COST SHEET

Cost Sheet (Traditional Format)

Particulars Amount
Raw material consumed
Direct Wages
Direct Expenses / Chargeable expenses
Prime Cost
Factory / Works / Production / Manufacturing Overhead
Less: Sale of scrap
Add: Opening stock of WIP
Less: Closing stock of WIP
Primary packing material
Factory / Works cost
Office & Administration Overhead
Cost of production
Add: Opening stock of Finished Goods
Less: Closing stock of Finished Goods
Cost of goods sold
Selling & Distribution Overhead
Cost of Sales
Add: Profit
Sale

DIRECT VS INDIRECT COST

KEY POINTS

1. Raw material consumed = Opening stock of Raw Material

Add: Purchase (net of return)
Add: Freight inward / loading &
unloading charges / transit insurance /
non recoverable taxes & duties
Less: Closing stock of Raw Material
Less: Abnormal loss of stock
Less: Sale of scrap of material
[Note – No treatment for Normal Loss]

2. Direct wages include basic wages, allowances, incentives, overtime,

employers contn to PF / other welfare funds, etc.

3. Direct / Chargeable expenses – Royalty paid for production, hire charges

for specific equipment, cost of specific drawing & designing, utilities, job
charges.

4. Items to be excluded from cost sheet:

 Any abnormal loss
 Bad debt & provision for bad debt.
 Any expense of financial nature (eg: interest on loan, cash
discount)
 Provision for income tax.
5. Cost Sheet is prepared on accrual basis.

6. Conversion cost – cost of converting raw material into finished goods

Conversion cost = Direct wages + Direct expenses + Factory Overhead’

7. Common / Joint cost needs to be apportioned amongst joint products in

the ratio of units produced X ratio or usage per unit of product
 VALUATION OF CLOSING STOCK OF FINISHED GOODS

SITUATION A – OPENING STOCK OF FG DOESN’T EXIST

Illu - Cost of production – Rs 24,00,000
No of units produced – 5000 out of which 4700 units were sold.

SITUATION B – OPENING STOCK OF FG EXISTS

Illu - Opening FG – 8000 units @ Rs 18 / unit = Rs 1,44,000
Production – 32000 units
COP – Rs 666,000
Special points -
Indirect manufacturing costs 40% of conversion cost
Direct manufacturing labour Rs 2,22,250
Calculate Factory Overhead

Illu -
Direct Material 4,00,000
Direct Wages 2,24,000
Production overhead 96,000
It is ascertained that the cost per unit ratios are
(a) Direct Material in type A consists twice as much as that in type B.
(b) The direct wages for type B were 60% of those for type A.
(c) Production overhead was the same per pen of A and B type.
(d ) Production during the year were:
Type A 40,000 pens of which 36,000 were sold.
Type B 120,000 pens of which 100,000 were sold.
The books of Adarsh Manufacturing Company present the following data for April, 20X9:

Direct labour cost ` 17,500 being 175% of works overheads.

Cost of goods sold excluding administrative expenses ` 56,000.

Inventory accounts showed the following opening and closing balances:

April 1 (`) April 30 (`)
Raw materials 8,000 10,600
Work-in-progress 10,500 14,500
Finished goods 17,600 19,000

Other data are:

(`)
Selling expenses 3,500
General and administration expenses 2,500
Sales for the month 75,000
Illu - A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at
varying levels of production is as under:

Level Works cost per unit (`)

10% 400
20% 390
30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310

It’s fixed administration expenses amount to ` 1,50,000 and fixed marketing expenses amount to `
2,50,000 per month respectively. The variable distribution cost amounts to ` 30 per unit.
It can sell 100% of its output at ` 500 per unit provided it incurs the following further expenditure:
(a) It gives gift items costing ` 30 per unit of sale;
(b) It has lucky draws every month giving the first prize of ` 50,000; 2nd prize of ` 25,000, 3rd prize of
` 10,000 and three consolation prizes of ` 5,000 each to customers buying the product
(c) It spends ` 1,00,000 on refreshments served every month to its customers;
(d) It sponsors a television programme every week at a cost of ` 20,00,000 per month.
It can market 30% of its output at ` 550 per unit without incurring any of the expenses referred to in
(a) to (d) above.
Prepare a cost sheet for the month showing total cost and profit at 30% and 100% capacity level.
 Illustration

X Ltd Provides you the following figures for the year 2021-22:

Particulars Amount (`)

Direct Material 3,20,000
Direct Wages 8,00,000
Production Overheads (25% variable) 4,80,000
Administration Overheads (75% fixed) 1,60,000
Selling and Distribution Overheads 2,40,000
Sales @ ` 125 per unit 25,00,000

For the year 2022-23, it is estimated that:

1. Output and sales quantity will increase by 20% by incurring additional advertisement expenses
of ` 45,200.
2. Material prices will go up 10%.
3. Wage Rate will go up by 5% along with, increase in overall direct labour efficiency by 12%.
4. Variable Overheads will increase by 5%.
5. Fixed Production Overheads will increase by 33.33%
Required:
(a) Calculate the Cost of Sales for the year 2021-22 and 2022-23.
(b) Find out the new selling price for the year 2022-23.
(i) If the same amount of profit is to be earned as in 2021-22.
(ii) If the same percentage of profit to sales is to be earned as in 2021-22.
(iii) If the existing percentage of profit to sales is to be increased by 25%.
(iv) If Profit per unit `10 is to be earned.

`
Illustration
An advertising agency has received an enquiry for which you are supposed to submit
the quotation. Bill ofmaterial prepared by the production department for the job states
the following requirement of material:
Paper 10 reams @ ₹1,800 per ream
Ink and other printing material ₹ 5,000

Binding material & other consumables ₹ 3,000

Some photography is required for the job. The agency does not have a photographer as an
employee. It decidesto hire one by paying ₹10,000 to him. Estimated job card prepared by
production department specifies that serviceof following employees will be required for this
job:
Artist (₹12,000 per month) 80 hours
Copywriter (₹10,000 per month) 75 hours

Client servicing (₹9,000 per month) 30 hours

The primary packing material will be required to the tune of ₹4,000. Production Overheads 40% of
direct cost, while the Selling & Distribution Overheads are likely to be 25% on Production Cost. The
agency expects a profit of 20% on the quoted price. The agency works 25 days in a month and 6
hours a day.
Illustration
The following figures were extracted from the Trial Balance of a company as on 31st December, 2022.
Credit Amount
Particulars Debit Amount (₹)
(₹)
Inventories:
Raw Material 1,40,000
Work in Progress 2,00,000
Finished Goods 80,000
Office Appliances 17,400
Plant and Machinery 4,60,500
Buildings 2,00,000
Sales 7,68,000
Sales Returns 14,000
Material Purchased 3,20,000
Freight on materials 16,000
Purchase Returns 4,800
Direct Labour 1,60,000

Indirect Labour 18,000

Factory Supervision 10,000

Factory repairs and upkeep 14,000

Heat, Light & Power 65,000

Rates & Taxes 6,300

Miscellaneous Factory Expenses 18,700

Sales Commission 33,600

Sales Travelling 11,000

Sales Promotion 22,500

Distribution Department Salaries and Wages 18,000

Office Salaries 8,600

Interest on borrowed funds 2,000

Further details are given as follows:

Closing inventories are Material ₹1,80,000, Work in Progress ₹1,92,000 and Finished Goods
₹1,15,000.
Accrued expenses are Direct Labour ₹8,000, Indirect Labour ₹1,200 and Interest ₹2,000.
Depreciation should be provided as 5% on Office Appliances, 10% on Machinery and 4% on Buildings.
Heat, light and power are to be distributed in the ratio of 8: 1: 1 among factory, office and distribution
respectively.
Rates & Taxes apply ⅔ rd to the factory and ⅓ rd to office.
Depreciation on building to be distributed in the ratio of 8: 1: 1 among factory, office and
distribution respectively.Prepare a Cost Sheet showing all important components and also a
condensed Profit & Loss Account for the year.
Sun & Moon Ltd. (SML) is a leading hardware manufacturing startup. It manufactured and sold 200
computers in the year 2022. The summarised Trading and Profit & Loss Account of SML for the year
2022 is as follows

Total Output (in units) = 200

Particulars P a r t i c u l a r s

To Cost of Material consumed 12,00,000 By Sales 60,00,000

To Direct Wages 18,00,000
To Manufacturing Charges 7,50,000
To Gross Profit cid 22,50,000
60,00,000 60,00,000
To Management Expenses 9,00,000 , By Gross Profit b/d 22,50,000
To General Expenses 3,00,000
To Rent, Rates & Taxes 1,50,000
To Selling Expenses 4,50,000 1
To Net Profit 4,50,000
22,50,000 : _ 22,50,000

The management of SL estimated the following facts for the year 2023:

1. The output and sales will be 300 computers.

2. Price of material will rise by 25% compared to previous year level.

3. Wages per unit will rise by 10%.

4. Manufacturing charges will increase in proportion to the combined cost of material and
wages.

5. Selling expenses per unit will remain unchanged.

6. Other expenses will remain unaffected by the rise in output.

Required:

(1) Prepare a Cost Sheet for the year 2023.

(ii) Suggest a Selling Price per unit to earn a profit of 20% on selling prices
From the following information, illustrate and prepare a statement showing profit for the period and
determine Cost per Unit

1.

Opening Closing
Raw Materials: ₹29,500 ₹36,000
Work-in-progress:
Material 13,600 12,000
Wages 11,000 16,500
Works overhead 6,600 9,900
Finished Goods: 200 units@ ₹84 1600 Units

2. Purchases of raw material ₹1,90,000, Carriage on purchases ₹1,500, Sale of scrap of raw materials
₹5,000

3. Wages ₹2,97,000

4. Works overheads are absorbed @ 60% of direct labour cost.

5. Administration overhead are absorbed @ ₹ 12 per unit produced.

6. Selling and distribution overhead are absorbed @ 20% of selling price.

7. Sales – 7600 units at a profit of 10% on sales price

MNQ LLP submits the following information on 31st March 2023. Based on the given data, illustrate
and prepare a statement of cost

Details (`)
Sales for the year 2,75,000
Inventories at the beginning of the year: Finished goods 7,000
Work in Progress 4,000
Purchase of the material for the year 1,10,000
Material inventory: At the beginning of the year 3,000
At the end of the year 4,000
Direct Labour 65,000
Factory overhead: 60% of direct labour cost
Inventories at the end of the year: Finished goods 8,000
Work in Progress 6,000
Other expenses for year:
Selling expenses - 10% of sales
Administrative expense – 5% of sales
GG Limited provides the following particulars for the year 2022

Particulars (₹) Particulars (₹)

Opening stock of raw materials 35,000 Carriage on goods sold 1,500
Purchase of raw materials 75,000 Rent and rates of Workshop 3,500
Raw materials returned to 1,500 Fuel, gas, water etc. 1,000
suppliers
Closing stock of raw materials 17,000 Repairs to plant 600
Wages paid to : Depreciation on Machinery 1,400
Productive workers 20,000 Office expenses 2,000
Non-productive workers 2,500 Di rect chargeable expenses 1,000
Salaries paid to office staff 5,000 Advertising 1,500
Carriage on raw materials 1,500 Abnormal loss of raw materials 3,000
purchased
Cash Discounts received 3,000 Loss on sale of investment 5,000

What is the cost of sales?

 MATERIAL

STOCK LEVELS

Reorder Level (ROL) - stock level at a. Company does not maintain safety
which next order should be placed stock
ROL = Maximum Consumption X
Maximum lead time
b. Company maintains safety stock
ROL = Safety stock + Normal
consumption X Normal lead time

Minimum Stock Level / Safety stock / ROL - Normal consumption X Normal

Buffer stock / Base stock lead time
Maximum Stock Level ROL - Minimum consumption X
Minimum lead time + ROQ
Average Stock Level (Maximum Stock Level + Minimum
Stock Level) / 2

Safety stock + EOQ / 2

Danger Level Normal consumption × Lead time for
emergency purchases

Notes:
a. Lead time / Reorder period / Delivery period - denotes the time gap
between the date of placing the order and date of receipt of material
from supplier.
b. Maximum Consumption = Maximum production X Usage per unit of
product
Minimum Consumption = Minimum production X Usage per unit of
product
Average Consumption = Average production X Usage per unit of product
c. Consumption and lead time should be expressed in same terms
A company uses three raw materials A, B and C for a particular product for which the following data
apply
Raw Usage Per Re-order Price per Delivery period Re- order Minimum
material unit of Quantity kg (`) (in weeks) Level Level
Product (Kg) (Kgs) (Kgs)
(Kgs) Min Avg Max
A 10 10000 0.10 1 2 3 8000 –
B 4 5000 0.30 3 4 5 4750 –
C 6 10000 0.15 2 3 4 – 2000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. Calculate:
(i) Minimum Stock of A (ii) Maximum stock of B
(iii) Re- order level of C (iv) Average stock level of A
ECONOMIC ORDER QUANTITY (EOQ)

Alt 1 Alt 2 Alt 3 Alt 4 Alt 5

Annual 5000 5000 5000 5000 5000
Requirement
Qty / order 5000 2500 1000 500 1
No of order 1 2 5 10 5000
Ordering
cost
Carrying cost
EOQ = 2AO
C

“A” denotes Annual requirement / purchase / demand / consumption of

raw material.
If nothing is specified, we should annualise normal usage / consumption

”O” denotes Ordering Cost/Order

“C” denotes carrying cost per unit per annum

If carrying cost is expressed as a %,then it should be applied as a % on
purchase price or cost per unit to calculate “C”

Note: Read the first sentence of question carefully to identify Raw

Material. If the company manufactures / produces a product, then it’s a
Finished Goods.

Kartik & Co, manufactures a special product, which requires ‘ZED’. The
following particulars were collected for the year 2019-20:
(i) Monthly demand of Zed 7,500 units
(ii) Cost of placing an order ` 500
(iii) Re-order period 5 to 8 weeks
(iv) Cost per unit ` 60
(v) Carrying cost p.a. 10%
(vi) Normal usage 500 units per week
Shriram enterprise manufactures a special product “ZED”. The following
particulars were collected
for the year 2011:
(a) Monthly demand of ZED − 1,000 units
(b) Cost of placing an order ` 100.
(c) Annual carrying cost per unit ` 15.
(d) Normal usage 50 units per week.
(e) Minimum usage 25 units per week.
(f ) Maximum usage 75 units per week.
(g) Re-order period 4 to 6 weeks.

Simran Limited produces a product which has a monthly demand of

52,000 units. The product requires a Component X which is purchased at
` 15 per unit. For every finished product, 2 units of Component X are
required. The ordering cost is ` 350 per order and the carrying cost is
12% p.a.

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

purchased at ` 80 per kg. The company incurs a handling cost of ` 370
plus freight of ` 380 per order. The incremental carrying cost of
inventory of raw materials is ` 0.25 per kg. per mensem. In addition, the
cost of working capital finance on the investment in inventory of raw
materials is ` 12 per kg. per annum. The annual production of the
product is 1,00,000 units and 2.5 units are obtained from one kg of raw
materials.
Company manufactures a special product which requires a component
‘Alpha’.
(i) Annual demand of Alpha 8,000 units
(ii) Cost of placing an order ` 200 per order
(iii) Cost per unit of Alpha ` 400
(iv) Carrying cost p.a. 20%

G. Ltd. produces a product which has a monthly demand of 4,000

units. The product requires a component X which is purchased at` 20.
For every finished product, one unit of component is required. The
ordering cost is `120 per order and the holding cost is 10% p.a.

KL Limited produces product ‘M’ which has a quarterly demand of

8,000 units. The product requires 3 kg. quantity of material ‘X’ for every
finished unit of product. The other information are follows:
Cost of material 'X' : ` 20 per kg.
Cost of placing an order : ` 1,000 per order
Carrying Cost : 15% per annum of average inventory
 EVALUATION OF ALTERNATIVES (EOQ VS NON-EOQ)

EOQ ALT 1 ALT 2

Annual a Will be given in the qsn
requirement of
RM
Quantity / order b We will Will be given in the qsn
calculate
c. No of orders a/b
d. Cost or d Will be After considering
Purchase price given in the discount analysis
per unit qsn
e. Ordering cost cX
Ordering
cost
f. Carrying cost b/2X
Carrying
cost pupa
g. Purchase cost aXd
h. Total cost e+f+g

Exam focus –
a. AT EOQ ;CARRYING COST= ORDERING COST.
b. Relevant cost –
Without trade discount – Only ordering cost and carrying cost
With trade discount – Purchase cost, ordering cost and carrying cost
c. In case of range of quantity, we will always consider the lower limit of
range to solve the question.
d. If carrying cost is expressed as a %, then remember carrying cost per
unit per annum will change with the change in purchase price or cost
per unit (in case of trade discount).

Frequency of placing the order = 360 / No of orders

Annual requirement of Coca Cola of 144,000 units is currently purchased in 8
installments. Each unit costs ` 4 and the ordering cost is ` 100. The inventory
carrying cost is estimated at 20% of unit value. How much money can be saved
by Economic Order Quantity.

(i) Annual demand of Alpha 8,000 units

(ii) Cost of placing an order ` 200 per order
(iii) Cost per unit of Alpha ` 400
(iv) Carrying cost p.a. 20%
The company has been offered a quantity discount of 4 % on the purchase of
‘Alpha’ provided the order size is 4,000 components at a time.
 INVENTORY TURNOVER RATIO

Inventory / stock turnover ratio = Raw material consumed

Average stock of RM
Material X Material Y
Opening stock 25,000 87,500
1.1.2019
Purchase during the 190,000 1,25,000
year
Closing stock 15,000 62,500
31.12.2019
 STORES LEDGER

Date Receipt Issue Balance

Qty Rate Amt Qty Rate Amt Qty Rate Amt

Key points:
1. Both purchase from supplier & return from production department –
shown in receipt column.
2. Any issue to production dept.& return to supplier –shown under issue
column.
3. Any inter department /inter job transfer not to be considered.
4. Àny return to supplier – will be recorded under Issue column at same
rate at which they were purchased from supplier.
5. Any return from production department - will be recorded under Receipt
column at last rate at which the material were issued to Production
Department.
6. Any shortage should be shown under issue column.
 LANDED COST

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.
The particulars relating to 1,200 kgs of a certain raw material purchased by a company
during June, were asfollows:
Lot prices quoted by supplier and accepted by the company for placing the purchase order:
Lot size upto 1,000 kgs @ ` 22 per kg
Between 1,000 – 1,500 kgs @ ` 20 per kg

Between 1,500 – 2,000 kgs @ ` 18 per kg

Trade discount – 20%

Additional charge for containers @ ` 10 per drum of 25 kgs

Credit allowed on return of containers @ ` 8 per drum

GST @ 12% on raw material and 5% on drums

Total freight paid by the purchaser ` 240.

Insurance @ 2.5% (on net invoice value) paid by the purchaser

Stores overhead applied @ 5% on total purchase cost of material

The containers are returned in due course.

