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 CA INTERMEDIATE

COST
&
MANAGEMENT ACCOUNTING
Volume 1

By
CA Namit Arora Sir

This book is dedicated to

Mr. Akshay Kakkar (Brother in Law)

&
Mrs. Aarzoo Kakkar (Sister)
 PREFACE TO THIS EDITION
This is a comprehensive book having thoroughly explained concepts with lucid and systematic
presentation of the subject matter. All attempts are made in this book to keep concept easier
to understand and remember with 100% coverage of institute materials.
A special attention is given to presentation keeping in mind the examination needs to
the student. The book is primarily written exclusively for CA - Inter.

For any suggestion please mail me at canamitarora@gmail.com

A word to the students

My dear student, hard work is the key to success. Though smart work is publicized in today’s
world but to be smart, you have to work hard. So always be attentive in class and have
thorough revision after the class. It is also important to be motivated and inspired for working
hard. The key for success is:

“Work hard in class, be attentive, grab the concepts

&
Work smart during revision, select important questions for next
revision.”

ALL THE BEST

CA. NAMIT ARORA
 INDEX
S. NO. CHAPTERS NAME PAGE NO. WEIGHTAGE

0 INTRODUCTION 0.1 – 0.2 -

1 MATERIAL COST 1.1 – 1.40 5 – 10

2 EMPLOYEE COST 2.1 – 2.24 5 – 10

3 OVERHEADS-ABSORPTION COSTING 3.1 – 3.35 5 – 10

METHOD

4 COST SHEET & UNIT COSTING 4.1 – 4.30 10

5 JOB AND BATCH COSTING 5.1 – 5.20 5 – 10

6 ACTIVITY BASED COSTING 6.1 – 6.29 10

7 DIRECT EXPENSES 7.1 – 7.2 -

8 SERVICE COSTING 8.1 – 8.45 10

9 PROCESS & OPERATION COSTING 9.1 – 9.46 10

10 JOINT & BY PRODUCTS 10.1 – 10.23 5 – 10

11 BUDGETS & BUDGETARY CONTROL 11.1 – 11.30 5 – 10

12 STANDARD COSTING 12.1 – 12.44 5 – 10

13 MARGINAL COSTING 13.1 – 13.45 10

14 COST ACCOUNTING SYSYTEM 14.1 – 14.20 5 – 10

15 RECONCILIATION 15.1 – 15.14 5 – 10

 CHAPTER 0 INTRODUCTION

CHAPTER 0 INTRODUCTION

1. CA Intermediate Syllabus:

2. Study Pattern and Books:

3. Cost and Management Accounting:

(a) Cost: It can be defined as the amount of expenditure (actual or notional) incurred on or
attributable to a specified article, product or activity.

(b) Management Accounting: Management accounting is an integral part of management

function. It assists management by provision of relevant information for planning,
organising, controlling, decision making etc.

(c) Cost Management: It is an application of management accounting concepts, methods of

collections, analysis and presentation of data to provide the information needed to plan,
monitor and control costs.

0.1
 INTRODUCTION CHAPTER 0

4. Objectives of Cost Accounting:

(a) Ascertainment of Cost,
(b) Determination of Selling Price and Profitability,
(c) Cost Control,
(d) Cost Reduction and
(e) Assisting management in decision making.

5. Elements of Cost:

6. Cost Sheet (Basic Understanding): A Cost Sheet or Cost Statement is a document which
provides a detailed cost information.

Proforma Cost Sheet (Basic)

Particulars Amount
Direct Material Cost XXX
Direct Employee Cost XXX
Direct Expenses XXX
Direct Cost/Prime Cost XXX
Production Overheads XXX
Administrative Overheads XXX
Selling and Distribution Overheads XXX
Total Cost XXX
Add: Profit XXX
Sales XXX

0.2
 CHAPTER 1 MATERIAL COST

CHAPTER 1 MATERIAL COST

ECONOMIC ORDER QUANTITY (EOQ) WITH DIFFERENT CASES

BQ 1
Find out the Economic Order Quantity from the following information. Also state the number of orders
to be placed in a year.
Consumption of materials per annum 10,000 kgs.
Order placing cost per order `50
Cost per kg of raw materials `2
Storage cost 8% of average inventory

Answer
2 AO 2 × 10 ,000 × 50
EOQ = = = 2,500 kgs
C 0.08 × 2

No. of orders to be placed in a year = Annual consumption of RM ÷ EOQ

= 10,000 kgs ÷ 2,500 kgs = 4 orders p.a.

BQ 2
(a) Compute E.O.Q. and the total cost for the following:
Annual Demand 5,000 units
Unit price `20.00
Order cost `16.00
Storage rate 2% per annum
Interest rate 12% per annum
Obsolescence rate 6% per annum

(b) Determine the total cost that would result for the items if an incorrect price of `12.80 is used.

Answer
2 AO 2 × 5 ,000 × 16
(a) EOQ = = = 200 units
C 20 × 20 %

Total cost = Purchase cost + Ordering cost + Carrying cost

A
= (5,000 units × `20) + (ROQ × O) + (½ × ROQ × C)
5,000
= `1,00,000 + (
200
× 16) + (½ × 200 × 20% of `20) = `1,00,800

(b) If an incorrect price `12.80 is used:

2 × 5 ,000 × 16
EOQ = = 250 units
12 .80 × 20 %

Total cost = Purchase cost + Ordering cost + Carrying cost

A
= (5,000 units × `12.80) + (ROQ × O) + (½ × ROQ × C)
5,000
= `64,000 + ( 250 × 16) + (½ × 250 × 20% of `12.80) = `64,640

1.1
 MATERIAL COST CHAPTER 1

BQ 3
Annual consumption of raw materials : 10,500 units
Opening stock of raw materials : 1,000 units
Company wants to maintain closing stock : 500 units
Ordering cost per order : `250
Purchase price per unit : `200
Carrying cost per unit : `10% per annum

Determine Economic Order Quantity.

Answer
2 AO 2 × 10 ,000 × 250
EOQ = = = 500 units
C 10 % × 200

A = Annual purchase
= Annual Consumption + Closing Stock – Opening Stock
= 10,500 + 500 – 1,000 = 10,000 units

BQ 4
The Complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: Super
Grow and Nature's Own. The following information is collected:
Fertilizer
Particulars
Super Grow Nature's Own
Annual Demand 2,000 bags 1,280 bags
Annual relevant carrying cost per bag `480 `560
Relevant ordering cost per purchase order `1,200 `1,400
Required:
(1) Compute EOQ for Super Grow and Nature's Own.
(2) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual relevant
carrying costs for Super Grow and Nature's Own?
(3) For the EOQ, Compute the number of deliveries per year for Super Grow and Nature's Own.

Answer
2 AO
(1) EOQ =
C

2 × 2 ,000 × 1 ,200
EOQ for Super Grow Fertilizer = = 100 bags
480
2 × 1 ,280 × 1 ,400
EOQ for Nature’s Own Fertilizer = = 80 bags
560

(2) Total annual relevant costs = Total annual relevant ordering costs + Total annual
relevant carrying costs

Super Grow Fertilizer = (2,000/100) × 1,200 + (½ × 100 bags × 480)

= `24,000 + `24,000 = `48,000

Nature’s Own Fertilizer = (1,280/80) × 1,400 + (½ × 80 bags × 560)

= `22,400 + `22,400 = `44,800

1.2
 CHAPTER 1 MATERIAL COST

Annual requiremen t
(3) Number of deliveries per year =
ROQ
Super Grow Fertilizer = 2,000 ÷ 100 = 20 orders
Nature’s Own Fertilizer = 1,280 ÷ 80 = 16 orders

BQ 5
Anil & Company buys its annual requirement of 36,000 units in 6 installments. Each unit costs `1 and the
ordering cost is `25. The inventory carrying cost is estimated at 20% of unit value. FIND the total annual cost
of the existing inventory policy. Calculate, how much money can be saved by Economic Order Quantity?

Answer
1. Total Annual cost in Existing Inventory Policy:
A
Ordering cost = ×O = 6 × `25 = `150
ROQ

Carrying cost = ½ × ROQ × C = ½ × 6,000 × 0.20 = `600

Total = `150 + `600 = `750

2. Total Annual cost in EOQ:

A 36 ,000
Ordering cost = ×O = × `25 = `300
ROQ 3,000

Carrying cost = ½ × ROQ × C = ½ × 3,000 × 0.20 = `300

Total = `300 + `300 = `600

Saving in cost = `750 - `600 = `150

Working Note:
2 AO 2 × 36 ,000 × 25
EOQ = = = 3,000 Units
C 20 % × 1

Note: As the units purchase cost of `1 does not change in both the computation, the same has not been
considered to arrive at total cost of inventory for the purpose of savings..

BQ 6
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 holding costs is 10% p.a.
You are required to calculate:
1. Economic order quantity.
2. If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to incur?
3. What is the minimum carrying cost, the company has to incur?

Answer
1. Computation of Economic Ordering Quantity:

2 AO 2 × 4 ,000 units × 12 × 120

EOQ = = = 2,400 units
C 20 × 10 %

1.3
 MATERIAL COST CHAPTER 1

2. Calculation of extra cost:

(a) Ordering & carrying cost (when order size is 2,400 units i.e. at EOQ):
48 ,000
Ordering Cost = No. of orders × Cost per order = × 120 = `2,400
2,400
Carrying Cost = ½ × ROQ × C = ½ × 2,400 × 2 = `2,400
Total = `2,400 + 2,400 = `4,800

(b) Ordering & carrying cost (when order size is 4,000 units):
48 ,000
Ordering Cost = No. of orders × Cost per order = × 120 = `1,440
4 ,000
Carrying Cost = ½ × ROQ × C = ½ × 4,000 × 2 = `4,000
Total = `2,400 + 2,400 = `5,440

Extra cost (a) - (b) = `5,440 - `4,800 = `640

3. Minimum Carrying Cost:

Carrying cost depends upon the size of the order. It will be minimum on the least order size. (In this
part of the question the two order sizes are 2,400 units and 4,000 units. Here 2,400 units is the least of
the two order sizes. At this order size carrying cost will be minimum.) The minimum carrying cost in
this case can be computed as under:
Minimum carrying cost = ½ × 2,400 units × 10% of `20 = `2,400

BQ 7
A Company manufactures a special product which requires a component ‘Alpha’. The following particulars
are collected for the year 2023-24:
Annual demand of Alpha 8,000 units
Cost of placing an order `200 per order
Cost per unit of Alpha `400
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.

Required:
1. Compute the economic order quantity
2. Advise whether the quantity discount offer can be accepted.

Answer
2 AO 2 × 8 ,000 × 200
1. EOQ = = = 200 units
C 20 % × 400

2. Evaluation of 4% discount offer

At EOQ (order At order size
Particulars
size 200 units) 4,000 units
Purchase cost 8,000 units @ `400/`384 per unit 32,00,000 30,72,000
Ordering cost (A/ROQ × `200) 8,000 400
Carrying cost (½ × ROQ × C) (C = 20% of `400/`384) 8,000 1,53,600
Total cost 32,16,000 32,26,000

1.4
 CHAPTER 1 MATERIAL COST

Advise: The total cost of inventory is lower if EOQ is adopted. Hence, the company is advised not to accept
the quantity discount.

BQ 8
Purchase manager has decided to place orders for minimum quantity of 500 units of a particular item in
order to get a discount of 10%. From the records, it was found out that in the last year, 8 orders each of 200
units have been placed. Ordering cost is `500 per order, inventory carrying cost 40% of the inventory value
and the purchase cost per unit is `400.
Is the purchase manager justified in his decision? What is the effect of his decision to the company?

Answer
Evaluation of 10% discount offer
Particulars At ROQ 200 units At ROQ 500 units
1. Purchase cost 1,600 units @ `400/`360 per unit 6,40,000 5,76,000
2. Ordering cost:
Number of orders 1,600 ÷ 200 = 8 1,600 ÷ 500 = 3.2 or 4
Ordering cost (number of orders × `500) 4,000 2,000
3. Carrying cost (½ × ROQ × C) (C = 40% of `400/`360) 16,000 36,000
Total cost (1+2+3) 6,60,000 6,14,000
Yes, Purchase manager justified in his decision and cost would reduce by `46,000 (`6,60,000 –
`6,14,000)

Working Note:
Annual requirement of Raw Materials = 200 units × 8 orders = 1,600 units

LEVEL SETTING (VARIOUS STOCK LEVELS)

BQ 9
Two components, A and B are used as follows:
Normal usage 50 per week each
Maximum usage 75 per week each
Minimum usage 25 per week each
Re-order quantity A: 300; B: 500
Re-order period A: 4 to 6 weeks
B: 2 to 4 weeks
Calculate for each component (a) Re-ordering level, (b) Minimum level, (c) Maximum level, (d)
Average stock level.

Answer
(a) Re-ordering level = Maximum usage per week × Maximum delivery period
Component A = 75 units × 6 weeks = 450 units
Component B = 75 units × 4 weeks = 300 units

(b) Minimum level = Re-order level – (Normal usage × Average period)

Component A = 450 units – (50 units × 5 weeks) = 200 units
Component B = 300 units – (50 units × 3 weeks) = 150 units

(c) Maximum level = Re-order level + Re-order quantity – (Min. usage × Minimum period)
Component A = (450 units + 300 units) – (25 units × 4 weeks) = 650 units

1.5
 MATERIAL COST CHAPTER 1

Component B = (300 units + 500 units) – (25 units × 2 weeks) = 750 units

(d) Average stock level = ½ (Minimum stock level + Maximum stock level)
Component A = ½ (200 units + 650 units) = 425 units
Component B = ½ (150 units + 750 units) = 450 units

BQ 10
From the details given below, calculate:
(i) Re-ordering level, (ii) Maximum level, (iii) Minimum level and (iv) Danger level.

Re-ordering quantity is to be calculated on the basis of following information:

Cost of placing a purchase order is `4,000
Number of units to be purchased during the year is 5,00,000
Purchase price per unit inclusive of transportation cost is `50
Annual cost of storage per unit is `10

Details of lead time: Average 10 days, Maximum 15 days, Minimum 5 days and for emergency purchases 4
days
Rate of consumption: Average 1,500 units per day and Maximum 2,000 units per day

Answer
(i) Re-ordering Level = Maximum usage × Maximum lead time
= 2,000 units per day × 15 days = 30,000 units

(ii) Maximum Level = ROL + ROQ – (Minimum usage × Minimum lead time)
= 30,000 units + 20,000 units – (1,000 units per day × 5 days)
= 45,000 units

(iii) Minimum Level = ROL – (Average usage × Average lead time)

= 30,000 units – (1,500 units per day × 10 days) = 15,000 units

(iv) Danger Level = Average usage × Lead time for emergency purchases
= 1,500 units per day × 4 days = 6,000 units

Working Notes:
2 AO 2 × 5,00 ,000 × 4 ,000
1. ROQ = = = 20,000 units
C 10

Minimum usage + Maximum usage

2. Average usage =
2
Minimum usage + 2,000 units
1,500 units =
2
Minimum usage = 1,000 units per day

BQ 11
A Company uses three raw materials A, B, and C for a particular product for which the following data apply:
Usage for one ROQ Price Delivery period (in weeks) ROL
RM Mini. level
unit of product (in kg) per kg Mini. Average Max. (in kg)
A 10 kg 10,000 0.10 1 2 3 8,000 -
B 4 kg 5,000 0.30 3 4 5 4,750 -
C 6 kg 10,000 0.15 2 3 4 - 2,000 kg
Weekly production varies from 175 to 225 units, averaging 200 units of the said product.

1.6
 CHAPTER 1 MATERIAL COST

What would be the following quantities?

(i) Minimum stock of A (ii) Maximum stock of B (iii) Re-order level of C (iv) Average stock level of A

Answer
(i) Minimum stock of A = ROL – (Average usage × Average lead time)
= 8,000 kg – [(200 units × 10 kg) × 2 weeks] = 4,000 kg

(ii) Maximum stock of B = ROL – (Minimum usage × Minimum lead time) + ROQ
= 4,750 – [(175 units × 4 kg) × 3 weeks] + 5,000
= 9,750 – 2,100 = 7,650 kg

(iii) Re-order Level of C = Maximum re-order period × Maximum usage

= 4 weeks × 1,350 (225 units × 6 kg) = 5,400 kg
Or
= Minimum stock of C + (Average usage × Average lead time)
= 2,000 + [(200 units × 6 kg) × 3 weeks] = 5,600 kg

(iv) Average level of A = Minimum stock level + ½ ROQ

= 4,000 + ½ × 10,000
= 4,000 + 5,000 = 9,000 kg
Or
Minimum stock + Maximum stock
=
2
4 ,000 + 16 ,250
= = 10,125 kg
2
Working Notes:
Max. Stock of A = ROL (Minimum usage × Minimum re-order period) + ROQ
= 8,000 kg – [(175 units × 10 kg) × 1 week] + 10,000 = 16,250 kg

BQ 12
A company manufactures 10,000 units of a product per month. The cost of placing an order is `200. The
purchase price of the raw material is `20 per kg. The re-order period is 4 to 8 weeks. The consumption of
raw materials varies from 200 kg to 900 kg per week, the average consumption being 550 kg. The carrying
cost of inventory is 20% per annum.
You are required to calculate:
1. Re-order quantity 4. Minimum level
2. Re-order level 5. Average stock level.
3. Maximum level

Answer
2 AO 2 × *28 ,600 × 200
1. Re-order quantity (ROQ) = = = 1,691 kgs
C 20 × 20 %

*Annual consumption (A) = Average Consumption per week × 52 weeks

= 550 kgs × 52 weeks = 28,600 kgs

2. Re-order level (ROL) = Maximum usage × Maximum re-order period

= 900 kgs × 8 weeks = 7,200 kgs

3. Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)

= 7,200 kgs + 1,691 kgs – (200 kgs × 4 weeks)
= 8,091 kgs

1.7
 MATERIAL COST CHAPTER 1

4. Minimum level = ROL – (Normal usage × Normal re-order period)

= 7,200 kgs. – (550 kgs × 6 weeks) = 3,900 kgs

5. Average stock level = ½ (Minimum level + Maximum level)

= ½ (3,900 kgs + 8,091 kgs) = 5,995.5 kgs
Or
= (Minimum level + ½ × ROQ)
= (3,900 kgs + ½ × 1,691 kgs) = 4,745.5 kgs

BQ 13
Shri Ram Enterprises manufactures a special product ZED. The following particulars were collected for the
year:
(a) Monthly demand of ZED 1,000 units (e) Minimum usage 25 units per week
(b) Cost of placing an order `100 (f) Maximum usage 75 unit per week
(c) Inventory Carrying cost 15% per annum (g) Cost of material `100 per unit
(d) Re-order period 4 to 6 weeks. (h) Normal usage 50 units per week

Calculate from the above:

1. Re-order-quantity. If the supplier is willing to supply 1,500 units at a discount of 5%, is it worth
accepting.
2. Re-order level 3. Minimum Level 4. Maximum Level 5. Average Stock Level.

Answer
2 × *2,600 × 100
1. Re-order quantity = = 186 units
15

*Annual Requirement = 52 weeks × Normal usage of input units per week

= 52 weeks × 50 units per week = 2,600 units

Evaluation of 5% discount offer

Particulars At EOQ 186 units At ROQ 1,500 units
1. Purchase cost 2,600 units @ `100/`95 p.u. 2,60,000 2,47,000
2. Ordering cost:
Number of orders 2,600 ÷ 186 = 13.97 or 14 2,600 ÷ 1,500 = 1.73 or 2
Ordering cost (number of orders × `100) 1,400 200
3. Carrying cost (½ × ROQ × C) 1,395 10,688
(C = 15% of `100/`95)
Total cost (1+2+3) 2,62,795 2,57,888

Advise: The total cost of inventory is lower if discount is adopted. Hence, it is worth accepting.

2. Re-order Level = Maximum Re-order period × Maximum Usage

= 6 weeks × 75 units = 450 units

3. Minimum Level = ROL - (Normal usage × Average re-order period)

= 450 units - (50 units × 5 weeks)
= 450 units - 250 units = 200 units

4. Maximum Level = ROL - (Minimum usage × Minimum re-order period) + ROQ

= 450 units - (25 units × 4 weeks) + 186 units = 536 units

1.8
 CHAPTER 1 MATERIAL COST

5. Average Stock Level = ½ × (Minimum Stock Level + Maximum Stock Level)

= ½ × (200 units + 536 units) = 368 units
Or
= ½ × ROQ + Minimum Stock Level
= ½ × 186 + 200 units = 293 units

BQ 14
Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves
are sold in pack of 10 pairs at a price of `250 per pack.
For the month of April 2023, it has been estimated that a demand for 60,000 packs of surgical gloves
will arise. Aditya Brothers purchases these gloves from manufacturer at `228 per pack within 5 days lead
time. The ordering and related cost is `240 per order. The storage cost is 10% per annum of average
inventory investment.
Required
(i) Calculate Economic Order Quantity (EOQ).
(ii) Calculate the number of orders needed every year.
(iii) Calculate the total cost of ordering and storage of the surgical gloves.
(iv) Determine when should the next order to be placed. (Assuming that the company does maintain a
safety stock and that the present inventory level is 10,000 packs with a year of 360 working days).

Answer
2 AO 2 × 60 ,000 × 12 × 240
(i) EOQ = =
C 228 × 10 %
= 3,893.3 or 3,893 packs

Annual Re quirement 7 ,20 ,000

(ii) No. of orders per year = =
EOQ 3,893
= 184.9 or 185 orders

(iii) Total cost of ordering and carrying:

Ordering cost = Number of orders × O
= 185 × `240 = `44,400
Carrying cost = ½ × ROQ × C
= ½ × 3,893 × 22.80 = `44,380.20
Total = `44,400 + `44,380.20 = `88,780.20

(iv) Normal usage per day = 7,20,000 packs ÷ 360 days = 2,000 packs
Present inventory = 10,000 packs
Present inventory = 10,000 packs ÷ 2,000 packs = 5 days
Normal lead time = 5 days

Since, Present inventory level is equal to normal lead time; next order should be placed immediately to
avoid stock out situation.

BQ 15
The following data are available:
Annual consumption : 24,300 units (360 days)

1.9
 MATERIAL COST CHAPTER 1

Cost per unit : `10

Order cost : `40 per order
Inventory carrying cost : 24% per annum of average inventory
Normal lead time : 18 days
Safety stock : 12 days consumption

You are required to find out:

(a) How many units should be ordered each time?
(b) When the order should be placed.
(c) What would be the ideal stock level (immediately before the supply of material ordered is received)?

Answer
2 AO 2 × 24 ,300 × 40
(a) Re-order quantity = = = 900 units
C 10 × 24 %

(b) Re-order level = Safety stock + Consumption during lead time

24 ,300 24 ,300
= × 12 + × 18
360 360
= 810 + 1,215 = 2,025 units

(c) Ideal Stock Level = ROL - Consumption during lead time

= 2,025 – 1,215 = 810 units

BQ 16
Aditya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in the
coming year. The following is the information regarding the raw material Dee:

1. The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
2. Maximum consumption per day is 20 kg. more than the average consumption per day.
3. There is an opening stock of 1,000 kg.
4. Time required to get the raw materials from the suppliers is 4 to 8 days.
5. The purchase price is `125 per kg.

There is an opening stock of 900 units of the finished product Exe. The rate of interest charged by bank on
Cash Credit facility is 13.76%. To place an order company has to incur `720 on paper and documentation
work.

From the above information find out the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Re-order level
(c) Maximum Stock level
(d) Minimum Stock level
(e) Average Stock level
(f) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]

Answer
2 × 17 ,200 × 720
(a) Re-order quantity = EOQ – 200 kg = - 200 kg = 1,000 kg
125 × 13 .76 %

(b) Re-order Level = Maximum consumption per day × Maximum lead time

1.10
 CHAPTER 1 MATERIAL COST

= 70 kg × 8 days = 560 kg

(c) Maximum Level = ROL + ROQ - (Minimum consumption per day × Minimum lead time)
= 560 kg + 1,000 kg - (30 kg × 4 days) = 1,440 kg

(d) Minimum Level = ROL - (Average consumption per day × Average lead time)
= 560 kg - (50 kg × 6 days) = 260 kg
(e) Average Stock Level = ½ × (Minimum Stock Level + Maximum Stock Level)
= ½ × (1,440 kg + 260 kg) = 850 kg
Or
= ½ × ROQ + Minimum Stock Level
= ½ × 1,000 kg + 260 kg = 760 kg

(f) Impact on Profitability

Particulars At ROQ (1,000 kg) At EOQ (1,200 kg)
Number of orders 17,200 17,200
= 17.20 or 18 = 14.33 or 15
1,000 1,200
Ordering cost 18 × 720 = 12,960 15 × 720 = 10,800
Carrying cost (½× ROQ × C) 8,600 10,320
(½ × 1,000 × 125 × 13.76%) (½ × 1,200 × 125 × 13.76%)
Total ordering and carrying cost 21,560 21,120
Impact on profit - 440
Working notes:
1. Calculation of annual consumption and purchase of raw materials ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ (900 units)
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’ (9,100 units × 2 kg.) 18,200 kg.
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual purchase for raw material ‘Dee’ 17,200 kg.

2. Minimum consumption per day of raw material ‘Dee’:

Average consumption per day = 18,200 kg ÷ 364 days = 50 kg
Hence, Maximum consumption per day = 50 kg + 20 kg = 70 kg
So minimum consumption per day = Average × 2 – Max. = 50 × 2 – 70
= 30 kg

BQ 17
M/s Tanishka Materials Private Limited produces a product which names “ESS”. The consumption of raw
material for the production of “ESS” is 210 Kgs to 350 Kgs per week. Other information is as follows:

Procurement Time : 5 to 9 Days

Purchase price of Raw Materials : `100 per kg
Ordering Cost per Order : `200
Storage Cost : 1% per month plus `2 per unit per annum
Consider 365 days a year.

You are required to Calculate:

(a) Economic Order Quantity
(b) Re-Order Level (ROL)

1.11
 MATERIAL COST CHAPTER 1

(c) Maximum Stock Level

(d) Minimum Stock Level
(e) Average Stock Level
(f) Number of Orders to be placed per year
(g) Total Inventory Cost
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders,
whether offer is acceptable?
(i) If the answer is no, what should be the counteroffer w.r.t. percentage of discount?

Answer
2 AO 2  *14 ,600  200
(a) EOQ = = = 646 kg
C 12 %  100  2

*Annual consumption of raw material = [{(210+350) ÷ 2} ÷ 7 days] × 365 = 14,600 kg

(b) Re-order Level = Maximum consumption per day × Maximum lead time
= (350 ÷ 7) × 9 days = 450 kg

(c) Maximum Stock Level = ROL + ROQ - (Minimum consumption per day × Minimum lead
time)
= 450 kg + 646 kg – (210 ÷ 7) × 5 days]
= 946 kg

(d) Minimum Stock Level = ROL - (Average consumption per day × Average lead time)
= 450 kg – [{(210+350) ÷ 2} ÷ 7 days] × (5 + 9) ÷ 2}
= 170 kg

(e) Average Stock Level = ½ × (Minimum Stock Level + Maximum Stock Level)
= ½ × (946 kg + 170 kg) = 558 kg
Or
= ½ × ROQ + Minimum Stock Level
= ½ × 646 kg + 170 kg = 493 kg

(f) Number of Orders = Annual consumption ÷ EOQ

= 14,600 kg ÷ 646 kg = 22.6 or 23

(g) Total Inventory Cost = Purchase cost + Ordering cost + Carrying cost
A
= (Purchase Quantity × Price) + ( × O) + (½ × ROQ × C)
ROQ
= (14,600 × `100) + (23 × `200) + (½ × 646 × `14)
= `14,69,122

(h) Evaluation of 1% discount offer in two orders:

Inventory Cost at Offer Price = Purchase cost + Ordering cost + Carrying cost
= (14,600 × `99) + (2 × `200) + (½ × 7,300) × (12% of `99 + `2)
= `14,96,462

Advice: As total inventory cost at offer price is `27,340 (14,96,462 – 14,69,122) higher, offer should not be
accepted.

(i) Counter offer:

Let discount rate (%) = D

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 CHAPTER 1 MATERIAL COST

Counter offer Price = `100 – D = `100 – D

Revised Carrying Cost = [(`100 – D) × 12%] + `2 = `12 - 0.12D + `2
= `14 – 0.12D

Total Inventory Cost at Counter offer Price:

= Purchase cost + Ordering cost + Carrying cost

= {14,600 × (`100 – D)}+(2 × `200) + (½ × 7,300) × (`14 - .12D)
= `14,60,000 – 14,600D + `400 + `51,100 – 438D
= `15,11,500 – 15,038D
Now,
`14,69,122 = `15,11,500 – 15,038D
`42,378 = 15,038D
D = 2.82

Therefore, discount should be at least 2.82% in offer price.

MOST ECONOMICAL PURCHASE LEVEL

BQ 18
EXE Limited has received an offer of quantity discounts on its order of materials as under::
Price per ton (`) Ton (Nos.)
`1,200 Less than 500
`1,180 500 and less than 1000
`1,160 1000 and less than 2000
`1,140 2000 and less than 3000
`1,120 3000 and above
The annual requirement for the materials is 5,000 tons. The delivery cost per order is `1,200 and the stock
holding cost is estimated at 20% of material cost per annum. (1) You are required to calculate the most
economical purchase level, and (2) What will be your answer to the above question if there are no
discounts offered and the price per ton is `1,500?

Answer
(1) Statement of Most Economical Purchase Level
Order Size Total Ordering Cost Total Carrying Cost Purchase Cost
Total Cost
(ROQ) (A/ROQ × 1,200) (½ × ROQ × 20% of Price) (5,000 × Price)
{(5,000/400) 12.5 or 48,000 60,00,000
400 60,63,600
13 × 1,200} = 15,600 (½ × 400 × 20% × 1,200) (5,000 × 1,200)
{(5,000/500) 10 × 59,000 59,00,000
500 59,71,000
1,200} = 12,000 (½ × 500 × 20% × 1,180) (5,000 × 1,180)
{(5,000/1,000) 5 × 1,16,000 58,00,000
1,000 59,22,000
1,200} = 6,000 (½ × 1,000 × 20% × 1,160) (5,000 × 1,160)
{(5,000/2,000) 2.5 2,28,000 57,00,000
2,000 59,31,600
or 3 × 1,200} = 3,600 (½ × 2,000 × 20% × 1,140) (5,000 × 1,140)
{(5,000/3,000) 1.6 3,36,000 56,00,000
3,000 59,38,400
or 2 × 1,200} = 2,400 (½ × 3,000 × 20% × 1,120) (5,000 × 1,120)

The above table shows that the total cost of 5,000 units including ordering and carrying cost is minimum
(`59,22,000) when the order size is 1,000 units. Hence the most economical purchase level is 1,000 units.

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 MATERIAL COST CHAPTER 1

(2) If there will are no discount offer then the purchase quantity should be equal to EOQ. The EOQ is as
follows:

2AO 2  5,000  1 ,200

EOQ = = = 200 tons
C 20% of 1 ,500

OPTIMUM SAFETY STOCK LEVEL

BQ 19
IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry.
IPL Limited purchases 54,000 castings per year at a cost of `800 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year
basis. The company estimates that it costs `9,000 to place a single purchase order and about `300 to carry
one casting in inventory for a year.
The high carrying costs result from the need to keep the castings in carefully controlled temperature
and humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6
days, but it can take as much as 10 days.
The days of delivery time and percentage of their occurrence are shown in the following tabulation:
Delivery time (days) : 6 7 8 9 10
Percentage of occurrence : 75 10 5 5 5
Required
1. Compute the economic order quantity (EOQ).
2. Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety
stock? The re-order point?
3. Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety
stock? The re-order point?
4. Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one
year?
5. Refer to the original data. Assume that using process re-engineering the company reduces its cost of
placing a purchase order to only `600. In addition, company estimates that when the waste and
inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is `720 per
year.
(a) Compute the new EOQ.
(b) How frequently would the company be placing an order, as compared to the old purchasing
policy?

Answer
1. Computation of economic order quantity (EOQ):

2AO 2  54 ,000  9,000

EOQ = = = 1,800 castings
C 300

2. Assuming a 15% risk of being out of stock:

From the probability table given in the question, we can see that 85% certainty in delivery time is achieved
when delivery period is 7 days i.e. at 15% risk level of being out of stock, the maximum delivery period should
not exceed 7 days.

Annual Demand
Safety stock = 360
× (Maximum lead time – Average lead time)

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 CHAPTER 1 MATERIAL COST

54,000
= 360
× (7 days – 6 days) = 150 castings

Re-order point = Safety stock + Average lead time consumption

= 150 castings + (6 days × 150 casting) = 1,050 castings

3. Assuming a 5% risk of being out of stock:

From the probability table given in the question, we can see that 95% certainty in delivery time is achieved
when delivery period is 9 days i.e. at 5% risk level of being out of stock, the maximum delivery period should
not exceed 9 days.
Annual Demand
Safety stock = 360
× (Maximum lead time – Average lead time)
54,000
= 360
× (9 days – 6 days) = 450 castings

Re-order point = Safety stock + Average lead time consumption

= 450 castings + (6 days × 150 casting) = 1,350 castings

4. At 5% stock-out risk the total cost of ordering and carrying cost is as follows:
Annual Demand
Total cost of ordering = EOQ
× Cost per order
54,000
= 1,800
× `9,000 = `2,70,000

Total cost of carrying = (Safety stock + ½ EOQ) × Carrying cost per unit p.a.
= (450 units + ½ × 1,800 units) × `300 = `4,05,000

2 × 54000 × 600
5. (a) Computation of new EOQ = = 300 castings
720

54,000
(b) Total number of orders to be placed in a year = = 180 orders
300

Under new purchasing policy IPL Ltd. has to place order in every 2nd day (360 days ÷ 180 orders),
however under the old purchasing policy it was every 12th day.

BQ 20
M/s Tyrotubes trades in four wheeler tyres and tubes. It stocks sufficient quantity of tyres of almost every
vehicle. In year end 2023-24, the report of sales manager revealed that M/s Tyrotubes experienced stock-
out of tyres.

Stock-out of tyres No. of times

100 2
80 5
50 10
20 20
10 30
0 33

M/s Tyrotubes losses `150 per unit due to stock-out and spends `50 per unit on carrying of inventory.

Determine optimum safety stock level.

Answer

1.15
 MATERIAL COST CHAPTER 1

Computation of Stock-out and Inventory Carrying Cost

Safety Stock-out Stock-out cost Expected Inventory Total cost
Probability
stock (units) (4) = stock-out cost carrying cost (7) =
(3)
(1) (2) (2) × `150 (5) = (3) × (4) (6) = (1) × `50 (5) + (6)
100 0 0 0 0 5,000 5,000
80 20 0.02 3,000 60 4,000 4,060
50 50 0.02 7,500 150
30 0.05 4,500 225
12,000 375 2,500 2,875
20 80 0.02 12,000 240
60 0.05 9,000 450
30 0.10 4,500 450
25,500 1,140 1,000 2,140
10 90 0.02 13,500 270
70 0.05 10,500 525
40 0.10 6,000 600
10 0.20 1,500 300
31,500 1,695 500 2,195
0 100 0.02 15,000 300
80 0.05 12,000 600
50 0.10 7,500 750
20 0.20 3,000 600
10 0.30 1,500 450
39,000 2,700 0 2,700

At safety stock level of 20 units, total cost is least i.e `2,140. Hence optimum safety stock is 20 units.

Working Notes:
Computation of Probability of Stock-out
Stock-out(units) 100 80 50 20 10 0 Total
No. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00

ABC ANALYSIS

BQ 21
From the following details, draw a plan of ABC selective control:

Item No. Units Unit cost (`)

1 7,000 5.00
2 24,000 3.00
3 1,500 10.00
4 600 22.00
5 38,000 1.50
6 40,000 0.50
7 60,000 0.20
8 3,000 3.50
9 300 8.00
10 29,000 0.40
11 11,500 7.10
12 4,100 6.20

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 CHAPTER 1 MATERIAL COST

Answer
Statement of Total Cost and Ranking
% of Total Unit cost Total cost % of Total
Items Units Ranking
units (`) (`) cost
1 7,000 3.1963 5.00 35,000 9.8378 4
2 24,000 10.9589 3.00 72,000 20.2378 2
3 1,500 0.6849 10.00 15,000 4.2162 7
4 600 0.2740 22.00 13,200 3.7103 8
5 38,000 17.3516 1.50 57,000 16.0216 3
6 40,000 18.2648 0.50 20,000 5.6216 6
7 60,000 27.3973 0.20 12,000 3.3730 9
8 3,000 1.3699 3.50 10,500 2.9513 11
9 300 0.1370 8.00 2,400 0.6746 12
10 29,000 13.2420 0.40 11,600 3.2605 10
11 11,500 5.2512 7.10 81,650 22.9502 1
12 4,100 1.8721 6.20 25,420 7.1451 5
- 2,19,000 100 - 3,55,770 100 -

Basis for selective control (Assumed in ICAI SM, in exam it will be given in question)
`50,000 & above ‘A’ items
`15,000 to `50000 ‘B’ items
Below `15,000 ‘C’ items

On this basis, a plan of A B C selective control is given below:

% of Total Total cost
Ranking Item No. % of Total cost Category
units (`)
1 11 5.2512 81,650 22.9502
2 2 10.9589 72,000 20.2378
3 5 17.3516 57,000 16.0216
Total 3 33.5617 2,10,650 59.2096 A
4 1 3.1963 35,00 9.8378
5 12 1.8721 25,420 7.1451
6 6 18.2648 20,000 5.6216
7 3 0.6849 15,000 4.2162
Total 4 24.0181 95,420 26.8207 B
8 4 0.2740 13,200 3.7103
9 7 27.3973 12,000 3.3730
10 10 13.2420 11,600 3.2605
11 8 1.3699 10,500 2.9513
12 9 0.1370 2,400 0.6746
Total 5 42.4202 49,700 13.9697 C
Grand Total 12 100 3,55,770 100

BQ 22
A Factory uses 4,000 varieties of inventory. In terms of inventory and holding inventory usage, the following
information is compiled.
No. of varieties of % value of inventory % of inventory usage
% of item
inventory holding (average) (in end-product)
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.00 100 100

1.17
 MATERIAL COST CHAPTER 1

Classify the items of inventory as per ABC analysis with reasons.

Answer
Classification of the items of inventory as per ABC Analysis
% value of inventory % of inventory usage
Category No. of items % of items
holding (average) (in end-product)
A 15 0.375 50 85
B 110 2.750 30 10
C 3,875 96.875 30 5
Total 4,000 100.00 100 100

Reasons:

Category A: 15 numbers of inventory items should be classified as those of A category because of the
following reasons:

1. They constitute 0.375% of total number of varieties of inventory items handled by stores of factory.
This is the minimum as per the given classification in the table
2. The total usage of these items is 50% of total use value of inventory holding (average) which is
maximum according to the given table.
3. The consumption of these items is about 85% of usage in end product.

Category B: 110 number of inventory items should be classified as those of B category because of the
following reasons:
1. They constitute 2.750% of total number of varieties of inventory items handled by the stores of the
factory.
2. They require moderate investment of about 30% of total use value of inventory holding (average).
3. Their consumption is moderate about 10% of inventory usage in the end product.

Category C: 3,875 numbers of varieties of inventory items should be classified as those of category C because
of the following reasons:

1. They constitute 96.875% of total varieties of inventory items handled by stores of factory.
2. They require investment of 20% of total use value of average of average inventory holding.
3. Their consumption is minimum, i.e. just 5% of inventory usage in end product.

INVENTORY TURNOVER RATIO

BQ 23
The following data are available in respect of material X for the year ended 31st March, 2024.

Opening stock `90,000

Purchases during the year `2,70,000
Closing stock `1,10,000

Calculate (1) Inventory turnover ratio, and (2) The number of days for which the average
inventory is held.

Answer
Statement Showing Inventory Turnover Ratio and Number of Days
Particulars Material X

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 CHAPTER 1 MATERIAL COST

Opening stock 90,000

Add: Purchases 2,70,000
Less: Closing stock (1,10,000)
Materials consumed 2,50,000
Average inventory (Opening stock + Closing stock) ÷ 2 1,00,000
Inventory turnover ratio (Materials consumed ÷ Average inventory) 2.5 times
Number of days for which the average inventory is held (365 ÷ IT Ratio) 146 days

BQ 24
From the following data for the year ended 31.03.24, Calculate the inventory turnover ratio for the two
items and put forward your comments on them:
Particulars Material A Material B
Opening stock 01.04.2023 10,000 9,000
Purchases 52,000 27,000
Closing stock 31.03.2024 6,000 11,000

Answer
Statement Showing Inventory Turnover Ratio
Particulars Material A Material B
Opening stock 10,000 9,000
Add: Purchases 52,000 27,000
62,000 36,000
Less: Closing stock (6,000) (11,000)
Materials consumed 56,000 25,000
Average inventory (Opening stock + Closing stock) ÷ 2 8,000 10,000
Inventory turnover ratio (Materials consumed ÷ Average inventory) 7 times 2.5 times
Inventory turnover (365 ÷ IT Ratio) 52 days 146 days
Comment: Material A is moving faster than Material B.

VALUATION OF MATERIAL

BQ 25
SKD Company Ltd., not registered under GST, purchased material P from a company which is registered
under GST. The following information is available for the one lot of 1,000 units of material purchased:
Listed price of one lot `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.)
Freight and Insurance `3,400
Toll Tax paid `1,000
Demurrage `1,000
Commission and brokerage on purchases `2,000
Amount deposited for returnable containers `6,000
Amount of refund on returning the container `4,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons. The payment to the supplier was made within 20
days of the purchases.
You are required to calculate cost per unit of material purchased to SKD Company Ltd.

1.19
 MATERIAL COST CHAPTER 1

Answer
Computation of Total cost of material purchased of SKD Manufacturing Company
Particulars Units `
Listed Price of Materials 1,000 50,000
Less: Trade discount @ 10% on invoice price (5,000)
45,000
Add: CGST @ 6% of ` 45,000 2,700
Add: SGST @ 6% of ` 45,000 2,700
50,400
Add: Toll Tax 1,000
Freight and Insurance 3,400
Commission and Brokerage Paid 2,000
Add: Cost of returnable containers:
Amount deposited `6,000
Less: Amount refunded (`4,000) 2,000
58,800
Add: Other Expenses @ 2% of Total Cost (`58,800 × 2/98) 1,200
Total Cost of Material 1,000 60,000
Less: Shortage due to Normal Loss @ 20% (200) -
Total cost of material of good units 800 60,000
Cost per unit (`60,000/800 units) 1 75

Note:
1. GST is payable on net price i.e., listed price less discount.
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off-loading of materials. It is
an abnormal cost and not included.
4. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.

BQ 26
At what price per unit would part number A 32 be entered in the stores ledger, if the following invoice was
received from the supplier?
Invoice `
200 units part A 32 @ `5.00 per unit 1,000.00
Less: 20% discount 200.00
800.00
Add: GST @ 12% 96.00
896.00
Add: Packing charges (5 non-returnable boxes) 50.00
946.00
Notes:
1. A 2 percent discount will be given for payment in 30 days.
2. Documents substantiating payment of GST is enclosed for claiming Input credit.

Answer
Statement Showing Cost per Unit
Particulars `
Net purchase price (1,000 - 200) 800.00
Add: Packing charges (5 non-returnable boxes) 50.00
Total cost 850.00
÷ Number of units ÷200
Cost per unit 4.25

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 CHAPTER 1 MATERIAL COST

Note:
1. Cash discount is treated as interest and finance charges hence, it is not considered for valuation of
material.
2. Input credit is available for GST paid; hence it will not be added to purchase cost.

BQ 27
A in invoice in respect of a consignment of chemicals A and B provides following information:
Invoice `
Chemical A: 10,000 kgs. at `10 per kg. 1,00,000
Chemical B: 8,000 kgs. at `13 per kg. 1,04,000
Basic custom duty @10% (Credit is not allowed) 20,400
Railway freight 3,840
Total cost 2,28,240
A shortage of 500 kgs. in chemical A and 320 kgs. in chemical B is noticed due to normal breakages.
You are required to determine the rate per kg. of each chemical, assuming a provision of 2% for
further deterioration.

Answer
Statement Showing the Computation of Rate per kg. of each Chemical
Particulars Chemical A Chemical B
Purchase price 1,00,000 1,04,000
Add: Basic custom duty @10% 10,000 10,400
Add: Railway freight in 5 : 4 2,133 1,707
Total cost 1,12,133 1,16,107
÷ Effective quantity ÷ 9,310 ÷ 7,526.4
Rate per kg 12.04 15.43

Working notes:
Calculation of Effective Quantity of each Chemical Available for Use
Particulars Chemical A Chemical B
Quantity purchased 10,000 8,000
Less: Shortage due to normal breakages 500 320
9,500 7,680
Less: Provision for deterioration @ 2% 190 153.6
Quantity available 9,310 7,526.4

STOCK VALUATION AND STORES LEDGER

BQ 28
‘AT’ Ltd. furnishes the following store transactions for September, 2023:
01.09.23 Opening balance 25 units value `162. 50
04.09.23 Issues Req. No. 85 8 units
06.09.23 Receipts from B & Co. GRN No. 26 50 units @ `5.75 per unit
07.09.23 Issues Req. No. 97 12 units
10.09.23 Return to B & Co. 10 units
12.09.23 Issues Req. No. 108 15 units
13.09.23 Issues Req. No. 110 20 units
15.09.23 Receipts from M & Co. GRN No. 33 25 units @ `6.10 per unit
17.09.23 Issues Req. No. 12 10 units

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 MATERIAL COST CHAPTER 1

19.09.23 Received replacement from B & Co. GRN No. 38 10 units

23.09.23 Returned from department, material of M & Co. MRR No. 4 5 units
22.09.23 Transfer from Job 182 to Job 187 in the dept. MTR 6 5 units
26.09.23 Issues Req. No. 146 10 units
29.09.23 Transfer from Dept. “A” to Dept. “B” MTR 10 5 units
30.09.23 Shortage in stock taking 2 units

Prepare the priced stores ledger on FIFO method and state how you would treat the shortage in
stock taking.

Answer
Stores Ledger of AT Ltd. for the month of September, 2023 (FIFO Method)
Receipts Issues Balance
Date
GRN/ Req.
Sep’23 Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
MRR No.
1 - - - - - - - - 25 6.50 162.50
4 - - - - 85 8 6.50 52 17 6.50 110.50
6 26 50 5.75 287.50 - - - - 17 6.50
50 5.75 398.00
7 - - - - 97 12 6.50 78 5 6.50
50 5.75 320.00
10 - - - - Return 10 5.75 57.50 5 6.50
40 5.75 262.50
12 - - - - 108 5 6.50 32.50
10 5.75 57.50 30 5.75 172.50
13 - - - - 110 20 5.75 115 10 5.75 57.50
15 33 25 6.10 152.50 - - - - 10 5.75
25 6.10 210.00
17 - - - - 121 10 5.75 57.50 25 6.10 152.50
19 38 10 5.75 57.50 - - - 25 6.10
10 5.75 210.00
20 4 5 5.75 28.75 - - - - 5 5.75
25 6.10
10 5.75 238.75
26 - - - - 146 5 5.75 28.75 20 6.10
5 6.10 30.50 10 5.75 179.50
30 - - - - Shortage 2 6.10 12.20 18 6.10
10 5.75 167.30

Working Notes:
1. The material received as replacement from vendor is treated as fresh supply.
2. In the absence of information the price of the material received from within on 20.09.23 has been-taken
as the price of the earlier issue made on 17.09.23. In FIFO method physical flow of the material is
irrelevant, and issue price is based on first in first out.
3. The issue of material on 26.09.23 is made out of the material received from a user department on
20.09.23.
4. The entries for transfer of material from one job and department to another on 22.09.23 and 29.09.23
respectively, do not affect the store ledger. However, adjustment entries for calculation of cost of
respective jobs and departments are made in cost accounts.
5. The material found short as a result of stock taking has been written off at the relevant issue price.

BQ 29
The following information is provided by Sunrise Industries for the fortnight of April 2024.

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 CHAPTER 1 MATERIAL COST

Material Exe: Stock on 01.04.24 100 units at `5 per unit.

Purchases Issues
Cost per Unit
Date Units Date Units
05.04.24 300 `6 06.04.24 250
08.04.24 500 `7 10.04.24 400
12.04.24 600 `8 14.04.24 500

(1) Calculate using FIFO and LIFO methods of pricing issues:

a. The value of material consumed during the period.
b. The value of stock of materials on 15.04.24.

(2) Explain why the figures in (a) and (b) in part 1 of this question are different under the two methods
of pricing of material issues used. You need not to draw up stores ledger.

Answer
(1) a. Value of Material Exe Consumed
During 01.04.2024 to 15.04.2024 (FIFO Method)
Date Description Quantity in Units Rate (`) Amount
01.04.24 Opening balance 100 5 500
05.04.24 Purchased 300 6 1,800
06.04.24 Issued 100 5
150 6 1,400
08.04.24 Purchased 500 7 3,500
10.04.24 Issued 150 6
250 7 2,650
12.04.24 Purchased 600 8 4,800
12.04.24 Issued 250 7
250 8 3,750
15.04.24 Balance 350 8 2,800
Total value of material Exe consumed during the period under FIFO method comes to `7,800 (i.e.
`1,400 + `2,650 + `3,750) and the balance of stock on 15.04.24 is of `2,800.

During 01.04.24 to 15.04.24 (LIFO Method)

Date Description Quantity in Units Rate (`) Amount
01.04.24 Opening balance 100 5 500
05.04.24 Purchased 300 6 1,800
06.04.24 Issued 250 6 1,500
08.04.24 Purchased 500 7 3,500
10.04.24 Issued 400 7 2,800
12.04.24 Purchased 600 8 4,800
12.04.24 Issued 500 8 4,000
15.04.24 Balance 350 - 2,300

Total value of material Exe issued under LIFO method comes to `8,300 (i.e. `1,500 + `2,800 +
`4,000). The balance 350 units of `2,300 on 15.04.24 represents opening balance on 01.04.24 and purchases
made on 05.04.24, 08.04.24 and 12.04.24 (100 units @ `5 + 50 units @ `6 + 100 units @ `7 + 100 units @
`8)
1. b. As shown in (a) above, the value of stock of materials on 15.4.2024:

Under FIFO method `2,800

Under LIFO method `2,300

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 MATERIAL COST CHAPTER 1

(2) Total value of material Exe issued to production under FIFO and LIFO methods comes to `7,800 and
`8,300 respectively.
The above computations show that the value of stock of materials on 15.04.24 is `2,800 under FIFO
method and `2,300 under LIFO method.
The reasons for the difference of `500 (i.e. `8,300 - `7,800) in the value of material Exe, issued to
production under FIFO and LIFO methods are given below:
Date Qty. Issued Value FIFO Total Value LIFO Total
06.04.24 250 1,400 1,500
10.04.24 400 2,650 2,800
14.04.24 500 3,750 7,800 4,000 8,300

(a) On 6.04.2024, 250 units were issued to production. Under FIFO their value comes to `1,400 (100 units
× `5 + 150 units × `6) and under LIFO `1,500 (250 × `6). Hence, `100 more was charged to production
under LIFO.
(b) On 10.04.2024, 400 units were issued to production. Under FIFO their value comes to `2,650 (150 × `6
+ 250 × `7) and under LIFO `2,800 (400 × `7). Hence, `150 more was charged to production under
LIFO.
(c) On 14.04.2024, 500 units were issued to production. Under FIFO their value comes to `3,750 (250 × `7
+ 250 × `8) and under LIFO `4,000 (500 × `8). Hence, `250 more was charged to production under
LIFO.
Thus the total excess amount charged to production under LIFO comes to `500.

The reasons for the difference of `500 (`2,800 – `2,300) in the value of 350 units of Closing Stock of material
Exe under FIFO and LIFO are as follows:
(a) In the case of FIFO, all the 350 units of the closing stock belongs to the purchase of material made on
12.04.2024, whereas under LIFO these units were from opening balance and purchases made on
5.04.2024, 8.04.2024 and 12.04.2024.
(b) Due to different purchase price paid by the concern on different days of purchase, the value of closing
stock differed under FIFO and LIFO. Under FIFO 350 units of closing stock were valued @ `8 p.u.
whereas under LIFO first 100 units were valued @ `5 p.u., next 50 units @ `6 p.u., next 100 units @ `7
p.u. and last 100 units @ `8 p.u.
Thus, under FIFO, the value of closing stock increased by `500.

BQ 30
The following transactions in respect of material Y occurred during the six months ended 30th September:
Month Purchase (in Units) Price per unit Issued Units
April 200 `25 Nil
May 300 `24 250
June 425 `26 300
July 475 `23 550
August 500 `25 800
September 600 `20 400

Required:
1. The Chief Accountant argues that the value of closing stock remains the same no matter which method
of pricing of material issues is used. Do you agree? Why or why not? EXPLAIN. Detailed stores ledgers
are not required.
2. STATE when and why would you recommend the LIFO method of pricing material issues?

Answer

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 CHAPTER 1 MATERIAL COST

(a) Total number of units purchased = 2,500 and Total number of units issued = 2,300. The closing stock
at the end of six months’ period i.e., on 30th September will be 200 units. Upto the end of August, total
purchases coincide with the total issues i.e., 1,900 units. It means that at the end of August, there was
no closing stock. In the month of September, 600 units were purchased out of which 400 units were
issued. Since there was only one purchase and one issue in the month of September and there was no
opening stock on 1st September, the Closing Stock of 200 units is to be valued at `20 per unit.

In the view of this, the argument of the Chief Accountant appears to be correct. Where there is only one
purchase and one issue in a month with no opening stock, the method of pricing of material issues
becomes irrelevant. Therefore, in the given case one should agree with the argument of the Chief
Accountant that the value of closing stock remains the same no matter which method of pricing the
issue is used.
It may, however, be noted that the argument of Chief Accountant would not stand if one finds the value
of the Closing Stock at the end of each month.

(b) LIFO method has an edge over FIFO or any other method of pricing material issues due to the following
advantages:
1. The cost of the materials issued will be either nearer or will reflect the current market price; Thus, the
cost of goods produced will be related to the trend of the market price of materials. Such a trend in
price of materials enables the matching of cost of production with current sales revenues.
2. The use of the method during the period of rising prices does not reflect undue high profit in the income
statement, as it was under the first-in-first-out or average method. In fact, the profit shown here is
relatively lower because the cost of production takes into account the rising trend of material prices.
3. In the case of falling prices, profit tends to rise due to lower material cost, yet the finished products
appear to be more competitive and are at market price.
4. During the period of inflation, LIFO will tend to show the correct profit and thus, avoid paying undue
taxes to some extent.

BQ 31
The following information is extracted from the stores ledger of material X:

Opening Stock Nil

Purchases:
January 1 100 @ `1 per unit
January 20 100 @ `2 per unit
Issues:
January 22 60 for Job W 16
January 23 60 for Job W 17
Compute the receipts and issues valuation by adopting the First-In-First-Out, Last-In-First-Out and the
Weighted Average Method.
Tabulate the values allocated to Job W16, Job W17 and the closing stock under the methods aforesaid
and discuss from different points of view which method you would prefer.

Answer
Stores Ledger of Material X (FIFO Method)
Receipts Issues Balance
Date
Units Rate Value Units Rate Value Units Rate Value
Jan 1 100 1 100 - - - 100 1 100
Jan 20 100 2 200 - - - 100 1 100
100 2 200
Jan 22 - - - 60 1 60 40 1 40

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 MATERIAL COST CHAPTER 1

100 2 200
Jan 23 - - - 40 1 40
20 2 40 80 2 160

Stores Ledger of Material X (LIFO Method)

Receipts Issues Balance
Date
Units Rate Value Units Rate Value Units Rate Value
Jan 1 100 1 100 - - - 100 1 100
Jan 20 100 2 200 - - - 100 1 100
100 2 200
Jan 22 - - - 60 2 120 100 1 100
40 2 80
Jan 23 - - - 40 2 80
20 1 20 80 1 80

Stores Ledger of Material X (Weighted Average Method)

Receipts Issues Balance
Date
Units Rate Value Units Rate Value Units Rate Value
Jan 1 100 1 100 - - - 100 1 100
Jan 20 100 2 200 - - - 200 1.5 300
Jan 22 - - - 60 1.5 90 140 1.5 210
Jan 23 - - - 60 1.5 90 80 1.5 120

Statement of Material value allocated to Job W 16, Job W 17 and Closing stock, under aforesaid
Methods
Job FIFO LIFO Weighted Average
Materials for Job W 16 60 120 90
Materials for Job W 17 80 100 90
Closing Stock 160 80 120
Total 300 300 300

From the point of view of cost of material charged to each job, it is minimum under FIFO and maximum under
LIFO (Refer to Tables). During the period of rising prices, the use of FIFO give rise to high profits and that of
LIFO low profits. In the case of weighted average there is no significant adverse or favourable effect on the
cost of material as well as on profits.
From the point of view of valuation of closing stock it is apparent from the above statement that it is
maximum under FIFO, moderate under weighted average and minimum under LIFO.
It is clear from the Tables that the use of weighted average evens out the fluctuations in the prices.
Under this method, the cost of materials issued to the jobs and the cost of material in hands reflects greater
uniformity than under FIFO and LIFO. Thus from different points of view, weighted average method is
preferred over LIFO and FIFO.

BQ 32
Imbrios India Ltd. is recently incorporated start-up company back in the year 2019. It is engaged in creating
embedded products and Internet of Things (IoT) solutions for the Industrial market. It is focused on
innovation, design, research and development of products and services. One of its embedded products is
LogMax, a system on module (SoM) Carrier board for industrial use. It is a small, flexible and embedded
computer designed as per industry specifications. In the beginning of the month of September 2023,
company entered into a job agreement of providing 4800 LogMax to NIT, Mandi. Following details w.r.t.
issues, receipts, returns of Store Department handling Micro-controller, a component used in the designated
assembling process have been extracted for the month of September, 2023:

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 CHAPTER 1 MATERIAL COST

Sep. 1 Opening stock of 6,000 units @ `285 per unit

Sep. 8 Issued 4875 units to mechanical division vide material requisition no. Mech 009/23
Sep. 9 Received 17,500 units @ `276 per unit vide purchase order no. 159/23
Sep. 10 Issued 12,000 units to technical division vide material requisition no. Tech 012/23
Sep. 12 Returned to stores 2375 units by technical division against material requisition no. Tech 012/23.
Sep. 15 Received 9,000 units @ `288 per units vide purchase order no. 160/ 23
Sep. 17 Returned to supplier 700 units out of quantity received vide purchase order no. 160/23.
Sep. 20 Issued 9,500 units to technical division vide material requisition no. Tech 165/23

On 25th September, 2023, the stock manager of the company expressed his need to leave for his hometown
due to certain contingency and immediately left the job same day. Later, he also switched his phone off. As
the company has the tendency of stock-taking every end of the month to check and report for the loss due to
rusting of the components, the new stock manager, on 30th September, 2023, found that 900 units of Micro-
controllers were missing which was apparently misappropriated by the former stock manager. He, further,
reported loss of 300 units due to rusting of the components.

From the above information you are required to prepare the Stock Ledger account using
‘Weighted Average’ method of valuing the issues.

Answer
Stores Ledger of Imbrios India Ltd. (Weighted Average Method)
Date Receipts Issues Balance of Stock
Sep. Units Rate Value Units Rate Value Units Rate Value
1 - - - - - - 6,000 285 17,10,000
8 - - - 4,875 285 13,89,375 1,125 285 3,20,625
9 17,500 276 48,30,000 - - - 18,625 276.54 51,50,625
10 - - - 12,000 276.54 33,18,480 6,625 276.55 18,32,145
12 2,375 276.54 6,56,783 - - - 9,000 276.55 24,88,928
15 9,000 288 25,92,000 - - - 18,000 282.27 50,80,928
17 - - - 700 288 2,01,600 17,300 282.04 48,79,328
20 - - - 9,500 282.04 26,79,380 7,800 282.04 21,99,948
30 - - - 900 282.04 2,53,836 6,900 282.04 19,46,112
30 - - - 300 - - 6,600 294.87 19,46,112

Note:
1. 900 units is abnormal loss, hence it will be transferred to Costing Profit & Loss A/c.
2. 300 units is normal loss, hence it will be absorbed by good units.

BQ 33
Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost method for
inventory valuation. Following are the data of component X:
Date Particulars Units Rate per unit
15-12-23 Purchase Order-008 10,000 `9,930
30-12-23 Purchase Order-009 10,000 `9,780
01-01-24 Opening stock 3,500 `9,810
05-01-24 GRN*-008 (against the Purchase Order-008) 10,000 -
05-01-24 MRN**-003 (against the Purchase Order-008) 500 -
06-01-24 Material Requisition-011 3,000 -
07-01-24 Purchase Order-010 10,000 `9,750
10-01-24 Material Requisition-012 4,500 -
13-01-24 GRN-009 (against the Purchase Order-009) 10,000 -
13-01-24 MRN-004 (against the Purchase Order-009) 400 -

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 MATERIAL COST CHAPTER 1

15-01-24 Material Requisition-013 2,200 -

24-01-24 Material Requisition-014 1,500 -
25-01-24 GRN-010 (against the Purchase Order-010) 10,000 -
28-01-24 Material Requisition-015 4,000 -
31-01-24 Material Requisition-016 3,200 -

*GRN- Goods Received Note; **MRN- Material Returned Note

Based on the above data, you are required to calculate:

(a) Re-order level
(b) Maximum stock level
(c) Minimum stock level
(d) Prepare Store Ledger for the period January 2024 and determine the value of stock as on 31-01-2024.
(e) Value of components used during the month of January, 2024.
(f) Inventory turnover ratio.

Answer
(a) Re-order level = Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units

(b) Maximum stock level = Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
= 1,04,500 units – 21,000 units = 83,500 units

(c) Minimum stock level = Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units = 42,000 units

(d) Store Ledger for the month of January 2024: (Weighted Average Method)
Receipts Issue Balance
Date GRN/M Amt. MRN/ Amt. Amt.
Units Rate Units Rate Units Rate
RN (‘000) MR (‘000) (‘000)
01-01-24 - - - - - - - - 3,500 9,810 34,335
05-01-24 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
06-01-24 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
10-01-24 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
13-01-24 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
15-01-24 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
24-01-24 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982
25-01-24 010 10,000 9,750 97,500 - - - - 21,400 9,789 2,09,482
28-01-24 - - - - 015 4,000 9,789 39,156 17,400 9,789 1,70,326
31-01-24 - - - - 016 3,200 9,789 31,325 14,200 9,789 1,39,001

Note: Decimal figures may be rounded-off to the nearest rupee value wherever required

Value of 14,200 units of stock as on 31-01-2024 (‘000) = `1,39,001

(e) Value of components used during the month of January 2024:

Sum of material requisitions 011 to 016 (‘000) = `29,694 + `44,541 + `21,611
+`14,734 + `39,156 + `31,325
= `1,81,061

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 CHAPTER 1 MATERIAL COST

(f) Inventory Turnover Ratio = Value of materials used ÷ Average stock value
= 1,81,061 ÷ (1,39,001+34,335)/2
= 1,81,061 ÷ 86,668 = 2.09 times

Working notes:
1. Calculation of consumption rate:
Maximum component usage = 4,500 units (Material requisition on 10-01-24)
Minimum component usage = 1,500 units (Material requisition on 24-01-24)

Date Material Requisition number Units

06-01-2024 11 3,000
10-01-2024 12 4,500 (Maximum)
15-01-2024 13 2,200
24-01-2024 14 1,500 (Minimum)
28-01-2024 15 4,000
31-01-2024 16 3,200

2. Calculation of lead time (purchase order date to material received date):

Maximum lead time = 21 days (15-12-2023 to 05-01-2024)
Minimum lead time = 14 days (30-12-2023 to 13-01-2024)

3. Reorder Quantity = 10,000 units (observed)

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 MATERIAL COST CHAPTER 1

PAST YEAR QUESTIONS

PYQ 1
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 material is `0.25 per kg per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is `12 per kg per annum. The annual production of the product is 1,00,000 units
and 2.5 units are obtained from one kg of raw material.
Required:
(a) Calculate the economic order quantity of raw materials.
(b) Advice, how frequently should order for procurement be placed.
(c) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
[(10 Marks) May 2014]

Answer
2 AO 2 × 40 ,000 × 750
(a) EOQ = = = 2,000 kgs
C 15
Where,

A = Annual usage of raw Material

= 1 unit of raw material gives 2.5 units of Finished Goods
Therefore, for 1,00,000 units of finished goods, material required
1 ,00 ,000
= = 40,000 Kgs
2 .5

O = Ordering cost per order = handling cost per order + freight per order
= `370 + `380 = `750
C = Carrying cost and holding cost of inventory per unit p.a.
= Carrying cost per unit p.a. + Interest cost of investment in inventory per unit p.a.
= (`0.25 per kg per month × 12 months) + `12 per kg p.a.
= `3 + `12 = `15 per kg p.a.

(b) Frequency of placing order/time interval between order:

365 days or 12 months 12 months
= = = 0.6 month
* No. of orders 20 orders
Or
365 days
= = 18 days (approx.)
20 orders
Working Notes:
Annual requiremen t 40 ,000 kgs
*No. of orders = = = 20 Orders
EOQ 2,000 kgs

(c) Statement of % of Discount to be Negotiated for Placing Quarterly Orders

At EOQ (order At order size
Particulars
size 2,000 kgs) 10,000 kgs
Ordering cost (A/ROQ × O) 15,000 3,000
Carrying cost (½ × ROQ × C) 15,000 75,000

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 CHAPTER 1 MATERIAL COST

Total cost 30,000 78,000

Extra Cost or Discount to be negotiated - 48,000
% of Discount {(48,000 ÷ 40,000 × 80) × 100} - 1.5%

PYQ 2
Following details are related to a manufacturing concern:
Re-order Level 1,60,000 units
Economic Order Quantity 90,000 units
Minimum Stock Level 1,00,000 units
Maximum Stock Level 1,90,000 units
Average Lead Time 6 days
Difference between minimum and maximum lead time 4 days
Calculate:
(1) Maximum consumption per day
(2) Minimum consumption per day
[(5 Marks) Nov 2014]

Answer
(1) Maximum consumption per day:
Re-order level = Maximum re-order period × Max consumption per day
1,60,000 units = 8 days × Maximum consumption per day
1,60 ,000 units
Max consumption per day = = 20,000 units
8 days

(2) Minimum consumption per day:

Maximum stock level = Re-order level + Re-order quantity - (Min lead time ×
Minimum consumption per day)
1,90,000 units = 1,60,000 units + 90,000 units - (4 days × Minimum
consumption per day)
2,50,000 – 1,90,000 = 4 days × Minimum consumption per day
Minimum consumption = 15,000 units per day

Working notes:
Calculation of Minimum Lead Time:
Maximum lead time – Minimum lead time = 4 days
Or Maximum lead time = Minimum lead time + 4 days (i)
Average lead time = 6 days
Max lead time + Min lead time Min lead time + 4 days + Min lead time
=
2 2
2 Minimum lead time + 4 Days = 6 days × 2 = 12 days
Minimum lead time = (12 days – 4 days) ÷ 2 = 4 days

PYQ 3
Supreme Limited is a manufacturer of energy saving bulbs. To manufacture the finished product one unit of
component ‘LED’ is required. Annual requirement of component ‘LED’ is 72,000 units, the cost being `300
per unit. Other relevant details for the year 2015-2016 are:
Cost of placing an order : `2,250

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 MATERIAL COST CHAPTER 1

Carrying cost of inventory : 12% per annum

Lead time:
Maximum : 20 days
Minimum : 8 days
Average : 14 days
Emergency purchase : 5 days
Consumption:
Maximum : 400 units per day
Minimum : 200 units per day
Average : 300 units per day

You are required to calculate:

(a) Re-order quantity
(b) Re-ordering level
(c) Minimum stock level
(d) Maximum stock level
(e) Danger level
[(5 Marks) Nov 2016]

Answer
2 AO 2 × 72 ,000 × 2,250
(a) ROQ = = = 3,000 units
C 12 % of 300

(b) Re-ordering Level = Maximum consumption × Maximum lead time

= 400 units × 20 days = 8,000 units

(c) Minimum Level = ROL – (Average consumption × Average lead time)

= 8,000 units – (300 units × 14 days) = 3,800 units

(d) Maximum Level = ROL + ROQ – (Minimum consumption × Minimum lead time)
= 8,000 units + 3,000 units – (200 units × 8 days)= 9,400 units

(e) Danger Level = Average consumption × Emergency delivery time

= 300 units × 5 days = 1,500 units
Or
= Minimum consumption × Emergency delivery time
= 200 units × 5 days = 1,000 units

PYQ 4
ASJ manufacturer produces a product which requires a component costing `1,000 per unit. Other
information related to the component are as under:

Usage of component 1,500 units per month

Ordering cost `75 per order
Storage cost rate 2% per annum
Obsolescence rate 1% per annum
Maximum usage 400 units per week
Lead time 6 - 8 weeks
The firm has been offered a quantity discount of 5% by the supplier on the purchase of component, if the
order size 6,000 units at a time.

You are required to compute:

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 CHAPTER 1 MATERIAL COST

(1) Economic order quantity.

(2) Re-order level and advise whether the discount offer be accepted by the firm or not.
[(5 Marks) May 2018]

Answer
2 AO 2 × 1 ,500 × 12 × 75
(1) EOQ = = = 300
C 1 ,000 × 3%
units
(2) Re-order Level = Maximum Re-order period × Maximum Usage
= 8 weeks × 400 units = 3,200 units

Evaluation of 5% discount offer

At EOQ (order At order size
Particulars
size 300 units) 6,000 units
Purchase cost 18,000 units @ `1,000/`950 per unit 1,80,00,000 1,71,00,000
Ordering cost (A/ROQ × `75) 4,500 225
Carrying cost (ROQ × ½ × C) (C = 3% of `1,000/`950) 4,500 85,500
Total cost 1,80,09,000 1,71,85,725
Advise: Accept the discount offer.

PYQ 5
M/S X private Limited is manufacturing a special product which requires a component “SKY BLUE” the
following particulars are available for the year ended 31st march, 2018:

Annual demand of “SKY BLUE” 12,000 units

Cost of placing an order `1,800
Cost per unit of “SKY BLUE” `640
Carrying cost per unit 18.75%
The company has been offered a quantity discount of 5% on purchase of “SKY BLUE” provided order size is
3,000 components a time.
You are required to compute:
(1) Economic order quantity.
(2) Advise whether the discount offer be accepted by the firm or not.
[(5 Marks) May 2018]

Answer
2 AO 2 × 12 ,000 × 1 ,800
(1) EOQ = = = 600 units
C 640 × 18 .75 %

(2) Evaluation of 5% discount offer

At EOQ (order At order size
Particulars
size 600 units) 3,000 units
Purchase cost 12,000 units @ `640/`608 per unit 76,80,000 72,96,000
Ordering cost (A/ROQ × `1,800) 36,000 7,200
Carrying cost (½ × ROQ × C) (C = 18.75% of `640/`608) 36,000 1,71,000
Total cost 77,52,000 74,74,200

Advise: Accept the discount offer.

PYQ 6

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 MATERIAL COST CHAPTER 1

M/S SJ Private Limited manufactures 20,000 units of a product per month. The cost of placing an order is
`1,500. The purchase price of the raw material is `100 per kg. The re-order period is 5 to 7 weeks. The
consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption being 250
kg. The carrying cost of inventory is 9.75% per annum.

You are required to calculate:

1. Re-order quantity 4. Minimum level
2. Re-order level 5. Average stock level.
3. Maximum level
[(5 Marks) Nov 2018]

Answer
2 AO 2 × 13 ,000 × 1 ,500
1. Re-order quantity = = = 2,000 kgs
C 100 × 9 .75 %

A = Normal usage per week × 52 weeks

= 250 kgs × 52 weeks = 13,000 kgs

2. Re-order level (ROL) = Maximum usage × Maximum re-order period

= 300 kgs × 7 weeks = 2,100 kgs

3. Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)

= 2,100 kgs + 2,000 kgs – (200 kgs × 5 weeks) = 3,100 kgs

4. Minimum level = ROL – (Normal usage × Normal re-order period)

= 2,100 kgs. – (250 kgs × 6 weeks) = 600 kgs

5. Average stock level = ½ (Minimum level + Maximum level)

= ½ (600 kgs + 3,100 kgs) = 1,850 kgs
Or
= (Minimum level + ½ × ROQ)
= (600 kgs + ½ × 2,000 kgs) = 1,600 kgs

PYQ 7
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing company during the
month of April 2019:
Date Particulars Quantity (kg) Rate per kg
April 4 Purchase 3000 `16
April 8 Issue 1000
April 15 Purchase 1500 `18
April 20 Issue 1200
April 25 Return to supplier
(out of purchase made on April 15) 300
April 26 Issue 1000
April 28 Purchase 500 `17

Opening stock as on 01-04-2019 is 1000 kg @ `15 per kg. On 30th April, 2019 it was found that 50 kg of
material ‘CXE’ was fraudulently misappropriated by the store assistant and never recovered by the company.

Required:
(1) Prepare a store ledger account under each of the following method of pricing the issue:
(A) Weighted Average Method, (B) LIFO

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 CHAPTER 1 MATERIAL COST

(2) What would be the value of material consumed and value of closing stock as on 30-04-2019 as per
these two methods?
[(10 Marks) May 2019]

Answer
(1) (A)Stores Ledger of Material CXE (Weighted Average Method)
Date Receipts Issues Balance
April Units Rate Value Units Rate Value Units Rate Value
1 - - - - - - 1000 15 15,000
4 3000 16 48,000 - - - 4000 15.75 63,000
8 - - - 1000 15.75 15,750 3000 15.75 47,250
15 1500 18 27,000 - - - 4500 16.50 74,250
20 - - - 1200 16.50 19,800 3300 16.50 54,450
25 - - Return 300 18 5400 3000 16.35 49,050
26 - - - 1000 16.35 16,350 2000 16.35 32,700
28 500 17 8,500 - - - 2500 16.48 41,200
30 - - Shortage 50 16.48 824 2450 16.48 40,376

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

Date Receipts Issues Balance
April Units Rate Value Units Rate Value Units Rate Value
1 - - - - - - 1000 15 15,000
4 3000 16 48,000 - - - 1000 15 15,000
3000 16 48,000
8 - - - 1000 16 16,000 1000 15 15,000
2000 16 32,000
15 1500 18 27,000 - - - 1000 15 15,000
2000 16 32,000
1500 18 27,000
20 - - - 1200 18 21,600 1000 15 15,000
2000 16 32,000
300 18 5,400
25 - - Return 300 18 5400 1000 15 15,000
2000 16 32,000
26 - - - 1000 16 16,000 1000 15 15,000
1000 16 16,000
28 500 17 8,500 - - - 1000 15 15,000
1000 16 16,000
500 17 8,500
30 - - Shortage 50 17 850 1000 15 15,000
1000 16 16,000
450 17 7,650

(2) Value of material consumed and closing stock:

Material Consumed Closing Stock
Under Weighted Average 51,900 40,376
Under LIFO 53,600 38,650

PYQ 8
Surekha limited produces 4,000 litres of paints on quarterly basis. Each litre requires 2 kg of raw material.
The cost of placing one order for raw material is `40 and the purchasing price of raw material is `50 per kg.

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 MATERIAL COST CHAPTER 1

The storage cost and interest cost is 2% and 6% per annum respectively. The lead time for procurement of
raw material is 15 days.
Calculate Economic Order Quantity and Total Annual Inventory Cost in respect of the above raw
material.
[(5 Marks) Nov 2019]

Answer
2 AO 2 × 32 ,000 × 40 25 ,60 ,000
(1) EOQ = = = = 800
C 50 × 8%(2% + 6%) 4
Kgs

A = 4,000 litres × 4 Quarters × 2 kg of raw material = 32,000 Kgs

(2) Total Annual Inventory Cost including purchase

Annual inventory cost = Purchase cost + Carrying cost + Ordering cost
A
= Purchase quantity × Purchase price + ½ × EOQ × C + ×O
EOQ
32,000
= 32,000 kgs × `50 + ½ × 800 × 4 + × 40
800
= `16,00,000 + `1,600 + `1,600 = `16,03,200

PYQ 9
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is
`240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs `50. At present, the
order size is 3,000 spare parts. (Assume that number of days in a year = 360 days)
Find out:
(1) How much the company’s cost would be saved by EOQ model?
(2) The re-order point under EOQ model if lead time is 12 days?
(3) How frequently should orders for procurement be placed under EOQ model?
[(10 Marks) Nov 2020]

Answer
1. Calculation of saving in cost by using EOQ:

(a) Total ordering and carrying cost under existing policy:

A 27 ,000
Ordering cost = ×O = × `240 = `2,160
ROQ 3 ,000

Carrying cost = ½ × ROQ × C = ½ × 3,000 × `6.25 = `9,375

Total = `2,160 + `9,375 = `11,535

(b) Total ordering and carrying cost under EOQ policy:

A 27,000
Ordering cost = ×O = ( ) 18.75 or 19 × `240= `4,560
ROQ 1,440

Carrying cost = ½ × ROQ × C = ½ × 1,440 × `6.25 = `4,500

Total = `4,560 + `4,500 = `9,060

Saving in cost (a) - (b) = `11,535 - `9,060 = `2,475

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 CHAPTER 1 MATERIAL COST

Working Note:
2 AO 2 × 27 ,000 × 240
EOQ = = = 1,440 Units
C 12 .5% × 50

2. Re-order Point = Normal Consumption × Normal Lead Time

27,000
= × 12 = 900 units
360

3. Frequency of placing order:

360 days 360
= = = 18.95 or 19 days
* No. of orders 19 orders

27,000
*No. of orders = = 18.75 or 19 orders
1 ,440

PYQ 10
MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (`)
101 25 50
102 300 1
103 50 80
104 75 8
105 225 2
106 75 12

MM ltd. has adopted the policy of classifying the items constituting 15% or above of Total Inventory Cost as
‘A’ category, items constituting 6% or less of Total Inventory Cost as ‘C’ category and the remaining items as
‘B’ category.

You are required to:

(1) Rank the items on the basis of % of Total Inventory Cost.
(2) Classify the items into A, B, and C, categories as per ABC Analysis of Inventory Control adopted by MM
Ltd.
[(5 Marks) July 2021]

Answer
(1) Statement Showing % of Total Inventory Cost and Rank
Item Code Number Units Unit Cost (`) Total Cost (`) % of Total Inventory Cost Rank
101 25 50 1,250 16.67 2
102 300 1 300 4 6
103 50 80 4,000 53.33 1
104 75 8 600 8 4
105 225 2 450 6 5
106 75 12 900 12 3
- 750 - 7,500 100 -

(2) Classifying items as per ABC Analysis of Inventory Control

Basis for ABC Classification as % of Total Inventory Cost
15% & above : ‘A’ items
7% to 14% : ‘B’ items
6% and less : ‘C’ items

1.37
 MATERIAL COST CHAPTER 1

Rank Item Code Number Total Cost (`) % of Total Inventory Cost Category
1 103 4,000 53.33
2 101 1,250 16.67
Total 2 5,250 70.00 A
3 106 900 12
4 104 600 8
Total 2 1,500 20.00 B
5 105 450 6
6 102 300 4
Total 2 750 10.00 C
Grand Total 6 7,500 100

PYQ 11
XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process and
has provided the following data year ended on 31st March, 2021:
Particulars Material A (`) Material B (`)
Opening stock as on 01.04.2020 30,000 32,000
Purchase during the year 90,000 51,000
Closing stock as on 31.03.2021 20,000 14,000

1. You are required to calculate:

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

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

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

PYQ 12
A Limited a toy company purchases its requirement of raw material from S Limited at `120 per kg. The
company incurs a handling cost of `400 plus freight of `350 per order. The incremental carrying cost of
inventory of raw material is `0.25 per kg per month. In addition the cost of working capital finance on the
investment in inventory of raw material is `15 per kg per annum. The annual production of the toys is 60,000
units and 5 units of toys are obtained from one kg. of raw material.

Required:

1.38
 CHAPTER 1 MATERIAL COST

(a) Calculate the Economic Order Quantity (EOQ) of raw materials.

(b) Advise, how frequently company should order to minimize its procurement cost. Assume 360 days
in a year.
(c) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ.
[(5 Marks) May 2022]

Answer
2 AO 2  12,000  750
(a) EOQ = = = 1,000 kgs
C 18

A = Annual usage of raw Material (1 unit of raw material gives 5 units of Finished Goods.
Therefore, for 60,000 units of finished goods, material required)
= 60,000 ÷ 5 = 12,000 Kgs

O = Ordering cost per order

= handling cost per order + freight per order
= `400 + `350 = `750

C = Carrying cost or holding cost of inventory per unit p.a.

= Carrying cost per unit p.a. + interest cost of investment in inventory per unit p.a.
= (`0.25 per unit per month × 12 months) + `15 per kg p.a.
= `3 + `15 = `18 per kg p.a.

(b) Frequency of placing order:

360 days 360 days
= = = 30 days
* No. of orders 12 orders
Annual requiremen t 12 ,000 kgs
*No. of orders = = = 12 orders
EOQ 1 ,000 kgs

(c) Total Ordering and Carrying cost per annum at EOQ:

Total cost of ordering = Number of orders × Cost per order

= 12 × `750 = `9,000
Total cost of carrying = ½ EOQ × C
= ½ × 1,000 Kg. × `18 = `9,000
Total Cost = `18,000

PYQ 13
MM Ltd. uses 7,500 valves per month which is purchased at a price of `1.50 per unit, the carrying cost is
estimated to be 20% of average inventory investment on an annual basis. The cost to place an order and
getting the delivery is `15. It takes a period of 1.5 months to receive a delivery from the date of placing and
order and a safety stock of 3,200 valves is desired.

You are required to determine:

(a) The Economics Order Quantity (EOQ) and the frequency of orders
(b) The re-order point.
(c) The Economics Order Quantity (EOQ) if the valve costs `4.50 each instead of `1.50 each.
(Assume a year consists of 360 days)
[(5 Marks) Nov 2022]

1.39
 MATERIAL COST CHAPTER 1

Answer
2AO 2  7 ,500  12  15
(a) EOQ = = = 3,000 valves
C 1.50  20 %

Number of orders = (7,500 × 12) ÷ 3,000 = 30 orders

Frequency of orders = 360 days ÷ 30 orders = 12 days

(b) Re-order point = Average consumption × Average lead time + Safety stock
7,500 ×12
= 360
× 45 days (1.5 months × 30 days) + 3,200
= 14,450 valves

2AO 2  7 ,500  12  15
(c) EOQ = = = 1,732.05 valves
C 4.50  20%

SUGGESTED REVISION FOR EXAM:

BQ: 6, 7, 10, 11, 13, 14, 16, 18, 19, 20, 21, 24, 25, 33

PYQ: 1, 13

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 CHAPTER 2 EMPLOYEE COST

CHAPTER 2 EMPLOYEE COST

WAGE PAYMENT AND INCENTIVES PLANS

BQ 1
Calculate the earnings of the workers A, B and C under Straight Piece Rate System and Time Rate System
from the following particulars:
Normal rate per hour `54
Standard time per unit 1 Minute
Output per day is as follows:
Worker A 390 Units
Worker B 450 Units
Worker C 600 Units
Working hours per day 8 hours

Answer
1. Calculation of earnings under Straight Piece Rate System:
Worker A = 390 units × `0.90 = `351.00
Worker B = 450 units × `0.90 = `405.00
Worker C = 600 units × `0.90 = `540.00

2. Calculation of earnings under Time Rate System:

Worker A = 8 Hours × `54 = `432
Worker B = 8 Hours × `54 = `432
Worker C = 8 Hours × `54 = `432

Working Notes:
Computation of Normal wage rate per unit:
Normal rate per hour `54
Standard Output per hour 60 units
Normal wage rate per unit `0.90 (`54 ÷ 60 units)

BQ 2
Calculate the earnings of a worker under Halsey System and under Rowan System. The relevant data is as
below:
Time Rate (per hour) `60
Time allowed 8 hours
Time taken 6 hours
Time saved 2 hours

Answer
Earning under Halsey System:

Earning = (AH × R) + 50% (SH - AH) × R

= (6 hours × `60) + 50% (8 hours – 6 hours) × `60 = `420.00
Earning under Rowan System:

2.1
 EMPLOYEE COST CHAPTER 2

Earning = (AH × R) + AH × (SH – AH) × R

SH
= (6 hours × `60) + 6 × (8 hours – 6 hours) × `60 = `450.00
8

BQ 3
From the under mentioned information work out the total amount payable and the rate earned per hour by
three workmen under the Halsey Premium Bonus System (the bonus being calculated at 50% of the time
saved):
Standard time for given operation : 10 hours
Hourly rate of wages : `1.00
Actual time taken: B : 8 hours
C : 6 hours
D : 5 hours

Answer
Earning under Halsey premium bonus system and rate earned per hour
Earning = (AH × R) + 50% (SH - AH) × R
Rate earned per hour = Earning ÷ AH
For B
Earning = (8 hours × `1) + 50% (10 - 8) × `1 = 8+1 = `9
Rate per hour = 9 ÷ 8 hours = `1.25

For C
Earning = (6 hours × `1) + 50% (10 - 6) × `1 = 6+2 = `8
Rate per hour = 8 ÷ 6 hours = `1.33

For D
Earning = (5 hours × `1) + 50% (10 – 5) × `1 = 5 + 2.50= `7.50
Rate per hour = 7.50 ÷ 5 hours = `1.50

BQ 4
(a) Bonus paid under the Halsey Plan with bonus at 50% for the time saved equals the bonus paid under
the Rowan System. When will this statement hold good? (Your answer should contain the proof).

(b) The time allowed for a job is 8 hours. The hourly rate is `8. Prepare a statement showing:
(i) The bonus earned,
(ii) The total earnings of labour and
(iii) Hourly earnings.
Under the Halsey system with 50% bonus for time saved and Rowan system for each hour saved
progressively.

BQ 5
Two workmen, ‘A’ and ‘B’ produce the same product using the same material. Their normal wage rate is also
the same; A is paid bonus according to the rowan system, while B is paid bonus according to the Halsey
System. The time allowed to make the product is 50 hours.
A takes 30 hours while B takes 40 hours to complete the product. The factory overhead rate is `5 per
man hour actually worked. The factory cost for the product for A is `3,490 and for B it is `3,600.
You are required:
(a) To find the normal rate of wages,

2.2
 CHAPTER 2 EMPLOYEE COST

(b) To find the cost of material,

(c) To prepare a statement comparing the factory cost of the products as made by the two workmen.
[(a) `20 per hour (b) `2,500 (c) A: `3,490; B: `3,600]

BQ 6
Mr. A is working by employing 10 skilled workers. He is considering the introduction of some incentive
scheme either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour
productivity to cope with the increased demand for the product by 25%. He feels that if the proposed
incentive scheme could bring about an average 20% increase over the present earnings of the workers, it
could act as sufficient incentive for them to produce more and he has accordingly given this assurance to the
workers.
As a result of the assurance, the increase in productivity has been observed as revealed by the
following figures for the current month:
Hourly rate of wages (guaranteed) `40.00
Average time for producing 1 piece by one worker 2 hours
(This may be taken as time allowed)
No. of working days in the month 25 days
No. of working hours per day for each worker 8 hours
Actual production during the month 1,250 units
Required:
1. Calculate effective rate of earnings per hour under Halsey scheme and Rowan scheme.
2. Calculate the savings to Mr. A in terms of direct labour cost per piece under the schemes.

Answer
1. Computation of effective rate of earnings under the Halsey and Rowan schemes:
Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R
= (2,000 × `40) + 50% (2,500 – 2,000) × `40
= `90,000

Total earnings under Rowan scheme = (AH × R) + AH × (SH – AH) × R

SH
2 ,000
= (2,000 × `40) + × (2,500 – 2,000) × `40
2 ,500
= `96,000
Effective rate under Halsey Plan = `90,000 ÷ 2,000 hours = `45 per hour
Effective rate under Rowan Plan = `96,000 ÷ 2,000 hours = `48 per hour
Actual hours (AH) = 10 workers × 25 days × 8 hours per day
= 2,000 hours
Standard hours (SH) = 1,250 units × 2 hours per unit = 2,500 hours

2. Savings to Mr. A in terms of direct labour cost per piece:

Direct labour cost per unit:
Under time wages = 2 hours × `40 per hour = `80 per unit
Under Halsey Plan = `90,000 ÷ 1,250 units = `72 per unit
Under Rowan Plan = `96,000 ÷ 1,250 units = `76.8 per unit

Savings of direct labour cost per unit under:

2.3
 EMPLOYEE COST CHAPTER 2

Halsey Plan = `80 – `72 = `8.00 per unit

Rowan Plan = `80 – `76.80 = `3.20 per unit

BQ 7
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. Mr. 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.
What could have been his total earnings and effective hourly rate, had he been put on Halsey
Incentive Scheme (50%)?

Answer
The following equation can be made:
Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
37.50 = [30 AH + AH/4 (4 - AH) × 30] ÷ AH
37.50 AH = 30 AH + AH/4 (4 - AH) × 30
7.50 AH = AH/4 (4 - AH) × 30
7.50 AH = AH (4 - AH) × 7.50
1 = 4 - AH
AH = 3 hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Total earnings = (AH × R) + 50% (SH – AH) × R
= (3 × 30) + 50% (4 – 3) × 30 = `105

Effective hourly rate = Total earning ÷ hours worked

= `105 ÷ 3 hours = `35

BQ 8
Wage negotiations are going on with the recognised Labour Union and the Management wants you as the
Cost Accountant of the Company to formulate an incentive scheme with a view to increase productivity. The
case of three typical workers A, B and C 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.
Calculate the earnings of each of the three workers, the employee cost per 100 pieces and also calculate
under the above schemes the average cost of labour for the company to produce 100 pieces under:
(i) Day wages, (iii) Halsey scheme and
(ii) Piece rate, (iv) The Rowan scheme.

Answer
Computation of earnings of each worker and labour cost per 100 pieces and the average cost of labour
for the company to produce 100 pieces under various schemes:
(i) Day Wages:
Worker Day wages Actual output Labour cost per 100 pieces
A 600 180 333.33
B 600 120 500.00
C 600 100 600.00
Total 1,800 400
Total wages paid 1,800
Average labour cost to produce 100 pieces = × 100 = × 100 = `450
Total output 400

2.4
 CHAPTER 2 EMPLOYEE COST

(ii) Piece Rate:

Worker Actual output Piece rate Wages earned Labour cost per 100 pieces
A 180 *7.50 1,350 750.00
B 120 7.50 900 750.00
C 100 7.50 750 750.00
Total 400 - 3,000 -
Total wages paid 3,000
Average labour cost to produce 100 pieces = × 100 = × 100 = `750
Total output 400

*Piece rate = `75 per hour ÷ 10 units in one hour = `7.50 per unit

(iii) Halsey Scheme:

Actual Wages earned Labour cost per
Worker SH AH
output (AH × R) + 50%(SH - AH) × R 100 pieces
A 180 18 8 975 541.67
B 120 12 8 750 625.00
C 100 10 8 675 675.00
Total 400 - - 2,400 -
Total wages paid 2,400
Average labour cost to produce 100 pieces = × 100 = × 100 = `600
Total output 400

(iv) Rowan Scheme:

Actual Wages earned Labour cost per
Worker SH AH
output (AH × R) + AH/SH × (SH - AH) × R 100 pieces
A 180 18 8 933 518.33
B 120 12 8 800 666.67
C 100 10 8 720 720.00
Total 400 - - 2,453 -
Total wages paid 2,453
Average labour cost to produce 100 pieces = × 100 = × 100 = `613.25
Total output 400

BQ 9
A factory having the latest sophisticated machines wants to introduce an incentive scheme for its workers,
keeping in view the following:
(a) The entire gains of improved production should not go to the workers.
(b) In the name of speed, quality should not suffer.
(c) The rate setting department being newly established are liable to commit mistakes.
You are required to prepare a suitable incentive scheme and demonstrate by an illustrative
numerical example how your scheme answers to all the requirements of the management.

Answer
Rowan Scheme of premium bonus (variable sharing plan) is a suitable incentive scheme for the workers of
the factory. If this scheme is adopted, the entire gains due to time saved by a worker will not pass to him.

Another feature of this scheme is that a worker cannot increase his earnings or bonus by merely
increasing its work speed. The reason for this is that the bonus under Rowan Scheme is maximum when the
time taken by a worker on a job is half of the time allowed. As this fact is known to the workers, therefore,
they work at such a speed which helps them to maintain the quality of output too.

2.5
 EMPLOYEE COST CHAPTER 2

Lastly, Rowan System provides a safeguard in the case of any loose fixation of the standards by the
rate-setting department. It may be observed from the following illustration that in the Rowan Scheme the
bonus paid will be low due to any loose fixation of standards. Workers cannot take undue advantage of such
a situation. The above three features of Rowan Plan can be discussed with the help of the following
illustration:

(a) Time allowed = 4 hours

Time taken = 3 hours
Rate = `5 per hour
Bonus = AH/SH (SH - AH) × R
= 3/4 × (4 - 3) × `5 = `3.75

In the above illustration time saved is 1 hour and, therefore, total gain is `5. Out of `5 according to Rowan
Plan only `3.75 is given to the worker in the form of bonus and the remaining `1.25 remains with the
management. In other words, a worker is entitled for 75 percent of the time saved in the form of bonus.

(b) The figures of bonus in the above illustration when the time taken is 2 hours and 1 hour respectively
are as below:
Bonus = 2/4 × (4 - 2) × `5 = `5.00
Bonus = 1/4 × (4 - 1) × `5 = `3.75

The above figures of bonus clearly show that when time taken is half of the time allowed, the bonus is
maximum. When the time taken is reduced from 2 to 1 hour, the bonus figure fell by `1.25. Hence, it is quite
apparent to workers that it is of no use to increase speed of work. This feature of Rowan Plan thus protects
the quality of output.

(c) If the rate-setting department erroneously sets the time allowed as 10 hours instead of 4 hours, in the
above illustration; then the bonus paid will be as follows:

Bonus = 3/10 × (10 - 3) × `5 = `10.50

The bonus paid for saving 7 hours thus is `10.50 which is approximately equal to the wages of 2 hours. In
other words, the bonus paid to the workers is low. Hence workers cannot take undue advantage of any
mistake committed by the time setting department of the concern.

OVERTIME

BQ 10
A company's basic wage rate is `100 per hour and its overtime rates are:
Before and after normal working hours 175% of basic wage rate
Sunday and holidays 225% of basic wage rate
During the previous year the following hours were worked:
Normal time 1,00,000 hours
Overtime before and after working hours 20,000 hours
Overtime on Sundays and holidays 5,000 hours
Total 1,25,000 hours

The following hours have been worked on job ‘Z’:

Normal time 1,000 hours
Overtime before and after working hours 100 hours
Overtime on Sundays and holidays 25 hours
Total 1,125 hours

2.6
 CHAPTER 2 EMPLOYEE COST

You are required to calculate the labour cost chargeable to job ‘Z’ and overheads in each of the
following circumstances:
(a) Where overtime is worked regularly throughout the year as a policy due to workers shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
[(a) `1,31,625 and Nil (b) `1,12,500 and `10,625 (c) `1,23,125 and Nil]

BQ 11
It is seen from the job card for repair of the customer’s equipment that a total of 154 hours have been put in
as detailed below:
Worker A paid @ `200 Worker B paid @ `100 Worker C paid @ `300
Day
per day for 8 hours per day for 8 hours per day for 8 hours
Monday (Hours) 10 - ½ hours 8 hours 10 - ½ hours
Tuesday (Hours) 8 hours 8 hours 8 hours
Wednesday (Hours) 10 - ½ hours 8 hours 10 - ½ hours
Thursday (Hours) 9 - ½ hours 8 hours 9 - ½ hours
Friday (Hours) 10 - ½ hours 8 hours 10 - ½ hours
Saturday (Hours) - 8 hours 8 hours
Total 49 hours 48 hours 57 hours
In terms of an award in a labour conciliation, the workers are to be paid dearness allowance on the
basis of cost of living index figures relating to each month which works out @ `968 for the relevant month.
The dearness allowance is payable to all workers ir-respective of wage rate if they are present or are on leave
with wages on all working days.
Each worker has to work for 8 hours on weekdays. Saturday and Sunday will be weekly holiday,
however workers may work on Saturdays due to exigency of work for 4 hours, though full payment of 8 hours
will be made with no other payments.
Overtime is paid twice of ordinary wage rate if a worker works more than nine hours in a day of forty
eight hours in a week. Excluding holidays, the total number of hours works out to 176 in the relevant month.
The company’s contribution to Provident Fund and Employees State Insurance Premium are absorbed into
overheads.
Work out the wages payable to each worker.

Answer
(1) Calculation of hours to be paid to worker A:
Normal Extra Overtime Equivalent normal hours Total normal
Days
hours hours hours for overtime worked hours
Monday 8 1 1.5 3 12
Tuesday 8 - - - 8
Wednesday 8 1 1.5 3 12
Thursday 8 1 .5 1 10
Friday 8 1 1.5 3 12
Saturday - - - - -
Total 40 4 5 10 54

(2) Calculation of hours to be paid to worker B:

Normal Extra Overtime Equivalent normal hours Total normal
Days
hours hours hours for overtime worked hours
Monday 8 - - - 8
Tuesday 8 - - - 8

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 EMPLOYEE COST CHAPTER 2

Wednesday 8 - - - 8
Thursday 8 - - - 8
Friday 8 - - - 8
Saturday 4 *4 - - 8
Total 44 4 - - 48
*Worker-B has neither worked more than 9 hours in any day nor more than 48 hours in the week.

(3) Calculation of hours to be paid to worker C:

Normal Extra Overtime Equivalent normal hours Total normal
Days
hours hours hours for overtime worked hours
Monday 8 1 1.5 3 12
Tuesday 8 - - - 8
Wednesday 8 1 1.5 3 12
Thursday 8 1 .5 1 10
Friday 8 1 1.5 3 12
Saturday 4 *4 - - 8
Total 44 8 5 10 62
*Worker-C will be paid for equivalent 8 hours, though 4 hours of working is required on Saturday. Further,
no overtime will be paid for working beyond 4 hours since it is paid for working beyond 9 hours.

Now,
Worker C worked 9 hours (57 – 48) above 48 hours in a week and eligible for 18 equivalent normal hours
for overtime worked. Thus total normal hours for worker C is 66 hours (48 + 18).

Statement Showing Wages Payable

Particulars A B C
Basic wages per hour `200 ÷ 8 = `25.00 `100 ÷ 8 = `12.50 `300 ÷ 8 = `37.50
Dearness allowance per hour `5.50 `5.50 `5.50
(`968 ÷ 176 hours)
Hourly rate `30.50 `18.00 `43.00
Total normal hours 54 48 66
Total wages payable `1,647.00 `864.00 `2,838.00

GROSS WAGES, NET WAGES AND LABOUR COST PER HOUR

BQ 12
‘X’ an employee of ABC Company gets the following emoluments and benefits:

Basic pay : `10,000 p.m.

Dearness allowance : `2,000 p.m.
Bonus : 20% of Salary and D.A.
Other allowances : `2,500 p.m.
Employee’s contribution to P.F. : 10% of salary and D.A.

‘X’ works for 2,400 hours per annum out of which 400 hours are non-productive and treated as normal
idle time.

You are required to find out the effective hourly cost of employee ‘X’.

Answer

2.8
 CHAPTER 2 EMPLOYEE COST

Statement of Effective Hourly Cost of Employee X

Particulars Amount
Basic pay (10,000 × 12) 1,20,000
Dearness Allowance (2,000 × 12) 24,000
Bonus @ 20% of 1,44,000 (1,20,000 + 24,000) 28,800
Other allowance (2,500 × 12) 30,000
Employer’s contribution to provided fund @ 10% of 1,44,000 14,400
Labour cost per annum 2,17,200
÷ Effective labour hours (2,400 - 400) ÷ 2,000
Effective hourly cost 108.60

BQ 13
Calculate the Employee hour rate of a worker X from the following data:
Basic pay `10,000 p.m.
D.A. `3,000 p.m.
Fringe benefits `1,000 p.m.
Number of working days in a year 300. 20 days are availed off as holidays on full pay in a year. Assume a day
of 8 hours.

Answer
Statement of Employee Hour Rate
Particulars Amount
Basic Wages annually (10,000 × 12) 1,20,000
Dearness Allowance (3,000 × 12) 36,000
Fringe Benefits (1,000 × 12) 12,000
Total Annual Labour Cost 1,68,000
÷ Effective Hours {(300 – 20) × 8 hours} ÷ 2,240
Wage rate per hour `75.00

BQ 14
In a factory working six days in a week and eight hours each day, a worker is paid at the rate of `100 per day
basic plus D.A. @ 120% of basic. He is allowed to take 30 minutes off during his 8 hours shift for meals-break
and a 10 minutes recess for rest. During a week, his card showed that his time was chargeable to:
Job X 15 hours
Job Y 12 hours
Job Z 13 hours
The time not booked was wasted while waiting for a job.
In cost accounting, how would you allocate the wages of the worker for the week?

Answer
Statement of Allocation of Wages in Cost Accounting
Particulars Amount
Allocated to Job X (15 hours × `30) 450
Allocated to Job Y (12 hours × `30) 360
Allocated to Job Z (13 hours × `30) 390
Charged to Costing Profit & Loss A/c (4 hours × `30)(assumed abnormal idle time) 120
Total 1,320
Working:
Total available hours in one week = 6 days × 8 hrs per day = 48 hours

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 EMPLOYEE COST CHAPTER 2

Normal Idle time = 6 days × 40 minutes per day

= 240 minutes or 4 hours per week
Effective hours per week = 48 hours – 4 hours = 44 hours
Total wages for a week = (`100+120%) × 6 days = `1,320
Wage rate per hour = `1,320 ÷ 44 hours = `30 per hour
Time wasted in waiting for job = 44 hrs – (15 + 12 + 13) = 4 hours
(Abnormal idle time)

BQ 15
A worker is paid `10,000 per month and a dearness allowance of `2,000 p.m. Worker contribution to
provident fund is @10% and employer also contributes the same amount as the employee. The Employees
State Insurance Corporation premium is 6.5% of wages of which 1.75% is paid by the employees. It is the
firm’s practice to pay 2 months’ wages as bonus each year.
The number of working days in a year are 300 of 8 hours each. Out of these the worker is entitled to 15
days leave on full pay.
Calculate the wage rate per hour for costing purposes.

Answer
Statement of Wage Rate per Hour
Particulars Amount
Basic Wages annually (10,000 × 12) 1,20,000
Dearness Allowance (2,000 × 12) 24,000
Basic plus D.A. 1,44,000
Bonus at two month’s wages (12,000 × 2) 24,000
Add: Employer contribution to:
Provident Fund @ 10% of 1,44,000 14,400
E.S.I. Premium @ 4.75% (6.5% - 1.75%) of 1,44,000 6,840
Total Annual Labour Cost 1,89,240
÷ Effective Hours {(300 – 15) × 8 hours} ÷ 2,280
Wage rate per hour `83.00

BQ 16
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
Basic wages `10,000 `16,000
Dearness Allowance 50% 50%
Contribution to Provident Fund (on basic wages) 8% 8%
Contribution to Employee State Insurance (on basic wages) 2% 2%
Overtime hours 10 hours -

The normal working hours for the month are 200. Overtime is paid at double the total of normal wages
and dearness allowance. Employer’s contributions to state insurance and provident fund are at equal rates
with employee’s contribution. The two workers were employed on jobs X, Y and Z in the following
proportions:
Jobs X Y Z
Workers A 40% 30% 30%
Workers B 50% 20% 30%

Overtime was done on job Y.

2.10
 CHAPTER 2 EMPLOYEE COST

Answer
Statement Showing Earnings of Worker A and B
Particulars A B
Basic Wages `10,000 `16,000
Dearness Allowance (50% of Basic) `5,000 `8,000
Overtime Wages (W.N.) `1,500 -
Gross Wages Earned `16,500 `24,000
Less: Employee’s Contribution to Provident Fund (8% of basic) (`800) (`1,280)
Less: Employee’s Contribution ESI (2% of basic) (`200) (`320)
Net Wages Earned `15,500 `22,400

Statement Showing Labour Cost Chargeable to Jobs

Particulars Job X Job Y Job Z
Worker A:
Ordinary Wages `16,000 in 4 : 3 : 3 `6,400 `4,800 `4,800
Overtime `1,500 for Job Y - `1,500 -
Worker B:
Ordinary Wages `25,600 in 5 : 2 : 3 `12,800 `5,120 `7,680
Labour Cost chargeable `19,200 `11,420 `12,480

Working Note:
1. Statement Showing Employee Cost Excluding Overtime
Particulars A B
Basic Wages `10,000 `16,000
Dearness Allowance (50% of Basic) `5,000 `8,000
Add: Employer’s Contribution to Provident Fund (8% of basic) `800 `1,280
Add: Employer’s Contribution ESI (2% of basic) `200 `320
Employee Cost (Excluding overtime) `16,000 `25,600

2. Overtime wages of worker A = (`15,000 ÷ 200 hours) × 2 × 10 hours = `1,500

LABOUR TURNOVER

BQ 17
The Accountant of Y Ltd. has computed rates for the quarter ending 31st March, 2020 as 10%, 5% and 3%
respectively under 'Flux Method', 'Replacement Method', and 'Separation Method'.

If the number of workers replaced during that quarter is 30, find out the number of workers for
the quarter:
(a) Recruited and joined;
(b) Left and discharged and
(c) Equivalent employee turnover rates for the year.

Answer
(a) Calculation of workers recruited and joined (No. of accessions):
No . of separation s  No . of accessions
Flux Rate = × 100
Average number of wor ker s
18  No. of accessions
= × 100 = 10%
600

2.11
 EMPLOYEE COST CHAPTER 2

No. of accessions = 10% of 600 – 18 = 42 workers

(b) Calculation of workers left and discharged (No. of separations):

Number of separation = 3% of average workers

= 3% of 600 = 18 workers

(c) Calculation of Equivalent employee turnover rates for the year:

Equivalent employee turnover rate = Turnover rate for the quarter × 4

Using Flux method = 10% × 4 = 40%
Using Replacement method = 5% × 4 = 20%
Using Separation method = 3% × 4 = 12%

Working:
Calculation of Average no of workers:
Number of replacements = 5% of average workers = 30
∴ Average workers = 30 ÷ 5% = 600 workers

BQ 18
No of workers on the payroll:

At the beginning of the month 900 workers

At the end of the month 1,100 workers
During the month 10 workers left, 40 persons were discharged and 150 workers were recruited. Of these 25
workers are recruited in the vacancies of those leaving, while the rest were engaged for an expansion scheme.

Calculate the various labour turnover rates.

Answer
No. of separation 10 + 40
Separation method = × 100 = × 100 = 5%
Average no. of workers 1,000

Replacement method = No. of workers replaced × 100 = 25

× 100 = 2.5%
Average no. of workers 1,000

No. of separation + No. of replaced 50 + 25

Flux method (Alt 1) = × 100 = × 100
Average no. of workers 1,000
= 7.5%

New Accession method = No. of new accessions × 100 = 125

× 100 = 12.5%
Average no. of workers 1,000

Accession method = No. of accessions × 100 = 1 50

× 100 = 15%
Average no. of workers 1,000

Flux method (Alt 2) = No. of accessions  No. of separation × 100 = 150 + 50

× 100
Average no. of workers 1,000
= 20%

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 CHAPTER 2 EMPLOYEE COST

900 + 1 ,100
*Average no of workers = = 1,000 workers
2

BQ 19
The management of Company are worried about their 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 in the last year.

Last year sales amounted to `83,03,300 and P/V ratio was 20 per cent. The total number of actual hours
worked by the direct labour force was 4,45,000. As a result of the delays by the personnel department in
filling vacancies due to labour turnover 1,00,000 potentially productive hours (excluding unproductive
training hours) were lost. The actual direct labour hours included 30,000 hours attributable to training on
new recruits, out of which half of the hours were unproductive.

The costs incurred consequent on labour turnover revealed, on analysis the following:

Settlement cost due to leaving `43,820 Recruitment Costs `26,740

Selecting costs `12,750 Training costs `30,490

Assuming that the potential production lost as a consequence of labour turnover could have been
sold at prevailing prices, find the profit foregone last year on account of labour turnover.

Answer
Statement Showing Profit Foregone on Account of Labour Turnover
Particulars Amount
Contribution Foregone (1,00,000 hours + 15,000 hours) × `3.862 per hour 4,44,130
Settlement Cost due to leaving 43,820
Recruitment Costs 26,740
Selection Costs 12,750
Training Costs 30,490
Profit Foregone 5,57,930

Working Notes:
1. Calculation of productive hours:
Actual hours worked 4,45,000
Less: Unproductive training hours (½ of 30,000 hours) (15,000)
Actual productive hours 4,30,000

2. Contribution earned per productive hours:

Sales value 83,03,300
Contribution (20% of 83,03,300) 16,60,660
Contribution per productive hour (16,60,660 ÷ 4,30,000) `3.862

MISCELLANEOUS

BQ 20
An article passes through five hand operations as follows:
Operation Time per article Grade of worker Wage rate per hour
1 15 Minutes A `0.65
2 25 Minutes B `0.50

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 EMPLOYEE COST CHAPTER 2

3 10 Minutes C `0.40
4 30 Minutes D `0.35
5 20 Minutes E `0.30
The factory works 40 hours per week and the production target is 600 dozens per week.

Prepare a statement showing for each operation and in total:

(a) The number of operators required,
(b) The labour cost per dozen and
(c) The total labour cost per week to produce the total targeted output.

Answer
Statement Showing Operators, Labour Cost per Dozen and Labour Cost per week
Time required to Number of Labour cost per Labour cost per
Operations
produce 7,200 units Operators dozen week
1 7,200 × 15/60 1,800 hours ÷ 40 0.65 × 15/60 × 12 1,800 hours × 0.65
= 1,800 Hours = 45 Operators = 1.95 = 1,170
2 7,200 × 25/60 3,000 hours ÷ 40 0.50 × 25/60 × 12 3,000 hours × 0.50
= 3,000 Hours = 75 Operators = 2.50 = 1,500
3 7,200 × 10/60 1,200 hours ÷ 40 0.40 × 10/60 × 12 1,200 hours × 0.40
= 1,200 Hours = 30 Operators = 0.80 = 480
4 7,200 × 30/60 3,600 hours ÷ 40 0.35 × 30/60 × 12 3,600 hours × 0.35
= 3,600 Hours = 90 Operators = 2.10 = 1,260
5 7,200 × 20/60 2,400 hours ÷ 40 0.30 × 20/60 × 12 2,400 hours × 0.30
= 2,400 Hours = 60 Operators = 1.20 = 720
Total - 300 `8.55 `5,130

Number of units = 600 dozens × 12 units in one dozen = 7,200 units

BQ 21
P Ltd. manufactures two products by using one grade of employees. The following estimates are available:

Product A Product B
Budgeted production units 3,480 4,000
Standard hours allowed per product 5 4

It is further worked out that the efficiency rating (efficiency ratio) for productive hours worked by direct
workers in actually manufacturing the production is 80%.

