₹. ₹.
10,00,000 12,00,000 14,00,000 36,00,000

Question 72
PSV Ltd. manufactures and sells a single product and estimated the
following related information for the period November, 2020 to March, 2021.
Particulars Nov. Dec. Jan. Feb. March
20 20 21 21 21

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 Opening Stock of 7,500 3,000 9,000 8,000 6,000
Finished Goods
(in Units)
Sales (in Units) 30,000 35,000 38,000 25,000 40,000
Selling Price per 10 12 15 15 20
unit (in ₹)
Additional Information:
 Closing stock of finished goods at the end of March, 2021 is 10,000
units.
 Each unit of finished output requires 2 kg of Raw Material ‘A’ and 3 kg of
Raw Material ‘B’.

You are required to prepare the following budgets for the period November,
2020 to March, 2021 on monthly basis:
1. Sales Budget (in ₹)
2. Production budget (in units) and
3. Raw material Budget for Raw material ‘A’ and ‘B’ separately (in units)

Answer
(i) Sales Budget :
Particulars Nov. 20 Dec. 20 Jan. 21 Feb. 21 Mar. 21
Sales (in 30,000 35,000 38,000 25,000 40,000
units)
Selling Price 10 12 15 15 20
(₹ p.u.)
Total Sales 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000
(₹)

(ii) Production Budget (in units) :

Particulars Nov. Dec. Jan. Feb. Mar.
20 20 21 21 21
Sales (units) 30,000 35,000 38,000 25,000 40,000

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 Add : Closing 3,000 9,000 8,000 6,000 10,000
stock of FG
Less : Opening (7,500) (3,000) (9,000) (8,000) (6,000)
stock of FG
∴ Production 25,500 41,000 37,000 23,000 44,000
(units)

(iii) Raw Material Consumption Budget (in units) :

Particulars Nov. Dec. 20 Jan. 21 Feb. Mar. 21
20 21
(a) Production 25,500 41,000 37,000 23,000 44,000
of FG (units)
(b) 51,000 82,000 74,000 46,000 88,000
Consumption of
RM 'A' (kg.)
[ (a) x 2 kg. ]
(c) 76,500 1,23,000 1,11,000 69,000 1,32,000
Consumption of
RM 'B' (kg.)
[ (a) x 3 kg. ]

Question 73
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
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 19 10

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 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 an increase in
expenditure on variable overhead and fixed overhead by 20% and 5%
respectively for both the products.
You are required to prepare a flexible budget for both the products:
1. Before promotion on social media.
2. After promotion on social media.

Answer
(i) Flexible Budget (before promotion):
Particulars Product Product Total
'AYE' 'ZYE'
Production & Sales 4,000 3,000
(units)
Amount (₹) Amount (₹) Amount
(₹)
A. Sales Value 8,00,000 5,40,000 13,40,000
(₹ 200 x (₹ 180 x
4,000) 3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(₹ 80 x 4,000) (₹ 70 x 3,000)
C. Direct Labour 1,60,000 1,05,000 2,65,000
(₹ 40 x 4,000) (₹ 35 x 3,000)
D. Variable Overheads 80,000 75,000 1,55,000
(₹ 20 x 4,000) (₹ 25 x 3,000)
E. Total Variable Cost 5,60,000 3,90,000 9,50,000
(B + C + D)
F. Contribution (A - E) 2,40,000 1,50,000 3,90,000

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 G. Fixed Overheads 40,000 30,000 70,000
(₹ 10 x 4,000) (₹ 10 x 3,000)
H. Profit (F - G) 2,00,000 1,20,000 3,20,000
I. Profit per unit (H / 50 40
Qty.)

(ii) Flexible Budget (after promotion):

Particulars Product 'AYE' Product Total
'ZYE'
Production & Sales (after 5%
(units) increase)
4,200 3,150
Amount (₹) Amount (₹) Amount
(₹)
A. Sales Value 9,24,000 6,23,700 15,47,700
(₹ 220 x 4,200) (₹ 198 x
3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(₹ 80 x 4,200) (₹ 70 x 3,150)
C. Direct Labour 1,68,000 1,10,250 2,78,250
(₹ 40 x 4,200) (₹ 35 x 3,150)
D. Variable 1,00,800 94,500 1,95,300
Overheads
(after 20% price
rise)
(₹ 24 x 4,200) (₹ 30 x 3,150)
E. Total Variable 6,04,800 4,25,250 10,30,050
Cost
(B + C + D)
F. Contribution (A - 3,19,200 1,98,450 5,17,650
E)

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 G. Fixed Overheads 42,000 31,500 73,500
(after 5%
increase)
(40,000 x 105%) (30,000 x
105%)
H. Profit (F - G) 2,77,200 1,66,950 4,44,150
I. Profit per unit (H / 66 53
Qty.)

Question 74
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.
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.

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  The estimated selling price will be same as above.
Required:
I. Calculate the number of shirts and shorts to be produced per month in the
first quarter of financial year 2022-2023 to maximize company's profit.
II. Prepare the following budgets on a monthly basis for July, August and
September 2022:
(i) Sales budget showing sales units and sales revenue for each product.
(ii) Production budget (in units) for each product.

Answer
I. Calculation of number of shirts & shorts to be produced per month:
Contribution per labour hour:
Shirts (₹) Shorts (₹)
A Sales Price per unit 60 44
B Variable Cost:
- Raw materials 30 16
- Direct labour 8 4
C Contribution per unit [A-B] 22 24
D Labour hour per unit 1 hour 0.5 hour
E Contribution per labour hour [C÷D] 22 48

Production plan for the first three months:

Since Shorts has the higher Contribution per labour hour, it will be made first.
Shirts will be 25% of Shorts. The quantity will be determined as below:
Let the Quantity of Shorts be X and Shirts will be 0.25X, then
(Qty. of Shorts × labour hour per unit) + (Qty. of Shirts × labour hour per unit) =
Total labour hours available
Or, (X × 0.5 hour) + (0.25X × 1 hour) = 12,000 hours
Or, 0.5X + 0.25X = 12,000
Or, 0.75X = 12,000
Or, X = 12,000 ÷ 0.75

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 = 16,000 units of Shorts
Therefore, for Shirts = 25% of 16,000 units
= 4,000 units
Production per month for the first quarter will be:
Shorts- 16,000 units & Shirts- 4,000 units

Question 75
A Limited has furnished the following information for the months from 1ˢᵗ
January to 30ᵗʰ April, 2023 :
Particulars January February March April
Number of Working days 25 24 26 25
Production (in units) per 50 55 60 52
working day
Raw Material Purchases 21% 26% 30% 23%
(% by weights to total of 4
months)

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 Purchase price of raw ₹ 10 ₹ 12 ₹ 13 ₹ 11
material
(per kg.)
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 materials (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.

Answer
Working Notes:
1. Calculation of Consumption & Purchase of Raw Material:
Particulars January February March April Total
(a) Number of Working days 25 24 26 25
(b) Production (in units) per 50 55 60 52
working day
(c) Total production [a x b] 1,250 1,320 1,560 1,300 5,430
(d) Consumption (kgs) [c x 4] 5,000 5,280 6,240 5,200 21,720
(e) Closing stock (kgs) 5,100
30.04.23
(f) Opening stock (kgs) 6,020
01.01.23
(g) Purchases (kgs) [d + e - f] 4,368 5,408 6,240 4,784 20,800
[shared in the ratio of
weights]
(21%) (26%) (30%) (23%) (100%)
(h) Purchase price of raw ₹ 10 ₹ 12 ₹ 13 ₹ 11
material (per kg.)
(i) Purchase value (₹) [g x h] 43,680 64,896 81,120 52,624 2,42,320

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Question 76
SJ Ltd. has furnished the following information:
Standard overhead absorption rate per unit ₹ 20
Standard rate per hour ₹4
Budgeted production 12,000 units
Actual production 15,560 units

Actual overheads were ₹ 2,95,000 out of which ₹ 62,500 fixed.

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 Actual hours 74,000
Overheads are based on the following flexible budget:
Production (units) 8,000 10,000 14,000
Total Overheads (₹) 1,80,000 2,10,000 2,70,000

You are required to calculate the following overhead variances (on hour's
basis) with appropriate workings:
(i) Variable overhead efficiency and expenditure variance
(ii) Fixed overhead efficiency and capacity variance.
Answer
Workings:
(a) Variable overhead rate per unit
= Difference in total overheads at two levels / Difference in output at two levels
= (2,70,000 – 2,10,000) / (14,000 – 10,000)
= 60,000 / 4,000 = Rs. 15 per unit
(b) Fixed overhead
= 2,70,000 – (14,000 × 15) = Rs. 60,000
(c) Standard Fixed Overhead Rate per hour
=4–3=1
(d) Standard Hour Per unit
= Standard hours rate per unit / Standard overhead rate per hour
= 20 / 4 = 5 hours
(e) Actual variable overhead
= 2,95,000 – 62,500 = 2,32,000
(f) Actual variable Overhead Per hour
= 2,32,500 / 74,000 = 3,14,19
(g) Budgeted hours
= 15,000 × 5 = 75,000 hours
(h) Standard variable overhead rate per hours
= Variable overhead / budgeted hours
= 15,000 × 15 / 75,000 = Rs. 3.00 per hours
(i) Standard Hours for Actual Production
= 15,560 × 5 = 77,800 hours

(i) Variable Overhead efficiency and expenditure variance:

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 Variable overhead efficiency variance
= Standard Rate per hour (Std Hour – Actual Hour)
= 3 (77,800 – 74,000) = 11,400 (F)
Variable overhead expenditure variance
= Actual Hours (Std Rate per Hour – Actual Rate per Hour)
= 74,000 (3 – 3.1419) = 10,500 (A)

(ii) Fixed Overhead efficiency and Expenditure variance:

Fixed Overhead efficiency variance
= Std Rate per hour (Std Hours – Actual Hours)
= 1 (77,800 – 74,000) = 3,800 (F)
Fixed Overheads Capacity variance
= Std Rate per Hour (Actual Hours – Budgeted Hours)
= 1 (74,000 – 75,000)
= 74,000 – 75,000 = 1,000 (A)
Standard Fixed overhead rate per hour
= Fixed overheads / budgeted hours
= 60,000 / 75,000 = Rs. 0.80 per hour

(iii) Fixed Overhead efficiency and capacity variance

Fixed overhead efficiency variance
= Std Rate per hour (Std hours – Actual hours)
= Rs. 0.80 (15,560 × 5 – 74,000)
= Rs. 3,040 (F)
Fixed Overhead capacity variance
= Std Rate per hour (Actual hours – Budgeted hours)
= Rs. 0.80 (74,000 – 15,000 × 5)
= Rs. 800 (A)

Question 77
The following information has been provided by a company:
Number of units produced and sold 6,000
Standard labour rate per hour ₹8
Standard hours required for 6,000 units -

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 Actual hours required 17,094 hours
Labour efficiency 105.3%
Labour rate variance ₹ 68,376 (A)

You are required to calculate:

(i) Actual labour rate per hour
(ii) Standard hours required for 6,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit

