INTERMEDIATE COURSE

PAPER – 4
COST AND MANAGEMENT
ACCOUNTING
[RELEVANT FOR MAY, 2025 EXAMINATION AND ONWARDS]

BOOKLET ON CASE SCENARIOS

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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 PREFACE

Under the New Scheme of Education and Training which was introduced on
1 st July, 2023, 30% of the examination assessment is by the way of Objective
Type Questions at Intermediate and Final level. Therefore, to provide
hands-on practice for such type of questions, BOS launched MCQ Paper
Practice Portal on 1 st July, 2023. This online portal contains independent
MCQs as well as case scenario based MCQs both for conceptual clarity and
practice of the students.
In continuation to this handholding initiative and to provide quality
academic inputs to the students to help them grasp the intricate aspects of
the subject, the Board of studies has brought forth subject-wise booklets on
Case Scenarios at Intermediate and Final level. These booklets are
meticulously designed to assist Chartered Accountancy (CA) students in their
preparation of the CA course.
The ‘Booklet on Case Scenarios for Paper 4: Cost and Management
Accounting’ will serve as revision help book towards preparing for
Intermediate examination of the Institute and help the students in
identifying the gaps in the preparation of the examination and developing
plan to make it up. The case scenario-based MCQs are all application
oriented MCQs and arise from the facts of the case. At the end of each case
scenario followed by MCQs, we have also provided explanations/hints for
each MCQ which will enable the students to evaluate their performance and
identify areas requiring further attention.
The objective of this subject is to develop an understanding of the basic
concepts and applications to establish the cost associated with the
production of products and provision of services and apply the same to
determine prices, understanding of cost accounting statements and to
acquire the ability to apply information for cost ascertainment, planning,
control and decision making. This case scenario booklet on Cost and
Management Accounting assists Chartered Accountant students to know
about the process of making prompt and knowledgeable business decisions.
After attaining conceptual clarity by reading the Study Material, you are
expected to apply the concepts learnt in answering the MCQs given in this
booklet. You have to read the case scenarios and the MCQs, identify the
concepts involved, apply the provisions correctly in addressing the issue
raised/making the computation required in the MCQ, and finally, choose the
correct answer. This process of learning and understanding the concepts and
solving MCQs based thereon will help you attain conceptual clarity and hone
your application and analytical skills so that you are able to approach the
examination with confidence and a positive attitude.
We are confident that this booklet will serve as a valuable companion in your
preparation journey. We encourage students to make the most of this
resource by engaging deeply with the scenarios, reflecting on the MCQs, and
embracing the learning process.

Happy Reading and Best Wishes!

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 CASE SCENARIO 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.
2 COST AND MANAGEMENT ACCOUNTING

MULTIPLE CHOICE QUESTIONS

The following information are required for managerial decisions:

1. 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
2. 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.
3. 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

4. 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
5. Value of output transferred to finished goods is:
(a) `22,57,200
(b) `20,06,400
 CASE SCENARIOS 3

(c) `22,44,000
(d) `19,27,200

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) 3,800 Litres

Reason:

Inflow into process Litres Outflow from process Litres

Opening WIP 500 Transferred to finished 3,400

goods

Quantity introduced 3,800 Total loss 800

(Balancing figure)

Closing WIP 100

4,300 4,300

2. Option(a) Normal loss- 380 litres & Abnormal loss- 420 litres
Reason:

Total loss 800 litres

Normal loss (10% of fresh input i.e. 3,800) 380 litres

Abnormal loss 420 litres

4 COST AND MANAGEMENT ACCOUNTING

3. Option (b) `10,33,600

Reason:

Calculation of Equivalent production units

Input Details Units Output Units Equivalent Production

Particulars Material Labour Overheads

% Units % Units % Units

Opening WIP 500 From 500 - - 20 100 40 200

Opening
WIP

Fresh inputs 3,800 From fresh 2900 100 2900 100 2900 100 2900
units

Normal loss 380 - - -

Closing WIP 100 100 100 20 20 10 10

Abnormal 420 100 420 100 420 100 420

loss

4,300 4,300 3,420 3,440 3,530

Value of raw materials introduced during the month

Equivalent Cost per Total

units EU (`) cost (`)
Total value of raw material 3420 300 10,26,000
Add: Scrap value of normal 380 20 7,600
loss
Value of raw material 10,33,600
introduced
 CASE SCENARIOS 5

4. Option (a) `4,000 & `1,600 respectively

Reason:

Value of labour and overhead in closing Work in process

Cost elements Equivalent units Cost per EU (`) Total cost (`)
Labour 20 200 4,000
Overheads 10 160 1,600

5. Option (c) ` 22,44,000

Value of output transferred to finished goods
Output transferred (Units) × Equivalent cost per unit

3,400 Litres × ` 660 = ` 22,44,000

6 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 2

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
 CASE SCENARIOS 7

(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.

MULTIPLE CHOICE QUESTIONS

You are asked to calculate the followings:

1. 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
2. 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

3. 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
4. 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
8 COST AND MANAGEMENT ACCOUNTING

(d). `56,000 & `7,88,72,000 respectively

5. 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

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) `7,87,10,000

Reason:
2. Option (c) `7,87,28,000 and `1,682.22 respectively
Reason:
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
3. Option (a) ` 92,400
Reason:
Car hire charges including GST @5%, please refer the cost sheet
4. Option (b) `56,000 & `7,88,76,400 respectively
Reason:
Selling and distribution cost includes the following:

Maintenance cost for weighing bridge 12,000

AMC cost of CCTV installed at weigh bridge 8,000
TA/ DA & hotel bill of sales manager 36,000
56,000

For Cost of Sale please refer the cost sheet

 CASE SCENARIOS 9

5. Option (a) `1,504.70 & 5 tonnes respectively

Manshift = 1,800 employees × 26 days = 46,800 manshifts

Computation of earnings per manshift (EMS):

Total employee benefits paid ` 7,04,20,000
EMS= = =` 1504.70
Manshift 46,800
Computation of Output per manshift (OMS):
Total Output/ Production 2,34,000 Tonne
OMS= = = 5 tonnes
Manshift 46,800
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 at factory 18,000
premises
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 weighing bridge 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
10 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 3

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:

MULTIPLE CHOICE QUESTIONS

1. 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
 CASE SCENARIOS 11

2. 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
3.. 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
4. 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
5. 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 TO MULTIPLE CHOISE QUESTIONS

1. Option (a) ` 322.22 Crore

Reason:
Revised Fixed Cost + Expected Profit
Revised Sale =
P/V Ratio
= {`115 + (20+10)} ÷ 45% = ` 322.22 crores
12 COST AND MANAGEMENT ACCOUNTING

2. Option (d) ` 255.56 Crore

Fixed Cost
Revised Break – even Point =
P/V Ratio

= `115 Crore ÷ 45% = `255.56 Crore

(Refer working notes)
3. Option (d) ` 66.66 Crore

Reason:
Revised Margin of Safety = Revised Sales – Revised Break–even Sales
= ` 322.22Crores – ` 255.56Crores
= ` 66.66 Crores.

4. Option (c) ` 20 Crore & ` 30 Crore respectively

Reason:
` 20 Crore & ` 30 Crore respectively (Refer working note)
5. Option (a) ` 230 Crore & ` 292.22
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
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
 CASE SCENARIOS 13

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 × 15.00
15%)
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 50.60
(` 92 × 55%)
Contribution (`92.00 – ` 50.60) 41.40
` 41.40
New P / V Ratio = x 100
` 92.00

= 45%
14 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 4

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 character.
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:

MULTIPLE CHOICE QUESTIONS

1. 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)
 CASE SCENARIOS 15

2. 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)

3. 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)

4. 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)
5. 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)
16 COST AND MANAGEMENT ACCOUNTING

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) ` 10,880 (A)

Reason:
Variable Overhead Cost = Standard Variable Overheads for
Production – Actual

Variance Variable Overheads

= ` 44,800 – ` 55,680
= ` 10,880 (A)

2. Option (c) ` 21,800 (A)

Reason:
Fixed Overhead Volume = Absorbed Fixed Overheads –
Budgeted Fixed Overheads
Variance = ` 87,200 – ` 1,09,000
= ` 21,800 (A)

3. Option (a) ` 21,520 (A)

Reason:
Fixed Overhead Expenditure= Budgeted Fixed Overheads –
Actual Fixed Overheads
Variance = ` 10.9 × 10,000 units – ` 1,30,520
= ` 21,520 (A)

4. Option (b) ` 5,450 (A)

Reason:
Calendar Variance = Possible Fixed Overheads –
Budgeted Fixed Overheads
= ` 1,03,550 – ` 1,09,000
= ` 5,450 (A)
 CASE SCENARIOS 17

5. Option (a) ` 43,320 (A)

Reason:

Fixed Overhead Cost Variance = Absorbed Fixed Overheads –

Actual Fixed Overheads
= ` 87,200 – ` 1,30,520
= ` 43,320 (A)
WORKING NOTE

` 10.00
Budgeted Fixed Overheads
Fixed Overheads=
Budgeted Output
= 12,00,000÷1,20,000
Fixed Overheads element in Semi-Variable Overheads i.e. 60% ` 1,08,000
of ` 1,80,000
Budgeted Fixed Overheads ` 0.90
Fixed Overheads ` 1,08,000/1,20,000
Budgeted Output
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 ` ` 72,000

1,80,000

Total Budgeted Variable Overheads ` 6,72,000

Budgeted Variable Overheads `5.60

Standard Variable Cost per unit =
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)
18 COST AND MANAGEMENT ACCOUNTING

BudgetedFixedOverheads ` 1,03,550
Possible Fixed Overheads= x ActualDays
BudgetedDays

= 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

 CASE SCENARIOS 19

CASE SCENARIO 5

Tropic Pvt Ltd was engaged in the business of manufacturing Product P. The
product P required 2 units of Material R. The company intends to sell 24,000
units of Product P and does not wish to retain any closing stock. However, the
opening stock of Product P is 4,000 units. Raw Material R has to be procured
after considering the opening stock of R amounting to 10,000 units. The
technical team further confirms that the yield in the course of manufacture of
Product P is 80% of the input.
The company presently procures its annual requirement of materials on a
quarterly basis from its regular supplier enjoying a discount of 2.5% on the
invoice price of the material of ` 20 per unit. Every time the company places
orders for Material R, it incurs ` 125 for each of the order placed. The company
also has taken a rented warehouse for storing material R and the annual cost of
storage is ` 10 per unit. The company appointed Mr. T a Chartered Accountant
to review the cost of inventory and provide measures of improvement of cost.
After reviewing the material purchase and consumption pattern, Mr. T
suggested that the implementation of Wilson’s EOQ would be beneficial to the
company. He emphasized that the change in the quantity ordered would result
in reduction of inventory carrying costs.
Mr. T further reviewed the labour costing and identified that the employees
were paid overtime wages to ensure timely completion of projects. Overtime
wages comprised of daily wage and 100% of daily wages as overtime premium.
Based on the cost record it was understood that every month had 180 hours of
regular working hours which was remunerated at ` 200 per hour and Overtime
of 20 hours which was remunerated at ` 400 per hour. Mr. T suggested that the
above time taken may be considered as standard and a scheme of Incentive be
introduced to reduce overtime cost. He further indicated that Rowan scheme of
incentive be used to measure performance and the improved productivity per
hour would be 125 units per hour.
In this regard, address the following queries in line with the suggestions
provided by Mr. T to Tropic Pvt Ltd.
20 COST AND MANAGEMENT ACCOUNTING

MULTIPLE CHOICE QUESTIONS

1. The annual requirement of Material R to meet the target sales of 24,000

units of Product P is:
(a) 48,000 units
(b) 60,000 units

(c) 40,000 units

(d) 50,000 units
2. The ordering quantity as per the current inventory policy and the
proposed Wilson’s Economic order quantity of Material R are:
(a) Order Quatity as per the current inventory policy – 10,000 units &
Economic Order Quantity – 1,000 units

(b) Order Quantity as per the current inventory policy – 15,000 units &
Economic Order Quantity – 1,225 units
(c) Order Quantity as per the current inventory policy – 12,000 units &
Economic Order Quantity – 1,095 units
(d) Order Quantity as per the current inventory policy – 12,500 units &
Economic Order Quantity – 1,118 units
3. The net savings to inventory cost on migration from the current inventory
policy to the Wilson’s Economic Order Quantity policy would be:
(a) Savings from EOQ as compared to current discount policy –
` 26,820
(b) Savings from EOQ as compared to current discount policy –
` 20,500
(c) Savings from EOQ as compared to current discount policy –
` 33,253
(d) Savings from EOQ as compared to current discount policy –
` 25,546
4. Incentive payable under the Rowan Incentive scheme amounts to:
(a) ` 7,500
 CASE SCENARIOS 21

(b) ` 6,400
(c) ` 6,000
(d) ` 8,000
5. The savings in labour cost achieved by implementation of incentive
scheme over the overtime payments amounts to:
(a) ` 9,600
(b) ` 5,600
(c) ` 8,000
(d) ` 3,200

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (c) 40,000 units.

Reason:
Projected Sales of Product P – 24,000 units
Less: Opening stock of Product P – (4,000 units)
Product P to be produced – 20,000 units
Raw Material required – 50,000 units (20,000 x 2/80% yield)
Opening stock of Material R available– 10,000 units
Material to be procured – 40,000 units.
2. Option (a)Order Quantity as per the current inventory policy – 10,000
units and EOQ – 1,000 units
Reason:
Annual requirement - Procurement - 40,000 units
Order Quantity as per the current inventory
policy (Quarterly) - 10,000 units
Ordering Cost - `125 per order
Carrying Cost - ` 10 per unit p.a.

EOQ - 1,000 units.

22 COST AND MANAGEMENT ACCOUNTING

3. Option (b) Savings from EOQ as Compared to current discount policy

– ` 20,500
Reason:
Associated Costs under EOQ:
Ordering Costs = No. of orders x Ordering cost per order

No of orders = Annual Requirement/ EOQ (or) current order quantity

Hence No of orders = 40
Therefore Ordering Cost = 40 x 125 = ` 5,000.

Carrying cost = Average Inventory x Carrying cost per unit per annum
Average Inventory = (EOQ/ current order quantity)/2
= 1,000/2 = 500
Carrying cost = 500 x 10 = ` 5,000
Associated Costs under EOQ = Ordering cost + Carrying Cost
= ` 10,000 A
Associated Costs under current inventory policy:
No of orders = 4 (Quarterly)
Ordering cost = 4 x 125 = ` 500

Average inventory = 10,000/2 = 5,000

Carrying cost = 5,000x10 = 50,000
Associated Costs = 50,000+500 = 50,500
Less: Discount = 20,000
Net cost = 30,500. B
Incremental Cost = B – A = 20,500
 CASE SCENARIOS 23

4. Option (b) ` 6,400

Reason:

Time taken under the Overtime regime 180 Hours + 20 Hours overtime
= 200 Hours
Time to be taken under the Incentive regime

Units to be produced = 20,000 units

Units produced per hour under incentive scheme = 125 units
Time taken = 160 Hours
Time saved = 200 – 160 = 40 hours.
Incentive under Rowan scheme = (Time saved/Time allowed) x time taken
x Rate
= (40/200) x 160x200 = ` 6,400.
5. Option (b) ` 5,600
Cost under the Overtime scheme:
Base wage = 200 x 200 = 40,000
OT Premium = 20 x 200 = 4,000
Total Wages under Overtime scheme = 44,000
Cost under Incentive scheme:
Base Wage = 160 hours x 200 = 32,000
Incentive = 6,400

Total wages paid = 38,400

Savings in Incentive scheme over Overtime scheme = ` 5,600.
24 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 6

XYZ Manufacturing Pvt. Ltd. is a prominent company in the electric appliances

industry, known for producing a diverse range of high-quality products. The
company has built a reputation for reliability and innovation in the
manufacturing of household appliances, including fans, mixers, and heaters.
XYZ Manufacturing Pvt. Ltd. is dedicated to delivering products that meet the
needs of its customers while adhering to the highest standards of quality and
performance.
The company operates a state-of-the-art factory that is fully equipped with
advanced machinery and technology to ensure efficient and consistent
production. The factory operates 25 days a month, running multiple shifts to
meet the growing demand for its products. The company have spare capacity
to additional orders. Each product type—fans, mixers, and heaters—undergoes
a meticulous manufacturing process that includes assembly, quality testing, and
packaging.