You are required to find out the exact standard employee hours requirement.

Answer
Standard hours allowed for budgeted production = 3,480 units × 5 hours + 4,000 units × 4 hours
= 33,400 hours

Exact standard employee hours required = 33,400 hours ÷ 80% = 41,750 hours

2.14
 CHAPTER 2 EMPLOYEE COST

PAST YEAR QUESTIONS

PYQ 1
Human Resources Department of A Ltd. computed labour turnover by replacement method at 3% for the
quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was made. The number of
workers at the beginning and end of the quarter was 990 and 1,010 respectively.
You are required to calculate the labour turnover rate by Separation Method and Flux Method.
[(5 Marks) Nov 2015]

Answer
Calculation of labour turnover rate:
Number of separation s 50 wor ker s
Separation Method = × 100 = × 100
Average number of wor ker s 1000 wor ker s
= 5%

No of separation s  No of accessions
Flux Method (Alternative 1) = × 100
Average number of wor ker s
50  70
= × 100 = 12%
1000

No of separation s + No of replacemen ts
Flux Method (Alternative 2) = × 100
Average number of wor ker s
50 + 30
= × 100 = 8%
1000

Working Notes:
Average no of workers = (Opening workers + Closing workers) ÷ 2
= (990 + 1,010) ÷ 2 = 1000

Number of Separations = Opening + Accession - Closing

= 990 + 70 – 1,010 = 50 workers
Number of Accessions = Replaced + New Joined
= 3% of 1,000 + 40 = 70 workers

PYQ 2
RST Company Ltd. had computed labour turnover rates for the quarter ended 31st March, 2017 as 20%, 10%
and 5% under Flux method, Replacement method and Separation method respectively. If the number of
workers replaced during the quarter is 50, find out (i) Workers recruited and joined, (ii) Workers left and
discharged and (iii) Average number of workers on roll.
[(5 Marks) May 2017]

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

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 EMPLOYEE COST CHAPTER 2

(ii) Calculation of workers left and discharged:

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

(iii) Calculation of average number of workers on roll:

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

PYQ 3
A skilled worker is paid a guaranteed wage rate of `150 per hour. The standard time allowed for a job is 50
hours. He gets an effective rate of wages of `180 under Rowan Incentive Plan due to saving in time. For the
same saving in time, calculate hourly rate of wages he will get, if he placed under Halsey Premium Scheme
(50%).
[(5 Marks) Nov 2017]

Answer
The following equation can be made:

Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH

180 = [150 AH + AH/50 (50 - AH) × 150] ÷ AH
30 AH = AH/50 (50 - AH) × 150
30 AH = AH (50 - AH) × 3
10 AH = AH (50 - AH)
∴ AH = 40 Hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Total earnings = (AH × R) + 50% (SH – AH) × R
= (40 × 150) + 50% (50 – 40) × 150 = `6,750

Effective hourly rate = Total earning ÷ hours worked

= `6,750 ÷ 40 hours = `168.75

PYQ 4
A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours. His wage rate is `5
per hour. Following additional information are also available:
Material cost of work `50
Factory overheads 100% of wages

Calculate the factory cost of work under the following methods of wage payment:
(i) Rowan Plan
(ii) Halsey Plan
[(5 Marks) May 2018]

Answer
Factory cost = Materials + Labour + Factory Overheads

(i) Under Rowan Plan = 50 + 93.75 + 93.75 = `237.50

(ii) Under Halsey Plan = 50 + 87.50 + 87.50 = `225

Working Notes:

2.16
 CHAPTER 2 EMPLOYEE COST

Earning of workers under Halsey’s and Rowan’s premium scheme:

Wages under Halsey = (AH × R) + 50% (SH – AH) × R
= (15 hours × 5) + 50% (20 – 15) × 5 = `87.50

Wages under Rowan = (AH × R) + AH × (SH – AH) × R

SH
= (15 hours × 5) + 15/20 (20 – 15) × 5 = `93.75

PYQ 5
Following data have been extracted from the books of M/s. ABC Private Limited:
Salary (each employee, per month) : `30,000
Bonus : 25% of Salary
Employer’s contribution to PF, ESI etc. : 15% of salary
Total cost at employees’ welfare activities : `6,61,500 per annum
Total leave permitted : 30 days
No. of employees : 175
Normal idle time : 70 hours per annum
Abnormal idle time (due to power failure) : 50 hours
Working days per annum : 310 days of 8 hours

You are required to calculate:

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

Answer
(i) Statement of Annual Cost of Each Employee
Particulars Amount
Salary (30,000 × 12) 3,60,000
Bonus @ 25% of 3,60,000 90,000
Employer’s contribution to PF, ESI @ 15% of 3,60,000 54,000
Welfare cost per employee (6,61,500 ÷ 175) 3,780
Annual Cost of Each Employee 5,07,780

(ii) Employee cost per hour = Annual cost per employee ÷ Labour hours
= 5,07,780 ÷ [(310 days – 30 days) × 8 hours – 70 hours]
= 5,07,780 ÷ 2,170 hours = `234

(iii) Cost of abnormal idle time per employee:

= Abnormal idle time per employee × cost per hour
= 50 × 234 = `11,700

PYQ 6
Zico Ltd. has its factory at two locations viz Nasik and Satara. Rowan plan is used at Nasik factory and Halsey
plan at Satara factory. Standard time and basic rate of wages are same for a job which is similar and is carried
out on similar machinery. Normal working hours is 8 hour per day in a 5 days week.

Job in Nasik factory is completed in 32 hours while at Satara factory it has taken 30 hours. Conversion
cost at Nasik and Satara are `5,408 and `4,950. Overheads account for `25 per hour.
Required:

2.17
 EMPLOYEE COST CHAPTER 2

(1) To find out the normal wage; and

(2) To compare the respective conversion costs.
[(10 Marks) Nov 2019]

Answer
(1) Calculation of Normal Wage:

Nasik:
Normal Wage = AH × R = 32 hours × `120 = `3,840

Satara:
Normal Wage = AH × R = 30 hours × `120 = `3,600

(2) Statement Shoeing Conversion Cost

Particulars Nasik (`) Satara (`)
Labour Cost 4,608 4,200
Overheads (32 Hours × `25) and (30 Hours × `25) 800 750
Conversion Cost 5,408 4,950

Working Note:
(a) Calculation of wage rate (R):
Using data of Nasik:
Conversion cost = Labour cost + Overheads
AH
5,408 = [AH × R + (SH - AH) × R] + Overheads
SH
32
5,408 = [32 × R + (40 - 32) × R] + (32 hours × 25)
40
5,408 – 800 = 38.4 R
Wage rate ‘R’ = `120

(b) Calculation of Labour Cost:

AH
Nasik = AH × R + (SH - AH) × R
SH
32
= 32 × `120 + (40 - 32) × `120 = `4,608
40

Satara = AH × R + 50% (SH - AH) × R

= 30 × `120 + 50% (40 - 30) × `120 = `4,200

(c) Standard Hours = 5 days × 8 hours per day = 40 hours

PYQ 7
Following are the particulars of two workers ‘R ‘and ‘S’ for a month:
R S
Basic wages `15,000 `30,000
Dearness Allowance 50% 50%
Contribution to Provident Fund (on basic wages) 7% 7.5%
Contribution to Employee State Insurance (on basic wages) 2% 2%
Overtime hours 20 hours -
The normal working hours for the month are 200. Overtime is paid at double the total of normal wages
and dearness allowance. Employer’s contributions to state insurance and provident fund are at equal rates
with employee’s contribution. Both workers were employed on jobs A, B and C in the following proportions:

2.18
 CHAPTER 2 EMPLOYEE COST

Jobs A B C
Workers R 75% 10% 15%
Workers S 40% 20% 40%
Overtime was done on job ‘A’.
You are required to:
1. Calculate ordinary wage rate per hour of ‘R’ and ‘S’.
2. Allocate the worker’s cost to job ‘A’, ‘B’ and ‘C’.
[(6 Marks) Nov 2020]

Answer
1. Statement Showing Ordinary Wage Rate per Hour
Particulars R S
Basic Wages `15,000 `30,000
Dearness Allowance (50% of Basic) `7,500 `15,000
Gross Wages (excluding overtime) `22,500 `45,000
Add: Employer’s Contribution to P.F. (7%/7.5% of basic) `1,050 `2,250
Add: Employer’s Contribution ESI (2% of basic) `300 `600
Ordinary Wages Earned `23,850 `47,850
÷ Effective Hours 200 200
Ordinary Wage Rate per Hour `119.25 `239.25

Working Note:
Overtime wages of worker R = (`22,500 ÷ 200 hours) × 2 × 20 hours = `4,500

2. Statement Showing Allocation of Worker’s Cost

Particulars Job A Job B Job C
Worker R:
Ordinary Wages `23,850 in 75 : 10 : 15 `17,887.50 `2,385 `3,577.50
Overtime for Job A `4,500 - -
Worker S:
Ordinary Wages `47,850 in 40 : 20 : 40 `19,140 `9,570 `19,140
Allocation of Labour Cost `41,527.50 `11,955 `22,717.50

PYQ 8
Z Ltd is working by employing 50 skilled workers. It is considered the introduction of incentive scheme-
either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour
productivity to cope up the increasing demand for the product by 40%. It is believed that proposed incentive
scheme could bring about an average 20% increase over the present earnings of the workers; it could act as
sufficient incentive for them to produce more and the company has accordingly given assurance to the
workers. Because of this assurance, the increase in productivity has been observed as revealed by the figures
for the month of April, 2020.
Hourly rate of wages (guaranteed) `50
Average time for producing one unit by one worker at the
Previous performance (This may be taken as time allowed) 1.975 hours
Number of working days in the month 24 days
Number of working hours per day of each worker 8 hours
Actual production during the month 6,120 units
Required:

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 EMPLOYEE COST CHAPTER 2

(1) Calculate the effective increase in earnings of workers in percentage terms under Halsey scheme and
Rowan scheme.
(2) Calculate the savings to the Z Ltd in terms of direct labour cost per unit under both the schemes.
(3) Advise Z Ltd about the selection of the scheme that would fulfill its assurance of incentivizing workers
and also to adjust with the increase in demand.
[(10 Marks) Jan 2021]

Answer
(1) Computation of effective increase in earnings:
Effective Rate − Normal Rate
Effective increase in earnings (in %) = Normal Rate
× 100

56.48 − 50
Under Halsey = 50
× 100 = 12.96%

60.29 − 50
Under Rowan = 50
× 100 = 20.58%

Working Notes:
Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R
= (9,600 × `50) + 50% (12,087 – 9,600) × `50
= `5,42,175

Total earnings under Rowan scheme = (AH × R) + AH × (SH – AH) × R

SH
= (9,600 × `50) + 9 ,600 × (12,087 – 9,600) × `50
12 ,087
= `5,78,764
Effective rate under Halsey Plan = `56.48 per hour (`5,42,175 ÷ 9,600 hours)
Effective rate under Rowan Plan = `60.29 per hour (`5,78,764 ÷ 9,600 hours)
Actual hours (AH) = 50 workers × 24 days × 8 hours per day = 9,600 hours
Standard hours (SH) = 6,120 units × 1.975 hours per unit = 12,087 hours

(2) Savings to the Z Ltd. in terms of direct labour cost per unit:
Direct labour cost per unit under time wages = 1.975 hours × `50 per hour
= `98.75 per unit
Direct labour cost per unit under Halsey Plan = `88.59 per unit (`5,42,175 ÷ 6,120 units)
Direct labour cost per unit under Rowan Plan = `94.57 (`5,78,764 ÷ 6,120 units)
Savings of direct labour cost per unit under:
Halsey Plan = `10.16 (`98.75 – `88.59)
Rowan Plan = `4.18 (`98.75 – `94.57)

(3) Advise: Rowan plan fulfils the company’s assurance of 20% increase over the present earnings of the
workers. This would increase productivity by 25.90% only. It will not adjust with increase in demand
by 40%.

Working Notes:
Normal production units = 9,600 hours ÷ 1.975 Hour = 4,861 units
Actual Production = 6,120 units

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 CHAPTER 2 EMPLOYEE COST

6,120 − 4,861
Increase in Productivity (in %) = × 100 = 25.90%
4,861

PYQ 9
Following information is given of a newly setup organization for the year ended on 31st March, 2021:
Number of workers replaced during the period 50
Number of workers left and discharged during the period 25
Average number of workers on the roll during the period 500
You are required to:
(1) Compute the Employee Turnover Rates using Separation method and Flux Method.
(2) Equivalent Employee Turnover Rates for (1) above, given that the organization was setup on 31st
January, 2021.
[(5 Marks) July 2021]

Answer
No. of Separation s 25
(1) Separation Rate = × 100 = × 100 = 5%
Average number of wor ker s 500

No. of Separation s + No. of Re placements

Flux Rate = × 100
Average number of wor ker s

25 + 50
= × 100 = 15%
500

(2) Equivalent Rates = Turnover rates × 12/2

Equivalent Separation Rate = 5% × 12/2 = 30%
Equivalent Flux Rate = 15% × 12/2 = 90%

PYQ 10
A skilled worker is paid a guaranteed wage rate of `150 per hour. The standard time allowed for a job is 10
hours. He took 8 hours to complete the job. He has been paid wages under the Rowan Incentive Plan.
You are required to:
(a) Calculate the effective hourly rate of earnings under Rowan Incentive Plan.
(b) Calculate the time in which he should complete the job, if the worker is placed under Halsey Incentive
Scheme (50%) and he wants to maintain the same effective hourly rate of earnings.
[(5 Marks) Dec 2021]

Answer
Total Earning 1 ,440
(a) Effective Hourly Rate = = = `180 Per Hour
Actual Hours 8

Calculation of total earning under Rowan Incentive Plan:

Earning under Rowan Plan = (AH × R) + AH × (SH – AH) × R

SH
= (8 × 150) + 8 × (10 – 8) × 150 = `1,440
10

(b) Actual hours to maintain same effective rate under Halsey Incentive scheme (50%):

2.21
 EMPLOYEE COST CHAPTER 2

Effective rate under Halsey = [(AH × R) + 50% × (SH – AH) × R] ÷ AH

180 = [(AH × 150) + 50% × (10 – AH) × 150] ÷ AH
180 AH = 150 AH + 750 – 75 AH
105 AH = 750
∴ AH = 750 ÷ 105 = 7.1428 hours

PYQ 11
PQR Limited has replaced 72 workers during the quarter ended 31st March 2022. The labour rates for the
quarter are as follows:
Flux method 16%
Replacement method 8%
Separation method 5%

You are required to ascertain:

(a) Average number of workers on roll (for the quarter),
(b) Number of workers left and discharged during the quarter,
(c) Number of workers recruited and joined during the quarter,
(d) Equivalent employee turnover rates for the year.
[(5 Marks) May 2022]

Answer
(a) Average number of workers:
Number of workers replaced = 8% of Average workers = 72 workers
∴ Average workers = 72 ÷ 8% = 900 Workers

(b) Number of workers left an discharged:

No. of workers left & discharged = 5% of Average workers
= 5% of 900 = 45 Workers

(c) Number of workers recruited and joined:

No. of workers recruited & joined = Flux – Separation = 16% - 5%
= 11% of 900 = 99 Workers

(d) Equivalent turnover rates for the year:

Equivalent turnover rate = Turnover for quarter × 4 quarters

Using Flux Method = 16% × 4 = 64%

Using Replacement Method = 8% × 4 = 32%

Using Separations Method = 5% × 4 = 20%

PYQ 12
A skilled worker, in PK Ltd., is paid a guaranteed wage rate of `15.00 per hour in a 48 hour week. The
standard time to produce a unit is 18 minutes. During a week, a skilled worker Mr. ‘A’ has produced 200 units
of the product. The company has taken a drive for cost reduction and wants to reduce its labour cost.
You are required to:
(1) Calculate wages of Mr. ‘A’ under each of the following methods :
(a) Time rate,

2.22
 CHAPTER 2 EMPLOYEE COST

(b) Piece-rate with a guaranteed weekly wage,

(c) Halsey Premium Plan
(d) Rowan Premium Plan

(2) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium Plan, the company should
follow.
[(6 Marks) Nov 2022]

Answer
(1) Calculation of wages:
(a) Time rate = Number of hours × Wage rate per hour
= 48 Hours × `15 = `720

(b) Piece rate with guaranteed weekly wages:

Wages as per piece rate = Number of units produced × Piece rate

= 200 units × `4.50 = `900
Or

Guaranteed weekly wages = Weekly hours × Wage rate per hour

= 48 Hours × `15 = `720

Worker will get whatever is higher i.e. `900

(c) Halsey System = (AH × R) + 50% (SH - AH) × R

= (48 hours × `15) + 50% (60 – 48) × `15 = `810

(d) Rowan System = (AH × R) + AH × (SH – AH) × R

SH
= (48 hours × `15) + 48 × (60 - 48) × `15 = `864
60

(2) As the company is planning to reduce labour cost, Halsey Premium Plan should be selected having
lower cost.

Working Notes:
1. Computation of Straight piece rate:
Normal rate per hour `15
Standard time per unit 18 minutes
Straight piece rate `4.50 (`15 × 18/60)

2. Standard Hours (SH) = 200 units × 18/60 = 60 hours

PYQ 13
SMC Company limited is producing a particular design of toys under the following existing incentive system:

Normal working hours in the week 48 hours

Late shift hours in the week 12 hours
Rate of payment Normal working: `150 per hour
Late shift: `300 per hour

Average output per operator for 60 hours per week (including late shift hours): 80 toys.

2.23
 EMPLOYEE COST CHAPTER 2

The company’s management has now decided to implement a system of labour cost payment with either the
Rowan Premium Plan or the Halsey Premium Plan in order to increase output, eliminate late shift overtime,
and reduce the labour cost.

The following information is obtained:

The standard time allotted for ten toys is seven and half hours.
Time rate: `150 per hour (as usual).

Assuming that the operator works for 48 hours in a week and produces 100 toys, you are required to
calculate the weekly earning for one operator under:
(a) The existing Time Rate,
(b) Rowan Premium Plan and,
(c) Halsey Premium Plan (50%)
[(5 Marks) May 2023]

Answer
(a) Earning under Existing Time Rate = (48 hours × `150) + (12 hours × `300)
= `10,800

(b) Earning under Rowan Plan = (AH × R) + AH × (SH – AH) × R

SH
= (48 × `150) + 48 × (75 – 48) × `150
75
= `9,792

(c) Earning under Halsey Plan = (AH × R) + 50% (SH – AH) × R

= (48 × `150) + 50% (75 – 48) × `150
= `9,225

Working Notes:
7.5 hours
Standard hours for 100 units =  100 units = 75 hours
10 units

SUGGESTED REVISION FOR EXAM:

BQ: 5, 7, 10, 11, 14, 16, 17, 18, 19

PYQ: 5, 6, 8, 10

2.24
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

PRIMARY AND SECONDARY DISTRIBUTION

BQ 1
A company's production for the year ending 30.06.2022 is given below:
Production Departments Service Departments
Items Total
P1 P2 P3 Office Stores Work Shop
Direct wages 20,000 25,000 30,000 - - - 75,000
Direct materials 30,000 35,000 45,000 - - - 1,10,000
Indirect materials 2,000 3,000 3,000 1,000 2,000 2,000 13,000
Indirect wages 3,000 3,000 4,000 10,000 10,000 5,000 35,000
Area (Square Meters) 200 250 300 150 100 250 1,250
Book value of machinery 30,000 35,000 25,000 - - 15,000 1,05,000
Machine capacity (H.P.) 15 20 25 - - 5 65
Machine hours worked 10,000 20,000 15,000 - - 5,000 50,000
General Expenses:
Rent : `12,500
Insurance (Machine) : `1,050
Depreciation : 15% of value of machinery
Power : `3,800
Light : `1,250
You are required to prepare an overhead analysis sheet for the departments showing clearly the basis
of apportionment when necessary.

Answer
Overhead Analysis Sheet
Basis of Production Departments Service Departments
Items
Charge P1 P2 P3 Office Stores Work Shop
Indirect materials Allocation 2,000 3,000 3,000 1,000 2,000 2,000
Indirect wages Allocation 3,000 3,000 4,000 10,000 10,000 5,000
Rent Area 2,000 2,500 3,000 1,500 1,000 2,500
Insurance Value 300 350 250 - - 150
Depreciation Value 4,500 5,250 3,750 - - 2,250
Power H.P. used 600 1,600 1,500 - - 100
Light Area 200 250 300 150 100 250
Total - 12,600 15,950 15,800 12,650 13,100 12,250

BQ 2
Modern Machines Ltd. have three production departments (A, B, and C) and two service departments (D and
E). From the following figures extracted from the records of the company, calculate the overhead rate per
labour hour:

Indirect Materials `15,000 Rent, Rates and Taxes `10,000

Indirect Wages `10,000 Electric Power for Machinery `15,000
Depreciation on Machinery `25,000 Electric Power for Lighting `500
Depreciation on Buildings `5,000 General Expenses `15,000

3.1
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Production Departments Service Departments

Items Total
A B C D E
Direct materials 20,000 10,000 19,000 6,000 5,000 60,000
Direct wages 15,000 15,000 4,000 2,000 4,000 40,000
Area (Square Meters) 15,000 10,000 10,000 5,000 10,000 50,000
Book value of machinery 60,000 1,00,000 40,000 25,000 25,000 2,50,000
Machine capacity (H.P.) 50 60 30 5 5 150
Labour hours worked 5,000 5,000 2,000 1,000 2,000 15,000
No. of light points 15 10 10 5 10 50
The expenses of service departments D and E are to be apportioned as follows:
A B C D E
Expenses of department D: 40 20 30 - 10
Expenses of department E: 30 30 40 - -

Answer
Statement Showing Overhead Rate per Labour Hour
Basis of Production Departments Service Departments
Items
Charge A B C D E
Direct materials Allocation - - - 6,000 5,000
Direct wages Allocation - - - 2,000 4,000
Indirect materials Materials 5,000 2,500 4,750 1,500 1,250
Indirect wages Wages 3,750 3,750 1,000 500 1,000
Depreciation:
Machinery Value 6,000 10,000 4,000 2,500 2,500
Building Area 1,500 1,000 1,000 500 1,000
Rent, rates, taxes Area 3,000 2,000 2,000 1,000 2,000
Power for machine H.P. 5,000 6,000 3,000 500 500
Power for lighting Light points 150 100 100 50 100
General expenses Labour hours 5,000 5,000 2,000 1,000 2,000
Total Overheads Prim. Dist. 29,400 30,350 17,850 15,550 19,350
Department D 4:2:3:1 6,220 3,110 4,665 (15,550) 1,555
Department E 3:3:4 6,272 6,271 8,362 - (20,905)
Total OH Secon. Dist. 41,892 39,731 30,877 - -
÷ Labour hours - 5,000 5,000 2,000 - -
OH rate per labour hour `8.3784 `7.9462 `15.4385 - -

BQ 3
XL Ltd., has three production departments and four service departments. The expenses for these
departments as per Primary Distribution Summary are as follows:
Production Departments: (`) (`)
A 30,00,000
B 26,00,000
C 24,00,000 80,00,000
Service Departments: (`) (`)
Stores 4,00,000
Time-keeping and Accounts 3,00,000
Power 1,60,000
Canteen 1,00,000 9,60,000
The following information is also available in respect of the production departments:

3.2
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Dept. A Dept. B Dept. C

Horse power of Machine 300 300 200
Number of workers 20 15 15
Value of stores requisition in (`) 2,50,000 1,50,000 1,00,000

Apportion the costs of service departments over the production departments.

Answer
Statement Showing Secondary Distribution
Production Departments
Particulars Basis Total
A B C
Cost as per primary distribution Given 80,00,000 30,00,000 26,00,000 24,00,0000
Stores Value of stores 4,00,000 2,00,000 1,20,000 80,000
requisition
Time keeping and Accounts No. of workers 3,00,000 1,20,000 90,000 90,000
Power H.P. of machine 1,60,000 60,000 60,000 40,000
Canteen No. of workers 1,00,000 40,000 30,000 30,000
Total OH - 89,60,000 34,20,000 29,00,000 26,40,000

BQ 4
Deccan Manufacturing Ltd. have three departments which are regarded as production departments. Service
department’s costs are distributed to these production departments using the “Step Ladder Method” of
distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year
are as follows. Data required for distribution is also shown against each department:

Departments Factory overheads Direct labour hours No. of employee Area (Ft2)
Production:
X 1,93,000 4,000 100 3,000
Y 64,000 3,000 125 1,500
Z 83,000 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:
(a) Prepare a schedule showing the distribution of overhead costs of the four service departments to the
three production departments; and
(b) Calculate the overhead recovery rate per direct labour hour for each of three production department

[(a) X `3,00,000; Y `1,35,000; Z `1,60,000 (b) X `75; Y `45; Z `40]

3.3
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

BQ 5
Suppose the expenses of two production departments A and B and two service departments X and Y are as
under:
Apportionment Basis
Departments Amount
Y A B
X 2,00,000 25% 40% 35%
Y 1,50,000 - 40% 60%
A 3,00,000
B 3,20,000

Prepare statement of overhead distribution.

Answer
Statement of Overhead Distribution
Particulars Basis X Y A B
Primary distribution Given 2,00,000 1,50,000 3,00,000 3,20,000
Apportionment:
Expenses of Dept. X 25:40:35 (2,00,000) 50,000 80,000 70,000
Expenses of Dept. Y 40:60 - (2,00,000) 80,000 1,20,000
Total OH - - - 4,60,000 5,10,000

BQ 6
A company is having three production departments X, Y and Z and two service departments Boiler house and
Pump room. The Boiler house has to depend upon the Pump room for supply of water and Pump room in it’s
turn is dependent on the Boiler house for supply of steam power for driving the pump. The expenses incurred
by the production departments are X `6,00,000, Y `5,25,000 and Z `3,75,000. The expenses for Boiler house
are `1,75,500 and Pump room are `2,25,000.
The expenses of the Boiler house and Pump room are apportioned to the production departments
on following basis:

Apportionment of services
Departments
X Y Z Boiler house Pump room
Boiler house 20% 40% 30% - 10%
Pump room 40% 20% 20% 20% -

Show clearly as to how the expenses of Bolier house and Pump room would be apportioned to X, Y
and Z departments?
[X `7,44,000; Y `6,64,500; Z `4,92,000]

BQ 7
Sanz Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’ and two service
departments ‘X’ and ‘Y’. The following is the budget for December 2022:

Total Production Department Services Departments

Items
Amount A B C X Y
Direct material 1,00,000 2,00,000 4,00,000 2,00,000 1,00,000
Direct wages 5,00,000 2,00,000 8,00,000 1,00,000 2,00,000
Factory rent 4,00,000
Power 2,50,000
Depreciation 1,00,000
Other overheads 9,00,000

3.4
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Additional information:
Production Department Service Departments
Details
A B C X Y
Area (Sq. ft) 500 250 500 250 500
Capital Value of Assets (in Lakhs) 20 40 20 10 10
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25

A technical assessment of the apportionment of expenses of service departments is as under:

Departments A B C X Y
Department X (%) 45 15 30 - 10
Department Y (%) 60 35 - 5 -

Required:
(1) A statement showing distribution of overheads to various departments.
(2) A statement showing re-distribution of service departments expenses to production departments
using Trial and error method.
(3) Machine hour rates of the production department A, B and C.

Answer
(1) Statement Showing Distribution of Overheads
Production Departments Service Departments
Items Basis of Charge
A B C X Y
Direct material Allocation - - - 2,00,000 1,00,000
Direct wages Allocation - - - 1,00,000 2,00,000
Factory rent Area 1,00,000 50,000 1,00,000 50,000 1,00,000
Power H.P. used 50,000 80,000 80,000 15,000 25,000
Depreciation Capital Value 20,000 40,000 20,000 10,000 10,000
Other overheads Machine Hours 1,00,000 2,00,000 4,00,000 1,00,000 1,00,000
Total Overheads - 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000

(2) Statement Showing Redistribution of Overheads

(Trial and Error Method)
Basis of Production Departments Service Departments
Items
Charge A B C X Y
Total Overheads - 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000
Reapportionment:
Department X 45:15:30:10 2,26,922 75,641 1,51,281 (5,04,271) 50,428
Department Y 60:35:5 3,51,256 2,04,900 - 29,272 (5,85,428)
Total Overheads - 8,48,178 6,50,541 7,51,281 - -

(3) Machine Hour Rate:

Budgeted Overheads
Machine Hour rate = Machine Hours

Department A = 8,48,178 ÷1,000 = `848.18

Department B = 6,50,541 ÷2,000 = `325.27

Department C = 7,51,281 ÷4,000 = `187.82

Working Note:

3.5
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Calculation of expenses under Trial and Error Method

Items % X Y
Total Overheads 4,75,000 5,35,000
Reapportionment:
Expenses of Department X 10% - 47,500
Expenses of Department Y 5% 29,125 -
Expenses of Department X 10% - 2,913
Expenses of Department Y 5% 146 -
Expenses of Department X 10% - 15
Expenses of Department Y 5% 1 -
Total Overheads - 5,04,272 5,85,428

Working Note:
Calculation of H.P Used
Departments A B C X Y
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25
H.P. used (H.P. × Machine hours) 50,000 80,000 80,000 15,000 25,000

BQ 8
The ABC Company has the following account balances and distribution of direct charges on 31st March, 2022.
Production Department Services Departments
Total
Items General Stores &
Amount Machine Shop Packing
Plant maintenance
Allocated overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s salary 4,000 - - 4,000 -
Cost & payroll salary 10,000 - - 10,000 -
OH to be apportioned:
Power 8,000
Rent 12,000
Fuel & heat 6,000
Insurance 1,000
Taxes 2,000
Depreciation 1,00,000

The following data were compiled by means of the factory survey made in the previous year:
Floor space Radiator No. of Investment
Details H.P. hours
in Sq. ft. sections employees in `
Machine shop 2,000 45 20 6,40,000 3,500
Packing 800 90 10 2,00,000 500
General plant 400 30 3 10,000 -
Store & maintenance 1,600 60 5 1,50,000 1,000
Total 4,800 225 38 10,00,000 5,000

Expenses charged to the stores and maintenance departments are to be distributed to the other departments
by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is distributed on the
basis of number of employees:
Requirements:

3.6
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

(a) Prepare an overhead distribution statement with supporting schedules to show computations and
basis of distribution including distribution of the service department expenses to producing
department.
(b) Determine the service department distribution by the method of continued distribution. Carry through
3 cycles. Show all calculations to the nearest rupees.

Answer
(a) Overhead Distribution Statement
Production Department Services Departments
Total
Items General Stores &
Amount Machine Shop Packing
Plant maintenance
Allocated overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s salary 4,000 - - 4,000 -
Cost & payroll salary 10,000 - - 10,000 -
Apportioned overheads 1,29,000 77,720 25,800 2,830 22,650
(see schedule below)
Total 1,64,420 83,920 30,500 20,000 30,000

Statement of Apportioned Expenses

Production Department Services Departments
Items Basis General Stores &
Machine Shop Packing
Plant maintenance
Power H.P. hours 5,600 800 - 1,600
Rent Floor space 5,000 2,000 1,000 4,000
Fuel & heat Radiator secs. 1,200 2,400 800 1,600
Insurance Investment 640 200 10 150
Taxes Investment 1,280 400 20 300
Depreciation Investment 64,000 20,000 1,000 15,000
Total - 77,720 25,800 2,830 22,650

(b) Distribution of Service Department Expenses

Production Department Services Departments
Items Basis Machine General Stores &
Packing
Shop Plant maintenance
Total Expenses [as per (a)] 83,920 30,500 20,000 30,000
Re-apportionment:
Expenses of General plant 20 : 10 : 5 11,429 5,714 (20,000) 2,857
Expenses of Stores & maintenance 50 : 20 : 30 16,429 6,571 9,857 (32,857)
Expenses of General plant 20 : 10 : 5 5,633 2,816 (9,857) 1,408
Expenses of Stores & maintenance 50 : 20 : 30 704 282 422 (1,408)
Expenses of General plant 20 : 10 : 5 241 121 (422) 60
Expenses of Stores & maintenance 50 : 20 43 17 - (60)
Total - 1,18,399 46,021 - -

BQ 9
Modern Manufactures Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1
and S2 details pertaining to which are as under:
Production Departments Service Departments
Items
P1 P2 P3 S1 S2
Direct wages 3,000 2,000 3,000 1,500 195

3.7
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Working hours 3,070 4,475 2,419 - -

Value of machines (`) 60,000 80,000 1,00,000 5,000 5,000
H.P. of machines 60 30 50 10 -
Light points 10 15 20 10 5
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500

The following figures extracted from the Accounting records are relevant:
Rent and rates : `5,000
General lighting : `600
Indirect wages : `1,939
Power : `1,500
Depreciation on machines : `10,000
Sundries : `9,695
The expenses of the Service Departments are allocated as under:
Departments P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -

Find out the total cost of product X which is processed for manufacture in Departments P1, P2 and P3
for 4, 5 and 3 hours respectively, given that its Direct Material Cost is `50 and Direct Labour Cost is `30.

Answer
Statement Showing Overhead Rate per Hour
Basis of Charge Production Departments Service Departments
Items
P1 P2 P3 S1 S2
Direct wages Allocation - - - 1,500 195
Rent and rates Area 1,000 1,250 1,500 1,000 250
General lighting Light points 100 150 200 100 50
Indirect wages Direct wages 600 400 600 300 39
Power H.P. 600 300 500 100 -
Depreciation on Value of
machines machines 2,400 3,200 4,000 200 200
Sundries Direct wages 3,000 2,000 3,000 1,500 195
Total overheads Primary Dist. 7,700 7,300 9,800 4,700 929
Re-apportionment:
Department S1 2:3:4:1 940 1,410 1,880 (4,700) 470
Department S2 4:2:3:1 559 280 420 140 (1,399)
Department S1 2:3:4:1 28 42 56 (140) 14
Department S2 4:2:3 6 3 5 - (14)
Total OH - 9,233 9,035 12,161 - -
÷ Working hours - 3,070 4,475 2,419 - -
OH rate per hour `3.01 `2.02 `5.03 - -

Calculation of cost of product X:

Direct material cost `50.00

Direct labour cost `30.00
Overheads: Department P1 (4 hours × `3.01) `12.04
Department P2 (5 hours × `2.02) `10.10
Department P3 (3 hours × `5.03) `15.09

Cost of product X `117.23

3.8
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

RECOVERY RATE

BQ 10
Atlas Engineering Ltd. accepts a variety of jobs which require both manual and machine operations.
The budgeted profit and Loss Account for the period 2022-23 is as follow:
(` in lakhs)
Sales 75
Cost:
Direct materials 10
Direct labour 5
Prime Cost 15
Production Overhead 30
Production Cost 45
Administrative, Selling and
Distribution Overhead 15 60
Profit 15
Other budgeted data:
Labour hours for the period 2,500 hours
Machine hours for the period 1,500 hours
No. of jobs for the period 300 jobs
An enquiry has been received recently from a customer and the production department has prepared
the following estimate of the prime cost required for the job:

Direct material `2,500

Direct labour `2,000
Prime Cost `4,500
Labour hours required 8 hours
Machine hours required 5 hours

You are required to:

(a) Calculate by different methods, six overhead absorption rates for absorption of production overhead.
(b) Calculate the production overhead cost of the order based on each of the above rates.

Answer
(a) Computation of overhead absorption rates for absorption of production overheads:
Pr oduction overheads 30 ,00 ,000
1. Direct labour hour rate = = = 1,200 per hour
Direct labour hours 2 ,500

Pr oduction overheads 30 ,00 ,000

2. Machine hour rate = = = 2,000 per hour
Machine hours 1 ,500

Pr oduction overheads 30 ,00 ,000

3. % of direct material cost= × 100= × 100= 300%
Direct material cos t 10 ,00 ,000

Pr oduction overheads 30 ,00 ,000

4. % of labour cost = × 100= × 100= 600%
Direct labour cos t 5 ,00 ,000

Pr oduction overheads 30 ,00 ,000

5. % of prime cost = × 100= × 100= 200%
Pr ime cos t 15 ,00 ,000

Pr oduction overheads 30 ,00 ,000

6. Job rate = = = 10,000 per job
No . of jobs 300

3.9
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

(b) Calculation of production overhead cost to the order on the basis of above rates:
1. Under direct labour hour rate = No. of labour hours × Rate per hour
= 8 hours × 1,200 = `9,600
2. Under machine hour rate = No. of machine hours × Rate per hour
= 5 hours × 2,000 = `10,000
3. Under % of direct material cost = Direct material cost × % of material cost
= 2,500 × 300% = `7,500
4. Under % of direct labour cost = Direct labour cost × % of labour cost
= 2,000 × 600% = `12,000
5. Under % of prime cost = Prime cost × % of prime cost
= 4,500 × 200% = `9,000
6. Under job rate = No. of jobs × Rate per job
= 1 job × 10,000 = `10,000

BQ 11
Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use of a special machine
and also the use of a computer. The computer is hired and the hire charges work out to `4,20,000 per annum.
The expenses regarding the machine are estimated as follows.
Rent for the quarter `17,500
Depreciation per annum `2,00,000
Indirect charges per annum `1,50,000
During the first month of operation the following details were taken from the job register:
Job A Job B Job C
Number of hours the machine was used:

(a) Without the use of the computer 600 900 -

(b) With the use of the computer 400 600 1,000

You are required to compute the machine hour rate:

(i) For the firm as a whole for the month when the computer was used and when the computer was not
used.
(ii) For the individual jobs A, B and C.
[(i) `27.50 and `10.00 per machine hour (ii) Job A: `17, Job B: `17, Job C: `27.50]

UNDER/OVER ABSORPTION OF OVERHEADS

BQ 12
In factory overheads of a particular department are recovered on the basis of `5 per machine hour. The total
expenses incurred and the actual machine hours for the department for the month of August were `80,000
and 10,000 hours respectively. Of the amount of `80,000, `15,000 became payable due to an award of the
Labour Court and `5,000 were in respect of expenses off the previous year booked in the current month
(August). Actual production was 40,000 units of which 30,000 units were sold. On analysing the reasons it
was found that 60% of the under absorbed overhead was due to defective planning and the rest was
attributed to normal cost increase.
How would you treat the under absorbed overhead in the cost accounts?

3.10
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Answer
(a) Computation of under absorption of Production Overheads:
Particulars Amount
Total production overheads actually incurred 80,000
Less: Amount payable due to an award of the Labour Court (15,000)
Less: Expenses off the previous year (5,000)
Net production overheads actually incurred 60,000
Production overheads recovered (10,000 hours × `5) 50,000
Under Recovery of production overheads `10,000

(b) Accounting treatment of under-recovered production overheads:

1. `6,000 (`10,000 × 60%) of under absorbed overheads were due to defective production planning.
This being abnormal should be debited to Costing Profit and Loss Account.
2. The balance of `4,000 of under absorbed overheads should be distributed over finished goods and
cost of sales by using supplementary rate.

Supplementary OH Rate = Under Recovered OH ÷ Equivalent Units

= `4,000 ÷ 40,000 units = `0.1 per unit

Distribution of unabsorbed overheads of `4,000:

Cost of Sales (30,000 × `0.1) = `3,000
Finished Goods (10,000 × `0.1) = `1,000

BQ 13
In a manufacturing unit factory overhead was recovered at predetermined rate of `25 per man day. The total
factory overhead expenses incurred and the man days actually worked were `41.50 lakhs and 1.5 lakhs man
days respectively. Out of the 40,000 units produced during a period 30,000 were sold.
On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to defective
planning and the rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in Cost Account?

Answer
(a) Computation of under absorption of Production Overheads:
Recovered Overheads (1,50,000 man days × `25) `37,50,000
Actual Overheads Incurred `41,50,000
Under absorption `4,00,000

(b) Accounting treatment of under-recovered production overheads:

1. `2,40,000 (`4,00,000 × 60%) of under absorbed overheads were due to defective planning. This
being abnormal should be debited to Costing Profit and Loss Account.
2. The balance of `1,60,000 of under absorbed overheads should be distributed over finished goods
and cost of sales by using supplementary rate.

Supplementary OH Rate = Under Recovered OH ÷ Equivalent Units

= `1,60,000 ÷ 40,000 units = `4 per unit

Distribution of unabsorbed overheads of `1,60,000:

Cost of Sales (30,000 × `4) = `1,20,000
Finished Goods (10,000 × `4) = `40,000

3.11
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

BQ 14
The total overhead expenses of a factory are `4,46,380. Taking into account the normal working of the
factory, overhead was recovered in production at `1.25 per hour. The actual hours worked were 2,93,104.
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the cost
of indirect materials and indirect labour and the remaining 50% was due to factory inefficiency.

How would you proceed to close the books of accounts, assuming that besides 7,800 units
produced of which 7,000 were sold, there were 200 equivalent units in work-in-progress? Also give the
profit implication of the method suggested.

Answer
(i) Treatment of Unabsorbed OH & its implication on Profit: The unabsorbed OH on account of increase
in cost of indirect material & labour of `40,000 should be adjusted in the cost books by applying
positive supplementary rates.

40,000
Supplementary Rate = = `5 per unit
8 ,000 Units

The unabsorbed OH of `40,000 should be applied by using supplementary rate of `5 per equivalent
completed unit proportionately on the basis of equivalent completed unit among Cost of Sales A/c, Stock of
Finished Goods A/c, & WIP A/c as under:

Items Equivalent units Rate Share of unabsorbed OH

Cost of Sales A/c 7,000 `5 `35,000
Stock of Finished 800 `5 `4,000
WIP A/c 200 `5 `1,000
Total `40,000

(ii) The above treatments of unabsorbed OH will reduce the profit by `35,000, the amount by which the
cost of sales has been increased. Moreover, the value of stock of Finished Goods & WIP will increase by
`4,000 & `1,000 respectively. The unabsorbed OH of `40,000 due to factory inefficiency being in the
nature of abnormal loss should be changed to costing P/L A/c & thereby the profit would be reduced
by `40,000.

Working Notes:

(a) Calculation of Unabsorbed Overheads:

Particulars Amount
Actual overhead incurred 4,46,380
Less: overhead absorbed (`1.25 × 2,93,104 Hours) 3,66,380
Unabsorbed OH 80,000

Unabsorbed OH on account of increase in cost (80,000 × 50%) 40,000

Unabsorbed OH on account of factory inefficiency (80,000 × 50%) 40,000

(b) Calculation of equivalent completed units:

Unit sold 7,000
Units in closing stock of Finished Goods (7,800-7,000) 800
Equivalent WIP units 200

Total Equivalent Completed Units 8,000 units

3.12
 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

BQ 15
A Ltd. manufactures two products A and B. The manufacturing division consists of two production
departments P1 and P2 and two services departments S1 and S2.
Budgeted overhead rates are used in the production departments to absorb factory overheads to the
products. The rate of department P1 is based on direct machine hours, while the rate of department P2 is
based on direct labour hours. In applying overheads, the predetermined rates are multiplied by actual hours.

For allocating the service department costs to production departments the basis adopted is as follows:
(i) Cost of departments S1 to departments P1 and P2 equally and
(ii) Cost of department S2 to departments P1 and P2 in the ratio of 2:1 respectively.

The following budgeted and actual data are available:

Annual Budget:
Factory overheads budgeted for the year:
P1 `25,50,000 S1 `6,00,000
P2 `21,75,000 S2 `4,50,000

Budgeted output in units:

Product A 50,000 Product B 30,000
Budgeted raw material cost per unit:
Product A `120 Product B `150

Budgeted time required for production per unit:

Department P1 Product A 1.5 Machine hours Product B 1 Machine hour
Department P2 Product A 2 Direct labour hours Product B 2.5 Direct labour hrs

Average wage rates budgeted in department P2 are:

Product A `72 per hour Product B `75 per hour
All materials and used in department P1 only.

Actual data (for the month of July, 2022):

Units actually produced:

Product A 4,000 units Product B 3,000 units

Actual direct machine hours worked in department P1:

Product A 6,100 hours Product B 4,150 hours

Actual direct labour hours worked in department P2:

Product A 8,200 hours Product B 7,400 hours

Costs actually incurred: Product A Product B

Raw Materials `4,89,000 `4,56,000
Wages `5,91,000 `5,52,000
Overheads:
Department P1 `2,31,000 S2 `60,000
P2 `2,04,000 S2 `48,000

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

You are required to:

(i) Compute the pre-determined overhead rate for the each production department.
(ii) Prepare a performance report for July, 2022 that will reflect the budgeted costs and actual costs.

Answer
(i) Computation of predetermined overhead rate for each production department
Basis of Charge Production Departments Service Departments
Items
P1 P2 S1 S2
Budgeted OH Given 25,50,000 21,75,000 6,00,000 4,50,000
Apportionment:
Expenses of S1 1:1 3,00,000 3,00,000 (6,00,000) -
Expenses of S2 2:1 3,00,000 1,50,000 - (4,50,000)
Total OH - 31,50,000 26,25,000 - -
÷ Budget Machine hours - ÷ 1,05,000 - - -
÷ Budget Labour hours - - ÷1,75,000 - -
Recovery rate - `30 `15 - -

(ii) Performance report for July 2022

(When 4,000 and 3,000 units of products A and B respectively were actually produced)
Particulars Budgeted Actual Performance
Raw materials:
A: 4,000 units @ `120 4,80,000 4,89,000 Adverse
B: 3,000 units @ `150 4,50,000 4,56,000 Adverse
Direct labour:
A: 4,000 × 2 hours × `72 5,76,000 5,91,900 Adverse
B: 3,000 × 2.5 hours × `75 5,62,500 5,52,000 Favorable
Overheads:
Department P1
A: 4,000 × 1.5 × `30 1,80,000 *1,74,400 Favorable
B: 3,000 × 1 hour × `30 90,000 *1,18,649 Adverse
Department P2
A: 4,000 × 2 hours × `15 1,20,000 *1,31,364 Adverse
B: 3,000 × 2.5 hours × `15 1,12,500 *1,18,548 Adverse
Total 25,71,000 26,31,861 Adverse

Computation of actual overhead rates for each production department from actual data
Basis of Charge Production Departments Service Departments
Items
P1 P2 S1 S2
Actual OH Given 2,31,000 2,04,000 60,000 48,000
Apportionment:
Expenses of S1 1:1 30,000 30,000 (60,000) -
Expenses of S2 2:1 32,000 16,000 - (48000)
Total OH - 2,93,000 2,50,000 - -
÷ Actual Machine hours - ÷ 10,250 - - -
÷ Actual Labour hours - - ÷15,600 - -
Recovery rate - `28.59 `16.02 - -

*A: 6,100 × `28.59 = `1,74,400; B: 4,150 × `28.59 = `1,18,649

*A: 8,200 × `16.02 = `1,31,364; B: 7,400 × `16.02 = `1,18,548

Working Notes:

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Calculation of Budgeted and Actual machine hours and labour hours:

Product A Product B Total

Budgeted output (in units) 50,000 units 30,000 units
Budgeted machine hours in department P1 75,000 hours 30,000 hours
1,05,000
(50,000  1.5 hours) (30,000  1 hours)
Budgeted labour hours in department P2 1,00,000 hours 75,000 hours
1,75,000
(50,000  2 hours) (30,000  2.5 hours)
Actual output (units) 4,000 units 3,000 units
Actual machine hours in department P1 6,100 hours 4,150 hours 10,250
Actual labour hours in department P2 8,200 hours 7,400 hours 15,600

MISCELLANEOUS

BQ 16
A light engineering factory fabricates machine parts to customers. The factory commenced fabrication of 12
Nos. machine parts to customers’ specifications and the expenditure incurred on the job for the week ending
21st August, 20X1 is given below:
Particulars ` `
Direct materials (all items) 780
Direct labour (manual) 20 hours @ `15 per hour 300

Machine facilities:
Machine No I: 4 hours @ `45 180 570
Machine No II: 6 hours @ `65 390
Total 1650
Overheads @ `8 per hour on 20 manual hours 160
Total cost 1810

The overhead rate of `8 per hour is based on 3,000 man hours per week; similarly, the machine hour rates
are based on the normal working of Machine Nos. I and II for 40 hours out of 45 hours per week (45 maximum
working hours and 40 hours normal working hours per week for both machines).
After the close of each week, the factory levies a supplementary rate for the recovery of full overhead
expenses on the basis of actual hours worked during the week. During the week ending 21st August, 20X1,
the total labour hours worked was 2,400 and Machine Nos. I and II had worked for 30 hours and 32.5 hours
respectively.

Prepare a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly levying the
supplementary rates.

Answer
Fabrication of 12 Nos. machine parts (job No......) Date of commencement: 16 August, 20X1 Date of
Completion. Cost sheet for the week ending, August 21, 20X1:
Particulars ` `
Direct materials (all items) 780
Direct labour (manual) 20 hours @ `15 per hour 300

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Machine facilities:
Machine No I: 4 hours @ `45 180
Machine No II: 6 hours @ `65 390 570
Total 1650
Overheads @ `8 per hour on 20 manual hours 160
Total cost 1810
Supplementary Rates
Overheads @ `2 per hour on 20 manual hours 40
Machine No I: 4 hours @ `15 60
Machine No II: 6 hours @ `15 90 190
Total cost 2,000

Working notes:
Calculation of Supplementary rate:
(a) Overheads:
Overheads budgeted 3,000 hours × `8 = `24,000
Actual hours = 2,400
Actual rate per hour `24,000 ÷ 2,400 hours = `10
Supplementary charge = `2 (`10 – `8) per hour

(b) Machine facilities:

Machine No I:

Overheads budgeted 40 hours × `45 = `1,800

Actual hours = 30
Actual rate per hour `1,800 ÷ 30 hours = `60
Supplementary charge = `15 (`60 – `45) per hour

Machine No II:

Overheads budgeted 40 hours × `65 = `2,600

Actual hours = 32.5
Actual rate per hour `2,600 ÷ 32.5 hours = `80
Supplementary charge = `15 (`80 – `65) per hour

BQ 17
A factory has three production departments. The policy of the factory is to recover the production overheads
of the entire factory by adopting a single blanket rate based on the percentage of total factory overheads to
total factory wages. The relevant data for a month are given below:

Direct Materials Direct Wages Factory OH Direct Labour Machine

Department
(`) (`) (`) hours hours
Budget:
Machining 6,50,000 80,000 3,60,000 20,000 80,000
Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000
Packing 1,00,000 70,000 1,25,000 50,000 -
Actual:
Machining 7,80,000 96,000 3,90,000 24,000 96,000
Assembly 1,36,000 2,70,000 84,000 90,000 11,000
Packing 1,20,000 90,000 1,35,000 60,000 -

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

The details of one of the representative jobs produced during the month are as under:
Job No. CW 7083
Direct Materials Direct Wages Direct Labour
Department Machine hours
(`) (`) hours
Machining 1,200 240 60 180
Assembly 600 360 120 30
Packing 300 60 40 -

The factory adds 30% on the factory cost to cover administration and selling overheads and profit.
Required:
(i) Calculate the overhead absorption rate as per the current policy of the company and determine the
selling price of the Job No. CW 7083.
(ii) Suggest any suitable alternative method(s) of absorption of the factory overheads and calculate the
overhead recovery rates based on the method(s) so recommended by you.
(iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii)
above.
(iv) Calculate the department-wise and total under or over recovery of overheads based on the company’s
current policy and the method(s) recommended by you.

Answer
(i) Calculation of overhead absorption rate as per current policy of the company (blanket rate):
Budgeted Factory Overheads 3,60 ,000  1,40 ,000  1,25 ,000
Blanket rate =  100 =  100
Budgeted Direct Wages 80 ,000  3,50 ,000  70 ,000
= 125% of Direct Wages

Calculation of Selling Price of the Job No. CW-7083:

Particulars Amount
Direct materials (`1,200 + `600 + `300) 2,100
Direct wages (`240 + `360 + `60) 660
Prime Cost 2,760
Overheads (125% × `660) 825
Factory Cost 3,585
Mark-up (30% × `3,585) 10,75.50
Selling Price 4,660.50

(ii) Methods available for absorbing factory overheads and their overhead recovery rates in different
departments:

1. Machining Department:
In the machining department, the use of machine time is the predominant factor of production. Hence
machine hour rate should be used to recover overheads in this department. The overhead recovery rate
based on machine hours has been calculated as under:
Budgeted Factory Overheads 3,60 ,000
Machine hour rate = = = `4.50 per hour
Budgeted Machine Hours 80 ,000 hours
2. Assembly Department:
In this department direct labour hours is the main factor of production. Hence direct labour hour rate
method should be used to recover overheads in this department. The overheads recovery rate in this case is:
Budgeted Factory Overheads 1 ,40 ,000
Direct labour hour rate = = = `1.40 per hour
Budgeted Direct Labour Hours 1 ,00 ,000 hours

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

3. Packing Department:
Labour is the most important factor of production in this department. Hence direct labour hour rate
method should be used to recover overheads in this department. The overhead recovery rate in this case
comes to:
Budgeted Factory Overheads 1 ,25 ,000
Direct labour hour rate = = = `2.50 per hour
Budgeted Direct Labour Hours 50 ,000 hours

(iii) Selling Price of Job CW-7083 [based on the overhead application rates calculated in (ii) above]
Particulars Amount
Direct materials (`1,200 + `600 + `300) 2,100
Direct wages (`240 + `360 + `60) 660
Prime Cost 2,760
Overheads:
Machining (180 machine hours × `4.50) 810
Assembly (120 labour hours × `1.40) 168
Packing (40 labour hours × `2.50) 100
Factory Cost 3,838
Mark-up (30% × `3,838) 1,151.40
Selling Price 4,989.40

(iv) Department-wise statement of total under or over recovery of overheads:

(a) Under Current Policy (Blanket Rate)
Details Machining Assembly Packing Total
Direct wages (Actual) 96,000 2,70,000 90,000
Overheads recovered @ 125% of Direct wage (1) 1,20,000 3,37,500 1,12,500 5,70,000
Actual overheads (2) 3,90,000 84,000 1,35,000 6,09,000
(Under)/over recovery (1 - 2) (2,70,000) 2,53,500 (22,500) (39,000)

(b) Under Method Suggested (Department-Wise Rate)

Details Machining Assembly Packing Total
Actual Machine Hours 96,000 - -
Actual Direct Labour Hours - 90,000 60,000
Recovery rate per machine hour/labour hour 4.50 1.40 2.50
Overheads recovered (1) 4,32,000 1,26,000 1,50,000 7,08,000
Actual overheads (2) 3,90,000 84,000 1,35,000 6,09,000
(Under)/over recovery (1 - 2) 42,000 42,000 15,000 99,000

BQ 18
A company which sells four products, some of them unprofitable, proposes discontinuing the sale of one of
them. The following information is available regarding income, costs and activity for the year ended 31 st
March, 2023.

Details A B C D
Sales (`) 30,00,000 50,00,000 25,00,000 45,00,000
Cost of sales (`) 20,00,000 45,00,000 21,00,000 22,50,000
(before selling and distribution overheads)
Area of storage (Sq. ft.) 50,000 40,000 80,000 30,000
Number of parcels sent 1,00,000 1,50,000 75,000 1,75,000
Number of invoices sent 80,000 1,40,000 60,000 1,20,000

Selling and Distribution overheads and the basis of allocation are:

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Details ` Basis of allocation to products

Fixed cost:
Rent & insurance 3,00,000 Square feet
Depreciation 1,00,000 Parcel
Salesmen’s salaries & expenses 6,00,000 Sales volume
Administrative wages & salaries 5,00,000 Number of invoices
Variable cost:
Packing wages & materials `2 per parcel
Commission 4% of sales
Stationery `1 per invoice

You are required to prepare Costing Profit & Loss Statement, showing the percentage of profit
or loss to sales for each product.

Answer
Statement Showing Costing Profit & Loss
Details Total (`) A (`) B (`) C (`) D (`)
Sales (`) 1,50,00,000 30,00,000 50,00,000 25,00,000 45,00,000
Variable cost:
Cost of sales (`) 1,08,50,000 20,00,000 45,00,000 21,00,000 22,50,000
Packing wages & materials @ 10,00,000 2,00,000 3,00,000 1,50,000 3,50,000
`2 per parcel
Commission @ 4% of sales 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000
Stationery @ `1 per invoice 4,00,000 80,000 1,40,000 60,000 1,20,000
Total Variable cost (A) 1,28,50,000 24,00,000 51,40,000 24,10,000 29,00,000
Fixed cost:
Rent & insurance (5 : 4 : 8 : 3) 3,00,000 75,000 60,000 1,20,000 45,000
Depreciation (100:150:75:175) 1,00,000 20,000 30,000 15,000 35,000
Salesmen’s salaries & expenses 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000
(30: 50 : 25 : 45)
Administrative wages & 5,00,000 1,00,000 1,75,000 75,000 1,50,000
salaries (80: 140 : 60 : 120)
Total Fixed cost (B) 15,00,000 3,15,000 4,65,000 3,10,000 4,10,000
Total cost (A + B) 1,43,50,000 27,15,000 56,05,000 27,20,000 33,10,000
Profit or Loss (Sales – Total cost) 6,50,000 2,85,000 (6,05,000) (2,20,000) 11,90,000
% of Profit or Loss to sales 4.33% 9.5% (12.10%) (8.80%) 26.44%

MACHINE HOUR RATE

BQ 19
A machine costing `1,00,00,000 is expected to run for 10 years. At the end of this period its scrap value is
likely to be `9,00,000. Repairs during the whole life of the machine are expected to be `18,00,000 and the
machine is expected to run 4,380 hours per year on the average. Its electricity consumption is 15 units per
hour, the rate per unit being `5. The machine occupies one-fourth of the area of the department and has two
points out of a total of ten for lighting. The foreman has to devote about one sixth of his time to the machine.
The monthly rent of the department is `30,000 and the lighting charges amount to `8,000 per month. The
foreman is paid a monthly salary of `19,200. Insurance is @ 1% p.a. and the expenses on oil, etc., are `900
per month.
Find out the machine hour rate.

Answer

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Machine Hour Rate

Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`1,00,00,000 – 9,00,000) × 1/10 years × 1/12] 75,833.33
Rent (`30,000 × ¼) 7,500
Lighting charges (`8,000 × 2/10) 1,600
Foreman’s salary (`19,200 × 1/6) 3,200
Insurance Premium (`1,00,00,000 × 1% × 1/12) 8,333.33
Total (A) 96,466.66
(B) Running charges/ Variable costs
Repairs (`18,00,000 × 1/10 years × 1/12) 15,000
Electricity [(15 units × 4,380 hours × `5) × 1/12] 27,375
Sundry expenses (oil etc.) 900
Total (B) 43,275
Total Cost (A + B) 1,39,741.66
÷ Productive Machine Hours in a month (4,380 ÷ 12) ÷ 365
Machine Hour Rate `382.85

BQ 20
A Manufacturing unit has added a new machine to its fleet of five existing machines. The total cost of purchase
and installation of the machine is `7,50,000. The machine has an estimated life of 15 years and is expected
to realize `30,000 as scrap at the end of its working life.
Other relevant data are as following:
(i) Budgeted working hours is 2,400 based on 8 hours per day for 300 days. This includes 400 hours for
plant maintenance.
(ii) Electricity used by the machine is 15 units per hour at a cost of `2.00 per unit. No current is drawn
during maintenance.
(iii) The machine requires special oil for heating which is replaced once in every month at a cost of `2,500
on each occasion.
(iv) Estimated cost of maintenance of the machine is `500 per week of 6 working days.
(v) 3 operators control the operations of the entire battery of six machines and the average wages per
person amounts to `450 per week plus 40% fringe benefits.
(vi) Departmental and general works overheads allocated to the operation during the last year was
`60,000. During the current year it is estimated that there will be an increase of 12.5% of this amount.
No incremental overhead is envisaged for the installation of the new machine.

You are required to compute the machine hour rate.

Answer
Machine Hour Rate
Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`7,50,000 – 30,000) × 1/15 years] 48,000
Operators wages and fringe benefits [(`450 × 300/6 × 3 × 1/6) + 40%] 15,750
Departmental and general overheads [(`60,000 + 12.5%) × 1/6] 11,250
Total (A) 75,000
(B) Running charges/ Variable costs
Maintenance (`500 × 300/6) 25,000
Electricity (15 units × 2,000 hours × `2) 60,000
Special oil (`2,500 × 12) 30,000
Total (B) 1,15,000

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Total Cost (A + B) 1,90,000

÷ Productive Machine Hours (2,400 - 400) ÷ 2,000
Machine Hour Rate `95.00

BQ 21
A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked
without an operator wholly engaged on it. The original cost of all these machines works out to `8 lakhs.

These particulars are furnished for a 6 month period:

Normal available hours per month 208

Absenteeism (without pay) hours 18
Leave (with pay) hours 20
Normal idle time (unavoidable) hours 10
Average rate of wages per day of 8 hours `800
Production bonus 15% on wages
Power and fuel consumption `80,500
Supervision & indirect labour `33,000
Lighting and electricity `12,000

The particulars are for a year:

Repairs and maintenance 3% of value of machines

Insurance `40,000
Depreciation 10% of original cost
Other factory expenses `12,000
Allocated general management expenses `54,530

You are required to work out a comprehensive machine hour rate for the machine shop.

Answer
Computation of Comprehensive Machine Hour Rate for the “Machine Shop” (6 Months)
Particulars Amount
(A) Standing Charges:
Operators wages [(800 ÷ 8 hours) × 7,380] 7,38,000
Production bonus (7,38,000 × 15%) 1,10,700
Supervision & indirect labour 33,000
Lighting and electricity 12,000
Insurance (40,000 × 6/12) 20,000
Depreciation (8,00,000 × 10% × 6/12) 40,000
Other sundry works expense (12,000 × 6/12) 6,000
General management expense allocated (54,530 × 6/12) 27,265
Total (A) 9,86,965
(B) Running Charges
Repairs and maintenance (8,00,000 × 3% × 6/12) 12,000
Power consumed 80,500
Total (B) 92,500
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 10,79,465
÷ Total machine hours ÷ 7,200
Machine Hour Rate `149.93

Working Notes:

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Calculation of effective productive hours available to the machine shop and paid hours for 6 months:

Particulars Hours
Normal Available hours (208 hours × 6 months × 6 operators) 7,488
Less: Absenteeism hours (18 hours × 6 operators) (108)
Paid Hours per month 7,380
Less: Leave hours (20 hours × 6 operators) (120)
Less: Normal idle time (10 hours × 6 operators) (60)
Effective Productive Hours 7,200

As machines cannot be worked without an operator wholly engaged on them therefore, hours for which 6
operators are available for 6 months are the hours for which machines can be used. Hence 7,200 hours
represent effective working hours.

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

PAST YEAR QUESTIONS

PYQ 1
A machine shop cost centre contains three machines of equal capacities. Three operators are employed on
each machine, payable `20 per hour each. The factory works for forty eight hours in a week which includes
4 hours setup time. The work is jointly done by operators. The operators are paid fully for the forty-eight
hours. In addition, they are paid a bonus of 10 percent of productive time. Costs are reported for this company
on the basis of four-weekly period.

The company for the purpose of computing machine hour rate includes the direct wages of the
operator and also recoups overheads allocated to the machine. The following details of factory overheads
applicable to the cost centre are available:

 Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is
`52,000
 Maintenance and repairs per week per machine is `60.
 Consumable stores per week per machine are `75.
 Power: 20 units per hour per machine at the rate of 80 paise per unit.
 Apportionment to the cost centre: Rent per annum `5,400, Heat and Light per annum `9,720 and
foreman's salary per annum `12,960 other miscellaneous expenditure per annum `18,000.
Required
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate.
[(8 Marks) May 2015]

Answer
(i) Computation of Cost of Running One Machine for a Four Week Period
Particulars Amount
(A) Standing Charges:
Rent (5,400 × ⅓ × 4/52) 138
Heat and light (9,720 × ⅓ × 4/52) 249
Forman’s salary (12,960 × ⅓ × 4/52) 332
Depreciation (52,000 × 10% × 4/52) 400
Wages (48 hours × 4 weeks × `20 per hour × 3 operators per machine) 11,520
Bonus 10% of (44 hours × 4 weeks × `20 per hour × 3 operators) 1,056
Other miscellaneous expenditure (18,000 × ⅓ × 4/52) 462
Total Standing Charges (A) 14,157
(B) Running Expenses:
Repairs and maintenance (`60 × 4 weeks) 240
Consumable stores (`75 × 4 weeks) 300
Power (44 hours × 4 weeks × 20 units × .80) 2,816
Total Running expenses (B) 3,356
Total Expenses of one machine for four week (A+B) 17,513

(ii) Machine hour rate = Total Expenses for 4 weeks ÷ Effective Hours for 4 weeks
= `17,513 ÷ 176 hours (44 hours × 4 weeks)
= `99.51 per hour

PYQ 2
The following particulars refers to process used in the treatment of materials subsequently, incorporated in
a component forming part of an electrical appliance:

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

(i) The original cost of the machine used (Purchased in June 2008) was `10,000. Its estimated life is 10
years, the estimated scrap value was `1,000, and the estimated working time per year (50 weeks of 44
hours) is 2200 hours of which machine maintenance etc., is estimated to take up 200 hours. No other
loss of working time expected setting up time, estimated at 100 hours, is regarded as productive time
(Holiday to be ignored).
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit. No
current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of `20 each
time.
(iv) The estimated cost of maintenance per year is `1,200.
(v) Two attendants control the operation of machine together with five other machines. Their combined
weekly wages, insurance and employer’s contribution to holiday pay amount `120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount to
`2,000.
You are required to calculate machine hour rate of operating the machine.
[(5 Marks) May 2016]

Answer
Statement of Machine Hour Rate (1 Machine ; 1 Year)
Particulars Amount
(A) Standing Charges:
Depreciation [(10,000 – 1,000) ÷ 10 Years] 900
Attendants wages, insurance etc. (120 × 50 weeks × 1/6) 1,000
Departmental and works overhead 2,000
Total Standing Charges (A) 3,900
(B) Running Expenses:
Electricity (1900 hours × 16 units per hour × 0.09) 2,736
Chemical solution (`20 × 50 weeks) 1,000
Maintenance 1,200
Total Running expenses (B) 4,936
Total Expenses of one machine for four week (A+B) 8,836
÷ Productive Machine Hours (Running and setting up) ÷ 2000
Machine Hour Rate `4.418

PYQ 3
APP Limited is a manufacturing concern and recovers overheads at a pre-determined rate of `30 per man-
day. The total factory overheads incurred and the man-days actually worked were `51 lakhs and 1.5 lakhs
days respectively. During the period 50,000 units were sold. At the end of the period 5,000 completed units
were held in stock but there was no opening stock of finished goods. Similarly, there was no stock of
uncompleted units at the beginning of the period but at the end of the period there were 10,000 uncompleted
units which may be treated as 50% complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective
planning and the balances were attributable to increase in overhead cost.
How would unabsorbed overhead be treated in cost accounts?
[(8 Marks) Nov 2017]

Answer
Calculation of under or over absorption of overheard:
Absorbed OH = 1,50,000 × 30 = `45,00,000
Actual OH = 51,00,000

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Under absorption = 51,00,000 – 45,0000 = `6,00,000

Treatment of unabsorbed overheads:

60% Abnormal = `3,60,000 charged to Profit and Loss A/c
40% Normal increase in OH costs = `2,40,000 charged to FG stock, WIP and COGS

Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units

= `2,40,000 ÷ 60,000 = `4 per unit

Apportionment of unrecovered overheads (due to increase in overheads):

Work-in-Progress (5,000 units × `4) = `20,000
Finished goods (5,000 units × `4) = `20,000
Cost of sales (50,000 units × `4) = `2,00,000

PYQ 4
Delta Ltd. Is a manufacturing concern having two production departments P1 and P2 and two service
departments S1 and S2. After making a primary distribution of factory overheads of all departments are as
under:
P1 = `4,02,000
P2 = `2,93,000
S1 = `3,52,000
S2 = `33,000

Overheads of service departments are apportioned as below:

P1 P2 S1 S2
Department S1 40% 50% - 10%
Department S2 50% 40% 10% -

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

Answer
(1) Statement Showing Secondary Distribution
Production Departments Service Departments
Particulars Basis
P1 P2 S1 S2
Overheads Primary 4,02,000 2,93,000 3,52,000 33,000
distribution
Apportionment:
Department S1 (40:50:10) 1,43,555 1,79,445 (3,58,889) 35,889
Department S2 (50:40:10) 34,445 27,555 6,889 (68,889)
Total Overheads 5,80,000 5,00,000 - -
÷ Production Hours 5,840 5,840 - -
Recovery rate per hour - 99.32 85.62 - -

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Calculation of adjusted expenses of service department by using Simultaneous Equation method:

Expenses of Department S1 = 3,52,000 + 10% of Expenses of S2

Expenses of Department S2 = 33,000 + 10% of Expenses of S1

Now:
Expenses of Department S1 = 3,52,000 + 10% (33,000 + 10% of S1)
Expenses of Department S1 = 3,52,000 + 3,300 + 1% of S1
Expenses of Department S1 = 3,55,300 ÷ 99% = 3,58,889

Expenses of Department S2 = 33,000 + 10% of S1

= 33,000 + 10% of 3,58,889
= 33,000 + 35,889 = 68,889

(2) Statement Showing Cost Per Unit of ‘Z’

Particulars Amount
Direct Materials 500
Direct Labour 350
Prime Cost 850
Production Overheads:
Department P1 (2 hours × 99.32) 198.64
Department P2 (3 hours × 85.62) 256.86
Total Cost 1,305.50

Working Notes:
Calculation of production hours = 365 × 16 hours = 5,840 hours

PYQ 5
RJS produces a single product and absorbs the production overheads at a pre determined rate. Information
relating to a period is as under:

Production overheads actually incurred `4,84,250

Overheads recovery rate at production `1.45 per hour
Actual hours worked 2,65,000 hours

Production:
Finished goods 17,500 units
Work-in-progress 5,000 units
(50% complete in all respects)
Sales:
Finished goods 12,500 units

At the end of the period, it was discovered that the actual production overheads incurred included
`40,000 on account of 'written off obsolete stores’ and wages paid for the strike period under an award.
It was also found that 30% of the under absorption of production overheads was due to production
inefficiency and the rest was attributable to normal increase in costs.

Required to calculate:
(1) The amount of under absorbed production overheads during the period.
(2) Show the accounting treatment of under absorption of production overheads and pass journal entry.
[(8 Marks) Nov 2018]

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Answer
(1) Computation of under absorption of Production Overheads during the period:
Particulars Amount
Total production overheads actually incurred during the period 4,84,250
Less: Written off obsolete stores and wages paid for strike period (40,000)
Net production overheads actually incurred 4,44,250
Production overheads absorbed (2,65,000 hours × `1.45) 3,84,250
Under Recovery of production overheads `60,000

(2) Accounting treatment of under-absorption of production overheads:

a. `18,000 (i.e. `60,000 × 30%) of under absorbed overheads were due to lack of production
planning. This being abnormal should be debited to Costing Profit and Loss Account.
b. The balance of `42,000 (i.e. `60,000 × 70%) of under absorbed overheads should be distributed
over work in progress, finished goods and cost of sales by using supplementary rate.

Under Absorbed Overhead 42,000

Supplementary OH Rate = =
Equivalent Units 12,500 + 5,000 + 2,500
= `2.10 per unit

Distribution of unabsorbed overheads of `42,000:

Work-in-Progress (2,500 units × `2.10) = `5,250
Finished goods (5,000 units × `2.10) = `10,500
Cost of sales (12,500 units × `2.10) = `26,250

Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 26,250 -
Finished Goods Control A/c Dr. 10,500 -
Work in Progress Control A/c Dr. 5,250 -
Costing Profit & Loss A/c Dr. 18,000 -
To Overhead Control A/c - 60,000
(Being under recovery of under absorbed oh recovered/charged)

PYQ 6
M/s. NOP Limited has its own power plant and generates its own power. Information regarding power
requirements and power used are as follows:
Production Departments Service Departments
Particulars
A B X Y
Needed capacity production (in hours) 20,000 25,000 15,000 10,000
Used during the quarter ended September 2018 16,000 20,000 12,000 8,000

During the quarter ended September 2018, cost for generating power amounted to `12.60 Lakhs out of which
`4.20 Lakhs was considered as fixed cost.
Service department X renders services to departments A, B and Y in the ratio of 6 : 4 : 2 whereas
department Y renders services to department A and B in the ratio of 4 : 1. The direct labour hours of
department A and B are 67,500 hours and 48,750 hours respectively.
Required:
(1) Prepare overheads distribution sheet.
(2) Calculate factory overhead per labour hour for department A and department B. [(5 Marks) Nov 2018]

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Answer
(1) Overheads Distribution Sheet
Production Departments Service Departments
Particulars Basis
A B X Y
Fixed overheads (4,20,000) Needed capacity 1,20,000 1,50,000 90,000 60,000
(20:25:15:10)
Variable overheads Used capacity 2,40,000 3,00,000 1,80,000 1,20,000
(12,60,000 – 4,20,000) (16:20:12:8)
Total overheads - 3,60,000 4,50,000 2,70,000 1,80,000
Apportionment of expenses of:
Department X 6:4:2 1,35,000 90,000 (2,70,000) 45,000
Department Y 4:1 1,80,000 45,000 - (2,25,000)
Total overheads - 6,75,000 5,85,000 - -

(2) Calculation of factory overhead per hour:

Department A = 6,75,000 ÷ 67,500 hours = `10 per hour
Department B = 5,85,000 ÷ 48,750 hours = `12 per hour

PYQ 7
M/s. Zaina Private Limited has purchased a machine costing `29,14,800 and it is expected to have a salvage
value of `1,50,000 at the end of its effective life of 15 years. Ordinarily the machine is expected to run for
4,500 hours per annum but it is estimated that 300 hours per annum will be lost for normal repair &
maintenance.
The other details in respect of the machine are as follows:
(a) Repair & maintenance during the whole life of the machine are expected to be `5,40,000.
(b) Insurance premium (per annum) 2% of the cost of the machine.
(c) Oil and lubricants required for operating the machine (per annum) `87,384.
(d) Power consumption: 10 units per hour @ `7 per unit. No power consumption during repair and
maintenance.
(e) Salary to operator per month `24,000. The operator devotes one-third of his time to the machine.

You are required to calculate comprehensive machine hour rate.

[(5 Marks) May 2019]

Answer
Machine Hour Rate
Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`29,14,800 – 1,50,000) × 1/15 years] 1,84,320
Insurance Premium (`29,14,800 × 2%) 58,296
Salary to Operator (`24,000 × 1/3 × 12) 96,000
Total (A) 3,38,616
(B) Running charges/ Variable costs
Repairs (`5,40,000 × 1/15 years) 36,000
Power (10 units × 4,200 hours × `7) 2,94,000
Oil and lubricants 87,384
Total (B) 4,17,384
Total Cost (A + B) 7,56,000
÷ Productive Machine Hours (4,500 - 300) ÷ 4,200
Machine Hour Rate `180.00

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

PYQ 8
ABS enterprise produces a product and adopts the policy to recover factory overheads applying blanket rate
based on machine hours. The cost records of the concern reveal following information:
Budgeted production overheads `10,35,000
Budgeted machine hours 90,000
Actual machine hours worked 45,000
Actual production overheads `8,80,000
Production overheads (actual) include:
Paid to worker as per court’s award `50,000
Wages paid for strike period `38,000
Stores written off `22,000
Expenses of previous year booked in current year `18,500
Production:
Finished goods 30,000 units
Sale of finished goods 27,000 units
The analysis of cost information reveals that ⅓ of the under absorption of overheads was due to
defective production planning and the balance was attributable to increase in costs.

You are required:

(1) To find out the amount of under absorbed production overheads.
(2) To give the ways of treating it in cost accounts.
(3) To apportion the under absorbed overheads over the items.
[(10 Marks) Nov 2019]

Answer
(1) Computation of Amount of Under Absorption of Production Overheads
Particulars Amount
Total production overheads actually incurred 8,80,000
Less: Paid to worker as per court’s award (50,000)
Less: Wages paid for strike period (38,000)
Less: Stores written off (22,000)
Less: Expenses of previous year booked in current year (18,500)
Net production overheads actually incurred 7,51,500
Production overheads absorbed (`10,35,000 ÷ 90,000 hours) × 45,000 hours 5,17,500
Under Recovery of production overheads `2,34,000

(2) Accounting treatment of under-absorption of production overheads:

(a) `78,000 (i.e., `2,34,000 × ⅓) of under absorbed overheads were due to defective production
planning. This being abnormal should be debited to Costing Profit and Loss Account.
(b) The balance of `1,56,000 (i.e., `2,34,000 × ⅔) of under absorbed overheads should be distributed
over finished goods and cost of sales by using supplementary rate.

Under Absorbed Overheads 1,56,000

Supplementary Rate =
Total Units
=
30,000
= `5.20 per unit

(3) Apportionment of `1,56,000 Under Absorbed Overheads:

Finished goods (3,000 units × `5.20) = `15,600
Cost of sales (27,000 units × `5.20) = `1,40,400

3.29
 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

PYQ 9
TEE Ltd. is a manufacturing company having three production departments ‘P’, ‘Q’ and ‘R’ and two service
departments ‘X’ and ‘Y’ details pertaining to which are as under:

P Q R X Y
Direct wages (`) 5,000 1,500 4,500 2,000 800
Working hours 13,191 7,598 14,995 - -
Value of machines (`) 1,00,000 80,000 1,00,000 20,000 50,000
H.P. of machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Floor space (sq. ft.) 2,000 2,500 3,500 1,000 1,000

The expenses are as follows:

Rent and rates `10,000

General lighting `600
Indirect wages `3,450
Power `3,500
Depreciation on machines `70,000
Sundries (apportionment on the basis of direct wages) `13,800

The expenses of the Service Departments are allocated as under:

Departments P Q R X Y
X 45% 15% 30% - 10%
Y 35% 25% 30% 10% -

Product ‘A’ is processes for manufacture in Department P, Q, R for 6, 5, and 2 hours respectively. Direct Costs
of Product A are: Direct material cost is 65 per unit and Direct labour cost is 40 per unit.

You are required to:

(i) Prepare a statement showing distribution of overheads among the production and service
departments.
(ii) Calculate recovery rate per hour of each production department after redistributing the service
department costs.
(iii) Find out the total cost of ‘Product A’.
[(10 Marks) Nov 2020]

Answer
(i) Statement Showing Distribution of Overheads among Production and Service Departments
Production Departments Service Departments
Items Basis of Charge
P Q R X Y
Direct wages Allocation - - - 2,000 800
Rent and rates Area 2,000 2,500 3,500 1,000 1,000
General lighting Light points 200 100 150 50 100
Indirect wages Direct wages 1,250 375 1,125 500 200
Power H.P. 1,000 800 1,000 200 500
Depreciation on Value of
machines machines 20,000 16,000 20,000 4,000 10,000
Sundries Direct wages 5,000 1,500 4,500 2,000 800
Total overheads Primary Dist. 29,450 21,275 30,275 9,750 13,400

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

(ii) Statement Showing Recovery Rate Per Hour

Production Departments Service Departments
Items Basis
P Q R X Y
Overheads Primary Dist. 29,450 21,275 30,275 9,750 13,400
Re-apportionment:
Department X 45 : 15 : 30 : 10 4,388 1,462 2,925 (9,750) 975
Department Y 35 : 25 : 30 : 10 5,031 3,594 4,313 1,437 (14,375)
Department X 45 : 15 : 30 : 10 647 216 431 (1,437) 143
Department Y 35 : 25 : 30 : 10 50 36 43 14 (143)
Department X 45 : 15 : 30 7 2 5 (14) -
Total OH - 39,573 26,585 37,992 - -
÷ Working hours - 13,191 7,598 14,995 - -
OH rate per hour `3.00 `3.50 `2.53 - -

Note: Cost of service departments are redistributed by using Repeated Distribution Method.

(iii) Calculation of cost of Product A:

Direct material cost `65.00

Direct labour cost `40.00
Overheads: Department P (6 hours × `3.00) `18.00
Department Q (5 hours × `3.50) `17.50
Department R (2 hours × `2.53) `5.06
Cost of Product A `145.56

PYQ 10
A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked
without an operator wholly engaged on it. The original cost of all these machines works out to `32 lakhs.

These following particulars are furnished for a 6 month period:

Normal available hours per month 208

Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time hours per operator 10
Average rate of wages per day of 8 hours per operator `100
Production bonus estimated 10% on wages
Power consumed `40,250
Supervision & indirect labour `16,500
Lighting and electricity `6,000

The following particulars are given for a year:

Repairs and maintenance (including consumables) 5% of value of machines

Insurance `3,60,000
Depreciation 10% of original cost
Sundry work expenses `50,000
Management expenses allocated `5,00,000

Prepare a statement showing the comprehensive machine hour rate for the machine shop.
[(5 Marks) Jan 2021]

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

Answer
Computation of Comprehensive Machine Hour Rate for the “Machine Shop”
Particulars Amount
(A) Standing Charges:
Operators wages (100 ÷ 8) × 7,380 hours 92,250
Production bonus (92,250 × 10%) 9,225
Supervision & indirect labour 16,500
Lighting and electricity 6,000
Insurance (3,60,000 × 6/12) 1,80,000
Depreciation (32,00,000 × 10% × 6/12) 1,60,000
Sundry works expense (50,000 × 6/12) 25,000
Management expenses allocated (5,00,000 × 6/12) 2,50,000
Total (A) 7,38,975
(B) Running Charges
Repairs and maintenance (32,00,000 × 5% × 6/12) 80,000
Power consumed 40,250
Total (B) 1,20,250
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 8,59,225
÷ Total machine hours ÷ 7,200
Machine Hour Rate `119.34
Working Notes:
Calculation of effective productive hours available to the machine shop and paid hours for 6 months:
Particulars 6 Operators (Hours)
Normal Available hours (208 hours × 6 months × 6 operators) 7,488
Less: Absenteeism hours (18 hours × 6 operators) (108)
Paid Hours per month 7,380
Less: Leave hours (20 hours × 6 operators) (120)
Less: Normal idle time (10 hours × 6 operators) (60)
Effective Productive Hours 7,200

PYQ 11
SNS Trading Company has three Main Departments and two Service Departments. The data for each
department is given below:
Departments Expenses (in `) Area in (Sq. Mtr) No. of Employees
Main Departments:
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Departments:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis of ‘Area in Square
Metres’ and ‘Number of Employees’ respectively.

You are required to:

(1) Prepare a statement showing the distribution of expenses of Service departments to Main departments
using “Step Ladder Method” of overhead distribution.
(2) Compute the rate per hour of each Main departments, given that, the Purchase department, Packing
department and Distribution department works for 12 hours a day, 24 hours a day and 8 hours a day
respectively. Assume that there are 365 days in a year and there are no holidays.
[(5 Marks) July 2021]

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

Answer
(1) Statement Showing Distribution of Expenses of Service Departments
Production Departments Service Departments
Particulars Basis
Purchase Packing Distribution Maintenance Personnel
Expenses Allocation 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Re-apportionment:
Maintenance Dept. Area 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Personnel Dept. No. of 1,04,000 2,21,000 91,000 - (4,16,000)
Employees
Total OH - 7,96,000 12,61,000 5,53,000 - -

(2) Calculation of rate per hour:

Rate per hour = Total Overheads ÷ Total Hours
Purchase Department = 7,96,000 ÷ (12 hours × 365 days) = `181.74
Packing Department = 12,61,000 ÷ (24 hours × 365 days) = `143.95
Distribution Department = 5,53,000 ÷ (8 hours × 365 days) = `189.38

PYQ 12
XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre-determined rate of `20 per
man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually worked
were `35,50,000 and 1,50,000 respectively. Out of the amount of `35,50,000, `2,00,000 were in respect of
wages for strike period and `1,00,000 was in respect of expenses off the previous year booked in the current
year. During the period, 50,000 units were sold. At the end of period, 12,000 completed units were held in
stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units
at the beginning of the period but at the end of the period there were 20,000 uncompleted units which may
be treated as 65% complete in all respects.
On investigation, it was found that 40% of the unabsorbed overheads due to factory inefficiency and
the rest were attributed to increase in the cost of indirect materials and indirect labour.

You are required to:

1. Calculate the amount of unabsorbed overheads during the year 2020-21.
2. Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal entry.
[(10 Marks) Dec 2021]

Answer
1. Computation of Amount of Unabsorbed Overheads:
Particulars Amount
Total production overheads actually incurred 35,50,000
Less: Amount payable in respect of wages for strike period (2,00,000)
Less: Expenses off the previous year (1,00,000)
Net production overheads actually incurred 32,50,000
Production overheads absorbed (1,50,000 man-days × `20) 30,00,000
Unabsorbed overheads `2,50,000

2. Accounting treatment of unabsorbed overheads:

(a) `1,00,000 (`2,50,000 × 40%) of unabsorbed overheads were due to factory inefficiency and
debited to Costing Profit and Loss Account.

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 OVERHEADS – ABSORPTION COSTING METHOD CHAPTER 3

(b) The balance of `1,50,000 of unabsorbed overheads should be distributed over Finished goods
stock, WIP stock and cost of sales by using supplementary rate.

Supplementary OH Rate = Unabsorbed overheads ÷ Equivalent Units

= `1,50,000 ÷ 75,000 units (50,000 + 12,000 + 65% of 20,000)
= `2 per unit

Distribution of unabsorbed overheads of `1,50,000:

Cost of Sales (50,000 × `2) = `1,00,000
Finished Goods Stock (12,000 × `2) = `24,000
WIP Stock (13,000 × `2) = `26,000

Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 1,00,000 -
Finished Goods Control A/c Dr. 24,000 -
WIP Control A/c Dr. 26,000 -
Costing Profit & Loss A/c Dr. 1,00,000 -
To Overhead Control A/c - 2,50,000
(Being unabsorbed factory overheads being absorbed)

PYQ 13
USP Ltd. is the manufacture of ‘double grip motorcycle tyres. In the manufacturing process, it undertakes
three different job namely, Vulcanising, Brushing and Striping. All of these jobs requires the use of a special
machine and also the aid of a robot when necessary. The robot is hired from outside and the hire charges
paid for every six month is `2,70,000, An estimated of overhead expenses relating to the special machine is
given below:
 Rent for a quarter is `18,000
 The cost of the special machine is `19,20,000 and depreciation is charged @ 10% per annum on
straight line basis.
 Other indirect expenses are recovered at 20% of direct wages.

The factory manager has informed that in the coming year, the total direct wages will be `12,00,000 which
will be incurred evenly throughout the year. During the first month of operation, the following details are
available from the job book:

Number of hours the special machine was used

Jobs Without the aid of the robot With the aid of the robot
Vulcanising 500 400
Brushing 1,000 400
Striping - 1,200

You are required to:

(a) Compute the Machine Hour Rate for the company as a whole for a month (A) when the robot is used
and (B) when the robot is not used.
(b) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanising, Brushing and Striping.
[(10 Marks) Nov 2022]

Answer
(a) Machine hour rate for the company as a whole for a month:

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 CHAPTER 3 OVERHEADS – ABSORPTION COSTING METHOD

69,000
(A) When the Robot is used = = `34.50
2,000 hrs
18,000
(B) When the Robot is not used = 1,500 hrs
= `12.00

(b) Machine hour rate for individual jobs:

Vulcanising Brushing Striping
Particulars
Hours ` Hours ` Hours `
Without Robot @ `12.00 per hour 500 6,000 1,000 12,000 - -
With Robot @ `34.50 per hour 400 13,800 400 13,800 1,200 41,400
Total Overheads - 19,800 - 25,800 - 41,400
÷ Hours - ÷900 - ÷1,400 - ÷1,200
Machine Hour Rate - 22.00 - 18.43 - 34.50

Working note:
1. Total machine hours used (500 + 1,000 + 400 + 400 + 1,200) 3,500
2. Total machine hours without the use of robot (500 + 1,000) 1,500
3. Total machine hours with the use of robot (400 + 400 + 1,200) 2,000
4. Total overheads of the machine per month:
Rent (`18,000 ÷ 3 months) `6,000.00
Depreciation (`19,20,000 × 10%) ÷ 12 months `16,000.00
Indirect Charges (`12,00,000 × 20% ÷ 12 months) `20,000.00
Total `42,000.00
5. Robot hire charges for a month (`2,70,000 ÷ 6 months) = `45,000
42,000
6. Overheads for using machines without Robot = × 1,500 hrs. = `18,000
3,500 hrs
42,000
7. Overheads for using machines with Robot = × 2,000 hrs. + `45,000
3,500 hrs
= `69,000

SUGGESTED REVISION FOR EXAM:

BQ: 2, 7, 8, 11, 12, 15, 16, 21

PYQ: 1, 5, 6

3.35
 CHAPTER 4 COST SHEET & UNIT COSTING

CHAPTER 4 COST SHEET & UNIT COSTING

BQ 1
The following information has been obtained from the records of ABC Corporation for the period from
June 1 to June 30, 2022.
On June 1, 2022 On June 30, 2022
Cost of raw materials 60,000 50,000
Cost of Work-in Progress 12,000 15,000
Cost of Stock of finished goods 90,000 1,10,000

Purchase of raw materials during June’22 4,80,000

Wages paid 2,40,000
Factory Overheads 1,00,000
Administration overheads (related to production) 50,000
Selling & Distribution Overheads 25,000
Sales 10,00,000

Prepare a statement giving the following information:

(a) Materials consumed,
(b) Prime cost,
(c) Factory cost,
(d) Cost of goods sold and
(e) Net Profit.
[(a) 4,90,000 (b) 7,30,000 (c) 8,27,000 (d) 8,57,000 (e) 1,18,000]

BQ 2
The books of Adarsh Manufacturing Company present the following data for the month of April, 2023. 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
Works 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 of the month 75,000
You are required to:
(1) Compute the value of materials purchased.
(2) Prepare a cost statement showing the various elements of cost and also the profit earned.

Answer
(1) Statement Showing Material Purchased
Particulars Amount
Cost of Goods Sold excluding Administrative Expenses 56,000
Add: Closing Finished Goods 19,000

4.1
 COST SHEET & UNIT COSTING CHAPTER 4

Less: Opening Finished Goods (17,600)

Factory Cost 57,400
Add: Closing WIP 14,500
Less: Opening WIP (10,500)
Gross Factory Cost 61,400
Less: Factory Overheads (10,000)
Prime Cost 51,400
Less Direct Wages (17,500)
Raw Material Consumed 33,900
Add: Closing Raw Materials 10,600
Less Opening Raw Materials (8,000)
Raw Materials Purchased 36,500

(2) Cost Sheet

Particulars Amount
Raw Materials Purchased (W.N.) 36,500
Add: Opening stock of Raw Materials 8,000
Less: Closing stock of Raw Materials (10,600)
Materials Consumed 33,900
Direct Wages 17,500
Prime Cost 51,400
Factory Overheads (17,500 ÷ 175%) 10,000
Add: Opening WIP 10,500
Less: Closing WIP (14,500)
Factory Cost 57,400
Add: Opening Finished Goods 17,600
Less: Closing Finished Goods (19,000)
Cost of Goods Sold 56,000
General Administrative Expenses 2,500
Selling and Distribution Overheads 3,500
Cost of Sales 62,000
Profit (b.f.) 13,000
Sales 75,000

BQ 3
The following data relate to the manufacture of a standard product during the month of April 2022:
Raw Materials consumed `1,80,000
Direct Wages `90,000
Machine hours worked 10,000 hours
Machine hours rate `8 per hour
Administration overheads (not related to production) `35,000
Selling overhead `5 per unit
Units produced 4,000 units
Units sold 3,600 @ `125 per unit
You are required to prepare a cost sheet showing the cost per unit and profit for the month.
[Profit `82,000, `102.22 per unit]

BQ 4
The following data relate to the manufacture of a standard product during the four week ended 28 th
February 2023:
Raw Materials consumed `4,00,000

4.2
 CHAPTER 4 COST SHEET & UNIT COSTING

Direct Wages `2,40,000

Machine hours worked 3,200 hours
Machine hours rate `40 per hour
Administration overheads (related to production) 10% of works cost
Selling overhead `20 per unit
Units produced and sold 10,000 @ `120 per unit

You are required to find out the cost per unit and profit for the four week period.
[Profit `1,55,200, `104.48 per unit]

BQ 5
From the following particulars, you are required to prepare monthly cost sheet of Aditya Industries:
Particulars Amount (`)
Opening Inventories:
- Raw materials 12,00,000
- Work-in-process 18,00,000
- Finished goods (10,000 units) 9,60,000
Closing Inventories:
- Raw materials 14,00,000
- Work-in-process 16,04,000
- Finished goods ?
Raw materials purchased 1,44,00,000
GST paid on raw materials purchased (ITC available) 7,20,000
Wages paid to production workers 36,64,000
Expenses paid for utilities 1,45,600
Office and administration expenses paid 26,52,000
Travelling allowance paid to office staffs 1,21,000
Selling expenses 6,46,000
Machine hours worked 21,600 hours
Machine hour rate ` 8.00 per hour
Units sold 1,60,000
Units produced 1,94,000
Desired profit 15% on sales

Answer
Cost Sheet of Aditya Industries
Particulars Total Cost Cost Per Unit
Raw materials purchased 1,44,00,000 -
Add: Opening value of raw materials 12,00,000 -
Less: Closing value of raw materials (14,00,000) -
Materials consumed 1,42,00,000 73.19
Wages paid to production workers 36,64,000 18.89
Expenses paid for utilities 1,45,600 0.75
Prime Cost 1,80,09,600 92.83
Factory overheads (`8 × 21,600 hours) 1,72,800 0.89
Add: Opening value of WIP 18,00,000 -
Less: Closing value of WIP (16,04,000) -
Cost of Production 1,83,78,400 94.73
Add: Value of opening finished stock 9,60,000 -
Less: Value of closing finished stock (`94.734× 44,000) (41,68,296) -
Cost of Goods Sold
1,51,70,104 94.81
Office and administration expenses paid
26,52,000 16.58

4.3
 COST SHEET & UNIT COSTING CHAPTER 4

Travelling allowance paid to office staffs 1,21,000 0.76

Selling expenses 6,46,000 4.03
Cost of Sales 1,85,89,104 116.18
Add: Profit @15% on sales 32,80,430 20.50
Sales (1,85,89,104÷85%) 2,18,69,534 136.68

Note:

(a) Units produced: 1,94,000; Opening Units: 10,000; Total available units: 2,04,000 & units sold 1,60,000.
(b) FIFO method is used for valuation of stock, alternatively student can solve the problem with weighted
average method.

BQ 6
From the following data of Arnav Metallic Ltd., calculate Cost of production:
Particulars Amount (`)
Repair & maintenance paid for plant & machinery 9,80,500
Insurance premium paid for plant & machinery 96,000
Raw materials purchased 64,00,000
Opening stock of raw materials 2,88,000
Closing stock of raw materials 4,46,000
Wages paid 23,20,000
Value of opening Work-in-process 4,06,000
Value of closing Work-in-process 6,02,100
Quality control cost for the products in manufacturing process 86,000
Research & development cost for improvement in production process 92,600
Administrative cost for:
Factory & production 9,00,000
Others 11,60,000
Amount realised by selling scrap generated during the manufacturing process 9,200
Packing cost necessary to preserve the goods for further processing 10,200
Salary paid to Director (Technical) 8,90,000

Answer
Statement Showing Cost of Production of Arnav Metallic Ltd. for the period
Particulars Total Cost
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000
Prime Cost 85,62,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for plant & machinery 96,000
Add: Opening value of WIP 4,06,000
Less: Closing value of WIP (6,02,100)
Factory Cost 94,42,400
Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,22,000

4.4
 CHAPTER 4 COST SHEET & UNIT COSTING

Notes:
1. Other administrative overhead does not form part of cost of production.
2. Salary paid to Director (Technical) is an administrative cost.

BQ 7
The following details are available from the books of R Ltd. for the year ending 31st March 2023:
Particulars Amount (`)
Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Direct wages 60,00,000
Carriage inward 1,72,600
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000
Expenditure on research and development on new production technology 9,60,000
Salary to accountants 7,20,000
Employer’s contribution to EPF & ESI 7,20,000
Cost of power & fuel 28,00,000
Production planning office expenses 12,60,000
Salary to delivery staffs 14,30,000
Income tax 2,80,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fees to independent directors 9,40,000
Donation to PM-national relief fund 1,10,000
Value of sales 2,82,60,000
Position of inventories as on 01-04-2022:
Raw Material 6,20,000
WIP 7,84,000
Finished goods 14,40,000
Position of inventories as on 31-03-2023:
Raw Material 4,60,000
WIP 6,64,000
Finished goods 9,80,000

From the above information prepare a cost sheet for the year ended 31st March 2023.

Answer
Cost Sheet of R Ltd.
(for the year ended at 31st March, 2023)
Particulars Amount (`) Amount (`)
Material Consumed:
Raw materials purchased 84,00,000
Add: Carriage inward 1,72,600
Add: Opening stock of raw materials 6,20,000
Less: Closing stock of raw materials (4,60,000) 87,32,600

Direct employee (labour) cost:

Direct wages 60,00,000
Employer’s Contribution towards PF & ESIS 7,20,000 67,20,000

Direct expenses:
Consumable materials 4,80,000

4.5
 COST SHEET & UNIT COSTING CHAPTER 4

Cost of power & fuel 28,00,000 32,80,000

Prime Cost 1,87,32,600
Works/ Factory overheads:
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000 9,75,000
Gross Factory Cost 1,97,07,600
Add: Opening value of WIP 7,84,000
Less: Closing value of WIP (6,64,000)
Factory Cost 1,98,27,600
Research & development cost paid for improvement in production 9,60,000
process
Production planning office expenses 12,60,000
Cost of Production 2,20,47,600
Add: Opening stock of finished goods 14,40,000
Less: Closing stock of finished goods (9,80,000)
Cost of Goods Sold
2,25,07,600
Administrative Overheads:
Salary to accountants 7,20,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fee paid to independent directors 9,40,000 19,20,000
Selling and Distribution Overheads:
Salary to delivery staffs
14,30,000
Cost of Sales
2,58,57,600
Add: Profit (b.f.)
24,02,400
Sales
2,82,60,000

Notes: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.

BQ 8
Arnav Inspat Udyog Ltd. has the following expendiures for the year ended 31st March, 2023:

Sl. No. Particulars Amount (`) Amount (`)

1 Raw materials purchased 10,00,00,000
2 GST paid on the above purchases @18% (eligible for input 1,80,00,000
tax credit)
3 Freight inward 11,20,600
4 Wages paid to factory workers 29,20,000
5 Contribution made towards employees’ PF & ESIS 3,60,000
6 Production bonus paid to factory workers 2,90,000
7 Royalty paid for production 1,72,600
8 Amount paid for power & fuel 4,62,000
9 Amount paid for purchase of moulds and patterns (life is 8,96,000
equivalent to two year production)
10 Job charges paid to job workers 8,12,000
11 Stores and spares consumed 1,12,000
12 Depreciation on:
Factory building 84,000
Office building 56,000
Plant & machinery 1,26,000
Delivery vehicles 86,000 3,52,000

4.6
 CHAPTER 4 COST SHEET & UNIT COSTING

13 Salary paid to supervisors 1,26,000

14 Repairs & maintenance paid for:
Plant & machinery 48,000
Sales office building 18,000
Vehicles used by directors 19,600 85,600
15 Insurance premium paid for:
Plant & machinery 31,200
Factory building 18,100
Stock of raw materials & WIP 36,000 85,300
16 Expenses paid for quality control check activities 19,600
17 Salary paid to quality control staffs 96,200
18 Research & development cost paid improvement in 18,200
production process
19 Expense paid for pollution control and engineering & 26,600
maintenance
20 Expense paid for administration of factory work 1,18,600
21 Salary paid to functional mangers:
Production control 9,60,000
Finance & accounts 9,18,000
Sales & marketing 10,12,000 28,90,000
22 Salary paid to general manager 12,56,000
23 Packing cost paid for:
Primary packing necessary to maintain quality 96,000
For re-distribution of finished goods 1,12,000 2,08,000
24 Wages of employees engaged in distribution of goods 7,20,000
25 Fee paid to auditors 1,80,000
26 Fee paid legal advisors 1,20,000
27 Fee paid to independent directors 2,20,000
28 Performance bonus paid to sales staffs 1,80,000

29 Value of stock as on 1st April, 2022:

Raw materials 18,00,000
Work-in-process 9,20,000
Finished goods 11,00,000 38,20,000

30 Value of stock as on 31st March, 2023:

Raw materials 9,60,000
Work-in-process 8,70,000
Finished goods 18,00,000 36,30,000

Amount realized by selling of scrap and waste generated during manufacturing process `86,000.

From the above data you are requested to prepare statement of cost for Arnav Ispat Udyog Ltd.
for the year ended 31st March, 2023, showing:

(a) Prime cost,

(b) Factory cost,
(c) Cost of production,
(d) Cost of goods sold and
(e) Cost of sales.

Answer

4.7
 COST SHEET & UNIT COSTING CHAPTER 4

Statement of Cost of Arnav Ispat Udyog Ltd

For the year ended 31st March, 2023
Particulars Amount Amount
Material consumed:
Raw materials purchased 10,00,00,000
Freight inward 11,20,600
Add: Opening stock of raw materials 18,00,000
Less: Closing stock of raw materials (9,60,000) 10,19,60,600
Direct employee (labour) cost:
Wages paid to factory workers 29,20,000
Contribution made towards employees’ PF & ESIS 3,60,000
Production bonus paid to factory workers 2,90,000 35,70,000
Direct expenses:
Royalty paid for production 1,72,600
Amount paid for power & fuel 4,62,000
Amortised cost of moulds and patterns 4,48,000
Job charges paid to job workers 8,12,000 18,94,600
Prime Cost 10,74,25,200
Works/Factory overheads:
Stores and spares consumed 1,12,000
Depreciation on factory building 84,000
Depreciation on plant & machinery 1,26,000
Repairs & maintenance paid for plant & machinery 48,000
Insurance premium paid for plant & machinery 31,200
Insurance premium paid for factory building 18,100
Insurance premium paid for stock of raw materials & WIP 36,000
Salary paid to supervisors 1,26,000
Expenses for pollution control & engineering & maintenance 26,600 6,07,900
Gross factory cost 10,80,33,100
Add: Opening value of WIP 9,20,000
Less: Closing value of WIP (8,70,000)
Works / Factory Cost 10,80,83,100
Quality control cost:
Expenses paid for quality control check activities 19,600
Salary paid to quality control staffs 96,200 1,15,800
Research & development cost paid improvement in production 18,200
process
Administration cost related with production:
Expenses paid for administration of factory work 1,18,600
Salary paid to production control manager 9,60,000 10,78,600
Less: Realisable value on sale scrap and waste (86,000)
Add: Primary packing cost 96,000
Cost of Production 10,93,05,700
Add: Opening stock of Finished goods 11,00,000
Less: Closing stock of Finished goods (18,00,000)
Cost of Goods Sold 10,86,05,700
Administrative overheads:
Depreciation on office building 56,000
Repairs & maintenance paid for vehicles used by directors 19,600
Salary paid to manager-finance & accounts 9,18,000
Salary paid to general manager 12,56,000
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000

4.8
 CHAPTER 4 COST SHEET & UNIT COSTING

Fee paid to independent directors 2,20,000

Selling overheads: 27,69,600
Repairs & maintenance paid for sales office building 18,000
Salary paid to manager of sales & marketing 10,12,000
Performance bonus paid to sales staffs 1,80,000
Distribution overheads: 12,10,000
Depreciation on delivery vehicles 86,000
Packing cost paid for re-distribution of finished goods 1,12,000
Wages of employees engaged in distribution of goods 7,20,000 9,18,000
Cost of Sales 11,35,03,300

Notes:
GST paid of purchase of raw materials would not be part of cost of materials as it eligible for input credit.

BQ 9
The following figures are extracted from the Trial Balance of G.K Co. on 31st March:
Name of Account Dr. (`) Cr. (`)
Inventories:
Finished Stock 80,000 -
Raw Materials 1,40,000 -
Work-in-Process 2,00,000 -
Office Appliances 17,400 -
Plant & Machinery 4,60500 -
Building 2,00,000 -
Sales - 7,68,000
Sales Return and Rebates 14,000 -
Materials Purchased 3,20,000 -
Freight incurred on Materials 16,000 -
Purchase Returns - 4,800
Direct employee cost 1,60,000 -
Indirect employee cost 18,000 -
Factory Supervision 10,000 -
Repairs and Upkeep Factory 14,000 -
Heat, Light and Power 65,000 -
Rates and Taxes 6,300 -
Miscellaneous Factory Expenses 18,700 -
Sales Commission 33,600 -
Sales Travelling 11,000 -
Sales Promotion 22,500 -
Distribution Department: Salaries and Expenses 18,000 -
Office Salaries and Expenses 8,600 -
Interest on Borrowed Funds 2,000 -
Further details are available as follows:
(a) Closing Inventories:
Finished Goods 1,15,000
Raw Materials 1,80,000
Work-in-Process 1,92,000

(b) Outstanding expenses on:

Direct employee cost 8,000
Indirect employee cost 1,200
Interest on Borrowed Funds 2,000

4.9
 COST SHEET & UNIT COSTING CHAPTER 4

(c) Depreciation to be provided on:

Office Appliances 5%
Plant and Machinery 10%
Buildings 4%
(d) Distribution of the following costs: Heat, Light and Power to Factory, Office and Distribution in the
ratio 8 : 1 : 1. Rates and Taxes two-thirds to Factory and one-third to Office. Depreciation on Buildings
to Factory, Office and Selling in the ratio 8 : 1 : 1.
With the help of the above information, you are required to prepare a condensed Profit and Loss
Statement of G.K. Company for the year ended 31st March along with supporting schedules of:
(1) Cost of Sales.
(2) Selling and Distribution Expenses.
(3) Administration Expenses.

Answer
Profit and Loss Statement of G.K Company for the year ended 31st March
Particulars (`) (`)
Gross Sales 7,68,000
Less: Returns (14,000) 7,54,000
Less: Cost of Sales [Refer to Schedule (1)] (7,14,020)
Net Operating Profit 39,980
Less: Interest on borrowed funds (2,000 + 2,000) (4,000)
Net Profit 35,980

(1) Schedule of Cost of Sales

Particulars (`) (`)
Materials consumed in Production
Raw Material (Inventory opening balance) 1,40,000
Add: Material Purchased 3,20,000
Add: Freight on Material 16,000
Less: Purchase Returns (4,800)
Less: Closing Raw Material Inventory (1,80,000) 2,91,200
Direct employee cost (`1,60,000 + `8,000) 1,68,000
Prime Cost 4,59,200
Factory Overheads:
Indirect employee cost (`18,000 + `1,200) 19,200
Factory Supervision 10,000
Repairs and Factory Upkeep 14,000
Heat, Light and Power (`65,000 × 8/10) 52,000
Rates and Taxes (`6,300 × 2/3) 4,200
Miscellaneous Factory Expenses 18,700
Depreciation of Plant (10% of `4,60,500) 46,050
Depreciation of Buildings (4% of `2,00,000 × 8/10) 6,400 1,70,550
Add: Opening Work-in-Process inventory 2,00,000
Less: Closing Work-in-Process inventory (1,92,000)
Works Cost/Cost of Production 6,37,750
Add: Opening Finished Goods inventory 80,000
Less: Closing Finished Goods inventory (1,15,000)
Cost of Goods Sold 6,02,750
Add: Administration Expenses [See Schedule (3)] 18,870
Add: Selling and Distribution Expenses [See Schedule (2)] 92,400
Cost of Sales 7,14,020

4.10
 CHAPTER 4 COST SHEET & UNIT COSTING

(2) Schedule of Selling and Distribution Expenses

Particulars (`)
Sales Commission 33,600
Sales Travelling 11,000
Sales Promotion 22,500
Distribution Department: Salaries and Expenses 18,000
Heat, Light and Power 6,500
Depreciation of Buildings 800
Selling and Distribution Expenses 92,400

(3) Schedule of Administration Expenses

Particulars (`)
Office Salaries and Expenses 8,600
Depreciation of Office Appliances 870
Depreciation of Buildings 800
Heat, Light and Power 6,500
Rates and Taxes 2,100
Administration Expenses 18,870

BQ 10
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

Its 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 market 100% of its output at `500 per unit provided it incurs the following further expenditure:

(a) It gives gift items costing Rs. 30 per unit of sale.

(b) It has lucky draws every month giving the first prize of Rs. 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.

Answer

4.11
 COST SHEET & UNIT COSTING CHAPTER 4

A Ltd. Co
Cost Sheet (for the month)
30% 100%
Particulars
(30,000 units) (1,00,000 units)
Works Cost @ `380/`310 per unit 1,14,00,000 3,10,00,000
Administrative overheads (Fixed) 1,50,000 1,50,000
Cost of Production 1,15,50,000 3,11,50,000
Fixed marketing expenses 2,50,000 2,50,000
Variable distribution cost @ `30 per unit 9,00,000 30,00,000
Additional expenses:
Gifts @ `30 per unit - 30,00,000
Customers prizes - 1,00,000
Refreshment - 1,00,000
Sponsorship cost - 20,00,000
Cost of Sales 1,27,00,000 3,96,00,000
Profit 38,00,000 1,04,00,000
Sales @ `550/`500 per unit 1,65,00,000 5,00,00,000

Advice: At 100% capacity utilization, profit of A Ltd Company is `1,04,00,000 whereas at 30% profit is only
`38,00,000. Therefore, it is advisable to the company to work at 100% capacity and incur special marketing
cost.

BQ 11
Atharva Pharmacare Limited produced a uniform type of product and has a manufacturing capacity of 3,000
units per week of 48 hours. From the records of the company, the following data are available relating to
output and cost of 3 consecutive weeks
Units Factory
Week Direct Materials Direct Wages
Manufactured Overheads
1 1,200 `9,000 `3,600 `31,000
2 1,600 `12,000 `4,800 `33,000
3 1,800 `13,500 `5,400 `34,000

Assuming that the company charges a profit of 20% on selling price, find out the selling price per
unit when the weekly output is 2,000 units
[Sale Price `35.00 per unit]

BQ 12
Wonder Ltd. Has a capacity of 1,20,000 Units per annum as its optimum capacity. The production costs are
as under:

Direct Material `90 per unit

Direct Labour `60 per unit
Overheads:
Fixed: `30,00,000 per annum
Variable: `100 per unit

Semi Variable overheads are `20,00,000 per annum up to 50% capacity and an extra amount of
`4,00,000 for every 25% increase in capacity or part thereof. The production is made to order and not for
stocks. Ignore Administration, Selling and Distribution overheads.