Answer
SR – Standard labour Rate per Hour
AR – Actual labour rate per hour
SH – Standard Hours
AH – Actual hours
(i) Actual labour rate per hour:
Labour rate Variance = AH (SR – AR)
= 17,094 (₹8 – AR) = 68,376 (A) = - 68,376
= ₹8 – AR = - 4
Or, AR = ₹12
(ii) Standard hour required for 6,000 units:
Labour Efficiency = SH / AH × 100 = 105.3
= SH = AH × 105.3 / 100 = 17,094 hours × 105.3 / 100
= 17,999.982 or, SH = 18,000 hours
(iii) Labour Efficiency Variance = SR (SH – AH)
= ₹8 (18,000 – 17,094)
= 8 × 906 = ₹7,248 (F)
(iv) Standard Labour Cost per Unit =
18,000 hours × ₹8 / 6,000 units = ₹24
(v) Actual Labour Cost per Unit =
17,094 hours × ₹12 / 6,000 units = ₹34.19

Question 78
The following information is available from the cost records of a Company
for the month of July 2016:

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 Materials Purchased: 22,000 pieces ₹ 90,000
Materials Consumed: 21,000 pieces
Actual Wages paid for 5,150 hours ₹ 25,750
Fixed Factory Overheads Incurred ₹ 46,000
Fixed Factory Overheads Budgeted ₹ 42,000

Units Produced: 1,900 units

Standard Rates and Prices are:
 Direct Material: ₹ 4.50 per piece.
 Standard Input: 10 pieces per unit
 Direct Labour Rate: ₹ 6 per hour.
 Standard Requirement: 2.5 hours per unit
 Overheads: ₹ 8 per Labour Hour.
You are required to calculate the following variances:
(a) Material Price Variance
(b) Material Usage Variance
(c) Labour Rate Variance
(d) Labour Efficiency Variance
(e) Fixed Overhead Expenditure Variance
(f) Fixed Overhead Efficiency Variance
(g) Fixed Overhead Capacity Variance

Answer
(i) Material price variance (on the basis of Single plan):
= Actual Quantity Purchased × (Std. Price – Actual Price)
= 22,000 pcs
= (Rs. 45 – Rs. 9,00,000 / 22,000 pcs) = Rs. 90,000 (Favourable)
OR
Material price variance (on the basis of Partial plan):
= Actual Quantity Consumed × (Std. Price – Actual Price)
= 21,000 pcs
= (Rs. 45 – Rs. 9,00,000 / 21,000 pcs) = Rs. 85,909 (Favourable)
(Figure may slightly differ due to rounding off the actual price per unit)

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 (ii) Material usage variance:
= Std. Price per piece × (Std. Quantity – Actual Quantity Consumed)
= Rs. 45 × (1,900 units × 10 – 21,000)
= Rs. 90,000 (Adverse)

(iii) Labour rate variance:

= Actual Hours Paid × (Std. Rate – Actual Rate)
= 5,150 hours × (Rs. 60 – Rs. 2,57,500 / 5,150 hours)
= Rs. 51,500 (Favourable)

(iv) Labour efficiency variance:

= Std. Rate per Hour × (Std. Hours – Actual Quantity Worked)
= Rs. 60 × (1,900 units × 2.5 hours – 5,150 hours)
= Rs. 24,000 (Adverse)

(v) Fixed overhead expenditure variance:

= Budgeted Overhead – Actual Overhead
= Rs. 4,20,000 – Rs. 4,60,000
= Rs. 40,000 (Adverse)

(vi) Fixed overhead efficiency variance:

= Std. Rate × (Std. Hours – Actual Hours Worked)
= Rs. 80 × (1,900 units × 2.5 hours – 5,150 hours)
= Rs. 32,000 (Adverse)
OR
Fixed overhead efficiency variance on basis of units:
= Std. Rate per Unit × (Actual Output – Standard Output for Actual Hours)
= Rs. 200 × (1,900 units – 5,150 / 2.5 hours)
= Rs. 32,000 (Adverse)

(vii) Fixed overhead capacity variance:

= Std. Rate × (Actual Hours Worked – Budgeted Hours)
= Rs. 80 × (5,150 hours – 4,20,000 / 80)
= Rs. 8,000 (Adverse)
OR
Fixed overhead capacity variance on basis of units:
= Std. Rate per Unit × (Standard Output for Actual Hours – Budgeted Output)

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 = Rs. 200 × (2,060 units – 4,20,000 / 200)
= Rs. 8,000 (Adverse)

Question 79
ZX Ltd. has furnished the following information:
Budgeted Actual March 2020
Number of working days 25 27
20,000 22,000
Production (in units)
Fixed Overheads ₹ 3,00,000 ₹ 3,10,000

Budgeted fixed overhead rate is ₹ 10.00 per hour. In March 2020, the actual
hours worked were 31,500. In relation to fixed overheads, CALCULATE:
(i) Efficiency Variance
(ii) Capacity Variance
(iii) Calendar Variance
(iv) Volume Variance
(v) Expenditure Variance
Answer
Working:
(1) Budgeted Hours = Rs. 3,00,000 / Rs. 10 per hour = 30,000 hours
(2) Standard Fixed Overhead rate per hour (Standard Rate);
Budgeted fixed overheads / Budgeted Hours = Rs. 3,00,000 / 30,000 hours =
₹10.00
(3) Standard hour per unit of output = 30,000 hours / 20,000 units = 1.5 hours
(4) Standard hours for Actual Output = 22,000 units × 1.5 hours = 33,000 Hours
(5) Budgeted Overhead per day for budgeted days = ₹3,00,000 / 25 days =
₹12,000
(6) Budgeted Overhead for actual days worked = ₹12,000 × 27 days = ₹3,24,000
(7) Budgeted Hours for Actual days worked = 30,000 hours / 25 days × 27 days
= 32,400 hours
Computation of Variances in relation to Fixed Overheads:

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 (i) Efficiency Variance
= Standard Rate × (Standard hours for actual output – Actual hours worked)
= ₹10 (33,000 hours – 31,500 hours) = ₹15,000 (Favourable)
(ii) Capacity Variance
= Standard Rate × (Actual Hours – Budgeted Hours for actual days worked)
= ₹10 (31,500 hours – 32,400 hours) = ₹9,000 (Adverse)
(iii) Calendar Variance
= Standard/Budgeted Fixed Overhead Rate per day × (Actual Working days –
Budgeted working days)
= ₹12,000 (27 days – 25 days) = ₹24,000 (Favourable)
(iv) Volume Variance
= Standard Rate × (Standard hours – Budgeted hours)
= ₹10 (33,000 hours – 30,000 hours) = ₹30,000 (Favourable)
(v) Expenditure Variance
= Budgeted Overheads – Actual Overheads
= ₹3,00,000 – ₹3,10,000 = ₹10,000 (Adverse)
Note: Overhead Variances may also be calculated based on output.

Question 80
XYZ Limited produces an article and uses a mixture of material X and Y. The
standard quantity and price of materials for one unit of output is as under:
Material Quantity Price (₹)
X 2000 KG 1.00 per kg.
Y 800 KG 1.50 per kg.

During a period, 1500 units were produced. The actual consumption of

materials and prices are given below:
Material Quantity Price (₹)
X 31,00,000 kg 1.10 per kg.
Y 12,50,000 kg 1.60 per kg.

Calculate:
(i) Standard cost for actual output
(ii) Material cost variance

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 (iii) Material Price variance
(iv) Material usage variance

Answer
(i) Standard cost for Actual output:
Material X = 1,500 units × 2,000 kg. × ₹ 1 = 30,00,000
Material Y = 1,500 units × 800 kg. × ₹ 1.50 = 18,00,000 ₹ 48,00,000

(ii) Material Cost Variance:

= Standard Cost for actual output – Actual Cost
= (SQ × SP) – (AQ × AP)
Material X = {30,00,000 – (31,00,000 kg. × ₹ 1.10)}
= 30,00,000 – 34,10,000 = 4,10,000 (A)
Material Y = {18,00,000 – (12,50,000 kg. × ₹ 1.60)}
= 18,00,000 – 20,00,000 = 2,00,000 (A)
6,10,000 (A)

(iii) Material Price Variance:

= AQ (SP – AP)
Material X = 31,00,000 kg. (₹ 1.00 – ₹ 1.10)
= 3,10,000 (A)
Material Y = 12,50,000 kg. (₹ 1.50 – ₹ 1.60)
= 1,25,000 (A)
4,35,000 (A)

(iv) Material Usage Variance:

= SP (SQ – AQ)
Material X = ₹ 1.00 {(1,500 × 2,000) – 31,00,000}
= 30,00,000 – 31,00,000 = 1,00,000 (A)
Material Y = ₹ 1.50 {(1,500 × 800) – 12,50,000}
= ₹ 1.50 (12,00,000 – 12,50,000)
= 75,000 (A)
1,75,000 (A)

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Question 81
A company planned to produce 2,000 units of a product in a week of 40
hours by employing 65 skilled workers. Other relevant information are as
follows:
• Standard wages rate : ₹ 45 per hour
• Actual production : 1800 units
• Actual number of worker employed: 50 workers in a week of 40 hours
• Actual wages rate : ₹ 50 per hour
• Abnormal time loss due to machinery breakdown : 100 hours.
You are required to calculate:
(i) Labour cost, rate, idle time and efficiency variances.
(ii) Reconcile the variances.

Answer
(i) Labour cost variance (SH x Std. Rate) – (AH paid x AR)
( ₹ 40 x ₹ 65 / ₹ 2,000 x 1,800 ) x ₹ 45 – ( ₹ 50 x ₹ 40 x ₹ 50 )
= (₹ 1,05,300 – ₹ 1,00,000)
= ₹ 5,300 (F)
Labour Rate Variance = AH paid (SR – AR)
= ₹ 2,000 (45 – 50) = ₹ 10,000 (A)
Labour efficiency variance = SR (SH – AH worked)
= ₹ 45 (2,340 – 1,900) = ₹ 19,800 (F)
Idle time variance = SR x Idle time = ₹ 45 x ₹ 100 = ₹ 4,500 (A)

(ii) Reconciliation
Labour Cost Variance = Labour Rate Variance + Labour efficiency variance + Idle
time variance
Or
₹ 10,000 (A) + ₹ 19,800 (F) + ₹ 4,500 (A) = ₹ 5,300 (F)

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Question 82
Beta Ltd. is manufacturing Product N. This is manufactured by mixing two
materials namely Material P and Material Q. The Standard Cost of Mixture is
as under:
Material P 150 ltrs. @ ₹ 40 per ltr.
Material Q 100 ltrs. @ ₹ 60 per ltr.
Standard loss @ 20 of total input is expected during production.
The cost records for the period exhibit following consumption:
Material P 140 ltrs. @ ₹ 42 per ltr,
Material Q 110 ltrs. @ ₹ 56 per ltr,
Quantity produced was 195 ltrs.
Calculate:
(i) Material Cost Variance.
(ii) Material Usage Variance.
(iii) Material Price Variance.