Cost Category Amount (`)

Fixed Costs (per month)
Factory Rent ` 3,00,000
Depreciation ` 2,00,000
Administrative Expenses ` 1,00,000
Salaries ` 4,00,000
Total Fixed Costs ` 10,00,000
Number of units produced per month 10,000 units
(Note: Last month there was an additional special order of
2000 units which resulted in higher production)
Selling price per unit ` 1,500

Additional Info: Raw Materials include Copper, Plastic, and Other Materials.
The per unit cost of Copper is ` 80 more than the cost of Plastic, while the cost
of Other Materials is twice that of Plastic. And the total Raw Material Cost per
unit is ` 210 more than the combined cost of Copper & Plastic.
 CASE SCENARIOS 25

The Labour Hour Rate is ` 100 per hour. The total labour hours used in the last
month were 36,000 Hours. The Utilities Cost per unit is ` 100, and the Packaging
Cost per unit is ` 50. Being a finance manager of the company, you are required
to answer the following:

MULTIPLE CHOICE QUESTIONS

1. Calculate the contribution margin per unit.

(a) ` 550
(b) ` 600

(c) ` 650
(d) ` 700
2. Determine the break-even point in sales revenue.
(a) ` 31,28,593
(b) ` 25,85,153
(c) ` 27,27,025
(d) ` 27,05,983
3. If the company wants to achieve a target profit of ` 5,00,000, what should
be the sales volume (in units)?
(a) 2,000 units
(b) 2,727 units
(c) 2,750 units
(d) 3,000 units
4. What would be the impact on the break-even point if the variable cost
per unit increases by 10%?
(a) 2,178 units
(b) 2,198 units
(c) 2,248 units
(d) 2,258 units
26 COST AND MANAGEMENT ACCOUNTING

5. Calculate the margin of safety in percentage if the company sells 4,000

units if the variable cost per unit increases by 10%
(a) 44.85%
(b) 42.55%
(c) 45.05%
(d) 45.75%

ANSWERS TO MULTIPLE CHOISE QUESTIONS

Answer
1. Option (a) ` 550

Reason:
Contribution Margin per Unit = Selling Price per Unit - Variable Cost per
Unit

= Variable Cost per unit = ` 500*+ ` 300**+ ` 100+ ` 50

Contribution Margin per Unit = ` 1,500 - ` 950 = ` 550
*Raw Material Cost Calculation

Let the cost of Plastic be x

The cost of Copper is ` 80 more than the cost of Plastic: Cost of Copper
= x + 80

The cost of Other Materials is twice that of Plastic: Cost of Other Materials
= 2x
The total Raw Material Cost per unit is ` 210 more than the combined cost
of Copper & Plastic: x + (x+80) + 2x = (x + (x+80)) + 210
Solving for X = 105
Now, calculate the total cost of Raw Materials:
105 + (105+80) +210 = 500
So, the total cost of Raw Materials is ` 500.
** Labour Cost Calculation
 CASE SCENARIOS 27

The Labour Hour Rate is ` 100 per hour.

The total labour hours used in the last month were 36,000 hours.
The production units last month were 12,000 units (10000 normal units
plus 2000 special order).
Total Labour Cost = Labour Hour Rate × Total Labour Hours

Total Labour Cost= ` 100 /hour × 36,000 hours = ` 3,600,000

Per Unit Labour Cost = Total Labour Cost/Production Units
Per Unit Labour Cost = ` 3,600,000/12000

Per Unit Labour Cost = ` 300

So, the per unit labour cost is ` 300.
2. Option (c) ` 27,27,025

Reason:
- Break-even Point (Sales Revenue) = Total Fixed Costs / Contribution
Margin Ratio

- Contribution Margin Ratio = Contribution Margin per Unit / Selling

Price per Unit
- = ` 550 / ` 1,500 = 0.3667
- Break-even Point = ` 10,00,000 / 0.3667 ≈ ` 27,27,025
3. Option (b) 2,727 units
Reason:

- Required Sales Volume (Units) = (Total Fixed Costs + Target Profit)

/ Contribution Margin per Unit
- = (` 10,00,000 + ` 5,00,000) / ` 550 ≈ 2,727.27 units ≈ 2,727 units
(rounded up)
4. Option (b) 2,198 units
Reason:

- New Variable Cost per Unit = ` 950 + 10% of ` 950 = ` 950 + ` 95

= ` 1,045
28 COST AND MANAGEMENT ACCOUNTING

- New Contribution Margin per Unit = ` 1,500 - ` 1,045 = ` 455

- New Break-even Point (Units) = Total Fixed Costs / New
Contribution Margin per Unit
- = ` 10,00,000 / ` 455 ≈ 2198 units
5. Option (c) 45.05%

Reason:
- Margin of Safety (Units) = Actual Sales - Break-even Sales
- = 4,000 - 2198 = 1,802 units

- Margin of Safety (%) = (Margin of Safety in Units / Actual Sales in

Units) * 100
- = (1,802 / 4,000) * 100 ≈ 45.05%
 CASE SCENARIOS 29

CASE SCENARIO 7

Mr. Vikas, a toy importer has understood the importance of manufacturing in

India. He is backed up by the new govt. policies that motivate him to
manufacture in India. As per the custom department any import made for the
manufacturing under “Made in India”, custom duty will be refunded upto 80%.
Vikas decided not to import toy from China anymore, instead import raw
material from Srilanka, for the manufacturing of toys in India. Under an
agreement of Govt. Of India with Srilankan Govt., any import from Srilanka will
receive tax benefits.

Vikas ordered material Xendga & material Zenga from Srilanka. Details are
given below:-
Srilankan Rupees (SLR)
Material Xendga (12,000 units * 125 SLR) 15,00,000
Material Zenga (8,000 units * 225 SLR) 18,00,000
Factory cost 33,00,000
Add: Containers cost 2,00,000
Add: Freight upto loading shipment on ship (paid by exporter) 50,000
F.O.B. 35,50,000
• Ocean Freight is $ 2,000
• Insurance is $ 1,500
When shipment reached India, it was unloaded at Chennai port. Vikas requested
to put the goods in custom port’s warehouse. Vikas due to cash crunch was not
in a position to pay custom duty and therefore did not file the bill of exchange
(B.O.E.). Custom authorities charged a penalty of INR 15,000.

Finally, after a month Vikas filled B.O.E. and paid custom duty of 20% on CIF
value of the shipment. IGST was also applicable @ 18% on the combined value
of CIF & custom duty paid.
He spent further a sum of INR 12,500 to bring the imported goods to his factory.
An inspection was done on the goods and it was found that 5% of the goods
30 COST AND MANAGEMENT ACCOUNTING

were broken. This came to management as a surprise because generally such

rate of defects on imports is 8%.

Additional Information:
• Exchange rates:
(1) 1 SLR = 0.25 INR

(2) 1 USD = 75 INR

• IGST credits are available.
• Containers were refunded at INR 38,000.

• Indian and Srilankan brokers were paid commission by Vikas on factory

cost. Indian broker charged 6% whereas Srilankan broker charged 12%.
• CIF (cost, insurance and Freight) includes F.O.B (Free on Board).,
Insurance & Ocean freight.
You are required to answer the following 5 questions:

MULTIPLE CHOICE QUESTIONS

1. What is the total cost of shipment to be recorded by Vikas?

(a) INR 13,17,000
(b) INR 13,04,500
(c) INR 13,54,500
(d) INR 13,32,500
2. What is the absorption rate of total cost per unit of Zenga?
(a) INR 90.28
(b) INR 84.44
(c) INR 93.62
(d) INR 85.77
3. What is the absorption rate of total cost per unit of Xendga?
(a) INR 52.01
(b) INR 54.24
 CASE SCENARIOS 31

(c) INR 58.13

(d) INR 68.65
4. Amount of refundable taxes?
(a) INR 4,13,600
(b) INR 4,57,600
(c) INR 2,20,000
(d) INR 2,37,600
5. If loss of goods was 9% instead of 5%, what will be the amount that will
be charged to statement of profit & loss?
(a) INR 13,045
(b) INR 19,898.4
(c) INR 14,178.4
(d) INR 24,045

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (a) INR 13,17,000

Reason:
Working notes:
Factory cost (33,00,000 x 0.25) INR 8,25,000
Add: Freight (50,000 x 0.25) INR 12,500
F.O.B. (Free On Board) INR 8,37,500
Containers (2,00,000 x 0.25) INR 50,000
Insurance (1,500 x 75) INR 1,12,500
Ocean freight (2,000 x 75) INR 1,50,000
CIF (Cost, Insurance and Freight) = 8,37,500 + 1,12,500 + 1,50,000
= INR 11,00,000
Custom duty = 20% x 11,00,000 = INR 2,20,000
32 COST AND MANAGEMENT ACCOUNTING

IGST = 18% x (11,00,000 + 2,20,000)

= INR 2,37,600
Penalty = INR 15,000
Commission
Indian = 6% x 8,25,000 = INR 49,500
Srilankan = 12% x 8,25,000 = INR 99,000

Particulars Amount (INR)

Factory cost 8,25,000
Containers (50,000-38,000) 12,000
Insurance 1,12,500
Ocean freight 1,50,000
Freight inwards 12,500
Commission (49,500+99,000) 1,48,500
Custom duty non-refundable 20%* 2,20,000 44,000
TOTAL 13,04,500
2. Option (a) INR 90.28
Reason:

Good units = 8,000* (1-5%) = 7,600 UNITS

Normal loss to be absorbed in good units. No abnormal loss.

Particulars Product Zenga

(INR)
Factory cost 4,50,000
Other cost except commission, insurance and 69,800
custom duty to be absorbed on the basis of quantity
i.e. 12:8 or 3:2 (12,000+1,50,000+12,500)*2/5
Commission, insurance and custom duty to be 1,66,363.63
absorbed on value basis 15:18 or 5:6
(1,48,500+1,12,500+44,000)*6/11
 CASE SCENARIOS 33

Total Cost 6,86,163.63

Number of good units 7,600 units
Per unit Cost 90.28

3. Option (b) INR 54.24

Reason:
Good units = 12000 * (1-5%) = 11400 units

Particulars Product Xendga

(INR)
Factory cost 3,75,000
Other cost (12,000+1,50,000+12,500)*3/5 1,04,700
Commission, insurance and custom duty 1,38,636.36
(1,48,500+1,12,500+44,000)*5/11
Total Cost 618,336.36
Number of good units 11,400 units
Per unit Cost 54.24

4. Option (a) INR 4,13,600

Reason:

Custom duty 80% x 2,20,000 = 1,76,000

Add: IGST = 2,37,600
4,13,600

5. Option (c) INR 14,178.4

Reason:
Normal loss upto 8%

Abnormal loss 1%
Total cost of xendga INR 6,18,336.36
Total cost of zenga INR 6,86,163.63
34 COST AND MANAGEMENT ACCOUNTING

Particulars XENGDA (INR) ZENGA (INR) (INR)

Normal loss of 8% 960 units 640 units

Good units after normal 11,040 units 7,360 units

loss

Per unit cost to be 56 93.23

absorbed in good units
(6,18,336.36/11,04 (6,86,163.63/
(total costs/no of good
0) 7,360)
units after normal loss)

Abnormal loss in units 1% 120 units 80 units

Loss in Profit & Loss 56 x 120 = 6,720 93.23 x 80= 14,178.4

7,458.4
 CASE SCENARIOS 35

CASE SCENARIO 8

Hilfy textiles Ltd. has been a major player in the textile industry, producing high-
quality polyester mix cotton fabric. The production process is complex and
involves multiple stages, including spinning, weaving, quality control, and
packaging. The company has been facing challenges in controlling costs and
maintaining profitability, mainly due to fluctuating material costs and labor
inefficiencies.
To address these challenges, the company's management has decided to
implement a standard costing system to better manage costs, set benchmarks,
and identify variances. The goal is to gain better control over production costs,
improve budgeting accuracy, and enhance decision-making.
Hilfy textiles Ltd. had prepared the following estimation for the month of April:

Quantity/Time Rate (`) Amount (`)

Cotton 8,000 m 50.00 4,00,000
Polyester 6,000 m 40.00 2,40,000
Skilled labour 1,000 hours 37.50 37,500
Unskilled labour 800 hours 22.00 17,600

Normal loss was expected to be 10% of total input materials and an idle labour
time of 5% of expected labour hours was also estimated.
At the end of the month the following information has been collected from the
cost accounting department:
The company has produced 14,800 m finished product by using the followings:

Quantity/Time Rate (`) Amount (`)

Cotton 9,000 m 48.00 4,32,000
Polyester 6,500 m 37.00 2,40,500
Skilled labour 1,200 hours 35.50 42,600
Unskilled labour 860 hours 23.00 19,780
36 COST AND MANAGEMENT ACCOUNTING

On the basis of analysis of standard costing system, company’s management

wants to take actions like supplier negotiation, process optimisation, employee
training, etc.
Being the cost manager of the company, you are required to answer the
following five requirements of the management:

MULTIPLE CHOICE QUESTIONS

1. Compute Material mix variance and Material Yield Variance

(a) ` 1430 (A) & 43,200 (F)
(b) ` 1430 (F) & 43,200 (F)
(c) ` 24,000 (A) & 37,500 (F)
(d) ` 19,300 (A) & 37,500 (F)
2. Compute Material Price Variance for supplier negotiation
(a) ` 18,000 (A)
(b) ` 43,200 (F)
(c) ` 37,500 (A)
(d) ` 37,500 (F)
3. Compute Material Cost Variance

(a) ` 32,500 (F)

(b) ` 24,500 (A)
(c) ` 79,270 (F)

(d) ` 79,270 (A)

4. Compute Labour Efficiency Variance and Labour Yield Variance.
(a) ` 940 (A) & 1,140 (A)

(b) ` 2,424 (A) & 1,556 (A)

(c) ` 2,424 (A) & 1,556 (A)
(d) ` 940 (A) & 1,140 (F)
 CASE SCENARIOS 37

5. Compute Labour Cost Variance.

(a) ` 884 (A)
(b) ` 1,556 (F)
(c) ` 884 (F)
(d) ` 1,556 (A)

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (a) ` 1430 (A) & 43,200 (F)

Reason:
Material Mix Variance (Cotton + Polyester) = {(RSQ × SP) – (AQ × SP)}
= {7,08,570- 7,10,000}
= 1,430 (A)
Material Yield Variance (Cotton + Polyester) = {(SQ × SP) – (RSQ × SP)}
= {7,51,770 – 7,08,570}
= 43,200 (F)

2. Option (d) ` 37,500 (F)

Reason:
Material Price Variance (Cotton + Polyester) = {(AQ × SP) – (AQ × AP)

= {7,10,000 – 6,72,500}
= 37,500 (F)
3. Option (c) ` 79,270 (F)
Reason:
Material Cost Variance (Cotton + Polyester) = {(SQ × SP) – (AQ × AP)}
= {7,51,770 – 6,72,500}
= 79,270 (F)
 38

Material SQ SP SQ × SP RSQ RSQ × AQ AQ × SP AP AQ × AP

Working Note

(WN-2) SP
(WN-1) (`) (`) (`) (`) (`)
Material Variances:

(`)

Cotton 9,397 m 50 4,69,850 8,857 m 4,42,850 9,000 m 4,50,000 48 4,32,000

Polyester 7,048 m 40 2,81,920 6,643 m 2,65,720 6,500 m 2,60,000 37 2,40,500

16,445 m 7,51,770 15,500 m 7,08,570 15,500 m 7,10,000 6,72,500

COST AND MANAGEMENT ACCOUNTING
 CASE SCENARIOS 39

WN-1: Standard Quantity (SQ):

 8,000m 
Cotton -  ×14,800m  = 9,396.8 or 9,397 m
 0.9 ×14,000m 

 6,000m 
Polyester-  ×14,800m  = 7,047.6 or 7048 m
 0.9 ×14,000m 

WN- 2: Revised Standard Quantity (RSQ):

8,000m
Cotton - � ×15,500m� = 8,857.1 or 8857m
14,000m

6,000m
Polyester - � ×15,500m� = 6,642.8 or 6643 m
14,000m

4. Option (b) ` 2,424 (A) & 1,556 (A)

Reason:
Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {61,496 – 63,920}
= 2,424 (A)
Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {61,496 – 63,052}
= 1,556 (A)
5. Option (a) ` 884 (A)
Reason:
Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {61,496 – 62,380}
= 884 (A)
 40

Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR

(WN-4)
Working Note

(WN-3) (`) (`) (`) (`) (`) (`)

Labour Variances:

Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600

Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780

2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380

COST AND MANAGEMENT ACCOUNTING
 CASE SCENARIOS 41

WN- 3: Standard Hours (SH):

 0.95 ×1,000hr. 
Skilled labour-  ×14,800m.  =1,115.87 or 1,116 hrs.
 0.90 × 14,000m. 