If the production programme of the factory is as indicated below and the management desires a profit
of `20,00,000 for the year work out the average selling price at which each unit should be quoted.

4.12
 CHAPTER 4 COST SHEET & UNIT COSTING

First 3 months 50% capacity

Remaining 9 months 80% capacity

Answer
Statement Showing Average selling Price Per Unit
Particulars First 3 Months Next 9 Months Total
Number of Units (W.N. 1) 15,000 72,000 87,000
Raw Materials @ `90 per unit 13,50,000 64,80,000 78,30,000
Direct Labour @ `60 per unit 9,00,000 43,20,000 52,20,000
Prime Cost 22,50,000 1,08,00,000 1,30,50,000
Factory Overheads:
Fixed 7,50,000 22,50,000 30,00,000
Variable @ `100 per unit 15,00,000 72,00,000 87,00,000
Semi Variable (W.N. 2) 5,00,000 21,00,000 26,00,000
Total Cost 50,00,000 2,23,50,000 2,73,50,000
Add: Profit 20,00,000
Sales Value 2,93,50,000
Average Sales Price (2,93,50,000 ÷ 87,000) `337.36

Working Notes:
1. Calculation of production per annum:
50% for 3 months (1,20,000 units × 50% × 3/12) = 15,000 units
80% for 9 months (1,20,000 units × 80% × 9/12) = 72,000 units
Total production for the year = 87,000 units

2. Calculation of Semi-variable cost:

First Three Months (20,00,000 × 3/12) = 5,00,000
Next Nine Months [(20,00,000 + 4,00,000 + 4,00,000) × 9/12] = 21,00,000

BQ 13
The Fancy Toys Company are manufacturer of two types of toys, x and y. The manufacturing costs for the
year ended 31st March, 2023 were:

Direct material 2,00,000

Direct wages 1,12,000
Production Overhead 48,000
3,60,000
There was no work-in-progress at the beginning or at the end of the year.

It is ascertained that:

(i) Direct materials in type x costs twice as much as direct material in type y.
(ii) The direct wages for type y were 60% of those for type x.
(iii) Production overhead was 30 paise, the same per toy of x and y types.
(iv) Administration overhead for each grade was 200% of direct labour (related to production).
(v) Selling cost was 25 paise per toy for each type of toy.
(vi) Production during the year was:
(a) Type x 40,000 toys of which 36,000 were sold and
(b) Type y 1,20,000 toys of which 1,00,000 were sold.
(vii) Selling price were `7 per toy for type x and `5 per toy for type y.

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 COST SHEET & UNIT COSTING CHAPTER 4

Prepare a statement showing the total cost and cost per toy for each type of toy and the profit
made on each type of toy.

Answer
The Fancy Toys Company
Cost Sheet for the year ending 31.03.2023
Toy ‘x’ Toy ‘y’
Particulars
Total Per unit Total Per unit
Direct Materials 80,000 2.00 1,20,000 1.00
Direct Labour 40,000 1.00 72,000 0.60
Prime Cost 1,20,000 3.00 1,92,000 1.60
Production overheads 12,000 0.30 36,000 0.30
Factory Cost 1,32,000 3.30 2,28,000 1.90
Administrative overheads @ 200% of wages 80,000 2.00 1,44,000 1.20
Cost of Production 2,12,000 5.30 3,72,000 3.10
Less: Closing stock (21,200) - (62,000) -
Cost of Goods Sold 1,90,800 5.30 3,10,000 3.10
Selling Expenses 9,000 0.25 25,000 0.25
Cost of Sales 1,99,800 5.55 3,35,000 3.35
Profit 52,200 1.45 1,65,000 1.65
Sales 2,52,000 7.00 5,00,000 5.00

BQ 14
XYZ Auto Ltd. is in the business of selling cars. It also sells insurance and finance as part of its overall business
strategy.

The following information is available for the company:

Physical units Sales value
Sales of Cars 10,000 Cars `30,000 lakhs
Sales of Insurance 6,000 Policies `1,500 lakhs
Sales of Finance 8,000 Loans `19,200 lakhs

The Revenue earnings from each line of business before expenses are as follow:

Sale of Cars 3% of Sales value

Sale of Insurance 20% of Sales value
Sale of Finance 2% of Sales value

The expenses of the company are as follows:

Salesman salaries `200 lakhs

Rent `100 lakhs
Electricity `100 lakhs
Advertising `200 lakhs
Documentation cost per insurance policy `100
Documentation cost for each loan `200
Direct sales expenses per car `5,000

Indirect costs have to be allocated in the ratio of physical units sold.

Required:
(i) Make a cost sheet for each product allocating the direct and indirect cost and also showing the product

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 CHAPTER 4 COST SHEET & UNIT COSTING

wise profit and total profit.

(ii) Calculate the percentage of profit to revenue earned from each line of business.

Answer
(i) Cost Sheet
(` in lakhs)
Car Insurance Finance
Particular Total
(Amount) (Amount) (Amount)
A – Sales unit 10,000 6,000 8,000 -
B – Sales value 30,000 1,500 19,200 -
C – Revenue earning (in Rs.) 900 300 384 1,584
D – Expenses:
Direct expenses:
Sales exp. Per car 500 - - 500
Document cost per insurance policy - 6 - 6
Document cost for each loan - - 16 16
Indirect Expenses:
Salesman Salaries (10 : 6 : 8) 83.33 50 66.67 200
Rent (10 : 6 : 8) 41.67 25 33.33 100
Electricity (10 : 6 : 8) 41.67 25 33.33 100
Advertisement (10 : 6 : 8) 83.33 50 66.67 200
Total 750 156 216 1,122
Profit (C–D) 150 144 168 462

(ii) Percentage of profit to revenue from each of business:-

150
(a) Sale of car =  100 = 16.67%
900

144
(b) Sale of insurance =  100 = 48.00%
300

168
(c) Sale of finance =  100 = 43.75%
384

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 COST SHEET & UNIT COSTING CHAPTER 4

PAST YEAR QUESTIONS

PYQ 1
Following information relate to a manufacturing concern for the year ended 31st March, 2018:
Raw Materials (opening) `2,28,000
Raw Material (closing) `3,05,000
Purchase of Raw Material `42,25,000
Freight Inwards `1,00,000
Direct wages paid `12,56,000
Direct wages outstanding at the end of the year `1,50,000
Factory Overheads 20% prime cost
Work-in-progress (opening) `1,92,500
Work-in-progress (closing) `1,40,700
Administrative Overheads (related to production) `1,73,000
Distribution expenses `16 per unit
Finished Stock (opening: 1,217 Units) `6,08,500
Sale of scrap of material `8,000

The firm produced 14,000 units of output during the year. The stock of finished goods at the end of the
year is valued at cost of production. The firm sold 14,153 units at a price of `618 per unit during the year.

Prepare cost sheet of the firm. [(10 Marks) May 2018]

Answer
Cost Sheet
Particulars Amount
Raw materials purchased 42,25,000
Add: Opening stock of raw materials 2,28,000
Add: Freight Inward 1,00,000
Less: Sale of scrap of materials (8,000)
Less: Closing stock of raw materials (3,05,000)
Materials consumed 42,40,000
Direct wages (12,56,000 + 1,50,000) 14,06,000
Prime Cost 56,46,000
Factory Overheads (20% of 56,46,000) 11,29,200
Add: Opening WIP 1,92,500
Less: Closing WIP (1,40,700)
Works Cost 68,27,000
Administrative Overheads 1,73,000
Cost of Production 70,00,000
Add: Opening Finished goods 6,08,500
Less: Closing Finished Goods [(70,00,000 ÷ 14,000) × 1,064 units] (5,32,000)
Cost of Goods Sold 70,76,500
Selling expenses (`16 × 14,153) 2,26,448
Cost of Sales 73,02,948
Profit (b.f.) 14,43,606
Sales (14,153 × 618) 87,46,554

Working Note:
Units in closing finished goods = Opening units + Units produced – Units sold
= 1,217 + 14,000 – 14,153 = 1,064 units

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 CHAPTER 4 COST SHEET & UNIT COSTING

PYQ 2
Following details are provided by M/s ZIA Private Limited for the quarter ended 30th September, 2018:

Direct Expenses `1,80,000

Direct Wages being 175% of Factory Overheads `2,57,250
Cost of Goods Sold `18,75,000
Selling and Distribution Overheads `60,000
Sales `22,10,000
Administration Overheads are 10% of Factory Overheads

Stock details as per Stock register:

30.06.2018 30.09.2018
Raw Materials `2,45,600 `2,08,000
Work-in-progress `1,70,800 `1,90,000
Finished Goods `3,10,000 `2,75,000

You are required to prepare a Cost Sheet showing:

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

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

Working Note:
Statement Showing Material Purchased
Particulars Amount
Cost of Goods Sold 18,75,000

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 COST SHEET & UNIT COSTING CHAPTER 4

Add: Closing Finished Goods 2,75,000

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

PYQ 3
M/s. Areeba Private Limited has a normal production capacity of 36,000 units of toys per annum. The
estimated costs of production are as under:

(a) Direct material `40 per unit

(b) Direct labour `30 per unit (subject to a minimum of `48,000 p.m.)
(c) Factory overheads:
Fixed `3,60,000 per annum
Variable `10 per unit
Semi variable `1,08,000 per annum up to 50% capacity and additional `46,800 for
every 20% increase in capacity or any part thereof.
(d) Administrative overheads `5,18,400 per annum (fixed)
(e) Selling overheads `8 per unit
(f) Each unit of raw material yields scrap which is sold at the rate of `5 per unit.
(g) In year 2019, the factory worked at 50% capacity for the first three month but it was expected that it
would work at 80% capacity for the remaining nine month.
(h) During the first three months, the selling price per unit was `145.

You are required to:

(1) Prepare a cost sheet showing prime cost, works cost, cost of production and cost of sales.
(2) Calculate the selling price per unit for remaining nine month to achieve the total annual profit of
`8,76,600.
[(10 Marks) May 2019]

Answer
(1) Cost Sheet
Particulars First 3 Months Next 9 Months Total
Number of Units (W.N. 1) 4,500 21,600 26,100
Raw Materials @ `40 per unit 1,80,000 8,64,000 10,44,000
Less: Sale of Scrap of Material @ `5 per unit (22,500) (1,08,000) (1,30,500)
Raw Materials Consumed 1,57,500 7,56,000 9,13,500
Direct Labour (W.N. 2) 1,44,000 6,48,000 7,92,000
Prime Cost 3,01,500 14,04,000 17,05,500
Factory Overheads:

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 CHAPTER 4 COST SHEET & UNIT COSTING

Fixed 90,000 2,70,000 3,60,000

Variable @ `10 per unit 45,000 2,16,000 2,61,000
Semi Variable (W.N. 3) 27,000 1,51,200 1,78,200
Works Cost 4,63,500 20,41,200 25,04,700
Administrative Overheads 1,29,600 3,88,800 5,18,400
Cost of Production 5,93,100 24,30,000 30,23,100
Selling and Distribution OH @ `8 per unit 36,000 1,72,800 2,08,800
Cost of Sales 6,29,100 26,02,800 32,31,900

(2) Statement Showing Selling Price Per Unit

Particulars Amount
Sales Value for First Three Months (4,500 × 145) 6,52,500
Less: Cost of Sales for First Three Months (6,29,100)
Profit for First Three Months 23,400

Required Profit from Next Nine Months (8,76,600 – 23,400) 8,53,200

Cost of Sales for Next Nine Months 26,02,800
Sales Value for Next Nine months 34,56,000
÷ Number of Units for Next Nine Months ÷ 21,600
Selling Price Per Unit for Next Nine Months `160.00
Working Notes:
1. Calculation of production per annum:
50% for 3 months (36,000 units × 50% × 3/12) = 4,500 units
80% for 9 months (36,000 units × 80% × 9/12) = 21,600 units
Total production for the year = 26,100 units

2. Calculation of Labour cost:

First Three Months (4,500 × 30 or 48,000 × 3) whichever is higher = 1,44,000
Next Nine Months (21,600 × 30 or 48,000 × 9) whichever is higher = 6,48,000

3. Calculation of Semi-variable cost:

First Three Months (1,08,000 × 3/12) = 27,000
Next Nine Months [(1,08,000 + 46,800 + 46,800) × 9/12] = 1,51,200

Note:
1. Administrative overheads is assumed to be related to production.

PYQ 4
XYZ a manufacturing firm, has revealed following information for September, 2019 :

1st September 30th September

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

The firm incurred following expenses for a targeted production of 1,00,000 units during the month:

Consumable stores and spares of factory `3,50,000

Research and development cost for process improvements `2,50,000
Quality control cost `2,00,000
Packing cost (secondary) per unit of goods sold `2.00

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 COST SHEET & UNIT COSTING CHAPTER 4

Lease rent of production asset `2,00,000

Administrative expenses (general) `2,24,000
Selling and distribution expenses `4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5,000 units

Defective output which is 4% of targeted production, realizes `61 per unit. Closing stock is valued at
cost of production (excluding administrative expenses). Cost of goods sold, excluding administrative
expenses amounts to `78,26,000. Direct employees cost is ½ of the cost of material consumed. Selling price
of the output is `110 per unit.

You are required to:

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

Answer
(1) Statement Showing Value of Material Purchased
Particulars Amount
Cost of Goods Sold (91,000 units) 78,26,000
Add: Closing Finished Goods [(78,26,000 ÷ 91,000 units) × 5,000 units] 4,30,000
Less: Opening Finished Goods (Nil)
Cost of Production 82,56,000
Add: Realizable Value from Sale of Defective Output (1,00,000 × 4% × `61) 2,44,000
Less: Research and Development Cost for Process Improvement (2,50,000)
Less: Quality Control Cost (2,00,000)
Factory Cost 80,50,000
Add: Closing WIP 5,00,000
Less: Opening WIP (2,00,000)
Gross Factory Cost 83,50,000
Less: Factory Overheads:
Consumable Stores and Spares of Factory (3,50,000)
Lease Rent of Production Asset (2,00,000)
Prime Cost 78,00,000
Less Direct Employee Cost [(78,00,000 ÷ 1.5) × 0.5] (26,00,000)
Raw Material Consumed 52,00,000
Add: Closing Raw Materials 2,92,000
Less Opening Raw Materials (2,42,000)
Raw Materials Purchased 52,50,000

(2) Cost Sheet

Particulars Amount
Raw Materials Purchased 52,50,000
Add: Opening stock of Raw Materials 2,42,000
Less: Closing stock of Raw Materials (2,92,000)
Materials Consumed 52,00,000
Add: Direct Employee Cost 26,00,000
Prime Cost 78,00,000
Add: Factory Overheads:
Consumable Stores and Spares of Factory 3,50,000
Lease Rent of Production Asset 2,00,000

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 CHAPTER 4 COST SHEET & UNIT COSTING

Gross Factory Cost 83,50,000

Add: Opening WIP 2,00,000
Less: Closing WIP (5,00,000)
Factory Cost 80,50,000
Add: Quality Control Cost 2,00,000
Add: Research and Development Cost for Process Improvement 2,50,000
Less: Realizable Value from Sale of Defective Output (2,44,000)
Cost of Production 82,56,000
Add: Opening Finished Goods Nil
Less: Closing Finished Goods (4,30,000)
Cost of Goods Sold 78,26,000
Add: Administrative Expenses (General) 2,24,000
Add: Secondary Packing Cost (91,000 units × `2) 1,82,000
Add: Selling and Distribution Expenses 4,13,000
Cost of Sales 86,45,000
Profit (b.f.) 13,65,000
Sales (91,000 units × `110) 1,00,10,000

Working Note:
Calculation of number of units produced and sold:
Target Production = 1,00,000 units
Good Output = Target Output – Defective Output
= 1,00,000 units – 4% of 1,00,000 = 96,000 units
Units Sold = Good Output - Units in Closing Finished Goods
= 96,000 units – 5,000 units = 91,000 units

PYQ 5
X Ltd. manufactures two types of pens ‘Super Pen’ and ‘Normal Pen’. The cost data for the year ended 30th
September, 2019 is as follows:
Direct material 8,00,000
Direct wages 4,48,000
Production Overhead 1,92,000
14,40,000
It is further ascertained that:
(i) Direct materials cost in Super Pen was twice as much as direct material in Normal Pen.
(ii) The direct wages for Normal Pen were 60% of those for Super Pen.
(iii) Production overhead was per unit was same rate for both the types.
(iv) Administration overhead was 200% of direct labour for each.
(v) Selling cost was `1 per Super Pen.
(vi) Production and sales during the year were as follows:
Production Sales
No. of units No. of units
Super Pen 40,000 Super Pen 36,000
Normal Pen 1,20,000
(vii) Selling price was `30 per unit for Super Pen.

Prepare a Cost Sheet for ‘Super Pen’ showing:

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

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 COST SHEET & UNIT COSTING CHAPTER 4

Answer
X Ltd.
Cost Sheet for the year ending 30.09.2019
Super Pen
Particulars
Total Per unit
Direct Materials [(8,00,000 ÷ 40,000 × 2 + 1,20,000 × 1) × 40,000 × 2] 3,20,000 8.00
Direct Labour [(4,48,000 ÷ 40,000 × 1 + 1,20,000 × .6) × 40,000 × 1] 1,60,000 4.00
Prime Cost 4,80,000 12.00
Production OH [(1,92,000 ÷ 40,000 × 1 + 1,20,000 × 1) × 40,000 × 1] 48,000 1.20
Factory Cost 5,28,000 13.20
Administrative overheads @ 200% of wages 3,20,000 8.00
Cost of Production 8,48,000 21.20
Less: Closing stock [(8,48,000 ÷ 40,000) × 4,000] (84,800) -
Cost of Goods Sold 7,63,200 21.20
Selling Expenses (36,000 × 1) 36,000 1.00
Cost of Sales 7,99,200 22.20
Profit (b.f.) 2,80,800 7.80
Sales (36,000 × 30) 10,80,000 30.00
Note: Administrative overhead is specific to the product as it is directly related to direct labour as mentioned
in the question and hence to be considered in cost of production only.

PYQ 6
The following data are available from the books and records of Q Ltd. for the month of April 2020:
Direct Labour Cost = `1,20,000 (120% of Factory Overheads)
Cost of Sales = `4,00,000
Sales = `5,00,000

Accounts show the following figures:

1st April 2020 30th April 2020
Raw materials 20,000 25,000
Works in progress 20,000 30,000
Finished Goods 50,000 60,000

Other details:
Selling expenses 22,000
General and administration expenses 18,000

You are required to prepare a cost sheet for the month of April 2020 showing:
(1) Prime Cost
(2) Works Cost
(3) Cost of Production
(4) Cost of Goods Sold
(5) Cost of Sales and Profit earned.
[(10 Marks) Jan 2021]

Answer
Cost Sheet for the Month of April 2020
Particulars Amount
Raw Materials Purchased (W.N.) 1,65,000
Add: Opening stock of Raw Materials 20,000

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 CHAPTER 4 COST SHEET & UNIT COSTING

Less: Closing stock of Raw Materials (25,000)

Materials Consumed 1,60,000
Add: Direct Wages 1,20,000
Prime Cost 2,80,000
Add: Factory Overheads (1,20,000 ÷ 120%) 1,00,000
Add: Opening WIP 20,000
Less: Closing WIP (30,000)
Works Cost/Cost of Production 3,70,000
Add: Opening Finished Goods 50,000
Less: Closing Finished Goods (60,000)
Cost of Goods Sold 3,60,000
Add: General Administrative Expenses 18,000
Add: Selling Expenses 22,000
Cost of Sales 4,00,000
Profit (b.f.) 1,00,000
Sales 5,00,000

Working Note:
Statement Showing Material Purchased
Particulars Amount
Cost of Sales 4,00,000
Less: Selling Expenses 22,000
Less: General Administrative Expenses 18,000
Cost of Goods Sold 3,60,00
Add: Closing Finished Goods 60,000
Less: Opening Finished Goods (50,000)
Works Cost 3,70,000
Add: Closing WIP 30,000
Less: Opening WIP (20,000)
Gross Works Cost 3,80,000
Less: Factory Overheads (1,00,000)
Prime Cost 2,80,000
Less Direct Wages (1,20,000)
Raw Material Consumed 1,60,000
Add: Closing Raw Materials 25,000
Less Opening Raw Materials (20,000)
Raw Materials Purchased 1,65,000

PYQ 7
The following data relates to manufacturing of a standard product during the month of March, 2021:
Particulars Amount
Stock of Raw materials as on 01.03.2021 80,000
Work in Progress as on 01.03.2021 50,000
Purchase of Raw material 2,00,000
Carriage Inwards 20,000
Direct Wages 1,20,000
Cost of special drawing 30,000
Hire charges paid for plant 24,000
Return of Raw material 40,000
Carriage on return 6,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500

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 COST SHEET & UNIT COSTING CHAPTER 4

Salary to office staff 25,000

Maintenance of office building 2,000
Depreciation of Delivery van 6,000
Warehousing charges 1,500
Stock of Raw material as on 31.03.2021 30,000
Stock of Work in Progress as on 31.03.2021 24,000

Additional information:
(a) Stores overheads on materials are 10% of material consumed
(b) Factory overheads are 20% of the Prime cost.
(c) 10% of the output was rejected and sum of 5,000 was realised on the sale of scrap.
(d) 10% of finished product was found to be defective and the defective products were rectified at an
additional expenditure which is equivalent to 20% of proportionate direct wages.
(e) The total output was 8,000 units during the month.

You are required to prepare a Cost Sheet for the above period showing the:
(1) Cost of Raw material consumed
(2) Prime Cost
(3) Work Cost
(4) Cost of Production
(5) Cost of Sales
[(10 Marks) July 2021]

Answer
Cost Sheet
(for the Month ended at 31st March, 2021)
Particulars Amount (`)
Material Consumed:
Raw materials purchased 2,00,000
Add: Carriage inward 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000)
Less: Return of raw material (40,000)
2,30,000
Direct Wages 1,20,000
Direct Expenses:
Cost of special drawing 30,000
Hire charges paid for plant 24,000
Prime Cost 4,04,000
Carriage on return 6,000
Add: Factory Overheads @ 20% of 4,04,000 80,800
Add: Stores overheads @ 10% of 2,30,000 23,000
Add: Cost of rectification of defective product (720 units × 20% of `15) 2,160
Gross Factory Cost 5,15,960
Add: Opening value of WIP 50,000
Less: Closing value of WIP (24,000)
Factory Cost 5,41,960
Less: Sales of scrap (5,000)
Cost of Production 5,36,960
Administrative Overheads:
Legal charges 2,500
Salary to office staff 25,000

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 CHAPTER 4 COST SHEET & UNIT COSTING

Maintenance of office building 2,000

Selling and Distribution Overheads:
Expenses for participation in Industrial exhibition 8,000
Warehousing charges 1,500
Depreciation on Delivery van 6,000
Cost of Sales 5,81,960

Working note:

Calculation finished goods = 8,000 units – 10% rejected = 7,200 units

Defective units = 10% of 7,200 units = 720 units
Wages cost per unit = 1,20,000 ÷ 8,000 = 15 per unit

Note: Alternatively hire charges for plant can be treated as indirect expenses and solution will be change
accordingly.

PYQ 8
G Ltd. manufactures leather bags for office and school purposes. The following information is related with
the production of leather bags for the month of September 2021.
(i) Leather sheets and cotton cloths are the main inputs, and the estimated requirement per bag is two
meters of leather sheets and one meter of cotton cloth. 2,000 meter of leather sheets and 1,000 meter
of cotton cloths are purchased at `3,20,000 and `15,000 respectively. Freight paid on purchases is
`8,500.
(ii) Stitching and finishing need 2,000 man hours at `80 per hour.
(iii) Other direct cost of `10 per labour hour is incurred.
(iv) G has 4 machines at a total cost of `22,00,000. Machine has a life of 10 years with a scrape value of 10%
of the original cost. Depreciation is charged on straight line method.
(v) The monthly cost of administrative and sales office staffs are `45,000 and `72,000 respectively. G Ltd.
pays `1,20,000 per month as rent for a 2400 sq. feet factory premises. The administrative and sales
office occupies 240 sq. feet and 200 sq. feet respectively of factory space.
(vi) Freight paid on delivery of finished bags is `18,000.
(vii) During the month 35 kg. of scrap (cuttings of leather and cotton) are sold at `150 per kg.
(viii) There is no opening and closing stocks for input materials. There is 100 bags in stock at the end of the
month.

You are required to prepare a cost sheet in respect of above for the month of September 2021 showing:
1. Cost of Raw Material Consumed
2. Prime Cost
3. Works/Factory Cost
4. Cost of Production
5. Cost of Goods Sold
6. Cost of Sales
[(10 Marks) Dec 2021]

Answer
Cost Sheet for the month of September 2021
Particulars Total Cost Cost Per Unit
Direct materials consumed:
Leather sheets 3,20,000 320.00

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 COST SHEET & UNIT COSTING CHAPTER 4

Cotton cloths 15,000 15.00

Add: Freight paid on purchase 8,500 8.50
Cost of Raw Material Consumed 3,43,500 343.50
Direct wages (`80 × 2,000 hours) 1,60,000 160.00
Direct expenses (`10 × 2,000 hours) 20,000 20.00
Prime Cost 5,23,500 523.50
Factory overheads:
Depreciation on machines {(`22,00,000×90%)÷120 months} 16,500 16.50
Apportion cost of factory rent {(1,20,000 ÷ 2,400) × 1,960} 98,000 98.00
Works Cost 6,38,000 638.00
Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25)
Cost of Production 6,32,750 632.75
Less: Closing stock of bags (100 bags × `632.75) (63,275) -
Cost of Goods Sold 5,69,475 632.75
Administrative Overheads:
Staff salary 45,000 50.00
Apportioned rent {(1,20,000 ÷ 2,400) × 240} 12,000 13.33

Selling and Distribution Overheads:

Staff salary 72,000 80.00
Apportioned rent {(1,20,000 ÷ 2,400) × 200} 10,000 11.11
Freight paid on delivery of bags 18,000 20.00
Cost of Sales 7,26,475 807.19
Working Note:
1. Factory space = Total space – space occupied by Administrative and Sales office
= 2,400 - 240 – 200 = 1,960 sq. feet

2. Units Produced = Main input raw material used ÷ Main material consumption for 1 unit output
= 2,000 meter leather ÷ 2 meter = 1,000 bags

3. Units sold = Units produced – Closing units

= 1,000 – 100 = 900 bags

PYQ 9
The following data are available from the books and records of A Ltd. for the month of April 2022:
Particulars Amount
Stock of raw materials on 1st April 2022 10,000
Raw materials purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & maintenance 1,000
Stock of raw materials on 30th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300

4.26
 CHAPTER 4 COST SHEET & UNIT COSTING

Stock of finished goods as on 1st April 2022 was 200 units having a total cost of `28,000. The entire opening
stock of finished goods has been sold during the month.
Production during the month of April, 2022 was 3,000 units. Closing stock of finished goods as on
30 April, 2022 was 400 units.
th

You are required to:

(1) Prepare a Cost Sheet for the above period showing the:
(a) Cost of Raw Material consumed
(b) Prime Cost
(c) Factory Cost
(d) Cost of Production
(e) Cost of goods sold
(f) Cost of Sales

(2) Calculate selling price per unit, if sale is made at a profit of 20% on sales.
[(10 Marks) May 2022]

Answer
(1) Cost Sheet
Particulars Amount
Raw Materials Purchased 2,80,000
Add: Opening stock of Raw Materials 10,000
Less: Closing stock of Raw Materials (40,000)
Materials Consumed 2,50,000
Add: Direct Wages 70,000
Prime Cost 3,20,000
Add: Factory Overheads:
Depreciation on plant 15,000
Lease Rent of Production Assets 10,000
Expenses paid for pollution control and engineering & maintenance 1,000
Factory Cost 3,46,000
Add: Expenses paid for quality control check activities 4,000
Add: Research and Development Cost 5,000
Add: Administration Overheads (Production) 15,000
Add: Primary Packing Cost 8,000
Cost of Production 3,78,000
Add: Opening Finished Goods 28,000
Less: Closing Finished Goods [(3,78,000 ÷ 3,000) × 400] (50,400)
Cost of Goods Sold 3,55,600
Add: Administrative Expenses 1,300
Add: Packing cost for redistribution of finished goods 1,500
Cost of Sales 3,58,400

(2) Selling Price per unit:

Cost per unit = 3,58,400 ÷ 2,800 units (200 + 3,000 - 400) = 128
Selling price per unit = 128 ÷ 80% = 160

PYQ 10
PNME Ltd. manufactures two types of masks- ‘Disposable Masks’ and ‘Cloth Masks’. The cost data for the
year ended 31st March, 2022 is as follows:
Direct Materials `12,50,000
Direct Wages `7,00,000

4.27
 COST SHEET & UNIT COSTING CHAPTER 4

Production Overheads `4,00,000

Total `23,50,000

It is further ascertained that:

 Direct materials cost per unit of Cloth Mask was twice as much of Direct materials cost per unit of
Disposable Mask.
 Direct wages per unit for Disposable Mask were 60% of those for Cloth Mask.
 Production overhead per unit was at same rate for both the types of the masks.
 Administration overhead was 50% of Production overhead for each type of mask.
 Selling cost was `2 per Cloth Mask.
 Selling Price was `35 per unit Cloth Mask.
 No. of units of Cloth Masks sold – 45,000
 No. of units of Production of
Cloth Masks : 50,000
Disposable Masks : 1,50,000

You are required to prepare a cost sheet for Cloth Masks showing:
(a) Cost per unit and Total cost,
(b) Profit per unit and Total Profit.
[(10 Marks) Nov 2022]

Answer
PNME Ltd.
Cost Sheet for the year ending 31.03.2022
Cloth Mask
Particulars
Total Per unit
Direct Materials [(12,50,000 ÷ 50,000 × 2 + 1,50,000 × 1) × 50,000 × 2] 5,00,000 10.00
Direct Labour [(7,00,000 ÷ 50,000 × 1 + 1,50,000 × .6) × 50,000 × 1] 2,50,000 5.00
Prime Cost 7,50,000 15.00
Production OH [(4,00,000 ÷ 50,000 × 1 + 1,50,000 × 1) × 50,000 × 1] 1,00,000 2.00
Factory Cost 8,50,000 17.00
Administrative overheads @ 50% of production overheads 50,000 1.00
Cost of Production 9,00,000 18.00
Less: Closing stock [(9,00,000 ÷ 50,000) × 5,000] (90,000) -
Cost of Goods Sold 8,10,000 18.00
Selling Expenses (45,000 × 2) 90,000 2.00
Cost of Sales 9,00,000 20.00
Profit (b.f.) 6,75,000 15.00
Sales (45,000 × 35) 15,75,000 35.00

Note: Administrative overhead is specific to the product as it is directly related to production overheads as
mentioned in the question and hence to be considered in cost of production only.

PYQ 11
The following information is available from SN Manufacturing Limited’s books for the month of April 2023.
Particulars April 1 April 30
Opening and closing inventories data:
Stock of finished goods 2,500 units ?
Stock of raw materials `42,500 `38,600
Work-in-progress `42,500 `42,800

4.28
 CHAPTER 4 COST SHEET & UNIT COSTING

Other data are:

Raw materials purchased `6,95,000
Carriage inward `36,200
Direct wages paid `3,22,800
Royalty paid for production `35,800
Purchase of special designs, moulds and patterns `1,53,600
(estimated life 12 production cycles)
Power, fuel and haulage (factory) `70,600
Research and development costs for improving the production `31,680
process (amortized)
Primary packing cost (necessary to maintain quality) `6,920
Administrative overhead `46,765
Salary and wages for supervisor and foremen `28,000

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

Required:

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

Answer
(1) Cost Sheet of SN Manufacturing Ltd.
Particulars Amount (`) Amount (`)
Raw material consumed:
Raw materials purchased 6,95,000
Add: Carriage inward 36,200
Add: Opening stock of raw materials 42,500
Less: Closing stock of raw materials (38,600) 7,35,100
Direct wages 3,22,800
Direct expenses:
Royalty paid for production 35,800
Special designs, moulds and patterns (1,53,600 × 1/12) 12,800
Power, fuel and haulage 70,600 1,19,200
Prime Cost 11,77,100
Factory overheads:
Salary and wages for supervisor and foremen 28,000
Add: Opening value of WIP 42,500
Less: Closing value of WIP (42,800)
Factory Cost 12,04,800
Research & development cost for improvement in production process 31,680

4.29
 COST SHEET & UNIT COSTING CHAPTER 4

Primary packing cost 6,920 38,600

Cost of Production 12,43,400
Add: Opening stock of finished goods (2,500 units × 8.05) 20,125
Less: Closing stock of finished goods (12,43,400 ÷ 1,52,000) × *1,900
(15,542)
Cost of Goods Sold
12,47,983
Administrative Overheads
46,765
Selling and Distribution Overheads (1,52,600 × 0.20)
30,520
Cost of Sales
13,25,268

*Closing Stock Units = Opening Units + Produced Units – Units Sold

= 2,500 + 1,52,000 – 1,52,600 = 1,900 units

(2) Sale Price Per unit:

Cost per unit = 13,25,268 ÷ 1,52,600 = 8.6846
Sale Price per unit = 8.6846 ÷ 80% = `10.86

SUGGESTED REVISION FOR EXAM:

BQ: 7, 8, 9, 10, 11, 12, 13

PYQ: 2, 4, 6, 7, 8, 11

4.30
 CHAPTER 5 JOB & BATCH COSTING

CHAPTER 5 JOB & BATCH COSTING

JOB COSTING

BQ 1
A company has been asked to quote for a job. The company aims to make a net profit of 30% on sales. The
estimated cost for the job is as follows:
Direct materials 10kg @ `10 per kg
Direct labour 20 hours @ `5 per hour
Variable production overheads are recovered at the rate of `2 per labour hour. Fixed production overheads
for the company are budgeted to be `1,00,000 each year and are recovered on the basis of labour hours.
There are 10,000 budgeted labour hours each year. Other cost in relation to selling, distribution and
administration are recovered at the rate of `50 per job.

Determine quote for the job by the company.

Answer
Budgeted Job Cost Sheet
Particulars Amount
Direct Materials (10 kg × `10) 100
Direct Labour (20 hours × `5) 100
Prime Cost 200
Production Overheads:
Variable overheads (20 hours × `2) 40
Fixed Overheads [(1,00,000 ÷ 10,000) × 20] 200
Factory Cost 440
Selling, Distribution and Administration Overheads 50
Cost of Production 490
Profit (30% on sales) 210
Quoted Price for Job (490 ÷ 70%) 700

BQ 2
A factory used job costing. The following cost data is obtained from its books for the year ended 31st
December 2022:
Direct materials 9,00,000
Direct wages 7,50,000
Selling & distribution overheads 5,25,000
Administrative overheads 4,20,000
Factory overheads 4,50,000
Profit 6,09,000
(a) Prepare a job sheet indicating the Prime cost, Work cost, Cost of production, Cost of sales & the Sales
value.
(b) In 2023, the factory receives an order for a number of jobs. It is estimated that direct materials required
will be `12,00,000 and direct labour will cost `7,50,000. What should be the price for the jobs if the
factory intends to earn the same rate of profit on sales assuming that the selling and distribution
overheads have gone by up by 15%? The factory recovers factory overheads as a percentage of direct
wages and administration & selling and distribution overheads as a percentage of works cost, based
on cost rates prevailing in the previous year.

5.1
 JOB & BATCH COSTING CHAPTER 5

Answer
(a) Cost sheet for the year ending on 31.12.2022
Particulars Amount
Direct material 9,00,000
Direct wages 7,50,000
Prime cost 16,50,000
Factory overhead 4,50,000
Works cost/ Cost of production 21,00,000
Administration overhead 4,20,000
Selling and distribution overhead 5,25,000
Cost of sales 30,45,000
Profit 6,09,000
Sales value 36,54,000

Working Notes:

1. % of Factory OH to direct wages = (4,50,000/7,50,000) × 100 = 60%

2. % of Administration OH to works cost = (4,20,000/21,00,000) × 100 = 20%

3. % of Selling & distribution OH to works cost = (5,25,000/21,00,000) × 100 = 25%

4. % of Profit to sales = (6,09,000/36,54,000) × 100 = 16.67%

(b) Cost Sheet for the job order in 2023

Particulars Amount
Direct material 12,00,000
Direct wages 7,50,000
Prime cost 19,50,000
Factory overhead (60% on direct wages) 4,50,000
Works cost/ Cost of production 24,00,000
Administration overhead (20% on works cost) 4,80,000
Selling and distribution overhead (25% on works cost + 15%) 6,90,000
Cost of sales 35,70,000
Profit (16.6.7% on sales or 20% on cost of sales) 7,14,000
Sales value (35,70,000 ÷ 83.33%) 42,84,000

BQ 3
A shop floor supervisor of a small factory presented the following cost for Job No. 303, to determine the
selling price:

Particulars Per Unit

Materials 70
Direct wages 18 hours @ 2.50 per hour 45
(Department X 8 hours; department Y 6 hours and department Z 4 hours)
Chargeable expenses (stores) 5
120
Overheads @ 33⅓% 40

Cost 160

5.2
 CHAPTER 5 JOB & BATCH COSTING

Analysis of the profit and loss account for the year 2022:
Particulars Amount Particulars Amount
Materials 1,50,000 Sales net of returns 2,50,000
Direct wages:
Department X 10,000
Department Y 12,000
Department Z 8,000 30,000
Stores expenses 4,000
Overheads:
Department X 5,000
Department Y 9,000
Department Z 2,000 16,000
Selling expenses 20,000
Gross profit 30,000
2,50,000 2,50,000

It is noted that average hourly rates for the three departments, X, Y and Z are similar.

You are required to draw up a job cost sheet showing revised cost using 2022 actual figures as
basis and add 20% to total cost to determine selling price.
[Selling Price `189.76]

BQ 4
In a factory following the job costing method, an abstract from the work in process as at 30th September was
prepared as under:
Job no. Materials cost Labour hours Labour cost Factory OH Applied
115 1,325 400 800 640
118 810 250 500 400
120 765 300 475 380
Total 2,900 950 1,775 1,420

Materials used in October were as follows:

Material Requisition Job No. Cost

54 118 300
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720
3,535

A summary of Labour Hours deployed during October is as under:

Job No. Numbers of hours
Shop A Shop B
115 25 25
118 90 30
120 75 10
121 65 -
124 20 10
Indirect labour:
Waiting for Material 120 10

5.3
 JOB & BATCH COSTING CHAPTER 5

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 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. Jobs 115, 118 and 120 were completed in October.

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?

You are asked to compute the factory cost of the completed jobs.

Answer
Factory Cost Statement for Completed Jobs
Month Job No. Materials Direct Labour Factory OH Factory Cost
September 115 1,325 800 640 2,765
October 115 - 125 100 225
Total - 1,325 925 740 2,990
September 118 810 500 400 1,710
October 118 515 330 264 1,109
Total - 1,325 830 664 2,819
September 120 765 475 380 1,620
October 120 665 245 196 1,106
Total - 1,430 720 576 2,726

Statement Showing Invoice Price of Completed Jobs

Particulars Job 115 Job 118 Job 120
Factory Cost 2,999.00 2,819.00 2,726.00
Admin and selling OH @10% of Factory Cost 299.00 281.90 272.60
Total Cost 3,289.00 3,100.90 2,998.60
Profit @ 20% on Cost 657.80 620.18 599.72
Invoice Price 3,946.80 3,721.08 3,598.32

Working Note:
Factory OH
Recovery rate of Factory Overheads = Direct Labour Cost
× 100

1,420
= 1,775
× 100 = 80% of Direct Labour Cost

Assumption: Indirect labour costs have been included in the factory overhead.

BQ 5
Job No. 198 was commenced on October 10, 2022 and completed on November 1, 2022. Materials used were
`600 and labour charged directly to the job was `400.

Other information is as follows:

5.4
 CHAPTER 5 JOB & BATCH COSTING

Machine No. 215 used for 40 hours : machine hour rate being `3.50
Machine No. 160 used for 30 hours : machine hour rate being `4.00
6 welders worked on the job for five days of 8 hours each : Direct labour hour per welder is `0.20

Expenses not included for calculating the machine hour or direct labour hour rate totalled `2,000, total direct
wages for the period being `20,000.

Ascertain the works costs of job No. 198.

Answer
Statement Showing Works Cost of Job No. 198
Particulars Amount
Material 600
Direct labour 400
Prime cost 1,000
Factory overhead:
Machine No. 215 : 40 hours @ `3.50 140
Machine No. 160 : 30 hours @ `4.00 120
240 hours of welders @ `0.20 per hour 48
General 10% of wages 40
Works Cost 1,348

Woking notes:
1. 6 welders × 5 days × 8 hours = 240 hours
2. Unapportioned expenses (General overheads) `2,000 which works out at 10% of direct wages.

BQ 6
Ares Plumbing and Fitting Ltd. (APFL) deals in plumbing materials and also provides plumbing services to
its customers. On 12th August, 2022, APFL received a job order for supply and fitting of plumbing materials.
The work is to be done on the basis of specification provided by the hostel owner. Hostel will be inaugurated
on 5th September, 2022 and the work is to be completed by 3rd September, 2022. Following are the details
related with the job work:

Direct Materials: APFL uses a weighted average method for the pricing of materials issues.
Opening stock of materials as on 12th August 2022:
15mm GI Pipe, 12 units of (15 feet size) @ `600 each
20mm GI Pipe, 10 units of (15 feet size) @ ` 660 each
Other fitting materials, 60 units @ ` 26 each
Stainless Steel Faucet, 6 units @ ` 204 each
Valve, 8 units @ ` 404 each

Purchases:
On 16th August 2022:
20mm GI Pipe, 30 units of (15 feet size) @ ` 610 each
10 units of Valve @ ` 402 each
On 18th August 2022:
Other fitting materials, 150 units @ ` 28 each
Stainless Steel Faucet, 15 units @ ` 209 each
On 27th August 2022:

5.5
 JOB & BATCH COSTING CHAPTER 5

15mm GI Pipe, 35 units of (15 feet size) @ ` 628 each

20mm GI Pipe, 20 units of (15 feet size) @ ` 660 each
Valve, 14 units @ ` 424 each

Issues for the hostel job:

On 12th August 2022:
20mm GI Pipe, 2 units of (15 feet size)
Other fitting materials, 18 units
On 17th August 2022:
15mm GI Pipe, 8 units of (15 feet size)
Other fitting materials, 30 units
On 28th August 2022:
20mm GI Pipe, 2 units of (15 feet size)
15mm GI Pipe, 10 units of (15 feet size)
Other fitting materials, 34 units
Valve, 6 units
On 30th August 2022:
Other fitting materials, 60 units
Stainless Steel Faucet, 15 units

Direct Labour:
Plumber: 180 hours @ `50 per hour (includes 12 hours overtime)
Helper: 192 hours @ `35 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.

Overheads: Overheads are applied @ `13 per labour hour.

Pricing policy: It is company’s policy to price all orders based on achieving a profit margin of 25% on sales
price.

You are required to:

(a) Calculate the total cost of the job.
(b) Calculate the price to be charged from the customer.

Answer
(a) Statement Showing Total Cost of the Job
Particulars Amount
Direct material cost:
15mm GI Pipe (WN 1) 11,051.28
20mm GI Pipe (WN 2) 2,588.28
Other fitting materials (WN 3) 3,866.07
Stainless steel faucet [{(6 × 204 + 15 × 209) ÷ 21 units } × 15 units] 3,113.57
Valve [{(8 × 404 + 10 × 402 + 14 × 424) ÷ 32 units } × 6 units] 2,472.75

Direct wages
Plumber [(180 hours × `50) + (12 hours × `25)] 9,300
Helper [(192 hours × `35) + (24 hours × `17.5)] 7,140

Overheads [`13 × (180 + 192) hours] 4,836

Total Cost 44,367.95

5.6
 CHAPTER 5 JOB & BATCH COSTING

(b) Price to be charged = Total Cost + 25% Profit on Job Price

= 44,367.95 ÷ 75% = `59,157.27

Working Notes:
1. Cost of 15mm GI Pipe:
Date Calculation Amount (`)
17.08.20 8 units × `600 4,800
28.07.20 {(4 units × `600 + 35 units × `628) ÷ 39 units} × 10 units 6,251.28
11,051.28

2. Cost of 20mm GI Pipe:

Date Calculation Amount (`)
12.08.20 2 units × `660 1,320
28.08.20 {(8 units × `660 + 30 units × `610 + 20 units × `660) ÷ 58 units} × 2 units 1,268.28
2,588.28

3. Cost of Other fitting materials:

Date Calculation Amount (`)
12.08.20 18 units × `26 468
17.08.20 30 units × `26 780
28.08.20 {(12 units × `26 + 150 units × `28) ÷ 162 units} × 34 units 946.96
30.08.20 {(12 units × `26 + 150 units × `28) ÷ 162 units} × 60 units 1,671.11
3,866.07

REVERSE CALCULATION OF OVERHEADS

BQ 7
In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct wages
and the administrative overheads are absorbed on a fixed percentage basis on factory cost.
The company has furnished the following data relating to two jobs undertaken by it in a period:

Job 101 Job 102

Direct Materials `54,000 `37,500

Direct Wages `42,000 `30,000
Selling price `1,66,650 `1,28,250
Profit as percentage on total cost 10% 20%

You are required to compute:

(i) Computation of percentage recovery rates of factory overheads and administrative overheads.
(ii) Calculation of the amount of factory overheads, administrative overheads and profit for each of the
two jobs.
(iii) Using the above recovery rates fix the selling price of job 103. The additional data being :

Direct materials `24,000

Direct wages `20,000
Profit percentage on selling price 12-½%

[(i) 60% & 25% (ii) `25,200, `30,300, `15,150 and `18,000, `21,375, `21,375 (iii) `80,000]

5.7
 JOB & BATCH COSTING CHAPTER 5

BATCH COSTING

BQ 8
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
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 muffins.

Answer
Statement of Cost per Batch and per Order
Particulars Cost per Batch Total Cost
Direct material cost 500.00 6,000.00
Direct wages 50.00 600.00
Oven set-up cost 150.00 1,800.00
Prime cost 700.00 8,400.00
Add: Production overhead (20% on direct wages) 10.00 120.00
Total Production Cost 710.00 8,520.00
Add: S & D and Administration overhead 71.00 852.00
(10% of Total Production Cost)
Total Cost 781.00 9,372.00
Add : Profit (⅓ of Total Cost) 260.33 3,124
Selling Price 1,041.33 12,496.00

No. of batch = 600 units ÷ 50 units = 12 batches

BQ 9
Rio Limited undertakes to supply 1,000 units of a component per month for the months of January, February,
and March, 2023. Every month a batch order is opened against which materials and labour cost are booked
at actual cost. Overheads are levied at a rate per labour hour. The selling price is contracted at `15 per unit.

From the following data, present the cost and profit per unit of each batch order and the overall position
of the order for the 3,000 units.
Month Batch output Material cost Labour cost
January 1,250 6,250 2,500
February 1,500 9,000 3,000
March 1,000 5,000 2,000

Labour is paid at the rate of `2 per hour the other details are:

Month Overheads Labour hours

January 12,000 4,000
February 9,000 4,500
March 15,000 5,000

5.8
 CHAPTER 5 JOB & BATCH COSTING

[Cost `10 per unit; Profit `5 per unit, Overall profit on order is `15,000]

BQ 10
A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing six months.
Every month a batch order is opened against which materials and labour hours are booked at actual.
Overheads are levied at a rate per labour hour. The selling price contracted for is `8 per piece. From the
following data present the cost and profit per piece of each batch order and overall position of the order for
1,200 pieces.

Month Batch output Material cost (`) Direct wages (`) Direct labour hours
January 210 650 120 240
February 200 640 140 280
March 220 680 150 280
April 180 630 140 270
May 200 700 150 300
June 220 720 160 320

The other details are:

Month Chargeable expenses Direct labour hours

January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

Answer
Statement Showing Cost and Profit
Particulars Jan. Feb. March April May June Total
Batch output (in units) 210 200 220 180 200 220 1,230
Sales value (`) 1,680 1,600 1,760 1,440 1,600 1,760 9,840
Material cost (`) 650 640 680 630 700 720 4,020
Direct wages (`) 120 140 150 140 150 160 860
Chargeable expenses (`) 600 672 672 621 780 800 4,145
Total cost 1,370 1,452 1,502 1,391 1,630 1,680 9,025
Profit per batch (`) 310 148 258 49 (30) 80 815
Total cost per unit (`) 6.52 7.26 6.83 7.73 8.15 7.64 7.34
Profit per unit (`) 1.48 0.74 1.17 0.27 (0.15) 0.36 0.66

Overall position of the order for 1,200 units:

Sales value of 1,200 units @ `8 per unit = `9,600

Total cost of 1,200 units @ `7.34 per unit = `8,808

Profit = `792

Note:
Ch arg eable exp enses
Chargeable expenses =  Direct labour hours for batch
Direct labour hour for the month

5.9
 JOB & BATCH COSTING CHAPTER 5

ECONOMIC/OPTIMUM BATCH QUANTITY

BQ 11
Monthly demand for a product 500 units
Setting-up cost per batch `60
Cost of manufacturing per unit `20
Rate of interest 10% p.a.

Determine economic batch quantity.

Answer
2 DS 2 × 6 ,000 × 60
EBQ/ Optimum Run size = = = 600 units
C 10 % of 20

BQ 12
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 the optimum run size of bearing manufacture?

(ii) State what would be the interval between two consecutive optimum runs?
(iii) Find out minimum inventory holding cost.

Answer
2DS 2  48 ,000  3,200
(i) EBQ/ Optimum Run size = =
C 12
= 5,060 bearings

(ii) Interval between two consecutive optimum runs.

= 365 ÷ No. of runs = 365 ÷ 10 = 36.5 days

(iii) Minimum inventory holding cost:

= ½ × EBQ × C = ½ × 5,060 × 12 = `30,360

Working Notes:

Number of optimum runs = 48,000 ÷ 5,060 = 9.49 or 10 runs

BQ 13
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 of 18,000 column 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.

Answer
2 DS 2  90 ,000  1 ,500
(i) Economic Run size = = = 1,567 bearings
C 5% of 2,200

5.10
 CHAPTER 5 JOB & BATCH COSTING

(ii) Calculation of Extra Cost at Run Size 6,000 bearings:

Particulars At EBQ 1,567 At RBQ 18,000
Set up Cost (D/RBQ × S) (90,000 ÷ 1,567) 57.4 or 58 set (90,000 ÷ 18,000) 5 set ups
ups × 1,500 = 87,000 × 1,500 = 7,500
Carrying cost (RBQ × ½ × C) ½ × 1,567 × 110 = 86,185 ½ × 18,000 × 110 = 9,90,000
Total Cost 1,73,185 9,97,500
Extra Cost - 8,24,315

BQ 14
X Ltd. is committed to supply 24,000 bearings per annum to Y 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.
(i) What should be the optimum run size for bearing manufacture?
(ii) Assuming that the company has a policy of manufacturing 6,000 bearings per run, how much extra
costs the company would be incurring as compared to the optimum run suggested in (a) above?
(iii) Calculate the inventory holding cost at optimum level?

Answer
2 DS 2  24 ,000  324
(a) EBQ/ Optimum Run size = =
C 1 .2
= 3,600 bearings

D = Bearing to be manufactured/supplied p.a. = 24,000 bearings

S = Set-up cost per run of bearing manufacture = `324
C = Carrying cost per bearing p.a. = `0.10 × 12 months
= `1.2 per bearing p.a.

(b) Calculation of Extra Cost at Run Size 6,000 bearings:

Particulars At EBQ 3,600 At RBQ 6,000
Set up Cost (D/RBQ × S) (24,000 ÷ 3,600) 6.6 or 7 set (24,000 ÷ 6,000) 4 set ups
ups × 324 = 2,268 × 324 = 1,296
Carrying cost (RBQ × ½ × C) ½ × 3,600 × 1.2 = 2,160 ½ × 6,000 × 1.2 = 3,600
Total Cost 4,428 4,896
Extra Cost - 468

(c) Inventory holding cost at optimum level is `2,160

BQ 15
A Company has an annual demand from a single customer for 50,000 litres of a paint product. The total
demand can be made up of a range of colour to be produced in a continuous production run after which a
set-up of the machinery will be required to accommodate the colour change. The total output of each colour
will be stored and then delivered to the customer as a single load immediately before production of the next
colour commences.
The Set up costs are `100 per set up. The Service is supplied by an outside company as required. The
Holding costs are incurred on rented storage space which costs `50 per sq. meter per annum. Each square
meter can hold 250 Litres suitably stacked.

You are required to calculate

(i) Calculate the total cost per year where batches may range from 4,000 to 10,000 litres in multiples of
1,000 litres and hence choose the production batch size which will minimize the cost.

5.11
 JOB & BATCH COSTING CHAPTER 5

(ii) Use the economic batch size formula to calculate the batch size which will minimise total cost.

Answer
(i) Statement Showing Total Cost Per Year Where Batches May Range from 4,000 to 10,000 Litres in
Multiples of 1,000 Litres
Production Set-up Cost Per Annum (`) Holding Cost Per Annum (`) Total Cost Per
Size (Lt.) [(D/RBQ) × 100] [½ × RBQ × C] Annum (`)
4,000 12.5 set up × 100 = 1,250 400 1,650
5,000 10 set up × 100 = 1,000 500 1,500
6,000 8.33 set up × 100 = 833 600 1,433
7,000 7.14 set up × 100 = 714 700 1,414
8,000 6.25 set up × 100 = 625 800 1,425
9,000 5.56 set up × 100 = 556 900 1,456
10,000 5 set up × 100 = 500 1,000 1,500

As the total cost is minimum at 7,000 ltr. i.e. `1,414, thus economic production lot would be 7,000 Litres.

(ii) Economic Batch Quantity (EBQ):

2DS 2  50 ,000  100

EBQ = = = 7,071 Litres
C .20  1

5.12
 CHAPTER 5 JOB & BATCH COSTING

PAST YEAR QUESTIONS

PYQ 1
M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year 2014 are
given below:
Opening stock of materials `1,50,000
Closing stock of materials `2,00,000
Purchase of materials `18,50,000
Direct labour `9,50,000
Factory overheads `3,80,000
Administrative overheads `2,50,400
During 2015, the company has received an order from a car manufacturer where it estimates the cost
of materials and labour will be `8,00,000 and `4,50,000 respectively.
M.L. Auto Ltd. charges factory overhead as a percentage of direct labour and administrative
overheads as a percentage of factory cost based on previous year’s cost.
Cost of delivery of the components at customer’s premises is estimated at `45,000.

You are required to:

1. Calculate the overhead recovery rates based on actual cost of 2014.
2. Prepared a detailed cost statement for the order received in 2015 and the price to be quoted if
company wants to earn a profit of 10% on sales.
[(8 Marks) Nov 2015]

Answer
1. Calculation of overhead recovery rates based on actual cost of 2014:
Factory overhead 3,80 ,000
Factory overhead rate = × 100 = × 100 = 40%
Direct labour cos t 9,50 ,000

Ad min overhead 2,50 ,400

Admin overhead rate = × 100 = ×100 = 8%
Factory cos t 31 ,30 ,000

Working Note:
Factory cost = Opening stock of materials + Purchase of materials – Closing of
materials + Labour + Factory overhead
= 1,50,000 + 18,50,000 – 2,00,000 + 9,50,000 + 3,80,000
= 31,30,000

2. Statement of Cost and Price

Particulars `
Direct materials 8,00,000
Direct wages 4,50,000
Prime cost 12,50,000
Factory overheads @ 40% of 4,50,000 1,80,000
Factory cost 14,30,000
Administration overheads @ 8% of 14,30,000 1,14,400
Cost of goods sold 15,44,400
Cost of delivery 45,000
Cost of sales 15,89,400
Profit @ 10% of sales 1,76,600
Sales (15,89,400/90%) 17,66,000

5.13
 JOB & BATCH COSTING CHAPTER 5

PYQ 2
XYZ Ltd. has obtained an order to supply 48,000 bearings per year from a concern on a steady basis. It is
estimated that it costs `.20 as inventory holding cost per bearing per month and that the set up cost per run
of bearing manufacture is `384.

You are required to:

(1) Compute optimum run size and number of runs for bearing manufacture.
(2) Compute the interval between two consecutive runs.
(3) Find out the extra cost incurred, if company adopts a policy to manufacture 8,000 bearings per run as
compared to optimum run size.
(4) Give your opinion regarding run size of bearing manufacture.

Assume 365 days in a year. [(10 Marks) Nov 2018]

Answer
2 DS 2 × 48 ,000 × 384
(1) Optimum Run size = =
C 12 × .20
= 3,919 bearings

Number of runs = Annual demand ÷ EBQ = 48,000 ÷ 3,919

= 12.24 or 13 runs

(2) Interval between two runs = 365 ÷ Number of Runs = 365 ÷ 13

= 28 days appx.

(3) Computation of Extra Cost:

Particulars At EBQ 3,919 At RBQ 8,000
Set up Cost (D/RBQ × S) (48,000 ÷ 3,919) 12.24 or 13 (48,000 ÷ 8,000) 6 set ups ×
set ups × 384 384
Carrying cost (RBQ × ½ × C) = 4,992 = 2,304
½ × 3,919 × 2.4 = 4,703 ½ × 8,000 × 2.4 = 9,600
Total Cost 9,695 11,904
Extra Cost - 2,209

(4) Opinion: Company should go with the EBQ (i.e. 3,919 bearings) having lower cost than RBQ 8,000
units.

PYQ 3
The following data presented by the supervisor of a factory for a job.
` Per unit
Direct Material 120
Direct Wages @ `4 per hour 60
(Departments A - 4 hrs., B - 7 hrs., C - 2 hrs & D - 2 hrs)
Chargeable Expenses 20

Total 200

Analysis of the profit and loss account for the year ended 31st March, 2019:
Particulars ` Particulars `
Material 2,00,000 Sales 4,30,000
Direct Wages

5.14
 CHAPTER 5 JOB & BATCH COSTING

Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000 50,000
Special store items 6,000
Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross profit c/d 1,30,000
4,30,000 4,30,000
Selling expenses 90,000 Gross profit b/d 1,30,000
Net profit 40,000
1,30,000 1,30,000

It is also to be noted that average hourly rates for all the four departments are similar.

Required:
(a) Prepare a job cost sheet.
(b) Calculate the entire revised cost using the above figures as the base.
(c) Add 20% profit on selling price to determine the selling price.
[(5 Marks) Nov 2019]

Answer
Job Cost Sheet
Particulars Amount
Direct Materials 120.00
Direct Wages:
Department A (4 hours × `4) 16.00
Department B (7 hours × `4) 28.00
Department C (2 hours × `4) 8.00
Department D (2 hours × `4) 8.00
Chargeable Expenses 20.00
Prime Cost 200.00
Overheads:
Department A @ 100% of direct wages 16.00
Department B @ 75% of direct wages 21.00
Department C @ 90% of direct wages 7.20
Department D @ 85% of direct wages 6.80
Works Cost 251.00
Selling Expenses @ 30% on works cost 75.30
Total Cost 326.30
Profit @ 20% on selling price or 25% on cost 81.575
Sales 407.875

Working note:
(1) Calculation of recovery rate of Overheads:
Overheads
Recovery rate of overheads = Direct Wages
× 100
12,000
Department A = 12,000
× 100 = 100% of direct wages

5.15
 JOB & BATCH COSTING CHAPTER 5

6,000
Department B = × 100 = 75% of direct wages
8,000
9,000
Department C = 10,000
× 100 = 90% of direct wages
17,000
Department D = 20,000
× 100 = 85% of direct wages

(2) Calculation of recovery rate of Selling Expenses:

Selling Expenses 90,000
Recovery rate of selling overheads = × 100 = × 100
Works Cost 4,30,000 − 1,30,000
= 30% of works cost

PYQ 4
GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the estimates provided by
Pharmaceutical Industry Bureau, there will be a demand of 40 Million 'Stents' in the coming year. GHI Ltd. is
expected to have a market share of 2.5% of the total market demand of the Stents in the coming year. It is
estimated that it costs `1.50 as inventory holding cost per stent per month and that the set -up cost per run
of stent manufacture is `225.
Required:
(a) What would be the optimum run size for Stent manufacture?
(b) What is the minimum inventory holding cost?
(c) Assuming that the company has a policy of manufacturing 4,000 stents per run, how much extra costs
the company would be incurring as compared to the optimum run suggested in (i) above?
[(5 Marks) Jan 2021]

Answer
2 DS 2  4 ,00 ,00 ,000  2.5%  225
(a) Optimum Run Size = = = 5,000 Stents
C 1.5  12

(b) Minimum Inventory Holding Cost:

Minimum Inventory Holding Cost = ½ × EBQ × C
= ½ × 5,000 × `18 = `45,000

(c) Calculation of Extra Cost:

Particulars At EBQ 5,000 At RBQ 4,000
Set up Cost (D/RBQ × S) (10,00,000 ÷ 5,000) × 225 (10,00,000 ÷ 4,000) × 225
= 45,000 = 56,250
Carrying cost (½× RBQ × C) ½ × 5,000 × 18 ½ × 4,000 × 18
= 45,000 = 36,000
Total Cost 90,000 92,250
Extra Cost - 2,250

PYQ 5
AUX Ltd. has an Annual demand from a single customer for 60,000 Covid-19 vaccines. The customer prefers
to order in the lot of 15,000 vaccines per order. The production cost of vaccine is `5,000 per vaccine. The set-
up cost per production run of Covid-19 vaccines is `4,800. The carrying cost is `12 per vaccine per month.

Required:
(a) Find out most Economical Production Run.
(b) Calculate the extra cost that company incurs due to production of 15,000 vaccines in a batch.
[(5 Marks) July 2021]

5.16
 CHAPTER 5 JOB & BATCH COSTING

Answer
2 DS 2 × 60 ,000 × 4 ,800
(a) Economic Production Run = = = 2,000 vaccines
C 12 × 12

(b) Calculation of Extra Cost:

Particulars At EBQ 2,000 At RBQ 15,000
Set up Cost (D/RBQ × S) 1,44,000 19,200
Carrying cost (RBQ × ½ × C) 1,44,000 10,80,000
Total Cost 2,88,000 10,99,200
Extra Cost - 8,11,200

PYQ 6
In a manufacturing company, the overhead is recovered as follows:
Factory Overheads: a fixed percentage basis on direct wages and
Administrative overheads: a fixed percentage basis on factory cost.

The company has furnished the following data relating to two jobs undertaken by it in a period.
Particulars Job 1 (`) Job 2 (`)
Direct Materials 1,08,000 75,000
Direct Wages 84,000 60,000
Selling Price 3,33,312 2,52,000
Profit percentage on total cost 12% 20%

You are required to:

(a) Compute the percentage recovery rates of factory overheads and administrative overheads.
(b) Calculate the amount of factory overheads, administrative overheads and profit for each of the two
jobs.
(c) Using the above recovery rates, determine the selling price to be quoted for job 3. Additional data
pertaining to Job 3 is as follows:
Direct Materials `68,750
Direct Wages `22,500
Profit percentage on selling price 15%
[(10 Marks) May 2022]

Answer
(a) Computation of percentage recovery rates of factory overheads and administration overheads:
Let % of factory overheads to direct wages be F and % of administrative overheads to factory cost be A

Jobs Cost Sheet

Particulars Job 1 Job 2
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
Factory overheads 84,000F 60,000F
Factory cost 1,92,000+84,000F 1,35,000+60,000F
Administration overheads (1,92,000+84,000F)A (1,35,000+60,000F)A
(1,92,000+84,000F)+ (1,35,000+60,000F)+
Total cost (1,92,000+84,000F)A (1,35,000+60,000F)A
= 2,97,600 = 2,10,000

5.17
 JOB & BATCH COSTING CHAPTER 5

* Computation of total cost of jobs:

3 ,33 ,312
Total cost of Job 1 when 12% is the profit on cost = = `2,97,600
112 %

2 ,52 ,000
Total cost of Job 2 when 20% is the profit on cost = = `2,10,000
120 %

Now, we have the following equations:

1,92,000 + 84,000 F + 1,92,000A + 84,000 FA = 2,97,600 (1)
1,35,000 + 60,000F + 1,35,000A + 60,000FA = 2,10,000 (2)

Multiply equation (1) by 5 and equation (2) by 7

9,60,000 + 4,20,000 F + 9,60,000A + 4,20,000 FA = 14,88,000 (3)

9,45,000 + 4,20,000F + 9,45,000A + 4,20,000FA = 14,70,000 (4)

By subtracting equation (4) from (3):

15,000 + 15,000 A = 18,000

15,000A = 3,000
A = 0.2 or 20%

Now putting the value of A in equation (1) to find the value of F:

1,92,000 + 84,000F + 1,92,000 × 0.2 + (84,000F × .2 = 2,97,600

84,000 F + 16,800 F = 67,200
F = 0.6667 or 66.67%

(b) Statement Showing Amount of Factory Overheads, Administrative Overheads and Profit
Particulars Job 1 Job 2
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
Factory overheads (66.67% of wages) 56,000 40,000
Factory cost 2,48,000 1,75,000
Administration overheads (20% of factory cost) 49,600 35,000
Total cost 2,97,600 2,10,000
Profit 35,712 42,000
Selling Price 3,33,312 2,52,000

(c) Selling Price of the Job 3

Particulars Amount
Materials 68,750
Productive Wages 22,500
Prime Cost 91,250
Factory Overheads (66.67% of 22,500) 15,000
Factory Cost 1,06,250
Admin Overheads (20% of 1,06,250) 21,250
Total Cost 1,27,500
Profit 22,500
Sale Price (1,27,500 ÷ 85%) 1,50,000

5.18
 CHAPTER 5 JOB & BATCH COSTING

PYQ 7
A Ltd. is a pharmaceutical company which produces vaccines for diseases like Monkey Pox, Covid-19 and
Chickenpox. A distributor has given an order for 1,600 Monkey pox vaccines. The company can produce 80
vaccines at a time. To process a batch of 80 Monkey Pox vaccines, the following costs would be incurred:

Direct materials `4,250

Direct wages `500
Lab set-up cost `1,400

The production overheads are absorbed at a rate of 20% of direct wages and 20% of total production cost is
charged in each batch for selling, distribution and administration overheads. The company is willing to earn
profit of 25% on sales value.

You are required to determine:

(a) Total sales value for 1,600 Monkey Pox vaccines

(b) Selling price per unit of vaccine.
[(5 Marks) Nov 2022]

Answer
(a) Statement Showing Sales Value of 1,600 Vaccines
Particulars Amount
Direct materials (4,250 × 20 batches) 85,000
Direct wages (500 × 20 batches) 10,000
Lab set-up cost (1,400 × 20 batches) 28,000
Prime cost 1,23,000
Add: Production overhead (20% on direct wages) 2,000
Total Production Cost 1,25,000
Add: S & D and Administration overhead (20% of production Cost) 25,000
Total Cost 1,50,000
Add : Profit 50,000
Selling Price (1,50,000 ÷ 75%) 2,00,000

No. of batch = 1,600 units ÷ 80 units = 20 batches

(b) Selling price per vaccine = 2,00,000 ÷ 1,600 = `125

PYQ 8
TSK Limited manufactures a variety of products. The annual demand for one of its products ‘X’ is estimated
as 1,35,000 units. Product ‘X’ is to be manufactured done in batches. Set up cost of each batch is `3,375 and
inventory holding cost is `5 per unit. It is expected that demand of product ‘X’ would be uniform throughout
the year.

Required:

(a) Calculate the Economic Batch Quantity (EBQ) for Product ‘X’.
(b) Assuming that the company has a policy of manufacturing 7,500 units of Product ‘X’ per batch, calculate
the additional cost incurred as compared to the cost incurred as per Economic Batch Quantity (EBQ) as
computed in (a) above.
[(5 Marks) May 2023]

5.19
 JOB & BATCH COSTING CHAPTER 5

Answer
2 DS 2  1 ,35,000  3,375
(a) Economic Batch Quantity = = = 13,500 units
C 5

(b) Calculation of Additional Cost:

Particulars At EBQ 13,500 At RBQ 7,500
Set up Cost (D/RBQ × S) 33,750 60,750
Carrying cost (RBQ × ½ × C) 33,750 18,750
Total Cost 67,500 79,500
Additional Cost - 12,000

SUGGESTED REVISION FOR EXAM:

BQ: 2, 3, 4, 7, 8, 9, 10

PYQ: 2

5.20
 CHAPTER 6 ACTIVITY BASED COSTING

CHAPTER 6 ACTIVITY BASED COSTING

BQ 1
ABC Ltd. is a multiproduct company, manufacturing three products A, B and C. The budgeted costs and
production for the year ending 31st March, 2023 are as follows:
Particulars A B C
Production quantity (in units) 4,000 3,000 1,600
Resources per unit:
Direct materials (kg.) 4 6 3
Direct labour (minutes) 30 45 60

The budgeted direct labour rate was `10 per hour, and the budgeted material cost was `2 per kg. Production
overheads were budgeted at `99,450 and were absorbed to products using the direct labour hour rate. ABC
Ltd. followed an Absorption Costing System.
ABC Ltd. is now considering to adopt an Activity Based Costing system. The following additional
information is made available for this purpose.

1. Budgeted overheads were analysed into the following:

Particulars (`)
Material handling 29,100
Storage costs 31,200
Electricity 39,150

2. The cost drivers identified were as follows:

Material handling Weight of material handled
Storage costs Number of batches of material
Electricity Number of Machine operations

3. The cost drivers identified were as follows:

Particulars A B C
For complete production:
Batches of material 10 5 15
Per unit of production:
Number of Machine operations 6 3 2

You are requested to:

(1) Prepare a statement for management showing the unit costs and total costs of each product using the
absorption costing method.
(2) Prepare a statement for management showing the product costs of each product using the ABC
approach.
(3) What are the reasons for the different product costs under the two approaches?

Answer
(1) Statement Showing Unit Cost and Total Cost Using Absorption Costing Method
Particulars A (`) B (`) C (`)
Direct Material 8.00 12.00 6.00
Direct Labour 5.00 7.50 10.00
Production Overhead @ `17.00 per hour 8.50 12.75 17.00
(17 × 30/60) (17 × 45/60) (17 × 60/60)

6.1
 ACTIVITY BASED COSTING CHAPTER 6

Total Unit Cost 21.50 32.25 33.00

Number of units 4,000 3,000 1,600
Total Cost (total unit cost × number of units) 86,000 96,750 52,800

Calculation of overhead rate per direct labour hour:

Overhead recovery rate = Budgeted overheads ÷ Budgeted labour hours

= `99,450 ÷ 5,850 hours = `17 per hour

Budgeted labour hours = 4,000 A × 30/60 + 3,000 B × 45/60 + 1,600 C × 60/60

= 5,850 hours

(2) Statement Showing Unit Cost and Total Cost Using ABC Method
Particulars A (`) B (`) C (`)
Direct Material 8.00 12.00 6.00
Direct Labour 5.00 7.50 10.00
Production Overhead:
Material handling @ `0.75 per kg 3.00 4.50 2.25
(4 × 0.75) (6 × 0.75) (3 × 0.75)
Electricity @ `1.082 per operation 6.49 3.25 2.16
(6 × 1.082) (3 × 1.082) (2 × 1.082)
Storage @ `1,040 per batch 2.60 1.73 9.75
 1 ,040   1 ,040   1 ,040 
 10   5    15  
 4 ,000   3,000   1 ,600 

Total Unit Cost 25.09 28.98 30.16

Number of units 4,000 3,000 1,600
Total Cost (total unit cost × number of units) 1,00,360 86,940 48,256

Calculation of Activity rate:

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material handling `29,100 Weight of material handled 38,800 `0.75 per kg
Storage costs `31,200 No. of batches of material 30 `1,040 per batch
Electricity `39,150 No. of Machine operations 36,200 `1.082 per operation

Total weight = 4,000 × 4 kg + 3,000 × 6 kg + 1,600 × 3 kg = 38,800 kgs

Total machine operations = 4,000 × 6 + 3,000 × 3 + 1,600 × 2 = 36,200 oper.

Total batches = 10 + 5 + 15 = 30 batches

(3) Comment: The difference in the total costs under the two systems is due to the differences in the
overheads borne by each of the products. The Activity Based Costs appear to be more precise.

BQ 2
Woolmark Ltd. manufactures three types of products namely P, Q and R. The data relating to a period are as
under:
Particulars P Q R
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (`) 90 80 120
Production (units) 3,000 5,000 20,000

6.2
 CHAPTER 6 ACTIVITY BASED COSTING

Currently the company uses traditional costing method and absorbs all production overheads on the basis of
machine hours. The machine hour rate of overheads is `6 per hour. Direct labour hour rate is `20 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:
Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3

The total production overheads are analysed as under:

Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
1. Calculate the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
2. Calculate the cost per unit of each product using activity based costing principles.

Answer
1. Statement Showing “Cost per unit as per Traditional Method”
Particulars P (`) Q (`) R (`)
Direct Materials 90 80 120
Direct Labour [(4, 12, 8 hours) × `20] 80 240 160
Production Overheads [(10, 18, 14 hours) × `6] 60 108 84
Cost per unit 230 428 364

2. Statement Showing “Cost per unit as per ABC Method”

Particulars P (`) Q (`) R (`)
Production (units) 3,000 5,000 20,000
Direct Materials @ `90/`80/`120 per unit 2,70,000 4,00,000 24,00,000
Direct Labour @ `80/`240/`160 per unit 2,40,000 12,00,000 32,00,000
Production Overhead:
Machine Related Costs @ `1.80 per hour of 30,000/ 54,000 1,62,000 5,04,000
90,000/2,80,000 hours
Setup Costs @ `9,600 per setup of 20/10/20 set ups 1,92,000 96,000 1,92,000
Inspection Costs @ `4,800 per inspection of 4,80,000 1,92,000 2,88,000
100/40/60 inspection
Purchase Related Costs @ `750 per purchase of 45,000 75,000 1,20,000
60/100/160 purchases
Total Costs 12,81,000 21,25,000 67,04,000
Cost per unit (Total Cost ÷ Units) 427.00 425.00 335.20

Working Notes:

(a) Total Machine Hours = 3,000 × 10 + 5,000 × 18 + 20,000 × 14 = 4,00,000 hours

(b) Total Production OH = 4,00,000 machine hours × `6 = `24,00,000

(c) Total no. of Batches = (3,000 ÷ 150) + (5,000 ÷ 500) + (20,000 ÷ 1,000)
= 20 batches + 10 batches + 20 batches = 50 batches

6.3
 ACTIVITY BASED COSTING CHAPTER 6

(d) Total no. of Inspections = 5 × 20 batches + 4 × 10 batches + 3 × 20 batches

= 200 inspections

(e) Total no. of Purchase Order = 3 × 20 batches + 10 × 10 batches + 8 × 20 batches

= 320 orders

(f) Statement Showing Cost Driver Rate:

Cost Pool % Overheads Cost Driver Basis Volume Cost Driver Rate
Setup 20% 4,80,000 Number of batches 50 9,600/Setup
Inspection 40% 9,60,000 Number of inspections 200 4,800/Inspection
Purchases 10% 2,40,000 Number of purchases 320 750/Purchase
Machine Hours 30% 7,20,000 Machine Hours 4,00,000 1.80/Machine Hour
Total - 24,00,000 - - -

BQ 3
BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three ranges of beauty
soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond. The budgeted costs and production
for the month of December, 2022 are as follows:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond

Production (Units) 4,000 3,000 2,000
Resources per Unit: Qty Rate Qty Rate Qty Rate
Essential Oils 60 ml `200/100 ml 55 ml `300/100 ml 65 ml `300/100 ml
Cocoa Butter 20 g `200/100 g 20 g `200/100 g 20 g `200/100 g
Filtered Water 30 ml `15/100 ml 30 ml `15/100 ml 30 ml `15/100 ml
Chemicals 10 g `30/100 g 12 g `50/100 g 15 g `60/100 g
Direct Labour 30 minutes `10/hour 40 minutes `10/hour 60 minutes `10/hour

Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to its
products using direct labour hour rate, which were budgeted at `1,98,000.

Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:

Particulars (`) Cost drivers

Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations

The number of machine operations per unit of production are 5, 5, and 6 for BABYSOFT- Gold, BABYSOFT-
Pearl, and BABYSOFT- Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively (ii)
Mass of output produced is equivalent to the mass of input materials taken together.)

You are requested to:

1. Prepare a statement showing the unit costs and total costs of each product using the absorption costing
method.
2. Prepare a statement showing the product costs of each product using the ABC approach.
3. State what are the reasons for the different product costs under the two approaches?

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 CHAPTER 6 ACTIVITY BASED COSTING

Answer
1. Statement Showing “Unit Cost and Total Cost as per Absorption Costing”
BABYSOFT- BABYSOFT- BABYSOFT-
Particulars
Gold Pearl Diamond
Number of units 4,000 3,000 2,000
Direct Materials 167.50 215.50 248.50
Direct Labour [(30, 40, 60 minutes) @ `10 per hour 5.00 6.67 10.00
Production OH [(30, 40, 60 minutes) @ `33 per hour 16.50 22.00 33.00
Cost per unit 189.00 244.17 291.50
Total cost (Cost per unit × number of units) 7,56,000 7,32,510 5,83,000

Working notes:
(a) Total Direct labour hours = 4,000 units × 30/60 + 3,000 × 40/60 + 2,000 × 1 hour
= 2,000 hours + 2,000 hours + 2,000 hours
= 6,000 hours

(b) Overhead rate = Budgeted overheads ÷ Budgeted labour hours

= `1,98,000 ÷ 6,000 hours
= `33/direct labour hour

(c) Calculation of Direct material cost

BABYSOFT- Gold (`) BABYSOFT- Pearl (`) BABYSOFT- Diamond (`)
120.00 165.00 195.00
Essential oils 200 × 60 300 × 55 300 × 65
( ) ( ) ( )
100 100 100
40.00 40.00 40.00
Cocoa Butter 200 × 20 200 × 20 200 × 20
( ) ( ) ( )
100 100 100
4.50 4.50 4.50
Filtered water 30 × 15 30 × 15 30 × 15
( ) ( ) ( )
100 100 100
3.00 6.00 9.00
Chemicals 30 × 10 50 × 12 60 × 15
( ) ( ) ( )
100 100 100
Total cost 167.50 215.50 248.50

2. Statement Showing “Unit Cost and Total Cost as per ABC Costing”
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT-
Particulars
Diamond
Number of units 4,000 3,000 2,000
Direct Materials 167.50 215.50 248.50
Direct Labour 5.00 6.67 10.00
Production OH:
Forklifting cost 6.48 6.36 7.02
(0.06 × 108) (0.06 × 106) (0.06 × 117)
Supervising cost 5.00 6.67 10.00
(10 × 30/60) (10 × 40/60) (10 × 60/60)
Utilities 8.50 8.50 10.20
(1.70 × 5) (1.70 × 5) (1.70 × 6)
Cost per unit 192.48 243.70 285.72
Total cost 7,69,920 7,31,100 5,71,440

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 ACTIVITY BASED COSTING CHAPTER 6

Working notes:
(a) Forklifting rate = `58,000 ÷ 9,84,000 grams = `0.06 per gram

(b) Supervising rate = `60,000 ÷ 6,000 hours labour hour = `10 labour hour

(c) Utilities rate = `80,000 ÷ 47,000 machine operations = `1.70/machine operations

(d) Calculation of Total Weight and Total Operations:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond Total
Quantity (units) 4,000 3,000 2,000 -
Weight per unit (grams) 108 106 117 -
{(60×0.8)+20+30+10} {(55×0.8)+20+30+12} {(65×0.8)+20+30+15}
Total weight (grams) 4,32,000 3,18,000 2,34,000 9,84,000
(4,000 × 108) (3,000 × 106) (2,000 × 117)
Total operations 20,000 15,000 12,000 47,000
(4,000 × 5) (3,000 × 5) (2,000 × 6)

3. Comments: The difference in the total costs under the two systems is due to the differences in the
overheads borne by each of the products. The Activity Based Costs appear to be more accurate.

BQ 4
RST Limited specializes in the distribution of pharmaceutical products. It buys from the pharmaceutical
companies and resells to each of the three different markets.

(1) General Supermarket Chains

(2) Drugstore Chains
(3) Chemist Shops

The following data for the month of April, 2023 in respect of RST Limited has been reported:
General Supermarket Drugstore Chains Chemist Shops
Particulars
Chains (`) (`) (`)
Average revenue per delivery 84,975 28,875 5,445
Average cost of goods sold per delivery 82,500 27,500 4,950
Number of deliveries 330 825 2,750

In the past, RST Limited has used gross margin percentage to evaluate the relative profitability of its
distribution channels. The company plans to use activity based costing for analysing the profitability of its
distribution channels.

The Activity analysis of RST Limited is as under:

Activity Area Cost Driver
Customer purchase order processing Purchase orders by customers
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store per delivery
Shelf-stocking at customer store Hours of shelf-stocking

The April, 2023 operating costs (other than cost of goods sold) of RST Limited are `8,27,970. These operating
costs are assigned to five activity areas. The cost in each area and the quantity of the cost allocation basis
used in that area for April, 2023 are as follows:

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 CHAPTER 6 ACTIVITY BASED COSTING

Total costs in Total Units of Cost Allocation

Activity Area
April, 2023 (`) Base used in April, 2023
Customer purchase order processing 2,20,000 5,500 orders
Line-item ordering 1,75,560 58,520 line items
Store delivery 1,95,250 3,905 store deliveries
Cartons dispatched to store 2,09,000 2,09,000 cartons dispatched
Shelf-stocking at customer store 28,160 1,760 hours

Other data for April, 2023 include the following:

Supermarket Drugstore Chemist
Particulars
Chains Chains Shops
Total number of orders 385 990 4,125
Average number of line items per order 14 12 10
Total number of store deliveries 330 825 2,750
Average no. of cartons shipped per store delivery 300 80 16
Average no. of hours of shelf stocking per store delivery 3 0.6 0.1

Required:
(1) Compute for April, 2023 gross-margin percentage for each of its three distribution channels and
compute RST Limited’s operating income.
(2) Compute the April, 2023 rate per unit of the cost-allocation base for each of the five activity areas.
(3) Compute the operating income of each distribution channel in April, 2023 using the activity based
costing information. Comment on the results. What new insights are available with the activity based
cost information?
(4) Describe four challenges one would face in assigning the total April, 2023 operating costs of `8,27,970
to five activity areas.

Answer
(1) Statement of Operating Income and Gross Margin % for Each of its Three Distribution Channel
Particulars Supermarket Drugstore Chemist Shops Total
Number of deliveries 330 825 2,750 -
Average revenue per delivery 84,975 28,875 5,445 -
(`) 82,500 27,500 4,950 -
Average COGS per delivery (`)
Revenue (`) 2,80,41,750 2,38,21,875 1,49,73,750 6,68,37,375
Less: Cost of goods sold (`) 2,72,25,000 2,26,87,500 1,36,12,500 6,35,25,000
Gross Margin (`) 8,16,750 11,34,375 13,61,250 33,12,375
Less: Other operating cost (`) - - - 8,27,970
Operating income (`) - - - 24,84,405
Gross Margin (%) 2.91% 4.76% 9.09% 4.96%
Operating income (%) - - - 3.72%

(2) Computation of rate per unit of the cost allocation base for each of the five activity areas
Rate per Unit of the Cost
Activity Area Calculation
Allocation Base (`)
Customer purch. order processing `2,20,000 ÷ 5,500 orders `40 per order
Line-item ordering `1,75,560 ÷ 58,520 line items `3 per line item
Store delivery `1,95,250 ÷ 3,905 store deliveries `50 per delivery
Cartons dispatched to store `2,09,000 ÷ 2,09,000 cartons `1 per carton dispatched
Shelf-stocking at customer store `28,160 ÷ 1,760 hours `16 per hour

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 ACTIVITY BASED COSTING CHAPTER 6

(3) Statement of Operating Income of Each Distribution Channel Using ABC Method
Particulars Supermarket Drugstore Chemist Shops
Gross Margin (`) 8,16,750 11,34,375 13,61,250
Less: Other operating cost (`) (WN) 1,62,910 1,90,410 4,74,650
Operating income (`) 6,53,840 9,43,965 8,86,600
Operating income (%) (Operating income ÷ Sales) 2.33% 3.96% 5.92%

Comments and new insights: The activity-based cost information highlights, how the ‘Chemist Shops’ uses
a larger amount of RST Ltd’s resources per revenue than do the other two distribution channels. Ratio of
operating costs to revenues, across these markets is:
Markets Calculation Operating cost ratio
General supermarket chains (1,62,910 ÷ 2,80,41,750) × 100 0.58%
Drug store chains (1,90,410 ÷ 2,38,21,875) × 100 0.80%
Chemist shops (4,74,650 ÷ 1,49,73,750) × 100 3.17%

Working note:

Computation of operating cost of each distribution channel:

Activities Supermarket Chains Drugstore Chains Chemist Shops
Customer purchase order process 15,400 39,600 1,65,000
(385 × `40) (990 × `40) (4,125 × `40)
Line item ordering 16,170 35,640 1,23,750
(385 × 14 × `3) (990 × 12 × `3) (4,125 × 10 × `3)
Store delivery 16,500 41,250 1,37,500
(330 × `50) (825 × `50) (2,750 × `50)
Cartons dispatched 99,000 66,000 44,000
(330 × 300 × `1) (825 × 80 × `1) (2,750 × 16 × `1)
Shelf-stocking 15,840 7,920 4,400
(330 × 3 × `16) (825 × 0.6 × `16) (2,750 × 0.1 × `16)
Operating cost 1,62,910 1,90,410 4,74,650

(4) Challenges faced in assigning total operating cost of `8,27,970:

- Choosing an appropriate cost driver for activity area.
- Developing a reliable data base for the chosen cost driver.
- Deciding, how to handle costs that may be common across several activities.
- Choice of the time period to compute cost rates per cost driver.
- Behavioural factors.

BQ 5
Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce
and Packaged food. Family store provides the following data for the year 2022-23 for each product line:
Soft drinks Fresh produce Packaged food
Revenues `39,67,500 `1,05,03,000 `60,49,500
Cost of goods sold `30,00,000 `75,00,000 `45,00,000
Cost of bottles returned `60,000 `0 `0
Number of purchase orders placed 360 840 360
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000

Family store also provides the following information for the year 2022-23:

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 CHAPTER 6 ACTIVITY BASED COSTING

Activity Description of activity Total Cost Cost-allocation base

Bottles returns Returning of empty bottles `60,000 Direct tracing to soft drink line
Ordering Placing of orders for purchases `7,80,000 1,560 purchase orders
Delivery Physical delivery and receipt of goods `12,60,000 3,150 deliveries
Shelf stocking Stocking of goods on store shelves `8,64,000 8,640 hours of shelf-stocking
and ongoing restocking time
Customer Assistance provided to customers `15,36,000 15,36,000 items sold
Support including check-out

Required:
1. Family store currently allocates support cost (all cost other than cost of goods sold) to product lines
on the basis of cost of goods sold of each product line. Calculate the operating income and operating
income as a % of revenues for each product line.
2. If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using
an activity-based costing system, Calculate the operating income and operating income as a % of
revenues for each product line.

Answer
1. Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines on the basis of cost of goods sold of each product)
Soft Drinks Fresh Packaged Total (`)
(`) Produce (`) Foods (`)
Revenues 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS) 30,00,000 75,00,000 45,00,000 1,50,00,000
Support cost (30% of COGS) 9,00,000 22,50,000 13,50,000 45,00,000
Total cost 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income (Sales – Total cost) 67,500 7,53,000 1,99,500 10,20,000
% of Operating income to Sales 1.70% 7.17% 3.30% 4.97%

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

(b) Total support cost = 60,000 + 7,80,000 + 12,60,000 + 8,64,000 + 15,36,000

= 45,00,000

45,00,000
(c) Percentage of support cost to COGS = × 100 = 30%
1,50,00,000

2. Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines using an activity based costing system)
Soft Drinks Fresh Packaged Total (`)
(`) Produce (`) Foods (`)
Revenues 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS) 30,00,000 75,00,000 45,00,000 1,50,00,000

6.9
 ACTIVITY BASED COSTING CHAPTER 6

Bottle return costs 60,000 - - 60,000

Ordering cost (360 : 840 : 360) 1,80,000 4,20,000 1,80,000 7,80,000
Delivery cost (300 : 2190 : 660) 1,20,000 8,76,000 2,64,000 12,60,000
Shelf stocking cost (540 : 5400 : 2700) 54,000 5,40,000 2,70,000 8,64,000
Customer Support cost (1,26,000 : 1,26,000 11,04,000 3,06,000 15,36,000
11,04,000 : 3,06,000)
Total cost 35,54,000 1,04,40,000 55,20,000 1,95,00,000
Operating income (Sales – Total cost) 4,27,500 63,000 5,29,500 10,20,000
% of Operating income to Sales 10.78% 0.60% 8.75% 4.97%

BQ 6
MST Limited has collected the following data for its two activities. It calculates activity cost rates based on
cost driver capacity.
Activity Cost Driver Capacity Cost
Power Kilowatt hours 50,000 kilowatt hours `2,00,000
Quality inspection Number of inspections 10,000 inspections `3,00,000

The company makes three products M, S and T. For the year ended March 31, 2023, the following
consumption of cost drivers was reported:
Product Kilowatt hours Quality inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000

Required:
(1) Compute the costs allocated to each product from each activity.
(2) Calculate the cost of unused capacity for each activity.
(3) Discuss the factors the management considers in choosing a capacity level to compute the budgeted
fixed overhead cost rate.

Answer
(1) Statement of Cost Allocation to Each Product from Each Activity
Product
Activity
M (`) S (`) T (`) Total (`)
Power @ `4 per kwh 40,000 80,000 60,000 1,80,000
(10,000 × `4) (20,000 × `4) (15,000 × `4)

Quality inspection @ `30 per inspection 1,05,000 75,000 90,000 2,70,000

(3,500 × `30) (2,500 × `30) (3,000 × `30)

Working note:
Cost driver rate/Activity rate:
Power = `2,00,000 ÷ 50,000 kwh = `4 per kwh
Quality inspection = `3,00,000 ÷ 10,000 inspections = `30 per inspection

(2) Computation of cost of unused capacity for each activity:

Power = `2,00,000 - `1,80,000 = `20,000
Quality inspection = `3,00,000 - `2,70,000 = `30,000

Total cost of unused capacity is `50,000.

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 CHAPTER 6 ACTIVITY BASED COSTING

(3) Factors management consider in choosing a capacity level to compute the budgeted fixed
overhead cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting chosen capacity level concepts.

BQ 7
ABC Ltd. manufactures two types of machinery equipment Y and Z and applies/absorbs overheads on the
basis of direct labour hours. The budgeted overheads and direct labour hours for the month of December,
2023 are `12,42,500 and 20,000 hours respectively.

The information about Company’s products is as follows:

Particulars Equipment Y Equipment Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost `300 per unit `450 per unit
Direct labour cost:
Y : 3 hours @ `150 per hour `450 -
Z : 4 hours @ `150 per hour - `600

ABC Ltd.’s overheads of `12,42,500 can be identified with three major activities: Order Processing
(`2,10,000), machine processing (`8,75,000), and product inspection (`1,57,500). These activities are driven
by number of orders processed, machine hours worked, and inspection hours, respectively. The data relevant
to these activities is as follows:
Equipments Orders processed Machine hours worked Inspection hours
Y 350 23,000 4,000
Z 250 27,000 11,000
Total 600 50,000 15,000

Required:
(1) Assuming use of direct labour hours to absorb/apply overheads to production, compute the unit
manufacturing cost of the equipment Y and Z, if the budgeted manufacturing volume is attained.
(2) Assuming use of activity based costing, compute the unit manufacturing costs of the equipment Y and Z,
if the budgeted manufacturing volume is achieved.
(3) ABC Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application base,
calculate the amount of cost distortion (under-costed or overcosted) for each equipment.

Answer
(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method
Particulars Equipment Y Equipment Z
Direct material cost `300 `450
Direct labour cost `450 `600
Overheads @ `62.125 per hour for 3 hours and 4 hours `186.38 `248.50
Manufacturing cost per unit `936.38 `1,298.50

Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours

= `12,42,500 ÷ 20,000 hours = `62.125/hour

Total labour hours = 2,500 units of Y × 3 hours + 3,125 units of Y × 4 hours

= 20,000 hours

6.11
 ACTIVITY BASED COSTING CHAPTER 6

(2) Statement Showing Unit Manufacturing Cost Using ABC Method

Particulars Equipment Y Equipment Z
Direct material cost `300 `450
Direct labour cost `450 `600
Overheads per unit (W.N.) `226.80 `216.16
Manufacturing cost per unit `976.80 `1,266.16

(3) Statement Showing Cost Distortion

Particulars Equipment Y Equipment Z
Unit manufacturing cost:
Using direct labour hours as an application base 936.38 1298.50
Using activity based costing 976.80 1,266.16
Cost distortion (-) 40.42 + 32.34
Low volume product Y is under-costed and high volume product Z is over-costed using direct labour hours
for overhead absorption.

Working note:
Calculation of overheads cost per unit under ABC costing
Overheads
Activity Overhead cost Cost driver Ratio
Y Z
Order processing `2,10,000 Orders processed 350 : 250 `1,22,500 `87,500
Machine processing `8,75,000 Machine hours 23,000 : 27,000 `4,02,500 `4,72,500
Inspection `1,57,500 Inspection hours 4,000 : 11,000 `42,000 `1,15,500
Total overheads `5,67,000 `6,75,500
÷ Number of units ÷ 2,500 ÷ 3,125
Overhead per unit `226.80 `216.16

BQ 8
Alpha Limited has decided to analyse the profitability of its five new customers. It buys bottled water at `90
per case and sells to retail customers at a list price of `108 per case. The data pertaining to five customers
are:
Customers
Particulars
A B C D E
Cases sold 4,680 19,688 1,36,800 71,550 8,775
List Selling Price (`) 108 108 108 108 108
Actual Selling Price (`) 108 106.20 99 104.40 97.20
Number of Purchase orders 15 25 30 25 30
Number of Customer visits 2 3 6 2 3
Number of deliveries 10 30 60 40 20
Kilometres travelled per delivery 20 6 5 10 30
Number of expedited deliveries 0 0 0 0 1

Its five activities and their cost drivers are:

Activity Cost Driver Rate
Order taking `750 per purchase order
Customer visits `600 per customer visit
Deliveries `5.75 per delivery Km travelled
Product handling `3.75 per case sold
Expedited deliveries `2,250 per expedited delivery

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 CHAPTER 6 ACTIVITY BASED COSTING

Required:
(1) Compute the customer-level operating income of each of five retail customers now being examined (A,
B, C, D and E). Comment on the results.
(2) What insights are gained by reporting both the list selling price and the actual selling price for each
customer?

Answer
(1) Computation of Customer Level Operating Income
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Cases sold 4,680 19,688 1,36,800 71,550 8,775
Revenue at list price @ `108 p.u. 5,05,440 21,26,304 1,47,74,400 77,27,400 9,47,700
Less: Discount - 35,438 12,31,200 2,57,580 94,770
Revenue net of discount 5,05,440 20,90,866 1,35,43,200 74,69,820 8,52,930
Less: COGS @ `90 p.u. 4,21,200 17,71,920 1,23,12000 64,39,500 7,89,750
Gross Margin 84,240 3,18,946 12,31,200 10,30,320 63,180
Less: Customer level operating 31,150 95,415 5,40,825 2,90,563 62,906
activities cost (W.N.)
Customer level Operating income 53,090 2,23,531 6,90,375 7,39,757 274

Comment on the results: Customer D is the most profitable customer. D’s profits are even higher than C
(whose revenue is the highest) despite having only 52.30% of the unit volume of customer C. The main
reason is that C receives a discount of ` 9 per case while customer D receives only a ` 3.60 discount per case.

Customer E is the least profitable. The profits of E is even less than A (whose revenue is least) Customer
E received a discount of ` 10.80 per case, makes more frequent orders, requires more customer visits and
requires more delivery kms. in comparison with customer A.

Working note:
Computation of customer level operating activities costs:

Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Order taking costs (`) 11,250 18,750 22,500 18,750 22,500
(No. of purchase × `750)
Customer visits costs (`) 1,200 1,800 3,600 1,200 1,800
(No. of customer visits × `600)
Delivery vehicles travel costs (`) 1,150 1,035 1,725 2,300 3,450
(Kms travelled × `5.75 per km.)
Product handling costs (`) 17,550 73,830 5,13,000 2,68,313 32,906
(units × `3.75)
Cost of expediting deliveries (`) - 2,250
(No. of expedited deliveries × `2,250)
Total cost of customer level operating
31,150 95,415 5,40,825 2,90,563 62,906
activities (`)

(2) Insight gained by reporting both the list selling price and the actual selling price for each customer:
Separate reporting of both-the listed and actual selling prices enables Alpha Ltd. To examine which customer
has received what discount per case, whether the discount received has any relationship with the sales
volume. The data given below provides us with the following information;

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 ACTIVITY BASED COSTING CHAPTER 6

Sales volume Discount per case (`)

C (1,36,800 cases) 9.00
D (71,550 cases) 3.60
B (19,688 cases) 1.80
E (8,775 cases) 10.80
A (4,680 cases) 0

The above data clearly shows that the discount given to customers per case has a direct relationship with
sales volume, except in the case of customer E. The reasons for `10.80 discount per case for customer E
should be explored.

BQ 9
‘Humara Apna’ bank offers three products, viz., deposits, Loans and Credit Cards. The bank has selected 4
activities for a detailed budgeting exercise, following activity based costing methods. The bank wants to
know the product wise total cost per unit for the selected activities, so that prices may be fixed accordingly.

The following information is made available to formulate the budget:

Present
Activity Estimation for the budget period
Cost (`)
ATM Services:
(a) Machine Maintenance 4,00,000 All fixed, no change.
(b) Rents 2,00,000 Fully fixed, no change.
(c) Currency Replenishment Cost 1,00,000 Expected to double during budget period.
Total 7,00,000 (This activity is driven by no. of ATM transactions)
Computer Processing 5,00,000 Half this amount is fixed and no change is expected.
The variable portion is expected to increase to three
times the current level.
(This activity is driven by the number of computer
transactions)
Issuing Statements 18,00,000 Presently, 3 lakh statements are made. In the budget
period, 5 lakh statements are expected.
For every increase of one lakh statement, one lakh
rupees is the budgeted increase.
(This activity is driven by the number of statements)
Computer Inquiries 2,00,000 Estimated to increase by 80% during the budget period.
(This activity is driven by telephone minutes)

The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit Cards
No. of ATM Transactions 1,50,000 - 50,000
No. of Computer Processing Transactions 15,00,000 2,00,000 3,00,000
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000

The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000 Credit Card
Accounts.

Required:
1. Calculate the budgeted rate for each activity.
2. Prepare the budgeted cost statement activity wise.
3. Compute the budgeted product cost per account for each product using (1) and (2) above.

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 CHAPTER 6 ACTIVITY BASED COSTING

Answer
Statement Showing “Budgeted Cost per unit of the Product”
Acti
Budgeted Budgeted vity
Credit
Activity Activity Activity Driver Activity Rat Deposits Loans
Cards
Cost (`) Driver units e
(`)
ATM Services 8,00,000 No. of ATM 2,00,000 4.00 6,00,000 - 2,00,000
Transaction
Computer 10,00,000 No. of Computer 20,00,000 0.50 7,50,000 1,00,000 1,50,000
Processing processing
Transaction
Issuing 20,00,000 No. of Statements 5,00,000 4.00 14,00,000 2,00,000 4,00,000
Statements
Computer 3,60,000 Telephone 7,20,000 0.50 1,80,000 90,000 90,000
Inquiries Minutes
Budgeted Cost 41,60,000 29,30,000 3,90,000 8,40,000
Units of Product (as estimated in the budget period) 58,600 13,000 14,000
Budgeted Cost per unit of the product 50 30 60

Working Note:
Budgeted
Activity Remark
Cost (`)
ATM Services:
(a) Machine Maintenance 4,00,000 All fixed, no change.
(b) Rents 2,00,000 Fully fixed, no change.
(c) Currency Replenishment Cost 2,00,000 Doubled during budget period.
Total 8,00,000
Computer Processing 2,50,000 `2,50,000 (half of `5,00,000) is fixed and no change
is expected.
7,50,000 `2,50,000 (variable portion) is expected to increase
to three times the current level.
Total 10,00,000
Issuing Statements 18,00,000 Existing.
2,00,000 2 lakh statements are expected to be increased in
budgeted period. For every increase of one lakh
statement, one lakh rupees is the budgeted increase.
Total 20,00,000
Computer Inquiries 3,60,000 Estimated to increase by 80% during the budget
period. (`2,00,000 × 180%)

6.15
 ACTIVITY BASED COSTING CHAPTER 6

PAST YEAR QUESTIONS

PYQ 1
PQR pens Ltd. manufactures two products ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data for the year
2017:
Annual Output Total Machine Total Number of Total Number of
Product
(Units) Hours Purchase Orders Set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56

The annual overheads are as under:

Particulars `
Volume related activity costs 4,75,020
Set up related cost 5,79,988
Purchase related cost 5,04,992

Calculate the overhead cost per unit of each Product: Gel Pen and Ball Pen on the basis of:
(1) Traditional method of charging overheads
(2) Activity based costing method and
(3) Find out the difference in cost per unit between both the methods.
[(10 Marks) May 2018]

Answer
(1) Statement Showing Overhead Cost per unit “Traditional Method”
Particulars Gel Pen Ball Pen
Overheads @ `20 per machine hour `4,80,000 `10,80,000
(24,000 × 20) (54,000 × 20)
Number of units 5,500 24,000
Overheads Cost Per Unit `87.27 `45.00

Overheads Recovery Rate = Annual Overheads ÷ Annual Machine Hours

= (4,75,020 + 5,79,988 + 5,04,992) ÷ (24,000 + 54,000)
= `15,60,000 ÷ 78,000 = `20 per machine hour

Note: Overheads is recovered on the basis of Machine Hours (as per ICAI suggested answer).

(2) Statement Showing Overhead Cost per unit “Activity Based Costing”
Activity Cost Pool Cost Driver Ratio Amount Gel Pen Ball Pen
Volume related activity Machine Hours 24 : 54 4,75,020 1,46,160 3,28,860
costs
Set up related cost No. of Setups 30 : 56 5,79,988 2,02,321 3,77,667
Purchase related cost No. of Purchase Orders 240 : 448 5,04,992 1,76,160 3,28,832
Total Cost 5,24,641 10,35,359
÷ Total Units 5,500 24,000
Overheads Cost Per Unit `95.39 `43.14
Note: Machine hours is used as Cost driver of volume related activity cost (as per ICAI suggested answer).

(3) Difference in overheads cost per unit under both methods

Particulars Gel Pen Ball Pen
Overheads cost per unit (Traditional method) `87.27 `45.00

6.16
 CHAPTER 6 ACTIVITY BASED COSTING

Overheads cost per unit (Activity based cost) `95.39 `43.14

Difference in overheads cost per unit - `8.12 + `1.86

PYQ 2
M/s HMB Limited is producing a product in 10 batches each of 15,000 units in a year incurring the following
overheads their on:
Particulars (`)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800

The prime cost for the year amounted to `3,01,39,000. The company is using currently the method of
absorbing overheads on the basis of prime cost. Now it wants to shift to activity based costing.

Information relevant to activity drivers for a year are as under:

Activity Driver Activity Volume
No. of purchase orders 1,500
Maintenance hours 9,080
No. of set-ups 2,250
No. of inspections 2,710

The company has produced a batch of 15,000 units and has incurred `26,38,700 and `3,75,200 on materials
and wages respectively.

The usage of activities of the said batch are as follows:

Activity Driver Activity Volume
Material orders 48
Maintenance hours 810
No. of set-ups 40
No. of inspections 25

You are required to:

(1) Find out cost of product per unit on absorption costing basis for the said batch.
(2) Determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of activity
based costing.
[(10 Marks) Nov 2018]

Answer
(1) Statement Showing Unit Cost Using Absorption Costing Method
Particulars (`)
Direct Material 26,38,700
Direct Labour 3,75,200
Prime Cost 30,13,900
Production Overhead @ 17.1847% of Prime Cost 5,17,930
Total Cost 35,31,830
÷ Number of units ÷ 15,000
Cost Per Unit `235.46
Calculation of overhead rate:
Overheads Recovery Rate = (Total Overheads ÷ Total Prime Cost) × 100

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 ACTIVITY BASED COSTING CHAPTER 6

= [(22,50,000 + 17,30,000 + 6,84,500 + 5,14,800) ÷ 3,01,39,000] × 100

= 17.1847 % of Prime Cost

(2) Statement Showing Unit Cost and Total Cost Using ABC Method
Particulars (`)
Direct Material 26,38,700
Direct Labour 3,75,200
Prime Cost 30,13,900
Production Overhead:
Material procurement (`1,500 × 48 orders) 72,000
Maintenance (`190.53 × 810 hours) 1,54,329
Set-up (`304.22 × 40 set-ups) 12,169
Quality control (`189.96 × 25 inspections) 4,749
Total Cost 32,57,147
Number of units 15,000
Cost Per Unit `217.14

Statement Showing Determination of Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material procurement `22,50,000 Material orders 1,500 `1,500 per order
Maintenance `17,30,000 Maintenance hours 9,080 `190.53 per hour
Set-up `6,84,500 No. of set-ups 2,250 `304.22 per set-up
Quality control `5,14,800 No. of inspections 2,710 `189.96 per inspection

PYQ 3
MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour
hours. The budgeted overheads and direct labour hours for the month of March 2019 are `15,00,000 and
25,000 hours respectively.

The information about the company’s products is as follows:

Particulars Equipment A Equipment B
Budgeted Production volume 3,200 units 3,850 units
Direct material cost `350 per unit `400 per unit
Direct labour cost:
Y : 3 hours @ `120 per hour `360 -
Z : 4 hours @ `120 per hour - `480

Overheads of `15,00,000 can be identified with three major activities:

Order Processing `3,00,000

Machine Processing `10,00,000
Product Inspection `2,00,000

These activities are driven by number of orders processed, machine hours worked, and inspection hours,
respectively. The data relevant to these activities is as follows:
Equipments Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000

Required:

6.18
 CHAPTER 6 ACTIVITY BASED COSTING

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

Answer
(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method
Particulars Equipment A Equipment B
Direct material cost `350 `400
Direct labour cost `360 `480
Overheads @ `60 per hour `180 `240
Manufacturing cost per unit `890 `1,120

Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours

= `15,00,000 ÷ 25,000 hours = `60 per hour

Total labour hours = 3,200 units of A × 3 hours + 3,850 units of B × 4 hours

= 25,000 hours

(2) Statement Showing Determination of Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Order processing `3,00,000 Orders processed 600 `500 per order
Machine processing `10,00,000 Machine hours 50,000 `20 per machine hour
Inspection `2,00,000 Inspection hours 20,000 `10 per inspection hour

Statement Showing Unit Manufacturing Cost Using ABC Method

Particulars Equipment A Equipment B
Direct material cost `350 `400
Direct labour cost `360 `480
Overheads per unit (W.N.) `218.75 `207.79
Manufacturing cost per unit `928.75 `1,087.79

(3) Statement Showing Cost Distortion

Particulars Equipment A Equipment B
Unit manufacturing cost:
Using direct labour hours as an application base 890 1,120
Using activity based costing 928.75 1,087.79
Cost distortion (-) 38.75 + 32.21

Working note:
Calculation of overheads cost per unit under ABC costing:
Overheads A B
Order processing @ `500 per order of 400/200 orders `2,00,000 `1,00,000
Machine processing `20 per machine hour of 22,500/27,500 hours `4,50,000 `5,50,000
Inspection `10 per inspection hour of 5,000/15,000 hours `50,000 `1,50,000
Total overheads `7,00,000 `8,00,000
÷ Number of units ÷ 3,200 ÷ 3,850
Overhead per unit `218.75 `207.79

6.19
 ACTIVITY BASED COSTING CHAPTER 6

PYQ 4
PQR Ltd has decided to analyse the profitability of it’s five new customers. It buys soft drink bottles in cases
at `45 per case and sells them to retail customers at a list price of `54 per case. The data pertaining to five
customers are given below:
Customers
Particulars
A B C D E
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price ` 54 54 54 54 54
Actual Selling Price ` 54 53.40 49 50.20 48.60
Number of Purchase Orders 30 50 60 50 60
Number of Customers Visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers Travelled Per Delivery 40 12 10 20 60
Number of Expediate Deliveries 0 0 0 0 2

Its five activities and their cost drivers are:

Activity Cost Driver
Order taking `200 per purchase order
Customer visits `300 per customer visit
Deliveries `4.00 per delivery km travelled
Product handling `2.00 per case sold
Expedited deliveries `100 per each such delivery

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

Answer
(1) Computation of Customer Level Operating Income
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Cases sold 9,360 14,200 62,000 38,000 9,800
Revenue at list price @ `54 p.u. 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Less: Discount - 8,520 3,10,000 1,44,400 52,920
Revenue net of discount 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
Less: COGS @ `45 p.u. 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
Gross Margin 84,240 1,19,280 2,48,000 1,97,600 35,280
Less: Customer level operating 29,120 43,080 1,44,400 93,600 43,200
activities cost (W.N.)
Customer Level Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)

Working note:
Computation of customer level operating activities costs:
Customers
Particulars
A (`) B (`) C (`) D (`) E (`)
Order taking costs (`) 6,000 10,000 12,000 10,000 12,000
(No. of purchase orders × `200)

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 CHAPTER 6 ACTIVITY BASED COSTING

Customer visits costs (`) 1,200 1,800 3,600 1,200 1,800

(No. of customer visits × `300)
Delivery costs (`) 3,200 2,880 4,800 6,400 9,600
(*Kms travelled × `4.00 per km.)
Product handling costs (`) 18,720 28,400 1,24,000 76,000 19,600
(Number of case sold × `2.00)
Cost of expediting deliveries (`) - - - - 200
(No. of expedited deliveries × `100)
Total cost of customer level operating activities 29,120 43,080 1,44,400 93,600 43,200

* Kms travelled = Number of deliveries × Kilometres travelled per delivery

(2) Comment on the results:

Customer D and Customer C: Operating income of Customer D is more than of Customer C, despite having
only 61.29% (38,000 units) of the units volume sold in comparison to Customer C (62,000 units). Customer
C receives a higher percent of discount i.e. 9.26% (`5) while Customer D receive a discount of 7.04% (`3.80).
Though the gross margin of customer C (`2,48,000) is more than Customer D (`1,97,600) but total cost of
customer level operating activities of C (`1,44,400) is more in comparison to Customer D (`93,600). As a
result, operating income is more in case of Customer D.

