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COST & MANAGEMENT

ACCOUNTING VOLUME I1
O E U T N A
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A A S H A A
CA NOTE HUB
CA NOTE HUB
 INDEX
VOLUME l

1 BASIC CONCEPTS 01

2 COST SHEET 08

3 OVERHEADS - ABSORPTION COSTING METHOD 49

4 ACTIVITY BASED COSTING 102

5 COST ACCOUNTING SYSTEM 139

6 JOB COSTING 190

7 UNIT & BATCH COSTING 198

8 MATERIAL COST 215

9 EMPLOYEE COST & DIRECT EXPENSES 258

10 PROCESS COSTING 293

11 JOINT & BY PRODUCTS 332

VOLUME ll

12 SERVICE COSTING 362

13 MARGINAL COSTING 400

14 STANDARD COSTING 464

15 BUDGET & BUDGETARY CONTROL 508

16 MULTIPLE CHOICE QUESTIONS & CASE SCENARIOS 552

CA NOTE HUB
CA NOTE HUB
 CHAPTER 12: SERVICE COSTING
PROBLEM – 1:
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".
(MT Metric Ton or Ton)
SOLUTION:
Weighted Average or Absolute basis – MT – Kilometer:
= (20 MT × 80 Kms) + (12 MT × 120 Kms) + (16 MT × 160 Kms)
= 1,600 + 1,440 + 2,560 = 5,600 MT - Kilometer
Simple Average or Commercial basis – MT – Kilometer:
= [{(20 + 12 + 16) ÷ 3} MT × {(80 + 120 + 160) Kms]
= 16 MT × 360 Kms = 5,760 MT – Kilometer

PROBLEM – 2:
ABC Transport Company has given a route 40 kilometers long to run bus
1. The bus costs the company a sum of ₹ 10,00,000
2. It has been insured at 3% p.a. and
3. The annual tax will amount to ₹ 20,000
4. Garage rent is ₹ 20,000 per month.
5. Annual repairs will be ₹ 2,04,000
6. The bus is likely to last for 2.5 years
7. The driver's salary will be ₹ 30,000 per month and the conductor's salary will be
₹ 25,000 per month in addition to 10% of takings as commission [To be shared by the
driver and conductor equally.
8. Cost of stationery will be ₹ 1,000 per month.
9. Manager-cum-accountant's salary is ₹ 17,000 per month.
10. Petrol and oil will be ₹ 500 per 100 kilometer
11. The bus will make 3 up and down trips carrying on an average 40 passengers on
each trip.
12. The bus will run on an average 25 days in a month.

CA NOTE HUB 362

 Assuming 15% profit on takings, CALCULATE the bus fare to be charged from each
passenger.
SOLUTION:
Working Note:
(1) Total Kilometers run per annum:
= Number of Buses × Distance × Number of days in the Month × Number of trips × 12 months
= 1 Bus × 40 kms × 25 Days × 6 Single trips (3 Round Trips) × 12 months = 72,000 kms.
(2) Total Passenger Kilometers per annum:
Total Kilometers run per annum × Seating Capacity
= 72,000 Kms × 40 Seats = 28,80,000 Passenger-Kms.
(3) Petrol & oil Consumption per annum:
Total Kilometers run per annum × Petrol Consumption per KM
= 72,000 Kms × (₹ 500 ÷ 100 Kms) = ₹ 3,60,000
Statement of Cost per Passenger – Km
Particulars Per Annum Per Passenger -
Kilometer
A. Standing Charges:
Insurance @ 3% on ₹ 10,00,000 30,000
Annual Tax 20,000
Garage rent (₹ 20,000 × 12) 2,40,000
Depreciation 4,00,000
Salary of Driver (Fixed part) 3,60,000
Salary of Conductor (Fixed part) 3,00,000
Stationary 12,000
Manager-cum-accountant’s salary 2,04,000
Total Standing Charges 15,66,000 0.5438
B. Running Charges:
Diesel and other Oil (WN - 3) 3,60,000
Commission to Driver* 1,42,000
(10% × ₹ 28,40,000 × 1 ÷ 2)
Commission to Conductor* 1,42,000
(10% × ₹ 28,40,000 × 1 ÷ 2)
Total Running Charges 6,44,000 0.2236
C. Maintenance Charges:

CA NOTE HUB 363

 Repairs 2,04,000 0.0708
Grand Total (A + B + C) 24,14,000 0.8382
Profit (15% × ₹ 28,40,000) 4,26,000 0.1479
Fare per Passenger Kilometer 0.9861
*Total takings = Standing Charges + (Running cost + Commission on takings) + Maintenance cost +
Profit
Let Takings = X
Or, X = ₹ 15,66,000 + (₹ 3,60,000 + 0.1X) + ₹ 2,04,000 + 0.15X
Or, X – 0.25X = 21,30,000
Or, X = ₹ 28,40,000

PROBLEM – 2A: (MTP 1 SEP 24)

A mini-bus, having a capacity of 32 passengers, operates between two places - 'A' and
'B'. The distance between the place 'A' and place 'B' is 30 km. The bus makes 10
round trips in a day for 25 days in a month. On an average, the occupancy ratio is
70% and is expected throughout the year. The details of other expenses are as under:
Amount (₹ )
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 of 25% on total taking.
PREPARE operating cost statement on the annual basis and find out the cost per
passenger kilometer and one way fare per passenger.

CA NOTE HUB 364

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

Calculation of Cost per passenger kilometre and one way fare per passenger:

Total Operating Cost

Cost per passenger - Km =
Total Passenger - Km

₹ 7,25,800
= = ₹ 0.018
40,32,000 Passenger-Km

Total Takings
One way fare per passenger = × 30Km
Total Passengers - Km

₹ 13,69,434
= × 30 Km = ₹ 10.20
40,32,000 Passenger-Km
Working Notes:
1. Let total be X then passenger tax and profit will be as follows:
X = ₹ 7,25,8000 + 0.22 X + 0.25X
X – 0.47 X = ₹ 7,25,800

CA NOTE HUB 365

 ₹ 7,25,800
X= = ₹ 13,69,434
0.53
Passenger tax = ₹ 13,69,434 x 0.22 = ₹ 3,01,275
Profit = ₹ 13,69,434 x 0.25 = ₹ 3,42,359
2. Total Kilometres to be run during the year
= 30 Km x 2 sides x 10 trips x 25 days x 12 months = 1,80,000 Kilometers
3. Total passenger kilometers
= 1,80,000 km x 32 passengers x 70% = 40,32,000 Passenger Km

PROBLEM – 3:
SMC is a public school having five buses each plying in different directions for the
transport of its school students. In view of a larger number of students availing of the
bus service, the buses work two shifts daily both in the morning and in the afternoon.
The buses are garaged in the school. The workload of the students has been so arranged
that in the morning the first trip picks up senior students and the second trip plying an
hour later picks up the junior students. Similarly, in the afternoon the first trip takes
the junior students and an hour later the second trip takes the senior students’ home.
The distance travelled by each bus one way is 8 km. The school works 25 days in a month
and remains closed for vacation in May, June and December. The bus fee, however, is
payable by the students for all 12 months in a year. The details of expenses for a year
are as under.
Driver's salary ₹ 4,500 per month per driver
Cleaner's salary ₹ 3,500 per month
(Salary payable for all 12 months)
(one cleaner employed for all the five buses)
License fee, taxes, etc. ₹ 8,600 per bus per annum
Insurance ₹ 10,000 per bus per annum
Repairs & maintenance ₹ 35,000 per bus per annum
Purchase price of the bus ₹ 15,00,000 each
Life of each bus 12 years
Scrap value of buses at the end of life ₹ 3,00,000
Diesel cost ₹ 45.00 per liter
Each bus gives an average mileage of 4 km per liter of diesel
The seating capacity of each bus is 50 students.
The seating capacity is fully occupied during the whole year.

CA NOTE HUB 366

Students picked up and dropped within a range up to 4 km. of distance from the school
are charged half fare and fifty per cent of the students travelling in each trip are in
this category. Ignore interest.
Since the charges are to be based on average cost you are required to:
1. PREPARE a statement showing the expenses of operating a single bus and the fleet
of five buses for a year.
2. WORK OUT the average cost per student per month in respect of -
a. students coming from a distance of up to 4 km. from the school and
b. students coming from a distance beyond 4 km. from the school
SOLUTION:
i. Statement of Expenses of operating bus/ buses for a year
Particulars Rate (₹) Per Bus Fleet of 5
per annum buses p.a.
(₹) (₹)
(i) Standing Charges:
Driver’s salary 4,500 54,000 2,70,000
Per Month
Cleaner’s salary 3,500 8,400 42,000
Per Month
Licence fee, taxes etc. 8,600 8,600 43,000
Per Annum
Insurance 10,000 10,000 50,000
Per Annum
Depreciation (15,00,000 – 3,00,000) ÷ 12 yrs 1,00,000 1,00,000 5,00,000
Per Annum
(ii) Maintenance Charges:
Repairs & maintenance 35,000 35,000 1,75,000
Per Annum
(iii) Operating Charges:
Diesel (Working Note 1) 1,62,000 8,10,000
Total Cost [(i) + (ii) + (iii)] 3,78,000 18,90,000
Cost per month 31,500 1,57,500
Total no. of equivalent students 150 750
Total Cost per half fareequivalent student ₹ 210 ₹ 210

CA NOTE HUB 367

ii. Average cost per student per month:
A. Students coming from distance of upto 4 km. from school
Total Cost per month ₹ 31,500
= = = ₹ 210
Total No of equivalent students 150 students
B. Students coming from a distance beyond 4 km. from school
= Cost of per half fare student × 2 = ₹ 210 × 2 = ₹ 420

Working Notes:
1. Calculation of Diesel cost per bus:
Distance travelled in a year:
(8 round trip × 8 km. × 25 days × 9 months)
Distance travelled per annum: 14,400 km
14,400 km
Cost of diesel (per bus per annum): x ₹ 45 = ₹ 1,62,000
4 kmpl
2. Calculation of equivalent number of students per bus:
Seating capacity of a bus 50 students
Half fare students (50% of 50 students) 25 students
Full fare students (50% of 50 students) 25 students
Total number of students equivalent to half fare students
Full fare students (25 students × 2) 50 students
Add: Half fare students 25 students
Total Equivalent number of students in a trip 75 students
Total number of equivalent students in two trips (Senior + Junior) 150 students

PROBLEM – 4:
GTC has a lorry of 6-ton carrying capacity. It operates a 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 the distance from city 'A' to 'C' is 140 km.
In January 20x1, 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

CA NOTE HUB 368

 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 20x1 are ₹ 2,94,400 (includes
₹ 12,400 paid as a 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, 20x1
SOLUTION:
i. Calculation of total monthly cost for running truck:
Particulars Amount per Amount per
annum (₹) month (₹)
(i) Standing Charges:
Annual fixed costs 6,00,000 50,000
(ii) Maintenance Charges: 1,20,000 10,000
(iii) Running Cost:
Running charges 2,94,400
Less: Penalty paid for overloading (12,400) 2,82,000
Total monthly cost 3,42,000

₹ 3,42,000
a) Cost per commercial tonne-km = = ₹ 7.62
44,856 ton - km.

(Refer to working note-1)

₹ 3,42,000
b) Cost per Absolute tonne-km = = ₹ 7.65
44,720 ton - km.
(Refer to working note-2)

ii. Calculation of Net Profit/Loss for the month of January:

Particulars (₹) (₹)
Truck hire charges received during the month:
From Outward journey [(10 + 2) trips × 6 tonne × ₹ 2,400] 1,72,800
From return journey 1,80,400 3,53,200
{(5 trips × 8 tonne × ₹ 2,200) + [(6 + 1) trips × 6 tonne ×

CA NOTE HUB 369

 ₹ 2,200]}
Less: Monthly running cost {as per (i) above} (3,42,000)
Operating profit 11,200
Less: Penalty paid for overloading (12,400)
Net Loss for the month (1,200)

Working Notes:
1. Calculation of Commercial Tonne-km (Simple Average Calculation):
Particulars Tonne-
km
A. Total Distance travelled
To and from (300 km × 2× 12 trips) (in km) 7,200
B. Average weight carried:
Outward (12 journeys × 6 tonne + 2 journeys × 4 tonne) 80
Return (5 journeys × 8 tonne + 6 journeys × 6 tonne + 1 journey 82
× 6 tonne)
Total weight 162
No. of journeys 26
Average weight (in tonne) (162 ÷ 26) 6.23
Total Commercial Tonne-km (A × B) 44,856

2. Calculation of Absolute Tonne-km (Weighted Average Calculation):

Particulars Tonne- Tonne-
km. km.
Outward journeys:
From city A to city B (10 journey × 300 km × 6 tonne) 18,000
From city A to city C (2 journeys × 140 km × 6 tonne) 1,680
From city C to city B (2 journeys × 160 km × 4 tonne) 1,280 20,960
Return journeys:
From city B to city A (5 journeys × 300 km. × 8 tonne) 22,800
+ (6 journeys × 300 km. × 6 tonne)
From city B to city C (1 journey × 160 km. × 6 tonne) 960 23,760
Total Absolute Tonne - km 44,720

CA NOTE HUB 370

PROBLEM – 4A: (MTP 1 MAY 24)
Chiku Transport Service is a Delhi based national goods transport service provider,
owning four trucks for this purpose. The cost of running and maintaining these trucks are
as follows:
Particulars Amount
Diesel cost ₹ 19.20 per km.
Engine oil ₹ 4,200 for every 13,000 km.
Repair and maintenance ₹ 36,000 for every 10,000 km.
Driver’s salary ₹ 24,000 per truck per month
Cleaner’s salary ₹ 15,000 per truck per month
Supervision and other general expenses ₹ 14,000 per month
Cost of loading of goods ₹ 180 per Metric Ton (MT)
All four trucks were purchased for ₹ 30 lakhs with an estimated life of 7,20,000
km each.
During the next month, it is expecting 6 bookings, the details are as follows:
Sl. Journey Distance in Weight- Up Weight- Down
No. km (in MT) (in MT)
1. Delhi to Kochi 2,700 14 6
2. Delhi to Guwahati 1,890 12 0
3. Delhi to Vijayawada 1,840 15 0
4. Delhi to Varanasi 815 10 0
5. Delhi to Asansol 1,280 12 4
6. Delhi to Chennai 2,185 10 8
Total 10,710 73 18
Required
(i) Calculate the total absolute Ton-km for the vehicles.
(ii) Calculate the cost per ton-km.

CA NOTE HUB 371

SOLUTION:
(i) Calculation of Absolute Ton-km for the next month:
Journey Distance Weight- Ton-km Weight- Ton-km Total
in km Up Down
(in MT) (in MT)
(a) (b) (c)=(a)×(b) (d) (e)= (c)+(e)
(a)×(d)
Delhi to Kochi 2,700 14 37,800 6 16,200 54,000
Delhi to 1,890 12 22,680 0 0 22,680
Guwahati
Delhi to 1,840 15 27,600 0 0 27,600
Vijayawada
Delhi to Varanasi 815 10 8,150 0 0 8,150

Delhi to Asansol 1,280 12 15,360 4 5,120 20,480

Delhi to 2,185 10 21,850 8 17,480 39,330
Chennai
Total 10,710 73 1,33,440 18 38,800 1,72,240

Total Ton-Km = 1,72,240 ton-km

(ii) Calculation of cost per ton-km:

Particulars Amount Amount
(₹ ) (₹ )
A. Running cost:
- Diesel Cost {₹ 19.20 × (10,710 × 2)} 4,11,264.00
- Engine oil cost 6,920.31
₹ 4,200
( × 21,420 km)
13,000 km
- Cost of loading of goods {₹ 180 × (73 + 18)} 16,380.00
- Depreciation {(30,00,000 ÷ 720,000 × 21,420 km) × 4} 3,57,000.00 7,91,564.31
B. Repairs & Maintenance Cost (36,000 ÷ 10,000 × 21,420) 77,112.00
C. Standing Charges
- Drivers’ salary (₹ 24,000 × 4 trucks) 96,000.00
- Cleaners’ salary (₹ 15,000 × 4 trucks) 60,000.00
- Supervision and other general exp. 14,000.00 1,70,000.00
Total Cost (A + B + C) 10,38,676.31

CA NOTE HUB 372

Total ton-km 1,72,240
Cost per ton-km 6.03

PROBLEM – 4B: (MTP 2 SEP 24)

SpeedEx Logistics, established in 2010 and headquartered in Mumbai, India, operates
within the transportation and logistics industry as a third- party logistics (3PL) provider.
The company’s fleet consists of 10 trucks, 15 vans, and 5 trailer, each serving distinct
purposes. The records of Truck R-40 reveal the following information for July 2024.
Days Maintained 30
Days Operated 25
Total Hours Operated 300
Total Kilometres Covered 2,500
Total Tonnage Carried
(4 tonne-load per trip, return journey empty 2 round trips per day)
The following further information is made available:
A. Operating Costs for the month: Petrol ₹ 400, oil ₹170, Grease ₹ 90, Wages to driver
₹ 550, Wages to Worker ₹ 350.
B. Maintenance Costs for the month: Repair ₹ 170, Overhaul ₹ 60, Tyres ₹ 150, Garage
charges ₹ 100.
C. Fixed Costs for the month based on the estimates for the year: Insurance ₹ 50,
Licence, tax etc. ₹ 80, Interest ₹ 40, Other Overheads ₹ 190
D. Capital costs: Cost of acquisition ₹ 54,000; Residual Value at the end of 5 years life
₹ 36,000.
You are required to CALCULATE:
(i) cost per days maintained
(ii) cost per days operated
(iii) cost per hours operated
(iv) cost per kilometres covered
(v) cost per commercial tonne km (5 Marks)

CA NOTE HUB 373

SOLUTION:
Time Saved
₹ 180 - ₹ 150 = × ₹ 150
Time Allowed

Particulars Amount in ₹
A Operating costs:
Petrol 400
Oil 170
Grease 90
Wages to Driver 550
Wages to Worker 350
(A) 1,560
B Maintenance Costs:
Repairs 170
Overhead 60
Tyres 150
Garage Charges 100
(B) 480
C Fixed Cost:
Insurance 50
License, Tax etc 80
Interest 40
Other Overheads 190
Depreciation
(54,000 - 36000) 300
5 x 12
(C) 660
Total Cost (A + B + C) 2,700
(i) Cost per days maintained = ₹ 2700 ÷ 30 days = ₹ 90
(ii) Cost per days operated = ₹ 2700 ÷ 25 days = ₹ 108
(iii) Cost per hours operated = ₹ 2700 ÷ 300 hours = ₹ 9
(iv) Cost per kilometres covered = ₹ 2700 ÷ 2500 kms = ₹ 1.08
(v) Cost per commercial tonne kms = ₹ 2700 ÷ 5000 tonne kms = ₹ 0.54
*Commercial tonne kms = Total distance travelled x Average load
(4 tonnes + 0 tonnes)
= × 2500 kms = 5000 tonne Kms
2

CA NOTE HUB 374

PROBLEM – 5: (PYP May 24)
Star Airlines operates a single aircraft of 180 seats capacity between city 'ND' and
'GA'. The average normal occupancy is estimated at 70% per flight. The average one-
way fare is ₹ 12,500 from city 'ND" to 'GA'. The costs of operation of the flight as
collected by an expert analyst are:
Fuel cost (Variable) per flight from ‘ND’ to ‘GA’ ₹ 2,28,000 per flight
Food served on flight from ‘ND’ to ‘GA’ ₹ 270 per passenger
(no charge to passenger)
Commission paid to Travel Agents (All ticket 7.5% of fare
booking through agents)
Fixed costs:
Lease & landing charges per flight ‘ND’ to ‘GA’ ₹ 9,12,000
Salaries of flight crew per flight ‘ND’ to ‘GA’ ₹ 90,000
Note: Assume that fuel costs are unaffected by the actual number of passengers on
a flight.
You are required to:
(i) Calculate the net operating income that Star Airlines makes per flight from 'ND'
to 'GA'.
(ii) Star Airlines expects that its occupancy will increase to 144 passengers per flight
if the fare is reduced to ₹ 11,670. Advise whether this proposal should be
implemented or not.
SOLUTION:
(i) No. of passengers 180 seats x 70% = 126
(₹ ) (₹ )
Fare collection (126 passengers x ₹ 12,500) 15,75,000
Variable costs:
Fuel 2,28,000
Food (126 passengers x ₹ 270) 34,020
Commission (7.5 % of ₹ 15,75,000) 1,18,125 3,80,145
Contribution per flight 11,94,855
Fixed costs:
Lease and Landing Charges 9,12,000
Salaries of flight Crew 90,000 10,02,000
Net income per flight 1,92,855

CA NOTE HUB 375

(ii)
Fare collection (144 passengers x ₹ 11,670) 16,80,480
Variable costs:
Fuel 2,28,000
Food (144 passengers x ₹ 270) 38,880
Commission (7.5% of ₹ 16,80,480) 1,26,036 3,92,916
Contribution 12,87,564
Fixed costs:
Lease and Landing Charges 9,12,000
Salaries of flight Crew 90,000 10,02,000
Net income per flight 2,85,564

There is an increase in contribution by ₹ 92,709. Hence the proposal is acceptable.

PROBLEM – 6:
A company is considering three alternative proposals for conveyance facilities for its sales
personnel who has to do considerable travelling, approximately 20,000 kilometers every
year. The proposals are as follows:
i. Purchase and maintain its own fleet of ca₹ 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 the costs of petrol, taxes and tyres.
The following further details are available:
Petrol ₹ 6 per km. Repairs and maintenance 0.20 per km.
Tyre ₹ 0.12 per km. Insurance ₹ 1,200 per car per annum
Taxes ₹ 800 per car per Life of the car: 5 years with an annual mileage of 20,000
annum km.
Resale value: ₹ 80,000 at the end of the fifth year.
WORK OUT the relative costs of three proposals and rank them.

CA NOTE HUB 376

SOLUTION:
Calculation of relative costs of three proposals and their ranking
per annum I II III
(₹) Use of Use of Use of
company’s own car hired
car per km. per km. car
(₹) (₹) per km.
(₹)
Reimbursement -- 10.00 9.00*
Fixed cost:
Insurance 1,200 0.06 0.06 --
Taxes 800 0.04 -- 0.04
Depreciation 1,04,000 5.20 -- --
(₹ 6,00,000 - ₹ 80,000) ÷ 5 year
Running and Maintenance Cost:
Petrol -- 6.00 -- 6.00
Repairs and Maintenance -- 0.20 -- --
Tyre -- 0.12 -- 0.12
Total cost per km. -- 11.62 10.06 15.16
Cost for 20,000 km. 2,32,400 2,01,200 3,03,200
Ranking of proposals II I III

* (₹ 1,80,000 ÷ 20,000 km.)

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.

PROBLEM – 7:
Mr. X owns a bus which runs according to the following schedule:
i. Delhi to Chandigarh and back, the same day.
Distance covered: 250 km. one way.
Number of days run each month: 8
Seating capacity occupied 90%.
ii. Delhi to Agra and back, the same day.
Distance covered: 210 km. one way
Number of days run each month: 10

CA NOTE HUB 377

 Seating capacity occupied 85%
iii. Delhi to Jaipur and back, the same day.
Distance covered: 270 km. one way
Number 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 km. per litre at ₹ 56 per litre
Road tax ₹ 15,915 p.a.
Lubricant oil ₹ 10 per 100 km.
Permit fee ₹ 315 p.m.
Repairs and maintenance ₹ 1,000 p.m.
Depreciation of the bus @ 20% p.a.
Seating capacity of the bus 50 persons.
Passenger tax is 20% of the total takings.
CALCULATE the bus fare to be charged from each passenger to earn a profit of 30% on
total takings. The fares are to be indicated per passenger for the journeys:
i. Delhi to Chandigarh ii. Delhi to Agra and iii. Delhi to Jaipur.
SOLUTION:
Working Notes:
Total Distance (in km.) covered per month
Bus route Km per Trips per Days per Km. per
trip day month month
Delhi to Chandigarh 250 2 8 4,000

Delhi to Agra 210 2 10 4,200

Delhi to Jaipur 270 2 6 3,240
11,440

CA NOTE HUB 378

 Passenger- km. per month
Total seats available Capacity Km. Passenger- Km.
per month utilised per trip per month
(at 100% capacity) (%) Seats
Delhi to 800 90 720 250 1,80,000
Chandigarh & (50 seats × 2 trips × 8 (720 seats × 250
Back days) km.)
Delhi to Agra & 1,000 85 850 210 1,78,500
Back (50 seats × 2 trips × 10 (850 seats × 210
days) km.)
Delhi to Jaipur & 600 100 600 270 1,62,000
Back (50 seats × 2 trips × 6 (600 seats × 270
days) km.)
Total 5,20,500

Monthly Operating Cost Statement

(₹) (₹)
i) Running Costs
Diesel {(11,440 km  4 km) x ₹ 56} 1,60,160
Lubricant oil {(11,440 km  100) x ₹ 10} 1,144 1,61,304
ii) Maintenance Costs
Repairs & Maintenance 1,000
iii) Standing charges
Salary to driver 24,000
Salary to conductor 21,000
Salary of part-time accountant Insurance (₹ 4,800 ÷ 12) 5,000
400
Road tax (₹ 15,915 ÷ 12) 1,326.25
Permit fee 315
Depreciation {(₹ 12,00,000 x 20%) ÷ 12} 20,000 72,041.25
Total costs per month before Passenger Tax (i) + (ii) + (iii) 2,34,345.25
Passenger Tax* 93,738.10
Total Cost 3,28,083.35
Add: Profit* 1,40,607.15
Total takings per month 4,68,690.50

CA NOTE HUB 379

*Let, total takings be X then
X = Total costs per month before passenger tax + 0.2 X (passenger tax) + 0.3 X (profit)
X = ₹ 2,34,345.25 + 0.2 X + 0.3 X
0.5 X = ₹ 2,34,345.25 or, X = ₹ 4,68,690.50
Passenger Tax = 20% of ₹ 4,68,690.50 = ₹ 93,738.10
Profit = 30% of ₹ 4,68,690.50 = ₹ 1,40,607.15
Calculation of Rate per passenger km. and fares to be charged for different routes
Total Takings Per Month ₹ 4,68,690.50
Rate per passenger - km. = = = ₹ 0.90
Total Passenger Km. Per Month 5,20,500 passenger - km.
Bus fare to be charged per passenger
Delhi to Chandigarh = ₹ 0.90 × 250 km = ₹ 225.00
Delhi to Agra = ₹ 0.90 × 210 km = ₹ 189.00
Delhi to Jaipur = ₹ 0.90 × 270 km = ₹ 243.00

PROBLEM – 8:
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 the total taking. It has three types of suites for
its customers, viz, single room, double rooms and triple rooms.
The following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of a double room’s suite is to be fixed at 2.5 times of the single room suite
and that of triple room’s suite as twice of the double room’s suite.
The other expenses for the year 20x1 are as follows:
Staff salaries ₹ 14,25,000
Room attendants’ wages ₹ 4,50,000
Lighting, heating and power ₹ 2,15,000
Repairs and renovation ₹ 1,23,500
Laundry charges ₹ 80,500
Interior decoration ₹ 74,000
Sundries ₹ 1,53,000
Provide profit 20% on total taking and assume 360 days in a year.
You are required to CALCULATE the rent to be charged for each type of suite

CA NOTE HUB 380

SOLUTION:
Working Notes:
(i) Total equivalent single room suites
Nature of suite Occupancy (Room-days) Equivalent single room
suites (Room-days)
Single room suites 36,000 36,000
(100 rooms x 360 days x 100%) (36,000 x 1)
Double rooms suites 14,400 36,000
(50 rooms x 360 days x 80%) (14,400 x 2.5)
Triple rooms suites 6,480 32,400
(30 rooms x 360 days x 60%) (6,480 x 5)
1,04,400

(ii) Statement of total cost:

(₹)
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
25,21,000
Building rent {(₹10,000 x 12 months) + 5% on total taking} 1,20,000 + 5% on total takings
Total cost 26,41,000 + 5% on total
takings
Profit is 20% of total takings
 Total takings = ₹ 26,41,000 + 25% (5% + 20%) of total takings
Let R be rent for single room suite
Then 1,04,400 R = 26,41,000 + (0.25 × 1,04,400 R)
Or, 1,04,400 R = 26,41,000 + 26,100 R
Or, 78,300 R = 26,41,000
Or, R = ₹ 33.73
Alternatively
Let total takings be x
 X= 26,41,000 + 0.25X ( 5% + 20% )

CA NOTE HUB 381

 X = 35,21,333
Let the rent of single room be R Then 1,04,400 R = 35,21,333
Or, R = ₹ 33.73
Rent to be charged:
Rent to be charged for single room suite = ₹ 33.73
Rent for double rooms suites ₹ 33.73 x 2.5 = ₹ 84.33
Rent for triple rooms suites ₹33.73 x 5 = ₹ 168.65

PROBLEM – 9:
A lodging home is being run in a small hill station with 100 single rooms. The home offers
concessional rates during six off-season months in a year when the number of visitors is
limited. 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 on 31st March
20x1. (Assume a month to be of 30 days).
i. Occupancy during the season is 80% while in the off-season it is 40% only.
ii. Total investment in the home is 200 lakhs of which 80% relate to buildings and balance
for furniture and equipment.
iii. 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

iv. Annual depreciation is to be provided for buildings @ 5% and on furniture and

equipment @ 15% on a straight-line basis.
v. Room attendants are paid 10 per room day on the basis of occupancy of the rooms in
a month.
vi. 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.

CA NOTE HUB 382

SOLUTION:
Working Notes:

(i) Total Room days in a year

Season Occupancy (Room-days) Equivalent Full Room
charge days
Season – 80% 100 Rooms × 80% × 6 months × 30 14,400 Room Days × 100%
Occupancy days in a month = 14,400 Room Days = 14,400

Off-season – 40% 100 Rooms × 40% × 6 months × 30 7,200 Room Days × 50%
Occupancy days in a month = 7,200 Room Days = 3,600

Total Room Days 14,400 + 7,200 = 21,600 Room Days 18,000 Full Room days

(ii) Lighting Charges:

It is given in the question that lighting charges for 8 months is ₹ 120 per month and during
winter season of 4 months it is ₹ 30 per month. Further it is also given that peak season is
6 months and off season is 6 months.
It should be noted that – being Hill station, winter season is to be considered as part of
Off season. Hence, the non-winter season of 8 months include – Peak season of 6 months
and Off season of 2 months.
Accordingly, the lighting charges are calculated as follows:
Season Occupancy (Room-days)
Season & Non-winter – 80% 100 Rooms × 80% × 6 months × ₹120 per month
Occupancy = ₹ 57,600
Off- season & non-winter – 40% 100 Rooms × 40% × 2 months × ₹120 per month
Occupancy (8 – 6 months) = ₹ 9,600
Off- season & -winter – 40% 100 Rooms × 40% × 4 months × ₹ 30 per month
Occupancy months) = ₹ 4,800
Total Lighting charges ₹ 57,600 + 9,600 + 4,800 = ₹ 72,000

Statement of total cost:

(₹)
Staff salary 5,50,000
Repairs to building 2,61,000
Laundry & Linen 80,000
Interior 1,75,000
Sundries Expenses 1,90,800

CA NOTE HUB 383

 Depreciation on Building (₹ 200 Lakhs × 80% × 5%) 8,00,000
Depreciation on Furniture & Equipment (₹ 200 Lakhs × 20% × 15%) 6,00,000
Room attendant’s wages (₹ 10 per Room Day for 21,600 Room Days) 2,16,000
Lighting charges 72,000
Total cost 29,44,800
Add: Profit Margin (20% on Room rent or 25% on Cost) 7,36,200
Total Rent to be charged 36,81,000

Calculation of Room Rent per day:

Total Cost / Equivalent Full Room days = ₹ 36,81,000 ÷ 18,000 = ₹ 204.50
Room Rent during Season – ₹ 204.50
Room Rent during Off season = ₹ 204.50 × 50% = ₹ 102.25

PROBLEM – 10:
ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds
and 5 more beds can be added, it 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 the 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.

CA NOTE HUB 384

 You are required
• CALCULATE profit per patient day, if the hospital recovers on an average ₹ 2,000
per day from each patient
• FIND OUT Breakeven point for the hospital.
SOLUTION:
Working Notes:
(1) Calculation of number of patient days
35 Beds × 150 days = 5,250
25 Beds × 80 days = 2,000
Extra beds = 750
Total = 8,000

(2) Statement of Profitability

Particulars Amount Amount
Income for the year (₹ 2,000 per patient per day × 8,000 1,60,00,000
patient days)
Variable Costs:
Doctor Fees (₹ 2,50,000 per month × 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) 75,000
Total Variable costs 56,05,000
Contribution 1,03,95,000
Fixed Costs:
Rent (₹ 75,000 per month × 12) 9,00,000
Supervisor (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 Fixed Costs 48,61,000
Profit 55,34,000

CA NOTE HUB 385

 1. Calculation of Contribution per Patient day
Total Contribution – ₹ 1,03,95,000
Total Patient days – 8,000
Contribution per Patient day – ₹ 1,03,95,000 ÷ 8,000 = ₹ 1,299.375
2. Breakeven Point = Fixed Cost / Contribution per Patient day
= ₹ 48,61,000 ÷ ₹ 1,299.375
= 3,741 patient days

PROBLEM – 11:
Following are the data pertaining to InfoTech Pvt. Ltd. for the year 20x1-x2:
Particulars Amount
Salary to Software Engineers (5 persons) ₹ 15,00,000
Salary to Project Leaders (2 persons) ₹ 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
▪ One Project Leader and three Software Engineers were involved for the entire
duration of the project, whereas the Project Manager spends 2 months of effort,
during the execution of the project.
▪ Travel expenses incurred for the project - ₹ 1,87,500
▪ 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 yea₹ PREPARE Project cost sheet.
SOLUTION:
Working Notes:
(1) Calculation of Cost per month and Overhead absorption rate
Particulars Total Per Per Person Per Per Person Per
Annum Annum Month
Salary to Software Engineer (5 Persons) ₹ 15,00,000 ₹ 3,00,000 ₹ 25,000
Salary to Project Leaders (2 persons) ₹ 9,00,000 ₹ 4,50,000 ₹ 37,500
Salary to Project Manager ₹ 6,00,000 ₹ 6,00,000 ₹ 50,000
Total ₹ 30,00,000 ₹ 1,12,500

CA NOTE HUB 386

(2) Total Overhead = Repairs & maintenance + Administration overheads
= ₹ 3,00,000 + ₹ 12,00,000 = ₹ 15,00,000
(3) Calculation of Overhead absorption rate
= Total Overhead ÷ Total Salary = ₹ 15,00,000 ÷ ₹ 30,00,000 = 50%
Project Cost Sheet
(₹)
Salary Cost:
Salary of Software Engineers (3 × ₹ 25,000 × 6 months) 4,50,000
Salary of Project Leader (₹ 37,500 × 6 months) 2,25,000
Salary of 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 months) 25,000
Total Project Cost 13,75,000

PROBLEM – 12:
SLS Infrastructure built and operates 110 km. highways on the basis of Built Operate-
Transfer (BOT) for a period of 25 years. A traffic assessment 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
S. No. Activities (In lakhs)
1 Site clearance ₹ 170.70
2 Land development and filling work ₹ 9,080.35
3 Sub base and base courses ₹ 10,260.70
4 Bituminous work ₹ 35,070.80
Bridge, flyovers, underpasses, pedestrian subway,
5 footbridge ₹ 29,055.60

CA NOTE HUB 387

 6 Drainage and protection work ₹ 9,040.50
7 Traffic sign, marking and road appurtenance ₹ 8,405.00
8 Maintenance, repairing and rehabilitation ₹ 12,429.60
9 Environmental 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 have been assigned to the passing vehicles:
S. No. Type of vehicle %
1 Two wheelers 5%
2 Car and SUVs 20%
3 Bus and LCV 30%
4 Heavy commercial vehicles 45%
Required:
i. CALCULATE the total project cost per day of the concession period.
ii. COMPUTE toll fee to be charged for, per vehicle of each type, if the company wants
to earn a profit of 15% on the total cost.
[Note: Concession period is a period for which infrastructure is allowed to operate
and recovers its investment]
SOLUTION:
(i) Calculation of total project cost per day of concession period:
Activities Amount
(₹ 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, flyovers, 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
Environmental management 982.00
Total Project cost 114,495.25

CA NOTE HUB 388

 Administration and toll plaza operation cost 1,120.00
Total Cost 115,615.25
Concession period in days (25 years × 365 days) 9,125
Cost per day of concession period (₹ in lakh) 12.67

(ii) Computation of toll fee:

Cost to be recovered per day = Cost per day of concession period + 15% profit on cost
= ₹ 12,67,000 + ₹ 1,90,050
= ₹ 14,57,050
₹ 14,57,050
Cost per equivalent vehicle =
76,444 units (Refer working note
= ₹ 19.06 per equivalent vehicle
Vehicle type-wise toll fee:
Sl. Type of vehicle Equivalent Weight Toll fee
No. cost [A] [B] per vehicle
[A×B]
1. Two wheelers ₹ 19.06 1 19.06
2. Car and SUVs ₹ 19.06 4 76.24
3. Bus and LCV ₹ 19.06 6 114.36
4. Heavy commercial vehicles ₹ 19.06 9 171.54

Working Note:
The cost per day has to be recovered from the daily traffic. The each type of vehicle is to be
converted into equivalent unit. Let’s convert all vehicle types equivalent to Two-wheelers.
Sl. Type of vehicle Daily Weight Ratio Equivalent
No. traffic [B] Two- wheeler
volume [A] [A×B]
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial vehicles 816 0.45 9 7,344
Total 76,444

CA NOTE HUB 389

 PROBLEM – 12A:
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 crore vehicles (only single type of vehicle) will be using the highway during the 10
years toll collection tenure.
Toll Operating and Maintenance costs for the month of April 20x1 are as follows:
i. Salary to
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

ii. Electricity - ₹ 8,00,000

iii. Telephone - ₹ 1,40,000
iv. Maintenance cost - ₹ 30 Lakh
Monthly depreciation and amortization expenses will be ₹ 1.5 crores. Further, the
company needs 25% profit over the total cost to cover interest and other costs.
Required:
• CALCULATE cost per kilometer per month.
• CALCULATE the toll rate per vehicle.
SOLUTION:
Calculation of cost for the month of April
Particulars (₹)
Salary to Collection Personnel (3 Shifts × 4 persons per shift × 30 days × 1,98,000
₹ 550 per day)
Salary to Supervisor (2 Shifts × 1 persons per shift × 30 days × 45,000
₹ 750 per day)
Salary to Security Personnel (3 Shifts × 6 persons per shift × 30 days × 2,43,000
₹ 450 per day)
Salary to Toll Booth Manager (2 Shifts × 1 persons per shift × 30 days × 54,000
₹ 900 per day)
Electricity 8,00,000
Telephone 1,40,000
Maintenance cost 30,00,000
Total operating cost (A) 44,80,000

CA NOTE HUB 390

 Depreciation and amortisation expenses (B) 1,50,00,000
Total Cost (A + B) 1,94,80,000

(i) Calculation of cost per kilometer per month:

Total cost ₹ 1,94,80,000
= = ₹ 3,24,666.67
Total km 60 km

(ii) Calculation of toll rate per vehicle:

Total cost + 25% profit ₹ 1,94,80,000 + ₹ 48,70,000
= = ₹ 24.35
Vehicles per month 10,00,000 vehicles

Working:
No. of vehicles using the highway per month
Total estimated vehicles 1 month 12 crore 1 month
x = x = 10 lakhs
10 years 12 months 10 years 12 months

PROBLEM – 13:
AD Higher Secondary School (AHSS) offers courses for 11 & 12 standards in three
streams i.e. Arts Commerce and Science. AHSS runs higher secondary classes along with
primary and secondary classes, but for accounting purposes, it treats higher secondary
as a separate responsibility center. 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.
Particulars Amount
Teachers' salary (25 teachers x 35,000 x 12 months) ₹ 1,05,00,000
Principal's salary ₹ 14,40,000
lab attendants’ salary (2 attendants x 15,000 x 12 months) ₹ 3,60,000
Salary to library staff ₹ 1,44,000
Salary to peons (4 peons x 10,000 x 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

CA NOTE HUB 391

Other information:
i.
Standard 11 & 12
Particulars Commerc Primary &
Arts e 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 180 240
year Hrs 120 Hrs Hrs 60 Hrs
208 480 1,400
Time spent by principal for administration Hrs 312 Hrs Hrs Hrs
Teachers for 11 & 12 standard 4 5 6 10
ii. One teacher who teaches economics for Arts stream students also teaches
commerce stream students. The teacher takes 1,040 classes in a year, it includes
208 classes for commerce students.
iii. There is another teacher who teaches mathematics for science stream students also
teaches business mathematics to commerce stream students. She takes 1,100
classes a year; it includes 160 classes for commerce students.
iv. One peon is fully dedicated to the higher secondary section. Other peons dedicate
their 15% time to the higher secondary section.
v. All school students irrespective of section and age participate in annual functions and
sports activities.
Required:
a. CALCULATE cost per student per annum for all three streams.
b. If the management decides to take a uniform fee of 1,000 per month from all higher
secondary students, CALCULATE streamwise profitability.
c. If management decides to take 10% profit on cost. COMPUTE fee to be charged from
the students of all three streams respectively,

CA NOTE HUB 392

SOLUTION:
Calculation of Cost per annum
Particulars Arts Commerce Science Total (₹)
(₹) (₹) (₹)
Teachers’ salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000
Re-apportionment of Economics & (84,000) 1,45,091 (61,091) -
Mathematics teachers’ salary (W.N- 2)
Principal’s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary (W.N-4) - - 1,72,800 1,72,800
Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600
Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000
Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200
Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200
Office & Administration expenses 1,21,600 3,64,800 1,82,400 6,68,800
(W.N- 7)
Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000
Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400

(i) Calculation of cost per student per annum

Particulars Arts (₹) Commerce (₹) Science (₹) Total (₹)
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
No. of students 120 360 180 660
Cost per student per annum 17,397 9,533 19,238 13,610

(ii) Calculation of profitability

Particulars Arts Commerce Science Total
(₹) (₹) (₹) (₹)
Total Fees per annum 12,000 12,000 12,000
Cost per student per annum 17,397 9,533 19,238
Profit/ (Loss) per student per (5,397) 2,467 (7,238)
annum
No. of students 120 360 180
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)

CA NOTE HUB 393

(iii) Computation of fees to be charged to earn a 10% profit on cost
Particulars Arts (₹) Commerce (₹) Science (₹)
Cost per student per annum 17,397 9,533 19,238
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764

Working Notes:

(1) Teachers’ salary

Particulars Arts Commerce Science

No. of teachers 4 5 6
Salary per annum (₹ 35,000 x 12) 4,20,000 4,20,000 4,20,000
Total salary 16,80,000 21,00,000 25,20,000

(2) Re-apportionment of Economics and Mathematics teachers’ salary

Economics Mathematics
Particulars Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re- (84,000) 84,000 (61,091) 61,091
apportionment (₹)
₹ 4,20,000 ₹ 4,20,000
( x 208) ( x 160)
1,040 1,100

(3) Principal’s salary has been apportioned on the basis of time spent byhim for administration
of classes.
(4) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the
students.
(5) Salary of library staffs are apportioned on the basis of time spent by thestudents in library.
(6) Salary of Peons are apportioned on the basis of number of students. The peons’ salary
allocable to higher secondary classes is calculated as below:
Amount (₹)
Peon dedicated for higher secondary 1,20,000
(1 peon × ₹10,000 × 12 months)
Add: 15% of other peons’ salary 54,000
{15% of (3 peons × ₹10,000 × 12 months)}
1,74,000

CA NOTE HUB 394

(7) Salary to other staffs, office & administration cost, Annual day expenses and sports
expenses are apportioned on the basis of number of students.
(8) Examination expenses has been apportioned taking number of students into account (It may
also be apportioned on the basis of number of examinations).

PROBLEM – 14:
Sanziet Life care Ltd. operates in the 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.
Particulars Amount
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 policies sold- 528
Total insured value of policies 1,320 crores.
Required:
i. CALCULATE total cost for Professionals Protection Plus' policy segregating the costs
into four main activities namely a. Marketing and Sales support. b. Operations, c. IT
and d. Support functions.
ii. CALCULATE cost per policy.
iii. CALCULATE cost per rupee of insured value.

CA NOTE HUB 395

SOLUTION:
i) Calculation of total cost for ‘Professionals Protection Plus policy
Particulars Amount (₹) Amount (₹)
1. Marketing and Sales support:
- Policy development cost 11,25,000
- Cost of marketing 45,20,000
- Sales support expenses 11,45,000 67,90,000
2. Operations:
- Policy issuance cost 10,05,900
- Policy servicing cost 35,20,700
- Claims management cost 1,25,600 46,52,200
3. IT Cost 74,32,000
4. Support functions
- Postage and logistics 10,25,000
- Facilities cost
15,24,000
- Employees cost
5,60,000
- Office administration cost
16,20,400 47,29,400
Total Cost
2,36,03,600

Total cost ₹ 2,36,03,600

ii) Calculation of cost per policy = = = ₹ 44,703.79
No. of policies 528

Total cost ₹ 2.36 crore

iii) Calculation of cost per policy = = = ₹ 0.0018
Total insured value ₹ 1,320 crore

PROBLEM – 15:
The loan department of a bank performs several functions in addition to the home loan
application processing task. It is estimated that 25% of the overhead costs of the loan
department are applicable to the processing of home-loan applications.
The following information is given concerning the processing of a loan application:
Particulars Amount
Direct professional Labour:
Loan processor monthly salary:
(4 employees@ ₹ 60,000 each) ₹ 2,40,000

Loan department overhead costs (monthly):

Chief loan officer's salary ₹ 75,000
Telephone expenses ₹ 7,500

CA NOTE HUB 396

 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 applications on the
assumption that five hundred home loan applications are processed each month.
SOLUTION:
Statement showing computation of the cost of processing a typical home loan application
(₹)
Direct professional labour cost 2,40,000
(4 employees @ ₹ 60,000 each)
Service overhead cost (25% of ₹ 1,81,000) 45,250
Total processing cost per month 2,85,250
No. of applications processed per month 500
Total processing cost per home loan application 570.5

PROBLEM – 16:
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
20x2-20x3.
Total units generated 20,00,000 kWh
Amount ₹
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.

