PAPER – 3: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) A Limited a toy company purchases its requirement of raw material from S Limited at
` 120 per kg. The company incurs a handling cost of ` 400 plus freight of ` 350 per order.
The incremental carrying cost of inventory of raw material is ` 0.25 per kg per month. In
addition the cost of working capital finance on the investment in inventory of raw material
is ` 15 per kg per annum. The annual production of the toys is 60,000 units and 5 units of
toys are obtained from one kg. of raw material.
Required:
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost.
Assume 360 days in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annu m as per
EOQ.
(b) PQR Limited has replaced 72 workers during the quarter ended 31 st March 2022. The
labour rates for the quarter are as follows:
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.

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 2 INTERMEDIATE EXAMINATION: MAY, 2022

(c) 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 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?
(d) Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is
at distance of 15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet of
lorries having carrying capacity of 4 tonnes is used to transport coal from the mines.
Records reveal that average speed of the lorries is 40 kms per hour when running and
regularly take 15 minutes to unload at the rail head.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading
time is 25 minutes per load.
Additional Information:
Drivers' wages, depreciation, insurance and taxes, etc. ` 12 per hour
Operated Fuel, oil tyres, repairs and maintenance, etc. ` 1.60 per km
You are required to prepare a statement showing the cost per tonne kilometre of carrying
coal from each mine 'X' and 'Y'. (4 x 5 = 20 Marks)
Answer
60,000 units
(a) Annual requirement of raw material in kg. (A) = = 12,000 kg.
5 units per kg.
Ordering Cost (Handling & freight cost) (O) = ` 400 + ` 350 = ` 750
Carrying cost per unit per annum i.e. inventory carrying cost + working capital cost
(c × i)
= (` 0.25 × 12 months) + `15

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

= ` 18 per kg.
2  12,000kgs.  ` 750
(i) E.O.Q.= = 1,000 kg.
` 18

(ii) Frequency of orders for procurement:

Annual consumption (A) = 12,000 kg.
Quantity per order (EOQ) = 1,000 kg.
A 12,000kg.
No. of orders per annum ( ) = = 12
EOQ 1,000kg.
12months
Frequency of placing orders (in months) = = 1 months
12 orders
360days
Or, (in days) = = 30 days
12orders
(iii) Calculation of total ordering cost and total inventory carrying cost as per EOQ:
Amount/Quantity
Size of the order 1,000 kg.
No. of orders 12
Cost of placing orders ` 9,000
(12 orders × ` 750)
Inventory carrying cost ` 9,000
(1,000 kg. × ½ × ` 18)
Total Cost `18,000
(b) Working Note:
(i) Average number of workers on roll (for the quarter):
Employee Turnover rate using Replacement method
No. of replacements
= ×100
Average number of workers on roll
8 72
Or, =
100 Average number of workers on roll
72×100
Or, Average number of workers on roll = = 900
8

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 4 INTERMEDIATE EXAMINATION: MAY, 2022

(ii) Number of workers left and discharged:

Employee turnover rate (Separation method)
No. of Separations(S) 5 S
= × 100 = = Or, S = 45
Average number of workers on roll 100 900
Hence, number of workers left and discharged comes to 45
(iii) Number of workers recruited and joined:
Employee turnover rate (Flux method)
No. of Separations*(S)+No. of Accessions(A)
=
Average number of workers on roll
16 45+ A  14400 
Or, = Or, A =  - 45 = 99
100 900  100 
No. of workers recruited and joined 99
(iv) Calculation of Equivalent employee turnover rates:
EmployeeTurnove rate for the quarter(s)
= × 4 quarters
Number of quarter(s)
16%
Using Flux method = ×4 = 64%
1
8%
Using Replacement method = ×4 = 32%
1
5%
Using Separation method = ×4 = 20%
1
(c)
Machine-A Machine-B Total
A Selling price per unit ( `) 400 400
B Variable cost per cost ( `) 240 260
C Contribution per unit ( `) [A-B] 160 140
D Units 8,00,000 10,00,000
E Total contribution ( ` [C×D] 12,80,00,000 14,00,00,000 26,80,00,000
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
H Profit per unit [G÷D] ( `) 116.25 120.00

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

(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 ( `) [A×B] 19,20,00,000 16,80,00,000 36,00,00,000
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.
(d) Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine X (`) Mine Y (`)
Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance and
taxes)
X: 1 hour 30 minutes @ ` 12 per hour 18.00
Y: 1 hour 40 minutes @ ` 12 per hour 20.00
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
X: 30 km. ` 1.60 per km. 48.00
Y: 40 km. ` 1.60 per km. 64.00

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 6 INTERMEDIATE EXAMINATION: MAY, 2022

Total cost per trip (`) 66.00 84.00

Cost per tonne – km 1.1 1.05

(Refer to working note 2)  ` 66   ` 84 
   
 60 tonne - km   80 tonne - km 

Working notes:
Mine- X Mine- Y
(1) Total operated time taken per
trip
Running time to & fro 45 minutes 60 minutes
 60minutes   60minutes 
 30km.×   40km.  
 40km.   40km. 

Un-loading time 15 minutes 15 minutes

Loading time 30 minutes 25 minutes
Total operated time 90 minutes or 100 minutes or
1 hour 30 minutes 1 hour 40 minutes
(2) Effective tones – km. 60 80
(4 tonnes × 15 km.) (4 tonnes × 20 km.)
Question 2
(a) 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%

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

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:
Direct materials ` 68,750
Direct wages ` 22,500
Profit percentage on selling price 15%
(10 Marks)
(b) Paramount Constructions Limited is engaged in construction and erection of bridges under
long term contracts. It has entered into a big contract at an agreed price of ` 250 Lakhs
subject to an escalation clause for material and labour as spelt out in the contract and
corresponding actual are as follows:
Standard Actual
Material Quantity Rate Per Tonne Quantity Tonnes Rate Per Tonne
Tonnes (`) (`)
P 2,800 1,500 3,000 1,750
Q 3,100 900 2,900 800
R 800 4,500 950 4,350
S 150 32,500 120 34,200
Labour Hours Hourly rate (`) Hours Hourly rate (`)
LM 65,000 60 61,500 70
LN 46,000 45 45,000 50
Required:
(i) Prepare a statement showing admissible additional claim of material and labour due
to escalation clause.
(ii) Determine the final price payable after admissible escalation claim. (5 Marks)
(c) Distinguish between Job costing and Process Costing. (Any five points of differences)
(5 Marks)

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 8 INTERMEDIATE EXAMINATION: MAY, 2022

Answer
(a) (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
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)
- - - - -
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

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

On solving the above relations: F = 0.667 and A = 0.20

Hence, percentage recovery rates of:
Factory overheads = 66.7% or 2/3 rd of wages and
Administrative overheads = 20% of factory cost.
Working note:
Selling price
Total Cost =
(100% + Percentage of profit)
` 3,33,312
*For Job 1 = = ` 2,97,600
(100% + 12%)

`2,52,000
**For Job 2 = = ` 2,10,000
(100% + 20%)
(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
2/3rd of direct wages 56,000 40,000
Factory cost 2,48,000 1,75,000
Administrative overheads
20% of factory cost 49,600 35,000
Total cost 2,97,600 2,10,000
Profit (12% & 20% respectively) 35,712 42,000
Selling price 3,33,312 2,52,000
(iii) Selling price of Job 3
(`)
Direct materials 68,750
Direct wages 22,500

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 10 INTERMEDIATE EXAMINATION: MAY, 2022

Prime cost 91,250

Factory overheads (2/3 rd 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
 Total Cost 
Selling price  
 85%  1,50,000

(b) Statement showing Additional claim

Standard Standard Actual Variation in Escalation
Qty/Hrs. Rate (`) Rate (`) Rate (`) Claim (`)
(a) (b) (c) (d) = (c)–(b) (e) =(a) × (d)
Materials
P 2,800 1,500 1,750 250 7,00,000
Q 3,100 900 800 (100) (3,10,000)
R 800 4,500 4,350 (150) (1,20,000)
S 150 32,500 34,200 1,700 2,55,000
Materials escalation claim: (A) 5,25,000
Wages
LM 65,000 60 70 10 6,50,000
LN 46,000 45 50 5 2,30,000
Wages escalation claim: (B) 8,80,000
Final claim: (A + B) 14,05,000
Statement showing final price payable
(`) (`)
Agreed price 2,50,00,000
Add: Agreed escalation
Material cost 5,25,000
Labour cost 8,80,000 14,05,000
Final price payable 2,64,05,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 11

(c)
Job Costing Process Costing
(i) A Job is carried out or a product is The process of producing the product
produced by specific orders. has a continuous flow and the product
produced is homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period
for each process or department.
(iii) Each job is separate and Products lose their individual identity as
independent of other jobs. they are manufactured in a continuous
flow.
(iv) Each job or order has a number The unit cost of process is an average
and costs are collected against the cost for the period.
same job number.
(v) Costs are computed when a job is Costs are calculated at the end of the
completed. The cost of a job may cost period. The unit cost of a process
be determined by adding all costs may be computed by dividing the total
against the job. cost for the period by the output of the
process during that period.
(vi) As production is not continuous Process of production is usually
and each job may be different, so standardized and is therefore, quite
more managerial attention is stable. Hence control here is
required for effective control. comparatively easier.
Question 3
(a) 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

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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.
• 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. (10 Marks)
(b) The following data are available from the books and records of A Ltd. for the month of April
2022:
Particulars Amount (`)
Stock of raw materials on 1 st April 2022 10,000
Raw materials purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & maintenance 1,000
Stock of raw materials on 30 th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300
Stock of finished goods as on 1 st April 2022 was 200 units having a total cost of
` 28,000. The entire opening stock of finished goods has been sold during the month.

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Production during the month of April, 2022 was 3,000 units. Closing stock of finished
goods as on 30th April, 2022 was 400 units.
You are required to:
I. Prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed
(ii) Prime Cost
(iii) Factory Cost
(iv) Cost of Production
(v) Cost of goods sold
(vi) Cost of Sales
II. Calculate selling price per unit, if sale is made at a profit of 20% on sales.
(10 Marks)
Answer
(a) 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
38 20
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 0.25 X, 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

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Or, 0.5X + 0.25X = 12,000

Or, 0.75X = 12,000
Or, X = 12,000÷0.75
= 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
II. (i) Sales Budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022
Shirts Shorts Shirts Shorts Shirts Shorts
A Sales demand 15,000 20,000 16,500 22,000 18,150 24,200
B Selling price per unit 60 44 60 44 60 44
(`)
C Sales Revenue (`) 9,00,000 8,80,000 9,90,000 9,68,000 10,89,000 10,64,800

(ii) Production budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022 October 2022
Shirts Shorts Shirts Shorts Shirts Shorts Shirts Shorts
A Opening stock 0 0 6,600 8,800 7,260 9,680
B Sales demand 15,000 20,000 16,500 22,000 18,150 24,200 19,965 26,620
C Closing stock 6,600 8,800 7,260 9,680 7,986 10,648
D Production 21,600 28,800 17,160 22,880 18,876 25,168
[B+C-A]

(b) I. Statement of Cost (for the month of April, 2022)

S. No. Particulars Amount (`) Amount (`)
Opening stock of Raw material 10,000
Add: Purchase of Raw material 2,80,000
Less: Closing stock of raw materials (40,000)
(i) Raw material consumed 2,50,000
Manufacturing wages 70,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 15

(ii) Prime Cost 3,20,000

Factory/work overheads:
Depreciation on plant 15,000
Lease rent of production Asset 10,000
Expenses paid for pollution control and
engineering & Maintenance 1,000 26,000
(iii) Factory/Work Cost 3,46,000
Expenses paid for quality control check
activity 4,000
Research and Development Cost 5,000
Administration Overheads (Production) 15,000
Primary Packing Cost 8,000
(iv) Cost of Production 3,78,000
Add: Opening stock of finished goods 28,000
Less: Closing stock of finished goods (50,400)
(v) Cost of Goods Sold 3,55,600
Advertisement expenses 1,300
Packing cost for re-distribution of
finished goods sold 1,500
(vi) Cost of Sales 3,58,400
Note: Valuation of Closing stock of finished goods
3,78,000
= × 400 units
3000 units
= `50,400
3,58,400
II. Cost per unit sold = = ` 128 per unit
200+3,000-400
128
 Selling Price = = `160 per unit
80%
Question 4
(a) STG Limited is a manufacturer of Chemical 'GK', which is required for industrial use. The
complete production operation requires two processes. The raw material first passes
through Process I, where Chemical 'G' is produced. Following data is furnished for the
month April 2022:

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 16 INTERMEDIATE EXAMINATION: MAY, 2022

Particulars (in kgs.)

Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)
Material input quantity 1,05,000
Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)
You are further provided that:
Particulars (in `)
Opening work-in-progress cost
Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100
Normal process loss may be estimated to be 10% of material input. It has no realizable
value. Any loss over and above normal loss is considered to be 100% complete in material
and processing.
The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Pr ocess II
for producing Chemical 'GK'. Further materials are added in Process II which yield 1.20 kg.
of Chemical 'GK' for every kg. of Chemical 'G' introduced. The chemicals transferred to
Process II for further processing are then sold as Chemical 'GK' for ` 10 per kg. Any
quantity of output completed in Process I, are sold as Chemical 'G' @ ` 9 per kg.
The monthly costs incurred in Process II (other than the cost of Chemical 'G') are:
Input 60,000 kg. of Chemical 'G'
Materials Cost ` 85,000
Processing Costs ` 50,000
You are required:
(i) Prepare Statement of Equivalent production and determine the cost per kg. of
Chemical ‘G' in Process I using the weighted average cost method.
(ii) Prepare a statement showing cost of Chemical 'G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in progress.
(iii) STG is considering the option to sell 60,000 kg. of Chemical 'G' of Process I without
processing it further in Process-II. Will it be beneficial for the company over the
current pattern of processing 60,000 kg in process-II? (10 Marks)

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(Note: You are not required to prepare Process Accounts)

(b) UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps
and sells its lamps at ` 450 per unit.
During the quarter ending on 31st December, 2021, it produced and sold 12,000 units and
suffered a loss of ` 35 per unit.
During the quarter ending on 31 st March, 2022, it produced and sold 30,000 units and
earned a profit of ` 40 per unit.
You are required to calculate:
(i) Total fixed cost incurred by UV ltd. per quarter.
(ii) Break Even sales value (in rupees)
(iii) Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e.,
quarter ending on 30 th June, 2022). (5 Marks)
(c) Journalize the following transactions assuming the cost and financial accounts are
integrated:
Particulars Amount (`)
Direct Materials issued to production ` 5,88,000
Allocation of Wages (Indirect) ` 7,50,000
Factory Overheads (Over absorbed) ` 2,25,000
Administrative Overheads (Under absorbed) ` 1,55,000
Deficiency found in stock of Raw material (Normal) ` 2,00,000
(5 Marks)
Answer
(a) (i) Statement of Equivalent Production
Particulars Input Particulars Total Material Processing
quantity Cost
% Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000
Material Input 1,05,000 Normal loss 10,500 - - - -
(10% of
1,05,000)
Abnormal loss 4,500 100% 4,500 100% 4,500
(Bal. fig.)

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 18 INTERMEDIATE EXAMINATION: MAY, 2022

Closing WIP 16,500 100% 16,500 60% 9,900

1,14,500 1,14,500 1,04,000 97,400
Statement of Cost for each element
Particulars Material Processing Total cost
(`) (`) (`)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25
Alternative Presentation
Statement showing cost per kg of each statement
(`) (`)
Material 29,500 + 3,34,500 3.5
1,04,000
Processing cost 14,750 + 2,53,100 2.75
97,400
Total Cost per kg 6.25
(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in- progress
(`)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:
Material (16,500 × 3.5) 57,750
Processing cost (9,900 × 2.75) 27,225
84,975
(iii) Calculation of Incremental Profit / Loss after further processing
Particulars (`) (`)
Sales if further processed (A) (60,000 x 1.20 x ` 10) 7,20,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

Calculation of cost in Process II

Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 x ` 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.

Alternative Presentation
Calculation of Incremental Profit / Loss after further processing
(`)
If 60,000 units are sold @ ` 9 5,40,000
If 60,000 units are processed in process II (60,000 × 1.2 × ` 10) 7,20,000
Incremental Revenue (A) 1,80,000
Incremental Cost: (B)
Material Cost 85,000
Processing Cost 50,000
1,35,000
Incremental Profit (A-B) 45,000
Additional net profit on further processing in Process II is 45,000. Therefore, it
is advisable to process further chemical ‘G’.
(b)

Quarter ending Quarter ending

31st December, 31st March, 2022
2021 (`) (`)
Sales (No. of units sold x ` 450 per unit) 54,00,000 1,35,00,000

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 20 INTERMEDIATE EXAMINATION: MAY, 2022

Profit (Loss) (4,20,000) 12,00,000

[12,000 × 35] [30,000 × 40]
Change in profit
P/V Ratio = ×100
Change in Sales
16,20,000
 ×100 = 20%
81,00,000
(i) Fixed Cost = Sales × P/V ratio – profit
= ` 1,35,00,000 × 20% – 12,00,000
= ` 15,00,000
Alternative Presentation for the calculation of Fixed cost
Quarter ending Quarter ending
31st December, 2021 31st March, 2022
(`) (`)
Sales (No. of units sold x ` 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
Total cost 58,20,000 1,23,00,000
VC per unit = (1,23,00,000 – 58,20,000) / (30,000 – 12,000)
= 64,80,000 / 18,000 =` 360 per unit
Fixed cost = TC – VC , 58,20,000 (360 x12,000 units) `15,00,000
Fixed cost
(ii) Break even sales value (in Rupees) = ×100
P/V ratio
15,00,000
= = `75,00,000
20%
(iii) Profit, if sales reach 50,000 units for the quarter ending 30 th June, 2022
(`)
Sales (50,000 × ` 450) 2,25,00,000
Less: Variable cost 1,80,00,000
Contribution 45,00,000
Less: Fixed cost 15,00,000
Profit 30,00,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

(c)
Particulars (`) (`)
(i) Work-in-Progress Ledger Control A/c Dr. 5,88,000
To Stores Ledger Control A/c 5,88,000
(Being issue of direct materials to production)
(ii) Factory Overhead control A/c Dr. 7,50,000
To Wages Control A/c 7,50,000
(Being allocation of Indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,25,000
To Costing Profit & Loss A/c 2,25,000
(Being transfer of over absorption of Factory
overhead)
(iv) Costing Profit & Loss A/c Dr. 1,55,000
To Administration Overhead Control A/c 1,55,000
(Being transfer of under absorption of Administration
overhead)
(v) Factory Overhead Control A/c Dr. 2,00,000
To Stores Ledger Control A/c 2,00,000
(Being transfer of deficiency in stock of raw material)
(Note: Costing P/&/L = P/&/L and SLC = MLC)
Question 5
(a) 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. per Materials per Volume in
per unit unit Unit1 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.

1 Material cost per unit

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 22 INTERMEDIATE EXAMINATION: MAY, 2022

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
Cost relating to machinery 10
Cost relating to material handling 30
Costs 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-ups No. of movements of Materials No. of 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)
(b) A manufacturing department of a company has employed 120 workers. The standard
output of product ''NPX" is 20 units per hour and the standard wage rate is ` 25 per labour
hour.
In a 48 hours week, the department produced 1,000 units of 'NPX' despite 5% of the time
paid being lost due to an abnormal reason. The hourly wages actually paid were ` 25.70
per hour.
Calculate:
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Idle time Variance (5 Marks)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

(c) RST Limited produces three joint products X, Y and Z. The products are processed further.
Pre-separation costs are apportioned on the basis of weight of output of each joint product.
The following data are provided for the month of April, 2022.
Cost incurred up to separation point: ` 10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80
` ` `
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre:
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45
You are required to:
(i) Prepare a statement showing profit or loss made by each product after further
processing using the presently adopted method of apportionment of pre-separation
cost.
(ii) Advise the management whether, on purely financial consideration, the three
products are to be processed further or not. (5 Marks)
Answer
(a) (i) Statement showing “Cost per unit” using “conventional method”
Particulars of Costs AX BX CX
(`) (`) (`)
Direct Materials 35 25 45
Direct Labour 20 18 30
Production Overheads 60 45 75
Cost per unit 115 88 150
(ii) Statement Showing “Cost per unit using “Activity Based Costing”
Products AX BX CX
Production (units) 7,500 12,500 25,000
(`) (`) (`)
Direct Materials 2,62,500 3,12,500 11,25,000
Direct Labour 1,50,000 2,25,000 7,50,000
Machine Related Costs 45,000 56,250 1,87,500

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 24 INTERMEDIATE EXAMINATION: MAY, 2022

Products AX BX CX
Setup Costs 2,62,500 3,37,500 5,55,000
Material handling Cost 1,50,000 2,10,000 5,06,250
Inspection Costs 77,000 1,54,000 3,46,500
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost  Units) 126.267 103.62 138.81

Working Notes:
Calculation of Total Machine hours
Particulars AX BX CX
(A) Machine hours per unit 2 1.5 2.5
(B) Production (units) 7,500 12,500 25,000
(C) Total Machine hours (A× B) 15,000 18,750 62,500
Total Machine hours = 96,250
Total Production overheads = 96,250 × 30 = ` 28,87,500
Calculation of Cost Driver Rate
Cost Pool % Overheads Cost Driver Cost Driver Cost Driver
(`) (Basis) (Units) Rate (`)
Set up 40 11,55,000 No of set ups 1,540 750 per set up
Machine 10 2,88,750 Machine hours 96,250 3 per machine
Operation hour
Material 30 8,66,250 No of material 1,155 750 per material
Handling movement movement
Inspection 20 5,77,500 No of 1,500 385 per
inspection inspection

(b) Working Notes:

1. Calculation of standard man hours
When 120 worker works for 1 hr., then the std. output is 20 units.
120 hrs.
Std. man hour per unit = = 6 hrs.
20 units
2. Calculation of std. man hours for actual output
Total std. man hours = 1,000 units × 6 hrs. = 6,000 hrs.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 25

Standard for actual Actual

Hours Rate Amount Actual hrs. Idle Production Rate Amount
(`) (`) paid time hrs. (`) paid
hrs. (`)
6,000 25 1,50,000 5,760 288 5,472 25.70 1,48,032
(48 hrs. x 120
workers)

(i) Labour cost variance

= Std. labour cost – Actual labour cost
= 1,50,000 – 1,48,032 = ` 1,968 F
(ii) Labour rate variance
= (SR – AR) × AHPaid
= (25 - 25.70) × 5,760 = ` 4,032 A
(iii) Labour efficiency variance
= (SH – AH) × SR
= (6,000 – 5,472) × 25 = ` 13,200 F
(iv) Labour Idle time variance
= Idle Hours × SR
= 288 × 25 = ` 7,200 A
Note: Variances can also be calculated for one worker instead of 120.
(c) (i) Statement showing profit/loss by each product after further processing
products
Product X Product Y Product Z
(in `) (in `) (in `)
Sales value after further processing 5,000 5,600 4,800
Less: Further processing cost 2,000 1,200 800
Less: Joint Cost* (as apportioned) 4,000 2,800 3,200
Profit/(loss) (1,000) 1,600 800
* Statement showing apportionment of joint cost on the basis of physical units

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 26 INTERMEDIATE EXAMINATION: MAY, 2022

Product X Product Y Product Z Total

(in `) (in `) (in `) (`)
Output (in litre) 100 70 80 250
Weight 0.4 0.28 0.32
(100/250) (70/250) (80/250)
Joint cost apportioned 4,000 2,800 3,200
(ii) Decision whether to process further or not
Product X Product Y Product Z
(in `) (in `) (in `)
Incremental Revenue 2,500 700 1,200
[(50-25) × 100] [(80-70) × 70] [(60-45) × 80]
Less: Further processing cost 2,000 1,200 800
Incremental profit /(loss) 500 (500) 400

Product X Product Y Product Z Total

(in `) (in `) (in `)
Sales 2500 4900 3600 11000
Pre separation costs 4000 2800 3200 10000
Profit/(Loss) (1500) 2100 400 1000
It is advisable to further process only product X and Z and to sale product Y at the
point of separation.
Question 6
Answer any four of the following:
(a) Briefly explain the essential features of a good Cost Accounting System.
(b) Write down the treatment of following items associated with purchase of materials.
(i) Cash discount
(ii) IGST
(iii) Demurrage
(iv) Shortage
(v) Basic Custom Duty

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 27

(c) Explain the treatment of Overtime Premium in following situations:

(i) SV & Co. wants to grab some special orders, and overtime is required to meet the
same.
(ii) Dept. X has to work overtime to make up a shortfall in production due to some fault
of management in dept. Y.
(iii) S Ltd. has to work overtime regularly throughout the year as a policy due to the
workers' shortage.
(iv) Due to flood in Odisha, RS Ltd. has to work overtime to complete the job.
(v) A customer requested the company MN Ltd. to expedite the job because of his
urgency of work.
(d) Discuss briefly some of the criticism which may be levelled against the Standard Costing
System.
(e) Identify the methods of costing from the following statements:
(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Costs ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units produced.
(4 x 5 = 20 Marks)
Answer
(a) The essential features, which a good cost accounting system should possess, are
as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical,
simple and capable of meeting the requirements of a business concern. The system
of costing should not sacrifice the utility by introducing inaccurate and unnecessary
details.
(b) Accurate and authentic: The data to be used by the cost accounting system should
be accurate and authenticated; otherwise it may distort the output of the system and
a wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in
classification, treatment and reporting of cost data and related information. This is
required for benchmarking and comparability of the results of the system for both
horizontal and vertical analysis.

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 28 INTERMEDIATE EXAMINATION: MAY, 2022

(d) Integrated and inclusive: The cost accounting system should be integrated with
other systems like financial accounting, taxation, statistics and operational research
etc. to have a complete overview and clarity in results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to
make necessary amendment and modifications in the system to incorporate changes
in technological, reporting, regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output.
For this, an active role of management is required for the development of such a
system that reflects a strong conviction in using information for decision making.
(b) Treatment of items associated with purchase of materials is tabulated as below
S. Items Treatment
No.
(i) Cash Discount Cash discount is not deducted from the purchase price.
It is treated as interest and finance charges. It is ignored.
(ii) Integrated Goods Integrated Goods and Service Tax (IGST) is paid on inter-
and Service Tax state supply of goods and provision of services and
(IGST) collected from the buyers. It is excluded from the cost
of purchase if credit for the same is available. Unless
mentioned specifically it should not form part of cost of
purchase.
(iii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase
(iv) Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units absorb
the cost of shortage due to normal reasons. Losses
due to breaking of bulk, evaporation, or due to any
unavoidable conditions etc. are the reasons of normal
loss.
Shortage due to abnormal reasons: Shortage arises
due to abnormal reasons such as material mishandling,
pilferage, or due to any avoidable reasons are not
absorbed by the good units. Losses due to abnormal
reasons are debited to costing profit and loss
account.
(v) Basic Custom Basic Custom duty is paid on import of goods from
Duty outside India. It is added with the purchase cost.

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(c) Treatment of Overtime premium in different situations

Situation Treatment
(i) SV & Co. wants to grab some If overtime is required to cope with general
special orders, and overtime is production programmes or for meeting urgent
required to meet the same. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost centre which works
overtime.
(ii) Dept. X has to work overtime to If overtime is worked in a department due to
make up a shortfall in the fault of another department, the overtime
production due to some fault of premium should be charged to the latter
management in dept. Y. department (Y).
(iii) S Ltd. has to work overtime The overtime premium is treated as a part of
regularly throughout the year employee cost and job is charged at an
as a policy due to the workers’ effective average wage rate.
shortage.
(iv) Due to flood in Odisha, RS Ltd. Overtime worked on account of abnormal
has to work overtime to conditions such as flood, earthquake etc.,
complete the job. should not be charged to cost, but to
Costing Profit and Loss Account.
(v) A customer requested the Where overtime is worked at the request of the
company MN Ltd. to expedite customer, overtime premium is also charged
the job because of his urgency to the job/ customer directly.
of work.
(d) Criticism of Standard Costing
(i) Variation in price: One of the chief problem faced in the operation of the standard
costing system is the precise estimation of likely prices or rate to be paid. The
variability of prices is so great that even actual prices are not necessarily adequately
representative of cost. But the use of sophisticated forecasting techniques should be
able to cover the price fluctuation to some extent. Besides this, the system provides
for isolating uncontrollable variances arising from variations to be dealt with
separately.
(ii) Varying levels of output: If the standard level of output set for pre-determination of
standard costs is not achieved, the standard costs are said to be not realised.
However, the statement that the capacity utilisation cannot be precisely estimated for
absorption of overheads may be true only in some industries of jobbing type. In vast
majority of industries, use of forecasting techniques, market research, etc., help to
estimate the output with reasonable accuracy and thus the variation is unlikely to be
very large. Prime cost will not be affected by such variation and, moreover, variance
analysis helps to measure the effects of idle time.

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 30 INTERMEDIATE EXAMINATION: MAY, 2022

(iii) Changing standard of technology: In case of industries that have frequent

technological changes affecting the conditions of production, standard costing may
not be suitable. This criticism does not affect the system of standard costing. Cost
reduction and cost control is a cardinal feature of standard costing because standards
once set do not always remain stable. They have to be revised.
(iv) Attitude of technical people: Technical people are accustomed to think of standards
as physical standards and, therefore, they will be misled by standard costs. Since
technical people can be educated to adopt themselves to the system through
orientation courses, it is not an insurmountable difficulty.
(v) Mix of products: Standard costing presupposes a pre-determined combination of
products both in variety and quantity. The mixture of materials used to manufacture
the products may vary in the long run but since standard costs are set normally for a
short period, such changes can be taken care of by revision of standards.
(vi) Level of Performance: Standards may be either too strict or too liberal because they
may be based on (a) theoretical maximum efficiency, (b) attainable good performance
or (c) average past performance. To overcome this difficulty, the management should
give thought to the selection of a suitable type of standard. The type of standard most
effective in the control of costs is one which represents an attainable level of good
performance.
(vii) Standard costs cannot possibly reflect the true value in exchange: If previous
historical costs are amended roughly to arrive at estimates for ad hoc purposes, they
are not standard costs in the strict sense of the term and hence they cannot also
reflect true value in exchange. In arriving at standard costs, however, the economic
and technical factors, internal and external, are brought together and analysed to
arrive at quantities and prices which reflect optimum operations. The resulting costs,
therefore, become realistic measures of the sacrifices involved.
(viii) Fixation of standards may be costly: It may require high order of skill and
competency. Small concerns, therefore, feel difficulty in the operation of such system.
(e) Method of costing followed:
Situation Method of costing
(i) Costs are directly charged to a group of products. Batch costing
(ii) Nature of the product is complex and method Multiple costing
cannot be ascertained.
(iii) Cost is ascertained for a single product. Unit/ Single/Output costing
(iv) All costs are directly charged to a specific job. Job costing
(v) Costs are charged to operations and averaged Process costing
over units produced.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Question No. 1 is compulsory.
Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) XYZ Ltd. uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production
process and has provided the following data for the year ended on 31 st March, 2021:
Particulars Material A Material B
(`) (`)
Opening stock as on 01.04.2020 30,000 32,000
Purchase during the year 90,000 51,000
Closing stock as on 31.03.2021 20,000 14,000
(i) You are required to calculate:
(a) The inventory turnover ratio of ‘Material A’ and ‘Material B’.
(b) The number of days for which the average inventory is held for both materials
‘A’ and ‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year.)
(b) The Accountant of KPMR Ltd. has prepared the following budget for the coming year
2022 for its two products ‘AYE’ and ‘ZYE’:
Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in `) Amount (in `)
Selling Price per unit 200 180
Direct Material per unit 80 70
Direct Labour per unit 40 35
Variable Overhead per unit 20 25
Fixed Overhead per unit 10 10

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 2 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

After reviewing the above budget, the management has called the marketing team for
suggesting some measures for increasing the sales. The marketing team has suggested
that by promoting the products on social media, the sales quantity of both the products
can be increased by 5%. Also, the selling price per unit will go up by 10%. But this will
result in increase in expenditure on variable overhead and fixed overhead by 20% and
5% respectively for both the products.
You are required to prepare flexible budget for both the products:
(i) Before promotion on social media,
(ii) After promotion on social media.
(c) A skilled worker is paid a guaranteed wage rate of ` 150 per hour. The standard time
allowed for a job is 10 hours. He took 8 hours to complete the job. He has been paid the
wages under Rowan Incentive Plan.
You are required to:
(i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan.
(ii) Calculate the time in which he should complete the job, if the worker is placed under
Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly
rate of earnings.
(d) A product passes through Process-I and Process-II.
Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ` 80,000, Wages ` 60,000 and manufacturing
overheads were ` 52,500. Normal Loss anticipated was 5% of input, 9,650 units of
output were produced and transferred out from Process-I to Process-II. Input raw
materials issued to Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ` 5 per unit.
You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account (4 x 5 = 20 Marks)
Answer
(a) (i) Calculation of Inventory Turnover ratios and number of days:
Material A (`) Material B (`)
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
1,20,000 83,000
Less: Closing stock 20,000 14,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

Materials consumed 1,00,000 69,000

Average inventory: (Opening Stock + Closing 25,000 23,000
Stock)  2
(a) Inventory Turnover ratio: (Consumption 4 times 3 times
 Average inventory)
(b) Number of days for which the average 90 days 120 days
inventory held (Number of Days in a
year/IT ratio)
(ii) Comments: Material A is moving faster than Material B. Or Material A has a less
holding period.
(b) (i) Flexible Budget (before promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,000 3,000
(units)
Amount (`) Amount (`) Amount (`)
A. Sales Value 8,00,000 5,40,000 13,40,000
(` 200×4,000) (` 180×3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(` 80 × 4,000) (`70 × 3,000)
C. Direct labour 1,60,000 1,05,000 2,65,000
(` 40 × 4,000) (` 35 × 3,000)
D. Variable Overheads 80,000 75,000 1,55,000
(` 20 × 4,000) (` 25 × 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
G. Fixed Overhead 40,000 30,000 70,000
(`10 × 4,000) (`10 × 3,000)
H. Profit (F-G) 2,00,000 1,20,000 3,20,000
Profit per unit 50 40
(ii) Flexible Budget (after promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,200 3,150
(units) (4,000×105%) (3,000×105%)

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 4 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Amount (`) Amount (`) Amount (`)

A. Sales Value 9,24,000 6,23,700 15,47,700
(` 220 × 4,200) (` 198 × 3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(` 80 × 4,200) (` 70 × 3,150)
C. Direct labour 1,68,000 1,10,250 2,78,250
(` 40 × 4,200) (` 35 × 3,150)
D. Variable Overheads 1,00,800 94,500 1,95,300
(` 24 × 4,200) (` 30 × 3,150)
E. Total Variable Cost 6,04,800 4,25,250 10,30,050
(B+C+D)
F. Contribution (A-E) 3,19,200 1,98,450 5,17,650
G. Fixed Overhead 42,000 31,500 73,500
(` 40,000 × (` 30,000 ×
105%) 105%)
H. Profit (F-G) 2,77,200 1,66,950 4,44,150
Profit per unit 66 53
(c) (i) Calculation of Effective hourly rate of earnings under Rowan Incentive Plan:
Standard time allowed = 10 hours
Time taken = 8 hours; Time saved = 2 hours
Particulars Amount
(`)
A Basic guaranteed wages (`150×8 hours) 1,200
B 2 240
Add: Bonus for time saved ( × 8 × ` 150)
10
C Total earnings (A+B) 1,440
D Hours worked 8 hours
E Effective hourly rate (C÷D) 180
(ii) Let the time taken to complete the job is “T” and the time saved is 10-T
Effective hourly rate under the Halsey Incentive scheme
(Rate × Hours Worked) + (Rate × 50% of Time Saved)
= = ` 180
Hours Worked

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

(`150 × T) + `150 × 50% (10 - T)

= ` 180
T
150T + 750 -75T = 180T
180T-75T = 750
750
T= = 7.14 hours
105
(d) (i) Process - I Account
Particulars Units (`) Particulars Units (`)
To Materials 10,000 80,000 By Normal loss 500 2,500
(5%of 10,000)
To Wages - 60,000 By Process-II A/c 9,650 1,93,000
(`20*×9,650units
)
To Manufacturing OH 52,500
To Abnormal Gain A/c 150 3,000
(`20*×150units)
10,150 1,95,500 10,150 1,95,500
(80,000 + 60,000 + 52,500) - 2,500
* = ` 20
10,000 - 500
(ii) Abnormal Gain - Account
Particulars Units (`) Particulars Units (`)
To Normal loss A/c 150 750 By Process-I A/c 150 3,000
To Costing P&L A/c - 2,250
150 3,000 150 3,000

Question 2
(a) G Ltd. manufactures leather bags for office and school purposes.
The following information is related with the production of leather bags for the month of
September, 2021.
(1) Leather sheets and cotton clothes are the main inputs and the estimated
requirement per bag is two metres of leather sheets and one metre of cott on cloth.
2,000 metre of leather sheets and 1,000 metre of cotton cloths are purchased at
` 3,20,000 and ` 15,000 respectively. Freight paid on purchases is ` 8,500.
(2) Stitching and finishing need 2,000 man hours at ` 80 per hour.

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 6 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

(3) Other direct costs of ` 10 per labour hour is incurred.

(4) G Ltd. have 4 machines at a total cost of ` 22,00,000. Machines have a life of 10
years with a scrap value of 10% of the original cost. Depreciation is charged on a
straight-line method.
(5) The monthly cost of administration and sales office staffs are ` 45,000 and ` 72,000
respectively. G Ltd. pays ` 1,20,000 per month as rent for a 2,400 sq. feet factory
premises. The administrative and sales office occupies 240 sq. feet and 200 sq. feet
respectively of factory space.
(6) Freight paid on delivery of finished bags is ` 18,000.
(7) During the month, 35 kgs of scrap (cuttings of leather and cotton) are sold at ` 150
per kg.
(8) There are no opening and closing stocks of input materials. There is a finished
stock of 100 bags in stock at the end of the month.
You are required to prepare a cost sheet in respect of above for the month of September
2021 showing:
(i) Cost of Raw Material Consumed
(ii) Prime Cost
(iii) Works/Factory Cost
(iv) Cost of Production
(v) Cost of Goods Sold
(vi) Cost of Sales (10 Marks)
(b) 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 desires a
profit increase of 20% more than the budgeted profit and selling price is reduced by
10% as above in point (iii). (10 Marks)

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Answer
(a) No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2021
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
(i) Cost of material consumed 3,43,500 343.50
2. Direct wages (`80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (`10 × 2,000 hours) 20,000 20.00
4. (ii) 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. (iii) Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (`150×35 (5,250) (5.25)
kg.)
8. (iv) Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × (63,275)
`632.75)
11. (v) Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 50.00
- Apportioned rent for administrative 12,000 13.33
office
13. 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
14. (vi) Cost of Sales 7,26,475 807.19

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 8 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

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 sale office {(` 1,20,000 ÷ 2400 sq. feet) × 200 sq. feet} = ` 10,000
(b) 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 =`20
Selling Price per Unit=Total Cost+ Profit =` 20+` 4 =` 24
Contribution per Unit=` 24-`16=` 8
Fixed cost ` 8,00,000
(i) Present Break-even Sales (Quantity) = =
Contribution margin per unit `8
= 1,00,000 units
Present Break-even Sales (`) = 1,00,000 units  ` 24 = ` 24,00,000
8
(ii) Present P/V Ratio =  100 = 33.33%
24
(iii) Revised Selling Price per Unit = ` 24 – 10% of ` 24 = ` 21.60
Revised Contribution per Unit=` 21.60-` 16 = ` 5.60
5.60
Revised P/V Ratio =  100 = 25.926%
21.60
Fixed cost 8,00,000
Revised Break-even point (`) = = = ` 30,85,705
P/V ratio 25.926%

Or

Fixed cost 8,00,000

Revised Break-even point (units) = = = 1,42,857
Contribution margin per unit 5.60
units
Revised Break-even point (`) = 1,42,857 units x ` 21.60 = ` 30,85,711
(iv) Present profit =` 8,00,000
Desired Profit = 120% of ` 8,00,000 =` 9,60,000
Sales to earn a profit of ` 9,60,000
Total contribution required = 8.00.000 + 9,60,000 = ` 17,60,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

Fixed cost + Desired profit 8,00,000 + 9,60,000
= = 3,14,286 units
Contribution per unit 5.60

Revised sales (in `) = 3,14,286 units x ` 21.60 = ` 67,88,578

Question 3
(a) 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 a fleet of 8 mini buses for this
purpose. The buses are parked in a garage adjoining the company’s premises. Co mpany
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 for ` 10,000 per attendant per month
each mini bus)
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,

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 10 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance upto 15 kms. from the office.
(b) Employees coming from a distance beyond 15 kms. from the office. (10 Marks)
(b) 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 placed (in nos.) 560 810 630
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Units sold (in Nos.) 1,75,200 1,50,300 1,44,500
Following additional information is also provided:
Activity Description of activity Total Cost Cost-allocation base
(`)
Drug Licence fee Drug Licence fee 5,00,000 To be distributed in
ratio 2:3:5 between A,
B and C
Ordering Placing of orders for 8,30,000 2,000 purchase orders
purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of foods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-
stocking time
Customer Support Assistance provided 28,20,000 4,70,000 units sold
to customers
You are required to:
(i) Calculate the operating income and operating income as a percentage (%) of
revenue of each product line if:
(a) All the support costs (Other than cost of goods sold) are allocated in the ratio
of cost of goods sold.

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(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 operat ing income
as a percentage (%) of revenue of each product line under both the situations as
above. (10 Marks)
Answer
(a) (i) Statement of Expenses of operating a mini bus in a year
Particulars Rate Per Bus per
(`) annum (`)
(A) Standing Charges:
Driver’s salary 20,000 p.m 2,40,000
Lady attendant’s salary 10,000 p.m 1,20,000
Average Cleaner’s salary (50%) 15,000 p.m 90,000
Insurance charge 30,000 p.a. 30,000
License fee, taxes etc. 5,080 p.m. 60,960
Average Garage Rent 24,000 p.m 36,000
Depreciation {(15,00,000 – 3,00,000) ÷ 8} 1,50,000 p.a. 1,50,000
(B) Maintenance Charges:
Repairs & maintenance including engine 28,560 p.a.
oil and lubricants (Working Note 1)
(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 upto 15 km
Total cost per month 1,10,960
= = = ` 1,541.11
Total no.of equivalent employee 72*

B. Employee coming from a distance beyond 15 km

= 1541.11 × 2 = ` 3,082.22
* Considering half fare employees as a base
Full fare employees (12 × 2) 24 employees

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 12 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

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 72 employees
+ afternoon shift of company)
Working Notes:
1. Calculation of Repairs and maintenance cost of a bus :
Distance travelled in a year:
(4 trip × 2 shifts × 30 km. × 20 days × 12 months)
Distance travelled p.a.: 57,600 km.
Repairs and maintenance cost per Bus per annum:
57,600 km.
= × ` 2,856 per bus
5,760 km
= ` 28,560 per annum
2. Calculation of diesel cost per bus per annum:
Distance travelled in a year = 57,600 km
Diesel cost per Bus per annum:
57,600 km.
= ×` 80
8 Km
= 5,76,000
3. Calculation of equivalent number of employees per bus:
Seating capacity of a bus 30 employees
Occupancy (80% of capacity) 24 employees
Half fare employees (50% of 24 employees) 12 employees
Full fare employees (50% of 24 employees) 12 employee
[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 15km will
1,10,960
be = ` 3,082.22 and employees coming from distance upto 15 km will be
36
3,082.22 / 2 = ` 1,541.11]

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 13

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

Working notes:
1. Total support cost:
(`)
Drug Licence Fee 5,00,000
Ordering 8,30,000
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
= 100
Total cost of goods sold
` 92,10,000
= ` 2,30,25,000 ×100 = 40%

3. Cost for each activity cost driver:

Activity Total Cost allocation base Cost driver rate
cost (`)
(1) (2) (3) (4) = [(2) ÷ (3)]
Ordering 8,30,000 2,000 purchase orders ` 415 per purchase order

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 14 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Delivery 18,20,000 2,800 deliveries ` 650 per delivery

Shelf-stocking 32,40,000 4,500 hours ` 720 per stocking hour
Customer support 28,20,000 4,70,000 units sold ` 6 per unit 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 % of 8.81% 12.71% 15.78% 13.46%
revenues
* Refer to working note 3
(ii) Comparison on the basis of operating income as per the percentage (%) 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 22.12% 14.60% 9.32% 13.46%
a % 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.

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(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 8.81% 12.71% 15.78% 13.46%
a % 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 4
(a) A construction company has obtained a contract of ` 30 lakhs contract price.
The following details are available in respect of this contract for the year ended
March 31, 2021:
Particulars (`)
Materials purchased 2,00,000
Materials issued from stores 8,00,000
Wages paid 1,50,000
Plant Supervisor Salary 2,40,000
Drawing and maps 50,000
Sundry expenses 30,000
Electricity charges 40,000
Plant hire expenses paid 75,000
Sub-contract cost 40,000
Materials returned to stores 35,000
Materials returned to suppliers 50,000
The following balances related to the contract for the year ended on March 31, 2020 and
March 31, 2021 are available:
As on 31 st March, 2020 As on 31 st March, 2021
(`) (`)
Work certified 2,50,000 70% of Contract Price
Work uncertified 10,000 ?
Materials at site 35,000 25,000
Wages outstanding 15,000 22,000
Plant hire charges outstanding 20,000 15,000

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 16 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Further informations are as under:

1. An additional plant was used for 270 days costing ` 5,00,000 with a residual value
of ` 20,000 having life of 4 years.
2. During the year, material costing ` 40,000 was sold for ` 20,000.
3. Plant supervisor has devoted 1/3 rd of his time to this contract.
4. As on 31.03-2021, 80% of the contract was completed.
You are required to prepare Contract Account and show the notional profit or loss as on
31st March, 2021 (Assume 360 days in a year). (10 Marks)
(b) R Ltd. showed a Net Profit of ` 3,60,740 as per their cost accounts for the year ended
31st March, 2021.
The following information was revealed as a result of scrutiny of the figures from the both
sets of accounts:
Sr. No. Particulars (`)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600

Required:
Prepare a reconciliation statement showing the profit as per financial records. (5 Marks)
(c) What is Bill of Material? Describe the uses of Bill of Material in following departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department (5 Marks)

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Answer
(a) Contract A/c
Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Opening Work in progress By Material returned to 35,000
store
- Work certified 2,50,000 By Material returned to 50,000
suppliers
- Work uncertified 10,000 2,60,000 By Costing P&L (Loss 20,000
on sale of material)
To Material at site 35,000 By Material Sold 20,000
To Material purchased 2,00,000 By Material at site 25,000
To Stores 8,00,000 By Works cost (Bal. fig.) 17,02,000
To Wages 1,50,000
Add: Closing O/s wages 22,000
Less: Opening O/s wages (15,000) 1,57,000
To Plant supervisor salary 80,000
(2,40,000 × 1/3)
To Drawing and maps 50,000
To Sundry expenses 30,000
To Electricity charges 40,000
To Plant hire expenses 75,000
Add: O/s at end 15,000
Less: O/s at beginning (20,000) 70,000
To Sub-contract 40,000
To Depreciation 90,000
 5,00,000 - 20,000 270 
 ×
4 360 
18,52,000 18,52,000
To works cost 17,02,000 By work in progress:
To Costing P& L (Notional 6,10,750 Work certified 21,00,000
profit)
Work uncertified 2,12,750 23,12,750
23,12,750 23,12,750

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 18 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Working Note:
Calculation of Value of work uncertified

Cost incurred till date 17,02,000

17,02,000 21,27,500
Estimate total cost [ ]
80%
Cost of work certified till date (21,27,500 × 70%) 14,89,250
Cost of uncertified work (17,02,000 – 14,89,250) 2,12,750
(b) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial records)
(`) (`)
Net Profit as per Cost Accounts 3,60,740
Add:
Over recovery of selling overheads in cost accounts 10,250
Rent received credited in financial accounts 5,450 15,700
376,440
Less:
Over valuation of closing stock in cost accounts 7,300
Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 35,850
Profit as per Financial Accounts 3,40,590
(c) Bill of Material: It is a detailed list specifying the standard quantities and qualities of
materials and components required for producing a product or carrying out of any job.
Uses of Bill of Material in different department:
Purchase Production Stores Cost/ Accounting
Department Department Department Department
Materials are Production is planned It is used as a It is used to estimate
procured according to the nature, reference cost and profit. Any
(purchased) on volume of the materials document while purchase, issue and
the basis of required to be used. issuing materials to usage are compared/
specifications Accordingly, material the requisitioning verified against this
mentioned in it. requisition lists are department. document.
prepared.

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Question 5
(a) 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% are of 1,80,000
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 (`)
Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% are of 19,200
variable)
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 (10 Marks)
(b) XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre -
determined rate of ` 20 per man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually
worked were ` 35.50 lakhs and 1.50 lakh days respectively. Out of the amount of ` 35.50
lakhs, ` 2.00 lakhs were in respect of wages for stick period and ` 1.00 lakh was in
respect of expenses of previous year booked in this current year. During the period,
50,000 units were sold. At the end of the period, 12,000 completed units were held in
stock but there was no opening stock of finished goods. Similarly, there was no stock of
uncompleted units at the beginning of the period but at the end of the period there were
20,000 uncompleted units which may be treated as 65% complete in all respects.

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 20 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

On investigation, it was found that 40% of the unabsorbed overheads were due to factory
inefficiency and the rest were attributable to increase in the cost of indirect materials and
indirect labour. You are required to:
(i) Calculate the amount of unabsorbed overheads during the year 2020 -21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass
journal entry. (10 Marks)
Answer
(a) Working Notes
Budgeted Fixed Overheads ` 12,00,000 ` 10
Fixed Overheads = =
Budgeted Output 1,20,000 units
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of ` 1,08,000
`1,80,000
Budgeted Fixed Overheads ` 1,08,000 ` 0.90
Fixed Overheads = =
Budgeted Output 1,20,000units
Standard Rate of Absorption of Fixed Overheads per unit (`10 + ` 10.90
`0.90)
Fixed Overheads Absorbed on 8,000 units @ ` 10.90 ` 87,200
Budgeted Variable Overheads ` 6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ` 1,80,000 ` 72,000
Total Budgeted Variable Overheads ` 6,72,000
Budgeted Variable Overheads `5.60
Standard Variable Cost per unit = =
Budgeted Output
` 6,72,000
1,20,000 units
Standard Variable Overheads for 8,000 units @ `5.60 ` 44,800
Budgeted Annual Fixed Overheads (` 12,00,000 + 60% of ` 1,80,000) ` 13,08,000
Budgeted Fixed Overheads ` 1,03,550
Possible Fixed Overheads = ×Actual Days
Budgeted Days
 ` 1,09,000 
=  19 Days 
 20 Days 
Actual Fixed Overheads (`1,10,000 + 60% of ` 19,200) ` 1,21,520
Actual Variable Overheads (`48,000 + 40% of `19,200) ` 55,680
COMPUTATION OF VARIANCES

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

i. Overhead Cost Variance = Absorbed Overheads – Actual Overheads

= (` 87,200 + ` 44,800) – (` 1,21,520 + ` 55,680)
= ` 45,200 (A)
ii. Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed
Overheads
= ` 87,200 – ` 1,21,520
= ` 34,320 (A)
iii. Variable Overhead Cost Variance = Standard Variable Overheads for Production–
Actual Variable Overheads
= ` 44,800 – ` 55,680
= ` 10,880 (A)
iv. Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
= ` 87,200 – `1,09,000
= ` 21,800 (A)
v. Fixed Overhead Expenditure Variance = Budgeted Fixed Overheads – Actual
Fixed Overheads
= ` 10.90 × 10,000 units – ` 1,21,520
= ` 12,520 (A)
vi. Calendar Variance = Possible Fixed Overheads – Budgeted
Fixed Overheads
= ` 1,03,550 – ` 1,09,000
= ` 5,450 (A)
OR
Calendar Variance = (Actual days – Budgeted days) x Standard fixed overhead
rate per day
Standard fixed overhead rate per day = 1308000/20*12 = ` 5450
Fixed Overhead Calendar Variance = (19-20) x 5450 = 5450(A)

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 22 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

(b) (i) Amount of under-absorption of overheads during the year 2020-21

(`)
Total production overheads actually incurred during the year 35,50,000
2020-21
Less: Wages paid during strike period `2,00,000
Wages of previous year booked in current ` 1,00,000 3,00,000
year
Net production overheads actually incurred: (A) 32,50,000
Production overheads absorbed by 1.50 lakh man-days @ ` 20 30,00,000
per man-day: (B)
Amount of under-absorption of production overheads: [(A)–(B)] 2,50,000
(ii) Accounting treatment of under absorption of production overheads: It is given
in the statement of the question that 62,000 units (50,000 sold + 12,000 closing
stock – 0 opening stock) were completely finished and 20,000 units were 65%
complete, 40% of the under-absorbed overheads were due to factory inefficiency
and the rest were attributable to increase in cost of indirect materials and indirect
labour.
(`)
1. (40% of `2,50,000) i.e. ` 1,00,000 of under – absorbed 1,00,000
overheads were due to factory inefficiency. This being
abnormal, should be debited to the Costing Profit and Loss
A/c
2. Balance (60% of ` 2,50,000) i.e. ` 1,50,000 of under – 1,50,000
absorbed overheads should be distributed over work-in-
progress, finished goods and cost of sales by using
supplementary rate
Total under-absorbed overheads 2,50,000

Apportionment of unabsorbed overheads of `1,50,000 over work-in-progress,

finished goods and cost of sales.
Equivalent (`)
Completed units
Work-in-progress (13,000 units × ` 2) 20000 * 65% = 13,000 26,000
(Refer to Working Note)
Finished goods (12,000 units × ` 2) 12,000 24,000
Cost of sales (50,000 units × ` 2) 50,000 1,00,000
75,000 1,50,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

Journal entry:
Work-in-progress control A/c Dr. ` 26,000
Finished goods control A/c Dr. ` 24,000
Cost of Sales A/c Dr. ` 1,00,000
Costing Profit & Loss A/c Dr. ` 1,00,000
To Overhead control A/c ` 2,50,000

Working Note:
` 1,50,000
Supplementary overhead absorption rate = = ` 2 per unit
75,000 units
Question 6
Answer any four of the following:
(a) Briefly explain the ‘techniques of costing’.
(b) Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term.
(c) Discuss the steps involved in setting labour time standards.
(d) What is ‘Budgetary Control System’ and discuss the components of the same.
(e) Describe the difference between ‘Cost Control’ and ‘Cost Reduction’. (4 x 5 = 20 Marks)
Answer
(a)
Techniques Description
Uniform Costing When a number of firms in an industry agree among themselves
to follow the same system of costing in detail, adopting common
terminology for various items and processes they are said to
follow a system of uniform costing.
Advantages of such a system are:
i. A comparison of the performance of each of the firms can
be made with that of another, or with the average
performance in the industry.
ii. Under such a system, it is also possible to determine the
cost of production of goods which is true for the industry as
a whole. It is found useful when tax-relief or protection is
sought from the Government.
Marginal It is defined as the ascertainment of marginal cost by
Costing differentiating between fixed and variable costs. It is used to
ascertain effect of changes in volume or type of output on profit.

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 24 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

Standard It is the name given to the technique whereby standard costs are
Costing and pre-determined and subsequently compared with the recorded
Variance actual costs. It is thus a technique of cost ascertainment and cost
Analysis control. This technique may be used in conjunction with any
method of costing. However, it is especially suitable where the
manufacturing method involves production of standardised goods
of repetitive nature.
Historical It is the ascertainment of costs after they have been incurred.
Costing This type of costing has limited utility.
• Post Costing: It means ascertainment of cost after
production is completed.
• Continuous costing: Cost is ascertained as soon as the job
is completed or even when the job is in progress.
Absorption It is the practice of charging all costs, both variable and fixed to
Costing operations, processes or products. This differs from marginal
costing where fixed costs are excluded.
Direct costing Direct costing is a specialized form of cost analysis that only
uses variable costs to make decisions. It does not consider fixed
costs, which are assumed to be associated with the time periods
in which they are incurred.
(b) (i) Joint Products - Joint products represent “two or more products separated in the
course of the same processing operation usually requiring further processing, each
product being in such proportion that no single product can be designated as a
major product”.
In other words, two or more products of equal importance, produced, simultaneously
from the same process, with each having a significant relative sale value are known
as joint products.
For example, in the oil industry, gasoline, fuel oil, lubricants, paraffin, coal tar,
asphalt and kerosene are all produced from crude petroleum. These are known as
joint products.
(ii) By-Products - These are defined as “products recovered from material discarded in
a main process, or from the production of some major products, where the material
value is to be considered at the time of severance from the main product.” Thus, by -
products emerge as a result of processing operation of another product or they are
produced from the scrap or waste of materials of a process. In short, a by-product is
a secondary or subsidiary product which emanates as a result of manufacture of the
main product.
The point at which they are separated from the main product or products is known
as split-off point. The expenses of processing are joint till the split –off point.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 25

Examples of by-products are molasses in the manufacture of sugar, tar, ammonia

and benzole obtained on carbonisation of coal and glycerine obtained in the
manufacture of soap.
(c) Procedure of Setting Labour Time Standards
The following are the steps involved in setting labour standards:
(a) Standardisation: Products to be produced are decided based on production plan
and customer's order.
(b) Labour specification: Types of labour and labour time is specified. Labour time
specification is based on past records and it takes into account normal wastage of
time.
(c) Standardisation of methods: Selection of proper machines to use proper
sequence and method of operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations to
be performed is prepared.
(e) Time and motion study: It is conducted for selecting the best way of completing
the job or motions to be performed by workers and the standard time which an
average worker will take for each job. This also takes into account the learning
efficiency and learning effect.
(f) Training and trial: Workers are trained to do the work and time spent at the time of
trial run is noted down.
(d) Budgetary Control System: It is the system of management control and
accounting in which all the operations are forecasted and planned in advance to the
extent possible and the actual results compared with the forecasted and planned
results.
Components of Budgetary Control System: The policy of a business for a
defined period is represented by the master budget, the detailed components of
which are given in a number of individual budgets called functional budgets. These
functional budgets are broadly grouped under the following heads:
1. Physical budgets: Those budgets which contain information in quantitative
terms such as the physical units of sales, production etc. This may include
quantity of sales, quantity of production, inventories, and manpower budgets
are physical budgets.
2. Cost budgets: Budgets which provides cost information in respect of
manufacturing, administration, selling and distribution, etc. for example,
manufacturing costs, selling costs, administration cost, and research and
development cost budgets are cost budgets.

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 26 INTERMEDIATE (NEW) EXAMINATION: DECEMBER, 2021

3. Profit budgets: A budget which enables the ascertainment of profit. For

example, sales budget, profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial
position of a concern, for example, cash budgets, capital expenditure budget,
budgeted balance sheet etc.
(e)
Cost Control Cost Reduction
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to
improvise them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition
possible cost under existing as permanent, since a change will
conditions. result in lower cost.
3. In case of cost control, emphasis 3. In case of cost reduction, it is on
is on past and present present and future.
4. Cost control is a preventive 4. Cost reduction is a corrective function.
function It operates even when an efficient cost
control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end and
are achieved. is a continuous process.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Question No. 1 is compulsory.
Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) 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.
(b) SNS Trading Company has three Main Departments and two Service Departments. The
data for each department is given below:
Departments Expenses Area in (Sq. Mtr) Number of
Main Department: (in `) Employees
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700

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 2 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Service Departments:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis
of ‘Area in Square Metres’ and 'Number of Employees' respectively.
You are required to:
(i) Prepare a Statement showing the distribution of expenses of Service Departments to
the Main Departments using the "Step Ladder method" of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that, the Purchase
Department, Packing Department and Distribution Department works for 12 hours a
day, 24 hours a day and 8 hours a day respectively. Assume that there are 365 days
in a year and there are no holidays.
(c) AUX Ltd. has an Annual demand from a single customer for 60,000 Covid-19 vaccines.
The customer prefers to order in the lot of 15,000 vaccines per order. The production cost
of vaccine is ` 5,000 per vaccine. The set-up cost per production run of Covid-19 vaccines
is ` 4,800. The carrying cost is ` 12 per vaccine per month.
You are required to:
(i) Find the most Economical Production Run.
(ii) Calculate the extra cost that company incurs due to production of 15,000 vaccines in
a batch.
(d) LR Ltd. is considering two alternative methods to manufacture a new product it intends to
market. The two methods have a maximum output of 50,000 units each and produce
identical items with a selling price of ` 25 each. The costs are:
Method-1 Method-2
Semi-Automatic Fully-Automatic
(`) (`)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000

You are required to calculate:

(1) Cost Indifference Point in units. Interpret your results.
(2) The Break-even Point of each method in terms of units. (4 x 5 = 20 Marks)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

Answer
(a) (i) Statement of Total Inventory Cost and Ranking of items
Item Units % of Total Unit Total % of Total Ranking
code no. units cost Inventory cost Inventory cost
(`) (`)
101 25 3.33 50 1,250 16.67 2
102 300 40.00 1 300 4.00 6
103 50 6.67 80 4,000 53.33 1
104 75 10.00 8 600 8.00 4
105 225 30.00 2 450 6.00 5
106 75 10.00 12 900 12.00 3
750 100 153 7,500 100

(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 code % of Total Total Inventory % of Total Category
No. units cost (`) Inventory Cost
1 103 6.67 4,000 53.33
2 101 3.33 1,250 16.67
Total 2 10.00 5,250 70.00 A
3 106 10.00 900 12.00
4 104 10.00 600 8.00
Total 2 20.00 1,500 20.00 B
5 105 30.00 450 6.00
6 102 40.00 300 4.00
Total 2 70.00 750 10.00 C
Grand Total 6 100 7,500 100

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 4 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

(b) (i) Schedule Showing the Distribution of Expenses of Service Departments using
Step ladder method.
Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
(`) (`) (`) (`) (`)
Expenses 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Distribution of
Maintenance
Department
(12:15:7:-:6) 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Distribution of
Personnel
Department
(800:1700:700:-:-) 1,04,000 2,21,000 91,000 - (4,16,000)
Total 7,96,000 12,61,000 5,53,000 - -
(ii) Calculation of Expenses rate per hour of Main Department
Purchase Packing Distribution
Total apportioned expenses (`) 7,96,000 12,61,000 5,53,000
Total Hours worked 4,380 8,760 2,920
(12 x 365) (24 x 365) (8 x 365)
Expenses rate per hour (`) 181.74 143.95 189.38
(c) (i) Calculation of most Economical Production Run
2 × 60,000× ` 4,800
= = 2,000 Vaccine
12×12
(ii) Calculation of Extra Cost due to processing of 15,000 vaccines in a batch
When run size is When run size is
2,000 vaccines 15,000 vaccines
Total set up cost 60,000 60,000
= × ` 4,800 = × ` 4,800
2,000 15,000
= ` 1,44,000 = ` 19,200
Total Carrying cost ½ × 2,000 × ` 144 ½ × 15,000 × ` 144
= ` 1,44,000 = ` 10,80,000
Total Cost ` 2,88,000 ` 10,99,200
Thus, extra cost = ` 10,99,200 – ` 2,88,000 = ` 8,11,200

© The Institute of Chartered Accountants of India

 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

(d) (i) Cost Indifference Point

Method-1 and Method-2
(`)
Differential Fixed Cost (I) ` 2,00,000
(` 3,00,000 – ` 1,00,000)
Differential Variable Costs (II) `5
(` 15 – ` 10)
Cost Indifference Point (I/II) 40,000
(Differential Fixed Cost / Differential Variable Costs
per unit)

Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs
and higher variable costs should be used. At activity level above the indifference
point, alternative with higher fixed costs and lower variable costs should be used.
No. of Product Alternative to be Chosen
Product ≤ 40,000 units Method-1, Semi-Automatic
Product ≥ 40,000 units Method-2, Automatic
(ii) Break Even point (in units)
Method-1 Method-2

Fixed cost 1,00,000 3,00,000

BEP (in units) = = 10,000 = 20,000
Contribution per unit (25-15) (25-10)

Question 2
(a) The following data relates to manufacturing of a standard product during the month of
March, 2021:
Particulars Amount (in `)
Stock of Raw material as on 01-03-2021 80,000
Work in Progress as on 01-03-2021 50,000
Purchase of Raw material 2,00,000
Carriage Inwards 20,000
Direct Wages 1,20,000
Cost of special drawing 30,000

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 6 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Hire charges paid for Plant 24,000

Return of Raw Material 40,000
Carriage on return 6,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500
Salary to office staff 25,000
Maintenance of office building 2,000
Depreciation on Delivery van 6,000
Warehousing charges 1,500
Stock of Raw material as on 31-03-2021 30,000
Stock of Work in Progress as on 31-03-2021 24,000
• Store overheads on materials are 10% of material consumed.
• Factory overheads are 20% of the Prime cost.
• 10% of the output was rejected and a sum of ` 5,000 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products
were rectified at an additional expenditure which is equivalent to 20% of proportionate
direct wages.
• The total output was 8000 units during the month.
You are required to prepare a Cost Sheet for the above period showing the :
(i) Cost of Raw Material consumed.
(ii) Prime Cost
(iii) Work Cost
(iv) Cost of Production
(v) Cost of Sales (10 Marks)
(b) OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process
results in four products at the spilt-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 processing costs Sales at split-off point Sales after further
(`) (`) processing (`)
S 80,000 20,000 1,20,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

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. (5 Marks)
(c) Following information is given of a newly setup organization for the year ended on
31st March, 2021.
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)
Answer
(a) Statement of Cost for the month of March, 2021
Particulars Amount Amount
(`) (`)
(i) Cost of Material Consumed:
Raw materials purchased (` 2,00,000 – ` 40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000) 2,30,000
Direct Wages 1,20,000
Direct expenses:
Cost of special drawing 30,000
Hire charges paid for Plant 24,000 54,000
(ii) Prime Cost 4,04,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cost) 80,800

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 8 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Additional expenditure for rectification of defective

products (refer working note) 2,160 1,11,960
Gross factory cost 5,15,960
Add: Opening value of W-I-P 50,000
Less: Closing value of W-I-P (24,000)
(iii) Works/ Factory Cost 5,41,960
Less: Realisable value on sale of scrap (5,000)
(iv) Cost of Production 5,36,960
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 5,36,960
Administrative overheads:
Maintenance of office building 2,000
Salary paid to Office staff 25,000
Legal Charges 2,500 29,500
Selling overheads:
Expenses for participation in Industrial exhibition 8,000 8,000
Distribution overheads:
Depreciation on delivery van 6,000
Warehousing charges 1,500 7,500
(v) Cost of Sales 5,81,960

Alternative Solution
(considering Hire charges paid for Plant as indirect expenses)
Statement of Cost for the month of March, 2021
Particulars Amount Amount
(`) (`)
Cost of Material Consumed:
Raw materials purchased (` 2,00,000 – ` 40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000) 2,30,000
Direct Wages 1,20,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

Direct expenses:
Cost of special drawing 30,000 30,000
Prime Cost 3,80,000
Hire charges paid for Plant 24,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cost) 76,000
Additional expenditure for rectification of defective products
(refer working note) 2,160 1,31,160
Gross factory cost 5,11,160
Add: Opening value of W-I-P 50,000
Less: Closing value of W-I-P (24,000)
Works/ Factory Cost 5,37,160
Less: Realisable value on sale of scrap (5,000)
Cost of Production 5,32,160
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 5,32,160
Administrative overheads:
Maintenance of office building 2,000
Salary paid to Office staff 25,000
Legal Charges 2,500 29,500
Selling overheads:
Expenses for participation in Industrial exhibition 8,000 8,000
Distribution overheads:
Depreciation on delivery van 6,000
Warehousing charges 1,500 7,500
Cost of Sales 5,77,160

Working Notes:
1. Number of Rectified units
Total Output 8,000 units

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 10 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Less: Rejected 10% 800 units

Finished product 7,200 units
Rectified units (10% of finished product) 720 units
2. Proportionate additional expenditure on 720 units
= 20% of proportionate direct wages
= 0.20 x (` 1,20,000/8,000) x 720
= ` 2,160
(b) Statement of Comparison of Profits before and after further processing
S (`) P (`) N (`) A (`) Total (`)
A. Sales at split off point 20,000 12,000 28,000 20,000 80,000
B. Apportioned Joint Costs 10,000 6,000 14,000 10,000 40,000
(Refer Working Note)
C. Profit at split-off point 10,000 6,000 14,000 10,000 40,000
D. Sales after further 1,20,000 40,000 48,000 - 2,08,000
processing
E. Further processing cost 80,000 32,000 36,000 - 1,48,000
F. Apportioned Joint Costs 10,000 6,000 14,000 - -
(Refer Working Note)
G. Profit if further processing 30000 2,000 (-) 2,000 - -
(D – E + F)
H. Increase/ decrease in profit 20,000 - 4000 - 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
Total joint cost
Apportioned joint cost = × Sales value of each product
Total Sales value at split-off point

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 11

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 x ` 20,000 = ` 10,000

` 80,000

Share of P in joint cost = ` 40,000 x ` 12,000 = ` 6,000

` 80,000

Share of N in joint cost = ` 40,000 x ` 28,000 = ` 14,000

` 80,000

Share of A in joint cost = ` 40,000 x ` 20,000 = ` 10,000

` 80,000

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 processing 20,000 (-)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.
(c) (i) Employee Turnover rate
Using Separation method:

= Number of employees Separated during the period

100
Average number of employees during the period on roll

25
=  100 = 5%
500

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 12 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Using Flux method:

Number of employeesSeparated +
= Number of employees Re placed during the period
 100
Average number of employees during the period on roll

50 + 25
=  100 = 15%
500
(ii) Equivalent Employee Turnover rate:

= Employee Turnover rate for the period  365

Number of days in the period

5
Using Separation method = ×365 = 30.42%
60
5
Or, = × 360 = 30%
60
5
Or, = × 12 = 30%
2
15
Using Flux method =  365 = 91.25%
60
15
Or, = × 360 = 90%
60
15
Or, = × 12 = 90%
2
Question 3
(a) The Profit and Loss account of ABC Ltd. for the year ended 31 st March, 2021 is given
below:
Profit and Loss account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales 15,00,000
(15000 units)
To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To Loss on sale of investments 2,000
To Net Profit 57,000
15,09,000 15,09,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 13

• Factory overheads are 50% fixed and 50% variable.

• Administrative overheads are 100% fixed.
• Selling overheads are completely variable.
• Normal production capacity of ABC Ltd. is 20,000 units.
• Indirect Expenses are absorbed in the cost accounts on the basis of normal
production capacity.
• Notional rent of own premises charged in Cost Accounts is amounting to ` 12,000.
You are required to:
(i) Prepare a Cost Sheet and ascertain the Profit as per Cost Records for the year ended
31st March, 2021.
(ii) Reconcile the Profit as per Financial Records with Profit as per Cost Records.
(10 Marks)
(b) PQR Ltd. is engaged in the production of three products P, Q and R. The company
calculates Activity Cost Rates on the basis of Cost Driver capacity which is provided as
below:
Activity Cost Driver Cost Driver Capacity Cost (`)
Direct Labour hours Labour hours 30,000 Labour hours 3,00,000
Production runs No. of Production runs 600 Production runs 1,80,000
Quality Inspections No. of Inspection 8000 Inspections 2,40,000
The consumption of activities during the period is as under:
Activity / Products P Q R
Direct Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500
You are required to:
(i) Compute the costs allocated to each Product from each Activity.
(ii) Calculate the cost of unused capacity for each Activity.
(iii) A potential customer has approached the company for supply of 12,000 units of a
new product. 'S' to be delivered in lots of 1500 units per quarter. This will involve an
initial design cost of ` 30,000 and per quarter production will involve the following:
Direct Material ` 18,000
Direct Labour hours 1,500 hours

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 14 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

No. of Production runs 15

No. of Quality Inspection 250
Prepare cost sheet segregating Direct and Indirect costs and compute the Sales value per
quarter of product 'S' using ABC system considering a markup of 20% on cost.
(10 Marks)
Answer
(a) (i) Cost Sheet
(for the year ended 31st March, 2021)
(`) (`)
Direct material 6,50,000
Direct wages 3,50,000
Prime cost 10,00,000
Factory Overheads:
Variable (50% of ` 2,60,000) 1,30,000
Fixed (` 1,30,000 × 15,000/20,000) 97,500 2,27,500
Works cost 12,27,500
Administrative Overheads (` 1,05,000 × 15,000/20,000) 78,750
Notional Rent 12,000
Cost of production 13,18,250
Selling Overheads 85,000
Cost of Sales 14,03,250
Profit (Balancing figure) 96,750
Sales revenue 15,00,000
(ii) Statement of Reconciliation
(Reconciling profit shown by Financial and Cost Accounts)
(`) (`)
Profit as per Cost Account 96,750
Add: Dividend received 9,000
Add: Notional Rent 12,000 21,000
Less: Factory Overheads under-charged in Cost Accounts 32,500
(` 2,60,000 – ` 2,27,500)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 15

Less: Administrative expenses under-charged in Cost 26,250

Accounts (` 1,05,000 – ` 78,750)
Less: Loss on sale of Investments 2,000 (60,750)
Profit as per Financial Accounts 57,000
(Note: Solution can be done considering base profit as per Financial Accounts)
(b) (i) Statement of cost allocation to each product from each activity
Product
P (`) Q (`) R (`) Total (`)
Direct Labour 1,00,000 80,000 60,000 2,40,000
hours (Refer to (10,000 Labour (8,000 Labour (6,000 Labour
working note) hours × `10) hours × `10) hours × `10)
Production 60,000 54,000 48,000 1,62,000
runs (Refer to (200 Production (180 Production (160 Production
working note) runs × ` 300) runs × ` 300) runs × ` 300)
Quality 90,000 75,000 45,000 2,10,000
Inspections (3,000 (2,500 (1,500
(Refer to Inspections × Inspections × Inspections ×
working note) `30) ` 30) ` 30)
Working note:
Rate per unit of cost driver
Direct Labour hours (` 3,00,000/30,000 Labour ` 10 per Labour hour
hours)
Production runs (` 1,80,000/600 Production ` 300 per Production run
runs)
Quality Inspection (` 2,40,000/8,000 Inspections) ` 30 per Inspection
(ii) Computation of cost of unused capacity for each activity
Particulars (`)
Direct Labour hours [(` 3,00,000 – ` 2,40,000) or (6,000 x ` 10)] 60,000
Production runs [(` 1,80,000 – ` 1,62,000) or (60 x ` 300)] 18,000
Quality Inspection [(` 2,40,000 – ` 2,10,000) or (1,000 x ` 30)] 30,000
Total cost of unused capacity 1,08,000

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 16 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ using ABC
system
Particulars (`)
1500 units of product ‘S’ to be delivered per quarter
Initial design cost per quarter (` 30,000 / 8 quarters) 3,750
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ` 10) 15,000
Direct Costs (A) 36,750
Set up Cost (15 Production runs × ` 300) 4,500
Inspection Cost (250 Inspections × ` 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add: Mark-up (20% on cost) 9,750
Sale Value 58,500
Selling Price per unit ‘S’ (` 58,500/1500 units) 39
Question 4
(a) A Manufacturing unit manufactures a product 'XYZ' which passes through three distinct
Processes - X, Y and Z. The following data is given:
Process X Process Y Process Z
Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000
• The total Production Overhead of ` 15,750 was recovered @ 150% of Direct wages.
• 15,000 units at ` 2 each were introduced to Process 'X'.
• The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process 'Z'.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal input Value of Scrap per unit ( `)
X 6% 1.10
Y ? 2.00
Z 5% 1.00

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You are required to:

(i) Find out the percentage of wastage in process 'Y', given that the output of Process
'Y' is transferred to Process 'Z' at ` 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z. (10 Marks)
(b) MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its
newly launched 'COVID-19' Insurance policy:
Office administration cost 48,00,000
Claim management cost 3,80,000
Employees cost 16,20,000
Postage and logistics 32,40,000
Policy issuance cost 29,50,000
Facilities cost 46,75,000
Cost of marketing of the policy 1,38,90,000
Policy development cost 35,00,000
Policy servicing cost 96,45,000
Sales support expenses 32,00,000
I.T. Cost ?
Number of Policy sold: 2,800
Total insured value of policies - ` 3,500 Crores
Cost per rupee of insured value - ` 0.002
You are required to:
(i) Calculate Total Cost for "COVID-19" Insurance policy segregating the costs into four
main activities namely (a) Marketing and Sales support (b) Operations (c) I.T. Cost
and (d) Support functions.
(ii) Calculate Cost Per Policy. (5 Marks)
(c) Brick Constructions Ltd. commenced a contract on April 1,2020. The contract was for
` 10,00,000. The following information relates to the Contract as on 31st March, 2021:
• The value of work completed up to Feb. 28, 2021 was certified by the architect and
as a matter of policy, the Contractee has retained ` 1,30,000 as retention money
which is 20% of the certified work and paid the balance amount.
• The cost of work completed subsequent to the architect's certificate was of
` 30,000.

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 18 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

• The expenditure incurred related to material purchase, wages and other chargeable
expenses were ` 5,10,000
• Materials of the value of ` 20,000 were lying on the site.
• A special plant was purchased specifically for this contract at ` 40,000 and after use
on this contract till 31st March, 2021, it was valued at ` 25,000.
You are required to compute the value of Work Certified, Cash received for certified work
and Notional profit of the contract for the year ended on 31st March, 2021. (5 Marks)
Answer
(a)
Dr. Process-X Account Cr.
Particulars Units (`) Particulars Units (`)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units)
x ` 1.1]
” Additional -- 2,600 ” Process-Y A/c 14,100 41,610
material (` 2.951* × 14,100
units)
” Direct wages -- 4,000
” Production OH -- 6,000
15,000 42,600 15,000 42,600
*Cost per unit of completed units
` 42,600 - ` 990
= Total Cost − Re alisable value from normal loss = = ` 2.951
Inputs units − Normal loss units 15,000 units - 900 units

Dr. Process-Y Account Cr.

Particulars Units (`) Particulars Units (`)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of
14,100 units) x
` 2]
” Additional -- 2,250 ” Process-Z A/c 12,205 48,820
material (` 4 × 12,205
units)
” Direct wages -- 3,500
” Production OH -- 5,250
14,100 52,610 14,100 52,610
# Calculation for % of wastage in process ‘Y’:

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

Let’s consider number of units lost under process ‘Y’ = A

Total Cost - Realisable value from normal loss
Now, =4
Inputs units - Normal loss units
` 52,610 - ` 2A
=`4
14,100 units - A
` 52,610 - ` 2A = ` 56,400 - ` 4A
2A = ` 3,790 => A = 1,895 units
1,895 units
% of wastage = = 13.44%
14,100 units
Dr. Process-Z Account Cr.
Particulars Units (`) Particulars Units (`)
To Process-Y A/c 12,205 48,820 By Normal Loss A/c 610 610
[(5% of 12,205
units) x ` 1]
” Additional material -- 2,000 ” Finished Stock A/c 12,000 59,726
(` 4.9771$ ×
12,000 units)
” Direct wages -- 3,000
” Production OH -- 4,500
” Abnormal gain 405 2,016
(` 4.9771$ × 405
units)
12,610 60,336 12,610 60,336
$Cost per unit of completed units
` 58,320 - ` 610
= Total Cost − Realisable value from normal loss = = ` 4.9771
Inputs units − Normal loss units 12,205 units - 610 units

Alternative Solution
Dr. Process-X Account Cr.
Particulars Units (`) Particulars Units (`)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units) x
` 1.1]

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 20 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

” Additional -- 2,600 ” Process-Y A/c 14,100 41,610

material (` 2.951* × 14,100 units)
” Direct wages -- 4,000
” Production OH -- 6,000
15,000 42,600 15,000 42,600
*Cost per unit of completed units
` 42,600 - ` 990
= Total Cost − Realisable value from normal loss = = ` 2.951
Inputs units − Normal loss units 15,000 units - 900 units

Dr. Process-Y Account Cr.

Particulars Units (`) Particulars Units (`)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[( 13.44% of 14,100
#

units) x ` 2]
” Additional material -- 2,250 ” Process-Z A/c 12,631 50,524
(` 4 × 12,631 units)
@

” Direct wages -- 3,500

” Production OH -- 5,250
” Abnormal gain 426 1,704
(` 4 × 426 units)
14,526 54,314 14,526 54,314
Working Notes:
@1. Units Transferred from Process Z Account to Finished Stock = 12,000 Units i.e 95%
of Inputs.
So, Input of Z or Output of Y is 12,000 x 100/95 = 12,631 Units and Normal Loss (5%)
is 631 units.
2. Let’s consider number of units lost under process ‘Y’ as:
For Normal loss =A
For Abnormal loss =B
Now, A + B = 1,469 [i.e. 14,100 – 12,631] …(I)
(A x ` 2 per unit) + (B x ` 4 per unit) = [ 52,610 – 50,524]
2A + 4B = 2,086 …(II)
Now, putting the values of (I) in (II), we get,
2(1,469 – B) + 4B = 2,086

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

2938 – 2B + 4B = 2,086
2B = - 852 => B = - 426 units
Since, the figure of B is in negative, it is an abnormal gain of 426 units.
Further, A (i.e. normal loss) = 1,469 + 426 = 1,895 units
1,895 units
#3. % of wastage in Process Y Account = = 13.44%
14,100 units
Dr. Process-Z Account Cr.
Particulars Units (`) Particulars Units (`)
To Process-Y A/c 12,631 50,524 By Normal Loss A/c 631 631
[(5% of 12,631 units)
x ` 1]
” Additional material -- 2,000
” Direct wages -- 3,000
” Production OH -- 4,500 ” Finished Stock A/c 12,000 59,393
(` 4.9494$ × 12,000
units)
12,631 60,024 12,631 60,024
$Cost per unit of completed units
` 60,024 - ` 631
= Total Cost -Realisable value from normal loss = = ` 4.9494
Inputs units-Normal loss units 12,631 units - 631 units

(b) (i) Calculation of total cost for ‘COVID-19’ Insurance policy

Particulars Amount (`) Amount (`)
a. Marketing and Sales support:
- Policy development cost 35,00,000
- Cost of marketing 1,38,90,000
- Sales support expenses 32,00,000 2,05,90,000
b. Operations:
- Policy issuance cost 29,50,000
- Policy servicing cost 96,45,000
- Claim management cost 3,80,000 1,29,75,000
c. IT Cost* 2,21,00,000

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 22 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

d. Support functions
- Postage and logistics 32,40,000
- Facilities cost 46,75,000
- Employees cost 16,20,000
- Office administration cost 48,00,000 1,43,35,000
Total Cost 7,00,00,000
* IT cost
= (` 3,500 crores x 0.002) – ` 4,79,00,000 = ` 2,21,00,000

(ii) Calculation of cost per policy = Total cost = ` 7,00,00,000 = ` 25,000

No.of policies 2,800

(c) 1. Value of Work Certified

` 1,30,000
= = ` 6,50,000
20%
2. Cash Received
= Value of Work certified – Retention Money
= 6,50,000 – 1,30,000 = ` 5,20,000
3. Notional Profit
= Value of Work certified – Cost of work certified
= 6,50,000 - 4,75,000* = ` 1,75,000
* Working Note
Cost of work certified = Work cost - Cost of work uncertified
= (Expenditure + Plant used – Material at site) - Cost of work
uncertified
= [5,10,000 + (40,000 - 25,000) - 20,000] - 30,000 = ` 4,75,000
Question 5
(a) The standard output of a Product 'DJ' is 25 units per hour in manufacturing department of
a Company employing 100 workers. In a 40 hours week, the department produced 960
units of product 'DJ' despite 5% of the time paid was lost due to an abnormal reason. The
hourly wage rates actually paid were ` 6.20, ` 6.00 and ` 5.70 respectively to Group 'A'
consisting 10 workers, Group 'B' consisting 30 workers and Group 'C' consisting 60
workers. The standard wage rate per labour is same for all the workers. Labour Efficiency
Variance is given ` 240 (F).

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

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. (10 Marks)
(b) PSV Ltd. manufactures and sells a single product and estimated the following related
information for the period November, 2020 to March, 2021.
Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Opening Stock of 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 unit 10 12 15 15 20
(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:
(i) Sales Budget (in `)
(ii) Production budget (in units) and
(iii) Raw material Budget for Raw material 'A' and 'B' separately (in units) (10 Marks)
Answer
(a) Working Notes:
1. Calculation of Standard Man hours
When 100 workers work for 1 hour, the standard output is 25 units.
100 hours
Standard man hours per unit = = 4 hours per unit
25 units

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 24 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

2. Calculation of standard man hours for actual output:

= 960 units x 4 hours = 3,840 hours.
3. Calculation of actual cost
Type of No of Actual Rate Amount Idle Hours (5% Actual hours
Workers Workers Hours Paid (`) (`) of hours paid) Worked
Group ‘A’ 10 400 6.2 2,480 20 380
Group ‘B’ 30 1,200 6 7,200 60 1,140
Group ‘C’ 60 2,400 5.7 13,680 120 2,280
100 4,000 23,360 200 3,800
4. Calculation of Standard wage Rate:
Labour Efficiency Variance = 240F
(Standard hours for Actual production – Actual Hours) x SR = 240F
(3,840 – 3,800) x SR = 240
Standard Rate (SR) = ` 6 per hour
(i) Total Labour Cost Variance
= (Standard hours x Standard Rate) – (Actual Hours x Actual rate)
= (3,840 x 6) – 23,360 = 320A
(ii) Total Labour Rate Variance
= (Standard Rate – Actual Rate) x Actual Hours
Group ‘A’ = (6- 6.2) 400 = 80A
Group ‘B’ = (6- 6) 1,200 = 0
Group ‘C’ = (6 – 5.7) 2,400 = 720F
640F
(iii) Total Labour Gang Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of
Standard Gang -Average Standard Rate per hour of Actual Gang @}
@ on the basis of hours worked

= 3,800 ×  6 - 3,840 × 6 
 3,800 

=0

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(iv) Total Labour Yield Variance

= Average Standard Rate per hour of Standard Gang × {Total Standard Time
(hours) - Total Actual Time worked (hours)}
= 6 x (3,840 – 3,800)
= 240F
(v) Total Labour idle time variance
= Total Idle hours x standard rate per hour
= 200 hours x 6
= 1,200A
(b) (i) Sales Budget (in `)
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales (in Units) 30,000 35,000 38,000 25,000 40,000 1,68,000
Selling Price per
10 12 15 15 20 -
unit (`)
Total Sales (`) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000 24,65,000
(ii) Production Budget (in units)
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total

Sales 30,000 35,000 38,000 25,000 40,000 1,68,000

Add: Closing stock of

3,000 9,000 8,000 6,000 10,000 36,000
finished goods

Total quantity required 33,000 44,000 46,000 31,000 50,000 2,04,000

Less: Opening stock of
7,500 3,000 9,000 8,000 6,000 33,500
finished goods

Units to be produced 25,500 41,000 37,000 23,000 44,000 1,70,500

(iii) Raw material budget (in units)

For Raw material ‘A’
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500

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 26 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Raw material consumption 2 2 2 2 2 -

p.u. (kg.): (b)
Total raw material 51,000 82,000 74,000 46,000 88,000 3,41,000
consumption (Kg.): (a × b)
For Raw material ‘B’
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be 25,500 41,000 37,000 23,000 44,000 1,70,500
produced: (a)
Raw material 3 3 3 3 3 -
consumption p.u.
(kg.): (b)
Total raw material 76,500 1,23,000 1,11,000 69,000 1,32,000 5,11,500
consumption (Kg.):
(a × b)
Question 6
Answer any four of the following:
(a) Specify the types of Responsibility centres under the following situations:
(i) Purchase of bonds, stocks, or real estate property.
(ii) Ticket counter in a Railway station.
(iii) Decentralized branches of an organization.
(iv) Maharana, Navratna and Miniratna public sector undertaking (PSU) of Central
Government.
(v) Sales Department of an organization.
(b) What is Margin of Safety? What does a large Margin of Safety indicates? How can you
calculate Margin of Safety?
(c) Rowan Premium Bonus system does not motivate a highly efficient worker as a less
efficient worker and a highly efficient worker can obtain same bonus under this system.
Discuss with an example.
(d) What do you understand by Build-Operate-Transfer (BOT) approach in Service Costing?
How is the Toll rate computed?
(e) Write a short note on VED analysis of Inventory Control. (4 x 5 = 20 Marks)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 27

Answer
(a)
Particulars Types of
Responsibility Centre
(i) Purchase of bonds, stocks, or real estate property. Investment Centre
(ii)Ticket counter in a Railway station. Revenue Centre
(iii)
Decentralized branches of an organization. Profit Centre
(iv)Maharatna, Navratna and Miniratna public sector Investment Centre
undertaking (PSU) of Central Government.
(v) Sales Department of an organization. Revenue Centre
(b) Margin of Safety: The margin of safety can be defined as the difference between the
expected level of sale and the breakeven sales.
The larger the margin of safety, the higher is the chances of making profits.
The Margin of Safety can be calculated by identifying the difference between the projected
sales and breakeven sales in units multiplied by the contribution per unit. This is po ssible
because, at the breakeven point all the fixed costs are recovered and any further
contribution goes into the making of profits.
Margin of Safety = (Projected sales – Breakeven sales) in units x contribution per
unit
It also can be calculated as:
Profit
Margin of Safety =
P / V Ratio
(c) Rowan Premium Plan: According to this system a standard time allowance is fixed for the
performance of a job and bonus is paid if time is saved.
Under Rowan System, the bonus is that proportion of the time wages as time saved bears
to the standard time.
Time Saved
Bonus = × Time taken × Rate per hour
Time Allowed
Example explaining highly efficient worker and less efficient worker obtaining same
bonus:
Time rate (per Hour) ` 60
Time allowed 8 hours.
Time taken by ‘X’ 6 hours.

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 28 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021

Time taken by ‘Y’ 2 hours.