Customer E and Customer A: Customer E is not profitable while Customer A is profitable. Customer E
receives a discount of 10% (`5.4) while Customer A doesn’t receive any discount. Sales Volume of Customer
A and E is almost same. However, total cost of customer level operating activities of E is far more (`43,200)
in comparison to Customer A (`29,120). This has resulted in occurrence of loss in case of Customer E.

PYQ 5
ABC Ltd. is engaged in production of three types of Fruit Juices: Apple, Orange and Mixed Fruit. The following
cost data for the month of March 2020 are as under:

Particulars Apple Orange Mixed Fruit

Units produced and sold 10,000 15,000 20,000
Material per unit (`) 8 6 5
Direct Labour per unit (`) 5 4 3
No. of Purchase Orders 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking Hours 110 160 170

Overheads incurred by the company during the month are as under:

Particulars (`)
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560

Required:

(1) Calculate cost driver’s rate.

(2) Calculate total cost of each product using Activity Based Costing.
[(6 Marks) Nov 2020]

Answer

6.21
 ACTIVITY BASED COSTING CHAPTER 6

(1) Statement Showing Cost Driver Rate

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Ordering costs 64,000 No. of Purchase Orders 80 `800 per purchase order
Delivery costs 1,58,200 No. of Deliveries 226 `700 per delivery
Shelf Stocking costs 87,560 Shelf Stocking Hours 440 `199 per shelf stocking hours

(2) Statement Showing Total Cost Using Activity Based Costing

Particulars Apple Orange Mixed Fruit
Units produced and sold 10,000 15,000 20,000
Material cost @ `8/ `6/ `5 per unit 80,000 90,000 1,00,000
Direct Labour @ `5/ `4/ `3 per unit 50,000 60,000 60,000
Production Overhead:
Ordering costs @ `800 per purchase order 27,200 25,600 11,200
(34 × 800) (32 × 800) (14 × 800)
Delivery costs @ `700 per delivery 77,000 44,800 36,400
Shelf Stocking costs @ `199 per hours (110 × 700) (64 × 700) (52 × 700)
21,890 31,840 33,830
Total Cost (110 × 199) (160 × 199) (170 × 199)
2,56,090 2,52,240 2,41,430

PYQ 6
ABC Ltd. manufactures three products X, Y and Z using the same plant and resources. It has given the
following information for the year ended on 31st March, 2020:
Particulars X Y Z
Production quantity (in units) 1,200 1,440 1,968
Resources per unit:
Direct materials (`) 90 84 176
Direct labour (`) 18 20 30

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

Budgeted Overheads (`) Cost Driver Remarks

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

Required:
(1) Calculate the total cost per unit of each product using the Absorption Costing Method.
(2) Calculate the total cost per unit of each product using the Activity Based Costing Method.

[(10 Marks) Jan 2021]

Answer
(1) Statement Showing Total Cost Per Unit of Each Product Using Absorption Costing Method

6.22
 CHAPTER 6 ACTIVITY BASED COSTING

Particulars X (`) Y (`) Z (`)

Direct Material 90 84 176
Direct Labour 18 20 30
Production Overhead @ `9 per hour 40.50 45 67.50
(9 × 18/4) (9 × 20/4) (9 × 30/4)
Total Unit Cost 148.50 149 273.50

Working Note:
Calculation of overhead rate per direct labour hour:

Overhead recovery rate = Budgeted overheads ÷ Budgeted labour hours

= (50,000 + 40,000 + 28,240 + 1,28,000)÷ 27,360 hours = `9/hour

Budgeted labour hours = 1,200 X × 18/4 + 1,440 Y × 20/4 + 1,968 C × 30/4 = 27,360 hours

(2) Statement Showing Total Cost Per Unit of Each Product Using ABC Method
Particulars X (`) Y (`) Z (`)
Direct Material 90 84 176
Direct Labour 18 20 30
Production OH:
Mat. Procurement 10.81 10.89 10.85
[(48×270.27)/1,200] [(58×270.27)/1,440] [(79×270.27)/1,968]
Set-up 8.68 8.68 8.68
[(25×416.67)/1,200] [(30×416.67)/1,440] [(41×416.67)/1,968]
Quality Control 6.13 6.13 6.13
[(25×294.17)/1,200] [(30×294.17)/1,440] [(41×294.17)/1,968]
Maintenance 26.67 22.22 32.52
[(20×6,400×1/4)/1,200] [(20×6,400×1/4)/1,440] [(20×6,400×1/2)/1,968]
Total Unit Cost 160.29 151.92 264.18

Calculation of Activity rate:

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material Procurement `50,000 No. of orders 185 `270.27 per order
Set-up `40,000 No. of production Runs 96 `416.67 per run
Quality Control `28,240 No. of Inspections 96 `294.17 per inspection
Maintenance `1,28,000 Maintenance hours 6,400 `20 per hour

Total no. of orders = (1,200 + 1,440 + 1,968) ÷ 25

= 48 orders + 58 orders + 79 orders = 185 orders

Total no. of production run = (1,200 + 1,440 + 1,968) ÷ 48

= 25 runs + 30 runs + 41 runs = 96 runs

Total no. of inspection = Total no. of runs = 96 inspections

PYQ 7
PQR Ltd. is engaged in the production of three Products P, Q and R. the company calculates Activity Cost
Rates on the basis of Cost Driver capacity which is provided as below:
Activity Cost Driver Cost Driver Capacity Cost
Direct Labour hours Labour hours 30,000 Labour hours `3,00,000
Production runs Number of Production runs 600 Production runs `1,80,000
Quality Inspections Number of inspections 8,000 Inspections `2,40,000

6.23
 ACTIVITY BASED COSTING CHAPTER 6

The consumption of activities during the period is as under:

Activity/Products P Q R
Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspections 3,000 2,500 1,500

You are required to:

(1) Compute the costs allocated to each product from each activity.
(2) Calculate the cost of unused capacity for each activity.
(3) A potential customer has approached the company for supply of 12,000 units of a new product ‘S’ to
be delivered in lots of 1,500 units per quarter. This will involve an initial design cost of `30,000 and
per quarter production will involve the following:

Direct Material `18,000

Direct Labour hours 1,500 hours
No. of production runs 15
No. of quality inspections 250

Prepare cost sheet segregating Direct and Indirect costs and compute the Sales value per quarter
of product ‘S’ using ABC system considering a mark-up of 20% on cost.
[(10 Marks) July 2021]

Answer
(1) Statement of Cost Allocation to Each Product from Each Activity
Product
Activity
P (`) Q (`) R (`) Total (`)
Direct Labour hours 1,00,000 80,000 60,000 2,40,000
(10,000 × `10) (8,000 × `10) (6,000 × `10)
Production runs 60,000 54,000 48,000 1,62,000
(200 × `300) (180 × `300) (160 × `300)
Quality Inspections 90,000 75,000 45,000 2,10,000
(3,000 × `30) (2,500 × `30) (1,500 × `30)

Working note:

Cost driver rate/Activity rate:

Direct Labour hours = `3,00,000 ÷ 30,000 labour hours = `10 per hour

Production runs = `1,80,000 ÷ 600 production runs = `300 per run

Quality inspection = `2,40,000 ÷ 8,000 inspection runs = `30 per inspection

(2) Computation of cost of unused capacity for each activity:

Direct Labour hours = `3,00,000 - `2,40,000 = `60,000

Production runs = `1,80,000 - `1,62,000 = `18,000
Quality inspection = `2,40,000 - `2,10,000 = `30,000

Total cost of unused capacity is `1,08,000.

6.24
 CHAPTER 6 ACTIVITY BASED COSTING

(3) Cost Sheet

Particulars Amount (`)
(A) Direct Cost: 18,000
Direct Material 3,750
Direct expenses: Initial design cost (30,000 × 1,500/12,000) 21,750
Total (A)
(B) Indirect cost: 15,000
Direct Labour hours (1,500 × `10) 4,500
Production runs (15 × `300) 7,500
Quality Inspections (250 × `30) 27,000
Total (B) 48,750
Total cost (A + B) 9,750
Add: Profit @ 20% on cost 58,500
Sales value
Sale Price per unit of S (58,500 ÷ 1,500) 39

PYQ 8
A Drug store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. Due to some
constraints, it has decided to go for only one product line of drugs. It has provided the following data for the
year 2020-21 for each product line:
A B C
Revenues `74,50,000 `1,11,75,000 `1,86,25,000
Cost of goods sold `41,44,500 `68,16,750 `1,20,63,750
Number of purchase orders placed 560 810 630
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Items sold 1,75,200 1,50,300 1,44,500

Following additional information is also provided:

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

Required:
1. Calculate the operating income and operating income as a percentage (%) of revenue of each product
line if:
(a) All support cost (other than cost of goods sold) are allocated in the ratio of cost of goods sold.
(b) All support cost (other than cost of goods sold) are allocated using an activity-based costing
system.

2. Give your opinion about choosing the product line on the basis of operating income as a percentage (%)
of revenue of each product line under both the situations as above.
[(10 Marks) Dec 2021]

Answer

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 ACTIVITY BASED COSTING CHAPTER 6

1. (a) Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines on the basis of cost of goods sold of each product)
A (`) B (`) C (`) Total (`)
Revenues 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold (COGS) 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Support cost (40% of COGS) 16,57,800 27,26,700 48,25,500 92,10,000
Total cost 58,02,300 95,43,450 1,68,89,250 3,22,35,000
Operating income (Sales – Total cost) 16,47,700 16,31,550 17,35,750 50,15,000
% of Operating income to Sales 22.12% 14.60% 9.32% 13.46%

1. (b) Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines using an activity based costing system)
A (`) B (`) C (`) Total (`)
Revenues 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold (COGS) 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug license fee @ `50,000/base point 1,00,000 1,50,000 2,50,000 5,00,000
(50,000 × 2) (50,000 × 3) (50,000 × 5)
Ordering cost @ `415/purchase order 2,32,400 3,36,150 2,61,450 8,30,000
(415 × 560) (415 × 810) (415 × 630)
Delivery cost @ `650/delivery 6,17,500 6,50,000 5,52,500 18,20,000
(650 × 950) (650 × 1,000) (650 × 850)
Shelf stocking cost @ `720/hour 6,48,000 9,00,000 16,92,000 32,40,000
(720 × 900) (720 × 1,250) (720 × 2,350)
Customer Support cost @ `6/unit 10,51,200 9,01,800 8,67,000 28,20,000
(6 × 1,75,200) (6 × 1,50,300) (6 × 1,44,500)
Total cost 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income (Sales – Total cost) 6,56,400 14,20,300 29,38,300 50,15,000
% of Operating income to Sales 8.81% 12.71% 15.78% 13.46%

2. Opinion about choosing the product line: As per first method where we use COGS as a flat rate for
allocating support costs, Drug A seems to be most profitable @ 22.12% and Drug C seems to be least
profitable @ 9.32% but this is deceptive method. ABC method on the other hand uses the cost driver
in each of the support costs for allocating it to the product line. Thus, it is much more accurate.
Accordingly now Drug C seems to be most profitable at 15.78% and Drug A seems to be the least
profitable at 8.81%. Therefore, it is suggested that company should go with Drug C.

Working notes:

(a) Total support cost = `5,00,000 + `8,30,000 + `18,20,000 + `32,40,000 + `28,20,000

= `92,10,000

(b) Total COGS = `41,44,500 + `68,16,750 + `1,20,63,750 = `2,30,25,000

92,10,000
(c) % of support cost to COGS= × 100 = 40%
2,30,25,000

(d) Calculation of Cost Driver Rate

Activity Total cost (`) Cost allocation base Cost driver rate
(1) (2) (3) (4) = [(2)÷(3)]
Drug License fee 5,00,000 2 : 3 : 5 total 10 `50,000 per base point
Ordering 8,30,000 2,000 purchase orders `415 per purchase order
Delivery 18,20,000 2,800 deliveries `650 per delivery

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 CHAPTER 6 ACTIVITY BASED COSTING

Shelf-stocking 32,40,000 4,500 hours `720 per stocking hour

Customer support 28,20,000 4,70,000 items sold `6 per item sold

PYQ 9
Star Limited manufacture three products using the same production methods. A conventional product
costing system is being used currently. Details of the three products for a typical period are:
Particulars AX BX CX
Direct Labour hours per unit 1.00 0.90 1.50
Machine hours per unit 2.00 1.50 2.50
Direct Material per unit (`) 35 25 45
Volume (units) 7,500 12,500 25,000

Direct Labour costs `20 per hour and production overheads are absorbed on a machine hour basis. The
overhead absorption rate for the period is `30 per machine hour.
Management is considering using Activity Based Costing system to ascertain the cost of the products.
Further analysis shows that the total production overheads can be divided as follows:
Cost relating to set up 40%
Cost relating to machinery 10%
Cost relating to material handling 30%
Cost relating to Inspection 20%

The following activity volumes are associated with the product line for the period as a whole. Total activities
for the period:
Particulars AX BX CX Total
Number of set-ups 350 450 740 1,540
Number of movement of Materials 200 280 675 1,155
Number of inspections 200 400 900 1,500
Required:
1. Calculate the cost per unit of each product using the conventional method.
2. Calculate the cost per unit of each product using activity based costing method.
[(10 Marks) May 2022]

Answer
1. Statement Showing “Cost per unit as per Conventional Method”
Particulars AX (`) BX (`) CX (`)
Direct Materials 35 25 45
Direct Labour [(1, 0.9, 1.5 hours) × `20] 20 18 30
Production Overheads [(2, 1.5, 2.5 hours) × `30] 60 45 75
Cost per unit 115 88 150

2. Statement Showing “Cost per unit as per ABC Method”

Particulars AX (`) BX (`) CX (`)
Production (units) 7,500 12,500 25,000
Direct Materials @ `35/`25/`45 per unit 2,62,500 3,12,500 11,25,000
Direct Labour @ `20/`18/`30 per unit 1,50,000 2,25,000 7,50,000
Production Overhead:
Setup Costs @ `750 per setup 2,62,500 3,37,500 5,55,000
(750 × 350) (750 × 450) (750 × 740)
Machine Related Costs @ `3 per hour 45,000 56,250 1,87,500

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 ACTIVITY BASED COSTING CHAPTER 6

(3 × 15,000) (3 × 18,750) (3 × 62,500)

Material Handling Cost @ `750 per movement 1,50,000 2,10,000 5,06,250
(750 × 200) (750 × 280) (750 × 675)
Inspection Costs @ `385 per inspection 77,000 1,54,000 3,46,500
(385 × 200) (385 × 400) (385 × 900)
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost ÷ Units) 126.267 103.62 138.81

Working Notes:
(a) Total Machine Hours = 7,500 × 2 + 12,500 × 1.5 + 25,000 × 2.5 = 96,250 hours

(b) Total Production OH = 96,250 machine hours × `30 =`28,87,500

(c) Statement Showing Cost Driver Rate:

Cost Pool % Overheads Cost Driver Basis Volume Cost Driver Rate
Set-up 40% 11,55,000 No of set ups 1,540 750/Setup
Machine related cost 10% 2,88,750 No of Machine Hours 96,250 3/Machine Hour
Material handling 30% 8,66,250 No of Material movements 1,155 750/Movement
Inspection 20% 5,77,500 No of inspections 1,500 385/Inspection
Total - 28,87,500 - - -

PYQ 10
XYZ Ltd. is engaged in manufacturing two products- Express Coffee and Instant Coffee. It furnishes the
following data for a year:
Actual Output Total Machine Total Number of Total Number of
Products
(units) Hours Purchase set ups
Express Coffee 5,000 20,000 160 20
Instant Coffee 60,000 1,20,000 384 44

The annual overheads are as under:

Particulars Amount
Machine Processing costs 7,00,000
Set up related costs 7,68,000
Purchase related costs 6,80,000

You are required to:

(a) Compute the costs allocated to each product – Express Coffee and Instant Coffee from each activity on
the basis of Activity – Based Costing (ABC) method.
(b) Find out the Overhead cost per units of each product – Express coffee and instant coffee based on (a)
above.
[(4 Marks) Nov 2022]

Answer
(a) Statement Showing Cost Allocated to Each Product Using Activity Based Costing
Activity Cost Pool Cost Driver Ratio Amount Express coffee Instant coffee
Machine Processing No. of machine hours 20 : 120 7,00,000 1,00,000 6,00,000
Set up related costs No. set ups 20 : 44 7,68,000 2,40,000 5,28,000
Purchase related costs No. of purchase 160 : 384 6,80,000 2,00,000 4,80,000
Total Cost `5,40,000 `16,08,000

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 CHAPTER 6 ACTIVITY BASED COSTING

(b) Overhead cost per unit:

Express coffee = 5,40,000 ÷ 5,000 = `108
Instant coffee = 16,08,000 ÷ 60,000 = `26.80

PYQ 11
Beta Limited produces 50,000 Units, 45,000 Units and 62,000 Units of product ‘A’, ‘B’ and ‘C’ respectively. At
present the company follows absorption costing method and absorbs overhead on the basis of direct labour
hours. Now, the Company wants to adopt Activity Based Costing.

The information provided by Beta Limited is as follows:

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

Overhead for year are as follows:

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

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

Answer
(1) Overhead rate per labour hour = Overhead ÷ Labour hours
= `33,75,000 ÷ 22,500 hours (7,500 + 7,200 + 7,800)
= `150 per labour hour

(2) Statement Showing Overheads Cost per Unit

(Using Activity based Costing)
Activity Cost Pool Cost Driver Ratio Amount Product A Product B Product C
Rent & Taxes Floor space 50:45:62 8,63,500 2,75,000 2,47,500 3,41,000
Electricity Expense Power consumption 32:28:40 10,66,475 3,41,272 2,98,613 4,26,590
Indirect labour Direct labour hours 75:72:78 13,16,250 4,38,750 4,21,200 4,56,300
Repair & Maintenance Machine hours 600:450:465 1,28,775 51,000 38,250 39,525
Total Cost 11,06,022 10,05,563 12,63,415
÷ Total Units ÷50,000 ÷45,000 ÷62,000
Overheads Cost Per Unit `22.12 `22.35 `20.38

SUGGESTED REVISION FOR EXAM:

BQ: 1, 2, 3, 4, 6, 8, 9

PYQ: 2, 7, 8

6.29
 CHAPTER 7 DIRECT EXPENSES

CHAPTER 7 DIRECT EXPENSES

1. Direct Expenses:
Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a
product or for provision of service and can be directly traced in an economically feasible manner to a cost
object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service etc.

2. Measurement of Direct Expenses:

The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties
and taxes (for which input credit not available), commission and other directly attributable costs.

In case of sub-contracting, where goods are get manufactured by job workers independent of the principal
entity, are measured at agreed price. Where the principal supplies some materials to the job workers, the
value of such materials and other incidental expenses are added with the job charges paid to the job workers.

3. Treatment of Direct Expenses:

Direct Expenses form part of the prime cost for the product or service to which it can be directly traceable
and attributable. In case of lump-sum payment or onetime payment, the cost is amortised over the
estimated production volume or benefit derived.
If the expenses incurred are of insignificant amount i.e. not material, it can be treated as part of overheads.

BQ 1
Aditya Ltd. is an engineering manufacturing company producing job order on the basis of specification given
by the customers. During the last the month it has completed three job works namely A, B and C. The
following are the items of expenditures which are incurred apart from direct materials and direct employee
cost:

(a) Office and administration cost: `3,00,000

(b) Product blueprint cost for job A: `1,40,000
(c) Hire charges paid for machinery used in job work B: `40,000
(d) Salary to office attendants: `50,000
(e) One time license fee paid for software used to make computerized graphics for job C: `50,000
(f) Salary paid to marketing manager: `1,20,000

Calculate direct expenses attributable to each Job.

Answer
Calculation of Direct Expenses
Particulars Job A (`) Job B (`) Job C (`)
Product blueprint cost 1,40,000 - -
Hire charges paid for machinery - 40,000 -
License fee paid for software - - 50,000
Total Direct Expenses 1,40,000 40,000 50,000

7.1
 DIRECT EXPENSES CHAPTER 7

BQ 2
The following expenditures were incurred in Aditya Ltd. For the month of March 2024:
Particulars `
Paid for power & fuel 4,80,200
Wages paid to factory workers 8,44,000
Bill paid to job workers 9,66,000
Royalty paid for production 8,400
Fee paid to technician hired for the job 96,000
Administrative overheads 76,000
Commission paid to sales staffs 1,26,000

You are required to calculate direct expenses for the month.

Answer
Calculation of Direct Expenses
Particulars `
Paid for power & fuel 4,80,200
Bill paid to job workers 9,66,000
Royalty paid for production 8,400
Fee paid to technician hired for the job 96,000
Total 15,50,600

Notes:
(a) Wages paid to factory workers is direct employee cost.
(b) Administrative overhead is indirect expense.
(c) Commission paid to sales staffs comes under selling expenses.

7.2
 CHAPTER 8 SERVICE COSTING

CHAPTER 8 SERVICE COSTING

TRANSPORT SERVICE

BQ 1
AXA Passenger Transport Company is running 5 buses between two towns, which are 40 kms apart. Seating
capacity of each bus is 40 passengers. Following details are available from their books, for the month of April
2023:
Salary of Drivers, Cleaners and Conductors `24,000
Salary to Supervisor `10,000
Diesel and other Oil `40,000
Repairs and Maintenance `8,000
Taxation `16,000
Depreciation `26,000
Insurance `20,000
Total `1,44,000

Actual passengers carried were 75% of the seating capacity. All the five buses run on all days for the
month. Each bus made one round trip per day.
Calculate cost per passenger – Kilometer.

Answer
Operating Cost Sheet
Particulars Amount
(A) Standing Charges:
Salary of Drivers, Cleaners and Conductors 24,000
Salary to Supervisor 10,000
Taxation and Insurance 16,000
Depreciation 26,000
Insurance 20,000
Total (A) 96,000
(B) Running Expenses:
Diesel and other Oil 40,000
Total (B) 40,000
(C) Maintenance Charges:
Repairs and Maintenance 8,000
Total (C) 8,000
Total operating cost (A + B + C) 1,44,000
÷ Total passenger - kms ÷ 3,60,000
Cost per passenger-km `0.40
Working:
Passenger-kms = 5 buses × 40 kms × 40 passengers × 75% × 30 days × 2 = 3,60,000

BQ 2
ABC Transport Company has been given a route 40 km long to run a bus. The bus costs the company a sum
of `10,00,000. It has been insured at 3% p.a. and the annual tax will amount to `20,000. Garage rent is
`20,000 p.m. Annual repairs will be `2,04,000 and the bus is likely to last for 2.5 years.

8.1
 SERVICE COSTING CHAPTER 8

The driver's salary will be `30,000 p.m. and the conductor's salary will be `25,000 p.m. in addition
to 10% of takings as commission (to be shared by the driver and the conductor equally). Cost of stationery
will be `1,000 p.m. Manager cum Accountant's salary is `17,000 p.m. Petrol and oil will be `500 per 100 km.
The bus will make 3 up and down trips carrying on an average 40 passengers on each trip.

Assuming 15% profit on takings, calculate the buy fare to be charged from each passenger. The
bus will run on an average 25 days in a month.

Answer
Statement of Cost Per Passenger Km
Particulars Amount
(A) Standing Charges:
Depreciation per month (10,00,000 ÷ 2.5 Years × 1/12) 33,333
Insurance per month [(10,00,000 × 3%) × 1/12] 2,500
Annual Tax for one month (20,000 × 1/12) 1,667
Garage Rent 20,000
Manager-cum accountant’s salary 17,000
Stationery 1,000
Driver’s salary 30,000
Conductor’s salary 25,000
Total (A) 1,30,500
(B) Running Charges:
Petrol and oil (500/100 × 6,000 kms) 30,000
Commission @ 10% of collections 23,667
Total (B) 53,667
(C) Maintenance Charges:
Repairs and maintenance (2,04,000 × 1/12) 17,000
Total (C) 17,000
Total operating cost (A + B + C) 2,01,167
Add: Profit @ 15% of collections 35,500
Collections (WN 3) 2,36,667
÷ Total Passenger-kms ÷ 2,40,000
Fare for per passenger-km `0.9861

WN 1: Calculation of total travelling of bus in one month:

= 2 × No of round trips daily × Distance one way × No of days
= 2 × 3 × 40 × 25 = 6,000 kms
WN 2: Calculation of passenger-kms per month:
= No of kms travelled per month × No of passengers
= 6,000 × 40 = 2,40,000 passenger-kms
WN 3: Calculation of collections:
Total collections = Operating cost (excluding commission on collections) + 10% for
commission + 15% for profit
= 1,30,500 + 30,000 + 17,000 + 25% of collections
Collections = `2,36,667

BQ 3
Shankar has been promised a contract to run a tourist car on a 20 km long route for the chief executive of a
multinational firm. He buys a car costing `1,50,000. The annual cost of insurance and taxes are `4,500 and

8.2
 CHAPTER 8 SERVICE COSTING

`900 respectively. He has to pay `500 per month for a garage where he keeps the car when it is not in use.
The annual repair costs are estimated at `4,000. The car is estimated to have a life of 10 years, at the end of
which the scrap value is likely to be `50,000.
He hires a driver who is to be paid `300 per month plus 10% of the takings as commission. Other
incidental expenses are estimated at `200 per month. Petrol and oil will cost `100 per 100 kms. The car will
make 4 round trips each day.

Assuming that profit of 15% on taking is desired and that the car will be on the road for 25 days
on an average per month what should he charge per round trip?

Answer
Operating Cost Sheet
Particulars Amount
(A) Standing Charges:
Insurance (4,500 ÷ 12) 375
Taxes (900 ÷ 12) 75
Garage Rent 500
Driver's Salary 300
Incidental Expenses 200
Depreciation (10,000 ÷ 12) 833.33
Total (A) 2,283.33
(B) Running Charges:
Petrol and Oil (1.00 × 4,000) 4,000
Commission @ 10% on taking (10% of 8,822.21) 882.22
Total (B) 4,882.22
(C) Maintenance Charges:
Annual Repairs (4,000 ÷ 12) 333.33
Total (C) 333.33
Total operating cost (A + B + C) 7,498.88
Add: Profit @ 15% on taking (15% of 8,822.21) 1,323.33
Taking (WN 2) 8,822.21
÷ Total round trips per month (25 days × 4 round trips) 100
Taking per round trip `88.22

WN 1: Calculation of total travelling of a car in one month:

= 20 Kms. × 2 sides × 4 times × 25 days = 4,000 kms
WN 2: Calculation of collections:
Total collections = Operating cost (excluding commission on collections) + 10% for
commission + 15% for profit
= 6,616.66 + 25% of collections
Collections = `8,822.21

BQ 4
Saitravels owns a bus and operates a tourist service on daily basis. The bus starts from Newcity to Restvillage
and returns back to Newcity the same day. Distance between Newcity and Restvillage is 250 kms. This trip
operates for 10 days in a month.
The bus also plies for another 10 days between Newcity and Shivapur and return back to Newcity the
same day, distance between these two places is 200 kms.
The bus makes local sightseeing trips for 5 days in a month, covering a total distance of 60 kms per
day.

8.3
 SERVICE COSTING CHAPTER 8

The following data are given:

Cost of bus `3,50,000
Depreciation 25% per annum
Driver's salary `1,200 p.m.
Conductor's salary `1,000 p.m.
Part-time clerk's salary `400 p.m.
Insurance `1,800 p.a.
Diesel consumption 4 kms per litre @ `8/litre
Token tax `2,400 p.a.
Permit fee `1,000 p.m.
Lubricant oil `100 for every 200 kms.
Repairs and maintenance `1,500 p.m.
Normal capacity 50 persons

While plying to and from Restvillage the bus occupies 90% of the capacity and 80% when it plies
between Newcity to Shivapur (both ways). In the city the bus runs full capacity. Passenger Tax is 20% of net
takings of the travel’s firm.

Calculate the rate to be charged to Restvillage and Shivapur from Newcity per passenger, if the
profit required to be earned is 33-⅓% of net takings of the firm.
[Newcity to Restvillage: 250kms × 0.161 = `40.25; Newcity to Shivapur: 200kms × 0.161 = `32.20]

BQ 5
Mr. X owns a bus which runs according to the following schedule:
(i) Delhi to Chandigarh and back the same day
Distance covered : 250 kms one way
Number of days runs each month : 8
Seating capacity occupied : 90%
(ii) Delhi to Agra and back the same day:
Distance covered : 210 kms one way
Numbers of days run each month : 10
Seating capacity occupied : 85%
(iii) Delhi to Jaipur and back the same day
Distance covered : 270 kms one way
Numbers of days run each month : 6
Seating capacity occupied : 100%
(iv) Following are the other details
Cost of the bus : `12,00,000
Salary of the driver : `24,000 p.m.
Salary of the Conductor : `21,000 p.m.
Salary of the part-time Accountant : `5,000 p.m.
Insurance of the bus : `4,800 p.a.
Diesel consumption : 4 kms per litre
Diesel rate : `56 per liter
Road tax : `15,915 p.a.
Lubricant Oil : `10 per 100 kms
Permit fee : `315 p.m.
Repairs and maintenance : `1,000 p.m.
Depreciation of the bus : 20% p.a.

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 CHAPTER 8 SERVICE COSTING

Seating capacity of the bus : 50 persons

Passenger tax : 20% of the total taking

Calculate the bus fare to be charged from each passenger to earn a profit of 30% on total taking,
fares are to be indicated per passenger for the journeys (i) Delhi to Chandigarh, (ii) Delhi to Agra and
(iii) Delhi to Jaipur

Answer
Statement of Fare to be Charged
Particulars Amount
(A) Standing Charges:
Salary of driver 24,000
Salary of conductor 21,000
Salary of part time accountant 5,000
Insurance (4,800 ÷ 12) 400
Road tax (15,915 ÷ 12) 1,326.25
Permit fee 315
Depreciation (`12,00,000 × 20%)  12 20,000
Total (A) 72,041.25
(B) Running Costs:
Diesel (11,440 km  4 km) × `56 1,60,160
Lubricant oil (11,440 km.  100 ) × `10 1,144
Total (B) 1,61,304
(C) Maintenance Costs:
Repairs and Maintenance 1,000
Total (C) 1,000
Total Operating Cost (A + B + C) 2,34,345.25
Add: Profit @ 30% on Taking 1,40,604.15
Net Taking 3,74,952.40
Add: Passenger tax @ 20 % on Taking 93,738.10
Taking per month 4,68,690.50
÷ Total passenger kms ÷ 5,20,500
Fare per passenger per km 0.90
Fare Delhi to Chandigarh (250 × 0.90) `225
Fare Delhi to Agra (210 × 0.90) `189
Fare Delhi to Jaipur (270 × 0.90) `243
Working Notes:

1. Calculation of taking:
Taking = Total operating cost + Profit + Passenger tax
= 2,34,345.25 + 30% of taking + 20% of taking
Taking = 2,34,345.25 + 50% of taking
Taking = 4,68,690.50

2. Calculation of total km runs per month:

Bus route Kms per trip Trips per day Days per month Kms per month
Delhi to Chandigarh 250 2 8 4,000 kms
Delhi to Agra 210 2 10 4,200 kms
Delhi to Jaipur 270 2 6 3,240 kms
11,440 kms

8.5
 SERVICE COSTING CHAPTER 8

3. Calculation of total passenger kms:

= (4,000 kms × 50 persons × 90%) + (4,200 kms × 50 persons × 85%) +
(3,240 kms × 50 persons × 100%) = 5,20,500

BQ 6
SMC is a public school having five buses each plying in different directions for the transport of its school
students. In view of a large number of students availing of the bus service, the buses work two shifts daily
both in the morning and in the afternoon. The buses are garaged in the school. The 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 afternoon the first trip drops the junior students and
an hour later second trip takes the senior students home.
The distance travelled by each bus one way is 8 kms. 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
the 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 and 1 cleaner employee for all the 5 buses)
License fee, taxes etc. `8,600 per bus per annum
Insurance `10,000 per bus per annum
Repair and maintenance `35,000 per bus per annum
Purchase price of the bus `15,00,000 each
Life 12 years
Salvage value at the end of economic life `3,00,000
Diesel cost `45.00 per litre
Average mileage 4 kms per litre
Seating capacity of each bus 50 students
(The seating capacity is fully occupied during the whole year)

Students picked up and dropped within a range up to 4 kms 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:
(a) Prepare a statement showing the expenses of operating a single bus and the fleet of five buses for a year.
(b) Work out the average cost per student per month in respect of (i) Students coming from the distance of
up to 4 kms from the school and (ii) Students coming from the distance beyond 4 kms from the school.
[(a) `3,78,000 & `18,90,000; (b) (i) `210, (ii) `420]

BQ 7
A company is considering three alternative proposals for conveyance facilities for its sales personnel who
have to do considerable travelling approximately 20,000 Kms every year. The proposals are as follows:
(i) Purchase and maintain it’s own fleet of cars. The average cost of a car is `6,00,000.
(ii) Allow the executive to use his own car and reimburse expenses at the rate of `10 per kilometer and
also bear insurance costs.
(iii) Hire cars from an agency at `1,80,000 per year per car. The Company will have to bear costs of petrol,
taxes and tyres.

The following further details are available:

(a) Petrol `6 per km.

8.6
 CHAPTER 8 SERVICE COSTING

(b) Repairs and maintenance `0.20 per km.

(c) Tyres `0.12 per km.
(d) Insurance `1,200 per car per annum.
(e) Taxes `800 per car per annum.
(f) Life of the car 5 years with annual mileage of 20,000 kms.
(g) Resale value `80,000 at the end of the fifth year.

Work out the relative costs of three proposals and rank them.

Answer
Calculation of Relative Costs of Three Proposals and their Ranking
Particulars Own Car Reimbursement Hire
(A) Standing Charges:
Insurance 1,200 1,200 -
Taxes 800 - 800
Depreciation (6,00,000 – 80,000) × 1/5 1,04,000 - -
Hire Charges - - 1,80,000
Total (A) 1,06,000 1,200 1,80,800
(B) Running Charges:
Petrol (20,000 × 6) 1,20,000 - 1,20,000
Reimbursement (20,000 × 10) - 2,00,000 -

Total (B) 1,20,000 2,00,000 1,20,000

(C) Maintenance Charges:
Repairs and maintenance (20,000 × 0.20) 4,000 - -
Tyres (20,000 × .12) 2,400 - 2,400
Total (C) 6,400 - 2,400
Total Cost (A + B + C) 2,32,400 2,01,200 3,03,200
Rank II I III

Analysis:
The Second alternative i.e., use of own car by the executive and reimbursement of expenses by the company
is the best alternative from company’s point of view.

BQ 8
Navya LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the offices of
Noida, Gurugram and Faridabad. At present it operates CNG fuelled cars but it is also considering to upgrade
these into Electric vehicle (EV). The details related with the owning of CNG & EV propelled cars are as
tabulated below:
Particulars CNG Car EV Car
Car purchase price (`) 9,20,000 15,20,000
Govt. subsidy to purchase car (`) - 1,50,000
Life of the car 15 Years 10 Years
Residual value (`) 95,000 1,70,000
Mileage 20 km/kg 240 km/charge
Electricity consumption per full charge - 30 KWH
CNG cost per kg (`) 60 -
Power cost per KWH (`) - 7.60
Annual maintenance cost (`) 8,000 5,200
Annual insurance (`) 7,600 14,600
Tyre replacement cost in every 5 year (`) 16,000 16,000
Battery replacement cost in every 8 year (`) 12,000 5,40,000

8.7
 SERVICE COSTING CHAPTER 8

Apart from the above, the following are the additional information:
Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (`) 20,000 p.m.
Garage rent per car (`) 4,500 p.m.
Share of Office and administration cost per car (`) 1,500 p.m.

Calculate the operating cost of vehicle per month per car for both CNG & EV options.

Answer
Operating Cost Sheet
Particulars CNG Car (`) EV Car (`)
(A) Running Charges:
Fuel cost/ Power consumption cost 4,500 1,425
Total (A) 4,500 1,425
(B) Standing Charges
Depreciation 4,583.33 10,000
Monthly insurance cost (7,600 ÷ 12)/ (14,600 ÷ 12) 633.33 1,216.67
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of office and administration cost 1,500 1,500
Total (B) 31,216.66 37,216.67
(C) Maintenance Charges:
Monthly maintenance cost (8,000 ÷ 12)/ (5,200 ÷ 12) 666.67 433.33
Amortised cost of tyre replacement [(16,000 ÷ 5 years) ÷ 12] 177.78 133.33
Amortised cost of battery replacement 66.67 4,500
Total (C) 911.12 5,066.66
Total Cost (A + B + C) 36,627.78 43,708.33

Working notes:

(a) Fuel cost per month = (`60 ÷ 20 kms) × 1,500 kms = `4,500
Power cost per month = (`7.6 × 30 KWH ÷ 240 kms) × 1,500 kms = `1,425

(b) Depreciation CNG Car = (`9,20,000 – `95,000) ÷ 15 Years × 1/12 = `4,583.33

Depreciation EV Car = (`15,20,000 – `1,50,000 – `1,70,000) ÷ 10 Years × 1/12
= `10,000

(c) Amortised cost of tyre CNG Car:

Life of car = 15 years
Replacement of tyres = after 5 years
Total replacements = only 2 replacements during 15 years
(no replacement at the end of useful life, sold as scrap)
Amortised cost = [(`16,000 × 2) ÷ 15 Years] × 1/12 = `177.78

(d) Amortised cost of tyre EV Car:

Life of car = 10 years
Replacement of tyres = after 5 years
Total replacements = only 1 replacement during 10 years
(no replacement at the end of useful life, sold as scrap)
Amortised cost = (`16,000 ÷ 10 Years) × 1/12 = `133.33

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(e) Amortised cost of battery CNG Car:

Life of car = 15 years
Replacement of battery = after 8 years
Total replacements = only one replacement during 15 years
Amortised cost = (`12,000 ÷ 15 Years) × 1/12 = `66.67

(f) Amortised cost of battery EV Car:

Life of car = 10 years
Replacement of battery = after 8 years
Total replacements = only one replacement during 10 years
Amortised cost = (`5,40,000 ÷ 10 Years) × 1/12 = `4,500

BQ 9
Prakash Automobiles distributes its foods to a regional dealer using a single lorry. The dealer's premises are
40 kms away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day fully loaded
on the outward journeys and empty on return journeys.
The following information is available for a four weekly period during the year 2023:
Petrol consumption 8 kms per litre
Petrol cost `13 per litre
Oil `100 per week
Driver's wages `400 per week
Repairs `100 per week
Garage rent `150 per week
Cost of lorry (excluding tyres) `4,50,000
Life of lorry 80,000 kms
Insurance `6,500 per annum
Cost of tyres `6,250
Life of tyres 25,000 kms
Estimated sale value of lorry `50,000 at end of its life
Vehicle license cost `1,300 per annum
Other overhead cost `41,600 per annum
The lorry operates five days week
Required:
(a) A statement to show the total cost of operating the vehicle for the four weekly period analysed into
running costs and fixed costs.
(b) Calculate the vehicle cost per kilometer and ton-km.

Answer
(a) Statement of Operating Cost of a Lorry of M/S Prakash Automobile
(For the four weekly period)
Particulars Amount
(A) Fixed Costs:
Garage rent (150 × 4) 600
Insurance (6,500  52) × 4 500
License cost (1,300  52) 4100 100
Other overheads (41,600  52) × 4 3,200
Driver’s wages (400 × 4) 1,600
Total (A) 6,000
(B) Running Costs:
Cost of petrol (3,200 Kms × 13/8) 5,200

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Oil (100 × 4) 400

Repairs (100 × 4) 400
Cost of tyres 800
Depreciation [{(4,50,000 – 50,000) ÷ 80,000 Kms} × 3,200 Kms] 16,000
Total (B) 22,800
Total operating cost (A + B) 28,800

(b) Vehicle cost per kilometer = Total cost ÷ Total Km

= 28,800 ÷ 3,200 km = `9.00

Cost per ton-km = Total cost ÷ Total ton-km

= 28,800 ÷ 16,000 ton-km = `1.80

Working notes:
1. Distance travelled in 4 weeks period:
40 kms one way × 2 (return) × 2 trips × 5 days × 4 weeks = 3,200 kms

2. Total ton-km = 1,600 kms × 10 + 1,600 kms × Nil = 16,000

3. Tyres cost = (6,250  25,000 kms) × 3,200 kms = `800

BQ 10
A transport company has 20 vehicles, which capacities are as follows:

No of vehicles Capacity per vehicle

5 9 MT
6 12 MT
7 15 MT
2 20 MT

The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between these
stations is 100 kilometres. Each vehicle makes one round trip per day an average. Vehicles are loaded with
an average of 90 per cent of capacity at the time of departure from station ‘A’ to station ‘B’ and at the time of
return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.

The following information is related to the month of October, 2023:

Salary of Transport Manager `60,000

Salary of 30 drivers `20,000 each driver
Wages of 25 Helpers `12,000 each helper
Loading and unloading charges `850 each trip
Consumable stores (depends on the running of vihicles) `1,35,000
Insurance (Annual) `8,40,000
Road Licence (Annual) `6,00,000
Cost of Diesel per litre `78
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. `1,15,000
Cost of replacement of Tyres, Tubes, other parts etc. (on running basis) `4,25,000
Garage rent (Annual) `9,00,000
Routine mechanical services `3,00,000
Electricity and Gas charges (for office, garage and washing station) `55,000
Depreciation of vehicles (on time basis) `6,00,000

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There is a workshop attached to transport department which repairs these vehicles and other
vehicles also. 40 per cent of transport manager’s salary is debited to the workshop. The transport department
has been apportioned `88,000 by the workshop during the month. During the month operation was 25 days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Determine the freight to be charged per ton-km, if the company earned a profit of 25 per cent on freight.

Answer
(i) Operating Cost Sheet for the month of October, 2023
Particulars Amount
(A) Standing Charges:
Salaries & Wages:
Manager (60% of `60,000) 36,000
Drivers (30 × `20,000) 6,00,000
Helpers (25 × `12,000) 3,00,000
Insurance (`8,40,000 ÷ 12) 70,000
Road licence (`6,00,000 ÷ 12) 50,000
Garage rent (`9,00,000 ÷ 12) 75,000
Electricity charges 55,000
Depreciation 6,00,000
Total (A) 17,86,000
(B) Running Charges:
Loading and unloading charges 7,65,000
Consumable Stores 1,35,000
Cost of diesel [(90,000 kms ÷ 5 kms) × `78] 14,04,000
Lubricants, Oil etc. 1,15,000
Total (B) 24,19,000
(C) Maintenance Charges:
Replacement of Tyres, Tubes & other parts 4,25,000
Routine mechanical services 3,00,000
Apportioned work shop expenses (for repairs of vehicles) 88,000
Total (C) 8,13,000
Total operating cost (A + B + C) 50,18,000
÷ Total ton-kms. 9,43,200
Cost per ton-km `5.32

(ii) Calculation of Chargeable Freight:

Freight per ton-km = Cost per ton-km + 25% profit on freight
= `5.32 ÷ 75% = `7.093

Working notes:
1. Calculation of kms ran in Oct, 2023 = 100 kms × 2 × 25 days × 20 vehicles × 90%
= 90,000 kms.

2. Loading and unloading charges = [(20 vehicles × 90%) × 25 days × 2 trips × `850]
= `7,65,000

3. Calculation of ton-kms = {100 kms × 25 days × 90% × [(5 × 9 tons) + (6 × 12 tons) + (7 × 15

tons) + (2 × 20 tons)] + 100 kms × 25 days × 70% [(5 × 9 tons) + (6 ×
12 tons) + (7 × 15 tons) + (2 × 20 tons)]} - 10%
= 9,43,200 ton-km

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BQ 11
A Factory which uses a large amount of coal is situated between two collieries X and Y, the former being 5
kms and the latter being 10 kms far from the factory. A fleet of lorries of 5 tonnes carrying capacity is used
for the collection coal from the pitheads. The lorry averages a speed of 20 kms per hour when running and
regularly takes 10 minutes in the factory premises to unload. At colliery X the loading time averages 30
minutes per load and at colliery Y 20 minutes per load.
Driver's wages, license, insurance, depreciation, garage rent and similar charges are noticed to cost
`6 per hour operated. Fuel oil, tyres, repairs and similar charges are noticed to cost `0.60/km run.

Draw a statement showing the cost per tonne km of carrying coal from each colliery if the coal
is equal quality and price. From which colliery should the purchase be made?

Answer
Statement Showing Cost per Tonne-Km
Particulars Colliery X Colliery Y
Drivers wages, license, insurance, depreciation, garage (6.00 × 70/60) (6.00 × 90/60)
rent and similar charges @ `6 per hour 7.00 9.00
Fuel oil, tyres, repairs similar charges @ `0.60 per Km (0.60 × 10 kms) (0.60 × 20 kms)
6.00 12.00
Operating Cost 13.00 21.00
÷ Effective tonne-kms ÷ 25 ÷ 50
Cost per tonne-km `0.52 `0.42

Decision: Purchase should be made from colliery X having lower operating cost per trip.

Working Notes:

(1) Total operating time in 1 trip: Colliery X Colliery Y

Running time (mine to plot) 60/20
× 5 Kms 60/20 ×
10 Kms
15 minutes 30 minutes
Loading time 30 minutes 20 minutes
Running time (plot to mine) 15 minutes 30 minutes
Unloading time 10 minutes 10 minutes
Total operating time in one trip 70 minutes 90 minutes

(2) Effective tonnes km per trip: 5 tonnes × 5 kms + 5 tonnes × 10 kms +

Nil tonnes × 5 kms Nil tonnes × 10 kms
= 25 tonne kms = 50 tonne kms

BQ 12
A Lorry starts with a load of 20 MT of Goods from Station ‘A’. It unloads 8 MT in Station ‘B’ and balance goods
in Station ‘C’. On return trip, it reaches Station ‘A’ with a load of 16 MT, loaded at Station ‘C’. The distance
between A to B, B to C and C to A are 80 Kms, 120 Kms and 160 Kms, respectively.

Compute “Absolute MT-Kilometer” and “Commercial MT – Kilometer”.

Answer
Weighted Average or Absolute basis MT kms:
= 20 MT × 80 kms + 12 MT × 120 kms + 16 MT × 160 kms
= 5,600 MT km.

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Simple Average or Commercial basis MT kms:

= Average load × Total kms travelled
20  12  16
= MT × 360 kms = 5,760 MT km.
3

BQ 13
GTC has a lorry of 6-ton carrying capacity. It operates lorry service from city A to city B. It charges `2,400 per
ton from city ‘A’ to city ‘B’ and `2,200 per ton for the return journey from city ‘B’ to city ‘A’. Goods are also
delivered to an intermediate city ‘C’ but no concession or reduction in rates is given. Distance between the
city ‘A’ to ‘B’ is 300 km and distance from city ‘A’ to ‘C’ is 140 km.

In January 2023, the truck made 12 outward journeys for 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

Annual fixed costs and maintenance charges are `6,00,000 and `1,20,000 respectively. Running charges
spent during January 2023 are `2,94,400 (includes `12,400 paid as penalty for overloading).

You are required to:

1. Calculate the cost as per (a) Commercial ton-kilometre. (b) Absolute ton-kilometre
2. Calculate Net Profit/ loss for the month of January, 2023.

Answer
1. (a) Calculation of cost per commercial ton-kms:

3,42,000
Cost per commercial ton-km = = `7.62
44,862

1. (b) Calculation of cost per absolute ton-kms:

3,42,000
Cost per absolute ton-km = = `7.65
44,720

2. Statement of Profit
(For the month of January, 2023)
Particulars Amount
Receipts:
From outward journey (12 journeys × 6 tons × `2,400) 1,72,800
From return journey (5 journeys × 8 tons × `2,200) + (7 journeys × 6 tons × `2,200) 1,80,400
Total Receipts 3,53,200
Less: Total operating cost (3,42,000)
Operating Profit 11,200
Less: Fine paid for overloading (12,400)
Net Loss for the month (`1,200)

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Notes:
(1) While calculating absolute/commercial ton km., actual load carried are considered irrespective of the
fact it attracts fines or penalty.
(2) Penalty paid for overloading is an abnormal expenditure and is not included in the operating cost of the
bus. This amount will be debited to Costing Profit and Loss A/c and hence deducted from operating
profit to arrive at net profit/loss.
(3) No concession or reduction in rates for any delivery of goods at station ‘C’.

Working Notes:
(i) Statement of Total Monthly Cost
(For the month of January, 2023)
Particulars Amount
Fixed cost (6,00,000 ÷ 12) 50,000
Maintenance charges (1,20,000 ÷ 12) 10,000
Running charges (2,94,400 – 12,400) 2,82,000
Total Operating Cost 3,42,000

(ii) Calculation of commercial ton-kms:

Total distance = 12 journeys × 300 kms × 2 (two way) = 7,200
Total weight = 12 journeys × 6 ton + 2 journeys × 4 ton + 5 journeys × 8 ton + 6
Journeys × 6 ton + 1 journey × 6 ton = 162 ton
Commercial ton-km = Total distance × Average weight
= 7,200 kms × (162 tons ÷ 26 journeys) = 44,862

(iii) Calculation of absolute ton-kms:

A to B = (10 journeys × 300 kms × 6 tons) + {2 journeys × [(140 kms × 6 tons)
+ (160 kms × 4 tons)]} = 20,960
B to A = (5 journeys × 300 kms × 8 tons) + (6 journeys × 300 kms × 6 tons) +
{1 journey × [(160 kms × 6 tons) + (140 kms × Nil tons)]}
= 23,760
Absolute ton-km = 20,960 + 23,760 = 44,720

HOTEL AND LODGES

BQ 14
A company runs a holiday home. For this purpose, it has hired a building at a rent of `10,000 per month along
with 5% of total taking. It has three types of suites for its customers viz. single room, double room and triple
room. Following information is given:
Type of suites Number of rooms Occupancy percentage
Single room 100 100%
Double room 50 80%
Triple room 30 60%

The rent of double room suite is to be fixed at 2.5 times of the single room suite and that of triple
room suite as twice of the double room suite.

The other expenses for the year 2023 are as follows:

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Expenses `
Staff salaries 14,25,000
Room attendant’s 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. You are required to
calculate the rent to be charged for each type of suite.

Answer
Statement Showing Rent to be Charged
Particulars `
Staff salaries 14,25,000
Room attendant's 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
Building rent:
Fixed 1,20,000
Variable @ 5% on taking 1,76,067
Total Cost 28,17,067
Add: Profit @ 20% on taking 7,04,266
*Total Taking 35,21,333
÷ Equivalent single room days ÷ 1,04,400
Rent for single room day `33.73
Rent for double room day (33.73 × 2.5) `84.32
Rent for triple room day (33.73 × 2.5 × 2) `168.65

Working Notes:
1. Calculation of Taking:
*Total Taking = Operating cost (excluding rent on taking) + 5% for rent + 20% for profit
= `26,41,000 + 25% of total takings
75% of Taking = `26,41,000

Total Taking = `35,21,333

2. Calculation of equivalent single room suites:

Type of suites Room days Equivalent single room suites
Single room suite 100 × 360 ×100% = 36,000 36,000 × 1= 36,000
Double room suite 50 × 360 × 80% = 14,400 14,400 × 2.5 = 36,000
Triple room suite 30 × 360 × 60% = 6,480 6,480 × 5 = 32,400
Total equivalent single room days 1,04,400

BQ 15
A lodging home is being run in a small hill station with 100 single rooms. The home offers concessional rates
during six off-season (Winter) months in a year. During this period, half of the full room rent is charged. The

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management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates and
other details for the year ending on 31st March. [Assume a month to be of 30 days].

(a) Occupancy during the season is 80% while in the off- season it is 40% only.
(b) Total investment in the home is `200 lakhs of which 80% relate to buildings and balance for furniture
and equipment.
(c) Expenses:
Staff salary [Excluding room attendants] `5,50,000
Repairs to building `2,61,000
Laundry charges `80,000
Interior `1,75,000
Miscellaneous expenses `1,90,800
(d) Annual depreciation is to be provided for buildings @ 5% and on furniture and equipment @ 15% on
straight-line basis.
(e) Room attendants are paid `10 per room day on the basis of occupancy of the rooms in a month.
(f) Monthly lighting charges are `120 per room, except in four months in winter when it is `30 per room.

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.

Answer
Statement Showing Per Day Chargeable Rent
Particulars `
Staff salary 5,5,0000
Repairs to building 2,61,000
Laundry charges 80,000
Interior 1,75,000
Miscellaneous expenses 1,90,800
Depreciation:
On Building (`200 lakhs × 80% × 5%) 8,00,000
On Furniture (`200 lakhs × 20% × 15%) 6,00,000
Room attendant's wages:
In Season (100 rooms × 80% × 30 days × 6 months × `10) 1,44,000
In Off-Season (100 rooms × 40% × 30 days × 6 months × `10) 72,000
Lighting charges:
Season & Non Winter (100 rooms × 80% × 6 months × `120) 57,600
Off-Season & Non Winter (100 rooms × 40% × 2 months × `120) 9,600
Off-Season & Winter (100 rooms × 40% × 4 months × `30) 4,800

Total Cost 29,44,800

Add: Profit @ 20% on Room rent or 25% on Cost 7,36,200
Total Rent to be Charged 36,81,000
÷ Equivalent Off-Season room days ÷ 36,000
Rent for one room per day in Off-Season `102.25
Rent for one room per day in Season (`102.25 × 2) `204.50

Working Notes:

Equivalent Off –Season room days = 100 × 80% × 30 days × 6 months × 2 (double of Off-Season) +
100 × 40% × 30 days × 6 months × 1
= 14,400 × 2 + 7,200 × 1

= 36,000 Room days

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HOSPITAL

BQ 16
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

(a) Calculate profit per Patient day, if the hospital recovers on an average `2,000 per day from each patient
(b) Find out Breakeven point for the hospital.

Answer
(a) Statement Showing Profit Per Patient Day
Particulars Amount
(A) Variable Costs:
Doctor fess (2,50,000 × 12) 30,00,000
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
Bed hire charges (100 × 750 beds) 75,0000
Total (A) 56,05,000
(B) Fixed Costs:
Rent (75,000 × 12) 9,00,000
Supervisors (2 persons × 25,000 × 12) 6,00,000
Nurses (4 persons × 20,000 × 12) 9,60,000
Ward Boys (4 persons × 5,000 × 12) 2,40,000
Repairs (Fixed) 81,000
Other fixed expenses 10,80,000
Administration expenses allocated 10,00,000
Total (B) 48,61,000

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 SERVICE COSTING CHAPTER 8

Total cost (A + B) 1,04,66,000

Collection from patients (2,000 × 8,000 patient days) 1,60,00,000
Profit (Collection – Total cost) 55,34,000
Profit per patient day (Profit ÷ Patient days) 691.75

(b) Calculation of BEP for the hospital:

BEP = Fixed cost ÷ Contribution per patient day
= 48,61,000 ÷ 1,299.375 = 3,741 patient days
Working Notes:
1. Calculation of number of Patient days:
= (35 beds × 150 days) + (25 beds × 80 days) + 750 beds
= 8,000

2. Calculation Contribution per patient day:

Contribution = Sales – Variable cost
= 1,60,00,000 – 56,05,000 = 1,03,95,000
Contribution per patient day = 1,03,95,000 ÷ 8,000 = 1,299.375

INFORMATION TECHNOLOGY (IT) AND IT ENABLED SERVICES (ITES)

BQ 17
Following are the data pertaining to Infotech Pvt. Ltd, for the year 2022 – 23:
Salary to 5 Software Engineers `15,00,000
Salary to 2 Project Leaders `9,00,000
Salary to Project Manager `6,00,000
Repairs & maintenance `3,00,000
Administration overheads `12,00,000
The company executes a Project XYZ, the details of the same as are as follows:
Project duration 6 months
Travel expenses incurred for the project `1,87,500
One Project Leader and three Software Engineers were involved for the entire duration of the project,
whereas Project Manager spends 2 months’ efforts, during the execution of the project. Two Laptops were
purchased at a cost of `50,000 each, for use in the project and the life of the same is estimated to be 2 years.
Prepare Project cost sheet considering overheads are absorbed on the basis of salary.

Answer
Project Cost Sheet
Particulars Amount
Salaries:
Software engineers (3 × 25,000 × 6 months) 4,50,000
Project Leader (37,500 × 6 months) 2,25,000
Project manager (50,000 × 2 months) 1,00,000
Total Salary 7,75,000
Overheads (50 % of Salary) 3,87,500
Travel expenses 1,87,500
Depreciation on Laptops [(1,00,000 ÷ 2 years) × 6/12] 25,000
Total Project Cost 13,75,000

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Working Notes:
1. Total Overheads per annum = Repairs & Maintenance + Administration Overheads
= 3,00,000 + 12,00,000 = 15,00,000

2. Calculation of total salary per annum and salary per month:

Particulars Total Per Annum Per Person Per Annum Per Person Per
Month
Salary to 5 Software Engineers `15,00,000 `3,00,000 `25,000
Salary to 2 Project Leaders `9,00,000 `4,50,000 `37,500
Salary to Project Manager `6,00,000 `6,00,000 `50,000
Total `30,00,000 `13,50,000 `1,12,500

3. Calculation of Overhead absorption rate:

Overhead absorption rate = Total overheads per annum ÷ Total salary per annum
= 15,00,000 ÷ 30,00,000 = 50% of salary

TOLL PLAZA/ TOLL ROADS

BQ 18
BHG Toll Plaza Ltd built a 60 km. long highway and now operates a toll plaza to collect tolls from passing
vehicles using the highway. The company has estimated that a total of 12 crores vehicles (only single type of
vehicle) will be using the highway during the 10 years toll collection tenure.

Toll Operating and Maintenance cost for the month of April are as follows:
Salary:
Collection Personnel (3 Shifts and 4 persons per shift) `550 per day per person
Supervisor (2 Shifts and 1 person per shift) `750 per day per person
Security Personnel (3 Shifts and 6 persons per shift) `450 per day per person
Toll Booth Manager (2 Shifts and 1 person per shift) `900 per day per person
Electricity `8,00,000
Telephone `1,40,000
Maintenance cost `30 Lakhs

Monthly depreciation and amortisation expenses will be `1.50 crore. Further, the company needs 25% profit
over total cost to cover interest and other costs.

Required:
1. Calculate cost per kilometre per month.
2. Calculate the toll rate per vehicle.

Answer
1. Statement of Cost per Kilometer per Month
(for the month April)
Particulars Amount (`)
Salary to Collection personnel (3 shifts × 4 persons × 30 days × 550 per day) 1,98,000
Salary to Supervisor (2 shifts × 1 person × 30 days × 750 per day) 45,000
Salary to Security personnel (3 shifts × 6 persons × 30 days × 450 per day) 2,43,000
Salary to Toll booth manager (2 shifts × 1 persons × 30 days × 900 per day) 54,000
Electricity 8,00,000
Telephone 1,40,000

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 SERVICE COSTING CHAPTER 8

Maintenance cost 30,00,000

Depreciation and amortization expenses 1,50,00,000
Total Cost for April 2020 1,94,80,000
÷ Total kilometers ÷ 60 kms
Cost per Kilometer for April `3,24,667

2. Calculation of toll rate per vehicle:

Total Toll Collection in April = Total Cost for April + 25%
= `1,94,80,000 + 25 % = `2,43,50,000

Toll Rate per vehicle = Total collection for April ÷ Total vehicles in April
= `2,43,50,000 ÷ 10,00,000 = `24.35

Working Notes:
Calculation of number of vehicles using the highway per month:
Total estimated number of vehicles using highway in 10 years = 12 crores
∴ Total number of vehicles using highway in 1 year = 1.2 crores
∴ Total number of vehicles using highway in 1 month = 10,00,000

BQ 19
SLS Infrastructure built and operates 110 km. highway on the basis of Built-Operate-Transfer (BOT) for the
period of 25 years. A traffic assessment has been carried out to estimate the traffic flow per day shows the
following figures:
Sl. No. Type of vehicle Daily traffic volume
1 Two wheelers 44,500
2 Car and SUVs 3,450
3 Bus and LCV 1,800
4 Heavy commercial vehicles 816

The following is the estimated cost of the project:

Amount
Activities
(` in Lakh)
Site clearance 170.70
Land development and filling work 9,080.35
Sub base and base courses 10,260.70
Bituminous work 35,070.80
Bridge, flyover, underpasses, pedestrian subway, footbridge, etc. 29,055.60
Drainage and protection work 9,040.50
Traffic sign, marking and road appurtenance 8,405.00
Maintenance, repairing and rehabilitation 12,429.60
Environment management 982.00
Total Project Cost 1,14,495.25

An average cost of `1,120 Lakh has to be incurred on administration and toll plaza operation.

On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights has
been assigned to passing vehicles:
Sl. No. Type of vehicle Weight (%)
1 Two wheelers 5%
2 Car and SUVs 20%

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3 Bus and LCV 30%

4 Heavy commercial vehicles 45%

Required:
(1) Calculate the total project cost per day of concession period.
(2) Compute toll fee to be charged for per vehicle of each type, if the company wants earn a profit of 15%
on total cost.

Note: Concession period is a period for which an infrastructure is allowed to operate and recover its
investment.

Answer
(1) Statement Showing Total Project Cost per Day
Amount
Activities
(` in Lakh)
Site clearance 170.70
Land development and filling work 9,080.35
Sub base and base courses 10,260.70
Bituminous work 35,070.80
Bridge, flyover, underpasses, pedestrian subway, footbridge, etc. 29,055.60
Drainage and protection work 9,040.50
Traffic sign, marking and road appurtenance 8,405.00
Maintenance, repairing and rehabilitation 12,429.60
Environment management 982.00
Administration and toll plaza operation cost 1,120.00
Total Project Cost 1,15,615.25
÷ Concession period in days (25 years × 365 days) ÷ 9,125
Cost per day of concession period (` in Lakh) `12.67

(2) Statement Showing Toll Fee to be Charged per Vehicle of Each Type
Particulars Amount
Toll to be recovered per day 14,57,050
÷ Total equivalent Two wheelers per day ÷ 76,444
Toll per Two wheelers `19.06
Toll per Cars and SUVs (`19.06 × 4) `76.24
Toll per Bus and LCV (`19.06 × 6) `114.36
Toll per Heavy commercial vehicles (`19.06 × 9) `171.54

Working note:
(a) Calculation of Toll per day:
Toll recovery per day = Cost per day of concession period + 15% profit on cost
= `12,67,000 + 15% of `12,67,000 = `14,57,050
(b) Calculation of Equivalent Two wheelers per day:
Sl. Weight Equivalent Two
Type of vehicle Ratio Daily traffic volume
No. (%) wheeler
1 Two wheelers 5% 1 44,500 44,500
2 Car and SUVs 20% 4 3,450 13,800
3 Bus and LCV 30% 6 1,800 10,800
4 Heavy commercial vehicles 45% 9 816 7,344
Total Equivalent Two wheeler per day 76,444

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EDUCATIONAL INSTITUTIONS

BQ 20
AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,
Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes, but
for accounting purpose it treats higher secondary as a separate responsibility centre. The Managing
committee of the school wants to revise its fee structure for higher secondary students. The accountant of
the school has provided the following details for a year:

Amount (`)
Teachers’ salary (25 teachers × `35,000 × 12 months) 1,05,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × `10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000

Other information:
(a)
Standard 11 & 12 Primary &
Arts Commerce Science Secondary
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156
No. of examinations in a year 2 2 2 2
Time spent at library per student per year 180 hours 120 hours 240 hours 60 hours
Time spent by principal for administration 208 hours 312 hours 480 hours 1,400 hours
Teachers for 11 & 12 standard 4 5 6 10

(b) One teacher who teaches economics for Arts stream students also teaches commerce stream students.
The teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.

(c) There is another teacher who teaches mathematics for Science stream students also teaches business
mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
commerce students.

(d) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for
higher secondary section.

(e) All school students irrespective of section and age participates in annual functions and sports activities.

Required:

1. Calculate cost per student per annum for all three streams.
2. If the management decides to take uniform fee of `1,000 per month from all higher secondary students,
calculate stream wise profitability.
3. If management decides to take 10% profit on cost, compute fee to be charged from the students of all
three streams respectively.

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Answer
1. Statement of Cost per Student per annum
Particulars Arts (`) Commerce (`) Science (`) Total (`)
Teachers’ salary 16,80,000 21,00,000 25,20,000 63,00,000
(35,000×12×4) (35,000×12×5) (35,000×12×6)
Re-apportionment of salary:
of Economics teacher (84,000) 84,000 - -
of Mathematics teacher - 61,091 (61,091) -
Principal’s salary 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary - - 1,72,800 1,72,800
Salary to library staff 43,200 28,800 57,600 1,29,600
Salary to peons 31,636 94,909 47,455 1,74,000
Examination expenses 86,400 2,59,200 1,29,600 4,75,200
Salary to other staffs 38,400 1,15,200 57,600 2,11,200
Office & Administration expenses 1,21,600 3,64,800 1,82,400 6,68,800
Annual Day expenses 36,000 1,08,000 54,000 1,98,000
Sports expenses 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
÷ Number of Students ÷ 120 ÷ 360 ÷ 180 ÷ 660
Cost per student per annum 17,397 9,533 19,238 13,610

2. Statement of Profitability
Particulars Arts (`) Commerce (`) Science (`) Total (`)
No. of students 120 360 180 660
Total Fees @ 12,000 per student p.a. 14,40,000 43,20,000 21,60,000 79,20,000
Less: Total Cost per annum (20,87,636) (34,32,000) (34,62,764) (89,82,400)
Total Profit/ (Loss) per annum (6,47,636) 8,88,000 (13,02,764) (10,62,400)

3. Statement Showing Fees to be Charged to Earn a 10% Profit on Cost

Particulars Arts (`) Commerce (`) Science (`)
Cost per student per annum 17,397 9,533 19,238
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764

Working Notes:
(a) Re-apportionment of Economics and Mathematics teachers’ salary:
Economics Mathematics
Particulars
Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re-apportionment (`) (84,000) 84,000 (61,091) 61,091
(`4,20,000 ÷ 1,040) × 208 (`4,20,000 ÷ 1,100) × 160

(b) Principal’s salary has been apportioned on the basis of time spent by him for administration of classes.

(c) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the students.

(d) Salary of library staffs are apportioned on the basis of time spent by the students in library.

(e) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable to higher
secondary classes is calculated as below:

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 SERVICE COSTING CHAPTER 8

Particulars Amount (`)

Peon dedicated for higher secondary (1 peon × 10,000 × 12 months) 1,20,000
Add: 15% of other peons’ salary {15% of 3 peons × 10,000 × 12 months) } 54,000
Total 1,74,000

(f) Examination expenditure has been apportioned taking number of students into account (It may also be
apportioned on the basis of number of examinations).

(g) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are
apportioned on the basis of number of students.

INSURANCE COMPANIES

BQ 21
Sanziet Lifecare Ltd. operates in life insurance business. Last year it launched a new term insurance policy
for practicing professionals ‘Professionals Protection Plus’. The company has incurred the following
expenditures during the last year for the policy:
Policy development cost `11,25,000
Cost of marketing of the policy `45,20,000
Sales support expenses `11,45,000
Policy issuance cost `10,05,900
Policy servicing cost `35,20,700
Claims management cost `1,25,600
IT cost `74,32,000
Postage and logistics `10,25,000
Facilities cost `15,24,000
Employees cost `5,60,000
Office administration cost `16,20,400
Number of policy sold 528
Total insured value of policies `1,320 crore
Required:
1. Calculate total cost for Professionals Protection Plus’ policy segregating the costs into four main activities
namely (a) Product development, Marketing and Sales support, (b) Operations, (c) IT and (d) Support
functions.
2. Calculate cost per policy.
3. Calculate cost per rupee of insured value.

Answer
1. Statement Showing Total Cost for ‘Professionals Protection Plus’ Policy
Particulars Amount
(a) Product development, Marketing and Sales support:
Policy development cost 11,25,000
Cost of marketing of the policy 45,20,000
Sales support expenses 11,45,000
Total (a) 67,90,000
(b) Operations:
Policy issuance cost 10,05,900
Policy servicing cost 35,20,700
Claims management cost 1,25,600
Total (b) 46,52,200

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 CHAPTER 8 SERVICE COSTING

(c) IT Cost:
IT cost 74,32,000
Total (c) 74,32,000
(d) Support functions:
Postage and logistics 10,25,000
Facilities cost 15,24,000
Employees cost 5,60,000
Office administration cost 16,20,400
Total (d) 47,29,400
Total Cost (a + b + c + d) 2,36,03,600

2. Calculate cost per policy = Total Cost ÷ No. of Policies

= `2,36,03,600 ÷ 528 = `44,703.79

3. Cost per rupee of insured value = Total Cost ÷ Total insured value
= `2,36,03,600 ÷ `1,320 crores = `0.0018

FINANCIAL INSTITUTES

BQ 22
The loan department of a bank performs several functions in addition to home loan application processing
task. It is estimated that 25% of the overhead costs of loan department are applicable to the processing of
home-loan application. The following information is given concerning the processing of a loan application:

Direct professional labour:

Loan processor monthly salary `2,40,000

(4 employees @ `60,000 each)

Loan department overhead costs (monthly):

Chief loan officer’s salary `75,000

Telephone expenses `7,500
Depreciation Building `28,000
Legal advice `24,000
Advertising `40,000
Miscellaneous `6,500
Total overhead costs `1,81,000

You are required to compute the cost of processing home loan application on the assumption
that five hundred home loan applications are processed each month.

Answer
Statement of Cost of Processing of One Home Loan Application
Particulars Amount
Direct professional labour cost (4 employees × 60,000) 2,40,000
Service overhead cost (25% of 1,81,000) 45,250
Total processing cost per month 2,85,250
÷ Number of applications processed per month ÷ 500
Cost of Processing One Home Loan Application `570.50

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 SERVICE COSTING CHAPTER 8

POWER HOUSES

BQ 23
Prepare the cost statement of Ignus Thermal Power Station showing the cost of electricity generated per
kwh, from the data provided below pertaining to the year 2022-23:

Total units generated 20,00,000 kwh

Operating labour `30,00,000
Repairs & maintenance `10,00,000
Lubricants, spares and stores `8,00,000
Plant supervision `6,00,000
Administration overheads `40,00,000

5 kwh. of electricity generated per kg of coal consumed @ `4.25 per kg. Depreciation charges @ 5% on capital
cost of `5,00,00,000.

Answer
Cost Statement of Ignus Thermal Power Station
Particulars Amount
(A) Fixed Costs:
Plant supervision 6,00,000
Administration overheads 40,00,000
Depreciation (`5,00,00,000 × 5%) 25,00,000
Total (A) 71,00,000
(B) Variable Costs:
Operating labour (Student can treat it as fixed also) 30,00,000
Lubricant, spares and stores 8,00,000
Repairs and Maintenance 10,00,000
Coal cost (20,00,000 kwh ÷ 5 kwh) × `4.25 per kg 17,00,000
Total (B) 65,00,000
Total Operating Cost (A + B) 1,36,00,000
÷ Total kwh generated ÷ 20,00,000
Cost of electricity generated per kwh `6.80

BQ 24
From the following data pertaining to the year 2022-23 prepare a cost statement showing the cost of
electricity generated per kwh by Chambal Thermal Power Station.

Total units generated 10,00,000 kwh

Operating labour `15,00,000
Repairs & maintenance `5,00,000
Lubricants, spares and stores `4,00,000
Plant supervision `3,00,000
Administration overheads `20,00,000

5 kwh. of electricity generated per kg. of coal consumed @ `4.25 per kg. Depreciation charges @ 5% on
capital cost of `2,00,00,000.

Answer
Cost Statement of Chambal Thermal Power Station
Particulars Amount

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 CHAPTER 8 SERVICE COSTING

(A) Fixed Costs:

Plant supervision 3,00,000
Administration overheads 20,00,000
Depreciation (`2,00,00,000 × 5%) 10,00,000
Total (A) 33,00,000
(B) Variable Costs:
Operating labour (Student can treat it as fixed also) 15,00,000
Lubricant, spares and stores 4,00,000
Repairs and Maintenance 5,00,000
Coal cost (10,00,000 kwh ÷ 5 kwh) × `4.25 per kg 8,50,000
Total (B) 32,50,000
Total Operating Cost (A + B) 65,50,000
÷ Total kwh generated ÷ 10,00,000
Cost of electricity generated per kwh `6.55

BQ 25
Solar Power Ltd. has a power generation capacity of 1000 Megawatt per day. On an average it operates at
85% of its installed capacity. The cost structure of the plant is as under:

Cost Particulars Amount (` in lakhs)

Employee cost per year 2,500
Solar panel maintenance cost per year 250
Site maintenance cost per year 150
Depreciation per year 5,940

Calculate cost of generating 1kW of power. [1 Megawatt = 1,000 kW]

Answer
Calculation of 1 kW Power Generation Cost
Particulars Amount (` in Lakhs)
Employee cost per year 2,500
Solar panel maintenance cost per year 250
Site maintenance cost per year 150
Depreciation per year 5,940
Total Cost 8,840
÷ Estimated Power generated in megawatt ÷ 3,10,250
Cost of generating 1 megawatt in ` 2,849.31
Cost of generating 1 kW (2,849.31 ÷ 1,000) 2.849

Working:
1. Estimated power generated in a year = 1000 Megawatt × 85% × 365 days
= 3,10,250 Megawatt

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 SERVICE COSTING CHAPTER 8

PAST YEAR QUESTIONS

PYQ 1
The following information relates to a bus operator:
Cost of the bus `18,00,000
Insurance charges 3% p.a.
Manager-cum accountant's salary `8,000 p.m.
Annual tax `50,000
Garage rent `2,500 p.m.
Annual repair and maintenance `1,50,000
Expected life of bus 15 years
Scrap value at the end of 15 years `1,20,000
Driver's salary `15,000 p.m.
Conductor's salary `12,000 p.m.
Stationery `500 p.m.
Engine oil, lubricants (for 1,200 kms.) `2,500
Diesel and oil (for 10 kms.) `52
Commission to driver and conductor (shared equally) 10% of collections
Route distance 20 km long
The bus will make 3 round trips for carrying on an average 40 passengers in each trip. Assume 15%
profit on collections. The bus will work on an average 25 days in a month.

Calculate fare for passenger-km.

[(8 Marks) Nov 2013]

Answer
Statement of Fare for Passenger-km
Particulars Amount
(A) Standing Charges:
Depreciation per month [(18,00,000 - 1,20,000) × 1/15 × 1/12] 9,333
Insurance per month [(18,00,000 × 3%) × 1/12] 4,500
Manager-cum accountant’s salary 8,000
Annual Tax for one month (50,000 × 1/12) 4,167
Garage Rent 2,500
Driver’s salary 15,000
Conductor’s salary 12,000
Stationery 500
Total (A) 56,000
(B) Running Charges:
Diesel and oil (52/10 × 3,000 kms) 15,600
Engine oil, lubricants (2,500/1,200 × 3,000 kms) 6,250
Commission @ 10% of collections ‘WN’ 12,047
Total (B) 33,897
(C) Maintenance Charges:
Repairs and maintenance (1,50,000 × 1/12) 12,500
Total (C) 12,500
Total operating cost (A + B + C) 1,02,397
Add: Profit @ 15% of collections 18,070
Collections (WN 3) 1,20,467
÷ Total Passenger-kms ÷ 1,20,000
Fare for per passenger-km `1.004

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 CHAPTER 8 SERVICE COSTING

WN 1: Calculation of total travelling of bus in one month:

= 2 × No of round trips daily × Distance one way × No of days
= 2 × 3 × 20 × 25 = 3,000 kms

WN 2: Calculation of passenger-kms per month:

= No of kms travelled per month × No of passengers
= 3,000 × 40 = 1,20,000 passenger-kms

WN 3: Calculation of collections:
Total collections = Operating cost (excluding commission on collections) + 10% for
commission + 15% for profit = 90,350 + 25% of collections
Collections = `1,20,467

PYQ 2
A mini-bus, having a capacity of 32 passengers, operates between two places – ‘A’ and ‘B’. The distance
between the place ‘A’ and ‘B’ is 30 km. The bus makes 10 round trips in a day for 25 days in a month. On an
average, the occupancy ratio is 70% and is expected throughout the year.

The details of other expenses are as under:

Insurance `15,600 per annum
Garage Rent `2,400 per quarter
Road Tax `5,000 per annum
Repairs `4,800 per quarter
Salary of Operating Staff `7,200 per month
Tyres and Tubes `3,600 per quarter
Diesel (one litre is consumed for every 5 km) `13 per litre
Oil and Sundries `22 per 100 km run
Depreciation `68,000 per annum

Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit @ 25% on total
taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger
kilometer and one way fare per passenger.
[(8 Marks) May 2015]

Answer
Operating Cost Statement
Particulars Amount
(A) Fixed Charges:
Insurance 15,600
Garage Rent (2,400 × 4 quarters) 9,600
Road Tax 5,000
Salary of Operating Staff (7,200 × 12 months) 86,400
Depreciation 68,000
Total (A) 1,84,600
(B) Variable Charges:
Diesel [(1,80,000 km ÷ 5 km) × 13] 4,68,000
Oil and Sundries [(1,80,000 km ÷ 100 km) × 22] 39,600
Total (B) 5,07,600

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 SERVICE COSTING CHAPTER 8

(C) Maintenance Charges:

Repairs (4,800 × 4 quarters) 19,200
Tyres and Tubes (3,600 × 4 quarters) 14,400
Total (C) 33,600
Total Operating Cost (A + B + C) 7,25,800
Add: Profit @ 25% of Taking 3,42,359
Add: Passenger Tax @ 22% Taking 3,01,275
Total Taking 13,69,434

Calculation of cost per passenger km and one way fare per passenger:

Total Operating Cost 7 ,25 ,800

Cost per passenger km = = = `0.18
Total Passenger Km 40 ,32 ,000

Total Taking 13 ,69 ,434

One way fare per passenger = × 30 km = × 30 km
Total Passenger Km 40 ,32 ,000
= `10.19

WN 1: Calculation of total travelling of bus in one year:

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

WN 2: Calculation of passenger-kms per year:

1,80,000 km × 32 passengers × 70% = 40,32,000 passenger-kms

WN 3: Calculation of Taking:
Total taking = Operating cost + 25% for profit + 22% for passenger tax
= 7,25,800 + 47% of Total taking
Total Taking = `13,69,434

PYQ 3
‘RP’ Resort (P) Ltd. offers three types of rooms to its guests, viz. deluxe room, super deluxe room and luxury
suite.
You are required to ascertain the tariff to be charged to the customers for different types of
rooms on the basis of following information:
Type of Rooms Number of Rooms Occupancy
Deluxe Room 100 90%
Super Deluxe Room 60 75%
Luxury Suite 40 60%

Rent of ‘super deluxe’ room is to be fixed at 2 times of the ‘deluxe room’ and that of ‘luxury suite’ is
three times of ‘deluxe room’.

Annual expenses are as follows:

Particulars ` in Lakhs
Staff salaries 680.00
Lighting, heating and power 300.00
Repairs, maintenance and renovation 180.00
Linen 30.00
Laundry charges 24.00

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Interior decoration 75.00

Sundries 30.28

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

Profit is to be provided @ 25% on total taking and assume 360 days in a year.
[(8 Marks) June 2015]

Answer
Statement Showing Tariff to be Charged
Particulars ` in Lakhs
Staff salaries 680.00
Lighting, heating and power 300.00
Repairs, maintenance and renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28
Room attendant's wages 286.20
Depreciation :
Building 5% on `900 lakhs 45.00
Furniture and fixtures 10% on `90 lakhs 9.00
Air conditioners 10% on `75 lakhs 7.50
Total Cost 1,666.98
Add: Profit @ 25% on taking 555.66
Total Taking 2,222.64
÷ Equivalent single room days ÷ 90,720
Tariff for Deluxe Room `2,450
Tariff for Super Deluxe Room (2,450 × 2) `4,900
Tariff for Luxury Suite (2,450 × 3) `7,350

Working Notes:
1. Calculation of Attendant wages:
Wages = No of rooms occupied in a year × `500 per room per day
= 57,240 × `500 = `286.20 lakhs

2. Calculation of equivalent single room suites:

Name of Room Room Days Equivalent Deluxe Room p.a.
Deluxe Room 100 × 360 × 90% = 32,400 32,400 × 1= 32,400
Super Deluxe Room 60 × 360 × 75% = 16,200 16,200 × 2 = 32,400
Luxury Suite 40 × 360 × 60% = 8,640 8,640 × 3 = 25,920
Total 57,240 90,720

PYQ 4
Royal transport company has been given a 50 kilometre long route to run 6 buses. The cost of each bus is
`7,50,000. The buses will make 3 round trips per day carrying on an average 75 percent passengers of their
seating capacity. The seating capacity of each bus is 48 passengers. The buses will run on an average 25 days
in a month. The other information for the year 2016-17 is given below:

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 SERVICE COSTING CHAPTER 8

Garage Rent `6,000 per month

Annual Repairs & Maintenance `24,000 each bus
Salaries of 6 drivers `4,000 each per month
Wages of 6 conductors `1,600 each per month
Wages of 6 cleaners `1,000 each per month
Manager’s salary `10,000 per month
Road Tax, Permit fee, etc. `6,000 for a quarter
Office expenses `2,500 per month
Cost of diesel per litre `66
Kilometer run per litre for each bus 6 kilometres
Annual Depreciation 20% of cost
Annual Insurance 4% of cost
Engine oils & lubricants (for 1,000 kilometres) `2,000

You are required to calculate the bus fare to be charged from each passenger per kilometer
(upto four decimal points), if the company wants to earn profit of 33-⅓% on taking (total receipts from
passengers).
[(8 Marks) Nov 2016]

Answer
Operating Cost Sheet
Particulars Amount
(A) Fixed Expenses:
Garage rent (6,000 × 12) 72,000
Salaries of 6 drivers (4,000 × 6 × 12) 2,88,000
Wages of 6 conductors (1,600 × 6 × 12) 1,15,200
Wages of 6 cleaners (1,000 × 6 × 12) 72,000
Manager’s salary (10,000 × 12) 1,20,000
Road tax, permit fee etc. (6,000 × 4) 24,000
Office expenses (2,500 × 12) 30,000
Depreciation (7,50,000 × 20% × 6) 9,00,000
Insurance (7,50,000 × 4% × 6) 1,80,000
Total (A) 18,01,200
(B) Variable Expenses:
Diesel (5,40,000 × 66 ÷ 6) 59,40,000
Engine oils & lubricants (2,000 ÷ 1,000) × 5,40,000 10,80,000
Total (B) 70,20,000
(C) Maintenance Expenses:
Repairs and maintenance (24,000 × 6) 1,44,000
Total (C) 1,44,000
Total operating cost (A + B + C) 89,65,200
Add: Profit @ 33-⅓% of taking 44,82,600
Taking 1,34,47,800
÷ Total passenger kms ÷ 1,94,40,000
Fare per passenger km `0.6918

WN 1: Calculation of total traveling of 5 buses per annum:

= No of round trips daily × Distance two way × No of days × No of buses × 12
= 3 × 100 × 25 × 6 × 12 = 5,40,000 kms

WN 2: Calculation of passenger kms per annum:

= No of kms travelled per annum × Capacity occupied × No of passengers
= 5,40,000 × 48 × 75% = 1,94,40,000 kms

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PYQ 5
A group of ‘Health Care Services’ has decided to establish a Critical Care Unit in a metro city with an
investment of `85 Lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and 10 more beds, if
required, can be added.
Building rent `2,25,000 per month
Manager salary (Number of manager-03) `50,000 per month each
Nurses salary (Number of nurses-24) `18,000 per month each
Ward boy’s salary (Number of ward boys-24) `9,000 per month each
Doctor’s payment (based on number of patients attended) `5,50,000 per month
Food to laundry services (Variable) `39,53,000
Medicines to patients (Variable) `22,75,000 per year
Administration overheads `28,00,000 per year
Depreciation on equipments 15% p.a. on original cost

It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were
occupied and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of `950 per bed to accommodate the flow of patients.
However, this never exceeded the normal capacity of 50 beds on a day.

Find out:
(a) Profit per Patient day, if the hospital charges on an average `2,500 per day from each patient.
(b) Breakeven point per patient day (make calculation on annual basis).
[(10 Marks) May 2018]

Answer
(a) Statement Showing Profit Per Patient Day
Particulars Amount
(A) Variable Cost:
Food and laundry Services 39,53,000
Medicines to Patients 22,75,000
Doctor’s Payment (5,50,000 × 12) 66,00,000
Hire Charges of Beds (250 × 950) 2,37,500
Total (A) 1,30,65,500
(B) Fixed Expenses:
Building Rent (2,25,000 × 12) 27,00,000
Manager’s Salary (3 × 50,000 × 12) 18,00,000
Nurse’s Salary (24 × 18,000 × 12) 51,84,000
Ward Boy’s Salary (24 × 9,000 × 12) 25,92,000
Administration Overheads 28,00,000
Depreciation on Equipment (15% of 85,00,000) 12,75,000
Total (B) 1,63,51,000
Total cost (A + B) 2,94,16,500
Collection from patients (2,500 × 14,600 patient days) 3,65,00,000
Profit (Collection – Total cost) 70,83,500
Profit per patient day (Profit ÷ Patient days) 485.17

(b) Calculation of BEP for the hospital:

BEP = Fixed cost ÷ Contribution per patient day
= 1,63,51,000 ÷ 1,605.10 = 10,186.90 patient days

Working Notes:

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 SERVICE COSTING CHAPTER 8

1. Calculation of number of Patient days:

= (50 beds × 200 days) + (30 beds × 105 days) + (20 beds × 60
days) + 250 beds = 14,600

2. Calculation Contribution per patient day:

Contribution = Sales – Variable cost
= 3,65,00,000 – 1,30,65,500 = 2,34,34,500
Contribution per patient day = 2,34,34,500 ÷ 14,600 = 1,605.10

PYQ 6
M/s XY Travels has been given a 25 km long route to run an air-conditioned Mini Bus. The cost of bus is
`20,00,000. It has been insured at 3% p.a. while annual road tax amounts to `36,000. Annual repairs will be
`50,000 and the bus is likely to last for 5 years. The driver's salary will be `2,40,000 per annum and the
conductor's salary will be `1,80,000 per annum in addition to 10% of takings as commission (to be shared
by the driver and the conductor equally). Office and administration overheads will be `3,18,000 per annum.
Diesel and oil will be `1,500 per 100 km. The bus will make 4 round trips carrying on an average 40
passengers on each trip. Assuming 25% profit on takings, and the bus will run on an average 25 days in a
month.

You are required to:

(a) Prepare operating cost sheet (for the month).
(b) Calculate fare to be charged per passenger km.
[(10 Marks) Nov 2018]

Answer
(a) Operating Cost Sheet (for the month)
Particulars Amount
(A) Standing Charges:
Depreciation (20,00,000 ÷ 5 Years × 1/12) 33,333
Insurance [(20,00,000 × 3%) ÷ 12] 5,000
Annual Tax for (36,000 ÷ 12) 3,000
Driver’s salary (2,40,000 ÷ 12) 20,000
Conductor’s salary (1,80,000 ÷ 12) 15,000
Office and administration overheads (3,18,000 ÷ 12) 26,500
Total (A) 1,02,833
(B) Running Charges:
Diesel and oil (1,500/100 × 5,000 kms) 75,000
Commission @ 10% of collections ‘WN’ 28,000
Total (B) 1,03,000
(C) Maintenance Charges:
Repairs (50,000 × 1/12) 4,167
Total (C) 4,167
Total operating cost (A + B + C) 2,10,000
Add: Profit @ 25% of collections 70,000
Total Takings (WN 3) 2,80,000

(b) Calculation of fare to be charged per passenger-km:

Fare per passenger km = Total Takings ÷ Total Passenger-kms
= 2,80,000 ÷ 2,00,000 = ` 1.40

WN 1: Calculation of total travelling of bus in one month:

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= 2 × No of round trips daily × Distance one way × No of days

= 2 × 4 × 25 × 25 = 5,000 kms

WN 2: Calculation of passenger-kms per month:

= No of kms travelled per month × No of passengers
= 5,000 × 40 = 2,00,000 passenger-kms

WN 3: Calculation of Takings:
Total takings = Operating cost (excluding commission on takings) + 10% for
commission + 25% for profit
= 1,82,000 + 35% of takings
Total Takings = `2,80,000

PYQ 7
X Ltd. distributes its goods to a regional dealer using single lorry. The dealer premises are 40 kms away by
road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on the
outward journey and empty on return journey.

The following information is available:

Diesel consumption 8 km per litre
Diesel cost `60 per litre
Engine oil `200 per week
Driver’s wages (fixed) `2,500 per week
Repairs `600 per week
Garage rent `800 per week
Cost of lorry (excluding cost of type) `9,50,000
Life of lorry 1,60,000 kms
Insurance `18,200 per annum
Cost of tyres `52,500
Life of tyres 25,000 kms
Estimated sale value of the lorry at end of its life is `1,50,000
Vehicle license cost `7,800 per annum
Other overheads cost `41,600 per annum
The lorry operates 5 days a week

Required:
(1) A statement to show the total cost of operating the vehicle for the four week period analysed into
Running cost and Fixed cost.
(2) Calculate the vehicle operating cost per km and per tonne km. (assume 52 weeks in a year.)
[(10 Marks) May 2019]

Answer
(1) Statement Showing Total Cost of Operating
(For the four weekly period)
Particulars Amount
(A) Fixed Costs:
Driver’s wages (2,500 × 4) 10,000
Garage rent (800 × 4) 3,200
Insurance (18,200 × 4/52) 1,400
Vehicle license (7,800 × 4/52) 600
Other overheads (41,600 × 4/52) 3,200
Total (A) 18,400

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 SERVICE COSTING CHAPTER 8

(B) Running Costs:

Diesel (3,200 Kms × 60/8) 24,000
Engine oil (200 × 4) 800
Repairs (600 × 4) 2,400
Cost of tyres 6,720
Depreciation [{(9,50,000 – 1,50,000) ÷ 1,60,000 Kms} × 3,200 Kms] 16,000
Total (B) 49,920
Total operating cost (A + B) 68,320

(2) Vehicle cost per kilometer = Total cost ÷ Total Kms

= 68,320 ÷ 3,200 kms = `21.35

Cost per tonne kilometer = Total cost ÷ Total tonne kms

= 68,320 ÷ 16,000 kms = `4.27

Working notes:
1. Distance travelled in 4 weeks period:
40 kms one way × 2 (return) × 2 trips × 5 days × 4 weeks = 3,200 kms

2. Total tonne kilometers = 1,600 kms × 10 + 1,600 kms × Nil = 16,000

3. Tyres cost = (52,500  25,000 kms) × 3,200 kms = `6,720

PYQ 8
A hotel is being run in a hill station with 200 single rooms. The hotel offers concessional rates during six off-
season (Winters) months in a year. During this period, half of the full room rent is charged.

The management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates
and other details for the year ending 31st March, 2019:

(1) Occupancy during the season is 80% while in the off-season it is 40%.
(2) Total investment in the hotel is `300 lakhs of which 80% relates to Building and the balance to
Furniture and other Equipment.
(3) Room attendants are paid `15 per room per day on the basis of occupancy of rooms in a months.
(4) Expenses:
Staff Salary (excluding that of room attendants) `8,00,000
Repairs to Buildings `3,00,000
Laundry Charges `1,40,000
Interior Charges `2,50,000
Miscellaneous Expenses `2,00,200

(5) Annual depreciation is to be provided on Building @ 5% and 15% on Furniture and other Equipments
on straight line method.
(6) Monthly lighting charges are `110, except in four months in winter when it is `30 per room.

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

[(10 Marks) Nov 2019]

Answer

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 CHAPTER 8 SERVICE COSTING

Statement Showing Per Day Chargeable Rent

Particulars `
Staff Salary 8,00,000
Repairs to Building 3,00,000
Laundry Charges 1,40,000
Interior Charges 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation:
On Building (`300 lakhs × 80% × 5%) 12,00,000
On Furniture (`300 lakhs × 20% × 15%) 9,00,000
Room attendant's wages:
In Season (200 rooms × 80% × 30 days × 6 months × `15)
In Off-Season (200 rooms × 40% × 30 days × 6 months × `15) 4,32,000
Lighting charges: 2,16,000
Season (200 rooms × 80% × 6 months × `110)
Off-Season & Non Winter (200 rooms × 40% × 2 months × `110) 1,05,600
Off-Season & Winter (200 rooms × 40% × 4 months × `30) 17,600
Total Cost 9,600
Add: Profit @ 20% on Room rent or 25% on Cost 45,71,000
Total Rent to be Charged 11,42,750
÷ Equivalent Off-Season room days 57,13,750
÷ 72,000
Rent for one room per day in Off-Season `79.356
Rent for one room per day in Season (`79.36 × 2) `158.72

Working Notes:
Equivalent Off –Season room days = 200 × 80% × 30 days × 6 months × 2 (double of Off-Season) +
200 × 40% × 30 days × 6 months × 1
= 28,800 × 2 + 14,400 × 1 = 72,000 Room days

PYQ 9
SEZ Ltd. built a 120 km. long highway and now operates a toll plaza to collect tolls. The company has invested
`900 crore to build the road and has estimated that a total of 120 crore vehicles will be using the highway
during the 10 years toll collection tenure. The other costs for the month of June 2020 are as follows:

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

Required:
1. Calculate cost per kilometer.
2. Calculate the toll rate per vehicle.
[(10 Marks) Nov 2020]

Answer

8.37
 SERVICE COSTING CHAPTER 8

1. Statement of Cost per Kilometer

(for the month June 2020)
Particulars Amount
Apportionment of capital cost/ Depreciation [(`900 crores ÷ 10 years) ×1/12] 7,50,00,000
Salary to Collection personnel (3 shifts × 5 persons × 30 days × `200 per day) 90,000
Salary to Supervisor (3 shifts × 2 person × 30 days × `350 per day) 63,000
Salary to Security personnel (2 shifts × 2 persons × 30 days × `200 per day) 24,000
Salary to Toll booth manager (3 shifts × 1 persons × 30 days × `500 per day) 45,000
Electricity 1,50,000
Telephone 1,00,000
Maintenance cost 50,00,000
Total Cost 8,04,72,000
÷ Total kilometers ÷ 120 kms
Cost per Kilometer `6,70,600

2. Calculation of toll rate per vehicle:

Total Toll Collection in June 2020 = Total Cost + 30%
= `8,04,72,000 + 30 % = `10,46,13,600

Toll Rate per vehicle = Total collection for June ÷ Total vehicles in June
= `10,46,13,600 ÷ 1,00,00,000 = `10.46
Working Notes:
Calculation of number of vehicles using the highway per month:
Total estimated number of vehicles using highway in 10 years = 120 crores
∴ Total number of vehicles using highway in 1 year = 12 crores
∴ Total number of vehicles using highway in 1 month = 1,00,00,000

PYQ 10
ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a building at a rent of
`50,000 per month with the agreement to bear the repairs and maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when the situation
demands. Though the unit is open for patients all the 365 days in a year, scrutiny of accounts for the year
2020 reveals that only for 120 days in the year, the unit had the full capacity of 100 patients per day and for
another 80 days, it had, on an average only 40 beds occupied per day. But, there were occasions when the
beds were full, extra beds were hired at a charge of `50 per bed per day. This did not come to more than 5
beds above the normal capacity on any one day. The total hire charges for the extra beds incurred for the
whole year amounted to `20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the
basis of the number of patients attended and time spent by them which on an average worked out to `30,000
per month in the year 2020.

The permanent staff expenses and other expenses of the unit were as follows:
Particulars Amount
2 Supervisors each at a per month salary of 5,000
4 Nurses each at a per month salary of 3,000
2 Ward boys each at a per month salary of 1,500

Other Expenses for the year were as under:

Repairs and Maintenance 28,000
Food supplied to patients 4,40,000

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 CHAPTER 8 SERVICE COSTING

Caretaker and Other services for patients 1,25,000

Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Cost of Oxygen etc. other than directly borne for treatment of patients 75,000
General Administration Charges allocated to the unit 71,000

Required:
(1) What is the profit per patient day made by the unit in the year 2020, if the unit recovered an overall
amount of `200 per day on an average from each patient.
(2) The unit wants to work on a budget for the year 2021, but the number of patients requiring medical
care is a very uncertain factor. Assuming that same revenue and expenses prevail in the year 2021 in
the first instance, work out the number of patient days required by the unit to break even.
[(10 Marks) Jan 2021]

Answer
(1) Statement Showing Profit Per Patient Day
Particulars Amount
(A) Variable Cost:
Doctor Fee (30,000 × 12) 3,60,000
Food to Patients 4,40,000
Caretaker and Other services for patients 1,25,000
Laundry charges 1,40,000
Medicines 2,80,000
Bed hire charges 20,000
Total (A) 13,65,000
(B) Fixed Expenses:
Rent (50,000 × 12) 6,00,000
Supervisors (2 × 5,000 × 12) 1,20,000
Nurses (4 × 3,000 × 12) 1,44,000
Ward Boys (2 × 1,500 × 12) 36,000
Repairs and Maintenance 28,000
Cost of Oxygen etc. other than directly borne for treatment of patients 75,000
General Administration Charges allocated to the unit 71,000
Total (B) 10,74,000
Total cost (A + B) 24,39,000
Collection from patients (200 × 15,600 patient days) 31,20,000
Profit (Collection – Total cost) 6,81,000
Profit per patient day (Profit ÷ Patient days) 43.65
(2) Calculation of BEP for the hospital:
BEP = Fixed cost ÷ Contribution per patient day
= 10,74,000 ÷ 112.50 = 9,547 patient days
Working Notes:
1. Calculation of number of Patient days:
= (100 beds × 120 days) + (40 beds × 80 days) + (20,000 ÷ 50)
= 15,600
2. Calculation Contribution per patient day:
Contribution = Sales – Variable cost
= 31,20,000 – 13,65,000 = 17,55,000
Contribution per patient day = 17,55,000 ÷ 15,600 = 112.50

8.39
 SERVICE COSTING CHAPTER 8

PYQ 11
MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its newly launched
‘COVID-19’ Insurance policy:

Office administration cost `48,00,000

Claims management cost `3,80,000
Employees cost `16,20,000
Postage and logistics `32,40,000
Policy issuance cost `29,50,000
Facilities cost `46,75,000
Cost of marketing of the policy `1,38,90,000
Policy development cost `35,00,000
Policy servicing cost `96,45,000
Sales support expenses `32,00,000
IT cost ?
Number of policy sold 2,800
Total insured value of policies `3,500 Crores
Cost per rupee of insured value `0.002

Required:
1. Calculate total cost for “Covid-19” insurance policy segregating the costs into four main activities
namely (a) Product development, Marketing and Sales support, (b) Operations, (c) IT cost and (d)
Support functions.
2. Calculate cost per policy.
[(5 Marks) July 2021]

Answer
1. Statement Showing Total Cost for “Covid-19” Insurance Policy
Particulars Amount
(a) Product development, Marketing and Sales support:
Policy development cost 35,00,000
Cost of marketing of the policy 1,38,90,000
Sales support expenses 32,00,000
Total (a) 2,05,90,000
(b) Operations:
Policy issuance cost 29,50,000
Policy servicing cost 96,45,000
Claims management cost 3,80,000
Total (b) 1,29,75,000
(c) IT Cost:
IT cost 2,21,00,000
Total (c) 2,21,00,000
(d) Support functions:
Postage and logistics 32,40,000
Facilities cost 46,75,000
Employees cost 16,20,000
Office administration cost 48,00,000
Total (d) 1,43,35,000
Total Cost (a + b + c + d) 7,00,00,000

2. Cost per policy = Total Cost ÷ No. of Policies

= `7,00,00,000 ÷ 2,800 = `25,000

8.40
 CHAPTER 8 SERVICE COSTING

Working note: Calculation of IT cost:

Cost per rupee of insured value = Total Cost ÷ Total insured value
0.002 = Total Cost ÷ `3,500 crores
Total Cost = `3,500 crores × 0.002 = `7,00,00,000

IT cost = Total cost – other costs

IT cost = 7,00,00,000 – 2,05,90,000 – 1,29,75,000 – 1,43,35,000
= 2,21,00,000

PYQ 12
Paras Travels provides mini buses to an IT company for carrying its employees from home to office and
dropping back after office hours. It runs a fleet of 8 mini buses for this purpose. The buses are parked in a
garage adjoining the company's premises. Company is operating in two shifts (one shift in the morning and
one shift in the afternoon). The distance travelled by each mini bus one way is 30 km. The company works
for 20 days in a month. The seating capacity of each mini bus is 30 persons. The seating capacity is normally
80% occupied during the year. The details of expenses incurred for a year are as under:
Driver’s salary `20,000 per driver per month
Lady attendant’s salary (mandatorily required for each mini bus) `10,000 per attendant per month
Cleaner's salary (One cleaner for 2 mini buses) `15,000 per cleaner per month
Diesel (Avg. 8 km per liter) `80 per liter
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes `5,080 per mini bus per month
Garage rent paid `24,000 per month
Repair & maintenance including engine oil and lubricants (for `2,856 per mini bus
every 5,760 km)
Purchase Price of mini bus `15,00,000 each
Residual life of mini bus 8 Years
Scrap value per mini bus at the end of residual life `3,00,000

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

You are required to:

1. Prepare a statement showing expenses of operating a single mini bus for a year,
2. Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance up to 15 km from the office.
(b) Employees coming from a distance beyond 15 km from the office.
[(10 Marks) Dec 2021]

1. Statement Showing Expenses of Operating a Single Mini Bus for a Year

Particulars `
(A) Standing Charges:
Driver’s salary (`20,000 × 12 months) 2,40,000
Lady attendant’s salary (`10,000 × 12 months) 1,20,000
Cleaner’s salary (`15,000 × 12 months × 1/2) 90,000
Insurance charges (2% of `15,00,000) 30,000
Licence fees and taxes (`5,080 × 12 months) 60,960
Garage rent (`24,000 × 12 months × 1/8) 36,000
Depreciation {(`15,00,000 - `3,00,000) × 1/8} 1,50,000

8.41
 SERVICE COSTING CHAPTER 8

Total (A) 7,26,960

(B) Maintenance Charges:
Repairs and maintenance {(`2,856 ÷ 5,760) × 57,600} 28,560
Total (B) 28,560
(C) Running Charges:
Diesel {(`80 ÷ 8) × 57,600} 5,76,000
Total (C) 5,76,000
Total operating cost (A + B + C) 13,31,520

2. Calculation of average cost per employee per month:

Operating cost of Mini Bus per month = `13,31,520 ÷ 12 = `1,10,960

No. of employees per bus in two trips = 30 persons × 2 trips × 80%
= 48

Let the fare charged from employee within 15 km be = X

Fare for employee beyond 15 km = 2X

Total Cost or fare (`1,10,960) = (48 × 50% × X) + (48 × 50% × 2X) = 72X
X = `1,10,960 ÷ 72 = `1,541.11

(a) Average cost per employee per month coming from a distance up to 15 kms. = `1,541.11

(b) Average cost per employee per month coming from a distance beyond 15 kms. = 2X
= `1,541.11 × 2
= `3,082.22
Working notes:
Calculation of kms. run by a mini bus in a year:
= One way distance × 2 (both ways) × No of trips × No of days in a month × 12 months in a year
= 30 kms. × 2 × 4 (two shifts and two trips in each shift) × 20 days × 12 months
= 57,600 kms.

PYQ 13
Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is at distance of 15
kms and Y is at a distance of 20 kms from the rail head plots. A fleet of lorries having carrying capacity of 4
tonnes is used to transport coal from the mines. Records reveal that average speed of the lorries is 40 kms
per hour when running and regularly take 15 minutes to unload at the rail head.

At Mine X average loading time is 30 minutes per load, while at mine Y average loading time is 25
minutes per load.

Additional Information:
Drivers' wages, depreciation, insurance and taxes, etc. `12 per hour
Operated Fuel, oil, tyres, repairs and maintenance, etc. `1.60 per km

You are required to prepare a statement showing the cost per tonne kilometre of carrying coal
from each mine 'X' and 'Y'.
[(5 Marks) May 2022]

8.42
 CHAPTER 8 SERVICE COSTING

Answer
Statement Showing Cost per Tonne-Km
Particulars Mine X Mine Y
Drivers wages, license, insurance, depreciation, garage (12.00 × 90/60) (12.00 × 100/60)
rent and taxes @ `12 per hour 18.00 20.00
Fuel, oil, tyres, repairs and maintenance @ `1.60 per Km (1.60 × 30 kms) (1.60 × 40 kms)
48.00 64.00
Operating Cost 66.00 84.00
÷ Effective tonne-kms ÷ 60 ÷ 80
Cost per tonne-km `1.10 `1.05

Working Notes:
(1) Total operating time in 1 trip: Mine X Mine Y

Running time (to & fro) 60/40

× 30 Kms 60/40 ×
40 Kms
45 minutes 60 minutes

Unloading time 15 minutes 15 minutes

Loading time 30 minutes 25 minutes

Total operating time in one trip 90 minutes 100 minutes

(2) Effective tonnes km per trip: 4 tonnes × 15 kms + 4 tonnes × 20 kms +

Nil tonnes × 15 kms Nil tonnes × 20 kms

= 60 tonne kms = 80 tonne kms

PYQ 14
ABC Bank is having a branch which is engaged in processing of ‘Vehicle Loan’ and ‘Education Loan’
applications in addition to other services to customers. 30% of the overhead costs of the branch are
estimated to be applicable to the processing of ‘Vehicle Loan’ applications and ‘Education Loan’ applications
each.
Branch is having four employees at a monthly salary of `50,000 each, exclusively for processing of
Vehicle loan applications and two employees at a monthly salary of `70,000 each, exclusively for processing
of Education Loan applications.

In addition to above, following expenses are incurred by the Branch:

 Branch Manager who supervises all the activities of branch, is paid at `90,000 per month.
 Legal charges, Printing & stationery and Advertising Expenses are incurred at `30,000, `12,000 and
`18,000 respectively for a month,
 Other Expenses are `10,000 per month.

You are required to:

(a) Compute the cost of processing a Vehicle Loan Application on the assumption that 496 Vehicle Loan
applications are processes each month.

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

[(5 Marks) Nov 2022]

8.43
 SERVICE COSTING CHAPTER 8

Answer
(a) Statement of Cost of Processing One Vehicle Loan Application
Particulars Amount
Direct labour cost (4 employees × 50,000) 2,00,000
Allocation of branch overhead cost (30% of 1,60,000) 48,000
Total processing cost per month 2,48,000
÷ Number of applications processed per month ÷ 496
Cost of Processing One Vehicle Loan Application `500

(b) Statement Showing Number of Education Loan Application

Particulars Amount
Direct labour cost (2 employees × 70,000) 1,40,000
Allocation of branch overhead cost (30% of 1,60,000) 48,000
Total processing cost per month 1,88,000
÷ Total processing cost per Education Loan Application ÷ 500
Number of Education Loan Application 376

Working Notes:
Overheads costs of the branch = 90,000 + 30,000 + 12,000 + 18,000 + 10,000 = `1,60,000

PYQ 15
RST Toll Plaza Limited built a 80 kilometer long highway between two cities and operates a toll plaza to
collect tolls from passing vehicles using the highway. The company has estimated that 50,000 light weight,
12,000 medium weight and 10,000 heavy weight vehicles will be using the highway in one month in outward
journey and the same number for return journey.
As per government notification, vehicles used for medical emergencies, members of parliament, and essential
services are exempt from toll charges. It is estimated that 10% of light weight vehicles will pass the highway
for such use.
It is the policy of the company that if vehicles return within 24 hours of their outward journey. The toll fare
will be reduced by 25 percent automatically. It is estimated 30% of chargeable light weight vehicles return
within the specified time frame.
The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight vehicles and that of
heavy weight vehicles as 2 times of the medium weight vehicles.
The toll operating and maintenance cost for a month is `59,09,090. The company requires a profit of 10%
over the total cost to cover interest and other costs.

Required:
(a) Calculate the toll rate for each type of vehicles if concession facilities are not available on the return
journey.
(b) Calculate the toll rate that will be charged from light weight vehicles if a return journey concession
facility is available, assuming that the revenue earned from light weight vehicles calculate in option
(a) remains the same.
[(5 Marks) May 2023]

Answer
(a) Calculation of toll rate for each type of vehicles:

Total collection from toll = Cost + 10% = `59,09,090 + 10%

= `64,99,999

8.44
 CHAPTER 8 SERVICE COSTING

Let, toll rate for Light weight vehicle be ‘T’ then toll rate for Medium weight vehicle will 2.5T and for
Heavy weight vehicles will 5T

Now,
Total Toll collection = (45,000 × 2 × T) + (12,000 × 2 × 2.5T) + (10,000 × 2 × 5T)
`64,99,999 = 2,50,000T
T = `26

Toll rate for light vehicles = `26

Toll rate for light vehicles = 2.5T = `26 × 2.5 = `65
Toll rate for light vehicles = 5T = `26 × 5 = `130

Note: Toll plaza collects toll from 45,000 light weight vehicles one side journey (50,000 – 10% Exempt
vehicles).

(b) Calculation of toll rate of Light weight vehicles with concession facility:

Revenue earned from Light weight vehicles under (a) = 45,000 × 2 × `26 = `23,40,000

Let, toll rate for Light weight vehicle be ‘T’ then toll rate for return Light weight vehicle be ‘0.75T’

Revenue from Light weight vehicles = (45,000×T) + (45,000×70%×T + 45,000×30%×0.75T)

`23,40,000 = 86,625T
T = `27.013

SUGGESTED REVISION FOR EXAM:

BQ: 2, 5, 6, 9, 11, 12, 13, 14, 15, 16, 17, 19, 21, 25

PYQ: 15

8.45
 CA INTERMEDIATE

COST
&
MANAGEMENT ACCOUNTING
Volume 2

By
CA Namit Arora Sir

This book is dedicated to my Niece

CANDY
 PREFACE TO THIS EDITION
This is a comprehensive book having thoroughly explained concepts with lucid and systematic
presentation of the subject matter. All attempts are made in this book to keep concept easier
to understand and remember with 100% coverage of institute materials.
A special attention is given to presentation keeping in mind the examination needs to
the student. The book is primarily written exclusively for CA - Inter.

