PREFACE TO THIS EDITION

CA INTERMEDIATE
This is a comprehensive book having thoroughly explained concepts with lucid and systematic
presentation of the subject matter. All attempts are made in this book to keep concept easier
to understand and remember with 100% coverage of institute materials.

COST
A special attention is given to presentation keeping in mind the examination needs to
the student. The book is primarily written exclusively for CA - Inter.

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

MANAGEMENT ACCOUNTING
Volume 1
A word to the students
My dear student, hard work is the key to success. Though smart work is publicized in today’s
world but to be smart, you have to work hard. So always be attentive in class and have
By thorough revision after the class. It is also important to be motivated and inspired for working
hard. The key for success is:
CA Namit Arora Sir
“Work hard in class, be attentive, grab the concepts
&
This book is dedicated to my Siblings Work smart during revision, select important questions for next
revision.”

Mr. Manik Arora (Brother)

&
Ms. Aarzoo Arora (Sister) ALL THE BEST
CA. NAMIT ARORA
 INTRODUCTION
INDEX 1. CA Intermediate Syllabus:

S.N. CHAPTER NAME PAGE NO. WEIGHTAGE

0 INTRODUCTION 0.1 – 0.2 -

1 MATERIAL COST 1.1 – 1.56 5 – 10

2 EMPLOYEE COST 2.1 – 2.44 5 – 10

3 OVERHEADS-ABSORPTION COSTING 3.1 – 3.55 5 – 10

METHOD

4 COST SHEET & UNIT COSTING 4.1 – 4.34 5 – 10

2. Study Pattern and Books:
5 JOB AND BATCH COSTING 5.1 – 5.23 5 – 10

6 ACTIVITY BASED COSTING 6.1 – 6.37 5 – 10

7 DIRECT EXPENSES 7.1 – 7.2 -

8 SERVICE COSTING 8.1 – 8.61 10

9 PROCESS & OPERATION COSTING 9.1 – 9.76 10

10 JOINT & BY PRODUCTS 10.1 – 10.37 5 – 10

11 BUDGETS & BUDGETARY CONTROL 11.1 – 11.39 5 – 10

12 STANDARD COSTING 12.1 – 12.59 5 – 10

13 MARGINAL COSTING 13.1 – 13.61 5 – 10

3. Cost and Management Accounting:
14 COST ACCOUNTING SYSYTEM 14.1 – 14.34 5 – 10 (a) Cost: It can be defined as the amount of expenditure (actual or notional) incurred on or
attributable to a specified article, product or activity.
15 RECONCILIATION 15.1 – 15.23 5 – 10
(b) Management Accounting: Management accounting is an integral part of management
function. It assists management by provision of relevant information for planning,
organising, controlling, decision making etc.

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

collections, analysis and presentation of data to provide the information needed to plan,
monitor and control costs.
 INTRODUCTION 0.2
4. Objectives of Cost Accounting:
(a) Ascertainment of Cost,
(b) Determination of Selling Price and Profitability,
(c) Cost Control,
(d)
(e)
Cost Reduction and
Assisting management in decision making. CHAPTER - 1
5. Elements of Cost:

MATERIAL COST
LEARNING OUTCOMES

After studying this chapter you will be able to

 State the meaning, need and importance of materials,
 Discuss the procedures and documentations involved in procuring,
storing and issuing material.
 Discuss the various inventory control techniques and determination
of various stock levels.
 Compute Economic Order Quantity (EOQ) and apply the EOQ to
determine the optimum order quantity.
6. Cost Sheet (Basic Understanding): A Cost Sheet or Cost Statement is a document which  Discuss the various methods of inventory accounting and Prepare
provides a detailed cost information.
stock ledger/ account.
Proforma Cost Sheet (Basic)  Identify and explain normal and abnormal loss and its accounting
Particulars Amount
Direct Material Cost XXX treatment.
Direct Employee Cost XXX
Direct Expenses XXX
Direct Cost/Prime Cost XXX
Production Overheads XXX
Administrative Overheads XXX
Selling and Distribution Overheads XXX
Total Cost XXX
Add: Profit XXX
Sales XXX
 MATERIAL COST 1.1 MATERIAL COST 1.2
ECONOMIC ORDER QUANTITY (EOQ) WITH DIFFERENT CASES EOQ =
2 AO
=
2 × 12 × 390 × 40
= 206.85 units
C 35 % × 25
BQ 1
Find out the Economic Order Quantity from the following information. Also state the number of orders to BQ 4
be placed in a year. Annual consumption of raw materials : 10,500 units
Consumption of materials per annum 10,000 kgs. Opening stock of raw materials : 1,000 units
Order placing cost per order `50 Company wants to maintain closing stock : 500 units
Ordering cost per order : `250
Cost per kg of raw materials `2
Purchase price per unit : `200
Storage cost 8% of average inventory
Carrying cost per unit : `10% per annum
Answer Determine Economic Order Quantity.
2AO 2 × 10 ,000 × 50
EOQ = = = 2,500 kgs
C 0.08 × 2 Answer
2 AO 2 × 10 ,000 × 250
EOQ = = = 500 units
No. of orders to be placed in a year = Annual consumption of RM ÷ EOQ C 10 % × 200
= 10,000 kgs ÷ 2,500 kgs = 4 orders p.a.
A = Annual purchase
BQ 2 = Annual Consumption + Closing Stock – Opening Stock
(a) Compute E.O.Q. and the total cost for the following: = 10,500 + 500 – 1,000 = 10,000 units
Annual Demand 5,000 units
Unit price `20.00 BQ 5
Order cost `16.00 Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1:4. The sales
Storage rate 2% per annum department has estimated a demand of 5,00,000 units for the product for the year. To produce one unit of
Interest rate 12% per annum finished product, 4 units of material A is required.
Obsolescence rate 6% per annum Stock position at the beginning of the year is as below:
Product X 12,000 units
(b) Determine the total cost that would result for the items if an incorrect price of `12.80 is used.
Material A 24,000 units
Material B 52,000 units
Answer
2AO 2 × 5 ,000 × 16 To place an order the company has to spend `15,000. The company is financing its working capital using a
(a) EOQ = = = 200 units bank cash credit @13% p.a. Product X is sold at `1,040 per unit. Material A and B is purchased at `150 and
C 20 × 20 %
`200 respectively.
Total cost = Purchase cost + Ordering cost + Carrying cost
A Compute economic order quantity (EOQ):
= (5,000 units × `20) + (ROQ × O) + (½ × ROQ × C)
(a) If purchase order for the both materials is placed separately.
5,000
= `1,00,000 + ( 200 × 16) + (½ × 200 × 20% of `20) = `1,00,800 (b) If purchase order for the both materials is not placed separately.

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

(a) Computation of EOQ when purchase order for the both materials is placed separately:
2 × 5 ,000 × 16
EOQ = = 250 units 2 AO
12 .80 × 20 % EOQ =
C
Total cost = Purchase cost + Ordering cost + Carrying cost 2 × 19 ,28 ,000 × 15 ,000
=
A
(5,000 units × `12.80) + (ROQ × O) + (½ × ROQ × C) Material A = = 54,462 units
13 % of 150
5,000
= `64,000 + ( 250 × 16) + (½ × 250 × 20% of `12.80) = `64,640
2 × 77 ,56 ,000 × 15 ,000
Material B = = 94,600 units
13 % of 200
BQ 3
The demand for a certain product is random. It has been estimated that the monthly demand of the product (b) Computation of EOQ when purchase order for the both materials is not placed separately:
has a normal distribution with a mean of 390 units. The unit price of product is `25. Ordering cost is `40 per
order and inventory carrying cost is estimated to be 35% per year. 2 × (19 ,28 ,000 + 77 ,56 ,000 )× 15 ,000
Material A & B = = 1,08,452 units
13 % of 190
You are required to calculate EOQ.
19,28,000
Answer Material A = 1,08,452 × = 21,592 units
19,28,000+77,56,000
 MATERIAL COST 1.3 MATERIAL COST 1.4
Material B = 1,08,452 ×
77,56,000
= 86,860 units The company has been offered a quantity discount of 4% on the purchase of ‘Alpha’ provided the order size is
19,28,000+77,56,000 4,000 components at a time.
Working notes: Required:
1. Calculation of annual requirement to be purchased of Material A and B: 1. Compute the economic order quantity
2. Advise whether the quantity discount offer can be accepted.
Annual production of Product X = Annual demand – Opening stock
= 5,00,000 – 12,000 = 4,88,000 units Answer
Annual requirement for RM = Annual production × Material per unit – Opening stock 1. EOQ =
2AO
=
2 × 8 ,000 × 200
= 200 units
C 20 % × 400
Material A = 4,88,000 × 4 units – 24,000 units = 19,28,000 units
Material B = 4,88,000 × 16 units – 52,000 units = 77,56,000 units 2. Evaluation of 4% discount offer
At EOQ (order At order size
2. Calculation of Average Purchase Price: Particulars
size 200 units) 4,000 units
(150 ×19,28,000)+(200×77,56,000) Purchase cost 8,000 units @ `400/`384 per unit 32,00,000 30,72,000
Average Purchase Price = = `190
19,28,000+77,56,000 Ordering cost (A/ROQ × `200) 8,000 400
Carrying cost (½ × ROQ × C) (C = 20% of `400/`384) 8,000 1,53,600
BQ 6 Total cost 32,16,000 32,26,000
Anil & Company buys its annual requirement of 36,000 units in 6 installments. Each unit costs `1 and the
ordering cost is `25. The inventory carrying cost is estimated at 20% of unit value. FIND the total annual cost Advise: The total cost of inventory is lower if EOQ is adopted. Hence, the company is advised not to accept the
of the existing inventory policy. Calculate, how much money can be saved by Economic Order Quantity? quantity discount.

Answer BQ 8
1. Total Annual cost in Existing Inventory Policy: Purchase manager has decided to place orders for minimum quantity of 500 units of a particular item in order
to get a discount of 10%. From the records, it was found out that in the last year, 8 orders each of 200 units
A have been placed. Ordering cost is `500 per order, inventory carrying cost 40% of the inventory value and the
Ordering cost = ×O = 6 × `25 = `150
ROQ purchase cost per unit is `400.
Carrying cost = ½ × ROQ × C = ½ × 6,000 × 0.20 = `600 Is the purchase manager justified in his decision? What is the effect of his decision to the company?
Total = `150 + `600 = `750
Answer
Evaluation of 10% discount offer
2. Total Annual cost in EOQ:
Particulars At ROQ 200 units At ROQ 500 units
A 36 ,000 1. Purchase cost 1,600 units @ `400/`360 per unit 6,40,000 5,76,000
Ordering cost = ×O = × `25 = `300
ROQ 3,000 2. Ordering cost:
Number of orders 1,600 ÷ 200 = 8 1,600 ÷ 500 = 3.2 or 4
Carrying cost = ½ × ROQ × C = ½ × 3,000 × 0.20 = `300
Ordering cost (number of orders × `500) 4,000 2,000
Total = `300 + `300 = `600 3. Carrying cost (½ × ROQ × C) (C = 40% of `400/`360) 16,000 36,000
Total cost (1+2+3) 6,60,000 6,14,000
Saving in cost = `750 - `600 = `150
Yes, Purchase manager justified in his decision and cost would reduce by `46,000 (`6,60,000 – `6,14,000)
Working Note:
Working Note:
2AO 2 × 36 ,000 × 25
EOQ = = = 3,000 Units Annual requirement of Raw Materials = 200 units × 8 orders = 1,600 units
C 20 % × 1

LEVEL SETTING (VARIOUS STOCK LEVELS)

Note: As the units purchase cost of `1 does not change in both the computation, the same has not been
considered to arrive at total cost of inventory for the purpose of savings..
BQ 9
Two components, A and B are used as follows:
BQ 7
A Company manufactures a special product which requires a component ‘Alpha’. The following particulars are Normal usage 50 per week each
collected for the year 2023-24: Maximum usage 75 per week each
Minimum usage 25 per week each
Annual demand of Alpha 8,000 units
Re-order quantity A: 300; B: 500
Cost of placing an order `200 per order
Re-order period A: 4 to 6 weeks
Cost per unit of Alpha `400
B: 2 to 4 weeks
Carrying cost p.a. 20%
 MATERIAL COST 1.5 MATERIAL COST 1.6
Calculate for each component (a) Re-ordering level, (b) Minimum level, (c) Maximum level, (d) Minimum usage + Maximum usage
2. Average usage =
Average stock level. 2
Minimum usage + 20 units
15 units =
Answer 2
(a) Re-ordering level = Maximum usage per week × Maximum delivery period Minimum usage = 10 units per day
Component A = 75 units × 6 weeks = 450 units
Component B = 75 units × 4 weeks = 300 units BQ 11
From the details given below, calculate:
(b) Minimum level = Re-order level – (Normal usage × Average period) (i) Re-ordering level, (ii) Maximum level, (iii) Minimum level and (iv) Danger level.
Component A = 450 units – (50 units × 5 weeks) = 200 units
Component B = 300 units – (50 units × 3 weeks) = 150 units Re-ordering quantity is to be calculated on the basis of following information:

(c) Maximum level = Re-order level + Re-order quantity – (Min. usage × Minimum period) Cost of placing a purchase order is `4,000
Component A = (450 units + 300 units) – (25 units × 4 weeks) = 650 units Number of units to be purchased during the year is 5,00,000
Component B = (300 units + 500 units) – (25 units × 2 weeks) = 750 units Purchase price per unit inclusive of transportation cost is `50
Annual cost of storage per unit is `10
(d) Average stock level = ½ (Minimum stock level + Maximum stock level)
Component A = ½ (200 units + 650 units) = 425 units Details of lead time: Average 10 days, Maximum 15 days, Minimum 5 days and for emergency purchases 4
Component B = ½ (150 units + 750 units) = 450 units days
Rate of consumption: Average 1,500 units per day and Maximum 2,000 units per day
BQ 10
Cost of placing a purchase order : `20 Answer
Number of units to be purchased during the year : 5,000 units (i) Re-ordering Level = Maximum usage × Maximum lead time
Purchase price inclusive of transportation cost : `50 per unit = 2,000 units per day × 15 days = 30,000 units
Annual cost of storage : `5 per unit
(ii) Maximum Level = ROL + ROQ – (Minimum usage × Minimum lead time)
Details of lead time: = 30,000 units + 20,000 units – (1,000 units per day × 5 days)
Average : 10 days = 45,000 units
Maximum : 15 days
Minimum : 5 days (iii) Minimum Level = ROL – (Average usage × Average lead time)
For emergency purchases : 4 days = 30,000 units – (1,500 units per day × 10 days) = 15,000 units
Rate of consumption:
(iv) Danger Level = Average usage × Lead time for emergency purchases
Average : 15 units per day = 1,500 units per day × 4 days = 6,000 units
Maximum : 20 units per day
Working Notes:
On the basis of above information, you are required to calculate: 2AO 2 × 5,00 ,000 × 4 ,000
(i) Re-ordering level, (ii) Maximum level, (iii) Minimum level and (iv) Danger level. 1. ROQ = = = 20,000 units
C 10

Answer Minimum usage + Maximum usage

2. Average usage =
(i) Re-ordering Level = Maximum usage × Maximum lead time 2
= 20 units per day × 15 days = 300 units Minimum usage + 2,000 units
1,500 units =
2
(ii) Maximum Level = ROL + ROQ – (Minimum usage × Minimum lead time) Minimum usage = 1,000 units per day
= 300 units + 200 units – (10 units per day × 5 days)
= 450 units BQ 12
A Company uses three raw materials A, B, and C for a particular product for which the following data apply:
(iii) Minimum Level = ROL – (Average usage × Average lead time)
= 300 units – (15 units per day × 10 days) = 150 units Usage for one ROQ Price Delivery period (in weeks) ROL
RM Mini. level
unit of product (in kg) per kg Mini. Average Max. (in kg)
(iv) Danger Level = Average usage × Lead time for emergency purchases A 10 kg 10,000 0.10 1 2 3 8,000 -
= 15 units per day × 4 days = 60 units B 4 kg 5,000 0.30 3 4 5 4,750 -
C 6 kg 10,000 0.15 2 3 4 - 2,000 kg
Working Notes: Weekly production varies from 175 to 225 units, averaging 200 units of the said product.
2AO 2 × 5,000 × 20
1. ROQ = = = 200 units
C 5 What would be the following quantities?
 MATERIAL COST 1.7 MATERIAL COST 1.8
(i) Minimum stock of A (ii) Maximum stock of B (iii) Re-order level of C (iv) Average stock level of A (iv) Average level of Pi = Minimum stock level + ½ ROQ
= 4,000 + ½ × 10,000
Answer = 4,000 + 5,000 = 9,000 kg
(i) Minimum stock of A = ROL – (Average usage × Average lead time) Or
= 8,000 kg – [(200 units × 10 kg) × 2 weeks] = 4,000 kg =
Minimum stock + Maximum stock
2
(ii) Maximum stock of B = ROL – (Minimum usage × Minimum lead time) + ROQ 4 ,000 + 16 ,250
= 4,750 – [(175 units × 4 kg) × 3 weeks] + 5,000 = = 10,125 kg
2
= 9,750 – 2,100 = 7,650 kg Working Notes:
(iii) Re-order Level of C = Maximum re-order period × Maximum usage Max. Stock of Pi = ROL (Minimum usage × Minimum re-order period) + ROQ
= 4 weeks × 1,350 (225 units × 6 kg) = 5,400 kg = 8,000 kg – [(350 units × 5 kg) × 1 week] + 10,000 = 16,250 kg
Or
= Minimum stock of C + (Average usage × Average lead time) BQ 14
= 2,000 + [(200 units × 6 kg) × 3 weeks] = 5,600 kg A company manufactures 10,000 units of a product per month. The cost of placing an order is `200. The
purchase price of the raw material is `20 per kg. The re-order period is 4 to 8 weeks. The consumption of raw
(iv) Average level of A = Minimum stock level + ½ ROQ materials varies from 200 kg to 900 kg per week, the average consumption being 550 kg. The carrying cost of
= 4,000 + ½ × 10,000 inventory is 20% per annum.
= 4,000 + 5,000 = 9,000 kg
You are required to calculate:
Or
Minimum stock + Maximum stock 1. Re-order quantity 4. Minimum level
= 2. Re-order level 5. Average stock level.
2
4 ,000 + 16 ,250 3. Maximum level
= = 10,125 kg
2
Working Notes: Answer
2 AO 2 × *28 ,600 × 200
Max. Stock of A = ROL (Minimum usage × Minimum re-order period) + ROQ 1. Re-order quantity (ROQ) = = = 1,691 kgs
C 20 × 20 %
= 8,000 kg – [(175 units × 10 kg) × 1 week] + 10,000 = 16,250 kg
*Annual consumption (A) = Average Consumption per week × 52 weeks
BQ 13 = 550 kgs × 52 weeks = 28,600 kgs
A Company uses three raw materials Pi, Qu, and Ar for a particular product for which the following data apply:
2. Re-order level (ROL) = Maximum usage × Maximum re-order period
Usage for one ROQ Price Delivery period (in weeks) ROL = 900 kgs × 8 weeks = 7,200 kgs
RM Mini. level
unit of product (in kg) per kg Mini. Average Max. (in kg)
Pi 5 kg 10,000 0.10 1 2 3 8,000 - 3. Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)
Qu 2 kg 5,000 0.30 3 4 5 4,750 - = 7,200 kgs + 1,691 kgs – (200 kgs × 4 weeks)
Ar 3 kg 10,000 0.15 2 3 4 - 2,000 kg = 8,091 kgs
4. Minimum level = ROL – (Normal usage × Normal re-order period)
Weekly production varies from 350 to 450 units, averaging 400 units of the said product. = 7,200 kgs. – (550 kgs × 6 weeks) = 3,900 kgs

What would be the following quantities? 5. Average stock level = ½ (Minimum level + Maximum level)
= ½ (3,900 kgs + 8,091 kgs) = 5,995.5 kgs
(i) Minimum stock of Pi (ii) Maximum stock of Qu (iii) Re-order level of Ar (iv) Average stock level of Pi
Or
Answer = (Minimum level + ½ × ROQ)
(i) Minimum stock of Pi = ROL – (Average usage × Average lead time) = (3,900 kgs + ½ × 1,691 kgs) = 4,745.5 kgs
= 8,000 kg – [(400 units × 5 kg) × 2 weeks] = 4,000 kg
BQ 15
(ii) Maximum stock of Qu = ROL – (Minimum usage × Minimum lead time) + ROQ Shri Ram Enterprises manufactures a special product ZED. The following particulars were collected for the
= 4,750 – [(350 units × 2 kg) × 3 weeks] + 5,000 year:
= 9,750 – 2,100 = 7,650 kg
(a) Monthly demand of ZED 1,000 units (e) Minimum usage 25 units per week
(b) Cost of placing an order `100 (f) Maximum usage 75 unit per week
(iii) Re-order Level of Ar = Maximum re-order period × Maximum usage
(c) Inventory Carrying cost 15% per annum (g) Cost of material `100 per unit
= 4 weeks × 1,350 (450 units × 3 kg) = 5,400 kg
(d) Re-order period 4 to 6 weeks. (h) Normal usage 50 units per week
Or
= Minimum stock of C + (Average usage × Average lead time)
Calculate from the above:
= 2,000 + [(400 units × 3 kg) × 3 weeks] = 5,600 kg
1. Re-order-quantity. If the supplier is willing to supply 1,500 units at a discount of 5%, is it worth
accepting.
 MATERIAL COST 1.9 MATERIAL COST 1.10
2. Re-order level 3. Minimum Level 4. Maximum Level 5. Average Stock Level. Annual Re quirement 7 ,20 ,000
(ii) No. of orders per year = =
EOQ 3,893
Answer = 184.9 or 185 orders
2 × *2,600 × 100
1. Re-order quantity = = 186 units
15 (iii) Total cost of ordering and carrying:
Ordering cost = Number of orders × O
*Annual Requirement = 52 weeks × Normal usage of input units per week
= 185 × `240 = `44,400
= 52 weeks × 50 units per week = 2,600 units
Carrying cost = ½ × ROQ × C
Evaluation of 5% discount offer = ½ × 3,893 × 22.80 = `44,380.20
Particulars At EOQ 186 units At ROQ 1,500 units Total = `44,400 + `44,380.20 = `88,780.20
1. Purchase cost 2,600 units @ `100/`95 p.u. 2,60,000 2,47,000
2. Ordering cost: (iv) Normal usage per day = 7,20,000 packs ÷ 360 days = 2,000 packs
Number of orders 2,600 ÷ 186 = 13.97 or 14 2,600 ÷ 1,500 = 1.73 or 2
Ordering cost (number of orders × `100) 1,400 200 Present inventory = 10,000 packs
3. Carrying cost (½ × ROQ × C) 1,395 10,688 Present inventory = 10,000 packs ÷ 2,000 packs = 5 days
(C = 15% of `100/`95)
Total cost (1+2+3) 2,62,795 2,57,888 Normal lead time = 5 days

Advise: The total cost of inventory is lower if discount is adopted. Hence, it is worth accepting. Since, Present inventory level is equal to normal lead time; next order should be placed immediately
to avoid stock out situation.
2. Re-order Level = Maximum Re-order period × Maximum Usage
= 6 weeks × 75 units = 450 units BQ 17
The following data are available:
3. Minimum Level = ROL - (Normal usage × Average re-order period) Annual consumption : 24,300 units (360 days)
= 450 units - (50 units × 5 weeks) Cost per unit : `10
= 450 units - 250 units = 200 units Order cost : `40 per order
Inventory carrying cost : 24% per annum of average inventory
4. Maximum Level = ROL - (Minimum usage × Minimum re-order period) + ROQ Normal lead time : 18 days
= 450 units - (25 units × 4 weeks) + 186 units = 536 units Safety stock : 12 days consumption
You are required to find out:
5. Average Stock Level = ½ × (Minimum Stock Level + Maximum Stock Level)
= ½ × (200 units + 536 units) = 368 units (a) How many units should be ordered each time?
Or (b) When the order should be placed.
= ½ × ROQ + Minimum Stock Level (c) What would be the ideal stock level (immediately before the supply of material ordered is received)?
= ½ × 186 + 200 units = 293 units
Answer
BQ 16 2 AO 2 × 24 ,300 × 40
(a) Re-order quantity = = = 900 units
Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves are C 10 × 24 %
sold in pack of 10 pairs at a price of `250 per pack.
For the month of April 2023, it has been estimated that a demand for 60,000 packs of surgical gloves (b) Re-order level = Safety stock + Consumption during lead time
will arise. Aditya Brothers purchases these gloves from manufacturer at `228 per pack within 5 days lead time. 24,300 24,300
= × 12 + × 18
The ordering and related cost is `240 per order. The storage cost is 10% per annum of average inventory 360 360
investment. = 810 + 1,215 = 2,025 units

Required (c) Ideal Stock Level = ROL - Consumption during lead time
(i) Calculate Economic Order Quantity (EOQ). = 2,025 – 1,215 = 810 units
(ii) Calculate the number of orders needed every year.
(iii) Calculate the total cost of ordering and storage of the surgical gloves. BQ 18
(iv) Determine when should the next order to be placed. (Assuming that the company does maintain a safety Aditya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
stock and that the present inventory level is 10,000 packs with a year of 360 working days). required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in the
coming year. The following is the information regarding the raw material Dee:
Answer
2 AO 2 × 60 ,000 × 12 × 240 1. The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(i) EOQ = = 2. Maximum consumption per day is 20 kg. more than the average consumption per day.
C 228 × 10 %
3. There is an opening stock of 1,000 kg.
= 3,893.3 or 3,893 packs 4. Time required to get the raw materials from the suppliers is 4 to 8 days.
 MATERIAL COST 1.11 MATERIAL COST 1.12
5. The purchase price is `125 per kg. So minimum consumption per day = Average × 2 – Max. = 50 × 2 – 70
= 30 kg
There is an opening stock of 900 units of the finished product Exe. The rate of interest charged by bank on
Cash Credit facility is 13.76%. To place an order company has to incur `720 on paper and documentation work.
BQ 19
A Ltd. produces a product ‘X’ using a raw material D. To produce one unit of X, 4 kg of D is required. As per the
From the above information find out the followings in relation to raw material Dee:
sales forecast conducted by the company, it will able to sale 20,000 units of X in the coming year. The following
(a) Re-order Quantity is the information regarding the raw material D:
(b) Re-order level
1. The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
(c) Maximum Stock level
2. Maximum consumption per day is 40 kg. more than the average consumption per day.
(d) Minimum Stock level
3. There is an opening stock of 2,000 kg.
(e) Average Stock level
4. Time required to get the raw materials from the suppliers is 4 to 8 days.
(f) Calculate the impact on the profitability of the company by not ordering the EOQ.
5. The purchase price is `250 per kg.
[Take 364 days for a year]
There is an opening stock of 1,800 units of the finished product X. The carrying cost of inventory is 14% p.a.
Answer To place an order company has to incur `1,340 on paper and documentation work.
(a) Re-order quantity = EOQ – 200 kg
From the above information find out the followings in relation to raw material D:
2 × 17 ,200 × 720
= - 200 kg = 1,000 kg (a) Re-order Quantity
125 × 13 .76 %
(b) Re-order Level
(c) Maximum Stock level
(b) Re-order Level = Maximum consumption per day × Maximum lead time (d) Minimum Stock level
= 70 kg × 8 days = 560 kg (e) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 300 days for a year]
(c) Maximum Level = ROL + ROQ - (Minimum consumption per day × Minimum lead time)
= 560 kg + 1,000 kg - (30 kg × 4 days) = 1,440 kg Answer
(a) Re-order quantity = EOQ – 400 kg
(d) Minimum Level = ROL - (Average consumption per day × Average lead time)
2 × 70 ,800 × 1 ,340
= 560 kg - (50 kg × 6 days) = 260 kg = - 400 kg
250 × 14 %
(e) Average Stock Level = ½ × (Minimum Stock Level + Maximum Stock Level) = 2,328 – 400 = 1,928 kg
= ½ × (1,440 kg + 260 kg) = 850 kg
Or (b) Re-order Level = Maximum consumption per day × Maximum lead time
= ½ × ROQ + Minimum Stock Level = {(72,800 ÷ 300) + 40 kg} × 8 days = 2,261 kg
= ½ × 1,000 kg + 260 kg = 760 kg
(c) Maximum Level = ROL + ROQ - (Minimum consumption per day × Minimum lead
time)
(f) Impact on Profitability
= 2,261 kg + 1,928 kg – [{(72,800 ÷ 300) - 40 kg} × 4 days]
Particulars At ROQ (1,000 kg) At EOQ (1,200 kg) = 3,378 kg
Number of orders 17,200 17,200
= 17.20 or 18 = 14.33 or 15 (d) Minimum Level = ROL - (Average consumption per day × Average lead time)
1,000 1,200
= 2,261 kg – {(72,800 ÷ 300) × 6 days} = 805 kg
Ordering cost 18 × 720 = 12,960 15 × 720 = 10,800
Carrying cost (½× ROQ × C) 8,600 10,320
(e) Impact on Profitability
(½ × 1,000 × 125 × 13.76%) (½ × 1,200 × 125 × 13.76%)
Total ordering and carrying cost 21,560 21,120 Particulars At ROQ (1,928 kg) At EOQ (2,328 kg)
Impact on profit - 440 Number of orders 70,800 70,800
= 36.72 or 37 = 30.41 or 31
1,928 2,328
Working notes: Ordering cost 37 × 1,340 = 49,580 31 × 1,340 = 41,540
1. Calculation of annual consumption and purchase of raw materials ‘Dee’: Carrying cost (½× ROQ × C) 33,740 40,740
Sales forecast of the product ‘Exe’ 10,000 units (½ × 1,928 × 250 × 14%) (½ × 2,328 × 250 × 14%)
Less: Opening stock of ‘Exe’ (900 units) Total ordering and carrying cost 83,320 82,280
Fresh units of ‘Exe’ to be produced 9,100 units Impact on profit - 1,040
Raw material required to produce 9,100 units of ‘Exe’ (9,100 units × 2 kg.) 18,200 kg.
Working notes:
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual purchase for raw material ‘Dee’ 17,200 kg. 1. Calculation of annual consumption and purchase of raw materials ‘D’:
Sales forecast of the product ‘X’ 20,000 units
2. Minimum consumption per day of raw material ‘Dee’: Less: Opening stock of ‘X’ (1,800 units)
Fresh units of ‘X’ to be produced 18,200 units
Average consumption per day = 18,200 kg ÷ 364 days = 50 kg
Raw material required to produce 72,800 units of ‘X’ (18,200 units × 4 kg.) 72,800 kg.
Hence, Maximum consumption per day = 50 kg + 20 kg = 70 kg
 MATERIAL COST 1.13 MATERIAL COST 1.14
Less: Opening Stock of ‘D’ 2,000 kg. = `14,69,122
Annual purchase for raw material ‘D’ 70,800 kg.
(h) Evaluation of 1% discount offer in two orders:
BQ 20
M/s Tanishka Materials Private Limited produces a product which names “ESS”. The consumption of raw Inventory Cost at Offer Price = Purchase cost + Ordering cost + Carrying cost
material for the production of “ESS” is 210 Kgs to 350 Kgs per week. Other information is as follows: = (14,600 × `99) + (2 × `200) + (½ × 7,300) × (12% of `99 + `2)
= `14,96,462
Procurement Time : 5 to 9 Days
Purchase price of Raw Materials : `100 per kg Advice: As total inventory cost at offer price is `27,340 (14,96,462 – 14,69,122) higher, offer should not be
Ordering Cost per Order : `200 accepted.
Storage Cost : 1% per month plus `2 per unit per annum
Consider 365 days a year. (i) Counter offer:

You are required to Calculate: Let discount rate (%) = D

Counter offer Price = `100 – D = `100 – D
(a) Economic Order Quantity Revised Carrying Cost = [(`100 – D) × 12%] + `2 = `12 - 0.12D + `2
(b) Re-Order Level (ROL) = `14 – 0.12D
(c) Maximum Stock Level
(d) Minimum Stock Level Total Inventory Cost at Counter offer Price:
(e) Average Stock Level
(f) Number of Orders to be placed per year = Purchase cost + Ordering cost + Carrying cost
(g) Total Inventory Cost = {14,600 × (`100 – D)} + (2 × `200) + (½ × 7,300) × (`14 - 0.12D)
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders, whether = `14,60,000 – 14,600D + `400 + `51,100 – 438D
offer is acceptable? = `15,11,500 – 15,038D
(i) If the answer is no, what should be the counteroffer w.r.t. percentage of discount?
Now,
Answer `14,69,122 = `15,11,500 – 15,038D
2 AO 2  *14 ,600  200 `42,378 = 15,038D
(a) EOQ = = = 646 kg
C 12 %  100  2 D = 2.82

*Annual consumption of raw material = [{(210+350) ÷ 2} ÷ 7 days] × 365 = 14,600 kg Therefore, discount should be at least 2.82% in offer price.

(b) Re-order Level = Maximum consumption per day × Maximum lead time BQ 21
= (350 ÷ 7) × 9 days = 450 kg If the minimum stock level and average stock level of raw-material A are 4,000 and 9,000 units respectively,
find out its ‘Re-order quantity’.
(c) Maximum Stock Level = ROL + ROQ - (Minimum consumption per day × Minimum lead
time) Answer
= 450 kg + 646 kg – (210 ÷ 7) × 5 days] Average Stock = ½ × ROQ + Minimum Stock
= 946 kg 9,000 = ½ × ROQ + 4,000
5,000 = ½ × ROQ
(d) Minimum Stock Level = ROL - (Average consumption per day × Average lead time) ROQ = 5,000 × 2 = 10,000 units
= 450 kg – [{(210+350) ÷ 2} ÷ 7 days] × (5 + 9) ÷ 2}
= 170 kg MOST ECONOMICAL PURCHASE LEVEL
(e) Average Stock Level = ½ × (Minimum Stock Level + Maximum Stock Level) BQ 22
= ½ × (946 kg + 170 kg) = 558 kg EXE Limited has received an offer of quantity discounts on its order of materials as under::
Or
= ½ × ROQ + Minimum Stock Level Price per ton (`) Ton (Nos.)
= ½ × 646 kg + 170 kg = 493 kg `1,200 Less than 500
`1,180 500 and less than 1000
(f) Number of Orders = Annual consumption ÷ EOQ `1,160 1000 and less than 2000
= 14,600 kg ÷ 646 kg = 22.6 or 23 `1,140 2000 and less than 3000
`1,120 3000 and above
(g) Total Inventory Cost = Purchase cost + Ordering cost + Carrying cost The annual requirement for the materials is 5,000 tons. The delivery cost per order is `1,200 and the stock
A
= (Purchase Quantity × Price) + (ROQ × O) + (½ × ROQ × C) holding cost is estimated at 20% of material cost per annum. (1) You are required to calculate the most
= (14,600 × `100) + (23 × `200) + (½ × 646 × `14)
 MATERIAL COST 1.15 MATERIAL COST 1.16
economical purchase level, and (2) What will be your answer to the above question if there are no OPTIMUM SAFETY STOCK LEVEL
discounts offered and the price per ton is `1,500?
BQ 24
Answer IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. IPL
(1) Statement of Most Economical Purchase Level Limited purchases 54,000 castings per year at a cost of `800 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year basis.
Order Size Total Ordering Cost Total Carrying Cost Purchase Cost The company estimates that it costs `9,000 to place a single purchase order and about `300 to carry one
Total Cost
(ROQ) (A/ROQ × 1,200) (½ × ROQ × 20% of Price) (5,000 × Price)
casting in inventory for a year.
{(5,000/400) 12.5 or 48,000 60,00,000 The high carrying costs result from the need to keep the castings in carefully controlled temperature and
400 60,63,600
13 × 1,200} = 15,600 (½ × 400 × 20% × 1,200) (5,000 × 1,200) humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6 days,
{(5,000/500) 10 × 59,000 59,00,000 but it can take as much as 10 days.
500 59,71,000
1,200} = 12,000 (½ × 500 × 20% × 1,180) (5,000 × 1,180)
{(5,000/1,000) 5 × 1,16,000 58,00,000 The days of delivery time and percentage of their occurrence are shown in the following tabulation:
1,000 59,22,000
1,200} = 6,000 (½ × 1,000 × 20% × 1,160) (5,000 × 1,160) Delivery time (days) : 6 7 8 9 10
{(5,000/2,000) 2.5 2,28,000 57,00,000 Percentage of occurrence : 75 10 5 5 5
2,000 59,31,600
or 3 × 1,200} = 3,600 (½ × 2,000 × 20% × 1,140) (5,000 × 1,140)
{(5,000/3,000) 1.6 3,36,000 56,00,000 Required
3,000 59,38,400
or 2 × 1,200} = 2,400 (½ × 3,000 × 20% × 1,120) (5,000 × 1,120) 1. Compute the economic order quantity (EOQ).
2. Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety
The above table shows that the total cost of 5,000 units including ordering and carrying cost is minimum stock? The re-order point?
(`59,22,000) when the order size is 1,000 units. Hence the most economical purchase level is 1,000 units. 3. Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock?
The re-order point?
(2) If there will are no discount offer then the purchase quantity should be equal to EOQ. The EOQ is as 4. Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?
follows: 5. Refer to the original data. Assume that using process re-engineering the company reduces its cost of
placing a purchase order to only `600. In addition, company estimates that when the waste and
2AO 2  5,000  1 ,200 inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is `720 per
EOQ = = = 200 tons year.
C 20% of 1 ,500
(a) Compute the new EOQ.
(b) How frequently would the company be placing an order, as compared to the old purchasing policy?
BQ 23
The cost of a single bearing with no discount is `30. The annual demand is 250 units. Ordering cost is `20 per
Answer
order and annual inventory carrying cost is `4 per unit. Determine the optimal order quantity and the
1. Computation of economic order quantity (EOQ):
associated minimal total cost of inventory and purchasing costs, if shortages are not allowed. Assume that
following quantity discount schedule for a particular bearing is available to a retail store: 2AO 2  54 ,000  9,000
EOQ = = = 1,800 castings
C 300
Order size (units) Discount
0 – 49 0% 2. Assuming a 15% risk of being out of stock:
50 – 99 5%
100 – 199 10% From the probability table given in the question, we can see that 85% certainty in delivery time is achieved
200 and above 12% when delivery period is 7 days i.e. at 15% risk level of being out of stock, the maximum delivery period should
not exceed 7 days.
Answer Annual Demand
Safety stock = × (Maximum lead time – Average lead time)
Statement of Computing Total cost at various order sizes 360
54,000
= × (7 days – 6 days) = 150 castings
Order Size Total Ordering Cost Total Carrying Cost Purchase Cost 360
Total Cost
(ROQ) (A/ROQ × 20) (½ × ROQ × 4) (250 × Price) Re-order point = Safety stock + Average lead time consumption
{(250/40) 6.25 or 7 × 7,500 = 150 castings + (6 days × 150 casting) = 1,050 castings
40 80 7,720
20} = 140 (250 × 30 × 100%)
{(250/50) 5 × 20} = 7,125 3. Assuming a 5% risk of being out of stock:
50 100 7,325
100 (250 × 30 × 95%)
{(250/100) 2.5 or 3 × 6,750 From the probability table given in the question, we can see that 95% certainty in delivery time is achieved
100 200 7,010 when delivery period is 9 days i.e. at 5% risk level of being out of stock, the maximum delivery period should
20} = 60 (250 × 30 × 90%)
{(250/200) 1.25 or 2 6,600 not exceed 9 days.
200 400 7,040
× 20} = 40 (250 × 30 × 88%) Safety stock =
Annual Demand
× (Maximum lead time – Average lead time)
360
54,000
Optimum order quantity is 100 units having minimum total cost of inventory and purchase cost of `7,010. = 360
× (9 days – 6 days) = 450 castings
 MATERIAL COST 1.17 MATERIAL COST 1.18
Re-order point = Safety stock + Average lead time consumption 50 0.10 7,500 750
= 450 castings + (6 days × 150 casting) = 1,350 castings 20 0.20 3,000 600
10 0.30 1,500 450
4. At 5% stock-out risk the total cost of ordering and carrying cost is as follows: 39,000 2,700 0 2,700
Annual Demand
Total cost of ordering = EOQ
× Cost per order At safety stock level of 20 units, total cost is least i.e `2,140. Hence optimum safety stock is 20 units.
54,000
= 1,800
× `9,000 = `2,70,000
Working Notes:
Total cost of carrying = (Safety stock + ½ EOQ) × Carrying cost per unit p.a. Computation of Probability of Stock-out
= (450 units + ½ × 1,800 units) × `300 = `4,05,000
Stock-out(units) 100 80 50 20 10 0 Total
No. of times 2 5 10 20 30 33 100
2 × 54000 × 600 Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00
5. (a) Computation of new EOQ = = 300 castings
720

54,000 ABC ANALYSIS

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

Under new purchasing policy IPL Ltd. has to place order in every 2nd day (360 days ÷ 180 orders), BQ 26
however under the old purchasing policy it was every 12th day. From the following details, draw a plan of ABC selective control:

BQ 25 Item No. Units Unit cost (`)

M/s Tyrotubes trades in four wheeler tyres and tubes. It stocks sufficient quantity of tyres of almost every 1 7,000 5.00
vehicle. In year end 2023-24, the report of sales manager revealed that M/s Tyrotubes experienced stock-out 2 24,000 3.00
of tyres. 3 1,500 10.00
4 600 22.00
Stock-out of tyres No. of times
5 38,000 1.50
100 2
6 40,000 0.50
80 5
7 60,000 0.20
50 10
8 3,000 3.50
20 20
9 300 8.00
10 30
10 29,000 0.40
0 33
11 11,500 7.10
12 4,100 6.20
M/s Tyrotubes losses `150 per unit due to stock-out and spends `50 per unit on carrying of inventory.
Determine optimum safety stock level. Answer
Statement of Total Cost and Ranking
Answer % of Total Unit cost Total cost % of Total
Computation of Stock-out and Inventory Carrying Cost Items Units Ranking
units (`) (`) cost
Safety Stock-out Stock-out cost Expected Inventory Total cost 1 7,000 3.1963 5.00 35,000 9.8378 4
Probability
stock (units) (4) = stock-out cost carrying cost (7) = 2 24,000 10.9589 3.00 72,000 20.2378 2
(3)
(1) (2) (2) × `150 (5) = (3) × (4) (6) = (1) × `50 (5) + (6) 3 1,500 0.6849 10.00 15,000 4.2162 7
100 0 0 0 0 5,000 5,000 4 600 0.2740 22.00 13,200 3.7103 8
80 20 0.02 3,000 60 4,000 4,060 5 38,000 17.3516 1.50 57,000 16.0216 3
50 50 0.02 7,500 150 6 40,000 18.2648 0.50 20,000 5.6216 6
30 0.05 4,500 225 7 60,000 27.3973 0.20 12,000 3.3730 9
12,000 375 2,500 2,875 8 3,000 1.3699 3.50 10,500 2.9513 11
20 80 0.02 12,000 240 9 300 0.1370 8.00 2,400 0.6746 12
60 0.05 9,000 450 10 29,000 13.2420 0.40 11,600 3.2605 10
30 0.10 4,500 450 11 11,500 5.2512 7.10 81,650 22.9502 1
25,500 1,140 1,000 2,140 12 4,100 1.8721 6.20 25,420 7.1451 5
10 90 0.02 13,500 270 - 2,19,000 100 - 3,55,770 100 -
70 0.05 10,500 525
40 0.10 6,000 600 Basis for selective control (Assumed in ICAI SM, in exam it will be given in question)
10 0.20 1,500 300 `50,000 & above ‘A’ items
31,500 1,695 500 2,195 `15,000 to `50000 ‘B’ items
0 100 0.02 15,000 300 Below `15,000 ‘C’ items
80 0.05 12,000 600
 MATERIAL COST 1.19 MATERIAL COST 1.20
On this basis, a plan of A B C selective control is given below: 1. They constitute 2.750% of total number of varieties of inventory items handled by the stores of the
% of Total Total cost factory.
Ranking Item No. % of Total cost Category 2. They require moderate investment of about 30% of total use value of inventory holding (average).
units (`)
1 11 5.2512 81,650 22.9502 3. Their consumption is moderate about 10% of inventory usage in the end product.
2 2 10.9589 72,000 20.2378
3 5 17.3516 57,000 16.0216 Category C: 3,875 numbers of varieties of inventory items should be classified as those of category C because
Total 3 33.5617 2,10,650 59.2096 A of the following reasons:
4 1 3.1963 35,00 9.8378
1. They constitute 96.875% of total varieties of inventory items handled by stores of factory.
5 12 1.8721 25,420 7.1451
2. They require investment of 20% of total use value of average of average inventory holding.
6 6 18.2648 20,000 5.6216
3. Their consumption is minimum, i.e. just 5% of inventory usage in end product.
7 3 0.6849 15,000 4.2162
Total 4 24.0181 95,420 26.8207 B
8 4 0.2740 13,200 3.7103 INVENTORY TURNOVER RATIO
9 7 27.3973 12,000 3.3730
10 10 13.2420 11,600 3.2605 BQ 28
11 8 1.3699 10,500 2.9513 The following data are available in respect of material X for the year ended 31st March, 2024.
12 9 0.1370 2,400 0.6746 Opening stock `90,000
Total 5 42.4202 49,700 13.9697 C Purchases during the year `2,70,000
Grand Total 12 100 3,55,770 100 Closing stock `1,10,000

