PRACTICE MANUAL - COST ACCOUNTING Page |1

MARGINAL COSTING

Q.1. Absorption Costing [Short note]

[CMA Inter June 2012, Marks 5]

Answer:

Absorption Costing: It is defined as the practice of charging all costs, both, variable and fixed, to
operations, processes or products. Under absorption costing, cost of finished goods and work in
progress include both fixed and variable costs. In absorption costing costs are classified as direct and
indirect, direct costs are identifiable with a particular product and hence charged directly. Current
year costs to some extent are carried forward to the subsequent period through closing inventory. In
absorption costing, selling price is fixed on the basis of total costs.

Limitations of Absorption Costing:

(i) A portion of fixed cost is carried over to the subsequent accounting period as part of closing
stock. This is an unsound practice because costs pertaining to a period should not be allowed to
be vitiated by the inclusion of costs pertaining to the previous and vice versa.
(ii) Absorption costing is dependent on the levels of output which may vary from period to period,
and consequently cost per unit changes due to the existence of fixed overhead. Unless fixed
overhead rate is based on normal capacity, such changed costs are not helpful for the purposes
of comparison and control.

Q.2. Distinguish between Indifference Point and Break-Even Point with regard to
their (i) Formula, (ii) Definition, and (iii) Purpose.
[CMA Inter December 2012, Marks 5]

Answer:

(i) With Regard to Formula:

Indifference point = Difference in Fixed Cost
Difference in P/V Ratio

Break - even Point = Fixed Cost

P/V Ratio

(ii) With regard to definition:

Indifference point is the level of sales at which Total Costs and profits of two points
are equal.

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Break-even Point is the level of sales at which total sales revenue is equal to total
costs and there is neither profit nor loss to the firm. At BEP, total contribution equals
fixed cost.
(iii) Purpose:
Indifference point is used to choose between two alternative options of achieving
the same objective – Break-even point is used for profit planning.

Q.3. Difference between marginal costing and absorption costing.

[CMA Inter December 2012, Marks 5]

Answer:

Difference between Marginal Costing and Absorption Costing :

Marginal Costing Absorption Costing

i) This is a technique of costing, which i) Here costs are classified as Direct and
advocates that only variable costs should Indirect. Direct costs are identifiable with a
be taken into consideration while working particular product and hence are charged
out the total cost of production. directly. Indirectly costs are first identified,
apportioned to the cost Centers and then
finally absorbed in the product units on
some suitable basis.
ii) The year-end inventory is valued at variable ii) The year-end inventory is valued at total
cost only. cost.
iii) Fixed overheads are not absorbed in the iii) The Fixed overhead absorption may create
product units and hence there is no some problems like under/over absorption.
question of under/over absorption.
iv) Due to inventory valuation, which is done
iv) Fixed costs are not taken into consideration at the full cost, the cost relating to the
while valuing the inventory and hence current period are carried forward to the
there is no distortion of profits. subsequent period. This will distort the cost
of production.
v) Only variable costs are charged to the cost v) The total cost of production is charged to
of production and therefore the selling the product without distinguishing
price is also based on any variable costs. between the fixed and variable
components. The selling price is thus fixed
This will result in fixation of selling price
on the basis of total costs.
below the total costs. There is a possibility
of starting a price war in such situations,
which will be harmful to all the companies
in the industry.

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Q.4. State briefly the usefulness of Break-even analysis.

[CMA Inter December 2014, Marks 5]
Answer:

Break even analysis used to determine:

(i) The amount of profit / loss at various volume of operations.
(ii) The volume of operations required to earn a target profit.
(iii) The effect of change in variable cost on profit.
(iv) The effect of change in fixed cost on profit.
(v) The effect of change in selling price on profit.
(vi) The effect of change in sales volume on profit.

Q.5. Margin of safety is .Using the appropriate word(s) fill in the Blank.
[CMA Inter December 2021, Marks 1]

Answer:
Actual sales – sales at Breakeven point
Or
Profit/ PV Ratio.

Q.6. M/s. Jupiter & Co. Ltd. manufactures a product in its factory which presently
utilises 60% of its capacity. The cost details including selling price are given
below:

Amount
Sales 6000 units 5 , 40,000
Direct Materials 96,000
Direct Labour 1 , 20,000
Direct Expenses 20,000
Factory Overheads 2 , 00,000
Administration Overheads 21,000
Selling and Distribution Overheads 25,000

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Out of fixed overheads, 12.5% and 20% of selling and distribution overheads
variable with production and sales. Administration overheads are wholly fixed.
Now, it is revealed that existing product could not achieve budgeted level for two
consecutive years, the management decides to introduce a new product with
marginal investment but largely using present plant and machinery. The cost data
of the new product is given below:

Direct Materials; 16 per unit

Direct Labour; 15 per unit
Direct Expenses; 2 per unit
Variable Factory Overheads; 2 per unit
Variable Selling & Distribution Overheads; 1.5 per unit
Marketing Manager of the company is expecting to sell 2000 units of new product at
a price of ` 60 per unit.
The fixed factory overheads are expected to increase by 10% and fixed selling and
distribution expense will go up by 13 ,500 annually. Administration overheads will
remain unchanged. You are advised to give your opinion. Should the new product be
introduced?
[CMA Inter December 2011, Marks (3+3+3+1)]

Answer:

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Analysis of over heads :

Particulars Total Fixed Variable

` ` `
Factory Overhead (Note 1) 2,00,000 1,75,000 25,000
Administration Over Head 21,000 21,000
Selling & Distribution Over Head 25,000 20,000 5,000
Total 2,46,000 2,16,000 30,000
Incremental Factory Fixed over head 17,500
(10% of 1,75,000)
Selling & distribution over head 13,500
31,000

Note-1 : Out of the total factory overhead 12.5% is assumed as variable cost.

Statement of Profits : Existing and New Product

Particulars Existing Product New Product Total Amount

Sales Quantity (Units) 6000 2000 8000
` ` `
Sales Value 5,40,000 1,20,000 6,60,000
Less : Direct Materials 96,000 32,000
Direct Labour 1,20,000 30,000
Direct Expenses 20,000 4,000
Other Variable Overheads 30,000 7,000
Total variable cost 2,66,000 73,000 3,39,000
Contribution 2,74,000 47,000 3,21,000
Less Fixed over head 2,16,000 31,000
Profit 58,000 16,000 74,000

The profit of the firm is expected to increase by ` 16,000 if the product is introduced. So,
the company should introduce the new product.

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Q.7. The following are figures relating to a factory for two successive years:

Particulars Year I (`) Year II (`)

Sales 10,00,000 16,80,000
Marginal Cost of Sales 6,00,000 8,00,000
Contribution 4,00,000 8,80,000

During Year II, the selling price increased by 20% and the company implemented a
cost reduction programme very aggressively. You are required to analyse the increase
in contribution due to
(i) Increase in selling price
(ii) Increase in sales volume
(iii) Reduction in cost

[CMA Inter June 2013, Marks (3+4+3)]

Answer:

Year I Year II SP Year II Workings Year II Before SP

increased Actual Increase
by 20%
` ` `
Sales 10,00,000 12,00,000 16,80,000 Increase in Sales 14,00,000
= ` 4,80,000 (10,00 ,000+40% )
Loss: Marginal 6,00,000 6,00,000 8,00,000 (16,80,000–12,00,000)
Cost of Sales Increase in Volume 8,40,000
`4,80,000 X100 (at year I cost)
= 12 , 00,000 (6,00,000 + 40%)
= 40%
Contribution 4,00,000 6,00,000 8,80,000 5,60,000

(i) Increase in contribution due to increase in Selling Price=16,80,000–14,00,000=2,80,000

Increase in Volume = 40%
If only volume increased,
Sales value should have been = 14,00,000
Variable cost should have been = 8,40,000
Contribution should have been = 5,60,000

(ii) Increase in Contribution due to volume increase = 5,60,000 – 4,00,000 = ` 1,60,000

Variable cost for the increased volume should have been = 8,40,000
It is actually = 8,00,000

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(iii) Increase in Contribution due to Cost Reduction = ` 40,000

Reconciliation `
Contribution in Yr. 1 4,00,000
Increase due to selling price increase 2,80,000
Increase due to increase in volume 1,60,000 40,000
Increase due to cost reduction
Contribution in Yr. II 8,80,000

Q.8. A company manufactures a product currently utilizing 80% capacity with a turnover of
32,000 units at a selling price of ` 25 per unit. The variable cost of the product is ` 17.5
per unit. Fixed cost amounts to ` 1,50,000 up to 80% of level of output and there will
be an additional cost of a supervisor amounting to ` 20,000 beyond that level.
Calculate:
(i) Activity level (%) at break-even point
(ii) Number of units to be sold to earn a net income of IO% of sales
(iii)Activity level (%) to earn a profit of `1,00,000

[CMA Inter June 2013, Marks 10]

Answer:
Selling Price = 25
Variable Cost = 17.5
Contribution = 7.5

(i) BEP (units) = Fixed Cost / Contribution per unit = 1,50,000/7.5 = 20,000 units
80% activity = 32000 units. Hence, 100% level = 32,000/0.8 = 40,000 units Activity Level at
BEP = 20,000/40,000 = 50%

(ii) Let x be the number of units to get 10% of sales as profit. 10% * 25 * x = 7.5x – 1,50,000 2.5x =
7.5x – 1,50,000.
5x = 1,50,000
X = 30,000, which is <32,000. Hence no additional supervision.

In the next range,

2.5x = 7.5x – 1,70,000

5x = 1,70,000
X = 1,70,000/5 = 34,000.

At 30,000 units and 34,000 units, there will be 10% of sales as profit.
At 30,000 units, sales = 7,50,000. Profits = 75,000.
At 34,000 units, sales = 8,50,000. Profits = 85,000.