Draw up a suitable statement to show Total cost of material purchased

. PQR Tubes Ltd. are the manufacturer of picture tubes of T.V. The following are the details of
their operations during 2022-2023

Ordering cost ₹100 per order Inventory carrying cost 20% p.a

100 tubes per

week
Cost of tubes ₹500 per tube Normal usage

Minimum usage 50 tubes per week Maximum usage 200 tubes per
week

Lead time to supply 6-8 weeks

Compute:
(i) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a
discount of 5%, is it worth accepting?
(ii) Re-order level;
(iii) Maximum level of stock;
(iv) Minimum level of stock
The following relates to a particular item of materials of a manufacturing company.
Ordering quantities Price per ton (
(tonne) Rs.)
Less than 250 6.00
250 but less than 800 5.90
800 but less than 2,000 5.80
2,000 but less than 4,000 5.70
4,000 and above 5.60

The annual demand for the material is 4,000 tonnes. Stock holding costs are 25% of material cost p.a.
The delivery cost per order is Rs. 6.00.
You are required to compute the following:
(i) Optimum Order Size (in units)
(ii) Annual Ordering Cost (in Rs.)
(iii) Annual Carrying Cost (in Rs.)
(iv) Annual Total Inventory Cost (in Rs.) annum if orders are made according to optimum order
size.
The components A and B are used as follows:
Normal usage 300 units per week each
Maximum usage 450 units per week
each
Minimum usage 150 units per week each
Reorder Quantity A 2,400 units; B 3,600 units.
Reorder period A 4 to 6 weeks, B 2 to 4
weeks.
Calculate for each component:
(i) Re-order Level
(ii) Minimum Level
(iii) Maximum Level
(iv) Average Stock Level
MVC Ltd. manufactures a special product, which requires ‘ABB’. The following particulars were
collected for the year 2021-22:
(i) Monthly demand of Zed : 6,500 units
(ii) Cost of placing an order : ₹ 500
(iii) Re-order period : 5 to 8 weeks
(iv) Cost per unit : ₹ 50
(v) Carrying cost % p.a. : 10%
(vi) Normal usage : 500 units per week
(vii) Minimum usage: 250 units per week
(viii) Maximum usage : 750 units
per week

Required:
(i) Re-order quantity
(ii) Re-order level
(iii) Minimum stock level
(iv) Maximum stock level
(v) Average stock level
 CONTRACT COSTING
CONTRACT NO……. ACCOUNT (FIRST YEAR)
Particulars Amt Particulars Amt
To Material purchased By Purchase return
- From supplier - To supplier
- From stores - Returned to stores
- From other contract - Transferred to other contract
To Costing PL – profit on sale of By Sale of material (sale proceeds)
material
To Labour (on accrual basis) By Costing PL – loss on sale of material
To other expenses e.g. subcontracting By Costing PL – abnormal loss of
charges, maps & design, architect fees, material (NO TREATMENT OF NORMAL
general charges LOSS)
To Depreciation on Plant (Alt 1) By Closing stock of Material
To Plant purchased (Alt 2) By WDV of Plant at year-end (Alt 2)
To Costing PL – profit on sale of plant By Sale of plant (Alt 2)
(Alt 2)
By Costing PL – loss on sale of plant
(Alt 2)
By Balance c/d – Cost of work to date

To Balance b/d – Cost of work to date By WIP – work certified

To Notional profit c/d By WIP – work uncertified
By Escalation

To Costing PL By Notional profit b/d

To Profit Reserve

Accrual basis: Expenses paid + Outstanding at year-end – Outstanding at beginning + Prepaid at

beginning – Prepaid at year-end

Special Points –
Land purchased –
Brokerage and registration fee paid on the above purchase –
Donation paid to local clubs –
Fines and penalty paid –
 CALCULATION OF COWTD

A contractor commenced a contract on 01-07-2013. The costing records concerning the said
contract reveal the following information as on 31-03-2014.
Amount (`)
Material sent to site 7,74,300
Material returned to store 32,500
Labour paid 10,79,000
Labour outstanding as on 31-03-2014 1,02,500
Salary to Engineer 20,500 per month
Cost of plant sent to site (01-07-2013) 7,71,000
Salary to Supervisor (3/4 time devoted to 9,000 per month
contract)
Site office cost 45,300
Plant hire charges paid for three years 39,000
Administration & other expenses 4,60,600
Prepaid Administration expenses 10,000
Material in hand at site as on 31-03-2014 75,800

Plant used for the contract has an estimated life of 7 years with residual value at the end of life `
50,000. Some of material costing ` 13,500 was found unsuitable and sold for ` 10,000. Material
which cost Rs 3,000 was destroyed by fire. There was a normal loss of material of Rs 7,000
WORK CERTIFIED VS WORK UNCERTIFIED

COWTD – Rs 36,00,000
Contract price -Rs 80,00,000
Contractor claimed 60% as work completed out of which 50% was certified
by architect. Retention money – 20%

Contract price was Rs 45,00,000. On 31-03-2014 two third of the contract was
completed. The architect issued certificate covering 50% of the contract price
and contractor has been paid Rs 20,00,000 on account.
COWTD – Rs 22,00,000
Cash received on account to date was Rs 1,75,000, representing 80% of the
work certified. The cost of work uncertified was valued at Rs 27,375. Contract
price – Rs 5,00,000

Notional profit to be transferred to PL is based on the DOC of the contract

(Work Certified / Contract Price).
DOC < 25% - Nil
25% < DOC < 50% - 1/3 X Notional Profit X Cash received / Work certified
50% <= DOC < 90% - 2/3 X Notional Profit X Cash received / Work certified
DOC >= 90% - Estimated Profit X Cash received / contract price

ESTIMATED PROFIT

Estimated profit = Contract price – (COWTD + Further estimated cost including

contingencies)
The total contract was for ` 27,12,500. Actual expenditure in 2013-14 and estimated expenditure in
2014-15 are given below:

2013-14 2014-15
Actual (`) Estimated (`)
Material issued 4,56,000 8,14,000
Labour : Paid 3,05,000 3,80,000
Outstanding at end : 24,000 37,500
Expenses : Paid 1,00,000 1,75,000
Outstanding at the end - 25,000
Prepaid at the end 22,500 -
Plant purchased 2,25,000 -
Plant returned to stores (a 75,000 1,50,000
historical stores) (on Dec. 31 2014)
Closing Material at site 30,000 75,000
Work-in progress certified 12,75,000 Full
WIP uncertified 40,000 ----
The plant is subject to annual depreciation @ 20% of WDV cost. Prepare Contract A/C and
estimated profit.
 CONTRACT ACCOUNT FOR SUBSEQUENT PERIOD (2ND YEAR AND
ONWARDS)
Particulars Amt Particulars Amt
To Opening stock of material By Profit Reserve
To Opening WIP – work certified -
To Opening WIP – work uncertified
To All 2nd year expenses

By WIP – work certified (on cumulative

basis)
To Notional profit By WIP – work uncertified

Illu - The following balances and information relate to the contract for the year ended 31st March,
2019:

1.4.2018 31.3.2019
Work-in-progress:
Work certified 10,60,000 38,40,000
Work uncertified 26,800 92,400
Materials at site 9,200 19,750
Accrued wages 2,000 4,600
Materials issued from store 4,27,980
Materials directly purchased 1,99,800
Wages paid 6,87,300
Architect’s fees 71,000
Plant hire charges 92,400
Indirect expenses 12,860
Share of general overheads 48,000
Materials returned to store 65,000
Materials returned to supplier 25,600
Fines and penalties paid 12,780
 CONTRACTEE ACCOUNT

BALANCE SHEET (EXTRACT)

Liability Amt Asset Amt
Fixed Asset (WDV)
Costing PL Closing stock of RM
Profit Reserve WIP-work certified
Less: Payment received from
contractee
Outstanding expenses WIP – work uncertified
Prepaid expenses
 ESCALATION CLAIM

Materials: Standard Actual Escalation

A 5000 kgs. @ ` 50 5050 kgs. @ ` 48
B 3500 kgs @ ` 80 3450 kgs. @ ` 79
C 2500 kgs. @ ` 60 2600 kg. @ ` 66
Wages:
P 2000 Hrs. @ ` 70 2100 Hrs. @ ` 72
Q 2500 Hrs. @ ` 75 2450 Hrs. @ ` 75
R 3000 Hrs. @ ` 65 3100 Hrs. @ ` 66
Deluxe limited undertook a contract for `5,00,000 on 1st July, 2022. On 30th June 2023 when the
accounts were closed, the following details about the contract were gathered:

Materials purchased 1,00,000

Wages paid 45,000

General expenses 10,000

Plant Purchased 50,000

Materials on hand 30.6.2023 25,000

Wages accrued 30.6.2023 5,000

Work certified 2,00,000

Cash received 1,50,000

Depreciation of Plant 5,000

Work uncertified 15,000

The above contract contained an escalator clause which read as follows:

“In the event of prices of materials and rates of wages increase by more than 5% the contract price
would be increased accordingly by 25% of the rise in the cost of materia ls 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 certify does not take into account the effect of the above
clause.

Prepare the contract account. Working should form part of the answer.
M/s RON (PVT) LTD. commenced a contract on 1st July, 2022 and the company closes its account for
the year on 31st March every year. The following information relates to the contract as on 31st
March 2023:

(i) Material issued 948000

(ii) Direct wages 457200

(iii) Prepaid direct wages as on 31.03.2023 108000

(iv) Administration charges 720000

(v) A supervisor, who is paid 50,000 per month, has devoted 720000 two third of his time to this
contract.

(vi) A plant costing 7,85,270 has been on the site for 185 days, its working life is estimated at 9 years
and its scrap value is 75,000.

The contract price is 42 lakhs. On 31st March 2023 two-third of the contract was completed. The
Architect issued certificate covering 50% of the contract price and the contractor had been paid
15.75 lakhs on account.

(Assume 365 days in a year).

You are required to:

(i) Prepare a Contract Account showing work cost.

(ii) Calculate Notional Profit or Loss as on 31st March, 2023

A company undertook a contract for construction of a large residual complex. The construction work
commenced on 1st April, 2021 and the following data are available for the year ended 31st March,
2022

(₹ ‘000)
Contract Price 35,000
Work Certified 20,000
Progress Payments Received 15,000
Materials Issued to Site 8,500
Planning & Estimating Costs 1,000
Direct Wages Paid 4,020
Materials Returned From Site 270
Plant Hire Charges 2,000
Wage Related Costs 500
Site office costs 650
Head Office Expenses apportioned 350
Direct Expenses incurred 1,000
Work Not Certified 150
The contractors own a plant which originally cost ₹30 lacs have been continuously in use in this
contract throughout the year. The residual value of the plant after 5 years of life is expected to be ₹5
lacs. Straight line method of depreciation is in use.

As on 31st March, 2022 the direct wages due and payable amounted to ₹2,50,000 and the materials
at site were estimated at ₹5,00,000.

Required:

(i) Record all the above information in a Contract Account.

(ii) Show the calculation of profit to be taken to the profit and loss account of the year
The following details are available from the books of accounts of a contractor with respect to aparticular construction
work for the year ended 31 st March, 2022

(₹)
Contract price 91,00,000
Cash received from contracted (90% of work certified) 71,91,000
Material sent to site 35,82,600
Planning and estimation cost 3,50,000
Direct wages paid 32,62,700
Cost of plant installed at site 8,00,000
Direct expenses 1,68,000
Establishment expenses 2,50,000
Material returned to store 15,000
Head office expenses apportioned 2,50,000
Cost of work uncertified 3,17,000
On 31st March, 2019:
Material at site 85,000
Accrued direct wages 77,300
Accrued direct expenses 12,000
Value of plant(as revalued) 7,16,000
 LABOUR
LABOUR COST
Particulars Amount
Basic Wages
- Time rate
- Piece rate
- Combination of time and piece rate
Dearness allowance
- Fixed
- % of basic
- Based on cost of living index
House Rent allowance
- Fixed
- % of basic
Bonus
- As per Payment of Bonus Act
- Incentive scheme like Halsey / Rowan
Overtime
- As per Factories Act (eligible if worker works for more than 9 hr / day or 48
hr / week at double the rate of Basic +DA)
Other fringe benefits
Gross Earnings
Add: Employer’s contribution to PF / ESI
Labour cost / Cost to Company

Gross Earnings
Less: Employee’s contribution to PF / ESI
Net Earnings

Effective hour worked

Effective hour worked = (Total available days – holiday – leave) X Hour / day
– Normal idle time
 Calculate the earnings of A and B from the following particulars for a month and allocate the labour
cost to each job X, Y and Z :
A B
(i) Basic Wages `100 ` 160
(ii) Dearness Allowance 50% 50%
(iii) Contribution to Provident Fund (on basic 8% 8%
wages)
(iv) Contribution to Employees’ State Insurance 2% 2%
(on basic wages)
(v) Overtime Hours 10 -

The normal working hours for the month are 200. 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. The two workers were employed on jobs X, Y and Z in
the followings proportions (Overtime was done on Job Y):
Jobs
X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%
LABOUR TURNOVER
METHODS %
LTO as per separation method = No of workers separated (i.e. left & discharged) X 100
Average no of workers

LTO as per replacement method = No of workers replaced X 100

Average no of workers

LTO as per New recruitment method = No of workers newly recruited for expansion
Average no of workers

LTO as per Flux method = Summation of all 3 methods

NOTES:
1. Average no of workers = (Opening workers + Closing workers) / 2
2. Closing workers = Opening workers – separated + replaced + new recruitment
3. Accession = Workers replaced + New recruitment
4. Flux method variants

5. Equivalent Annual Labour Turnover Rate =

𝐋𝐚𝐛𝐨𝐮𝐫 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐞 𝐂𝐨𝐦𝐩𝐮𝐭𝐞𝐝 above × 365/ 52 / 12
𝐃𝐚𝐲𝐬 / Weeks / 𝐌𝐨𝐧𝐭𝐡𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐠𝐢𝐯𝐞𝐧 𝐩𝐞𝐫𝐢𝐨𝐝

COST ASSOCIATED WITH LABOUR TURNOVER

1. Contribution lost due to labour turnover = Existing Contribution X Labour hour lost
Effective labour hour worked

2. Cost of rectification of defective units = No of defective units X Cost of rectification / unit

3. Settlement cost
4. Recruitment cost
5. Selection cost
6. Training cost
During October 2021, the following information is obtained from the Personnel Department of a
manufacturing company. Labour force at the beginning of the month 1,900 and at the end of the
month 2,100. During the month 25 people left while 40 persons were discharged. 280 workers
were engaged out of which only 30 were appointed in the vacancy created by the number of
workers separated and the rest on account of expansion scheme. Calculate the Labour Turnover
by different methods.

The LTO of an organisation 10%, 5%, & 3% respectively under Flux Method, Replacement Method &
Separation Method. If the number of workers replaced during that quarter is 30 , find the no of
workers a. recruited & joined ; b. left & discharged
The management of XYZ Ltd is worried about the increasing Labour Turnover in the factory and
before analyzing the causes and taking remedial steps; they want to have an idea of the profit
foregone as a result of Labour Turnover during the last year. Last year’s sales amounted to `
83,03,300 and the profit / volume ratio was 20%. The total number of actual hours worked by the
direct labour force was 4.45 lakhs. As a result of the delays by the personnel department in filling
vacancies due to Labour Turnover, 1,00,000 potentially productive hours were lost. The actual
direct labour hours included 30,000 hours attributable to training new recruits, out of which, half
of the hours were unproductive. The cost incurred consequent on labour turnover revealed, on
analysis the following: Settlement cost due to leaving: ` 43,820, recruitment costs: ` 26,740,
selection costs: ` 12,750 and training costs: ` 30,490.
Assuming that the potential production lost as a consequence of Labour Turnover could have
been sold at prevailing prices, find out the profit foregone last year on account of Labour Turnover.
 HALSEY AND ROWAN PLAN
BONUS AS PER HALSEY = 50% x TIME SAVED X RATE / HOUR

BONUS AS PER ROWAN = TIME TAKEN X TIME SAVED / TIME ALLOWED X RATE/ HOUR

BASIC WAGES = TIME TAKEN X RATE / HOUR

TIME SAVED = TIME ALLOWED** – TIME TAKEN

** CALCULATE TIME ALLOWED FOR ACTUAL UNITS / OUTPUT PRODUCED

EFFECTIVE HOURLY RATE = BASIC WAGES + BONUS

TIME TAKEN

EXAM FOCUS –

A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of ` 30 per hour. The standard time per
unit for a particular product is 4 hours. P, a machine man, has been paid wages under the Rowan
Incentive Plan and he had earned an effective hourly rate of ` 37.50 on the manufacture of that
particular product.
Required: What could have been his total earnings and effective hourly rate, had he been put on
Halsey Incentive Scheme (50%)?
A skilled worker is paid a guaranteed wage rate of `120 per hour. The standard time allowed for a
job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan.
(a) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.
(b) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the
same effective hourly rate of earnings, calculate the time in which he should complete the job.

Worker A B C
Actual hours 38 40 34
worked in a week
Hourly rate of `6 `5 `8
wages
Production in units:
Product P 21 -- 60
Product Q 36 -- 135
Product R 46 25 --
Standard time allowed per unit of each product is:
P Q R
Minutes 12 18 30
The current output on an average is 6 units/ man hour which may be regarded as standard output.
If bonus scheme is introduced, it is expected that the output will increase to 8 units per man hour.
The workers will, if necessary, continue to work overtime up to the specified limit although no
premium on incentives will be paid. The budgeted weekly output is 19,200 units.
direct workers is paid ` 400 as wages per week of 40 hours.

The case of three typical workers Achyuta, Ananta and Govida who produce respectively 180, 120
and 100 units of the company’s product in a normal day of 8 hours is taken up for study. Assuming
that day wages would be guaranteed at ` 75 per hour and the piece rate would be based on a
standard hourly output of 10 units
Two workmen, Vishnu & Shiva, produce the same product using the same material. Their normal
wage rate is also the same. Vishnu is paid bonus according to the Rowan system, while Shiva is paid
bonus according to the Halsey system. The time allowed to make the product is 100 hours. Vishnu
takes 60 hours while Shiva takes 80 hours to complete the product. The factory overhead rate is ` 10
per man-hour actually worked. The cost of production for the product for Vishnu is ` 7,280 & for
Shiva it is ` 7,600. Find the normal rate of wages; the cost of materials.

The existing Incentive system of Alpha Limited is as under:

Normal working week 5 days of 8 hours each plus 3 late shifts of 3 hours each
Rate of Payment Day work: `160 per hour
Late shift: ` 225 per hour
Average output per operator for 49-hours 120 articles
week i.e. including 3 late shifts

In order to increase output and eliminate overtime, it was decided to switch on to a system of
payment by results. The following information is obtained:
Time-rate (as usual) : `160 per hour
Basic time allowed for : 5 hours
15 articles
Piece-work rate : Add 20% to basic
piece-rate
Premium Bonus : Add 50% to time.
Required:
Prepare a Statement showing hours worked, weekly earnings, number of articles produced and
labour cost per article for one operator under the following systems:
(A) Existing time- (B) Straight piece-
rate work
(C) Rowan system (D) Halsey premium
system.

Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan
Premium system, and Halsey premium system above and worker earns half the time saved under
Halsey premium system.
SINT LTD., a manufacturing 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 300 100 540
Hourly rate of wages 40 50 60
Production in units
Product A 210 600
Product B 360 1350
Product C 460 250
Standard time allowed per unit of each product
is
Minutes
A :-15
B :-20
C :-30

Required:
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.
Y Ltd., a manufa cturing concern, supplies you the following data relating to the week
ending 16th March, 2022 for two workers A and B
A B
Work issued (units) 1,500 3,168
Time Allowed 30 minutes per dozen 2 ½ hours per gross
(1 gross = 144)
Output rejected (units) 400 568
Basic hourly wages rate ₹ 50 ₹ 80
Hours Worked 54 48

Bonus is paid @ 2 /3 of the basic rate for all time and for all output without deductions for
rejected output. The working week is 42 hours, the first 6 hours of overtime being paid at
time plus 1 /4 and the next 6 hours at time plus ½. Using the above information, compute
for each worker

(a) Amount of bonus earned

(b) Amount of gross wages
(c) Direct wages cost per dozen of finished output when over time is worked—

(i)Regularly throughout the year as company’s policy due to labour shortage;

and
(ii) Specifically at the customer’s request to expedite delivery
Two workmen, Suresh and Umesh, produce the same product using the same material.
Their normal wage rate is also the same. Suresh is paid bonus according to the Rowan
system, while Umesh is paid bonus according to the Halsey system. The time allowed to
make the product is 25 hours. Suresh takes 15 hours while Umesh takes 20 hours to
complete the product. The factory overhead rate is Rs 5 per man-hour actually worked. The
factory cost for the product for Suresh is Rs 1,745 and for Umesh it is Rs 1,800.
(i) What is the amount of normal rate of wages per hour?
(ii) The cost of materials would be how much? [2]
(iii) What is the amount of wages payable to workmen Suresh ?
 DIRECT EXPENSE
Royalty or technical know-how fees, or drawing designing fees, are paid for which the benefit is
ensured in the future period. In such case, the production / service volumes shall be estimated for
the effective period and based on volume achieved during the cost accounting period, the charge for
amortization be determined.

Illustration

Royalty paid on sales ` 30,000; Royalty paid on units produced ` 20,000, Hire charges of equipment
used for production ` 2,000, Design charges ` 15,000, Software development charges related to
production ` 22,000. Compute the direct expenses.