For any suggestion please mail me at canamitarora@gmail.com

A word to the students

My dear student, hard work is the key to success. Though smart work is publicized in today’s
world but to be smart, you have to work hard. So always be attentive in class and have
thorough revision after the class. It is also important to be motivated and inspired for working
hard. The key for success is:

“Work hard in class, be attentive, grab the concepts

&
Work smart during revision, select important questions for next
revision.”

ALL THE BEST

CA. NAMIT ARORA
 INDEX
S. NO. CHAPTERS NAME PAGE NO. WEIGHTAGE

0 INTRODUCTION 0.1 – 0.2 -

1 MATERIAL COST 1.1 – 1.40 5 – 10

2 EMPLOYEE COST 2.1 – 2.24 5 – 10

3 OVERHEADS-ABSORPTION COSTING 3.1 – 3.35 5 – 10

METHOD

4 COST SHEET & UNIT COSTING 4.1 – 4.30 10

5 JOB AND BATCH COSTING 5.1 – 5.20 5 – 10

6 ACTIVITY BASED COSTING 6.1 – 6.29 10

7 DIRECT EXPENSES 7.1 – 7.2 -

8 SERVICE COSTING 8.1 – 8.45 10

9 PROCESS & OPERATION COSTING 9.1 – 9.46 10

10 JOINT & BY PRODUCTS 10.1 – 10.23 5 – 10

11 BUDGETS & BUDGETARY CONTROL 11.1 – 11.30 5 – 10

12 STANDARD COSTING 12.1 – 12.44 5 – 10

13 MARGINAL COSTING 13.1 – 13.45 10

14 COST ACCOUNTING SYSYTEM 14.1 – 14.20 5 – 10

15 RECONCILIATION 15.1 – 15.14 5 – 10

 CHAPTER 9 PROCESS & OPERATION COSTING

CHAPTER 9 PROCESS & OPERATION COSTING

NORMAL PROCESS ACCOUNT

BQ 1
A product passes through three processes A, B, and C. The normal wastage and actual output of each process
is as follows:
Process Actual Output Normal Loss
Process A 9,500 units 3%
Process B 9,100 units 5%
Process C 8,100 units 8%

Wastage of Process A was sold 25 Paise per unit, that of Process B at 50 Paise per unit and that of
Process C at `1 per unit. 10,000 units were issued to Process A in the beginning of October 2023 at a cost of
`1 per unit the other expenses were as follows:
Name of Expenses Process A (`) Process B (`) Process C (`)
Sundry Materials 1,000 1,500 500
Labour 5,000 8,000 6,500
Direct expenses 1,050 1,188 2,009
Selling and distribution expenses are `850 and sale value per unit is `6.00.

Prepare all accounts.

Answer
Process A Account
Particulars Units ` Particulars Units `
To Units Introduced 10,000 10,000 By Normal Loss A/c 300 75
To Sundry Materials 1,000 (3% @ `0.25/unit)
To Labour 5,000 By Process B A/c 9,500 16,625
To Direct expenses 1,050 @ `1.75 per unit
By Abnormal Loss A/c @ 200 350
`1.75 per unit
10,000 17,050 10,000 17,050

Total Cost − Sale value of Normal Loss Units 17,050 − 75

NCPU = Total Units−Normal Loss Units
= 10,000 − 300
= `1.75 per unit

Process B Account
Particulars Units ` Particulars Units `
To Process A A/c 9,500 16,625 By Normal Loss A/c 475 238
To Sundry Materials 1,500 (5% @ `0.50/unit)
To Labour 8,000 By Process C A/c 9,100 27,300
To Direct expenses 1,188 @ `3 per unit
To Abnormal Gain A/c @ 75 225
`3 per unit
9,575 27,538 9,575 27,538

Total Cost − Sale value of Normal Loss Units 27,313 − 238

NCPU = Total Units−Normal Loss Units
= 9,500 − 475
= `3 per unit

9.1
 PROCESS & OPERATION COSTING CHAPTER 9

Process C Account
Particulars Units ` Particulars Units `
To Process B A/c 9,100 27,300 By Normal Loss A/c 728 728
To Sundry Materials 500 (8% @ `1.00/unit)
To Labour 6,500 By Profit & Loss A/c 8,100 34,425
To Direct expenses 2,009 @ `4.25 per unit
By Abnormal Loss A/c @ 272 1,156
`4.25 per unit
9,100 36,309 9,100 36,309

Total Cost − Sale value of Normal Loss Units 36,309 − 728

NCPU = Total Units−Normal Loss Units
= 9,100 − 728
= `4.25 per unit

Normal Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 300 75 By Cash A/c:
To Process B A/c 475 238 Process A 300 75
To Process C A/c 728 728 Process B 400 200
Process C 728 728
By Abnormal Gain A/c 75 38
1,503 1,041 1,503 1,041

Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 200 350 By Cash A/c:
To Process C A/c 272 1,156 Process A 200 50
Process C 272 272
By Costing P/L A/c 1,184

472 1,506 472 1,506

Abnormal Gain Account

Particulars Units ` Particulars Units `
To Normal Loss A/c 75 38 By Process B A/c 75 225
To Costing P/L A/c 187
75 225 75 225

Costing Profit and Loss Account

Particulars Units ` Particulars Units `
To Process C A/c 8,100 34,425 By Sales A/c 8,100 48,600
To Selling Expenses 850 (8,100 × 6.00)
To Abnormal Loss A/c 1,184 By Abnormal Gain A/c 187
To Profit (b.f.) 12,328
8,100 48,787 8,100 48,787

BQ 2
A product passes through three processes. The output of each process is treated as the raw material of the
next process to which it is transferred and output of the third process is transferred to finished stock.
Name of Expenses Process I (`) Process II (`) Process III (`)
Materials issued 40,000 20,000 10,000
Labour 6,000 4,000 1,000
Manufacturing overheads 10,000 10,000 15,000

9.2
 CHAPTER 9 PROCESS & OPERATION COSTING

10,000 units have been issued to the Process-I and after processing, the output of each process is as under:

Process Actual Output Normal Loss

Process I 9,750 units 2%
Process II 9,400 units 5%
Process III 8,000 units 10%

No stock of materials or of work-in-process was left at the end. Calculate the cost of the finished articles.

Answer
Process I Account
Particulars Units ` Particulars Units `
To Materials 10,000 40,000 By Normal Loss 200 -
To Labour 6,000 (2% of 10,000 units)
To Manufacturing OH 10,000 By Abnormal Loss A/c 50 286
By Process II Account 9,750 55,714
@ `5.7142 per unit
10,000 56,000 10,000 56,000

Cost per unit of completed units and abnormal loss:

Total Cost 56 ,000

= = = `5.7142
Inputs  Normal Loss 10 ,000  200

Process II Account
Particulars Units ` Particulars Units `
To Process I A/c 9,750 55,714 By Normal Loss 488 -
To Materials 20,000 (5% of 9,750 units)
To Labour 4,000 By Process III Account 9,400 91,051
To Manufacturing OH 10,000 @ `9.6862 per unit
To Abnormal Gain 138 1,337
9,888 91,051 9,888 91,051

Cost per unit of completed units and abnormal gain:

Total Cost 89 ,714

= = = `9.6862
Inputs  Normal Loss 9 ,750  488

Process III Account

Particulars Units ` Particulars Units `
To Process II A/c 9,400 91,051 By Normal Loss 940 -
To Materials 10,000 (10% of 9,400 units)
To Labour 1,000 By Abnormal Loss A/c 460 6,364
To Manufacturing OH 15,000 By Finished Goods A/c 8,000 1,10,687
@ `13.8358 per unit
9,400 1,17,051 9,400 1,17,051

Cost per unit of completed units and abnormal loss:

Total Cost 1 ,17 ,051

= = = `13.8358
Inputs  Normal Loss 9 ,400  940

9.3
 PROCESS & OPERATION COSTING CHAPTER 9

BQ 3
From the following data, prepare process accounts indicating the cost of each process and the total cost. The
total units that pass through each process were 240 for the period.
Name of Expenses Process I Process II Process C III
Materials (`) 1,50,000 50,000 20,000
Labour (`) 80,000 2,00,000 60,000
Other Expenses (`) 26,000 72,000 25,000

Indirect expenses amounting to `85,000 may be apportioned on the basis of wages. There was no opening
or closing stock.

Answer
Process I Account
Particulars Per Unit Total Particulars Per Unit Total
To Materials 625 1,50,000 By Process II Account 1,150 2,76,000
To Labour 333.33 80,000 (transfer to Process-II)
To Other Expenses 108.33 26,000
To Indirect Expenses 83.34 20,000
1,150 2,76,000 1,150 2,76,000

Process II Account
Particulars Per Unit Total Particulars Per Unit Total
To Process I Account 1,150 2,76,000 By Process III Account 2,700 6,48,000
To Materials 208.33 50,000 (transfer to Process-III)
To Labour 833.33 2,00,000
To Other Expenses 300 72,000
To Indirect Expenses 208.34 50,000
2,700 6,48,000 2,700 6,48,000

Process III Account

Particulars Per Unit Total Particulars Per Unit Total
To Process II Account 2,700 6,48,000 By Finished Stock A/c 3,200 7,68,000
To Materials 83.33 20,000 (transferred)
To Labour 250 60,000
To Other Expenses 104.17 25,000
To Indirect Expenses 62.50 15,000
3,200 7,68,000 3,200 7,68,000
Working Notes:
Calculation of apportionment of Indirect Expenses:
Indirect Expenes 85 ,000
Process I = × Labour cost of Process I = × 80,000 = 20,000
Total Labour Cost 3,40 ,000
Indirect Expenes 85 ,000
Process I = × Labour cost of Process II = × 2,00,000 = 50,000
Total Labour Cost 3,40 ,000
Indirect Expenes 85 ,000
Process I = × Labour cost of Process III = × 60,000 = 15,000
Total Labour Cost 3,40 ,000

BQ 4
A product passes through three processes A, B and C. 10,000 units at a cost of `1.10 per unit were issued to
process A. The other direct expenses were as follows:

9.4
 CHAPTER 9 PROCESS & OPERATION COSTING

Details 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 scrap of process A was 5% and in process B 4% on input. The scrap of process A as sold at `0.25
per units and that of process B at `0.50 per unit and that of process C at `1.00 per unit.
The overhead charges were 160% of direct labour. The final product was sold at `10 per unit fetching
a profit of 20% on sales.

Prepare all the three process accounts and find out the number of units of scrap in process C.
[Output: Process A `25,075; Process B `48,185; Process C `67,392; Units scraped in Process C 696]

BQ 5
RST Limited processes Product Z through two distinct processes – Process-I and Process-II. On completion,
it is transferred to finished stock. From the following information for the year 2022-23, prepare Process-I
A/c, Process-II A/c, Finished Stock A/c and Income Statement:
Particulars Process-I Process-II
Raw materials used 7,500 units -
Raw materials cost per unit `60 -
Transfer to next process/finished stock 7,050 units 6,525 units
Normal loss (on inputs) 5% 10%
Direct wages `1,35,750 `1,29,250
Direct expenses 60% of Direct wages 65% of Direct wages
Manufacturing overheads 20% of Direct wages 15% of Direct wages
Realisable value of scrap per unit `12.50 `37.50
6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no opening or
closing stock of work-in-process.

Answer
Process-I Account
Particulars Units ` Particulars Units `
To Raw Materials used 7,500 4,50,000 By Normal Loss 375 4,688
To Direct Wages 1,35,750 (5% of 7,500 units) ×12.5
To Direct Expenses 81,450 By Process-II Account 7,050 6,82,402
To Manufacturing OH 27,150 (`96.7947 × 7,050 units)
By Abnormal Loss A/c 75 7,260
(`96.7947 × 75 units)
7,500 6,94,350 7,500 6,94,350
Total Cost  Re alisable Value of Normal Loss Units 6 ,94 ,350  4 ,688
NCPU = = = `96.7947
Inputs Units  Normal Loss Units 7 ,500  375

Process-II Account
Particulars Units ` Particulars Units `
To Process-I A/c 7,050 6,82,402 By Normal Loss 705 26,438
To Direct Wages 1,29,250 (10% of 7,050 units)×37.5
To Direct Expenses 84,013 By Finished Stock A/c 6,525 9,13,823
To Manufacturing OH 19,387 (`140.0495 × 6,525 units)
To Abnormal Gain A/c 180 25,209
(`140.0495 × 180 units) 7,230 9,40,261 7,230 9,40,261

9.5
 PROCESS & OPERATION COSTING CHAPTER 9

Total Cost  Re alisable Value of Normal Loss Units 9,15 ,052  26 ,438
NCPU = = = `140.0495
Inputs Units  Normal Loss Units 7 ,050  705

Finished Goods Stock Account

Particulars Units ` Particulars Units `
To Process-II A/c 6,525 9,13,823 By Cost of Sales 6,000 8,40,297
(`140.0495 × 6,000
units) 525 73,526
6,525 9,13,823 By Balance c/d 6,525 9,13,823

Income Statement
Particulars ` Particulars `
To Cost of Sales 8,40,297 By Sales 9,66,342
(`140.0495 × 6,000 units) (`8,40,297 × 115%)
To Abnormal Loss 6,322 By Abnormal Gain 18,459
[(`96.7947 – `12.50) × 75 units] [(`140.0495 – `37.50) × 180 units]
To Net Profit 1,38,182
9,84,801 9,84,801

PROCESS ACCOUNT WITH ROYALTY

BQ 6
The input to a purifying process was 16,000 kgs of basic material purchased @ `1.20 per kg Process wages
amounted to `720 and overhead was applied @ 240% of the labour cost. Indirect materials of negligible
weight were introduced into the process at a cost of `336. The actual output from the process weighted
15,000 kgs. The normal yield of the process is 92%. Any difference in weight between the input of basic
material and output of purified material (Product) is sold @ `0.50 per kg.

The process is operated under a license which provides for the payment of royalty @ `0.15 per kg of
the purified material produced.

Prepare:
(a) Purifying Process Account
(b) Normal Wastage Account
(c) Abnormal Wastage/Yield Account
(d) Royalty Payable Account

Answer
(a) Purifying Process Account
Particulars Kgs. ` Particulars Kgs. `
To Basic Materials 16,000 19,200 By Normal Wastage A/c 1,280 640
To Process Wages 720 (8% of 16,000 kgs) × 0.50
To Overhead (240%×`720) 1,728 By Purified Material 15,000 24,000
To Indirect Materials @ `1.60 per kg
To Royalty Payable A/c 336
(0.15×14,720) 2,208
To Abnormal Yield A/c
@ `1.60 per kg 280 448
16,280 24,640 16,280 24,640
Total Cost − Sale value of Normal Loss Units 24,192 − 640
NCPU = Total Units−Normal Loss Units
= 16,000 − 1,280
= `1.60 per kg

9.6
 CHAPTER 9 PROCESS & OPERATION COSTING

(b) Normal Wastage Account

Particulars Kgs. ` Particulars Kgs. `
To Purifying Process A/c 1,280 640 By Cash A/c @ `0.50 per kg 1,000 500
By Abnormal Gain A/c 280 140
1,280 640 1,280 640

(c) Abnormal Yield Account

Particulars Kgs. ` Particulars Kgs. `
To Normal Wastage A/c 280 140 By Purifying Process A/c 280 448
To Royalty Payable A/c 42
(280 × 0.15)
To Costing P/L A/c 266
280 448 280 448

(d) Royalty Payable Account

Particulars Kgs. ` Particulars Kgs. `
To Bank A/c 15,000 2,250 By Purifying Process A/c 14,720 2,208
By Abnormal yield A/c 280 42

15,000 2,250 15,000 2,250

PROCESS ACCOUNT WITH BY PRODUCTS

BQ 7
M Ltd. produces a product X, which passes through three processes, I, II and III. In Process III a by-product
arises, which after further processing at a cost of `85 per unit, product Z is produced. The information related
for the month of August is as follows:
Details Process I Process II Process III
Normal loss 5% 10% 5%
Materials introduced (7,000 units) 1,40,000 - -
Other materials added 62,000 1,36,000 84,200
Direct wages 42,000 54,000 48,000
Direct Expenses 14,000 16,000 14,000

Production overhead for the month is `2,88,000, which is absorbed as a percentage of direct wages. The
scrapes are sold at `10 per unit. Product Z can be sold at `135 per unit with a selling cost of `15 per unit.
There is not stock at the beginning and end of the month.
No. of units produced:

Process I 6,600 units;

Process II 5,200 units,
Process III 4,800 units and
Product Z 600 units

You are required to prepare accounts for:

(1) Process I, II and III
(2) By product process.

Answer

9.7
 PROCESS & OPERATION COSTING CHAPTER 9

(1) Process I Account

Particulars Units ` Particulars Units `
To Materials 7,000 1,40,000 By Normal Loss 350 3,500
To Other materials 62,000 (5% @ `10 per unit)
To Direct wages 42,000 By Process II Account 6,600 3,35,955
To Direct expenses 14,000 @ `50.9022 per unit
To Production OH 84,000 By Abnormal Loss 50 2,545
(200% of `42,000) @ `50.9022 per unit
7,000 3,42,000 7,000 3,42,000

Production OH Rate = (Production OH ÷ Direct wages) × 100

= [2,88,000 ÷ (42,000 + 54,000 + 48,000)] × 100 = 200%

Total Cost − Sale value of Normal Loss Units 3,42,000 − 3,500

NCPU =
Total Units−Normal Loss Units
=
7,000 − 350
= `50.9022 p. u.

Process II Account
Particulars Units ` Particulars Units `
To Process I Account 6,600 3,35,955 By Normal Loss 660 6,600
To Other materials 1,36,000 (10% @ `10 per unit)
To Direct wages 54,000 By Abnormal Loss 740 80,149
To Direct expenses 16,000 @ `108.3089 per unit
To Production OH 1,08,000 By Process III Account 5,200 5,63,206
(200% of `54,000) @ `108.3089 per unit
6,600 6,49,955 6,600 6,49,955

Total Cost − Sale value of Normal Loss Units 6,49,955 − 6,600

NCPU = Total Units−Normal Loss Units
= 6,600 − 660
= `108.3089 p. u.

Process III Account

Particulars Units ` Particulars Units `
To Process II Account 5,200 5,63,206 By Normal Loss 260 2,600
To Other materials 84,200 (5% @ `10 per unit)
To Direct wages 48,000 By By-Product Z 600 21,000
To Direct expenses 14,000 @ `35 (135 – 85 - 15) p.
To Production OH 96,000 u. 4,800 8,64,670
(200% of `16,000) By Product X
To Abnormal Gain A/c 460 82,864 @ `180.1396 per unit
@ `180.1396 per unit
5,660 8,88,270 5,660 8,88,270

Total Cost − Sale value of Normal Loss Units − Net realisable value of By Product Z
NCPU =
Total Units−Normal Loss Units−By product units
8,05,406 − 2,600 − 21,000
= 5,200 − 260 − 600
= `180.1396 p. u.

(2) By-Product Process Account

Particulars Units ` Particulars Units `
To Process III Account 600 21,000 By Product Z @ `135 p. u. 600 81,000
To Processing cost 51,000
@ `85 p. u.
To Selling exp @ `15 p. u. 9,000
600 81,000 600 81,000

9.8
 CHAPTER 9 PROCESS & OPERATION COSTING

STATEMENT OF PROFIT

BQ 8
A product passes through three processes A, B and C. The details of expenses incurred on the three processes
during the year 2023 were as under:
Details Process A Process B Process C
Units introduced (cost per unit `50) 1,000 - -
Sundry Materials `1,000 `1,500 `500
Labour `2,600 `8,000 `6,392
Direct Expenses `600 `1,815 `2,720
Selling price per unit of output `70 `100 `200
Actual output of the three processes was-Process A: 930 units; Process B: 540 units; and process C:
210 units. Two-third of output of Process A and one-half of the output of Process B was passed on to 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% Process B: 15% and Process C: 20%. The loss of Process A was sold at `1 per unit that of
Process B at `3 per unit and that of Process C at `6 per unit.
Selling and distribution expenses during the year were `9,000. These are not allocable to the processes
but to be considered while drawing the income statement.
Prepare the three process accounts and a statement of income.
[A: 930 units, `53,010; B 540 units, `47,520; C 210 units, `32,130; Net Profit `7,243]

INPUT – OUTPUT RATIO

BQ 9
An article passes through three successive operations from raw material stage to the finished goods stage.
The following data are available from the production records for the month of March:
Operation No. of pieces (Input) No. of pieces (Rejected) No. of pieces (Output)
1 1,80,000 60,000 1,20,000
2 1,98,000 18,000 1,80,000
3 1,44,000 24,000 1,20,000

(1) Determine the input required to be introduced in the first operation in no. of pieces in order to obtain
finished output of 500 pieces after the last operation.
(2) Calculate the cost of raw material required to produce one piece of finished product. If the weight of the
finished piece is 0.5 Kg. and the price of raw material is `80 per kg.

Answer
(1) Determination the input required to obtain finished output of 500 pieces after the last operation:
Particulars No. of pieces
Output required after operation 3 500
Add: Rejection in operation 3 (20%) 100
Output required after operation 2 600
Add: Rejection in operation 2 (10%) 60
Output required after operation 1 660
Add: Rejection in operation 1 (50%) 330
Input required in operation 1 990

9.9
 PROCESS & OPERATION COSTING CHAPTER 9

(2) Calculation of cost of raw material:

990
To get a finished piece of 0.5 kg of output, the weight of input required = 500
× 0.5 kg
= 0.99 Kg raw material

Cost of raw material 0.99 kg to produce 1 piece of finished goods = 0.99 × `80
= `79.20

Working Note:
Statement of production
Rejections
Operation Input Output
Total % of output
1 1,80,000 60,000 50% 1,20,000
2 1,98,000 18,000 10% 1,80,000
3 1,44,000 24,000 20% 1,20,000

EQUIVALENT PRODUCTION (CLOSING WIP ONLY)

BQ 10
An English willow company who manufactures cricket bat buys wood as its direct material. The Forming
department processes the cricket bats and the cricket bats are then transferred to the Finishing department
where stickers are applied. The Forming department began manufacturing 10,000 initial bats during the
month of December for the first time and their cost is as follows:
Direct material `33,000
Conversion costs `17,000
Total `50,000

A total of 8,000 cricket bats were completed and transferred to the Finishing department, the rest 2,000 were
still in the Forming process at the end of the month. All of the forming departments direct material were
placed, but, on average, only 25% of the conversion costs was applied to the ending work in progress
inventory.

Calculate:
(A) Equivalent units of production for each cost.
(B) The Conversion cost per Equivalent units.
(C) Cost of closing work in process (WIP) and finished products.

Answer
(A) Statement of Equivalent Production
Materials Conversion Cost
Particulars Units
% Eq. Unit % Eq. Unit
Finished Output 8,000 100 8,000 100 8,000
Closing WIP 2,000 100 2,000 25 500
Total 10,000 - 10,000 - 8,500

(B) Statement of Cost per Equivalent Unit

Elements Cost Eq. Units Cost Per Unit
Materials 33,000 10,000 `3.30
Conversion Cost 17,000 8,500 `2.00
Total cost per unit `5.30

9.10
 CHAPTER 9 PROCESS & OPERATION COSTING

(C) Statement Showing Cost of Finished Output and Closing WIP

Particulars Elements Equivalent Units Cost Per Unit Total (`)
Finished Output All 8,000 5.30 42,400

Closing WIP Materials 2,000 3.30 6,600

Conversion Cost 500 2.00 1,000
7,600

BQ 11
AB Ltd. is engaged in the process engineering industry. During the month of April 2023, 2,000 units were
introduced in Process X. The normal loss is estimated at 5% of input.
At the end of the month 1,400 units had been produced and transferred to Process Y; 460 were
incomplete units and 140 units had to be scrapped at the end of the process. The incomplete units reached
the following degree of completion:
Materials: 75% Labour: 50% Overheads: 50%
Following are the further details regarding Process X:
Cost of 2,000 units introduced `58,000
Additional materials consumed `14,400
Direct labour `33,400
Allocated overheads `16,700
Note: The scrapped units fetched `10 each
Required:
(A) Statement of Equivalent Production; (C) Statement of Evaluation;
(B) Statement of Cost; (D) Process X Account.

Answer
(A) Statement of Equivalent Production
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Normal Loss 100 - - - -
Abnormal Loss 40 100 40 100 40
Transfer to Process Y 1,400 100 1,400 100 1,400
Closing WIP 460 75 345 50 230
Total 2,000 - 1,785 - 1,670

(B) Statement of Cost

Elements Cost Eq. Units Cost Per Unit
Materials 58,000 + 14,400 – 1,000 = 71,400 1,785 `40.00
Labour 33,400 1,670 `20.00
Overheads 16,700 1,670 `10.00
Total cost per unit `70.00

(C) Statement of Evaluation

Particulars Elements Equivalent Units Cost Per Unit Total (`)
Abnormal Loss Materials 40 40 1,600
Labour 40 20 800
Overhead 40 10 400
2,800
Transfer to Process Y Materials 1,400 40 56,000

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 PROCESS & OPERATION COSTING CHAPTER 9

Labour 1,400 20 28,000

Overhead 1,400 10 14,000
98,000
Closing WIP Materials 345 40 13,800
Labour 230 20 4,600
Overhead 230 10 2,300
20,700

(D) Process X Account

Particulars Units ` Particulars Units `
To Units Introduced 2,000 58,000 By Normal wastage 100 1,000
To Materials 14,400 (5% @ `10 per unit)
To Labour 33,400 By Abnormal Loss A/c 40 2,800
To Overheads 16,700 By Closing WIP 460 20,700
By Process Y Account 1,400 98,000
2,000 1,22,500 2,000 1,22,500

BQ 12
C Limited manufactures a range of products and the data below refer to one product which goes through one
process only. The company operates a thirteen four weekly reporting system for process and product costs
and the data given below relate to period 10. There was no opening work-in-progress stock.
5,000 units of materials input at `2.94 per unit
Further direct materials added 13,830
Direct wages incurred 6,555
Production overheads 7,470
Normal loss 3% of input
Closing work-in-progress was 800 units but these were incomplete, having reached the following
percentage of completion for each of the elements of cost listed.
Direct materials added 75% Direct wages 50%
Production overhead 25%
270 units were scrapped after a quality control check when the units were at the following degrees
of completion:
Direct materials added 66-⅔% Direct wages 33-⅓%
Production overhead 16-⅔%
Units scrapped regardless of the degree of completion are sold for `1.00 each and it is company policy
to credit the process account with the scrap value of normal loss units.

You are required to prepare the Period 10 accounts for the:

(i) Process account; and
(ii) Abnormal gain or loss.

Answer
Process Account
Particulars Units ` Particulars Units `
To Units Introduced 5,000 14,700 By Normal Loss 150 150
To Direct Materials 13,830 By Abnormal Loss A/c 120 696
To Labour 6,555 By Finished Goods 3,930 36,549
To Production OH 7,470 By Closing WIP 800 5,160
5,000 42,555 5,000 42,555

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 CHAPTER 9 PROCESS & OPERATION COSTING

Abnormal Loss A/c

Particulars Units ` Particulars Units `
To Process A/c 120 696 By Cash A/c 120 120
By Profit and Loss A/c 576
120 696 120 696
Working Notes:
Statement of Equivalent Production (Process I)
Materials 1 Materials 2 Labour Overhead
Particulars Units
% E. Unit % E. Unit % E. Unit % E. Unit
Normal Loss 150 - - - - - - - -
Abnormal Loss 120 100 120 66.67 80 33.33 40 16.67 20
Finished Units 3,930 100 3,930 100 3,930 100 3,930 100 3,930
Closing WIP 800 100 800 75 600 50 400 25 200
Total 5,000 - 4,850 - 4,610 - 4,370 - 4,150

Statement of Cost
Elements Cost Equivalent Units Cost Per Unit
Materials 1 14,700 – 150 = 14,550 4,850 3.00
Materials 2 13,830 4,610 3.00
Labour 6,555 4,370 1.50
Overheads 7,470 4,150 1.80
Total cost per unit 9.30

Statement of Evaluation
Particulars Elements Equivalent Units Cost Per Unit Total
Finished Units Materials 1 3,930 3.00 11,790
Materials 2 3,930 3.00 11,790
Labour 3,930 1.50 5,895
Overhead 3,930 1.80 7,074
36,549
Abnormal Loss Materials 1 120 3.00 360
Materials 2 80 3.00 240
Labour 40 1.50 60
Overhead 20 1.80 36
696
Closing WIP Materials 1 800 3.00 2,400
Materials 2 600 3.00 1,800
Labour 400 1.50 600
Overhead 200 1.80 360
5,160

BQ 13
A Company produces a component, which passes through two processes. During the month of April,
materials for 40,000 components were put into Process I of which 30,000 were completed and transferred
to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete
as to labour and overheads cost.
The Process I costs incurred were as follows:
Direct Materials `6,00,000
Direct Wages `7,00,000
Factory Overheads `4,90,000

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 PROCESS & OPERATION COSTING CHAPTER 9

Of those transferred to Process II, 28,000 units were completed and transferred to finished goods
stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units,
remained unfinished in the process with 100% complete as to material and 25% complete as regard to wages
and overheads.
Costs incurred in Process II are as follows:
Packing Materials `1,60,000
Direct Wages `1,42,250
Factory Overheads `1,70,700
Packing material cost is incurred at the end of the second process as protective packing to the completed
units of production.

Required:
(i) Prepare Statement of Equivalent Production, Cost Per unit and Process I A/c
(ii) Prepare State of Equivalent Production, Cost per Unit and Process II A/C

Answer
Statement of Equivalent Production (Process I)
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Transfer to Process II 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000
Total 40,000 - 40,000 - 35,000

Statement of Cost (Process I)

Elements Cost Equivalent Units Cost Per Unit
Direct Materials 6,00,000 40,000 15.00
Direct Wages 7,00,000 35,000 20.00
Factory Overheads 4,90,000 35,000 14.00
Total cost per unit 49.00

Statement of Apportionment of Cost (Process I)

Particulars Elements Eq. Units Cost Per Unit Total
Transfer to Process II Materials, Labour, 30,000 49.00 14,70,000
Overhead

Closing WIP Materials 10,000 15.00 1,50,000

Labour, Overhead 5,000 20.00 + 14.00 1,70,000
3,20,000

Process I Account
Particulars Units ` Particulars Units `
To Direct Materials 40,000 6,00,000 By Process II A/c 30,000 14,70,000
To Direct Labour 7,00,000 By Closing WIP 10,000 3,20,000
To Overhead 4,90,000
40,000 17,90,000 40,000 17,90,000

Statement of Equivalent Production (Process II)

Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Normal Loss 200 - - - -

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 CHAPTER 9 PROCESS & OPERATION COSTING

Units Completed 28,000 100 28,000 100 28,000

Closing WIP 1,800 100 1,800 25 450
Total 30,000 - 29,800 - 28,450

Statement of Cost (Process II)

Elements Cost Equivalent Units Cost Per Unit
Direct Materials 14,70,000 29,800 49.3289
Direct Wages 1,42,250 28,450 5.0000
Factory Overheads 1,70,700 28,450 6.0000
60.3289

Statement of Apportionment of Cost (Process II)

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed All 28,000 60.3289 16,89,209
Add: Packing Expenses 1,60,000
(Only at completed units) 18,49,209
Closing WIP Materials 1,800 49.3289 88,791
Labour, Overhead 450 5+6 4,950
93,741

Process II Account
Particulars Units ` Particulars Units `
To Process I A/c 30,000 14,70,000 By Normal loss 200 -
To Direct Labour 1,42,250 By Finished Stock 28,000 18,49,209
To Overhead 1,70,700 By Closing WIP 1,800 93,741
To Packing Materials 1,60,000
30,000 19,42,950 30,000 19,42,950

EQUIVALENT PRODUCTION (OPENING AND CLOSING WIP)

BQ 14
Hill manufacturing Ltd uses process costing to manufacture Water density sensors for hydro sector. The
following information pertains to operations for the month of May.

Particulars Units
Beginning WIP, May 1 16,000
Started in production during May 1,00,000
Completed production during May 92,000
Ending work in progress, May 31 24,000

The beginning work in progress was 60% complete for materials and 20% complete for conversion costs.
The ending inventory was 90% complete for material and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are material `27,670, direct labour `30,120 and factory overhead `12,720. Cost
incurred during May are material used, `4,79,000, direct labour `1,82,880, factory overheads `3,91,160.

Calculate:
(a) Using the FIFO method, the equivalent units of production for material.
(b) Cost per equivalent unit for conversion cost.

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 PROCESS & OPERATION COSTING CHAPTER 9

Answer
(a) Statement of Equivalent Production
Materials Conversion cost
Particulars Units
% Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 16,000 40% 6,400 80% 12,800
Units Introduced:
Used for Completed Units 76,000 100 76,000 100 76,000
Used for Closing WIP 24,000 90 21,600 40 9,600
Total 1,16,000 - 1,04,000 - 98,400

(b) Statement of Cost per Equivalent Unit for Conversion Cost

Elements Amount (`) Equivalent Units Cost Per Unit
Conversion Cost 1,82,880 + 3,91,160 98,400 `5.8337
= 5,74,040

BQ 15
The following data are available in respect of process 1 for March 2023:
1. Opening stock of work in process 800 units at a total cost of `4,000.
2. Degree of completion of opening work in progress:
Materials 100%
Labour 60%
Overheads 60%
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. Unit scrapped 1,200 units. The state of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
7. Closing work in progress 900 units. The stage of completion of these units was:
Materials 100%
Labour 70%
Overheads 70%
8. 7,900 units were completed and transferred to the next process.
9. Normal loss is 8% of the total input.
10. Scrap value is `4 per unit.

You are required to:

(A) Compute equivalent production.
(B) Calculate the cost per equivalent unit for each element.
(C) Calculate the value of abnormal loss (or gain) closing work in progress and the units transferred to
the next process by using FIFO Method.
(D) Show the process account for March 2023.

Answer
(A) Statement of Equivalent Production
Materials Labour & OH
Particulars Units
% Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 800 - - 40 320

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 CHAPTER 9 PROCESS & OPERATION COSTING

Units Introduced:
Used for Completed Units 7,100 100 7,100 100 7,100
Used for Closing WIP 900 100 900 70 630
Normal Loss 800 - - - -
Abnormal Loss 400 100 400 80 320
Total 10,000 - 8,400 - 8,370

(B) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 36,800 – 3,200 = 33,600 8,400 `4.00
Labour 16,740 8,370 `2.00
Overheads 8,370 8,370 `1.00
Total cost per unit `7.00

(C) Statement of Valuation of Abnormal Loss, Closing WIP, and Units Transferred to Next Process
Particulars Elements Eq. Units Cost per unit Total
Units Transferred:
Current Period Cost Materials 7,100 4.00 28,400
Labour, OH 7,420 2.00 + 1.00 22,680
Add: Cost of Opening WIP
(Used in completed units) 4,000
54,660
Closing WIP Materials 900 4.00 3,600
Labour, OH 630 2.00 + 1.00 1,890
5,490
Materials 400 4.00 1,600
Abnormal Loss Labour, OH 320 2.00 + 1.00 960
2,560

(D) Process Account For March 2023

Particulars Units ` Particulars Units `
To Opening WIP 800 4,000 By Normal loss 800 3,200
To Materials 9,200 36,800 By Abnormal Loss 400 2,560
To Labour 16,740 By Next Process A/c 7,900 54,660
To Overhead 8,370 By Closing WIP 900 5,490
10,000 65,910 10,000 65,910

BQ 16
The following data pertains to process for March, 2023 of Beta Ltd.
Opening work in progress 1,500 units at `15,000
Degree of completion: Material 100%,
Labour and overhead 33-⅓
Input of materials 18,500 units at `52,000
Direct labour `14,000
Overheads `28,000
Closing work in progress 5,000 units
Degree of completion: Materials 90%
Labour and overhead 30%
Normal progress loss 10% of total Input
Scrap value `2.00 per unit
Unit transferred to the next process 15,000 units

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 PROCESS & OPERATION COSTING CHAPTER 9

You are required to:

(a) Compute equivalent units of production using FIFO Method.
(b) Compute cost per equivalent units for each cost element i.e. material labour and overheads.
(c) Compute the cost of finished output, closing work in progress and abnormal gain.
(d) Prepare the process and other accounts.

Answer
(a) Statement of Equivalent Production
Materials Labour & OH
Particulars Units
% Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 1,500 - - 66-⅔ 1,000
Units Introduced:
Used for Completed Units 13,500 100 13,500 100 13,500
Used for Closing WIP 5,000 90 4,500 30 1,500
Normal Loss 2,000 - - - -
Total 22,000 - 18,000 - 16,000
Less: Abnormal Gain (2,000) 100 (2,000) 100 (2,000)
Net Total 20,000 - 16,000 - 14,000

(b) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 52,000 – 4,000 = 48,000 16,000 `3.00
Labour 14,000 14,000 `1.00
Overheads 28,000 14,000 `2.00
Total cost per unit `6.00

(c) Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost Materials 13,500 3.00 40,500
Labour, Overhead 14,500 1.00 + 2.00 43,500
Add: Cost of Opening WIP 15,000
99,000
Closing WIP Materials 4,500 3.00 13,500
Labour, Overhead 1,500 1.00 + 2.00 4,500
18,000
Abnormal Gain All 2,000 6.00 12,000

(d) Process Account

Particulars Units ` Particulars Units `
To Opening WIP 1,500 15,000 By Normal loss 2,000 4,000
To Input of Materials 18,500 52,000 By Next Process A/c 15,000 99,000
To Direct Labour 14,000 By Closing WIP 5,000 18,000
To Overhead 28,000
To Abnormal Gain 2,000 12,000
22,000 1,21,000 22,000 1,21,000

BQ 17
Opening Work-in-progress 2,000 units
Materials (100% complete) `7,500
Labour (60% complete) `3,000

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 CHAPTER 9 PROCESS & OPERATION COSTING

Overhead (60% complete) `1,500

Units introduced into this process 8,000 units
Closing Work-in-progress 2,000 units
Stage of completion is estimated to be:
Material 100%
Labour 50%
Overhead 50%
Transferred to next process 8,000 units
The process costs for the period are:
Materials `1,00,000
Labour `78,000
Overheads `39,000

From the following details prepare:

(a) Statement of Equivalent Production,
(b) Statement of Cost and
(c) Statement of Apportionment of Cost as per Weighted Average Cost basis.

Answer
(a) Statement of Equivalent Production
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Units Transferred 8,000 100 8,000 100 8,000
Closing WIP 2,000 100 2,000 50 1,000
Total 10,000 - 10,000 - 9,000

(b) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 7,500 + 1,00,000 = 1,07,500 10,000 `10.75
Labour 3,000 + 78,000 = 81,000 9,000 `9.00
Overheads 1,500 + 39,000 = 40,500 9,000 `4.50
Total cost per unit `24.25

(c) Statement of Apportionment of Cost

Particulars Elements Eq. Units Cost Per Unit Total
Units transferred All 8,000 24.25 1,94,000

Closing WIP Materials 2,000 10.75 21,500

Labour & Overhead 1,000 9.00 + 4.50 13,500
35,000

BQ 18
Following information is available regarding Process A for the month of February:
Production Records:
Units in process as on 1st Feb 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28th Feb 6,000
(All materials used, 33-⅓% complete for labour and overhead)

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 PROCESS & OPERATION COSTING CHAPTER 9

Cost Records:

Work-in-process as on 1st Feb

Materials `6,000
Labour `1,000
Overhead `1,000
Total `8,000

Cost during the month

Materials `25,600
Labour `15,000
Overhead `15,000
Total `55,600
Presuming that average method of inventory is used, prepare:
(i) Statement of equivalent production.
(ii) Statement showing cost for each element.
(iii) Statement of apportionment of cost.
(iv) Process cost account for Process A.

Answer
Statement of Equivalent Production
Materials Labour & Overhead
Particulars Units
% Eq. Unit % Eq. Unit
Units Completed 14,000 100 14,000 100 14,000
Closing WIP 6,000 100 6,000 33-⅓ 2,000
Total 20,000 - 20,000 - 16,000

Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 6,000 + 25,600 = 31,600 20,000 1.58
Labour 1,000 + 15,000 = 16,000 16,000 1.00
Overheads 1,000 + 15,000 = 16,000 16,000 1.00
3.58

Statement of Apportionment of Cost

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials, 14,000 3.58 50,120
Labour, Overhead
Closing WIP Materials 6,000 1.58 9,480
Labour, Overhead 2,000 1.00 + 1.00 4,000
13,480

Process Account
Particulars Units ` Particulars Units `
To Opening WIP 4,000 8,000 By Completed Units 14,000 50,120
To Materials 16,000 25,600 By Closing WIP 6,000 13,480
To Labour 15,000
To Overhead 15,000
20,000 63,600 20,000 63,600

9.20
 CHAPTER 9 PROCESS & OPERATION COSTING

BQ 19
Following details are related to the work done in Process 'A' of XYZ Company during the month of March,
2024:
Opening work-in-progress 2,000 units
Materials `80,000
Labour `15,000
Overheads `45,000

Materials introduced in Process ‘A’ 38,000 units

Materials `14,80,000
Direct labour `3,59,000
Overheads `10,77,000

Units scrapped 3,000 units

Degree of completion:
Materials 100%
Labour and overheads 80%

Closing work-in-progress 2,000 units

Degree of completion:
Materials 100%
Labour and overhead 80%

Units finished and transferred to Process ‘B’ 35,000 units

Normal loss to total input including opening work-in-progress 5%
Scrapped units fetch `20 per unit

You are required to prepare

1. Statement of equivalent production;
2. Statement of cost;
3. Statement of distribution cost; and
4. Process ‘A’ Account, Normal and Abnormal Loss Accounts.

Answer
1. Statement of Equivalent Production (Average Cost Method)
Materials Processing Cost
Particulars Total Units
% Unit % Unit
Units Completed 35,000 100 35,000 100 35,000
Normal loss 2,000 - - - -
Abnormal Loss 1,000 100 1,000 80 800
Closing WIP 2,000 100 2,000 80 1,600
Total 40,000 - 38,000 - 37,400

2. Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 80,000 + 14,80,000 – 40,000 = 15,20,000 38,000 40.00
Labour 15,000 + 3,59,000 = 3,74,000 37,400 10.00
Overheads 45,000 + 10,77,000 = 11,22,000 37,400 30.00
80.00

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 PROCESS & OPERATION COSTING CHAPTER 9

3. Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials, Labour, Overheads 35,000 80.00 28,00,000

Abnormal Loss Materials 1,000 40.00 40,000

Labour, Overheads 800 10.00 + 30.00 32,000
72,000
Closing WIP Materials 2,000 40.00 80,000
Labour, Overheads 1,600 10.00 + 30.00 64,000
1,44,000

4. Process A Account
Particulars Units ` Particulars Units `
To Opening WIP 2,000 1,40,000 By Normal Loss 2,000 40,000
To Direct Materials 38,000 14,80,000 By Process B A/c 35,000 28,00,000
To Direct Labour 3,59,000 By Abnormal Loss A/c 1,000 72,000
To Overhead 10,77,000 By Closing WIP 2,000 1,44,000
40,000 30,56,000 40,000 30,56,000

Normal Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 2,000 40,000 By Cash A/c 2,000 40,000

2,000 40,000 2,000 40,000

Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 1,000 72,000 By Cash A/c 1,000 20,000
By Costing P&L A/c 72,000
1,000 72,000 (b.f.) 1,000 72,000

BQ 20
‘Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve sugarcane crushing for juice
extraction, then filtration and boiling of juice along with some chemicals and then letting it cool to cut
solidified jaggery blocks.
The main process of juice extraction (Process I) is done in conventional crusher, which is then filtered and
boiled (Process II) in iron pots. The solidified jaggery blocks are then cut, packed and dispatched. For
manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which extracts only 45 litre of juice.

Following information regarding Process – I has been obtained from the manufacturing department of
Healthy Sweets for the month of January, 2023:
Opening work-in process (4,500 litre)
Sugarcane `50,000
Labour `15,000
Overheads `45,000
Sugarcane introduced for juice extraction (1,00,000 kg) `5,00,000
Direct Labour `2,00,000
Overheads `6,00,000
Abnormal Loss 1,000 kg
Degree of completion:

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 CHAPTER 9 PROCESS & OPERATION COSTING

Sugarcane 100%
Labour and overheads 80%
Closing work-in process 9,000 litre
Degree of completion:
Sugarcane 100%
Labour and overheads 80%

Extracted juice transferred for filtering and boiling 39,500 litre

(Consider mass of 1 litre of juice equivalent to 1 kg)

You are required to prepare using average method:

1. Statement of equivalent production,
2. Statement of cost,
3. Statement of distribution cost, and
4. Process I Account.

Answer
1. Statement of Equivalent Production (Average Cost Method)
Materials Labour & OH
Particulars Total Units
% Unit % Unit
Units Completed 39,500 100 39,500 100 39,500
Normal loss 55,000 - - - -
Abnormal Loss 1,000 100 1,000 80 800
Closing WIP 9,000 100 9,000 80 7,200
Total 1,04,500 - 49,500 - 47,500

2. Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 50,000 + 5,00,000 = 5,50,000 49,500 11.111
Labour 15,000 + 2,00,000 = 2,15,000 47,500 4.526
Overheads 45,000 + 6,00,000 = 6,45,000 47,500 13.579
29.216

3. Statement of Distribution of Cost

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed All 39,500 29.216 11,54,032

Abnormal Loss Materials 1,000 11.111 11,111

Labour, Overheads 800 4.526 + 13.579 14,484
25,595 + 18
Closing WIP Materials 9,000 11.111 99,999
Labour, Overheads 7,200 4.526 + 13.579 1,30,356
2,30,355
4. Process I Account
Particulars Units ` Particulars Units `
To Opening WIP 4,500 1,10,000 By Normal Loss @55% 55,000 -
To Sugarcane introduced 1,00,000 5,00,000 of 1,00,000 kgs.
To Direct Labour 2,00,000 By Process II A/c 39,500 11,54,032
To Overhead 6,00,000 By Abnormal Loss A/c 1,000 25,613
By Closing WIP 9,000 2,30,355
1,04,500 14,10,000 1,04,500 14,10,000

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 PROCESS & OPERATION COSTING CHAPTER 9

BQ 21
Cost of opening work-in-process (1,000 units 60% complete) `1,10,000
Cost of units introduced during the period (10,000 units) `19,30,000
Transferred to next process 9,000 units
Closing work-in-process (75% complete) 800 units
Normal loss 10% of total input
Scraps realise `10 per unit
Scraps 100% complete
Compute equivalent production and cost per equivalent unit and also evaluate the Output,
Closing WIP and Abnormal loss using (1) FIFO method and (2) Weighted average method.

Answer
(1) FIFO Method:

(a) Statement of Equivalent Production

Total Cost
Particulars Units
% Eq. Unit
Opening units:
Used for Units transferred 1,000 40 400
Units Introduced:
Used for Units transferred 8,000 100 8,000
Used for Closing WIP 800 75 600
Normal Loss 1,100 - -
Abnormal Loss 100 100 100
11,000 - 9,100

(b) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Total Current period Cost 19,30,000 – 1,100 × 10 9,100 `210.8791
= 19,19,000

(c) Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost All 8,400 210.8791 17,71,384
Add: Cost of Opening WIP 1,10,000
18,81,384

Closing WIP All 600 210.8791 1,26,528

Abnormal Loss All 100 210.8791 21,088

(2) Weighted Average Method:

(a) Statement of Equivalent Production

Total Cost
Particulars Units
% Eq. Unit
Normal Loss 1,100 - -
Abnormal Loss 100 100 100
Units transferred 9,000 100 9,000
Closing WIP 800 75 600
11,000 - 9,700

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 CHAPTER 9 PROCESS & OPERATION COSTING

(b) Statement of Cost

Elements Cost (Current + Opening WIP) Equivalent Units Cost Per Unit
Total Cost 19,30,000 + 1,10,000 – 1,100 × 10 9,700 `209.1752
= 20,29,000

(c) Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total

Units Transferred All 9,000 209.1752 18,82,577

Closing WIP All 600 209.1752 1,25,505

Abnormal Loss All 100 209.1752 20,918

INTER PROCESS PROFIT

BQ 22
A Ltd. produces product AXE which passes through two processes before it is completed and transferred to
finished stock. The following data relate to October 2023.

Process I Process II Finished Stock

Opening stock 7,500 9,000 22,500
Direct materials 15,000 15,750
Direct wages 11,200 11,250
Factory overheads 10,500 4,500
Closing stock 3,700 4,500 11,250
Inter - process profit included in opening stock Nil 1,500 8,250

Output of process I is transferred to Process II at 25% profit on the transfer price. Output of Process II
is transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at prime cost.
Finished stock is valued at the price at which it is received from process II. Sales during the period are
`1,40,000. Prepare Process accounts and finished goods account showing the profit element at each stage.

Answer
Process I A/c
Particulars Total Cost Profit Particulars Total Cost Profit
Opening Stock 7,500 7,500 - Process II A/c 54,000 40,500 13,500
Direct Materials 15,000 15,000 - Closing Stock 3,700 3,700 -
Direct Wages 11,200 11,200 -
Prime Cost 33,700 33,700 -
Factory OH 10,500 10,500 -
Total Cost 44,200 44,200 -
Profit 13,500 - 13,500
57,700 44,200 13,500 57,700 44,200 13,500

Process II A/c
Particulars Total Cost Profit Particulars Total Cost Profit
Opening Stock 9,000 7,500 1,500 Finished Stock 1,12,500 75,750 36,750
Process II A/C 54,000 40,500 13,500 A/c

9.25
 PROCESS & OPERATION COSTING CHAPTER 9

Direct Materials 15,750 15,750 - Closing Stock 4,500 3,750 *750

Direct Wages 11,250 11,250 -
Prime Cost 90,000 75,000 15,000
Factory OH 4,500 4,500 -
Total Cost 94,500 79,500 15,000
Profit 22,500 - 22,500
1,17,000 79,500 37,500 1,17,000 79,500 37,500

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
Opening Stock 22,500 14,250 8,250 Costing P&L A/c 1,40,000 82,425 57,575
Process II A/c 1,12,500 75,750 36,750 Closing Stock 11,250 7,575 *3,675
Profit 16,250 - 16,250
1,51,250 90,000 61,250 1,51,250 90,000 61,250

* Stock reserve in closing stock of Process II = 15,000/90,000 × 4,500 = 750

* Stock reserve in closing stock of FG = 36,750/1,12,500 × 11,250 = 3,675

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 CHAPTER 9 PROCESS & OPERATION COSTING

PAST YEAR QUESTIONS

PYQ 1
M J Pvt. Ltd. produces a product “SKY” which passes through two processes, viz. Process A and Process B.
The details for the year ending 31st March, 2014 are as follows:
Process A Process B
40,000 units introduced at a cost of `3,60,000 -
Materials Consumed `2,42,000 `2,25,000
Direct Wages `2,58,000 `1,90,000
Manufacturing Expenses `1,96,000 `1,23,720
Output in Units 37,000 27,000
Normal Wastage of Input 5% 10%
Scrap Value (per unit) `15 `20
Selling Price (per unit) `37 `61

Additional Information:
(a) 80% of the output of Process A, was passed on to the next process and the balance was sold. The
entire output of Process B was sold.
(b) Indirect expenses for the year was `4,48,080.
(c) It is assumed that Process A and Process B are not responsibility centre.

Required:
(i) Prepare Process A and Process B Account.
(ii) Prepare Profit & Loss Account showing the net profit/net loss for the year.
[(8 Marks) May 2014]

Answer
(i) Process A Account
Particulars Units ` Particulars Units `
To Units Introduced 40,000 3,60,000 By Normal Loss 2,000 30,000
To Materials Consumed 2,42,000 (5% @ `15 per unit)
To Direct Wages 2,58,000 By Abnormal Loss A/c 1,000 27,000
To Manufacturing Exps 1,96,000 By Process B Account 29,600 7,99,200
By Profit and Loss A/c 7,400 1,99,800
40,000 10,56,000 10,000 10,56,000

Total cos t  scrap of normal loss 10 ,56 ,000  30 ,000

Normal cost per unit = = = `27.00
Total units  normal loss units 40 ,000  2,000

Process B Account
Particulars Units ` Particulars Units `
To Process A Account 29,600 7,99,200 By Normal Loss 2,960 59,200
To Materials Consumed 2,25,000 (10% @ `20 per unit)
To Direct Wages 1,90,000 By Profit and Loss A/c 27,000 12,96,000
To Manufacturing Exps 1,23,720
To Abnormal Gain 360 17,280
29,960 13,55,200 29,960 13,55,200

Total cos t  scrap of normal loss 13 ,37 ,920  59 ,200

Normal cost per unit = = = `48.00
Total units  normal loss units 29 ,600  2,960

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 PROCESS & OPERATION COSTING CHAPTER 9

(ii) Profit and Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 7,400 1,99,800 By Sales:
To Process B A/c 27,000 12,96,000 Process A 7,400 2,73,800
To Indirect Expenses 4,48,080 Process B 27,000 16,47,000
To Abnormal Loss A/c 12,000 By Abnormal Gain A/c 10,080
(27,000 – 1,000 (17,280 – 360 units×20)
units×15) By Net Loss 25,000
34,400 19,55,880 34,400 19,55,880

PYQ 2
The following information relate to process A:
(1) Opening work-in process 8,000 units at `75,000
Degree of completion:
Materials 100%
Labour and Overhead 60%
(2) Input 1,82,000 units at `7,37,500
(3) Labour paid `3,40,600
(4) Overheads incurred `1,70,300
(5) Units scrapped 14,000
Degree of completion:
Material 100%
Labour and overhead 80%
(6) Closing work-in-process 18,000 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 5% of total input including opening work-in-process
(9) Scrap value is `5 per unit to be adjusted out of direct material cost.

You are required to compute on the basis FIFO method:

(a) Equivalent production,
(b) Cost per unit.
(c) Value of Units transferred to next process.
[(8 Marks) Nov 2014]

Answer
(a) Statement of Equivalent Production
Materials Labour & OH
Particulars Units
% E. Units % E. Units
Opening units:
Used for Completed Units 8,000 - - 40 3,200
Current Units:
Used for Completed Units 1,50,000 100 1,50,000 100 1,50,000
Used for Closing WIP 18,000 100 18,000 70 12,600
Normal Loss 9,500 - - - -
(1,90,000 × 5%)
Abnormal Loss 4,500 100 4,500 80 3,600
Total 1,90,000 - 1,72,500 - 1,69,400

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 CHAPTER 9 PROCESS & OPERATION COSTING

(b) Statement of Cost Per Unit

Elements Cost Equivalent Units Cost Per Unit
Materials 7,37,500 - 47,500 (9,500 × 5)
Labour = 6,90,000 1,72,500 4.0000
Overhead 3,40,600 1,69,400 2.0106
1,70,300 1,69,400 1.0053
Total Cost Per Unit 7.0159

(c) Statement Showing Value Units Transferred to Next Process

Particulars Elements Equivalent Cost Per Unit `
Units
Current period work Materials 1,50,000 4.00 6,00,000
Labour and OH 1,53,200 2.0106 + 1.0053 4,62,036

Add: Cost of Opening WIP 75,000

Value of Units Transferred 11,37,036

PYQ 3
The following information is furnished by ABC Company for Process – II of its manufacturing activity for the
month of April 2015:
(1) Opening work-in process Nil
(2) Units transferred from Process – I 55,000 units at `3,27,800
(3) Expenses debited to Process – II:
Consumables `1,57,200
Labour `1,04,000
Overheads `52,000
(4) Units transferred to Process – III 51,000 units
(5) Closing WIP 2,000 units
Degree of completion:
Consumables 80%
Labour 60%
Overheads 60%
(6) Units scrapped 2,000 units
(7) Scrapped units were sold at `5 per unit
(8) Normal loss 4% of units introduced

You are required to

(a) Prepare a Statement of Equivalent Production.
(b) Determine the cost per unit.
(c) Determine the value of WIP and units transferred to Process – III.
[(8 Marks) Nov 2015]

Answer
(a) Statement of Equivalent Production
Materials 1 Material 2 Labour & OH
Particulars Units
% E. Units % E. Units % E. Units
Normal Loss (55,000 × 4%) 2,200 - - - - - -
Units transferred to Process - III 51,000 100 51,000 100 51,000 100 51,000
Units in Closing WIP 2,000 100 2,000 80 1,600 60 1,200
Less: Abnormal Gain (200) 100 (200) 100 (200) 100 (200)
Total 55,000 - 52,800 - 52,400 - 52,000

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 PROCESS & OPERATION COSTING CHAPTER 9

(b) Statement of Cost Per Unit

Elements Cost Equivalent Units Cost Per Unit
Materials 1 3,27,800 - 11,000 (2,200 × 5) = 3,16,800 52,800 6.00
Materials 2 1,57,200 52,400 3.00
Labour 1,04,000 52,000 2.00
Overhead 52,000 52,000 1.00
12.00

(c) Statement Showing Value of WIP and Units Transferred to Process – III
Particulars Elements Equivalent Units Cost Per Unit `
1. Closing WIP Materials 1 2,000 6.00 12,000
Materials 2 1,600 3.00 4,800
Labour 1,200 2.00 2,400
Overheads 1,200 1.00 1,200
20,400

2. Transferred to Process-III All (M, L, OH) 51,000 12.00 6,12,000

PYQ 4
KMR Limited produces product AY, which passes through three processes ‘XM’, ‘YM’ and ‘ZM’. The output of
process ‘XM’ and ‘YM’ is transferred to next process at cost plus 20% each on transfer price and the output
of process ‘ZM’ is transferred to finished stock at a profit of 25% on transfer price. The following information
are available in respect of the year ending 31st March, 2017:

Details Process XM Process YM Process ZM Finished Stock

Opening Stock 30,000 54,000 80,000 90,000
Materials 1,60,000 1,30,000 1,00,000 -
Wages 2,50,000 2,16,000 1,84,000 -
Manufacturing Overheads 1,92,000 1,44,000 1,33,000 -
Closing Stock 40,000 64,000 78,000 1,00,000
Inter process profit included in Op. Stock NIL 8,000 20,000 40,000

Stock in process is valued at prime cost. The finished stock is valued at the price at which it is received
from process ‘ZM’. Sales of the finished stock during the period was `28,00,000.

You are required to prepare:

(i) All process accounts and
(ii) Finished Stock A/c showing profit element at each stage.
[(8 Marks) May 2017]

Answer
(i) Process XM A/c
Particulars Cost Profit Total Particulars Cost Profit Total
Opening Stock 30,000 - 30,000 Process YM A/c 5,92,000 1,48,000 7,40,000
Materials 1,60,000 - 1,60,000 Closing Stock 40,000 - 40,000
Wages 2,50,000 - 2,50,000
Prime Cost 4,40,000 - 4,40,000
Factory OH 1,92,000 - 1,92,000
Total Cost 6,32,000 - 6,32,000
Profit - 1,48,000 1,48,000
6,32,000 1,48,000 7,80,000 6,32,000 1,48,000 7,80,000

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 CHAPTER 9 PROCESS & OPERATION COSTING

Process YM A/c
Particulars Cost Profit Total Particulars Cost Profit Total
Opening Stock 46,000 8,000 54,000 Process ZM 10,72,758 4,52,242 15,25,000
Process XM 5,92,000 1,48,000 7,40,000 A/c
Materials 1,30,000 - 1,30,000 Closing 55,242 8,758 64,000
Wages 2,16,000 - 2,16,000 Stock
Prime Cost 9,84,000 1,56,000 11,40,000
Factory OH 1,44,000 - 1,44,000
Total Cost 11,28,000 1,56,000 12,84,000
Profit - 3,05,000 3,05,000
11,28,000 4,61,000 15,89,000 11,28,000 4,61,000 15,89,000
1,56 ,000
Profit element in closing stock = × 64,000 = 8,758
11 ,40 ,000

Process ZM A/c
Particulars Cost Profit Total Particular Cost Profit Total
Opening Stock 60,000 20,000 80,000 Finished 14,91,258 11,00,742 25,92,000
Process ZM 10,72,758 4,52,242 15,25,000 Stock A/c
Materials 1,00,000 - 1,00,000 Closing 58,500 19,500 78,000
Wages 1,84,000 - 1,84,000 Stock
Prime Cost 14,16,758 4,72,242 18,89,000
Factory OH 1,33,000 - 1,33,000
Total Cost 15,49,758 4,72,242 20,22,000
Profit - 6,48,000 6,48,000
15,49,758 11,20,242 26,70,000 15,49,758 11,20,242 26,70,000
4 ,72 ,242
Profit element in closing stock = × 78,000 = 19,500
18 ,89 ,000

(ii) Finished Stock A/c

Particulars Cost Profit Total Particulars Cost Profit Total
Opening Stock 50,000 40,000 90,000 Costing 14,83,725 13,16,275 28,00,000
Process ZM 14,91,258 11,00,742 25,92,000 P/L A/c
Profit - 2,18,000 2,18,000 Closing 57,533 42,467 1,00,000
Stock
15,41,258 13,58,742 29,00,000 15,41,258 13,58,742 29,00,000
11 ,00 ,742
Profit element in closing stock = × 1,00,000 = 42,467
25 ,92 ,000

PYQ 5
ABC Ltd. produces an item which is completed in three processes – X, Y and Z. the following information is
furnished for the month of March, 2018:
Opening work-in process 5,000 units
Materials `35,000
Labour `13,000
Overheads `25,000
Units introduced into process X 55,000 units
Materials `20,20,000
Labour `8,00,000
Overheads `13,30,000

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 PROCESS & OPERATION COSTING CHAPTER 9

Units scrapped 5,000 units

Degree of completion:
Material 100%
Labour and overhead 60%
Closing work-in-process 5,000 units
Degree of completion:
Material 100%
Labour and overhead 60%
Units finished and transferred to Process Y 50,000 units

Normal loss is 5% of total input including opening work-in-process, scrap units fetch `20 per unit.

Presuming average method of inventory is used, prepare:

(1) Statement of Equivalent production,
(2) Statement of Cost for each element,
(3) Statement of distribution of cost,
(4) Abnormal loss account.
[(8 Marks) May 2018]

Answer
(1) Statement of Equivalent Production
Materials Conversion Cost
Particulars Input Particulars Output
% Unit % Unit
Opening WIP 5,000 Transfer to Process Y 50,000 100 50,000 100 50,000
Fresh Units 55,000 Normal Loss 3,000 - - - -
(5% of 60,000)
Abnormal Loss 2,000 100 2,000 60 1,200
Closing WIP 5,000 100 5,000 60 3,000
Total 60,000 Total 60,000 - 57,000 - 54,200

(2) Statement of Cost

Elements Cost Equivalent Units Cost Per Unit
Materials 35,000 + 20,20,000 – 60,000 (3,000 × 20) 57,000 35.00
= 19,55,000
Labour 13,000 + 8,00,000 = 8,13,000 54,200 15.00
Overhead 25,000 + 13,30,000 = 13,55,000 54,200 25.00
75.00

(3) Statement of Distribution of Cost

Particulars Elements Equivalent Units Cost Per Unit `
Units transferred All (M, L, OH) 50,000 75.00 37,50,000
to Process Y

Abnormal Loss Materials 2,000 35.00 70,000

Labour & OH 1,200 40.00 48,000
1,18,000

Closing WIP Materials 5,000 35.00 1,75,000

Labour & OH 3,000 40.00 1,20,000
2,95,000

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 CHAPTER 9 PROCESS & OPERATION COSTING

(4) Abnormal Loss A/c

Particulars Units ` Particulars Units `
To Process X A/c 2,000 1,18,000 By Cash @ `20 p.u. 2,000 40,000
By P/L A/c 78,000
2,000 1,18,000 2,000 1,18,000

PYQ 6
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process – Process P,
Process Q and Process R. the following data relating to cost and output is obtained from the books for the
month of April, 2017:

Particulars Process P Process Q Process R

Direct Materials 38,000 42,500 42,880
Direct Labour 30,000 40,000 50,000

Production overheads of `90,000 were recovered as a percentage of direct labour. 10,000 kg of raw material
@ `5 per kg. was issued to Process P. There was no stock of material or work in process. There is normal
wastage, in processing of 10%. The scrap value of wastage is `1 per kg.

The entire output of each process transferred to next process and finally to warehouse as Process P
= 9,000 kg, Process Q = 8,200 kg and Process R = 7,300 kg.
The company fixes selling price of the end product in such a way so as to yield a profit of 25% on selling price.

Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product.
[(10 Marks) May 2018]

Answer
1. Process P Account
Particulars Units ` Particulars Units `
To Input 10,000 50,000 By Normal Loss 1,000 1,000
To Direct Materials 38,000 (10% of 10,000 units)
To Direct Labour 30,000 By Process Q Account @ 9,000 1,39,500
To Manufacturing OH 22,500 `15.50 per unit
(75% of 30,000)
10,000 1,40,500 10,000 1,40,500

Total Cost  Re alisable Value of Normal Loss Units

Cost per unit of completed units =
Inputs Units  Normal Loss Units
= 1,40,500 - 1,000/10,000 - 1,000 = `15.50

2. Process Q Account
Particulars Units ` Particulars Units `
To Process P A/c 9,000 1,39,500 By Normal Loss 900 900
To Direct Materials 42,500 (10% of 9,000 units)
To Direct Labour 40,000 By Process R Account @ 8,200 2,54,200
To Manufacturing OH 30,000 `31.00 per unit
(75% of 40,000)
To Abnormal Gain 100 3,100
9,100 2,55,100 9,100 2,55,100

Cost per unit of completed units = 2,52,000 - 900/9,000 - 900 = `31.00

9.33
 PROCESS & OPERATION COSTING CHAPTER 9

3. Process R Account
Particulars Units ` Particulars Units `
To Process Q A/c 8,200 2,54,200 By Normal Loss 820 820
To Direct Materials 42,880 (10% of 8,200 units)
To Direct Labour 50,000 By Abnormal Loss A/c 80 4,160
To Manufacturing OH 37,500 By Finished Goods @ 7,300 3,79,600
(75% of 50,000) `52.00 per unit
8,200 3,84,580 8,200 3,84,580

Cost per unit of completed units = 3,84,580 - 820/8,200 - 820 = `52.00

4. Selling price of end product = Cost per unit + Profit @ 25% on Sales or 1/3 on Cost
= 52.00 + 52.00 × 1/3 = `69.33
Working note:

Calculation of recovery rate of overheads:

Total Overheads 90 ,000
Recovery rate = × 100 = × 100
Total Labour Cost 1 ,20 ,000
= 75% of labour cost

PYQ 7
Following detail have been provided by M/s AR Enterprises:

 Opening work-in process 3,000 units (70% complete)

 Units introduced during the year 17,000 units
 Cost of process (for the period) `33,12,720
 Transferred to next process 15,000 units
 Closing work-in-process 2,200 units (80 complete)
 Normal loss is estimated at 12% of total input including opening work-in-process
 Scrap realize `50 per unit (100% complete)

Using FIFO method, compute:

(1) Equivalent production,

(2) Cost per equivalent unit.
[(5 Marks) Nov 2018]

Answer
(1) Statement of Equivalent Production
Materials, Labour & OH
Particulars Units
% E. Units
Opening Units:
Used to produce Units transferred to Next Process 3,000 30 900
Current Units:
Used to produce Units transferred to Next Process 12,000 100 12,000
Normal loss (12% of 20,000) 2,400 - -
Abnormal loss 400 100 400
(3,000 + 17,000 – 2,400 - 15,000 – 2,200)
Closing WIP 2,200 80 1,760
Total 20,000 - 15,060

9.34
 CHAPTER 9 PROCESS & OPERATION COSTING

(2) Statement of Cost Per Equivalent Unit

Elements Cost Equivalent Units Cost Per Unit
33,12,720 – 2,400 × 50 212.00
Materials, Labour and Overheads 15,060
= 31,92,720

PYQ 8
A company manufacturing chemical solution that passes through a number of processes uses FIFO method
to value WIP and Finished goods. At the end of the month of September, a fire occurred in the factory and
some papers containing records of the process operations for the month were destroyed. The company
desires to prepare process account for the month during which the fire occurred. Some information could be
gathered as to operating activities as under:
 Opening work-in process at the beginning of the month of 1,100 litres, 40% complete for labour and
60% for overheads. Opening WIP was valued at `48,260.
 Closing WIP at the end of the month was 220 litres, 40% complete for labour and 30% for overheads.
 Normal loss is 10% of input and total losses during the month were 2,200 litres partly due to fire
damage. Assume degree of completion of abnormal loss is 100%.
 Output sent to Finished goods warehouse was 5,900 litres.
 Losses have a scrap value of `20 per litre.
 All raw materials are added at the commencement of the process.
 The cost per equivalent unit (litre) is `53 for the month consisting:
Raw materials `35
Labour `8
Overheads `10
Total `53
You are required to:
(1) Calculate the quantity (in litres) of raw materials input during the month.
(2) Calculate the quantity (in litres) of normal loss and abnormal loss/gain experienced in the month.
(3) Calculate the value of raw materials, labour and overheads added to the process during the month.
(4) Prepare process account for the month.
[(8 Marks) Nov 2018]

Answer
(1) Calculation of quantity of raw materials input during the month:

Raw materials input = Output of Finished goods + Closing WIP + Losses – Opening WIP
= 5,900 + 220 + 2,200 – 1,100 = 7,220 litres

(2) Calculation of quantity of normal loss and abnormal loss or gain:

Normal loss = 10% of Input = 10% of 7,220 = 722 litres

Abnormal loss = Actual loss – Normal loss
= 2,200 – 722 = 1,478 litres

(3) Statement of Material, Labour and Overheads added during the month
Particulars Materials Labour Overheads
Cost per equivalent units 35 8 10
Number of equivalent units 6,498 7,026 6,784
Cost of equivalent units 2,27,430 56,208 67,840
Add: Scrap value of normal loss units (722 × 20) 14,440 - -
Total value added 2,41,870 56,208 67,840

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 PROCESS & OPERATION COSTING CHAPTER 9

(4) Process A/c

Particulars Units ` Particulars Units `
To Opening WIP 1,100 48,260 By Normal Loss 722 14,440
To Materials 7,220 2,41,870 By Finished Output 5,900 3,12,340
To Labour 56,208 By Abnormal Loss 1,478 78,334
To Overheads 67,840 By WIP Closing 220 9,064

8,320 4,14,178 8,320 4,14,178

Working Note:
(a) Statement of Equivalent Production
Materials Labour Overheads
Particulars Units
% E. Units % E. Units % E. Units
Opening Units:
Used for Completed Units 1,100 - - 60 660 40 440
Current Units:
Used for Completed Units 4,800 100 4,800 100 4,800 100 4,800
Normal loss 722 - - - - - -
Abnormal loss 1,478 100 1,478 100 1,478 100 1,478
Closing WIP 220 100 220 40 88 30 66
Total 8,320 - 6,498 - 7,026 - 6,784

(b) Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed:
Current period cost Materials 4,800 35 1,68,000
Labour 5,460 8 43,680
Overheads 5,240 10 52,400
Add: Cost of Opening WIP 48,260
3,12,340

Abnormal Loss All 1,478 53 78,334

Closing WIP Materials 220 35 7,700

Labour 88 8 704
Overheads 66 10 660
9,064

PYQ 9
KT Ltd. produces a product EMM which passes through two processes before it is completed and transferred
to finished stock. The following data relate to May 2019:
Process Finished Stock
Particulars
A (`) B (`) (`)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock - 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output of
Process B is transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at

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 CHAPTER 9 PROCESS & OPERATION COSTING

prime cost. Finished stock is valued at the price at which it is received from Process B. Sales during the period
are `75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each
stage.
[(10 Marks) May 2019]

Answer
Process A A/c
Particulars Total Cost Profit Particulars Total Cost Profit
Opening Stock 5,000 5,000 - Process B A/c 28,800 21,600 7,200
Materials 9,000 9,000 - Closing Stock 2,000 2,000 -
Wages 5,000 5,000 -
Prime Cost 19,000 19,000 -
Factory OH 4,600 4,600 -
Process Cost 23,600 23,600 -
Profit 7,200 - 7,200
30,800 23,600 7,200 30,800 23,600 7,200

Process B A/c
Particulars Total Cost Profit Particulars Total Cost Profit
Opening Stock 5,500 4,500 1,000 Finished Stock 61,675 41,550 20,125
Process A A/c 28,800 21,600 7,200 A/c
Materials 9,500 9,500 - Closing Stock 2,490 2,080 410
Wages 6,000 6,000 -
Prime Cost 49,800 41,600 8,200
Factory OH 2,030 2,030 -
Process Cost 51,830 43,630 8,200
Profit 12,335 - 12,335
64,165 43,630 20,535 64,165 43,630 20,535

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
Opening Stock 10,000 6,000 4,000 Costing P & L 75,000 44,189 30,818
Process B A/c 61,675 41,550 20,125 A/c
Profit (b.f.) 8,325 - 8,325 Closing Stock 5,000 3,361 1,632
80,000 47,550 32,450 80,000 47,550 32,450
* Stock reserve in closing stock of Process B = 8,200/49,800 × 2,490 = 410
* Stock reserve in closing stock of FG = 20,125/61,675 × 5,000 = 1,632

PYQ 10
A product passes through two distinct processes before completion. Following information are available in
this respect:
Process 1 Process 2
Raw materials used 10,000 units -
Raw material cost (per unit) `75 -
Transfer to next process/Finished goods 9,000 units 8,200 units
Normal loss (on inputs) 5% 10%
Direct wages `3,00,000 `5,60,000
Direct expenses 50% of direct wages 65% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realisable value of scrap (per unit) `13.50 `145

9.37
 PROCESS & OPERATION COSTING CHAPTER 9

8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing stock of
work-in-progress.
Prepare:
(1) Process 1 and process 2 account
(2) Finished goods account
(3) Normal loss account
(4) Abnormal loss account
(5) Abnormal gain account
[(10 Marks) Nov 2019]

Answer
(1) Process 1 Account
Particulars Units ` Particulars Units `
To Raw Materials 10,000 7,50,000 By Normal Loss A/c 500 6,750
To Direct Wages 3,00,000 (5% @ `13.50 per unit)
To Direct Expenses 1,50,000 By Process 2 A/c 9,000 12,01,500
(50% of Direct Wages) @ `133.50 per unit
To Manufacturing OH 75,000 By Abnormal Loss A/c @ 500 66,750
(25% of Direct Wages) `133.50 per unit
10,000 12,75,000 10,000 12,75,000

Total Cost − Sale value of Normal Loss Units 12,75,000 − 6,750

NCPU =
Total Units−Normal Loss Units
=
10,000 − 500
= `133.50 p.u.

Process 2 Account
Particulars Units ` Particulars Units `
To Process 1 A/c 9,000 12,01,500 By Normal Loss A/c 900 1,30,500
To Direct Wages 5,60,000 (10% @ `145 per unit)
To Direct Expenses 3,64,000 By Finished Goods A/c 8,200 21,04,667
(65% of Direct Wages) @ `256.67 per unit
To Manufacturing OH 84,000
(15% of Direct Wages)
To Abnormal Gain A/c 100 25,667
@ `256.67 per unit
9,100 22,35,167 9,100 22,35,167

Total Cost − Sale value of Normal Loss Units 22,09,500 − 1,30,500

NCPU = Total Units−Normal Loss Units
= 9,000 − 900
= `256.67 p.u.

(2) Finished Goods Account

Particulars Units ` Particulars Units `
To Process 2 A/c 8,200 21,04,667 By Cost of Sales 8,000 20,53,333
By Balance c/d 200 51,334
8,200 21,04,667 8,200 21,04,667

(3) Normal Loss Account

Particulars Units ` Particulars Units `
To Process 1 A/c 500 6,750 By Cash A/c:
To Process 2 A/c 900 1,30,500 Process 1 500 6,750
Process 2 800 1,16,000
By Abnormal Gain A/c 100 14,500
1,400 1,37,250 1,400 1,37,250

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 CHAPTER 9 PROCESS & OPERATION COSTING

(4) Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process 1 A/c 500 66,750 By Cash A/c 500 6,750
By Costing P/L A/c 60,000
500 66,750 500 66,750

(5) Abnormal Gain Account

Particulars Units ` Particulars Units `
To Normal Loss A/c 100 14,500 By Process 2 A/c 100 25,667
To Costing P/L A/c 11,167
100 25,667 100 25,667

PYQ 11
Following details are related to the work done in Process I by ABC Ltd. during the month of May, 2019:

Opening work-in-progress 3,000 units

Materials `1,80,500
Labour `32,400
Overheads `90,000

Materials introduced in Process I 42,000 units

Materials `36,04,000
Direct labour `4,50,000
Overheads `15,18,000

Units scrapped 4,800 units

Degree of completion:
Materials 100%
Labour and overheads 70%

Closing work-in-progress 4,200 units

Degree of completion:
Materials 100%
Labour and overhead 50%

Units finished and transferred to Process II 36,000 units

Normal loss:
4% of total input including opening work-in-progress
Scrapped units fetch `62.50 per piece.

Prepare:
1. Statement of equivalent production,
2. Statement of cost per equivalent unit,
3. Process I Account,
4. Normal Loss Account and,
5. Abnormal Loss Account.
[(10 Marks) Nov 2020]

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 PROCESS & OPERATION COSTING CHAPTER 9

Answer
1. Statement of Equivalent Production (Average Cost Method)
Materials Processing Cost
Particulars Total Units
% Unit % Unit
Units Completed 36,000 100 36,000 100 36,000
Normal loss 1,800 - - - -
Abnormal Loss 3,000 100 3,000 70 2,100
Closing WIP 4,200 100 4,200 50 2,100
Total 45,000 - 43,200 - 40,200

2. Statement of Cost per Equivalent Unit

Elements Total Cost Equivalent Units Cost Per Unit
Materials 1,80,500 + 36,04,000 – 1,12,500 = 43,200 85.00
Labour 36,72,000 40,200 12.00
Overheads 32,400 + 4,50,000 = 4,82,400 40,200 40.00
90,000 + 15,18,000 = 16,08,000 137.00

3. Process I Account
Particulars Units ` Particulars Units `
To Opening WIP 3,000 3,02,900 By Normal Loss 1,800 1,12,500
To Direct Materials 42,000 36,04,000 By Process II A/c 36,000 49,32,000
To Direct Labour 4,50,000 By Abnormal Loss A/c 3,000 3,64,200
To Overhead 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900

4. Normal Loss Account

Particulars Units ` Particulars Units `
To Process I A/c 1,800 1,12,500 By Cash A/c 1,800 1,12,500

1,800 1,12,500 1,800 1,12,500

5. Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process I A/c 3,000 3,64,200 By Cash A/c 3,000 1,87,500
By Costing P/L A/c 1,76,700

3,000 3,64,200 3,000 3,64,200

Working note: Statement of Evaluation

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed Materials, Labour, Overheads 36,000 137.00 49,32,000

Abnormal Loss Materials 3,000 85.00 2,55,000

Labour, Overheads 2,100 12.00 + 40.00 1,09,200
3,64,200

Closing WIP Materials 4,200 85.00 3,57,000

Labour, Overheads 2,100 12.00 + 40.00 1,09,200
4,66,200

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 CHAPTER 9 PROCESS & OPERATION COSTING

PYQ 12
MNO Ltd has provided following details:
 Opening work in progress is 10,000 units at `50,000 (Material 100%, Labour and overheads 70%
complete).
 Input of materials is 55,000 units at `2,20,000. Amount spent on Labour and Overheads is `26,500 and
`61,500 respectively.
 9,500 units were scrapped; degree of completion for material 100% and for labour & overheads 60%.
 Closing work in progress is 12,000 units; degree of completion for material 100% and for labour &
overheads 90%.
 Finished units transferred to next process are 43,500 units.
 Normal loss is 5% of total input including opening work in progress. Scrapped units would fetch `8.50
per unit.

You are required to prepare using FIFO method:

(1) Statement of Equivalent production
(2) Abnormal Loss Account
[(5 Marks) Jan 2021]

Answer
(1) Statement of Equivalent Production (FIFO Method)
Materials Labour & OH
Particulars Units
% E. Units % E. Units
Opening Units:
Used for Completed Units 10,000 - - 30 3,000
Current Units:
Used for Completed Units 33,500 100 33,500 100 33,500
Normal loss (5% of 65,000) 3,250 - - - -
Abnormal loss 6,250 100 6,250 60 3,750
Closing WIP 12,000 100 12,000 90 10,800
Total 65,000 - 51,750 - 51,050

(2) Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process A/c 6,250 29,698 By Cash A/c 6,250 53,125
To Costing P/L A/c 23,427
6,250 53,125 6,250 53,125

Working notes:
(a) Statement of Cost per Equivalent Unit
Elements Total Cost Equivalent Units Cost Per Unit
Materials 2,20,000 – (3,250 × 8.50) = 1,92,375 51,750 3.7174
Labour 26,500 51,050 0.5191
Overheads 61,500 51,050 1.2047
5.4412

(b) Valuation of Abnormal loss = (6,250 × 3.7174) + [3,750 × (0.5191 + 1.2047)]

= 29,698

PYQ 13
A manufacturing unit manufactures a product ‘XYZ’ which passes through three Processes: X, Y and Z. the
following data is given:

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 PROCESS & OPERATION COSTING CHAPTER 9

Particulars Process X Process Y Process Z

Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000

(a) The total production overhead of `15,750 was recovered @150% of direct wages.
(b) 15,000 units at `2 each were introduced to process ‘X’.
(c) The output of each process passes to the next process and finally, 12,000 units were transferred
finished stock account from process ‘Z’.
(d) No stock of materials or work in progress were left at the end.

The following additional information if given:

Process % of wastage to normal input Value of scrap per unit (`)
X 6% 1.10
Y ? 2.00
Z 5% 1.00

You are required to:

(1) Find out the percentage of wastage in process ‘Y’ given that the output of process ‘Y’ is transferred to
process ‘Z’ at `4 per unit.
(2) Prepare process accounts for all the three processes X, Y and Z.
[(10 Marks) July 2021]

Answer
(1) Calculation of percentage of wastage in process Y:

Let scrap units in process Y be ‘x’

Total cost – sale of scrap 52,610 – 2x

Cost per unit in process Y = total units – Normal loss units
= 14,100 – x
= `4

4 (14,100 - x) = 52,610 – 2x
56,400 – 4x = 52,610 – 2x
3,790 = 2x
x = 3,790 ÷ 2 = 1,895 units

Percentage of wastage = (1,895 ÷ 14,100) × 100 = 13.44%

(2) Process X Account

Particulars Units ` Particulars Units `
To Units introduced 15,000 30,000 By Normal Loss 900 990
To Material consumed 2,600 (6% of 15,000 units)
To Direct wages 4,000 By Process Y Account 14,100 41,610
To Production overheads 6,000
(150% of 4,000) 15,000 42,600 15,000 42,600

Process Y Account
Particulars Units ` Particulars Units `
To Process X A/c 14,100 41,610 By Normal Loss 1,895 3,790
To Material consumed 2,250 By Process Z Account
To Direct wages 3,500 @`4 per unit 12,205 48,820
To Production overheads 5,250
(150% of 3,500)
14,100 52,610 14,100 52,610

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 CHAPTER 9 PROCESS & OPERATION COSTING

Process Z Account
Particulars Units ` Particulars Units `
To Process Y A/c 12,205 48,820 By Normal Loss 610 610
To Material consumed 2,000 (5% of 12,205 units)
To Direct wages 3,000 By Finished stock 12,000 59,725
To Production overheads 4,500 Account @ `4.977 per
(150% of 3,000) unit
To Abnormal gain @ 405 2,015
`4.977 per unit
12,610 60,335 12,610 60,335

Total cost – sale of scrap 58,320 – 610

Cost per unit =
total units – Normal loss units
=
12,205 – 610
= `4.977 per unit

PYQ 14
A product passes through Process-I and Process-II. Particulars pertaining to the Process I are: Materials
issued to Process I amounted to `80,000, Wages `60,000 and manufacturing overheads were `52,500.
Normal Loss anticipated was 5% of input. 9,650 units of output were produced and transferred out from
Process I to Process II. Input raw materials issued to Process I were 10,000 units. There were no opening
stocks. Scrap has realizable value of `5 per unit.

You are required to prepare:

1. Process I Account
2. Abnormal Gain Account
[(5 Marks) Dec 2021]

Answer
1. Process I Account
Particulars Units ` Particulars Units `
To Raw Material Issued 10,000 80,000 By Normal Loss A/c 500 2,500
To Wages 60,000 (5% @ `5 per unit)
To Manufacturing OH 52,500 By Process II A/c 9,650 1,93,000
To Abnormal Gain A/c 150 3,000 @ `20 per unit
@ `20 per unit
10,150 1,95,500 10,150 1,95,500
Total Cost − Sale value of Normal Loss Units 1,92,500 − 2,500
NCPU =
Total Units−Normal Loss Units
=
10,000 − 500
= `20 per unit

2. Abnormal Gain Account

Particulars Units ` Particulars Units `
To Normal Loss A/c 150 750 By Process I A/c 150 3,000
To Costing P/L A/c 2,250
150 3,000 150 3,000

PYQ 15
STG Limited is a manufacturer of Chemical 'GK', which is required for industrial use. The complete
production operation requires two processes. The raw material first passes through Process I, where
Chemical 'G' is produced. Following data is furnished for the month April 2022:
Particulars (in kgs.)
Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)

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 PROCESS & OPERATION COSTING CHAPTER 9

Material input quantity 1,05,000

Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)

You are further provided that:

Particulars (in `)
Opening work-in-progress cost:
Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100

Normal process loss may be estimated to be 10% of material input. It has no realizable value. Any loss over
and above normal loss is considered to be 100% complete in material and processing.

The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II for producing
Chemical 'GK'. Further materials are added in Process II which yield 1.20 kg. of Chemical 'GK' for every kg. of
Chemical 'G' introduced. The chemicals transferred to Process II for further processing are then sold as
Chemical 'GK' for `10 per kg. Any quantity of output completed in Process I, are sold as Chemical 'G' @ `9
per kg.

The monthly costs incurred in Process II (other than the cost of Chemical 'G') are:
Input 60,000 kg. of Chemical 'G':
Materials Cost `85,000
Processing Costs `50,000

You are required:

(a) Prepare Statement of Equivalent production and determine the cost per kg. of Chemical ‘G' in Process
I using the weighted average cost method.
(b) Prepare a statement showing cost of Chemical 'G’ transferred to Process II, cost of abnormal loss and
cost of closing work-in progress.
(c) STG is considering the option to sell 60,000 kg. of Chemical 'G' of Process I without processing it
further in Process-II. Will it be beneficial for the company over the current pattern of processing
60,000 kg in process-II?
[(10 Marks) May 2022]

Answer
(a) Statement of Equivalent Production (Average Cost Method)
Materials Processing Cost
Particulars Units
% Unit % Unit
Units Completed 83,000 100 83,000 100 83,000
Normal loss (10% of 10,500) 10,500 - - - -
Closing WIP 16,500 100 16,500 60 9,900
Abnormal Loss 4,500 100 4,500 100 4,500
(9,500 + 1,05,000 -83,000 – 16,500 – 10,500)
Total 1,14,500 - 1,04,000 - 97,400

Statement of Cost per Equivalent Unit

Elements Total Cost Equivalent Units Cost Per Unit
Materials 29,500 + 3,34,500 = 3,64,000 1,04,000 3.50

9.44
 CHAPTER 9 PROCESS & OPERATION COSTING

Processing Cost 14,750 + 2,53,100 = 2,67,850 97,400 2.75

6.25

(b) Statement Showing Cost of Chemical 'G’ transferred to Process II, Cost of Abnormal Loss and Cost
of Closing work-in progress
Particulars Elements Eq. Units Cost Per Unit Total
Units transferred (60,000 units) All 60,000 6.25 3,75,000

Abnormal Loss All 4,500 6.25 28,125

Closing WIP Materials 16,500 3.50 57,750

Processing Cost 9,900 2.75 27,225
84,975

(c) Further Processing Decision:

Incremental revenue Incremental cost Situation Decision
(60,000 × 1.2 kgs × `10) – (60,000 × `9) `85,000 + `50,000 IR > IC Yes
= `1,80,000 = `1,35,000
Advise: Additional net profit on further processing in Process II is 45,000 (1,80,000 – 1,35,000). Therefore,
it is advisable to process further chemical ‘G’.

PYQ 16
N Ltd. produces a product which passes through two processes – Process-I and Process-II. The company has
provided following information related to the Financial Year 2021-22.
Particulars Process-I Process-II
Raw Material @ `65 per unit 6,500 units -
Direct Wages `1,40,000 `1,30,000
Direct Expenses 30% of Direct wages 35% of Direct wages
Manufacturing Overheads `21,500 `24,500
Realisable value of scrap per unit `4.00 `16.00
Normal Loss 250 units 500 units
Units transferred to Process II / finished stock 6,000 units 5,500 units
Sales - 5,000 units
There was no opening or closing stock of work-in-progress.

You are required to prepare:

(a) Process-I Account
(b) Process-II Account
(c) Finished Stock Account
[(10 Marks) Nov 2022]

Answer
(a) Process-I Account
Particulars Units ` Particulars Units `
To Raw Materials used 6,500 4,22,500 By Normal Loss 250 1,000
To Direct Wages 1,40,000 By Process-II Account @ 6,000 6,00,000
To Direct Expenses 42,000 `100 per unit
(30% of `1,40,000) By Abnormal Loss A/c @ 250 25,000
To Manufacturing OH 21,500 `100 per unit
6,500 6,26,000 6,500 6,26,000

9.45
 PROCESS & OPERATION COSTING CHAPTER 9

Total Cost  Re alisable Value of Normal Loss Units 6 ,26 ,000  1 ,000
NCPU = = = `100 p.u.
Inputs Units  Normal Loss Units 6 ,500  250

(b) Process-II Account

Particulars Units ` Particulars Units `
To Process-I A/c 6,000 6,00,000 By Normal Loss 500 8,000
To Direct Wages 1,30,000 By Finished Stock A/c @ 5,500 7,92,000
To Direct Expenses 45,500 `144 per unit
(35% of `1,30,000)
To Manufacturing OH 24,500

6,000 8,00,000 6,000 8,00,000

Total Cost  Re alisable Value of Normal Loss Units 8 ,00 ,000  8 ,000
NCPU = = = `144 p.u.
Inputs Units  Normal Loss Units 6 ,000  500

(c) Finished Stock Account

Particulars Units ` Particulars Units `
To Process-II A/c 5,500 7,92,000 By COS @ `144 per unit 5,000 7,20,000
By Balance c/d 500 72,000
5,500 7,92,000 5,500 7,92,000

SUGGESTED REVISION FOR EXAM:

BQ: 1, 4, 5, 7, 8, 11, 12, 13, 15, 17, 20, 22

PYQ: 4, 8

9.46
 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

METHODS OF APPORTIONMENT OF JOINT COST

BQ 1
A coke manufacturing company produces the following products by using 5,000 tonnes of coal @ `1,100 per
ton into a common process.

Coke 3,500 tonnes

Tar 1,200 tonnes
Sulphate of ammonia 52 tonnes
Benzol 48 tonnes

Apportion the joint cost amongst the products on the basis of the physical unit method.

Answer
Statement Showing Apportionment of Joint Cost
Particulars Coke Tar Ammonia Benzol
Number of units (Quantity in Tonnes) 3,500 1,200 52 48
Apportionment of Joint Cost
(`55,00,000 in proportion of units) `40,10,417 `13,75,000 `59,583 `55,000

BQ 2
Find out cost of joint products A, B and C using average unit cost method from the following data:

Pre-separation Joint Cost `60,000

Production data:
Products Unit Produced
A 500
B 200
C 300
1,000

Answer
Total Joint Cost 60,000
Average unit cost = Total Units
= 1,000
= `60 per unit

Joint Cost:
Product A = 500 Units × `60 = `30,000
Product B = 200 Units × `60 = `12,000
Product C = 300 Units × `60 = `18,000

BQ 3
An entity incurs a joint cost of `64,500 in producing two products A (200 units), B (200 units) and earns a
sales revenue of `86,000 by selling @ `170 per unit of product A and product B @ `260 per unit.

Apportion the joint cost on the basis of Market value at the point of separation.

Answer

10.1
 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

Statement Showing Apportionment of Joint Cost

Particulars Product A Product B
Number of units 200 200
Market value at separation point per unit `170 `260
Total market value at separation point `34,000 `52,000

Apportionment of Joint Cost `64,500 in 34 : 52 `25,500 `39,000

BQ 4
An entity incurs a joint cost of `64,500 in producing two products A (200 units), B (200 units) and sale price
of the products A and B after further processing are `200 and `300 respectively.

Apportion the joint cost on the basis of Market value after further processing.

Answer
Statement Showing Apportionment of Joint Cost
Particulars Product A Product B
Number of units 200 200
Market value after further processing per unit `200 `300
Total market value after further processing `40,000 `60,000

Apportionment of Joint Cost `64,500 in 40 : 60 `25,800 `38,700

BQ 5
An entity incurs a joint cost of `64,500 in producing two products A (200 units), B (200 units) and earns a
sales revenue of `86,000 by selling @ `170 per unit of product A and product B @ `260 per unit. Further
processing costs for products A and B are `4,000 and `32,000 respectively.

Apportion the joint cost on the basis of Net Realisable Value at Split-off Point Method.

Answer
Statement Showing Apportionment of Joint Cost
Particulars Product A Product B
Number of units 200 200
Market value after further processing `34,000 `52,000
Less: Further processing cost `4,000 `32,000

Net Realisable Value (NRV) `30,000 `20,000

Apportionment of Joint Cost `64,500 in 30 : 20 `38,700 `25,800

BQ 6
Find out the cost of joint products A and B using contribution margin method from the following data:

Sales:
Product A 100 kg @ `60 per kg.
Product B 120 kg @ `30 per kg.

Joint costs Marginal cost ` 4,400

Fixed cost ` 3,900

Answer

10.2
 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

Statement Showing Apportionment of Joint Cost

Particulars Product A Product B
Number of units (Quantity in Kgs.) 100 120

Variable Joint Cost `4,400 in 100 : 120 `2,000 `2,400

Sales `6,000 `3,600
Less: Variable joint cost `2,000 `2,400
Contribution `4,000 `1,200

Fixed Joint Cost `3,900 in 40 : 12 `3,000 `900

Total Joint Cost `5,000 `3,300

BQ 7
From the following details apportion `37,500 joint cost.
Particulars Product A Product B
Sale value after further processing 50,000 80,000
Profit 10% 20%
Selling expenses 5% 5%
Further cost 25,000 40,000

Answer
Statement Showing Apportionment of Joint Cost
Particulars Product A Product B
Sale value after further processing 50,000 80,000
Less: Profit (5,000) (16,000)
Less: Selling expenses (2,500) (4,000)
Less: Further cost (25,000) (40,000)
Joint Cost `17,500 `20,000

BQ 8
From the following details apportion `39,000 joint cost using gross constant margin method.
Particulars Product A Product B
Sale value after further processing 60,000 70,000
Selling expenses 5% 5%
Further cost 20,000 45,000

Answer
Statement Showing Apportionment of Joint Cost
Particulars Product A Product B
Sale value after further processing 60,000 70,000
Less: Profit @ 15% (9,000) (10,500)
Less: Selling expenses (3,000) (3,500)
Less: Further cost (20,000) (45,000)
Joint Cost `28,000 `11,000

Calculation of Constant % of Profit/Margin:

Particulars Total
Total sale value (60,000 + 70,000) 1,30,000
Less: Total selling expenses (3,000 + 3,500) (6,500)
Less: Total further cost (20,000 + 45,000) (65,000)
Less: Total joint cost (39,000)

10.3
 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

Total Profit `19,500

% of Profit [(19,500 ÷ 1,30,000) × 100] 15%

BQ 9
Bright Chemicals Ltd. electrolyses common salt to obtain three joint products - caustic soda, chlorine and
hydrogen. During a costing period, the expenditure relating to the inputs for the common process amounted
to `3,50,000. After separation expenses amounting to `1,60,000, `75,000 and `10,000 were incurred for
caustic soda, chlorine and hydrogen respectively.
The entire production was sold and `3,75,000, `2,50,000 and `60,000 were realised for caustic soda,
chlorine and hydrogen respectively. The selling expenses were estimated at 5% of realizations sale. The
management expected profits @ 15%, 10% and 5% of realization from sale of caustic soda, chlorine, and
hydrogen respectively.
Draw a columnar statement showing the apportionment of joint costs and the profitability of
each product.

Answer
Statement Showing Apportionment of Joint Cost
Particulars Soda Chlorine Hydrogen
Sale value after further processing 3,75,000 2,50,000 60,000
Less: Estimated profit @ 15%, 10% and 5% on sales 56,250 25,000 3,000
Less: Selling expenses @ 5% of sales 18,750 12,500 3,000
Less: Further cost 1,60,000 75,000 10,000
Estimated Joint Cost `1,40,000 `1,37,500 `44,000
Joint Cost `3,50,000 in 1,400 : 1,375 : 440 `1,52,411 `1,49,689 `47,900
Profit
`43,839 `12,811 (`900)
(Sales–Selling expenses–Further cost–Actual Joint cost)

FURTHER PROCESSING DECISION

BQ 10
From the following details advise whether products should be processed further or not:
Particulars Product A Product B Product C
Sale value: After further processing 1,50,000 2,40,000 70,000
At separation point 80,000 1,50,000 50,000

Selling expenses: After further processing 20,000 30,000 12,000

At separation point 15,000 20,000 7,000

Further cost 30,000 80,000 35,000

Answer
Statement Showing Further Processing Decision
Product Calculation Incremental Revenue and Cost Status Decision
IR = 1,50,000 – 80,000 = 70,000
A IR > IC Yes
IC = 30,000 + (20,000 – 15,000) = 35,000
IR = 2,40,000 – 1,50,000 = 90,000
B IR = IC Indifferent
IC = 80,000 + (30,000 – 20,000) = 90,000
IR = 70,000 – 50,000 = 20,000
C IR < IC No
IC = 35,000 + (12,000 – 7,000) = 40,000

10.4
 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

BQ 11
Sellwell Ltd. operates a chemical process which produces four products A, B, C and D from a basis raw
material. The company's budget for a month is as under:

Raw materials consumption : `17,520

Initial processing wages : `16,240
Initial processing overheads : `16,240
`50,000

Product Production (in kgs) Sales (in `) Separate costs (in `)

A 16,000 1,09,600 28,800
B 200 5,600 Nil
C 2,000 30,000 16,000
D 360 21,600 6,600

The company presently intends to sell product B at the point of split off without further processing.
The remaining products A, C and D are to be further processed and sold. However, the management has been
advised that it would be possible to sell all the four products at the split off point without further processing
and if this course was adopted. The selling prices would be as under:

Product A B C D
Selling Price Per Kg (in `) 4.00 28.00 8.00 40.00

The joint costs are to be apportioned on the basis of the sales value realisation at the point of split-off.

You are required to:

(a) Prepare a statement showing the apportionment of joint costs.
(b) Prepare a statement showing the product wise and total budgeted profit or loss based on the proposal
to sell product B at the split-off point and products A, C and D after further processing.
(c) Prepare a statement to show the product wise and total profit or loss if the alternative strategy to sell
all the products at split off stage was adopted.
(d) Recommend any other alternative which, in your opinion, can increase the total profit. Further
calculate the total profit as also the product wise profit or loss based on your recommendation.

[(a) 32,000; 2,800; 8,000; 7,200 (b) 48,800; 2,800; 6,000; 7,800; 65,400 (c) 32,000; 2,800; 8,000; 7,200;
50,000 (d) B & C should be sold at split off point and A and D after further processing; 48,800; 2,800;
8,000; 7,800; 67,400]

BQ 12
A company purchases raw materials worth `11.04 lakhs and processes them into four products P, Q, R and
S, which have a unit sale value of `3, `9, `16 and `60 respectively at split-off point, as they could be sold as
such to other processors. However, during a year, the company decided to further process and sell products
P, Q and S, while R was not to be processed further but sold at split-off point to other processors. The
processing of raw materials into the four products cost `28 lakhs to the company. The other data for the year
were as under:
Product Output (in units) Sales (in `) Separate costs (in `)
P 10,00,000 46,00,000 12,00,000
Q 20,000 4,00,000 2,40,000
R 10,000 1,60,000 NIL
S 18,000 12,00,000 40,000

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 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

You are required to work out the following information for managerial decision-making:
(a) If the joint costs are allocated amongst the four products on the basis of Net realizable value at split-
off point, what would be the company's annual income?
(b) If the company had sold off all the other three products at split-off stage, identify the increase or
decrease in the company's annual income as compared to (a) above.
(c) What sales strategy could the company have planned to maximize its profits in the year?
(d) Identify the net increase in income if the strategy at (c) is adopted, as compared to (a) above.

Answer
(a) Statement Showing Annual Income
(Net Realisable Value Method)
Products P (`) Q (`) R (`) S (`) Total (`)
Sales value after further processing 46,00,000 4,00,000 1,60,000 12,00,000 63,60,000
Less: Further cost 12,00,000 2,40,000 - 40,000 14,80,000
Net Realisable Value 34,00,000 1,60,000 1,60,000 11,60,000 48,80,000
Joint Cost (in NRV proportion) 27,20,000 1,28,000 1,28,000 9,28,000 39,04,000
Sales value after further processing 46,00,000 4,00,000 1,60,000 12,00,000 63,60,000
Less: Further cost 12,00,000 2,40,000 - 40,000 14,80,000
Less: Joint cost 27,20,000 1,28,000 1,28,000 9,28,000 39,04,000
Annual Income 6,80,000 32,000 32,000 2,32,000 9,76,000

Joint cost = Raw material cost + Processing cost (excluding material cost)
= 11,04,000 + 28,00,000 = 39,04,000

(b) Statement Showing Annual Income

(When all products are sold at split off stage)
Products P (`) Q (`) R (`) S (`) Total (`)
Number of units 10,00,000 20,000 10,000 18,000 -
Sale price per unit at split off stage `3 `9 `16 `60 -
Sales value at split off stage 30,00,000 1,80,000 1,60,000 10,80,000 44,20,000
Less: Joint cost 27,20,000 1,28,000 1,28,000 9,28,000 39,04,000
Annual Income 2,80,000 52,000 32,000 1,52,000 5,16,000
Increase/(Decrease) in Income (5,16,000 – 9,76,000) (4,60,000)

(c) Strategy to maximize profits: Best production plan will be to sell P and S after further processing and
Q and R at the point of split off.

(d) Statement Showing Net Increase in Income (If strategy is adopted)

Products P (`) Q (`) R (`) S (`) Total (`)
Sales value 46,00,000 1,80,000 1,60,000 12,00,000 63,60,000
Less: Further cost 12,00,000 - - 40,000 14,80,000
Less: Joint cost 27,20,000 1,28,000 1,28,000 9,28,000 39,04,000
Annual Income 6,80,000 52,000 32,000 2,32,000 9,96,000
Net Increase in Income (9,96,000 – 9,76,000) 20,000

BQ 13
‘Buttery Butter’ is engaged in the production of Buttermilk, Butter and Ghee. It purchases processed cream
and let it through the process of churning until it separates into buttermilk and butter. For the month of
January, 2023, ‘Buttery Butter’ purchased 50 Kilolitre processed cream @ `100 per 1,000 ml. Conversion
cost of `1,00,000 were incurred upto the split off point, where two saleable products were produced i.e.
buttermilk and butter. Butter can be further processed into Ghee.

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 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

The January, 2023 production and sales information is as follows:

Products Production (in Sales Quantity (in Selling price per
Kilolitre/tonne) Kilolitre/tonne) Litre/Kg (`)
Buttermilk 28 28 30
Butter 20 - -
Ghee 16 16 480

All 20 tonne of butter were further processed at an incremental cost of `1,20,000 to yield 16 Kilolitre of Ghee.
There was no opening or closing inventories of buttermilk, butter or ghee in January, 2023.
Required:
(a) Show how joint cost would be apportioned between Buttermilk and Butter under Estimated Net
Realisable Value method.
(b) ‘Healthy Bones’ offers to purchase 20 tonne of butter in February at `360 per kg. In case ‘Buttery Butter’
accepts this offer, no Ghee would be produced in February. Suggest whether ‘Buttery Butter’ shall
accept the offer affecting its operating income or further process butter to make Ghee itself?

Answer
(a) Statement Showing Apportionment of Joint Cost
(Estimated Net Realisable Value Method)
Buttermilk Butter
Particulars
Amount (`) Amount (`)
Sales Value 8,40,000 76,80,000
(`30 × 28 × 1000) (`480 × 16 × 1000)
Less: Post split-off cost (Further processing cost) - (1,20,000)
Net Realisable Value 8,40,000 75,60,000
Apportionment of Joint Cost of `51,00,000 in ratio of 1:9 5,10,000 45,90,000
Joint cost = (`100 × 50 × 1000) + `1,00,000 = ` 51,00,000

(b) Further processing of Butter into Ghee decision:

Incremental revenue = `480 × 16 × 1000 - `360 × 20 × 1000 = `4,80,000
Incremental cost = `1,20,000
Incremental benefit = `4,80,000 - `1,20,000 = `3,60,000

The operating income of ‘Buttery Butter’ will be reduced by `3,60,000 in February if it sells 20 tonne of Butter
to ‘Healthy Bones’, instead of further processing of Butter into Ghee for sale. Thus, ‘Buttery Butter’ is advised
not to accept the offer and further process butter to make Ghee itself.

BQ 14
Inorganic Chemicals purchases salt and processes it into more refined products such as Caustic Soda,
Chlorine and PVC (Polyvinyl chloride). During the month of July, Inorganic Chemicals purchased Salt for
`40,000. Conversion costs of `60,000 were incurred upto the split off point, at which time two saleable
products were produced viz. Caustic soda and Chlorine. Chlorine can be further processed in PVC. The July
production and sales information is as follows:
Production (tonnes) Sales Quantity (tonnes) Selling price (per tonne)
Caustic Soda 1,200 1,200 `50
Chlorine 800 - -
PVC 500 500 `200

All 800 tonnes of Chlorine were further processed at an incremental cost of `20,000 to yield 500

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 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

tonnes of PVC. There were no by products or scrap from this further processing of Chlorine. There were no
beginning or ending inventories of Caustic Soda, Chlorine or PVC in July.
There is an active market for Chlorine. Inorganic Chemicals could have sold all its July production of
Chlorine at `75 a tonne.

Required
1. To calculate how the joint cost of `1,00,000 would be allocated between Caustic Soda and Chlorine under
each of the following methods:
(a) Sales value at split off point;
(b) Physical unit method; and
(c) Estimated NRV.

2. Lifetime Swimming Pool Products offers to purchase 800 tonnes of Chlorine in August at `75 per ton.
This sale would mean that no PVC would be produced in August. Explain how would accepting the offer
affect August’s operating income?

Answer
1. Statement Showing Allocation of Joint Cost
Joint Products
Particulars
Caustic Soda Chlorine
(a) Allocation of joint cost on the basis of sale value at split off point: (1,200 × 50) (800 × 75)
Sale Value of production at split off (production × sales price) 60,000 60,000
Share of joint cost of `1,00,000 in ratio (60 : 60) 50,000 50,000
(b) Allocation of joint cost on ten basis of physical measure:
Output at split off point 1,200 tonnes 800 tonnes
Share of joint cost of `1,00,000 in ratio (12 : 8) 60,000 40,000
(c) Allocation of joint cost on the basis of estimated NRV:
Sale Value of production after further processing (1,200 × 50) (500 × 200)
(output after further processing × sales price) 60,000 1,00,000
Less: Further processing cost - 20,000
Net Realizable Value (NRV) 60,000 80,000
Share of joint cost of `1,00,000 in ratio (60 : 80) 42,857 57,143

2. Analysis of Life Swimming Pool Products

Sale value of 500 tons of PVC @ `200 per tonne 1,00,000
Less: Sale Value of 800 tons of Chlorine 60,000

Incremental Revenue 40,000

Cost of further processing chlorine into PVC 20 000

Increase in net income due to further processing of chlorine into PVC 20,000

The operating income of Inorganic Chemicals will be reduced by `20,000 in August if it sells 800 tons of
Chlorine to Lifetime Swimming Pool Products, instead of further processing of Chlorine into PVC for sale.

BQ 15
Sun-moon Ltd. produces and sells the following products:
Selling price at split-off Selling price after
Products Units
point (`) further processing (`)
A 2,00,000 17 25

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 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

B 30,000 13 17
C 25,000 8 12
D 20,000 10 -
E 75,000 14 20

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.
(c) 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.

Answer
(a) Statement Showing Income Forecast of the Company
(Assuming that none of its products are further processed)
Products A (`) B (`) C (`) D (`) E (`) Total (`)
Number of units 2,00,000 30,000 25,000 20,000 75,000 -
Sale price per unit 17 13 8 10 14 -
Sales revenue 34,00,000 3,90,000 2,00,000 2,00,000 10,50,000 52,40,000
Less: Apportioned cost 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000 41,37,000
7,75,000 1,38,000 25,000 60,000 1,05,000 11,03,000
Less: Fixed cost 4,73,000
Profit 6,30,000

(b) Statement Showing Income Forecast of the Company

(Assuming that products A, B, C and E are further processed)
Products A (`) B (`) C (`) D (`) E (`) Total (`)
Number of units 2,00,000 30,000 25,000 20,000 75,000 -
Sale price per unit 25 17 12 10 20 -
Sales revenue 50,00,000 5,10,000 3,00,000 2,00,000 15,00,000 75,10,000
Less: Apportioned cost 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000 41,37,000
Less: Further cost 12,50,000 1,50,000 50,000 - 1,50,000 16,00,000
11,25,000 1,08,000 75,000 60,000 4,05,000 17,73,000
Less: Fixed cost 4,73,000
Profit 13,00,000

(c) Suggested production plan for maximising profits: On comparing the figures of excess of revenue
over cost of manufacturing in the above statements one observes that the concern is earning more after
further processing of A, C and E products but is loosing a sum of `30,000 in the case of product B (if it is
processed further). Hence the best production plan will be to sell A, C and E after further processing and B
and D at the point of split off. The profit statement based on this suggested production plan is as below:

Profit Statement Based on Suggested Production Plan

Products A (`) B (`) C (`) D (`) E (`) Total (`)
Number of units 2,00,000 30,000 25,000 20,000 75,000 -
Sale price per unit 25 13 12 10 20 -

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 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

Sales revenue 50,00,000 3,90,000 3,00,000 2,00,000 15,00,000 73,90,000

Less: Apportioned cost 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000 41,37,000
Less: Further cost 12,50,000 - 50,000 - 1,50,000 14,50,000
11,25,000 1,38,000 75,000 60,000 4,05,000 18,03,000
Less: Fixed cost 4,73,000
Profit 13,30,000

Hence the profit of the company has increased by `30,000

Working note:
Statement Showing Apportionment of Joint Cost
(Net Realisable Value Method)
Products A (`) B (`) C (`) D (`) E (`)
Number of units 2,00,000 30,000 25,000 20,000 75,000
Sale price per unit 25 17 12 10 20
Sales revenue 50,00,000 5,10,000 3,00,000 2,00,000 15,00,000
Less: Further cost 12,50,000 1,50,000 50,000 - 1,50,000
Net Realisable Value 37,50,000 3,60,000 2,50,000 2,00,000 13,50,000
Joint cost (in NRV proportion) 26,25,000 2,52,000 1,75,000 1,40,000 9,45,000

Joint cost = Raw material cost + other manufacturing expenses

= 35,90,000 + 5,47,000
= 41,37,000

BY PRODUCTS

BQ 16
A Factory is engaged in the production of a chemical BOMEX and in the course of its manufacture, a by-
product BRUCIL is produced, which after further processing has commercial value. For the month of April
2023, the following are the summarised cost data.