BQ 27 Calculate (1) Inventory turnover ratio, and (2) The number of days for which the average inventory is
A Factory uses 4,000 varieties of inventory. In terms of inventory and holding inventory usage, the following held.
information is compiled.
No. of varieties of % value of inventory % of inventory usage
Answer
% of item Statement Showing Inventory Turnover Ratio and Number of Days
inventory holding (average) (in end-product)
3,875 96.875 20 5 Particulars Material X
110 2.750 30 10 Opening stock 90,000
15 0.375 50 85 Add: Purchases 2,70,000
4,000 100.00 100 100 Less: Closing stock (1,10,000)
Materials consumed 2,50,000
Classify the items of inventory as per ABC analysis with reasons. Average inventory (Opening stock + Closing stock) ÷ 2 1,00,000
Inventory turnover ratio (Materials consumed ÷ Average inventory) 2.5 times
Answer Number of days for which the average inventory is held (365 ÷ IT Ratio) 146 days
Classification of the items of inventory as per ABC Analysis
% value of % of inventory BQ 29
Category No. of items % of items inventory holding usage (in end- From the following data for the year ended 31.03.24, Calculate the inventory turnover ratio for the two
(average) product) items and put forward your comments on them:
A 15 0.375 50 85
B 110 2.750 30 10 Particulars Material A Material B
C 3,875 96.875 30 5 Opening stock 01.04.2023 10,000 9,000
Total 4,000 100.00 100 100 Purchases 52,000 27,000
Closing stock 31.03.2024 6,000 11,000
Reasons:
Answer
Category A: 15 numbers of inventory items should be classified as those of A category because of the following Statement Showing Inventory Turnover Ratio
reasons: Particulars Material A Material B
Opening stock 10,000 9,000
1. They constitute 0.375% of total number of varieties of inventory items handled by stores of factory. This Add: Purchases 52,000 27,000
is the minimum as per the given classification in the table
62,000 36,000
2. The total usage of these items is 50% of total use value of inventory holding (average) which is maximum Less: Closing stock (6,000) (11,000)
according to the given table. Materials consumed 56,000 25,000
3. The consumption of these items is about 85% of usage in end product. Average inventory (Opening stock + Closing stock) ÷ 2 8,000 10,000
Inventory turnover ratio (Materials consumed ÷ Average inventory) 7 times 2.5 times
Category B: 110 number of inventory items should be classified as those of B category because of the following Inventory turnover (365 ÷ IT Ratio) 52 days 146 days
reasons:
Comment: Material A is moving faster than Material B.
 MATERIAL COST 1.21 MATERIAL COST 1.22
VALUATION OF MATERIAL Invoice `
200 units part A 32 @ `5.00 per unit 1,000.00
BQ 30 Less: 20% discount 200.00
SKD Company Ltd., not registered under GST, purchased material P from a company which is registered under 800.00
GST. The following information is available for the one lot of 1,000 units of material purchased: Add: GST @ 12% 96.00
896.00
Listed price of one lot `50,000 Add: Packing charges (5 non-returnable boxes) 50.00
Trade discount @ 10% on listed price 946.00
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @10% Notes:
(Will be given only if payment is made within 30 days.) 1. A 2 percent discount will be given for payment in 30 days.
Freight and Insurance `3,400 2. Documents substantiating payment of GST is enclosed for claiming Input credit.
Toll Tax paid `1,000
Demurrage `1,000 Answer
Commission and brokerage on purchases `2,000 Statement Showing Cost per Unit
Amount deposited for returnable containers `6,000
Particulars `
Amount of refund on returning the container `4,000
Net purchase price (1,000 - 200) 800.00
Other Expenses @ 2% of total cost
Add: Packing charges (5 non-returnable boxes) 50.00
20% of material shortage is due to normal reasons. The payment to the supplier was made within 20 Total cost 850.00
days of the purchases. ÷ Number of units ÷200
Cost per unit 4.25
You are required to calculate cost per unit of material purchased to SKD Company Ltd.
Note:
Answer 1. Cash discount is treated as interest and finance charges hence, it is not considered for valuation of material.
Computation of Total cost of material purchased of SKD Manufacturing Company 2. Input credit is available for GST paid; hence it will not be added to purchase cost.
Particulars Units `
Listed Price of Materials 1,000 50,000 BQ 32
Less: Trade discount @ 10% on invoice price (5,000) A in invoice in respect of a consignment of chemicals A and B provides following information:
45,000 Invoice `
Add: CGST @ 6% of ` 45,000 2,700 Chemical A: 10,000 kgs. at `10 per kg. 1,00,000
Add: SGST @ 6% of ` 45,000 2,700 Chemical B: 8,000 kgs. at `13 per kg. 1,04,000
50,400 Basic custom duty @10% (Credit is not allowed) 20,400
Add: Toll Tax 1,000 Railway freight 3,840
Freight and Insurance 3,400 Total cost 2,28,240
Commission and Brokerage Paid 2,000
Add: Cost of returnable containers: A shortage of 500 kgs. in chemical A and 320 kgs. in chemical B is noticed due to normal breakages.
Amount deposited `6,000 You are required to determine the rate per kg. of each chemical, assuming a provision of 2% for
Less: Amount refunded (`4,000) 2,000 further deterioration.
58,800
Add: Other Expenses @ 2% of Total Cost (`58,800 × 2/98) 1,200 Answer
Total Cost of Material 1,000 60,000 Statement Showing the Computation of Rate per kg. of each Chemical
Less: Shortage due to Normal Loss @ 20% (200) - Particulars Chemical A Chemical B
Total cost of material of good units 800 60,000 Purchase price 1,00,000 1,04,000
Cost per unit (`60,000/800 units) 1 75 Add: Basic custom duty @10% 10,000 10,400
Add: Railway freight in 5 : 4 2,133 1,707
Note: Total cost 1,12,133 1,16,107
÷ Effective quantity ÷ 9,310 ÷ 7,526.4
1. GST is payable on net price i.e., listed price less discount. Rate per kg 12.04 15.43
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off-loading of materials. It is Working notes: Calculation of Effective Quantity of each Chemical Available for Use
an abnormal cost and not included.
Particulars Chemical A Chemical B
4. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.
Quantity purchased 10,000 8,000
Less: Shortage due to normal breakages 500 320
BQ 31
9,500 7,680
At what price per unit would part number A 32 be entered in the stores ledger, if the following invoice was
Less: Provision for deterioration @ 2% 190 153.6
received from the supplier?
Quantity available 9,310 7,526.4
 MATERIAL COST 1.23 MATERIAL COST 1.24
BQ 33 STOCK VALUATION AND STORES LEDGER
HBL Ltd. produces product ‘M’ which has a quarterly demand of 20,000 units. Each product requires 3 kg. and
4 kg. of material X and Y respectively. Material X is supplied by a local supplier and can be procurred at factory BQ 34
stores at any time, hence, no need to keep inventory for material X. The material Y is not locally available, it ‘AT’ Ltd. furnishes the following store transactions for September, 2023:
requires to be purchased from other states in a specially designed truck container with a capacity of 10 tons.
01.09.23 Opening balance 25 units value `162. 50
The cost and other information related with the materials are as follows : 04.09.23 Issues Req. No. 85 8 units
Particulars Material X Material Y 06.09.23 Receipts from B & Co. GRN No. 26 50 units @ `5.75 per unit
07.09.23 Issues Req. No. 97 12 units
Purchase price per kg. (excluding GST) `140 `640
10.09.23 Return to B & Co. 10 units
Rate of GST 18% 18%
12.09.23 Issues Req. No. 108 15 units
Freight per trip (fixed, irrespective of quantity) - `28,000
13.09.23 Issues Req. No. 110 20 units
Loss of material in transit on purchase quantity - 2%
15.09.23 Receipts from M & Co. GRN No. 33 25 units @ `6.10 per unit
Loss in process on purchase quantity 4% 5%
17.09.23 Issues Req. No. 12 10 units
19.09.23 Received replacement from B & Co. GRN No. 38 10 units
Other information:
23.09.23 Returned from department, material of M & Co. MRR No. 4 5 units
(a) The company has to pay 15% p.a. to bank for cash credit facility. 22.09.23 Transfer from Job 182 to Job 187 in the dept. MTR 6 5 units
(b) Input credit is available on GST paid on materials. 26.09.23 Issues Req. No. 146 10 units
29.09.23 Transfer from Dept. “A” to Dept. “B” MTR 10 5 units
Required: 30.09.23 Shortage in stock taking 2 units
(1) Calculate cost per kg. of material X and Y.
(2) Calculate the Economic Order Quantity for both the materials. Prepare the priced stores ledger on FIFO method and state how you would treat the shortage in
stock taking.
Answer
(1) Statement Showing Cost per kg. of Material X and Y Answer
Particulars Material X Material Y Stores Ledger of AT Ltd. for the month of September, 2023 (FIFO Method)
Purchase quantity (in kg) 2,50,000 3,44,086 Receipts Issues Balance
Purchase cost @ `140/ `640 per kg `3,50,00,000 `22,02,15,040 Date
GRN/ Req.
Add: Freight (W.N.) - `9,80,000 Sep’23 Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
MRR No.
Total cost `3,50,00,000 `22,11,95,040 1 - - - - - - - - 25 6.50 162.50
÷ Effective quantity ÷ 2,40,000 ÷ 3,20,000 4 - - - - 85 8 6.50 52 17 6.50 110.50
Cost per kg `145.83 `691.23 6 26 50 5.75 287.50 - - - - 17 6.50
50 5.75 398.00
2 AO 7 - - - - 97 12 6.50 78 5 6.50
(2) EOQ = 50 5.75 320.00
C
2 × 2,50 ,000 × 0
10 - - - - Return 10 5.75 57.50 5 6.50
Material X = = Nil 40 5.75 262.50
145 .83 × 15 %
12 - - - - 108 5 6.50 32.50
2  3,44 ,086  28 ,000 10 5.75 57.50 30 5.75 172.50
Material Y = = 13,632.35 Kgs
691 .23  15% 13 - - - - 110 20 5.75 115 10 5.75 57.50
15 33 25 6.10 152.50 - - - - 10 5.75
Working Note: 25 6.10 210.00
17 - - - - 121 10 5.75 57.50 25 6.10 152.50
(a) Freight = Number of orders × Freight per trip
19 38 10 5.75 57.50 - - - 25 6.10
= (3,44,086 kg ÷ 10,000 kg) × 28,000 = 34.40 or 35 orders × 28,000
10 5.75 210.00
= `9,80,000
20 4 5 5.75 28.75 - - - - 5 5.75
25 6.10
(b) Calculation of Quantity to be Purchased:
10 5.75 238.75
Particulars Material X Material Y 26 - - - - 146 5 5.75 28.75 20 6.10
Annual production of product M (20,000 units × 4 quarters) 80,000 80,000 5 6.10 30.50 10 5.75 179.50
Raw material required for one unit of M 3 kg 4 kg 30 - - - - Shortage 2 6.10 12.20 18 6.10
Net quantity of raw material (in kg) 2,40,000 3,20,000 10 5.75 167.30
Add: Loss in transit : Y [(3,20,000 kg ÷ 93%) × 2%] - 6,882
Add: Loss in process : X [(2,40,000 kg ÷ 96%) × 4%] 10,000 Working Notes:
Y [(3,20,000 kg ÷ 93%) × 5%] 17,204 1. The material received as replacement from vendor is treated as fresh supply.
Raw material quantity required to be purchased (in kg) 2,50,000 3,44,086
 MATERIAL COST 1.25 MATERIAL COST 1.26
2. In the absence of information the price of the material received from within on 20.09.23 has been-taken Total value of material Exe issued under LIFO method comes to `8,300 (i.e. `1,500 + `2,800 +
as the price of the earlier issue made on 17.09.23. In FIFO method physical flow of the material is `4,000). The balance 350 units of `2,300 on 15.04.24 represents opening balance on 01.04.24 and purchases
irrelevant, and issue price is based on first in first out. made on 05.04.24, 08.04.24 and 12.04.24 (100 units @ `5 + 50 units @ `6 + 100 units @ `7 + 100 units @ `8)
3. The issue of material on 26.09.23 is made out of the material received from a user department on
20.09.23. 1. b. As shown in (a) above, the value of stock of materials on 15.4.2024:
Under FIFO method `2,800
4. The entries for transfer of material from one job and department to another on 22.09.23 and 29.09.23
respectively, do not affect the store ledger. However, adjustment entries for calculation of cost of Under LIFO method `2,300
respective jobs and departments are made in cost accounts.
5. The material found short as a result of stock taking has been written off at the relevant issue price. (2) Total value of material Exe issued to production under FIFO and LIFO methods comes to `7,800 and
`8,300 respectively.
The above computations show that the value of stock of materials on 15.04.24 is `2,800 under FIFO
BQ 35
method and `2,300 under LIFO method.
The following information is provided by Sunrise Industries for the fortnight of April 2024.
The reasons for the difference of `500 (i.e. `8,300 - `7,800) in the value of material Exe, issued to
Material Exe: Stock on 01.04.24 100 units at `5 per unit.
production under FIFO and LIFO methods are given below:
Purchases Issues
Cost per Unit Date Qty. Issued Value FIFO Total Value LIFO Total
Date Units Date Units
06.04.24 250 1,400 1,500
05.04.24 300 `6 06.04.24 250
10.04.24 400 2,650 2,800
08.04.24 500 `7 10.04.24 400
14.04.24 500 3,750 7,800 4,000 8,300
12.04.24 600 `8 14.04.24 500
(a) On 6.04.2024, 250 units were issued to production. Under FIFO their value comes to `1,400 (100 units
(1) Calculate using FIFO and LIFO methods of pricing issues:
× `5 + 150 units × `6) and under LIFO `1,500 (250 × `6). Hence, `100 more was charged to production
a. The value of material consumed during the period.
under LIFO.
b. The value of stock of materials on 15.04.24.
(b) On 10.04.2024, 400 units were issued to production. Under FIFO their value comes to `2,650 (150 × `6
(2) Explain why the figures in (a) and (b) in part 1 of this question are different under the two methods of
+ 250 × `7) and under LIFO `2,800 (400 × `7). Hence, `150 more was charged to production under LIFO.
pricing of material issues used. You need not to draw up stores ledger.
(c) On 14.04.2024, 500 units were issued to production. Under FIFO their value comes to `3,750 (250 × `7
+ 250 × `8) and under LIFO `4,000 (500 × `8). Hence, `250 more was charged to production under LIFO.
Answer Thus the total excess amount charged to production under LIFO comes to `500.
(1) a. Value of Material Exe Consumed
During 01.04.2024 to 15.04.2024 (FIFO Method)
The reasons for the difference of `500 (`2,800 – `2,300) in the value of 350 units of Closing Stock of material
Date Description Quantity in Units Rate (`) Amount Exe under FIFO and LIFO are as follows:
01.04.24 Opening balance 100 5 500
05.04.24 Purchased 300 6 1,800 (a) In the case of FIFO, all the 350 units of the closing stock belongs to the purchase of material made on
06.04.24 Issued 100 5 12.04.2024, whereas under LIFO these units were from opening balance and purchases made on
150 6 1,400 5.04.2024, 8.04.2024 and 12.04.2024.
08.04.24 Purchased 500 7 3,500 (b) Due to different purchase price paid by the concern on different days of purchase, the value of closing
10.04.24 Issued 150 6 stock differed under FIFO and LIFO. Under FIFO 350 units of closing stock were valued @ `8 p.u. whereas
250 7 2,650 under LIFO first 100 units were valued @ `5 p.u., next 50 units @ `6 p.u., next 100 units @ `7 p.u. and
12.04.24 Purchased 600 8 4,800 last 100 units @ `8 p.u.
12.04.24 Issued 250 7 Thus, under FIFO, the value of closing stock increased by `500.
250 8 3,750
15.04.24 Balance 350 8 2,800 BQ 36
Total value of material Exe consumed during the period under FIFO method comes to `7,800 (i.e. The following transactions in respect of material Y occurred during the six months ended 30th September:
`1,400 + `2,650 + `3,750) and the balance of stock on 15.04.24 is of `2,800. Month Purchase (in Units) Price per unit Issued Units
April 200 `25 Nil
During 01.04.24 to 15.04.24 (LIFO Method) May 300 `24 250
Date Description Quantity in Units Rate (`) Amount June 425 `26 300
01.04.24 Opening balance 100 5 500 July 475 `23 550
05.04.24 Purchased 300 6 1,800 August 500 `25 800
06.04.24 Issued 250 6 1,500 September 600 `20 400
08.04.24 Purchased 500 7 3,500
10.04.24 Issued 400 7 2,800 Required:
12.04.24 Purchased 600 8 4,800
12.04.24 Issued 500 8 4,000 1. The Chief Accountant argues that the value of closing stock remains the same no matter which method
15.04.24 Balance 350 - 2,300 of pricing of material issues is used. Do you agree? Why or why not? EXPLAIN. Detailed stores ledgers
are not required.
2. STATE when and why would you recommend the LIFO method of pricing material issues?
 MATERIAL COST 1.27 MATERIAL COST 1.28
Answer Stores Ledger of Material X (LIFO Method)
(a) Total number of units purchased = 2,500 and Total number of units issued = 2,300. The closing stock at Receipts Issues Balance
the end of six months’ period i.e., on 30th September will be 200 units. Upto the end of August, total Date
Units Rate Value Units Rate Value Units Rate Value
purchases coincide with the total issues i.e., 1,900 units. It means that at the end of August, there was no Jan 1 100 1 100 - - - 100 1 100
closing stock. In the month of September, 600 units were purchased out of which 400 units were issued. Jan 20 100 2 200 - - - 100 1 100
Since there was only one purchase and one issue in the month of September and there was no opening 100 2 200
stock on 1st September, the Closing Stock of 200 units is to be valued at `20 per unit. Jan 22 - - - 60 2 120 100 1 100
40 2 80
In the view of this, the argument of the Chief Accountant appears to be correct. Where there is only one Jan 23 - - - 40 2 80
purchase and one issue in a month with no opening stock, the method of pricing of material issues 20 1 20 80 1 80
becomes irrelevant. Therefore, in the given case one should agree with the argument of the Chief
Accountant that the value of closing stock remains the same no matter which method of pricing the issue
Stores Ledger of Material X (Weighted Average Method)
is used.
It may, however, be noted that the argument of Chief Accountant would not stand if one finds the value Receipts Issues Balance
Date
of the Closing Stock at the end of each month. Units Rate Value Units Rate Value Units Rate Value
Jan 1 100 1 100 - - - 100 1 100
(b) LIFO method has an edge over FIFO or any other method of pricing material issues due to the following Jan 20 100 2 200 - - - 200 1.5 300
advantages: Jan 22 - - - 60 1.5 90 140 1.5 210
Jan 23 - - - 60 1.5 90 80 1.5 120
1. The cost of the materials issued will be either nearer or will reflect the current market price; Thus, the
cost of goods produced will be related to the trend of the market price of materials. Such a trend in price
Statement of Material value allocated to Job W 16, Job W 17 and Closing stock, under aforesaid Methods
of materials enables the matching of cost of production with current sales revenues.
2. The use of the method during the period of rising prices does not reflect undue high profit in the income Job FIFO LIFO Weighted Average
statement, as it was under the first-in-first-out or average method. In fact, the profit shown here is Materials for Job W 16 60 120 90
relatively lower because the cost of production takes into account the rising trend of material prices. Materials for Job W 17 80 100 90
3. In the case of falling prices, profit tends to rise due to lower material cost, yet the finished products Closing Stock 160 80 120
appear to be more competitive and are at market price. Total 300 300 300
4. During the period of inflation, LIFO will tend to show the correct profit and thus, avoid paying undue
taxes to some extent. From the point of view of cost of material charged to each job, it is minimum under FIFO and maximum under
LIFO (Refer to Tables). During the period of rising prices, the use of FIFO give rise to high profits and that of
BQ 37 LIFO low profits. In the case of weighted average there is no significant adverse or favourable effect on the cost
The following information is extracted from the stores ledger of material X: of material as well as on profits.
From the point of view of valuation of closing stock it is apparent from the above statement that it is
Opening Stock Nil maximum under FIFO, moderate under weighted average and minimum under LIFO.
Purchases:
January 1 100 @ `1 per unit It is clear from the Tables that the use of weighted average evens out the fluctuations in the prices. Under
January 20 100 @ `2 per unit this method, the cost of materials issued to the jobs and the cost of material in hands reflects greater uniformity
Issues: than under FIFO and LIFO. Thus from different points of view, weighted average method is preferred over
January 22 60 for Job W 16 LIFO and FIFO.
January 23 60 for Job W 17
BQ 38
Compute the receipts and issues valuation by adopting the First-In-First-Out, Last-In-First-Out and the
Imbrios India Ltd. is recently incorporated start-up company back in the year 2019. It is engaged in creating
Weighted Average Method.
embedded products and Internet of Things (IoT) solutions for the Industrial market. It is focused on
Tabulate the values allocated to Job W16, Job W17 and the closing stock under the methods aforesaid innovation, design, research and development of products and services. One of its embedded products is
and discuss from different points of view which method you would prefer. LogMax, a system on module (SoM) Carrier board for industrial use. It is a small, flexible and embedded
computer designed as per industry specifications. In the beginning of the month of September 2023, company
entered into a job agreement of providing 4800 LogMax to NIT, Mandi. Following details w.r.t. issues, receipts,
Answer
returns of Store Department handling Micro-controller, a component used in the designated assembling
Stores Ledger of Material X (FIFO Method)
process have been extracted for the month of September, 2023:
Receipts Issues Balance
Date
Units Rate Value Units Rate Value Units Rate Value Sep. 1 Opening stock of 6,000 units @ `285 per unit
Jan 1 100 1 100 - - - 100 1 100 Sep. 8 Issued 4875 units to mechanical division vide material requisition no. Mech 009/23
Jan 20 100 2 200 - - - 100 1 100 Sep. 9 Received 17,500 units @ `276 per unit vide purchase order no. 159/23
100 2 200 Sep. 10 Issued 12,000 units to technical division vide material requisition no. Tech 012/23
Jan 22 - - - 60 1 60 40 1 40 Sep. 12 Returned to stores 2375 units by technical division against material requisition no. Tech
100 2 200 012/23.
Jan 23 - - - 40 1 40 Sep. 15 Received 9,000 units @ `288 per units vide purchase order no. 160/ 23
20 2 40 80 2 160
 MATERIAL COST 1.29 MATERIAL COST 1.30
Sep. 17 Returned to supplier 700 units out of quantity received vide purchase order no. 160/23. (a) Re-order level
Sep. 20 Issued 9,500 units to technical division vide material requisition no. Tech 165/23 (b) Maximum stock level
(c) Minimum stock level
On 25th September, 2023, the stock manager of the company expressed his need to leave for his hometown (d) Prepare Store Ledger for the period January 2024 and determine the value of stock as on 31-01-2024.
due to certain contingency and immediately left the job same day. Later, he also switched his phone off. As the (e) Value of components used during the month of January, 2024.
company has the tendency of stock-taking every end of the month to check and report for the loss due to (f) Inventory turnover ratio.
rusting of the components, the new stock manager, on 30th September, 2023, found that 900 units of Micro-
controllers were missing which was apparently misappropriated by the former stock manager. He, further, Answer
reported loss of 300 units due to rusting of the components. (a) Re-order level = Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units
From the above information you are required to prepare the Stock Ledger account using
‘Weighted Average’ method of valuing the issues.
(b) Maximum stock level = Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
Answer = 1,04,500 units – 21,000 units = 83,500 units
Stores Ledger of Imbrios India Ltd. (Weighted Average Method)
Date Receipts Issues Balance of Stock (c) Minimum stock level = Re-order level – (Avg. consumption × Avg. lead time)
Sep. Units Rate Value Units Rate Value Units Rate Value = 94,500 units – (3,000 units × 17.5 days)
1 - - - - - - 6,000 285 17,10,000 = 94,500 units – 52,500 units = 42,000 units
8 - - - 4,875 285 13,89,375 1,125 285 3,20,625
9 17,500 276 48,30,000 - - - 18,625 276.54 51,50,625 (d) Store Ledger for the month of January 2024: (Weighted Average Method)
10 - - - 12,000 276.54 33,18,480 6,625 276.55 18,32,145 Receipts Issue Balance
12 2,375 276.54 6,56,783 - - - 9,000 276.55 24,88,928 Date GRN/M Amt. MRN/ Amt. Amt.
15 9,000 288 25,92,000 - - - 18,000 282.27 50,80,928 Units Rate Units Rate Units Rate
RN (‘000) MR (‘000) (‘000)
17 - - - 700 288 2,01,600 17,300 282.04 48,79,328 01-01-24 - - - - - - - - 3,500 9,810 34,335
20 - - - 9,500 282.04 26,79,380 7,800 282.04 21,99,948 05-01-24 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
30 - - - 900 282.04 2,53,836 6,900 282.04 19,46,112 06-01-24 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
30 - - - 300 - - 6,600 294.87 19,46,112 10-01-24 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
13-01-24 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
Note: 15-01-24 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
1. 900 units is abnormal loss, hence it will be transferred to Costing Profit & Loss A/c.
24-01-24 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982
2. 300 units is normal loss, hence it will be absorbed by good units.
25-01-24 010 10,000 9,750 97,500 - - - - 21,400 9,789 2,09,482
28-01-24 - - - - 015 4,000 9,789 39,156 17,400 9,789 1,70,326
BQ 39
31-01-24 - - - - 016 3,200 9,789 31,325 14,200 9,789 1,39,001
Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost method for
inventory valuation. Following are the data of component X:
Note: Decimal figures may be rounded-off to the nearest rupee value wherever required
Date Particulars Units Rate per unit
15-12-23 Purchase Order-008 10,000 `9,930 Value of 14,200 units of stock as on 31-01-2024 (‘000) = `1,39,001
30-12-23 Purchase Order-009 10,000 `9,780
01-01-24 Opening stock 3,500 `9,810 (e) Value of components used during the month of January 2024:
05-01-24 GRN*-008 (against the Purchase Order-008) 10,000 - Sum of material requisitions 011 to 016 (‘000) = `29,694 + `44,541 + `21,611 +
05-01-24 MRN**-003 (against the Purchase Order-008) 500 - `14,734 + `39,156 + `31,325
06-01-24 Material Requisition-011 3,000 - = `1,81,061
07-01-24 Purchase Order-010 10,000 `9,750
10-01-24 Material Requisition-012 4,500 - (f) Inventory Turnover Ratio = Value of materials used ÷ Average stock value
13-01-24 GRN-009 (against the Purchase Order-009) 10,000 - = 1,81,061 ÷ (1,39,001+34,335)/2
13-01-24 MRN-004 (against the Purchase Order-009) 400 - = 1,81,061 ÷ 86,668 = 2.09 times
15-01-24 Material Requisition-013 2,200 -
24-01-24 Material Requisition-014 1,500 - Working notes:
25-01-24 GRN-010 (against the Purchase Order-010) 10,000 -
1. Calculation of consumption rate:
28-01-24 Material Requisition-015 4,000 -
31-01-24 Material Requisition-016 3,200 - Maximum component usage = 4,500 units (Material requisition on 10-01-24)
Minimum component usage = 1,500 units (Material requisition on 24-01-24)
*GRN- Goods Received Note; **MRN- Material Returned Note
Date Material Requisition number Units
Based on the above data, you are required to calculate: 06-01-2024 11 3,000
 MATERIAL COST 1.31 MATERIAL COST 1.32

PAST YEAR QUESTIONS

10-01-2024 12 4,500 (Maximum)
15-01-2024 13 2,200
24-01-2024 14 1,500 (Minimum)
28-01-2024 15 4,000
31-01-2024 16 3,200 PYQ 1
M/s Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
2. Calculation of lead time (purchase order date to material received date): during 1997:
Maximum lead time = 21 days (15-12-2023 to 05-01-2024) Average monthly market demand 2,000 Tubes
Minimum lead time = 14 days (30-12-2023 to 13-01-2024) Ordering cost `100 per order
Inventory carrying cost 20% per annum
3. Reorder Quantity = 10,000 units (observed) Cost of tubes `500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6 - 8 weeks
Compute from the above:
(1) Economic order quantity. If the supplier is willing to supply 1,500 units at a discount of 5%, is it worth
accepting?
(2) Maximum level of stock.
(3) Minimum level of stock.
(4) Re-order level.
[(10 Marks) May 1998, Nov 2000]

Answer
2 AO 2 × *5,200 × 100
(1) EOQ = = = 102 tubes approx.
C 500 × 20 %

*A = Annual usage of tubes = Normal usage per week × 52 week

= 100 tubes × 52 weeks = 5,200 tubes.

Evaluation of 5% discount offer

Particulars At EOQ 102 units At ROQ 1,500 units
1. Purchase cost 5,200 units @ `500/`475 p.u. 26,00,000 24,70,000
2. Ordering cost:
Number of orders 5,200 ÷ 102 = 50.98 or 51 5,200 ÷ 1,500 = 3.47 or 4
Ordering cost (number of orders × `100) 5,100 400
3. Carrying cost (½ × ROQ × C) 5,100 71,250
(C = 20% of `500/`475)
Total cost (1+2+3) 26,10,200 25,41,650
Advise: The total cost of inventory is lower if discount is adopted. Hence, it is worth accepting.

(2) Maximum Level of Stock = ROL + Re-order quantity -(Min. Usage x Min. Re-order Period)
= 1,600 tubes + 102 tubes - (50 tubes per week × 6 weeks)
= 1,402 tubes
(3) Minimum Level of Stock = Re-order Level- (Normal Usage x Average Re-order Period)
= 1,600 tubes – (100 tubes per week × 7 weeks)
= 900 tubes
(4) Reorder Level = Maximum Consumption × Maximum Re-order Period
= 200 tubes per week × 8 weeks = 1,600 tubes

PYQ 2
A Factory uses 4,000 varieties of inventory. In terms of inventory and holding inventory usage, the following
information is compiled.
 MATERIAL COST 1.33 MATERIAL COST 1.34
No. of varieties of % value of inventory % of inventory usage 2 AO 2 × 4 ,000 units × 12 × 120
% of item EOQ = = = 2,400 units
inventory holding (average) (in end-product) C 20 × 10 %
3,875 96.875 20 5
110 2.750 30 10 2. Calculation of extra cost:
15 0.375 50 85
4,000 100.00 100 100 (a) Ordering & carrying cost (when order size is 2,400 units i.e. at EOQ):
48 ,000
Classify the items of inventory as per ABC analysis with reasons. Ordering Cost = No. of orders × Cost per order = × 120 = `2,400
2,400
[(6 Marks) Nov 1998]
Carrying Cost = ½ × ROQ × C = ½ × 2,400 × 2 = `2,400
Answer Total = `2,400 + 2,400 = `4,800
Classification of the items of inventory as per ABC Analysis
% value of % of inventory (b) Ordering & carrying cost (when order size is 4,000 units):
Category No. of items % of items inventory holding usage (in end- 48 ,000
(average) product) Ordering Cost = No. of orders × Cost per order = × 120 = `1,440
4 ,000
A 15 0.375 50 85 Carrying Cost = ½ × ROQ × C = ½ × 4,000 × 2 = `4,000
B 110 2.750 30 10
C 3,875 96.875 30 5 Total = `2,400 + 2,400 = `5,440
Total 4,000 100.00 100 100
Extra cost (a) - (b) = `5,440 - `4,800 = `640
Reasons:
3. Minimum Carrying Cost:
Category A: 15 numbers of inventory items should be classified as those of A category because of the following Carrying cost depends upon the size of the order. It will be minimum on the least order size. (In this part
reasons: of the question the two order sizes are 2,400 units and 4,000 units. Here 2,400 units is the least of the
1. They constitute 0.375% of total number of varieties of inventory items handled by stores of factory. This two order sizes. At this order size carrying cost will be minimum.) The minimum carrying cost in this
is the minimum as per the given classification in the table case can be computed as under:
2. The total usage of these items is 50% of total use value of inventory holding (average) which is maximum Minimum carrying cost = ½ × 2,400 units × 10% of `20 = `2,400
according to the given table.
3. The consumption of these items is about 85% of usage in end product. PYQ 4
Category B: 110 number of inventory items should be classified as those of B category because of the following The Complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: Super
reasons: Grow and Nature's Own. The following information is collected:
Fertilizer
1. They constitute 2.750% of total number of varieties of inventory items handled by the stores of the Particulars
factory. Super Grow Nature's Own
2. They require moderate investment of about 30% of total use value of inventory holding (average). Annual Demand 2,000 bags 1,280 bags
3. Their consumption is moderate about 10% of inventory usage in the end product. Annual relevant carrying cost per bag `480 `560
Relevant ordering cost per purchase order `1,200 `1,400
Category C: 3,875 numbers of varieties of inventory items should be classified as those of category C because
of the following reasons: Required:

1. They constitute 96.875% of total varieties of inventory items handled by stores of factory. (1) Compute EOQ for Super Grow and Nature's Own.
2. They require investment of 20% of total use value of average of average inventory holding. (2) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual relevant
3. Their consumption is minimum, i.e. just 5% of inventory usage in end product. carrying costs for Super Grow and Nature's Own?
(3) For the EOQ, Compute the number of deliveries per year for Super Grow and Nature's Own.
PYQ 3 [(10 Marks) Nov 1999]
G Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a component X
which is purchased at `20. For every finished product, one unit of component is required. The ordering cost is Answer
`120 per order and holding costs is 10% p.a. 2 AO
(1) EOQ =
C
You are required to calculate:
2 × 2 ,000 × 1 ,200
1. Economic order quantity. EOQ for Super Grow Fertilizer = = 100 bags
2. If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to incur? 480
3. What is the minimum carrying cost, the company has to incur? 2 × 1 ,280 × 1,400
[(5 Marks) May 1999] EOQ for Nature’s Own Fertilizer = = 80 bags
560
Answer
1. Computation of Economic Ordering Quantity: (2) Total annual relevant costs = Total annual relevant ordering costs + Total annual
 MATERIAL COST 1.35 MATERIAL COST 1.36
relevant carrying costs Ordering cost (A/ROQ × O) 15,000 3,000
Carrying cost (½ × ROQ × C) 15,000 75,000
Super Grow Fertilizer = (2,000/100) × 1,200 + (½ × 100 bags × 480)
Total cost 30,000 78,000
= `24,000 + `24,000 = `48,000
Extra Cost or Discount to be negotiated - 48,000
Nature’s Own Fertilizer = (1,280/80) × 1,400 + (½ × 80 bags × 560) % of Discount {(48,000 ÷ 40,000 × 60) × 100} - 2%
= `22,400 + `22,400 = `44,800
PYQ 6
Annual requiremen t The quarterly production of a company’s product which has a steady market is 20,000 units. Each unit of a
(3) Number of deliveries per year =
ROQ product requires 0.5 kg. of raw material. The cost of placing one order for raw material is `100 and the
Super Grow Fertilizer = 2,000 ÷ 100 = 20 orders inventory carrying cost is `2 per kg p.a. The lead time for procurement of raw material is 36 days and safety
Nature’s Own Fertilizer = 1,280 ÷ 80 = 16 orders stock of 1,000 kgs of raw materials is maintained by the company.
The company has been able to negotiate the following discount structure with the raw material
PYQ 5 supplier:
A Company manufactures a product from a raw material, which is purchased at `60 per kg. The company Order Quantity (Kg) Discount
incurs a handling cost of `360 plus freight of `390 per order. The incremental carrying cost of inventory of
Upto 6,000 Nil
raw material is `0.50 per kg per month. In addition, the cost of working capital finance on the investment in
6,000 - 8,000 `400
inventory of raw material is `9 per kg per annum. The annual production of the product is 1,00,000 units and
8,000 - 16,000 `2,000
2.5 units are obtained from one kg of raw material.
16,000 - 30,000 `3,200
Required: 30,000 - 45,000 `4,000
(a) Calculate the economic order quantity of raw materials. You are required to:
(b) Advice, how frequently should orders for procurement be placed.
(a) Calculate the re-order point taking 30 days in a month.
(c) If the company proposes to rationalise placement of orders on quarterly basis, what percentage of
(b) Prepare a statement showing the total cost of procurement and storage of raw materials after
discount in the price of raw materials should be negotiated?
considering the discount if the company elects to place one, two, four or six orders in the year.
[(10 Marks) Nov 2001]
(c) State the number of orders which the company should place to minimize the costs after taking EOQ also
into consideration.
Answer
[(10 Marks) May 2002]
2 AO 2 × 40 ,000 × 750
(a) EOQ = = = 2,000 kgs
C 15 Answer
A = Annual usage of raw Material (1 unit of raw material gives 2.5 units of Finished Goods. (a) Re-order point = (Normal consumption per day × Normal lead time) + Safety stock
Therefore, for 1,00,000 units of finished goods, material required) = [(40,000 kg/360 days) × 36 days] + 1,000 kg
= 1,00,000 ÷ 2.5 = 40,000 Kgs = 4,000 kg + 1,000 kg = 5,000 kg
O = Ordering cost per order
= handling cost per order + freight per order (b) Statement Showing the Total Cost of Procurement and Storage of Raw Materials
= `360 + `390 = `750 (After considering the discount)
C = Carrying cost or holding cost of inventory per unit p.a. Ordering Cost Storage Cost of Total Cost
Order No. of Storage Cost
= Carrying cost per unit p.a. + interest cost of investment in inventory per unit p.a. (No. of Orders Safety Stock Discount (Net of
Size Orders (½ × ROQ × `2)
= (`0.50 per unit per month × 12 months) + `9 per kg p.a. × `100) (1,000 × `2) discount)
= `6 + ` 9 = `15 per kg p.a. 40,000 1 100 40,000 2,000 4,000 38,100
20,000 2 200 20,000 2,000 3,200 19,000
(b) Frequency of placing order/time interval between order 10,000 4 400 10,000 2,000 2,000 10,400
6,666.66 6 600 6,667 2,000 400 8,867
365 days or 12 months 12 months
= = = 0.6 month
* No. of orders 20 orders (c) Number of orders which the company should place to minimize the costs after taking EOQ also into
Or consideration is 20 orders each of size 2,000 kgs. The total cost of procurement and storage in this case
365 days comes to `6,000, which is minimum.
= = 18 days (approx.)
20 orders
Working Notes
Annual requiremen t 40 ,000 kgs 1. Annual production of finished product (20,000 units per quarter × 4) = 80,000 units
*No. of orders = = = 20 orders
EOQ 2,000 kgs 2. Raw material required for 80,000 units (80,000 units × 0.5 kg) = 40,000 kg

(c) Statement Showing % of Discount to be Negotiated for Placing Quarterly Orders 2 × 40 ,000 kg × 100
3. EOQ = = 2,000 kg
2
At EOQ (order At order size
Particulars
size 2,000 kgs) 10,000 kgs 4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg
 MATERIAL COST 1.37 MATERIAL COST 1.38
Total cost = Ordering cost + Storage cost – Discount 3. Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock?
= {(40,000 ÷ 2,000) × 100} + (½ × 2,000 × 2) + (1,000 × 2) – Nil The re-order point?
= 2,000 + 2,000 + 2,000 – Nil = `6,000 4. Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?
5. Refer to the original data. Assume that using process re-engineering the company reduces its cost of
PYQ 7 placing a purchase order to only `600. In addition, company estimates that when the waste and
A company manufactures 5,000 units of a product per month. The cost of placing an order is `100. The inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is `720 per
purchase price of the raw material is `10 per kg. The re-order period is 4 to 8 weeks. The consumption of raw year.
materials varies from 100 kg to 450 kg per week, the average consumption being 275 kg. The carrying cost of (a) Compute the new EOQ.
inventory is 20% per annum. (b) How frequently would the company be placing an order, as compared to the old purchasing policy?
[(10 Marks) May 2004]
You are required to calculate:
1. Re-order quantity 4. Minimum level Answer
2. Re-order level 5. Average stock level. (a) Computation of economic order quantity (EOQ):
3. Maximum level
[(10 Marks) Nov 2007] 2AO 2  54 ,000  9,000
EOQ = = = 1,800 castings
C 300
Answer
2 AO 2 × *14 ,300 × 100 (b) Assuming a 15% risk of being out of stock:
1. Re-order quantity (ROQ) = = = 1,196 kgs
C 10 × 20 %
From the probability table given in the question, we can see that 85% certainty in delivery time is achieved
*Annual consumption of RM (A) = Average Consumption per week × 52 weeks when delivery period is 7 days i.e. at 15% risk level of being out of stock, the maximum delivery period should
= 275 kgs × 52 weeks = 14,300 kgs not exceed 7 days.
Annual Demand
2. Re-order level (ROL) = Maximum usage × Maximum re-order period Safety stock = × (Maximum lead time – Average lead time)
360
= 450 kgs × 8 weeks = 3,600 kgs =
54,000
× (7 days – 6 days) = 150 castings
360
3. Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)
= 3,600 kgs + 1,196 kgs – (100 kgs × 4 weeks) Re-order point = Safety stock + Average lead time consumption
= 4,396 kgs = 150 castings + (6 days × 150 casting) = 1,050 castings

4. Minimum level = ROL – (Normal usage × Normal re-order period) (c) Assuming a 5% risk of being out of stock:
= 3,600 kgs. – (275 kgs × 6 weeks = 1,950 kgs
From the probability table given in the question, we can see that 95% certainty in delivery time is achieved
5. Average stock level = ½ (Minimum level + Maximum level) when delivery period is 9 days i.e. at 5% risk level of being out of stock, the maximum delivery period should
= ½ (4,396 kgs + 1,950 kgs) = 3,173 kgs not exceed 9 days.
Or Annual Demand
Safety stock = × (Maximum lead time – Average lead time)
= (½ × ROQ + Minimum level) 54,000
360
= (½ × 1,196 kgs + 1,950 kgs) = 2,548 kgs = 360
× (9 days – 6 days) = 450 castings

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

PYQ 8
= 450 castings + (6 days × 150 casting) = 1,350 castings
IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. IPL
Limited purchases 54,000 castings per year at a cost of `800 per casting.
(d) At 5% stock-out risk the total cost of ordering and carrying cost is as follows:
The castings are used evenly throughout the year in the production process on a 360-day-per-year basis.
The company estimates that it costs `9,000 to place a single purchase order and about `300 to carry one Total cost of ordering =
Annual Demand
× Cost per order
casting in inventory for a year. EOQ
54,000
The high carrying costs result from the need to keep the castings in carefully controlled temperature and =
1,800
× `9,000 = `2,70,000
humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6 days,
but it can take as much as 10 days. Total cost of carrying = (Safety stock + ½ EOQ) × Carrying cost per unit p.a.
= (450 units + ½ × 1,800 units) × `300 = `4,05,000
The days of delivery time and percentage of their occurrence are shown in the following tabulation:
Delivery time (days) : 6 7 8 9 10 (e) (a) Computation of new EOQ =
2 × 54000 × 600
= 300 castings
Percentage of occurrence : 75 10 5 5 5 720
54,000
(b) Total number of orders to be placed in a year = = 180 orders
Required 300

1. Compute the economic order quantity (EOQ). Under new purchasing policy IPL Ltd. has to place order in every 2nd day (360 days ÷ 180 orders),
2. Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety however under the old purchasing policy it was every 12th day.
stock? The re-order point?
 MATERIAL COST 1.39 MATERIAL COST 1.40
PYQ 9 (c) Ideal Stock Level = ROL - Consumption during lead time
RST Limited has received an offer of quantity discount on its order of materials as under: = 1,500 – 500 = 1,000 units
Price per tonne Tonnes number
PYQ 11
`9,600 Less than 50
PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a
`9,360 50 and less than 100
component X which is purchased at `15 per unit. For every finished product, 2 units of component X are
`9,120 100 and less than 200
required. The Ordering cost is `350 per order and the Carrying cost is 12% p.a.
`8,880 200 and less than 300
`8,640 300 and above Required:
1. Calculate the economic order quantity for Component X.
The annual requirement for the material is 500 tonnes. The ordering cost per order is `12,500 and the 2. If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to
stock holding cost is estimated at 25% of the material cost per annum. incur?
Required 3. What is the minimum carrying cost, the Company has to incur?
1. Compute the most economical purchase level. [(10 Marks) May 1999, 2006]
2. Compute EOQ if there are no quantity discounts and the price per tonne is `10,500.
[(5 Marks) Nov 2004] Answer
2 AO 2 × 12 ,48 ,000 × 350
1. EOQ = = = 22,030 units
Answer C 15 × 12 %
1. Statement Showing Most Economical Purchase Level
Cost of Ordering Cost Carrying Cost Annual consumption = 52,000 units of FG × 2 units of X for 1 unit of FG × 12 month
Order No. of Orders = 12,48,000 units
Purchase (No. of Orders × (½ × ROQ × Total Cost
Size (A/ROQ)
(500 × Price) `12,500) Price × 25%)
40 (500/40) = 12.5 or 13 48,00,000 1,62,500 48,000 50,10,500 2. Statement Showing Extra Cost
50 (500/50) = 10 46,80,000 1,25,000 58,500 48,63,500 Particulars At EOQ 22,030 units At ROQ 52,000 units
100 (500/100) = 5 45,60,000 62,500 1,14,000 47,36,500 1. Ordering cost: 12,48,000 ÷ 22,030 = 12,48,000 ÷ 52,000 =
200 (500/200) = 2.5 or 3 44,40,000 37,500 2,22,000 46,99,500 Number of orders 56.65 or 57 24
300 (500/300) = 1.67 or 2 43,20,000 25,000 3,24,000 46,69,000 Ordering cost (number of orders × `350) 19,950 8,400
2. Carrying cost (½ × ROQ × C) (C = 12% of `15) 19,827 46,800
Most economical purchase level is 300 units having lower total cost.
Total cost (1+2) 39,777 55,200
Extra cost - 15,423
2 AO 2 × 500 × 12 ,500
2. EOQ = = = 69 tonnes
C 10 ,500 × 25 % 3. Minimum Carrying Cost:
Carrying cost depends upon the size of the order. It will be minimum on the least order size. (In this part
PYQ 10 of the question the two order sizes are 22,030 units and 52,000 units. Here 22,030 units is the least of
SK Enterprise manufactures a special product "ZE". The following particulars were collected for the year 2004: the two order sizes. At this order size carrying cost will be minimum.) The minimum carrying cost in this
Annual consumption 12,000 units (360 days) case can be computed as under:
Cost per unit `1 Minimum carrying cost = ½ × 22,030 units × 12% of `15 = `19,827
Ordering cost `12 per order
Inventory carrying cost 24% p.a. PYQ 12
Normal lead time 15 days PQR Ltd. manufactures a special product, which requires 'ZED'. The following particulars were collected for
Safety stock 30 days consumption the year 2005-06:
Required Monthly demand of Zed : 7,500 units
(a) Re-order quantity Cost of placing an order : `500
(b) Re-order level Re-order period : 5 to 8 weeks
(c) What should be the inventory level (ideally) immediately before the material order is received? Cost per unit : `60
[(5 Marks) May 2005] Carrying cost : 10% p.a.
Normal usage : 500 units per week
Answer Minimum usage : 250 units per week
Maximum usage : 750 units per week
2 AO 2 × 12 ,000 × 12
(a) Re-order quantity (EOQ) = = = 1,095 units
C 1.00 × 24 % Required:
1. Re-order quantity 4. Maximum stock level
(b) Re-order level = Safety stock + Consumption during lead time 2. Re- order level 5. Average stock level.
= (12,000 ÷ 360) × 30 + (12,000 ÷ 360) × 15 3. Minimum stock level
= 1,000 + 500 = 1,500 units [(10 Marks) Nov 2006]
 MATERIAL COST 1.41 MATERIAL COST 1.42
Answer 2. No. of orders needed =
Annual Re quirement
=
40,000
= 100 orders
2 AO 2 × 26 ,000 × 500 EOQ 400
1. Re-order Quantity = = = 2,082 units
C 60 × 10 %
3. Total cost of ordering and carrying (at EOQ level):
A = Annual Requirement in units 40,000
= Normal usage per week × 52 weeks Ordering Cost = No. of orders × Cost per order = ×8 = `800
400
= 500 units × 52 weeks = 26,000 units Carrying Cost = ½ × ROQ × C = ½ × 400 × 4 = `800