 0.95 × 800hr. 
Unskilled labour-  ×14,800m.  = 892.69 or 893 hrs.
 0.90 × 14,000m. 

WN- 4: Revised Standard Hours (RSH):

 1,000hr. 
Skilled labour-  × 2,060hr.  = 1,144.44 or 1,144 hrs.
 1,800hr. 

 800hr. 
Unskilled labour-  × 2,060hr.  = 915.56 or 916 hrs.
 1,800hr. 
42 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 9

XYZ Manufacturing Ltd. is a mid-sized enterprise that has established a strong

reputation in the field of precision engineering. The company specializes in
producing high-quality engineering components that meet the stringent
requirements of various industries including automotive, aerospace, medical
devices, and industrial machinery. With a commitment to precision and
excellence, XYZ Manufacturing Ltd. has positioned itself as a reliable supplier of
critical components that demand the highest levels of accuracy and durability.
To maintain stringent control over its production costs and enhance cost
efficiency, XYZ Manufacturing Ltd. operates under a standard costing system.
This system plays a pivotal role in the company’s financial and operational
management. Standard costing involves setting predetermined costs for each
production element, including materials, labor, and overheads. These
predetermined costs, known as standard costs, serve as benchmarks against
which actual production costs are measured.

Particulars Budgeted Data Actual Data

Units Produced 10,000 units 9,500 units
Fixed Overheads ₹ 20,00,000 ₹ 19,50,000 + ₹ 1,00,000
(additional quality control
cost for 1,000 units chosen
on sample basis)
Hours Worked 15,000 hours 14,250 hours
Variable ₹ 50 per hour ₹ 50 per hour (first 10,000
Overhead Rate hours)
₹ 60 per hour (additional
hours)
 CASE SCENARIOS 43

MULTIPLE CHOICE QUESTIONS

Based on the given information, you are being required to answer the
following questions
1. What is the Fixed Overhead Cost Variance for XYZ Manufacturing Ltd. in
May 2024?

(a) ` 50,000 (A)

(b) ` 1,00,000 (A)
(c) ` 1,50,000 (A)
(d) ` 2,00,000 (A)
2. What is the Fixed Overhead Volume Variance for XYZ Manufacturing Ltd.
in May 2024?

(a) ` 50,000 (F)

(b) ` 50,000 (A)
(c) ` 1,00,000 (F)

(d) ` 1,00,000 (A)

3. What is the Variable Overhead Efficiency Variance for XYZ Manufacturing
Ltd. in May 2024?
(a) ` 37,500 (A)
(b) ` 42,500 (A)
(c) `0
(d) ` 25,000 (A)
4. What is the Variable Overhead Expenditure Variance for XYZ
Manufacturing Ltd. in May 2024?

(a) ` 40,000 (A)

(b) ` 42,500 (A)
(c) ` 45,000 (A)
(d) ` 45,030 (A)
44 COST AND MANAGEMENT ACCOUNTING

5. What is the Fixed Overhead Expenditure Variance for XYZ Manufacturing

Ltd. in May 2024?

(a) ` 50,000 (F)

(b) ` 50,000 (A)
(c) ` 1,00,000 (F)

(d) ` 1,00,000 (A)

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (c) ` 1,50,000 (A)

Reason:
Fixed Overhead Cost Variance = Absorbed Fixed Overheads - Actual Fixed
Overheads
Absorbed Fixed Overheads = (Budgeted Fixed Overheads / Budgeted
Production) x Actual Production
= (` 20,00,000 / 10,000 units) x 9,500 units
= ` 19,00,000
Adjusted Actual Fixed Overheads = ` 19,50,000 + ` 1,00,000 = ` 20,50,000
Fixed Overhead Cost Variance = ` 19,00,000 - ` 20,50,000 = ` 1,50,000
(Adverse)
2. Option (d) ` 1,00,000 (A)
Reason:
Fixed Overhead Volume Variance = (Actual Production - Budgeted
Production) x Standard Fixed Overhead Rate per Unit
Standard Fixed Overhead Rate per Unit = ` 20,00,000 / 10,000 units = `
200 per unit
Fixed Overhead Volume Variance = (9,500 units - 10,000 units) x ` 200
= 500 units x ` 200

= ` 1,00,000 (Adverse)
 CASE SCENARIOS 45

3. Option (c) 0
Reason:
Variable Overhead Efficiency Variance = (Standard Hours for Actual
Production - Actual Hours
Worked) x Standard Variable
Overhead Rate
Standard Hours for Actual Production = 9,500 units x 1.5 hours/unit
= 14,250 hours

Variable Overhead Efficiency Variance = (14,250 – 14,250) x ` 50 = 0

4. Option (b) ` 42,500 (A)
Reason:
Variable Overhead Expenditure Variance = (Standard Rate - Actual Rate)
x Actual Hours Worked
Total Variable Overhead for Actual Hours: =(10,000 x ` 50) + (4,250 x ` 60)

= ` 5,00,000 + ` 2,55,000
= ` 7,55,000
Variable Overhead Expenditure Variance = (` 50 x 14,250 hours)
- ` 7,55,000
= ` 42,500 (Adverse)
5. Option (b) ` 50,000 (A)
Reason:
Fixed Overhead Expenditure Variance = Budgeted Fixed Overheads -
Actual Fixed Overheads

= ` 20,00,000 - ` 20,50,000
= ` 50,000 (Adverse)
46 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 10

A garment manufacturer has been producing and selling T-shirts exclusively for
Indian market. His T-shirts are made of a specific material which is eco-friendly.
It means that T-shirts are bio-degradable in soil after they become unsuitable
for use.
This invention has been applauded throughout the country. Owner, Vikas,
registered for the patent rights for his invention so that no one else could use
it.
Vikas feels that this invention will also be liked in foreign markets, and thus
plans to expand his business outside India. He feels that US market is the first
foreign market he should tap into.
Current cost structure (each T-shirt):
Direct material 90
Direct labour 60
Special service 80
(Used in T-shirt making, 50% fixed)
Fixed overhead 50
Administration overhead (fixed) 20
Total cost per T-shirt 300
(+) Profit margin 200
Selling price in India 500
There is no limitation of any resources in India. Vikas is able to sell 80,000
T-shirts each year. He is currently working at 80% of his total capacity.
After searching for potential customers in US, Vikas received an inquiry for
30,000 units from a wholesale distributor in California. As per the inquiry, order
will be placed if price per T-shirt is reasonable and the order has to be satisfied
in full.
 CASE SCENARIOS 47

Vikas decided to send a quote and the order was placed by the foreign client,
on the same day. Vikas, without a second thought accepted the order, but did
not feel the need to extend the manufacturing capacity; therefore he decided
forgo a few Indian clients.
This foreign order also required special packaging. It is spent at 20% of the total
prime cost per T-shirt. The production was done quickly and foreign
consignment was transported to custom port via services from a carriage
agency. It charged ` 80,000 for 1 truck, whose capacity was 500 kg, to transport
whole of the consignment. Truck was 20% vacant after loading the
consignment.
Bill of lading was filed and a professional fee of ` 25,000 for filing this was paid
to a Chartered accountant. Custom port also charged ` 80 per kg per day to
handle the material, storing it in warehouse, and for loading the goods on ship.
The shipping company, which was booked by Vikas for taking the consignment
to US, got delayed due to bad weather. Stock was held at port for 5 days and
on 6th day it was loaded on ship. Shipping company charged ` 2,800/ 10kg of
goods. Insurance was charged flat at ` 1,11,000.
There is no custom duty on such exports.

MULTIPLE CHOICE QUESTIONS

Answer the following questions (MCQs 61to 5):

1. Vikas had sufficient funds in his hands but he still raised a short-term
working capital loan @ 6.5% p.a. for the satisfaction of this foreign order
because he found a one time investment opportunity which was giving
him 9.25% returns. Foreign order was accepted on 1st June and loan was
taken on the same day. Repayment of the loan will be made on 1st
September. Calculate net cash outflow due to this export order. Which of
the following is correct?
(a) ` 73,91,000
(b) ` 75,47,750

(c) ` 74,76,500
48 COST AND MANAGEMENT ACCOUNTING

(d) ` 71,06,000
2. What would have been the minimum price that Vikas could have quoted
per T-shirt in US dollars? (exchange rate on 1st June, $1 = ` 83.86)
(a) $ 4.23
(b) $ 4.20

(c) $ 4.17
(d) $4.05
3. Payment from foreign client was received on 8th October when exchange
rate was ` 86 for each US $. Calculate the profit earned from this export
order if actual quoted price was $4.90 per T-shirt. Select the correct
amongst following:

(a) ` 40,65,500
(b) ` 41,51,000
(c) ` 39,94,250
(d) ` 44,36,000
4. What is the net cash Inflow from this export order?
(a) ` 55,36,000
(b) ` 51,65,500
(c) ` 52,51,000
(d) ` 50,94,250
5. What is the Incremental benefit from this export order?
(a) ` 19,94,250
(b) ` 21,51,000
(c) ` 20,65,500
(d) ` 24,36,000
 CASE SCENARIOS 49

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (b) ` 75,47,750

Reason:
Funds required for foreign order:

Costs Amounts
Direct material per unit 90
Add: Direct labour per unit 60
Add: special services per unit 40
190
Add: packaging per unit [20% x prime cost, 20% x (90 + 60 + 80)] 46
Variable cost per unit 236
Total variable cost (236x30,000) 70,80,000
Add: freight 80,000
Add: professional fees 25,000
Add: custom charges (500kg x 80% x 80 x 6) 1,92,000
73,77,000
Add: shipping ((500x80%/10) x 2,800) 1,12,000
Add: insurance 1,11,000
Funds required 76,00,000

Net amount of interest earned (interest earned in 9.25% and paid is 6.50%
for 3 months) = 76,00,000 x (9.25% - 6.50%) x 3/12 = 52,250
So, net cash outflow due to export order = 76,00,000 - 52,250

= 75,47,750
2. Option (a) $ 4.23
Reason:

Minimum price :-

Variable cost (net) 75,47,750

Add: fixed cost recovery (110 x 10,000 units) 11,00,000
50 COST AND MANAGEMENT ACCOUNTING

Add: loss of profit (200 x 10,000 units) 20,00,000

Minimum price 1,06,47,750
Minimum price per unit 1,06,47,750/30,000 ` 354.925
Minimum price is $ ($1 = ` 83.864) $ 4.23

3. Option (c) ` 39,94,250

Reason:
PROFIT EARNED:

SALES ($4.90 x 30,000 x RS. 86) ` 1,26,42,000

(-) Variable cost (net) (75,47,750)
(-) allotted fixed cost (10,000 units x110) (11,00,000)
PROFIT ` 39,94,250

4. Option (d) ` 50,94,250

Reason:
CASH INFLOW:

SALES ($4.90 x 30,000 x RS. 86) ` 1,26,42,000

(-) Variable cost (net) (75,47,750)
CASH INFLOW ` 50,94,250

5. Option (a) ` 19,94,250

Option
Incremental benefits:

SALES ($4.90 x 30,000 x RS. 86) ` 1,26,42,000

(-) Variable cost (net) (75,47,750)
(-) allotted fixed cost (10,000 units x110) (11,00,000)
(-) loss of profit (10,000x200) (20,00,000)
Incremental benefits 19,94,250
 CASE SCENARIOS 51

CASE SCENARIO 11

A truck driver, named Raju, owns a truck which can carry 5 tonne of material at
a time. Raju has no other truck and he has listed himself with various carriage
services agencies, to offer his services. He gets his work from these agencies
and they pay him as per the load and the distance. Raju has one condition that
he must be paid for at least 75% of his total capacity. Raju charges freight at `
10 per tonne-km.
He received a work contract, from one of these agencies, where he has to take
4 tonne from Delhi in the morning and drop it off at Chandigarh. After that he
will move to Ludhiana, where he again loads 3 tonne and come back to Delhi
by evening. This contract is for nearly 3 months.
Raju is excited to accept the order but it is not physically possible for Raju to
complete this project alone. He decides to hire a helper cum driver who will
assist him in this work contract and will also drive in turns with Raju. Thus, such
a long contract will be managed comfortably. This helper will take ` 15,000 per
month.
The contract will start from 15th June, 2024 and will run till 14th September, 2024.
Throughout this time period there are only 2 days holidays, both falling in
August (1 for Independence Day and 1 for Raksha Bandhan).
Some information about the Truck and its associated costs:
• Truck was purchased on 1st April, 2021 by taking a loan of ` 20,00,000 @
10% p.a. from Punjab national bank for 5 years. Raju mortgaged jewellery
of his wife to get this loan.
• Every year-end he has to pay ` 5,27,595 as instalment.
• Scrap value after 10 years is expected to be ` 500,000.
• Depreciation is charged on straight-line method.
• Services and maintenance charges each month is ` 80,000.
• Truck runs on diesel and its running average is 8kms/ litre.
• Diesel cost per litre:
52 COST AND MANAGEMENT ACCOUNTING

June 80.30
July 80.50
August 81.25
September 80.90
Yearly interest amount of loan and yearly depreciation is charged to a work
contract on the basis of days worked in a year in the contract.
Distance between these places:
(1) Delhi to Chandigarh = 250 kms
(2) Chandigarh to Ludhiana = 100 kms
(3) Ludhiana to Delhi = 150 kms

MULTIPLE CHOICE QUESTIONS

Answer the following questions (MCQs 1 to 5):

1. What would be the amount of profit Raju would have earned if he had no
minimum charges limit of 75% of total capacity on absolute Tonne-km
basis? (If the vehicle runs empty then he would only charge for Diesel
expenses).
(a). 3,34,249
(b). 4,43,249
(c). 5,96,977
(d). 4,34,249
2. If payment was made on commercial Tonne-km basis and Raju had no
minimum charges limit of 75%, how much he would have lost due to no
minimum requirement?

(a). ` 6,37,500
(b). ` 5,93,750
(c). ` 4,92,438

(d). ` 3,91,126
 CASE SCENARIOS 53

3. What should be the minimum amount charged on basis of absolute

Tonne-km if Raju wants to earn ` 2,70,000?

(a). ` 4.58
(b). ` 6.13
(c). ` 8.39

(d). ` 3.21
4. Choose the correct amount of depreciation and interest that should be
charged to this work contract.