(iii) No. of units to earn a profit of ` 1,00,000

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7.5x – 1,50,000 = 1,00,000

X = 2,50,000/7.5 = 33,333 which exceeds 32,000 units.
Hence fixed costs = 1,70,000.
X = 2,70,000/7.5 = 36,000 units.
Activity Level = 36,000/40,000 = 90%

Q.9. Gupta Enterprises is operating at 60% capacity level producing and selling 60,000 units @ ` 100 per unit.
Other relevant particulars are given below:

Cost per units

Material 40
Conversion Cost (variable) 20
Dealer’s margin (10% of sales) 10

Fixed cost for the period is ` 12,00,000.

As there is a stiff competition, it is not possible to sell all the products at the existing cost price structure.
The following alternative proposals are considered:

First proposal (i) Decrease selling price by 20%.

Second Proposal (ii) Increase dealers’ margin from 10% to 20%.

Select the better alternative.

Also calculate the sales volume required to maintain the same amount of profit under the alternative, which
is considered better assuming that volume of sales will not be a limiting factor under such an alternative.
Also assume that fixed cost will remain constant.

[CMA Inter December 2014, Marks 10]

Answer:
Computations under existing conditions

Contribution per unit = Unit selling price – Unit variable cost

= ` 100 – (` 40 + 20 + 10) = ` 30
Contribution for sale of 60,000 x ` 30 = ` 18,00,000

Profit = Contribution – Fixed cost = 18,00,000 – 12,00,000 = ` 6,00,000

Computation under 1st alternative

(i.e., when selling price is decreased by 20%)

Revised selling price per unit (` 100 – 20% of ` 100) = ` 80

Variable cost per unit = ` 70
Revised contribution per unit = ` 10
P/V Ratio = Contribution X 100 = 10 X 100 = 12.5%

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Sales 80

BEP Sales in Rs. = Fixed Cost

P/V Ratio
= 12, 00,000
12.5%
= 96,00,000

Computation under 2nd alternative

(i.e., when dealer’s margin is increased to 20%)

`
Selling price per unit 100
Revised variable cost per unit ( ` 40+20+20) 80
Revised contribution 20

Contribution 20
P/V Ratio = x 100 = x 100 = 20%
Sales 100

From the above result it appears that P/V Ratio under the second alternative is higher than that
under the first alternative. Also breakeven point under the second alternative sets at a lower level
than under the first alternative. Therefore, second alternative i.e., increasing dealer’s margin to 20%
is better both in terms of profitability (as reflected from P/V ratio) and risk (as reflected from BEP).

If the second alternative is selected, the required volume of sales to maintain the same profit i.e.,
6,00,000

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Q.10. A company manufactures an Engineering product utilizing 90% capacity and produces 10800 units at a
selling price of ` 500 per unit.
The following per unit Cost data are given:
`
Raw Material 200
Direct Labourcost 60
VariableOverhead 40
VariableFactory Overhead 40
Dealers commission 20% on selling price
Fixed Cost 5,50,000 per annum

The company was able to sell the entire products in the market to meet the demand

of Local customers. Local market demand was for 10,800 units only.

Now, one of the dealers is willing to purchase additional 1200 units provided selling price is reduced to ` 400
per unit and he is also wiling to sacrifice 50% of his normal commission. Since the company has balance
capacity of 10%, Management has expressed willingness to consider the proposal. Fixed costs will remain
unaltered.
Management wants your views about the proposals.

[CMA Inter December 2014, Marks 10]

Answer:

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Q.11. M/s Northern Industries specialises in the manufacture of small capacity motors. The

Fixed overheads of the company ` 3,00,000 per annum. The sale price of the motor is `400 each.
(i) Determine the number of motors that have to be manufactured and sold in a year in
order to break-even.
(ii) How many motors have to be made and sold to make a profit of ` 1,20,000 per year.
If the sale price is reduced by ` 20 each, how many motors have to be sold to break-even?

[CMA Inter December 2014, Marks 10]

Answer:
Calculation of contribution per motor:

(` )
Selling Price 400
Variable Cost:
Material 100
Labour 160
V Overhead (50% of Labour) 80
Total 340
Contribution 60

(a ) Calculation of break even quantity

Fixed over head 3, 00,000
= = 5000 Motors
Contribution per unit 60

= = 7000 Motors

(b) Calculation of Break-even point of selling price is reduced by ` 20 each.

Contribution per motor = (400 – 20) – 340

= 380 – 340 = 40
Break-even (R) = = 7,500 motors

Q.12. M/s Shrama Engineering Ltd. has just received an export order for its product which will
require use of 50% of the factory’s total capacity, which is estimated at 5,00,000 units. The condition
of export order is that it has to be accepted in full only.
The factory is currently operating at 60% level to meet the demand of domestic market where sale
price per unit is ` 6. The export offer is at ` 4.70 per unit, which is

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less than the total cost of current production per unit as follows:
`
Direct Material 2.00
Direct Labour 1.50
Variable Expenses 0.50
Fixed overhead 1.00
Total cost 5.00

The company has the following options:

(i) Accept the export order and cut back domestic sales as necessary.
(ii) Remove the capacity constraint by installing necessary balancing equipment
and also by working overtime to meet both domestic and export demand. This decision will
increase fixed overhead by ` 20,000 and additional cost for overtime work will be for `
35,000.
You are required to prepare a statement of costs & profits under each of above two options and advise the
management suitably.