2. Re-order level = Maximum re-order period × Maximum usage Total = `800 + 800 = `1,600
= 8 Weeks × 750 units per week = 6,000 units.
4. Normal usage per day = 111 packs (40,000 packs /360 days)
3. Minimum stock level = Re order level – (Normal usage × Average re-order period) Present inventory = 333 packs
= 6,000 – (500 units per week × 6.5weeks) Present inventory in terms of no. of days = 3 days consumption (333 packs/111 Packs per
= 6,000 – 3,250 = 2,750 units day)
Normal lead time = 3 days
4. Maximum stock level = Re-order level + Re-order quantity – (Minimum usage × Minimum re-
order period) Since, Present inventory level is equal to normal lead time; next order should be placed immediately
= 6,000 + 2,082 – (250 units per week × 5 weeks) to avoid stock out situation.
= 6,000 + 2,082 – 1,250 = 6,832 units
PYQ 15
5. Average stock level = ½ (Minimum stock + Maximum stock) The annual carrying cost of material ‘X’ is `3.6 per unit and its total carrying cost is `9,000 per annum. What
= ½ (2,750 + 6,832) = 4,791 units would be the Economic order quantity for material ‘X’, if there is no safety stock of material X?
Or [(2 Marks) Nov 2008]
= ½ × ROQ + Minimum stock
= ½ × 2,082 + 2,750 = 3,791 units Answer
C = `3.6 per unit per annum
PYQ 13 Total carrying cost = ½ × EOQ × C
The average annual consumption of a material is 18,250 units at a price of `36.50 per unit. The storage cost is 9,000 = ½ × EOQ × 3.60
20% on an average inventory and the cost of placing an order is `50. How much quantity is to be purchased at 9 ,000 × 2
EOQ = = 5,000 units
a time? 3 .6
[(2 Marks) May 2007]
Assumption: Company follows EOQ policy.
Answer
PYQ 16
2AO 2  18 ,250  50 18 ,25,000 The following information relating to a type of Raw material is available:
EOQ = = = = 500 units
C 20% of 36.50 7 .3
Annual demand 2000 units
Unit price `20.00
PYQ 14
Ordering cost per order `20.00
ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its products is a
Storage cost 2% p.a.
special bowl, disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10 pieces
Interest rate 8% p.a.
at a price of `50 per pack.
Lead time Half month
The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The
company purchases the bowl direct from manufacturer at `40 per pack within a three days lead time. The
Calculate economic order quantity and total annual inventory cost of the raw material.
ordering and related cost is `8 per order. The storage cost is 10% per annum of average inventory investment.
[(5 Marks) Nov 2009]
Answer
Required:
2 AO 2 × 2,000 × 20 80,000
1. Calculate Economic Order Quantity. (1) EOQ = = = = 200 units
C 20 × 10 %(2% + 8%) 2
2. Calculate number of orders needed every year.
3. Calculate the total cost of ordering and storage bowls for the year.
(2) Total Annual Inventory Cost including purchase
4. Determine when should the next order to be placed (Assuming that the company does maintain a safety
stock and that the present inventory level is 333 packs with a year of 360 working days). Purchase cost (2,000units × `20 each) = `40, 000
[(10 Marks) May 2008] Ordering Cost (*10 orders × `20 per order) = `200
Carrying cost (½ × 200 × `20 × 10%) = `200
Answer Total annual inventory cost including purchase = `40,400
2 AO 2 × 40 ,000 × 8
1. EOQ = = = 400 packs * No. of Order (2,000 ÷ 200) = 10 orders
C 40 × 10 %
 MATERIAL COST 1.43 MATERIAL COST 1.44
PYQ 17 requirement of material ‘X’ in 4 equal quarterly installments?
Re-order quantity of material ‘X’ is 5,000 kgs; Maximum level 8,000 kgs; Minimum usage 50 kgs per hour; [(5 Marks) Nov 2012]
Minimum re-order period 4 days; daily working hours in the factory is 8 hours. You are required to calculate
the re-order level of material ‘X’. Answer
[(2 Marks) May 2010] 2 AO 2 × 96 ,000 × 1 ,000
(1) EOQ = = = 8,000 Kg
C 20 × 15 %
Answer
Maximum Level = ROL + ROQ - (Min lead time × Min consumption per day) (2) Statement of Evaluation
8,000 = ROL + 5,000 - [4 × 400 (50 kgs per hour × 8 hours per day)]
Re-order Level = 8,000 – 5,000 + 1,600 = 4,600 kg Particulars EOQ Quarterly
Purchase Price @ `20/`19.60/kg of 96,000 kg `19,20,000 `18,81,600
PYQ 18 Ordering cost @ `1,000 per order 12 orders × `1,000 4 orders × `1,000
ABC Limited has received an offer of quantity discounts on its order of materials as under: = `12,000 = `4,000
Carrying cost (½ × ROQ × Price × 15%) ½ × 8,000 × 20 × 15% ½ × 24,000 × 19.60 ×15%
= `12,000 = `35,280
Price per tonne Tones
`4,800 Less than 50
Total Cost `19,44,000 `19,20,880
`4,680 50 and less than 100
`4,560 100 and less than 200 Advise: Company should accept 2% discount offer (Net saving by acceptance is `23,120).
`4,440 200 and less than 300 Working Notes:
`4,320 300 and above
(a) A = (3 kg × 32,000) 96,000 kg (1 unit of product ‘M’ requires 3 kgs of ‘X’)
The annual requirement for the material is 500 tones the ordering cost per order is `6,250 and the stock Annual demand of ‘M’ = 8,000 units × 4 quarters = 32,000 units
holding cost is estimated at 25% of the material cost per annum.
96 ,000
(b) No. of orders at EOQ = = 12 orders
Required: 8 ,000

1. Compute the most economical purchase level, (c) ROQ at 2% offer =

96 ,000
= 24,000 kg
2. Compute EOQ, if there are no quantity discounts and the price per ton is `5,250. 4 orders
[(5 Marks) Nov 2010]
PYQ 20
Answer Primex Limited produces product ‘P’. It uses annually 60,000 units of a material ‘Rex’ costing `10 per unit.
1. Statement Showing Most Economical Purchase Level Other relevant information are:
Cost of Ordering Cost Carrying Cost Cost of placing an order : `800 per order
Order No. of Orders
Purchase (No. of Orders × (½ × ROQ × Total Cost Carrying cost : 15% p.a. of average inventory
Size (A/ROQ)
(500 × Price) `6,250) Price × 25%) Re-order period : 10 days
40 (500/40) = 12.5 or 13 24,00,000 81,250 24,000 25,05,250 Safety stock : 600 units
50 (500/50) = 10 23,40,000 62,500 29,250 24,31,750 Company operates : 300 days in a year
100 (500/100) = 5 22,80,000 31,250 57,000 23,68,250
200 (500/200) = 2.5 or 3 22,20,000 18,750 1,11,000 23,49,750 You are required to calculate:
300 (500/300) = 1.67 or 2 21,60,000 12,500 1,62,000 23,34,500 1. Economic Order Quantity for material ‘Rex’.
Most Economical order size is 300 units because at this level, the total cost is minimum i.e. `23,34,500. 2. Re-order Level
3. Maximum Stock Level
2 AO 2 × 500 × 6 ,250 62 ,50 ,000
4. Average Stock Level
2. EOQ = = = = 69 tones [(5 Marks) Nov 2013]
C 5 ,250 × 25 % 1 ,312 .50

Answer
PYQ 19
2 AO 2 × 60 ,000 × 800
KL Limited produces product ‘M’ which has a quarterly demand of 8,000 units. The product requires 3 kgs 1. EOQ = = = 8,000 units
C 10 × 15 %
quantity of material ‘X’ for every finished unit of product. The other information are follows:
Cost of material ‘X’ : `20 per kg. 2. Re-order Level (ROL) = Safety Stock + (Re-order period × Average consumption per day)
Cost of placing an order : `1,000 per order  60,000 Units 
Carrying Cost : 15% per annum of average inventory = 600 +  10 Days ×  = 2,600 units
 300 Days 
You are required:
3. Maximum Stock Level = ROL + ROQ – (Re-order period × Average consumption per day)
(1) Calculate the Economics Order Quantity for material ‘X’.
(2) Should the company accept an offer of 2 percent discount by the supplier, if he wants to supply the annual
 MATERIAL COST 1.45 MATERIAL COST 1.46
 60,000 Units  Total cost 30,000 78,000
= 2,600 + 8,000 –  10 Days ×  = 8,600 units
 300 Days  Extra Cost or Discount to be negotiated - 48,000
% of Discount {(48,000 ÷ 40,000 × 80) × 100} - 1.5%
4. Average stock level = ½ of ROQ + Safety stock
= ½ of 8,000 + 600 units = 4,600 units PYQ 22
Following details are related to a manufacturing concern:
PYQ 21 Re-order Level 1,60,000 units
A company manufactures a product from a raw material, which is purchased at `80 per kg. The company incurs Economic Order Quantity 90,000 units
a handling cost of `370 plus freight of `380 per order. The incremental carrying cost of inventory of raw Minimum Stock Level 1,00,000 units
material is `0.25 per kg per month. In addition, the cost of working capital finance on the investment in Maximum Stock Level 1,90,000 units
inventory of raw material is `12 per kg per annum. The annual production of the product is 1,00,000 units and Average Lead Time 6 days
2.5 units are obtained from one kg of raw material. Difference between minimum and maximum lead time 4 days
Required: Calculate:
(a) Calculate the economic order quantity of raw materials. (1) Maximum consumption per day
(b) Advice, how frequently should order for procurement be placed. (2) Minimum consumption per day
(c) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of [(5 Marks) Nov 2014]
discount in the price of raw materials should be negotiated?
[(10 Marks) May 2014] Answer
(1) Maximum consumption per day:
Answer
2 AO 2 × 40 ,000 × 750
Re-order level = Maximum re-order period × Max consumption per day
(a) EOQ = = = 2,000 kgs 1,60,000 units = 8 days × Maximum consumption per day
C 15
1,60 ,000 units
Where, Max consumption per day = = 20,000 units
8 days

A = Annual usage of raw Material (2) Minimum consumption per day:

= 1 unit of raw material gives 2.5 units of Finished Goods
Therefore, for 1,00,000 units of finished goods, material required Maximum stock level = Re-order level + Re-order quantity - (Min lead time ×
1 ,00 ,000 Minimum consumption per day)
= = 40,000 Kgs 1,90,000 units = 1,60,000 units + 90,000 units - (4 days × Minimum
2 .5
consumption per day)
O = Ordering cost per order = handling cost per order + freight per order 2,50,000 – 1,90,000 = 4 days × Minimum consumption per day
= `370 + `380 = `750 Minimum consumption = 15,000 units per day
C = Carrying cost and holding cost of inventory per unit p.a.
= Carrying cost per unit p.a. + Interest cost of investment in inventory per unit p.a. Working notes:
= (`0.25 per kg per month × 12 months) + `12 per kg p.a.
= `3 + `12 = `15 per kg p.a. Calculation of Minimum Lead Time:
Maximum lead time – Minimum lead time = 4 days
(b) Frequency of placing order/time interval between order: Or Maximum lead time = Minimum lead time + 4 days (i)
365 days or 12 months 12 months Average lead time = 6 days
= = = 0.6 month
* No. of orders 20 orders Max lead time + Min lead time Min lead time + 4 days + Min lead time
=
Or 2 2
=
365 days
= 18 days (approx.) 2 Minimum lead time + 4 Days = 6 days × 2 = 12 days
20 orders Minimum lead time = (12 days – 4 days) ÷ 2 = 4 days
Working Notes:
*No. of orders =
Annual requiremen t
=
40 ,000 kgs
= 20 Orders PYQ 23
EOQ 2,000 kgs Supreme Limited is a manufacturer of energy saving bulbs. To manufacture the finished product one unit of
component ‘LED’ is required. Annual requirement of component ‘LED’ is 72,000 units, the cost being `300 per
(c) Statement of % of Discount to be Negotiated for Placing Quarterly Orders unit. Other relevant details for the year 2015-2016 are:
At EOQ (order At order size Cost of placing an order : `2,250
Particulars
size 2,000 kgs) 10,000 kgs Carrying cost of inventory : 12% per annum
Ordering cost (A/ROQ × O) 15,000 3,000 Lead time:
Carrying cost (½ × ROQ × C) 15,000 75,000 Maximum : 20 days
 MATERIAL COST 1.47 MATERIAL COST 1.48
Minimum : 8 days (2) Re-order Level = Maximum Re-order period × Maximum Usage
Average : 14 days = 8 weeks × 400 units = 3,200 units
Emergency purchase : 5 days
Consumption: Evaluation of 5% discount offer
Maximum : 400 units per day At EOQ (order At order size
Particulars
Minimum : 200 units per day size 300 units) 6,000 units
Average : 300 units per day Purchase cost 18,000 units @ `1,000/`950 per unit 1,80,00,000 1,71,00,000
Ordering cost (A/ROQ × `75) 4,500 225
You are required to calculate: Carrying cost (ROQ × ½ × C) (C = 3% of `1,000/`950) 4,500 85,500
Total cost 1,80,09,000 1,71,85,725
(a) Re-order quantity
(b) Re-ordering level Advise: Accept the discount offer.
(c) Minimum stock level
(d) Maximum stock level PYQ 25
(e) Danger level M/S X private Limited is manufacturing a special product which requires a component “SKY BLUE” the
[(5 Marks) Nov 2016] following particulars are available for the year ended 31st march, 2018:

Answer Annual demand of “SKY BLUE” 12,000 units

2 AO 2 × 72 ,000 × 2,250 Cost of placing an order `1,800
(a) ROQ = = = 3,000 units
C 12 % of 300 Cost per unit of “SKY BLUE” `640
Carrying cost per unit 18.75%
(b) Re-ordering Level = Maximum consumption × Maximum lead time The company has been offered a quantity discount of 5% on purchase of “SKY BLUE” provided order size is
= 400 units × 20 days = 8,000 units 3,000 components a time.

(c) Minimum Level = ROL – (Average consumption × Average lead time) You are required to compute:
= 8,000 units – (300 units × 14 days) = 3,800 units (1) Economic order quantity.
(2) Advise whether the discount offer be accepted by the firm or not.
(d) Maximum Level = ROL + ROQ – (Minimum consumption × Minimum lead time) [(5 Marks) May 2018]
= 8,000 units + 3,000 units – (200 units × 8 days)= 9,400 units
Answer
(e) Danger Level = Average consumption × Emergency delivery time 2 AO 2 × 12 ,000 × 1 ,800
= 300 units × 5 days = 1,500 units (1) EOQ = = = 600 units
C 640 × 18 .75 %
Or
= Minimum consumption × Emergency delivery time
(2)
Evaluation of 5% discount offer
= 200 units × 5 days = 1,000 units
At EOQ (order At order size
Particulars
size 600 units) 3,000 units
PYQ 24
Purchase cost 12,000 units @ `640/`608 per unit 76,80,000 72,96,000
ASJ manufacturer produces a product which requires a component costing `1,000 per unit. Other information
Ordering cost (A/ROQ × `1,800) 36,000 7,200
related to the component are as under:
Carrying cost (½ × ROQ × C) (C = 18.75% of `640/`608) 36,000 1,71,000
Usage of component 1,500 units per month
Ordering cost `75 per order Total cost 77,52,000 74,74,200
Storage cost rate 2% per annum Advise: Accept the discount offer.
Obsolescence rate 1% per annum
Maximum usage 400 units per week PYQ 26
Lead time 6 - 8 weeks M/S SJ Private Limited manufactures 20,000 units of a product per month. The cost of placing an order is
The firm has been offered a quantity discount of 5% by the supplier on the purchase of component, if the order `1,500. The purchase price of the raw material is `100 per kg. The re-order period is 5 to 7 weeks. The
size 6,000 units at a time. consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption being 250 kg.
The carrying cost of inventory is 9.75% per annum.
You are required to compute:
(1) Economic order quantity. You are required to calculate:
(2) Re-order level and advise whether the discount offer be accepted by the firm or not.
1. Re-order quantity 4. Minimum level
[(5 Marks) May 2018]
2. Re-order level 5. Average stock level.
3. Maximum level
Answer [(5 Marks) Nov 2018]
2 AO 2 × 1 ,500 × 12 × 75
(1) EOQ = = = 300 units
C 1 ,000 × 3% Answer
 MATERIAL COST 1.49 MATERIAL COST 1.50
2 AO 2 × 13 ,000 × 1 ,500 28 500 17 8,500 - - - 2500 16.48 41,200
1. Re-order quantity = = = 2,000 kgs 30 - - Shortage 50 16.48 824 2450 16.48 40,376
C 100 × 9 .75 %

A = Normal usage per week × 52 weeks (B) Stores Ledger of Material CXE (LIFO Method)
= 250 kgs × 52 weeks = 13,000 kgs Date Receipts Issues Balance
April Units Rate Value Units Rate Value Units Rate Value
2. Re-order level (ROL) = Maximum usage × Maximum re-order period
1 - - - - - - 1000 15 15,000
= 300 kgs × 7 weeks = 2,100 kgs
4 3000 16 48,000 - - - 1000 15 15,000
3000 16 48,000
3. Maximum level = ROL + ROQ – (Minimum usage × Minimum re-order period)
8 - - - 1000 16 16,000 1000 15 15,000
= 2,100 kgs + 2,000 kgs – (200 kgs × 5 weeks) = 3,100 kgs
2000 16 32,000
4. Minimum level = ROL – (Normal usage × Normal re-order period) 15 1500 18 27,000 - - - 1000 15 15,000
= 2,100 kgs. – (250 kgs × 6 weeks) = 600 kgs 2000 16 32,000
1500 18 27,000
5. Average stock level = ½ (Minimum level + Maximum level) 20 - - - 1200 18 21,600 1000 15 15,000
= ½ (600 kgs + 3,100 kgs) = 1,850 kgs 2000 16 32,000
Or 300 18 5,400
= (Minimum level + ½ × ROQ) 25 - - Return 300 18 5400 1000 15 15,000
= (600 kgs + ½ × 2,000 kgs) = 1,600 kgs 2000 16 32,000
26 - - - 1000 16 16,000 1000 15 15,000
PYQ 27 1000 16 16,000
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing company during the 28 500 17 8,500 - - - 1000 15 15,000
month of April 2019: 1000 16 16,000
500 17 8,500
Date Particulars Quantity (kg) Rate per kg 30 - - Shortage 50 17 850 1000 15 15,000
April 4 Purchase 3000 `16 1000 16 16,000
April 8 Issue 1000 450 17 7,650
April 15 Purchase 1500 `18
April 20 Issue 1200 (2) Value of material consumed and closing stock:
April 25 Return to supplier
Material Consumed Closing Stock
(out of purchase made on April 15) 300
Under Weighted Average 51,900 40,376
April 26 Issue 1000
Under LIFO 53,600 38,650
April 28 Purchase 500 `17
PYQ 28
Opening stock as on 01-04-2019 is 1000 kg @ `15 per kg. On 30th April, 2019 it was found that 50 kg of
Surekha limited produces 4,000 litres of paints on quarterly basis. Each litre requires 2 kg of raw material. The
material ‘CXE’ was fraudulently misappropriated by the store assistant and never recovered by the company.
cost of placing one order for raw material is `40 and the purchasing price of raw material is `50 per kg. The
Required: storage cost and interest cost is 2% and 6% per annum respectively. The lead time for procurement of raw
material is 15 days.
(1) Prepare a store ledger account under each of the following method of pricing the issue:
(A) Weighted Average Method, (B) LIFO Calculate Economic Order Quantity and Total Annual Inventory Cost in respect of the above raw
(2) What would be the value of material consumed and value of closing stock as on 30-04-2019 as per these material.
two methods? [(5 Marks) Nov 2019]
[(10 Marks) May 2019]
Answer
Answer 2AO 2 × 32 ,000 × 40 25 ,60 ,000
(1) (A)Stores Ledger of Material CXE (Weighted Average Method) (1) EOQ = = = = 800 Kgs
C 50 × 8%(2% + 6%) 4
Date Receipts Issues Balance
April Units Rate Value Units Rate Value Units Rate Value A = 4,000 litres × 4 Quarters × 2 kg of raw material = 32,000 Kgs
1 - - - - - - 1000 15 15,000
4 3000 16 48,000 - - - 4000 15.75 63,000 (2) Total Annual Inventory Cost including purchase
8 - - - 1000 15.75 15,750 3000 15.75 47,250
15 1500 18 27,000 - - - 4500 16.50 74,250 Annual inventory cost = Purchase cost + Carrying cost + Ordering cost
A
20 - - - 1200 16.50 19,800 3300 16.50 54,450 = Purchase quantity × Purchase price + ½ × EOQ × C + EOQ × O
25 - - Return 300 18 5400 3000 16.35 49,050 = 32,000 kgs × `50 + ½ × 800 × 4 +
32,000
× 40
26 - - - 1000 16.35 16,350 2000 16.35 32,700 800
 MATERIAL COST 1.51 MATERIAL COST 1.52
= `16,00,000 + `1,600 + `1,600 = `16,03,200 103 50 80
104 75 8
PYQ 29 105 225 2
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is `240 106 75 12
and the annual carrying cost of average inventory is 12.5%. Each spare part costs `50. At present, the order
size is 3,000 spare parts. (Assume that number of days in a year = 360 days) MM ltd. has adopted the policy of classifying the items constituting 15% or above of Total Inventory Cost as
‘A’ category, items constituting 6% or less of Total Inventory Cost as ‘C’ category and the remaining items as
Find out: ‘B’ category.
(1) How much the company’s cost would be saved by EOQ model?
(2) The re-order point under EOQ model if lead time is 12 days? You are required to:
(3) How frequently should orders for procurement be placed under EOQ model?
[(10 Marks) Nov 2020] (1) Rank the items on the basis of % of Total Inventory Cost.
(2) Classify the items into A, B, and C, categories as per ABC Analysis of Inventory Control adopted by MM
Answer Ltd.
1. Calculation of saving in cost by using EOQ: [(5 Marks) July 2021]

(a) Total ordering and carrying cost under existing policy: Answer
(1) Statement Showing % of Total Inventory Cost and Rank
A 27 ,000 Item Code Number Units Unit Cost (`) Total Cost (`) % of Total Inventory Cost Rank
Ordering cost = ×O = × `240 = `2,160
ROQ 3 ,000 101 25 50 1,250 16.67 2
102 300 1 300 4 6
Carrying cost = ½ × ROQ × C = ½ × 3,000 × `6.25 = `9,375 103 50 80 4,000 53.33 1
Total = `2,160 + `9,375 = `11,535 104 75 8 600 8 4
105 225 2 450 6 5
(b) Total ordering and carrying cost under EOQ policy: 106 75 12 900 12 3
- 750 - 7,500 100 -
A 27,000
Ordering cost = ×O = ( 1,440 ) 18.75 or 19 × `240= `4,560 (2) Classifying items as per ABC Analysis of Inventory Control
ROQ
Basis for ABC Classification as % of Total Inventory Cost
Carrying cost = ½ × ROQ × C = ½ × 1,440 × `6.25 = `4,500
15% & above : ‘A’ items
Total = `4,560 + `4,500 = `9,060
7% to 14% : ‘B’ items
6% and less : ‘C’ items
Saving in cost (a) - (b) = `11,535 - `9,060 = `2,475
Rank Item Code Number Total Cost (`) % of Total Inventory Cost Category
Working Note:
1 103 4,000 53.33
2AO 2 × 27 ,000 × 240
EOQ = = = 1,440 Units 2 101 1,250 16.67
C 12 .5% × 50
Total 2 5,250 70.00 A
3 106 900 12
2. Re-order Point = Normal Consumption × Normal Lead Time 4 104 600 8
27,000 Total 2 1,500 20.00 B
= × 12 = 900 units
360 5 105 450 6
6 102 300 4
3. Frequency of placing order: Total 2 750 10.00 C
360 days 360 Grand Total 6 7,500 100
= =
* No. of orders 19 orders
= 18.95 or 19 days PYQ 31
XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process and has
*No. of orders =
27,000
= 18.75 or 19 orders provided the following data year ended on 31st March, 2021:
1 ,440
Particulars Material A (`) Material B (`)
Opening stock as on 01.04.2020 30,000 32,000
PYQ 30
Purchase during the year 90,000 51,000
MM Ltd. has provided the following information about the items in its inventory.
Closing stock as on 31.03.2021 20,000 14,000
Item Code Number Units Unit Cost (`)
101 25 50 1. You are required to calculate:
102 300 1 a. The inventory turnover ratio of ‘Material A’ and ‘Material B’.
 MATERIAL COST 1.53 MATERIAL COST 1.54
b. The number of days for which the average inventory is held for both materials ‘A’ and ‘B’. Annual requiremen t 12 ,000 kgs
*No. of orders = = = 12 orders
2. Based on above calculations, give your comments. EOQ 1 ,000 kgs
(Assume 360 days in a year.)
[(5 Marks) Dec 2021] (c) Total Ordering and Carrying cost per annum at EOQ:
Answer Total cost of ordering = Number of orders × Cost per order
1. Statement Showing Inventory Turnover Ratio = 12 × `750 = `9,000
Particulars Material A Material B
Total cost of carrying = ½ EOQ × C
Opening stock 30,000 32,000
= ½ × 1,000 Kg. × `18 = `9,000
Add: Purchases 90,000 51,000
Less: Closing stock (20,000) (14,000) Total Cost = `18,000
Materials consumed 1,00,000 69,000
Average inventory (Opening stock + Closing stock) ÷ 2 25,000 23,000 PYQ 33
a. Inventory turnover ratio (Materials consumed ÷ Average inventory) 4 times 3 times MM Ltd. uses 7,500 valves per month which is purchased at a price of `1.50 per unit, the carrying cost is
b. Inventory holding period (360 ÷ IT Ratio) 90 days 120 days estimated to be 20% of average inventory investment on an annual basis. The cost to place an order and
getting the delivery is `15. It takes a period of 1.5 months to receive a delivery from the date of placing and
2. Comment: The material turnover ratio of material A is higher than material B. Hence, A is the fast moving order and a safety stock of 3,200 valves is desired.
material. Inventory Turnover Ratio indicates that how much time a particular inventory is rotated
during the year. Since, inventory turnover ratio of A is higher than that of B; it indicates that A is fast You are required to determine:
moving. This can be further verified by average inventory holding as it is lesser for A in comparison to (a) The Economics Order Quantity (EOQ) and the frequency of orders
B. Attempt should be therefore made to reduce the amount of capital locked up in B. (b) The re-order point.
(c) The Economics Order Quantity (EOQ) if the valve costs `4.50 each instead of `1.50 each.
PYQ 32 (Assume a year consists of 360 days)
A Limited a toy company purchases its requirement of raw material from S Limited at `120 per kg. The [(5 Marks) Nov 2022]
company incurs a handling cost of `400 plus freight of `350 per order. The incremental carrying cost of
inventory of raw material is `0.25 per kg per month. In addition the cost of working capital finance on the Answer
investment in inventory of raw material is `15 per kg per annum. The annual production of the toys is 60,000
2AO 2  7 ,500  12  15
units and 5 units of toys are obtained from one kg. of raw material. (a) EOQ = = = 3,000 valves
C 1.50  20 %
Required:
(a) Calculate the Economic Order Quantity (EOQ) of raw materials. Number of orders = (7,500 × 12) ÷ 3,000 = 30 orders
(b) Advise, how frequently company should order to minimize its procurement cost. Assume 360 days in
a year. Frequency of orders = 360 days ÷ 30 orders = 12 days
(c) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ.
[(5 Marks) May 2022] (b) Re-order point = Average consumption × Average lead time + Safety stock
7,500 ×12
= × 45 days (1.5 months × 30 days) + 3,200
360
Answer = 14,450 valves
2 AO 2  12,000  750
(a) EOQ = = = 1,000 kgs
C 18 2AO 2  7 ,500  12  15
(c) EOQ = = = 1,732.05 valves
A = Annual usage of raw Material (1 unit of raw material gives 5 units of Finished Goods. C 4.50  20%
Therefore, for 60,000 units of finished goods, material required)
= 60,000 ÷ 5 = 12,000 Kgs
O = Ordering cost per order
= handling cost per order + freight per order
= `400 + `350 = `750
C = Carrying cost or holding cost of inventory per unit p.a.
= Carrying cost per unit p.a. + interest cost of investment in inventory per unit p.a.
= (`0.25 per unit per month × 12 months) + `15 per kg p.a.
= `3 + `15 = `18 per kg p.a.

(b) Frequency of placing order:

360 days 360 days
= = = 30 days
* No. of orders 12 orders
 MATERIAL COST 1.55 MATERIAL COST 1.56

SUGGESTED REVISION
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 EMPLOYEE COST 2.1
WAGE PAYMENT AND INCENTIVES PLANS
BQ 1
Calculate the earnings of the workers A, B and C under Straight Piece Rate System and Time Rate System

CHAPTER - 2
from the following particulars:
Normal rate per hour `54
Standard time per unit 1 Minute
Output per day is as follows:
Worker A 390 Units

EMPLOYEE COST
Worker B 450 Units
Worker C 600 Units
Working hours per day 8 hours

Answer
1. Calculation of earnings under Straight Piece Rate System:
LEARNING OUTCOMES Worker A = 390 units × `0.90 = `351.00
Worker B = 450 units × `0.90 = `405.00
Worker C = 600 units × `0.90 = `540.00
After studying this chapter you will be able to
 State the meaning and importance of employee (labour) cost in an 2. Calculation of earnings under Time Rate System:
organisation. Worker A = 8 Hours × `54 = `432
Worker B = 8 Hours × `54 = `432
 Discuss the attendance and payroll procedures. Worker C = 8 Hours × `54 = `432
 State the meaning and treatment of idle time and overtime cost.
Working Notes:
 Compute employee (labour) turnover discuss its meaning, reasons,
Computation of Normal wage rate per unit:
methods of measurement and cost impacts.
Normal rate per hour `54
 Discuss and apply the various methods of remuneration and Standard Output per hour 60 units
incentive system in calculation of wages, bonus etc. Normal wage rate per unit `0.90 (`54 ÷ 60 units)
 Discuss the efficiency rating procedures. BQ 2
Calculate the earnings of a worker under Halsey System and under Rowan System. The relevant data is as
below:
Time Rate (per hour) `60
Time allowed 8 hours
Time taken 6 hours
Time saved 2 hours

Answer
Earning under Halsey System:
Earning = (AH × R) + 50% (SH - AH) × R
= (6 hours × `60) + 50% (8 hours – 6 hours) × `60 = `420.00
Earning under Rowan System:
Earning = (AH × R) + AH × (SH – AH) × R
SH
= (6 hours × `60) + 6 × (8 hours – 6 hours) × `60 = `450.00
8

BQ 3
From the following particulars you are required to work out the earnings of a worker for a week under:
1. Straight piece rate,
2. Time rate,
 EMPLOYEE COST 2.2 EMPLOYEE COST 2.3
3. Halsey premium scheme (50% sharing) and BQ 5
4. Rowan premium scheme From the under mentioned information work out the total amount payable and the rate earned per hour by
three workmen under the Halsey Premium Bonus System (the bonus being calculated at 50% of the time
Weekly working hours 48 hours Normal time taken per piece 20 minutes
saved):
Hourly wage rate `7.50 Normal output per week 144 pieces
Standard time for given operation : 10 hours
Piece rate per unit `3.00 Actual output for the week 150 Pieces
Hourly rate of wages : `1.00
Answer Actual time taken: B : 8 hours
Calculation of earnings under various System: C : 6 hours
D : 5 hours
(a) Straight piece rate = Number of units produced × Piece rate
= 150 units × `3.00 = `450.00
Answer
Earning under Halsey premium bonus system and rate earned per hour
(b) Time rate = Number of hours × Wage rate per hour
= 48 Hours × `7.50 = `360.00 Earning = (AH × R) + 50% (SH - AH) × R
Rate earned per hour = Earning ÷ AH
(c) Halsey System = (AH × R) + 50% (SH - AH) × R
= (48 hours × `7.50) + 50% (50 – 48) × `7.50 = `367.50 For B
Earning = (8 hours × `1) + 50% (10 - 8) × `1 = 8+1 = `9
Rate per hour = 9 ÷ 8 hours = `1.25
(d) Rowan System = (AH × R) + AH × (SH – AH) × R
SH
For C
= (48 hours × `7.50) + 48 × (50 - 48) × `7.50 = `374.40 Earning = (6 hours × `1) + 50% (10 - 6) × `1 = 6+2 = `8
50
Rate per hour = 8 ÷ 6 hours = `1.33
*Standard Hours (SH) = 150 units × 20/60 = 50 hours
For D
BQ 4 Earning = (5 hours × `1) + 50% (10 – 5) × `1 = 5 + 2.50= `7.50
During first week of April, 2022 the workman Mr. Kalyan manufactures 300 articles. He receives wage for a Rate per hour = 7.50 ÷ 5 hours = `1.50
guaranteed 48 hours week at the rate of `4 per hour. The estimated time to produce one article is 10 minutes
and under incentive schemes (Halsey and Rowan) the time allowed is increased by 20%. BQ 6
(a) Bonus paid under the Halsey Plan with bonus at 50% for the time saved equals the bonus paid under the
Calculate his gross wages according to: Rowan System. When will this statement hold good? (Your answer should contain the proof).
(a) Piece work with a guaranteed weekly wage,
(b) Halsey premium bonus 50% to workman, and (b) The time allowed for a job is 8 hours. The hourly rate is `8. Prepare a statement showing:
(c) Rowan premium bonus. (i) The bonus earned,
(ii) The total earnings of labour and
Answer (iii) Hourly earnings.
Calculation of earnings under various System:
Under the Halsey system with 50% bonus for time saved and Rowan system for each hour saved progressively.
(a) Piece work with guarantee weekly wages:
BQ 7
Piece work wages = Number of units produced × Piece rate A workman whose basic rate of pay is `3 per hour is covered under Rowan system of premium bonus. In
= 300 units × `0.6666 = `200 addition he gets a cost of living allowance (Dearness Allowance/ D.A.) of `50 per week of 48 hours.

Guaranteed weekly wages = Number of hours × Wage rate per hour Calculate the total earnings of the worker if during a week he worked on the following jobs:
= 48 Hours × `4.00 = `192
(i) Job X for 30 hours for which standard time allowed is 40 hours.
Final wages = `200 or `192 whichever is higher = `200 (ii) Job Y for 15 hours for which standard time allowed is 20 hours, for 3 hours he was not provided with
any job.
(b) Halsey System = (AH × R) + 50% (SH - AH) × R [`239.41]
= (48 hours × `4) + 50% (60 – 48) × `4 = `216
(c) Rowan System = (AH × R) + AH × (SH – AH) × R BQ 8
SH Two workmen, ‘A’ and ‘B’ produce the same product using the same material. Their normal wage rate is also
= (48 hours × `4) + 48 × (60 - 48) × `4 = `230.40 the same; A is paid bonus according to the rowan system, while B is paid bonus according to the Halsey System.
60
The time allowed to make the product is 50 hours.
Working note: A takes 30 hours while B takes 40 hours to complete the product. The factory overhead rate is `5 per
man hour actually worked. The factory cost for the product for A is `3,490 and for B it is `3,600.
Standard Hours (SH) = Standard time to produced 300 articles + 20%
= 300 units × 10/60 + 20% = 60 hours You are required:
 EMPLOYEE COST 2.4 EMPLOYEE COST 2.5
(a) To find the normal rate of wages, 3. Advise to Mr. A about the selection of the scheme to fulfill assurance:
(b) To find the cost of material,
Halsey scheme brings more savings to Mr. A but the other scheme viz. Rowan fulfils the promise of 20%
(c) To prepare a statement comparing the factory cost of the products as made by the two workmen.
increase over the present earnings of `40 per hour by paying effectively `48 per hour. Hence, Rowan Plan
[(a) `20 per hour (b) `2,500 (c) A: `3,490; B: `3,600] should be adopted.

BQ 9 BQ 10
Mr. A is working by employing 10 skilled workers. He is considering the introduction of some incentive scheme A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a
either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour particular product is 4 hours. Mr. P, a machine man, has been paid wages under the Rowan Incentive Plan and
productivity to cope with the increased demand for the product by 25%. He feels that if the proposed incentive he had earned an effective hourly rate of `37.50 on the manufacture of that particular product.
scheme could bring about an average 20% increase over the present earnings of the workers, it could act as
sufficient incentive for them to produce more and he has accordingly given this assurance to the workers. What could have been his total earnings and effective hourly rate, had he been put on Halsey
Incentive Scheme (50%)?
As a result of the assurance, the increase in productivity has been observed as revealed by the
following figures for the current month: Answer
Hourly rate of wages (guaranteed) `40.00 The following equation can be made:
Average time for producing 1 piece by one worker 2 hours Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
(This may be taken as time allowed) 37.50 = [30 AH + AH/4 (4 - AH) × 30] ÷ AH
No. of working days in the month 25 days 37.50 AH = 30 AH + AH/4 (4 - AH) × 30
No. of working hours per day for each worker 8 hours 7.50 AH = AH/4 (4 - AH) × 30
Actual production during the month 1,250 units 7.50 AH = AH (4 - AH) × 7.50
Required: 1 = 4 - AH
1. Calculate effective rate of earnings per hour under Halsey scheme and Rowan scheme. AH = 3 hours
2. Calculate the savings to Mr. A in terms of direct labour cost per piece under the schemes.
3. Advise Mr. A about the selection of the scheme to fulfill his assurance. Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Total earnings = (AH × R) + 50% (SH – AH) × R
Answer = (3 × 30) + 50% (4 – 3) × 30 = `105
1. Computation of effective rate of earnings under the Halsey and Rowan schemes:
Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R Effective hourly rate = Total earning ÷ hours worked
= (2,000 × `40) + 50% (2,500 – 2,000) × `40 = `105 ÷ 3 hours = `35
= `90,000
BQ 11
Total earnings under Rowan scheme = (AH × R) + AH × (SH – AH) × R JBL Sisters operates a boutique which works for various fashion houses and retail stores. It has employed 26
SH workers and pays them on time rate basis. On an average an employee is allowed 8 hours for boutique work
2 ,000
= (2,000 × `40) + × (2,500 – 2,000) × `40 on a piece of garment. In the month of December 2021, two workers M and J were given 15 pieces and 21
2 ,500
pieces of garments respectively for boutique work. The following are the details of their work:
= `96,000
M J
Effective rate under Halsey Plan = `90,000 ÷ 2,000 hours = `45 per hour Work assigned 15 pcs. 21 pcs.
Effective rate under Rowan Plan = `96,000 ÷ 2,000 hours = `48 per hour Time taken 100 hours 140 hours

Actual hours (AH) = 10 workers × 25 days × 8 hours per day Workers are paid bonus as per Halsey System. The existing rate of wages is `60 per hour. As per the new wages
= 2,000 hours agreement the workers will be paid `72 per hour w.e.f. 1st January 2022. At the end of the month December
2021, the accountant of the company has wrongly calculated wages to these two workers taking `72 per hour.
Standard hours (SH) = 1,250 units × 2 hours per unit = 2,500 hours
Required:
2. Savings to Mr. A in terms of direct labour cost per piece: 1. Calculate the loss incurred due to incorrect rate selection.
Direct labour cost per unit: 2. Calculate the loss incurred due to incorrect rate selection, had Rowan scheme of bonus payment followed.
3. Calculate the loss/ savings if Rowan scheme of bonus payment had followed.
Under time wages = 2 hours × `40 per hour = `80 per unit 4. Discuss the suitability of Rowan scheme of bonus payment for JBL Sisters?
Under Halsey Plan = `90,000 ÷ 1,250 units = `72 per unit
Under Rowan Plan = `96,000 ÷ 1,250 units = `76.8 per unit Answer
1. Calculation of loss incurred due to incorrect rate selection:
Savings of direct labour cost per unit under: Worker M = (100 × `12) + 50% (15 × 8 – 100) × `12 = `1,320
Halsey Plan = `80 – `72 = `8.00 per unit Worker J = (140 × `12) + 50% (21 × 8 – 140) × `12 = `1,848
Rowan Plan = `80 – `76.80 = `3.20 per unit Total = `1,320 + `1,848 = `3,168
 EMPLOYEE COST 2.6 EMPLOYEE COST 2.7
2. Calculation of loss incurred due to incorrect rate selection under Rowan scheme: C 600 100 600.00
Total 1,800 400
Worker M = (100 × `12) + 100/120 (120 – 100) × `12 = `1,400
Total wages paid
Worker J = (140 × `12) + 140/168 (168 – 140) × `12 = `1,960 Average labour cost to produce 100 pieces = × 100 = 1,800
× 100 = `450
Total output 400
Total = `1,400 + `1,960 = `3,360
(ii) Piece Rate:
3. Calculation of loss/savings if Rowan scheme of bonus payment had followed:
Worker Actual output Piece rate Wages earned Labour cost per 100 pieces
(Loss)/savings = Loss under Halsey – Loss under Rowan A 180 *7.50 1,350 750.00
B 120 7.50 900 750.00
Worker M = `1,320 - `1,400 = (`80)
C 100 7.50 750 750.00
Worker J = `1,848 - `1,960 = (`112) Total 400 - 3,000 -
Total loss = `80 + `112 = `192 Total wages paid 3,000
Average labour cost to produce 100 pieces = × 100 = × 100 = `750
Total output 400
4. Suitability of Rowan scheme of bonus payment for JBL Sisters: Rowan Scheme of incentive payment
has the following benefits, which is suitable with the nature of business in which JBL Sisters operates: *Piece rate = `75 per hour ÷ 10 units in one hour = `7.50 per unit
(a) Under Rowan Scheme of bonus payment, workers cannot increase their earnings or bonus by merely
increasing its work speed. Bonus under Rowan Scheme is maximum when the time taken by a worker (iii) Halsey Scheme:
on a job is half of the time allowed. As this fact is known to the workers, therefore, they work at such Actual Wages earned Labour cost per 100
a speed which helps them to maintain the quality of output too. Worker SH AH
output (AH × R) + 50%(SH - AH) × R pieces
(b) If the rate setting department commits any mistake in setting standards for time to be taken to A 180 18 8 975 541.67
complete the works, the loss incurred will be relatively low. B 120 12 8 750 625.00
C 100 10 8 675 675.00
Total 400 - - 2,400 -
BQ 12
The standard hours of Job X is 100 hours. The Job has been completed by Amar in 60 hours, Akbar in 70 hours Total wages paid 2,400
and Anthony in 95 hours. The bonus system applicable to the job is as follows: Average labour cost to produce 100 pieces = × 100 = × 100 = `600
Total output 400
% of time saved to time allowed Bonus
Saving upto 10% 10% of time saved
(iv) Rowan Scheme:
From 11% to 20% 15% of time saved
From 21% to 40% 20% of time saved Actual Wages earned Labour cost per 100
Worker SH AH
From 41% to 100% 25% of time Saved output (AH × R) + AH/SH × (SH - AH) × R pieces
A 180 18 8 933 518.33
The rate of pay is `1 per hour. Calculate the total earnings of each worker and also the rate of earnings per B 120 12 8 800 666.67
hour. C 100 10 8 720 720.00
[Amar `66.50, `1.108; Akbar `74.50, `1.064; Anthony `95.50, `1.005] Total 400 - - 2,453 -

BQ 13 Total wages paid 2,453

Average labour cost to produce 100 pieces = × 100 = × 100 = `613.25
Wage negotiations are going on with the recognised Labour Union and the Management wants you as the Cost Total output 400
Accountant of the Company to formulate an incentive scheme with a view to increase productivity. The case
of three typical workers A, B and C who produce respectively 180, 120 and 100 units of the company's product BQ 14
in a normal day of 8 hours is taken up for study. Assuming that day wages would be guaranteed at `75 per A factory having the latest sophisticated machines wants to introduce an incentive scheme for its workers,
hour and the piece rate would be based on a standard hourly output of 10 units. keeping in view the following:
Calculate the earnings of each of the three workers, the employee cost per 100 pieces and also calculate (a) The entire gains of improved production should not go to the workers.
under the above schemes the average cost of labour for the company to produce 100 pieces.under: (b) In the name of speed, quality should not suffer.
(i) Day wages, (iii) Halsey scheme and (c) The rate setting department being newly established are liable to commit mistakes.
(ii) Piece rate, (iv) The Rowan scheme. You are required to prepare a suitable incentive scheme and demonstrate by an illustrative
numerical example how your scheme answers to all the requirements of the management.
Answer
Computation of earnings of each worker and labour cost per 100 pieces and the average cost of labour Answer
for the company to produce 100 pieces under various schemes: Rowan Scheme of premium bonus (variable sharing plan) is a suitable incentive scheme for the workers of the
(i) Day Wages: factory. If this scheme is adopted, the entire gains due to time saved by a worker will not pass to him.
Worker Day wages Actual output Labour cost per 100 pieces Another feature of this scheme is that a worker cannot increase his earnings or bonus by merely
A 600 180 333.33 increasing its work speed. The reason for this is that the bonus under Rowan Scheme is maximum when the
B 600 120 500.00
 EMPLOYEE COST 2.8 EMPLOYEE COST 2.9
time taken by a worker on a job is half of the time allowed. As this fact is known to the workers, therefore, they You are required to calculate the labour cost chargeable to job ‘Z’ and overheads in each of the
work at such a speed which helps them to maintain the quality of output too. following circumstances:
Lastly, Rowan System provides a safeguard in the case of any loose fixation of the standards by the (a) Where overtime is worked regularly throughout the year as a policy due to labour shortage.
rate-setting department. It may be observed from the following illustration that in the Rowan Scheme the (b) Where overtime is worked irregularly to meet the requirements of production.
bonus paid will be low due to any loose fixation of standards. Workers cannot take undue advantage of such a (c) Where overtime is worked at the request of the customer to expedite the job.
situation. The above three features of Rowan Plan can be discussed with the help of the following illustration:
[(a) `1,31,625 and Nil (b) `1,12,500 and `10,625 (c) `1,23,125 and Nil]
(a) Time allowed = 4 hours
Time taken = 3 hours BQ 16
Rate = `5 per hour It is seen from the job card for repair of the customer’s equipment that a total of 154 hours have been put in
Bonus = AH/SH (SH - AH) × R as detailed below:
= 3/4 × (4 - 3) × `5 = `3.75 Worker A paid @ `200 Worker B paid @ `100 Worker C paid @ `300
Day
per day for 8 hours per day for 8 hours per day for 8 hours
In the above illustration time saved is 1 hour and, therefore, total gain is `5. Out of `5 according to Rowan Plan Monday (Hours) 10 - ½ hours 8 hours 10 - ½ hours
only `3.75 is given to the worker in the form of bonus and the remaining `1.25 remains with the management. Tuesday (Hours) 8 hours 8 hours 8 hours
In other words, a worker is entitled for 75 percent of the time saved in the form of bonus. Wednesday (Hours) 10 - ½ hours 8 hours 10 - ½ hours
Thursday (Hours) 9 - ½ hours 8 hours 9 - ½ hours
(b) The figures of bonus in the above illustration when the time taken is 2 hours and 1 hour respectively are Friday (Hours) 10 - ½ hours 8 hours 10 - ½ hours
as below: Saturday (Hours) - 8 hours 8 hours
Bonus = 2/4 × (4 - 2) × `5 = `5.00 Total 49 hours 48 hours 57 hours

Bonus = 1/4 × (4 - 1) × `5 = `3.75 In terms of an award in a labour conciliation, the workers are to be paid dearness allowance on the basis
of cost of living index figures relating to each month which works out @ `968 for the relevant month. The
The above figures of bonus clearly show that when time taken is half of the time allowed, the bonus is dearness allowance is payable to all workers ir-respective of wage rate if they are present or are on leave with
maximum. When the time taken is reduced from 2 to 1 hour, the bonus figure fell by `1.25. Hence, it is quite wages on all working days.
apparent to workers that it is of no use to increase speed of work. This feature of Rowan Plan thus protects Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 4 hours on
the quality of output. Saturdays; the workers are however paid full wages for Saturday (8 hours for 4 hours worked).
Overtime is paid twice of ordinary wage rate if a worker works more than nine hours in a day of forty
(c) If the rate-setting department erroneously sets the time allowed as 10 hours instead of 4 hours, in the eight hours in a week. Excluding holidays, the total number of hours works out to 176 in the relevant month.
above illustration; then the bonus paid will be as follows: The company’s contribution to Provident Fund and Employees State Insurance Premium are absorbed into
overheads.
Bonus = 3/10 × (10 - 3) × `5 = `10.50
Work out the wages payable to each worker.
The bonus paid for saving 7 hours thus is `10.50 which is approximately equal to the wages of 2 hours. In
other words, the bonus paid to the workers is low. Hence workers cannot take undue advantage of any mistake Answer
committed by the time setting department of the concern. (1) Calculation of hours to be paid to worker A:
Normal Extra Overtime Equivalent normal hours Total normal
Days
OVERTIME hours hours hours for overtime worked hours
Monday 8 1 1.5 3 12
BQ 15 Tuesday 8 - - - 8
A company's basic wage rate is `100 per hour and its overtime rates are: Wednesday 8 1 1.5 3 12
Thursday 8 1 .5 1 10
Before and after normal working hours 175% of basic wage rate Friday 8 1 1.5 3 12
Sunday and holidays 225% of basic wage rate Saturday - - - - -
During the previous year the following hours were worked: Total 40 4 5 10 54
Normal time 1,00,000 hours
Overtime before and after working hours 20,000 hours
(2) Calculation of hours to be paid to worker B:
Overtime on Sundays and holidays 5,000 hours
Total 1,25,000 hours Normal Extra Overtime Equivalent normal hours Total normal
Days
hours hours hours for overtime worked hours
The following hours have been worked on job ‘Z’: Monday 8 - - - 8
Tuesday 8 - - - 8
Normal time 1,000 hours Wednesday 8 - - - 8
Overtime before and after working hours 100 hours Thursday 8 - - - 8
Overtime on Sundays and holidays 25 hours Friday 8 - - - 8
Total 1,125 hours Saturday 4 *4 - - 8
Total 44 4 - - 48
 EMPLOYEE COST 2.10 EMPLOYEE COST 2.11
*Worker-B has neither worked more than 9 hours in any day nor more than 48 hours in the week. BQ 18
Calculate the Employee hour rate of a worker X from the following data:
(3) Calculation of hours to be paid to worker C:
Basic pay `10,000 p.m.
Normal Extra Overtime Equivalent normal hours Total normal D.A. `3,000 p.m.
Days
hours hours hours for overtime worked hours Fringe benefits `1,000 p.m.
Monday 8 1 1.5 3 12
Tuesday 8 - - - 8 Number of working days in a year 300. 20 days are availed off as holidays on full pay in a year. Assume a day
Wednesday 8 1 1.5 3 12 of 8 hours.
Thursday 8 1 .5 1 10
Friday 8 1 1.5 3 12 Answer
Saturday 4 *4 - - 8 Statement of Employee Hour Rate
Total 44 8 5 10 62 Particulars Amount
*Worker-C will be paid for equivalent 8 hours, though 4 hours of working is required on Saturday. Further, no Basic Wages annually (10,000 × 12) 1,20,000
overtime will be paid for working beyond 4 hours since it is paid for working beyond 9 hours. Dearness Allowance (3,000 × 12) 36,000
Fringe Benefits (1,000 × 12) 12,000
Now, Total Annual Labour Cost 1,68,000
Worker C worked 9 hours (57 - 48) above 48 hours in a week and eligible for 18 equivalent normal hours for ÷ Effective Hours {(300 – 20) × 8 hours} ÷ 2,240
overtime worked. Thus total normal hours for worker C is 66 hours (48 + 18). Wage rate per hour `75.00