(a). 56,983 & 22,588

(b). 36,986 & 22,578
(c). 63,963 & 12,568

(d). 63,953 & 12,558

5. What is the profit as per current rate charged by Raju? (Use absolute
Tonne-Km).

(a). 7,34,249
(b). 9,44,863
(c). 5,96,977
(d). 4,34,249

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (c) Profit if no minimum charges are there, on absolute tonne

basis, but he will charge for diesel petrol when running empty
Reason:
Absolute tonne-kms: (250 kms x 4 tonnes + 150 kms x 3 tonnes) x 90 days

= 1,30,500 tonne-kms
Vacant moving (Chandigarh to Ludhiana) = 100kms x 90 days = 9,000 kms
Charges for vacant running:
54 COST AND MANAGEMENT ACCOUNTING

(`)
June (80.30 x 16 x 100)/8 16,060
July (80.50 x 31 x 100) /8 31,194
August (81.25 x 29 x 100) /8 29,453
September (80.90 x 14 x 100) /8 14,158
Total Charges 90,864

(`)
Total revenue (1,30,500 x 10) 13,05,000
Add: diesel recovery for vacant running 90,864
Less: service & maintenance (80,000 x 3) (2,40,000)
Less: salary (15,000 x 3) (45,000)
Less: diesel cost (4,54,323)
Less: interest (22,578)
Less: depreciation (36,986)
Profit 5,96,977
Bifurcation of principal and interest

Years Calculation of Interest Principal Loan

interest (`) repayment balance
(`) (`) (`)
0 - - - 20,00,000
1 20,00,000 x 10% 2,00,000 3,27,595 16,72,405
2 16,72,405 x 10% 1,67,241 3,60,354 13,12,051
3 13,12,051 x 10% 1,31,205 3,96,390 9,15,661
4 9,15,661 x 10% 91,566 4,36,029 4,79,632
5 4,79,632 x 10% 47,963 4,79,632 -

Interest allocated to this job = 91,566 x 90 / 365 = 22,578

20,00,000 − 5,00,000 90
Depreciation = x = 36,986
10 365
 CASE SCENARIOS 55

Diesel expenses:

(`)
June (80.30 x 16 x 500)/8 80,300
July (80.50 x 31 x 500)/8 1,55,969
August (81.25 x 29 x 500)/8 1,47,266
September (80.90 x 14 x 500)/8 70,788
Total diesel expenses 4,54,322

2. Option (a) ` 6,37,500

Reason:

With Without minimum limit

minimum limit (`)
(`)
Commercial tonne kms 3.75 x 500 x 90 ((4+0+3)/3) x 500 x 90
= 1,68,750 = 1,05,000
revenue 1,68,750 x 10 1,05,000 x 10
= 16,87,500 = 10,50,000
Less: costs (7,98,887) (7,98,887)
Profit/(loss) 8,88,613 2,51,113

Loss arising due to no minimum limit = 8,88,613-2,51,113 = 6,37,500

3. Option (b) ` 6.13
Reason:
Total Revenue = Cost + Profit = 7,98,887+ 2,70,000 = ` 10,68,887
Absolute Tonne-Kms = 1,74,375
Rate = 10,68,887/1,74,375 = ` 6.13
4. Option (b) 36,986 & 22,578
56 COST AND MANAGEMENT ACCOUNTING

5. Option (b) 9,44,863

Reason for 4 & 5:
Profit at current rate (based on minimum charges of 75%)
Absolute tonne-kms: (250 kms x 4 tonnes + 100 kms x 3.75 tonnes + 150
kms x 3.75 tonnes) x 90 days = 1,74,375 tonne-kms

(`)
Total revenue (1,74,375 x 10) 17,43,750
Less: service & maintenance (80,000 x 3) (2,40,000)
Less: salary (15,000 x 3) (45,000)
Less: diesel cost (4,54,323)
Less: interest (22,578)
Less: depreciation (36,986)
Profit 9,44,863
 CASE SCENARIOS 57

CASE SCENARIO 12

eSalt is the biggest producer of sodium hydroxide in India. This main product
of the company has a strong reactivity with other organic compounds. It is
highly versatile and is alkaline in nature. However, the basic material required
for the production of this product is salt along with the electricity.
The manufacturing process involve electrolysis which produces Halogen as co-
product. Modern use of Halogen is widespread. However, the common use is in
disinfection like for purifying drinking water or swimming pool water. It is also
an important ingredient of toothpaste. Thus, the company’s management
affirmed the simultaneous production of Halogen.
During the previous financial year, the company purchased the base material of
` 5,34,000. For the current year, company decided to increase the production
by 2 times. Due to increased production, the total conversion cost hiked to 3
times. Last year, the conversion cost accounted to ` 8,01,000 up to the point at
which two products i.e. sodium hydroxide and Halogen are separated.
The production and sales information for current year is provided as below:

Sodium hydroxide Halogen

Production/ Sales(in tonne) 24,030 16,020
Selling price per tonne (`) 100 150

During the current year, the management of the company pointed the extensive
use of Vinyl which can be produced by further processing Halogen. Having
selling price of ` 250 per tonne higher than that of the Halogen, it was decided
not to sell Halogen and further process it into Vinyl. The incremental processing
cost took ` 8,01,000 producing 10,012.50 tonnes of Vinyl.
58 COST AND MANAGEMENT ACCOUNTING

MULTIPLE CHOICE QUESTIONS

You are required to FIGURE OUT the following for managerial decision (MCQs
1 to 5):
1. For the current year, the amount of base material purchased and the
conversion cost up to the point at which two products i.e. Sodium
hydroxide and Halogen are separated would be:
(a). base material ` 10,68,000 and conversion cost ` 24,03,000
(b). base material ` 10,68,000 and conversion cost ` 16,02,000
(c). base material ` 16,02,000 and conversion cost ` 24,03,000
(d). base material ` 24,03,000 and conversion cost ` 16,02,000
2. Joint cost to be apportioned between Sodium hydroxide and Halogen as
per the physical unit method would be:
(a). Sodium hydroxide ` 24,03,000 and Halogen ` 10,68,000
(b). Sodium hydroxide ` 10,68,000 and Halogen ` 16,02,000
(c). Sodium hydroxide ` 16,02,000 and Halogen ` 24,03,000
(d). Sodium hydroxide ` 24,03,000 and Halogen ` 16,02,000
3. Joint cost to be apportioned between Sodium hydroxide and Halogen as
per the sales value at split- off point method would be:
(a). Sodium hydroxide ` 20,02,500 and Halogen ` 20,02,500
(b). Sodium hydroxide ` 16,02,000 and Halogen ` 24,03,000

(c). Sodium hydroxide ` 24,03,000 and Halogen ` 16,02,000

(d). Sodium hydroxide ` 10,68,000 and Halogen ` 20,02,500
4. Joint cost to be apportioned between Sodium hydroxide and Halogen as
per the estimated net realisable value method would be:
(a). Sodium hydroxide ` 23,44,390 and Halogen ` 16,60,610
(b). Sodium hydroxide ` 17,16,429 and Halogen ` 22,88,571
 CASE SCENARIOS 59

(c). Sodium hydroxide ` 22,88,571 and Halogen ` 17,16,429

(d). Sodium hydroxide ` 16,60,610 and Halogen ` 23,44,390
5. Considering that the decision relating to further processing Halogen is
not approved, suggest whether this would be in favour of the
management by calculating incremental revenue /loss from further
processing Halogen into Vinyl.
(a). Incremental loss would be ` 16,02,000, thus the decision of not
further processing Halogen is correct.

(b). Incremental loss would be ` 8,01,000, thus the decision of not

further processing Halogen is correct.
(c). Incremental revenue would be ` 8,01,000, thus the decision relating
to further processing Halogen needs to be approved.
(d). Incremental revenue would be ` 16,02,000, thus the decision
relating to further processing Halogen needs to be approved.

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option(c) base material ` 16,02,000 and conversion cost ` 24,03,000

Reason:

Particulars Base Material Conversion cost

Previous year cost (`) 5,34,000 8,01,000

Increased by 2 times -
Increased to 3 times
Current year cost (`) 5,34,000 + (5,34,000 x 2) = 8,01,000 x 3
16,02,000 = 24,03,000
60 COST AND MANAGEMENT ACCOUNTING

2. Option (d) Sodium hydroxide ` 24,03,000 and Halogen ` 16,02,000

Reason:

Products Production/ Sales(in Joint Cost

tonne) Apportioned (`)
Sodium hydroxide 24,030 24,03,000
Halogen 16,020 16,02,000
Total 40,050 40,05,000

Joint cost = base material + conversion cost

= 16,02,000 + 24,03,000
= 40,05,000
Total joint cost
Apportioned joint cost = x Physical units of each product
Total physical value
` 40,05,000
For Sodium hydroxide = x 24,030 tonnes
40,050 tonnes

= ` 24,03,000
` 40,05,000
For Halogen = x 16,020 tonnes
40,050 tonnes

= ` 16,02,000
3. Option (a) Sodium hydroxide ` 20,02,500 and Halogen ` 20,02,500
Reason:

Products Sales Selling Price Sales Joint Cost

(in Tonne) per Tonne Revenue Apportioned
(`) (`) (`)

Sodium 24,030 100 24,03,000 20,02,500

hydroxide

Halogen 16,020 150 24,03,000 20,02,500

Total 40,050 48,06,000 40,05,000

Total joint cost

Apportioned joint cost = x Sale revenue of each product
Total sale revenue
 CASE SCENARIOS 61

` 40,05,000
For Sodium hydroxide = x 24,03,000 = ` 20,02,500
` 48,06,000

For Halogen = x 24,03,000 = ` 20,02,500

` 40,05,000
` 48,06,000

4. Option (b) Sodium hydroxide ` 17,16,429 and Halogen ` 22,88,571

Reason:

Products Sales Selling Sales Post split- Net Joint Cost

(in Price Value (`) off cost Realisable Apportioned
Tonne) per Tonne (`) Value (`) (`)
(`)

Sodium 24,030 100 24,03,000 - 24,03,000 17,16,429

hydroxide

Halogen (Vinyl 10,012.50 150 + 250 40,05,000 8,01,000 32,04,000 22,88,571

after further = 400
processing)

Total 56,07,000 40,05,000

Total joint cost

Apportioned joint cost = x Net Realisable Value of each product
Total Net Realisable Value
` 40,05,000
For Sodium hydroxide = x 24,03,000
` 56,07,000

= ` 17,16,429
` 40,05,000
For Halogen = x 32,04,000
` 56,07,000

= ` 22,88,571
62 COST AND MANAGEMENT ACCOUNTING

5. Option (c) Incremental revenue would be ` 8,01,000, thus the

decision relating to further processing Halogen needs to be
approved.
Reason:

Particulars Amount
(in `)
Revenue from sales of Vinyl if Halogen further processed 40,05,000
(10,012.50 tonnes × ` 400) (A)
Revenue from sales of Halogen if no further processing 24,03,000
done (16,020 tonnes × ` 150)(B)
Incremental revenue from further processing of 16,02,000
Halogen into Vinyl (A-B)
Incremental cost of further processing Halogen into Vinyl 8,01,000
Incremental operating income from further 8,01,000
processing

Incremental revenue would be ` 8,01,000, thus the decision relating to

further processing Halogen needs to be approved.
 CASE SCENARIOS 63

CASE SCENARIO 13

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:
1. 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.
2. The economic order quantity (EOQ) for both the material A & B:
64 COST AND MANAGEMENT ACCOUNTING

(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
3. 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.
4. 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.
5. What would the minimum stock level for material A:
(a) 1,800 kg.
(b) 1,200 kg.
(c) 600 kg.
(d) 2,400 kg.

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) 30,000 kg & 20,000 kg respectively.

Reason:

Monthly Production of X = 30,000 kgs.

30,000
Raw Material Required = ×5 = 50,000 kgs.
3
 CASE SCENARIOS 65

50,000
Material A = ×3 = 30,000 kg.
5
50,000
Material B = ×2 = 20,000 kg.
5
2. Option (a) 13,856 kg & 16,181 kg respectively
Reason:
Calculation of Economic Order Quantity (EOQ):
2×Annual consumption× Order cost
Material A =
Carrying cost per unit p.a.

2×(30,000×12)×1,200
=� = 13,856 kg.
15% of 30

2×(20,000×12)×1,200
Material B =� = 16,181 kg.
5% of 44

3. Option (b) 12,000 kg.

Reason:
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
= ×10 days = 12,000 kg.
25
(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.
30,000
Maximum stock Level = 15,000 kg. + 2,400 kg. – ( × 1 day)
25

= 17,400 – 1,200 = 16,200 kg.

66 COST AND MANAGEMENT ACCOUNTING

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.)
4. Option (b) Loss of ` 3,21,201.
Reason:
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 `24,30,000 `16,70,400

obsolescence (d) [`27 × (30 × 3,000)] [`30 × (30 × 1,856)]
[Note- (iii)]

Total Cost [(a) + (b) + ` 1,22,16,375 ` 1,25,37,576

(c) + (d)]

Purchasing of material -A at present policy of 15,000 kg. saves ` 3,21,201.

 CASE SCENARIOS 67

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.
5. Option (c) 600 kg.

Reason:
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.)
68 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 14

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

MULTIPLE CHOICE QUESTIONS

You being an associate finance to GM(HR), has been asked the following
questions:
1. 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
2. How much loss in the form of contribution, the company incurred due to
labour turnover?
(a) ` 4,32,000
 CASE SCENARIOS 69

(b) ` 4,20,000
(c) ` 4,36,000
(d) ` 4,28,000
3. What is the cost repairing of defective units?
(a) ` 75,000
(b) ` 15,000
(c) ` 50,000
d) ` 25,000
4. 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
5. 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

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (c) 12,000 units

Reason:
Output by experienced workers in 50,000 hours
50,000
=
10
= 5,000 units
70 COST AND MANAGEMENT ACCOUNTING

 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
2. Option (a) ` 4,32,000
Reason:
Contribution per unit = 20% of ` 180 = ` 36

Total contribution lost = ` 36 × 12,000 units = ` 4,32,000

3. Option (b) ` 15,000
Reason:
Cost of repairing defective units = 3,000 units × 0.2 × ` 25
= ` 15,000
4. Option (d) ` 9,00,000
Reason:
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
 CASE SCENARIOS 71

5. Option (c) 2,000 units

Reason:
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

72 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 15

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
Production and sales data for the six months are as under:

Production:
Finished goods 1,10,000 units
Works-in-progress
(50% complete in every respect) 80,000 units
Sale:
Finished goods 90,000 units
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.
 CASE SCENARIOS 73

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:

MULTIPLE CHOICE QUESTIONS

1. How much was the budgeted machine hour rate used to recover
overhead?
(a) ` 760
(b) ` 820

(c) ` 780
(d) ` 840
2. 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
3. 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

4. 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
74 COST AND MANAGEMENT ACCOUNTING

5. 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

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) ` 840

Reason:
Budgeted Machine hour rate (Blanket rate)
` 50,40,000
= =` 840 per hour
6,000 hours
2. Option (a) ` 25,20,000
Reason:
3. Option (a) 1,18,000 over-absorbed
Reason:

Amount Amount
(`) (`)
Total production overheads actually incurred 34,08,000
during the period
Less: Amount paid to worker as 4,50,000
per court order
Expenses of previous year 1,00,000
booked in the current
year
Wages paid for the strike 4,20,000
period under an award
Obsolete stores written off 36,000 10,06,000
24,02,000
 CASE SCENARIOS 75

Less: Production overheads

absorbed as per machine 25,20,000
hour rate (3,000 hours ×
` 840*)
Amount of over absorbed production 1,18,000
overheads
* Budgeted Machine hour rate (Blanket rate) calculated in part (i)
4. Option (b) ` 0.472 per unit
Reason:

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

` 70,800
Supplementary rate = = ` 0.472 per unit
1,50,000 units

5. Option (c) ` 18,880

Reason:
Apportionment of over absorbed production overheads over WIP,
Finished goods and Cost of sales:
76 COST AND MANAGEMENT ACCOUNTING

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
 CASE SCENARIOS 77

CASE SCENARIO 16

‘Axe Trade’, an unregistered supplier under GST, purchased material from Vye
Ltd. which is registered supplier under GST. During the month of June 2024, the
Axe Traders has purchased a lot of 5,000 units on credit from Vye Ltd. The
information related to the purchase are as follows:
Listed price of one lot of 5,000 units ` 2,50,000

Trade discount - @ 10% on listed price

CGST and SGST (Credit available) - 18% (9% CGST + 9% SGST)
Cash discount - @ 10%

(Will be given only if payment is made within 30 days.)

