COST ACCOUNTING

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Intermediate Examinations – Autumn 2011

A.1 Allocation of costs to

Basis Machine M1 Machine M2 Inspection Packing Total
cost centres
Area Occupied 5,500 4,800 12,000 15,000 37,300

Allocation of Electricity Area 330,000 288,000 720,000 900,000 2,238,000

Allocation of rent Area 220,000 192,000 480,000 600,000 1,492,000
Operational cost 5,500,000 3,200,000 - - 8,700,000
6,050,000 3,680,000 1,200,000 1,500,000 12,430,000

ALLOCATION OF COST TO PRODUCTS

Basis of Cost Allocation A B TOTAL
Units produced 5,600 7,500
Inspection time (hrs.) (5,600 x 15 min /60) & (7,500 x 12 min /60) 1,400 1,500 2,900
Packing time (hrs.) (5,600 x 12 min /60) & (7,500 x 10 min /60) 1,120 1,250 2,370
Units produced on Machine M1 (50% A and 65% B) 2,800 4,875 7,675
Units produced on Machine M2 (50% A and 35% B) 2,800 2,625 5,425

Cost Allocated
Machine M1 cost 2,207,166 3,842,834 6,050,000
Machine M2 cost 1,899,355 1,780,645 3,680,000
Inspection department cost 579,310 620,690 1,200,000
Packing department cost 708,861 791,139 1,500,000
5,394,692 7,035,308 12,430,000

A.2 (a) Cost Rs.000’

Units (x) (xy) (x2)
(y)
March 2011 75 900 67,500 5,625
April 2011 60 700 42,000 3,600
May 2011 65 850 55,250 4,225
June 2011 80 950 76,000 6,400
July 2011 105 1,200 126,000 11,025
August 2011 95 1,040 98,800 9,025
480 5,640 465,550 39,900

n(∑ xy) - (∑ x)(∑ y) 6 × 465,550 - 480 × 5,640

b (Variable cost per unit) = = = 9.57
n(∑ x ) − (∑ x)
2 2
6 (39,900) - (480) 2
(∑ y) − b(∑ x) (5,640 - 9.57 (480))
a (Fixed costs per month) = = = 174
n 6

Estimated cost to produce 110 units:

Y= a + b (x)
= 174 + 9.57 x 110 = Rs. 1,227

(b) Allocation of wages between direct and indirect labour

Direct Indirect Total

Rupees
Normal wages (47 × Rs. 25) 1,175 - 1,175
Overtime wages (4 × Rs. 25)(4 x 25 × 0.45) 100 45 145
Idle time wages (3 × Rs. 25) - 75 75
1,275 120 1,395
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Intermediate Examinations – Autumn 2011

Reasons for the allocation:

Normal wages paid for production will be charged to production. The portion of the overtime
wages which is paid in excess of the normal wages should be charged to indirect labour as it
does not give extra production. Idle time wages are unproductive, therefore will be charged to
indirect labour.

A.3 (a) (i) Standard quantity for actual production at standard price:
Materials Quantity (kg) Price Per Kg(Rs.) Amount
A (30/400 × 192) 14.4 240 3,456
B (25/400 × 192) 12 320 3,840
26.4 7,296

(ii) Actual quantity at actual price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A 16 230 3,680
B 13 308 4,004
29 7,684

(iii) Actual quantity used at standard price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A 16 240 3,840
B 13 320 4,160
29 8,000

(iv) Standard mix of actual total input at standard price:

Materials Quantity (kg) Price Per Kg(Rs.) Amount
A (30/55 × 29) 15.82 240 3,796.80
B (25/55 × 29) 13.18 320 4,217.75
29 8,014.55

Direct Material Cost Variance

SC – AC = (i) – (ii) = 7,296 – 7,684 = Rs. 388 adverse

Direct Material Price Variance

AQ (SP-AP) = (iii) – (ii) = 8,000 – 7,684 = Rs. 316 favourable

Direct Material Usage Variance

SP (AQ-SQ) = (iii) – (i) = 8,000 – 7,296 = Rs. 704 adverse

Direct Material Mix Variance

SP (SQ-AQ) = (iv) – (iii) = 8,014.55 – 8,000 = Rs. 14.55 favourable

Direct Material Yield Variance

SR (SY-AY) = (iv) – (i) = 8,014.55 – 7,296 = Rs. 718.55 adverse
 COST ACCOUNTING
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Intermediate Examinations – Autumn 2011

(b) Production Cost Budget

Actual (30-06-2011) Budget (30-09-2011)

Rupees
Direct material cost 120,000 132,000
Direct labour cost (W-1) 75,000 64,350
Prime Cost 195,000 196,350
Production Overhead:
Variable 70,000 80,080
Fixed 45,000 45,000
Total cost 310,000 321,430

W-1:
The labour hours will increase by 10%. Also there will be increase in labour hours as
production efficiency has decreased by 4%. Therefore, increased total labour hours will
be:

110 104
(75,000 ÷ 4) = 18,750 × × = 21,450
100 100
Rate is decreased to Rs. 3. Therefore, direct labour cost will be 21,450 x 3 = Rs. 64,350.