Statement Showing Wages Payable BQ 19

In a factory working six days in a week and eight hours each day, a worker is paid at the rate of `100 per day
Particulars A B C
basic plus D.A. @ 120% of basic. He is allowed to take 30 minutes off during his 8 hours shift for meals-break
Basic wages per hour `200 ÷ 8 = `25.00 `100 ÷ 8 = `12.50 `300 ÷ 8 = `37.50
and a 10 minutes recess for rest. During a week, his card showed that his time was chargeable to:
Dearness allowance per hour `5.50 `5.50 `5.50
(`968 ÷ 176 hours) Job X 15 hours
Hourly rate `30.50 `18.00 `43.00 Job Y 12 hours
Total normal hours 54 48 66 Job Z 13 hours
Total wages payable `1,647.00 `864.00 `2,838.00 The time not booked was wasted while waiting for a job.
In cost accounting, how would you allocate the wages of the worker for the week?
GROSS WAGES, NET WAGES AND LABOUR COST PER HOUR
Answer
BQ 17 Statement of Allocation of Wages in Cost Accounting
‘X’ an employee of ABC Company gets the following emoluments and benefits:
Particulars Amount
Basic pay : `10,000 p.m. Allocated to Job X (15 hours × `30) 450
Dearness allowance : `2,000 p.m. Allocated to Job Y (12 hours × `30) 360
Bonus : 20% of Salary and D.A. Allocated to Job Z (13 hours × `30) 390
Other allowances : `2,500 p.m. Charged to Costing Profit & Loss A/c (4 hours × `30)(assumed abnormal idle time) 120
Employee’s contribution to P.F. : 10% of salary and D.A. Total 1,320

‘X’ works for 2,400 hours per annum out of which 400 hours are non-productive and treated as normal Working:
idle time. Total available hours in one week = 6 days × 8 hrs per day = 48 hours
Normal Idle time = 6 days × 40 minutes per day
You are required to find out the effective hourly cost of employee ‘X’. = 240 minutes or 4 hours per week
Answer Effective hours per week = 48 hours – 4 hours = 44 hours
Statement of Effective Hourly Cost of Employee X Total wages for a week = (`100+120%) × 6 days = `1,320
Particulars Amount
Basic pay (10,000 × 12) 1,20,000 Wage rate per hour = `1,320 ÷ 44 hours = `30 per hour
Dearness Allowance (2,000 × 12) 24,000 Time wasted in waiting for job = 44 hrs – (15 + 12 + 13) = 4 hours
Bonus @ 20% of 1,44,000 (1,20,000 + 24,000) 28,800 (Abnormal idle time)
Other allowance (2,500 × 12) 30,000
Employer’s contribution to provided fund @ 10% of 1,44,000 14,400 BQ 20
Labour cost per annum 2,17,200 A worker is paid `10,000 per month and a dearness allowance of `2,000 p.m. Worker contribution to provident
÷ Effective labour hours (2,400 - 400) ÷ 2,000 fund is @10% and employer also contributes the same amount as the employee. The Employees State
Effective hourly cost 108.60
 EMPLOYEE COST 2.12 EMPLOYEE COST 2.13
Insurance Corporation premium is 6.5% of wages of which 1.75% is paid by the employees. It is the firm’s (c) Employer's share of ESI (5% of `1,910) 95.50
practice to pay 2 months’ wages as bonus each year. Employer's share of ESI (3% of `1,910) 57.30
The number of working days in a year are 300 of 8 hours each. Out of these the worker is entitled to 15 ESI contribution to be deposited by employer 152.80
days leave on full pay. (d) Total Gross Wages 1,910.00
Calculate the wage rate per hour for costing purposes. Add: Employer's contribution towards P.F. 152.80
Add: Employer's contribution towards ESI 95.50
Answer Total Labour cost to employer 2,158.30
Statement of Wage Rate per Hour
BQ 22
Particulars Amount Calculate the earnings of A and B from the following particulars for a month and allocate the labour cost to
Basic Wages annually (10,000 × 12) 1,20,000 each job X, Y and Z:
Dearness Allowance (2,000 × 12) 24,000 A B
Basic plus D.A. 1,44,000 Basic wages `10,000 `16,000
Bonus at two month’s wages (12,000 × 2) 24,000 Dearness Allowance 50% 50%
Add: Employer contribution to: Contribution to Provident Fund (on basic wages) 8% 8%
Provident Fund @ 10% of 1,44,000 14,400 Contribution to Employee State Insurance (on basic wages) 2% 2%
E.S.I. Premium @ 4.75% (6.5% - 1.75%) of 1,44,000 6,840 Overtime hours 10 hours -
Total Annual Labour Cost 1,89,240
÷ Effective Hours {(300 – 15) × 8 hours} ÷ 2,280 The normal working hours for the month are 200. Overtime is paid at double the total of normal wages
Wage rate per hour `83.00 and dearness allowance. Employer’s contributions to state insurance and provident fund are at equal rates
with employee’s contribution. The two workers were employed on jobs X, Y and Z in the following proportions:
BQ 21
Jobs X Y Z
Following are the particulars for April, 2017 relating to four employees working in department M of a factory
Workers A 40% 30% 30%
exclusively for Job No 120:
Workers B 50% 20% 30%
Name Designation Wages
Overtime was done on job Y.
A Foreman `800 per month
B Mechanic `15 per day
C Machine operator
Answer
`12 per day
Statement Showing Earnings of Worker A and B
D Workman `10 per day
Particulars A B
The normal working hours per week of six days are 48 or 8 hours per day. Sundays are paid holidays. Basic Wages `10,000 `16,000
There were no other holidays during the month. Provident Fund contribution was 8% of monthly wages by Dearness Allowance (50% of Basic) `5,000 `8,000
employee and employer each. Employee State Insurance contribution was 3% of monthly wages by employee Overtime Wages (W.N.) `1,500 -
and 5% of monthly wages by employer. Gross Wages Earned `16,500 `24,000
Less: Employee’s Contribution to Provident Fund (8% of basic) (`800) (`1,280)
From the foregoing data, calculate: Less: Employee’s Contribution ESI (2% of basic) (`200) (`320)
(a) Net wages payable by the employer for the month; Net Wages Earned `15,500 `22,400
(b) The total amount of Provident Fund contribution to be deposited by employer;
(c) Employee State Insurance contribution to be deposited by the employer and Statement Showing Labour Cost Chargeable to Jobs
(d) Total labour cost to the employer for the month of April, chargeable to the job.
Particulars Job X Job Y Job Z
Worker A:
Answer Ordinary Wages `16,000 in 4 : 3 : 3 `6,400 `4,800 `4,800
(a) Statement of Net Wages Payable Overtime `1,500 for Job Y - `1,500 -
Particulars Amount Worker B:
Foreman @ `800 per month 800.00 Ordinary Wages `25,600 in 5 : 2 : 3 `12,800 `5,120 `7,680
Machenic @ `15 per day (15 × 30 days) 450.00 Labour Cost chargeable `19,200 `11,420 `12,480
Machine operator @ `12 per day (12 × 30 days) 360.00
Workman @ `10 per day (10 × 30 days) 300.00 Working Note:
Gross wages payable 1,910.00 1. Statement Showing Employee Cost Excluding Overtime
Less: Contribution to PF by employee @ 8% of `1,910 (152.80) Particulars A B
Less: Contribution to ESI by employee @ 3% of `1,910 (57.30)
Basic Wages `10,000 `16,000
Net wages Payable 1,699.90 Dearness Allowance (50% of Basic) `5,000 `8,000
(b) Employer's share of Provident Fund (8% of `1,910) 152.80 Add: Employer’s Contribution to Provident Fund (8% of basic) `800 `1,280
Employee's share of Provident Fund (8% of `1,910) 152.80 Add: Employer’s Contribution ESI (2% of basic) `200 `320
Total amount of PF contribution to be deposited by employer 305.60 Employee Cost (Excluding overtime) `16,000 `25,600
 EMPLOYEE COST 2.14 EMPLOYEE COST 2.15
2. Overtime wages of worker A = (`15,000 ÷ 200 hours) × 2 × 10 hours = `1,500 (c) House rent allowance 16% of basic salary
(d) Transport allowance `50 per day of actual work
BQ 23 (e) Overtime Twice the hourly rate (considers basic and DA), only if
Mr. A an employee of XYZ Company gets the following emoluments and benefits: works more than 9 hours a day otherwise no overtime
Salary `250 per month allowance. If works for more than 9 hours a day then
Dearness Allowance: overtime is considered after 8th hours.
on first `100 of salary `400 (f) Work of holiday and Sunday Double of per day basic rate provided works atleast 4
on next `100 of salary `100 hours. The holiday and Sunday basic is eligible for all
on balance every `100 `50 or part thereof allowances and statutory deductions.
Employer's contribution to P.F. 8% of salary and D.A. (g) Earned leave & Casual leave These are paid leave.
Employer’s contribution to E.S.I. 4% of salary and D.A. (h) Employer’s contribution to Provident fund 12% of basic and DA
Bonus 20% of salary and D.A. (i) Employer’s contribution to Pension fund 7% of basic and DA
Other Allowances `2,724 per annum
The company normally works 8 hours a day and 26 days in a month. The company provides 30 minutes lunch
A works for 2,400 hours per annum, out of which 400 hours are non-productive but treated as normal break in between. During the month of August 2020, Mr. Z works for 23 days including 15th August and a
idle time. A worked for 18 effective hours on Job No 13, where the cost of direct materials equal A's earnings Sunday and applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours
(labour cost) and the overhead applied is 100% of prime cost. The sale value of the job is quoted to earn a respectively without lunch break. On 5th and 13th August he worked for 10 and 9 hours respectively.
profit of 10% on such value.
During the month Mr. Z worked for 100 hours on Job no. HT200.
You are requested to find out:
(a) Effective hourly cost of 'A', and You are required to calculate:
(b) The expected sale value of Job No 13. (i) Earnings (ordinary wages) per day
(ii) Effective wages rate per hour of Mr. Z.
Answer (iii) Wages to be charged to Job no. HT200.
(a) Statement showing Effective Hourly Cost of ‘A’
Particulars Amount Answer
Basic wages 250 (i) Statement of Earnings per day
Dearness allowance:
Particulars Amount
On first `100 of salary 400
Basic salary (`1,000 × 26 days) 26,000
On next `100 of salary 100
Dearness allowance (20% of basic salary) 5,200
On balance `50 25
Basic plus D.A. 31,200
Basic and DA per month 775
House rent allowance (16% of basic salary) 4,160
Basic and DA per annum (775 × 12) 9,300 Transport Allowance (50 × 26) 1,300
Bonus [20% of `9300] 1,860 Employer’s contribution to Provident fund (12% × `31,200) 3,744
Other allowance 2,724 Employer’s contribution to Pension fund (7% × `31,200) 2,184
Add: Employer’s contribution towards PF (8% of `9,300) 744
Earning (Ordinary Wages) Per Month 42,588
Add: Employer’s contribution towards E.S.I. (4% of `9,300) 372
÷ No. of working days in a month (days) ÷ 26
Total Labour cost 15,000 Earning (Ordinary Wages) per day 1,638
÷ Labour hours (2,400 hours – 400 hours) ÷ 2,000
Labour cost per hour `7.50
(ii) Statement of Effective Wage Rate per Hour of Mr. Z
(b) Statement of Expected Sales Value of Job No 13 Particulars Amount
Basic salary:
Particulars Amount For Actual working days (`1,000 × 23 days) 23,000
Direct materials (equal to A’s wages) 135 For Casual leaves (`1,000 × 3 days) 3,000
Direct labour (18 hours @ `7.50 per hour) 135 Additional for Holidays and Sunday (`1,000 × 2 days) 2,000
Prime cost 270 28,000
Overheads @ 100% of Prime cost 270 Dearness allowance @20% of basic salary 5,600
Total cost 540 Basic plus D.A. 33,600
Profit @ 10% on Sales value or 1/9 of total cost 60 Overtime payment (W.N. 1) 640
Sales Value 600 House rent allowance @16% of basic salary 4,480
Transport allowance (`50 × 23 days) 1,150
BQ 24 Employer’s contribution to Provident fund (12% × `33,600) 4,032
GZ Ld. pays the following to a skilled worker engaged in production works. The following are the employee Employer’s contribution to Pension fund (7% × `33,600) 2,352
benefits paid to the employee: Total Labour Cost for the month 46,254
(a) Basic salary per day `1,000 ÷ Effective Hours (W.N. 2) ÷ 171.50
(b) Dearness allowance (DA) 20% of basic salary Labour Cost per hour `269.70
 EMPLOYEE COST 2.16 EMPLOYEE COST 2.17
(iii) Wages to be charged to Job no. HT200 = `269.70 × 100 hours = `26,970 Working:
Calculation of Average no of workers:
Working Notes:
1,000 + 20% Number of replacements = 5% of average workers = 30
1. Overtime payment = × 2 × *2 hours = `640
7.5 Hours ∴ Average workers = 30 ÷ 5% = 600 workers
2. Hours worked by Mr. Z = (19 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours) BQ 27
= 142.5 + 18 + 11 = 171.50 hours No of workers on the payroll:
*for 2 hours in excess of 8 hours on 5 august. At the beginning of the month 900 workers
At the end of the month 1,100 workers
LABOUR TURNOVER During the month 10 workers left, 40 persons were discharged and 150 workers were recruited. Of these 25
workers are recruited in the vacancies of those leaving, while the rest were engaged for an expansion scheme.
BQ 25
The extracts from the payroll of M/S Maheshwari Bros. is as follows: Calculate the various labour turnover rates.

Number of employees at the beginning of 2022 150 workers Answer

Number of employees at the end of 2022 200 workers No. of separation 10 + 40
Number of employees resigned 20 workers Separation method = × 100 = × 100 = 5%
Average no. of workers 1,000
Number of employees discharged 5 workers
Numbers of employees replaced due to resignations and discharges 20 workers
Replacement method = No. of workers replaced × 100 = 25
× 100 = 2.5%
Calculate the labour turnover rate for the factory by different methods. Average no. of workers 1,000
[11.43%, 14.29%, 31.43%, 42.85%, 25.71% & 57.14%]
No. of separation + No. of replaced
Flux method (Alt 1) = × 100
BQ 26 Average no. of workers
The Accountant of Y Ltd. has computed rates for the quarter ending 31st March, 2020 as 10%, 5% and 3% = 50 + 25
× 100 = 7.5%
respectively under 'Flux Method', 'Replacement Method', and 'Separation Method'. 1,000

If the number of workers replaced during that quarter is 30, find out the number of workers for the No. of new accessions 125
quarter: New Accession method = × 100 = × 100 = 12.5%
Average no. of workers 1,000
(a) Recruited and joined;
(b) Left and discharged and Accession method = No. of accessions × 100 = 1 50
× 100 = 15%
(c) Equivalent employee turnover rates for the year. Average no. of workers 1,000

Answer Flux method (Alt 2) = No. of accessions  No. of separation × 100

(a) Calculation of workers recruited and joined (No. of accessions): Average no. of workers
150 + 50
No . of separation s  No . of accessions = × 100 = 20%
Flux Rate = × 100 1,000
Average number of wor ker s
18  No. of accessions 900 + 1 ,100
= × 100 = 10% *Average no of workers = = 1,000 workers
600 2

No. of accessions = 10% of 600 – 18 = 42 workers BQ 28

The management of Moonshine Ltd wants to have an idea of the profit foregone as a result of labour turnover
(b) Calculation of workers left and discharged (No. of separations): last year.
Last year sales accounted to `33,00,000 and the P/V ratio was 20%. The total number of actual hours
Number of separation = 3% of average workers
worked by the direct labour force was 2,40,000. As a result of the delays by the personnel department in filling
= 3% of 600 = 18 workers
vacancies due to labour turnover 25,000 potentially productive hours (excluding unproductive training hours)
were lost. The actual direct labour hours included 40,000 hours attributable to training new recruits out of
(c) Calculation of Equivalent employee turnover rates for the year:
which half of the hours were unproductive.
Equivalent employee turnover rate = Turnover rate for the quarter × 4 The costs incurred consequent on labour turnover revealed on analysis the following:
Using Flux method = 10% × 4 = 40% Settlement cost due to leaving `25,000
Recruitment costs `20,000
Using Replacement method = 5% × 4 = 20%
Selection costs `12,000
Using Separation method = 3% × 4 = 12% Training costs `18,000
 EMPLOYEE COST 2.18 EMPLOYEE COST 2.19
Assuming that the potential production lost due to labour turnover could have been sold at MISCELLANEOUS
prevailing prices. Ascertain the profit foregone last year on account of labour turnover.
BQ 30
Answer A, B, and C were engaged on a group task for which a payment of `72,500 was to be made. A's time basis wages
Statement Showing Profit Foregone on Account of Labour Turnover are `800 per day, B's `600 per day and C's `500 per day. A worked for 25 days; B worked for 30 days and C
Particulars Amount for 40 days.
Contribution Foregone (25,000 hours + 20,000 hours) × `3 per hour 1,35,000
Distribute the amount of `72,500 among the three workers.
Settlement Cost due to leaving 25,000
[A `25,000; B `22,500; C `25,000]
Recruitment Costs 20,000
Selection Costs 12,000
Training Costs 18,000 BQ 31
Profit Foregone 2,10,000 Both direct and indirect employees of a department in a factory are entitled to production bonus in accordance
with a group incentive scheme, the outline of which is as follows:
Working Notes: (a) For any production in excess of the standard rate fixed at 16,800 tons per month (of 28 days) a general
incentive of `1,500 per ton is paid in aggregate. The total amount payable to each separate group is
1. Calculation of productive hours:
determined on the basis of an assumed percentage of such excess production being contributed by it,
Actual hours worked 2,40,000 namely @ 65% by direct employee, @ 15% by inspection staff, @ 12% by maintenance staff and @ 8%
Less: Unproductive training hours (½ of 40,000 hours) (20,000) by supervisory staff.
Actual productive hours 2,20,000
(b) Moreover, if the excess production is more than 20% above the standard, direct employees also get a
2. Contribution earned per productive hours: special bonus @ `500 per ton for all production in excess of 120% of standard.
Sales value `33,00,000
Contribution (20% of `33,00,000) `6,60,000 (c) Inspection staff are penalized @ `2,000 per ton for rejection by customer in excess of 2% of production.
Contribution per productive hour (`6,60,000 ÷ 2,20,000) `3.00 (d) Maintenance staff are also penalized @ `2,000 per hour for breakdown.

BQ 29 From the following particulars for a month, compute production bonus earned by each group:
Jyoti Ltd. wants to ascertain the profit lost during the year 2022-23 due to increased labour turnover. For this Actual working days : 25
purpose, it has given you the following information: Production : 21,000 tons
(a) Training period of the new recruits is 50,000 hours. During this period their productivity is 60% of the Rejection by customer : 500 tons
experienced workers. Time required by an experienced worker is 10 hours per unit. Machine breakdown : 40 hours
(b) 20% of the output during training period was defective. Cost of rectification of a defective unit was `25.
(c) Potential productive hours lost due to delay in recruitment were 1,00,000 hours. Answer
(d) Selling price per unit is `180 and P/V ratio is 20%. Statement of production bonus earned by each group
(e) Settlement cost of the workers leaving the organization was `1,83,480. Direct Inspection Maintenance Supervisory
(f) Recruitment cost was `1,56,340 Particulars Total (`)
Employee (`) staff (`) staff (`) staff (`)
(g) Training cost was `1,13,180. Aggregate general 58,50,000 13,50,000 10,80,000 7,20,000 90,00,000
Calculate the profit lost by the company due to increased labour turnover during the year 2022-23. incentive
Special bonus 15,00,000 - - - 15,00,000
Penalty - (1,60,000) (80,000) - (2,40,000)
Answer
Production bonus 73,50,000 11,90,000 10,00,000 7,20,000 1,02,60,000
Statement Showing Profit Foregone Due to Labour Turnover
Particulars Amount Working Notes:
Loss of contribution 4,32,000 S tan dard output per month
Cost of rectification of defective units (20% of 3,000 units × `25) 15,000 1. Standard output per day =
Budgeted number of days in a month
Settlement cost of the workers leaving 1,83,480
16 ,800 tons
Recruitment cost 1,56,340 = = 600 tons
28 days
Training cost 1,13,180
Profit Foregone 9,00,000 2. Standard output for 25 days = 600 tons × 25 days = 15,000 tons

Working Notes: 3. General Incentive:

(i) Standard output = 15,000 tons
1. Calculation of loss of contribution:
(ii) Actual output = 21,000 tons
Output by experienced workers in 50,000 hours = 50,000 ÷ 10 = 5,000 units
(iii) Excess output over standard = 21,000 – 15,000 = 6,000 tons
Loss of output by new recruits = 5,000 × 40% = 2,000 units
Excess production 6 ,000 tons
Loss of output due to delay in recruitment = 1,00,000 ÷ 10 = 10,000 units (iv) Percentage of excess production = × 100 = × 100
Total loss of output = 10,000 + 2,000 = 12,000 units S tan dard production 15 ,000 tons
Loss of contribution (12,000 units × `180 × 20%) = `4,32,000
 EMPLOYEE COST 2.20 EMPLOYEE COST 2.21
= 40% Number of units = 600 dozens × 12 units in one dozen = 7,200 units
(v) Aggregate general incentive = Excess output × `1,500
= 6,000 tons × `1,500 = `90,00,000 BQ 33
(vi) Allocation of general incentive: P Ltd. manufactures two products by using one grade of employees. The following estimates are available:
Direct Employee = 65% of `90,00,000 = `58,50,000
Inspection staff = 15% of `90,00,000 = `13,50,000 Product A Product B
Maintenance staff = 12% of `90,00,000 = `10,80,000 Budgeted production units 3,480 4,000
Supervisory staff = 8% of `90,00,000 = `7,20,000 Standard hours allowed per product 5 4
Total = `90,00,000
It is further worked out that the efficiency rating (efficiency ratio) for productive hours worked by direct
4. Special bonus to direct workers: workers in actually manufacturing the production is 80%.
(i) 20% is the excess output over 120% of standard output or 3,000 tons (15,000 tons × 20%)
(ii) Special incentive = 3,000 tons × `500 = `15,00,000 You are required to find out the exact standard employee hours requirement.
5. Penalty imposed on inspection staff:
Answer
(i) Normal rejection = 2% of production Standard hours allowed for budgeted production = 3,480 units × 5 hours + 4,000 units × 4 hours
= 2% of 21,000 tons = 420 tons = 33,400 hours
(ii) Actual rejection = 500 tons
(iii) Excess rejection = 500 – 420 = 80 tons Exact standard employee hours required = 33,400 hours ÷ 80% = 41,750 hours
(iv) Penalty = 80 tons × `2,000 per ton = `1,60,000
6. Penalty imposed on maintenance staff:
(i) Breakdown hours = 40 hours
(ii) Penalty = 40 hours × `2,000 per hour = `80,000

BQ 32
An article passes through five hand operations as follows:
Operation Time per article Grade of worker Wage rate per hour
1 15 Minutes A `0.65
2 25 Minutes B `0.50
3 10 Minutes C `0.40
4 30 Minutes D `0.35
5 20 Minutes E `0.30
The factory works 40 hours per week and the production target is 600 dozens per week.

Prepare a statement showing for each operation and in total:

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

Answer
Statement Showing Operators, Labour Cost per Dozen and Labour Cost per week
Time required to Number of Labour cost per Labour cost per
Operations
produce 7,200 units Operators dozen week
1 7,200 × 15/60 1,800 hours ÷ 40 0.65 × 15/60 × 12 1,800 hours × 0.65
= 1,800 Hours = 45 Operators = 1.95 = 1,170
2 7,200 × 25/60 3,000 hours ÷ 40 0.50 × 25/60 × 12 3,000 hours × 0.50
= 3,000 Hours = 75 Operators = 2.50 = 1,500
3 7,200 × 10/60 1,200 hours ÷ 40 0.40 × 10/60 × 12 1,200 hours × 0.40
= 1,200 Hours = 30 Operators = 0.80 = 480
4 7,200 × 30/60 3,600 hours ÷ 40 0.35 × 30/60 × 12 3,600 hours × 0.35
= 3,600 Hours = 90 Operators = 2.10 = 1,260
5 7,200 × 20/60 2,400 hours ÷ 40 0.30 × 20/60 × 12 2,400 hours × 0.30
= 2,400 Hours = 60 Operators = 1.20 = 720
Total - 300 `8.55 `5,130
 EMPLOYEE COST 2.22 EMPLOYEE COST 2.23

PAST YEAR QUESTIONS

*SH = Time allowed by the management for 20 dozen articles
= 3 hours × 20 dozen = 60 hours

PYQ 3
PYQ 1 A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a
The management of Sunshine Ltd. wants to have an idea of the profit foregone as a result of labour turnover particular product is 4 hours. Mr. P, a machine man, has been paid wages under the Rowan Incentive Plan and
last year. Last year sales accounted to `66,00,000 and the P/V ratio was 20%. he had earned an effective hourly rate of `37.50 on the manufacture of that particular product.
The total number of actual hours worked by the direct labour force was 3,45,000. As a result of the delays What could have been his total earnings and effective hourly rate, had he been put on Halsey
by the personnel department in filling vacancies due to labour turnover 75,000 potentially productive hours Incentive Scheme (50%)?
(excluding unproductive training hours) were lost. The actual direct labour hours included 30,000 hours [(5 Marks) Nov 1999]
attributable to training new recruits, out of which half of the hours were unproductive.
The costs incurred consequent on labour turnover revealed on analysis the following: Answer
The following equation can be made:
Settlement cost due to leaving `27,420
Recruitment costs `18,725 Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
Selection costs `12,750 37.50 = [30 AH + AH/4 (4 - AH) × 30] ÷ AH
Training costs `16,105 37.50 AH = 30 AH + AH/4 (4 - AH) × 30
7.50 AH = AH/4 (4 - AH) × 30
Assuming that the potential production lost due to labour turnover could have been sold at 7.50 AH = AH (4 - AH) × 7.50
prevailing prices, ascertain the profit foregone last year on account of labour turnover. 1 = 4 - AH
[(5 marks) May 1998] AH = 3 hours

Answer Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Calculation of profit foregone as a result of labour turnover:
Total earnings = (AH × R) + 50% (SH – AH) × R
Contribution foregone 13 ,20 ,000 × (75,000 hours + 15,000 hours) `3,60,000 = (3 × 30) + 50% (4 – 3) × 30 = `105
3 ,30 ,000 hours
Settlement cost due to leaving `27,420 Effective hourly rate = Total earning ÷ hours worked
Recruitment cost `18,725 = `105 ÷ 3 hours = `35
Selection cost `12,750
Training cost `16,105 PYQ 4
Total profit foregone `4,35,000 The present output details of a manufacturing department are as follows:
Average output per week 48,000 units from 160 employees
Working: Saleable value of output `6,00,000
Calculation of productive hours: Contribution `2,40,000
Total actual hours worked (including training new recruits) 3,45,000
Less: Unproductive hours 30,000 hours × 1/2 (15,000) The Board of Directors plans to introduce more mechanization into department at a capital cost of
Total productive hours 3,30,000 `1,60,000. The effect of this will be to reduce the number of employees to 120, and increasing the output per
individual employee by 60%.
PYQ 2 To provide the necessary incentive to achieve the increased output, The Board intends to offer a 1%
Calculate the earnings of a worker under Halsey Plan and Rowan Plan from the following particulars: increase on the piece work rate of `1 per units for every 2% increase in average individual output achieved.
(1) Hourly rate of wages guaranteed 50 paise per hour. To sell the increased output, it will be necessary to decrease the selling price by 4%.
(2) Standard time for producing one dozen articles 3 hours.
(3) Actual time taken by the worker to produce 20 dozen articles 48 hours. Calculate the extra weekly contribution resulting from the proposed change and evaluate for the
[(5 Marks) Nov 1998] Board’s information, the desirability of introducing the change.
[(10 Marks) Nov 2000]
Answer
Computation of earnings of a worker under Halsey Plan: Answer
Calculation of original selling price per unit and materials cost:
Earnings = (AH × R) + 50% (SH – AH) × R = (48 × 0.50) + 50% (60 – 48) × 0.50
= `27.00 Total Amount Per Unit
Sale value of 48,000 units 6,00,000 12.5
Computation of earnings of a worker under Rowan Plan: Less: Contribution 2,40,000 5.00
Total variable cost 3,60,000 7.50
Earning = (AH × R) + AH × (SH – AH) × R = (48 × 0.50) + 48 × (60 – 48) × 0.50
SH 60 Less: labour cost @ `1 per unit on 48,000 units 48,000 1.00
= `28.80 Variable cost other than Labour Cost 3,12,000 6.50
 EMPLOYEE COST 2.24 EMPLOYEE COST 2.25
Calculation of proposed output: Accession method = No. of accessions × 100 = 1,500
× 100
Output of 160 employees = 48,000 Average no. of workers 8,000
48,000 units = 18.75%
 Output per employee = = 300 units
160 employees
Flux method (Alt 2) = No. of accessions  No. of separation × 100= 1,500  400 × 100
Proposed output per employee = 300 units + 60% = 480 units
Average no. of workers 8,000
Proposed number of employees = 120 units
 Proposed output = 480 units × 120 employees = 23.75%
= 57,600 units
*Average no of workers = 7 ,600  8 ,400 = 8,000 workers
Calculation of proposed piece work rate: 2

Proposed increase in piece work rate = 1% per 2% increase in individual output

% increase in individual output = 60% PYQ 6
60 %
The management of Company are worried about their increasing labour turnover in the factory and before
 Proposed % increase in piece work rate = = 30% analyzing the causes and taking remedial steps, they want to have an idea of the profit foregone as a result of
2
labour turnover in the last year.
 Proposed piece work rate = `1 per unit + 30% = `1.30 per unit
Last year sales amounted to `83,03,300 and P/V ratio was 20 per cent. The total number of actual hours
Calculation of proposed selling price per unit: worked by the direct labour force was 4,45,000. As a result of the delays by the personnel department in filling
vacancies due to labour turnover 1,00,000 potentially productive hours (excluding unproductive training
Existing selling price per unit = `12.50
hours) were lost. The actual direct labour hours included 30,000 hours attributable to training on new recruits,
Proposed selling price per unit = `12.50 – 4% = `12 per unit
out of which half of the hours were unproductive.
Statement of Extra Weekly Contribution from Proposed Charge
The costs incurred consequent on labour turnover revealed, on analysis the following:
Particulars Amount Amount
Proposed sales value (57,600 units × `12) 6,91,200 Settlement cost due to leaving `43,820 Recruitment Costs `26,740
Less: Total variable cost: Selecting costs `12,750 Training costs `30,490
Other than Labour cost @ `6.5 per unit on 57,600 units 3,74,400
Labour cost @ `1.30 per unit on 57,600 units 74,880 (4,49,280) Assuming that the potential production lost as a consequence of labour turnover could have been
Proposed contribution 2,41,920 sold at prevailing prices, find the profit foregone last year on account of labour turnover.
Less: Existing contribution (2,40,000) [(5 Marks) Nov 2001]
Extra contribution 1,920
Answer
PYQ 5 Statement Showing Profit Foregone on Account of Labour Turnover
From the following information, calculate Labour turnover rate and Labour flux rate: Particulars Amount
No. of workers as on 01.01.2000 = 7,600 workers Contribution Foregone (1,00,000 hours + 15,000 hours) × `3.862 per hour 4,44,130
No. of workers as on 31.12.2000 = 8,400 workers Settlement Cost due to leaving 43,820
Recruitment Costs 26,740
During the year, 80 workers left while 320 workers were discharged. 1,500 workers were recruited Selection Costs 12,750
during the year of these, 300 workers were recruited because of exits and the rest were recruited in Training Costs 30,490
accordance with expansion plans. Profit Foregone 5,57,930
[(5 Marks) May 2001]
Working Notes:
Answer
No. of separation 80  320
1. Calculation of productive hours:
Separation method = × 100 = × 100
Average no. of workers 8,000 Actual hours worked 4,45,000
= 5% Less: Unproductive training hours (½ of 30,000 hours) (15,000)
No. of workers replaced 300 Actual productive hours 4,30,000
Replacement method = × 100 = × 100
Average no. of workers 8,000 2. Contribution earned per productive hours:
= 3.75% Sales value 83,03,300
Contribution (20% of 83,03,300) 16,60,660
Flux method (Alt 1) = No. of separation  No. of replaced × 100= 400  300 × 100 Contribution per productive hour (16,60,660 ÷ 4,30,000) `3.862
Average no. of workers 8,000
= 8.75%
PYQ 7
The finishing shop of a company employs 60 direct workers. Each worker is paid `400 as wages per week of
New Accession method = No. of new accessions × 100 = 1,500  300 × 100
Average no. of workers 8,000
40 hours. When necessary, overtime is worked upto a maximum of 15 hours per week per worker at time rate
plus one-half as premium. The current output on an average is 6 units per man hour which may be regarded
= 15%
as standard output.
 EMPLOYEE COST 2.26 EMPLOYEE COST 2.27
If bonus scheme is introduced, it is expected that the output will increase to 8 units per man hour. The Total wages = (AH × R) + AH × (SH – AH) × R
workers will, if necessary, continue to work overtime upto the specified limit although no overtime premium SH
will be paid. = (2,400 × 10) + 2 ,400 × (3,200 – 2,400) × 10 = `30,000
The company is considering introduction of either Halsey Scheme or Rowan Scheme of wage incentive 3 ,200
system. The budgeted weekly output is 19,200 units. The selling price is `11 per unit and the direct material
cost is `8 per unit. The variable overheads amount to `0.50 per direct labour hour and the fixed overhead is PYQ 8
`9,000 per week. A Company is undecided as to what kind of wage scheme should be introduced. The following particulars have
been compiled in respect of three systems, which are under consideration of the management:
Prepare a statement to show the effect on the Company's weekly profit of the proposal to introduce
(a) Halsey Scheme, and (b) Rowan Scheme. Workers A B C
[(10 Marks) May 2002]
Actual hours worked in a week 38 40 34
Answer Hourly rate of wages `6 `5 `7.20
Statement Showing Effect on Profit Production in units:
Particulars Present Halsey Rowan
Product P 21 – 60
Sales Value (`11 × 19,200) 2,11,200 2,11,200 2,11,200
Product Q 36 – 135
Less: Direct Materials Consumed (`8 × 19,200) (1,53,600) (1,53,600) (1,53,600)
Product R 46 25 –
Direct Labour Cost (refer above workings) (36,000) (28,000) (30,000)
Variable OH @ `0.50 per direct labour hour (1,600) (1,200) (1,200) Standard time allowed per unit of each product is:
Contribution 20,000 28,400 26,400 P Q R
Less: Fixed Overheads (9,000) (9,000) (9,000) Minutes 12 18 30
Weekly Profit 11,000 19,400 17,400
Effect on Profit (Under scheme – Present) - +8,400 +6,400 For the purpose of piece rate, each minute is valued at `0.10. You are required to calculate the wages
Working Notes: of each worker under:
Calculation of total wages under the present scheme: (i) Guaranteed hourly rates basis.
400 (ii) Piece work earnings basis but guaranteed at 75% of basic pay (guaranteed hourly rate) if his earnings
Wage rate per hour per worker = = `10 per hour
40 hours are less than 50% of basic pay.
(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.
Overtime rate per hour = Normal rate per hour + 50% premium [(9 Marks) Nov 2002]
= `10 + 50% of `10 = `15 per hour
Average current output per hour = 6 units Answer
(i) Computation of wages of each worker under guaranteed hourly rate basis
19 ,200 units
Hours to be worked = = 3,200 hours Workers Actual hours worked in a week Hourly rate Wages (AH × R)
6 units per hour
A 38 `6.00 `228.00
Total normal hours available in a week = No. of workers × Hours per week B 40 `5.00 `200.00
= 60 workers × 40 hours = 2,400 hours C 34 `7.20 `244.80
Overtime hour required to be worked = Hours worked – Normal hours available (ii) Computation of wages of each worker under piece work earnings basis
= 3,200 – 2,400 = 800 hours
Product A B C
Total wages (under present scheme) = Normal wages + Overtime wages P 21 × 1.20 - 60 × 1.20
= (2,400 hours × `10) + (800 hours × `15) Q 36 × 1.80 - 135 × 1.80
= 36,000 R 46 × 3.00 25 × 3.00 -
Total Wages `228.00 `75.00 `315.00
Total wages under the proposed scheme: 50% of Basic Pay `114.00 `100.00 `122.40
19 ,200 units
Applicable Wages As Per Piece Rate 75% of Basic As Per Piece Rate
Standard hours for 19,200 units = = 3,200 hours
6 units per hour Final Wages `228.00 `150.00 (75% of `200) `315.00
19 ,200 units Working Notes:.
Actual hours for 19,200 units = = 2,400 hours
8 units per hour
1. Calculation of piece rate (Standard time per unit × `0.10):
Under Halsey: P = `1.20 (12 minutes × `0.10)
Q = `1.80 (18 minutes × `0.10)
Total wages = (AH × R) + 50% (SH – AH) × R R = `3.00 (30 minutes × `0.10)
= (2,400 × 10) + 50% (3,200 – 2,400) × 10 = `28,000
2. Calculation of time allowed to each worker:
Under Rowan:
 EMPLOYEE COST 2.28 EMPLOYEE COST 2.29
Worker A = (21 × 12) + (36 × 18) + (46 × 30) = 2,280 minutes (i.e. 38 hours) (2) Savings to the ZED Ltd. in terms of direct labour cost per piece:
Direct labour cost per unit under time wages = 1.975 hours × `30 per hour
Worker B = 25 units × 30 minutes = 750 minutes (i.e. 12.5 hours)
= `59.25 per unit
Worker C = (60 × 12) + (135 × 18) = 3,150 minutes (i.e. 52.50 hours)
Direct labour cost per unit under Halsey Plan = `53.15 per unit (`3,25,305 ÷ 6,120 units)
(iii) Computation of wages of each worker under Premium bonus basis Direct labour cost per unit under Rowan Plan = `56.74 (3,47,258.38 ÷ 6,120 units)
Total Wages Savings of direct labour cost per unit under:
Workers SH AH Wage Rate (AH × R) + AH × (SH – AH) × R
SH Halsey Plan = `6.10 (`59.25 – `53.15)
A 38 hours 38 hours `6.00 (38 × 6) + 38 × (38 – 38) × 6 = `228 Rowan Plan = `2.51 (`59.25 – `56.74)
38
B 12.50 hours 40 hours `5.00 (40 × 5) + *Nil = `200.00
(3) Advise to ZED Ltd about the selection of the scheme to fulfill assurance: Halsey scheme brings more
(34 × 7.2) + 34 × (52.5 – 34) × 7.2 = `331.06 savings to the management of ZED Ltd, over the present earnings of `2,88,000 but the other scheme viz.
C 52.50 hours 34 hours `7.20 52 .5
Rowan fulfils the promise of 20% increase over the present earnings of `2,88,000 by paying 20.58% in
*Bonus can never be negative. the form of bonus. Hence, Rowan Plan should be adopted.