CA NOTE HUB 397

SOLUTION:
Cost Statement of Ignus Thermal Power Station
Total units generated 20,00,000 kwh
Per annum (₹) Per kWh (₹)
Fixed costs:
Plant supervision 6,00,000
Administration overheads 40,00,000
Depreciation (5% of ₹ 5,00,00,000 p.a.) 25,00,000
Total fixed cost: (A) 71,00,000 3.55
Variable costs:
Operating labour 30,00,000
Lubricants, spares and stores 8,00,000
Repairs & maintenance 10,00,000
Coal cost (Refer to working note) 17,00,000
Total variable cost: (B) 65,00,000 3.25
Total cost [(A) + (B)] 1,36,00,000 6.80

Working Note:
Coal cost (20,00,000 kwh. ÷ 5 kwh) × ₹ 4.25 per kg. = ₹ 17,00,000

PROBLEM – 16A:
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 Lakh)
1. Employee cost per year 2500
2. Solar panel maintenance cost per year 250
3. Site maintenance cost per year 150
4. Depreciation per year 5940
CALCULATE cost of generating 1kW of power. [1 Megawatt = 1,000 kW]
SOLUTION:
Working:
Estimated power generated in a year
= 1000 Megawatt × 85% × 365 days
= 3,10,250 Megawatt

CA NOTE HUB 398

 Calculation of 1 kW power generation cost:
Cost particulars Amount
(₹ in Lakh)
A. Employee cost per year 2500
B. Solar panel maintenance cost per year 250
C. Site maintenance cost per year 150
D. Depreciation per year 5940
E. Total Cost [A+B+C+D] 8840
F. Estimated power generated (in Megawatt) 3,10,250
(Refer working note-1)
G. Cost of generating 1 Megawatt (₹) [(E ÷ F) × 1,00,000] 2,849.31
H. Cost of 1 kW (₹) [G ÷ 1,000] 2.849

CA NOTE HUB 399

 CHAPTER 13: MARGINAL COSTING
PROBLEM – 1:
A company producing a single article sells it at 10 each. The marginal cost of production
is ₹ 6 each and the fixed cost is ₹ 400 per annum.
Calculate
a. The P/V ratio;
b. The break-even sales;
c. The sales to earn at profit ₹ 5,000;
d. Profit at sales ₹ 3,000;
e. New break-even point if the Sale price is reduced by 10%.
f. MOS when the profit earned in ₹ 200 and PVR – 40%.
SOLUTION:
Contribution Per Unit ₹4
a) PVR = = x 100 = 40%
Sales price ₹ 10
Fixed Cost ₹ 400
b) Break Even Sales (BES) = = = ₹ 1000
PV Ratio 40%
In Units = ₹ 400 ÷ ₹ 4 = 100 Units
Contribution
c) PVR = x 100
Sales
Particulars Amount (₹)
Contribution 5400
Less: Fixed Cost (Given) 400
Profit (Given) 5000
Required Sales = ₹ 5400 ÷ 40% = ₹ 13500
In Units = ₹ 5400 ÷ 4 = 1350 Units
Total Sales = Break Even sales + Margin of Safety
= 100 Units + (₹ 5000 ÷ 4 Per Unit)
= 100 Units + 1250 Units = 1350 Units
In Value = ₹ 1000 + (₹ 5000 ÷ 40%) = ₹ 13500
d) Income Statement
Particulars Amount (₹)
Sales 3000
Less: Variable Cost (3000 x 60%) 1800
Contribution @40% 1200
Less: Fixed Cost 400

CA NOTE HUB 400

 Profit 800

Or Profit = Margin of Safety x PV Ratio

= (3000 – 1000) x 40% = ₹ 800
e) Existing Selling Price = ₹ 10
Reduction in Selling Price = 10% on ₹ 10 = ₹ 1
Revised Selling Price = ₹ 9
Particulars Per Unit (₹)
Sales (Given) 9
Less: Variable Cost (Given) 6
Contribution 3

Contribution Per Unit ₹ 3

PVR = = x 100 = 33.333%
Sales price ₹9
Fixed Cost
Break Even Sales (BES) =
PV Ratio
₹ 400
Break Even Sales (BES) = = ₹ 1200
33.333%
In units = ₹ 400 ÷ ₹ 3 = 133 Units
f) Margin of Safety = Profit ÷ PVR = ₹ 200 ÷ 40% = ₹ 500
In Units = ₹ 200 ÷ ₹ 4 = 50 Units

PROBLEM – 2:
Fill in the blanks for each of the following independent situations:
SITUATIONS AYE BYE CEE
Selling price per unit (a) ₹ 50 ₹ 20
Variable cost as % of selling price 60 (c) 75
No. of units sold 10,000 4,000 (e)
Marginal contribution 20,000 80,000 (f)
Fixed costs ₹ 12,000 (d) ₹ 1,20,000
Profit or loss (b) ₹ 20,000 ₹ 30,000

SOLUTION:
Aye:
Profit = Contribution – Fixed Cost
= ₹ 20000 - ₹ 12000 = ₹ 8000
PV Ratio = 100% - VC Ratio = 100% - 60% = 40%

CA NOTE HUB 401

 Contribution
Sales = = ₹ 20000 ÷ 40% = ₹ 50000
PV Ratio
Per Unit = ₹ 50000 ÷ 10000 Units = ₹ 5 Per Unit
Bye:
Fixed Cost = Contribution – Profit = ₹ 80000 - ₹ 20000 = ₹ 60000
Sales = Units Sold x Selling Price Per Unit = 4000 Units x ₹ 50 = ₹ 200000
Contribution ₹ 80000
PVR = = x 100 = 40%
Sales ₹ 200000
VC Ratio = 100% - PV Ratio = 100% - 40% = 60%
Cee:
Contribution = Fixed Cost + Profit = ₹ 120000 + ₹ 30000 = ₹ 150000
PV Ratio = 100% - VC Ratio = 100% - 25% = 75%
Contribution
Sales = = ₹ 150000 ÷ 25% = ₹ 600000
PV Ratio
Units Sold = Sales ÷ Selling Price Per Unit = ₹ 600000 ÷ ₹ 20 = 30000 Units

PROBLEM – 3:
The company estimates that next year it will earn a profit of ₹ 50,000. The budgeted
fixed cost is ₹ 2,50,000 and the sales is ₹ 9,93,000. Find out the breakeven point for
the company.
SOLUTION:
Contribution = Fixed Cost + Profit = ₹ 250000 + ₹ 50000 = ₹ 300000
Contribution ₹ 300000
PVR = = x 100 = 30.2115%
Sales ₹ 993000
Fixed Cost ₹ 250000
Break Even Sales (BES) = = = ₹ 827500
PV Ratio 30.2115%

PROBLEM – 4:
From the following particulars, find out the selling price per unit if BEP is to be
brought down by 1800 units.
Particulars Amount
Variable cost per unit ₹ 75
Fixed expenses ₹ 2,70,000
Selling price per unit ₹ 100

CA NOTE HUB 402

SOLUTION:
Step 1: Calculation of Existing Break Even Point
Contribution = Sales – variable Cost = ₹ 100 - ₹ 75 = ₹ 25 Per Unit
Fixed Cost
Existing BEP = ₹ 270000 ÷ ₹ 25 = 10800 Units
Contribution Per Unit
The company wants to reduce the BEP by 1800 Units
The Target BEP = 10800 Units – 1800 Units = 9000 Units
The Company wants to achieve this by increasing the selling price.
Step 2: Calculation of selling price for target BEP of 9000 Units
Fixed Cost
Target BEP = = ₹ 270000 ÷ 9000 Units = ₹ 30 Per Unit
Target Contribution Per Unit
Target Selling Price Per Unit = Variable Cost Per Unit + Contribution Per Unit
₹ 75 + ₹ 30 = ₹ 105 Per Unit

PROBLEM – 5:
1. If margin safety is ₹ 2,40,000 (40% of sales) and PVR is 30%,
Calculate a. BES b. amount of Profit on sales of 9,00,000.
2. X Ltd. has earned a Contribution of 2,00,000 and a Net Profit of ₹ 1,50,000 on
sales of ₹ 8,00,000. What is its margin of safety?
3. The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of
the capacity sales. Compute the capacity sales when the fixed costs are ₹ 90,000.
Also, compute profit at 75% of the capacity sales.
4. PV ratio of X Ltd. is 50% and the margin of safety is 40%. Calculate the net profit
when sales is ₹ 1,00,000.
5. Ascertain profit when sales is ₹ 2,00,000, fixed cost is ₹ 40,000 and BEP is
₹ 1,60,000.
6. Ascertain sales when the fixed cost is ₹ 20,000, profit is ₹ 10,000 and BES is
₹ 40,000.
7. If BEP is 40% and the net profit ratio is 12%, find out the contribution sales ratio.
SOLUTION:
1)
Margin of safety = ₹ 240000 (40% of sales)
Sales = ₹ 240000 ÷ 40% = ₹ 6,00,000
Sales = Margin of Safety (MOS) + Break Even Point (BEP)
₹ 6,00,000 = ₹ 240000 + Break Even Point (BEP)

CA NOTE HUB 403

 Break Even Point (BEP) = ₹ 360000

2) Profit when sales is ₹ 9,00,000

Margin of Safety (MOS) = Sales - Break Even Point (BEP) = ₹ 9,00,000 – ₹ 360000
Margin of Safety (MOS) = ₹ 540000
Profit = Margin of Safety (MOS) x PV Ratio
= ₹ 5,40,000 x 30%
= ₹ 162000
Contribution
PV Ratio = x 100
Sales
₹ 2,00,000
PV Ratio = x 100 = 25%
₹ 8,00,000
Profit ₹ 1,50,000
Margin of Safety = = = ₹ 6,00,000
PV Ratio 25%

3) Capacity sales when Fixed Cost = ₹ 90000

PV Ratio = 100% - VC Ratio = 100% - 70% = 30%
Fixed Cost
Break Even Point (₹) = = ₹ 90000 ÷ 30% = ₹ 300000
PV Ratio
Break Even Point (₹) = 60% x Capacity Sales
Capacity Sales = Break Even Point ÷ 60% = ₹ 300000 ÷ 60% = ₹ 500000
Profit at 75% of Capacity Sales:
Actual Sales = 75% of Capacity Sales
= 75% x ₹ 500000 = ₹ 375000
Margin of Safety = Actual Sales - Break Even Point
= ₹ 375000 - ₹ 300000 = ₹ 75000
Profit = Margin of Safety x PV ratio
= ₹ 75000 x 30% = ₹ 22500

4) When sales = ₹ 100000 Net Profit?

Margin of Safety = 40% of Total Sales = 40% on ₹ 100000 = ₹ 40000
Profit = Margin of Safety x PV Ratio
= ₹ 40000 x 50% = ₹ 20000

5) PV Ratio = Fixed Cost ÷ Break Even Point

= (₹ 40000 ÷ ₹ 160000) x 100 = 25%
Margin of Safety = Total Sales - Break Even Point
= ₹ 200000 - ₹ 160000 = ₹ 40000
Profit = Margin of Safety x PV ratio = ₹ 40000 x 25% = ₹ 10000

CA NOTE HUB 404

6) Contribution = Fixed Cost + Profit = ₹ 20000 + ₹ 10000 = ₹ 30000
Fixed Cost
PV Ratio = x 100
Break Even Point
₹ 20000
PV Ratio = x 100 = 50%
₹ 40000
Contribution
Sales = x 100
PV Ratio
₹ 30000
= = ₹ 60000
50%
7) PV Ratio = NP ratio ÷ MOS Ratio = (12% ÷ 60%) x 100 = 20%

PROBLEM – 5A:
A Ltd. Maintains margin of safety of 37.5% with an overall contribution to sales ratio
of 40%. Its fixed costs amount to ₹ 5 lakhs.
CALCULATE the following:
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 %.
SOLUTION:
(i) We know that: Break- even Sales (BES) × P/V Ratio = Fixed Cost
Break-even Sales (BES) × 40% = ₹ 5,00,000
Break- even Sales (BES) = ₹ 12,50,000

(ii) Total Sales (S) = Break Even Sales + Margin of Safety

S = ₹ 12,50,000 + 0.375S
Or, S – 0.375S = ₹ 12,50,000 Or,
S = ₹ 20,00,000

(iii) Contribution to Sales Ratio = 40%

Therefore, Variable cost to Sales Ratio = 60%
Variable cost = 60% of sales = 60% of 20,00,000
Variable cost = ₹ 12,00,000

(iv) Current Profit = Sales – (Variable Cost + Fixed Cost)

= ₹ 20,00,000 – (12,00,000 + 5,00,000) = ₹ 3,00,000

(v) If sales value is increased by 7 ½ %

New Sales value = ₹ 20,00,000 × 1.075 = ₹ 21,50,000

CA NOTE HUB 405

 New Margin of Safety = New Sales value – BES
= ₹ 21,50,000 – ₹ 12,50,000 = ₹ 9,00,000

PROBLEM – 5B: (MTP 1 MAY 24)

PQ Ltd. sells bottles and currently is trying to find out the profitability of opening
another store which will have the following expenses and revenues:
Amount per piece (₹)
Selling Price 600
Variable costs:
Material cost 410
Salesmen’s commission 60
Total variable cost 470
Annual fixed expenses are: (₹)
- Rent 6,00,000
- Office and administrative expenses 20,00,000
- Advertising 8,00,000
- Other fixed expenses 2,00,000
Calculate the annual break-even point in units and in value. Also determine the
profit or loss if 35,000 units of bottles are sold.
SOLUTION:
Total Fixed Cost = ₹ 6,00,000 + ₹ 20,00,000 + ₹ 8,00,000 + ₹ 2,00,000
= ₹ 36,00,000
Contribution per unit = ₹ 600 - ₹ 470 = ₹ 130
Contribution per unit ₹ 130
P/V Ratio = x 100 = x 100 = 21.67%
Selling price ₹ 600
Total Fixed cost
Break even point =
Contribution per unit
₹ 36,00,000
= = 27,692.31 or 27,693 units
₹ 130
Total Fixed cost ₹ 36,00,000
Break even sales = = = ₹ 1,66,12,829
P/V ratio 21.67%

Calculation of Profit/ (loss):

Total Contribution (₹ 130 × 35,000 units) = ₹ 45,50,000
Less: Fixed Cost = ₹ 36,00,000
Profit = ₹ 9,50,000

CA NOTE HUB 406

 PROBLEM – 6:
A company 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 the second half, it suffered
a loss of ₹ 1,50,000.
CALCULATE
i. The profit-volume ratio, break-even point and margin of safety for the first half
year.
ii. Expected sales volume for the second half year assuming that selling price and fixed
expenses remained unchanged during the second half year.
iii. The break-even point and margin of safety for the whole year.
SOLUTION:
(i) In the First half year:
Contribution = Fixed cost + Profit
= ₹ 4,50,000 + ₹ 3,00,000 = ₹ 7,50,000
Contribution ₹ 7,50,000
P/V ratio = x 100 = x 100 = 50%
Sales ₹ 15,00,000
Fixed cost ₹ 4,50,000
Break-even point = = x 100 = ₹ 9,00,000
P/V ratio 50%
Margin of safety = Actual sales – Break-even point
= ₹ 15,00,000 – ₹ 9,00,000 = ₹ 6,00,000
(ii) In the second half year:
Contribution = Fixed cost – Loss
= ₹ 4,50,000 – ₹ 1,50,000 = ₹ 3,00,000
Fixed cost - Loss ₹ 3,00,000
Expected sales volume = = = ₹ 6,00,000
P/V ratio 50%
(iii) For the whole year:
Fixed cost ₹ 4,50,000 x 2
Break-even point = = = ₹ 18,00,000
P/V ratio 50%
Profit ₹ 3,00,000 - ₹ 1,50,000
Margin of safety = = = ₹ 3,00,000
P/V ratio 50%

PROBLEM – 6A:
You are required to
(₹)
(i) DETERMINE profit, when sales 2,00,000
Fixed Cost 40,000
BEP 1,60,000

CA NOTE HUB 407

 (ii) DETERMINE sales, when fixed cost 20,000
Profit 10,000
BEP 40,000
SOLUTION:
(i) We know that: B.E. Sales × P/V Ratio = Fixed Cost
or ₹ 1,60,000 × P/V ratio = ₹ 40,000
P/V ratio = 25%
We also know that Sales × P/V Ratio = Fixed Cost + Profit
or ₹ 2,00,000 × 0.25 = ₹ 40,000 + Profit
or Profit = ₹ 10,000
(ii) Again B.E. Sales × P/V ratio = Fixed Cost or ₹ 40,000 × P/V Ratio = ₹ 20,000
or P/V ratio = 50%
We also know that: Sales × P/V ratio = Fixed Cost + Profit
or Sales × 0.50 = ₹ 20,000 + ₹ 10,000
or Sales = ₹ 60,000.

PROBLEM – 7: (RTP MAY 24)

The analysis of cost sheet of A Ltd. for the last financial year has revealed the following
information for it’s product R:
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
General & Administration Overhead 2% of cost of goods sold ₹ 71,000
Selling & Distribution Overhead 4% of cost of sales ₹ 68,000
Last year 5,000 units were sold at ₹185 per unit.
You being an associate to cost controller of the A Ltd.,
CALCULATE:
(i) Break-even Sales (in rupees),
(ii) Profit earned during last year,
(iii) Margin of safety (in %) and
(iv) the profit if the sales were 10% less than the actual sales.

CA NOTE HUB 408

SOLUTION:
Workings:
Calculation of Cost of Goods Sold (COGS):
COGS = {(DM - 0.3 COGS) + (DL - 0.15 COGS) + (FOH - 0.10 COGS + ₹ 2,30,000)
+ (G & AOH - 0.02 COGS + ₹ 71,000)}
Or COGS = 0.57 COGS + ₹ 3,01,000
₹ 3,01,000
Or COGS = = ₹ 7,00,000
0.43
Calculation of Cost of Sales (COS):
COS = COGS + (S & DOH - 0.04 COS + ₹ 68,000)
Or COS = ₹ 7,00,000 + (0.04 COS + ₹ 68,000)
₹ 7,68,000
Or COGS = = ₹ 8,00,000
0.96

Calculation of total Fixed Costs:

Factory Overhead ₹ 2,30,000
General & Administration OH ₹ 71,000
Selling & Distribution OH ₹ 68,000
₹ 3,69,000

Calculation of Variable Costs:

Direct Material (0.3 × ₹ 7,00,000) ₹ 2,10,000
Direct Labour (0.15 × ₹ 7,00,000) ₹ 1,05,000
Factory Overhead (0.10 × ₹ 7,00,000) ₹ 70,000
General & Administration OH (0.02 × ₹ 7,00,000) ₹ 14,000
Selling & Distribution OH (0.04 × ₹ 8,00,000) ₹ 32,000
₹ 4,31,000

Calculation of P/V Ratio:

Contribution Sales - Varaible Costs
P/V Ratio = x 100 = x 100
Sales Sales
(₹ 185 x 5,000 units) - ₹ 4,31,000
= x 100 = 53.41%
₹ 185 x 5,000 units
Fixed costs ₹ 3,69,000
i) Break even sales = = = ₹ 6,90,882
P/V ratio 53.41%
ii) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs
= (₹ 9,25,000 - ₹ 4,31,000) - ₹ 3,69,000
= ₹ 1,25,000

CA NOTE HUB 409

 Sales - Break even sales
iii) Break even sales =
Sales
₹ 9,25,000 - ₹ 6,90,882
= x 100 = 25.31%
₹ 9,25,000
iv) Profit if the sales were 10% less than the actual sales:
Profit = 90% (₹ 9,25,000 - ₹ 4,31,000) - ₹ 3,69,000
= ₹ 4,44,600 - ₹ 3,69,000 = ₹ 75,600

PROBLEM – 8:
You are given the following data for the current financial year of Rio Co. Ltd:
Variable cost 60,000 60%
Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%
FIND OUT a. Break-even point, b. P/V ratio, and c. Margin of safety. Also DRAW a
break-even chart showing contribution and profit.
SOLUTION:
Sales - Variable cost ₹ 1,00,000 - ₹ 60,000
P/V ratio = = = 40%
Sales ₹ 1,00,000
Fixed cost ₹ 30,000
Break-even point = = = ₹ 75,000
P/V ratio 40%
Margin of safety = Actual Sales – BE point = ₹ 1,00,000 – ₹ 75,000 = ₹ 25,000
Break even chart showing contribution is shown below:

CA NOTE HUB 410

PROBLEM – 9:
PREPARE a profit graph for products A, B and C and find break-even point from the
following data:
Products A B C Total
Sales (₹) 7,500 7,500 3,750 18,750
Variable cost (₹) 1,500 5,250 4,500 11,250
Fixed cost (₹) --- --- --- 5,000

SOLUTION:
Statement Showing Cumulative Sales & Profit
Sales Cumulative Sales Variable Contribution Cumulative Cumulative
Cost Contribution Profit
₹ ₹ ₹ ₹ ₹ ₹
A 7,500 7,500 1,500 6,000 6,000 1,000
B 7,500 15,000 5,250 2,250 8,250 3,250
C 3,750 18,750 4,500 (750) 7,500 2,500

PROBLEM – 10:
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 ₹ 3.50 per unit). Fixed
costs are incurred uniformly throughout the year and amounting to ₹ 35,00,000 (including
depreciation of ₹ 15,00,000). There is no beginning or ending inventories.
Required:
COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.

CA NOTE HUB 411

SOLUTION:
Fixed cost ₹ 35,00,000
Break even Sales Quantity = = = 1,75,000 units
Contribution margin per unit ₹ 20
Cash Fixed cost ₹ 20,00,000
Cash Break-even Sales Quantity = = = 1,00,000 units
Contribution margin per unit ₹ 20

PROBLEM – 11:
Company Variable Cost per unit Fixed cost
P 9 ₹ 60,000
Q 5 ₹ 90,000
At what sale range is P more profitable than Q and vice versa? Assume that both the
products have the same selling price.
SOLUTION:
Difference in Fixed Cost ₹ 90000 - ₹ 60000
Indifference point = = = 7500 units
Difference in Variable Cost ₹9-₹5

When the volume is 7500 units the total cost of with the company will be the same.
Analysis:
Volume Company Reason
Less than 7500 units P Lower Fixed Cost
= 7500 units P (or) Q Indifference
> 7500 units Q Lower Variable Cost

PROBLEM – 12:
The following are cost data for three alternative ways of processing the clerical work
for cases brought before the LC Court System:
Particulars Manual Semi-Automatic Fully-Automatic
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 costs (per report):
Supplies ₹ 40 ₹ 80 ₹ 20
₹200 ₹60 ₹20
Labour
(5hrs x ₹ 40) (1hrs x ₹ 60) (0.25hrs x ₹ 80)
Required:

CA NOTE HUB 412

 • CALCULATE cost indifference points. Interpret your results.
• If the present caseload is 600 cases and it is expected to go up to 850 cases in
the near future, SELECT most appropriate on cost considerations?
SOLUTION:
(i) Cost Indifference Point
A and B A and C B and C
₹ ₹ ₹
Differential Fixed Cost (I) ₹ 30,000 ₹ 1,10,000 ₹ 80,000
(₹ 45,000 – (₹ 1,25,000 – (₹ 1,25,000 –
₹ 15,000) ₹ 15,000) ₹ 45,000)
Differential Variable Costs (II) ₹ 100 ₹ 200 ₹ 100
(₹ 240 – (₹ 240 – (₹ 140 – ₹ 40)
₹ 140) ₹ 40)
Cost Indifference Point (I/II) 300 550 800
(Differential Fixed Cost / Differential Cases Cases Cases
Variable Costs per case)

Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs and higher
variable costs should be used. At activity level above the indifference point alternative with
higher fixed costs and lower variable costs should be used.
No. of Cases Alternative to be Chosen
Cases ≤ 300 Alternative ‘A’
300 ≥ Cases ≤ 800 Alternative ‘B’
Cases ≥ 800 Alternative ‘C’
(ii) 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.

PROBLEM – 12A:
Two businesses AB Ltd and CD Ltd. sell the same type of product in the same type of
market. Their budgeted Profit and Loss Accounts for the year ending 20x1 are as follows:
A.B. Ltd. C.D. Ltd.
Sales ₹ 1,50,000 ₹ 1,50,000
Less:
Variable costs ₹ 1,20,000 ₹ 1,00,000

CA NOTE HUB 413

 Fixed costs ₹ 15,000 ₹ 1,35,000 ₹ 35,000 ₹ 1,35,000
Net profit budgeted ₹ 15,000 ₹ 15,000
You are required to:
a. Calculating the break-even point of each business;
b. Calculate the sales volume at which each of the businesses will earn ₹ 5,000 profit;
and
c. State which business is likely to earn greater profits in conditions of:
i. Heavy demand for the product;
ii. Low demand for the product.
SOLUTION:
Part I: Break-Even Point:
AB Ltd CD Ltd
Fixed cost ₹ 15000 ₹ 35000
Contribution 20% 33.33%
PVR ( )
Sales ₹ 30000 ₹ 50000
( ) ( )
₹ 150000 ₹ 150000
Fixed Cost ₹ 75000 ₹ 105000
BEP ( )
PVR ₹ 15000 ₹ 35000
( ) ( )
20% 33.33%

Part II: Sales volume at which profit ₹ 50000

AB Ltd CD Ltd
Profit ₹ 5000 ₹ 5000
(+) Fixed Cost ₹ 15000 ₹ 35000
Contribution ₹ 20000 ₹ 40000
PVR 20% 33.33%
Sales ₹ 1,00,000 ₹ 1,20,000

Part III: Analysis of volume and profit

Difference in Fixed Cost
Indifference point =
Difference in PV Ratio
₹ 20000
=
13.33%
= ₹ 1,50,000
When the sales is ₹ 1,50,000 both AB Ltd and CDF Ltd earn the same profit
Sales Company: Reason:
Less than 1,50,000 AB Ltd Low Fixed Cost
= 1,50,000 AB (or) CD Indifference Point

CA NOTE HUB 414

 > 150000 CD Ltd Low Variable Cost Ratio or High PV Ratio

PROBLEM – 13:
You are given the following data:
Sales Profit
Year 2021-22 ₹ 1,20,000 ₹ 8,000
Year 20x2-23 ₹ 1,40,000 ₹ 13,000
FIND OUT
1. P/V ratio,
2. B.E. Point,
3. Profit when sales are ₹ 1,80,000,
4. Sales required earn a profit of ₹ 12,000,
5. Margin of safety in year 20x2-20x3.
SOLUTION:
Sales Profit
Year 2021-22 ₹ 1,20,000 8,000
Year 2022-23 ₹ 1,40,000 13,000
Difference ₹ 20,000 5,000

Difference in Profit ₹ 5,000

1) P/V Ratio = x 100 = x 100 = 25%
Difference in sales ₹ 20,000
Contribution in 2021-22 (₹ 1,20,000 x 25%) ₹ 30,000
Less: Profit ₹ 8,000
Fixed Cost* ₹ 22,000
*Contribution = Fixed cost + Profit
 Fixed cost = Contribution - Profit
Fixed cost ₹ 22,000
2) Break even point = = = ₹ 88,000
P/V ratio 25%
3) Profit when sales are ₹ 1,80,000 ₹
Contribution (₹ 1,80,000 × 25%) 45,000
Less: Fixed cost 22,000
Profit 23,000
4) Sales to earn a profit of ₹ 12,000
Fixed cost + Desired profit ₹ 22,000 + ₹ 12,000
= = ₹ 1,36,000
P/V ratio 25%

CA NOTE HUB 415

5) Margin of safety in 2022-23 –
Margin of safety = Actual sales – Break-even sales
= ₹ 1,40,000 – ₹ 88,000 = ₹ 52,000.

PROBLEM – 13A:
A company sells its product at ₹ 15 per unit. In a period, if it produces and sells 8,000
units, it incurs a loss of ₹ 5 per unit. If the volume is raised to 20,000 units, it earns
a profit of ₹ 4 per unit. CALCULATE break-even point both in terms of Value as well
as in units.
SOLUTION:
We know that S – V = F + P
 Suppose variable cost = x, Fixed Cost = y
In first situation:
15 × 8,000 - 8,000 x = y – 40,000 (1)
In second situation:
15 x 20,000 - 20,000 x = y + 80,000 (2)
or, 1,20,000 – 8,000 x = y – 40,000 (3)
3,00,000 – 20,000 x = y + 80,000 (4)
From (3) & (4) we get x = ₹ 5, Variable cost per unit = ₹ 5
Putting this value in 3rd equation:
1,20,000 – (8,000 × 5) = y – 40,000
or, y = ₹ 1,20,000
Fixed Cost = ₹ 1,20,000
S - V 15 - 5 200 2
P/V ratio = = x 100 = = 66 %
S 15 3 3
Suppose break-even sales = x
15x – 5x = 1,20,000 (at BEP, contribution will be equal to fixed cost)
x = 12,000 units.
or, Break-even sales in units = 12,000, Break-even sales in Value
= 12,000 × 15 = ₹ 1,80,000.

CA NOTE HUB 416

 PROBLEM – 13B: (PYP MAY 24)
The following information is given by PQR Ltd:
Year Sales (₹) Profit (Loss (₹)
2022-23 1,80,00,000 (3,80,000)
2023-24 2,40,00,000 11,20,000
You are required to:
(i) Calculate the Break even sales.
(ii) In 2024-25, it is estimated that the variable cost will go up by 5% and fixed cost
will reduce by ₹ 4,80,000. Selling price will remain same. Calculate the sales
volume to earn a profit of ₹ 15,00,000.
SOLUTION:
Fixed cost
(i) Break-even sales =
P/V ratio
Change in profit ₹ 15,00,000
P/V ratio = x 100 or, x 100
Change in sales ₹ 2,40,00,000 - ₹ 1,80,00,000
₹ 15,00,000
or, x 100 or, 25%
₹ 60,00,000
Fixed Cost = Contribution – Profit
= ₹ 2,40,00,000 × 25% - ₹ 11,20,000
= ₹ 60,00,000 – ₹ 11,20,000 = ₹ 48,80,000
₹ 48,80,000
Break even sales = = ₹ 1,95,20,000
25%
(ii) Desired Contribution in 2024-25 = Revised Fixed Cost + Target Profit
= (₹ 48,80,000 - ₹ 4,80,000) + ₹ 15,00,000
= ₹ 59,00,000
Earlier P/V ratio = 25%. So Variable Cost ratio =75%.
Selling price remain the same.
Variable cost increased by 5% i.e. Variable Cost ratio will be 78.75% (75+5%of 75).
Now revised P/V ratio=21.25%
₹ 59,00,000
Sales Volume in 2024-25 = = ₹ 2,77,64,706 (approx.)
21.25%
If it is assumed that variable cost will go up by 5% on total. So, it will be increased
from 75% to 80% and solution can be done in following way:
(i) Desired Contribution in 2024-25 = Revised Fixed Cost + Target Profit
= (₹ 48,80,000 - ₹ 4,80,000) + ₹ 15,00,000
= ₹ 59,00,000

CA NOTE HUB 417

 Earlier P/V ratio = 25%. So Variable Cost ratio =75%.
Selling price remain the same.
Variable cost increased by 5% i.e. Variable Cost ratio will be 80% (75%+5%).
Now revised P/V ratio=20%
₹ 59,00,000
Sales Volume in 2024-25 = = ₹ 2,95,00,000
20%

PROBLEM – 14:
A company has three factories situated in the north, east and south with its Head Office
in Mumbai. The management has received the following summary report on the operations
of each factory for a period:
Sales Profit
Actual Over/(Under) 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:
i. The fixed cost
ii. Break even sales
SOLUTION:
Calculation of P/V Ratio (₹ ‘000)
Sales Profit
North : Actual 1,100 135
Add : Under budgeted 400 180
Budgeted 1,500 315

Difference in Profit ₹ 315 - ₹ 135 ₹ 180

P/V Ratio = = x 100 = x 100 = 45%
Difference in sales ₹ 1,500 - ₹ 1,100 ₹ 400
(₹ 000)
Sales Profit
East : Actual 1,450 210
Less : Over budgeted (150) (90)
Budgeted 1,300 120

₹ 90
P/V Ratio = x 100 = 60%
₹ 150

CA NOTE HUB 418

 (₹ ’000)
Sales Profit
South : Actual 1,200 330
Add: Under budgeted 200 110
Budgeted 1,400 440

₹ 110
P/V Ratio = x 100 = 55%
₹ 200
i. Calculation of fixed cost
Fixed Cost = (Actual sales x P/V ratio) – Profit
North = (1,100 x 45%) – 135 360
East = (1,450 x 60%) – 210 660

South = (1,200 x 55%) – 330 330

Total Fixed Cost 1,350

ii. Calculation of break-even sales (in ₹’ 000)

Fixed cost
B E sales =
P/V ratio
₹ 360
North = = ₹ 800
45%
₹ 660
East = = ₹ 1,100
60%
₹ 330
South = = ₹ 600
55%
Total ₹ 2,500

PROBLEM – 15:
Good luck Ltd has prepared the following estimate for the year 20x1-x2.
Sales 15,000 units
Fixed expenses ₹ 34,000
Sales value ₹ 1,50,000
Variable cost ₹ 6 per unit
You are required to;
• Find the PVR, BEP and MOS
• Calculate the revised PVR, BEP and MOS in each of the following cases
i. Decrease of 10% in selling price
ii. Increase of 10% variable cost
iii. Increase of sales volume by 2,000 units.

CA NOTE HUB 419

 iv. Increase of ₹6,000 in fixed cost.
SOLUTION:
Part I: Calculation of PV Ratio, Break Even Point, Margin of Safety
Selling Price Per Unit = Sales Value ÷ Selling Price Per unit
= ₹ 150000 ÷ 15000 Units = ₹ 10
Contribution Per unit = SP – VC
= ₹ 10 – ₹ 6 = ₹ 4
Contribution = 15000 Units x ₹ 4 = ₹ 60000
PV Ratio = ₹ 60000 ÷ ₹ 150000 x 100 = 40%
Break Even Point = Fixed Cost ÷ PV Ratio = ₹ 34000 ÷ 40% = ₹ 85000 = ₹ 8500 Per unit
Margin of Safety = Sales – Break Even Point
= ₹ 150000 – ₹ 85000
= ₹ 65000 = ₹ 6500 Per Unit
Part II: Sensitivity analysis
Situation PV Ratio @ 40% Break Even Point 8500 Margin of Safety
Contribution Units 6500 Units
( x 100)
Sales Fixed Cost (Sales – BES)
( )
Contribution Per Unit
1. Selling Price 33.33% 11334 3666
 by 10% 3 ₹ 34000 (₹ 15000 –
( ) ( )
9 3
₹ 11334)
2. Increase in VC 34% 10000 5000
by 10% 3.4 ₹ 34000 (₹ 15000 –
( ) ( )
10 3.4
₹ 10000)
3. Volume  by - - 8500 units
2000 units (17000 units –
8500 units)
4. Increase of 10000 units 5000 units
₹ 6000 in FC ₹ 40000 (15000 units –
( )
4
10000 units)

PROBLEM – 15A:
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:
i. An increase in the physical sales volume;

CA NOTE HUB 420

ii. An increase in the fixed cost;
iii. A decrease in the variable cost per unit;
iv. A decrease in the contribution margin;
v. An increase in selling price per unit;
vi. A decrease in the fixed cost;
vii.A 10% increase in both selling price and variable cost per unit;
viii. A 10% increase in the selling price per unit and 10% decrease in the physical sales
volume;
ix. A 50% increase in the variable cost per unit and 50% decrease in the fixed cost.
x. An increase in the angle of incidence.
SOLUTION:
Item P/V Ratio Reason
no.
(i) Will not change The ratio of sales value and variable cost will remain same
irrespective of change in sales volume.
(ii) Will not change Fixed cost is not considered in calculation of P/V ratio.
(iii) Will increase Decrease in variable cost increases contribution margin so
does the P/V ratio.
(iv) Will decrease Decrease in contribution margin decreases the P/V ratio.
(v) Will increase Increase in selling price per unit increases the contribution
margin per unit and the P/V ratio.
(vi) Will not change Fixed cost is not considered in calculation of P/V ratio.
(vii) Will not change The increase in selling price and variable cost by the same ratio
will not change the P/V ratio. Please refer the example note- 1
below.
(viii) Will increase The increase in selling price will increase the contribution
margin but the change in sales volume in any direction will not
affect P/V ratio. Thus, increase in selling price with decrease
in sales volume will increase the P/V ratio.
(ix) Will decrease The increase in variable cost reduces the contribution margin
thus decreases the PV ratio. Increase or decrease in fixed
cost will not affect the P/V ratio.
(x) Will increase Angle of incidence represents the rate of profit earning, after
reaching the break-even point. Increase in angle of incidence

CA NOTE HUB 421

 means increase in rate of profit earning which is nothing but
the P/V ratio that contributes towards the profitability after
recovering the fixed cost. (Please also refer para 14.12)
A 10% increase in both selling price and variable cost per unit. Example note-1:
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
₹ 100 - ₹ 90
P/V ratio =
10
= 10% i.e. P/V ratio will not change

PROBLEM – 16:
A company has a P/V ratio of 40 % COMPUTE by what percentage must sales be increased
to offset: 20% reduction in selling price?
SOLUTION:
Desired Contribution 0.40
Revised Sales Value = = = 1.6
Revised P/V ratio 0.25
This means sales value to be increased by 60% of the existing sales.
Revised Contribution 0.80 - 0.60
**Revised P/V ratio = = = 0.25
Revised Selling Price 0.80
Desired Contribution 0.40
Revised Sales Quantity = = =2
Revised P/V ratio x Revised Selling Price 0.25 x 0.80
Therefore, Sales value to be increased by 60% and sales quantity to be doubled to offset the
reduction in selling price.
Proof:
Let selling price per unit is ₹ 10 and sales quantity is 100 units.
Data before change in selling price:
₹
Sales (₹ 10 × 100 units) 1,000
Contribution (40% of 1,000) 400
Variable cost (balancing figure) 600
Data after the change in selling price:
Selling price is reduced by 20% that means it became ₹ 8 per unit. Since, we have to maintain

CA NOTE HUB 422

the earlier contribution margin i.e. ₹ 400 by increasing the sales quantity only. Therefore, the
target contribution will be ₹ 400.
The new P/V Ratio will be
₹
Sales 8.00
Variable cost 6.00
Contribution per unit 2.00
P/V Ratio 25%

Desired Contribution ₹ 400

Sales value = = = ₹ 1,600
Revised P/V ratio 0.25
Sales value ₹ 1600
Sales quantity = = = 200 units
Selling price per unit ₹8

PROBLEM – 17:
PQR Ltd. has furnished the following data for the two years:
Particulars 20x1 20x2
Sales ₹ 8,00,000 ?
Profit/Volume Ratio (P/V 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 20x2 due to the
restructuring process. The company could maintain its sales quantity level of 20x1 in
20x2 by reducing the selling price.
You are required to CALCULATE the following:
i. Sales for 20x2 in Value.
ii. Fixed cost for 20x2 in Value,
iii. Break-even sales for 20x2 in Value.
SOLUTION:
In 2021-22, PV ratio = 50%
Variable cost ratio = 100% - 50% = 50%
Variable cost in 2021-22 = ₹ 8,00,000  50% = ₹ 4,00,000
In 2022-23, sales quantity has not changed. Thus, variable cost in 2022-23 is ₹ 4,00,000.
In 2022-23, P/V ratio = 37.50%
Thus, Variable cost ratio = 100%  37.5% = 62.5%
4,00,000
(i) Thus, sales in 2022-23 = = ₹ 6,40,000
62.5%
In 2022-23, Break-even sales = 100%  21.875% (Margin of safety) = 78.125%

CA NOTE HUB 423

(ii) Break-even sales = 6,40,000  78.125% = ₹ 5,00,000
(iii) Fixed cost = B.E. sales  P/V ratio
= 5,00,000  37.50% = ₹ 1,87,500.

PROBLEM – 18:
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:
Particulars Amount
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%.
Required:
FIND OUT by computing in detail the cost and profit for next year, whether the proposal
of Sales Manager can be adopted.
SOLUTION:
Statement Showing “Cost and Profit for the Next Year”
Particulars Existing Volume, Costs, Estimated Sale,
Volume, etc etc. after 10% Cost, Profit,
Increase etc.*
₹ ₹ ₹
Sales 5,00,000 5,50,000 5,72,000
Less: Direct Materials 2,50,000 2,75,000 2,69,500
Direct Labour 1,00,000 1,10,000 1,07,800
Variable Overheads 40,000 44,000 43,120
Contribution 1,10,000 1,21,000 1,51,580
Less: Fixed Cost# 60,000 60,000 58,800
Profit 50,000 61,000 92,780

(*) for the next year after increase in selling price @ 4% and overall cost reduction by 2%. (#)
Fixed Cost = Existing Sales – Existing Marginal Cost – 12.5% on ₹ 4,00,000

CA NOTE HUB 424

= ₹ 5,00,000 – ₹ 3,90,000 – ₹ 50,000 = ₹ 60,000
₹ 92,780
Percentage Profit on Capital Employed equals to 23.19% ( x 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.

PROBLEM – 18A:
A single product company sells its product at ₹ 60 per unit. In 20x1-20x2, 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 20x2-20x3, it is estimated that the variable cost will go up by 10% and the fixed
cost will increase by 5%.
i. FIND the selling price required to be fixed in 20x2-23 to earn the same P/V ratio
as in 20x1-20x2.
ii. Assuming the same selling price of ₹ 60 per unit in 20x2-20x3, FIND the number of
units required to be produced and sold to earn the same profit as in 20x1-20x2.
SOLUTION:
Profit earned in 2021-22:
Particulars ₹
Total contribution (50,000 x ₹ 12) 6,00,000
Less: Fixed cost 3,60,000
Profit 2,40,000
Selling price to be fixed in 2022-23:
Revised variable cost (₹ 48 x 1.10) 52.80
Revised fixed cost (3,60,000 x 1.05) 3,78,000
P/V Ratio (Same as of 2021-22) 20%
Variable cost ratio to selling price 80%

Therefore, revised selling price per unit = ₹ 52.80 x 80% = ₹ 66

No. of units to be produced and sold in 2022-23 to earn the same profit:
We know that Fixed Cost plus profit = Contribution
₹
Profit in 2021-22 2,40,000
Fixed cost in 2022-23 3,78,000
Desired contribution in 2022-23 6,18,000
Contribution per unit = Selling price per unit – Variable cost per unit.

CA NOTE HUB 425

 = ₹ 60 – ₹ 52.80 = ₹ 7.20.
No. of units to be produced in 2022-23 = ₹ 6,18,000  ₹ 7.20 = 85,834 units.
Workings:
1. PV Ratio in 2021-22
₹
Selling price per unit 60
Variable cost (80% of Selling Price) 48
Contribution 12
P/V Ratio 20%

2. No. of units sold in 2021-22

Break-even point = Fixed cost x 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 = Break-even point in units ÷ 60%
= 30,000 ÷ 60% = 50,000 units.

PROBLEM – 18B:
An automobile manufacturing company produces different models of Car The budget in
respect of model 007 for the month of March is as under:
Budgeted Output 40,000 Units
₹ In lakhs ₹ In lakhs
Net Realisation 2,10,000
Variable Costs:
Materials 79,200
Labour 15,600
Direct expenses 37,200 1,32,000
Specific Fixed Costs 27,000
Allocated Fixed Costs 33,750 60,750
Total Costs 1,92,750
Profit 17,250
Sales 2,10,000
CALCULATE:
i. Profit with 10 percent increase in selling price with a 10 percent reduction in sales
volume.

CA NOTE HUB 426

 ii. Volume to be achieved to maintain the original profit after a 10 percent rise in
material costs, at the originally budgeted selling price per unit.
SOLUTION:
(i) Budgeted selling price = 2,10,000 lakhs/ 40,000 units = ₹ 5,25,000 per unit.
Budgeted variable cost = 1,32,000 lakhs/ 40,000 units = ₹ 3,30,000 per unit.
Increased selling price = ₹ 5,25,000 + 10% = ₹ 5,77,500 per unit
New volume 40,000 – 10% = 36,000 units
Statement of Calculation of Profit:
(₹ In lakhs)
Sales 36,000 units at ₹ 5,77,500 2,07,900
Less: Variable cost: 36,000 × ₹ 3,30,000 1,18,800
Contribution 89,100
Less: fixed costs 60,750
Profit 28,350

(ii) Budgeted Material Cost = ₹ 79,200 Lakhs ÷ 40,000 Units = ₹ 1,98,000 per Unit
Increased material cost = ₹ 1,98,000 × 110% 2,17,800
Labour cost ₹ 15,600 lakhs ÷ 40,000 units 39,000
Direct expenses, ₹ 37,200 lakhs ÷ 40,000 units 93,000
Variable cost per unit 3,49,800
Budgeted selling price per unit 5,25,000
Contribution per unit (5,25,000 – 3,49,800) 1,75,200

Fixed costs + Profit 60,750 lakhs + 17,250 lakhs

Sales volume = =
Contribution per unit ₹ 1.752 lakhs
= 44,521 units are to be sold to maintain the original profit of ₹ 17,250 lakhs.