A.4 Hornbill Limited – Department-B

Cost of Production Report
For the Month of August, 2011

Quantity schedule: (in litres)

Work in process - opening -
Units received from department-A 55,000

Units transferred to department-C 39,500

Work in process - closing 10,500
Units lost in process – Normal loss (balancing figure) 5,000
55,000

Equivalent production statement (in litres)

Labour FOH
Units transferred to department-C 39,500 39,500
Work in process – closing (10,500 × 0.3335) (W-1) 3,500 3,500
Equivalent Units 43,000 43,000

Cost charged to department: Total Cost Unit Cost

Rupees
Cost from preceding department:
Transferred in during the month (55,000 × 1.80) 99,000 1.80

Cost added by the department:

Labour (W-2) 27,520 0.64
Factory overhead (W-2) 15,480 0.36
Total cost added 43,000 1.00
Adjustment for lost units (W-3) 0.18
Total cost to be accounted for 142,000 2.98
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Intermediate Examinations – Autumn 2011

Cost Accounted for as Follows:

Transferred to department-C (39,500 × Rs 2.98) 117,710
Work in process - ending inventory:
Cost from department-1 [10,500 × (Rs. 1.8 + Rs. 0.18)] 20,790
Labour (3,500 × Rs. 0.64) 2,240
Factory overhead (3,500 × Rs. 0.36) 1,260 24,290
Total cost accounted for 142,000

W-1: Units in Process Equivalent

50% were 40% completed 0.20
20% were 30% completed 0.06
30% were 24.5% completed 0.0735
Weighted average 0.3335

W-2 : Unit cost based on equivalent units

Labour FOH
Equivalent units (Litres) 43,000 43,000
Cost (Rs.) 27,520 15,480
Cost per Unit (Rs.) 0.64 0.36

W-3: Adjustment for lost units (Normal loss):

Formula for Calculation:

Unit cost of lost units = (lost units × cost from department 1) / (units from department 1 - lost units)
= (5,000 × 1.80) / (55,000 units – 5,000 units) = Rs 9,000 / 50,000 = Rs 0.18

A.5 (i) Optimal Production Plan

Football Basketball Rugby ball Total
Leather required per unit (Sq. ft.)
38 ÷ 95 0.4
238 ÷ 340 0.7
255 ÷ 510 0.5
Budgeted sales volume 5,000 3,500 2,000
Total Leather required (Sq. ft.) 2,000 2,450 1,000 5,450
Maximum Leather available (Sq. ft.) 3,840

Football Basketball Rugby ball

Selling price 295 397 500
Less: Variable Costs
Leather 38 238 255
Direct labour @ Rs. 50/hr. 100 50 75
Variable Overheads 65 25 45
Total Variable Cost 203 313 375
Contribution per unit 92 84 125

Leather requirement (Sq. ft.) 0.4 0.7 0.5

Contribution per Sq. ft. 230 120 250
Ranking 2 3 1

(Sq. ft.)
Maximum Leather available 3,840
Less: Leather allocated to confirmed order:
Football (800 x 0.4 ) (320)
Basketball (1,300 x 0.7 ) (910)
Rugby ball (400 x 0.5 ) (200)
Unused balance of leather 2,410
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Intermediate Examinations – Autumn 2011

Now, the scarce material will be allocated as per ranking.

Leather Balance
Product Volume Material used
requirements unused
2,410
Rugby ball 1,600 0.5 800 1,610
Football (balance) 4,025 0.4 1,610 -
Basketball Nil 0.7 - -

(ii) Profit arising from above production plan

Contribution
Product Units Contribution per unit
margin
Rugby ball 2,000 125 250,000
Football 4,825 92 443,900
Basketball 1,300 84 109,200
Total Contribution 803,100
Less: Fixed costs (Note 1) (66,000)
Profit 737,100

Note – 1 - Fixed overhead

Fixed costs
Product Units Direct labour Hour Fixed costs
per D.L Hour
Rugby ball 2,000 (2,000×1.5)=3,000 4 12,000
Football 5,000 (5,000×2)=10,000 4 40,000
Basketball 3,500 (3,500×1)=3,500 4 14,000
Total Fixed Costs 66,000

A.6 (a) Evaluation of inventory policies:

Rupees in '000
Particulars Existing PI PII PIII
Sales 300,000 422,500 527,500 620,000

(240,040
Cost of goods sold W-1 ) (338,040) (422,040) (496,040)
Contribution 59,960 84,460 105,460 123,960
Less: inventory carrying cost @
8% (2,400) (3,863) (5,627) (7,937)
Profit before tax 57,560 80,597 99,833 116,023
Tax @ 30% (17,268) (24,179) (29,950) (34,807)
Profit after tax 40,292 56,418 69,883 81,216
Incremental profit - 16,126 29,591 40,925
Incremental investment - 18,286 40,335 69,203
Incremental return - 88% 73% 59%

Recommendation: The incremental rate of return is maximised if inventory Policy PI

is adopted by the company.

W-1: Calculation of cost of goods sold:

Existing 300,000 80% 40 240,040

PI 422,500 80% 40 338,040
PII 527,500 80% 40 422,040
PIII 620,000 80% 40 496,040
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Intermediate Examinations – Autumn 2011

W-2: Level of investment in inventory & carrying cost:

Carrying
cost
Existing 240,040 / 8 30,005 @ 8% 2,400
PI 338,040 / 7 48,291 @ 8% 3,863
PII 422,040 / 6 70,340 @ 8% 5,627
PIII 496,040 / 5 99,208 @ 8% 7,937

) (b) Average stock level:

Average stock level = minimum level + ½ (reorder quantity)

As minimum level is not given it will be computed a follows:

Re-order level = maximum usage × maximum lead time
Re-order level = 300 × 6 = 1,800 units.
Minimum level = Re-order level – ( average usage × average lead time)
Minimum level = 1,800 – (225 × (6+2/2) = 900 units.
Therefore, Average stock level = 900 + (½ 750) = 1,275 units.

(THE END)