PYQ 9 PYQ 10
ZED Limited is working by employing 50 skilled workers. It is considered the introduction of incentive scheme- The existing incentive system of Alpha Limited is as under:
either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour
Normal working week : 5 days of 8 hours each plus 3 late shifts of 3 hours each
productivity to cope up the increasing demand for the product by 40%. It is believed that proposed incentive
Rate of Payment:
scheme could bring about an average 20% increase over the present earnings of the workers; it could act as
Day work : `160 per hour
sufficient incentive for them to produce more. Because of assurance, the increase in productivity has been
Late shift : `225 per hour
observed as revealed by the figures for the month of April, 2004.
Average output per operator : 120 articles (49-hours week including 3 late shifts)
Hourly rate of wages (guaranteed) `30
Average time for producing one unit by one worker at the In order to increase output and eliminate overtime, it was decided to switch on to a system of payment
Previous performance (This may be taken as time allowed) 1.975 hours by results. The following information is obtained:
Number of working days in the month 24 days
Time-rate (as usual) : `160 per hour
Number of working hours per day of each worker 8 hours
Basic time allowed : 5 hours for 15 articles
Actual production during the month 6,120 units
Piece-work rate : Add 20% to basic piece-rate
Required: Premium Bonus : Add 50% to time
(1) Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme. Prepare a statement showing hours worked, weekly earnings, number of articles produced and labour
(2) Calculate the savings to the ZED Limited in terms of direct labour cost per piece. cost per article for one operator under the following systems:
(3) Advise ZED Limited about the selection of the scheme to fulfill his assurance.
[(4+2+2 = 8 Marks) May 2004] (a) Existing time rate,
(b) Straight piece work,
Answer (c) Rowan system,
(1) Computation of effective rate of earnings under the Halsey and Rowan schemes: (d) Halsey premium system.
Assume that 135 articles are produced in a 40 hours week under straight piece work, Rowan premium
Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R system, and Halsey premium system above and worker earns half the time saved under Halsey premium
= (9,600 × `30) + 50% (12,087 – 9,600) × `30 system.
= `3,25,305 [(8 Marks) Nov 2005]
Total earnings under Rowan scheme = (AH × R) + AH × (SH – AH) × R
SH Answer
Statement showing hours worked, weekly earnings, number of articles produced and labour cost per
= (9,600 × `30) + 9 ,600 × (12,087 – 9,600) × `30
12 ,087 article under various wage system
= `3,47,258.38 Hours Articles Labour Cost
Scheme Weekly Earning
Worked Produced per Article
Effective rate under Halsey Plan = `33.89 per hour (`3,25,305 ÷ 9,600 hours)
Existing time rate 49 `8,425 120 70.21
Effective rate under Rowan Plan = `36.17 per hour (3,47,258.38 ÷ 9,600 hours) Straight piece work 40 `8,640 135 64.00
Rowan system 40 `9,007.41 135 66.72
Actual hours (AH) = 50 workers × 24 days × 8 hours per day Halsey system 40 `8,600 135 63.70
= 9,600 hours
Standard hours (SH) = 6,120 units × 1.975 hours per unit Working Notes:
= 12,087 hours Calculation of weekly earning under:
 EMPLOYEE COST 2.30 EMPLOYEE COST 2.31
Existing time rate = `8,425 (40 hours × `160) + (9 hours × `225) PYQ 12
Standard time for a job is 90 hours. The hourly rate of guaranteed wages is `50. Because of the saving in time
Piece rate system = `8,640 (135 articles × *`64 per article)
a worker A gets an effective hourly rate of wages of `60 under Rowan premium bonus system. For the same
*Basic rate per article = `53.33 (160 per hour ÷ 3 articles per hour) saving in time.
Applicable piece rate = `64 (`53.33 + 20%)
Calculate the hourly rate of wages a worker B will get under Halsey premium bonus system
Rowan premium system = (AH × R) + AH × (SH – AH) × R assuring 40% to worker.
SH [(3 Marks) Nov 2009]
= (40 × `160) + 40 × (*67.50 – 40) × `160 = `9,007.41
67.50 Answer
*Standard hours (SH) = Basic time + 50% The following equation can be made:

Basic time = 15 articles in 5 hours Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
60 = [50 AH + AH/90 (90 - AH) × 50] ÷ AH
= 3 articles in 1 hour or 60 minutes
60 AH = 50 AH + AH/90 (90 - AH) × 50
Standard time = 1 article in 20 minutes + 50% 10 AH = AH/90 (90 - AH) × 50
= 30 minutes for 1 article 18 AH = AH (90 - AH)
= 67.50 hours for 135 articles 18 = 90 - AH
AH = 72 hours
Halsey premium system = (AH × R) + 50% (SH – AH) × R
= (40 × `160) + 50% (67.50 – 40) × `160 = `8,600
Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
PYQ 11 Total earnings = (AH × R) + 40% (SH – AH) × R
Two workmen, A and B produce the same product using the same material. A is paid bonus according to Halsey = (72 × 50) + 40% (90 – 72) × 50 = `3,960
plan, while B is paid bonus according to Rowan plan. The time allowed to manufacture the product is 100
hours. A has taken 60 hours and B has taken 80 hours to complete the product. The normal hourly rate of Effective hourly rate = Total earning ÷ hours worked
wages of workman A is `24 per hour. The total earnings of both the workers are same. = `3,960 ÷ 72 hours = `55
PYQ 13
Calculate normal hourly rate of wages of workman B. You are given the following information of a worker:
[(5 Marks) May 2009]
Name of worker : X
Answer Ticket No. : 002
A B Work started : 01.04.11 at 8 am
Time Allowed (Hours) 100 100 Work finished : 05.04.11 at 12 noon
Time Taken(Hours) 60 80 Work allotted : Production of 2,160 units
Time Saved (Hours) 40 20 Work done and approved : 2,000 units
Time and units allowed : 40 units per hour
Let the rate of wages of the worker B is ` R Per hour Wage rate : `25 per hour
Bonus : 40% of time saved
Normal Wages 1440 80 Worker X worked : 9 hours a day
(Time taken × Hourly rate of wages) (60 × 24) (80 × R)
Bonus 480 16X Calculate the remuneration of the worker on the following basis:
20 (a) Halsey plan and
(50% × 40 × `24) ( × 80R)
100 (b) Rowan plan
Total 1,920 96R [(5 Marks) May 2011]

According to the problem, Answer

Total earning of A = Total earnings of B 2,000 units
Time allowed = = 50 hours
1920 = 96R 40 units per hour
1 ,920 Time worked:
R = = `20
96 01.04.11 to 04.04.11 = 9 hours per day
05.04.11 = 4 hours
Therefore, hourly rate of wages of the worker is `20 per hour Total hours = 9 hours × 4 days + 4 hours × 1 day = 40 hours

*Bonus = Time saved × 50% × Wage Rate Remuneration of worker X under:

(a) Halsey plan = (AH × R) + 40% (SH – AH) × R
Time Taken = (40 × 25) + 40% (50 - 40) × 25 = `1,100
**Bonus = × Time saved × Wage Rate
Time Allowed
 EMPLOYEE COST 2.32 EMPLOYEE COST 2.33
(b) Rowan plan = (AH × R) + AH × (SH – AH) × R 140 AH = 120 AH + 360 – 60 AH
SH 80 AH = 360
= (40 × 25) + 40 × (50 – 40) × 25 = `1200 ∴ AH = 360 ÷ 80 = 4.5 hours
50
PYQ 16
PYQ 14 The rate of change of labour force in a company during the year ending 31st march, 2013 was calculated as
Accountant of your company had computed labour turnover rates for the quarter ended 30th September, 2012 13%, 8% and 5% respectively under 'Flux Method', 'Replacement Method', and 'Separation Method'. If the
as 14%, 8% and 6% under Flux method, Replacement method and Separation method respectively. If the number of workers separated during the year is 40.
number of workers replaced during 2nd quarter of the financial year 2012-13 is 36.
You are required to calculate:
Find the following:
(a) Average number of workers on roll.
(a) The number of workers recruited and joined; and (b) Number of workers replaced during the year.
(b) The number of workers left and discharged. (c) Number of new accessions i.e. new recruitment.
[(5 Marks) Nov 2012] (d) Number of workers at the beginning of the year.
[(8 Marks) Nov 2013]
Answer
(a) No. of workers recruited & joined = 36 workers (Accessions) Answer
(b) No. of workers left & discharged = 27 workers (Separations) (a) Average number of workers on roll:

Working Notes: Separations = 5% of average workers = 40 workers

∴ Average workers = 40 ÷ 5% = 800 workers
(a) Calculation of average workers:-
Replacements = 8% of average workers = 36 workers (b) Number of workers replaced = 8% of average workers
∴ Average workers = 36 ÷ 8% = 450 workers = 8% of 800 = 64 workers
(c) Number of new accessions:
(b) Number of worker separated = 6% of average workers No . of separation s  No . of accessions
Flux Method = × 100
= 6% of 450 workers = 27 workers Average number of wor ker s
40  No . of accessions
(c) Number of Accessions = Total Movement – Workers separated 13% = × 100
800
= 14% of 450 - 27 = 36 workers No. of accessions = 13% of 800 – 40 = 64 workers
PYQ 15 No. of accessions = No. of replacement + No. of new accessions
A skilled worker is paid a guaranteed wage rate of `120 per hour. The standard time allowed for a job is 6 No. of new accessions = No. of accessions - No. of replacement
hours. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan. = 64 workers – 64 workers = Nil
(a) Calculate his effective hourly rate of earning under Rowan Incentive Plan.
(b) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same (d) Number of workers at the beginning:
effective hourly rate of earnings, calculate the time in which he should complete the job. Let opening workers be x
[(8 Marks) May 2013] Now,
Closing workers = Opening workers + Replacement + New accessions –
Answer Separations
Total Earning 700 = x + 64 + Nil – 40 = x + 24
(a) Effective Hourly Rate = = = `140 Per Hour
Actual Hours 5
Average no of workers = [Opening workers + Closing workers] ÷ 2
800 = [x + x + 24] ÷ 2
Working Notes:
∴ x (opening workers) = 788 workers
Calculation of total earning under Rowan Incentive Plan:
PYQ 17
Earning under Rowan Plan = (AH × R) + AH × (SH – AH) × R Human Resources Department of A Ltd. computed labour turnover by replacement method at 3% for the
SH
quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was made. The number of
= (5 × 120) + 5 × (6 – 5) × 120 workers at the beginning and end of the quarter was 990 and 1,010 respectively.
6
= 600 + 100 = `700 You are required to calculate the labour turnover rate by Separation Method and Flux Method.
[(5 Marks) Nov 2015]
(b) Actual hours to maintain same effective rate under Halsey Incentive scheme (50%):
Effective rate under Halsey = [(AH × R) + 50% × (SH – AH) × R] ÷ AH
Answer
140 = [(AH × 120) + 50% × (6 – AH) × 120] ÷ AH Calculation of labour turnover rate:
 EMPLOYEE COST 2.34 EMPLOYEE COST 2.35
Separation Method =
Number of separation s
× 100 =
50 wor ker s
× 100 Answer
Average number of wor ker s 1000 wor ker s The following equation can be made:
= 5%
Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
180 = [150 AH + AH/50 (50 - AH) × 150] ÷ AH
No of separation s  No of accessions
Flux Method (Alternative 1) = × 100 30 AH = AH/50 (50 - AH) × 150
Average number of wor ker s
30 AH = AH (50 - AH) × 3
50  70 10 AH = AH (50 - AH)
= × 100 = 12%
1000 ∴ AH = 40 Hours

No of separation s + No of replacemen ts Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:
Flux Method (Alternative 2) = × 100
Average number of wor ker s
Total earnings = (AH × R) + 50% (SH – AH) × R
50 + 30
= × 100 = 8% = (40 × 150) + 50% (50 – 40) × 150 = `6,750
1000
Effective hourly rate = Total earning ÷ hours worked
Working Notes: = `6,750 ÷ 40 hours = `168.75
Average no of workers = (Opening workers + Closing workers) ÷ 2
= (990 + 1,010) ÷ 2 = 1000 PYQ 20
A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours. His wage rate is `5
Number of Separations = Opening + Accession - Closing per hour. Following additional information are also available:
= 990 + 70 – 1,010 = 50 workers Material cost of work `50
Number of Accessions = Replaced + New Joined Factory overheads 100% of wages
= 3% of 1,000 + 40 = 70 workers
Calculate the factory cost of work under the following methods of wage payment:
PYQ 18
RST Company Ltd. had computed labour turnover rates for the quarter ended 31st March, 2017 as 20%, 10% (i) Rowan Plan
and 5% under Flux method, Replacement method and Separation method respectively. If the number of (ii) Halsey Plan
workers replaced during the quarter is 50, find out (i) Workers recruited and joined, (ii) Workers left and [(5 Marks) May 2018]
discharged and (iii) Average number of workers on roll.
[(5 Marks) May 2017] Answer
Factory cost = Materials + Labour + Factory Overheads
Answer
(i) Calculation of workers recruited and joined: (i) Under Rowan Plan = 50 + 93.75 + 93.75 = `237.50

Number of accessions = Replaced + New Joined (ii) Under Halsey Plan = 50 + 87.50 + 87.50 = `225
= (10% + 5%) 15% of average workers
= 15% of 500 = 75 workers Working Notes:
Or Earning of workers under Halsey’s and Rowan’s premium scheme:
Number of accessions = Flux - Separated
= (20% - 5%) 15% of average workers Wages under Halsey = (AH × R) + 50% (SH – AH) × R
= 15% of 500 = 75 workers = (15 hours × 5) + 50% (20 – 15) × 5 = `87.50

(ii) Calculation of workers left and discharged: Wages under Rowan = (AH × R) + AH × (SH – AH) × R
SH
Number of workers separated = 5% of average workers = (15 hours × 5) + 15/20 (20 – 15) × 5 = `93.75
= 5% of 500 = 25 workers
PYQ 21
(iii) Calculation of average number of workers on roll: Following data have been extracted from the books of M/s. ABC Private Limited:
Number of workers replaced = 10% of average workers = 50 workers Salary (each employee, per month) : `30,000
Therefore, Average workers = 50 ÷ 10% = 500 workers Bonus : 25% of Salary
Employer’s contribution to PF, ESI etc. : 15% of salary
PYQ 19 Total cost at employees’ welfare activities : `6,61,500 per annum
A skilled worker is paid a guaranteed wage rate of `150 per hour. The standard time allowed for a job is 50 Total leave permitted : 30 days
hours. He gets an effective rate of wages of `180 under Rowan Incentive Plan due to saving in time. For the No. of employees : 175
same saving in time, calculate hourly rate of wages he will get, if he placed under Halsey Premium Scheme Normal idle time : 70 hours per annum
(50%). Abnormal idle time (due to power failure) : 50 hours
[(5 Marks) Nov 2017] Working days per annum : 310 days of 8 hours
 EMPLOYEE COST 2.36 EMPLOYEE COST 2.37
You are required to calculate: Conversion cost = Labour cost + Overheads
AH
(i) Annual cost of each employee 5,408 = [AH × R + (SH - AH) × R] + Overheads
SH
(ii) Employee cost per hour 32
(iii) Cost of abnormal idle time per employee 5,408 = [32 × R + (40 - 32) × R] + (32 hours × 25)
40
[(5 Marks) Nov 2018] 5,408 – 800 = 38.4 R
Wage rate ‘R’ = `120
Answer
(i) Statement of Annual Cost of Each Employee (b) Calculation of Labour Cost:
Particulars Amount AH
Nasik = AH × R + (SH - AH) × R
Salary (30,000 × 12) 3,60,000 SH
32
Bonus @ 25% of 3,60,000 90,000 = 32 × `120 + (40 - 32) × `120 = `4,608
Employer’s contribution to PF, ESI @ 15% of 3,60,000 54,000 40
Welfare cost per employee (6,61,500 ÷ 175) 3,780
Satara = AH × R + 50% (SH - AH) × R
Annual Cost of Each Employee 5,07,780
= 30 × `120 + 50% (40 - 30) × `120 = `4,200
(ii) Employee cost per hour = Annual cost per employee ÷ Labour hours
(c) Standard Hours = 5 days × 8 hours per day = 40 hours
= 5,07,780 ÷ [(310 days – 30 days) × 8 hours – 70 hours]
= 5,07,780 ÷ 2,170 hours = `234
PYQ 23
(iii) Cost of abnormal idle time per employee: Following are the particulars of two workers ‘R ‘and ‘S’ for a month:
= Abnormal idle time per employee × cost per hour R S
= 50 × 234 = `11,700 Basic wages `15,000 `30,000
Dearness Allowance 50% 50%
Contribution to Provident Fund (on basic wages) 7% 7.5%
PYQ 22
Contribution to Employee State Insurance (on basic wages) 2% 2%
Zico Ltd. has its factory at two locations viz Nasik and Satara. Rowan plan is used at Nasik factory and Halsey
Overtime hours 20 hours -
plan at Satara factory. Standard time and basic rate of wages are same for a job which is similar and is carried
out on similar machinery. Normal working hours is 8 hour per day in a 5 days week. The normal working hours for the month are 200. Overtime is paid at double the total of normal wages
Job in Nasik factory is completed in 32 hours while at Satara factory it has taken 30 hours. Conversion and dearness allowance. Employer’s contributions to state insurance and provident fund are at equal rates
cost at Nasik and Satara are `5,408 and `4,950. Overheads account for `25 per hour. with employee’s contribution. Both workers were employed on jobs A, B and C in the following proportions:

Required: Jobs A B C
Workers R 75% 10% 15%
(1) To find out the normal wage; and Workers S 40% 20% 40%
(2) To compare the respective conversion costs.
[(10 Marks) Nov 2019] Overtime was done on job ‘A’.
You are required to:
Answer
(1) Calculation of Normal Wage: 1. Calculate ordinary wage rate per hour of ‘R’ and ‘S’.
2. Allocate the worker’s cost to job ‘A’, ‘B’ and ‘C’.
Nasik: [(6 Marks) Nov 2020]
Normal Wage = AH × R = 32 hours × `120 = `3,840
Answer
Satara: 1. Statement Showing Ordinary Wage Rate per Hour
Normal Wage = AH × R = 30 hours × `120 = `3,600 Particulars R S
Basic Wages `15,000 `30,000
(2) Statement Shoeing Conversion Cost
Dearness Allowance (50% of Basic) `7,500 `15,000
Particulars Nasik (`) Satara (`) Gross Wages (excluding overtime) `22,500 `45,000
Labour Cost 4,608 4,200 Add: Employer’s Contribution to P.F. (7%/7.5% of basic) `1,050 `2,250
Overheads (32 Hours × `25) and (30 Hours × `25) 800 750 Add: Employer’s Contribution ESI (2% of basic) `300 `600
Conversion Cost 5,408 4,950 Ordinary Wages Earned `23,850 `47,850
÷ Effective Hours 200 200
Working Note: Ordinary Wage Rate per Hour `119.25 `239.25
(a) Calculation of wage rate (R):
Working Note:
Using data of Nasik:
Overtime wages of worker R = (`22,500 ÷ 200 hours) × 2 × 20 hours = `4,500
 EMPLOYEE COST 2.38 EMPLOYEE COST 2.39
2. Statement Showing Allocation of Worker’s Cost Actual hours (AH) = 50 workers × 24 days × 8 hours per day = 9,600 hours
Particulars Job A Job B Job C Standard hours (SH) = 6,120 units × 1.975 hours per unit = 12,087 hours
Worker R:
Ordinary Wages `23,850 in 75 : 10 : 15 `17,887.50 `2,385 `3,577.50 (2) Savings to the Z Ltd. in terms of direct labour cost per unit:
Overtime for Job A `4,500 - -
Direct labour cost per unit under time wages = 1.975 hours × `50 per hour
Worker S:
= `98.75 per unit
Ordinary Wages `47,850 in 40 : 20 : 40 `19,140 `9,570 `19,140
Allocation of Labour Cost `41,527.50 `11,955 `22,717.50 Direct labour cost per unit under Halsey Plan = `88.59 per unit (`5,42,175 ÷ 6,120 units)
Direct labour cost per unit under Rowan Plan = `94.57 (`5,78,764 ÷ 6,120 units)
PYQ 24
Z Ltd is working by employing 50 skilled workers. It is considered the introduction of incentive scheme-either Savings of direct labour cost per unit under:
Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour productivity Halsey Plan = `10.16 (`98.75 – `88.59)
to cope up the increasing demand for the product by 40%. It is believed that proposed incentive scheme could
bring about an average 20% increase over the present earnings of the workers; it could act as sufficient Rowan Plan = `4.18 (`98.75 – `94.57)
incentive for them to produce more and the company has accordingly given assurance to the workers. Because
of this assurance, the increase in productivity has been observed as revealed by the figures for the month of (3) Advise: Rowan plan fulfils the company’s assurance of 20% increase over the present earnings of the
April, 2020. workers. This would increase productivity by 25.90% only. It will not adjust with increase in demand by
40%.
Hourly rate of wages (guaranteed) `50
Average time for producing one unit by one worker at the Working Notes:
Previous performance (This may be taken as time allowed) 1.975 hours
Number of working days in the month 24 days Normal production units = 9,600 hours ÷ 1.975 Hour = 4,861 units
Number of working hours per day of each worker 8 hours Actual Production = 6,120 units
Actual production during the month 6,120 units Increase in Productivity (in %) =
6,120 − 4,861
× 100 = 25.90%
4,861
Required:
(1) Calculate the effective increase in earnings of workers in percentage terms under Halsey scheme and PYQ 25
Rowan scheme. Following information is given of a newly setup organization for the year ended on 31st March, 2021:
(2) Calculate the savings to the Z Ltd in terms of direct labour cost per unit under both the schemes.
Number of workers replaced during the period 50
(3) Advise Z Ltd about the selection of the scheme that would fulfill its assurance of incentivizing workers
and also to adjust with the increase in demand. Number of workers left and discharged during the period 25
[(10 Marks) Jan 2021] Average number of workers on the roll during the period 500
You are required to:
Answer
(1) Compute the Employee Turnover Rates using Separation method and Flux Method.
(1) Computation of effective increase in earnings:
(2) Equivalent Employee Turnover Rates for (1) above, given that the organization was setup on 31st
Effective increase in earnings (in %) =
Effective Rate − Normal Rate
× 100 January, 2021.
Normal Rate
[(5 Marks) July 2021]
56.48 − 50
Under Halsey = 50
× 100 = 12.96% Answer
No. of Separation s 25
60.29 − 50 (1) Separation Rate = × 100 = × 100 = 5%
Under Rowan = 50
× 100 = 20.58% Average number of wor ker s 500

Working Notes:
No. of Separation s + No. of Re placements
Flux Rate = × 100
Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R Average number of wor ker s
= (9,600 × `50) + 50% (12,087 – 9,600) × `50
= `5,42,175 =
25 + 50
× 100 = 15%
500
AH
Total earnings under Rowan scheme = (AH × R) + × (SH – AH) × R
SH (2) Equivalent Rates = Turnover rates × 12/2
= (9,600 × `50) + 9 ,600 × (12,087 – 9,600) × `50
12 ,087 Equivalent Separation Rate = 5% × 12/2 = 30%
= `5,78,764 Equivalent Flux Rate = 15% × 12/2 = 90%
Effective rate under Halsey Plan = `56.48 per hour (`5,42,175 ÷ 9,600 hours)
PYQ 26
Effective rate under Rowan Plan = `60.29 per hour (`5,78,764 ÷ 9,600 hours) A skilled worker is paid a guaranteed wage rate of `150 per hour. The standard time allowed for a job is 10
 EMPLOYEE COST 2.40 EMPLOYEE COST 2.41
hours. He took 8 hours to complete the job. He has been paid wages under the Rowan Incentive Plan. (d) Equivalent turnover rates for the year:
You are required to: Equivalent turnover rate = Turnover for quarter × 4 quarters
(a) Calculate the effective hourly rate of earnings under Rowan Incentive Plan.
Using Flux Method = 16% × 4 = 64%
(b) Calculate the time in which he should complete the job, if the worker is placed under Halsey Incentive
Scheme (50%) and he wants to maintain the same effective hourly rate of earnings. Using Replacement Method = 8% × 4 = 32%
[(5 Marks) Dec 2021]
Using Separations Method = 5% × 4 = 20%
Answer
Total Earning 1 ,440 PYQ 28
(a) Effective Hourly Rate = = = `180 Per Hour
Actual Hours 8 A skilled worker, in PK Ltd., is paid a guaranteed wage rate of `15.00 per hour in a 48 hour week. The standard
time to produce a unit is 18 minutes. During a week, a skilled worker Mr. ‘A’ has produced 200 units of the
Calculation of total earning under Rowan Incentive Plan: product. The company has taken a drive for cost reduction and wants to reduce its labour cost.
You are required to:
Earning under Rowan Plan = (AH × R) + AH × (SH – AH) × R
SH (1) Calculate wages of Mr. ‘A’ under each of the following methods :
(a) Time rate,
= (8 × 150) + 8 × (10 – 8) × 150 = `1,440
10 (b) Piece-rate with a guaranteed weekly wage,
(c) Halsey Premium Plan
(b) Actual hours to maintain same effective rate under Halsey Incentive scheme (50%): (d) Rowan Premium Plan

Effective rate under Halsey = [(AH × R) + 50% × (SH – AH) × R] ÷ AH (2) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium Plan, the company should follow.
180 = [(AH × 150) + 50% × (10 – AH) × 150] ÷ AH [(6 Marks) Nov 2022]
180 AH = 150 AH + 750 – 75 AH
105 AH = 750 Answer
∴ AH = 750 ÷ 105 = 7.1428 hours (1) Calculation of wages:
(a) Time rate = Number of hours × Wage rate per hour
PYQ 27 = 48 Hours × `15 = `720
PQR Limited has replaced 72 workers during the quarter ended 31st March 2022. The labour rates for the
quarter are as follows: (b) Piece rate with guaranteed weekly wages:
Flux method 16% Wages as per piece rate = Number of units produced × Piece rate
Replacement method 8% = 200 units × `4.50 = `900
Separation method 5% or
You are required to ascertain: Guaranteed weekly wages = Weekly hours × Wage rate per hour
(a) Average number of workers on roll (for the quarter), = 48 Hours × `15 = `720
(b) Number of workers left and discharged during the quarter,
(c) Number of workers recruited and joined during the quarter, Worker will get whatever is higher i.e. `900
(d) Equivalent employee turnover rates for the year.
[(5 Marks) May 2022] (c) Halsey System = (AH × R) + 50% (SH - AH) × R
= (48 hours × `15) + 50% (60 – 48) × `15 = `810
Answer
(a) Average number of workers: (d) Rowan System = (AH × R) + AH × (SH – AH) × R
SH
Number of workers replaced = 8% of Average workers = 72 workers
= (48 hours × `15) + 48 × (60 - 48) × `15 = `864
∴ Average workers = 72 ÷ 8% = 900 Workers 60

(b) Number of workers left an discharged: (2) As the company is planning to reduce labour cost, Halsey Premium Plan should be selected having
No. of workers left & discharged = 5% of Average workers lower cost.
= 5% of 900 = 45 Workers
Working Notes:
(c) Number of workers recruited and joined: 1. Computation of Straight piece rate:
No. of workers recruited & joined = Flux – Separation = 16% - 5% Normal rate per hour `15
= 11% of 900 = 99 Workers Standard time per unit 18 minutes
 EMPLOYEE COST 2.42 EMPLOYEE COST 2.43
Straight piece rate `4.50 (`15 × 18/60)

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

SUGGESTED REVISION
PYQ 29 Page No. of 3rd, 4th & Revision
Ques. Observations or KEY Points 1st & 2nd
SMC Company limited is producing a particular design of toys under the following existing incentive system: Practical 5th during
No. (Note down during revisions) Revision
Register Revision Exams
Normal working hours in the week 48 hours BQ (Book Questions covering Study Module of ICAI, PM, RTP’s, MTP’s and Important Questions)
Late shift hours in the week 12 hours 1 Y - -
Rate of payment Normal working: `150 per hour 2 Y - -
Late shift: `300 per hour 3 Y Y -
Average output per operator for 60 hours per week (including late shift hours): 80 toys. 4 Y Y -
5 Y - -
The company’s management has now decided to implement a system of labour cost payment with either the 6 Y Y Y
Rowan Premium Plan or the Halsey Premium Plan in order to increase output, eliminate late shift overtime, 7 Y Y -
and reduce the labour cost. 8 Y Y Y
9 Y Y Y
The following information is obtained: 10 Y Y Y
11 Y Y -
The standard time allotted for ten toys is seven and half hours. 12 Y Y -
Time rate: `150 per hour (as usual). 13 Y Y Y
14 Y Y -
Assuming that the operator works for 48 hours in a week and produces 100 toys, you are required to calculate 15 Y Y Y
the weekly earning for one operator under: 16 Y Y Y
17 Y Y -
(a) The existing Time Rate, 18 Y Y -
(b) Rowan Premium Plan and, 19 Y Y Y
(c) Halsey Premium Plan (50%) 20 Y Y Y
[(5 Marks) May 2023] 21 Y Y -
22 Y Y Y
Answer 23 Y Y -
(a) Earning under Existing Time Rate = (48 hours × `150) + (12 hours × `300) 24 Y Y Y
= `10,800
25 Y Y -
26 Y Y Y
(b) Earning under Rowan Plan = (AH × R) + AH × (SH – AH) × R 27 Y Y Y
SH
28 Y Y Y
= (48 × `150) + 48 × (75 – 48) × `150 29 Y Y -
75
= `9,792 30 Y - -
31 Y Y -
(c) Earning under Halsey Plan = (AH × R) + 50% (SH – AH) × R 32 Y Y -
= (48 × `150) + 50% (75 – 48) × `150 33 Y Y -
= `9,225 PYQ (Past Year Questions)
1 Y Y -
Working Notes: 2 Y Y -
3 Y Y -
Standard hours for 100 units = 7.5 hours
= 75 hours 4 Y Y Y
 100 units
10 units 5 Y - -
6 Y - -
7 Y Y Y
8 Y Y Y
9 Y Y -
10 Y Y Y
11 Y Y Y
12 Y - -
13 Y Y -
 EMPLOYEE COST 2.44
14 Y Y -
15 Y Y Y
16 Y Y Y
17 Y - -
18
19
20
Y
Y
Y
Y
-
Y
Y
-
-
CHAPTER - 3
21 Y Y Y
22 Y Y Y
23 Y - -
24
25
26
Y
Y
Y
Y
-
-
Y
-
-
OVERHEADS
ABSORPTION COSTING
27 Y Y -
28 Y Y -
29 Y Y -

METHOD
LEARNING OUTCOMES

After studying this chapter you will be able to:

 Discuss the meaning of Overheads- Production, Administrative and
Selling & Distribution.
 Discuss the meaning and methods of allocation, apportionment
and absorption of overheads.
 Discuss the meaning and treatment of under-absorption and over-
absorption of overheads and apply the same in cost computation.
 State the accounting and control of administrative, selling and
distribution overheads.
 Discuss and apply the various methods to calculate overhead rate.
 OVERHEADS ABSORPTION COSTING METHOD 3.1 OVERHEADS ABSORPTION COSTING METHOD 3.2
PRIMARY AND SECONDARY DISTRIBUTION The expenses of service departments D and E are to be apportioned as follows:
A B C D E
BQ 1 Expenses of department D: 40 20 30 - 10
A company's production for the year ending 30.06.2022 is given below: Expenses of department E: 30 30 40 - -
Production Departments Service Departments
Items Total
P1 P2 P3 Office Stores Work Shop Answer
Direct wages 20,000 25,000 30,000 - - - 75,000 Statement Showing Overhead Rate per Labour Hour
Direct materials 30,000 35,000 45,000 - - - 1,10,000 Basis of Production Departments Service Departments
Indirect materials 2,000 3,000 3,000 1,000 2,000 2,000 13,000 Items
Charge A B C D E
Indirect wages 3,000 3,000 4,000 10,000 10,000 5,000 35,000 Direct materials Allocation - - - 6,000 5,000
Area (Square Meters) 200 250 300 150 100 250 1,250 Direct wages Allocation - - - 2,000 4,000
Book value of machinery 30,000 35,000 25,000 - - 15,000 1,05,000 Indirect materials Materials 5,000 2,500 4,750 1,500 1,250
Machine capacity (H.P.) 15 20 25 - - 5 65 Indirect wages Wages 3,750 3,750 1,000 500 1,000
Machine hours worked 10,000 20,000 15,000 - - 5,000 50,000 Depreciation:
General Expenses: Machinery Value 6,000 10,000 4,000 2,500 2,500
Building Area 1,500 1,000 1,000 500 1,000
Rent : `12,500
Rent, rates, taxes Area 3,000 2,000 2,000 1,000 2,000
Insurance (Machine) : `1,050 Power for machine H.P. 5,000 6,000 3,000 500 500
Depreciation : 15% of value of machinery Power for lighting Light points 150 100 100 50 100
Power : `3,800 General expenses Labour hours 5,000 5,000 2,000 1,000 2,000
Light : `1,250
Total Overheads Prim. Dist. 29,400 30,350 17,850 15,550 19,350
You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Department D 4:2:3:1 6,220 3,110 4,665 (15,550) 1,555
apportionment when necessary. Department E 3:3:4 6,272 6,271 8,362 - (20,905)
Total OH Secon. Dist. 41,892 39,731 30,877 - -
Answer ÷ Labour hours - 5,000 5,000 2,000 - -
Overhead Analysis Sheet OH rate per labour hour `8.3784 `7.9462 `15.4385 - -
Basis of Production Departments Service Departments
Items BQ 3
Charge P1 P2 P3 Office Stores Work Shop
Indirect materials Allocation 2,000 3,000 3,000 1,000 2,000 2,000 XL Ltd., has three production departments and four service departments. The expenses for these departments
Indirect wages Allocation 3,000 3,000 4,000 10,000 10,000 5,000 as per Primary Distribution Summary are as follows:
Rent Area 2,000 2,500 3,000 1,500 1,000 2,500
Insurance Value 300 350 250 - - 150 Production Departments: (`) (`)
Depreciation Value 4,500 5,250 3,750 - - 2,250 A 30,00,000
Power H.P. used 600 1,600 1,500 - - 100 B 26,00,000
Light Area 200 250 300 150 100 250 C 24,00,000 80,00,000
Total - 12,600 15,950 15,800 12,650 13,100 12,250
Service Departments: (`) (`)
BQ 2
Modern Machines Ltd. have three production departments (A, B, and C) and two service departments (D and Stores 4,00,000
E). From the following figures extracted from the records of the company, calculate the overhead rate per Time-keeping and Accounts 3,00,000
labour hour: Power 1,60,000
Indirect Materials `15,000 Rent, Rates and Taxes `10,000 Canteen 1,00,000 9,60,000
Indirect Wages `10,000 Electric Power for Machinery `15,000
Depreciation on Machinery `25,000 Electric Power for Lighting `500 The following information is also available in respect of the production departments:
Depreciation on Buildings `5,000 General Expenses `15,000 Dept. A Dept. B Dept. C
Production Departments Service Departments Horse power of Machine 300 300 200
Items Total
A B C D E Number of workers 20 15 15
Direct materials 20,000 10,000 19,000 6,000 5,000 60,000 Value of stores requisition in (`) 2,50,000 1,50,000 1,00,000
Direct wages 15,000 15,000 4,000 2,000 4,000 40,000
Apportion the costs of service departments over the production departments.
Area (Square Meters) 15,000 10,000 10,000 5,000 10,000 50,000
Book value of machinery 60,000 1,00,000 40,000 25,000 25,000 2,50,000
Machine capacity (H.P.) 50 60 30 5 5 150 Answer
Labour hours worked 5,000 5,000 2,000 1,000 2,000 15,000 Statement Showing Secondary Distribution
No. of light points 15 10 10 5 10 50 Production Departments
Particulars Basis Total
A B C
 OVERHEADS ABSORPTION COSTING METHOD 3.3 OVERHEADS ABSORPTION COSTING METHOD 3.4
Cost as per primary distribution Given 80,00,000 30,00,000 26,00,000 24,00,0000 Primary distribution Given 2,00,000 1,50,000 3,00,000 3,20,000
Stores Value of stores 4,00,000 2,00,000 1,20,000 80,000 Apportionment:
requisition Expenses of Dept. X 25:40:35 (2,00,000) 50,000 80,000 70,000
Time keeping and Accounts No. of workers 3,00,000 1,20,000 90,000 90,000 Expenses of Dept. Y 40:60 - (2,00,000) 80,000 1,20,000
Power H.P. of machine 1,60,000 60,000 60,000 40,000 Total OH - - - 4,60,000 5,10,000
Canteen No. of workers 1,00,000 40,000 30,000 30,000
Total OH - 89,60,000 34,20,000 29,00,000 26,40,000 BQ 6
A company is having three production departments X, Y and Z and two service departments Boiler house and
BQ 4 Pump room. The Boiler house has to depend upon the Pump room for supply of water and Pump room in it’s
Deccan Manufacturing Ltd. have three departments which are regarded as production departments. Service turn is dependent on the Boiler house for supply of steam power for driving the pump. The expenses incurred
department’s costs are distributed to these production departments using the “Step Ladder Method” of by the production departments are X `6,00,000, Y `5,25,000 and Z `3,75,000. The expenses for Boiler house
distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year are `1,75,500 and Pump room are `2,25,000.
are as follows. Data required for distribution is also shown against each department:
The expenses of the Boiler house and Pump room are apportioned to the production departments
Area in square on following basis:
Departments Factory overheads Direct labour hours No. of employee
meters
Apportionment of services
Production: Departments
X Y Z Boiler house Pump room
X 1,93,000 4,000 100 3,000
Boiler house 20% 40% 30% - 10%
Y 64,000 3,000 125 1,500
Pump room 40% 20% 20% 20% -
Z 83,000 4,000 85 1,500
Service:
P 45,000 1,000 10 500 Show clearly as to how the expenses of Bolier house and Pump room would be apportioned to X, Y
Q 75,000 5,000 50 1,500 and Z departments?
[X `7,44,000; Y `6,64,500; Z `4,92,000]
R 1,05,000 6,000 40 1,000
S 30,000 3,000 50 1,000
BQ 7
The overhead costs of the four service departments are distributed in the same order, viz. P, Q, R and S A factory has two service departments P and Q and three production departments A, B, and C. You are supplied
respectively on the following basis: with the following information:
Production Departments Service Departments
Department Basis Particulars Total
A B C P Q
P Number of employees Rent 2,400 4,800 2,000 2,000 800 12,000
Q Direct labour hours Electricity 800 2,000 500 400 300 4,000
R Area in square metres Indirect labour 1,200 2,000 1,000 800 1,000 6,000
S Direct labour hours Depreciation of machinery 2,500 1,600 200 500 200 5,000
You are required to: Sundries 910 2,143 847 300 300 4,500
Estimated working hours 1,000 2,000 1,400 - - 4,400
(a) Prepare a schedule showing the distribution of overhead costs of the four service departments to the
three production departments; and Expenses of service departments P and Q are apportioned as under:
(b) Calculate the overhead recovery rate per direct labour hour for each of three production department A B C P Q
[(a) X `3,00,000; Y `1,35,000; Z `1,60,000 (b) X `75; Y `45; Z `40] P 30% 40% 20% - 10%
Q 10% 20% 50% 20% -
BQ 5
Suppose the expenses of two production departments A and B and two service departments X and Y are as You are required to show the apportionment of overheads under different methods of apportioning
under: inter-service departments overheads (Reciprocal Method) and also to work-out the production hour rate
recovery of overheads in departments A, B and C.
Apportionment Basis
Departments Amount
Y A B Answer
X 2,00,000 25% 40% 35% (A) Statement Showing Overhead Rate per Hour
Y 1,50,000 - 40% 60% (Repeated Distribution Method)
A 3,00,000
B 3,20,000 Basis of Production Departments Service Departments
Items
Charge A B C P Q
Prepare statement of overhead distribution. Rent Allocation 2,400 4,800 2,000 2,000 800
Electricity Allocation 800 2,000 500 400 300
Indirect labour Allocation 1,200 2,000 1,000 800 1,000
Answer
Depreciation Allocation 2,500 1,600 200 500 200
Statement of Overhead Distribution
Sundries Allocation 910 2,143 847 300 300
Particulars Basis X Y A B
 OVERHEADS ABSORPTION COSTING METHOD 3.5 OVERHEADS ABSORPTION COSTING METHOD 3.6
Total Overheads - 7,810 12,543 4,547 4,000 2,600 Working Note:
Reapportionment:
Calculation of expenses under Trial and Error Method:
Department P 3:4:2:1 1,200 1,600 800 (4,000) 400
Department Q 1:2:5:2 300 600 1,500 600 (3,000) Items % P Q
Department P 3:4:2:1 180 240 120 (600) 60 Total Overheads 4,000 2,600
Department Q 1:2:5:2 6 12 30 12 (60) Reapportionment:
Department P 3:4:2 4 5 3 (12) Expenses of Department P 10% - 400
Total Overheads - 9,500 15,000 7,000 - - Expenses of Department Q 20% 600 -
÷ hours - 1,000 2,000 1,400 - - Expenses of Department P 10% - 60
OH rate per hour `9.50 `7.50 `5.00 - - Expenses of Department Q 20% 12 -
Expenses of Department P 10% - 1
(B) Statement Showing Overhead Rate per Hour Total Overheads - 4,612 3,061
(Equation Method)
Basis of Production Departments Service Departments
BQ 8
Items Sanz Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’ and two service
Charge A B C P Q
departments ‘X’ and ‘Y’. The following is the budget for December 2022:
Rent Allocation 2,400 4,800 2,000 2,000 800
Electricity Allocation 800 2,000 500 400 300 Total Production Department Services Departments
Indirect labour Allocation 1,200 2,000 1,000 800 1,000 Items
Amount A B C X Y
Depreciation Allocation 2,500 1,600 200 500 200 Direct material 1,00,000 2,00,000 4,00,000 2,00,000 1,00,000
Sundries Allocation 910 2,143 847 300 300 Direct wages 5,00,000 2,00,000 8,00,000 1,00,000 2,00,000
Total Overheads - 7,810 12,543 4,547 4,000 2,600 Factory rent 4,00,000
Reapportionment: Power 2,50,000
Department P 3:4:2:1 1,384 1,845 922 (4,612) 461 Depreciation 1,00,000
Department Q 1:2:5:2 306 612 1,531 612 (3,061) Other overheads 9,00,000
Total Overheads - 9,500 15,000 7,000 - -
÷ hours - 1,000 2,000 1,400 - - Additional information:
OH rate per hour `9.50 `7.50 `5.00 - - Production Department Service Departments
Details
A B C X Y
Working Note:
Area (Sq. ft) 500 250 500 250 500
Calculation of expenses by using equation:
Capital Value of Assets (in Lakhs) 20 40 20 10 10
Expenses of Department P = 4,000 + 20% of Expenses of Q Machine hours 1,000 2,000 4,000 1,000 1,000
Expenses of Department Q = 2,600 + 10% of Expenses of P Horse power of machines 50 40 20 15 25
Now,
Expenses of Department P = 4,000 + 20% (2,600 + 10% of P) A technical assessment of the apportionment of expenses of service departments is as under:
Expenses of Department P = 4,000 + 520 + 2% of P Departments A B C X Y
4 ,520 Department X (%) 45 15 30 - 10
Expenses of Department P = = 4,612 Department Y (%) 60 35 - 5 -
98%
Expenses of Department Q = 2,600 + 10% of 4,612 = 3,061
Required:
(1) A statement showing distribution of overheads to various departments.
(C) Statement Showing Overhead Rate per Hour
(2) A statement showing re-distribution of service departments expenses to production departments using
(Trial and Error Method)
Trial and error method.
Basis of Production Departments Service Departments
Items (3) Machine hour rates of the production department A, B and C.
Charge A B C P Q
Rent Allocation 2,400 4,800 2,000 2,000 800
Answer
Electricity Allocation 800 2,000 500 400 300
(1) Statement Showing Distribution of Overheads
Indirect labour Allocation 1,200 2,000 1,000 800 1,000
Depreciation Allocation 2,500 1,600 200 500 200 Production Departments Service Departments
Items Basis of Charge
Sundries Allocation 910 2,143 847 300 300 A B C X Y
Total Overheads - 7,810 12,543 4,547 4,000 2,600 Direct material Allocation - - - 2,00,000 1,00,000
Reapportionment: Direct wages Allocation - - - 1,00,000 2,00,000
Department P 3:4:2:1 1,384 1,845 922 (4,612) 461 Factory rent Area 1,00,000 50,000 1,00,000 50,000 1,00,000
Department Q 1:2:5:2 306 612 1,531 612 (3,061) Power H.P. used 50,000 80,000 80,000 15,000 25,000
Total Overheads - 9,500 15,000 7,000 - - Depreciation Capital Value 20,000 40,000 20,000 10,000 10,000
÷ hours - 1,000 2,000 1,400 - - Other overheads Machine Hours 1,00,000 2,00,000 4,00,000 1,00,000 1,00,000
OH rate per hour `9.50 `7.50 `5.00 - - Total Overheads - 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000
 OVERHEADS ABSORPTION COSTING METHOD 3.7 OVERHEADS ABSORPTION COSTING METHOD 3.8
(2) Statement Showing Redistribution of Overheads The following data were compiled by means of the factory survey made in the previous year:
(Trial and Error Method) Floor space Radiator No. of Investment
Details H.P. hours
Basis of Production Departments Service Departments in Sq. ft. sections employees in `
Items
Charge A B C X Y Machine shop 2,000 45 20 6,40,000 3,500
Total Overheads - 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000 Packing 800 90 10 2,00,000 500
Reapportionment: General plant 400 30 3 10,000 -
Department X 45:15:30:10 2,26,922 75,641 1,51,281 (5,04,271) 50,428 Store & maintenance 1,600 60 5 1,50,000 1,000
Department Y 60:35:5 3,51,256 2,04,900 - 29,272 (5,85,428) Total 4,800 225 38 10,00,000 5,000
Total Overheads - 8,48,178 6,50,541 7,51,281 - -
Expenses charged to the stores and maintenance departments are to be distributed to the other departments
by the following percentages:
(3) Machine Hour Rate:
Budgeted Overheads Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is distributed on the
Machine Hour rate = basis of number of employees:
Machine Hours

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

(a) Prepare an overhead distribution statement with supporting schedules to show computations and basis
Department B = 6,50,541 ÷2,000 = `325.27
of distribution including distribution of the service department expenses to producing department.
Department C = 7,51,281 ÷4,000 = `187.82 (b) Determine the service department distribution by the method of continued distribution. Carry through
3 cycles. Show all calculations to the nearest rupees.
Working Note:
Calculation of expenses under Trial and Error Method Answer
Items % X Y (a) Overhead Distribution Statement
Total Overheads 4,75,000 5,35,000 Production Department Services Departments
Reapportionment: Total
Items General Stores &
Expenses of Department X 10% - 47,500 Amount Machine Shop Packing
Plant maintenance
Expenses of Department Y 5% 29,125 - Allocated overheads:
Expenses of Department X 10% - 2,913 Indirect labour 14,650 4,000 3,000 2,000 5,650
Expenses of Department Y 5% 146 - Maintenance materials 5,020 1,800 700 1,020 1,500
Expenses of Department X 10% - 15 Misc. supplies 1,750 400 1,000 150 200
Expenses of Department Y 5% 1 - Superintendent’s salary 4,000 - - 4,000 -
Total Overheads - 5,04,272 5,85,428 Cost & payroll salary 10,000 - - 10,000 -
Apportioned overheads 1,29,000 77,720 25,800 2,830 22,650
Working Note: (see schedule below)
Calculation of H.P Used Total 1,64,420 83,920 30,500 20,000 30,000
Departments A B C X Y
Machine hours 1,000 2,000 4,000 1,000 1,000 Statement of Apportioned Expenses
Horse power of machines 50 40 20 15 25
Production Department Services Departments
H.P. used (H.P. × Machine hours) 50,000 80,000 80,000 15,000 25,000 Items Basis General Stores &
Machine Shop Packing
Plant maintenance
BQ 9 Power H.P. hours 5,600 800 - 1,600
The ABC Company has the following account balances and distribution of direct charges on 31st March, 2022. Rent Floor space 5,000 2,000 1,000 4,000
Production Department Services Departments Fuel & heat Radiator secs. 1,200 2,400 800 1,600
Total
Items General Stores & Insurance Investment 640 200 10 150
Amount Machine Shop Packing
Plant maintenance Taxes Investment 1,280 400 20 300
Allocated overheads: Depreciation Investment 64,000 20,000 1,000 15,000
Indirect labour 14,650 4,000 3,000 2,000 5,650 Total - 77,720 25,800 2,830 22,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200 (b) Distribution of Service Department Expenses
Superintendent’s salary 4,000 - - 4,000 - Production Department Services Departments
Cost & payroll salary 10,000 - - 10,000 - Items Basis Machine General Stores &
OH to be apportioned: Packing
Shop Plant maintenance
Power 8,000 Total Expenses [as per (a)] 83,920 30,500 20,000 30,000
Rent 12,000 Re-apportionment:
Fuel & heat 6,000 Expenses of General plant 20 : 10 : 5 11,429 5,714 (20,000) 2,857
Insurance 1,000 Expenses of Stores & maintenance 50 : 20 : 30 16,429 6,571 9,857 (32,857)
Taxes 2,000 Expenses of General plant 20 : 10 : 5 5,633 2,816 (9,857) 1,408
Depreciation 1,00,000
 OVERHEADS ABSORPTION COSTING METHOD 3.9 OVERHEADS ABSORPTION COSTING METHOD 3.10
Expenses of Stores & maintenance 50 : 20 : 30 704 282 422 (1,408) Direct material cost `50.00
Expenses of General plant 20 : 10 : 5 241 121 (422) 60 Direct labour cost `30.00
Expenses of Stores & maintenance 50 : 20 43 17 - (60) Overheads: Department P1 (4 hours × `3.01) `12.04
Total - 1,18,399 46,021 - - Department P2 (5 hours × `2.02) `10.10
Department P3 (3 hours × `5.03) `15.09
BQ 10 Cost of product X `117.23
Modern Manufactures Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1 and
S2 details pertaining to which are as under: RECOVERY RATE
Production Departments Service Departments
Items BQ 11
P1 P2 P3 S1 S2
Direct wages 3,000 2,000 3,000 1,500 195 The monthly budget of a department is as under:
Working hours 3,070 4,475 2,419 - - Direct material : `45,000
Value of machines (`) 60,000 80,000 1,00,000 5,000 5,000 Direct wages : `60,000
H.P. of machines 60 30 50 10 - Overheads : `90,000
Light points 10 15 20 10 5
Direct labour hours : 15,000
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500
Machine hours : 30,000
The following figures extracted from the Accounting records are relevant: Find out the overhead recovery rate based on at least five different possible methods of absorption
Rent and rates : `5,000 of overheads.
General lighting : `600 [% of material cost 200%, % of labour cost 150%, % of prime cost 85.71%, Rate per labour hour `6.00,
Indirect wages : `1,939 Rate per machine hour `3.00]
Power : `1,500
Depreciation on machines : `10,000 BQ 12
Sundries : `9,695 Atlas Engineering Ltd. accepts a variety of jobs which require both manual and machine operations. The
The expenses of the Service Departments are allocated as under: budgeted profit and Loss Account for the period 2022-23 is as follow:
(` in lakhs)
Departments P1 P2 P3 S1 S2 Sales 75
S1 20% 30% 40% - 10% Cost:
S2 40% 20% 30% 10% - Direct materials 10
Direct labour 5
Find out the total cost of product X which is processed for manufacture in Departments P1, P2 and P3 for Prime Cost 15
4, 5 and 3 hours respectively, given that its Direct Material Cost is `50 and Direct Labour Cost is `30. Production Overhead 30
Production Cost 45
Answer Administrative, Selling and
Statement Showing Overhead Rate per Hour Distribution Overhead 15 60
Basis of Charge Production Departments Service Departments Profit 15
Items Other budgeted data:
P1 P2 P3 S1 S2
Direct wages Allocation - - - 1,500 195 Labour hours for the period 2,500 hours
Rent and rates Area 1,000 1,250 1,500 1,000 250 Machine hours for the period 1,500 hours
General lighting Light points 100 150 200 100 50 No. of jobs for the period 300 jobs
Indirect wages Direct wages 600 400 600 300 39
Power H.P. 600 300 500 100 - An enquiry has been received recently from a customer and the production department has prepared the
Depreciation on Value of following estimate of the prime cost required for the job:
machines machines 2,400 3,200 4,000 200 200
Sundries Direct wages 3,000 2,000 3,000 1,500 195 Direct material `2,500
Total overheads Primary Dist. 7,700 7,300 9,800 4,700 929 Direct labour `2,000
Re-apportionment: Prime Cost `4,500
Department S1 2:3:4:1 940 1,410 1,880 (4,700) 470 Labour hours required 8 hours
Department S2 4:2:3:1 559 280 420 140 (1,399) Machine hours required 5 hours
Department S1 2:3:4:1 28 42 56 (140) 14
You are required to:
Department S2 4:2:3 6 3 5 - (14)
Total OH - 9,233 9,035 12,161 - - (a) Calculate by different methods, six overhead absorption rates for absorption of production overhead.
÷ Working hours - 3,070 4,475 2,419 - - (b) Calculate the production overhead cost of the order based on each of the above rates.
OH rate per hour `3.01 `2.02 `5.03 - -
Answer
Calculation of cost of product X: (a) Computation of overhead absorption rates for absorption of production overheads:
 OVERHEADS ABSORPTION COSTING METHOD 3.11 OVERHEADS ABSORPTION COSTING METHOD 3.12
1. Direct labour hour rate =
Pr oduction overheads
= 30 ,00 ,000
= 1,200 per hour 4 1,60,000
Direct labour hours 2 ,500 5 90,000
Pr oduction overheads 30 ,00 ,000 Total 6,19,600
2. Machine hour rate = = = 2,000 per hour
Machine hours 1 ,500 You are required to calculate:
Pr oduction overheads 30 ,00 ,000 (a) The departmental direct labour hours rates of overhead, based on the preliminary budget.
3. % of direct material cost= × 100= × 100= 300%
Direct material cos t 10 ,00 ,000 (b) The department direct labour rate of overhead, based on the revised budget.
Pr oduction overheads 30 ,00 ,000 (c) The overhead chargeable at the revised rates to one unit of product X for which the following hours are
4. % of labour cost = × 100= × 100= 600%
Direct labour cos t 5 ,00 ,000 spent in each department:
Pr oduction overheads 30 ,00 ,000 Department 1 3 4 5
5. % of prime cost = × 100= × 100= 200%
Pr ime cos t 15 ,00 ,000 Hours 6 4 8 3
Pr oduction overheads 30 ,00 ,000
6. Job rate = = = 10,000 per job
No . of jobs 300 Answer
(a) Statement of Departmental Direct Labour Hour Rate of Overheads
(b) Calculation of production overhead cost to the order on the basis of above rates: (Based on Preliminary Budget)
1. Under direct labour hour rate = No. of labour hours × Rate per hour Items Basis 1 2 3 4
= 8 hours × 1,200 = `9,600 Allocated Overheads - 14,200 7,200 16,400 22,600
Apportioned Overheads 10:30:20:40 17,600 52,800 35,200 70,400
2. Under machine hour rate = No. of machine hours × Rate per hour Total OH - 31,800 60,000 51,600 93,000
= 5 hours × 2,000 = `10,000 ÷ Labour Hours - 60,000 2,00,000 1,20,000 1,50,000
3. Under % of direct material cost = Direct material cost × % of material cost Direct Labour Hour Rate `0.53 `0.30 `0.43 `0.62
= 2,500 × 300% = `7,500
(b) Statement of Departmental Direct Labour Hour Rate of Overheads
4. Under % of direct labour cost = Direct labour cost × % of labour cost (Based on Revised Budget)
= 2,000 × 600% = `12,000 Items Basis 1 2 3 4 5
5. Under % of prime cost = Prime cost × % of prime cost Total Overheads Preliminary 31,800 60,000 51,600 93,000 -
= 4,500 × 200% = `9,000 Budget
Additional Overheads Allocation - - - - 15,000
6. Under job rate = No. of jobs × Rate per job Transfer of OH 3 to 5 - - (6,600) - 6,600
= 1 job × 10,000 = `10,000 Additional Overheads 10:20:10:60 3,000 6,000 - 3,000 18,000
Total OH - 34,800 66,000 45,000 96,000 39,600
BQ 13 ÷ Labour Hours - 69,600 2,00,000 1,00,000 1,60,000 90,000
The preliminary budget for a company with four departments was as under: Direct Labour Hour Rate `0.50 `0.33 `0.45 `0.60 `0.44
Direct overheads Apportioned
Departments Direct labour hours
allocation overheads (%) (c) Chargeable overheads on one unit of Product X = 6 hours × `0.50 + 4 hours × `0.45 + 8
1 `14,200 10 60,000 hours × `0.60 + 3 hours × `0.44
2 `7,200 30 2,00,000 = `10.92
3 `16,400 20 1,20,000
4 `22,600 40 1,50,000 BQ 14
Total `60,400 `1,76,000 5,30,000 Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use of a special machine
and also the use of a computer. The computer is hired and the hire charges work out to `4,20,000 per annum.
It was decided to establish a new department 5 and to slightly re organize the existing departments.
The following alternations were agreed to in making a revised budget: The expenses regarding the machine are estimated as follows.
(a) A sum of `15,000 being additional overhead will be allocated directly to department 5. Rent for the quarter `17,500
(b) An amount of `6,600 being overhead previously allocated directly to department 3 will now be Depreciation per annum `2,00,000
transferred to department 5. Indirect charges per annum `1,50,000
(c) `30,000 additional overhead expected to be incurred due to re organization will be apportioned as
follows: During the first month of operation the following details were taken from the job register:
Department 1 2 3 4 5 Job A Job B Job C
Proportion (%) 10 20 - 10 60 Number of hours the machine was used:
(d) Revised direct labour hours are expected to be (a) Without the use of the computer 600 900 -
(b) With the use of the computer 400 600 1,000
Department Hours
1 69,600 You are required to compute the machine hour rate:
2 2,00,000 (i) For the firm as a whole for the month when the computer was used and when the computer was not
3 1,00,000 used.
 OVERHEADS ABSORPTION COSTING METHOD 3.13 OVERHEADS ABSORPTION COSTING METHOD 3.14
(ii) For the individual jobs A, B and C. Factory cost 67,500+30,000F 96,000+42,000F
[(i) `27.50 and `10.00 per machine hour (ii) Job A: `17, Job B: `17, Job C: `27.50] Selling and Administration OH (67,500+30,000F)A (96,000+42,000F)A
Total cost (67,500+30,000F)(1+A) (96,000+42,000F)(1+A)
REVERSE CALCULATION OF OVERHEADS * Computation of total cost of jobs:
BQ 15 Total cost of Job 1102 when 8% is the profit on cost = 1 ,07 ,325
× 100 = `99,375
In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct wages 108 %
and the administrative overheads are absorbed on a fixed percentage basis on factory cost. 1 ,57 ,920
Total cost of Job 1108 when 12% is the profit on cost = × 100 = `1,41,000
The company has furnished the following data relating to two jobs undertaken by it in a period: 112 %