Answer
Workings
Take the good output of 195 liters. The standard quantity of material required for
195 liters of output is:

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 195 / 80 × 100 = 243.75 liters

Note:
SQ = Standard Quantity = Expected Consumption for Actual Output
AQ = Actual Quantity of Material Consumed
SP = Standard Price Per Unit
AP = Actual Price Per Unit

Computation of Variances
Material Cost Variance
Material Cost Variance = SQ × SP - AQ × AP
A = 146.25 Kg × 40 - 140 Kg × 42 = 30.00 (A)
B = 97.50 Kg × 60 - 110 Kg × 56 = 310.00 (A)
Total = 30.00 (A) + 310.00 (A) = 340.00 (A)

Material Usage Variance

Material Usage Variance = SP × (SQ - AQ)
A = 40 × (146.25 - 140) = 250.00 (F)
B = 60 × (97.50 - 110) = 750.00 (A)
Total = 250.00 (F) + 750.00 (A) = 500.00 (A)

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 Material Price Variance
Material Price Variance = AQ × (SP - AP)
A = 140 Kg × (40 - 42) = 280.00 (A)
B = 110 Kg × (60 - 56) = 440.00 (F)
Total = 280.00 (A) + 440.00 (F) = 160.00 (F)

Question 83
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 8,000 hours
four week
Standard hours expected to be earned 9,600 hours
per four week
Actual hours worked in the four week 7,500 hours
period
Standard hours earned in the four week 8,800 hours
period
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

Answer
(i) Efficiency Ratio:
= Standard Hrs / Actual Hrs × 100
= 8,800 hours / 7,500 hours × 100
= 117.33%

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 (ii) Activity Ratio:
= Standard Hrs / Budgeted Hrs × 100
= 8,800 hours / 8,000 hours × 100
= 110%

(iii) Standard Capacity Usage Ratio:

= Budgeted Hours / Max. possible hours in the budgeted period × 100
= 8,000 hours / 9,600 hours × 100
= 83.33%

(iv) Actual Capacity Usage Ratio:

= Actual Hours worked / Max. possible working hours in a period × 100
= 7,500 hours / 9,600 hours × 100
= 78.125%

(v) Actual Usage of Budgeted Capacity Ratio:

= Actual working Hours / Budgeted Hours × 100
= 7,500 hours / 8,000 hours × 100
= 93.75%

Working Notes:
1. Maximum Capacity in a budget period
= 60 Employees × 8 Hrs. × 5 Days × 4 Weeks
= 9,600 Hrs.
2. Budgeted Hours (Hrs)
= 50 Employees × 8 Hrs. × 5 Days × 4 Weeks
= 8,000 Hrs.
3. Actual Hrs.
= 7,500 Hrs. (given)
4. Standard Hrs. for Actual Output
= 8,800 Hrs.

Question 84

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 The standard cost of a chemical mixture is as follows:
60% of Material A @ ₹50 per kg
40% 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.
Answer

Std. cost of actual output = ₹ 43,200 × 680 / 640 = ₹ 45,900

Calculation of Variances
(i) Material Cost Variance
Material Cost Variance = (Std. cost of actual output – Actual cost)
= (45,900 – 45,400)
= ₹ 500 (F)

(ii) Material Price Variance

Material Price Variance = (SP – AP) × AQ

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 Material A:
= (50 – 60) × 540
= ₹ 5,400 (A)
Material B:
= (60 – 50) × 260
= ₹ 2,600 (F)
MPV = ₹ 2,800 (A)

(iii) Material Usage Variance (MUV)

Material Usage Variance = (Std. Quantity for actual output – Actual Quantity) ×
Std. Price
Material A:
= (480 × 680 / 640 – 540) × 50
= ₹ 1,500 (A)
Material B:
= (320 × 680 / 640 – 260) × 60
= ₹ 4,800 (F)
MUV = ₹ 3,300 (F)

(iv) Material Mix Variance

Material Mix Variance = SP × (RAQ – AQ)
A:
= ₹ 50 × (480 Kg – 540 Kg)
= ₹ 3,000 (A)
B:
= ₹ 60 × (320 Kg – 260 Kg)
= ₹ 3,600 (F)
Total = ₹ 3,000 (A) + ₹ 3,600 (F)
= ₹ 600 (F)

(v) Material Yield Variance

Material Yield Variance = SP × (SQ – RAQ)
A:
= ₹ 50 × (510 Kg – 480 Kg)
= ₹ 1,500 (F)

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 B:
= ₹ 60 × (340 Kg – 320 Kg)
= ₹ 1,200 (F)
Total = ₹ 1,500 (F) + ₹ 1,200 (F)
= ₹ 2,700 (F)

Question 85
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:
1. Fixed Overhead Expenditure Variance
2. Actual Overheads Incurred
3. Actual Hours for Actual Production
4. Fixed Overhead Capacity Variance
5. Standard hours for Actual Production
6. Fixed Overhead Efficiency Variance

Answer
(1) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ₹ 12,000 – ₹ 12,800 (as calculated below) = ₹ 800 (A)

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 (2) Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed
Overheads
2,800 (A) = ₹ 10,000 – Actual Overheads
Actual Overheads = ₹ 12,800
(3) Actual Hours for Actual Production = ₹ 12,800 / ₹ 8 = 1,600 hrs.
(4) Fixed Overhead Capacity Variance
= Budgeted Fixed Overheads for Actual Hours – Budgeted Fixed Overheads
= ₹ 5 × 1600 hrs. – ₹ 12,000 = ₹ 4,000 (A)
(5) Standard Hours for Actual Production
= Absorbed Overheads / Std. Rate
= ₹ 10,000 / ₹ 5 = 2,000 hrs.
(6) Fixed Overhead Efficiency Variance
= Absorbed Fixed Overheads – Budgeted Fixed Overheads for Actual Hours
= ₹ 10,000 – ₹ 5 × 1,600 hrs. = ₹ 2,000 (F)

Working Note:
(i) Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted
Fixed Overheads
2,000 (A) = Absorbed Fixed Overheads – ₹ 12,000
Absorbed Fixed Overheads = ₹ 10,000
(ii) Standard Rate/Hour = ₹ 5 (₹ 12,000 / 2,400 hrs.)

Question 86
Premier Industries has a small factory where 52 workers are employed on an
average for 25 days a month and they work 8 hours per day. The normal
down time is 15%. The firm has introduced standard costing for cost
control. Its monthly budget for November, 2020 shows that the budgeted
variable and fixed overhead are ₹ 1,06,080 and ₹ 2,21,000 respectively.
The firm reports the following details of actual performance for November,
2020, after the end of the month:
Actual hours worked 8,100 hrs.
Actual production expressed in standard hours 8,800 hrs.
Actual Variable Overheads ₹ 1,02,000
Actual Fixed Overheads ₹ 2,00,000
You are required to calculate:

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 (i) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.
(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.
(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio.
(c) Activity ratio.

Answer
Workings:
Calculation of budgeted hours
Budgeted hours = (52 × 25 × 8) × 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead
= ( ₹ 1,06,080 ÷ 8,840 × 8,100 ) - ₹ 1,02,000
= 4800 A
(b) Variable overhead efficiency variance
Std. rate per hour × (Std. hours for actual production – Actual hours)
= ( ₹ 1,06,080 ÷ 8,840 ) × ( 8,800 hours – 8,100 hours )
= 8400 F
(ii) Fixed overhead variances
(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ₹ 2,21,000 – ₹ 2,00,000
= 21,000 F
(b) Fixed overhead capacity variance
= Std rate × (Actual hours – budgeted hours)
= ( ₹ 2,21,000 ÷ 8,840 ) × ( 8,100 – 8,840 )
= 18,500 A
(c) Fixed overhead efficiency variance
= Std rate × (Std hours for actual production – Actual hours)

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 = ( ₹ 2,21,000 ÷ 8,840 ) × ( 8,800 – 8,100 )
= 17,500 F
(iii) Control Ratios
(a) Capacity Ratio
= ( Actual hours ÷ Budgeted hours ) × 100
= ( 8,100 ÷ 8,840 ) × 100 = 91.63%
(b) Efficiency Ratio
= ( Standard hours ÷ Actual hours ) × 100
= ( 8,800 ÷ 8,100 ) × 100 = 108.64%
(c) Activity Ratio
= ( Standard hours ÷ Budgeted hours ) × 100
= ( 8,800 ÷ 8,840 ) × 100 = 99.55%

Question 87
The standard output of a Product 'D' is 50 units per hour in manufacturing
department of a Company employing 100 workers. In a 40 hours week, the
department produced 1,920 units of product 'D' despite 5% of the time paid
was lost due to an abnormal reason. The hourly wage rates actually paid
were ₹ 12.40, ₹ 12.00 and ₹ 11.40 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 ₹ 480 (F).
You are required to COMPUTE:
(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.

Answer
Working Notes:
1. Calculation of Standard Man hours
When 100 workers work for 1 hour, the standard output is 50 units.
Standard man hours per unit = 100 hours / 50 units = 2 hours per unit

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 2. Calculation of standard man hours for actual output:
= 1,920 units x 2 hours = 3,840 hours

3. Calculation of actual cost

Type of No of Actual Rate Amount Idle Hours Actual
Workers Workers Hours (₹) (₹) (5% of Hours
Paid hours Worked
paid)
Group ‘A’ 10 400 12.40 4,960 20 380
Group ‘B’ 30 1,200 12 14,400 60 1,140
Group ‘C’ 60 2,400 11.40 27,360 120 2,280
Total 100 4,000 46,720 200 3,800

4. Calculation of Standard wage Rate:

Labour Efficiency Variance
(Standard hours for Actual production – Actual Hours) x SR
= (3,840 – 3,800) x SR
= 480
Standard Rate (SR) = ₹ 12 per hour

(i) Total Labour Cost Variance

= (Standard hours x Standard Rate) – (Actual Hours x Actual rate)
= (3,840 x 12) – 46,720 = 640A

(ii) Total Labour Rate Variance

= (Standard Rate – Actual Rate) x Actual Hours
 Group ‘A’ = (12 – 12.40) 400 = 160A
 Group ‘B’ = (12 – 12) 1,200 = 0
 Group ‘C’ = (12 – 11.40) 2,400 = 1,440F
Total = 1,280F

(iii) Total Labour Gang Variance

= Total Actual Time Worked (hours) x {Average Standard Rate per hour of

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 Standard Gang – Average Standard Rate per hour of Actual Gang@}
@ on the basis of hours worked
= 3,800 x (12 – (3,840 x 12 / 3,800))
=0
[Note: As the number of workers in standard and actual is the same, there is no
difference in mix ratio, so labour gang variance will be NIL]

(iv) Total Labour Yield Variance

= Average Standard Rate per hour of Standard Gang x {Total Standard Time
(hours) – Total Actual Time worked (hours)}
= 12 x (3,840 – 3,800)
= 480F

(v) Total Labour idle time variance

= Total Idle hours x standard rate per hour
= 200 hours x 12
= 2,400A

Question 88
In a manufacturing company the standard units of production for the year
were fixed at 1,20,000 units and overhead expenditures were estimated to be
as follows:
Particulars Amount
(₹)
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature and 40% 1,80,000
are of variable nature)
Variable 6,00,000

Actual production during the month of April, 2021 was 8,000 units. Each
month has 20 working days. During the month there was one public holiday.
The actual overheads were as follows:
Particulars Amount
(₹)

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 Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% 19,200
are of variable nature)
Variable 48,000

You are required to calculate the following variances for the month of April,
2021:
i. Overhead Cost variance
ii. Fixed Overhead Cost variance
iii. Variable Overhead Cost variance
iv. Fixed Overhead Volume variance
v. Fixed Overhead Expenditure Variance
vi. Calendar Variance

Answer
Working Notes :
 Budgeted Fixed Overheads p.a. = ₹ 12,00,000 + (60% x 1,80,000) = ₹
13,08,000
 Budgeted Fixed Overheads per month = ₹ 13,08,000 / 12 months = ₹
1,09,000
 Budgeted Output per month = 1,20,000 units / 12 months = 10,000 units
 Budgeted Variable Overheads p.a. = ₹ 6,00,000 + (40% x 1,80,000) = ₹
6,72,000
 Budgeted Variable Overheads per month = ₹ 6,72,000 / 12 months = ₹
56,000
 SRR/Unit for Fixed OH = Bud. OH per month / Bud. Output per month
= ₹ 1,09,000 / 10,000 units = ₹ 10.90 per unit
 SRR/Unit for Variable OH = ₹ 56,000 / 10,000 units = ₹ 5.60 per unit
 SRR/Day for Fixed OH = Bud. OH per month / Bud. Working Days per month
= ₹ 1,09,000 / 20 days = ₹ 5,450 per day
 Actual Fixed Overheads p.m. = ₹ 1,10,000 + (60% x 19,200) = ₹ 1,21,520
 Actual Variable Overheads p.m. = ₹ 48,000 + (40% x 19,200) = ₹ 55,680

(i) Overhead Cost Variance (i.e. total overhead cost variance):

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 = (SRR/unit x Actual Output) – Actual Overheads
= [ (10.90 x 8,000) + (5.60 x 8,000) ] – [ 1,21,520 + 55,680 ]
= [ 1,32,000 – 1,77,200 ] = ₹ 45,200 (A)
Note: Alternatively, we can also calculate it as Fixed OH Cost Variance + Variable
OH Cost Variance.