Time Saved
Bonus = × Time taken × Rate per hour
Time Allowed
2 hours
For ‘X' = × 6 hours × ` 60 = ` 90
8 hours
6 hours
For ‘Y’ = × 2 hours × ` 60 = ` 90
8 hours
From the above example, it can be concluded that a highly efficient worker may obtain
same bonus as less efficient worker under this system.
(d) Build-Operate-Transfer (BOT) Approach: In recent years a growing trend emerged
among Governments in many countries to solicit investments for public projects from the
private sector under BOT scheme. BOT is an option for the Government to outsource
public projects to the private sector.
With BOT, the private sector designs, finances, constructs and operate the facility and
eventually, after specified concession period, the ownership is transferred to the
Government. Therefore, BOT can be seen as a developing technique for infrastructure
projects by making them amenable to private sector participation.
Toll Rate: In general, the toll rate should have a direct relation with the benefits that the
road users would gain from its improvements. The benefits to road users are likely to be in
terms of fuel savings, improvement in travel time and good riding quality.
To compute the toll rate, following formula may be used
Total Cost + Profit
=
Number of Vehicles
Or, to compute the toll rate following formula with rounding off to nearest multiple of five
has been adopted: User fee = Total distance x Toll rate per km.
(e) Vital, Essential and Desirable (VED): Under this system of inventory analysis,
inventories are classified on the basis of its criticality for the production function
and final product. Generally, this classification is done for spare parts which are used for
production.
(i) Vital- Items are classified as vital when its unavailability can interrupt the
production process and cause a production loss. Items under this category are
strictly controlled by setting re-order level.
(ii) Essential- Items under this category are essential but not vital. The unavailability
may cause sub standardisation and loss of efficiency in production process.
Items under this category are reviewed periodically and get the second priority.
(iii) Desirable- Items under this category are optional in nature; unavailability does not
cause any production or efficiency loss.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) During a particular period ABC Ltd has furnished the following data:
Sales ` 10,00,000
Contribution to sales ratio 37% and
Margin of safety is 25% of sales.
A decrease in selling price and decrease in the fixed cost could change the "contribution
to sales ratio" to 30% and "margin of safety" to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost.
(ii) Revised Sales and
(iii) New Break-Even Point.
(b) A machine shop has 8 identical machines manned by 6 operators. The machine cannot
work without an operator wholly engaged on it. The original cost of all the 8 machines
works out to ` 32,00,000. The following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Average rate of wages per day of 8 hours per operator ` 100
Production bonus estimated 10% on wages
Power consumed ` 40,250
Supervision and Indirect Labour ` 16,500
Lighting and Electricity ` 6,000
2 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

The following particulars are given for a year:

Insurance ` 3,60,000
Sundry work Expenses ` 50,000
Management Expenses allocated ` 5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine
shop.
(c) MNO Ltd has provided following details:
 Opening work in progress is 10,000 units at ` 50,000 (Material 100%, Labour and
overheads 70% complete).
 Input of materials is 55,000 units at ` 2,20,000. Amount spent on Labour and
Overheads is ` 26,500 and ` 61,500 respectively.
 9,500 units were scrapped; degree of completion for material 100% and for labour &
overheads 60%.
 Closing work in progress is 12,000 units; degree of completion for material 100%
and for labour & overheads 90%.
 Finished units transferred to next process are 43,500 units.
Normal loss is 5% of total input including opening work in progress. Scrapped units
would fetch ` 8.50 per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account
(d) GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the
estimates provided by Pharmaceutical Industry Bureau, there will be a demand of 40
Million 'Stents' in the coming year. GHI Ltd. is expected to have a market share of 2.5%
of the total market demand of the Stents in the coming year. It is estimated that it costs
` 1.50 as inventory holding cost per stent per month and that the set-up cost per run of
stent manufacture is ` 225.
Required:
(i) What would be the optimum run size for Stent manufacture?
(ii) What is the minimum inventory holding cost?
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

(iii) Assuming that the company has a policy of manufacturing 4,000 stents per run, how
much extra costs the company would be incurring as compared to the optimum run
suggested in (i) above? (4 x 5 = 20 Marks)
Answer
(a) Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = ` 10,00,000 x 63% = ` 6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus,
variable cost is ` 6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100%  30% = 70%
` 6,30,000
Thus, Revised sales = = ` 9,00,000
70%
Revised, Break-even sales ratio = 100%  40% (revised Margin of safety) = 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to
sales ratio
= ` 5,40,000 (` 9,00,000 x 60%) x 30%
= ` 1,62,000
(ii) Revised sales = ` 9,00,000 (as calculated above)
(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
= ` 9,00,000 x 60%
= ` 5,40,000
(b) Workings:
Particulars Six months 6
operators (Hours)
Normal available hours per month (208 x 6 months x 6 7,488
operators)
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
4 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Computation of Comprehensive Machine Hour Rate

Particulars Amount for six
months (`)
Operators' wages (7,380/8 x100) 92,250
Production bonus (10% on wages) 9,225
Power consumed 40,250
Supervision and indirect labour 16,500
Lighting and Electricity 6,000
Repair and maintenance {(5% × ` 32,00,000)/2} 80,000
Insurance (` 3,60,000/2) 1,80,000
Depreciation {(` 32,00,000 × 10%)/2} 1,60,000
Sundry Work expenses (` 50,000/2) 25,000
Management expenses (` 5,00,000/2) 2,50,000
Total Overheads for 6 months 8,59,225
Comprehensive Machine Hour Rate = ` 8,59,225/7,200 hours ` 119.33
(Note: Machine hour rate may be calculated alternatively. Further, presentation of figures
may also be done on monthly or annual basis.)
(c) (i) Statement of Equivalent Production (Using FIFO method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
Units introduced 55,000 - From opening 10,000 - 30 3,000
WIP
- From fresh inputs 33,500 100 33,500 100 33,500
43,500 33,500 36,500
Normal Loss 3,250 - -
{5% (10,000 +
55,000 units)}
Abnormal loss 6,250 100 6,250 60 3,750
(9,500 – 3,250)
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

Closing WIP 12,000 100 12,000 90 10,800

65,000 65,000 51,750 51,050
(ii) Abnormal Loss A/c
Particulars Units (`) Particulars Units (`)
To Process-I A/c 6,250 29,698 By Cost Ledger Control A/c 6,250 53,125
(Refer Working (6,250 units × ` 8.5)
Note-2)
To Costing Profit - 23,427
& Loss A/c
6,250 53,125 6,250 53,125

Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(`) (`) (`)
Input costs 2,20,000 26,500 61,500
Less: Realisable value of normal (27,625) -- --
scrap (3,250 units x ` 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047
Total cost per unit = ` (3.7174 + 0.5191 + 1.2047) = ` 5.4412
2. Valuation of Abnormal Loss
(`)
Materials (6,250 units × ` 3.7174) 23,233.75
Labour (3,750 units × ` 0.5191) 1,946.63
Overheads (3,750 units × ` 1.2047) 4,517.62
29,698
(d) (i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity
(EBQ)
2DS
Economic Batch Quantity (EBQ) =
C
6 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Where, D = Annual demand for the Stents

= 4,00,00,000 × 2.5% = 10,00,000 units
S = Set- up cost per run
= ` 225
C = Carrying cost per unit per annum
= ` 1.50 × 12 = ` 18
2  10,00,000 ` 225
EBQ =
` 18
= 5,000 units of Stents
(ii) Minimum inventory holding cost
Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum
= (5,000 ÷ 2) × ` 18
= ` 45,000
(iii) Calculation of the extra cost due to manufacturing policy
When run size is 4,000 When run size is 5,000
units units i.e. at EBQ
Total set up cost 10,00,000 10,00,000
=  ` 225  ` 225
4,000 5,000
= ` 56,250 = ` 45,000
Total Carrying cost ½ × 4,000 × ` 18 ½ × 5,000 × ` 18
= ` 36,000 = ` 45,000
Total Cost ` 92,250 ` 90,000

Extra cost = ` 92,250 - ` 90,000 = ` 2,250

Question 2
(a) 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.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

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 producing one unit by one worker at the previous 1.975 hours
performance (this may be taken as time allowed)
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 assurance of
incentivising workers and also to adjust with the increase in demand. (10 Marks)
(b) 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:
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:
(i) Prime Cost
8 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(ii) Works Cost

(iii) Cost of Production
(iv) Cost of Goods sold
(v) Cost of Sales and Profit earned. (10 Marks)
Answer
(a) Working Notes:
1. Total time wages of 50 workers per month:
= No. of working days in the month × No. of working hours per day of each worker
× Hourly rate of wages × No. of workers
= 24 days × 8 hrs. × ` 50 × 50 workers = ` 4,80,000
2. Time saved per month:
Time allowed per unit to a worker 1.975 hours
No. of units produced during the month by 50 workers 6,120 units
Total time allowed to produce 6,120 units (6,120 × 1.975 hrs) 12,087 hours
Actual time taken to produce 6,120 units (24 days × 8 hrs. × 50 workers) 9,600 hours
Time saved (12,087 hours – 9,600 hours) 2,487 hours
3. Bonus under Halsey scheme to be paid to 50 workers:
Bonus = (50% of time saved) × hourly rate of wages
= 50/100 × 2,487 hours × ` 50 = ` 62,175
Total wages to be paid to 50 workers are (` 4,80,000 + ` 62,175) ` 5,42,175, if Z
Ltd. considers the introduction of Halsey Incentive Scheme to increase the worker
productivity.
4. Bonus under Rowan Scheme to be paid to 50 workers:
Time taken
Bonus = × Time saved × hourly rate
Time allowed
9,600 hours
= × 2,487 hours × ` 50 = ` 98,764
12,087 hours
Total wages to be paid to 50 workers are (` 4,80,000 + ` 98,764) ` 5,78,764, if Z Ltd.
considers the introduction of Rowan Incentive Scheme to increase the worker
productivity.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

(i) (a) Effective hourly rate of earnings under Halsey scheme:

(Refer to Working Notes 1, 2 and 3)
Total time wages of 50 workers  Total bonus under Halsey scheme
=
Total hours worked
` 4,80,000 ` 62,175
= = ` 56.48
9,600 hours

` 56.48  ` 50
Effective increase in earnings of worker (in %) = x 100 = 2.96%
` 50
(b) Effective hourly rate of earnings under Rowan scheme:
(Refer to Working Notes 1, 2 and 4)
Total time wages of 50 workers  Total bonus under Rowan scheme
=
Total hours worked

` 4,80,000 ` 96,875
= = ` 60.29
9,600 hours

` 60.29  ` 50
Effective increase in earnings of worker (in %)= x 100 =20.58%
` 50
(ii) (a) Saving in terms of direct labour cost per unit under Halsey scheme:
(Refer to Working Note 3)
Labour cost per unit (under time wage scheme)
= 1.975 hours × ` 50 = ` 98.75
Labour cost per unit (under Halsey scheme)
Total wages paid under the scheme ` 5,42,175
= = = s` 88.60
Total number of units produced 6,120

Saving per unit = ` 98.75 – ` 88.60 = ` 10.15

(b) Saving in terms of direct worker cost per unit under Rowan Scheme:
(Refer to Working Note 4)

Labour cost per unit under Rowan scheme = ` 5,78,764/6,120 units= ` 94.57

Saving per unit = ` 98.75 – ` 94.57 = ` 4.18

10 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(iii) Calculation of Productivity:

Normal Production Hours worked/Unit per Hour (9,600/1.975) 4,861
Actual Production Units 6,120
Increase in labour productivity 1,259
% Productivity i.e. increase in production/Normal production 25.9%
Advice: Rowan plan fulfils the company’s assurance of 20% increase over the present
earnings of workers. This would increase productivity by 25.9% only. It will not adjust with
the increase in demand by 40%.
(b) Cost Sheet for the Month of April 2020
Particulars (`)
Opening stock of Raw Material 20,000
Add: Purchases [Refer Working Note-2] 1,65,000
Less: Closing stock of Raw Material (25,000)
Raw material consumed 1,60,000
Add: Direct labour cost 1,20,000
Prime cost 2,80,000
Add: Factory overheads 1,00,000
Gross Works cost 3,80,000
Add: Opening work-in-progress 20,000
Less: Closing work-in-progress (30,000)
Works Cost 3,70,000
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: General and administration expenses* 18,000
Add: Selling expenses 22,000
Cost of sales 4,00,000
Profit {Balancing figure (` 5,00,000 – ` 4,00,000)} 1,00,000
Sales 5,00,000
*General and administration expenses have been assumed as not relating to the
production activity.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 11

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)
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
 ` 1,20,000 
Less: Factory overheads   100 
 120  (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 3
(a) Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
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
12 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Assuming that the proposal is implemented, calculate:

(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of ` 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ` 60,00,000, what
percentage of increase in selling price is required to sustain an increase of 5% in
fixed overheads. (10 Marks)
(b) XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70%
capacity on per annum basis. Company is in the process of determining sales price for
the financial year 2020-21. It has provided the following information:
Direct Material ` 60 per unit
Direct Labour ` 30 per unit
Indirect Overheads:
Fixed ` 65,50,000 per annum
Variable ` 15 per unit
Semi-variable ` 5,00,000 per annum up to 60% capacity and ` 50,000 for every
5% increase in capacity or part thereof up to 80% capacity and
thereafter ` 75,000 for every 10% increase in capacity or part
thereof.
Company desires to earn a profit of ` 25,00,000 for the year. Company has planned that
the factory will operate at 50% of capacity for first six months of the year and at 75% of
capacity for further three months and for the balance three months, factory will operate at
full capacity.
You are required to :
(1) Determine the average selling price at which each of the toy should be sold to earn
the desired profit.
(2) Given the above scenario, advise whether company should accept an offer to sell
each Toy at:
(a) ` 130 per Toy
(b) ` 129 per Toy (10 Marks)
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 13

Answer
(a) Workings:
1. Statement showing computation of Breakeven of merged plant and other
required information
S. Plan A Plant B Merged
No. Particulars 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 cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000
(iii) Contribution (i - ii) 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000
(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000
(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000
Contribution
2. PV ratio of merged plant = x 100
Sales
` 68,50,000
= x 100 = 45.67 %
` 1,50,00,000
Fixed Cost
(i) Break even sales of merged plant =
P/V Ratio
` 28,00,000
=
45.67%
= ` 61,30,939.34 (approx.)
` 61,30,939.34
Capacity utilisation = x 100= 40.88%
` 1,50,00,000

(ii) Profitability of the merged plant at 80% capacity utilisation

= (` 1,50,00,000 x 80%) x P/v ratio – fixed cost
= ` 1,20,00,000 x 45.67% – ` 28,00,000
= ` 26,80,400
(iii) Sales to earn a profit of ` 60,00,000
Fixed Cost + desired profit
Desired sales =
P/V Ratio
` 28,00,000 + ` 60,00,000
=
45.67%
14 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

= ` 1,92,68,666 (approx.)
(iv) Increase in fixed cost
= ` 28,00,000 x 5% = ` 1,40,000
Therefore, percentage increase in sales price
` 1,40,000
= x 100 = 0.726% (approx.)
` 1,92,68,666
(b) (1) Statement of Cost
For For For Total
first 6 further 3 remaining 3
months months months
6,00,000 x 6,00,000 x 6,00,000 x
6/12 x 50% 3/12 x 75% 3/12
= 1,50,000 = 1,12,500 = 1,50,000 4,12,500
units units units units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable 22,50,000 16,87,500 22,50,000 61,87,500
Expenses
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000
Indirect Semi-variable
expenses
- For first six months @ 2,50,000
5,00,000 per annum
- For further three months 1,62,500
@ 6,50,000* per annum
- For further three months 2,12,500 6,25,000
@ 8,50,000** per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45
* ` 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ` 6,50,000
** ` 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%)
× 75,000] = ` 8,50,000
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 15

(2) (a) Company Should accept the offer as it is above its targeted sales price of
` 128.45 per toy.
(b) Company Should accept the offer as it is above its targeted sales price of
` 128.45 per toy.
Question 4
(a) Mayura Chemicals Ltd buys a particular raw material at ` 8 per litre. At the end of the
processing in Department- I, 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
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-realisable 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. (10 Marks)
(b) 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 31 st March, 2020:
X Y Z
Production Quantity (units) 1200 1440 1968
Cost per unit:
16 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

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.
Budgeted Cost Driver Remarks
Overheads (`)
Material 50,000 No. of orders No. of orders was 25
Procurement units for each product.
Set-up 40,000 No. of production All the three products
Runs are produced in
production runs of 48
units.
Quality Control 28,240 No. of Inspections Done for each
production run.
Maintenance 1,28,000 Maintenance hours Total maintenance
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 the Activity Based Costing
Method. (10 Marks)
Answer
(a) (i) Statement of Joint Cost allocation of inventories of X, Y and Z
Products Total
X (`) Y (`) Z (`) (`)
Final sales value of 4,50,000 9,60,000 15,00,000 29,10,000
total production (15,000 x ` 30) (15,000 x ` 64) (30,000 x ` 50)
(Working Note 1)
Less: Additional -- 6,60,000 11,00,000 17,60,000
cost
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 17

Net realisable value 4,50,000 3,00,000 4,00,000 11,50,000

(at split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000
(Working Note 2)
(ii) Calculation of Cost of goods sold and Closing inventory
Products Total
X (`) Y (`) Z (`) (`)
Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs -- 6,60,000 11,00,000 17,60,000
Cost of goods sold 2,34,000 8,16,000 13,08,000 23,58,000
(COGS)
Less: Cost of closing 78,000 -- 3,27,000 4,05,000
inventory (COGS × 100/3%) (COGS × 25%)
(Working Note 1)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000
(iii) Comparative Statement of Gross Profit
Products Total
X (`) Y (`) Z (`) (`)
Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000
(10,000 x ` 30) (15,000 x ` 64) (22,500 x ` 50)
Less: Cost of goods 1,56,000 8,16,000 9,81,000 19,53,000
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 inventory production inventory
litres in litres percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
Z 22,500 7,500 30,000 25
18 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

2. Joint cost apportioned to each product:

Total Joint cost
= x Net Realisable Value of each product
TotalNet Realisable Value

` 5,98,000
Joint cost of product X = x ` 4,50,000 = ` 2,34,000
` 11,50,000
` 5,98,000
Joint cost of product Y = x ` 3,00,000 = ` 1,56,000
` 11,50,000
` 5,98,000
Joint cost of product Z = x ` 4,00,000 = ` 2,08,000
` 11,50,000
(b) 1. Traditional Absorption Costing
X Y Z Total
(a) Quantity (units) 1,200 1,440 1,968 4608
(b) Direct labour per unit (`) 18 20 30 -
(c) Direct labour hours (a × b)/` 4 5,400 7,200 14,760 27,360
Overhead rate per direct labour hour:
= Budgeted overheads Budgeted labour hours
= (` 50,000 + ` 40,000 + ` 28,240 + ` 1,28,000)  27,360 hours
= ` 2,46,240  27,360 hours
= ` 9 per direct labour hour
Unit Costs:
X Y Z
Direct Costs:
- Direct Labour (`) 18.00 20.00 30.00
- Direct Material (`) 90.00 84.00 176.00
Production Overhead: (`) 40.50 45.00 67.50

Total cost per unit (`) 148.50 149.00 273.50

 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

2. Calculation of Cost-Driver level under Activity Based Costing

X Y Z Total
Quantity (units) 1,200 1,440 1,968 -
No. of orders (to be 48 58 79 185
rounded off for fraction) (1200 / 25) (1440 / 25) (1968 / 25)
No. of production runs 25 30 41 96
(1200 / 48) (1440 / 48) (1968 / 48)
No. of Inspections 25 30 41 96
(done for each
production run)
Maintenance hours 1,600 1,600 3,200 6400
Calculation of Cost-Driver rate
Activity Budgeted Cost-driver Cost Driver rate
Cost (`) level (`)
(a) (b) (c) = (a) / (b)
Material procurement 50,000 185 270.27
Set-up 40,000 96 416.67
Quality control 28,240 96 294.17
Maintenance 1,28,000 6,400 20.00
Calculation of total cost of products using Activity Based Costing

Particulars Product
X (`) Y (`) Z (`)
Direct Labour 18.00 20.00 30.00
Direct Material 90.00 84.00 176.00
Prime Cost per 108.00 104.00 206.00
unit (A)
Material 10.81 10.89 10.85
procurement [(48 x 270.27)/1200] [(58 x 270.27)/1440] [(79 x 270.27)/1968]
Set-up 8.68 8.68 8.68
[(25 x 416.67)/1200] [(30 x 416.67)/ 1440] [(41 x 416.67)/ 1968]
Quality control 6.13 6.13 6.13
[(25 x 294.17)/1200] [(30 x 294.17)/ 1440] [(41 x 294.17)/ 1968]
Maintenance 26.67 22.22 32.52
[(1,600 x 20)/1200] [(1,600 x 20)/ 1440] [(3,200 x 20)/ 1968]
20 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Overhead Cost 52.29 47.92 58.18

per unit (B)
Total Cost per 160.29 151.92 264.18
unit (A + B)

Note: Question may also be solved assuming no. of orders for material procurement
to be 25 for each product.
Question 5
(a) 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 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, 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:
`
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
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

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. (10 Marks)
(b) 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:

(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. (10 Marks)
22 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Answer
(a) Workings:
Calculation of number of Patient days
100 Beds × 120 days = 12000
40 Beds × 80 days = 3,200
Extra beds = 400
Total = 15,600
(i) Statement of Profitability
Particulars Amount (`) Amount (`)
Income for the year (` 200 per patient per day × 31,20,000
15,600 patient days)
Variable Costs:
Doctor Fees (` 30,000 per month × 12) 3,60,000
Food to Patients (Variable) 4,40,000
Caretaker Other services to patients (Variable) 1,25,000
Laundry charges (Variable) 1,40,000
Medicines (Variable) 2,80,000
Bed Hire Charges (` 50 × 400 Beds) 20,000
Total Variable costs (13,65,000)
Contribution 17,55,000
Fixed Costs:
Rent (` 50,000 per month × 12) 6,00,000
Supervisor (2 persons × ` 5,000 × 12) 1,20,000
Nurses (4 persons × ` 3,000 × 12) 1,44,000
Ward Boys (2 persons x ` 1500 x12) 36,000
Repairs (Fixed) 28,000
Cost of Oxygen 75,000
Administration expenses allocated 71,000
Total Fixed Costs (10,74,000)
Profit 6,81,000
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

Calculation of Contribution and profit per Patient day

Total Contribution = ` 17,55,000
Total Patient days = 15,600 days
Contribution per Patient day = ` 17,55,000 / 15,600 days = ` 112.50
Total Profit = ` 6,81,000
Total Patient days = 15,600 days
Profit per Patient day = ` 6,81,000 / 15,600 days = ` 43.65
(ii) Breakeven Point = Fixed Cost / Contribution per Patient day
= ` 10,74,000 / ` 112.50
= 9,547 patient days
(b) Workings:
Calculation of budgeted hours
Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead

=  ` 1,06,080 x 8,100 - ` 1,02,000

 8,840 
= 4800 A
(b) Variable overhead efficiency variance
Std. rate per hour × (Std. hours for actual production – Actual hours)
` 1,06,080
= (8,800 hours – 8,100 hours)
8,840
= 8400 F
(ii) Fixed overhead variances
(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ` 2,21,000 – ` 2,00,000
= 21,000 F
24 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(b) Fixed overhead capacity variance

= Std rate x (Actual hours – budgeted hours)
` 2,21,000
= x (8,100 – 8,840)
8,840
= 18,500 A
(c) Fixed overhead efficiency variance
= Std rate x (Std hours for actual production – Actual hours)
` 2,21,000
= x (8,800 – 8,100)
8,840
= 17,500 F
(iii) Control Ratios
(a) Capacity Ratio
Actual hours
= x 100
Budgeted hours
8,100
= x 100 = 91.63%
8,840
(b) Efficiency Ratio
Standard hours
= x 100
Actual hours
8,800
= x 100 = 108.64 %
8,100
(c) Activity Ratio
Standard hours
= x 100
Budgted hours
8,800
= x 100 = 99.55%
8,840
Question 6
Answer any four of the following:
(a) State how the following items are treated in arriving at the value of cost of material
purchased:
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 25

(i) Detention Charges/Fines

(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons.
(b) State the limitations of Budgetary Control System.
(c) Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are
calculated? State the conditions required for the application of Blanket Overhead Rate.
(d) State the method of costing that would be most suitable for:
(i) Oil Refinery
(ii) Interior Decoration
(iii) Airlines Company
(iv) Advertising
(v) Car Assembly
(e) Give any five examples of the impact of use of Information Technology in Cost
Accounting. (4 x 5 = 20 Marks)
Answer
(a) Treatment of items in arriving at the value of cost of material Purchased
S. No. Items Treatment
(i) Detention charges/ Detention charges/ fines imposed for non-
Fine compliance of rule or law by any statutory authority.
It is an abnormal cost and not included with cost of
purchase.
(ii) Demurrage Demurrage is a penalty imposed by the transporter
for delay in uploading or offloading of materials. It is
an abnormal cost and not included with cost of
purchase.
(iii) Cost of returnable Treatment of cost of returnable containers are as
containers follows:
Returnable Containers: If the containers are
returned and their costs are refunded, then cost of
containers should not be considered in the cost of
purchase.
If the amount of refund on returning the container is
less than the amount paid, then, only the short fall
is added with the cost of purchase.
26 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(iv) Central Goods and Central Goods and Service Tax (CGST) is paid on
Service Tax (CGST) manufacture and supply of goods and collected
from the buyer. It is excluded from the cost of
purchase if the input credit is available for the
same. Unless mentioned specifically CGST is not
added with the cost of purchase.
(v) Shortage due to Shortage arises due to abnormal reasons such as
abnormal reasons material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the good
units. Losses due to abnormal reasons are debited
to costing profit and loss account.
(b) Limitations of Budgetary Control System
Points Description
1. Based on Estimates Budgets are based on a series of estimates, which are
based on the conditions prevalent or expected at the
time budget is established. It requires revision in plan
if conditions change.
2. Time factor Budgets cannot be executed automatically. Some
preliminary steps are required to be accomplished
before budgets are implemented. It requires proper
attention and time of management. Management must
not expect too much during the initial development
period.
3. Co-operation Required Staff co-operation is usually not available during the
initial budgetary control exercise. In a decentralised
organisation, each unit has its own objective and
these units enjoy some degree of discretion. In this
type of organisation structure, coordination among
different units is required. The success of the
budgetary control depends upon willing co-operation
and teamwork,
4. Expensive The implementation of budget is somewhat expensive.
For successful implementation of the budgetary
control, proper organisation structure with
responsibility is prerequisite. Budgeting process start
from the collection of information to for preparing the
budget and performance analysis. It consumes
valuable resources (in terms of qualified manpower,
equipment, etc.) for this purpose; hence, it is an
expensive process.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 27

5. Not a substitute for Budget is only a managerial tool and must be

management intelligently applied for management to get benefited.
Budgets are not a substitute for good management.
6. Rigid document Budgets are sometime considered as rigid documents.
But in reality, an organisation is exposed to various
uncertain internal and external factors. Budget should
be flexible enough to incorporate ongoing
developments in the internal and external factors
affecting the very purpose of the budget.
(c) Blanket Overhead Rate: Blanket overhead rate refers to the computation of one single
overhead rate for the whole factory.
This overhead rate is computed as follows:

Blanket Rate = Total overheads for the factory

Total number of units of base for the factory

Departmental Overhead Rate: It refers to the computation of one single overhead rate
for a particular production unit or department.
This overhead rate is determined by the following formula:

Departmental overhead Rate = Overheads of department or cost centre

Corresponding base

Conditions required for the Application of Blanket Overhead:

A blanket rate should be applied in the following cases:
(1) Where only one major product is being produced.
(2) Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.
(d) Method of Costing
S.No. Industry Method of Costing
(i) Oil Refinery Process Costing
(ii) Interior Decoration Job Costing
(iii) Airlines Company Operation/ Service Costing
(iv) Advertising Job Costing
(v) Car Assembly Multiple Costing
28 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(e) Example of Impact of Information Technology in cost accounting may include the
following:
(i) After the introduction of ERPs, different functional activities get integrated and as a
consequence a single entry into the accounting system provides custom made
reports for every purpose and saves an organisation from preparing different sets of
documents. Reconciliation process of results of both cost and financial accounting
systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of
Material, Material Requisition Note, Goods Received Note, labour utilisation report
etc. are no longer required to be prepared in multiple copies, the related department
can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet)
helping in resource procurement and mobilisation. For example, production
department can get materials from the stores without issuing material requisition
note physically. Similarly, purchase orders can be initiated to the suppliers with the
help of extranet. This enables an entity to shift towards Just-in-Time (JIT) approach
of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in
timely manner. Each cost centre and cost object is codified and all related costs are
assigned to the cost objects or cost centres using assigned codes. This automates
the cost accumulation and ascertainment process. The cost information can be
customised as per the requirement. For example, when an entity manufacture or
provide services, are able to know information job-wise, batch-wise, process-wise,
cost centre wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the
help of IT. ERP software plays an important role in bringing uniformity irrespective
of location, currency, language and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables
the management to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or
service activity closely to eliminate non value added activities.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) During a particular period ABC Ltd has furnished the following data:
Sales ` 10,00,000
Contribution to sales ratio 37% and
Margin of safety is 25% of sales.
A decrease in selling price and decrease in the fixed cost could change the "contribution
to sales ratio" to 30% and "margin of safety" to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost.
(ii) Revised Sales and
(iii) New Break-Even Point.
(b) A machine shop has 8 identical machines manned by 6 operators. The machine cannot
work without an operator wholly engaged on it. The original cost of all the 8 machines
works out to ` 32,00,000. The following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Average rate of wages per day of 8 hours per operator ` 100
Production bonus estimated 10% on wages
Power consumed ` 40,250
Supervision and Indirect Labour ` 16,500
Lighting and Electricity ` 6,000
2 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

The following particulars are given for a year:

Insurance ` 3,60,000
Sundry work Expenses ` 50,000
Management Expenses allocated ` 5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine
shop.
(c) MNO Ltd has provided following details:
 Opening work in progress is 10,000 units at ` 50,000 (Material 100%, Labour and
overheads 70% complete).
 Input of materials is 55,000 units at ` 2,20,000. Amount spent on Labour and
Overheads is ` 26,500 and ` 61,500 respectively.
 9,500 units were scrapped; degree of completion for material 100% and for labour &
overheads 60%.
 Closing work in progress is 12,000 units; degree of completion for material 100%
and for labour & overheads 90%.
 Finished units transferred to next process are 43,500 units.
Normal loss is 5% of total input including opening work in progress. Scrapped units
would fetch ` 8.50 per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account
(d) GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the
estimates provided by Pharmaceutical Industry Bureau, there will be a demand of 40
Million 'Stents' in the coming year. GHI Ltd. is expected to have a market share of 2.5%
of the total market demand of the Stents in the coming year. It is estimated that it costs
` 1.50 as inventory holding cost per stent per month and that the set-up cost per run of
stent manufacture is ` 225.
Required:
(i) What would be the optimum run size for Stent manufacture?
(ii) What is the minimum inventory holding cost?
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

(iii) Assuming that the company has a policy of manufacturing 4,000 stents per run, how
much extra costs the company would be incurring as compared to the optimum run
suggested in (i) above? (4 x 5 = 20 Marks)
Answer
(a) Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = ` 10,00,000 x 63% = ` 6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus,
variable cost is ` 6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100%  30% = 70%
` 6,30,000
Thus, Revised sales = = ` 9,00,000
70%
Revised, Break-even sales ratio = 100%  40% (revised Margin of safety) = 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to
sales ratio
= ` 5,40,000 (` 9,00,000 x 60%) x 30%
= ` 1,62,000
(ii) Revised sales = ` 9,00,000 (as calculated above)
(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
= ` 9,00,000 x 60%
= ` 5,40,000
(b) Workings:
Particulars Six months 6
operators (Hours)
Normal available hours per month (208 x 6 months x 6 7,488
operators)
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
4 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Computation of Comprehensive Machine Hour Rate

Particulars Amount for six
months (`)
Operators' wages (7,380/8 x100) 92,250
Production bonus (10% on wages) 9,225
Power consumed 40,250
Supervision and indirect labour 16,500
Lighting and Electricity 6,000
Repair and maintenance {(5% × ` 32,00,000)/2} 80,000
Insurance (` 3,60,000/2) 1,80,000
Depreciation {(` 32,00,000 × 10%)/2} 1,60,000
Sundry Work expenses (` 50,000/2) 25,000
Management expenses (` 5,00,000/2) 2,50,000
Total Overheads for 6 months 8,59,225
Comprehensive Machine Hour Rate = ` 8,59,225/7,200 hours ` 119.33
(Note: Machine hour rate may be calculated alternatively. Further, presentation of figures
may also be done on monthly or annual basis.)
(c) (i) Statement of Equivalent Production (Using FIFO method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
Units introduced 55,000 - From opening 10,000 - 30 3,000
WIP
- From fresh inputs 33,500 100 33,500 100 33,500
43,500 33,500 36,500
Normal Loss 3,250 - -
{5% (10,000 +
55,000 units)}
Abnormal loss 6,250 100 6,250 60 3,750
(9,500 – 3,250)
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

Closing WIP 12,000 100 12,000 90 10,800

65,000 65,000 51,750 51,050
(ii) Abnormal Loss A/c
Particulars Units (`) Particulars Units (`)
To Process-I A/c 6,250 29,698 By Cost Ledger Control A/c 6,250 53,125
(Refer Working (6,250 units × ` 8.5)
Note-2)
To Costing Profit - 23,427
& Loss A/c
6,250 53,125 6,250 53,125

Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(`) (`) (`)
Input costs 2,20,000 26,500 61,500
Less: Realisable value of normal (27,625) -- --
scrap (3,250 units x ` 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047
Total cost per unit = ` (3.7174 + 0.5191 + 1.2047) = ` 5.4412
2. Valuation of Abnormal Loss
(`)
Materials (6,250 units × ` 3.7174) 23,233.75
Labour (3,750 units × ` 0.5191) 1,946.63
Overheads (3,750 units × ` 1.2047) 4,517.62
29,698
(d) (i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity
(EBQ)
2DS
Economic Batch Quantity (EBQ) =
C
6 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Where, D = Annual demand for the Stents

= 4,00,00,000 × 2.5% = 10,00,000 units
S = Set- up cost per run
= ` 225
C = Carrying cost per unit per annum
= ` 1.50 × 12 = ` 18
2  10,00,000 ` 225
EBQ =
` 18
= 5,000 units of Stents
(ii) Minimum inventory holding cost
Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum
= (5,000 ÷ 2) × ` 18
= ` 45,000
(iii) Calculation of the extra cost due to manufacturing policy
When run size is 4,000 When run size is 5,000
units units i.e. at EBQ
Total set up cost 10,00,000 10,00,000
=  ` 225  ` 225
4,000 5,000
= ` 56,250 = ` 45,000
Total Carrying cost ½ × 4,000 × ` 18 ½ × 5,000 × ` 18
= ` 36,000 = ` 45,000
Total Cost ` 92,250 ` 90,000

Extra cost = ` 92,250 - ` 90,000 = ` 2,250

Question 2
(a) 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.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

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 producing one unit by one worker at the previous 1.975 hours
performance (this may be taken as time allowed)
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 assurance of
incentivising workers and also to adjust with the increase in demand. (10 Marks)
(b) 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:
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:
(i) Prime Cost
8 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(ii) Works Cost

(iii) Cost of Production
(iv) Cost of Goods sold
(v) Cost of Sales and Profit earned. (10 Marks)
Answer
(a) Working Notes:
1. Total time wages of 50 workers per month:
= No. of working days in the month × No. of working hours per day of each worker
× Hourly rate of wages × No. of workers
= 24 days × 8 hrs. × ` 50 × 50 workers = ` 4,80,000
2. Time saved per month:
Time allowed per unit to a worker 1.975 hours
No. of units produced during the month by 50 workers 6,120 units
Total time allowed to produce 6,120 units (6,120 × 1.975 hrs) 12,087 hours
Actual time taken to produce 6,120 units (24 days × 8 hrs. × 50 workers) 9,600 hours
Time saved (12,087 hours – 9,600 hours) 2,487 hours
3. Bonus under Halsey scheme to be paid to 50 workers:
Bonus = (50% of time saved) × hourly rate of wages
= 50/100 × 2,487 hours × ` 50 = ` 62,175
Total wages to be paid to 50 workers are (` 4,80,000 + ` 62,175) ` 5,42,175, if Z
Ltd. considers the introduction of Halsey Incentive Scheme to increase the worker
productivity.
4. Bonus under Rowan Scheme to be paid to 50 workers:
Time taken
Bonus = × Time saved × hourly rate
Time allowed
9,600 hours
= × 2,487 hours × ` 50 = ` 98,764
12,087 hours
Total wages to be paid to 50 workers are (` 4,80,000 + ` 98,764) ` 5,78,764, if Z Ltd.
considers the introduction of Rowan Incentive Scheme to increase the worker
productivity.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

(i) (a) Effective hourly rate of earnings under Halsey scheme:

(Refer to Working Notes 1, 2 and 3)
Total time wages of 50 workers  Total bonus under Halsey scheme
=
Total hours worked
` 4,80,000 ` 62,175
= = ` 56.48
9,600 hours

` 56.48  ` 50
Effective increase in earnings of worker (in %) = x 100 = 2.96%
` 50
(b) Effective hourly rate of earnings under Rowan scheme:
(Refer to Working Notes 1, 2 and 4)
Total time wages of 50 workers  Total bonus under Rowan scheme
=
Total hours worked

` 4,80,000 ` 96,875
= = ` 60.29
9,600 hours

` 60.29  ` 50
Effective increase in earnings of worker (in %)= x 100 =20.58%
` 50
(ii) (a) Saving in terms of direct labour cost per unit under Halsey scheme:
(Refer to Working Note 3)
Labour cost per unit (under time wage scheme)
= 1.975 hours × ` 50 = ` 98.75
Labour cost per unit (under Halsey scheme)
Total wages paid under the scheme ` 5,42,175
= = = s` 88.60
Total number of units produced 6,120

Saving per unit = ` 98.75 – ` 88.60 = ` 10.15

(b) Saving in terms of direct worker cost per unit under Rowan Scheme:
(Refer to Working Note 4)

Labour cost per unit under Rowan scheme = ` 5,78,764/6,120 units= ` 94.57

Saving per unit = ` 98.75 – ` 94.57 = ` 4.18

10 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(iii) Calculation of Productivity:

Normal Production Hours worked/Unit per Hour (9,600/1.975) 4,861
Actual Production Units 6,120
Increase in labour productivity 1,259
% Productivity i.e. increase in production/Normal production 25.9%
Advice: Rowan plan fulfils the company’s assurance of 20% increase over the present
earnings of workers. This would increase productivity by 25.9% only. It will not adjust with
the increase in demand by 40%.
(b) Cost Sheet for the Month of April 2020
Particulars (`)
Opening stock of Raw Material 20,000
Add: Purchases [Refer Working Note-2] 1,65,000
Less: Closing stock of Raw Material (25,000)
Raw material consumed 1,60,000
Add: Direct labour cost 1,20,000
Prime cost 2,80,000
Add: Factory overheads 1,00,000
Gross Works cost 3,80,000
Add: Opening work-in-progress 20,000
Less: Closing work-in-progress (30,000)
Works Cost 3,70,000
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: General and administration expenses* 18,000
Add: Selling expenses 22,000
Cost of sales 4,00,000
Profit {Balancing figure (` 5,00,000 – ` 4,00,000)} 1,00,000
Sales 5,00,000
*General and administration expenses have been assumed as not relating to the
production activity.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 11

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)
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
 ` 1,20,000 
Less: Factory overheads   100 
 120  (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 3
(a) Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
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
12 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Assuming that the proposal is implemented, calculate:

(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of ` 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ` 60,00,000, what
percentage of increase in selling price is required to sustain an increase of 5% in
fixed overheads. (10 Marks)
(b) XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70%
capacity on per annum basis. Company is in the process of determining sales price for
the financial year 2020-21. It has provided the following information:
Direct Material ` 60 per unit
Direct Labour ` 30 per unit
Indirect Overheads:
Fixed ` 65,50,000 per annum
Variable ` 15 per unit
Semi-variable ` 5,00,000 per annum up to 60% capacity and ` 50,000 for every
5% increase in capacity or part thereof up to 80% capacity and
thereafter ` 75,000 for every 10% increase in capacity or part
thereof.
Company desires to earn a profit of ` 25,00,000 for the year. Company has planned that
the factory will operate at 50% of capacity for first six months of the year and at 75% of
capacity for further three months and for the balance three months, factory will operate at
full capacity.
You are required to :
(1) Determine the average selling price at which each of the toy should be sold to earn
the desired profit.
(2) Given the above scenario, advise whether company should accept an offer to sell
each Toy at:
(a) ` 130 per Toy
(b) ` 129 per Toy (10 Marks)
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 13

Answer
(a) Workings:
1. Statement showing computation of Breakeven of merged plant and other
required information
S. Plan A Plant B Merged
No. Particulars 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 cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000
(iii) Contribution (i - ii) 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000
(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000
(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000
Contribution
2. PV ratio of merged plant = x 100
Sales
` 68,50,000
= x 100 = 45.67 %
` 1,50,00,000
Fixed Cost
(i) Break even sales of merged plant =
P/V Ratio
` 28,00,000
=
45.67%
= ` 61,30,939.34 (approx.)
` 61,30,939.34
Capacity utilisation = x 100= 40.88%
` 1,50,00,000

(ii) Profitability of the merged plant at 80% capacity utilisation

= (` 1,50,00,000 x 80%) x P/v ratio – fixed cost
= ` 1,20,00,000 x 45.67% – ` 28,00,000
= ` 26,80,400
(iii) Sales to earn a profit of ` 60,00,000
Fixed Cost + desired profit
Desired sales =
P/V Ratio
` 28,00,000 + ` 60,00,000
=
45.67%
14 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

= ` 1,92,68,666 (approx.)
(iv) Increase in fixed cost
= ` 28,00,000 x 5% = ` 1,40,000
Therefore, percentage increase in sales price
` 1,40,000
= x 100 = 0.726% (approx.)
` 1,92,68,666
(b) (1) Statement of Cost
For For For Total
first 6 further 3 remaining 3
months months months
6,00,000 x 6,00,000 x 6,00,000 x
6/12 x 50% 3/12 x 75% 3/12
= 1,50,000 = 1,12,500 = 1,50,000 4,12,500
units units units units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable 22,50,000 16,87,500 22,50,000 61,87,500
Expenses
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000
Indirect Semi-variable
expenses
- For first six months @ 2,50,000
5,00,000 per annum
- For further three months 1,62,500
@ 6,50,000* per annum
- For further three months 2,12,500 6,25,000
@ 8,50,000** per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45
* ` 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ` 6,50,000
** ` 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%)
× 75,000] = ` 8,50,000
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 15

(2) (a) Company Should accept the offer as it is above its targeted sales price of
` 128.45 per toy.
(b) Company Should accept the offer as it is above its targeted sales price of
` 128.45 per toy.
Question 4
(a) Mayura Chemicals Ltd buys a particular raw material at ` 8 per litre. At the end of the
processing in Department- I, 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
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-realisable 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. (10 Marks)
(b) 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 31 st March, 2020:
X Y Z
Production Quantity (units) 1200 1440 1968
Cost per unit:
16 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

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.
Budgeted Cost Driver Remarks
Overheads (`)
Material 50,000 No. of orders No. of orders was 25
Procurement units for each product.
Set-up 40,000 No. of production All the three products
Runs are produced in
production runs of 48
units.
Quality Control 28,240 No. of Inspections Done for each
production run.
Maintenance 1,28,000 Maintenance hours Total maintenance
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 the Activity Based Costing
Method. (10 Marks)
Answer
(a) (i) Statement of Joint Cost allocation of inventories of X, Y and Z
Products Total
X (`) Y (`) Z (`) (`)
Final sales value of 4,50,000 9,60,000 15,00,000 29,10,000
total production (15,000 x ` 30) (15,000 x ` 64) (30,000 x ` 50)
(Working Note 1)
Less: Additional -- 6,60,000 11,00,000 17,60,000
cost
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 17

Net realisable value 4,50,000 3,00,000 4,00,000 11,50,000

(at split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000
(Working Note 2)
(ii) Calculation of Cost of goods sold and Closing inventory
Products Total
X (`) Y (`) Z (`) (`)
Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs -- 6,60,000 11,00,000 17,60,000
Cost of goods sold 2,34,000 8,16,000 13,08,000 23,58,000
(COGS)
Less: Cost of closing 78,000 -- 3,27,000 4,05,000
inventory (COGS × 100/3%) (COGS × 25%)
(Working Note 1)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000
(iii) Comparative Statement of Gross Profit
Products Total
X (`) Y (`) Z (`) (`)
Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000
(10,000 x ` 30) (15,000 x ` 64) (22,500 x ` 50)
Less: Cost of goods 1,56,000 8,16,000 9,81,000 19,53,000
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 inventory production inventory
litres in litres percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
Z 22,500 7,500 30,000 25
18 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

2. Joint cost apportioned to each product:

Total Joint cost
= x Net Realisable Value of each product
TotalNet Realisable Value

` 5,98,000
Joint cost of product X = x ` 4,50,000 = ` 2,34,000
` 11,50,000
` 5,98,000
Joint cost of product Y = x ` 3,00,000 = ` 1,56,000
` 11,50,000
` 5,98,000
Joint cost of product Z = x ` 4,00,000 = ` 2,08,000
` 11,50,000
(b) 1. Traditional Absorption Costing
X Y Z Total
(a) Quantity (units) 1,200 1,440 1,968 4608
(b) Direct labour per unit (`) 18 20 30 -
(c) Direct labour hours (a × b)/` 4 5,400 7,200 14,760 27,360
Overhead rate per direct labour hour:
= Budgeted overheads Budgeted labour hours
= (` 50,000 + ` 40,000 + ` 28,240 + ` 1,28,000)  27,360 hours
= ` 2,46,240  27,360 hours
= ` 9 per direct labour hour
Unit Costs:
X Y Z
Direct Costs:
- Direct Labour (`) 18.00 20.00 30.00
- Direct Material (`) 90.00 84.00 176.00
Production Overhead: (`) 40.50 45.00 67.50

Total cost per unit (`) 148.50 149.00 273.50

 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

2. Calculation of Cost-Driver level under Activity Based Costing

X Y Z Total
Quantity (units) 1,200 1,440 1,968 -
No. of orders (to be 48 58 79 185
rounded off for fraction) (1200 / 25) (1440 / 25) (1968 / 25)
No. of production runs 25 30 41 96
(1200 / 48) (1440 / 48) (1968 / 48)
No. of Inspections 25 30 41 96
(done for each
production run)
Maintenance hours 1,600 1,600 3,200 6400
Calculation of Cost-Driver rate
Activity Budgeted Cost-driver Cost Driver rate
Cost (`) level (`)
(a) (b) (c) = (a) / (b)
Material procurement 50,000 185 270.27
Set-up 40,000 96 416.67
Quality control 28,240 96 294.17
Maintenance 1,28,000 6,400 20.00
Calculation of total cost of products using Activity Based Costing

Particulars Product
X (`) Y (`) Z (`)
Direct Labour 18.00 20.00 30.00
Direct Material 90.00 84.00 176.00
Prime Cost per 108.00 104.00 206.00
unit (A)
Material 10.81 10.89 10.85
procurement [(48 x 270.27)/1200] [(58 x 270.27)/1440] [(79 x 270.27)/1968]
Set-up 8.68 8.68 8.68
[(25 x 416.67)/1200] [(30 x 416.67)/ 1440] [(41 x 416.67)/ 1968]
Quality control 6.13 6.13 6.13
[(25 x 294.17)/1200] [(30 x 294.17)/ 1440] [(41 x 294.17)/ 1968]
Maintenance 26.67 22.22 32.52
[(1,600 x 20)/1200] [(1,600 x 20)/ 1440] [(3,200 x 20)/ 1968]
20 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Overhead Cost 52.29 47.92 58.18

per unit (B)
Total Cost per 160.29 151.92 264.18
unit (A + B)

Note: Question may also be solved assuming no. of orders for material procurement
to be 25 for each product.
Question 5
(a) 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 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, 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:
`
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
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

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. (10 Marks)
(b) 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:

(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. (10 Marks)
22 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

Answer
(a) Workings:
Calculation of number of Patient days
100 Beds × 120 days = 12000
40 Beds × 80 days = 3,200
Extra beds = 400
Total = 15,600
(i) Statement of Profitability
Particulars Amount (`) Amount (`)
Income for the year (` 200 per patient per day × 31,20,000
15,600 patient days)
Variable Costs:
Doctor Fees (` 30,000 per month × 12) 3,60,000
Food to Patients (Variable) 4,40,000
Caretaker Other services to patients (Variable) 1,25,000
Laundry charges (Variable) 1,40,000
Medicines (Variable) 2,80,000
Bed Hire Charges (` 50 × 400 Beds) 20,000
Total Variable costs (13,65,000)
Contribution 17,55,000
Fixed Costs:
Rent (` 50,000 per month × 12) 6,00,000
Supervisor (2 persons × ` 5,000 × 12) 1,20,000
Nurses (4 persons × ` 3,000 × 12) 1,44,000
Ward Boys (2 persons x ` 1500 x12) 36,000
Repairs (Fixed) 28,000
Cost of Oxygen 75,000
Administration expenses allocated 71,000
Total Fixed Costs (10,74,000)
Profit 6,81,000
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

Calculation of Contribution and profit per Patient day

Total Contribution = ` 17,55,000
Total Patient days = 15,600 days
Contribution per Patient day = ` 17,55,000 / 15,600 days = ` 112.50
Total Profit = ` 6,81,000
Total Patient days = 15,600 days
Profit per Patient day = ` 6,81,000 / 15,600 days = ` 43.65
(ii) Breakeven Point = Fixed Cost / Contribution per Patient day
= ` 10,74,000 / ` 112.50
= 9,547 patient days
(b) Workings:
Calculation of budgeted hours
Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead

=  ` 1,06,080 x 8,100 - ` 1,02,000

 8,840 
= 4800 A
(b) Variable overhead efficiency variance
Std. rate per hour × (Std. hours for actual production – Actual hours)
` 1,06,080
= (8,800 hours – 8,100 hours)
8,840
= 8400 F
(ii) Fixed overhead variances
(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ` 2,21,000 – ` 2,00,000
= 21,000 F
24 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(b) Fixed overhead capacity variance

= Std rate x (Actual hours – budgeted hours)
` 2,21,000
= x (8,100 – 8,840)
8,840
= 18,500 A
(c) Fixed overhead efficiency variance
= Std rate x (Std hours for actual production – Actual hours)
` 2,21,000
= x (8,800 – 8,100)
8,840
= 17,500 F
(iii) Control Ratios
(a) Capacity Ratio
Actual hours
= x 100
Budgeted hours
8,100
= x 100 = 91.63%
8,840
(b) Efficiency Ratio
Standard hours
= x 100
Actual hours
8,800
= x 100 = 108.64 %
8,100
(c) Activity Ratio
Standard hours
= x 100
Budgted hours
8,800
= x 100 = 99.55%
8,840
Question 6
Answer any four of the following:
(a) State how the following items are treated in arriving at the value of cost of material
purchased:
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 25

(i) Detention Charges/Fines

(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons.
(b) State the limitations of Budgetary Control System.
(c) Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are
calculated? State the conditions required for the application of Blanket Overhead Rate.
(d) State the method of costing that would be most suitable for:
(i) Oil Refinery
(ii) Interior Decoration
(iii) Airlines Company
(iv) Advertising
(v) Car Assembly
(e) Give any five examples of the impact of use of Information Technology in Cost
Accounting. (4 x 5 = 20 Marks)
Answer
(a) Treatment of items in arriving at the value of cost of material Purchased
S. No. Items Treatment
(i) Detention charges/ Detention charges/ fines imposed for non-
Fine compliance of rule or law by any statutory authority.
It is an abnormal cost and not included with cost of
purchase.
(ii) Demurrage Demurrage is a penalty imposed by the transporter
for delay in uploading or offloading of materials. It is
an abnormal cost and not included with cost of
purchase.
(iii) Cost of returnable Treatment of cost of returnable containers are as
containers follows:
Returnable Containers: If the containers are
returned and their costs are refunded, then cost of
containers should not be considered in the cost of
purchase.
If the amount of refund on returning the container is
less than the amount paid, then, only the short fall
is added with the cost of purchase.
26 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(iv) Central Goods and Central Goods and Service Tax (CGST) is paid on
Service Tax (CGST) manufacture and supply of goods and collected
from the buyer. It is excluded from the cost of
purchase if the input credit is available for the
same. Unless mentioned specifically CGST is not
added with the cost of purchase.
(v) Shortage due to Shortage arises due to abnormal reasons such as
abnormal reasons material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the good
units. Losses due to abnormal reasons are debited
to costing profit and loss account.
(b) Limitations of Budgetary Control System
Points Description
1. Based on Estimates Budgets are based on a series of estimates, which are
based on the conditions prevalent or expected at the
time budget is established. It requires revision in plan
if conditions change.
2. Time factor Budgets cannot be executed automatically. Some
preliminary steps are required to be accomplished
before budgets are implemented. It requires proper
attention and time of management. Management must
not expect too much during the initial development
period.
3. Co-operation Required Staff co-operation is usually not available during the
initial budgetary control exercise. In a decentralised
organisation, each unit has its own objective and
these units enjoy some degree of discretion. In this
type of organisation structure, coordination among
different units is required. The success of the
budgetary control depends upon willing co-operation
and teamwork,
4. Expensive The implementation of budget is somewhat expensive.
For successful implementation of the budgetary
control, proper organisation structure with
responsibility is prerequisite. Budgeting process start
from the collection of information to for preparing the
budget and performance analysis. It consumes
valuable resources (in terms of qualified manpower,
equipment, etc.) for this purpose; hence, it is an
expensive process.
 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 27

5. Not a substitute for Budget is only a managerial tool and must be

management intelligently applied for management to get benefited.
Budgets are not a substitute for good management.
6. Rigid document Budgets are sometime considered as rigid documents.
But in reality, an organisation is exposed to various
uncertain internal and external factors. Budget should
be flexible enough to incorporate ongoing
developments in the internal and external factors
affecting the very purpose of the budget.
(c) Blanket Overhead Rate: Blanket overhead rate refers to the computation of one single
overhead rate for the whole factory.
This overhead rate is computed as follows:

Blanket Rate = Total overheads for the factory

Total number of units of base for the factory

Departmental Overhead Rate: It refers to the computation of one single overhead rate
for a particular production unit or department.
This overhead rate is determined by the following formula:

Departmental overhead Rate = Overheads of department or cost centre

Corresponding base

Conditions required for the Application of Blanket Overhead:

A blanket rate should be applied in the following cases:
(1) Where only one major product is being produced.
(2) Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.
(d) Method of Costing
S.No. Industry Method of Costing
(i) Oil Refinery Process Costing
(ii) Interior Decoration Job Costing
(iii) Airlines Company Operation/ Service Costing
(iv) Advertising Job Costing
(v) Car Assembly Multiple Costing
28 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021

(e) Example of Impact of Information Technology in cost accounting may include the
following:
(i) After the introduction of ERPs, different functional activities get integrated and as a
consequence a single entry into the accounting system provides custom made
reports for every purpose and saves an organisation from preparing different sets of
documents. Reconciliation process of results of both cost and financial accounting
systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of
Material, Material Requisition Note, Goods Received Note, labour utilisation report
etc. are no longer required to be prepared in multiple copies, the related department
can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet)
helping in resource procurement and mobilisation. For example, production
department can get materials from the stores without issuing material requisition
note physically. Similarly, purchase orders can be initiated to the suppliers with the
help of extranet. This enables an entity to shift towards Just-in-Time (JIT) approach
of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in
timely manner. Each cost centre and cost object is codified and all related costs are
assigned to the cost objects or cost centres using assigned codes. This automates
the cost accumulation and ascertainment process. The cost information can be
customised as per the requirement. For example, when an entity manufacture or
provide services, are able to know information job-wise, batch-wise, process-wise,
cost centre wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the
help of IT. ERP software plays an important role in bringing uniformity irrespective
of location, currency, language and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables
the management to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or
service activity closely to eliminate non value added activities.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answers.
Question 1
Answer the following:
(a) G Ltd. manufactures a single product for which market demand exists for additional
quantity. Present sales of ` 6,00,000 utilises only 60% capacity of the plant. The following
data are available:
(1) Selling price : ` 100 per unit
(2) Variable cost : ` 30 per unit
(3) Semi-variable expenses : ` 60,000 fixed + ` 5 per unit
(4) Fixed expenses : ` 1,00,000 at present level,
estimated to increase by 25% at
and above 80% capacity.
You are required to prepare a flexible budget so as to arrive at the operating profit at 60%,
80% and 100% levels.
(b) Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse it's production mix
in respect of these three products - 'X', 'Y' and 'Z'.
You have the following information :
X Y Z
Direct Materials ` (per unit) 160 120 80
Variable Overheads ` (per unit) 8 20 12
Direct labour :
Departments: Rate per Hour ( `) Hours per unit Hours per unit Hours per unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11

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 2 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

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 sales in the 12,000 16,000 24,000
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.
(c) 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'.
(d) W Limited undertook a contract for ` 5,00,000 on 1st July, 2019. On 30th June, 2020 when
the accounts were closed, the following details about the contract were gathered:
Amount (`)
Materials purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Materials on hand (30-6-2020) 25,000
Wages accrued (30-6-2020) 5,000
Work certified 2,00,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

Cash received 1,50,000

Work uncertified 15,000
The above contract contained "Escalation clause" which read as follows :
"In the event of increase in the prices of materials and rates of wages by more than 5%,
the contract price would be increased accordingly by 25% of the rise in the cost of materials
and wages beyond 5% in each case."
It was found that since the date of signing the agreement, the prices of materials and wage
rates increased by 25%. The value of the work certified does not take into account the
effect of the above clause.
Calculate the 'value of work certified' after taking the effect of 'Escalation Clause' as on
30th June, 2020. (4 x 5 = 20 Marks)
Answer
(a) Flexible Budget
Activity Level 60% 80% 100%
Production (units) 6,000 8,000 10,000
(`) (`) (`)
Sales @ ` 100 per unit 6,00,000 8,00,000 10,00,000
Variable Cost 2,10,000 2,80,000 3,50,000
(@ ` 35 (` 30 + ` 5) per unit)
Contribution (A) 3,90,000 5,20,000 6,50,000
Fixed Cost (part of semi-variable cost) 60,000 60,000 60,000
Other Fixed Cost 1,00,000 1,25,000 1,25,000
Total Fixed Cost (B) 1,60,000 1,85,000 1,85,000
Operating Profit (A – B) 2,30,000 3,35,000 4,65,000
(b) (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
Dept. A (Rate x Hours) 24 40 20

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 4 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Dept. B (Rate x Hours) 48 120 88

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 6hrs. + 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 (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
(c) Comprehensive Cost Statement
Particulars Total Cost Product-M Product-N
(`) (`) (`)
No. of units produced * 5,400 units 810 units
Cost of raw material (` 80 × 6,750 5,40,000
units)
Processing cost:

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

- 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 1,48,500 82,500 66,000
 1,48,500  100   1,48,500  80 
   
 180   180 
Other joint costs (including material) 6,16,500 5,36,087 80,413
in the ratio of output  6,16,500  5,400   6,16,500  810 
(5,400:810)    6,210 
 6,210   

(ii) Total product cost 7,65,000 6,18,587 1,46,413

* No. of units produced of Product M = 6750 units x 80% = 5400 units
No. of units produced of Product N = 6750 units x 12% = 810 units
(d) Workings:
(i) Percentage of work certified:
Value of work certified ` 2,00,000
×100 =  100 = 40%
Contract price ` 5,00,000

(ii) Value of material and labour used in the contract:

Particulars Amount (`) Amount (`)
Material purchased 1,00,000
Less: Material on hand (30-06-2020) (25,000) 75,000
Wages paid 45,000
Add: Wages accrued (30-06-2020) 5,000 50,000
1,25,000
Price of materials and wages has been increased by 25%, the value before price
increase is:
` 1,25,000
 100 = ` 1,00,000
125

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 6 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

(iii) Calculation of Value of work certified:

The value of the contract would be increased by 25% of the price increased beyond
5%.
Price increased beyond 5% = ` 25,000 – 5% of ` 1,00,000 = ` 20,000
Value of contract would be increased by 25% of ` 20,000 = ` 5,000
Therefore, the revised contract value = ` 5,00,000 + ` 5,000 = ` 5,05,000
Calculation of the Value of work certified after taking the effect of escalation clause:
Revised contract value × Percentage of work certified
= ` 5,05,000 × 40% = ` 2,02,000
Question 2
(a) 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:
(`)
Direct Materials 8,00,000
Direct Wages 4,48,000
Production Overhead 1,92,000
Total 14,40,000
It is further ascertained that :
(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 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 follow :
Production Sales
No. of units No. of units
Super Pen 40,000 Super Pen 36,000
Normal Pen 1,20,000
(7) Selling price was ` 30 per unit for Super Pen.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

Prepare a Cost Sheet for 'Super Pen' showing:

(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit (10 Marks)
(b) TEE Ltd. is a manufacturing company having three production departments 'P', 'Q' and 'R'
and two service departments 'X' and 'Y' details pertaining to which are as under :
P Q R X Y
Direct wages (`) 5,000 1,500 4,500 2,000 800
Working hours 13,191 7,598 14,995 - -
Value of machine ( `) 1,00,000 80,000 1,00,000 20,000 50,000
H.P. of machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Floor space (sq. ft.) 2,000 2,500 3,500 1,000 1,000
The expenses are as follows:
(`)
Rent and Rates 10,000
General Lighting 600
Indirect Wages 3,450
Power 3,500
Depreciation on Machines 70,000
Sundries (apportionment on the basis of direct wages) 13,800
The expenses of Service Departments are allocated as under :
P Q R X Y
X 45% 15% 30% - 10%
Y 35% 25% 30% 10% -
Product 'A' is processed for manufacture in Departments P, Q and R for 6, 5 and 2 hours
respectively.
Direct Costs of Product A are :
Direct material cost is ` 65 per unit and Direct labour cost is ` 40 per unit.
You are Required to:
(i) Prepare a statement showing distribution of overheads among the production and
service departments.

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 8 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

(ii) Calculate recovery rate per hour of each production department after redistributing
the service departments costs.
(iii) Find out the Total Cost of a 'Product A'. (10 Marks)
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 wages) 8.00 3,20,000
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
` 8,00,000
Or, M = =`4
2,00,000
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 x 40,000) + (0.6W x 1,20,000) = ` 4,48,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

W = ` 4 per unit
` 1,92,000
(iii) Production overhead per unit = = ` 1.20
(40,000 + 1,20,000)
Production overhead for Super pen = ` 1.20 × 40,000 units = ` 48,000
* 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 is related to per unit only.
Note: Direct Material and Direct wages can be calculated in alternative ways.
(b) (i) Statement showing distribution of Overheads
Primary Distribution Summary
Item of cost Basis of Total P Q R X Y
apportionment (`) (`) (`) (`) (`) (`)
Direct wages Actual 2,800 -- -- -- 2,000 800
Rent and Rates Floor area 10,000 2,000 2,500 3,500 1,000 1,000
(4:5:7:2:2)
General lighting Light points 600 200 100 150 50 100
(4:2:3:1:2)
Indirect wages Direct wages 3,450 1,250 375 1,125 500 200
(50:15:45:20:8)
Power Horse Power of 3,500 1,000 800 1,000 200 500
machines used
(10:8:10:2:5)
Depreciation of Value of 70,000 20,000 16,000 20,000 4,000 10,000
machinery machinery
(10:8:10:2:5)
Sundries Direct wages 13,800 5,000 1,500 4,500 2,000 800
(50:15:45:20:8)
Total 1,04,150 29,450 21,275 30,275 9,750 13,400
Secondary Distribution using simultaneous equation method:
Overheads of service cost centres
Let, X be the overhead of service cost centre X
Y be the overhead of service cost centre Y

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 10 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

X = 9,750 + 0.10 Y
Y = 13,400 + 0.10 X
Substituting the value of Y in X we get
X = 9,750 + 0.10 (13,400 + 0.10 X)
X = 9,750 + 1,340 + 0.01 X
0.99 X = 11,090
 X = ` 11,202
 Y = 13,400 + 0.10  11,202
= ` 14,520.20
Secondary Distribution Summary
Particulars Total (`) P (`) Q (`) R (`)

Allocated and Apportioned 29,450.00 21,275.00 30,275.00

over-heads as per primary
distribution
X 11,202.00 5,040.90 1,680.30 3,360.60
Y 14,520.20 5,082.07 3,630.05 4,356.06
Total 39,572.97 26,585.35 37,991.66

(ii) Calculation of Overhead recovery rate per hour

P (`) Q (`) R (`)
Total overheads cost 39,572.97 26,585.35 37,991.66
Working hours 13,191 7,598 14,995
Rate per hour (`) 3 3.50 2.53

(iii) Cost of Product A

(`)
Direct material 65.00
Direct labour 40.00
Prime cost 105.00
Production on overheads

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 11

P 6 hours  ` 3 = ` 18
Q 5 hours  ` 3.50 = ` 17.50
R 2 hours  ` 2.53 = ` 5.06 40.56
Total cost 145.56
Note: Secondary Distribution can also be done using repeated distribution Method
Question 3
(a) 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 (10 Marks)
(b) An automobile company purchases 27,000 spare parts for its annual requirements. The
cost per order is ` 240 and the annual carrying cost of average inventory is 12.5%. Each
spare part costs ` 50.
At present, the order size is 3,000 spare parts.
(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company's cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?
(10 Marks)

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 12 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Answer
(a) (1) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ` 12,000 – ` 12,800 (as calculated below) = ` 800 (A)
(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 x 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 x 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.)
(b) Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = ` 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = ` 50
Carrying cost per unit (i × c) = ` 50 × 12.5% = ` 6.25

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 13

2 × A ×O
Economic Order Quantity (EOQ) =
i×c
2×27,000×240
=√ = 1440 units
6.25

(i) Calculation of saving by opting EOQ:

Existing Order policy EOQ Model
No. of orders 9 18.75 or 19
 27,000   27,000 
   
 3,000   1,440 
A. Ordering Cost (`) 2,160 4,500
(` 240 × 9)   27,000  
` 240 ×  
  1,440  
B. Carrying cost (`) 9,375 4,500
 3,000 × ` 6.25   1,440 × ` 6.25 
   
 2   2 
Total cost (A+B) (`) 11,535 9,000
Savings of Cost by opting EOQ Model = ` 11,535 – ` 9,000 = ` 2,535
(ii) Re-order point under EOQ:
Re-order point/ Re-order level = Maximum consumption × Maximum lead time
27,000units
Consumption per day = = 75 units
360days
Re-order point/ Re-order level = 75 units × 12 days = 900 units
(iii) Frequency of Orders (in days):
360days 360 days
= = 18.95 days or 19 days
No.of ordersa year 19
Question 4
(a) Following details are related to the work done in Process-I by ABC Ltd. during the month
of May 2019 :
(`)
Opening work in process (3,000 units)
Materials 1,80,500

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 14 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Labour 32,400
Overheads 90,000
Materials introduced in Process-I (42,000 units) 36,04,000
Labour 4,50,000
Overheads 15,18,000
Units Scrapped : 4,800 units
Degree of completion :
Materials : 100%
Labour & overhead : 70%
Closing Work-in-process : 4,200 units
Degree of completion :
Materials : 100%
Labour & overhead : 50%
Units finished and transferred to Process-II : 36,000 units
Normal loss:
4% of total input including opening work-in-process
Scrapped units fetch ` 62.50 per piece.
Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit.
(iii) Process-I A/c
(iv) Normal Loss Account and
(v) Abnormal Loss Account (10 Marks)
(b) 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 -

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 15

The normal working hours for the month are 200 hrs. 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)
(c) Discuss any four objectives of 'Time keeping' in relation to attendance and payroll
procedures. (4 Marks)
Answer
(a) (i) Statement of Equivalent Production (Weighted Average method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour & O.H.
% Units % Units
Opening WIP 3,000 Completed and 36,000 100 36,000 100 36,000
transferred to
Process-II
Units introduced 42,000 Normal Loss 1,800 -- -- -- --
(4% of 45,000 units)
Abnormal loss 3,000 100 3,000 70 2,100
(Balancing figure)
Closing WIP 4,200 100 4,200 50 2,100
45,000 45,000 43,200 40,200
(ii) Statement showing cost for each element
Particulars Materials (`) Labour (`) Overhead (`) Total (`)
Cost of opening work- 1,80,500 32,400 90,000 3,02,900
in-process
Cost incurred during 36,04,000 4,50,000 15,18,000 55,72,000
the month

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 16 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Less: Realisable (1,12,500) -- -- (1,12,500)

Value of normal scrap
(` 62.50 × 1,800
units)
Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400
Equivalent units: (B) 43,200 40,200 40,200
Cost per equivalent 85.00 12.00 40.00 137.00
unit: (C) = (A ÷ B)
Statement of Distribution of cost
Particulars Amount (`) Amount (`)
1. Value of units completed and transferred: 49,32,000
(36,000 units × ` 137)
2. Value of Abnormal Loss:
- Materials (3,000 units × ` 85) 2,55,000
- Labour (2,100 units × ` 12) 25,200
- Overheads (2,100 units × ` 40) 84,000 3,64,200
3. Value of Closing W-I-P:
- Materials (4,200 units × ` 85) 3,57,000
- Labour (2,100 units × ` 12) 25,200
- Overheads (2,100 units × ` 40) 84,000 4,66,200
(iii) Process-I A/c
Particulars Units (`) Particulars Units (`)
To Opening W.I.P:
− Materials 3,000 1,80,500 By Normal Loss 1,800 1,12,500
− Labour -- 32,400 (` 62.5 × 1,800
− Overheads -- 90,000 units)
To Materials introduced 42,000 36,04,000 By Abnormal loss 3,000 3,64,200
To Labour 4,50,000 By Process-I A/c 36,000 49,32,000
To Overheads 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 17

(iv) Normal Loss A/c

Particulars Units (`) Particulars Units (`)
To Process-I 1,800 1,12,500 By Cost Ledger 1,800 1,12,500
A/c Control A/c
1,800 1,12,500 1,800 1,12,500

(v) Abnormal Loss A/c

Particulars Units (`) Particulars Units (`)
To Process-I 3,000 3,64,200 By Cost Ledger Control 3,000 1,87,500
A/c A/c (` 62.5 × 3,000
units)
By Costing Profit & 1,76,700
Loss A/c (Bal. Figure)
3,000 3,64,200 3,000 3,64,200

(b) (i) Calculation of Net Wages paid to Worker ‘R’ and ‘S’
Particulars R (`) S (`)
Basic Wages 15,000.00 30,000.00
Dearness Allowance (DA) (50% of Basic Wages) 7,500.00 15,000.00
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% × ` 30,000) (1,050.00) (2,250.00)
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’
R (`) S (`)
Gross Wages (Basic Wages + DA) 22,500.00 45,000.00
(excluding overtime)
Employer’s contribution to P.F. and E.S.I. 1,350.00 2,850.00
23,850.00 47,850.00
Ordinary wages Labour Rate per hour 119.25 239.25
(` 23,850 ÷ 200 hours); (` 47,850 ÷ 200 hours)

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 18 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

(ii) Statement Showing Allocation of workers cost to each Job

Total Jobs
Wages A B C
Worker R
Ordinary Wages (15:2:3) 23,850.00 17,887.50 2,385.00 3577.50
Overtime 4500.00 4500.00 - --
Worker S
Ordinary Wages (2:1:2) 47,850.00 19,140.00 9,570.00 19,140.00
76,200.00 41,527.50 11,955.00 22,717.50

Working Note:
Normal Wages are considered as basic wages.
2 x(Basic wage + D.A.) x 20hours
Over time =
200hours
`22, 500
= 2x x 20hours
200
= ` 4,500
(c) The objectives of time-keeping in relation to attendance and payroll procedures are
as follows:
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining and controlling employee cost.
(iv) For ascertaining idle time.
(v) For disciplinary purposes.
(vi) For overhead distribution
Question 5
(a) 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.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

• 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:
(1) Calculate cost per kilometre.
(2) Calculate the toll rate per vehicle. (10 Marks)
(b) ABC Ltd. is engaged in production of three types of Fruit Juices:
Apple, Orange and Mixed Fruit.
The following cost data for the month of March 2020 are as under:
Particulars Apple Orange Mixed Fruit
Units produced and sold 10,000 15,000 20,000
Material per unit ( `) 8 6 5
Direct Labour per unit ( `) 5 4 3
No. of Purchase Orders 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking Hours 110 160 170
Overheads incurred by the company during the month are as under :
(`)
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560
Required:
(i) Calculate cost driver's rate.
(ii) Calculate total cost of each product using Activity Based Costing. (6 Marks)
(c) Describe the various levels of activities under 'ABC' methodology. (4 Marks)

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 20 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Answer
(a) Statement of Cost
Particulars (`)
A. Apportionment of ` 900crore 1 7,50,00,000
( × )
capital cost 10years 12months
B. Other Costs
Salary to Collection (3 Shifts × 5 persons per shift × 30 days 90,000
Personnel × ` 200 per day)
Salary to Supervisor (3 Shifts × 2 persons per shift × 30 days 63,000
× ` 350 per day)
Salary to Security (2 Shifts × 2 persons per shift × 30 days 24,000
Personnel × ` 200 per day)
Salary to Toll Booth (3 Shifts × 1 person per shift × 30 days 45,000
Manager × ` 500 per day)
Electricity 1,50,000
Telephone 1,00,000
4,72,000
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
= = = ` 6,70,600
Total km. 120km.
(2) Calculation of toll rate per vehicle:
Total Cost + 25% profit ` 8,04,72,000 + ` 2,41,41,600
= = = ` 10.46
Vehicles per month 1,00,00,000 vehicles
Working:
Total estimated vehicles 1 month
Vehicles per month = ×
10 years 12 months
120crore 1 month
= × = 1 Crore vehicles
10years 12months

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(b) (i) Calculation Cost-Driver’s rate

Overhead cost Cost-driver level Cost driver rate
Activity (`) (`)
(A) (B) (C) = (A)/(B)
Ordering 64,000 34 + 32 + 14 800
= 80 no. of purchase orders
Delivery 1,58,200 110 + 64 + 52 700
= 226 no. of deliveries
Shelf stocking 87,560 110 + 160 + 170 199
= 440 shelf stocking hours
(ii) Calculation of total cost of products using Activity Based Costing
Particulars Fruit Juices
Apple (`) Orange (`) Mixed Fruit (`)
Material cost 80,000 90,000 1,00,000
(10,000 x ` 8) (15,000 x ` 6) (20,000 x ` 5)
Direct labour cost 50,000 60,000 60,000
(10,000 x ` 5) (15,000 x ` 4) (20,000 x ` 3)
Prime Cost (A) 1,30,000 1,50,000 1,60,000
Ordering cost 27,200 25,600 11,200
(800 x 34) (800 x 32) (800 x 14)
Delivery cost 77,000 44,800 36,400
(700 x 110) (700 x 64) (700 x 52)
Shelf stocking cost 21,890 31,840 33,830
(199 x 110) (199 x 160) (199 x 170)
Overhead Cost (B) 1,26,090 1,02,240 81,430
Total Cost (A + B) 2,56,090 2,52,240 2,41,430
(c) Various Level of Activities under ABC Methodology
Level of Activities Meaning
1. Unit level activities These are those activities for which the consumption
of resources can be identified with the number of units
produced.
2. Batch level activities The activities such as setting up of a machine or
processing a purchase order are performed each time
a batch of goods is produced. The cost of batch related

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activities varies with number of batches made, but is

common (or fixed) for all units within the batch.
3. Product level activities These are the activities which are performed to support
different products in product line.
4. Facilities level activities These are the activities which cannot be directly
attributed to individual products. These activities are
necessary to sustain the manufacturing process and
are common and joint to all products manufactured.
Question 6
Answer any four of the following:
(a) Differentiate between "Cost Accounting and Management Accounting".
(b) What are the important points an organization should consider if it wants to adopt
Performance Budgeting?
(c) Explain what are the pre-requisites of integrated accounting.
(d) State the Method of Costing to be used in the following industries:
(i) Real Estate
(ii) Motor repairing workshop
(iii) Chemical Industry
(iv) Transport service
(v) Assembly of bicycles
(vi) Biscuits manufacturing Industry
(vii) Power supply Companies
(viii) Car manufacturing Industry
(ix) Cement Industry
(x) Printing Press
(e) Differentiate between "Marginal and Absorption Costing". (4 x 5 = 20 Marks)
Answer
(a) Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning and
providing a service. co-ordination.

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(iii) Area It only deals with cost It is wider in scope as it includes

Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of It uses both past and It is focused with the projection
data present figures. of figures for future.
(v) Development Its development is related It develops in accordance to the
to industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles It does not follow any specific
Regulation and procedures for rules and regulations.
recording costs of different
products.
(b) For an enterprise that wants to adopt Performance Budgeting, it is thus imperative
that:
• the objectives of the enterprise are spelt out in concrete terms.
• the objectives are then translated into specific functions, programmes, activities and
tasks for different levels of management within the realities of fiscal constraints.
• realistic and acceptable norms, yardsticks or standards and performance indicators
should be evolved and expressed in quantifiable physical units.
• a style of management based upon decentralised responsibility structure should be
adopted, and
• an accounting and reporting system should be developed to facilities monitoring,
analysis and review of actual performance in relation to budgets .
(c) The essential pre-requisites for integrated accounts include the following steps:
• The management’s decision about the extent of integration of the two sets of books.
Some concerns find it useful to integrate up to the stage of prime cost or factory cost
while other prefer full integration of the entire accounting records.
• A suitable coding system must be made available so as to serve the accounting
purposes of financial and cost accounts.
• An agreed routine, with regard to the treatment of provision for accruals, prepaid
expenses, other adjustment necessary for preparation of interim accounts.
• Perfect coordination should exist between the staff responsible for the financial and
cost aspects of the accounts and an efficient processing of accounting documents
should be ensured.
• Under this system there is no need for a separate cost ledger. Of course, there will
be a number of subsidiary ledgers; in addition to the useful Customers’ Ledger and
the Bought Ledger, there will be: (a) Stores Ledger; (b) Stock Ledger and (c) Job
Ledger.

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(d) Method of costing used in different industries:

S. No. Industries Method of Costing
(i) Real Estate Contract Costing
(ii) Motor Repairing Workshop Job Costing
(iii) Chemical Industry Process Costing
(iv) Transport Service Service/Operating Costing
(v) Assembly of Bicycles Unit/ Single/Output/Multiple Costing
(vi) Biscuits Manufacturing Industry Batch Costing
(vii) Power Supply Companies Service/Operating Costing
(viii) Car Manufacturing Industry Multiple Costing
(ix) Cement Industry Unit/Single/Output Costing
(x) Printing Press Job Costing
(e) Difference between Marginal costing and Absorption costing
S. Marginal costing Absorption costing
No.
1. Only variable costs are considered Both fixed and variable costs are
for product costing and inventory considered for product costing and
valuation. inventory valuation.
2. Fixed costs are regarded as period Fixed costs are charged to the cost of
costs. The Profitability of different production. Each product bears a
products is judged by their P/V reasonable share of fixed cost and thus
ratio. the profitability of a product is influenced
by the apportionment of fixed costs.
3. Cost data presented highlight the Cost data are presented in conventional
total contribution of each product. pattern. Net profit of each product is
determined after subtracting fixed cost
along with their variable costs.
4. The difference in the magnitude of The difference in the magnitude of
opening stock and closing stock opening stock and closing stock affects
does not affect the unit cost of the unit cost of production due to the
production. impact of related fixed cost.
5. In case of marginal costing the cost In case of absorption costing the cost per
per unit remains the same, unit reduces, as the production
irrespective of the production as it increases as it is fixed cost which
is valued at variable cost reduces, whereas, the variable cost
remains the same per unit.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Question No. 1 is compulsory.
Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the required
number, then only the requisite number of questions first answered in the answer book shall be
valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) Surekha Limited produces 4,000 Litres of paints on a quarterly basis. Each Litre requires 2 kg of
raw material. The cost of placing one order for raw material is ` 40 and the purchasing price of
raw material is ` 50 per kg. The storage cost and interest cost is 2% and 6% per annum
respectively. The lead time for procurement of raw material is 15 days.
Calculate Economic Order Quantity and Total Annual Inventory Cost in respect of the above
raw material.
(b) 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 50,000
Special Store items 6,000

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 44 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross Profit c/d 1,30,000
4,30,000 4,30,000
Selling Expenses 90,000 Gross Profit b/d 1,30,000
Net Profit 40,000
1,30,000 1,30,000
It is also to be noted that average hourly rates for all the four departments are similar.
Required:
(i) Prepare a Job Cost Sheet.
(ii) Calculate the entire revised cost using the above figures as the base.
(iii) Add 20% profit on selling price to determine the selling price.
(c) 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 joints 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.
(d) When volume is 4,000 units; average cost is ` 3.75 per unit. When volume is 5,000 units,
average cost is ` 3.50 per unit. The Break-Even point is 6,000 units.
Calculate: (i) Variable Cost per unit (ii) Fixed Cost and (iii) Profit Volume Ratio.
(4 x 5 = 20 Marks)

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Answer
(a) Working:
Calculation of Annual demand of raw material
= 4,000 Litres (per quarter) x 4 (No. of Quarter in a year) x 2 kg. (raw material required for each
Litre of paint)
= 32,000 kg.
Calculation of Carrying cost
Storage rate = 2%
Interest Rate = 6%
Total = 8% per annum
Carrying cost per unit per annum = 8% of ` 50 = ` 4 per unit per annum
2×Annual demand (A)×Ordering Cost per order(O)
(i) EOQ =
Carrying cost per unit per annum (C)

2  32,000kg ` 40
= = 800 Kg
`4
(ii) Total Annual Inventory Cost
Purchasing cost of 32,000 kg @ ` 50 per kg = ` 16,00,000
 32,000kg 
Ordering Cost   ` 40  = ` 1,600
 800kg 
 15 days 
Carrying Cost of Inventory   800 kg ` 4  = ` 1,600
 30 days 
` 16,03,200
(b) 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

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 46 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Deptt. C ` 4.00 × 2 hrs. ` 8.00

Deptt. D ` 4.00 × 2 hrs. ` 8.00 60
Chargeable expenses 20
Prime cost 200
Overheads
` 12,000 ` 16
Deptt. A = × 100 =100% of ` 16
` 12, 000

` 6,000 ` 21
Deptt. B = × 100 = 75% of ` 28
` 8,000

` 9,000 ` 7.20
Deptt. C = × 100 = 90% of ` 8
` 10,000
` 9,000
= × 100 = 90% of ` 8 = ` 7.20
` 10,000
` 17,000 ` 6.80 51.00
Deptt. D = × 100 = 85% of ` 8
` 20,000
Works cost 251.00
` 90,000 75.30
Selling expenses = ×100 = 30% of work cost
` 3,00,000
Total cost 326.30
Profit (20% profit on selling price i.e 25% of total cost) 81.58
Selling price 407.88
(c) 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

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Apportionment of Joint Costs:

Product-A Product-B
I. (i) Apportionment of Joint ` 38,000 ` 45,600
Cost on the basis of  ` 83,600   ` 83,600 
‘Physical Quantity’   100    120 
 100 + 120units   100 + 120units 
(ii) Apportionment of Joint
Cost on the basis of
‘Contribution Margin
Method’:
- Variable Costs (on ` 23,455 ` 28,145
basis of physical  ` 51,600   ` 51,600 
units)   100    120 
 100 + 120units   100 + 120units 
Contribution Margin 36,545 -4,145
(`600×100 – 23,455) (`200×120 – 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
A. Sales Value ` 60,000 ` 24,000
B. Apportioned joint cost on ` 38,000 ` 45,600
basis of ‘Physical
Quantity’:
A-B Profit or (Loss) 22,000 (21,600)
When Joint cost apportioned on basis of ‘Contribution Margin Method’
C Apportioned joint cost on ` 55,455 ` 28,145
basis of ‘Contribution
Margin Method’
A-C Profit or (Loss) ` 4,545 ` (4,145)

* 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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 48 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Change inTotal cost

(d) (i) Variable cost per unit =
Change in units
(` 3.50  5,000 units) − ( ` 3.75  4,000 units)
=
5,000 − 4,000

` 17,500 - ` 15,000
= = ` 2,500/1000 = `2.5
1,000

(ii) Fixed cost = Total Cost – Variable cost (at 5,000 units level)
= `17,500 – `2.5 × 5,000 = `5,000
Fixed cost ` 5,000
(iii) Contribution per unit = = = 0.833
BEP (in units) 6,000 units
Contributionper unit 0.833
P/V Ratio = = = 25%
Salepriceper unit 2.5 + 0.833
Question 2
(a) 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 Orders 30 50 60 50 60
Number of Customers visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number of expediate Deliveries 0 0 0 0 2
Its five activities and their cost drivers are:
Activity Cost Driver
Order taking ` 200 per purchase order
Customer visits ` 300 per each visit

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Deliveries ` 4.00 per delivery km travelled

Product Handling ` 2.00 per case sold
Expedited deliveries ` 100 per such delivery
You are required to :
(i) Compute the customer level operating income of each of five retail customers by using the
Cost Driver rates.
(ii) Examine the results to give your comments on Customer 'D' in comparison with Customer
'C' and on Customer 'E' in comparison with Customer 'A'. (10 Marks)
(b) 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:
Budgeted production overheads ` 10,35,000
Budgeted machine hours ` 90,000
Actual machine hours worked ` 45,000
Actual production overheads ` 8,80,000
Production overheads (actual) include-
Paid to worker as per court's award ` 50,000
Wages paid for strike period ` 38,000
Stores written off ` 22,000
Expenses of previous year booked in current year ` 18,500
Production -
Finished goods 30,000 units
Sale of finished goods 27,000 units
The analysis of cost information reveals that 1/3 of the under absorption of overheads was due
to defective production planning and the balance was attributable to increase in costs.
You are required:
(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)
Answer

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 50 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

(a) Working note:

Computation of revenues (at listed price), discount, cost of goods sold and custome r level
operating activities costs:
Customers
Particular A B C D E
Cases sold: (a) 9,360 14,200 62,000 38,000 9,800
Revenues (at listed price) 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(`): (b) {(a) × ` 54)}
Discount (`): (c) {(a) × - 8,520 3,10,000 1,44,400 52,920
Discount per case} (14,200 (62,000 (38,000 (9,800
cases × cases × cases × cases ×
` 0.6) ` 5) ` 3.80) ` 5.40)
Cost of goods sold (`): (d) 4,21,200 6,39,000 27,90,000 17,10,000 4,41000
{(a) × ` 45}
Customer level operating activities costs
Order taking costs (`): (No. 6,000 10,000 12,000 10,000 12,000
of purchase × ` 200)
Customer visits costs 1,200 1,800 3,600 1,200 1,800
(`) (No. of customer visits
×
` 300)
Delivery vehicles travel 3,200 2,880 4,800 6,400 9,600
costs (`) (Kms travelled by
delivery vehicles × ` 4 per
km.)
Product handling costs (`) 18,720 28,400 1,24,000 76,000 19,600
{(a) ×` 2}
Cost of expediting - - - - 200
deliveries (`)
{No. of expedited deliveries
× ` 100}
Total cost of customer level 29,120 43,080 1,44,400 93,600 43,200
operating activities (`)

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(i) Computation of Customer level operating income

Customers
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: Discount - 8,520 3,10,000 1,44,400 52,920
(Refer to working note)
Revenue 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
(At actual price)
Less: Cost of goods 4,21,200 6,39,000 27,90,000 17,10,000 4,41000
sold
(Refer to working note)
Gross margin 84,240 1,19280 2,48,000 1,97,600 35,280
Less: Customer level 29,120 43,080 1,44,400 93,600 43,200
operating activities
costs
(Refer to working note)
Customer level 55,120 76,200 1,03,600 1,04,000 (7,920)
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 receive 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.

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(b) (i) Amount of under absorption of production overheads:

Particular Amoun Amount
t (`) (`)
Total production overheads actually incurred 8,80,000
Less: Amount paid to worker as per court order 50,000
Wages paid for the strike period under an award 38,000
Stores written off 22,000
Expenses of previous year booked in the current 18,500 1,28,500
year
7,51,500
Less: Production overheads absorbed as per machine
hour rate (45,000 hours × `11.50*) 5,17,500
Amount of under- absorbed production overheads 2,34,000
` 10,35,000
*Budgeted Machine hour rate (Blanket rate) = = ` 11.50 per hour
90,000

(ii) Accounting treatment of under absorbed production overheads:

(a) As 1/3rd of the under absorbed overheads were due to defective production planning,
this being abnormal, hence should be debited to Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account
= ` 2,34,000 × 1/3 = ` 78,000.
(b) Balance of under absorbed production overheads should be distributed over Finished
goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = ` 2,34,000 × 2/3 = `1,56,000
` 1,56,000
*Supplementary rate = = ` 5.20 per unit
30,000 units
(iii) Apportionment of under absorbed production overheads over Finished goods and Cost of
sales:
Particular Units Amount
(`)
Finished goods (3,000 units × `5.20) 3,000 15,600
Cost of sales (27,000 units × `5.20) 27,000 1,40,400

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Total 30,000 1,56,000

Question 3
(a) 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 th e
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
• 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 workout 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).
(10 Marks)
(b) XYZ a manufacturing firm, has revealed following information for September ,2019:
1st September 30th September
(`) (`)
Raw Materials 2,42,000 2,92,000
Works-in-progress 2,00,000 5,00,000
The firm incurred following expenses for a targeted production of 1,00,000 units during the
month :

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(`)
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
Selling and distribution Expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5000 units
Defective output which is 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 1/2 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 cost sheet showing the profit earned by the firm. (10 Marks)
Answer
(a) Working Notes:
(i) Total Room days in a year
Season Occupancy (Room-days) Equivalent Full Room
charge days
Season – 80% 200 Rooms × 80% × 6 28,800 Room Days × 100%
Occupancy months × 30 days in a = 28,800
month = 28,800 Room Days
Off-season – 40% 200 Rooms × 40% × 6 14,400 Room Days × 50%
Occupancy months × 30 days in a = 7,200
month = 14,400 Room Days
Total Room Days 28,800 + 14,400 = 43,200 36,000 Full Room days
Room Days
(ii) Lighting Charges:

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It is given in the question that lighting charges for 8 months is `110 per month and during
winter season of 4 months it is `30 per month. Further it is also given that peak season is
6 months and off season is 6 months.
It should be noted that – being Hill station, winter season is to be considered as part of Off
season. Hence, the non-winter season of 8 months include – Peak season of 6 months
and Off season of 2 months.
Accordingly, the lighting charges are calculated as follows:
Season Occupancy (Room-days)
Season & Non-winter – 80% 200 Rooms × 80% × 6 months × ` 110 per
Occupancy month = ` 1,05,600
Off- season & Non-winter – 200 Rooms × 40% × 2 months × `110 per
40% Occupancy (8 – 6 months) month = ` 17,600
Off- season & -winter – 40% 200 Rooms × 40% × 4 months × ` 30 per
Occupancy months) month = ` 9,600
Total Lighting charges ` 1,05,600+ ` 17,600 + ` 9,600 = ` 132,800

Statement of total cost:

(`)
Staff salary 8,00,000
Repairs to building 3,00,000
Laundry 1,40,000
Interior 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation on Building (` 300 Lakhs × 80% × 5%) 12,00,000
Depreciation on Furniture & Equipment (` 300 Lakhs × 20% × 15%) 9,00,000
Room attendant’s wages (` 15 per Room Day for 43,200 Room 6,48,000
Days)
Lighting charges 1,32,800
Total cost 45,71,000
Add: Profit Margin (20% on Room rent or 25% on Cost) 11,42,750
Total Rent to be charged 57,13,750
Calculation of Room Rent per day:

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Total Rent / Equivalent Full Room days = ` 57,13,750/ 36,000 = ` 158.72

Room Rent during Season – ` 158.72
Room Rent during Off season = ` 158.72 × 50% = ` 79.36
(b) Workings:
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4%×1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000
2. Calculation of Cost of Production
Particular Amount (`)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods 4,30,000
 ` 78,26,000 
 91,000 units  5,000 units 
 
Cost of Production 82,56,000
3. Calculation of Factory Cost
Particular Amount (`)
Cost of Production 82,56,000
Less: Quality Control Cost (2,00,000)
Less: Research and Development Cost (2,50,000)
Add: Credit for Recoveries/Scrap/By-Products/ 2,44,000
misc. income (1,00,000 units × 4% × ` 61)
Factory Cost 80,50,000
4. Calculation of Gross Factory Cost
Particular Amount (`)
Cost of Factory Cost 80,50,000
Less: Opening Work in Process (2,00,000)
Add: Closing Work in Process 5,00,000

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Cost of Gross Factory Cost 83,50,000

5. Calculation of Prime Cost
Particular Amount (`)
Cost of Gross Factory Cost 83,50,000
Less: Consumable stores & spares (3,50,000)
Less: Lease rental of production assets (2,00,000)
Prime Cost 78,00,000
6. Calculation of Cost of Materials Consumed & Labour cost
Let Cost of Material Consumed = M and Labour cost = 0.5M
Prime Cost = Cost of Material Consumed + Labour Cost
78,00,000 = M + 0.5M
M = 52,00,000
Therefore, Cost of Material Consumed = ` 52,00,000 and
Labour Cost = ` 26,00,000
(i) Calculation of Value of Materials Purchased
Particular Amount (`)
Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000
Cost Sheet
Sl. Particulars Total Cost
(`)
1. Direct materials consumed:
Opening Stock of Raw Material 2,42,000
Add: Additions/ Purchases [balancing figure as per 52,50,000
requirement (i)]
Less: Closing stock of Raw Material (2,92,000)
Material Consumed 52,00,000
2. Direct employee (labour) cost 26,00,000

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3. Prime Cost (1+2) 78,00,000

4. Add: Works/ Factory Overheads
Consumable stores and spares 3,50,000
Lease rent of production asset 2,00,000
5. Gross Works Cost (3+4) 83,50,000
6. Add: Opening Work in Process 2,00,000
7. Less: Closing Work in Process (5,00,000)
8. Works/ Factory Cost (5+6-7) 80,50,000
9. Add: Quality Control Cost 2,00,000
10. Add: Research and Development Cost 2,50,000
11. Less: Credit for Recoveries/Scrap/By-Products/misc. (2,44,000)
income
12. Cost of Production (8+9+10-11) 82,56,000
13. Add: Opening stock of finished goods -
14. Less: Closing stock of finished goods (5000 Units) (4,30,000)
15. Cost of Goods Sold (12+13-14) 78,26,000
16. Add: Administrative Overheads (General) 2,24,000
17. Add: Secondary packing 1,82,000
18. Add: Selling Overheads& Distribution Overheads 4,13,000
19. Cost of Sales (15+16+17+18) 86,45,000
20. Profit 13,65,000
21. Sales 91,000 units@ ` 110 per unit 1,00,10,000
Question 4
(a) 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 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 at 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 respectively. Overheads account
for ` 25 per hour.
Required:
(i) To find out the normal wage; and
(ii) To compare the respective conversion costs. (10 Marks)

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(b) A product passes through two distinct processes before completion.

Following information are available in this respect :
Process-1 Process-2
Raw materials used 10,000 units -
Raw material cost (per unit) ` 75 -
Transfer to next process/Finished good 9,000 units 8,200 units
Normal loss (on inputs) 5% 10%
Direct wages ` 3,00,000 ` 5,60,000
Direct expenses 50% of direct wages 65% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realisable value of scrap (per unit) ` 13.50 ` 145
8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and
closing stock of work-in-progress.
Prepare:
(i) Process-1 and Process-2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account. (10 Marks)
Answer
(a)
Particulars Nasik Satara
Hours worked 32 hr. 30 hr.
Conversion Costs `5,408 `4,950
Less: Overheads `800 `750
(`25×32 hr.) (`25×30 hr.)
Labour Cost `4,608 `4,200
(i) Finding of Normal wage rate:
Let Wage rate be `R per hour, this is same for both the Nasik and Satara factory.
Normal wage rate can be found out taking total cost of either factory.
Nasik: Rowan Plan

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Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan
 Time saved 
` 4,608 = Hours worked × Rate per hour +  ×Hours worked×Rate per hour) 
 Time allowed 
 40 − 32 
Or, ` 4,608 = 32 hr. × R +  ×32×R 
 40 
Or, ` 4,608 = 32R + 6.4R
R = ` 120
Normal wage = 32 hrs × ` 120 = ` 3,840
OR
Satara: Halsey Plan
Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
` 4,200 = Hours worked × Rate per hour + ( 50% ×Hours saved×Rate per hour )
` 4,200 = 30 hr. × R + 50% × (40 hr. – 30 hr.) × R
` 4,200 = 35 R
Or R = ` 120
Normal Wage = 30 hrs × ` 120 = ` 3,600
(ii) Comparison of conversion costs:
Particulars Nasik (`) Satara (`)
Normal Wages (32 x 120) 3,840
(30x120) 3,600
Bonus (6.4 x 120) 768
(5 x 120) 600
Overhead 800 750
5,408 4,950
(b) (i)
Dr. Process-1 Account Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Raw Material 10,000 7,50,000 By Normal Loss A/c 500 6,750
Consumed @ 13.5
” Direct Wages -- 3,00,000 ” Process 2 @ 9,000 12,01,500
133.5
” Direct -- 1,50,000 ” By Abnormal 500 66,750

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Expenses Loss @ 133.5

“ Manufacturing 75,000
Overheads
10,000 12,75,000 10,000 12,75,000
Cost per unit of completed units and abnormal loss:
` 12,75,000 - ` 6,750
= = ` 133.5
10,000units- 500units
(ii)
Dr. Process-2 Account Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process-I A/c 9,000 12,01500 By Normal Loss A/c 900 1,30,500
@ 145
” To Direct -- 5,60,000 ” By Finished Stock 8,200 21,04,667
Wages A/c [bal fig]
” Direct -- 3,64,000
Expenses
” Manufacturing -- 84,000
Overheads
” To Abnormal 100 25,667
gain
(` 256.67 × 100
units)
9,100 22,35,167 9,100 22,35,167
Cost per unit of completed units and abnormal gain:
` 22,09,500 - ` 130500
= = ` 256.67
8,100units

Dr. Finished Goods A/c Cr.

Particulars Units Total (`) Particulars Units Total (`)
To Process II A/c 8,200 21,04,667 By By Cost of Sales 8,000 20,53,333
” By Balance c/d 200 51,334
8,200 21,04,667 8,200 21,04,667

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(iii) Normal Loss A/c

Dr. Cr.
Particular Units Total (`) Particulars Units Total (`)
s
To Process I 500 6,750 By By abnormal Gain II 100 14,500
Process II 900 1,30,500 By Cash 500 6,750
By Cash 800 1,16,000
1400 1,37,250 1400 1,37,250
(iv) Abnormal Loss A/c
Dr. Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process I 500 66,750 By By Cost Ledger 500 6,750
Control A/c
By Costing P& L 60,000
A/C (Abnormal
Loss)
66,750 66,750

(v) Abnormal Gain A/c

Dr. Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Normal Loss 100 14,500 By Process II 100 25,667
A/c @ 145
To Costing P & L 11,167
A/C
100 25,667 100 25,667
Question 5
(a) PJ Ltd manufactures hockey sticks. It sells the products at ` 500 each and makes a profit of `
125 on each stick. The Company is producing 5,000 sticks annually by using 50% of its
machinery capacity.
The cost of each stick is as under:
Direct Material ` 150
Direct Wages ` 50

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Works Overhead ` 125 (50% fixed)

Selling Expenses ` 50 (25% variable)
The anticipation for the next year is that cost will go up as under:
Fixed Charges 10%
Direct Wages 20%
Direct Material 5%
There will not be any change in selling price.
There is an additional order for 2,000 sticks in the next year.
Calculate the lowest price that can be quoted so that the Company can earn the same profit as
it has earned in the current year? (10 Marks)
(b) 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. (10 Marks)
Answer
(a) Selling Price = ` 500
Profit = ` 125
No of Sticks = 5,000
Particular Current Year Next Year
(`) (`)

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Direct Material 150 157.50

(150 + 5%)
Direct Wages 50 60
(50+20%)
Works Overheads 62.50 62.5
(125 × 50%)
Selling Expenses 12.50 12.5
(50 × 25%)
Total Variable Cost 275 292.50
Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,000) = 5,00,000 5,50,000
1,87,500
Let: Lowest Price Quoted = K
Now, Sales = Target Profit (5,000 units × ` 125) + Variable Cost + Fixed Cost
Or, = (5,000 × 500) + (2,000 × K) = 6,25,000 + 20,47,500 + 5,50,000
Or, K = ` 361.25
So, Lowest Price that can be quoted to earn the profit of ` 6,25,000 (same as current year) is `
361.25
(b) Basic Calculation
Material Standard for 640 kg. output Actual for 680 kg. output
Qty. Rate Amount Qty Rate Amount
Kg. (`) (`) Kg. (`) (`)
A 480 50 24,000 540 60 32,400
B 320 60 19,200 260 50 13,000
Total 800 43,200 800 45,400
Less: Loss 160 − − 120 − −
640 43,200 680 45,400
Std. cost of actual output = ` 43,200 × 680/640 = ` 45,900
Calculation of Variances
(i) Material Cost Variance = (Std. cost of actual output – Actual cost)
= (45,900– 45,400)
= ` 500 (F)
(ii) Material Price Variance = (SP – AP) × AQ
Material A = (50 – 60) × 540 = ` 5400 (A)

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Material B = (60 – 50)) × 260 = ` 2600 (F)

MPV = ` 2800 (A)
(iii) Material Usage Variance (MUV) = (Std. Quantity for actual output – Actual
Quantity) × Std. Price
 480 × 680 
Material A =  - 540  × 50 = ` 1,500 (A)
 640 
 320 × 680 
Material B =  - 260  × 60 = ` 4,800 (F)
 640 
MUV = ` 3,300 (F)
(iv) 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 = SP × (SQ – RAQ)
A = ` 50 × (510 Kg. – 480 Kg) = ` 1,500 (F)
B = ` 60 × (340 Kg. – 320 Kg.) = ` 1,200 (F)
Total = ` 1,500 (F) + ` 1,200 (F) = ` 2,700 (F)
Question 6
Answer any four of the following:
(a) Describe Composite Cost unit as used in Service Costing and discuss the ways of computing it .
(b) Journalise the following transactions in cost books under Non-Integrated system of Accounting.
(i) Credit Purchase of Material ` 27,000
(ii) Manufacturing overhead charged to Production ` 6,000
(iii) Selling and Distribution overheads recovered from Sales ` 4,000
(iv) Indirect wages incurred ` 8,000
(v) Material returned from production to stores ` 9,000
(c) Define Inventory Control and give its objectives.
List down the basis to be adopted for Inventory Control.
(d) Mention the Cost Unit of the following Industries:
(i) Electricity

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(ii) Automobile
(iii) Cement
(iv) Steel
(v) Gas
(vi) Brick Making
(vii) Coal Mining
(viii) Engineering
(ix) Professional Services
(x) Hospital
(e) Define Zero Base Budgeting and mention its various stages. (4 x 5 = 20 Marks)
Answer
(a) Composite Cost Unit: Sometime two measurement units are combined together to know the
cost of service or operation. These are called composite cost units. For example, a public
transportation undertaking would measure the operating cost per passenger per kilometre.
Examples of Composite units are Ton- km., Quintal- km, Passenger-km., Patient-day etc.
Composite unit may be computed in two ways:
(i) Absolute (Weighted Average) basis.
(ii) Commercial (Simple Average) basis.
In both bases of computation of service cost unit, weightage is also given to qualitative factors
rather quantitative (which are directly related with variable cost elements) factors alone.
(i) Weighted Average or Absolute basis – It is summation of the products of qualitative and
quantitative factors. For example, to calculate absolute Ton-Km for a goods transport is
calculated as follows.:
∑ (Weight Carried × Distance) 1 + (Weight Carried × Distance) 2 +….+ (Weight
Carried × Distance) n

Similarly, in case of Cinema theatres, price for various classes of seats are fixed
differently. For example–
First class seat may be provided with higher quality service and hence charged at a higher
rate, whereas Second Class seat may be priced less. In this case, appropriate weight to
be given effect for First Class seat and Second Class seat – to ensure proper cost per
composite unit.
(ii) Simple Average or Commercial basis – It is the product of average qualitative and total
quantitative factors. For example, in case of goods transport, Commercial Ton -Km is
arrived at by multiplying total distance km., by average load quantity.

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 W1+W2 +....+Wn 
∑ (Distance 1 + Distance 2 + …………...…+ Distance n) ×  
 n 
In both the example, variable cost is dependent of distance and is a quantitative factor.
Since, the weight carried does not affect the variable cost hence and is a qualitative factor.
(b) Journal entries are as follows:
Dr. Cr.
(`) (`)
(i) Stores Ledger Control A/c…………………… Dr. 27,000
To Cost Ledger Control A/c 27,000
(ii) Work-in-Process Control A/c........................... Dr. 6,000
To Manufacturing Overhead Control A/c 6,000
(iii) Cost of Sales A/c……………………………… Dr. 4,000
To Selling & Dist. Overhead Control A/c 4,000
(iv) (1) Wage Control A/c…………………… Dr. 8,000
To Cost Ledger Control A/c 8,000
(2) Manufacturing Overhead Control A/c……… Dr. 8,000
To Wages Control A/c 8,000
OR
Manufacturing Overhead Control A/c……………. Dr. 8,000
To Cost Ledger Control A/c 8,000
(v) Stores Ledger Control A/c ……………………… Dr. 9,000
To Work-in-Process Control A/c 9,000
*Cost Ledger Control A/c is also known as General Ledger Control A/c
(c) Inventory Control: The Chartered Institute of Management Accountants (CIMA) defines
Inventory Control as “The function of ensuring that sufficient goods are retained in stock to meet
all requirements without carrying unnecessarily large stocks.”
The objective of inventory control is to make a balance between sufficient stock and over-
stock. The stock maintained should be sufficient to meet the production requirements so that
uninterrupted production flow can be maintained. Insufficient stock not only pause the
production but also cause a loss of revenue and goodwill. On the other hand, Inventory requires
some funds for purchase, storage, maintenance of materials with a risk of obsolescence,
pilferage etc. A trade-off between Stock-out and Over-stocking is required. The management
may employ various methods of Inventory control to have a balance. Management may adopt
the following basis for Inventory control:

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Inventory Control

On the basis of Using Ratio

By Setting
Relative Analysis Physical Control
Quantitative Levels
Classification

(d) Cost Unit of Industries:

S. No. Industry Cost Unit Basis
(i) Electricity Kilowatt-hour (kWh)
(ii) Automobile Number
(iii) Cement Ton/ per bag etc.
(iv) Steel Ton
(v) Gas Cubic feet
(vi) Brick-making 1,000 bricks
(vii) Coal mining Tonne/ton
(viii) Engineering Contract, job
(ix) Professional services Chargeable hour, job, contract
(x) Hospitals Patient day
(e) Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the
limitations of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is
defined as ‘a method of budgeting which requires each cost element to be specifically justified,
although the activities to which the budget relates are being undertaken for the first time,
without approval, the budget allowance is zero’.
ZBB is an activity based budgeting system where budgets are prepared for each
activities rather than functional department. Justification in the form of cost benefits for the
activity is required to be given. The activities are then evaluated and prioritized by the
management on the basis of factors like synchronisation with organisational objectives,
availability of funds, regulatory requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities
like Government department, local bodies, not for profit organisations, where these entities
need to justify the benefits of expenditures on social programmes like mid -day meal, installation
of street lights, provision of drinking water etc.
ZBB involves the following stages:
(i) Identification and description of Decision packages

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 69

(ii) Evaluation of Decision packages

(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Question No. 1 is compulsory.
Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) Following data is available for ABC Ltd.:
Standard working hours 8 hours per day of 5 days per
week
Maximum Capacity 60 employees
Actual working 50 employees
Actual hours expected to be worked per four week 8,000 hours
Standard hours expected to be earned per four week 9,600·hours
Actual hours worked in the four week period 7,500 hours
Standard hours earned in the four week period 8,800 hours

The related period is of four weeks. Calculate the following Ratios :

(i) Efficiency Ratio
(ii) Activity Ratio
(iii) Standard Capacity Usage Ratio
(iv) Actual Capacity Usage Ratio
(v) Actual Usage of Budgeted Capacity Ratio
(b) M/s Zeba Private Limited allotted a standard time of 40 hours for a job and the rate per
hour is ` 75. The actual time taken by a worker is 30 hours.
You are required to calculate the total earnings under the following plans:
(i) Halsey Premium Plan (Rate 50%)
(ii) Rowan Plan
(iii) Time Wage System
(iv) Piece Rate System

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 50 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(v) Emerson Plan

(c) 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 Expenses Separate 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 sale of Cromex 5
Number of units produced 2,000 2,000
units units
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.
(d) 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:
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
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.
(4 x 5 = 20 Marks)

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

(ii) Activity Ratio:

Standard Hrs 8,800 hours
= ×100 = ×100 = 110%
Budgeted Hrs 8,000 hours

(iii)Standard Capacity Usage Ratio:

Budgeted Hours
= ×100
Max. possible hours in the budgeted period

8,000 hours
= ×100 = 83.33%
9,600 hours

(iv) Actual Capacity Usage Ratio:

Actual Hours worked
= ×100
Max. possible working hours in a period

7,500 hours
= ×100 = 78.125%
9,600 hours

(v) Actual Usage of Budgeted Capacity Ratio:

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

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.

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(b) (i) Halsey Premium plan:

1
= (Time taken×Rate per hour)+ ( ×Time saved×Rate per hour)
2
1
= (30hours×Rs.75)+ ( ×10hours×Rs.75)
2
= ` 2,250 + ` 375 = ` 2,625
(ii) Rowan Premium plan:
 Time saved 
= (Time taken×Rate per hour)+  ×Time taken×Rate per hour 
 Time allowed 

 10 
= (30hours× ` 75)+  ×30× ` 75 
 40 
= ` 2,250 + ` 562.5 = ` 2,812.5 or ` 2,813
(iii) Time wage system:
= Time taken × Rate per hour
= 30 × ` 75 = ` 2,250
(iv) Piece Rate System:
= Std. Time × Rate per hour
= 40 × ` 75 = ` 3,000
(v) Emerson plan:
Efficiency level = 40/30 = 133.33%
Time taken × (120% + 33.33%) of Rate
= 30 hours × 153.33% of ` 75
= ` 3,450
(c) (i) Statement Showing Joint Cost Allocation to ‘Cromex’
Particulars Cromex (`)
Sales (` 40 × 2,000 units) 80,000
Less: Post Split Off Costs (28,000)
(4,000+18,000+6,000)
Less: Estimated Profit (` 5 × 2,000 units) (10,000)
Joint cost allocable 42,000

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(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

(d) Memorandum Reconciliation Account
Dr. Cr.
Particulars (`) Particulars (`)
To Works overheads under 48,600 By Net profit as per 48,408
recovered in Cost Accounts Costing books
To Provision for doubtful debts 17,800 By Office overheads over 11,500
recovered in cost
accounts
To Obsolescence loss 17,200 By Dividend received on 17,475
shares
To Store adjustment (Debit) 35,433 By Interest on fixed deposit 21,650
By Depreciation over- 5,000
charged
By Net loss as per financial 15,000
accounts
1,19,033 1,19,033
[Note: This question may also be solved by taking net loss as per financial accounts as basis.]
Question 2
(a) M/s Areeba Private Limited has a normal production capacity of 36,000 units of toys per
annum. The estimated costs of production are as under:
(i) Direct Material ` 40 per unit
(ii) Direct Labour ` 30 per unit (subject to a minimum of ` 48,000 p.m.)
(iii) Factory Overheads:
(a) Fixed ` 3,60,000 per annum
(b) Variable ` 10 per unit

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(c) Semi-variable ` 1,08,000 per annum up to 50% capacity and additional

` 46,800 for every 20% increase in capacity or any part
thereof.
(iv) Administrative Overheads ` 5, 18,400 per annum (fixed)
(v) Selling overheads are incurred at ` 8 per unit.
(vi) Each unit of raw material yields scrap which is sold at the rate of ` 5 per unit.
(vii) In year 2019, the factory worked at 50% capacity for the first three months but it
was expected that it would work at 80% capacity for the remaining nine months.
(viii) During the first three months, the selling price per unit was ` 145.
You are required to:
(i) Prepare a cost sheet showing Prime Cost, Works Cost, Cost of Production and Cost
of Sales.
(ii) Calculate the selling price per unit for remaining nine months to achieve the total
annual profit of ` 8,76,600. (10 Marks)
(b) KT Ltd. produces a product EMM which passes through two processes before it is
completed and transferred to finished stock. The following data relate to May 2019:
Particulars Process Finished stock
A B
(` ) (` ) (` )
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and
output of Process B is transferred to finished stock at 20% profit on the transfer price.
Stock in process is valued at prime cost. Finished stock is valued at the price at which it
is received from Process B. Sales during the period are ` 75,000.
Prepare the Process cost accounts and Finished stock account showing the profit
element at each stage. (10 Marks)

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Answer
(a) (i) Cost Sheet of M/s Areeba Pvt. Ltd. for the year 2019.
Normal Capacity: 36,000 units p.a.
3 Months 9 Months
Particulars 4,500 Units 21,600 units
Amount Cost per Amount Cost per
(`) unit (`) (`) unit (`)
Direct material 1,80,000 8,64,000
Less: Scrap (22,500) (1,08,000)
Materials consumed 1,57,500 35 7,56,000 35
Direct Wages 1,44,000 32 6,48,000 30
Prime Cost 3,01,500 67 14,04,000 65
Factory overheads:
- Fixed 90,000 2,70,000
- Variable 45,000 2,16,000
- Semi variable 27,000 36 1,51,200 29.50
Works Cost 4,63,500 103 20,41,200 94.50
Add: Administrative overheads 1,29,600 28.80 3,88,800 18
Cost of Production 5,93,100 131.80 24,30,000 112.5
Selling Overheads 36,000 8 1,72,800 8
Cost of Sales 6,29,100 139.80 26,02,800 120.5
Working Notes:
1. Calculation of Costs
Particulars 4,500 units 21,600 units
Amount (`) Amount (`)
Material 1,80,000 (` 40 × 4,500 units) 8,64,000 (`40 × 21,600 units)
Wages 1,44,000 (Max. of ` 30 × 4,500 6,48,000 (21600 Units×30)
units = `1,35,000 and ` 48,000
× 3 months = `1,44,000)
Variable Cost 45,000 (`10 × 4,500 units) 2,16,000 (`10 × 21,600 units)
Semi-variable ` 1,08,000 ` 1,08,000
27,000 ( ×3 Months ) 1,51,200[( ×9 Months )
Cost 12 Months 12 Months

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 56 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

+46,800(for 20 % increase)
+23,400(for 10% increase)
Selling 36,000 (`8 × 4,500 units) 1,72,800(` 8 × 21,600 units)
Overhead
Notes:
1. Alternatively scrap of raw material can also be reduced from Work cost.
2. Administrative overhead may be treated alternatively as a part of general overhead.
In that case, Works Cost as well as Cost of Production will be same i.e. ` 4,63,500
and Cost of Sales will remain same as ` 6,29,100.
(ii) Calculation of Selling price for nine months period
Particulars Amount (`)
Total Cost of sales ` (6,29,100+26,02,800) 32,31,900
Add: Desired profit 8,76,600
Total sales value 41,08,500
Less: Sales value realised in first three months (`145 × 4,500 units) (6,52,500)
Sales Value to be realised in next nine months 34,56,000
No. of units to be sold in next nine months 21,600
Selling price per unit (` 34,56,000 ÷ 21,600 units) 160
(b) Process-A A/c
Particulars Total Cost Profit Particulars Total Cost Profit
(`) (`) (`) (`) (`) (`)
Opening stock 5,000 5,000 _ Process B 28,800 21,600 7,200
A/c
Direct materials 9,000 9,000 _
Direct wages 5,000 5,000 _
19,000 19,000 _
Less: Closing (2,000) (2,000) _
stock
Prime Cost 17,000 17,000 _
Overheads 4,600 4,600 _
Process Cost 21,600 21,600 _

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Profit (33.33% of 7,200 - 7,200

total cost)
28,800 21,600 7,200 28,800 21,600 7,200
Process-B A/c
Particulars Total Cost Profit Particulars Total Cost Profit
(`) (`) (`) (`) (`) (`)
Opening stock 5,500 4,500 1,000 Finished stock 61,675 41,550 20,125
A/c
Process A A/c 28,800 21,600 7,200
Direct materials 9,500 9,500 _
Direct wages 6,000 6,000 _
49,800 41,600 8,200
Less: Closing stock (2,490) (2,080) (410)
Prime Cost 47,310 39,520 7,790
Overheads 2,030 2,030 _
Process Cost 49,340 41,550 7,790
Profit (25% of total 12,335 - 12,335
cost)
61,675 41,550 20,125 61,675 41,550 20,125

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
(`) (`) (`) (`) (`) (`)
Opening stock 10,000 6,000 4,000 Costing P&L A/c 75,000 44,181 30,819
Process B A/c 61,675 41,550 20,125
71,675 47,550 24,125
Less: Closing stock (5,000) (3,369) (1,631)
COGS 66,675 44,181 22,494
Profit 8,325 - 8,325
75,000 44,181 30,819 75,000 44,181 30,819

Question 3
(a) A gang of workers normally consists of 30 skilled workers, 15 semi-skilled workers and
10 unskilled workers. They are paid at standard rate per hour as under:
Skilled ` 70

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Semi-skilled ` 65
Unskilled ` 50
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of
output. During the week ended 31 st March, 2019, the gang consisted of 40 skilled, 10
semi-skilled and 5 unskilled workers. The actual wages paid were at the rate of ` 75,
` 60 and ` 52 per hour respectively. Four hours were lost due to machine breakdown
and 1,600 units were produced.
Calculate the following variances showing clearly adverse (A) or favourable (F)
(i) Labour Cost Variance (ii) Labour Rate Variance
(iii) Labour Efficiency Variance (iv) Labour Mix Variance
(v) Labour Idle Time Variance (10 Marks)
(b) 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 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 processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000

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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)
Answer
(a) (i) Labour Cost Variance = Standard Cost – Actual Cost
= `1,14,400 – `1,54,400

= 40,000 (A)

(1,600*75+400*60+200*52= `1,54,400)

Or

Types of workers Standard Cost – Actual Cost Amount (`)

Skilled Workers (30x40x70/2,000x1,600)- (40x40x75) 52,800 (A)
67,200-1,20,000
Semi- Skilled (15x40x65/2,000x1,600)- (10x40x60) 7,200 (F)
31,200-24,000
Un-Skilled Workers (10x40x50/2,000x1,600)- (5x40x52) 5,600 (F)
16,000-10,400
Total 1,14,400-1,54,400 40,000 (A)
(ii) Labour Rate Variance
Types of workers Actual Hours × (Standard Rate - Amount (`)
Actual Rate)
Skilled Workers 1,600 hours × (`70.00 – `75.00) 8,000 (A)
Semi- Skilled 400 hours × (`65.00 – `60.00) 2,000 (F)
Un-Skilled Workers 200 hours × (`50.00 – `52.00) 400 (A)
Total `8,000 (A) + `2,000 (F) + `400 (A) 6,400 (A)

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 60 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(iii) Labour Efficiency Variance

Types of workers Standard Rate × (Standard Hours – Amount
Actual Hours) (`)
Skilled Workers `70.00 × (960 hours – 1,440 hours) 33,600 (A)

Semi- Skilled `65.00 × (480 hours – 360 hours) 7,800 (F)

Un-Skilled Workers `50.00 × (320 hours – 180 hours) 7,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 18,800 (A)
Alternatively labour efficiency can be calculated on basis of labour hours paid
Types of workers Standard Rate × (Standard Hours – Amount
Actual Hours) (`)
Skilled Workers 70.00 × (960 hours – 1600 hours) 44,800 (A)
Semi- Skilled 65.00 × (480 hours – 400 hours) 5,200 (F)
Un-Skilled Workers 50.00 × (320 hours – 200 hours) 6,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 33,600 (A)
(iv) Labour Mix Variance
= Total Actual Time Worked (hours) × {Average Standard
Rate per hour of Standard Gang Less Average Standard
Rate per hour of Actual Gang}
@ on the basis of hours worked

= 1,980 hours × 
`1,14,400 1,440hrs.×`70 + 360hrs.×`65 + 180hrs.×`50 
– 
 1,760 hrs. 1,980 hrs. 
= ` 4,500 (A)
Or
Labour Mix Variance
Types of workers Std. Rate  (Revised Actual Hours Worked- Amount (`)
Actual Hours Worked)

Skilled Workers `70 × (1,080 hrs. – 1440 hrs.) 25,200 (A)

Semi- Skilled `65 × (540 hrs. – 360 hrs.) 11,700 (F)
Un Skilled Workers `50 × (360 hrs. – 180 hrs.) 9,000 (F)
Total `25,200 (A) + `11,700 (F) + `9,000 (F) 4,500 (A)

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(v) Labour Idle Time Variance

Types of workers Standard Rate × (Hours Paid – Hours Amount (`)
Worked)
Skilled Workers `70.00 × (1,600 hours – 1,440 hours) 11,200 (A)

Semi- Skilled `65.00 × (400 hours – 360 hours) 2,600 (A)

Un-Skilled Workers `50.00 × (200 hours – 180 hours) 1,000 (A)
Total 11,200 (A) + 2,600 (A) + 1,000 (A) 14,800 (A)
Verification:
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance + Labour Idle Time Variance
= 6,400 (A) + 18,800 (A) + 14,800 (A) = ` 40,000 (A)
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance
= 6400(A) + 33600(A)= `40000(A)
In this case, labour idle time variance is a part of labour efficiency variance.
Working Notes:
Category Standard Cost Actual (1600 units) Revised
Actual
Hrs. Rate Amt. (`) Hrs. Rate Amt. (`)
Hours

Skilled 960 70.00 67,200 1,440 1,08,000 1,080

(30Wx40x1,600/ 2, 000) (40Wx36) 75.00 (1,980x6/11)

Semi- 480 65.00 31,200 360 21,600 540

Skilled (15Wx40 x1,600/2,000) (10Wx36) 60.00 (1,980x3/11)

Unskilled 320 50.00 16,000 180 52.00 9,360 360

(10Wx40 x1,600/2,000) (5Wx36) (1,980x2/11)

Total 1,760 65 1,14,400 1,980 1,38,960 1,980

(b) (i) Overheads application base: Direct labour hours

Equipment Equipment
A (`) B (`)
Direct material cost 350 400
Direct labour cost 360 480

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Overheads* 180 240

890 1120
Budgeted overheads ` 15,00,000
*Pre-determined rate = = = `60
Budgeted direct labour hours 25,000 hours
(ii) Estimation of Cost-Driver rate
Activity Overhead cost Cost-driver level Cost driver rate
(`) (`)
Order processing 600
3,00,000 Orders processed 500
Machine processing 50,000
10,00,000 Machine hours 20
Inspection 15,000
2,00,000 Inspection hours 10
Equipment Equipment
A (`) 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)
Per unit cost A (`) B (`)
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

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(iii) Calculation of Cost Distortion

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

Question 4
(a) X Ltd. distributes' its goods to a regional dealer using single lorry. The dealer premises
are 40 kms away by road. The capacity of the lorry is 10 tonnes. The lorry makes the
journey twice a day fully loaded on the outward journey and empty on return journey. The
following information is available:
Diesel Consumption 8 km per litre
Diesel Cost ` 60 per litre
Engine Oil ` 200 per week
Driver's Wages (fixed) ` 2,500 per week
Repairs ` 600 per week
Garage Rent ` 800 per week
Cost of Lorry (excluding cost of tyres) ` 9,50,000
Life of Lorry 1,60,000 kms
Insurance ` 18,200 per annum
Cost of Tyres ` 52,500
Life of Tyres 25,000 kms
Estimated sale value of the lorry at end of its life is ` 1,50,000
Vehicle License Cost ` 7,800 per annum
Other Overhead Cost ` 41,600 per annum
The lorry operates on a 5 day week.
Required:
(i) A statement to show the total cost of operating the vehicle for the four week period
analysed into Running cost and Fixed cost.