Job 101 Job 102 Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore, we have
Direct Materials `54,000 `37,500 the following equations:
Direct Wages `42,000 `30,000
Selling price `1,66,650 `1,28,250 (67,500 + 30,000F) (1 + A) = `99,375 (1)
Profit as percentage on total cost 10% 20% (96,000 + 42,000F) (1 + A) = `1,41,000 (2)
Or
You are required to compute: 67,500 + 30,000F + 67,500 A + 30,000FA = `99,375
(i) Computation of percentage recovery rates of factory overheads and administrative overheads. 96,000 + 42,000F + 96,000 A + 42,000FA = `1,41,000
(ii) Calculation of the amount of factory overheads, administrative overheads and profit for each of the two Or
jobs. 30,000F + 67,500A + 30,000FA = `31,875 (3)
(iii) Using the above recovery rates fix the selling price of job 103. The additional data being : 42,000F + 96,000A + 42,000FA = `45,000 (4)

Direct materials `24,000 On solving (3) and (4) we get:

Direct wages `20,000
Profit percentage on selling price 12-½% A = 0.25 or 25% on factory cost
F = 0.40 or 40% on direct wages
[(i) 60% & 25% (ii) `25,200, `30,300, `15,150 and `18,000, `21,375, `21,375 (iii) `80,000]
(ii) Selling price of the new order
BQ 16 Particulars Amount
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as under: Materials 64,000
Job 1102 Job 1108 Productive Wages 50,000
Selling price `1,07,325 `1,57,920 Prime Cost 1,14,000
Profit as percentage on cost 8% 12% Factory overheads (40% of 50,000) 20,000
Direct Materials `37,500 `54,000 Factory Cost 1,34,000
Direct Wages `30,000 `42,000 Selling and Admin overheads (25% of 1,34,000) 33,500
Total Cost 1,67,500
It is the policy of the company to charge factory overheads as percentage on direct wages and selling and 41,875
Profit (20% on sales or 25% on cost)
administration overheads as percentage on factory cost.
Sale Price 2,09,375
The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order is `64,000 and `50,000 respectively. A profit of 20% on
sales is required. UNDER AND OVER ABSORPTION OF OVERHEADS
You are required to compute: BQ 17
(i) The rates of Factory overheads and Selling and Administration overheads to be charged; Sweet Dreams Ltd. uses a historical cost system and absorbs overheads the basis of pre determined rate. The
(ii) The Selling price of the new order. following data are available for the year ended 31st March 2019:

Answer Overhead actually spent : `1,70,000

(i) Computation of rates of factory overheads and selling and administration overheads to be charged: Overhead absorbed : `1,50,000
Cost of goods sold : `3,36,000
Let % of factory overheads to direct wages be F and % of selling and administrative overheads to factory cost Stock of finished goods : `96,000
be A Work-in-progress : `48,000
Jobs Cost Sheet
Using three methods of disposal of under absorbed overheads show the implication on the profits
Particulars Job 1102 Job 1108
of the company under each method.
Direct materials 37,500 54,000
Direct wages 30,000 42,000 [Under absorbed overheads `20,000; Effect on profit: Transfer to P/L method: Profit will decline by
Prime cost 67,500 96,000 `20,000; carry forward to next period method: No impact on profit; Supplementary rate method: Profit
Factory overheads 30,000F 42,000F will decline by `14,000]
 OVERHEADS ABSORPTION COSTING METHOD 3.15 OVERHEADS ABSORPTION COSTING METHOD 3.16
BQ 18 Under absorption `4,00,000
In factory overheads of a particular department are recovered on the basis of `5 per machine hour. The total
expenses incurred and the actual machine hours for the department for the month of August were `80,000 (b) Accounting treatment of under-recovered production overheads:
and 10,000 hours respectively. Of the amount of `80,000, `15,000 became payable due to an award of the
1. `2,40,000 (`4,00,000 × 60%) of under absorbed overheads were due to defective planning. This
Labour Court and `5,000 were in respect of expenses off the previous year booked in the current month
being abnormal should be debited to Costing Profit and Loss Account.
(August). Actual production was 40,000 units of which 30,000 units were sold. On analysing the reasons it was
found that 60% of the under absorbed overhead was due to defective planning and the rest was attributed to 2. The balance of `1,60,000 of under absorbed overheads should be distributed over finished goods
normal cost increase. and cost of sales by using supplementary rate.
How would you treat the under absorbed overhead in the cost accounts?
Supplementary OH Rate = Under Recovered OH ÷ Equivalent Units
= `1,60,000 ÷ 40,000 units = `4 per unit
Answer
(a) Computation of under absorption of Production Overheads: Distribution of unabsorbed overheads of `1,60,000:
Particulars Amount
Total production overheads actually incurred 80,000 Cost of Sales (30,000 × `4) = `1,20,000
Less: Amount payable due to an award of the Labour Court (15,000) Finished Goods (10,000 × `4) = `40,000
Less: Expenses off the previous year (5,000)
Net production overheads actually incurred 60,000 Journal Entries
Production overheads recovered (10,000 hours × `5) 50,000 Entries Dr. Cr.
Under Recovery of production overheads `10,000 Cost of Sales A/c Dr. 1,20,000 -
Finished Goods Control A/c Dr. 40,000 -
(b) Accounting treatment of under-recovered production overheads: Costing Profit & Loss A/c Dr. 2,40,000 -
1. `6,000 (`10,000 × 60%) of under absorbed overheads were due to defective production planning. To Overhead Control A/c - 4,00,000
(Being under recovery of under absorbed oh recovered/charged)
This being abnormal should be debited to Costing Profit and Loss Account.
2. The balance of `4,000 of under absorbed overheads should be distributed over finished goods and BQ 20
cost of sales by using supplementary rate. From the following data relating to a production unit work out the over absorbed or under absorbed
overhead resulted during the month of review.
Supplementary OH Rate = Under Recovered OH ÷ Equivalent Units
= `4,000 ÷ 40,000 units = `0.1 per unit The unit having strength of 20 workmen planned for 290 working days of 8 hours each with half an hour
break. Based on the earlier years trend it is forecasted that average absenteeism per workman would be 10
Distribution of unabsorbed overheads of `4,000: days in addition to the eligibility of 30 days annual leave.

Cost of Sales (30,000 × `0.1) = `3,000 The budgeted overheads related to the unit for the year amounted to `75,000 and the unit follows a
Finished Goods (10,000 × `0.1) = `1,000 system of recovering overheads on the basis of direct labour hour.
The actual overheads during the year amounted to `71,200 and the following details regarding actual
Journal Entries working of the unit are available:
Entries Dr. Cr.
(i) The factory worked 3 extra days to meet the production targets but one additional paid holiday had to
Cost of Sales A/c Dr. 3,000 -
be declared.
Finished Goods Control A/c Dr. 1,000 -
(ii) There was a severe breakdown of major equipment leading to a loss of 350 man hours.
Costing Profit & Loss A/c Dr. 6,000 -
(iii) Total overtime hours (in addition to 3 extra days worked) amounted to 680 hours.
To Overhead Control A/c - 10,000
(iv) The actual average absenteeism per workman was 12 days.
(Being under recovery of under absorbed oh recovered/charged)
[Over absorbed `4,460]
BQ 19 BQ 21
In a manufacturing unit factory overhead was recovered at predetermined rate of `25 per man day. The total A Ltd. manufactures two products A and B. The manufacturing division consists of two production
factory overhead expenses incurred and the man days actually worked were `41.50 lakhs and 1.5 lakhs man departments P1 and P2 and two services departments S1 and S2.
days respectively. Out of the 40,000 units produced during a period 30,000 were sold. Budgeted overhead rates are used in the production departments to absorb factory overheads to the
On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to defective products. The rate of department P1 is based on direct machine hours, while the rate of department P2 is
planning and the rest were attributable to increase in overhead costs. based on direct labour hours.
How would unabsorbed overheads be treated in Cost Account?
For allocating the service department costs to production departments the basis adopted is as follows:
Answer (i) Cost of departments S1 to departments P1 and P2 equally and
(a) Computation of under absorption of Production Overheads: (ii) Cost of department S2 to departments P1 and P2 in the ratio of 2:1 respectively.
Recovered Overheads (1,50,000 man days × `25) `37,50,000
Actual Overheads Incurred `41,50,000 The following data relating to factory overheads budgeted for the year is available:
 OVERHEADS ABSORPTION COSTING METHOD 3.17 OVERHEADS ABSORPTION COSTING METHOD 3.18
P1 `25,50,000 S1 `6,00,000 The overhead rate of `8 per hour is based on 3,000 man hours per week; similarly, the machine hour rates are
P2 `21,75,000 S2 `4,50,000 based on the normal working of Machine Nos. I and II for 40 hours out of 45 hours per week (45 maximum
working hours and 40 hours normal working hours per week for both machines).
Budgeted output in units:
After the close of each week, the factory levies a supplementary rate for the recovery of full overhead
Product A 50,000 Product B 30,000
expenses on the basis of actual hours worked during the week. During the week ending 21st August, 20X1, the
total labour hours worked was 2,400 and Machine Nos. I and II had worked for 30 hours and 32.5 hours
Budgeted raw material cost per unit:
respectively.
Product A `120 Product B `150
Prepare a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly levying the
Budgeted time required for production per unit: supplementary rates.
Department P1 Product A 1.5 Machine hours Product B 1 Machine hour
Department P2 Product A 2 Direct labour hours Product B 2.5 Direct labour hrs Answer
Fabrication of 12 Nos. machine parts (job No......) Date of commencement: 16 August, 20X1 Date of Completion.
You are required to compute the pre-determined overhead rate for both the production department. Cost sheet for the week ending, August 21, 20X1:
Particulars ` `
Answer Direct materials (all items) 780
(i) Computation of predetermined overhead rate for each production department Direct labour (manual) 20 hours @ `15 per hour 300
Production Departments Service Departments Machine facilities:
Items Basis of Charge Machine No I: 4 hours @ `45 180
P1 P2 S1 S2
Budgeted OH Given 25,50,000 21,75,000 6,00,000 4,50,000 Machine No II: 6 hours @ `65 390 570
Apportionment: Total 1650
Expenses of S1 1:1 3,00,000 3,00,000 (6,00,000) - Overheads @ `8 per hour on 20 manual hours 160
Expenses of S2 2:1 3,00,000 1,50,000 - (4,50,000) Total cost 1810
Total OH - 31,50,000 26,25,000 - - Supplementary Rates
÷ Budget Machine hours - ÷ 1,05,000 - - - Overheads @ `2 per hour on 20 manual hours 40
÷ Budget Labour hours - - ÷1,75,000 - - Machine No I: 4 hours @ `15 60
Recovery rate - `30 `15 - - Machine No II: 6 hours @ `15 90 190
Total cost 2,000
Working Notes:
Working notes:
Calculation of Budgeted and Actual machine hours and labour hours:
Calculation of Supplementary rate:
Product A Product B Total
(a) Overheads:
Budgeted output (in units) 50,000 units 30,000 units
Overheads budgeted 3,000 hours × `8 = `24,000
Budgeted machine hours in department P1 75,000 hours 30,000 hours 1,05,000 Actual hours = 2,400
(50,000  1.5 hours) (30,000  1 hours) Actual rate per hour `24,000 ÷ 2,400 hours = `10
Supplementary charge = `2 (`10 – `8) per hour
Budgeted labour hours in department P2 1,00,000 hours 75,000 hours 1,75,000
(50,000  2 hours) (30,000  2.5 hours) (b) Machine facilities:

MISCELLANEOUS Machine No I:
Overheads budgeted 40 hours × `45 = `1,800
BQ 22 Actual hours = 30
A light engineering factory fabricates machine parts to customers. The factory commenced fabrication of 12 Actual rate per hour `1,800 ÷ 30 hours = `60
Nos. machine parts to customers’ specifications and the expenditure incurred on the job for the week ending Supplementary charge = `15 (`60 – `45) per hour
21st August, 20X1 is given below:
Machine No II:
Particulars ` `
Overheads budgeted 40 hours × `65 = `2,600
Direct materials (all items) 780
Actual hours = 32.5
Direct labour (manual) 20 hours @ `15 per hour 300
Actual rate per hour `2,600 ÷ 32.5 hours = `80
Machine facilities:
Supplementary charge = `15 (`80 – `65) per hour
Machine No I: 4 hours @ `45 180
Machine No II: 6 hours @ `65 390 570
Total 1650
BQ 23
Overheads @ `8 per hour on 20 manual hours 160 A factory has three production departments. The policy of the factory is to recover the production overheads
of the entire factory by adopting a single blanket rate based on the percentage of total factory overheads to
Total cost 1810
total factory wages. The relevant data for a month are given below:
 OVERHEADS ABSORPTION COSTING METHOD 3.19 OVERHEADS ABSORPTION COSTING METHOD 3.20
Direct Factory Budgeted Factory Overheads 3,60 ,000
Direct Wages Direct Labour Machine hour rate = = = `4.50 per hour
Department Materials Overheads Machine hours Budgeted Machine Hours 80 ,000 hours
(`) hours
(`) (`)
Budget: 2. Assembly Department:
Machining 6,50,000 80,000 3,60,000 20,000 80,000 In this department direct labour hours is the main factor of production. Hence direct labour hour rate
Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000 method should be used to recover overheads in this department. The overheads recovery rate in this case is:
Packing 1,00,000 70,000 1,25,000 50,000 -
Actual: Budgeted Factory Overheads 1 ,40 ,000
Direct labour hour rate = = = `1.40 per hour
Machining 7,80,000 96,000 3,90,000 24,000 96,000 Budgeted Direct Labour Hours 1 ,00 ,000 hours
Assembly 1,36,000 2,70,000 84,000 90,000 11,000
Packing 1,20,000 90,000 1,35,000 60,000 - 3. Packing Department:
Labour is the most important factor of production in this department. Hence direct labour hour rate
The details of one of the representative jobs produced during the month are as under: method should be used to recover overheads in this department. The overhead recovery rate in this case
comes to:
Job No. CW 7083
Budgeted Factory Overheads 1 ,25 ,000
Direct Materials Direct Wages Direct Labour Direct labour hour rate = = = `2.50 per hour
Department Machine hours Budgeted Direct Labour Hours 50 ,000 hours
(`) (`) hours
Machining 1,200 240 60 180
(iii) Selling Price of Job CW-7083 [based on the overhead application rates calculated in (ii) above]
Assembly 600 360 120 30
Packing 300 60 40 - Particulars Amount
Direct materials (`1,200 + `600 + `300) 2,100
The factory adds 30% on the factory cost to cover administration and selling overheads and profit. Direct wages (`240 + `360 + `60) 660
Prime Cost 2,760
Required:
Overheads:
(i) Calculate the overhead absorption rate as per the current policy of the company and determine the
Machining (180 machine hours × `4.50) 810
selling price of the Job No. CW 7083.
Assembly (120 labour hours × `1.40) 168
(ii) Suggest any suitable alternative method(s) of absorption of the factory overheads and calculate the
Packing (40 labour hours × `2.50) 100
overhead recovery rates based on the method(s) so recommended by you.
(iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii) Factory Cost 3,838
Mark-up (30% × `3,838) 1,151.40
above.
(iv) Calculate the department-wise and total under or over recovery of overheads based on the company’s Selling Price 4,989.40
current policy and the method(s) recommended by you.
(iv) Department-wise statement of total under or over recovery of overheads:
Answer (a) Under Current Policy (Blanket Rate)
(i) Calculation of overhead absorption rate as per current policy of the company (blanket rate):
Machining Assembly Packing Total
Details
Budgeted Factory Overheads 3,60 ,000  1,40 ,000  1,25 ,000 (`) (`) (`) (`)
Blanket rate =  100 =  100
Budgeted Direct Wages 80 ,000  3,50 ,000  70 ,000 Direct wages (Actual) 96,000 2,70,000 90,000
= 125% of Direct Wages Overheads recovered @ 125% of Direct wage (1) 1,20,000 3,37,500 1,12,500 5,70,000
Actual overheads (2) 3,90,000 84,000 1,35,000 6,09,000
Calculation of Selling Price of the Job No. CW-7083: (Under)/over recovery (1 - 2) (2,70,000) 2,53,500 (22,500) (39,000)
Particulars Amount (b) Under Method Suggested (Department-Wise Rate)
Direct materials (`1,200 + `600 + `300) 2,100
Direct wages (`240 + `360 + `60) 660 Machining Assembly Packing Total
Details
Prime Cost 2,760 (`) (`) (`) (`)
Overheads (125% × `660) 825 Actual Machine Hours 96,000 - -
Factory Cost 3,585 Actual Direct Labour Hours - 90,000 60,000
Mark-up (30% × `3,585) 10,75.50 Recovery rate per machine hour/labour hour 4.50 1.40 2.50
Selling Price 4,660.50 Overheads recovered (1) 4,32,000 1,26,000 1,50,000 7,08,000
Actual overheads (2) 3,90,000 84,000 1,35,000 6,09,000
(ii) Methods available for absorbing factory overheads and their overhead recovery rates in different (Under)/over recovery (1 - 2) 42,000 42,000 15,000 99,000
departments:
BQ 24
1. Machining Department: A company which sells four products, some of them unprofitable, proposes discontinuing the sale of one of
In the machining department, the use of machine time is the predominant factor of production. Hence them. The following information is available regarding income, costs and activity for the year ended 31 st
machine hour rate should be used to recover overheads in this department. The overhead recovery rate based March, 2023.
on machine hours has been calculated as under: Details A B C D
 OVERHEADS ABSORPTION COSTING METHOD 3.21 OVERHEADS ABSORPTION COSTING METHOD 3.22
Sales (`) 30,00,000 50,00,000 25,00,000 45,00,000 Find out the machine hour rate.
Cost of sales (`) 20,00,000 45,00,000 21,00,000 22,50,000
(before selling and distribution overheads) Answer
Area of storage (Sq. ft.) 50,000 40,000 80,000 30,000 Machine Hour Rate
Number of parcels sent 1,00,000 1,50,000 75,000 1,75,000 Particulars Amount
Number of invoices sent 80,000 1,40,000 60,000 1,20,000 (A) Standing charges/ Fixed costs
Depreciation [(`1,00,00,000 – 9,00,000) × 1/10 years × 1/12] 75,833.33
Selling and Distribution overheads and the basis of allocation are: Rent (`30,000 × ¼) 7,500
Details ` Basis of allocation to products Lighting charges (`8,000 × 2/10) 1,600
Fixed cost: Foreman’s salary (`19,200 × 1/6) 3,200
Rent & insurance 3,00,000 Square feet Insurance Premium (`1,00,00,000 × 1% × 1/12) 8,333.33
Depreciation 1,00,000 Parcel Total (A) 96,466.66
Salesmen’s salaries & expenses 6,00,000 Sales volume (B) Running charges/ Variable costs
Administrative wages & salaries 5,00,000 Number of invoices Repairs (`18,00,000 × 1/10 years × 1/12) 15,000
Variable cost: Electricity [(15 units × 4,380 hours × `5) × 1/12] 27,375
Packing wages & materials `2 per parcel Sundry expenses (oil etc.) 900
Commission 4% of sales Total (B) 43,275
Stationery `1 per invoice Total Cost (A + B) 1,39,741.66
÷ Productive Machine Hours in a month (4,380 ÷ 12) ÷ 365
You are required to prepare Costing Profit & Loss Statement, showing the percentage of profit or Machine Hour Rate `382.85
loss to sales for each product.
BQ 26
Answer A Manufacturing unit has added a new machine to its fleet of five existing machines. The total cost of purchase
Statement Showing Costing Profit & Loss and installation of the machine is `7,50,000. The machine has an estimated life of 15 years and is expected to
Details Total (`) A (`) B (`) C (`) D (`) realize `30,000 as scrap at the end of its working life.
Sales (`) 1,50,00,000 30,00,000 50,00,000 25,00,000 45,00,000 Other relevant data are as following:
Variable cost:
Cost of sales (`) 1,08,50,000 20,00,000 45,00,000 21,00,000 22,50,000 (i) Budgeted working hours is 2,400 based on 8 hours per day for 300 days. This includes 400 hours for
Packing wages & materials @ 10,00,000 2,00,000 3,00,000 1,50,000 3,50,000 plant maintenance.
`2 per parcel (ii) Electricity used by the machine is 15 units per hour at a cost of `2.00 per unit. No current is drawn
Commission @ 4% of sales 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000 during maintenance.
Stationery @ `1 per invoice 4,00,000 80,000 1,40,000 60,000 1,20,000 (iii) The machine requires special oil for heating which is replaced once in every month at a cost of `2,500
Total Variable cost (A) 1,28,50,000 24,00,000 51,40,000 24,10,000 29,00,000 on each occasion.
Fixed cost: (iv) Estimated cost of maintenance of the machine is `500 per week of 6 working days.
Rent & insurance (5 : 4 : 8 : 3) 3,00,000 75,000 60,000 1,20,000 45,000 (v) 3 operators control the operations of the entire battery of six machines and the average wages per
Depreciation (100:150:75:175) 1,00,000 20,000 30,000 15,000 35,000 person amounts to `450 per week plus 40% fringe benefits.
Salesmen’s salaries & expenses 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000 (vi) Departmental and general works overheads allocated to the operation during the last year was `60,000.
(30: 50 : 25 : 45) During the current year it is estimated that there will be an increase of 12.5% of this amount. No
Administrative wages & 5,00,000 1,00,000 1,75,000 75,000 1,50,000 incremental overhead is envisaged for the installation of the new machine.
salaries (80: 140 : 60 : 120)
Total Fixed cost (B) 15,00,000 3,15,000 4,65,000 3,10,000 4,10,000 You are required to compute the machine hour rate.
Total cost (A + B) 1,43,50,000 27,15,000 56,05,000 27,20,000 33,10,000
Profit or Loss (Sales – Total cost) 6,50,000 2,85,000 (6,05,000) (2,20,000) 11,90,000 Answer
% of Profit or Loss to sales 4.33% 9.5% (12.10%) (8.80%) 26.44% Machine Hour Rate
Particulars Amount
MACHINE HOUR RATE (A) Standing charges/ Fixed costs
Depreciation [(`7,50,000 – 30,000) × 1/15 years] 48,000
BQ 25 Operators wages and fringe benefits [(`450 × 300/6 × 3 × 1/6) + 40%] 15,750
A machine costing `1,00,00,000 is expected to run for 10 years. At the end of this period its scrap value is likely Departmental and general overheads [(`60,000 + 12.5%) × 1/6] 11,250
to be `9,00,000. Repairs during the whole life of the machine are expected to be `18,00,000 and the machine Total (A) 75,000
is expected to run 4,380 hours per year on the average. Its electricity consumption is 15 units per hour, the (B) Running charges/ Variable costs
rate per unit being `5. The machine occupies one-fourth of the area of the department and has two points out Maintenance (`500 × 300/6) 25,000
of a total of ten for lighting. The foreman has to devote about one sixth of his time to the machine. The monthly Electricity (15 units × 2,000 hours × `2) 60,000
rent of the department is `30,000 and the lighting charges amount to `8,000 per month. The foreman is paid Special oil (`2,500 × 12) 30,000
a monthly salary of `19,200. Insurance is @ 1% p.a. and the expenses on oil, etc., are `900 per month. Total (B) 1,15,000
 OVERHEADS ABSORPTION COSTING METHOD 3.23 OVERHEADS ABSORPTION COSTING METHOD 3.24
Total Cost (A + B) 1,90,000 Production bonus 15% on wages
÷ Productive Machine Hours (2,400 - 400) ÷ 2,000 Power and fuel consumption `8,050
Machine Hour Rate `95.00 Supervision & indirect labour `3,300
Electricity `1,200
BQ 27 The following particulars are on a yearly basis:
A manufacturing unit has purchased and installed a new machine of `12,70,000 to its fleet of 7 existing
machines. The new machine has an estimated life of 12 years and is expected to realise `70,000 as scrap at the Repairs and maintenance 3% of value of machines
end of its working life. Insurance `40,000
Depreciation 10% of original cost
Other relevant data are as follows: Other sundry works expenses `12,000
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for Allocated general management expenses `54,530
plant maintenance and 92 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is `25,000 p.a. You are required to work out a comprehensive machine hour rate for the machine shop.
(iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a [`23.87 per hour]
week) at a cost of `400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person amounts to `420 per BQ 29
week plus 15% fringe benefits. Operating data of a company given below:
(v) Electricity used by the machine during the production is 16 units per hour at a cost of `3 per unit. No
current is taken during maintenance and setting up. Total number of weeks per quarter = 13 weeks
(vi) Departmental and general works overhead allocated to the operation during last year was `50,000. Total number of hours per week = 48 hours
During the current year it is estimated to increase 10% of this amount. Stoppage due to maintenance = 8 hours per month
Time taken for set up = 2 hours per week
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.
Cost details:
Answer
Total Cost Cost of machine = `2,00,000
Machine Hour Rate = Repair and maintenance = `24,000 per annum
Productive Hours
Consumable stores = `30,000 per annum
(a) Setting up time is unproductive = `2,72,116 ÷ 2,200 = `123.69 per hour Rent, rates and taxes = `8,000 per quarter
Operator's wages = `3,000 per month
(b) Setting up time is productive = `2,72,116 ÷ 2,292 = `118.72 per hour Supervisor's salary = `5,000 per month
Cost of power = 15 units per hour at `3 p.u.
Statement Shoeing Total Cost Related to Machine
Notes:
Particulars Amount (i) Life of the machine is 10 years. Depreciation is provided on straight line basis and is treated as variable
(A) Standing charges/ Fixed costs cost.
Depreciation [(`12,70,000 – 70,000) × 1/12 years] 1,00,000 (ii) Repairs and maintenance and consumable stores are variable costs.
Operators wages and fringe benefits [(`420 × 324/6 × 4 × 1/8) + 15%] 13,041 (iii) Power is consumed for production runs and for set up but not for maintenance.
Departmental and general overheads [(`50,000 + 10%) × 1/8] 6,875 (iv) The supervisor is supervising work on five identical machines including the one now considered.
Total (A) 1,19,916
(B) Running charges/ Variable costs Required:
Maintenance 25,000
Electricity (16 units × 2,200 hours × `3) 1,05,600 (a) Calculate the machine hour rate (if set up time is productive).
Special oil (`400 × 324/6) 21,600 (b) The company hires out excess capacity in the machine shop for outside jobs. Assuming that hire charges
Total (B) 1,52,200 are fixed at variable cost plus 20%. What rate should be quoted by the company?
Total Cost (A + B) `2,72,116
Answer
BQ 28 (a) Machine Hour Rate
In a manufacturing concern ABC Ltd. the machine shop has 8 identical machines manned by 6 operators. The Particulars Amount
machines cannot be worked without an operator wholly engaged on them. The total cost of the machines are (A) Running charges/ Variable costs
`8,00,000. Depreciation (`2,00,000 × 1/10) 20,000
Repairs and maintenance 24,000
Following information relates to a six monthly period ended 30th June, 2017: 30,000
Consumables
Normal available hours per month 208 Power (15 units × 2,400 hours × `3) 1,08,000
Absenteeism (without pay) hours per months 18 Total (A) 1,82,000
Leave (with pay) hours per months 20 (B) Standing charges/ Fixed costs
Normal idle time (unavoidable) hours per month 10 Rent, rates and taxes (`8,000 × 4 quarters) 32,000
Average rate of wages per day of 8 hours `20 Operators wages (`3,000 × 12) 36,000
 OVERHEADS ABSORPTION COSTING METHOD 3.25 OVERHEADS ABSORPTION COSTING METHOD 3.26

PAST YEAR QUESTIONS

Supervisor’s salary (`5,000 × 12 × 1/5) 12,000
Total (B)
80,000
Total Cost (A + B)
2,62,000
÷ Productive Machine Hours
÷ 2,400
Machine Hour Rate `109.17 PYQ 1
A company has three production departments and two service departments. Distribution summary of
(b) Hire Charges = (1,82,000 ÷ 2,400) + 20% = `91.00 per hour overheads is as follows:
Production Department:
Working notes: A `13,600
B `14,700
Productive machine hours = Total hours – Maintenance hours C `12,800
= (48 hours per week × 13 weeks × 4 quarters) – (8 hours × 12 months) Service Department:
= 2,496 hours – 96 hours = 2,400 hours X `9,000
Y `3,000
BQ 30
Sree Ajeet Ltd. having fifteen different types of automatic machines furnishes information as under for 2022- The expenses of service departments are charged on a percentage basis which is as follows:
2023: A B C X Y
(1) Overhead expenses: Factory rent `1,80,000 (Floor area 1,00,000 sq. ft.), Heat and gas `60,000 and Department X 40% 30% 20% - 10%
Supervision `1,50,000. Department Y 30% 30% 20% 20% -
(2) Wages of operator are `200 per day of 8 hours. Operator attends to one machine when it is under set up
and two machines while they are under operation. Apportion the cost of Service Departments by using the Repeated Distribution method.
[(8 Marks) Nov 1998]
In respect of Machine B (one of the above machines) the following particulars are furnished:
(a) Cost of machine `1,80,000, Life of machine is 10 years and scrap value at the end of its life `10,000. Answer
(b) Annual expenses on special equipment attached to the machine are estimated as `12,000. Distribution of Overheads (Repeated Distribution Method)
(c) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum.
Production departments Service departments
(d) The machine occupies 5,000 sq. ft. of floor area. Particulars Basis
A B C X Y
(e) Power cost `5 per hour while machine is in operation.
Total overheads 13,600 14,700 12,800 9,000 3,000
Apportionment of Expenses:
Estimate the comprehensive machine hour rate of machine B. Also find out machine cost to be absorbed
Department X 40:30:20:10 3,600 2,700 1,800 (9000) 900
in respect of use of machine B on the following two work order.
Department Y 30:30:20:20 1,170 1,170 780 780 (3,900)
Department X 40:30:20:10 312 234 156 (780) 78
Particulars Work order 1 Work order 2
Department Y 30:30:20:20 23 23 16 16 (78)
Machine set up time (Hours) 15 30 Department X 40:30:20:10 6 5 3 (16) 2
Machine operation time (Hours) 100 190 Department Y 30:30:20 1 1 - - -
Total - 18,712 18,833 15,555 - -
Answer
Statement Showing Comprehensive Machine Hour Rate
PYQ 2
Particulars Amount Basis Set up Running ABC Ltd. manufactures a single product and absorbs the production overheads at a pre determined rate of `10
Factory rent [(`1,80,000/1,00,000) × 5,000] 9,000 400 : 3600 900 8,100 per machine hour. At the end of financial year 1998-99, it has been found that actual production overheads
Heat and gas (`60,000 ÷ 15) 4,000 400 : 3600 400 3,600 incurred were `6,00,000. It included `45,000 on account of 'written off' obsolete stores and `30,000 being the
Supervision (`1,50,000 ÷ 15) 10,000 400 : 3600 1,000 9,000 wages paid for the strike period under an award.
Wages of operator:
For operational hours [(`200 ÷ 8) × 3,600 × ½] 45,000 Allocation - 45,000 The production and sales data for the year 1998-99 is as under:
For set up hours [(`200 ÷ 8) × 400] 10,000 Allocation 10,000 - Production:
Depreciation [(`1,80,000 – `10,000) × 1/10] 17,000 400 : 3600 1,700 15,300 Finished goods 20,000 units
Annual expenses of equipment 12,000 400 : 3600 1,200 10,800 Work-in-progress 8,000 units
Power (`5 per hours × 3,600 hours) 54,000 Allocation - 18,000 (50% complete in all respects)
Total Cost - - 15,200 1,09,800 Sales:
÷ Hours - - ÷ 400 ÷ 3,600 Finished goods 18,000 units
Machine Hour Rate - - `38 `30.50 The actual machine hours worked during the period were 48,000. It has been found that one third of the under
absorption of production overheads was due to lack of production planning and the rest was attributable to
Computation of Machine B cost to be absorbed on the two work order: normal increase in costs.
Work order 1 = 15 hours set up × `38 + 100 operational hours × `30.50 = `3,620
You are required to:
Work order 2 = 30 hours set up × `38 + 190 operational hours × `30.50 = `6,935
 OVERHEADS ABSORPTION COSTING METHOD 3.27 OVERHEADS ABSORPTION COSTING METHOD 3.28
(i) Calculate the amount of under absorption of production overheads during the year 1998-99 and The following particulars are on a yearly basis:
(ii) Show the accounting treatment of under absorption of production overheads.
Repairs and maintenance 3% of value of machines
[(10 marks) Nov 1999]
Insurance `42,000
Depreciation 10% of original cost
Answer
Other factory expenses `12,000
(i) Computation of under absorption of Production Overheads:
Allocated general management expenses `54,530
Particulars Amount
Total production overheads actually incurred during the year 1998-99 6,00,000 You are required to work out a comprehensive machine hour rate for the machine shop.
Less: Written off obsolete stores (45,000) [(8 Marks) May 2000]
Less: Wages paid for strike period (30,000)
Net production overheads actually incurred 5,25,000 Answer
Production overheads absorbed (48,000 hours × `10) 4,80,000 Computation of Comprehensive Machine Hour Rate for the “Machine Shop”
Under Recovery of production overheads 45,000 Particulars Amount
(A) Standing Charges:
(ii) Accounting treatment of under-absorption of production overheads: Operators wages [(20 ÷ 8 hours) × 6,840] 17,100
Production bonus (17,100 × 15%) 2,565
1. `15,000 (i.e., 45,000 × ⅓) of under absorbed overheads were due to lack of production planning. Supervision & indirect labour 3,300
This being abnormal should be debited to Costing Profit and Loss Account. Lighting and electricity 1,200
Insurance (42,000 × 6/12) 21,000
2. The balance of `30,000 (i.e., 45,000 × ⅔) of under absorbed overheads should be distributed over Depreciation (8,00,000 × 10% × 6/12) 40,000
work in progress, finished goods and cost of sales by using supplementary rate. Other sundry works expense (12,000 × 6/12) 6,000
General management expense allocated (54,530 × 6/12) 27,265
Supplementary OH Rate = Under Absorbed Overhead
= 30,000 Total (A) 1,18,430
Equivalent Units 4,000 + 2,000 + 18,000 (B) Running Charges
= `1.25 per unit Repairs and maintenance (8,00,000 × 3% × 6/12) 12,000
Power consumed 9,000
Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales: Total (B) 21,000
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 1,39,430
Work-in-Progress (4,000 units × `1.25) 5,000 ÷ Total machine hours ÷ 5,760
Finished goods (2,000 units × `1.25) 2,500
Machine Hour Rate `24.21
Cost of sales (18,000 units × `1.25) 22,500
Working Notes:
Journal Entries
Entries Dr. Cr. Calculation of effective productive hours available to the machine shop and paid hours:
Cost of Sales A/c Dr. 22,500 - Particulars 6 Months, 6 Operators (Hours)
Finished Goods Control A/c Dr. 2,500 - Normal Available hours (208 hours × 6 months × 6 operators) 7,488
Work in Progress Control A/c Dr. 5,000 - Less: Absenteeism hours (18 hours × 6 months × 6 operators) (648)
Costing Profit & Loss A/c Dr. 15,000 - Paid Hours per month 6,840
To Overhead Control A/c - 45,000 Less: Leave hours (20 hours × 6 months × 6 operators) (720)
(Being under recovery of under absorbed oh recovered/charged) Less: Normal idle time (10 hours × 6 months × 6 operators) (360)
Effective Productive Hours 5,760
PYQ 3
A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked PYQ 4
without an operator wholly engaged on it. The original cost of all these machines works out to `8 lakhs. The total overhead expenses of a factory are `4,46,380. Taking into account the normal working of the factory,
overhead was recovered in production at `1.25 per hour. The actual hours worked were 2,93,104. On
These particulars are furnished for a 6 month period: investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the cost of
indirect materials and indirect labour and the remaining 50% was due to factory inefficiency.
Normal available hours per month 208
Absenteeism (without pay) hours per months 18 How would you proceed to close the books of accounts, assuming that besides 7,800 units
Leave (with pay) hours per months 20 produced of which 7,000 were sold, there were 200 equivalent units in work-in-progress? Also give the
Normal idle time (unavoidable) hours per month 10 profit implication of the method suggested.
Average rate of wages per day of 8 hours `20 [(8 Marks) Nov 2000]
Production bonus 15% on wages
Power and fuel consumption `9,000 Answer
Supervision & indirect labour `3,300 (i) Treatment of Unabsorbed OH & its implication on Profit: The unabsorbed OH on account of increase
Electricity `1,200 in cost of indirect material & labour of `40,000 should be adjusted in the cost books by applying positive
 OVERHEADS ABSORPTION COSTING METHOD 3.29 OVERHEADS ABSORPTION COSTING METHOD 3.30
supplementary rates. Power is required for productive purposes only. Set up time, though productive, does not require
power. The supervisor and operator are permanent. Repairs and maintenance and consumable stores vary
Unbsorbed OH
Supplementary Rate = with the running of the Machine.
Equivalent completed units of Production
Calculate a two-tier machine hour rate for (a) set up time, (b) running time.
Supplementary Rate =
40,000
= `5 per unit [(8 Marks) May 2002]
8 ,000 Units
Answer
The unabsorbed OH of `40,000 should be applied by using supplementary rate of `5 per equivalent Statement Showing Two Tier Machine Hour Rate
completed unit proportionately on the basis of equivalent completed unit among Cost of Sales A/c, Stock of
Particulars Amount Basis Set up Running
Finished Goods A/c, & WIP A/c as under:
Depreciation [(5,00,000 – 20,000) × 1/10 × 1/12] 4,000 20 : 180 400 3,600
Equivalent completed Share of unabsorbed Repairs & Maintenance (60,480 × 1/12) 5,040 Allocation - 5,040
Items Rate
units overheads Consumable Stores (47,520 × 1/12) 3,960 Allocation - 3,960
Cost of Sales A/c 7,000 `5 `35,000 Building Rent (72,000 × 1/6 × 1/12) 1,000 20 : 180 100 900
Stock of Finished 800 `5 `4,000 Supervisor’s Salary (6,000 ÷ 3) 2,000 20 : 180 200 1,800
WIP A/c 200 `5 `1,000 Wage of operator 2,500 20 : 180 250 2,250
Total `40,000 General Lighting 1,000 20 : 180 100 900
Power (25 units × `2 per unit × 180 hours) 9,000 Allocation - 9,000
(ii) The above treatments of unabsorbed OH will reduce the profit by `35,000, the amount by which the cost
Total Cost - - 1,050 27,450
of sales has been increased. Moreover, the value of stock of Finished Goods & WIP will increase by `4,000
÷ Hours - - ÷ 20 ÷ 180
& `1,000 respectively. The unabsorbed OH of `40,000 due to factory inefficiency being in the nature of
Machine Hour Rate - - `52.50 `152.50
abnormal loss should be changed to costing P/L A/c & thereby the profit would be reduced by `40,000.

Working Notes: PYQ 6

E-books is an online book retailer. The Company has four departments. The two sales departments are
(a) Calculation of Unabsorbed Overheads: Corporate Sales and Consumer Sales. The two support departments are Administrative (Human resources,
Particulars Amount Accounting) and Information systems. Each of the sales department conducts merchandising and marketing
Actual overhead incurred 4,46,380 operations independently.
Less: overhead absorbed (`1.25 × 2,93,104 Hours) 3,66,380 The following data are available for October, 2003:
Unabsorbed OH 80,000
Departments Revenues Number of Employees Processing Time used
Unabsorbed OH on account of increase in cost (80,000 × 50%) 40,000 (in minutes)
Unabsorbed OH on account of factory inefficiency (80,000 × 50%) 40,000 Corporate Sales `16,67,750 42 2,400
Consumer Sales `8,33,875 28 2,000
(b) Calculation of equivalent completed units: Administrative - 14 400
Information systems - 21 1,400
Unit sold 7,000
Units in closing stock of Finished Goods (7,800-7,000) 800 Cost incurred in each of four departments for October, 2003 are as follows:
Equivalent WIP units 200 Corporate sales `12,97,751
Consumers sales `6,36,818
Total Equivalent Completed Units 8,000 units Administrative `94,510
Information systems `3,04,720
PYQ 5
In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of 8 hours The company uses number of employees as a basis to allocate Administrative costs and processing time
and set up time of 20 hours. as a basis to allocate Information systems costs.