PROBLEM – 18C: (MTP 2 SEP 24)

A company manufactures and sells a product, the price of which is controlled by the
Government. Raw material required for this product is also made available at a fixed
controlled price. The following figures have been called for the previous two accounting
years of the company:
Year- I Year- II
Quantity Sold (tones) 1,26,000 1,44,000
Price per tone ₹ 185 ₹ 185
(₹ In thousands)

CA NOTE HUB 427

 Sales Value 23,310 26,640
Raw Materials 11,340 12,960
Direct Labour 1,512 1,872
Factory, Administration and Selling Expenses 9,702 11,232
Profit 756 576
1
During the year II direct labour rates increased by 8 /3%. Increases in factory,
administration and selling expenses during the year were ₹ 8,10,000 on account
of factors other than the increased quantities produced and sold. The managing director
desires to know, what quantity if they had produced and sold would have given the
company the same net profit per tonne in Year II as it earned during the Year I Advise
him.
SOLUTION:
Contribution per tonne (₹ )
Sales Price 185.00
Variable Cost:
Material (W.N.-1) 90.00
Labour (W.N.-2) 13.00
Variable Overhead (W.N.-3) 40.00
Contribution 42.00
Profit Required (₹ 7,56,000 ÷ 1,26,000 tonnes) 6.00
Balance Contribution per tonne for meeting Fixed Costs 36.00
Fixed Costs (W.N.-4) 54,72,000
Quantity Required (₹ 54,72,000 ÷ ₹ 36) 1,52,000 tonnes

Working Notes
1. Materials Cost per tonne in Year II ₹ 90
₹ 1,29,60,000
( )
1,44,000 tonnes
2. Labour Cost per tonne in Year II ₹ 13
₹ 18,72,000
( )
1,44,000 tonnes
3. 2. Variable portion of Factory, Administration and Selling
Expenditure, etc ₹
Total in Year II 1,12,32,000
Less: Increase otherwise than on account of increased
turnover 8,10,000

CA NOTE HUB 428

 1,04,22,000
Less: Amount Spent in Year I 97,02,000
Increase 7,20,000
Increase in Quantity Sold 18,000
Variable Expenses per tonne ₹ 40
₹ 7,20,000
( )
18,000 tonnes
4. 3. Fixed portion of Factory, Administration and Selling Expenses
4. (Year 2) ₹ 1,12,32,000
Variable Expenses @ ₹ 40 per tonne ₹ 57,60,000
Fixed Portion ₹ 54,72,000

PROBLEM – 19:
The following set of information is presented to you by your client AB Ltd producing
two products X and Y.
Particulars X Y
Direct materials ₹ 20 ₹ 18
Direct wages ₹ 6 ₹ 4
▪ Fixed expenses during the period are expected to be ₹ 1,600.
▪ Variable expenses are allocated to the products at the rate of 100% of direct
wages.
▪ Selling price per unit X: ₹ 40 and Y: ₹ 30.
▪ Proposed sales mix:
i. 100 units of X and 200 units of Y
ii. 150 units of X and 150 units of Y
iii. 200 units of X and 100 units of Y
As a cost accountant, you are required to present to the management the following:
a. The total contribution and profit from each of the above sales mix.
b. The proposed sales mix to earn of profit of ₹ 300 and ₹ 600 with the total sales
of X and Y being 300 units.
c. Calculate BEP when the sales mix is 2:1
d. Recalculate BEP when sales mix is 1:2

CA NOTE HUB 429

SOLUTION:
Part I:
Step 1: Calculation of Contribution Per Unit:
Particulars X Y
Selling Price 40 30
(-) Direct Material (20) (18)
(-) Direct Wages (6) (4)
(-) Wages (6) (4)
Contribution 8 4

Step 2: Calculation of profit under difference sales mix

Scenario 1 = 100 units of X
Y = 200 units
Contribution = (100 Units x ₹ 8) (+) (200 Units x ₹ 4)
= ₹ 800 + ₹ 800 = ₹ 1600
(-) Fixed Cost = (₹ 1600)
Profit = ₹0
Scenario 2 = 150 units of X
Y = 150 units
Contribution = (150 Units x ₹ 8) (+) (150 Units x ₹ 4)
= ₹ 1200 + ₹ 600 = ₹ 1800
(-) Fixed Cost = (₹ 1600)
Profit = ₹ 200
Scenario 3 = 200 units of X
Y = 100 units
Contribution = (200 Units x ₹ 8) (+) (100 Units x ₹ 4)
= ₹ 1600 + ₹ 400 = ₹ 2000
(-) Fixed Cost = (₹ 1600)
Profit = ₹ 400

Part II: Sales Mix to earn a profit ₹ 300

Step 1: volume of 300 units
Let No. of units of X be “x”
Let No. of units of Y be “300 – x”
Contribution = 8x + 4 (300 – x)
(-) Fixed Cost = ₹ (1600)

CA NOTE HUB 430

Profit ₹ 300
8x – 4x + ₹ 1200 – ₹ 1600 = ₹ 300
4x = 700
X = 175 Units
Y = 300 - 175 = 125 Units
The co sells when x = 175 units
y = 125 units
It will earn the profit of ₹ 300
Volume = 300 units
Profit = ₹ 600
Contribution = 8x + 4 (300 – x)
(-) FC = (₹ 1600)
Profit ₹ 600
8x + 1200 – 4x – 1600 = 600
4x = 1000
X = 250 units
Y = 300 – 250
= 50 units
The co sells 250 units of x and 50 units of y

Part III: Calculation of Break Even Point: When the sales mix 2: 1:
2 1
Weighted Contribution Per Unit = [8 x ] (+) [4 x ]
3 3
= 5.33 + 1.33
= 6.67
Fixed Cost ₹ 1600
BES = = = 240 units
Weighted Contribution Per Unit 6.67

300
units

X Y

240 x 2 ÷ 3 240 x 1 ÷ 3

160 units 80 units

When the co sells 160 units of X and 80 units of Y it earns 0 profit

CA NOTE HUB 431

Part IV: Calculation of BEP when the sales mix of 1 : 2:
1 2
Weighted Contribution Per Unit = [8 x ] (+) [4 x ]
3 3
= 2.67 (+) 2.67 = 5.33 units
Fixed Cost ₹ 1600
BES = = = 300 units
Weighted Contribution Per Unit 5.33

300
units

X Y

1÷3 2÷3

100 200 units

units

When the co sells the 100 units of X and 200 units of Y to earn a profit of 0.

PROBLEM – 19A: (RTP SEP 24)

RS Ltd. manufactures and sells a single product X whose selling price is ₹100 per
unit and the variable cost is ₹60 per unit.
(i) If the Fixed Costs for this year are ₹24,00,000 and the annual sales are at 60%
margin of safety, CALCULATE the rate of net return on sales, assuming an income
tax level of 40%
(ii) For the next year, it is proposed to add another product line Y whose selling
price would be ₹150 per unit and the variable cost ₹100 per unit. The total
fixed costs are estimated at ₹28,00,000. The sales mix of X : Y would be 5 :
3. COMPUTE the break-even sales in units for both the products.
SOLUTION:
(i) Contribution per unit = Selling price – Variable cost
= ₹ 100 – ₹ 60
= ₹ 40
₹ 24,00,000
Break-even Point =
₹ 40
= 60,000 units
Actual Sales - Break -even sales
Percentage Margin of Safety =
Actual Sales
Actual Sales - 60,000 units
Or, 60% =
Actual Sales
 Actual Sales = 1,50,000 units

CA NOTE HUB 432

 (₹ )
Sales Value (1,50,000 units × ₹ 100) 1,50,00,000
Less: Variable Cost (1,50,000 units × ₹ 60) (90,00,000)
Contribution 60,00,000
Less: Fixed Cost (24,00,000)
Profit 36,00,000
Less: Income Tax @ 40% (14,40,000)
Net Return 21,60,000

₹ 21,60,000
Rate of Net Return on Sales = 14.40% ( x 100)
₹ 1,50,00,000
(ii) Products
X (₹) Y (₹)
Selling Price per unit 100 150
Variable Cost per unit 60 100
Contribution per unit 40 50
Composite contribution will be as follows:
40 50
Contribution per unit = ( x 5) + ( x 3)
8 8
= 25 + 18.75 = ₹ 43.75
₹ 28,00,000
Break even sale = 64,000 units ( )
₹ 43.75
Break-even Sales Mix:
X (64,000 units × 5/8) = 40,000 units
Y (64,000 units × 3/8) = 24,000 units

PROBLEM – 19B:
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

CA NOTE HUB 433

 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:
i. CALCULATE the total contribution to sales ratio and present break-even sales at
existing sales mix.
ii. CALCULATE the total contribution to sales ratio and present break-even sales at
proposed sales mix.
iii. STATE whether the proposed sales mix is accepted or not?
SOLUTION:
(i) Calculation of Contribution to sales ratio at existing sales mix:
Products
A B C Total
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 × 20% 17.5% 10% 47.5%
Sales 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

CA NOTE HUB 434

(ii) Calculation of Contribution to sales ratio at proposed sales mix:
Products
A B C Total
Selling Price (₹) 300 400 300
Less: Variable Cost (₹) 150 200 150
Contribution per unit (₹) 150 200 150
P/V Ratio 50% 50% 50%
Sales Mix 45% 30% 25%
Contribution per rupee of sales (P/V Ratio x 22.5% 15% 12.5% 50%
Sales Mix)
Proposed Total Contribution (₹ 64,00,000 × 50%) ₹ 32,00,000
Less: Fixed Costs ₹ 18,00,000
Proposed Profit ₹ 14,00,000
Proposed Break-Even Sales ₹ 36,00,000
(₹ 18,00,000/0.50)

(iii) 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.

PROBLEM – 20:
Aravind Ltd. manufactures and sells four products under the brand names A, B, C, & D.
the following details are provided in respect of the products.
PRODUCT A B C D
% in Sales Value 30 40 20 10
% of Variable cost to selling price 60 70 80 30
The total budgetary sales (100%) are ₹ 10,00,000 p.m. fixed costs are ₹ 2,50,000
p.m. The Company’s new sales manager Aravind has suggested a change in sales mix
keeping the total sales at ₹ 10,00,000 per month. His suggestion is as under:
Product A B C D
% in sales Value 25 40 30 5
▪ Calculate the break-even point for the company, under the existing sales mix.
▪ Compute the effect of implementing the suggested change in the sales mix.
▪ Explain the reasons for the effect of change in sales mix despite total sales and
fixed cost being the same.

CA NOTE HUB 435

SOLUTION:
Step 1: Calculated of budgeted profit with existing sales mix:
Product Sales PVR Contribution
₹ ₹
A 3,00,000 40% 1,20,000
B 4,00,000 30% 1,20,000
C 2,00,000 20% 40,000
D 1,00,000 70% 70,000
10,00,000 3,50,000
(-) Fixed Cost (2,50,000)
Profit 1,00,000

Step 2: Break even sales with current sales mix:

Product Sales mix PV Ratio Weighted PV Ratio
A 0.30 40% 12%
B 0.40 30% 12%
C 0.2 20% 4%
D 0.10 70% 7%
Weighted PV Ratio 35%

Fixed Cost ₹ 2,50,000

Break Even Sales = = = ₹ 714286
Weighted PV Ratio 35%

₹ 714286

A B C D

₹ 214286 ₹ 285714 ₹ 142857 ₹ 71429

When the company sells its product work ₹ 714286 in the proportion.
70 : 40 : 20 : 10 of A : B : C : D profit 0.
Step 3: Calculation of profit under charged sales mix
Product Sales ₹ PVR Contribution
A (25%) 250000 40% 1,00,000
B (40%) 400000 30% 1,20,000
C (30%) 300000 20% 60,000
D (5%) 50000 70% 35,000

CA NOTE HUB 436

 10,00,000 3,15,000
(-) Fixed Cost 2,50,000
Profit 65000

Step 4: understanding the reason for drop in profit:

 Despite the sales & FC remaining the same the profit has dropped by ₹35000
 This is way of drop in PV ratio due to change in sales mix
₹ 3,15,000
 Existing PVR is 35% New PVR = = 31.5%
₹ 1,00,000
Decrease in PV Ratio = 35 – 31.5%
= 3.5%
Decrease in profit = Sales x Decrease in PVR
₹ 10,00,000 x 3.5% = ₹ 35000
The PV Ratio has dropped due to change in sales mix which can be analysed as follows
Product Sales Mix PV Ratio  PV Ratio
A  5% 40%  2%
B - 30% -
C  10% 20%  2%
D  5% 70%  3.5%
 3.5%

PROBLEM – 21:
A, B and C are three similar plants under the same management who want them to be
merged for better operation. The details are as under:-
Plant A B C
Capacity Operated % 100 70 50
(in lakhs) (in lakhs) (in lakhs)
Turnover ₹ 300 ₹ 280 ₹ 150
Variable Cost ₹ 200 ₹ 210 ₹ 75
Fixed Costs ₹ 70 ₹ 50 ₹ 62
Find out:
a. The capacity of the merged plant for break-even
b. The profit at 75% capacity of the merged plant.
c. The turnover from the merged plant to give a profit of ₹28 lakhs.

CA NOTE HUB 437

SOLUTION:
Step 1: Details of merged plant at 100% capacity:
(₹ In lakhs)
Particulars A B C Merged
Sales 300 400 300 1000
(280 x 100 ÷ 70)
(-) Variable Cost (200) (300) (150) (650)
Contribution 100 100 150 350
(-) Fixed Cost (70) (50) (62) (182)
Profit 30 50 88 168
If the merged plant works at 110% capacity it can earn a profit of ₹ 168 Lakhs
Step 2:
Part I: Capacity to break even:
Contribution ₹ 350
PV Ratio = = = 35%
Sales ₹ 1000
Fixed Cost ₹ 182
Break Even Sales = = = ₹ 520 Lakhs
PV Ratio 35%
₹ 520
% capacity to break even = x 100 = 52%
₹ 1000
Part II: Profit at 75% capacity of the merged plant:
Contribution (350 x 75%) = ₹ 262.5
(-) Fixed Cost ₹ (182)
Profit = ₹ 80.5
Part III: Turnover for the merged plant to given a project ₹ 28 Lakhs
Contribution = Fixed Cost + Required profit
= ₹ 182 + ₹ 28
= ₹ 210
Sales = Contribution ÷ PV Ratio = ₹ 210 ÷ 35% = ₹ 600 Lakhs

PROBLEM – 22:
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.
Relevant information about the products for the next year is given below.
Particulars X Y Z
Selling Price (₹/unit) ₹ 10 ₹ 12 ₹ 12
Variable Costs (₹/unit) ₹ 6 ₹ 9 ₹ 7

CA NOTE HUB 438

 Market Demand (units) 3,000 2,000 1,000
Production Capacity (units) 2,000 3,000 900
Fixed Costs (₹) ₹ 30,000
Required:
COMPUTE the opportunity costs for each of the products.
SOLUTION:
X Y Z
I. Contribution per unit ₹ 4 3 5
II. Units (Lower of Production / Market Demand) 2,000 2,000 900
III. Possible Contribution ₹ [ I × II ] 8,000 6,000 4,500
IV. 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).

PROBLEM – 23:
The following particulars are extracted from the records company:-
Product A Product B
Particulars
Per Unit Per Unit
Sales ₹ 100 ₹ 120
Consumption of Material 2 Kg. 3 Kg.
Material Cost ₹ 10 ₹ 15
Direct wages cost ₹ 15 ₹ 10
Direct expenses ₹ 5 ₹ 6
Machine Hours used 3 2
Overhead expenses :
- Fixed ₹ 5 ₹ 10
- Variable ₹ 15 ₹ 20
Direct wages per hour is ₹ 5.
a. Comment on the profitability of each product (both use the same raw material) when
i. Raw material is in short supply;
ii. Production capacity (in terms of machine-hours) is the limiting factor.

CA NOTE HUB 439

 b. Assuming Raw material as the key factor availability of which is 10,000 Kg. and the
maximum sales potential of each product being 3,500 units, find out the product mix
which will yield the maximum profit.
SOLUTION:
Step 1: Calculation Contribution of A and B:
Particulars A B
Selling Price 100 120
Less: Variable Cost
Direct Material (10) (15)
Direct Wages (15) (10)
Direct Expenses (5) (6)
Less: Variable Overhead (15) (20)
Variable Cost 45 51
Contribution Per Unit 55 69

Note: Fixed Overheads to be ignored for decision making

Step 2: Ranking the products when raw material is a Limiting factor:
Particulars A B
Contribution Per Unit 55 69
Kgs 2 Kg 3 Kg
Contribution Per Unit Per Kg 27.5 23
Rank I II

Step 3: Ranking the products when machine hrs is a Limiting factor:

Particulars A B
Contribution Per Unit 55 69
Hours 3 Hours 2 Hours
Contribution Per Unit Per Hour 18.33 34.5
Rank II I

Step 4: Allocation of 10000 kg of raw materials to maximize contribution:

Rank Product Units Kg Per unit Kg Per Unit Kgs
Consumed consumed
I A 3500 units 2 kg 7000 kg 7000 kg
II B 1000 units 3 kg 3000 kg 10000 kg

CA NOTE HUB 440

Step 5: Calculation of Total Contribution
Product Units Contribution Per Contribution
Unit
A 3500 units 55 ₹ 192500
B 1000 units 69 ₹ 69000
₹ 261500

PROBLEM – 23A: (PYP SEP 24)

ABC Ltd. is a well-known company for producing baby care products.
The company produces and sells two variants of organic shampoo for children: "Baby
Rose" and "Baby Lily". The sales and cost data for both products are provided below:
Particulars Baby Rose Baby Lily
Current demand and Sales (Number of bottles) 4,000 3,000
Production Capacity (Number of bottles) 7,500 6,000
Selling Price per bottle (₹) 600 750
Variable Costs per bottle:
- Direct Materials (₹ 20 Per litre) 160 200
- Other Variable Costs 270 350
The fixed costs amount to ₹ 5,00,000 and ₹ 4,50,000 for Baby Rose and Baby Lily
respectively. The Production Manager has informed that 1,00,000 litres of material
is available for production. A dealer has approached the company and proposed to
purchase both products at the existing selling prices, which are to be produced by
utilizing the remaining unused material. However, he has insisted that all the bottles
must be packed with eco-friendly packaging, which will result in an additional cost of
₹ 10 per bottle for the company. Presently, the company is not using eco-friendly
material for packing of bottles.
Required:
Prepare a detailed statement showing the overall contribution and profit of the
company after acceptance of the dealer's proposal.

CA NOTE HUB 441

SOLUTION:
Statement showing the Overall contribution and profit of the company
Particulars Baby Rose Baby Lily Total
(₹ ) (₹ ) (₹ )
Selling price per bottle 600 750 -
Less: Direct Materials 160 200 -
Other variable costs 270 350 -
Additional packaging 10 10
Contribution per bottle 160 190 -
Material required per bottle 8 litres 10
Contribution per litre of 20 19
material
Ranking on the basis of I II
Contribution per litre of
material
Baby Rose Baby Lily
(4,000 + 3,500 (3,000 +1,000
bottles) bottles)
Selling price per bottle 600 750 -
Sales Value 45,00,000 30,00,000
Variable Cost
Direct Materials 7,500 units x ₹ 160 4,000 units x ₹ 200
= 12,00,000 = 8,00,000
Other Variable Costs 7,500 units x ₹ 270 4,000 units x ₹ 350
= 20,25,000 = 14,00,000
Eco-friendly pack cost 3,500 units x ₹ 10 1,000 units x ₹ 10
= 35,000 = 10,000
Total Variable Costs 32,60,000 22,10,000
Contribution 4,000 units x 170 3,000 units x 200
3,500 units x 160 1,000 units x 190
= 12,40,000 = 7,90,000 20,30,000
Less: Fixed Cost 5,00,000 4,50,000 9,50,000
Profit 7,40,000 3,40,000 10,80,000

CA NOTE HUB 442

WN1
Baby Rose Baby Lily
Raw Material used per unit of bottle (a) 8 litres 10 litres
(₹ 160 ÷ ₹ 20) (₹ 200 ÷ ₹ 20)
Current Demand and Sales (b) 4,000 bottles 3,000 bottles
Total Raw Material used (c = a x b) 32,000 litres 30,000 litres

WN2
Raw Material available after current sales = 1,00,000 litres – 62,000 litres
= 38,000 litres
Since the contribution per unit of Baby Rose is higher than Baby Lily, the company will
produce and sale Baby Rose shampoo to the dealer.
Number of units that can be produced in 38,000 litres = 38,000 litres ÷ 8 litres
= 4,750 bottles
However, the Production capacity of Baby Rose is 7,500 bottles, only 3,500 bottles can be
produced.
Raw materials used in 3,500 bottles = 8 litres x 3,500 bottles
= 28,000 litres Remaining material = 10,000 litres
Number of Baby Lily that can be produced in 10,000 litres = 10,000 litres ÷ 10 litres
= 1,000 bottles
Alternatively, Solution can also be presented in following way: Statement showing the
Overall contribution and profit of the company
Particulars Baby Rose Baby Lily Total
(₹ ) (₹ ) (₹ )
Selling price per bottle 600 750 -
Less: Direct Materials 160 200 -
Other variable costs 270 350 -
Contribution per bottle Before additional 170 200 -
packaging
Contribution per bottle per unit of raw 21.25 20
material Before additional packaging
Ranking on the basis of Contribution per I II
bottle per unit of raw material

CA NOTE HUB 443

Particulars Current Additional Sales of Additional Sales of Total
Sales Baby Rose Baby Lily
(WN2) (3,500 bottles) (1,000 bottles)
(₹ ) (₹ ) (₹ ) (₹ )
Selling price per bottle - 600 750 -
Less: Direct Materials - 160 200 -
Other variable costs - 270 350 -
Additional packaging - 10 10
Contribution per unit - 160 190 -
Total Contribution 12,80,000 5,60,000 1,90,000 20,30,000
Less: Fixed Cost 9,50,000 - - 9,50,000
Profit 3,30,000 5,60,000 1,90,000 10,80,000

WN1
Baby Rose Baby Lily
Raw Material used per unit of bottle (a) 8 litres 10 litres
(₹ 160 ÷ ₹ 20) (₹ 200 ÷ ₹ 20)
Current Demand and Sales (b) 4,000 bottles 3,000 bottles
Total Raw Material used (c = a x b) 32,000 litres 30,000 litres

WN2
Statement showing the current contribution and profit of the company
Particulars Baby Rose Baby Lily Total
(₹ ) (₹ ) (₹ )
Selling price per bottle 600 750 -
Less: Direct Materials 160 200 -
Other variable costs 270 350 -
Contribution per bottle Before additional 170 200 -
packaging
Contribution per bottle per unit of raw material 21.25 20
Before additional packaging
Total Contribution Before additional packaging 6,80,000 6,00,000 12,80,000
Less: Fixed Cost 5,00,000 4,50,000 9,50,000
Profit 1,80,000 1,50,000 3,30,000

CA NOTE HUB 444

WN3
Raw Material available after current sales = 1,00,000 litres – 62,000 litres
= 38,000 litres
Since the contribution per unit of Baby Rose is higher than Baby Lily, the company will
produce and sale Baby Rose shampoo to the dealer.
Number of units that can be produced in 38,000 litres = 38,000 litres/8 litres
= 4,750 bottles
However, the Production capacity of Baby Rose is 7,500 bottles, only 3,500 bottles can be
produced.
Raw materials used in 3,500 bottles = 8 litres x 3,500 bottles
= 28,000 litres Remaining material = 10,000 litres
Number of Baby Lily that can be produced in 10,000 litres = 10,000 litres/10 litres
= 1,000 bottles

PROBLEM – 24:
X Ltd. supplies spare parts to an aircraft company Y Ltd. The production capacity of X
Ltd. facilitates the 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
Particulars Part A Part B
Per unit
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine P 0.6 h 0.25 h
Machine Time: Machine Q 0.5 h 0.55 h
Target Price (₹) ₹ 145 ₹ 115
Total hours available:
Machine P: 4,000 hours
Machine Q: 4,500 hours
Alloy available is 13,000 kgs. @ ₹ 12.50 per kg.
Variable overheads per machine hours:
Machine P: ₹ 80
Machine Q: ₹ 100
Required:
i. IDENTIFY the spare part which will optimize contribution at the offered price.

CA NOTE HUB 445

 ii. If Y Ltd. reduces the target price by 10% and offers ₹ 60 per hour of unutilized
machine hour, CALCULATE the total contribution from the spare part identified
above?
SOLUTION:
(i)
Part A Part B
Machine “P” (4,000 Hours) 6,666 16,000
Machine “Q” (4,500 Hours) 9,000 8,181
Alloy Available (13,000 kg) 8,125 8,125
Maximum Number of Parts to be manufactured 6,666 8,125
(Minimum of the above three)

₹ ₹
Material (₹12.5 × 1.6 kg.) 20.00 20.00
Variable Overhead: Machine “P” 48.00 20.00
Variable Overhead: Machine “Q” 50.00 55.00
Total Variable Cost per unit 118.00 95.00
Price Offered 145.00 115.00
Contribution per unit 27.00 20.00
Total Contribution for units produced (I) 1,79,982 1,62,500

Spare Part A will optimize the contribution.

(ii)
Part A
Parts to be manufactured numbers 6,666

Machine P: to be used 4,000

Machine Q: to be used 3,333

Underutilized Machine Hours (4,500 Hours – 3,333 Hours) 1,167

Compensation for unutilized machine hours (1,167 Hours × ₹ 60) (II) 70,020

Reduction in Price by 10%, Causing fall in Contribution of ₹ 14.50 96,657

per unit (6,666 units × ₹ 14.5) (III)
Total Contribution (I + II – III) 1,53,345

CA NOTE HUB 446

 PROBLEM –25:
A paint manufacturing company manufactures 2,00,000 medium-sized tins of “Spray Lac
Paints” per annum when working at normal capacity. It incurs the following costs of
manufacturing per unit:.

Particulars (₹)
Direct Material 7.8
Direct Labour 2.1
Variable overheads 2.5
Fixed overheads 4
Product Cost per unit 16.4
The selling price is ₹ 21 per and variable selling and administrative expenses are 60 paise
per tin. During the next quarter, only 10,000 units can be produced and sold. Management
plans to shut down the plant estimating that the fixed manufacturing cost can be reduced
to ₹ 74,000 for the quarter. When the plant is operating, the fixed overheads are
incurred at a uniform rate throughout the year. Additional costs of plant shutdown for
the quarter are estimated at ₹ 14,000.
REQUIRED:
a. Express your opinion, as to whether the plant should be shut down during the quarter,
and
b. Calculate the shutdown point for the quarter in terms of number of tins.
SOLUTION:
Step 1: Calculation of Contribution Per Unit
Particulars (₹)
Selling price 21
Less: Variable Cost
Direct Material 7.8
Direct Labour 2.1
Variable Overheads 2.5
Variable selling Overheads 0.6
Contribution Per Unit 8

Step 2: Calculation of Avoidable Fixed Cost (FC)

Total Annual Fixed Cost (200000 x ₹ 4) = ₹ 800000
Total Fixed Cost per Quarter = ₹ 800000 ÷ 4 = ₹ 200000
Unavoidable Fixed Cost (Given) = ₹ 74000

CA NOTE HUB 447

Avoidable (₹ 200000 - ₹ 74000) = ₹ 126000
Step 3: Shut Down Point
Avoidable Fixed Cost - Shutdown cost
Shutdown point =
Contribution Per Unit
= ₹ 126000 – ₹ 14000 ÷ ₹ 8 = 14000 Units
Estimated Shut Down point
Sales Decision
< 14000 Units Shut down
= 14000 Units Indifference
> 14000 Units Continue

PROBLEM – 26:
Mr. X has ₹ 2,00,000 investments in his business firm. He wants a 15 per cent return
on his money. From an analysis of recent cost figures, he finds that his variable cost of
operating is 60 per cent 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 per cent 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?
SOLUTION:
Particulars ₹
Suppose sales 100
Variable cost 60
Contribution 40
P/V ratio 40%
Fixed cost = ₹ 80,000
(i) Break-even point = Fixed Cost ÷ P/V ratio = 80,000  40% or ₹ 2,00,000
(ii) 15% return on ₹ 2,00,000 30,000
Fixed Cost 80,000
Contribution required 1,10,000
Sales volume required = ₹ 1,10,000  40% or ₹ 2,75,000
(iii) Avoidable fixed cost if business is locked up = ₹ 80,000 - ₹ 25,000 = ₹ 55,000
Minimum sales required to meet this cost: ₹ 55,000  40% or ₹ 1,37,500

CA NOTE HUB 448

Mr. X will be better off by locking his business up, if the sale is less than ₹ 1,37,500

PROBLEM –27:
From the following data compute the profit under a. Marginal costing, and b.
Absorption costing and reconcile the difference in profit.

₹ Per unit
Selling price ₹ 8
Variable cost ₹ 4
Fixed cost ₹ 2
The normal volume of production is 26,000 units per quarter.
The opening and closing stocks consisting of both finished goods and equivalent units of
work-in-progress are as follows:-
Particulars Qr. I Qr. II Qr. III Qr. IV Total
Op. stock - - 6,000 2,000 -
Production 26,000 30,000 24,000 30,000 1,10,000
Sales 26,000 24,000 28,000 32,000 1,10,000
Closing stock - 6,000 2,000 - -
SOLUTION:
Part I: Calculation of Profit Under Marginal Costing System:
Particulars Q1 (₹) Q2 (₹) Q3 (₹) Q4 (₹)
A. Sales 208000 192000 224000 256000
Opening stock 0 - 24000 8000
Add: Variable cost of production 104000 120000 96000 120000
Less: Closing stock 0 (24000) (8000) 0
B. Variable COGS 104000 96000 112000 128000
C. Gross contribution (A – B) 104000 96000 112000 128000
D. Variable & selling - - - -
E Contribution 104000 96000 112000 128000
F. Fixed cost (52000) (52000) (52000) (52000)
Profit 52000 44000 60000 76000

CA NOTE HUB 449

 Part II: Calculation of Profit Under Absorption Costing System
Particulars Q1 (₹) Q2 (₹) Q3 (₹) Q4 (₹)
A. Sales 208000 192000 224000 256000
B. Opening stock 0 36000 12000
Add: COP @ ₹ 6 156000 180000 144000 180000
Less: Closing stock 0 (36000) (12000) -
156000 144000 168000 192000
C. Gross Profit (A – B) 52000 48000 56000 64000
D. Selling & Administrative - - - -
E Under / over absorption - 8000 (4000) + 8000
F. Profit (C – D + E) (52000) 56000 52000 72000

W.N.1: Calculation of under / over absorption:

Particulars Q1 (₹) Q2 (₹) Q3 (₹) Q4 (₹)
Actual Overheads 52000 52000 52000 52000
Absorbed Overheads 52000 60000 48000 60000
(Actual x pre determined )
Under / over Absorption - 8000 4000 8000
 Over  under  Over

Statement Reconciling Marginal Costing & Absorption Costing Method:

Particulars Q1 (₹) Q2 (₹) Q3 (₹) Q4 (₹)
Opening stock - - 6000 2000
Closing stock - 6000 2000 -
Net stock - 6000 4000 2000
Fixed cost in net stock - 12000 (8000) (4000)
Marginal costing profit 52000 44000 60000 76000
Absorption costing profit 52000 56000 52000 72000

PROBLEM – 27A:
XYZ Ltd. has a production capacity of 2,00,000 units per year. Normal capacity
utilisation 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 and fixed
selling costs are ₹2,70,000 per year. The unit selling price is ₹ 20.

CA NOTE HUB 450

 In the year just ended on 31st March, the production was 1,60,000 units and sales were
1,50,000 units. The closing inventory on 31st March was 20,000 units. The actual variable
production costs for the year were ₹ 35,000 higher than the standard.
i. CALCULATE the profit for the year
a. by absorption costing method and
b. by marginal costing method.
ii. EXPLAIN the difference in the profits.
SOLUTION:
Income Statement (Absorption Costing) for the year ending 31st March
₹ ₹
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
Cost of Goods Produced 21,15,000
Add: Opening stock (10,000 units @ ₹ 13)* 1,30,000
22,45,000
₹ 21,15,000 2,64,375
Less: Closing stock ( x 20,000 units)
1,60,000 units

Cost of Goods Sold 19,80,625

Add: Under absorbed fixed production overhead (3,60,000 – 3,20,000) 40,000
20,20,625
Add: Non-production costs:
Variable selling costs (1,50,000 units @ ₹ 3) 4,50,000
Fixed selling costs 2,70,000
Total cost 27,40,625
Profit (Sales – Total Cost) 2,59,375
* Working Notes:
1. Fixed production overhead is absorbed at a pre-determined rate based on normal capacity,
i.e. ₹ 3,60,000 ÷ 1,80,000 units = ₹ 2.
2. Opening stock is 10,000 units, i.e., 1,50,000 units + 20,000 units – 1,60,000 units.
It is valued at ₹ 13 per unit, i.e., ₹ 11 + ₹ 2 (Variable + fixed).

CA NOTE HUB 451

 Income Statement (Marginal Costing) for the year ended 31st March
₹ ₹
Sales (1,50,000 units @ ₹ 20) 30,00,000
Variable production cost (1,60,000 units @ ₹ 11 + ₹ 35,000) 17,95,000
Variable selling cost (1,50,000 units @ ₹ 3) 4,50,000
22,45,000
Add: Opening Stock (10,000 units @ ₹ 11) 1,10,000
23,55,000
₹ 17,95,000 2,24,375
Less: Closing stock ( x 20,000 units)
1,60,000 units
Variable cost of goods sold 21,30,625
Contribution (Sales – Variable cost of goods sold) 8,69,375
Less: Fixed cost – Production 3,60,000
– Selling 2,70,000 6,30,000
Profit 2,39,375

Reasons for Difference in Profit: ₹

Profit as per absorption costing 2,59,375
Add: Opening stock under –valued in marginal costing (₹ 1,30,000 – 1,10,000) 20,000
2,79,375
Less: Closing Stock under –valued in marginal closing (₹ 2,64,375 – 2,24,375) 40,000
Profit as per marginal costing 2,39,375

PROBLEM – 27B: (MTP 1 MAY 24)

AB Ltd produces a single product V2 and sells it at a fixed price of ₹ 2,050
per unit. The production and sales data for first quarter of the year 2023-24 are as
follows:
April May June
Sales in units 4,200 4,500 5,200
Production in units 4,600 4,400 5,500
Actual/budget information for each month was as follows:
Direct materials 4 kilograms at ₹ 120 per kilogram
Direct labour 6 hours at ₹ 60 per hour
Variable production overheads 150% of direct labour
Fixed production overheads ₹ 5,00,000

CA NOTE HUB 452

 Fixed selling overheads ₹ 95,000
There was no opening inventory at the start of the quarter. Fixed production overheads
are budgeted at ₹ 60,00,000 per annum and are absorbed into products based on a
budgeted normal output of 60,000 units per annum.
Required:
(i) Prepare a profit statement for each of the three months using absorption
costing principles.
(ii) Prepare a profit statement for each of the three months using marginal costing
principles.
(iii) Present a reconciliation of the profit or loss figures given in your answer to (i)
and (ii).
SOLUTION:
(i) Statement of Profit under Absorption Costing
Particulars April May June
(₹ ) (₹ ) (₹ )
Sales (units) 4,200 4,500 5,200
Selling price per unit 2,050 2,050 2,050
Sales value (A) 86,10,000 92,25,000 1,06,60,000
Cost of Goods Sold:
Opening Stock @ ₹ 1,480 0 5,92,000 4,44,000
Production cost @ ₹ 1,480 68,08,000 65,12,000 81,40,000
Closing Stock @ ₹ 1,480 (5,92,000) (4,44,000) (8,88,000)
Under/ (Over) absorption 40,000 60,000 (50,000)
Add: Fixed Selling Overheads 95,000 95,000 95,000
Cost of Sales (B) 63,51,000 68,15,000 77,41,000
Profit (A – B) 22,59,000 24,10,000 29,19,000

Workings:
1. Calculation of Full Production Cost
(₹ )
Direct Materials (4 kg. × ₹ 120) 480
Direct labour (6 hours × ₹ 60) 360
Variable production Overhead (150% of ₹ 360) 540
Total Variable cost 1,380
₹ 60,00,000 100
Fixed production overhead ( )
60,000 units

CA NOTE HUB 453

 1,480

2. Calculation of Opening and Closing stock

April May June
Opening Stock 0 400 300
Add: Production 4,600 4,400 5,500
Less: Sales 4,200 4,500 5,200
Closing Stock 400 300 600

3. Calculation of Under/Over absorption of fixed production overhead

April (₹) May (₹) June (₹)
Actual Overhead 5,00,000 5,00,000 5,00,000
Overhead 4,60,000 4,40,000 5,50,000
absorbed (4,600 units × (4,400 units × (5,500 units ×
₹ 100) ₹ 100) ₹ 100)
Under/(Over) 40,000 60,000 (50,000)
absorption

(ii) Statement of Profit under Marginal Costing

Particulars April (₹) May (₹) June (₹)
Sales (units) 4,200 4,500 5,200
Selling price per unit 2,050 2,050 2,050
Sales value 86,10,000 92,25,000 1,06,60,000
Less: Variable production cost 57,96,000 62,10,000 71,76,000
@ ₹ 1,380
Contribution 28,14,000 30,15,000 34,84,000
Less: Fixed Production 5,00,000 5,00,000 5,00,000
Overheads
Less: Fixed Selling Overheads 95,000 95,000 95,000
Profit 22,19,000 24,20,000 28,89,000

(iii) Reconciliation of profit under Absorption costing to Marginal Costing

Particulars April (₹) May (₹) June (₹)
Profit under Absorption 22,59,000 24,10,000 29,19,000
Costing
Add: Opening Stock 0 40,000 30,000
(400 × ₹ 100) (300 × ₹ 100)
Less: Closing Stock 40,000 30,000 60,000

CA NOTE HUB 454

 (400 × ₹ 100) (300 × ₹ 100) (600 × ₹ 100)
Profit under Marginal 22,19,000 24,20,000 28,89,000
Costing

PROBLEM – 28:
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
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. COMPUTE the fixed production costs absorbed by ZEST if absorption costing is used.
b. CALCULATE the under/over-recovery of overheads during the period.
c. CALCULATE the profit using absorption costing.
d. CALCULATE the profit using marginal costing.
SOLUTION:
(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
During the first quarter, the fixed production
cost absorbed by ZEST would be (220 units × ₹ 200) 44,000

CA NOTE HUB 455

(b) Under /over-recovery of overheads during the period: ₹
Actual fixed production overhead 40,000
(1/4 of ₹ 1,60,000)
Absorbed fixed production overhead 44,000
Over-recovery of overheads 4,000
(c) Profit for the Quarter (Absorption Costing)
₹ ₹
Sales revenue (160 units × ₹ 2,000): (A) 3,20,000
Less: Production costs:
- Variable cost (220 units × ₹ 800) 1,76,000
- Fixed overheads absorbed (220 units × ₹ 200) 44,000 2,20,000
Add: Opening stock --
₹ 2,20,000
Less: Closing Stock ( x 60 units)
220 units
(60,000)
Cost of Goods sold
1,60,000
Less: Adjustment for over-absorption of fixed production
(4,000)
overheads
Add: Selling & Distribution Overheads:
64,000
- Variable (160 units × ₹ 400)
60,000 1,24,000
- Fixed (1/4th of ₹ 2,40,000)
2,80,000
Cost of Sales (B)
Profit {(A) – (B)}
40,000

(d) Profit for the Quarter (Marginal Costing)

₹ ₹
Sales revenue (160 units × ₹ 2,000): (A) 3,20,000
Less: Production costs: 1,76,000
- Variable cost (220 units × ₹ 800) --
Add: Opening stock
₹ 1,76,000
Less: Closing Stock ( x 60 units)
220 units
(48,000)
Variable cost of goods sold
1,28,000
Add: Selling & Distribution Overheads:
64,000
- Variable (160 units × ₹400)
1,92,000
Cost of Sales (B)

CA NOTE HUB 456

 Contribution {(C) = (A) – (B)} 1,28,000
Less: Fixed Costs: (40,000)
- Production cost (60,000) (1,00,000)
- Selling & distribution cost
Profit 28,000

PROBLEM – 29:
A dairy product company manufacturing baby food with a shelf life of one year furnishes
the following information:
i. On 1st April, 20x3, the company has an opening stock of 20,000 packets whose
variable cost is ₹180 per packet.
ii. In 20x2-20x3, production was ₹ 1,20,000 packets and the expected production in
20x3-20x4 is 1,50,000 packets. Expected sales for 20x3-20x4 is 1,60,000 packets
iii. In 20x2-20x3, fixed cost per unit was ₹ 60 and it is expected to increase by 10% in
20x3-20x4. The variable cost is expected to increase by 25%. Selling price for 20x3-
20x4 has been fixed at ₹ 300 per packet.
You are required to calculate the Break-even volume in units for 20x3-20x4.
SOLUTION:
Working Notes:
Particulars 2022-23 (₹) 2023-24 (₹)
Fixed Cost 72,00,000 79,20,000
(₹ 60 x 1,20,000 units) (110% of ₹ 72,00,000)
Variable Cost 180 225
(125% of ₹ 180)

Calculation of Break-even Point (in units):

Since, shelf life of the product is one year only, hence, opening stock is to be sold first.
₹
Total Contribution required to recover total fixed cost in 79,20,000
2023 - 24 and to reach break-even volume.
Less: Contribution from opening stock {20,000 units x (₹ 300 — ₹ 180)} 24,00,000
Balance Contribution to be recovered 55,20,000
Units to be produced to get balance contribution
= ₹ 55,20,000 ÷ ₹ 300 – ₹ 225 = 73,600 packets.

CA NOTE HUB 457

Break-even volume in units for 2023-24
Packets
From 2023-24 production 73,600
Add: Opening stock from 2022-23 20,000
93,600

PROBLEM – 30:
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:
Total annual costs Percent of Total
Annual Cost which is
variable
Material 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
i. COMPUTE the sale price per bottle to enable the management to realize an estimated
10% profit on sale proceeds in Bhutan.
ii. CALCULATE the break-even point in rupees sales as also in number of bottles for the
Bhutanese subsidiary on the assumption that the sale price is ₹ 14 per bottle.
SOLUTION:
(i) Computation of Sale Price Per Bottle
Output: 40,000 Bottles
Particulars ₹
Variable Cost:
Material 2,10,000
Labour (₹ 1,50,000 × 80%) 1,20,000
Factory Overheads (₹ 92,000 × 60%) 55,200
Administrative Overheads (₹ 40,000 × 35%) 14,000

CA NOTE HUB 458

 Commission (8% on ₹ 6,00,000) (W.N.-1) 48,000
Fixed Cost:
Labour (₹ 1,50,000 × 20%) 30,000
Factory Overheads (₹ 92,000 × 40%) 36,800
Administrative Overheads (₹ 40,000 × 65%) 26,000
Total Cost 5,40,000
Profit (W.N.-1) 60,000
Sales Proceeds (W.N.-1) 6,00,000
₹ 6,00,000 15
Sales Price per bottle ( )
40,000 bottles

(ii) Calculation of Break-even Point

Sales Price per Bottle = ₹ 14
₹ 4,44,000 (W.N)
Variable Cost per Bottle = = ₹ 11.10
40,000 Bottles
Contribution per Bottle = ₹ 14 − ₹ 11.10 = ₹ 2.90
Break -even Point:
Fixed costs
(in number of Bottles) =
Contribution on per bottle
₹ 92,800
= = 32,000 bottles
₹ 2.90
(in Sales Value) = 32,000 Bottles × ₹ 14
= ₹ 4,48,000
Working Note
W.N.-1
Let the Sales Price be ‘x’
8x
Commission =
100
10x
Profit =
100
8x 10x
x = 4,92,000 + +
100 100
100x - 8x - 10x = 4,92,00,000
x = 4,92,00,000 ÷ 82 = ₹ 6,00,000
W.N.-2
Total Variable Cost ₹
Material 2,10,000
Labour 1,20,000
Factory Overheads 55,200

CA NOTE HUB 459

 Administrative Overheads 14,000
Commission [(40,000 Bottles × ₹ 14) × 8%] 44,800
4,44,000

PROBLEM – 31: (PYP SEP 24)

JC Ltd. has a production capacity of 80,000 units per year. Presently a
company produces 60,000 units. Its cost structure is as under:
Material Cost ₹ 6 per unit
Labour Cost ₹ 4 per unit
Variable overheads ₹ 2 per unit
Total fixed cost ₹ 3,00,000 per annum. Present selling price ₹ 20 per unit in the
month of January, 2024 company received an offer from a Japanese client to supply
20,000 units at a price of ₹ 14 per unit with the additional shipping cost of ₹ 8,000.
Required:
(i) On the basis of changes in the profit, advice to the company, whether the
offer should be accepted or not?
(ii) Will your advice be different, if the customer is local one?
(iii) If Japanese client offer for supply of 30,000 units to a price of ₹ 14 (part supply
of order not accepted) and shipping cost treated as variable cost, analyze the
impact on the profit of JC Ltd., if order accepted.
SOLUTION:
(i) Statement Showing “Cost and Profit under Both Situation”
Particulars Existing After Offer
Production (80,000 units)
(60,000 units)
(₹ ) (₹ )
Sales
Existing (60,000 x ₹ 20) 12,00,000 12,00,000
Offer (20,000 x ₹ 14) - 2,80,000
Total Sales 12,00,000 14,80,000
Less: Direct Materials @ ₹ 6 3,60,000 4,80,000
Direct Labour @ ₹ 4 2,40,000 3,20,000
Variable Overheads @ ₹ 2 1,20,000 1,60,000
Contribution 4,80,000 5,20,000

CA NOTE HUB 460

 Less: Additional Shipping cost - 8,000
Less: Fixed Cost 3,00,000 3,00,000
Profit 1,80,000 2,12,000

Since the Profit has increased by ₹ 32,000, the proposal of the Japanese client should
be accepted
(ii) Yes, the advice will be different, if the customer is local one since the company is
currently selling at ₹ 20 in local market and therefore, selling at discounted price of
₹ 14 may impact its local market.