Toll Tax paid ` 5,000

Freight and Insurance ` 17,220

Demurrage paid to transporter ` 5,000

Commission and brokerage on purchases ` 10,000

Amount deposited for returnable containers ` 30,000

Amount of refund on returning the container ` 20,000

Other Expenses @ 2% of total cost

A 20% shortage in material on receipt is expected considering the nature of the
raw material.
The payment to the supplier was made within 21 days of the purchases.

MULTIPLE CHOICE QUESTIONS

1. If Axe Traders pays the supplier within 30 days of purchase, then, what is
the total amount of cash discount received from the supplier and how it
is treated to calculate material cost?
(a) ` 25,000 & it will not be deducted from the material cost

(b) ` 26,550 & it will be deducted from the material cost

78 COST AND MANAGEMENT ACCOUNTING

(c) ` 26,550 & it will not be deducted from the material cost
(d) ` 22,500 & it will not be deducted from the material cost
2. What will be the amount of other expenses and how it is treated in
material cost?
(a) ` 6,154.40 & it will be added with the material cost

(b) ` 6,280.00 & it will be added with the material cost

(c) ` 5,344.40 & it will be added with the material cost
(d) ` 5,453.47 & it will not be added with the material cost

3. What is the amount of GST and how will it be treated in cost sheet of Axe
Traders?
(a) ` 40,500 & it will not be added with material cost
(b) ` 40,500 & it will be added with material cost
(c) ` 45,000 & it will not be added with material cost
(d) ` 45,000 & it will be added with material cost

4. What is the total material cost chargeable in the cost sheet of Axe Traders?
(a) ` 3,14,000
(b) ` 2,73,500

(c) ` 2,72,673
(d) ` 3,13,874
5. The number of good units and cost per unit of the materials received are:

(a) 5,000 units & ` 62.80

(b) 5,000 units & ` 54.70
(c) 4,000 units & ` 78.50
(d) 4,000 units & ` 68.38
 CASE SCENARIOS 79

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) ` 22,500 & it will not be deducted from the material cost
Reason:
Cash discount is received when credit amount is paid within the stipulated
period of 30 days. The amount of cash discount to be received from the
supplier is:

Particulars Amount (`)

A. Listed price 2,50,000
B. Less: Trade Discount @10% (25,000)
C. Taxable value (A-B) 2.25,000
D. Add: GST@18% (18% of C) 40,500
E. Total amount payable to the supplier 2,65,500
F. Cash discount @10% (10% of C) (22,500)
G. Net amount to be paid to the supplier (E-F) 2,43,000

2. Option (b) ` 6,280.00 & it will be added with the material cost
Reason:

Particulars Units (`)

Listed Price of Materials 5,000 2,50,000
Less: Trade discount @ 10% on invoice price (25,000)
2,25,000
Add: GST @ 18% of ` 2,25,000 40,500
2,65,500
Add: Toll Tax 5,000
Freight and Insurance 17,220
Commission and Brokerage Paid 10,000
Add: Cost of returnable containers:
Amount deposited ` 30,000
Less: Amount refunded ` 20,000 10,000
3,07,720
80 COST AND MANAGEMENT ACCOUNTING

Add: Other Expenses @ 2% of Total Cost 6,280

` 3,07,720
� ×2�
98
Total cost of material 3,14,000
Less: Shortage material due to normal reasons @ 1,000 -
20%
Total cost of material of good units 4,000 3,14,000
Cost per unit (` 3,14,000/4,000 units) 78.5

3. Option (b) ` 40,500 & it will be added with material cost

Reason:
Axe Traders is an unregistered supplier in the GST; thus, GST credit is not
applicable for it. GST paid on the purchase of the material will be the part
of the material cost.
4 Option (a) ` 3,14,000
Reason:
Please refer the solution above
5. (c) 4,000 units & ` 78.50
Reason:
Please refer the solution above
 CASE SCENARIOS 81

CASE SCENARIO 17

ABC Pvt Ltd is engaged in the manufacture of a Product Q. The product has the
following standard production requirements determined by the technical team
of the company post satisfactory completion of test run.
Raw Material Z – 2 units @ ` 2 per unit
Skilled labour of – 2.5 hours@ ` 5 per hour

Fixed Overheads – ` 7.5 per unit

The input of Raw material Z has a yield of 80% everytime when infused into
production. The actual quantity of Raw material Z consumed for production
during the year was 24,000 units. The Usage variance of Material Z was 2,000
Favourable. Further the actual amount of material cost for the material
consumed amounted to ` 45,000.

During the said year, the actual working hours were 30,000 for which the labour
cost paid by the company amounted to `1,20,000. The idle time variance
amounted to 10,000 Adverse.
The actual fixed overheads incurred for the year amounted to ` 1,50,000 and
the expenditure variance was `25,000 Favourable.

MULTIPLE CHOICE QUESTIONS

In the context of the above, the following needs to be determined:

1. The Actual output of Product Q produced during the year is:

(a) 10,000 units
(b) 12,500 units

(c) 25,000 units

(d) 15,000 units
2. The Material price and material cost variance are:

(a) Price variance – 3,000 Adverse, Cost Variance – 5,000 Adverse

(b) Price variance – 3,000 Favourable, Cost Variance – 5,000 Favourable
82 COST AND MANAGEMENT ACCOUNTING

(c) Price variance – 3,000 Favourable, Cost Variance – 8,000 Adverse

(d) Price variance – 5,000 Adverse, Cost Variance – 3,000 Favourable
3. The Standard Hours, Net Actual hours and the idle time are:
(a) Standard Hours – 27,500 Net Actual Hours – 28,000 hours Idle Time
– 2,000 hours

(b) Standard Hours – 22,500 Net Actual Hours – 28,500 hours Idle Time
– 1,500 hours
(c) Standard Hours – 24,000 Net Actual Hours – 29,000 hours Idle Time
– 1,000 hours
(d) Standard Hours – 25,000 hours Net Actual Hours –28,000 hours Idle
Time – 2,000 hours
4. Labour Efficiency variance and Labour rate variance are:
(a) Labour Efficiency Variance – 30,000 Favourable Labour rate Variance
– 25,000 Adverse

(b) Labour Efficiency Variance – 25,000 Favourable, Labour rate

Variance – 30,000 Adverse
(c) Labour Efficiency Variance – 25,000 Adverse, Labour rate Variance –
30,000 Favourable
(d) Labour Efficiency Variance – 30,000 Adverse Labour rate Variance –
25,000 Favourable

5. Fixed Overhead volume variance is:

(a) Fixed Overhead volume variance – 1,00,000 Favourable
(b) Fixed Overhead volume variance – 50,000 Adverse
(c) Fixed Overhead volume variance – 1,00,000 Adverse
(d) Fixed Overhead volume variance – 50,000 Favourable
 CASE SCENARIOS 83

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (a) 10,000 units

Reason:
Usage variance of Material Z = 2,000 F
Usage Variance = SQ x SP – AQ x SP

SP =`2
AQ = 24,000 units
2 x (SQ – 24,000) = 2,000
2SQ = 50,000
Therefore SQ = 25,000
No of units of Input required per output = 2

Yield of input = 80%

= (25000/2)x80% = 10,000 units.
2. Option (b) Price variance – 3,000 Favourable, Cost Variance – 5,000
Favourable
Reason:
Price variance – 3,000 Favourable,
Cost Variance – 5,000 Favourable

Price variance = AQ x (SP-AP)

24,000 x (2-1.875) = 3,000 Favourable.
Cost variance = SQ x SP – AQ x AP

= 50,000–45,000=5,000 Favourable.
84 COST AND MANAGEMENT ACCOUNTING

3. Option (d) Standard Hours – 25,000 hours Net Actual Hours –28,000
hours Idle Time – 2,000 hours
Reason:
Standard Hours – 25,000 hours Net Actual Hours –28,000 hours Idle Time
– 2,000 hours
Actual output = 10,000 units
Standard hours per unit = 2.5
Therefore standard hours = 10,000 x 2.5 = 25,000 hours.
Idle time variance = SR x (Net AH – AH)
5 x (Net AH – 30,000) = 10,000 Adverse
5 Net AH – 1,50,000 = -10,000
5 Net AH = 1,40,000
Net AH = 28,000 hours
Idle time = 2,000 hours
4. Option (c) Labour Efficiency Variance – 25,000 Adverse, Labour rate
Variance – 30,000 Favourable
Reason:
Labour Efficiency Variance – 25,000 Adverse,
Labour rate Variance – 30,000 Favourable

Efficiency Variance = SR x (SH-AH)

= 5 x (25,000 – 30,000)
= 25,000 Adverse
Rate Variance = AH x (SR – AR)
= 30,000 (5 – 4) [1,20,000/30,000]
= 30,000 Favourable.
 CASE SCENARIOS 85

5. Option (c) Fixed Overhead volume variance – 1,00,000 Adverse

Reason:
Fixed Overhead Volume variance – 1,00,000 Adverse

Overhead Volume variance = Actual Output x SR per unit –

Budgeted FOH
Budgeted FOH = Actual FOH (+/-) Expenditure
variance
1,50,000 + 25,000 = 1,75,000
AO x SR = 10,000 x 7.5 = 75,000
Therefore volume variance = 75,000 – 1,75,000
=1,00,000 Adverse.
86 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 18

Popular company produces various articles for student purposes. It has been in
industry since last 25 years. Company had a very humble start but gained
popularity over the years due to excellent quality products which were sold at
very competitive prices. Company has huge reserves and feel that it is also
obligated to give back to the society from which it has grown.
Last year management decided to produce and supply special quality school
bags, water bottles, & geometry boxes to NGOs, at no price, as a social
responsibility. These articles were simple looking but were more durable, that
would not have wore-off easily and could have been used for long-term.
This year management wants to add another dimension to this social work. It
approached charitable schools and government run schools and offered them
the supply of the same articles, at cost. This will help students in these schools
to get these things at a very low price compared to market.
The variable costs are ` 100, ` 80, and ` 40 for school bags, water bottles, and
geometry boxes, respectively. These articles are made using a single machine.
0.20 hours of machine operation is required for manufacturing 1 unit of school
bag. Similarly, machine hours required for each units of water bottle and
geometry box is 0.15 hours and 0.10 hours, respectively. Fixed overhead related
to machine is ` 7,40,000 per year. Machine can operate for 8,000 hours in a year.
Company has decided to sell its 80% capacity production in markets. Rest is
divided amongst the 2 undergoing social works, equally.
All Schools requests these items in the ratio of 2:3:5, as per their demand by the
school students.
Company wants to set a price for these articles to be offered to the schools.
Management has few questions they need the answers to. They assigned the
task to their team. Team made rough calculations but as there were too many
people on the team, each came up with different answers. As a Chartered
accountant, you have been approached. Understand the case closely, find the
correct answers and help management to set a price.
 CASE SCENARIOS 87

MULTIPLE CHOICE QUESTIONS

1. What is allocated fixed cost per unit of School bags, water bottles, and
geometry boxes?
(a) 18.5, 13.875, 9.75
(b) 18.5, 13.875, 9.25

(c) 18.5, 13.785, 9.25

(d) 18.5, 13.785, 9.50
2. If the prices were ` 200, ` 160, and ` 100, what would be the overall break-
even point in units in relation to fixed cost allocated to these supplies?
(a) 308.33 units
(b) 500 units
(c) 508.33 units
(d) 1,000 units
3. Find out the maximum number of units of each article that can be given
at the prices given in Part (ii).
(a) 61, 92, 154
(b) 200, 300, 500
(c) 101, 152, 254
(d) 100, 150, 250
4. What will be the maximum units that can be supplied to the schools of
each article?
(a) 1103, 1645, 2726
(b) 1093, 1655, 2748

(c) 1185, 1777, 2962

(d) 1133, 1675, 2958
5. What should be the correct price for each item as per the management’s
decision?
88 COST AND MANAGEMENT ACCOUNTING

(a) 118.50, 93.875, 49.75

(b) 118.50, 93.785, 49.25
(c) 118.50, 93.785, 49.50
(d) 118.50, 93.875, 49.25

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (b) 18.5, 13.875, 9.25

Reason:
Fixed overhead = 740000

Total machine hours = 8000 hours

Fixed OH per hour = ` 92.5
Fixed OH per unit of:
School bag = 0.20 x 92.5 = ` 18.5
Water bottle = 0.15 x 92.5 = ` 13.875
Geometry box = 0.10 x 92.5 = ` 9.25
2. Option (d) 1,000 units
Reason:
Hours allocated = 8000 x 10% = 800 hours

Fixed overhead allocated = 800 x 92.5 = ` 74,000

Contribution:
Bag = 200-100 = 100

Bottle = 160-80=80
Geometry = 100- 40 = 60
Composite contribution = 100 x 2/10 + 80 x 3 / 10 + 60
x 5/10 = ` 74
Overall breakeven point for this assignment is = fixed cost
allocated/composite contribution = 74,000/74 = 1,000 units
 CASE SCENARIOS 89

3. Option (b) 200, 300, 500

Reason:
1000 units are to be distributed in the ratio of 2:3:5
Bag = 200 units, bottle = 300 units, geometry = 500 units
4. Option (c) 1185, 1777, 2962
Reason:
Total hours = 800 hours
let total no of units =X
Supply = bag 2/10 x X;
bottle =3 /10 x X;
geometry = 5/10 x X
Hours = (2X/10) x 0.20 + (3X/10) x 0.15 + (5X/10) x 0.10
= 800 hours
X = 5925
Units of :
Bag = 2/10 x 5925 = 1185
Bottle = 3/10 x 5925 = 1777.5 or 1777

Geometry = 5/10 x 5925 = 2962.5 or 2962

5. Option (d) 118.50, 93.875, 49.25
Reason:
Correct price is AT COST.
COST = Marginal Cost Per Unit + Fixed Overhead Cost Allocated Per Unit

Bag Bottle Geometry

Variable cost per unit 100 80 40
Fixed cost per unit 18.5 13.875 9.25
Total 118.5 93.875 49.25
90 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 19

Knowing the hectic schedule of a student preparing for the examination, a

homemaker managing work from home or a new parent busy in neonatal care,
a freshly qualified professional (Mr. Rishi) entered into a start-up business of
manufacturing frozen foods.
The process majorly involve washing and cutting the vegetables (Process I),
blanching, cooling and mixing of ingredients with spices (Process II), forming,
frying and freezing the final product (Process III).
In Accounts, Mr. Rishi normally transfers the output of one process to another
process at cost but, being a young entrepreneur, he is interested in knowing
the profit made at each and every process. Thus, it was decided to transfer the
output of Process I and II to the next process at cost plus 25%. Further, the
output of Process III is also transferred to finished stock at cost plus 33 1/3%.
Following information is extracted from the books of Mr. Rishi for the current
year:

Process I Process II Process III Finished Stock

(`) (`) (`) (`)
Opening stock 8,02,500 14,44,500 21,40,000 24,07,500
Direct materials 42,80,000 34,77,500 26,75,000 --
Direct wages 66,87,500 57,78,000 49,22,000 --
Factory overheads 51,36,000 38,52,000 35,57,750 --
Closing stock 10,70,000 17,12,000 20,86,500 26,75,000
Inter-process profit 2,14,000 5,35,000 10,70,000
included in opening NIL
stock