Joint Expenses Separate Expenses

BOMEX BRUCIL
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 per unit on sale of BRUCIL 4
No. of units produced 2,000 2,000

The factory uses reverse cost method of accounting for by-products where by the sales value of by-
products after deduction of the estimated profit, post separation cost and selling and distribution expenses
relating to the by product is credited to the joint process account.

You are required to prepare statements showing:

(1) The joint cost allocable to BOMEX.

(2) The product wise and overall profitability of the factory for April 2023.

Answer
(1) Statement of Allocation of Joint Cost to BOMEX

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 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

Particulars Amount (`)

Sales value of BRUCIL (2,000 units × `34) 68,000
Less: Estimated profit (2,000 units × `4) 8,000
Less: Separate cost (`4,000 + `18,000 + `6,000) 28,000
Joint Cost of BRUCIL 32,000
Total Joint Cost (`1,00,000 + `50,000 + 1,80,000
`30,000) 32,000
Less: Joint cost allocable to BRUCIL
Joint Cost allocable to BOMEX 1,48,000

(2) Product-wise & Overall Profitability Statement

Particulars BOMEX BRUCIL Total
Sales value 1,96,000 68,000 2,64,000
Less: Separate cost 36,000 28,000 64,000
Less: Joint cost 1,48,000 32,000 1,80,000
Profit 12,000 8,000 20,000

BQ 17
Smile company produces two main products and a by-product out of a joint process. The ratio of output
quantities to input quantities of direct material used in the joint process remains consistent on yearly basis.
Company has employed the physical volume method to allocate joint production costs to the main products.
The net realizable value of the by-product is used to reduce the joint production costs before the joint costs
are allocated to the main products. Details of company’s operation are given in the table below. During the
month, company incurred joint production costs of `10,00,000. The main products are not marketable at the
split off point and thus have to be processed further.
Particulars Product A Product B By Product
Monthly output in kg. 60,000 1,20,000 50,000
Selling price per kg. ` 50 ` 30 `5
Process costs ` 2,00,000 ` 3,00,000

Find out the amount of joint product cost that Smile company would allocate to the product B by
using the physical volume method to allocate joint production costs?

Answer
Calculation of Net joint costs to be allocated:
Particulars Amount (`)
Joint Costs 10,00,000
Less: Net Realizable value of by-product (50,000×5) 2,50,000
Net joint costs to be allocated 7,50,000

Net joint cost allocable to products

Joint cost allocable to Product B = × Physical qty of Product B
Total Units

7,50,000
= × 1,20,000
60,000+1,20,000

= `5,00,000

BQ 18
NN Manufacturing company uses joint production process that produces three products at the split off point.
Joint productions costs during September were `8,40,000. Product information for September was as
follows:

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 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

Particulars Product A Product B Product C

Units produced 1,500 3,000 4,500
Units sold 2,000 6,000 7,500
Sales prices:
At the split-off `100 - -
After further processing `150 ` 175 `50
Costs to process after split-off `1,50,000 `1,50,000 `1,50,000

Assume that product C is treated as a by-product and the company accounts for the by-product at net
realizable value as a reduction of joint cost. Assume also that Product B & C must be processed further before
they can be sold. Find out the total cost of Product A in September if joint cost allocation is based on net
realizable values.

Answer
Calculation of Net joint costs to be allocated:
Particulars Amount (`)
Joint Costs 8,40,000
Less: Net Realizable value of by-product {(4,500×50) – 1,50,000} 75,000
Net joint costs to be allocated 7,65,000

Note: Product A can be sold at the split-off point, because the question says that "Products B and C must be
processed further before they can be sold." Since product A is not included in that, we know that Product A
can be sold at the split-off point. Furthermore, the cost to process Product A after the split-off point is
`150,000, whereas the additional revenue to be earned by processing it further is only `75,000 (`50 increase
in selling price per unit multiplied by the 1,500 units produced during September). Therefore, Product A
will not be processed further, and we use the sales value at split-off for A for allocating the joint costs. The
sales value at the split-off for A is `100 × 1,500 units, or `1,50,000.

Statement Showing Total Cost of Product A

(Estimated Net Realisable Value Method)
Product A Product B
Particulars
Amount (`) Amount (`)
Sales Value of units Produced 1,50,000 5,25,000
(Product A at split off and B after further processing) (`100 × 1,500) (`175 × 3,000)
Less: Further processing cost - (1,50,000)
Net Realisable Value 1,50,000 3,75,000
Apportionment of Joint Cost of `7,65,000 in ratio of 2:5 2,18,571 5,46,429
Add: Further processing cost - 1,50,000
Total Cost of product 2,18,571 6,96,429

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 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

PAST YEAR QUESTIONS

PYQ 1
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

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

There are no beginning or closing inventories.

Prepare statement showing:

I. Allocation of joint cost; and
II. Product-wise and overall profitability of the company for January 2013.
[(8 Marks) May 2013/May 2015]

Answer
I. Statement of Allocation of Joint Cost
Particulars B1 B2
Sales @ `40/`30 per unit 72,000 90,000
Less: Estimated profit @ 20%/30% 14,400 27,000
Less: Estimated selling expenses @ 15% on sales 10,800 13,500
Less: Further estimated cost (cost after separation) 35,000 24,000
Joint Cost 11,800 25,500
Total Joint Cost 2,12,400
Less: Joint cost allocable to B1 11,800
Less: Joint cost allocable to B2 25,500
Joint Cost allocable to M1 1,75,100

II. Product-wise & Overall Profitability Statement

Particulars M1 B1 B2 Total
Sales 4,00,000 72,000 90,000 5,62,000
Less: Selling expenses @ 20%/15%/15% 80,000 10,800 13,500 1,04,300
Less: Cost after separation Nil 35,000 24,000 59,000
Less: Joint cost 1,75,100 11,800 25,500 2,12,400
Profit 1,44,900 14,400 27,000 1,86,300

PYQ 2
SV Chemicals Limited processes 9,00,000 kgs of raw material in a month purchased at `95 per kg in
department X. The input output ratio of department X is 100 : 90. Processing of material result in two joint
products being produced ‘P1’ and ‘P2’ in the ratio of 60 : 40. Product ‘P1’ can be sold at the split of stage or
can be processed further at department Y and sold as a new product ‘YP1’. The input output ratio of
department Y is 100 : 95. Department Y is utilized only for further processing of product ‘P1’ to product ‘YP1’.

Individual departmental expenses are as follows:

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 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

Department X Department Y
(In Lakh) (In Lakh)
Direct materials `95.00 `14.00
Direct labour `80.00 `27.00
Variable overheads `100.00 `35.00
Fixed overheads `75.00 `52.00
Total `350.00 `128.00

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

Product ‘P1’ `28.38 lakh
Product ‘P2’ `25.00 lakh
Product ‘YP1’ `19.00 lakh

The selling prices per kg are as under:

Product ‘P1’ `110
Product ‘P2’ `325
Product ‘YP1’ `150

You are required to:

(1) Prepare a statement showing the apportionment of joint costs in the ratio of value of sales, net of selling
expenses.
(2) Statement showing profitability at split off point.
(3) Statement of profitability of ‘YP1’
(4) Would you recommend further processing of ‘P1’?
[(8 Marks) June 2015]

Answer
Input in Department X = 9,00,000 kgs
Yield = 90%
Therefore Output = 90% of 9,00,000 kgs = 8,10,000 kgs

Ratio of output for ‘P1’ and ‘P2’ = 60 : 40

Product of ‘P1’ = 60% of 8,10,000 kgs = 4,86,000 kgs

Product of ‘P2’ = 40% of 8,10,000 kgs = 3,24,000 kgs

(1) Statement Showing Apportionment of Joint Cost

Product ‘P1’ Product ‘P2’
Particulars
(` in Lakh) (` in Lakh)
Sales value at split-off-point (4,86,000 × 110) (3,24,000 × 325)
534.60 1,053.00
Less: Selling expenses if sold at split-off-point (28.38) (25.00)
Net sales at split-off-point 506.22 1,028.00
Share of joint cost of *`1,205 lakh (in 506.22 : 1,028) 397.59 807.41

* Calculation of joint cost:

Raw materials (9,00,000 kgs × `95) = 855 lakh

Process cost of department X = 350 lakh
Joint cost = 1,205 lakh

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 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

(2) Statement of Profitability at Split Off Point

Product ‘P1’ Product ‘P2’
Particulars
(` in Lakh) (` in Lakh)
Sales value at split-off-point (4,86,000 × 110) (3,24,000 × 325)
534.60 1,053.00
Less: Selling expenses if sold at split-off-point (28.38) (25.00)
Less: Joint Cost (397.59) (807.41)
Profit 108.63 220.59

(3) Statement of Profitability of ‘YP1’

Product ‘YP1’
Particulars
(` in Lakh)
Sales value (4,61,700 × 150) 692.55
Less: Further processing cost in department Y (128.00)
Less: Selling expenses if sold after further processing (19.00)
Less: Joint Cost (397.59)
Profit 147.96

Calculation of output of product ‘YP1’:

Output = 95% of 4,86,000 kgs = 4,61,700 kgs

(4) Further Processing Decision: Product ‘P1’ should be sold after further processing as product ‘YP1’
having higher profit.

PYQ 3
A factory producing article A also produces a by-product B which is further processed into finished product.

The joint costs of manufacture are given below:

Material `5,000
Labour `3,000
Overheads `2,000
`10,000
Subsequent costs are given below:
A B
Material `3,000 `1,500
Labour `1,400 `1,000
Overheads `600 `500
`5,000 `3,000
Selling Price:
Product A `16,000
Product B `8,000

Estimated profits on selling prices:

Product A 25%
Product B 20%

Assume that selling and distributing expenses are in proportion of sales prices. Show how you
would apportion joint costs of manufacture and prepare a statement showing cost of production of A
and B.
[(8 Marks) May 2016]

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 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

Answer
Statement Showing Apportionment of Joint Cost
Particulars Article A By-product B
Sales value 16,000 8,000
Less: Profit @ 25% of 16,000 & 20% of 8,000 4,000 1,600
Less: Selling expenses (400 in 16 : 8) 267 133
Less: Subsequent cost 5,000 3,000
Joint cost 6,733 3,267

* Calculation of selling expenses:

Selling expenses = Total sales – Total profit – Total subsequent cost – Total joint cost
= (16,000 + 8,000) – (4,000 + 1,600) – (5,000 + 3,000) – 10,000
= 400

Statement Showing Cost of Production

Particulars Article A By-product B
Joint cost 6,733 3,267
Subsequent cost 5,000 3,000
Cost of Production 11,733 6,267

PYQ 4
A Ltd produces ‘M’ as a main product and gets two by products ‘P’ and ‘Q’ in the course of processing.
Following information are available for the month of October 2017:
Particulars M P Q
Cost after separation - `60,000 `30,000
No. of units produced 4,500 2,500 1,500
Selling price per units `170 `80 `50
Estimated net profit as percentage to sales value - 30% 25%

The joint cost upto separation point amounts to `2,50,000. Selling expenses amounting to 85,000 are to be
apportioned to the three products in the ratio of sales units. There are no beginning or closing inventories.

Prepare statement showing:

(i) Allocation of joint cost;
(ii) Product-wise and overall profitability and
(iii) Advise the company regarding results if the by product ‘P’ is not further processed and is sold at the
point of separation at `60 per unit without incurring selling expenses.
[(8 Marks) Nov 2017]

Answer
(i) Statement of Allocation of Joint Cost
Particulars P Q
Sales @ `80/`50 per unit 2,00,000 75,000
Less: Estimated profit @ 30%/25% 60,000 18,750
Less: Estimated selling 85,000 in (4,500 : 2,500 : 1,500) 25,000 15,000
Less: Further estimated cost (cost after separation) 60,000 30,000
Joint Cost 55,000 11,250
Total Joint Cost 2,50,000
Less: Joint cost allocable to P 55,000
Less: Joint cost allocable to Q 11,250
Joint Cost allocable to M 1,83,750

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 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

(ii) Product-wise & Overall Profitability Statement

Particulars M P Q Total
Sales 7,65,000 2,00,000 75,000 10,40,000
Less: Selling expenses 45,000 25,000 15,000 85,000
Less: Cost after separation Nil 60,000 30,000 90,000
Less: Joint cost 1,83,750 55,000 11,250 2,50,000
Profit 5,36,250 60,000 18,750 6,15,000

(iii) Further processing decision in respect of by product ‘P’:

Reduction in revenue = 2,500 units (`80 - `60) = `50,000
Reduction in cost = Further processing cost + Selling expenses
= 60,000 + 25,000 = `85,000

Decision: Since, reduction in cost is higher than reduction in revenue therefore, By product ‘P’ should be
sold at split of stage (by following such decision company can increase its income by `35,000).

PYQ 5
A Factory is engaged in the production of a chemical BOMEX and in the course of its manufacture, a by-
product CROMEX is produced which after further processing has commercial value. For the month of April
2019, the following are the summarised cost data.
Joint Expenses Separate Expenses
BOMEX CROMEX
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling price per unit 100 40
Estimated profit per unit on sale of CROMEX 5
No. of units produced 2,000 2,000
The factory uses net realizable value method for apportionment of joint cost to by-products.

You are required to prepare statements showing:

(1) Joint cost allocable to CROMEX.
(2) Product wise and overall profitability of the factory for April 2019.
[(5 Marks) May 2019]

Answer
(1) Statement of Allocation of Joint Cost to CROMEX
Particulars Amount (`) Amount (`)
Number of units produced 2,000 2,000
Sale price per unit `100 `40
Sales value 2,00,000 80,000
Less: Separate cost 36,000 28,000
Net realizable value 1,64,000 52,000
Joint Cost `1,80,000 in 1,64,000 : 52,000 1,36,667 43,333

(2) Product-wise & Overall Profitability Statement

Particulars BOMEX CROMEX Total
Sales value 2,00,000 80,000 2,80,000
Less: Separate cost 36,000 28,000 64,000
Less: Joint cost 1,36,667 43,333 1,80,000
Profit 27,333 8,667 36,000

10.17
 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

PYQ 6
A factory produces two, ‘A’ and ‘B’ from a single process. The joint processing costs during a particular month
are:
Direct material `30,000
Direct labour `9,600
Variable overheads `12,000
Fixed overheads `32,000

Sales: A – 100 units @ `600 per unit; B – 120units @ `200 per unit.

Apportion joints costs on the basis of:

(1) Physical quantity of each product.
(2) Contribution margin method, and
(3) Determine profit or loss under both the methods. [(5 Marks) Nov 2019]

Answer
(1) Statement Showing Apportionment of Joint Cost
(Based on Physical Quantity Method)
Particulars Product A Product B
Number of units 100 120
Apportionment of Joint Cost `83,600 in 100 : 120 `38,000 `45,600

(2) Statement Showing Apportionment of Joint Cost

(Based on Contribution Margin Method)
Particulars Product A Product B
Number of units 100 120
(A) Variable Joint Cost `51,600 in 100 : 120 `23,455 `28,145
Sales `60,000 `24,000
Less: Variable joint cost `23,455 `28,145
Contribution `36,545 (`4,145)
(B) Fixed Joint Cost `32,000 to Product A only `32,000 -
(C) Total Joint Cost (A) + (B) `55,455 `28,145

Note: * The fixed cost of `32,000 is to be apportioned over the joint products A and B in the ratio of their
contribution margin but contribution margin of Product B is Negative so fixed cost will be charged to Product
A only.
(3) Statement Showing Profit under Both Methods
Particulars Product A Product B
(1) Profit under physical quantity method:
Sales 60,000 24,000
Less: Joint cost 38,000 45,600
Profit/ (loss) `22,000 (`21,600)

(2) Profit under contribution margin method:

Sales 60,000 24,000
Less: Joint cost 55,455 28,145
Profit/ (loss) `4,545 (`4,145)

Working note:
Variable joint cost = Direct material + Direct wages + Variable overheads
= `30,000 + `9,600 + `12,000 = `51,600

10.18
 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

Total joint cost = Variable joint cost + Fixed overheads

= `51,600 + `32,000 = `83,600

PYQ 7
A company’s plant processes 6,750 units of raw material in a month to produce two products ‘M’ and ‘N’.

The process yield is as under:

Product M 80%
Product N 12%
Process Loss 8%

Processing cost is `2,25,000 of which labour cost is accounted for 66%. Labour is chargeable to products ‘M’
and ‘N’ in ratio of 100 : 80. The cost of material is `80 per unit

Prepare a comprehensive cost statement for each products showing:

(i) Apportionment of joint cost among products ‘M’ and ‘N’ and
(ii) Total cost of the products ‘M’ and ‘N’
[(5 Marks) Nov 2020]

Answer
Statement Showing Apportionment of Joint Cost and Total Cost of ‘M’ and ‘N’
Particulars Basis ‘M’ ‘N’ Total
Material (6,750 × `80) 5,400:810 4,69,565 70,435 5,40,000
Processing Cost except Labour (2,25,000 × 34%) 5,400:810 66,522 9,978 76,500
Labour (2,25,000 × 66%) 100:80 82,500 66,000 1,48,500
Joint Cost `6,18,587 `1,46,413 `7,65,000

Note: Cost of materials and processing cost except labour are apportioned between M and N in proportion
of physical units i.e. 5,400 units of M (80% of 6,750) and 810 units of N (12% of 6,750).

PYQ 8
Mayura Chemicals Ltd buys a particular raw material at `8 per litre. At the end of the processing in
Department 1, this raw material splits-off into products X, Y and Z. Product X is sold at the split-off point,
with no further processing. Products Y and Z require further processing before they can be sold. Product Y is
processed in Department 2, and Product Z is processed in Department 3.

Following is a summary of the costs and other related data for the year 2019-20:
Departments
Particulars
1 2 3
Cost of Raw Material `4,80,000 - -
Direct Labour `70,000 `4,50,000 `6,50,000
Manufacturing Overheads `48,000 `2,10,000 `4,50,000
Products
X Y Z
Sales (Litres) 10,000 15,000 22,500
Closing Inventory (Litres) 5,000 - 7,500
Sale price per litre (`) 30 64 50

There were no opening and closing inventories of basic raw materials at the beginning as well as at the end
of the year. All finished goods inventory in litres was complete as to processing. The company uses the Net
realisable value method of allocating joint costs.

10.19
 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

You are required to prepare:

(1) Schedule showing the allocation of joint costs.
(2) Calculate the Cost of goods sold of each product and the cost of each item in Inventory.
(3) A comparative statement of Gross profit. [(10 Marks) Jan 2021]

Answer
(1) Statement of Allocation of Joint Cost
Particulars X Y Z Total
Production in litres 15,000 15,000 30,000 -
(Sales + Closing Inventory)
Sale price per litre `30 `64 `50 -
Sales value of total production (in `) 4,50,000 9,60,000 15,00,000 29,10,000
Less: Further cost (in `):
Cost of Dept. 2 (4,50,000 + 2,10,000) - (6,60,000) - (6,60,000)
Cost of Dept. 3 (6,50,000 + 4,50,000) - - (11,00,000) (11,00,000)
Net realizable value (in `) 4,50,000 3,00,000 4,00,000 11,50,000
Joint Cost `5,98,000* in 45 : 30 : 40 2,34,000 1,56,000 2,08,000 5,98,000

*Joint cost = Cost of dept. 1 = `4,80,000 + `70,000 + `48,000 = `5,98,000

(2) Statement of Cost of Goods Sold and Cost of Inventory

Particulars X (`) Y (`) Z (`) Total (`)
Joint Cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Further cost: - 6,60,000 11,00,000 17,60,000
Total Cost 2,34,000 8,16,000 13,08,000 23,58,000

Cost of Goods Sold 1,56,000 8,16,000 9,81,000 19,53,000

10,000 22,500
(2,34,000 × ) (13,08,000 × )
15,000 30,000

Closing Inventory 78,000 - 3,27,000 4,05,000

5,000 7,500
(2,34,000 × ) (13,08,000 × )
15,000 30,000

(3) Statement of Gross Profit

Particulars X Y Z Total
Sales `3,00,000 `9,60,000 `11,25,000 `23,85,000
(10,000 × `30) (15,000 × `64) (22,500 × `50)
Less: Cost of Goods Sold `1,56,000 `8,16,000 `9,81,000 `19,53,000
Gross Profit `1,44,000 `1,44,000 `1,44,000 `4,32,000

PYQ 9
OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process results in four
products at split-off point: S, P, N and A. Product ‘A’ is fully processed at split-off point. Product S, P and N
can be individually further refined into SK, PM, and NL respectively. The joint cost of purchasing the crude
vegetable oil and processing it were `40,000. Other details are as follows:
Products Further processing cost (`) Sales at split off point (`) Sales after further processing (`)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 -

10.20
 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

You are required to identify the products which can be further processed for maximizing profits
and make suitable suggestions.
[(5 Marks) July 2021]

Answer
Statement Showing Further Processing Decision
Product Calculation Incremental Revenue and Incremental Cost Status Decision
IR = 1,20,000 – 20,000 = 1,00,000
S IR > IC Yes
IC = 80,000 = 80,000
IR = 40,000 – 12,000 = 28,000
P IR < IC No
IC = 32,000 = 32,000
IR = 48,000 – 28,000 = 20,000
N IR < IC No
IC = 36,000 = 36,000
Suggestion: Product S should be processed further and Product P, N and A at split off point to maximize
profit.

PYQ 10
RST Limited produces three joint products X, Y and Z. The products are processed further. Pre-separation
costs are apportioned on the basis of weight of output of each joint product. The following data are provided
for the month of April, 2022.
Cost incurred up to separation point: `10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80
Cost incurred after separation point 2,000 1,200 800

Selling Price per Litre:

After further processing 50 80 60
At pre-separation point (estimated) 25 70 45

You are required to:

(a) Prepare a statement showing profit or loss made by each product after further processing using the
presently adopted method of apportionment of pre-separation cost.
(b) Advise the management whether, on purely financial consideration, the three products are to be
processed further or not.
[(5 Marks) May 2022]

Answer
(a) Statement Showing Profit or Loss made by each Product after Further Processing
Particulars Product X Product Y Product Z
Output in units 100 70 80
Sales after further processing (`) 5,000 5,600 4,800
Less: Further processing cost (`) (2,000) (1,200) (800)
Less: Joint cost (`10,000 in proportion of 100:70:80) (4,000) (2,800) (3,200)
Profit/(Loss) (`) (1,000) 1,600 800

(b) Further Processing Decision

Products Incremental revenue Incremental cost Situation Decision
X 100 (`50 - `25) = `2,500 `2,000 IR > IC Yes
Y 70 (`80 - `70) = `700 `1,200 IR < IC No
Z 80 (`60 - `45) = `1,200 `800 IR > IC Yes
Advise: It is advisable to further process only product X and Z and to sale product Y at the point of separation.

10.21
 JOINT PRODUCTS & BY PRODUCTS CHAPTER 10

PYQ 11
ASR Ltd mainly produces Product ‘L’ and gets a by-Product ‘M’ out of a joint process. The net realizable value
of the by-product is used to reduce the joint production costs before the joint costs are allocated to the main
product. During the month of October 2022, company incurred joint production costs of `4,00,000. The main
Product ‘L’ is not marketable at the spilt off point. Thus, it has to be processed further. Details of company’s
operation are as under:
Particulars Product L By- Product M
Production (units) 10,000 200
Selling pricing per kg `45 `5
Further Processing cost `1,01,000 -

You are required to find out:

(a) Profit earned from Product ‘L’
(b) Selling price per kg of product ‘L’, if the company wishes to earn a profit of `1,00,000 from the above
production.
[(5 Marks) Nov 2022]

Answer
(a) Statement Showing Profit Earned from Product ‘L’
Particulars Amount
Sales Value of Product ‘L’ (10,000 × `45) 4,50,000
Less: Further Processing Cost (1,01,000)
Less: Net Joint Cost (`4,00,000 – 200 × `5) (3,99,000)
Profit (50,000)

(b) Statement Showing Selling Price of Product ‘L’

Particulars Amount
Further Processing Cost 1,01,000
Add: Net Joint Cost (`4,00,000 – 200 × `5) 3,99,000
Add: Desired Profit 1,00,000
Sales Value 6,00,000
Selling Price (`6,00,000 ÷ 10,000 units) `60

PYQ 12
ABC Company produces a Product ‘X’ that passes through three processes: R, S and T. Three types of raw
materials, viz., J, K, and L are used in the ratio of 40:40:20 in process R. The output of each process is
transferred to next process. Process loss is 10% of total input in each process. At the stage of output in
process T, a by-product ‘Z’ is emerging and the ratio of the main product ‘X’ to the by-product ‘Z’ is 80: 20.
The selling price of product ‘X’ is ₹ 60 per kg. The company produced 14,580 kgs of product ‘X’.
Material price: Material J @ `15 per kg; Material K @ `9 per kg; Material L @ `7 per kg. Process costs are as
follows:
Process Variable cost per kg (`) Fixed cost of Input (`)
R 5.00 42,000
S 4.50 5,000
T 3.40 4,800
The by-product ‘Z’ cannot be processed further and can be sold at `30 per kg at the split-off stage. There is
no realizable value of process losses at any stage.

Present a statement showing the apportionment of joint costs on the basis of the sales value of product
‘X’ and by-product ‘Z’ at the split-off point and the profitability of product ’X’ and by-product ‘Z’.
[(10 Marks) May 2023]

10.22
 CHAPTER 10 JOINT PRODUCTS & BY PRODUCTS

Answer
Statement Showing Apportionment of Joint Cost and Profitability
Particulars Product X By-Product Z
Number of units produced at split off point (in kg) 14,580 3,645
Market value at separation point per kg `60 `30
Total market value at separation point `8,74,800 `1,09,350

Apportionment of Joint Cost `6,21,900 in sales ratio `5,52,800 `69,100

Profit (Sales value – Joint cost) `3,22,000 `40,250

Working Notes:

(a) Output of Product X at split off point = 14,580 kg

∴ Output of By-product Z = (14,580 ÷ 80) × 20 = 3,645 kgs

(b) Input of raw material into each process:

Output of Process T = 14,580 + 3,645 = 18,225 kgs
Input of process T = 18,225 ÷ 90% = 20,250 kgs
Input of Process S = 20,250 ÷ 90% = 22,500 kgs
Input of Process R = 22,500 ÷ 90% = 25,000 kgs

(c) Calculation of Joint Cost:

Particulars Process R Process S Process T Total
Material input (in kg) 25,000 22,500 20,250 -
Material cost:
Material J (25,000 × 40% × `15) 1,50,000 - - 1,50,000
Material K (25,000 × 40% × `9) 90,000 - - 90,000
Material L (25,000 × 20% × `7) 35,000 - - 35,000
Variable cost @ `5, `4.50, `3.40 per kg 1,25,000 1,01,250 68,850 2,95,100
Fixed cost 42,000 5,000 4,800 51,800
Joint Cost 4,42,000 1,06,250 73,650 6,21,900

SUGGESTED REVISION FOR EXAM:

BQ: 9, 10, 12, 13, 14, 15, 17, 18

PYQ: 1, 2, 3, 5, 6, 7, 8, 12

10.23
 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

CHAPTER 11 BUDGETS & BUDGETARY CONTROL

FLEXIBLE BUDGET

BQ 1
A factory which expects to operate 7,000 hours, i.e., at 70% level of activity, furnishes details of expenses as
under:
Variable expenses `1,260
Semi-variable expenses `1,200
Fixed expenses `1,800

The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95% activity.

Construct a flexible budget for 70, 80, 90 and 100 percent activities. Also calculate recovery rate
per hour.

Answer
Flexible Budget
Particulars 70% 80% 90% 100%
Operating Hours 7,000 8,000 9,000 10,000
Variable Expenses 1,260 1,440 1,620 1,800
Semi Variable Expenses 1,200 1,200 1,320 1,440
Fixed Expense 1,800 1,800 1,800 1,800
Total Cost `4,260 `4,440 `4,740 `5,040
Recovery Rate (Total Cost ÷ Hours) `0.61 `0.56 `0.53 `0.50

BQ 2
A department of Company X attains sale of `6,00,000 at 80 percent of its normal capacity and its expenses
are given below:

Administration Costs:
Office Salaries 90,000
General Expenses 2 percent of sales
Depreciation 7,500
Rates and taxes 8,750

Selling Costs:
Salaries 8 percent of sales
Travelling expenses 2 percent of sales
Sales office expenses 1 percent of sales
General expenses 1 percent of sales

Distribution costs:
Wages 15,000
Rent 1 percent of sales
Other expenses 4 percent of sales

Draw up flexible administration, selling and distribution costs budget, operating at 90 per cent,
100 per cent and 110 per cent of normal capacity.

11.1
 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Answer
Flexible Budget
Particulars 80% 90% 100% 110%
Sales in ` 6,00,000 6,75,000 7,50,000 8,25,000
(A) Administration cost:
Office salaries (fixed) 90,000 90,000 90,000 90,000
General expenses (2% of sales) 12,000 13,500 15,000 16,500
Depreciation (fixed) 7,500 7,500 7,500 7,500
Rent and rates (fixed) 8,750 8,750 8,750 8,750
Total (A) 1,18,250 1,19,750 1,21,250 1,22,750

(B) Selling cost:

Salaries (8% of sales) 48,000 54,000 60,000 66,000
Travelling expenses (2% of sales) 12,000 13,500 15,000 16,500
Sales office (1% of sales) 6,000 6,750 7,500 8,250
General expenses (1% of sales) 6,000 6,750 7,500 8,250
Total (B) 72,000 81,000 90,000 99,000
(C) Distribution Cost:
Wages (fixed) 15,000 15,000 15,000 15,000
Rent (1% of sales) 6,000 6,750 7,500 8,250
Other expenses (4% of sales) 24,000 27,000 30,000 33,000
Total (C) 45,000 48,750 52,500 56,250
Total Cost (A + B + C) 2,35,250 2,49,500 2,63,750 2,78,000

Note: In the absence of information it has been assumed that office salaries, depreciation, rates and taxes and
wages remain the same at 110% level of activity also. However, in practice some of these costs may change
if present capacity is exceeded.

BQ 3
The budgeted expenses for production of 10,000 units in a factory are furnished below:
Particulars ` per unit
Material 70
Labour 25
Variable overheads 20
Fixed overheads (`1,00,000) 10
Variable expenses (direct) 5
Selling expenses (10% fixed) 13
Distribution expenses (20% fixed) 7
Administration expenses (`50,000) 5
Total 155

Prepare a budget for the production of (a) 8,000 units, and (b) 6,000 units. Assume that
administration expenses are rigid for all levels of production.

Answer
Flexible Budget
6,000 units 8,000 units 10,000 units
Particulars
Per unit Total Per unit Total Per unit Total
Materials 70.00 4,20,000 70.00 5,60,000 70.00 7,00,000
Labour 25.00 1,50,000 25.00 2,00,000 25.00 2,50,000
Direct expenses (variable) 5.00 30,000 5.00 40,000 5.00 50,000
Variable overhead 20.00 1,20,000 20.00 1,60,000 20.00 2,00,000

11.2
 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

Fixed overhead 16.67 1,00,000 12.50 1,00,000 10.00 1,00,000

Selling expenses:
Fixed 2.17 13,000 1.63 13,000 1.30 13,000
Variable 11.70 70,200 11.70 93,600 11.70 1,17,000
Distribution expenses:
Fixed 2.33 14,000 1.75 14,000 1.40 14,000
Variable 5.60 33,600 5.60 44,800 5.60 56,000
Administration expenses 8.33 50,000 6.25 50,000 5.00 50,000
Total Cost 166.80 10,00,800 159.43 12,75,400 155.00 15,50,000

BQ 4
S Ltd. has prepared budget for the coming year for its two products A and B.

Product A Product B
Production & Sales units 6,000 9,000
Raw material cost per unit `60.00 `42.00
Direct labour cost per unit `30.00 `18.00
Variable overhead per unit `12.00 `6.00
Fixed overhead per unit `8.00 `4.00
Selling price per unit `120.00 `78.00

After some marketing efforts, the sales quantity of the Product A & B can be increased by 1,500 units
and 500 units respectively but for this purpose the variable overhead and fixed overhead will be increased
by 10% and 5% respectively for both products.

You are required to prepare flexible budget for both the products:
(a) Before marketing efforts.
(b) After marketing efforts.

Answer
(a) Flexible Budget before Marketing Efforts
Product A (6,000 units) Product B (9,000 units)
Particulars
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000
Raw materials cost 60.00 3,60,000 42.00 3,78,000
Direct labour cost 30.00 1,80,000 18.00 1,62,000
Variable overhead 12.00 72,000 6.00 54,000
Fixed overhead 8.00 48,000 4.00 36,000
Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000

(b) Flexible Budget After Marketing Efforts

Product A (7,500 units) Product B (9,500 units)
Particulars
Per unit Total Per unit Total
Sales 120.00 9,00,000 78.00 7,41,000
Raw materials cost 60.00 4,50,000 42.00 3,99,000
Direct labour cost 30.00 2,25,000 18.00 1,71,000
Variable overhead 13.20 99,000 6.60 62,700
Fixed OH (48,000 + 5%)/(36,000 + 5%) 6.72 50,400 3.98 37,800
Total cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500

11.3
 BUDGETS & BUDGETARY CONTROL CHAPTER 11

BQ 5
During the FY 2022-23, P Limited has produced 60,000 units operating at 50% capacity level. The cost
structure at the 50% level of activity is as under:
Direct Material `300 per unit
Direct Wages `100 per unit
Variable Overheads `100 per unit
Direct Expenses `60 per unit
Factory Expenses (25% Fixed) `80 per unit
Selling and Distribution Expenses (80% Variable) `40 per unit
Office and Administrative Expenses (100% Fixed) `20 per unit
The company anticipates that in FY 2023-24, the variable costs will go up by 20% and fixed costs will go up
by 15%. The selling price per unit will increase by 10% to `880

Required:
(a) Calculate the budgeted profit/loss for the FY 2022-23.
(b) Prepare an Expense budget on marginal cost basis for the FY 2023-24 for the company at 50% and
60% level of activity and find out the profits at respective levels.

Answer
(1) Statement of Budgeted Profit for the FY 2022-23
Particulars Per Unit (`) 60,000 units (`)
(A) Sales 800.00 4,80,00,000
(B) Variable Cost:
Direct Material 300 1,80,00,000
Direct Wages 100 60,00,000
Variable Overhead 100 60,00,000
Direct Expenses 60 36,00,000
Variable Factory Expenses (75% of `80 p.u.) 60 36,00,000
Variable Selling and Distribution Expenses (80% of `40 p.u.) 32 19,20,000
Total (B) 652 3,91,20,000
(C) Contribution (A - B) 148 88,80,000
(D) Fixed Cost:
Office and Administration Expenses (100%) - 12,00,000
Fixed Factory Expenses (25%) - 12,00,000
Fixed Selling and Distribution Expenses (20%) - 4,80,000
Total (D) 28,80,000
Net Profit (C - D) - 60,00,000

(2) Expense Budget of P Ltd. for the FY 2023-24 at 50% & 60% level
60,000 units 72,000 units
Particulars
Per Unit Amount Per Unit Amount
(A) Sales 880 5,28,00,000 880 6,33,60,000
(B) Variable Cost:
Direct Material 360 2,16,00,000 360 2,59,20,000
Direct Wages 120 72,00,000 120 86,40,000
Variable Overhead 120 72,00,000 120 86,40,000
Direct Expenses 72 43,20,000 72 51,84,000
Variable Factory Expenses 72 43,20,000 72 51,84,000
Variable Selling and Distribution Expenses 38.40 23,04,000 38.40 27,64,800
Total (B) 782.40 4,69,44,000 782.40 5,63,32,800
(C) Contribution (A - B) 97.60 58,56,000 97.60 70,27,200

11.4
 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

(D) Fixed Cost:

Office and Administration Expenses (100%) - 13,80,000 - 13,80,000
Fixed Factory Expenses (25%) - 13,80,000 - 13,80,000
Fixed Selling and Distribution Expenses - 5,52,000 - 5,52,000
(20%) 33,12,000 33,12,000
Total (D)
Net Profit (C - D) - 25,44,000 - 37,15,200

BQ 6
ABC Ltd. is currently operating at 75% of its capacity. In the past two years the level of operations was 55%
and 65% respectively. Presently, the production is 75,000 units. The company is planning for 85% capacity
level during 2022-23. The cost details are as follow:
Particulars 55% 65% 75%
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 Overheads 1,60,000 1,60,000 1,60,000
Total cost 24,40,000 28,00,000 31,60,000

Profit is estimated @ 20% on sales.

The following increases in costs are expected during the year:
Direct materials 8%
Direct Labour 5%
Variable factory overheads 5%
Variable selling overheads 8%
Fixed factory overheads 10%
Fixed selling overheads 15%
Administrative overheads 10%
Prepare a flexible budget for the period 2022-23 at 85% level of capacity and ascertain the profit and
contribution.
[Profit `9,46,300; Contribution `14,57,300; Sales `47,31,500]

BQ 7
Action Plan Manufacturers normally produce 8,000 units of their product in a month, in their machine shop.
For the month of January, they had planned for a production of 10,000 units. Owing to a sudden cancellation
of a contract in the middle of January, they could only produce 6,000 units in January.

Indirect manufacturing costs are carefully planned and monitored in the machine shop and the
foreman of the shop is paid a 10% of the savings as bonus when in any month the indirect manufacturing
cost incurred is less than the budgeted provision.

The foreman has put in a claim that he should be paid a bonus of `88.50 for the month of January.
The works manager wonders how anyone can claim a bonus when the Company has lost a sizeable contract.
The relevant figures are as under:
For a normal month Planned for January Actual in January
Indirect manufacturing costs
8,000 units 10,000 units 6,000 units
Salary of foreman 1,000.00 1,000.00 1,000.00
Indirect Labour 720.00 900.00 600.00
Indirect material 800.00 1,000.00 700.00
Repairs and maintenance 600.00 650.00 600.00

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Power 800.00 875.00 740.00

Tools consumed 320.00 400.00 300.00
Rates and taxes 150.00 150.00 150.00
Depreciation 800.00 800.00 800.00
Insurance 100.00 100.00 100.00
Total 5,290.00 5,875.00 4,990.00

Do you agree with the works manager? Is the foreman entitled to any bonus for the performance in
January? Substantiate your answer with facts and figures.
[Costs as per flexible budget for 6,000 units are `4,705; hence, foreman is not entitled for Bonus.]

PRODUCTION AND RELATED BUDGETS

BQ 8
A single product company estimated its sales for the next year quarter-wise as under:
Quarter Sales (in units)
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 6,000 units and the company expects to maintain the closing stock of
finished goods at 12,250 units at the end of the year. The production pattern in each quarter is based on 80%
of the sales of the current quarter and 20% of the sales of the next quarter.

The opening stock of raw materials in the beginning of the year is 10,000 kg and the closing stock at
the end of the year is required to be maintained at 5,000 kg. Each unit of finished output requires 2 kg of raw
materials. The value of the opening stock of raw materials in the beginning of the year is `20,000.

The company proposes to purchase the entire annual requirement of raw materials in the first three
quarters in the proportion and at the prices given below:

Quarter Purchase of raw materials (%) Price per kg

I 30% `2
II 50% `3
III 20% `4

You are required to present the following for the next year, quarter wise:
(i) Production budget in units.
(ii) Raw material consumption budget in quantity.
(iii) Raw material purchase budget in quantity and value.
(iv) Prepare stores ledger on the basis of FIFO method.

[(i) 31,500, 38,250, 42,000, 48,250 (ii) 63,000, 76,500, 84,000, 96,500 (iii) 94,500, 1,57,500, 63,000
and 1,89,000, 4,72,500, 2,52,000]

BQ 9
Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the
year 2023-24. The company’s policy is to hold closing stock of finished goods at 25% of the anticipated
volume of sales of the succeeding month. The following are the estimated data for two products:

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

Minimax (MM) Heavyhigh (HH)

Budgeted production (in units) 1,80,000 1,20,000
Direct material per unit `220.00 `280.00
Direct labour per unit `130.00 `120.00
Manufacturing overheads `4,00,000 `5,00,000

The estimated units to be sold in the first four months of the year 2023-24 are as under:

April May June July

Minimax (MM) 8,000 10,000 12,000 16,000
Heavyhigh (HH) 6,000 8,000 9,000 14,000

You are required to:

(a) Prepare a production budget for the first quarter in month-wise.
(b) Present production cost budget for first quarter.

Answer
(a) Production Budget of Product Minimax and Heavyhigh (in units)
April May June Total
Particulars
MM HH MM HH MM HH MM HH
Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000
Add: Closing Stock 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
(25% of next month’s sales)
Less: Opening Stock *2,000 *1,500 2,500 2,000 3,000 2,250 7,500 5,750
Production in units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000

Note: Opening stock of April is the closing stock of March, which is as per company’s policy 25% of next
month’s sales.

(b) Production Cost Budget

Minimax (MM) Heavyhigh (HH)
Elements of cost
Per unit Total (`) Per unit Total (`)
No of units 1 32,000 1 25,000
Direct Material 220 70,40,000 280 70,00,000
Direct Labour 130 41,60,000 120 30,00,000
Manufacturing Overhead:
MM: (`4,00,000 ÷ 1,80,000) × 32,000 2.22 71,111 - -
HH: (`5,00,000 ÷ 1,20,000) × 25,000 - - 4.167 1,04,167
Production Cost 352.22 1,12,71,111 404.167 1,01,04,167

BQ 10
K Ltd. produces and markets a very popular product called ‘X’. The company is interested in presenting its
budget for the second quarter of 2023.

The following information are made available for this purpose:

(a) It expects to sell 1,50,000 bags of ‘X’ during the second quarter of 2023 at the selling price of `1,200 per
bag.
(b) Each bag of ‘X’ requires 2.5 mtr. of raw material ‘Y’ and 7.5 mtr. of raw – material ‘Z’.
(c) Stock levels are planned as follows:

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Particulars Beginning of Quarter End of Quarter

Finished Bags of ‘X’ (Nos.) 45,000 33,000
Raw – Material ‘Y’ (mtr) 96,000 78,000
Raw – Material ‘Z’ (mtr) 1,71,000 1,41,000
Empty Bag (Nos.) 1,11,000 84,000

(d) ‘Y’ cost `160 per mtr., ‘Z’ costs `30 per mtr. and ‘Empty Bag’ costs `110 each.
(e) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is `70 per hour.
(f) Variable manufacturing costs are `60 per bag. Fixed manufacturing costs `40,00,000 per quarter.
(g) Variable selling and administration expenses are 5% of sales and fixed administration and selling
expenses are `3,75,000 per quarter.

Required
1. Prepare a production budget for the said quarter in quantity.
2. Prepare a raw material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said quarter in quantity as
well as in rupees.
3. Compute the budgeted variable cost to produce one bag of ‘X’.

Answer
1. Production Budget of ‘X’ for the Second Quarter
Particulars Bags (Nos.)
Budgeted Sales 1,50,000
Add: Desired Closing stock 33,000
Total Requirements 1,83,000
Less: Opening stock (45,000)
Required Production 1,38,000

2. Raw Materials Purchase Budget in Quantity as well as in ` for 1,38,000 Bags of ‘X’
Particulars ‘Y’ ‘Z’ Empty Bags
Production Requirements Per bag of ‘X’ 2.5 7.5 1.0
Requirement for Production 3,45,000 10,35,000 1,38,000
(1,38,000 × 2.5) (1,38,000 × 7.5) (1,38,000 × 1)
Add: Desired Closing Stock 78,000 1,41,000 84,000
Total Requirements 4,23,000 11,76,000 2,22,000
Less: Opening Stock (96,000) (1,71,000) (1,11,000)
Quantity to be Purchased 3,27,000 10,05,000 1,11,000
Cost per mtr./Bag `160 `30 `110
Cost of Purchase `5,23,20,000 `3,01,50,000 `1,22,10,000

3. Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’

Particulars Amount (`)
Raw Material:
Y 2.5 mtr @`160 400.00
Z 7.5 mtr @`30 225.00
Empty Bag 110.00
Direct Labour {(`70 ÷ 60 minutes) × 9 minutes} 10.50
Variable Manufacturing Overheads 60.00
Variable Cost of Production per bag 805.50

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

BQ 11
A light motor vehicle manufacturer has prepared sales budget for the next few months, and the following
draft figures are available:
Month Number of vehicles
October 4,000
November 3,500
December 4,500
January 6,000
February 6,500

To manufacture a vehicle a standard cost of `2,85,700 is incurred and sold through dealers at a
uniform selling price of `3,95,600 to customers. Dealers are paid 12.5% commission on selling price on sale
of a vehicle.
Apart from other materials four units of Part X are required to manufacture a vehicle. It is a policy of
the company to hold stocks of Part X at the end of the each month to cover 40% of next month’s production.
4,800 units of Part X are in stock as on 1st October.
There are 950 numbers of completed vehicles in stock as on 1st October and it is the policy to have
stock at the end of each month to cover 20% of the next month’s sales.

You are required to:

(a) Prepare Production budget (in numbers) for the month of October, November, December and
January.
(b) Prepare Purchase budget for Part X (in units) for the month of October, November and December.
(c) Calculate the budgeted Gross profit for the quarter October to December.

Answer
(a) Production Budget (in numbers)
Particulars October November December January
Demand for the month (in nos.) 4,000 3,500 4,500 6,000
Add: Closing Stock 700 900 1,200 1,300
(20% of the next month’s demand)
Less: Opening Stock (950) (700) (900) (1,200)
Vehicles to be produced 3,750 3,700 4,800 6,100

(b) Purchase Budget for Part X (in units)

Particulars October November December
Production for the month (in numbers) 3,750 3,700 4,800
No of units of Part X required for production of 15,000 14,800 19,200
current month (4 units for 1 units of vehicle)
Add: Closing Stock of Part X 5,920 7,680 9,760
(To cover 40% of the next month’s production) (40% × 14,800) (40% × 19,200) (40%×4×6,100)
Less: Opening Stock (4,800) (5,920) (7,680)
Part X to be purchased 16,120 16,560 21,280

(c) Budgeted Gross Profit for the Quarter October to December

Particulars October November December Total
Sales in numbers 4,000 3,500 4,500 12,000
Sales value @ `3,46,150 per unit (in Lakh) 13,846 12,115.25 15,576.75 41,538
Less: Cost @ `2,85,700 per unit (in Lakh) 11,428 9,999.50 12,856.50 34,284
Gross Profit (in Lakh) 2,418 2,115.75 2,720.25 7,254

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Note: Net selling price per unit (`3,95,600 – 12.5% commission = `3,46,150) is used to prepare the gross
profit budget.

SALES BUDGET

BQ 12
B Ltd manufactures two products viz., X and Y and sells them through two divisions, East and West. For the
purpose of Sales Budget to the Budget Committee, following information has been made available for the
year 2022-23:

Budgeted Sales Actual Sales

Product
East Division West Division East Division West Division
X 800 units at `18 1,200 units at `18 1,000 units at `18 1,400 units at `18
Y 600 units at `42 1,000 units at `42 400 units at `42 800 units at `42

Adequate market studies reveal that product X is popular but underpriced. It is expected that if the
price of X is increased by `2, it will find a ready market. On the other hand, Y is overpriced and if the price of
Y is reduced by `2, it will have more demand in the market. The company management has agreed for the
aforesaid price changes. On the basis of these price changes and the reports of salesmen, following estimates
have been prepared by the Divisional Managers:

Percentage increase in sales over budgeted sales:

Product East Division West Division
X + 12.5% + 7.5%
Y + 22.5% + 12.5%

With the help of the intensive advertisement campaign, following additional sales (over and above the above
mentioned estimated sales by Divisional Managers) are possible:

Product East Division West Division

X 120 units 140 units
Y 80 units 100 units

You are required to prepare Sales Budget 2023 – 2024 after incorporating above estimates and
also show the Budgeted Sales and Actual Sales of 2022 – 2023.

Answer
1. Statement Showing Sales Budget for 2023-24
Division Product X Product Y Total
Qty. Rate (`) Amount (`) Qty. Rate (`) Amount (`) Amount (`)
East 1,020 20 20,400 815 40 32,600 53,000
West 1,430 20 28,600 1,225 40 49,000 77,600
Total 2,450 - 49,000 2,040 - 81,600 1,30,600

Working notes:
Calculation of budgeted sales of product X for 2023 -24 in units:
East division = (800 units + 12.5%) + 120 units = 1,020 units
West division = (1,200 units + 7.5%) + 140 units = 1,430 units

Calculation of budgeted sales of product Y for 2022 -23 in units:

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

East division = (600 units + 22.5%) + 80 units = 815 units

West division = (1,000 units + 12.5%) + 100 units = 1,225 units

2. Statement Showing Sales Budget for 2022 – 23

Division Product X Product Y Total
Qty. Rate (`) Amount (`) Qty. Rate (`) Amount (`) Amount (`)
East 800 18 14,400 600 42 25,200 39,600
West 1,200 18 21,600 1,000 42 42,000 63,600
Total 2,000 - 36,000 1,600 - 67,200 1,03,200

3. Statement Showing Actual Sales for 2022 – 23

Division Product X Product Y Total
Qty. Rate (`) Amount (`) Qty. Rate (`) Amount (`) Amount (`)
East 1,000 18 18,000 400 42 16,800 34,800
West 1,400 18 25,200 800 42 33,600 58,800
Total 2,400 - 43,200 1,200 - 50,400 93,600

MASTER BUDGET

BQ 13
Float Glass manufacturing company requires you to present the Master budget for the next year from the
following information:
Sales:
Toughened Glass `6,00,000
Bent Glass `2,00,000

Cost:
Direct materials cost 60% of sales
Direct wages 20 workers @ `150 per month

Factory overheads:
Indirect labour:
Works manager `500 per month
Foreman `400 per month
Stores and spares 2.5% of sales
Depreciation on machine `12,600
Light and power `3,000
Repairs and maintenance `8,000
Other sundries 10% of direct wages

Administration, selling and distribution expenses `36,000 per year

Answer
Master Budget
Particulars ` ` `
Sales:
Toughened Glass 6,00,000
Bent Glass 2,00,000
Total Sales 8,00,000
Less: Cost of production:

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Direct materials (60% of `8,00,000) 4,80,000

Direct wages (20 workers × `150 × 12 months) 36,000
Prime Cost 5,16,000
Fixed Factory Overheads:
Works manager’s salary (`500 × 12 months) 6,000
Foreman’s salary (`400 × 12 months) 4,800
Depreciation 12,600
Light and power (assumed fixed) 3,000 26,400
Variable Factory Overheads:
Stores and spares (2.5% of `8,00,000) 20,000
Repairs and maintenance (assumed variable) 8,000
Sundry expenses (10% of `36,000) 3,600 31,600
Works Cost 5,74,000
Gross Profit (Sales – Works cost) 2,26,000
Less: Administration, selling and distribution OH 36,000
Net Profit 1,90,000

MISCELLANEOUS

BQ 14
The accountant of manufacturing company provides you the following details for the year 2022:

Direct materials `1,75,000 Other variable costs `80,000

Direct wages `1,00,000 Other fixed costs `80,000
Fixed factory overheads `1,00,000 Profit `1,15,000
Variable factory overheads `1,00,000 Sales `7,50,000

During the year, the company manufactured two products A and B and the output and costs were:

A B

Output (units) 2,00,000 1,00,000

Selling price per unit `2.00 `3.50
Direct materials per unit `0.50 `0.75
Direct wages per unit `0.25 `0.50

Variable factory overhead are absorbed as a percentage of direct wages. Other variable costs have
been computed as: Product A `0.25 per unit; and B `0.30 per unit.

During 2023, it is expected that the demand of product A will fall by 25% and for B by 50%. It is
decided to manufacture a further product C, the cost for which are estimated as follows:
C
Output (units) 2,00,000
Selling price per unit `1.75
Direct materials per unit `0.40
Direct wages per unit `0.25

It is anticipated that the other variable cost per unit will be the same as for product A.

Prepare a budget to present to the management, showing the current position and the position
for 2023. Comment on the comparative results.

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

Answer
Budget Showing Current Position and Position for 2023
Position for 2022 Position for 2023
Particulars
A B Total A B C Total
Sales (Units) 2,00,000 1,00,000 3,00,000 1,50,000 50,000 2,00,000 4,00,000
Sales (in `) 4,00,000 3,50,000 7,50,000 3,00,000 1,75,000 3,50,000 8,25,000
Direct materials 1,00,000 75,000 1,75,000 75,000 37,500 80,000 1,92,500
Direct wages 50,000 50,000 1,00,000 37,500 25,000 50,000 1,12,500
Factory OH (V) 50,000 50,000 1,00,000 37,500 25,000 50,000 1,12,500
Other cost (V) 50,000 30,000 80,000 37,500 15,000 50,000 1,02,500
Marginal Cost 2,50,000 2,05,000 4,55,000 1,87,500 1,02,500 2,30,000 5,20,000
Contribution 1,50,000 1,45,000 2,95,000 1,12,500 72,500 1,20,000 3,05,000
Less: Fixed cost
Factory 1,00,000 1,00,000
Other 80,000 80,000
Profit 1,15,000 1,25,000

Comment: Introduction of Product C is likely to increase profit by 10,000 (i.e. from 1,15,000 to 1,25,000) in
2023 as compared to 2022. Therefore, introduction of product C is recommended.

BQ 15
Concorde Ltd. manufactures two products using two types of materials and one grade of labour. Shown below
is an extract from the company’s working papers for the next month’s budget:
Product A Product B
Budgeted sales (in units) 2,400 3,600

Budgeted material consumption per unit (in kg):

Material X 5 3
Material Y 4 6
Standard labour hours allowed per unit of product 3 5

Material X and Material Y cost `4 and `6 per kg and labours are paid 25 per hour. Overtime premium
is 50% and is payable, if a worker works for more than 40 hours a week. There are 180 direct workers.
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.
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.
It is anticipated that stock at the beginning of the period will be:
Product A 400 units
Product B 200 units
Material X 1,000 kg
Material Y 500 kg
The anticipated closing stocks for the budgeted period are as below:
Product A 4 days sales
Product B 5 days sales
Material X 10 days consumption
Material Y 6 days consumption

Calculate the Materials Purchase Budget and Wages Budget for the direct workers, showing the
quantities and values, for the month.

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Answer
(i) Material Purchase Budget
Particulars Material X Material Y
Materials consumed:
Product A @ 5 kg/4 kg per unit of 2,480 units 12,400 9,920
Product B @ 3 kg/6 kg per unit of 4,300 units 12,900 25,800
Total consumption (in kg) 25,300 35,720
Add: Closing Stock:
Materials X (25,300/20 days × 10 days) 12,650 -
Materials Y (35,720/20 days × 6 days) - 10,716
Less: Opening Stock of Raw Material (1,000) (500)
Quantity of materials to be purchased (in kg) 36,950 45,936
Rate per kg `4 `6
Material Purchase (in `) `1,47,800 `2,75,616

(ii) Wages Budget

Particulars Product A Product B
Units to be produced 2,480 4,300
Standard hours allowed per unit 3 5
Total standard hours allowed 7,440 21,500

Productive hours required for production (80% efficiency)

Product A (7,440 ÷ 80%) 9,300 -
Product A (21,500 ÷ 80%) - 26,875
Add: Non-productive down time @ 20% of productive hours 1,860 5,375

Total hours to be paid 11,160 32,250

Total hours to be paid (11,160 + 32,250) 43,410

Normal hours (4 weeks × 40 hours × 180 workers) 28,800
Overtime hours (43,410 – 28,800) 14,610

Wages to be paid:
Normal hours @ `25 per hour for 28,800 hours `7,20,000
Overtime hours @ `37.50 (25 + 50%) per hour for 14,610 hours `5,47,875
Total Wages paid (in `) `12,67,875
Working notes:
(1) Number of days in budget period = 4 weeks × 5 days = 20 days

(2) Calculation of number of units to be produced:

Particulars Product A Product B
Units to be sold 2,400 3,600
Add: Closing Stock:
Product A (2,400/20 days × 4 days) 480 -
Product B (3,600/20 days × 5 days) - 900
Less: Opening Stock (400) (200)
Units to be produced 2,480 4,300

BQ 16
A company is engaged in the manufacture of specialised sub-assemblies required for certain electronic
equipment. The company envisages that in the forthcoming month, December, the sales will take a pattern
in the ratio of 3 : 4 : 2 respectively of sub-assemblies, ACB, MCB and DP.

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

The following is the schedule of components required for manufacture:

Selling Component Requirements
Sub-assembly
Price (`) Base Board IC08 IC12 IC26
ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase Price (`) - 60 20 12 8

The direct labour time and variable overheads required for each of the sub-assemblies are:
Labour hours
Particulars Variable overheads
Grade A Grade B
ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (`) 5 4 -
The labourers work 8 hours a day for 25 days a month.

The opening stocks of sub-assemblies and components for December are as under:
ACB MCB DP Base Board IC08 IC12 IC26
800 1,200 2,800 1,600 1,200 6,000 4,000
Fixed overheads amount to `7,57,200 for the month and a monthly profit target of `12,00,000 has been set.
The company is eager for a reduction of *closing inventories for December of sub-assemblies and
components by 10% of quantity as compared to the opening stock.

Prepare the following budgets for December:

(a) Sales budget in quantity and value.
(b) Production budget in quantity
(c) Component usage budget in quantity.
(d) Component purchase budget in quantity and value.
(e) Manpower budget showing the number of workers and the amount of wages payable.

Answer
(a) Sales Budget in Quantity and Value
Particulars ACB MCB DP Total
Sales in quantity in 3 : 4 : 2 6,300 8,400 4,200 18,900
Selling price per unit (`) 520 500 350 -
Sales value (`) 32,76,000 42,00,000 14,70,000 89,46,000

(b) Production Budget in Quantity

Particulars ACB MCB DP
Sales in units 6,300 8,400 4,200
Add: Closing stock (10% less than opening stock) 720 1,080 2,520
Less: Opening stock (800) (1,200) (2,800)
Production in units 6,220 8,280 3,920

(c) Component Usage Budget in Quantity

Particulars ACB MCB DP Total
Production in quantity 6,220 8,280 3,920 -
Base board (1 each) 6,220 8,280 3,920 18,420

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

IC08 (8, 2 and 2 per unit) 49,760 16,560 7,840 74,160

IC12 (4, 10 and 4 per unit) 24,880 82,800 15,680 1,23,360
IC26 (2, 6 and 8 per unit) 12,440 49,680 31,360 93,480

(d) Component Purchase Budget in Quantity and Value

Particulars Base Board IC08 IC12 IC26 Total
Usage in production 18,420 74,160 1,23,360 93,480 -
Add: Closing stock 1,440 1,080 5,400 3,600 -
(10% less than opening)
Less: Opening stock (1,600) (1,200) (6,000) (4,000) -
Purchase in quantity 18,260 74,040 1,22,760 93,080 3,08,140
Purchase price per unit (`) 60 20 12 8 -
Purchase value (`) 10,95,600 14,80,800 14,73,120 7,44,640 47,94,160

(e) Manpower Budget Showing the Number of Workers and the Amount of Wages Payable
Grade A Grade B
Budgeted
Particulars Hours Total Hours Total Total
Production
Per Unit Hours Per Unit Hours
ACB 6,220 8 49,760 16 99,520
MCB 8,280 6 49,680 12 99,360
DP 3,920 4 15,680 8 31,360
(A) Total hours 1,15,120 2,30,240
(B) Hours per man per month (8 hours × 25 days) 200 200
(C) Number of workers per month (A ÷ B) 576 1,152 1,728
(D) Wage rate per month (200 hours × `5/`4) 1,000 800
(E) Wages payable (C × D) 5,76,000 9,21,600 14,97,600

Working notes:
1. Desired contribution = Fixed cost + Profit = 7,57,200 + 12,00,000 = 19,57,200

2. Calculation of contribution per unit:

Particulars ACB (`) MCB (`) DP (`)
Selling price per unit 520 500 350
Variable cost per unit:
Components:
Base board (1 × 60) = 60 (1 × 60) = 60 (1 × 60) = 60
IC08 (8 × 20) = 160 (2 × 20) = 40 (2 × 20) = 40
IC12 (4 × 12) = 48 (10 × 12) = 120 (4 × 12) = 48
IC26 (2 × 8) = 16 (6 × 8) = 48 (8 × 8) = 64
Labour:
Grade A (8 × 5) = 40 (6 × 5) = 30 (4 × 5) = 20
Grade B (16 × 4) = 64 (12 × 4) = 48 (8 × 4) = 32
Variable production overheads 36 24 24
Total Variable Cost per unit 424 370 288
Contribution per unit 96 130 62
3. Number of units required = Desired contribution ÷ Composite contribution per unit
= 19,57,200 ÷ 103.555 = 18,900 units
Units of ACB = 18,900 × 3/9 = 6,300 units
Units of MCB = 18,900 × 4/9 = 8,400 units
Units of DP = 18,900 × 2/9 = 4,200 units
4. Composite contribution p.u. = (96 × 3 + 130 × 4 + 62 × 2) ÷ 9 = 103.555 p.u.

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

PAST YEAR QUESTIONS

PYQ 1
RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold at
a price of `200 per unit. The cost structure at 50% level of activity is as under:

Direct Material `75 per unit

Direct Wages `25 per unit
Variable Overheads `25 per unit
Direct Expenses `15 per unit
Factory Expenses (25% Fixed) `20 per unit
Selling and Distribution Expenses (80% Variable) `10 per unit
Office and Administrative Expenses (100% Fixed) `5 per unit

The company anticipates that the variable costs will go up by 10% and fixed costs will go up by 15%.

You are required to prepare an Expense Budget, on the basis of marginal cost for the company
at 50% and 60% level of activity and find out the profit at respective levels.
[(8 Marks) Nov 2014]

Answer
Expenses Budget of RST Ltd
Per Unit 30,000 units 36,000 units
Particulars
(`) (`) (`)
(A) Sales 200.00 60,00,000 72,00,000
(B) Variable Cost:
Direct Material (`75 + 10%) 82.50 24,75,000 29,70,000
Direct Wages (`25 + 10%) 27.50 8,25,000 9,90,000
Variable Overhead (`25 + 10%) 27.50 8,25,000 9,90,000
Direct Expenses (`15 + 10%) 16.50 4,95,000 5,94,000
Variable Factory Expenses (`20 × 75% + 10%) 16.50 4,95,000 5,94,000
Variable Selling and Distribution Expenses 8.80 2,64,000 3,16,800
(`10 × 80% + 10%)
Total (B) 179.30 53,79,000 64,54,800
(C) Contribution (A - B) 20.70 6,21,000 7,45,200
(D) Fixed Cost:
Office and Administration Expenses - 1,72,500 1,72,500
(`5 × 100% × 30,000 units + 15%)
Factory Expenses - 1,72,500 1,72,500
(`20 × 25% × 30,000 units + 15%)
Selling and Distribution Expenses - 69,000 69,000
(`10 × 20% × 30,000 units + 15%)
Total (D) - 4,14,000 4,14,000
Net Profit (C - D) - 2,07,000 3,31,200

PYQ 2
XYZ company is drawing a production plan for its two products XML and YML for the year 2015-16. The
company’s policy is to maintain a closing stock of finished goods at 25% of the anticipated volume of the
sales of the succeeding month.

The following are the estimated data for two products:

XML YML

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Budgeted production in units 2,00,000 1,50,000

Direct material per unit `220.00 `280.00
Direct labour per unit `130.00 `120.00
Other manufacturing expenses `4,00,000 `5,00,000

The estimated units to be sold in the first 4 months of the year 2015-16 are as under:
April May June July
XML 8,000 10,000 12,000 16,000
YML 6,000 8,000 9,000 14,000

Prepare:
(i) Production Budget (Month wise)
(ii) Production Cost Budget (for first quarter of the year)
[(5 Marks) May 2015]

Answer
(i) Production Budget
Product XML
Particulars April May June
Budgeted Sales (in units) 8,000 10,000 12,000
Add: Expected Closing Stock (25% of sales of next month) 2,500 3,000 4,000
Less: Opening Stock (2,000) (2,500) (3,000)
Total Production 8,500 10,500 13,000
Product YML
Particulars April May June
Budgeted Sales (in units) 6,000 8,000 9,000
Add: Expected Closing Stock (25% of sales of next month) 2,000 2,250 3,500
Less: Opening Stock (1,500) (2,000) (2,250)
Total Production 6,500 8,250 10,250

(ii) Production Cost Budget

Particulars XML YML
No of units expected to be produced during first quarter 32,000 25,000
Direct material @ `220/ `280 per unit 70,40,000 70,00,000
Direct labour @ `130/ `120 per unit 41,60,000 30,00,000
Other manufacturing expenses @ `2 / `3.33 per unit 64,000 83,333
Total Production Cost 1,12,64,000 1,00,83,333

Note: Other manufacturing expenses are apportioned on the basis of no of units, one student may apportion
these expenses on the basis of period i.e. `1,00,000 for quarter first in case of XML.

PYQ 3
XY Co. Ltd manufactures two products viz. X and Y and sells them through two divisions, East and West. For
the purpose of Sales budget to the Budget Committee, following information has been made available for the
year 2014 – 2015:
Budgeted Sales Actual Sales
Product
East Division West Division East Division West Division
X 400 units at `9 600 units at `9 500 units at `9 700 units at `9
Y 300 units at `21 500 units at `21 200 units at `21 400 units at `21

Adequate market studies reveal that product X is popular but under priced. It is expected that if the price of

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

X is increased by `1, it will find a ready market. On the other hand, Y is overpriced and if the price of Y is
reduced by `1, it will have more demand in the market. The company management has agreed for the
aforesaid price changes. On the basis of these price changes and the reports of salesmen, following estimates
have been prepared by the Divisional Managers:

Percentage increase in sales over budgeted sales:

Product East Division West Division
X + 10% + 5%
Y + 20% + 10%
With the help of the intensive advertisement campaign, following additional sales (over and above the above
mentioned estimated sales by Divisional Managers) are possible:
Product East Division West Division
X 60 units 70 units
Y 40 units 50 units

You are required to prepare Sales Budget 2015 – 2016 after incorporating above estimates and
also show the Budgeted Sales and Actual Sales of 2014 – 2015.
[(8 Marks) Nov 2015]

Answer
1. Statement Showing Sales Budget for 2015-16
Division Product X Product Y Total
Qty. Rate (`) Amount (`) Qty. Rate (`) Amount (`) Amount (`)
East 500 10 5,000 400 20 8,000 13,000
West 700 10 7,000 600 20 12,000 19,000
Total 1,200 - 12,000 1,000 - 20,000 32,000

2. Statement Showing Sales Budget for 2014-15

Division Product X Product Y Total
Qty. Rate (`) Amount (`) Qty. Rate (`) Amount (`) Amount (`)
East 400 9 3,600 300 21 6,300 9,900
West 600 9 5,400 500 21 10,500 15,900
Total 1,000 - 9,000 800 - 16,800 25,800

3. Statement Showing Actual Sales for 2014-15

Division Product X Product Y Total
Qty. Rate (`) Amount (`) Qty. Rate (`) Amount (`) Amount (`)
East 500 9 4,500 200 21 4,200 8,700
West 700 9 6,300 400 21 8,400 14,700
Total 1,200 - 10,800 600 - 12,600 23,400

Working notes:
Calculation of budgeted sales of product X for 15 -16 in units
East division = (400 units + 10%) + 60 units = 500 units
West division = (600 units + 5%) + 70 units = 700 units

Calculation of budgeted sales of product Y for 15 -16 in units

East division = (300 units + 20%) + 40 units = 400 units
West division = (500 units + 10%) + 50 units = 600 units

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

PYQ 4
You are given the following data of a manufacturing concern:
Variable expenses (at 50% capacity)
Materials 48,00,000
Labour 51,20,000
Others 7,60,000

Semi variable expenses (at 50% capacity)

Maintenance and repairs 5,00,000
Indirect labour 19,80,000
Sales department salaries 5,80,000
Sundry administrative expenses 5,20,000

Fixed expenses
Wages and salaries 16,80,000
Rent, rates and taxes 11,20,000
Depreciation 14,00,000
Sundry administrative expenses 17,80,000
The fixed expenses remain constant for all levels of production. Semi variable expenses remain constant
between 45% and 65% of capacity whereas it increases by 10% between 65% and 80% capacity of 20%
between 80% and 100 % capacity.

Sales at various levels are as under:

At 75% capacity `2,40,00,000
At 100% capacity `3,20,00,000

You are required to prepare flexible budget at 75% and 100% capacity.
[(8 Marks) May 2017]

Answer
Flexible Budget
Capacity Levels
Particulars
50% (`) 75% (`) 100% (`)
(A) Sales - 2,40,00,000 3,20,00,000

(B) Variable Expenses:

Material 48,00,000 72,00,000 96,00,000
Labour 51,20,000 76,80,000 1,02,40,000
Others 7,60,000 11,40,000 15,20,000
Total (B) 1,06,80,000 1,60,20,000 2,13,60,000
(C) Semi Variable Expenses
Maintenance and repairs 5,00,000 5,50,000 6,00,000
Indirect labour 19,80,000 21,78,000 23,76,000
Sales department salaries 5,80,000 6,38,000 6,96,000
Sundry administrative expenses 5,20,000 5,72,000 6,24,000
Total (C) 35,80,000 39,38,000 42,96,000

(D) Fixed Cost:

Wages and salaries 16,80,000 16,80,000 16,80,000
Rent, rates and taxes 11,20,000 11,20,000 11,20,000
Depreciation 14,00,000 14,00,000 14,00,000
Sundry administrative expenses 17,80,000 17,80,000 17,80,000

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

Total (D) 59,80,000 59,80,000 59,80,000

Total Cost (B + C + D) 2,02,40,000 2,59,38,000 3,16,36,000
Net Profit (A - D) - (19,38,000) 3,64,000

PYQ 5
AB manufacturing company manufactures two products A and B. both products use a common raw materials
‘C’. The raw material ‘C’ is purchased at the rate of `45 per kg. from the market. The company has made
estimates for the year ended 31st March, 2018 (the budgeted period) as under:

Product A Product B

Sales in units 36,000 16,700

Finished goods stock increased by year end in units 860 400
Post-production rejection rate (%) 3 5
Material ‘C’ per computed unit, net of wastage 4 kg 5 kg
Material ‘C’ wastage in % 5 4

Additional information available is as under:

 Usage of raw material ‘C’ is expected to be at constant rate over the period.
 Annual cost of holding one unit of raw material “C” in stock is 9% of the material cost.
 The cost of placing an order is 250 per order.

You are required to:

(a) Prepare functional budgets for the year ended 31st March, 2018 under the following categories:
i. Production budget for product A and B in units.
ii. Purchase budget for raw material ‘C’ in kg and value.
(b) Calculate economic order quantity (EOQ) in kg for raw material ‘C’.
[(8 Marks) Nov 2018]

Answer
(a) (i) Production Budget for the year (in Quantity)
Particulars (in units) Product A Product B
Sales (in units) 36,000 16,700
Add: Increase in Closing Stock 860 400
Budgeted Production after rejection 36,860 17,100
Add: Post rejection @ 3%/5% 1,140 900
[(36,860÷97%) × 3%] [(36,860÷95%) × 5%]
Budgeted Production before rejection 38,000 18,000

(a) (ii) Raw Material Purchase ‘C’

Particulars Product A Product B
Budgeted Production in units 38,000 18,000
Raw Material Consumption for one unit 4 kg 5 kg
Materials to be Purchased net of wastage 1,52,000 90,000
Add: Wastage @ 5%/4% 8,000 3,750
[(1,52,000÷95%) × 5%] [(90,000÷96%) × 4%]
Materials to be Purchased 1,60,000 93,750
Materials to be Purchased in kg (1,60,000 + 93,750) 2,53,750
Materials to be Purchased in value @ `45 of 2,53,750 `1,14,18,750

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

2AO 2 × 2,53,750 × 250

(b) Economic order quantity = = = 5,597 kgs
C 45 × 9%

PYQ 6
An electronic gadget manufacture was prepared sales budget for the next few months. In this respect,
following figures are available:

Month : January February March April May

Sales (units) : 5,000 6,000 7,000 7,500 8,000

To manufacture an electronic gadget, a standard cost of `1,500 is incurred and it is sold through dealers at
an uniform price `2,000 per gadget to customers. Dealers are given a discount of 15% on selling.

Apart from other materials, two units of batteries are required to manufacture a gadget. The company
wants to hold stock of batteries at the end of each month to cover 30% of next month’s production and to
hold stock of manufactured gadget to cover 25% of the next month’s sale.

3,250 units of batteries and 1,200 units of manufactured gadgets were in stock on 1st January.

Required:
(1) Prepare production budget (in units) for the month of January, February, March and April.

(2) Prepare purchase budget for batteries (in units) for the month of January, February and March and
calculate profit for the quarter ending on March.
[(10 Marks) Nov 2018]

Answer
(a) Production Budget in Units
Particulars January February March April
Budgeted Sales (in units) 5,000 6,000 7,000 7,500
Add: Desired Closing Stock 1,500 1,750 1,875 2,000
(25% of sales of next month)
Less: Opening Stock (1,200) (1,500) (1,750) (1,875)
Budgeted Production (in Gadget) 5,300 6,250 7,125 7,625

(b) Raw Material Purchase Budget in Batteries

Particulars January February March April
Consumption of batteries @ unit per gadget 10,600 12,500 14,250 15,250
(5,300 × 2) (6,250 × 2) (7,125 × 2) (7,625 × 2)
Add: Desired Closing Stock 3,750 4,275 4,575 -
(30% of consumption of next month)
Less: Opening Stock (3,250) (3,750) (4,275) -
Budgeted Purchase (in Batteries) 11,100 13,025 14,550 -

Statement Showing Profit

Particulars January February March Total
Number of units sold 5,000 6,000 7,000 18,000
Sales @ `2,000 per Gadget 1,00,00,000 1,20,00,000 1,40,00,000 3,60,00,000
Less: Discount @ 15% of sales (15,00,000) (18,00,000) (21,00,000) (54,00,000)
Less: Standard cost @ `1,500 per Gadget (75,00,000) (90,00,000) (1,05,00,000) (2,70,00,000)
Profit 10,00,000 12,00,000 14,00,000 36,00,000

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

PYQ 7
PJ Ltd manufactures hockey sticks. It sells the products at `500 each and makes a profit of `125 on each stick.
The company is producing 5,000 sticks annually by using 50% of its machinery capacity.

The cost of each stick is as under:

Direct Material `150
Direct Wages `50
Works Overheads `125 (50% fixed)
Selling Expenses `50 (25% variable)

The anticipation for the next year is that cost will go up as under:
Fixed Charges 10%
Direct Wages 20%
Direct Material 5%

There will not be any change in selling price. There is an additional order for 2,000 sticks in the next year.

Calculate the lowest price that can be quoted so that the company can earn the same profit as it
earned in the current year?
[(10 Marks) Nov 2019]

Answer
Statement Showing Lowest Sale Price
Particulars Amount (`)
Direct Material (7,000 units × `150 × 105%) 11,02,500
Direct Wages (7,000 units × `50 × 120%) 4,20,000
Works Overheads:
Variable (7,000 units × `125 × 50%) 4,37,500
Fixed (5,000 units × `125 × 50% × 110%) 3,43,750
Selling Expenses:
Variable (7,000 units × `50 × 25%) 87,500
Fixed (5,000 units × `50 × 75% × 110%) 2,06,250

Total Cost 25,97,500

Add: Target Profit (5,000 units × `125) 6,25,000
Total Sales Value 32,22,500
Less: Sale Value of 5,000 units (5,000 units × `500) (25,00,000)
Sales Value of 2,000 units of additional offer 7,22,500
÷ Number of units ÷2,000
Lowest Sale Price `361.25

PYQ 8
G Ltd. manufacturers a single product for which market demand exist for an additional quantity. Present
sales are of `6,00,000 utilises only 60% capacity of the plant.

The following data are available:

(1) Selling price `100 per unit
(2) Variable cost `30 per unit
(3) Semi variable cost `60,000 fixed + `5 per unit
(4) Fixed cost `1,00,000 at present level, estimated to increase by
25% at and above 80% capacity.

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

You are required to prepare a flexible budget so as to arrive at the operating profit at 60%, 80%
and 100% levels.
[(5 Marks) Nov 2020]

Answer
Flexible Budget
Particulars 60% 80% 100%
Sales units 6,000 8,000 10,000
Sales @ `100 per unit 6,00,000 8,00,000 10,00,000
Variable Cost @ `30 per unit 1,80,000 2,40,000 3,00,000
Semi Variable Cost:
Variable @ `5 per unit 30,000 40,000 50,000
Fixed 60,000 60,000 60,000
Fixed Cost 1,00,000 1,25,000 1,25,000
Total Cost 3,70,000 4,65,000 5,35,000
Operating Profit (Sales – Total Cost) 2,30,000 3,35,000 4,65,000

PYQ 9
PSV Ltd. manufactures and sells a single product and estimated the following related information for the
period November, 2020 to March, 2021.
Particulars Nov, 2020 Dec, 2020 Jan, 2021 Feb, 2021 March, 2021
Op. stock of FG (in units) 7,500 3,000 9,000 8,000 6,000
Sales (in units) 30,000 35,000 38,000 25,000 40,000
Selling price per unit (in `) 10 12 15 15 20

Additional information:
 Closing stock of finished goods at the end of March, 2021 is 10,000 units.
 Each unit of finished output requires 2 kg of Raw Material ‘A’ and 3 kg of Raw Material ‘B’.

You are required to prepare the following budgets for the period November, 2020 to March, 2021
on monthly basis:

(1) Sales Budget (in `)

(2) Production budget (in units) and
(3) Raw material budget for raw material ‘A’ and ‘B’ separately (in units).
[(10 Marks) July 2021]

Answer
(1) Sales Budget (in `)
Particulars Nov. Dec. Jan. Feb. March
Sales (in units) 30,000 35,000 38,000 25,000 40,000
Selling price per unit (in `) 10 12 15 15 20
Sales Value (in `) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000

(2) Production Budget (in units)

Particulars Nov. Dec. Jan. Feb. March
Sales 30,000 35,000 38,000 25,000 40,000
Add: Closing Finished Goods 3,000 9,000 8,000 6,000 10,000
Less: Opening Finished Goods (7,500) (3,000) (9,000) (8,000) (6,000)
Production Budget (in units) 25,500 41,000 37,000 23,000 44,000

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

(3) Raw Material ‘A’ Budget (in units)

Particulars Nov. Dec. Jan. Feb. March
Units Produced 25,500 41,000 37,000 23,000 44,000
Raw material for 1 unit in Kg 2 2 2 2 2
Raw Material Consumption 51,000 82,000 74,000 46,000 88,000

Raw Material ‘B’ Budget (in units)

Particulars Nov. Dec. Jan. Feb. March
Units Produced 25,500 41,000 37,000 23,000 44,000
Raw material for 1 unit in Kg 3 3 3 3 3
Raw Material Consumption 76,500 1,23,000 1,11,000 69,000 1,32,000

PYQ 10
The Accountant of KPMR Ltd. has prepared the following budget for the coming year 2022 for its two
products ‘AYE’ and ‘ZYE’:
Product ‘AYE’ Product ‘ZYE’
Production & Sales units 4,000 3,000
Selling price per unit `200 `180
Direct Material per unit `80 `70
Direct Labour per unit `40 `35
Variable overhead per unit `20 `25
Fixed overhead per unit `10 `10

After reviewing the above budget, the management has called the marketing team for suggesting some
measures for increasing the sales. The marketing team has suggested that by promoting the products on
social media, the sales quantity of both the products can be increased by 5%. Also, the selling price per unit
will go up by 10%. But this will result in increase in expenditure on variable overhead and fixed overhead
by 20% and 5% respectively for both the products.

You are required to prepare flexible budget for both the products:
(a) Before promotion on social media,
(b) After promotion on social media.
[(5 Marks) Dec 2021]

Answer
(a) Flexible Budget before Promotion on Social Media
Product ‘AYE’ (4,000 units) Product ‘ZYE’ (3,000 units)
Particulars
Per unit Total Per unit Total
Sales 200.00 8,00,000 180.00 5,40,000
Direct Materials cost 80.00 3,20,000 70.00 2,10,000
Direct Labour cost 40.00 1,60,000 35.00 1,05,000
Variable overhead 20.00 80,000 25.00 75,000
Fixed overhead 10.00 40,000 10.00 30,000
Total cost 150.00 6,00,000 140.00 4,20,000
Profit 50.00 2,00,000 40.00 1,20,000

(b) Flexible Budget After Promotion on Social Media

Product ‘AYE’ (4,200 units) Product ‘ZYE’ (3,150 units)
Particulars
Per unit Total Per unit Total
Sales 220.00 9,24,000 198.00 6,23,700
Direct Materials cost 80.00 3,36,000 70.00 2,20,500

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

Direct Labour cost 40.00 1,68,000 35.00 1,10,250

Variable overhead 24.00 1,00,800 30.00 94,500
Fixed OH (40,000 + 5%)/(30,000 + 5%) 10.00 42,000 10.00 31,500
Total cost 154.00 6,46,800 145.00 4,56,750
Profit 66.00 2,77,200 53.00 1,66,950

PYQ 11
SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23 commencing on
1st April 2022, production will be constrained by direct labour. It is estimated that only 12,000 hours of direct
labour hours will be available in each month.
For market reasons, production of either of the two garments must be at least 25% of the production
of the other. Estimated cost and revenue per garment are as follows:
Particulars Shirt (`) Short (`)
Sales price 60 44
Raw materials:
Fabric @ 12 per meter 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed overhead @ 4 per hour 4 2
Profit 18 22

From the month of July 2022 direct labour will no longer be a constraint. The company expects to be able to
sell 15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock at the beginning of July
2022.

Sales volumes are expected to grow at 10% per month cumulatively thereafter throughout the year.
Following additional information is available:

 The company intends to carry stock of finished garments sufficient to meet 40% of the next month's
sale from July 2022 onwards.
 The estimated selling price will be same as above.
Required:
(1) Calculate the number of shirts and shorts to be produced per month in the first quarter of financial
year 2022-2023 to maximize company's profit.
(2) Prepare the following budgets on a monthly basis for July, August and September 2022:
(a) Sales budget showing sales units and sales revenue for each product.
(b) Production budget (in units) for each product.
[(10 Marks) May 2022]

Answer
(1) Calculation of the number of shirts and shorts to be produced per month:

(a) Contribution per labour hour:

Particulars Shirt (`) Short (`)
Sales price per unit 60 44
Less: Variable cost per unit:
Raw materials (24 + 6) & (12 + 4) 30 16
Direct labour 8 4
Contribution per unit 22 24
÷ Labour hour per unit (8 ÷ 8) & (4 ÷ 8) ÷1 ÷0.5
Contribution per labour hour 22 48

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 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

(b) Production plan for the first three months:

Since, Shorts has the higher Contribution per labour hour, it will be made first. Shirts will be 25% of Shorts.

Let the Quantity of Shorts be X and Shirts will be 0.25 X, then

(Qty. of Shorts × labour hour p.u.) + (Qty. of Shirts × labour hour p.u.) = Total labour hours
(X × 0.5 hour) + (0.25X × 1 hour) = 12,000 hours
0.5X + 0.25X = 12,000
X = 12,000 ÷ 0.75 = 16,000 units of Shorts
Therefore, for Shirts = 25% of 16,000 units = 4,000 units

Production per month for the first quarter will be Shorts 16,000 units & Shirts 4,000 units.

(2) (a) Sales Budget for the month of July, August & September 2022
July 2022 August 2022 September 2022
Particulars
Shirts Shorts Shirts Shorts Shirts Shorts
Sales demand (units) 15,000 20,000 16,500 22,000 18,150 24,200
Selling price per unit 60 44 60 44 60 44
Sales Revenue (`) 9,00,000 8,80,000 9,90,000 9,68,000 10,89,000 10,64,800

(2) (b) Production budget for the month of July, August & September 2022
July 2022 August 2022 September 2022
Particulars
Shirts Shorts Shirts Shorts Shirts Shorts
Sales demand (units) 15,000 20,000 16,500 22,000 18,150 24,200
Add: Closing stock 6,600 8,800 7,260 9,680 7,986 10,648
(40% of next month)
Less: Opening stock - - (6,600) (8,800) (7,260) (9,680)
Production (units) 21,600 28,800 17,160 22,880 18,876 25,168
Working Note: Sales demand for October 2022:
Shirts = 18,150 + 10% = 19,965
Shorts = 24,200 + 10% = 26,620

PYQ 12
A Limited has furnished the following information for the months from 1st January to 30th April, 2023:
January February March April
Number of Working days 25 24 26 25
Production (in units) per Working day 50 55 60 52
Raw Material Purchases (% by weight to 21% 26% 30% 23%
total of 4 months)
Purchase price of raw material (per kg) `10 `12 `13 `11

Quantity of raw material per unit of product : 4 kg.

Opening stock of raw material on 1st January : 6,020 kg. (Cost `63, 210)
Closing stock of raw material on 30th April : 5,100 kg.

All the purchases of material are made at the start of each month.

Required:
(a) Calculate the consumption of raw materials (in kgs) month-by-month and in total.
(b) Calculate the month-wise quantity and value of raw materials purchased.

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 BUDGETS & BUDGETARY CONTROL CHAPTER 11

(c) Prepare the priced stores ledger for each month using the FIFO method.
[(10 Marks) May 2023]

Answer
(a) Raw Material Consumption Budget in Kgs
Particulars January February March April Total
No. of working days 25 24 26 25 -
Production in units per day 50 55 60 52 -
Monthly production in units 1,250 1,320 1,560 1,300 5,430
Raw Material Consumption @ 4 kg p.u. 5,000 5,280 6,240 5,200 21,720

(b) Raw Material Purchase Budget in Quantity and Value

Particulars January February March April
Raw Material Purchases (%) 21% 26% 30% 23%
Purchase in kgs (20,800 kgs × % of purchase) 4,368 kgs 5,408 Kgs 6,240 kgs 4,784 kgs
Purchase price per kg `10 `12 `13 `11
Purchase in Value `43,680 `64,896 `81,120 `52,624

Working note:

Total Purchase of Raw Material (January to April) = Consumption + Closing Stock –Opening Stock
= 21,720 + 5,100 – 6,020
= 20,800 Kgs.

(c) Stores Ledger (FIFO Method)

Receipts Issues Balance
Months
Kgs Rate Value Kgs Rate Value Kgs Rate Value
Opening 6,020 10.5 63,210
January 4,368 10 43,680 5,000 10.5 52,500 1,020 10.5 10,710
4,368 10 43,680
February 5,408 12 64,896 1,020 10.5 10,720 108 10 1,080
4,260 10 42,600 5,408 12 64,896
March 6,240 13 81,120 108 10 1,080 5,516 13 71,708
5,408 12 64,896
724 13 9,412
April 4,784 11 52,624 5,200 13 67,600 316 13 4,108
4,784 11 52,624

PYQ 13
PQR Limited manufactures three products – X, Product Y and Product Z. The output for the current year is
2,50,000 units of Product X, 2,80,000 units of Product Y and 3,20,000 units of Product Z respectively.

Selling price of Product X is 1.25 times of Product Z whereas Product Y can be sold at double the price at
which product Z can be sold. Product Z can be sold at a profit of 20% on its marginal cost.

Other information are as follows:

Product X Product Y Product Z

Direct Materials Cost (per unit) `20 `20 `20
Direct Wages Cost (per unit) `16 `24 `16

Raw materials used for manufacturing all the three products is the same. Direct Wages are paid @ `4 per

11.28
 CHAPTER 11 BUDGETS & BUDGETARY CONTROL

labour hour. Total overhead cost of the company is `52,80,000 for the year, out of which `1 per labour is
variable and the rest is fixed.

In the next year it is expected that sales of product X and product Z will increase by 12% and 15%
respectively and sale of product Y will decline by 5%. The total overhead cost of the company for the next
year is estimated at `55,08,000. The variable cost of `1 per labour hour remains unchanged. It is anticipated
that all other costs will remain same for the next year and there is no opening and closing stock. Selling Price
per unit of each product will remain unchanged in the next year.

Prepare a budget showing the current position and the position for the next year clearly
indicating the total product-wise contribution and profit for the company as a whole.
[(10 Marks) May 2023]

Answer
(1) Statement Showing Product-wise Contribution and Profit for the Company (Current Position)
Particulars Product X Product Y Product Z Total
Sales (Units) 2,50,000 2,80,000 3,20,000 8,50,000
Sales value @ `60, `96 and `48 per unit 1,50,00,000 2,68,80,000 1,53,60,000 5,72,40,000
Direct materials @ `20 per unit 50,00,000 56,00,000 64,00,000 1,70,00,000
Direct wages @ `16, `24 and `16 per unit 40,00,000 67,20,000 51,20,000 1,58,40,000
Variable overheads @ `1 per hour 10,00,000 16,80,000 12,80,000 39,60,000
Marginal cost 1,00,00,000 1,40,00,000 1,28,00,000 3,68,00,000
Contribution 50,00,000 1,28,80,000 25,60,000 2,04,40,000
Less: Fixed overheads 13,20,000
Profit 1,91,20,000

(2) Statement Showing Product-wise Contribution and Profit for the Company (Next Year)
Particulars Product X Product Y Product Z Total
Sales (Units) 2,80,000 2,66,000 3,68,000 9,14,000
Sales value @ `60, `96 and `48 per unit 1,68,00,000 2,55,36,000 1,76,64,000 6,00,00,000
Direct materials @ `20 per unit 56,00,000 53,20,000 73,60,000 1,82,80,000
Direct wages @ `16, `24 and `16 per unit 44,80,000 63,84,000 58,88,000 1,67,52,000
Variable overheads @ `1 per hour 11,20,000 15,96,000 14,72,000 41,88,000
Marginal cost 1,12,00,000 1,33,00,000 1,47,20,000 3,92,20,000
Contribution 56,00,000 1,22,36,000 29,44,000 2,07,80,000
Less: Fixed overheads 13,20,000
Profit 1,94,60,000

Working note:

(a) Labour hours (Current) = 2,50,000 units × 16/4 + 2,80,000 units × 24/4 + 3,20,000 units
×16/4
= 10,00,000 hours + 16,80,000 hours + 12,80,000 hours
= 39,60,000 hours

(b) Fixed OH (Current) = Total OH – Variable OH

= `52,80,000 – 39,60,000 hours × `1 = `13,20,000

(c) Sale price of Product Z = Marginal cost p.u. + 20%

= (`20 + `16 + 4 hours × `1) + 20% = `48 per unit

(d) Sale price of Product X = 1.25 times of `48 = `60 per unit

11.29
 BUDGETS & BUDGETARY CONTROL CHAPTER 11

(e) Sale price of Product Y = 2 times of `48 = `96 per unit

(f) Labour hours (Next year) = 2,80,000 units × 4H + 2,66,000 units × 6H + 3,68,000 units × 4H
= 11,20,000 hours + 15,96,000 hours + 14,72,000 hours
= 41,88,000 hours

(g) Fixed OH (Next year) = Total OH – Variable OH

= `55,08,000 – 41,88,000 hours × `1 = `13,20,000

SUGGESTED REVISION FOR EXAM:

BQ: 3, 4, 5, 7, 8, 9, 10, 12, 14, 15

PYQ: 8, 9, 11, 13

11.30
 CHAPTER 12 STANDARD COSTING

CHAPTER 12 STANDARD COSTING

MATERIAL COST VARIANCE

BQ 1
The standard and actual figures of product ‘Z’ are as under:
Standard Actual
Material quantity 50 units 45 units
Material price per unit `1.00 `0.80
Calculate material cost variance.

Answer
(i) Material Price Variance = Actual Quantity (Standard Price – Actual Price)
= 45 units (`1.00 - `0.80) = `9 F

(ii) Material Usage Variance = Standard Price (Standard Quantity – Actual Quantity)
= `1.00 (50 units - 45 units) = `5 F

(iii) Material Cost Variance = Standard cost – Actual cost

= `50 - `36 = `14 F

(a) Standard cost = Standard Quantity × Standard Price

= 50 units × `1.00 = `50.00

(b) Actual cost = Actual Quantity × Actual Price

= 45 units × `0.80 = `36.00

BQ 2
NXE Manufacturing Concern furnishes the following information:
Standard: Material for 70 kg finished products 100 kg.
Price of material `1 per kg.
Actual: Output 2,10,000 kg.
Material used 2,80,000 kg.
Cost of Materials `2,52,000
Calculate:
(a) Material usage variance,
(b) Material price variance,
(c) Material cost variance.

Answer
(a) Material Usage Variance = SP × (SQ – AQ)
= `1.00 × (3,00,000 – 2,80,000) = `20,000 F

(b) Material Price Variance = AQ × (SP – AP)

= 2,80,000 × (`1.00 - `0.90) = `28,000 F

(c) Material Cost Variance = (SQ × SP) – (AQ × AP)

= (3,00,000×1) – (2,80,000×0.90) = `48,000 F

12.1
 STANDARD COSTING CHAPTER 12

Working notes:
100 kgs
1. SQ of input for actual output = 2,10,000 kg × = 3,00,000 kgs
70 kgs

2. Actual Price (AP) = `2,52,000 ÷ 2,80,000 kg = `0.90 per kg.

BQ 3
The standard cost of a chemical mixture is as follows:
40% material A at `20 per kg.
60% material B at `30 per kg.
A standard loss of 10% of input is expected in production. The cost records for a period showed the following
usage:
90 kg material A at a cost of `18 per kg.
110 kg material B at a cost of `34 per kg.
The quantity produced was 182 kg. of good product.

Calculate (1) Material Price Variance, (2) Material Usage variance and (3) Material Cost variance.

Answer
1. Material Price Variance = (AQ × SP) – (AQ × AP)
= `5,100 - `5,360 = `260 A

2. Material Usage Variance = (SQ × SP) – (AQ × SP)

= `5,257.78 – `5,100 = `157.78 F

3. Material Cost Variance = (SQ × SP) – (AQ × AP)

= `5,257.78 – `5,360 = `102.22 A

Working notes:
(a) Analysis Table
Materials SQ × SP AQ × SP AQ × AP
A 80.88 kg × `20 90 kg × `20 90 kg × `18
B 121.33 kg × `30 110 kg × `30 110 kg × `34
Total `5,257.78 `5,100 `5,360

(b) SQ of input for actual output = 182 kg ÷ 90% = 202.22 kgs

Materials A = 202.22 kgs × 40% = 80.88 kgs
Materials B = 202.22 kgs × 60% = 121.33 kgs

BQ 4
For making 10 kg. of CEMCO, the standard material requirements is:
Materials Quantity (kg) Rate per kg. (`)
A 8 6.00
B 4 4.00

During April, 1,000 kg of CEMCO were produced. The actual consumption of materials is as under:
Materials Quantity (kg) Rate per kg. (`)
A 750 7.00
B 500 5.00

12.2
 CHAPTER 12 STANDARD COSTING

Calculate:
(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Usage Variance.

Answer
(a) Material Cost Variance = (SQ × SP) – (AQ × AP)
= `6,400 – `7,750 = `1,350 A

(b) Material Price Variance = (AQ × SP) – (AQ × AP)

= `6,500 - `7,750 = `1,250 A

(c) Material Usage Variance = (SQ × SP) – (AQ × SP)

= `6,400 – `6,500 = `100 A
Working notes:
1. Basic calculation
Materials SQ × SP AQ × SP AQ × AP
A 800 kg × `6 750 kg × `6 750 kg × `7
B 400 kg × `4 500 kg × `4 500 kg × `5
Total `6,400 `6,500 `7,750

2. SQ of input for actual output:

Materials A = (8 kg ÷ 10 kg) × 1,000 kg = 800 kgs
Materials B = (4 kg ÷ 10 kg) × 1,000 kg = 400 kgs

BQ 5
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 `5,000
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
2,460 `52,225
Calculate all material variances.

Answer
1. Material Cost Variance = (SQ × SP) – (AQ × AP)
= `50,000 – `52,225 = `2,225 A
2. Material Price Variance = (AQ × SP) – (AQ × AP)
= `50,350 - `52,225 = `1,875 A
3. Material Usage Variance = (SQ × SP) – (AQ × SP)
= `50,000 – `50,350 = `350 A
4. Material Mix Variance = (RSQ × SP) – (AQ × SP)
= `51,250 – `50,350 = `900 F
5. Material Yield Variance = (SQ × SP) – (RSQ × SP)
= `50,000 – `51,250 = `1,250 A

12.3
 STANDARD COSTING CHAPTER 12

Working notes:
a. Basic Calculation
Materials SQ × SP RSQ × SP AQ × SP AQ × AP
X 600 × `15.00 615 × `15.00 640 × `15.00 640 × `17.50
Y 800 × `20.00 820 × `20.00 950 × `20.00 950 × `18.00
Z 1,000 × `25.00 1,025 × `25.00 870 × `25.00 870 × `27.50
Total `50,000 `51,250 `50,350 `52,225

b. SQ of input for actual output:

Materials X = 60 units × 10 units of FG = 600 units
Materials Y = 80 units × 10 units of FG = 800 units
Materials Z = 100 units × 10 units of FG = 1,000 units

c. RSQ (Revised Standard Quantity)of actual input:

Materials X = 2,460 units × 60/240 = 615 units
Materials Y = 2,460 units × 80/240 = 820 units
Materials Z = 2,460 units × 100/240 = 1,025 units

BQ 6
A company manufactures a particular product the standard direct materials cost of which is `10 per unit.
The following is obtained from the costing records:
(a) Standard:
Material Quantity Rate Amount
A 70 10.00 700.00
B 30 5.00 150.00
100 850.00
Loss: (15%) 15 NIL
85 850.00
(b) Actual result:
Material Quantity Rate Amount
A 400 11.00 4,400.00
B 200 6.00 1,200.00
600 5,600.00
Loss: 60 NIL
540 5,600.00
Compute:
(i) Material Price Variance; (ii) Material Mix Variance;
(iii) Material Yield Variance; (iv) Material Usage Variance; and
(v) Total Material Cost Variance.
[(i) 600 A (ii) 100 F (iii) 300 F (iv) 400 F (v) 200 A]

BQ 7
The standard cost of a chemical mixture is as follows:

60% of Material A @ `50 per kg

40% of Material B @ `60 per kg

A standard loss of 25% on output is expected in production. The cost records for a period has shown the
following usage:
540 kg of Material A @ `60 per kg
260 kg of Material B @ `50 per kg

12.4
 CHAPTER 12 STANDARD COSTING

The quantity processed was 680 kilograms of good product.

From the above given information calculate:

(1) Material Cost Variance
(2) Material Price Variance
(3) Material Usage Variance
(4) Material Mix Variance
(5) Material Yield Variance

Answer
(1) Material Cost Variance = (SQ × SP) – (AQ × AP)
= `45,900 – `45,400 = `500 F

(2) Material Price Variance = (AQ × SP) – (AQ × AP)

= `42,600 - `45,400 = `2,800 A

(3) Material Usage Variance = (SQ × SP) – (AQ × SP)

= `45,900 – `42,600 = `3,300 F

(4) Material Mix Variance = (RSQ × SP) – (AQ × SP)

= `43,200 – `42,600 = `600 F
(5) Material Yield Variance = (SQ × SP) – (RSQ × SP)
= `45,900 – `43,200 = `2,700 F

Working notes:
(a) Basic Calculation
Materials SQ × SP RSQ × SP AQ × SP AQ × AP
A 510 × `50 480 × `50 540 × `50 540 × `60
B 340 × `60 320 × `60 260 × `60 260 × `50
Total `45,900 `43,200 `42,600 `45,400

(b) SQ of input for actual output:

Input – Loss = Output
Input – 25% Output = Output
Input = 125% Output
Input of Raw Material = 125% × 680 kgs of Good Product = 850 kgs

Materials A = 850 kgs × 60% = 510 kgs

Materials B = 850 kgs × 40% = 340 kgs

(c) RSQ (Revised Standard Quantity)of actual input:

Materials A = 800 kgs × 60% = 480 kgs
Materials B = 800 kgs × 40% = 320 kgs

BQ 8
Vinayak Ltd. produces an article by blending two basic raw materials. It operates a standard costing system
and the following standards have been set for raw materials:

Materials Mix Standard price per kg

A 40% `4.00
B 60% `3.00

12.5
 STANDARD COSTING CHAPTER 12

The standard loss in processing is 15%. During April, 2023, the company produced 1,700 kg of
finished output and the position of stock and purchased for the month of April, 2023 is as under:
Material Stock on 01.04.23 Stock on 30.04.23 Purchased during April’ 23
kg Cost (`)
A 35 kgs 5 kgs 800 3,400
B 40 kgs 50 kgs 1,200 3,000

Calculate material variances (Price variance on the basis of consumption).

[MPV 376.25 F, MMV 22 A, MYV 68 A, MUV 90 A, MCV 286.25 F]

BQ 9
J.K. Ltd. manufactures NXE by mixing three raw materials. For every batch of 100 kg. of NXE, 125 kg. of raw
materials are used. In April, 60 batches were prepared to produce an output of 5,600 kg. of NXE. The standard
and actual particulars for April, are as follows:
Standard Actual Materials
Materials Mix Price per kg Mix Price per kg Purchased
% (`) % (`) (kg)
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate all variances.

Answer
1. Material Price Variance = (AQP × SP) – (AQP × AP)
(Based on purchase) = `1,26,000 - `1,28,200 = `2,200 A
Or
Material Price Variance = (AQ used × SP) – (AQ used × AP)
(Based on consumption) = `1,12,500 - `1,15,500 = `3,000 A

2. Material Mix Variance = (RSQ × SP) – (AQ × SP)

= `1,05,000 – `1,12,500 = `7,500 A

3. Material Yield Variance = (SQ × SP) – (RSQ × SP)

= `98,000 – `1,05,000 = `7,000 A

4. Material Usage Variance = (SQ × SP) – (AQ × SP)

= `98,000 – `1,12,500 = `14,500 A

5. Material Cost Variance = MUV + MPV

(based on purchase) = `14,500 A + `2,200 A = `16,700 A
Or
Material Cost Variance = (SQ × SP) – (AQ × AP)
(based on consumption) = `98,000 – `1,15,500 = `17,500 A

Working notes:
a. Basic calculation
Materials SQ × SP RSQ × SP AQC × SP AQC × AP AQP × SP AQP × AP
A 3,500 × `20 3,750 × `20 4,500 × `20 4,500 × `21 5,000 × `20 5,000 × `21
B 2,100 × `10 2,250 × `10 1,500 × `10 1,500 × `8 2,000 × `10 2,000 × `8
C 1,400 × `5 1,500 × `5 1,500 × `5 1,500 × `6 1,200 × `5 1,200 × `6
Total `98,000 `1,05,000 `1,12,500 `1,15,500 `1,26,000 `1,28,200

12.6
 CHAPTER 12 STANDARD COSTING

b. Actual quantity of materials used = 125 kg × 60 batches = 7,500 kgs.

Materials A = 7,500 kgs. × 60% = 4,500 kgs.
Materials B = 7,500 kgs. × 20% = 1,500 kgs.
Materials C = 7,500 kgs. × 20% = 1,500 kgs.

c. RSQ (Revised Standard Quantity) of actual input:

Materials A = 7,500 kgs. × 50% = 3,750 kgs.
Materials B = 7,500 kgs. × 30% = 2,250 kgs.
Materials C = 7,500 kgs. × 20% = 1,500 kgs.

d. SQ of input for actual output = 5,600 kgs × 125 kg/100 kg = 7,000 kgs.
Materials A = 7,000 kgs. × 50% = 3,500 kgs.
Materials B = 7,000 kgs. × 30% = 2,100 kgs.
Materials C = 7,000 kgs. × 20% = 1,400 kgs.

BQ 10
GAP Limited operates a system of standard costing in respect of one of its products which is manufactured
within a single cost centre. Following are the details:

Budgeted data:
Material Quantity Price Amount (`)
A 60 20 1,200
B 40 30 1,200
100 2,400
Normal Loss: 20 -
Output 80 2,400

Actual data:
Material Quantity Price Amount (`)
A 70 ? ?
B ? 30 ?

Material Price Variance (A) `105A

Material Cost Variance `275A

You are required to calculate:

1. Actual Price of material A
2. Actual Quantity of material B
3. Material Price Variance
4. Material Usage Variance
5. Material Mix Variance
6. Material Sub Usage (Yield) Variance

Answer
1. Actual Price of Material A:

Material Price Variance (A) = AQ × (SP - AP) = 70 × (`20 - AP)

`105A = 1,400 – 70 AP
70 AP = `1,505

AP = `1,505 ÷ 70 = `21.50

12.7
 STANDARD COSTING CHAPTER 12

2. Actual Quantity of Material B:

Material Cost Variance = (SQ × SP) – (AQ × AP)
`275A = {(60 × 20) + (40 × 30)} – {(70 × 21.5) + (AQB × 30)}
`275A = `2,400 – `1,505 – 30 AQB
30 AQB = `1,170

AQ of Materials B = `1,170 ÷ 30 = 39 units

3. Material Price Variance = (AQ × SP) – (AQ × AP)
= `2,570 - `2,675 = `105 A

4. Material Usage Variance = (SQ × SP) – (AQ × SP)

= `2,400 – `2,570 = `170 A

5. Material Mix Variance = (RSQ × SP) – (AQ × SP)

= `2,616 – `2,570 = `46 F

6. Material Yield Variance = (SQ × SP) – (RSQ × SP)

= `2,400 – `2,616 = `216 A

Working notes:
a. Basic Calculation
Materials SQ × SP RSQ × SP AQ × SP AQ × AP
A 60 × `20 65.4 × `20 70 × `20 70 × `21.50
B 40 × `30 43.6 × `30 39 × `30 39 × `30
Total `2,400 `2,616 `2,570 `2,675

b. RSQ (Revised Standard Quantity):

Materials A = 109 units × 60/100 = 65.4 units
Materials B = 109 units × 40/100 = 43.6 units

BQ 11
Following data is extracted from the books of XYZ Ltd. for the month of January, 2023:

1. 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.

2. Actuals: 1480 kg of output produced.

Particulars Quantity (kg.) Price (`) Amount (`)

Material A 900 ? -
Material B ? 32.50 -
59,825

3. Other Information:

Material Cost Variance `3,625 (F)

Material Price Variance `175 (F)

12.8
 CHAPTER 12 STANDARD COSTING

You are required to calculate:

1. Standard Price of Material A;
2. Actual Quantity of Material B;
3. Actual Price of Material A;
4. Revised standard quantity of Material A and Material B; and
5. Material Mix Variance.

Answer
1. Material Cost Variance = (SQ × SP) – (AQ × AP)
`3,625 = (SQ × SP) – `59,825
(SQ × SP) = `63,450
(SQA × SPA) + (SQB × SPB) = `63,450
(940 kg × SPA) + (705 kg ×`30) = `63,450
(940 kg × SPA) + `21,150 = `63,450
(940 kg × SPA) = `42,300
SPA = 42,300 ÷ 940 kg
Standard Price of Material A = `45

Working notes:
(a) SQ of input for actual output = 1,480 kg ÷ 90% = 1,645 kgs
Materials A = 1,645 kgs × 8/14 = 940 kgs
Materials B = 1,645 kgs × 6/14 = 705 kgs

2. Material Price Variance (A + B) = (AQ × SP) – (AQ × AP)

`175 = (AQ × SP) – ` 59,825
(AQ × SP) = `60,000
(AQA × SPA) + (AQB × SPB) = `60,000
(900 kg × `45) + (AQB × `30) = `60,000
(AQB × `30) = `60,000 - `40,500 = `19,500
Actual Quantity of Material B = `19,500 ÷ `30 = 650 kg.

3. Actual Material Cost (A + B) = (AQ × AP) = `59,825

(AQA × APA) + (AQB × APB) = `59,825
(900 kg × APA) + (650 kg × ` 32.5) = `59,825
(900 kg × APA) + `21,125 = `59,825
(900 kg × APA) = `38,700
Actual Price of Material A = `38,700 ÷ 900 kg = `43

4. Revised Standard Quantity (RSQ) of A & B:

Materials A = (900 + 650) × 8/14 = 886 kgs
Materials B = (900 + 650) × 6/14 = 664 kgs

5. Material Mix Variance (A + B) = (RSQ × SP) – (AQ × SP)

= (886 × 45) + (664 × 30) – 60,000
= `210 A

BQ 12
One kilogram of product K requires two chemicals A and B. The following were the details of product K for
the month of June 2023:
(a) Standard mix for chemical A is 50% and chemical B is 50%.

12.9
 STANDARD COSTING CHAPTER 12

(b) Standard price kilogram of chemical A is `12 and chemical B is `15.

(c) Actual input of chemical B is 70 kilograms.
(d) Actual price per kilogram of chemical A is `15.
(e) Standard normal loss is 10% of total input.
(f) Total Material cost variance is `650 adverse.
(g) Total Material yield variance is `135 adverse.

You are required to calculate:

(1) Total Material mix variance
(2) Total Material usage variance
(3) Total Material price variance
(4) Actual loss of actual input
(5) Actual input of chemical A
(6) Actual price per kg. of chemical B

Answer
(1) Material Mix Variance = (RSQ × SP) – (AQ × SP)
= `1,485 – `1,530 = `45 A

(2) Material Usage Variance = (SQ × SP) – (AQ × SP)

= `1,350 – `1,530 = `180 A

(3) Material Price Variance = (AQ × SP) – (AQ × AP)

= `1,530 – `2,000 = `470 A

(4) Actual loss of actual input = Actual input – Actual output

= 110 kg – 90 kg = 20 Kgs

(5) Actual input of chemical A = 40 Kgs

(6) Actual Price per kg of B = `20

Working Notes:
(a) Calculation of standard mix of input (assuming Standard input as 100 kg, it will be given in
exam):
Material Quantity in Kg Rate Amount
A 50 12.00 600.00
B 50 15.00 750.00
100 1,350.00
Loss: (10%) 10 NIL
90 1,350.00

(b) Let the actual input of chemical A be X kg. and the actual price of chemical B be `Y

Given,
Material Yield Variance = (Total Standard input – Total Actual input) × Std cost p. u. of input
135 A = [100 – (70 + X)] × 13.5 (1,350 ÷ 100 kg)
-135 = (30 – X) × 13.5
-10 = 30 – X
X = 40 Kg.