(iii) Statement Showing “Cost and Profit”

Particulars After Offer
(80,000 units)
(₹ )
Sales
Existing (50,000 x ₹ 20) 10,00,000
Offer (30,000 x ₹ 14) 4,20,000
Total Sales 14,20,000
Less: Direct Materials @ ₹ 6 4,80,000
Direct Labour @ ₹ 4 3,20,000
Variable Overheads @ ₹ 2 1,60,000
Additional Shipping cost 12,000
(₹ 8,000/20,000 units) x 30,000 units
Contribution 4,48,000
Less: Fixed Cost 3,00,000
Profit 1,48,000

If offer of Japanese client to supply 30,000 units at a price of ₹ 14 is accepted, the

Profit will decrease by ₹ 32,000 from the current level.

PROBLEM – 32: (RTP JAN 25)

XYZ Ltd. is a company involved in production and construction specialised equipment
and machines on the demand of customers The company received an order for
construction of a specialised machine, it had nearly completed this job relating to
construction of a specialised machine, when it discovered that the customer had gone
out of business. At this stage, the position of the job was as under:

CA NOTE HUB 461

 (₹ )
Original cost estimate 27,50,000
Costs incurred so far 24,80,000
Costs to be incurred 3,70,000
Progress payment received from original customer 15,50,000
After searches, a new customer for the machine has been found. He is interested to
take the machine, if certain modifications are carried out. The new customer wanted
the machine in its original condition, but without its AI device and with certain other
modifications. The costs of these additions and modifications are estimated as under:
Direct Materials (at cost) ₹ 1,05,000
Direct Wages Dept.: X 35 men days
Dept.: Y 55 men days
Variable Overheads 30% of Direct Wages in each Dept.
Delivery Costs ₹ 15,500
Fixed overheads will be absorbed at 50% of direct wages in each department.
The following additional information is available:
(1) The direct materials required for the modification are in stock and if not used for
modification of this order, they will be used in another job in place of materials that
will now cost ₹ 1,50,000.
(2) Department X is working normally and hence any engagement of labour will have to be
paid at the direct wage rate of ₹ 1,000 per man day.
(3) Department Y is extremely busy. Its direct wages rate is ₹ 1,200 per man day and
it is currently yielding a contribution of ₹ 3 per rupee of direct wages.
(4) Additional supervisory required for the modification cost ₹ 80,000.
(5) The cost of the AI device that the new customer does not require is ₹ 1,35,000. If
it is taken out, it can be used in another job in place of a different mechanism. The
latter mechanism has otherwise to be bought for ₹ 1,05,000. The dismantling and
removal of the control mechanism will take 5 man day in department X.
(6) If the conversion is not carried out, some of the materials in the original machine
can be used in another contract in place of materials that would have cost ₹ 2,00,000.
It would have taken 5 men days of work in department X to make them suitable for
this purpose. The remaining materials will realize ₹ 1,50,000 as scrap. The drawings,
which are included as part for the job can he sold for ₹ 45,000.
You are required to CALCULATE the minimum price, which the company can afford
to quote for the new customer as staled above.

CA NOTE HUB 462

SOLUTION:
Statement of Minimum Price Which the Company Can Afford to Quote for the
New Customer
(₹ ) (₹ )
Cost to be incurred to bring the machine in its original 3,70,000
condition
Direct Material (Replacement Value) 1,50,000
Direct Wages
Dept. X: (35 men days × ₹ 1,000) 35,000
Dept. Y: (55 men days × ₹ 1,200) 66,000
Opportunity Cost of Contribution Lost by Dept. Y 1,98,000 2,99,000
(₹ 66,000 × ₹ 3)
Variable Overheads [30% × (₹ 35,000 + ₹ 66,000)] 30,300
Delivery Costs 15,500
Additional Supervisory required for modification 80,000
Saving Due to Alternative Use of AI Device
Bought Out Price 1,05,000
Less: Dismantling & Removal Cost (5 men day × ₹ 1,000) 5,000
Less: Variable Cost (30% × ₹ 5,000) 1,500 (98,500)
Net Loss on Material Cost Savings (W.N.) 1,93,500
Opportunity Cost of Remaining Materials which can be sold as 1,50,000
scrap
Opportunity Cost of Sale of Drawings 45,000
Total Minimum Price which may be quoted 12,34,800
Working Note
(₹ )
Loss on Material Cost Saving of Machine 2,00,000
Less: Conversion Cost (5 men days × ₹ 1,000) 5,000
Less: Variable Cost (30% × ₹ 5,000) 1,500
Net Loss on Material Cost Saving of Machine 1,93,500

CA NOTE HUB 463

 CHAPTER 14: STANDARD COSTING
PROBLEM – 1:
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.
SOLUTION:
100 Kg
Standard Quantity of input for actual output (SQ) = 2,10,000 kg × = 3,00,000 kg
70 Kg
Standard Price = ₹ 1
Actual Quantity = 280000 (Given)
Actual Price (AP) = (₹ 2,52,000 ÷ 2,80,000 kg) = ₹ 0.90 per kg.
(a) Material Usage Variance = (SQ – AQ) × SP
= (3,00,000 – 2,80,000) × 1= ₹ 20,000 (F)
(b) Material Price Variance = (SP – AP) × AQ
= (1 – 0.90) × 2,80,000 = ₹ 28, 000 (F)
(c) Material Cost Variance = (SQ × SP) – (AQ × AP)
= (3,00,000 × ₹ 1) – (2,80,000 × ₹ 0.90)
= ₹ 48, 000 (F)
Check MCV = MPV + MUV
₹ 48, 000 (F) = ₹ 28, 000 (F) + ₹ 20, 000 (F)

PROBLEM – 2:
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.

CA NOTE HUB 464

 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 all material variances.
SOLUTION:
Basic Calculation
Material Standard for 182 kg output Actual for 182 kg output
SQ SP Amount Qty Rate Amount
(₹) (₹) Kg. (₹) (₹)
A 80.888 20 1,617.777 90 18 1,620
B 121.333 30 3640 110 34 3,740
Total 202.22 5,257.777 200 5,360
Less: Loss 20 - - 18 - -
182 5,257.777 182 5,360
Calculation of Variances
1. Material Cost Variance = (SQ x SP – AQ x AP)
A = (80.888 x ₹ 20) – (90 x ₹ 18)
B = (121.333 x ₹ 30) – (110 x ₹ 34)
= (5,257.78 – 5,360) = ₹ 102.22 (A)
2. Material Price Variance= (SP – AP) × AQ
Material A = (₹ 20 – ₹ 18) × 90 = ₹ 180.00 (F)
Material B = (₹ 30 – ₹ 34)) × 110 = ₹ 440.00 (A)
MPV = ₹ 260.00 (A)
3. Material Usage Variance = (Std. Quantity for actual output – Actual Quantity)
× Std. Price
182
Material A = (80 x - 90) x ₹ 20 = ₹ 182.22 (A)
180
182
Material B = (120 x - 100) x ₹ 30 = ₹ 340.00 (F)
180
MUV = ₹ 157.78 (F)

Material Mix Variance Material Yield Variance

(RAQ – AQ) x SP (SQ – RAQ) x SP
A = (80 – 90) x ₹ 20 = ₹ 200 (A) A = (80.88 – 80) x ₹ 20 = ₹ 17.777 (F)
B = (120 – 110) x ₹ 30 = ₹ 300 (F) B = (121.33 – 120) x ₹ 30 = ₹ 40 (F)

CA NOTE HUB 465

 PROBLEM – 2A:
The standard mix to produce one unit of a product is as follows:
Material X 60 units @ ₹15 per unit 900
Material Y 80 units @ ₹20 per unit 1,600
Material Z 100 units @ ₹25 per unit 2,500
240 units 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 units 52,225
CALCULATE all material variances.
SOLUTION:
Material Standard for 10 units Actual for 10 units
Qty. Rate Amount Qty. Rate Amount
Units (₹) (₹) units (₹) (₹)
X 600 15 9,000 640 17.50 11,200
Y 800 20 16,000 950 18.00 17,100
Z 1,000 25 25,000 870 27.50 23,925
Total 2,400 50,000 2,460 52,225
1. Material Cost Variance = (SQ x SP – AQ x AP)
= ₹ 50,000 – ₹ 52,225 = MCV = ₹ 2,225 (A)
2. Material Price Variance = (Standard Price – Actual Price) × Actual Qty
Material X = (₹ 15 – ₹ 17.50) × 640 = ₹ 1,600(A)
Material Y = (₹ 20 – ₹ 18) × 950 = ₹ 1,900 (F)
Material Z = (₹ 25 – ₹ 27.50) × 870 = ₹ 2,175 (A)
MPV = ₹ 1,875 (A)
3. Material Usage Variance= (Standard Qty. – Actual Qty.) × Standard Price
Material X = (600 – 640) × ₹ 15 = ₹ 600 (A)
Material Y = (800 – 950) × ₹ 20 = ₹ 3,000 (A)
Material Z = (1,000 – 870) × ₹ 25 = ₹ 3,250 (F)
MUV = ₹ 350 (A)
Check MCV = MPV + MUV

CA NOTE HUB 466

 ₹ 2,225 (A) = ₹ 1,875 (A) + ₹ 350 (A)
4. Material Mix Variance = (Revised Standard Qty. – Actual Qty.) × Standard Price
Material X = (615 * – 640) × 15 = ₹ 375 (A)
Material Y = (820 * – 950) × 20 = ₹ 2,600(A)
Material Z = (1,025 – 870) × 25 = ₹ 3,875 (F)
MMV = ₹ 900 (F)
*Revised Standard Quantity (RSQ) is calculated as follows:
2460
Material X = x 600 = 615 units
2400
2460
Material Y = x 800 = 820 units
2400
2460
Material Z = x 1,000 = 1,025 units
2400
5. Material Yield Variance = (Standard Qty - Revised Standard Qty.) × Standard Price
Material X = (600 - 615) × ₹ 15 = ₹ 225 (A)
Material Y = (800 - 820) × ₹ 20 = ₹ 400 (A)
Material Z = (1,000 - 1,025) × ₹ 25 = ₹ 625 (A)
MYV = ₹ 1,250 (A)
Check
MUV = MMV + MYV (Or MRUV)
₹ 350 (A) = ₹ 900 (F) + ₹ 1,250 (A)
or
MCV = MPV + MMV + MYV (Or MRUV)
₹ 2,225 (A) = ₹ 1,875 (A) + ₹ 900 (F) + ₹ 1,250 (A)

PROBLEM – 2B:
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 the month of April, 60 batches
were prepared to produce an output of 5,600 kg. of NXE. The standard and actual
particulars for the month of April, are as follows:
Raw Standard Actual Quantity of Raw
Materials Mix Price per kg. Mix Price per Kg. Materials
Purchased
(%) (₹) (%) (₹) (Kg.)
A 50 20 60 21 5,000
B 30 10 20 8 2,000

CA NOTE HUB 467

 C 20 5 20 6 1,200
You are required to CALCULATE:
i. Material Price variance
ii. Material Usage Variance
SOLUTION:
Actual material used = 125 kg × 60 = 7,500 kg.
Actual cost of actual material used (AQ × AR) (₹)
A (60%) 4,500 kg × ₹ 21 94,500
B (20%) 1,500 kg × ₹ 8 12,000
C (20%) 1,500 kg × ₹ 6 9,000
7,500 1,15,500
Standard cost of actual material used (AQ × SR) (₹)
A 4,500 kg × ₹ 20 90,000
B 1,500 kg × ₹ 10 15,000
C 1,500 kg × ₹ 5 7,500
7,500 1,12,500
Standard cost of material, if it had been used in standard proportion
(Standard Proportion *Standard Rate) (₹)
A (50%) 3,750 kg × ₹ 20 75,000
B (30%) 2,250 kg × ₹ 10 22,500
C (20%) 1,500 kg × ₹ 5 7,500
7,500 1,05,000
Standard cost of production (SQ for actual production * SR)
Standard cost of output for 100 kg: (₹)
A 62.50 kg x ₹ 20 1,250
B 37.50 kg x ₹ 10 375
C 25.00 kg x ₹ 5 125
125.00 1,750
Standard cost for output of 5,600 kg.
1,750
= kg. x 5,600 kg. = ₹ 98,000
100
Material Price Variance = Standard cost of actual material used – Actual cost of actual material
used = ₹ 1,12,500 – ₹ 1,15,500 = ₹ 3,000 (A)

Material Usage Variance = Standard cost of production – Standard cost of actual material
used = ₹ 98,000 – ₹ 1,12,500 = ₹ 14,500 (A)

CA NOTE HUB 468

Note: Material Price Variance can be calculated at the time of purchase as well. In that case,
material variance will be as follows:
Actual cost of material purchased
A 5,000 kg × ₹ 21 = ₹ 1,05,000
B 2,000 kg × ₹ 8 = ₹ 16,000
C 1,200 kg × ₹ 6 = ₹ 7,200
₹ 1,28,200
Standard cost of material purchased
A 5,000 kg × ₹ 20 = ₹ 1,00,000
B 2,000 kg × ₹ 10 = ₹ 20,000
C 1,200 kg × ₹ 5 = ₹ 6,000
₹ 1,26,000
Material Price variance (if calculated at the time of purchase)
= Standard cost of actual material used – Actual cost of actual material used
= ₹ 1,26,000 – ₹ 1,28,200 = ₹ 2,200 (A)

PROBLEM – 2C: (RTP MAY 24)

EML operates in coal mining through open cast mining method. Explosives and detonators
are used for excavation of coal from the mines. The following are the details of standard
quantity of explosives materials used for mining:
Particulars Rate (₹) Standard Qty. for Standard Qty. for
Iron ore Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic- meter

Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic- meter
The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be
removed to get one tonne of coal).
During the month of December 2023, the company produces 20,000 tonnes of coal and
58,000 cubic- meter of OB. The quantity of explosive materials used and paid for the
month is as below:
Material Quantity Amount (₹)
SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200
Explosive suppliers are paid for the explosive materials on the basis of performance of
the explosives which is termed as powder factor. One of the suppliers has presented

CA NOTE HUB 469

 their bill for explosive supplied for the month of December 2023. You being a bill passing
officer of EML is required to COMPUTE the material price variance, material quantity
variance and material cost variance.
SOLUTION:
Workings:
1. Calculation of Standard Qty of Explosives and Detonators for actual output:
Particulars Coal Overburden Total
(OB)
SME:
A Actual Output 20,000 tonne 58,000 M3
B Standard Qty per unit 2.4 kg Per 1.9 kg Per M3
tonne
C Standard Qty for actual production 48,000 kg 1,10,200 kg 1,58,200
[A × B] kg
Detonators:
D Standard Qty per unit 2 pcs/ tonne 2 pcs/ M3
E Standard Qty for actual production 40,000 pcs 1,16,000 1,56,000
[A × D] pcs pcs

2. Calculation of Actual Price per unit of materials:

Material Quantity [A] Amount (₹) [B] Rate (₹) [C = B÷A]
SME 1,67,200 kg 63,53,600 38.00
Detonators 1,18,400 pcs 24,27,200 20.50

Computation of material price variance:

Material Price Variance = Actual Qty × (Standard Price - Actual Price)
SME = 1,67,200 kg. × (₹ 40 – ₹ 38) = ₹ 3,34,400 (F)
Detonators = 1,18,400 pcs × (₹ 20 – ₹ 20.5) = ₹ 59,200 (A)
Total = ₹ 2,75,200 (F)
Computation of material quantity variance:
Material Qty. Variance = Standard Price × (Standard Qty for actual output – Actual
Qty.)
SME = ₹ 40 × (1,58,200 kg. - 1,67,200 kg.) = ₹ 3,60,000 (A)
Detonators = ₹ 20 × (1,56,000 pcs -1,18,400 pcs) = ₹ 7,52,000 (F)
Total = ₹ 3,92,000 (F)
Computation of material cost variance:
Material cost variance = Standard cost – Actual Cost

CA NOTE HUB 470

 Or, (Standard Price × Standard Qty) – (Actual Price × Actual Qty.)
SME = (₹ 40 × 1,58,200 kg) – (₹ 38 × 1,67,200 kg.)
= ₹ 63,28,000 – ₹ 63,53,600 = ₹ 25,600 (A)
Detonators = (₹ 20 × 1,56,000 pcs) – (₹ 20.50 × 1,18,400 pcs)
= ₹ 31,20,000 – ₹ 24,27,200 = 6,92,800 (F)
Total = ₹ 6,67,200 (F)

PROBLEM – 2D: (RTP JAN 25)

Banku manufacturing Ltd. is engaged in producing a item named ‘ABC’. It produces ‘ABC’
in a batch of 100 kgs. Standard material inputs required for 100 kgs. of ‘ABC’ are as
below:
Material Quantity (in kgs.) Rate per kg. (in ₹)
A 50 110
B 30 320
C 30 460
During the month of April, 2024, actual production was 50,000 kgs. of ‘ABC’ for which
the actual quantities of material used for a batch and the prices paid thereof are as
under:
Material Quantity (in kgs.) Rate per kg. (in ₹)
A 60 115
B 25 330
C 20 405
You are required to CALCULATE the following variances based on the above given
information for the month of April, 2024 for Banku manufacturing Ltd.:
(i) Material Cost Variance;
(ii) Material Price Variance;
(iii) Material Usage Variance;
(iv) Material Mix Variance;
(v) Material Yield Variance.

CA NOTE HUB 471

SOLUTION:
Material SQ * × SP AQ ** × SP AQ ** × AP RSQ *** × SP
(₹) (₹) (₹) (₹)
A 27,50,000 33,00,000 34,50,000 26,24,600
(25,000 kg. (30,000 kg. (30,000 kg. (23,860 kg.
× ₹ 110) × ₹ 110) × ₹ 115) × ₹ 110)
B 48,00,000 40,00,000 41,25,000 45,82,400
(15,000 kg. (12,500 kg. (12,500 kg. (14,320 kg.
× ₹ 320) × ₹ 320) × ₹ 320) × ₹ 320)
C 69,00,000 46,00,000 40,50,000 65,87,200
(15,000 kg. × (10,000 kg. (10,000 kg. (14,320 kg.
₹ 460) × ₹ 460) × ₹ 405) × ₹ 460)
Total 1,44,50,000 1,19,00,000 1,16,25,000 1,37,94,200

* Standard Quantity of materials for actual output:

A 50 kgs
= x 50,000 kgs = 25,000 kgs
100 kgs
B 30 kgs
= x 50,000 kgs = 15,000 kgs
100 kgs
C 30 kgs
= x 50,000 kgs = 15,000 kgs
100 kgs

** Actual Quantity of Material used for actual output:

A 60 kgs
= x 50,000 kgs = 30,000 kgs
100 kgs
B 25 kgs
= x 50,000 kgs = 12,500 kgs
100 kgs
C 20 kgs
= x 50,000 kgs = 10,000 kgs
100 kgs

***Revised Standard Quantity (RSQ):

A 50 kgs
= x 52,500 kgs = 23,860 kgs
110 kgs
B 30 kgs
= x 52,500 kgs = 14,320 kgs
110 kgs
C 30 kgs
= x 52,500 kgs = 14,320 kgs
110 kgs

CA NOTE HUB 472

(i) Material Cost Variance = (SQ × SP) – (AQ × AP)
A = ₹ 27,50,000 - ₹ 34,50,000 = ₹ 7,00,000 (A)
B = ₹ 48,00,000 - ₹ 41,25,000 = ₹ 6,75,000 (F)
C = ₹ 69,00,000 - ₹ 40,50,000 = ₹ 28,50,000 (F)
= ₹ 28,25,000 (F)

(ii) Material Price Variance = Actual Quantity (Standard Price – Actual Price)
= (AQ × SP) – (AQ × AP)
A = ₹ 33,00,000 - ₹ 34,50,000 = ₹ 1,50,000 (A)
B = ₹ 40,00,000 - ₹ 41,25,000 = ₹ 1,25,000 (A)
C = ₹ 46,00,000 - ₹ 40,50,000 = ₹ 5,50,000 (F)
= ₹ 2,75,000 (F)

(iii) Material Usage Variance = Standard Price (Standard Qty. – Actual Qty.)
Or = (SQ × SP) – (AQ × SP)
A = ₹ 27,50,000 - ₹ 33,00,000 = ₹ 5,50,000 (A)
B = ₹ 48,00,000 - ₹ 40,00,000 = ₹ 8,00,000 (F)
C = ₹ 69,00,000 - ₹ 46,00,000 = ₹ 23,00,000 (F)
= ₹ 25,50,000 (F)

(iv) Material Mix Variance = Standard Price (Revised Standard Qty. – Actual Qty.)
Or = (RSQ × SP) – (AQ × SP)
A = ₹ 26,24,600 - ₹ 33,00,000 = ₹ 6,75,400 (A)
B = ₹ 45,82,400 - ₹ 40,00,000 = ₹ 5,82,400 (F)
C = ₹ 65,87,200 - ₹ 46,00,000 = ₹ 19,87,200 (F)
= ₹ 18,94,200 (F)

(v) Material Yield Variance = Standard Price (Standard Qty. – Revised Standard Qty.)
Or = (SQ × SP) – (RSQ × SP)
A = ₹ 27,50,000 - ₹ 26,24,600 = ₹ 1,25,400 (F)
B = ₹ 48,00,000 - ₹ 45,82,400 = ₹ 2,17,600 (F)
C = ₹ 69,00,000 - ₹ 65,87,200 = ₹ 3,12,800 (F)
= ₹ 6,55,800 (F)

CA NOTE HUB 473

 PROBLEM – 3:
ABC Ltd. produces an article by lending two basic raw materials. It operates a standard
costing system and the following standards have been set for raw materials:
Material Standard mix Standard price (₹ per kg)
A 40% 4
B 60% 3
The standard loss in processing is 15%. During April, the company produced 1,700 kgs.
of finished output. The position of stock and purchases for the month of April are as
under:
Material Stock on Stock on Purchased during April 2021
01.04.20x1 30.04.20x1
(Kg.) (Kg.) (Kg.) (₹)
A 35 5 800 3,400
B 40 50 1,200 3,000
Opening stock of material is valued at standard price. CALCULATE the following
variances:
i. Material price variance
ii. Material usage variance
iii. Material yield variance Material mix variance
iv. Total Material cost variance
SOLUTION:
Types of material Standard Actual
Qty. Rate Amount Qty. Rate (₹) Amount (₹)
(Kg.) (₹) (₹) (Kg.)
A @ 40% 800 4 3,200 35 4 140.00
795 4.25 3,378.75
B @ 60% 1200 3 3,600 40 3 120.00
1,150 2.50 2,875.00
Input 2,000 6,800 2,020 6,513.75
Loss @ 15% (300) (320)
Output 1700 6800 1700 6513.75
(i) Material Cost Variance
= (SQ × SP) – (AQ × AP) = ₹ 6,800 – ₹ 6,513.75 = 286.25 (F)

CA NOTE HUB 474

(ii) Material price variance
= (SP – AP) x AQ
Material A: = (₹ 4 – ₹ 4.25) x 795 kg = ₹ 198.75 (A)
Material B: = (₹ 3 – ₹ 2.50) x 1,150 kg. = ₹ 575 (F)
Total = ₹ 198.75 (A) + ₹ 575 (F) = ₹ 376.25(F)
(iii) Material usage variance
= (SQ – AQ) x SP
Material A = (800 – 830) × ₹ 4 = ₹ 120 (A)
Material B = (1,200 – 1,190) × ₹ 3 = ₹ 30 (F)
₹ 90 (A)
(iv) Material mix variance
= (RAQ – AQ) x SP
Material A = (808 – 830) × ₹ 4 = 88 (A)
Material B = (1,212 – 1,190) × ₹ 3 = 66 (F)
₹ 22 (A)
(v) Material yield variance
= (SQ – RAQ) x SP
Material A = (800 – 808) × ₹ 4 = ₹ 32 (A)
Material B = (1,200 – 1,212) × ₹ 3 = ₹ 36 (A)
₹ 68 (A)

PROBLEM – 4
The standard and actual figures of a firm are as under:
Standard time for the job 1,000 hours
Standard rate per hour ₹ 50
Actual time taken 900 hours
Actual wages paid ₹ 36,000
CALCULATE variances.
SOLUTION:
SH = 1000 Hours
SR = ₹ 50
AH = 900 Hours
AR = ₹ 36,000 ÷ 900 hours = ₹ 40

CA NOTE HUB 475

Variances
(i) Total labour cost variance = (SH x SR) – (AH X AR) = {(₹ 50 × 1,000 hours) – ₹ 36,000}
= (₹ 50,000 – ₹ 36,000) = ₹ 14,000 (F)
(ii) Labour Rate variance = (SR – AR) x AH = 900 hours (₹ 50 – ₹ 40) = ₹ 9,000 (F)
(iii) Efficiency variance = (SH – AH) x SR
= ₹ 50 (1,000 Hours – 900 Hours) = ₹ 5,000 (F)

PROBLEM – 5:
The standard output of product ‘EXE’ is 25 units per hour in manufacturing department
of a company employing 100 workers. The standard wage rate per labour hour is ₹6.
In a 42 hours week, the department produced 1,040 units of ‘EXE’ despite 5% of the
time paid being lost due to an abnormal reason. The hourly wages actually paid were
₹6.20, ₹6 and ₹5.70 respectively to 10, 30 and 60 of the workers.
CALCULATE relevant labour variances.
SOLUTION:
Working Notes:
1. Calculation of standard man hours
When 100 worker works for 1 Hour, then the std. output is 25 units.
100 Hour
Standard man hour per unit = = 4 Hours
25 units
2. Calculation of standard man hours for actual output
Total standard man hours = 1,040 units × 4 hours = 4,160 hours
Standard for actual Actual
Hours Rate Amount No. of Actual Idle Actual Rate Amount
(₹) (₹) workers hours time Hours (₹) paid
paid hours Worked (₹)
4,160 6 24,960 10 420 21 399 6.20 2,604

30 1,260 63 1,197 6.00 7,560

60 2,520 126 2,394 5.70 14,364

4,160 6 24,960 100 4,200 210 3,990 24,528

1. Labour cost variance

(SH x SR) – (AH X AR) = ₹ 24,960 – ₹ 24,528 = ₹ 432 (F)
2. Labour rate variance
= (SR – AR) × AH Paid
= (₹ 6 – ₹ 6.20) × 420 = 84 (A)

CA NOTE HUB 476

 = (₹ 6 - ₹ 6) × 1260 = NIL
= (₹ 6 - ₹ 5.70) × 2,520 = 756 (F)
= 672 (F)
3. Labour efficiency variance
= (SH – AH) × SR
= (4,160 – 3,990) × ₹ 6 = 1,020 (F)

4. Labour Idle time variance

= Idle Hours × SR
= 210 × ₹ 6 = 1,260 (A)

PROBLEM – 6:
Labour type Std hrs per unit Std rate Act hrs Act rate
Un Skilled 2 hrs ₹ 10 22,000 hrs ₹ 11
Skilled 1 hr ₹ 20 8,000 hrs ₹ 22
Workers produced 11000 units. Find out Labour variances.
SOLUTION:
SH SR AH AR
Unskilled A 22000 Hours ₹ 10 22000 Hours ₹ 11
(11000 x 2)
Skilled B 11000 Hours ₹ 20 8000 Hours ₹ 22
(11000 x 1)
Labour cost variance
= (SH x SR) – (AH – AR)
Unskilled = 22000 x ₹ 10 – 22000 x ₹ 11
= ₹ 22000 – ₹ 242000 = ₹ 22000 (A)
Skilled = (11000 H x ₹ 20) – (8000 H x ₹ 22)
= ₹ 220000 – ₹ 176000 = ₹ 44000 (F)
Total = ₹ 22000 (F)

Labour rate variance Labour efficiency Variance

(SR – AR) x Actual Hours (SH – AH) x Standard rate
Un Skilled = (₹ 10 – ₹ 11) x 22000 Hours Un Skilled = (22000 H – 22000 H) x ₹ 10
= ₹ 22000 (A) =0

CA NOTE HUB 477

 skilled = (20 – 22) x 8000 Hours skilled = (11000 H – 8000 H) x ₹ 20
= ₹ 16000 (A) = (3000 H x ₹ 20)
= ₹ 60000 (F)

Labour Gang variance Labour yield Variance

(RAH – AH) x Standard Rate (SH – RAH) x Standard rate
Un Skilled = (20000 – 22000) x ₹ 10 Un Skilled = (22000 H – 20000 H) x
= ₹ 20000 (A) ₹ 10
= 20000 (F)
skilled = (10000 – 8000) x ₹ 20 skilled = (11000 H – 10000 H) x ₹ 20
= ₹ 40000 (F) = 20000 (F)
Total ₹ 20000 (F) Total ₹ 40000 (F)

PROBLEM – 6A:
The standard labour employment and the actual labour engaged in a week for a job
are as under:
Skilled Semi-skilled Unskilled
workers workers workers
Standard no. of workers in the gang 32 12 6
Actual no. of workers employed 28 18 4
Standard wage rate per hour 3 2 1
Actual wage rate per hour 4 3 2
During the 40 hours working week, the gang produced 1,800 standard labour hours of
work. CALCULATE:
i. Labour Cost Variance
ii. Labour Rate Variance
iii. Labour Mix Variance
iv. Labour Efficiency Variance
v. Labour Yield Variance
SOLUTION:
Workings:
1. Standard hours (SH) for actual hours produced are calculated as below:
1,800
Skilled = x 1,280 = 1,152 Hours
2,000

CA NOTE HUB 478

 1,800
Semi-Skilled = x 480 = 4322 Hours
2,000
1,800
Unskilled = x 240 = 216 Hours
2,000
2. Actual hours (AH) paid are calculated as below:
Category No. of Worker Hours in a week Total Hours
Skilled 28 40 1,120
Semi-skilled 18 40 720
Unskilled 4 40 160
2,000

3. For 40 hours week total Revised standard hours (RSH) will be calculated as below:
Category No. of Worker Hours in a week Total Hours
Skilled 32 40 1,280
Semi-skilled 12 40 480
Unskilled 6 40 240
2,000

Calculations
Category of SH × SR AH × SR AH × AR RSH × SR
workers
Skilled 1,152 × 3 1,120 × 3 1,120 × 4 1,280 × 3
= 3,456 = 3,360 = 4,480 = 3,840
Semi-skilled 432 × 2 = 864 720 × 2 720 × 3 480 × 2 = 960
= 1,440 = 2,160
Unskilled 216 × 1 = 216 160 × 1 = 160 160 × 2 = 320 240 × 1 = 240
Total ₹ 4,536 ₹ 4,960 ₹ 6,960 ₹ 5,040

(i) Labour Cost Variance = Standard Cost for hours worked – Actual cost paid
= (SH × SR) – (AH × AR)
= ₹ 4,536 – ₹ 6,960 = ₹ 2,424 (A)
(ii) Labour Rate Variance = AH (SR – AR) or (AH × SR) – (AH × AR)
Skilled = ₹ 3,360 – ₹ 4,480 = ₹ 1,120 (A)
Semi-skilled = ₹ 1,440 – ₹ 2,160 = ₹ 720 (A)
Unskilled = 160 - 320 = ₹ 160 (A)
2,000 (A)
(iii) Labour Efficiency Variance = SR (SH – AH) or (SR × SH) – (SR × AH)
Skilled = ₹ 3,456 – ₹ 3,360 = ₹ 96 (F)

CA NOTE HUB 479

 Semi-skilled = ₹ 864 – ₹ 1,440 = ₹ 576 (A)
Unskilled = ₹ 216 – ₹ 160 = ₹ 56 (F)
₹ 424 (A)
(iv) Labour Mix Variance = SR (RSH – AH) or (SR × RSH) – (SR × AH)
Skilled = ₹ 3,840 – ₹ 3,360 = ₹ 480 (F)
Semi-skilled = ₹ 960 – ₹ 1,440 = ₹ 480 (A)
Unskilled = ₹ 240 – ₹ 160 = ₹ 80 (F)
= ₹ 80 (F)
(v) Labour Yield Variance = SR (SH – RSH) or (SR × SH – SR × RSH)
Skilled = ₹ 3,456 - ₹ 3,840 = ₹ 384 (A)
Semi-skilled = ₹ 864 – ₹ 960 = ₹ 96 (A)
Unskilled = ₹ 216 – ₹ 240 = ₹ 24 (A) ₹ 504 (A)
Check
(i) LCV = LRV + LEV
₹ 2,424 (A) = ₹ 2,000 (A) + ₹ 424 (A)
(ii) LEV = LMV + LYV
₹ 424 (A) = ₹ 80 (F) + ₹ 504 (A)

PROBLEM – 7:
NPX Ltd. uses standard costing system for the manufacturing of its product X. The
following is the budget data given in relation to labour hours for the 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, 20x1, a total of 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:

CA NOTE HUB 480

 Skilled 500
Semi- Skilled 700
Unskilled 800
Total 2,000
CALCULATE:
1. Labour Variances.
2. 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.
SOLUTION:
Working Notes:
Standard for actual Actual
Hours Rate Amount (₹) Hours Paid Rate Amount (₹)
(₹) (₹)
Skilled 20,000 6 1,20,000 18,000 7 1,26,000
Semi- skilled 30,000 4 1,20,000 33,000 3.5 1,15,500
Unskilled 50,000 3 1,50,000 58,000 4 2,32,000
1,00,000 3,90,000 1,09,000 4,73,500

Idle Hours Hours worked

Skilled 500 17,500
Semi-skilled 700 32,300
Unskilled 800 57,200
2,000 1,07,000
(a) (i) Labour Cost Variance= (SH × SR – AH × AR)
Skilled (20,000 × ₹ 6 – 18,000 × ₹ 7) = ₹ 6,000 (A)
Semi-Skilled (30,000 × ₹ 4 – 33,000 × ₹ 3.5) = ₹ 4,500 (F)
Unskilled (50,000 × ₹ 3 – 58,000 × ₹ 4) = ₹ 82,000 (A)
Total ₹ 83,500 (A)
(ii) Labour Rate Variance = (SR – AR) × AHPaid
Skilled (₹ 6 – ₹ 7) × 18,000 = ₹ 18,000 (A)
Semi-Skilled (₹ 4 – ₹ 3.5) × 33,000 = ₹ 16,500 (F)
Unskilled (₹ 3 – ₹ 4) × 58,000 = ₹ 58,000 (A)
Total ₹ 59,500 (A)

CA NOTE HUB 481

(iii) Labour Efficiency Variance = (SH – AH) × SR
Skilled (20,000 H – 17,500 H) × ₹ 6 = ₹ 15,000 (F)
Semi- Skilled (30,000 H – 32,300 H) × ₹ 4 = ₹ 9,200 (A)
Unskilled (50,000 H – 57,200 H) × ₹ 3 = ₹ 21,600 (A)
Total ₹ 15,800 (A)
Labour Idle Time Variance = (Idle Hours × SR)
Skilled 500 H × ₹ 6 = ₹ 3,000 (A)
Semi- Skilled 700 H × ₹ 4 = ₹ 2,800 (A)
Unskilled 800 H × ₹ 3 = ₹ 2,400 (A)
Total ₹ 8,200 (A)

(iv) Labour Mix Variance = (RAH – AH Worked) × SR

Standard Hours
Revised Actual Hours (RAH) = × Total Actual Hours
Total Standard Hours
20,000 H
Skilled ( × 1,07,000 H - 17,500 H) × ₹ 6 = ₹ 23,400 (F)
1,00,000 H
30,000 H
Semi-Skilled ( × 1,07,000 H - 32,300 H) × ₹ 4 = ₹ 800 (A)
1,00,000 H
50,000 H
Un Skilled ( × 1,07,000 H - 57,200 H) × ₹ 3 = ₹ 11,100 (A)
1,00,000 H
Total ₹ 11,500 (F)

(v) Labour Yield Variance = (SH – RAH) × SR

20,000 H
Skilled (20,000 H - × 1,07,000 H) × ₹ 6 = ₹ 8,400 (A)
1,00,000 H
30,000 H
Semi-Skilled (30,000 H - × 1,07,000 H) × ₹ 4 = ₹ 8,400 (A)
1,00,000 H
50,000 H
Un Skilled (50,000 H - × 1,07,000 H) × ₹ 3 = ₹ 10,500 (A)
1,00,000 H
Total ₹ 27,300 (A)

(b) Labour Rate Variance = (SR – AR) × AHPaid

Skilled (₹ 6 – ₹ 5.5) × 5,000 H ₹ 2500 (F)
(₹ 6 – ₹ 7) × 13,000 H ₹ 13000 (A)
₹ 10,500 (A)
Semi- Skilled (₹ 4 – ₹ 3.5) × 33,000 H ₹ 16,500 (F)
Unskilled (₹ 3 – ₹ 4) × 58,000 H ₹ 58,000 (A)

Total ₹ 52,000 (A)

CA NOTE HUB 482

PROBLEM – 8: (PYP SEP 24)
BG company produces a standard product and sold in a packet of 10 kg. The standard
cost card per pack is as follows:
Direct Material:
A - 4 kg @ ₹ 50 per kg
B - 8 kg @ ₹ 40 per kg Direct Labour:
6 hours @ ₹ 20 per hour
The company manufactured and sold 1,600 packets during the month. Actual data for
material and labour recorded as under.
Direct Material:
A - 7,000 kg @ ₹ 40
B - 12,500 kg @ ₹ 45
Labour hours paid for two different categories of workers:
Skilled 6,000 hours @ ₹ 25
Semi-skilled 4,000 hours @ ₹ 20
5% of the time paid was lost due to an abnormal reason.
Calculate the following variances indicating their nature (Favourable or Adverse):
(i) Material cost variances
(ii) Material price variances
(iii) Material usage variances
(iv) Material mix variances
(v) Material yield variances
(vi) Labour cost variances
(vii) Labour rate variances
(viii) Labour efficiency variances
(ix)Labour Idle time variances

SOLUTION:

standard Actual
Qty (Kg) Price (₹) Amount (₹) Qty (Kg) Price (₹) Amount
[SQ] [SP] [SQ x SP] [AQ] [AP] (₹)
[AQ x AP]
A 6,400 50 3,20,000 7,000 40 2,80,000
B 12,800 40 5,12,000 12,500 45 5,62,500
19,200 8,32,000 19,500 8,42,500

CA NOTE HUB 483

Material Cost Variance = (SQ x SP – AQ x AP)
= ₹ 8,32,000 – ₹ 8,42,500 = ₹ 10,500 (A)
Material Price Variance = (SP – AP) x AQ
A (₹ 50 – ₹ 40) × 7,000 Kg = ₹ 70,000 (F)
B (₹ 40 – ₹ 45) × 12,500 Kg = ₹ 62,500 (A)
₹ 7,500 (F)

Material Usage Variance = SP x (SQ – AQ)

A ₹ 50 × (6,400 Kg – 7000 Kg) = ₹ 30,000 (A)
B ₹ 40 × (12,800 Kg – 12,500 Kg) = ₹ 12,000 (F)
₹ 18,000 (A)

Material Mix Variance = (RSQ - AQ) x SP

A = (6,500 Kg – 7,000 Kg) x ₹ 50 = ₹ 25,000 (A)
B = (13,000 Kg – 12,500 Kg) x ₹ 40 = ₹ 20,000 (F)
₹ 5,000 (A)

Material Yield Variance = (SQ – RSQ) x SP

A = (6,400 Kg – 6,500 Kg) x ₹ 50 = ₹ 5,000 (A)
B = (12,800 Kg – 13,000 Kg) x ₹ 40 = ₹ 8,000 (A)
₹ 13,000 (A)
Labour
Standard Hours for actual Production = 6 Hours x 1,600 Units = 9,600 Hours
Labour Cost Variance = (SH x SR – AH x AR)
= 9,600 Hours x ₹ 20 – {(6,000 Hours x ₹ 25) + (4,000 Hours x ₹ 20)}
= ₹ 1,92,000 – ₹ 2,30,000 = ₹ 38,000 (A)
Labour Rate Variance = (SR – AR) x AH
= (₹ 20 - ₹ 25) x 6,000 Hours = ₹ 30,000 (A)
Efficiency Variance = (SH – AH worked) x SR
= (9,600 hrs – 9,500 hrs) x ₹ 20 = ₹ 2,000 (F)
Idle time Variance = Idle Hours X SR
= (AH – AH#) × SR
= (10,000 hours – 9,500 hours) x ₹ 20 = ₹ 10,000 (A)
AH# refers to Actual Hours Worked

CA NOTE HUB 484

 PROBLEM – 8A:
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 hours @ ₹ 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 as follows:
12,500 units of A at ₹ 4.40 per unit 18,000 units of B at ₹ 2.80 per unit 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
i. Materials price variance & Usage variance
ii. Labour rate &Efficiency variances.
SOLUTION:
For Material Cost Variances
SQ × SP AQ × AP AQ × SP
A 12,000 × 4 = ₹ 48,000 12,500 × 4.40 = ₹ 55,000 12,500 × 4
= ₹ 50,000
B 18,000 × 3 = ₹ 54,000 18,000 × 2.80 = ₹ 50,400 18,000 × 3
= ₹ 54,000
C 90,000 × 1 = ₹ 90,000 88,500 × 1.20 = ₹ 1,06,200 88,500 × 1
= ₹ 88,500
Total ₹ 1,92,000 ₹ 2,11,600 ₹ 1,92,500

Variances:
Material Price Variance = Actual quantity (Standard price – Actual price)
Or, = (AQ × SP) – (AQ × AP)
Or, = ₹ 1,92,500 – ₹ 2,11,600
= ₹ 19,100 (A)

CA NOTE HUB 485

Material Usage Variance = Standard Price (Standard Quantity – Actual Quantity)
Or, = (SP × SQ) – (SP × AQ)
Or, = ₹ 1,92,000 – ₹ 1,92,500 = ₹ 500 (A)
For Labour Cost Variance :
SH × SR AH × AR AH × SR
Labour (6,000 H × 3) × ₹ 8 2,500 H × ₹ 12 = ₹ 30,000 17,500 H × ₹ 8
= 1,44,000 15,000 H × ₹ 8 = ₹ 1,20,000 = ₹ 1,40,000
Total ₹ 1,44,000 ₹ 1,50,000 ₹ 1,40,000
Variances:
Labour Rate Variance: Actual Hours (Standard Rate – Actual Rate)
Or, = (AH × SR) – (AH × AR)
Or, = ₹ 1,40,000 – ₹ 1,50,000
= ₹ 10,000 (A)
Labour Efficiency Variance: Standard Rate (Standard Hours – Actual Hours)
Or, = (SR × SH) – (SR × AH)
Or, = ₹ 1,44,000 – ₹ 1,40,000
= ₹ 4,000 (F)

PROBLEM – 8B:
The following information is available from the cost records of Novell & Co. for the
month of March 20x1:
Materials purchased 20,000 units @ ₹88,000
Materials consumed 19,000 units
Actual wages paid for 4,950 H ours ₹ 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
You are required to CALCULATE relevant material and labour variance for the month.
SOLUTION:
Material variances
1. Material cost variance
= (Standard qty for actual output* × Standard price) – (Actual qty. × Actual price)

CA NOTE HUB 486

 = (18,000 H × ₹ 4) – (19,000 H × ₹ 4.40)
= ₹ 72,000 – ₹ 83,600 = ₹ 11,600 (A)
* Standard qty for actual output = 1,800 × 10 = 18,000 units
2. Material price variance
= (Standard price – Actual price) × Actual qty.
= (₹ 4 - ₹ 4.40) × 19,000 H = 0.40 × 19,000 H = ₹ 7,600 (A)
3. Material usage variance
= (Standard qty. – Actual qty.) × Standard price
= (18,000 H – 19,000 H) × 4 = 1,000 × 4 = ₹ 4,000 (A)
Labour variances
1. Labour cost variance
= (Standard Hours for actual output* × Std. price) – Actual cost
= (4,500 H × ₹ 4) – ₹ 24,750
= ₹ 18,000 – ₹ 24,750 = ₹ 6,750 (A)
*Standard Hours for actual output = 1,800 × 2.5 = 4,500 Hours
2. Labour rate variance
= (Standard rate – Actual rate) × Actual Hours
= (₹ 4 – ₹ 5) × 4,950 Hours
= ₹ 4,950 (A)
3. Labour efficiency variance
= (Standard Hours for actual output – Actual Hours) × Standard rate
= (4,500 H – 4,950 H) × ₹ 4 = ₹ 1,800 (A)

PROBLEM – 9:
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

CA NOTE HUB 487

SOLUTION:
SH = 11800 Hours (5900 Units x 2 Hours)
SR = ₹ 10 Per Hour (₹ 120000 ÷ 6000 Units x 2 Hour)
AH = 11600 Hours
AR = ₹ 10.5172 (₹ 122000 ÷ 11600 Hours)
Variable Overhead Cost Variance:
= (SH x SR) – (AH x SR)
= (11800 Hours x ₹ 10) – (11600 Hours x ₹ 10.5172)
= ₹ 118000 - ₹ 122000 = ₹ 4000 (A)
Variable Overhead Expenditure Variance:
= (SR – AR) x AH
= (₹ 10 - ₹ 10.5172) x 11600 Hours = ₹ 6000 (A)
Variable Overhead Efficiency Variance:
= (SH – AH) x SR
= (11800 Hours - 11600 Hours) x ₹ 10 = ₹ 2000 (F)

PROBLEM – 9A:
The following data for Pijee Ltd. is given:
Budget Actual
Production (in units) 400 360
Man hours to produce above 8,000 7,000
Variable overheads (in ₹) 10,000 9,150
CALCULATE relevant Variable overhead variances.
SOLUTION:
Working Notes:
Calculation of standard variable overhead per unit
Budgeted Variable overhead 10,000
= = = ₹ 25 per unit
Budgeted production 400
Calculation of standard variable overhead per hour
Budgeted Variable overhead 10,000
= = = ₹ 1.25 per unit
Budgeted man hours 8,000

Calculation of standard variable overhead for actual output

= Actual output × Standard variable overhead per unit
= 360 units × ₹ 25 = ₹ 9,000

CA NOTE HUB 488

Calculation of Budgeted variable overhead based on actual hours worked
= Actual hours worked × Standard variable overhead per hour
= 7,000 × 1.25 = ₹ 8,750

Calculation of standard hours for actual output

= Actual output × Standard hours per unit
= 360 units × 20 hours = 7,200 hours

Variable overhead cost variance

= (SH x SR) – (AH x SR)
= ₹ 9,000 – ₹ 9,150 = ₹ 150 (A)

Variable overhead expenditure variance

= (SR – AR) x AH
= ₹ 8,750 – ₹ 9,150 = ₹ 400 (A)

Variable overhead efficiency variance

= (SH – AH) x SR
= (7,200 – 7,000) × 1.25 = ₹ 250 (F)

PROBLEM – 10:
The cost detail of J&G Ltd. for the month of September, 20x1 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.
SOLUTION:
SH = 15600 Hours (7800 units x 2 Hours)
SR = (₹ 1500000 ÷ 7500 units x 2 Hours) = ₹ 100 Per Hour
Actual Fixed Overheads = ₹ 1560000 (Given)

CA NOTE HUB 489

Budgeted Fixed Overheads = ₹ 1500000 (Given)
Actual Hours = 16000 Hours (Given)

(i) Fixed Overhead Cost Variance:

= Overhead absorbed for actual production – Actual overhead incurred
= [15600 Hours x ₹ 100] - ₹ 15,60,000 = 0

(ii) Fixed Overhead Expenditure Variance:

= Budgeted overhead – Actual overhead
= ₹ 15,00,000 - ₹ 15,60,000 = ₹ 60,000 (A)

(iii) Fixed Overhead Volume Variance:

= Absorbed overhead – Budgeted overhead
= [15600 Hours x ₹ 100] - ₹ 15,00,000 = ₹ 60000 (F)

(iv) Fixed Overhead Efficiency Variance:

= Absorbed overhead – ( A H x S R)
= [15600 Hours x ₹ 100] - [16000 Hours x ₹ 100]= ₹ 40000 (A)

(v) Fixed Overhead Capacity Variance:

= (AH x SR) – Budgeted Fixed Overheads
= [16000 Hours x ₹ 100] - ₹ 1500000 = ₹ 100000 (F)

PROBLEM -10A:
S.V. Ltd. has furnished the following data:
Budget Actual (for the month of
July)
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, the actual hours worked were
31,500.
CALCULATE the following variances:
i. Expenditure variance.
ii. Volume variance.
iii. Total overhead variance.