[CMA Inter December 2014, Marks 10]

Answer:
Fixed overhead @ ` 1 per unit

So, Fixed overhead : 60% of 5,00,000 x 1 = ` 3,00,000

repeated in future it may create under utilization of capacity.

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Q.13. A plant that manufactures tiffin boxes has an installed capacity of 1,20,000 units per
year distributed evenly over each calendar month. The following is the cost structure
of the product:

Raw Material ` 20 per unit

Direct Labour ` 12 per unit
Direct Expenses ` 2 per unit
Variable overheads ` 16 per unit
Fixed overhead ` 3,00,000 per annum (i.e. ` 1,50,000 per half year)

Semi-variable overheads:` 7500 per month up to 50% capacity and an additional` 2500 per
month for every additional 25% capacity utilization or part thereof.
The plant will operate at 50% capacity during the first 6 months of the calendar year
2014 and at 100% capacity in the remaining months.
The selling price for the period from 1 st January to 30th June was fixed at ` 70 per unit.
The firm wishes to revise the selling price for the next half year, which should be fixed
effective 1st July to achieve a total profit of ` 9, 00,000 during 2014.
You may assume that whatever is produced is sold and that the market is likely to
absorb the production after the revision in price.
You are required to prepare a statement showing the element wise total cost and profit for
each half year and the revised selling price in the second half of the year to achieve the
overall annual profit of ` 9,00,000 in 2014. Compute the semi-variable and fixed cost per unit
for each of the half yearly periods.

[CMA Inter June 2014, Marks 8]

Answer:
Variable Cost per unit = 20 + 12 + 2 + 16 = 50
st
Selling Price 1 half year = 70
Contribution p.u. (January to June) = 20

Contribution per unit required in July – December = 12.

Hence, selling price = 12 + 50 = 62 ` per unit should be fixed in the second half of the year.

Q.14. M/s Starlight Co. Ltd. specialises in the manufacturing of small components. Cost
structure is given below:
Material `60 (per unit)
Labour `100 (per unit)

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Variable cost 75% of Labour Cost

Fixed over head of the Co, `3 lakhs per annum. Unit price of small component is ` 260.
(i) Determine the number of components that have to be manufactured and sold in a year
in order to break-even.
(ii) How many components have to be manufactured and sold to make a profit of `1 lakh
(one lakh) per year?
If the sale price is reduced by `20 per unit, how many components have to be sold to break
even?
[CMA Inter June 2015, Marks 10]

Answer:
(i)
Sales Price per unit `260

Less variable cost per unit: -

Material `60

Labour `100

V. of Head (75% labour) 75 `235

Contribution per unit `25

Fixed cost `3,00,000

FC 3,00,000
Break even (unit) ------ = --------------------
C 25 12,000 Unit

(ii) Fixed overhead = `3,00,000

Required Profit = `1,00,000
Revised total contribution required = `4,00,000
Breakeven (units) = 16,000 units

(iii) If sale price is reduced by `20 per unit:

Revised contribution –
S. P. = `240

Less V. C. = `235

Contribution = `5 (per unit)

Q.15. M/s Zenith Co. Ltd. operating at normal capacity produces 1,00,000 units of a product which
supplies the following particulars:

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Particulars (`) Per unit

Direct Materials 32
Direct labour 12
Variable overhead 16
Fixed overhead 15
75

Sale Price per unit `100.

In addition, selling and distribution cost of ` 5 per unit is incurred for selling each unit of
product.
As the company faces recession in the market, the Marketing Department desires to
produce only 5000 units.
But, management is of the opinion to shut down the plant.
If the plant is shutdown the loss due to fixed cost could be avoided for ` 4,00,000, but the
committed unavoidable cost would be estimated at ` 2,95,000.
Required: Advise whether the plant should be shut down or not.
[CMA Inter June 2015, Marks 10]

Answer:

`
Fixed cost 15,00,000
Less: avoidable fixed cost 4,00,000
11,00,000
Add: Addl. Fixed cost 2,95,000
Shutdown cost 13,95,000

Advice: It is apparent that the shutdown costs is higher; (`13,95,000 – `13,25,000) = 70,000.

So, it is not justified to Shut down.

Q.16. ABC Ltd. has furnished the following data for the two years:

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Particulars 2015-16 2016-17

Sales (`) 10,00,000 ?
Profit/Volume Ratio 50% 37.5%
Margin of safety sales as a % of total sales 40% 21.875%
There has been substantial savings in the fixed cost in the year 2016-17 due to the restructuring
process. The company could maintain its sales quantity level of 2015-16 in 2016-2017 by reducing
the selling price.