(ii) Fixed OH Cost Variance

= (SRR/unit x Actual Output) – Actual Overheads
= (10.90 x 8,000) – 1,21,520 = ₹ 34,320 (A)

(iii) Variable OH Cost Variance

= (SRR/unit x Actual Output) – Actual Overheads
= (5.60 x 8,000) – 55,680 = ₹ 10,880 (A)

(iv) Fixed OH Volume Variance

= SRR/unit x [ Budgeted Output – Actual Output ]
= 10.90 x ( 10,000 – 8,000 ) = ₹ 21,800 (A)

(v) Fixed OH Expenditure Variance

= Budgeted Overheads – Actual Overheads
= ₹ 1,09,000 – ₹ 1,21,520 = ₹ 12,520 (A)

(vi) Calendar Variance (it is calculated for Fixed OH only)

= SRR/day x [ Budgeted working days – Actual working days ]
= ₹ 5,450 per day x ( 20 – 19 ) = ₹ 5,450 (A) [i.e. one day worked less]

Question 89
Y Ltd. manufactures “Product M” which requires three types of raw
materials – “A”, “B” & “C”.
Following information related to 1st quarter of the F.Y. 2022-23 has been
collected from its books of accounts. The standard material input required
for 1,000 kg of finished product ‘M’ as under:
Material Quantity (Kg.) Std. Rate per Kg. (₹)
A 500 25
B 350 45

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 C 250 55
Total input 1100
Less : Standard Loss 100
Standard Output 1000

During the period, the company produced 20,000 kg of product ‘M’ for which
the actual quantity
of materials consumed and purchase prices are as under:
Material Quantity (Kg.) Purchase price per Kg. (₹)
A 11,000 23
B 7,500 48
C 4,500 60

You are required to calculate:

(i) Material Cost Variance
(ii) Material Price Variance for each raw material and Product ‘M’
(iii) Material Usage Variance for each raw material and Product ‘M’
(iv) Material Yield Variance.
(Note : Indicate the nature of variance i.e. Favourable or Adverse).

Answer
i) Material Cost Variance :
Std. Qty. of input required for actual output
Material A = 500 Kgs. x 20,000/1,000 = 10,000 Kgs.
Material B = 350 Kgs. x 20,000/1,000 = 7,000 Kgs.
Material C = 250 Kgs. x 20,000/1,000 = 5,000 Kgs.
Material Cost Variance = ( SQ x SP ) - ( AQ x AP )
A : ( 10,000 kg. x Rs. 25 ) - ( 11,000 kg. x Rs. 23 ) = 3,000 (A)
B : ( 7,000 kg. x Rs. 45 ) - ( 7,500 kg. x Rs. 48 ) = 45,000 (A)
C : ( 5,000 kg. x Rs. 55 ) - ( 4,500 kg. x Rs. 60 ) = 5,000 (F)
Total for output 'M' = 43,000 (A)

ii) Material Price Variance : = AQ x ( Std. price - Actual price )

A : 11,000 kgs. x ( Rs. 25 - Rs. 23 ) = 22,000 (F)

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 B : 7,500 kgs. x ( Rs. 45 - Rs. 48 ) = 22,500 (A)
C : 4,500 kgs. x ( Rs. 55 - Rs. 60 ) = 22,500 (A)
Total for output 'M' = 23,000 (A)

iii) Material Usage Variance = Std. price x ( Std. Qty. - Actual Qty. )
A : Rs. 25 x ( 10,000 kg. - 11,000 kg ) = 25,000 (A)
B : Rs. 45 x ( 7,000 kg - 7,500 kg ) = 22,500 (A)
C : Rs. 55 x ( 5,000 kg - 4,500 kg ) = 27,500 (F)
Total for output 'M' = 20,000 (A)

iv) Material Yield Variance ( i.e. Sub-usage Variance ) :

= Std. price x ( Std. Qty. - Std. Mix )
Std. Mix = Actual Qty. consumed revised in standard proportion
i.e. Total 23,000 kg. consumed revised in 50 : 35 : 25 proportion
A : Rs. 25 x ( 10,000 kg. - 10,455 kg ) = 11,375 (A)
B : Rs. 45 x ( 7,000 kg - 7,318 kg ) = 14,310 (A)
C : Rs. 55 x ( 5,000 kg. - 5,227 kg ) = 12,485 (A)
Total for output 'M' = 38,170 (A)

Question 90
NC Limited uses a standard costing system for the manufacturing of its
product ‘X’. The following information is available for the last week of the
month:
 25,000 kg of raw material were actually purchased for ₹ 3,12,500. The
expected output is 8 units of product 'X' from each one kg of raw
material. There is no opening and closing inventories. The material price
variance and material cost variance, as per cost records, are ₹ 12,500 (F)
and ₹ 1800 (A), respectively.
 The standard time to produce a batch of 10 units of product 'X' is 15
minutes. The standard wage rate per labour hour is 50. The company
employs 125 workers in two categories, skilled and semi-skilled, in a
ratio of 60:40. The hourly wages actually paid were ₹ 50 per hour for
skilled workers and ₹ 40 per hour for semi-skilled workers. The weekly
working hours are 40 hours per worker. Standard wage rate is the same
for skilled and semi-skilled workers.
 The monthly fixed overheads are budgeted at ₹ 76,480 Overheads are
evenly distributed throughout the month and assume 4 weeks in a

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 month. In the last week of the month, the actual fixed overhead
expenses were ₹ 19,500.
Required:
(i) Calculate the standard price per kg and the standard quantity of raw
material.
(ii) Calculate the material usage variance, labour cost variance, and labour
efficiency variance.
(iii) Calculate the fixed overhead cost variance, the fixed overhead
expenditure variance and the fixed overhead volume variance.
Note: Indicate the nature of variance i.e Favourable or Adverse.

Answer

(i) Calculation of Standard price per kg and the standard quantity of raw
material:
Standard Price
(a) Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
12,500 (F) = (SP × AQ) – ₹ 3,12,500
12,500 (F) = (SP × 25,000) – ₹ 3,12,500
SP = ₹ 13
Standard Quantity
(b) Material Cost Variance = Standard Cost – Actual Cost
1,800 (A) = SQ × ₹13 – ₹ 3,12,500
SQ = 23,900 kg.

(ii) Calculation of Material Usage Variance, Labour Cost Variance and

Labour Efficiency Variance
(a) Material Usage Variance
= Standard Cost of Standard Quantity for Actual Output – Standard Cost of Actual
Quantity
= SQ × SP – AQ × SP
Or
= SP × (SQ – AQ)
= ₹ 13 × (23,900 kg. – 25,000 kg.)
= ₹ 14,300 (A)

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 (b) Labour Cost Variance
= Standard Cost – Actual Cost
= (SH × SR) – (AH × AR)
= ₹ 2,39,000 – ₹ 2,30,000
= ₹ 9,000 (F)
(c) Labour Efficiency Variance
= Standard Cost of Standard Time for Actual Production – Standard Cost of
Actual Time
= (SH × SR) – (AH × SR)
Or
= (SH – AH) × SR
= ₹ 50 × [4,780 hrs. – 5,000 hrs.]
= ₹ 11,000 (A)

(iii) Calculation of Fixed Overhead Cost Variance, Fixed Overhead

Expenditure Variance and Fixed Overhead Volume Variance:
(a) Fixed overhead cost variance
= Standard Fixed Overheads – Actual Fixed Overheads
= 18,279 – 19,500
= ₹ 1,221 (A)
(b) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ₹ 19,120 – ₹ 19,500
= ₹ 380 (A)
(c) Fixed overhead volume variance
= (Budgeted output – Actual Output) × Budgeted rate per unit
= (2,00,000 – 1,91,200) × 0.0956
= ₹ 8,800 × 0.0956
= ₹ 841 (A)

Alternative presentation to part (iii) (a) and (b)

(i) Fixed Overhead Cost Variance:
= Overhead absorbed for actual production – Actual overhead incurred
= ₹19,120 / 2,00,000 × 1,91,200 – 19,500 = ₹ 1,221 (A)
(iii) Fixed Overhead Volume Variance:
= Absorbed overhead – Budgeted overhead
= ₹19,120 / 2,00,000 × 1,91,200 – 19,120 = ₹ 841 (A)

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 Working Notes:
1. Standard time to produce 10 units of product X is 15 minutes. Therefore,
we can manufacture 40 units in an hour.
Hours available in a week:
125 Workers × 40 Hours = 5,000 hours
Therefore budgeted output = 5,000 × 40 units per hour = 2,00,000 units
Alternatively
Budgeted time per unit = 15 units / 10 units = 1.5 minutes
So, Budgeted output = (5,000 Hours × 60 Minutes) / 1.5 Minutes = 2,00,000 units
Actual output = 23,900 × 8 units = 1,91,200 units
Standard hour for actual output = 1,91,200 × 0.25 Hrs / 10 units = 4,780 Hrs

4. Standard Fixed Overheads:

₹19,120 / 2,00,000 × 1,91,200 = ₹18,279
Budgeted rate per unit:
₹19,120 / 2,00,000 = ₹ 0.0956

Question 91

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 SHA Limited provides the following trading results:
Year Sale Profit
2012-13 ₹ 25,00,000 10% of Sale
2013-14 ₹ 20,00,000 8% of Sale
You are required to calculate:
(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is 30,00,000
(iv) Sale, when desired profit is 4,75,000
(v) Margin of Safety at a profit of ₹ 2,70,000

Answer
Workings:
Profit in year 2012-13 = 25,00,000 × 10% = 2,50,000
Profit in year 2013-14 = 20,00,000 × 8% = 1,60,000
So, P/V Ratio = Change in Profit / Change in Sales × 100
= (2,50,000 – 1,60,000) / (25,00,000 – 20,00,000) × 100
= 90,000 / 5,00,000 × 100 = 18%

(i) Fixed Cost

Fixed Cost = Contribution (in year 2012-13) – Profit (in year 2012-13)
= (Sales × P/V Ratio) – Profit
= (25,00,000 × 18%) – 2,50,000
= 4,50,000 – 2,50,000
= 2,00,000

(ii) Break-even Point (in Sales)

Break-even Point = Fixed Cost / P/V Ratio
= 2,00,000 / 18%
= 11,11,111 (Approx)

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 (iii) Calculation of profit, if sale is 30,00,000
Profit = Contribution – Fixed Cost
= (Sales × P/V Ratio) – Fixed Cost
= (30,00,000 × 18%) – 2,00,000
= 5,40,000 – 2,00,000
= 3,40,000
So profit is 3,40,000, if Sale is 30,00,000.