CA NOTE HUB 490

SOLUTION:
For Fixed Overhead Variances
Actual fixed overhead incurred ₹ 31,000
Budgeted fixed overhead for the period ₹ 30,000
Standard fixed overhead for production ₹ 33,000
(₹ 30,000 ÷ 20,000 units) × 22,000 units

Computation of Variances
(i) Fixed overhead expenditure variance:
= Budgeted fixed overhead – Actual fixed overhead
= ₹ 30,000 – ₹ 31,000 = ₹ 1,000 (A)

(ii) Fixed overhead volume variance:

= Standard fixed overhead – Budgeted fixed overhead
= ₹ 33,000 – ₹ 30,000 = ₹ 3,000 (F)

(iii) Fixed overhead variance:

= Standard fixed overhead – Actual fixed overhead
= ₹ 33,000 – ₹ 31,000 = ₹ 2,000 (F)

PROBLEM – 11:
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 2021, 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 the following Fixed Overhead variance:
1. Efficiency variance
2. Capacity variance
3. Calendar variance
4. Expenditure variance
5. Volume variance
6. Total Fixed overhead variance

CA NOTE HUB 491

SOLUTION:
Working Notes:
SH = 21220 Hours
SR = ₹ 6 Per Hour
Actual Fixed overhead = ₹ 142000 (Given)
Budgeted Fixed Overhead = ₹ 144000 (Given)
AH = 20160 Hours (840 machines hours × 24 days)
Revised Budgeted Fixed Overhead = ₹ 138240 (₹ 144000 x 24 Days ÷ 25 days)

1. Total fixed overhead Variance

= Absorbed overhead – Actual overhead incurred
= (SH x SR) - Actual overhead incurred
= (21200 x ₹ 6) – ₹ 1,42,000 = ₹ 14,680 (A)

2. Expenditure variance
= Budgeted overhead – Actual overhead
= ₹ 1,44,000 – ₹ 1,42,000 = ₹ 2,000 (F)

3. Volume variance
= Absorbed overhead – Budgeted overhead
= ₹ 127320 – ₹ 1,44,000 = ₹ 16,680 (A)

4. Efficiency variance
= Absorbed overhead – (AH x SR)
= ₹ 127320 – (20160 Hours x ₹ 6) = ₹ 6360 (F)

5. Capacity variance
= (AH x SR) - Revised Budgeted Fixed Overhead
= (20160 Hours x ₹ 6) - ₹ 138240 = ₹ 17,280 (A)

6. Calendar variance
= Revised Budgeted Fixed Overhead - Budgeted overhead
= ₹ 138240 - ₹ 1,44,000 = ₹ 5,760 (A)

PROBLEM – 11A:
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

CA NOTE HUB 492

 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 fixed overhead variances:
i. Expenditure Variance
ii. Volume Variance,
iii. Fixed Cost Variance.
SOLUTION:
For Fixed overheads Variances:
Actual fixed overhead incurred = ₹ 1,56,000
Budgeted fixed overhead for the period = ₹ 1,50,000
Standard fixed overhead for production (Standard output for actual time × Standard Fixed
Overhead per unit)
(6,300 Hours × 27 days × 0.9) × (₹ 1,50,000 ÷ 1,50,000 units) = ₹ 1,53,090

(a) Fixed Overhead Expenditure Variance

= Budgeted fixed overhead – Actual fixed overhead
= ₹ 1,50,000 – ₹ 1,56,000 = ₹ 6,000 (A)

(b) Fixed OverheadVolume Variance

= Standard fixed overhead – Budgeted fixed overhead
= ₹ 1,53,090 – ₹ 1,50,000 = ₹ 3,090 (F)

(c) Fixed OverheadVariance

= Standard fixed overhead – Actual fixed overhead
= ₹ 1,53,090 – ₹ 1,56,000 = ₹ 2,910 (A)

PROBLEM – 12:
The following information was obtained from the records of a manufacturing unit using
standard costing system.
Particulars Standard Actual
Production 4,000 units 3,800 units
Working days 20 21
Machine hours 8,000 hours 7,800 hours

CA NOTE HUB 493

 Fixed Overhead ₹ 4,00,000 ₹ 3,90,000
Variable Overhead ₹ 1,20,000 ₹ 1,20,000
You are required to CALCULATE the following overhead variances:
a) Variable overhead variances
b) Fixed overhead variances
SOLUTION:
(a) Variable Overhead Variances
SH = 7600 Hours (8000 Hours x 3800 Units ÷ 4000 Units)
SR = ₹ 15 Per Hour (₹ 120000 ÷ 8000 Hours)
AH = 7800 Hours (Given)
AR = ₹ 15.3846 Per Hour (₹ 120000 ÷ 7800 Hours)
Variable overhead cost variance
= (SH x SR) – (AH x SR)
= (7600 Hours x ₹ 15) – (7800 Hours x ₹ 15.3846)
= ₹ 114000 – ₹ 120000 = ₹ 6000 (A)
Variable overhead expenditure variance
= (SR – AR) x AH
= (₹ 15 – ₹ 15.3846) x 7800 Hours = ₹ 3000 (A)
Variable overhead efficiency variance
= (SH – AH) x SR
= (7600 – 7800) × ₹ 15 = ₹ 3000 (A)
(b) Fixed Overhead Variance:
SH = 7600 Hours (8000 Hours x 3800 Units ÷ 4000 Units)
SR = ₹ 50 Per Hour (₹ 400000 ÷ 8000 Hours)
Actual Fixed Overheads = ₹ 390000
Budgeted Fixed Overheads = ₹ 400000
AH = 7800 Hours (Given)
Revised Budgeted Fixed Overhead = ₹ 420000 (₹ 400000 x 21 Days ÷ 20 days)
(i) Fixed Overhead Variance:
= Absorbed overhead – Actual overhead
= (7600 Hours x ₹ 50) - ₹ 3,90,000
= ₹ 3,80,000 - ₹ 3,90,000 = ₹ 10,000 (A)
(ii) Fixed Overhead Expenditure Variance:
= Budgeted Overhead – Actual Overhead
= ₹ 4,00,000 - ₹ 3,90,000 = ₹ 10,000 (F)

CA NOTE HUB 494

 (iii) Fixed Overhead Volume Variance:
= Absorbed overhead – Budgeted Overhead
= ₹ 3,80,000 - ₹ 4,00,000 = ₹ 20,000 (A)
(iv) Fixed Overhead Efficiency Variance:
= Absorbed overhead – ( A H x S R )
= ₹ 3,80,000 - ₹ 3,90,000 = ₹ 10,000 (A)
(v) Fixed Overhead Capacity Variance:
= (AH x SR) - Revised Budgeted Fixed Overhead
= (7800 Hours x ₹ 50) - ₹ 420000 = ₹ 30000 (A)
(vi) Fixed Overhead Calendar Variance:
= Revised Budgeted Fixed Overhead - Budgeted overhead
= ₹ 420000 - ₹ 400000 = ₹ 20000 (F)

PROBLEM – 13:
The overhead expense budget for a factory producing to a capacity of 200 units per
month is as follows:
Description of overhead Fixed cost per Variable cost per Total cost per
unit in ₹ unit in ₹ 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
₹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 and are as
follows:
Description of overhead Actual cost
Power and fuel ₹ 4,00,000
Repair and maintenance ₹ 2,00,000
Printing and stationary ₹ 1,75,000
Other overheads ₹ 3,75,000
You are required to CALCULATE the Overhead volume variance and the overhead expense
variances.

CA NOTE HUB 495

SOLUTION:
Overheads volume variance (in case of fixed overhead):
= Absorbed overhead – Budgeted Overhead
= (₹ 3,000 × 100 units) – (₹ 3,000 × 200 units)
= ₹ 3,00,000 - ₹ 6,00,000 = ₹ 3,00,000 (Adverse)
Overhead expense variances
= Budgeted Overhead – Actual Overhead
= (₹ 3,000 × 200 units) – (Total overhead – Variable overhead)
= (₹ 3,000 × 200 units) – (₹ 11,50,000 - ₹ 1,500 × 100 units)
= ₹ 6,00,000 – (₹ 11,50,000 - ₹ 1,50,000)
= ₹ 6,00,000 – ₹ 10,00,000 = ₹ 4,00,000 (Adverse)
Note: It is assumed that the actual Variable Overhead Per Unit is also ₹ 1500 Per unit.

PROBLEM – 13A:
XYZ Company has established the following standards for factory overheads.
Variable overhead 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
Required:
CALCULATE overhead variances viz:
i. Production volume variance
ii. Overhead expense variance
SOLUTION:
Production/ 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 (Adverse)
Overhead expense variances
= Budgeted Overhead – Actual Overhead
= (₹ 5 × 20,000 units) – (Total overhead – Variable overhead)
= (₹ 5 × 20,000 units) – (₹ 3,00,000 - ₹ 10 × 15,000 units)
= ₹ 1,00,000 – (₹ 3,00,000 - ₹ 1,50,000)

CA NOTE HUB 496

= ₹ 1,00,000 – ₹ 1,50,000 = ₹ 50,000 (Adverse)

PROBLEM – 14:
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 Qty Price (₹) Amount (₹)
A 60 20 1200
B 40 30 1200
Inputs 100 2400
Normal loss 20
Output 80 2400
Actual data:
Actual output 80 units.
Material Qty Price (₹) Amount (₹)
A 70 ? ?
B ? 30 ?
Material Price Variance a. ₹105 A Material cost variance ₹275A
You are required to CALCULATE:
i. Actual Price of material A
ii. Actual Quantity of material B
iii. Material Price Variance
iv. Material Usage Variance
v. Material Mix Variance
vi. Material Sub Usage Variance
SOLUTION:
(i) Actual Price of Material A
Let Actual Price of Material A be ‘X’
Material Price Variance (A) = ₹ 105 (A)
Material Price Variance = (SP – AP) × AQ
(20 – X) × 70 = 105 (A)
1,400 – 70X = - 105
X = 1,505 ÷ 70 = 21.5
Therefore X (Actual Price) = ₹21.5

CA NOTE HUB 497

(ii) Actual Quantity of Material B
Let Actual Quantity of Material B be ‘X ‘
Material Cost Variance = (SQ × SP) – (AQ × AP)
Material Cost Variance = 275 (A)
{(60 × 20) – (70 × 21.5)} + {(40 × 30) – (‘X’ × 30)} = 275 (A)
{(1,200 – 1,505) + (1,200 – 30X)} = -275
(895 – 30X) = -275
X = 1,170 ÷ 30 = 39 units

(iii) Material Price Variance = (SP – AP) × AQ

Material A = (20 – 21.5) × 70 = ₹ 105 (A)
Material B = (30 – 30) × 39 = ₹ 0
Total = ₹ 105 (A)

(iv) Material Usage Variance = (SQ – AQ) × SP

Material A = (60 – 70) × 20 = ₹ 200 (A)
Material B = (40 – 39) × 30 = ₹ 30 (F)
Total = ₹ 170 (A)

(v) Material Mix Variance = (RAQ– AQ) × SP

109
Material A = ( x 60 - 70) × 20 = ₹ 92 (A)
100
109
Material B = ( x 40 - 39) × 30 = ₹ 138 (F)
100
Total = ₹ 46 (F)

(vi) Material Yield Variance = (SQ – RSQ) × SP

109
Material A = (60 - x 60) × 20 = ₹ 108 (A)
100
109
Material B = (40 - x 40) × 30 = ₹ 108 (A)
100
Total = ₹ 216 (A)

PROBLEM – 14A:
Following data is extracted from the books of XYZ Ltd. for the month of January:
Estimation
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 800 ? --
Material-B 600 30.00 18,000

CA NOTE HUB 498

 --
Normal loss was expected to be 10% of total input materials.
Actuals- 1480 kg of output produced.
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 900 ? --
Material-B ? 32.50 --
59,825
Other Information-
Material Cost Variance = ₹3,625 (F)
Material Price Variance = ₹175 (F)
You are required to CALCULATE:
i. Standard Price of Material-A;
ii. Actual Quantity of Material-B;
iii. Actual Price of Material-A;
iv. Revised standard quantity of Material-A and Material-B; and
v. Material Mix Variance.
SOLUTION:
Particulars SQ Workings
Raw Material A 940 (1645 ÷ 14 x 8)
Raw Material B 705 (1645 ÷ 14 x 6)
Input 100% 1645 (1480 ÷ 90% x 100%)
Less: Standard Loss 10% 165 (1645 ÷ 100% x 10%)
Output 90% 1480

(i) Material Cost Variance (A + B) = {(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
₹ 42,300
SPA =
940 kg
Standard Price of Material-A = ₹ 45

CA NOTE HUB 499

(ii) 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 (from (i) above)] + (AQB × ₹ 30) = ₹60,000

₹ 40,500 + (AQB × ₹ 30) = ₹60,000(AQB × ₹ 30) = ₹ 19,500
19,500
AQB = = 650 kg
30
Actual Quantity of Material B = 650 kg.

(iii) (AQ × AP) = ₹ 59,825

(AQA × APA) + (AQB × APB) = ₹ 59,825
(900 kg × APA) + (650 kg (from (ii) above) × ₹ 32.5) = ₹ 59,825
(900 kg × APA) + ₹ 21,125 = ₹ 59,825
(900 kg × APA) = ₹ 38,700
38,700
AQ of A = = 43
900
Actual Price of Material-A = ₹ 43

(iv) Total Actual Quantity of Material-A and Material-B

= 940 kg
= 705 kg
= AQA + AQB = 900 kg + 650 kg (from (ii) above)
= 1,550 kg
Now,
800 kg
Revised SQA = x 1,550kg. = 886 kg
(800 + 600)
600 kg
Revised SQB = x 1,550kg. = 664 kg
(800 + 600)

(v) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}

= {(RSQA × SPA) + (RSQB × SPB) – 60,000}
= (886 kg (from (iv) above) × ₹ 45 (from above)) + (664 kg
(from (iv) above) × ₹ 30) - ₹ 60,000
= (39,870 + 19,920) – 60,000 = ₹ 210 (A)

CA NOTE HUB 500

 PROBLEM – 14B:
One kilogram of product K requires two chemicals A and B. The following were the
details of product K for the month of June 20x3:
a. Standard mix for chemical A is 50% and chemical B is 50%.
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:
i. Total Material mix variance
ii. Total Material usage variance
iii. Total Material price variance
iv. Actual loss of actual input
v. Actual input of chemical A
vi. Actual price per kg. of chemical B
SOLUTION:
Working Notes:
(1) Calculation of standard mix of input (assuming Standard input as 100 kg)
Qty. (Kg) Price (₹) Amount (₹)
Chemical A 50 12 600
Chemical B 50 15 750
100 13.50 1,350
Normal Loss (10%) (10)
90 1,350

(2) 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) x Standard cost per
unit of input
= [100 – (70 + X)] x 13.5 = 135 (A)
Therefore, X = 40 kg.
Also, Material cost variance = (Standard quantity x Standard price) – (Actual quantity x
Actual price)

CA NOTE HUB 501

 = 1,350 – {(40 x 15) + (70 x Y)} = 650 (A)
= 1,350 – 600 – 70Y = 650 A
Therefore, Y = ₹ 20
(i) Material mix variance
= (Revised Std. Quantity* – Actual quantity) x Standard Price
Chemical A = (55 – 40) x 12 = 180 (F)
Chemical B = (55 - 70) x 15 = 225 (A)
= ₹ 45 (A)
*Revised Std. Quantity:
Chemical A = (70 + 40) x 50% = 55
Chemical B = (70 + 40) x 50% = 55
(ii) Material usage variance
= (Std. qty. – Actual qty.) × Std. price
Chemical A = (50 – 40) × 12 = 120 (F)
Chemical B = (50 – 70) × 15 = 300 (A)
= ₹ 180 (A)
(iii) Material price variance
= (Std. price – Actual price) × Actual qty.
Chemical A = (12 – 15) × 40 = 120 (A)
Chemical B = (15 – 20) × 70 = 350 (A)
= ₹ 470 (A)
(iv) Actual loss of actual input
Actual total input = 110 kg.
Less: Actual output = 90 kg.
Actual loss = 20 kg.
(v) Actual input of chemical A = 40 kg. [As calculated in Working note (2)].
(vi) Actual price per kg. of chemical B = ₹ 20 [As calculated in Working note (2)].

PROBLEM – 15:
Paras Synthetics uses Standard costing system in the manufacturing of its product
‘Star 95 Mask’. The details are as follows;
Particulars Amt
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

CA NOTE HUB 502

 Total ₹ 60
During the month of August, 20x1 10,000 units of ‘Star 95 Mask’ were manufactured.
Details are as follows:
Direct material consumed 5700 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.
SOLUTION:
Step 1: Calculation of Actual Hours
Variable overhead Efficiency Variance = (Standard Hours – Actual Hours) × Standard Rate per
Hour
Let Actual Hours be ‘X’
(10,000 – X) × 10 = 2,000 (A)
1,00,000 – 10X = -2,000
X = 1,02,000 ÷ 10
Therefore, Actual Hours (X) = 10,200
Step 2: Calculation of Actual Rate of Direct Labour
Actual Direct Labour Cost = AH x AR
Actual Rate = ₹ 2,24,400 ÷ 10,200 hours = ₹ 22
i. Material Variances
Budget Standard for actual Actual
Quantity Price Amount Quantity Price Amount Quantity Price Amount
(₹) (₹) (₹) (₹) (₹) (₹)
Material 0.5 60 30 5,000 60 3,00,000 5,700 58 3,30,600

Material Cost Variance = (SQ × SP – AQ × AP)

= (5000 x ₹ 60) – (5700 x ₹ 58)
= ₹ 3,00,000 – ₹ 3,30,600 = ₹ 30,600(A)
Material Price Variance = (SP – AP) AQ
(₹ 60 - ₹ 58) 5,700 = ₹ 11,400 (F)
Material Usage Variance = (SQ – AQ) SP
(5,000 – 5,700) ₹ 60 = ₹ 42,000 (A)

CA NOTE HUB 503

ii. Labour variances
Budget Standard for actual Actual
Hours Rate Amount Hours Rate Amount Hours Rate Amount
(₹) (₹) (₹) (₹) (₹) (₹)
Labour 1 20 20 10,000 20 2,00,000 10,200 22 2,24,400

Labour Cost Variance = (SH × SR) – (AH × AR)

(10,000 Hours × ₹ 20) – (10,200 Hours × ₹ 22) = ₹ 24,400 (A)
Labour Rate Variance = (SR – AR) × AH
(₹ 20 – ₹ 22) × 10,200 Hours = ₹ 20,400 (A)
Labour Efficiency Variance = (SH – AH) × SR
(10,000 Hours – 10,200 Hours ) × ₹ 20 = ₹ 4,000 (A)

iii. Variable overhead cost Variance (SH x SR) – (AH x AR)

(10000 Hours x ₹ 10) - 112200 = ₹ 12,200(A)
Variable overhead Expenditure Variance = (SR – AR) x AH
(10 – 11) x 10200 Hours = ₹ 10,200 (A)
Variable overhead Efficiency Variance = (SH – AH) x SR = (10000 – 10200) x ₹ 10
= ₹ 2000 (A)

PROBLEM – 16: (MTP 1 SEP 24)

Anju Limited produces a product 'Pect' which is sold in a 10 Kg. packet. The standard
cost card per packet of 'Pect' are as follows:
₹
Direct materials 10 kg @ ₹ 45 per kg 450
Direct labour 8 hours @ ₹ 50 per hour 400
Variable Overhead 8 hours @ ₹ 10 per hour 80
Fixed Overhead 200
1,130
Budgeted output for the third quarter of a year was 10,000 Kg.
Actual output is 9,000 Kg.
Actual cost for this quarter are as follows :
₹
Direct Materials 8,900 Kg @ ₹ 46 per Kg. 4,09,400
Direct Labour 7,000 hours @ ₹ 52 per hour 3,64,000
Variable Overhead incurred 72,500

CA NOTE HUB 504

 Fixed Overhead incurred 1,92,000
You are required to CALCULATE:
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance

SOLUTION:

(i) Material Usage Variance = Standard Price (Standard Quantity – Actual Quantity)
= ₹ 45 (9,000 kgs. – 8,900 kgs.)
= ₹ 4,500 (Favourable)
(ii) Material Price Variance = Actual Quantity (Standard Price – Actual Price)
= 8,900 kgs. (₹ 45 – ₹ 46)
= ₹ 8,900 (Adverse)
(iii) Material Cost Variance = Standard Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (9,000 kgs. × ₹ 45) – (8,900 kgs. × ₹ 46)
= ₹ 4,05,000 – ₹ 4,09,400
= ₹ 4,400 (Adverse)
(iv) Labour Efficiency Variance = Standard Rate (Standard Hours – Actual Hours)
= ₹ 50 (9,000 ÷ 10 × 8 Hours – 7,000 Hours)
= ₹ 50 (7,200 Hours – 7,000 Hours)
= ₹ 10,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Standard Rate – Actual Rate)
= 7,000 Hours (₹ 50 – ₹ 52)
= ₹ 14,000 (Adverse)
(vi) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 Hours × ₹ 50) – (7,000 Hours × ₹ 52)
= ₹ 3,60,000 – ₹ 3,64,000
= ₹ 4,000 (Adverse)

CA NOTE HUB 505

(vii) Variable Overhead Cost Variance = Standard Overhead for Actual Production –
Actual Variable Overhead Cost
= (7,200 Hours × ₹ 10) – ₹ 72,500
= ₹ 500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= ₹ 200 ÷ 10 kgs × 9,000 kgs - ₹ 1,92,000
= ₹ 1,80,000 – ₹ 1,92,000
= ₹ 12,000 (Adverse)

PROBLEM – 16A: (MTP 1 MAY 24)

SARA Ltd. has furnished the following standard cost data per' unit of production:
Material 15 kg @ ₹ 15 per kg.
Labour 6 hours @ ₹ 5 per hour
Variable overhead 6 hours @ ₹ 12 per hour.
Fixed overhead ₹ 4,50,000 per month (Based on a normal volume of 30,000 labour
hours)
The actual cost data for the month of August 2023 are as follows: Material used
65,000 kg at a cost of ₹ 9,85,000.
Labour paid ₹ 1,40,000 for 31,500 hours worked. Variable overheads ₹ 3,60,200
Fixed overheads ₹ 4,70,000 Actual production 4,800 units. CALCULATE:
(i) Material Cost Variance.

(ii) Labour Cost Variance.

(iii) Fixed Overhead Cost Variance.

(iv) Variable Overhead Cost Variance.

SOLUTION:
Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate = ₹ 4,50,000 ÷ 5,000 units = ₹ 90 per unit
Or = ₹ 4,50,000 ÷ 30,000 hours = ₹ 15 per hour.

(i) Material Cost Variance = (Standard Qty. × Standard Price) – (Actual Qty. × Actual
Price)
= (4,800 units × 15 kg. × ₹15) - ₹ 9,85,000
= ₹ 10,80,000 – ₹ 9,85,000
= ₹ 95,000 (F)

CA NOTE HUB 506

(ii) Labour Cost Variance = (Standard Hours × Standard Rate) – (Actual Hours × Actual
rate)
= (4,800 units × 6 hours × ₹ 5) – ₹1,40,000
= ₹ 1,44,000 – ₹ 1,40,000
= ₹ 4,000 (F)
(iii) Fixed Overhead Cost Variance = (Budgeted Rate × Actual Qty) – Actual Overhead
= (₹ 90 x 4,800 units) – ₹ 4,70,000
= ₹ 38,000 (A)
OR
= (Budgeted Rate × Standard Hours) – Actual Overhead
= (₹ 15 x 4,800 units × 6 hours) – ₹ 4,70,000
= ₹ 38,000 (A)
(iv) Variable Overhead Cost Variance = (Standard Rate × Standard Hours) – Actual Overhead
= (4,800 units × 6 hours × ₹ 12) - ₹ 3,60,200
= ₹ 3,45,600 - ₹ 3,60,200
= ₹ 14,600 (A)

CA NOTE HUB 507

 CHAPTER 15: BUDGET AND BUDGETARY
CONTROL
PROBLEM – 1:
Prepare a quantitative production, material usage & purchases budget from the following
data of a month.
Particulars Product A Product B
Budgeted sales quantity 15,000 units 17,500 units
Material consumption p.u:
Material P (3 per kg) 2 kgs 4 kgs
Material Q (2 per kg) 31/8 kgs 1 kgs
Stocks of products and materials are as under:
Product A Product B Material P Material Q
Particulars
(in units) (in units) (in kgs) (in kgs)
Opening stock 750 875 12000 8000
Closing stock 1750 3375 ? ?
The company wishes to operate a JIT material inventory system. As an initial procedure,
it wishes to maintain a minimum stock of materials equivalent to 2 days consumption.
There are 28 working days in a month.
SOLUTION:
Step 1: Production Budget (Units)
Particulars A B
Sales 15000 units 17500 units
(+) Closing stock 1750 3375
(-) Opening stock (750) (875)
Production 16000 units 20000 units

Step 2: Material Consumption Budget (Kgs)

Particulars P Q
A 16000 units 32000 50000
(2 kg : 3 1/8 kg)
B 20000 units 80000 20000
(4 : 1)
112000 70000

CA NOTE HUB 508

Step 3: Material Purchase Budget:
Particulars P Q
Raw Material Consumption 112000 70000
(-) Closing stock (WN) 8000 5000
(-) Opening stock of Raw (12000) (8000)
Material
Purchases (in kg) 108000 67000
Price (₹) 3 2
In value 324000 134000

W.N.1: Closing stock of Raw Material (2 days consumption)

P = 112000 x 2 ÷ 28 = 8000 Kg
Q = 70000 x 2 ÷ 28 = 5000 kg

PROBLEM – 2:
The direct Labour hour requirement of three of the products, manufactured in a factory,
each involving more than one Labour operation, are estimated as follows:
Direct Labour hour/unit (in minutes)
PRODUCT A B C
Operation X 18 42 30
Operation Y -- 12 24
Operation Z 12 6 --
The factory work 8 hours per day, 6 days a week. The budget quarter is taken as 13
weeks, and during a quarter, lost hours due to leave and holidays and other causes is
estimated to be 124 hours. The budgeted hourly rate for the workers manning the
operation X, Y and Z are ₹ 2, ₹ 2.550 and ₹ 3 respectively. The budgeted sales of the
products during the quarter are A – 9,000 units, B – 15,000 units and C – 12,000 units.
There is an opening stock of 5,000 units of B and 4,000 units of C and it is proposed to
build up stock at the end of the budget quarter as A – 1,000 units and C – 2,000 units.
Prepare a manpower budget showing for each operation;
▪ Direct Labour hours
▪ Direct Labour cost and
▪ The number of operatives.

CA NOTE HUB 509

SOLUTION:

Step 1: Production Budget (Units)

Particulars A B C
Sales 9000 15000 12000
(+) Closing stock 1000 - 2000
(-) Opening stock - (5000) (4000)
Production (Units) 10000 10000 10000

Step 2: Labour Hours budget:

Operations A B C Total
Operation X 180000 Minutes 420000 Minutes 300000 Minutes 900000 Minutes
(10000 units x (10000 units x (10000 units x (or)
18) 42) 30) 15000 Hours
Operation Y - 120000 min 240000 min 360000 min
(10000 units x (10000 units x (or)
12) 24) 6000 Hours
Operation Z 120000 min 60000 min - 180000 min
(10000 units x (10000 units x (or)
12) 6) 3000 Hours

Step 3: Labour cost budget

Operation Hours Rate (₹) Cost (₹)
X 15000 Hours 2 ₹ 30000
Y 6000 Hours 2.550 ₹ 15300
Z 3000 Hours 3 ₹ 9000
Total ₹ 54300

Step 4: No. of operatives / workers

Operations X Y Z
A. Hours required per quarter 15000 6000 3000
B. Hours available per worker / per quarter 500 Hours 500 Hours 500 Hours
(8 Hours x 6 days x 13 weeks (-) 124 Hours)
C. No. of workers required 30 workers 12 workers 6 workers

CA NOTE HUB 510

 PROBLEM – 3:
A single product company estimated its sales for the next year quarter wise as under:
Quarter Sales (units)
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stocks of finished goods are 10,000 units and the company experts to
maintain the closing stocks of finished goods at 16,250 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 stocks of raw materials at the beginning of the year are 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 company proposes to purchases the entire annual, requirement of raw materials in
the first three quarters in proportion and at the prices given below:
Quarter Purchases of raw material Price per kg
I 30% ₹ 2
II 50% ₹ 3
III 20% ₹ 4
The value of the opening stock of the raw material in the beginning of the year is ₹
20,000.
You are required to present the following for the next year, quarter wise:
▪ Production budget (in units)
▪ Raw material consumption budget (in quantity)
▪ Raw material purchases budget (in quantity and value)
▪ Priced stores ledger card of the raw materials using the First in First out method.
SOLUTION:
Working Note:
Calculation of Total Annual Production
Particulars (Units)
Sales in 4 quarters 1,53,750
Add: Closing balance 16,250
170000

CA NOTE HUB 511

 Less: Opening balance (10,000)
Total number of units to be produced in the next year 1,60,000

(i) Production Budget (in units)

Quarters I II III IV Total Units
Units Units Units Units
Sales 30,000 37,500 41,250 45,000 1,53,750
Production in current quarter 24,000 30,000 33,000 36,000
(80% of the sale of current
quarter)
Production for next quarter 7,500 8,250 9,000 12,250
(20% of the sale of next
quarter)
Total production 31,500 38,250 42,000 48,250 1,60,000

(ii) Raw Material Consumption Budget In Quantity

Quarters I II III IV Total
Units to be produced in each quarter: 31,500 38,250 42,000 48,250 1,60,000
(A)
Raw material consumption p.u. (kg.): 2 2 2 2
(B)
Total raw material consumption (Kg.) 63,000 76,500 84,000 96,500 3,20,000
: (A × B)

(iii) Raw material purchase budget (in quantity)

Qty (kg.)
Raw material required for production 3,20,000
Add : Closing balance of raw material 5,000
3,25,000
Less : Opening balance (10,000)
Material to be purchased 3,15,000

CA NOTE HUB 512

 Raw material purchase budget (in value)
Quarters % of annual Qty. of material Rate per Amount (₹)
requirement kg (₹)
(1) (2) (3) (4) (5) = (3×4)
I 30 94,500 2 1,89,000
(3,15,000 kg × 30%)
II 50 1,57,500 3 4,72,500
(3,15,000 kg × 50%)
III 20 63,000 4 2,52,000
(3,15,000 kg × 20%)
Total 3,15,000 9,13,500

Priced Stores Ledger Card

(of the raw material using FIFO method)
Quarters

I II III IV

Kg. Rate Value Kg. Rate Value Kg. Rate Value Kg. Rate Value

(₹) (₹) (₹) (₹) (₹) (₹) (₹) (₹)

Opening balance 10,000 2 20,000 41,500 2 83,000 1,22,500 3 3,67,500 38,500 3 1,15,500

(A) 63,000 4 2,52,000

Purchases: (B) 94,500 2 1,89,000 1,57,500 3 4,72,500 63,000 4 2,52,000 – – –

Consumption: (C) 63,000 2 1,26,000 41,500 2 83,000 84,000 3 2,52,000 38,500 3 1,15,500

35,000 3 1,05,000 58,000 4 2,32,000

Balance: (D) 41,500 2 83,000 1,22,500 3 3,67,500 38,500 3 1,15,500 5,000 4 20,000

(D) = (A) +(B) – 63,000 4 2,52,000

(C)

PROBLEM – 3A:
Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh
(HH) for the year 20x2-20x3. 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:
Minimax (MM) Heavyhigh (HH)
Budgeted Production units 1,80,000 1,20,000
(₹) (₹)
Direct material cost per unit 220 280
Direct Labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000

CA NOTE HUB 513

 The estimated units to be sold in the first four months of the year 20x2-20x3 are as
under
April May June July
Minimax 8,000 10,000 12,000 16,000
Heavy high 6,000 8,000 9,000 14,000
PREPARE production budget for the first quarter in month-wise.
SOLUTION:
Production Budget of Product Minimax and Heavy High (in units)
April May June Total
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 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
Stock
(25% of next
month’s sale)
Less: Opening 2,000* 1,500* 2,500 2,000 3,000 2,250 7,500 5,750
Stock
Production units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000

* Opening stock of April is the closing stock of March, which is as per company’s policy 25% of
next month’’ sale.
Production Cost Budget
Element of cost Rate (₹) Amount (₹)
MM HH MM HH
(32,000 (25,000
units) units)
Direct Material 220 280 70,40,000 70,00,000
Direct Labour 130 120 41,60,000 30,00,000
Manufacturing Overhead
(4,00,000 ÷ 1,80,000 × 32,000) 71,111
(5,00,000 ÷ 1,20,000 × 25,000) 1,04,167
1,12,71,111 1,01,04,167

CA NOTE HUB 514

PROBLEM – 4:
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 worker.
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 budget period are as below:
Product-A 4 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption
Required:
CALCULATE the Material Purchase Budget and the Wages Budget for the direct workers,
showing the quantities and values, for the next month.

CA NOTE HUB 515

SOLUTION:
Number of days in budget period = 4 weeks × 5 days = 20 days
Number of units to be produced
Product-A Product-B
(units) (units)
Budgeted Sales 2,400 3,600
Add: Closing stock
2,400 units 3,600 units
( x 4 days) ( x 5 days) 480 900
20 days 20 days

Less: Opening stock 400 200

2,480 4,300

(i) Material Purchase Budget

Material-X (Kg.) Material-Y (Kg.)
Material required:
Product-A 12,400 9,920
(2,480 units × 5 kg.) (2,480 units × 4 kg.)
Product-B 12,900 25,800
(4,300 units × 3 kg.) (4,300 units × 6 kg.)
25,300 35,720
Add: Closing stock
25,300 kgs
( x 10 days)
20 days 12,650 10,716
35,720 kgs
( x 6 days)
20 days
Less: Opening stock 1,000 500

Quantity to be purchased 36,950 45,936

Rate per kg. of Material ₹4 ₹6

Total Cost ₹ 1,47,800 ₹ 2,75,616

(ii) Wages Budget

Product-A (Hours) Product-B (Hours)
Units to be produced 2,480 units 4,300 units
Standard hours allowed per unit 3 5

Total Standard Hours allowed 7,440 21,500

CA NOTE HUB 516

 Productive hours required for 7,440 hours 21,500 hours
= 9,300 = 26,875
80% 80%
production
Add: Non-Productive down 1,860 hours 5,375 hours
time (20% of 9,300 hours) (20% of 26,875 hours)
Hours to be paid 11,160 32,250
Total Hours to be paid = 43,410 hours (11,160 + 32,250)
Hours to be paid at normal rate = 4 weeks × 40 hours × 180 workers
= 28,800 hours
Hours to be paid at premium rate = 43,410 hours – 28,800 hours = 14,610 hours
Total wages to be paid = 28,800 hours × ₹ 25 + 14,610 hours × ₹ 37.5
= ₹ 7,20,000 + ₹ 5,47,875
= ₹ 12,67,8750

PROBLEM - 4A: (RTP SEP 24)

Raja Ltd manufactures and sells a single product and has estimated sales revenue of
₹302.4 lakh during the year based on 20% profit on selling price. Each unit of product
requires 6 kg of material A and 3 kg of material B and processing time of 4 hours
in machine shop and 2 hours in assembly shop. Factory overheads are absorbed at a
blanket rate of 20% of direct labour. Variable selling & distribution overheads are
₹60 per unit sold and fixed selling & distribution overheads are estimated to be
₹69,12,000.
The other relevant details are as under:
Purchase Price: Material A ₹160 per kg
Materials B ₹100 per kg
Labour Rate: Machine Shop ₹140 per hour
Assembly Shop ₹70 per hour
Finished Stock Material A Material B
Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
Required
(i) CALCULATE number of units of product proposed to be sold and selling price per unit,
(ii) PREPARE Production Budget in units and
(iii) PREPARE Material Purchase Budget in units.

CA NOTE HUB 517

SOLUTION:
Workings
Statement Showing “Total Variable Cost for the year”
Particulars Amount (₹)
Estimated Sales Revenue 3,02,40,000
Less: Desired Profit Margin on Sale @ 20% 60,48,000
Estimated Total Cost 2,41,92,000
Less: Fixed Selling and Distribution Overheads 69,12,000
Total Variable Cost 1,72,80,000

Statement Showing “Variable Cost per unit”

Particulars Variable Cost Per Unit
(₹)
Direct Materials:
A: 6 Kg. @ ₹ 160 per kg. 960
B: 3 Kg. @ ₹ 100 per kg. 300
Labour Cost:
Machine Shop: 4 hrs @ ₹ 140 per hour 560
Assembly Shop: 2 hrs @ ₹ 70 per hour 140
Factory Overheads: 20% of (₹ 560 + ₹ 140) 140
Variable Selling & Distribution Expenses 60
Total Variable Cost per unit 2,160

(i) Calculation of number of units of product proposed to be sold and selling price per
unit:
Number of Units Sold = Total Variable Cost ÷ Variable Cost per unit
= ₹ 1,72,80,000 ÷ ₹ 2,160
= 8,000 units
Selling Price per unit = Total Sales Value ÷ Number of Units Sold
= ₹ 3,02,40,000 ÷ 8,000 units
= ₹ 3,780
(ii) Production Budget (units)
Particulars Units
Budgeted Sales 8,000
Add: Closing Stock 3,000
Total Requirements 11,000

CA NOTE HUB 518

 Less: Opening Stock (2,500)
Required Production 8,500

(iii) Materials Purchase Budget (Kg)

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

PROBLEM – 5:
A company is engaged in the manufacture of specialized sub-assemblies required for
certain electronic equipments. The company envisages that in the forthcoming month,
December, 20x1, the sales will take a pattern in the ratio of 3:4:2 respectively of sub-
assemblies, ACB, MCB and DP.
The following is the schedule of components required for manufacture:
Component requirements
Sub-assembly Selling price Base Board IC 08 IC 12 IC 26
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 assemblies are:
Labour hours per Sub-assembly
Variable overheads per
Grade A Grade B
Sub-assembly (₹)
ACB 8 16 ₹ 36
MCB 6 12 ₹ 24
DP 4 8 ₹ 24
Direct wages rate per hour ₹ 5 ₹ 4 -
The Labourers work 8 hours a day 25 day a month. The opening stocks of Sub-assemblies
and components for December, 20x1 are as under:

CA NOTE HUB 519

 Sub-assemblies Components
ACB 800 Based Board 1,600
MCB 1,200 IC 08 1,200
DP 2,800 IC 12 6,000
IC 26 4,000
Fixed overheads amount to ₹ 7,57,200 for the month and a monthly profit target of
₹ 12 lakhs has been set.
The company is eager for a reduction of closing inventories for December, 20x1 of Sub-
assemblies and components by 10% of quantity as compared to the opening stocks prepared
the following budget for December 20x1:
i. Sales budget in quantity and value
ii. Production budget in quantity
iii. Component usage budget in quantity
iv. Component purchases budget in quantity and value
v. Manpower budget showing the number of workers and the amount of wages payable.
SOLUTION:
Working Note:
1. Statement showing contribution:
Sub- assemblies ACB MCB DP Total
(₹) (₹) (₹) (₹)
Selling price per unit (Per Unit) : (A) 520 500 350
Marginal Cost per unit.
Components
- Base board 60 60 60
- IC08 160 40 40
- IC12 48 120 48
- IC26 16 48 64
Labour
- Grade A 40 30 20
- Grade B 64 48 32
Variable production overhead 36 24 24
Total marginal cost per unit: (B) 424 370 288
Contribution per unit: (C) = (A) – (B) 96 130 62
Sales ratio: (D) 3 4 2

CA NOTE HUB 520

 Contribution × Sales ratio: [(E) = (C) × (D)] 288 520 124 932

2. Desired Contribution for the forthcoming month December

(₹)
Fixed overheads 7,57,200
Desired profit 12,00,000

Desired contribution 19,57,200

3. Sales mix required i.e. number of batches for the forthcoming month December
Sales mix required = Desired contribution ÷ contribution × Sales ratio
= ₹ 19,57,200 ÷ 932 (Refer to Working notes 1 and 2)
= 2,100 batches
Budgets for the Month of December
(a) Sales budget in quantity and value
Sub-assemblies ACB MCB DP Total
Sales (Qty) 6,300 8,400 4,200
(2,100 × 3) (2,100 × 4) (2,100 × 2)
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

Sub-assemblies ACB MCB DP
Sales 6,300 8,400 4,200
Add : Closing stock 720 1,080 2,520
(Opening stock less 10%) ____ ____ ____
Total quantity required 7,020 9,480 6,720
Less : Opening stock (800) (1,200) (2,800)
Production 6,220 8,280 3,920

(c) Component usage budget in quantity

Sub-assemblies ACB MCB DP Total
Production 6,220 8,280 3,920 —
Base board (1 each) 6,220 8,280 3,920 18,420
Component IC08 (8:2:2) 49,760 16,560 7,840 74,160
(6,220 × 8) (8,280 × 2) (3,920 × 2)
Component IC12 24,880 82,800 15,680 1,23,360
(4:10:4) (6,220 × 4) (8,280 × 10) (3,920 × 4)
Component IC26 (2:6:8) 12,440 49,680 31,360 93,480

CA NOTE HUB 521

 (6,220 × 2) (8,280 × 6) (3,920 × 8)

(d) Component Purchase budget in quantity and value

Sub-assemblies 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
(Opening stock less
10%)
19,860 75,240 1,28,760 97,080
Less: Opening stock (1,600) (1,200) (6,000) (4,000)
Purchase (Qty.) 18,260 74,040 1,22,760 93,080
Purchase price (₹) 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
Sub- Budgeted Direct labour Total
assemblies Production Grade A Grade B
Hours Total Hours Total
Per hours Per hours
Unit Unit
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 200 200
(C) Number of workers per month: 576 1,152
(A/B)
(D) Wage rate per month (₹) 1,000 800
(E) Wages payable (₹) : (C × D) 5,76,000 9,21,600 14,97,600

PROBLEM – 6:
K Ltd. produces and markets a very popular product called ‘X’. The company is interested
in presenting its budget for the second quarter of 20x2-20x3.
The following information are made available for this purpose:
i. It expects to sell 1,50,000 bags of ‘X’ during the second quarter of 20x2- 20x3 at

CA NOTE HUB 522

 the selling price of ₹ 1,200 per bag.
ii. Each bag of ‘X’ requires 2.5 mtr. of raw – material ‘Y’ and 7.5 mtr. of raw – material
‘Z’.
iii. Stock levels are planned as follows:
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

iv. Y’ cost ₹160 per mtr., ‘Z’ costs ₹30 per mtr. and ‘Empty Bag’ costs ₹110 each.
v. It requires 9 minutes of direct Labour to produce and fill one bag of ‘X’. Labour cost
is ₹ 70 per hour.
vi. Variable manufacturing costs are ₹ 60 per bag. Fixed manufacturing costs ₹ 40,00,000
per quarter.
vii.Variable selling and administration expenses are 5% of sales and fixed administration
and selling expenses are ₹ 3,75,000 per quarter.
Required
i. PREPARE a production budget for the said quarter in quantity.
ii. PREPARE a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said
quarter in quantity as well as in rupees.
iii. COMPUTE the budgeted variable cost to produce one bag of ‘X’.
SOLUTION:
(i) 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

CA NOTE HUB 523

(ii) Raw–Materials Purchase Budget in Quantity as well as in ₹ for 1,38,000 Bags of ‘X’
Particulars ‘Y’ ‘Z’ Empty Bags
Mtr. Mtr. Nos.
Production Requirements 2.5 7.5 1.0
Per bag of ‘X’
Requirement for 3,45,000 10,35,000 1,38,000
Production
(1,38,000 × 2.5) (1,38,000 × 7.5) (1,38,000 × 1)
Add: Desired Closing 78,000 1,41,000 84,000
Stock
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 permtr./Bag ₹ 160 ₹ 30 ₹ 110
Cost of Purchase (₹) 5,23,20,000 3,01,50,000 1,22,10,000

(iii) Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’

Particulars (₹)
Raw – Material
Y 2.5 mtr @160 400.00
Z 7.5 mtr @30 225.00
Empty Bag 110.00
Direct Labour (₹ 70 × 9 minutes ÷ 60 minutes) 10.50
Variable Manufacturing Overheads 60.00
Variable Cost of Production per bag 805.50

PROBLEM – 7:
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, the following
information has been made available for the year 20x1:
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

CA NOTE HUB 524

 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 to the aforesaid price changes. On the
basis of these price changes and the reports of salesmen, the following estimates have
been prepared by the Divisional Managers:
Percentage increase in sales over the budgeted sales
Product East Division West Division
X +12.50% +7.50%
Y +22.50% +12.50%
With the help of an 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 for 20x2 after incorporating the above
estimates and also show the Budgeted Sales and Actual Sales of 20x1.
SOLUTION:
Statement Showing Sales Budget for 2022-23
Product X Product Y Total
Division Qty Rate Amount Qty Rate Amount Amount
(₹) (₹) (₹) (₹) (₹)
East 1,020 1 20 20,400 815 3 40 32,600 53,000
West 1,430 2 20 28,600 1,225 4
40 49,000 77,600
Total 1,200 49,000 1,000 81,600 1,30,600
Workings
1. 800 × 112.5% + 120 = 1,020 units
2. 1,200 × 107.5% + 140 = 1,430 units
3. 600 × 122.5% + 80 = 815 units
4. 1,000 × 112.5% + 100 = 1,225 units
Statement Showing Sales Budget for 2021-22
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

CA NOTE HUB 525

 Statement Showing Actual Sales for 2021-22
Product X Product Y Total
Division 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

PROBLEM – 8:
Float glass Manufacturing Company requires you to PREPARE the Master budget for the
next year from the following information:
Sales:
Toughened Glass ₹ 6,00,000
Bent Glass ₹ 2,00,000
Direct material 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% on sales
Depreciation on machinery ₹ 12,600
Light and power ₹ 3,000
Repairs and maintenance ₹ 8,000
Others sundries 10% on direct wages
Administration, selling and distribution expenses ₹ 36,000 per year
SOLUTION:
Master Budget for the year ending _____
Sales: (₹)
Toughened Glass 6,00,000
Bent Glass 2,00,000
Total Sales 8,00,000
Less: Cost of production:

CA NOTE HUB 526

Direct materials (60% of ₹ 8,00,000) 4,80,000
Direct wages (20 workers × ₹ 150 × 12months) 36,000
Prime Cost 5,16,000
Fixed Factory Overhead:
Works manager’s salary (500 × 12) 6,000
Foreman’s salary (400 × 12) 4,800
Depreciation 12,600
Light and power (assumed fixed) 3,000 26,400
Variable Factory Overhead:
Stores and spares (₹ 800000 x 2.5%) 20,000
Repairs and maintenance 8,000
Sundry expenses (₹ 36000 x 10%) 3,600 31,600
Works Cost 5,74,000
Gross Profit (Sales – Works cost) 2,26,000
Less: Adm., selling and distribution expenses 36,000
Net Profit 1,90,000

PROBLEM – 9:
ABC Ltd. is currently operating at 75% of its capacity. In the past two years, the levels
of operations were 55% and 65% respectively. Presently, the production is 75,000 units.
The company is planning for 85% capacity level during 20X2-20X3. The cost details are
as follows:
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
24,40,000 28,00,000 31,60,000
Profit is estimated @ 20% on sales.