You are required to calculate the following values (in `):

(i) Sales for 2016-17

(ii) Break-even sales for 2016-17
(iii)Fixed cost for 2016-17

[CMA Inter June 2017, Marks 8]

Answer:
In 2015, P/V ratio = 50%
Variable cost ratio = 100%-50% = 50%
Variable cost in 2015 – 2016 = ` 10,00,000 50% = ` 5,00,000
In 2016 - 2017, sales quantity has not changed. Thus Variable Cost in 2016 – 2017 is ` 5,00,000.
In 2016 - 2017, P/V ratio = 37.50%
Thus, Variable Cost ratio = 100%-37.5% = 62.5%
(i) Thus sales in 2016 - 2017 = 5,00,000/62.5% = ` 8,00,000 At break-even point, Fixed Cost is equal to
contribution.
In 2016 - 2017 Break-even Sales = 100%-21.875% = 78.125%
(ii) Break-even sales = 8,00,000 78.125% = `6,25,000
(iii) Fixed Cost of 2016 - 2017= B.E. sales × P/V ratio
= 6,25,000 37.50% = `2,34,375

Q.17. A firm can produce three different products from the same raw material using the same
production facilities. The requisite labour is available in plenty at ` 8 per hour for all
products. The supply of raw material, which is imported at `8 per Kg is limited to 10,400
kg. for the budget period. The variable overheads are ` 5.60 per hour. The fixed overheads
are ` 50,000. The selling commission is 10% on sales.

From the following information, you are required to suggest the sales mix which will maximize the
firm's profits. Also determine the profit that will be earned at the level:

Product Market Demand Selling Price Per Labour (Hours Raw Material (Kg
(units) unit (`) Required per unit) Required per unit)
X 8,000 30 1 0.7
Y 6,000 40 2 0.4
Z 5,000 50 1.5 1.5
[CMA Inter June 2017, Marks 7]

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Answer:
Marginal Profitability Statement
Particulars Production
X(`) Y(`) Z(`)
Direct Materials 5.60 3.20 12.00
Direct Labour 8.00 16.00 12.00
Variable Production Overheads 5.60 11.20 8.40

Q.18. Following particulars relate to a manufacturing factory for the month of March, 2017
Variable cost per unit Rs. 14 Fixed factory overhead Rs. 5,40,000
Fixed selling overhead Rs. 2,52,000
Sales price per unit Rs. 20
(i) What is the break-even point expressed in rupee sales?
(ii) How many units be sold to earn a target net income of Rs. 60,000 per month?
(iii) How many units must be sold to earn a net income of 25% on cost?
(iv) What should be the selling price per unit if break-even point is to be brought down to
120000 units?

[CMA Inter December 2017, Marks 8]

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Answer:

Q.19.

[CMA Inter December 2017, Marks 7]

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Answer:

Q.20. ANKIT LTD. a manufacturing Company which produces three products furnishes the

three products. Raw material is in 'Short Supply'. The firm has a quota for the supply of
raw materials of the value of Rs. 36 lakhs for the year 2016-17 for the production of
three products to meet sales demand.

Required:
Determine the optimal product mix and ascertain the maximum profit therefrom.

[CMA Inter June 2018, Marks 8]

Answer:
(a) Marginal Cost Statement

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Q.21. The following figures are obtained from the records of P. Ltd.:

2015-16 (Rs.) 2016-17 (Rs.)

Sales 80,000 1,00,000
Net Profit 10,000 16,000

Required: Calculate the following:

(i) Profit Volume Ratio

(ii) Break Even Point

(iii) Profit or loss at sales of Rs. 40,000

(iv) Sales required to earn a profit of Rs. 22,000

(v) Margin of Safety if sales is Rs. 55,000

[CMA Inter June 2018, Marks 7]

Answer:

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Q.22. A company budgets for a production of 5 lakh units at a variable cost of Rs.20 each. The
fixed costs are Rs.20 lakh. The selling price is fixed to yield a profit of 25% on cost. You are
required to calculate
(i) P/V Ratio and Break- even point.
(ii) If the selling price is reduced by 20%,
Ascertain:
(A) The effect of price reduction on the P/V Ratio and BEP.

The number of units required to be sold at the reduced selling price to obtain an increase of 20%
over the budgeted profit.
[CMA Inter December 2018, Marks 8]

Answer:

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Q.23.AVONA LTD., a toy factory presents the following information for the year
ended 31st
March, 2018:
Rs.
Material cost 1,20,000
Labour cost 2,40,000
Fixed overheads 1,20,000
Variable overheads 60,000
Units produced 12,000
Selling Price per Unit 50

The available capacity is a production of 20000 units per year. The firm has an offer for
the purchase of 5000 additional units at a price of Rs.40 per unit. It is expected that by
accepting this offer there will be a saving of rupee one per unit in material cost on all units
manufactured, the fixed overhead will increase by Rs.35,000 and the overall efficiency will
drop by 2% on all production.
State whether offer is acceptable or not.