(iv) Calculation of Sale, when desired Profit is 4,75,000

Contribution Required = Desired Profit + Fixed Cost
= 4,75,000 + 2,00,000
= 6,75,000
Sales = Contribution / P/V Ratio
= 6,75,000 / 18%
= 37,50,000
Sales is 37,50,000 when desired profit is 4,75,000.

(v) Margin of Safety

Margin of Safety = Profit / P/V Ratio
= 2,70,000 / 18%
= 15,00,000
So Margin of Safety is 15,00,000 at a profit of 2,70,000.

Question 92
SK Ltd. engaged in the manufacture of tyres. Analysis of income statement
indicated a profit of ₹150 lakhs on a sales volume of 50,000 units. The fixed
cost is ₹850 lakhs which appears to be high. Existing selling price is ₹3,400
per unit. The company is considering to revise the profit target to ₹350
lakhs. You are required to COMPUTE –
(i) Break-even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 15% increase in selling price and drop in sales volume by
10%.

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 (iv) Volume to be achieved to earn target profit at the revised selling price as
calculated in (ii) above, if a reduction of 8% in the variable costs and ₹85
lakhs in the fixed cost is envisaged.

Answer
Sales Volume 50,000 Units
Computation of existing contribution

Table of Particulars
Particulars Per unit (₹) Total (₹ in lakhs)
Sales 3,400 1,700
Fixed Cost 1,700 850
Profit 300 150
Contribution 2,000 1,000
Variable Cost 1,400 700

(i) Break even sales in units

Break even sales in units = Fixed Cost / Contribution per unit
= 8,50,00,000 / 2,000
= 42,500 units
Break even sales in rupees = 42,500 units × ₹ 3,400
= ₹ 1,445 lakhs
OR
P/V Ratio = (2,000 / 3,400) × 100
= 58.82%
B.E.P (in rupees) = Fixed Cost / P/V Ratio
= 8,50,00,000 / 58.82%
= ₹ 1,445 lakhs (approx.)

(ii) Number of units sold to achieve a target profit of ₹ 350 lakhs:

Desired Contribution = Fixed Cost + Target Profit
= 850 lakhs + 350 lakhs
= 1,200 lakhs

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 Number of units to be sold = Desired Contribution / Contribution per unit
= 12,00,00,000 / 2,000
= 60,000 units

(iii) Profit if selling price is increased by 15% and sales volume drops by
10%
Existing Selling Price per unit = ₹ 3,400
Revised selling price per unit = ₹ 3,400 × 115%
= ₹ 3,910
Existing Sales Volume = 50,000 units
Revised sales volume = 50,000 units – 10% of 50,000
= 45,000 units
Statement of profit at sales volume of 45,000 units @ ₹ 3,910 per unit:
Particulars Per unit (₹) Total (₹ in lakhs)
Sales 3,910.00 1,759.50
Less: Variable Costs (1,400.00) (630.00)
Contribution 2,510.00 1,129.50
Less: Fixed Cost (850.00)
Profit 279.50

(iv) Volume to be achieved to earn target profit of ₹ 350 lakhs with revised
selling price and reduction of 8% in variable costs and ₹ 85 lakhs in fixed
cost.
Revised Variable Costs:
Reduction of 8% in variable costs = ₹ 1,400 – 8% of 1,400
= ₹ 1,400 – ₹ 112
= ₹ 1,288
Revised Fixed Cost:
Total Fixed Cost (existing) = ₹ 850 lakhs
Reduction in fixed cost = ₹ 85 lakhs
Revised fixed cost = ₹ 850 lakhs – ₹ 85 lakhs
= ₹ 765 lakhs
Revised Contribution (per unit):
Revised Contribution per unit = Revised selling price – Revised Variable Costs
= ₹ 3,910 – ₹ 1,288
= ₹ 2,622

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 Desired Contribution:
Desired Contribution = Revised Fixed Cost + Target Profit
= ₹ 765 lakhs + ₹ 350 lakhs
= ₹ 1,115 lakhs
Number of units to be sold:
Number of units to be sold = Desired Contribution / Contribution per unit
= ₹ 1,115 lakh / ₹ 2,622
= 42,525 units

Question 93
A Company gives the following information:
Margin of ₹ Margin of Safety 15,000
Safety 3,75,000 (Quantity) units
Total Cost ₹ Break Even Sales in 5,000 units
3,87,500 Units
Calculate –
(i) Selling Price per unit,
(ii) Profit,
(iii) Profit / Volume Ratio,
(iv) Break Even Sales (in Rupees), and
(v) Fixed Cost.

Answer
1. Sale Price p.u. = MOS Amount / MOS Quantity = ₹ 3,75,000 / 1,500 Units =
₹ 25 pu
2. Profit = Total Sales (–) Total Cost [Note: Total Sales = BES + MOS = 15,000
+ 5,000 = 20,000 units]
= (15,000 + 5,000) units × ₹ 25 – 3,87,500 = ₹ 1,12,500
3. Also, Profit = MOS Quantity × Contribution p.u.
On substitution, 1,12,500 = 15,000 units × Contribution p.u.
So, Contribution p.u. = ₹ 7.50
Hence PVR = Contribution p.u. / Sale Price p.u = 7.5 / 25 = 30%

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 4. BES in ₹ = BES Quantity × Sale Price p.u. = 5,000 units × ₹ 25 = ₹ 1,25,000
5. At BEP, Total Contribution = Fixed Cost.
Total Contribution at BEP = 5,000 units × ₹ 7.50 p.u.
So, Fixed Cost = ₹ 37,500

Question 94
A dairy product company manufacturing baby food with a shelf life of one
year furnishes the following information:
(i) On 1st April, 2023, the company has an opening stock of 20,000 packets
whose variable cost is ₹ 180 per packet.
(ii) In 2022-23, production was 1,20,000 packets and the expected production
in 2023-24 is 1,50,000 packets. Expected sales for 2023-24 is 1,60,000
packets.
(iii) In 2022-23, fixed cost per unit was ₹ 60 and it is expected to increase by
10% in 2023-24. The variable cost is expected to increase by 25%. Selling
price for 2023-24 has been fixed at ₹ 300 per packet.
You are required to calculate the Break-even volume in units for 2023-24.

Answer
Working Notes:
Particulars 2022-23 (₹) 2023-24 (₹)
Fixed Cost 72,00,000 79,20,000
(₹ 60 × 1,20,000 units) (110% of ₹ 72,00,000)
Variable Cost 180 225
(125% of ₹ 180)

Calculation of Break-even Point (in units):

Since, shelf life of the product is one year only, hence, opening stock is to be sold
first.
(₹)
Total Contribution required to recover total fixed cost in 2023-24 79,20,000
and to reach break-even volume.

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 Less: Contribution from opening stock {20,000 units × (₹ 300 – ₹ 24,00,000
180)}
Balance Contribution to be recovered 55,20,000
Units to be produced to get balance contribution
= ₹ 55,20,000 ÷ (₹ 300 – ₹ 225)
= 73,600 packets.

Break-even volume in units for 2023-24

Packets
From 2023-24 production 73,600
Add: Opening stock from 2022-23 20,000
93,600

Question 95
The M-Tech Manufacturing Company is presently evaluating two possible
processes for the manufacture of a toy. The following information is
available:
Particulars Process A (₹) Process B (₹)
Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000

Suggest:
1. Identify the process which gives more profit.
2. Would you change your answer as given above, if you were informed
that the capacities of the two processes are as follows:
A - 6,00,000 units; B - 5,00,000 units?

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 Answer
(1) Comparative Profitability Statements
Particulars Process - A (₹) Process - B (₹)
Selling Price per unit 20.00 20.00
Less: Variable Cost per unit 12.00 14.00
Contribution per unit 8.00 6.00
Capacity (units) 4,00,000 4,00,000
Total Contribution 32,00,000 24,00,000
(₹ 8 × 4,00,000) (₹ 6 × 4,00,000)
Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000

Particulars Process - A (₹) Process - B (₹)

Capacity (units) 4,30,000 5,00,000
Total Contribution at full capacity 34,40,000 30,00,000
(₹ 8 × 4,30,000) (₹ 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000
Process - B gives more profit.

(2)
Particulars Process - A (₹) Process - B (₹)
Capacity (units) 6,00,000 5,00,000
Total Contribution 48,00,000 30,00,000
(₹ 8 × 6,00,000) (₹ 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000

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 Process - A be chosen.

Note: It is assumed that capacity produced equals sales.

Question 96
A Company has introduced a new product and marketed 20,000 units.
Variable Cost of the product is ₹ 20 per unit and Fixed Overheads are ₹
3,20,000. You are required to:
(a) Calculate Selling Price per unit to earn a profit of 10% on Sales Value,
BEP and Margin of Safety.
(b) If the Selling Price is reduced by the Company by 10%, demand is
expected to increase by 5000 units, then what will be its impact on Profit,
BEP and Margin of Safety?
(c) Calculate Margin of Safety if Profit is ₹ 64,000.

Answer
1. Present Sale Price, BEP and MOS:
Let Selling Price per unit = ‘P’.
So, Sales Value = 20,000 units × P = 20,000 P
So, Profit at 10% = 20,000 P × 10% = 2,000 P
Contribution per unit = Sale Price (–) Variable Cost = (P – 20)
The equation is:
Total Contribution = Fixed Cost + Profit
On substitution, we have:
20,000 units × (P – 20) = 3,20,000 + 2,000 P
On simplification, we have:
20,000P – 4,00,000 = 3,20,000 + 2,000 P
On solving,
18,000P = 7,20,000, or P = 40.

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 Hence,
Sales Value = 20,000 units × ₹ 40 = ₹ 8,00,000.
Profit = 10% on Sales = ₹ 80,000
Break-Even Quantity (BEQ):
BEQ = Fixed Costs / Contribution per Unit
= 3,20,000 / (40 – 20) = 16,000 units.
Break-Even Sales (BES):
BES (₹) = BEQ × Selling Price
= 16,000 units × ₹ 40 = ₹ 6,40,000
Margin of Safety (MOS):
MOS (Qty) = Total Sales – BEQ
= 20,000 – 16,000 = 4,000 units.
MOS (₹) = MOS Quantity × Selling Price
= 4,000 units × ₹ 40 = ₹ 1,60,000
2. Impact of Price Reduction on Profit, BEP and MOS:
New Sale Price = ₹ 40 less 10% = ₹ 36 pu
Profit = Total Contribution (–) Fixed Costs
= 25,000 units × (36 – 20) – 3,20,000
= ₹ 80,000
BEQ = Fixed Costs / Contribution per Unit = 3,20,000 / (36 – 20) = 20,000 units.
BES (₹) = 20,000 units × ₹ 36 pu = ₹ 7,20,000
MOS (Qty) = Total Sales – BEQ = 25,000 – 20,000 = 5,000 units.
MOS (₹) = 5,000 units × ₹ 36 pu = ₹ 1,80,000

3. MOS when Profit is ₹ 64,000:

Particulars Situation 1: Using Situation 2: Using
Original Sale Price ₹ Revised Sale Price ₹
40 pu 36 pu
MOS Quantity = Profit 64,000 / (40 – 20) = 64,000 / (36 – 20) =
/ Contribution p.u. 3,200 units 4,000 units
MOS Sale Value = 3,200 units × ₹ 40 pu = 4,000 units × ₹ 36 pu =
MOS Quantity × Price ₹ 1,28,000 ₹ 1,44,000