Illustration
A manufacturing unit produces two products X and Y. the following information is furnished:

Particulars Product X Product Y

Units produced (quantity) 20,000 15,000
Units sold (quantity) 15,000 12,000
Machine Hours utilized 10,000 5,000
Design charges 15,000 18,000
Software development charges 24,000 36,000
Royalty paid on sales ` 54,000 [@ ` 2 per unit sold, for both the products]; Royalty paid on
units produced` 35,000 [@ ` 1 per unit produced, for both the products], Hire charges of
equipment used in manufacturing process of Product X only ` 5,000. Compute the direct expenses.
 OPERATING COSTING
TRANSPORTATION

A. DISTANCE TRAVELLED, PASSENGER KM

Distance / trip – 80 km, Round trips / day – 3, No of days / month - 27

Seating capacity – 50 passengers out of which 80% is occupied

B. FUEL COST

Mileage – 15km / Ltr, Fuel rate – Rs 75 / Ltr

C. COMMISSION AS A % OF TAKINGS

Total Cost excluding commission – Rs 100,000. Commission – 5% of takings, Profit – 20% of takings
You have been given a permit to run a bus on a route 20 Km. long. The bus costs you ` 90,000. It has

to be insured @ 3% p.a. and the annual tax will be ` 1,000. Garage rent is ` 100 p.m. Annual repairs

will be ` 1,000 and the bus is likely to last for 5 years at the end of which the scrap value is likely to

be ` 6,000.

The driver’s salary will be ` 150 p.m. and the conductor’s ` 100 p.m. together with 10% of the takings

as commission (to be shared equally by both). Stationery will cost ` 50 p.m. The manager-cum-
accountant’s salary will be ` 350 p.m.

Diesel and oil be ` 25 per hundred kilometres. The bus will make 3 round trips for carrying on the

average 40 passengers on each trip. Assuming 15% profit on takings, calculate the bus fare to be

charged from each passenger. The bus will work on the average 25 days in a month.
A transport service company is running five buses between two towns, which are 50 kilometers
apart. Seating capacity of each bus is 50 passengers. The following particulars are obtained from
their books for April 2022

Particulars Amounts
₹
Wage of drivers, conductors and 2,40,000
cleaners
Salaries of office staff 1,00,000
Diesel oil and other oil 3,50,000
Repairs and maintenance 80,000
Taxation, insurance etc. 1,60,000
Depreciation 2,60,000
Interest and other expenses 2,00,000
Total 13,90,000

Actually, passengers carried were 75% of seating capacity. All buses ran on all day of the month.
Each bus made one round trip per day. Calculate out the cost per passenger kilo meter
ASK Institute is a school having five buses each plying in different directions for the transport of its
school students. In view of a larger 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
work-load 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 up the junior students. Similarly, in the after-
noon the first trip takes the junior 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 25 days in a month and
remains closed for vacation in May, June and December. Bus fee, however, is payable by the
students for all 12 months in a year.

The details of expenses for a year are as under:

Driver’s salary ₹4,500 per month per driver

Cleaner’s salary ₹3,500 per month (Salary payable for all 12 months)

(one cleaner employed for all the five buses)

Licence fee, taxes, etc. ₹ 8,600 per bus per annum

Insurance ₹10,000 per bus per annum

Repairs & maintenance ₹35,000 per bus per annum

Purchase price of the bus ₹15,00,000 each

Life of each bus 12 years

Scrap value of buses at the end of life ₹3,00,000

Diesel cost ₹45.00 per litre

Each bus gives an average mileage of 4 km. per litre of diesel. Seating capacity of each bus is 50
students.

The seating capacity is fully occupied during the whole year.

Students picked up and dropped within a range up to 4 km. of distance from the school are charged
half fare and fifty per cent of the students travelling in each trip are in this category. Ignore interest.
Since the charges are to be based on average cost you are required to:

(i) Prepare a statement showing the expenses of operating a single bus and the fleet of five
buses for a year.

(ii) Work out the average cost per student per month in respect of –

a. students coming from a distance of up to 4 km. from the school

b. students coming from a distance beyond 4 km. from the school

XYZ has started a transport business with a fleet of 10 taxis. The various expenses incurred by him
are given below:

Cost of each taxi Rs. 3,00,000.

Salary of Office Staff Rs. 5,000 p.m.

Salary of Garage's Supervisor Rs. 10,000 p.m.

Rent of Garage Rs. 5,000 p.m.

Drivers Salary (per taxi) Rs. 10,000 p.m.

Road Tax and Repairs per taxi Rs. 6,000 p.a.

Insurance premium @ 6% of cost p.a.

The life of a taxi is 3,00,000 Km and at the end of which it is estimated to be sold at Rs. 25,000. A taxi
runs on an average 6,000 Km. per month of which 10% it runs empty, petrol consumption 11 Km. per
litre of petrol costing Rs. 72 per litre. Oil and other sundry expenses amount to Rs. 50 per 100 Km.

(i) Calculate the fixed expenses per k.m.

(ii) Calculate the effective cost of running a taxi per kilometre.

(iii) If the hire charge is Rs. 13 per kilometre on average, find out the profit/loss that XYZ may
expect to make in the first year of operation
 D. ABSOLUTE TON-KM VS COMMERCIAL TON-KM

A lorry starts with a load of 24 tones of goods from station A. it unloads 10 tones at station B & rest
of goods at station C. It reaches back directly to station A after getting reloaded with 18 tones of
goods at station C. The distance between A to B, B to C and then from C to A are 270 Kms, 150 Kms
& 325 Kms respectively. Compute ‘absolute tones Kms’ & ‘Commercial tones-Kms’.
GTC has a lorry of 6-ton carrying capacity. Distance between the city ‘A’ to ‘B’ is 300 km and distance
from city ‘A’ to ‘C’ is 140 km. In the month of January, the truck made 12 journeys between
city ‘A’ and city ‘B’. The details of journeys are as follows:
Outward journey No. of journeys Load (in ton)
‘A’ to ‘B’ 10 6
‘A’ to ‘C’ 2 6
‘C’ to ‘B’ 2 4
Return journey No. of journeys Load (in ton)
‘B’ to ‘A’ 5 8
‘B’ to ‘A’ 6 6
‘B’ to ‘C’ 1 6
‘C’ to ‘A’ 1 0
Rajput Transport Service is a Delhi based national goods transport service provider, owning five
trucks for this purpose. The cost of running and maintaining these trucks are as follows

Each truck was purchased for Rs. 30 lakh 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

(i) What is the total absolute Ton-km for the next month?

(ii) The cost per ton-km would be how much ?

 HOTEL – CALCULATION OF RATE

A. ROOM-WISE RATE

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.
Type of suite Number Occupancy
percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
Revenue – Rs 25,41,000.

CATEGORY NO OF OCCUPANCY NO OF DAYS RATE REVENUE

ROOMS

B. SEASON-WISE RATE

A lodging home is being run in a small hill station with 50 single rooms. The home offers concession
rates during six off-seasons 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. Occupancy during the season
is 80%, while in the off season is 40% only, assume a month to be of 30 days. Revenue – Rs 1773000

CATEGORY NO OF OCCUPANCY NO OF DAYS RATE REVENUE

ROOMS
Illustration
XYZ Ltd runs a holiday home. For this purpose, it has hired a building at a rent of ₹ 10,000
per month along with5% of total taking. It has three types of suites for its customers, viz.,
single room, double rooms and triple rooms.
Following information is available:

Type of Suite Number Percentage of Occupancy

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.

Particulars ₹
Staff salaries 14,25,000
Room attendants’ wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.

Calculate the rent to be charged for each type of suite.

Illustration
Manar lodging home is being run in a small hill station with 50 single rooms. The
home offers concessional ratesduring six-off season months in a year. During this
period, half of the full room rent is charged. The management’s profit margin is
targeted at 20% of the room rent. The following are the cost estimates and other
details for the yearending on 31st March, 2022. [Assume a month to be of 30 days].
(i) Occupancy during the season is 80% while in the off season it is 40% only.
(ii) Expenses:
Staff salary [Excluding room attendants] ₹ 2,75,000
Repairs to building ₹ 1,30,500
Laundry and linen ₹ 40,000
Interior and tapestry ₹ 87,500
Sundry expenses ₹ 95,400
(iii) Annual depreciation is to be provided for buildings @ 5% and on furniture and
equipments @ 15% on straightline basis.
(iv) Room attendants are paid ₹ 5 per room day on the basis of occupancy of the rooms in a month.
(v) Monthly lighting charges are ₹ 120 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.
(vi) Total investment in the home is ₹ 100 lakhs of which ₹ 80 lakhs relate to buildings and balance
for furniture
and equipments.
You are required to work out the room rent chargeable per day both during the season
and the off-season months
on the basis of the foregoing information
 HOSPITAL
ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more
beds can be added, if required.
Rent per month - ` 75,000
Supervisors – 2 persons – ` 25,000 per month – each
Nurses – 4 persons – ` 20,000 per month – each
Ward Boys – 4 persons – ` 5,000 per month – each

Doctors paid ` 2,50,000 per month – paid on the basis of number of patients attended and the time
spent by them
Other expenses for the year are as follows:
Repairs (Fixed) – ` 81,000
Food to Patients (Variable) – ` 8,80,000
Other services to patients (Variable) – ` 3,00,000
Laundry charges (Variable) – ` 6,00,000
Medicines (Variable) – ` 7,50,000
Other fixed expenses – ` 10,80,000
Administration expenses allocated – ` 10,00,000

It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25 beds are
occupied.
The hospital hired 750 beds at a charge of ` 100 per bed per day, to accommodate the flow of
patients. However, this does not exceed more than 5 extra beds over and above the normal capacity
of 35 beds on any day.
You are required to calculate profit per Patient day, if the hospital recovers on an average ` 2,000 per
day from each patient
MEDCO 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 2022 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 20000.

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 2022.

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

2 Supervisors each at a per month salary of 5000

4 nurses each at a per month salary of 3000

2 ward boys each at a per month salary of 1500

Other expenses for the year were as under:

Repairs and Maintenance 28000

Food supplied to patients 440000

Caretaker and other services for patients 125000

Laundry charges for bed linen 140000

Medicines supplied 280000

Cost of Oxygen etc. other than directly borne for treatment of patients 71000

General Administration Charges allocated to the unit

REQUIRED :-

(i) What is the profit per patient day made by the unit in the year 2022 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 2023, but the number of patients requiring
medical care is a very uncertain factor. Assuming that same revenue and expenses prevail in the year
2023 in the first instance, work out the number of patient days required by the unit to break even
 OVERHEAD
PRIMARY DISTRIBUTION – ALLOCATION,APPORTIONMENT

Particulars Basis Production Service Department Total

Department
PD1 PD2 SD1 SD2
Direct Material Allocation ------------ ------------ xx xx xx
Direct Wages Allocation ------------ ------------ xx xx xx
Direct Expenses Allocation ------------ ------------ xx xx xx
Other expenses Allocation xx xx xx xx xx
Power HP/ KWH xx xx xx xx xx
Rent & rates Area / Floor xx xx xx xx xx
space
Depreciation / Value of xx xx xx xx xx
Insurance / R&M plant
on plant
General Lighting No of light xx xx xx xx xx
points
Depreciation / Area xx xx xx xx xx
R&M on building
Indirect wages Direct Wages xx xx xx xx xx
Stores Expenses Direct xx xx xx xx xx
Material
Employee related No of xx xx Xx xx xx
expenses employees
Total xx xx Xx xx xx

SECONDARY DISTRIBUTION – REAPPORTIONMENT

A. DIRECT DISTRIBUTION METHOD

Particulars Basis Production Service Department Total

Department
PD1 PD2 SD1 SD2
Total overhead Xx Xx Xx Xx xx
after primary
distribution
Reapportionment:
SD1 Given Xx Xx (xx) 0 0
SD2 Given Xx Xx 0 (xx) 0
Total xx xx 0 0 Xx
 B. RECIPROCAL BASIS

REPEATED DISTRIBUTION METHOD

Particulars Basis Production Service Department Total

Department
PD1 PD2 SD1 SD2
Total overhead 50000 40000 30000 20000 140000
after primary
distribution
Reapportionment:
SD1 5:3:2
SD2 4:3:3
SD1 5:3:2
SD2 4:3:3
SD1 5:3:2
SD2 4:3:3
Total

SIMULTANEOUS EQUATION METHOD

Particulars Basis Production Service Department Total

Department
PD1 PD2 SD1 SD2
Total overhead 50000 40000 30000 20000 140000
after primary
distribution
Reapportionment:
SD1 5:3:2
SD2 4:3:3
Total
 C. NON RECIPROCAL BASIS / STEP DOWN METHOD / STEP LADDER METHOD

Particulars Basis Production Service Department

Department
PD1 PD2 SD1 SD2 SD3
Total overhead Xx Xx Xx Xx xx
after primary
distribution
Reapportionment:
SD1 Given Xx Xx (xx) XX XX
SD2 Given Xx Xx 0 (xx) XX
SD3 Given Xx Xx 0 0 (xx)
Total xx xx 0 0 0
 OVERHEAD RECOVERY / ABSORPTION RATE

BASIS FORMULA
NO OF UNITS

DIRECT MATERIAL COST

DIRECT WAGES COST

PRIME COST

LABOUR HOUR

MACHINE HOUR

SINGLE / BLANKET OVERHEAD RECOVERY RATE

MULTIPLE / DEPARYMENTAL RECOVERY RATE

 OVERHEAD RECOVERED / ABSORBED / APPLIED /
CHARGED

BUDETED OVERHEAD – RS 10,00,000

BUDGETED MACHINE HOUR – 200,000

ACTUAL MACHINE HOUR – 190,000

ACTUAL OVERHEAD INCURRED – RS 970,000

UNDER / OVER RECOVERY OF OVERHEAD

NORMAL RATE INCREASE ABNORMAL REASON

(EG. DEFECTIVE PRODUCTION POLICY)

USING SUPPLEMENTARY RATE, APPORTION TRANSFERRED TO COSTING PL

BETWEEN FG SOLD, CLOSING FG, CLOSING WIP

 MACHINE HOUR RATE

FIXED / STANDING EXPENSES VARIABLE / RUNNING CHARGES

RENT POWER

LIGHTING CHARGES REPAIR & MAINTENANCE

INDIRECT WAGES CHEMICAL, COOLANTS

MANAGER SALARY LUBRICANTS

DEPARTMENTAL EXPENSES DEPRECIATION (ON HOUR BASIS)

DEPRECIATION (ON FIXED TIME BASIS)

EFFECTIVE MACHINE HOUR = TOTAL MACHINE HOUR – SET UP TIME – REPAIR & MAINTENACE
TIME

**SET UP TIME AND REPAIR & MAINTENANCE TIME WILL BE REDUCED ONLY WHEN IT IS
UNPRODUCTIVE IN NATURE AND NORMAL IN NATURE

TWO-TIER MACHINE HOUR RATE

FIXED / STANDING EXPENSES VARIABLE / RUNNING CHARGES

Base – Running time + set up time Base – Running time

Calculate machine hour rate from the following information:
Cost of machine - `25, 00,000
Salvage value - `1,25,000
Estimated life of the machine - 10 years
Annual working hours 3,000
Repairs and maintenance hours 400
Setting-up time (productive time) 156

Power used 25 units per hour at a cost of `5 per unit. No power used during maintenance and set-
up time.
Cost of repairs and maintenance is ` 26,000 p.a.
Chemical required for operating the machine is ` 2,600 per annum.
Annual insurance charges 2.5 % of cost of machine.
Light charges for the department is ` 3,300 per month, having 96 points in all, out of which 12 points
are used at this machine.
Other indirect expenses are chargeable to the machine are `7,200 per month.
Wages of an operator is `9,500 per month. The operator, devoted one-fifth of his time to the
machine.
The company has purchased a new machine costing `25,40,000 to the group of 9 existing machines.
The estimated life of new machine is 10 years with salvage value of `1,40,000 at the end of its working
life. Additional information:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 210 hours
for plant maintenance and 182 hours for setting up of plant.
(ii) Power used by the machine @ 32 units per hour at a cost of `2.50 per unit. No power is consumed
during maintenance and setting up.
(iii) Five operators control operation of 10 machines and the wages amounts to `2,500 per week per
person plus 12% fringe benefits.
(iv) The machine requires a chemical solution, which is replaced at the end of each week (6 days in
a week) at a cost of `750 each time.
(v) Maintenance of the machine is `62,500 p.a.
(vi) Departmental overhead allocated to the operation last year was `112,500. During the current
year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive
A machine shop has 8 identical machines manned by 6 operators. The machine cannot be worked
without an operator wholly engaged on it. The original cost of all these machines workers out
to `8 lakhs. These particulars are furnished for a 6 month period:
Normal available hours per month per 208
worker
Absenteeism (without pay) hours P.M. per 18
worker
Leave (with pay) hours per worker P.M 20
Normal idle time Unavoidable hours per 10
worker P.M.
Average rate of wages per worker for 8 `20
hours a day
Average rate of production bonus 15% on wages
estimated
Value of Power consumed `8,050
Supervision and indirect labour `3,300
Lighting and electricity `4,200
These particulars are for a year :
Repairs and maintenance including 3% of value of machines
consumables
Insurance `40,000
Depreciation 10% of original cost
Other sundry works expenses `12,000
General management expenses allocated `54,530

You are required to work out a comprehensive machine hour rate for the machine shop.
Calculate two - tier machine hour rate for (a) set up time, and (b) running time from the following
information:
Details regarding Machinery:
Cost of the machine `7,50,000
Estimated useful Life 15 years
Salvage value ` 30,000.
The supervisor and operator are permanent whose salary is as:
Supervisor’s salary per month (common to four `12,000
machines)
Operator wages per month per machine `3,750
Repairs and maintenance and consumable stores vary with the machine hours.
Repairs and maintenance per annum `90,720
Consumable stores per annum `71,280
Power is required for productive purposes. Set up time, though productive, does not require
power.
Power 15 units per hour at 5 per unit
Other expenses:
Rent of building p.a. (machine under reference 90,000
occupies 1/5th of the area)
General lighting charges per month allocated 1,500
to the machine

The machine is considered to work for 312 hours in a month. It includes maintenance time of 12
hours and set up time of 30 hours.
The budgeted production overheads of the factory are `4,20,000 and budgeted machine hours are
40,000. For financial year 2018-19, following information were extracted from the books:
`
Actual production overheads 6,35,000
Amount included in the production overheads:
Obsolete stores written off 18,000
Paid as per court’s order 11,000
Paid to workers for strike period under an 32,000
award
Expenses of previous year booked in 10,000
current year
Production and sales data of the concern are as under:
Production:
Finished goods 44,000 units
WIP (50% complete in every respect) 32,000 units
Sales:
Finished goods 36,000 units

The actual machine hours worked during the period were 48,000 hrs. it is revealed from the analysis
of information that ¼ of the 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 under absorption of production overheads for the period.
(ii) To show the accounting treatment of under-absorption of production overheads, and
(iii) To apportion the unabsorbed overheads over the items.
APP is a manufacturing concern and recovers overheads at a predetermined rate of ` 30 per labour
hour.
Information relating to 2018-19 is as under:
Actual overheads incurred `51,50,000
(includes ‘written off’ obsolete stores `20,000 and wages paid for the strike period `30,000)
Actual labour hours worked 1.50,000
Sales (units) 50,000 units
Stocks at the end of the period:
Finished goods 5,000 units
Work-in-progress (50% completed) 10,000 units

On analyzing the situation, it was discovered that 60% of the under-absorption of overheads was
due to defective production planning and the balance was due to normal increase in overhead
costs.
How would you treat under absorbed overhead in Cost Accounting.
Following data are extracted from the records of the company:
P1 P2 P3 S1 S2
Direct Material 75,000 50,000 75,000 37,500 12,500
(`)
Number of 50 75 100 50 25
light points
Cost of 4,50,000 6,00,000 7,50,000 37,500 37,500
machinery (`)
Production 5,000 4,000 4,500 -- --
hours worked
HP of Machine 30 15 25 5 --
used
Floor space 500 625 750 500 125
(sq.ft)

Rent & Rates 25,000 General lighting 42,000

Stores expenses 60,000 Power 45,000
Depreciation on 70,000 Insurance of 28,000
machinery machinery

Other Information:
Expenses of the service departments S1 and S2 are reapportioned as below:
P1 P2 P3 S1 S2
S1 40% 20% 30% -- 10%
S2 30% 50% 10% 10% --