Stock in processes is valued at prime cost. The finished stock is valued at the
price at which it is received from Process III.
Mr. Rishi wants you to FIGURE OUT the following to analyse the profit generated
at each process:
 CASE SCENARIOS 91

MULTIPLE CHOICE QUESTIONS

1. What is the transfer price value at which the output of Process I is trans-
ferred to Process II?
(a) ` 1,97,95,000
(b) ` 39,59,000
(c) ` 1,58,36,000
(d) ` 1,69,06,000
2. What is the transfer price value at which the output of Process II is trans-
ferred to Process III?
(a) ` 1,20,97,476
(b) ` 4,07,93,750
(c) ` 2,86,96,274
(d) ` 3,43,47,000
3. What is the transfer price value at which the output of Process III is
transferred to Finished Stock?
(a) ` 5,40,88,500
(b) ` 3,98,91,140
(c) ` 2,94,44,860
(d) ` 6,93,36,000
4. What is the cost value at which the output of Process III is transferred to
Finished Stock?
(a) ` 5,40,88,500
(b) ` 3,98,91,140
(c) ` 2,94,44,860
(d) ` 6,93,36,000
5. What is the cost value of closing stock of Process III A/c?
(a) ` 20,86,500
(b) ` 15,64,884
 1.
92
Par ticulars Cost Profit Total Par ticular Cost Profit Total
s
(c)
(`) (`) (`) (`) (`) (`)

(d)
Opening Stock 8,02,500 − 8,02,500 Process II 1,58,36,000 39,59,000 1,97,95,000
A/c

Reason:
(Transfer)*
Direct Material 42,80,000 − 42,80,000 Closing 10,70,000 − 10,70,000
stock
Direct Wages 66,87,500 − 66,87,500
` 5,21,616

Process I Account
Prime Cost 1,17,70,000 − 1,17,70,000
` 3,98,91,140

Manufactur-ing 51,36,000 − 51,36,000

Option (a) ` 1,97,95,000

Overheads
Total cost 1,69,06,000 − 1,69,06,000
Costing Profit 39,59,000 39,59,000
and Loss A/c**
1,69,06,000 39,59,000 2,08,65,000 1,69,06,000 39,59,000 2,08,65,000
ANSWERS TO MULTIPLE CHOISE QUESTIONS

*Transfer price = (Total Cost - Closing Stock) (1 + 25%)

= (1,69,06,000 - 10,70,000) x 1.25
= ` 1,97,95,000
COST AND MANAGEMENT ACCOUNTING

**Profit on transfer = (1,69,06,000 - 10,70,000) x .25 = ` 39,59,000

 2.
Cost Profit Total Particulars Cost Profit Total
Particulars
(`) (`) (`) (`) (`) (`) Reason:
Opening 12,30,500 2,14,000 14,44,500 By Process 2,86,96,274 1,20,97,476 4,07,93,750
Stock III A/c

**Transfer price
(Transfer)**

Process I 1,58,36,000 39,59,000 1,97,95,000 Closing 14,77,726 2,34,274 17,12,000

Process II Account

***Profit on transfer
A/c stock*

* Cost of Closing Stock =

Direct -
Option (b) ` 4,07,93,750

34,77,500 34,77,500
Material

Direct -
57,78,000 57,78,000
Wages

Prime Cost 2,63,22,000 41,73,000 3,04,95,000

` 2,63,22,000
Manufactur-

�` 3,04,95,000� x
CASE SCENARIOS

ing 38,52,000 - 38,52,000

Overheads

Total cost 3,01,74,000 41,73,000 3,43,47,000

Costing - 81,58,750 81,58,750

Profit and
Loss A/c***

3,01,74,000 1,23,31,750 4,25,05,750 3,01,74,000 1,23,31,750 4,25,05,750

= (Total Cost - Closing Stock) (1 + 25%)

` 17,12,000 = ` 14,77,726

= (3,43,47,000 - 17,12,000) x .25 = ` 81,58,750

= (3,43,47,000 - 17,12,000) x 1.25 = ` 4,07,93,750
93
 3.
94

Particulars Cost Profit Total Particulars Cost Profit Total

(`) (`) (`) (`) (`) (`)
Opening 16,05,000 5,35,000 21,40,000 By Finished 3,98,91,140 2,94,44,860 6,93,36,000 Reason:
Stock Stock A/c**
(Transfer)
Process II 2,86,96,274 1,20,97,476 4,07,93,750 Closing 15,64,884 5,21,616 20,86,500
A/c stock*
Direct 26,75,000 -- 26,75,000
Process III Account

Material
Direct 49,22,000 -- 49,22,000

* Cost of Closing Stock =

Option (d) ` 6,93,36,000

Wages

`
Prime Cost 3,78,98,274 1,26,32,476 5,05,30,750
Manufactur-
ing 35,57,750 -- 35,57,750
Overheads

= ` 15,64,884
3,78,98,274
Total cost 4,14,56,024 1,26,32,476 5,40,88,500

�` 5,05,30,750� x
Costing - 1,73,34,000 1,73,34,000
Profit and
Loss A/c***
4,14,56,024 2,99,66,476 7,14,22,500 4,14,56,024 2,99,66,476 7,14,22,500

` 20,86,500
COST AND MANAGEMENT ACCOUNTING
 CASE SCENARIOS 95

**Transfer price = (Total Cost - Closing Stock) (1 + 33 1/3%)

= (5,40,88,500 - 20,86,500) x (1 + 33 1/3%)
= ` 6,93,36,000
***Profit on transfer = (5,40,88,500 - 20,86,500) x 33 1/3%
= ` 1,73,34,000
4. Option (b) ` 3,98,91,140
Reason:
Refer part (iii) above.
5. Option (b) ` 15,64,884
Reason:
Refer part (iii) above.
96 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 20

P Ltd. has gathered cost information from ledgers and other sources for the
year ended 31st December 2023. The information are tabulated below:

Sl. Amount Amount

No. (`) (`)
(i) Raw materials purchased 5,00,00,000
(ii) Freight inward 9,20,600
(iii) Wages paid to factory workers 25,20,000
(iv) Royalty paid for production 1,80,000
(v) Amount paid for power & fuel 3,50,000
(vi) Job charges paid to job workers 3,10,000
(vii) Stores and spares consumed 1,10,000
(viii) Depreciation on office building 50,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 40,000
- Sales office building 20,000 60,000
(x) Insurance premium paid for:
- Plant & Machinery 28,200
- Factory building 18,800 47,000
(xi) Expenses paid for quality control 18,000
check activities
(xii) Research & development cost paid 20,000
for improvement in production
process
(xiii) Expenses paid for pollution control 36,000
and engineering & maintenance
(xiv) Salary paid to Sales & Marketing 5,60,000
mangers
 CASE SCENARIOS 97

(xv) Salary paid to General Manager 6,40,000

(xvi) Packing cost paid for:
- Primary packing necessary to 46,000
maintain quality
- For re-distribution of finished 80,000 1,26,000
goods
(xvii) Fee paid to independent directors 1,20,000
(xviii) Performance bonus paid to sales 1,20,000
staffs
(xix) Value of stock as on 1stJanuary, 2023:
- Raw materials 10,00,000
- Work-in-process 8,60,000
- Finished goods 12,00,000 30,60,000
(xx) Value of stock as on 31stDecember,
2023:
- Raw materials 8,40,000
- Work-in-process 6,60,000
- Finished goods 10,50,000 25,50,000

Amount realized by selling of scrap and waste generated during manufacturing

process – ` 48,000/-
The board meeting is scheduled to be held in next week and you being an
associate to the chief cost controller of the company, has been asked to be
prepared with the following figures:

MULTIPLE CHOICE QUESTIONS

1. How much is the prime cost of the company?

(a) ` 5,10,80,600

(b) ` 5,44,40,600
(c) ` 5,36,00,600
98 COST AND MANAGEMENT ACCOUNTING

(d) ` 5,19,20,600
2. How much is the cost of production?
(a) ` 5,49,09,600
(b) ` 5,50,59,600
(c) ` 5,48,73,600
(d) ` 5,50,59,000
3. What is the value of cost of goods sold?
(a) ` 5,49,09,600
(b) ` 5,50,59,600
(c) ` 5,48,73,600
(d) ` 5,50,59,000
4. How much is the factory cost?
(a) ` 5,49,09,600
(b) ` 5,50,59,600
(c) ` 5,48,73,600
(d) ` 5,50,59,000
5. What is the value of cost of sales?

(a) ` 5,66,49,600
(b) ` 5,50,59,600
(c) ` 5,48,73,600
(d) ` 5,50,59,000
Answer
1 Option (b) ` 5,44,40,600
2. Option (a) ` 5,49,09,600

3. Option (b) ` 5,50,59,600

4. Option (c) ` 5,48,73,600
 CASE SCENARIOS 99

5. Option (a) ` 5,66,49,600

Reason for 1,2,3,4 & 5
Statement of Cost of P Ltd. for the year ended 31st December, 2023:

Sl. Particulars Amount (`) Amount (`)

No.
(i) Material Consumed:
- Raw materials purchased 5,00,00,000
- Freight inward 9,20,600
Add: Opening stock of raw 10,00,000
materials
Less: Closing stock of raw materials (8,40,000) 5,10,80,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 25,20,000
(iii) Direct expenses:
- Royalty paid for production 1,80,000
- Amount paid for power & fuel 3,50,000
- Job charges paid to job 3,10,000 8,40,000
workers
Prime Cost 5,44,40,600
(iv) Works/ Factory overheads:
- Stores and spares consumed 1,10,000
- Repairs & Maintenance paid 40,000
for plant & machinery
- Insurance premium paid for 28,200
plant & machinery
- Insurance premium paid for 18,800
factory building
- Expenses paid for pollution 36,000 2,33,000
control and engineering &
maintenance
Gross factory cost 5,46,73,600
100 COST AND MANAGEMENT ACCOUNTING

Add: Opening value of W-I-P 8,60,000

Less: Closing value of W-I-P (6,60,000)
Factory Cost 5,48,73,600
(v) Quality control cost:
- Expenses paid for quality 18,000
control check activities
(vi) Research & development cost paid 20,000
for improvement in production
process
(vii) Less: Realisable value on sale of (48,000)
scrap and waste
(viii) Add: Primary packing cost 46,000
Cost of Production 5,49,09,600
Add: Opening stock of finished 12,00,000
goods
Less: Closing stock of finished (10,50,000)
goods
Cost of Goods Sold 5,50,59,600
(ix) Administrative overheads:
- Depreciation on office building 50,000
- Salary paid to General Manager 6,40,000
- Fee paid to independent 1,20,000 8,10,000
directors
(x) Selling overheads:
- Repairs & Maintenance paid 20,000
for sales office building
- Salary paid to Manager- Sales 5,60,000
& Marketing
- Performance bonus paid to 1,20,000 7,00,000
sales staffs
 CASE SCENARIOS 101

(xi) Distribution overheads:

- Packing cost paid for re- 80,000
distribution of finished goods
Cost of Sales 5,66,49,600
102 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 21

Pari 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

MULTIPLE CHOICE QUESTIONS

The following information has been sought from you for the purpose of
performance review meeting:

1. Number of large size bottles that can be processed in a batch?

(a) 5,000 bottles
 CASE SCENARIOS 103

(b) 1,666 bottles

(c) 3,333 bottles
(d) 8,333 bottles
2. Total number of batches to be run to process medium size bottles
(a) 180
(b) 225
(c) 240
(d) 645
3. 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
4. Calculate profit/ loss per batch for large size bottles.
(a) `89,03,880
(b) `2,12,41,650
(c) `4,70,71,840

(d) `7,72,17,370
5. Compute Economic Batch Quantity (EBQ) for small size bottles.
(a) 1,34,234
(b) 2,12,243
(c) 3,46,592
(d) 4,42,562
104 COST AND MANAGEMENT ACCOUNTING

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1 Option (b) 1,666 bottles

Reason:
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 Qty (ltr) Max Qty (ml) Max
bottles bottles bottles
3 1,666 1.5 3,333 600 8,333

*For simplicity of calculation small fractions has been ignored.

2. Option (b)
Reason:
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 1,666 3,333 8,333
(Refer WN-1)
C No. of batches [A÷B] 180 225 240 645
*For simplicity of calculation small fractions has been ignored.
3. Option (b)
Reason:
Working note 3:
Quantity of Material-W and Material C required to meet demand:

Particulars Large Medium Small Total

A Demand 3,00,000 7,50,000 20,00,000
(bottle)
 CASE SCENARIOS 105

B Qty per 3 1.5 0.6

bottle (Litre)
C Output (Litre) 9,00,000 11,25,000 12,00,000 32,25,000
[A×B]
D Material-W 14 14 14
per litre of
output (Litre)
E Material-W 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000
required
(Litre) [C×D]
F Material-C 25 25 25
required per
litre of
output (ml)
G Material-C 22,500 28,125 30,000 80,625
required
(Litre)
[(C×F)÷1000]

4. Option (a)
Reason:
Working note 4: No. of Man-shift required

Large Medium Small Total

A No. of batches 180 225 240 645
B Hours required per batch 2 2 2
(Hours)
C Total hours required 360 450 480 1,290
(Hours) [A×B]
D No. of shifts required [C÷8] 45 57 60 162
E Total manshift [D×20 900 1,140 1,200 3,240
workers]
106 COST AND MANAGEMENT ACCOUNTING

Working note 5: Power consumption in Kwh

Large Medium Small Total

For processing
A No. of batches 180 225 240 645
B Hours required per batch 1.75 1.75 1.75 1.75
(Hours)
C Total hours required 315 393.75 420 1,128.75
(Hours) [A×B]
D Power consumption per 90 90 90 90
hour
E Power consumption in 28,350 35,437.5 37,800 1,01,587.5
Kwh [C×D]
F Per batch consumption 157.5 157.5 157.5 157.5
(Kwh) [E÷A]
For set-up
G Hours required per batch 0.25 0.25 0.25 0.25
(Hours)
H Total hours required 45 56.25 60 161.25
(Hours) [A×G]
I Power consumption per 18 18 18 18
hour [20%×90]
J Power consumption in 810 1,012.5 1,080 2,902.5
Kwh [H×I]
K Per batch consumption 4.5 4.5 4.5 4.5
(Kwh) [J÷A]
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 (`) 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000

[A×B]
 CASE SCENARIOS 107

Direct Material
cost:

E Material-W (`) 63,00,000 78,75,000 84,00,000 2,25,75,000

[Qty in WN-3 ×
`0.50]

F Material-C (`) 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000

[Qty in 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 (`) 9,00,000 22,50,000 60,00,000 91,50,000

[A×`3]

Power cost (`)

J For processing 1,98,450 2,48,062.5 2,64,600 7,11,112.5

(`) [WN-5 × `7]

K For set-up time 5,670 7,087.5 7,560 20,317.5

(`) [WN-5 × `7]

L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430

M Other variable 54,00,000 67,50,000 72,00,000 1,93,50,000

cost (`) [No. of
batch in WN-2 ×
`30,000]

N Total Variable 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630

cost per 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 Cost [O-P] 2,82,17,370

108 COST AND MANAGEMENT ACCOUNTING

5. Option (c)
Reason:
Computation of Economic Batch Quantity (EBQ):
2×D×S
EBQ=� C

D = Annual Demand for the Product = Refer A below

S = Set-up cost per batch = Refer D below
C = Carrying cost per unit per annum =Refer E below

Particulars Large Medium Small

A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
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
 CASE SCENARIOS 109

CASE SCENARIO 22

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 ` 2,30,000
sold
General & Administration Overhead 2% of cost of goods ` 71,000
sold
Selling & Distribution Overhead 4% of cost of sales ` 68,000

Last year 5,000 units were sold at `185 per unit.