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 64 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in
a year) (10 Marks)
(b) The following are the details of receipt and issue of material 'CXE' in a manufacturing Co.
during the month of April 2019:
Date Particulars Quantity Rate
(kg) per kg
April 4 Purchase 3,000 ` 16
April8 Issue 1,000
April15 Purchase 1,500 ` 18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 ` 17
Opening stock as on 01-04-2019 is 1,000 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:
(i) Prepare a store ledger account under each of the following method of pricing the
issue:
(a) Weighted Average Method
(b) LIFO
(ii) 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)
Answer
(a) Working Notes:
Particulars For 4 weeks For 1 week
(by dividing by 4)
Total distance travelled (40 k.m × 2 3,200 km 800 km
× 2 trips × 5 days × 4 weeks)
Total tonne km (40 k.m × 10 tonnes × 2 16,000 tonne km 4,000 tonne km
× 5 days × 4 weeks)

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(i) Statement showing Operating Cost

Amount (`)
Particulars For 4 For 1 week
weeks (by dividing
by 4)
A. Fixed Charges:
Drivers’ wages (`2,500  4 weeks) 10,000 2,500
Garage rent (`800 × 4 weeks) 3,200 800
Insurance {(`18,200 ÷ 52 weeks) × 4 weeks} 1,400 350
Vehicle license {(`7,800 ÷ 52 weeks) × 4 600 150
weeks}
Other overheads cost {(`41,600 ÷ 52 weeks) × 3,200 800
4 weeks}
Total (A) 18,400 4,600
B. Running Cost:
Cost of diesel {(3,200 ÷ 8 kms) × `60} 24,000 6,000
Engine Oil (`200 × 4 weeks)* 800 200
Repairs (`600 × 4 weeks)* 2,400 600
Depreciation on vehicle 16,000 4,000
 `9,50,000 `1,50,000 
  3,200km 
 1,60,000km 
 `52,500  6,720 1,680
Depreciation on tyres   3,200km 
 25,000km 
Total (B) 49,920 12,480
C. Total Cost (A + B) 68,320 17,080
*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates
these with time i.e. in weeks instead of running of vehicle.
(ii) Calculation of vehicle operating cost:
Operating cost per k.m. = ` 68,320 or ` 17,080 = ` 21.35
3,200 kms 800 Kms
Operating cost per Tonne-k.m. = ` 68,320 or ` 17,080 = ` 4.27
16,000 4,000

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 66 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(b) (i) (a) Stores Ledger Account for the month of April, 2019 (Weighted Average
Method)
Receipt Issue Balance
Date Qty Rate Amount Qty Rate Amount Qty Rate Amount
Units (`) (`) Units (`) (`) Units (`) (`)
1-4-19 _ _ _ _ _ _ 1,000 15.00 15,000
4-4-19 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000
8-4-19 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250
15-4-19 1,500 18.00 27,000 _ _ _ 4,500 16.50 74,250
20-4-19 _ _ _ 1,200 16.50 19,800 3,300 16.50 54,450
25-4-19 _ _ _ 300 18.00 5,400 3,000 16.35 49,050
26-4-19 _ _ _ 1,000 16.35 16,350 2,000 16.35 32,700
28-4-19 500 17.00 8,500 _ _ _ 2,500 16.48 41,200
30-4-19 _ _ _ 50 16.48 824 2,450 16.48 40,376

(b) Stores Ledger Account for the month of April, 2019 (LIFO)
Receipt Issue Balance
Date Qty Rate Amount Qty Rate Amount Qty Rate Amount
Units (`) (`) Units (`) (`) Units (`) (`)
1-4-19 _ _ _ _ _ _ 1,000 15 15,000
4-4-19 3,000 16 48,000 _ _ _ 1,000 15 15,000
3,000 16 48,000
8-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
2,000 16 32,000
15-4-19 1,500 18 27,000 _ _ _ 1,000 15 15,000
2,000 16 32,000
1,500 18 27,000
20-4-19 _ _ _ 1,200 18 21,600 1,000 15 15,000
2,000 16 32,000
300 18 5,400
25-4-19 _ _ _ 300 18 5,400 1,000 15 15,000
2,000 16 32,000
26-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
1,000 16 16,000
28-4-19 500 17 8,500 _ _ _ 1,000 15 15,000

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 67

1,000 16 16,000
500 17 8,500
30-4-19 _ _ _ 50 17 850 1,000 15 15,000
1,000 16 16,000
450 17 7,650

(ii) Value of Material Consumed and Closing Stock

Weighted Average LIFO method
method (`) (`)
Opening stock as on 01-04-2019 15,000 15,000
Add: Purchases 83,500 83,500
98,500 98,500
Less: Return to supplier 5,400 5,400
Less: Abnormal loss 824 850
Less: Closing Stock as on 30-04-2019 40,376 38,650
Value of Material Consumed 51,900 53,600

Question 5
(a) M/s Gaurav Private Limited is manufacturing and selling two products:
'BLACK' and 'WHITE' at selling price of ` 20 and ` 30 respectively.
The following sales strategy has been outlined for the financial year 2019-20:
(i) Sales planned for the year will be ` 81,00,000 in the case of 'BLACK' and
` 54,00,000 in the case of 'WHITE'.
(ii) The selling price of 'BLACK' will be reduced by 10% and that of 'WHITE' by 20%.
(iii) Break-even is planned at 70% of the total sales of each product.
(iv) Profit for the year to be maintained at ` 8,26,200 in the case of 'BLACK' and
` 7,45,200 in the case of 'WHITE'. This would be possible by reducing the present
annual fixed cost of ` 42,00,000 allocated as ` 22,00,000 to 'BLACK' and
` 20,00,000 to 'WHITE'.
You are required to calculate:
(1) Number of units to be sold of 'BLACK' and 'WHITE' to Break even during the
financial year 2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned
at (iv) above. (5 Marks)

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(b) 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 repair & maintenance. The other details
in respect of the machine are as follows :
(i) Repair & Maintenance during the whole life of the machine are expected to be
` 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ` 87,384.
(iv) Power consumptions: 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 comprehensive machine hour rate. (5 Marks)
(c) A contractor prepares his accounts for the year ending 31 st March each year. He
commenced a contract on 1 st September, 2018. The following information relates to
contract as on 31st March, 2019:
Material sent to site ` 18,75,000
Wages paid ` 9,28,500
Wages outstanding at end ` 84,800
Sundry expenses ` 33,825
Material returned to supplier ` 15,000
Plant purchased ` 3,75,000
Salary of supervisor ` 15,000 per month
(Devotes 1/3rd of his time on contract)
Material at site as on 31-03-2019 ` 2,16,800
Some of material costing ` 10,000 was found unsuitable and was sold for ` 11,200. On
31-12-2018 plant which costs ` 25,000 was transferred to some other contract and on
31-01-2019 plant which costs ` 32,000 was returned to stores. The plant is subject to
annual depreciation @ 15% on written down value method.
The contract price is ` 45,00,000. On 31st March, 2019 two-third-of the contract was
completed. The architect issued certificate covering 50% of the contract price.
Prepare Contract A/c and show the notional profit or loss as on 31st March, 2019.
(10 Marks)

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Answer
(a) (i) Statement showing Break Even Sales
Particulars Black White
Sales Planned 81,00,000 54,00,000
Selling Price (`) 18 24
Number of Units to be sold 4,50,000 2,25,000
Break Even sales (in Units),70% of total sales 3,15,000 1,57,500
Or
Break Even sales (in `),70% of total sales 56,70,000 37,80,000
(ii) Statement Showing Fixed Cost Reduction
Profit to be maintained (`) 8,26,200 7,45,200
Margin of Safety (70% of Sales) (`) 24,30,000 16,20,000
PVR (Profit/ Margin of Safety) x 100 34% 46%
Contribution (Sales x 34% or 46%) (`) 27,54,000 24,84,000
Less: Profit (`) 8,26,200 7,45,200
Revised Fixed Cost (`) 19,27,800 17,38,800
Present Fixed Cost (`) 22,00,000 20,00,000
Reduction in Fixed Cost 2,72,200 2,61,200
(b) Effective machine hour = 4,500 – 300 = 4,200 hours
Calculation of Comprehensive machine hour rate

Elements of Cost and Revenue Amount (`) Per

Annum
Repair and Maintenance 36,000
(`5,40,000 ÷15 years)
Power (4,200 hours × 10 units × `7) 2,94,000
 `29,14,800 - `1,50,000  1,84,320
Depreciation  
 15 years 
Insurance (`29,14,800 × 2%) 58,296
Oil and Lubricant 87,384
Salary to Operator {(`24,000×12)/3} 96,000

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 70 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Total Cost 7,56,000

Effective machine hour 4,200
Total Machine Rate Per Hour 180

(c) Contract Account as on 31-03-2019

Particulars (` ) Particulars (` )
To Materials sent to site 18,75,000 By Material returned to 15,000
Supplier
To Wages paid 9,28,500 By Material sold 11,200
Add: Outstanding 84,800 10,13,300 By Plant transferred to 23,750
other contract
To Plant purchased 3,75,000 By Plant returned to 30,000
stores
To Sundry Expenses 33,825 By Plant at site c/d 2,90,175
To Salary of Supervisor 35,000 By Material at site c/d 2,16,800
{1/3rd (`15,000 × 7 month)}
To Costing P & L A/c 1,200 By Works Cost 27,46,400
(’11,200-10,000)
33,33,325 33,33,325
To Works Cost 27,46,400 By Work-in-progress c/d 22,50,000
Work certified
By Work uncertified 6,86,600
To Notional profit (Profit 1,90,200
for the year)
29,36,600 29,36,600

Working Notes:
1. Value of plant transferred to other contract:
` 25,000 less Depreciation for 4 months
= ` 25,000-(` 25,000×15%×4/12) = ` 23,750
2. Value of plant returned to stores:
` 32,000 less Depreciation for 5 months
= ` 32,000-(` 32,000×15%×5/12) = ` 30,000
3. Value for work uncertified:

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The cost of 2/3rd of the contract is `27,46,400

` 27,46,400
 Cost of 100% " " " " ×3 = `41,19,600
2
Cost of 50% of the contract which has been certified by the architect is
` 41,19,600 /2= ` 20,59,800. Also, the cost of 1/3 rd of the contract, which has been
completed but not certified by the architect is ` (27,46,400- 20,59,800) = `
6,86,600/-
Question 6
Answer any four of the following:
(a) Differentiate between cost control and cost reduction.
(b) What are the cases when a flexible budget is found suitable?
(c) Explain integrated accounting system and state its advantages.
(d) Explain Direct Expenses and how these are measured and their treatment in cost
accounting.
(e) What are the limitations of marginal costing? (4 x 5 = 20 Marks)
Answer
(a) Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to better
them continuously.
2. Cost control seeks to attain 2. Cost reduction recognises no condition
lowest possible cost under as permanent, since a change will
existing conditions. result in lower cost.
3. In case of Cost Control, 3. In case of cost reduction it is on
emphasis is on past and present and future.
present.
4. Cost Control is a preventive 4. Cost reduction is a corrective
function. function. It operates even when an
efficient cost control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.

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(b) Flexible budgeting may be resorted to under following situations:

(i) In the case of new business venture due to its typical nature it may be difficult to
forecast the demand of a product accurately.
(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing in
wool trade may have enough market if temperature goes below the freezing point.
(iii) In the case of labour-intensive industry where the production of the concern is
dependent upon the availability of labour.
Suitability for flexible budget:
1. Seasonal fluctuations in sales and/or production, for example in soft drinks
industry;
2. a company which keeps on introducing new products or makes changes in the
design of its products frequently;
3. industries engaged in make-to-order business like ship building;
4. an industry which is influenced by changes in fashion; and
5. General changes in sales.
(c) Integrated Accounting System: Integrated Accounts is the name given to a system of
accounting, whereby cost and financial accounts are kept in the same set of books.
Obviously, then there will be no separate sets of books for Costing and Financial records.
Integrated accounts provide or meet out fully the information requirement for Costing a s
well as for Financial Accounts. For Costing it provides information useful for ascertaining
the cost of each product, job, and process, operation of any other identifiable activity and
for carrying necessary analysis. Integrated accounts provide relevant information which
is necessary for preparing profit and loss account and the balance sheets as per the
requirement of law and also helps in exercising effective control over the liabilities and
assets of its business.
Advantages of Integrated Accounting System
The main advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation - The question of reconciling costing profit and finan-
cial profit does not arise, as there is only one figure of profit.
(ii) Less efforts - Due to use of one set of books, there is a significant saving in efforts
made.
(iii) Less time consuming - No delay is caused in obtaining information as it is
provided from books of original entry.
(iv) Economical process - It is economical also as it is based on the concept of
“Centralisation of Accounting function”.

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(d) Direct Expense: Expenses other than direct material cost and direct employee cost,
which are incurred to manufacture a product or for provision of service and can be
directly traced in an economically feasible manner to a cost object. The following costs
are examples for direct expenses:
(i) Royalty paid/ payable for production or provision of service;
(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provision
of service.
The above list of expenses is not exhaustive; any other expenses which are directly
attributable to the production or service are also included as direct expenses.
Measurement of Direct Expenses
The direct expenses are measured at invoice or agreed price net of rebate or discount
but includes duties and taxes (for which input credit not available), commission and other
directly attributable costs.
In case of sub-contracting, where goods are get manufactured by job workers
independent of the principal entity, are measured at agreed price. Where the principal
supplies some materials to the job workers, the value of such materials and other
incidental expenses are added with the job charges paid to the job workers.
Treatment of Direct Expenses
Direct Expenses forms part the prime cost for the product or service to which it can be
directly traceable and attributable. In case of lump-sum payment or one time payment,
the cost is amortised over the estimated production volume or benefit derived. If the
expenses incurred are of insignificant amount i.e. not material, it can be treated as part of
overheads.
(e) Limitations of Marginal Costing
(i) Difficulty in classifying fixed and variable elements: It is difficult to classify
exactly the expenses into fixed and variable category. Most of the expenses are
neither totally variable nor wholly fixed. For example, various amenities provided to
workers may have no relation either to volume of production or time factor.
(ii) Dependence on key factors: Contribution of a product itself is not a guide for
optimum profitability unless it is linked with the key factor.
(iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost
and sell at a price; which will result in loss or low profits. Hence, sales staff should
be cautioned while giving marginal cost.

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(iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded

particularly in large contracts, while valuing the work-in- progress. In order to show
the correct position fixed overheads have to be included in work-in-progress.
(v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour
of various costs are not necessarily true in a realistic situation. For example, the
assumption that fixed cost will remain static throughout is not correct. Fixed cost
may change from one period to another. For example, salaries bill may go up
because of annual increments or due to change in pay rate etc. The variable costs
do not remain constant per unit of output. There may be changes in the prices of
raw materials, wage rates etc. after a certain level of output has been reached due
to shortage of material, shortage of skilled labour, concessions of bulk purchases
etc.
(vi) Marginal costing ignores time factor and investment: The marginal cost of two
jobs may be the same but the time taken for their completion and the cost of
machines used may differ. The true cost of a job which takes longer time and uses
costlier machine would be higher. This fact is not disclosed by marginal costing.
(vii) Understating of W-I-P: Under marginal costing stocks and work in progress are
understated.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Question No. 1 is compulsory.
Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) A Limited a toy company purchases its requirement of raw material from S Limited at
` 120 per kg. The company incurs a handling cost of ` 400 plus freight of ` 350 per order.
The incremental carrying cost of inventory of raw material is ` 0.25 per kg per month. In
addition the cost of working capital finance on the investment in inventory of raw material
is ` 15 per kg per annum. The annual production of the toys is 60,000 units and 5 units of
toys are obtained from one kg. of raw material.
Required:
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost.
Assume 360 days in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annu m as per
EOQ.
(b) PQR Limited has replaced 72 workers during the quarter ended 31 st March 2022. The
labour rates for the quarter are as follows:
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.

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(c) 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 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?
(d) Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is
at distance of 15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet of
lorries having carrying capacity of 4 tonnes is used to transport coal from the mines.
Records reveal that average speed of the lorries is 40 kms per hour when running and
regularly take 15 minutes to unload at the rail head.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading
time is 25 minutes per load.
Additional Information:
Drivers' wages, depreciation, insurance and taxes, etc. ` 12 per hour
Operated Fuel, oil tyres, repairs and maintenance, etc. ` 1.60 per km
You are required to prepare a statement showing the cost per tonne kilometre of carrying
coal from each mine 'X' and 'Y'. (4 x 5 = 20 Marks)
Answer
60,000 units
(a) Annual requirement of raw material in kg. (A) = = 12,000 kg.
5 units per kg.
Ordering Cost (Handling & freight cost) (O) = ` 400 + ` 350 = ` 750
Carrying cost per unit per annum i.e. inventory carrying cost + working capital cost
(c × i)
= (` 0.25 × 12 months) + `15

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= ` 18 per kg.
2  12,000kgs.  ` 750
(i) E.O.Q.= = 1,000 kg.
` 18

(ii) Frequency of orders for procurement:

Annual consumption (A) = 12,000 kg.
Quantity per order (EOQ) = 1,000 kg.
A 12,000kg.
No. of orders per annum ( ) = = 12
EOQ 1,000kg.
12months
Frequency of placing orders (in months) = = 1 months
12 orders
360days
Or, (in days) = = 30 days
12orders
(iii) Calculation of total ordering cost and total inventory carrying cost as per EOQ:
Amount/Quantity
Size of the order 1,000 kg.
No. of orders 12
Cost of placing orders ` 9,000
(12 orders × ` 750)
Inventory carrying cost ` 9,000
(1,000 kg. × ½ × ` 18)
Total Cost `18,000
(b) Working Note:
(i) Average number of workers on roll (for the quarter):
Employee Turnover rate using Replacement method
No. of replacements
= ×100
Average number of workers on roll
8 72
Or, =
100 Average number of workers on roll
72×100
Or, Average number of workers on roll = = 900
8

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(ii) Number of workers left and discharged:

Employee turnover rate (Separation method)
No. of Separations(S) 5 S
= × 100 = = Or, S = 45
Average number of workers on roll 100 900
Hence, number of workers left and discharged comes to 45
(iii) Number of workers recruited and joined:
Employee turnover rate (Flux method)
No. of Separations*(S)+No. of Accessions(A)
=
Average number of workers on roll
16 45+ A  14400 
Or, = Or, A =  - 45 = 99
100 900  100 
No. of workers recruited and joined 99
(iv) Calculation of Equivalent employee turnover rates:
EmployeeTurnove rate for the quarter(s)
= × 4 quarters
Number of quarter(s)
16%
Using Flux method = ×4 = 64%
1
8%
Using Replacement method = ×4 = 32%
1
5%
Using Separation method = ×4 = 20%
1
(c)
Machine-A Machine-B Total
A Selling price per unit ( `) 400 400
B Variable cost per cost ( `) 240 260
C Contribution per unit ( `) [A-B] 160 140
D Units 8,00,000 10,00,000
E Total contribution ( ` [C×D] 12,80,00,000 14,00,00,000 26,80,00,000
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
H Profit per unit [G÷D] ( `) 116.25 120.00

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(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 ( `) [A×B] 19,20,00,000 16,80,00,000 36,00,00,000
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.
(d) Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine X (`) Mine Y (`)
Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance and
taxes)
X: 1 hour 30 minutes @ ` 12 per hour 18.00
Y: 1 hour 40 minutes @ ` 12 per hour 20.00
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
X: 30 km. ` 1.60 per km. 48.00
Y: 40 km. ` 1.60 per km. 64.00

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Total cost per trip (`) 66.00 84.00

Cost per tonne – km 1.1 1.05

(Refer to working note 2)  ` 66   ` 84 
   
 60 tonne - km   80 tonne - km 

Working notes:
Mine- X Mine- Y
(1) Total operated time taken per
trip
Running time to & fro 45 minutes 60 minutes
 60minutes   60minutes 
 30km.×   40km.  
 40km.   40km. 

Un-loading time 15 minutes 15 minutes

Loading time 30 minutes 25 minutes
Total operated time 90 minutes or 100 minutes or
1 hour 30 minutes 1 hour 40 minutes
(2) Effective tones – km. 60 80
(4 tonnes × 15 km.) (4 tonnes × 20 km.)
Question 2
(a) 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%

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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:
Direct materials ` 68,750
Direct wages ` 22,500
Profit percentage on selling price 15%
(10 Marks)
(b) Paramount Constructions Limited is engaged in construction and erection of bridges under
long term contracts. It has entered into a big contract at an agreed price of ` 250 Lakhs
subject to an escalation clause for material and labour as spelt out in the contract and
corresponding actual are as follows:
Standard Actual
Material Quantity Rate Per Tonne Quantity Tonnes Rate Per Tonne
Tonnes (`) (`)
P 2,800 1,500 3,000 1,750
Q 3,100 900 2,900 800
R 800 4,500 950 4,350
S 150 32,500 120 34,200
Labour Hours Hourly rate (`) Hours Hourly rate (`)
LM 65,000 60 61,500 70
LN 46,000 45 45,000 50
Required:
(i) Prepare a statement showing admissible additional claim of material and labour due
to escalation clause.
(ii) Determine the final price payable after admissible escalation claim. (5 Marks)
(c) Distinguish between Job costing and Process Costing. (Any five points of differences)
(5 Marks)

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 8 INTERMEDIATE EXAMINATION: MAY, 2022

Answer
(a) (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
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)
- - - - -
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

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

On solving the above relations: F = 0.667 and A = 0.20

Hence, percentage recovery rates of:
Factory overheads = 66.7% or 2/3 rd of wages and
Administrative overheads = 20% of factory cost.
Working note:
Selling price
Total Cost =
(100% + Percentage of profit)
` 3,33,312
*For Job 1 = = ` 2,97,600
(100% + 12%)

`2,52,000
**For Job 2 = = ` 2,10,000
(100% + 20%)
(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
2/3rd of direct wages 56,000 40,000
Factory cost 2,48,000 1,75,000
Administrative overheads
20% of factory cost 49,600 35,000
Total cost 2,97,600 2,10,000
Profit (12% & 20% respectively) 35,712 42,000
Selling price 3,33,312 2,52,000
(iii) Selling price of Job 3
(`)
Direct materials 68,750
Direct wages 22,500

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 10 INTERMEDIATE EXAMINATION: MAY, 2022

Prime cost 91,250

Factory overheads (2/3 rd 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
 Total Cost 
Selling price  
 85%  1,50,000

(b) Statement showing Additional claim

Standard Standard Actual Variation in Escalation
Qty/Hrs. Rate (`) Rate (`) Rate (`) Claim (`)
(a) (b) (c) (d) = (c)–(b) (e) =(a) × (d)
Materials
P 2,800 1,500 1,750 250 7,00,000
Q 3,100 900 800 (100) (3,10,000)
R 800 4,500 4,350 (150) (1,20,000)
S 150 32,500 34,200 1,700 2,55,000
Materials escalation claim: (A) 5,25,000
Wages
LM 65,000 60 70 10 6,50,000
LN 46,000 45 50 5 2,30,000
Wages escalation claim: (B) 8,80,000
Final claim: (A + B) 14,05,000
Statement showing final price payable
(`) (`)
Agreed price 2,50,00,000
Add: Agreed escalation
Material cost 5,25,000
Labour cost 8,80,000 14,05,000
Final price payable 2,64,05,000

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(c)
Job Costing Process Costing
(i) A Job is carried out or a product is The process of producing the product
produced by specific orders. has a continuous flow and the product
produced is homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period
for each process or department.
(iii) Each job is separate and Products lose their individual identity as
independent of other jobs. they are manufactured in a continuous
flow.
(iv) Each job or order has a number The unit cost of process is an average
and costs are collected against the cost for the period.
same job number.
(v) Costs are computed when a job is Costs are calculated at the end of the
completed. The cost of a job may cost period. The unit cost of a process
be determined by adding all costs may be computed by dividing the total
against the job. cost for the period by the output of the
process during that period.
(vi) As production is not continuous Process of production is usually
and each job may be different, so standardized and is therefore, quite
more managerial attention is stable. Hence control here is
required for effective control. comparatively easier.
Question 3
(a) 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

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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.
• 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. (10 Marks)
(b) The following data are available from the books and records of A Ltd. for the month of April
2022:
Particulars Amount (`)
Stock of raw materials on 1 st April 2022 10,000
Raw materials purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & maintenance 1,000
Stock of raw materials on 30 th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300
Stock of finished goods as on 1 st April 2022 was 200 units having a total cost of
` 28,000. The entire opening stock of finished goods has been sold during the month.

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Production during the month of April, 2022 was 3,000 units. Closing stock of finished
goods as on 30th April, 2022 was 400 units.
You are required to:
I. Prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed
(ii) Prime Cost
(iii) Factory Cost
(iv) Cost of Production
(v) Cost of goods sold
(vi) Cost of Sales
II. Calculate selling price per unit, if sale is made at a profit of 20% on sales.
(10 Marks)
Answer
(a) 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
38 20
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 0.25 X, 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

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Or, 0.5X + 0.25X = 12,000

Or, 0.75X = 12,000
Or, X = 12,000÷0.75
= 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
II. (i) Sales Budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022
Shirts Shorts Shirts Shorts Shirts Shorts
A Sales demand 15,000 20,000 16,500 22,000 18,150 24,200
B Selling price per unit 60 44 60 44 60 44
(`)
C Sales Revenue (`) 9,00,000 8,80,000 9,90,000 9,68,000 10,89,000 10,64,800

(ii) Production budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022 October 2022
Shirts Shorts Shirts Shorts Shirts Shorts Shirts Shorts
A Opening stock 0 0 6,600 8,800 7,260 9,680
B Sales demand 15,000 20,000 16,500 22,000 18,150 24,200 19,965 26,620
C Closing stock 6,600 8,800 7,260 9,680 7,986 10,648
D Production 21,600 28,800 17,160 22,880 18,876 25,168
[B+C-A]

(b) I. Statement of Cost (for the month of April, 2022)

S. No. Particulars Amount (`) Amount (`)
Opening stock of Raw material 10,000
Add: Purchase of Raw material 2,80,000
Less: Closing stock of raw materials (40,000)
(i) Raw material consumed 2,50,000
Manufacturing wages 70,000

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(ii) Prime Cost 3,20,000

Factory/work overheads:
Depreciation on plant 15,000
Lease rent of production Asset 10,000
Expenses paid for pollution control and
engineering & Maintenance 1,000 26,000
(iii) Factory/Work Cost 3,46,000
Expenses paid for quality control check
activity 4,000
Research and Development Cost 5,000
Administration Overheads (Production) 15,000
Primary Packing Cost 8,000
(iv) Cost of Production 3,78,000
Add: Opening stock of finished goods 28,000
Less: Closing stock of finished goods (50,400)
(v) Cost of Goods Sold 3,55,600
Advertisement expenses 1,300
Packing cost for re-distribution of
finished goods sold 1,500
(vi) Cost of Sales 3,58,400
Note: Valuation of Closing stock of finished goods
3,78,000
= × 400 units
3000 units
= `50,400
3,58,400
II. Cost per unit sold = = ` 128 per unit
200+3,000-400
128
 Selling Price = = `160 per unit
80%
Question 4
(a) STG Limited is a manufacturer of Chemical 'GK', which is required for industrial use. The
complete production operation requires two processes. The raw material first passes
through Process I, where Chemical 'G' is produced. Following data is furnished for the
month April 2022:

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Particulars (in kgs.)

Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)
Material input quantity 1,05,000
Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)
You are further provided that:
Particulars (in `)
Opening work-in-progress cost
Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100
Normal process loss may be estimated to be 10% of material input. It has no realizable
value. Any loss over and above normal loss is considered to be 100% complete in material
and processing.
The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Pr ocess II
for producing Chemical 'GK'. Further materials are added in Process II which yield 1.20 kg.
of Chemical 'GK' for every kg. of Chemical 'G' introduced. The chemicals transferred to
Process II for further processing are then sold as Chemical 'GK' for ` 10 per kg. Any
quantity of output completed in Process I, are sold as Chemical 'G' @ ` 9 per kg.
The monthly costs incurred in Process II (other than the cost of Chemical 'G') are:
Input 60,000 kg. of Chemical 'G'
Materials Cost ` 85,000
Processing Costs ` 50,000
You are required:
(i) Prepare Statement of Equivalent production and determine the cost per kg. of
Chemical ‘G' in Process I using the weighted average cost method.
(ii) Prepare a statement showing cost of Chemical 'G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in progress.
(iii) STG is considering the option to sell 60,000 kg. of Chemical 'G' of Process I without
processing it further in Process-II. Will it be beneficial for the company over the
current pattern of processing 60,000 kg in process-II? (10 Marks)

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(Note: You are not required to prepare Process Accounts)

(b) UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps
and sells its lamps at ` 450 per unit.
During the quarter ending on 31st December, 2021, it produced and sold 12,000 units and
suffered a loss of ` 35 per unit.
During the quarter ending on 31 st March, 2022, it produced and sold 30,000 units and
earned a profit of ` 40 per unit.
You are required to calculate:
(i) Total fixed cost incurred by UV ltd. per quarter.
(ii) Break Even sales value (in rupees)
(iii) Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e.,
quarter ending on 30 th June, 2022). (5 Marks)
(c) Journalize the following transactions assuming the cost and financial accounts are
integrated:
Particulars Amount (`)
Direct Materials issued to production ` 5,88,000
Allocation of Wages (Indirect) ` 7,50,000
Factory Overheads (Over absorbed) ` 2,25,000
Administrative Overheads (Under absorbed) ` 1,55,000
Deficiency found in stock of Raw material (Normal) ` 2,00,000
(5 Marks)
Answer
(a) (i) Statement of Equivalent Production
Particulars Input Particulars Total Material Processing
quantity Cost
% Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000
Material Input 1,05,000 Normal loss 10,500 - - - -
(10% of
1,05,000)
Abnormal loss 4,500 100% 4,500 100% 4,500
(Bal. fig.)

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Closing WIP 16,500 100% 16,500 60% 9,900

1,14,500 1,14,500 1,04,000 97,400
Statement of Cost for each element
Particulars Material Processing Total cost
(`) (`) (`)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25
Alternative Presentation
Statement showing cost per kg of each statement
(`) (`)
Material 29,500 + 3,34,500 3.5
1,04,000
Processing cost 14,750 + 2,53,100 2.75
97,400
Total Cost per kg 6.25
(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in- progress
(`)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:
Material (16,500 × 3.5) 57,750
Processing cost (9,900 × 2.75) 27,225
84,975
(iii) Calculation of Incremental Profit / Loss after further processing
Particulars (`) (`)
Sales if further processed (A) (60,000 x 1.20 x ` 10) 7,20,000

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Calculation of cost in Process II

Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 x ` 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.

Alternative Presentation
Calculation of Incremental Profit / Loss after further processing
(`)
If 60,000 units are sold @ ` 9 5,40,000
If 60,000 units are processed in process II (60,000 × 1.2 × ` 10) 7,20,000
Incremental Revenue (A) 1,80,000
Incremental Cost: (B)
Material Cost 85,000
Processing Cost 50,000
1,35,000
Incremental Profit (A-B) 45,000
Additional net profit on further processing in Process II is 45,000. Therefore, it
is advisable to process further chemical ‘G’.
(b)

Quarter ending Quarter ending

31st December, 31st March, 2022
2021 (`) (`)
Sales (No. of units sold x ` 450 per unit) 54,00,000 1,35,00,000

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 20 INTERMEDIATE EXAMINATION: MAY, 2022

Profit (Loss) (4,20,000) 12,00,000

[12,000 × 35] [30,000 × 40]
Change in profit
P/V Ratio = ×100
Change in Sales
16,20,000
 ×100 = 20%
81,00,000
(i) Fixed Cost = Sales × P/V ratio – profit
= ` 1,35,00,000 × 20% – 12,00,000
= ` 15,00,000
Alternative Presentation for the calculation of Fixed cost
Quarter ending Quarter ending
31st December, 2021 31st March, 2022
(`) (`)
Sales (No. of units sold x ` 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
Total cost 58,20,000 1,23,00,000
VC per unit = (1,23,00,000 – 58,20,000) / (30,000 – 12,000)
= 64,80,000 / 18,000 =` 360 per unit
Fixed cost = TC – VC , 58,20,000 (360 x12,000 units) `15,00,000
Fixed cost
(ii) Break even sales value (in Rupees) = ×100
P/V ratio
15,00,000
= = `75,00,000
20%
(iii) Profit, if sales reach 50,000 units for the quarter ending 30 th June, 2022
(`)
Sales (50,000 × ` 450) 2,25,00,000
Less: Variable cost 1,80,00,000
Contribution 45,00,000
Less: Fixed cost 15,00,000
Profit 30,00,000

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(c)
Particulars (`) (`)
(i) Work-in-Progress Ledger Control A/c Dr. 5,88,000
To Stores Ledger Control A/c 5,88,000
(Being issue of direct materials to production)
(ii) Factory Overhead control A/c Dr. 7,50,000
To Wages Control A/c 7,50,000
(Being allocation of Indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,25,000
To Costing Profit & Loss A/c 2,25,000
(Being transfer of over absorption of Factory
overhead)
(iv) Costing Profit & Loss A/c Dr. 1,55,000
To Administration Overhead Control A/c 1,55,000
(Being transfer of under absorption of Administration
overhead)
(v) Factory Overhead Control A/c Dr. 2,00,000
To Stores Ledger Control A/c 2,00,000
(Being transfer of deficiency in stock of raw material)
(Note: Costing P/&/L = P/&/L and SLC = MLC)
Question 5
(a) 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. per Materials per Volume in
per unit unit Unit1 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.

1 Material cost per unit

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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
Cost relating to machinery 10
Cost relating to material handling 30
Costs 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-ups No. of movements of Materials No. of 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)
(b) A manufacturing department of a company has employed 120 workers. The standard
output of product ''NPX" is 20 units per hour and the standard wage rate is ` 25 per labour
hour.
In a 48 hours week, the department produced 1,000 units of 'NPX' despite 5% of the time
paid being lost due to an abnormal reason. The hourly wages actually paid were ` 25.70
per hour.
Calculate:
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Idle time Variance (5 Marks)

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(c) RST Limited produces three joint products X, Y and Z. The products are processed further.
Pre-separation costs are apportioned on the basis of weight of output of each joint product.
The following data are provided for the month of April, 2022.
Cost incurred up to separation point: ` 10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80
` ` `
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre:
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45
You are required to:
(i) Prepare a statement showing profit or loss made by each product after further
processing using the presently adopted method of apportionment of pre-separation
cost.
(ii) Advise the management whether, on purely financial consideration, the three
products are to be processed further or not. (5 Marks)
Answer
(a) (i) Statement showing “Cost per unit” using “conventional method”
Particulars of Costs AX BX CX
(`) (`) (`)
Direct Materials 35 25 45
Direct Labour 20 18 30
Production Overheads 60 45 75
Cost per unit 115 88 150
(ii) Statement Showing “Cost per unit using “Activity Based Costing”
Products AX BX CX
Production (units) 7,500 12,500 25,000
(`) (`) (`)
Direct Materials 2,62,500 3,12,500 11,25,000
Direct Labour 1,50,000 2,25,000 7,50,000
Machine Related Costs 45,000 56,250 1,87,500

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Products AX BX CX
Setup Costs 2,62,500 3,37,500 5,55,000
Material handling Cost 1,50,000 2,10,000 5,06,250
Inspection Costs 77,000 1,54,000 3,46,500
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost  Units) 126.267 103.62 138.81

Working Notes:
Calculation of Total Machine hours
Particulars AX BX CX
(A) Machine hours per unit 2 1.5 2.5
(B) Production (units) 7,500 12,500 25,000
(C) Total Machine hours (A× B) 15,000 18,750 62,500
Total Machine hours = 96,250
Total Production overheads = 96,250 × 30 = ` 28,87,500
Calculation of Cost Driver Rate
Cost Pool % Overheads Cost Driver Cost Driver Cost Driver
(`) (Basis) (Units) Rate (`)
Set up 40 11,55,000 No of set ups 1,540 750 per set up
Machine 10 2,88,750 Machine hours 96,250 3 per machine
Operation hour
Material 30 8,66,250 No of material 1,155 750 per material
Handling movement movement
Inspection 20 5,77,500 No of 1,500 385 per
inspection inspection

(b) Working Notes:

1. Calculation of standard man hours
When 120 worker works for 1 hr., then the std. output is 20 units.
120 hrs.
Std. man hour per unit = = 6 hrs.
20 units
2. Calculation of std. man hours for actual output
Total std. man hours = 1,000 units × 6 hrs. = 6,000 hrs.

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Standard for actual Actual

Hours Rate Amount Actual hrs. Idle Production Rate Amount
(`) (`) paid time hrs. (`) paid
hrs. (`)
6,000 25 1,50,000 5,760 288 5,472 25.70 1,48,032
(48 hrs. x 120
workers)

(i) Labour cost variance

= Std. labour cost – Actual labour cost
= 1,50,000 – 1,48,032 = ` 1,968 F
(ii) Labour rate variance
= (SR – AR) × AHPaid
= (25 - 25.70) × 5,760 = ` 4,032 A
(iii) Labour efficiency variance
= (SH – AH) × SR
= (6,000 – 5,472) × 25 = ` 13,200 F
(iv) Labour Idle time variance
= Idle Hours × SR
= 288 × 25 = ` 7,200 A
Note: Variances can also be calculated for one worker instead of 120.
(c) (i) Statement showing profit/loss by each product after further processing
products
Product X Product Y Product Z
(in `) (in `) (in `)
Sales value after further processing 5,000 5,600 4,800
Less: Further processing cost 2,000 1,200 800
Less: Joint Cost* (as apportioned) 4,000 2,800 3,200
Profit/(loss) (1,000) 1,600 800
* Statement showing apportionment of joint cost on the basis of physical units

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 26 INTERMEDIATE EXAMINATION: MAY, 2022

Product X Product Y Product Z Total

(in `) (in `) (in `) (`)
Output (in litre) 100 70 80 250
Weight 0.4 0.28 0.32
(100/250) (70/250) (80/250)
Joint cost apportioned 4,000 2,800 3,200
(ii) Decision whether to process further or not
Product X Product Y Product Z
(in `) (in `) (in `)
Incremental Revenue 2,500 700 1,200
[(50-25) × 100] [(80-70) × 70] [(60-45) × 80]
Less: Further processing cost 2,000 1,200 800
Incremental profit /(loss) 500 (500) 400

Product X Product Y Product Z Total

(in `) (in `) (in `)
Sales 2500 4900 3600 11000
Pre separation costs 4000 2800 3200 10000
Profit/(Loss) (1500) 2100 400 1000
It is advisable to further process only product X and Z and to sale product Y at the
point of separation.
Question 6
Answer any four of the following:
(a) Briefly explain the essential features of a good Cost Accounting System.
(b) Write down the treatment of following items associated with purchase of materials.
(i) Cash discount
(ii) IGST
(iii) Demurrage
(iv) Shortage
(v) Basic Custom Duty

© The Institute of Chartered Accountants of India

 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 27

(c) Explain the treatment of Overtime Premium in following situations:

(i) SV & Co. wants to grab some special orders, and overtime is required to meet the
same.
(ii) Dept. X has to work overtime to make up a shortfall in production due to some fault
of management in dept. Y.
(iii) S Ltd. has to work overtime regularly throughout the year as a policy due to the
workers' shortage.
(iv) Due to flood in Odisha, RS Ltd. has to work overtime to complete the job.
(v) A customer requested the company MN Ltd. to expedite the job because of his
urgency of work.
(d) Discuss briefly some of the criticism which may be levelled against the Standard Costing
System.
(e) Identify the methods of costing from the following statements:
(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Costs ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units produced.
(4 x 5 = 20 Marks)
Answer
(a) The essential features, which a good cost accounting system should possess, are
as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical,
simple and capable of meeting the requirements of a business concern. The system
of costing should not sacrifice the utility by introducing inaccurate and unnecessary
details.
(b) Accurate and authentic: The data to be used by the cost accounting system should
be accurate and authenticated; otherwise it may distort the output of the system and
a wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in
classification, treatment and reporting of cost data and related information. This is
required for benchmarking and comparability of the results of the system for both
horizontal and vertical analysis.

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 28 INTERMEDIATE EXAMINATION: MAY, 2022

(d) Integrated and inclusive: The cost accounting system should be integrated with
other systems like financial accounting, taxation, statistics and operational research
etc. to have a complete overview and clarity in results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to
make necessary amendment and modifications in the system to incorporate changes
in technological, reporting, regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output.
For this, an active role of management is required for the development of such a
system that reflects a strong conviction in using information for decision making.
(b) Treatment of items associated with purchase of materials is tabulated as below
S. Items Treatment
No.
(i) Cash Discount Cash discount is not deducted from the purchase price.
It is treated as interest and finance charges. It is ignored.
(ii) Integrated Goods Integrated Goods and Service Tax (IGST) is paid on inter-
and Service Tax state supply of goods and provision of services and
(IGST) collected from the buyers. It is excluded from the cost
of purchase if credit for the same is available. Unless
mentioned specifically it should not form part of cost of
purchase.
(iii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase
(iv) Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units absorb
the cost of shortage due to normal reasons. Losses
due to breaking of bulk, evaporation, or due to any
unavoidable conditions etc. are the reasons of normal
loss.
Shortage due to abnormal reasons: Shortage arises
due to abnormal reasons such as material mishandling,
pilferage, or due to any avoidable reasons are not
absorbed by the good units. Losses due to abnormal
reasons are debited to costing profit and loss
account.
(v) Basic Custom Basic Custom duty is paid on import of goods from
Duty outside India. It is added with the purchase cost.

© The Institute of Chartered Accountants of India

 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 29

(c) Treatment of Overtime premium in different situations

Situation Treatment
(i) SV & Co. wants to grab some If overtime is required to cope with general
special orders, and overtime is production programmes or for meeting urgent
required to meet the same. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost centre which works
overtime.
(ii) Dept. X has to work overtime to If overtime is worked in a department due to
make up a shortfall in the fault of another department, the overtime
production due to some fault of premium should be charged to the latter
management in dept. Y. department (Y).
(iii) S Ltd. has to work overtime The overtime premium is treated as a part of
regularly throughout the year employee cost and job is charged at an
as a policy due to the workers’ effective average wage rate.
shortage.
(iv) Due to flood in Odisha, RS Ltd. Overtime worked on account of abnormal
has to work overtime to conditions such as flood, earthquake etc.,
complete the job. should not be charged to cost, but to
Costing Profit and Loss Account.
(v) A customer requested the Where overtime is worked at the request of the
company MN Ltd. to expedite customer, overtime premium is also charged
the job because of his urgency to the job/ customer directly.
of work.
(d) Criticism of Standard Costing
(i) Variation in price: One of the chief problem faced in the operation of the standard
costing system is the precise estimation of likely prices or rate to be paid. The
variability of prices is so great that even actual prices are not necessarily adequately
representative of cost. But the use of sophisticated forecasting techniques should be
able to cover the price fluctuation to some extent. Besides this, the system provides
for isolating uncontrollable variances arising from variations to be dealt with
separately.
(ii) Varying levels of output: If the standard level of output set for pre-determination of
standard costs is not achieved, the standard costs are said to be not realised.
However, the statement that the capacity utilisation cannot be precisely estimated for
absorption of overheads may be true only in some industries of jobbing type. In vast
majority of industries, use of forecasting techniques, market research, etc., help to
estimate the output with reasonable accuracy and thus the variation is unlikely to be
very large. Prime cost will not be affected by such variation and, moreover, variance
analysis helps to measure the effects of idle time.

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 30 INTERMEDIATE EXAMINATION: MAY, 2022

(iii) Changing standard of technology: In case of industries that have frequent

technological changes affecting the conditions of production, standard costing may
not be suitable. This criticism does not affect the system of standard costing. Cost
reduction and cost control is a cardinal feature of standard costing because standards
once set do not always remain stable. They have to be revised.
(iv) Attitude of technical people: Technical people are accustomed to think of standards
as physical standards and, therefore, they will be misled by standard costs. Since
technical people can be educated to adopt themselves to the system through
orientation courses, it is not an insurmountable difficulty.
(v) Mix of products: Standard costing presupposes a pre-determined combination of
products both in variety and quantity. The mixture of materials used to manufacture
the products may vary in the long run but since standard costs are set normally for a
short period, such changes can be taken care of by revision of standards.
(vi) Level of Performance: Standards may be either too strict or too liberal because they
may be based on (a) theoretical maximum efficiency, (b) attainable good performance
or (c) average past performance. To overcome this difficulty, the management should
give thought to the selection of a suitable type of standard. The type of standard most
effective in the control of costs is one which represents an attainable level of good
performance.
(vii) Standard costs cannot possibly reflect the true value in exchange: If previous
historical costs are amended roughly to arrive at estimates for ad hoc purposes, they
are not standard costs in the strict sense of the term and hence they cannot also
reflect true value in exchange. In arriving at standard costs, however, the economic
and technical factors, internal and external, are brought together and analysed to
arrive at quantities and prices which reflect optimum operations. The resulting costs,
therefore, become realistic measures of the sacrifices involved.
(viii) Fixation of standards may be costly: It may require high order of skill and
competency. Small concerns, therefore, feel difficulty in the operation of such system.
(e) Method of costing followed:
Situation Method of costing
(i) Costs are directly charged to a group of products. Batch costing
(ii) Nature of the product is complex and method Multiple costing
cannot be ascertained.
(iii) Cost is ascertained for a single product. Unit/ Single/Output costing
(iv) All costs are directly charged to a specific job. Job costing
(v) Costs are charged to operations and averaged Process costing
over units produced.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. Reliable India Pvt Ltd is a startup company engaged in manufacturing of Agro Tech product
from a raw material, which is purchased at `190 per kg. The company incurs a handling
cost of `1,470 plus, freight of `770 per order. The incremental carrying cost of inventory
of raw material is `3 per kg per month. In addition, the cost of working capital finance on
the investment in inventory of raw material is `20 per kg per annum. The annual production
of the product is 1,50,000 units and 3 units are obtained from one kg. of raw material.
Assume 360 days in a year.
Required:
(i) Calculate the economic order quantity of raw materials.
(ii) Determine, how frequently company should order for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis,
determine the percentage of discount in the price of raw materials should be
negotiated?
Employee Cost
2. Following information are available from the cost records of BMR Limited, CALCULATE
Labour turnover rate and Labour flux rate:
No. of Employees as on 01.04.2021 = 9,400
No. of Employees as on 31.03.2022 = 10,600
During the year, 160 Employees left while 640 Employees were discharged and 1,500
Employees were recruited during the year; of these, 400 Employees were recruited
because of exits and the rest were recruited in accordance with expansion plans.
Overhead
3. SANDY Ltd. is a manufacturing company having three production departments, ‘A’, ‘B’ and
‘C’ and two service departments ‘X’ and ‘Y’. The following is the budget for December
2022:
Total (`) A (` ) B (` ) C (` ) X (` ) Y (` )
Direct material 1,60,000 3,20,000 6,40,000 3,20,000 1,60,000
Direct wages 8,00,000 3,20,000 12,80,000 1,60,000 3,20,000
Factory rent 6,40,000
Power 4,00,000
Depreciation 1,60,000
2 INTERMEDIATE EXAMINATION: MAY, 2023

Other overheads 14,40,000

Additional
information:
Area (Sq. ft.) 800 400 800 400 800
Capital value of 32 64 32 16 16
assets (`) lakhs)
Machine hours 1,600 3,200 6,400 1,600 1,600
Horsepower of 80 64 32 24 40
machines
Apportionment of expenses of service departments is as under:
A B C X Y
Service Dept. ‘X’ 72 24 48 – 16
Service Dept. ‘Y’ 96 56 – 8 –
Required:
(i) PREPARE a statement showing distribution of overheads to various departments.
(ii) PREPARE a statement showing re-distribution of service departments expenses to
production departments using Repeated Distribution method. Also CALCULATE
machine hour rate of the production departments 'A', 'B', 'C'.
ABC Costing
4. Hygiene Care Ltd. is a manufacturer of a range of goods. The cost structure of its different
products is as follows:
Particulars Hand Wash Detergent Dishwasher
Powder
Direct Materials (` / Pu) 150 120 120
Direct Labour @ `10/ hour (` / 45 60 75
Pu)
Production Overheads ( ` / Pu) 40 50 40
Total Cost (` / Pu) 235 230 235
Quantity Produced (Units) 30,000 60,000 90,000
Hygiene Care Ltd. was absorbing overheads on the basis of direct labour hours.
Management accountant has suggested that the company should introduce ABC system
and has identified cost drivers and cost pools as follows:
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

Activity Cost Pool Cost Driver Associated Cost

(`)
Goods Receiving Number of Dispatch Order 8,88,000
Inspecting and Testing costs Number of Production Runs 26,82,000
Dispatching Number of dispatch order 6,30,000
Storage Cost Number of Batches of material 36,00,000
The following information is also supplied:
Details Hand Wash Detergent Powder Dishwasher
Batches of material 720 780 900
Number of dispatch order 360 540 600
No. of Production Runs 1,500 2,100 2,400
Number of Dispatch Orders 600 900 1,000
Required:
CALCULATE activity-based production cost of all the three products.
Cost Sheet
5. From the following data of Motilal Ltd., CALCULATE Cost of production:
(`)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for inventories 26,000
(iii) Insurance premium paid for plant & machinery 96,000
(iv) Raw materials purchased 64,00,000
(v) Opening stock of raw materials 2,88,000
(vi) Closing stock of raw materials 4,46,000
(vii) Wages paid 23,20,000
(viii) Value of opening Work-in-process 4,06,000
(ix) Value of closing Work-in-process 6,02,100
(x) Quality control cost for the products in manufacturing process 86,000
(xi) Research & development cost for improvement in production 92,600
process
(xii) Administrative cost for:
- Factory & production 9,00,000
- Others 11,60,000
4 INTERMEDIATE EXAMINATION: MAY, 2023

(xiii) Amount realised by selling scrap generated during the 9,200

manufacturing process
(xiv) Packing cost necessary to preserve the goods for further 10,200
processing
(xv) Salary paid to Director (Technical) 8,90,000
Reconciliation
6. The financial records of Riva Private Limited showed a net profit of `1,69,500 for the year
ended 31st March, 2022. The cost accounts, however, disclosed a net loss of ` 88,500 for
the same period. The following information were revealed as a result of scrutiny of the
figures of cost accounts and financial accounts:
(`)
(i) (Administrative overhead under recovered 63,750.0
(ii) Factory overhead over recovered 3,37,500.0
(iii) Depreciation under charged in Cost Accounts 65,000.0
(iv) Dividend received 50,000.0
(v) Loss due to obsolescence charged in Financial Accounts 42,000.0
(vi) Income tax provided 1,09,000.0
(vii) Bank interest credited in Financial Accounts 34,000.0
(viii) Value of opening stock:
In Cost Accounts 4,12,500.0
In Financial Accounts 3,62,500.0
(ix) Value of closing stock:
In Cost Accounts 3,13,750.0
In Financial Accounts 3,30,000.0
(x) Goodwill written-off in Financial Accounts 62,500.0
(xi) Notional rent of own premises charged in Cost Accounts 1,50,000.0
(xii) Provision for doubtful debts in Financial Accounts 37,500.0
Prepare a reconciliation statement by taking costing net loss as base.
Job and Batch Costing
7. A jobbing factory has undertaken to supply 200 pieces of a component per month for the
ensuing six months. Every month a batch order is opened against which materials and
labour hours are booked at actual. Overheads are levied at a rate per labour hour. The
selling price contracted for is ` 80 per piece. From the following data.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

COMPUTE the cost and profit per piece of each batch order and overall position of the
order for 1,200 pieces.
Month Batch Output Material cost Direct wages Direct labour
(Pieces) (`) (`) (Hours)
January 210 6,500 1,200 240
February 200 6,400 1,400 280
March 220 6,800 1,500 280
April 180 6,300 1,400 270
May 200 7,000 1,500 300
June 220 7,200 1,600 320
The other details are:
Month Chargeable expenses Direct labour
(`) Hours
January 1,20,000 4,800
February 1,05,600 4,400
March 1,20,000 5,000
April 1,05,800 4,600
May 1,30,000 5,000
June 1,20,000 4,800
Contract Costing
8. XYZ LLP, contractors and civil engineers, are building a new wing to a school. The quoted
fixed price for the contract is `30,00,000. Work commenced on 1 st January 20X2 and is
expected to be completed on schedule by 30 June 20X3.
Data relating to the contract at the year ended 31 st March 20X3 is as follows.
(`)
Plant sent to site at commencement of contract 2,40,000
Hire of plant and equipment 77,000
Materials sent to site 6,62,000
Materials returned from site 47,000
Direct wages paid 9,60,000
Wage related costs 1,32,000
Direct expenses incurred 34,000
6 INTERMEDIATE EXAMINATION: MAY, 2023

Supervisory staff salaries 90,000

- Direct
- Indirect 20,000
Regional office expenses apportioned to contract 50,000
Head office expenses apportioned to contract 30,000
Surveyor’s fees 27,000
Progress payments received from school 18,00,000
Additional information:
1. Plant is to be depreciated at the rate of 25 % per annum following straight line method,
with no residual value.
2. Unused materials on site at 31st March are estimated at ` 50,000.
3. Wages owed to direct workers total ` 40,000
4. Budgeted profit on the contract is ` 8,00,000
5. Value of work certified by the surveyor is ` 24,00,000.
6. The surveyor has not certified the work costing ` 1,80,000
You are required to PREPARE the account for the school contract for the fifteen months
ended 31st March 20X3, and CALCULATE the notional profit to date.
Process Costing
9. ‘Dairy Wala Private limited’ is engaged in the production of flavoured milk. Its process
involve filtration and boiling of milk after that some sugar, flavour, colour is added and then
letting it cool to fill the product into clean and sterile bottles. For Producing 10 litre of flavour
milk, 100 litre of Raw milk is required, which extracts only 45 litres of standardized milk.
Following information regarding Process – I has been obtained from the manufacturing
department of Dairy Wala Private limited for the month of December 2022:
Items (`)
Opening work-in process (13,500 litre)
Milk 1,50,000
Labour 45,000
Overheads 1,35,000
Milk introduced for filtration and boiling (3,00,000 litre) 15,00,000
Direct Labour 6,00,000
Overheads 18,00,000
Abnormal Loss: 3,000 litres
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

Degree of completion:
Milk 100%
Labour and overheads 80%
Closing work-in process: 27,000 litres
Degree of completion:
Milk 100%
Labour and overheads 80%
Milk transferred for Packing: 1,18,500 litres
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iii) Statement of distribution cost, and
(iv) Process-I Account.
Joint Product by Product
10. Key Pee Limited produces and sells the following products:
Products Units Selling price at split-off Selling price after
point (`) further processing (`)
A 500000 42.5 62.5
B 75000 32.5 42.5
C 62500 20 30
D 50000 25 -
E 187500 35 50
Cost of raw material ` 89,75,000 and other manufacturing ex-penses cost `13,67,500 in
the manufacturing process which are absorbed on the products on the basis of their ‘Net
realisable value’. The further processing costs of A, B, C and E are `31,25,000;
` 3,75,000; `1,25,000 and `3,75,000 respectively. Fixed costs are `11,82,500.
You are required to PREPARE the following in respect of the coming year:
(a) Statement showing income forecast of the company assuming that none of its
products are to be further processed.
(b) Statement showing income forecast of the company assuming that products A, B, C
and E are to be processed further.
8 INTERMEDIATE EXAMINATION: MAY, 2023

Service Costing
11. PREPARE cost statement of Panipat Thermal Power Station showing the cost of electricity
generated per kwh, from the following data.
Total units generated 16,50,000 kWh
(`)
Operating labour 21,75,000
Repairs & maintenance 7,25,000
Lubricants, spares and stores 5,80,000
Plant supervision 4,35,000
Administration overheads 29,00,000
Insurance Charges 15,00,000
Fuel Charges 8,00,000
7 kWh. of electricity generated per kg. of coal consumed @ `4.75 per kg. Depreciation
charges @ 5% on capital cost of `3,10,00,000.
Standard Costing
12. XYZ Manufacturing Ltd. had prepared the following estimation for the month of Janua ry:
Quantity Rate (`) (`)
Raw Material-DF 1,600 kg. 50 80,000
Raw Material-CE 1,200 kg. 35 42,000
Skilled labour 2,000 hours 40 80,000
Semiskilled labour 1,600 hours 25 40,000
Standard loss in the process was expected to be 10% of total input materials and an idle
labour time of 5% of expected labour hours was also estimated.
At the end of the month the following information has been collected from the cost
accounting department:
The company has produced 2,960 kg. finished product by using the followings:
Quantity Rate (`) (`)
Raw Material-DF 1,800 kg. 40 72,000
Raw Material-CE 1,300 kg. 30 39,000
Skilled labour 2,400 hours 35 84,000
Semiskilled labour 1,720 hours 20 34,400
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

You are required to CALCULATE:

(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Mix Variance;
(d) Material Yield Variance;
(e) Labour Cost Variance;
(f) Labour Efficiency Variance and
(g) Labour Yield Variance
Marginal Costing
13. The following data are available from the budget records of Finesign Women's Handbag
Company for the forthcoming budget period.
`
Selling Price per unit 1000
Variable cost per unit:
Cost of Material used 750.00
Sales commission 50.00
Total Variable Cost 800.00
Annual fixed expenses:
Rent 7,00,000
Salaries 11,00,000
Other fixed expenses 5,00,000
Total Fixed Cost 23,00,000
Although the firm manufactures Bags with different styles, they have identical purchase
costs and selling price.
Requirement:
(a) What is the annual break-even point both in terms of units and value?
(b) If the store manager is paid 1 per cent commission on sales, what would be the annual
break-even point both in terms of units and value?
(c) If the firm decides to pay a fixed salary of ` 9,00,000 in lieu of sales commission,
what would be the annual break-even point in terms of units and value.
Considering break-even point in requirement (a), If the stores manager is paid 2 per
cent commission on each bag sold in excess of the break-even point, what would be
the profit if 20000 bags were sold.
10 INTERMEDIATE EXAMINATION: MAY, 2023

Budget and Budgetary Control

14. EDF Ltd. produces two products using Skilled labour and two types of materials. S hown
below the information for the next month’s budget:
Product- A Product-B
Budgeted sales (in units) 4,080 6,120
Budgeted material consumption per unit (in kg):
Material-X 8.5 5.1
Material-Y 6.8 10.2
Standard labour hours allowed per unit of product 5.1 8.5

Material-X and Material-Y cost `8 and `10 per kg and labours are paid `30 per hour.
Overtime premium is 75% and is payable, if a worker works for more than 45 hours a week.
There are 400 direct workers.
The target efficiency ratio for the productive hours worked by the direct workers in actually
manufacturing the products is 85%. In addition the non-productive down-time is budgeted
at 15% of the productive hours worked.
There are four 6-days weeks in the budgeted period and it is anticipated that sales and
production will occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product-A 550 units
Product-B 350 units
Material-X 1,200 kgs.
Material-Y 600 kgs.
The anticipated closing stocks for budget period are as below:
Product-A 5 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 5 days consumption
Required:
CALCULATE the Material Purchase Budget and the Wages Budget for the direct workers,
showing the quantities and values, for the next month.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

Miscellaneous
15. (a) SUGGEST the unit of cost for following industries:
(a) Transport
(b) Power
(c) Hotel
(d) Hospital
(e) Steel
(f) Coal mining
(g) Professional Services
(h) Gas
(i) Engineering
(j) Oil
(b) DISCUSS the difference between Job costing and Batch costing.
(c) EXPLAIN what are the essential pre-requisite for Integrated Accounting system?
(d) DISCUSS the difference between cost control and cost reduction.

ANSWERS

1. (i) Calculation of Economic Order Quantity (E.O.Q)

1,50,000units
Annual requirement (usage) of raw material in kg. (A) = = 50,000kg.
3unitsperkg.
Ordering Cost (Handling & freight cost) (O) = `1,470 + `770 = `2,240
Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital
cost= (`3 × 12 months) + `20 = `56 per kg.

2AO 2×50,000 kg.× ` 2,240

E.O.Q = √ = √ = 2,000 kg.
C ` 56
(ii) Frequency of placing orders for procurement :
Annual consumption (A) = 50,000 kg.
Quantity per order (E.O.Q) = 2,000 kg.
A 50,000kg.
No. of orders per annum = = = 25 orders
E.O.Q 2,000kg.
12 INTERMEDIATE EXAMINATION: MAY, 2023

360days
Frequency of placing orders (in days) = = 14.4 Days
25orders
(iii) Percentage of discount in the price of raw materials to be negotiated:
Particulars On Quarterly Basis On E.O.Q Basis
1. Annual Usage (in Kg.) 50,000 kg. 50,000 kg.
2. Size of the order 12,500 kg. 2,000 kg.
3. No. of orders (1 ÷ 2) 4 25
4. Cost of placing orders ` 8,960 ` 56,000
or Ordering cost
(No. of orders × Cost (4 order × ` 2,240) (25 orders × ` 2,240)
per order)
5. Inventory carrying `3,50,000 `56,000
cost
(Average inventory × (12,500 kg. × ½ × ` 56) (2,000 kg. × ½ × ` 56)
Carrying cost per unit)
6. Total Cost (4 + 5) ` 3,58,960 ` 1,12,000
When order is placed on quarterly basis the ordering cost and carrying cost increased
by `2,46,960 (`3,58,960 - `1,12,000). So, discount required = ` 2,46,960
Total annual purchase = 50,000 kg. × `190 = `95,00,000 So, Percentage of discount
` 2,46,960
to be negotiated = = ×100 = 2.60%
` 95,00,000
2. Employee turnover rate:
It comprises of computation of Employee turnover by using following methods:
Number of employees seperated during the period
(i) Separate Method: = x 100
Average number of employees during the period on roll
Number of employees left + Number of employees discharged
OR, = x 100
Average number of employees during the period on roll
(160 + 640)
= x100
(9,400 + 10,600) ÷
800
= x 100 = 8%
10,000
Number of employees replaced during the period
(ii) Replacement Method = x 100
Average number of employees during the period on roll
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

400
= x 100 = 4%
10,000
Number of employees joining in a period (excluding replacement)
(iii) New Recruitment = x 100
Average number of employees during the period on roll

Number of Recruitments - Number of Replacements

= x 100
Average number of employees during the period on roll

1500 - 400
= x 100
10,000
1,100
= 10,000 𝑥 100 = 11%

Number of separation + Number of replacement + Number of new joining

Flux Method = x 100
Average number of employees during the period on roll

(800 + 400 + 1,100)

= x 100
(9,400 + 10,600) ÷ 2
2,300
= x 100 = 23%
10,000
3. (i) Overhead Distribution Summary
Basis Total (`) A (`) B (`) C (`) X (` ) Y (` )
Direct materials Direct – – – – 3,20,000 1,60,000
Direct wages Direct – – – – 1,60,000 3,20,000
Factory rent Area 6,40,000 1,60,000 80,000 1,60,000 80,000 1,60,000
(2:1:2:1:2)
Power H.P. × 4,00,000 80,000 1,28,000 1,28,000 24,000 40,000
(10:16:16:3:5)* Machine
Hrs.
Depreciation Capital 1,60,000 32,000 64,000 32,000 16,000 16,000
(2:4:2:1:1) value of
assets
Other overheads Machine 14,40,000 1,60,000 3,20,000 6,40,000 1,60,000 1,60,000
(1:2:4:1:1) hrs.
Total 26,40,000 4,32,000 5,92,000 9,60,000 7,60,000 8,56,000

*{(1600×80) : (3200×64) : (6400×32) : (1600×24) : (1600×40)}

(1,28,000 : 2,04,800 : 2,04,800 : 38,400 : 64,000)
(10:16:16:3:5)
14 INTERMEDIATE EXAMINATION: MAY, 2023

(ii) Redistribution of service department’s expense using repeated distribution

Method:
A (`) B (`) C (`) X (` ) Y (` )
Total overheads 4,32,000 5,92,000 9,60,000 7,60,000 8,56,000
Dept. X overhead 3,42,000 1,14,000 2,28,000 -7,60,000 76,000
apportioned in the ratio
(72:24:48: —:16)
Dept. Y overhead 5,59,200 3,26,200 - 46,600 -9,32,000
apportioned in the ratio
(96:56: —:8: —)
Dept. X overhead 20,970 6,990 13,980 -46,600 4,660
apportioned in the ratio
(72:24:48: —:16)
Dept. Y overhead 2,796 1,631 - 233 -4,660
apportioned in the ratio
(96:56: —:8: —)
Dept. X overhead 105 35 70 -233 23
apportioned in the ratio
(72:24:48: —:16)
Dept. Y overhead 15 8 - - -23
apportioned in the ratio
(96:56: —:8: —)
13,57,086 10,40,864 12,02,050 - -

Calculation of machine hour rate

A B C
A Total overheads (`) 13,57,086 10,40,864 12,02,050
B Machine hours 1,600 3,200 6,400
C Machine hour rate (`) [A ÷ B] 848.18 325.27 187.82
4. 1. The Total Production Overhead are 78,00,000
Items Labour Hour Overheads allocation on the
basis of direct Labour Hour (`)
Labour Hour Ratio (4.5:6:7.5)
Hand Wash 1,35,000 9,00,000
Detergent Powder 3,60,000 24,00,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

Dishwasher 6,75,000 45,00,000

Total 11,70,000 78,00,000
2. On the basis of ABC analysis this amount will be apportioned as follows:
Statement Showing "Activity Based Production Cost"
Activity Cost Cost Driver Ratio Total Hand Detergent Dishwas
Pool Amount Wash (`) Powder her
(` ) (` ) (` )
Goods Receiving Dispatch order 06:09:10 8,88,000 2,13,120 3,19,680 3,55,200
Inspecting and Production Runs 05:07:08 26,82,000 6,70,500 9,38,700 10,72,800
Testing costs
Dispatching Dispatch Order 06:09:10 6,30,000 1,51,200 2,26,800 2,52,000
Storage Cost Batches of 12:13:15 36,00,000 10,80,000 11,70,000 13,50,000
material
Total Activity Cost 21,14,820 26,55,180 30,30,000
Quantity Produces 30,000 60,000 90,000
Unit Cost
(Overheads) 70.49 44.25 33.67
Add: Conversion
Cost (Material +
Labour) 195 180 195
Total 265.49 224.25 228.67

Note: This question can also be solved by using cost driver rate
5. Calculation of Cost of Production of Motilal Ltd for the period…..
Particulars (`)
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000
Prime cost 85,62,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for inventories 26,000
Insurance premium paid for plant & machinery 96,000
Quality control cost 86,000
16 INTERMEDIATE EXAMINATION: MAY, 2023

Research & development cost 92,600

Administrative overheads related with factory and production 9,00,000
1,07,43,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,47,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,48,000
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.
6. Statement of Reconciliation
Sl. No. Particulars (`) (`)
Net loss as per Cost Accounts (88,500)
Additions
1 Factory O/H over recovered 3,37,500
2 Dividend Received 50,000
3 Bank Interest received 34,000
4 Difference in Value of Opening Stock 50,000
(4,12,500 – 3,62,500)
5 Difference in Value of Closing Stock 16,250
(3,30,000 – 3,13,7500)
6 Notional Rent of own Premises 1,50,000 6,37,750
Deductions
1 Administration O/H under recovered 63,750
2 Depreciation under charged 65,000
3 Loss due to obsolescence 42,000
4 Income tax Provided 1,09,000
5 Goodwill written-off 62,500
6 Provision for doubtful debts 37,500 (3,79,750)
Net Profit as per Financial A/c. 1,69,500
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

7.
Particulars Jan. Feb. March April May June Total
(`) (`) (`) (`) (`) (`) (`)
Batch output 210 200 220 180 200 220 1,230
(in pieces)
Sale value @ `80 16,80 16,00 17,60 14,40 16,00 17,60 98,40
0 0 0 0 0 0 0
Material cost 6,500 6,400 6,800 6,300 7,000 7,200 40,20
0
Direct wages 1,200 1,400 1,500 1,400 1,500 1,600 8,600
Chargeable 6,000 6,720 6,720 6,210 7,800 8,000 41,45
expenses* 0
Total cost 13,70 14,52 15,02 13,91 16,30 16,80 90,25
0 0 0 0 0 0 0
Profit per batch 3,100 1,480 2,580 490 (300) 800 8,150
Total cost per piece 65.2 72.6 68.3 77.3 81.5 76.4 73.4
Profit per piece 14.8 7.4 11.7 2.7 (1.5) 3.6 6.6
Overall position of the order for 1,200 pieces
Sales value of 1,200 pieces @ ` 80 per piece ` 96,000
Total cost of 1,200 pieces @ ` 73.4 per piece ` 88,080
Profit ` 7,920
Chargeable expenses
*  Direct labour hours for batch
Direct labour hour for the month
8. School Contract Account
Particulars (`) Particulars (`)
To Plant 2,40,000 By Material returned 47,000
To Hire of plant 77,000 By Plant c/d 1,65,000
To Materials 6,62,000 By Materials c/d 50,000
To Direct wages 9,60,000 By WIP c/d:
Add: Accrued 40,000 10,00,000 Value of work certified 24,00,000
To Wages related costs 1,32,000 Cost of work not certified 1,80,000
To Direct expenses 34,000
To Supervisory staff:
Direct 90,000
18 INTERMEDIATE EXAMINATION: MAY, 2023

Indirect 20,000 1,10,000

To Regional office 50,000
expenses
To Head office expenses 30,000
To Surveyors’ fees 27,000
To Notional profit c/d 4,80,000
28,42,000 28,42,000
9. (i) Statement of Equivalent Production
Particulars Input Particulars Output Equivalent Production
Units Units Milk Labour & O.H.
% Units % Units
Opening WIP 13,500 Completed and 1,18,500 100 1,18,500 100 1,18,500
transferred to Process-II
Units 3,00,000 Normal Loss (55%* of 1,65,000 -- -- -- --
introduced 3,00,000)
Abnormal loss 3,000 100 3,000 80 2400
Closing WIP 27,000 100 27,000 80 21,600
3,13,500 3,13,500 1,48,500 1,42,500
* 100 litre of milk extracts only 45 litre of standardized milk. Thus, normal loss = 100 – 45 = 55%

(ii) Statement showing cost for each element

Particulars Milk (`) Labour (`) Overhead (`) Total (`)
Cost of opening work-in- 1,50,000 45,000 1,35,000 3,30,000
process
Cost incurred during the 15,00,000 6,00,000 18,00,000 39,00,000
month
Total cost: (A) 16,50,000 6,45,000 19,35,000 42,30,000
Equivalent units: (B) 1,48,500 1,42,500 1,42,500
Cost per equivalent unit: (C) 11.111 4.526 13.578 29.216
= (A ÷ B)
(iii) Statement of Distribution of cost
(`) (`)
1. Value of units completed and transferred (1,18,500 34,62,096
units × ` 29.216)
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

2. Value of Abnormal Loss: -

Milk (3,000 units × ` 11.111) 33,333
Labour (2400 units × ` 4.526) 10,863
Overheads (2400 units × ` 13.579) 32,590 76,786
3. Value of Closing W-I-P:
Milk (27,000 units × ` 11.111) 299997
Labour (21,600 units × ` 4.526) 97,762
Overheads (21,600 units × ` 13.579) 2,93,306 6,91,065
(iv) Process-I A/c
Particulars Units Amount Particulars Units Amount
(` ) (` )
To Opening W.I.P: By Normal Loss 1,65,000 --
Milk 13,500 1,50,000 By Abnormal Loss 3,000 76,839
(`.44 difference due
to approximation)
Labour -- 45,000 By Process-II A/c 1,18,500 34,62,096
Overheads -- 1,35,000 By Closing WIP 27,000 6,91,065
To Milk introduced 3,00,000 15,00,000
To Direct Labour 6,00,000
To Overheads 18,00,000
3,13,500 42,30,000 3,13,500 42,30,000

10. Working Note:

Apportionment of joint costs on the basis of Net Realisable Value method
Products Sales Value (`) Post separation Net Realisable Apportioned
Cost (`) Value (`) Cost (`)
A 3,12,50,000 31,25,000 2,81,25,000 67,74,563
(5,00,000 units x ` 62.50)
B 31,87,500 3,75,000 28,12,500 6,77,456
(75,000 units x ` 42.5)
C 18,75,000 1,25,000 17,50,000 4,21,528
(62,500 units x ` 30)
D 12,50,000 --- 12,50,000 3,01,092
(50,000 units x ` 25)
20 INTERMEDIATE EXAMINATION: MAY, 2023

E 93,75,000 3,75,000 90,00,000 21,67,860

(1,87,500 units x ` 50)
4,29,37,500 1,03,42,500

Total joint cost =Raw material costs + Manufacturing expenses = `89,75,000 +

`13,67,500 = `1,03,42,500
Apportioned joint cost = (Total Joint Cost/ Total Net Realisable value of each X Net
Realisable value of each product)
Apportioned joint cost for Product A = (1,03,42,500 / 4,29,37,500 X 2,81,25,000) =
`67,74,563.32
Similarly, the apportioned joint cost for products B, C, D and E are `6,77,456, `4,21,528,
`3,01,092 and `21,67,860 respectively.
(a) Statement showing income forecast of the company assum-ing that none of its
products are further processed.
Products
A (`) B (`) C (`) D (`) E (`) Total (`)
Sales revenue 2,12,50,000 24,37,500 12,50,000 12,50,000 65,62,500 3,27,50,000
(`42.5 × (` 32.5 × (` 20 × (` 25 × (` 35 ×
5,00,000) 75,000) 62,500) 50,000) 1,87,500)
Less: Apportioned
Costs (Refer
Working note) 67,74,563 6,77,456 4,21,528 3,01,092 21,67,860 1,03,42,500
1,44,75,437 17,60,044 8,28,472 9,48,908 43,94,640 2,24,07,500
Less: Fixed Cost 11,82,500
Profit 2,12,25,000

(b) Statement showing income forecast of the company: assuming that products A, B, C
and E are further processed (Refer to working note)
Products
A (`) B (` ) C (`) D (`) E (` ) Total (`)
A. Sales revenue 3,12,50,000 31,87,500 18,75,000 12,50,000 93,75,000 4,69,37,500
B. Apportioned 67,74,563 6,77,456 4,21,528 3,01,092 21,67,860 1,03,42,500
Costs
C. Further 31,25,000 3,75,000 1,25,000 - 3,75,000 40,00,000
processing cost
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

D. Total 98,99,563 10,52,456 5,46,528 3,01,092 25,42,860 1,43,42,500

processing cost
(B+ C)
E. Excess of sales 2,13,50,437 21,35,044 13,28,472 9,48,908 68,32,140 3,25,95,000
revenue (A-D)
F. Fixed Cost 11,82,500
G. Profit (E - F) 3,14,12,500

11. Total units generated 16,50,000 kWh.

Cost Statement of Panipat Thermal Power Station
Per annum (`) Per kWh. (`)
Fixed costs:
Plant supervision 4,35,000
Administration overheads 29,00,000
Insurance Charges 15,00,000
Depreciation (5% of ` 3,10,00,000 p.a.) 15,50,000
Total fixed cost: (A) 63,85,000 3.87
Variable costs:
Operating labour 21,75,000
Fuel Charges 8,00,000
Lubricants, spares and stores 5,80,000
Repairs & maintenance 7,25,000
Coal cost (Refer to working note) 11,19,643
Total variable cost: (B) 53,99,643 3.27
Total cost [(A) + (B)] 1,17,84,643 7.14
Working Note:
Coal cost (16,50,000 kWh. ÷ 7 kWh) × `4.75 per kg. = `11,19,643
12. Material Variance
Raw SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
Material (kg.) (WN-2)
(WN-1) ( `) ( `) (kg.) ( `) ( `) ( `) ( `)
DF 1879 50 93,950 1771 88,550 1800 90,000 40 72,000
CE 1410 35 49,350 1329 46,515 1300 45,500 30 39,000
3289 1,43,300 3,100 1,35,065 3100 1,35,500 1,11,000
22 INTERMEDIATE EXAMINATION: MAY, 2023

WN-1: Standard Quantity (SQ):

 1,600 kg. 
1879.365 or 1879 kg. =  × 2,960 kg. 
 0.9 × 2,800 kg. 
 1,200 kg. 
Raw Material DF =  × 2,960 kg. 
 0.9 × 2,800 kg. 
 1,200 kg. 
Raw Material CE = 1409.52 or 1410 kg.  × 3,100 kg. 
 2,800 kg. 
WN- 2: Revised Standard Quantity (RSQ):
 1,200 kg. 
Raw Material DF = 1,771.43 or 1,771 kg.  × 3,100 kg. 
 2,800 kg. 
Raw Material CE = 1,328.57 or 1,329 kg.
(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
{1,43,300 –1,11,000} = 32,300(F) (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ ×AP)
{1,35,500 – 1,11,000} = 24,500(F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
{1,35,065 – 1,35,500} = 435 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
{1,43,300 – 1,35,065} = 8,235 (F)

Labour Variances:
Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR
(WN-3) (`) (WN-4)
(` ) (` ) (` ) (` ) (` )
Skilled 2232 40 89,280 2289 91,560 2,400 96,000 35 84,000
Semiskilled 1785 25 44,625 1831 45,775 1720 43,000 20 34,400
4,017 hrs 1,33,905 4,120 1,37,335 4,120 1,39,000 1,18,400

WN- 3: Standard Hours (SH):

 0.95 x 2,000 hr 
Skilled labour = 2,231.746 or 2,232 hrs  x 2,960 kg 
 0.90 x 2,800 kg 
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

 0.95 x 1600 hr 
Semiskilled labour = 1785.397 or 1785 hrs  x 2,960 kg 
 0.90 x 2,800 kg 
WN- 4: Revised Standard Hours (RSH):
 2,000 hrs 
Skilled labour = 2,288.889 or 2,289 hrs. =  x 4,120 hrs 
 3,600 kg 
 1,600 hrs 
Semiskilled labour = 1831.11 or 1831 hrs. =  x 4,120 hrs 
 3,600 kg 
(e) Labour Cost Variance (Skilled + Semiskilled) = {(SH × SR) – (AH × AR)}
{1,33,905 – 1,18,400} =15,505 (F)
(f) Labour Efficiency Variance (Skilled + Semiskilled) = {(SH × SR) – (AH × SR)}
{1,33,905 – 1,39,000} = 5,095 (A)
(g) Labour Yield Variance (Skilled + Semiskilled) = {(SH × SR) – (RSH × SR)}
= {1,33,905 – 1,37,335} = 3,430 (A)
Sales per unit - Variable Cost per unit
13. (a) P/V ratio: 100
Selling price per unit
1000 − 800
=  100
1000
200
=  100 = 20%
1000
Annual fixed cost
Annual BEP in units:
Contribution per unit

` 23,00,000
= = 11,500 units
` 200
Annual fixed cost
Annual BEP in value:
P / V ratio
` 23,00,000
= `1,15,00,000
` 20%
(b) Revised P/V ratio and BEP :
commission on sales per unit= 1% of 1,000= `10
24 INTERMEDIATE EXAMINATION: MAY, 2023

1000 − ( 750 + 50 + 10 )
So, P/V ratio :
1000
190
=  100 = 19%
1000
Annual fixed cost
BEP in terms of units:
Contribution per unit

23,00,000
= = 12,106 units
190
Annual fixed cost
BEP in terms of value:
P/V
23,00,000
= = `1,21,05,263
19%
(c) Break-even point under fixed salary plan:
Contribution per unit 1000 − 750 250
P/V ratio = =  100 = ×100 =25%
Selling price per unit 1000 1000

Revised fixed cost :

Original fixed cost ` 23,00,000
Proposed fixed salary ` 9,00,000
Total ` 32,00,000
Annual fixed cost 32,00,000
BEP in terms of units: = = 12,800 units
Contribution per unit 250
Annual fixed cost 32,00,000
BEP in terms of value: = = 1,28,00,000
P / v ratio 25%
(d) Annual break-even point under requirement (a) is 11,500 units.
Margin of safety at sales volume of 20,000 unit of bags (20,000 – 11,500) = 8500
units
Contribution on sales beyond break-even sales:
Revised contribution per unit: 200 – (2% of 1000) = 180
Profit = Margin of safety (in units) × Contribution per unit
= 8500 × 180 = ` 15,30,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 25

14. Number of days in budget period = 4 weeks × 6 days = 24 days

Number of units to be produced
Product-A (units) Product-B (units)
Budgeted Sales 4,080 6,120
Add: Closing stock 850 1275
 4,080 units   6,120 units 
  5 days    5 days 
 24 days   24 days 
Less: Opening stock 550 350
4,380 7,045
(i) Material Purchase
Budget
Material-X (Kg.) Material-Y (Kg.)
Material required:
Product-A 37,230 29,784
(4,380 units × 8.5 kg.) (4,380 units × 6.8 kg.)
Product-B 35,930 71,859
(7,045 units × 5.1 kg.) (7,045 units × 10.2 kg.)
73,160 1,01,643
Add: Closing stock 30,483 21,176
73,160 kgs. 1,01,643 kgs.
( × 10 days) ( × 5 days)
24 days 24 days
Less: Opening stock 1,200 600
Quantity to be purchased 1,02,443 1,22,219
Rate per kg. of Material 8 10
Total Cost 8,19,541 12,22,186
(ii) Wages Budget
Product-A (Hours) Product-B (Hours)
Units to be produced 4,380 7,045
Standard hours allowed per 5.1 8.5
unit
Total Standard Hours 22,338 59,883
allowed
26 INTERMEDIATE EXAMINATION: MAY, 2023

Productive hours required 22,338 hours 59,883 hours

for production  26,280  70,450
85% 85%
Add: Non-Productive down 3942 10568
time hours (15% of 26,280 hours) (15% of 70,450 hours)
Hours to be paid 30,222 81,018
Total Hours to be paid = 1,11,240
Hours to be paid at normal 72000
rate (4 weeks × 45 hours ×
400 workers) =
Hours to be paid at premium 39,240
rate
Total wages to be paid = ` 21,60,000 + ` 20,60,100 = ` 42,20,100
= (72,000 hours × `30 +
39,240 hours × ` 52.5)
15. (a) Cost units are as follows:
Industry or Product Cost Unit Basis
Transport Passenger- kilometer
Power Kilo-watt hour (kWh)
Hotel Room
Hospitals Patient day
Steel Ton
Coal mining Tonne/ton
Professional services Chargeable hour, job, contract
Gas Cubic feet
Engineering Contract, job
Oil Barrel, tonne, litre

(b) Differences between Job costing and Batch costing:

Sr. No Job Costing Batch Costing
1. Method of costing used for non- Homogeneous products
standard and non- repetitive produced in a continuous
products produced as per customer production flow in lots.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 27

specifications and against specific

orders.
2. Cost determined for each Job. Cost determined in aggregate
for the entire Batch and then
arrived at on per unit basis.
3. Jobs are different from each other Products produced in a batch
and independent of each other. are homogeneous and lack of
Each Job is unique. individuality.

(c) Essential pre-requisites for Integrated Accounts: The essential pre-requisites for
integrated accounts include the following steps-
1. The management’s decision about the extent of integration of the two sets of
books. Some concerns find it useful to integrate up to the stage of prime cost or
factory cost while other prefers full integration of the entire accounting records.
2. A suitable coding system must be made available so as to serve the accounting
purposes of financial and cost accounts.
3. An agreed routine, with regard to the treatment of provision for accruals, prepaid
expenses, other adjustment necessary for preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial
and cost aspects of the accounts and an efficient processing of accounting
documents should be ensured.
(d)
S. No. Cost Control Cost Reduction
1 Cost control aims at maintaining Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to
improvise them continuously
2 Cost control seeks to attain lowest Cost reduction recognises no
possible cost under existing condition as permanent, since a
conditions. change will result in lower cost.
3 In case of cost control, emphasis In case of cost reduction, it is on
is on past and present present and future.
4 Cost control is a preventive Cost reduction is a corrective
function function. It operates even when an
efficient cost control system exists.
5 Cost control ends when targets Cost reduction has no visible end and
are achieved. is a continuous process.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. M/s Tanishka Materials Private Limited produces a product which names “ESS”. The
consumption of raw material for the production of “ESS” is 210 Kgs to 350 Kgs per week.
Other information is as follows:
Procurement Time: 5 to 9 Days
Purchase price of Raw Materials: ` 100 per kg
Ordering Cost per Order: ` 200
Storage Cost: 1% per month plus ` 2 per unit per annum
Consider 365 days a year.
You are required to CALCULATE:
(a) Economic Order Quantity
(b) Re-Order Level (ROL)
(c) Maximum Stock Level
(d) Minimum Stock Level
(e) Average Stock Level
(f) Number of Orders to be placed per year
(g) Total Inventory Cost
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in
two orders, whether offer is acceptable?
(i) If the answer is no, what should be the counteroffer w.r.t. percentage of discount?
Employee Cost
2. HR Ltd. is progressing in its legal industry. One of its trainee executives, Mr. H, in the
Personnel department has calculated labour turnover rate 24.92% for the last year using
Flux method.
Following is the data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end
Records clerk 810 1,620 90 2,340
Human Resource Manager ? 30 90 60
Legal Secretary ? 90 --- ?

© The Institute of Chartered Accountants of India

 2 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

Staff Attorney ? 30 30 ?
Associate Attorney ? 30 --- 45
Senior Staff Attorney 6 --- --- 18
Senior Records clerk 12 --- --- 51
Litigation attorney ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Staff Attorney --- 12 --- ---
Senior Records clerk --- 39 --- ---
Employees transferred to the Subsidiary Company
Litigation attorney --- --- 90 ---
Associate Attorney --- --- 15 ---
At the beginning of the year there were total 1,158 employees on the payroll of the
company. The opening strength of the Legal Secretary, Staff Attorney and Associate
Attorney were in the ratio of 3 : 3 : 2.
The company has decided to abandon the post of Litigation attorney and consequently all
the Litigation attorneys were transferred to the subsidiary company.
The company and its subsidiary are maintaining separate set of books of account and
separate Personnel Department.
You are required to:
(a) CALCULATE Labour Turnover rate using Replacement method and Separation
method.
(b) VERIFY the Labour turnover rate calculated under Flux method by Mr. H
Overheads: Absorption Costing Method
3. SE Limited manufactures two products- A and B. The company had budgeted factory
overheads amounting to ` 36,72,000 and budgeted direct labour hour of 1,80,000 hours.
The company uses pre-determined overhead recovery rate for product costing purposes.
The department-wise break-up of the overheads and direct labour hours were as follows:
Particulars Budgeted Budgeted direct Rate per direct
overheads labour hours labour hour
Department Pie ` 25,92,000 90,000 hours ` 28.80
Department Qui ` 10,80,000 90,000 hours ` 12.00
Total ` 36,72,000 1,80,000 hours

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

Additional Information:
Each unit of product A requires 4 hours in department Pie and 1 hour in department Qui.
Also, each unit of product B requires 1 hour in department Pie and 4 hours in department
Qui.
This was the first year of the company's operation. There was no WIP at the end of the
year. However, 1,800 and 5,400 units of Products A and B were on hand at the end of the
year.
The budgeted activity has been attained by the company. You are required to:
(i) DETERMINE the production and sales quantities of both products 'A' and 'B' for the
above year.
(ii) ASCERTAIN the effect of using a pre-determined overhead rate instead of
department-wise overhead rates on the company's income due to its effect on stock
value.
(iii) CALCULATE the difference in the selling price due to the use of pre-determined
overhead rate instead of using department-wise overhead rates. Assume that the
direct costs (material and labour costs) per unit of products A and B were ` 25 and `
40 respectively and the selling price is fixed by adding 40% over and above these
costs to cover profit and selling and administration overhead.
Activity Based Costing
4. The profit margin of BABY Hairclips Company were over 20% of sales producing BROWN
and BLACK hairclips.
During the last year, GREEN hairclips had been introduced at 10% premium in selling price
after the introduction of YELLOW hairclips earlier five years back at 10/3% premium.
However, the manager of the company is disheartened with the sales figure for the current
financial year as follows:
Traditional Income Statement (in `)
Brown Black Yellow Green Total
Sales 1,50,00,000 1,20,00,000 27,90,000 3,30,000 3,01,20,000
Material Costs 50,00,000 40,00,000 9,36,000 1,10,000 1,00,46,000
Direct Labour 20,00,000 16,00,000 3,60,000 40,000 40,00,000
Overhead (3 times of 60,00,000 48,00,000 10,80,000 1,20,000 1,20,00,000
direct labour)
Total Operating 20,00,000 16,00,000 4,14,000 60,000 40,74,000
Income
Return on Sales (in 13.3% 13.3% 14.8% 18.2% 13.5%
%)

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 4 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

It is a known fact that customers are ready to pay premium amount for YELLOW and
GREEN hairclips for their attractiveness; and the percentage returns are also high on new
products.
At present, all of the Plant’s indirect expenses are allocated to the products at 3 times of
the direct labour expenses. However, the manager is interested in allocating indirect
expenses on the basis of activity cost to reveal real earner.
He provides support expenses category-wise as follows:
Support Expenses (`)
Indirect Labour 40,00,000
Labour Incentives 32,00,000
Computer Systems 20,00,000
Machinery depreciation 16,00,000
Machine maintenance 8,00,000
Energy for machinery 4,00,000
Total 1,20,00,000
He provides following additional information for accomplishment of his interest:
Incentives to be allocated @ 40% of labour expenses (both direct and indirect).
Indirect labours are involved mainly in three activities. About half of indirect labour is
involved in handling production runs. Another 40% is required just for the physical
changeover from one color hairclip to another because YELLOW hairclips require
substantial labour for preparing the machine as compared to other colo ur hairclips.
Remaining 10% of the time is spend for maintaining records of the products in four parts.
Another amount spent on computer system of ` 20,00,000 is for maintenance of
documents relating to production runs and record keeping of the four products. In
aggregate, approx.. 80% of the amount expend is involved in the production run activity
and approx.. 20% is used to keep records of the products in four parts.
Other overhead expenses i.e. machinery depreciation, machine maintenance and energy
for machinery are incurred to supply machine capacity to produce all the hairclips (practical
capability of 20,000 hours).
Activity Cost Drivers:
Particulars Brown Black Yellow Green Total
Sales Volume (units) 1,00,000 80,000 18,000 2,000 2,00,000
Selling Price (`) 150 150 155 165
Material cost (`) 50 50 52 55

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

Machine hours per unit (Hrs) 0.10 0.10 0.10 0.10 20,000
Production runs 100 100 76 24 300
Setup time per run (Hrs) 4 1 6 4
You are required to –
(i) CALCULATE operating income and operating income as per percentage of sales
using activity-based costing system.
(ii) STATE the reasons for different operating income under traditional income system
and activity-based costing system.
Cost Sheet
5. CT Limited is engaged in producing medical equipment. It has furnished following details
related to its products produced during a month:
Units Amount (`)
Raw materials
Opening stock 1,000 90,00,000
Purchases 49,000 44,10,00,000
Closing stock 1,750 1,57,50,000
Works-in-progress
Opening 2,000 1,75,50,000
Closing 1,000 94,50,000
Direct employees' wages, allowances etc. 6,88,50,000
Primary packaging cost (per unit) 1,440
R&D expenses & Quality control expenses 2,10,60,000
Consumable stores, depreciation on plant 3,42,00,000
Administrative overheads related to production 3,15,00,000
Selling expenses 4,84,30,800
Royalty paid for production 3,64,50,000
Cost of web-site (for online sale) maintenance 60,75,000
Secondary packaging cost (per unit) 225
There was a normal scrap of 250 units of direct material which realized ` 5,400 per unit.
The entire finished product was sold at a profit margin of 20% on sales.
You are required to PREPARE a cost sheet showing:
(i) Prime cost

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 6 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

(ii) Gross works cost

(iii) Factory costs
(iv) Cost of production
(v) Profit
(vi) Sales
Cost Accounting System
6. The financial books of a company reveal the following data for the financial year ending on
31st March, 2022:
(`)
Opening Stock:
Finished goods 875 units 1,48,750
Work-in-process 64,000
01.04.2021 to 31.3.2022
Raw materials consumed 15,60,000
Direct Labour 9,00,000
Factory overheads 6,00,000
Goodwill written off 2,00,000
Administration overheads 5,90,000
Dividend paid 1,70,000
Bad Debts 24,000
Selling and Distribution Overheads 1,22,000
Interest received 90,000
Rent received 36,000
Sales 14,500 units 41,60,000
Closing Stock: Finished goods 375 units 82,500
Work-in-process 77,334
The cost records provide as under:
➢ Factory overheads are absorbed at 60% of direct wages.
➢ Administration overheads are recovered at 20% of factory cost.
➢ Selling and distribution overheads are charged at ` 8 per unit sold.
➢ Opening Stock of finished goods is valued at ` 208 per unit.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

➢ The company values work-in-process at factory cost for both Financial and Cost Profit
Reporting.
Required:
(i) PREPARE statements for the year ended 31 st March, 2022 showing-
➢ the profit as per financial records
➢ the profit as per costing records.
(ii) PRESENT a statement reconciling the profit as per costing records with the profit as
per Financial Records.
Batch Costing
7. PS Ltd. manufactures articles in predetermined lots simultaneously. The following costs
have been incurred for Batch No. ‘PS143’ in the month of March, 2022:
Units produced 1,000 units
Direct materials cost ` 2,00,000
Direct Labour -
Department A 800 labour hours @ ` 100 per hour.
Department B 1,400 labour hours @ ` 120 per hour.
Factory overheads are absorbed on labour hour basis and the rates are:
Department A @ ` 140 per hour.
Department B @ ` 80 per hour.
Administrative overheads are absorbed at 10% of selling price.
The firm expects 25% gross profit (sales value minus factory cost) for determining the
selling price.
You are required to CALCULATE the selling price per unit of Batch No. 'PS143'.
Contract Costing
8. A contractor prepares his accounts for the year ending 31 st March each year. He
commenced a contract on 1 st July, 2021.
The following information relates to the contract as on 31 st March, 2022:
(`)
Material issued 12,55,000
Wages 28,28,000
Salary to Foreman 4,06,500

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 8 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

A machine costing ` 13,00,000 has been on the site for 4.8 months, its working life is
estimated at 7 years and its final scrap value at ` 75,000.
A supervisor, who is paid ` 40,000 p.m. has devoted one-half of his time to this contract.
All other expenses and administration charges amount to ` 6,82,500.
Material in hand at site costs ` 1,77,000 on 31st March, 2022.
The contract price is ` 1,00,00,000. On 31st March, 2022 2/3rd of the contract was
completed. The architect issued certificates covering 50% of the contract price, and the
contractor had been paid ` 37,50,000 on account.
PREPARE Contract A/c and show the notional profit or loss as on 31st March, 202 2.
Process Costing
9. SM Pvt. Ltd. manufactures their products in three consecutive processes. The details are
as below:
Process A Process B Process C
Transferred to next Process 60% 50%
Transferred to warehouse for sale 40% 50% 100%
In each process, there is a weight loss of 2% and scrap of 8% of input of each process.
The realizable value of scrap of each process is as below:
Process A @ ` 2 per ton
Process B @ ` 4 per ton
Process C @ ` 6 per ton.
The following particulars relate to April, 2022:
Process A Process B Process C
Materials used (in Tons) 1,000 260 140
Rate per ton ` 20 ` 15 ` 10
Direct Wages ` 4,000 ` 3,000 ` 2,000
Direct Expenses ` 3,160 ` 2,356 ` 1,340
PREPARE Process Accounts- A, B and C & calculate cost per ton at each process.
Joint Products & By Products
10. JP Ltd. uses joint production process that produces three products at the split -off point.
Joint production costs during the month of July, 2022 were ` 33,60,000.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

Product information for the month of July is as follows:

Particulars Product A Product B Product C
Units produced 3,000 6,000 9,000
Sales prices:
At the split-off ` 200
After further processing ` 300 ` 350 ` 100
Costs to process after split-off ` 6,00,000 ` 6,00,000 ` 6,00,000
Other information is as follows:
Product C is a by-product and the company accounts for the by-product at net realizable
value as a reduction of joint cost. Further, Product B & C must be processed further before
they can be sold. FIND OUT the joint cost allocated to Product A in the month of July if
joint cost allocation is based on Net Realizable Value.
Service Costing
11. Royal Transport Services runs fleet of buses within the limits of Jaipur city. The following
are the details which were incurred by the company during October, 2021:
(`)
Cost of each Bus 24,00,000
Garage Rent 1,00,000
Insurance 25,000
Road tax 20,000
Manager’s Salary 60,000
Assistant’s Salary (Two) 32,000 each
Supervisor’s Salary (Three) 24,000 each
Driver’s Salary (Twenty-Five) 20,000 each
Cleaner’s Salary (Twenty) 5,000 each
Office Staff’s Salary 1,00,000
Consumables 1,20,000
Repairs & Maintenance 90,000
Other Fixed Expenses 72,000
Diesel (10 Kms per Litre) 80 per litre
Oils & Lubricants 1,45,000

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 10 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

Tyres and tubes 35,000

Depreciation 10% p.a. on Cost
Other details are as below:
Capacity
12 Buses 60 Passengers
13 Buses 50 Passengers
Each bus makes 4 round trips a day covering a distance of 10 Kilometers in each trip (One
Way) on an average. During the trips 80% of the seats are occupied. The annual records
show that 5 buses are generally required to be kept away from roods each day for repairs.
You are required to CALCULATE cost per passenger-km.
Cost sheet to be prepared on the basis of 25 buses.
Standard Costing
12. Ahaan Limited operates a system of standard costing in respect of one of its products 'AH1'
which is manufactured within a single cost centre. Details of standard per unit are as
follows:
• The standard material input is 20 kilograms at a standard price of ` 24 per kilogram.
• The standard wage rate is ` 72 per hour and 5 hours are allowed to produce one unit.
• Fixed production overhead is absorbed at the rate of 100% of wages cost.
During the month of April 2022, the following was incurred:
• Actual price paid for material purchased @ ` 22 per kilogram.
• Total direct wages cost was ` 43,92,000
• Fixed production overhead cost incurred was ` 45,00,000
Analysis of variances was as follows:
Variances Favourable Adverse
Direct material price ` 4,80,000 -
Direct material usage ` 48,000
Direct labour rate - ` 69,120
Direct labour efficiency ` 33,120 -
Fixed production overhead expenditure ` 1,80,000
You are required to CALCULATE the following for the month of April, 2022
(i) Material cost variance

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

(ii) Budgeted output (in units)

(iii) Quantity of raw materials purchased (in kilograms)
(iv) Actual output (in units)
(v) Actual hours worked
(vi) Actual wage rate per labour hour
(vii) Labour cost variance
(viii) Production overhead cost variance
Marginal Costing
13. (a) RPP Manufacturers is approached by an international customer for one-time special
order similar to one offered to its domestic customers. Per unit data for sales to
regular customers is provided below:
Direct material ` 693
Direct labour ` 315
Variable manufacturing support ` 504
Fixed manufacturing support ` 1092
Total manufacturing costs ` 2604
Markup (50%) ` 1302
Targeted selling price ` 3906
It is provided that RPP Manufacturers has excess capacity.
Required:
(i) WHAT is the full cost of the product per unit?
(ii) WHAT is the contribution margin per unit?
(iii) WHICH costs are relevant for making the decision regarding this one-time
special order? WHY?
(iv) For RPP Manufacturers, WHAT is the minimum acceptable price of this one-
time-special order only
(v) For this one-time-only special order, SHOULD RPP Manufacturers consider a
price of ` 2100 per unit? WHY or why not?