(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 P1, P2
and P3 for 9 hours, 12 hours and 14 hours respectively, given that its direct material cost is ` 500 and
direct labour cost is ` 450.
An engine manufacturing company has two production departments:
(i) Snow mobile engine and ;
(ii) Boat engine and Two service departments: (i) Maintenance and (ii) Factory office.
Budgeted cost data and relevant cost drivers are as follows:
Departmental costs: `
Snow mobile engine 6,00,000
Boat mobile engine 17,50,000
Factory office 3,00,000
Maintenance 2,40,000

Cost drivers:
Factory office department: No. of employees
Snow mobile engine 1,080 employees
department
Boat engine department 270 employees
Maintenance department 150 employees
1,500 employees
Maintenance department: No. of work orders
Snow mobile engine 570 orders
department
Boat engine department 190 orders
Factory office department 40 orders
800 orders

Required
(i) Compute the cost driver allocation percentage and then use these percentage to allocated the
service department costs by using direct method.
(ii) Compute the cost driver allocation percentage and then use these percentage to allocate the
service dept. costs by using non-reciprocal method/step method.
Illustration
Helping Hand Ltd gensets and produced its own power Data for power costs are as follows:

Production Departments Service Departments

A B X Y
Horse Power Hours 10,000 20,000 12,000 8,000
Needed at capacity production used during the 8,000 13,000 7,000 6,000
month of May
During the month of May costs for generating power amounted to ` 9,300, of this ` 2,500
was considered to befixed. Department X renders service to other Departments in the ratio
of 13 : 6 : 1, while Y renders service to A and B in the ratio of 31 : 3. Given that the direct
labour hours in Departments A and B are 1,650 hours and 2,175 hoursrespectively, find the
power cost per labour in each of these two departments.
SONTA LTD. has three production departments and two service departments. The overhead
distribution sheet showed the following:
Production Departments: Rs
MP 25000
BQ 31000
NR 28000
Service Departments:
S 8000
T 13900

Using the following bases of apportionment, distribute the cost of service departments
under simultaneously Equation Method

MP BQ NR S T
Department S 30% 20% 40% 10%
Department T 40% 15% 25% 20%
A Company has three production cost centers A, B and C are two service cost centres X and
Y. Cost allocated to service centres are required to be apportioned to the production centres to
find out cost of production of different products.
It is found that benefit of service cost centres is also received by each other along with
production cost centres.
Overhead cost as allocated to the five cost centres and estimates of benefit of service cost
centres received by each of them are as under
Estimates of benefits received
from
Cost Centres Overhead costs
service centres
asallocated
(%)
X Y
A 80,000 20 20
B 40,000 30 25
C 20,000 40 50
X 20,000 -- 5
Y 10,000 10 -

Required :-
Compute the final overhead costs of each of the production department includ ing
reapportioned cost of service centres using –
(A) Continuous distribution method and
(B) Simultaneous equation method
Ashima Manufacturing Ltd. have three departments which are regarded as production
departments. Service departments’ costs are distributed to these production departments using
the ‘Step Distribution Method’ of distribution. Estimates of factory overhead costs to be
incurred by each department in the forthcoming year as follows. Data required for
distribution is also shown against each department.

Department Factory Direct labour hours No. of Area in sq. m.

Overhead (₹) Employees
Production:
X 93,000 4,000 100 3,000
Y 54,000 3,000 125 1,500
Z 73,000 4,000 85 1,500
Service:
P 45,000 1,000 10 500
Q 75,000 5,000 50 1,500
R 1,05,000 6,000 40 1,000
S 30,000 3,000 50 1,000
The overhead costs of the four service departments are distributed in the same order, viz. P,
Q, R and S respectively on the following basis
Department Basis
P Number of employees
Q Direct labour hours
R Area in square metres
S Direct labour hours

You are required to:

1. Prepare a schedule showing the distribution of overhead costs of the four service
departments to the three production departments; and
2. Calculate the overhead recovery rate per direct labour hour for each of the three
production departments
On the basis of the following data, determine the overhead rates at 70% and 80%.

Particulars Amount (Rs.)

Production capacity At 80%

Variable Overheads: capacity
Indirect labour 12,000
Stores including spares 4,000
Semi Variable:
Power (30% - Fixed: 70% -Variable) 20,000
Repairs (60%- Fixed: 40% -Variable) 2,000
Fixed Overheads:
Depreciation 11,000
Insurance 3,000
Salaries 10,000
Total overheads 62,000
Estimated Direct Labour Hours 1,24,000
A company has two production departments and two service departments. The data relating
to a period are as under:
Production Department s Service Departments
PD 1 PD 2 SD1 SD2
Direct Materials ( ₹) 80,000 40,000 20,000 30,000
Direct Wages ( ₹) 95,000 50,000 30,000 20,000
Overheads ( ₹) 80,000 50,000 40,000 30,000
Power Requirement at
Normal capacity (Kwh) 25,000 30,000 15,000 10,000
operations
Actual power
consumption duringthe
period (Kwh) 12,000 20,000 8,000 12,000

The power requirement of these departments is met by a power generation plant. The said
plant incurred an expenditure, which is not included above, of ₹1,21,875 out of which a sum
of ₹84,375 was variable and the rest fixed.
After apportionment of power generation plant costs to the four departments, the service
department overheads are to be redistributed on the following bases
PD1 PD2 SD1 SD2
SD1 50% 40% - 10%
SD2 60% 20% 20% -

You are required to:

(i) What is the total O/ H of each of the departments?
(ii) What is the total O/ H post re-apportionment of service Department Cost?
JOB & BATCH COSTING
BATCH COSTING

EBQ = 2AS
C

“A” denotes Annual demand of finished goods.

”S” denotes Set-up Cost/batch

“C” denotes carrying cost per unit per annum

If carrying cost is expressed as a %,then it should be applied as a % on
cost of production per unit to calculate “C”

EVALUATION OF ALTERNATIVES (EBQ VS NON-EBQ)

EOQ ALT 1 ALT 2

Annual demand a Will be given in the qsn
of FG
Quantity / batch b We will Will be given in the qsn
calculate
c. No of batches a/b
d. Setup cost c X Setup
/ batch
e. Carrying cost b/2X
Carrying
cost pupa
f. Total cost e+f+g

Frequency of starting the batch = 360 / No of batches

 JOB COSTING

PREPARATION OF JOB COST SHEET

STEP 1 – DIRECT MATERIAL, DIRECT WAGES AND DIRECT EXPENSES IS TRACEABLE TO THE JOB

STEP 2 – OVERHEAD TO BE CALCULATED AS –

OVERHEAD BASIS FORMULA

FACTORY OVERHEAD DIRECT WAGES FACTORY OVERHEAD X 100
DIRECT WAGES
OFFICE & ADMIN OVERHEAD COST OF PRODUCTION OFFICE & ADIM O/H X 100
COST OF PRODUCTION
SELLING & DISTRUBUTION COST OF PRODUCTION SELLING & DIST O/H X 100
OVERHEAD COST OF PRODUCTION

NOTE :

1. OFFICE & ADMIN OVERHEAD IS ASSUMED TO BE MARKETING IN NATURE, HENCE DOES

NOT FORM PART OF COST OF PRODUCTION

2. FACTORY OVERHEAD RECOVERY RATE IS CALCULATED ON DEPARTMENTAL BASIS INSTEAD

OF BLANKET BASIS.

A Ltd. is committed to supply 24,000 bearings p.a. to B Ltd. on a steady basis. It is estimated that it

costs 10 paise as inventory holding cost per bearing per month and that the set-up cost per run of

bearing manufacture is ` 324. What should be the optimum run size for bearing manufacture?
What would be the interval between two consecutive optimum runs?
M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s. KMR Fans on a

steady daily basis. It is estimated that it costs ` 1 as inventory holding cost per bearing per month

and that the set up cost per run of bearing manufacture is ` 3,200

(i) DETERMINE what would be the optimum run size of bearing manufacture?

(ii) DETERMINE What would be the interval between two consecutive optimum runs?

(iii) CALCULATE the inventory carrying cost at EBQ?

Arnav Motors 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 pistons in the coming

year. Arnav Motors Ltd. is expected to have a market share of 1.15% of the total market demand

of the pistons in the coming year. It is estimated that it costs ` 1.50 as inventory holding cost per

piston per month and that the set-up cost per run of piston manufacture is ` 3,500.

(i) DETERMINE the optimum run size for piston manufacturing?

(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run, CALCULATE

the extra costs company would be incurring as compared to the optimum run suggested in (i)
above?
A customer has been ordering 90,000 special design metal columns at the rate of 18,000 columns

per order during the past years. The production cost comprises ` 2,120 for material, ` 60 for labour

and ` 20 for fixed overheads. It costs ` 1,500 to set up for one run and inventory carrying cost is 5%.

(i) Find the most economic production run.

(ii) Calculate the extra cost that company incur due to processing of 18,000 columns in a batch.

Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes
and muffins. AC use to bake at least 50 units of any item at a time. A customer has given an order
for 600 muffins. To process a batch of 50 muffins, the following cost would be incurred:

Direct materials- ` 500

Direct wages- ` 50
Oven set- up cost ` 150 Irrespective of no of units

AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads.
AC requires a profit margin of 25% of sales value. Determine the selling price for 600 and 605
muffins
Illu - A factory uses job costing. The following data are obtained from its books for the year ended 31st
March, 2018:
Amount (`)
Direct materials 9,00,000
Direct wages 7,50,000
Selling and distribution overheads 5,25,000
Administration overheads 4,20,000
Factory overheads 4,50,000
Profit 6,09,000
Required:
(i) PREPARE a Job Cost sheet indicating the Prime cost, Cost of Production, Cost of sales and the Sales
value.
(ii) In 2018-19, the factory received an order for a job. It is estimated that direct materials required
will be `2,40,000 and direct labour will cost `1,50,000. DETERMINE what should be the price for the
job if factory intends to earn the same rate of profit on sales assuming that the selling and
distribution overheads have gone up by 15%. The 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.
Illu - A shop floor supervisor of a small factory presented the following cost for Job No. 303,to
determine the selling price.

Materials 70
Direct wages 18 hours @ ` 2.50 45
(Deptt. X 8 hours; Deptt. Y 6 hours;
Deptt. Z
4 hours)
Chargeable expenses 5
120
Add : 33-1/3 % for expenses cost 40
160

Materials used 1,50,000 Sales less returns 2,50,000

Direct wages :
Deptt. X 10,000
Deptt. Y 12,000
Deptt. Z 8,000 30,000
Special stores items 4,000
Overheads :
Deptt. X 5,000
Deptt. Y 9,000
Deptt. Z 2,000 16,000
Works cost 2,00,000
Gross profit c/d 50,000
2,50,000 2,50,000
Selling expenses 20,000 Gross profit b/d 50,000
Net profit 30,000
50,000 50,000

It is also noted that average hourly rates for the three Departments X, Y and Z are similar.
You are required to :
(i) Calculate the entire revised cost using 20X2 actual figures as basis.
(ii) Add 20% to total cost to determine selling price.
In a factory following the Job Costing Method, an abstract from the work-in-progress as on 30th
September was prepared as under.
Job No. Materials Direct hrs. Labour Factory OH
(`) (`) applied
(`)
115 1325 400 hrs. 800 640
118 810 250 hrs. 500 400
120 765 300 hrs. 475 380

Materials used in October were as follows:

Materials Job No. Cost (`)
Requisition No.
54 118 300
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720

A summary for labour hours deployed during October is as under:

Job No. Number of Hours
Shop A Shop B
115 25 25
118 90 30
120 75 10
121 65 --
124 25 10
Indirect Labour: Waiting of 20 10
material
Machine breakdown 10 5
Idle time 5 6
Overtime premium 6 5

A shop credit slip was issued in October that material issued under Requisition No. 54 was returned
back to stores as being not suitable. A material transfer note issued in October indicated that
material issued under Requisition No. 55 for Job 118 was directed to Job 124.
The hourly rate in shop A per labour hour is ` 3 per hour while at shop B, it is ` 2 per hour. The factory
overhead is applied at the same rate as in September. Job 115, 118 and 120 were completed in
October.
You are asked to compute the factory cost of the completed jobs. It is the practice of the
management to put a 10% on the factory cost to cover administration and selling overheads and
invoice the job to the customer on a total cost plus 20% basis. What would be the invoice price of
these three jobs?
Illustration

Component ‘Gold’ is made entirely in cost centre 100. Material cost is 6 paise per component and
each component takes 10 minutes to produce. The machine operator is paid 72 paise per hour,
and machine hour rate is ₹ 1.50. The setting up of the machine to produce the component ‘Gold’
takes 2 hours 20 minutes.

On the basis of this information, prepare a cost sheet showing the production and setting up cost,
both in total and per component, assuming that a batch of: (a) 10 components, (b) 100
components, and (c) 1,000 components are produced.
In the current quarter, ABC company has undertaken two jobs. The data relating to these jobs are
as under

Job A Job B

Selling price ₹ 1,07,325 ₹ 1,57,920

Profit as percentage on cost 8% 12%

Direct Materials ₹ 37,500 ₹ 54,000

Direct wages ₹ 30,000 ₹ 42,000

It is the policy of the company to charge Factory overheads as percentage on direct wages and
selling and administration overheads as percentage on Factory Cost.

The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order are ₹ 75,000 and ₹ 50,000 respectively. A
profit of 20% on sales is required. You are required to compute:

(i) The rates of Factory overheads and selling and Administration overheads to be charged.

(ii) The selling price of the new order

A ltd . undertakes to supply 1,000 units of a component per month of April, May and June. Every
month a batch order is opened against which materials and labour costs are booked at actual.
Overheads are levied on the basis of labour hours. The selling price is contracted at ₹16 per unit.

From the following data, Calculate the profit per annum of each batch order and the total profit
for 3000 units. Labour is paid at the rate of ₹2 per hour. The other details are

Months Batch Material Labour Cost Overheads Total Labour

Output
Cost (₹) (₹) (₹) (Hours)
(Units

January 1,250 6,250 2,500 12,000 4,000

February 1,500 9,000 3,000 9,000 4,500

March 1,000 5,000 2,000 15,000 5,000

The normal expenses attributable to Machine 1 and the normal hours for which the machine is
expected to be utilised in the year 2023 are indicated below

Particulars ₹ ₹

Fixed Expenses 4,000

Variable:

Power 1,500

Repairs 900

Lubricants 600 3,000

Total 7,000

Predetermined normal hours of working:

To make ready 200 hours

Running on jobs 800 hours

Total 1,000 hours

From the data furnished below, compute the cost of Job No. 1993:

Materials consumed: 10 units at ₹5 per unit 50

Machine labour:

To make ready: 2 hours at ₹1 per hour 2

Running on jobs: 8 hours at ₹1 per hour 8

60

Note: Wherever a job to be put on the machine, the machine is cleared, any tools or jigs already
on the machine are removed and new tools, etc. suitable for the particular job are fixed before
commissioning the machine for the job and the time involved is to be charged to the job as ‘make
ready’ time. Hence, fixed expenses are absorbed on the basis of total normal working hours &
variable expenses are absorbed on the basis of running working hours
 BUDGET
FLEXIBLE BUDGET

CLASSIFICATION OF COST
Nature Description Total Per / unit Change in cost
Fixed Cost FC remains FC in TOTAL FC / unit will Any CHANGE to
Constant remains constant DECREASE with FC should be
irrespective of INCREASE in no made in TOTAL.
change in no of of units.
units
FC / unit will
INCREASE with
DECREASE in no
of units.
Variable Cost VC will change in TOTAL VC will VC / UNIT will Any CHANGE to
same proportion INCREASE with remains VC should be
with the change in INCREASE in no CONSTANT. made in VC /
no of units. of units. UNIT.

TOTAL VC will
DECREASE with
DECREASE in no
of units.

Exam Focus:

1. All information relating to FC should be made in TOTAL and information relating to VC

should be in PER Unit basis.

2. If FC is given as per unit, then total FC = FC / unit X No of units based on which FC / Unit
has been calculated

3. If VC is given on total basis, then VC / unit = Total VC / No of units based on which total

VC has been calculated

Illustration - 5,000 units (50% capacity)

Fixed cost A 15,000

Fixed Cost B 4/ unit

Variable Cost C 3 / unit

Variable cost D 25,000

Next Year, the company will produce 6,000 units and anticipates Fixed cost A will increase by 7%,
Fixed Cost B will decrease by 5%, Variable Cost C will decrease by 8% and Variable cost D will
increase by 10%. Calculate total cost of 6,000 units.

5000 units 4000 units 6000 units

Material cost 35000 100% varying

Power 2000 80% ”

Repairs & maintenance 3000 75% ”

Depreciation 10,000 100% fixed

Administration O/H 5400 20% varying

Semi-Variable cost : Segregation between Fixed cost and Variable cost/ unit

Illu 1 - No of units Total cost

5,000 Rs 15,000

8,000 Rs 21,000

12,500 ?

Illu 2 -

55000 65000 75000 85000

` ` `
Direct Materials 11,00,000 13,00,000 15,00,000
Direct Labour 5,50,000 6,50,000 7,50,000
Factory Overheads 3,10,000 3,30,000 3,50,000
Selling Overheads 3,20,000 3,60,000 4,00,000
Administrative 1,60,000 1,60,000 1,60,000
Overheads
24,40,000 28,00,000 31,60,000
 50% 60% 75% 90%

Fixed Cost 30

SVC 18

VC 50

Assume that the fixed expenses remain constant for all levels of production, semi-variable
expenses remain constant between 45 % & 65 % of capacity, increasing by 10 % between 65 % &
80 % capacity and by 20 % between 80 % & 100 % capacity.

FUNCTIONAL BUDGET

STEP BUDGET DEPARTMENT CALCULATION

1 SALES MARKETING BASED ON ESTIMATED SALES QTY & SP /
BUDGET UNIT (AFTER CONSIDERING CUSTOMER
TASTE & PREFERENCE) AND MARKETING
EFFORT.
2 PRODUCTION PRODUCTION QUANTITATIVE TERMS:
BUDGET
OPENING FG + PRODUCTION – CLOSING
FG = SALES
3 RAW PRODUCTION QUANTITATIVE TERMS:
MATERIAL
CONSUMED RAW MATERIAL CONSUMED =
PRODUCTION (UNITS ) X RAW MATERIAL
USED / UNIT OF PRODN.
4 RAW STORES QUANTITATIVE TERMS:
MATERIAL
PURCHASED OPENING RM + PURCHASE – CLOSING RM
= RAW MATERIAL CONSUMED
Illustration –

Estimated Sales qty – 102,000 units

Closing FG – 8,000 units
Opening FG – 10,000 units
Each unit of production required 3 kg of Raw Material A and 4kg of Raw Material B.
Opening Closing
Raw Material A (kg) 22,000 28,000
Raw Material B (kg) 37,500 43,400
Illu 2- Sales budget for calendar year 2013 by a quarters is as under:

Quarters I II III IV

No. of units to be sold 18,000 22,000 25,000 27,000

The year is expected to open with an inventory of 6,000 units of finished products and close with

inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current

quarter’s sales demand plus 30% of the following quarter demand. Prepare Quarterly Prodn
Budget

Illu 3- The Estimated Units To Be Sold In The First Four Months Of The Year 2013-14 Are As Under

April May June July

Minimax 8,000 10,000 12,000 16,000
Heavyhigh 6,000 8,000 9,000 14,000

The company’s policy is to hold closing stock of finished goods at 25% of the anticipated volume of
sales of the succeeding month. Prepare Production Budget For The First Quarter In Month Wise
Shown Below Is An Extract From The Company’s Working Papers For The Next Month’s Budget:
A B

Budgeted sales (in units) 2,400 3,600

Budgeted material consumption per unit (in kg):

Material-X 5 3

Material-Y 4 6

There Are Four 5-Days Weeks In The Budgeted Period And It Is Anticipated That Sales And
Production Will Occur Evenly Throughout The Whole Period.

Opening Stock:

Product-A 400 units

Product-B 200 units

Material-X 1,000 kg.

Material-Y 500 kg.