Question 97

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 The following information has been obtained from the records of a
manufacturing unit:
Rs. Rs.
Sales 80,000 units @ Rs. 50 40,00,000
Material consumed 16,00,000
Variable Overheads 4,00,000
Labour Charges 8,00,000
Fixed Overheads 7,20,000
35,20,000
Net Profit 4,80,000
CALCULATE:
(i) The number of units by selling which the company will neither lose nor
gain anything.
(ii) The sales needed to earn a profit of 20% on sales.
(iii) The extra units which should be sold to obtain the present profit if it is
proposed to reduce the selling price by 20% and 25%.
The selling price to be fixed to bring down its Break-even Point to 10,000
units under present conditions.
Answer
Workings:
(1) Contribution per unit = Selling price per unit – Variable cost per unit
= Rs. 50 – {Rs. (16,00,000 + 4,00,000 + 8,00,000) ÷ 80,000 units}
= Rs. 50 – Rs. 35 = Rs. 15
(2) Profit-Volume (P/V) Ratio = Contribution per unit/Selling Price per Unit × 100
= Rs. 15 / Rs.50 × 100 = 30%

Calculations:
(i) The number of units to be sold for neither loss nor gain i.e. Break-even units:
= Fixed Overheads / Contribution per unit
= Rs.7,20,000 / Rs.15 = 48,000 Units
(ii) The sales needed to earn a profit of 20% on sales:
As we know S = V + F + P

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 (S = Sales; V = Variable Cost; F = Fixed Cost; P = Profit) Suppose Sales units are
x then
Rs. 50x = Rs. 35x + Rs. 7,20,000 + Rs. 10x
Rs. 50x – Rs. 45x = Rs. 7,20,000
Or, X = Rs.7,20,000 / Rs.5 = 1,44,000 units
Therefore, Sales needed = 1,44,000 units × Rs. 50 = Rs. 72,00,000 to earn a
profit of 20% on sales.

(iii) Calculation of extra units to be sold to earn present profit of Rs. 4,80,000
under the following proposed selling price:
Particulars When selling price is When selling price is
reduced by 20% (Rs.) reduced by 25% (Rs.)
Selling price per unit 40.00 37.50
Less: Variable Cost per (Rs. 50 × 80%) = 35.00 (Rs. 50 × 75%) = 35.00
unit
Contribution per unit 5.00 2.50
Desired Contribution
Fixed Overheads 7,20,000 7,20,000
Desired Profit 4,80,000 4,80,000
Total Contribution 12,00,000 12,00,000
(a) Sales units for 2,40,000 units 4,80,000 units
desired contribution
(b) Units presently sold 80,000 units 80,000 units
(c) Extra units to be 1,60,000 units 4,00,000 units
sold {(a) – (b)}

(iv) Sales price to bring down BEP to 10,000 units:

B.E.P (Units) = Fixed Cost / Contribution per unit
Contribution per unit = Rs. 7,20,000 ÷ 10,000 units = Rs. 72
Sales Price (per unit) = Variable Cost + Contribution
Sales Price (per unit) = Rs. 35 + Rs. 72 = Rs. 107

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Question 98
A company, with 90% Capacity utilization, is manufacturing a product and
makes a sale
of ₹ 9,45,000 at ₹ 30 per unit. The cost data is as under:
Materials - ₹ 9.00 per unit
Labour - ₹ 7.00 per unit
Semi variable cost (including
variable cost of ₹ 4.25 per unit) - ₹ 2,10,000.
Fixed cost is ₹ 94,500 upto 90% level of output (capacity). Beyond this, an
additional
amount of ₹ 15,000 will be incurred.
You are required to calculate:
(i) Level of output at break-even point
(ii) Number of units to be sold to earn a net income of 10% of sales
(iii) Level of output needed to earn a profit of ₹ 1,41,375

Answer
Answer
(a) Working Note:
1. Current utilization 90% capacity and Turnover is ₹ 9,45,000
No. of units = ₹ 9,45,000 ÷ ₹ 30 = 31,500 units
Variable Cost per unit:
Particulars Amount (₹)
Material 9.00
Labour cost 7.00
Variable overheads 4.25
Total Variable Cost 20.25
Selling price 30.00
Contribution per unit 9.75
Calculation of Total Fixed Cost
Particulars ₹

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 Semi-variable cost 2,10,000
Less: Variable cost (31,500 units × ₹ 4.25) 1,33,875
Fixed Cost 76,125
Add: Fixed cost up to 90% level 94,500
Total Fixed Cost 1,70,625

2. Present Profit:
Particulars ₹
Contribution (31,500 units × ₹ 9.75) 3,07,125
Less: Fixed cost 1,70,625
Profit 1,36,500
(i) Break-even point
Break-even point = Total Fixed Cost ÷ Contribution per unit
= 1,70,625 ÷ 9.75 = 17,500 Units
At 17,500 units, output level = 17,500 ÷ 31,500 × 90% = 50%
So, at 50% activity level, this company reaches at BEP.

(ii) Sales (Units):

Sales (Units) = Fixed Cost + Profit ÷ Contribution per unit
10% of sales = 10% of ₹ 30 = ₹ 3 per unit profit.
Let ‘S’ be the number of units to be sold. Profit will be 3S.
S = 1,70,625 + 3S ÷ 9.75
Simplifying:
9.75 S = 1,70,625 + 3S
S = 1,70,625 ÷ 6.75 = 25,278 units.

(iii) Sales (Units):

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 Sales (Units) = Fixed Cost + Profit ÷ Contribution per unit
Sales = 1,70,625 + 1,41,375 ÷ 9.75
= 3,12,000 ÷ 9.75 = 32,000 units
32,000 units exceed 90% activity level. Fixed cost increases by ₹ 15,000 to ₹
3,27,000.
Sales = 3,27,000 ÷ 9.75 = 33,538 units
Activity level = 33,538 ÷ 35,000 × 100 = 95.82%

Question 99
A company is producing an identical product in two factories. The following
are the details in respect of both factories:
Factory X Factory Y
Selling price per unit (₹) 50 50
Variable cost per unit (₹) 40 35
Fixed cost (₹) 2,00,000 3,00,000
Depreciation included in above fixed cost (₹) 40,000 30,000
Sales in units 30,000 20,000
Production capacity (units) 40,000 30,000
You are required to determine:
(i) Break Even Point (BEP) each factory individually.
(ii) Cash break even point for each factory individually.
(iii) BEP for company as a whole, assuming the present product mix is in
sales ratio.
(iv) Consequence on profit and BEP if product mix is changed to 2:3 and
total demand remain same.
Answer
Factory X Factory Y
(i) Break Even Point: Fixed 2,00,000 / (50 - 40) 3,00,000 / (50 - 35)
Cost / Contribution = 20,000 units = 20,000 units
(ii) Cash Break Even Point: (2,00,000 - 40,000) (3,00,000 - 30,000)
(Fixed Cost - Depreciation) / / 10 = 16,000 units / 15 = 18,000 units
Contribution

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 (iii) BEP as a whole = Complete Fixed Cost / Composite Contribution
= (2,00,000 + 3,00,000) / (10 × 3/5 + 15 × 2/5)
= 5,00,000 / (6 + 6) = 41,667 units

(iv) New Sales Mix = 50,000 × 2/5 = 20,000 of X

50,000 × 3/5 = 30,000 of Y
Calculation of Composite contribution:
10 × 2/5 + 15 × 3/5 = 4 + 9 = ₹ 13

Consequence on profit
Existing Mix New Mix
Contribution 50,000 × 12 = 6,00,000 50,000 × 13 = 6,50,000
Less: Fixed Cost 5,00,000 5,00,000
Profit 1,00,000 1,50,000
Increase in profit = 1,50,000 − 1,00,000 = ₹ 50,000

Consequence on BEP
New BEP as a whole = Complete Fixed Cost / Composite Contribution
= 5,00,000 / 13 = 38,462 units
So, BEP Reduced by 3,205 units (41,667 − 38,462)

Question 100
Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse its
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

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 Direct Labour :
Departments: Rate per Hours per Hours per Hours per
Hour (₹) unit X unit Y unit Z
Department- 4 6 10 5
A
Department- 8 6 15 11
B

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 departments estimate of possible 12,000 16,000 24,000
sales in the coming year (in units)

There is a constraint on supply of labour in Department-A and its manpower

cannot be increased 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 mix.

Answer
(i) Statement Showing "Calculation of Contribution/ unit"
Particulars X (₹) Y (₹) Z (₹)
Selling Price (A) 312 400 240
Variable Cost:
Direct Material 160 120 80
Direct Labour 80 120 88
Dept. A (Rate x Hours) 24 40 20
Dept. B (Rate x Hours) 48 120 88

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 Variable Overheads 8 20 12
Total Variable Cost (B) 240 300 200
Contribution per unit (A - B) 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Rank I II III

Existing Hours
10,000 x 6 hrs. + 12,000 x 10 hrs. + 20,000 x 5 hrs. = 2,80,000 hrs.

Best possible product mix (Allocation of Hours on the basis of ranking)

 Produce 'X' = 12,000 units
Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000 hrs.)
 Produce 'Y' (the Next Best) = 16,000 units
Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)
Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000 hrs.)
 Produce 'Z' (balance) = 9,600 units
Hours Required = 48,000 hrs (48,000 hrs. / 5 hrs.)

(ii) Statement Showing "Contribution"

Product Units Contribution/ Unit (₹) Total Contribution (₹)
X 12,000 72 8,64,000
Y 16,000 100 16,00,000
Z 9,600 40 3,84,000
Total = 28,48,000

Question 101
Two manufacturing companies A and B are planning to merge. The details
are as follows:
A B

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 Capacity utilisation (%) 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:
1. Break-Even sales of the merged plant and the capacity utilization at that
stage.
2. Profitability of the merged plant at 80% capacity utilization.
3. Sales Turnover of the merged plant to earn a profit of ₹ 60,00,000.
4. 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.

Answer
Workings:
1. Statement showing computation of Breakeven of merged plant and other
required information
S. Particulars Plan A Plan A Plant B Plant B Merged
No. (Before (After (Before (After Plant
90%) 100%) 60%) 100%) (100%)
(i) Sales ₹ ₹ ₹ ₹ ₹
63,00,000 70,00,000 48,00,000 80,00,000 1,50,00,000
(ii) Variable ₹ ₹ ₹ ₹ ₹ 81,50,000
cost 39,60,000 44,00,000 22,50,000 37,50,000
(iii) Contribution ₹ ₹ ₹ ₹ ₹ 68,50,000
(i - ii) 23,40,000 26,00,000 25,50,000 42,50,000
(iv) Fixed Cost ₹ ₹ ₹ ₹ ₹ 28,00,000
13,00,000 13,00,000 15,00,000 15,00,000
(v) Profit (iii - ₹ ₹ ₹ ₹ ₹ 40,50,000
iv) 10,40,000 13,00,000 10,50,000 27,50,000

2. PV ratio of merged plant = Contribution / Sales × 100

= ₹ 68,50,000 / ₹ 1,50,00,000 × 100 = 45.67%

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 (i) Break even sales of merged plant = Fixed Cost / P/V Ratio
= ₹ 28,00,000 / 45.67%
= ₹ 61,30,939.34 (approx.)
Capacity utilisation
= ₹ 61,30,939.34 / ₹ 1,50,00,000 × 100 = 40.88%

(ii) Profitability of the merged plant at 80% capacity utilisation

= (₹ 1,50,00,000 × 80%) × P/V ratio – fixed cost
= ₹ 1,20,00,000 × 45.67% – ₹ 28,00,000
= ₹ 26,80,400

(iii) Sales to earn a profit of ₹ 60,00,000

Desired sales = (Fixed Cost + desired profit) / P/V Ratio
= (₹ 28,00,000 + ₹ 60,00,000) / 45.67%
= ₹ 1,92,68,666 (approx.)