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 12 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

(b) The lab corner of Newlife Hospital Trust operates two types of specialist MRI scanning
machine- MR10 and MR59. Following details are estimated for the next period:
Machine MR10 MR59
Running hours 1,100 2,000
(`) (`)
Variable running costs excluding special technology 68,750 1,60,000
Fixed Costs 50,000 2,43,750
A brain scan is normally carried out on machine type MR10. This task uses special
technology costing ` 100 each and takes four hours of machine time. Because of the
nature of the process, around 10% of the scans produce blurred and therefore useless
results.
Required:
(i) CALCULATE the total cost of a satisfactory brain scan on machine type MR10.
(ii) Brain scans can also be done on machine type MR59 and would take only 1.8
hours per scan with a reduced reject rate of 6%. However, the cost of the special
technology would be ` 137.50 per scan. ADVISE which type should be used,
assuming sufficient capacity is available on both types of machines. Consider
fixed costs will remain unchanged.
Budget and Budgetary Control
14. Following information is available for DK and Co.:
Standard working hours 9 hours per day of 5 days per week
Maximum capacity 50 employees
Actual working 40 employees
Actual hours expected to be worked per four week 7,200 hours
Std. hours expected to be earned per four weeks 9,000 hours
Actual hours worked in the four- week period 6,750 hours
Standard hours earned in the four- week period 7,875 hours.
The related period is of 4 weeks. In this period there was a one special day holiday due to
national event.
You are required to CALCULATE the following ratios:
(i) Efficiency Ratio
(ii) Activity Ratio

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

(iii) Calendar Ratio

(iv) Standard Capacity Usage Ratio
(v) Actual Capacity Usage Ratio
(vi) Actual Usage of Budgeted Capacity Ratio
Miscellaneous
15. (a) Health Wealth Hospital is interested in estimating the cost for each patient stay. The
hospital offers general health care facility i.e. only basic services.
You are required to:
(i) CLASSIFY each of the following costs as either direct or indirect with respect to
each patient.
(ii) CLASSIFY each of the following costs as either fixed or variable with respect to
hospital costs per day.
Direct Indirect Fixed Variable
Electronic monitoring
Meals for patients
Nurses' salaries _
Parking maintenance
Security
(b) Differentiate between Cost Control and Cost Reduction.
(c) Though Cost Accounting and Management Accounting is used synonymously but
there are a few differences. Elaborate those differences.
(d) What are cost units? Write the cost unit basis against each of the following
Industry/Product-Automobile, Steel, Cement, Chemicals, Power and Transport.

SUGGESTED ANSWERS

1. As procurement time is given in days, consumption should also be calculated in days:

350
Maximum Consumption per Day: = 50 Kgs
7
210
Minimum Consumption per Day: = 30 Kgs.
7
(50+30)
Average Consumption per Day: = 40 Kgs
2

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 14 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

(a) Calculation of Economic Order Quantity (EOQ)

Annual consumption of Raw Materials (A): 40 Kgs x 365 days = 14,600 Kgs
Storage or Carrying Cost per unit per annum (C):(` 100 x 1% x 12 months) + ` 2
= ` 14
Ordering Cost (O): ` 200 per Order
2× A ×O
EOQ =
C

= 2  14,600  200 = 646 Kgs.

14

(b) Re-Order Level (ROL) = (Maximum consumption Rate × Maximum

Procurement Time)
= 50 kgs per day × 9 days
= 450 kgs
(c) Maximum Stock Level = Recorder Level + Recorder Quantity – (Minimum
Consumption Rate × Minimum Procurement Time)
= 450 kgs + 646 kgs - (30 kgs X 5 days)
= 946 kgs
(d) Minimum Stock Level = Recorder Level – (Average consumption Rate ×
Average Procurement Time)
= 450 kgs – (40 kgs X 7 days)
= 170 kgs
Maximum Stock Level + Minimum Stock Level
(e) Average Stock Level =
2
946 kgs + 170 kgs
=
2
= 558 kgs
(f) Number of Orders to be placed per year
Annual Consumption of Raw Materials
=
EOQ
14600 kgs
=
646 kgs

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

= 22.60 Orders or 23 Orders

(g) Total Inventory Cost
Cost of Materials (A x Purchase Price) (14600 kgs x ` 100)= ` 14,60,000
Total Ordering Cost (No. of Orders x O) (23 Orders x 200) = ` 4,600
Total Carrying Cost (EOQ / 2 x C) (646 kgs / 2 x ` 14) = ` 4,522
Total Inventory Cost ` 14,69,122
(h) If the supplier is willing to offer 1% discount on purchase of total annual
quantity in two orders:
Offer Price = ` 100 x 99% = ` 99
Revised Carrying Cost = (` 99 x 1% x 12 months) + `2 = ` 13.88
Revised Order Quantity = 14600 kgs / 2 Orders = 7300 kgs
Total Inventory Cost at Offer Price
Cost of Materials (A x Purchase Price) (14600 kgs x ` 99) = ` 14,45,400
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ` 400
Total Carrying Cost (EOQ / 2 x C) (7300 kgs / 2 x `13.88) = ` 50,662
Total Inventory Cost ` 14,96,462
Advice: As total inventory cost at offer price is ` 27,340 (14,96,462 – 14,69,122)
higher, offer should not be accepted.
(i) Counter-offer:
Let Discount Rate = z%
Counter-Offer Price = ` 100 – z% = ` 100 – z
Revised Carrying Cost = [(` 100 – z) x 1% x 12 months] + ` 2 = ` 12 -0.12z + ` 2
= ` 14 – 0.12z
Total Inventory Cost at Counter-Offer Price
Cost of Materials (A x Purchase Price) [14600 kgs x (` 100 – z)] = ` 14,60,000 –
14,600z
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ` 400
Total Carrying Cost (EOQ / 2 x C) [7300 kgs / 2 x (` 14 – 0.12z)] = ` 51,100 – 438z
Total Inventory Cost ` 15,11,500 – 15038z

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 16 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

` 14,69,122 = ` 15,11,500 – 15038z

Or 15038z = 42,378
Or z = 2.82
Therefore, discount should be at least 2.82% in offer price.
2. Working Notes:
(i) Calculation of no. of employees at the beginning and end of the year
At the Beginning At the end
of the year of the year
Records clerk 810 2,340
Human Resource Manager [Left- 90 + 120 60
Closing- 60 – Joined- 30]
Legal Secretary* 45 135
Staff Attorney* 45 45
Associate Attorney* 30 45
Senior Staff Attorney 6 18
Senior Records clerk 12 51
Litigation attorney 90 0
Total 1,158 2,694
(*) At the beginning of the year:
Strength of Legal Secretary, Staff Attorney and Associate Attorney =
[1158 – {810 + 120 + 6 + 12 + 90} employees] or [1158 – 1038 = 120 employees]
3 3
[{Legal Secretary - 120 × = 45, Staff Attorney - 120 × = 45 & Associate Attorney
8 8
2
- 120 × 8 = 30} employees]
At the end of the year:
[Legal Secretary -(Opening 45 + 90 Joining) = 135; Staff Attorney - (Opening 45 + 30
Joined – 30 Left) = 45]
(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Recruitment Replacement Total
Joining
Records clerk 90 1,530 90 1,620
Human Resource --
Manager 90 30 30

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

Legal Secretary -- 90 -- 90
Staff Attorney 30 -- 30 30
Associate
Attorney 15 15 15 30
Senior Staff -- --
Attorney 12 12
Senior Records -- --
clerk 39 39
Litigation -- -- --
attorney 90
Total 315 1,686 165 1,851
(Since, HR Ltd. and its subsidiary are maintaining separate Personnel Department,
so transfer-in and transfer-out are treated as recruitment and separation
respectively.)
(a) Calculation of Labour Turnover rate:
No.of employeesreplacedduringthe year
Replacement Method = 100
Averageno.of employeesonroll
165 165
= ×100 = ×100= 8.57%
(1,158+2,694)/2 1,926
No.of employees separatedduringthe year
Separation Method = 100
Averageno.of employeesonroll
315
= ×100= 16.36%
1,926
(b) Labour Turnover rate under Flux Method:
No.of employees(Joined + Separated)duringthe year
= 10
Averageno.of employeesonroll
No. of employees (Replaced + New recruited + Separated) during the year
= ×100
Average no. of employees on roll
1,851+315
= ×100= 112.46%
1,926
Labour Turnover rate calculated by Mr. H is incorrect as it seems he has not
taken the No. of new recruitment while calculating the labour turnover rate under
Flux method.

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 18 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

3. (i) Computation of production and sales quantities:

The products processing times are as under –
Product A B Total
Department Pie 4 hours 1 hour 90,000 hours
Department Qui 1 hour 4 hours 90,000 hours

Let X and Y be the number of units (production quantities) of the two products.
Converting these into equations, we have –
4X + Y = 90,000 &
X + 4Y = 90,000
Solving the above, we get X = 18,000; Y = 18,000
Hence, the Production and Sales Quantities are determined as under –
Product Production Quantity Closing Stock Sales Quantity
(Given) (Balancing Figure)
A 18,000 units 1,800 units 16,200 units
B 18,000 units 5,400 units 12,600 units

(ii) Effect of using pre-determined rate of overheads on the company's profit

Product Closing Overhead Overhead included Difference in
Stock included using using department overhead in
Quantity pre- rate closing stock
determined value / Effect
rate on closing
stock value
A 1,800 1,800 x 5 hours Pie = 1,800 units x 4 (-) ` 45,360
units x ` 20.40 hours x ` 28.80
= ` 1,83,600 = ` 2,07,360
Qui = 1,800 units x 1
hour x ` 12
= ` 21,600
B 5,400 5,400 x 5 hours Pie = 5,400 units x 1 (+) ` 1,36,080
units x ` 20.40 hour x ` 28.80
= ` 5,50,800 = ` 1,55,520

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

Qui = 5,400 units x 4

hours x `12
= ` 2,59,200
Total ` 7,34,400 ` 6,43,680 (+) ` 90,720
Use of pre-determined overhead rate has resulted in over valuation of stock by
` 90,720 due to which the company's income would be affected (increase) by
` 90,720. Profit would be affected only to the extent of Overhead contained in closing
finished goods and closing WIP, if any.
(iii) Effect of using pre-determined on the products' selling prices
Particulars Product A Product B
Selling Price per unit if pre-determined `177.80 ` 198.80
overhead rate is used
Selling Price per unit if department wise rate ` 213.08 `163.52
is used
Difference ` 35.28 ` 35.28
Under-Priced Over-Priced
Workings:
` 36,72,000
(1) Pre-determined overhead recovery rate = = ` 20.40 per direct labour
1,80,000 hours
hour
(2) If pre-determined recovery rate is used
Particulars Product A in ` Product B in `
Materials & Labour 25.00 40.00
Add: Production Overhead 102.00 102.00
A = 5 hours x ` 20.40 per hour
B = 5 hours x ` 20.40 per hour
Cost of production 127.00 142.00
Add: 40% of margin 50.80 56.80
177.80 198.50
(3) If department-wise recovery rate is used
Particulars Product A in ` Product B in `
Materials & Labour 25.00 40.00
Add: Production Overhead 127.20 76.80

© The Institute of Chartered Accountants of India

 20 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

A= Pie = 4 hours x ` 28.80

Qui = 1 hour x ` 12
B= Pie = 1 hour x ` 28.80
Qui = 4 hours x ` 12
Cost of production 152.20 116.80
Add: 40% of margin 60.88 46.72
Selling Price per unit 213.08 163.52
4. (i) Calculation of operating income using Activity Based Costing
Calculation of Cost-Driver rate
Overhead Allocation Overhead Cost-driver Cost
Activity cost cost level driver rate
(`) (`) (`)
Indirect labour 56,00,000 50% 28,00,000 300 9,333.33
+ 40% for Production runs
incentives
40% 22,40,000 1052* 2,129.28
Setup hours
10% 5,60,000 4 1,40,000
Number of
parts
Computer 20,00,000 80% 16,00,000 300 5,333.33
Systems Production runs
20% 4,00,000 4 1,00,000
Number of
parts
Machinery 100% 16,00,000 20,000 80
depreciation 16,00,000 Machine hours
Machine 8,00,000 100% 8,00,000 20,000 40
Maintenance Machine hours
Energy for 4,00,000 100% 4,00,000 20,000 20
Machinery Machine hours
* (100 x 4) + (100 x 1) + (76 x 6) + (24 x 4)
= (400 + 100 + 456 + 96)
= 1052 setup hours

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

Activity Based Costing

Brown Black Red Green Total
Quantity (units) 1,00,000 80,000 18,000 2,000 2,00,000
(`) (`) (`) (`) (`)
Sales 1,50,00,000 1,20,00,000 27,90,000 3,30,000 3,01,20,000
Less: Material 50,00,000 40,00,000 9,36,000 1,10,000 1,00,46,000
Costs
Less: Direct 20,00,000 16,00,000 3,60,000 40,000 40,00,000
labour
Less: 40% 8,00,000 6,40,000 1,44,000 16,000 16,00,000
incentives on
direct labour
(A) 72,00,000 57,60,000 13,50,000 1,64,000 1,44,74,000
Overheads
Indirect labour +
incentives
- 50% based 9,33,333 9,33,333 7,09,334 2,24,000 28,00,000
on Production (9,333.33 x 100) (9,333.33 x (9,333.33 x (9,333.33
runs 100) 76) x 24)
- 40% based 8,51,711 2,12,928 9,70,951 2,04,410 22,40,000
on Setup (2,129.28 x 400) (2,129.28 x (2,129.28 x (2,129.28
hours 100) 456) x 96)
- 10% based 1,40,000 1,40,000 1,40,000 1,40,000 5,60,000
on number of (1,40,000 x 1)
parts
Computer
Systems
- 80% based 5,33,333 5,33,333 4,05,334 1,28,000 16,00,000
on Production (5,333.33 x 100) (5,333.33 x (5,333.33 x (5,333.33
runs 100) 76) x 24)
- 20% based 1,00,000 1,00,000 1,00,000 1,00,000 4,00,000
on number of (1,00,000 x 1)
parts
Machinery 8,00,000 6,40,000 1,44,000 16,000 16,00,000
depreciation (80 x 0.1 x (80 x 0.1 x (80 x 0.1 x (80 x 0.1 x
1,00,000) 80,000) 18,000) 2,000)
Machine 4,00,000 3,20,000 72,000 8,000 8,00,000
Maintenance (40 x 0.1 x (40 x 0.1 x (40 x 0.1 x (40 x 0.1 x
1,00,000) 80,000) 18,000) 2,000)

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 22 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

Energy for 2,00,000 1,60,000 36,000 4,000 4,00,000

Machinery (20 x 0.1 x (20 x 0.1 x (20 x 0.1 x (20 x 0.1 x
1,00,000) 80,000) 18,000) 2,000)
Total Overheads 39,58,377 30,39,594 25,77,619 8,24,410 1,04,00,000
(B)
Operating 32,41,623 27,20,406 (12,27,619) (6,60,410) 40,74,000
Income (A-B)
Return on Sales 21.61 22.67 (44.00) (200.12) 13.53
(%)

(ii) The difference in the operating income under the two systems is due to the
differences in the overheads borne by each of the products. The Activity Based Costs
appear to be more accurate.
5. Cost Sheet
Particulars Units Amount (`)
Material
Opening stock 1,000 90,00,000
Add: Purchases 49,000 44,10,00,000
Less: Closing stock (1,750) (1,57,50,000)
48,250 43,42,50,000
Less: Normal wastage of materials realized @ ` 5,400 (250) (13,50,000)
per unit
Material consumed 43,29,00,000
Direct employee's wages and allowances 6,88,50,000
Direct expenses- Royalty paid for production 3,64,50,000
Prime cost 48,000 53,82,00,000
Factory overheads - Consumable stores, depreciation etc. 3,42,00,000
Gross Works Cost 48,000 57,24,00,000
Add: Opening WIP 2,000 1,75,50,000
Less: Closing WIP (1,000) (94,50,000)
Factory/Works Cost 49,000 58,05,00,000
Administration Overheads related to production 3,15,00,000
R&D expenses and Quality control cost 2,10,60,000
Add: Primary packaging cost @ ` 1,440 per unit 7,05,60,000
Cost of production 49,000 70,36,20,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

Selling expenses 4,84,30,800

Cost of maintaining website for online sale 60,75,000
Secondary packaging cost @ ` 225 per unit 49,000 1,10,25,000
Cost of sales 76,91,50,800
Add: Profit @ 20% on sales or 25% of cost 19,22,87,700
Sales value 96,14,38,500
6. (i) Statement of Profit as per financial records
(for the year ended March 31, 2022)
(`) (`)
To Opening stock: By Sales 41,60,000
Finished Goods 1,48,750 By Closing stock:
Work-in-process 64,000 Finished Goods 82,500
To Raw materials consumed 15,60,000 Work-in-Process 77,334
To Direct labour 9,00,000 By Rent received 36,000
To Factory overheads 6,00,000 By Interest received 90,000
To Goodwill written off 2,00,000
To Administration overheads 5,90,000
To Selling & distribution 1,22,000
overheads
To Dividend paid 1,70,000
To Bad debts 24,000
To Profit 67,084
44,45,834 44,45,834
Statement of Profit as per costing records
(for the year ended March 31,2022)
(`) (`)
Sales revenue (14,500 units) (A) 41,60,000
Cost of Sales:
Opening stock (875 units x ` 208) 1,82,000
Add: Cost of production of 14,000 units 35,84,000
(Refer to Working Note 1& 2)

© The Institute of Chartered Accountants of India

 24 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

` 35,84,000 × 375 units (96,000)

Less: Closing stock ( )
14,000 units
Production cost of goods sold (14,500 units) 36,70,000
Selling & distribution overheads (14,500 units x ` 8) 1,16,000
Cost of sales: (B) 37,86,000
Profit: {(A) – (B)} 3,74,000
(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per
financial records)
(`) (`)
Profit as per Cost Accounts 3,74,000
Add: Admin. overheads over absorbed 7,333
(` 5,97,333 – ` 5,90,000)
Opening stock overvalued (` 1,82,000 – ` 1,48,750) 33,250
Interest received 90,000
Rent received 36,000 1,66,583
5,40,583
Less: Factory overheads under recovery 60,000
(` 6,00,000 – ` 5,40,000)
Selling & distribution overheads under recovery 6,000
(` 1,22,000 – ` 1,16,000)
Closing stock overvalued (` 96,000 – ` 82,500) 13,500
Goodwill written off 2,00,000
Dividend 1,70,000
Bad debts 24,000 4,73,500
Profit as per financial accounts 67,083

Working Notes:
1. Number of units produced Units
Sales 14,500
Add: Closing stock 375
Total 14,875
Less: Opening stock 875
Number of units produced 14,000

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 25

2. Cost Sheet
(`) (`)
Raw materials consumed 15,60,000
Direct labour 9,00,000
Prime cost 24,60,000
Factory overheads (60% of direct wages) 5,40,000
Factory cost 30,00,000
Add: Opening work-in-process 64,000
Less: Closing work-in-process 77,334
Factory cost of goods produced 29,86,666
Administration overheads (20% of factory cost) 5,97,333
Cost of production of 14,000 units 35,83,999
Total Cost of Production ` 35,83,999
Cost of production per unit: = = = ` 256
No. of units produced 14,000units
7. Statement showing selling price per unit of Batch number 'PS143'
Particulars Amount (`) Amount (`)
Direct Materials 2,00,000
Direct Labour
Department A 800 labour hours @ `100 per hour 80,000
Department B 1400 labour hours @ `120 per hour 1,68,000 2,48,000
Factory overheads
Department A 800 labour hours @ `140 per hour 1,12,000
Department B 1400 labour hours @ `80 per hour 1,12,000 2,24,000
Factory Cost 6,72,000
Add: Administrative overheads (10% of selling price) 89,600
(6,72,000/75% x 10%)
Cost of production 7,61,600
Add: Profit (15% of selling price) (6,72,000/75% x 15%) 1,34,400
Selling price of batch no 'PS143' 8,96,000
Selling price per unit (8,96,000 / 1000 units) 896

© The Institute of Chartered Accountants of India

 26 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

Alternatively, selling price calculation:- Selling price assume X

25% = (X – factory cost) / X
or 0.25 X = X- 6,72,000
or 0.75 X = 6,72,000
hence X = ` 8,96,000
8. Contract Account
Particulars (`) Particulars (`)
To Material issued 12,55,000 By Machine (Working note 1) 12,30,000
” Wages 28,28,000 ” Material (in hand) 1,77,000
” Foreman’s salary 4,06,500 ” Works cost (balancing 52,45,000
figure)
” Machine 13,00,000
” Supervisor’s salary 1,80,000
(` 40,000 × 9)/2
” Administrative 6,82,500
charges
66,52,000 66,52,000
” Works cost 52,45,000 ” Value of work certified 50,00,000
” Costing P&L A/c 10,66,250 ” Cost of work uncertified 13,11,250
(Notional profit) (Working Note 2)
63,11,250 63,11,250
Working notes:
1. Written down value of Machine:
` 13,00,000 - 75,000 4.8 months
Depreciation = × = ` 70,000
7 years 12 months
Hence the value of machine after the period of 4.8 months = ` 13,00,000 –
` 70,000 = ` 12,30,000
2. The cost of 2/3 rd of the contract is ` 52,45,000
` 52,45,000
 Cost of 100% of the contract is 2
×3 = ` 78,67,500

Cost of 50% of the contract which has been certified by the architect is ` 39,33,750.
Also, the cost of 1/3 rd of the contract, which has been completed but not certified by
the architect is ` 13,11,250.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 27

9. Process A Account
Particulars Tones Amount (`) Particulars Tones Amount (`)
To Materials 1,000 20,000 By Weight Loss 20 ---
To Wages 4,000 By Scrap 80 160
To Direct Expenses 3,160 By Process B 540 16,200
By Warehouse 360 10,800
Total 1,000 27,160 Total 1,000 27,160
27,160 – 160
Cost per Tonne =
1,000 – 20 – 80
27,000
=
900
= ` 30 per ton
Process B Account
Particulars Tones Amount (`) Particulars Tones Amount (`)
To Process A 540 16,200 By Weight Loss 16 ---
To Materials 260 3,900 By Scrap 64 256
To Wages 3,000 By Process C 360 12,600
To Direct Expenses 2,356 By Warehouse 360 12,600
Total 800 25,456 Total 800 25,456
25,456 – 256
Cost per Tonne =
800 – 16 – 64
25,200
=
720
= `35 per ton
Process C Account
Particulars Tones Amount (`) Particulars Tones Amount (`)
To Process B 360 12,600 By Weight Loss 10 ---
To Materials 140 1,400 By Scrap 40 240
To Wages 2,000 By Warehouse 450 17,100
To Direct Expenses 1,340
Total 500 17,340 Total 500 17,340

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 28 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

17,340 – 240
Cost per Tonne =
500 – 10 – 40
17,100
=
450
= ` 38 per ton
10. Product A
As the question says that "Products B and C must be processed further before they can
be sold", it means Product A can be sold at the split-off point.
Cost to process Product A after the split-off point = ` 6,00,000
Additional revenue to be earned by processing further = ` 3,00,000
(` 100 increase in selling price per
unit x 3,000 units)
Therefore, Product A will not be processed further, and the sales value at split -off for A will
be used for allocating the joint costs.
Sales value at the split-off for A = ` 6,00,000
(` 200 × 3,000 units)
Product B
Since Product B must be processed further, we use its net realizable value for the joint
cost allocation.
Net realizable value of Product B = ` 15,00,000
[(` 350 × 6,000 units) – ` 6,00,000
further processing costs]
Product C
Product C, the by-product, must also be processed further to be sold.
Net realizable value of Product C = ` 3,00,000
[(` 100 × 9,000 units) – ` 6,00,000
in further processing costs]
Joint Cost Allocation
Joint production cost = ` 33,60,000

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 29

Since, by-product C is accounted for as a reduction to the joint costs, the joint costs to be
allocated
= ` 30,60,000
(` 33,60,000 - ` 3,00,000 NRV of Product C)
Allocation of joint costs between Product A and B will be on the basis of ` 6,00,000:
` 15,00,000
` 6,00,000
Joint Cost allocated to Product A = ` 30,60,000 x = ` 8,74,286
` 21,00,000
11. Operating Cost Sheet
Particulars Amount (`) Amount (`)
Standing Charges:
Depreciation (` 24,00,000 X 10% X 1/12 X 25) 5,00,000
Garage Rent 1,00,000
Insurance 25,000
Road Tax 20,000
Manager’s Salary 60,000
Assistant’s Salary (` 32,000 X 2) 64,000
Supervisor’s Salary (` 24,000 X 3) 72,000
Driver’s Salary (` 20,000 X 25) 5,00,000
Cleaner’s Salary (` 5,000 X 20) 1,00,000
Office Staff’s Salary 1,00,000
Consumables 1,20,000
Repairs & Maintenance 90,000
Other Fixed Expenses 72,000 18,23,000
Running Charges
Diesel (49,600 Kms / 10 Kms X ` 80 per unit) 3,96,800
Oils & Lubricants 1,45,000
Tyres and tubes 35,000 5,76,800
Total Operating Cost 23,99,800
Total Operating Cost
Cost per passenger-km =
Passenger –kms
23,99,800
=
27,18,080
= 0.883

© The Institute of Chartered Accountants of India

 30 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

Working Note:
Calculation of Total Kilometers and Passenger Kilometers
Specification Total Km. Passenger–Km.
12 Buses (60 Passengers) 29,760 Kms 14,28,480
(10 Kms × 4 X 2 trips × 31 (29760 Kms x 60 Pass. x
days x 12 Buses) 80%)
13 Buses (50 Passengers) 32,240 Kms 12,89,600
(10 Kms × 4 X 2 trips × 31 (32240 Kms x 50 Pass. x
days x 13 Buses) 80%)
Total 62,000 27,18,080

Since 5 buses out of 25 buses are kept for repairs every day
Actual total Km. 62,000 × 20/25 = 49,600
12. (i) Direct Material Cost Variance = Direct Material Price Variance + Direct Material
Usage Variance
= ` 4,80,000 F + ` 48,000 F = ` 5,28,000 F
(ii) Budgeted Output (units)
Fixed Production Overhead Expenditure Variance
= Budgeted Fixed Overhead - Actual Fixed Overheads
= Budgeted Output x Standard Overhead Rate - Actual Fixed
Overheads
` 1,80,000 A = Budgeted Output x ` 360 (5 hrs @` 72) - ` 45,00,000
`45,00,000 -` 1,80,000
Budgeted Output = = 12,000 units
`360
(iii) Quantity of Materials purchased (in kilograms)
Material Price Variance = Actual Usage (Standard Price per kg - Actual price per kg)
` 4,80,000 F = Actual Usage (` 24 -` 22)
` 4,80,000 -` 1,80,000
Actual usage in kgs = = 2,40,000 kgs
`2
(iv) Actual Output (units)
Actual Direct Wages ` 43,92,000
Direct labour rate variance ` 69,120 A

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 31

Direct labour efficiency variance ` 33,120 F

Standard labour cost for actual output ` 43,56,000
Standard labour cost for actual output
Actual Output =
Standard wage rate per unit
` 43,56,000
= = 12,100 units
` 360 (72 x 5)
Alternatively, let X be the actual quantity of output
Then, Standard Quantity of input for actual output 'X'
20X = SQ
Material cost variance = (SQ x SP) - (AQ x AP)
` 5,28,000 = (20 X x ` 24) - (2,40,000 kgs x ` 22)
480X = ` 52,80,000 + ` 5,28,000
480X = ` 58,08,000
` 58,08,000
X = = 12,100 units
480
(v) Actual hours worked
Labour Efficiency Variance = Standard Labour Rate (Standard time for actual
output - Actual time)
` 33,120 F = ` 72 (5 hours x 12100 units - Actual time)
460 hours = 60,500 hours - Actual time
Actual time = 60,500 - 460 = 60,040 hours
(vi) Actual wage rate per hour
Actual Wages paid = ` 43,92,000
Actual hours worked = 60,040 hours
` 43,92,000
Actual Wage rate per hour = = ` 73.15 per hour
60,040 hours
(vii) Labour cost variance
= Labour rate variance + Labour efficiency variance
=` 69,120 A + ` 33,120 F
= ` 36,000 A

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 32 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

(viii) Production Overhead Cost Variance

= Actual Output x Standard overhead rate - Actual Overheads Incurred
= 12,100 units x` 360 - ` 45,00,000
= ` 43,56,000 - ` 45,00,000
= ` 1,44,000 A
13. (a) (i) Full cost of the product per unit
Direct material ` 693
Direct labour ` 315
Variable manufacturing support ` 504
Fixed manufacturing support ` 1092
Total manufacturing costs ` 2604
(ii) Contribution margin per unit
Selling price ` 3906
Less: Variable costs
Direct material ` 693
Direct labour ` 315
Variable manufacturing support ` 504
Contribution margin per unit ` 2394
(iii) Costs for decision making are those costs that differ between alternatives, which
in this situation are the incremental costs.
Direct material ` 693
Direct labour ` 315
Variable manufacturing support ` 504
Total incremental costs ` 1512
(iv) Minimum acceptable price would be the incremental costs in the short term i.e.
` 1512
(v) Yes, RPP Manufacturers may consider a price of ` 2100 per unit because this
price is greater than the minimum acceptable price.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 33

(b) (i)
Particulars (`)
Variable cost per running hour of Machine MR10 62.50
(` 68,750/1100 hours)
Fixed cost (` 50,000/1100 hours) 45.46
Cost of brain scan on Machine MR10: (`)
Variable machine cost (4 hours × ` 62.50) 250.00
Special technology 100.00
Total variable cost 350.00
Fixed machine cost (4 hours × ` 45.46) 181.84
Total cost of a scan 531.84
Total cost of a satisfactory scan (` 531.84/0.9) 590.93
(ii) It is given that fixed cost will remain unchanged and thus they are not relevant
for the decision. The relevant costs would be the incremental costs of an
additional scan:
Machine MR10: (`)
Variable cost per scan 350.00
Variable cost per satisfactory scan (` 350/0.9) 388.89
Machine MR59: (`)
Variable machine cost per scan (` 1,60,000 / 2000 hours × 144.00
1.8 hours)
Special technology 137.50
Variable cost per scan 281.50
Variable cost per satisfactory scan (` 281.50/0.94) 299.47
The relevant costs per satisfactory scan are cheaper on Machine MR59 and
therefore brain scans should be undertaken on said machine.
14. Maximum Capacity in a budget period
= 50 Employees × 9 Hrs. × 5 Days × 4 Weeks = 9,000 Hrs.
Budgeted Hours
= 40 Employees × 9 Hrs. × 5 Days × 4 Weeks = 7,200 Hrs.
Actual Hrs.
= 6,750 Hrs.

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 34 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

Standard Hrs. for Actual Output

= 7,875 Hrs.
Budget No. of Days
= 20 Days (4 Weeks x 5 Days)
Actual No. of Days
= 20 – 1 = 19 Days
Standard Hrs 7,875 hours
(i) Efficiency Ratio = ×100 = ×100 = 116.67%
Actual Hrs 6,750 hours
Standard Hrs 7,875 hours
(ii) Activity Ratio = ×100 = ×100 = 109.375%
Budgeted Hrs 7,200 hours
Available working days 19 days
(iii) Calendar Ratio = ×100 = ×100 = 95%
Budgeted working days 20 days
Budgeted Hours
(iv) Standard Capacity Usage Ratio = ×100
Max. possible hours in the budgeted period
7,200 hours
= ×100 = 80%
9,000 hours
Actual Hours worked
(v) Actual Capacity Usage Ratio = ×100
Max. possible working hours in a period
6,750 hours
= ×100 = 75%
9,000 hours
Actual working Hours
(vi) Actual Usage of Budgeted Capacity Ratio = ×100
Budgeted Hours
6,750 hours
= ×100= 93.75%
7,200 hours
15. (a)
Item Direct Indirect Fixed Variable
Electronic monitoring YES YES
Meals for patients YES YES
Nurses' salaries YES YES
Parking maintenance YES YES
Security YES YES

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 35

(b)
Cost Control Cost Reduction
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to
improvise them continuously
2. Cost control seeks to attain 2. Cost reduction recognises no
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, emphasis 3. In case of cost reduction, it is on
is on past and present present and future.
4. Cost control is a preventive 4. Cost reduction is a corrective
function function. It operates even when an
efficient cost control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end
are achieved. and is a continuous process.
(c)
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative
aspect only. and quantitative aspect.
(ii) Objective It records the cost of It provides information to
producing a product and management for planning
providing a service. and co-ordination.
(iii) Area It only deals with cost It is wider in scope as it
Ascertainment. includes financial
accounting, budgeting,
taxation, planning etc.
(iv) Recording of It uses both past and present It is focused with the
data figures. projection of figures for
future.
(v) Development Its development is related to Its development is related to
industrial revolution. the need of modern
business world.
(vi) Rules and It follows certain principles It does not follow any
Regulation and procedures for recording specific rules and
costs of different products. regulations.

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 36 INTERMEDIATE EXAMINATION: NOVEMBER, 2022

(d) Cost units are usually the units of physical measurement like number, weight, area,
volume, length, time and value.
Industry or Product Cost Unit Basis
Automobile Number
Steel Ton
Cement Ton/ per bag etc.
Chemicals Litre, gallon, kilogram, ton etc.
Power Kilo-watt hour (kWh)
Transport Passenger- kilometer

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. Sky & Co., an unregistered supplier under GST, purchased material from Vye Ltd. which
is registered under GST. The following information is available for one lot of 5,000 units of
material purchased:
Listed price of one lot ` 2,50,000
Trade discount @ 10% on listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @ 10%
(Will be given only if payment is made within 30 days.)
Toll Tax paid ` 5,000
Freight and Insurance ` 17,000
Demurrage paid to transporter ` 5,000
Commission and brokerage on purchases ` 10,000
Amount deposited for returnable containers ` 30,000
Amount of refund on returning the container ` 20,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 21 days of the purchases.
You are required to CALCULATE cost per unit of material purchased by Sky & Co.
Employee Cost
2. A total of 108 labour hours have been put in a particular job card for repair work engaging
a semi-skilled and skilled labour (Mr. Deep and Mr. Sam respectively).
The hours devoted by both the workers individually on daily basis for this particular job are
given below:
Monday Tuesday Wednesday Thursday Friday
10.5 8.0 10.5 9.5 10.5
The skilled labour also worked on Saturday for 10 hours.

© The Institute of Chartered Accountants of India

 2 INTERMEDIATE EXAMINATION: MAY, 2022

Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and
5 hours on Saturdays; the workers are however paid full wages for Saturday (8 hours for
5 hours worked).
Semi-skilled and skilled worker is paid ordinary wage @ ` 400 and ` 600 respectively per
day of 8 hours labour. Further, the workers are also paid dearness allowance @ 20%.
Extra hours worked over and above 8 hours are also paid at ordinary wage rate however,
overtime premium of 100% of ordinary wage rate is paid if a worker works for more than 9
hours in a day AND 48 hours in a week.
You are required to COMPUTE the wages payable to Mr. Deep (Semi-skilled) and Mr. Sam
(Skilled).
Overheads: Absorption Costing Method
3. Pretz Ltd. is a manufacturing company having two production departments, ‘A’ & ‘B’ and
two service departments ‘X’ & ‘Y’. The following is the budget for March, 2022:
Total (`) A (`) B (`) X (`) Y (`)
Direct material 2,00,000 4,00,000 4,00,000 2,00,000
Direct wages 10,00,000 4,00,000 2,00,000 4,00,000
Factory rent 9,00,000
Power (Machine) 5,10,000
Depreciation 2,00,000
General Lighting 3,00,000
Perquisites 4,00,000
Additional information:
Area (Sq. ft.) 500 250 250 500
Capital value of assets (` lakhs) 40 80 20 20
Light Points 10 20 10 10
Machine hours 1,000 2,000 1,000 1,000
Horse power of machines 50 40 15 25
A technical assessment of the apportionment of expenses of service departments is as
under:
A B X Y
Service Dept. ‘X’ (%) 55 25 – 20
Service Dept. ‘Y’ (%) 60 35 5 –

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

You are required to:

(a) PREPARE a statement showing distribution of overheads to various departments.
(b) PREPARE a statement showing re-distribution of service departments expenses to
production departments using-
(i) Simultaneous equation method
(ii) Trial and error method
(iii) Repeated Distribution Method.
Activity Based Costing
4. PCP Limited belongs to the apparel industry. It specializes in the distribution of fashionable
garments. It buys from the industry and resells the same to the following two different
supermarkets:
(i) Supermarket A dealing in Adults’ garments (Age group 15 - 30)
(ii) Supermarket B dealing in Kids’ garments (Age group 5 - 10)
The following data for the month of April in respect of PCP Limited has been reported:
Supermarket A (`) Supermarket B (`)
Average revenue per delivery 1,69,950 57,750
Average cost of goods sold per delivery 1,65,000 55,000
Number of deliveries 660 1,650
In the past, PCP Limited has used gross margin percentage to evaluate the relative
profitability of its supermarket segments.
The company plans to use activity –based costing for analysing the profitability of its
supermarket segments.
The April month’s operating costs (other than cost of goods sold) of PCP Limited are
` 16,55,995. These operating costs are assigned to five activity areas. The cost in each
area and Activity analysis including cost driver for the month of April are as follows:
Activity Area Total costs (`) Cost Driver
Store delivery 3,90,500 Store deliveries
Cartons dispatched to store 4,15,250 Cartons dispatched to a store
per delivery
Shelf-stocking at customer store 64,845 Hours of shelf-stocking
Line-item ordering 3,45,400 Line-items per purchase order
Customer purchase order 4,40,000 Purchase orders by customers
processing

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 4 INTERMEDIATE EXAMINATION: MAY, 2022

Other data for the month of April include the following:

Supermarket A Supermarket B
Total number of store deliveries 1,100 2,805
Average number of cartons shipped per store 250 50
delivery
Average number of hours of shelf-stocking per 6 1.5
store delivery
Average number of line items per order 14 12
Total number of orders 770 1,980

Required:
(i) COMPUTE gross-margin percentage for each of its supermarket segments and
compute PCP Limited’s operating income.
(ii) COMPUTE the operating income of each supermarket segments using the activity-
based costing information.
Cost Sheet
5. A Ltd. produces a single product X. During the month of December 2021, the company has
produced 14,560 tonnes of X. The details for the month of December 2021 are as follows:
(i) Materials consumed ` 15,00,000
(ii) Power consumed 13,000 Kwh @ ` 7 per Kwh
(iii) Diesels consumed 1,000 litres @ ` 93 per litre
(iv) Wages & salary paid – ` 64,00,000
(v) Gratuity & leave encashment paid – ` 44,20,000
(vi) Hiring charges paid for HEMM- ` 13,00,000
(vii) Hiring charges paid for cars used for official purpose – ` 80,000
(viii) Reimbursement of diesel cost for the cars – ` 20,000
(ix) The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the
time of despatch) – ` 7,000
(xi) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at
the time of despatch) and factory premises is ` 6,000 and ` 18,000 per month
respectively.
(xii) TA/ DA and hotel bill paid for sales manager- ` 16,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

(xiii) The company has 180 employees works for 26 days in a month.
Required:
(a) PREPARE a Cost sheet for the month of December 2021.
(b) COMPUTE Earnings per manshift (EMS) and Output per manshift (OMS) for the
month of December 2021.
Cost Accounting System
6. X Ltd. maintains a non-integrated accounting system for the purpose of management
information. The following are the data related with year 2021-22:
Particulars Amount (‘000)
Opening balances:
- Stores ledger control A/c 48,000
- Work-in-process control A/c 12,000
- Finished goods control A/c 2,58,000
- Building construction A/c 6,000
- Cost ledger control A/c 3,24,000
During the year following transactions took place:
Materials:
- Purchased 24,000
- Issued to production 30,000
- Issued to general maintenance 3,600
- Issued to building construction 2,400
Wages:
- Gross wages paid 90,000
- Indirect wages paid 24,000
- For building construction 6,000
Factory overheads:
- Actual amount incurred (excluding items shown above) 96,000
- Absorbed in building construction 12,000
- Under-absorbed 4,800
Royalty paid 3,000
Selling distribution and administration overheads 15,000
Sales 2,70,000

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 6 INTERMEDIATE EXAMINATION: MAY, 2022

At the end of the year, the stock of raw material and work-in-process was `3,30,00,000
and `15,00,000 respectively. The loss arising in the raw material account is treated as
factory overheads. The building under construction was completed during the year. Gross
profit margin is 20% on sales.
Required:
PREPARE the relevant control accounts to record the above transactions in the cost ledger
of the company.
Batch Costing
7. Brostom Ltd. manufactures 'Stent' that is used by hospitals in angioplasty, a procedure
used to open blocked coronary arteries without open-heart surgery. As per the estimates
provided by Pharmaceutical Industry Bureau, there will be a demand of 1 crore 'Stents' in
the coming year. Brostom Ltd. is having a market share of 10% of the total market demand
of the Stents. It is estimated that it costs ` 3.00 as inventory holding cost per stent per
month and that the set-up cost per run of stent manufacture is ` 450.
Required:
(i) WHAT would be the optimum run size for Stent manufacture?
(ii) WHAT is the minimum inventory holding cost?
Job Costing
8. KJ Motors Ltd. is a manufacturer of auto components. Following are the details of expenses
for the year 2020-21:
(`)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2021-22, the company has received an order from a car manufacturer where
it estimates that the cost of material and labour will be ` 80,00,000 and ` 40,50,000
respectively. The company charges factory overhead as a percentage of direct labour and
administrative overheads as a percentage of factory cost based on previous year's cost.
Cost of delivery of the components at customer's premises is estimated at ` 9,50,000.
You are required to:
(i) CALCULATE the overhead recovery rates based on actual costs for 2020-21.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the
desired profit is 25% on sales.
Process Costing
9. A company produces a component, which passes through two processes. During the
month of December, 2021, materials for 40,000 components were put into Process -I of
which 30,000 were completed and transferred to Process-II. Those not transferred to
Process- II were 100% complete as to materials cost and 50% complete as to labour and
overheads cost. The Process- I costs incurred were as follows:
Direct Materials ` 6,00,000
Direct Wages ` 7,00,000
Factory Overheads ` 4,90,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished
goods stores. There was a normal loss with no salvage value of 200 units in Process II.
There were 1,800 units, remained unfinished in the process with 100% complete as to
materials and 25% complete as regard to wages and overheads.
Costs incurred in Process-II are as follows:
Packing Materials ` 1,60,000
Direct Wages ` 1,42,250
Factory Overheads ` 1,70,700
Packing material cost is incurred at the end of the second process as protective packing
to the completed units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.
Service Costing
10. Navya LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service
to the offices of Noida, Gurugram and Faridabad. At present it operates CNG fuelled cars
but it is also considering to upgrade these into Electric vehicle (EV). The details related
with the owning of CNG & EV propelled cars are as tabulated below:
Particulars CNG Car EV Car
Car purchase price (`) 9,20,000 15,20,000
Govt. subsidy on purchase of car (`) -- 1,50,000
Life of the car 15 years 10 years

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 8 INTERMEDIATE EXAMINATION: MAY, 2022

Residual value (`) 95,000 1,70,000

Mileage 20 km/kg 240 km per charge
Electricity consumption per full charge -- 30 Kwh
CNG cost per Kg (`) 60 --
Power cost per Kwh (`) -- 7.60
Annual Maintenance cost (`) 8,000 5,200
Annual insurance cost (`) 7,600 14,600
Tyre replacement cost in every 5 -year (`) 16,000 16,000
Battery replacement cost in every 8- year (`) 12,000 5,40,000
Apart from the above, the following are the additional information:

Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (`) 20,000 p.m
Garage rent per car (`) 4,500 p.m
Share of Office & Administration cost per car (`) 1,500 p.m
Required:
CALCULATE the operating cost of vehicle per month per car for both CNG & EV options.
Standard Costing
11. 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.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

Marginal Costing
12. A Limited manufactures three different products and the following information has been
collected from the books of accounts:
Products
S T U
Sales Mix 25% 35% 40%
Selling Price ` 600 `800 `400
Variable Cost ` 300 `400 `240
Total Fixed Costs ` 36,00,000
Total Sales ` 1,20,00,000
The company has currently under discussion, a proposal to discontinue the manufacture
of Product U and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 40% 35% 25%
Selling Price ` 600 ` 800 ` 600
Variable Cost ` 300 ` 400 ` 300
Total Fixed Costs ` 36,00,000
Total Sales ` 1,28,00,000
Required:
(i) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing
product mix.
(ii) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the
proposed product mix
Budget and Budgetary Control
13. Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is
in process of preparing its revenue budget for the year 2022. The company has the
following information which can be useful in preparing the budget:
(i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes.
(ii) The sales price of `23,000 per tonne will be increased by 10% provided Wholesale
Price Index (WPI) increases by 5%.
(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw
material cost is `4,500 per tonne. The price of raw material will also increase by 10%
if WPI increase by 5%.

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 10 INTERMEDIATE EXAMINATION: MAY, 2022

(iv) The projected increase in WPI for 2022 is 4%

(v) A total of 6,000 employees works for the company. The company works 26 days in a
month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year
wage agreement. The earnings per manshift (means an employee cost for a shift of 8
hours) is ` 3,000 (excluding terminal benefits). The new wage agreement will be
implemented from 1st July 2022 and it is expected that a 15% increase in pay will be
given.
(vii) The casual employees are getting a daily wage of ` 850. The wages in linked to
Consumer Price Index (CPI). The present CPI is 165.17 points and it is expected to
be 173.59 points in year 2022.
(viii) Power cost for the year 2021 is ` 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60%
of power is used for production purpose (directly related to production volume) and
remaining are for employee quarters and administrative offices.
(ix) During the year 2021, the company has paid ` 60,00,000 for safety and maintenance
works. The amount will increase in proportion to the volume of production.
(x) During the year 2021, the company has paid ` 1,20,000 for the purchase of diesel to
be used in car hired for administrative purposes. The cost of diesel will increase by
15% in year 2022.
(xi) During the year 2021, the company has paid ` 6,00,000 for car hire charges
(excluding fuel cost). In year 2022, the company has decided to reimburse the diesel
cost to the car rental company. Doing this will attract 5% GST on Reverse Charge
Mechanism (RCM) basis on which the company will not get GST input credit.
(xii) Depreciation on fixed assets for the year 2021 is ` 80,40,00,000 and it will be 15%
lower in 2022.
Required:
From the above information PREPARE Revenue (Flexible) budget for the year 2022 and
also show the budgeted profit/ loss for the year.
Miscellaneous
14. (a) EXPLAIN the difference between controllable & uncontrollable costs?
(b) DEFINE cost plus contract? STATE its advantages.
(c) “Is reconciliation of cost accounts and financial accounts necessary in case of
integrated accounting system?” EXPLAIN.
(d) DISCUSS the impact of Information Technology in Cost Accounting.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

SUGGESTED HINTS/ANSWERS

1. Calculation of cost per unit:

Particulars Units (`)

Listed Price of Materials 5,000 2,50,000
Less: Trade discount @ 10% on invoice price (25,000)
2,25,000
Add: CGST @ 6% of ` 2,25,000 13,500
Add: SGST @ 6% of ` 2,25,000 13,500
2,52,000
Add: Toll Tax 5,000
Freight and Insurance 17,000
Commission and Brokerage Paid 10,000
Add: Cost of returnable containers:
Amount deposited ` 30,000
Less: Amount refunded ` 20,000 10,000
2,94,000
` 2,94,000 6,000
Add: Other Expenses @ 2% of Total Cost ( ×2)
98
Total cost of material 3,00,000
Less: Shortage material due to normal reasons @ 20% 1,000 -
Total cost of material of good units 4,000 3,00,000
Cost per unit (` 3,00,000/4,000 units) 75
Note:
1. GST is payable on net price i.e., listed price less discount.
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off -loading
of materials. It is an abnormal cost and not included.
4. Shortage due to normal reasons should not be deducted from cost to ascertain total
cost of good units.

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 12 INTERMEDIATE EXAMINATION: MAY, 2022

2. Calculation of total normal hours to be paid for Mr. Deep (Semi-skilled):

Day Normal Extra Overtime Equivalent Total normal

hours hours hours normal hours for hours
overtime worked
A B C D = C×2 E = A+B+D
Monday 8 1 1½ 3 12
Tuesday 8 -- -- -- 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday -- -- -- -- --
Total 40 4 5 10 54

Calculation of total normal hours to be paid for Mr. Sam (Skilled):

Day Normal Extra Overtime Equivalent normal Total

hours hours hours hours for overtime normal
worked hours
A B C D = C×2 E = A+B+D
Monday 8 1 1½ 3 12
Tuesday 8 --- --- --- 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday 5 3* + 1 1** 2 11
Total 45 8 6 12 65

*Mr. Sam will be paid for equivalent 8 normal working hours at ordinary wage rate, though
5 hours of working is required on Saturday. Further, extra 9 th hour worked will also be paid
at ordinary wage rate.
** Overtime of 1 hour worked over and above 9 hours will be paid at overtime rate.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

Wages payable:

Mr. Deep Mr. Sam

Basic Wages per hour (` 400/8, ` 600/8) (`) 50 75
Dearness allowance per hour (@ 20%) (`) 10 15
Hourly rate (`) 60 90
Total equivalent normal hours 54 65
Total Wages payable (`) 3,240 5,850
3. (a) Primary Distribution of Overheads
Basis Total (`) A (`) B (`) X (`) Y (`)
Direct Direct 6,00,000 – – 4,00,000 2,00,000
materials
Direct wages Direct 6,00,000 – – 2,00,000 4,00,000
Factory rent Area 9,00,000 3,00,000 1,50,000 1,50,000 3,00,000
(2:1:1:2)
Power H.P. × Machine 5,10,000 1,50,000 2,40,000 45,000 75,000
(Machine) Hrs.
(10:16:3:5)*
Depreciation Capital value 2,00,000 50,000 1,00,000 25,000 25,000
(2:4:1:1)
General Light Points 3,00,000 60,000 1,20,000 60,000 60,000
Lighting
(1:2:1:1)
Perquisites Direct Wages 4,00,000 2,00,000 80,000 40,000 80,000
(5:2:1:2)
35,10,000 7,60,000 6,90,000 9,20,000 11,40,000
*{(1000×50) : (2000×40) : (1000×15) : (1000×25)}
(50000 : 80000 : 15000 : 25000)
(10 : 16 : 3 : 5)
(b) (i) Redistribution of Service Department’s expenses using ‘Simultaneous
equation method’
X = 9,20,000 + 0.05 Y
Y = 11,40,000 + 0.20 X

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 14 INTERMEDIATE EXAMINATION: MAY, 2022

Substituting the value of X,

Y = 11,40,000 + 0.20 (9,20,000 + 0.05 Y)
= 13,24,000 + 0.01 Y
Y - 0.01Y = 13,24,000
13,24,000
Y = 0.99

Y = ` 13,37,374
The total expense of Y is ` 13,37,374 and that of X is ` 9,86,869 i.e., ` 9,20,000
+ (0.05 × ` 13,37,374).
Distribution of Service departments’ overheads to Production departments
Production Departments
A (`) B (`)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ` 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ` 13,37,374) 8,02,424 4,68,081
21,05,202 14,04,798
(ii) Redistribution of Service Department’s expenses using ‘Trial and Error
Method’:
Service
Departments
X (`) Y (`)
Overheads as per primary distribution 9,20,000 11,40,000
(i) Apportionment of Dept-X expenses to Dept-Y
--- 1,84,000
(20% of ` 9,20,000)
--- 13,24,000
(ii) Apportionment of Dept-Y expenses to Dept-X
66,200 ---
(5% of ` 13,24,000)
(i) Apportionment of Dept-X expenses to Dept-Y
--- 13,240
(20% of ` 66,200)
(ii) Apportionment of Dept-Y expenses to Dept-X
662 ---
(5% of ` 13,240)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

(i) Apportionment of Dept-X expenses to Dept-Y

132
(20% of ` 662)
(ii) Apportionment of Dept-Y expenses to Dept-X
7
(5% of ` 132)
Total 9,86,869 13,37,372
Distribution of Service departments’ overheads to Production departments
Production Departments
A (`) B (`)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ` 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ` 13,37,372) 8,02,423 4,68,080
21,05,201 14,04,797

(iii) Redistribution of Service Department’s expenses using ‘repeated

distribution method’:
A (`) B (`) X (`) Y (`)
Overhead as per primary 7,60,000 6,90,000 9,20,000 11,40,000
distribution
Dept. X overhead 5,06,000 2,30,000 (9,20,000) 1,84,000
apportioned in the ratio
(55:25:—:20)
Dept. Y overhead 7,94,400 4,63,400 66,200 (13,24,000)
apportioned in the ratio
(60:35:5: —)
Dept. X overhead 36,410 16,550 (66,200) 13,240
apportioned in the ratio
(55:25:—:20)
Dept. Y overhead 7,944 4,634 662 (13,240)
apportioned in the ratio
(60:35:5: —)
Dept. X overhead 364 166 (662) 132
apportioned in the ratio
(55:25:—:20)

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 16 INTERMEDIATE EXAMINATION: MAY, 2022

Dept. Y overhead 79 46 7 (132)

apportioned in the ratio
(60:35:5: —)
Dept. X overhead 4 3 (7) -
apportioned in the ratio
(55:25:—:20)
21,05,201 14,04,799 − −
4. (i) PCP Limited’s
Statement of operating income and gross margin percentage
for each of its supermarket segments

Particulars Supermarket A Supermarket B Total

Revenues: (`) 11,21,67,000 9,52,87,500 20,74,54,500
(660 × ` 1,69,950) (1,650 × ` 57,750)
Less: Cost of goods 10,89,00,000 9,07,50,000 19,96,50,000
sold: (`) (660 × ` 1,65,000) (1650 × ` 55,000)
Gross Margin: (`) 32,67,000 45,37,500 78,04,500
Less: Other operating 16,55,995
costs: (`)
Operating income: (`) 61,48,505
Gross Margin 2.91% 4.76 % 3.76%
Operating income % 2.96%
(ii) Operating Income Statement of each distribution channel
in April (Using the Activity based Costing information)

Supermarket A Supermarket B
Gross margin (`) : (A) 32,67,000 45,37,500
(Refer to (i) part of the answer)
Operating cost (`): (B) 6,55,600 10,00,395
(Refer to working note)
Operating income (`): (A–B) 26,11,400 35,37,105
Operating income (in %) 2.33 3.71
(Operating income/Revenue) ×100

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

Working note:
Computation of rate per unit of the cost allocation base for each of the five activity
areas for the month of April
(`)
Store delivery 100 per delivery
[` 3,90,500/ (1,100 + 2,805 store deliveries)]
Cartons dispatched 1 per carton dispatch
[` 4,15,250/ {(250×1,100) +( 50×2,805)} carton dispatches]
Shelf-stocking at customer store (`) 6 per hour
[` 64,845/ {(6×1,100) + (1.5×2,805)} hours]
Line item ordering 10 per line item order
[` 3,45,400/ {(14×770) + (12×1,980)} line items]
Customer purchase order processing 160 per order
[` 4,40,000/ (770 + 1,980 orders)]
Computation of operating cost of each distribution channel:

Supermarket A (`) Supermarket B (`)

Store delivery 1,10,000 2,80,500
(` 100 × 1,100 deliveries) (` 100 × 2,805 deliveries)
Cartons dispatched 2,75,000 1,40,250
(` 1× 250 cartons × 1,100 (` 1 × 50 cartons × 2,805
deliveries) deliveries)
Shelf stocking 39,600 25,245
(` 6 × 1,100 deliveries × 6 Av. (` 6 × 2,805 deliveries × 1.5
hrs.) Av. hrs)
Line item ordering 1,07,800 2,37,600
(` 10 × 14 line item x 770 (` 10 × 12 line item x 1,980
orders) orders)
Customer purchase 1,23,200 3,16,800
order processing (` 160 × 770 orders) (` 160 × 1,980 orders)
Operating cost 6,55,600 10,00,395

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 18 INTERMEDIATE EXAMINATION: MAY, 2022

5. (a) Cost Sheet of A Ltd. for the month of December 2021

Particulars Amount (`) Amount (`)
Materials consumed 15,00,000
Wages & Salary 64,00,000
Gratuity & leave encashment 44,20,000 1,08,20,000
Power cost (13,000 kwh × ` 7) 91,000
Diesel cost (1,000 ltr × ` 93) 93,000 1,84,000
HEMM hiring charges 13,00,000
Prime Cost 1,38,04,000
AMC cost of CCTV installed at factory premises 18,000
Cost of Production/ Cost of Goods Sold 1,38,22,000
Hiring charges of cars 80,000
Reimbursement of diesel cost 20,000
1,00,000
Add: GST @5% on RCM basis 5,000 1,05,000
Maintenance cost for weighing bridge 7,000
AMC cost of CCTV installed at weigh bridge 6,000 13,000
TA/ DA & hotel bill of sales manager 16,000
Cost of Sales 1,39,56,000
(b) Manshift = 180 employees × 26 days = 4,680 manshifts
Computation of earnings per manshift (EMS):
Total employee benefits paid
EMS =
Manshift
` 1,08,20,000
= = ` 2,312
4,680
Computation of Output per manshift (OMS):
Total Output/ Production
OMS =
Manshift
14,560 Tonne
= = 3.11 tonne
4,680

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

6. Cost Ledger Control Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Costing P&L A/c 2,70,000 By Balance b/d 3,24,000
To Building Construction A/c 26,400 By Stores Ledger Control 24,000
A/c
To Balance c/d 2,89,800 By Wages Control A/c 90,000
By Factory overhead control 96,000
A/c
By Royalty A/c 3,000
By Selling, Distribution and 15,000
Administration overheads
By Costing P&L A/c 34,200
5,86,200 5,86,200
Stores Ledger Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 48,000 By WIP control A/c 30,000
To Cost Ledger control A/c 24,000 By Factory overheads 3,600
control A/c
By Building construction A/c 2,400
By Factory overhead control 3,000
A/c (loss) (Bal. fig)
By Balance c/d 33,000
72,000 72,000
Work-in-process Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 12,000 By Finished goods control 1,99,800
A/c
To Stores Ledger control A/c 30,000
To Wages Control A/c 60,000
To Factory overhead control 1,09,800
A/c
To Royalty A/c 3,000 By Balance c/d 15,000
2,14,800 2,14,800

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 20 INTERMEDIATE EXAMINATION: MAY, 2022

Finished Goods Control Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 2,58,000 By Cost of Goods Sold A/c 2,16,000
(Refer working note)
To WIP control A/c 1,99,800 By Balance c/d 2,41,800
4,57,800 4,57,800
Cost of Sales Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost of Goods Sold A/c 2,16,000 By Costing P&L A/c 2,31,000
To Selling, Distribution and 15,000
Administration A/c
2,31,000 2,31,000
Costing P&L Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost of Sales A/c 2,31,000 By Cost Ledger control A/c 2,70,000
To Factory overhead control A/c 4,800
To Cost Ledger control A/c 34,200
2,70,000 2,70,000
Building Construction Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 6,000 By Cost Ledger control A/c 26,400
To Stores Ledger control A/c 2,400
To Wages Control A/c 6,000
To Factory overhead control A/c 12,000
26,400 26,400
Factory Overhead Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Stores Ledger control A/c 3,600 By Building Construction A/c 12,000
To Wages Control A/c 24,000 By WIP Control A/c 1,09,800
To Cost Ledger control A/c 96,000 By Costing P&L A/c 4,800

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

To Stores Ledger control A/c 3,000

(loss)
1,26,600 1,26,600
Wages Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 90,000 By Factory overhead control 24,000
A/c
By Building Construction A/c 6,000
By WIP Control A/c 60,000
90,000 90,000
Royalty Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 3,000 By WIP Control A/c 3,000
3,000 3,000
Cost of Goods Sold Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Finished Goods control A/c 2,16,000 By Cost of sales A/c 2,16,000
2,16,000 2,16,000
Selling, Distribution and Administration Overhead Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 15,000 By Cost of sales A/c 15,000
15,000 15,000
Trial Balance
Particulars Dr. Cr.
(` in ‘000) (` in ‘000)
Stores Ledger Control A/c 33,000
WIP Control A/c 15,000
Finished Goods Control A/c 2,41,800
Cost Ledger Control A/c 2,89,800
2,89,800 2,89,800
Working Note:
Cost of Goods sold = 2,70,000 × 80/100 = ` 2,16,000

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 22 INTERMEDIATE EXAMINATION: MAY, 2022

7. (i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity

(EBQ)
2DS
Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand for the Stents
= 1,00,00,000 × 10% = 10,00,000 units
S = Set- up cost per run
= ` 450
C = Carrying cost per unit per annum
= ` 3 × 12 = ` 36

2 × 10,00,000× ` 450
EBQ =√
` 36

= 5,000 units of Stents

(ii) Minimum inventory holding cost
Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum
= (5,000 ÷ 2) × ` 36
= ` 90,000
(iii) Calculation of the extra cost due to manufacturing policy
When run size is 6,000 units When run size is 5,000
units i.e. at EBQ
Total set up cost 10,00,000 10,00,000
= × ` 450 × ` 450
6,000 5,000
= ` 75,000 = ` 90,000

Total Carrying cost ½ × 6,000 × ` 36 ½ × 5,000 × ` 36

= ` 1,08,000 = ` 90,000
Total Cost ` 1,83,000 ` 1,80,000
Extra cost = ` 1,83,000 - ` 1,80,000 = ` 3,000

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

8. (i) Calculation of Overhead Recovery Rate:

Factory Overhead in 2020-21
Factory Overhead Recovery Rate = ×100
Direct labour cost in 2020-21
` 30,80,000
= 100 = 34% of Direct labour
` 90,50,000
Administrative Overhead in 2020-21
Administrative Overhead Recovery Rate = ×100
Factory cost in 2020-21 (W.N)
` 20,50,400
= 100 = 6.91% of Factory Cost
` 2,96, 80,000
Working Note: Calculation of Factory Cost in 2020-21
Particulars Amount (`)
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Direct Labour 90,50,000
Prime Cost 2,66,00,000
Factory Overhead 30,80,000
Factory Cost 2,96,80,000
(ii) Job Cost Sheet for the order received in 2021-22
Particulars Amount (`)
Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of ` 40,50,000) 13,77,000
Factory Cost 1,34,27,000
Administrative Overhead (6.91% of ` 1,34,27,000) 9,27,806
Cost of delivery 9,50,000
Total Cost 1,53,04,806
Add: Profit @ 25% of Sales or 33.33% of cost 51,01,602
Sales value (Price to be quoted for the order) 2,04,06,408
Hence the price to be quoted is ` 2,04,06,408.

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 24 INTERMEDIATE EXAMINATION: MAY, 2022

9. (i) Process I
Statement of Equivalent Production and Cost
Input Particulars Outpu Equivalent Production
(Units) t Units Materials Labour Overheads
(%) Units (%) Units (%) Units
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000

Particulars Materials Labour Overhead Total

Cost incurred (`) 6,00,000 7,00,000 4,90,000 17,90,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (`) 15 20 14 49

Process-I Account
Particulars Units (`) Particulars Units (`)
To Materials 40,000 6,00,000 By Process-II A/c 30,000 14,70,000
(30,000 units × `49)
To Labour 7,00,000 By Closing WIP* 10,000 3,20,000
To Overhead 4,90,000
40,000 17,90,000 40,000 17,90,000
* (Material 10,000 units × ` 15) + (Labour 5,000 units × ` 20) + (Overheads 5,000
units × ` 14)
= ` 1,50,000 + ` 1,00,000 + ` 70,000 = ` 3,20,000
(ii) Process II
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 -- -- --
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 25

Particulars Materials Labour Overhead Total

Process-I Cost 14,70,000 -- -- 14,70,000
Cost incurred (`) -- 1,42,250 1,70,700 3,12,950
Equivalent units 29,800 28,450 28,450 --
Cost per equivalent unit (`) 49.3289 5.00 6.00 60.3289

Process-II Account
Particulars Units (`) Particulars Units (`)
To Process-I A/c 30,000 14,70,000 By Normal loss A/c 200 --
To Packing -- 1,60,000 By Finished Goods 28,000* 18,49,209
Material Stock A/c
To Direct Wages -- 1,42,250 By Closing WIP 1,800** 93,741
To Factory -- 1,70,700
Overhead
30,000 19,42,950 30,000 19,42,950
* 28,000 × ` 60.3289 = ` 16,89,209 + `1,60,000 (Packing Material Cost)
= ` 18,49,209
** 1,800 units × ` 49.3289 + 450 units × (` 5 + `6) = ` 93,741
10. Working Notes:
1. Calculation of Depreciation per month:
Particulars CNG Car EV Car
A Car purchase price (`) 9,20,000 15,20,000
B Less: Govt. subsidy (`) -- (1,50,000)
C Less: Residual value (`) (95,000) (1,70,000)
D Depreciable value of car (`) [A-B-C] 8,25,000 12,00,000
E Life of the car 15 years 10 years
F Annual depreciation (`) [D÷E] 55,000 1,20,000
G Depreciation per month (`) [F÷12] 4,583.33 10,000
2. Fuel/ Electricity consumption cost per month:
Particulars CNG Car EV Car
A Average distance covered in a month (KM) 1,500 1,500
B Mileage (KM) 20 240

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 26 INTERMEDIATE EXAMINATION: MAY, 2022

C Qty. of CNG/ Full charge required [A÷B] 75 kg. 6.25

D Electricity Consumption [C×30kwh] - 187.5
E Cost of CNG per kg (`) 60 -
F Power cost per Kwh (`) - 7.60
G CNG Cost per month (`) [C×E] 4,500 -
H Power cost per month (`) [D×F] - 1,425
3. Amortised cost of Tyre replacement:
Particulars CNG Car EV Car
A Life of vehicle 15 years 10 years
B Replacement interval 5 years 5 years
C No. of time replacement required 2 times 1 time
D Cost of tyres for each replacement (`) 16,000 16,000
E Total replacement cost (`) [C×D] 32,000 16,000
F Amortised cost per year (`) [E÷A] 2,133.33 1,600
E Cost per month (`) [F÷12] 177.78 133.33
4. Amortised cost of Battery replacement:
Particulars CNG Car EV Car
A Life of vehicle 15 years 10 years
B Replacement interval 8 years 8 years
C No. of time replacement required 1 time 1 time
D Cost of battery for each replacement (`) 12,000 5,40,000
E Total replacement cost (`) [C×D] 12,000 5,40,000
F Amortised cost per year (`) [E÷A] 800 54,000
E Cost per month (`) [F÷12] 66.67 4,500
Calculation of Operating cost per month:
Particulars CNG Car (`) EV Car (`)
A Running cost:
Fuel cost/ Power consumption cost [Refer 4,500 1,425
WN-2]

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 27

B Maintenance cost:
Annual Maintenance cost [Annual cost 666.67 433.33
÷12]
Annual Insurance cost [Annual cost ÷12] 633.33 1,216.67
Amortised cost of Tyre replacement 177.78 133.33
[Refer WN-3]
Amortised cost of Battery replacement 66.67 4,500
[Refer WN-4]
1,544.45 6,283.33
C Fixed cost:
Depreciation [Refer WN-1] 4,583.33 10,000
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of Office & Administration cost 1,500 1,500
30,583.33 36,000
D Operating cost per month [A+B+C] 36,627.78 43,708.33
11. Working Notes:
1. Calculation of Standard Man hours
When 100 workers work for 1 hour, the standard output is 50 units.
100 hours
Standard man hours per unit = = 2 hours per unit
50 units
2. Calculation of standard man hours for actual output:
= 1,920units x 2 hours = 3,840 hours.
3. Calculation of actual cost
Type of No of Actual Rate Amount Idle Hours (5% Actual hours
Workers Workers Hours Paid (`) (`) of hours paid) Worked
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
100 4,000 46,720 200 3,800

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 28 INTERMEDIATE EXAMINATION: MAY, 2022

4. Calculation of Standard wage Rate:

Labour Efficiency Variance = 480F
(Standard hours for Actual production – Actual Hours) x SR = 480F
(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
1,280F
(iii) Total Labour Gang Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of
Standard Gang -Average Standard Rate per hour of Actual Gang @}
@ on the basis of hours worked
3,840×12
= 3,800 × (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 × {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

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 29

12. (i) Computation of PV ratio, contribution, profit and break-even sales for existing
product mix
Products
Total
S T U
Selling Price (`) 600 800 400
Less: Variable Cost (`) 300 400 240
Contribution per unit (`) 300 400 160
P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 25% 35% 40%
Contribution per rupee of sales
12.5% 17.5% 16% 46%
(P/V Ratio × Sales Mix)
Present Total Contribution (`1,20,00,000 × 46%) ` 55,20,000
Less: Fixed Costs ` 36,00,000
Present Profit ` 19,20,000
Present Break Even Sales (` 36,00,000/0.46) ` 78,26,087
(ii) Computation of PV ratio, contribution, profit and break-even sale for proposed
product mix
Products
S T M Total
Selling Price (`) 600 800 600
Less: Variable Cost (`) 300 400 300
Contribution per unit (`) 300 400 300
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 40% 35% 25%
Contribution per rupee of sales
20% 17.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution (` 1,28,00,000 x 50%) ` 64,00,000
Less: Fixed Costs ` 36,00,000
Proposed Profit ` 28,00,000
Proposed Break- Even Sales (` 36,00,000/0.50) ` 72,00,000

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 30 INTERMEDIATE EXAMINATION: MAY, 2022

13. Revenue Budget (Flexible Budget) of Maharatna Ltd. for the Year 2022
Particulars PY 2021 CY 2022
A Sales Volume (Tonnes) 4,20,000 4,70,400
[112%×4,20,000]
B Selling Price per tonne (`) 23,000 23,000
(` in lakh) (` in lakh)
C Sales value [A×B] 96,600 1,08,192
D Raw material Cost:
(i) Qty. of Material 9,66,000 10,81,920
[2.3 tonnes × A] (tonnes)
(ii) Price per tonne (`) 4,500 4,500
(iii) Total raw material cost 43,470 48,686.40
(` in lakh) [(i)×(ii)]
E Wages & Salary Cost:
(i) Wages to casual employees 2,386.80 2,508.47
(15% × 6,000 = 900 employees) [900 × 26 × 12 × [900 × 26 × 12 ×
` 850] ` 893.33]
(ii) Salary to permanent employees 47,736 51,316.20
(85% × 6,000 = 5,100 employees) [5100 × 26 × 12 × [(5100 × 26 × 6 ×
` 3,000] ` 3,000) + (5100 × 26
× 6 × ` 3,450)]
(iii) Total wages & salary [(i)+(ii)] 50,122.80 53,824.67
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units) 2,80,000 2,80,000
[40% × 7,00.000]
(iii) Total Power consumption (units) 7,00,000 7,50,400
[(i)+(ii)]
(iv) Power rate per unit (`) 6.00 6.00
[`42,00,000 ÷ 7,00,000]
(v) Total power cost [(iii)×(iv)] 42 45.024
G Safety and maintenance Cost 60 67.20
[112% × 60,00,000]
H Diesel cost 1.2 -

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 31

I Car Hire charge:

(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5% on RCM basis - 0.369
[5%×(i+ii)]
(iv) Total Car hire charge cost 6 7.749
[(i)+(ii)+(iii)]
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C-L] (5,142) (1273.043)
14. (a) Controllable costs and Uncontrollable costs: Cost that can be controlled, typically
by a cost, profit or investment centre manager is called controllable cost. Controllable
costs incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre.
Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs.
(b) Cost plus contract: Under cost plus contract, the contract price is ascertained by
adding a percentage of profit to the total cost of the work. Such types of contracts
are entered into when it is not possible to estimate the contract cost with reasonable
accuracy due to unstable condition of material, labour services etc.
Following are the advantages of cost plus contract:
(i) The contractor is assured of a fixed percentage of profit. There is no risk of
incurring any loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time
of making the estimate.
(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered
to examine the books and documents of the contractor to ascertain the veracity
of the cost of contract.
(c) In integrated accounting system cost and financial accounts are kept in the same set
of books. Such a system will have to afford full information required for Costing as
well as for Financial Accounts. In other words, information and data should be
recorded in such a way so as to enable the firm to ascertain the cost (together with
the necessary analysis) of each product, job, process, operation or any other
identifiable activity. It also ensures the ascertainment of marginal cost, variances,
abnormal losses and gains. In fact all information that management requires from a

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 32 INTERMEDIATE EXAMINATION: MAY, 2022

system of Costing for doing its work properly is made available. The integrated
accounts give full information in such a manner so that the profit and loss account
and the balance sheet can be prepared according to the requirements of law and the
management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting
purpose so there is no necessity of reconciliation of cost and financial accounts.
(d) The impact of IT in cost accounting may include the following:
(i) After the introduction of ERPs, different functional activities get integrated and
as a consequence a single entry into the accounting system provides custom
made reports for every purpose and saves an organisation from preparing
different sets of documents. Reconciliation process of results of both cost and
financial accounting systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill
of Material, Material Requisition Note, Goods Received Note, labour utilisation
report etc. are no longer required to be prepared in multiple copies, the related
department can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet)
helps in resource procurement and mobilisation. For example, production
department can get materials from the stores without issuing material requisition
note physically. Similarly, purchase orders can be initiated to the suppliers with
the help of extranet. This enables an entity to shift towards Just -in-Time (JIT)
approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in
timely manner. Each cost centre and cost object is codified and all related costs
are assigned to the cost object or cost centre. This process automates the cost
accumulation and ascertainment process. The cost information can be
customised as per the requirement. For example, when an entity manufactures
or provide services, it can know information job-wise, batch-wise, process-wise,
cost centre wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with
the help of IT. ERP software plays an important role in bringing uniformity
irrespective of location, currency, language and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which
enables the management to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or
service activity closely to eliminate non-value-added activities.
The above are examples of few areas where Cost Accounting is done with the
help of IT.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. The following data are available in respect of material X for the year ended 31st March,
2021:
(`)
Opening stock 9,00,000
Purchases during the year 1,70,00,000
Closing stock 11,00,000
(i) CALCULATE:
(a) Inventory turnover ratio, and
(b) The number of days for which the average inventory is held.
(ii) INTERPRET the ratio calculated as above if the industry inventory turnover rate is
10.
Employee Cost
2. Textile Ltd. pays following overtime premium for its labour beside normal wages of ` 100
per hour:
Before and after normal working hours 80% of basic wage rate
Sundays and holidays 150% of basic wage rate

During the previous year 2019-20, the following hours were worked:
Normal time 3,00,000 hours
Overtime before and after normal working hours 60,000 hours
Overtime on Sundays and holidays 15,000 hours
Total 3,75,000 hours
During the current year 2020-21, the following hours have been worked on job ‘Spinning’:
Normal 4,000 hours
Overtime before and after normal working hours 400 hours
Overtime on Sundays and holidays 100 hours
Total 4,500 hours
2 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

You are required to CALCULATE the labour cost chargeable to job ‘Spinning’ and overhead
in each of the following instances:
(a) Where overtime is worked regularly throughout the year as a policy due to the
workers’ shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
Overheads: Absorption Costing Method
3. PL Ltd. has three production departments P 1, P2 and P3 and two service departments S 1
and S2. The following data are extracted from the records of the company for the month of
October, 2020:
(`)
Rent and rates 12,50,000
General lighting 1,50,000
Indirect Wages 3,75,000
Power 5,00,000
Depreciation on machinery 10,00,000
Insurance of machinery 4,00,000
Other Information:
P1 P2 P3 S1 S2
Direct wages (`) 7,50,000 5,00,000 7,50,000 3,75,000 1,25,000
Horse Power of 60 30 50 10 −
Machines used
Cost of machinery (`) 60,00,000 80,00,000 1,00,00,000 5,00,000 5,00,000
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light 10 15 20 10 5
points
Production hours 6,225 4,050 4,100 − −
worked

Expenses of the service departments S 1 and S2 are reapportioned as below:

P1 P2 P3 S1 S2
S1 20% 30% 40% − 10%
S2 40% 20% 30% 10% −
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

Required:
(i) COMPUTE overhead absorption rate per production hour of each production
department.
(ii) DETERMINE the total cost of product X which is processed for manufacture in
department P 1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its
direct material cost is ` 12,500 and direct labour cost is ` 7,500.
Activity Based Costing
4. Family Store wants information about the profitability of individual product lines: Soft
drinks, Fresh produce and Packaged food. Family store provides the following data for the
year 2020-21 for each product line:
Soft drinks Fresh produce Packaged
food
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Cost of goods sold ` 30,00,000 ` 75,00,000 ` 45,00,000
Cost of bottles returned ` 60,000 `0 `0
Number of purchase orders placed 360 840 360
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000
Family store also provides the following information for the year 2020-21:
Activity Description of activity Total Cost Cost-allocation base
(`)
Bottles returns Returning of empty 60,000 Direct tracing to soft
bottles drink line
Ordering Placing of orders for 7,80,000 1,560 purchase orders
purchases
Delivery Physical delivery and 12,60,000 3,150 deliveries
receipt of goods
Shelf stocking Stocking of goods on 8,64,000 8,640 hours of shelf-
store shelves and on- stocking time
going restocking
Customer Support Assistance provided to 15,36,000 15,36,000 items sold
customers including
check-out
4 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold)
to product lines on the basis of cost of goods sold of each product line. CALCULATE
the operating income and operating income as a % of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to
product lines using and activity-based costing system, CALCULATE the operating
income and operating income as a % of revenues for each product line.
Cost Sheet
5. Impact Ltd. provides you the following details of its expenditures for the year ended
31st March, 2021:
S. Particulars Amount (`) Amount (`)
No.
(i) Raw materials purchased 5,00,00,000
(ii) GST paid under Composition scheme 10,00,000
(iii) Freight inwards 5,20,600
(iv) Trade discounts received 10,00,000
(v) Wages paid to factory workers 15,20,000
(vi) Contribution made towards employees’ PF &
ESIS 1,90,000
(vii) Production bonus paid to factory workers 1,50,000
(viii) Fee for technical assistance 1,12,000
(ix) Amount paid for power & fuel 2,62,000
(x) Job charges paid to job workers 4,50,000
(xi) Stores and spares consumed 1,10,000
(xii) Depreciation on:
Factory building 64,000
Office building 46,000
Plant & Machinery 86,000 1,96,000
(xiii) Salary paid to supervisors 1,20,000
(xiv) Repairs & Maintenance paid for:
Plant & Machinery 58,000
Sales office building 50,000
Vehicles used by directors 20,600 1,28,600
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

(xv) Insurance premium paid for:

Plant & Machinery 31,200
Factory building 28,100 59,300
(xvi) Expenses paid for quality control check
activities 25,000
(xvii) Research & development cost paid for
improvement in production process 48,200
(xviii) Expenses paid for administration of factory
work 1,38,000
(xix) Salary paid to functional mangers:
Production control 4,80,000
Finance & Accounts 9,60,000
Sales & Marketing 12,00,000 26,40,000
(xx) Salary paid to General Manager 13,20,000
(xxi) Packing cost paid for:
Primary packing necessary to maintain
quality 1,06,000
For re-distribution of finished goods 1,12,000 2,18,000
(xxii) Interest and finance charges paid (for usage
of non- equity fund) 3,50,000
(xxiii) Fee paid to auditors 1,80,000
(xxiv) Fee paid to legal advisors 1,20,000
(xxv) Fee paid to independent directors 2,40,000
(xxvi) Payment for maintenance of website for 1,80,000
online sales
(xxvii) Performance bonus paid to sales staffs 2,40,000
(xxviii) Value of stock as on 1st April, 2020:
Raw materials 9,00,000
Work-in-process 4,00,000
Finished goods 7,00,000 20,00,000
(xxix) Value of stock as on 31st March, 2021:
Raw materials 5,60,000
Work-in-process 2,50,000
Finished goods 11,90,000 20,00,000
6 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Amount realized by selling of waste generated during manufacturing process – ` 66,000/-

From the above data, you are required to PREPARE Statement of cost of Impact Ltd. for
the year ended 31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of
Production, (iv) Cost of goods sold and (v) Cost of sales.
Cost Accounting System
6. XYZ Ltd. maintains a non-integrated accounting system for the purpose of management
information. The following are the data related with year 2020-21:
Particulars (` in ‘000)
Opening balances:
- Stores ledger control A/c 24,000
- Work-in-process control A/c 6,000
- Finished goods control A/c 1,29,000
- Building construction A/c 3,000
- Cost ledger control A/c 1,62,000
During the year following transactions took place:
Materials:
- Purchased 12,000
- Issued to production 15,000
- Issued to general maintenance 1,800
- Issued to building construction 1,200
Wages:
- Gross wages paid 45,000
- Indirect wages paid 12,000
- For building construction 3,000
Factory overheads:
- Actual amount incurred (excluding items shown above) 48,000
- Absorbed in building construction 6,000
- Under-absorbed 2,400
Royalty paid 1,500
Selling, distribution and administration overheads 7,500
Sales 1,35,000

At the end of the year, the stock of raw material and work-in-process was ` 1,65,00,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

and ` 75,00,000 respectively. The loss arising in the raw material account is treated as
factory overheads. The building under construction was completed during the year. Gross
profit margin is 20% on sales.
Required:
PREPARE the relevant control accounts to record the above transactions in the cost
ledger of the company.
Batch Costing
7. Rollon Ltd. is committed to supply 96,800 bearings per annum to Racing Ltd. on steady
basis. It is estimated that it costs 25 paise as inventory carrying cost per bearing per month
and the set-up cost per run of bearing manufacture is ` 588.
(a) COMPUTE what would be the optimum run size for bearing manufacture?
(b) Assuming that the company has a policy of manufacturing 8,800 bearings per run,
CALCULATE how much extra costs the company would be incurring as compared to
the optimum run suggested in (a) above?
Contract Costing
8. RN Builders Ltd. entered into a contract on April 1, 2019. The total contract was for
` 2,00,00,000. Actual expenditure for the period April 1, 2019 to March 31, 2020 and
estimated expenditure for April 1, 2020 to December 31, 2020 are given below:
Particulars 2019-20 2020-21
(actual) (9 months) (estimated)
(`) (`)
Materials issued 36,00,000 34,30,000
Wages: Paid 30,00,000 34,93,000
Outstanding at the end 2,50,000 3,32,000
Plant purchased 10,00,000 -
Sundry expenses: Paid 2,90,000 2,75,000
Prepaid at the end 25,000 -
Establishment charges 5,85,000 -

A part of the material was unsuitable and thus sold for ` 7,25,000 (cost being ` 6,00,000)
and a part of plant was scrapped and disposed-off for ` 1,15,000. The value of plant at
site on 31 March, 2020 was ` 3,10,000 and the value of material at site was ` 1,70,000.
Cash received on account to date was ` 70,00,000, representing 80% of the work certified.
The cost of work uncertified was valued at ` 10,95,000.
8 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

The contract would be completed by 31 st December, 2020 and the contractor estimated
further expenditure that would be incurred in completion of the contract:
➢ A sum of ` 12,50,000 would have to be spent on the plant and the residual value of
the plant on the completion of the contract would be ` 1,50,000.
➢ Establishment charges would cost the same amount per month as in the previous
year.
➢ ` 4,32,000 would be sufficient to provide for contingencies.
Required:
PREPARE a Contract Account for the year ended 31 st March, 2020, and CALCULATE
estimated total profit on this contract.
Process Costing
9. Following information is available regarding Process-I of a manufacturing company for the
month of February:
Production Record:
Units in process as on 1 st February 8,000
(All materials used, 1/4th complete for labour and overhead)
New units introduced 32,000
Units completed 28,000
Units in process as on 28 th February 12,000
(All materials used, 1/3rd complete for labour and overhead)
Cost Records: (`)
Work-in-process as on 1 st February
Materials 1,20,000
Labour 20,000
Overhead 20,000
1,60,000
Cost during the month:
Materials 5,12,000
Labour 3,00,000
Overhead 3,00,000
11,12,000
Presuming that average method of inventory is used, PREPARE the following:
(i) Statement of equivalent production.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

(ii) Statement showing cost for each element.

(iii) Statement of apportionment of cost.
(iv) Process cost account for Process-I.
Joint Products & By Products
10. A company produces two joint products A and B from the same basic materials. The
processing is completed in three departments.
Materials are mixed in Department I. At the end of this process, A and B get separated.
After separation, A is completed in the Department II and B in Department III. During a
period, 4,00,000 kg of raw material was processed in Department I at a total cost of
` 17,50,000, and the resultant 50% becomes A and 40% becomes B and 10% normally
lost in processing.
In Department II, 1/5th of the quantity received from Department I is lost in processing. A
is further processed in Department II at a cost of ` 2,60,000.
In Department III, further new material is added to the material received from Department
I and weight mixture is doubled, there is no quantity loss in the department III. Further
processing cost (with material cost) in Department III is ` 3,00,000.
The details of sales during the said period are:
Product A Product B
Quantity sold (kg) 1,50,000 3,00,000
Sales price per kg (`) 10 4

There were no opening stocks. If these products sold at split-off-point, the selling price of
A and B would be ` 8 and ` 4 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint cost to A and B in
proportion of sales value at split off point.
(ii) PREPARE a statement showing the cost per kg of each product indicating joint cost,
processing cost and total cost separately.
(iii) PREPARE a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product A and B, give
your COMMENT that products should be further processed or not.
10 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Service Costing
11. Mr. PS owns a bus which runs according to the following schedule:
(i) Delhi to Hisar and back, the same day
Distance covered: 160 km. one way
Number of days run each month: 9
Seating capacity occupied 90%.
(ii) Delhi to Aligarh and back, the same day
Distance covered: 160 km. one way
Number of days run each month: 12
Seating capacity occupied 95%
(iii) Delhi to Alwar and back, the same day
Distance covered: 170 km. one way
Number of days run each month: 6
Seating capacity occupied 100%
(iv) Following are the other details:
Cost of the bus ` 15,00,000
Salary of the Driver ` 30,000 p.m.
Salary of the Conductor ` 26,000 p.m.
Salary of the part-time Accountant ` 7,000 p.m.
Insurance of the bus ` 6,000 p.a.
Diesel consumption 5 km. per litre at ` 90 per litre
Road tax ` 21,912 p.a.
Lubricant oil ` 30 per 100 km.
Permit fee ` 500 p.m.
Repairs and maintenance ` 5,000 p.m.
Depreciation of the bus @ 30% p.a.
Seating capacity of the bus 50 persons
Passenger tax is 20% of the total takings.
CALCULATE the bus fare to be charged from each passenger to earn a profit of 30% on
total takings.
The fares are to be indicated per passenger for the journeys: (i) Delhi to Hisar (ii) Delhi to
Aligarh and (iii) Delhi to Alwar.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

Standard Costing
12. BabyMoon Ltd. uses standard costing system in manufacturing one of its product ‘Baby
Cap’. The details are as follows:
Direct Material 1 Meter @ ` 60 per meter ` 60
Direct Labour 2 hour @ ` 20 per hour ` 40
Variable overhead 2 hour @ ` 10 per hour ` 20
Total ` 120
During the month of August, 10,000 units of ‘Baby Cap’ were manufactured. Details are
as follows:
Direct material consumed 11,400 meters @ ` 58 per meter
Direct labour Hours ? @ ? ` 4,48,800
Variable overhead incurred ` 2,24,400
Variable overhead efficiency variance is ` 4,000 A. Variable overheads are based on
Direct Labour Hours.
You are required to CALCULATE the following Variances:
(a) Material Variances- Material Cost Variance, Material Price Variance and Material
Usage Variance.
(b) Variable Overheads variances- Variable overhead Cost Variance, Variable overhead
Efficiency Variance and Variable overhead Expenditure Variance.
(c) Labour variances- Labour Cost Variance, Labour Rate Variance and Labour
Efficiency Variance.
Marginal Costing
13. A company has three factories situated in North, East and South with its Head Office in
Mumbai. The Management has received the following summary report on the operations
of each factory for a period:
(` in ‘000)
Factory Sales Profit
Actual Over / (Under) Actual Over / (Under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)
12 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

CALCULATE the following for each factory and for the company as a whole for the period:
(i) Fixed Cost
(ii) Break-even Sales
Budget and Budgetary Control
14. The accountant of manufacturing company provides you the following details for year 2019-
20:
Particulars (`)
Direct materials 28,00,000
Direct Wages 16,00,000
Fixed factory overheads 16,00,000
Variable factory overheads 16,00,000
Other variable costs 12,80,000
Other fixed costs 12,80,000
Profit 18,40,000
Sales 1,20,00,000
During the year, the company manufactured two products A and B and the output and
costs were:
Particulars A B
Output (units) 2,00,000 1,00,000
Selling price per unit ` 32.00 ` 56.00
Direct materials per unit ` 8.00 ` 12.00
Direct wages per unit ` 4.00 ` 8.00
Variable factory overhead is absorbed as a percentage of direct wages. Other variable
costs have been computed as: Product A ` 4.00 per unit; and B ` 4.80 per unit.
During 2020-21, it is expected that the demand for product A will fall by 25% and for B by
50%. It is decided to manufacture a new product C, the cost for which is estimated as
follows:
Particulars Product C
Output (units) 2,00,000
Selling price per unit ` 28.00
Direct materials per unit ` 6.40
Direct wages per unit ` 4.00
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

It is anticipated that the other variable costs per unit of Product C will be same as for
product A.
PREPARE a budget to present to the management, showing the current position and the
position for 2020-21. COMMENT on the comparative results.
Miscellaneous
15. (a) DIFFERENTIATE between Cost Control and Cost Reduction.
(b) ‘Like other branches of accounting, cost accounting also has certain limitations’ .
EXPLAIN the limitations.
(c) DIFFERENTIATE between Job Costing and Batch Costing.
(d) DISCUSS the treatment of by-product cost in Cost Accounting when they are of small
total value.

SUGGESTED HINTS/ANSWERS

1. (i) (a) Inventory turnover ratio (Refer to working note)

= Cost of stock of raw material consumed

Average stock of raw material

` 1,68,00,000
= = 16.8
` 10,00,000

(b) Average number of days for which the average inventory is held
365 365days
= = = 21.73 days
Inventory turnover ratio 16.8

Working Note:
Particulars (`)
Opening stock of raw material 9,00,000
Add: Material purchases during the year 1,70,00,000
Less: Closing stock of raw material 11,00,000
1,68,00,000
(ii) The Inventory turnover ratio for material X is 16.8 which mean an inventory item takes
only 21.73 or 22 days to issue from stores for production process. The rate is better
than the industry rate which is 10 time or 36.5 days. This inventory turnover ratio
14 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

indicates better inventory management system and good demand for the final product
in market.
2. Workings:
Basic wage rate = ` 100 per hour
Overtime wage rate before and after working hours = ` 100 + (` 100 × 80%)
= ` 180 per hour
Overtime wage rate for Sundays and holidays = ` 100 + (` 100 × 150%)
= ` 250 per hour
Computation of average inflated wage rate (including overtime premium):
Particulars Amount (`)
Annual wages for the previous year for normal time 3,00,00,000
(3,00,000 hrs. × ` 100)
Wages for overtime before and after normal working hours 108,00,000
(60,000 hrs. × ` 180)
Wages for overtime on Sundays and holidays 37,50,000
(15,000 hrs. × ` 250)
Total wages for 3,75,000 hrs. 4,45,50,000
` 4,45,50,000
Average inflated wage rate = = ` 118.80
3,75,000 hours
(a) Where overtime is worked regularly as a policy due to workers’ shortage
The overtime premium is treated as a part of employee cost and job is charged at an
inflated wage rate. Hence, employee cost chargeable to job ‘Spinning’
= Total hours × Inflated wage rate = 4,500hrs. × ` 118.80 = ` 5,34,600
(b) Where overtime is worked irregularly to meet the requirements of production
Basic wage rate is charged to the job and overtime premium is charged to factory
overheads as under:
Employee cost chargeable to Job ‘Spinning’ = 4,500hours @ ` 100 per hour
= ` 4,50,000
Factory overhead = {400 hrs. × (` 100 × 80%)} + {100 hrs. × (` 100 × 150%)}
= {` 32,000 + ` 15,000} = ` 47,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

(c) Where overtime is worked at the request of the customer, overtime premium is
also charged to the job as under: (`)
Job ‘Spinning’ Employee cost: 4,500hrs. @ ` 100 = 4,50,000
Overtime premium: 400 hrs. @ (` 100 × 80%) = 32,000
100 hrs. @ (` 100 × 150%) = 15,000
Total 4,97,000
3. Primary Distribution Summary
Item of cost Basis of Total P1 P2 P3 S1 S2
apportionment (`) (`) (`) (`) (`) (`)
Direct wages Actual 5,00,000 -- -- -- 3,75,000 1,25,000
Rent and Floor area 12,50,000 2,50,000 3,12,500 3,75,000 2,50,000 62,500
Rates (4 : 5 : 6 : 4 : 1)
General Light points 1,50,000 25,000 37,500 50,000 25,000 12,500
lighting (2 : 3 : 4 : 2 : 1)
Indirect wages Direct wages 3,75,000 1,12,500 75,000 1,12,500 56,250 18,750
(6 : 4 : 6 : 3 : 1)
Power Horse Power of 5,00,000 2,00,000 1,00,000 1,66,667 33,333 −
machines used
(6 : 3 : 5 : 1)
Depreciation of Value of machinery 10,00,000 2,40,000 3,20,000 4,00,000 20,000 20,000
machinery (12 : 16 : 20 : 1 : 1)
Insurance of Value of machinery 4,00,000 96,000 1,28,000 1,60,000 8,000 8,000
machinery (12 : 16 : 20 : 1 : 1)
41,75,000 9,23,500 9,73,000 12,64,167 7,67,583 2,46,750
Overheads of service cost centres
Let S1 be the overhead of service cost centre S 1 and S2 be the overhead of service cost
centre S2.
S1 = 7,67,583 + 0.10 S 2
S2 = 2,46,750 + 0.10 S 1
Substituting the value of S 2 in S1 we get
S1 = 7,67,583 + 0.10 (2,46,750 + 0.10 S 1)
S1 = 7,67,583 + 24,675 + 0.01 S 1
0.99 S1 = 7,92,258
S1 = ` 8,00,260
S2 = 2,46,750 + 0.10  8,00,260
= ` 3,26,776
16 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Secondary Distribution Summary

Particulars Total (`) P1 (`) P2 (`) P3 (`)

Allocated and Apportioned 31,60,667 9,23,500 9,73,000 12,64,167

over-heads as per primary
distribution
S1 8,00,260 1,60,052 2,40,078 3,20,104
S2 3,26,776 1,30,710 65,355 98,033
12,14,262 12,78,433 16,82,304
(i) Overhead rate per hour
P1 P2 P3
Total overheads cost (`) 12,14,262 12,78,433 16,82,304
Production hours worked 6,225 4,050 4,100
Rate per hour (`) 195.06 315.67 410.32
(ii) Cost of Product X
(`)
Direct material 12,500.00
Direct labour 7,500.00
Prime cost 20,000.00
Production on overheads
P1 5 hours  ` 195.06 = 975.30
P2 3 hours  ` 315.67 = 947.01
P3 4 hours  ` 410.32 = 1,641.28 3,563.59
Factory cost 23,563.59
4. Working notes:
1. Total support cost:
(`)
Bottles returns 60,000
Ordering 7,80,000
Delivery 12,60,000
Shelf stocking 8,64,000
Customer support 15,36,000
Total support cost 45,00,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

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

Total support cost
= 100
Total cost of goods sold
` 45,00,000
= ` 1,50,00,000 × 100 = 30%

3. Cost for each activity cost driver:

Activity Total cost Cost allocation base Cost driver rate
(1) (`) (3) (4) = [(2) ÷ (3)]
(2)
Ordering 7,80,000 1,560 purchase orders ` 500 per purchase order
Delivery 12,60,000 3,150 deliveries ` 400 per delivery
Shelf-stocking 8,64,000 8,640 hours ` 100 per stocking hour
Customer 15,36,000 15,36,000 items sold ` 1 per item sold
support

(i) 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)
Soft Fresh Packaged Total (`)
Drinks (`) Produce (`) Foods (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
(COGS): (B)
Support cost (30% of 9,00,000 22,50,000 13,50,000 45,00,000
COGS): (C)
(Refer working notes)
Total cost: (D) = {(B) + 39,00,000 97,50,000 58,50,000 1,95,00,000
(C)}
Operating income: (E) 67,500 7,53,000 1,99,500 10,20,000
= {(A)-(D)}
Operating income as a 1.70% 7.17% 3.30% 4.97%
percentage of
revenues: (F)= {(E)/(A)
× 100}
18 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

(ii) 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)
Soft drinks Fresh Packaged Total
(`) Produce Food (`)
(`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 0 0 60,000
Ordering cost* 1,80,000 4,20,000 1,80,000 7,80,000
(360:840:360)
Delivery cost* 1,20,000 8,76,000 2,64,000 12,60,000
(300:2,190:660)
Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5,400:2,700)
Customer Support 1,26,000 11,04,000 3,06,000 15,36,000
cost*
(1,26,000:11,04,00
0:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income: 4,27,500 63,000 5,29,500 10,20,000
(C) = {(A)- (B)}
Operating income 10.78% 0.60% 8.75% 4.97%
as a % of revenues:
(D) = {(C)/(A) × 100}
* Refer to working note 3
5. Statement of Cost of Impact Ltd. for the year ended 31st March, 2021:
Sl. Particulars Amount (`) Amount (`)
No.
(i) Material Consumed:
Raw materials purchased 5,00,00,000
GST paid under Composition scheme* 10,00,000
Freight inwards 5,20,600
Less: Trade discounts received (10,00,000)
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

Add: Opening stock of raw materials 9,00,000

Less: Closing stock of raw materials (5,60,000) 5,08,60,600
(ii) Direct employee (labour) cost:
Wages paid to factory workers 15,20,000
Contribution made towards employees’ PF &
ESIS 1,90,000
Production bonus paid to factory workers 1,50,000 18,60,000
(iii) Direct expenses:
Fee for technical assistance 1,12,000
Amount paid for power & fuel 2,62,000
Job charges paid to job workers 4,50,000 8,24,000
Prime Cost 5,35,44,600
(iv) Works/ Factory overheads:
Stores and spares consumed 1,10,000
Depreciation on factory building 64,000
Depreciation on plant & machinery 86,000
Repairs & Maintenance paid for plant &
machinery 58,000
Insurance premium paid for plant & machinery 31,200
Insurance premium paid for factory building 28,100
Salary paid to supervisors 1,20,000 4,97,300
Gross factory cost 5,40,41,900
Add: Opening value of W-I-P 4,00,000
Less: Closing value of W-I-P (2,50,000)
Factory Cost 5,41,91,900
(v) Quality control cost:
Expenses paid for quality control check
activities 25,000
(vi) Research & development cost paid for
improvement in production process 48,200
(vii) Administration cost related with production:
-Expenses paid for administration of factory
work 1,38,000
-Salary paid to Production control manager 4,80,000 6,18,000
20 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

(viii) Less: Realisable value on sale of scrap and

waste (66,000)
(ix) Add: Primary packing cost 1,06,000
Cost of Production 5,49,23,100
Add: Opening stock of finished goods 7,00,000
Less: Closing stock of finished goods (11,90,000)
Cost of Goods Sold 5,44,33,100
(x) Administrative overheads:
Depreciation on office building 46,000
Repairs & Maintenance paid for vehicles used
by directors 20,600
Salary paid to Manager- Finance & Accounts 9,60,000
Salary paid to General Manager 13,20,000
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,40,000 28,86,600
(xi) Selling overheads:
Repairs & Maintenance paid for sales office
building 50,000
Salary paid to Manager- Sales & Marketing 12,00,000
Payment for maintenance of website for online 1,80,000
sales
Performance bonus paid to sales staffs 2,40,000 16,70,000
(xii) Packing cost paid for re-distribution of finished
goods 1,12,000
(xiii) Interest and finance charges paid 3,50,000
Cost of Sales 5,94,51,700

* GST paid under Composition scheme would be included under cost of material as it is
not eligible for input tax credit.
6. Cost Ledger Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Costing P&L A/c 1,35,000 By Balance b/d 1,62,000
To Building Construction A/c 13,200 By Stores Ledger control A/c 12,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

To Balance c/d 1,44,900 By Wages Control A/c 45,000

By Factory overhead control 48,000
A/c
By Royalty A/c 1,500
By Selling, Distribution and 7,500
Administration overheads
By Costing P&L A/c 17,100
2,93,100 2,93,100
Stores Ledger Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 24,000 By WIP control A/c 15,000
To Cost Ledger control A/c 12,000 By Factory overheads 1,800
control A/c
By Building construction A/c 1,200
By Factory overhead control 1,500
A/c (bal. fig.) (loss)
By Balance c/d 16,500
36,000 36,000
Wages Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 45,000 By Factory overhead control 12,000
A/c
By Building Construction A/c 3,000
By WIP Control A/c (bal. fig.) 30,000
45,000 45,000
Factory Overhead Control Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Stores Ledger control A/c 1,800 By Building Construction A/c 6,000
To Wages Control A/c 12,000 By WIP Control A/c (bal. fig.) 54,900
To Cost Ledger control A/c 48,000 By Costing P&L A/c (under- 2,400
absorption)
22 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

To Stores Ledger control A/c 1,500

(loss)
63,300 63,300
Royalty Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 1,500 By WIP Control A/c 1,500
1,500 1,500

Work-in-process Control Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 6,000 By Finished goods control 99,900
A/c (bal. fig.)
To Stores Ledger control A/c 15,000
To Wages Control A/c 30,000
To Factory overhead control 54,900
A/c
To Royalty A/c 1,500 By Balance c/d 7,500
1,07,400 1,07,400

Finished Goods Control Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 1,29,000 By Cost of Goods Sold A/c 1,08,000
(Refer working note)
To WIP control A/c 99,900 By Balance c/d 1,20,900
2,28,900 2,28,900
Cost of Goods Sold Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Finished Goods control 1,08,000 By Cost of sales A/c 1,08,000
A/c
1,08,000 1,08,000
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

Selling, Distribution and Administration Overhead Control Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 7,500 By Cost of sales A/c 7,500
7,500 7,500

Cost of Sales Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Cost of Goods Sold A/c 1,08,000 By Costing P&L A/c 1,15,500

To Selling, Distribution and 7,500

Administration A/c

1,15,500 1,15,500

Costing P&L Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Cost of Sales A/c 1,15,500 By Cost Ledger control A/c 1,35,000
To Factory overhead control 2,400
A/c
To Cost Ledger control A/c 17,100
(bal. fig.) (Profit)
1,35,000 1,35,000
Building Construction Account
Particulars (` in ‘000) Particulars (` in ‘000)
To Balance b/d 3,000 By Cost Ledger control A/c 13,200
To Stores Ledger control 1,200
A/c
To Wages Control A/c 3,000
To Factory overhead 6,000
control A/c
13,200 13,200
24 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Trial Balance
Particulars Dr. Cr.
(` in ‘000) (` in ‘000)
Stores Ledger Control A/c 16,500
WIP Control A/c 7,500
Finished Goods Control A/c 1,20,900
Cost Ledger Control A/c 1,44,900
1,44,900 1,44,900

Workings:
` 13,50,00,000 × 80
Cost of Goods sold = = ` 10,80,00,000
100
7. (a) Optimum production run size (Q)

2DS 2 × 96,800 × ` 588

= =√ = 6,160 bearings.
C 0.25 × 12

(b) Calculation of Extra Cost

Total Cost (of maintaining the inventories) when production run size (Q) are 6,160
and 8,800 bearings respectively.
Total cost = Total set-up cost + Total carrying cost.