Closing Stocks For Budget Period:

Product-A 4 days sales

Product-B 5 days sales

Material-X 10 days consumption

Material-Y 6 days consumption

Labour Budget

A B

Production 2,480 4,300

Standard labour hours allowed per unit of product 3 5

The Target Productivity Ratio (Or Efficiency Ratio) For the Productive Hours Worked By The Direct

Workers In Actually Manufacturing the Products Is 80%. In addition The Non-Productive Down-

Time Is Budgeted At 20% Of the Productive Hours Worked. Rate / hour = Rs 25 / hr

Illustration

You are required to prepare a selling overhead Budget from the estimates given below

Particulars (`)
Advertisement 1,000
Salaries of the Sales dept. 1,000
Expenses of the Sales dept.(Fixed) 750
Salesmen’s remuneration 3,000
Salesmen’s and dearness Allowance - Commission @ 1% on sales affected excluding
agents sale.Carriage outwards: estimated @ 5% on sales
Agents Commission: 7½ % on sales
The sales during the period were estimated as follows:
(a) ` 80,000 including Agent’s Sales ` 8,000
(b) ` 90,000 including Agent’s Sales ` 10,000
(c) ` 1,00,000 including Agent’s Sales ` 10,500
Illustration

From the following information relating to 2021 and conditions expected to prevail in 2022, prepare
abudget for 2022.

2021 Actual: Amount (`)

Sales (40,000 units) 1,00,000
Raw materials 53,000
Wages 11,000
Variable Overhead 16,000
Fixed Overheads 10,000

2022 Prospects:
Sales (60,000 units) 1,50,000
Raw Materials 5% increase in prices
Wages 10% increase in wage rate
5% increase in productivity
Additional plant: One Lathe ` 25,000
One Drill ` 12,000
10% Depreciation to be considered.
Illustration

Production costs of a factory for a year are as follows:

Amount (`)
Direct Wages 80,000
Direct Materials 1,20,000
Production Overheads: Fixed 40,000
Variable 60,000
During the forthcoming year it is anticipated that:
a. The average rate for direct labour remuneration will fall from ` 0.80 per hour to ` 0.75 per hour.
b. Production efficiency will be reduced by 5%
c. Price per unit of direct material and of other materials and services which comprise
overheadswill remain unchanged, and
d. Production in the coming year will increase by 33.33%Draw up a production cost budget.
Illustration

The following information at 50% capacity is given. Prepare a flexible budget and forecast the profit or
lossat 60%,70% and capacity.

Fixed Expenses Amount (`)

Salaries 50,000
Rent and taxes 40,000
Depreciation 60,000
Administrative expenses 70,000
Variable expenses
Materials 2,00,000
Labour 2,50,000
Others 40,000
Semi – variable expenses
Repairs 1,00,000
Indirect labour 1,50,000
Others 90,000
Sales 9,00,000
It is estimated that fixed expenses will remain constant at all capacities. semi –variable expenses
willnot change between 45% and 60% capacity, will rise by 10% between 60% and 75% capacity, a
furtherincrease of 5% whenthe capacity crosses by 75%.
Estimated sales:

60% 70% 90%

Capacity
11,00,000 13,00,000 15,00,000
Illustration

AB Co., Ltd. manufactures two products A and B and sells them through two Divisions-North and
South. For the purpose of submission of sales budget to the budget committee the following
information is available:-
Budgeted sales for the current year were:

Product North South

A 4,000 at ` 9 6,000 at ` 9
B 3,000 at ` 21 5,000 at ` 21
Actual sales for the current year were: -

Product North South

A 5,000 at ` 9 7,000 at ` 9
B 2,000 at ` 21 4,000 at ` 21
Adequate market studies reveal that Product A is popular but under-priced. It is observed that if the price
of A is increased by ` 1 it will still find a ready market. On the other hand, B is overpriced to customers and
the market could absorb more if sales price of B be reduced by ` 1. The management has agreed to
giveeffect to the above price changes.
From the information based on these price changes and reports from salesmen, the following estimates
have beenprepared by divisional managers: -
Percentage increase in sales over current budget is :-

Product North South

A + 10% +5%
B +20% +10%
With the help of an intensive advertisement campaign the following additional sales over the estimated sales
of divisional managers are possible:-

Additional sales above the estimated sales of divisional managers:

Product North (units) South (units)

A 600 700
B 400 500
You are required to prepare a budget for sales incorporating the above estimates and also show
the budgeted and actual sales of current year.
Illustration

A company manufactures product - A and product - B during the year ending 31st December 2022,it
isexpected to sell 15,000 kg of product A and 75,000 kg of product B at ` 30 and ` 16 per kg respectively.
Thedirect materials P, Q and R are mixed in the proportion of 3: 5: 2 in the manufactureof product A,
MaterialsQ and R are mixed in the proportion of 1:2 in the manufacture of product B. The actual
and budget inventories for the year are given below:

Opening Stock Closing Stock Cost per Kg

Material – P 4,000 3,000 12
Material – Q 3,000 6,000 10
Material – R 30,000 9,000 8
Product – A 3,000 1,500 —
B 4,000 4,500 —
Prepare the Production Budget and Materials Budget showing the expenditure on purchase of materialsforthe
year ending 31-12-2022.
Illustration

The following details apply to an annual budget for a manufacturing company.

QUARTER 1st 2nd 3rd 4th

Working Days 65 60 55 60
Raw material purchases 30% 50% 20% —
(% by weight of annual total)
Budgeted purchase price/Kg. (`) 1 1.05 1.125 —
Quantity of raw material per unit of production 2 kgs. The budgeted closing stock of raw material 2,000
kg.Budgeted opening stock of raw material 4,000 kg. (Cost ` 4,000). Issues are priced on FIFOBasis.
Calculate the following budgeted figures.
(a) Quarterly and annual purchase of raw material by weight and value.
(b) Closing quarterly stocks by weight and value.
The monthly budgets for manufacturing overhead of SHEBAN LTD., for two levels of activity were
as follows:
Capacity 60% 80%
Budgeted Production (units) 600 1000
Rs Rs
Wages 1200 2000
Consumable stores 900 1500
Maintenance 1100 1500
Power and Fuel 1600 2000
Depreciation 4000 4000
Insurance 1000 1000

(i) Prepare a Budget for 80% capacity; and

(ii) Find the total cost, both fixed and variable per unit of output at 60%, 80% and 100% capacity.
A factory is currently running at 50% capacity and produces 5,000 units at a cost of ₹90 per unit as
per details below

Material ₹50
Labour 15
Factory Overheads 15 (₹ 6/- fixed)
Administrative Overheads 10 (₹ 5/- fixed)

The current selling price is ₹100 per unit.

At 60% working, material cost per unit increase by 2% and selling price per unit falls by 2%.
At 80% working, material cost per unit increase by 5 % and selling price per unit falls by 5%.
Compute and estimate profits of the factory at 60% and 80% working and offer your
The following are the estimated sales of S Ltd. for eight months ending 30.11.2022:
Months Estimated Sales (units)
April 2022 1,20,000
May 2022 1,30,000
June 2022 90,000
July 2022 80,000
August 2022 1,00,000
September 2022 1,20,000
October 2022 1,40,000
November 2022 1,20,000

As a matter of policy, the company maintains the closing balance of finished goodsand raw materials
as follows

Stock item Closing balance of a month

Stock item 50% of the estimated sales for the next month
Raw Materials Estimated consumption for the next month

Every unit of production requires 2 kg. of raw material costing ₹5 per kg.
Prepare Production Budget (in units) and Raw Material Purchase Budget (in units and cost) of the
company for the half year ending 30 September, 2022
Zee Co. Ltd. wishes to arrange overdraft facilities with its bankers from the period August to October
2022 when it will be manufacturing mostly for stock. Prepare a cash budget for the above period from
the following data given below:
Manufacturin
Mont Sales Purchases Wages Office Selling
g Exp.
h Exp. Exp.
June 1,80,000 1,24,800 12,000 3,000 2,000 2,000
July 1,92,000 1,44,000 14,000 4,000 1,000 4,000
August 1,08,000 2,43,000 11,000 3,000 1,500 2,000
Septemb 1,74,000 2,46,000 12,000 4,500 2,000 5,000
er
October 1,26,000 2,68,000 15,000 5,000 2,500 4,000
Novemb 1,40,000 2,80,000 17,000 5,500 3,000 4,500
er
Decemb 1,60,000 3,00,000 18,000 6,000 3,000 5,000
er
Additional Information:
1. Cash on hand 1-08-2022 ` 25,000.
2. 50% of credit sales are realized in the month following the sale and the remaining 50% in the
second month following. Creditors are paid in the month following the month of purchase.
3. Lag in payment of manufacturing expenses half month.
4. Lag in payment of other expenses one month
When the financial controller of Better Company set the budget for the year ahead, it was expected that
monthly output of cake packages would be 12,000 units. In March the output was increased to 14,000
per month following negotiation with a chain of corner shops. The following table contains the original
budget and the actual outcome for the month of March.
Particulars Origin al Budget A ct ual for March
Cake packages output 12,000 14,000
Direct materials 48,000 53,000
Direct labour 24,000 29,000
Variable overhead 6,000 7,200
Fixed overhead 4,000 4,500
Total produ ction costs 82,000 93,700

The Financial Controller wants you to analyse the variances in order to prepare a report
Prepare a Cash Budget for the three months ending 30th June, 2023 from the information given below
Month Sales (`) Mat erials (`) Wag es (`) Overhead (`)
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300

Credit terms are:

 Sales / Debtors: 10% sales are on cash, 50% of the credit sales are collected next month and the balance
in the following month.
 Creditors: Materials 2 months Wages
1/4 month

Overheads 1⁄2 month

 Cash and bank balance on 1st April, 2023 is expected to be ` 6,000.

Other relevant information are:

• Plant and machinery will be installed in February 2017 at a cost of ` 96,000. The monthly
instalment of ` 2,000 is payable from April onwards.
• Dividend @ 5% on preference share capital of ` 2, 00,000 will be paid on 1st June.
• Advance to be received for sale of vehicles ` 9,000 in June.
Dividends from investments amounting to ` 1,000 are expected to be received in June.
ASHUB (P) Company manufactures two products — X and Y. A forecast of units to be sold in the first
five month of the year is given below
Months Produ ct X Product Y
April 1,000 2,800
May 1,200 2,800
June 1,600 2,400
July 2,000 2,000
August 2,400 1,600

Other information is as follows:

Cost per u nit (`) Produ ct X Product Y
Direct Materials 12.50 19.00
Direct Labour 4.50 7.00
Factory Overhead 3.00 4.00

There will be no opening and closing work-in-progress at the end of any month. Finished product (in
units), equal to half of the budgeted sales of the next month, should be in stock at the end of each month
(including previous year ended March)
You are required to prepare:
(i) Production (in quantity) Budget for April to July; and
(ii) Summarized Production Cost Budget for the period.
ANTU GLASS Company provides the following details relating to Master Budget for the year ended
March 31, 2024,
Sales:
Toughened Glass ` 60,00,000
Bent Glass ` 20,00,000
Direct material cost 60% of sales
Diner wages 20 w orkers @ ` 1,500
per month
Factory overheads:
Ind irect labour-
Works manager ` 5,000 per month
Foreman ` 4,000 per month
Stores and spares 2.5% on sales
Dep reciation on machinery ` 1,26,000
Light and power ` 30,000
Repairs and maintenance ` 80,000
Others sundries 10% on direct wages
Administration , sellin g and distribution expenses ` 3,60,000 p er year

Required:
Prepare the Master Budget for the year ended March 31, 2024.
PCT LTD Provides you with the following information :-
(PP DEC 2022 ,2016 SYLL)

Particulars Product A Product B

1) Figures for the year 2021
a) Sales 240000 200000
b) Selling price per unit 24 50
c) Closing finished stock (on FIFO) `20,000at Rs 20 `46000 at Rs 20
Material and Labour requirements
Direct material X at the rate Rs 3 per units 1.9 units 3.8 unit
Direct material Y at the rate Rs 1 per units 1.08 UNIT 1.62 Unit
Direct labour in P dept at the rate Rs 1 hour 2 hours 1 hour
Direct labour in Q dept at the rate Rs 3 hour 1 Hour 1 hour
Target for 2022
Sales qty increase (20%) 25%
Selling price increase 25% (20%)
Closing finished stock units 2700 1100
Post production rejection rate 3% 5%
Direct material stock
Closing stock on 31/12/2021 11280 units 1640 units
Estimated stock was 31.12.2022 16000 units 4000 units
Material wastage rate 5% 4%

1. Material Prices are expected to increase by 10%.

2. Wage Rates are expected to increase by 30% and a 25% increase in labour productivity is
expected.
3. The factory works for 8 hours a day, 6 days a week and the budget period is one year and
during each quarter hours lost due to leave, holidays and other causes are estimated to be 124
hours.

Required: Prepare Sales Budget, Production Budget, Direct Material Usage & Purchase Budget, Man
Power Budget, Direct Labour Cost Budget.
B ltd is manufacturers of electronic switches .Each switch requires 3 minor circuit that cost RS 2 each
.The company has prepared a production budget for the electronic switches by quarters for year 2 and
the 1st quarter of the year 3 as follows :-

Year 2 Year 3
st
Budgeted production 1 2 3 4 First
60000 90000 150000 100000 80000

The inventory of the circuit at the end of a quarter must be equal to 20% of the following quarters
production needs. There will be 36000 minor circuits on hand to start the first quarter of year
Required :-
Prepare direct material budget for the minor circuits for each quarter for year .
 MARGINAL COSTING – BASIC CONCEPTS
INCOME STATEMENT

QUICK RECAP OF COSTS:

Nature Description Total Per / unit Change in cost

Fixed Cost FC remains FC in TOTAL FC / unit will Any CHANGE to
Constant remains constant DECREASE with FC should be
irrespective of INCREASE in no made in TOTAL.
change in no of of units.
units
FC / unit will
INCREASE with
DECREASE in no
of units.
Variable Cost VC will change in TOTAL VC will VC / UNIT will Any CHANGE to
same proportion INCREASE with remains VC should be
with the change in INCREASE in no CONSTANT. made in VC /
no of units. of units. UNIT.

TOTAL VC will
DECREASE with
DECREASE in no
of units.

INCOME STATEMENT

Particulars 1 unit 2000 unit 5000 unit 7000 unit 10000 unit
Sales @ Rs 100 p.u.
Less: Variable cost
@ Rs 40 p.u.
Contribution
Less: Fixed cost
(Rs 3 lakh)
Profit
CONTRIBUTION

1. CONTRIBUTION = SALES – VARIABLE COST

2. CONTRIBUTION = FIXED COST + PROFIT

PROFIT VOLUME RATIO / CONTRIBUTION TO SALES RATIO

1. PV RATIO = CONTRIBUTION X 100

SALES

2. PV RATIO = CONTN / UNIT X 100

SP / UNIT

3. PV RATIO = ∆ CONTRIBUTION X 100

∆ SALES

4. PV RATIO = ∆ PROFIT X 100

∆ SALES

5. PV RATIO = FIXED COST X 100

BEP VALUE

6. PV RATIO = PROFIT X 100

MOS VALUE

 PV RATIO WILL REMAIN …………………………IRRESPECTIVE OF CHANGE IN NO OF UNITS

 ………………………….THE PV RATIO, BETTER FOR THE COMPANY

 PV RATIO WILL IMPROVE –

 A. …………………………IN SP / UNIT

B. …………………………IN VC / UNIT

C. …………………………IN SP / UNIT > …………………………IN VC / UNIT

D. …………………………IN SP / UNIT < …………………………IN VC / UNIT

 PV RATIO + VARIABLE COST RATIO = 100%

BREAK EVEN POINT

1. BEP (QUANTITY) = FIXED COST

CONTN / UNIT

2. BEP (VALUE ) = FIXED COST

PV RATIO
 MARGIN OF SAFETY

1. MOS (QUANTITY) = PROFIT

CONTN / UNIT

2. MOS (VALUE ) = PROFIT

PV RATIO
 SALES TO EARN DESIRED LEVEL OF PROFIT

1. SALES (QUANTITY) = FC + PROFIT

CONTN / UNIT

2. SALES (VALUE ) = FC + PROFIT

PV RATIO

IMPORTANT POINT

 PV RATIO + VC & ON SALES = 100%

 BEP % ON SALES + BEP % ON SALES = 100%

 SALES VALUE = SALES QTY X SP/ UNIT

BEP VALUE = BEP QTY X SP / UNIT
MOS VALUE = MOS QTY X SP / UNIT

 IN CASE OF MERGED PLANT – CONVERT SALES, VC INTO 100% OF VALUES OF

PLANTS TO BE MEREGED, THEN CUMULATE VALUE FOR ALL THE PLANTS. FIXED
COST, HOWEVER, WILL NOT CHANGE.
COMPOSITE BEP

TOTAL CONTRIBUTION = FIXED COST

ILLUSTRATION - SHIRT T-SHIRT

SP / UNIT 1000 500
VC / UNIT 400 300
CONTN / UNIT 600 200

RATIO 5 : 2
FIXED COST = RS 680,000
1. A company sells its product at ` 15 per unit. In a period, if it produces and sells 8,000 units, it
incurs a loss of ` 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ` 4 per unit.
Calculate break-even point both in terms of rupees as well as in units.

2. A single product company sells its products at ` 60 per unit. In 2010, the company operated at a
margin of safety of 40%. The fixed costs amounted to ` 3,60,000 and the variable cost ratio to sales
was 80%
In 2011, it is estimated that the variable cost will go up by 10% and the fixed costs will increase by
5%.Find the selling price required to be fixed in 2011 to earn the same P/V ratio as in 2010.
Assuming the same selling price of ` 60 per unit in 2011, find the number of units required to be
produced and sold to earn the same profit as in 2010.

3. 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 :
Sales Profit
Actual Over/(Under) Actual Over/(Under)
Budget Budget
( ` in ‘000)
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)

Calculate for each factory and for the company as a whole for the period :
(i) The Fixed Costs. (ii) Break-even Sales.

4. PQR Ltd. has furnished the following data for the two years :
2010-11 2011-12
Sales ` 8,00,000 ?
Profit/Volume Ratio (P/V ratio) 50% 37.5%
Margin of Safety Sales as a % 40% 21.875%
of Total Sales

You are required to calculate the following :

(i) Sales for 2011-12 in ` (ii) Fixed cost for 2011-12
(iii) Break-even sales for 2011-12 in `
5. You are given the following data :
Sales Profit
Year 2010 ` 1,20,000 8,000
Year 2011 ` 1,40,000 13,000

(i) P/V ratio,

(ii) B.E. Point,
(iii) Profit when sales are ` 1,80,000,
(iv) Sales required earn a profit of ` 12,000,
(v) Margin of safety in year 2011.

6. A, B and C are three similar plans under the same Management who wants them to be merged for
better operation. The details are as under:
Plant A B C
Capacity operated 100 % 70 % 50 %
(in lacs) (in lacs) (in lacs)
Turnover 300 280 150
Variable cost 200 210 75
Fixed cost 70 50 62

Find out :
(i) The capacity of the Merged Plant for - Break Even
(ii) The profit at 75 % capacity of the Merged Plant.
(iii) The turnover from the merged plant to give a profit of ` 28 lacs.

7. A company gives the following information:

Margin of Safety ` 3,75,000
Total Cost ` 3,87,500
Margin of Safety (Qty.) 15,000 units
Break Even Sales in Units 5,000 units

(i) Selling price per unit (ii) Profit (iii) Profit/ Volume Ratio (iv) Break Even Sales (in Rupees) (v) Fixed
Cost
8. Arnav 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 COGS --
Direct Labour 15% of COGS --
Factory Overhead 10% of COGS ` 2,30,000
General & Administration 2% of COGS ` 71,000
Overhead
Selling & Distribution 4% of Cost of Sales ` 68,000
Overhead

Last Year 5,000 units were sold at ` 185 per unit. From the given data find the followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in %)
(d) Profit if the sales were 10% less than the actual sales.
9. M.K. Ltd. manufactures and sells a single product X whose selling price is ` 40 per unit and the
variable cost is ` 16 per unit.
(i) If the Fixed Costs for this year are` 4,80,000 and the annual sales are at 60%margin of safety,
calculate the rate of net return on sales, assuming an income tax level of 40%
(ii) For the next year, it is proposed to add another product line Y whose selling price would be` 50
per unit and the variable cost ` 10 per unit. The total fixed costs are estimated at ` 6,66,600. The
sales mix of X : Y would be 7 : 3. At what level of sales next year, would M.K. Ltd. break even? Give
separately for both X and Y the breakeven sales in rupee and quantities.