MULTIPLE CHOICE QUESTIONS

You being an associate to cost controller of the A Ltd., is expected to answer

the followings:
1. What is the cost of goods sold for the last year?
(a) `7,20,000

(b) `7,00,000
(c) `7,10,000
(d) `7,30,000

2. What is the cost of sales for the last year?

(a) `8,00,000
(b) `8,20,000

(c) `8,10,000
(d) `7,90,000
110 COST AND MANAGEMENT ACCOUNTING

3. The total fixed cost is :

(a) `3,79,000
(b) `3,89,000
(c) `3,59,000
(d) `3,69,000
4. Calculate Break-even Sales (in rupees)
(a) `6,90,882
(b) `7,90,000
(c) `3,89,000
(d) `5,48,692
5. What is the Margin of safety (in %)?
(a) 26.58%
(b) 25.31%
(c) 53.41%
(d) 34.25%

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (b) `7,00,000

Reason:
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
 CASE SCENARIOS 111

2. Option (a) `8,00,000

Reason:
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 COS = = ` 8,00,000
0.96
3. Option (d) `3,69,000
Reason:
Calculation of total Fixed Costs:
Factory Overhead- ` 2,30,000
General & Administration OH- ` 71,000
Selling & Distribution OH ` 68,000
` 3,69,000
4. Option (a) `6,90,882
Reason:
Workings:
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 − Variable Costs
P/V Ratio = ×100 = ×100
Sales Sales
(` 185 × 5,000units) − ` 4,31,000
= ×100 = 53.41%
` 185 × 5,000units
112 COST AND MANAGEMENT ACCOUNTING

FixedC os ts ` 3,69,000
Break-Even Sales = = = ` 6,90,882
P / V Ratio 53.41%

5. Option (b) 25.31%

Reason:
Sales - Breakeven sales
Margin of Safety (%) = × 100
Sales

` 9,25,000 − ` 6,90,882
= ×100 = 25.31%
` 9,25,000
 CASE SCENARIOS 113

CASE SCENARIO 23

The following data are available in respect of Process-I for January 2024:
(1) Opening stock of work in process: 600 units at a total cost of `4,200.
(2) Degree of completion of opening work in process:
Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of ` 55,200 for 9,200 units.
(4) Direct wages incurred ` 18,600
(5) Overheads ` 8,630.
(6) Units scrapped 200 units. The stage of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units
was:
Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)

(10) Scrap value is `6 per unit.

114 COST AND MANAGEMENT ACCOUNTING

MULTIPLE CHOICE QUESTIONS

You are required to be ready with the following information:

1. What is the equivalent units for labour?

(a) 9,800 units
(b) 8,808 units

(c) 9,030 units

(d) 8,838 units
2. What is the total cost of per equivalent units?
(a) `9.08
(b) `10.10
(c) `8.08

(d) `8.68
3. What is the total cost of abnormal gain?
(a) `1,743.36

(b) `1,209.52
(c) `2,506.25
(d) `3,728.16

4. What is the total cost of closing work in process?

(a) `5,709.20
(b) `6,203.20

(c) `5,806.20
(d) `5,734.80
5. What is the cost of the units to be transferred to the next process using
the FIFO method?
(a) `50,900.15
(b) `80,303.20
 CASE SCENARIOS 115

(c) `80,800.36
(d) `50,300.80

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) 8,838 units

Reason:
Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Materials Labour Overheads
Details Units Details Units % Units % Units % Units
Opening 600 Finished goods
Stock transferred to 600 - - 40 240 40 240
next process:-
from opening
stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials
Closing W-I-P 700 100 700 70 490 70 490
Fresh 9,200 Normal loss 392 - - - - - -
inputs
9,992 9,000 9,030 9,030
Less: Abnormal (192) 100 (192) 100 (192) 100 (192)
Gain
9,800 9,800 8,808 8,838 8,838

2. Option (a) `9.08

Reason:
Statement of Cost per equivalent units

Elements Cost Equivalent Cost per

units equivalent
Unit

(`) (`) (`)

Material Cost 55,200

116 COST AND MANAGEMENT ACCOUNTING

Less: Scrap realisation 2,352 52,848 8,808 6.00

392 units @ ` 6/- p.u.

Labour cost 18,600 8,838 2.10

Overheads 8,630 8,838 0.98

Total Cost 80,078 9.08
3. Option (a) `1,743.36
Reason:
Cost of Abnormal Gain – 192 Units

(`) (`)
Material cost of 192 units @ ` 6.00/- p.u. 1,152.00
Labour cost of 192 units @ ` 2.10/- p.u. 403.20
Overheads of 192 units @ ` 0.98/- p.u. 188.16 1,743.36
4. Option (a) ` `5,709.20
Reason:
Cost of closing WIP – 700 Units

Material cost of 700 equivalent units @ ` 4,200.00

6.00/- p.u.
Labour cost of 490 equivalent units @ `2.10/- p.u. 1,029.00
Overheads of 490 equivalent @ ` 0.98/- p.u. 480.20 5709.20
5. Option (b) `80,303.20
Reason:

Calculation of cost of 8,900 units transferred to next process (`)

(i) Cost of opening W-I-P Stock b/f – 600 units 4,200.00

(ii) Cost incurred on opening W-I-P stock

Material cost —
Labour cost 240 equivalent units @ ` 2.10 p.u. 504.00
Overheads 240 equivalent units @ ` 0.98/- p.u. 235.20
739.20
 CASE SCENARIOS 117

(iii) Cost of 8,300 completed units

8,300 units @ `9.08 p.u. 75,364.00

Total cost [(i) + (ii) + (iii))] 80,303.20

118 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 24

Miniso Pvt Ltd a company engaged in the business of manufacturing wireless

Bluetooth earphones. The company wishes to track its operating profitability
and the margin it needs to maintain to sustain profitability in the long run.
Further the company has adopted the marginal costing technique to identify
and define operational levels. In this regard the company has provided the
following information for the current year:
Opening stock of earphones - 30,000 units
Selling Price of the earphones - `450 per unit

Variable costs incurred in manufacture - `270 per unit

Units produced during the previous year - 1,80,000 units

Expected production for the current year - 2,25,000 units

Expected sales for the current year - 2,40,000 units

Fixed cost per unit for last year was - `60 per unit

Expected rise in Fixed Cost - 10%

Expected Increase in Variable cost - 25%

MULTIPLE CHOICE QUESTIONS

Based on the above information available, the following needs to be

determined.
1. The profit that the company will make on achieving its targeted sales
amounts to:
(a) `1,51,20,000

(b) `1,62,00,000
(c) `1,71,45,000
(d) `1,72,00,000

2. The units to be sold by the company to achieve Break-even is:

 CASE SCENARIOS 119

1. 57,600 units
2. 87,600 units
3. 1,05,600 units
4. 96,000 units
3. The total fixed cost for the current year post the cost increase amounts
to:
(a) `1,08,00,000
(b) `1,48,50,000

(c) `1,18,80,000
(d) `1,44,00,000
4. The quantity of closing stock and its value amounts to:

(a) Closing stock in units – NIL and Value – NIL

(b) Closing stock in units – 15,000 and Value – `40,50,000
(c) Closing stock in units – 15,000 and Value – `50,62,500
(d) Closing stock in units – 15,000 and Value – `58,05,000
5. Margin of Safety in units amounts to:
(a) 87,600 units
(b) 1,52,400 units
(c) 1,62,000 units
(d) 1,60,000 units

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (c) `1,71,45,000

2. Option (b) 87,600 units
3. Option (c) `1,18,80,000
4. Option (c) Closing stock in units – 15,000 and Value – `50,62,500
5. Option (b) 1,52,400 units
120 COST AND MANAGEMENT ACCOUNTING

Reason:
Selling Price = 450
Less: Variable cost of Prior Year = 270
Contribution per unit prior year = 180
Variable cost for current year = 337.5
Contribution per unit = 112.5
Total Contribution = 2,90,25,000
(30,000 x 180 + 2,10,000 x 112.5)

Less: Fixed Cost = 1,18,80,000

(1,80,000 x 60 x 110%)
Profit for the year = 1,71,45,000

Contribution from Opening stock = 54,00,000 (30,000 x 180)

Balance fixed cost to be covered = 64,80,000 (1,18,80,000-54,00,000)
Contribution per unit = 112.5
Units to be to be sold to break even = 57,600
Therefore total units for break even = 30,000 + 57,600 = 87,600
Opening stock - 30,000

Add: Manufactured - 2,25,000

Less: Sales - (2,40,000)
Closing stock - 15,000

Cost per unit (VC only) - 337.5

Closing stock - 50,62,500
Margin of safety in units = Profit/contribution per unit
= 1,71,45,000/112.5
Margin of safety in units = 1,52,400 units
 CASE SCENARIOS 121

CASE SCENARIO 25

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
122 COST AND MANAGEMENT ACCOUNTING

MULTIPLE CHOICE QUESTIONS

You have been assigned the following task of computing different cost
information for managerial decision making:
1. How much cost on customer visit is incurred on customer E?
(a) `7,200

(b) `10,800
(c) `21,600
(d) `3,600

2. 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
3. How much is the cost of expediting delivery for customer A?
(a) `13,500
(b) `27,000
(c) `40,500
(d) `0
4. 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

5. Compute the customer-level operating income of each of five retail

customers D and E.
(a) `46,82,550 & 50,65,720
 CASE SCENARIOS 123

(b) `55,72,350 & 46,85,500

(c) `47,57,400 & 55,72,350
(d) `61,88,550 & 50,57,325

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (b) `10,800

2. Option (d) `4,05,00,000

3. Option (c) `0
4. Option (b) `46,82,550

5. Option (d) `61,88,550 & 50,57,325

Reason for 1,2,3,4 & 5)
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)
124 COST AND MANAGEMENT ACCOUNTING

Customer visits costs 7,200 10,800 21,600 7,200 10,800

(`)
(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}
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 (2,43,00,000) (3,24,00,000 (5,13,00,000) (4,05,00,000) (6,88,50,000)
goods sold )
(Refer to working
note)
Gross margin 48,60,000 58,32,000 51,30,000 64,80,000 55,08,000
Less: Customer
level operating
activities costs
(Refer to working
note) (1,77,450) (2,59,650) (3,72,600) (2,91,450) (4,50,675)
Customer level 46,82,550 55,72,350 47,57,400 61,88,550 50,57,325
operating income
 CASE SCENARIOS 125

CASE SCENARIO 26

Litto ltd. is a manufacturing company which has as a machine shop cost centre
that contains three machines of equal capacities. To operate these three
machines nine operators are required i.e. three operators on each machine.
Operators are paid ` 20 per hour. The factory works for fourty eight hours in a
week which includes 4 hours set up time. The work is jointly done by operators.
The operators are paid fully for the fourty eight hours. In additions they are
paid a bonus of 10 per cent of productive time. Costs are reported for this
company on the basis of thirteen four-weekly period.
The company for the purpose of computing machine hour rate includes the
direct wages of the operator and also recoups the factory overheads allocated
to the machines. The following details of factory overheads applicable to the
cost centre are available:
 Depreciation 10% per annum on original cost of the machine. Original
cost of each machine is `52,000.
 Maintenance and repair per week per machine is `60.
 Consumable stores per week per machine are `75.
 Power: 20 units per hour per machine at the rate of 80 paise per unit. No
power is used during the set-up hours.
 Apportionment to the cost centre: Rent per annum `5,400, Heat and Light
per annum `9,720, foreman’s salary per annum `12,960 and other
miscellaneous expenditure per annum `18,000.
1. What is the effective machine hour for four-week period?
(a) 170 hours
(b) 176 hours
(c) 189 hours
(d) 192 hours
2. What is the bonus charges and power expenses for four-week period?
(a) `1,056 and `2,816
(b) `1,562 and `3,560
126 COST AND MANAGEMENT ACCOUNTING

(c) `1,240 and `3,325

(d) `860 and `2,450
3. What is the standing charges for four-week period?
(a) `12,357
(b) `10,450
(c) `13,757
(d) `14,226
4. What is the machine expenses for four-week period?
(a) `2,500
(b) `3,450
(c) `3.986
(d) `3,756
5. What is the machine hour rate?
(a) `99.51
(b) `92.25
(c) `105.22
(d) `86.90

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (b) 176 hours

2. Option (a) `1,056 and `2,816

3. Option (c) `13,757

4. Option (d) `3,756
5. Option (a) `99.51
Reason for 1,2,3,4 & 5
Effective Machine hour for four-week period
= Total working hours – unproductive set-up time
 CASE SCENARIOS 127

= {(48 hours × 4 weeks) – {(4 hours × 4 weeks)}

= (192 – 16 hours) =176 hours.
Computation of cost of running one machine for a four week period
` 17,513.54
Machine hour rate = = `99.51
176 hours

(`) (`)
(A) Standing charges (per annum)
Rent 5,400
Heat and light 9,720
Forman’s salary 12,960
Other miscellaneous expenditure 18,000
Standing charges (per annum) 46,080
Total expenses for one machine for four- 1,181.54
week period
 ` 46,080 
 
 3 machines ×13 four - week period 
Wages (48 hours × 4 weeks × ` 20 × 3 11,520.00
operators)
Bonus {(176 hours × ` 20 × 3 operators) × 1,056.00
10%}
Total standing charges 13,757.54
B) Machine Expenses
Depreciation 400.00
 1 
 `52,000 ×10% × 
 13four - week period 

Repairs and maintenance (`60 × 4 weeks) 240.00

Consumable stores (`75 × 4 weeks) 300.00
Power (176 hours × 20 units ×` 0.80) 2,816.00
Total machine expenses 3,756.00
(C) Total expenses (A) + (B) 17,513.54
128 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 27

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:
 CASE SCENARIOS 129

MULTIPLE CHOICE QUESTIONS

1. What would be the depreciable value of EV Car?

(a) `13,50,000
(b) `15,20,000
(c) `14,40,000
(d) `12,00,000
2. What would be the monthly cost of electricity for an EV car?
(a) `1,425
(b) `1,500
(c) `1,450
(d) `1,525
3. 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
4. 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
5. 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
130 COST AND MANAGEMENT ACCOUNTING

ANSWERS TO MULTIPLE CHOISE QUESTIONS

1. Option (d) `12,00,000

Reason:
Calculation of Depreciation per month:

Particulars CNG Car EV Car

A Car purchase price (`) 9,20,000 15,20,000
B Less: Govt. subsidy (`) -- (1,50,000)
C Less: Residual value (`) (95,000) (1,70,000)
D Depreciable value of car (`) [A-B-C] 8,25,000 12,00,000
E Life of the car 15 years 10 years
F Annual depreciation (`) [D÷E] 55,000 1,20,000
G Depreciation per month (`) [F÷12] 4,583.33 10,000

2. Option (a) `1,425

Reason:
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
 CASE SCENARIOS 131

3. Option (d) `16,000

Reason:
Amortised cost of Tyre replacement:

Particulars CNG Car EV Car

A Life of vehicle 15 years 10 years
B Replacement interval 5 years 5 years
C No. of time replacement required 2 times 1 time
D Cost of tyres for each replacement (`) 16,000 16,000
E Total replacement cost (`) [C×D] 32,000 16,000
F Amortised cost per year (`) [E÷A] 2,133.33 1,600
E Cost per month (`) [F÷12] 177.78 133.33
4. Option (a) `36,627.78
5. Option (c) `43.708.33
Reason for 4 & 5:
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
132 COST AND MANAGEMENT ACCOUNTING

Calculation of Operating cost per month

Particulars CNG Car EV Car (`)

(`)
A Running cost:
Fuel cost/ Power consumption cost 4,500 1,425
[Refer WN-2]
B Maintenance cost:
Annual Maintenance cost [Annual cost 666.67 433.33
÷12]
Annual Insurance cost [Annual cost ÷12] 633.33 1,216.67
Amortised cost of Tyre replacement 177.78 133.33
[Refer WN-3]
Amortised cost of Battery replacement 66.67 4,500
[Refer WN-4]
1,544.45 6,283.33
C Fixed cost:
Depreciation [Refer WN-1] 4,583.33 10,000
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of Office & Administration cost 1,500 1,500
30,583.33 36,000
D Operating cost per month [A+B+C] 36,627.78 43,708.33
 CASE SCENARIOS 133

CASE SCENARIO 28

Phalsa Ltd. pays its workers on time-basis because their services cannot be
tangibly measured. The company’s normal working week includes 5 days of 8
hours each. Sometimes, the workers needs to work late at night which was 3
nights of 3 hours each for the current week. The average output produced per
worker for the week is 120 units.
Information regarding incentive rate is as follows:
Rate of Payment Day shift: ` 320 per hour
Night shift: ` 450 per hour
However, this time-basis payment made workers lazy, making their expected
output lower. As workers started doing more of the night shifts for higher
earnings with minimal impact on the outputs, the company decided to shift on
to a system of payments on output basis. Information regarding amended
incentive rate is as follows:

Time-rate (as usual) : ` 320 per hour

Basic time allowed for 15 units : 5 hours
Piece-work rate : Add 15% to basic piece-rate
In the amended incentive system, the normal weekly working hours remained
the same while production increased to 135 units.