Particulars When run size is 6,160 When run size is 8,800

bearings bearings
Total set up cost = 96,800 × ` 588 = ` 9,240 = 96,800 × ` 588 = ` 6,468
6,160 8,800
Or,
No. of setups = 15.71 (16
setups)
= 16 x ` 588 = ` 9,408
Total Carrying cost ½ × 6,160 × 0.25 × 12 ½ × 8,800 × 0.25 × 12
= ` 9,240 = ` 13,200
Total Cost ` 18,480/ ` 18,648 ` 19,668
` 1,188/ ` 1,020 is the extra cost incurred by the company due to run size not being
optimum run size.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 25

8. RN Builders Ltd.
Contract Account (2019-20)
Particulars (`) Particular (`)
s
To Materials issued 36,00,000 By Material sold 7,25,000
To Wages paid 30,00,000 By Plant sold 1,15,000
Add: Outstanding 2,50,000 32,50,000 By Plant at site c/d 3,10,000
To Plant 10,00,000 By Material at site c/d 1,70,000
To Sundry 2,90,000 By Work-in-progress c/d
Expenses
Less: Prepaid (25,000) 2,65,000 Work 87,50,000
certified
(` 70,00,000 ÷ 80%)
To Establishment charges 5,85,000 Work 10,95,000 98,45,000
uncertified
To Costing P & L A/c 1,25,000
(` 7,25,000 – ` 6,00,000)
To Notional profit (Profit for 23,40,000
the year)
1,11,65,000 1,11,65,000

Calculation of Estimated Profit

Particulars (`) (`)

(1) Material consumed (36,00,000+ 1,25,000– 7,25,000) 30,00,000
Add: Further consumption 34,30,000 64,30,000
(2) Wages: 32,50,000
Add: Further cost (34,93,000 – 2,50,000) 32,43,000
Add: Outstanding 3,32,000 68,25,000
(3) Plant used (10,00,000– 1,15,000) 8,85,000
Add: Further plant introduced 12,50,000
Less: Closing balance of plant (1,50,000) 19,85,000
(4) Establishment charges 5,85,000
26 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Add: Further charges for nine months (5,85,000  9/12) 4,38,750 10,23,750
(5) Sundry expenses 2,90,000
Add: Further expenses 2,75,000 5,65,000
(6) Reserve for contingencies 4,32,000
Estimated profit (balancing 27,39,250
figure)
Contract price 2,00,00,000

9. (i) Statement of equivalent production (Average cost method)

Particulars Input Particulars Output Equivalent Production
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 8,000 Completed and 28,000 100 28,000 100 28,000
transferred
Units introduced 32,000 Closing WIP 12,000 100 12,000 1/3rd 4,000
40,000 40,000 40,000 32,000
(ii) Statement showing cost for each element
Particulars Materials Labour Overhead Total
(`) (`) (`) (`)
Cost of opening work-in- 1,20,000 20,000 20,000 1,60,000
process
Cost incurred during the month 5,12,000 3,00,000 3,00,000 11,12,000
Total cost: (A) 6,32,000 3,20,000 3,20,000 12,72,000
Equivalent units: (B) 40,000 32,000 32,000
Cost per equivalent unit: (C) = 15.8 10 10 35.8
(A ÷ B)
(iii) Statement of apportionment of cost
Particulars Amount (`) Amount (`)
1. Value of units completed and transferred 10,02,400
(28,000 units × ` 35.8)
2. Value of Closing W-I-P:
- Materials (12,000 units × ` 15.8) 1,89,600
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 27

- Labour (4,000 units × ` 10) 40,000

- Overheads (4,000 units × ` 10) 40,000 2,69,600
(iv) Process-I Cost Account
Particulars Units (`) Particulars Units (`)
To Opening W-I-P 8,000 1,60,000 By Completed units 28,000 10,02,400
To Materials 32,000 5,12,000 By Closing W-I-P 12,000 2,69,600
To Labour -- 3,00,000
To Overhead -- 3,00,000
40,000 12,72,000 40,000 12,72,000

10. Calculation of quantity produced

Dept I (kg) Dept II (kg) Dept III (kg)
Input 4,00,000 2,00,000 1,60,000
(50% of 4,00,000 kg.) (40% of 4,00,000 kg.)
Weight (lost) or (40,000) (40,000) 1,60,000
added (10% of 4,00,000 kg.) (1/5th of 2,00,000 kg.)
3,60,000 1,60,000 3,20,000
Production of A 2,00,000 1,60,000 --
Production of B 1,60,000 -- 3,20,000

(i) Statement of apportionment of joint cost of dept I

Product A Product B
Output (kg) 2,00,000 1,60,000
Selling price per kg (`) 8 4
Sales value (`) 16,00,000 6,40,000
Share in Joint cost (5:2) 12,50,000 5,00,000
(` 17,50,000 × 5 ÷ 7) (` 17,50,000 × 2 ÷ 7)

(ii) Statement of cost per kg

Product A Product B
Output (kg) 1,60,000 3,20,000
Share in joint cost (`) 12,50,000 5,00,000
Joint Cost per kg (`) (A) 7.8125 1.5625
28 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Further processing cost (`) 2,60,000 3,00,000

Further processing cost per kg (`) (B) 1.625 0.9375
Total cost per kg (`) {(A)+(B)} 9.4375 2.5000

(iii) Statement of profit

Product A Product B
Output (kg) 1,60,000 3,20,000
Sales (kg) (1,50,000) (3,00,000)
Closing stock (kg) 10,000 20,000
(`) (`)
Sales 15,00,000 12,00,000
(1,50,000 kg × ` 10) (3,00,000 kg × ` 4)
Add: closing stock (at full cost) 94,375 50,000
(10,000 kg × ` 9.4375) (20,000 kg × ` 2.5)
Value of production 15,94,375 12,50,000
Less: Share in joint cost 12,50,000 5,00,000
Further processing cost 2,60,000 3,00,000
Profit 84,375 4,50,000

(iv) Profitability statement before and after processing

Product A Product B
Before (`) After (`) Before (`) After (`)
Sales Value 16,00,000 6,40,000
Share in joint 12,50,000 5,00,000
costs
Profit 3,50,000 84,375 1,40,000 4,50,000
(as per iii above) (as per iii above)

Product A should be sold at split off point and product B after processing because of higher
profitability.
11. Working Notes:
1. Total Distance (in km.) covered per month
Bus route Km. per trip Trips per day Days per Km. per
month month
Delhi to Hisar 160 2 9 2,880
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 29

Delhi to Aligarh 160 2 12 3,840

Delhi to Alwar 170 2 6 2,040
Total 8,760

2. Passenger- km. per month

Total seats available Capacity Km. Passenger-
per month (at 100% utilised per Km. per
capacity) trip month
(%) Seats
Delhi to Hisar & 900 90 810 160 1,29,600
Back (50 seats  2 trips  9 (810 seats ×
days) 160 km.)
Delhi to Aligarh 1,200 95 1,140 160 1,82,400
& Back (50 seats  2 trips  12 (1,140 seats
days) × 160 km.)
Delhi to Alwar & 600 100 600 170 1,02,000
Back (50 seats  2 trips  6 (600 seats ×
days) 170 km.)
Total 4,14,000

Monthly Operating Cost Statement

Particulars (`) (`)
(i) Running Costs
Diesel {(8,760 km  5 km)  ` 90} 1,57,680.00
Lubricant oil {(8,760 km  100)  ` 30} 2,628.00 1,60,308.00
(ii) Maintenance Costs
Repairs & Maintenance 5,000.00
(iii) Standing charges
Salary to driver 30,000.00
Salary to conductor 26,000.00
Salary of part-time accountant 7,000.00
Insurance (` 6,000 ÷12) 500.00
Road tax (` 21,912 ÷12) 1,826.00
Permit fee 500.00
30 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

Depreciation {(` 15,00,000  30%)  12} 37,500.00 1,03,326.00

Total costs per month before Passenger Tax 2,68,634.00
(i)+(ii)+(iii)
Passenger Tax* 1,07,453.60
Total Cost 3,76,087.60
Add: Profit* 1,61,180.40
Total takings per month 5,37,268.00
*Let total takings be X then,
X = Total costs per month before passenger tax + 0.2 X (passenger tax) + 0.3 X (profit)
X = ` 2,68,634 + 0.2 X + 0.3 X
0.5 X = ` 2,68,634 or, X = ` 5,37,268
Passenger Tax = 20% of ` 5,37,268 = ` 1,07,453.60
Profit = 30% of ` 5,37,268 = ` 1,61,180.40
Calculation of Rate per passenger km. and fares to be charged for different routes
Rate per Passenger-Km. = Total takings per month
Total Passenger - Km. per month

` 5,37,268
= = ` 1.30 (approx.)
4,14,000 Passenger-Km.
Bus fare to be charged per passenger:
Delhi to Hisar = ` 1.30  160 km = ` 208.00
Delhi to Aligarh = ` 1.30  160 km = ` 208.00
Delhi to Alwar = ` 1.30  170 km = ` 221.00
12. (i) Material Variances

Budget Std. for actual Actual

Quantity Price Amount Quantity Price Amount Quantity Price Amount
(Meter) (`) (`) (Meter) (`) (`) (Meter) (`) (`)
1 60 60 10,000 60 6,00,000 11,400 58 6,61,200
Material Cost Variance = (SQ × SP – AQ × AP)
= 6,00,000 – 6,61,200 = ` 61,200 (A)
Material Price Variance = (SP – AP) AQ
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 31

= (60 - 58) 11,400 = ` 22,800 (F)

Material Usage Variance = (SQ – AQ) SP
= (10,000 – 11,400) 60 = ` 84,000 (A)
(ii) Variable Overheads variances
Variable overhead cost Variance
= Standard variable overhead – Actual Variable Overhead
= (10,000 units × 2 hours × ` 10) – 2,24,400 = ` 24,400 (A)
Variable overhead Efficiency Variance
= (Standard Hours – Actual Hours) × Standard Rate per Hour
Let Actual Hours be ‘X’, then:
(20,000 – X) × 10 = 4,000 (A)
2,00,000 – 10X = - 4,000
X = 2,04,000 ÷ 10
Therefore, Actual Hours (X) = 20,400
Variable overhead Expenditure Variance
= Variable Overhead at Actual Hours - Actual Variable Overheads
= 20,400 × ` 10 – 2,24,400 = ` 20,400 (A)
(iii) Labour variances

Budget Std. for actual Actual

Hours Rate Amount Hours Rate Amount Hours Rate Amount
(`) (`) (`) (`) (`) (`)
2 20 40 20,000 20 4,00,000 20,400 22* 4,48,800
*Actual Rate = ` 4,48,800 ÷ 20,400 hours = ` 22
Labour Cost Variance = (SH × SR) – (AH × AR)
= 4,00,000 – 4,48,800 = ` 48,800 (A)
Labour Rate Variance = (SR – AR) × AH
= (20 – 22) × 20,400 = ` 40,800 (A)
Labour Efficiency Variance = (SH – AH) × SR
= (20,000 – 20,400) × 20 = ` 8,000 (A)
13. Computation of Profit Volume Ratio
32 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

(` in ‘000)

Sales Profit P/V Ratio

 Change in Profit 
Factory

Actual Over / Budgeted Actual Over / Budget  

 Change inSales 
(Under) Sales (Under) Profit
Budget Budget

North 1,100 (400) 1,500 135 (180) 315 45%

East 1,450 150 1,300 210 90 120 60%
South 1,200 (200) 1,400 330 (110) 440 55%

(i) Computation of Fixed Costs (` in ‘000)

Factory Actual P/V Ratio Contribution Actual Fixed Cost
Sales Profit
(1) (2) (3) = (1) × (2) (4) (5) = (3) - (4)
North 1,100 45% 495 135 360
East 1,450 60% 870 210 660
South 1,200 55% 660 330 330
Total 3,750 2,025 675 1,350

(ii) Computation of Break-Even Sales

Factory Fixed Cost P/V Ratio Break-even Sales
(a) (b) (a) / (b)
North 360 45% 800
East 660 60% 1,100
South 330 55% 600
2,500
Fixed Cost
Break-even Sales (Company as Whole) =
Composite P / V Ratio *

` 13,50,000
=
54%
= ` 25,00,000
Total Contribution 2,025
*Composite P/V Ratio = = = 54%
Total Actual sales 3,750
14. Budget Showing Current Position and Position for 2020-21
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 33

Position for 2019-20 Position for 2020-21

A B Total A B C Total
(A+B) (A+B+C)
Sales (units) 2,00,000 1,00,000 – 1,50,000 50,000 2,00,000 –
(`) (`) (`) (`) (`) (`) (`)
(A) Sales 64,00,000 56,00,000 1,20,00,000 48,00,000 28,00,000 56,00,000 1,32,00,000
Direct Material 16,00,000 12,00,000 28,00,000 12,00,000 6,00,000 12,80,000 30,80,000
Direct wages 8,00,000 8,00,000 16,00,000 6,00,000 4,00,000 8,00,000 18,00,000
Factory overhead 8,00,000 8,00,000 16,00,000 6,00,000 4,00,000 8,00,000 18,00,000
(variable)
Other variable costs 800,000 4,80,000 12,80,000 6,00,000 240,000 8,00,000 16,40,000
(B) Marginal Cost 40,00,000 32,80,000 72,80,000 30,00,000 16,40,000 36,80,000 83,20,000
(C) Contribution (A- 24,00,000 23,20,000 47,20,000 18,00,000 11,60,000 19,20,000 48,80,000
B)
Fixed costs
– Factory 16,00,000 16,00,000
– Others 12,80,000 12,80,000
(D) Total fixed cost 28,80,000 28,80,000
Profit (C – D) 18,40,000 20,00,000

Comments: Introduction of Product C is likely to increase profit by ` 1,60,000 (i.e. from

` 18,40,000 to ` 20,00,000) in 2020-21 as compared to 2019-20 even if the demand for
Product A & B falls. Therefore, introduction of product C is recommended.
15. (a)
S. No. Cost Control Cost Reduction
1 Cost control aims at Cost reduction is concerned with reducing
maintaining the costs in costs. It challenges all standards and
accordance with the endeavours to improvise them
established standards. continuously.
2 Cost control seeks to attain Cost reduction recognises no condition as
lowest possible cost under permanent, since a change will result in
existing conditions. lower cost.
3 In case of cost control, In case of cost reduction, it is on present
emphasis is on past and and future.
present.
4 Cost control is a preventive Cost reduction is a corrective function. It
operates even when an efficient cost
34 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2021

function. control system exists.

5 Cost control ends when targets Cost reduction has no visible end and is a
are achieved. continuous process.
(b) "Like other branches of accounting, cost accounting also has certain
limitations". The limitations of cost accounting are as follows:
(i) Expensive: It is expensive because analysis, allocation and absorption of
overheads requires considerable amount of additional work, and hence
additional money.
(ii) Requirement of reconciliation: The results shown by cost accounts differ from
those shown by financial accounts. Thus, preparation of reconciliation
statements is necessary to verify their accuracy.
(iii) Duplication of work: It involves duplication of work as organization has to
maintain two sets of accounts i.e. Financial Accounts and Cost Accounts.
(c)
S. Job Costing Batch Costing
No.
1 Method of costing used for non- standard Homogeneous products
and non-repetitive products produced as produced in a continuous
per customer specifications and against production flow in lots.
specific orders.
2 Cost determined for each Job. Cost determined in aggregate
for the entire Batch and then
arrived at on per unit basis.
3 Jobs are different from each other and Products produced in a batch
independent of each other. Each Job is are homogeneous and lack of
unique. individuality.
(d) When the by-products are of small total value, the amount realised from their
sale may be dealt in any one the following two ways:
(i) The sales value of the by-products may be credited to the Costing Profit
and Loss Account and no credit be given in the Cost Accounts. The credit to
the Costing Profit and Loss Account here is treated either as miscellaneous
income or as additional sales revenue.
(ii) The sale proceeds of the by-product may be treated as deductions from the
total costs. The sale proceeds in fact should be deducted either from the
production cost or from the cost of sales.
 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. A Ltd. produces a product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg of D
is required. As per the sales forecast conducted by the company, it will be able to sale
20,000 units of X in the coming year.
The following are the information related to the raw material D:
(i) The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 40 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ` 250 per kg.
There is an opening stock of 1,800 units of the finished product X.
The carrying cost of inventory is 14% p.a.
To place an order company has to incur ` 1,340 on paper and documentation work.
From the above information FIND OUT the followings in relation to raw material D:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 300 days for a year]
Employee Cost
2. JBL Sisters operates a boutique which works for various fashion houses and retail stores.
It has employed 26 workers and pays them on time rate basis. On an average an employee
is allowed 8 hours for boutique work on a piece of garment. In the month of December
2020, two workers M and J were given 15 pieces and 21 pieces of garments respectively
for boutique work. The following are the details of their work:
M J
Work assigned 15 pcs. 21 pcs.
Time taken 100 hours 140 hours

Workers are paid bonus as per Halsey System. The existing rate of wages is ` 60 per hour.
As per the new wages agreement the workers will be paid ` 72 per hour w.e.f. 1 stJanuary

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 53

2021. At the end of the month December 2020, the accountant of the company has wrongly
calculated wages to these two workers taking ` 72 per hour.
Required:
(i) CALCULATE the loss incurred due to incorrect rate selection.
(ii) CALCULATE the loss incurred due to incorrect rate selection, had Rowan scheme of
bonus payment followed.
(iii) CALCULATE the loss/ savings if Rowan scheme of bonus payment had followed.
(iv) DISCUSS the suitability of Rowan scheme of bonus payment for JBL Sisters?
Overheads: Absorption Costing Method
3. A manufacturing unit has purchased and installed a new machine at a cost of ` 24,90,000
to its fleet of 5 existing machines. The new machine has an estimated life of 12 years and
is expected to realise ` 90,000 as scrap value at the end of its working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant
maintenance work is carried out on weekends when production is totally halted. Th e
estimated maintenance hours are 416. During the production hours machine set -up
and change over works are carried out. During the set-up hours no production is done.
A total 312 hours are required for machine set-ups and change overs.
(ii) An estimated cost of maintenance of the machine is ` 2,40,000 p.a.
(iii) The machine requires a component to be replaced every week at a cost of ` 2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each
operator is paid ` 30,000 per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine
consumes 60 units per hour. During the maintenance the machine consumes only 10
units per hour. Rate of electricity per unit of consumption is ` 6.
(vi) Departmental and general works overhead allocated to the operation during last year
was ` 5,00,000. During the current year it is estimated to increase by 10%.
Required:
COMPUTE the machine hour rate.

© The Institute of Chartered Accountants of India

 54 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Activity Based Costing

4. The following budgeted information relates to N Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(`) (`) (`)
Selling price per unit 90 180 140
Direct cost per unit 50 90 95
Hours Hours Hours
Machine department 3 4 5
(machine hours per unit)
Assembly department 6 4 3
(direct labour hours per unit)
The estimated overhead expenses for the year 2021 will be as below:
Machine Department ` 73,60,000
Assembly Department ` 55,00,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respe ctive cost
drivers are found:
Cost Pool Amount (`) Cost Driver Quantity
Machining services 64,40,000 Machine hours 9,20,000 hours
Assembly services 44,00,000 Direct labour hours 11,00,000 hours
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups
Order processing 7,20,000 Customer orders 7,200 orders
Purchasing 4,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:
Products
X Y Z
Machine set-ups 4,500 3,000 1,500

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 55

Customer orders 2,200 2,400 2,600

Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:
(i) Absorption costing method;
(ii) Activity-based method.
Cost Sheet
5. RTA Ltd. has the following expenditures for the year ended 31 st December, 2020:
Sl. Amount (`) Amount (`)
No.
(i) Raw materials purchased 5,00,00,000
(ii) Freight inward 9,20,600
(iii) Wages paid to factory workers 25,20,000
(iv) Royalty paid for production 1,80,000
(v) Amount paid for power & fuel 3,50,000
(vi) Job charges paid to job workers 3,10,000
(vii) Stores and spares consumed 1,10,000
(viii) Depreciation on office building 50,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 40,000
- Sales office building 20,000 60,000
(x) Insurance premium paid for:
- Plant & Machinery 28,200
- Factory building 18,800 47,000
(xi) Expenses paid for quality control check 18,000
activities
(xii) Research & development cost paid for 20,000
improvement in production process
(xiii) Expenses paid for pollution control and 36,000
engineering & maintenance
(xiv) Salary paid to Sales & Marketing mangers 5,60,000
(xv) Salary paid to General Manager 6,40,000
(xvi) Packing cost paid for:

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 56 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

- Primary packing necessary to 46,000

maintain quality
- For re-distribution of finished goods 80,000 1,26,000
(xvii) Fee paid to independent directors 1,20,000
(xviii) Performance bonus paid to sales staffs 1,20,000
(xix) Value of stock as on 1 stJanuary, 2020:
- Raw materials 10,00,000
- Work-in-process 8,60,000
- Finished goods 12,00,000 30,60,000
(xx) Value of stock as on 31 stDecember, 2020:
- Raw materials 8,40,000
- Work-in-process 6,60,000
- Finished goods 10,50,000 25,50,000
Amount realized by selling of scrap and waste generated during manufacturing process –
` 48,000/-
From the above data you are requested to PREPARE Statement of Cost for RTA Ltd. for
the year ended 31st December, 2020, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of
Production, (iv) Cost of goods sold and (v) Cost of sales.
Cost Accounting System
6. The financial books of a company reveal the following data for the year ended 31 st March,
2020:
(`)
Opening Stock:
Finished goods 625 units 1,06,250
Work-in-process 92,000
01.04.2019 to 31.03.2020
Raw materials consumed 16,80,000
Direct Labour 12,20,000
Factory overheads 8,44,000
Administration overheads (production related) 3,96,000
Dividend paid 2,44,000
Bad Debts 36,000
Selling and Distribution Overheads 1,44,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 57

Interest received 76,000

Rent received 92,000
Sales 12,615 units 45,60,000
Closing Stock: Finished goods 415 units 91,300
Work-in-process 82,400
The cost records provide as under:
➢ Factory overheads are absorbed at 70% of direct wages.
➢ Administration overheads are recovered at 15% of factory cost.
➢ Selling and distribution overheads are charged at ` 6 per unit sold.
➢ Opening Stock of finished goods is valued at ` 240 per unit.
➢ The company values work-in-process at factory cost for both Financial and Cost Profit
Reporting.
Required:
(i) PREPARE statements for the year ended 31 st March, 2020 showing:
➢ the profit as per financial records
➢ the profit as per costing records.
(ii) PREPARE a statement reconciling the profit as per costing records with the profit as
per financial records.
Job Costing
7. SM Motors Ltd. is a manufacturer of auto components. Following are the details of
expenses for the year 2019-20:
(`)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2020-21, the company has received an order from a car manufacturer where
it estimates that the cost of material and labour will be ` 80,00,000 and ` 40,50,000
respectively. The company charges factory overhead as a percentage of direct labour and
administrative overheads as a percentage of factory cost based on previous year's cost.

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 58 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Cost of delivery of the components at customer's premises is estimated at ` 4,50,000.

You are required to:
(i) CALCULATE the overhead recovery rates based on actual costs for 2019-20.
(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the
desired profit is 25% on sales.
Process Costing
8. A company produces a component, which passes through two processes. During the
month of November, 2020, materials for 40,000 components were put into Process- I of
which 30,000 were completed and transferred to Process- II. Those not transferred to
Process- II were 100% complete as to materials cost and 50% complete as to labour and
overheads cost. The Process- I costs incurred were as follows:
Direct Materials ` 3,00,000
Direct Wages ` 3,50,000
Factory Overheads ` 2,45,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished
goods stores. There was a normal loss with no salvage value of 200 units in Process II.
There were 1,800 units, remained unfinished in the process with 100% complete as to
materials and 25% complete as regard to wages and overheads.
Costs incurred in Process-II are as follows:
Packing Materials ` 80,000
Direct Wages ` 71,125
Factory Overheads ` 85,350
Packing material cost is incurred at the end of the second process as protective packing
to the completed units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.
Service Costing
9. VPS is a public school having 25 buses each plying in different directions for the transport
of its school students. In view of large number of students availing of the bus service, the
buses work two shifts daily both in the morning and in the afternoon. The buses are
garaged in the school. The workload of the students has been so arranged that in the
morning, the first trip picks up senior students and the second trip plying an hour later picks

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 59

up junior students. Similarly, in the afternoon, the first trip takes the juni or students and an
hour later the second trip takes the senior students home.
The distance travelled by each bus, one way is 8 km. The school works 22 days in a month
and remains closed for vacation in May and June. The bus fee, however, is payable by the
students for all the 12 months in a year.
The details of expenses for a year are as under:
Driver's salary – payable for all the 12 in months ` 12,000 per month per driver
Cleaner's salary payable for all the 12 months ` 8,000 per month per cleaner
License fees, taxes etc. ` 8,400 per bus per annum
Insurance Premium ` 15,600 per bus per annum
Repairs and Maintenance ` 20,500 per bus per annum
Purchase price of the bus ` 20,00,000 each
Life of the bus 16 years
Scrap value ` 1,60,000
Diesel Cost ` 78.50 per litre
Each bus gives an average of 5 km. per litre of diesel. The seating capacity of each bus is
40 students.
The school follows differential transportation fees based on distance travelled as under:
Students picked up and dropped within Transportation Percentage of students
the range of distance from the school fee availing this facility
2 km. 25% of Full 15%
4 km. 50% of Full 30%
8 km. Full 55%
Due to a pandemic, lockdown imposed on schools and the school remained closed from
April 2020 to December 2020. Drivers and cleaners were paid 75% of their salary during
the lockdown period. Repairing cost reduced to 75% for the year 2020.
Ignore the interest cost.
Required:
(i) PREPARE a statement showing the expenses of operating a single bus and the fleet
of 25 buses for a year.
(ii) FIND OUT transportation fee per student per month in respect of:
(a) Students coming from a distance of upto 2 km. from the school.
(b) Students coming from a distance of upto 4 km. from the school; and

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 60 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

(c) Students coming from a distance of upto 8 km. from the school.
(iii) CALCULATE the minimum bus fare that has to be recovered from the students for
the year 2020.
Standard Costing
10. LM Limited produces a product 'SX4' which is sold in a 10 Kg. packet. The standard cost
card per packet of 'SX4' is as follows:
(`)
Direct materials 10 kg @ ` 90 per kg 900
Direct labour 8 hours @ ` 80 per hour 640
Variable Overhead 8 hours @ ` 20 per hour 160
Fixed Overhead 250
1,950
Budgeted output for a quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.
Actual costs for this quarter are as follows:
(`)
Direct Materials 8,900 Kg @ ` 92 per Kg. 8,18,800
Direct Labour 7,000 hours @ ` 84 per hour 5,88,000
Variable Overhead incurred 1,40,000
Fixed Overhead incurred 2,60,000
You are required to CALCULATE:
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance
Marginal Costing (Short- term Decision making)
11. Aditya Limited manufactures three different products and the following information has
been collected from the books of accounts:

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Products
S T U
Sales Mix 35% 35% 30%
Selling Price ` 300 ` 400 ` 200
Variable Cost ` 150 ` 200 ` 120
Total Fixed Costs ` 18,00,000
Total Sales ` 60,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of
Product U and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 50% 25% 25%
Selling Price ` 300 ` 400 ` 300
Variable Cost ` 150 ` 200 ` 150
Total Fixed Costs ` 18,00,000
Total Sales ` 64,00,000
Required
(i) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing
product mix.
(ii) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the
proposed product mix.
Budget and Budgetary Control
12. RS Ltd manufactures and sells a single product and has estimated sales revenue of
` 302.4 lakh during the year based on 20% profit on selling price. Each unit of product
requires 6 kg of material A and 3 kg of material B and processing time of 4 hours in machine
shop and 2 hours in assembly shop. Factory overheads are absorbed at a blanket rate of
20% of direct labour. Variable selling & distribution overheads are ` 60 per unit sold and
fixed selling & distribution overheads are estimated to be ` 69,12,000.
The other relevant details are as under:
Purchase Price: Material A ` 160 per kg
Materials B ` 100 per kg
Labour Rate: Machine Shop ` 140 per hour
Assembly Shop ` 70 per hour

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 62 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Finished Stock Material A Material B

Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
Required:
(i) CALCULATE number of units of product proposed to be sold and selling price per
unit,
(ii) PREPARE Production Budget in units, and
(iii) PREPARE Material Purchase Budget in units.
Miscellaneous
13. (a) WRITE note on cost-plus-contracts.
(b) HOW apportionment of joint costs upto the point of separation amongst the joint
products using market value at the point of separation and net realizable value
method is done? DISCUSS.
(c) DISCUSS cost classification based on variability and controllability.
(d) DESCRIBE the salient features of budget manual.

SUGGESTED HINTS/ANSWERS

1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘D’:
Sales forecast of the product ‘X’ 20,000 units
Less: Opening stock of ‘X’ 1,800 units
Fresh units of ‘X’ to be produced 18,200 units
Raw material required to produce 18,200 units of ‘X’ 72,800 kg.
(18,200 units × 4 kg.)
Less: Opening Stock of ‘D’ 2,000 kg.
Annual demand for raw material ‘D’ 70,800 kg.
(ii) Computation of Economic Order Quantity (EOQ):
2  Annualdemandof 'D'  Orderingcos t
EOQ =
Carryingcos t per unit per annum

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 63

2  70,800kg. ` 1,340 2  70,800kg. ` 1,340

= = = 2,328 kg.
` 250 14% ` 35

(iii) Re- Order level:

= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'D'  
=  + 40kg.   8 days 
 300days  

 70,800kg.  
=  + 40kg.   8 days  = 2,208 kg.
 300days  
(iv) Minimum consumption per day of raw material ‘D’:
Average Consumption per day = 236 Kg.
Hence, Maximum Consumption per day = 236 kg. + 40 kg. = 276 kg.
So Minimum consumption per day will be
Min.consumption+ Max.consumption
Average Consumption =
2
Min.consumption + 276 kg.
Or, 236 kg. =
2
Or, Min. consumption = 472 kg – 276 kg. = 196 kg.
(a) Re-order Quantity :
EOQ – 400 kg. = 2,328 kg. – 400 kg.= 1,928 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 2,208 kg. + 1,928 kg. – (196 kg. × 4 days) = 4,136 kg. – 784 kg. = 3,352 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 2,208 kg. – (236 kg. × 6 days) = 792 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,928 kg. 2,328 kg.
II No. of orders a 70,800kg. 70,800kg.
= 36.72or 37orders = 30.41or 31orders
year 1,928kg. 2,328kg.

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 64 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

III Ordering Cost 37 orders × ` 1,340 31 orders × ` 1,340

= ` 49,580 = ` 41,540
IV Average 1,928kg. 2,328kg.
= 964kg. = 1,164kg.
Inventory 2 2
V Carrying Cost 964 kg. × ` 35 = ` 33,740 1,164 kg. × ` 35 = ` 40,740
VI Total Cost ` 83,320 ` 82,280
Extra Cost incurred due to not ordering EOQ = `83,320 - `82,280 = `1,040
2. Workings Notes:
Calculation of Total hours saved:
M J
No. of garments assigned (Pieces.) 15 21
Hour allowed per piece (Hours) 8 8
Total hours allowed (Hours) 120 168
Hours Taken (Hours) 100 140
Hours Saved (Hours) 20 28
(i) Calculation of loss incurred due to incorrect rate selection:
(While calculating loss only excess rate per hour has been taken)
M J Total
(`) (`) (`)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × `12) (140 Hrs. × `12)
Bonus (as per Halsey Scheme) 120 168 288
(50% of Time Saved × Excess (50% of 20 Hrs. × `12) (50% of 28 Hrs. × `12)
Rate)
Excess Wages Paid 1,320 1,848 3,168
(ii) Calculation of loss incurred due to incorrect rate selection had Rowan scheme
of bonus payment followed:
M J Total
(`) (`) (`)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × `12) (140 Hrs. × `12)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 65

Bonus (as per Rowan Scheme) 200 280 480

 Time Taken   100   140 
 Time Allowed  TimeSaved  ExcessRate    20  ` 12    28  `12 
   120   168 

Excess Wages Paid 1,400 1,960 3,360

(iii) Calculation of amount that could have been saved if Rowan Scheme were
followed
M J Total (`)
(`) (`)
Wages paid under Halsey Scheme 1,320 1,848 3,168
Wages paid under Rowan Scheme 1,400 1,960 3,360
Difference (loss) (80) (112) (192)
(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with
the nature of business in which JBL Sisters operates:
(a) Under Rowan Scheme of bonus payment, workers cannot increase their
earnings or bonus by merely increasing its work speed. Bonus under Rowan
Scheme is maximum when the time taken by a worker on a job is half of the time
allowed. As this fact is known to the workers, therefore, they work at such a
speed which helps them to maintain the quality of output too.
(b) If the rate setting department commits any mistake in setting standards for time
to be taken to complete the works, the loss incurred will be relatively low.
3. Working Note:
1. Effective machine hour:
= Budgeted working hours – Machine Set-up time
= 2,496 hours – 312 hours = 2,184 hours.
2. Operators’ salary per annum:
Salary (3 operators × `30,000 × 12 months) ` 10,80,000
Add: Fringe benefits (20% of `10,80,000) ` 2,16,000
` 12,96,000
3. Depreciation per annum
` 24,90,000 − ` 90,000
= ` 2,00,000
12years

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 66 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Computation of Machine hour Rate

Amount Amount per
p.a. (`) hour (`)
Standing charges
 `12,96,000 1  12,96,000 98.90
Operators’ Salary  × 
 6machines 2,184 hours 
Departmental and general overheads:
(` 5,00,000 × 110%) 5,50,000 41.97
 `5,50,000 1 
 × 
 6machines 2,184 hours 
(A) 18,46,000 140.87
Machine Expenses
 `2,00,000  2,00,000 91.58
Depreciation  
 2,184hours 
Electricity:
During working hours (2,496 hours × 60 units `6) 8,98,560 411.43
During maintenance hours (416 hours × 10 units `6) 24,960 11.43
Component replacement cost (2,400 × 52 weeks) 1,24,800 57.14
Machine maintenance cost 2,40,000 109.89
(B) 14,88,320 681.47
Machine Hour Rate (A + B) 822.34
4. (i) Profit Statement using Absorption costing method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit (`) 90 180 140
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit (`) 50 90 95
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads:

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 67

(i) Machine department 24,00,000 25,60,000 24,00,000 73,60,000

(`) (Working note-1)
(ii) Assembly department 30,00,000 16,00,000 9,00,000 55,00,000
(`) (Working note-1)
G. Total Cost (`) [E+F] 1,04,00,000 1,13,60,000 90,00,000 3,07,60,000
H. Profit (C-G) (14,00,000) 30,40,000 (6,00,000) 10,40,000
(ii) Profit Statement using Activity based costing (ABC) method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit 90 180 140
(`)
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit (`) 50 90 95
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (`) 21,00,000 22,40,000 21,00,000 64,40,000
(ii) Assembly services (`) 24,00,000 12,80,000 7,20,000 44,00,000
(iii) Set-up costs (`) 4,50,000 3,00,000 1,50,000 9,00,000
(iv) Order processing (`) 2,20,000 2,40,000 2,60,000 7,20,000
(v) Purchasing (`) 1,50,000 1,75,000 75,000 4,00,000
G. Total Cost (`) [E+F] 1,03,20,000 1,14,35,000 90,05,000 3,07,60,000
H. Profit (`) (C-G) (13,20,000) 29,65,000 (6,05,000) 10,40,000
Working Notes:
1.
Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours 3,00,000 3,20,000 3,00,000 9,20,000
[A×B]

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 68 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

D. Rate per hour (`) 8 8 8

E. Machine Dept. cost 24,00,000 25,60,000 24,00,000 73,60,000
[C×D]
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour (`) 5 5 5
I Assembly Dept. cost 30,00,000 16,00,000 9,00,000 55,00,000
[G×H]

`73,60,000
Machine hour rate = =`8
9,20,000hours

`55,00,000
Labour hour rate = =`5
11,00,000hours

2. Calculation of cost driver rate

Cost Pool Amount Cost Driver Quantity Driver rate
(`) (`)
Machining 64,40,000 Machine hours 9,20,000 hours 7.00
services
Assembly 44,00,000 Direct labour hours 11,00,000 hours 4.00
services
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups 100.00
Order processing 7,20,000 Customer orders 7,200 orders 100.00
Purchasing 4,00,000 Purchase orders 800 orders 500.00

3. Calculation of activity-wise cost

Products
X Y Z Total
A. Machining hours (Refer 3,00,000 3,20,000 3,00,000 9,20,000
Working note-1)
B. Machine hour rate (`) 7 7 7
(Refer Working note-2)
C. Machining services 21,00,000 22,40,000 21,00,000 64,40,000
cost (`) [A×B]

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D. Labour hours (Refer 6,00,000 3,20,000 1,80,000 11,00,000

Working note-1)
E. Labour hour rate (`) 4 4 4
(Refer Working note-2)
F. Assembly services 24,00,000 12,80,000 7,20,000 44,00,000
cost (`) [D×E]
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (`) 100 100 100
(Refer Working note-2)
I. Set-up cost (`) [G×H] 4,50,000 3,00,000 1,50,000 9,00,000
J. Customer orders 2,200 2,400 2,600 7,200
K. Rate per order (`) (Refer 100 100 100
Working note-2)
L. Order processing cost 2,20,000 2,40,000 2,60,000 7,20,000
(`) [J×K]
M. Purchase orders 300 350 150 800
N. Rate per order (`) (Refer 500 500 500
Working note-2)
O. Purchasing cost (`) 1,50,000 1,75,000 75,000 4,00,000
[M×N]
5. Statement of Cost of RTA Ltd. for the year ended 31 st December, 2020:
Sl. Particulars Amount (`) Amount (`)
No.
(i) Material Consumed:
- Raw materials purchased 5,00,00,000
- Freight inward 9,20,600
Add: Opening stock of raw materials 10,00,000
Less: Closing stock of raw materials (8,40,000) 5,10,80,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 25,20,000
(iii) Direct expenses:
- Royalty paid for production 1,80,000
- Amount paid for power & fuel 3,50,000
- Job charges paid to job workers 3,10,000 8,40,000

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Prime Cost 5,44,40,600

(iv) Works/ Factory overheads:
- Stores and spares consumed 1,10,000
- Repairs & Maintenance paid for plant & 40,000
machinery
- Insurance premium paid for plant & 28,200
machinery
- Insurance premium paid for factory 18,800
building
- Expenses paid for pollution control and
engineering & maintenance 36,000 2,33,000
Gross factory cost 5,46,73,600
Add: Opening value of W-I-P 8,60,000
Less: Closing value of W-I-P (6,60,000)
Factory Cost 5,48,73,600
(v) Quality control cost:
- Expenses paid for quality control check 18,000
activities
(vi) Research & development cost paid for 20,000
improvement in production process
(vii) Less: Realisable value on sale of scrap and (48,000)
waste
(viii) Add: Primary packing cost 46,000
Cost of Production 5,49,09,600
Add: Opening stock of finished goods 12,00,000
Less: Closing stock of finished goods (10,50,000)
Cost of Goods Sold 5,50,59,600
(ix) Administrative overheads:
- Depreciation on office building 50,000
- Salary paid to General Manager 6,40,000
- Fee paid to independent directors 1,20,000 8,10,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales 20,000
office building

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- Salary paid to Manager- Sales & 5,60,000

Marketing
- Performance bonus paid to sales staffs 1,20,000 7,00,000
(xi) Distribution overheads:
- Packing cost paid for re-distribution of
finished goods 80,000
Cost of Sales 5,66,49,600
6. (i) Statement of Profit as per financial records
(for the year ended March 31, 2020)
(`) (`)
To Opening stock of Finished 1,06,250 By Sales 45,60,000
Goods
To Work-in-process 92,000 By Closing stock of finished 91,300
Goods
To Raw materials consumed 16,80,000 By Work-in-Process 82,400
To Direct labour 12,20,000 By Rent received 92,000
To Factory overheads 8,44,000 By Interest received 76,000
To Administration overheads 3,96,000
To Selling & distribution 1,44,000
overheads
To Dividend paid 2,44,000
To Bad debts 36,000
To Profit 1,39,450
49,01,700 49,01,700

Statement of Profit as per costing records

(for the year ended March 31,2020)
(`)
Sales revenue (A) 45,60,000
(12,615 units)
Cost of sales:
Opening stock 1,50,000
(625 units × ` 240)
Add: Cost of production of 12,405 units 43,28,140

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 72 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

(Refer to working note 2)

Less: Closing stock (1,44,795)
 ` 43,28,140  415 units 
 
 12,405 units 
Production cost of goods sold (12,615 units) 43,33,345
Selling & distribution overheads
(12,615 units × ` 6) 75,690
Cost of sales: (B) 44,09,035
Profit: {(A) – (B)} 1,50,965
(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial
records)

(`) (`)
Profit as per Cost Accounts 1,50,965
Add: Administration overheads over absorbed 1,68,540
(` 5,64,540 – ` 3,96,000)
Opening stock overvalued 43,750
(`1,50,000 – ` 1,06,250)
Interest received 76,000
Rent received 92,000
Factory overheads over recovered 10,000 3,90,290
(` 8,54,000 – ` 8,44,000)
5,41,255
Less: Selling & distribution overheads under recovery 68,310
(` 1,44,000 – ` 75,690)
Closing stock overvalued (`1,44,795 – ` 91,300) 53,495
Dividend 2,44,000
Bad debts 36,000 (4,01,805)
Profit as per financial accounts 1,39,450

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 73

Working notes:
1. Number of units produced
Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405
2. Cost Sheet
(`)
Raw materials consumed 16,80,000
Direct labour 12,20,000
Prime cost 29,00,000
Factory overheads 8,54,000
(70% of direct wages)
Factory cost 37,54,000
Add: Opening work-in-process 92,000
Less: Closing work-in-process (82,400)
Factory cost of goods produced 37,63,600
Administration overheads 5,64,540
(15% of factory cost)
Cost of production of 12,405 units 43,28,140
(Refer to working note 1)
Cost of production per unit:
TotalCost of Pr oduction `43,28,140
= = = ` 348.90
No.of unitsproduced 12,405units

7. (i) Calculation of Overhead Recovery Rate:

Factory Overheadin 2019 − 20
Factory Overhead Recovery Rate = 100
Direct Labour Costsin 2019 − 20
` 30,80,000
= 100 = 34% of Direct labour
` 90,50,000

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 74 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Administrative Overhead Recovery Rate

Administrative Overheadin 2019 − 20
= 100
Factory Costs in 2019 − 20(W.N.)

= ` 20,50,400 100 = 6.91% of Factory Cost

` 2,96, 80,000

Working Note:
Calculation of Factory Cost in 2019-20
Particulars Amount (`)
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Direct Labour 90,50,000
Prime Cost 2,66,00,000
Factory Overhead 30,80,000
Factory Cost 2,96,80,000
(ii) Job Cost Sheet for the order received in 2020-21
Particulars Amount (`)
Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of ` 40,50,000) 13,77,000
Factory Cost 1,34,27,000
Administrative Overhead (6.91% of ` 1,34,27,000) 9,27,806
Cost of delivery 4,50,000
Total Cost 1,48,04,806
Add: Profit @ 25% of Sales or 33.33% of cost 49,34,935
Sales value (Price to be quoted for the order) 1,97,39,741

Hence the price to be quoted is ` 1,97,39,741

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 75

8. Process I
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000

Particulars Materials Labour Overhead Total

Cost incurred (`) 3,00,000 3,50,000 2,45,000 8,95,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (`) 7.50 10.00 7.00 24.50

Process-I Account
Particulars Units (`) Particulars Units (`)
To Materials 40,000 3,00,000 By Process-II A/c 30,000 7,35,000
(30,000 units × `24.5)
To Labour 3,50,000 By Closing WIP* 10,000 1,60,000
To Overhead 2,45,000
40,000 8,95,000 40,000 8,95,000

* (Material 10,000 units × ` 7.5) + (Labour 5,000 units × ` 10) + (Overheads 5,000 units × `7)
= ` 75,000 + ` 50,000 + ` 35,000 = ` 1,60,000

Process II
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 -- -- --
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450

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 76 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Particulars Materials Labour Overhead Total

Process-I Cost 7,35,000 -- -- 7,35,000
Cost incurred (`) -- 71,125 85,350 1,56,475
Equivalent units 29,800 28,450 28,450 --
Cost per equivalent unit (`) 24.6644 2.5000 3.0000 30.1644

Process-II Account
Particulars Units (`) Particulars Units (`)
To Process-I A/c 30,000 7,35,000 By Normal loss A/c 200 --
To Packing Material -- 80,000 By Finished Goods 28,000* 9,24,604
Stock A/c
To Direct Wages -- 71,125 By Closing WIP 1,800** 46,871
To Factory Overhead -- 85,350
30,000 9,71,475 30,000 9,71,475
* 28,000 × ` 30.1644 = ` 8,44,603 + ` 80,000 (Packing Material Cost) = ` 9,24,604
** 1,800 units × ` 24.6644 + 450 units × (` 2.5 + `3) = ` 46,871
9. (i) Statement showing the expenses of operating a single bus and
the fleet of 25 buses for a year
Particulars Per bus Fleet of 25
per annum buses
(`) per annum
(`)
Running costs : (A)
Diesel (Refer to working note 1) 2,21,056 55,26,400
Repairs & maintenance costs: (B) 20,500 5,12,500
Fixed charges:
Driver's salary 1,44,000 36,00,000
(` 12,000 × 12 months)
Cleaners salary 96,000 24,00,000
(` 8,000 × 12 months)
Licence fee, taxes etc. 8,400 2,10,000
Insurance 15,600 3,90,000
 ` 20,00,000 − `1,60,000  1,15,000 28,75,000
Depreciation  
 16 years 

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 77

Total fixed charges: (C) 3,79,000 94,75,000

Total expenses: (A+B+C) 6,20,556 1,55,13,900
(ii) Average cost per student per month in respect of students coming from a
distance of:
(a) 2 km. from the school {` 6,20,556 / (236 students × 12 months)} ` 219.12
(Refer to Working Note 2)
(b) 4 km. from the school (` 219.12 × 2) ` 438.24
(c) 8 km. from the school (` 219.12 × 4) ` 876.48
(iii) Calculation of minimum bus fare to be recovered from the students during the
year 2020:
Statement showing the expenses of operating a single bus in year 2020
Particulars Per bus
per annum
(`)
Running costs : (A)
Diesel (Refer to working note 3) 66,316.80
Repairs & maintenance costs: (B) 15,375
(` 20,500 x 0.75)
Fixed charges:
Driver's salary 1,17,000
{` 12,000 × 3 months + (75% of ` 12,000 × 9 months)}
Cleaners salary 78,000
{` 8,000 × 3 months + (75% of ` 8,000 × 9 months)}
Licence fee, taxes etc. 8,400
Insurance 15,600
 ` 20,00,000 − `1,60,000  1,15,000
Depreciation  
 16 years 
Total fixed charges: (C) 3,34,000
Total expenses: (A+B+C) 4,15,691.80
Minimum bus fare to be recovered:
(a) 2 km. from the school {` 4,15,691.8 / (236 students × 12 months)} ` 146.78
(Refer to Working Note 2)
(b) 4 km. from the school (` 146.78 × 2) ` 293.56
(c) 8 km. from the school (`146.78 × 4) ` 587.12

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 78 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (8 km. × 2 trips) 16 km.
Distance travelled per day by a bus (16 km. × 4 shifts) 64 km.
Distance travelled during a month ( 64 km. × 22 days) 1,408 km.
Distance travelled per year (1,408 × 10 months) 14,080 km.
No. of litres of diesel required per bus per year 2,816 litres
(14,080 km. ÷ 5 km.)
Cost of diesel per bus per year (2,816 litres × ` 78.50) ` 2,21,056
2. Calculation of equivalent number of students per bus:
Bus capacity of 2 trips (40 students × 2 trips) 80 students
1/ th fare students (15% × 80 students) 12 students
4

½ fare students (30% × 80 students × 2) (equivalent to 1/ th

4 48 students
fare students)
Full fare students (55% × 80 students × 4) (equivalent to 1/4th 176 students
fare students)
Total students equivalent to 1/4th fare students 236 students
3. Calculation of diesel cost per bus in Year 2020:
Distance travelled during a month ( 64 km. × 22 days) 1,408 km.
Distance travelled during the year 2020 (1,408 × 3 months) 4,224 km.
No. of litres of diesel required per bus per year 844.8 litres
(4,224 km. ÷ 5 km.)
Cost of diesel per bus per year (844.8 litres × ` 78.50) ` 66,316.80
10. (i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ` 90 (9,000 kg. – 8,900 kg.)
= ` 9,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 8,900 kg. (` 90 – ` 92) = ` 17,800 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 79

= (9,000 kg. × ` 90) – (8,900 kg. × ` 92)

= ` 8,10,000 – ` 8,18,800
= ` 8,800 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
9,000
= ` 80 (  8hours – 7,000 hrs.)
10
= ` 80 (7,200 hrs. – 7,000 hrs.)
= ` 16,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 7,000 hrs. (` 80 – ` 84)
= ` 28,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × ` 80) – (7,000 hrs. × ` 84)
= ` 5,76,000 – ` 5,88,000
= ` 12,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × ` 20) – ` 1,40,000
= ` 4,000 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
` 250
=  9,000kgs. − ` 2,60,000
10 kgs.
= ` 2,25,000 – ` 2,60,000 = ` 35,000 (Adverse)
11. (i) Computation of PV ratio, contribution and break-even sales for existing product
mix
Products
Total
S T U
Selling Price (`) 300 400 200
Less: Variable Cost (`) 150 200 120

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Contribution per unit (`) 150 200 80

P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 35% 35% 30%
Contribution per rupee of sales
17.5% 17.5% 12% 47%
(P/V Ratio × Sales Mix)
Present Total Contribution (`60,00,000 × 47%) ` 28,20,000
Less: Fixed Costs ` 18,00,000
Present Profit ` 10,20,000
Present Break Even Sales (`18,00,000/0.47) ` 38,29,787
(ii) Computation of PV ratio, contribution and break-even sale for proposed product
mix
Products
S T M Total
Selling Price (`) 300 400 300
Less: Variable Cost (`) 150 200 150
Contribution per unit (`) 150 200 150
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 50% 25% 25%
Contribution per rupee of sales
25% 12.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution (`64,00,000 x 50%) ` 32,00,000
Less: Fixed Costs ` 18,00,000
Proposed Profit ` 14,00,000
Proposed Break Even Sales (`18,00,000/0.50) ` 36,00,000
12. Workings:
Statement Showing “Total Variable Cost for the year”
Particulars Amount
(`)
Estimated Sales Revenue 3,02,40,000
Less: Desired Profit Margin on Sale @ 20% 60,48,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 81

Estimated Total Cost 2,41,92,000

Less: Fixed Selling and Distribution Overheads 69,12,000
Total Variable Cost 1,72,80,000
Statement Showing “Variable Cost per unit”
Particulars Variable Cost
p.u. (`)
Direct Materials:
A: 6 Kg. @ ` 160 per kg. 960
B: 3 Kg. @ ` 100 per kg. 300
Labour Cost:
Machine Shop: 4 hrs. @ ` 140 per hour 560
Assembly Shop: 2 hrs. @ ` 70 per hour 140
Factory Overheads: 20% of (` 560 + ` 140) 140
Variable Selling & Distribution Expenses 60
Total Variable Cost per unit 2,160
(i) Calculation of number of units of product proposed to be sold and selling price
per unit:
Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ` 1,72,80,000 / ` 2,160
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ` 3,02,40,000 / 8,000 units
= ` 3,780
(ii) Production Budget (units)
Particulars Units
Budgeted Sales 8,000
Add: Closing Stock 3,000
Total Requirements 11,000
Less: Opening Stock (2,500)
Required Production 8,500

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 82 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

(iii) Materials Purchase Budget (Kg.)

Particulars Material Material
A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)
Quantity to be purchased 51,500 27,000

13. (a) These contracts provide for the payment by the contractee of the actual cost of
construction plus a stipulated profit, mutually decided between the two parties.
The main features of these contracts are as follows:
(i) The practice of cost-plus contracts is adopted in the case of those contracts
where the probable cost of the contracts cannot be ascertained in advance with
a reasonable accuracy.
(ii) These contracts are preferred when the cost of material and labour is not steady
and the contract completion may take number of years.
(iii) The different costs to be included in the execution of the contract are mutually
agreed, so that no dispute may arise in future in this respect. Under such type
of contracts, contractee is allowed to check or scrutinize the concerned books,
documents and accounts.
(iv) Such a contract offers a fair price to the contractee and also a reasonable profit
to the contractor.
The contract price here is ascertained by adding a fixed and mutually pre -decided
component of profit to the total cost of the work.
(b) Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of
joint costs to joint products upto the split off point. It is difficult to apply if the market
value of the product at the point of separation is not available. It is useful method
where further processing costs are incurred disproportionately.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 83

Net realizable value Method: From the sales value of joint products (at finished
stage) the followings are deducted:
− Estimated profit margins
− Selling & distribution expenses, if any
− Post split off costs.
The resultant figure so obtained is known as net realizable value of joint products.
Joint costs are apportioned in the ratio of net realizable value.
(c) Cost classification based on variability
(i) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuatio ns in
the levels of activity (output or turnover). They do not tend to increase or de -
crease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine
shop foreman.

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 84 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

(d) Salient features of Budget Manual

• Budget manual contains much information which is required for effective
budgetary planning.
• A budget manual is a collection of documents that contains key information for
those involved in the planning process.
• An introductory explanation of the budgetary planning and control process,
including a statement of the budgetary objective and desired results is included
in Budget Manual.
• Budget Manual contains a form of organisation chart to show who is responsible
for the preparation of each functional budget and the way in which the budgets
are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets,
with explanations concerning their completion is included in Budget Manual.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. A company uses four raw materials A, B, C and D for a particular product for which the
following data apply :–
Raw Usage Re-order Price Delivery period Re- Minimum
Material per unit Quantity per Kg. (in weeks) order level
of (Kg.) (`) Minimum Average Maximum level (Kg.)
product (Kg.)
(Kg.)
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?
Weekly production varies from 550 to 1,250 units, averaging 900 units of the said
product. What would be the following quantities:–
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D?
Employee Cost
2. GZ Ld. pays the following to a skilled worker engaged in production works. The following
are the employee benefits paid to the employee:
(a) Basic salary per day `1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance `50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA),
only if works more than 9 hours a day otherwise no
overtime allowance. If works for more than 9 hours
a day then overtime is considered after 8 th hours.

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 2 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

(f) Work of holiday and Double of per day basic rate provided works atleast
Sunday 4 hours. The holiday and Sunday basic is eligible
for all allowances and statutory deductions.
(h) Earned leave & Casual These are paid leave.
leave
(h) Employer’s contribution to 12% of basic and DA
Provident fund
(i) Employer’s contribution to 7% of basic and DA
Pension fund
The company normally works 8-hour a day and 26-day in a month. The company
provides 30 minutes lunch break in between.
During the month of August 2020, Mr.Z works for 23 days including 15 th August and a
Sunday and applied for 3 days of casual leave. On 15th August and Sunday he worked
for 5 and 6 hours respectively without lunch break.
On 5th and 13 th August he worked for 10 and 9 hours respectively.
During the month Mr. Z worked for 100 hours on Job no.HT200.
You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200.
Overheads: Absorption Costing Method
3. You are given the following information of the three machines of a manufacturing
department of X Ltd.:
Preliminary estimates of expenses (per annum)
Machines
Total (`)
A (`) B (`) C (`)
Depreciation 2,00,000 75,000 75,000 50,000
Spare parts 1,00,000 40,000 40,000 20,000
Power 4,00,000
Consumable stores 80,000 30,000 25,000 25,000
Insurance of machinery 80,000
Indirect labour 2,00,000
Building maintenance expenses 2,00,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

Annual interest on capital outlay 1,00,000 40,000 40,000 20,000

Monthly charge for rent and rates 20,000
Salary of foreman (per month) 42,000
Salary of Attendant (per month) 12,000
(The foreman and the attendant control all the three machines and spend equal time on
them.)
The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays.
The manufacturing department works 8 hours in a day but Saturdays are half days. All
machines work at 90% capacity throughout the year and 2% is reasonable for
breakdown.
You are required to :
CALCULATE predetermined machine hour rates for the above machines after taking into
consideration the following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
• 20% general increase in wages rates.
Activity Based Costing
4. KD Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume
are as follows:
Cost pool Budgeted Cost driver Budgeted
overheads (`) volume
Material procurement 18,42,000 No. or orders 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820

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 4 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

The company has produced a batch of 7,600 units, its material cost was `24,62,000 and
wages `4,68,500. Usage activities of the said batch are as follows:
Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
No. of inspections 18
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.
Cost Sheet
5. The following details are available from the books of R Ltd. for the year ending
31st March 2020:
Particulars Amount (`)
Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Direct wages 60,00,000
Carriage inward 1,72,600
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000
Expenditure on research and development on new production 9,60,000
technology
Salary to accountants 7,20,000
Employer’s contribution to EPF & ESI 7,20,000
Cost of power & fuel 28,00,000
Production planning office expenses 12,60,000
Salary to delivery staffs 14,30,000
Income tax for the assessment year 2019-20 2,80,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fees to independent directors 9,40,000
Donation to PM-national relief fund 1,10,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

Value of sales 2,82,60,000

Position of inventories as on 01-04-2019:
- Raw Material 6,20,000
- W-I-P 7,84,000
- Finished goods 14,40,000
Position of inventories as on 31-03-2020:
- Raw Material 4,60,000
- W-I-P 6,64,000
- Finished goods 9,80,000
From the above information PREPARE a cost sheet for the year ended 31 st March 2020.
Cost Accounting System
6. A manufacturing company disclosed a net loss of `6,94,000 as per their cost accounts
for the year ended March 31,2020. The financial accounts however disclosed a net loss
of `10,20,000 for the same period. The following information was revealed as a result of
scrutiny of the figures of both the sets of accounts.
(`)
(i) Factory Overheads under-absorbed 80,000
(ii) Administration Overheads over-absorbed 1,20,000
(iii) Depreciation charged in Financial Accounts 6,50,000
(iv) Depreciation charged in Cost Accounts 5,50,000
(v) Interest on investments not included in Cost Accounts 1,92,000
(vi) Income-tax provided 1,08,000
(vii) Interest on loan funds in Financial Accounts 4,90,000
(viii) Transfer fees (credit in financial books) 48,000
(ix) Stores adjustment (credit in financial books) 28,000
(x) Dividend received 64,000
PREPARE a memorandum Reconciliation Account.
Batch Costing
7. A Ltd. manufactures mother boards used in smart phones. A smart phone requires one
mother board. As per the study conducted by the Indian Cellular Association, there will
be a demand of 180 million smart phones in the coming year. A Ltd. is expected to have
a market share of 5.5% of the total market demand of the mother boards in the coming

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 6 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

year. It is estimated that it costs `6.25 as inventory holding cost per board per month
and that the set-up cost per run of board manufacture is `33,500.
(i) COMPUTE the optimum run size for board manufacturing?
(ii) Assuming that the company has a policy of manufacturing 80,000 boards per run,
CALCULATE how much extra costs the company would be incurring as compared to
the optimum run suggested in (i) above?
Job Costing
8. AP Ltd. received a job order for supply and fitting of plumbing materials. Following are
the details related with the job work:
Direct Materials
AP Ltd. uses a weighted average method for the pricing of materials issues.
Opening stock of materials as on 12 th August 2020:
- 15mm GI Pipe, 12 units of (15 feet size) @ `600 each
- 20mm GI Pipe, 10 units of (15 feet size) @ ` 660 each
- Other fitting materials, 60 units @ ` 26 each
- Stainless Steel Faucet, 6 units @ ` 204 each
- Valve, 8 units @ ` 404 each
Purchases:
On 16th August 2020:
- 20mm GI Pipe, 30 units of (15 feet size) @ ` 610 each
- 10 units of Valve @ ` 402 each
On 18th August 2020:
- Other fitting materials, 150 units @ ` 28 each
- Stainless Steel Faucet, 15 units @ ` 209 each
On 27th August 2020:
- 15mm GI Pipe, 35 units of (15 feet size) @ ` 628 each
- 20mm GI Pipe, 20 units of (15 feet size) @ ` 660 each
- Valve, 14 units @ ` 424 each

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

Issues for the hostel job:

On 12th August 2020:
- 20mm GI Pipe, 2 units of (15 feet size)
- Other fitting materials, 18 units
On 17th August 2020:
- 15mm GI Pipe, 8 units of (15 feet size)
- Other fitting materials, 30 units
On 28th August 2020:
- 20mm GI Pipe, 2 units of (15 feet size)
- 15mm GI Pipe, 10 units of (15 feet size)
- Other fitting materials, 34 units
- Valve, 6 units
On 30th August 2020:
- Other fitting materials, 60 units
- Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ `100 per hour (includes 12 hours overtime)
Helper: 192 hours @ `70 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.
Overheads:
Overheads are applied @ `26 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on
sales price.
You are required to
(a) CALCULATE the total cost of the job.
(b) CALCULATE the price to be charged from the customer.

© The Institute of Chartered Accountants of India

 8 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Process Costing
9. M Ltd. produces a product-X, which passes through three processes, I, II and III. In
Process-III a by-product arises, which after further processing at a cost of `85 per unit,
product Z is produced. The information related for the month of August 2020 is as
follows:
Process-I Process-II Process-III
Normal loss 5% 10% 5%
Materials introduced (7,000 units) 1,40,000 - -
Other materials added 62,000 1,36,000 84,200
Direct wages 42,000 54,000 48,000
Direct expenses 14,000 16,000 14,000
Production overhead for the month is `2,88,000, which is absorbed as a percentage of
direct wages.
The scrapes are sold at `10 per unit
Product-Z can be sold at `135 per unit with a selling cost of `15 per unit
No. of units produced:
Process-I- 6,600; Process-II- 5,200, Process-III- 4,800 and Product-Z- 600
There is not stock at the beginning and end of the month.
You are required to PREPARE accounts for:
(i) Process-I, II and III
(ii) By-product process.
Joint Products & By Products
10. ABC Ltd. operates a simple chemical process to convert a single material into three
separate items, referred to here as X, Y and Z. All three end products are separated
simultaneously at a single split-off point.
Product X and Y are ready for sale immediately upon split off without further processing
or any other additional costs. Product Z, however, is processed further before being sold.
There is no available market price for Z at the split-off point.
The selling prices quoted here are expected to remain the same in the coming year.
During 2019-20, the selling prices of the items and the total amounts sold were:
X – 186 tons sold for `3,000 per ton
Y – 527 tons sold for `2,250 per ton

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

Z – 736 tons sold for `1,500 per ton

The total joint manufacturing costs for the year were `12,50,000. An additional
` 6,20,000 was spent to finish product Z.
There were no opening inventories of X, Y or Z at the end of the year. The following
inventories of complete units were on hand:
X 180 tons
Y 60 Tons
Z 25 tons
There was no opening or closing work-in-progress.
Required:
COMPUTE the cost of inventories of X, Y and Z and cost of goods sold for year ended
March 31, 2020, using Net realizable value (NRV) method of joint cost allocation.
Service Costing
11. A transport company has 20 vehicles, the capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 MT
6 12 MT
7 15 MT
2 20 MT
The company provides the goods transport service between stations ‘A’ to station ‘B’.
Distance between these stations is 100 kilometers. Each vehicle makes one round trip
per day on an average. Vehicles are loaded with an average of 90 per cent of capac ity
at the time of departure from station ‘A’ to station ‘B’ and at the time of return back
loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every
day. The following information is related to the month of August, 2020:
Salary of Transport Manager ` 60,000
Salary of 30 drivers ` 20,000 each driver
Wages of 25 Helpers ` 12,000 each helper
Loading and unloading charges ` 850 each trip
Consumable stores (depends on running of vehicles) ` 1,35,000
Insurance (Annual) ` 8,40,000
Road Licence (Annual) ` 6,00,000
Cost of Diesel per litre ` 78

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 10 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Kilometres run per litre each vehicle 5 Km.

Lubricant, Oil etc. ` 1,15,000
Cost of replacement of Tyres, Tubes, other parts etc. (on ` 4,25,000
running basis)
Garage rent (Annual) ` 9,00,000
Routine mechanical services ` 3,00,000
Electricity charges (for office, garage and washing ` 55,000
station)
Depreciation of vehicles (on time basis) ` 6,00,000
There is a workshop attached to transport department which repairs these vehicles and
other vehicles also. 40 per cent of transport manager’s salary is debited to the workshop.
The transport department has been apportioned `88,000 by the workshop during the
month. During the month operation was for 25 days.
You are required:
(i) CALCULATE per ton-km operating cost.
(ii) DETERMINE the freight to be charged per ton-km, if the company earned a profit of
25 per cent on freight.
Standard Costing
12. Following are the standard cost for a product-X:
(`)
Direct materials 10 kg @ ` 90 per kg 900
Direct labour 8 hours @ `100 per hour 800
Variable Overhead 8 hours @ `15 per hour 120
Fixed Overhead 400
2,220
Budgeted output for the year was 2,000 units. Actual output is 1,800 units.
Actual cost for year is as follows:
(`)
Direct Materials 17,800 Kg @ ` 92 per Kg. 16,37,600
Direct Labour 14,000 hours @ ` 104 per hour 14,56,000
Variable Overhead incurred 2,17,500
Fixed Overhead incurred 7,68,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

You are required to CALCULATE:

(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance.
Marginal Costing
13. J Ltd. manufactures a Product-Y. Analysis of income statement indicated a profit of
` 250 lakhs on a sales volume of 5,00,000 units. Fixed costs are `1,000 lakhs which
appears to be high. Existing selling price is `680 per unit. The company is considering
revising the profit target to ` 700 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 10% increase in selling price and drop in sales volume by 10%.
(iv) Volume to be achieved to earn target profit at the revised selling price as calculated
in (ii) above, if a reduction of 10% in the variable costs and ` 170 lakhs in the fixed
cost is envisaged.
Budget and Budgetary Control
14. The information of Z Ltd. for the year ended 31 st March 2020 is as below:
Amount (`)
Direct materials 17,50,000
Direct wages 12,50,000
Variable factory overhead 9,50,000
Fixed factory overhead 12,00,000
Other variable costs 6,00,000
Other fixed costs 4,00,000
Profit 8,50,000
Sales 70,00,000

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 12 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

During the year, the company manufactured two products, X and Y, and the output and
cost were:
X Y
Output (units) 8,000 4,000
Selling price per unit (`) 600 550
Direct material per unit (`) 140 157.50
Direct wages per unit (`) 90 132.50
Variable factory overheads are absorbed as a percentage of direct wages and other
variable costs are computed as:
Product X – `40 per unit and Product Y- `70 per unit.
For the FY 2020-21, due to a pandemic, it is expected that demand for product X and Y
will fall by 20% & 10% respectively. It is also expected that direct wages cost will raise by
20% and other fixed costs by 10%. Products will be required to be sold at a discount of
20%.
You are required to:
(i) PREPARE product- wise profitability statement on marginal costing method for the
FY 2019-20 and
(ii) PREPARE a budget for the FY 2020-21.
Miscellaneous
15. (a) DISCUSS short notes on (i) Discretionary Cost Centre and (ii) Investment Centre
(b) DESCRIBE the three advantages of Cost-plus contract.
(c) STATE the advantages of Zero-based budgeting.
(d) DESCRIBE Operation costing with two examples of industries where operation
costing is applied.

SUGGESTED HINTS/ANSWERS

1. (i) Minimum stock of A

Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900units × 12 kg. × 3 weeks) = 27,600 kg.
(ii) Maximum stock of B
Re-order level + Re-order quantity– (Min. Consumption × Min. Re-order period)
= 70,000 kg.+ 8,000 kg– (550units ×8 kg.× 5 weeks).

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

=78,000–22,000 = 56,000 kg.

(iii) Re-order level of C
Maximum re-order period × Maximum Usage
= 7 weeks × (1,250units × 6 kg.) = 52,500 kg.
OR
= Minimum stock of C+(Average consumption × Average delivery time)
= 25,500 kg.+ [(900 units ×6 kg.)×5 weeks] =52,500 kg.
(iv) Average stock level of A
Minimum stock + Maximum stock
= (Refer to Working Note)
2
27,600 + 58,800
= = 43,200 kg.
2
Working note
Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550units × 12 kg.) × 2 weeks] = 58,800 kg.
(v) Re-order level of D
Maximum re-order period × Maximum Usage
= 3 weeks × (1,250 units × 5 kg.) = 18,750 kg
(vi) Minimum stock of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900units × 5 kg. × 2 weeks) = 9,750 kg.
2. Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of
days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday
worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.

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 14 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

(i) Calculation of earnings per day

Particulars Amount (`)
Basic salary (`1,000 × 26 days) 26,000
Dearness allowance (20% of basic salary) 5,200
31,200
House rent allowance (16% of basic salary) 4,160
Employer’s contribution to Provident fund (12% × `31,200) 3,744
Employer’s contribution to Pension fund (7% × `31,200) 2,184
41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
Earnings per day 1,638
(ii) Calculation of effective wage rate per hour of Mr. Z:
Particulars Amount (`)
Basic salary (`1,000 × 26 days) 26,000
Additional basic salary for Sunday & holiday (`1,000 × 2 days) 2,000
Dearness allowance (20% of basic salary) 5,600
33,600
House rent allowance (16% of basic salary) 4,480
Transport allowance (`50 × 23 days) 1,150
Overtime allowance (`160 × 2 × 2 hours)* 640
Employer’s contribution to Provident fund (12% × `33,600) 4,032
Employer’s contribution to Pension fund (7% × `33,600) 2,352
Total monthly wages 46,254
Hours worked by Mr. Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic + DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = `160 per hour
(iii) Calculation of wages to be charged to Job no. HT200
= ` 248 × 100 hours = ` 24,800

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

3. (a) Computation of Machine Hour Rate

Basis of Machines
apportionment Total (`) A (`) B (`) C (`)
(A) Standing Charges
Insurance Depreciation 80,000 30,000 30,000 20,000
Basis (3:3:2)
Indirect Labour Direct Labour 2,40,000 60,000 90,000 90,000
(2:3:3)
Building Floor Space 2,00,000 80,000 80,000 40,000
maintenance (2:2:1)
expenses
Rent and Rates Floor Space 2,40,000 96,000 96,000 48,000
(2:2:1)
Salary of foreman Equal 5,04,000 1,68,000 1,68,000 1,68,000
Salary of attendant Equal 1,44,000 48,000 48,000 48,000
Total standing charges 14,08,000 4,82,000 5,12,000 4,14,000
Hourly rate for standing charges 247.43 262.83 212.53
(B) Machine
Expenses:
Depreciation Direct 2,00,000 75,000 75,000 50,000
Spare parts Final estimates 1,32,250 46,000 57,500 28,750
Power K.W. rating 4,00,000 1,50,000 1,00,000 1,50,000
(3:2:3)
Consumable Direct 80,000 30,000 25,000 25,000
Stores
Total Machine expenses 8,12,250 3,01,000 2,57,500 2,53,750
Hourly Rate for Machine expenses 154.52 132.19 130.26
Total (A + B) 22,20,250 7,83,000 7,69,500 6,67,750
Machine Hour rate 401.95 395.02 342.79

Working Notes:
(i) Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days

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 16 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

No. of full working days = 365 days – 64 days – 50 days = 251 days
Total working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200 = 2,208 hours.
Total effective hours = Total working hours × 90% - 2% for break-
down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.
(ii) Amount of spare parts is calculated as under:
A (`) B (`) C (`)
Preliminary estimates 40,000 40,000 20,000
Add: Increase in price @ 15% 6,000 6,000 3,000
46,000 46,000 23,000
Add: Increase in consumption − 11,500 5,750
@ 25%
Estimated cost 46,000 57,500 28,750
(iii) Amount of Indirect Labour is calculated as under:
(`)
Preliminary estimates 2,00,000
Add: Increase in wages @ 20% 40,000
2,40,000
(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from
the cost accounts.
4. (i) Calculation of cost driver rate:
Cost pool Budgeted Cost driver Cost driver rate
overheads (`) (`)
Material procurement 18,42,000 1,200 1,535.00
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

(ii) Calculation of cost for the batch:

Particulars Amount (`) Amount (`)
Material cost 24,62,000.00
Wages 4,68,500.00
Overheads:
- Material procurement (`1,535×56 orders) 85,960.00
- Material handling (`685.48×84 57,580.32
movements)
- Maintenance (`139.94×1,420 hours) 1,98,714.80
- Set-up (`628.97×60 set-ups) 37,738.20
- Quality control (`242.86×18 inspections) 4,371.48 3,84,364.80
Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17
5. Statement of Cost of R Ltd. for the year ended 31 st March, 2020:
Sl. Particulars Amount (`) Amount (`)
No.
(i) Material Consumed:
- Raw materials purchased 84,00,000
- Carriage inward 1,72,600
Add: Opening stock of raw materials 6,20,000
Less: Closing stock of raw materials (4,60,000) 87,32,600
(ii) Direct employee (labour) cost:
- Direct wages 60,00,000
- Employer’s Contribution towards PF 7,20,000 67,20,000
& ESIS
(iii) Direct expenses:
- Consumable materials 4,80,000
- Cost of power & fuel 28,00,000 32,80,000
Prime Cost 1,87,32,600
(iv) Works/ Factory overheads:
- Wages to foreman and store keeper 8,40,000

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 18 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

- Other indirect wages to factory

staffs 1,35,000 9,75,000
Gross factory cost 1,97,07,600
Add: Opening value of W-I-P 7,84,000
Less: Closing value of W-I-P (6,64,000)
Factory Cost 1,98,27,600
(v) Research & development cost paid for 9,60,000
improvement in production process
(vi) Production planning office expenses 12,60,000
Cost of Production 2,20,47,600
Add: Opening stock of finished goods 14,40,000
Less: Closing stock of finished goods (9,80,000)
Cost of Goods Sold 2,25,07,600
(vii) Administrative overheads:
- Salary to accountants 7,20,000
- Fees to statutory auditor 1,80,000
- Fees to cost auditor 80,000
- Fee paid to independent directors 9,40,000 19,20,000
(viii) Selling overheads& Distribution overheads:
- Salary to delivery staffs 14,30,000
Cost of Sales 2,58,57,600
Profit (balancing figure) 24,02,400
Sales 2,82,60,000
Note: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.
6. Memorandum Reconciliation Accounts
Dr. Cr.
(`) (`)
To Net Loss as per Costing 6,94,000 By Administration 1,20,000
books overheads over
recovered in cost
accounts

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

To Factory overheads under 80,000 By Interest on investment 1,92,000

absorbed in Cost not included in Cost
Accounts Accounts
To Depreciation under 1,00,000 By Transfer fees in 48,000
charged in Cost Accounts Financial books
To Income-Tax not provided 1,08,000 By Stores adjustment 28,000
in Cost Accounts (Credit in financial
books)
To Interest on Loan Funds in 4,90,000 By Dividend received in 64,000
Financial Accounts financial books
By Net loss as per 10,20,000
Financial books
14,72,000 14,72,000
7. (i) Computation of optimum run size
2D S
Optimum run size or Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand i.e. 5.5% of 18,00,00,000 = 99,00,000 units
S = Set-up cost per run = `33,500
C = Inventory holding cost per unit per annum
= `6.25 × 12 months = `75
2  99,00,000units `33,500
EBQ = = 94,042.5 units or 94,043 units
` 75
(ii) Calculation of Total Cost of set-up and inventory holding
Batch No. of set- Set-up Cost Inventory holding Total Cost
size ups (`) cost (`) (`)
30,00,000
124 41,54,000
80,000  80,000  `75 
A  99,00,000  (124 ×   71,54,000
units  80,000   2 
  `33,500)

106 35,51,000 35,26,612.5

94,043 (106 ×
B  99,00,000   94,043  `75  70,77,612.50
units   `33,500)  
 94,043   2 

Extra Cost (A – B) 76,387.50

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 20 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

8. (a) Calculation of Total Cost for the Job:

Particulars Amount (`) Amount (`)
Direct Material Cost:
- 15mm GI Pipe (Working Note- 1) 11,051.28
- 20mm GI Pipe (Working Note- 2) 2,588.28
- Other fitting materials (Working Note- 3) 3,866.07
- Stainless steel faucet
 6  ` 204 + 15  ` 209 
15 units ×  
 21units  3,113.57
- Valve
 8  ` 404 + 10  ` 402 + 14  ` 424 
6 units ×  
 32units  2,472.75 23,091.95
Direct Labour:
- Plumber [(180 hours × `100) + (12 hours × 18,600.00
`50)]
- Helper [(192 hours × `70) + (24 hours × `35)] 14,280.00 32,880.00
- Overheads[`26 × (180 + 192) hours] 9,672.00
Total Cost 65,643.95
(b) Price to be charged for the job work:
Amount (`)
Total Cost incurred on the job 65,643.95
 65,643.95  21,881.32
Add: 25% Profit on Job Price   25% 
 75% 
87,525.27
Working Note:
1. Cost of 15mm GI Pipe
Date Amount (`)
17-08-2020 8 units × ` 600 4,800.00
28-08-2020  4  ` 600 + 35  ` 628  6,251.28
10 units ×  
 39units 
11,051.28

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

2. Cost of 20mm GI Pipe

Date Amount (`)
12-08-2020 2 units × ` 660 1,320.00
28-08-2020  8  ` 660 + 30  ` 610 + 20  ` 660 
2 units ×   1,268.28
 58units 
2,588.28
3. Cost of Other fitting materials
Date Amount (`)
12-08-2020 18 units × ` 26 468.00
17-08-2020 30 units × ` 26 780.00
28-08-2020  12  ` 26 + 150  ` 28  946.96
34 units ×  
 162units 
30-08-2020  12  ` 26 + 150  ` 28 
60 units ×   1,671.11
 162units 
3,866.07
9. (i) Process-I A/c
Particulars Units Amt.(`) Particulars Units Amt.(`)
To Materials 7,000 1,40,000 By Normal loss 350 3,500
(5% of 7,000)
To Other materials - 62,000 By Process-II* 6,600 3,35,955
To Direct wages - 42,000 By Abnormal loss* 50 2,545
To Direct expenses - 14,000
To Production OH - 84,000
(200% of `42,000)
7,000 3,42,000 7,000 3,42,000
`(3,42,000 − 3,500)
* = `50.9022
(7,000 − 350)units
Process-II A/c
Particulars Units Amt.(`) Particulars Units Amt.(`)
To Process-I A/c 6,600 3,35,955 By Normal loss 660 6,600
(10% of 6,600)

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 22 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

To Other - 1,36,000 By Process-III** 5,200 5,63,206

materials
To Direct wages - 54,000 By Abnormal loss** 740 80,149
To Direct - 16,000
expenses
To Production OH - 1,08,000
(200% of `54,000)
6,600 6,49,955 6,600 6,49,955
`(6,49,955 − 6,600)
** = `108.3089
(6,600 − 660)units
Process-III A/c
Particulars Units Amt.(`) Particulars Units Amt.(`)
To Process-I A/c 5,200 5,63,206 By Normal loss 260 2,600
(5% of 5,200)
To Other - 84,200 By Product-X*** 4,800 8,64,670
materials
To Direct wages - 48,000
To Direct - 14,000 By Product-Z# 600 21,000
expenses (`35×600)
To Production OH - 96,000
(200% of `48,000)

To Abnormal 460 82,864

gain***
5,660 8,88,270 5,660 8,88,270
`(8, 05, 406 − 2,600 − 21,000)
*** = `180.1396
(5,200 − 260 − 600)units
# Realisable value = `135 – (85+15) = `35
(ii) By-Product Process A/c
Particulars Units Amt.(`) Particulars Units Amt.(`)
To Process-III A/c 600 21,000 By Product-Z 600 81,000
To Processing cost - 51,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

To Selling expenses - 9,000

600 81,000 600 81,000

10. (i) (a) Statement of Joint Cost allocation of inventories of X, Y and Z

(By using Net Realisable Value Method)
Products
Total
X Y Z
(`) (`) (`) (`)
Final sales value of 10,98,000 13,20,750 11,41,500 35,60,250
total production (366 × (587 × `2,250) (761 × `1,500)
(Working Note 1) `3,000)
Less: Additional cost -- -- (6,20,000) (6,20,000)
Net realisable value 10,98,000 13,20,750 5,21,500 29,40,250
(at split-off point)
Joint cost allocated 4,66,797 5,61,496 2,21,707 12,50,000
(Working Note 2)

Cost of goods sold as on March 31, 2020

(By using Net Realisable Value Method)
Products
Total
X Y Z
(`) (`) (`) (`)
Allocated joint 4,66,797 5,61,496 2,21,707 12,50,000
cost
Additional costs -- -- 6,20,000 6,20,000
Cost of goods 4,66,797 5,61,496 8,41,707 18,70,000
available for sale
(CGAS)
Less: Cost of 2,29,571 57,385 27,692 3,14,648
ending inventory (CGAS×49.18%) (CGAS × 10.22%) (CGAS × 3.29%)
(Working Note 1)
Cost of goods 2,37,226 5,04,111 8,14,015 15,55,352
sold

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 24 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Working Notes
1. Total production of three products for the year 2019-2020
Products Quantity Quantity of ending Total Ending inventory
sold in tones inventory in tons production percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 186 180 366 49.18
Y 527 60 587 10.22
Z 736 25 761 3.29
2. Joint cost apportioned to each product:
Total Joint cost
Net Realisable Value of each product
TotalNet Realisable Value
` 12,50,000
Totalcos t of Product X =  ` 10,98,000 = ` 4,66,797
` 29,40,250
` 12,50,000
Totalcos t of Product Y =  ` 13,20,750 = ` 5,61,496
` 29,40,250
` 12,50,000
Totalcos t of Product Z =  ` 5,21,500 = ` 2,21,707
` 29,40,250
11. (i) Operating Cost Sheet for the month of August, 2020
Particulars Amount (`)
A. Fixed Charges:
Manager’s salary (`60,000 × 60%) 36,000
Drivers’ Salary (`20,000  30 drivers) 6,00,000
Helpers’ wages (`12,000  25 helpers) 3,00,000
Insurance (`8,40,000 ÷ 12 months) 70,000
Road licence (`6,00,000 ÷ 12 months) 50,000
Garage rent (`9,00,000 ÷ 12 months) 75,000
Routine mechanical services 3,00,000
Electricity charges (for office, garage and washing 55,000
station)
Depreciation of vehicles 6,00,000
Apportioned workshop expenses 88,000
Total (A) 21,74,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 25

B. Variable Charges:
Loading and unloading charges (Working Note 1) 7,65,000
Consumable Stores 1,35,000
Cost of diesel (Working Note 2) 14,04,000
Lubricant, Oil etc. 1,15,000
Replacement of Tyres, Tubes & other parts 4,25,000
Total (B) 28,44,000
C. Total Cost (A + B) 50,18,000
D. Total Ton-Kms. (Working Note 3) 9,43,200
E. Cost per ton-km. (C ÷ D) 5.32
(ii) Calculation of Chargeable Freight
Cost per ton-km. ` 5.32
Add: Profit @ 25% on freight or 33⅓% on cost ` 1.77
Chargeable freight per ton-km. ` 7.09
Working Notes:
1. Wages paid to loading and unloading labours
Numbers of vehicles available per day × No. of days × trips × wages per trip
(20 vehicles × 90%) × 25 days × 2 trips × `850
18 × 25 × 2 × 850 = `7,65,000
2. Cost of Diesel:
Distance covered by each vehicle during August, 2020
= 100 k.m.  2  25 days  90% = 4,500 km.
4,500k.m.  20vehicles
Consumption of diesel = = 18,000 litres.
5k.m.
Cost of diesel = 18,000 litres  ` 78 = `14,04,000.
3. Calculation of total ton-km:
Total Ton-Km. = Total Capacity  Distance covered by each vehicle  Average
Capacity Utilisation ratio.

= ( 5  9 MT ) + ( 6  12MT ) + ( 7  15 MT ) + ( 2  20 MT )  4,500k.m.

( 90% + 70% )
2

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 26 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

= ( 45 + 72 + 105 + 40 )  4,500 k.m.  80%

= 262  4,500  80%.

= 9,43,200 ton-km.
12. (i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ` 90 (18,000 kg. – 17,800 kg.)
= ` 18,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 17,800 kg. (` 90 – ` 92) = ` 35,600 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (18,000 kg. × ` 90) – (17,800 kg. × ` 92)
= ` 16,20,000 – ` 16,37,600
= `17,600 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ` 100 (1,800 units × 8 – 14,000 hrs.)
= ` 100 (14,400 hrs. – 14,000 hrs.)
= ` 40,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 14,000 hrs. (` 100 – `104)
= ` 56,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (14,400 hrs. × ` 100) – (14,000 hrs. × ` 104)
= ` 14,40,000 – ` 14,56,000
= `16,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (14,400 hrs. × ` 15) – ` 2,17,500
= ` 1,500 (Adverse)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 27

(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed
Overhead
= (1,800 units × `400) - ` 7,68,000
= ` 7,20,000 – ` 7,68,000 = ` 48,000 (Adverse)
13. Sales Volume 5,00,000 Units
Computation of existing contribution
Particulars Per unit (`) Total (` In lakhs)
Sales 680 3,400
Fixed Cost 200 1,000
Profit 50 250
Contribution 250 1,250
Variable Cost (Sales – Contribution) 430 2,150
Fixed Cost `10,00,00,000
(i) Break even sales in units = = = 4,00,000 units
Contribution per unit `250
Break even sales in rupees = 4,00,000 units × ` 680 = ` 2,720 lakhs
OR
250
P/V Ratio =  100 = 36.76%
680
Fixed Cost 10,00,00,000
B.EP (Rupees) = = = ` 2,720 lakhs (approx.)
P / VRatio 36.76%
(ii) Number of units sold to achieve a target profit of `700 lakhs:
Desired Contribution = Fixed Cost + Target Profit
= 1,000 L + 700 L = 1,700 L
Desired Contribution 17,00,00,000
Number of units to be sold = = = 6,80,000 units
Contribution per unit 250
(iii) Profit if selling price is increased by 10% and sales volume drops by 10%:
Existing Selling Price per unit = ` 680
Revised selling price per unit = ` 680 × 110% = `748
Existing Sales Volume = 5,00,000 units
Revised sales volume = 5,00,000 units – 10% of 5,00,000 = 4,50,000 units.
Statement of profit at sales volume of 4,50,000 units @ ` 748 per unit

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 28 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

Particulars Per unit (`) Total (` In lakhs)

Sales 748 3,366
Less: Variable Costs 430 1,935
Contribution 318 1,431
Less: Fixed Cost 1,000
Profit 431
(iv) Volume to be achieved to earn target profit of `700 lakhs with revised selling price
and reduction of 10% in variable costs and `170 lakhs in fixed cost:
Revised selling price per unit = `748
Variable costs per unit existing = `430
Revised Variable Costs
Reduction of 10% in variable costs = ` 430 – 10% of 430
= ` 430 – `43
= `387
Total Fixed Cost (existing) = ` 1,000 lakhs
Reduction in fixed cost = ` 170 lakhs
Revised fixed cost = ` 1,000 lakhs – ` 170 lakhs = `830 lakhs
Revised Contribution (unit) = Revised selling price per unit – Revised
Variable Costs per units
Revised Contribution per unit = ` 748 – ` 387 = ` 361
Desired Contribution = Revised Fixed Cost + Target Profit
= ` 830 lakhs + `700 lakhs = `1,530 lakhs
Desired Contribution `15,30,00,000
No. of units to be sold = = =4,23,823 units
Contribution per unit `361
14. (i) Product-wise Profitability Statement for the FY 2019-20:
Particulars Product-X (`) Product-Y (`) Total (`)
Output (units) 8,000 4,000
Selling price per unit 600 550
Sales value 48,00,000 22,00,000 70,00,000
Direct material 11,20,000 6,30,000 17,50,000
(`140×8,000) (`157.50×4,000)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 29

Direct wages 7,20,000 5,30,000 12,50,000

(`90×8,000) (`132.5×4,000)
Variable factory overheads 5,47,200 4,02,800 9,50,000
(76%of 7,20,000) (76%of 5,30,000)
Other variable costs 3,20,000 2,80,000 6,00,000
(`40×8,000) (`70×4,000)
Contribution 20,92,800 3,57,200 24,50,000
Fixed factory overheads - - 12,00,000
Other fixed costs - - 4,00,000
Profit 8,50,000
(ii) Preparation of Budget for the FY 2020-21:
Particulars Product-X (`) Product-Y (`) Total (`)
Output (units) 6,400 3,600
(8,000×80%) (4,000×90%)
Selling price per unit 480 440
(600×80%) (550×80%)
Sales value 30,72,000 15,84,000 46,56,000
Direct material 8,96,000 5,67,000 14,63,000
(`140×6,400) (`157.50×3,600)
Direct wages per unit 6,91,200 5,72,400 12,63,600
(`108×6,400) (`159×3,600)
Variable factory overheads 5,25,312 4,35,024 9,60,336
(76%of 6,91,200) (76%of 5,72,400)
Other variable costs 2,56,000 2,52,000 5,08,000
(`40×6,400) (`70×3,600)
Contribution 7,03,488 (2,42,424) 4,61,064
Fixed factory overheads - - 12,00,000
Other fixed costs (110%of - - 4,40,000
`4,00,000)
Profit/ (Loss) (11,78,936)

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 30 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2020

15. (a) (i) Discretionary Cost Centre: The cost centre whose output cannot be
measured in financial terms, thus input-output ratio cannot be defined. The
cost of input is compared with allocated budget for the activity. Example of
discretionary cost centres are Research & Development department,
Advertisement department where output of these department cannot be
measured with certainty and co-related with cost incurred on inputs.
(ii) Investment Centres: These are the responsibility centres which are not only
responsible for profitability but also has the authority to make capital
investment decisions. The performance of these responsibility centres are
measured on the basis of Return on Investment (ROI) besides profit. Examples
of investment centres are Maharatna, Navratna and Miniratna companies of
Public Sector Undertakings of Central Government.
(b) Advantages of Cost plus contracts are as follows:
(i) The Contractor is assured of a fixed percentage of profit. There is no risk of
incurring any loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time
of making the estimate.
(iii) Contractee can ensure himself about ‘the cost of the contract’, as he is
empowered to examine the books and documents of the contractor to
ascertain the veracity of the cost of the contract.
(c) The advantages of zero-based budgeting are as follows:
• It provides a systematic approach for the evaluation of different activities and
ranks them in order of preference for the allocation of scarce resources.
• It ensures that the various functions undertaken by the organization are critica l
for the achievement of its objectives and are being performed in the best
possible way.
• It provides an opportunity to the management to allocate resources for various
activities only after having a thorough cost-benefit-analysis. The chances of
arbitrary cuts and enhancement are thus avoided.
• The areas of wasteful expenditure can be easily identified and eliminated.
• Departmental budgets are closely linked with corporation objectives.
• The technique can also be used for the introduction and implementation of the
system of ‘management by objective.’ Thus, it cannot only be used for
fulfillment of the objectives of traditional budgeting but it can also be used for a
variety of other purposes.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 31

(d) This product costing system is used when an entity produces more than one variant
of final product using different materials but with similar conversion activities. This
means conversion activities are similar for all the product variants but materials
differ significantly. Operation Costing method is also known as Hybrid product
costing system as materials costs are accumulated by job order or batch wise but
conversion costs i.e. labour and overheads costs are accumulated by department,
and process costing methods are used to assign these costs to products. Moreover,
under operation costing, conversion costs are applied to products using a
predetermined application rate. This predetermined rate is based on budgeted
conversion costs.
The two examples of industries are Ready made garments and Jewellery making.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. Arnav Electronics manufactures electronic home appliances. It follows weighted average
Cost method for inventory valuation. Following are the data of component X:
Date Particulars Units Rate per unit
(`)
15-12-19 Purchase Order- 008 10,000 9,930
30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 008) 10,000 -
05-01-20 MRN**-003 (against the Purchase Order- 008) 500 -
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 9,750
10-01-20 Material Requisition-012 4,500 -
12-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
12-01-20 MRN-004 (against the Purchase Order- 009) 400 -
15-01-20 Material Requisition-013 2,200 -
24-01-20 Material Requisition-014 1,500 -
25-01-20 GRN-010 (against the Purchase Order- 010) 10,000 -
28-01-20 Material Requisition-015 4,000 -
31-01-20 Material Requisition-016 3,200 -
*GRN- Goods Received Note; **MRN- Material Returned Note
Based on the above data, you are required to CALCULATE:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of
stock as on 31-01-2020.
(v) Value of components used during the month of January, 2020.
(vi) Inventory turnover ratio.

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 2 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

Employee Cost
2. From the following information, CALCULATE employee turnover rate using – (i) Separation
Method, (ii) Replacement Method, (iii) New Recruitment Method, and (iv) Flux Method :
No. of workers as on 01.01.2019 = 3,600
No. of workers as on 31.12.2019 = 3,790
During the year, 40 workers left while 120 workers were discharged. 350 workers were
recruited during the year, of these 150 workers were recruited because of exits and the
rest were recruited in accordance with expansion plans.
Overheads: Absorption Costing Method
3. ABC Ltd. has three production departments P 1, P2 and P3 and two service departments S 1
and S2. The following data are extracted from the records of the company for the month
of January, 2020:
(`)
Rent and rates 6,25,000
General lighting 7,50,000
Indirect wages 1,87,500
Power 25,00,000
Depreciation on machinery 5,00,000
Insurance of machinery 2,00,000
Other Information:
P1 P2 P3 S1 S2
Direct wages (`) 3,75,000 2,50,000 3,75,000 1,87,500 62,500
Horse Power of Machines 60 30 50 10 
used
Cost of machinery (`) 30,00,000 40,00,000 50,00,000 2,50,000 2,50,000
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light points 10 15 20 10 5
Production hours worked 6,225 4,050 4,100  

Expenses of the service departments S 1 and S2 are reapportioned as below:

P1 P2 P3 S1 S2
S1 20% 30% 40%  10%
S2 40% 20% 30% 10% 

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

Required:
(i) COMPUTE overhead absorption rate per production hour for each production
department.
(ii) DETERMINE the total cost of product X which is processed for manufacture in
department P 1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its
direct material cost is `6,250 and direct labour cost is `3,750.
Activity Based Costing
4. Following are the data of three product lines of a departmental store for the year 2019 -20:
Soft drinks Fresh produce Packaged
food
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Cost of goods sold ` 30,00,000 ` 75,00,000 ` 45,00,000
Cost of bottles returned ` 60,000 `0 `0
Number of purchase orders 360 840 360
placed
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000
Additional information related with the store are as follows:
Activity Description of activity Total Cost Cost-allocation
base
Bottles Returning of empty bottles ` 60,000 Direct tracing to soft
returns drink line
Ordering Placing of orders for purchases ` 7,80,000 1,560 purchase
orders
Delivery Physical delivery and receipt of ` 12,60,000 3,150 deliveries
goods
Shelf Stocking of goods on store ` 8,64,000 8,640 hours of shelf-
stocking shelves and on-going restocking stocking time
Customer Assistance provided to ` 15,36,000 15,36,000 items sold
Support customers including check-out
Required:
CALCULATE the total cost and operating income using Activity Based Costing method.

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 4 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

Cost Sheet
5. From the following data of Arnav Metallic Ltd., CALCULATE Cost of production:
Amount (`)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for plant & machinery 96,000
(iii) Raw materials purchased 64,00,000
(iv) Opening stock of raw materials 2,88,000
(v) Closing stock of raw materials 4,46,000
(vi) Wages paid 23,20,000
(vii) Value of opening Work-in-process 4,06,000
(viii) Value of closing Work-in-process 6,02,100
(ix) Quality control cost for the products in manufacturing process 86,000
(x) Research & development cost for improvement in production 92,600
process
(xi) Administrative cost for:
- Factory & production 9,00,000
- Others 11,60,000
(xii) Amount realised by selling scrap generated during the 9,200
manufacturing process
(xiii) Packing cost necessary to preserve the goods for further 10,200
processing
(xiv) Salary paid to Director (Technical) 8,90,000
Cost Accounting System
6. The following are the balances existed in the books of JPG Ltd. for the year ended,
31st March, 2019:
Particulars Dr. Cr.
(`) (`)
Stores Ledger Control A/c 30,00,000
WIP Control A/c 15,00,000
Finished Goods Control A/c 25,00,000
Manufacturing Overheads Control A/c 1,50,000
Cost Ledger Control A/c 68,50,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

During the year 2019-20, the following transactions took place:

Particulars Amount (`)
Finished product (at cost) 22,50,000
Manufacturing Overhead incurred 8,50,000
Raw material purchased 12,50,000
Factory wages 4,00,000
Indirect labour 2,00,000
Cost of sales 17,50,000
Materials issued to production 13,50,000
Sales returned (at cost) 90,000
Material returned to suppliers 1,30,000
Manufacturing overhead charged to production 8,50,000
Required:
PREPARE the following control accounts and Trial balance at the end of the year:
Cost Ledger, Stores Ledger, Work-in-process, Finished Stock, Manufacturing Overhead,
Wages and Cost of Sales.
Job Costing
7. A factory uses job costing system. The following data are obtained from its books for the
year ended 31 st March, 2020:
Amount (`)
Direct materials 18,00,000
Direct wages 15,00,000
Selling and distribution overheads 10,50,000
Administration overheads 8,40,000
Factory overheads 9,00,000
Profit 12,18,000
(i) PREPARE a Job Cost sheet indicating the Prime cost, Cost of Production, Cost of
sales and the Sales value.
(ii) In 2019-20, the factory received an order for a job. It is estimated that direct materials
required will be `4,80,000 and direct labour will cost `3,00,000. DETERMINE what
should be the price for the job if factory intends to earn the same rate of profit o n
sales assuming that the selling and distribution overheads have gone up by 15%. The

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 6 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

factory overheads is recovered as percentage of wages paid, whereas, other

overheads as a percentage of cost of production, based on cost rates prevailing in
the previous year.
Process Costing
8. Star Ltd. manufactures chemical solutions for the food processing industry. The
manufacturing takes place in a number of processes and the company uses FIFO method
to value work-in-process and finished goods. At the end of the last month, a fire occurred
in the factory and destroyed some of papers containing records of the process operations
for the month.
Star Ltd. needs your help to prepare the process accounts for the month during which the
fire occurred. You have been able to gather some information about the month’s operating
activities but some of the information could not be retrieved due to the damage. The
following information was salvaged:
• Opening work-in-process at the beginning of the month was 1,600 litres, 70%
complete for labour and 60% complete for overheads. Opening work-in-process was
valued at ` 1,06,560.
• Closing work-in-process at the end of the month was 320 litres, 30% complete for
labour and 20% complete for overheads.
• Normal loss is 10% of input and total losses during the month were 1,200 litres partly
due to the fire damage.
• Output sent to finished goods warehouse was 8,400 litres.
• Losses have a scrap value of `15 per litre.
• All raw materials are added at the commencement of the process.
• The cost per equivalent unit (litre) is `78 for the month made up as follows:
(`)
Raw Material 46
Labour 14
Overheads 18
78
Required:
(i) CALCULATE the quantity (in litres) of raw material inputs during the month.
(ii) CALCULATE the quantity (in litres) of normal loss expected from the process and the
quantity (in litres) of abnormal loss / gain experienced in the month.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

(iii) CALCULATE the values of raw material, labour and overheads added to the process
during the month.
(iv) PREPARE the process account for the month.
Service Costing
9. AD Higher Secondary School (AHSS) offers courses for 11 th & 12th standard in three
streams i.e. Arts, Commerce and Science. AHSS runs higher secondary classes alongwith
primary and secondary classes but for accounting purpose it treats higher secondary as a
separate responsibility centre. The Managing committee of the school wants to revise its
fee structure for higher secondary students. The accountant of the school has provided the
following details for a year:
Amount (`)
Teachers’ salary (15 teachers × `35,000 × 12 months) 63,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × `10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000
Other information:
(i)
Standard 11 & 12 Primary &
Arts Commerce Science Secondary

No. of students 120 360 180 840

Lab classes in a year 0 0 144 156
No. of examinations in a year 2 2 2 2
Time spent at library per 180 hours 120 hours 240 hours 60 hours
student per year
Time spent by principal for 208 hours 312 hours 480 hours 1,400 hours
administration
Teachers for 11 & 12 standard 4 5 6 -

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 8 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

(ii) One teacher who teaches economics for Arts stream students also teaches
commerce stream students. The teacher takes 1,040 classes in a year, it includes
208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also
teaches business mathematics to commerce stream students. She takes 1,100
classes a year, it includes 160 classes for commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their
15% time for higher secondary section.
(v) All school students irrespective of section and age participate in annual functions and
sports activities.
Requirement:
(a) CALCULATE cost per student per annum for all three streams.
(b) If the management decides to take uniform fee of ` 1,000 per month from all higher
secondary students, CALCULATE stream wise profitability.
(c) If management decides to take 10% profit on cost, COMPUTE fee to be charged from
the students of all three streams respectively.
Standard Costing
10. ABC Ltd. had prepared the following estimation for the month of January:
Quantity Rate (`) Amount (`)
Material-A 800 kg. 90.00 72,000
Material-B 600 kg. 60.00 36,000
Skilled labour 1,000 hours 75.00 75,000
Unskilled labour 800 hours 44.00 35,200
Normal loss was expected to be 10% of total input materials and an idle labour time of 5%
of expected labour hours was also estimated.
At the end of the month the following information has been collected from the cost
accounting department:
The company has produced 1,480 kg. finished product by using the followings:
Quantity Rate (`) Amount (`)
Material-A 900 kg. 86.00 77,400
Material-B 650 kg. 65.00 42,250
Skilled labour 1,200 hours 71.00 85,200
Unskilled labour 860 hours 46.00 39,560

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

You are required to CALCULATE:

(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Mix Variance;
(d) Material Yield Variance;
(e) Labour Cost Variance;
(f) Labour Efficiency Variance and
(g) Labour Yield Variance.
Marginal Costing
11. A Ltd. manufacture and sales its product R-9. The following figures have been collected
from cost records of last year for the product R-9:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold --
Direct Labour 15% of Cost of Goods Sold --
Factory Overhead 10% of Cost of Goods Sold ` 2,30,000
Administration Overhead 2% of Cost of Goods Sold ` 71,000
Selling & Distribution Overhead 4% of Cost of Sales ` 68,000
Last Year 5,000 units were sold at `185 per unit. From the given DETERMINE the
followings:
(i) Break-even Sales (in rupees)
(ii) Profit earned during last year
(iii) Margin of safety (in %)
(iv) Profit if the sales were 10% less than the actual sales.
(Assume that Administration Overhead is related with production activity)
Budget and Budgetary Control
12. A Vehicle manufacturer has prepared sales budget for the next few months, and the
following draft figures are available:
Month No. of vehicles
October 40,000
November 35,000
December 45,000

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 10 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

January 60,000
February 65,000
To manufacture a vehicle a standard cost of `11,42,800 is incurred and sold through
dealers at a uniform selling price of `17,14,200 to customers. Dealers are paid 15%
commission on selling price on sale of a vehicle.
Apart from other materials, four units of Part - X are required to manufacture a vehicle. It
is a policy of the company to hold stocks of Part-X at the end of each month to cover 40%
of next month’s production. 48,000 units of Part-X are in stock as on 1 st October.
There are 9,500 nos. of completed vehicles in stock as on 1 st October and it is policy to
have stocks at the end of each month to cover 20% of the next month’s sales.
You are required to -
(i) PREPARE Production budget (in nos.) for the month of October, November,
December and January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October,
November and December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December.
Miscellaneous
13. (a) DIFFERENTIATE between Cost Accounting and Management Accounting.
(b) DISCUSS the impact of Information Technology (IT) on cost accounting system.
(c) DISCUSS the Escalation Clause in a Contract.
(d) DISCUSS the treatment of by-product cost in cost accounting.