Illustration
The following is the statement of a Radical Co. for the month of June

Particulars Products Total (₹)

L M
₹ ₹
Sales 60,000 60,000 1,20,000
Less: Variable Costs 42,000 30,000 72,000
Contribution 18,000 30,000 48,000
Less: Fixed Cost 36,000
Net Income 12,000

You are required to compute the P/V Ratio for each product and then compute he P/V
Ratio, Break Even Pointand Net Income for the following assumption:
Sales revenue divided 60% to Product L & 40% to Product M
Sales revenue divided 40% to Product L & 60% to Product M
The following data has been extracted from the cost records of CYTOGEN Inc. For a
particular period, the Sales revenue is ` 2,00,000 and the profit is ` 20,000. If it is known that
the variable Cost ratio is 60% you are required to calculate:
(i) the Contribution to Sales Ratio
(ii) the Fixed Cost and
(iii) the Sales volume to earn a profit of ` 50,000

An exporter of auto machine parts is earning a profit of ` 1,00,000 on a sale of ` 12,00,000.

Selling price is ` 40 per part and variable cost is ` 30 per part. The exporter incurs an
additional fixed cost of `. 3,00,000 on product improvement which also enables him to
economise ` 5 in per part variable cost. As per trade agreements, the sale of his parts is
restricted to the old value of ` 12,00,000
Determine the selling price per part so that the exporter earns the same profit at the same
sales value?
A) Z plc currently sells products Aye, Bee and Cee in equal quantities and at the same selling
price per unit. The contribution to sales ratio for product Aye is 40 per cent; for product Bee
it is 50 per cent and the total is 48 per cent. If fixed costs are unaffected by mix and are
currently 20 per cent of sales. If the product mix is changed to: Aye 40% Bee 25% Cee 35%
Calculate the new total contribution/total sales ratio.

B) RT plc sells three products.

Product R has a contribution to sales ratio of 30%.
Product S has a contribution to sales ratio of 20%.
Product T has a contribution to sales ratio of 25%.
Monthly fixed costs are `100 000.
If the products are sold in the ratio: R: 2 S: 5 T: 3
Calculate the monthly breakeven point (to nearest
RONBANI Ltd., a manufacturing company, has prepared its budget to produce 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 quantity).
(ii) Revised break-even sales (in quantity), if it reduces its selling price by 10%.

M/s Ankita Plastics Limited provides you the data of the following products for the year
2022-23.
Particulars 1" PVC Pipe 1/2" PVC Pipe
Profit (`) 3,00,000 60,000
Unit Selling price (`) 200 150
P/V Ratio 40% 50%
Sales Mix = 2:1
Joint Fixed Cost = ` 8,15,000

M/s Ankita Plastics Limited expects that number of units to be sold in 2023-24 would be
same as in 2022-23. However, due to upgradation in manufacturing process, the joint fixed
cost would be reduced by 10% and the variable cost would increase by 8%.
You are required to calculate the following:
A. Number of units of product 1” PVC Pipe and 1/2” PVC Pipe sold in 2022-23.
B. Total expected profit of the company from the two products in 2023-24.
From the cost records of a company for a specific period, for product X, the information given in
the first column can be ignored since it is only one of the several projections of an assistant
accountant, but it may be useful to you
Particular This Period Actual (`) One of The Future Projections (`)
Sales (Units) 10,000 20,000
Profit (Loss) (10,000) 10,000
Fixed Costs 30,000 30,000
Variable Cost Per Unit 8 8

On the basis of the first column, determine

1. What increased sales volume is required to cover an additional attractive packaging cost of `
0.50 per unit, to increase the sales, at the existing sales price, to yield zero profit?
2. What increased sales volume is in required at the present sale price, to cover an additional
publicity expense of ` 5,000 for that period, while yielding a profit of ` 5,000.
3. What increased sales volume is required to reach a profit of ` 4,000 while reducing the selling
price by 3 per cent per unit
S Ltd. furnishes you the following information relating to the half year ended 30th June, 2022
Fixed expenses ` 45,000
Sales value ` 1,50,000
Profit ` 30,000
During the second half the year the company has projected a loss of 710,000.
Calculate:
1. The B.E.P and M/S for six months ending 30th June, 2022.
2. Expected sales volume for the second half of the year assuming that the P/V Ratio and Fixed
expenses remain constant in the second half year also.
The B.E.P and M/S for the whole year for 2022
Reaxon Ltd. a manufacturing company provides you the following details for the year 2023:
Sales (16,000 units) `16,00,000
Less Expenses (including ` 8,00,000 Fixed Expenses) `17,60,000
Net loss ` 1,60,000
The manager believes that an increase of `4,00,000 in advertising outlays will increase sales
substantially. His plan was approved by the chairman of the board.
Required:
(i) Calculate P/V Ratio and Break Even Sales.
(ii) Calculate what additional sales will be required to offset that increase in
advertisement outlays.
(iii) Determine what should be selling price per unit if the breakeven point is brought down to
20,000 units?
The cost volume -profit relationship of A ltd is described by the equation Y =Rs 240000+0.6 x , in
which x represents sales revenue and Y is the total cost (FC+VC) at the sales revenue / Volume
represented by X
Required :-
i. Identify this P/V ratio
ii. What sales volume must be obtained to break even for the company?
iii. Analyse sales volume to be required to produce an income of Rs 100000
FOVA LTD a manufacturing company sells 24000 flower vases every year .The details of cost for the
year ended 31st march 2022 is given below :-
Selling price per flower vase Rs 800
Variable cost per flower vase Rs 600
Fixed cost :- staff salaries Rs 2400000
General office cost Rs 800000
Advertising cost Rs 800000
Required :-
i. Assess the break even point and margin of safety in no.of units of sales
The company has gained reputation and in the year 2023 no advertising cost will have to be incurred if
the company so decides .The selling price will remain unaltered.The variable cost will have to increase
by 10% to make the flower vases more attractive.Consider the new BEP AND MARGIN OF SAFETY
AGT Ltd. manufactures a product, currently utilising 50% capacity with a turnover of 18,00,000 at 100
per unit and its P/V Ratio is 40%. The cost data is as under:
Particulars RS
Direct Material per unit 30
Direct Wages per unit 20
Variable Overheads per unit 8
Semi-Variable Overheads (which will increase by 22,800 for every 18% increase in capacity or any part
thereof) 96000
Fixed Overheads 240000
Required :-
(i) Calculate the Total Fixed Cost at 50% capacity level
(ii) Calculate the Number of units to be sold to earn a profit of 28 per unit
(iii) Calculate the Selling Price per unit to earn a profit of 25% on capital employed at the 80% activity
level. The fixed portion of capital employed is 53,85,600 and the Working Capital portion is 20% of
Sales
Calculate Break-Even-Point for a train journey between Delhi and Jaipur where the cost of an Engine is
80,000 and of a Bogie is 16,000. The capacity of a bogie is 70 passengers and each ticket is priced at
600. The variable cost per ticket is 100

GYC LTD provides you with the following information :-

Year 1 Year 2
Loss Rs 40000 Cost 1140000
Cost 108% of sales Profit 24% of sales
During the next year III, the Selling Price and Variable Cost are expected to be reduced by 20% and 33-
1/3% respectively and Fixed Costs are expected to increase by 25%.
Required: Estimate the Sales so as to earn a return of 30% on Capital Employed. Working Capital is
25% of Sales and 20% of Capital Employed
The following data relates to a manufacturing company:
Plant Capacity = 4,00,000 units per annum. Present Utilization = 40% Actual for the year 2014 were:
Selling price = 50 per unit, Material cost = 20 per unit,
Variable Manufacturing costs = 15 per unit and Fixed cost = 27,00,000.
\ In order to improve capacity utilization, the following proposal is considered: Reduce Selling price by
10% and spend additionally 3,00,000 in Sales Promotion. How many units should be produced and sold
in order to increase profit by 8,00,000 per year?
M/s BLl3 Industries provided you the following 31-03-2023; information for the year ended
Particulars Amount (In `)
Sales 40,000
Raw Material Cot 20,000
Direct Wages 6,000
Fixed & Variable Overhead 10,000
Profit 4,000
Units Sold 200 units
In the next financial year M/s BLB Industries expects the following:
(1) Wage rate will increase by 50%.
(ii) Fixed Cost will decrease by 1,000.
(iii) No, of units to be sold in the next year is 300 units.
(iv) Total Fixed & Variable overhead in the next financial year will be 12,000.

How many units are required to be sold in the next year so that same amount of profit per unit as in
2023 can be achieved?
 MARGINAL COSTING – DECISION MAKING
ABC Limited produces and sells two product- X and Y. The product is highly demanded in the
market. Following information relating to both the products are given as under :
Per Unit (`)
X Y
Direct Materials 140 180
Direct Wages 60 100
Variable Overheads (` 5 per 20 40
machine hour)
Selling price 300 450

The company is facing scarcity of machine hours for working. The availability of machine hours are
limited to 60,000 hrs in a month. At present, the monthly demand of product X and product Y is
8,000 units and 6,000 units respectively. The fixed expenses of the company are ` 2,25,000 per
month.
DETERMINE the product mix that generates maximum profit to the company in the given situation
and also CALCULATE the profit of the company.
Moon Ltd. produces products ‘X’, ‘Y’ and ‘Z’ and has decided to analyse its production mix in respect
of these three products - ‘X’, ‘Y’ and ‘Z’.

You have the following information:

Department X Y Z
Direct Materials ` (per 160 120 80
unit)
Variable Overheads ` 8 20 12
(per unit)

Direct labour:
Department Rate per Hour (`) Hours per unit Hours per unit Hours pe
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11

From the current budget, further details are as below :

X Y Z
Annual Production at 10,000 12,000 20,000
present (in units)
Estimated Selling Price 312 400 240
per unit (`)
Sales departments 12,000 16,000 24,000
estimate of possible
sales in the coming
year (in units)

There is a constraint on supply of labour in Department-A and its manpower cannot be increased
beyond its present level.
Required:
(i) IDENTIFY the best possible product mix of Moon Ltd.
(ii) CALCULATE the total contribution from the best possible product mix.
Illustration
A company has a capacity of producing 1 lakh units of a certain product in a month. The sales
department reports that the following schedule of sales price is possible:
Volume of Production Selling Price per unit
% (₹)
60 0.90
70 0.80
80 0.75
90 0.67
100 0.61
The variable cost of manufacture between these levels is 15 paise per unit and fixed cost ₹
40,000. Prepare a statement showing incremental revenue and differential cost at each stage.
At which volume of production will the profit be maximum?

Illustration
A company is at present working at 90% of its capacity and producing 13,500 units per annum. It
operates a flexible budgetary control system. The following figures are obtained from its budget:

90% 100%
Amount (₹) Amount (₹)
Sales 15,00,000 16,00,000
Fixed expenses 3,00,500 3,00,600
Semi-fixed expenses 97,500 1,00,500
Variable expenses 1,45,000 1,49,500
Units made 13,500 15,000

Labour and material costs per unit are constant under present conditions. Profit margin is 10%.
(a) You are required to determine the differential cost of producing 1,500 units by increasing capacity to 100%.

(b) What would you recommend for an export price for these 1,500 units taking into account that overseas
prices are much lower than indigenous prices?
Illustration

A Company is manufacturing a product marks an average net profit of ₹ 2.50 per piece on a selling
priceof ₹ 14.30 by producing and selling 6,000 pieces or 60% of the capacity. His cost of sales is as under:

Particulars `
Direct material 3.50
Direct wages 1.25
Works overheads (50% fixed) 6.25
Sales overheads (25% variable) 0.80
During the current year, he intends to produce the same number but anticipates that fixed charges willgo up
by 10%, with direct labour rate and material will increase by 8% and 6% respectively but he hasno option
of increasing the selling price. Under this situation, he obtains an offer for further 20% of thecapacity. What
minimum price you will recommend for acceptance to ensure the manufacturer an overall profit of ₹ 16,730.
Illustration

A Co. currently operating at 80% capacity has the following; profitability particulars:

Amount (`) Amount (`)

Sales 12,80,000
Costs:
Direct Materials 4,00,000
Direct labour 1,60,000
Variable Overheads 80,000
Fixed Overheads 5,20,000 11,60,000
Profit 1,20,000

An export order has been received that would utilise half the capacity of the factory. The order has
either to be taken in full and executed at 10% below the normal domestic prices, or rejected totally. The
alternatives available to the management are given below:
a) Reject order and Continue with the domestic sales only, as at present;
b) Accept; order, split capacity equally between overseas and domestic sales and turn away
excessdomestic demand;
c) Increase capacity so as to accept the export order and maintain the present domestic sales by:
(i) buying an equipment that will increase capacity by 10% and fixed cost by `40,000 and
(ii) Work overtime at one and a half the normal rate to meet balance of required capacity.
Preparecomparative statements of profitability and suggest the best.
Illustration

A company is producing two products A and B. The particulars of the company are as follows:

Product A Product B
(₹ per unit) (₹ per unit)
Sales 75 80
Material Cost 15 20
Labour Cost 20 15
Direct Expense 10 12
Variable overheads 10 15
Machine Hours used 3 hours 2 hours
Consumption of material 2 kgs 2 kgs

Comment on profitability of each product, if both use the same raw material, when:
(i) Total sales potential in units is key factor.
(ii) Total sales potential in values is key factor.
(iii) Raw material is in short supply.
(iv) Production Capacity (in terms of machine hr.) is the key factor.
Illustration

X Ltd. wants to replace one of its old machines. Three alternative machines namely X1, X2 and X3
areunder its consideration. The costs associated with these machines are as under:

Amount (₹)
X1 X2 X3
Direct material cost p.a……………..... 50 100 150
Direct labour cost p.a…………………. 40 70 200
Variable overhead p.a………………… 10 30 50
Fixed cost p.a………………………….. 2,50,000 1,50,000 70,000

(i) Compute the cost indifference points for these alternatives.

(ii) Based on these points suggest a most economical alternative machine to replace the old one
whenthe expected level of annual production is 1,200 units.
Illustration 9

The Hope Company has three divisions. Each of which makes a different product. The budgeted data for
the coming year are as follows:

A (₹) B (₹) C (₹)

Sales 1,12,000 56,000 84,000
Direct Material 14,000 7,000 14,000
Direct Labour 5,600 7,000 22,400
Direct Expenses 14,000 7,000 28,000
Fixed Cost 28,000 14,000 28,000

The Management is considering closing down the division C. There is no possibility of reducing fixed
cost.Advise whether or not division C should be closed down.
Illustration

A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option only at
thebeginning of each year. Relevant information about the products for the next year is given below:

X Y Z
Selling Price (₹ / unit) 10 12 12
Variable Costs (₹ / unit) 6 9 7
Market Demand (units) 3,000 2,000 1,000
Production Capacity (units) 2,000 3,000 900
Fixed Costs (₹) 30,000

Required:
Compute the opportunity costs for each of the products.

Illustration

As a Management Accountant of Bush Radio Company you find that while it costs ₹12.50 to
make acomponent X, the same is available in the market at ₹11.50 with an assurance of continued
supply. The break-down of the cost is:

(₹)
Materials -- ₹5.50
Labour -- ₹3.50
Other variable overheads -- ₹1.00
Depreciation & other fixed cost -- ₹2.50
Total Cost -- ₹12.50

a. Should you make or buy?

b. What would be your decision, if the supplier offered the component at ₹. 9.70 each?
Illustration

A factory produces 24000 units. The cost sheet gives the following information:
Direct material ₹ 1,20,000
Direct wages 84,000
Variable overheads 48,000
Semi-variable overheads 28,000
Fixed overheads 80,000
Total Cost 3,60,000
The product is sold at ₹20 per unit. The management proposed to increase the production by 3000
unitsfor sales in the foreign market. It is estimated that semi-variable overheads will increase by ₹1,000.
But the product will be sold at ₹14 per unit in the foreign market. However, no additional capital
expenditure willbe incurred. The management seeks your advice as cost accountant.
What will you advise them?

Illustration

XYZ Company is considering hiring a machine at an annual charge of ₹12,000 to increase the output ofa
product from its present level of 6,000 units. It is anticipated that with the introduction of the machine the
variable cost per unit will be reduced by ₹1.00 due to savings in labour cost. The new machine will notaffect
fixed cost in total, except for the hiring charges. The selling price of the product is ₹12 per unit. Thepresent
cost structure of the product is Variable cost ₹9 per unit and fixed cost ₹1.00 unit.
You are required to calculate the number of extra units, which must be produced and sold to justify hiringthe
machine, (that is the cost indifference point for the new machine).
 Illustration

A plant is running at present at 50% of its capacity. The following details are available:
Cost of productionper
unit (₹)
Direct materials 2
Direct Labour 1
Variable overhead 3
Fixed Overhead 2
Total Cost per unit 8
Production per month 20,000 units
Total cost of production ₹1,60,000
Sales Price ₹1,40,000
Loss ₹20,000
An exporter offers to buy 5,000 units per month at the rate of ₹. 6.50 per unit and the company hesitates to
accept the offer for fear of increasing its operating losses. Advise whether the company should accept or
decline this offer.
M/s Visual Infotech Pvt. Limited is a multiple product manufacturer. One product line consists of CCT
V Camera and the company manufactures three different models. M/s Visual Infotech Pvt. Limited is
currently considering a proposal from a supplier who want to supply lenses of the CCTV Camera to M/s
Visual Infotech Pvt. Limited.
M/s Visual Infotech Pvt. Limited currently produces all the lenses it requires. In order to meet
customers’ needs, M/s Visual Infotech Pvt. Limited produces three different types of lenses for each
CCTV Camera model (i.e. nine different lenses).
The supplier would charge ¥ 2,500 per lens, regardless of type of lens. For the next year, M/s Visual
Infotech Pvt. Limited has projected the cost of its own production of lenses as follows (based on
projected volume of 10,000 units):
Particulars Amount (`)
Direct Material 75,00,000
Direct Labour 65,00,000
Variable Overhead 55,00,000
Fixed Overhead:
Factory Supervisors’ Cost 35,00,000
Other Fixed Cost 65,00,000
Total Production Cost 2,95,00,000

Additional information:
1. The equipment utilized to produce the lenses has no alternative use and no market value.
2. The space occupied by the lens production unit will remain idle if the company purchases the
lenses from outside market rather than produce in-house
3. Factory supervision cost is for salary of a Quality Manager & Production Supervisor who
would be dismissed from the company if the company closes its lens production unit

Required:
(i) Determine the net profit or loss of purchasing (rather than manufacturing) the lenses required for
CCTV Camera.
(ii) Determine the level of production where the company would be indifferent between buying and
producing the lenses. If the future volume level is predicted to decrease, would that influence your
decision?
(iii) What would be your decision if the space presently occupied by lens production unit could be leased
to another company at a lease rent of % 25,00,000 per annum?
A company is engaged in three distinct lines of production. Their production cost per unit and selling
prices are as under
X Y Z
Production (Units) 3,000 2,000 5,000
` ` `
Material Cost 18 26 30
Wages 7 9 10
Variable overheads 2 3 3
Fixed Overheads 5 8 9
32 46 52
Selling price 40 60 61
Profit 8 14 9
.
The management wants to discontinue one line and gives you the assurance that production in two other lines
shall be raised by 50%.
They intend to discontinue the line which produces Article X as it is less profitable

(a) Do you agree to the scheme in principle?