[CMA Inter December 2018, Marks 7]

Answer:

Analysis: With the acceptance of special offer of 5,000 Units, the Profit is increased by
Rs. 200 (i.e. Rs. 60,200 – Rs. 60,000). Hence, the firm can accept the special offer.

Analysis: With the acceptance of special offer of 5,000 Units, the Profit is increased by Rs. 200 (i.e. Rs. 60,200 –
Rs. 60,000). Hence, the firm can accept the special offer.

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[Working Notes as under may be shown separately or as shown in above table “Profitability

Alternative
Labour Cost if taken at Rs.20.41 in the working. An alternative answer with an incremental approach lead to
the same analysis.

PARTICULARS Amount in
Rs.
Sales (5000*40) 2,00,000
Less: Variable Cost:
Direct Materials (DM)(5000*9) 45,000
Direct Labour (DL)(5000*20)/0.98 1,02,041
Variable Overheads (VO/Hs)(5000*5) 25,000
Contribution 27,959
Add :Savings in Materials (12000*1) 12,000
Less: Additional Labour Cost (ADLC) (12000*0.41) 4,920
Less: Increase in Fixed cost 35,000
Net Surplus 39
Decision : It is better to Accept the offer

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Q.24. MODERN LTD. has three departments X, Y and Z, each of which makes a different product.
The budgeted data for the coming year are as follows:

is a possibility of reducing fixed cost by Rs. 1,50,000 if department 'Z' is closed down.
Advise the management whether or not department 'Z' should be closed down.
[CMA Inter June 2019, Marks 8]

Answer:
Statement of Profit before closing Department ‘Z’
Amount (Rs.)
Particulars X Y Z Total
(i) Sales 22,40,000 11,20,000 16,80,000 50,40,000

Advice: From the comparative profitability statements stated supra, it is clear that profit is decreased by Rs.
2,42,000 that is (Rs. 12,60,000 –Rs.10,18,000) by closing down Department 'Z'. Therefore, it should not be closed
down.

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Q.25. SRIJAN LTD. had incurred fixed expenses of Rs. 9,00,000 with sales of Rs. 20,00,000 and
earned a profit of Rs. 3,00,000 during the first half-year. In the second-half, it suffered a loss of Rs.
1,50,000.
Required:
Calculate the following:
(i) The P/V Ratio, Break Even Point and Margin of Safety for the first half-year.
(ii) The expected sales amount for the second half-year assuming that the selling price and
fixed expenses remained unchanged during the second half-year.
(iii) The Break Even point and Margin of Safety for the whole year.
[CMA Inter June 2019, Marks 7]

Answer:
(i) P/V Ratio = (Contribution/ Sales) × 100
Where, Contribution = Fixed Cost + Profit = Rs. 9,00,000 + Rs. 3,00,000 = Rs.
12,00,000
P/V Ratio = (Rs. 12,00,000 / 20,00,000) × 100 = 60%
Break Even Point = (Fixed Cost)/ (P/V Rtio)
= Rs. 9,00,000/ 60% = Rs. 15,00,000
Margin of Safety = Sales- Break Even Point
= Rs. 20,00,000 – Rs. 15,00,000 = Rs.5,00,000
Or Margin of Safety = (Profit)/ (P/V Ratio) = Rs. 3,00,000/60% = Rs.5,00,000

(ii) Contribution during the second half-year = Fixed Cost + Profit

= Rs. 9,00,000 + (- Rs. 1,50,000) = Rs. 7,50,000
Expected Sales = (Contribution) / (P/V Ratio)
= Rs. 7,50,000/60% = Rs.12,50,000

(iii) Break Even Point for the whole year = Fixed Cost for the whole year/(P/V Ratio)
= Rs. 18,00,000/60% = Rs. 30,00,000
Margin of Safety = Sales- Break Even Point
= Rs. 32,50,000 – Rs. 30,00,000 = Rs.2,50,000
Or Margin of Safety = (Profit)/ (P/V Ratio) = Rs. 1,50,000/60% = Rs.2,50,000

Q.26. PANCHAL LTD, a toy manufacturer earns an average net profit of Rs. 1.80 per piece on a
selling price of Rs. 16.50 by producing and selling 12000 pieces or 60% of the capacity. His
cost of sales per toy is as under:
Amount (Rs.)
Direct material 4.25
Direct wages 1.60
Works Overheads (40% fixed) 7.15
Sales Overheads (30% fixed) 0.90

During the current year, he intends to produce the same number of toys but anticipates
that fixed cost will go up by 10%. Direct wages and material will increase by 6% and 4%

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respectively but he has no option of increasing the selling price. Under this situation, he
obtains an offer for further sale of 20% of the capacity.