SUGGESTED HINTS/ANSWERS

1. Workings:
Consumption is calculated on the basis of material requisitions:
Maximum component usage = 4,500 units (Material requisition on 10-01-20)
Minimum component usage = 1,500 units (Material requisition on 24-01-20)
Lead time is calculated from purchase order date to material received date
Maximum lead time = 21 days (15-12-2019 to 05-01-2020)
Minimum lead time = 14 days (30-12-2019 to 12-01-2020)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

Calculations:
(i) Re-order level
= Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units
(ii) Maximum stock level
= Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
= 1,04,500 units – 21,000 units = 83,500 units
(iii) Minimum stock level
= Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units
= 42,000 units
(iv) Store Ledger for the month of January 2020:
Date Receipts Issue Balance
GRN/ Units Rate Amt. MRN/ Units Rate Amt. Units Rate Amt.
MRN ` (` ‘000) MR ` (` ‘000) ` (` ‘000)
01-01-20 - - - - - - - - 3,500 9,810 34,335
05-01-20 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
06-01-20 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
10-01-20 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
12-01-20 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
15-01-20 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
24-01-20 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982
25-01-20 010 10,000 9,750 97,500 - - - - 21,400 9,789 2,09,482
28-01-20 - - - - 015 4,000 9,789 39,156 17,400 9,789 1,70,326
31-01-20 - - - - 016 3,200 9,789 31,325 14,200 9,789 1,39,001
[Note: Decimal figures may be rounded-off to the nearest rupee value wherever required)
Value of stock as on 31-01-2020 (‘000) = `1,39,001
(v) Value of components used during the month of January 2020:
Sum of material requisitions 011 to 016 (‘000)
= ` 29,694 + ` 44,541 + ` 21,611 + ` 14,734 + ` 39,156 + ` 31,325 = ` 1,81,061

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 12 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

(vi) Inventory Turnover Ratio

Value of materialsused
=
Average stock value

` 1,81,061 ` 1,81,061
= = = 2.09
` (1,39,001  34,335) / 2 ` 86,668
2. Employee turnover rate using:
(i) Separation Method:
No. of workers left + No. of workers discharged
=  100
Average number of workers
(40  120) 160
=  100 = 100 = 4.33%
(3,600  3,790) / 2 3,695
(ii) Replacement Method:
No. of workers replaced 150
= 100 =  100 = 4.06%
Average number of workers 3,695
(iii) New Recruitment Method:
No. of workers newly recruited
  100
Average number of wor ker s
No. Recruitments - No. of Replacements
 100
Average number of wor ker s
350 150 200
  100   100 = 5.41%
3,695 3,695
(iv) Flux Method:
No. of separations + No. of accessions
  100
Average number of wor ker s
(160  350) 510
  100   100 = 13.80%
(3,600  3,790) / 2 3,695
3. Primary Distribution Summary
Item of Basis of Total P1 P2 P3 S1 S2
cost apportionment (`) (`) (`) (`) (`) (`)
Direct Actual 2,50,000 -- -- -- 1,87,500 62,500
wages

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

Rent and Floor area 6,25,000 1,25,000 1,56,250 1,87,500 1,25,000 31,250
rates (4 : 5 : 6 : 4 : 1)
General Light points 7,50,000 1,25,000 1,87,500 2,50,000 1,25,000 62,500
lighting (2 : 3 : 4 : 2 : 1)
Indirect Direct wages 1,87,500 56,250 37,500 56,250 28,125 9,375
wages (6 : 4 : 6 : 3 : 1)
Power Horse Power of 25,00,000 10,00,000 5,00,000 8,33,333 1,66,667 
machines used
(6 : 3 : 5 : 1)
Depreciati Value of 5,00,000 1,20,000 1,60,000 2,00,000 10,000 10,000
on of machinery
machinery (12:16:20:1:1)
Insurance Value of 2,00,000 48,000 64,000 80,000 4,000 4,000
of machinery
machinery (12:16:20:1:1)
50,12,500 14,74,250 11,05,250 16,07,083 6,46,292 1,79,625

Overheads of service cost centres:

Let S1 be the overhead of service cost centre S 1 and S2 be the overhead of service cost
centre S2.
S1 = 6,46,292 + 0.10 S2
S2 = 1,79,625 + 0.10 S1
Substituting the value of S 2 in S1 we get
S1 = 6,46,292 + 0.10 (1,79,625 + 0.10 S1)
S1 = 6,46,292 + 17,962.5 + 0.01 S 1
0.99 S1 = 6,64,254.5
S1 = `6,70,964
S2 = 1,79,625 + 0.10  6,70,964
= `2,46,721.4
Secondary Distribution Summary
Particulars Total (`) P1 (`) P2 (`) P3 (`)
Allocated and Apportioned 41,86,583 14,74,250 11,05,250 16,07,083
overheads as per primary
distribution
S1 6,70,964 1,34,192.8 2,01,289.2 2,68,385.6

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 14 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

S2 2,46,721.4 98,688.6 49,344.3 74,016.5

17,07,131.4 13,55,883.5 19,49,485.1
(i) Overhead rate per hour
P1 P2 P3
Total overheads cost (`) 17,07,131.4 13,55,883.5 19,49,485.1
Production hours worked 6,225 4,050 4,100
Rate per hour (`) 274.24 334.79 475.48
(ii) Cost of Product X
(`)
Direct material 6,250.00
Direct labour 3,750.00
Prime cost 10,000.00
Production on overheads
P1 5 hours  ` 274.24 = 1,371.20
P2 3 hours  ` 334.79 = 1,004.37
P3 4 hours  ` 475.48 = 1,901.92 4,277.49
Factory cost 14,277.49
4. Working notes:
(i) Total support cost:
(`)
Bottles returns 60,000
Ordering 7,80,000
Delivery 12,60,000
Shelf stocking 8,64,000
Customer support 15,36,000
Total support cost 45,00,000
(ii) Cost for each activity cost driver:
Activity Total cost (`) Cost allocation base Cost driver rate
(1) (2) (3) (4) = [(2) ÷ (3)]
Ordering 7,80,000 1,560 purchase `500 per purchase
orders order

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

Delivery 12,60,000 3,150 deliveries `400 per delivery

Shelf-stocking 8,64,000 8,640 hours `100 per stocking
hour
Customer 15,36,000 15,36,000 items sold `1 per item sold
support
Statement of Total cost and Operating income
Soft Fresh Packaged Total
drinks Produce Food
(`) (`) (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 0 0 60,000
Ordering cost* 1,80,000 4,20,000 1,80,000 7,80,000
(360:840:360)
Delivery cost* 1,20,000 8,76,000 2,64,000 12,60,000
(300:2190:660)
Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5400:2700)
Customer Support cost* 1,26,000 11,04,000 3,06,000 15,36,000
(1,26,000:11,04,000:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C:{(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
* Refer to working note (ii)
5. Calculation of Cost of Production of Arnav Metallic Ltd. for the period…..
Particulars Amount (`)
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000
Prime cost 85,62,000
Repair and maintenance cost of plant & machinery 9,80,500

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 16 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

Insurance premium paid for plant & machinery 96,000

Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,17,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,21,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,22,000
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.
6. Cost Ledger Control Account
Particulars (`) Particulars (`)
To Stores Ledger control A/c 1,30,000 By Balance b/d 68,50,000
To Costing Profit & Loss A/c 17,10,000 By Stores Ledger control A/c 12,50,000
By Wages Control A/c 6,00,000
To Balance c/d 77,10,000 By Manufacturing overhead 8,50,000
control A/c
95,50,000 95,50,000
Store Ledger Control Account
Particulars (`) Particulars (`)
To Balance b/d 30,00,000 By WIP Control A/c 13,50,000
To Cost Ledger control A/c 12,50,000 By Cost Ledger control A/c 1,30,000
(return)
By Balance c/d 27,70,000
42,50,000 42,50,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

WIP Control Account

Particulars (`) Particulars (`)
To Balance b/d 15,00,000 By Finished Stock Control 22,50,000
A/c
To Wages Control A/c 4,00,000
To Stores Ledger control A/c 13,50,000
To Manufacturing overhead 8,50,000 By Balance c/d 18,50,000
control A/c
41,00,000 41,00,000
Finished Stock Control Account
Particulars (`) Particulars (`)
To Balance b/d 25,00,000 By Cost of Sales A/c 17,50,000
To WIP Control A/c 22,50,000
To Cost of Sales A/c (sales 90,000 By Balance c/d 30,90,000
return)
48,40,000 48,40,000
Manufacturing Overhead Control Account
Particulars (`) Particulars (`)
To Cost Ledger Control A/c 8,50,000 By Balance b/d 1,50,000
To Wages Control A/c 2,00,000 By WIP Control A/c 8,50,000
By Costing P&L A/c (under 50,000
recovery)
10,50,000 10,50,000
Wages Control Account
Particulars (`) Particulars (`)
To Cost Ledger Control A/c 6,00,000 By WIP Control A/c 4,00,000
By Manufacturing overhead 2,00,000
control A/c
6,00,000 6,00,000
Cost of Sales Account
Particulars (`) Particulars (`)
To Finished Stock Control 17,50,000 By Finished Stock Control 90,000
A/c A/c (sales return)

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 18 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

By Costing Profit & Loss A/c 16,60,000

17,50,000 17,50,000
Trial Balance
Particulars Dr. Cr.
(`) (`)
Stores Ledger Control A/c 27,70,000
WIP Control A/c 18,50,000
Finished Goods Control A/c 30,90,000
Cost Ledger Control A/c 77,10,000
77,10,000 77,10,000

Working:

Costing P&L Account

Particulars (`) Particulars (`)
To Cost of Sales A/c 16,60,000 By Cost Ledger control A/c 17,10,000
To Manufacturing overhead 50,000
control A/c
17,10,000 17,10,000
7. (i) Production Statement
For the year ended 31 st March, 2020
Amount (`)
Direct materials 18,00,000
Direct wages 15,00,000
Prime Cost 33,00,000
Factory overheads 9,00,000
Cost of Production 42,00,000
Administration overheads 8,40,000
Selling and distribution overheads 10,50,000
Cost of Sales 60,90,000
Profit 12,18,000
Sales value 73,08,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

Calculation of Rates:
`9,00,000
1. Percentage of factory overheads to direct wages =  100 = 60%
`15,00,000
2. Percentage of administration overheads to Cost of production
`8,40,000
=  100 = 20%
` 42,00,000
3. Selling and distribution overheads = `10,50,000 × 115% = `12,07,500
Selling and distribution overhead % to Cost of production
`12,07,500
=  100 = 28.75%
` 42,00,000
`12,18,000
4. Percentage of profit to sales =  100 = 16.67% or, 1/6
`73,08,000
(ii) Calculation of price for the job received in 2019-20
Amount (`)
Direct materials 4,80,000
Direct wages 3,00,000
Prime Cost 7,80,000
Factory overheads (60% of `3,00,000) 1,80,000
Cost of Production 9,60,000
Administration overheads (20% of `9,60,000) 1,92,000
Selling and distribution overheads (28.75% of `9,60,000) 2,76,000
Cost of Sales 14,28,000
Profit (1/5 of `14,28,000) 2,85,600
Sales value 17,13,600
8. (i) Calculation of Raw Material inputs during the month:
Quantities Entering Litres Quantities Leaving Litres
Process Process
Opening WIP 1,600 Transfer to Finished Goods 8,400
Raw material input 8,320 Process Losses 1,200
(balancing figure)
Closing WIP 320
9,920 9,920

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 20 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

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

Litres
Total process losses for month 1,200
Normal Loss (10% input) 832
Abnormal Loss (balancing figure) 368
(iii) Calculation of values of Raw Material, Labour and Overheads added to the
process:
Material Labour Overheads
Cost per equivalent unit `46.00 `14.00 `18.00
Equivalent units (litre) 7,488 7,744 7,872
(refer the working note)
Cost of equivalent units `3,44,448 `1,08,416 `1,41,696
Add: Scrap value of normal loss `12,480 -- --
(832 units × `15)
Total value added `3,56,928 `1,08,416 `1,41,696
Workings:
Statement of Equivalent Units (litre):
Equivalent Production
Input
Units Output details Units Material Labour Overheads
Details
Units (%) Units (%) Units (%)
Opening 1,600 Units
WIP completed:
Units 8,320 - Opening 1,600 -- -- 480 30 640 40
introduced WIP
- Fresh 6,800 6,800 100 6,800 100 6,800 100
inputs
Normal loss 832 -- -- -- -- -- --
Abnormal loss 368 368 100 368 100 368 100
Closing WIP 320 320 100 96 30 64 20
9,920 9,920 7,488 7,744 7,872

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

(iv) Process Account for the month

Litres Amount Litres Amount
(`) (`)
To Opening WIP 1,600 1,06,560 By Finished 8,400 6,55,200
goods
[8400 x ` 78]
To Raw Materials 8,320 3,56,928 By Normal loss 832 12,480
[832 x ` 15]
To Wages -- 1,08,416 By Abnormal loss 368 28,704
[368 x ` 78]
To Overheads -- 1,41,696 By Closing WIP 320 17,216
[(320 x ` 46) + (320
x .30 x ` 14) + (320
x .20 x ` 18)]
9,920 7,13,600 9,920 7,13,600
9. Calculation of Cost per annum
Particulars Arts (`) Commerce Science Total (`)
(`) (`)
Teachers’ salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000
Re-apportionment of Economics (84,000) 1,45,091 (61,091) -
& Mathematics teachers’ salary
(W.N- 2)
Principal’s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary (W.N-4) - - 1,72,800 1,72,800
Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600
Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000
Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200
Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200
Office & Administration expenses 1,21,600 3,64,800 1,82,400 6,68,800
(W.N- 7)
Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000
Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400

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 22 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

(a) Calculation of cost per student per annum

Particulars Arts (`) Commerce Science Total (`)
(`) (`)
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
No. of students 120 360 180 660
Cost per student per 17,397 9,533 19,238 13,610
annum
(b) Calculation of profitability
Particulars Arts (`) Commerce Science (`) Total (`)
(`)
Total Fees per annum 12,000 12,000 12,000
Cost per student per 17,397 9,533 19,238
annum
Profit/ (Loss) per student (5,397) 2,467 (7,238)
per annum
No. of students 120 360 180
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)
(c) Computation of fees to be charged to earn a 10% profit on cost
Particulars Arts (`) Commerce Science (`)
(`)
Cost per student per annum 17,397 9,533 19,238
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764
Working Notes:
(1) Teachers’ salary
Particulars Arts Commerce Science
No. of teachers 4 5 6
Salary per annum (`) 4,20,000 4,20,000 4,20,000
Total salary 16,80,000 21,00,000 25,20,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

(2) Re-apportionment of Economics and Mathematics teachers’ salary

Economics Mathematics
Particulars Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re-apportionment (`) (84,000) 84,000 (61,091) 61,091
 `4,20,000   `4,20,000 
  208   1,100  160 
 1,040   
Total addition to Commerce stream = ` 84,000 + ` 61,091 = ` 1,45,091
(3) Principal’s salary has been apportioned on the basis of time spent by him for
administration of classes.
(4) Lab attendants’ salary has been apportioned on the basis of lab classes attended by
the students.
(5) Salary of library staffs are apportioned on the basis of time spent by the students in
library.
(6) Salary of Peons are apportioned on the basis of number of students. The peo ns’
salary allocable to higher secondary classes is calculated as below:
Amount (`)
Peon dedicated for higher secondary 1,20,000
(1 peon × `10,000 × 12 months)
Add: 15% of other peons’ salary 54,000
{15% of (3 peons × `10,000 × 12 months)}
1,74,000
(7) Salary to other staffs, office & administration cost, Annual day expenses and sports
expenses are apportioned on the basis of number of students.
(8) Examination Expenses has been apportioned taking number of students and number
of examinations into account.
10. Material Variances:
Material SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
(WN-1) (`) (`) (WN-2) (`) (`) (`) (`)

A 940 kg. 90.00 84,600 886 kg. 79,740 900 kg. 81,000 86.00 77,400
B 705 kg. 60.00 42,300 664 kg. 39,840 650 kg. 39,000 65.00 42,250
1645 kg 1,26,900 1550 kg 1,19,580 1550 kg 1,20,000 1,19,650

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 24 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020

WN-1: Standard Quantity (SQ):

 800kg. 
Material A-  1,480kg.  = 939.68 or 940 kg.
 0.9 1,400kg. 
 600kg. 
Material B-  1,480kg.  = 704.76 or 705 kg.
 0.9 1,400kg. 
WN- 2: Revised Standard Quantity (RSQ):
 800kg. 
Material A-  1,550kg.  = 885.71 or 886 kg.
 1,400kg. 
 600kg. 
Material B-  1,550kg.  = 664.28 or 664 kg.
 1,400kg. 
(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
= {1,26,900 – 1,19,650} = 7,250 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {1,20,000 – 1,19,650} = 350 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {1,19,580 – 1,20,000} = 420 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {1,26,900 – 1,19,580} = 7,320 (F)
Labour Variances:
Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR
(WN-3) (`) (`) (WN-4) (`) (`) (`) (`)

Skilled 1,116 hrs 75.00 83,700 1144 85,800 1,200 90,000 71.00 85,200
Unskilled 893 hrs 44.00 39,292 916 40,304 860 37,840 46.00 39,560
2,009 hrs 1,22,992 2,060 1,26,104 2,060 1,27,840 1,24,760

WN- 3: Standard Hours (SH):

 0.95 1,000hr. 
Skilled labour-  1,480kg.  =1,115.87 or 1,116 hrs.
 0.90  1,400kg. 
 0.95  800hr. 
Unskilled labour-  1,480kg.  = 892.69 or 893 hrs.
 0.90  1,400kg. 

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WN- 4: Revised Standard Hours (RSH):

 1,000hr. 
Skilled labour-   2,060hr.  = 1,144.44 or 1,144 hrs.
 1,800hr. 
 800hr. 
Unskilled labour-   2,060hr.  = 915.56 or 916 hrs.
 1,800hr. 
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {1,22,992 – 1,24,760} = 1,768 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {1,22,992 – 1,27,840} = 4,848 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {1,22,992 – 1,26,104} = 3,112 (A)
11. Working Notes:
(1) Calculation of Cost of Goods Sold (COGS):
COGS = DM + DL + FOH + AOH
COGS = {0.3 COGS + 0.15 COGS + (0.10 COGS + ` 2,30,000) +
(0.02 COGS + ` 71,000)}
Or, COGS = 0.57 COGS + ` 3,01,000
` 3,01,000
Or, COGS = = ` 7,00,000
0.43
(2) Calculation of Cost of Sales (COS):
COS = COGS + S&DOH
COS = COGS + (0.04 COS + ` 68,000)
Or, COS = ` 7,00,000 + (0.04 COS + ` 68,000)
` 7,68,000
Or, COS = = ` 8,00,000
0.96
(3) Calculation of Variable Costs:
Direct Material- (0.30 × ` 7,00,000) ` 2,10,000
Direct Labour- (0.15 × ` 7,00,000) ` 1,05,000
Factory Overhead- (0.10 × ` 7,00,000) ` 70,000
Administration OH- (0.02 × ` 7,00,000) ` 14,000
Selling & Distribution OH (0.04 × ` 8,00,000) ` 32,000
` 4,31,000

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(4) Calculation of total Fixed Costs:

Factory Overhead- ` 2,30,000
Administration OH- ` 71,000
Selling & Distribution OH ` 68,000
` 3,69,000
(5) Calculation of P/V Ratio:
Contribution Sales  VariableCosts
P/V Ratio = 100 = 100
Sales Sales
(`185 5,000units)  ` 4,31,000
= 100 = 53.41%
`185 5,000units
(i) Break-Even Sales
FixedCos ts ` 3,69,000
= = = `6,90,882
P / VRatio 53.41%
(ii) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs
= (`9,25,000 - `4,31,000) - `3,69,000
= `1,25,000
(iii) Margin of Safety (%)
Sales  Breakevensales
= 100
Sales
` 9,25,000  ` 6,90,882
= 100 = 25.31%
` 9,25,000
(iv) Profit if the sales were 10% less than the actual sales:
Profit = 90% (`9,25,000 - `4,31,000) - `3,69,000
= `4,44,600 - `3,69,000 = `75,600
12. (i) Preparation of Production Budget (in units)
October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000

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(ii) Preparation of Purchase budget for Part-X

October November December
Production for the month 37,500 37,000 48,000
(Nos.)
Add: 40% of next 14,800 19,200 24,400
month’s production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for 2,09,200 2,24,800 2,89,600
production (52,300 × 4 units) (56,200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14,800 × 4 units) (19,200 × 4 units)
No. of units to be 1,61,200 1,65,600 2,12,800
purchased
(iii) Budgeted Gross Profit for the Quarter October to December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* (`) 14,57,070 14,57,070 14,57,070
Sales Revenue (` in lakh) 5,82,828 5,09,974.50 6,55,681.50 17,48,484
Less: Cost of Sales (` in lakh) 4,57,120 3,99,980 5,14,260 13,71,360
(Sales unit × Cost per unit)
Gross Profit (` in lakh) 1,25,708 1,09,994.50 1,41,421.50 3,77,124
* Net Selling price unit =`17,14,200 – 15% commission on `17,14,200
= `14,57,070.
13. (a) Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative
It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost ofIt Provides information to
producing a product and
management for planning and
providing a service. co-ordination.
(iii) Area It only deals with cost
It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of It uses both past and It is focused with the projection
data present figures. of figures for future.

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(v) Development Its development is related It develops in accordance to the

to industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles It does not follow any specific
Regulation and procedures for rules and regulations.
recording costs of different
products.
(b) The impact of IT in cost accounting system may include the following:
(i) After the introduction of ERPs, different functional activities get integrated and
as a consequence a single entry into the accounting system provides custom
made reports for every purpose and saves an organisation from preparing
different sets of documents. Reconciliation process of results of both cost and
financial accounting systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill
of Material, Material Requisition Note, Goods Received Note, labour utilisation
report etc. are no longer required to be prepared in multiple copies, the related
department can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet)
helps in resource procurement and mobilisation. For example, production
department can get materials from the stores without issuing material requisition
note physically. Similarly, purchase orders can be initiated to the suppliers with
the help of extranet. This enables an entity to shift towards Just-in-Time (JIT)
approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in
timely manner. Each cost centre and cost object is codified and all related costs
are assigned to the cost object or cost centre. This process automates the cost
accumulation and ascertainment process. The cost information can be
customised as per the requirement. For example, when an entity manufacture or
provide services, it can know information job-wise, batch-wise, process-wise,
cost centre wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with
the help of IT. ERP software plays an important role in bringing uniformity
irrespective of location, currency, language and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which
enables the management to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or
service activity closely to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help
of IT.

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(c) Escalation clause in a contract empowers a contractor to revise the price of the
contract in case of increase in the prices of inputs due to some macro-economic or
other agreed reasons. A contract takes longer period to complete and the factors
based on which price negotiation is done at the time of entering into the contract may
change till the contract completes. This protect the contractor from adverse financial
impacts and empowers the contractor to recover the increased prices. As per this
clause, the contractor increases the contract price if the cost of materials, employees
and other expenses increase beyond a certain limit. Inclusion of such a clause in a
contract deed is called an “Escalation Clause”.
(d) By-product cost can be dealt in cost accounting in the following ways:
(i) When they are of small total value: When the by-products are of small total
value, the amount realised from their sale may be dealt in any one the following
two ways:
1. The sales value of the by-products may be credited to the Costing Profit
and Loss Account and no credit be given in the Cost Accounts. The credit
to the Costing Profit and Loss Account here is treated either as
miscellaneous income or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from
the total costs. The sale proceeds in fact should be deducted either from
the production cost or from the cost of sales.
(ii) When the by-products are of considerable total value: Where by-products
are of considerable total value, they may be regarded as joint products rather
than as by-products. To determine exact cost of by-products the costs incurred
upto the point of separation, should be apportioned over by-products and joint
products by using a logical basis. In this case, the joint costs may be divided
over joint products and by-products by using relative market values; physical
output method (at the point of split off) or ultimate selling prices (if sold).
(iii) Where they require further processing: In this case, the net realisable value
of the by-product at the split-off point may be arrived at by subtracting the further
processing cost from the realisable value of by-products.
If total sales value of by-products at split-off point is small, it may be treated as
per the provisions discussed above under (i).
In the contrary case, the amount realised from the sale of by-products will be
considerable and thus it may be treated as discussed under (ii).

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. HBL Limited produces product 'M' which has a quarterly demand of 20,000 units. Each
product requires 3 kg. and 4 kg. of material X and Y respectively. Material X is supplied by
a local supplier and can be procured at factory stores at any time, hence, no need to keep
inventory for material X. The material Y is not locally available, it requires to be purchased
from other states in a specially designed truck container with a capacity of 10 tons.
The cost and other information related with the materials are as follows:
Particulars Material –X Material-Y
Purchase price per kg. (excluding GST) `140 `640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - `28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%
*On purchased quantity

Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
(i) CALCULATE cost per kg. of material X and Y
(ii) CALCULATE the Economic Order quantity for both the materials.
Employee (Labour) Cost
2. ADV Pvt. Ltd. manufactures a product which requires skill and precision in work to get
quality products. The company has been experiencing high labour cost due to slow speed
of work. The management of the company wants to reduce the labour cost but without
compromising with the quality of work. It wants to introduce a bonus scheme but is
indifferent between the Halsey and Rowan scheme of bonus.
For the month of November 2019, the company budgeted for 24,960 hours of work. The
workers are paid `80 per hour.
Required:

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(i) CALCULATE and suggest the bonus scheme where the time taken (in %) to time
allowed to complete the works is (a) 100% (b) 75% (c) 50% & (d) 25% of budgeted
hours.
Overheads- Absorption Costing Method
3. PLR Ltd. manufacturers a single product and recovers the overheads by adopting a single
blanket rate based on machine hours. The budgeted production overheads of the factory
for the FY 2019-20 are `50,40,000 and budgeted machine hours are 6,000.
For a period of first six months of the financial year 201920, following information were
extracted from the books:
Actual production overheads `34,08,000
Amount included in the production overheads:
Paid as per court’s order `4,50,000
Expenses of previous year booked in current year `1,00,000
Paid to workers for strike period under an award `4,20,000
Obsolete stores written off `36,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 1,10,000 units
Works-in-progress
(50% complete in every respect) 80,000 units
Sale:
Finished goods 90,000 units
The actual machine hours worked during the period were 3,000 hours. It is revealed from
the analysis of information that 40% of the over/under-absorption was due to defective
production policies and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of over/ under absorption of production overheads for the
period,
(ii) to show the accounting treatment of over/ under-absorption of production overheads,
and
(iii) to apportion the over/ under-absorbed overheads over the items.
Overheads- Activity Based Costing (ABC) Method

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4. SMP Pvt. Ltd. manufactures three products using three different machines. At present the
overheads are charged to products using labour hours. The following statement for the
month of September 2019, using the absorption costing method has been prepared:

Particulars Product X Product Y Product Z

(using machine A) (using machine B) (using machine C)
Production units 45,000 52,500 30,000
Material cost per unit (`) 350 460 410
Wages per unit @ `80 per 240 400 560
hour
Overhead cost per unit (`) 240 400 560
Total cost per unit (`) 830 1,260 1,530
Selling price (`) 1,037.50 1,575 1,912.50
The following additional information is available relating to overhead cost drivers.
Cost driver Product X Product Y Product Z Total
No. of machine set-ups 40 160 400 600
No. of purchase orders 400 800 1,200 2,400
No. of customers 1,000 2,200 4,800 8,000
Actual production and budgeted production for the month is same. Workers are paid at
standard rate. Out of total overhead costs, 30% related to machine set-ups, 30% related
to customer order processing and customer complaint management, while the balance
proportion related to material ordering.
Required:
(i) COMPUTE overhead cost per unit using activity based costing method.
(ii) DETERMINE the selling price of each product based on activity-based costing with
the same profit mark-up on cost.
Cost Sheet
5. 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.

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(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.
Cost Accounting Systems
6. As of 30th September, 2019, the following balances existed in a firm’s cost ledger, which
is maintained separately on a double entry basis:
Debit(` ) Credit(` )
Stores Ledger Control A/c 15,00,000 
Work-in-progress Control A/c 7,50,000 
Finished Goods Control A/c 12,50,000 
Manufacturing Overhead Control A/c  75,000
Cost Ledger Control A/c  34,25,000
35,00,000 35,00,000
During the next quarter, the following items arose:
(` )
Finished Product (at cost) 11,25,000
Manufacturing overhead incurred 4,25,000
Raw material purchased 6,25,000
Factory wages 2,00,000
Indirect labour 1,00,000

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 88 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Cost of sales 8,75,000

Materials issued to production 6,75,000
Sales returned (at cost) 45,000
Materials returned to suppliers 65,000
Manufacturing overhead charged to production 4,25,000
Required:
PREPARE the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-in-progress
Control A/c, Finished Stock Ledger Control A/c, Manufacturing Overhead Control A/c ,
Wages Control A/c, Cost of Sales A/c and the Trial Balance at the end of the quarter.
Contract Costing
7. GVL Ltd. commenced a contract on April 1, 2018. The total contract was for
` 1,08,50,000. It was decided to estimate the total profit and to take to the credit of Costing
P & L A/c the proportion of estimated profit on cash basis which work completed bear to
the total contract. Actual expenditure in 2018-19 and estimated expenditure in 2019-20 are
given below:
2018-19 2019-20
Actual (` ) Estimated (` )
Material issued 18,24,000 32,56,000
Labour : Paid 12,20,000 15,20,000
: Outstanding at end 96,000 1,50,000
Plant purchased 9,00,000 -
Expenses : Paid 4,00,000 7,00,000
: Outstanding at the end - 1,00,000
: Prepaid at the end 90,000 -
Plant returned to stores (a historical stores) 3,00,000 6,00,000
(on Sep. 30, 2019)
Material at site 1,20,000 3,00,000
Work-in progress certified 51,00,000 Full
Work-in-progress uncertified 1,60,000 ----
Cash received 40,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to
be completed on September 30, 2019.
Required:

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(i) PREPARE the Contract A/c for the year 2018-19.

(ii) ESTIMATE the profit for the contract.
Batch Costing
8. BTL LLP. manufactures glass bottles for HDL Ltd., a pharmaceutical company, which is in
ayurvedic medicines business..
BTL can produce 2,00,000 bottles in a month. Set-up cost of each production run is ` 5,200
and the cost of holding one bottle for a year is ` 1.50.
As per an estimate HDL Ltd. can order as much as 19,00,000 bottles in a year spreading
evenly throughout the year.
At present the BTL manufactures 1,60,000 bottles in a batch.
Required:
(i) COMPUTE the Economic Batch Quantity for bottle production.
(ii) COMPUTE the annual cost saving to BTL by adopting the EBQ of a production.
Job Costing
9. Ispat Engineers Limited (IEL) undertook a plant manufacturing work for a client. It will
charge a profit mark up of 20% on the full cost of the jobs. The following are the information
related to the job:
Direct materials utilised – `1,87,00,000
Direct labour utilised – 2,400 hours at `80 per hour
Budgeted production overheads are Rs. 48,00,000 for the period and are recovered on the
basis of 24,000 labour hours.
Budgeted selling and administration overheads are `18,00,000 for the period and
recovered on the basis of total budgeted total production cost of `36,00,00,000.
Required:
CALCULATE the price to be charged for the job.
Service Costing
10. A transport company has a fleet of four trucks of 10 tonne capacity each plying in different
directions for transport of customer's goods. The trucks run loaded with goods and return
empty. The distance travelled, number of trips made and the load carried per day by each
truck are as under:
Truck No. One way No. of trips Load carried
Distance Km per day per trip / day tonnes
1 48 4 6
2 120 1 9

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 90 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

3 90 2 8
4 60 4 8
The analysis of maintenance cost and the total distance travelled during the last two years
is as under
Year Total distance travelled Maintenance Cost `
1 1,60,200 1,38,150
2 1,56,700 1,35,525
The following are the details of expenses for the year under review:
Diesel ` 60 per litre. Each litre gives 4 km per litre of diesel on an
average.
Driver's salary ` 22,000 per truck per month
Licence and taxes ` 15,000 per annum per truck
Insurance ` 80,000 per annum for all the four trucks
Purchase Price per `30,00,000, Life 10 years. Scrap value at the end of life is
truck `1,00,000.
Oil and sundries ` 525 per 100 km run.
General Overhead ` 1,10,840 per annum
The trucks operate 24 days per month on an average.
Required
(i) PREPARE an Annual Cost Statement covering the fleet of four trucks.
(ii) CALCULATE the cost per km. run.
(iii) DETERMINE the freight rate per tonne km. to yield a profit of 30% on freight.
Process Costing
11. A product is manufactured in two sequential processes, namely Process-1 and Process-2.
The following information relates to Process-1. At the beginning of June 2019, there were
1,000 WIP goods (60% completed in terms of conversion cost) in the inventory, which are
valued at `2,86,020 (Material cost: `2,55,000 and Conversion cost: `31,020). Other
information relating to Process-1 for the month of June 2019 is as follows;

Cost of materials introduced- 40,000 units (`) 96,80,000

Conversion cost added (`) 18,42,000
Transferred to Process-2 (Units) 35,000

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Closing WIP (Units) (60% completed in terms of conversion cost) 1,500

100% of materials are introduced to Process-1 at the beginning. Normal loss is estimated
at 10% of input materials (excluding opening WIP).
Required:
(i) PREPARE a statement of equivalent units using the weighted average cost method
and thereby calculate the following:
(ii) CALCULATE the value of output transferred to Process-2 and closing WIP.
Standard Costing
12. JVG Ltd. produces a product and operates a standard costing system and value material
and finished goods inventories at standard cost. The information related with the product
is as follows:
Particulars Cost per unit (`)
Direct materials (30 kg at `350 per kg) 10,500
Direct labour (5 hours at `80 per hour) 400

The actual information for the month just ended is as follows:

(a) The budgeted and actual production for the month of September 2019 is 1,000 units.
(b) Direct materials –5,000 kg at the beginning of the month. The closing balance of direct
materials for the month was 10,000 kg. Purchases during the month were made at
` 365 per kg. The actual utilization of direct materials was 7,200 kg more than the
budgeted quantity.
(c) Direct labour – 5,300 hours were utilised at a cost of ` 4,34,600.
Required:
CALCULATE (i) Direct material price and usage variances (ii) Direct labour rate and
efficiency variances.
Marginal Costing
13. PVC Ltd sold 55,000 units of its product at `375 per unit. Variable costs are `175 per unit
(manufacturing costs of `140 and selling cost `35 per unit). Fixed costs are incurred
uniformly throughout the year and amount to `65,00,000 (including depreciation of
`15,00,000). There is no beginning or ending inventories.
Required:
(i) COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.
(ii) COMPUTE the P/V ratio.

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 92 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

(iii) COMPUTE the number of units that must be sold to earn an income (EBIT) of
`5,00,000.
(iv) COMPUTE the sales level achieve an after-tax income (PAT) of `5,00,000, assume
40% corporate tax rate..
Budget and Budgetary Control
14. KLM Limited has prepared its expense budget for 50,000 units in its factory for the year
2019-20 as detailed below:
(` per unit)
Direct Materials 125
Direct Labour 50
Variable Overhead 40
Direct Expenses 15
Selling Expenses (20% fixed) 25
Factory Expenses (100% fixed) 15
Administration expenses (100% fixed) 8
Distribution expenses (85% variable) 20
Total 298
PREPARE an expense budget for the production of 35,000 units and 70,000 units.
Miscellaneous
15. (i) DIFFERENTIATE between Cost Accounting and Management Accounting.
(ii) EXPLAIN the meaning of Budget Manual.
(iii) EXPLAIN the term Equivalent units used in process industries.

SUGGESTED HINTS/ANSWERS

1. Working Notes:
(a) Annual purchase quantity for material X and Y:
Annual demand for product M- 20,000 units × 4 = 80,000 units
Particulars Mat-X Mat-Y
Quantity required for per unit of product M 3 kg. 4 kg.
Net quantity for materials required 2,40,000 kg. 3,20,000 kg.
Add: Loss in transit - 6,881 kg.
Add: Loss in process 10,000 kg. 17,204 kg.

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Purchase quantity 2,50,000 kg. 3,44,085 kg.

Note - Input credit on GST paid is available; hence, it will not be included in cost of material.
(i) Calculation of cost per kg. of material X and Y:
Particulars Mat-X Mat-Y
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Rate per kg. `140 `640
Purchase price `3,50,00,000 `22,02,14,400
Add: Freight 0 `9,80,000*
Total cost `3,50,00,000 `22,11,94,400
Net Quantity 2,40,000 kg. 3,20,000 kg
Cost per kg. `145.83 `691.23
*No. of trucks = 3,44,085kg. = 34.40 trucks or 35 trucks
10 ton  1,000
Therefore, total freight = 35 trucks × `28,000 = `9,80,000
(ii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:
2  Annual Re quirement  Order cos t
EOQ =
Carryingcos t per unit p.a.

Particulars Mat-X Mat-Y

Annual Requirement 2,50,000 kg. 3,44,085 kg.
Ordering cost 0 `28,000
Cost per unit `145.83 `691.23
Carrying cost 15% 15%
Carrying cost per unit p.a. 0* `103.68
EOQ 0 13,632.62 kg.
2. The Cost of labour under the bonus schemes are tabulated as below:
Time Time Wages (`) Bonus (`) Total Wages (`) Earning per hour
Allowed taken (`)
Halsey* Rowan** Halsey Rowan Halsey Rowan
(1) (2) (3) (4) (5) (6) (7) (8) (9)
= (2) ×` 80 = (3) + (4) = (3) + (5) = (6)/(2) = (7)/(2)
24,960 24,960 19,96,800 - - 19,96,800 19,96,800 80.00 80.00
24,960 18,720 14,97,600 2,49,600 3,74,400 17,47,200 18,72,000 93.33 100.00

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 94 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

24,960 12,480 9,98,400 4,99,200 4,99,200 14,97,600 14,97,600 120.00 120.00

24,960 6,240 4,99,200 7,48,800 3,74,400 12,48,000 8,73,600 200.00 140.00
* Bonus under Halsey Plan = 50% of (Time Allowed – Time Taken) × Rate per hour

** Bonus under Rowan Plan = Time taken  Time saved  Rate per hour
Time allowed

Rowan scheme of bonus keeps checks on speed of work as the rate of incentive increases
only upto 50% of time taken to time allowed but the rate decreases as the time taken to
time allowed comes below 50%. It provides incentives for efficient workers for saving in
time but also puts check on careless speed. On implementation of Rowan scheme, the
management of ADV Pvt. Ltd. would resolve issue of the slow speed work while
maintaining the skill and precision required maintaining the quality of product.
3. (i) Amount of over/ under absorption of production overheads during the period of first
six months of the year 2019-20:
Amount Amount
(` ) (` )
Total production overheads actually incurred during the 34,08,000
period
Less: Amount paid to worker as per court order 4,50,000
Expenses of previous year booked in the current 1,00,000
year
Wages paid for the strike period under an award 4,20,000
Obsolete stores written off 36,000 10,06,000
24,02,000
Less: Production overheads absorbed as per machine
hour rate (3,000 hours × `840*) 25,20,000
Amount of over absorbed production overheads 1,18,000
` 50,40,000
*Budgeted Machine hour rate (Blanket rate) =  `840 per hour
6,000 hours
(ii) Accounting treatment of over absorbed production overheads: As, 40% of the
over absorbed overheads were due to defective production policies, this being
abnormal, hence should be credited to Costing Profit and Loss Account.
Amount to be credited to Costing Profit and Loss Account
= `1,18,000× 40% = `47,200.

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Balance of over absorbed production overheads should be distributed over Works in

progress, Finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = `1,18,000× 60% = `70,800
` 70,800
Supplementary rate =  ` 0.472 per unit
1,50, 000 units
(iii) Apportionment of over absorbed production overheads over WIP, Finished goods and
Cost of sales:
Equivalent Amount
completed units (` )
Work-in-Progress (80,000 units × 50% ×0.472) 40,000 18,880
Finished goods (20,000 units × 0.472) 20,000 9,440
Cost of sales (90,000 units × 0.472) 90,000 42,480
Total 1,50,000 70,800
4. Workings:
Total labour hours and overhead cost:
Particulars Product Product Product Total
X Y Z
Production units 45,000 52,500 30,000 1,27,500
Hour per unit 3 5 7
Total hours 1,35,000 2,62,500 2,10,000 6,07,500
Rate per hour `80.00
Total overhead `4,86,00,000
Cost per activity and driver
Activity Machine Customer Customer Total
Set-up order complaint
processing management
Total overhead (`) 1,45,80,000 1,45,80,000 1,94,40,000 4,86,00,000
No. of drivers 600 2,400 8,000
Cost per driver (`) 24,300 6,075 2,430
(i) Computation of Overhead cost per unit:
Particulars Product X Product Y Product Z
No. of machine set-ups 40 160 400

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 96 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Cost per driver (`) 24,300 24,300 24,300

Total Machine set-up cost (`) [A] 9,72,000 38,88,000 97,20,000
No. of purchase orders 400 800 1,200
Cost per driver (`) 6,075 6,075 6,075
Total order processing cost (`) 24,30,000 48,60,000 72,90,000
[B]
No. of customers 1,000 2,200 4,800
Cost per driver (`) 2,430 2,430 2,430
Total customer complaint 24,30,000 53,46,000 1,16,64,000
management cost (`) [C]
Total Overhead cost (`) [A+B+C] 58,32,000 1,40,94,000 2,86,74,000
Production units 45,000 52,500 30,000
Cost per unit (`) 129.60 268.46 955.80
(ii) Determination of Selling price per unit
Particulars Product X Product Y Product Z
(using machine A) (using machine B) (using machine C)
Material cost per unit (`) 350.00 460.00 410.00
Wages per unit @ `80 per 240.00 400.00 560.00
hour
Overhead cost per unit (`) 129.60 268.46 955.80
Total cost per unit (`) 719.60 1,128.46 1,925.80
Profit (25% profit mark-up) 179.90 282.11 481.45
(`)
Selling price (`) 899.50 1,410.57 2,407.25
5. No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2019
Particulars Total Cost per
Cost (`) 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

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 97

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}
Apportion cost of factory rent 98,000 98.00
6. Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25)
8. Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × `632.75) (63,275)
11. Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 45.00
- Apportioned rent for administrative office 12,000 12.00
13. 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
14. Cost of Sales (18+19+20) 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 sale office {(`1,20,000 ÷ 2400 sq.feet) × 200 sq. feet} = `10,000
6. Cost Ledger Control Account
Dr. Cr.
(` ) (` )
To Store Ledger 65,000 By Opening Balance 34,25,000
Control A/c
To Balance c/d 47,10,000 By Store ledger control A/c 6,25,000
By Manufacturing
Overhead Control A/c 4,25,000

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 98 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

By Wages Control A/c 3,00,000

47,75,000 47,75,000

Stores Ledger Control Account

Dr. Cr.
(` ) (` )
To Opening Balance 15,00,000 By WIP Control A/c 6,75,000
To Cost ledger control A/c 6,25,000 By Cost ledger control 65,000
A/c (Returns)
By Balance c/d 13,85,000
21,25,000 21,25,000

WIP Control Account

Dr. Cr.
(` ) (` )
To Opening Balance 7,50,000 By Finished Stock 11,25,000
Ledger Control A/c
To Wages Control A/c 2,00,000 By Balance c/d 9,25,000
To Stores Ledger Control 6,75,000
A/c
To Manufacturing 4,25,000
Overhead Control A/c
20,50,000 20,50,000

Finished Stock Ledger Control Account

Dr. Cr.
(` ) (` )
To Opening Balance 12,50,000 By Cost of Sales 8,75,000
To WIP Control A/c 11,25,000 By Balance c/d 15,45,000
To Cost of Sales A/c (Sales 45,000
Return)
24,20,000 24,20,000
Manufacturing Overhead Control Account

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Dr. Cr.
(` ) (` )
To Cost Ledger Control A/c 4,25,000 By Opening Balance 75,000
To Wages Control A/c 1,00,000 By WIP Control A/c 4,25,000
By Under recovery 2 5,000
c/d
5,25,000 5,25,000

Wages Control Account

Dr. Cr.
(` ) (` )
To Transfer to Cost Ledger 3,00,000 By WIP Control A/c 2,00,000
Control A/c
By Manufacturing 1,00,000
Overhead Control A/c
3,00,000 3,00,000

Cost of Sales Account

Dr. Cr.
(` ) (` )
To Finished Stock Ledger 8,75,000 By Finished Stock Ledger 45,000
Control A/c Control A/c (Sales
return)
By Balance c/d 8,30,000

8,75,000 8,75,000

Trial Balance
(` ) (` )
Stores Ledger Control A/c 13,85,000
WIP Control A/c 9,25,000
Finished Stock Ledger Control A/c 15,45,000
Manufacturing Overhead Control A/c 25,000
Cost of Sales A/c 8,30,000

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 100 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Cost ledger control A/c ---- 47,10,000

47,10,000 47,10,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 101

7. GVL Ltd.
Contract A/c
(April 1, 2018 to March 31, 2019)
Particulars Amount Particulars Amount
(` ) (` )
To Materials Issued 18,24,000 By Plant returned to Stores 2,40,000
(Working Note 1)
To Labour 12,20,000 By Materials at Site 1,20,000
Add: Outstanding 96,000 13,16,000 By W.I.P.
To Plant Purchased 9,00,000 Certified 51,00,000
To Expenses 4,00,000 Uncertified 1,60,000 52,60,000
Less: Prepaid 90,000 3,10,000 By Plant at Site
(Working Note 2) 4,80,000
To Notional Profit 17,50,000
61,00,000 61,00,000
GVL Ltd.
Contract A/c
(April 1, 2018 to September 30, 2019)
(For Computing estimated profit)
Particulars Amount (` ) Particulars Amount (` )
To Materials Issued 50,80,000 By Material at Site 3,00,000
(` 18,24,000 + `32,56,000)
To Labour Cost 28,90,000 By Plant returned to Stores 2,40,000
(`12,20,000 + `96,000 + on 31.03.2019.
`14,24,000* + `1,50,000)
To Plant purchased 9,00,000 By Plant returned to Stores 4,32,000
on 30.09.2019 (Working Note
3)
To Expenses 12,00,000 By Contractee A/c 1,08,50,000
(`3,10,000 + `7,90,000 +
`1,00,000)
To Estimated profit 17,52,000
1,18,22,000 1,18,22,000
* Labour paid in 2019-20: `15,20,000 – `96,000 = `14,24,000

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 102 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Working Notes
(` )
1. Value of the Plant returned to Stores on 31.03.2019
Historical Cost of the Plant returned 3,00,000
Less: Depreciation @ 20% of WDV for one year (60,000)
2,40,000
2. Value of Plant at Site 31.03.2019
Historical Cost of Plant at Site (`9,00,000 – `3,00,000) 6,00,000
Less: Depreciation @ 20% on WDV for one year (1,20,000)
4,80,000
3. Value of Plant returned to Stores on 30.09.2019
Value of Plant (WDV) on 31.3.2019 4,80,000
Less: Depreciation @ 20% of WDV for a period of 6 months (48,000)
4,32,000
4. Expenses Paid for the year 2018-19
Total expenses paid 4,00,000
Less: Pre-paid at the end (90,000)
3,10,000

8. Economic Batch Quantity (EBQ) = 2DS

C
Where, D = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production
(i) Computation of EBQ :

= 2 19,00,000 `5,200
`1.5
= 1,14,775 bottles
(ii) Computation of savings in cost by adopting EBQ:
Batch Size No. of Set-up cost Carrying cost Total Cost
Batch
1,60,000 62,400 1,20,000
12 1,82,400
bottles (`5,200 × 12) (`1.5 × ½ × 1,60,000)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 103

1,14,775 88,400 86,081.25

17 1,74,481.25
bottles (`5,200 × 17) (`1.5 × ½ × 1,14,775)
Saving 7,918.75
9. Calculation of job price
Particulars Amount (`)
Direct materials 1,87,00,000
Direct wages (`80 × 2,400 hours) 1,92,000
 `48,00,000  4,80,000
Production overheads   2,400hrs 
 24,000hrs 
Production cost 1,93,72,000
Selling and administration overheads 96,860
 `18,00,000 
 `36,00,00,000 `1,93,72,000 
 

Total cost of sales 1,94,68,860

Profit mark-up @ 20% 38,93,772
Price for the job 2,33,62,632
10. (i) Annual Cost Statement of four vehicles
(` )
Diesel {(4,21,632 km. ÷ 4 km) × ` 60) (Refer to Working Note 1) 63,24,480
Oil & sundries {(4,21,632 km. ÷ 100 km.) × ` 525} 22,13,568
Maintenance {(4,21,632 km. × ` 0.75) + ` 18,000} 3,34,224
(Refer to Working Note 2)
Drivers' salary {(`22,000 × 12 months) × 4 trucks} 10,56,000
Licence and taxes (` 15,000 × 4 trucks) 60,000
Insurance 80,000
Depreciation {(`29,00,000 ÷ 10 years) × 4 trucks} 11,60,000
General overhead 1,10,840
Total annual cost 1,13,39,112

(ii) Cost per km. run

Cost per kilometer run = Totalannual cos t of vehicles (Refer to Working Note 1)
Totalkilometre travelled annually

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 104 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

= `1,13,39,112  ` 26.89
4,21,632 Kms

(iii) Freight rate per tonne km (to yield a profit of 30% on freight)
Cost per tonne km. = Total annual cos t of three vehicles (Refer to Working Note 1)
Total effective tonnes kms. per annum
= `1,13,39,112  ` 7.04
16,10,496 kms

Freight rate per tonne km.  `7.04   1 = ` 10.06

 0.7 
Working Notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by four trucks in one year
Truck One way No. of Total distance Load carried Total
number distance trips covered in km per trip / day effective
in kms per day in tonnes tonnes km
1 48 4 384 6 1,152
2 120 1 240 9 1,080
3 90 2 360 8 1,440
4 60 4 480 8 1,920
Total 1,464 5,592
Total kilometre travelled by four trucks in one year
(1,464 km. × 24 days × 12 months) = 4,21,632
Total effective tonnes kilometre of load carried by four trucks during one year
(5,592 tonnes km. × 24 days × 12 months) = 16,10,496
2. Fixed and variable component of maintenance cost:
Variable maintenance cost per km= Difference in maintenanc e cost
Difference in distance travelled

= ` 1,38,150 – ` 1,35,525
1,60,200 kms – 1,56,700 kms

= ` 0.75
Fixed maintenance cost = Total maintenance cost–Variable maintenance cost
= `1,38,150 – 1,60,200 kms × ` 0.75 = ` 18,000
11. (i) Statement of Equivalent Production

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 105

Particulars Input Particulars Output Equivalent Production

Units Units Conversion
Material
cost
% Units % Units
Opening WIP 1,000 Completed and transfer r ed 35,000 100 35,000 100 35,000
to Process-2
Units 40,000 Normal Loss (10% of 40,000) 4,000 -- -- -- --
introduced
Abnormal loss 500 100 500 60 300
(Balancing figure)
Closing WIP 1,500 100 1,500 60 900
41,000 41,000 37,000 36,200

(ii) Calculation of value of output transferred to Process-2 & Closing WIP

Amount (` ) Amount (` )
1. Value of units completed and transferred 1,12,08,750
(35,000 units × ` 320.25) (Refer working note)
3. Value of Closing W-I-P:
- Materials (1,500 units × ` 268.51) 4,02,765
- Conversion cost (900 units × ` 51.74) 46,566 4,49,331
Workings:
Cost for each element
Particulars Materials Conversion Total
(` ) (` ) (` )
Cost of opening work-in-process 2,55,000 31,020 2,86,020
Cost incurred during the month 96,80,000 18,42,000 1,15,22,000
Total cost: (A) 99,35,000 18,73,020 1,18,08,020
Equivalent units: (B) 37,000 36,200
Cost per equivalent unit: (C) = (A ÷ B) 268.51 51.74 320.25
12. Working:
Quantity of material purchased and used.
No. of units produced 1,000 units
Std. input per unit 30kg.
Std. quantity (Kg.) 30,000 kg.
Add: Excess usage 7,200 kg.
Actual Quantity 37,200 kg.

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 106 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Add: Closing Stock 10,000 kg.

Less: Opening stock 5,000 kg.
Quantity of Material purchased 42,200 kg.
(i) Direct Material Price Variance:
= Actual Quantity purchased (Std. Price – Actual Price)
= 42,200 kg.(`350 – `365) = 6,33,000 (Adverse)
Direct Material Usage Variance:
= Std. Price (Std. Quantity – Actual Quantity)
= `350 (30,000 kg. – 37,200 kg.) = `25,20,000 (Adverse)
(ii) Direct Labour Rate Variance:
= Actual hours (Std. Rate – Actual Rate)
= 5,300 hours (`80 – `82) = `10,600 (Adverse)
Direct Labour Efficiency Variance:
= Std. Rate (Std. hours – Actual hours)
= `80 (1,000 units × 5 hours – 5,300 hours) = `24,000 (Adverse)
13. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cos t ` 65,00,000
Break even Sales Quantity = = = 32,500 units
Contribution margin per unit ` 200
Cash Fixed Cost `50,00,000
Cash Break even Sales Qty= = = 25,000 units.
Contribution margin per unit `200

(ii) P/V ratio = Contribution/ unit ` 200

100 =  100 = 53.33%
Selling Pr ice / unit ` 375

(iii) No. of units that must be sold to earn an Income (EBIT) of `5,00,000
Fixed cost  Desired EBIT level = 65,00,000  5,00,000 = 35,000 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = `5,00,000
Tax rate = 40%
`5,00,000
Desired level of Profit before tax = 100 = `8,33,333
60

Estimate Sales Level = FixedCost  DesiredPr ofit

P / V ratio

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 107

 FixedCost  DesiredPr ofit 

Or,   SellingPr iceper unit 
 Contributionper unit 
`65,00,000  `8,33,333
= = `1,37,50,859
53.33%
14. Expense Budget of KLM Ltd.
Particulars 50,000 Units 35,000 Units 70,000 Units (` )
(` ) (` )
Direct Material 62,50,000 43,75,000 87,50,000
(50,000 x 125) (35,000 x 125) (70,000 x 125)
Direct Labour 25,00,000 17,50,000 35,00,000
(50,000 x 50) (35,000 x 50) (70,000 x 50)
Variable Overhead 20,00,000 14,00,000 28,00,000
(50,000 x 40) (35,000 x 40) (70,000 x 40)
Direct Expenses 7,50,000 5,25,000 10,50,000
(50,000 x 15) (35,000 x 15) (70,000 x 15)
Selling Expenses (Variable)* 10,00,000 7,00,000 14,00,000
(50,000 x 20) (35,000 x 20) (70,000 x 20)
Selling Expenses (Fixed)* 2,50,000 2,50,000 2,50,000
(5 x 50,000)
Factory Expenses (Fixed) 7,50,000 7,50,000 7,50,000
(15 x 50,000)
Administration Expenses (Fixed) 4,00,000 4,00,000 4,00,000
(8 x 50,000)
Distribution Expenses (Variable)** 8,50,000 5,95,000 11,90,000
(17 x 50,000) (17 x 35,000) (17 x 70,000)
Distribution Expenses (Fixed)** 1,50,000 1,50,000 1,50,000
(3 x 50,000)
1,49,00,000 1,08,95,000 2,02,40,000
*Selling Expenses: Fixed cost per unit = `25 x 20% = `5
Fixed Cost = `5 x 50,000 units = `2,50,000
Variable Cost Per unit = `25 – `5 = `20
**Distribution Expenses: Fixed cost per unit = `20 x 15% = `3
Fixed Cost = `3 x 50,000 units = `1,50,000

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 108 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2019

Variable cost per unit = `20 – `3 = `17

15. (i) Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative
aspect only. and quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning
providing a service. and co-ordination.
(iii) Area It only deals with cost It is wider in scope as it
Ascertainment. includes financial
accounting, budgeting,
taxation, planning etc.
(iv) Recording of It uses both past and It is focused with the
data present figures. projection of figures for
future.
(v) Development Its development is related It develops in accordance
to industrial revolution. to the need of modern
business world.
(vi) Rules and It follows certain principles It does not follow any
Regulation and procedures for specific rules and
recording costs of different regulations.
products.
(ii) Budget Manual: A budget manual is a collection of documents that contains key
information for those involved in the planning process. Typical contents could include
the following:
• An introductory explanation of the budgetary planning and control process,
including a statement of the budgetary objective and desired results.
• A form of organisation chart to show who is responsible for the preparation of
each functional budget and the way in which the budgets are interrelated.
• A timetable for the preparation of each budget. This will prevent the formation
of a ‘bottleneck’ with the late preparation of one budget holding up the
preparation of all others.
• Copies of all forms to be completed by those responsible for preparing budgets,
with explanations concerning their completion.
• A list of the organization’s account codes, with full explanations of how to use
them.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 109

• Information concerning key assumptions to be made by managers in their

budgets, for example the rate of inflation, key exchange rates, etc.
(iii) Equivalent Units: Equivalent units or equivalent production units, means converting
the incomplete production units into their equivalent completed units. Under each
process, an estimate is made of the percentage completion of work-in-process with
regard to different elements of costs, viz., material, labour and overheads. It is
important that the estimate of percentage of completion should be as accurate as
possible. The formula for computing equivalent completed units is:
 Actualnumber of unitsin   Percentage of 
Equivalent completed units =   
 theprocessof manufacture   Work completed 
For instance, if 25% of work has been done on the average of units still under process,
then 200 such units will be equal to 50 completed units and the cost of work-in-
process will be equal to the cost of 50 finished units.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of
Exe, 2 kg of Dee is required. As per the sales forecast conducted by the company, it will
able to sale 10,000 units of Exe in the coming year. The following is the information
regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work.
From the above information FIND OUT the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) CALCULATE the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Employee (Labour) Cost
2. A Company is undecided as to what kind of wage scheme should be introduced. The
following particulars have been compiled in respect of three workers. Which are under
consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -

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 2 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Standard time allowed per unit of each product is:

A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1/-
You are required to CALCULATE the wages of each worker under:
(i) Guaranteed hourly rate basis
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly
rate if his earnings are less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.
Overheads- Absorption Costing Method
3. The Union Ltd. has the following account balances and distribution of direct charges on
31st March, 2019.
Production Depts. Service Depts.
Total Machine Shop Packing General Stores
Plant
Allocated Overheads: (`) (`) (`) (`) (`)
Indirect labour 29,000 8,000 6,000 4,000 11,000
Maintenance Material 9,900 3,400 1,600 2,100 2,800
Misc. supplies 5,900 1,500 2,900 900 600
Supervisor’s salary 16,000 -- -- 16,000 --
Cost & payroll salary 80,000 -- -- 80,000 --
Overheads to be apportioned:
Power 78,000
Rent 72,000
Fuel and Heat 60,000
Insurance 12,000
Taxes 8,400
Depreciation 1,20,000
The following data were compiled by means of the factory survey made in the previous
year:
Floor Space Radiator No. of Investment H.P.
Section employees hours
Machine Shop 2,000 Sq. ft. 45 20 8,00,000 3,500

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3

Packing 800 Sq. ft. 90 12 2,40,000 500

General Plant 400 Sq. ft. 30 4 80,000 -
Stores & 1,600 Sq. ft. 60 8 1,60,000 1,000
maintenance
Expenses charged to the stores departments are to be distributed to the other departments
by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%;
General Plant overheads is distributed on the basis of number of employees.
(a) PREPARE an overhead distribution statement with supporting schedules to show
computations and basis of distribution.
(b) DETERMINE the service department distribution by simultaneous equation method.
Overheads- Activity Based Costing (ABC) Method
4. MST Limited has collected the following data for its two activities. It calculates activity cost
rates based on cost driver capacity.
Activity Cost Driver Capacity Cost (`)
Power Kilowatt hours 50,000 kilowatt hours 40,00,000
Quality Number of 10,000 Inspections 60,00,000
Inspections Inspections
The company makes three products M, S and T. For the year ended March 31, 20X 9, the
following consumption of cost drivers was reported:
Product Kilowatt hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the factors the management considers in choosing a capacity level to
compute the budgeted fixed overhead cost rate.
Cost Sheet
5. Following information relate to a manufacturing concern for the year ended 31 st March,
2019:

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 4 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(`)
Raw Material (opening) 2,28,000
Raw Material (closing) 3,05,000
Purchases of Raw Material 42,25,000
Freight Inwards 1,00,000
Direct wages paid 12,56,000
Direct wages-outstanding at the end of the year 1,50,000
Factory Overheads 20% of prime cost
Work-in-progress (opening) 1,92,500
Work-in-progress (closing) 1,40,700
Administrative Overheads (related to production) 1,73,000
Distribution Expenses `16 per unit
Finished Stock (opening)- 1,217 Units 6,08,500
Sale of scrap of material 8,000
The firm produced 14,000 units of output during the year. The stock of finished goods at the
end of the year is valued at cost of production. The firm sold 14,153 units at a price of `618
per unit during the year.
PREPARE cost sheet of the firm.
Non-integrated Accounting
6. The following is the summarised Trading and Profit and Loss Account of XYZ Ltd. for the
year ended 31 st March 2019:
Particulars Amount Particulars Amount (`)
(`)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works overheads 4,26,000 Work-in-progress:
Administration overheads 1,50,000 - Materials 34,000
Selling and distribution 1,65,000 - Wages 16,000
overheads
Net profit for the year 3,22,500 - Works overhead 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works
overheads have been charged @ 20% on prime cost, (ii) administration overheads are

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 5

related with production activities and are recovered at `5 per finished unit, and (iii) selling
and distribution overheads are recovered at `6 per unit sold.
You are required to PREPARE:
(i) Costing Profit and Loss Account indicating the net profits,
(ii) A Statement showing reconciliation between profit as disclosed by the Cost Accounts
and Financial Accounts.
Contract Costing
7. Dream house (P) Ltd. is engaged in building two residential housing projects in the city.
Particulars related to two housing projects are as below:
HP-1 (`) HP-2 (`)
Work in Progress on 1 st April 2018 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31st March, 2019 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 1st 72,000 57,000
April 2018
Value of materials at site as on 31st March, 2019 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2018 for `8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a. (this machine
can be used for any other projects)
PREPARE contract account for the two housing projects showing the notional profit or loss
on each project for the year ended 31st March, 2019.
Process Costing
8. Following information is available regarding process A for the month of February, 20X9:
Production Record:
Units in process as on 01.02.20X9 4,000
(All materials used, 25% complete for labour and overhead)

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 6 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

New units introduced 16,000

Units completed 14,000
Units in process as on 28.02.20X9 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.02.20X9 (`)
Materials 6,00,000
Labour 1,00,000
Overhead 1,00,000
8,00,000
Cost during the month
Materials 25,60,000
Labour 15,00,000
Overhead 15,00,000
55,60,000
Presuming that average method of inventory is used, PREPARE:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A.
Joint Product and By Product
9. A company processes a raw material in its Department 1 to produce three products, viz.
A, B and X at the same split-off stage. During a period 1,80,000 kgs of raw materials were
processed in Department 1 at a total cost of ` 12,88,000 and the resultant output of A, B
and X were 18,000 kgs, 10,000 kgs and 54,000 kgs respectively. A and B were further
processed in Department 2 at a cost of `1,80,000 and `1,50,000 respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in
further processing. The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 7

There were no opening stocks. If these products were sold at split-off stage, the selling
prices of A, B and X would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint costs to A, B and X.
(ii) PRESENT a statement showing the cost per kg of each product indicating joint cost
and further processing cost and total cost separately.
(iii) PREPARE a statement showing the product wise and total profit for the period.
(iv) STATE with supporting calculations as to whether any or all the products should be
further processed or not
Service Costing
10. A company runs a holiday home. For this purpose, it has hired a building at a rent of
`10,00,000 per month alongwith 5% of total taking. It has three types of suites for its
customers, viz., single room, double rooms and triple rooms.
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%

The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that
of triple rooms suite as twice of the double rooms suite.
The other expenses for the year 20X9 are as follows:
(`)
Staff salaries 14,25,00,000
Room attendants’ 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
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to CALCULATE the rent to be charged for each type of suite.

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 8 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Standard Costing
11. ABC Ltd. had prepared the following estimation for the month of April:
Quantity Rate (`) Amount (`)
Material-A 800 kg. 45.00 36,000
Material-B 600 kg. 30.00 18,000
Skilled labour 1,000 hours 37.50 37,500
Unskilled labour 800 hours 22.00 17,600
Normal loss was expected to be 10% of total input materials and an idle labour time of 5%
of expected labour hours was also estimated.
At the end of the month the following information has been collected from the cost
accounting department:
The company has produced 1,480 kg. finished product by using the followings:
Quantity Rate (`) Amount (`)
Material-A 900 kg. 43.00 38,700
Material-B 650 kg. 32.50 21,125
Skilled labour 1,200 hours 35.50 42,600
Unskilled labour 860 hours 23.00 19,780
You are required to CALCULATE:
(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Mix Variance;
(d) Material Yield Variance;
(e) Labour Cost Variance;
(f) Labour Efficiency Variance and
(g) Labour Yield Variance.
Marginal Costing
12. MNP Ltd sold 2,75,000 units of its product at ` 375 per unit. Variable costs are ` 175 per
unit (manufacturing costs of `140 and selling cost `35 per unit). Fixed costs are incurred
uniformly throughout the year and amount to `3,50,00,000 (including depreciation of
` 1,50,00,000). there are no beginning or ending inventories.
Required:
(i) COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 9

(ii) COMPUTE the P/V ratio.

(iii) COMPUTE the number of units that must be sold to earn an income (EBIT) of
` 25,00,000.
(iv) COMPUTE the sales level achieve an after-tax income (PAT) of ` 25,00,000. Assume
40% corporate Income Tax rate.
Budget and Budgetary Control
13. S Ltd. has prepared budget for the coming year for its two products A and B.
Product A (`) Product B (`)
Production & Sales unit 6,000 units 9,000 units
Raw material cost per unit 60.00 42.00
Direct labour cost per unit 30.00 18.00
Variable overhead per unit 12.00 6.00
Fixed overhead per unit 8.00 4.00
Selling price per unit 120.00 78.00
After some marketing efforts, the sales quantity of the Product A & B can be increased by
1,500 units and 500 units respectively but for this purpose the variable overhead and fixed
overhead will be increased by 10% and 5% respectively for the both products.
You are required to PREPARE flexible budget for both the products:
(a) Before marketing efforts
(b) After marketing efforts.
Miscellaneous
14. (a) DISTINGUISH between Cost Control and Cost Reduction.
(b) DISCUSS the accounting treatment of Idle time and overtime wages.
(c) DISCUSS cost classification based on variability and controllability.

SUGGESTED HINTS/ANSWERS

1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units

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 10 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.

(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.
(ii) Computation of Economic Order Quantity (EOQ):
2  Annualdemandof 'Dee '  Orderingcos t
EOQ =
Carryingcos t per unit per annum

2 17,200kg. ` 720 2 17,200kg. ` 720

= = = 1,200 kg.
` 125 13.76% ` 17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'Dee '  
=   20kg.   8 days 
 364 days  

 18,200kg.  
=   20kg.   8 days  = 560 kg.
 364 days  
(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumption  Max.consumption
Average Consumption =
2
Min.consumption  70kg.
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead
time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 11

= 1,560 kg. – 120 kg. = 1,440 kg.

(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,000 kg. 1,200 kg.
II No. of orders a 17,200kg. 17,200kg.
17.2or18orders 14.33or15orders
year 1,000kg. 1,200kg.

III Ordering Cost 18 orders × ` 720 = `12,960 15 orders × ` 720 = `10,800

IV Average 1,000kg. 1,200kg.
Inventory  500kg.  600kg.
2 2
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120

Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440
2. (i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours Hourly wage rate Wages (`)
worked (Hours) (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400
(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit
(`) Units Wages Units Wages Units Wages
(`) (`) (`)
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000

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 12 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Since each worker’s earnings are more than 50% of basic pay. Therefore, worker -I,
II and III will be paid the wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000
respectively.
Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per
unit in minute minute (`) unit (`)
A 15 1 15
B 20 1 20
C 30 1 30
2. Time allowed to each worker
Worker Product-A Product-B Product-C Total Time (H
ours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600
(iii) Computation of wages of each worker under Premium bonus basis (where each
worker receives bonus based on Rowan Scheme)
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken saved Rate per (`) (`)* Earning
(Hr.) (Hr.) (Hr.) hour (`) (`)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640

Time Taken
*  TimeSaved  WageRate
Time Allowed
380
Worker-I =  22.5  40  850
402.5
100
Worker-II =  25  50  1,000
125

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 13

540
Worker-III =  60  60  3,240
600
3. (a) Overhead Distribution Statement
Production Service Departments
Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (`) (`) (`) (`)
Indirect labour 8,000 6,000 4,000 11,000
Maintenance Material 3,400 1,600 2,100 2,800
Misc. supplies 1,500 2,900 900 600
Supervisor’s salary -- -- 16,000 --
Cost & payroll salary -- -- 80,000 --
Total allocated overheads 12,900 10,500 1,03,000 14,400
Add: Apportioned Overheads 1,84,350 70,125 22,775 73,150
(As per Schedule below)
1,97,250 80,625 1,25,775 87,550
Schedule of Apportionment of Overheads
Production Service Departments
Departments
Item of Cost Basis
Machine Packing General Stores
Shops (`) (`) Plant (`) (`)
Power HP hours 54,600 7,800 -- 15,600
(7 : 1 : - : 2)
Rent Floor space 30,000 12,000 6,000 24,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 12,000 24,000 8,000 16,000
(3 : 6 : 2 : 4)
Insurance Investment 7,500 2,250 750 1,500
(10 : 3 : 1 : 2)
Taxes Investment 5,250 1,575 525 1,050
(10 : 3 : 1 : 2)
Depreciation Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2)
1,84,350 70,125 22,775 73,150

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 14 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(b) Re-distribution of Overheads of Service Departments to Production

Departments:
Let, the total overheads of General Plant = ‘a’ and the total overheads of Stores = ‘b’
a = 1,25,775 + 0.3b ..........................................(i)
b = 87,550 + 0.2a ..........................................(ii)
Putting the value of ‘b’ in equation no. (i)
a = 1,25,775 + 0.3 (87,550 + 0.2a)
Or a = 1,25,775 + 26,265 + 0.06a
Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.)
Putting the value of a = 1,61,745 in equation no. (ii) to get the value of ‘b’
b = 87,550 + 0.2 × 1,61,745 = 1,19,899
Secondary Distribution Summary
Particulars Total (`) Machine Shops (`) Packing (`)
Allocated and Apportioned 2,77,875 1,97,250.00 80,625.00
overheads as per Primary
distribution
- General Plant 1,61,745 80,872.50 48,523.50
5 3
(1,61,745 × ) (1,61,745 × )
10 10
- Stores 1,19,899 59,949.50 23,979.80
(1,19,899 × 50%) (1,19,899 ×
20%)
3,38,072.00 1,53,128.30
4. (i) Statement of cost allocation to each product from each activity
Product
M (`) S (`) T (`) Total (`)
Power 8,00,000 16,00,000 12,00,000 36,00,000
(Refer to (10,000 kWh × (20,000 kWh × `80) (15,000 kWh ×
working note) `80) `80)
Quality 21,00,000 15,00,000 18,00,000 54,00,000
Inspections (3,500 (2,500 inspections × (3,000
(Refer to inspections × `600) inspections ×
working note) `600) `600)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 15

Working Note:
Rate per unit of cost driver:
Power : (`40,00,000 ÷ 50,000 kWh) = `80/kWh
Quality Inspection : (`60,00,000 ÷ 10,000 inspections) = `600 per inspection
(ii) Calculation of cost of unused capacity for each activity:
(`)
Power 4,00,000
(`40,00,000 – `36,00,000)
Quality Inspections 6,00,000
(`60,00,000 – `54,00,000)
Total cost of unused capacity 10,00,000
(iii) Factors management consider in choosing a capacity level to compute the
budgeted fixed overhead cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting for any capacity level.
5. Cost sheet for the year ended 31 st March, 2019.
Units produced - 14,000 units
Units sold - 14,153 units
Particulars Amount (`)
Raw materials purchased 42,25,000
Add: Freight Inward 1,00,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
42,48,000
Less: Sale of scrap of material (8,000)
Materials consumed 42,40,000
Direct Wages (12,56,000 + 1,50,000) 14,06,000

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 16 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Prime Cost 56,46,000

Factory overheads (20% of Prime Cost) 11,29,200
Add: Opening value of W-I-P 1,92,500
Less: Closing value of W-I-P (1,40,700)
Factory Cost 68,27,000
Add: Administrative overheads 1,73,000
Cost of Production 70,00,000
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock (5,32,000)
[` 500(70,00,000/14,000) × 1,064]
(1,217+ 14,000 – 14,153 = 1,064 units)
Cost of Goods Sold 70,76,500
Distribution expenses (`16 × 14,153 units) 2,26,448
Cost of Sales 73,02,948
Profit (Balancing figure) 14,43,606
Sales (` 618 × 14,153 units) 87,46,554
6. (i) Costing Profit and Loss Account for the year ended 31 st March 2019:
Particulars Amount (`) Particulars Amount (`)
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000
Prime Cost 21,58,000
Works overheads 4,31,600
(20% of Prime cost)
25,89,600
Less: Work in progress (54,000)
Factory cost 25,35,600
Administration overheads 1,60,000
(`5 × 32,000 units)
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Cost of goods sold 25,27,125

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 17

Selling and distribution 1,80,000

overheads
(`6 × 30,000 unit)
Cost of sales 27,07,125
Profit (balancing figure) 2,92,875
30,00,000 30,00,000
(ii) Statement reconciling the profit as per costing profit and loss account with the profit
as per financial accounts
Particulars Amount Amount
(`) (`)
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (` 4,31,600 – ` 4,26,000) 5,600
- Administration OH (` 1,60,000 – ` 1,50,000) 10,000
- Selling and Distribution (` 1,80,000 – ` 1,65,000) 15,000 30,600
Less: Closing stock overvalued (` 1,68,475 – ` 1,67,500) (975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.
7. Dr. Contract Account for the year ended 31 st March, 2019 Cr.
Particulars HP-1 (`) HP-2 (`) Particulars HP-1 (`) HP-2 (`)
To Balance b/d: W-I-P 7,80,000 2,80,000 By Closing 47,000 52,000
material at
site
To Material purchased 6,20,000 8,10,000 By W-I-P:
To Wages: (`85,000+`12,000) Value of work 20,50,000 16,10,000
(`62,000+`8,400) 97,000 certified
70,400 Cost of work
not certified 1,90,000 1,40,000
To Donation to local club* 5,000 2,500
To Plant hire charges:
(`72,000x1/3) 24,000
(`57,000x1/3) 19,000

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 18 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

To Depreciation on
concrete mixture**:
(`8,20,000x15%x180/365) 60,658
(`8,20,000x15%x100/365) 33,699
To Notional profit 7,00,342 5,86,401
22,87,000 18,02,000 22,87,000 18,02,000

* Assuming donation paid to local club was exclusively for the above projects, hence
included in the contract account.
** Depreciation on concrete mixture machine is charged on the basis of number of days
used for the projects, as it is clearly mentioned in the question that this machine can be
used for other projects also.
(Land purchased and brokerage and registration fee paid for this purpose cannot be
charged to contract account, hence not included in the contract account)
8. (i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%*) Units** (% )* Units** (%)* Units**
20,000 Completed 14,000 100 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33-1/ 3 2,000 33-1/3 2,000
20,000 20,000 20,000 16,000 16,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element
Particulars Materials Labour Overhead Total
Cost of opening work-in- 6,00,000 1,00,000 1,00,000 8,00,000
progress (`)
Cost incurred during the 25,60,000 15,00,000 15,00,000 55,60,000
month (`)
Total cost (`) : (A) 31,60,000 16,00,000 16,00,000 63,60,000
Equivalent units : (B) 20,000 16,000 16,000
Cost per equivalent unit (`) : 158 100 100 358
C= (A ÷ B)

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 19

(iii) Statement of Apportionment of cost

(`) (`)
Value of output transferred: (A) (14,000 units × ` 358) 50,12,000
Value of closing work-in-progress: (B)
Material (6,000 units × `158) 9,48,000
Labour (2,000 units × ` 100) 2,00,000
Overhead (2,000 units × ` 100) 2,00,000 13,48,000
Total cost : (A + B) 63,60,000
(iv) Process- A Account
Particulars Units (`) Particulars Units (`)
To Opening WIP 4,000 8,00,000 By Completed 14,000 50,12,000
units
To Materials 16,000 25,60,000 By Closing WIP 6,000 13,48,000
To Labour 15,00,000
To Overhead 15,00,000
20,000 63,60,000 20,000 63,60,000

9. (i) Statement showing the apportionment of joint costs to A, B and X

Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value 9,00,000 4,00,000 5,40,000 18,40,000
at the point of (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)
split off (`)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportion-  ` 12,88,000   ` 12,88,000   ` 12,88,000 
ment on the  ` 18,40,000 x ` 9,00,000   x ` 4,00,000   ` 18,40,000 x ` 5,40,000 
   ` 18,40,000   
basis of sales
value at the
point of split
off (`)

(ii) Statement showing the cost per kg. of each product

(indicating joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000

© The Institute of Chartered Accountants of India

 20 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Production (kg) : (II) 18,000 10,000 54,000

Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. 10 15 2
(`)  ` 1,80,000   ` 1,50,000   ` 1,08,000 
     
 18,000kg   10,000kg   54,000kg 
Total cost per kg (`) 45 43 9
(iii) Statement showing the product wise and total profit for the period
Products A B X Total
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000
Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000
Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 ` 12,24,000   ` 2,50,000   ` 7,92,000 
     
 17,000kg   5,000kg   44,000kg 

2. Valuation of closing stock:

Since the selling price per kg of products A, B and X is more than their total
costs, therefore closing stock will be valued at cost.
Products A B X Total
Closing stock 1,000 5,000 10,000
(kgs.)
Cost per kg (`) 45 43 9

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 21

Closing stock 45,000 2,15,000 90,000 3,50,000

value (`) (` 45 x 1,000 kg) (` 43 x 5,000 kg) (`9x10,000 kg)

(iv) Calculations for processing decision

Products A B X
Selling price per kg at the point of split off (`) 50 40 10
Selling price per kg after further processing (`) 72 50 18
(Refer to working Note 1)
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence,
these two products may be further processed. However, further processing of product
B is not profitable hence, product B shall be sold at split off point.
10. (i) Total equivalent single room suites
Nature of suite Occupancy (Room-days) Equivalent single room
suites (Room-days)
Single room suites 36,000 36,000
(100 rooms  360 days  100%) (36,000  1)
Double rooms suites 14,400 36,000
(50 rooms  360 days  80%) (14,400  2.5)
Triple rooms suites 6,480 32,400
(30 rooms  360 days  60%) (6,480  5)
1,04,400
(ii) Statement of total cost:
(`)
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
25,21,00,000

© The Institute of Chartered Accountants of India

 22 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Building rent {(`10,00,000  12 months) + 5% 1,20,00,000+ 5% on total takings

on total taking}
Total cost 26,41,00,000 + 5% on total takings
Profit is 20% of total takings
 Total takings = ` 26,41,00,000 + 25% (5% +20%) of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,00,000 + 0.25 × 1,04,400 x
Or, 1,04,400 x = 26,41,00,000 + 26,100 x
Or, 78,300 x = 26,41,00,000
Or, x = 3,373
(iii) Rent to be charged for single room suite = ` 3,373
Rent for double rooms suites ` 3,373  2.5 = ` 8,432.5
Rent for triple rooms suites ` 3,373  5 = ` 16,865
11. Material Variances:
Material SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
(WN-1) (`) (`) (WN-2) (`) (`) (`) (`)
A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700
B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125
1645 kg 63,450 1550 kg 59,790 1550 kg 60,000 59,825

WN-1: Standard Quantity (SQ):

 800kg. 
Material A-  1,480kg.  = 939.68 or 940 kg.
 0.9 1,400kg. 

 600kg. 
Material B-  1,480kg.  = 704.76 or 705 kg.
 0.9 1,400kg. 
WN- 2: Revised Standard Quantity (RSQ):
 800kg. 
Material A-  1,550kg.  = 885.71 or 886 kg.
 1,400kg. 

 600kg. 
Material B-  1,550kg.  = 664.28 or 664 kg.
 1,400kg. 

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 23

(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}

= {63,450 – 59,825} = 3,625 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {60,000 – 59,825} = 175 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {59,790 – 60,000} = 210 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {63,450 – 59,790} = 3,660 (F)
Labour Variances:
Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR
(WN-3) (`) (`) (WN-4) (`) (`) (`) (`)
Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600
Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780
2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380

WN- 3: Standard Hours (SH):

 0.95 1,000hr. 
Skilled labour-  1,480kg.  =1,115.87 or 1,116 hrs.
 0.90  1,400kg. 

 0.95  800hr. 
Unskilled labour-  1,480kg.  = 892.69 or 893 hrs.
 0.90  1,400kg. 
WN- 4: Revised Standard Hours (RSH):
 1,000hr. 
Skilled labour-   2,060hr.  = 1,144.44 or 1,144 hrs.
 1,800hr. 
 800hr. 
Unskilled labour-   2,060hr.  = 915.56 or 916 hrs.
 1,800hr. 
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {61,496 – 62,380} = 884 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {61,496 – 63,920} = 2,424 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}

© The Institute of Chartered Accountants of India

 24 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

= {61,496 – 63,052} = 1,556 (A)

12. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cost
Break even Sales Quantity = = ` 3,50,00,000 = 1,75,000 units
Contribution margin per unit ` 200

Cash Fixed Cost

Cash Break even Sales Qty= = `2,00,00,000 = 1,00,000 units.
Contribution margin per unit `200

Contribution/ unit ` 200

(ii) P/V ratio = 100 =  100 = 53.33%
Selling Pr ice / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of ` 25,00,000
Fixed cost  Desired EBIT level 3,50,00,000  25,00,000
= = 1,87,500 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = `25,00,000
Tax rate = 40%
`25,00,000
Desired level of Profit before tax = 100 = `41,66,667
60
FixedCost  DesiredPr ofit
Estimate Sales Level =
P / Vratio

 FixedCost  DesiredPr ofit 

Or,   SellingPr ice per unit 
 Contributionper unit 
`3,50,00,000  ` 41,66,667
= = `7,34,42,091
53.33%
13. (a) Flexible Budget before marketing efforts:
Product A (`) Product B (`)
6,000 units 9,000 units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000
Raw material cost 60.00 3,60,000 42.00 3,78,000
Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000
Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000

© The Institute of Chartered Accountants of India

 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 25

Total cost 110.00 6,60,000 70.00 6,30,000

Profit 10.00 60,000 8.00 72,000
(b) Flexible Budget after marketing efforts:
Product A (`) Product B (`)
7,500 units 9,500 units
Per unit Total Per unit Total
Sales 120.00 9,00,000 78.00 7,41,000
Raw material cost 60.00 4,50,000 42.00 3,99,000
Direct labour cost per unit 30.00 2,25,000 18.00 1,71,000
Variable overhead per unit 13.20 99,000 6.60 62,700
Fixed overhead per unit 6.72 50,400 3.98 37,800
Total cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500
14. (a) Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to
better them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no
possible cost under existing condition as permanent, since a
conditions. change will result in lower cost.
3. In case of cost control, emphasis 3. In case of cost reduction, it is on
is on past and present present and future.
4. Cost control is a preventive 4. Cost reduction is a corrective
function function. It operates even when an
efficient cost control system
exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(b) Accounting treatment of idle time wages & overtime wages in cost accounts:
Normal idle time is treated as a part of the cost of production. Thus, in the case of
direct workers, an allowance for normal idle time is built into the labour cost rates. In
the case of indirect workers, normal idle time is spread over all the products or jobs
through the process of absorption of factory overheads.

© The Institute of Chartered Accountants of India

 26 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

Under Cost Accounting, the overtime premium is treated as follows:

➢ If overtime is resorted to at the desire of the customer, then the overtime
premium may be charged to the job directly.
➢ If overtime is required to cope with general production program or for meeting
urgent orders, the overtime premium should be treated as overhead cost of
particular department or cost center which works overtime.
➢ Overtime worked on account of abnormal conditions should be charged to
costing Profit & Loss Account.
➢ If overtime is worked in a department due to the fault of another department the
overtime premium should be charged to the latter department.
(c) Cost classification based on variability
(a) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuations in
the levels of activity (output or turnover). They do not tend to increase or
decrease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.
(b) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine
shop foreman.

© The Institute of Chartered Accountants of India

 Test Series: October 2022
MOCK TEST PAPER –2
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium. If
a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.

Time Allowed – 3 Hours Maximum Marks – 100

1. Answer the following:

(a) A company makes 1,500 units of a product for which the profitability statement is given
below:
(`)
Sales 1,20,000
Direct Materials 30,000
Direct Labour 35,000
Variable Overheads 15,000
Fixed Cost 16,800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of ` 5 per unit
towards overtime labour. The premium so paid has been included in the direct labour cost of
` 35,000 given above.
You are required to COMPUTE the Break-even point.
(b) Madhu Ltd has calculated a predetermined overhead rate of `22 per machine hour for its
Quality Check (QC) department. This rate has been calculated for the budgeted level of
activity and is considered as appropriate for absorbing overheads. The following overhead
expenditures at various activity levels had been estimated.
Total overheads Number of machine hours
`3,38,875 14,500
`3,47,625 15,500
`3,56,375 16,500
You are required to:
(i) COMPUTE the variable overhead absorption rate per machine hour.
(ii) COMPUTE the estimated total fixed overheads.
(iii) CALCULATE the budgeted level of activity in machine hours.
(iv) CALCULATE the amount of under/over absorption of overheads if the actual machine
hours were 14,970 and actual overheads were `3,22,000.
1

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 (c) R Ltd. has computed labour turnover rates for the quarter ended 31 st March, 2022 as 20%,
10% and 5% under flux method, replacement method and separation method respectively. If
the number of workers replaced during that quarter is 50,
FIND OUT (i) Workers recruited and joined
(ii) Workers left and discharged and
(iii) Average number of workers on roll.
(d) Premier Construction Company undertook a contract for `50,00,000 on 1 st August, 2021. On
31st March, 2022 when the accounts were closed, the following information was available:
Cost of work uncertified `12,00,000
Cash received `25,00,000 (80 of work certified)
Profit transferred to costing Profit and `8,00,000
Loss account at the end of the year on
Incomplete contract
CALCULATE:
(i) The value of work in progress certified
(ii) Degree of completion of contract
(iii) Notional Profit and
(iv) Cost of contract as on 31-03-2022. (4 × 5 = 20 Marks)
2. (a) The following information is available from the cost records of a company for the month of
July, 2022:
(1) Material purchased 22,000 pieces ` 9,00,000
(2) Material consumed 21,000 pieces
(3) Actual wages paid for 5,150 hours ` 2,57,500
(4) Fixed Factory overhead incurred ` 4,60,000
(5) Fixed Factory overhead budgeted ` 4,20,000
(6) Units produced 1,900
(7) Standard rates and prices are:
Direct material ` 45 per piece
Standard input 10 pieces per unit
Direct labour rate ` 60 per hour
Standard requirement 2.5 hours per unit
Overheads ` 80 per labour hour
You are required to CALCULATE the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Fixed overhead expenditure variance
(vi) Fixed overhead efficiency variance

© The Institute of Chartered Accountants of India

 (vii) Fixed overhead capacity variance (10 Marks)
(b) A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of
production are as under:
Direct material `300 per unit
Direct employee cost `160 per unit
Indirect expenses:
- Fixed `32,50,000 per annum
- Variable `50 per unit
- Semi- `20,000 per month up to 50% capacity and `2,500 for every
variable 20% increase in the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to
ensure a profit of `1,00,00,000 for the year, DETERMINE the average selling price at which
each unit should be quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity. (10 Marks)
3. (a) The following data are available in respect of Process-I for January 2022:
(1) Opening stock of work in process: 600 units at a total cost of ` 8,40,000.
(2) Degree of completion of opening work in process:
Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of `1,10,40,000 for 9,200 units.
(4) Direct wages incurred `37,20,000
(5) Production overhead `17,26,000.
(6) Units scrapped 200 units. The stage of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units was:
Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
(10) Scrap value is `600 per unit.
You are required to:
(i) COMPUTE equivalent production,
(ii) CALCULATE the cost per equivalent unit for each element.

© The Institute of Chartered Accountants of India

 (iii) CALCULATE the cost of abnormal loss (or gain), closing work in process and the units
transferred to the next process using the FIFO method. (10 Marks)
(b) ANI Limited is a trader of a Product Z. It has decided to analyse the profitability of its five
new customers. It buys Z article at `5,400 per unit and sells to retail customers at a listed
price of `6,480 per unit. The data pertaining to five customers are:
Customers
A B C D E
Units sold 4,500 6,000 9,500 7,500 12,750
Listed Selling Price `6,480 `6,480 `6,480 `6,480 `6,480
Actual Selling Price `6,480 `6,372 `5,940 `6,264 `5,832
Number of Purchase orders 15 25 30 25 30
Number of Customer visits 2 3 6 2 3
Number of deliveries 10 30 60 40 20
Kilometers travelled per delivery 20 6 5 10 30
Number of expedited deliveries 0 0 0 0 1
Its five activities and their cost drivers are:
Activity Cost Driver Rate
Order taking `4,500 per purchase order
Customer visits `3,600 per customer visit
Deliveries `7.50 per delivery Km travelled
Product handling `22.50 per case sold
Expedited deliveries `13,500 per expedited delivery
Required:
(i) COMPUTE the customer-level operating income of each of five retail customers (A, B,
C, D and E).
(ii) STATE the factors ANI Limited should consider in deciding whether to drop a customer.
(10 Marks)
4. (a) N Ltd a vehicle manufacturer has prepared sales budget for the next few months, and the
following draft figures are available:
Month No. of vehicles
October 40,000
November 35,000
December 45,000
January 60,000
February 65,000
To manufacture a vehicle a standard cost of `5,71,400 is incurred and sold through dealers
at a uniform selling price of `8,57,100 to customers. Dealers are paid 15% commission on
selling price on sale of a vehicle.

© The Institute of Chartered Accountants of India

 Apart from other materials four units of Part - X are required to manufacture a vehicle. It is a
policy of the company to hold stocks of Part-X at the end of each month to cover 40% of next
month’s production. 48,000 units of Part-X are in stock as on 1 st October.
There are 9,500 nos. of completed vehicles are in stock as on 1st October and it is policy to have
stocks at the end of each month to cover 20% of the next month’s sales.
You are required to
(i) PREPARE Production budget (in nos.) for the month of October, November, December
and January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October,
November and December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December.
(10 Marks)
(b) The following are the balances existed in the books of JPG Ltd. for the year ended, 31 st
March, 2022:
Particulars Dr. Cr.
(`) (`)
Stores Ledger Control A/c 15,00,000
WIP Control A/c 7,50,000
Finished Goods Control A/c 12,50,000
Manufacturing Overheads Control A/c 75,000
Cost Ledger Control A/c 34,25,000
During the year 2022-23, the following transactions took place:
Particulars Amount (`)
Finished product (at cost) 11,25,000
Manufacturing Overhead incurred 4,25,000
Raw material purchased 6,25,000
Factory wages 2,00,000
Indirect labour 1,00,000
Cost of sales 8,75,000
Materials issued to production 6,75,000
Sales returned (at cost) 45,000
Material returned to suppliers 65,000
Manufacturing overhead charged to production 4,25,000
Required:
PREPARE the following control accounts and Trial balance at the end of the year:
Cost Ledger, Stores Ledger, Work-in-process, Finished Stock, Manufacturing Overhead,
Wages and Cost of Sales. (10 Marks)
5. (a) Royal transport company has been given a 50-kilometre-long route to run 6 buses. The cost
of each bus is ` 75,00,000. The buses will make 3 round trips per day carrying on an

© The Institute of Chartered Accountants of India

 average 75 percent 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 the year 2021-22 is given below:
Garage Rent ` 60,000 per month
Annual Repairs & Maintenance ` 2,40,000 each bus
Salaries of 6 drivers ` 20,000 each per month
Wages of 6 conductors ` 16,000 each per month
Wages of 6 cleaners ` 10,000 each per month
Manager’s salary ` 50,000 per month
Road Tax, Permit fee, etc. ` 60,000 for a quarter
Office expenses ` 25,000 per month
Cost of diesel per litre `92
Kilometer run per litre for each bus 6 kilometres
Annual Depreciation 20% of cost
Annual Insurance 4% of cost
Engine oils & lubricants (for 1,000 kilometres) ` 20,000
You are required to calculate the bus fare to be charged from each passenger per kilometer
1
(upto four decimal points), if the company wants to earn profit of 33 percent on taking
3
(total receipts from passengers). (10 Marks)
(b) The following are the details of receipts and issues of a material of stores in a manufacturing
company for the period of three months ending 30th June, 2022:
Receipts:
Date Quantity (kg.) Rate per kg. (`)
April 10 1,600 50.00
April 20 2,400 49.00
May 5 1,000 51.00
May 17 1,100 52.00
May 25 800 52.50
June 11 900 54.00
June 24 1,400 55.00
There was 1,500 kg. in stock at April 1, 2022 which was valued at ` 48.00 per kg.
Issues:
Date Quantity (kg.)
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200

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 Issues are to be priced on the basis of weighted average method.
The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 20 22 and 60
kgs. on 30th June, 2022.
You are required to PREPARE a Stores Ledger Account. (10 Marks)
6. (a) DISCUSS the essentials of good Cost Accounting System.
(b) STATE various causes of and treatment of Overtime Premium in Cost Accounting.
(c) STATE Direct Expenses with examples.
(d) EXPLAIN the difference between product cost and period cost. (4 × 5 =20 Marks)

© The Institute of Chartered Accountants of India

 Test Series: October 2022
MOCK TEST PAPER – 2
INTERMEDIATE : GROUP – I
PAPER – 3: COST MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1.(a)
Data / Unit 1 – 500 501 – 1,500
(Rs.) (Rs.)
Sales (Rs.1,20,000 / 1,500 units) 80 80
Direct Material (Rs.30,000 / 1,500 units) 20 20
Direct Labour* 20 25
Variable Overheads (Rs.15,000 / 1,500 units) 10 10
Contribution 30 25
Contribution at 500 units = Rs. 15,000
Fixed Cost = Rs. 16,800
Shortfall = Rs. 1,800
No. of units to recover shortfall = 72 units (Rs. 1,800 / Rs.25)
Break Even Point = 572 units (500 units + 72 units)
(*)
Let X be the Direct Labour per unit up to 500 units. Total Direct Labour -
500X + 1,000 × (X + 5) = 35,000
1,500X + 5,000 = 35,000
X = 20
Therefore, up to 500 units the Direct Labour is Rs. 20. After 500 units it is Rs. 25.

(b) (i) Computation of variable overhead absorption rate:

𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
Variable overhead absorption rate = 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑙𝑒𝑣𝑒𝑙𝑠 𝑖𝑛 𝑡𝑒𝑟𝑚𝑠 𝑜𝑓 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
𝑅𝑠.3,47,625−𝑅𝑠.3,38,875
= 15,500ℎ𝑜𝑢𝑟𝑠−14,500ℎ𝑜𝑢𝑟𝑠= Rs.8.75 per machine hour.
(ii) Computation of Total fixed overheads:
(Rs.)

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 Total overheads at 14,500 hours 3,38,875
Less: Variable overheads (Rs. 8.75 × 14,500) (1,26,875)
Total fixed overheads 2,12,000
(iii) Calculation of Budgeted level of activity in machine hours:
Let budgeted level of activity = X
(𝑅𝑠.8.75 𝑋 + 𝑅𝑠.2,12,000)
Then, 𝑋
= Rs. 22

8.75X + Rs.2,12,000 = 22X

13.25X = 2,12,000
X =16,000
Thus, budgeted level of activity = 16,000 machine hours.
(iv) Calculation of Under / Over absorption of overheads:
(Rs.)
Actual overheads 3,22,000
Absorbed overheads (14,970 hours × Rs. 22 per hour) 3,29,340
Over-absorption (3,29,340 – 3,22,000) 7,340

𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑

(c) Labour Turnover Rate (Replacement method) = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
× 100
10 50
Or, 100
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝑛𝑜.𝑜𝑓𝑤𝑜𝑟 𝑘𝑒𝑟 𝑠

Thus, Average No. of workers = 500

𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑
Labour Turnover Rate (Separation method) = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
× 100
5 𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓𝑤𝑜𝑟 𝑘𝑒𝑟 𝑠𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑
Or, 100 = 500
Thus, No. of workers separated = 25
Labour Turnover Rate (Flux Method)
𝑁𝑜.𝑜𝑓 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑖𝑜𝑛𝑠 +𝑁𝑜.𝑜𝑓 𝐴𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛 (𝐽𝑜𝑖𝑛𝑖𝑛𝑔𝑠)
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
× 100
20 25 + 𝑁𝑜.𝑜𝑓 𝑎𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑠 (𝐽𝑜𝑖𝑛𝑖𝑛𝑔𝑠)
Or, 100
= 500
Or, 100 (25 + No. of Accessions) = 10,000
Or, 25 + No. of Accessions =100

© The Institute of Chartered Accountants of India

 Thus, No. of Accessions = 100 - 25 =75
Accordingly,
(i) Workers recruited and joined = 75
(ii) Workers left and discharged = 25
(iii) Average number of workers on roll = 500

(d) (i) Value of work in progress certified:

Since, Cash Received of Rs. 25,00,000 is 80% of work certified
Rs.25,00,000
Therefore, Value of work in progress certified = 80%
= Rs. 31,25,000
(ii) Degree of completion of contract:
𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝑤𝑜𝑟𝑘𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 Rs.31,25,000
= 𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
× 100 = Rs.50,00,000 × 100= 62.5%

(iii) Notional Profit:

2 Cash Received
Profit transferred to Costing Profit & Loss A/c = ×Notional Profit ×
3 Valueofworkcertified
(Since contract completion is 62.5% i.e. more than 50%)
2 Rs. 25,00,000
Or, Rs. 8,00,000 = × Notional Profit×
3 Rs.31,25,000

Notional Profit = Rs. 15,00,000

(iv) Cost of contract as on 31-03-2022:
= Value of Work certified + Cost of work uncertified – Notional profit
= Rs. 31,25,000 + Rs.12,00,000 – Rs. 15,00,000
= Rs. 28,25,000

2. (a) (i) Material price variance (on the basis of Single plan):
= Actual Quantity Purchased (Std. Price – Actual Price)
𝑅𝑠.9,00,000
=22,000 pcs (𝑅𝑠. 45 − )= Rs.90,000* (Favourable)
22,000𝑝𝑐𝑠

OR
Material price variance (on the basis of Partial plan):
= Actual Quantity consumed (Std. Price – Actual Price)
Rs.9,00,000
= 21,000 pcs (Rs. 45 − 22,000pcs
)= Rs.85,909* (Favourable)

© The Institute of Chartered Accountants of India

 (*Figure may slightly differ due to rounding off the actual price per unit)
(ii) Material usage variance:
= Std. price per piece (Std. Quantity – Actual Quantityconsumed)
= Rs.45 (1,900 units × 10 – 21,000) = Rs. 90,000 (Adverse)
(iii) Labour rate variance:
= Actual hours paid (Std. rate – Actual rate)
Rs.2,57,500
= 5,150 hours (Rs. 60 − 5,150hours) = Rs. 51,500 (Favourable)

(iv) Labour efficiency variance:

= Std. rate per hour (Std. hours – Actual hours 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.4,20,000
= Rs. 80 (5,150hours − Rs.80
)= Rs. 8,000 (Adverse)
Or,
Fixed overhead capacity variances on basis of units
= Std. rate per unit (Standard output for actual hours – Budgeted output)
= Rs.200 (2,060 units - 4,20,000 / 200) = Rs. 8,000 (Adverse)

© The Institute of Chartered Accountants of India

 (b) Statement of Cost

First three Remaining Total (Rs.)

months (Rs.) nine months
(Rs.)

37,500 units 1,68,750 units 2,06,250 units

Direct material 1,12,50,000 5,06,25,000 6,18,75,000
Direct employee cost 60,00,000 2,70,00,000 3,30,00,000
Indirect- variable expenses 18,75,000 84,37,500 1,03,12,500
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable expenses
- For first three months @ 60,000
Rs.20,000 p.m.
- For remaining nine months @ 2,25,000 2,85,000
Rs.25,000 p.m.
Total cost 1,99,97,500 8,87,25,000 10,87,22,500
Desired profit - - 1,00,00,000
Sales value - - 11,87,22,500
Average selling price per unit 575.62

3. (a) (i) Statement of Equivalent Production (FIFO Method)

Input Output Equivalent Production
Materials Labour Production
Overhead
Details Units Details Units % Units % Units % Units
Opening 600 From opening 600 - - 40 240 40 240
Stock stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials

Closing W-I-P 700 100 700 70 490 70 490

Fresh inputs 9,200 Normal loss 392 - - - - - -

© The Institute of Chartered Accountants of India

 9,992 9,000 9,030 9,030
Less: Abnormal
Gain (192) 100 (192) 100 (192) 100 (192)
9,800 9,800 8,808 8,838 8,838

(ii) Statement of Cost per equivalent units

Elements Cost Equivalent Cost per
units (EU) EU
(Rs.) (Rs.) (Rs.)
Material Cost 1,10,40,000
Less: Scrap realisation 392 (2,35,200) 1,08,04,800 8,808 1,226.70
units @ Rs. 600/- p.u.
Labour cost 37,20,000 8,838 420.91
Production OH Cost 17,26,000 8,838 195.29
Total Cost 1,62,50,800 1,842.90
(iii) Cost of Abnormal Gain – 192 Units
(Rs.) (Rs.)
Material cost of 192 units @ Rs. 1,226.70 p.u. 2,35,526.40
Labour cost of 192 units @ Rs. 420.91 p.u. 80,814.72
Production OH cost of 192 units @ Rs. 195.29 p.u. 37,495.68 3,53,836.80

Cost of closing WIP – 700 Units

Material cost of 700 equivalent units @ Rs. 8,58,690.00
1,226.70 p.u.
Labour cost of 490 equivalent units @ Rs. 420.91 2,06,245.90
p.u.
Production OH cost of 490 equivalent @ Rs. 95,692.10 11,60,628.00
195.29 p.u.
Cost of 8,900 units transferred to next process
(i) Cost of opening W-I-P Stock b/f – 600 units 8,40,000.00
(ii) Cost incurred on opening W-I-P stock
Material cost —
Labour cost 240 equivalent units @ Rs. 420.91 p.u. 1,01,018.40

© The Institute of Chartered Accountants of India

 Production OH cost 240 equivalent units @ Rs197.29 p.u. 47,349.60
1,48,368.00
(iii) Cost of 8,300 completed units
8,300 units @ Rs. 1,842.90 p.u. 1,52,96,070.00
Total cost [(i) + (ii) + (iii))] 1,62,84,438.00

(b) Working note:

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

Customers
A B C D E
Units sold: (a) 4,500 6,000 9,500 7,500 12,750
Revenues (at listed 2,91,60,000 3,88,80,000 6,15,60,000 4,86,00,000 8,26,20,000
price) (Rs.): (b)
{(a) ×Rs.6,480)}
Revenues (at listed 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
price) (Rs.): (c) (4,500×6,480) (6,000×6,372) (9,500×5,940) (7,500×6,264) (12,750×5,832)
{(a) ×Actual selling
price)}
Discount (Rs.) (d) 0 6,48,000 51,30,000 16,20,000 82,62,000
{(b) – (c)}
Cost of goods sold 2,43,00,000 3,24,00,000 5,13,00,000 4,05,00,000 6,88,50,000
(Rs.) : (d)
{(a) x Rs.5,400}
Customer level operating activities costs
Order taking costs 67,500 1,12,500 1,35,000 1,12,500 1,35,000
(Rs.):
(No. of purchase
orders × Rs. 4,500)
Customer visits 7,200 10,800 21,600 7,200 10,800
costs (Rs.)
(No. of customer visits
x Rs. 3,600)
Delivery vehicles 1,500 1,350 2,250 3,000 4,500
travel costs (Rs.)
(Kms travelled by

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 delivery vehicles x Rs.
7.50 per km.)
Product handling 1,01,250 1,35,000 2,13,750 1,68,750 2,86,875
costs (Rs.)
{(a) x Rs. 22.50}
Cost of expediting - - - - 13,500
deliveries (Rs.)
{No. of expedited
deliveries x Rs.
13,500}
Total cost of
customer level
operating activities
(Rs.) 1,77,450 2,59,650 3,72,600 2,91,450 4,50,675
(i) Computation of Customer level operating income
Customers
A B C D E
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
(At list price)
(Refer to working
note)
Less: Cost of (2,43,00,000) (3,24,00,000) (5,13,00,000) (4,05,00,000) (6,88,50,000)
goods sold
(Refer to working
note)
Gross margin 48,60,000 58,32,000 51,30,000 64,80,000 55,08,000
Less: Customer
level operating
activities costs
(Refer to working
note) (1,77,450) (2,59,650) (3,72,600) (2,91,450) (4,50,675)
Customer level 46,82,550 55,72,350 47,57,400 61,88,550 50,57,325
operating income
(ii) Factors to be considered for dropping a customer:
Dropping customers should be the last resort to be taken by an entity. Factors to be considered
should include:
- What is the expected future profitability of each customer?