Also,

12.10
 CHAPTER 12 STANDARD COSTING

Material Cost Variance = (SQ × SP) – (AQ × AP)

650 A = 1,350 – {(40 × 15) + (70 × Y)}
- 650 = 1,350 – 600 – 70 Y
- 650 – 750 = 70 Y
Y = `20

(c) Basic Calculation

Materials SQ × SP RSQ × SP AQ × SP AQ × AP
A 50 × `12 55 × `12 40 × `12 40 × `15
B 50 × `15 55 × `15 70 × `15 70 × `20
Total `1,350 `1,485 `1,530 `2,000

(d) RSQ (Revised Standard Quantity):

Materials A = 110 units × 50/100 = 55 units
Materials B = 110 units × 50/100 = 55 units

LABOUR COST VARIANCE

BQ 13
The following details are available from the records of ABC Ltd. engaged in manufacturing article A of the
week ended 28th February:

The standard labour hours and rates of payment per article were as following:
Category of workers Hours Rate per hour Total
Skilled labour 10 `3.00 `30.00
Semi-skilled labour 8 `1.50 `12.00
Unskilled labour 16 `1.00 `16.00
Total 34 - `58.00

The actual production was 1,000 articles A for which the actual hours worked and rates are given below:
Category of workers Hours Rate per hour Total
Skilled labour 9,000 `4.00 `36,000
Semi-skilled labour 8,400 `1.50 `12,600
Unskilled labour 20,000 `0.90 `18,000
Total 37,400 - `66,600

From the above set of data, you are asked to calculate:

(i) Labour Cost Variance; (ii) Labour Rate Variance; (iii) Labour Efficiency; (iv) Labour Mix Variance and
(v) Labour Yield Variance.
[(i) 8,600 A (ii) 7,000 A (iii) 1,600 A (iv) 4,200 F (v) 5,800 A]

BQ 14
The standard labour employment and the actual labour engaged in a week for a job are as under:

Skilled Semi-Skilled Unskilled

Particulars
Workers Workers Workers
Standard number of workers in the gang 32 12 6
Standard wage rate per hour (`) 3.00 2.00 1.00
Actual number of workers in the gang 28 18 4
Actual wage rate per hour (`) 4.00 3.00 2.00

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During the 40 hours working week, the gang produced 1,800 standard labour hours of work.

Calculate the various labour variances.

[LRV 2,000 A, LMV 80 F, LYV 504 A, LEV 424 A, LCV 2,424 A]

BQ 15
The standard and actual figures of a firm are as under:

Standard time for the job 1,000 hours

Standard rate per hour `0.50
Actual time taken 900 hours
Actual wages paid `360
Compute the variances

Answer
1. Labour Rate Variance = (AH × SR) – (AH × AR)
= (900 × `0.50) – `360 = `90 F

2. Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (1,000 × `0.50) – (900 × `0.50) = `50 F

3. Labour Cost Variance = (SH × SR) – (AH × AR)

= (1,000 × `0.50) – `360 = `140 F

BQ 16
NPX Ltd. uses standard costing system for manufacturing of its product X. Following is the budget data given
in relation to labour hours for manufacture of 1 unit of Product X:
Labour Hours Rate (`)
Skilled 2 6
Semi-Skilled 3 4
Un-Skilled 5 3
Total 10 -

In the month of January, 2023, total 10,000 units were produced following are the details:
Labour Hours Rate (`) Amount (`)
Skilled 18,000 7 1,26,000
Semi-Skilled 33,000 3.5 1,15,500
Un-Skilled 58,000 4 2,32,000
Total 1,09,000 - 4,73,500

Actual Idle hours (abnormal) during the month:

Skilled 500
Semi-Skilled 700
Un-skilled 800
Total 2,000

Calculate:
(a) Labour Variances.
(b) Also show the effect on Labour Rate Variance if 5,000 hours of Skilled Labour are paid @ `5.5 per hour
and balance were paid @ `7 per hour.

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 CHAPTER 12 STANDARD COSTING

Answer
(a) Calculation of Labour Variances:

Labour Cost Variance = (SH × SR) – (AH × AR)

= `3,90,000 - `4,73,500 = `83,500 A

Labour Rate Variance = (AH × SR) – (AH × AR)

= `4,14,000 – `4,73,500 = `59,500 A

Labour Efficiency Variance = (SH × SR) – (AHW × SR)

= `3,90,000 – `4,05,800 = `15,800 A

Labour Mix Variance = (RSH × SR) – (AHW × SR)

= `4,17,300 – `4,05,800 = `11,500 F

Labour Yield Variance = (SH × SR) – (RSH × SR)

= `3,90,000 – `4,17,300 = `27,300 A

Labour Idle Variance = (AHW × SR) – (AH × SR)

= `4,05,800 – `4,14,000 = `8,200 A

(b) Labour Rate Variance revised:

Labour rate Variance = (AH × SR) – (AH × AR)

Skilled = (18,000×6) – (5,000×5.5 + 13,000×7) = 10,500 A
Semi-Skilled = 33,000 × (4 – 3.5) = 16,500 F
Un-Skilled = 58,000 × (3 - 4) = 58,000 A

Total = 10,500 A + 16,500 F + 58,000 A = `52,000 A

Effect on Labour Rate Variance= Adverse effect decreased by `7,500 (`59,500A to `52,000 A)

Working notes:
1. Basic Calculation
Workers SH × SR RSH × SR AHW × SR AH × SR AH × AR
Skilled 20,000 × 6 21,400 × 6 17,500 × 6 18,000 × 6 18,000 × 7
Semi-Skilled 30,000 × 4 32,100 × 4 32,300 × 4 33,000 × 4 33,000 × 3.5
Un-Skilled 50,000 × 3 53,500 × 3 57,200 × 3 58,000 × 3 58,000 × 4
Total `3,90,000 `4,17,300 `4,05,800 `4,14,000 `4,73,500

2. RSH (Revised Standard Hours):

Total Actual Hours Worked = 17,500 + 32,300 + 57,200 = 1,07,000 hours

Skilled = 1,07,000 × 2/10 = 21,400 hours

Semi-Skilled = 1,07,000 × 3/10 = 32,100 hours
Un-Skilled = 1,07,000 × 5/10 = 53,500 hours

3. SH (Standard hours) for actual output 10,000 units:

Skilled = 10,000 × 2 = 20,000 hours

Semi-Skilled = 10,000 × 3 = 30,000 hours
Un-Skilled = 10,000 × 5 = 50,000 hours

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 STANDARD COSTING CHAPTER 12

BQ 17
The standard output of a Product 'D' is 50 units per hour in manufacturing department of a Company
employing 100 workers. In a 40 hours week, the department produced 1,920 units of product 'D' despite 5%
of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were `12.40, `12.00
and `11.40 respectively to Group 'A' consisting 10 workers, Group 'B' consisting 30 workers and Group 'C'
consisting 60 workers. The standard wage rate per labour is same for all the workers. Labour Efficiency
Variance is given `480 (F).

You are required to compute:

(1) Total Labour Cost Variance.
(2) Total Labour Rate Variance.
(3) Total Labour Gang Variance.
(4) Total Labour Yield Variance, and
(5) Total Labour Idle Time Variance.

Answer
(1) Labour Cost Variance = (SH × SR) – (AH × AR)
= `46,080 - `46,720 = `640 A

(2) Labour Rate Variance = (AH × SR) – (AH × AR)

= `48,000 – `46,720 = `1,280 F

(3) Labour Gang Variance = (RSH × SR) – (AHW × SR)

= `45,600 – `45,600 = Nil

(4) Labour Yield Variance = (SH × SR) – (RSH × SR)

= `46,080 – `45,600 = `480 F

(5) Labour Idle Variance = (AHW × SR) – (AH × SR)

= `45,600 – `48,000 = `2,400 A

Working notes:
(a) Basic Calculation
Workers SH × SR RSH × SR AHW × SR AH × SR AH × AR
Group A 384 × 12 380 × 12 380 × 12 10×40×12 10×40×12.40
Group B 1,152 × 12 1,140 × 12 1,140 × 12 30×40×12 30×40×12.00
Group C 2,304 × 12 2,280 × 12 2,280 × 12 60×40×12 60×40×11.40

Total `46,080 `45,600 `45,600 `48,000 `46,720

(b) RSH (Revised Standard Hours) and AHW (Actual Hours Worked):
Total Actual Hours Worked = (100 workers × 40 hours) – 5% abnormal idle time
= 3,800 hours
Group A = 3,800 × 10/100 = 380 hours
Group B = 3,800 × 30/100 = 1,140 hours
Group C = 3,800 × 60/100 = 2,280 hours

(c) SH (Standard hours) for actual output 1,920 units:

Total standard hours = (100 workers × 1 hour ÷ 50 units) × 1,920 units
= 3,840 hours
Group A = 3,840 × 10/100 = 384 hours

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 CHAPTER 12 STANDARD COSTING

Group B = 3,840 × 30/100 = 1,152 hours

Group C = 3,840 × 60/100 = 2,304 hours

(d) Standard wages rate (SR):

Labour Efficiency Variance = (SH - AHW) × SR
480 F = (3,840 – 3,800) × SR
SR = 480 ÷ 40 = `12 per hour

OVERHEAD VARIANCE

BQ 18
The following data for Pijee Ltd. is given:
Particulars Budgeted Actual
Production in units 400 360
Man hours to produce above 8,000 7,000
Variable overheads `10,000 `9,150

The standard time to produce one unit of the product is 20 hours.

Calculate relevant Variable overhead variances.

Answer
(i) Variable Overhead Cost variance = (SH × SR) - (AH × AR)
= (360 × 20 hours × `1.25) - `9,150 = 150 A

(ii) Variable OH Expenditure Variance = (AH × SR) - (AH × AR)

= (7,000 × `1.25) - `9,150 = 400 A

(iii) Variable OH Efficiency Variance = (SH × SR) - (AH × SR)

= (360 × 20 hours × `1.25) - (7,000 × `1.25)= 250 F
Working Notes:

(a) Standard Rate (SR) = Budgeted Variable Overheads ÷ Budgeted Hours

= `10,000 ÷ 8,000 hours = `1.25 per hour

BQ 19
From the following information of G Ltd., Calculate (i) Variable Overhead Cost Variance; (ii) Variable
Overhead Expenditure Variance and (iii) Variable Overhead Efficiency Variance:
Budgeted production 6,000 units
Budgeted variable overhead `1,20,000
Standard time for one unit of output 2 hours
Actual production 5,900 units
Actual overhead incurred `1,22,000
Actual hours worked 11,600 hours

Answer
(i) Variable Overhead Cost variance = (SH × SR) - (AH × AR)
= (11,800 × `10) - `1,22,000 = 4,000 A

(ii) Variable OH Expenditure Variance = (AH × SR) - (AH × AR)

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 STANDARD COSTING CHAPTER 12

= (11,600 × `10) - `1,22,000 = 6,000 A

(iii) Variable OH Efficiency Variance = (SH × SR) - (AH × SR)

= (11,800 × `10) - (11,600 × `10) = 2,000 F
Working Notes:
(a) Standard Hours (SH) = 5,900 units × 2 hours per unit = 11,800 hours

(b) Standard Rate (SR) = Budgeted Variable Overheads ÷ Budgeted Hours

= `1,20,000 ÷ 6,000 units × 2 hours = `10 per hour

BQ 20
The cost detail of J&G Ltd. for the month of September, 2023 is as follows:
Particulars Budgeted Actual
Fixed overhead `15,00,000 `15,60,000
Units of production 7,500 7,800
Standard time for one unit 2 hours -
Actual hours worked - 16,000 hours

Required:
Calculate (i) Fixed Overhead Cost Variance (ii) Fixed Overhead Expenditure Variance (iii) Fixed Overhead
Volume Variance (iv) Fixed Overhead Efficiency Variance and (v) Fixed Overhead Capacity Variance.

Answer
(1) Fixed Overhead Cost Variance = Recovered Fixed OH – Actual Fixed OH
15,00 ,000
= × 7 ,800 – `15,60,000 = Nil
7,500

(2) Fixed OH Expenditure Variance = Budgeted Fixed OH – Actual Fixed OH

= `15,00,000 – `15,60,000 = 60,000 A

(3) Fixed OH Volume Variance = Recovered Fixed OH – Budgeted Fixed OH

15,00 ,000
= × 7 ,800 – `15,00,000 = 60,000 F
7,500

(4) Fixed OH Efficiency Variance = Recovered Fixed OH – Recovered Fixed OH for AH

= SH × SR – AH × SR
15,00 ,000 15 ,00 ,000
= × 7 ,800 – × 16 ,000
7,500 7,500 × 2
= `15,60,000 - `16,00,000 = 40,000 A

(5) Fixed OH Capacity Variance = Recovered Fixed OH for AH - Budgeted Fixed OH

= `16,00,000 - `15,00,000 = 1,00,000 F

BQ 21
Following information is available from the records of a factory:
Particulars Budget Actual
Fixed overhead for June, 2017 `10,000 `12,000
Production in June, 2017 (units) 2,000 2,100
Standard time per unit (hours) 10 -
Actual hours worked in June - 22,000

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 CHAPTER 12 STANDARD COSTING

Compute: (i) Fixed Overhead Cost Variance, (ii) Expenditure Variance, (iii) Volume Variance.

Answer
(i) Fixed Overhead Variance = Absorbed Overheads – Actual Overheads
= (2,100 units × 10 hours × `0.50*) – 12,000
= 10,500 – 12,000 = 1,500 A

(ii) Fixed OH Expenditure Variance = Budgeted Overheads - Actual Overheads

= 10,000 - 12,000 = 2,000 A

(iii) Fixed OH Volume Variance = Absorbed Overheads – Budgeted Overheads

= 10,500 – 10,000 = 500 F

Budgeted OH
*Standard Rate (SH) per hour =
Budgeted Hours
10 ,000
= = `0.50
2,000 Units  10 Hours per unit

BQ 22
S.V. Ltd. has furnished the following data:
Particulars Budget Actual, May’ 23
No. of working days 25 27
Production in units 20,000 22,000
Fixed Overheads (`) 30,000 31,000

Budgeted fixed overhead rate is `1.00 per hour. In May’ 23, the actual hours worked were 31,500.

Calculate the following variances in relation to fixed overheads:

(i) Efficiency Variance (ii) Capacity Variance (iii) Calendar Variance
(iv) Expenditure Variance (v) Volume Variance (vi) Total OH Variance.
[(i) 1,500 F (ii) 900 A (iii) 2,400 F (iv) 1,000 A (v) 3,000 F (vi) 2,000 F]

BQ 23
A company has a normal capacity of 120 machines, working 8 hours per day of 25 days in a month. The fixed
overheads are budgeted at `1,44,000 per month. The standard time required to manufacture one unit of
product is 4 hours.
In April, the company worked 24 days of 840 machine hours per day and produced 5,305 units of
output. The actual fixed overheads were `1,42,000.

Compute: (i) Expense Variance; (ii) Volume Variance and (iii) Total Fixed Overheads Variance

Answer
(i) Fixed OH Expenditure Variance = (BH × SR) - (AH × AR)
= 1,44,000 - 1,42,000 = 2,000 F

(ii) Total Volume Variance = (SH × SR) – (BH × SR)

= (5,305 units × 4 hours × `6*) – 1,44,000
= 1,27,320 – 1,44,000 = 16,680 A

(iii) Fixed overhead variance = (SH × SR) - (AH × AR)

= 1,27,320 – 1,42,000 = 14,680 A

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 STANDARD COSTING CHAPTER 12

Budgeted OH
*Standard Rate (SH) per hour =
Budgeted Hours
1 ,44 ,000
= = `6/hour
120 Machines  8 Hours  25 Days

BQ 24
The following data has been collected from the cost records of a unit for computing the various fixed
overhead variances for a period.
Number of budgeted working days 25
Budgeted man-hours per day 6,000
Output (budgeted) per man-hour (in units) 1
Fixed overhead cost as budgeted `1,50,000
Actual number of working days 27
Actual man-hours per day 6,300
Actual output per man-hour (in units) 0.9
Actual fixed overhead incurred `1,56,000
Calculate the following variances:
(i) Efficiency Variance (ii) Capacity Variance (iii) Calendar Variance
(iv) Expenses Variance (v) Volume Variance (vi) Total Fixed OH
Variance
[(i) 17,010 A (ii) 8,100 F (iii) 12,000 F (iv) 6,000 A (v) 3,090 F (vi) 2,910 A]

BQ 25
The following information was obtained from the records of a manufacturing unit using standard costing
system.
Particulars Budget Actual, March’ 23
Production in units 4,000 3,800
No. of working days 20 21
Fixed Overheads `40,000 `39,000
Variable Overheads `12,000 `12,000
You are required to calculate the following overhead variance:
(a) Variable Overhead Variance
(b) Fixed Overheads Variances:
(i) Expenditure Variance (ii) Volume Variance (iii) Overhead Variance
[(a) 600 A (b)(i) 1,000 F (ii) 2,000 A (iii) 1,000 A]
BQ 26
XYZ Ltd. is having standard costing system in operation for quite some time. The following data relating to
the month of April, is available from the cost records:
Particulars Budget Actual
Output (in units) 30,000 32,500
Operating hours 30,000 33,000
Fixed Overheads (`) 45,000 50,000
Variable Overheads (`) 60,000 68,000
Working Days 25 26

Calculate overheads variances.

[FOH Variances: Cost 1,250 A, Exp. 5,000 A, Vol. 3,750 F, Cal. 1,800 F, Cap. 2,700 F, Eff. 750 A and VOH
Variances: Cost 3,000 A, Expenditure 2,000 A, Efficiency 1,000 A]

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 CHAPTER 12 STANDARD COSTING

BQ 27
XYZ Company has established the following standards for factory overheads:

Variable overheads per unit : `10

Fixed overheads per month : `1,00,000
Capacity of the plant : 20,000 units per month.

The actual data for the month are as follows:

Actual overheads incurred : `3,00,000
Actual output (units) : `15,000 units

Calculate overhead variances:

(i) Production Volume Variance
(ii) Overhead Expense Variance

Answer
(i) Production or Overhead volume variance (only for fixed overhead)
Fixed Overhead Volume Variance = Absorbed Overhead – Budgeted Overhead
= (`5* × 15,000 units) – (`5 × 20,000 units)
= `75,000 - `1,00,000
= `25,000 A

*Standard fixed overhead per unit = `1,00,000 ÷ 20,000 units = `5 per unit

(ii) Overhead Expense Variance:

Variable Overhead = Standard Variable OH – Actual Variable OH
= (15,000 units × `10) – (15,000 units × `10)
= Nil
Fixed Overhead = Budgeted Overhead – Actual Overhead
= `1,00,000 – (Total overhead – Variable overhead)
= `1,00,000 – (`3,00,000 - `10 ×15,000 units)
= `1,00,000 – `1,50,000 = `50,000 A

Assumption: Budgeted variable overheads per unit and actual variable overheads per unit are same.

BQ 28
The overhead expense budget for a factory producing to a capacity of 200 units per month is as follows:
Fixed cost Variable cost per Total cost
Description of overhead
per unit in ` unit in ` per unit in `
Power and fuel 1,000 500 1,500
Repair and maintenance 500 250 750
Printing and stationary 500 250 750
Other overheads 1,000 500 1,500
Total `3,000 `1,500 `4,500

The factory has actually produced only 100 units in a particular month. Details of overheads actually incurred
have been provided by the accounts department are as follows:
Description of overhead Actual cost
Power and fuel `4,00,000

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 STANDARD COSTING CHAPTER 12

Repair and maintenance `2,00,000

Printing and stationary `1,75,000
Other overheads `3,75,000
You are required to compute the production volume variance and the overhead expenses variance.

Answer
(i) Production or Overhead volume variance (only for fixed overhead)

Fixed Overhead Volume Variance = Absorbed Overhead – Budgeted Overhead

= (`3,000 × 100 units) – (`3,000 × 200 units)
= `3,00,000 - `6,00,000 = `3,00,000 A

(ii) Overhead Expense Variance:

Variable Overhead = Standard Variable OH – Actual Variable OH

= (100 units × `1,500) – (100 units × `1,500)
= Nil

Fixed Overhead = Budgeted Overhead – Actual Overhead

= `6,00,000 – (Total overhead – Variable overhead)
= `6,00,000 – (`11,50,000 - `1,500 ×100 units)
= `6,00,000 – `1,50,000 = `4,00,000 A

Assumption: Budgeted variable overheads per unit and actual variable overheads per unit are same.

COMBINED VARIANCE

BQ 29
The following standards have been set to manufacture a product:
Direct Material: 2 units of A @ `4 per unit `8.00
3 units of B @ `3 per unit `9.00
15 units of C @ `1 per unit `15.00
`32.00
Direct Labour: 3 hrs @ `8 per hour `24.00
Total standard prime cost `56.00

The company manufactured and sold 6,000 units of the product during the year. Direct material costs
were 12,500 units of A at `4.40 per unit; 18,000 units of B at `2.80 per unit; and 88,500 units of C at `1.20
per unit. The company worked 17,500 direct labour hours during the year. For 2,500 of these hours, the
company paid at `12 per hour while for the remaining, the wages were paid at standard rate.

Calculate all materials and labour variances.

Answer
1. Material Price Variance = (AQ × SP) – (AQ × AP)
= `1,92,500 - `2,11,600 = `19,100 A

2. Material Mix Variance = (RSQ × SP) – (AQ × SP)

= `1,90,400 – `1,92,500 = `2,100 A

3. Material Yield Variance = (SQ × SP) – (RSQ × SP)

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 CHAPTER 12 STANDARD COSTING

= `1,92,000 – `1,90,400 = `1,600 F

4. Material Usage Variance = (SQ × SP) – (AQ × SP)

= `1,92,000 – `1,92,500 = `500 A

5. Material Cost Variance = (SQ × SP) – (AQ × AP)

= `1,92,000 – `2,11,600 = `19,600 A

6. Labour Rate Variance = (AH × SR) – (AH × AR)

= (17,500 × `8) - (2,500 × `12 + 15,000 × `8)
= `1,40,000 – `1,50,000 = `10,000 A

7. Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (6,000 × 3 hours × `8) - (17,500 × `8)
= `1,44,000 – `1,40,000 = `4,000 F

8. Labour Cost Variance = (SH × SR) – (AH × AR)

= `1,44,000 - `1,50,000 = `6,000 A

Working notes:
a. Basic calculation in respect of materials:
Materials SQ × SP RSQ × SP AQ × SP AQ × AP
A 12,000 × `4.00 11,900 × `4.00 12,500 × `4.00 12,500 × `4.40
B 18,000 × `3.00 17,850 × `3.00 18,000 × `3.00 18,000 × `2.80
C 90,000 × `1.00 89,250 × `1.00 88,500 × `1.00 88,500 × `1.20
Total `1,92,000 `1,90,400 `1,92,500 `2,11,600

b. RSQ (Revised Standard Quantity)of actual input:

Total input of materials = 12,500 + 18,000 + 88,500 = 1,19,000 units
Materials A = 1,19,000 × 2/20 = 11,900 units
Materials B = 1,19,000 × 3/20 = 17,850 units
Materials C = 1,19,000 × 15/20 = 89,250 units

c. SQ of input for actual output:

Materials A = 6,000 units × 2 units = 12,000 units
Materials B = 6,000 units × 3 units = 18,000 units
Materials C = 6,000 units × 15 units = 90,000 units

BQ 30
The following information is available from the cost records of Novell & Co. for the month of March 2023:
Materials purchased 20,000 units @ `88,000
Materials consumed 19,000 units
Actual wages paid for 4,950 hrs `24,750
Units produced 1,800 units

Standard rates and pieces are:

Direct material `4 per unit
Standard output 10 number for one unit
Direct labour rate `4.00 per hour
Standard requirement 2.5 hours per unit

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 STANDARD COSTING CHAPTER 12

You are required to calculate relevant material (based on consumption) and labour variance for
the month.

Answer
(a) Material Cost Variance = (SQ × SP) – (AQ × AP)
= (1,800 units × 10 units × `4) – (19,000 units × `4.40*)
= `72,000 – `83,600 = `11,600 A
*Actual Purchase Price (AP) = `88,000 ÷ 20,000 units = `4.40

(b) Material Price Variance = (SP – AP) × AQ

= (`4.00 - `4.40) × 19,000 units = `7,600 A

(c) Material Usage Variance = (SQ × SP) – (AQ × SP)

= (1,800 units × 10 units × `4) – (19,000 units × `4.00)
= `72,000 – `76,000 = `4,000 A

(d) Labour Cost Variance = (SH × SR) – (AH × AR)

= (1,800 units × 2.5 hrs × `4) – `24,750
= `18,000 – `24,750 = `6,750 A

(e) Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (1,800 units × 2.5 hrs × `4) – (4,950 hours × `4.00)
= `18,000 – `19,800 = `1,800 A

(f) Labour Rate Variance = (SR – AR) × AH

= (`4.00 - `5.00) × 4,950 hours = `4,950 A

*Actual Rate (AR) = `24,750 ÷ 4,950 hours = `5.00

BQ 31
Paras Synthetics uses Standard costing system in manufacturing of its product ‘Star 95 Mask’. The details are
as follows;
Direct Material 0.50 Meter @ `60 per meter `30
Direct Labour 1 hour @ `20 per hour `20
Variable overhead 1 hour @ `10 per hour `10
Total `60

During the month of August, 2023 10,000 units of ‘Star 95 Mask’ were manufactured. Details are as follows:
Direct material consumed 5,700 meters @ `58 per meter
Direct labour Hours? @ ? `2,24,400
Variable overhead incurred `1,12,200

Variable overhead efficiency variance is ` 2,000 A. Variable overheads are based on Direct Labour Hours.

You are required to calculate the missing data and all the relevant Variances.

Answer
1. Material Variances:
Material Cost Variance = (SQ × SP) – (AQ × AP)
= (10,000 units × 0.5 meter × `60) – (5,700 × `58)
= `30,600 A

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 CHAPTER 12 STANDARD COSTING

Material Price Variance = (AQ × SP) – (AQ × AP)

= (5,700 × `60) – (5,700 × `58) = `11,400 F

Material Usage Variance = (SQ × SP) – (AQ × SP)

= (10,000 units × 0.5 meter × `60) - (5,700 × `60)
= `42,000 A

2. Variable Overheads Variances:

Variable OH Cost variance = (SH × SR) - (AH × AR)
= (10,000 × 1 hour × `10) – `1,12,200 = `12,200 A

Variable OH Eff. Variance = (SH × SR) - (AH × SR)

`2,000 A = (10,000 × 1 hour × `10) - (AH × `10)
`2,000 A = `1,00,000 – 10 AH

Actual Hours = `1,02,000 ÷ `10 = 10,200 hours

Variable OH Exp. Variance = (AH × SR) - (AH × AR)
= (10,200 × `10) - `1,12,200 = 10,200 A

3. Labour Variances:
Labour Rate Variance = (AH × SR) – (AH × AR)
= (10,200 hours × `20) – `2,24,400 = `20,400 A

Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (10,000 units × 1 hour × `20) – (10,200 hours × `20)
= `4,000 A

Labour Cost Variance = (SH × SR) – (AH × AR)

= (10,000 units × 1 hour × `20) – `2,24,400
= `24,400 A

Actual Labour rate = Actual Labour Cost ÷ AH

= `2,24,400 ÷ 10,200 hours = `22

BUDGET RELATED

BQ 32
TQM Ltd. has furnished the following information for the month ending 30th June, 2007:
Master Budget Actual Variance
Units produced and sold 80,000 72,000
Sales (`) 3,20,000 2,80,000 40,000 (A)
Direct material (`) 80,000 73,600 6,400 (F)
Direct wages (`) 1,20,000 1,04,800 15,200 (F)
Variable overhead (`) 40,000 37,600 2,400 (F)
Fixed overhead (`) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200

The Standard costs of the products are as follows:

Direct materials (1 kg at the rate of `1 per kg) `1.00

12.23
 STANDARD COSTING CHAPTER 12

Direct wages (1 hour at the rate of `1.50) `1.50

Variable overhead (1 hour at the rate of `0.50) `0.50

Actual results for the month showed that 78,400 kg of material were used and 70,400 labour hours were
recorded.

Required:
(i) Prepare Flexible budget for the month and compare with actual results.
(ii) Calculate Material, Labour, Sales Price, Variable overhead and Fixed overhead expenditure variances
and Sales Volume (Profit) variance.

Answer
(i) Flexible Budget
Particulars Budget for 72,000 units Actual for 72,000 units Difference
Direct Materials 72,000 73,600 1,600 A
Direct Labour 1,08,000 1,04,800 3,200 F
Variable OH 36,000 37,600 1,600 A
Fixed OH 40,000 39,200 800 F
Total cost 2,56,000 2,55,200 800 F
Sales 2,88,000 2,80,000 8,000 A
Profit 32,000 24,800 7,200 A

(ii) Calculation of Various Variance:

(a) Material Variance :

Material Price Variance = (AQ × SP) - (AQ × AP)
= (78,400 kg × `1.00) – 73,600 (given) = 4,800 F
Material Usage Variance = (SQ × SP) - (AQ × SP)
= (72,000 kg × `1.00) – (78,400 kg × `1.00) = 6,400 A
Material Cost Variance = (SQ × SP) – (AQ × AP)
= 72,000 - 73,600 = 1,600 A

(b) Labour Variance :

Labour Rate Variance = (AH × SR) – (AH × AR)
= (70,400 hours × `1.5) - 1,04,800 (given) = 800 F
Labour Efficiency Variance = (SH × SR) – (AH × SR)
= (72,000 hours × `1.5) – (70,400 hours × `1.5) = 2,400 F
Labour Cost Variance = (SH × SR) – (AH × AR)
= (72,000 hours × `1.5) - 1,04,800 = 3,200 F

(c) Overhead Expenditure Variance :

Variable OH Exp. Variance = (AH × SR) – (AH × AR)
= (70,400 hours × `0.50) – 37,600 (given) = 2,400 A
Fixed OH Exp. Variance = Budgeted Fixed OH – Actual Fixed OH
= 40,000 - 39,200 (given) = 800 F

(d) Sales Variance :

Sales Price Variance = (AQ × Standard Sales Price) – (AQ × Actual Sales Price)

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 CHAPTER 12 STANDARD COSTING

= (72,000 units × `4) – 2,80,000(given) = 8,000 A

Sales Vol. (Profit) Variance = Standard Profit per unit (BQ – AQ)
= `0.50 × (80,000 – 72,000) = 4,000 A

BQ 33
Following data is available for DKG and Co:

Standard working hours 8 hours per day of 5 days per week

Maximum capacity 50 employees
Actual working 40 employees
Actual hours expected to be worked per four week 6,400 hours
Standard hours expected to be earned per four weeks 8,000 hours
Actual hours worked in the four week period 6,000 hours
Standard hours earned in the four week period 7,000 hours.

The related period is of 4 weeks. In this period there was a one special day holiday due to national event.

Calculate:

(1) Efficiency Ratio,

(2) Activity Ratio,
(3) Calendar Ratio,
(4) Standard Capacity Usage Ratio,
(5) Actual Capacity Usage Ratio,
(6) Actual Usage of Budgeted Capacity Ratio.

Answer
Maximum Capacity in a budget period = 50 Employees × 8 Hours × 5 Days × 4 Weeks = 8,000 Hours

Budgeted Hours = 40 Employees × 8 Hours × 5 Days × 4 Weeks = 6,400 Hours

Actual Hours = 6,000 Hours (given)

Standard Hours for Actual Output = 7,000 Hours

Budget Number of Days = 20 Days (4 Weeks x 5 Days)

Actual Number of Days = 20 – 1 = 19 Days

S tan dard Hours 7 ,000 Hours

(1) Efficiency Ratio = × 100 = × 100
Actual Hours 6 ,000 Hours
= 116.67%

S tan dard Hours 7 ,000 Hours

(2) Activity Ratio = × 100 = × 100
Budgeted Hours 6 ,400 Hours
= 109.375%

Available Working Days 19 Days

(3) Calendar Ratio = =
Budgeted Working Days 20 Days
= 95%

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 STANDARD COSTING CHAPTER 12

Budgeted Hours
(4) Standard Capacity Usage Ratio = × 100
Max . Possible Hours in Budget Period
6 ,400 Hours
= × 100 = 80%
8 ,000 Hours

Actual Hours Worked

(5) Actual Capacity Usage Ratio = × 100
Max . Possible Working Hours in a Period
6 ,000 Hours
= × 100 = 75%
8 ,000 Hours

(6) Actual Usage of Budgeted Capacity Ratio

Actual Working Hours

= × 100
Budgeted Hours
6 ,000 Hours
= × 100 = 93.75%
6 ,400 Hours

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 CHAPTER 12 STANDARD COSTING

PAST YEAR QUESTIONS

PYQ 1
SJ Ltd. has furnished the following information:

Standard overhead absorption rate per unit `20

Standard rate per hour `4
Budgeted production 12,000 units
Actual production 15,560 units
Actual overheads were `2,95,000 (`62,500 fixed)
Actual hours 74,000

Overheads are based on the following flexible budget:

Production (units) 8,000 10,000 14,000

Total Overheads (`) 1,80,000 2,10,000 2,70,000

You are required to calculate the following overhead variances (on hour’s basis) with appropriate
workings:
(i) Variable overhead efficiency and expenditure variance.
(ii) Fixed overhead efficiency and capacity variance.
[(8 Marks) May 2012/2015]

Answer
(i) Variable Overhead Efficiency = (SH × SR) - (AH × SR)
= 2,33,400 - 2,22,000 = 11,400 F

Variable Expenditure Variable = (AH × SR) - (AH × AR)

= 2,22,000 - 2,35,500 = 10,500 A

(ii) Fixed Overhead Efficiency = (SH × SR) - (AH × SR)

= 77,800 – 74,000 = 3,800 F

Fixed OH Capacity Variance = (AH × SR) - (BH × SR)

= 74,000 - 60,000 = 14,000 F
Working Notes:
For variable overheads:
SH × SR = 15,560 units × 5 hours per unit × `3 per hour
= 2,33,400
AH × SR = 74,000 hours × `3 per hour = 2,22,000
AH × AR = 2,95,000 - 62,500 = 2,32,500
For fixed overheads:
SH × SR = 15,560 units × 5 hours × `1 per hour = 77,800
AH × SR = 74,000 × `1 per hour = 74,000
BH × BR = 12,000 units × 5 hours per unit × `1 per hour
= 60,000
Standard OH (variable + fixed) = `20 per unit

12.27
 STANDARD COSTING CHAPTER 12

S tan dard overhead per unit 20.00

Standard hours per unit = =
S tan dard rate per hour 4.00
= 5 hours per unit
Difference in exp ense 2,10 ,000  1,80 ,000
Budgeted variable cost per unit = =
Difference in units 10 ,000  8 ,000
= `15.00 per unit
15 .00
Standard variable overhead per hour = = `3 per hour
5 hours

Standard fixed overhead per hour = Total Standard OH per hour – Standard Variable OH
per hour
= 4.00 - 3.00 = `1 per hour

PYQ 2
XYZ Co. Ltd. provides the following information:
Particulars Standard Actual
Production in units 4,000 3,800
Working Days 20 21
Fixed Overhead `40,000 `39,000
Variable Overhead `12,000 `12,000

You are required to calculate the following overhead variance:

(a) Variable Overhead Variance
(b) Fixed Overheads Variances
(i) Expenditure Variance
(ii) Volume Variance
[(8 Marks) May 2014]

Answer
(a) Variable Overhead Variance = Standard Variable OH for 3,800 units – Actual Variable OH
= (Actual production × SR) – 12,000
= (3,800 units × 3) – 12,000 = 600 A

(b) Fixed Overhead Variances:

(i) Expenditure Variance = Budgeted Fixed OH – Actual Fixed OH

= 40,000 – 39,000 = 1,000 F

(ii) Volume Variance = (Actual Production - Budgeted Production) × SR

= (3,800 – 4,000) × 10 = 2,000 A

Working Notes:
Budgeted Variable OH 12 ,000
1. Standard rate of Variable OH = = = `3 p.u.
Budgeted Pr oduction 4 ,000 Units

Budgeted Fixed OH 40 ,000

2. Standard rate of Fixed OH = = = `10 p.u.
Budgeted Pr oduction 4 ,000 Units

PYQ 3
The following information has been provided by a company:

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 CHAPTER 12 STANDARD COSTING

No of units produced and sold 6,000 units

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
[(8 Marks) June 2015]

Answer
(i) Actual labour rate per hour:
Labour rate variance = (AH × SR) - (AH × AR) = 68,376 A
= (17,094 × 8) – (17,094 × AR) = 68,376 A
17,094 AH = 1,36,752 + 68,376
AH = 2,05,128 ÷ 17,094 = `12 per hour

(ii) Standard hours required for 6,000 units

Labour efficiency ratio = SH ÷ AH
105.3% = SH ÷ 17,094
SH = 17,094 × 105.3% = 18,000 hours

(iii) Labour efficiency variance:

Labour efficiency variance = (SH × SR) - (AH × SH)
= (18,000 × 8) – (17,094 × 8) = 7,248 F

(iv) Standard labour cost per unit:

Standard labour cost per unit = (SH × SR) ÷ No of units
= (18,000 × 8) ÷ 6,000 units = `24 per unit

(v) Standard labour cost per unit:

Actual labour cost per unit = (AH × AR) ÷ No of units
= (17,094 × 12) ÷ 6,000 units = `34.188/unit

PYQ 4
The following information available from the cost records of a company for the month of July’ 2016:

(1) Materials purchased 22,000 pieces `90,000

(2) Materials consumed 21,000 pieces
(3) Actual wages paid for 5,150 hours `25,750
(4) Fixed Factory overhead incurred `46,000
(5) Fixed Factory overhead budgeted `42,000
(6) Units produced 1,900
(7) Standard rates and prices are:
Direct material `4.50 per piece
Standard input 10 pieces per unit

12.29
 STANDARD COSTING CHAPTER 12

Direct labour rate `6 per hour

Standard requirement 2.5 hour per unit
Overheads `8 per labour hour

You are required to calculate the following variances:

(a) Material price variance
(b) Material usage variance
(c) Labour rate variance
(d) Labour efficiency variance
(e) Fixed overhead expenditure variance
(f) Fixed overhead efficiency variance
(g) Fixed overhead capacity variance.
[(8 Marks) Nov 2016]
Answer
(a) Material Price Variance = (AQ purchased × SP) – (AQ purchased × AP)
(based on purchase/single plan) = (22,000 × `4.5) – `90,000 = 9,000 F

(b) Material Usage Variance = (SQ × SP) - (AQ × SP)

= (1,900 × 10 × `4.5) - (21,000 × `4.5)
= `85,500 – `94,500 = 9,000 A

(c) Labour Rate Variance = (AH × SR) – (AH × AR)

= (5,150 × `6) - `25,750 = 5,150 F

(d) Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (1,900 × 2.5 × `6) - (5,150 × `6) = 2,400 A

(e) Fixed OH Expenditure Variance = Budgeted Fixed OH – Actual Fixed OH

= `42,000 – `46,000 = 4,000 A

(f) Fixed OH Efficiency Variance = (SH × SR) – (AH × SR)

= (1,900 × 2.5 × `8) – (5,150 × `8)= 3,200 A

(g) Fixed OH Capacity Variance = (AH × SR) – (BH × SR)

= (5,150 × `8) – `42,000 = 800 A

PYQ 5
AB Ltd. has furnished the following data:

Particulars Budget Actual, July’16

No. of working days 25 27
Production in units 20,000 22,000
Fixed Overheads (`) 30,000 31,000

Budgeted fixed overhead rate is `1.00 per hour. In July’16, the actual hours worked were 31,500.

Calculate the following variances in relation to fixed overheads:

(a) Efficiency Variance (b) Capacity Variance (c) Calendar Variance

(d) Volume Variance (e) Expenditure Variance.
[(5 Marks) May 2017]

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 CHAPTER 12 STANDARD COSTING

Answer
(a) Fixed OH Efficiency Variance = (SH × SR) – (AH × SR)
= (33,000 × `1) – (31,500 × `1) = 1,500 F

(b) Fixed OH Capacity Variance = (AH × SR) – (CH × SR)

= (31,500 × `1) – (32,400 × `1) = 900 A

(c) Fixed OH Calendar Variance = (CH × SR) – (BH × SR)

= (32,400 × `1) – `30,000 = 2,400 F

(d) Fixed OH Volume Variance = (SH × SR) – (BH × SR)

= (33,000 × `1) – `30,000 = 3,000 F

(e) Fixed OH Expenditure Variance = (BH × SR) – (AH × AR)

= `30,000 – `31,000 = 1,000 A

Working notes:
Budgeted hours (BH) = `30,000 ÷ `1 per hour = 30,000 hours
Standard hour per unit = 30,000 hours ÷ 20,000 units = 1.5 hour
Standard hour for actual output (SH) = 22,000 units × 1.5 hours = 33,000 hours
Calendar hours (CH) = (30,000 hours × 27/25 days) = 32,400 hours

PYQ 6
XYZ Limited produces an article and uses a mixture of material X and Y. The standard quantity and price of
materials for one unit of output as under:
Materials Quantity Price (`)
X 2,000 kg 1.00 per kg
Y 800 kg 1.50 per kg

During a period, 1,500 units were produced. The actual consumption of materials and prices are given below:
Materials Quantity Price (`)
X 31,00,000 kg 1.10 per kg
Y 12,50,000 kg 1.60 per kg

Calculate:
(1) Standard cost for actual output;
(2) Material Cost Variance;
(3) Material Price Variance;
(4) Material Usage Variance.
[(8 Marks) Nov 2017]

Answer
(1) Standard cost for actual output = Std. cost of materials X and Y for 1,500 units of output
= SQ × SP = `48,00,000

(2) Material Cost Variance = (SQ × SP) – (AQ × AP)

= `48,00,000 – `54,10,000 = `6,10,000 A

(3) Material Price Variance = (AQ × SP) – (AQ × AP)

= `49,75,000 - `54,10,000 = `4,35,000 A

(4) Material Usage Variance = (SQ × SP) – (AQ × SP)

12.31
 STANDARD COSTING CHAPTER 12

= `48,00,000 – `49,75,000 = `1,75,000 A

Working notes:
1. Basic calculation
Materials SQ × SP RQ × SP AQ × SP AQ × AP
X 30,00,000 × `1.00 31,07,143 × `1.00 31,00,000 × `1.00 31,00,000 × `1.10
Y 12,00,000 × `1.50 12,42,857 × `1.50 12,50,000 × `1.50 12,50,000 × `1.60
Total `48,00,000 `49,71,429 `49,75,000 `54,10,000

2. SQ of input for actual output:

Materials X = 1,500 units × 2,000 kg = 30,00,000 kgs
Materials Y = 1,500 units × 800 kg = 12,00,000 kgs

3. RQ (Revised Quantity) of actual input:

Materials X = (31,00,000 + 12,50,000) × 20/28 = 31,07,143 kgs
Materials Y = (31,00,000 + 12,50,000) × 8/28 = 12,42,857 kgs

PYQ 7
A company planned to produce 2,000 units of a product in a week of 40 hours by employing 65 skilled
workers. Other relevant information are as follows:

 Standard wage rate : `45 per hour

 Actual production : 1,800 units
 Actual number of workers employed : 50 workers in a week of 40 hours
 Actual wage rate : `50 per hour
 Abnormal time loss : due to machine breakdown 100 hours

You are required to calculate:

(1) Labour cost, rate, idle time and efficiency variances.
(2) Reconcile the variances.
[(5 Marks) May 2018]

Answer
(1) Labour Cost Variance = (SH × SR) – (AH × AR)
65 × 40
= × 1 ,800 × `45 – (50 × 40 × `50)= 5,300 F
2,000

Labour Rate Variance = (AH × SR) – (AH × AR)

= (50 × 40 × `45) - (50 × 40 × `50) = 10,000 A

Labour Efficiency Variance = (SH × SR) – (AHW × SR)

= (2,340 × `45) - (1,900 × `45) = 19,800 F

Labour Idle Time Variance = (AHW × SR) – (AH × SR)

= (1,900 × `45) - (2,000 × `45) = 4,500 A

(2) Reconciliation :
Labour Cost Variance = LRV + LEV + Idle time variance
= 10,000 A + 19,800 F + 4,500 A = 5,300 F

12.32
 CHAPTER 12 STANDARD COSTING

PYQ 8
Beta ltd. is manufacture Product N. This is manufactured by mixing two materials namely Material P and
Material Q. The standard cost of mixture is as under:
Material P : 150 ltrs. @ `40 per ltr.
Material Q : 100 ltrs. @ `60 per ltr.
Standard loss expected : 20% of total input during production

The cost records for the period exhibit following consumption:

Material P : 140 ltrs. @ `42 per ltr.
Material Q : 110 ltrs. @ `56 per ltr.
Quantity produced : 195 ltrs.

Calculate:
(1) Material Cost Variance
(2) Material Usage Variance
(3) Material Price Variance
[(5 Marks) May 2018]
Answer
(1) Material Cost Variance = (SQ × SP) – (AQ × AP)
= `11,700 – `12,040 = 340 A
(2) Material Usage Variance = (SQ × SP) - (AQ × SP)
= `11,700 – `12,200 = 500 A

(3) Material Price Variance = (AQ × SP) – (AQ × AP)

= `12,200 – `12,040 = 160 F

Working notes:
Analysis Table
Materials SQ × SP AQ × SP AQ × AP
P 146.25 ltrs. × `40 140 ltrs. × `40 140 ltrs. × `42
Q 97.50 ltrs. × `60 110 ltrs. × `60 110 ltrs. × `56
Total `11,700 `12,200 `12,040

(a) SQ of input for actual output

Total input = 195 ltrs. ÷ 80% = 243.75 ltrs.
Materials P = 243.75 ltrs. × 150/250 = 146.25 ltrs.
Materials Q = 243.75 ltrs. × 100/250 = 97.50 ltrs.

PYQ 9
A manufacturing concern has provided following information related to fixed overheads:
Particulars Standard Actual
Output in a month 5,000 4,800
Working days in a month 25 23
Fixed Overhead `5,00,000 `4,90,000

Compute:
(1) Fixed Overheads Variance
(2) Fixed Overheads Expenditure Variance
(3) Fixed Overheads Volume Variance
(4) Fixed Overheads Efficiency Variance [(5 Marks) Nov 2018]

12.33
 STANDARD COSTING CHAPTER 12

Answer
(1) Fixed Overhead Variance = Standard Fixed OH – Actual Fixed OH
5,00 ,000
= × 4 ,800 – `4,90,000 = 10,000 A
5,000

(2) Fixed OH Expenditure Variance= Budgeted Fixed OH – Actual Fixed OH

= `5,00,000 – `4,90,000 = 10,000 F

(3) Fixed OH Volume Variance = Standard Fixed OH – Budgeted Fixed OH

= `4,80,000 – `5,00,000 = 20,000 A

(4) Fixed OH Efficiency Variance = Standard Fixed OH – Standard Fixed OH for AH

= SH × SR – AH × SR
5,00 ,000
= `4,80,000 –  23 Days = 20,000 F
25 Days

Note: In the absence of actual hours, we used calendar hours as actual hours in above solution.

PYQ 10
Following data is available for ABC Ltd:
Standard working hours 8 hours per day of 5 days per week
Maximum capacity 60 employees
Actual working 50 employees
Actual hours expected to be worked per four week 8,000 hours
Standard hours expected to be earned per four weeks 9,600 hours
Actual hours worked in the four week period 7,500 hours
Standard hours earned in the four week period 8,800 hours.
The related period is of 4 weeks.

Calculate the following ratios:

(1) Efficiency Ratio,
(2) Activity Ratio,
(3) Standard Capacity Usage Ratio,
(4) Actual Capacity Usage Ratio,
(5) Actual Usage of Budgeted Capacity Ratio. [(5 Marks) May 2019]

Answer
Maximum Capacity in a budget period = 60 Employees × 8 Hours × 5 Days × 4 Weeks
= 9,600 Hours
Budgeted Hours = 50 Employees × 8 Hours × 5 Days × 4 Weeks
= 8,000 Hours
Actual Hours = 7,500 Hours (given)
Standard Hours for Actual Output = 8,800 Hours

S tan dard Hours 8 ,800 Hours

(1) Efficiency Ratio = × 100 = × 100
Actual Hours 7 ,500 Hours
= 117.33%
S tan dard Hours 8 ,800 Hours
(2) Activity Ratio = × 100 = × 100
Budgeted Hours 8 ,000 Hours
= 110.00%

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 CHAPTER 12 STANDARD COSTING

Budgeted Hours
(3) Standard Capacity Usage Ratio = × 100
Max . Possible Hours in Budget Period
8 ,000 Hours
= × 100 = 83.33%
9 ,600 Hours

Actual Hours Worked

(4) Actual Capacity Usage Ratio = × 100
Max . Possible Working Hours in a Period
7 ,500 Hours
= × 100 = 78.125%
9 ,600 Hours

Actual Working Hours

(5) Actual Usage of Bgt Capacity Ratio = × 100
Budgeted Hours
7 ,500 Hours
= × 100 = 93.75%
8 ,000 Hours

PYQ 11
The standard cost of a chemical mixture is as follows:

60% of Material A @ `50 per kg

40% of Material B @ `60 per kg

A standard loss of 25% on output is expected in production. The cost records for a period has shown the
following usage:
540 kg of Material A @ `60 per kg
260 kg of Material B @ `50 per kg

The quantity processed was 680 kilograms of good product.

From the above given information calculate:

(1) Material Cost Variance
(2) Material Price Variance
(3) Material Usage Variance
(4) Material Mix Variance
(5) Material Yield Variance
[(10 Marks) Nov 2019]

Answer
(1) Material Cost Variance = (SQ × SP) – (AQ × AP)
= `45,900 – `45,400 = `500 F
(2) Material Price Variance = (AQ × SP) – (AQ × AP)
= `42,600 - `45,400 = `2,800 A
(3) Material Usage Variance = (SQ × SP) – (AQ × SP)
= `45,900 – `42,600 = `3,300 F
(4) Material Mix Variance = (RSQ × SP) – (AQ × SP)
= `43,200 – `42,600 = `600 F
(5) Material Yield Variance = (SQ × SP) – (RSQ × SP)
= `45,900 – `43,200 = `2,700 F

Working notes:

12.35
 STANDARD COSTING CHAPTER 12

a. Basic Calculation
Materials SQ × SP RSQ × SP AQ × SP AQ × AP
A 510 × `50 480 × `50 540 × `50 540 × `60
B 340 × `60 320 × `60 260 × `60 260 × `50
Total `45,900 `43,200 `42,600 `45,400

b. SQ of input for actual output:

Input – Loss = Output
Input – 25% Output = Output
Input = 125% Output
Input of Raw Material = 125% × 680 kgs of Good Product = 850 kgs
Materials A = 850 kgs × 60% = 510 kgs
Materials B = 850 kgs × 40% = 340 kgs

c. RSQ (Revised Standard Quantity)of actual input:

Materials A = 800 kgs × 60% = 480 kgs
Materials B = 800 kgs × 40% = 320 kgs

PYQ 12
ABC Ltd. has furnished the following information regarding the overheads for the month of June, 2020:
(i) Fixed Overhead Cost Variance `2,800 (Adverse)
(ii) Fixed Overhead Volume Variance `2,000 (Adverse)
(iii) Budgeted Hours for June, 2020 2,400 hours
(iv) Budgeted Overheads for June, 2020 `12,000
(v) Actual rate of recovery of overheads `8 per hour

From the given information calculate:

(1) Fixed Overhead Expenditure Variance
(2) Actual Overheads Incurred
(3) Actual Hours for Actual Production
(4) Fixed Overhead Capacity Variance
(5) Standard Hours for Actual Production
(6) Fixed Overhead Efficiency Variance
[(10 Marks) Nov 2020]

Answer
(1) Fixed OH Expenditure Variance = Fixed OH Cost Variance – Fixed OH Volume Variance
= `2,800 A – `2,000 A = `800 A

(2) Fixed OH Expenditure Variance = Budgeted Fixed OH - Actual Fixed OH

`800 A = `12,000 - Actual Fixed OH
Actual Overheads incurred = `12,000 + `800 = `12,800

(3) Actual Hours for Actual Production:

Actual Overheads Incurred = AH × AR = AH × `8= `12,800
Actual Hours (AH) = `12,800 ÷ `8 = 1,600

(4) Fixed OH Capacity Variance = AH × SR – BH × SR

= 1,600 × `5 – `12,000 = 4,000 A

12.36
 CHAPTER 12 STANDARD COSTING

(5) Standard Hours for Actual Production:

Fixed OH Volume Variance = SH × SR – BH × SR
= SH × `5 – `12,000 = `2,000 A
SH × `5 = `2,000 A + `12,000 = `10,000
SH for Actual Production = `10,000 ÷ `5 = 2,000

(6) Fixed OH Efficiency Variance = SH × SR – AH × AR

= 2,000 × `5 – 1,600 × `5 = 2,000 F
Working Note:
(a) Standard Rate (SR) = Budgeted OH ÷ Budgeted Hours
= `12,000 ÷ 2,400 = `5/hour

PYQ 13
Premier Industries has a small factory where 52 workers are employed on an average for 25 days a month
and they work 8 hours per day. The normal down time is 15%. The firm has introduced standard costing for
cost control. Its monthly budget for November, 2020 shows that the budgeted variable and fixed overhead
are `1,06,080 and `2,21,000 respectively. The firm reports the following details of actual performance for
November, 2020, after the end of the month:
Actual hours worked 8,100 hours
Actual production expressed in standard hours 8,800 hours
Actual Variable Overheads `1,02,000
Actual Fixed Overheads `2,00,000

You are required to calculate:

(1) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.

(2) Fixed Overhead Variances:

(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.

(3) Control Ratios:

(a) Capacity ratio.
(b) Efficiency ratio.
(c) Activity ratio.
[(10 Marks) Jan 2021]

Answer
(1) Variable Overhead Variances:
(a) Variable OH Exp. Variance = (AH × SR) - (AH × AR)
= (8,100 hours × `12) - `1,02,000 = `4,800 A

(b) Variable OH Eff. Variance = (SH – AH) × SR

= (8,800 hours – 8,100 hours) × `12 = `8,400 F

(2) Fixed Overhead Variances:

(a) Fixed OH Budget Variance = Budgeted Overheads - Actual Overheads

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 STANDARD COSTING CHAPTER 12

= `2,21,000 - `2,00,000 = `21,000 F

(b) Fixed OH Capacity Variance = (AH × SR) – (BH × SR)

= (8,100 hours × `25) - `2,21,000 = `18,500 A

(c) Fixed OH Efficiency Variance = (SH – AH) × SR

= (8,800 hours – 8,100 hours) × `25 = `17,500 F

(3) Control Ratios:

(a) Capacity Ratio = (Actual Hours ÷ Budgeted Hours) × 100
= (8,100 hours ÷ 8,840 hours) × 100 = 91.63%

(b) Efficiency Ratio = (Standard Hours ÷ Actual Hours) × 100

= (8,800 hours ÷ 8,100 hours) × 100 = 108.64%

(c) Activity Ratio = (Standard Hours ÷ Budgeted Hours) × 100

= (8,800 hours ÷ 8,840 hours) × 100 = 99.55%

Working Notes:
Variable OH Standard Rate (SR) = Budgeted Variable OH ÷ Budgeted Hours
= `1,06,080 ÷ 8,840 hours = `12 per hour

Fixed OH Standard Rate (SR) = Budgeted Fixed OH ÷ Budgeted Hours

= `2,21,000 ÷ 8,840 hours = `25 per hour

Budgeted Hours = (52 workers × 25 Days × 8 Hours) – 15% Normal down time
= 8,840 hours

PYQ 14
The standard output of a product ‘DJ’ is 25 units per hour in manufacturing department of a company
employing 100 workers. In a 40 hours week, the department produced 960 units of product ‘DJ’ despite 5%
of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were `6.20, `6.00
and `5.70 respectively to Group ‘A’ consisting 10 workers, Group ‘B’ consisting 30 workers and Group ‘C’
consisting 60 workers. The standard wage rate per labour is same for all the workers. Labour Efficiency
Variance is given `240 (F).

You are required to compute:

(1) Total Labour Cost Variance,
(2) Total Labour Rate Variance,
(3) Total Labour Gang variance,
(4) Total Labour Yield Variance, and
(5) Total Labour Idle Time Variance. [(10 Marks) July 2021]

Answer
(1) Labour Cost Variance = (SH × SR) – (AH × AR)
= (3,840 × 6) – 23,360 = `320 A

(2) Labour Rate Variance = (AH × SR) – (AH × AR)

= (4,000 × 6) – 23,360 = `640 F

(3) Labour Gang Variance = (RH × SR) – (AHW × SR)

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 CHAPTER 12 STANDARD COSTING

= `22,800 – `22,800 = Nil

(4) Labour Yield Variance = (SH × SR) – (RH × SR)

= (3,840 × 6) – `22,800 = `240 F

(5) Labour Idle Variance = (AHW × SR) – (AH × SR)

= `22,800 – `24,000 = `1,200 A

Working notes:
(a) Basic Calculation
Workers SH × SR RSH × SR AHW × SR AH × SR AH × AR
Group A 384 × 6 380 × 6 380 × 6 10 × 40 × 6.00 10 × 40 × 6.20
Group B 1,152 × 6 1,140 × 6 1,140 × 6 30 × 40 × 6.00 30 × 40 × 6.00
Group C 2,304 × 6 2,280 × 6 2,280 × 6 60 × 40 × 6.00 60 × 40 × 5.70
Total `23,040 `22,800 `22,800 `24,000 `23,360

(b) RSH (Revised Standard Hours) and AHW (Actual Hours Worked):
Total Actual Hours Worked = (100 workers × 40 hours) – 5% abnormal idle time
= 3,800 hours
Group A = 3,800 × 10/100 = 380 hours
Group B = 3,800 × 30/100 = 1,140 hours
Group C = 3,800 × 60/100 = 2,280 hours

(c) SH (Standard hours) for actual output 1,920 units:

Total standard hours = (100 workers × 1 hour ÷ 25 units) × 960 units
= 3,840 hours
Group A = 3,840 × 10/100 = 384 hours
Group B = 3,840 × 30/100 = 1,152 hours
Group C = 3,840 × 60/100 = 2,304 hours

(d) Standard wages rate (SR):

Labour Efficiency Variance = (SH - AHW) × SR
240 F = (3,840 – 3,800) × SR
SR = 240 ÷ 40 = `6 per hour

PYQ 15
In a manufacturing company the standard units of production for the year were fixed at 1,20,000 units and
overhead expenditures were estimated to be as follows:

`
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature and 40% are of variable nature) 1,80,000
Variable 6,00,000

Actual production during the month of April, 2021 was 8,000 units. Each month has 20 working days. During
the month there was one public holiday. The actual overheads were as follows:

`
Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% are of variable nature) 19,200
Variable 48,000

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 STANDARD COSTING CHAPTER 12

You are required to calculate the following variances for the month of April 2021:
1. Overhead Cost variance
2. Fixed Overhead Cost variance
3. Variable Overhead Cost variance
4. Fixed Overhead Volume variance
5. Fixed Overhead Expenditure Variance
6. Calendar Variance
[(10 Marks) Dec 2021]

Answer
1. Overheads Cost Variance = Standard OH for 8,000 units – Actual OH
= 8,000 units × (10.9 + 5.6) – (1,10,000 + 19,200 + 48,000)
= 1,32,000 - 1,77,200 = 45,200 A

2. Fixed Overhead Cost Variance = Standard Fixed OH – Actual Fixed OH

= 8,000 units × 10.9 – 1,2,1520
= 87,200 – 1,21,520 = 34,320 A

3. Variable OH Cost Variance = Standard Variable OH – Actual Variable OH

= 8,000 units × 5.6 – 55,680
= 44,800 – 55,680 = 10,880 A

4. Fixed OH Volume Variance = Standard Fixed OH – Budgeted Fixed OH

= 8,000 units × 10.9 – 1,09,000
= 87,200 – 1,09,000 = 21,800 A

5. Fixed OH Exp Variance = Budgeted Fixed OH – Actual Fixed OH

= 1,09,000 – 1,2,1520 = 12,520 A

6. Calendar Variance = Standard Fixed OH for 19 days – Budgeted Fixed OH

= 1,09,000 × 19/20 – 1,09,000
= 1,03,550 – 1,09,000 = 5,450 A

Working notes:
Total Budgeted Fixed OH per annum = `12,00,000 + 60% × `1,80,000 = `13,08,000
Total Budgeted Fixed OH per month = `13,08,000 ÷ 12 = `1,09,000
Total Budgeted Variable OH per annum = `6,00,000 + 40% × `1,80,000 = `6,72,000
Total Actual Fixed OH per month = `1,10,000 + 60% × `19,200 = `1,21,520
Total Actual Variable OH per month = `48,000 + 40% × `19,200 = `55,680
Standard Fixed OH rate = Budgeted Fixed OH ÷ Budgeted Units
= `13,08,000 ÷ 1,20,000 units = `10.9 per unit
Standard Variable OH rate = Budgeted Variable OH ÷ Budgeted Units
= `6,72,000 ÷ 1,20,000 units = `5.6 per unit

PYQ 16
A manufacturing department of a company has employed 120 workers. The standard output of product
''NPX" is 20 units per hour and the standard wage rate is `25 per labour hour.
In a 48 hours week, the department produced 1,000 units of 'NPX' despite 5% of the time paid being
lost due to an abnormal reason. The hourly wages actually paid were `25.70 per hour.

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 CHAPTER 12 STANDARD COSTING

Calculate:
(a) Labour Cost Variance
(b) Labour Rate Variance
(c) Labour Efficiency Variance
(d) Labour Idle time Variance
[(5 Marks) May 2022]

Answer
(a) Labour Cost Variance = (SH × SR) – (AH × AR)
= `1,50,000 - `1,48,032 = `1,968 F

(b) Labour Rate Variance = (AH × SR) – (AH × AR)

= `1,44,000 – `1,48,032 = `4,032 A

(c) Labour Efficiency Variance = (SH × SR) – (AHW × SR)

= `1,50,000 – `1,36,800 = `13,200 F

(d) Labour Idle Variance = (AHW × SR) – (AH × SR)

= `1,36,800 – `1,44,000 = `7,200 A

Working notes:
1. Basic Calculation
SH × SR AHW × SR AH × SR AH × AR
1,000 units × 6 hours × 120 workers × 45.6 120 workers × 48 hours 120 workers × 48
`25 hours (48 – 5%) × `25 × `25 hours × `25.70
`1,50,000 `1,36,800 `1,44,000 `1,48,032

2. Standard hour per unit = (120 workers × 1 hour) ÷ 20 units = 6 hours per unit

PYQ 17
Y Ltd. manufactures “Product M” which requires three types of raw materials – “A”, “B” & “C”. Following
information related to 1st quarter of the F.Y. 2022-23 has been collected from its books of accounts. The
standard material input required for 1,000 kg of finished product ‘M’ are as under:

Material Quantity (Kg.) Std. Rate per Kg. (`)

A 500 25
B 350 45
C 250 55
1,100
Less: Standard Loss 100
Standard Output 1,000

During the period the company produced 20,000 kgs of product ‘M’ for which the actual quantity of materials
consumed and purchase prices are as under:

Material Quantity (Kg.) Purchase price per kg. (`)

A 11,000 23
B 7,500 48
C 4,500 60

You are required to calculate:

(a) Material Cost Variance

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 STANDARD COSTING CHAPTER 12

(b) Material Price Variance for each raw material and Product ‘M’
(c) Material Usage Variance for each raw material and product ‘M’
(d) Material Yield Variance

Note: Indicate the nature of variance i.e. Favourable or Adverse.

[(10 Marks) Nov 2022]

Answer
1. Material Cost Variance = (SQ × SP) – (AQ × AP)
= `8,40,000 – `8,83,000 = `43,000 A

2. Material Price Variance = AQ × (SP – AP)

Material A = 11,000 × (25 – 23) = `22,000 F
Material B = 7,500 × (45 – 48) = `22,500 A
Material C = 4,500 × (55 – 60) = `22,500 A
Total = 22,000 F + 22,500 A + 22,500 A = `23,000 A

3. Material Usage Variance = SP × (SQ – AQ)

Material A = 25 × (10,000 – 11,000) = `25,000 A
Material B = 45 × (7,000 – 7,500) = `22,500 A
Material C = 55 × (5,000 – 4,500) = `27,500 F
Total = 25,000 A + 22,500 A + 27,500 F = `20,000 A

4. Material Yield Variance = (SQ × SP) – (RSQ × SP)

= `8,40,000 – `8,78,170 = `38,170 A

Working notes:
a. Basic Calculation
Materials SQ × SP RSQ × SP AQ × SP AQ × AP
A 10,000 × `25 10,455 × `25 11,000 × `25 11,000 × `23
B 7,000 × `45 7,318 × `45 7,500 × `45 7,500 × `48
C 5,000 × `55 5,227 × `55 4,500 × `55 4,500 × `60
Total `8,40,000 `8,78,170 `8,60,000 `8,83,000

b. SQ of input for actual output:

Materials A = 500 kgs × 20 times = 10,000 kgs
Materials B = 350 kgs × 20 times = 7,000 kgs
Materials C = 250 kgs × 20 times = 5,000 kgs

c. RSQ (Revised Standard Quantity)of actual input:

Materials A = 23,000 kgs × 500/1,100 = 10,455 kgs
Materials B = 23,000 kgs × 350/1,100 = 7,318 kgs
Materials C = 23,000 kgs × 250/1,100 = 5,227 kgs

PYQ 18
NC Limited uses a standard costing system for the manufacturing of its product ‘X’. The following information
is available for the last week of the month:

 25,000 kg of raw material were actually purchased for `3,12,500. The expected output is 8 units of
product ‘X’ from each one kg of raw material. There is no opening and closing inventories. The material
price variance and material cost variance, as per cost records, are `12,500 (F) and `1800 (A),
respectively.

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 CHAPTER 12 STANDARD COSTING

 The standard time to produce a batch of 10 units of product ‘X’ is 15 minutes. The standard wage rate
per labour hour is `50. The company employs 125 workers in two categories, skilled and semi-skilled,
in a ratio of 60:40. The hourly wages actually paid were `50 per hour for skilled workers and `40 per
hour for semi-skilled workers. The weekly working hours are 40 hours per worker. Standard wage rate
is the same for skilled and semi-skilled workers.

 The monthly fixed overheads are budgeted at `76,480. Overheads are evenly distributed throughout the
month and assume 4 weeks in a month. In the last week of the month, the actual fixed overhead expenses
were `19,500.

Required:
(a) Calculate the standard price per kg and the standards quantity of raw material.
(b) Calculate the material usage variance, labour cost variance, and labour efficiency variance.
(c) Calculate the fixed overhead cost variance, the fixed overhead expenditure variance and the fixed
overhead volume variance.

Note: Indicate the variance of variance i.e favourable or adverse.

[(10 Marks) May 2023]

Answer
(a) Material Price Variance = (AQ × SP) – (AQ × AP)
`12,500 F = 25,000 × SP – `3,12,500
Standard Price per kg = `13

Material Cost Variance = (SQ × SP) – (AQ × AP)

`1,800 A = SQ × `13 – `3,12,500
Standard Quantity of material = 23,900 Kgs

(b) Material Usage Variance = Material Cost Variance – Material Price Variance
= `1,800 A – `12,500 F = `10,700 A

Labour Cost Variance = (SH × SR) – (AH × AR)

= (4,780 × `50) – [(3,000 hours × `50) + (2,000 hours × `40)]
= `9,000 F

Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (4,780 × `50) – (5,000 hours × `50) = `11,000 A

(c) Fixed OH Cost Variance = (SH × SR) – (AH × SR)

= `18,279 – `19,500 = `1,221 A

Fixed OH Exp. Variance = (BH × SR) – (AH × SR)

= `19,120 – `19,500 = `380 A

Fixed OH Volume Variance = (SH × SR) – (BH × SR)

= `18,279 – `19,120 = `841 A

Working Notes:

(1) Actual Quantity Produced = 23,900 kgs Materials × 8 units per kg

= 1,91,200 units of Product X

(2) Standard Hours = 1,91,200 units × 1.5 minute per unit/60= 4,780 hours

12.43
 STANDARD COSTING CHAPTER 12

(3) Actual Hours = 125 workers × 40 hours = 5,000 hours

(4) Actual Hours (Skilled) = 125 workers × 60% × 40 hours = 3,000 hours
Actual Hours (Semi-skilled) = 125 workers × 40% × 40 hours = 2,000 hours

(5) Budgeted Fixed OH (BH × SR) = `76,480 ÷ 4 weeks = `19,120

(6) Recovered Fixed OH (SH × SR) = `19,120 × 4,780 hours/5,000 hours = `18,279

SUGGESTED REVISION FOR EXAM:

BQ: 5, 6, 7, 8, 9, 10, 11, 12, 16, 17, 19, 22, 24, 28, 30, 32, 33

PYQ: 1, 12, 13, 16, 18

12.44
 CHAPTER 13 MARGINAL COSTING

CHAPTER 13 MARGINAL COSTING

CONTRIBUTION, PV RATIO, BEP, MOS AND PROFIT PLANNING

BQ 1
Tata Ltd. had incurred fixed expenses of `4,50,000 with sales of `15,00,000 and earned a profit of `3,00,000
during the first half year. In second half it suffered a loss of `1,50,000.
Calculate:
(i) The profit volume ratio, B.E.P. & MOS for the first half year.
(ii) Expected sales volume for second half year assuming that sales price and fixed expenses remains
unchanged during the second half year.
(iii) B.E.P. & MOS of the whole year.
[(i) 50%, 9,00,000, 6,00,000; (ii) 6,00,000, 18,00,000, 3,00,000]

BQ 2
A company sells its product at `15. 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.

[12,000 units, `1,80,000]

BQ 3
The ratio of variable cost to sales is 70%. The break - even point occurs at 60% of the capacity sales. Find the
capacity sales when fixed costs are `90,000. Also compute profit at 75 % of the capacity sales.
[`5,00,000 `22,500]

BQ 4
A company earned a profit of `30,000 during the year. If the marginal cost and selling price of a product are
`8 and `10 per unit respectively.

Find out the amount of ‘Margin of Safety’.

[`1,50,000]

BQ 5
A company has made a profit of `50,000 during the year. If the selling price and marginal cost (variable cost)
of the product are `15 and `12 per unit respectively.

Find out the amount of margin of safety.

Answer
Pr ofit 50 ,000
Marginal of Safety = = = `2,50,000
* PV Ratio 20 %

Contribution 15  12
*P/V Ratio = × 100 = × 100 = 20%
Sales 15

BQ 6
If Margin of safety of AB Ltd. is `2,40,000 (40% of sales) and P/V ratio is 30%.

13.1
 MARGINAL COSTING CHAPTER 13

Calculate its (1) Break-even sales and (2) Amount of profit on sales of `9,00,000.
[(1) `3,60,000 (2) `1,62,000]

BQ 7
You are given the following data:
Year Sales Profit
2022 `1,20,000 `8,000
2023 `1,40,000 `13,000
Find out:
(i) P/V ratio, (ii) BEP, (iii) Profit when sales are `1,80,000, (iv) Sales required earn a profit of `12,000, (v)
Margin of safety in year 2023.
[(i) 25% (ii) `88,000 (iii) `23,000 (iv) `1,36,000 (v) `52,000]

BQ 8
You are given the following particulars:
(i) Fixed cost `1,50,000
(ii) Variable cost `15 per unit
(iii) Selling price is `30 per unit

Calculate:
(a) Break-even point
(b) Sales to earn a profit of `20,000

Answer
Fixed cos t 1 ,50 ,000
(a) Break-even point = =
Contributi on per unit 30  15
= 10,000 Units
Fixed cos t  Desired profit 1,50,000  20,000
(b) Sales to earn profit of `20,000 = =
* PV ratio 50%
= `3,40,000

Contribution 15
*PV ratio =  100 =  100
Sales 30
= 50%

BQ 9
If P/V ratio is 60% and the marginal cost of the product is `20. What will be the selling price?

Answer
Variable Cost Per Unit 20
Sales Price = = = `50 per unit
* Variable Cost Ratio 40%

*Variable Cost Ratio = 100 – P/V Ratio = 100 – 60 = 40%

BQ 10
1. Ascertain profit, when:
Sales 2,00,000
Fixed Cost 40,000
BEP 1,60,000

13.2
 CHAPTER 13 MARGINAL COSTING

2. Ascertain sales, when:

Fixed cost 20,000
Profit 10,000
BEP 40,000

Answer
1. Profit:
BEP Sales × P/V Ratio = Fixed Cost = `1,60,000 × P/V ratio = `40,000
P/V ratio = `40,000 ÷ `1,60,000 = 25%

Sales × P/V Ratio = Fixed Cost + Profit = `2,00,000 × 25% = `50,000

Profit = `50,000 - `40,000 = `10,000

2. Sales:
BEP Sales × P/V Ratio = Fixed Cost = `40,000 × P/V ratio = `20,000
P/V ratio = `20,000 ÷ `40,000 = 50%

Sales × P/V Ratio = Fixed Cost + Profit = `20,000 + `10,000 = `30,000

Sales = `30,000 ÷ 50% = `60,000

BQ 11
A company has a PV ratio of 40%. By what percentage must sales be increased to offset 20% reduction in
selling price?

Answer
Let current sales be `100. Hence,
Particulars Current Proposed
Sales 100 80
Less: Variable cost (60% of sale) 60 60
Contribution 40 20
40
In order to maintain the same contribution, the volume of sales should be = × 80 = `160
20

Thus, if selling price is reduced by 20%, the sales will have to be increased by 60% i.e. from `100
to `160.

BQ 12
From the following data, calculate cash break-even point in units and in value:
Selling price per unit `10
Variable cost per unit `6
Fixed cost (including `3,000 as depreciation) `10,000
[1,750 units and `17,500]

BQ 13
MNP Ltd. sold 2,75,000 units of its product at `37.50 per unit. Variable costs are `17.50 per unit
(manufacturing costs of `14 and selling cost of `3.50 per unit). Fixed costs are incurred uniformly throughout
the year and amount to `35,00,000 (including depreciation of `15,00,000). There are no beginning or ending
inventories.

Required:

13.3
 MARGINAL COSTING CHAPTER 13

(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.
(iii) Estimate the number of units that must be sold to earn an income (EBIT) of `2,50,000.
(iv) Estimate the sales level to achieve an after-tax income (PAT) of `2,50,000. Assume 40% corporate
Income Tax rate.
[(8 Marks) Nov 2010]

Answer
Fixed cos t 35,00,000
(a) Break even sales = =
Contributi on per unit 37.50  17.50
= 1,75,000 units.

Fixed cos t (excluding depreciati on )

Cash BEP (in Quantity) =
Contributi on per unit
35,00,000  15,00,000
= = 1,00,000 units.
37.50  17.50

Contribution 37.50  17.50

(b) P/V ratio = × 100 = × 100
Sales 37.50
= 53.33%

Fixed cos t  Desired EBIT

(c) No. of units must be sold =
Contributi on per unit
35,00,000  2,50,000
= = 1,87,500 units.
20.00

Fixed cos t  Desired Pr ofit Before Tax

(d) Desired Sales level (`) =
PV ratio
35,00,000  4 ,16,667
= = `73,43,750
53.33%
WN:
Desired PAT = `2,50,000
Tax rate = 40%
Desired PAT 2,50 ,000
Desired Profit before tax = = = `4,16,667
(1  t ) (1  0.40 )

BQ 14
An automobile manufacturing company produces different models of Cars. The budget in respect of model
118 for the month of March is as under:
Budgeted Output 40,000 units
` (in lacs) ` (in lacs)
Variable costs:
Materials 79,200
Labour 15,600
Direct Expenses 37,200 1,32,000
Fixed costs:
Specific Fixed Cost 27,000
Allocated Fixed Cost 33,750 60,750
Total Costs 1,92,750
Profit 17,250
Sales 2,10,000

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 CHAPTER 13 MARGINAL COSTING

Calculate:
(i) Profit with 10 percent increase in selling price with a 10 percent reduction in sales volume.
(ii) Volume to be achieved to maintain the original profit after a 10 per cent rise in material costs at the
originally budgeted selling price per unit.
[(i) `28,350 Lakhs (ii) 44,521 units]

BQ 15
A Ltd. maintains margin of safety of 37.5% with an overall contribution to sales ratio of 40%. Its fixed costs
amount to `5,00,000.
Calculate (i) Break-even sales, (ii) Total sales, (iii) Total variable cost, (iv) Current profit, (v) New 'margin
of safety’ if the sales volume is increased by 7-½%.

Answer
(i) Break Even Sales × PV Ratio = Fixed Cost
Break Even Sales × 40% = `5,00,000
Break Even Sales = `5,00,000 ÷ 40% = `12,50,000

(ii) Total Sales = Break Even Sales + Margin of Safety

Total Sales = `12,50,000 + 37.50% of Total Sales
62.50% of Total Sales = `12,50,000
Total Sales = `12,50,000 ÷ 62.50% = `20,00,000

(iii) Contribution to Sales Ratio = 40%

Therefore, Variable cost to Sales Ratio = 60%
Variable cost = 60% of sales
Variable cost = 60% of `20,00,000 = `12,00,000

(iv) Current Profit = Sales - (Variable Cost + Fixed Cost)

= `20,00,000 - (`12,00,000 + `5,00,000)
= `3,00,000

(v) New Sales value = `20,00,000 + 7.50% of `20,00,000

= `21,50,000

New Margin of Safety = New Sales value – BES

= `21,50,000 - `12,50,000 = `9,00,000

BQ 16
PQR Ltd. has furnished the following data for the two years:
Particulars 2022 2023
Sales `8,00,000 ?
Profit Volume Ratio 50% 37.50%
Margin of Safety sales as a % of total sales 40% 21.875%

There has been substantial savings in the fixed cost in the year 2023 due to the restructuring process.
The company could maintain its sales quantity level of 2022 in 2023 by reducing selling price.

You are required to calculate the following:

(i) Sales for 2023 in `;
(ii) Fixed cost for 2023;
(iii) Break-even sales for 2023 in `.

13.5
 MARGINAL COSTING CHAPTER 13

Answer
In 2022:
PV ratio = 50%
Variable cost ratio = 100% - 50% = 50%
Variable cost in 2022 = `8,00,000 × 50% = `4,00,000

In 2023:
Sales quantity has not changed. Thus variable cost in 2023 is `4,00,000.
PV ratio = 37.50%
Thus, Variable cost ratio = 100% - 37.50% = 62.50%
4 ,00,000
(i) Thus sales in 2023 = = `6,40,000
62.5%

At break-even point, fixed cost is equal to contribution.

In 2023, Break-even sales = 100% - 21.875% = 78.125%

(iii) Break-even sales = 6,40,000 × 78.125% = `5,00,000

(ii) Fixed cost = BEP sales × PV ratio

= 5,00,000 × 37.50% = `1,87,500

BQ 17
A single product company sells its product at `60 per unit. In 2022, 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 2023,
it is estimated that the variable cost will go up by 10% and the fixed cost will increase by 5%.
Find the selling price required to be fixed in 2023 to earn the same P/V ratio as in 2022.
Assuming the same selling price of `60 per unit in 2023, find the number of units required to be produced
and sold to earn the same profit as in 2022.

Answer
1. PV Ratio in 2022:
Selling price per unit 60
Variable cost (80% of Selling price) 48
Contribution 12
P/V Ratio 20%

2. No. of units sold in 2022:

Break-even point = Fixed cost ÷ Contribution per unit
= `3,60,000 ÷ `12 = 30,000 units.

Margin of safety is 40%. Therefore, break-even sales will be 60% of units sold.

No. of units sold = BEP in units ÷ 60% = 50,000 units.

3. Profit earned in 2022:

Profit = Contribution – Fixed cost
= (50,000 × `12) - `3,60,000 = `2,40,000

4. Selling price to be fixed in 2023:

Revised variable cost = `48 × 110% = `52.80

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 CHAPTER 13 MARGINAL COSTING

Revised fixed cost = `3,60,000 × 105% = 3,78,000

PV Ratio = 20% (Same as of 2016)
Variable cost ratio = 80%
Revised selling price = `52.80 ÷ 80% = `66.00

5. No. of units to be produced and sold in 2023 to earn the same profit:
Fixed cos t  Desired profit 2,40,000  3,78,000
= = = 85,834 units
Contributi on per unit 60  52.80

BQ 18
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
Factory
Actual Over / (Under Budget) Actual Over / (Under Budget)
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 Fixed Costs and Break
- Even Sales.
[(i) `1,350 (ii) `2,500]

BQ 19
The profit for the year of R.J. Ltd. works out to 12.5% of the capital employed and the relevant figures are as
under:
Sales `5,00,000
Direct Materials `2,50,000
Direct Labour `1,00,000
Variable Overheads `40,000
Capital Employed `4,00,000

The new Sales Manager who has joined the company recently estimates for next year a profit of about 23%
on capital employed, provided the volume of sales is increased by 10% and simultaneously there is an
increase in Selling Price of 4% and an overall cost reduction in all the elements of cost by 2%.

Find out by computing in detail the cost and profit for next year, whether the proposal of Sales
Manager can be adopted.

Answer
Statement Showing Cost and Profit for the Next Year
Particulars Existing Estimated
Sales Value 5,00,000 5,72,000
Less: Direct Materials 2,50,000 2,69,500
Direct Labour 1,00,000 1,07,800
Variable Overheads 40,000 43,120
Contribution 1,10,000 1,51,580
Less: Fixed Cost 60,000 58,800
Profit 50,000 92,780

Fixed Cost = Existing Sales – Existing Marginal Cost – 12.5% on `4,00,000

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 MARGINAL COSTING CHAPTER 13

= `5,00,000 – `3,90,000 – `50,000 = `60,000

 92 ,780 
Percentage Profit on Capital Employed equals to 23.19%   100 
 4 ,00 ,000 

Since the Profit of `92,780 is more than 23% of capital employed, the proposal of the Sales
Manager can be adopted.

BQ 20
An Indian soft drink company is planning to establish a subsidiary company in Bhutan to produce mineral
water. Based on the estimated annual sales of 40,000 bottles of the mineral water, cost studies produced the
following estimates for the Bhutanese subsidiary:
Name of Expense Total Annual Cost % of Total annual cost which is variable
Materials 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%

The Bhutanese production will be sold by manufacturer’s representatives who will receive a commission of
8% of the sale price. No portion of the Indian office expenses is to be allocated to the Bhutanese subsidiary.
You are required to
1. Compute the sale price per bottle to enable the management to realize an estimated 10% profit on sale
proceeds in Bhutan.
2. Calculate the break-even point in sales as also in number of bottles for the Bhutanese subsidiary on the
assumption that the sale price is `14 per bottle.

Answer
1. Calculation of sales price to earn 10% profit on sales:
Sales value = Fixed cost + Variable cost + Profit
Sales value = (2,10,000 × 0% + 1,50,000 × 20% + 92,000 × 40% + 40,000 × 65%) +
(2,10,000 × 100% + 1,50,000 × 80% + 92,000 × 60% + 40,000 × 35% +
Commission @ 8% on sales) + Profit @10% on sales
Sales value = 92,800 + 3,99,200 + 8% of sales + 10% of sales
Sales value = 4,92,000 ÷ 82% = `6,00,000

Sales Price = Sales value ÷ No. of units

= 6,00,000 ÷ 40,000 units = `15.00

2. Calculation of Break Even Point:

Break Even Point (in units) = Fixed cost ÷ Contribution per unit
= 92,800 ÷ 2.90 (14 – 11.10) = 32,000 units
Break Even Point (in `) = BEP in units × Sales price per unit
= 32,000 units × 14.00 = `4,4,8000

Working notes:
Total variable cost = 3,99,200 + 8% on sales (8% of 40,000 × 14.00)
= 4,44,000
Variable cost per unit = Total variable cost ÷ No. of units
= 4,44,000 ÷ 40,000 units = `11.10

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 CHAPTER 13 MARGINAL COSTING

BEP IN CASE OF STOCK

BQ 21
The Co. has an opening stock of 6,000 units of output. Production plan for current period is 24,000 units.
Expected sale for the current period comes to 28,000 units. The selling price per unit `10 variable cost per
unit is `6 while it was `5 per unit during the previous period. Fixed cost of the current period is `86,000.
Find out break-even point using FIFO Method.
[14,000 units of current period and 6,000 units of previous period]

CONTRIBUTION, PV RATIO, BEP, MOS AND PROFIT PLANNING

BQ 22
M Company’s central services department is evaluating new copying machines to replace the firm’s current
copier, which is worm out. The analysis of alternative machines has been narrowed to two and the estimated
costs of operating them are shown below:
Cost per 100 copies
Particulars
Machine A Machine B
Material Costs (Variable) `60 `40
Labour Cost (variable) `80 `30
Annual Lease Cost (Fixed) `30,000 `58,000

Required:
(i) Compute the cost indifference points for the two alternatives.
(ii) What do the cost indifference points suggest as a course of action in this regard?
(iii) If the management expects to need 87,000 copies next year, which copier would be most economical?
[(i) 40,000 Copies; (ii) Below 40,000: A, At 40,000: A/B, Above 40,000: B; (iii) B]

BQ 23
The following are cost data for three alternative ways of processing the clerical work for cases brought before
the LC Court System:
‘A’ Manual ‘B’ Semi Automatic ‘C’ Fully Automatic
Particulars
(`) (`) (`)
Monthly fixed costs:
Occupancy 15,000 15,000 15,000
Maintenance contract - 5,000 10,000
Equipment lease - 25,000 1,00,000

Unit variable cost (per report):

Supplies 40 80 20
Labour 200 60 20
(5 hours × 40) (1 hour × 60) (0.25 hour × 80)

1. Calculate cost indifference points. Interpret your results.

2. If the present case load is 600 cases and it is expected to go up to 850 cases in near future, which method
is most appropriate on cost considerations?

Answer
1. Statement Showing Cost Indifference Point

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 MARGINAL COSTING CHAPTER 13

Particulars A and B A and C B and C

(a) Differential Fixed Cost 30,000 1,10,000 80,000
(45,000 – 15,000) (1,25,000 – 15,000) (1,25,000 – 45,000)
(b) Differential Variable Cost 100 200 100
(240 - 140) (240 - 40) (140 - 40)
(c) Cost Indifference Point
(a) ÷ (b) 300 cases 550 cases 800 cases

Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs and higher variable costs
should be used. At activity level above the indifference point alternative with higher fixed costs and lower
variable costs should be used.
Number of Cases Alternative to be Chosen
Cases ≤ 300 Alternative ‘A’
300 ≥ Cases ≤ 800 Alternative ‘B’
Cases ≥ 800 Alternative ‘C’

2. Present case load is 600. Therefore, alternative B is suitable. As the number of cases is expected to go
upto 850 cases, alternative C is most appropriate.

SHUT DOWN POINT

BQ 24
Mr. X has `2,00,000 investments in his business firm. He wants a 15 percent return on his money. From an
analysis of recent cost figures, he finds that his variable cost of operating is 60 percent of sales, his fixed costs
are `80,000 per year.

Show computations to answer the following questions:

(i) What sales volume must be obtained to break even?
(ii) What sales volume must be obtained to get 15 percent return on investment?
(iii) Mr. X estimates that even if he closed the doors of his business, he would incur `25,000 as expenses
per year. At what sales would he be better off by locking his business up?

Answer
P/V Ratio = 100 – Variable cost ratio
= 100 – 60% = 40%

(i) Break-even point = Fixed cost ÷ PV ratio

= 80,000 ÷ 40% = `2,00,000
Fixed cos t  Desired profit
(ii) Sales volume required =
PV ratio
80,000  15% of 2,00,000
= = `2,75,000
40%

Avoidable fixed cos t

(iii) Shut down point <
PV ratio
80,000  25,000
< < `1,37,500
40%

Mr. X should shut down the business if the sale is less than `1,37,500.

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 CHAPTER 13 MARGINAL COSTING

SALES MIX OR CONCEPT OF MULTIPLE PRODUCTS

BQ 25
A Company sells two products, A and B. The sales mix is 5 units of A and 3 units of B. The sale price of A and
B are `80 and `60 per unit respectively and variable cost `50 and `45 respectively. Fixed costs are `4,87,500
per month.
Compute the break-even point.

Answer
Fixed cos t 4 ,87 ,500
Break Even Points in units = =
Composite contributi on per unit 24.375
= 20,000 units (12,500 units of A and 7,500 units of B)
WN:
Composite contribution = [(30 × 5 units of A) + (15 × 3 units of B)] ÷ 8 units
= 24.375 per unit

BQ 26
The product mix of a Gama Ltd. is as under:
Particulars Product M Product N
Units 54,000 18,000
Selling price `7.50 `15.00
Variable cost `6.00 `4.50

Find the break-even points in units, if the company discontinues product ‘M’ and replace with product ‘O’.
The quantity of product ‘O’ is 9,000 units and its selling price and variable costs respectively are `18 and `9.
Fixed Cost is ` 15,000.

Answer
Fixed Cost 15 ,000
Break Even Point = =
Composite Contributi on Per Unit 10
= 1,500 units (1,000 units of ‘N’ and 500 units of ‘O’ in 2 : 1)

Working note:
Composite contribution = [(10.50 × 2 units of N) + (9 × 1 unit of O)] ÷ 3 units = 10 per unit

BQ 27
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.

(a) 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%
(b) 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 units
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.

Answer
4 ,32 ,000
(a) Rate of net return on sales =  100 = 21.60%
20 ,00 ,000

13.11
 MARGINAL COSTING CHAPTER 13

Fixed Cost 6 ,66 ,600

(b) Break Even Point = =
Composite Contributi on Per Unit 28.80
= 23,145.80 units
Break even Sales Mix:
Product X = 70% of 23,145.80 units = 16,202 units or `6,48,080
Product Y = 30% of 23,145.80 units = 6,944 units or `3,47,200

Working notes:
(1) Calculation of Net return:
Particulars (`)
Sales value (50,000 units × 40) 20,00,000
Less: Variable cost (50,000 units × 16) 8,00,000
Contribution 12,00,000
Less: Fixed cost 4,80,000
Profit Before Tax 7,20,000
Less: Income Tax @ 40% 2,88,000
Profit After Tax 4,32,000
Fixed cos t 4 ,80,000
BEP in units = = = 20,000 units
contributi on per unit 40  16

Total sales = BEP + MOS (60% of sales) = 20,000 units + 60% sales
Total sales = 20,000 units ÷ 40% = 50,000 units

(2) Composite Contribution per unit= (40 – 16) × 7/10 + (50 - 10) × 3/10 = 28.80 per unit

BQ 28
Prisha Limited manufactures three different products and the following information has been collected from
the books of accounts:
Products
A B C
Sales Mix 40% 35% 25%
Selling Price `300 `400 `200
Variable Cost `150 `200 `120
Total Fixed Costs `18,00,000
Total Sales `60,00,000

The company has currently under discussion, a proposal to discontinue the manufacture of Product C and
replace it with Product E, when the following results are anticipated:
Products
A B E
Sales Mix 45% 30% 25%
Selling Price `300 `400 `300
Variable Cost `150 `200 `150
Total Fixed Costs `18,00,000
Total Sales `64,00,000
Required:
(a) Calculate the PV ratio, Total contribution, Profit and Break-even sales for the existing product mix.
(b) Calculate the PV ratio, Total contribution, Profit and Break-even sales for the proposed sales mix.
(c) State whether the proposed sales mix is accepted or not?

13.12
 CHAPTER 13 MARGINAL COSTING

Answer
(a) Calculation of PV Ratio, Total Contribution, Profit and BEP for the existing product mix:
Products
Total
A B C
Selling Price (`) 300 400 200
Less: Variable Cost (`) 150 200 120
Contribution per unit (`) 150 200 80
P/V Ratio 50% 50% 40%
Sales Mix 40% 35% 25%
Contribution per rupee of sales (P/V Ratio × Sales 20% 17.5% 10% 47.5%
Mix)
Present Total Contribution (`60,00,000 × 47.5%) `28,50,000
Less: Fixed Costs `18,00,000
Present Profit `10,50,000
Present Break-Even Sales (`18,00,000/0.475) `37,89,473.68

(b) Calculation of PV Ratio, Total Contribution, Profit and BEP for the proposed product mix:
Products
Total
A B E
Selling Price (`) 300 400 300
Less: Variable Cost (`) 150 200 150
Contribution per unit (`) 150 200 80
P/V Ratio 50% 50% 50%
Sales Mix 45% 30% 25%
Contribution per rupee of sales (P/V Ratio × Sales 22.5% 15% 12.5% 50%
Mix)
Present Total Contribution (`64,00,000 × 50%) `32,00,000
Less: Fixed Costs `18,00,000
Present Profit `14,00,000
Present Break-Even Sales (`18,00,000/0.5) `36,00,000

(c) The proposed sales mix increases the total contribution to sales ratio from 47.5% to 50% and the total
profit from `10,50,000 to `14,00,000. Thus, the proposed sales mix should be accepted.

MERGER OF PLANTS

BQ 29
Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
Capacity utilisation (%) 90 60
Sales (`) 31,50,000 24,00,000
Variable Cost (`) 19,80,000 11,25,000
Fixed Cost (`) 6,50,000 7,50,000

Assuming that the proposal is implemented, calculate:

(1) Break-Even sales of the merged plant and the capacity utilization at that stage.
(2) Profitability of the merged plant at 80% capacity utilization.
(3) Sales Turnover of the merged plant to earn a profit of `30,00,000.
(4) When the merged plant is working at a capacity to earn a profit of `30,00,000, what percentage of
increase in selling price is required to sustain an increase of 5% in fixed overheads.

13.13
 MARGINAL COSTING CHAPTER 13

Answer
(1) Break-Even sales of the merged plant and the capacity utilization at that stage:
Break-Even Sales = Fixed Cost ÷ P/V Ratio
= `14,00,000 ÷ 45.67% = `30,65,470

Capacity Utilization = (BEP Sales ÷ Sales at 100% Capacity) × 100

= (`30,65,470 ÷ `75,00,000) × 100 = 40.87%

(2) Profitability of merged plant at 80% Capacity:

Profit = Contribution – Fixed Cost
= {(`75,00,000 × 80%) × 45.67%} - `14,00,000= `13,40,200

(3) Sales to earn a profit of `30,00,000:

Sales = (Fixed Cost + Profit) ÷ P/V Ratio
= (`14,00,000 + `30,00,000) ÷ 45.67% = `96,34,333

(4) % increase in selling price:

Increase in fixed cost = `14,00,000 × 5% = `70,000
∴ % increase in sales price = (`70,000 ÷ `96,34,333) × 100 = 0.727%

Working Notes:
Calculation of Sales, Variable Cost, P/V Ratio and Fixed Cost at 100% capacity of merged plant:
Sales = (`31,50,000 ÷ 90%) + (`24,00,000 ÷ 60%) = `75,00,000
Variable Cost = (`19,80,000 ÷ 90%) + (`11,25,000 ÷ 60%) = `40,75,000
P/V Ratio = (Contribution ÷ Sales) × 100
= {(`75,00,000 – `40,75,000) ÷ `75,00,000} × 100 = 45.67%
Fixed Cost = `6,50,000 + `7,50,000 = `14,00,000

KEY FACTOR OR LIMITING FACTOR

BQ 30
Moon Ltd. produces products ‘X’, ‘Y’, ‘Z’ and has decided to analyse it’s production mix in respect of these
three products: ‘X’, ‘Y’, ‘Z’.

You have the following information:

X Y Z
Direct Material ` (per unit) 160 120 80
Variable Overheads ` (per unit) 8 20 12
Direct Labour:

Departments: Rate per hour (`) Hours per unit Hours per unit Hours per unit
X Y Z
Department A 4 6 10 5
Department B 8 6 15 11

From the current budget, further details are as below:

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 CHAPTER 13 MARGINAL COSTING

Particulars X Y Z
Annual production at present (in units) 10,000 12,000 20,000
Estimated selling price per unit (`) 312 400 240
Sales departments estimate of possible 12,000 16,000 24,000
sales in the coming year (in units)
There is constraint on supply of labour in Department A and its manpower cannot be increased beyond its
present level.

Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the total contribution from the best possible product mix.

Answer
(i) Statement Showing Best Possible Mix of Moon Ltd.
Rank Product Units/Mix Labour hours dept. A
I Product X 12,000 72,000
II Product Y 16,000 1,60,000
III Product Z (48,000 ÷ 5) 9,600 48,000 (b.f.)
Total 37,600 2,80,000

Best possible mix of X, Y, Z is 12,000 : 16,000 : 9,600

(ii) Calculation of contribution from best possible mix:

Total contribution = 12,000 units of X × 72 + 16,000 units of Y × 100 + 9,600 units of Z × 40

= `28,48,000

Working notes:

(1) Calculation of total available labour hours in department A:

Total available labour hours = 10,000 units of X × 6 hours + 12,000 units of Y × 10 hours
+ 20,000 units of Z × 5 hours
= 2,80,000 hours

(2) Calculation of Contribution per labour hour of department A and Rank:

Particulars X Y Z
Sale price per unit 312 400 240
Less: Direct materials per unit 160 120 80
Less: Variable overheads per unit 8 20 12
Less: Wages per unit:
Department A 24 40 20
(6 × 4) (10 × 4) (5 × 4)
Department B 48 120 88
(6 × 8) (15 × 8) (11 × 8)

Contribution per unit 72 100 40

÷ Labour hours per unit of Dept. A ÷6 ÷ 10 ÷5
Contribution per labour hour Dept. A 12 10 8
Rank I II III

13.15
 MARGINAL COSTING CHAPTER 13

BQ 31
X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates
production of any one spare part for a particular period of time. The following are the cost and other
information for the production of the two different spare parts A and B:
Per unit Part A Part B
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine A 0.6 hrs. 0.25 hrs.
Machine Time: Machine B 0.5 hrs. 0.55 hrs.
Target Price (`) 145 115

Total hours available for Machine A: 4,000 hours and for Machine B: 4,500 hours. Alloy available is 13,000
kgs @ `12.50 per kg. Variable overheads per machine hours for Machine A: `80 and for Machine B: `100

Required
1. Identify the spare part which will optimize contribution at the offered price.
2. If Y Ltd. reduces target price by 10% and offers ` 60 per hour of unutilized machine hour, what will be
the total contribution from the spare part identified above?

Answer
1. Statement Showing Optimum Contribution
Particulars Part A Part B
Maximum units to be manufactured and sold 6,666 8,125
Sales Price 145 115
Less: Materials 1.60 kgs. @ `12.50 per kg 20 20
Variable overheads Machine A 0.6/.25 hour @ `80 48 20
Variable overheads Machine B 0.5/.55 hour @ `100 50 55
Contribution per unit 27 20
Maximum Contribution (Contribution per unit × Max. units) 1,79,982 1,62,500

Calculation of maximum number of units that can be produced under various limiting factor:
Particulars Part A Part B
Machine A (4,000 hours) 6,666 16,000
(4,000 ÷ 0.6) (4,000 ÷ 0.25)
Machine B (4,500 hours) 9,000 8,181
(4,500 ÷ 0.5) (4,500 ÷ 0.55)
Alloy Available (13,000 kg.) 8,125 8,125
(13,000 ÷ 1.6) (13,000 ÷ 1.6)
Maximum number of part to be manufactured (least of all) 6,666 8,125
Spare Part A will optimize the contribution.

2. Statement Showing Revised Contribution

Particulars Part A
Parts to be manufactured 6,666
Machine A to be used (0.6 × 6,666) 4,000
Machine B to be used (0.5 × 6,666) 3,333
Underutilized machine hours (4,500 – 3,333) 1,167
Compensation for unutilized machine hours (1,167 × `60) 70,020
Reduction in price by 10% (6,666 × 145 × 10%) 96,657
Total revised contribution (1,79,982 + 70,020 – 96,657) 1,53,345

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 CHAPTER 13 MARGINAL COSTING

BQ 32
A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option only at the
beginning of each year. Fixed cost for the period is `30,000, Relevant information about the products for the
next year is given below:
Details X Y Z
Selling price per unit (`) 10 12 12
Variable cost per unit (`) 6 9 7
Market demand in units 3,000 2,000 1,000
Production capacity in units 2,000 3,000 900

Compute the opportunity costs for each of the products.

Answer
Statement Showing Opportunity Cost
Details X Y Z
Contribution per unit (`) 4 3 5
Units 2,000 2,000 900
(lower of market demand or production capacity)
Possible contribution (`) 8,000 6,000 4,500
Opportunity cost (`) 6,000 8,000 8,000

Opportunity cost is the maximum possible contribution forgone by not producing alternative product i.e. if
Product X is produced then opportunity cost will be maximum of (` 6,000 from Y, ` 4,500 from Z).

MAKE OR BUY DECISION

BQ 33
NN Ltd. manufactures automobiles accessories and parts. The following are the total cost of processing
2,00,000 units:
Direct material cost `375 per unit
Direct labour cost `80 per unit
Variable factory overhead `16 per unit
Fixed factory overhead `500 Lakhs

The purchase price of the component is `485. The fixed overhead would continue to be incurred even when
the component is bought from outside.

Required:
(a) Should the part be made or bought from outside considering that the present facility when released
following a buying decision would remain idle?
(b) In case the released capacity can be rented out to another manufacturer for `32,00,000 having good
demand. What should be the decision?

Answer
(a) Make or Buy decision when present facility would remain idle:
Variable cost per unit = `375 + `80 + `16 = `471
Buying cost of component = `485

Decision: Here the variable cost of making the component is `471 as compared to buying cost of `485. The

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 MARGINAL COSTING CHAPTER 13

component shall be made by using own production facility as it would save the company `14 per unit.

Note: The fixed cost of `500 lakhs is irrelevant for decision making as it would incur in either case.

(b) Make or Buy decision when present facility can be rented out:
Rental income if we buy = `32,00,000
Additional cost of buying = (`485 - `471) × 2,00,000 units = `28,00,000
Net benefit if we buy = `32,00,000 - `28,00,000 = `4,00,000

Decision: The component should be bought from outside as it would save the company `4,00,000 in fixed
cost.

PROCESSING OF SPECIAL ORDER

BQ 34
PQR Ltd. manufactures medals for winners of athletic events and other contests. Its manufacturing plant has
the capacity to produce 10,000 medals each month. The company has current production and sales level of
7,500 medals per month. The current domestic market price of the medal is `150. The cost data for the month
of August 2023 is as under:
(`)
Variable cost:
Direct material cost 2,62,500
Direct labour cost 3,00,000
Overheads 75,000
Fixed manufacturing cost 2,75,000
Fixed marketing cost 1,75,000
Total cost 10,87,500

PQR Ltd. has received a special onetime only order for 2,500 medals at `120 per medal.

Required:
(1) Should PQR Ltd. accept the special order? Why? Explain briefly.
(2) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month. The special order
must be taken either in full or rejected totally. Analyse whether PQR Ltd. should accept the special order
or not.

Answer
(1) Profit if we accept special order of 2,500 units with capacity of 10,000 units:
Particulars Amount (`)
Sales (7,500 units × `150) + (2,500 units × `120) 14,25,000
Less: Variable Cost:
Direct material cost (2,62,500 × 10,000/7,500) 3,50,000
Direct labour cost (3,00,000 × 10,000/7,500) 4,00,000
Overheads (75,000 × 10,000/7,500) 1,00,000
Contribution 5,75,000
Less: Fixed manufacturing cost 2,75,000
Less: Fixed marketing cost 1,75,000
Proposed Profit 1,25,000

Decision: The offer for 2,500 units be accepted as it increases the profit by `87,500 (`1,25,000 – `37,500).

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 CHAPTER 13 MARGINAL COSTING

(2) Profit if we accept special order of 2,500 units with capacity of 9,000 units:
Particulars Amount (`)
Sales (6,500 units × `150) + (2,500 units × `120) 12,75,000
Less: Variable Cost:
Direct material cost (2,62,500 × 9,000/7,500) 3,15,000
Direct labour cost (3,00,000 × 9,000/7,500) 3,60,000
Overheads (75,000 × 9,000/7,500) 90,000
Contribution 5,10,000
Less: Fixed manufacturing cost 2,75,000
Less: Fixed marketing cost 1,75,000
Proposed Profit 60,000

Decision: The offer for 2,500 units be accepted as it increases the profit by `22,500 (`60,000 – `37,500).

Working note:
Existing profit at 7,500 units
Particulars Amount (`)
Sales (7,500 units × `150) 11,25,000
Less: Variable Cost:
Direct material cost 2,62,500
Direct labour cost 3,00,000
Overheads 75,000
Contribution 4,87,500
Less: Fixed manufacturing cost 2,75,000
Less: Fixed marketing cost 1,75,000
Existing Profit 37,500

ABSORPTION COSTING V/S MARGINAL COSTING

BQ 35
XYZ Ltd. has a production capacity of 2,00,000 units per year normal capacity utilization is reckoned as 90%.
Standard variable production costs are `11 per unit. The fixed costs are `3,60,000 per year. Variable selling
costs are `3 per unit & fixed selling costs are `2,70,000 per year. The unit selling price is `20. In the year just
ended on 30th June 2023, the production was 1,60,000 units & sales were 1,50,000 units. The closing
inventory on 30th June 2023 was 20,000 units. The actual variable production costs for the year were `35,000
higher than the standard.
Calculate the profit for the year:
(a) By the absorption costing method,
(b) By the marginal costing method,
(c) Explain the difference in the profits.

Answer
(a) Income Statement (Under Absorption Costing)
Particulars `
Sales (1,50,000 units @ `20) 30,00,000
Production costs:
Variable (1,60,000 units @ `11) 17,60,000
Add :Increase 35,000 17,95,000
Fixed (1,60,000 units @ `2*) 3,20,000

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 MARGINAL COSTING CHAPTER 13

Cost of Goods Produced 21,15,000

Add: Opening stock (10,000 Units @ `13*) 1,30,000
 21 ,15 ,000 
Less: Closing stock   20 ,000 units  (2,64,375)
 1 ,60 ,000 
Cost of Goods Sold 19,80,625
Add: Under absorbed fixed production overhead (3,60,000-3,20,000) 40,000
Add: Variable selling costs (1,50,000 units @ `3) 4,50,000
Add: Fixed selling costs 2,70,000
Total cost 27,40,625
Profit (Sales – Total Cost) 2,59,375

(b) Income Statement (Under Marginal Costing)

Particulars `
Sales (1,50,000 units @ `20) 30,00,000
Variable cost of goods sold:
Variable production cost (1,60,000 units @ `11 + `35,000) 17,95,000
Variable cost of production 17,95,000
Add: Opening Stock (10,000 units @ `11) 1,10,000
 17 ,95 ,000 
Less: Closing stock   20 ,000 units 
 1 ,60 ,000  (2,24,375)
Variable cost of goods sold 16,80,625
Variable selling cost (1,50,000 units @ `3) 4,50,000
Variable Cost of Sales 21,30,625
Contribution (Sales - Variable Cost of Sales) 8,69,375
Less: Fixed cost:
Production 3,60,000
Selling 2,70,000 (6,30,000)
Profit (Contribution – Fixed Cost) 2,39,375

Working Notes:
 Fixed production overhead are absorbed at a pre-determined rate based on normal capacity, i.e.
`3,60,000 ÷ 1,80,000 units = `2 per unit
 Opening stock is 10,000 units (1,50,000 units + 20,000 units - 1,60,000 units). It is valued at `13 per unit
[`11 + `2 (standard variable + standard fixed)].

(c) Reconciliation Statement

Particulars `
Profit as per absorption costing 2,59,375
Add: Opening stock under-valued in marginal costing (`1,30,000 – `1,10,000) 20,000
Less: Closing Stock under-valued in marginal closing (`2,64,375 – `2,24,375) (40,000)
Profit as per marginal costing 2,39,375

BQ 36
Wonder ltd manufactures a single product, ZEST. The following figures relate to ZEST for a one year period:
Activity Level 50% 100%
Sales and production (units) 400 800
Sales `8,00,000 `16,00,000
Production costs:
Variable `3,20,000 `6,40,000
Fixed `1,60,000 `1,60,000

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 CHAPTER 13 MARGINAL COSTING

Selling and distribution costs:

Variable `1,60,000 `3,20,000
Fixed `2,40,000 `2,40,000

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year and
actual fixed costs are the same as budgeted. There were no stocks of ZEST at the beginning of the year. In the
first quarter, 220 units were produced and 160 units were sold.

Required:
(a) What would be the fixed production costs absorbed by ZEST if absorption costing is used?
(b) What would be the under/over-recovery of overheads during the period?
(c) What would be the profit using absorption costing?
(d) What would be the profit using marginal costing?
(e) Why is there a difference between the answers to (c) and (d)?