CA NOTE HUB 527

The following increases in costs are expected during the year:
In %
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 flexible budget for the period 20x2-20x3 at 85% level of capacity. Also
ascertain profit and contribution.
SOLUTION:
ABC Ltd.
Budget for 85% capacity level for the period 2022-23
Budgeted production (units) 85,000
Per Unit (₹) Amount (₹)
Direct Material (note 1) 21.60 18,36,000
Direct Labour (note 2) 10.50 8,92,500
Variable factory overhead (note 3) 2.10 1,78,500
Variable selling overhead (note 4) 4.32 3,67,200

Variable cost 38.52 32,74,200

Fixed factory overhead (note 3) 2,20,000

Fixed selling overhead (note 4) 1,15,000

Administrative overhead 1,76,000

Fixed cost 5,11,000

Total cost 37,85,200

Add: Profit 20% on sales or 25% on total cost 9,46,300

Sales 47,31,500

Contribution (Sales – Variable cost) 14,57,300

CA NOTE HUB 528

Working Notes:
1. Direct Materials:
(₹) (₹)

75% Capacity 15,00,000 65% Capacity 13,00,000

65% Capacity 13,00,000 55% Capacity 11,00,000

10% change in capacity 2,00,000 10% change in capacity 2,00,000

For 10% increase in capacity, i.e., for increase by 10,000 units, the total direct material
cost regularly changes by ₹ 2,00,000
Direct material cost (variable) = ₹ 2,00,000 ÷ 10,000 = ₹ 20
After 8% increase in price, direct material cost per unit = ₹ 20 × 1.08
= ₹ 21.60
Direct material cost for 85,000 budgeted units = 85,000 × ₹ 21.60
= ₹ 18,36,000
2. Direct Labour:
(₹) (₹)
75% Capacity 7,50,000 65% Capacity 6,50,000
65% Capacity 6,50,000 55% Capacity 5,50,000
10% change in capacity 1,00,000 10% change in capacity 1,00,000

For 10% increase in capacity, direct labour cost regularly changes by ₹ 1,00,000.
Direct labour cost per unit = ₹ 1,00,000 ÷ 10,000 = ₹ 10
After 5% increase in price, direct labour cost per unit = ₹ 10 × 1.05 = ₹ 10.50
Direct labour for 85,000 units = 85,000 units × ₹ 10.50 = ₹ 8,92,500.
3. Factory overheads are semi-variable overheads:
(₹) (₹)
75% Capacity 3,50,000 65% Capacity 3,30,000
65% Capacity 3,30,000 55% Capacity 3,10,000
10% change in capacity 20,000 10% change in capacity 20,000

Variable factory overhead = ₹ 20,000 ÷ 10,000 = ₹ 2

Variable factory overhead for 75,000 units = 75,000 × ₹ 2 = ₹ 1,50,000
Fixed factory overhead = ₹ 3,50,000 – ₹ 1,50,000 = ₹ 2,00,000.
Variable factory overhead after 5% increase = ₹ 2 × 1.05 = ₹ 2.10
Fixed factory overhead after 10% increase = ₹ 2,00,000 × 1.10 = ₹ 2,20,000.

CA NOTE HUB 529

4. Selling overhead is semi-variable overhead:
(₹) (₹)
75% Capacity 4,00,000 65% Capacity 3,60,000
65% Capacity 3,60,000 55% Capacity 3,20,000
10% change in capacity 40,000 10% change in capacity 40,000

Variable selling overhead = ₹ 40,000 ÷ 10,000 units = ₹ 4

Variable selling overhead for 75,000 units = 75,000 × ₹ 4 = ₹ 3,00,000.
Fixed selling overhead = ₹ 4,00,000 – ₹ 3,00,000 = ₹ 1,00,000
Variable selling overhead after 8% increase = ₹ 4 × 1.08 = ₹ 4.32
Fixed selling overhead after 15% increase = ₹ 1,00,000 × 1.15 = ₹ 1,15,000
5. Administrative overhead is fixed:
After 10% increase = ₹ 1,60,000 × 1.10 = ₹ 1,76,000

PROBLEM – 9A:
A department of Company X attains sale of ₹ 6,00,000 at 80 per cent of its normal
capacity and its expenses are given below:
Administration costs: ₹
Office salaries 90,000
General expenses 2 per cent of sales
Depreciation 7,500
Rates and taxes 8,750
Selling costs:
Salaries 8 per cent of sales
Travelling expenses 2 per cent of sales
Sales office expenses 1 per cent of sales
General expenses 1 per cent of sales
Distribution costs:
Wages 15,000
Rent 1 per cent of sales
Other expenses 4 per cent of sales
PREPARE flexible administration, selling and distribution costs budget, operating at 90
per cent, 100 per cent and 110 per cent of normal capacity.

CA NOTE HUB 530

SOLUTION:
Flexible Budget of Department of Company ‘X’
80% (₹) 90% (₹) 100% (₹) 110% (₹)
Sales 6,00,000 6,75,000 7,50,000 8,25,000
Administration Costs:
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
(A) Total Adm. Costs 1,18,250 1,19,750 1,21,250 1,22,750
Selling Costs:
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
(B) Total Selling Costs 72,000 81,000 90,000 99,000
Distribution Costs:
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
(C) Total Distribution Costs 45,000 48,750 52,500 56,250
Total Costs (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.

PROBLEM – 10:
A factory which expects to operate 7,000 hours, i.e., at 70% level of activity,
furnishes details of expenses as under:
Variable expenses ₹1260
Semi-variable expenses ₹1200
Fixed expenses ₹1800
The semi-variable expenses go up by 10% between 85% and 95% activity and by 20%
above 95% activity. PREPARE a flexible budget for 80, 90 and 100 per cent activities.

CA NOTE HUB 531

SOLUTION:
Head of Account Control basis 70% 80% 90% 100%
Budgeted hours 7,000 8,000 9,000 10,000
(₹) (₹) (₹) (₹)
Variable expenses Variable 1,260 1,440 1,620 1,800
Semi-variable expenses Semi-variable 1,200 1,200 1,320 1,440
Fixed expenses Fixed 1,800 1,800 1,800 1,800
Total expenses 4,260 4,440 4,740 5,040
Recovery rate per hour:
Total expenses/Budgeted 0.61 0.55 0.53 0.50
Hours

Conclusion:
We notice that the recovery rate at 70% activity is ₹ 0.61 per hour. If in a particular month the
factory works 8,000 hours, it will be incorrect to estimate the allowance as ₹ 4,880 @ ₹ 0.61.
The correct allowance will be ₹ 4,440 as shown in the table. If the actual expenses are ₹ 4,500
for this level of activity, the company has not saved any money but has over-spent by ₹ 60
(₹ 4,500 – ₹ 4,440).

PROBLEM – 11: (PYP May 24)

A factory is currently working at 60% capacity and produces 12,000 units of a product.
Management is thinking to increase the working capacity either to 70% or 90% level.
It is estimated that at both the levels, it will be able to sell all the produced units.
The other details are as under:
• At 70% capacity, the cost of raw materials increases by 4% and the selling price
falls by 3%.
• At 90% capacity, the cost of raw materials increases by 5% and selling price
falls by 4%.
• At 60% capacity, the product cost is ₹ 360 per unit and it is sold at ₹ 400 per
unit.
• The unit cost of 360 consists of the following:
Material ₹ 200
Labour ₹ 60
Factory overhead ₹ 60 (50 % fixed)
Administrative & Selling overhead ₹ 40 (60 % fixed)

CA NOTE HUB 532

• Additional advertising cost of ₹ 20,000 is to be incurred for selling the product
above 80% capacity.
You are required to:
(i) Calculate the profits of the company when the factory works at 60%, 70% and
90% capacity level.
(ii) Offer your comments regarding increase in the capacity based on profit calculated.
SOLUTION:

(i) Expense Budget at 60%, 70% & 90% level

60% 70% 90%
(12,000 units) (14,000 units) (18,000 units)
Per Amount Per Amount Per Amount
unit (₹ ) unit (₹ ) unit (₹ )
(₹) (₹ ) (₹ )
Sales (A) 400 48,00,000 388 54,32,000 384 69,12,000
Variable Costs:

Direct Material 200 24,00,000 208 29,12,000 210 37,80,000

Direct Wages 60 7,20,000 60 8,40,000 60 10,80,000

Variable Factory 30 3,60,000 30 4,20,000 30 5,40,000
Overheads
Variable
Administrative & 16 1,92,000 16 2,24,000 16 2,88,000
Selling Overheads

Total Variable Cost 306 36,72,000 314 43,96,000 316 56,88,000

(B)
Contribution 94 11,28,000 74 10,36,000 68 12,24,000
(C)=(A–B)
Fixed Costs:
Fixed Factory -- 3,60,000 -- 3,60,000 -- 3,60,000
Overheads (50%)
Fixed
Administrative & -- 2,88,000 -- 2,88,000 -- 2,88,000
Selling Overheads
(60%)
Adverting Cost -- -- -- -- -- 20,000
Total Fixed Costs -- 6,48,000 -- 6,48,000 -- 6,68,000
(D)

CA NOTE HUB 533

 Profit (C – D) -- 4,80,000 -- 3,88,000 -- 5,56,000

(ii) Comment: Increase of production capacity to 90% is likely to increase the profit to
maximum of ₹ 5,56,000 due to increase in contribution while fixed cost is slightly
increased due to in advertising cost. At 70% capacity, profit is reduced to minimum of
₹ 3,88,00 due to decrease in selling price by 3% along with increase in raw material cost
by 4% resulting in decrease of contribution. Therefore, it is recommended that factory
should operate at 90% capacity.

PROBLEM – 11A:
During the FY 2021-22, 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 Exp. (80% variable) 40 per unit
Office and Administrative Exp. (100% fixed) 20 per unit
The company anticipates that in FY 20x2-20x3, 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:
i. CALCULATE the budgeted profit/ loss for the FY 2021-22.
ii. PREPARE an Expense budget on marginal cost basis for the FY 20x2-20x3 for the
company at 50% and 60% level of activity and FIND OUT the profits at respective
levels.

CA NOTE HUB 534

SOLUTION:

(i) Calculation of Budgeted profit for the FY 2021-22

60,000 units
Per unit Amount
(₹) (₹)
Sales (A) 800.00 4,80,00,000
Variable Costs:
- Direct Material 300.00 1,80,00,000
- Direct Wages 100.00 60,00,000
- Variable Overheads 100.00 60,00,000
- Direct Expenses 60.00 36,00,000
- Variable factory expenses 60.00 36,00,000
(75% of ₹80 p.u.)
- Variable Selling & Dist. exp. 32.00 19,20,000
(80% of ₹40 p.u.)
Total Variable Cost (B) 652.00 3,91,20,000
Contribution (C) = (A – B) 148.00 88,80,000
Fixed Costs:
- Office and Admin. exp. (100%) -- 12,00,000
- Fixed factory exp. (25%) -- 12,00,000
- Fixed Selling & Dist. exp. (20%) -- 4,80,000
Total Fixed Costs (D) -- 28,80,000
Profit (C – D) -- 60,00,000

(ii) Expense Budget of P Ltd. for the FY 2022-23 at 50% & 60% level
60,000 units 72,000 units
Per unit Amount Per unit Amount
(₹) (₹) (₹) (₹)
Sales (A) 880.00 5,28,00,000 880.00 6,33,60,000
Variable Costs:
- Direct Material 360.00 2,16,00,000 360.00 2,59,20,000
- Direct Wages 120.00 72,00,000 120.00 86,40,000
- Variable Overheads 120.00 72,00,000 120.00 86,40,000
- Direct Expenses 72.00 43,20,000 72.00 51,84,000
- Variable factory expenses 72.00 43,20,000 72.00 51,84,000

CA NOTE HUB 535

- Variable Selling & Dist. exp. 38.40 23,04,000 38.40 27,64,800
Total Variable Cost (B) 782.40 4,69,44,000 782.40 5,63,32,800
Contribution (C) = (A – B) 97.60 58,56,000 97.60 70,27,200
Fixed Costs:
- Office and Admin. exp. (100%) -- 13,80,000 -- 13,80,000
- Fixed factory exp. (25%) -- 13,80,000 -- 13,80,000
- Fixed Selling & Dist. exp. (20%) -- 5,52,000 -- 5,52,000
Total Fixed Costs (D) -- 33,12,000 -- 33,12,000
Profit (C – D) -- 25,44,000 -- 37,15,200

PROBLEM – 11B: (PYP SEP 24)

Savi Limited is currently working at 80% of its capacity level and furnished the
following information for current period:
Production / Sales 96,000 units
Direct Variable Cost ₹ 20 per unit
Factory Overheads ₹ 8,40,000
Administrative Overheads (Fixed) ₹ 20,60,000
Sales Commission 2% of Sales Value
Transportation Expenses ₹ 4,000 per truck (Loading Capacity 4,000 units)
The selling price of the product is ₹ 120 per unit and Factory Overheads are 80% variable
in nature.
The management of Savi Limited has come.to know that there will be high fluctuations in
the demand of the product in upcoming year and it would not be an easy task to predict
the demand. Selling price per unit will not be affected by demand fluctuations.
Savi Limited has decided to prepare a flexible budget for. the product at 60%, 80% and
100% capacity level.
You are required to prepare the Flexible Budget showing total cost of the product at
each level.

CA NOTE HUB 536

SOLUTION:
Flexible Budget of Savi Ltd
60% 80% 100%
(72,000 units) (96,000 (1,20,000
(₹ ) units) units)
(₹ ) (₹ )
Sales (A) 120.00 120.00 120.00
Variable Costs:
- Direct Variable Cost 20.00 20.00 20.00
-Variable Factory Overheads (WN1) 7.00 7.00 7.00
- Sales Commission (2%) 2.40 2.40 2.40
- Transportation Expenses 1.00 1.00 1.00
Total Variable Cost (B) 30.40 30.40 30.40
Contribution Per Unit (C) = (A – B) 89.60 89.60 89.60
Total Contribution (D) 64,51,200.00 86,01,600.00 1,07,52,000.00
Fixed Costs:
- Administrative Overheads (100%) 20,60,000.00 20,60,000.00 20,60,000.00
- Factory Overheads (20%) 1,68,000.00 1,68,000.00 1,68,000.00
Total Fixed Costs (E) 22,28,000.00 22,28,000.00 22,28,000.00
Profit (D-E) 42,23,200.00 63,73,600.00 85,24,000.00
Total Cost 44,16,800.00 51,46,400.00 58,76,000.00

WN 1:
Variable factory Overheads = ₹ 8,40,000 x 80% = ₹ 6,72,000
Variable factory Overheads per unit = ₹ 6,72,000 ÷ 96,000 Units = ₹ 7

PROBLEM – 12:
The accountant of manufacturing company provides you the following details for year
20x1-20X2:
₹ ₹
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:

CA NOTE HUB 537

 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 is 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 20X2-20X3, it is expected that the demand for product A will fall by 25 % and
for B by 50%. It is decided to manufacture a further product C, the cost for which is
estimated as follows:
Product 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 costs 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 20X2-20X3. Comment on the comparative results.
SOLUTION:
Budget Showing Current Position and Position for 2022-23
Position for 2021-22 Position for 2022-23
A B Total A B C Total
(A + B) (A + B + C)
Sales (units) 2,00,000 1,00,000 – 1,50,000 50,000 2,00,000 –
(₹) (₹) (₹) (₹) (₹) (₹) (₹)
(A) Sales 4,00,000 3,50,000 7,50,000 3,00,000 1,75,000 3,50,000 8,25,000
Direct Material 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 50,000 50,000 1,00,000 37,500 25,000 50,000 1,12,500
Overhead
(100% of Direct
Wages)
(variable)
Other variable 50,000 30,000 80,000 37,500 15,000 50,000 1,02,500
costs

CA NOTE HUB 538

 (B) Marginal 2,50,000 2,05,000 4,55,000 1,87,500 1,02,500 2,30,000 5,20,000
Cost
(C) Contribution 1,50,000 1,45,000 2,95,000 1,12,500 72,500 1,20,000 3,05,000
(A-B)
Fixed costs
– Factory 1,00,000 1,00,000
– Others 80,000 80,000
(D) Total fixed 1,80,000 1,80,000
cost
Profit (C – D) 1,15,000 1,25,000

Comments: Introduction of Product C is likely to increase profit by ₹ 10,000 (i.e. from ₹ 1,15,000
to ₹ 1,25,000) in 2022-23 as compared to 2021-22. Therefore, introduction of product C is
recommended.

PROBLEM – 13:
TQM Ltd. has furnished the following information for the month ending 30th June:
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 overheads (₹) 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:
Per unit ₹
Direct materials (1 kg. at the rate of ₹1 per kg.) 1.00
Direct wages (1 hour at the rate of ₹ 1.50) 1.50
Variable overheads (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, Variable Overhead and Fixed Overhead Expenditure
variances.

CA NOTE HUB 539

SOLUTION:
(i) Statement showing Flexible Budget and its comparison with actual
Master Flexible Budget (at Actual for Variance
Budget standard cost) 72,000
80,000 Per unit 72,000 units
units units
A. Sales 3,20,000 4.00 2,88,000 2,80,000 8,000 (A)
B. Direct material 80,000 1.00 72,000 73,600 1,600 (A)
C. Direct wages 1,20,000 1.50 1,08,000 1,04,800 3,200 (F)
D. Variable overhead 40,000 0.50 36,000 37,600 1,600 (A)
E. Total variable 2,40,000 3.00 2,16,000 2,16,000
cost
F. Contribution 80,000 1.00 72,000 64,000
G. Fixed overhead 40,000 0.50 40,000 39,200 800 (F)
H. Net profit 40,000 0.50 32,000 24,800 7,200 (A)

(ii) Variances:
Direct Material Cost Variance = Standard Cost for Actual output –Actual cost
= ₹ 72,000 – ₹ 73,600 = ₹ 1,600 (A)
Direct Material Price Variance = Actual Quantity (Standard rate – Actual Rate)
₹ 73,600
= 78,400 units ( ₹ 1.00 - )
78,400 units
= 4,800 (F)
Direct Material Usage Variance = Standard Rate (Std. Qty. – Actual Quantity)
= ₹ 1 (72,000 units – 78,400 units)
= ₹ 6,400 (A)
Direct Labour Cost Variance = Standard Cost for actual output – Actual cost
= ₹ 1,08,000 – ₹ 1,04,800 = ₹ 3,200 (F)
Direct Labour Rate Variance = Actual Hour (Std Rate – Actual Rate)
₹ 1,04,800
= 70,400 units ( ₹1.50 - )
70,400 units
= ₹ 800 (F)
Direct Labour Efficiency = Standard Rate (Standard Hour –Actual Hour)
= ₹ 1.5 (72,000 – 70,400) = ₹ 2,400 (F)
Variable Overhead = Recovered variable overhead – Actual variable
overhead
= (72,000 units x ₹ 0.50) – ₹ 37,600

CA NOTE HUB 540

 = ₹ 1,600 (A)
Fixed Overhead Expenditure = Budgeted fixed overhead – Actual fixed
overhead
= ₹ 40,000 – ₹ 39,200 = ₹ 800 (F)

PROBLEM – 14: (MTP 1 MAY 24)

P Ltd. manufactures two products called ‘X’ and ‘Y’. Both products use a common raw
material Z. The raw material Z is purchased @ ₹ 72 per kg from the market. The
company has decided to review inventory management policies for the forthcoming year.
The following forecast information has been extracted from departmental estimates for
the year ended 31st March 2025 (the budget period):
Product X Product Y
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of 5 kg 6 kg
wastage)
Material Z wastage (%) 10 5
Additional information:
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material
cost.
- The cost of placing an order is ₹ 15,600 per order.
- The management of P Ltd. has decided that there should not be more than 40 orders
in a year for the raw material Z.
Required:
(a) (i) Prepare Production budget for Products X and Y (in units) for the year ended
31st March 2025.
(ii) Calculate the Economic Order Quantity for Material Z (in kgs).
(b) Prepare Purchases budget for Material Z (in kgs and value) for the year ended 31st
March 2025.
(c) If there is a sole supplier for the raw material Z in the market and the supplier do
not sale more than 4,000 kg. of material Z at a time. Keeping the management
purchase policy and production quantity mix into consideration, calculate the maximum
number of units of Product X and Y that could be produced.

CA NOTE HUB 541

SOLUTION:
(a)

(i) Production Budget (in units) for the year ended 31st March 2025
Product X Product Y
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000
28,320 13,160
( ) ( )
0.96 0.94

(ii) Calculation of Economic Order Quantity for Material Z

2 × 2,52,310 × 15,600 5,04,620 × 15,600

EOQ=√ =√ = 31,526.95 kg
72 × 11% 72 × 11%

(b) Purchase budget (in kgs and value) for Material Z

Product X Product Y

No. of units to be produced 29,500 14,000

Usage of Material Z per unit of production 5 kg. 6 kg.

Material needed for production 1,47,500 kg. 84,000 kg.

Materials to be purchased 1,63,889 kg. 88,421 kg.
1,47,500 84,000
( ) ( )
0.90 0.95
Total quantity to be purchased 2,52,310 kg.
Rate per kg. of Material Z ₹ 72
Total purchase price ₹ 1,81,66,320

(c) Since, the maximum number of orders per year cannot be more than 40 orders and the
maximum quantity per order that can be purchased is 4,000 kg. Hence, the total quantity
of Material Z that can be available for production:
= 4,000 kg. × 40 orders = 1,60,000 kg.

CA NOTE HUB 542

 Product X Product Y
Material needed for production to 1,03,929 kg. 56,071 kg.
maintain the same production mix 1,63,889 88,421
(1,60,000 × ) (1,60,000 × )
2,52,310 2,52,310
Less: Process wastage 10,393 kg 2,804 kg
Net Material available for production 93,536 kg 53,267 kg

Units to be produced 18,707 units 8,878 units

93,536 kg 53,267 kg
( ) ( )
5 kg 6 kg

PROBLEM – 15: (MTP 1 JAN 25)

The following information relates to Anu Limited, a AI enabled toy manufacturing
company:
The selling price of a toy is ₹ 3,000, and sales are made on credit and invoiced on the
last day of the month.
Variable costs of production per toy are materials (₹ 1,000), labour (₹ 800), and
overhead (₹400)
The sales manager has forecasted the following volumes:
Month No. of Toys
November 1,000
December 1,000
January 1,000
February 1,250
March 1,500
April 2,000
May 1,900
June 2,200
July 2,200
August 2,300
Customers are expected to pay 50% One month after the sale and 50% Two months
after the sale.
The company produces the toys two months before they are sold and the creditors
for materials are paid two months after production.

CA NOTE HUB 543

 Variable overheads are paid in the month following production and are expected to increase
by 25 % in April; 75% of wages are paid in the month of production and 25% in the
following month. A wage increase of 25% will take place on 1st March.
The company needs funds for the running the business and purchase of new machine
so it will sell one of its freehold properties in June for
₹ 20,00,000, and buy a new machine in June for ₹ 5,00,000. Depreciation is currently
₹ 10,000 per month, and will rise to ₹ 15,000 after the purchase of the new machine.
The company’s corporation tax of ₹ 1,00,000 is due for payment in March.
The company presently has a cash balance at bank on 31 December 2023, of ₹ 50,000.
You are required to PREPARE a cash budget for the six months from January to June,
2024.
SOLUTION:

Workings:
1. Sale receipts
Month Nov Dec Jan Feb Mar Apr May Jun
Forecast 1,000 1,000 1,000 1,250 1,500 2,000 1,900 2,200
sales (S)
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
S × 3000 30,00,000 30,00,000 30,00,000 37,50,000 45,00,000 60,00,000 57,00,000 66,00,000
Debtors
pay:
1 month 15,00,000 15,00,000 15,00,000 18,75,000 22,50,000 30,00,000 28,50,000
50%
2nd month - 15,00,000 15,00,000 15,00,000 18,75,000 22,50,000 30,00,000
50%
- 15,00,000 30,00,000 30,00,000 33,75,000 41,25,000 52,50,000 58,50,000

2. Variable overheads
Month Nov Dec Jan Feb Mar Apr May Jun
Qty 1,000 1,250 1,500 2,000 1,900 2,200 2,200 2,300
produced
(Q)
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
Variable 4,00,000 5,00,000 6,00,000 8,00,000 7,60,000
overhead
(Q × 400)
Variable 11,00,000 11,00,000 11,50,000
overhead
(Q × 500)

CA NOTE HUB 544

 Paid one 4,00,000 5,00,000 6,00,000 8,00,000 7,60,000 11,00,000 11,00,000
month
later

3. Wages payments
Month Dec Jan Feb Mar Apr May Jun
Qty 1,250 1,500 2,000 1,900 2,200 2,200 2,300
produced
(Q)
₹ ₹ ₹ ₹ ₹ ₹ ₹
Wages 10,00,000 12,00,000 16,00,000
(Q × 800)
Wages 19,00,000 22,00,000 22,00,000 23,00,000
(Q × 1,000)
75% this 7,50,000 9,00,000 12,00,000 14,25,000 16,50,000 16,50,000 17,25,000
month
25% next 2,50,000 3,00,000 4,00,000 4,75,000 5,50,000 5,50,000
month
7,50,000 11,50,000 15,00,000 18,25,000 21,25,000 22,00,000 22,75,000

Cash Budget – Six Months Ended June

Jan Feb Mar Apr May Jun
₹ ₹ ₹ ₹ ₹ ₹
Receipts:
Sales receipts 30,00,000 30,00,000 33,75,000 41,25,000 52,50,000 58,50,000
Freehold property - - - - - 20,00,000
30,00,000 30,00,000 33,75,000 41,25,000 52,50,000 78,50,000
Payments:
Materials 10,00,000 12,50,000 15,00,000 20,00,000 19,00,000 22,00,000
Var. overheads 5,00,000 6,00,000 8,00,000 7,60,000 11,00,000 11,00,000
Wages 11,50,000 15,00,000 18,25,000 21,25,000 22,00,000 22,75,000
Machine - - - - - 5,00,000
Tax - - 1,00,000 - - -
26,50,000 33,50,000 42,25,000 48,85,000 52,00,000 60,75,000
Net cash flow 3,50,000 (3,50,000) (8,50,000) (7,60,000) 50,000 17,75,000
Balance b/f 50,000 4,00,000 50,000 (8,00,000) (15,60,000) (15,10,000)
Cumulative cash 4,00,000 50,000 (8,00,000) (15,60,000) (15,10,000) 2,65,000
flow

CA NOTE HUB 545

PROBLEM – 16: (RTP MAY 24)
M Ltd. is a public sector undertaking (PSU), produces a product A. The company is in
process of preparing its revenue budget for the year 2024. The company has the following
information which can be useful in preparing the budget:
(i) It has anticipated 12% growth in sales volume from the year 2023 of 4,20,000
tonnes.
(ii) The sales price of ₹ 23,000 per tonne will be increased by 10% provided Wholesale
Price Index (WPI) increases by 5%.
(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The
raw material cost is ₹ 4,500 per tonne. The price of raw material will also increase
by 10% if WPI increase by 5%.
(iv) The projected increase in WPI for 2024 is 4%
(v) A total of 6,000 employees works for the company. The company works 26 days in a
month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year
wage agreement. The earnings per manshift (means an employee cost for a shift of
8 hours) is ₹ 3,000 (excluding terminal benefits). The new wage agreement will be
implemented from 1st July 2024 and it is expected that a 15% increase in pay will be
given.
(vii) The casual employees are getting a daily wage of ₹ 850. The wages in linked to
Consumer Price Index (CPI). The present CPI is 165.17 points and it is expected to
be 173.59 points in year 2024.
(viii) Power cost for the year 2023 is ₹ 42,00,000 for 7,00,000 units (1 unit
= 1 Kwh). 60% of power is used for production purpose (directly related to production
volume) and remaining are for employee quarters and administrative offices.
(ix)During the year 2023, the company has paid ₹ 60,00,000 for safety and maintenance
works. The amount will increase in proportion to the volume of production.
(x) During the year 2023, the company has paid ₹ 1,20,000 for the purchase of diesel
to be used in car hired for administrative purposes. The cost of diesel will increase
by 15% in year 2024.
(xi) During the year 2023, the company has paid ₹ 6,00,000 for car hire charges
(excluding fuel cost). In year 2024, the company has decided to reimburse the
diesel cost to the car rental company. Doing this will attract 5% GST on Reverse
Charge Mechanism (RCM) basis on which the company will not get GST input credit.
(xii) Depreciation on fixed assets for the year 2023 is ₹ 80,40,00,000 and it will

CA NOTE HUB 546

 be 15% lower in 2024.
You being an associate to the budget controller of the company, PREPARE Revenue
(Flexible) budget for the year 2024 and also show the budgeted profit/ loss for the year.
SOLUTION:
Revenue Budget (Flexible Budget) of M Ltd. for the Year 2024
Particulars PY 2023 CY 2024
A Sales Volume (Tonnes) 4,20,000 4,70,400
[112% × 4,20,000]
B Selling Price per tonne (₹) 23,000 23,000
(₹ in lakh) (₹ in lakh)
C Sales value [A × B] 96,600 1,08,192
D Raw material Cost:
(i) Qty of Material [2.3 tonnes × A] 9,66,000 10,81,920
(tonnes)
(ii) Price per tonne (₹) 4,500 4,500
(iii) Total raw material cost 43,470 48,686.40
[(i) × (ii)]
E Wages & Salary Cost:
(i) Wages to casual employees 2,386.80 2,508.47
(15% × 6,000 = 900 employees) [900 × 26 × 12 × ₹ 850] [900 × 26 × 12 ×
₹ 893.33]
(ii) Salary to permanent employees 47,736 51,316.20
(85% × 6,000 = 5,100 employees) [5100 × 26 × 12 × [(5100 × 26 × 6 ×
₹ 3,000] ₹ 3,000) +
(5100 × 26 × 6 ×
₹ 3,450)]
(iii) Total wages & salary 50,122.80 53,824.67
[(i) + (ii) + (iii)]
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units) 2,80,000 2,80,000
[40% × 7,00.000]
(iii) Total Power 7,00,000 7,50,400
Consumption (units) [(i) + (ii)]

CA NOTE HUB 547

(iv) Power rate per unit (₹) 6.00 6.00
[₹ 42,00,000 ÷ 7,00,000]
(v) Tota power cost [(iii)×(iv)] 42 45.024
G Safety and maintenance Cost 60 67.20
[112% × 4,20,000]
H Diesel cost 1.2 -
I Car Hire charge:
(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5%on RCM basis - 0.369
[5% × (i + ii)]
(iv) Total Car hire charge cost 6 7.749
[(i) + (ii) + (iii)]
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C - L] (5,142) (1273.043)

PROBLEM – 17: (MTP 2 MAY 24)

Aman International School has a total of 180 students consisting of 6 sections with 30
students per section. The school plans for a picnic around the city during the week-end
to places such as Prayag zoo, the Capi Park, Azad planetarium etc. A private transport
operator has come forward to lease out the buses for taking the students. Each bus will
have a maximum capacity of 50 (excluding 2 seats reserved for the teachers accompanying
the students). The school will employ two teachers for each bus, paying them an allowance
of ₹ 500 per teacher. It will also lease out the required number of buses. The following
are the other cost estimates:
Cost per student (₹)
Breakfast 50
Lunch 100
Tea 10
Entrance fee at zoo 20
Rent ₹ 6500 per bus.
Special permit fee ₹ 500 per bus.

CA NOTE HUB 548

 Block entrance fee at the planetarium ₹ 2500. Prizes to students
for games ₹ 500.
No cost are incurred in respect of the accompanying teachers (except the allowance of
₹ 500 per teacher).
You are required to PREPARE:
(a) A flexible budget estimating the total cost for the levels of 60, 90,120,150 and 180
students. Each item of cost is to be indicated separately.
(b) COMPARE the average cost per student at these levels.
(c) WHAT will be your conclusions regarding the break-been level of student if the school
proposes to collect ₹ 400 per student?
SOLUTION:
a) Flexible Budget for different levels
₹ ₹ ₹ ₹ ₹
No. of Students 60 90 120 150 180
Variable Cost
Breakfast 3000 4500 6000 7500 9000
Lunch 6000 9000 12000 15000 18000
Tea 600 900 1200 1500 1800
Entrance fee 1200 1800 2400 3000 3600
Sub-Total (A) 10800 16200 21600 27000 32400
Variable cost/unit 180 180 180 180 180
Semi-Variable Cost
Bus rent 13000 13000 19500 19500 26000
Special permit fee 1000 1000 1500 1500 2000
Allowance for teachers 2000 2000 3000 3000 4000
Sub-total (B) 16000 16000 24000 24000 32000
Fixed Cost
Block entrance fee 2500 2500 2500 2500 2500
Prize to students 500 500 500 500 500
Sub total (C) 3000 3000 3000 3000 3000
Total cost (A + B + C) 29,800 35,200 48,600 54,000 67,400
b) Cost per student 496.67 391.11 405.00 360.00 374.44

CA NOTE HUB 549

c) Break-even level ₹
Collection per students 400
Less Variable Cost 180
Contribution 220
Since semi-fixed costs relate to a block of 50 students, the fixed and semi-variable cost
for three level will be:
Level of Student 51 – 100 101 – 150 151 - 200
Fixed + Semi–variable cost (₹) 19,000 27,000 35,000
Contribution per unit (₹) 220 220 220
Break Even level of students 86 123 159

PROBLEM – 18:
The following data is available for DKG and Co:
8 hours per day of 5 days per
Standard working hours 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 a national event.
CALCULATE the following ratios:
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

CA NOTE HUB 550

SOLUTION:
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 No. of Days = 20 Days = 20 Days (4 Weeks x 5 Days)
Actual No. of Days = 20 – 1 = 19 Days
Standard Hours 7000 Hours
1. Efficiency Ratio = x 100 = x 100 = 116.67%
Actual Hours 6000 Hours
Standard Hours 7000 Hours
2. Activity Ratio = x 100 = x 100 = 109.375%
Budgeted Hours 6,400 Hours
Available working days 19 days
3. Calendar Ratio x 100 = x 100 = 95%
Budgeted working days 20 days
Budgeted Hours
4.Standard Capacity usage ratio = x 100
Maximum possible hours in the budgeted period
6400 Hours
= x 100 = 80%
8000 Hours
Actual Hours worked
5. Actual Capacity usage ratio = x 100
Max possible working hours in a period
6,000 Hours
= x 100 = 75%
8,000 Hours
Actual working Hours
6. Actual Usage of Budgeted Capacity Ratio = x 100
Budgeted Hours
6,000 Hours
= x 100 = 93.75%
6,400 Hours

CA NOTE HUB 551

 Hey
Folks !

Multiple Choice
Questions (MCQs) &
Case Scenarios

CA NOTE HUB
CA NOTE HUB
 1. INTRODUCTION TO COST AND
MANAGEMENT ACCOUNTING
Multiple Choice Questions
1. ……………….. is anything for which a separate measurement is required.
(a) Cost unit
(b) Cost object
(c) Cost driver
(d) Cost centre

2. Which of the following is true about Cost control?

(a) It is a corrective function
(b) It challenges the set standards
(c) It ends when targets achieved
(d) It is concerned with future

3. Cost units used in power sector is:

(a) Kilometer (K.M)
(b) Kilowatt-hour (kWh)
(c) Number of electric points
(d) Number of hours

4. Process Costing method is suitable for

(a) Transport sector
(b) Chemical industries
(c) Dam construction
(d) Furniture making

5. Which of the following is Not true about the cost control and cost reduction:
(a) Cost control seeks to attain lowest possible cost under best conditions.
(b) Cost control emphasises on past and present.
(c) Cost reduction is a corrective function. It operates even when an efficient cost control
system exists.
(d) Cost control ends when targets are achieved.

CA NOTE HUB 552

6. The advantage of using IT in Cost Accounting does not include:
(a) Integration of various functions
(b) Stock needs to be reconciled with Goods Received Note
(c) Reduction in multicity of documents
(d) Customised reports can be prepared.

7. A taxi provider charges minimum ₹ 80 thereafter ₹ 12 per kilometer of distance

travelled, the behaviour of conveyance cost is:
(a) Fixed Cost
(b) Semi-variable Cost
(c) Variable Cost
(d) Administrative cost.

8. A Ltd. has three production department, and each department has two machines,
which of the following cannot be treated as cost centre for cost allocation:
(a) Machines under the production department
(b) Production departments
(c) Both Production department and machines
(d) A Ltd.

9. Which of the following is an example of functional classification of cost:

(a) Direct Material Cost
(b) Fixed Cost
(c) Administrative Overheads
(d) Indirect Overheads.

10. Ticket counter in a Railway Station is an example of

(a) Cost Centre
(b) Revenue Centre
(c) Profit Centre
(d) Investment Centre
Answers to the MCQs
1. (b) 2. (c) 3. (b) 4. (b) 5. (a) 6. (b)
7. (b) 8. (d) 9. (c) 10. (b)

CA NOTE HUB 553

 2. MATERIAL COST
Multiple Choice Questions
1. Direct material can be classified as
(a) Fixed cost
(b) Variable cost
(c) Semi-variable cost.
(d) Prime Cost

2. In most of the industries, the most important element of cost is

(a) Material
(b) Labour
(c) Overheads
(d) Administration Cost

3. Which of the following is considered to be the normal loss of materials?

(a) Loss due to accidents
(b) Pilferage
(c) Loss due to breaking the bulk
(d) Loss due to careless handling of materials.

4. In which of following methods of pricing, costs lag behind the current economic values?
(a) Last-in-first out price
(b) First-in-first out price
(c) Replacement price
(d) Weighted average price

5. Continuous stock taking is a part of

(a) Annual stock taking
(b) Perpetual inventory
(c) ABC analysis.
(d) Bin Cards

CA NOTE HUB 554

6. In which of the following methods, issues of materials are priced at pre-determined
rate?
(a) Inflated price method
(b) Standard price method
(c) Replacement price method
(d) Market price method.

7. When material prices fluctuate widely, the method of pricing that gives absurd results
is
(a) Simple average price
(b) Weighted average price
(c) Moving average price
(d) Inflated price.

8. When prices fluctuate widely, the method that will smooth out the effect of
fluctuations is
(a) Simple average
(b) Weighted average
(c) FIFO
(d) LIFO

9. Under the FSN system of inventory control, inventory is classified on the basis of:
(a) Volume of material consumption
(d) Frequency of usage of items of inventory
(c) Criticality of the item of inventory for production
(d) Value of items of inventory

10. Form used for making a formal request to the purchasing department to purchase
materials is a - :
(a) Material Transfer Note
(b) Purchase Requisition Note
(c) Bill of Materials
(d) Material Requisition Note
Answers to the MCQs
1. (b) 2. (a) 3. (c) 4. (b) 5. (b) 6. (b)

CA NOTE HUB 555

7. (a) 8. (b) 9. (b) 10. (b)

CA NOTE HUB 556

 Case Scenarios
QUESTION 1: The purchase committee of A Ltd. has been entrusted to review the
material procurement policy of the company. The chief marketing manager has appraised
the committee that the company at present produces a single product X by using two raw
materials A and B in the ratio of 3:2. Material A is perishable in nature and has to be
used within 10 days from Goods received note (GRN) date otherwise material becomes
obsolete. Material B is durable in nature and can be used even after one year. Material A
is purchased from the local market within 1 to 2 days of placing order. Material B, on the
other hand, is purchased from neighbouring state and it takes 2 to 4 days to receive the
material in the store.
The purchase price of per kilogram of raw material A and B is ₹ 30 and ₹ 44 respectively
exclusive of taxes. To place an order, the company has to incur an administrative cost of
₹ 1,200. Carrying cost for Material A and B is 15% and 5% respectively. At present
material A is purchased in a lot of 15,000 kg. to avail 10% discount on market price. GST
applicable for both the materials is 18% and the input tax credit is availed.
The sales department has provided an estimate that the company could sell 30,000 kg. in
January 2024 and also projected the same trend for the entire year.
The ratio of input and output is 5:3. Company works for 25 days in a month and production
is carried out evenly.
The following queries/ calculations to be kept ready for purchase committees’ reference:
i. For the month of January 2024, what would be the quantity of the materials to be
requisitioned for both material A and B:
(a) 9,000 kg & 6,000 kg respectively
(b) 18,000 kg & 12,000 kg respectively
(c) 27,000 kg & 18,000 kg respectively
(d) 30,000 kg & 20,000 kg respectively.

ii. The economic order quantity (EOQ) for both the material A & B:
(a) 13,856 kg & 16,181 kg respectively
(b) 16,197 kg & 17,327 kg respectively
(c) 16,181 kg & 17,165 kg respectively
(d) 13,197 kg & 17,165 kg respectively

CA NOTE HUB 557

iii. What would the maximum stock level for material A:
(a) 18,200 kg.
(b) 12,000 kg.
(c) 16,000 kg.
(d) 16,200 kg.

iv. Calculate saving/ loss in purchase of Material A if the purchase order quantity is equal
to EOQ.
(a) Profit of ₹3,21,201.
(b) Loss of ₹3,21,201.
(c) Profit of ₹2,52,500.
(d) Loss of ₹2,52,500.

v. What would the minimum stock level for material A:

(a) 1,800 kg.
(b) 1,200 kg.
(c) 600 kg.
(d) 2,400 kg.
Answer:
i. (d) ii. (a) iii. (b) iv. (b) v. (c)

(i) (d)
Monthly Production of X = 30,000 kgs.
Raw Material Required = 30,000 × 5 ÷ 3 = 50,000 kgs.
Material A = 50,000 × 3 ÷ 5 = 30,000 kg.
Material B = 50,000 × 2 ÷ 5 = 20,000 kg.
(ii) (a)
Calculation of Economic Order Quantity (EOQ):

2 × Annual consumption × Order cost

Material A = √
Carrying cost per unit p.a.