(iv) Increase in fixed cost

= ₹ 28,00,000 × 5% = ₹ 1,40,000
Therefore, percentage increase in sales price
= ₹ 1,40,000 / ₹ 1,92,68,666 × 100 = 0.726% (approx.)

Question 102
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 ₹ 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

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 desires a profit increase of 20% more than the budgeted profit and selling
price is reduced by 10% as above in point (iii).

Answer

Variable Cost per Unit = ₹ 16

Fixed Cost per Unit = ₹ 4
Total Fixed Cost = 2,00,000 units x ₹ 4 = ₹ 8,00,000
Total Cost per Unit = 16 + 4 = ₹ 20
Selling Price per Unit = Total Cost + Profit @ 20% = ₹ 20 + ₹ 4 = ₹ 24
Contribution per Unit = ₹ 24 - ₹ 16 = ₹ 8

(i)
Present BEP Sales (Quantity) = Total Fixed Cost / Contribution per unit
= ₹ 8,00,000 / ₹ 8 = 1,00,000 units
Present BEP Sales (₹) = 1,00,000 units x ₹ 24 = ₹ 24,00,000

(ii)
Present P/V Ratio = (8 / 24) x 100 = 33.33%

(iii)
Revised Selling Price per Unit = ₹ 24 – 10% = ₹ 21.60
Revised Contribution per Unit = ₹ 21.60 – ₹ 16 = ₹ 5.60
Revised P/V Ratio = (5.60 / 21.60) x 100 = 25.926%
Revised Break-even point (₹) = Fixed Cost / P/V Ratio
= ₹ 8,00,000 / 25.926% = ₹ 30,85,705 (approx)

(iv)
Present profit = Present Contribution – Fixed Cost
= (₹ 8 x 2,00,000 units ) – ₹ 8,00,000 = ₹ 8,00,000
Desired Profit = 120% of ₹ 8,00,000 = ₹ 9,60,000
Sales required to earn desired profit at reduced sales price
= (Fixed cost + Desired profit) / Contribution per unit
= (₹ 8,00,000 + ₹ 9,60,000) / ₹ 5.60 = 3,14,286 units (approx)
Revised sales (in ₹) = 3,14,286 units x ₹ 21.60 = ₹ 67,88,578 (approx)

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Question 103
Top-tech, a manufacturing company, is presently evaluating two possible
machines for the manufacture of superior Pen-drives. The following information is
available:
Particulars Machine A Machine B
Selling price per unit ₹ 400.00 ₹ 400.00
Variable cost per unit ₹ 240.00 ₹ 260.00
Total fixed costs per year ₹ 350 lakhs ₹ 200 lakhs
Capacity (in units) 8,00,000 10,00,000

Required:
(i) Recommend which machine should be chosen?
(ii) Would you change your answer if you were informed that in the near future
demand will be unlimited and the capacities of the two machines are as follows?
 Machine A - 12,00,000 units
 Machine B - 12,00,000 units
Why?

Answer
Machine-A Machine-B Total
A Selling price per unit (₹) 400 400
B Variable cost per cost 240 260
(₹)
C Contribution per unit (₹) 160 140
[A-B]
D Units 8,00,000 10,00,000
E Total contribution (₹) 12,80,00,000 14,00,00,000 26,80,00,000
[C×D]
F Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000
G Profit [E-F] (₹) 9,30,00,000 12,00,00,000 21,30,00,000

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 H Profit per unit [G÷D] (₹) 116.25 120.00

(i) Machine B has the higher profit of ₹2,70,00,000 than the Machine-A. Further,
Machine-B’s fixed cost is less than the fixed cost of Machine-A and higher
capacity. Hence, Machine B be recommended.
Note: This question can also be solved as below:
Indifferent point = Difference in fixed cost / difference in variable cost per unit
= 1,50,00,000 / 20 = 7,50,000 units
At the level of demand 7,50,000 units both machine options equally profitable.
If demand below 7,50,000 units, select machine B (with lower FC).
If demand above 7,50,000 units, select machine A (with lower VC).

(ii) When the capacities of both the machines are same and demand for the
product is unlimited, calculation of profit will be as follows:
Machine-A Machine-B Total
A Contribution per unit (₹) 160 140
B Units 12,00,000 12,00,000
C Total contribution (₹) 19,20,00,000 16,80,00,000 36,00,00,000
[A×B]
D Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000
E Profit [C-E] (₹) 15,70,00,000 14,80,00,000 30,50,00,000
F Profit per unit [E÷B] (₹) 130.83 123.33
Yes, the preference for the machine would change because now, Machine A is
having higher contribution and higher profit, hence recommended.

Question 104
Following information have been extracted from the cost (₹)
records of XYZ Pvt. Ltd.
Stores:
Opening balance 1,08,000

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 Purchases 5,76,000
Transfer from WIP 2,88,000
Issue to WIP 5,76,000
Issue for repairs 72,000
Deficiency found in stock 21,600
Work-in-process: (₹)
Opening balance 2,16,000
Direct wages applied 2,16,000
Overheads charged 8,64,000
Closing balance 1,44,000
Finished Production: (₹)
Entire production is sold at a profit of 15% on cost of WIP
Wages paid 2,52,000
Overheads incurred 9,00,000

PREPARE Stores Ledger Control Account, Work-in-Process Control Account,

Overheads Control Account and Costing Profit and Loss Account.

Answer
Stores Ledger Control A/c
Particulars ₹ Particulars ₹
To Balance b/d 1,08,000 By Work in Process A/c 5,76,000
To General Ledger By Overhead Control 72,000
A/c
Adjustment A/c 5,76,000 By Overhead Control 21,600*
A/c
To Work in Process 2,88,000 By Balance c/d 3,02,400
A/c
9,72,000 9,72,000

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 *Deficiency assumed as normal (alternatively can be treated as abnormal
loss)

Work in Process Control A/c

Particulars ₹ Particulars ₹
To Balance b/d 2,16,000 By Stores Ledger 2,88,000
Control A/c
To Stores Ledger 5,76,000 By Costing P/L A/c 14,40,000
Control A/c

Particulars ₹ Particulars ₹
To Wages Control A/c 2,16,000 By Balance c/d 1,44,000
To Overheads Control A/c 8,64,000
18,72,000 18,72,000

Overheads Control A/c

Particulars ₹ Particulars ₹
To Stores Ledger 72,000 By Work in Process A/c 8,64,000
Control A/c
To Stores Ledger 21,600 By Balance c/d (Under 1,65,600
Control A/c absorption)
To Wages Control 36,000
A/c
(2,52,000 –
2,16,000)
To Gen. Ledger 9,00,000
Adjust. A/c
10,29,600 10,29,600

Costing Profit & Loss A/c

Particulars ₹ Particulars ₹

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 To Work in process 14,40,000 By Gen. ledger Adjust. 16,56,000
A/c (Sales)
To Gen. Ledger 2,16,000
Adjust. A/c (Profit)
16,56,000 16,56,000

Question 105
Point Description Amount
(a) Opening Balance of Creditors Account ₹ 25,000
(b) Closing Balance of Creditors Account ₹ 40,000
(c) Payment made to Creditors ₹
5,80,000
(d) Opening Balance of Stores Ledger Control ₹ 40,000
Account
(e) Closing Balance of Stores Ledger Control ₹ 65,000
Account
(f) Wages Paid (for 8,000 hours) ₹
4,00,000
20% relate to Indirect Workers -
(g) Various Indirect Expenses incurred ₹ 60,000
(h) Opening Balance of WIP Control Account ₹ 50,000

(i) Inventory of WIP at the end of the month includes Material worth ₹ 35,000
on which 400 Labour Hours have been booked.
(j) Factory Overhead is charged to production at budgeted rate based on
Direct Labour Hours.
(k) Budgeted Overhead Cost is ₹ 20,80,000, for Budgeted Direct Labour
Hours of 1,04,000.

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 Prepare Creditors A/c, Stores Ledger Control A/c, WIP Control A/c, Wages
Control A/c and Factory Overhead Control A/c.
Answer
Working Notes:
1. (a) OH Rate p.u = ₹ 20,80,000 ÷ 1,04,000 hrs = ₹ 20 per hour
(b) Wage Rate ph = ₹ 4,00,000 ÷ 8,000 hrs = ₹ 50 ph
2. Value of Closing WIP = Direct Material = 35,000
o Direct Labour + (400 hrs × ₹ 50)
o Applied POH + (400 hrs × ₹ 20)
= ₹ 63,000

Ledger Accounts:
1. Sundry Creditors Account
Particulars ₹ Particulars ₹
To Bank 5,80,000 By balance b/d 25,000
(Payments)
To balance c/d 40,000 By Stores Ledger Control a/c 5,95,000
(Purchases) (bal.fig)
Total 6,20,000 6,20,000

2. Stores Ledger Control Account

Particulars ₹ Particulars ₹
To balance b/d – 40,000 By WIP Control – A/c 5,70,000
given Transfer (bal. fig)
To Creditors – 5,95,000 By balance c/d 65,000
Purchases
Total 6,35,000 6,35,000

3. Wages Control Account

Particulars ₹ Particulars ₹

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 To Cash / 4,00,000 By WIP Control A/c – Direct 3,20,000
Bank Wages – (bal. fig)
By POH Control – 20% Indirect 80,000
Wages
Total 4,00,000 4,00,000

4. Factory OH Control Account

Particulars ₹ Particulars ₹
To Cash / Bank / – 60,000 By WIP Control [8,000 1,60,000
POH paid (given) hrs × ₹ 20] (WN.1 a)
To Wages Control A/c 80,000 – absorbed OH transfer
– Indirect Wages
To balance c/d 20,000
(assumed carried
fwrd)
Total 1,60,000 1,60,000

5. WIP Control Account

Particulars ₹ Particulars ₹
To balance b/d 50,000 By Finished Goods 10,37,000
Control – (bal.fig)
To Stores Ledger 5,70,000 By balance c/d (WN 63,000
Control – RM 2)
Consumed
To Wages Control 3,20,000
To POH Control – 1,60,000
Absorbed
Total 11,00,000 11,00,000

Question 106
The following balances were extracted from a Company’s ledger as on 30th
June, 2018:

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 Particulars Debit (Rs.) Credit (Rs.)
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
Total 9,13,250 9,13,250

The following transactions took place during the quarter ended 30th
September, 2018:

Rs.
(i) Factory overheads - allocated to work-in-progress 1,36,350
(ii) Goods furnished - at cost 13,76,200
(iii) Raw materials purchased 12,43,810
(iv) Direct wages - allocated to work-in-progress 2,56,800
(v) Cost of goods sold 14,56,500
(vi) Raw materials - issued to production 13,60,430
(vii) Raw materials - credited by suppliers 27,200
(viii) Raw materials losses - inventory audit 6,000
(ix) Work-in-progress rejected (with no scrap value) 12,300
(x) 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
Answer
(i) Raw Material Control A/c
Particulars (Rs.) Particulars (Rs.)