(b) Offer your comments and show the necessary statements to support your decision
Susma Products Co. Ltd. manufactured and sold in a year 15,000 units of a particular product fetching a
sales value of ₹15 lakhs. After charging direct material @ 30% on sales value, direct labour 20% on sales
value, variable overheads ₹10 per unit, the company earned profit of ₹ 16⅔ per unit during the year. The
existing equipment can produce a maximum of 20,000 units per annum. In case, the demand exceeds the
maximum output, new equipment will be required which will cost ₹10 lakhs and it will have a life span
of 10 years, with no residual value.
A prospective customer is willing to place an order on the company for 10,000 units per year regularly at
90% of the present selling price, which will be, if accepted, over and above the existing market for 15,000
units.
Irrespective of the fact whether or not the new order materializes, the cost increases with immediate effect
are:
1. 10% in the Direct Materials.
2. 25% in the Direct Labour.
3. ₹50,000 in Fixed Overheads per year.
If the order of additional 10,000 units is accepted, the fixed overhead will increase by another ₹50,000
by way of increased administration expenses.
You are required to determine whether the company should accept the new business at the stipulated price
or decline the new offer and make a concerted sales drive to sell the present unused capacity at the present
selling price. The sales drive will cost ₹ 60,000 per year.
Ignore the financial charges on the cost of the equipment and assume there is no opening and closing
inventories. Variable costs will increase in direct proportion to the output.
Company XYZ produces two components (M, and N) and is planning the allocation of its available
resources for the next period, 750 units of component M and 600 waits of component N are required fo
be produced' but machine hour capacity is restricted to a total of 3,000 hours. Any deficit of components,
produced in-house can be made up by the purchase of any quantity of either component from an outside
supplier. The objective of the company is to satisfy the requirement for components at minimum total
cost.
The following information is available concerning each component..The information is for cost per

PARTICUL ARS M N
Direct material 62 87
Direct l abour 51 75
Vari able production overh ead 12 13
Fixed production overhead 48 64
Total 173 239
Machine hours 2 3
Price from outsi de suppli er 185 259

Calculate the variable costs of producing each component in — house, extra costs of buying-in each
component and determine which component should have production priority.
 PROCESS COSTING
PROCESS ACCOUNT (NO OPENING & CLOSING WIP)

PROCESS I ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

To Raw 1000 50 50,000 By Normal Loss 100 10 1000
Material
To Direct 15,000 By Process II 850
Wages A/C
To Direct 25,000 By Abnormal
Expenses Loss
To Factory O/H 10,000

1000 1000

PROCESS I ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

To Raw 1000 50 50,000 By Normal Loss 100 10 1000
Material
To Direct 15,000 By Process II 930
Wages A/C
To Direct 25,000
Expenses
To Factory O/H 10,000
To Abnormal
Gain
 NORMAL LOSS / ABNORMAL LOSS / ABNORMAL GAIN

NORMAL LOSS ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

ABNORMAL LOSS ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

ABNORMAL GAIN ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

A product passes through three processes A, B and C. The details of expenses incurred on the three
processes during the year were as under:
Process A Process B Process C
` ` `
Units introduced @ `100 per unit 10,000
Sundry materials (`) 10,000 15,000 5,000
Labour 30,000 80,000 65,000
Direct expenses 6,000 18,150 27,200
Selling price per unit 120 165 250

Management expenses during the year were ` 80,000 and selling expenses were ` 50,000. These

are not allocated to the processes. Actual output of three processes was: A: 9,300 units; B: 5,400

units; C: 2,100 units.

Two-thirds of the output of Process A and one-half of the output of Process B was passed on the

next process and the balance was sold. The entire output of Process C was sold.

The normal loss of the three processes, calculated on the input of every process, was:

Process A 5%, B 15% and C 20%. The loss of Process A was sold at ` 2 per unit and that of B at ` 5 per

unit and of Process C at ` 10 per unit. Prepare the three Process Accounts.
 PROCESS ACCOUNT (CLOSING WIP)

PROCESS I ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

To Raw 1000 50 50,000 By Normal Loss 100 10 1000
Material
To Direct 35,000 By Process II 700
Wages A/C
To Factory O/H 15,000 By Abnormal 50
Loss
By Closing WIP 150
(Mat 100%, CC
40%)

1000 1000

STATEMENT OF EQUIVALENT NO OF UNITS

INPUT PARTICULARS OUTPUT % MAT % LABOUR % O/H

COMPLETED
CLOSING WIP
NORMAL
LOSS
ABNORMAL
LOSS
ABNORMAL
GAIN

STATEMENT OF COST / EQUIVALENT UNIT

PARTICULARS COST EQUIVALENT UNIT RATE / EQUIVALENT

UNIT

STATEMENT OF VALUE OF COMPLETED UNITS, CLOSING WIP, ABNORMAL LOSS / GAIN

PARTICULARS DETAILS AMOUNT

COMPLETED
CLOSING WIP
NORMAL LOSS
ABNORMAL LOSS
ABNORMAL GAIN
XP Ltd. furnishes you the following information relating to process II.
(i) Opening work-in-progress NIL
(ii) Units introduced 42,000 units @ ` 8
(iii) Expenses debited to the process:
Direct material 79,380
Labour 1,01,170
Overhead 1,61,024
(iv) Normal loss in the process 2 % of input.
(v) Closing work-in-progress 1200 units
Degree of completion- 100%
Materials
Labour 50%
Overhead 40%
(vi) Finished output - 39,500 units
(vii) Degree of completion of abnormal loss:
Material 100%
Labour 80%
Overhead 60%
(viii) Units scraped were sold at ` 4.50 per unit.
 PROCESS ACCOUNT (OPENING & CLOSING WIP) – FIFO

PROCESS I ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

To Opening WIP 200 70 14,000 By Normal Loss 120 10 1200
(Mat 100%, CC (10%)
80%)
To Raw 1000 50 50,000 By Process II 900
Material A/C
To Direct 35,000 By Abnormal 30
Wages Loss
To Factory O/H 15,000 By Closing WIP 150
(Mat 100%, CC
70%)

1200 1200
STATEMENT OF EQUIVALENT NO OF UNITS

INPUT PARTICULARS OUTPUT % MAT % LABOUR % O/H

COMPLETED
- Out of
opening
- Introduced
& completed

CLOSING WIP
NORMAL
LOSS
ABNORMAL
LOSS
ABNORMAL
GAIN

STATEMENT OF COST / EQUIVALENT UNIT

PARTICULARS COST EQUIVALENT UNIT RATE / EQUIVALENT

UNIT
STATEMENT OF VALUE OF COMPLETED UNITS, CLOSING WIP, ABNORMAL LOSS / GAIN

PARTICULARS DETAILS AMOUNT

COMPLETED
CLOSING WIP
NORMAL LOSS
ABNORMAL LOSS
ABNORMAL GAIN

The following data are available in respect of Process I for February 2012 :
(1) Opening stock of work in process : 800 units at a total cost of ` 4,000.
(2) Degree of completion of
Opening WIP Scrapped Closing WIP
Materials 100% 100% 100%
Labour 60% 80% 70%
Overheads 60% 80% 70%
Units 800 1,200 900
(3) Input of materials at a total cost of ` 36,800 for 9,200 units.

(4) Direct wages incurred ` 16,740.

(5) Production overhead ` 8,370.

(6) 7,900 units were completed and transferred to the next process.

(7) Normal loss is 8% of the total input (opening stock plus units put in).

(8) Scrap value is ` 4 per unit.

You are required to show the Process Account for February, 2012 on FIFO basis.
 PROCESS ACCOUNT (OPENING & CLOSING WIP) –
WEIGHTED AVERAGE

PROCESS I ACCOUNT

Particulars Qty Rate Value Particulars Qty Rate Value

To Opening WIP 200 70 14,000 By Normal Loss 120 10 1200
(10000+1500+2500) (10%)
To Raw Material 1000 50 50,000 By Process II 900
A/C
To Direct Wages 35,000 By Abnormal 30
Loss
To Factory O/H 15,000 By Closing WIP 150
(Mat 100%, CC
70%)

1200 1200

STATEMENT OF EQUIVALENT NO OF UNITS

INPUT PARTICULARS OUTPUT % MAT % LABOUR % O/H

COMPLETED
CLOSING WIP
NORMAL
LOSS
ABNORMAL
LOSS
ABNORMAL
GAIN

STATEMENT OF COST / EQUIVALENT UNIT

PARTICULARS COST EQUIVALENT UNIT RATE / EQUIVALENT

UNIT

STATEMENT OF VALUE OF COMPLETED UNITS, CLOSING WIP, ABNORMAL LOSS / GAIN

PARTICULARS DETAILS AMOUNT

COMPLETED
CLOSING WIP
NORMAL LOSS
ABNORMAL LOSS
ABNORMAL GAIN
 The following details are available of Process X for August 2011:
(1) Opening work-in-progress 8,000 units
Degree of completion and cost:
Material (100%) `63,900
Labour (60%) ` 10,800
Overheads (60%) ` 5,400
(2) Input 1,82,000 units at ` 7,56,900
(3) Labour paid ` 3,28,000
(4) Over heads incurred ` 1,64,000
(5) Units scrapped 14,000
Degree of completion:
Material 100%
Labour and overhead 80%
(6) Closing work-in-process 18000 units
Degree of completion:
Material 100%
Labour and overhead 70%
(7) 1,58,000 units were completed and transferred to next process.

(8) Normal loss is 8% of total input including opening work-in-process

(9) Scrap value is ` 8 per unit to be adjusted in direct material cost

You are required to compute, assuming that average method of inventory is used:
."Super Bite" is a leading product in the confectionery market which is obtained after it has gone
through three distinct processes - X, Y and Z. The following information is obtained from cost records
of Super (India) Ltd. for the month of July, 2023:
PARTICULARS PROCESS X PROCESS Y PROCESS Z
Input of raw materials @30 per unit (units) 1000
Other material (`) 26000 19800 29620
Direct wages 20000 30000 40000
Normal loss of input 5% 10% 15%
Output (units) 950 840 750
Sale of scrap/unit 20 40 50

Total overheads Rs 90000 which are recovered at 100% of wages

Prepare Process Account
A product passes through two processes. The output of Process I becomes the input of Process II
and the output of Process II is transferred to warehouse. The quantity of raw materials
introduced into process I is 20,000 kgs. at ₹ 10 per kg. The cost and output data for the month
under review are as under

Particulars Process I Process II

Direct materials ₹60,000 ₹ 40,000
Direct labour ₹40,000 ₹ 30,000
Production ₹39,000 ₹40,250
overheadsNormal 8% 5%
loss 18,000 17,400
Output 2.00 3.00
Loss realization of ₹/Unit

The company’s policy is to fix the selling price of the end product in such a way as to yield a
profit of 20% on selling price.
Required: (i) Prepare the Process Accounts, (ii) Determine the selling price per unit to the end
product
A company produces a product 'M' by three distinct processes before it is ready for sale. From
the information given below, work out the selling price of the product if the Management
decides to earn a profit of 20% over its works cost. Prepare the Process A/c for each process

Particulars Process
A B C
1 Input of raw materials @ ₹40 per kg. (kg) 10,000 - -
2 Normal loss of input 5% 5% 5%
3 Delivered to next process (kg) 9,000 8,000 -
4 Total direct labour cost (₹) 15,000 15,750 13,000
5 Variable overhead (%of direct labour) 150% 120% 100%
6 Fixed overhead (% of direct labour) 250% 180% 200%
7 Finished stock held back (kg) 400 400 -
A product passes through three processes: A, B and C 10,000 units at a cost of ₹1.10 were
issued to process L. The other direct Expenses were as follows:
Process A Process B Process C
(₹) (₹) (₹)
Sundry materials 1,500 1,500 1,500

Direct Labour 4,500 8,000 6,500

Direct Expenses 1,000 1,000 1,503

The wastage of process A was 5% and in process B 4%. The wastage of process A was sold at ₹0.25
per unit and that of B at ₹ 0.50 per unit and that C at ₹ 1.00 per unit. The overhead charges were
160% of direct labour. The final product was sold at ₹10 per unit sfetching a profit of 25% on cost.
Prepare process A/ c and also find out percentage of wastage in Process C
 JOINT & BY PRODUCT
JOINT PRODUCT VS BY PRODUCT

JOINT COST AND SUBSEQUENT COST

 METHODS OF APPORTIONMENT OF JOINT COST

A. PHYSICAL UNIT METHOD

UNITS AMOUNT

A 500

B 300

C 200

60,000

B. AVERAGE COST METHOD

UNITS AMOUNT

A 500

B 300

C 200

60,000

C. CONTRIBUTION MARGIN METHOD

UNITS SP / UNIT SALES VALUE VARIABLE COST CONTN FC

A 500 10

B 300 8

60,000 40,000
 D. REVERSE COST METHOD

XY Ltd manufactures three joint products – A, B and C. The actual joint expenses of manufacture for
a period were ` 8,000. It was estimated that the profit on each product as a percentage of sales
would be 30%, 25% and 15% respectively. Subsequent expenses were as follows:
A B C
` ` `
Materials 100 75 25
Labour 200 125 50
Overheads 150 125 75
450 325 150
Sales 6,000 4,000 2,500

Prepare a statement showing apportionment of the joint expenses of manufacture over different
products based on Reverse Cost method.
E. SALES VALUE AT SPLIT OFF POINT METHOD

F. NET REALISABLE VALUE (NRV) METHOD

NRV = SALES VALUE OF FINAL OUTPUT - S & D OVERHEAD – FURTHER PROCESSING COST
 BY PRODUCT

METHOD OF CALCULATION OF VALUE OF BY -PRODUCT

SCRAP REALISABLE VALUE REVERSE COST METHOD

A company manufactures one main product (M1) and two by-products B1 and B2. For the month of
January 2013, following details are available:
Total Cost upto separation Point ` 2,12,400
M1 B1 B2
Cost after separation ` 35,000 ` 24,000
No. of units produced 4,000 1,800 3,000
Selling price per unit ` 100 ` 40 ` 30
Estimated profit as % to sales 20% 30%
Estd selling exp as % to sales 20% 15% 15%
value

Prepare statement showing: (i) Allocation of joint cost; and (ii) Product-wise and overall profitability
of the company for January 2013.
A factory is engaged in the production of chemical BOMEX and in the course of its manufacture, a
by-product. Berucil is produced, which after further processing has a commercial value. For
the month of April 2011, the following are the summarised cost data :-
Separate Expenses of
Joint Expenses Bomex Berucil
` ` `
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 98 34
Estimated profit p.u. 4
No. of units produced 2,000 2,000

The factory uses reverse cost method of accounting for by-products.

You are required to prepare statements showing :
(i) The joint cost allocable to Bomex.
(ii) The product wise and overall profitability of the factory for April, 2011.
Inorganic Chemicals purchases salt and processes it into more-refined products such as caustic soda,
chlorine, and PVC (Polyvinyl chloride). During the month of April, 2000, Inorganic Chemicals
purchased salt for ` 40,000. Conversion cost of ` 60,000 were incurred upto the split-off point,
at which time two saleable products were produced ; Caustic soda and chlorine can be further
processed into PVC. The April production and sales information are as follows :
Production Sales Sales price per Ton
Caustic Soda 1,200 tons 1,200 tons ` 50
Chlorine 800 tons
PVC 500 tons 500 tons ` 200

All 800 tons of chlorine were further processed, at an incremental cost of ` 20,000 to yield 500 tons
of PVC. There were no byproducts or scrap from this further processing of chlorine. There were
no beginning or inventories of caustic soda, chlorine or PVC in April.
There is an active market for chlorine. Inorganic Chemicals could have sold all its April production of
chlorine at ` 75 a ton.
Required ;
i. Calculate, how the joint costs of ` 100,000 would be allocated between Caustic soda and chlorine
under each of the following methods :
a. Sales value at split off ;
b. Physical measure (tons); and
c. Estimated net realizable value.
ii. Lifetime Swimming Pool Products offer to purchase 800 tons of Chlorine in May, 2000 at ` 75 a
ton. This sale would mean that no PVC would be produced in May. How would accepting the offer
affect May Operating Income?
SUNMOON Ltd. produces 2,00,000 : 30,000; 25,000; 20,000 and 75,000 units of its five products A, B,
C, D and E respectively in a manufacturing process and sells them at ` 17, ` 13, ` 8, ` 10 and ` 14 per
unit. Except product D remaining products can be further processed and then can be sold at ` 25, `
17, ` 12 and ` 20 per unit in case of A, B, C and E respectively. Raw material costs ` 35,90,000 and other
manufacturing expenses cost ` 5,47,000 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
` 12,50,000; ` 1,50,000; ` 50,000 and ` 1,50,000 respectively. Fixed costs are ` 4,73,000.
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.
Can you suggest any other production plan whereby the company can maximise its profits ? If yes,
then submit a statement showing income forecast arising out of adoption of that plan.
XINT LTD. in the course of refining crude oil obtains four joint products P, Q, R and S. The total

cost till the split off point was

PRODUCT OUTPUT(GALLON) SALES AMOUNT SEPARATE COST

D 50000 1250000 260000
Q 10000 30000 20000
R 5000 50000
S 8000 80000 10000

Required:

(i) Determine the net income for each of the products if the joint costs are apportioned on the basis
of sales value of the different products.

(ii) Calculate the net income of each of the products if the company decides to sale the products at
the split off point itself as-P@18, Q@ 1.50, R@ 10 and S @7.80 per gallon.

(iii) Advise the Management of XINT LTD. as to whether the four products are to be sold at the split
off point or after further processing.
CBA Ltd., manufactures certain grades of products known as M, B1 and B2. In course of manufacture
of product M (main product), by-products - B1 and B2 emerge. The joint expenses of manufacture
amount to ₹ 2,37,600.

All the three products are processed further after separation and sold as per details given below

Product – B1 Product – B2
Sales (₹) 2,00,000 1,20,000 80,000
Cost incurred after separation (₹) 20,000 15,000 10,000
Profit as percentage on sales 25 20 15

Total fixed selling expenses are 10% of total cost of sales which are apportioned to the three
products in the ratio of 20:40:40.

Required:

(i) Prepare a statement showing the apportionment of joint costs to the products (M, B1 and
B2)

(ii) If the product B1 (by product) is not subject to further processing and is sold at the point of
separation, for which there is a market at ₹1,00,440 without incurring any selling expenses, would
you advise its disposal at this stage? Show the working
XYZ company obtains four different products namely M,N,O and P. The data on production and sale
of these brands during 2022 is reproduced below.
Brand Name M N O P

Production & Sales (units) 5,00,000 3,00,000 40,000 70,000

Sale value (₹ Lakhs) 31 15 1.2 2.8

All the above beauty soaps are manufactured jointly up to a particular process. At split off point they
are formed into cake-sand packed. The annual cost data were as under
Direct Material Cost ₹ 40 lakhs

Value added
(includes profit at 25% on total cost) ₹ 10 lakhs

Out of the above brands, P is sold in unpacked condition without further processing while other 3
brands further processed at an additional cost
M ₹ 1,30,000
N ₹ 1,20,000
O ₹ 50,000

You are required to: -

(a) Work out the profit and cost of each brand of soap after allocating joint cost on the basis of
Net Realisable value at split up point. (Per unit cost not required).

(b) Find out revised cost and profit on each brand if the company decides to sell all soaps at split
up point at following prices: M ₹6.00; N ₹ 4.50; O ₹ 1.50 and P ₹ 4.00 per unit

Assume that for allocation of joint cost net realisable value method is used.

With the working results in (a) and (b) above advise XYZ company about the processing decision as
to which soap to be sold at split of point and which to be processed further so as to maximize profit.
Substantiate your decision with suitable costing technique.
 STANDARD COSTING
MATERIAL COST VARIANCE

MATERIAL USAGE / QUANTITY VARIANCE MATERIAL RATE / PRICE VARIANCE

MATERIAL YIELD VARIANCE MATERIAL MIX VARIANCE

COST CARD

MATERIAL SQ FOR STD RATE STD COST ACTUAL ACTUAL ACTUAL ACTUAL
ACTUAL QTY RATE COST QTY IN STD
OUTPUT PROP
A 1000 4 1200 5
B 500 3 600 3.5
C 300 2 360 1.8
1800 2160
TREATMENT OF NORMAL LOSS

COST CARD

MATERIAL STD QTY SQ FOR STD RATE STD COST ACTUAL ACTUAL ACTUAL
ACTUAL QTY RATE COST
OUTPUT
A 1000 4 1300 5

B 500 3 800 3.5

C 300 2 660 1.8

1800 2160
(-) (180)
NORMAL
LOSS @
10%
1620

ACTUAL OUTPUT – 2430 UNITS

The standard mix to produce one unit of product is as follows:
Material X 60 units @ ` 15 per unit 900
Material Y 80 units @ ` 20 per unit 1,600
Material Z 100 units @ ` 25 per unit 2,500
240 units

During the month of April, 10 units were actually produced and consumption was as follows:
Material X 640 units @ ` 17.50 per unit 11,200
Material Y 950 units @ ` 18.00 per unit 17,100
Material Z 870 units @ ` 27.50 per unit 23,925
2460 units

Calculate all material variances.