Required:
What minimum price you will recommend for acceptance of the offer to ensure the
manufacturer an overall profit of Rs. 30,100?
(Show your calculations upto 3 decimal points.)
[CMA Inter December 2019, Marks 8]
Answer:

Computation of the selling price of the offer:

Particulars Amount (Rs.)
Variable Cost of order (4,000 Units/Pieces Rs. 11.836 47,344
Add: Required Profit (Rs. 30,100 – Rs. 14,652) 15,448
Sales required (in Rs.) 62,792
Selling Price per Unit/Piece of the order = Rs. 62,792 / 4,000 Units/ Pieces 15.698 say
Rs. 15.70

ALTERNATIVE ANSWER :6 (a)

Computation of Profit at present after increase in Cost
Particulars Amount (Rs.)
I Net Profit per Piece 1.80
II Total Pieces 12,000
III Total Net Profit (I II) 21,600
IV Increased Direct Material Cost ( Rs.4.25 4%) 12,000 2,040
V Increased Direct Wages Cost ( Rs.1.60 6%) 12,000 1,152
VI Increased Works Overhead [{ ( Rs.7.15 40%) 12,000} 10%] 3,432
VII Increased Sales Overhead [{( Rs.0.90 30%) 12,000} 10%] 324
VIII Net Profit after increase in Cost {III – (IV +V v + VI + VII)} 14,652

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IX Expected Net Profit 30,100

X Net Profit required to be earned (IX – VIII) 15,448

Computation of Selling Price of the Offer:

Particulars Amount (Rs.) Amount (Rs.)
I Variable Cost:
Material (4.25 104) / 100 4.420
Wages (1.60 106) / 100 1.696
Works Overheads (60% of Rs. 7.15) 4.290
Sales Overheads (70% of Re. 0.90) 0.630
Other Variable Cost 0.800 11.836
II Profit Per Piece (Rs. 15,448 / 4,000 Pieces) 3.862
III Selling Price per Piece of the order ( I + II) 15.698
Say Rs. 15.70

Q.27. The following data pertaining to sales and profit are extracted from the records of READYAAH
LTD. for two years:
Sales Profit
Year 2017 Rs. 12,00,000 Rs. 80,000
Year 2018 Rs. 14,00,000 Rs. 1,30,000

Required:
Calculate the following:
(i) P/V Ratio
(ii) Break Even Point
(iii) Profit when sales are Rs. 18,00,000
(iv) Sales required to earn a profit of Rs. 1,20,000
(v) Margin of safety in the year 2018.
[CMA Inter December 2019, Marks 7]
Answer:

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Q.28. ESPM Ltd sold 5,50,000 units of its product at Rs 75 per unit. Variable costs are Rs35 per unit
(manufacturing costs of Rs 28 and selling cost Rs 7 per unit). Fixed costs are incurred uniformly
throughout the year and amount to Rs 70,00,000 (including depreciation of Rs 30,00,000). There is
no opening or closing stock.

(i) Estimate the breakeven sales level quantity and cash breakeven sales level quantity.

(ii) What is the P/V ratio ?

(iii) The sales level to be achieved an after-tax income (PAT) of Rs 5,00,000 would be how much?
(Assume 40% corporate Income Tax rate).

[CMA Inter December 2021, Marks 6]

Answer:
(i) Break even Sales Quantity = 1,75,000 units Cash Break even sales Quantity = 1,00,000 units
(ii) P/V ratio = 53.33% or 53.33333
(iii) Sales level to achieve an after‐tax income (PAT) of Rs.5,00,000 = Rs.1,46,87,500

Q.29. QBZ Limited produces and sells a single product. Sales budget for calendar year 2020 by a
quarter is as under:

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The year is expected to open with an inventory of 12,000 units of finished

products and close with inventory of 16,000 units. Production is customarily
scheduled to provide for 70% of the current quarter’s sales demand plus 30% of
the following quarter demand. The budgeted selling price per unit is Rs 80 . The
standard cost details for one unit of the product are as follows:
Variable Cost Rs 69.00 per unit
Fixed Overheads @ Rs 4 per hour based on a budgeted production volume of 2,20,000 direct
labour hours for the year.
Fixed overheads are evenly distributed through-out the year.
(i) What is the Budgeted Total Production (in unit) for the year 2020?
(ii) In which quarter of the year, company expected to achieve break-even point?
[CMA Inter December 2021, Marks 6]
Answer:
(i) Budgeted Total Production for the year 2020 = 1,88,000 units
(ii) The company will break even in the end of Second Quarter
The total sales by the end of Quarter 2 will be 80,000 units i.e. (36,000 +
44,000). Hence the Company will break-even in the end of Second Quarter.