Answer
(a) Fixed production costs absorbed:
Budgeted fixed production costs `1,60,000
Budgeted output (Normal level of activity 800 units)
Therefore, the absorption rate (`1,60,000 ÷ 800) `200 per unit
Fixed cost recovered (During the first quarter, 220 units × `200) `44,000

(b) Under/over-recovery of overheads during the period:

Actual fixed production overhead (¼ of `1,60,000) `40,000
Absorbed fixed production overhead `44,000
Over-recovery of overheads `4,000

(c) Profit for the Quarter (Absorption Costing)

Activity Level ` `
Sales revenue (160 units × `2,000) 3,20,000
Production costs:
Variable (220 units × `800) 1,76,000
Fixed overheads absorbed (220 units × `200) 44,000 2,20,000
Cost of production 2,20,000
Add: Opening stock Nil
Less: Closing stock (`2,20,000 ÷ 220 units) × 60 units (60,000)
Cost of goods sold 1,60,000
Less: Adjustment for over recovery of fixed overheads (4,000)
Add: Selling and distribution costs:
Variable (160 units × `400) 64,000
Fixed (¼ of `2,40,000) 60,000 1,24,000
Cost of sales 2,80,000
Profit (Sales – Cost of sales) 40,000

(d) Profit for the Quarter (Marginal costing)

Activity Level ` `
Sales revenue (160 units × `2,000) 3,20,000
Production costs:
Variable (220 units × `800) 1,76,000
Cost of production 1,76,000
Add: Opening stock Nil
Less: Closing stock (`1,76,000 ÷ 220 units) × 60 units (48,000)

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 MARGINAL COSTING CHAPTER 13

Cost of goods sold 1,28,000

Add: Selling and distribution costs:
Variable (160 units × `400) 64,000
Cost of sales 1,92,000
Contribution (Sales – Variable Cost of sales) 1,28,000
Less: Fixed costs:
Production 40,000
Selling & distribution 60,000 (1,00,000)
Profit 28,000

(e) Difference in profit between both techniques is due to difference in valuation of closing stock:
Profit as per Marginal costing 28,000
Add: under valuation of closing stock in marginal costing (60,000 – 48,000) 12,000
Profit as per Absorption costing 40,000

OTHERS

BQ 37
Arnav Ltd. manufacture and sales its product R9. The following figures have been collected from cost records
of last year for the product R9:
Elements of Cost Variable Cost Portion Fixed Cost
Direct Material 30% of Cost of Goods Sold -
Direct Labour 15% of Cost of Goods Sold -
Factory Overhead 10% of Cost of Goods Sold `2,30,000
Administration Overhead 2% of Cost of Goods Sold `71,000
Selling and Distribution Overhead 4% of Cost of Sales `68,000
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.
(Assume that Administration Overhead is related with production activity)

Answer
(a) Break-even Sales = Fixed Cost ÷ PV Ratio
= `3,69,000 ÷ 53.4054% = `6,90,941

(b) Profit Last Year = Sales – Variable Cost - Fixed Cost

= 5,000 units × `185 – `4,31,000 – `3,69,000 = `1,25,000

(c) Margin of safety (%)

Margin of Safety = Sales – BEP Sales
= `9,25,000 – `6,90,941 = `2,34,059
Margin of Safety (%) = MOS Sales ÷ Sales
= `2,34,059 ÷ `9,25,000 = 25.3036%

(d) Profit at 90% Sales = 90% of Sales – 90% of Variable Cost - Fixed Cost
= 90% (`9,25,000 – `4,31,000) – `3,69,000 = `75,600

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 CHAPTER 13 MARGINAL COSTING

Working notes:
1. Cost of Goods Sold = Direct Material + Direct Labour + Factory OH + Administration OH
= 30% COGS + 15% COGS + 10% COGS + `2,30,000 + 2% COGS
+`71,000
Cost of Goods Sold = 57% of COGS + `3,01,000 or 43% of COGS = `3,01,000

Cost of Goods Sold = `3,01,000 ÷ 43% = `7,00,000

2. Cost of Sales = COGS + Selling and Distribution Overheads

= `7,00,000 + 4% of Cost of Sales + `68,000
Cost of Sales = `7,68,000 ÷ 96% = `8,00,000

3. Classification of Fixed and Variable Cost

Elements of Cost Variable Cost Portion Fixed Cost
Direct Material 30% of `7,00,000 = `2,10,000 -
Direct Labour 15% of `7,00,000 = `1,05,000 -
Factory Overhead 10% of `7,00,000 = `70,000 `2,30,000
Administration Overhead 2% of `7,00,000 = `14,000 `71,000
Selling and Distribution Overhead 4% of `8,00,000 = `32,000 `68,000
Total `4,31,000 `3,69,000

Sales  Variable Cost 5,000 units  185  4 ,31 ,000

4. Profit Volume Ratio =  100 =  100
Sales 5,000 units  185
= 53.4054%

BQ 38
By noting “P/V will increase or P/V will decrease or P/V will not change”, as the case may be, state how the
following independent situations will affect the P/V ratio:

1. An increase in the physical sales volume;

2. An increase in the fixed cost;
3. A decrease in the variable cost per unit;
4. A decrease in the contribution margin;
5. An increase in selling price per unit;
6. A decrease in the fixed cost;
7. A 10% increase in both selling price and variable cost per unit;
8. A 10% increase in the selling price per unit and 10% decrease in the physical sales volume;
9. A 50% increase in the variable cost per unit and 50% decrease in the fixed cost.
10. An increase in the angle of incidence.

Answer
Item number P/V Ratio Reason
1 Will not change -
2 Will not change -
3 Will increase -
4 Will decrease -
5 Will increase -
6 Will not change -
7 Will not change Reasoning 1
8 Will increase Reasoning 2
9 Will decrease Reasoning 3
10 Will increase Reasoning 4

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 MARGINAL COSTING CHAPTER 13

Reasoning 1: A 10% increase in both selling price and variable cost per unit.
Assumptions: a) Variable cost is less than selling price.
b) Selling price `100 variable cost ` 90 per unit.
100  90
c) P/V ratio = = 10%
100

10% increase in S.P. = `110

10% increase in variable cost = `99
P/V ratio = 10% i.e. P/V ratio will not change

Reasoning 2: Increase or decrease in physical sales volume will not change P/V ratio. Hence 10% increase
in selling price per unit will increase P/V ratio.

Reasoning 3: Increase or decrease in fixed cost will not change P/V ratio. Hence 50% increase in the variable
cost per unit will decrease P/V ratio.

Reasoning 4: Angle of incidence is the angle at which sales line cuts the total cost line. If it is large, it indicates
that the profits are being made at higher rate. Hence increase in the angle of incidence will increase the P/V
ratio.

BQ 39
XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2. You are given that the unit
contribution of Y is one fifth less than the unit contribution of X, that the total of F1 and F2 is `1,50,000, that
the BEP of X is 1,800 units (for BEP of X F2 is not considered) and that 3,000 units is the indifference point
between X and Y. (i.e. X and Y make equal profits at 3,000 unit volume, considering their respective fixed
costs). There is no inventory build up as whatever is produced is sold.

Find out the values F1 and F2 and units contributions of X and Y.

Answer
Let Cx be the Contribution per unit of Product X.
Therefore, Contribution per unit of Product Y = Cy = ⅘ Cx = 0.8 Cx

Given F1 + F2 = 1,50,000,
F1 = 1,800 Cx (Break even Volume × Contribution per
unit)
Therefore, F2 = 1,50,000 – 1,800 Cx

3,000 Cx – F1 = 3,000 × 0.8 Cx – F2 or 3,000 Cx – F1

= 2,400 Cx - F2 (Indifference Point)
i.e., 3,000 Cx – 1,800 Cx = 2,400 Cx – 1,50,000 + 1,800 Cx
i.e., 3,000 Cx = 1,50,000,
Cx = 1,50,000 ÷ 3,000 = `50

Contribution per unit of X = `50

Contribution per unit of Y = `50 × 0.8 = `40

Fixed Cost of X = F1
= 1,800 × 50 = `90,000
Fixed Cost of Y = F2
= 1,50,000 – 90,000 = `60,000

13.24
 CHAPTER 13 MARGINAL COSTING

PAST YEAR QUESTIONS

PYQ 1
SHA Limited provides the following trading results:
Year Sales Profit
2012-13 `25,00,000 10% of Sale
2013-14 `20,00,000 8% of Sale
You are required to calculate:
(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is `30,00,000
(iv) Sale, when desired profit is `4,75,000
(v) Margin of Safety at a profit of `2,70,000
[(5 Marks) May 2014]

Answer
(i) Calculation of Fixed Cost (by using data of year 2012-13):
Fixed cost = Contribution – profit = (Sales × PV Ratio) - 10% of Sale
= (`25,00,000 × 18%) - 10% of `25,00,000 = `2,00,000

(ii) Calculation of Break Even Point:

Fixed Cost 2 ,00 ,000
BEP = = = `11,11,111.11
PV Ratio 18 %

(iii) Calculation of Amount of profit, if Sale is `30,00,000:

Profit = Contribution - Fixed Cost
= `30,00,000 × 18% - 2,00,000 = `3,40,000

(iv) Sales, when desired profit is `4,75,000:

Fixed Cost  Desired Pr ofit 2,00,000  4 ,75,000
Sales = =
PV Ratio 18%
= `37,50,000

(v) Margin of Safety at a profit of `2,70,000:

Pr ofit 2 ,70 ,000
MOS = = = `15,00,000
PV Ratio 18 %

Working Note:
Difference in Pr ofit 10 % of 25 ,00 ,000  8 % of 20 ,00 ,000
PV Ratio = × 100 = × 100
Difference in Sales 25 ,00 ,000  20 ,00 ,000
90 ,000
= × 100 = 18%
5,00 ,000

PYQ 2
ABC Limited started is operation in the year 2013 with the total production capacity of 2,00,000 units. The
following information, for two years, are made available to you:

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 MARGINAL COSTING CHAPTER 13

2013 2014
Sales units 80,000 1,20,000
Total cost (`) 34,40,000 45,60,000

There has been no change in the cost structure and selling price and it is anticipated that it will remain
unchanged in 2015 also. Selling price is `40 per unit.

Calculate:
(a) Variable cost per unit.
(b) Profit Volume ratio.
(c) Break-Even Point (in units).
(d) Profit if the firm operates at 75% of the capacity.
[(5 Marks) May 2015]

Answer
Increase in Cost 45 ,60 ,000  34 ,40 ,000
(a) Variable cost per unit = =
Increase in Units 1,20 ,000  80 ,000
= `28 per unit
Contributi on per unit 40  28
(b) Profit Volume ratio = × 100 = × 100
Sale price per unit 40

= 30%
Fixed Cost 12,00,000
(c) Break Even Point (in units) = n
= = 1,00,000 units
Cont P.U . 12

(d) Profit at 75% of total capacity:

Profit = (No. of units sold × Contn per unit) – Fixed cost
= (2,00,000 × 75% × `12) - 12,00,000 = `6,00,000
Working Note:
Fixed Cost = Total cost – Variable cost (by using data of 2013)
= 34,40,000 – (80,000 × 28) = 12,00,000

PYQ 3
SL Limited is engaged in manufacture of tyres. Analysis of income statement indicated a profit of `150 Lakhs
on a sales volume of 50,000 units. The fixed costs are `850 Lakhs which appears to be high. Existing selling
price is `3,400 per unit. The company is considering to revise the target profit to `350 Lakhs.

You are required to compute:

(i) Break even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 15% increase in selling price and drop in sales volume by 10%
(iv) Volume to be achieved to earn target profit at revised selling price as calculated in (iii) above, if
reduction of 8% in the variable costs and `85 Lakhs in the fixed cost is envisaged.
[(8 Marks) June 2015]

Answer
Fixed Cost 850 Lakhs
(i) Break even point (in units) = = = 42,500 Units
Contributi on Per Unit 2,000

Break even point (in rupees) = BEP in Units × Sales Price Per Unit

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 CHAPTER 13 MARGINAL COSTING

= 42,500 × `3,400 = `1,445 Lakhs

Fixed Cost  T arg et Pr ofit 850 Lakhs  350 Lakhs

(ii) Sales to earn target profit = =
Contributi on Per Unit 2,000
= 60,000 Units

(iii) Revised Profit = Revised Contribution – Fixed Cost

= [`2,510 × 45,000 units (50,000 – 10%)] - 850 Lakhs
= `279.5 Lakhs

Re vised Fixed Cost  T arg et Pr ofit

(iv) Volume to earn target profit =
Re vised Contributi on Per Unit
765 Lakhs  350 Lakhs
= = 42,524.79 Units
2,622

Working Note:
(a) Calculation of Contribution per unit and PV Ratio:
Contribution = Fixed Cost + Profit
= 850 Lakhs + 150 Lakhs = 1,000 Lakhs

Contribution Per Unit = Total Contribution ÷ No of units

= 1,000 Lakhs ÷ 50,000 units = `2,000 per unit

(b) Calculation of Revised Contribution with 15% increase in sale price:

Revised Contribution = Revised Sale Price – Variable Cost
= (3,400 + 15%) – 1,400 = `2,510 per unit

(c) Calculation of Revised Variable Cost per unit, Revised Contribution per unit and Fixed Cost:
Revised Variable Cost = Variable Cost – 8%
= 1,400 – 8% = `1,288 per unit
Revised Contribution per unit = (3,400 + 15%) – 1,288 = `2,622 per unit
Revised Fixed Cost = 850 Lakhs – 85 Lakhs = `765 Lakhs

PYQ 4
A company gives the following information:
Margin of safety : `3,75,000
Total cost : `3,87,500
Margin of safety in units : 15,000 units
Break even sales in units : 5,000 units
You are required to calculate:
(i) Selling price per unit, (ii) Profit, (iii) Profit/Volume ratio, (iv) Break even sales (in `), (v) Fixed cost
[(5 Marks) Nov 2015]

Answer
M arg in of safety in rupees 3,75 ,000
(i) Selling price per unit = = = `25
M arg in of safety in units 15 ,000

(ii) Profit = Total sales – Total cost

= [(15,000 + 5,000) × 25] – 3,87,500 = `1,12,500

13.27
 MARGINAL COSTING CHAPTER 13

Pr ofit 1,12 ,500

(iii) Profit/Volume ratio = × 100 = × 100
M arg in of safety in rupees 3,75 ,000
= 30%

(iv) Break even sales in rupees = Break even point in units × sale price per unit
= 5,000 units × 25 = `1,25,000

(v) Fixed cost = Break even point in rupees × PV ratio

= 1,25,000 × 30% = `37,500

PYQ 5
A dairy product company manufacturing baby food with a shelf life of one year furnishes the following
information:
(i) On 1st January, 2016, the company has an opening stock of 20,000 packets whose variable cost is `180
per packet.
(ii) In 2015, production was 1,20,000 packets and the expected production in 2016 is 1,50,000 packets.
Expected sales for 2016 is 1,60,000 packets.
(iii) In 2015, fixed cost per unit was `60 and it is expected to increase by 10% in 2016. The variable cost is
expected to increase by 25%. Selling price for 2016 has been fixed at `300 per packet.

You are required to calculate the Break-even volume in units for 2016.
[(5 Marks) May 2016]

Answer
Fixed cos t  Contributi on from opening units
Break-even-point (in units) = Opening units +
Contributi on per current period unit

79 ,20 ,000  120  20 ,000

= 20,000 units + = 93,600 Units
300  225

Note: Since, shelf life of the product is one year only, hence, opening stock is to be sold first.

Working notes:
Fixed cost (2015) = 1,20,000 packets × `60 per unit = `72,00,000

Fixed cost (2016) = `72,00,000 + 10% = `79,20,000

Variable cost (2016) = `180 + 25% = `225 per unit

Contribution (2015) = `300 - `180 = `120 per unit

PYQ 6
The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture of
a toy. The following information is available:

Particulars Process A (`) Process B (`)

Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed cost per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (next year, in units) 4,00,000 4,00,000

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 CHAPTER 13 MARGINAL COSTING

Suggest:
1. Which process should be chosen?
2. Would you change your answer as given above, if you were informed that the capacities of the two
processes are as follows: A - 6,00,000 units; B - 5,00,000 units? Why?
[(4 Marks) May 2016]

Answer
1. Profit (Process A) = Contribution – Fixed cost
= 4,00,000 units × `8 (`20 - `12) – `30,00,000 = `2,00,000

Profit (Process B) = Contribution – Fixed cost

= 4,00,000 units × `6 (`20 - `14) – `21,00,000 = `3,00,000

Suggestion: Process B should be chosen as it gives more profit.

2. Profit (Process A) = Contribution – Fixed cost

= 6,00,000 units × `8 (`20 - `12) – `30,00,000 = `18,00,000

Profit (Process B) = Contribution – Fixed cost

= 5,00,000 units × `6 (`20 - `14) – `21,00,000 = `9,00,000

Suggestion: Process A should be chosen as it will give more profit.

Note: It is assumed that capacity produced equals sales.

PYQ 7
The following figures are available from the records of ABC Company as at 31st March:

2015 (` in Lakhs) 2016 (` in Lakhs)

Sales 200 250
Profit 30 45

Calculate:
1. The P/V ratio and total fixed expenses.
2. The break-even level of sales.
3. Sales required to earn a profit of `70 lakhs.
[(5 Marks) Nov 2016]

Answer
Increase in Pr ofit 45  30
1. Profit Volume ratio = × 100 = × 100 = 30%
Increase in Sales 250  200

Fixed Cost = Contribution – Profit (by using data of 2015)

= 200 Lakhs × 30% – 30 Lakhs = `30,00,000

Fixed Cost 30,00,000

2. Break Even Point = =
PV Ratio 30%
= `1,00,00,000

Fixed Cost  Pr ofit 30 Lakhs  70Lakhs

3. Required Sales = =
PV Ratio 30%
= `3,33,33,333

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 MARGINAL COSTING CHAPTER 13

PYQ 8
A company has introduced a new product and marketed 20,000 units. Variable cost of the product is `20 per
units and fixed overheads are `3,20,000.
You are required to:
1. Calculate selling price per unit to earn a profit of 10% on sales value, BEP and Margin of Safely?
2. If the selling price is reduced by the company by 10%, demand is expected to increase by 5,000 units,
then what will be its impact on Profit, BEP and Margin of Safety?
3. Calculate Margin of Safety if profit is `64,000.
[(8 Marks) Nov 2016]

Answer
1. Sales:
Let Sale price per unit be ‘x’

Sale price × no of units = Variable cost per unit × no of units + Fixed cost + Profit
20,000 x = 20 × 20,000 + 3,20,000 + 10% of 20,000 x
20,000 x = 4,00,000 + 3,20,000 + 2,000 x
x = 7,20,000 ÷ 18,000 = `40 per unit
Break-even-point = Fixed cost ÷ Contribution per unit
= 3,20,000 ÷ 20 = 16,000 units
Margin of safety = Total sales unit – BEP units
= 20,000 units – 16,000 units = 4,000 units

2. Impact on Profit, BEP and MOS:

Impact on profit:
Existing profit = Sales – Variable cost – Fixed cost
= 20,000 units × 40 – 20,000 units × 20 – 3,20,000
= 80,000
Revised profit = Sales – Variable cost – Fixed cost
= 25,000 units × 36 (40 – 10%) – 25,000 units × 20 – 3,20,000
= 80,000

Though there is no impact on the total profit amount but the rate of profit is decreased from 10% to
8.89% (80,000/9,00,000 × 100).

Impact on BEP:
Revised BEP = Fixed cost ÷ Contribution per unit
= 3,20,000 ÷ 16 (36 - 20) = 20,000 units
The Break-even point is increased by 4,000 units (20,000 units – 16,000 units).

Impact on MOS:
Revised MOS = Total sales unit – BEP units
= 25,000 units – 20,000 units = 5,000 units
Margin of safety is increased by 1,000 units (5,000 units – 4,000 units).

3. Margin of Safety when, profit `64,000:

Margin of safety = Profit ÷ Contribution per unit
= 64,000 ÷ 20 = 3,200 units

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 CHAPTER 13 MARGINAL COSTING

PYQ 9
The following information was obtained from the records of a manufacturing unit:
Particulars (`) (`)
Sales 80,000 units @ `25 per unit 20,00,000
Materials consumed 8,00,000
Variable overheads 2,00,000
Labour charges 4,00,000
Fixed overheads 3,60,000 17,60,000
Net profit 2,40,000

Calculate:
1. The number of units by selling which the company will neither lose nor gain anything.
2. The sales needed to earn a profit of 20% on sales.
3. The extra units which should be sold to obtain the present profit if it is proposed to reduce the selling
price by 20% and 25%.
4. The selling price to be fixed to bring down its Break-even Point to 10,000 units under present
conditions. [(8 Marks) May 2017]

Answer
1. Break-even-point (in units) = Fixed cost ÷ Contribution per unit
= 3,60,000 ÷ 7.50 = 48,000 units

Fixed cos t
2. Required sales (in units) =
Contributi on per unit  Pr ofit per unit
3,60 ,000
= = 1,44,000 units/ `36,00,000
7.50  20 % of 25 .00

3. Calculation of Extra units to be sold:

No. of units sold with 20% decrease in sales price
Fixed cos t  Pr ofit 3,60,000  2,40,000
= =
Re vised contributi on per unit 2.50
= 2,40,000 units
Extra units to be sold = 2,40,000 – 80,000 = 1,60,000 units

No. of units sold with 20% decrease in sales price

Fixed cos t  Pr ofit 3,60,000  2,40,000
= =
Re vised contributi on per unit 1.25
= 4,80,000 units
Extra units to be sold = 4,80,000 – 80,000 = 4,00,000 units

4. Selling price per unit to bring down its BEP to 10,000 units:
At BEP, Sales Value = Variable Cost + Fixed Cost
= 10,000 units × `17.50 + `3,60,000 = `5,35,000
Sales value for 10,000 units = `5,35,000
Sales price per unit = `5,35,000 ÷ 10,000 units = `53.50

PYQ 10
A company, with 90% Capacity utilization, is manufacturing a product and makes a sale of `9,45,000 at `30
per unit. The cost data is as under:

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 MARGINAL COSTING CHAPTER 13

Materials `9 per unit

Labour `7 per unit
Semi variable cost (including variable cost `4.25 per unit) `2,10,000
Fixed cost is `94,500 upto 90% level of output (capacity). Beyond this, an additional amount of `15,000 will
be incurred.
You are required to calculate:
(1) Level of output at break-even point,
(2) Number of units to be sold to earn a net income of 10% of sales and
(3) Level of output needed to earn a profit of `1,41,375.
[(8 Marks) Nov 2017]

Answer
(1) Break-even-point (in units) = Fixed cost ÷ Contribution per unit
= `1,70,625 ÷ `9.75 = 17,500 units

Break-even-point (in `) = 17,500 units × `30 = `5,25,000

Fixed cos t
(2) Required sales (in units) =
Contributi on per unit  Pr ofit per unit
1 ,70 ,625
= = 25,278 units
9.75  10 % of 30

Fixed cos t  Pr ofit

(3) Required sales (in units) =
Contributi on per unit
1 ,70 ,625  1 ,41 ,375
= = 32,000 units
9.75

Note: 32,000 units is higher than 90% activity level (31,500 units), therefore now fixed cost will be `1,85,625
(`1,70,625 + `15,000)
Fixed cos t  Pr ofit 1 ,85 ,625  1 ,41 ,375
Required sales (in units) = =
Contributi on per unit 9.75
= 33,538.46 units or `10,06,154
Working notes:
Existing level of sales = `9,45,000 ÷ `30 = 31,500 units
(90% capacity level)

Fixed cost in semi variable cost = Total semi variable cost – variable cost
= `2,10,000 – 31,500 × `4.25 = `76,125

Fixed cost = `94,500 + `76,125 = `1,70,625

Contribution per unit = `30 - `9 - `7 - `4.25 = `9.75

PYQ 11
A company is producing an identical product in two factories. The following are the details in respect of both
factories:
Particulars Factory X Factory Y
Sales price per unit (`) 50 50
Variable cost per unit (`) 40 35
2,00,000 3,00,000

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 CHAPTER 13 MARGINAL COSTING

Fixed cost (`) 40,000 30,000

Depreciation included in above fixed cost (`) 30,000 20,000
Sales in units 40,000 30,000
Production capacity (units)

You are required to determine:

(1) Break even point (BEP) each factory individually.
(2) Cash break even point for each factory individually.
(3) BEP for company as a whole, assuming the present product mix is in sales ratio.
(4) Consequence on profit and BEP if product mix is changed to 2 : 3 and total demand remain same.
[(8 Marks) May 2018]

Answer
(1) Individual BEP:
Factory X = Fixed cost ÷ Contribution per unit
= 2,00,000 ÷ 10 (50 - 40) = 20,000 units
Factory Y = 3,00,000 ÷ 15 (50 - 35) = 20,000 units

(2) Individual Cash BEP:

Factory X = Cash fixed cost ÷ Contribution per unit
= 1,60,000 ÷ 10 (50 - 40) = 16,000 units
Factory Y = 2,70,000 ÷ 15 (50 - 35) = 18,000 units

(3) BEP as a whole: = Total fixed cost ÷ Composite contribution per unit
= (2,00,000 + 3,00,000) ÷ 12 (10 × 3/5 + 15 × 2/5)
= 41,667 units

(4) BEP as a whole:

Total demand original = 30,000 of X + 20,000 of Y = 50,000 units
Revised sales X = 50,000 × 2/5 = 20,000 units
Revised sales Y = 50,000 × 3/5 = 30,000 units
Existing Profit = Contribution – Fixed cost
= (30,000 × 10 + 20,000 × 15) – (2,00,000 + 3,00,000)
= `1,00,000
Revised Profit = (20,000 × 10 + 30,000 × 15) – (2,00,000 + 3,00,000)
= `1,50,000
Consequence on Profit = Increase in Profit by `50,000

Revised BEP = Total fixed cost ÷ Revised composite contribution per unit
= (2,00,000 + 3,00,000) ÷ 13 (10 × 2/5 + 15 × 3/5)
= 38,462 units
Consequence on BEP = Decrease in BEP by 3,205 units

PYQ 12
Following figures have been extracted from the books of M/s. RST Private Limited:
Year Sales Profit
2016-17 `4,00,000 15,000 (loss)
2017-18 `5,00,000 15,000 (profit)

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 MARGINAL COSTING CHAPTER 13

You are required to calculate:

(1) Profit Volume Ratio
(2) Fixed Costs
(3) Break Even Point
(4) Sales required to earn a profit of `45,000
(5) Margin of Safety in financial year 2017-2018. [(5 Marks) May 2018]

Answer
Difference in Pr ofit 30 ,000
(a) PV Ratio = × 100 = = 30%
Difference in Sales 1 ,00 ,000

(b) Calculation of Fixed Cost (by using data of year 2017-18):

Fixed cost = Contribution – profit
= 5,00,000 × 30% - 15,000 = `1,35,000

(c) Calculation of Break Even Point:

Fixed Cost 1 ,35,000
BEP = = = `4,50,000
PV Ratio 30%

(d) Sales required to earn `45,000:

Fixed Cost  Desired Pr ofit 1 ,35,000 + 45 ,000
Sales = =
PV Ratio 30%
= `6,00,000

(e) Margin of Safety in financial year 2017-2018:

Pr ofit 15,000
MOS = = = `50,000
PV Ratio 30%

PYQ 13
A manufacturing concern was operating at margin of safety of 40% in the year 2018 and was selling its
product at `75 per unit. Variable cost ratio was 80% and fixed cost amounted to `5,40,000.
In the year 2019, the concern anticipates an increase in the variable costs and fixed cost by 15%
and 5% respectively.

You are required to:

Find out the selling price to be fixed in the year 2019 keeping in view that concern is willing to maintain same
P/V ratio as it was in the year 2018.
[(5 Marks) Nov 2018]

Answer
Variable cost (2018) = `75 × 80% = `60 per unit
Variable cost (2019) = `60 + 15% = `69 per unit
Sale Price to maintain same PV Ratio = `69 ÷ 80% = `86.25 p.u.

PYQ 14
A manufacturing company is providing a product ‘A’ which is sold in the market at `45 per unit. The company
has the capacity to produce 40,000 units per year. The budget for the year 2018-2019 projects a sale of
30,000 units.

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 CHAPTER 13 MARGINAL COSTING

The cost of each unit are expected as under:

Materials `12
Wages `9
Overheads `6
Margin of safety is `4,12,500.

You are required to:

(1) Calculate fixed cost and break-even point.
(2) Calculate the volume of sales to earn profit of 20% on sales.
(3) If management is willing to invest 10,00,000 with the expected return of 20%, calculate units to be sold
to earn this profit.
(4) Management expects additional sales if the selling price is reduced to `44. Calculate units to be sold to
achieve the same profit as desired in above (3).
[(10 Marks) Nov 2018]

Answer
(1) Fixed cost = BEP sales × P/V ratio
= `9,37,500 × 40% = `3,75,000
Break-even point = Total sales – Margin of safety
= 30,000 units × `45 – `4,12,500 = `9,37,500

P/V ratio = (Contribution ÷ Sales) × 100

= [{45 – (12 + 9 + 6)} ÷ 45] × 100
= (18 ÷ 45) × 100 = 40%

Fixed Cost + Pr ofit 3,75,000 + 20% Sales

(2) Sales to earn 20% on sales = =
P / V Ratio 40%
= `18,75,000 or 41,667 units

Fixed Cost + Pr ofit 3,75,000 + 20% on 10 ,00 ,000

(3) Sales in units = =
Contributi on p. u. 18
= 31,945 units

(4) Calculation of units to be sold to earn same profit as in (3) with revised sale price:
Fixed Cost + Pr ofit 3,75,000 + 2,00 ,000
Revised sales = =
Re vised Contributi on p. u . 17
= 33,824 units

PYQ 15
When volume is 4,000 units, average cost is `3.75 per unit. When volume is 5,000 units, average cost is `3.50
per unit. The break-even point is 6,000 units.
Calculate:
(1) Variable Cost per unit
(2) Fixed Cost and
(3) Profit Volume Ratio. [(5 Marks) Nov 2019]

Answer
Change in Cost 5,000 × 3.50 − 4,000 × 3.75
(1) Variable Cost per unit = =
Change in Units 5,000 − 4,000

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 MARGINAL COSTING CHAPTER 13

17,500 − 15,000
= = `2.50 per unit
1,000

(2) Fixed Cost = Total Cost – Variable Cost

= 4,000 × `3.75 – 4,000 × `2.50 (using 4,000 units as base)
= `15,000 – `10,000 = `5,000

Fixed Cost 5,000

(3) Profit Volume Ratio = × 100 = × 100
BEP Sales 20,000
= 25%
Working Note:
BEP sales = Fixed Cost + Variable Cost
= 5,000 + 6,000 units × `2.50 = `20,000

PYQ 16
Moon Ltd. produces products ‘X’, ‘Y’, ‘Z’ and has decided to analyse it’s production mix in respect of these
three products: ‘X’, ‘Y’, ‘Z’.

You have the following information:

X Y Z
Direct Material ` (per unit) 160 120 80
Variable Overheads ` (per unit) 8 20 12
Direct Labour:

Departments: Rate per hour (`) Hours per unit Hours per unit Hours per unit
X Y Z
Department A 4 6 10 5
Department B 8 6 15 11

From the current budget, further details are as below:

Particulars X Y Z
Annual production at present (in units) 10,000 12,000 20,000
Estimated selling price per unit (`) 312 400 240
Sales departments estimate of possible 12,000 16,000 24,000
sales in the coming year (in units)
There is 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.
[(5 Marks) Nov 2020]

Answer
(i) Statement Showing Best Possible Mix of Moon Ltd.
Rank Product Units/Mix Labour hours dept. A
I Product X 12,000 72,000
II Product Y 16,000 1,60,000
III Product Z (48,000 ÷ 5) 9,600 48,000 (b.f.)
Total 37,600 2,80,000

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 CHAPTER 13 MARGINAL COSTING

Best possible mix of X, Y, Z is 12,000 : 16,000 : 9,600

(ii) Calculation of contribution from best possible mix:

Total contribution = 12,000 units of X × 72 + 16,000 units of Y × 100
+ 9,600 units of Z × 40
= `28,48,000
Working note:
(1) Calculation of total available labour hours in department A:
Total available labour hours = 10,000 units of X × 6 hours + 12,000 units of Y × 10 hours
+ 20,000 units of Z × 5 hours
= 2,80,000 hours

(2) Calculation of Contribution per labour hour of department A and Rank:

Particulars X Y Z
Sale price per unit 312 400 240
Less: Direct materials per unit 160 120 80
Less: Variable overheads per unit 8 20 12
Less: Wages per unit:
Department A 24 40 20
(6 × 4) (10 × 4) (5 × 4)
Department B 48 120 88
(6 × 8) (15 × 8) (11 × 8)
Contribution per unit 72 100 40
÷ Labour hours per unit of Dept. A ÷6 ÷ 10 ÷5
Contribution per labour hour Dept. A 12 10 8
Rank I II III

PYQ 17
During a particular period ABC Ltd has furnished the following data:
Sales `10,00,000
Contribution to sales ratio 37%
Margin of safety is 25% of sales

A decrease in selling price and decrease in the fixed cost could change the "contribution to sales ratio" to
30% and "margin of safety" to 40% of the revised sales.

Calculate:
(1) Revised Fixed Cost.
(2) Revised Sales and
(3) New Break-Even Point.
[(5 Marks) Jan 2021]

Answer
Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = `10,00,000 × 63% = `6,30,000

After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable cost is `6,30,000.

Revised Contribution to sales = 30%

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 MARGINAL COSTING CHAPTER 13

Thus, Variable cost ratio = 100% - 30% = 70%

Thus, Revised sales = `6,30,000 ÷ 70% = `9,00,000
Revised Margin of Safety = 40%
Thus, Revised Break-even to sales ratio = 100% - 40% = 60%

(1) Revised Fixed Cost = Revised break-even sales × Revised P/V Ratio
= (`9,00,000 × 60%) × 30% = `1,62,000

(2) Revised Sales = `9,00,000 (as calculated above)

(3) New BEP = Revised sales × Revised break-even sales ratio

= `9,00,000 × 60% = `5,40,000

PYQ 18
Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
Capacity utilisation (%) 90 60
Sales (`) 63,00,000 48,00,000
Variable Cost (`) 39,60,000 22,50,000
Fixed Cost (`) 13,00,000 15,00,000

Assuming that the proposal is implemented, calculate:

(1) Break-Even sales of the merged plant and the capacity utilization at that stage.
(2) Profitability of the merged plant at 80% capacity utilization.
(3) Sales Turnover of the merged plant to earn a profit of `60,00,000.
(4) When the merged plant is working at a capacity to earn a profit of `60,00,000, what percentage of
increase in selling price is required to sustain an increase of 5% in fixed overheads.
[(10 Marks) Jan 2021]

Answer
(a) Break-Even sales of the merged plant and the capacity utilization at that stage:
Break-Even Sales = Fixed Cost ÷ P/V Ratio
= `28,00,000 ÷ 45.67% = `61,30,939

Capacity Utilization = (BEP Sales ÷ Sales at 100% Capacity) × 100

= (`61,30,939 ÷ `1,50,00,000) × 100 = 40.87%

(b) Profitability of merged plant at 80% Capacity:

Profit = Contribution – Fixed Cost
= {(`1,50,00,000 × 80%) × 45.67%} - `28,00,000
= `26,80,400

(c) Sales to earn a profit of `60,00,000:

Sales = (Fixed Cost + Profit) ÷ P/V Ratio
= (`28,00,000 + `60,00,000) ÷ 45.67% = `1,92,68,666

(d) % increase in selling price:

Increase in fixed cost = `28,00,000 × 5% = `1,40,000

∴ % increase in sales price = (`1,40,000 ÷ `1,92,68,666) × 100 = 0.727%

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 CHAPTER 13 MARGINAL COSTING

Working Notes:
Calculation of Sales, Variable Cost, P/V Ratio and Fixed Cost at 100% capacity of merged plant:

Sales = (`63,00,000 ÷ 90%) + (`48,00,000 ÷ 60%) = `1,50,00,000

Variable Cost = (`39,60,000 ÷ 90%) + (`22,50,000 ÷ 60%) = `81,50,000

P/V Ratio = (Contribution ÷ Sales) × 100

= {(`1,50,00,000 – `81,50,000) ÷ `1,50,00,000} × 100 = 45.67%

Fixed Cost = `13,00,000 + `15,00,000 = `28,00,000

PYQ 19
LR Ltd. is considering two alternative methods to manufacture a new product it intends to market. The two
methods have a maximum output of 50,000 units each and produce identical items with a selling price of `25
each. The costs are:

Method 1 Method 2
Particulars
Semi-Automatic Fully-Automatic
Variable cost per unit `15 `10
Fixed costs `1,00,000 `3,00,000

You are required to calculate:

(1) Cost Indifference Points in units, Interpret your results.
(2) The Break-even Points of each method in terms of units.
[(5 Marks) July 2021]

Answer
Difference in Fixed Costs 3,00,000 − 1,00,000
(1) Cost Indifference Pont = Difference in Variable Cost per unit
= 15 − 10
= 40,000 units
Interpretation:
If expected output < 40,000 units Select Method 1
If expected output = 40,000 units Select Any Method
If expected output > 40,000 units Select Method 2

(2) Break-even Points in units = Fixed cost ÷ Contribution per unit

Method 1 = 1,00,000 ÷ (25 - 15) = 10,000 units
Method 2 = 3,00,000 ÷ (25 - 10) = 20,000 units

PYQ 20
AZ company has prepared its budget for the production of 2,00,000 units. The variable cost per unit is `16
and fixed cost is `4 per unit. The company fixes its selling price to fetch a profit of 20% on total cost.

You are required to calculate:

1. Present break-even sales (in ` and in quantity).
2. Present profit-volume ratio.
3. Revised break-even sales in ` and the revised profit-volume ratio, if it reduces its selling price by 10%.

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 MARGINAL COSTING CHAPTER 13

4. What would be revised sales -in quantity and the amount, if a company desires a profit increase of 20%
more than the budgeted profit and selling price is reduced by 10% as above in point (iii)
[(10 Marks) Dec 2021]

Answer
1. Present BEP in ` = Fixed cost ÷ PV Ratio
= (2,00,000 units × `4) ÷ 33.33% = `24,00,000
Present BEP in units = Fixed cost ÷ Contribution per unit
= `8,00,000 ÷ `8 = 1,00,000 units

2. Present PV Ratio = (Contribution ÷ Sales Price) × 100

= (`8 ÷ `24) × 100 = 33.33%

3. Revised BEP in ` = Fixed cost ÷ Revised PV Ratio

= `8,00,000 ÷ 25.9259% = `30,85,714

Revised PV Ratio = (Revised Contribution ÷ Revised Sales Price) × 100

= (`5.6 ÷ `21.6) × 100 = 25.9259%

4. Revised Sales in Quantity= (Fixed cost + Desired Profit) ÷ Revised Contribution per unit
= (`8,00,000 + `9,60,000) ÷ `5.6 = 3,14,286 units

Revised Sales in Amount= (Fixed cost + Desired Profit) ÷ Revised PV Ratio

= (`8,00,000 + `9,60,000) ÷ 25.9259% = `67,88,571.42

Working Notes:
(a) Present Sale Price = Cost p.u. + 20%
= (`16 + `4) + 20% = `24 per unit

(b) Present Contribution p.u.= Sale Price p.u. – Variable Cost p.u.
= `24 – `16 = `8 per unit

(c) Revised Sale Price = Present Sale Price – 10%

= `24 – 10% = `21.6 per unit

(d) Revised Contribution p.u.= Revised Sales p.u. –Variable Cost p.u.
= `21.6 – `16 = `5.6 per unit

PYQ 21
Top-tech a manufacturing company is presently evaluating two possible machines for the manufacture of
superior Pen-drives. The following information is available:

Particulars Machine A (`) Machine B (`)

Sales price per unit 400 400
Variable cost per unit 240 260
Total fixed cost per year 350 Lakhs 200 Lakhs
Capacity (in units) 8,00,000 10,00,000

Required:
1. Recommend which machine should be chosen?
2. Would you change your answer, if you were informed that the capacities of the two processes are as
follows: A - 12,00,000 units; B - 12,00,000 units? Why? [(5 Marks) May 2022]

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 CHAPTER 13 MARGINAL COSTING

Answer
1. Profit (Machine A) = Contribution – Fixed cost
= 8,00,000 units × `160 (`400 - `240) – `3,50,00,000
= `9,30,00,000

Profit (Machine B) = Contribution – Fixed cost

= 10,00,000 units × `140 (`400 - `260) – `2,00,00,000
= `12,00,00,000

Recommendation: Machine B should be chosen as it gives more profit.

2. Profit (Machine A) = Contribution – Fixed cost

= 12,00,000 units × `160 (`400 - `240) – `3,50,00,000
= `15,70,00,000

Profit (Machine B) = Contribution – Fixed cost

= 12,00,000 units × `140 (`400 - `260) – `2,00,00,000
= `14,80,00,000

Yes, the preference for the machine would change because now, Machine A is having higher contribution and
higher profit, hence recommended.

PYQ 22
UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps and sells its
lamps at `450 per unit.
During the quarter ending on 31st December, 2021, it produced and sold 12,000 units and suffered a
loss of `35 per unit.
During the quarter ending on 31st March, 2022, it produced and sold 30,000 units and earned a profit
of `40 per unit.

You are required to calculate:

(a) Total fixed cost incurred by UV ltd. per quarter.
(b) Break Even sales value (in rupees)
(c) Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e., quarter ending on 30th
June, 2022).
[(5 Marks) May 2022]

Answer
(a) Fixed Cost per quarter (by using data of quarter ending 31st March, 2022):

Fixed cost = Contribution – profit

= 30,000 units × 450 × 20% - 30,000 × 40 = `15,00,000

(b) Calculation of Break Even Point:

Fixed Cost 15 ,00 ,000

BEP = = = `75,00,000
PV Ratio 20 %

(c) Calculation of profit at 50,000 units:

Profit = Contribution – Fixed cost

= 50,000 × 450 × 20% - 15,00,000 = `30,00,000

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 MARGINAL COSTING CHAPTER 13

Working Notes:
Difference in Pr ofit 30 ,000  40  12 ,000  35
PV Ratio = × 100 = = 20%
Difference in Sales (30 ,000  12 ,000 )  450

PYQ 23
ABC Ltd, sell its Product ‘Y’ at a price of `300 per unit and its variable cost is `180 per unit. The fixed costs
are `16,80,000 per year uniformly incurred throughout the year, The Profit for the year is `7,20,000.

You are required to calculate:

(a) BEP in value (`) and units.
(b) Margin of Safety
(c) Profits made when sales are 24,000 units,
(d) Sales in value (`) to be made to earn a net profit of `10,00,000 for the year.
[(5 Marks) Nov 2022]

Answer
(a) BEP in value (`) and units:
BEP in value (`) = Fixed Cost ÷ P/V Ratio
= `16,80,000 ÷ 40% = `42,00,000

BEP in units = Fixed Cost ÷ Contribution per unit

= `16,80,000 ÷ 120 (300 - 180) = 14,000 units

(b) Margin of Safety:

MOS in value (`) = Profit ÷ P/V Ratio
= `7,20,000 ÷ 40% = `18,00,000

(c) Profit at 24,000 units:

Profit = Contribution – Fixed cost
= (24,000 × `120) – `16,80,000 = `12,00,000

(d) Sales in value (`) to earn a profit of `10,00,000:

Sales in value (`) = (Fixed Cost + Profit) ÷ P/V Ratio
= (`16,80,000 + `10,00,000) ÷ 40% = `67,00,000

Working Note:
Contributi on 300 - 180
P/V Ratio = × 100 = × 100 = 40%
Sale Price 300

PYQ 24
An agriculture based company having 210 hectares of land is engaged in growing three different cereals
namely, wheat, rice, and maize annually. The yield of the different crops and their selling prices are given
below:
Particulars Wheat Rice Maize
Yield (in kgs per hectare) 2,000 500 100
Selling price (` per kg) 20 40 250

The variable cost data of different crops are given below:

(All figures in ` per kg)

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 CHAPTER 13 MARGINAL COSTING

Particulars Wheat Rice Maize

Labour charges 8 10 120
Packing materials 2 2 10
Other variable expenses 4 1 20

The company has a policy to produce and sell all the three kinds of crops. The maximum and minimum area
to be cultivated for each crop is as follows:

Particulars Wheat Rice Maize

Maximum area in hectares 160 50 60
Minimum area in hectares 100 40 10

You are required to:

(a) Rank the crops on the basis of contribution per hectare.
(b) Determine the optimum product mix considering that all the three cereals are to be produced.
(c) Calculated the maximum profit which can be achieved if the total fixed cost per annum is `21,45,000.
(Assume that there are no other constraints applicable to this company)
[(10 Marks) Nov 2022]

Answer
(a) Statement Showing Rank on the basis of Contribution per Hectare
Particulars Wheat Rice Maize
Sale price per kg 20 40 250
Less: Labour charges per kg (8) (10) (120)
Less: Packing materials per kg (2) (2) (10)
Less: Other variable expenses per kg (4) (1) (20)
Contribution per kg 6 27 100
× Yield in kg per hectare × 2,000 × 500 × 100
Contribution per Hectare 12,000 13,500 10,000
Rank II I III

(b) Statement Showing Optimum Product Mix

Yield per Production
Cereals Rank Minimum Area Additional Area Total Area
Hectare in kgs.
Wheat II 100 50 (b.f.) 150 2,000 3,00,000
Rice I 40 50 – 40 = 10 50 500 25,000
Maize III 10 - 10 100 1,000
Total 150 60 210 - 3,26,000

(c) Maximum Profit = (3,00,000 kgs × `6) + (25,000 kgs × `27) + (1,000 kgs × `100) – `21,45,000
= `4,30,000

PYQ 25
The following information pertains to ZB Limited for the year:

Profit volume ratio 30%

Margin of Safety (as % of total sales) 25%
Fixed Cost `12,60,000

You are required to calculate:

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 MARGINAL COSTING CHAPTER 13

(a) Break even sales value (`),

(b) Total sales value (`) at present,
(c) Proposed sales value (`) if company wants to earn the present profit after reduction of 10% in fixed
cost,
(d) Sales in value (`) to be made to earn a profit of 20% on sales assuming fixed cost remains unchanged,
(e) New Margin of Safety if the sales value at present as computed in (b) decreased by 12.5%.

[(5 Marks) May 2023]

Answer
Fixed cos t 12 ,60 ,000
(a) Break even sales = = = `42,00,000
PV Ratio 30 %

BEP Sales 42 ,00 ,000

(b) Total sales at present = =
BEP as % of Total Sales 75 %
= `56,00,000

Re vised Fixed cos t  Desired Pr ofit

(c) Proposed Sales =
PV Ratio
(12,60 ,000  10%)  4 ,20 ,000
= = `51,80,000
30%

Fixed cos t 12 ,60 ,000

(d) Desired Sales Value = =
PV ratio  % of Pr ofit to Sales 30 %  20 %
= `1,26,00,000
(e) New Margin of Safety = Revised Sales – BEP Sales
= (56,00,000 – 12.5%) – 42,00,000 = `7,00,000

WN:
Existing Profit = MOS × PV Ratio = `56,00,000 × 25% × 30%
= `4,20,000

PYQ 26
MNP Company Limited produces two products ‘A’ and ‘B’. The relevant cost and sales data per unit of output
is as follows:
Particulars Product A (`) Product B (`)
Direct material 55 60
Direct labour 35 45
Variable factory overheads 40 20
Selling Price 180 175

The availability of machine hours is limited to 55,000 hours for the month. The monthly demand for product
‘A’ and product ‘B’ is 5,000 units and 6,000 units, respectively. The fixed expense of the company are
`1,40,000 per month. Variable factory overheads are `4 per machine hour. The company can produce both
products according to the market demand.

Calculate the product mix that generates maximum profit for the company in the given situation
and also calculate profit of the company.

[(5 Marks) May 2023]

13.44
 CHAPTER 13 MARGINAL COSTING

Answer
Statement Showing Best Possible Mix and Profit of MNP Company Ltd.
Rank Product Units/Mix Machine hours Contribution
I Product B 6,000 30,000 3,00,000
II Product A (25,000 hours ÷ 10) 2,500 25,000 (b.f.) 1,25,000
Total 8,500 55,000
Total Contribution 4,25,000
Less: Fixed Expenses (1,40,000)
Profit 2,85,000

Working notes:
Calculation of Contribution per machine hour and Rank:
Particulars A B
Sale price per unit 180 175
Less: Direct materials per unit 55 60
Less: Direct labour per unit 35 45
Less: Variable overheads per unit 40 20
Contribution per unit 50 50
÷ Machine hours per unit (40 ÷ 4) and (20 ÷ 4) ÷ 10 ÷5
Contribution per machine hour 5 10
Rank II I

SUGGESTED REVISION FOR EXAM:

BQ: 7, 11, 13, 14, 16, 18, 19, 20, 23, 24, 28, 29, 31, 33, 36, 37, 39

PYQ: 1, 3, 5, 6, 16, 24

13.45
 CHAPTER 14 COST ACCOUNTING SYSTEM

CHAPTER 14 COST ACCOUNTING SYSTEM

INTEGRATED ACCOUNTING SYSTEM

BQ 1
In the absence of the chief Accountants you have been asked to prepare a month's cost accounts for a
company which operates a batch costing system fully integrated with the financial accounts. The following
relevant information is provided to you:

Balances at the beginning of the month:

Stores ledger control Account 25,000
Work in progress control account 20,000
Finished goods control account 35,000
Prepaid production overheads brought forward from previous month 3,000

Transactions during the month:

Materials purchased 75,000
Materials Issued:
To Production 30,000
To factory Maintenance 4,000 34,000
Materials transferred between batches 5,000
Total wages paid:
To direct workers 25,000
To Indirect workers 5,000 30,000
Direct wages charged to batches 20,000
Recorded non-productive time of direct workers 5,000
Selling and distribution overheads incurred 6,000
Other production overheads incurred 12,000
Sales 1,00,000
Cost of finished goods sold 80,000
Cost of goods completed and transferred into Finished goods during the month 65,000
Physical value of work in progress at the end of month 40,000
The production overhead absorption rate is 150% of direct wages charged to work in progress.

Prepare the following accounts for the month:

(a) Stores ledger control account.
(b) Work in progress control account.
(c) Finished goods control account.
(d) Production overheads control account.
(e) Profit and loss account.
[(a) `66,000 (b) `40,000 (c) `20,000 (d) Over absorption taken to P/L A/c `1,000 (e) `20,000]

BQ 2
The following incomplete accounts are furnished to you for the month ended 31st October, 2023:

Creditors for Purchases Account

01.10.23 By Balance 30,000

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 COST ACCOUNTING SYSTEM CHAPTER 14

Stores Control Account

01.10.23 To Balance 54,000

Factory overheads Control Account

Total debits for October, 2023 45,000

Work in progress control Account

01.10.23 To Balance 6,000

Finished Goods Control Account

01.10.23 To Balance 75,000

Additional information:
(i) The factory overheads are applied by using a budgeted rate based on direct labour hours. The budget
for overheads for 2023 is `6,75,000 and the budget of direct labour hours is 4,50,000.
(ii) The balance in the account of creditors for purchases on 31.10.23 is `15,000 and the payments made
to creditors in October, 2023 amount to `1,05,000.
(iii) The finished goods inventory as on 31st October, 2023 is `66,000.
(iv) The cost of goods sold during the month was `1,95,000.
(v) On 31st October, 2023 there was only one unfinished job in the factory. The cost records show that
`3,000 (1,200 direct labour hours) of direct labour cost and `6,000 of direct material cost had been
charged.
(vi) A total of 28,200 direct labour hours were worked in October, 2023. All factory workers earn same rate
of pay.
(vii) All actual factory overheads incurred in October, 2023 have been posted.

You are required to find:

(a) Materials purchased during October, 2023.
(b) Cost of goods completed in October, 2023.
(c) Overheads applied to production in October, 2023.
(d) Balance of work in progress on 31st October, 2023.
(e) Direct materials consumed during October, 2023.
(f) Balance of Stores Control account on 31st October, 2023.
(g) Over absorbed or under absorbed overheads for October, 2023.
[(a) 90,000 (b) 1,86,000 (c) 42,300 (d) 10,800 (e) 78,000 (f) 66,000 (g) 2,700 under-recovered]

BQ 3
A fire destroyed some accounting records of a company. You have been able to collect the following from the
spoilt papers/records and as a result of consultation with accounting staff in respect of January, 2017.

Incomplete Ledger Entries:

Materials Control A/c
Particulars ` Particulars `
To Balance b/d 32,000

Work-in-Progress Control A/c

Particulars ` Particulars `
To Balance b/d 9,200 By Finished Goods Control A/c 1,51,000

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 CHAPTER 14 COST ACCOUNTING SYSTEM

Payable (Creditors) A/c

Particulars ` Particulars `
To Balance c/d 19,200 By Balance b/d 16,400

Manufacturing Overheads Control A/c

Particulars ` Particulars `
To Bank A/c 29,600
(Amount Spent)

Finished Goods Control A/c

Particulars ` Particulars `
To Balance b/d 24,000 By Balance c/d 30,000

Additional Information:
1. The cash-book showed that `89,200 have been paid to creditors for raw-material.
2. Ending inventory of work-in-progress included material `5,000 on which 300 direct labour hours have
been booked against wages and overheads.
3. The job card showed that workers have worked for 7,000 hours. The wage rate is `10 per labour hour.
4. Overhead recovery rate was `4 per direct labour hour.

You are required to complete the above accounts in the cost ledger of the company.

Answer
Materials Control A/c
Particulars ` Particulars `
To Balance b/d 32,000 By WIP Ledger Control A/c 53,000
To Payables/Creditors A/c (WN) 92,000 (figure from WIP A/c)
(Purchases) By Balance b/d 71,000
1,24,000 1,24,000

WIP Ledger Control A/c

Particulars ` Particulars `
To Balance b/d 9,200 By Finished Goods Control A/c 1,51,000
To Materials Control A/c (b.f.) 53,000 By Balance c/d:
To Wages Control A/c 70,000 Material
(7,000 hrs × `10) `5,000
To Manufacturing OH Control A/c 28,000 Labour (300 hrs × `10) 9,200
1,60,200 `3,000 1,60,200
Overheads (300 hrs × `4)
`1,200

Manufacturing Overheads Control A/c

Particulars ` Particulars `
To Bank A/c 29,600 By WIP Ledger Control A/c 28,000
(7,000 hrs × `4)
By Costing P/L A/c 1,600
(Under-absorbed Overheads)
29,600 29,600

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 COST ACCOUNTING SYSTEM CHAPTER 14

Finished Goods Control A/c

Particulars ` Particulars `
To Balance b/d 24,000 By Cost of Sales A/c (b.f.) 1,45,000
To Work-in-progress Control A/c 1,51,000 By Balance c/d 30,000
1,75,000 1,75,000

Working note:
Payables (Creditors) A/c
Particulars ` Particulars `
To Cash or Bank A/c 89,200 By Balance b/d 16,400
To Balance c/d 19,200 By Material Control A/c 92,000
(Purchase/Balancing figure)
1,08,400 1,08,400

BQ 4
Journalise the following transactions assuming that cost and financial transactions are integrated:
Details of Transactions (`)
Raw materials purchased 2,00,000
Direct materials issued to production 1,50,000
Wages paid (30% indirect) 1,20,000
Wages charged to production 84,000
Manufacturing expenses incurred 84,000
Manufacturing overhead charged to production 92,000
Selling and distribution costs 20,000
Finished products (at cost) 2,00,000
Sales 2,90,000
Closing stock Nil
Receipts from debtors 69,000
Payments to creditors 1,10,000

Answer
Journal Entries
Entries Dr. Cr.
Stores Ledger Control A/c Dr. 2,00,000
To Payables (Creditors)/Bank A/c 2,00,000
(Being materials purchased)
Work-in-progress Ledger Control A/c Dr. 1,50,000
To Stores Ledger Control A/c 1,50,000
(Being direct materials issued to production)
Wages Control A/c Dr. 1,20,000
To Bank A/c 1,20,000
(Being wages paid)
Work-in-progress Ledger Control A/c Dr. 84,000
Factory Overhead Control A/c Dr. 36,000
To Wages Control A/c 1,20,000
(Being allocation of direct and indirect wages)
Factory Overhead Control A/c Dr. 84,000
To Bank A/c 84,000
(Being manufacturing overheads incurred)
Work-in-progress Ledger Control A/c Dr. 92,000
To Factory Overhead Control A/c 92,000

14.4
 CHAPTER 14 COST ACCOUNTING SYSTEM

(Being manufacturing overheads charged to production)

Selling and Distribution Overhead Control A/c Dr. 20,000
To Bank A/c 20,000
(Being selling and distribution cost incurred)
Finished Goods Control A/c Dr. 2,00,000
To Work-in-progress Ledger Control A/c 2,00,000
(Being cost of finished goods transferred to finished goods account)
Cost of Sales A/c Dr. 2,20,000
To Finished Goods Control A/c 2,00,000
To Selling and Distribution Overhead Control A/c 20,000
(Being cost of goods sold)
Receivables/Debtors/Bank A/c Dr. 2,90,000
To Sales A/c 2,90,000
(Being finished stock sold)
Bank A/c Dr. 69,000
To Receivables/Debtors A/c 69,000
( Being collection received from debtors)
Payables/Creditors A/c Dr. 1,10,000
To Bank A/c 1,10,000
( Being payments made to creditors)

BQ 5
Dutta Enterprises operates an integral system of accounting. You are required to pass the Journal Entries for
the following transactions that took place for the year ended 30th June, 2023.
Details of Transactions (`)
Raw materials purchased (50% on credit) 6,00,000
Materials issued to production 4,00,000
Wages paid (50% indirect) 2,00,000
Wages charged to production 1,00,000
Factory overheads incurred 80,000
Factory overheads charged to production 1,00,000
Selling and distribution overheads incurred 40,000
Finished goods at cost 5,00,000
Sales (50% on credit) 7,50,000
Closing stock Nil
Receipts from debtors 2,00,000
Payments to creditors 2,00,000
(Narrations are not required.)

Answer
Journal Entries
Entries Dr. Cr.
Stores Ledger Control A/c Dr. 6,00,000
To Payables/Creditors A/c 3,00,000
To Bank A/c 3,00,000
Work-in-progress Ledger Control A/c Dr. 4,00,000
To Stores Ledger Control A/c 4,00,000
Wages Control A/c Dr. 2,00,000
To Bank A/c 2,00,000
Work-in-progress Ledger Control A/c Dr. 1,00,000
To Wages Control A/c 1,00,000
Factory Overhead Control A/c Dr. 1,00,000

14.5
 COST ACCOUNTING SYSTEM CHAPTER 14

To Wages Control A/c 1,00,000

Factory Overhead Control A/c Dr. 80,000
To Bank A/c 80,000
Work-in-progress Ledger Control A/c Dr. 1,00,000
To Factory Overhead Control A/c 1,00,000
Selling and Distribution Overhead Control A/c Dr. 40,000
To Bank A/c 40,000
Finished Goods Control A/c Dr. 5,00,000
To Work-in-progress Ledger Control A/c 5,00,000
Cost of Sales A/c Dr. 5,40,000
To Finished Goods Control A/c 5,00,000
To Selling and Distribution Overhead Control A/c 40,000
Receivables/Debtors A/c Dr. 3,75,000
Bank A/c Dr. 3,75,000
To Sales A/c 7,50,000
Bank A/c Dr. 2,00,000
To Receivables/Debtors A/c 2,00,000
Payables/Creditors A/c Dr. 2,00,000
To Bank A/c 2,00,000

NON INTEGRATED ACCOUNTING SYSTEM

BQ 6
As on 31st March, 2023, the following balance existed in a firm's cost Ledger:
Name of Account Dr. Cr.
Stores Ledger Control A/c 3,01,435 -
Work in progress Control A/c 1,22,365 -
Finished Stock Ledger Control A/c 2,51,945 -
Manufacturing Overhead Control A/c - 10,525
Cost Ledger Control A/c - 6,65,220
Total 6,75,745 6,75,745

During the next three months the following items arose:

Finished product (at cost) 2,10,835
Manufacturing overhead incurred 91,510
Raw materials purchased 1,23,000
Factory Wages 50,530
Indirect Labour 21,665
Cost of sales 1,85,890
Material issued to production 1,27,315
Sales returned at Cost 5,380
Material returned to suppliers 2,900
Manufacturing overhead charged to production 77,200
You are required to pass the Journal Entries; write up the accounts and schedule the balances,
stating what each balance represents.
[SLC 2,94,220; WIP 1,66,575; Finished Stock 2,82,270; Manufacturing OH 25,450; COS 1,80,510; CLC
9,49,025]

BQ 7
Acme Manufacturing Co. Ltd. opens the costing records, with the balances as on 1st July as follows:

14.6
 CHAPTER 14 COST ACCOUNTING SYSTEM

Name of Account Dr. Cr.

Material Control A/c 1,24,000 -
Work-in-process 62,500 -
Finished Goods A/c 1,24,000 -
Production Overheads A/c 8,400 -
Administration Overhead - 12,000
Selling and Distribution Overhead A/c 6,250 -
Cost Ledger Control A/c - 3,13,150
Total 3,25,150 3,25,150

The following are the transactions for the quarter ended 30th September:
Particulars `
Materials purchased 4,80,100
Materials issued to jobs 4,77,400
Materials to works maintenance 41,200
Materials to administration office 3,400
Materials to sales department 7,200
Wages direct 1,49,300
Wages indirect 65,000
Transportation for indirect materials 8,400
Production overheads 2,42,250
Absorbed production overheads 3,59,100
Administration overheads incurred 74,000
Administration allocation to production 52,900
Administration allocation to sales department 14,800
Selling & Distribution overheads incurred 64,200
Selling & Distribution overheads absorbed 82,000
Finished goods produced 9,58,400
Finished goods sold 9,77,300
Sales 14,43,000

Make up the various accounts as you envisage in the Cost Ledger and prepare a Trial Balances
as at 30th September.

Answer
Material Control A/c
Particulars ` Particulars `
To Balance b/d 1,24,000 By Work-in-process control A/c 4,77,400
To Cost ledger control A/c 4,80,100 By Production OH control A/c 41,200
(Purchases) By Administration OH control A/c 3,400
By S & D OH control A/c 7,200
By Balance c/d 74,900
6,04,100 6,04,100

Wages Control A/c

Particulars ` Particulars `
To Cost ledger control A/c 2,14,300 By Work-in-process control A/c 1,49,300
(`1,49,300 + `65,000) By Production OH control A/c 65,000
2,14,300 2,14,300

Production Overhead Control A/c

Particulars ` Particulars `

14.7
 COST ACCOUNTING SYSTEM CHAPTER 14

To Balance b/d 8,400 By Work-in-process control A/c 3,59,100

To Cost Ledger control A/c: By Balance c/d 6,150
Transportation
8,400 2,50,650
Production overheads 65,000
2,42,250 41,200
To Wages control A/c 3,65,250 3,65,250
To Material control A/c

Work-in-Progress Control A/c

Particulars ` Particulars `
To Balance b/d 62,500 By Finished goods control A/c 9,58,400
To Material control A/c 4,77,400 By Balance c/d 89,900
To Wages control A/c 1,49,300
To Production OH control A/c 3,59,100
10,48,300 10,48,300

Administration Overhead Control A/c

Particulars ` Particulars `
To Cost Ledger control A/c 74,000 By Balance b/d 12,000
To Material control A/c 3,400 By Finished goods control A/c 52,900
To Balance c/d 2,300 By Cost of sales A/c 14,800
79,700 79,700

Finished Goods Control A/c

Particulars ` Particulars `
To Balance c/d 1,24,000 By Cost of sales A/c 9,77,300
To Work-in-process A/c 9,58,400 By Balance c/d 1,58,000
To Administration OH control A/c 52,900
11,35,300 11,35,300

Selling and Distribution Overhead Control A/c

Particulars ` Particulars `
To Balance b/d 6,250 By Cost of Sales A/c 82,000
To Cost Ledger control A/c 64,200
To Material control A/c 7,200
To Balance c/d 4,350
82,000 82,000

Cost of Sales A/c

Particulars ` Particulars `
To Finished Goods Control A/C 9,77,300 By Costing profit & loss A/c 10,74,100
To Administration OH control A/c 14,800
To S & D OH control A/c 82,000
10,74,100 10,74,100
Costing Profit & Loss A/c
Particulars ` Particulars `
To Cost of sales A/c 10,74,100 By Cost ledger control A/c 14,43,000
To Cost ledger control A/c (b.f.) 3,68,900 (Sales)
(Profit for the period)
14,43,000 14,43,000

14.8
 CHAPTER 14 COST ACCOUNTING SYSTEM

Cost Ledger Control A/c

Particulars ` Particulars `
To Costing profit and loss A/c 14,43,000 By Balance b/d 3,13,150
To Balance c/d 3,22,300 By Material control A/c 4,80,100
By Wages Control A/c 2,14,300
By Production OH control A/c 2,50,650
By Administration OH control A/c 74,000
By S & D OH control A/c 64,200
By Costing profit and loss A/c 3,68,900
17,65,300 17,65,300

Trial Balance as at 30th September

Name of Account Dr. Cr.
Material Control A/c 74,900 -
Work-in-process Control A/c 89,900 -
Finished Goods Control A/c 1,58,000 -
Production Overheads Control A/c 6,150 -
Administration Overhead Control A/c - 2,300
Selling and Distribution Overhead Control A/c - 4,350
Cost Ledger Control A/c - 3,22,300
Total 3,28,950 3,28,950

BQ 8
The following figures have been extracted from the Cost Ledger of a manufacturing unit:
Stores:
Opening balance 15,000
Purchases 80,000
Transfer from work-in-progress 40,000
Issues to work-in-progress 80,000
Issues to repairs and maintenance 10,000
Sold as special case at cost 5,000
Shortage in the year 3,000
Work-in-progress:
Opening inventory 30,000
Direct labour cost charged 30,000
Overhead cost charged 1,20,000
Closing balance 20,000

Entire output is sold at a profit of 10% on actual cost from work-in-progress.

Wages for the period 35,000
Overhead expenses 1,25,000
Ascertain the profit or loss as per financial account and cost accounts and reconcile them.

Answer
Stores Ledger Control Account
Particulars Amount Particulars Amount
To Balance b/d 15,000 By WIP Control A/c 80,000
To Cost Ledger Control A/c 80,000 By Cost Ledger Control A/c 5,000
(Purchases) 40,000 (Materials sold at cost)
To Work in progress Control A/c By Overhead Control A/c 10,000

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 COST ACCOUNTING SYSTEM CHAPTER 14

(Return from WIP) By Overhead Control A/c 3,000

(assumed normal)
By Balance c/d 37,000
1,35,000 1,35,000

Wages Control Account

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 35,000 By WIP Control A/c 30,000
By Overhead Control A/c 5,000
35,000 35,000

Overhead Control Account

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 1,25,000 By WIP Control A/c 1,20,000
To Store Ledger Control A/c 10,000 By Balance c/d 23,000
To Store Ledger Control A/c 3,000 (under recovery carried forward)
To Wages Control A/c 5,000
1,43,000 1,43,000

Work in Progress Control Account

Particulars Amount Particulars Amount
To Balance b/d 30,000 By Stores Control A/c 40,000
To Stores Ledger Control A/c 80,000 By Costing Profit and Loss A/c 2,00,000
To Wages Control A/c 30,000 (i.e., cost of sales)
To Overhead Control A/c 1,20,000 By Balance c/d 20,000
2,60,000 2,60,000

Costing Profit & Loss Account

Particulars Amount Particulars Amount
To WIP Control A/c 2,00,000 By Cost Ledger Control A/c 2,20,000
To Profit 20,000 (Sales: 2,00,000 + 10%)
2,20,000 2,20,000

(Alternatively) Statement of Profit as per Costing Records

Particulars Amount
Direct materials cost (80,000 – 40,000) 40,000
Direct wages 30,000
Prime Cost 70,000
Production overheads 1,20,000
Add: Opening WIP 30,000
Less: Closing WIP (20,000)
Cost of Finished Goods 2,00,000
Profit @10% of 2,00,000 20,000
Sales 2,20,000

Profit & Loss Account

Particulars Amount Particulars Amount
To Opening stock: By Sales 2,20,000
Materials 15,000 By Closing stock:
WIP 30,000 45,000 Materials 37,000
To Purchases net of item sold 75,000 WIP 20,000 57,000

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 CHAPTER 14 COST ACCOUNTING SYSTEM

(80,000 – 5,000) By Net Loss 3,000

To Wages incurred 35,000
To Overheads incurred 1,25,000
2,80,000 2,80,000

Reconciliation statement
Particulars `
Profit as per Cost Accounts 20,000
Less: Overhead under recovered (23,000)
Loss as per Financial Accounts (3,000)

BQ 9
A company operates on historic job cost accounting system, which is not integrated with the financial
accounts. At the beginning of a month, the opening balances in cost ledger were:
Particulars ` (In lakhs)

Stores Ledger Control Account 80

Work-in-Process Control Account 20
Finished Goods Control Account 430
Building Construction Account 10
Cost Ledger Control Account 540

During the month, the following transaction took place:

Materials:
Purchased 40
Issued to production 50
Issued to factory maintenance 6
Issued to building construction 4
Wages:
Gross wages paid 150
Indirect wages 40
For building construction 10
Works Overheads:
Actual amount incurred 160
(excluding items shown above)
Absorbed in building construction 20
Under absorbed 8
Royalty paid (related to production) 5
Selling, distribution and administration overheads 25
Sales 450

At the end of the month, the stock of raw material and work-in-Process was `55 lakhs and `25 lakhs
respectively. The loss arising in the raw material accounts is treated as factory overheads. The building under
construction was completed during the month. Company’s gross profit margin is 20% on sales.

Prepare the relevant control accounts to record the above transactions in the cost ledger of the
company.

Answer
Stores Ledger Control A/c
Particulars ` (in lakhs) Particulars ` (in lakhs)

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 COST ACCOUNTING SYSTEM CHAPTER 14

To Balance b/d 80 By Work-in-process A/c 50

To Cost Ledger Control A/c 40 By Works OH Control A/c 6
By Building Construction A/c 4
By Works OH Control A/c (b.f.; loss) 5
By Balance c/d 55

120 120

Wages Control A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Cost Ledger Control A/c 150 By Work-in-process A/c (b.f.) 100
By Works OH Control A/c 40
By Building Construction A/c 10
150 150

Royalty A/c
Particulars ` (in lakhs) Particulars ` (in lakhs)
To Cost Ledger Control A/c 5 By Work-in-process A/c 5
5 5

Works Overhead Control A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Cost Ledger Control A/c 160 By Work-in-process A/c (b.f.) 183
To Stores Ledger Control A/c 6 By Building Construction A/c 20
To Stores Ledger Control A/c 5 By Costing P & L A/c 8
To Wages Control A/c 40 (under absorption)
211 211

Work-in-Process Control A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Balance b/d 20 By Finished Goods Control A/c (b.f.) 333
To Works OH Control A/c 183 By Balance c/d 25
To Wages Control A/c 100
To Stores Ledger Control A/c 50
To Royalty A/c 5
358 358

Finished Goods Control A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Balance b/d 430 By Cost of Sales A/c 360
To Work-in-Progress Control A/c 333 (80% of `450/Gross Profit 20%)
By Balance c/d (b.f) 403
763 763

Selling, Distribution and Administration Overhead A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Cost Ledger Control A/c 25 By Cost of Sales A/c 25
25 25

Cost of Sales A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Finished Goods Control A/c 360 By Costing P & L A/c 385

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CHAPTER 14 COST ACCOUNTING SYSTEM

To Selling, Distribution and 25

Administration OH A/c
385 385

Costing P & L A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Cost of Sales A/c 385 By Cost Ledger Control A/c (Sales) 450
To Works OH Control A/c 8
To Cost Ledger Control A/c 57
(Profit/b.f.) 450 450

Building Construction A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Balance b/d 10 By Cost Ledger Control A/c 44
To Stores Ledger Control A/c 4
To Wages Control A/c 10
To Works OH Control A/c 20
44 44

Cost Ledger Control A/c

Particulars ` (in lakhs) Particulars ` (in lakhs)
To Costing P & L A/c 450 By Balance b/d 540
To Building Construction A/c 44 By Stores Ledger Control A/c 40
To Balance c/d 483 By Wages Control A/c 150
By Works OH Control A/c 160
By Royalty A/c 5
By Selling, Distribution and 25
Administration OH A/c
By Costing P & L A/c 57
977 977

Trial Balance
Name of Account Dr. Cr.
Stores Ledger Control A/c 55 -
Work in progress Control A/c 25 -
Finished Goods Control A/c 403 -
Cost Ledger Control A/c - 483
Total 483 483

14.13
 COST ACCOUNTING SYSTEM CHAPTER 14

PAST YEAR QUESTIONS

PYQ 1
The following information has been extracted from the cost records of a manufacturing company:
Stores:
Opening balance 9,000
Purchase 48,000
Transfer from WIP 24,000
Issue to work-in-process 48,000
Issue for repairs 6,000
Deficiency found in stock 1,800
Work-in-process:
Opening balance 18,000
Direct wages applied 18,000
Overhead charged 72,000
Closing balance 12,000

Finished Production: Entire production is sold at a profit of 10% on cost from Work-in-process.
Wages paid 21,000
Overhead incurred 75,000

Draw the Stores Ledger Control A/c, Work-in-progress Control A/c, Overheads Control A/c and Costing
Profit and Loss A/c.
[(8 marks) Nov 2011/May 2017]

Answer
Stores Ledger Control A/c
Particulars Amount Particulars Amount
To Balance b/d 9,000 By WIP Ledger Control A/c 48,000
To Cost Ledger Control A/c 48,000 By Overhead Control A/c 6,000
To WIP Ledger Control A/c 24,000 By Overhead Control A/c 1,800
(Deficiency assumed normal) 25,200
By Balance c/d
81,000 81,000

WIP Ledger Control A/c

Particulars Amount Particulars Amount
To Opening balance 18,000 By Stores Ledger Control A/c 24,000
To Stores Ledger Control A/c 48,000 By Costing Profit & Loss A/c 1,20,000
To Wages Control A/c 18,000 By Balance c/d 12,000
To Overhead Control A/c 72,000
1,56,000 1,56,000

Overhead Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 75,000 By WIP Ledger Control A/c 72,000
To Stores Ledger Control A/c 6,000 By Costing P & L A/c 13,800
To Stores Ledger Control A/c 1,800

14.14
 CHAPTER 14 COST ACCOUNTING SYSTEM

To Wages Control A/c 3,000

85,800 85,800

Costing P/L A/c

Particulars Amount Particulars Amount
To WIP Ledger Control A/c 1,20,000 By Cost Ledger Control A/c 1,32,000
To Overhead Control A/c 13,800 (1,20,000 + 10%)
By Cost Ledger Control A/c 1,800
(Loss)
1,33,800 1,33,800

Wages Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 21,000 By WIP Ledger Control A/c 18,000
By Overhead Control A/c 3,000
21,000 21,000

Note: This question is solved on the basis of Non Integrated Method of accounting, alternatively student
can solve this problem by using Integrated Method of accounting.

PYQ 2
Following information has been extracted from the cost records of XYZ Pvt. Ltd:

Stores:

Opening balance 54,000

Purchase 2,88,000
Transfer from WIP 1,44,000
Issue to work-in-process 2,88,000
Issue for repairs 36,000
Deficiency found in stock 10,800

Work-in-process:

Opening balance 1,08,000

Direct wages applied 1,08,000
Overhead charged 4,32,000
Closing balance 72,000

Finished Production:

Entire production is sold at a profit of 15% on cost from Work-in-process.

Wages paid 1,26,000

Overhead incurred 4,50,000

Draw the Stores Ledger Control A/c, Work-in-progress Control A/c, Overheads Control A/c and
Costing Profit and Loss A/c.
[(8 marks) Nov 2014]

Answer
Stores Ledger Control A/c
Particulars Amount Particulars Amount

14.15
 COST ACCOUNTING SYSTEM CHAPTER 14

To Balance b/d 54,000 By WIP Ledger Control A/c 2,88,000

To Cost Ledger Control A/c 2,88,000 By Overhead Control A/c 36,000
To WIP Ledger Control A/c 1,44,000 By Overhead Control A/c 10,800
(Deficiency assumed normal) 1,51,200
By Balance c/d
4,86,000 4,86,000

WIP Ledger Control A/c

Particulars Amount Particulars Amount
To Opening balance 1,08,000 By Stores Ledger Control A/c 1,44,000
To Stores Ledger Control A/c 2,88,000 By Costing Profit & Loss A/c 7,20,000
To Wages Control A/c 1,08,000 By Balance c/d 72,000
To Overhead Control A/c 4,32,000
9,36,000 9,36,000

Overhead Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 4,50,000 By WIP Ledger Control A/c 4,32,000
To Stores Ledger Control A/c 36,000 By Costing P & L A/c 82,800
To Stores Ledger Control A/c 10,800
To Wages Control A/c 18,000
5,14,800 5,14,800

Costing P/L A/c

Particulars Amount Particulars Amount
To WIP Ledger Control A/c 7,20,000 By Cost Ledger Control A/c 8,28,000
To Overhead Control A/c 82,800 (Sales: 7,20,000 + 15%)
To Cost Ledger Control A/c 25,200
(Profit)
8,28,000 8,28,000

Wages Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 1,26,000 By WIP Ledger Control A/c 1,08,000
By Overhead Control A/c 18,000
1,26,000 1,26,000

PYQ 3
The following information is available from a company's records for March, 2016:

(a) Opening balance of Creditors Account `25,000

(b) Closing balance of Creditors Account `40,000
(c) Payment made to Creditors `5,80,000
(d) Opening balance of Stores Ledger Control Account `40,000
(e) Closing balance of Stores Ledger Control Account `65,000
(f) Wages paid (for 8,000 hours) 20% relate to indirect workers `4,00,000
(g) Various indirect expenses incurred `60,000
(h) Opening balance of WIP Control Account `50,000
(i) Inventory of WIP at the end includes:

Material worth `35,000

Labour hours booked 400 hours

14.16
 CHAPTER 14 COST ACCOUNTING SYSTEM

(j) Budgeted:
Overhead cost `20,80,000
Labour hours 1,04,000
(a) Factory overhead is charged to production at budgeted rate based on direct labour hours.

You are required to prepare Creditors A/c, Stores Ledger Control A/c, WIP Control A/c, Wages
Control A/c and Factory Overhead Control A/c.
[(8 marks) May 2016]

Answer
Creditors A/c
Particulars ` Particulars `
To Cash or Bank A/c 5,80,000 By Balance b/d 25,000
To Balance c/d 40,000 By Stores Ledger Control A/c 5,95,000
(Balancing figure)
6,20,000 6,20,000

Stores Ledger Control A/c

Particulars ` Particulars `
To Balance b/d 40,000 By Work-in-progress Control A/c 5,70,000
To Creditors A/c 5,95,000 (Balancing figure)
(Purchase: figure from creditor A/c) By Balance b/d 65,000
6,35,000 6,35,000

Work-in-progress Ledger Control A/c

Particulars ` Particulars `
To Balance b/d 50,000 By Finished Goods Control A/c (b.f.) 10,05,000
To Stores Ledger Control A/c 5,70,000 By Balance c/d:
To Wages Control A/c 3,20,000 Material
To Factory Overhead Control A/c 1,28,000 `35,000
Labour (400 hrs × `50) 63,000
10,68,000 `20,000 10,68,000
Overheads (400 hrs × `20) `8,000

Wages Control A/c

Particulars ` Particulars `
To Bank A/c 4,00,000 By WIP Ledger Control A/c 3,20,000
(8,000 hours × 80% × 50)
By Factory Overhead Control A/c 80,000
(8,000 hours × 20% × 50)
4,00,000 4,00,000

Factory Overhead Control A/c

Particulars ` Particulars `
To Bank A/c 60,000 By WIP Ledger Control A/c 1,28,000
To Wages Control A/c 80,000 (6,400 hrs × `20)
By Costing P/L A/c 12,000
(Under-absorbed Overheads)
1,40,000 1,40,000

Working notes:

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 COST ACCOUNTING SYSTEM CHAPTER 14

1. Direct Labour Hour Rate = Labour Cost ÷ Labour Hour

= `4,00,000 ÷ 8,000 hours = `50 per hour

2. Factory Overhead Rate = Budgeted Factory Overheads ÷ Budgeted Labour Hours

= `20,80,000 ÷ 1,04,000 = `20 per hour

PYQ 4
The following balances were extracted from a company's ledger as on 30th June 2018:
Name of Account Dr. Cr.
Raw materials control A/c 2,82,450 -
Work in progress control A/c 2,38,300 -
Finished stock control A/c 3,92,500 -
General ledger adjustment A/c - 9,13,250
Total 9,13,250 9,13,250

The following transactions took place during the quarter ended 30th September, 2018:
Factory overhead - allocated to WIP 1,36,350
Goods Finished at - cost 13,76,200
Raw materials purchased 12,43,810
Direct wages - allocated to WIP 2,56,800
Cost of goods sold 14,56,500
Raw materials - issued to production 13,60,430
Raw materials - credited by suppliers 27,200
Raw material losses – inventory audit 6,000
WIP rejected (with no scrap value) 12,300
Customer's return (at cost) of finished goods 45,900

You are required to prepare:

(1) Raw material control A/c
(2) Work-in-progress control A/c
(3) Finished stock control A/c
(4) General ledger adjustment A/c
[(10 Marks) Nov 2018]

Answer
Raw Material Control A/c
Particulars Amount Particulars Amount
To Balance b/d 2,82,450 By WIP A/c 13,60,430
To General Ledger Adjustment A/c 12,43,810 By General Ledger Adjustment A/c 27,200
By General Ledger Adjustment A/c 6,000
(Loss)
By Balance c/d (Bal. figure) 1,32,630
15,26,260 15,26,260

Work-in-Process Control A/c

Particulars Amount Particulars Amount
To Balance b/d 2,38,300 By Finished Stock Control A/c 13,76,200
To Raw Material Control A/c 13,60,430 By General Ledger Adjustment A/c 12,300
To Wages Control A/c 2,56,800 (Rejected)
To Factory OH Control A/c 1,36,350 By Balance c/d (Bal. figure) 6,03,380
19,91,880 19,91,880

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 CHAPTER 14 COST ACCOUNTING SYSTEM

Finished Stock Control A/c

Particulars Amount Particulars Amount
To Balance b/d 3,92,500 By Cost of Sales 14,56,500
To Work-in-Progress Control A/c 13,76,200 By Balance c/d (bal. figure) 3,58,100
To Cost of Sales (Return) 45,900
18,14,600 18,14,600

General Ledger Adjustment A/c

Particulars Amount Particulars Amount
To Raw Material Control A/c 27,200 By Balance b/d 9,13,250
(Returns) By Raw Material Control A/c 12,43,810
To Raw Materials Control A/c (Loss) 6,000 By Wages Control A/c 2,56,800
To WIP Control A/c (Rejected) 12,300 By Factory OH Control A/c 1,36,350
To Balance c/d 25,04,710
25,50,210 25,50,210

PYQ 5
Journalise the following transactions in the cost books under non- integrated system of accounting:

(a) Credit Purchase of Material `27,000

(b) Manufacturing overheads charged to production `6,000
(c) Selling and Distribution overheads recovered from Sales `4,000
(d) Indirect wages incurred `8,000
(e) Material returned from production to stores `9,000
[(5 Marks) Nov 2019]

Answer
Journal Entries
S. No. Entries Dr. Cr.
(a) Store Ledger Control A/c Dr. 27,000 -
To Cost Ledger Control A/c - 27,000
(b) Work-in-progress Ledger Control A/c Dr. 6,000 -
To Manufacturing Overhead Control A/c - 6,000
(c) Cost of Sales A/c Dr. 4,000 -
To Selling & Distribution Overhead Control A/c - 4,000
(d) Wages Control A/c Dr. 8,000 -
To Cost Ledger Control A/c - 8,000
(e) Store Ledger Control A/c Dr. 9,000 -
To Work-in-progress Ledger Control A/c - 9,000

PYQ 6
Journalize the following transactions assuming the cost and financial accounts are integrated:

Particulars (in `)
Direct Materials issued to production 5,88,000
Allocation of Wages (Indirect) 7,50,000
Factory Overheads (Over absorbed) 2,25,000
Administrative Overheads (Under absorbed) 1,55,000
Deficiency found in stock of Raw material (Normal) 2,00,000

[(5 Marks) May 2022]

14.19
 COST ACCOUNTING SYSTEM CHAPTER 14

Answer
Journal Entries
S. No. Entries Dr. Cr.
(a) Work-in-progress Ledger Control A/c Dr. 5,88,000 -
To Store Ledger Control A/c - 5,88,000
(Being issue of direct materials to production)
(b) Factory Overhead Control A/c Dr. 7,50,000 -
To Wages Control A/c - 7,50,000
(Being allocation of indirect wages)
(c) Factory Overhead Control A/c Dr. 2,25,000 -
To Costing Profit & Loss A/c - 2,25,000
(Being transfer of over absorption of factory overhead)
(d) Costing Profit & Loss A/c Dr. 1,55,000 -
To Administration Overhead Control A/c - 1,55,000
(Being transfer of under absorption of administration overhead)
(e) Factory Overhead Control A/c Dr. 2,00,000 -
To Store Ledger Control A/c - 2,00,000
(Being transfer of deficiency in stock of raw material)

SUGGESTED REVISION FOR EXAM:

BQ: 1, 2, 6, 9

PYQ: 1, 3, 4

14.20
 CHAPTER 15 RECONCILIATION

CHAPTER 15 RECONCILIATION

INTEGRATED ACCOUNTING SYSTEM

BQ 1
During the year ended 31st March, 2023, the profit of a company stood at `36,450 as per financial records.
The cost books however showed a profit of `51,950 for the same period.

Prepare a statement reconciling the profit as per cost records with the profit as per financial records.

(a) Opening stock overstated in cost accounts 3,500

(b) Closing stock understated in cost accounts 4,600
(c) Factory overheads under recovered in cost accounts 2,500
(d) Administration expenses over recovered in cost accounts 750
(e) Selling and distribution expenses under recovered in cost accounts 1,650
(f) Depreciation over recovered in cost accounts 1,500
(g) Interest on investment not included cost accounts 5,000
(h) Obsolescence loss in respect of machineries charged in financial accounts 2,450
(i) Income tax provided in financial accounts 25,000
(j) Bank interest credited in financial accounts 1,500
(k) Stores adjustments (debit in financial book) 750

Answer
Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Books 51,950

Add: Opening stock overstated 3,500

Closing stock understated 4,600
Administration expenses over recovered 750
Depreciation over recovered 1,500
Interest on investment 5,000
Bank interest credited 1,500 16,850

Less: Factory overheads under recovered 2,500

Selling and distribution expenses under recovered 1,650
Obsolescence loss 2,450
Income tax provided 25,000
Stores adjustment (debit in financial book) 750 (32,350)

Profit as per Financial Books 36,450

BQ 2
M/s. H.K. Piano Company showed a net loss of `4,16,000 as per their financial accounts for the year ended
31st March. The cost accounts, however, disclosed a net loss of `3,28,000 for the same period. The following
information was revealed as a result of scrutiny of the figures of both the sets of books:

(1) Factory overheads under recovered 6,000

(2) Administration overheads over recovered 4,000

15.1
 RECONCILIATION CHAPTER 15

(3) Depreciation charged in financial accounts 1,20,000

(4) Depreciation recovered in costs 1,30,000
(5) Interest on investment not included costs 20,000
(6) Income-tax provided 1,20,000
(7) Transfer fees (credit in financial books) 2,000
(8) Stores adjustments (credit in financial book) 2,000

Prepare a Memorandum reconciliation account.

Answer
Memorandum Reconciliation Account
Particulars Amount Particulars Amount
To Net loss as per Cost A/c 3,28,000 By Admin. OH over recovered 4,000
To Factory OH under recovered 6,000 By Depreciation over recovered 10,000
To Income Tax 1,20,000 (1,30,000 – 1,20,000)
By Interest on investment 20,000
By Transfer fees 2,000
By Stores adjustment 2,000
By Net loss as per Financial A/c 4,16,000
4,54,000 4,54,000

BQ 3
Given below is the trading and profit and loss account of a company for the year ended 31st March 2023:
Particulars Amount Particulars Amount
To Direct Materials 27,40,000 By Sales (60,000 units) 60,00,000
To Direct Wages 15,10,000 By Closing finished goods 1,60,000
To Factory Expenses 8,30,000 (2,000 units)
To Administration Expenses 3,82,400 By Closing Work in progress:
To Selling Expenses 4,50,000 Materials 64,000
To Preliminary Expenses 60,000 Wages 36,000
Factory Expenses 20,000 1,20,000
To Net profit 3,25,600 By Dividend received 18,000
62,98,000 62,98,000

The company manufactures standard units. In the cost Accounts:

(1) Factory expenses have been allocated to production at 20% of prime cost.
(2) Administrative expenses at `6 per unit produced.
(3) Selling expenses at `8 per unit sold.

Prepare the costing profit and loss account of the company and reconcile the same with the profit
disclosed by the financial accounts.

Answer
Costing Profit & Loss Account
Particulars Amount Particulars Amount
To Direct Materials 27,40,000 By Sales (60,000 units) 60,00,000
To Direct Wages 15,10,000 By Closing finished goods 1,72,645
To Factory Expenses 8,50,000 (2,000 units)
To Administration Expenses 3,72,000 By Closing Work in progress 1,20,000
To Selling Expenses 4,80,000
To Net profit 3,40,645
62,92,645 62,92,645

15.2
 CHAPTER 15 RECONCILIATION

Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Accounts 3,40,645
Add: Factory expenses over recovered (8,50,000 – 8,30,000) 20,000
Selling expenses over recovered (4,80,000 – 4,50,000) 30,000
Dividend received 18,000 68,000

Less: Administration overheads under recovered (3,82,400 - 3,72,000) 10,400

Closing stock over valued (1,72,645 – 1,60,000) 12,645
Preliminary expenses 60,000 (83,045)
Profit as per Financial Accounts 3,25,600

Working note:
(a) Factory expenses = 20% of prime cost
= 20% (27,40,000 + 15,10,000) = `8,50,000

(b) Administration expenses = `6 × 62,000 units = `3,72,000

(c) Selling expenses = `8 × 60,000 units = `4,80,000

(d) Number of units produced = Units sold + Units in closing finished goods
= 60,000 + 2,000 = 62,000 units

Cost of Production
(e) Value of closing finished goods = × Closing finished goods units
Units Produced
53,52,000
= × 2,000 = `1,72,645
62,000

(f) Cost of production = 27,40,000 + 15,10,000 + 8,50,000 – 1,20,000 + 3,72,000

= `53,52,000

BQ 4
The following figures are available from the financial records of ABC Manufacturing Co. Ltd. for the year
ended 31.03.2023.
Particulars `
Sales (20,000 units) 25,00,000
Materials 10,00,000
Wages 5,00,000
Factory overheads 4,50,000
Office and administrative overheads (production related) 2,60,000
Selling and distribution overheads 1,80,000
Finished goods (1,230 units) 1,50,000
Work-in-process:
Materials 30,000
Labour 20,000
Factory overheads 20,000 70,000
Goodwill written off 2,00,000
Interest on loan taken 20,000

In the Costing records, factory overhead is charged at 100% of wages, administration overhead 10% of
factory cost and selling and distribution overhead at the rate of `10 per unit sold.

15.3
 RECONCILIATION CHAPTER 15

Prepare a statement reconciling the profit as per cost records with the profit as per financial
records.

Answer
Profit & Loss Account of ABC Manufacturing Co. Ltd.
(For the year ended 31.03.2023)
Particulars Amount Particulars Amount
To Opening finished goods Nil By Sales (20,000 units) 25,00,000
To Materials 10,00,000 By Closing stock:
To Wages 5,00,000 Finished goods (1,230 units) 1,50,000
To Factory overheads 4,50,000 Work-in-process 70,000
To Office & Admin. overheads 2,60,000
To Selling & distribution Overheads 1,80,000
To Goodwill written off 2,00,000
To Interest on loan 20,000
To Profit 1,10,000
27,20,000 27,20,000

Cost Sheet
Particulars Amount
Materials 10,00,000
Wages 5,00,000
Direct Expenses Nil
Prime Cost 15,00,000
Factory overheads at 100% of wages 5,00,000
Less: Closing stock of WIP (70,000)
Factory Cost 19,30,000
Office and administrative overheads at 10% of factory cost 1,93,000
Cost of Production (21,230 units) 21,23,000
Less: Closing stock of Finished goods {(21,23,000 ÷ 21,230) × 1,230 units} (1,23,000)
Production cost of 20,000 units or COGS 20,00,000
Selling and distribution overheads at `10 per unit 2,00,000
Cost of sales 22,00,000
Profit (balancing figure) 3,00,000
Sales 25,00,000

Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Accounts 3,00,000
Add: Factory overheads over recovered 50,000
Selling and distribution overheads over recovered 20,000
Closing stock under valued in costs 27,000 97,000

Less: Office and administrative overheads under recovered 67,000

Goodwill written off 2,00,000
Interest on loan 20,000 (2,87,000)
Profit as per Financial Accounts 1,10,000

BQ 5
The following figures have been extracted from the Financial Accounts of a manufacturing firm for the first
year of its operation:
Particulars `

15.4
 CHAPTER 15 RECONCILIATION

Direct material consumption 50,00,000

Direct wages 30,00,000
Factory overheads 16,00,000
General administration 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 received on deposits 20,000
Sales (1,20,000 units) 1,20,00,000
Closing stock:
Finished goods (4,000 units) 3,20,000
Work-in-process 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. Administration overhead is recovered at `6 per unit of goods
sold. Selling and distribution overheads are recovered at `8 per unit sold.

Prepare the Profit and Loss Accounts as per financial records and Cost Sheet as per cost records.
Reconcile the profits as per the two records.

Answer
Profit & Loss Account
(As per financial records)
Particulars Amount Particulars Amount
To Materials 50,00,000 By Sales (1,20,000 units) 1,20,00,000
To Wages 30,00,000 By Closing stock:
To Factory overheads 16,00,000 Finished goods (4,000 units) 3,20,000
To Gross profit c/d 29,60,000 Work-in-process 2,40,000
1,25,60,000 1,25,60,000
To General administrave overheads 7,00,000 By Gross profit b/d 29,60,000
To Selling & distribution Overheads 9,60,000 By Dividends 1,00,000
To Bad debts 80,000 By Interest 20,000
To Preliminary expenses written off 40,000
To Legal charges 10,000
To Profit 12,90,000
30,80,000 30,80,000

Statement of Cost and Profit

(As per Cost Records)
Particulars Amount
Direct materials 56,00,000
Direct wages 30,00,000
Prime Cost 86,00,000
Factory overheads (20% of 86,00,000) 17,20,000
Less: Closing stock of WIP (2,40,000)
Cost of Production (1,24,000 units) 1,00,80,000
Less: Closing stock of Finished goods [(1,00,80,000 ÷ 1,24,000) × 4,000] (3,25,161)
Cost of goods sold (1,20,000 units) 97,54,839
General administrative overheads (1,20,000 units @ `6 per unit) 7,20,000
Selling and distribution overheads (1,20,000 units @ `8 per unit) 9,60,000

15.5
 RECONCILIATION CHAPTER 15

Cost of sales 1,14,34,839

Net Profit (balancing figure) 5,65,161
Sales 1,20,00,000

Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Accounts 5,65,161
Add: Excess of material consumption 6,00,000
Factory overheads over recovered 1,20,000
Administration overheads over recovered 20,000
Dividend received 1,00,000
Interest received 20,000 8,60,000
Less: Closing stock over valued in costs (3,25,161 - 3,20,000) 5,161
Bad debts 80,000
Preliminary expenses written off 40,000
Legal charges 10,000 (1,35,161)
Profit as per Financial Accounts 12,90,000

BQ 6
The financial books of a company reveal the following data for the year ended 31st March, 2023:
Opening stock:
Finished goods (625 units) 53,125
Work-in-process 46,000
During the year (01.04.22 to 31.03.23):
Raw materials consumed 8,40,000
Direct Labour 6,10,000
Factory overheads 4,22,000
Administration overheads (production related) 1,98,000
Dividend paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest received 38,000
Rent received 46,000
Sales (12,615 units) 22,80,000
Closing stock:
Finished goods (415 units) 45,650
Work-in-process 41,200

The cost records provide as under:

 Factory overheads are absorbed at 70% of direct wages.
 Administration overheads are recovered at 15% of factory cost.
 Selling and distribution overheads are charged at `3 per unit sold.
 Opening stock of finished goods is valued at `120 per unit.
 The company values work-in-process at factory cost for both Financial and Cost Profit reporting.

Required:
(i) Prepare statements for the year ended 31st March, 2023 to show
(a) The profit as per financial records
(b) The profit as per costing records.
(ii) Present a statement reconciling the profit as per costing records with the profit as per Financial
Records?

15.6
CHAPTER 15 RECONCILIATION

Answer
(i) (a) Financial Profit and Loss A/c
Particulars Amount Particulars Amount
To Opening stock: By Sales 22,80,000
WIP 46,000 By Closing stock:
Finished goods 53,125 WIP 41,200
To Raw material consumed 8,40,000 Finished goods (375 units) 45,650
To Direct labour 6,10,000
To Gross profit 8,17,725
23,66,850 23,66,850
To Factory overheads 4,22,000 By Gross profit 8,17,725
To Administrative overheads 1,98,000 By Interest received 38,000
To Selling & Distribution overheads 72,000 By Rent received 46,000
To Dividend Paid 1,22,000
To Bad debts 18,000
To Net Profit 69,725
9,01,725 9,01,725

(i) (b) Cost Sheet showing Costing P/L (Production 12,405 units)
Particulars Amount
Direct Material 8,40,000
Direct labour 6,10,000
Prime Cost 14,50,000
Factory overhead (70% of direct wages) 4,27,000
Add: Opening WIP 46,000
Less: Closing WIP (41,200)
Factory Cost 18,81,800
Administrative overhead (15% of factory cost) 2,82,270
Cost of Production 21,64,070
Add: Opening finished goods (`120 × 625 units) 75,000
Less: Closing Stock of finished goods (W.N. 2) (72,397)
Cost of Goods Sold 21,66,673
Selling & distribution overheads (`3 × 12,615 units) 37,845
Cost of sales 22,04,518
Profit (balancing figure) 75,482
Sales 22,80,000

(ii) Reconciliation Statement

Particulars Amount Amount
Profit as per Cost Records (Cost Sheet) 75,482
Add: Interest Received 38,000
Rent Received 46,000
Administration overheads over recovered (2,82,270 – 1,98,000) 84,270
Factory overheads over recovered (4,27,000 – 4,22,000) 21,875
Opening stock overvalued (75,000 – 53,125) 5,000 1,95,145

Less: Dividend 1,22,000

Bad debts 18,000
Selling & distribution OH under recovered (72,000 – 37,845) 34,155
Closing stock over valued (72,397 – 45,650) 26,747 (2,00,902)
Profit as per Financial Records 69,725

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 RECONCILIATION CHAPTER 15

Working note:
(1) Number of units produced = Units sold + Closing finished units – Opening finished units
= 12,615 + 415 - 625 = 12,405 units

Cost of Production
(2) Value of closing finished goods = × Closing finished goods units
Units Produced
21,64,070
= × 415 = `72,397
12,405

Note: Closing stock is valued as per FIFO method.

BQ 7
The following information is available from the financial books of a company having a normal production
capacity of 60,000 units of the year ended 31st March.

(1) Sales `10,00,000 (50,000 units).

(2) There was no opening and closing stock of finished units.
(3) Direct material and direct wages cost were `5,00,000 and `2,50,000 respectively.
(4) Actual factory expenses were `1,50,000 of which 60% are fixed.
(5) Actual administrative expenses were `45,000 which are completely fixed.
(6) Actual selling and distribution expenses were `30,000 of which 40% are fixed.
(7) Interest and dividends received `15,000.

You are required to:

(a) Find out profit as per financial books for the year ended 31st March.
(b) Prepare the cost sheet and ascertain the profit as per cost accounts for the year ended 31st March
assuming that the indirect exp. are absorbed on the basis of normal production capacity.
(c) Prepare a statement reconciling profits shown by financial and cost books.

[Financial Profit: `40,000; Cost Profit: `49,500]

15.8
 CHAPTER 15 RECONCILIATION

PAST YEAR QUESTIONS

PYQ 1
A manufacturing company has disclosed net loss of `48,700 as per their cost accounting records for the year
ended 31st March, 2014. However their financial accounting records disclosed net profit of `35,400 for the
same period.

A scrutiny of data of both the sets of books of accounts revealed the following informations:
(a) Factory overheads under absorbed `30,500
(b) Administrative overheads over absorbed `65,000
(c) Depreciation charged in financial accounts `2,25,000
(d) Depreciation charged in cost accounts `2,70,000
(e) Income tax provision `52,400
(f) Transfer fee (credited in financial accounts) `10,200
(g) Obsolescence loss charged in financial accounts `20,700
(h) Notional rent of own premises charged in cost accounts `54,000
(i) Value of opening stock:
(a) In cost accounts `1,38,000
(b) In financial accounts `1,15,000
(j) Value of closing stock:
(c) In cost accounts `1,22,000
(d) In financial accounts `1,12,500

Prepare a Memorandum Reconciliation Account by taking costing loss as base.

[(5 Marks) May 2014]

Answer
Memorandum Reconciliation Account
Particulars ` Particulars `
To Net loss as per Costing Books 48,700 By Admin OH over absorbed 65,000
To Factory OH under absorbed 30,500 By Depreciation over charged 45,000
To Income tax provision 52,400 (2,70,000 - 2,25,000)
To Obsolescence loss 20,700 By Transfer fee 10,200
To Closing stock over valued 9,500 By Notional rent 54,000
To Net profit as per Fin. Books 35,400 By Opening stock over valued 23,000
1,97,200 1,97,200

PYQ 2

The Trading and Profit and Loss Account of a company for the year ended 31.03.2016 is as under:
Particulars Amount Particulars Amount
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing stock (2,000 units) 1,50,000
To Factory expenses 9,50,000 By Dividend received 20,000
To Administrative expenses 4,80,200
To Selling expenses 2,50,000
To Preliminary expenses written off 50,000
To Net Profit 1,79,800
63,70,000 63,70,000

15.9
 RECONCILIATION CHAPTER 15

In the Cost Accounts:

(i) Factory expenses have been allocated to production at 20% of Prime Cost.
(ii) Administrative expenses absorbed at 10% of factory cost.
(iii) Selling expenses charged at `10 per unit sold.

Prepare the Costing Profit and Loss Account of the company and reconcile the Profit/Loss with the
profit as shown in the Financial Accounts.
[(8 Marks) Nov 2016]

Answer
Costing Profit & Loss A/c
Particulars Amount Particulars Amount
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing stock (2,000 units) 2,26,431
To Factory overheads 8,92,000
To Administration overheads 5,35,200
To S & D Expenses (50,000 × 10) 5,00,000
To Net profit 39,231
64,26,431 64,26,431

Working notes:
1. Factory overheads in costs = 20% of Prime cost
= 20% of (26,80,000 + 17,80,000) = 8,92,000
2. Administrative overheads = 10% of Factory cost
= 10% of (26,80,000 + 17,80,000 + 8,92,000) = 5,35,200
Cost of production
3. Valuation of closing stock =  Units in Clo sin g stock
Units produced
26 ,80 ,000  17 ,80 ,000  8 ,92 ,000  5,35 ,200
=  2,000
52 ,000
= 2,26,431

4. Units produced = Units sold + Closing units – Opening units

= 50,000 + 2,000 – Nil = 52,000

Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Accounts 39,231
Add: Administrative expenses over recovered (5,35,200 – 4,80,200) 55,000
Selling expenses over recovered (5,00,000 – 2,50,000) 2,50,000
Dividend received 20,000 3,25,000
Less: Factory expenses under recovered (9,50,000 – 8,92,000) 58,000
Closing stock over valued in costs (2,26,431 – 1,50,000) 76431
Preliminary expenses written off 50,000 (1,84,431)
Profit as per Financial Accounts 1,79,800

PYQ 3
GK Limited showed a net loss of `2,43,300 as per their financial accounts for the year ended 31st March, 2018.
However, cost accounts disclosed a net loss of `2,48,300 for the same period. On scrutinizing both the set of
books of accounts, the following information were revealed:

15.10
 CHAPTER 15 RECONCILIATION

(a) Works overheads over recovered 30,400

(b) Selling overheads under recovered 20,300
(c) Administrative overhead under recovered 27,700
(d) Depreciation over charged in cost accounts 35,100
(e) Bad debts w/off in financial accounts 15,000
(f) Preliminary Exp. w/off in financial accounts 5,000
(g) Interest credited during the year in financial accountants 7,500

Prepare a reconciliation statement reconciling losses shown by financial and cost accounts by
taking costing net loss as base.
[(5 marks) Nov 2018]

Answer
Reconciliation Statement
Particulars Amount Amount
Loss as per Cost Records (2,48,300)

Add: Factory overhead over recovered 30,400

Depreciation over charged in cost accounts 35,100
Interest credited during the year in financial accounts 7,500 73,000

Less: Selling overheads under recovered 20,300

Administrative overheads under recovered 27,700
Bad debts w/off in financial accounts 15,000
Preliminary Exp. w/off in financial accounts 5,000 (68,000)

Profit as per Financial Books (2,43,300)

PYQ 4
M/s Abid Private Limited disclosed a net profit of `48,408 as per cost books for the year ending 31st March
2019. However, financial accounts disclosed net loss of `15,000 for the same period. On scrutinizing both the
set of books of accounts, the following information was revealed:

Works Overheads under recovered in Cost Books 48,600

Office Overheads over recovered in Cost Books 11,500
Dividend received on Shares 17,475
Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800
Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000

Prepare a Memorandum Reconciliation Account.

[(5 Marks) May 2019]

Answer
Memorandum Reconciliation Account
Particulars ` Particulars `
To Works OH under recovered 48,600 By Net profit as per Costing Books 48,408
To Provision for doubtful debts 17,800 By Admin overheads over recovered 11,500
To Obsolescence loss 17,200 By Dividend received 17,475

15.11
 RECONCILIATION CHAPTER 15

To Stores adjustments 35,433 By Interest on fixed deposits 21,650

By Depreciation over recovered
(35,000 - 30,000) 5,000
By Net loss as per Financial Books 15,000
1,19,033 1,19,033

PYQ 5
The Profit and Loss account of ABC Ltd. for the year ended 31st March, 2021 is given below:

Profit & Loss Account

(For the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales (15,000 units) 15,00,000
To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To Loss on sale of investments 2,000
To Net profit 57,000
15,09,000 15,09,000

Additional information:

(a) The factory overheads are 50% fixed and 50% variable.
(b) The administration overheads are 100% fixed.
(c) Selling overheads are completely variable.
(d) Normal production capacity of ABC Ltd. is 20,000 units.
(e) Indirect expenses are absorbed in the cost accounts on the basis of normal production capacity.
(f) Notional rent of own premises charged in Cost Accounts is amounting to `12,000.

You are required to:

(1) Prepare a Cost Sheet and ascertain the profit as per Cost records for the year ended 31st March, 2021.
(2) Reconcile the Profit as per Financial Records with profit as per Cost Records.
[(10 Marks) July 2021]

Answer
(1) Cost Sheet
Particulars Amount (`)
Direct Materials 6,50,000
Direct Wages 3,50,000
Prime Cost 10,00,000
Factory Overheads:
Variable (2,60,000 × 50%) 1,30,000
Fixed {(2,60,000 × 50%) × 15,000/20,000} 97,500
Factory Cost 12,27,500
Administrative Overheads (1,05,000 ×15,000/20,000) 78,750
Notional rent 12,000
Cost of Production 13,18,250
Selling Overheads (completely variable) 85,000
Cost of sales 14,03,250
Profit (balancing figure) 96,750
Sales 15,00,000

15.12
 CHAPTER 15 RECONCILIATION

(2) Reconciliation Statement

Particulars Amount
Profit as per Cost Accounts 96,750
Add: Dividend received 9,000
Notional rent 12,000

Less: Factory overheads under recovered (2,60,000 – 1,30,000 – 97,500) 32,500

Administration overheads under recovered (1,05,000 – 78,750) 26,250
Loss on sale of investments 2,000
Profit as per Financial Accounts 57,000

PYQ 6
R Ltd. showed a Net Profit of `3,60,740 as per their cost accounts for the year ended 31st March, 2021. The
following information was revealed as a result of scrutiny of the figures from the both sets of accounts:

(a) Over recovery of selling overheads in cost accounts 10,250

(b) Over valuation of closing stock in cost accounts 7,300
(c) Rent received credited in financial accounts 5,450
(d) Bad debts provided in financial accounts 3,250
(e) Income tax provided in financial accounts 15,900
(f) Loss on sale of capital asset debited in financial accounts 5,800
(g) Under recovery of administration overheads in cost accounts 3,600

Required: Prepare a reconciliation statement showing the profit as per financial records.
[(5 Marks) Dec 2021]

Answer
Reconciliation Statement
Particulars Amount Amount
Profit as per Cost Books 3,60,740

Add: Over recovery of selling overheads in cost accounts 10,250

Rent received credited in financial accounts 5,450 15,700

Less: Over valuation of closing stock in cost accounts 7,300

Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 (35,850)

Profit as per Financial Books 3,40,590

PYQ 7
‘X’ Ltd. follows Non-Integrated Accounting System. Financial Accounts of the company show a Net Profit of
`5,50,000 For the year ended 31st March, 2022. The chief accountant of the company has provided following
information form the Financial Accounts and Cost Accounts:

SN. Particulars (`)

(i) Legal Charges provided in financial accounts 15,250
(ii) Interim Dividend received credited in financial accounts 4,50,000
(iii) Preliminary Expenses written off in financial accounts 25,750
(iv) Over recovery of selling overheads in cost accounts 11,380
(v) Profit on sale of capital asset credited in financial accounts 30,000

15.13
 RECONCILIATION CHAPTER 15

(vi) Under valuation of closing stock in cost accounts 25,000

(vii) Over recovery of production overheads in cost accounts 10,200
(viii) Interest paid on Debentures shown in financial accounts 50,000

Find out the Profit (Loss) as per Cost Accounts by preparing a Reconciliation Statement.
[(5 Marks) Nov 2022]

Answer
Reconciliation Statement
Particulars Amount Amount
Profit as per Financial Books 5,50,000

Add: Legal charges 15,250

Preliminary expenses 25,750
Interest paid on debentures 50,000 91,000

Less: Interim dividend received 4,50,000

Over recovery of selling overheads 11,380
Profit on sale of capital assets 30,000
Under valuation of closing stock in cost accounts 25,000
Over recovery of production overheads 10,200 (5,26,580)
Profit as per Cost Books 1,14,420

PYQ 8
The following has been obtained from financial accounting and cost accounting records.
Financial Accounting Cost Accounting
Factory Overhead 94,750 90,000
Administrative overhead 60,000 57,000
Selling Overhead 55,000 61,500
Opening Stock 17,500 22,500
Closing Stock 12,500 15,000

Indicate under-recovery and over-recovery and their effects on cost accounting profit.

Note: You are not required to prepare reconciliation statement.

[(5 Marks) May 2023]

Answer
Financial Cost Under-over Effect on Cost
Particulars
Accounting Accounting Recovered Accounting Profit
Factory Overhead 94,750 90,000 4,750 under recovered Increased
Administrative overhead 60,000 57,000 3,000 under recovered Increased
Selling Overhead 55,000 61,500 6,500 over recovered Decreased
Opening Stock 17,500 22,500 5,000 over valued Decreased
Closing Stock 12,500 15,000 2,500 over valued Increased

SUGGESTED REVISION FOR EXAM:

BQ: 3, 4, 6

PYQ: 1, 4, 5
15.14
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