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 - Are the currently least profitable or low profitable customers are likely to be highly
profitable in the future?
- What costs are avoidable if one or more customers are dropped?
- Can the relationship with the “problem” customers be restructured so that there is at
“win- win” situation

4. (a) (i) Preparation of Production Budget (in units)

October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000
(ii) Preparation of Purchase budget for Part-X
October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s 14,800 19,200 24,400
production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for 2,09,200 2,24,800 2,89,600
production (52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800
(iii) Budgeted Gross Profit for the Quarter October to December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (Rs. in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
Less: Cost of Sales (Rs. in lakh) 2,28,560 1,99,990.00 2,57,130.00 6,85,680
(Sales unit × Cost per unit)
Gross Profit (Rs. in lakh) 62,854 54,997.25 70,710.75 1,88,562

© The Institute of Chartered Accountants of India

 * Net Selling price unit = Rs. 8,57,100 – 15% commission on Rs. 8,57,100
= Rs.7,28,535.

(b) Cost Ledger Control Account

Particulars (Rs.) Particulars (Rs.)
To Stores Ledger control A/c 65,000 By Balance b/d 34,25,000
To Costing Profit & Loss A/c 8,55,000 By Stores Ledger control A/c 6,25,000
By Wages Control A/c 3,00,000
To Balance c/d 38,55,000 By Manufacturing overhead 4,25,000
control A/c
47,75,000 47,75,000

Store Ledger Control Account

Particulars (Rs.) Particulars (Rs.)
To Balance b/d 15,00,000 By WIP Control A/c 6,75,000
To Cost Ledger control A/c 6,25,000 By Cost Ledger control A/c 65,000
(return)
By Balance c/d 13,85,000
21,25,000 21,25,000

WIP Control Account

Particulars (Rs.) Particulars (Rs.)
To Balance b/d 7,50,000 By Finished Stock Control 11,25,000
A/c
To Wages Control A/c 2,00,000
To Stores Ledger control A/c 6,75,000
To Manufacturing overhead 4,25,000 By Balance c/d 9,25,000
control A/c
20,50,000 20,50,000

Finished Stock Control Account

Particulars (Rs.) Particulars (Rs.)
To Balance b/d 12,50,000 By Cost of Sales A/c 8,75,000
To WIP Control A/c 11,25,000
To Cost of Sales A/c (sales 45,000 By Balance c/d 15,45,000

10

© The Institute of Chartered Accountants of India

 return)
24,20,000 24,20,000

Manufacturing Overhead Control Account

Particulars (Rs.) Particulars (Rs.)
To Cost Ledger Control A/c 4,25,000 By Balance b/d 75,000
To Wages Control A/c 1,00,000 By WIP Control A/c 4,25,000
By Costing P&L A/c (under 25,000
recovery)
5,25,000 5,25,000

Wages Control Account

Particulars (Rs.) Particulars (Rs.)
To Cost Ledger Control A/c 3,00,000 By WIP Control A/c 2,00,000
By Manufacturing overhead 1,00,000
control A/c
3,00,000 3,00,000

Cost of Sales Account

Particulars (Rs.) Particulars (Rs.)
To Finished Stock Control A/c 8,75,000 By Finished Stock Control 45,000
A/c (sales return)
By Costing Profit & Loss A/c 8,30,000
8,75,000 8,75,000

Trial Balance
Particulars Dr. Cr.
(Rs.) (Rs.)
Stores Ledger Control A/c 13,85,000
WIP Control A/c 9,25,000
Finished Goods Control A/c 15,45,000
Cost Ledger Control A/c 38,55,000
38,55,000 38,55,000

11

© The Institute of Chartered Accountants of India

 Working:

Costing P&L Account

Particulars (Rs.) Particulars (Rs.)
To Cost of Sales A/c 8,30,000 By Cost Ledger control A/c 8,55,000
To Manufacturing overhead 25,000
control A/c
8,55,000 8,55,000

5. (a) Working Notes:

1. Total Kilometres to be run during the year 2021-22
= 50 km.× 2 sides × 3 trips × 25 days × 12 months × 6 buses = 5,40,000 Kilometres
2. Total passenger Kilometres
= 5,40,000 km. × 48 passengers × 75% = 1,94,40,000 Passenger- km.
Operating Cost Sheet for the year 2021- 22
Particulars Total Cost (Rs.)
A. Fixed Charges:
Garage rent (Rs. 60,000 × 12 months) 7,20,000
Salary of drivers (Rs. 20,000 × 6 drivers ×12 months) 14,40,000
Wages of Conductors (Rs. 16,000 × 6 conductors × 12 months) 11,52,000
Wages of Cleaners (Rs. 10,000 × 6 cleaners × 12 months) 7,20,000
Manager’s salary (Rs.50,000 × 12 months) 6,00,000
Road Tax, Permit fee, etc. (Rs. 60,000 × 4 quarters) 2,40,000
Office expenses (Rs. 25,000 × 12 months) 3,00,000
Depreciation (Rs. 75,00,000 × 6 buses × 20%) 90,00,000
Insurance (Rs. 75,00,000 × 6 buses × 4%) 18,00,000
Total (A) 1,59,72,000
B. Variable Charges:
Repairs and Maintenance (Rs. 2,40,000 × 6 buses) 14,40,000
Diesel {(5,40,000 km. ÷ 6 km.) × Rs.92} 82,80,000
Engine oils & lubricants {(Rs. 20,000. ÷ 1000 km.) × 5,40,000 km} 1,08,00,000
Total (B) 2,05,20,000

12

© The Institute of Chartered Accountants of India

 Total Cost (A+B) 3,64,92,000
Add: 33 1/
3% Profit on takings or 50% on cost 1,82,46,000
C. Total Takings (Total bus fare collection) 5,47,38,000
D. Total Passenger-km. (Working Note 2) 1,94,40,000
E. Bus fare to be charged from each passenger per km. (C ÷ D) 2.82

(b) Stores Ledger Account

for the three months ending 30th June, 2022
(Weighted Average Method)
Receipts Issues Balance
Rate for further Issue
Date Rates Rates Amount Amount
GRN No. Qty. (Kg.) Amounts MR No. Qty. (Kg.) Qty. (Kg.) (Rs.)
(Rs.) (Rs.) (Rs.) (Rs.)
2017
April 1 1,500 72,000 48.00
April 4 1,100 48.00 52,800 400 19,200 48.00
April 10 1,600 50.00 80,000 2,000 99,200 99,200
= 49.60
2,000
April 20 2,400 49.00 1,17,600 4,400 216,800 2,16,800
= 49.30
4,400
April 24 1,600 49.30 78,880 2,800 137,920 1,37,920
= 49.30
2,800
May 5 1,000 51.00 51,000 3,800 188,920 1,88,920
= 49.70
3,800
May 10 1,500 49.70 74,550 2,300 114,370 1,14,370
= 49.70
2,300
May 17 1,100 52.00 57,200 3,400 171,570 1,71,570
= 50.50
3,400
May 25 800 52.50 42,000 4,200 213,570 2,13,570
= 50.90
4,200
May 26 1,700 50.90 86,530 2,500 127,040 1,27,040
= 50.90
2,500
May 31 Shortage 80 2,420 127,040 1,27,040
= 52.50
2,420
June 11 900 54.00 48,600 3,320 175,640 1,75,640
= 52.90
3,320
June 15 1,500 52.90 79,350 1,820 96,290 96,290
= 52.90
1,820
June 21 1,200 52.90 63,480 620 32,810 32,810
= 52.90
620
June 24 1,400 55.00 77,000 2,020 109,810 1,09,810
= 54.40
2,020
June 30 Shortage 60 1,960 109,810 1,09,810
= 56.00
1,960

13

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 6. (a) The essential features, which a good cost and management accounting system should
possess, are as follows:
(a) Informative and simple: Cost and management accounting system should be
tailor-made, practical, simple and capable of meeting the requirements of a business
concern. The system of costing should not sacrifice the utility by introducing meticulous
and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost and management
accounting system should be accurate and authenticated; otherwise it may distort the
output of the system and a wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in
classification, treatment and reporting of cost data and related information. This is
required for benchmarking and comparability of the results of the system for both
horizontal and vertical analysis.
(d) Integrated and inclusive: The cost and management accounting system should be
integrated with other systems like financial accounting, taxation, statistics and
operational research etc. to have a complete overview and clarity in results.
(e) Flexible and adaptive: The cost and management accounting system should be
flexible enough to make necessary amendments and modification in the system to
incorporate changes in technological, reporting, regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output.
For this, an active role of management is required for the development of such a
system that reflect a strong conviction in using information for decision making.
(b) Causes and Treatment of Overtime premium in cost accounting
Causes Treatment
(1) The customer may agree to bear (1) If overtime is resorted to at the desire
the entire charge of overtime of the customer, then overtime
because urgency of work. premium may be charged to the job
directly.
(2) Overtime may be called for to (2) If overtime is required to cope with
make up any shortfall in general production programmes or for
production due to some meeting urgent orders, the overtime
unexpected development. premium should be treated as
overhead cost of the particular
department or cost centre which works
overtime.
(3) Overtime work may be (3) If overtime is worked in a department
necessary to make up a shortfall due to the fault of another department,
in production due to some fault the overtime premium should be
of management. charged to the latter department.

14

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 (4) Overtime work may be resorted (4) Overtime worked on account of
to, to secure an out-turn in abnormal conditions such as flood,
excess of the normal output to earthquake etc., should not be
take advantage of an expanding charged to cost, but to Costing Profit
market or of rising demand and Loss Account.

(c) Expenses other than direct material cost and direct employee cost, which are incurred to
manufacture a product or for provision of service and can be directly traced in an
economically feasible manner to a cost object. The following costs are examples for
direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of
service.
(d) Product costs are those costs that are identified with the goods purchased or produced
for resale. In a manufacturing organisation they are attached to the product and that are
included in the inventory valuation for finished goods, or for incomplete goods. Product
cost is also known as inventoriable cost. Under absorption costing method it includes
direct material, direct labour, direct expenses, directly attributable costs (variable and
non-variable) and other production (manufacturing) overheads. Under marginal costing
method Product Costs includes all variable production costs and the all fixed costs are
deducted from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as
expense against revenue of the period in which they are incurred. General
Administration, marketing, sales and distributor overheads are recognized as period
costs.

15

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 Test Series: September, 2022
MOCK TEST PAPER –1
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi
medium. If a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.
Time Allowed – 3 Hours Maximum Marks – 100
1. Answer the following:
(a) A company has the following three alternative proposals for conveyance facilities for its sales
personnel who has to do substantial traveling, approximately 20,000 kilometers yearly:
(i) Purchasing and maintaining its own fleet of cars. The average cost of a car is ` 7,20,000
(ii) Allow the Executive to use their own car and reimburse the expenses @ ` 12 per kilometer
and also bear insurance costs.
(iii) Hire cars from an agency at ` 2,16,000 per year per car. The company will have to bear costs
of petrol, taxes and tyres.
The following further details are available:
Petrol ` 7.20 per km.
Tyre ` 0.144 per km.
Taxes ` 960 per car per annum
Repairs and maintenance ` 0.24 per km.
Insurance ` 1,440 per car per annum
Life of the car 5 years with annual mileage of 20,000 km.
Resale value ` 96,000 at the end of the fifth year.
WORK OUT the relative costs of three proposals and rank them.
(b) A manufacturing process yields the following products out of the raw materials introduced in the
process:
Main Product X 60% of Raw Materials
By-Product Y 15% of Raw Materials
By Product Z 20% of Raw Materials
Wastage 5% of Raw Materials
Other information is as follows:
a. Total Cost: Raw Materials 1,000 units of ` 9,200; Labour ` 8,200; Overheads ` 12,000

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 b. One unit of product z requires ½ the raw materials required for one unit of product Y, one
unit of product X requires1½ times the raw materials required for product Y.
c. Product X required double the time needed for production of one unit of Y and one unit of Z.
d. Product Z requires ½ the time required for the production of one unit of product Y.
e. Overheads are to be apportioned in the ratio of 6:1:1.
You are required to CALCULATE the total and per unit of cost of each of the products.
(c) EFF Limited, a construction company, entered into a contract for ` 14,50,000 on 1st July, 2021.
On 30th June, 2022 when the accounts were closed, the following details were gathered about the
contract:
Amount (`)
Materials purchased 2,90,000
Wages paid 1,30,500
General expenses 29,000
Materials on hand (30-6-2022) 72,500
Wages accrued (30-6-2022) 14,500
Work certified 5,80,000
Work uncertified 43,500
Cash received 4,35,000
The above contract contained "Escalation clause" which read as follows:
"In the event of increase in the prices of materials and rates of wages by more than 5%, the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond
5% in each case."
It was found that since the date of signing the agreement, the prices of materials and wage rates
increased by 25% leading to increase the values from the very beginning. However, the value of
the work certified does not take into account the effect of the above clause.
You are required to CALCULATE the 'value of work certified' after taking the effect of 'Escalation
Clause' as on 30 th June, 2022.
(d) A company produces a product 'AB' by using two raw materials - 'Material Ae' and 'Material Be' in
the ratio of 5:3.
A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting
the trend will continue for entire year. The ratio of input and output is 8:5.
Other Information about Raw Material Ae is as follows:
Purchase Price ` 150 per kg
Re-order period 2 to 3 days
Carrying Cost 12%
Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase it becomes
obsolete.
To place an order for material 'Ae’, the company has to incur an administrative cost of
` 375 per order. At present, material ‘Ae’ is purchased in a lot of 7,500 kgs. to avail the discount
on purchase. Company works for 25 days in a month and production is carried out evenly.
2

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 You are required to CALCULATE:
(i) Economic Order Quantity (EOQ) for Material Ae;
(ii) Maximum stock level for Material Ae. (4 × 5 Marks = 20 Marks)
2. (a) The details regarding a product manufactured by the company for the last one week are as follows:
Standard cost (per unit)
Direct materials 10 units @ ` 22.50 ` 225
Direct wages 5 hours @ ` 120 ` 600
Total: ` 825
Actual (for whole activity):
Direct materials ` 96,525
Direct wages ` 2,44,860
Analysis of variances:
Direct materials:
Price ` 8,775 (Adverse)
Usage ` 5,625 (Favourable)
Direct wages (labour):
Efficiency ` 5,400 (Adverse)
You are required to CALCULATE:
(i) Material Cost variance
(ii) Actual output units
(iii) Actual price of material per unit
(iv) Actual Wages rate per labour hour
(v) Labour rate variance
(vi) Labour Cost variance (10 Marks)
(b) PS Limited is a manufacturing company and is operating at 75% capacity utilization. The PV ratio
at this level of activity is 40%.
The flexible budget drafted by the company for two levels of activity is given below:
Capacity utilization (75 %) Capacity utilization (100 %)
Amount in ` (Lakhs) Amount in ` (Lakhs)
Direct materials 180 240
Direct wages 120 160
Power and fuel 12 16
Repairs and maintenance 18 21
Consumables 21 28
Supervision 20 20
Indirect labour 36 42
Administrative expenses 21 21

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 Selling expenses 18 18
Depreciation 54 54
You are required to:
i. CALCULATE the profit earned by PS Limited at 75% level of activity.
ii. CALCULATE the break-even level of activity. (10 Marks)
3. (a) XYZ Ltd. is manufacturer of medicines. It carries on production operation in two processes. The
material first passes through Process I, where Medicine 'X' is produced. Following data are given
for the month October, 2022:
Opening work-in-progress quantity (in Liter) 12,000
(Material 100% and conversion 50% complete)
Material input quantity (in Liter) 60,000
Work completed quantity (in Liter) 40,000
Closing work-in-progress quantity (in Liter) 15,000
(Material 100% and conversion 80% complete)
Opening work-in-progress cost
Material cost (in `) 1,75,000
Processing cost (in `) 1,40,000
Material input cost (in `) 7,70,000
Processing cost (in `) 8,35,000
Normal process loss is 15% of material input. It has no realizable value.
Any quantity of Medicine 'X' can be sold for ` 42.50 per Liter. Alternatively, it can be transferred to
Process II for further processing and then sold as Medicine ' XYZ' for ` 50 per Liter. Further
materials are added in Process II, which yield 1.25 Liter of Medicine 'XYZ' for every Liter of
Medicine 'X' of Process I. Out of the 40,000 Liter of work completed in Process I, 10,000 Liter are
sold as Medicine 'X' and 30,000 Liter are passed through Process II for sale as Medicine 'XYZ'.
The monthly costs incurred in Process II (other than the cost of Medicine ' X') are:
Input 30,000 Liter of Medicine 'X'
Materials Cost ` 2,75,000
Processing Costs ` 2,50,000
You are required to:
(i) PREPARE Statement of Equivalent production and determine the cost per Liter of Medicine
'X' in Process I, using the weighted average cost method.
(ii) Company is mulling over the option to sell the 30,000 Liter of Medicine 'X' at Process-I without
processing it further in Process-II. WILL IT BE beneficial for the company over the current
pattern of processing 30,000 Liter in process-II? (10 Marks)
(b) The following information pertains to A Limited for the year 1 st April 2021 to 31 st March 2022:
Particulars Amount (`)
Sales 50,00,000
Direct labour 10,50,000
Administrative overheads (relating to production activity) 1,50,000
Selling expenses 2,50,000
4

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 Inventory details are as follows:
As on 1st April 2021 As on 31st March 2022
(Amount in `) (Amount in `)
Raw materials 5,00,000 6,30,000
Finished goods 9,80,000 10,50,000
Work in Progress 6,00,000 8,00,000

Additional Information:
• Direct labour would be 175% of works overheads.
• Cost of goods sold would be ` 6,900 per unit
• Selling expenses would be ` 500 per unit.
You are required to PREPARE a cost sheet for the year ended 31 st March, 2022 showing:
(i) Value of material purchased
(ii) Prime cost
(iii) Works cost
(iv) Cost of production
(v) Cost of goods sold
(vi) Cost of Sales
(vii) Profit earned
(viii) Profit as a percentage of sales (10 Marks)
4. (a) Archika Tyre Manufacturing Private Limited has four workers Ram, Shyam, Mohan & Kundan who
are paid wages on the basis of ` 100 per day, ` 120 per day, ` 130 per day & ` 2500 per month
respectively.
Standard working days in a week are six of 8 hours per day. For the month of Octob er 2022, there
was only one holiday other than Sunday for which no payment was made to employees except
Kundan who was paid for full month. Sundays are considered paid holidays i.e. employees are paid
for Sunday also even there is no working on that day. Provident fund contribution is 8% of monthly
wages by employer and employee each. ESI contribution is 5% of monthly wages by employer and
4% of monthly wages by employee.
On the basis of above information, you are required to CALCULATE (regarding the month of
October 2022):
(i) Amount of net wages receivable by each employee from the employer.
(ii) What is the total amount of Provident Fund required to be deposited by employer?
(iii) What is the total amount of ESI required to be deposited by employer?
(iv) What is the total labour cost to employer?
(v) If total material cost is ` 20,000 for October 2022 and overheads are charged equal to labour
cost, calculate total cost for the month. (10 Marks)

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 (b) A firm has a total capacity of producing 1,00,000 units of an item. The budgeted expenses at this
level of activity are as under:
Per unit (`)
Direct Materials 650
Direct Wages 325
Direct Expenses 125
Variable overheads 50
Fixed Production Overheads 25
Selling and Distribution Overheads (20% fixed) 25
Administrative Expenses (100% fixed) 60
Total 1,260
The selling price is ` 1,750 per unit and is anticipated to remain constant.
You are required to PREPARE a flexible budget, on the basis of marginal costing, for 60,000 and
75,000 units of output level showing the profit and P/V Ratio. (10 Marks)
5. (a) A work-shop has 8 identical machines operated by 6 operators. The machine cannot work without
an operator wholly engaged on it. The original cost of all the 8 machines works out to ` 64,00,000.
The following particulars are furnished for a six months’ period:
Normal available hours per operator 1,248
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Production bonus estimated 10% on wages
Power consumed ` 80,500
Supervision and Indirect Labour ` 33,000
Lighting and Electricity ` 12,000
Average rate of wages per day of 8 hours per operator ` 200
The following particulars are given for a year:
Insurance ` 7,20,000
Sundry work Expenses ` 1,00,000
Management Expenses allocated ` 10,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine shop.
(10 Marks)
(b) SMD Limited manufactures four products namely A, B, C and D using the same production and
process facilities. The company has been following conventional method of costing and wishes to
shift to activity-based costing system.
6

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 The data pertaining to four products are:
Product Units Material per unit Labour hours per unit Machine hours per unit
produced (`)
A 1,500 140 1 3
B 2,500 90 3 2
C 10,000 180 2 6
D 6,000 150 1.5 4
The following activity volumes are associated to the production process for the relevant period -
Number of Inspections Number of Material Movements Number of set-ups
A 200 15 100
B 250 20 125
C 900 100 600
D 650 85 400
The cost data also states that:
• Direct Labour cost: ` 60 per hour
• Machine hour rate: ` 280 per hour
• Production overheads are absorbed on machine hour basis.
• For activity-based costing, a thorough, analysis of the production process revealed that:
Costs relating to set-ups and inspection bears the equal percentage while costs relating to
machinery accounts for 20% of the production overhead.
Costs relating to material handling stands at 50% of costs relating to machinery.
You are required to:
(i) Prepare a statement showing the unit costs and total costs of each product using the
absorption costing method.
(ii) Prepare a statement showing the unit costs and total costs of each product using activity -
based costing system. (10 Marks)
6. Answer any four of the following:
(a) LIST OUT cost unit examples of following service industry:
Hospital, Electricity Supply service, Cinema, Canteen, Hotels
(b) LIST OUT five purely financial expenses that are included only in Financial Accounts.
(c) DESCRIBE Unit Costing. WHAT kind of industries follow this method of co sting?
(d) WRITE DOWN the corresponding cost drivers related to the following activity cost pools:
Inspecting and testing costs, Setting-up machines cost, Machining costs, Supervising Costs,
Ordering and Receiving Materials cost
(e) BRIEF the treatment of following while calculating purchase cost of material:
Trade Discount, Cash Discount, Penalty, Insurance charges, Commission paid.
(4 × 5 =20 Marks)

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 Test Series: September, 2022
MOCK TEST PAPER – 1
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) Calculation of relative costs of three proposals and their ranking
I- Use of II- Use of III- Use of
company’s car own car hired car
per km. (`) per km. (`) per km. (`)
Reimbursement -- 12.00 --
Hire Charges -- -- 10.80*
Fixed cost:
Insurance 0.072 0.072 --
Taxes 0.048 -- 0.048
Depreciation 6.24# -- --
Running and Maintenance Cost:
Petrol 7.20 -- 7.20
Repairs and Maintenance 0.24 -- --
Tyre 0.144 -- 0.144
Total cost per km. 13.944 12.072 18.192
Cost for 20,000 km. 2,78,880 2,41,440 3,63,840
Ranking of proposals II I III
* (` 2,16,000 ÷ 20,000 km.) = ` 10.80
# [(` 7,20,000 - ` 96,000) ÷ 5 years] ÷ 20,000 km. = ` 6.24
The Second alternative i.e., use of own car by the executive and reimbursement of expenses by
the company is the best alternative from company’s point of view.
(b) Statement of Distribution of Costs
Cost Elements Basis Total Main Product X By-Product Y By-Product Z
Cost (600 Units) (150 Units) (200 Units)
Total Per Total Per Total Per
Unit Unit Unit
Raw Materials 18:3:2 9,200 7,200 12 1,200 8 800 4
Labour 36:3:2 8,200 7,200 12 600 4 400 2
Overheads 6:1:1 12,000 9,000 15 1,500 10 1,500 7.50
Total 29,400 23,400 39 3,300 22 2,700 13.50

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 Working Notes:
1. Calculation of Units produced:
Main Product X 60% of Raw Materials 600 Units
By-Product Y 15% of Raw Materials 150 Units
By Product Z 20% of Raw Materials 200 Units
Wastage 5% of Raw Materials 50 Units
1000 Units
2. Cost Allocation
Raw Materials
Let Product Z requires 1 unit of raw materials then, Product Y will require 2 units of raw
materials and Product X will require 3 units of raw materials.
Product X Y Z
Individual Unit ratio (a) 3 : 2 : 1
Units (b) 600 150 200
Ratio for Cost Allocation (a*b) 1800 : 300 : 200
Ratio 18 : 3 : 2
Labour:
Let Product Z requires 1 hour of Labour then, Product Y will require 2 hours of Labour and
Product X will require 6 hours of Labour.
Product X Y Z
Individual hour ratio (a) 6 : 2 : 1
Units (b) 600 150 200
Ratio for Cost Allocation (a*b) 3600 : 300 : 200
Ratio 36 : 3 : 2
(c) Workings:
(i) Percentage of work certified:
Value of work certified ` 5,80,000
×100 = ×100 = 40%
Contract price ` 14,50,000

(ii) Value of material and labour used in the contract:

Particulars Amount (`) Amount (`)
Material purchased 2,90,000
Less: Material on hand (30-06-2022) (72,500) 2,17,500
Wages paid 1,30,500
Add: Wages accrued (30-06-2022) 14,500 1,45,000
3,62,500

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 Price of materials and wages has been increased by 25%, the value before price increase is:
` 3,62,500
×100 = ` 2,90,000
125
(iii) Calculation of Value of work certified:
The value of the contract would be increased by 25% of the price increased beyond 5%.
Price increased beyond 5% = ` (3,62,500 – 2,90,000) – 5% of ` 2,90,000
= ` 72,500 – ` 14,500 = ` 58,000
Value of contract would be increased by 25% of ` 58,000 = ` 14,500
Therefore, the revised contract value = ` 14,50,000 + ` 14,500 = ` 14,64,500
Calculation of the Value of work certified after taking the effect of escalation clause:
= Revised contract value × Percentage of work certified
= ` 14,64,500 × 40% = ` 5,85,800
(d) (i) Monthly production of AB = 50,000 kgs
Raw material required = 50,000/5 x 8 = 80,000 kgs
Material Ae and Material Be ratio = 5:3
Therefore, material Ae = 80,000/8 x 5 =50,000 kgs

2 x (Annual demand x cost per order)

Calculation of EOQ =√
Annual holding cost per unit

2 x 50,000 kgs x 12 x 375

EOQ =√ = 5,000 kgs
12% of ` 150

(ii) Calculation of maximum stock level of Material Ae which is perishable in nature and is
required to be used within 3.5 days.
(a) Stock equals to 3.5 days consumption = 50,000 kgs/ 25 days x 3.5 days = 7,000 kgs
(b) Maximum stock level for Material Ae
Maximum stock = Reorder quantity + reorder level – (minimum consumption x
minimum lead time)
Where, reorder quantity = 7,500 kgs
Reorder level = maximum consumption* x maximum lead time
= 50,000/ 25 x 3 days = 6,000 kgs
Now, Maximum stock level = 7,500 kgs + 6,000 kgs – (50,000 /25 days x 2 days) = 9,500
kgs
Stock required for 3.5 days consumption is lower than the maximum stock level
calculated above. Therefore, maximum stock level will be 7,000 kgs.
(*since production is processed evenly throughout the month hence material consumption will
also be even.)

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2. (a) (i) Material Cost Variance = Material Price Variance+ Material Usage Variance
= ` 8,775 A + ` 5,625 F= ` 3,150 Adverse
(ii) Actual output units
Let x be the actual quantity of output
Then Standard Quantity of input for actual output ‘x’
SQ = 10x
Material cost variance = (SQ x SP) - (AQ x AP)
-3,150 = (10x x ` 22.50) - ` 96,525
-3,150 = 225x - ` 96,525
225x = ` 96,525 – 3,150 = ` 93,375
x = ` 93,375/225 = 415 Units
(iii) Actual Price of Material per unit
Material Usage variance = (SQ - AQ) x SP
5,625 = (10x - AQ) x ` 22.50
5,625 = (10 x 415 units - AQ) x ` 22.50
5,625/22.50 = 4,150 - AQ
AQ = 4,150 - 250 = 3,900 units
Now, AQ x AP = ` 96,525 (given)
AP = ` 96,525/AQ
= ` 96,525/3,900 units = ` 24.75
(iv) Actual wages rate per labour hour
Labour efficiency variance = 5,400 Adverse (given)
Standard rate per hour (Standard time – Actual time) = -5,400
` 120 [(Actual output units x Number of hours per output) – Actual time] = -5,400
` 120 [(415 units x 5 hrs) – Actual time] = -5,400
2,075 hrs – Actual time = -5,400/120
Actual time = 2,075 + 45
= 2,120 hrs
Now Direct wages = ` 2,44,860 (given)
Actual time x Actual rate per hour = ` 2,44,860
Actual rate per hour = ` 2,44,860 / 2,120 hrs
= ` 115.50

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 (v) Labour rate variance
= Actual time (Standard Rate – Actual Rate)
= 2,120 hrs (` 120 - ` 115.50)
= 2,120 hrs x ` 4.50 = 9,540 Favourable
(vi) Labour Cost variance
= Labour rate variance+ Labour efficiency variance
= 9,540 F + 5,400 A = 4,140 Favourable
(b) Calculation of Semi Variable component
Repairs and Maintenance (`) Indirect labour (`)
At 75% capacity 18,00,000 36,00,000
At 100% capacity 21,00,000 42,00,000
Variable component for 25% 3,00,000 6,00,000
Hence variable cost at 75% 3,00,000 x 75/25=9,00,000 6,00,000 x 75/25 =
18,00,000
Fixed cost at 75% capacity 18,00,000 – 9,00,000 = 9,00,000 36,00,000 –
18,00,000=18,00,000

Segregation of Fixed and Variable cost

75% 100% VC at 75% FC at 75%
Direct Material 180 240 180
Direct Labour 120 160 120
Power and fuel 12 16 12
Repairs and maintenance 18 21 9 9
Consumables 21 28 21
Supervision 20 20 20
Indirect labour 36 42 18 18
Administrative expenses 21 21 21
Selling expenses 18 18 18
Depreciation 54 54 54
Total 500 620 360 140
(i) Calculation of profit earned at 75% capacity
Given PV ratio = 40%, Hence variable cost would be 60%
If variable cost is ` 360 lakhs then sales would be 360/ 0.60 = ` 600 lakhs
Less: Variable cost = ` 360 lakhs
Less: Fixed cost = ` 140 lakhs
Profit = ` 100 lakhs
(ii) Break-even level of activity
BEP Sales = FC/ P/V ratio = 140 /0.40 = ` 350 lakhs
5

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3. (a) (i) Process I Statement of Equivalent Production (Under Weighted Average Method)
Particulars Input Particulars Output Equivalent Production
units units Material Conversion
(in (in
Liter) Liter) (%) Equivalen (%) Equivalent
t units units
(in Liter) (in Liter)
Opening WIP 12,000 Units introduced 40,000 100 40,000 100 40,000
and completed
New Material 60,000 Normal Loss (15% 9,000 - - - -
Introduced of 60,000 liters)
Closing WIP 15,000 100 15,000 80 12,000
Abnormal Loss
(Bal. fig.) 8,000 100 8,000 100 8,000
72,000 72,000 63,000 60,000

Statement of Cost for Each Element

Elements of Costs Material (`) Conversion Cost (`)
Costs of Opening WIP 1,75,000 1,40,000
Cost of the Process (for the period) 7,70,000 8,35,000
Total Cost 9,45,000 9,75,000
Equivalent Units (in liter) 63,000 60,000
Cost Per equivalent Units (in liter) ` 15 ` 16.25
Therefore, Cost of Medicine ‘X’ is ` 31.25 per liter (` 15 + ` 16.25)
(ii) Statement showing comparative data to decide whether 30,000 Liters of Medicine ‘X'
should be further processed into 'XYZ'
Alternative 1 Alternative 2
Sell medicine 'X' after Process further into
Process I 'XYZ'
(`) (`)
Sales 12,75,000 18,75,000
(30,000 liters x ` 42.50) (37,500 liters x ` 50)
Less: Costs:
Process I - Costs
(30,000 liters x ` 31.25) 9,37,500 9,37,500
Material in Process II - 2,75,000
Conversion cost in Process II - 2,50,000
Total Cost 9,37,500 14,62,500
Profit 3,37,500 4,12,500

Hence, company should process further as it will increase profit further by ` 75,000
(` 4,12,500 – ` 3,37,500)

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 (b) Cost Sheet of A Limited for the year ended 31st March 2022
Particulars Amount (`) Amount (`)
Opening Stock of Raw materials 5,00,000
Add: Purchases (balancing figure) 20,50,000
Less: Closing stock of raw materials 6,30,000
Direct material consumed (balancing figure) 19,20,000
Direct labour 10,50,000
Prime Cost 29,70,000
Add: Factory Overheads (10,50,000 / 175%) 6,00,000
Add: Opening Stock of Work in Progress 6,00,000
41,70,000
Less: Closing Stock of Work in Progress 8,00,000
Works Cost 33,70,000
Add: Administrative Overheads (relating to production activity) 1,50,000
COST OF PRODUCTION 35,20,000
Add: Opening stock of finished goods 9,80,000
Cost of Goods available for sale 45,00,000
Less: Closing Stock of finished goods 10,50,000
COST OF GOODS SOLD 34,50,000
(Working Note: (iv))
Add: Selling and Distribution Overhead 2,50,000
COST OF SALES 37,00,000
Add: Profit (Balancing figure) [ Sales - Cost of Sales] 13,00,000
SALES 50,00,000
13 Lakhs
Profit as a % of sales = x 100 = 26%
50 Lakhs
Working Notes:
(i) The cost sheet is completed by Reverse Working. Purchases amount is the balancing figure.
(ii) Direct labour = 175% of factory overhead (given). Hence, if direct labour = 10,50,000, then
Factory Overhead = 10,50,000 / 175% = ` 6,00,000
(iii) Selling Overhead ` 2,50,000 (total), selling per unit ` 500.
Number of units sold = ` 2,50,000/ ` 500 = 500 units
(iv) Cost of goods sold = 500 units x ` 6,900 = ` 34,50,000
4. (a) (i) Calculation of net wages receivable by each employee from the employer (October
2022):
Ram Shyam Mohan Kundan Total
(`) (`) (`) (`) (`)
Wages for October 2022 3,000 3,600 3,900 2,500 13,000
(` 100 x (` 120 x (` 130 x
30 days) 30 days) 30 days)

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 Less: Employee Contribution
to PF @ 8% 240 288 312 200 1,040
Less: Employee Contribution
to ESI @ 4% 120 144 156 100 520
Net Wages Receivable 2,640 3,168 3,432 2,200 11,440
(ii) Calculation of total amount of Provident Fund required to be deposited by employer
(October 2022):
(`)
Total Wages for the month 13,000
Employer’s Contribution to Provident Fund @8% of ` 13,000 1,040
Add: Employee’s Contribution to Provident Fund @8% of ` 13,000 1,040
Total amount of Provident Fund required to be deposited by employer 2,080
(iii) Calculation of total amount of ESI required to be deposited by employer (October 2022):
(`)
Total Wages for the month 13,000
Employer’s Contribution to ESI @5% of ` 13,000 650
Add: Employee’s Contribution to ESI @4% of ` 13,000 520
Total amount of ESI required to be deposited by employer 1,170
(iv) Total labour cost to employer (October 2022):
(`)
Total Wages for the month 13,000
Add: Employer’s Contribution to Provident Fund @8% of ` 13,000 1,040
Add: Employer’s Contribution to ESI @5% of ` 13,000 650
Total labour cost to employer 14,690
(v) Calculation of Total Cost for October 2022
(`)
Total Material Cost 20,000
Total Labour Cost 14,690
Total Overheads (Equal to Labour Cost) 14,690
Total Cost 49,380
(b) Workings -
1. Fixed Production overheads (given) = ` 25 per unit
So, at 1,00,000 units capacity, it will be ` 25,00,000 (1,00,000 units x ` 25)
2. Selling and distribution overheads:
Given (1,00,000 units x ` 25) = ` 25,00,000
So, Fixed component = ` 25,00,000 x 20% = ` 5,00,000
Hence, variable component = ` 25,00,000 - ` 5,00,000 = ` 20,00,000
Variable per unit = ` 20,00,000/1,00,000 units
= ` 20 per unit
8

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 Flexible Budget
Particulars Per unit Output Level
(`) 60,000 units 75,000 units
(`) (`)
Sales (A) 1,750 10,50,00,000 13,12,50,000
Variable costs:
Direct Material 650 3,90,00,000 4,87,50,000
Direct Wages 325 1,95,00,000 2,43,75,000
Direct expenses 125 75,00,000 93,75,000
Variable overheads 50 30,00,000 37,50,000
Selling and distribution overheads 20 12,00,000 15,00,000
Total Variable cost (B) 1,170 7,02,00,000 8,77,50,000
Contribution (C = A - B) 3,48,00,000 4,35,00,000
Fixed costs:
Production overheads 25,00,000 25,00,000
Administrative overheads 60,00,000 60,00,000
Selling and distribution overheads 5,00,000 5,00,000
Total Fixed cost (D) 90,00,000 90,00,000
Profit (C-D) 2,58,00,000 3,45,00,000
P/V Ratio = (` 3,48,00,000/` 10,50,00,000) x 100 = 33.143%
OR
P/V Ratio = (` 4,35,00,000/` 13,12,50,000) x 100 = 33.143%
5. (a) Workings:
Particulars Six months 6
operators (Hours)
Normal available hours half yearly (1,248 x 6 operators) 7,488
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
Computation of Comprehensive Machine Hour Rate
Particulars Amount for six
months (`)
Operators' wages (7,380/8 x200) 1,84,500
Production bonus (10% on wages) 18,450
Power consumed 80,500
Supervision and indirect labour 33,000
Lighting and Electricity 12,000

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 Repair and maintenance {(5% × ` 64,00,000)/2} 1,60,000
Insurance (` 7,20,000/2) 3,60,000
Depreciation {(` 64,00,000 × 10%)/2} 3,20,000
Sundry Work expenses (` 1,00,000/2) 50,000
Management expenses (` 10,00,000/2) 5,00,000
Total Overheads for 6 months 17,18,450
Comprehensive Machine Hour Rate = ` 17,18,450/7,200 hours ` 238.67

(b) (i) Cost per unit - Conventional Costing: Absorption rate method
Particulars A (`) B (`) C (`) D (`)
Material 140 90 180 150
Labour @ ` 60 per labour hour 60 180 120 90
Overheads @ ` 280 per machine hour 840 560 1680 1120
Cost per unit (in `) 1,040 830 1,980 1,360
No of units 1,500 2,500 10,000 6,000
Total cost (`) 15,60,000 20,75,000 1,98,00,000 81,60,000
(ii) Statement of apportionment of overheads: Amount (`)
Type of Cost Cost Driver A B C D
Setups No of 7,48,000 9,35,000 44,88,000 29,92,000
Setups (100 x 7,480) (125x7,480) (600 x 7,480) (400 x7,480)
Machinery Machine 2,52,000 2,80,000 33,60,000 13,44,000
hours (4,500 x 56) (5,000 x 56) (60,000 x 56) (24,000 x 56)
Material No. of 1,78,500 2,38,000 11,90,000 10,11,500
Handling Movements (15 x 11,900) (20 x 11,900) (100 x 11,900) (85 x 11,900)
of material
Inspection No. of 9,16,300 11,45,375 41,23,350 29,77,975
Inspections (200x4,581.50) (250x4,581.50) (900x4,581.50) (650x4,581.50)
Total 20,94,800 25,98,375 1,31,61,350 83,25,475
Output Units 1,500 2,500 10,000 6,000
Overhead/ unit 1,396.53 1,039.35 1,316.14 1,387.58
Statement showing Cost per unit and Total cost using Activity Based Costing
Particulars A (`) B (`) C (`) D (`)
Material 140.00 90.00 180.00 150.00
Labour 60.00 180.00 120.00 90.00
Total 200.00 270.00 300.00 240.00
No. of units 1,500 2,500 10,000 6,000
Total cost (excluding overheads) 3,00,000 6,75,000 30,00,000 14,40,000
Add: Overheads (as calculated) 20,94,800 25,98,375 1,31,61,350 83,25,475
Total cost 23,94,800 32,73,375 1,61,61,350 97,65,475
Cost per unit 1,596.53 1,309.35 1,616.14 1,627.58

10

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 Working Notes:
1. Calculation of Total machine hours
Particulars A B C D
(a) Machine hours per unit 3 2 6 4
(b) Production(units) 1,500 2,500 10,000 6,000
(c) Total machine hours (a) x(b) 4,500 5,000 60,000 24,000

Total Machine hours = 93,500

Total production overheads= 93,500 x 280 = ` 2,61,80,000
2. Calculation of cost driver rate
Cost pool Amount of Cost Driver Cost Driver Cost Driver Rate (`)
cost (`) (basis) (units)
Setups 91,63,000 No. of Setups 1,225 7,480 per set up
Machinery 52,36,000 Machine Hrs. 93,500 56 per machine hour
Material 26,18,000 No. of Material 220 11,900 per material
Handlings Movements movement
Inspection 91,63,000 No. of Inspections 2,000 4,581.50 per
inspection
2,61,80,000
6. (a)
Service industry Unit of cost (examples)
Hospital Patient per day, room per day or per bed, per operation etc.
Electricity Supply service Kilowatt- hour (kWh)
Cinema Per ticket
Canteen Per item, per meal etc.
Hotels Guest Days or Room Days

(b) Purely Financial Expenses included in Financial Accounts only:

(i) Interest on loans or bank mortgages.
(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments
(v) Income tax, donations, subscriptions
(vi) Expenses of the company’s share transfer office, if any. (Any five)
(c) Unit costing: It is that method of costing where the output produced is identical and each unit of
output requires identical cost. Unit costing is synonymously known as single or output costing, but
these are sub-division of unit costing method.
This method of costing is followed by industries which produce single output or few variants of a
single output, therefore, this method of costing, finds its application in industries like paper, cement,
steel works, mining, breweries etc. These types of industries produce identical products and
therefore have identical costs.
11

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 (d)
Activity Cost Pools Related Cost Drivers
Inspecting and testing costs Number of tests
Setting up machines cost Number of set-ups
Machining costs Machine hours
Supervising Costs Direct labour hours
Ordering and Receiving Materials cost Number of purchase orders
(e)
Trade Discount Trade discount is deducted from the purchase price if it is not
shown as deduction in the invoice.
Cash Discount Cash discount is not deducted from the purchase price. It is
treated as interest and finance charges. It is ignored.
Penalty Penalty of any type is not included with the cost of purchase
Insurance charges Insurance charges are paid for protecting goods during transit. It is
added with the cost of purchase.
Commission paid Commission or brokerage paid is added with the cost of purchase.

12

© The Institute of Chartered Accountants of India

 Test Series: April, 2022
MOCK TEST PAPER –2
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi
medium. If a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.
Time Allowed – 3 Hours Maximum Marks – 100
1. Answer the following:
(a) R Ltd. is facing increasing employee turnover in the factory and before analyzing the causes and
taking remedial steps; the management wants to have an idea of the profit foregone as a result of
employee turnover in the last year.
Last year sales amounted to ` 99,63,960 and P/V ratio was 20%.
The total number of actual hours worked by the direct employee force was 5.34 lakhs. The actual
direct employee hours included 36,000 hours attributable to training new recruits, out of which half
of the hours were unproductive. As a result of the delays by the Personnel Department in filling
vacancies due to employee turnover, 1,20,000 potentially productive hours (excluding unproductive
training hours) were lost.
The costs incurred consequent on employee turnover revealed, on analysis, the following:
Settlement cost due to leaving ` 52,584
Recruitment costs ` 32,088
Selection costs ` 15,300
Training costs ` 36,588
Assuming that the potential production lost as a consequence of employee turnover could have
been sold at prevailing prices, FIND the profit foregone last year on account of employee turnover.
(b) A contractor prepares his accounts for the year ending 31st March each year. He commenced a
contract on 1 st July, 2021.
The following information relates to the contract as on 31 st March, 2022:
(`)
Material issued 7,53,000
Wages 16,96,800
Salary to Foreman 2,43,900
A machine costing ` 7,80,000 has been on the site for 146 days, its working life is estimated at 7
years and its final scrap value at ` 45,000.
A supervisor, who is paid ` 24,000 p.m. has devoted one-half of his time to this contract.
All other expenses and administration charges amount to ` 4,09,500.
1

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 Material in hand at site costs ` 1,06,200 on 31st March, 2022.
The contract price is ` 60,00,000. On 31st March, 2022 two-third of the contract was completed.
The architect issued certificates covering 50% of the contract price, and the contractor had been
paid ` 22,50,000 on account.
PREPARE Contract A/c and show the notional profit or loss as on 31st March, 202 2.
(c) Following information is available for A Ltd.:
Sales-
P: 200 kg @ ` 120 per kg.
Q: 240 kg @ ` 60 per kg.
Joint costs-
Marginal cost ` 17,600
Fixed cost ` 15,600
You are required to FIND OUT the cost of joint products P and Q using contribution margin method.
(d) F Ltd. requires you to PREPARE the Master budget for the next year from the following information:
Sales ` 1,20,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ` 2,250 per month
Factory overheads:
Indirect labour –
Works manager ` 7,500 per month
Foreman ` 6,000 per month
Stores and spares 2.5% on sales
Depreciation on machinery ` 1,89,000
Light and power (fixed) ` 45,000
Repairs and maintenance ` 1,20,000
Other sundries 10% on direct wages
Administration, selling and distribution ` 5,40,000 per year
expenses
(4 × 5 Marks = 20 Marks)
2. (a) Company manufacture and sell 3 types of mobile handset. It also manufactures wireless charger
for mobile. The company has worked out following estimates for next year.
Annual Demand Selling Price Material cost Labour cost
(in units) (` per unit) (` per unit) (` per unit)
X5 5,000 8,000 2,000 1,000
X6 4,000 9,000 2,500 1,500
X7 3,000 12,000 3,000 2,000
Wireless Charger 15,000 1,500 300 200

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 To encourage the sale of wireless charger a discount of 10% in its price is being offered if it were
to be purchased along with mobile. It is expected that customer buying mobile will also buy the
wireless charger. The company factory has an effective capacity of 35,000 labour hours. The labour
is paid @ ` 500 per hour. Overtime of labour has to be paid at double the normal rate. Other
variable cost work out to be 50% of direct labour cost and fixed cost is ` 1,00,00,000. There will be
no inventory at the end of the year.
PREPARE statement of profitability. (10 Marks)
(b) Rounak Minerals Ltd. operates in iron ore mining through open cast mining method. Explosives
and detonators are used for excavation of iron ores from the mines. The following are the details
of standard quantity of explosives materials used for mining:

Particulars Rate (`) Standard Qty. for Standard Qty. for

Iron ore Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic- meter
Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic-meter

The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be removed to get
one tonne of iron ore).
During the month of December 2021, the company produced 20,000 tonnes of iron ore and
removed 58,000 cubic- meter of OB. The quantity of explosive materials used and paid for the
month is as below:

Material Quantity Amount (`)

SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200

You are required to COMPUTE:

(i) Material price variance
(ii) Material quantity variance
(iii) Material cost variance. (10 Marks)
3. (a) M/s SE Traders is a distributor of an electronic items. A periodic inventory of electronic items on
hand is taken when books are closed at the end of each quarter. The following information is
available for the quarter ended on 30th September, 2021:
Sales ` 2,19,30,000
Opening Stock 12,500 units @ ` 600 per unit
Administrative Expenses ` 5,62,500
Purchases (including freight inward):
- July 1, 2021 25,000 units @ ` 573 per unit
- September 30, 2021 12,500 units @ ` 630 per unit
Closing stock- September 30, 2021 16,000 units

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 You are required to COMPUTE the following by WAM (Weighted Average Method), FIFO method
and LIFO method assuming issue/ consumption pattern was even throughout the quarter:
(i) Value of Inventory on 30 th September, 2021.
(ii) Profit or loss for the quarter ended 30th September, 2021. (10 Marks)
(b) Equate bank offers 3 products, viz., deposits, Loans and Credit Cards. The bank has selected 4
activities for a detailed budgeting exercise, following activity-based costing methods.
The bank wants to know the product wise total cost per unit for the selected activities, s o that prices
may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost Estimation for the budget period
(`)
ATM Services:
(a) Machine Maintenance 5,20,000 All fixed, no change.
(b) Rents 2,60,000 Fully fixed, no change.
(c) Currency Replenishment Cost 1,30,000 Expected to double during budget
9,10,000 period.
Computer Processing 6,50,000 Half this amount is fixed, and no
change is expected.
The variable portion is expected to
increase to three times the current
level.
Issuing Statements 23,40,000 Presently, 3.90 lakh statements are
made. In the budget period, 6.5 lakh
statements are expected.
For every single increase of
statement, one rupee is the budgeted
increase.
Computer Inquiries 2,60,000 Estimated to increase by 80% during
the budget period.
The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit Cards
No. of ATM Transactions 1,95,000 --- 65,000
No. of Computer Processing Transactions 19,50,000 2,60,000 3,90,000
No. of Statements to be issued 4,55,000 65,000 1,30,000
Telephone Minutes 4,68,000 2,34,000 2,34,000
The bank budgets a volume of 76,180 deposit accounts, 16,900 loan accounts, and 18,200 Credit
Card Accounts.
Required:
(i) CALCULATE the budgeted rate for each activity.
(ii) PREPARE the budgeted cost statement activity wise.
(iii) COMPUTE the budgeted product cost per account for each product using (i) and (ii) above.
(10 Marks)

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4. (a) Arnav Ltd. operates in beverages industry where it manufactures soft -drink in three sizes of Large
(3 litres), Medium (1.5 litres) and Small (600 ml) bottles. The products are processed in batches.
The 5,000 litres capacity processing plant consumes electricity of 90 Kilowatts per hour and a batch
takes 1 hour 45 minutes to complete. Only symmetric size of products can be processed at a time.
The machine set-up takes 15 minutes to get ready for next batch processing. During the set-up,
power consumption is only 20%.
(I) The current price of Large, Medium and Small are ` 150, ` 90 and ` 50 respectively.
(II) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-C are required
which costs ` 0.50 and `1,000 per litre respectively.
(III) 20 direct workers are required. The workers are paid ` 880 for 8 hours shift of work.
(IV) The average packing cost per bottle is `3
(V) Power cost is ` 7 per Kilowatt -hour (Kwh)
(VI) Other variable cost is ` 30,000 per batch.
(VII) Fixed cost (Administration and marketing) is ` 4,90,00,000.
(VIII) The holding cost is ` 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of products:
Large Medium Small
3,00,000 7,50,000 20,00,000

Required:
CALCULATE net profit/ loss of the organisation and also COMPUTE Economic Batch Quantity
(EBQ). (10 Marks)
(b) Comput Ltd. has capacity to produce 1,00,000 units of a product every month. Its fixed general
administration expenses amount to ` 7,50,000 and fixed marketing expenses amount to
` 12,50,000 per month respectively. The variable distribution cost amounts to ` 150 per unit.
Its works cost at varying levels of production is as under:
Level Works cost per unit (`)
10% 2,000
20% 1,950
30% 1,900
40% 1,850
50% 1,800
60% 1,750
70% 1,700
80% 1,650
90% 1,600
100% 1,550

It can sell 100% of its output at ` 2,500 per unit provided it incurs the following additional
expenditure:
(i) it spends ` 5,00,000 on refreshments served every month to its customers;
5

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 (ii) it gives gift items costing ` 150 per unit of sale;
(iii) it sponsors a television programme every week at a cost of ` 1,00,00,000 per month.
(iv) it has lucky draws every month giving the first prize of ` 2,50,000; 2nd prize of ` 1,25,000,
3rd prize of ` 50,000 and three consolation prizes of ` 25,000 each to customers buying the
product.
However, it can market 30% of its output at ` 2,750 per unit without incurring any of the expenses
referred to in (i) to (iv) above.
PREPARE a cost sheet for the month showing total cost and profit at 30% and 100% capacity level.
(10 Marks)
5. (a) A Manufacturing unit manufactures a product which passes through three distinct Processes - A,
B and C. The following data is given:
Process A Process B Process C
Material consumed (in `) 36,400 31,500 28,000
Direct wages (in `) 56,000 49,000 42,000

• The total Production Overhead of ` 2,20,500 was recovered @ 150% of Direct wages.
• 15,000 units at ` 28 each were introduced to Process 'A'.
• The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process 'C'.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal input Value of Scrap per unit (`)
A 6% 15.40
B ? 28.00
C 5% 14.00

You are required to:

(i) FIND OUT the percentage of wastage in process 'B', given that the output of Process 'B' is
transferred to Process 'C' at ` 56 per unit.
(ii) PREPARE Process accounts for all the three processes A, B and C. (10 Marks)
(b) M/s Avyukt Automobile Parts has four identical machines in its factory. Cost of each machine is
` 5,00,000 with expected scrap value of 10% at the end of its effective life (9 years). The expected
annual running hours of machine is expected to run for 2,200 hours. The other details in respect
of the machine shop are:
(I) Factory Rent ` 5,000 per month
(II) Lighting of Factory ` 3,000 per month
(III) Operator Wages (Two operators and each operator is in charge of two machines)
`10,000 per month (per Operator)
(IV) Fixed repairs and maintenance charges per machine ` 2,000 per quarter
(V) Insurance premium for the machine (Annual) 3% of cost
6

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 (VI) Forman’s salary (Devoted 1/6 th of his time to this factory)
` 2,500 per month
(VII) Other factory overhead (Annual) `40,000
(VIII) Power Consumption per machine per hour 80 units
(IX) Rate of Power ` 150 for 100 units
(X) Unproductive Hours lost during repairs 50 per annum
(XI) Unproductive Hours Lost while Job Setting 650 per annum
You are required to COMPUTE a comprehensive machine hour rate assuming power is used during
operating time only. (10 Marks)
6. Answer any four of the following:
(a) BRIEF OUT advantages and disadvantages of Halsey Premium Plan.
(b) STATE the method of costing for the following industries:
(i) Sugar manufacturing
(ii) Bridge Construction
(iii) Advertising
(iv) Car Assembly
(c) STATE the unit of cost for the following service industries:
(i) Electricity Supply service
(ii) Hospital
(iii) Cinema
(iv) Hotels
(d) BRIEF OUT advantages of Integrated Accounts.
(e) BRIEF OUT difference between Fixed and Flexible Budget. (4 × 5 =20 Marks)

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 Test Series: April, 2022
MOCK TEST PAPER – 2
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) Workings:
(i) Computation of productive hours
Actual hours worked 5,34,000
Less: Unproductive training hours 18,000
Actual productive hours 5,16,000
(ii) Productive hours lost:
Loss of potential productive hours + Unproductive training hours
= 1,20,000 + 18,000 = 1,38,000 hours
(iii) Loss of contribution due to unproductive hours:
Sales value
= ×Total unproductive hours
Actual productive hours
` 99,63,960
= × 1,38,000 hours = ` 26,64,780
5,16,000 hrs
` 26,64,780
Contribution lost for 1,38,000 hours = × 20= ` 5,32,956
100
Computation of profit forgone on account of employee turnover
(`)
Contribution foregone (as calculated above) 5,32,956
Settlement cost due to leaving 52,584
Recruitment cost 32,088
Selection cost 15,300
Training costs 36,588
Profit foregone 6,69,516

(b) Contract Account

Particulars (`) Particulars (`)
To Material issued 7,53,000 By Machine (Working 7,38,000
note 1)
” Wages 16,96,800 ” Material (in hand) 1,06,200
” Foreman’s salary 2,43,900 ” Works cost 31,47,000
(balancing figure)
” Machine 7,80,000
” Supervisor’s salary 1,08,000
(` 24,000 × 9)/2

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 ” Administrative 4,09,500
charges
39,91,200 39,91,200
” Works cost 31,47,000 ” Value of work 30,00,000
certified
” Costing P&L A/c 6,39,750 ” Cost of work 7,86,750
(Notional profit) uncertified
(Working Note 2)
37,86,750 37,86,750
Working notes:
1. Written down value of Machine:
` 7,80,000 -` 45,000 146 days
= × = ` 42,000
7 years 365 days
Hence, the value of machine after the period of 146 days = ` 7,80,000 – ` 42,000
= ` 7,38,000
2. The cost of 2/3 rd of the contract is ` 31,47,000
` 31,47,000
 Cost of 100% " " " " ×3 = ` 47,20,500
2
Cost of 50% of the contract which has been certified by the architect is ` 23,60,250. Also,
the cost of the contract, which has been completed but not certified by the architect is
` 7,86,750.
(c) The marginal cost (variable cost) of ` 17,600 is apportioned over the joint products P and Q in
the ratio of their physical quantity i.e. 200 : 240
200
Marginal cost for Product P : ` 17,600 × = ` 8,000
440
240
Marginal cost for Product Q : ` 17,600 × = ` 9,600
440
The fixed cost of ` 15,600 is apportioned over the joint products P and Q in the ratio of their
contribution margin i.e. 160 : 48 (Refer to working note)
Product P : ` 15,600 × 160/208 = ` 12,000
Product Q : ` 15,600 × 48/208 = ` 3,600
Working Note:
Computation of contribution margin ratio

Products Sales revenue Marginal cost Contribution

(`) (`) (`)
P 24,000 8,000 16,000
Q 14,400 9,600 4,800
(Refer to above)
Contribution ratio is 160 : 48

© The Institute of Chartered Accountants of India

 (d) Master Budget for the year ending _____
Particulars Amount (`) Amount (`)
Sales 1,20,00,000
Less: Cost of production:
Direct materials (60% of ` 1,20,00,000) 72,00,000
Direct wages (20 workers × ` 2,250 × 12 5,40,000
months)
Prime Cost 77,40,000
Fixed Factory Overhead:
Works manager’s salary (7,500 × 12) 90,000
Foreman’s salary (6,000 × 12) 72,000
Depreciation 1,89,000
Light and power 45,000 3,96,000
Variable Factory Overhead:
Stores and spares (2.5% of ` 1,20,00,000) 3,00,000
Repairs and maintenance 1,20,000
Sundry expenses (10% of ` 5,40,000) 54,000 4,74,000
Works Cost 86,10,000
Gross Profit (Sales – Works cost) 33,90,000
Less: Adm., selling and distribution expenses 5,40,000
Net Profit 28,50,000
2. (a)

Calculation of Labour overtime hours

Total hours required for production
X5 (5,000 x 2 hrs) 10,000
X6 (4,000 x 3 hrs) 12,000
X7 (3,000 x 4 hrs) 12,000
Wireless Charger (15,000 x 0.40 hrs) 6,000
40,000
Hours available (35,000)
Overtime 5,000
Statement of Profitability

Particulars Amount (`) Amount (`)

Sales
X5 (5,000 x 8,000) 4,00,00,000
X6 (4,000 x 9,000) 3,60,00,000
X7 (3,000 x 12,000) 3,60,00,000
Wireless Charger [(12,000 x 1,350) + (3,000 x 1,500) 2,07,00,000 13,27,00,000

© The Institute of Chartered Accountants of India

 Less: Variable cost
Material:
X5 (5,000 x 2,000)
X6 (4,000 x 2,500)
X7 (3,000 x 3,000)
Wireless Charger (15,000 x 300) 3,35,00,000
Labour:
X5 (5,000 x 1,000)
X6 (4,000 x 1,500)
X7 (3,000 x 2,000)
Wireless Charger (15,000 x 200)
Overtime (5,000 x 1,000) 2,50,00,000
Other variable overheads 1,25,00,000 7,10,00,000
Contribution 6,17,00,000
Less: Fixed Cost 1,00,00,000
Profit 5,17,00,000

(b) Workings:
1. Calculation of Standard Qty. of Explosives and Detonators for actual output:

Particulars Iron ore Overburden (OB) Total

SME:
A Actual Output 20,000 tonne 58,000 M3
B Standard Qty per unit 2.4 kg./tonne 1.9 kg./M3
C Standard Qty. for actual 48,000 kg. 1,10,200 kg. 1,58,200 kg.
production [A×B]
Detonators:
D Standard Qty per unit 2 pcs/ tonne 2 pcs/ M3
E Standard Qty. for actual 40,000 pcs. 1,16,000 pcs 1,56,000 pcs
production [A×D]

2. Calculation of Actual Price per unit of materials:

Material Quantity [A] Amount (`) [B] Rate (`) [C = B÷A]

SME 1,67,200 kg. 63,53,600 38.00

Detonators 1,18,400 pcs 24,27,200 20.50

(i) Computation of material price variance:

Material Price Variance = Actual Qty. × (Std. Price - Actual Price)
SME = 1,67,200 kg. × (`40 – `38) = ` 3,34,400 (F)

© The Institute of Chartered Accountants of India

 Detonators = 1,18,400 pcs × (`20 – `20.5) = ` 59,200 (A)
Total = ` 2,75,200 (F)
(ii) Computation of material quantity variance:
Material Qty. Variance = Std. Price × (Std. Qty for actual output - Actual Qty.)
SME = `40 × (1,58,200 kg. - 1,67,200 kg.) = ` 3,60,000 (A)
Detonators = `20 × (1,56,000 pcs -1,18,400 pcs) = ` 7,52,000 (F)
Total = ` 3,92,000 (F)
(iii) Computation of material cost variance:
Material cost variance = Std. cost – Actual Cost
Or, (Std. Price × Std. Qty) – (Actual Price × Actual Qty.)
SME = (`40 × 1,58,200 kg) – (`38 × 1,67,200 kg.)
= `63,28,000 – `63,53,600 = ` 25,600 (A)
Detonators = (`20 × 1,56,000 pcs) – (`20.50 × 1,18,400 pcs)
= `31,20,000 – `24,27,200 = ` 6,92,800 (F)
Total = ` 6,67,200 (F)
3. (a) (i) Computation of Value of Inventory as on 30th September 2021:
Date Particulars Units WAM (`) FIFO (`) LIFO (`)

01-07-21 Opening 12,500 75,00,000 75,00,000 75,00,000

Stock
(`600×12,500) (`600×12,500) (`600×12,500)

01-07-21 Purchases 25,000 1,43,25,000 1,43,25,000 1,43,25,000

(`573×25,000) (`573×25,000) (`573×25,000)

30-09-21 Purchases 12,500 78,75,000 78,75,000 78,75,000

(`630×12,500) (`630×12,500) (`630×12,500)

01-07-21 Issues/ 34,000 2,01,96,000* 1,98,19,500** 2,01,94,500***

to Consumption
30-09-21 (Balancing
figure)

30-09-21 Closing 16,000 95,04,000 98,80,500 95,05,500

Stock

` 75,00,000 + ` 1,43,25,000 + ` 78,75,000

Weighted average rate = = ` 594
(12,500 + 25,000 + 12,500) units
* ` 594 x 34,000 = ` 2,01,96,000
** ` 600 × 12,500 + ` 573 × 21,500 = ` 1,98,19,500
*** ` 630 × 12,500 + ` 573 × 21,500 = ` 2,01,94,500

© The Institute of Chartered Accountants of India

 (ii) Computation of Profit or Loss for the Quarter ended 30th September 2021
Particulars WAM (`) FIFO (`) LIFO (`)
Sales 2,19,30,000 2,19,30,000 2,19,30,000
Less: Consumption 2,01,96,000 1,98,19,500 2,01,94,500
Less: Administrative Exp. 5,62,500 5,62,500 5,62,500
Profit or Loss 11,71,500 15,48,000 11,73,000

(b) Statement Showing “Budgeted Cost per unit of the Product”

Activity Activity Cost Activity No. of Activity Deposits Loans Credit

(Budgeted) Driver Units of Rate (`) Cards
(`) Activity
Driver
(Budget)
ATM 10,40,000 No. of ATM 2,60,000 4.00 7,80,000 --- 2,60,000
Services Transaction
Computer 13,00,000 No. of 26,00,000 0.50 9,75,000 1,30,000 1,95,000
Processing Computer
processing
Transaction
Issuing 26,00,000 No. of 6,50,000 4.00 18,20,000 2,60,000 5,20,000
Statements Statements
Customer 4,68,000 Telephone 9,36,000 0.50 2,34,000 1,17,000 1,17,000
Inquiries Minutes
Budgeted 54,08,000 38,09,000 5,07,000 10,92,000
Cost
Units of Product (as estimated in the budget period) 76,180 16,900 18,200
Budgeted Cost per unit of the product 50 30 60
Working Note:
Activity Budgeted Remark
Cost (`)
ATM Services:
(a) Machine Maintenance
(b) Rents 5,20,000 − All fixed, no change.
(c) Currency Replenishment 2,60,000 − Fully fixed, no change.
Cost
Total 2,60,000 − Doubled during budget period.
10,40,000
Computer Processing 3,25,000 − ` 3,25,000 (half of ` 6,50,000) is
fixed and no change is expected.
9,75,000 − ` 3,25,000 (variable portion) is
expected to increase to three times
13,00,000 the current level.
Total

© The Institute of Chartered Accountants of India

 Issuing Statements 23,40,000 − Existing.
2,60,000 − 2.60 lakh statements are expected
to be increased in budgeted period.
For every single increase of
statement, one rupee is the
budgeted increase.
Total 26,00,000
Computer Inquiries 4,68,000 − Estimated to increase by 80%
during the budget period.
Total 4,68,000 (` 2,60,000 x 180%)

4. (a) Workings:
1. Maximum number of bottles that can be processed in a batch:
5,000 ltrs
=
Bottle volume
Large Medium Small
Qty (ltr) Max bottles Qty (ltr) Max bottles Qty (ml) Max bottles
3 1,666 1.5 3,333 600 8,333
For simplicity of calculation small fractions has been ignored.
2. Number of batches to be run:
Large Medium Small Total
A Demand 3,00,000 7,50,000 20,00,000
B Bottles per batch (Refer WN-1) 1,666 3,333 8,333
C No. of batches [A÷B] 180 225 240 645
For simplicity of calculation small fractions has been ignored.
3. Quantity of Material-W and Material C required to meet demand:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000
B Qty per bottle (Litre) 3 1.5 0.6
C Output (Litre) [A×B] 9,00,000 11,25,000 12,00,000 32,25,000
D Material-W per litre of 14 14 14
output (Litre)
E Material-W required (Litre) 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000
[C×D]
F Material-C required per litre 25 25 25
of output (ml)
G Material-C required (Litre) 22,500 28,125 30,000 80,625
[(C×F)÷1000]

© The Institute of Chartered Accountants of India

 4. No. of Man-shift required:
Large Medium Small Total
A No. of batches 180 225 240 645
B Hours required per batch (Hours) 2 2 2
C Total hours required (Hours) [A×B] 360 450 480 1,290
D No. of shifts required [C÷8] 45 57 60 162
E Total manshift [D×20 workers] 900 1,140 1,200 3,240
For simplicity of calculation small fractions has been ignored.
5. Power consumption in Kwh
Large Medium Small Total
For processing
A No. of batches 180 225 240 645
B Hours required per batch 1.75 1.75 1.75 1.75
(Hours)
C Total hours required (Hours) 315 393.75 420 1,128.75
[A×B]
D Power consumption per hour 90 90 90 90
(Kwh)
E Total Power consumption 28,350 35,437.5 37,800 1,01,587
(Kwh) [C×D]
F Per batch consumption* 157.5 157.5 157.5 157.5
(Kwh) [E÷A]
For set-up
G Hours required per batch 0.25 0.25 0.25 0.25
(Hours)
H Total hours required (Hours) 45 56.25 60 161.25
[A×G]
I Power consumption per hour 18 18 18 18
(Kwh) [20%×90]
J Total Power consumption 810 1,012.5 1,080 2,902.5
(Kwh) [H×I]
K Per batch consumption* 4.5 4.5 4.5 4.5
(Kwh) [J÷A]
* Per batch consumption can be directly calculated as [Hours required per batch x Power
consumption per hour]
Calculation of Profit/ loss per batch:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000 30,50,000
B Price per bottle (`) 150 90 50
C Sales value (`) [A×B] 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000

© The Institute of Chartered Accountants of India

 Direct Material cost:
E Material-W (`) [Qty in 63,00,000 78,75,000 84,00,000 2,25,75,000
WN-3 × `0.50]
F Material-C (`) [Qty in 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000
WN-3 × `1,000]
G [E+F] 2,88,00,000 3,60,00,000 3,84,00,000 10,32,00,000
H Direct Wages (`) [Man- 7,92,000 10,03,200 10,56,000 28,51,200
shift in WN-4 × × `880]
I Packing cost (`) 9,00,000 22,50,000 60,00,000 91,50,000
[A×`3]
Power cost (`)
J For processing (`) 1,98,450 2,48,062.5 2,64,600 7,11,112.5
[WN-5 × `7]
K For set-up time (`) 5,670 7,087.5 7,560 20,317.5
[WN-5 × `7]
L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430
M Other variable cost (`) 54,00,000 67,50,000 72,00,000 1,93,50,000
[No. of batch in WN-2 ×
`30,000]
N Total Variable cost 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630
per batch
[G+H+I+L+M]
O Profit/ loss before 89,03,880 2,12,41,650 4,70,71,840 7,72,17,370
fixed cost [C-N]
P Fixed Cost 4,90,00,000
Q Net Profit [O-P] 2,82,17,370
Computation of Economic Batch Quantity (EBQ):

2×D×S
EBQ=√
C

D = Annual Demand for the Product = Refer A below

S = Set-up cost per batch = Refer D below
C = Carrying cost per unit per annum =Refer E below
Particulars Large Medium Small
A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
B Power cost for set-up time (`) 31.50 31.50 31.50
[Consumption per batch in WN-5 × `7]
C Other variable cost (`) 30,000 30,000 30,000
D Total Set-up cost [B+C] 30,031.50 30,031.50 30,031.50
E Holding cost: 1.00 1.00 1.00
F EBQ (Bottle) 1,34,234 2,12,243 3,46,592

© The Institute of Chartered Accountants of India

 (b) Cost Sheet (For the month)
Level of Capacity 30% 100%
30,000 units 1,00,000 units
Per unit (`) Total (`) Per unit (`) Total (`)
Works Cost 1,900.00 5,70,00,000 1,550.00 15,50,00,000
Add: Fixed general administration 25.00 7,50,000 7.50 7,50,000
expenses
Add: Fixed marketing expenses 41.67 12,50,000 12.50 12,50,000
Add: Variable distribution cost 150.00 45,00,000 150.00 1,50,00,000
Add: Special Costs:
- Refreshments - - 5.00 5,00,000
- Gift items costs - - 150.00 1,50,00,000
- Television programme - - 100.00 1,00,00,000
sponsorship cost
- Customers’ prizes* - - 5.00 5,00,000
Cost of sales 2,116.67 6,35,00,000 1,980.00 19,80,00,000
Profit (Balancing figure) 633.33 1,90,00,000 520.00 5,20,00,000
Sales revenue 2,750.00 8,25,00,000 2,500.00 25,00,00,000
*Customers’ prize cost:
Amount (`)
1st Prize 2,50,000
2nd Prize 1,25,000
3rd Prize 50,000
Consolation Prizes (3 × ` 25,000) 75,000
Total 5,00,000

5. (a)
Dr. Process-A Account Cr.
Particulars Units (`) Particulars Units (`)
To Material 15,000 4,20,000 By Normal Loss A/c 900 13,860
introduced [(6% of 15,000 units)
x ` 15.40]
” Additional -- 36,400 ” Process-B A/c 14,100 5,82,540
material (` 41.31* × 14,100
units)
” Direct wages -- 56,000
” Production OH -- 84,000
15,000 5,96,400 15,000 5,96,400
*Cost per unit of completed units
` 5,96,400 - ` 13,860
= Total Cost − Re alisable value from normal loss = = ` 41.31
Inputs units − Normal loss units 15,000 units - 900 units

10

© The Institute of Chartered Accountants of India

 Dr. Process-B Account Cr.
Particulars Units (`) Particulars Units (`)
To Process-A A/c 14,100 5,82,540 By Normal Loss A/c 1,895 53,060
[(#13.44% of 14,100
units) x
` 28]
” Additional material -- 31,500 ” Process-C A/c 12,205 6,83,480
(` 56 × 12,205 units)
” Direct wages -- 49,000
” Production OH -- 73,500
14,100 7,36,540 14,100 7,36,540
# Calculation for % of wastage in process ‘B’:
Let’s consider number of units lost under process ‘B’ = b
Total Cost - Realisable value from normal loss
Now, = 56
Inputs units - Normal loss units
` 7,36,540- ` 28b
= ` 56
14,100 units - b
` 7,36,540 - ` 28b = ` 7,89,600 - ` 56b
28b = ` 53,060 => b = 1,895 units
1,895 units
% of wastage = = 13.44%
14,100 units

Dr. Process-C Account Cr.

Particulars Units (`) Particulars Units (`)
To Process-B A/c 12,205 6,83,480 By Normal Loss A/c 610 8,540
[(5% of 12,205 units)
x ` 14]
” Additional material -- 28,000 ” Finished Stock A/c 12,000 8,36,160
(` 69.68$ × 12,000
units)
” Direct wages -- 42,000
” Production OH -- 63,000
” Abnormal gain 405 28,220
(` 69.68$ × 405
units)
12,610 8,44,700 12,610 8,44,700
$Cost per unit of completed units
` 8,16,480 - ` 8,540
= Total Cost − Realisable value from normal loss = = ` 69.68
Inputs units − Normal loss units 12,205 units - 610 units

11

© The Institute of Chartered Accountants of India

 (b) Computation of Comprehensive Machine Hour Rate per Machine
Particulars Per Annum (`) Per Hour (`)
Standing Charges:
Depreciation (Working Note 2) 50,000
Factory Rent (` 5,000 x 12 months / 4) 15,000
Lighting of Factory (` 3,000 x 12 months / 4) 9,000
Operator Wages (` 10,000 x 12 months / 2) 60,000
Repairs and maintenance (` 2,000 x 4) 8,000
Insurance premium (` 5,00,000 x 3%) 15,000
Forman’s salary (` 2,500 x 12 x ⅙ / 4) 1,250
Other factory overhead (` 40,000 / 4) 10,000
1,68,250
Standing Charges per hour (` 1,68,250 / 1,500 hours) 112.17

Running Charges:
Power (80 units x ` 150 / 100) 120.00
Comprehensive Machine Hour Rate 232.17
Working Notes:
1. Computation of Total Operative Hours
Total Running Hours: 2,200
Less: Unproductive hours lost during repairs 50
Less: Unproductive hours Lost while Job Setting 650
Total Operative Hours 1,500 per annum
2. Calculation of Annual Depreciation
Purchase Cost – Estimated Scrap Value
Annual Depreciation =
Effective Life in Years
` 5,00,000 – ` 50,000
=
9 Years
= ` 50,000
6. (a)
Advantages Disadvantages
1. Time rate is guaranteed while there is 1. Incentive is not so strong as
opportunity for increasing earnings by with piece rate system. In fact
increasing production. the harder the worker works,
2. The system is equitable in as much as the the lesser he gets per piece.
employer gets a direct return for his efforts in 2. The sharing principle may not
improving production methods and providing be liked by employees.
better equipment.

12

© The Institute of Chartered Accountants of India

 (b)
S. No. Industry Method of costing
(i) Sugar manufacturing Process costing
(ii) Bridge Construction Contract Costing
(iii) Advertising Job costing
(iv) Car Assembly Multiple Costing (Combination of any method)
(c)
S. Service industry Unit of cost
No.
(i) Electricity Supply service Kilowatt- hour (kWh)
(ii) Hospital Patient per day, room per day or per bed, per operation etc.
(iii) Cinema Per ticket.
(iv) Hotels Guest Days or Room Days
(d) Advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation- The question of reconciling costing profit and financial profit
does not arise, as there is only one figure of profit.
(ii) Less efforts- Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming- No delay is caused in obtaining information as it is provided from
books of original entry.
(iv) Economical process- It is economical also as it is based on the concept of “Centralisation
of Accounting function”.
(e)
S. No. Fixed Budget Flexible Budget
1. It does not change with actual volume of It can be re-casted on the basis of
activity achieved. Thus it is known as rigid activity level to be achieved. Thus it
or inflexible budget. is not rigid.
2. It operates on one level of activity and under It consists of various budgets for
one set of conditions. It assumes that there different levels of activity.
will be no change in the prevailing
conditions, which is unrealistic.
3. Here as all costs like - fixed, variable and Here analysis of variance provides
semi-variable are related to only one level useful information as each cost is
of activity so variance analysis does not analysed according to its behaviour.
give useful information.
4. If the budgeted and actual activity levels Flexible budgeting at different levels
differ significantly, then the aspects like of activity facilitates the
cost ascertainment and price fixation do not ascertainment of cost, fixation of
give a correct picture. selling price and tendering of
quotations.
5. Comparison of actual performance with It provides a meaningful basis of
budgeted targets will be meaningless comparison of the actual
specially when there is a difference performance with the budgeted
between the two activity levels. targets.

13

© The Institute of Chartered Accountants of India

 Test Series: March, 2022
MOCK TEST PAPER –1
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi
medium. If a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.
Time Allowed – 3 Hours Maximum Marks – 100
1. Answer the following:
(a) SKY Company Ltd., not registered under GST, purchased material ‘RPP’ from a company,
registered under GST. The following information is available for one lot of 5,000 units of material
purchased:
Listed price of one lot ` 7,50,000
Trade discount @ 10% on Listed price.
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Road Tax paid ` 15,000
Freight and Insurance ` 51,000
Detention Charges ` 15,000
Commission and brokerage on purchases ` 30,000
Amount deposited for returnable containers ` 90,000
Amount of refund on returning the container ` 60,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
You are required to CALCULATE cost per unit of material purchased to SKY Company Ltd.
(b) The following expenses were incurred on a contract:
(`)
Materials purchased 7,20,000
Material drawn from stores 1,20,000
Wages 2,70,000
Plant issued 90,000
Chargeable expenses 90,000
Apportioned indirect expenses 30,000

1
 The contract was for ` 24,00,000 and it commenced on April 1, 2021. The value of the work
completed and certified upto 28th February, 2022 was ` 15,60,000 of which ` 12,48,000 was
received in cash, the balance being held back as retention money by the contractee. The value of
work completed subsequent to the architect’s certificate but before 31st March, 202 2 was ` 72,000.
There were also lying on the site materials of the value of ` 48,000. It was estimated that the value
of plant as at 31 st March, 2022 was ` 36,000.
You are required to COMPUTE notional profit on the contract till the year ended 31 st March, 2022.
(c) Mili Ltd., a manufacturing company, produces two main products and a by-product out of a joint
process. The ratio of output quantities to input quantities of direct material used in the joint process
remains consistent on yearly basis.
Company has employed the physical volume method to allocate joint production costs to the main
products. The net realizable value of the by-product is used to reduce the joint production costs
before the joint costs are allocated to the main products.
During a month, company incurred joint production costs of ` 15,00,000. The main products are
not marketable at the split off point and thus have to be processed further. Details of company’s
operation are given in the table below.

Particulars Product-Q Product-R By product

Monthly output in kg. 90,000 1,80,000 75,000
Selling price per kg. ` 50 ` 30 `5
Process costs ` 3,00,000 ` 4,50,000

FIND OUT the amount of joint product cost that Mili Ltd. would allocate to product-R by using the
physical volume method to allocate joint production costs?
(d) Chill Ltd. uses process costing to manufacture water density sensor for hydro sector. The following
information pertains to operations for the month of February:

Particulars Units
Beginning WIP, February 1 22,400
Started in production during February 1,40,000
Completed production during February 1,28,800
Ending work in progress, February 28 33,600
The beginning work in progress was 50% complete for materials and 30% complete for conversion
costs. The ending inventory was 80% complete for material and 30% complete for conversion
costs.
Costs pertaining to the month of February are as follows:
Beginning inventory costs are material ` 1,38,350, direct labour ` 1,50,600 and factory overhead
` 63,600
Cost incurred during February are material ` 23,95,000, direct labour ` 9,14,400, factory
overheads ` 19,55,800.
CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.
(ii) Cost per equivalent unit for conversion cost. (4 × 5 Marks = 20 Marks)

2
2. (a) The following data relates to the manufacturing project received for the budgeted output of 19,600
units. You are required to CALCULATE the selling price per unit covering a profit of 25% on the
selling price.
Direct materials: 40 sq. m. per unit @ ` 10.60 per sq. m.
Direct wages: Bonding department 48 hours per unit @ ` 25 per hour
Finishing department 30 hours per unit @ ` 19 per hour
Budgeted costs and hours per annum-
Variable overhead:
(`) Total hours
Bonding department 15,00,000 10,00,000
Finishing department 6,00,000 6,00,000

Fixed overhead-
(`)
Production 15,68,000
Selling and distribution 7,84,000
Administration (General) 3,92,000
(10 Marks)
(b) Following are the details given:
Budgeted Days 25
Budgeted Fixed Overheads 1,00,000
Budgeted Production 800 units per day
Actual Production 21,000 units
Fixed Overheads are absorbed @ ` 10 per hour.
Fixed overheads efficiency variance 10,000A
Fixed overheads calendar variance 8,000F
Fixed overheads cost variance 15,000A
You are required to CALCULATE:
(a) Actual Fixed Overheads
(b) Actual Days

(c) Actual Hours

(d) Fixed overheads Expenditure variance
(e) Fixed overheads volume variance

(f) Fixed overheads capacity variance (10 Marks)

3
3. (a) The standard time allowed for a certain piece of work is 240 hours. Normal wage rate is ` 75 per
hour.
The bonus system applicable to the work is as follows:

Percentage of time saved to time allowed (slab Bonus

rate)
(i) Up to the first 20% of time allowed 25% of the corresponding saving in time.
(ii) For and within the next 30% of time allowed 40% of the corresponding saving in time.
(iii) For and within the next 30% of time allowed 30% of the corresponding saving in time.
(iv) For and within the next 20% of time allowed 10% of the corresponding saving in time.

CALCULATE the total earnings of a worker over the piece of work and his earnings per hour when
he takes-
(a) 256 hours,
(b) 120 hours, and
(c) 24 hours respectively. (10 Marks)
(b) At budget activity of 80% of total capacity, a company earns a P/V ratio of 30% and a profit of 15%
of total sales. Due to covid pandemic resulting in poor demand, the company has to reduce its
selling price by 10%. The company was able to achieve a production and sales volume for the
year equivalent to 50% of total capacity. The sales value at this level was ` 27,00,000 at a reduced
price of ` 18 per unit. Due to reduction in production, the actual variable cost went up by 5% of
the budget.
You are required to:
(i) PREPARE statement of profitability at budget and actual activity.
(ii) FIND P/V ratio and BES (in ` and unit of the actual sales activity). (10 Marks)
4. (a) YSPP Transport Company is running local city buses. It has a fleet of 20 Buses. Each bus can
carry average 40 passengers per day and cover distance of 112.50 kms per day. Due to Covid-19
pandemic, the company is running 90% buses on average.
Below are the operational expenses worked out for the month of November, 2021:
Original cost per bus ` 48,00,000
Insurance for 20 buses ` 63,36,000 per annum
Diesel & Oil ` 10 per km.
Salary of drivers per bus ` 25,000
Salary of cleaners per bus ` 15,000
Tyres and tubes ` 12,58,040
Lubricants ` 10,70,000
Repairs ` 24,70,000
Road tax per bus ` 1,50,000
Administrative overhead ` 50,88,000 per annum

4
 Depreciation on buses is computed @ 20% using Straight Line Method.
Passenger tax is 15% on total taking.
Based on abovementioned information, you are required to COMPUTE the fare to be charged from
each passenger per kilometer assuming 25% margin on total taking (Total receipts from
passengers.) (10 Marks)
(b) The following data relates to manufacturing of a standard product during the month of February,
2022:
Particulars Amount (in `)
Stock of Raw material as on 01-02-2022 1,20,000
Work in Progress as on 01-02-2022 75,000
Purchase of Raw material 3,00,000
Carriage Inwards 30,000
Direct Wages 1,80,000
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000
Return of Raw Material 60,000
Carriage on return 9,000
Expenses for participation in Industrial exhibition 12,000
Maintenance of office building 3,000
Salary to office staff 37,500
Legal charges 3,750
Depreciation on Delivery van 9,000
Warehousing charges 2,250
Stock of Raw material as on 28-02-2022 45,000
Stock of Work in Progress as on 28-02-2022 36,000

• Store overheads on materials are 10% of material consumed.

• Factory overheads are 20% of the Prime cost.
• 10% of the output was rejected and a sum of ` 7,500 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were rectified
at an additional expenditure which is equivalent to 20% of proportionate direct wages.
• The total output was 8,000 units during the month.
You are required to PREPARE a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed.
(ii) Prime Cost
(iii) Work Cost
(iv) Cost of Production
(v) Cost of Sales (10 Marks)

5
5. (a) MG Ltd. manufactures three types of products namely A, B and C. The data relating to a period
are as under:

Particulars A B C
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (`) 1,350 1,200 1,800
Production (units) 3,000 5,000 20,000

Currently the company uses traditional costing method and absorbs all production overheads on
the basis of machine hours. The machine hour rate of overheads is ` 90 per hour. Direct labour
hour rate is ` 300 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:

Particulars A B C
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
(i) CALCULATE the cost per unit of each product using traditional method of absorbing all
production overheads on the basis of machine hours.
(ii) CALCULATE the cost per unit of each product using activity based costing principles.
(10 Marks)
(b) PM Ltd. has three Production Departments P 1, P2, P3 and two Service Departments S 1 and S2
details pertaining to which are as under:
P1 P2 P3 S1 S2

Direct wages (`) 60,000 40,000 60,000 30,000 3,900

Working hours 3,070 4,475 2,419 - -
Value of machines (`) 12,00,000 16,00,000 20,00,000 1,00,000 1,00,000
H.P. of machines 60 30 50 10 -
Light points 10 15 20 10 5
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500

6
 The following figures extracted from the accounting records are relevant:
(`)
Rent and Rates 1,00,000
General Lighting 12,000
Indirect Wages 38,780
Power 30,000
Depreciation on Machines 2,00,000
Sundries 1,93,900
The expenses of the service departments are allocated as under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -

DETERMINE the total cost of product X which is processed for manufacture in Departments P 1, P2
and P3 for 4, 5 and 3 hours respectively, given that its Direct Material Cost is ` 1,000 and Direct
Labour Cost is ` 600. (10 Marks)
6. Answer any four of the following:
(a) DISTINGUISH clearly between Bin cards and Stores Ledger.
(b) Some of the items of PR Company, a manufacturer of corporate office furniture, are provided below.
As the company is in the process of developing a formal cost accounting system, you are required
to CLASSIFY the items into three categories namely: (i) Cost tracing (ii) Cost allocation (iii) Non-
manufacturing item.
Carpenter wages, Depreciation - office building, Glue for assembly, Lathe department supervisor,
Metal brackets for drawers, Factory washroom supplies, Lumber, Samples for trade shows, Lathe
depreciation, Lathe operator wages.
(c) In Batch Costing, STATE how is Economic Batch Quantity determined?
(d) EXPLAIN what are the essential pre-requisites of Integrated accounting system?
(e) WHAT is inter-process profit? STATE its advantages and disadvantages. (4 × 5 =20 Marks)

7
 Test Series: March, 2022
MOCK TEST PAPER – 1
INTERMEDIATE: GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) Computation of Total cost of material purchased of SKY Manufacturing Company
Particulars Units (Amount in `)
Listed Price of Materials 5,000 7,50,000
Less: Trade discount @ 10% on invoice price (75,000)
6,75,000
Add: CGST @ 6% of ` 6,75,000 40,500
SGST @ 6% of ` 6,75,000 40,500
7,56,000
Add: Road Tax paid 15,000
Freight and Insurance 51,000
Commission and Brokerage Paid 30,000
Add: Cost of returnable containers:
Amount deposited ` 90,000
Less: Amount refunded ` 60,000 30,000
8,82,000
Add: Other Expenses @ 2% of Total Cost 18,000
8,82,000
( ×2)
98
Total cost of material 9,00,000
Less: Shortage due to Normal Loss @ 20% 1,000 -
Total cost of material of good units 4,000 9,00,000
Cost per unit (` 9,00,000/4,000 units) 225
Notes:
1. GST is payable on net price i.e., listed price less discount.
2. Detention charges/ fines imposed for non-compliance of rule or law by any statutory authority.
It is an abnormal cost and not included with cost of purchase.
3. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of
good units.
(b) Contract Account
Particulars (`) Particulars (`)
To Material purchased 7,20,000 By Work-in-progress:
” Stores issued 1,20,000 Value of work certified 15,60,000
” Wages 2,70,000 Cost of work uncertified 72,000
” Plant 90,000 ” Material unused 48,000
” Chargeable expenses 90,000 ” Plant less depreciation 36,000
1
 ” Indirect expenses 30,000
” Costing P&L A/c 3,96,000
(Notional profit) (bal. fig.)
17,16,000 17,16,000

(c) Calculation of Net joint costs to be allocated:

Particulars Amount (`)

Joint Costs 15,00,000
Less: Net Realizable value of by-product (75,000 × 5) 3,75,000
Net joint costs to be allocated 11,25,000
Therefore, amount of joint product cost that Mili Ltd. would allocate to the product -R by using the
physical volume method to allocate joint production costs:
Physical quantity of Product-R
= Total Quantity
×Net joint costs to be allocated
1,80,000 units
= 2,70,000 units ×11,25,000 = ` 7,50,000

(d) (i) Calculation of equivalent units of production:

Equivalent Units
Output
Input Details Units Units Material Conversion cost
Particulars
% Units % Units
Beginning WIP 22,400 From beginning 22,400 50 11,200 70 15,680
WIP
Unit Introduced 1,40,000 Completed 1,06,400 100 1,06,400 100 1,06,400
output
Closing W-I-P 33,600 80 26,880 30 10,080
Total 1,62,400 Total 1,62,400 1,44,480 1,32,160
(ii) Calculation of cost per equivalent unit for conversion costs
Particulars
Direct labour ` 9,14,400
Factory overheads ` 19,55,800
Total ` 28,70,200
Equivalent units 1,32,160 units
Cost per equivalent unit ` 21.72
2. (a) Decision making Cost Sheet (per unit)
Particulars (Amount in `) (Amount in `)
Direct materials 40 m 2 at ` 10.60 per m 2 424
Direct wages:
Bonding department- 48 hours at ` 25 per hour 1,200
Finishing department- 30 hours at ` 19 per hour 570 1,770
Prime Cost 2,194

2
 Variable overhead: *
Bonding department- 48 hours at ` 1.50 per hour 72
Finishing department- 30 hours at ` 1.00 per hour 30 102
Variable production cost 2,296
Fixed production overhead # 80
Total production cost 2,376
Selling and distribution cost $ 40
Administration cost $ 20 60
Total Cost 2,436
100
Selling price per unit = ` 2,436 × 75
= ` 3,248

Working Notes:
* Variable overhead rates-
15,00,000
Bonding: 10,00,000 hours = ` 1.50
6,00,000
Finishing: 6,00,000 hours
= ` 1.00
15,68,000
# Fixed production overhead rate per unit of output = 19,600 units
= ` 80
7,84,000
$ Selling and production cost per unit of output = = ` 40
19,600 units
3,92,000
Administration cost per unit of output = = ` 20
19,600 units

(b) (i) Fixed Overhead Cost Variance = (Std Fixed Overheads – Actual Fixed Overheads)
1,00,000
=(  21,000 units – Actual Fixed Overheads) = 15,000A
20,000

= (1,05,000 - Actual Fixed Overheads) = 15,000A

=> Actual Fixed Overheads = 1,20,000
(ii) Fixed Overhead Calendar Variance=(Actual Days – Budgeted Days) x Budgeted rate per day
1,00,000
= (Actual Days - 25)× 25
= 8,000F

= (Actual Days - 25) = 2

=> Actual Days = 27
(iii) Fixed Overhead Efficiency Variance =(Standard Hours for Actual Production – Actual Hours)
x Budgeted rate per hour
 10,000 
=  21,000 - Actual Hours   10 = 10,000A
 20,000 
= (10,500 – Actual Hours) = -1,000
=> Actual Hours = 11,500

3
 (iv) Fixed overheads Expenditure variance=(Budgeted Fixed Overheads – Actual Fixed Overheads)
= (1,00,000 – 1,20,000) = 20,000A
(v) Fixed overheads volume variance = (Budgeted units – Actual Units ) x Budgeted Rate per unit
1,00,000
= ( 20,000 − 21,000 )  = 5,000F
20,000

(vi) Fixed overheads capacity variance = (Budgeted Hours for Actual Days – Actual Hours)
x Budgeted Rate per Hour
 10,000 
=  27 − 11,500  10 = 7,000F
 25 
3. (a) Calculation of total earnings and earnings per hour:
Particulars (a) Time taken (b) Time taken (c) Time taken
is 256 hours is 120 hours is 24 hours
A. Time Allowed 240 hours 240 hours 240 hours
B. Time taken 256 hours 120 hours 24 hours
C. Time Saved (A-B) Nil 120 hours 216 hours
D. Bonus hours Nil 40.80 hours 64.80 hours
(Refer workings)
E. Hours to be paid (B+D) 256 hours 160.80 hours 88.80 hours
F. Wages rate per hour ` 75 ` 75 ` 75
G. Total earnings (E×F) ` 19,200 ` 12,060 ` 6,660
H. Earnings per hour (G÷B) ` 75 ` 100.50 ` 277.50
Working Notes:
Calculation of bonus hours:
Time saved 120 Time saved 216 hours
hours
For first 20% of time allowed i.e. 48 hours 12 12
(25% of 48 hours) (25% of 48 hours)
For next 30% of time allowed i..e. 72 hours 28.80 28.80
(40% of 72 hours) (40% of 72 hours)
For next 30% of time allowed i..e. 72 hours - 21.60
(30% of 72 hours)
For next 20% of time allowed i..e. 48 hours - 2.40
(10% of 24 hours)
Bonus hours 40.80 64.80
(b)
Actual Sales ` 27,00,000
Actual Selling Price per unit 18
Actual units (50%)
27,00,000
( ) 1,50,000
18
4
 Therefore, budgeted units (80%)
80
( 1,50,000  )
50 2,40,000
18
Budgeted Selling Price ( )
90% 20

(2,40,000 x 20) (1-.30) 33,60,000

Budgeted Variable cost per unit = 2,40,000 units
=2,40,000 units = ` 14

(i) Statement of profitability at budget and actual activity

Particulars Budget (80%) Actual (50%)

Units 2,40,000 1,50,000
Sales (`) (a) 48,00,000 27,00,000
Variable cost (`) (b) 33,60,000 22,05,000
Contribution (`) (c = a - b) 14,40,000 4,95,000
Fixed cost (`) (d) 7,20,000 7,20,000
Profit (`) (e = c – d) 7,20,000 (2,25,000)

(ii) Calculation of P/V ratio and BES

Contribution
P/V ratio =  100
Sales
4,95,000
=  100 = 18.33%
27,00,000

Fixed Cost
Break Even Sales (in `) =
P/v Ratio
7,20,000
= = ` 39,27,987
18.33%
Fixed Cost
Break Even Sales (in Units) =
Contribution per unit
7,20,000
= = 2,18,182 Units
3.3*
4,95,000
*Contribution per unit = 1,50,000 units
= 3.3 per unit

4. (a) Operating Cost Statement

Particulars Total Cost Per
Month (in `)
Fixed Charges:
Salary of Drivers (` 25,000 × 20 buses) 5,00,000
Salary of Cleaners (` 15,000 × 20 buses) 3,00,000
Road Tax (` 1,50,000 × 20 buses) 30,00,000
Insurance (` 63,36,000/12 months) 5,28,000

5
 48,00,000 × 20% × 20 buses 16,00,000
Depreciation( )
12 months
Administrative Overheads (` 50,88,000/12 months) 4,24,000
Total (A) 63,52,000
Variable Charges:
Diesel (60,750 km. × `10) 6,07,500
Tyres and Tubes 12,58,040
Lubricants 10,70,000
Repairs 24,70,000
Total (B) 54,05,540
Total Operating Cost (A+B) 1,17,57,540
Add: Passenger tax (Refer to WN-1) 29,39,385
Add: Profit (Refer to WN-1) 48,98,975
Total takings (C) 1,95,95,900
No. of passengers kms. in a month (D) 24,30,000
Cost per passenger km. (C/D) 8.06
Working Notes:
1. Let total takings be X then Passenger tax and profit will be as follows:
X = ` 1,17,57,540 + 0.15X + 0.25X
X – 0.40X = ` 1,17,57,540
1,17,57,540
X = = ` 1,95,95,900
0.60

Passenger tax = ` 1,95,95,900 × 0.15 = ` 29,39,385

Profit = ` 1,95,95,900 × 0.25 = ` 48,98,975
2. Total Kilometres to run during the month of November, 2021
= (112.50 km. × 30 days × 20 Buses) x 90% = 60,750 Kilometres
3. Total passenger Kilometres during the month of November, 2021
= 60,750 km. × 40 passengers = 24,30,000 Passenger- km.
(b) Statement of Cost for the month of February, 2022
Particulars Amount (`) Amount (`)
(i) Cost of Material Consumed:
Raw materials purchased (` 3,00,000 – ` 60,000) 2,40,000
Carriage inwards 30,000
Add: Opening stock of raw materials 1,20,000
Less: Closing stock of raw materials (45,000) 3,45,000
Direct Wages 1,80,000
Direct expenses:
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000 81,000

6
 (ii) Prime Cost 6,06,000
Carriage on return 9,000
Store overheads (10% of material consumed) 34,500
Factory overheads (20% of Prime cost) 1,21,200
Additional expenditure for rectification of 3,240 1,67,940
defective
products (refer working note)
Gross factory cost 7,73,940
Add: Opening value of W-I-P 75,000
Less: Closing value of W-I-P (36,000)
(iii) Works/ Factory Cost 8,12,940
Less: Realisable value on sale of scrap (7,500)
(iv) Cost of Production 8,05,440
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 8,05,440
Administrative overheads:
Maintenance of office building 3,000
Salary paid to Office staff 37,500
Legal Charges 3,750 44,250
Selling overheads:
Expenses for participation in Industrial exhibition 12,000 12,000
Distribution overheads:
Depreciation on delivery van 9,000
Warehousing charges 2,250 11,250
(v) Cost of Sales 8,72,940
Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Less: Rejected 10% 800 units
Finished product 7,200 units
Rectified units (10% of finished product) 720 units
2. Proportionate additional expenditure on 720 units
= 20% of proportionate direct wages
= 0.20 x (` 1,80,000/8,000) x 720
= ` 3,240

7
5. (a) (i) Statement Showing “Cost per unit - Traditional Method”

Particulars of Costs A B C
(`) (`) (`)
Direct Materials 1,350 1,200 1,800
Direct Labour [(4, 12, 8 hours)  ` 300] 1,200 3,600 2,400
Production Overheads [(10, 18, 14 hours)  ` 90] 900 1,620 1,260
Cost per unit 3,450 6,420 5,460
(ii) Statement Showing “Cost per unit - Activity Based Costing”
Products A B C
Production (units) 3,000 5,000 20,000
(`) (`) (`)
Direct Materials (1350, 1200, 1800) 40,50,000 60,00,000 3,60,00,000
Direct Labour (1200, 3600, 2400) 36,00,000 1,80,00,000 4,80,00,000
Machine Related Costs @ ` 27 per hour (30,000, 8,10,000 24,30,000 75,60,000
90,000, 2,80,000)
Setup Costs @ ` 1,44,000 per setup 28,80,000 14,40,000 28,80,000
(20, 10, 20)
Inspection Costs @ ` 72,000 per inspection (100, 72,00,000 28,80,000 43,20,000
40, 60)
Purchase Related Costs @ ` 11,250 per purchase 6,75,000 11,25,000 18,00,000
(60, 100, 160)
Total Costs 1,92,15,000 3,18,75,000 10,05,60,000
Cost per unit (Total Cost  Units) 6,405 6,375 5,028

Working Notes:
1. Number of Batches, Purchase Orders, and Inspections-

Particulars A B C Total
A. Production (units) 3,000 5,000 20,000
B. Batch Size (units) 150 500 1,000
C. Number of Batches [A. ÷ B.] 20 10 20 50
D. Number of Purchase Order per batch 3 10 8
E. Total Purchase Orders [C.  D.] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C.  F.] 100 40 60 200

2. Total Machine Hours-

Particulars A B C
A. Machine Hours per unit 10 18 14
B. Production (units) 3,000 5,000 20,000
C. Total Machine Hours [A.  B.] 30,000 90,000 2,80,000
8
 Total Machine Hours = 4,00,000
Total Production Overheads-
= 4,00,000 hrs.  ` 90 = ` 3,60,00,000
3. Cost Driver Rates-

Cost Pool % Overheads Cost Driver Cost Cost Driver Rate

Basis Driver
(`) (Units) (`)
Setup 20% 72,00,000 Number of 50 1,44,000 per Setup
batches
Inspection 40% 1,44,00,000 Number of 200 72,000 per
inspections Inspection
Purchases 10% 36,00,000 Number of 320 11,250 per
purchases Purchase
Machine 30% 1,08,00,000 Machine Hours 4,00,000 27 per Machine
Operation Hour
(b) Statement Showing Distribution of Overheads of PM Ltd.
Particulars Basis Total Production Departments Service
Departments
P1 P2 P3 S1 S2
(`) (`) (`) (`) (`) (`)
Direct wages Actual 33,900 - - - 30,000 3,900
Rent & rates Area 1,00,000 20,000 25,000 30,000 20,000 5,000
General Light points 12,000 2,000 3,000 4,000 2,000 1,000
lighting
Indirect wages Direct wages 38,780 12,000 8,000 12,000 6,000 780
Power H.P. 30,000 12,000 6,000 10,000 2,000 -
Depreciation of Value of 2,00,000 48,000 64,000 80,000 4,000 4,000
machines machines
Sundries Direct wages 1,93,900 60,000 40,000 60,000 30,000 3,900
6,08,580 1,54,000 1,46,000 1,96,000 94,000 18,580
Redistribution of Service Department’s Expenses over Production Departments
P1 P2 P3 S1 S2
(`) (`) (`) (`) (`)
Total overhead distributed as 1,54,000 1,46,000 1,96,000 94,000 18,580
above
Dept. S1 Overheads apportioned 18,800 28,200 37,600 (94,000) 9,400
(20:30:40:—:10)
Dept. S2 overheads apportioned 11,192 5,596 8,394 2,798 (27,980)

9
 (40:20:30:10:—)
Dept. S1 Overheads apportioned 560 839 1,119 (2,798) 280
(20:30:40:—:10)
Dept. S2 overheads apportioned 124 63 93 - (280)
(40:20:30:10:—)
1,84,676 1,80,698 2,43,206 - -
Working hours 3,070 4,475 2,419
Rate per hour 60.16 40.38 100.54
Determination of total cost of Product ‘X’
(`)
Direct material cost 1,000.00
Direct labour cost 600.00
Overhead cost (See working note) 744.14
2,344.14
Working Note:
Overhead cost
= (` 60.16 × 4 hrs.) + (` 40.38 × 5 hrs.) + (` 100.54 × 3 hrs.)
= ` 240.62 + ` 201.90 + ` 301.62 = ` 744.14
6. (a)
Bin Card Stores Ledger
It is maintained by the storekeeper in the It is maintained in cost accounting
store. department.
It contains only quantitative details of It contains information both in quantity and
material received, issued and returned to value.
stores.
Entries are made when transaction takes It is always posted after the transaction.
place.
Each transaction is individually posted. Transactions may be summarized and then
posted.
Inter-department transfers do not appear in Material transfers from one job to another job
Bin Card. are recorded for costing purposes.
(b)
Item Cost Tracing Cost Allocation Non-manufacturing
Carpenter wages √
Depreciation - office building √
Glue for assembly √
Lathe department supervisor √
Metal brackets for drawers √
Factory washroom supplies √
Lumber √
Samples for trade shows √

10
 Lathe depreciation √
Lathe operator wages √

(c) The economic batch size or Economic Batch Quantity may be determined by calculating the
total cost for a series of possible batch sizes and checking which batch size gives the minimum
cost. The objective here being to determine the production lot (Batch size) that optimizes on both
set up and inventory holding cots formula. The mathematical formula usually used for its
determination is as follows:

2DS
EBQ =
C
Where,
D = Annual demand for the product
S =Setting up cost per batch
C=Carrying cost per unit of production
(d) Essential pre-requisites for Integrated Accounts: The essential pre-requisites for integrated
accounts include the following steps-
1. The management’s decision about the extent of integration of the two sets of books. Some
concerns find it useful to integrate up to the stage of prime cost or factory cost while other
prefers full integration of the entire accounting records.
2. A suitable coding system must be made available so as to serve the accounting purposes
of financial and cost accounts.
3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses,
other adjustment necessary for preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial and cost
aspects of the accounts and an efficient processing of accounting documents should be
ensured.
(e) Inter-Process Profit: To control cost and to measure performance, different processes within an
organization are designated as separate profit centres. In this type of organizational structure,
the output of one process is transferred to the next process not at cost but at market value or cost
plus a percentage of profit. The difference between cost and the transfer price is known as inter -
process profits.
The advantages and disadvantages of using inter-process profit, in the case of process type
industries are as follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is
facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out.