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 To Balance b/d 2,82,450 By General Ledger 27,200
Adjustment A/c
" General Ledger 12,43,810 " Work-in-progress 13,60,430
Adjustment A/c Control A/c
Costing P & L A/c 6,000
(Loss) (OR GLA)
" Balance c/d 1,32,630
15,26,260 15,26,260

(ii) Work-in-Progress Control A/c

Particulars (Rs.) Particulars (Rs.)
To Balance b/d 2,38,300 " Finished Goods 13,76,200
Control A/c
" Raw Material 13,60,430 Costing P & L A/c (OR 12,300
Control A/c GLA)
" Wages Control A/c 2,56,800 " Balance c/d 6,03,380
" Factory OH Control 1,36,350
A/c
19,91,880 19,91,880

(iii) Finished Goods Control A/c

Particulars (Rs.) Particulars (Rs.)
To Balance b/d 3,92,500 By Cost of goods sold 14,56,500
A/c (OR GLA)
" General Ledger 45,900 " Balance c/d 3,58,100
Adjustment A/c
" Work-in-progress 13,76,200
Control A/c
18,14,600 18,14,600

(iv) General Ledger Adjustment A/c

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 Particulars (Rs.) Particulars (Rs.)
To Costing P & L A/c 25,68,910 By Balance b/d 9,13,250
(Sales)
" Raw Material Control 27,200 " Raw Material Control 12,43,810
A/c A/c
" Wages Control A/c 2,56,800
" Factory OH Control 1,36,350
A/c
" Finished Goods 45,900
Control A/c
25,96,110 25,96,110

General Ledger Adjustment Account (Alternate Presentation)

Particulars (Rs.) Particulars (Rs.)
To Raw Material Control 27,200 By Balance b/d 9,13,250
A/c
" Raw Material Control 6,000 " Raw Material 12,43,810
Account Control A/c
" WIP Control Account 12,300 " Wages Control A/c 2,56,800
(Rejection)
" Finished Stock Control 14,56,500 " Factory OH Control 1,36,350
Account A/c
" Balance c/d 10,94,110 " Finished Goods 45,900
Control A/c
25,96,110 25,96,110

Factory Overhead Control A/c

Particulars (Rs.) Particulars (Rs.)
To General Ledger 1,36,350 By Work-in-progress 1,36,350
Adjustment A/c A/c

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 1,36,350 1,36,350

Question 107
A manufacturing company had disclosed net loss of ₹ 48,700/- as per their
cost accounting records for the year ended 31st march 2014. However, their
financial accounting records disclosed net profit of ₹ 35,400 for the same
period. A scrutiny of date of both the sets of books of accounts revealed the
following information:
Particulars (₹)
Amount
(i) Factory overheads under absorbed 30,500
(ii) Administrative overheads over-absorbed 65,000
(iii) Depreciation charged in financial accounts 225,000
(iv) Depreciation charged in cost accounts 270,000
(v) Income-tax provision 52,400
(vi) transfer fee (credited in financial accounts) 10,200
(vii) obsolescence loss charged in financial accounts 207000
(viii) Notional Rent of own premises (charged in cost 54000
a/cs)
(ix) Value of opening stock:
(a) in cost accounts 138000
(b) in financial accounts 115,000
(x) Value of closing stock
(a) in cost accounts 122,000
(b) in financial accounts 112,500
Prepare a memorandum Reconciliation Account by taking costing loss as
base
Answer
Dr. Memorandum Reconciliation Account Cr.
Particulars Amount Particulars Amount
(₹) (₹)

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 To Net loss as per cost 48,700 By administrative 65,000
a/cs overheads over
absorbed in cost a/cs
To factory overheads 30500 By Excess depreciation 45,000
under absorbed in cost charged in cost a/cs
a/cs (270,000 - 225,000)
To provision for income 52400 By transfer fee credited 10,200
tax in financial a/cs
To obsolescence loss 20700 By Notional rent of own 54,000
premises
To Overvaluation of 9500 By Over-valuation of 23000
closing stock in cost opening stock in cost
a/cs (122000 - 112500) a/cs (138000 - 115,000)
To Net profit (as per 35,400
financial a/cs)
(balancing figure)
197200 197200

Question 108
The Trading and Profit and Loss Account of a company for the year ended
31.03.2016 is as under:
Particulars Amount Particulars Amount
To Materials 26,80,000 By Sales (50,000 62,00,000
units)
To Wages 17,80,000 By Closing stock 1,50,000
(2,000 units)
To Factory expenses 9,50,000 By Dividend 20,000
received
To Administrative 4,80,200
expenses
To Selling expenses 2,50,000
To Preliminary 50,000
expenses written off
To Net Profit 1,79,800

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 Total 63,70,000 Total 63,70,000

In the Cost Accounts:

(i) Factory expenses have been allocated to production at 20% of Prime
Cost.
(ii) Administrative expenses absorbed at 10% of factory cost.
(iii) Selling expenses charged at `10 per unit sold.
Prepare the Costing Profit and Loss Account of the company and reconcile
the Profit/Loss with the profit as shown in the Financial Accounts.
Answer
Costing Profit & Loss A/c
Particulars Amount Particulars Amount
To Materials 26,80,000 By Sales (50,000 62,00,000
units)
To Wages 17,80,000 By Closing stock 2,26,431
(2,000 units)
To Factory overheads 8,92,000
To Administration 5,35,200
overheads
To S & D Expenses 5,00,000
(50,000 × 10)
To Net profit 39,231
64,26,431 64,26,431

Working Notes:
1. Factory overheads in costs
= 20% of Prime cost
= 20% of (26,80,000 + 17,80,000)
= 8,92,000
2. Administrative overheads
= 10% of Factory cost
= 10% of (26,80,000 + 17,80,000 + 8,92,000)
= 5,35,200

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 3. Valuation of closing stock
= Cost of production × Units in Closing stock
Units produced
= (26,80,000 + 17,80,000 + 8,92,000 + 5,35,200) × 2,000 ÷ 52,000
= 2,26,431
4. Units produced
= Units sold + Closing units – Opening units
= 50,000 + 2,000 – Nil
= 52,000

Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Accounts 39,231
Add: Administrative expenses over recovered 55,000
(5,35,200 – 4,80,200)
Selling expenses over recovered (5,00,000 – 2,50,000
2,50,000)
Dividend received 20,000 3,25,000
Less: Factory expenses under recovered (9,50,000 58,000
– 8,92,000)
Closing stock over valued in costs (2,26,431 – 76,431
1,50,000)
Preliminary expenses written off 50,000 (1,84,431)
Profit as per Financial Accounts 1,79,800

Question 109
GK Limited showed a net loss of 2,43,300 as per their financial accounts for
the year ended 31st March, 2018. However, cost accounts disclosed a net
loss of 2,48,300 for the same period. On scrutinizing both the set of books of
accounts, the following information were revealed:
(a) Works overheads over recovered 30,400
(b) Selling overheads under recovered 20,300
(c) Administrative overhead under recovered 27,700
(d) Depreciation over charged in cost accounts 35,100
(e) Bad debts w/off in financial accounts 15,000

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 (f) Preliminary Exp. w/off in financial accounts 5,000
(g) Interest credited during the year in financial accountants 7,500
Prepare a reconciliation statement reconciling losses shown by financial
and cost accounts by taking costing net loss as base.

Answer
Reconciliation Statement
Particulars Amount Amount
Loss as per Cost Records (2,48,300)
Add: Factory overhead over recovered 30,400
Depreciation over charged in cost accounts 35,100
Interest credited during the year in financial 7,500 73,000
accounts
Less: Selling overheads under recovered 20,300
Administrative overheads under recovered 27,700
Bad debts w/off in financial accounts 15,000
Preliminary Exp. w/off in financial accounts 5,000 (68,000)
Profit as per Financial Books (2,43,300)

Question 110
M/s Abid Private Limited disclosed a net profit of 48,408 as per cost books
for the year ending 31st March 2019. However, financial accounts disclosed
net loss of 15,000 for the same period.
On scrutinizing both the set of books of accounts, the following information
was revealed:
Particulars Amount (`)
Works Overheads under recovered in Cost Books 48,600
Office Overheads over recovered in Cost Books 11,500
Dividend received on Shares 17,475
Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800

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 Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000
Prepare a Memorandum Reconciliation Account.

Answer
Memorandum Reconciliation Account
Particulars Particulars
To Works OH under 48,600 By Net profit as per 48,408
recovered Costing Books
To Provision for 17,800 By Admin overheads over 11,500
doubtful debts recovered
To Obsolescence 17,200 By Dividend received 17,475
loss
To Stores 35,433 By Interest on fixed 21,650
adjustments deposits
By Depreciation over 5,000
recovered (35,000 -
30,000)
By Net loss as per 15,000
Financial Books
Total 1,19,033 Total 1,19,033

Question 111
The Profit and Loss account of ABC Ltd. for the year ended 31st March,
2021 is given below:
Profit & Loss Account
(For the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales (15,000 15,00,000
units)

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 To Direct Wages 3,50,000 By Dividend 9,000
received
To Factory overheads 2,60,000
To Administrative 1,05,000
overheads
To Selling overheads 85,000
To Loss on sale of 2,000
investments
To Net profit 57,000
Total 15,09,000 Total 15,09,000

Additional information:
(a) The factory overheads are 50% fixed and 50% variable.
(b) The administration overheads are 100% fixed.
(c) Selling overheads are completely variable.
(d) Normal production capacity of ABC Ltd. is 20,000 units.
(e) Indirect expenses are absorbed in the cost accounts on the basis of
normal production capacity.
(f) Notional rent of own premises charged in Cost Accounts is amounting to
`12,000.

You are required to:

(1) Prepare a Cost Sheet and ascertain the profit as per Cost records for the
year ended 31st March, 2021.
(2) Reconcile the Profit as per Financial Records with profit as per Cost
Records.
Answer
Working Note
Calculation of Fixed OH Recovery Rates:
(a) For Factory Overheads = Fixed Factory OH / Normal Production Capacity
= (50% x 2,60,000) / 20,000 units
= ₹ 1,30,000 / 20,000 units
= ₹ 6.50 per unit

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 (b) For Administration Overheads
= ₹ 1,05,000 / 20,000 units
= ₹ 5.25 per unit

Cost Sheet for the year ended 31st March, 2021 : (for 15,000 units)
Particulars (₹) (₹)
Direct material 6,50,000
Direct wages 3,50,000
Prime cost 10,00,000
Factory Overheads:
Variable (50% of ₹ 2,60,000) actual 1,30,000
Fixed (₹ 6.50 per unit x 15,000 units) 97,500 2,27,500
Works cost 12,27,500
Administrative OH (₹ 5.25 per unit x 15,000 units) 78,750
Notional Rent charged in cost accounts 12,000
Cost of production 13,18,250
Selling Overheads - fully variable 85,000
Cost of Sales 14,03,250
Profit (Balancing figure) 96,750
Sales revenue 15,00,000

Statement of Reconciliation
Particulars Add Less Total
Profit as per Financial Accounts 57,000
Under absorption of Factory OH in cost 32,500
accounts
[2,60,000 - 2,27,500]
Under absorption of Admin. OH in cost 26,250
accounts
[1,05,000 - 78,750]

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 Notional rent considered only in cost 12,000
accounts
Items considered only in Financial Accounts:
Loss on sale of investments 2,000
Dividend received 9,000
Sub-total 60,750 21,000 39,750
Profit as per Cost Accounts 96,750

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