The standard cost of a certain mixture is as under:
60% of material A at ` 40 per tonne. 40% of Material B at ` 60 per tonne.
A standard loss of 20% is expected in production. The following actual cost data is given for the
period:
140 tonne material A at a cost of ` 42 per tonne
110 tonne of material B at a cost of ` 56 per tonne
The quantity produced was 195 tonne of good product.
Traditional Tiles Ltd. makes tiles of size of 6” × 6” x 1/8”. Calculate direct materials variances:
A standard mix of the compound required to produce 24,000 square feet of tiles 1/8” thick is as
below:
Direct Quantity kg. Price per kg.
Material (`)
X 1380 70
Y 920 35
Z 1150 20
During December, 8 mixes were processed and actual materials consumed were :
Direct Material Quantity kg. Price per kg.
(`)
X 11,500 65
Y 6,670 30
Z 10,120 25
Actual production for December was 7,44,000 tiles.
J.K. Ltd. manufactures NXE by mixing three raw materials. For every batch of 100 kgs. of NXE,
125 kgs. of raw materials are used. In April, 2012, 60 batches were prepared to produce an
output of 5,600 kgs. of NXE. The standard and actual particulars for April, 2012, are as follows
:
Raw Materials Standard Actual
Mix Price per kg. Mix Price per kg.

% ` % `
A 50 20 60 21
B 30 10 20 8
C 20 5 20 6
Following data is extracted from the books of XYZ Ltd. for the month of January, 2020:

(i) Estimation-
Particulars Quantity (kg.) Price (`) Amount (`)
Material-A 800 ? --
Material-B 600 30.00 18,000
--

Normal loss was expected to be 10% of total input materials.

(ii) Actuals-
1480 kg of output produced.
Particulars Quantity (kg.) Price (`) Amount (`)
Material-A 900 ? --
Material-B ? 32.50 --
59,825

(iii) Other Information-

Material Cost Variance = ` 3,625 (F) Material Price Variance = ` 175 (F)
The following standards have been set for the production:

Material Standard Mix Standard Price (`)

A 40% 40 per kg.
B 60% 30 per kg.

The standard loss in processing is 15%.

During July, 2018 the company produced 2,000 kg. of finished output.
The positions of stock and purchases for the month of July, 2018 are as under:
Material Stock on 1st Stock on Purchases during July 2018
July, 2018 31st July, 2018 Quantity Amount (`)
A 40 kg. 10 kg. 900 kg. 42.50
B 50 kg. 60 kg. 1,400 kg. 25.00

The company follows FIFO method of stock valuation.

A factory of GOXIN LTD. using standard costing system, manufactures a chemical product
VON with three ingredient chemicals. A, B and C as per standard data given below:
Chemical Percentage of total input standard cost/kg
A 50% 40
B 30% 60
C 20% 95
There is a process loss of 5% during the course of manufacture.
The Management gives the following details for a certain week.
Chemical Consumed Quantity Purchased and issued Actual Cost
(
A 5200 kg
234000
B 3600 kg
219600
C 1700 kg
158100

Output of finished product – 10200kg

The standard material inputs required for 1,000 kgs. of a finished product are given below
Material Quantity Standard rate per
kg.
(in kg)
(in ₹)
P 450 20
Q 400 40
R 250 60
1,100
Standard loss 100
Standard output 1,000

Actual production in a period was 20,000 kgs. of the finished product for which the actual
quantities of material used and the prices paid thereof, are as under
Material Quantity Standard rate per
kg.
(in kgs)
(in ₹)
P 10,000 19
Q 8,500 42
R 4,500 65
 LABOUR COST VARIANCE

LABOUR EFFICIENCY VARIANCE IDLE TIME VARIANCE LABOUR RATE VARIANCE

LABOUR REVISED EFF / YIELD VARIANCE LABOUR GANG / MIX VARIANCE

COST CARD

MATERIAL SH FOR STD STD ACTUAL ACTUAL ACTUAL ACTUAL IDLE

ACTUAL RATE COST HOUR RATE COST PRODUCTIVE TIME
OUTPUT HR
SKILLED 1000 4 1200 5
SEMI 500 3 600 3.5
SKILLED
UNSKILLED 300 2 360 1.8
1800 2160

ABNORMAL IDLE TIME – 5% OF ACTUAL HOUR

The standard labour employment and the actual labour engaged in a 40 hours week for a job are as
under:
Category of Standard Actual
Workers No of workers Wage rate / hr No of workers Wage rate / hr
Skilled 30 70 40 75
Semi-skilled 15 65 10 60
Unskilled 10 50 5 52

4 hours were lost due to machine breakdown

Standard output: 2,000 units; Actual output: 1,600 units
Calculate:
(i) Labour Cost Variance (ii) Labour Efficiency Variance (iii) Labour Idle Time Variance.
The standard labour employment and the actual labour engaged in a week for a job are as under:

Skilled Workers Semi-skilled workers Unskilled Workers

Standard no. of 32 12 6
workers in the gang
Actual no. of workers 28 18 4
employed
Standard wage rate per 3 2 1
hour
Actual wage rate per 4 3 2
hour

During The 40 Hours Working Week, The Gang Produced 1,800 Standard Labour Hours Of Work.
following information has been provided by a company:
Number of units produced and 6,000
sold
Standard labour rate per hour `8
Standard hours required for 6,000 –
units
Actual hours required 17,094 hours
Labour efficiency 105.3%
Labour rate variance ` 68,376 (A)

You are required to calculate:

(i) Actual labour rate per hour (ii) Standard hours required for 6,000 units
(iii) Labour Efficiency variance (iv) Standard labour cost per unit
(v) Actual labour cost per unit.
Following information is given regarding standard composition and standard rates of a gang
workers:
Standard composition Standard hourly rate
100 Men ₹0.625
50 Women ₹0.400
50 Boys ₹0.350

According to given specifications, a week consists of 40 hours and standard output for a week
is 1,000 units.
In a particular week, gang consisted of 130 men, 40 women and 30 boys and actual wages
were paid as follows:
Men @ ₹0.6 per hour Women @ ₹0.425
Boys @ ₹0.325 per hour
Two hours were lost in the week due to abnormal sale time. Actual production was 960 units
in the week.
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 800 hours 22.00 17,600
labour

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
 COST ACCOUNTING RECORD
KEY LEDGERS WITH OPENING BALANCES

1. STORES LEDGER CONTROL ACCOUNT

2. WIP CONTROL ACCOUNT
3. FG CONTROL ACCOUNT
4. GENERAL / NOMINAL LEDGER ADJUSTMENT / COST LEDGER CONTROL ACCOUNT
5. OVERHEAD CONTROL ACCOUNT*****

JOURNAL ENTRIES

ACCOUNT PARTICULARS JOURNAL ENTRY

STORES LEDGER MATERIAL PURCHASED SLC A/C………………………….DR
CONTROL TO GLA A/C
ACCOUNT PURCHASE RETURN GLA A/C………………………….DR
TO SLC A/C
DIRECT MATERIAL ISSUED WIP CONTROL A/C……………DR
TO SLC A/C
INDIRECT MATERIAL ISSUED PROD O/H CONTROL A/C……………DR
O & A O/H CONTROL A/C……………DR
S & D O/H CONTROL A/C……………DR
TO SLC A/C
NORMAL LOSS PROD O/H CONTROL A/C……………DR
TO SLC A/C
ABNORMAL LOSS COSTIG PL A/C……….……………DR
TO SLC A/C

WAGES WAGES PAID / INCURRED WAGES CONTROL A/C…………DR

CONTROL TO GLA A/C
ACCOUNT DIRECT WAGES WIP CONTROL A/C……………DR
TO WAGES CONTROL A/C
INDIRECT WAGES PROD O/H CONTROL A/C……………DR
 O & A O/H CONTROL A/C……………DR
S & D O/H CONTROL A/C……………DR
TO WAGES CONTROL A/C

DIRECT EXPENSE DIRECT EXPENSE PAID / DIRECT EXP CONTROL A/C…………DR

CONTROL INCURRED TO GLA A/C
ACCOUNT DIRECT EXPENSE WIP CONTROL A/C……………DR
TRANSFERRED TO DIRECT EXP CONTROL A/C

PRODN PRODN O/H INCURRED / PRODN OH CONTROL A/C…………DR

OVERHEAD PAID TO GLA A/C
CONTROL PRODN O/H ABSORBED WIP CONTROL A/C……………DR
TO PRODN OH CONTROL A/C

O & A OVERHEAD O & A O/H INCURRED / PAID O & A OH CONTROL A/C…………DR

CONTROL TO GLA A/C
O & A O/H ABSORBED FG CONTROL A/C……………DR
TO O & A OH CONTROL A/C

S & D OVERHEAD S & D O/H INCURRED / PAID S & D OH CONTROL A/C…………DR

CONTROL TO GLA A/C
S & D O/H ABSORBED COST OF SALES A/C……………DR
TO S & D OH CONTROL A/C

OVERHEAD UNDER RECOVERY / COSTING PL A/C…………………DR

CONTROL ABSORPTION OF O/H TO OH CONTROL A/C
ACCOUNT OVER RECOVERY / OH CONTROL A/C………………DR
ABSORPTION OF O/H TO COSTING PL A/C

TRANSFER FINISHED GOODS FG CONTROL A/C……………DR

ENTRIES PRODUCED TO WIP CONTROL A/C
COST OF GOODS SOLD COST OF SALES A/C……………DR
TO FG CONTROL A/C
COST OF SALES COSTING PL A/C……………DR
TRANSFERRED TO COST OF SALES A/C

COSTING PL SALES GLA A/C…………….………………DR

TO COSTING PL A/C
PROFIT COSTING PL A/C…………….…DR
TO GLA A/C
LOSS GLA A/C…………….………………DR
TO COSTING PL A/C
 RECONCILIATION OF FINANCIAL PROFIT AND COSTING
PROFIT

STEP 1- PREPARE COST SHEET TO CALCULATE PROFIT AS PER COSTING

 FACTORY O/H , O & A O/H , S & D O/H ABSROBED TO BE CALCULATED ON THE
BASIS OF COSTING INFORMATION

 VALUE OF CLOSING STOCK OF FG IS TO BE CALCULATED ON THE BASIS OF COST OF

PRODUCTION
STEP 2 – PREPARE TRADING , PROFIT & LOSS ACCOUNT TO CALCULATE PROFIT AS PER
FINANCIAL

STEP 3 – PREPARE RECONCILIATION STATEMENT / MEMORANDUM RECONCILIATION

ACCOUNT

PARTICULARS AMOUNT
PROFIT AS PER COSTING
+ INCOME INCLUDED ONLY IN FINANCIAL ACCOUNTS

- EXPENSES INCLUDED ONLY IN FINANCIAL ACCOUNTS

- APPROPRIATION OF PROFIT ONLY IN FINANCIAL ACCOUNT

+ NOTIONAL COST / OPPORTUNITY COST / IMPUTED COST INCLUDED

ONLY IN COST ACCOUNTS

+ / - DIFFERENCE IN METHOD OF CALCULATION OF DEPRECIATION

- UNDER RECOVERY / UNDER ABSORPTION OF OVERHEAD

+ OVER RECOVERY / OVER ABSORPTION OF OVERHEAD

+ OVER VALUATION OF CLOSING FG IN FINANCIAL ACCOUNTS

- UNDER VALUATION OF CLOSING FG IN FINANCIAL ACCOUNTS

+ UNDER VALUATION OF OPENING FG IN FINANCIAL ACCOUNTS

- OVER VALUATION OF OPENING FG IN FINANCIAL ACCOUNTS

PROFIT AS PER FINANCIAL ACCOUNTS

MEMORANDUM RECONCILIATION ACCOUNT

PARTICULARS AMT PARTICULARS AMT

TO LOSS AS PER COSTING BY PROFIT AS PER COSTING
TO EXPENSES INCLUDED ONLY IN BY INCOME INCLUDED ONLY IN
FINANCIAL ACCOUNTS FINANCIAL ACCOUNTS
TO APPROPRIATION OF PROFIT BY NOTIONAL COST /
ONLY IN FINANCIAL ACCOUNT OPPORTUNITY COST / IMPUTED
COST INCLUDED ONLY IN COST
ACCOUNT
TO DIFFERENCE IN METHOD OF BY DIFFERENCE IN METHOD OF
CALCULATION OF DEPRECIATION CALCULATION OF DEPRECIATION
TO UNDER RECOVERY / UNDER BY OVER RECOVERY / OVER
ABSORPTION OF OVERHEAD ABSORPTION OF OVERHEAD
TO UNDER VALUATION OF BY OVER VALUATION OF
CLOSING FG IN FINANCIAL CLOSING FG IN FINANCIAL
ACCOUNTS ACCOUNTS
TO OVER VALUATION OF BY UNDER VALUATION OF
OPENING FG IN FINANCIAL OPENING FG IN FINANCIAL
ACCOUNTS ACCOUNTS
TO PROFIT AS PER FINANCIAL BY LOSS AS PER FINANCIAL
R Limited showed a net loss of ` 35,400 as per their cost accounts for the year ended 31st March,
2014. However, the financial accounts disclosed a net profit of ` 67,800 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 25,500
(ii) Factory overhead over recovered 1,35,000
(iii) Depreciation under charged in Cost Accounts 26,000
(iv) Dividend received 20,000
(v) Loss due to obsolescence charged in Financial Accounts 16,800
(vi) Income tax provided 43,600
(vii) Bank interest credited in Financial Accounts 13,600
(viii) Value of opening stock:
In Cost Accounts 1,65,000
In Financial Accounts 1,45,000
(ix) Value of closing stock:
In Cost Accounts 1,25,500
In Financial Accounts 1,32,000
(x) Goodwill written-off in Financial Accounts 25,000
(xi) Notional rent of own premises charged in Cost Accounts 60,000
(xii) Provision for doubtful debts in Financial Accounts 15,000
Prepare a reconciliation statement by taking costing net loss as base.
A manufacturing company has disclosed net loss of ` 48,700 as per their cost accounting records.
However their financial accounting disclosed net profit of ` 35,400. A scrutiny of data revealed
the following information:
`
(i) Factory overheads under absorbed 30,500
(ii) Administrative overheads over absorbed 65,000
(iii) Depreciation charged in financial accounts 2,25,000
(iv) Depreciation charged in cost accounts 2,70,000
(v) Income-tax provision 52,400
(vi) Transfer fee (credited in financial accounts) 10,200
(vii) Obsolescence loss charged in financial accounts 20,700
(viii) Notional rent of own premises charged in cost 54,000
accounts
(ix) Value of Opening stock:
(a) in cost accounts 1,38,000
(b) in financial accounts 1,15,000
(x) Value of closing stock:
(a) in cost accounts 1,22,000
(b) in financial accounts 1,12,500
The figures have been extracted from the financial accounts of a manufacturing firm for the first year
of its operation.
`
Direct material consumption 50,00,000
Direct wages 30,00,000
Factory overheads 16,00,000
Administrative overheads 7,00,000
Selling and distribution overheads 9,60,000
Bad Debts 80,000
Preliminary Expenses written off 40,000
Legal charges 10,000
Dividends received 1,00,000
Interest on deposit received 20,000
Sales - 1,20,000 units 1,20,00,000
Closing Stock :
Finished Stock -4,000 units 3,20,000
Work-in-progress 2,40,000

The Cost Accounts for the same period reveal that the Direct material consumption was ` 56,00,000;
Factory overhead is recovered at 20% on Prime cost ; Admn. Overhead is recovered @ ` 6 per unit of
production ; and Selling and distribution overheads are recovered at ` 8.00 per unit sold.
You are required to prepare costing, and Financial Profit and Loss Accounts and reconcile the
difference in the Profits as arrived at in the two sets of accounts.
The following information has been extracted from the financial books of ABON LTD. for the year
ended March 31, 2023
Particulars Amount
Sales (20000 units) 40,00,000
Materials 16,00,000
Wages 8,00,000

Factory Overheads 7,20,000

Office and Administrative Overheads 4,16,000

Selling and Distribution Overhead 2,88,000

Closing stock of Finished Goods (1230 units 2,40,000

Work-in-Progress (closing):
Materials 48000

Labour 32000

Overheads (Factory) 32000

Goodwill written off 3,20,000

Interest on Capital 32000

Dividend received 10000

Interest received 5000

In the Costing records, factory overhead is charged at 100% of wages, administration overhead at
10% of works cost and selling and distribution overhead at 16 per unit sold.
Required:
(i) Find out the profit as per Cost Accounts
(ii) Prepare the Profit and Loss Account as per Financial Books
(iii) Prepare a statement reconciling Profit shown by Cost and Financial Accounts for the year ended
March 31, 2023.
Essbee Ltd. maintains Integrated Accounts of Cost and Financial Accounts. Journalize how to the
following transactions in the books of the firm
Particulars Amount
Raw material purchased on credit 800000
Direct materials issued to production 600000
Wages paid (30% indirect) 480000
Wages charged to production 336000
Manufacturing expenses incurred 380000
Manufacturing overhead charged to production 360000
Selling and distribution cost 80000
Finished products (at cost) 800000
Sales 1160000
Receipts from debtors 276000
Prepare and pass the journal entries for the following transactions in a double entry cost
accounting system
Particulars Amount (`)
A) Issue of Material:
- Direct 5,50,000
- Indirect 1,50,000
B) Allocation of wages and salaries:
- Direct 2,00,000
- Indirect 40,000
C) Overheads absorbed in jobs:
- Factory 1,50,000
- Administration 50,000
- Selling 30,000
D) Under / Over absorbed overhead:
- Factory (Over) 20,000
- Administration (Under) 10,000
The following information is available from the financial books of BG Mfg. Co. having a normal
production capacity of 120,000 units for the year ended 31st March, 2021:
*Sales Rs 20, 00,000 (100,000 units).
*There was no opening and closing stock of finished units.
*Direct material and direct wages cost were Rs 10, 00,000 and Rs 5, 00,000 respectively.
*Actual factory expenses were Rs 3, 00,000 of which 60% are fixed.
*Actual administrative expenses related with production activities were Rs 90,000 which are
completely fixed.
*Actual selling and distribution expenses were Rs 60,000 of which 40% are fixed.
*Interest and dividends received Rs 30,000. Required:
(i)Find out profit as per financial books for the year ended 31st March, 2021
(ii)What is the amount of profit as per cost accounts for the year ended 31st March, 2021 assuming
that the indirect expenses are absorbed on the basis of normal production capacity; (4)
(iii) What is the amount of Factory expenses under charged in cost Accounts
In case, there are disagreements in items and amounts appearing in Financial Accounts and Cost
Accounts, the Profit/Loss figures as per Financial Accounts may not agree with that of Cost Accounts
and for which a Reconciliation Statement is usually prepared.
How much should be added to/deducted from Profit/Loss as per Cost Records to arrive at Profit/Loss
as per Financial Accounts with respect to each of the following:
(1)Over recovery and Under-recovery of administration overhead
(2)Over recovery and Under-recovery of selling and distribution overhead
(3)Difference in Value of Closing Stock
(4)Incomes not included and Expenses not included in Cost Accounts
The following is the Trading & Profit and Loss Account of ABC & Co
Particulars Rs. Particular Rs.
s
To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,00
0
To Direct Wages 12,05,750 By Stock of Finished Goods (1,000 1,30,000
units)
To Production Overheads 6,92,250 By W.I.P: Rs.
Material 55,250
Wages 26,000
Production O/H 16,250 97,500
To Administration Overheads 3,10,375 By Interest on Bank deposit 65,000
To Selling & Distribution 3,68,875 By Dividends 3,90,000
Overheads
To Preliminary Expenses written 22,790
off
To Goodwill written off 45,000
To Fines 3,250
To Interest of Mortgage 13,000
To Loss on Sale of Machine 16,250
To Taxation 1,95,000
To Net Profit 3,83,960
55,57,500 55,57,50
0

ABC & Co. manufactures a standard unit. The cost accounting records of the firm shows the
following information:
Production overheads have been charged at 20% on prime cost.
Administration overheads have been recovered at Rs. 9.75 per finished unit. Selling and distribution
overheads have been recovered at Rs. 13 per unit sold\
You are required to compute the following as it would appear in Cost Records:
1. Cost of Production of 31,000 units
Costing Profit/Loss on sale of 30,000 units