11
 Test Series: November, 2021
MOCK TEST PAPER – 2
INTERMEDIATE (NEW): GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) (i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours worked Hourly wage rate (`) Wages (`)
(Hours)
M 380 90 34,200
N 100 100 10,000
O 540 110 59,400
(ii) Computation of Wages of each worker under piece work earning basis
Product Piece Worker-M Worker-N Worker-O
rate per
unit
(`) Units Wages (`) Units Wages (`) Units Wages (`)
A 22.50 210 4,725 - - 600 13,500
B 30.00 360 10,800 - - 1,350 40,500
C 45.00 460 20,700 250 11,250 - -
Total 36,225 11,250 54,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker-M, N
and O will be paid the wages as computed i.e. ` 36,225, ` 11,250 and ` 54,000
respectively.
Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per unit
unit (in minutes) minute (`) (`)
A 15 1.5 22.50
B 20 1.5 30.00
C 30 1.5 45.00

© The Institute of Chartered Accountants of India

 (b) (i) Optimal order quantity i.e. E.O.Q.

2 × 48,000 × 1,350
= = 86, 40,000 = 2,939 units
15
Relevant Cost of this order quantity `
48,000
Ordering cost = =16.33, say 17 orders at `1,350 22,950.00
2,939
1
Carrying Cost = × 2,939 × 15 22,042.50
2
Relevant cost 44,992.50
2 × 48,000 × 800
(ii) Revised EOQ = = 2,263 units
15
Relevant Cost of this order quantity `
48,000
Ordering cost = = 21.21, say 22 orders at ` 800 17,600.00
2,263
1
Carrying cost = × 2,263 × 15 16,972.50
2
Relevant cost 34,572.50
Differential cost = 44,992.50 – 34,572.50 = ` 10,420
(iii) In case of discount in purchase price, the total cost of Purchase cost, ordering
cost and carrying cost should be compared.
Original offer at ` 80 per unit Supplier offered at ` 72 per unit
` `
Purchase Cost (48,000 × 80) 38,40,000.00 Purchase cost 34,56,000.00
(48,000 × 72)
Ordering cost 22,950.00 Ordering cost 0.00
Carrying cost 22,042.50 Carrying cost 3,60,000.00
1
× 48,000 × 15
2
Total cost 38,84,992.50 38,16,000.00

© The Institute of Chartered Accountants of India

 This special offer at ` 72 per unit should be accepted as it saves ` 68,992.50 as
compared to original offer.
(c) Statement of Cost
First three Remaining nine months Total (`)
months (`) (`)
37,500 1,68,750 units 2,06,250 units
units
Direct material 18,75,000 84,37,500 1,03,12,500
Direct employee cost 6,00,000 27,00,000 33,00,000
Indirect- variable 3,75,000 16,87,500 20,62,500
expenses
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable
expenses
- For first three 1,20,000 1,20,000
months @ `
40,000 p.m.
- For remaining 6,30,000 6,30,000
nine months @
` 70,000* p.m.
Total cost 37,82,500 1,58,92,500 1,96,75,000
Desired profit - - 10,00,000
Sales value - - 2,06,75,000
Average selling price per 100.24
unit
* ` 40,000 for 50% capacity + ` 15,000 for 20% increase in capacity + ` 15,000 for 5% increase
in capacity (because cost is increased for every 20% increase in capacity or part thereof)
(d) Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate = ` 90,00,000 ÷ 5,000 units = ` 1,800 per unit
= ` 90,00,000 ÷ 30,000 hours = ` 300 per hour.
(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (4,800 units × 10 kg. × `200) - `1,05,00,000

© The Institute of Chartered Accountants of India

 = ` 96,00,000 – ` 1,05,00,000
= ` 9,00,000 (A)
(ii) Labour Cost Variance = (Std. Hours × Std. Rate) – (Actual Hours × Actual rate)
= (4,800 units × 6 hours × ` 110) – `31,00,000
= ` 31,68,000 – ` 31,00,000
= ` 68,000 (F)
(iii) Fixed Overhead Cost Variance= (Budgeted Rate × Actual Qty) – Actual Overhead
= (` 1,800 × 4,800 units) – ` 94,00,000
= ` 7,60,000 (A)
OR = (Budgeted Rate × Std. Hours) – Actual Overhead
= (` 300 × 4,800 units × 6 hours) – ` 94,00,000
= ` 7,60,000 (A)
(iv) Variable Overhead Cost Variance= (Std. Rate × Std. Hours) – Actual Overhead
= (4,800 units × 6 hours × ` 200) - ` 58,60,000
= ` 57,60,000 - ` 58,60,000
= ` 1,00,000 (A)
2. (a) (i) Statement of Equivalent Production (Average cost method)

Input Particulars Output Equivalent Production

(Units) Units
Materials Labour Overheads

(%*) Units** (% )* Units** (%)* Units**

40,000 Completed 28,000 100 28,000 100 28,000 100 28,000

WIP 12,000 100 12,000 33-1/3 4,000 33-1/3 4,000
40,000 40,000 40,000 32,000 32,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element

Particulars Materials Labour Overhead Total

Cost of opening work-in-progress (`) 12,00,000 2,00,000 2,00,000 16,00,000

© The Institute of Chartered Accountants of India

 Cost incurred during the month (`) 51,20,000 30,00,000 30,00,000 1,11,20,000
Total cost (`) : (a) 63,20,000 32,00,000 32,00,000 1,27,20,000
Equivalent units : (B) 40,000 32,000 32,000
Cost per equivalent unit (`) : C= (A ÷ 158 100 100 358
B)

(iii) Statement of Apportionment of cost

(`) (`)
Value of output transferred: (A) (28,000 units × ` 358) 1,00,24,000
Value of closing work-in-progress: (B)
Material (12,000 units × `158) 18,96,000
Labour (4,000 units × ` 100) 4,00,000
Overhead (4,000 units × ` 100) 4,00,000 26,96,000
Total cost : (A + B) 1,27,20,000

(iv) Process- A Account

Particulars Units ( `) Particulars Units (`)
To Opening WIP 8,000 16,00,000 By Completed 28,000 1,00,24,000
units
To Materials 32,000 51,20,000 By Closing WIP 12,000 26,96,000
To Labour 30,00,000
To Overhead 30,00,000
40,000 1,27,20,000 40,000 1,27,20,000
(b) Primary Distribution of Overheads
Item Basis Total Production Departments Service
Amount Departments
(`) X (`) Y (`) Z (`) A (`) B (`)
Indirect Material Actual 5,00,000 80,000 1,20,000 1,80,000 1,00,000 20,000
Indirect Labour Actual 10,40,000 1,80,000 2,00,000 2,80,000 2,40,000 1,40,000
Supervisor’s Salary Actual 3,84,000 - - 3,84,000 - -
Fuel & Heat Radiator 60,000 6,000 12,000 18,000 15,000 9,000
Sections
{2:4:6:5:3}

© The Institute of Chartered Accountants of India

 Power Kilowatt Hours 7,20,000 2,10,000 2,40,000 1,80,000 90,000 -
{7:8:6:3:-}
Rent & Rates Area (Sq. ft.) 6,00,000 1,76,000 1,60,000 1,20,000 96,000 48,000
{22:20:15:12:6}
Insurance Capital Value 72,000 16,000 24,000 20,000 4,000 8,000
of Assets
{4:6:5:1:2}
Canteen Charges No. of 2,40,000 48,000 56,000 96,000 24,000 16,000
Employees
{6:7:12:3:2}
Depreciation Capital Value 10,80,000 2,40,000 3,60,000 3,00,000 60,000 1,20,000
of Assets
{4:6:5:1:2}
Total overheads 46,96,000 9,56,000 11,72,000 15,78,000 6,29,000 3,61,000
Re-distribution of Overheads of Service Department A and B
Total overheads of Service Departments may be distributed using simultaneous
equation method
Let, the total overheads of A = ‘a’ and the total overheads of B = ‘b’
a = 6,29,000 + 0.10 b (i)
or, 10a - b = 62,90,000 [(i) x10]
b = 3,61,000 + 0.20 a (ii)
or, -0.20a + b = 3,61,000
Solving equation (i) & (ii)
10a - b = 62,90,000
-0.20a + b = 3,61,000
9.8a = 66,51,000
a = 6,78,673
Putting the value of ‘a’ in equation (ii), we get
b = 3,61,000 + 0.20 × 6,78,673
b = 4,96,735

© The Institute of Chartered Accountants of India

 Secondary Distribution of Overheads
Production Departments
X ( `) Y ( `) Z ( `)
Total overhead as per primary distribution 9,56,000 11,72,000 15,78,000
Service Department A (80% of 6,78,673) (3:3:2) 2,03,602 2,03,602 1,35,734
Service Department B (90% of 4,96,735) (5:8:5) 1,24,184 1,98,694 1,24,184
Total 12,83,786 15,74,296 18,37,918
3. (a) (i) Calculation of total project cost per day of concession period:
Activities Amount (` in lakh)

Site clearance 341.00

Land development and filling work 9,160.00
Sub base and base courses 10,520.00
Bituminous work 32,140.00
Bridge, flyovers, underpasses, Pedestrian subway, footbridge,
etc 28,110.00
Drainage and protection work 9,080.00
Traffic sign, marking and road appurtenance 8,810.00
Maintenance, repairing and rehabilitation 12,850.00
Environmental management 1,964.00
Total Project cost 1,12,975.00
Administration and toll plaza operation cost 1,200.00
Total Cost 1,14,175.00
Concession period in days (21 years × 365 days) 7,665
Cost per day of concession period (` in lakh) 14.90

(ii) Computation of toll fee:

Cost to be recovered per day = Cost per day of concession period + 15% profit on
cost
= ` 14,90,000 + ` 2,23,500 = ` 17,13,500
` 17,13,500
Cost per equivalent vehicle =
76,444 units (Refer working note)
= ` 22.42 per equivalent vehicle

© The Institute of Chartered Accountants of India

 Vehicle type-wise toll fee:
Sl. Type of vehicle Equivalent cost Weight Toll fee per vehicle
No. [A] [B] [A×B]

1. Two wheelers `22.42 1 22.42

2. Car and SUVs `22.42 4 89.68
3. Bus and LCV `22.42 6 134.52
4. Heavy commercial vehicles `22.42 9 201.78
Working Note:
The cost per day has to be recovered from the daily traffic. The each type of
vehicle is to be converted into equivalent unit. Let’s convert all vehicle types
equivalent to Two-wheelers..
Sl. Type of vehicle Daily traffic Weight Ratio Equivalent Two-
No. volume [A] [B] wheeler [A×B]
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial vehicles 816 0.45 9 7,344
Total 76,444
(b) Cost Ledger Control Account

Particulars (` in Particulars (` in
‘000) ‘000)
To Costing P&L A/c 2,70,000 By Balance b/d 3,24,000
To Building Construction A/c 26,400 By Stores Ledger control A/c 24,000
To Balance c/d 2,89,800 By Wages Control A/c 90,000
By Factory overhead control 96,000
A/c
By Royalty A/c 3,000
By Selling. Distribution and 15,000
Administration overheads
By Costing P&L A/c 34,200
5,86,200 5,86,200

© The Institute of Chartered Accountants of India

 Stores Ledger Control Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Balance b/d 48,000 By WIP control A/c 30,000
To Cost Ledger control A/c 24,000 By Factory overheads 3,600
control A/c
By Building construction A/c 2,400
By Factory overhead control 3,000
A/c (loss) (bal. fig.)
By Balance c/d 33,000
72,000 72,000

Wages Control Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Cost Ledger control A/c 90,000 By Factory overhead control 24,000
A/c
By Building Construction A/c 6,000
By WIP Control A/c (bal. fig.) 60,000
90,000 90,000

Factory Overhead Control Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Stores Ledger control A/c 3,600 By Building Construction A/c 12,000
To Wages Control A/c 24,000 By Costing P&L A/c 4,800
To Cost Ledger control A/c 96,000 By WIP Control A/c (bal. fig) 1,09,800
To Stores Ledger control A/c 3,000
(loss)
1,26,600 1,26,600

Royalty Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Cost Ledger control A/c 3,000 By WIP Control A/c 3,000
3,000 3,000

© The Institute of Chartered Accountants of India

 Work-in-process Control Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Balance b/d 12,000 By Finished goods control 1,99,800
A/c (bal. fig)
To Stores Ledger control A/c 30,000
To Wages Control A/c 60,000
To Factory overhead control A/c 1,09,800
To Royalty A/c 3,000 By Balance c/d 15,000
2,14,800 2,14,800

Finished Goods Control Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Balance b/d 2,58,000 By Cost of Goods Sold A/c 2,16,000
(Refer working note)
To WIP control A/c 1,99,800 By Balance c/d 2,41,800
4,57,800 4,57,800

Cost of Goods Sold Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Finished Goods control A/c 2,16,000 By Cost of sales A/c 2,16,000
2,16,000 2,16,000

Selling, Distribution and Administration Overhead Control Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 15,000 By Cost of sales A/c 15,000
15,000 15,000

Cost of Sales Account

Particulars (` in ‘000) Particulars (` in ‘000)
To Cost of Goods Sold A/c 2,16,000 By Costing P&L A/c 2,31,000
To Selling, Distribution and 15,000
Administration A/c
2,31,000 2,31,000

10

© The Institute of Chartered Accountants of India

 Costing P&L Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Cost of Sales A/c 2,31,000 By Cost Ledger control A/c 2,70,000
To Factory overhead control A/c 4,800
To Cost Ledger control A/c 34,200
2,70,000 2,70,000

Building Construction Account

Particulars (` in ‘000) Particulars (` in ‘000)

To Balance b/d 6,000 By Cost Ledger control A/c 26,400
To Stores Ledger control A/c 2,400
To Wages Control A/c 6,000
To Factory overhead control A/c 12,000
26,400 26,400

Trial Balance

Particulars Dr. Cr.

(` in ‘000) (` in ‘000)
Stores Ledger Control A/c 33,000
WIP Control A/c 15,000
Finished Goods Control A/c 2,41,800
Cost Ledger Control A/c 2,89,800
2,89,800 2,89,800

Working Note:
` 2,70,000 × 80
Cost of Goods sold = = ` 2,16,000
100

11

© The Institute of Chartered Accountants of India

 4. (a) Statement of Cost of G Ltd. for the year ended 31st March, 2021:
Sl. No. Particulars Amount (`) Amount (`)

(i) Material Consumed:

- Raw materials purchased 20,00,00,000
- Freight inward 22,41,200
Add: Opening stock of raw materials 36,00,000
Less: Closing stock of raw materials (19,20,000) 20,39,21,200
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 58,40,000
(iii) Direct expenses:
- Royalty paid for production 3,45,200
- Amount paid for power & fuel 9,24,000
- Job charges paid to job workers 16,24,000 28,93,200
Prime Cost 21,26,54,400
(iv) Works/ Factory overheads:
- Stores and spares consumed 2,24,000
- Repairs & Maintenance paid for 96,000
plant & machinery
- Insurance premium paid for plant 62,400
& machinery
- Insurance premium paid for 36,200
factory building
- Expenses paid for pollution
control and engineering & maintenance 53,200 4,71,800
Gross factory cost 21,31,26,200
Add: Opening value of W-I-P 18,40,000
Less: Closing value of W-I-P (17,40,000)
Factory Cost 21,32,26,200
(v) Quality control cost:
- Expenses paid for quality control 39,200
check activities
(vi) Research & development cost paid 36,400
improvement in production process

12

© The Institute of Chartered Accountants of India

 (vii) Less: Realisable value on sale of scrap (1,72,000)
and waste
(viii) Add: Primary packing cost 1,92,000
Cost of Production 21,33,21,800
Add: Opening stock of finished goods 22,00,000
Less: Closing stock of finished goods (36,40,000)
Cost of Goods Sold 21,18,81,800
(ix) Administrative overheads:
- Depreciation on office building 1,12,000
- Salary paid to General Manager 25,12,000 26,24,000
(x) Selling overheads:
- Repairs & Maintenance paid for 36,000
sales office building
- Salary paid to Manager- Sales & 20,24,000
Marketing
- Performance bonus paid to sales
staffs 7,20,000 27,80,000
(xi) Distribution overheads:
- Packing cost paid for re-
distribution of finished goods 2,24,000
Cost of Sales 21,75,09,800

(b) (i) Computation of PV ratio, contribution and break-even sales for existing
product mix
Products
Total
S T U
Selling Price (`) 600 800 400
Less: Variable Cost (`) 300 400 240
Contribution per unit (`) 300 400 160
P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 25% 35% 40%
Contribution per rupee of sales
12.5% 17.5% 16% 46%
(P/V Ratio × Sales Mix)

13

© The Institute of Chartered Accountants of India

 Present Total Contribution (` 1,20,00,000 × 46%) `55,20,000
Less: Fixed Costs `36,00,000
Present Profit `19,20,000
Present Break Even Sales (` 36,00,000/0.46) ` 78,26,087
(ii) Computation of PV ratio, contribution and break-even sale for proposed
product mix
Products
S T M Total
Selling Price (`) 600 800 600
Less: Variable Cost (`) 300 400 300
Contribution per unit (`) 300 400 300
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 40% 35% 25%
Contribution per rupee of sales
20% 17.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution (`1,28,00,000 x 50%) `64,00,000
Less: Fixed Costs `36,00,000
Proposed Profit `28,00,000
Proposed Break Even Sales (`36,00,000/0.50) `72,00,000
5. (a) (i) Profit Statement using Absorption costing method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit (`) 45 90 70
C. Sales Value (`) [A×B] 45,00,000 72,00,000 42,00,000 1,59,00,000
D. Direct cost per unit (`) 25 45 50
E. Direct Cost (`) [A×D] 25,00,000 36,00,000 30,00,000 91,00,000
F. Overheads:
(i) Machine department (`) 12,00,000 12,80,000 12,00,000 36,80,000
(Working note-1)

14

© The Institute of Chartered Accountants of India

 (ii) Assembly department (`) 15,00,000 8,00,000 4,50,000 27,50,000
(Working note-1)
G. Total Cost (`) [E+F] 52,00,000 56,80,000 46,50,000 1,55,30,000
H. Profit (C-G) (7,00,000) 15,20,000 (4,50,000) 3,70,000
(ii) Profit Statement using Activity based costing (ABC) method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit (`) 45 90 70
C. Sales Value (`) [A×B] 45,00,000 72,00,000 42,00,000 1,59,00,000
D. Direct cost per unit (`) 25 45 50
E. Direct Cost (`) [A×D] 25,00,000 36,00,000 30,00,000 91,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (`) 10,50,000 11,20,000 10,50,000 32,20,000
(ii) Assembly services (`) 12,00,000 6,40,000 3,60,000 22,00,000
(iii) Set-up costs (`) 2,25,000 1,50,000 75,000 4,50,000
(iv) Order processing (`) 1,10,000 1,20,000 1,30,000 3,60,000
(v) Purchasing (`) 75,000 87,500 37,500 2,00,000
G. Total Cost (`) [E+F] 51,60,000 57,17,500 46,52,500 1,55,30,000
H. Profit (`) (C-G) (6,60,000) 14,82,500 (4,52,500) 3,70,000
Working Notes:
(1)
Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per 3 4 5
unit
C. Total Machine hours 3,00,000 3,20,000 3,00,000 9,20,000
[A×B]
D. Rate per hour (`) 4 4 4

15

© The Institute of Chartered Accountants of India

 E. Machine Dept. cost 12,00,000 12,80,000 12,00,000 36,80,000
[C×D]
F. Labour hours per unit 6 4 3
G. Total labour hours 6,00,000 3,20,000 1,80,000 11,00,000
[A×F]
H. Rate per hour (`) 2.5 2.5 2.5
I Assembly Dept. cost 15,00,000 8,00,000 4,50,000 27,50,000
[G×H]
` 36,80,000
Machine hour rate = =`4
9,20,000 hours
` 27,50,000
Labour hour rate = = ` 2.5
11,00,000 hours
2. Calculation of cost driver rate

Cost Pool Amount (`) Cost Driver Quantity Driver

rate (`)
Machining services 32,20,000 Machine hours 9,20,000 hours 3.50
Assembly services 22,00,000 Direct labour 11,00,000 2.00
hours
hours
Set-up costs 4,50,000 Machine set- 9,000 set-ups 50.00
ups
Order processing 3,60,000 Customer 7,200 orders 50.00
orders
Purchasing 2,00,000 Purchase 800 orders 250.00
orders
3. Calculation of activity-wise cost
Products
X Y Z Total
A. Machining hours (Refer Working 3,00,000 3,20,000 3,00,000 9,20,000
note-1)
B. Machine hour rate (`) (Refer 3.5 3.5 3.5
Working note-2)
C. Machining services cost (`) 10,50,000 11,20,000 10,50,000 32,20,000
[A×B]

16

© The Institute of Chartered Accountants of India

 D. Labour hours (Refer Working 6,00,000 3,20,000 1,80,000 11,00,000
note-1)
E. Labour hour rate (`) (Refer 2 2 2
Working note-2)
F. Assembly services cost (`) 12,00,000 6,40,000 3,60,000 22,00,000
[D×E]
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (`) (Refer 50 50 50
Working note-2)
I. Set-up cost (`) [G×H] 2,25,000 1,50,000 75,000 4,50,000
J. Customer orders 2,200 2,400 2,600 7,200
K. Rate per order (`) (Refer 50 50 50
Working note-2)
L. Order processing cost (`) 1,10,000 1,20,000 1,30,000 3,60,000
[J×K]
M. Purchase orders 300 350 150 800
N. Rate per order (`) (Refer 250 250 250
Working note-2)
O. Purchasing cost (`) [M×N] 75,000 87,500 37,500 2,00,000
(b) Workings
Statement Showing “Total Variable Cost for the year”
Particulars Amount
(`)
Estimated Sales Revenue 1,51,20,000
Less: Desired Profit Margin on Sale @ 20% 30,24,000
Estimated Total Cost 1,20,96,000
Less: Fixed Selling and Distribution Overheads 34,56,000
Total Variable Cost 86,40,000
Statement Showing “Variable Cost per unit”
Particulars Variable Cost
p.u. (`)
Direct Materials:
A: 6 Kg. @ `80 per kg. 480

17

© The Institute of Chartered Accountants of India

 B: 3 Kg. @ `50 per kg. 150
Labour Cost:
Machine Shop: 4 hrs. @ `70 per hour 280
Assembly Shop: 2 hrs. @ `35 per hour 70
Factory Overheads: 20% of (`280 + `70) 70
Variable Selling & Distribution Expenses 30
Total Variable Cost per unit 1,080

(i) Calculation of number of units of product proposed to be sold and selling

price per unit:
Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ` 86,40,000 / ` 1,080
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ` 1,51,20,000 / 8,000 units
= ` 1,890
(ii) Production Budget (units)
Particulars Units
Budgeted Sales 8,000
Add: Closing Stock 3,000
Total Requirements 11,000
Less: Opening Stock (2,500)
Required Production 8,500
(iii) Materials Purchase Budget (Kg.)
Particulars Material Material
A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)
Quantity to be purchased 51,500 27,000

18

© The Institute of Chartered Accountants of India

 6. (a) Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of
joint costs to joint products upto the split off point. It is difficult to apply if the market
value of the product at the point of separation is not available. It is useful method
where further processing costs are incurred disproportionately.
Net realizable value Method: From the sales value of joint products (at finished stage)
the followings are deducted:
− Estimated profit margins
− Selling & distribution expenses, if any
− Post- split off costs.
The resultant figure so obtained is known as net realizable value of joint products. Joint
costs are apportioned in the ratio of net realizable value.
(b) Cost classification based on variability
(i) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuations in
the levels of activity (output or turnover). They do not tend to increase or decrease
with the changes in output. For example, rent, insurance of factory building etc.,
remain the same for different levels of production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs incurred
in a particular responsibility centre can be influenced by the action of the executive
heading that responsibility centre. For example, direct costs comprising direct
labour, direct material, direct expenses and some of the overheads are generally
controllable by the shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure which
is apportioned to a machine shop is not to be controlled by the machine shop
foreman.

19

© The Institute of Chartered Accountants of India

 (c) Cost-Plus Contracts: These contracts provide for the payment by the contractee of the
actual cost of construction plus a stipulated profit, mutually decided between the two
parties.
The main features of these contracts are as follows:
(i) The practice of cost-plus contracts is adopted in the case of those contracts where
the probable cost of the contracts cannot be ascertained in advance with a
reasonable accuracy.
(ii) These contracts are preferred when the cost of material and labour is not steady
and the contract completion may take number of years.
(iii) The different costs to be included in the execution of the contract are mutually
agreed, so that no dispute may arise in future in this respect. Under such type of
contracts, contractee is allowed to check or scrutinize the concerned books,
documents and accounts.
(iv) Such a contract offers a fair price to the contractee and also a reasonable profit to
the contractor.
The contract price here is ascertained by adding a fixed and mutually pre-decided
component of profit to the total cost of the work.
(d) Salient features of Budget Manual
• Budget manual contains much information which is required for effective budgetary
planning.
• A budget manual is a collection of documents that contains key information for
those involved in the planning process.
• An introductory explanation of the budgetary planning and control process,
including a statement of the budgetary objective and desired results is included in
Budget Manual
• Budget Manual contains a form of organisation chart to show who is responsible
for the preparation of each functional budget and the way in which the budgets are
interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets,
with explanations concerning their completion is included in Budget Manual.

20

© The Institute of Chartered Accountants of India

 Test Series: November, 2021
MOCK TEST PAPER –2
INTERMEDIATE (NEW): GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium. If
a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.

Time Allowed – 3 Hours Maximum Marks – 100

1. Answer the following:

(a) The following particulars have been compiled in respect of three workers:
M N O
Actual hours worked 380 100 540
Hourly rate of wages (in `) 90 100 110
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -
Standard time allowed per unit of each product is:
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1.50.
You are required to CALCULATE the wages of each worker under:
(i) Guaranteed hourly rate basis.
(ii) Piece work earning basis but guaranteed at 75% of basic pay (Guaranteed hourly rate if
his earnings are less than 50% of basic pay.)
(b) The annual demand for an item of raw material is 48,000 units and the purchase price is
` 80 per unit. The cost of processing an order is ` 1,350 and the annual cost of storage is
` 15 per unit.
(i) DETERMINE is the optimal order quantity and total relevant cost for the order?
(ii) If the cost of processing an order is ` 800 and all other data remain same, then
DETERMINE the differential cost?
(iii) If the supplier offers bulk purchase of 48,000 units at a price of ` 72 and cost of placing the
is Nil, SHOULD the order be accepted?
(c) A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of
production are as under:
Direct material ` 50 per unit
Direct employee cost ` 16 per unit
1

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 Indirect expenses:
- Fixed ` 32,50,000 per annum
- Variable ` 10 per unit
- Semi-variable ` 40,000 per month up to 50% capacity and ` 15,000 for
every 20% increase in the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to
ensure a profit of `10,00,000 for the year, DETERMINE the average selling price at which
each unit should be quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity.
(d) JK Ltd. has furnished the following standard cost data per unit of production:
Material 10 kg @ ` 200 per kg.

Labour 6 hours @ ` 110 per hour

Variable overhead 6 hours @ ` 200 per hour.
Fixed overhead ` 90,00,000 per month (Based on a normal volume of 30,000
labour hours.)
The actual cost data for the month of September 2021 are as follows:
Material used 50,000 kg at a cost of ` 1,05,00,000.
Labour paid ` 31,00,000 for 31,000 hours
Variable overheads ` 58,60,000
Fixed overheads ` 94,00,000
Actual production 4,800 units.
CALCULATE:
(i) Material Cost Variance.
(ii) Labour Cost Variance.
(iii) Fixed Overhead Cost Variance.
(iv) Variable Overhead Cost Variance. (4 × 5 Marks = 20 Marks)
2. (a) Following information is available regarding process A for the month of October, 2021:
Production Record:
Units in process as on 01.10.2021 8,000
(All materials used, 25% complete for labour and overhead)
New units introduced 32,000
Units completed 28,000
Units in process as on 31.10.2021 12,000
(All materials used, 33-1/3% complete for labour and overhead)

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 Cost Records:
Work-in-process as on 01.10.2021 (`)
Materials 12,00,000
Labour 2,00,000
Overhead 2,00,000
16,00,000
Cost during the month
Materials 51,20,000
Labour 30,00,000
Overhead 30,00,000
1,11,20,000
Presuming that average method of inventory is used, PREPARE:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A. (10 Marks)
(b) The following account balances and distribution of indirect charges are taken from the
accounts of a manufacturing concern for the year ending on 31st March, 2021:
Total Production Departments Service
Item Amount Departments
(`) X (`) Y (`) Z (`) A (`) B (`)
Indirect Material 5,00,000 80,000 1,20,000 1,80,000 1,00,000 20,000
Indirect Labour 10,40,000 1,80,000 2,00,000 2,80,000 2,40,000 1,40,000
Supervisor's Salary 3,84,000 - - 3,84,000 - -
Fuel & Heat 60,000
Power 7,20,000
Rent & Rates 6,00,000
Insurance of Assets 72,000
Canteen Charges 2,40,000
Depreciation 10,80,000
The following departmental data are also available:
Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of
Assets (`) 40,00,000 60,00,000 50,00,000 10,00,000 20,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20

© The Institute of Chartered Accountants of India

 Expenses charged to the service departments are to be distributed to other departments by
the following percentages:
X Y Z A B
Department A (%) 30 30 20 - 20
Department B (%) 25 40 25 10 -
PREPARE an overhead distribution statement to show the total overheads of production
departments after re-apportioning service departments' overhead by using simultaneous
equation method. Show all the calculations to the nearest rupee. (10 Marks)
3. (a) MKL Infrastructure built and operates 110 k.m. highway on the basis of Built-Operate-
Transfer (BOT) for a period of 21 years. A traffic assessment has been carried out to
estimate the traffic flow per day which shows the following figures:
Sl. No. Type of vehicle Daily traffic volume
1. Two wheelers 44,500
2. Car and SUVs 3,450
3. Bus and LCV 1,800
4. Heavy commercial vehicles 816
The following is the estimated cost of the project:
Sl. no. Activities Amount
(` in lakh)
1 Site clearance 341.00
2 Land development and filling work 9,160.00
3 Sub base and base courses 10,520.00
4 Bituminous work 32,140.00
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 28,110.00
6 Drainage and protection work 9,080.00
7 Traffic sign, marking and road appurtenance 8,810.00
8 Maintenance, repairing and rehabilitation 12,850.00
9 Environmental management 1,964.00
Total Project cost 1,12,975.00
An average cost of `1,200 lakh has to be incurred on administration and toll plaza operation.
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following
weights has been assigned to the passing vehicles:
Sl. No. Type of vehicle
1. Two wheelers 5%
2. Car and SUVs 20%
3. Bus and LCV 30%
4. Heavy commercial vehicles 45%
Required:
(i) CACULATE the total project cost per day of concession period.

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 (ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company wants
earn a profit of 15% on total cost.
[Note: Concession period is a period for which an infrastructure is allowed to operate and recover its
investment] (10 Marks)
(b) XYZ Ltd. maintains a non-integrated accounting system for the purpose of management
information. The following are the data related with year 2020-21:
Particulars Amount (‘000)
Opening balances:
- Stores ledger control A/c 48,000
- Work-in-process control A/c 12,000
- Finished goods control A/c 2,58,000
- Building construction A/c 6,000
- Cost ledger control A/c 3,24,000
During the year following transactions took place:
Materials:
- Purchased 24,000
- Issued to production 30,000
- Issued to general maintenance 3,600
- Issued to building construction 2,400
Wages:
- Gross wages paid 90,000
- Indirect wages paid 24,000
- For building construction 6,000
Factory overheads:
- Actual amount incurred (excluding items shown above) 96,000
- Absorbed in building construction 12,000
- Under-absorbed 4,800
Royalty paid 3,000
Selling distribution and administration overheads 15,000
Sales 2,70,000
At the end of the year, the stock of raw material and work-in-process was ` 33,00,000, and
`15,00,000 respectively. The loss arising in the raw material account is treated as factory
overheads. The building under construction was completed during the year. Gross profit
margin is 20% on sales.
Required:
PREPARE the relevant control accounts to record the above transactions in the cost ledger
of the company. (10 Marks)

© The Institute of Chartered Accountants of India

 4. (a) G Ltd. has the following expenditures for the year ended 31 st March, 2021:
Sl. No. Amount (`) Amount (`)
(i) Raw materials purchased 20,00,00,000
(ii) Freight inward 22,41,200
(iii) Wages paid to factory workers 58,40,000
(iv) Royalty paid for production 3,45,200
(v) Amount paid for power & fuel 9,24,000
(vi) Job charges paid to job workers 16,24,000
(vii) Stores and spares consumed 2,24,000
(viii) Depreciation on office building 1,12,000
(ix) Repairs & Maintenance paid for: 96,000
- Plant & Machinery
- Sales office building 36,000 1,32,000
(x) Insurance premium paid for:
- Plant & Machinery 62,400
- Factory building 36,200 98,600
(xi) Expenses paid for quality control check 39,200
activities
(xii) Research & development cost paid 36,400
improvement in production process
(xiii) Expenses paid for pollution control and 53,200
engineering & maintenance
(xiv) Salary paid to Sales & Marketing Managers: 20,24,000
(xv) Salary paid to General Manager 25,12,000
(xvi) Packing cost paid for:
- Primary packing necessary to 1,92,000
maintain quality
- For re-distribution of finished goods 2,24,000 4,16,000
(xvii) Performance bonus paid to sales staffs 7,20,000
(xviii) Value of stock as on 1st April, 2020:
- Raw materials 36,00,000
- Work-in-process 18,40,000
- Finished goods 22,00,000 76,40,000
(xix) Value of stock as on 31st March, 2021:
- Raw materials 19,20,000
- Work-in-process 17,40,000
- Finished goods 36,40,000 73,00,000
Amount realized by selling of scrap and waste generated during manufacturing process –
`1,72,000/-

© The Institute of Chartered Accountants of India

 From the above data you are requested to PREPARE Statement of cost for G Ltd. for the
year ended 31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of
Production, (iv) Cost of goods sold and (v) Cost of sales. (10 Marks)
(b) A Limited manufactures three different products and the following information has been
collected from the books of accounts:
Products
S T U
Sales Mix 25% 35% 40%
Selling Price ` 600 ` 800 ` 400
Variable Cost ` 300 ` 400 ` 240
Total Fixed Costs ` 36,00,000
Total Sales ` 1,20,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of
Product U and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 40% 35% 25%
Selling Price ` 600 `800 `600
Variable Cost ` 300 `400 `300
Total Fixed Costs ` 36,00,000
Total Sales `1,28,00,000
Required
(i) Compute the PV ratio, total contribution, profit and Break-even sales for the existing
product mix.
(ii) Compute the PV ratio, total contribution, profit and Break-even sales for the proposed
product mix. (10 Marks)
5. (a) The following budgeted information relates to B Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(`) (`) (`)
Selling price per unit 45 90 70
Direct cost per unit 25 45 50
Hours Hours Hours
Machine department 3 4 5
(machine hours per unit)
Assembly department 6 4 3
(direct labour hours per unit)
The estimated overhead expenses for the year 2021 will be as below:

© The Institute of Chartered Accountants of India

 Machine Department ` 36,80,000
Assembly Department ` 27,50,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respective cost
drivers are found:

Cost Pool Amount (`) Cost Driver Quantity

Machining services 32,20,000 Machine hours 9,20,000 hours

Assembly services 22,00,000 Direct labour hours 11,00,000 hours
Set-up costs 4,50,000 Machine set-ups 9,000 set-ups
Order processing 3,60,000 Customer orders 7,200 orders

Purchasing 2,00,000 Purchase orders 800 orders

As per an estimate the activities will be used by the three products:

Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150

You are required to PREPARE a product-wise profit statement using:

(i) Absorption costing method;
(ii) Activity-based method. (10 Marks)
(b) T Ltd manufactures and sells a single product and has estimated sales revenue of
`1,51,20,000 during the year based on 20% profit on selling price. Each unit of product
requires 6 kg of material A and 3 kg of material B and processing time of 4 hours in machine
shop and 2 hours in assembly shop. Factory overheads are absorbed at a blanket rate of
20% of direct labour. Variable selling & distribution overheads are `30 per unit sold and
fixed selling & distribution overheads are estimated to be `34,56,000.
The other relevant details are as under:
Purchase Price: Material A `80 per kg
Materials B `50 per kg

Labour Rate: Machine Shop `70 per hour

Assembly Shop `35 per hour

Finished Stock Material A Material B

Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
8

© The Institute of Chartered Accountants of India

 Required
(i) CALCULATE number of units of product proposed to be sold and selling price per unit,
(ii) PREPARE Production Budget in units and
(iii) PREPARE Material Purchase Budget in units. (10 Marks)
6. (a) How apportionment of joint costs up-to the point of separation amongst the joint products
using market value at the point of separation and net realizable value method is done?
DISCUSS.
(b) DISCUSS cost classification based on variability and controllability.
(c) WRITE NOTE on cost-plus-contracts.
(d) DESCRIBE the salient features of budget manual. (4 × 5 = 20 Marks)

© The Institute of Chartered Accountants of India

 Test Series: October 2021
MOCK TEST PAPER –I
INTERMEDIATE (NEW): GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi
medium. If a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.

Time Allowed – 3 Hours Maximum Marks – 100

1. Answer the following:
(a) A factory produces two products, 'Ghee' and 'Cream' from a single process. The joint processing
costs during a particular month are:
Direct Material ` 60,000
Direct Labour ` 19,200
Variable Overheads ` 24,000
Fixed Overheads ` 64,000
Sales: Ghee - 200 litre @ ` 600 per litre; Cream – 240 litre @ ` 200 per litre.
REQUIRED:
I. Apportion joints 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.
(b) Zee Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto Parts
Manufacturers Association, there will be a demand of 80 million pisto ns in the coming year. A Ltd.
is expected to have a market share of 2.15% of the total market demand of the pistons in the
coming year. It is estimated that it costs ` 2.50 as inventory holding cost per piston per month and
that the set-up cost per run of piston manufacture is ` 4,500.
(i) COMPUTE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 20,000 pistons per run,
CALCULATE how much extra costs the company would be incurring as compared to th e
optimum run suggested in (i) above?
(c) A machine costing ` 10 lakhs, was purchased on 01-04-2021. The expected life of the machine is
10 years. At the end of this period its scrap value is likely to be ` 10,000. The total cost of all the
machines including new one was ` 90 lakhs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was ` 6,000.
(iii) Insurance Premium was paid for all the machine ` 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75
1

© The Institute of Chartered Accountants of India

 (v) The new machine occupies 1/10 th area of the department. Rent of the department is
` 2,400 per month.
(vi) Depreciation is charged on straight line basis.
COMPUTE machine hour rate for the new machine.
(d) From the following particulars, COMPUTE Notional profit and estimated profit on a contract (which
has been 80% complete):
(`)
Total expenditure to date 4,00,000
Estimated further expenditure to complete the contract
(including contingencies) 22,000
Contract price 5,44,000
Work certified 4,89,600
Work uncertified 30,200
Cash received 3,91,680
(5 Marks × 4 = 20 Marks)
2. (a) The yearly production of a company's product which has a steady market is 40,000 units. Each unit
of a product requires 1 kg. of raw material. The cost of placing one order for raw material is ` 1,000
and the inventory carrying cost is ` 20 per annum. The lead time for procurement of raw material
is 36 days and a safety stock of 1,000 kg. of raw materials is maintained by the company. The
company has been able to negotiate the following discount structure with the raw material supplier:
Order quantity (kg.) Discount (`)
Upto 6,000 NIL
6,001 – 8,000 4,000
8,001 – 16,000 20,000
16,001 – 30,000 32,000
30,001 – 45,000 4,0000
You are REQUIRED to:
(i) Calculate the re-order point considering 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw material after
considering the discount of the company elects to place one, two, four or five orders in the
year.
(iii) State the number of orders which the company should place to minimize the costs after taking
EOQ also into consideration. (10 Marks)
(b) Breezle Ltd has decided to analyse the profitability of its five new customers. It buys soft drink
bottles in cases at ` 54 per case and sells them to retail customers at a list price of ` 64.80 per
case. The data pertaining to five customers are given below:
Particulars Customers
Aey Bee Cee Dee Eey
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price (`) 64.80 64.80 64.80 64.80 64.80
Actual Selling Price (`) 64.80 64.08 58.80 60.24 58.32
2

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 Number of Purchase Orders 30 50 60 50 60
Number of Customers visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number of expediate Deliveries 0 0 0 0 2
Its five activities and their cost drivers are:
Activity Cost Driver
Order taking ` 240 per purchase order
Customer visits ` 360 per each visit
Deliveries ` 4.80 per delivery km travelled
Product Handling ` 2.40 per case sold
Expedited deliveries ` 120 per such delivery
You are REQUIRED to :
(i) Compute the customer level operating income of each of five retail customers by using the
Cost Driver rates.
(ii) Examine the results to give your comments on Customer 'Dee' in comparison with Customer
'Cee' and on Customer 'Eey' in comparison with Customer 'Aey'. (10 Marks)
3. (a) Navyug Ltd. manufactures chemical solutions for the food processing industry. The manufacturing
takes place in a number of processes and the company uses a FIFO process costing system to
value work-in-process and finished goods. At the end of the last month, a fire occurred in the factory
and destroyed some of the paper files containing records of the process operations for the month.
Navyug Ltd. needs your help to prepare the process accounts for the month during which the fire
occurred. You have been able to gather some information about the month’s operating activities
but some of the information could not be retrieved due to the damage. The following information
was salvaged:
• Opening work-in-process at the beginning of the month was 900 litres, 70% complete for
labour and 60% complete for overheads. Opening work-in-process was valued at ` 29,970.
• Closing work-in-process at the end of the month was 160 litres, 30% complete for labour and
20% complete for overheads.
• Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to
the fire damage.
• Output sent to finished goods warehouse was 4,200 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 `39 for the month made up as follows:
(`)
Raw Material 23
Labour 7
Overheads 9
39

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 REQUIRED:
(i) Calculate the quantity (in litres) of raw material inputs during the month.
(ii) Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in
litres) of abnormal loss / gain experienced in the month.
(iii) Calculate the values of raw material, labour and overheads added to the process during the
month.
(iv) Prepare the process account for the month. (10 Marks)
(b) Xim Ltd. manufactures two types of boxes 'Super' and 'Normal'. The cost data for the year ended
31st March, 2021 is as follows:
(`)
Direct Materials 12,00,000
Direct Wages 6,72,000
Production Overhead 2,88,000
Total 21,60,000
There was no work-in-progress at the beginning or at the end of year. It is further ascertained that:
1. Direct materials cost per unit in ‘Super’ was twice as much of direct material in ‘Normal’.
2. 2% cash discount was received for payment made within 30 days to the creditors of Direct
materials.
3. Direct wages per unit for ‘Normal’ were 60% of those of ‘Super’.
4. Production overhead per unit was at same rate for both the types of boxes.
5. Administration overhead was 200% of direct labour for each type.
6. Selling cost was ` 1 per ‘Super’ type.
7. Production and sales during the year were as follows:
Production Sales
Type No. of units Type No. of units
Super 60,000 Super 54,000
Normal 1,80,000
8. Selling price was ` 30 per unit for ‘Super’.
9. Company was also involved in a copyright infringement case related to the manufacturing
process of ‘Super’ production. As per the verdict, it had to pay penalty of ` 50,000.
PREPARE Cost Sheet of Xim Ltd. for ‘Super’ showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit (10 Marks)
4. (a) A hotel is being run in a Hill station with 200 single rooms. The hotel offers concessional rates
during six off-season (winter) 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, 2021:
(i) Occupancy during the season is 80% while in the off-season it is 40%.

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 (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
• 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 per room, 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 workout 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).
(10 Marks)
(b) ABC Ltd. has its factory at two locations viz Noida and Patparganj. Rowan plan is used at Noida
factory and Halsey plan at Patparganj factory.
Standard time and basic rate of wages are same for a job which is similar and is carried out on
similar machinery. Normal working hours is 9 hours per day in a 5 day week.
Job at Noida factory is completed in 36 hours while at Patparganj factory it has taken 33 hours 45
minutes. Conversion costs at Noida and Patparganj are ` 6,084 and ` 5,569 respectively.
Overheads account for ` 25 per hour.
REQUIRED:
(i) To find out the normal wage; and
(ii) To compare the respective conversion costs. (10 Marks)
5. (a) Amy Ltd. manufacture and sales its product RM. The following figures have been collected from
cost records of last year for the product RM:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold --
Direct Labour 15% of Cost of Goods Sold --
Factory Overhead 10% of Cost of Goods Sold ` 3,45,000
Administration Overhead 2% of Cost of Goods Sold ` 1,06,500
Selling & Distribution Overhead 4% of Cost of Sales ` 1,02,000
Last Year, 7,500 units were sold at ` 185 per unit. From the given information, DETERMINE the
followings:
(i) Break-even Sales (in rupees)
(ii) Profit earned during last year

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 (iii) Margin of safety (in %)
(iv) Profit if the sales were 10% less than the actual sales.
(Assume that Administration Overhead is related with production activity) (10 Marks)
(b) Following information has been provided by a company:
Number of units produced and sold 9,000
Standard labour rate per hour ` 12
Standard hours required for 9,000 units -
Actual hours required 25,641 hours
Labour efficiency 105.3%
Labour rate variance ` 1,53,846 (A)
You are required to CALCULATE:
(i) Actual labour rate per hour
(ii) Standard hours required for 9,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit. (10 Marks)
6. (a) JOURNALISE the following transactions in cost books under Non-Integrated system of Accounting.
(i) Credit Purchase of Material ` 27,000
(ii) Manufacturing overhead charged to Production ` 6,000
(iii) Selling and Distribution overheads recovered from Sales ` 4,000
(iv) Indirect wages incurred for Manufacturing department ` 8,000
(v) Material returned from production to stores ` 9,000
(b) EXPLAIN the difference between Cost Accounting and Management Accounting
(c) DEFINE Zero Based Budgeting and mention its various stages.
(d) HOW do you deal with the following in cost accounts?
(i) Fringe benefits
(ii) Bad debts. (4 × 5 =20 Marks)

© The Institute of Chartered Accountants of India

 Test Series: October 2021
MOCK TEST PAPER – I
INTERMEDIATE (NEW): GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) Total Joint Cost
Particulars Amount (`)
Direct Material 60,000
Direct Labour 19,200
Variable Overheads 24,000
Total Variable Cost 1,03,200
Fixed Overheads 64,000
Total joint cost 1,67,200

Apportionment of Joint Costs:

Product-Ghee Product-Cream
I. (i) Apportionment of Joint ` 76,000 ` 91,200
Cost on the basis of ` 1,67,200 ` 1,67,200
‘Physical Quantity’ ( × 200) ( × 240)
200 + 240 litre 200 + 240 litre
(ii) Apportionment of Joint
Cost on the basis of
‘Contribution Margin
Method’:
- Variable Costs (on ` 46,909 ` 56,291
basis of physical ` 1,03,200 ` 1,03,200
units) ( × 200) ( × 240)
200 + 240 litre 200 + 240 litre
Contribution Margin 73,091 - 8,291
(`600×200 – 46,909) (`200×240 – 56,291)
Fixed Costs* ` 64,000
Total apportioned cost ` 1,10,909 ` 56,291
II. (iii) Profit or Loss:
When Joint cost apportioned on basis of physical units
A. Sales Value ` 1,20,000 ` 48,000
B. Apportioned joint cost on ` 76,000 ` 91,200
basis of ‘Physical
Quantity’:
A-B Profit or (Loss) 44,000 (43,200)
When Joint cost apportioned on basis of ‘Contribution Margin Method’

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 C Apportioned joint cost on ` 1,10,909 ` 56,291
basis of ‘Contribution
Margin Method’
A-C Profit or (Loss) ` 9,091 ` (8,291)

* The fixed cost of ` 64,000 is to be apportioned over the joint products- Ghee and Cream in the
ratio of their contribution margin but contribution margin of Product- Cream is Negative so fixed
cost will be charged to Product- Ghee only.
2D S
(b) (i) Optimum run size or Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand i.e. 2.15% of 8,00,00,000 = 17,20,000 units
S = Set-up cost per run = ` 4,500
C = Inventory holding cost per unit per annum
= ` 2.5 × 12 months = ` 30

2 × 17,20,000 units × ` 4,500

EBQ =√ = 22,716 units
` 30
(ii) Calculation of Total Cost of set-up and inventory holding
Batch size No. of set- Set-up Inventory Total Cost
ups Cost holding cost
(`) (`) (`)
A 20,000 86 3,87,000 3,00,000 6,87,000
units 17,20,000 (86 × ` 20,000 × ` 30
( ) ( )
20,000 4,500) 2
B 22,716 76 3,42,000 3,40,740 6,82,740
units 17,20,000 (76 × ` 22,716 × ` 30
( ) ( )
22,716 4,500) 2

Extra Cost (A – B) 4,260

(c) Computation of machine hour rate of new Machine
Total (`) Per hour (`)
A. Standing Charges
1 1,000
I. Insurance Premium ` 9,000 ×
9
1
II. Rent × `2,400 ×12 months 2,880
10
3,880 0.97*
B. Machine expenses
I. Repairs and Maintenance (` 6,000 ÷ 4,000 hours) 1.50
 `10,00,000 - `10,000 
II. Depreciation   24.75
 10 years × 4,000hours 
2

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 III. Electricity (8 units x ` 3.75) 30.00
Machine hour rate 57.22

Working Note
Calculation of productive Machine hour rate
Total hours 4,200
Less: Non-Productive hours 200
Effective machine hours 4,000
* ` 3,880 ÷ 4,000 hours = ` 0.97
(d) Computation of Notional Profit (`)
Value of work certified 4,89,600
Less: Cost of work certified
(` 4,00,000 – ` 30,200) 3,69,800
Notional profit 1,19,800
Computation of Estimated Profit (`)
Contract price 5,44,000
Less: Estimated total cost
Cost of work to date 4,00,000
Estimated further expenditure to complete the contract 22,000 4,22,000
Estimated profit 1,22,000
2. (a) Working notes
1. Annual production = 40,000 units

2. Raw material required for 40,000 units (40,000 units × 1 kg.) = 40,000 kg.

2 × 40,000 kgs. × ` 1,000

3. EOQ = √ = 2,000 kgs.
` 20

4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg.
No. of orders (40,000 kg. ÷ 2,000 kg.) = 20 times
Ordering cost (20 orders × `1,000) = ` 20,000
Carrying cost (`) (½ × 2,000 kg. × ` 20) = ` 20,000
Total cost ` 40,000
(i) Re-order point = Safety stock + Lead time consumption
40,000kg.
= 1,000 kg. + ×36days
360days

= 1,000 kg. + 4,000 kg. = 5,000 kg.

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 (ii) Statement showing the total cost of procurement and storage of raw materials
(after considering the discount)
Order No. of Total cost of Average Total cost of Discount Total cost
size orders procurement stock storage of raw
materials
Kg. (`) Kg. (`) (`) (`)
(1) (2) (3)=(2)×`1,000 (4)=½×(1) (5)=(4)×`20 (6) (7)=[(3)+(5)– (6)
40,000 1 1,000 20,000 4,00,000 40,000 3,61,000
20,000 2 2,000 10,000 2,00,000 32,000 1,70,000
10,000 4 4,000 5,000 1,00,000 20,000 84,000
8,000 5 5,000 4,000 80,000 4,000 81,000
(iii) Number of orders which the company should place to minimize the costs after taking EOQ
also into consideration is 20 orders each of size 2,000 kg. The total cost of procurement and
storage in this case comes to ` 40,000, which is minimum. (Refer to working notes 3 and 4)
(b) Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level operating
activities costs:
Customers
Particulars Aey Bee Cee Dee Eey
Cases sold: (a) 9,360 14,200 62,000 38,000 9,800
Revenues (at listed price) 6,06,528 9,20,160 40,17,600 24,62,400 6,35,040
(`): (b) {(a) × ` 64.80)}
Discount (`): (c) {(a) × - 10,224 3,72,000 1,73,280 63,504
Discount per case} (14,200 cases × (62,000 cases × (38,000 cases × (9,800 cases ×
` 0.72) ` 6) ` 4.56) ` 6.48)
Cost of goods sold (`): (d) 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
{(a) × ` 54}
Customer level operating activities costs
Order taking costs (`): 7,200 12,000 14,400 12,000 14,400
(No. of purchase × ` 240)
Customer visits costs 1,440 2,160 4,320 1,440 2,160
(`) (No. of customer visits
× ` 360)
Delivery vehicles travel 3,840 3,456 5,760 7,680 11,520
costs (`) (Kms travelled
by delivery vehicles × `
4.80 per km.)
Product handling costs (`) 22,464 34,080 1,48,800 91,200 23,520
{(a) ×` 2.40}
Cost of expediting - - - - 240
deliveries (`)
{No. of expedited
deliveries × ` 120}
Total cost of customer 34,944 51,696 1,73,280 1,12,320 51,840
level operating activities
(`)

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 (i) Computation of Customer level operating income
Customers
Particulars Aey (`) Bee (`) Cee (`) Dee (`) Eey (`)
Revenues 6,06,528 9,20,160 40,17,600 24,62,400 6,35,040
(At list price)
(Refer to working note)
Less: Discount - 10,224 3,72,000 1,73,280 63,504
(Refer to working note)
Revenue 6,06,528 9,09,936 36,45,600 22,89,120 5,71,536
(At actual price)
Less: Cost of goods sold 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
(Refer to working note)
Gross margin 1,01,088 1,43,136 2,97,600 2,37,120 42,336
Less: Customer level operating 34,944 51,696 1,73,280 1,12,320 51,840
activities costs
(Refer to working note)
Customer level operating income 66,144 91,440 1,24,320 1,24,800 (9,504)

(ii) Comments
Customer Dee in comparison with Customer Cee: Operating income of Customer Dee is
more than that of Customer Cee, despite having only 61.29% (38,000 units) of the units
volume sold in comparison to Customer Cee (62,000 units). Customer Cee receives a higher
percent of discount i.e. 9.26% (` 6) while Customer Dee receive a discount of 7.04% (` 4.56).
Though the gross margin of customer Cee (` 2,97,600) is more than that of Customer Dee
(` 2,37,120) but total cost of customer level operating activities of Cee (` 1,73,280 ) is more
in comparison to Customer Dee (` 1,12,320). As a result, operating income is more in case
of Customer Dee.
Customer Eey in comparison with Customer Aey: Customer Eey is not profitable while
Customer Aey is profitable. Customer Eey receives a discount of 10% (` 6.48) while Customer
Aey doesn’t receive any discount. Sales Volume of Customer Aey and Eey is almost same.
However, total cost of customer level operating activities of Eey is far more (` 51,840) in
comparison to Customer Aey (` 34,944). This has resulted in occurrence of loss in case of
Customer Eey.
3. (a) (i) Calculation of Raw Material inputs during the month:
Quantities Entering Process Litres Quantities Leaving Process Litres
Opening WIP 900 Transfer to Finished Goods 4,200
Raw material input (balancing figure) 5,260 Process Losses 1,800
Closing WIP 160
6,160 6,160
(ii) Calculation of Normal Loss and Abnormal Loss/Gain
Particulars Litres
Total process losses for month 1,800
Normal Loss (10% input) 526
Abnormal Loss (balancing figure) 1,274

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 (iii) Calculation of values of Raw Material, Labour and Overheads added to the process:
Material Labour Overheads
Cost per equivalent unit ` 23.00 ` 7.00 ` 9.00
Equivalent units (litre) (refer the 4,734 4,892 4,966
working note)
Cost of equivalent units ` 1,08,882 ` 34,244 ` 44,694
Add: Scrap value of normal loss (526 ` 10,520 -- --
units × ` 20)
Total value added ` 1,19,402 ` 34,244 ` 44,694
Workings:
Statement of Equivalent Units (litre):
Input Details Units Output details Units Equivalent Production
Material Labour Overheads
Units (%) Units (%) Units (%)
Opening WIP 900 Units completed:
Units introduced 5,260 - Opening WIP 900 -- -- 270 30 360 40
- Fresh inputs 3,300 3,300 100 3,300 100 3,300 100
Normal loss 526 -- -- -- -- -- --
Abnormal loss 1,274 1,274 100 1,274 100 1,274 100
Closing WIP 160 160 100 48 30 32 20
6,160 6,160 4,734 4,892 4,966

(iv) Process Account for Month

Litres Amount (`) Litres Amount (`)
To Opening WIP 900 29,970 By Finished goods 4,200 1,63,800
To Raw Materials 5,260 1,19,402 By Normal loss 526 10,520
To Wages -- 34,244 By Abnormal loss 1,274 49,686
To Overheads -- 44,694 By Closing WIP 160 4,304
6,160 2,28,310 6,160 2,28,310

(b) Cost Sheet of ‘Super’

Particulars Per unit Total (`)
(`)
Direct materials (Working note- (i)) 8.00 4,80,000
Direct wages (Working note- (ii)) 4.00 2,40,000
Prime cost 12.00 7,20,000
Production overhead (Working note- (iii)) 1.20 72,000
Factory Cost 13.20 7,92,000
Administration Overhead (200% of direct wages) 8.00 4,80,000
Cost of production 21.20 12,72,000
Less: Closing stock (60,000 units – 54,000 units) - 1,27,200
Cost of goods sold i.e. 54,000 units 21.20 11,44,800
Selling cost 1.00 54,000
Cost of sales/ Total cost 22.20 11,98,800
6

© The Institute of Chartered Accountants of India

 Profit 7.80 4,21,200
Sales value (` 30 × 54,000 units) 30.00 16,20,000
Working Notes:
(i) Direct material cost per unit of ‘Normal’ = M
Direct material cost per unit of ‘Super’ = 2M
Total Direct Material cost = 2M × 60,000 units + M × 1,80,000 units
Or, ` 12,00,000 = 1,20,000 M + 1,80,000 M
` 12,00,000
Or, M = =`4
3,00,000
Therefore, Direct material Cost per unit of ‘Super’ = 2 × ` 4 = ` 8
(ii) Direct wages per unit for ‘Super’ =W
Direct wages per unit for ‘Normal’ = 0.6W
So, (W x 60,000) + (0.6W x 1,80,000) = ` 6,72,000
W = ` 4 per unit
` 2,88,000
(iii) Production overhead per unit = = ` 1.20
(60,000 + 1,80,000)
Production overhead for ‘Super’ = ` 1.20 × 60,000 units = ` 72,000
Notes:
1. 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.
2. Cash discount is treated as interest and finance charges; hence, it is ignored.
3. Penalty paid against the copyright infringement case is an abnormal cost; hence, not included.
4. (a) Working Notes:
(i) Total Room days in a year
Season Occupancy (Room-days) Equivalent Full Room charge
days
Season – 80% 200 Rooms × 80% × 6 months 28,800 Room Days × 100%
Occupancy × 30 days in a month = 28,800 = 28,800
Room Days
Off-season – 40% 200 Rooms × 40% × 6 months 14,400 Room Days × 50% = 7,200
Occupancy × 30 days in a month = 14,400
Room Days
Total Room Days 28,800 + 14,400 = 43,200 36,000 Full Room days
Room Days
(ii) Lighting Charges:
It is given in the question that lighting charges for 8 months is `110 per month and during
winter season of 4 months it is `30 per month. Further it is also given that peak season is 6
months and off season is 6 months.

© The Institute of Chartered Accountants of India

 It should be noted that – being Hill station, winter season is to be considered as part of Off
season. Hence, the non-winter season of 8 months include – Peak season of 6 months and
Off season of 2 months.
Accordingly, the lighting charges are calculated as follows:
Season Occupancy (Room-days)
Season & Non-winter – 80% 200 Rooms × 80% × 6 months × ` 110 per month
Occupancy = ` 1,05,600
Off- season & Non-winter – 200 Rooms × 40% × 2 months × `110 per month
40% Occupancy (8 – 6 months) = ` 17,600
Off- season & -winter – 40% 200 Rooms × 40% × 4 months × ` 30 per month
Occupancy months) = ` 9,600
Total Lighting charges ` 1,05,600+ ` 17,600 + ` 9,600 = ` 132,800

Statement of total cost:

(`)
Staff salary 8,00,000
Repairs to building 3,00,000
Laundry 1,40,000
Interior 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation on Building (` 300 Lakhs × 80% × 5%) 12,00,000
Depreciation on Furniture & Equipment (` 300 Lakhs × 20% × 15%) 9,00,000
Room attendant’s wages (` 15 per Room Day for 43,200 Room Days) 6,48,000
Lighting charges 1,32,800
Total cost 45,71,000
Add: Profit Margin (20% on Room rent or 25% on Cost) 11,42,750
Total Rent to be charged 57,13,750
Calculation of Room Rent per day:
Total Rent / Equivalent Full Room days = ` 57,13,750/ 36,000 = ` 158.72
Room Rent during Season – ` 158.72
Room Rent during Off season = ` 158.72 × 50% = ` 79.36
(b)
Particulars Noida Patparganj
Hours worked 36 hr. 33.75 hr.
Conversion Costs ` 6,084 ` 5,569
Less: Overheads ` 900 ` 844
(`25 × 36 hr.) (` 25 × 33.75 hr.)
Labour Cost ` 5,184 ` 4,725
(i) Finding of Normal wage rate:
Let Wage rate be ` R per hour, this is same for both the Noida and Patparganj factory.
8

© The Institute of Chartered Accountants of India

 Normal wage rate can be found out taking total cost of either factory.
Noida: Rowan Plan
Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan
 Time saved 
` 5,184 = Hours worked × Rate per hour +  ×Hours worked×Rate per hour) 
 Time allowed 
45 - 36
Or, ` 5,184 = 36 hr. × R + ( × 36 × R)
45
Or, ` 5,184 = 36R + 7.2R
R = ` 120
Normal wage = 36 hrs × ` 120 = ` 4,320
OR
Patparganj: Halsey Plan
Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
` 4,725 = Hours worked × Rate per hour + ( 50% ×Hours saved×Rate per hour )
` 4,725 = 33.75 hr. × R + 50% × (45 hr. – 33.75 hr.) × R
` 4,725 = 39.375 R
R = ` 120
Normal Wage = 33.75 hrs × ` 120 = ` 4,050
(ii) Comparison of conversion costs:
Particulars Noida (`) Patparganj (`)
Normal Wages (36 x 120) 4,320
(33.75 x 120) 4,050
Bonus (7.2 x 120) 864
(5.625 x 120) 675
Overhead 900 844
6,084 5,569
5. (a) Working Notes:
(1) Calculation of Cost of Goods Sold (COGS):
COGS = DM + DL + FOH + AOH
COGS = {0.3 COGS + 0.15 COGS + (0.10 COGS + ` 3,45,000) +
(0.02 COGS + ` 1,06,500)}
Or, COGS = 0.57 COGS + ` 4,51,500
` 4,51,500
Or COGS = = ` 10,50,000
0.43
(2) Calculation of Cost of Sales (COS):
COS = COGS + S&DOH
COS = COGS + (0.04 COS + ` 1,02,000)
Or COS = ` 10,50,000 + (0.04 COS + ` 1,02,000)

© The Institute of Chartered Accountants of India

 ` 11,52,000
Or, COS = = ` 12,00,000
0.96
(3) Calculation of Variable Costs:
Direct Material- (0.30 × ` 10,50,000) ` 3,15,000
Direct Labour- (0.15 × ` 10,50,000) ` 1,57,500
Factory Overhead- (0.10 × ` 10,50,000) ` 1,05,000
Administration OH- (0.02 × ` 10,50,000) ` 21,000
Selling & Distribution OH (0.04 × ` 12,00,000) ` 48,000
` 6,46,500
(4) Calculation of total Fixed Costs:
Factory Overhead ` 3,45,000
Administration OH ` 1,06,500
Selling & Distribution OH ` 1,02,000
` 5,53,500
(5) Calculation of P/V Ratio:
Contribution Sales − VariableCosts
P/V Ratio = 100 = 100
Sales Sales
(` 185 × 7,500 units) - ` 6,46,500
= ×100
` 185 × 7,500 units
` 13,87,500 - ` 6,46,500
= ×100 = 53.41%
` 13,87,500
FixedCos ts ` 5,53,500
(i) Break-Even Sales = = = ` 10,36,323
P / VRatio 53.41%

(ii) Profit earned during the last year

= (Sales – Total Variable Costs) – Total Fixed Costs
= (` 13,87,500 - ` 6,46,500) - ` 5,53,500
= ` 1,87,500
Sales − Breakevensales
(iii) Margin of Safety (%) = 100
Sales
` 13,87,500 - ` 10,36,323
= ×100 = 25.31%
` 13,87,500
(iv) Profit if the sales were 10% less than the actual sales:
Profit = 90% (` 13,87,500 - ` 6,46,500) - ` 5,53,500
= ` 1,13,400
(b) SR – Standard labour Rate per Hour
AR – Actual labour rate per hour
SH – Standard Hours
AH – Actual hours
(i) Labour rate Variance = AH (SR – AR)
10

© The Institute of Chartered Accountants of India

 - 1,53,846 = 25,641 (12 – AR)
-6 = 12 – AR
AR = ` 18
SH
(ii) Labour Efficiency = x 100 = 105.3
AH
AH  105.3 25,641 × 105.3
SH = =
100 100

SH = 26,999.973
SH = 27,000 hours
(iii) Labour Efficiency Variance = SR (SH – AH)
= 12 (27,000 – 25,641)
= ` 16,308 (F)
27,000 × 12
(iv) Standard Labour Cost per Unit = = ` 36
9,000
25,641 × 18
(v) Actual Labour Cost Per Unit = = ` 51.282
9,000
6. (a) Journal entries are as follows:
Dr. Cr.
(`) (`)
(i) Stores Ledger Control A/c…………………… Dr. 27,000
To Cost Ledger Control A/c 27,000
(ii) Work-in-Process Control A/c........................... Dr. 6,000
To Manufacturing Overhead Control A/c 6,000
(iii) Cost of Sales A/c……………………………… Dr. 4,000
To Selling & Dist. Overhead Control A/c 4,000
(iv) (1) Wage Control A/c…………………… Dr. 8,000
To Cost Ledger Control A/c 8,000
(2) Manufacturing Overhead Control A/c……… Dr. 8,000
To Wages Control A/c 8,000
OR
Manufacturing Overhead Control A/c……………. Dr. 8,000
To Cost Ledger Control A/c 8,000
(v) Stores Ledger Control A/c ……………………… Dr. 9,000
To Work-in-Process Control A/c 9,000
*Cost Ledger Control A/c is also known as General Ledger Control A/c
(b) Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning and
providing a service. co-ordination.
11

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 (iii) Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of data It uses both past and It is focused with the projection of
present figures. figures for future.
(v) Development Its development is related It develops in accordance to the
to industrial revolution. need of modern business world.
(vi) Rules and Regulation It follows certain principles It does not follow any specific
and procedures for rules and regulations.
recording costs of different
products.
(c) Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the
limitations of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined
as ‘a method of budgeting which requires each cost element to be specifically justified, although
the activities to which the budget relates are being undertaken for the first time, without approval,
the budget allowance is zero’.
ZBB is an activity based budgeting system where budgets are prepared for each activities
rather than functional department. Justification in the form of cost benefits for the activity is
required to be given. The activities are then evaluated and prioritized by the management on the
basis of factors like synchronisation with organisational objectives, availability of funds, regulatory
requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like
Government department, local bodies, not for profit organisations, where these entities need to
justify the benefits of expenditures on social programmes like mid-day meal, installation of street
lights, provision of drinking water etc.
ZBB involves the following stages:
(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources
(d) (i) Fringe benefits: These are the additional payments or facilities provided to the workers apart
from their salary and direct cost-allowances like house rent, dearness and city compensatory
allowances. These benefits are given in the form of overtime, extra shift duty allowance,
holiday pay, pension facilities etc.
These indirect benefits stand to improve the morale, loyalty and stability of employees towards
the organisation. If the amount of fringe benefit is considerably large, it may be recovered as
direct charge by means of a supplementary wage or labour rate; otherwise, these may be
collected as part of production overheads.
(ii) Bad debts: There is no unanimity among different authors of Cost Accounting about the
treatment of bad debts. One view is that ‘bad debts’ should be excluded from cost. According
to this view bad debts are financial losses and therefore, they should not be included in the
cost of a particular job or product.
According to another view it should form part of selling and distribution overheads, especially
when they arise in the normal course of trading. Therefore, bad debts should be treated in
cost accounting in the same way as any other selling and distribution cost. However extra
ordinarily large bad debts should not be included in cost accounts.

12

© The Institute of Chartered Accountants of India

 Test Series: April 2021
MOCK TEST PAPER –II
INTERMEDIATE (NEW): GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium. If a
candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.

Time Allowed – 3 Hours Maximum Marks – 100

1. Answer the following:
(a) From the following information, CALCULATE employee turnover rate using – (i) Separation
Method, (ii) Replacement Method, (iii) New Recruitment Method, and (iv) Flux Method :
No. of workers as on 01.04.2020 = 3,800
No. of workers as on 31.03.2021 = 4,200
During the year, 40 workers left while 160 workers were discharged and 600 workers were
recruited during the year; of these, 150 workers were recruited because of exits and the rest were
recruited in accordance with expansion plans.
(b) A company uses three raw materials Pi, Qu and Ar for a particular product for which the following
data applies:
Raw Usage per Re-order Price per Delivery period Re-order Minimum
Material unit of Quantity Kg. (in weeks) level (Kg.) level (Kg.)
product (Kg.) (Rs.)
(Kg.)
Minimum Average Maximum
Pi 5 10,000 0.10 1 2 3 8,000 ?
Qu 2 5,000 0.30 3 4 5 4,750 ?
Ar 3 10,000 0.15 2 3 4 ? 2,000
Weekly production varies from 350 to 450 units, averaging 400 units of the said product.
WHAT would be the following quantities:
(i) Minimum Stock of Pi?
(ii) Maximum Stock of Qu?
(iii) Re-order level of Ar?
(iv) Average stock level of Pi?
(c) The following particulars refer to process used in the treatment of material subsequently,
incorporated in a component forming part of an electrical appliance:
(i) The original cost of the machine used (Purchased in June 2013) was Rs. 1,00,000. Its
estimated life is 10 years, the estimated scrap value at the end of its life is Rs.1 0,000, and
the estimated working time per year (50 weeks of 44 hours) is 2,200 hours of which machine
maintenance etc., is estimated to take up 200 hours.
No other loss of working time expected, setting up time, estimated at 100 hours, is regarded
as productive time. (Holiday to be ignored).
1

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 (ii) Electricity used by the machine during production is 16 units per hour at cost of a 90 paisa
per unit. No current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of
Rs. 200 each time.
(iv) The estimated cost of maintenance per year is Rs.12,000.
(v) Two attendants control the operation of machine together with five other identical machines.
Their combined weekly wages, insurance and the employer's contribution to holiday pay
amount Rs. 1,200.
(vi) Departmental and general works overhead allocated to this machine for the current year
amount to Rs. 20,000.
You are required to CALCULATE the machine hour rate of operating the machine.
(d) An article passes through three successive operations from raw materials stage to the finished
product stage. The following data are available from the production records for the month of
March, 2021:
Operation No. of pieces (Input) No. of pieces (Rejected) No. of pieces (Output)
1 1,80,000 60,000 1,20,000
2 1,98,000 18,000 1,80,000
3 1,44,000 24,000 1,20,000
(i) DETERMINE the input required to be introduced in the first operation in no. of pieces in
order to obtain finished output of 500 pieces after the last operation.
(ii) CALCULATE the cost of raw material required to produce one piece of finished product, if
the weight of the finished piece is 0.5 kg. and the price of raw material is Rs. 80 per kg.
(5 Marks × 4 = 20 Marks)
2. (a) RVP Cinema provides the following data for the year 2020-21:
Particulars Premium Recliner 7D Cafeteria
Hall Hall Hall
(Rs.) (Rs.) (Rs.) (Rs.)
Revenue 11,55,000 18,75,000 9,30,000 5,25,000
Cost of Goods sold - - - 4,51,125
Digital media cost 6,19,800 9,46,875 4,02,900 -
Number of Credit Card transactions 75,000 90,000 60,000 45,000
Number of Tests 12,000 18,000 15,000 7,500
Number of Setups 225 450 150 75
Area in Square feet 3,000 4,500 2,250 750
Number of Customer contacts 2,62,500 3,00,000 1,50,000 37,500
Number of Customer online orders 2,10,000 2,47,500 1,20,000 22,500

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 Cost analysis has revealed the following:
Activity Activity Activity Driver Activity
Cost (Rs.) Capacity
Marketing Expenses 2,25,000 Number of Customer contacts 7,50,000
Website Maintenance 1,50,000 Number of Customer online 6,00,000
Expenses orders
Credit Card Processing Fees 1,35,000 Number of Credit Card 2,70,000
transactions
Cleaning Equipment Cost 3,15,000 Number of square feet 10,500
Inspecting and testing costs 2,62,500 Number of tests 52,500
Setting up machine's costs 4,50,000 Number of set-ups 900
Required:
(i) If RVP Cinema allocates all costs (other than Cost of Goods sold and Digital Media costs) to
the departments on the basis of Activity Based Costing system, CALCULATE the operating
income and percentage of operating income of each department.
(ii) RVP Cinema operated for years under the assumption that profitability can be increased by
increasing net revenue from Cafeteria. However, the Supervisor of RVP Cinema wants to
shut down Cafeteria. On the basis of (i) above, STATE whether the contention of the
Supervisor is valid or not. (10 Marks)
(b) Zed Limited obtained a contract No. 1551 for Rs. 150 lacs. The following details are available in
respect of this contract for the year ended March 31, 2021:
Rs.
Materials purchased 4,80,000
Materials issued from stores 15,00,000
Wages paid 21,00,000
Drawing and maps 1,80,000
Sundry expenses 45,000
Electricity charges 75,000
Plant hire expenses 1,80,000
Sub-contract cost 60,000
Materials returned to stores 90,000
Materials returned to suppliers 60,000
The following balances relating to the contract No. 1551 for the year ended on March 31, 2020
and March 31, 2021 are available:
as on 31st March, 2020 as on 31st March, 2021
Work certified 36,00,000 1,05,00,000
Work uncertified 60,000 1,20,000
Materials at site 45,000 90,000
Wages outstanding 30,000 60,000
The contractor receives 70% of work certified in cash.
PREPARE Contract Account and Contractee's Account. (10 Marks)
3

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3. (a) The following figures have been taken from the financial accounts of a manufacturing firm for the
year ended 31 st March, 2021:
(Rs.)
Direct material consumption 20,00,000
Direct wages 12,00,000
Factory overheads 6,40,000
Administrative overheads 2,80,000
Selling and distribution overheads 3,84,000
Bad debts 32,000
Preliminary expenses written off 16,000
Legal charges 4,000
Dividend received 40,000
Interest on fixed deposit 8,000
Sales - 48,000 units 48,00,000
Closing stock:
- Finished stock - 4,000 units 3,20,000
- Work-in-process 96,000
The cost accounts for the same period reveal that the Direct Material consumption was
Rs. 22,40,000; Factory overhead is recovered at 20% on prime cost; Administration overhead is
recovered @ Rs. 4.8 per unit of production; and Selling and Distribution overheads are recovered
at Rs. 6.40 per unit sold.
Required:
PREPARE Costing and Financial Profit & Loss Accounts and RECONCILE the difference in the
profit as arrived at in the two sets of accounts. (10 Marks)
(b) Mix Soap Pvt. Ltd., manufactures three brands of soap – Luxury, Herbal and Beauty. The
following information has been obtained for the period from June 1 to June 30, 202 1 relating to
three brands:
Luxury Herbal Beauty
Actual Production (units) 6,750 14,000 77,500
Wages paid (Rs.) 7,500 18,750 1,15,000
Raw materials consumed (Rs.) 20,000 47,000 2,40,000
Selling price per unit (Rs.) 25 15 8
Other data are:
Factory overheads Rs. 80,000
General & administration overheads (equal for all) Rs. 48,000
Selling overheads 20% of Works cost
If the company limits the manufacture to just one brand of soap adopting a single brand
production, then monthly production will be:
Units
Luxury 5,000
Herbal 15,000
Beauty 30,000
4

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 Further, factory overheads are to be allocated to each brand on the basis of the units which could
have been produced when single brand production was in operation.
You are required to:
(i) FIND out the Factory overhead rate for all the brands.
(ii) PREPARE a cost statement for the month of June showing the various elements of cost and
also the profit earned. (10 Marks)
4. (a) Harry Transport Service is a Delhi based national goods transport service provider, owning f ive
trucks for this purpose. The cost of running and maintaining these trucks are as follows:
Particulars Amount
Diesel cost Rs.15 per km.
Engine oil Rs. 4,200 for every 14,000 km.
Repair and maintenance Rs.12,000 for every 10,000 km.
Driver’s salary Rs. 20,000 per truck per month
Cleaner’s salary Rs. 7,000 per truck per month
Supervision and other general expenses Rs.15,000 per month
Cost of loading of goods Rs. 200 per Metric Ton (MT)
Each truck was purchased for Rs. 20 lakhs with an estimated life of 7,20,000 km.
During the next month, it is expecting 6 bookings, the details of which are as follows:
Sl. Journey Distance Weight - Up Weight - Down
No. (in km) (in MT) (in MT)
1. Delhi to Kochi 2,700 15 7
2. Delhi to Guwahati 1,890 13 0
3. Delhi to Vijayawada 1,840 16 0
4. Delhi to Varanasi 815 11 0
5. Delhi to Asansol 1,280 13 5
6. Delhi to Chennai 2,185 11 9
Total 10,710 79 21
Required:
(i) CALCULATE the total absolute Ton-km for the next month.
(ii) CALCULATE the cost per ton-km. (10 Marks)
(b) The following information relates to Process Q:
(i) Opening Work-in-Progress 16,000 units at Rs.1,50,000
Degree of Completion:
Material 100%
Labour and Overhead 60%
(ii) Input - 3,64,000 units Rs. 14,75,000
(iii) Wages paid Rs. 6,81,200
(iv) Overheads paid Rs. 3,40,600
(v) Units scrapped 28,000
5

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 Degree of Completion:
Material 100%
Labour and Overhead 80%
(vi) Closing Work - in- Progress 36,000 units
Degree of Completion:
Material 100%
Labour and Overhead 70%
(vii) Units completed and transferred to next process 3,16,000
(viii) Normal loss is 5% of total input including opening WIP
(ix) Scrap value is Rs. 5 per unit to be adjusted out of direct material cost

You are required to COMPUTE on the basis of FIFO:

(i) Equivalent production
(ii) Cost per unit
(iii) Value of units transferred to next process (10 Marks)
5. (a) Following data is available from the costing department of Aarya Ltd. which manufactures and
markets a single product:
Material Rs. 32 per unit Fixed Cost (Rs.) Rs. 10,00,000
Conversion Cost (Variable) Rs. 24 per unit Present Sales (units) 90,000
Dealer’s Margin (10% of Sales) Rs. 8 per unit Capacity Utilization 60 %
Selling Price Rs. 80 per unit

There is acute competition in the market, thus extra efforts are necessary to enhance the sales.
For this, following suggestions have been proposed:
(i) Reducing selling price by 5 per cent.
(ii) Increasing dealer's margin by 20 per cent over the existing rate.
Which of these two suggestions would you RECOMMEND, if the company desires to maintain the
present profit? GIVE REASONS. (10 Marks)
(b) Tricon Co. furnishes the following information for the month of September, 2020.
Particulars Budget Details Static Budget Actual
Units produced & Sold 4,000 3,200
(Rs.) (Rs.)
Direct Material 3 kg p.u. @ Rs. 30 per kg. 3,60,000 3,10,000
Direct Labour 1 hr. p.u. @ Rs. 72 per hr. 2,88,000 2,25,600
Variable Overhead 1 hr. p.u. @ Rs. 44 per hr. 1,76,000 1,47,200
Fixed Overhead 1,80,000 1,68,000
Total Cost 10,04,000 8,50,800
Sales 12,00,000 8,96,000
Profit 1,96,000 45,200
During the month 10,000 kg. of materials and 3,100 direct labour hours were utilized.

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 Required:
(i) PREPARE a flexible budget for the month.
(ii) DETERMINE the material usage variance and the direct labour rate variance for the actual
vs the flexible budget. (10 Marks)
6. (a) DISTINGUISH between cost control and cost reduction.
(b) EXPLAIN the advantages that would accrue in using the LIFO method of pricing for the valuation
of raw material stock.
(c) DISCUSS basic assumptions of Cost Volume Profit analysis.
(d) DESCRIBE the steps necessary for establishing a good budgetary control system.
(4 × 5 = 20 Marks)

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 Test Series: April, 2021
MOCK TEST PAPER – II
INTERMEDIATE (NEW): GROUP – I
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) Employee turnover rate using:
(i) Separation Method:
No. of workers left + No. of workers discharged
= × 100
Average number of workers
(40+160) 200
= ×100= 4,000 ×100= 5%
(3,800+4,200) ÷ 2

(ii) Replacement Method:

No. of workers replaced 150
= 100 = 4,000 ×100= 3.75%
Average number of workers
(iii) New Recruitment Method:
No. of workers newly recruited
 × 100
Average number of workers
No. of Recruitments-No. of Replacements
= ×100
Average number of workers
600-150 450
= × 100 = × 100 = 11.25%
4,000 4,000

(iv) Flux Method:

No. of separations + No. of accessions
  100
Average number of wor ker s
(200+600) 800
= (3,800+4,200) ÷ 2 × 100 = 4,000 × 100 = 20%
(b) (i) Minimum stock of Pi
Re-order level – (Average consumption × Average time required to obtain delivery)
= 8,000 kg. – (400 units × 5 kg. × 2 weeks) = 4,000 kg.
(ii) Maximum stock of Qu
Re-order level – (Min. Consumption × Min. delivery period) + Re-order quantity
= 4,750 kg. – (350 units × 2 kg. × 3 weeks) + 5,000 kg.
= 9,750 - 2,100 = 7,650 kg.
(iii) Re-order level of Ar
Maximum delivery period × Maximum Usage
= 4 weeks × (450 units × 3 kg.) = 5,400 kg.
OR
= Minimum stock of Ar + (Average consumption × Average delivery time)
= 2,000 kg. + [(400 units × 3 kg.) × 3 weeks] = 5,600 kg.

1
 (iv) Average stock level of Pi

= Minimum stock level of Pi + 1 Re-order quantity

2
= 4,000 kg. + 1 10,000 kg. = 4,000 + 5,000 = 9,000 kg.
2
OR
Minimum stock + Maximum stock
= (Refer to Working Note)
2
4,000 + 16,250
= = 10,125 kg.
2
Working note
Maximum stock of Pi = ROL + ROQ – (Minimum consumption × Minimum delivery period)
= 8,000 kg. + 10,000 kg. – [(350 units × 5 kg.) × 1 week] = 16,250 kg.
(c) Working Notes:
(i) Total Productive hours = Estimated Working hours – Machine Maintenance hours
= 2,200 hours – 200 hours = 2,000 hours
Rs. 1,00,000- Rs. 10,000
(ii) Depreciation per annum = 10years
= Rs. 9000

(iii) Chemical solution cost per annum = Rs. 200 × 50 weeks = Rs.10,000
Rs. 1,200 × 50 weeks
(iv) Wages of attendants (per annum) = 6 machines
= Rs.10,000

Calculation of Machine hour rate

Particulars Amount (Rs.) Amount (Rs.)
(per annum) (per hour)
A. Standing Charge
(i) Wages of attendants 10,000
(ii) Departmental and general works overheads 20,000
Total Standing Charge 30,000
30,000 15.00
Standing Charges per hour ( 2,000 )
B. Machine Expense
(iii) Depreciation 9,000 4.50
Rs. 0.9×16units×1,900hours - 13.68
(iv) Electricity ( 2,000hours
)
(v) Chemical solution 10,000 5.00
(vi) Maintenance cost 12,000 6.00
Machine operating cost per hour (A + B) 44.18
(d) Statement of production
Operation Input Rejections Output
Total % of output
1 1,80,000 60,000 50 1,20,000
2
 2 1,98,000 18,000 10 1,80,000
3 1,44,000 24,000 20 1,20,000
(i) Determination of input required to obtain 500 pieces of finished output:
Particulars No. of pieces
Output required after operation 3 500
Add: Rejection in operation 3 (20%) 100
Output required after operation 2 600
Add: Rejection in operation 2 (10%) 60
Output required after operation 1 660
Add: Rejection in operation 1 (50%) 330
Input required in operation 1 990

(ii) Calculation of cost of raw material:

To produce 500 pieces of final output, 990 pieces of inputs are required at operation 1.
Thus, to get a finished piece of 0.5 kg. of output, the weight of input required is:
0.5
= × 990 = 0.99 kg.
500
The cost of raw material would be Rs. 80 × 0.99 kg. = Rs.79.20
2. (a) Computation showing Rates for each Activity

Activity Activity Activity driver Activity Activity

Cost Capacity Rate
(Rs.)
(B) (A/B)
(A)

Marketing Expenses 2,25,000 Number of Customer Contacts 7,50,000 0.30

Website Maintenance 1,50,000 Number of Customer Online 6,00,000 0.25

Expenses orders

Credit Card Processing 1,35,000 Number of Credit card 2,70,000 0.50

Fees transactions

Cleaning Equipment 3,15,000 Number of Square Feet 10,500 30.00

Cost

Inspecting and Testing 2,62,500 Number of Tests 52,500 5.00

Cost

Setting up machine's 4,50,000 Number of set-ups 900 500.00

cost

3
Activity based Cost for each Department

Activity Premium Hall Recliner Hall 7D Cafeteria (Rs.)

Hall
(Rs.) (Rs.)
(Rs.)

Marketing Expenses 78,750 90,000 45,000 11,250

(2,62,500 x 0.3) (3,00,000 x 0.3) (1,50,000 x 0.3) (37,500 x 0.3)

Website 52,500 61,875 30,000 5,625

Maintenance
(2,10,000 x 0.25) (2,47,500 x 0.25) (1,20,000 x 0.25) (22,500 x 0.25)
Expenses

Credit Card 37,500 45,000 30,000 22,500

Processing Fees
(75,000 x 0.5) (90,000 x 0.5) (60,000 x 0.5) (45,000 x 0.5)

Cleaning Equipment 90,000 1,35,000 67,500 22,500

Cost
(3,000 x 30) (4,500 x 30) (2,250 x 30) (750 x 30)

Inspecting and 60,000 90,000 75,000 37,500

Testing Cost
(12,000 x 5) (18,000 x 5) (15,000 x 5) (7,500 x 5)

Setting up 1,12,500 2,25,000 75,000 37,500

machine's cost
(225 x 500) (450 x 500) (150 x 500) (75 x 500)

Total 4,31,250 6,46,875 3,22,500 1,36,875

(i) Statement of Operating Income and Operating Income percentage for each
Department
Particulars Premium Recliner 7D Cafeteria
Hall Hall Hall (Rs.)
(Rs.) (Rs.) (Rs.)

Revenues (Given) (A) 11,55,000 18,75,000 9,30,000 5,25,000

Cost of Goods Sold (given) (B1) - - - 4,51,125
Digital Media Cost (given) (B2) 6,19,800 9,46,875 4,02,900 -
Activity Based Cost (as per Workings) 4,31,250 6,46,875 3,22,500 1,36,875
(B3)
Operating Cost (B)
(B1+ B2 + B3) 10,51,050 15,93,750 7,25,400 5,88,000
Operating Income/(Loss) 1,03,950 2,81,250 2,04,600 (63,000)
(C = A – B)
Percentage of profit/(loss) on sales 9% 15% 22% (12%)
(ii) Contention of Supervisor is valid as operating income of Cafeteria is negative i.e. (Rs.
63,000) or percentage of profit/loss is (12%).
4
 (b) Contract No. 1551 Account for the year ended 31 st March, 2021
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Work in progress b/d: By Material returned to 90,000
stores
- Work certified 36,00,000 By Material returned to 60,000
suppliers
- Work uncertified 60,000 By Stock (Materials) c/d 90,000
To Stock (Materials) b/d 45,000 By Work in progress c/d:
To Material purchased 4,80,000 - Work certified 1,05,00,000
To Material issued 15,00,000 - Work uncertified 1,20,000
To Wages paid 21,00,000
Less: Opening O/s (30,000)
Add: Closing O/s 60,000 21,30,000
To Drawing and maps 1,80,000
To Sundry expenses 45,000
To Electricity charges 75,000
To Plant hire expenses 1,80,000
To Sub-contract cost 60,000
To Notional profit c/d 25,05,000
(balancing figure)
1,08,60,000 1,08,60,000
Dr. Contractee’s Account Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Balance c/d 73,50,000 By Balance b/d 25,20,000
(Rs. 1,05,00,000 × 70%) (70% of Rs. 36,00,000)
By Bank A/c 48,30,000
73,50,000 73,50,000
3. (a) Costing Profit and Loss Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Direct Material consumed 22,40,000 By Sales 48,00,000
To Direct Wages 12,00,000 By Closing Work-in-process 96,000
Prime Cost 34,40,000 By Closing Finished stock 3,10,154
 Rs. 41,28,000  Rs. 96,000 
  4,000 
 52,000units 
To Factory overheads 6,88,000
(20% of prime cost)
41,28,000

5
To Administrative overheads 2,49,600
(Rs. 4.80 × 52,000* units)
To Selling & distribution 3,07,200
overheads
(Rs.6.40 × 48,000 units)
To Net profit (balancing figure) 5,21,354
52,06,154 52,06,154
* Units produced = Units sold + Closing stock - Opening stock
= 48,000 + 4,000 - 0 = 52,000 units
Financial Profit and Loss Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Direct Material consumed 20,00,000 By Sales 48,00,000
To Direct Wages 12,00,000 By Dividend received 40,000
To Factory overheads 6,40,000 By Interest on fixed deposit 8,000
To Administrative overheads 2,80,000 By Closing Work-in-process 96,000
To Selling & distribution overheads 3,84,000 By Closing Finished stock 3,20,000
To Bad debts 32,000
To Preliminary expenses 16,000
To Legal charges 4,000
To Net profit (balancing figure) 7,08,000
52,64,000 52,64,000
Reconciliation Statement
Particulars Amount Amount
(Rs.) (Rs.)
Net profit as per Financial Profit & Loss A/c 7,08,000
Add: Administrative overheads (2,80,000 - 2,49,600) 30,400
Selling & Distribution overheads (3,84,000 - 3,07,200) 76,800
Bad debts 32,000
Preliminary expenses 16,000
Legal charges 4,000 1,59,200
8,67,200
Less: Difference in value of materials consumed (22,40,000 - 2,40,000
20,00,000)
Factory overheads (6,88,000 - 6,40,000) 48,000
Dividend received 40,000
Interest on fixed deposit 8,000
Closing stock (3,20,000 - 3,10,154) 9,846 (3,45,846)
Profit as per Costing Profit & Loss A/c 5,21,354

6
 (b) (i) Calculation of Factory overhead rate.
If the single brand production was in operation, then
1 unit of Luxury = 3 units of Herbal = 6 units of Beauty. Therefore, the factory overhead ratio
in the reverse order would be 5,000:15,000:30,000 or 1:3:6.
The overhead rate will be lowest in case of brand which will be produced in high number.
Therefore, in case of Beauty soap brand, the overhead rate will be:
80,000
=
6 x 6,750 + 3 x 14,000 + 1 x 77,500

80,000
=
40,500 + 42,000 + 77,500

80,000
= = 0.5
1,60,000
So, the overhead rate will be:
Luxury = 0.5 x 6 = Rs. 3
Herbal = 0.5 x 3 = Rs. 1.5
Beauty = 0.5 x 1 = Rs. 0.5
(ii) Statement of Cost of Mix Soap Pvt. Ltd. for the month of June 2021:
Luxury (Rs.) Herbal (Rs.) Beauty (Rs.) Total (Rs.)
Raw material consumed 20,000 47,000 2,40,000 3,07,000
Add: Wages paid 7,500 18,750 1,15,000 1,41,250
Prime cost 27,500 65,750 3,55,000 4,48,250
Add: Factory overheads 20,250 21,000 38,750 80,000
(Rs.3 x 6,750) (Rs.1.5 x 14,000) (Rs.0.5 x 77,500)
Works cost 47,750 86,750 3,93,750 5,28,250
Add: General & 16,000 16,000 16,000 48,000
administration
oveheads (1:1:1)
Add: Selling expenses 9,550 17,350 78,750 1,05,650
(Rs.47,750 x (Rs.86,750 x (Rs. 3,93,750 x
0.20) 0.20) 0.20)
Cost of sales 73,300 1,20,100 4,88,500 6,81,900
Profit (Balancing figure) 95,450 89,900 1,31,500 3,16,850
Sales 1,68,750 2,10,000 6,20,000 9,98,750
(Rs.25 x 6,750) (Rs.15 x 14,000) (Rs.8 x 77,500)

4. (a) (i) Calculation of Absolute Ton-km for the next month:

Journey Distance Weight- Ton-km Weight- Ton-km Total
(in km) Up Down
(in MT) (in MT)
(a) (b) (c) = (a)×(b) (d) (e) = (a)×(d) (f) = (c)+(e)

Delhi to Kochi 2,700 15 40,500 7 18,900 59,400

7
 Delhi to Guwahati 1,890 13 24,570 0 0 24,570

Delhi to Vijayawada 1,840 16 29,440 0 0 29,440

Delhi to Varanasi 815 11 8,965 0 0 8,965

Delhi to Asansol 1,280 13 16,640 5 6,400 23,040
Delhi to Chennai 2,185 11 24,035 9 19,665 43,700
Total 10,710 79 1,44,150 21 44,965 1,89,115
Total absolute Ton-Km = 1,89,115 ton-km
(ii) Calculation of cost per ton-km:
Particulars Amount (Rs.) Amount (Rs.)
A. Running cost:
- Diesel Cost {Rs.15 × (10,710 × 2)} 3,21,300
- Engine oil cost (
Rs. 4,200
× 21,420 km) 6,426
14,000 km
- Cost of loading of goods {Rs.200 × (79 + 21)} 20,000
 Rs.20,00,000  59,500 4,07,226
- Depreciation   21,420km 
 7,20,000km 
B. Repair & Maintenance Cost 25,704
 Rs.12,000 
  21,420km 
 10,000km 
C. Standing Charges
- Drivers’ salary (Rs.20,000 × 5 trucks) 1,00,000
- Cleaners’ salary (Rs.7,000 × 5 trucks) 35,000
- Supervision and other general expenses 15,000 1,50,000
Total Cost (A + B + C) 5,82,930
Total absolute ton-km 1,89,115
Cost per ton-km 3.08
(b) (i) Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Particulars Units Particulars Units Material Labour & Overhead
(%) Units (%) Units
Opening WIP 16,000 Transfer to next Process:
Introduced 3,64,000 Opening WIP completed 16,000 -- -- 40 6,400
Introduced & completed 3,00,000 100 3,00,000 100 3,00,000
Normal loss 19,000 -- -- -- --
5% (16,000 + 3,64,000)
Abnormal loss 9,000 100 9,000 80 7,200
Closing WIP 36,000 100 36,000 70 25,200
3,80,000 3,80,000 3,45,000 3,38,800
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 (ii) Computation of Cost per unit
Particulars Material Labour Overhead
(Rs.) (Rs.) (Rs.)
Input of Materials 14,75,000 -- --
Expenses -- 6,81,200 3,40,600
Total 14,75,000 6,81,200 3,40,600
Less: Sale of Scrap (95,000) -- --
(19,000 units x Rs. 5)
Net cost (A) 13,80,000 6,81,200 3,40,600
Equivalent Units (B) 3,45,000 3,38,800 3,38,800
Cost Per Unit (A/B) 4.0000 2.0106 1.0053
Total cost per unit = Rs. (4.0000 + 2.0106 + 1.0053) = Rs. 7.0159
(iii) Value of units transferred to next process:
Amount (Rs.) Amount (Rs.)
Opening W-I-P 1,50,000
Add: Labour (6,400 units × Rs. 2.0106) 12,868
Overhead (6,400 units × Rs. 1.0053) 6,434 1,69,302
New introduced (3,00,000 units × Rs. 21,04,770
7.0159)
22,74,072
5. (a) Workings:
Statement Showing Profit on Sale of 90,000 units
(Rs.) (Rs.)
Selling Price per unit 80
Less: Variable Cost per unit
Material 32
Conversion Cost 24
Dealers’ Margin 8 64
Contribution per unit 16
Total Contribution (90,000 units × Rs. 16) 14,40,000
Less: Fixed Cost 10,00,000
Profit 4,40,000
In both the proposed suggestions, the fixed costs remain unchanged. Therefore, the present
profit of Rs. 4,40,000 can be maintained by maintaining the total contribution at the present level
i.e. Rs. 14,40,000.
(i) Reducing Selling Price by 5%
New Selling Price (Rs. 80 − 5% of Rs. 80) = Rs. 76
New Dealer's Margin (10% of Rs. 76) = Rs. 7.60
New Variable Cost (Rs. 32 + Rs. 24 + Rs. 7.60) = Rs. 63.60
New Contribution per unit (Rs. 76 − Rs. 63.60) = Rs. 12.40

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 Total Contribution Required
Level of sales required for present level of Profits =
New Contribution per unit
Rs. 14,40,000
=
Rs. 12.40
= 1,16,129 units
(ii) Increasing Dealer’s Margin by 20%
New Dealer’s Margin after increasing it by 20% = Rs. 8 + (20% of Rs. 8)
= Rs. 9.60
New Variable Cost (Rs. 32 + Rs. 24 + Rs. 9.60) = Rs. 65.60
Contribution (Rs. 80 − Rs. 65.60) = Rs. 14.40
Total Contribution Required
Level of sales required for present level of Profits =
New Contribution per unit
Rs. 14,40,000
=
Rs. 14.40
= 1,00,000 units
Conclusion:
The second proposal, i.e., increasing the Dealer's Margin is recommended because:
1. The contribution per unit is higher which is Rs. 14.40 in comparison to Rs. 12.40 in the first
proposal; and
2. The sales (in units) required to earn the same level of profit are lower. They are at 1,00,000
units as against 1,16,129 units in the first proposal. This means a lower sales effort and
less finance would be required for implementing proposal (ii) as against proposal (i). Of
course, under proposal (ii) the company can earn higher profits than at present level if it
can increase its sales beyond 1,00,000 units.
(b) (i) Statement Showing “Flexible Budget for 3,200 units Activity Level”
Particulars Amount Amount
(Rs.) (Rs.)
Rs. 12,00,000 9,60,000
Sales ( 4,000 units
x 3,200 units)
Less: Variable Cost
Direct Material (3,200 units × 3 kg. p.u. × Rs. 30 per kg.) 2,88,000
Direct Labour (3,200 units × 1 hr. p.u. × Rs. 72 per hr.) 2,30,400
Variable Overhead (3,200 units × 1 hr. p.u. × Rs. 44 per hr.) 1,40,800 (6,59,200)
Contribution 3,00,800
Less: Fixed Overhead 1,80,000
Profit 1,20,800
(ii) Computation of Variances
Material Usage Variance = Standard Cost of Standard Quantity for Actual
Production – Standard Cost of Actual Quantity
= (SQ × SP) – (AQ × SP)
Or
= (SQ – AQ) × SP
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 = [(3,200 units × 3 kg.) – 10,000 kg.] × Rs. 30.00
= Rs. 12,000 (A)
Labour Rate Variance = Standard Cost of Actual Time – Actual Cost
= (SR × AH) – (AR × AH)
Or
= (SR – AR) × AH
Rs. 2,25,600
= [(Rs. 72- ) x 3,100 hrs.]
3,100 hrs.

= Rs. 2,400 (A)

6. (a) Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining the 1. Cost reduction is concerned with
costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to improvise
them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition
possible cost under existing as permanent, since a change will
conditions. result in lower cost.
3. In case of cost control, emphasis is on 3. In case of cost reduction, it is on
past and present present and future.
4. Cost control is a preventive function 4. Cost reduction is a corrective function.
It operates even when an efficient cost
control system exists.
5. Cost control ends when targets are 5. Cost reduction has no visible end and is
achieved. a continuous process.
(b) The advantages that would accrue in using the LIFO method of pricing for the valuation of
raw material stock are as follows:
 The cost of materials issued will be either nearer to and or will reflect the current market
price. Thus, the cost of goods produced will be related to the trend of the market price of
materials. Such a trend in price of materials enables the matching of cost of production with
current sales revenues.
 The use of the method during the period of rising prices does not reflect undue high profit in
the income statement as it was under the first-in-first-out or average method. In fact, the
profit shown here is relatively lower because the cost of production takes into account the
rising trend of material prices.
 In the case of falling prices profit tends to rise due to lower material cost, yet the finished
products appear to be more competitive and are at market price.
 Over a period, the use of LIFO helps to iron out the fluctuations in profits.
 In the period of inflation LIFO will tend to show the correct profit and thus avoid paying
undue taxes to some extent.
(c) Assumptions of Cost Volume Profit analysis:
1. Changes in the levels of revenues and costs arise only because of changes in the
number of product (or service) units produced and sold – for example, the number of
television sets produced and sold by Sony Corporation or the number of packages del ivered

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 by Overnight Express. The number of output units is the only revenue driver and the only
cost driver. Just as a cost driver is any factor that affects costs, a revenue driver is a
variable, such as volume, that causally affects revenues.
2. Total costs can be separated into two components; a fixed component that does not
vary with output level and a variable component that changes with respect to output level.
Furthermore, variable costs include both direct variable costs and indirect variable cos ts of a
product. Similarly, fixed costs include both direct fixed costs and indirect fixed costs of a
product
3. When represented graphically, the behaviours of total revenues and total costs are
linear (meaning they can be represented as a straight line) in relation to output level within
a relevant range (and time period).
4. Selling price, variable cost per unit, and total fixed costs (within a relevant range and
time period) are known and constant.
5. The analysis either covers a single product or assumes that the proportion of different
products when multiple products are sold will remain constant as the level of total units
sold changes.
6. All revenues and costs can be added, subtracted, and compared without taking into
account the time value of money.
(d) The following steps are necessary for establishing a good budgetary control system:
1. Determining the objectives to be achieved, over the budget period, and the policy or policies
that might be adopted for the achievement of these objectives.
2. Determining the activities that should be undertaken for the achievement of the objectives.
3. Drawing up a plan or a scheme of operation in respect of each class of activity, in
quantitative as well as monetary terms for the budget period.
4. Laying out a system of comparison of actual performance by each person, or department
with the relevant budget and determination of causes for the variation, if any.
5. Ensuring that corrective action will be taken where the plan has not been achieved and, if
that is not possible, for the revision of the plan.

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