2 × (30,000 x 12) x 1,200

=√ = 13,856 kg.
15% of 30

2 × (20,000 x 12) x 1,200

Material B = √ = 16,181 kg.
5% of 44

CA NOTE HUB 558

(iii) (b)
Calculation of Maximum Stock level: Since, the Material A is perishable in nature and it
required to be used within 10 days, hence, the Maximum Stock Level shall be lower of two:
(a) Stock equal to 10 days consumption
=30000 ÷ 25 × 10 days = 12,000 kg.
(b) Maximum Stock Level for Material A:
Re-order Quantity + Re-order level – (Min consumption* × Min. lead time)
Where,
Re-order Quantity = 15,000 kg.
Re-order level = Max. Consumption* × Max. Lead time
= 30,000 ÷ 25 × 2 days = 2,400 kg.
Maximum stock Level = 15,000 kg. + 2,400 kg. - (30,000 ÷ 25 × 1 day)
= 17,400 – 1,200 = 16,200 kg.
Stock required for 10 days consumption is lower than the maximum stock level calculated
through the formula. Therefore, Maximum Stock Level will be 12,000 kg.
(*Since, production is processed evenly throughout the month hence material consumption
will also be even.)
(iv) (b)
Calculation of Savings/ loss in Material A if purchase quantity equals to EOQ.
Purchase Quantity Purchase Quantity
= 15,000 kg. = EOQ i.e. 13,856 kg.
Annual consumption 3,60,000 kg. 3,60,000 kg.
(30,000 × 12 months) (30,000 × 12 months)
No. of orders 30 30
[Note- (i)] (3,60,000 ÷ 12,000) (3,60,000 ÷ 12,000)
Ordering Cost (a) ₹ 36,000 ₹ 36,000
(₹ 1200 × 30) (₹ 1200 × 30)
Carrying Cost (b) ₹ 30,375 ₹ 31,176
[Note- (ii)] (15% of ₹ 27 × 7,500) (15% of ₹ 30 × 6,928)
Purchase Cost (c) ₹ 97,20,000 ₹ 1,08,00,000
(for good portion) (₹ 27 × 3,60,000) (₹ 30 × 3,60,000)
Loss due to obsolescence (d) ₹ 24,30,000 ₹ 16,70,400
[Note- (iii)] [₹ 27 × (30 × 3,000)] [₹ 30 × (30 × 1,856)]
Total Cost [(a) + (b) + (c) + (d)] ₹ 1,22,16,375 ₹ 1,25,37,576
Purchasing of material -A at present policy of 15,000 kg. saves ₹ 3,21,201.

CA NOTE HUB 559

 Notes: (i) Since, material gets obsolete after 10 days, the quantity in excess of 10 days
consumption i.e. 12,000 kg. are wasted. Hence, after 12,000 kg. a fresh order needs to be
given.

(ii) Carrying cost is incurred on average stock of Materials purchased.

(iii) the excess quantity of material becomes obsolete and loss has to be incurred.
(v) (c)
Minimum Stock Level for Material A
= Re-order level – (Average Consumption Rate x Average Re-order Period)
= 2400 – (1200 x 1.5) = 600 kgs
Re-order level = Max. Consumption* × Max. Lead time
= 30,000 ÷ 25 × 2 days = 2,400 kg.
Average Consumption Rate = (30,000 ÷ 25 + 30,000 ÷ 25) ÷ 2
= 1,200 Kg
Average Re-order Period = (1 + 2) ÷ 2 = 1.5 Days
Stock required for 10 days consumption is lower than the maximum stock level calculated
through the formula. Therefore, Maximum Stock Level will be 12,000 kg.
(*Since, production is processed evenly throughout the month hence material consumption
will also be even.)

CA NOTE HUB 560

 3. EMPLOYEE COST AND DIRECT EXPENSES
Multiple Choice Questions
1. Idle time is the time under which-
(a) Full wages are paid to workers
(b) No productivity is given by the workers
(c) Both (a) and (b)
(d) None of the above

2. Cost of idle time due to non- availability of raw material is-

(a) Charged to overhead costs
(b) Charged to respective jobs
(c) Charged to costing profit and loss account
(d) None of the above

3. Time and motion study is conducted by-

(a) Time keeping department
(b) Personnel department
(c) Payroll department
(d) Engineering department

4. Identify, which one of the following, does not account for increasing labour productivity-
(a) Job satisfaction
(b) Motivating workers
(c) High labour turnover
(d) Proper supervision and control

5. Labour turnover is measured by-

(a) Number of persons replaced/ average number of workers
(b) Numbers of persons separated / number of workers at the beginning of the year
(c) (Number of persons replaced + number of persons separated)/(number of persons at the
beginning + the number of persons at the end of the year)
(d) None of the above

CA NOTE HUB 561

6. Time booking refers to a method wherein ……………… of an employee is recorded.
(a) Attendance
(b) Food expenses
(c) Health status
(d) Time spent on a particular job

7. Employee Cost includes-

(a) Wages and salaries
(b) Allowances and incentives
(c) Payment for overtime
(d) All of the above

8. If the time saved is less than 50% of the standard time, then the wages under Rowan
and Halsey premium plan on comparison gives-
(a) More wages to workers under Rowan plan than Halsey plan
(b) More wages to workers under Halsey plan than Rowan plan
(c) Equal wages under two plans
(d) None of the above

9. Standard time of a job is 60 hours and guaranteed time rate is ₹ 0.30 per hour. What
is the amount of wages under Rowan plan if job is completed in 48 hours?
(a) ₹ 16.20
(b) ₹ 17.28
(c) ₹ 18.00
(d) ₹ 14.40

10. Important factors for control of employee cost can be-

(a) Time and Motion Study
(b) Control over idle time and overtime
(c) Control over employee turnover
(d) All of the above

11. Out of the following methods attendance is marked by recognizing an employee based on
physical and behavioural traits-
(a) Punch Card Attendance method

CA NOTE HUB 562

 (b) Bio- Metric Attendance system
(c) Attendance Register method
(d) Token Method

12. If overtime is required for meeting urgent orders, the overtime premium should be
charged as-
(a) Respective job
(b) Overhead cost
(c) Costing P& L A/c
(d) None of above
Answers to the MCQs

1. (c) 2. (c) 3. (d) 4. (c) 5. (a) 6. (d)

7. (d) 8. (a) 9. (b) 10. (d) 11. (b) 12. (a)

Case Scenarios
QUESTION 1: The board of the J Ltd. has been appraised by the General Manager (HR)
that the employee attrition rate in the company has increased. The following facts has
been presented by the GM(HR):
(1) Training period of the new recruits is 50,000 hours During this period their productivity
is 60% of the experienced workers Time required by an experienced worker is 10 hours
per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a
defective unit was ₹ 25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours
(4) Selling price per unit is ₹ 180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was ₹ 1,83,480.
(6) Recruitment cost was ₹ 1,56,340
(7) Training cost was ₹ 1,13,180
You being an associate finance to GM(HR), has been asked the following questions:
i. How much quantity of output is lost due to labour turnover?
(a) 10,000 units
(b) 8,000 units
(c) 12,000 units
(d) 12,600 units

CA NOTE HUB 563

ii. How much loss in the form of contribution, the company incurred due to labour turnover?
(a) ₹ 4,32,000
(b) ₹ 4,20,000
(c) ₹ 4,36,000
(d) ₹ 4,28,000

iii. What is the cost repairing of defective units?

(a) ₹ 75,000
(b) ₹ 15,000
(c) ₹ 50,000
(d) ₹ 25,000

iv. Calculate the profit lost by the company due to increased labour turnover.
(a) ₹ 7,50,000
(b) ₹ 15,00,000
(c) ₹ 5,00,000
(d) ₹ 9,00,000

v. How much quantity of output is lost due to inexperience of the new worker?
(a) 1,000 units
(b) 2,600 units
(c) 2,000 units
(d) 12,600 units
Answer:

i. (c) ii. (a) iii. (b) iv. (d) v. (c)

(i) (c)
Output by experienced workers in 50,000 hours
= 50,000 ÷ 10 =5,000 units
 Output by new recruits = 60% of 5,000 = 3,000 units
Loss of output = 5,000 – 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
(ii) (a)
Contribution per unit = 20% of ₹ 180 = ₹ 36
Total contribution lost = ₹ 36 × 12,000 units = ₹ 4,32,000

CA NOTE HUB 564

(iii) (b)
Cost of repairing defective units = 3,000 units × 0.2 × ₹ 25 = ₹ 15,000
(iv) (d)
Calculation of loss of profit due to labour turnover
(₹)
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 2022-23 9,00,000
(v) (c)
Output by experienced workers in 50,000 hours
= = 5,000 units 50,000 10
Output by new recruits = 60% of 5,000 = 3,000 units
Loss of output = 5,000 – 3,000 = 2,000 units

CA NOTE HUB 565

 4. OVERHEADSABSORPTION COSTING
METHOD
Multiple Choice Questions
1. “Fixed overhead costs are not affected in monetary terms during a given period by a
change in output”. But this statement holds good provided:
(a) Increase in output is not substantial
(b) Increase in output is substantial
(c) Both (a) and (b)
(d) None of the above

2. ………….. capacity is defined as actually utilised capacity of a plant.

(a) Theoretical
(b) Installed
(c) Practical
(d) Normal

3. The allotment of whole items of cost to cost centres or cost units is called:
(a) Overhead absorption
(b) Cost apportionment
(c) Cost allocation
(d) None of the above

4. Primary packing cost is a part of:

(a) Direct material cost
(b) Production Cost
(c) Selling overheads
(d) Distribution overheads

5. Director’s remuneration and expenses form part of:

(a) Production overhead
(b) Administration overhead
(c) Selling overhead
(d) Distribution overhead

CA NOTE HUB 566

6. Which of the following is not the classification of overhead based on its functionality?
(a) Factory Overhead
(b) Administrative Overhead
(c) Fixed Overhead
(d) Selling Overhead

7. Bad debt is an example of:

(a) Distribution overhead
(b) Production overhead
(c) Selling overhead
(d) Administration overhead

8. Normal capacity of a plant refers to the difference between:

(a) Maximum capacity and practical capacity
(b) Practical capacity and normal capacity
(c) Practical capacity and estimated idle capacity as revealed by long term sales trend.
(d) Maximum capacity and actual capacity

9. The difference between actual factory overhead and absorbed factory overhead will be
usually at the minimum level, provided pre- determined overhead rate is based on:
(a) Maximum capacity
(b) Direct labour hours
(c) Machine hours
(d) Normal capacity

10. Which of the following overhead cost may not be apportioned on the basis of direct
wages?
(a) Worker’s Holiday Pay
(b) Perquisites to worker
(c) ESI contribution
(d) Managerial Salaries
Answers to the MCQs

1. (a) 2. (c) 3. (c) 4. (b) 5. (b) 6. (c)

7. (c) 8. (c) 9. (d) 10 (d)

CA NOTE HUB 567

 Case Scenarios
QUESTION 1: During half year ending inter departmental review meeting of P Ltd., cost
variance report was discussed and the performance of the departments were assessed. The
following figures were presented.
For a period of first six months of the financial year, following information were extracted
from the books:
Actual production overheads ₹ 34,08,000
The above amount is inclusive of the following payments made:
Paid as per court’s order ₹ 4,50,000
Expenses of previous year booked in current year ₹ 1,00,000
Paid to workers for strike period under an award ₹ 4,20,000
Obsolete stores written off ₹ 36,000
Machine worked during the period was 3,000 hours
At the of preparation of revenue budget, it was estimated that a total of ₹ 50,40,000
would be required for budgeted machine hours of 6,000 as production overheads for the
entire year.
During the meeting, a data analytic report revealed that 40% of the over/under-absorption
was due to defective production policies and the balance was attributable to increase in
costs.
You were also present at the meeting; the chairperson of the meeting has asked you to be
ready with the followings for the performance appraisal of the departmental heads:
(i) How much was the budgeted machine hour rate used to recover overhead?
(a) ₹ 760
(b) ₹ 820
(c) ₹ 780
(d) ₹ 840

(ii) How much amount of production overhead has been recovered (absorbed) upto the end
of half year end?
(a) ₹ 25,20,000
(b) ₹ 34,08,000
(c) ₹ 24,00,000
(d) ₹ 24,60,000

CA NOTE HUB 568

(iii) What is the amount of overhead under/ over absorbed?
(a) 1,18,000 over-absorbed
(b) 1,18,000 under- absorbed
(c) 18,000 over-absorbed
(d) 18,000 under-absorbed

(iv) What is the supplementary rate for apportionment of over/under absorbed overheads
over WIP, Finished goods and Cost of sales?
(a) ₹ 0.315 per unit
(b) ₹ 0.472 per unit
(c) ₹ 0.787 per unit
(d) ₹ 1 per unit

(v) What is the amount of over/under absorbed overhead apportioned to Work in Progress?
(a) ₹ 9,440
(b) ₹ 42,480
(c) ₹ 18,880
(d) ₹ 70,800
Answer:
i. (d) ii. (a) iii. (a) iv. (b) v. (c)

(i) (d)
Budgeted Machine hour rate (Blanket rate)
= ₹ 50,40,000 ÷ 6,000 hours = ₹ 840 per hour
(ii) (a) ₹ 25,20,000
(iii) (a)
Amount (₹) Amount (₹)
Total production overheads actually incurred during the 34,08,000
period
Less: Amount paid to worker as per court order 4,50,000
Expenses of previous year booked in the current year 1,00,000
Wages paid for the strike period under an award 4,20,000
Obsolete stores written off 36,000 10,06,000
24,02,000

CA NOTE HUB 569

 Less: Production overheads absorbed as per machine 25,20,000
hour rate (3,000 hours × ₹ 840*)
Amount of over absorbed production overheads 1,18,000

(iv) (b)
Accounting treatment of over absorbed production overheads: As, 40% of the over
absorbed overheads were due to defective production policies, this being abnormal, hence
should be credited to Costing Profit and Loss Account.
Amount to be credited to Costing Profit and Loss Account
= ₹ 1,18,000 × 40% = ₹ 47,200.
Balance of over absorbed production overheads should be distributed over Works in
progress, Finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = ₹ 1,18,000 × 60% = ₹ 70,800
Supplementary rate = ₹ 70,800 ÷ 1,50,000 units = 0.472 per unit
(v) (c)
Apportionment of over absorbed production overheads over WIP, Finished goods and Cost of
sales:
Equivalent Amount
completed (₹)
units
Work-in-Progress (80,000 units × 50% × 0.472) 40,000 18,880
Finished goods (20,000 units × 0.472) 20,000 9,440
Cost of sales (90,000 units × 0.472) 90,000 42,480
Total 1,50,000 70,800

CA NOTE HUB 570

 5. ACTIVITY BASED COSTING
Multiple Choice Questions
1. A cost driver is:
(a) An item of production overheads
(b) A common cost which is shared over cost centres
(c) Any cost relating to transport
(d) An activity which generates costs

2. In activity based costing, costs are accumulated by activity using:

(a) Cost drivers
(b) Cost objects
(c) Cost pools
(d) Cost benefit analysis

3. A cost driver:
(a) Is a force behind the overhead cost
(b) Is an allocation base
(c) Is a transaction that is a significant determinant of cost
(d) All of the above

4. Which of the following is not a correct match:

Activity Cost Driver
(a) Production Scheduling Number of Production runs
(b) Despatching Number of dispatch orders
(c) Goods receiving Goods received orders
(d) Inspection Machine hours

5. Transactions undertaken by support department personnel are the appropriate cost

drivers Find the one which is not appropriate:
(a) The number of purchase, supplies and customers’ orders drives the cost associated with
new material inventory, work-in-progress and finished goods inventory
(b) The number of production runs undertaken drives production scheduling, inspection and
material handling
(c) The quality of raw material issued drives the cost of receiving department costs

CA NOTE HUB 571

 (d) The number of packing orders drives the packing costs

6. Steps in ABC include:

(a) Identification of activities and their respective costs
(b) Identification of cost driver of each activity and computation of an allocation rate per
activity
(c) Allocation of overhead cost to products/ services based on the activities involved
(d) All of the above

7. Which of the following is not a benefit of ABC?

(a) Accurate cost allocation
(b) Improved decision making
(c) Better control on activity and costs
(d) Reduction of prime cost

8. The steps involved for installation of ABC in a manufacturing company include the
following except:
(a) Borrowing fund
(b) Feasibility study
(c) Building up necessary IT infrastructure and training of line employees
(d) Strategy and value chain analysis

9. Which of the following statements are true:

(1) Activity based Management involves activity analysis and performance measurement.
(2) Activity based costing serves as a major source of information in ABM.
(a) (1) True; (2) False
(b) (1) True; (2) True
(c) (1) False; (2) True
(d) (1) False; (2) False

10. The key elements of activity based budgeting are:

(a) Type of activity to be performed
(b) Quantity of activity to be performed
(c) Cost of activity to be performed
(d) All of the above

CA NOTE HUB 572

Answers to the MCQs
1. (d) 2. (c) 3. (d) 4. (d) 5. (c) 6. (d)

7. (d) 8. (a) 9. (b) 10. (d)

Case Scenarios
QUESTION 1: The sales department of A Limited is analysing the customer profitability
for its Product Z. It has decided to analyse the profitability of its five new customers
using activity-based costing method. It buys Product Z at
₹5,400 per unit and sells to retail customers at a listed price of ₹ 6,480 per unit.
The data pertaining to five customers are:
Customers
A B C D E
Units sold 4,500 6,000 9,500 7,500 12,750
Listed Selling Price ₹ 6,480 ₹ 6,480 ₹ 6,480 ₹ 6,480 ₹ 6,480
Actual Selling Price ₹ 6,480 ₹ 6,372 ₹ 5,940 ₹ 6,264 ₹ 5,832
Number of Purchase orders 15 25 30 25 30
Number of Customer visits 2 3 6 2 3
Number of deliveries 10 30 60 40 20
Kilometers travelled per 20 6 5 10 30
delivery
Number of expedited deliveries 0 0 0 0 1
After a detailed analysis and computation, the following activities has been identified
and respective cost has been calculated:
Activity Cost Driver Rate
Order taking ₹ 4,500 per purchase order
Customer visits ₹ 3,600 per customer visit
Deliveries ₹ 7.50 per delivery Km travelled
Product handling ₹ 22.50 per case sold
Expedited deliveries ₹ 13,500 per expedited delivery
You have been assigned the following task of computing different cost information for
managerial decision making:
(i) How much cost on customer visit is incurred on customer E?
(a) ₹ 7,200
(b) ₹ 10,800

CA NOTE HUB 573

 (c) ₹ 21,600
(d) ₹ 3,600
(ii) What is the cost of goods sold for customer D?
(a) ₹ 2,43,00,000
(b) ₹ 3,24,00,000
(c) ₹ 5,13,00,000
(d) ₹ 4,05,00,000
(iii) How much is the cost of expediting delivery for customer A?
(a) ₹ 13,500
(b) ₹ 27,000
(c) ₹ 40,500
(d) ₹ 0
(iv) Compute the customer-level operating income of each of customers A.
(a) ₹ 55,72,350
(b) ₹ 46,82,550
(c) ₹ 47,57,400
(d) ₹ 50,57,325
(v) Compute the customer-level operating income of each of five retail customers D and
E.
(a) ₹ 46,82,550 & 50,65,720
(b) ₹ 55,72,350 & 46,85,500
(c) ₹ 47,57,400 & 55,72,350
(d) ₹ 61,88,550 & 50,57,325
Answers to the Case Scenarios
i. (b) ii. (d) iii. (c) iv. (b) v. (d)

(i) (b) ₹ 10,800

(ii) (d) ₹ 4,05,00,000
(iii) (c) ₹ 0
(iv) (b) ₹ 46,82,550
(v) (d) ₹ 61,88,550 & 50,57,325

CA NOTE HUB 574

Working note:
1. Computation of revenues (at listed price), discount, cost of goods sold and customer
level operating activities costs:
Customers
A B C D E
Units sold: (a) 4,500 6,000 9,500 7,500 12,750
Revenues (at listed 2,91,60,000 3,88,80,000 6,15,60,000 4,86,00,000 8,26,20,000
price) (₹): (b)
{(a) ×₹ 6,480)}
Revenues (at listed 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
price) (₹): (c) (4,500 × (6,000 × (9,500 × (7,500 × (12,750 ×
{(a) ×Actual selling 6,480) 6,372) 5,940) 6,264) 5,832)
price)}
Discount (₹) (d) 0 6,48,000 51,30,000 16,20,000 82,62,000
{(b) – (c)}
Cost of goods sold 2,43,00,000 3,24,00,000 5,13,00,000 4,05,00,000 6,88,50,000
(₹) : (e)
{(a) x ₹ 5,400}
Customer level operating activities costs
Order taking costs 67,500 1,12,500 1,35,000 1,12,500 1,35,000
(₹):
(No. of purchase
orders × ₹ 4,500)
Customer visits 7,200 10,800 21,600 7,200 10,800
costs (₹)
(No. of customer
visits x ₹ 3,600)
Delivery vehicles 1,500 1,350 2,250 3,000 4,500
travel costs (₹)
(Kms travelled by
delivery vehicles x
₹ 7.50 per km.)
Product handling 1,01,250 1,35,000 2,13,750 1,68,750 2,86,875
costs (₹)
{(a) x ₹ 22.50}

CA NOTE HUB 575

 Cost of expediting - - - - 13,500
deliveries (₹)
{No. of expedited
deliveries x
₹ 13,500}
Total cost of
customer level
operating activities
(₹) 1,77,450 2,59,650 3,72,600 2,91,450 4,50,675

Computation of Customer level operating income

Customers
A B C D E
(₹) (₹) (₹) (₹) (₹)
Revenues 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
(At list price)
(Refer to
working note)
Less: Cost of goods (2,43,00,000) (3,24,00,000) (5,13,00,000) (4,05,00,000) (6,88,50,000)
sold
(Refer to
working note)
Gross margin 48,60,000 58,32,000 51,30,000 64,80,000 55,08,000
Less: Customer level
operating activities
costs
(Refer to working (1,77,450) (2,59,650) (3,72,600) (2,91,450) (4,50,675)
note)
Customer level 46,82,550 55,72,350 47,57,400 61,88,550 50,57,325
operating income

CA NOTE HUB 576

 6. COST SHEET
Multiple Choice Questions
1. Generally, for the purpose of cost sheet preparation, costs are classified on the basis
of:
(a) Functions
(b) Variability
(c) Relevance
(d) Nature

2. Which of the following does not form part of prime cost:

(a) Cost of packing
(b) Cost of transportation paid to bring materials to factory
(c) GST paid on raw materials (input credit cannot be claimed)
(d) Overtime premium paid to workers

3. A Ltd. received an order, for which it purchased a special frame for manufacturing,
it is a part of:
(a) Direct Materials
(b) Direct expenses
(c) Factory Overheads
(d) Administration Overheads

4. Salary paid to plant supervisor is a part of

(a) Direct expenses
(b) Factory overheads
(c) Quality control cost
(d) Administration cost

5. Depreciation of director’s laptop is treated as a part of:

(a) Administration Overheads
(b) Factory Overheads
(c) Direct Expenses
(d) Research & Development cost.

CA NOTE HUB 577

 6. A manufacture has set-up a lab for testing of products for compliance with
standards, salary of this lab staffs are part of:
(a) Works overheads
(b) Quality Control Cost
(c) Direct Expenses
(d) Research & Development Cost.

7. Audit fees paid to auditors is part of:

(a) Administration Cost
(b) Production cost
(c) Selling & Distribution cost
(d) Not shown in cost sheet.

8. Salary paid to factory store staff is part of:

(a) Factory overheads
(b) Production Cost
(c) Direct Employee cost
(d) Direct Material Cost.

9. Canteen expenses for factory workers are part of:

(a) Factory overhead
(b) Administration Cost
(c) Marketing cost
(d) None of the above.

10. A company pays royalty to State Government on the basis of production, it is treated
as:
(a) Direct Material Cost
(b) Factory Overheads
(c) Direct Expenses
(d) Administration cost.
Answers to the MCQs
1. (a) 2. (a) 3. (b) 4. (b) 5. (a) 6. (b)

7. (a) 8. (a) 9. (a) 10. (c)

CA NOTE HUB 578

 Case Scenarios
QUESTION 1: M Ltd. is producing a single product and may expand into product
diversification in next one to two years M Ltd. is amongst a labour-intensive company where
majority of processes are done manually. Employee cost is a major cost element in the total
cost of the company. The company conventionally uses performance parameters Earnings
per manshift (EMS) to measure cost paid to an employee for a shift of 8 hours, and Output
per manshift (OMS) to measure an employee’s output in a shift of 8 hours
The Chief Manager (Finance) of the company has emailed you few information related to
the last month. The email contains the following data related to the last month:
During the last month, the company has produced 2,34,000 tonnes of output. Expenditures
for the last months are:
(i) Raw materials consumed ₹ 50,00,000
(ii) Power consumed 13,000 Kwh @ ₹ 8 per Kwh to run the machines for production.
(iii) Diesels consumed 2,000 litres @ ₹ 93 per litre to run power generator used as
alternative or backup for power cuts.
(iv) Wages & salary paid – ₹ 6,40,00,000
(v) Gratuity & leave encashment paid – ₹ 64,20,000
(vi) Hiring charges paid for HEMM- ₹ 30,00,000. HEMM are directly used in production.
(vii) Hiring charges paid for cars used for official purpose – ₹ 66,000
(viii) Reimbursement of diesel cost for the cars – ₹ 22,000
(ix)The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the
time of dispatch) – ₹ 12,000
(xi)AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at
the time of dispatch) and factory premises is ₹ 8,000 and ₹ 18,000 per month
respectively.
(xii) TA/ DA and hotel bill paid for sales manager - ₹ 36,000
(xiii) The company has 1,800 employees works for 26 days in a month. You are asked to
calculate the followings:
i. What is the amount of prime cost incurred during the last month:
(a) ₹ 7,54,20,000
(b) ₹ 7,57,10,000
(c) ₹ 7,56,06,000
(d) ₹ 7,87,10,000

CA NOTE HUB 579

ii. What is the total and per shift cost of production for last month:
(a) ₹ 7,87,10,000 and ₹ 336.37 respectively
(b) ₹ 7,87,10,000 and ₹ 1,681.84 respectively
(c) ₹ 7,87,28,000 and ₹ 1,682.22 respectively
(d) ₹ 7,87,28,000 and ₹ 336.44 respectively

iii. What is the value of administrative cost incurred during the last month?
(a) ₹ 92,400
(b) ₹ 88,000
(c) ₹ 1,48,400
(d) ₹ 1,44,000

iv. What is the value of selling and distribution cost and total cost of sales?
(a) ₹ 36,000 & `7,88,76,400 respectively
(b) ₹ 56,000 & `7,88,76,400 respectively
(c) ₹ 36,000 & `7,88,72,000 respectively
(d) ₹ 56,000 & `7,88,72,000 respectively

v. What is the value EMS and OMS for the last month?
(a) ₹ 1,504.70 & 5 tonnes respectively
(b) ₹ 1,367.52 & 5 tonnes respectively
(c) ₹ 1,504.70 & 4.37 tonnes respectively
(d) ₹ 1,367.52 & 4.37 tonnes respectively
Answer:
i. (d) ii. (c) iii. (a) iv. (b) v. (a)

i. (d) Please refer cost sheet below for prime cost

ii. ©
Please refer cost sheet below for cost of production Cost of production per manshift
= Cost of production ÷ Total manshift
₹ 7,87,28,000 ÷ 46,800 = ₹ 1,682.22
iii. (a) Car hire charges including GST @5%, please refer the cost sheet
iv. (b)
Selling and distribution cost includes the following:
Maintenance cost for weighing bridge 12,000
AMC cost of CCTV installed at weigh bridge 8,000

CA NOTE HUB 580

 TA/ DA & hotel bill of sales manager 36,000
56,000
For Cost of Sale please refer the cost sheet
v. (a)
Manshift = 1,800 employees × 26 days = 46,800 manshifts Computation of earnings per
manshift (EMS):
EMS = Total employee benefits paid ÷ Manshift
= ₹ 7,04,20,000 ÷ 46,800 = ₹ 1504.70
Computation of Output per manshift (OMS):
OMS = Total Output / Production ÷ Manshift
2,34,000 Tonne ÷ 46,800 = 5 tonnes
Workings
Cost Sheet of M Ltd. for the last month
Particulars Amount (₹) Amount (₹)
Materials consumed 50,00,000
Wages & Salary 6,40,00,000
Gratuity & leave encashment 64,20,000 7,04,20,000
Power cost (13,000 kwh × ₹ 8) 1,04,000
Diesel cost (2,000 ltr × ₹ 93) 1,86,000 2,90,000
HEMM hiring charges 30,00,000
Prime Cost 7,87,10,000
AMC cost of CCTV installed atfactory premises 18,000
Cost of Production/ Cost of Goods Sold 7,87,28,000
Hiring charges of cars 66,000
Reimbursement of diesel cost 22,000
88,000
Add: GST @5% on RCM basis 4,400 92,400
Maintenance cost for weighingbridge 12,000
AMC cost of CCTV installed at weigh bridge 8,000 20,000
TA/ DA & hotel bill of sales manager 36,000
Cost of Sales 7,88,76,400

CA NOTE HUB 581

 7. COST ACCOUNTING SYSTEMS
Multiple Choice Questions
1. Under the Non-integrated accounting system
(a) Same ledger is maintained for cost and financial accounts by accountants
(b) Separate ledgers are maintained for cost and financial accounts
(c) (a) and (b) both
(d) None of the above

2. Notional costs
(a) May be included in Integrated accounts
(b) May be included in Non- integrated accounts
(c) Cannot be included in Non-integrated accounts
(d) None of the above

3. Under Non-integrated accounting system, the account made to complete double entry is
(a) Stores ledger control account
(b) Work in progress control account
(c) Finished goods control account
(d) General ledger adjustment account

4. Integrated systems of accounts are maintained

(a) In separate books of accounts for costing and financial accounting purposes
(b) In same books of accounts
(c) Both (a) & (b)
(d) None of the above

5. Under Non-integrated system of accounting, purchase of raw material is debited to

which account
(a) Material control account / Stores ledger control account
(b) General ledger adjustment account
(c) Purchase account
(d) None of the above

CA NOTE HUB 582

6. Under Non-integrated accounts, if materials worth ₹ 1,500 are purchased for a special
job, then which account will be debited:
(a) Special job account / Work in Process account
(b) Material Control account
(c) Cost Control account
(d) None of the above

7. Which account is to be debited if materials worth ₹ 500 are returned to vendor under
Non-integrated accounts:
(a) Cost ledger control account
(b) Finished goods control account
(c) WIP control account
(d) None of the above

8. Which of the following items is included in cost accounts?

(a) Notional rent
(b) Donations
(c.) Transfer to general reserve
(d) Rent receivable

9. When costing loss is ₹ 5,600, administrative overhead under-absorbed being ₹ 600, the
loss as per financial accounts should be
(a) ₹ 5,600
(b) ₹ 6,200
(c) ₹ 5,000
(d) None of the above

10. Which of the following items should be added to costing profit to arrive at financial
profit?
(a) Over-absorption of works overhead
(b) Interest paid on debentures
(c) Income tax paid
(d) All of the above

CA NOTE HUB 583

Answers to the MCQs

1. (b) 2. (b) 3. (d) 4. (b) 5. (a)

6. (a) 7. (a) 8. (a) 9. (b) 10. (a)

CA NOTE HUB 584

 8. UNIT & BATCH COSTING
Multiple Choice Questions
1. Different businesses in order to determine cost of their product or service offering
follow:
(a) Different methods of Costing
(b) Uniform Costing
(c) Different techniques of costing
(d) None of the above

2. In order to determine cost of the product or service, following are used:

(a) Techniques of costing like Marginal, Standard etc.
(b) Methods of Costing
(c) Comparatives
(d) All of the above

3. Unit Costing is applicable where:

(a) Product produced are unique and no 2 products are same
(b) Dissimilar articles are produced as per customer specification
(c) homogeneous articles are produced on large scale
(d) Products made require different raw materials

4. In case product produced or jobs undertaken are of diverse nature, the system of
costing to be used should be:
(a) Process costing
(b) Operating costing
(c) Job costing
(d) None of the above

5. Job Costing is:

(a) Applicable to all industries regardless of the products or services provided
(b) Technique of costing
(c) Suitable where similar products are produced on mass scale
(d) Method of costing used for non- standard and non- repetitive products.

CA NOTE HUB 585

6. The production planning department prepares a list of materials and stores required for
the completion of a specific job order, this list is known as:
(a) Bin card
(b) Bill of material
(c) Material requisition slip
(d) None of the above

7. Batch costing is a type of:

(a) Process costing
(b) Job Costing
(c) Differential costing
(d) Direct costing

8. Batch costing is similar to that under job costing except with the difference that a:
(a) Job becomes a cost unit.
(b) Batch becomes the cost unit instead of a job
(c) Process becomes a cost unit
(d) None of the above

9. The main points of distinction between job and contract costing includes:
(a) Length of time to complete.
(b) Big jobs
(c) Activities to be done outside the factory area
(d) All of the above

10. Economic batch quantity is that size of the batch of production where:
(a) Average cost is minimum
(b) Set-up cost of machine is minimum
(c) Carrying cost is minimum
(d) Both (b) and (c)
Answers to the MCQs
1. (a) 2. (b) 3. (c) 4. (c) 5. (d) 6. (b)
7. (b) 8. (b) 9. (d) 10. (d)

CA NOTE HUB 586

 Case Scenarios
QUESTION 1: Arnav Ltd. operates in beverages industry where it manufactures soft-
drink in three sizes of Large (3 litres), Medium (1.5 litres) and Small (600 ml) bottles. The
products are processed in batches. The 5,000 litres capacity processing plant consumes
electricity of 90 Kilowatts per hour and a batch takes 1 hour 45 minutes to complete.
Only symmetric size of products can be processed at a time. The machine set-up takes
15 minutes to get ready for next batch processing. During the set-up power consumption
is only 20%.
(i) The current price of Large, Medium and Small are ₹ 150, ₹ 90 and ₹ 50 respectively.

(ii) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-

C are required which costs ₹ 0.50 and ₹ 1,000 per litre respectively.
(iii) 20 direct workers are required. The workers are paid ₹ 880 for 8 hours shift of work.

(iv) The average packing cost per bottle is ₹ 3

(v) Power cost is ₹ 7 per Kilowatt -hour (Kwh)

(vi) Other variable cost is ₹ 30,000 per batch.

(vii) Fixed cost (Administration and marketing) is ₹ 4,90,00,000.

(viii) The holding cost is ₹ 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of the product:
Large Medium Small
3,00,000 7,50,000 20,00,000
The following information has been sought from you for the purpose of performance review
meeting:
(i) Number of large size bottles that can be processed in a batch?
(a) 5,000 bottles
(b) 1,666 bottles
(c) 3,333 bottles
(d) 8,333 bottles

(ii) Total number of batches to be run to process medium size bottles

(a) 180
(b) 225
(c) 240
(d) 645

CA NOTE HUB 587

(iii) Material -W required for small size bottles
(a) 1,26,00,000 ltrs
(b) 1,68,00,000 ltrs
(c) 1,57,50,000 ltrs
(d) 1,51,50,000 ltrs

(iv) Calculate total profit/ loss per batch.

(a) ₹ 3,46,28,460
(b) ₹ 2,56,28,360
(c) ₹ 2,82,17,370
(d) ₹ 1,88,56,360

(v) Compute Economic Batch Quantity (EBQ) for small size bottles.
(a) 1,34,234 ltrs
(b) 2,12,243 ltrs
(c) 1,57,882 ltrs
(d) 3,46,592 ltrs
Answer:
i. (b) ii. (b) iii. (b) iv. (c) v. (d)

(i) (b)
Working note 1: Maximum number of bottles that can be processed in a batch:
5,000 ltrs / Bottle volume
Large Medium Small
Qty (ltr) Max bottles Qty (ltr) Max bottles Qty (ml) Max bottles
3 1,666 1.5 3,333 600 8,333
*For simplicity of calculation small fractions has been ignored.
(ii) (b)
Working note 2: Number of batches to be run:
Large Medium Small Total
A Demand 3,00,000 7,50,000 20,00,000
B Bottles per batch (Refer WN-1) 1,666 3,333 8,333
C No. of batches [A÷B] 180 225 240 645
*For simplicity of calculation small fractions has been ignored.

CA NOTE HUB 588

(iii) (b)
Working note 3:
Quantity of Material-W and Material C required to meet demand:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000
B Qty per bottle (Litre) 3 1.5 0.6
C Output (Litre) [A × B] 9,00,000 11,25,000 12,00,000 32,25,000
D Material-W per litre 14 14 14
of output (Litre)
E Material-W required 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000
(Litre) [C × D]
F Material-C required 25 25 25
per litre of
output (ml)
G Material-C required 22,500 28,125 30,000 80,625
(Litre) [(C × F) ÷ 1000]

(iv) (c) Workings:

4. No. of Man-shift required:
Large Medium Small Total
A No. of batches 180 225 240 645
B Hours required per batch (Hours) 2 2 2
C Total hours required (Hours) [A × B] 360 450 480 1,290
D No. of shifts required [C ÷ 8] 45 57 60 162
E Total manshift [D × 20 workers] 900 1,140 1,200 3,240

5. Power consumption in Kwh

Large Medium Small Total
For processing
A No. of batches 180 225 240 645
B Hours required per batch (Hours) 1.75 1.75 1.75 1.75
C Total hours required (Hours) [A × B] 315 393.75 420 1,128.75
D Power consumption per hour 90 90 90 90
E Power consumption in Kwh [C × D] 28,350 35,437.5 37,800 1,01,587.5
F Per batch consumption(Kwh) [E ÷ A] 157.5 157.5 157.5 157.5
For set-up

CA NOTE HUB 589

 G Hours required per batch (Hours) 0.25 0.25 0.25 0.25
H Total hours required (Hours) [A × G] 45 56.25 60 161.25
I Power consumption per hour [20% × 18 18 18 18
90]
J Power consumption in Kwh [H × I] 810 1,012.5 1,080 2,902.5
K Per batch consumption(Kwh) [J ÷ A] 4.5 4.5 4.5 4.5

Calculation of Profit/ loss per batch:

Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000 30,50,000
B Price per bottle (₹) 150 90 50
C Sales value (₹) [A × B] 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000
Direct Material cost:
E Material-W (₹) [Qty in 63,00,000 78,75,000 84,00,000 2,25,75,000
WN-3 × ₹ 0.50]
F Material-C (₹) [Qty in 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000
WN-3 × ₹ 1,000]
G [E+F] 2,88,00,000 3,60,00,000 3,84,00,000 10,32,00,000
H Direct Wages (₹) 7,92,000 10,03,200 10,56,000 28,51,200
[Man-shift in WN-4 ×
₹ 880]
I Packing cost (₹) [A × ₹ 3] 9,00,000 22,50,000 60,00,000 91,50,000
Power cost (₹)
J For processing (₹) 1,98,450 2,48,062.5 2,64,600 7,11,112.5
[WN - 5 × ₹ 7]
K For set-up time (₹) 5,670 7,087.5 7,560 20,317.5
[WN-5 × ₹ 7]
L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430
M Other variable cost (₹) 54,00,000 67,50,000 72,00,000 1,93,50,000
[No. of batch in WN-2 ×
₹ 30,000]
N Total Variable cost per 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630
batch [G + H + I + L +
M]
O Profit/ loss 89,03,880 2,12,41,650 4,70,71,840 7,72,17,370
before fixed cost [C - N]
P Fixed Cost 4,90,00,000
Q Total Profit [O - P] 2,82,17,370

CA NOTE HUB 590

(v) (d)
Computation of Economic Batch Quantity (EBQ):

2xDxS
EBQ = √
C

D = Annual Demand for the Product = Refer A below

S = Set-up cost per batch = Refer D below
C = Carrying cost per unit per annum =Refer E below
Particulars Large Medium Small
A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
Set-up Cost:
B Power cost for set-up time (₹) 31.50 31.50 31.50
[Consumption per batch in WN- 5 × ₹ 7]

C Other variable cost (₹) 30,000 30,000 30,000

D Total Set-up cost [B + C] 30,031.50 30,031.50 30,031.50
E Holding cost: 1.00 1.00 1.00
F EBQ (Bottle) 1,34,234 2,12,243 3,46,592

CA NOTE HUB 591

 9. JOB COSTING
Multiple Choice Questions
1. In case product produced or jobs undertaken are of diverse nature, the system of
costing to be used should be:
(a) Process costing
(b) Operating costing
(c) Job costing
(d) None of the above

2. The production planning department prepares a list of materials and stores required
for the completion of a specific job order, this list is known as:
(a) Bin card
(b) Bill of material
(c) Material requisition slip
(d) None of the above

3. Job costing is similar to that under Batch costing except with the difference that a:
(a) Job becomes a cost unit.
(b) Batch becomes the cost unit instead of a job
(c) Process becomes a cost unit
(d) None of the above.

4. In job costing which of the following documents are used to record the issue of direct
material to a job’:
(a) Goods received note
(b) Material requisition
(c) Purchase order
(d) Purchase requisition

5. The most suitable cost system where the products differ in type of materials and
work performed is :
(a) Job Costing
(b) Process Costing
(c) Operating Costing

CA NOTE HUB 592

 (d) None of these.

6. Which of the following statements is true:

(a) Job cost sheet may be used for estimating profit of jobs.
(b) Job costing cannot be used in conjunction with marginal costing.
(c) A production order is an order received from a customer for particular jobs.
(d) None of these.

7. Which of the following statements is true:

(a) Job cost sheet may be prepared for facilitating routing and scheduling of the job
(b) Job costing can be suitably used for concerns producing uniformly any specific product
(c) Job costing cannot be used in companies using standard costing
(d) Neither (a) nor (b) nor (c)
Answers to the MCQs
1. (c) 2. (b) 3. (a) 4. (b) 5. (a) 6. (a)
7. (d)

CA NOTE HUB 593

 10. Process & Operation Costing
Multiple Choice Questions
1. The type of process loss that should not be allowed to affect the cost of good units
is:
(a) Abnormal loss
(b) Normal loss
(c) Seasonal loss
(d) Standard loss

2. 200 units were introduced in a process in which 20 units is the normal loss. If the
actual output is 150 units, then there is:
(a) No abnormal loss
(b) No abnormal gain
(c) Abnormal loss of 30 units
(d) Abnormal gain of 30 units

3. 100 units are processed at a total cost of ₹ 160, normal loss is 10%, & scrap units
are sold @ ₹ 0.25 each. If the output is 80 units, then the value of abnormal loss is:
(a) ₹ 2.50
(b) ₹ 16
(c) ₹ 17.50
(d) ₹ 17.75

4. When average method is used in process costing, the opening inventory costs are:
(a) Subtracted from the new costs
(b) Added to the new costs
(c) Kept separate from the costs of the new period
(d) Averaged with other costs to arrive at total cost

5. Spoilage that occurs under inefficient operating conditions and is ordinarily

controllable is called:
(a) Normal spoilage
(b) Abnormal spoilage
(c) Normal defectives

CA NOTE HUB 594

 (d) None of the above
6. The cost of normal process loss is -
(a) Absorbed by good units produced and amount realised by the sale of loss units should be
debited to the process account.
(b) Debited to costing profit and loss account.
(c) Absorbed by good units produced.
(d) Debited to costing profit and loss account and amount realised by the sale of loss units
should be credited to the process account.

7. The value of abnormal loss is equal to:

(a) Total cost of materials
(b) Total process cost less realizable value of normal loss
(c) Total process cost less cost of scrap
(d) Total process cost less realizable value of normal loss less value of transferred
out goods.

8. Inter-process profit is calculated, because:

(a) a process is a cost centres
(b) each process has to report profit
(c) the efficiency of the process is measured
(d) the wages of employees are linked to the process profitability.

9. Under Weighted Average (Average) Method:

(a) The cost to complete the opening WIP is ignored.
(b) The cost to complete the opening WIP and other completed units are calculated
separately.
(c) The cost of opening work-in-process and cost of the current period are aggregated and
the aggregate cost is divided by output in terms of completed units.
(d) Closing stock of work in process is valued at current cost.

10. A process account is debited by abnormal gain, the value is determined as:
(a) Equal to the value of normal loss
(b) Cost of good units less realizable value of normal loss
(c) Cost of good units less realizable value of actual loss
(d) Equal to the value of good units less closing stock

CA NOTE HUB 595

11. Lean Labs develops 55mm film using a four-step process that moves progressively
through four departments. The company specializes in overnight service and has the
largest drug store chain as its primary customer. Currently, direct labor, direct
materials, and overhead are accumulated by departments.
The cost accumulation system that best describes the system Lean Labs is using is:
(a) Operation costing.
(b) Activity-based costing.
(c) Job-order costing.
(d) Process costing.

12. When compared with normal spoilage, abnormal spoilage:

(a) Arises more frequently from factors that are inherent in the manufacturing process.
(b) Is given the same accounting treatment as normal spoilage.
(c) Is generally thought to be more controllable by purchase department than production
department.
(d) Is not typically influenced by the "tightness" of production standards.