Q.28. SUBN Ltd. a single-product company sells its products at 60 per unit. In 2021, the
Company operated at a margin of 40%. The Fixed Costs amounted to ₹ 3,60,000 and the
Variable cost ratio to sales was 80%.
In 2022, it is estimated that the variable cost will go up by 10% and the fixed costs will
Increase by 5%.
Required:
Find the selling price required to be fixed in 2022 to earn the same P/V ratio as in 2021.
Assuming the same selling price of 60 per unit in 2022, find the number of units
Required to be produced and sold to earn the same profit as in 2021.
[CMA Inter December 2022, Marks 8]
Answer:
Selling price required to be fixed in 2022 = ₹ 66

Number of Units to be produced and sold in 2022 = 85834 units

Q.29. PANT Ltd., producing single product sells it at 50 per unit variable cost is 35, and the fixed
cost amount to 12 lakh annum.
With this data, you are required to calculate the following treating each independent of the other.
(i) P/V ratio and break-even sales
(ii) New Break-even sales if variable cost increases by 3 per unit, without an increase in selling
price
(iii) Increase in sales required if profit are to be increased by 204 lakhs
(iv) Percentage increase/decrease in sales volume units to off-set
I. An increase of 3 in the variable cost per unit
II. A 10% increase in selling price without affecting existing profits quantum

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[CMA Inter December 2022, Marks 7]

Answer:
(i) P/V Ratio and Break Even Sales = 30% and ₹ 40 Lakhs
(ii) New Break-even sales = ` 50 Lakhs
(iii) Increase in Sales = ` 8 Lakhs
(iv) I- Increase in Sales Volume = 25%
II- Decrease in Sales Volume = 25%

Q.30. M/s Moon Light Ltd. Produces three product A,B and C and furnishes the following
information for the year 2022-23
Particulars Products
A B C
Selling Price per unit 500 375 250
Profit Volume Ratio 12% 20% 40%
Raw Material content as a % of 50% 50% 50%
Variable Cost
Maximum Market Demand 22,000 20,000 12,000
(units)

Fixed costs are estimated at 20 lakhs. The firm uses same raw material in all the three products.
Raw material is in ‘Short Supply’. The firm has quota of the supply of raw materials of the value of
61 lakhs for the year 2022-23 for the production of three products to meet sales demand.
Required:
Determine the optimal product mix and ascertain the maximum profit therefrom.
[CMA Inter June 2023, Marks 8]
Answer:
Optimal Product Mix:
Product A 10,000 units
Product B 20,000 units
Product C 12,000 units
Maximum Profit 13,00,000

Q.31. M/s PQR Ltd. Is a leading manufacturer of product ‘Alpha’. For the year 2022-23, it budget
for a production of 5 lakh units at a variable cost of 40 each. The fixed costs are 40 Lakhs. The
selling price is fixed to yield a profit of 25% on cost.

Calculate the following:

i. P/V Ratio and Bread-Even Point

ii. If the selling price is reduced by 20%, ascertain:
a) The effect of price reduction on the P/V Ratio and BEP.
b) The number of units required to be sold at the reduced price to obtain an increase of
10% over the budgeted profit.
[CMA Inter June 2023, Marks 7]

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Answer:
(i) BEP ( in units ) = 2,00,000 units
P/V Ratio = 33.33%
(ii)
(a) New BEP ( in units ) = 5,00,000 units
New P/V Ratio = 16.67%
(b) Sales (units) required = 13,25,000 units

Q.32. M/S Alpha Ltd. Manufactures a single product and has the following data for the year 2022:

Selling price per unit 200

Direct material cost per unit 54
Direct wages per unit 40
Fixed overheads 1,90,000
Variable overhead 50% of direct wages
Trade discount 5%

M/S Alpha Ltd. Approaches you as a qualified cost accountant and asks you to:

a) Advise the Profit Volume ratio of the company

b) Critically assess the Break-Even Sales (in units and in Rs.)
c) Evaluate the Margin of Safety (in Rs. And as % of sales)
d) Recommend the Net profit if sales are 10% and 20% above the Break-even
Volume
[CMA Inter June 2023, Marks 7]

Answer:
1. Profit/Volume Ratio = 40%
2. Break Even-Sales (in units) = 2,500 units
Break-Even Sales (in ₹) = ₹ 4,75,000
3. Margin of Safety (in value) = C 47,500 and ₹ 95,000
Margin of Safety (as % of sale) = 9.09% and 16.67%
4. Net Profit = D 19,000 and ₹ 38,000

Q.33. Mr. Lurvey is an umbrella manufacturer and marks an average Net Profit of Rs. 5 per piece
on a selling price of Rs. 28.60 by producing and selling 12,000 pieces or 60% of the capacity. His
cost of sales is-
Particulars Rs.
Direct material 7.00
Direct wages 2.50
Work overheads (50% fixed) 12.50
Sales overheads (25% variable) 1.60

During the current year, he intends to produce the same number but anticipates that fixed charges
will go up by 10% while direct labour rate and material will increase by 8% and 6% respectively but
he has no option of increasing the selling price.

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Under this situation, he obtains an offer for further 20% of the capacity. Mr. Lurvey approaches
you as a cost accountant and asks you to ADVICE the minimum price per unit for acceptance the
offer if he wants to ensure an overall profit of Rs. 70,000.
[CMA Inter June 2023, Marks 8]

Answer:
Minimum price per units for the offer = Rs. 23.365

CA CS PAVAN SHARMA (9175035823) UNIQUE ACADEMY