MULTIPLE CHOICE QUESTION

1. CALCULATE the labour cost per unit as per the existing incentive system,
along with the amended incentive system.
(a) ` 140.42 and ` 122.67 respectively

(b) ` 124.81 and ` 138.00 respectively

(c) ` 124.81 and ` 122.67 respectively
(d) ` 140.42 and ` 138.00 respectively
134 COST AND MANAGEMENT ACCOUNTING

ANSWER TO MULTIPLE CHOISE QUESTION

1. Option (a) Calculation of existing labour cost per unit (time basis)

Reason:
Normal weekly hours = 5 days x 8 hours = 40 hours
Night shift hours = 3 nights x 3 hours = 9 hours

Average production per week = 120 units

Weekly wages:
Normal shift (40 hours × ` 320) ` 12,800
Night shift (9 hours × ` 450) ` 4,050
Total wages ` 16,850
` 16,850
Labour cost per unit = �120 units�
= ` 140.42
Calculation of amended labour cost per unit (piece basis)
15 units are produced in 5 hours
5 hours
Therefore, to produce 135 units, hours required is �15 units� x 135 units
= 45 hours.
Labour cost of producing 135 units:
At basic time rate (45 hours × ` 320) = ` 14,400
Add: Bonus @ 15% on basic Piece rate
` 14,400
[� � x 15%] x 135 units = ` 2,160
135 units
Earning for the week ` 16,560
` 16,560
Labour cost per unit = �135 units�
= ` 122.67
 CASE SCENARIOS 135

CASE SCENARIO 29

Gaarmentz Ltd. run a sewing factory for medical garments. But, the company
suffers from the limiting factor i.e. labor. Each sewing machine needs 100%
attention of one person at a particular point of time to operate it. The company
has 8 number of alike sewing machines on which 8 operators work separately.
The following particulars are furnished for a six months period:
Paid hours for all the 8 operators 9,594 hours
Effective working hours for all the 8 operators 9,360 hours
Average rate of wages per day of 8 hours per operator ` 110
Power consumed ` 60,125
Supervision and Indirect Labour ` 21,450
The following particulars are given for a year:
Insurance ` 4,68,000
Sundry Expenses ` 7,15,000
Depreciation charged is 10% on the original cost of all the sewing machines.
Repairs and Maintenance comes to 5% of the value of all the sewing machines.
The original cost of all the sewing machines works out to ` 41,60,000

MULTIPLE CHOICE QUESTIONS

1. CALCULATE the Comprehensive Machine Hour Rate.

(a) ` 215.86
(b) ` 217.99
(c) ` 116.43

(d) ` 119.34
136 COST AND MANAGEMENT ACCOUNTING

ANSWER TO MULTIPLE CHOISE QUESTION

1. Option (d) ` 119.34

Reason:
Computation of Comprehensive Machine Hour Rate

Particulars Amount
for six
months (`)

Operators' wages paid [(9,594 hrs./ 8 hrs.) x ` 110] 1,31,918

Power consumed 60,125

Supervision and indirect labour 21,450

Insurance (` 4,68,000/2) 2,34,000

Sundry expenses (` 7,15,000/2) 3,57,500

Depreciation {(` 41,60,000 × 10%)/2} 2,08,000

Repair and maintenance {(5% × ` 41,60,000)/2} 1,04,000

Total Overheads for 6 months 11,16,993

` 11,16,993
Comprehensive Machine Hour Rate = �9,360 hours� 119.34
 CASE SCENARIOS 137

CASE SCENARIO 30

Following information is available for the month of March relating to

manufacturing of a product:

Particulars Amount (`)

Cost of Sales 37,51,540

Stock of Raw material as on 01st March 6,50,000

Direct Wages 11,44,000

Hire charges paid for Plant (indirect expenses) 3,24,740

Salary to office staff 1,78,750

Maintenance of office building 13,000

Depreciation on Delivery van 39,000

Warehousing charges 61,750

Stock of Raw material as on 31st March 1,95,000

Realisable value on sale of scrap 32,500

Factory overheads are 20% of the Prime cost.

MULTIPLE CHOICE QUESTION

1. FIND OUT the value of Raw Material purchased with the help of Statement
of Cost.
(a) ` 10,40,000
(b) ` 14,95,000
(c) ` 26,39,000
(d) ` 34,91,540
138 COST AND MANAGEMENT ACCOUNTING

ANSWER TO MULTIPLE CHOISE QUESTION

1 Option (a) ` 10,40,000

Reason:
Statement of Cost for the month of March
Particulars Amount Amount
(`) (`)
Cost of Material Consumed:
Raw materials purchased 10,40,000**
Add: Opening stock of raw materials 6,50,000
Less: Closing stock of raw materials (1,95,000) 14,95,000
Direct Wages 11,44,000
Prime Cost 26,39,000*
Hire charges paid for Plant (indirect expenses) 3,24,740
Factory overheads (20% of Prime cost) 5,27,800 8,52,540
Works/ Factory Cost 34,91,540
Less: Realisable value on sale of scrap (32,500)
Cost of Production/ Cost of Goods Sold 34,59,040
Administrative overheads:
Maintenance of office building 13,000
Salary paid to Office staff 1,78,750 1,91,750
Distribution overheads:
Depreciation on delivery van 39,000
Warehousing charges 61,750 1,00,750
Cost of Sales 37,51,540
(Reverse calculation to be done to find out the value of Raw materials
purchased)

* Prime Cost + 3,24,740 + 20% of Prime Cost = 34,91,540

1.2 Prime Cost = 34,91,540 - 3,24,740
= 31,66,800

Prime Cost = 26,39,000

** Raw materials purchased = 14,95,000 - 6,50,000 +
1,95,000
= 10,40,000
 CASE SCENARIOS 139

CASE SCENARIO 31

ICT Ltd. belongs to pharmaceutical industries. The chemical process that ICT
Ltd. operates convert one compound into three category of medicines viz.
BetaTab, Folick and TegriCap. Though BetaTab and Folick are already converted
to final product at split-off point, Tegricap needs further processing along with
addition of new compound with it.
The market for BetaTab and Folick is highly active, thus the production is sold
at split-off point, however, Tegricap can be sold only after further processing.
Following information is provided for the current year:

Products Quantity sold (tons) Selling price per ton (`)

BetaTab 372 7,500
Folick 1,054 5,625
TegriCap 1,472 3,750

The selling price is expected to remain the same for coming years.
The total joint manufacturing costs till split-off point is ` 62,50,000 and the
amount spent for further processing w.r.t. Tegricap is ` 31,00,000
The details regarding closing inventories are as follows:

Products Completed units (tons)

BetaTab 360
Folick 120
TegriCap 50

MULTIPLE CHOICE QUESTION

1. You are required to COMPUTE the joint cost allocated to BetaTab, Folick
and TegriCap using Net realizable value (NRV) method.
(a) BetaTab- ` 15,65,481, Folick - ` 33,26,647 and TegriCap -
` 13,57,872
140 COST AND MANAGEMENT ACCOUNTING

(b) BetaTab - ` 23,33,985, Folick - ` 28,07,478 and TegriCap -

` 11,08,537

(c) BetaTab - ` 19,27,533, Folick - ` 23,18,570 and TegriCap -

` 20,03,897
(d) BetaTab - ` 11,08,537, Folick - ` 28,07,478 and TegriCap -
` 23,33,985

ANSWER TO MULTIPLE CHOISE QUESTION

1. Option (b) BetaTab - ` 23,33,985, Folick - ` 28,07,478 and TegriCap -

` 11,08,537
Calculation of total production of BetaTab, Folick and TegriCap

Products Quantity Quantity of Total

sold (tons) closing production
inventories (tons)
(1) (2) (3) (4) = [(2) + (3)]
BetaTab 372 360 732
Folick 1,054 120 1,174
TegriCap 1,472 50 1,522

Calculation of Net Realisable Value (at split-off point)

Products Total (`)

BetaTab Folick TegriCap

Total Production (tons) 732 1,174 1,522

(A)

Selling price per ton (`) 7,500 5,625 3,750

(B)

Final sales value of total 54,90,000 66,03,750 57,07,500 1,78,01,250

production (`) [(A) x (B)]

Less: Additional cost (`) - - (31,00,000) (31,00,000)

Net realisable value (`) 54,90,000 66,03,750 26,07,500 1,47,01,250

(at split-off point)
 CASE SCENARIOS 141

Joint cost allocated using Net Realisable Value (at split-off point):
Total Jointcost
× NetRealisable Valueof each product
Total Net Realisable Value
` 62,50,000
BetaTab =� � x ` 54,90,000
` 1,47,01,250

= ` 23,33,985
` 62,50,000
Folick =� � x ` 66,03,750
` 1,47,01,250

= ` 28,07,478
` 62,50,000
TegriCap =� � x ` 26,07,500
` 1,47,01,250

= ` 11,08,537
142 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 32

Ms. Gauri has the business of selling pens. She has setup this pen retailing for
over 10 years with good profit volume ratio. Her average cost from the retailing
is ` 11.25 per unit if she sells 16,000 units and is ` 11 per unit if she sells 20,000
units.
For the current month, she also charged ` 5,000 towards depreciation and the
rental payment due.
The excess of sales revenue over the variable costs is ` 3.333 per unit.

MULTIPLE CHOICE QUESTION

1. You are required to CALCULATE Break-even Point (in units), Cash Break-
even Point (in units) and Profit Volume Ratio.

(a) Break-even Point- 6,000 units, Cash Break-even Point- 6,000 units
and Profit Volume Ratio- 33.33%

(b) Break-even Point- 6,000 units, Cash Break-even Point- 4,500 units
and Profit Volume Ratio- 25%

(c) Break-even Point- 4,500 units, Cash Break-even Point- 4,500 units
and Profit Volume Ratio- 33.33%
(d) Break-even Point- 4,500 units, Cash Break-even Point- 4,500 units
and Profit Volume Ratio- 25%

ANSWER TO MULTIPLE CHOISE QUESTION

1. Option (b) Break-even Point- 6,000 units, Cash Break-even Point-

4,500 units and Profit Volume Ratio- 25%
Change inTotal cost
Variable cost per unit =
Change in units
(` 11 x 20,000 units) - (` 11.25 x 16,000 units)
=� �
20,000 units - 16,000 units
` 2,20,000 - ` 1,80,000
=� � = ` 10
4,000 units
 CASE SCENARIOS 143

Fixed cost = Total Cost – Variable cost (at 20,000 units level)
= (` 11 x 20,000 units) – (` 10 x 20,000 units)
= ` 20,000
Fixed Costs
(i) Break-even Point (in units) = � �
Contribution per unit*
` 20,000
=� �
` 3.333

= 6,000 units
* Contribution is the excess of sales revenue over the variable costs.
Cash Fixed Costs**
(ii) Cash Break-even Point (in units) = � �
Contribution per unit
` 20,000 - ` 5,000
=� �
` 3.333

= 4,500 units
** depreciation and other non-cash fixed costs are excluded from
the fixed costs to compute cash break-even point.
Contribution per unit
(iii) P/V Ratio =
Sale price per unit
` 3.333
=� �
` 10 + ` 3.333

= 25%
144 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 33

The accountant for Brilliant Tools Ltd applies overhead based on machine hours.
The budgeted overhead and machine hours for the year are ` 1,30,000 and
8,000 hours, respectively. The actual overhead and machine hours incurred were
` 1,37,500 and 10,000 hours. The cost of goods sold and inventory data
compiled for the year is as follows:
Direct Material ` 25,000
Cost of Goods Sold ` 2,25,000
Units: WIP 50,000 and Finished Goods 75,000

MULTIPLE CHOICE QUESTION

1. What is the amount of over/under absorbed overhead for the year?

(a) Over absorbed by ` 25,000
(b) Under absorbed by ` 25,000
(c) Over a absorbed by ` 32,500
(d) Under absorbed by ` 32,500

ANSWER TO MULTIPLE CHOISE QUESTION

1. Option (a) Over absorbed by ` 25,000

Reason:
Overabsorbed by ` 25,000
Predetermined Overhead Rate = Budgeted Overhead / Budgeted
hours i.e. 130,000 / 8,000

= ` 16.25 per hour.

Hence, absorbed overhead = 10,000 X 16.25 = ` 1,62,500.
Since actual overhead incurred were ` 1,37,500

Hence the overhead were over absorbed by 1,62,500 – 1,37,500

= ` 25,000.
 CASE SCENARIOS 145

CASE SCENARIO 34

The following information is available in respect of Process I: Raw material

purchased and introduced 10,000 units @ 5 per unit Raw Material received from
store 4000 units @ 6 per unit Direct Labour 40,000 Overheads 28,000 Output of
Process is 13,500 units, Normal wastage 5% of inputs Scrap value of wastage 4
per unit

MULTIPLE CHOICE QUESTION

1. The value of Abnormal Gain is:

(a) ` 2062.68
(b) ` 2135.34
(c) ` 2103.70
(d) ` 2093.2

ANSWER TO MULTIPLE CHOISE QUESTION

1. Option (d) ` 2093.2

Reason:
Process a/c

Particulars Units Amount Particulars units Amount

Raw material 10,000 50,000 Normal loss 700 2,800
Stores 4,000 24,000 Units transferred 13,500 1,41,293.2
Direct Wages 40,000
Production
overheads 28,000
Abnormal
gain 200 2,093.2
1,44,093.2 1,44,093.2

1, 42,000- 2,800
Cost per unit= = 10.466 per unit
14,000- 700
146 COST AND MANAGEMENT ACCOUNTING

CASE SCENARIO 35

A hotel has 200 rooms (120 Deluxe rooms and 80 Premium rooms). The normal
occupancy in summer is 80% and winter 60%. The period of summer and winter
is taken as 8 months and 4 months respectively. Assume 30 days in each month.
Room rent of Premium room will be double of Deluxe room. Hotel is expecting
a profit of 20% on total revenue, total cost for the year is 2,66,11,200.

MULTIPLE CHOICE QUESTION

1. Calculate the room rent to be charged for Premium room.

(a) ` 450 per room day
(b) ` 900 per room day
(c) ` 380 per room day
(d) ` 760 per room day

ANSWER TO MULTIPLE CHOISE QUESTION

1. (b) ` 900 per room day

Reason:
Total Revenue (2,66,11,200/80%) = 3,32,64,000
Calculation of Room Days:

Deluxe Premium

Summer 120 rooms x 80% x 30 80 rooms x 80% x 30

days x 8 months = 23,040 days x 8 months =
15,360

Winter 120 rooms x 60% x 30 80 rooms x 60% x 30

days x 4 months = 8,640 days x 4 months
= 5,760

Total room days 31,680 21,120

 CASE SCENARIOS 147

Let’s assume the room rent of Deluxe room be ‘x’

Then rent of Premium room will be ‘2x’
Therefore: 31,680x + 42,240x = 3,32,64,000
X = 450
Rent of Premium room will be 450 x 2 = ` 900 per room day
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