13. Assume 550 units were worked on during a period in which a total of 500 good units
were completed. Normal spoilage consisted of 30 units; abnormal spoilage, 20 units.
Total production costs were ₹ 2,200. The company accounts for abnormal spoilage
separately on the income statement as loss due to abnormal spoilage. Normal spoilage
is not accounted for separately. What is the cost of the good units produced?
(a) ₹ 2,080
(b) ₹ 2,115
(c) ₹ 2,200
(d) ₹ 2,332

14. IC Limited uses process costing systems and inspects its goods post manufacturing. An
engineer noticed on May 31st the following:
Good units completed 15,000

Normal spoilage (units) 300

Abnormal spoilage (units) 100

Unit costs were: Material ₹ 2.50 and conversion costs (Labour & overheads)
₹ 6.00. The number of units that company would transfer to its finished goods stock and

CA NOTE HUB 596

 the related cost of these units are:
(a) 15,000 units transferred at a cost of ₹ 127,500
(b) 15,000 units transferred at a cost of ₹ 130,050
(c) 15,000 units transferred at a cost of ₹ 135,000
(d) 15,300 units transferred at a cost of ₹ 130,05
Answers to the MCQs
1. (a) 2. (c) 3. (c) 4. (b) 5. (b) 6. (c)

7. (d) 8. (c) 9. (c) 10. (b) 11. (d) 12. (d)

13. (b) 14. (b)

Case Scenarios
QUESTION 1: Arnav Ltd. manufactures chemical solutions used in paint and adhesive
products. Chemical solutions are produced in different processes. Some of the processes
are hazardous in nature which may results in fire accidents.
At the end of the last month, one fire accident occurred in the factory. The fire destroyed
some of the paper files containing records of the process operations for the month.
You being an associate to the Chief Manager (Finance), are assigned to prepare the process
accounts for the month during which the fire occurred. From the documents and files of
other sources, following information could be retrieved:
Opening work-in-process at the beginning of the month was 500 litres, 80% complete for
labour and 60% complete for overheads. Opening work-in-process was valued at ₹ 2,78,000.
Closing work-in-process at the end of the month was 100 litres, 20% complete for labour
and 10% complete for overheads.
Normal loss is 10% of input (fresh) and total losses during the month were 800 litres partly
due to the fire damage.
Output transferred to finished goods was 3,400 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 is ₹ 660 for the month made up as follows: Raw Material ₹
300 Labour ₹ 200 Overheads ₹ 160
The company uses FIFO method to value work-in-process and finished goods. The following
information are required for managerial decisions:

CA NOTE HUB 597

i. How much quantity of raw material introduced during the month?
(a) 4,300 Litres
(b) 3,500 Litres
(c) 4,200 Litres
(d) 3,800 Litres
ii. The Quantity of normal loss and abnormal loss are:
(a) Normal loss- 380 litres & Abnormal loss- 420 litres
(b) Normal loss- 350 litres & Abnormal loss – 450 litres
(c) Normal loss- 430 litres & Abnormal loss – 370 litres
(d) Normal loss- 420 litres & Abnormal loss – 380 litres.

iii. Value of raw material added to the process during the month is:
(a) ₹ 10,10,000
(b) ₹ 10,33,600
(c) ₹ 10,18,400
(d) ₹ 10,20,000

iv. Value of labour and overhead in closing Work-in-process are:

(a) ₹ 4,000 & ₹ 1,600 respectively
(b) ₹ 20,000 & ₹ 16,000 respectively
(c) ₹ 16,000 & ₹ 9,000 respectively
(d) ₹ 13,200 & ₹ 6,600 respectively

v. Value of output transferred to finished goods is:

(a) ₹ 22,57,200
(b) ₹ 20,06,400
(c) ₹ 22,44,000
(d) ₹ 19,27,200
Answer:
i. (d) ii. (a) iii. (b) iv. (a) v. (c)

i. d
Inflow into process Litres Outflow from process Litres
Opening WIP 500 Transferred to finished goods 3,400
Quantity introduced 3,800 Total loss 800
(Balancing figure) Closing WIP 100

CA NOTE HUB 598

 4,300 4,300
ii. a
Total loss 800 litres
Normal loss (10% of fresh input i.e. 3,800) 380 litres
Abnormal loss 420 litres
iii. b
Calculation of Equivalent production units
Input Details Units Output Particulars Units Equivalent Production
Material Labour Overheads
% Units % Units % Units
Opening WIP 500 From Opening WIP 500 - - 20 100 40 200
Fresh inputs 3,800 From fresh units 2900 100 2900 100 2900 100 2900
Normal loss 380 - - -
Closing WIP 100 100 100 20 20 10 10
Abnormal loss 420 100 420 100 420 100 420
4,300 4,300 3,420 3,440 3,530

Value of raw materials introduced during the month

Equivalent Cost per Total cost
units EU (₹) (₹)
Total value of raw material 3420 300 10,26,000
Add: Scrap value of normal loss 380 20 7,600
Value of raw material introduced 10,33,600
iv. a
Value of labour and overhead in closing Work in process
Cost elements Equivalent Cost per Total cost
units EU (₹) (₹)
Labour 20 200 4,000
Overheads 10 160 1,600
v. c
Value of output transferred to finished goods
Output transferred (Units) × Equivalent cost per unit
3,400 Litres × ₹ 660 = ₹ 22,44,000

CA NOTE HUB 599

 11. JOINT PRODUCTS AND BY PRODUCTS
Multiple Choice Questions
1. In sugar manufacturing industries molasses is also produced along with sugar. Molasses
may be of smaller value as compared with the value of sugar and is known as:
(a) Common product
(b) By- product
(c) Joint product
(d) None of them

2. Method of apportioning joint costs on the basis of output of each joint product at
the point of split off is:
(a) Sales value method
(b) Physical unit method
(c) Average cost method
(d) Marginal cost and contribution method

3. In the Net realisable value method, for apportioning joint costs over the joint
products, the basis of apportionment would be:
(a) Selling price per unit of each of the joint products
(b) Selling price multiplied by units sold of each of the joint products
(c) Sales value of each joint product less further processing costs of individual products
(d) Both (b) and (c)

4. The main purpose of accounting of joint products and by- products is to:
(a) Determine the opportunity cost
(b) Determine the replacement cost
(c) Determine profit or loss on each product line
(d) None of the above

5. Under net realizable value method of apportioning joint costs to joint products, the
selling & distribution cost is:
(a) Added to joint cost
(b) Deducted from further processing cost
(c) Deducted from sales value

CA NOTE HUB 600

 (d) Ignored
6. Which of the following is a co-product:
(a) Diesel and Petrol in an oil refinery
(b) Edible oils and oil cakes
(c) Curd and butter in a dairy
(d) Mustard oil and Sunflower oil in an oil processing company.

7. Which of the following is an example of by-product

(a) Diesel and Petrol in an oil refinery
(b) Edible oils and oil cakes
(c) Curd and butter in a dairy
(d) Mustard seeds and mustard oil.

8. Which of following method can be used when the joint products are of unequal quantity
and used for captive consumption:
(a) Technical estimates, using market value of similar goods
(b) Net Realisable value method
(c) Physical Units method
(d) Market value at split-off method.

9. Which of the following statement is not correct in relation to Co-products:

(a) Co-products may also have joint products
(b) Costing for co-products are done according to process costing method
(c) Co-products do not have any by-products
(d) Co-products are treated as a separate cost object for costing purpose.

10. When a by-product does not have any realisable value, the cost of by- product is:
(a) Transferred to Costing Profit & Loss A/c
(b) By-product cost is borne by the good units
(c) By-product cost is ignored
(d) By-product cost is determined taking value of similar goods

CA NOTE HUB 601

11. SG Ltd manufactures two products from a joint milling process. The two products
developed are Mine support (MS) and Commercial building (CB). A standard production
run incurs joint costs of ₹ 1,00,000 and results in 60,000 units of MS and 90,000
units of CB. Each MS sells for ₹ 200 per unit, and each CB sells for ₹ 450 per
unit.
Assuming no further processing work is done after the split-off point, the amount of
joint cost allocated to Commercial building (CB) on a physical quantity allocation basis
would be:
(a) ₹ 60,000.
(b) ₹ 180,000.
(c) ₹ 225,000.
(d) ₹ 120,000.

12. Kay Company manufactures two hair care lotions, Livi and Sili, out of a joint process.
The joint (common) costs incurred are ₹ 6,30,000 for a standard production run that
generates 1,80,000 gallons of Livi and 1,20,000 gallons of Sili. Livi sells for ₹
240 per gallon, and Sili sells for ₹ 390 per gallon.
If additional processing costs beyond the split-off point are ₹ 140 per gallon for Livi
and ₹ 90 per gallon for Sili, the amount of joint cost of each production run allocated
to Livi on a physical-quantity basis is:
(a) ₹ 340,000.
(b) ₹ 378,000.
(c) ₹ 232,000.
(d) ₹ 580,000.

13. For the purpose of allocating joint costs to joint products, the sales price at point
of sale, reduced by cost to complete after split-off, is assumed to be equal to the:
(a) Joint costs
(b) Sales price less a normal profit margin at point of sale
(c) Net sales value at split off
(d) Total costs.
Answers to the MCQs
1. (b) 2. (b) 3. (d) 4. (c) 5. (c) 6. (d)
7. (b) 8. (a) 9. (c) 10. (b) 11. (a) 12. (b)
13. (c)

CA NOTE HUB 602

 Case Scenarios
QUESTION 1: Pokemon Chocolates manufactures and distributes chocolate products. It
purchases Cocoa beans and processes them into two intermediate products:
Chocolate powder liquor base Milk-chocolate liquor base
These two intermediate products become separately identifiable at a single split off
point. Every 500 pounds of cocoa beans yields 20 gallons of chocolate – powder liquor
base and 30 gallons of milk-chocolate liquor base.
The chocolate powder liquor base is further processed into chocolate powder. Every 20
gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk-
chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk-
chocolate liquor base yields 340 pounds of milk chocolate.
Production and sales data for October, 2023 are:
Cocoa beans processed 7,500
pounds
Costs of processing Cocoa beans to split off point (including purchase of beans) ₹
7,12,500
Production Sales Selling price
Chocolate powder 3,000 pounds 3,000 pounds ₹ 190 per pound
Milk chocolate 5,100 Pounds 5,100 Pounds ₹ 237.50 per pound
The October, 2023 separable costs of processing chocolate-powder liquor into chocolate
powder are ₹ 3,02,812.50. The October 2023 separable costs of processing milk-
chocolate liquor base into milk-chocolate are ₹ 6,23,437.50.
Pokemon full processes both of its intermediate products into chocolate powder or milk-
chocolate. There is an active market for these intermediate products. In October, 2023,
Pokemon could have sold the chocolate powder liquor base for ₹ 997.50 a gallon and
the milk-chocolate liquor base for ₹ 1,235 a gallon. You are required to show how the
joint cost of ₹ 7,12,500 would be allocated between the chocolate powder and milk-
chocolate liquor bases:
(i) How much joint cost is allocated between the chocolate powder and milk-chocolate liquor
bases respectively using Sales value at split off point?
(a) ₹ 2,22,656.25 and ₹ 4,89,843.75
(b) ₹ 2,49,375 and ₹ 4,63,125
(c) ₹ 2,21,587.50 and ₹ 4,90,912.50
(d) ₹ 2,85,000 and ₹ 4,27,500

CA NOTE HUB 603

(ii) How much joint cost is allocated between the chocolate powder and milk-chocolate liquor
bases respectively using Physical measure (gallons)?
(a) ₹ 2,22,656.25 and ₹ 4,89,843.75
(b) ₹ 2,49,375 and ₹ 4,63,125
(c) ₹ 2,21,587.50 and ₹ 4,90,912.50
(d) ₹ 2,85,000 and ₹ 4,27,500

(iii) how much joint cost is allocated between the chocolate powder and milk-chocolate liquor
bases respectively using Estimated net realisable value, (NRV)?
(a) ₹ 2,22,656.25 and ₹ 4,89,843.75
(b) ₹ 2,49,375 and ₹ 4,63,125
(c) ₹ 2,21,587.50 and ₹ 4,90,912.50
(d) ₹ 2,85,000 and ₹ 4,27,500

(iv) What is the constant gross-margin percentage NRV?

(a) 8%
(b) 9%
(c) 12%
(d) 12.5%

(v) How much joint cost is allocated between the chocolate powder and milk-chocolate
liquor bases respectively using Constant gross-margin percentage NRV?
(a) ₹ 2,22,656.25 and ₹ 4,89,843.75
(b) ₹ 2,49,375 and ₹ 4,63,125
(c) ₹ 2,21,587.50 and ₹ 4,90,912.50
(d) ₹ 2,85,000 and ₹ 4,27,500
Answer:
i. (b) ii. (d) iii. (a) iv. (a) v. (c)
(i) (b)
Sales Value at Split-off Point Method
Chocolate powder Milk chocolate Total
liquor base liquor base
Sales value of products at ₹ 2,99,250* ₹ 5,55,750** ₹ 8,55,000
split off

CA NOTE HUB 604

 Weights 0.35 0.65 1.00
Joint cost allocated ₹ 2,49,375 ₹ 4,63,125 ₹ 7,12,500
(₹ 7,12,500 × 0.35) (₹ 7,12,500 × 0.65)
*(3,000 lbs ÷ 200 lbs) × 20 gallon × ₹ 997.50 = ₹ 2,99,250
** (5,100 lbs ÷ 340 lbs) × 30 gallon × ₹ 1,235 = ₹ 5,55,750
(ii) (d)
Physical Measure Method
Chocolate powder Milk chocolate Total
liquor base liquor base
Output 300 gallon* 450 gallon** 750 gallons
Weight 300 ÷ 750 = 0.40 450 ÷ 750 = 0.60 1.00
Joint cost allocated ₹ 2,85,000 ₹ 4,27,500 ₹ 7,12,500
(₹ 7,12,500 x 0.40) (₹ 7,12,500 x 0.60)
*(3,000 lbs ÷ 200 lbs) × 20 gallon = 300 gallon
** (5,100 lbs ÷ 340 lbs) × 30 gallon = 450 gallon
(iii) (a)
Net Realisable Value (NRV) Method
Chocolate powder Milk chocolate Total
liquor base liquor base

Final sales value of ₹ 5,70,000 ₹ 12,11,250 ₹ 17,81,250

production (3,000 lbs × (5,100 lbs × ₹
₹ 190) 237.50)
Less: Separable costs ₹ 3,02,812.50 ₹ 6,23,437.50 ₹ 9,26,250
Net realisable value at ₹ 2,67,187.50 ₹ 5,87,812.50 ₹ 8,55,000
split off point
Weight 0.3125 0.6875 1.00
(2,67,187.50 ÷ (5,87,812.5 ÷
8,55,000) 8,55,000)
Joint cost allocated ₹ 2,22,656.25 ₹ 4,89,843.75 ₹ 7,12,500
(₹ 7,12,500 x (₹ 7,12,500 x
0.3125) 0.6875)
(iv) (a)
Final sales value of total production = ₹ 17,81,250
Less: Joint and separable cost = ₹ 16,38,750 (₹ 7,12,500 + ₹ 9,26,250) Gross Margin
= ₹ 1,42,500

CA NOTE HUB 605

 Gross margin (%) = ₹ 1,42,500 ÷ ₹ 17,81,250 × 100 = 8%

(v) (c)
Constant Gross Margin (%) NRV method
Chocolate powder Milk chocolate Total
Liquor base liquor Base
Final sales value ofproduction ₹ 5,70,000 ₹ 12,11,250 ₹ 17,81,250
Less: Gross margin* 8% ₹ 45,600 ₹ 96,900 ₹ 1,42,500
Cost of goods available for sale ₹ 5,24,400 ₹ 11,14,350 ₹ 16,38,750
Less: Separable costs ₹ 3,02,812.50 ₹ 6,23,437.50 ₹ 9,26,250
Joint cost allocated ₹ 2,21,587.50 ₹ 4,90,912.50 ₹ 7,12,500

CA NOTE HUB 606

 12. SERVICE COSTING
Multiple Choice Questions
1. Composite cost unit for a hospital is:
(a) Per patient
(b) Per patient-day
(c) Per day
(d) Per bed

2. Cost of diesel and lubricant is an example of:

(a) Operating cost
(b) Fixed charges
(c) Semi-variable cost
(d) None of the above

3. Cost units used in power sector is:

(a) Kilo meter (K.M)
(b) Kilowatt-hour (kWh)
(c) Number of electric points
(d) Number of hours

4. Absolute Tonne-km. is an example of:

(a) Composite units in power sector
(b) Composite unit of transport sector
(c) Composite unit for bus operation
(d) Composite unit for oil and natural gas

5. Depreciation is treated as fixed cost if it is related to:

(a) Activity level
(b) Related with machine hours
(c) Efflux of time
(d) None of the above

CA NOTE HUB 607

6. Jobs undertaken by IT & ITES organizations are considered as:
(a) Project
(b) Batch work
(c) Contract
(d) All the above

7. In Toll Road costing, the repetitive costs include:

(a) Maintenance cost
(b) Annual operating costs
(c) None of the above
(d) Both (a) and (b)

8. BOT approach means:

(a) Build, Operate and Transfer
(b) Buy, Operate and Transfer
(c) Build, Operate and Trash
(d) Build, Own and Trash

9. Pre-product development activities in insurance companies, include:

(a) Processing of Claim
(b) Selling of policy
(c) Provision of conditions
(d) Policy application processing

10. Which of the following costing method is not appropriate for costing of educational
institutes:
(a) atch Costing
(b) Activity Based Costing
(c) Absorption Costing
(d) Process Costing
Answers to the MCQs
1. (b) 2. (a) 3. (b) 4. (b) 5. (c) 6. (a)
7. (a) 8. (a) 9. (c) 10. (d)

CA NOTE HUB 608

 Case Scenarios
QUESTION 1: A 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
following details related with the owning of CNG & EV propelled cars are as tabulated
below:
Particulars CNG Car EV Car
Car purchase price (₹) 9,20,000 15,20,000
Govt. subsidy on purchase of car (₹) -- 1,50,000
Life of the car 15 years 10 years
Residual value (₹) 95,000 1,70,000
Mileage 20 km/kg 240 km per
charge
Electricity consumption per full charge -- 30 Kwh
CNG cost per Kg (₹) 60 --
Power cost per Kwh (₹) -- 7.60
Annual Maintenance cost (₹) 8,000 5,200
Annual insurance cost (₹) 7,600 14,600
Tyre replacement cost in every 5 - year (₹) 16,000 16,000
Battery replacement cost in every 8- year (₹) 12,000 5,40,000
Apart from the above, the following are the additional information:
Particulars

Average distance covered by a car in a month 1,500 km

Driver’s salary (₹) 20,000 p.m

Garage rent per car (₹) 4,500 p.m

Share of Office & Administration cost per car (₹) 1,500 p.m

You have been approached by the management of A LMV Pvt. Ltd. for consultation on the
two options of operating the cab service. The expected questions that may be asked by the
management are as follows:
(i) What would be the depreciable value of EV Car?
(a) ₹ 13,50,000
(b) ₹ 15,20,000
(c) ₹ 14,40,000

CA NOTE HUB 609

 (d) ₹ 12,00,000

(ii) What would be the monthly cost of electricity for an EV car?

(a) ₹ 1,425
(b) ₹ 1,500
(c) ₹ 1,450
(d) ₹ 1,525

(iii) What would be the total cost to be incurred for replacement of tyres for EV car?
(a) ₹ 32,000
(b) ₹ 24,000
(c) ₹ 12,000
(d) ₹ 16,000

(iv) Calculate the operating cost of vehicle per month per car for CNG options.
(a) ₹ 36,627.78
(b) ₹ 24,000.50
(c) ₹ 43.708.33
(d) ₹ 16,605.55
(v) Calculate the operating cost of vehicle per month per car for EV options
(a) ₹ 36,627.78
(b) ₹ 24,000.50
(c) ₹ 43.708.33
(d) ₹ 16,605.55
Answer:
i. (d) ii. (a) iii. (d) iv. (a) v. (c)

(i) (d) ₹ 12,00,000

Calculation of Depreciation per month:
Particulars CNG Car EV Car
A Car purchase price (₹) 9,20,000 15,20,000
B Less: Govt. subsidy (₹) -- (1,50,000)
C Less: Residual value (₹) (95,000) (1,70,000)
D Depreciable value of car (₹) [A – B - C] 8,25,000 12,00,000
E Life of the car 15 years 10 years
F Annual depreciation (₹) [D ÷ E] 55,000 1,20,000

CA NOTE HUB 610

 G Depreciation per month (₹) [F ÷ 12] 4,583.33 10,000

(ii) (a) ₹1,425

Fuel/ Electricity consumption cost per month:
Particulars CNG Car EV Car
A Average distance covered in a month (KM) 1,500 1,500
B Mileage (KM) 20 240
C Qty. of CNG/ Full charge required [A ÷ B] 75 kg. 6.25
D Electricity Consumption [C × 30kwh] - 187.5
E Cost of CNG per kg (₹) 60 -
F Power cost per Kwh (₹) - 7.60
G CNG Cost per month (₹) [C × E] 4,500 -
H Power cost per month (₹) [D × F] - 1,425

(iii) (d) ₹16,000

Amortised cost of Tyre replacement:
Particulars CNG Car EV Car
A Life of vehicle 15 years 10 years
B Replacement interval 5 years 5 years
C No. of time replacement required 2 times 1 time
D Cost of tyres for each replacement (₹) 16,000 16,000
E Total replacement cost (₹) [C × D] 32,000 16,000
F Amortised cost per year (₹) [E ÷ A] 2,133.33 1,600
E Cost per month (₹) [F ÷ 12] 177.78 133.33

(iv) (a) ₹ 36,627.78

(v) (c) ₹ 43.708.33

Amortised cost of Battery replacement:
Particulars CNG Car EV Car
A Life of vehicle 15 years 10 years
B Replacement interval 8 years 8 years
C No. of time replacement required 1 time 1 time
D Cost of battery for each replacement (₹) 12,000 5,40,000
E Total replacement cost (₹) [C × D] 12,000 5,40,000
F Amortised cost per year (₹) [E ÷ A] 800 54,000
E Cost per month (₹) [F ÷ 12] 66.67 4,500

CA NOTE HUB 611

Calculation of Operating cost per month
Particulars CNG Car (₹) EV Car (₹)
A Running cost:
Fuel cost/ Power consumption cost [Refer WN-2] 4,500 1,425
B Maintenance cost:
Annual Maintenance cost [Annual cost ÷ 12] 666.67 433.33
Annual Insurance cost [Annual cost ÷ 12] 633.33 1,216.67
Amortised cost of Tyre replacement 177.78 133.33
[Refer WN-3]
Amortised cost of Battery replacement 66.67 4,500
[Refer WN-4]
1,544.45 6,283.33
C Fixed cost:
Depreciation [Refer WN-1] 4,583.33 10,000
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of Office & Administration cost 1,500 1,500
30,583.33 36,000
D Operating cost per month [A + B + C] 36,627.78 43,708.33

CA NOTE HUB 612

 13. Standard Costing
Multiple Choice Questions
1. Under standard cost system the cost of the product determined at the beginning of
production is its:
(a) Direct cost
(b) Pre-determined cost
(c) Historical cost
(d) Actual cost

2. The deviations between actual and standard cost is known as:

(a) Multiple analysis
(b) Variable cost analysis
(c) Variance analysis
(d) Linear trend analysis

3. The standard which is attainable under favourable conditions is:

(a) Theoretical standard
(b) Expected standard
(c) Normal standard
(d) Basic standard

4. The standard most suitable from cost control point of view is:
(a) Normal standard
(b) Theoretical standard
(c) Expected standard
(d) Basic standard

5. Overhead cost variances is:

(a) The difference between overheads recovered on actual output - actual overhead incurred.
(b) The difference between budgeted overhead cost and actual overhead cost.
(c) Obtained by multiplying standard overhead absorption rate with the difference between
standard hours for actual output and actual hours worked.
(d) None of the above

CA NOTE HUB 613

6. Which of the following variance arises when more than one material is used in the
manufacture of a product:
(a) Material price variance
(b) Material usage variance
(c) Material yield variance
(d) Material mix variance

7. If standard hours for 100 units of output are 400 @ ₹ 2 per hour and actual hours
take are 380 @ ₹ 2.25 per, then the labour rate variance is:
(a) ₹ 95 (adverse)
(b) ₹ 100 (adverse)
(c) ₹ 25 (favourable)
(d) ₹ 120 (adverse)

8. Controllable variances are best disposed-off by transferring to:

(a) Cost of goods sold
(b) Cost of goods sold and inventories
(c) Inventories of work–in–progress and finished goods
(d) Costing profit and loss account

9. Idle time variance is obtained by multiplying:

(a) The difference between standard and actual hours by the actual rate of labour per
hour
(b) The difference between actual labour hours paid and actual labour hours worked by the
standard rate
(c) The difference between standard and actual hours by the standard rate of labour per
hour
(d) None of the above.

10. Basic standards are:

(a) Those standards, which require high degree of efficiency and performance.
(b) Average standards and are useful in long term planning.
(c) Standards, which can be attained or achieved
(d) Assuming to remain unchanged for a long time.

CA NOTE HUB 614

Answers:
1. (b) 2. (c) 3. (a) 4. (c) 5. (a) 6. (d)
7. (a) 8. (d) 9. (b) 10. (d)

Case Scenarios
QUESTION 1: K Ltd. is a manufacturer of a single product A. 8,000 units of the product
A has been produced in the month of March 2024. At the beginning of the year a total
1,20,000 units of the product-A has been planned for production. The cost department
has provided the following estimates of overheads:
Fixed ₹ 12,00,000 Variable ₹ 6,00,000
Semi-Variable ₹ 1,80,000
Semi-variable charges are considered to include 60 per cent expenses of fixed nature
and 40 per cent of variable nature.
The records of the production department shows that the company could have operated
for 20 days but there was a festival holiday during the month.
The actual cost data for the month of March 2024 are as follows:
Fixed ₹ 1,19,000 Variable ₹ 48,000
Semi-Variable ₹ 19,200
The cost department of the company is now preparing a cost variance report for managerial
information and action. You being an accounts officer of the company are asked to calculate
the following information for preparation of the variance report:
i. What is the amount of variable overhead cost variance for the month of March 2024:
(a) ₹ 10,200 (A)
(b) ₹ 10,400 (A)
(c) ₹ 10,800 (A)
(d) ₹ 10,880 (A)

ii. What is the amount of fixed overhead volume variance for the month of March 2024:
(a) ₹ 9,000 (F)
(b) ₹ 9,000 (A)
(c) ₹ 21,800 (A)
(d) ₹ 11,000 (A)

CA NOTE HUB 615

iii. What is the amount of fixed overhead expenditure variance for the month of March
2024:
(a) ₹ 21,520 (A)
(b) ₹ 21,500 (A)
(c) ₹ 21,400 (A)
(d) ₹ 21,480 (A)

iv. What is the amount of fixed overhead calendar variance for the month of March 2024:
(a) ₹ 5,400 (A)
(b) ₹ 5,450 (A)
(c) ₹ 5,480 (A)
(d) ₹ 5.420 (A)

v. What is the amount of fixed overhead cost variance for the month of March 2024:
(a) ₹ 43,320 (A)
(b) ₹ 43,300 (A)
(c) ₹ 43,200 (A)
(d) ₹ 43,380 (A)
Answers to the Case Scenarios
i. (d) ii. (c) iii. (a) iv. (b) v. (a)
i. d
Variable Overhead Cost = Standard Variable Overheads for Variance Production
– Actual Variable Overheads
= ₹ 44,800 – ₹ 55,680
= ₹ 10,880 (A)
ii. c
Fixed Overhead Volume = Absorbed Fixed Overheads – Variance Budgeted Fixed
Overheads
= ₹ 87,200 – ₹ 1,09,000
= ₹ 21,800 (A)
iii. a
Fixed Overhead Expenditure = Budgeted Fixed Overheads – Variance Actual Fixed
Overheads
= ₹ 10.9 × 10,000 units – ₹ 1,30,520
= ₹ 21,520 (A)

CA NOTE HUB 616

iv. b
Calendar Variance = Possible Fixed Overheads – Budgeted Fixed Overheads
= ₹ 1,03,550 – ₹ 1,09,000
= ₹ 5,450 (A)
v. a
Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed Overheads
= ₹ 87,200 – ₹ 1,30,520
= ₹ 43,320 (A)
WORKING NOTE
Fixed Overheads = Budgeted Fixed Overheads / Budgeted Output ₹ 10.00
= 12,00,000 ÷ 1,20,000
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of ₹ 1,80,000 ₹ 1,08,000
Fixed Overheads = Budgeted Fixed Overheads / Budgeted Output
₹ 1,08,000 ÷ 120,000 ₹ 0.90
Standard Rate of Absorption of Fixed Overheads per unit ₹ 10.90
(₹ 10.00 + ₹ 0.90)
Fixed Overheads Absorbed on 8,000 units @ ₹ 10.90 ₹ 87,200
Budgeted Variable Overheads ₹ 6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ₹ 1,80,000 ₹ 72,000
Total Budgeted Variable Overheads ₹ 6,72,000
Standard Variable Cost per unit ₹ 5.60
= Budgeted Variable Overheads ÷ Budgeted Output
Standard Variable Overheads for 8,000 units @ ₹ 5.60 ₹ 44,800
Budgeted Annual Fixed Overheads (₹ 12,00,000 + 60% of ₹ 13,08,000
₹ 1,80,000)
Possible Fixed Overheads ₹ 1,03,550
= Budgeted Fixed Overheads ÷ Budgeted Days × Actual Days
= 1,09,000 ÷ 20 days × 19 days
Actual Fixed Overheads (₹ 1,19,000 + 60% of ₹ 19,200) ₹ 1,30,520
Actual Variable Overheads (₹ 48,000 + 40% of ₹ 19,200) ₹ 55,680

CA NOTE HUB 617

 14. MARGINAL COSTING
Multiple Choice Questions
1. Under marginal costing the cost of product includes:
(a) Prime costs only.
(b) Prime costs and variable overheads.
(c) Prime costs and fixed overheads.
(d) Prime costs and factory overheads.

2. Reporting under marginal costing is accomplished by:

(a) Treating all costs as period costs.
(b) Eliminating the work-in-progress inventory account.
(c) Matching variable costs against revenue and treating fixed costs as period costs.
(d) Including only variable costs in income statement.

3. Period costs are:

(a) Variable costs.
(b) Fixed costs.
(c) Prime costs.
(d) Overheads costs.

4. When sales and production (in units) are same then profit under:
(a) Marginal costing is higher than that of absorption costing.
(b) Marginal costing is lower than that of absorption costing.
(c) Marginal costing is equal to that of absorption costing.
(d) None of the above.

5. When sales exceed production (in units) then profit under:

(a) Marginal costing is higher than that of absorption costing.
(b) Marginal costing is lower than that of absorption costing.
(c) Marginal costing is equal than that of absorption costing.
(d) None of above.

CA NOTE HUB 618

6. The main difference between marginal costing and absorption costing is regarding
the treatment of:
(a) Prime cost.
(b) Fixed overheads.
(c) Direct materials.
(d) Variable overheads.

7. Under profit volume ratio, the term profit:

(a) Means the sales proceeds in excess of total costs.
(b) Means the same thing as is generally understood.
(c) Is a misnomer, it in fact refers to contribution i.e. (sales revenue-variable costs).
(d) None of the above.

8. Factors which can change the break-even point:

(a) Change in fixed costs.
(b) Change in variable costs.
(c) Change in the selling price.
(d) All of the above.

9. If P/V ratio is 40% of sales then what about the remaining 60% of sales:
(a) Profit.
(b) Fixed cost.
(c) Variable cost.
(d) Margin of safety.

10. The P/V ratio of a product is 0.6 and profit is ₹ 9,000. The margin of safety is:
(a) ₹ 5,400
(b) ₹ 15,000
(c) ₹ 22,500
(d) ₹ 3,600

CA NOTE HUB 619

 Case Scenarios
QUESTION 1: A meeting of the heads of departments of the Arnav Ltd. has been called
to review the operating performance of the company in the last financial year. The
head of the production department appraised that during the last year the company could
operate at 70% capacity level but in the coming financial year 95% capacity level can be
achieved if an additional amount of ₹ 100 Crore on capex and working capital is incurred.
The head of the finance department has presented that during the last financial year the
company had a P/V ratio of 40%, margin of safety and the break-even were ₹ 50 crore
and
₹ 200 crore respectively.
To the reply to the proposal of increasing the production capacity level to 95%, the head
of the finance department has informed that this could be achieved if the selling price and
variable cost are reduced by 8% and 5% of sales respectively. Fixed cost will also increase
by ₹ 20 crore due to increased depreciation on additional assets. The additional capital will
be arranged at a cost of 15% p.a. from a bank.
In the coming financial year, it has been aimed to achieve an additional profit of ₹ 10
crore over and above the last year’s profit after adjusting the interest cost on the
additional capital.
The following points is required to be calculated on urgent basis to put the same in the
meeting. You being an assistant to the head of finance, has been asked the followings:
i. What will be the revised sales for the coming financial year?
(a) ₹ 322.22 Crore
(b) ₹ 311.11 Crore
(c) ₹ 300.00 Crore
(d) ₹ 324.24 Crore

ii. What will be the revised break-even point for the coming financial year?
(a) ₹ 222.22 Crore
(b) ₹ 252.22 Crore
(c) ₹ 244.44 Crore
(d) ₹ 255.56 Crore

CA NOTE HUB 620

iii. What will be the revised margin of safety for the coming financial year?
(a) ₹ 100 Crore
(b) ₹ 58.89 Crore
(c) ₹ 55.56 Crore
(d) ₹ 66.66 Crore

iv. The profit of the last year and for the coming year are:
(a) ₹ 50 Crore & ₹ 95 Crore respectively
(b) ₹ 20 Crore & ₹ 65 Crore respectively
(c) ₹ 20 Crore & ₹ 30 Crore respectively
(d) ₹ 45 Crore & ₹ 66.66 Crore respectively
v. The total cost of the last year and for the coming year are:
(a) ₹ 230 Crore & ₹ 292.22
(b) ₹ 230 Crore & ₹ 275 Crore
(c) ₹ 220 Crore & ₹ 282.22 Crore
(d) ₹ 220 Crore & ₹ 292.22 Crore
Answers:
i. (a) ii. (d) iii. (d) iv. (c) v. (a)

i. a
Revised Sale = Revised FixedCost + Expected Profit ÷ P / V Ratio
= {₹ 115 + (20 + 10)} ÷ 45% = ₹ 322.22 crores
ii. d
Revised Break – even Point = Fixed Cost ÷ P / V Ratio
= ₹ 115 Crore ÷ 45% = ₹ 255.56 Crore (Refer working notes)
iii. d
Revised Margin of Safety = Revised Sales – Revised Break– even Sales
= ₹ 322.22Crores – ₹ 255.56Crores = ₹ 66.66 Crores.
iv. c
₹ 20 Crore & ₹ 30 Crore respectively (Refer working note)
v. a
Total cost in last year = ₹ 230 Crore
Total cost in coming year = Variable Cost + Fixed Cost Revised sales × 55% + 115 Crore
= ₹ 322.22 Crore × 55% + ₹ 115 Crore = ₹ 292.22 Crore

CA NOTE HUB 621

Working Note
Present Sales and Profit
Total Sales = Break – even Sales + Margin of Safety
= ₹ 200 Crores + ₹ 50 Crores
= ₹ 250 Crores
P/V Ratio = 40%
Variable Cost = 60% of Sales
= ₹ 250 Crores × 60%

= ₹ 150 Crores
Fixed Cost = Break – even Sales × P/V Ratio
= ₹ 200 Crores × 40%
= ₹ 80 Crores
Total Cost = ₹ 150 Crores + ₹ 80 Crores
= ₹ 230 Crores
Profit = Total Sales – Total Cost

= ₹ 250 Crores – ₹ 230 Crores

= ₹ 20 Cores

Revised Sales (₹in Crores)

Present Fixed Cost 80.00
Increase in Fixed Cost 20.00
Interest at 15 per cent on Additional Capital (₹ 100Crores × 15%) 15.00
Total Revised Fixed Cost (in crore) 115.00
Assuming that the Present Selling Price is ₹ 100
Revised Selling Price will be (8% Less) 92.00
New Variable Cost (Reduced from 60% to 55%) of Sales (₹ 92 × 55%) 50.60
Contribution (₹ 92.00 – ₹ 50.60) 41.40
New P / V Ratio = ₹ 41.40 ÷ ₹ 90.00 x 100 = 45%

CA NOTE HUB 622

 15. Budgets & Budgetary Control
Multiple Choice Questions
1. If a company wishes to establish a factory overhead budget system in which estimated
costs can be derived directly from estimates of activity levels, it should prepare a:
(a) Master budget
(b) Cash budget
(c) Flexible budget
(d) Fixed budget

2. The classification of fixed and variable cost is useful for the preparation of:
(a) Master budget
(b) Flexible budget
(c) Cash budget
(d) Capital budget

3. Budget manual is a document:

(a) Which contains different type of budgets to be formulated only.
(b) Which contains the details about standard cost of the products to be made.
(c) Setting out the budget organization and procedures for preparing a budget including
fixation of responsibilities, formats and records required for the purpose of preparing a
budget and for exercising budgetary control system.
(d) None of the above

4. The budget control organization is usually headed by a top executive who is known as:
(a) General manager
(b) Budget director/budget controller
(c) Accountant of the organization
(d) None of the above

5. “A favourable budget variance is always an indication of efficient performance”.

Do you agree, give reason?
(a) A favourable variance indicates, saving on the part of the organization hence it
indicates efficient performance of the organization.
(b) Under all situations, a favourable variance of an organization speaks about its efficient

CA NOTE HUB 623

 performance.
(c) A favourable variance does not necessarily indicate efficient performance, because such
a variance might have been arrived at by not carrying out the expenses mentioned in the
budget.
(d) None of the above.

6. A budget report is prepared on the principle of exception and thus-

(a) Only unfavourable variances should be shown
(b) Only favourable variance should be shown
(c) Both favourable and unfavourable variances should be shown
(d) None of the above

7. Purchases budget and materials budget are same:

(a) Purchases budget is a budget which includes only the details of all materials
purchased
(b) Purchases budget is a wider concept and thus includes not only purchases of materials
but also other item’s as well
(c) Purchases budget is different from materials budget; it includes purchases of other
items only
(d) None of the above

8. Efficiency ratio is:

(a) The extent of actual working days avoided during the budget period
(b) Activity ratio/ capacity ratio
(c) Whether the actual activity is more or less than budgeted activity
(d) None of the above

9. Activity Ratio depicts:

(a) Whether actual capacity utilized exceeds or falls short of the budgeted capacity
(b) Whether the actual hours used for actual production were more or less than the
standard hours
(c) Whether actual activity was more or less than the budgeted capacity
(d) None of the above

CA NOTE HUB 624

10. Which of the following is usually a short-term budget:
(a) Capital expenditure budget
(b) Research and development budget
(c) Cash budget
(d) Sales budget
Answers to the MCQs
1. (c) 2. (b) 3. (c) 4. (b) 5. (c) 6. (c)
7. (b) 8. (b) 9. (c) 10. (c)

Case Scenarios
QUESTION 1: M Ltd. is a public sector undertaking (PSU), produces a product A. The
company is in process of preparing its revenue budget for the year 2024. The company
has the following information which can be useful in preparing the budget:
(i) It has anticipated 12% growth in sales volume from the year 2023 of 4,20,000 tonnes.

(ii) The sales price of ₹ 23,000 per tonne will be increased by 10% provided Wholesale

Price Index (WPI) increases by 5%.

(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw

material cost is ₹ 4,500 per tonne. The price of raw material will also increase by
10% if WPI increase by 5%.
(iv) The projected increase in WPI for 2022 is 4%

(v) A total of 6,000 employees works for the company. The company works 26 days in a

month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year

wage agreement. The earnings per manshift (means an employee cost for a shift of 8
hours) is
₹ 3,000 (excluding terminal benefits). The new wage agreement will be implemented
st
from 1 July 2024 and it is expected that a 15% increase in pay will be given.
(vii) The casual employees are getting a daily wage of ₹ 850. The wages in linked to
Consumer Price Index (CPI). The present CPI is 165.17 points and it is expected
to be 173.59 points in year 2024.
(viii) Power cost for the year 2021 is ₹ 42,00,000 for 7,00,000 units (1 unit = 1
Kwh). 60% of power is used for production purpose (directly related to production
volume) and remaining are for employee quarters and administrative offices.
(ix) During the year 2023, the company has paid ₹ 60,00,000 for safety and maintenance

works. The amount will increase in proportion to the volume of production.

CA NOTE HUB 625

(x) During the year 2023, the company has paid ₹ 1,20,000 for the purchase of diesel

to be used in car hired for administrative purposes. The cost of diesel will increase
by 15% in year 2024.
(xi) During the year 2023, the company has paid ₹ 6,00,000 for car hire charges (excluding

fuel cost). In year 2024, the company has decided to reimburse the diesel cost to
the car rental company. Doing this will attract 5% GST on Reverse Charge Mechanism
(RCM) basis on which the company will not get GST input credit.
(xii) Depreciation on fixed assets for the year 2023 is ₹ 80,40,00,000 and it will be

15% lower in 2024.

You being an associate to the budget controller of the company is expected to answer the
following question:
(i) What would be the sales volume for the FY 2024?
(a) 4,70,400 tonnes
(b) 4,70,000 tonnes
(c) 4,70,600 tonnes
(d) 4,70,200 tonnes

(ii) What would be quantity of raw material in FY 2024?

(a) 9,66,000 tonnes
(b) 1,81,000 tonnes
(c) 10,81,900 tonnes
(d) 10,81,920 tonnes

(iii) What would be the car hire charges for the FY 2023?
(a) ₹ 6,00,000
(b) ₹ 6,50,000
(c) ₹ 6,40,000
(d) ₹ 6,20,000

(iv) What would be the car hire charges for the FY 2024?
(a) ₹ 6,00,000
(b) ₹ 7,74,900
(c) ₹ 6,83,000
(d) ₹ 6,20,000

CA NOTE HUB 626

(v) What would be the budgeted profit/ loss for the year 2024?
(a) ₹ 1273.043 lakhs
(b) (₹ 5142 lakhs)
(c) ₹ 5142 lakhs
(d) (₹ 1273.043 lakhs)
Answers:
i. (a) ii. (d) iii. (a) iv. (b) v. (d)

(i) (a) 4,70,400 tonnes

(ii) (d) 10,81,920 tonnes
(iii) (a) ₹ 6,00,000
(iv) (b) ₹ 7,74,900
(v) (d) (₹ 1273.043 lakhs)
Revenue Budget (Flexible Budget) of M Ltd. for the Year 2024
Particulars PY 2023 CY 2024
A Sales Volume (Tonnes) 4,20,000 4,70,400
[112%×4,20,000]
B Selling Price per tonne (₹) 23,000 23,000
(₹in lakh) (₹in lakh)
C Sales value [A×B] 96,600 1,08,192
D Raw material Cost:
(i) Qty. of Material [2.3 tonnes × A] 9,66,000 10,81,920
(tonnes)
(ii) Price per tonne (₹) 4,500 4,500
(iii) Total raw material cost 43,470 48,686.40
(₹in lakh) [(i) × (ii)]
E Wages & Salary Cost:
(i) Wages to casual employees 2,386.80 2,508.47
[900 × 26 × 12 × [900 × 26 × 12 ×
₹850] ₹ 893.33]
(15% × 6,000 = 900
employees)
(ii) Salary to permanent employees 47,736 51,316.20
[5100 × 26 × 12 × [(5100 × 26 × 6 ×
₹ 3,000] ₹ 3,000) +
(85% × 6,000 = 5,100 (5100 × 26 × 6 × ₹

CA NOTE HUB 627

 3,450)]
employees)
(iii) Total wages & salary [(i ) + (ii) + (iii)] 50,122.80 53,824.67
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units) 2,80,000 2,80,000
[40% × 7,00.000]
(iii) Total Power 7,00,000 7,50,400
consumption (units) [(i) + (ii)]
(iv) Power rate per unit (₹) 6.00 6.00
[₹ 42,00,000 ÷7,00,000]
(v) Total power cost [(iii)×(iv)] 42 45.024
G Safety and 60 67.20
maintenance Cost [112% × 4,20,000]
H Diesel cost 1.2 -
I Car Hire charge:
(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5% on RCM basis [5% × ( i + ii)] - 0.369
(iv) Total Car hire charge cost [(i) + (ii) 6 7.749
+ (iii)]
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C - L] (5,142) (1,273.043)

CA NOTE HUB 628

CA NOTE HUB
 Hey
Folks !
I've put my heart into crafting this material to guide you,
but your dedication is what will truly bring it to life.
Success is a team effort, and together, we can conquer
Costing and crack this exam. You bring the determination,
and I'll provide the direction— together, let’s make it
happen!"
Remember, a perfect 100/100 in Costing is soon a reality
for you.
With Ganesh

Know your Faculty

CA Ganesh Bharadwaj is a highly regarded faculty for Costing and Financial

Management in CA & CMA courses, known for his engaging and student-
friendly teaching style.

He has been recognized as one of the top performers in India in the

subjects Costing & FM for an impressive score of 94% in his CA exams.

He has been on a mission to teach Costing & FM in simple English with crystal
clear explanations and real-life examples, aiming for both exam success and
conceptual understanding.

A firm believer in Conceptual Learning, his teaching philosophy aligns with

his powerful quote: “Stop Mugging Up. Start Learning.”

CA NOTE HUB
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