The expense data relating to the machine are as under: Required:

(i) Allocate the support department costs to the sales departments using the direct method.
Cost of the machine `5,00,000 (ii) Rank the support departments based on percentage of their services rendered to other support
Life of machine 10 years departments. Use this ranking to allocate support costs based on the step-down allocation method.
Estimated scrap value at the end of life `20,000 (iii) How could you have ranked the support departments differently?
Repairs and maintenance per annum `60,480 (iv) Allocate the support department costs to two sales departments using the reciprocal allocation method.
Consumable stores per annum `47,520 [((10 Marks) Nov 2003]
Rent of building per annum (The machine occupies 1/6 of the area) `72,000
Supervisor's salary per month (Common to three machines) `6,000 Answer
Wages of operator per month per machine `2,500 (i) Statement Showing Allocation of support department costs to the sales departments
General lighting charges per month allocated to the machine `1,000 (By Using Direct Method)
Power per hour 25 units per hour at `2 per unit. Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
 OVERHEADS ABSORPTION COSTING METHOD 3.31 OVERHEADS ABSORPTION COSTING METHOD 3.32
Total overheads 12,97,751 6,36,818 94,510 3,04,720 Departmental cost
Apportionment of Expenses:
Show mobile engine `6,00,000
Administrative Dept No. of 56,706 37,804 (94,510) -
Boat engine `17,00,000
(42:28) employees
Factory office `3,00,000
Information system Processing 1,66,211 1,38,509 - (3,04,720)
Maintenance `2,40,000
(2,400:2,000) time
Total - 15,20,668 8,13,131 - - Cost drivers Factory office department: No. of employees

(ii) Ranking of support departments based on percentage of their services rendered to other support Snow mobile engine department 1,080 employees
departments: Boat engine department 270 employees
Maintenance department 150 employees
21
Services by Administrative to Information systems = × 100 = 23.077% 1,500 employees
42+28+21
400
Services by Information systems to Administrative = × 100 = 8.333% Cost drivers Maintenance department: No. of work orders
2,400+2,000+400

Ranking as per percentage of services, Administrative as first and information system as second. Snow mobile engine department 570 orders
Boat engine department 190 orders
Statement Showing Allocation of Support Departments Costs Factory office department 40 orders
(By Using Step-Down Method) 800 orders
Sales departments Support departments Required:
Particulars Basis
Corporate Consumer Admin IS (i) Compute the cost driver allocation percentage and then use these percentages to allocate the service
Total overheads 12,97,751 6,36,818 94,510 3,04,720 department cost by using direct method.
Apportionment of Expenses: (ii) Compute the cost driver allocation percentage and then use these percentages to allocate the service
Administrative Dept No. of 43,620 29,080 (94,510) 21,810 department costs by using non-reciprocal method/step method.
(42:28:21) employees [(8 Marks) May 2005]
Information system Processing 1,78,107 1,48,423 - (3,26,530)
(2,400:2,000) time Answer
Total - 15,19,478 8,14,321 - - (i) Cost Driver Allocation Percentage
Factory office department Number of employees Percentage
(iii) An alternative ranking is based on the rupee amount of services rendered to other service departments: Snow-mobile engine 1,080 80%
Services by Administrative to Information systems
21
= 42+28+21 × `94,510 = `21,810 Boat engine 270 20%
Total 1,350 100%
Services by Information systems to Administrative
400
= 2,400+2,000+400 × `3,04,720 = `25,393 Maintenance department Number of work orders Percentage
Snowmobile engine 570 75%
Ranking as per amount of services, information system as first and Administrative as second. Boat engine 190 25%
Total 760 100
(iv) Statement Showing the Allocation of Support Department Costs to the Sales Departments
(By Using Repeated Distribution Method) Statement of Allocation of Service Department Cost
Sales departments Support departments (Using Direct Method)
Particulars Basis
Corporate Consumer Admin IS Particulars Factory office Maintenance Snowmobile Boat engine
Total overheads 12,97,751 6,36,818 94,510 3,04,720 Departmental Cost 3,00,000 2,40,000 6,00,000 17,00,000
Apportionment of Expenses: Factory office department (3,00,000) - 2,40,000 60,000
Administrative Dept. 42:28:21 43,620 29,080 (94510) 21,810 Maintenance department - (2,40,000) 1,80,000 60,000
Information System Dept. 24:20:4 1,63,265 1,36,054 27,211 (3,26,530) Total - - 10,20,000 18,20,000
Administrative Dept. 42:28:21 12,559 8,373 (27211) 6,279
Information System Dept. 24:20:4 3,140 2,616 523 (6,279) (ii) Cost Driver Allocation Percentage
Administrative Dept. 42:28:21 241 161 (523) 121 Factory office department Number of employees Percentage
Information System Dept. 24:20:4 61 50 10 (121) Snow mobile engine 1,080 72%
Administrative Dept. 42:28 6 4 (10) - Boat engine 270 18%
Total - 15,20,643 8,13,156 - - Maintenance department 150 10%
Total 1,500 100%
PYQ 7 Maintenance department Number of work orders Percentage
An engine manufacturing company has two production departments: (i) Snow mobile engine and (ii) Boat Snowmobile engine 570 75%
engine and two service departments: (i) Maintenance and (ii) Factory office. Budgeted cost data and relevant Boat engine 190 25%
cost drivers are as follows: Total 760 100
 OVERHEADS ABSORPTION COSTING METHOD 3.33 OVERHEADS ABSORPTION COSTING METHOD 3.34
Statement of Allocation of Service Department Cost 4,700 3,450
(Using Step Down Method) Production bonus (33 – 1/3% of Basic plus D.A.) 1,567 1,150
Particulars Factory office Maintenance Snowmobile Boat engine Leave wages (10% of Basic plus D.A.) 470 345
Departmental Cost 3,00,000 2,40,000 6,00,000 17,00,000 Total labour cost 6,737 4,945
Factory office department (3,00,000) 30,000 2,16,000 54,000
Maintenance department - (2,70,000) 2,02,500 67,500 PYQ 9
Total - - 10,18,500 18,21,500 RST Ltd. has two production departments, Machining and Finishing. There are three service departments
Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as
PYQ 8 follows:
From the details furnished below you are required to compute a comprehensive machine hour rate: Particulars HR Maintenance Design
Variable 1,00,000 1,60,000 1,00,000
Purchase price of the machine (depreciation @ 10% p.a.) `3,24,000
Fixed 4,00,000 3,00,000 6,00,000
Normal working hours for the month 200 hours
Total 5,00,000 4,60,000 7,00,000
(The machine works to only 75% of capacity)
Wages of Machine man `125 per day (of 8 hours)
Wages for a helper (machine attendant) `75 per day (of 8 hours) The usage of these Service Departments' output during the year just completed is as follows (Provision of
Service Output in hours of service)
Power cost for the month for the time worked `15,000
Supervision charges apportioned for the machine centre `3,000 for the month Providers of services
Users of services
Electricity & Lighting for the month `7,500 HR Maintenance Design
Repairs & maintenance (machine) including consumable stores `17,500 per month HR - - -
Insurance of Plant & Building (apportioned) for the year `16,250 Maintenance 500 - -
Other general expenses per annum `27,500 Design 500 500 -
Machining 4,000 3,500 4,500
The workers are paid a fixed dearness allowance of `1,575 per month. Production bonus payable to Finishing 5,000 4,000 1,500
workers in terms of an award is equal to 33-⅓% of basic wages and dearness allowance. Add 10% of the basic Total 10,000 8,000 6,000
wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour Required:
wage for debit to production. (i) Use the direct method to re-apportion RST Ltd's service department cost to its production departments.
[(8 Marks) Nov 2005] (ii) Determine the proper sequence to use in re-apportioning the firm's service department cost by step-
down method.
Answer (iii) Use the step-down method to reapportion the firm's service department cost.
Statement Showing Comprehensive Machine Hour Rate [(7 Marks) Nov 2006]
Particulars Amount
(A) Standing Charges: Answer
Supervision charges 3,000 (1) Statement Showing Re-apportionment of Service Departements Cost
Electricity and lighting 7,500 (Using Direct Method)
Insurance of Plant and Building (16,250 × 1/12) 1,354 Production department
Depreciation (32,400 × 1/12) 2,700 Service department Basis Total
Machining Finishing
Other general expense (27,500 × 1/12) 2,292 H.R. (4:5) 5,00,000 2,22,222 2,77,778
Total (A) 16,846 Maintenance (7:8) 4,60,000 2,14,667 2,45,333
(B) Running Charges Design (3:1) 7,00,000 5,25,000 1,75,000
Repairs and maintenance 17,500 Total 9,61,889 6,98,111
Power 15,000
Wages of machine man (W.N. 2) (can be treated as fixed cost) 6,737 (2) Squence of re-apportioning: As H.R. department serves large number of departements, so its cost
Wages of helper (W.N. 2) (can be treated as fixed cost) 4,945 should be first re apportioned then overhead of maintenance departement should be re-apportioned
Total (B) 44,182 and lastly overhead of design department should be re-apportioned.
Total OH for the shop (A+B) 61,028
÷ Total machine hours ÷ 150 (3) Statement Showing Re-apportionment of Service Department Cost
Machine Hour Rate `406.85 (Using Step Down Method)
Working Notes: Departments
Particulars
H.R. Maintenance Design Machining Finishing
1. Effective machine working hours per month = 200 hour × 75% = 150 hours Total Overhead 5,00,000 4,60,000 7,00,000 - -
Re-Apportionment:
2. Calculation of Labour Cost: H.R. (1:1:8:10) (5,00,000) 25,000 25,000 2,00,000 2,50,000
Particulars Machine Man Helper Maintenance (1:7:8) - (4,85,000) 30,313 2,12,187 2,42,500
Wages for 200 hours (`125 ÷ 8H) × 200H and (`75 ÷ 8H) × 200H 3,125 1,875 Design (3:1) - - (7,55,313) 5,66,485 1,88,828
Dearness Allowance 1,575 1,575 Total - - - 9,78,672 6,81,328
 OVERHEADS ABSORPTION COSTING METHOD 3.35 OVERHEADS ABSORPTION COSTING METHOD 3.36
PYQ 10 Machine Value 2,880 2,160 720 288 864 288
A company has three production departments (M1, M2 and A1) and three service departments, one of which Building (1/3 to M1) Area 1,080 648 864 216 270 162
Engineering service department, servicing the M1 and M2 only. Power H.P. % 3,240 2,268 324 - 648 -
Light Area 1,080 1,296 1,728 432 540 324
The relevant information are as follows: Rent Area 2,697 3,236 4,315 1,079 1,348 -
Product X Product Y Notional rent 8%×6,000 - - - - - 480
M1 10 Machine hours 6 Machine hours Total - 85,937 81,028 32,331 14,599 17,962 13,558
M2 4 Machine hours 14 Machine hours
A1 4 Direct Labour hours 18 Direct Labour hours (ii) Allocation of Service Department Overheads
The annual budgeted overhead costs for the year are: Production departments Service departments
Particulars Basis
M1 M2 A1 Stores ES GS
Indirect Wages Consumable Supplies Total Overheads 85,937 81,028 32,331 14,599 17,962 13,558
M1 46,520 12,600 Apportionment:
M2 41,340 18,200 Stores Consumables 5,256 7,591 1,752 (14,599) - -
A1 16,220 4,200 (126:182:42)
Stores 8,200 2,800 Engineering Dept Machine 7,983 9,979 - - (17,962) -
Engineering Service 5,340 4,200 hours
General Service 7,520 3,200 General Service (4:5) 4,172 3,129 6,257 - - (13,558)
Depreciation on Machinery 39,600 Labour hours
Insurance of Machinery 7,200 (20:15:30)
Insurance of Building 3,240 Total OH - 1,03,348 1,01,727 40,340 - - -
(Total building insurance cost for M1 is one third of annual premium)
Power 6,480 (iii) Calculation of recovery rate:
Light 5,400 Particulars M1 M2 A1
Rent 12,675 Total OH 1,03,348 1,01,727 40,340
÷ Base of recovery
The general service department is located in a building owned by the company. It is valued at `6,000 Machine hours 40,000 50,000 -
and is charged into cost at notional value of 8% per annum. This cost is additional to the rent shown above. Labour hours - - 3,00,000
The value of issues of materials to the production departments are in the same proportion as shown above for Recovery rate (per machine/labour hour) `2.5837 `2.0345 `0.1345
the consumable supplies.
(iv) Absorbed overheads:
The following data are also available:
Particulars Product X Product Y
Book Value of Area in Effective H.P. Direct Labour Capacity
Department M1 @ `2.5837 per machine hour of 10/6 machine hours 25.84 15.50
Machinery Square Feet Hours % Hour Machine Hrs
M2 @ `2.0345 per machine hour of 4/14 machine hours 8.14 28.48
M1 1,20,000 5,000 50 2,00,000 40,000
A1 @ `0.1345 per labour hour of 4/18 labour hours 0.54 2.42
M2 90,000 6,000 35 1,50,000 50,000
Absorbed OH 34.52 46.40
A1 30,000 8,000 05 3,00,000 -
Stores 12,000 2,000 - - -
Engineering Service 36,000 2,500 10 - - Note: Machine Shops A and B have got the production capacity of both direct labour hours and machine hours.
General Service 12,000 1,500 - - - It appears to reason that overhead absorption of Machine Shops. A and B should be based on machine hours
absorption overhead rate of Assembly shop should be based on labour hours.
Required:
PYQ 11
(i) Prepare an overhead analysis sheet, showing the bases of apportionment of overhead to departments. A machine shop cost centre contains three machines of equal capacities. Three operators are employed on
(ii) Allocate service department overheads to production department ignoring the apportionment of service each machine, payable `20 per hour each. The factory works for forty eight hours in a week which includes 4
department costs among service departments. hours setup time. The work is jointly done by operators. The operators are paid fully for the forty-eight hours.
(iii) Calculate suitable overhead absorption rate for the production departments. In addition, they are paid a bonus of 10 percent of productive time. Costs are reported for this company on the
(iv) Calculate the overheads to be absorbed by two products, X and Y. basis of four-weekly period.
[(15 Marks) May 2007]
Answer The company for the purpose of computing machine hour rate includes the direct wages of the operator
(i) Overhead Analysis Sheet and also recoups overheads allocated to the machine. The following details of factory overheads applicable to
the cost centre are available:
Production departments Service departments
Particulars Basis
M1 M2 A1 Stores ES GS  Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is
Indirect wages Allocation 46,520 41,340 16,220 8,200 5,340 7,520 `52,000
Consumables Allocation 12,600 18,200 4,200 2,800 4,200 3,200  Maintenance and repairs per week per machine is `60.
Depreciation Value 15,840 11,880 3,960 1,584 4,752 1,584  Consumable stores per week per machine are `75.
Insurance on:  Power: 20 units per hour per machine at the rate of 80 paise per unit.
 OVERHEADS ABSORPTION COSTING METHOD 3.37 OVERHEADS ABSORPTION COSTING METHOD 3.38
 Apportionment to the cost centre: Rent per annum `5,400, Heat and Light per annum `9,720 and Consumable stores 8,000 3,000 2,500 2,500
foreman's salary per annum `12,960. Insurance of machinery 8,000
Indirect Labour 20,000
Required
Building maintenance expenses 20,000
(i) Calculate the cost of running one machine for a four week period. Annual interest on capital outlay 50,000 20,000 20,000 10,000
(ii) Calculate machine hour rate.
Monthly charge for rent and rates 10,000
[(8 Marks) Nov 2007/ May 2015]
Salary of foreman (per month) 20,000
Salary of attendant (per month) 5,000
Answer (The foreman and the attendant control all the three machines and spend equal time on them)
(i) Computation of Cost of Running One Machine for a Four Week Period
Particulars Amount The following additional information is also available:
(A) Standing Charges: A B C
Rent (5,400 × ⅓ × 4/52) 138.46 Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Heat and light (9,720 × ⅓ × 4/52) 249.23 Ratio of K.W. Rating 3 2 3
Forman’s salary (12,960 × ⅓ × 4/52) 332.31 Floor space (square feet) 40,000 40,000 20,000
Depreciation (52,000 × 10% × 4/52) 400
Wages (48 hours × 4 weeks × `20 per hour × 3 operators per machine) 11,520 There are 12 holidays (plus 52 Sundays) in the year, of which two were on Saturday. The manufacturing
Bonus 10% of (44 hours × 4 weeks × `20 per hour × 3 operators) 1,056 department works 8 hours in a day and Saturdays are half days. All machines work at 90% capacity throughout
the year and 2% is reasonable for breakdown.
Total Standing Charges (A) 13,696
(B) Running Expenses: Required:
Repairs and maintenance (`60 × 4 weeks) 240 Calculate predetermined machine hour rates for the above machines after taking into consideration the
Consumable stores (`75 × 4 weeks) 300 following factors:
Power (44 hours × 4 weeks × 20 units × .80) 2,816  An increase of 15% in the price of spare parts.
Total Running expenses (B) 3,356  An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
Total Expenses of one machine for four week (A+B) 17,052  20% general increase in wages rates.
[(8 Marks) May 2011]
(ii) Machine hour rate = Total Expenses for 4 weeks ÷ Effective Hours for 4 weeks
= `17,052 ÷ 176 hours (44 hours × 4 weeks) = `96.89 per hour Answer
Machine Hour Rate
PYQ 12
A machine was purchased from a manufacturer who claimed that his machine could produce 36.5 tonnes in a Machines
Particulars
year consisting of 365 days. Holidays, break-down, etc., were normally allowed in the factory for 65 days. Sales A B C
were expected to be 25 tonnes during the year and the plant actually produced 25.2 tonnes during the year. Depreciation 7,500 7,500 5,000
Spare parts 4,600 5,750 2,875
You are required to state (i) Rated capacity, (ii) Practical capacity, (iii) Normal capacity and (iv) (4,000 × 1.15) (4,000 × 1.15 × 1.25) (2,000 × 1.15 × 1.25)
Actual capacity. Power (in the ratio of K.W. Rating) 15,000 10,000 15,000
[(2 Marks) Nov 2008] Consumable Stores 3,000 2,500 2,500
Insurance of Machine 3,000 3,000 2,000
Answer (In the ratio of Depreciation)
(i) Rated Capacity = 36.50 tonnes or 100% Indirect Labour (20,000 × 1.20) 6,000 9,000 9,000
(ii) Practical Capacity: (In the ratio of direct labour hours)
Number of working days in a year = 365 – 65 = 300 days Building Maintenance Expenses 8,000 8,000 4,000
36 .5  300 (In the ratio Floor space)
Practical capacity = = 30 tonnes or 82.19%
365 Rent & Rates (10,000 × 12) 48,000 48,000 24,000
(iii) Normal Capacity = 25 tonnes or 68.49% (In the ratio of floor space)
(iv) Actual Capacity = 25.2 tonnes or 69.04% Foreman Salary 80,000 80,000 80,000
(20,000 × 12) in (1:1:1)
PYQ 13 Attendant Salary 20,000 20,000 20,000
You are given the following information of the three machines of a manufacturing department of X Ltd.: (5000 × 12) in (1:1:1)
Total overhead 1,95,100 1,93,750 1,64,375
Preliminary estimates of expenses (per annum) ÷ Productive Machine Hours 1,947 1,947 1,947
Total Machines Machine Hour rate 100.21 99.51 84.42
A B C
(`) (`) (`) (`) Note: Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost.
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000 Working Note:
Power 40,000 Calculation of Productive machine hours worked during the year:
 OVERHEADS ABSORPTION COSTING METHOD 3.39 OVERHEADS ABSORPTION COSTING METHOD 3.40
Total No. of days in one year 365 PYQ 15
Less: Sundays 52 A machine costing `10 lacs was purchased on 01.04.2011. The expected life of the machine is 10 years. At the
Less: Holidays other than Sundays and including 2 Saturdays 12 end of this period its scrap value is likely to be `10,000. The total cost of all the machines including new one
Working days 301 was `90 lacs.
(a) Normal working days other than Saturdays 251
(b) Saturday (Out of 12 holidays 2 holidays were on Saturday) 50 The other information is given as follows:
(c) Normal working hours per day 8 hours (a) Working hours of the machine for the year was 4,200 including 200 non productive hours.
(d) Working hours on Saturdays 4 hours (b) Repairs and maintenance for the new machine during the year was `5,000.
(e) Total machine Hours available (251 × 8 hours) + (50 × 4 hours) 2,208 hours (c) Insurance premium was paid for all the machines `9,000.
(f) 10% Idle time (10% of 2,208 hours) 221 hours (d) New machine consumes 8 units of electricity per hour, the rate per unit being `3.75.
(g) Productive Hours (2,208 - 221) 1987 hours (e) The new machine occupies 1/10 area of the department. Rent of the department is `2,400 per month.
(h) Breakdown time (2% of 1,987 hours) 40 hours (f) Depreciation is charged on straight line basis.
(i) Actual Productive time per machine per annum (1987 - 40) 1,947 hrs
Compute machine hour rate for the new machine.
[(5 Marks) May 2012]
PYQ 14
X Ltd. recovers overheads at a pre-determined rate of `50 per man-day. The total factory overheads incurred
Answer
and the man-days actually worked were `79 lakhs and 1.5 lakhs days respectively. During the period 30,000
Machine Hour Rate
units were sold. At the end of the period 5,000 completed units were held in stock but there was no opening
stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period but Particulars Amount
at the end of the period there were 10,000 uncompleted units which may be treated as 50% complete. (A) Standing charges:
Rent [(`2,400 × 12 months) × 1/10] 2,880
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective Depreciation (10 lacs – 10,000) × 1/10 years 99,000
planning and the balances were attributable to increase in overhead cost. *Insurance Premium (9,000 ÷ 90,00,000)× 10 lacs 1,000
How would unabsorbed overhead be treated in cost accounts? Total (A) 1,02,880
[(8 Marks) Nov 2011] (B) Running charges:
Repairs & Maintenance 5,000
Answer **Electricity ( 8 units × 4,000 hours × `3.75) 1,20,000
Calculation of under or over absorption of overheard: Total (B) 1,25,000
Total Cost (A + B) 2,27,880
Absorbed OH = 1,50,000 × 50 = 75,00,000 Machine Hour Rate (Total cost ÷ Productive hours) `56.97
Actual OH = 79,00,000
Under absorption = 79,00,000 – 75,0000 = 4,00,000 *Insurance premium assumed to be incurred on the basis of cost of machine & same basis has been used for
apportionment of expense.
Treatment of unabsorbed overheads:
**Electricity expense assumed to be incurred on productive hours only i.e. 4,000 hours.
60% Abnormal = 2,40,000 charged to Profit and Loss A/c
40% Normal increase in OH costs = 1,60,000 charged to FG stock, WIP and COGS PYQ 16
The following account balances and distribution of indirect charges are taken from the accounts of a
Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units
manufacturing concern for the year ending on 31st March, 2012.
= 1,60,000 ÷ 40,000 = `4 per unit
Total Production Department Services Departments
Items
Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales: Amount X Y Z A B
Indirect material 1,25,000 20,000 30,000 45,000 25,000 5,000
Work-in-Progress (5,000 units × `4) = `20,000 Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Finished goods (5,000 units × `4) = `20,000 Superintendence Salary 96,000 - - 96,000 - -
Cost of sales (30,000 units × `4) = `1,20,000 Fuel & Heat 15,000
Power 1,80,000
Journal Entries Rent & Rates 1,50,000
S. No. Particulars Dr. Cr. Insurance 18,000
1 Production OH Control A/c Dr. 79,00,000 Meal Charges 60,000
To General Ledger Adjustment A/c 79,00,000 Deprecation 2,70,000
2 WIP of Sales A/c Dr. 75,00,000
To Production OH Control A/c 75,00,000 The departmental data are also available:
3 Cost of Sales A/c Dr. 1,20,000 Production Department Service Departments
Details
Finished Goods Control A/c Dr. 20,000 X Y Z A B
WIP Control A/c Dr. 20,000 Area (Sq. ft) 4,400 4,000 3,000 2,400 1,200
Costing P/L A/c Dr. 2,40,000 Capital Value of Assets (Rs.) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000
To Production OH control A/c 4,00,000 Kilowatt Hours 3,500 4,000 3,000 1,500 -
 OVERHEADS ABSORPTION COSTING METHOD 3.41 OVERHEADS ABSORPTION COSTING METHOD 3.42
Radiator Sections 20 40 60 50 30 (i) Power 25 units @ `5 per unit per hour.
No. of Employees 60 70 120 30 20 (ii) Cost of repairs and maintenance `26,000 per annum.
(iii) Chemicals required for operating the machine `2,600 per month.
Expenses charged to the service departments are to be distributed to other departments by the following (iv) Overheads chargeable to the machine `18,000 per month.
percentage: (v) Insurance premium (per annum) 2% of the cost of machine.
Departments X Y Z A B (vi) No. of operators – 02 (looking after three other machines also).
Department A 30 30 20 - 20 (vii) Salary per operator per month `18,500.
Department B 25 40 25 10 - [(8 Marks) Nov 2013]

Prepare an overhead distribution statement to show total overhead of production department after re- Answer
apportioning service departments overhead by using simultaneous equation method. Show all the calculation Statement of Machine Hour Rate
to the nearest rupee. Particulars Amount
[(8 Marks) Nov 2012]
(A) Standing Charges:
Overhead chargeable (`18,000 × 12) 2,16,000
Answer Insurance premium (2% of `25,00,000) 50,000
Statement Showing Secondary Distribution Operators salaries (2 × `18,500 × 12 × ¼) 1,11,000
Production Service Total (A) 3,77,000
Particulars Basis
X Y Z A B (B) Running Charges:
Indirect Mat. Allocation 20,000 30,000 45,000 25,000 5,000 Depreciation (25,00,000 – 1,25,000) × 2,407/25,000 2,28,665
Indirect labour “ 45,000 50,000 70,000 60,000 35,000 Power ( 25 units × 2,407 hours × `5) 3,00,875
Superintendent’s “ - - 96,000 - - Repairs & Maintenance 26,000
Fuel & Heat Radiator Sec. 1,500 3,000 4,500 3,750 2,250 Chemicals (`2,600 × 12) 31,200
Power Kwt. Hours 52,500 60,000 45,000 22,500 - Total (B) 5,86,740
Rent & Rates Area 44,000 40,000 30,000 24,000 12,000 Total Operating Cost (A + B) 9,63,740
Insurance Capital Asset value 4,000 6,000 5,000 1,000 2,000 ÷ Productive hours ÷ 2,407
Meals charges No of Employees 12,000 14,000 24,000 6,000 4,000 Machine Hour Rate `400.39
Depreciation Capital Value 60,000 90,000 75,000 15,000 30,000
Total (Prim. Dist) 2,39,000 2,93,000 3,94,500 1,57,250 90,250 Working Notes:
Apportionment:
Department A (30 : 30 : 20 : 20) 50,900 50,900 33,934 (1,69,668) 33,934 Calculation of actual hours and productive hours:
Department B (25 : 40 : 25 : 10) 31,046 49,674 31,046 12,418 (1,24,184) Total working hours per annum 3,000
Total OH - 3,20,946 3,93,574 4,59,480 - - Less: hours required for maintenance (400)
Working hours after maintenance 2,600
Working Note: Less: Setting-up hours (2,600 × 8/108) (193)
Calculation of adjusted expenses of service department by using Simultaneous Equation method: Actual hours/ Effective working hours 2,407
Expenses of Department A = 1,57,250 + 10% of Expenses of B Assumptions as per suggested answer:
Expenses of Department B = 90,250 + 20% of Expenses of A
Now: 1. Working hours (i.e. 3,000 hours) are inclusive of maintenance and setting-up time.
Expenses of Department A = 1,57,250 + 10% (90,250 + 20% of A) 2. It is assumed that no power is consumed by the machine during unproductive hours i.e. during
Expenses of Department A = 1,57,250 + 9,025 + 2% of A maintenance and unproductive setting-up hours.
98% of Expenses of A = 1,66,275 3. Depreciation is calculated on the basis of estimated life of the machine hours actually work.

Expenses of Department A = 1,66,275 ÷ 98% = 1,69,668 Note: As this numerical problem does not specifically mention about the nature of setting- up time; means
whether setting-up time is unproductive or productive is not clear. The problem can be solved assuming
Expenses of Department B = 90,250 + 20% of A = 1,24,184 setting-up time either as productive or as unproductive.
PYQ 17 PYQ 18
Calculate Machine Hour Rate from the following particulars: The following particulars refers to process used in the treatment of materials subsequently, incorporated in a
Cost of machine : `25,00,000 component forming part of an electrical appliance:
Salvage value : `1,25,000
Estimated life of machine : 25,000 hours (i) The original cost of the machine used (Purchased in June 2008) was `10,000. Its estimated life is 10
Working hours (per annum) : 3,000 hours years, the estimated scrap value was `1,000, and the estimated working time per year (50 weeks of 44
Hours required for maintenance : 400 hours hours) is 2200 hours of which machine maintenance etc., is estimated to take up 200 hours. No other
Setting-up time required : 8% of actual working hours loss of working time expected setting up time, estimated at 100 hours, is regarded as productive time
(Holiday to be ignored).
Additional Information:
 OVERHEADS ABSORPTION COSTING METHOD 3.43 OVERHEADS ABSORPTION COSTING METHOD 3.44
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit. No Apportionment of unrecovered overheads (due to increase in overheads):
current is taken during maintenance or setting up.
Work-in-Progress (5,000 units × `4) = `20,000
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of `20 each time.
Finished goods (5,000 units × `4) = `20,000
(iv) The estimated cost of maintenance per year is `1,200.
Cost of sales (50,000 units × `4) = `2,00,000
(v) Two attendants control the operation of machine together with five other machines. Their combined
weekly wages, insurance and employer’s contribution to holiday pay amount `120.
Journal Entries
(vi) Departmental and general works overhead allocated to this machine for the current year amount to
`2,000. Entries Dr. Cr.
Cost of Sales A/c Dr. 2,00,000 -
You are required to calculate machine hour rate of operating the machine. Finished Goods Control A/c Dr. 20,000 -
[(5 Marks) May 2016] Work in Progress Control A/c Dr. 20,000 -
Costing Profit & Loss A/c Dr. 3,60,000 -
Answer To Overhead Control A/c - 6,00,000
Statement of Machine Hour Rate (1 Machine ; 1 Year) (Being under recovery of under absorbed oh recovered/charged)
Particulars Amount
(A) Standing Charges: PYQ 20
Depreciation [(10,000 – 1,000) ÷ 10 Years] 900 Delta Ltd. Is a manufacturing concern having two production departments P1 and P2 and two service
Attendants wages, insurance etc. (120 × 50 weeks × 1/6) 1,000 departments S1 and S2. After making a primary distribution of factory overheads of all departments are as
Departmental and works overhead 2,000 under:
Total Standing Charges (A) 3,900 P1 = `4,02,000
(B) Running Expenses: P2 = `2,93,000
Electricity (1900 hours × 16 units per hour × 0.09) 2,736 S1 = `3,52,000
Chemical solution (`20 × 50 weeks) 1,000 S2 = `33,000
Maintenance 1,200
Total Running expenses (B) 4,936 Overheads of service departments are apportioned as below:
Total Expenses of one machine for four week (A+B) 8,836 P1 P2 S1 S2
÷ Productive Machine Hours (Running and setting up) ÷ 2000 Department S1 40% 50% - 10%
Machine Hour Rate `4.418 Department S2 50% 40% 10% -

A product ‘Z’ passes through all the two production departments – P1 and P2 and each unit of product
PYQ 19
remain in process for 2 and 3 hours respectively. The material and labour cost of one unit of product ‘Z’ is `500
APP Limited is a manufacturing concern and recovers overheads at a pre-determined rate of `30 per man-day.
and `350 respectively. The company run for all 365 days of the year and 16 hours per day.
The total factory overheads incurred and the man-days actually worked were `51 lakhs and 1.5 lakhs days
respectively. During the period 50,000 units were sold. At the end of the period 5,000 completed units were You are required to:
held in stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted
units at the beginning of the period but at the end of the period there were 10,000 uncompleted units which (1) To make secondary distribution of overheads of service departments by applying Simultaneous
may be treated as 50% complete. Equation method and
(2) Determine the total cost of one unit of product Z.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective [(8 Marks) May 2018]
planning and the balances were attributable to increase in overhead cost.
Answer
How would unabsorbed overhead be treated in cost accounts? (1) Statement Showing Secondary Distribution
[(8 Marks) Nov 2017]
Production Departments Service Departments
Particulars Basis
P1 P2 S1 S2
Answer Overheads Primary 4,02,000 2,93,000 3,52,000 33,000
Calculation of under or over absorption of overheard:
distribution
Absorbed OH = 1,50,000 × 30 = `45,00,000 Apportionment:
Actual OH = 51,00,000 Department S1 (40:50:10) 1,43,555 1,79,445 (3,58,889) 35,889
Under absorption = 51,00,000 – 45,0000 = `6,00,000 Department S2 (50:40:10) 34,445 27,555 6,889 (68,889)
Total Overheads 5,80,000 5,00,000 - -
Treatment of unabsorbed overheads: ÷ Production Hours 5,840 5,840 - -
60% Abnormal = `3,60,000 charged to Profit and Loss A/c Recovery rate per hour - 99.32 85.62 - -
40% Normal increase in OH costs = `2,40,000 charged to FG stock, WIP and COGS
Calculation of adjusted expenses of service department by using Simultaneous Equation method:
Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units
= `2,40,000 ÷ 60,000 = `4 per unit Expenses of Department S1 = 3,52,000 + 10% of Expenses of S2
Expenses of Department S2 = 33,000 + 10% of Expenses of S1
 OVERHEADS ABSORPTION COSTING METHOD 3.45 OVERHEADS ABSORPTION COSTING METHOD 3.46
(2) Accounting treatment of under-absorption of production overheads:
Now:
a. `18,000 (i.e. `60,000 × 30%) of under absorbed overheads were due to lack of production planning.
Expenses of Department S1 = 3,52,000 + 10% (33,000 + 10% of S1)
This being abnormal should be debited to Costing Profit and Loss Account.
Expenses of Department S1 = 3,52,000 + 3,300 + 1% of S1
b. The balance of `42,000 (i.e. `60,000 × 70%) of under absorbed overheads should be distributed
Expenses of Department S1 = 3,55,300 ÷ 99% = 3,58,889
over work in progress, finished goods and cost of sales by using supplementary rate.
Expenses of Department S2 = 33,000 + 10% of S1
Under Absorbed Overhead 42,000
= 33,000 + 10% of 3,58,889 Supplementary OH Rate (Positive) = =
Equivalent Units 12,500 + 5,000 + 2,500
= 33,000 + 35,889 = 68,889
= `2.10 per unit
(2) Statement Showing Cost Per Unit of ‘Z’
Particulars Amount Distribution of unabsorbed overheads of `42,000 over work-in-progress, finished goods and cost of sales:
Direct Materials 500 Work-in-Progress (2,500 units × `2.10) = `5,250
Direct Labour 350 Finished goods (5,000 units × `2.10) = `10,500
Prime Cost 850 Cost of sales (12,500 units × `2.10) = `26,250
Production Overheads:
Department P1 (2 hours × 99.32) 198.64 Journal Entries
Department P2 (3 hours × 85.62) 256.86
Total Cost 1,305.50 Entries Dr. Cr.
Cost of Sales A/c Dr. 26,250 -
Working Notes: Finished Goods Control A/c Dr. 10,500 -
Work in Progress Control A/c Dr. 5,250 -
Calculation of production hours = 365 × 16 hours = 5,840 hours Costing Profit & Loss A/c Dr. 18,000 -
To Overhead Control A/c - 60,000
PYQ 21 (Being under recovery of under absorbed oh recovered/charged)
RJS produces a single product and absorbs the production overheads at a pre determined rate. Information
relating to a period is as under: PYQ 22
Production overheads actually incurred `4,84,250 M/s. NOP Limited has its own power plant and generates its own power. Information regarding power
Overheads recovery rate at production `1.45 per hour requirements and power used are as follows:
Actual hours worked 2,65,000 hours Production Departments Service Departments
Particulars
A B X Y
Production: Needed capacity production (in hours) 20,000 25,000 15,000 10,000
Finished goods 17,500 units Used during the quarter ended September 2018 16,000 20,000 12,000 8,000
Work-in-progress 5,000 units
(50% complete in all respects)
During the quarter ended September 2018, cost for generating power amounted to `12.60 Lakhs out of which
Sales:
`4.20 Lakhs was considered as fixed cost.
Finished goods 12,500 units
Service department X renders services to departments A, B and Y in the ratio of 6 : 4 : 2 whereas
At the end of the period, it was discovered that the actual production overheads incurred included department Y renders services to department A and B in the ratio of 4 : 1. The direct labour hours of
`40,000 on account of 'written off obsolete stores’ and wages paid for the strike period under an award. department A and B are 67,500 hours and 48,750 hours respectively.
It was also found that 30% of the under absorption of production overheads was due to production inefficiency
Required:
and the rest was attributable to normal increase in costs.
(1) Prepare overheads distribution sheet.
Required to calculate: (2) Calculate factory overhead per labour hour for department A and department B.
[(5 Marks) Nov 2018]
(1) The amount of under absorbed production overheads during the period.
(2) Show the accounting treatment of under absorption of production overheads and pass journal entry.
Answer
[(8 Marks) Nov 2018] (1) Overheads Distribution Sheet
Answer Production Departments Service Departments
Particulars Basis
(1) Computation of under absorption of Production Overheads during the period: A B X Y
Fixed overheads (4,20,000) Needed capacity 1,20,000 1,50,000 90,000 60,000
Particulars Amount (20:25:15:10)
Total production overheads actually incurred during the period 4,84,250 Variable overheads Used capacity 2,40,000 3,00,000 1,80,000 1,20,000
Less: Written off obsolete stores and wages paid for strike period (40,000) (12,60,000 – 4,20,000) (16:20:12:8)
Net production overheads actually incurred 4,44,250 Total overheads - 3,60,000 4,50,000 2,70,000 1,80,000
Production overheads absorbed (2,65,000 hours × `1.45) 3,84,250 Apportionment of expenses of:
Under Recovery of production overheads `60,000 Department X 6:4:2 1,35,000 90,000 (2,70,000) 45,000
 OVERHEADS ABSORPTION COSTING METHOD 3.47 OVERHEADS ABSORPTION COSTING METHOD 3.48
Department Y 4:1 1,80,000 45,000 - (2,25,000) Finished goods 30,000 units
Total overheads - 6,75,000 5,85,000 - - Sale of finished goods 27,000 units
The analysis of cost information reveals that ⅓ of the under absorption of overheads was due to
(2) Calculation of factory overhead per hour:
defective production planning and the balance was attributable to increase in costs.
Department A = 6,75,000 ÷ 67,500 hours = `10 per hour You are required:
Department B = 5,85,000 ÷ 48,750 hours = `12 per hour (1) To find out the amount of under absorbed production overheads.
(2) To give the ways of treating it in cost accounts.
PYQ 23 (3) To apportion the under absorbed overheads over the items.
M/s. Zaina Private Limited has purchased a machine costing `29,14,800 and it is expected to have a salvage [(10 Marks) Nov 2019]
value of `1,50,000 at the end of its effective life of 15 years. Ordinarily the machine is expected to run for 4,500
hours per annum but it is estimated that 300 hours per annum will be lost for normal repair & maintenance. Answer
(1) Computation of Amount of Under Absorption of Production Overheads
The other details in respect of the machine are as follows:
Particulars Amount
(a) Repair & maintenance during the whole life of the machine are expected to be `5,40,000. Total production overheads actually incurred 8,80,000
(b) Insurance premium (per annum) 2% of the cost of the machine. Less: Paid to worker as per court’s award (50,000)
(c) Oil and lubricants required for operating the machine (per annum) `87,384. Less: Wages paid for strike period (38,000)
(d) Power consumption: 10 units per hour @ `7 per unit. No power consumption during repair and Less: Stores written off (22,000)
maintenance. Less: Expenses of previous year booked in current year (18,500)
(e) Salary to operator per month `24,000. The operator devotes one-third of his time to the machine. Net production overheads actually incurred 7,51,500
Production overheads absorbed (`10,35,000 ÷ 90,000 hours) × 45,000 hours 5,17,500
You are required to calculate comprehensive machine hour rate. Under Recovery of production overheads `2,34,000
[(5 Marks) May 2019]
(2) Accounting treatment of under-absorption of production overheads:
Answer
Machine Hour Rate (a) `78,000 (i.e., `2,34,000 × ⅓) of under absorbed overheads were due to defective production
Particulars Amount planning. This being abnormal should be debited to Costing Profit and Loss Account.
(A) Standing charges/ Fixed costs (b) The balance of `1,56,000 (i.e., `2,34,000 × ⅔) of under absorbed overheads should be distributed
Depreciation [(`29,14,800 – 1,50,000) × 1/15 years] 1,84,320 over finished goods and cost of sales by using supplementary rate.
Insurance Premium (`29,14,800 × 2%) 58,296
Salary to Operator (`24,000 × 1/3 × 12) 96,000 Under Absorbed Overheads 1,56,000
Total (A) 3,38,616 Supplementary OH Rate = Total Units
= 30,000
(B) Running charges/ Variable costs = `5.20 per unit
Repairs (`5,40,000 × 1/15 years) 36,000
Power (10 units × 4,200 hours × `7) 2,94,000 (3) Apportionment of `1,56,000 Under Absorbed Overheads:
Oil and lubricants 87,384
Finished goods (3,000 units × `5.20) = `15,600
Total (B) 4,17,384
Cost of sales (27,000 units × `5.20) = `1,40,400
Total Cost (A + B) 7,56,000
÷ Productive Machine Hours (4,500 - 300) ÷ 4,200 Journal Entries
Machine Hour Rate `180.00
Entries Dr. Cr.
PYQ 24 Finished Goods Control A/c Dr. 15,600 -
ABS enterprise produces a product and adopts the policy to recover factory overheads applying blanket rate Cost of Sales A/c Dr. 1,40,400 -
based on machine hours. The cost records of the concern reveal following information: Costing Profit & Loss A/c Dr. 78,000 -
To Overhead Control A/c 2,34,000
Budgeted production overheads `10,35,000 (Being under recovery of under absorbed oh recovered/charged)
Budgeted machine hours 90,000
Actual machine hours worked 45,000 PYQ 25
Actual production overheads `8,80,000 TEE Ltd. is a manufacturing company having three production departments ‘P’, ‘Q’ and ‘R’ and two service
Production overheads (actual) include: departments ‘X’ and ‘Y’ details pertaining to which are as under:
P Q R X Y
Paid to worker as per court’s award `50,000 Direct wages (`) 5,000 1,500 4,500 2,000 800
Wages paid for strike period `38,000 Working hours 13,191 7,598 14,995 - -
Stores written off `22,000 Value of machines (`) 1,00,000 80,000 1,00,000 20,000 50,000
Expenses of previous year booked in current year `18,500 H.P. of machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Production:
Floor space (sq. ft.) 2,000 2,500 3,500 1,000 1,000
 OVERHEADS ABSORPTION COSTING METHOD 3.49 OVERHEADS ABSORPTION COSTING METHOD 3.50
The expenses are as follows: Direct labour cost `40.00
Overheads: Department P (6 hours × `3.00) `18.00
Rent and rates `10,000
Department Q (5 hours × `3.50) `17.50
General lighting `600
Department R (2 hours × `2.53) `5.06
Indirect wages `3,450
Cost of Product A `145.56
Power `3,500
Depreciation on machines `70,000
PYQ 26
Sundries (apportionment on the basis of direct wages) `13,800
A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked
without an operator wholly engaged on it. The original cost of all these machines works out to `32 lakhs.
The expenses of the Service Departments are allocated as under:
Departments P Q R X Y These following particulars are furnished for a 6 month period:
X 45% 15% 30% - 10% Normal available hours per month 208
Y 35% 25% 30% 10% - Absenteeism (without pay) hours per operator 18
Product ‘A’ is processes for manufacture in Department P, Q, R for 6, 5, and 2 hours respectively. Direct Costs Leave (with pay) hours per operator 20
of Product A are: Direct material cost is 65 per unit and Direct labour cost is 40 per unit. Normal unavoidable idle time hours per operator 10
Average rate of wages per day of 8 hours per operator `100
You are required to: Production bonus estimated 10% on wages
(i) Prepare a statement showing distribution of overheads among the production and service departments. Power consumed `40,250
(ii) Calculate recovery rate per hour of each production department after redistributing the service Supervision & indirect labour `16,500
department costs. Lighting and electricity `6,000
(iii) Find out the total cost of ‘Product A’.
[(10 Marks) Nov 2020] The following particulars are given for a year:
Repairs and maintenance (including consumables) 5% of value of machines
Answer Insurance `3,60,000
(i) Statement Showing Distribution of Overheads among Production and Service Departments Depreciation 10% of original cost
Production Departments Service Departments Sundry work expenses `50,000
Items Basis of Charge Management expenses allocated `5,00,000
P Q R X Y
Direct wages Allocation - - - 2,000 800
Rent and rates Area 2,000 2,500 3,500 1,000 1,000 Prepare a statement showing the comprehensive machine hour rate for the machine shop.
General lighting Light points 200 100 150 50 100 [(5 Marks) Jan 2021]
Indirect wages Direct wages 1,250 375 1,125 500 200
Power H.P. 1,000 800 1,000 200 500 Answer
Depreciation on Value of Computation of Comprehensive Machine Hour Rate for the “Machine Shop”
machines machines 20,000 16,000 20,000 4,000 10,000 Particulars Amount
Sundries Direct wages 5,000 1,500 4,500 2,000 800 (A) Standing Charges:
Total overheads Primary Dist. 29,450 21,275 30,275 9,750 13,400 Operators wages (100 ÷ 8) × 7,380 hours 92,250
Production bonus (92,250 × 10%) 9,225
(ii) Statement Showing Recovery Rate Per Hour Supervision & indirect labour 16,500
Production Departments Service Departments Lighting and electricity 6,000
Items Basis Insurance (3,60,000 × 6/12) 1,80,000
P Q R X Y
Depreciation (32,00,000 × 10% × 6/12) 1,60,000
Overheads Primary Dist. 29,450 21,275 30,275 9,750 13,400
Sundry works expense (50,000 × 6/12) 25,000
Re-apportionment:
Management expenses allocated (5,00,000 × 6/12) 2,50,000
Department X 45 : 15 : 30 : 10 4,388 1,462 2,925 (9,750) 975
Total (A) 7,38,975
Department Y 35 : 25 : 30 : 10 5,031 3,594 4,313 1,437 (14,375)
(B) Running Charges
Department X 45 : 15 : 30 : 10 647 216 431 (1,437) 143
Repairs and maintenance (32,00,000 × 5% × 6/12) 80,000
Department Y 35 : 25 : 30 : 10 50 36 43 14 (143)
Power consumed 40,250
Department X 45 : 15 : 30 7 2 5 (14) -
Total (B) 1,20,250
Total OH - 39,573 26,585 37,992 - -
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 8,59,225
÷ Working hours - 13,191 7,598 14,995 - -
÷ Total machine hours ÷ 7,200
OH rate per hour `3.00 `3.50 `2.53 - -
Machine Hour Rate `119.34
Note: Cost of service departments are redistributed by using Repeated Distribution Method. Working Notes:
Calculation of effective productive hours available to the machine shop and paid hours:
(iii) Calculation of cost of Product A:
Particulars 6 Months, 6 Operators (Hours)
Direct material cost `65.00 Normal Available hours (208 hours × 6 months × 6 operators) 7,488
 OVERHEADS ABSORPTION COSTING METHOD 3.51 OVERHEADS ABSORPTION COSTING METHOD 3.52
Less: Absenteeism hours (18 hours × 6 operators) (108) beginning of the period but at the end of the period there were 20,000 uncompleted units which may be treated
Paid Hours per month 7,380 as 65% complete in all respects.
Less: Leave hours (20 hours × 6 operators) (120)
On investigation, it was found that 40% of the unabsorbed overheads due to factory inefficiency and
Less: Normal idle time (10 hours × 6 operators) (60)
the rest were attributed to increase in the cost of indirect materials and indirect labour.
Effective Productive Hours 7,200
You are required to:
PYQ 27
SNS Trading Company has three Main Departments and two Service Departments. The data for each 1. Calculate the amount of unabsorbed overheads during the year 2020-21.
department is given below: 2. Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal entry.
[(10 Marks) Dec 2021]
Departments Expenses (in `) Area in (Sq. Mtr) No. of Employees
Main Departments: Answer
Purchase Department 5,00,000 12 800 1. Computation of Amount of Unabsorbed Overheads:
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700 Particulars Amount
Service Departments: Total production overheads actually incurred 35,50,000
Maintenance Department 6,40,000 4 200 Less: Amount payable in respect of wages for strike period (2,00,000)
Personnel Department 3,20,000 6 250 Less: Expenses off the previous year (1,00,000)
Net production overheads actually incurred 32,50,000
The cost of Maintenance Department and Personnel Department is distributed on the basis of ‘Area in Square Production overheads absorbed (1,50,000 man-days × `20) 30,00,000
Metres’ and ‘Number of Employees’ respectively. Unabsorbed overheads `2,50,000

You are required to: 2. Accounting treatment of unabsorbed overheads:

(1) Prepare a statement showing the distribution of expenses of Service departments to Main departments
using “Step Ladder Method” of overhead distribution. (a) `1,00,000 (`2,50,000 × 40%) of unabsorbed overheads were due to factory inefficiency and debited
(2) Compute the rate per hour of each Main departments, given that, the Purchase department, Packing to Costing Profit and Loss Account.
department and Distribution department works for 12 hours a day, 24 hours a day and 8 hours a day (b) The balance of `1,50,000 of unabsorbed overheads should be distributed over Finished goods stock,
respectively. Assume that there are 365 days in a year and there are no holidays. WIP stock and cost of sales by using supplementary rate.
[(5 Marks) July 2021]
Supplementary OH Rate = Unabsorbed overheads ÷ Equivalent Units
Answer = `1,50,000 ÷ 75,000 units (50,000 + 12,000 + 65% of 20,000)
(1) Statement Showing Distribution of Expenses of Service Departments = `2 per unit
Production Departments Service Departments
Particulars Basis
Purchase Packing Distribution Maintenance Personnel Distribution of unabsorbed overheads of `1,50,000:
Expenses Allocation 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000 Cost of Sales (50,000 × `2) = `1,00,000
Re-apportionment:
Finished Goods Stock (12,000 × `2) = `24,000
Maintenance Dept. Area 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
WIP Stock (13,000 × `2) = `26,000
Personnel Dept. No. of 1,04,000 2,21,000 91,000 - (4,16,000)
Employees
Journal Entries
Total OH - 7,96,000 12,61,000 5,53,000 - -
Entries Dr. Cr.
(2) Calculation of rate per hour: Cost of Sales A/c Dr. 1,00,000 -
Finished Goods Control A/c Dr. 24,000 -
Rate per hour = Total Overheads ÷ Total Hours WIP Control A/c Dr. 26,000 -
Purchase Department = 7,96,000 ÷ (12 hours × 365 days) = `181.74 Costing Profit & Loss A/c Dr. 1,00,000 -
To Overhead Control A/c - 2,50,000
Packing Department = 12,61,000 ÷ (24 hours × 365 days) = `143.95 (Being unabsorbed factory overheads being absorbed)
Distribution Department = 5,53,000 ÷ (8 hours × 365 days) = `189.38
PYQ 29
PYQ 28 USP Ltd. is the manufacture of ‘double grip motorcycle tyres. In the manufacturing process, it undertakes three
XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre-determined rate of `20 per different job namely, Vulcanising, Brushing and Striping. All of these jobs requires the use of a special machine
man-day. and also the aid of a robot when necessary. The robot is hired from outside and the hire charges paid for every
six month is `2,70,000, An estimated of overhead expenses relating to the special machine is given below:
During the year 2020-21, the total factory overheads incurred and the man-days actually worked were
`35,50,000 and 1,50,000 respectively. Out of the amount of `35,50,000, `2,00,000 were in respect of wages  Rent for a quarter is `18,000
for strike period and `1,00,000 was in respect of expenses off the previous year booked in the current year.  The cost of the special machine is `19,20,000 and depreciation is charged @ 10% per annum on straight
During the period, 50,000 units were sold. At the end of period, 12,000 completed units were held in stock but line basis.
there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the  Other indirect expenses are recovered at 20% of direct wages.
 OVERHEADS ABSORPTION COSTING METHOD 3.53 OVERHEADS ABSORPTION COSTING METHOD 3.54
The factory manager has informed that in the coming year, the total direct wages will be `12,00,000 which will
be incurred evenly throughout the year. During the first month of operation, the following details are available
from the job book:
SUGGESTED REVISION
Number of hours the special machine was used Page No. of 3rd, 4th & Revision
Ques. Observations or KEY Points 1st & 2nd
Jobs Without the aid of the robot With the aid of the robot Practical 5th during
No. (Note down during revisions) Revision
Vulcanising 500 400 Register Revision Exams
Brushing 1,000 400 BQ (Book Questions covering Study Module of ICAI, PM, RTP’s, MTP’s and Important Questions)
1 Y Y -
Striping - 1,200
2 Y Y Y
You are required to: 3 Y - -
(a) Compute the Machine Hour Rate for the company as a whole for a month (A) when the robot is used and 4 Y Y Y
(B) when the robot is not used. 5 Y - -
(b) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanising, Brushing and Striping. 6 Y - -
[(10 Marks) Nov 2022] 7 Y Y Y
8 Y Y -
Answer 9 Y Y Y
(a) Machine hour rate for the company as a whole for a month: 10 Y - -
69,000
11 Y - -
(A) When the Robot is used = 2,000 hrs
= `34.50 12 Y - -
18,000
13 Y Y Y
(B) When the Robot is not used = 1,500 hrs
= `12.00 14 Y Y Y
15 Y - -
(b) Machine hour rate for individual jobs: 16 Y Y Y
17 Y - -
Vulcanising Brushing Striping 18 Y Y Y
Particulars
Hours ` Hours ` Hours ` 19 Y - -
Without Robot @ `12.00 per hour 500 6,000 1,000 12,000 - - 20 Y Y Y
With Robot @ `34.50 per hour 400 13,800 400 13,800 1,200 41,400 21 Y Y Y
Total Overheads - 19,800 - 25,800 - 41,400 22 Y Y Y
÷ Hours - ÷900 - ÷1,400 - ÷1,200 23 Y Y Y
Machine Hour Rate - 22.00 - 18.43 - 34.50 24 Y Y Y
25 Y Y -
Working note:
26 Y Y Y
1. Total machine hours used (500 + 1,000 + 400 + 400 + 1,200) 3,500
27 Y Y -
2. Total machine hours without the use of robot (500 + 1,000) 1,500 28 Y Y Y
29 Y - -
3. Total machine hours with the use of robot (400 + 400 + 1,200) 2,000
30 Y Y Y
4. Total overheads of the machine per month: PYQ (Past Year Questions)-
Rent (`18,000 ÷ 3 months) `6,000.00 1 Y - -
Depreciation (`19,20,000 × 10%) ÷ 12 months `16,000.00 2 Y Y -
Indirect Charges (`12,00,000 × 20% ÷ 12 months) `20,000.00 3 Y - -
Total `42,000.00 4 Y Y Y
5 Y Y Y
5. Robot hire charges for a month (`2,70,000 ÷ 6 months) = `45,000 6 Y Y Y
6. Overheads for using machines without Robot =
42,000
× 1,500 hrs. = `18,000 7 Y Y -
3,500 hrs 8 Y Y Y
7. Overheads for using machines with Robot =
42,000
× 2,000 hrs. + `45,000 9 Y Y -
3,500 hrs 10 Y Y Y
11 Y Y Y
= `69,000
12 Y - -
13 Y Y Y
14 Y Y -
15 Y Y -
16 Y Y Y
 OVERHEADS ABSORPTION COSTING METHOD 3.55
17 Y Y Y
18 Y - -
19 Y - -
20 Y Y -
21
22
23
Y
Y
Y
-
Y
-
Y
-

-
CHAPTER - 4
24 Y - -
25 Y Y -
26 Y Y Y
27
28
29
Y
Y
Y
Y
-
Y
Y
-
-
COST SHEET
&
UNIT COSTING
LEARNING OUTCOMES

When you have finished studying this chapter, you should be able to:

 Understand the meaning of prime cost, works cost, cost of

production, cost of goods sold and cost of sales.
 Classify and ascertain cost on the basis of function.
 Prepare cost sheet/statement for production of goods and
providing services.
 Prepare budgeted cost and income statement.
 Describe Unit costing method.
 Prepare and calculate the cost under Unit costing.
 COST SHEET & UNIT COSTING 4.1 COST SHEET & UNIT COSTING 4.2
BQ 1 Cost of Goods Sold 84,46,000
The following information has been obtained from the records of ABC Corporation for the period from Office Expenses 10,34,000
June 1 to June 30, 2022. Selling and Distribution Expenses 7,50,000
On June 1, 2022 On June 30, 2022 Cost of Sales 1,02,30,000
Profit (b.f.) 31,70,000
Cost of raw materials 60,000 50,000 Sales 1,34,00,000
Cost of Work-in Progress 12,000 15,000
Cost of Stock of finished goods 90,000 1,10,000
BQ 3
Purchase of raw materials during June’22 4,80,000 The following data are available from books and records of Q Ltd. for the month of August 2022. Direct labour
Wages paid 2,40,000 cost `16,000 (160% of the factory overhead) and Cost of goods sold `56,000.
Factory Overheads 1,00,000 August 1 August 31
Administration overheads (related to production) 50,000
Selling & Distribution Overheads 25,000 Raw Material 8,000 8,600
Sales 10,00,000 Work in progress 8,000 12,000
Finished goods 14,000 18,000
Prepare a statement giving the following information:
Selling Expenses 3,400
(a) Materials consumed, Administration expenses (related to production) 2,600
(b) Prime cost, Sales (for the Month) 75,000
(c) Factory cost,
(d) Cost of goods sold and You are required to prepare a statement showing the cost of goods manufactured and sold and the
(e) Net Profit. profit earned.
[(a) 4,90,000 (b) 7,30,000 (c) 8,27,000 (d) 8,57,000 (e) 1,18,000] [Raw materials purchases `36,000; Prime cost `51,400; Works cost `57,400; Cost of production
`60,000; Cost of sales `59,400; Profit `15,600]
BQ 2
From the following figures, Calculate cost of production and profit for the month of March 2022: BQ 4
Particulars Amount Particulars Amount The books of Adarsh Manufacturing Company present the following data for the month of April, 2023. Direct
labour cost `17,500 being 175% of works overheads. Cost of goods sold excluding administrative expenses
Stock on 1st March, 2022: Purchase of Raw materials 28,57,000
`56,000.
Raw Materials 6,06,000 Sales of Finished goods 1,34,00,000
Finished Goods 3,59,000 Direct wages 37,50,000 Inventory accounts showed the following opening and closing balances:
Stock on 31st March, 2022: Factory expenses 21,25,000 April 1 April 30
Raw Materials 7,50,000 Office expenses 10,34,000
Finished Goods 3,09,000 Selling and distribution expenses 7,50,000 Raw materials 8,000 10,600
Work-in-process: Sale of scrap 26,000 Works in progress 10,500 14,500
On 1st March, 2022 12,56,000 Finished Goods 17,600 19,000
On 31st March, 2022 14,22,000 Other data are:

Answer Selling expenses 3,500

Cost Sheet General and administration expenses 2,500
Particulars Amount Sales of the month 75,000
Raw Materials Purchased 28,57,000 You are required to:
Add: Opening stock of Raw Materials 6,06,000 (1) Compute the value of materials purchased.
Less: Closing stock of Raw Materials (7,50,000) (2) Prepare a cost statement showing the various elements of cost and also the profit earned.
Materials Consumed 27,13,000
Direct Wages 37,50,000 Answer
Prime Cost 64,63,000 (1) Statement Showing Material Purchased
Factory Expenses 21,25,000 Particulars Amount
Add: Opening WIP 12,56,000 Cost of Goods Sold excluding Administrative Expenses 56,000
Less: Closing WIP (14,22,000) Add: Closing Finished Goods 19,000
Factory Cost 84,22,000 Less: Opening Finished Goods (17,600)
Less: Sale of Scrap (26,000) Factory Cost 57,400
Cost of Production 83,96,000 Add: Closing WIP 14,500
Add: Opening Finished Goods 3,59,000 Less: Opening WIP (10,500)
Less: Closing Finished Goods (3,09,000) Gross Factory Cost 61,400
Less: Factory Overheads (10,000)
 COST SHEET & UNIT COSTING 4.3 COST SHEET & UNIT COSTING 4.4
Prime Cost 51,400 BQ 7
Less Direct Wages (17,500) The following figures for the month of April, 2023 were extracted from the records of a factory:
Raw Material Consumed 33,900
Add: Closing Raw Materials Opening Stock of finished goods (5,000 Units) `45,000
10,600
Less Opening Raw Materials Purchase of raw materials `2,57,100
(8,000)
Raw Materials Purchased Direct Wages `1,05,000
36,500
Factory Overheads 100% of Direct wages
Administration Overheads `1.00 per unit produced
(2) Cost Sheet
Selling and distribution Overheads 10% of sales
Particulars Amount
Closing stock of finished goods (10,000 Units) ?
Raw Materials Purchased (W.N.) 36,500
Sales (45,000 units) `6,60,000
Add: Opening stock of Raw Materials 8,000
Less: Closing stock of Raw Materials (10,600) Prepare a cost sheet for the month of April 2023, assuming that sales are made on the basis of "first-
Materials Consumed 33,900 in first out" principle.
Direct Wages 17,500 [Profit `1,35,320]
Prime Cost 51,400
Factory Overheads (17,500 ÷ 175%) 10,000 BQ 8
Add: Opening WIP 10,500 From the following particulars, you are required to prepare monthly cost sheet of Aditya Industries:
Less: Closing WIP (14,500) Particulars Amount (`)
Factory Cost 57,400 Opening Inventories:
Add: Opening Finished Goods 17,600 - Raw materials 12,00,000
Less: Closing Finished Goods (19,000) - Work-in-process 18,00,000
Cost of Goods Sold 56,000 - Finished goods (10,000 units) 9,60,000
General Administrative Expenses 2,500 Closing Inventories:
Selling and Distribution Overheads 3,500 - Raw materials 14,00,000
Cost of Sales 62,000 - Work-in-process 16,04,000
Profit (b.f.) 13,000 - Finished goods ?
Sales 75,000 Raw materials purchased 1,44,00,000
GST paid on raw materials purchased (ITC available) 7,20,000
BQ 5 Wages paid to production workers 36,64,000
The following data relate to the manufacture of a standard product during the month of April 2022: Expenses paid for utilities 1,45,600
Raw Materials consumed `1,80,000 Office and administration expenses paid 26,52,000
Direct Wages `90,000 Travelling allowance paid to office staffs 1,21,000
Machine hours worked 10,000 hours Selling expenses 6,46,000
Machine hours rate `8 per hour Machine hours worked 21,600 hours
Administration overheads (not related to production) `35,000 Machine hour rate ` 8.00 per hour
Selling overhead `5 per unit Units sold 1,60,000
Units produced 4,000 units Units produced 1,94,000
Units sold 3,600 @ `125 per unit Desired profit 15% on sales
You are required to prepare a cost sheet showing the cost per unit and profit for the month.
[Profit `82,000, `102.22 per unit] Answer
Cost Sheet of Aditya Industries
BQ 6 Particulars Total Cost Cost Per Unit
The following data relate to the manufacture of a standard product during the four week ended 28th Raw materials purchased 1,44,00,000 -
February 2023: Add: Opening value of raw materials 12,00,000 -
Less: Closing value of raw materials (14,00,000) -
Raw Materials consumed `4,00,000 Materials consumed 1,42,00,000 73.19
Direct Wages `2,40,000 Wages paid to production workers 36,64,000 18.89
Machine hours worked 3,200 hours Expenses paid for utilities 1,45,600 0.75
Machine hours rate `40 per hour Prime Cost 1,80,09,600 92.83
Administration overheads (related to production) 10% of works cost Factory overheads (`8 × 21,600 hours) 1,72,800 0.89
Selling overhead `20 per unit Add: Opening value of WIP 18,00,000 -
Units produced and sold 10,000 @ `120 per unit Less: Closing value of WIP (16,04,000) -
Cost of Production 1,83,78,400 94.73
You are required to find out the cost per unit and profit for the four week period. Add: Value of opening finished stock 9,60,000 -
[Profit `1,55,200, `104.48 per unit] Less: Value of closing finished stock (`94.734× 44,000) (41,68,296) -
 COST SHEET & UNIT COSTING 4.5 COST SHEET & UNIT COSTING 4.6
Cost of Goods Sold 1,51,70,104 94.81 2. Salary paid to Director (Technical) is an administrative cost.
Office and administration expenses paid 26,52,000 16.58
Travelling allowance paid to office staffs 1,21,000 0.76 BQ 10
Selling expenses 6,46,000 4.03 The following details are available from the books of R Ltd. for the year ending 31st March 2023:
Cost of Sales 1,85,89,104 116.18
Add: Profit @15% on sales 32,80,430 20.50 Particulars Amount (`)
Sales (1,85,89,104÷85%) 2,18,69,534 136.68 Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Note: Direct wages 60,00,000
(a) Units produced: 1,94,000; Opening Units: 10,000; Total available units: 2,04,000 & units sold 1,60,000. Carriage inward 1,72,600
(b) FIFO method is used for valuation of stock, alternatively student can solve the problem with weighted Wages to foreman and store keeper 8,40,000
average method. Other indirect wages to factory staffs 1,35,000
Expenditure on research and development on new production technology 9,60,000
BQ 9 Salary to accountants 7,20,000
From the following data of Arnav Metallic Ltd., calculate Cost of production: Employer’s contribution to EPF & ESI 7,20,000
Particulars Amount (`) Cost of power & fuel 28,00,000
Repair & maintenance paid for plant & machinery 9,80,500 Production planning office expenses 12,60,000
Insurance premium paid for plant & machinery 96,000 Salary to delivery staffs 14,30,000
Raw materials purchased 64,00,000 Income tax 2,80,000
Opening stock of raw materials 2,88,000 Fees to statutory auditor 1,80,000
Closing stock of raw materials 4,46,000 Fees to cost auditor 80,000
Wages paid 23,20,000 Fees to independent directors 9,40,000
Value of opening Work-in-process 4,06,000 Donation to PM-national relief fund 1,10,000
Value of closing Work-in-process 6,02,100 Value of sales 2,82,60,000
Quality control cost for the products in manufacturing process 86,000 Position of inventories as on 01-04-2022:
Research & development cost for improvement in production process 92,600 Raw Material 6,20,000
Administrative cost for: WIP 7,84,000
Factory & production 9,00,000 Finished goods 14,40,000
Others 11,60,000 Position of inventories as on 31-03-2023:
Amount realised by selling scrap generated during the manufacturing process 9,200 Raw Material 4,60,000
Packing cost necessary to preserve the goods for further processing 10,200 WIP 6,64,000
Salary paid to Director (Technical) 8,90,000 Finished goods 9,80,000

Answer From the above information prepare a cost sheet for the year ended 31st March 2023.
Statement Showing Cost of Production of Arnav Metallic Ltd. for the period
Answer
Particulars Total Cost Cost Sheet of R Ltd.
Raw materials purchased 64,00,000 (for the year ended at 31st March, 2023)
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000) Particulars Amount (`) Amount (`)
Material consumed 62,42,000 Material Consumed:
Wages paid 23,20,000 Raw materials purchased 84,00,000
Prime Cost 85,62,000 Add: Carriage inward 1,72,600
Repair and maintenance cost of plant & machinery 9,80,500 Add: Opening stock of raw materials 6,20,000
Insurance premium paid for plant & machinery 96,000 Less: Closing stock of raw materials (4,60,000) 87,32,600
Add: Opening value of WIP 4,06,000
Less: Closing value of WIP (6,02,100) Direct employee (labour) cost:
Factory Cost Direct wages 60,00,000
94,42,400
Quality control cost Employer’s Contribution towards PF & ESIS 7,20,000 67,20,000
86,000
Research & development cost 92,600
Administrative overheads related with factory and production Direct expenses:
9,00,000
Less: Amount realised by selling scrap Consumable materials 4,80,000
(9,200)
Add: Primary packing cost Cost of power & fuel 28,00,000 32,80,000
10,200
Cost of Production Prime Cost 1,87,32,600
1,05,22,000
Works/ Factory overheads:
Notes: Wages to foreman and store keeper 8,40,000
1. Other administrative overhead does not form part of cost of production. Other indirect wages to factory staffs 1,35,000 9,75,000
 COST SHEET & UNIT COSTING 4.7 COST SHEET & UNIT COSTING 4.8
Gross Factory Cost 1,97,07,600 16 Expenses paid for quality control check activities 19,600
Add: Opening value of WIP 7,84,000 17 Salary paid to quality control staffs 96,200
Less: Closing value of WIP (6,64,000) 18 Research & development cost paid improvement in 18,200
Factory Cost 1,98,27,600 production process
Research & development cost paid for improvement in production 9,60,000 19 Expense paid for pollution control and engineering & 26,600
process maintenance
Production planning office expenses 12,60,000 20 Expense paid for administration of factory work 1,18,600
Cost of Production 2,20,47,600 21 Salary paid to functional mangers:
Add: Opening stock of finished goods 14,40,000 Production control 9,60,000
Less: Closing stock of finished goods (9,80,000) Finance & accounts 9,18,000
Cost of Goods Sold 2,25,07,600 Sales & marketing 10,12,000 28,90,000
Administrative Overheads: 22 Salary paid to general manager 12,56,000
Salary to accountants 7,20,000 23 Packing cost paid for:
Fees to statutory auditor 1,80,000 Primary packing necessary to maintain quality 96,000
Fees to cost auditor 80,000 For re-distribution of finished goods 1,12,000 2,08,000
Fee paid to independent directors 9,40,000 19,20,000 24 Wages of employees engaged in distribution of goods 7,20,000
Selling and Distribution Overheads: 25 Fee paid to auditors 1,80,000
Salary to delivery staffs 14,30,000 26 Fee paid legal advisors 1,20,000
Cost of Sales 2,58,57,600 27 Fee paid to independent directors 2,20,000
Add: Profit (b.f.) 24,02,400 28 Performance bonus paid to sales staffs 1,80,000
Sales 2,82,60,000 29 Value of stock as on 1st April, 2022:
Raw materials 18,00,000
Notes: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet. Work-in-process 9,20,000
Finished goods 11,00,000 38,20,000
BQ 11 30 Value of stock as on 31st March, 2023:
Arnav Inspat Udyog Ltd. has the following expendiures for the year ended 31st March, 2023: Raw materials 9,60,000
Work-in-process 8,70,000
Sl. No. Particulars Amount (`) Amount (`) Finished goods 18,00,000 36,30,000
1 Raw materials purchased 10,00,00,000
2 GST paid on the above purchases @18% (eligible for input tax 1,80,00,000 Amount realized by selling of scrap and waste generated during manufacturing process `86,000.
credit)
3 Freight inward 11,20,600 From the above data you are requested to prepare statement of cost for Arnav Ispat Udyog Ltd. for
4 Wages paid to factory workers 29,20,000 the year ended 31st March, 2023, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of production, (iv) Cost
5 Contribution made towards employees’ PF & ESIS 3,60,000 of goods sold and (v) Cost of sales.
6 Production bonus paid to factory workers 2,90,000
7 Royalty paid for production 1,72,600 Answer
8 Amount paid for power & fuel 4,62,000 Statement of Cost of Arnav Ispat Udyog Ltd
9 Amount paid for purchase of moulds and patterns (life is 8,96,000 For the year ended 31st March, 2023
equivalent to two year production)
Particulars Amount Amount
10 Job charges paid to job workers 8,12,000
Material consumed:
11 Stores and spares consumed 1,12,000
Raw materials purchased 10,00,00,000
12 Depreciation on:
Freight inward 11,20,600
Factory building 84,000
Add: Opening stock of raw materials 18,00,000
Office building 56,000
Less: Closing stock of raw materials (9,60,000) 10,19,60,600
Plant & machinery 1,26,000
Direct employee (labour) cost:
Delivery vehicles 86,000 3,52,000
Wages paid to factory workers 29,20,000
13 Salary paid to supervisors
Contribution made towards employees’ PF & ESIS 3,60,000
14 Repairs & maintenance paid for: 1,26,000
Production bonus paid to factory workers 2,90,000 35,70,000
Plant & machinery 48,000
Direct expenses:
Sales office building 18,000
Royalty paid for production 1,72,600
Vehicles used by directors 19,600 85,600
Amount paid for power & fuel 4,62,000
15 Insurance premium paid for:
Amortised cost of moulds and patterns 4,48,000
Plant & machinery 31,200 Job charges paid to job workers 8,12,000 18,94,600
Factory building 18,100 Prime Cost 10,74,25,200
Stock of raw materials & WIP 36,000 85,300
Works/Factory overheads:
Stores and spares consumed 1,12,000
 COST SHEET & UNIT COSTING 4.9 COST SHEET & UNIT COSTING 4.10
Depreciation on factory building 84,000 5 Amount paid for power & fuel 3,50,000
Depreciation on plant & machinery 1,26,000 6 Job charges paid to job workers 3,10,000
Repairs & maintenance paid for plant & machinery 48,000 7 Stores and spares consumed 1,10,000
Insurance premium paid for plant & machinery 31,200 8 Depreciation on office building 50,000
Insurance premium paid for factory building 18,100 9 Repairs & maintenance paid for:
Insurance premium paid for stock of raw materials & WIP 36,000 Plant & machinery 40,000
Salary paid to supervisors 1,26,000 Sales office building 20,000 60,000
Expenses paid for pollution control and engineering & 26,600 6,07,900 10 Insurance premium paid for:
maintenance 10,80,33,100 Plant & machinery 28,200
Gross factory cost 9,20,000 Factory building 18,800 47,000
Add: Opening value of WIP (8,70,000) 11 Expenses paid for quality control check activities 18,000
Less: Closing value of WIP 10,80,83,100 12 Research & development cost paid improvement in 20,000
Works / Factory Cost production process
Quality control cost: 13 Expense paid for pollution control and engineering & 36,000
Expenses paid for quality control check activities 19,600 maintenance
Salary paid to quality control staffs 96,200 1,15,800 14 Salary paid to Sales & Marketing manager 5,60,000
Research & development cost paid improvement in production 18,200 15 Salary paid to General Manager 6,40,000
process 16 Packing cost paid for:
Administration cost related with production: Primary packing necessary to maintain quality 46,000
Expenses paid for administration of factory work 1,18,600 For re-distribution of finished goods 80,000 1,26,000
Salary paid to production control manager 9,60,000 10,78,600 17 Fee paid to independent directors 1,20,000
Less: Realisable value on sale scrap and waste (86,000) 18 Performance bonus paid to sales staffs 1,20,000
Add: Primary packing cost 96,000 19 Value of stock as on 1st April, 2022:
Cost of Production 10,93,05,700 Raw materials 10,00,000
Add: Opening stock of Finished goods 11,00,000 Work-in-process 8,60,000
Less: Closing stock of Finished goods (18,00,000) Finished goods 12,00,000 30,60,000
Cost of Goods Sold 10,86,05,700 20 Value of stock as on 31st March, 2023:
Administrative overheads: Raw materials 8,40,000
Depreciation on office building 56,000 Work-in-process 6,60,000
Repairs & maintenance paid for vehicles used by directors 19,600 Finished goods 10,50,000 25,50,000
Salary paid to manager-finance & accounts 9,18,000
Salary paid to general manager 12,56,000 Amount realized by selling of scrap and waste generated during manufacturing process `48,000.
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000 From the above data you are requested to prepare statement of cost for RTA Ltd. for the year
Fee paid to independent directors 2,20,000 27,69,600 ended 31st March, 2023, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of production, (iv) Cost of goods
Selling overheads: sold and (v) Cost of sales.
Repairs & maintenance paid for sales office building 18,000
Salary paid to manager of sales & marketing 10,12,000 Answer
Performance bonus paid to sales staffs 1,80,000 Statement of Cost of RTA
Distribution overheads: 12,10,000 For the year ended 31st March, 2023
Depreciation on delivery vehicles 86,000 Particulars Amount Amount
Packing cost paid for re-distribution of finished goods 1,12,000
Wages of employees engaged in distribution of goods Material consumed:
7,20,000 9,18,000
Raw materials purchased 5,00,00,000
Cost of Sales 11,35,03,300 Freight inward 9,20,600
Add: Opening stock of raw materials 10,00,000
Notes: Less: Closing stock of raw materials (8,40,000) 5,10,80,600
GST paid of purchase of raw materials would not be part of cost of materials as it eligible for input credit. Direct wages paid to factory workers 25,20,000
Direct expenses: 1,80,000
BQ 12 Royalty paid for production 3,50,000
RTA Ltd. has the following expendiures for the year ended 31st March, 2023: Amount paid for power & fuel 3,10,000 8,40,000
Sl. No. Particulars Amount (`) Amount (`) Job charges paid to job workers 5,44,40,600
1 Raw materials purchased 5,00,00,000 Prime Cost
2 Freight inward 9,20,600 Works/Factory overheads:
3 Wages paid to factory workers 25,20,000 Stores and spares consumed 1,10,000
4 Royalty paid for production 1,80,000 Repairs & maintenance paid for plant & machinery 40,000
Insurance premium paid for plant & machinery 28,200
 COST SHEET & UNIT COSTING 4.11 COST SHEET & UNIT COSTING 4.12
Insurance premium paid for factory building 18,800 Direct materials consumed:
Expenses paid for pollution control and engineering & 36,000 2,33,000 Leather sheets 3,20,000 320.00
maintenance Cotton cloths 15,000 15.00
Gross factory cost 5,46,73,600 Add: Freight paid on purchase 8,500 8.50
Add: Opening value of WIP 8,60,000 Direct wages (`80 × 2,000 hours) 1,60,000 160.00
Less: Closing value of WIP (6,60,000) Direct expenses (`10 × 2,000 hours) 20,000 20.00
Works / Factory Cost 5,48,73,600 Prime Cost 5,23,500 523.50
Quality control cost: Expenses paid for quality control check activities 18,000 Factory overheads:
Research & development cost paid improvement in production 20,000 Depreciation on machines {(`22,00,000×90%)÷120 months} 16,500 16.50
process Apportion cost of factory rent {(1,20,000 ÷ 2,400) × 1,960} 98,000 98.00
Less: Realisable value on sale scrap and waste (48,000) Works Cost 6,38,000 638.00
Add: Primary packing cost 46,000 Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25)
Cost of Production 5,49,09,600 Cost of Production 6,32,750 632.75
Add: Opening stock of Finished goods 12,00,000 Less: Closing stock of bags (100 bags × `632.75) (63,275) -
Less: Closing stock of Finished goods (10,50,000) Cost of Goods Sold 5,69,475 632.75
Cost of Goods Sold 5,50,59,600 Administrative Overheads:
Administrative overheads: Staff salary 45,000 50.00
Depreciation on office building 50,000 Apportioned rent {(1,20,000 ÷ 2,400) × 240} 12,000 13.33
Salary paid to general manager 6,40,000
Fee paid to independent directors 1,20,000 8,10,000 Selling and Distribution Overheads:
Selling overheads: Staff salary 72,000 80.00
Repairs & maintenance paid for sales office building 20,000 Apportioned rent {(1,20,000 ÷ 2,400) × 200} 10,000 11.11
Salary paid to manager of sales & marketing 5,60,000 Freight paid on delivery of bags 18,000 20.00
Performance bonus paid to sales staffs 1,20,000 7,00,000 Cost of Sales 7,26,475 807.19
Distribution overheads:
Packing cost paid for re-distribution of finished goods 80,000 Working Note:
Cost of Sales 5,66,49,600 1. Factory space = Total space – space occupied by Administrative and Sales office
= 2,400 - 240 – 200 = 1,960 sq. feet
BQ 13
2. Units Produced = Main input raw material used ÷ Main material consumption for 1 unit output
DFG Ltd. manufactures leather bags for office and school purpose. The following information is related with
= 2,000 meter leather ÷ 2 meter = 1,000 bags
the production of leather bags for the month of September 2022:
3. Units sold = Units produced – Closing units
(i) Leather sheets and cotton cloths are the main inputs, and the estimated requirement per bag is two
= 1,000 – 100 = 900 bags
meters of leather sheets and one meter of cotton cloth. 2,000 meter of leather sheets and 1,000 meter of
cotton cloths are purchased at `3,20,000 and `15,000 respectively. Freight paid on purchases is `8,500.
BQ 14
(ii) Stitching and finishing need 2,000 man hours at `80 per hour. A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at varying levels of
production is as under:
(iii) Other direct cost of `10 per labour hour is incurred.
Level Works cost per unit (`)
(iv) DFG has 4 machines at a total cost of `22,00,000. Machine has a life of 10 years with a scrape value of 10% 400
10% of the original cost. Depreciation is charged on straight line method. 20% 390
30% 380
(v) The monthly cost of administrative and sales office staffs are `45,000 and `72,000 respectively. DFG
40% 370
pays `1,20,000 per month as rent for a 2400 sq. feet factory premises. The administrative and sales office 50% 360
occupies 240 sq. feet and 200 sq. feet respectively of factory space. 60% 350
(vi) Freight paid on delivery of finished bags is `18,000. 70% 340
80% 330
(vii) During the month 35 kg. of leather and cotton cuttings are sold at `150 per kg. 90% 320
(viii) There is no opening and closing stocks for input materials. There is 100 bags in stock at the end of the 100% 310
month. Its fixed administration expenses amount to `1,50,000 and fixed marketing expenses amount to
`2,50,000 per month respectively. The variable distribution cost amounts to `30 per unit.
Prepare a cost sheet following functional classification for the month of September 2022.
It can market 100% of its output at `500 per unit provided it incurs the following further expenditure:
Answer
Cost Sheet for the month of September 2022 (a) It gives gift items costing Rs. 30 per unit of sale.
(b) It has lucky draws every month giving the first prize of Rs. 50,000; 2nd prize of `25,000; 3rd prize of
Particulars Total Cost Cost Per Unit
`10,000 and three consolation prizes of `5,000 each to customers buying the product.
 COST SHEET & UNIT COSTING 4.13 COST SHEET & UNIT COSTING 4.14
(c) It spends `1,00,000 on refreshments served every month to its customers. If the production programme of the factory is as indicated below and the management desires a profit
(d) It sponsors a television programme every week at a cost of `20,00,000 per month. of `20,00,000 for the year work out the average selling price at which each unit should be quoted.
First 3 months 50% capacity
It can market 30% of its output at `550 per unit without incurring any of the expenses referred to in (a)
Remaining 9 months 80% capacity
to (d) above.
Prepare a cost sheet for the month showing total cost and profit at 30% and 100% capacity level. Answer
Statement Showing Average selling Price Per Unit
Answer Particulars First 3 Months Next 9 Months Total
A Ltd. Co Number of Units (W.N. 1) 15,000 72,000 87,000
Cost Sheet (for the month) Raw Materials @ `90 per unit 13,50,000 64,80,000 78,30,000
30% 100% Direct Labour @ `60 per unit 9,00,000 43,20,000 52,20,000
Particulars
(30,000 units) (1,00,000 units) Prime Cost 22,50,000 1,08,00,000 1,30,50,000
Works Cost @ `380/`310 per unit 1,14,00,000 3,10,00,000 Factory Overheads:
Administrative overheads (Fixed) 1,50,000 1,50,000 Fixed 7,50,000 22,50,000 30,00,000
Cost of Production 1,15,50,000 3,11,50,000 Variable @ `100 per unit 15,00,000 72,00,000 87,00,000
Fixed marketing expenses 2,50,000 2,50,000 Semi Variable (W.N. 2) 5,00,000 21,00,000 26,00,000
Variable distribution cost @ `30 per unit 9,00,000 30,00,000 Total Cost 50,00,000 2,23,50,000 2,73,50,000
Additional expenses: Add: Profit 20,00,000
Gifts @ `30 per unit - 30,00,000 Sales Value 2,93,50,000
Customers prizes - 1,00,000 Average Sales Price (2,93,50,000 ÷ 87,000) `337.36
Refreshment - 1,00,000
Sponsorship cost - 20,00,000 Working Notes:
Cost of Sales 1,27,00,000 3,96,00,000
Profit 38,00,000 1,04,00,000 1. Calculation of production per annum:
Sales @ `550/`500 per unit 1,65,00,000 5,00,00,000 50% for 3 months (1,20,000 units × 50% × 3/12) = 15,000 units
Advice: At 100% capacity utilization, profit of A Ltd Company is `1,04,00,000 whereas at 30% profit is only 80% for 9 months (1,20,000 units × 80% × 9/12) = 72,000 units
`38,00,000. Therefore, it is advisable to the company to work at 100% capacity and incur special marketing Total production for the year = 87,000 units
cost.
2. Calculation of Semi-variable cost:
BQ 15
Atharva Pharmacare Limited produced a uniform type of product and has a manufacturing capacity of 3,000 First Three Months (20,00,000 × 3/12) = 5,00,000
units per week of 48 hours. From the records of the company, the following data are available relating to Next Nine Months [(20,00,000 + 4,00,000 + 4,00,000) × 9/12] = 21,00,000
output and cost of 3 consecutive weeks
BQ 17
Units Factory A manufacturing Company has an installed capacity of 1,20,000 units per annum. The cost structure of the
Week Direct Materials Direct Wages
Manufactured Overheads product manufactured is as under:
1 1,200 `9,000 `3,600 `31,000
2 1,600 `12,000 `4,800 `33,000 (i) Variable cost per unit:
3 1,800 `13,500 `5,400 `34,000 Materials `8.00
Labour (subject to a minimum of `56,000 per month) `8.00
Assuming that the company charges a profit of 20% on selling price, find out the selling price per Overheads `3.00
unit when the weekly output is 2,000 units (ii) Fixed overheads `1,04,000 per annum.
[Sale Price `35.00 per unit]
(iii) Semi-variable overhead `48,000 per annum at 60% capacity, which increase by `6,000 per annum for
BQ 16 increase of every 10% of the capacity utilization or any part thereof, for the year as a whole.
Wonder Ltd. Has a capacity of 1,20,000 Units per annum as its optimum capacity. The production costs are as
The capacity utilization for the next year is estimated at 60% for two months, 75% for next six months
under: and 80% for remaining part of the year. Assume that there are no opening and closing stock.
Direct Material `90 per unit
Direct Labour `60 per unit If the company is planning to have a profit of 25% on the selling price calculate selling price per
Overheads: unit.
Fixed: `30,00,000 per annum
Variable: `100 per unit
Answer
Semi Variable overheads are `20,00,000 per annum up to 50% capacity and an extra amount of Statement Showing Selling Price Per unit
`4,00,000 for every 25% increase in capacity or part thereof. The production is made to order and not for Particulars First 2 Month Next 6 Month Next 4 Month Total
stocks. Ignore Administration, Selling and Distribution overheads. Number of Units (W.N. 1) 12,000 45,000 32,000 89,000
 COST SHEET & UNIT COSTING 4.15 COST SHEET & UNIT COSTING 4.16
Raw Materials @ `8 per unit 96,000 3,60,000 2,56,000 7,12,000 [Profit (total) `4,34,400; P `1,04,400, per unit `2.90; Q `3,30,000, per unit `3.3]
Direct Labour (W.N. 2) 1,12,000 3,60,000 2,56,000 7,28,000
Prime Cost 2,08,000 7,20,000 5,12,000 14,40,000 BQ 19
Factory Overheads: The Fancy Toys Company are manufacturer of two types of toys, x and y. The manufacturing costs for the
Fixed 17,333 52,000 34,667 1,04,000 year ended 31st March, 2023 were:
Variable @ `3 per unit 36,000 1,35,000 96,000 2,67,000
Semi Variable (W.N. 3) Direct material 2,00,000
8,000 30,000 20,000 58,000
Total Cost Direct wages 1,12,000
2,69,333 9,37,000 6,62,667 18,69,000
Production Overhead 48,000
Add: Profit @ 25% on sales or 33⅓ on cost 6,23,000
3,60,000
Sales Value 24,92,000
There was no work-in-progress at the beginning or at the end of the year.
Sales Price (24,92,000 ÷ 89,000) `28.00
It is ascertained that:
Working Notes:
(i) Direct materials in type x costs twice as much as direct material in type y.
1. Calculation of production per annum: (ii) The direct wages for type y were 60% of those for type x.
(iii) Production overhead was 30 paise, the same per toy of x and y types.
60% for 2 months (1,20,000 units × 60% × 2/12) = 12,000 units (iv) Administration overhead for each grade was 200% of direct labour (related to production).
75% for 6 months (1,20,000 units × 75% × 6/12) = 45,000 units (v) Selling cost was 25 paise per toy for each type of toy.
80% for 4 months (1,20,000 units × 80% × 4/12) = 32,000 units (vi) Production during the year was:
Total production for the year = 89,000 units (a) Type x 40,000 toys of which 36,000 were sold and
(b) Type y 1,20,000 toys of which 1,00,000 were sold.
2. Calculation of Labour cost:
(vii) Selling price were `7 per toy for type x and `5 per toy for type y.
First Two Months (12,000 × 8 or 56,000 × 2) whichever is higher = 1,12,000
Next Six Months (45,000 × 8 or 56,000 × 6) whichever is higher = 3,60,000 Prepare a statement showing the total cost and cost per toy for each type of toy and the profit made
Next Four Months (32,000 × 8 or 56,000 × 4) whichever is higher = 2,56,000 on each type of toy.
3. Calculation of Semi-variable cost:
Answer
First Two Months (48,000 × 2/12) = 8,000 The Fancy Toys Company
Next Six Months [(48,000 + 6,000 + 6,000) × 6/12] = 30,000 Cost Sheet for the year ending 31.03.2023
Next Four Months [(48,000 + 6,000 + 6,000) × 4/12] = 20,000 Toy ‘x’ Toy ‘y’
Particulars
Total Per unit Total Per unit
BQ 18 Direct Materials 80,000 2.00 1,20,000 1.00
Sreelekha Manufacturing Company manufactures two types of pens P & Q: The cost data for the year ended Direct Labour 40,000 1.00 72,000 0.60
30th June 2023 is as follows: Prime Cost 1,20,000 3.00 1,92,000 1.60
Direct Materials 4,00,000 Production overheads 12,000 0.30 36,000 0.30
Direct Wages 2,24,000 Factory Cost 1,32,000 3.30 2,28,000 1.90
Production Overheads 96,000 Administrative overheads @ 200% of wages 80,000 2.00 1,44,000 1.20
7,20,000 Cost of Production 2,12,000 5.30 3,72,000 3.10
It’s further ascertained that: Less: Closing stock (21,200) - (62,000) -
Cost of Goods Sold 1,90,800 5.30 3,10,000 3.10
(a) Direct Materials in type P cost twice as much direct Materials as in type Q. Selling Expenses 9,000 0.25 25,000 0.25
(b) Direct wages for type Q were 60% of those for type P. Cost of Sales 1,99,800 5.55 3,35,000 3.35
(c) Production overhead was of the same rate for both types. Profit 52,200 1.45 1,65,000 1.65
(d) Administration Overheads for each was 200% of direct labour (related to production). Sales 2,52,000 7.00 5,00,000 5.00
(e) Selling cost were 50 Paise per pen for both types.
(f) Production during the year: BQ 20
(i) Type P 40,000 pens and Nilgiri Air-conditioning Company produces refrigerators and sells each for `2,000 during a certain accounting
(ii) Type Q 1,20,000 pens.
year. The direct material the direct labour and overhead costs are 60 per cent, 20 per cent, and 20 per cent
(g) Sales during the year:
respectively of the cost of sales. In a subsequent accounting year, the direct material cost has increased by 15
(i) Type P 36,000 pens and per cent and direct labour cost by 17.5 per cent. Due to these increases in costs, there would be a 50 per cent
(ii) Type Q 1,00,000 pens. decrease in the amount of profit if the same selling price is to be maintained.
(h) Selling prices were `14 per pen for type P and `10 per pen for type Q. Compute the new selling price to enable the Company to maintain the same percentage of profit as
that earned during the preceding year.
Prepare statement showing per unit cost of production, total cost, profit and also total sales value
and profit separately for the two types of pen P and Q. [Old Cost of Sales `,1600, New Cost of Sales `1,800; New Sales Price `2,250]
 COST SHEET & UNIT COSTING 4.17 COST SHEET & UNIT COSTING 4.18
BQ 21 The expenses of the company are as follows:
A company presently sells equipment for `35,000. Increase in price of material and rate of labour cost are
Salesman salaries `200 lakhs
anticipated to the extent of 15% and 10% respectively in the coming year. Material cost represents 40% of
Rent `100 lakhs
cost of sales and labour cost 30% of cost of sales and remaining relate to overheads. If the existing selling price
Electricity `100 lakhs
is retained, despite the increase in labour and material prices, the company would face a 20% decrease in the
Advertising `200 lakhs
existing amount of profit on the equipment.
Documentation cost per insurance policy `100
You are required to arrive at a selling price so as to give the same percentage of profit on Documentation cost for each loan `200
increased cost of sales as before. Prepare a statement of profit/loss per unit, showing the new selling Direct sales expenses per car `5,000
price and cost per unit in support of your answer.
Indirect costs have to be allocated in the ratio of physical units sold.
Answer
Statement of Profit (Loss) Required:
Particulars Existing Anticipated (i) Make a cost sheet for each product allocating the direct and indirect cost and also showing the product
Materials (24,138 × .40) (24,138 × .46) wise profit and total profit.
9,655.20 11,103.48 (ii) Calculate the percentage of profit to revenue earned from each line of business.
Labour (24,138 × .30) (24,138 × .33)
7,241.40 7,965.54 Answer
Overheads (24,138 × .30) (24,138 × .30) (i) Cost Sheet
7,241.40 7,241.40 (` in lakhs)
Cost of Sales 24,138.00 26,310.42 Car Insurance Finance
Particular Total
Profit @ 45% cost of sales 10,862.00 11,839.68 (Amount) (Amount) (Amount)
Sales Price per unit A – Sales unit 10,000 6,000 8,000 -
35,000 38,150.10
B – Sales value 30,000 1,500 19,200 -
C – Revenue earning (in Rs.) 900 300 384 1,584
Working Notes:
D – Expenses:
Selling Price `35,000; Let us assume present total cost of sales as X
Direct expenses:
Existing situation Anticipated Situation Sales exp. Per car 500 - - 500
Direct Material 0.40X 0.46X Document cost per insurance policy - 6 - 6
Labour 0.30X 0.33X Document cost for each loan - - 16 16
Overhead 0.30X 0.30X Indirect Expenses:
Cost of Sales X 1.09X Salesman Salaries (10 : 6 : 8) 83.33 50 66.67 200
Profit `35,000-X `35,000-1.09X Rent (10 : 6 : 8) 41.67 25 33.33 100
From the above the following equation can be made: Electricity (10 : 6 : 8) 41.67 25 33.33 100
Advertisement (10 : 6 : 8) 83.33 50 66.67 200
(35,000-X) - (35,000-1.09X) = 20% of (35,000-X) or Total 750 156 216 1,122
X + 1.09X = 7,000-0.20X or Profit (C–D) 150 144 168 462
0.29X = 7,000 or
X (Present Total Cost) = `24,138 (ii) Percentage of profit to revenue from each of business:-

New selling price of the equipment should be (say) `38,150. 150

(a) Sale of car =  100 = 16.67%
900
BQ 22 144
(b) Sale of insurance =  100 = 48.00%
XYZ Auto Ltd. is in the business of selling cars. It also sells insurance and finance as part of its overall business 300
strategy. 168
(c) Sale of finance =  100 = 43.75%
The following information is available for the company: 384
Physical units Sales value
BQ 23
Sales of Cars 10,000 Cars `30,000 lakhs A Re-roller produced 400 metric tonnes of M.S. bars spending `36,00,000 towards materials and `6,20,000
Sales of Insurance 6,000 Policies `1,500 lakhs
towards rolling charges. Ten percent of the output was found to be defective, which had to be sold at 10% less
Sales of Finance 8,000 Loans `19,200 lakhs than the price for good production. If the sales realization should give the firm an overall profit of 12.5% on
The Revenue earnings from each line of business before expenses are as follow: cost.
Find the selling price per metric tonne of both the categories of bars. The scrap arising during the
Sale of Cars 3% of Sales value rolling process fetched a realization of `60,000.
Sale of Insurance 20% of Sales value
Sale of Finance 2% of Sales value Answer
 COST SHEET & UNIT COSTING 4.19 COST SHEET & UNIT COSTING 4.20

PAST YEAR QUESTIONS

(1) Calculation of sales value:
Material consumed `36,00,000
Less: Realisation of Scrap (`60,000)
Add: Rolling Charges `6,20,000
Total Cost `41,60,000 PYQ 1
Add: Overall Profit @ 12.5% on `41,60,000 `5,20,000 Following information relate to a manufacturing concern for the year ended 31st March, 2018:
Total sales realisation required `46,80,000
Raw Materials (opening) `2,28,000
(2) Calculation of equivalent good production: Raw Material (closing) `3,05,000
Total production = 400 metric tonnes Purchase of Raw Material `42,25,000
Good production (90% of 400) = 360 metric tonnes Freight Inwards `1,00,000
Defective production (10% of 400) = 40 metric tonnes Direct wages paid `12,56,000
Equivalent good production = 360 + 40 × 90% Direct wages outstanding at the end of the year `1,50,000
(10% less than the price of good production) Factory Overheads 20% prime cost
= 396 metric tonnes Work-in-progress (opening) `1,92,500
Work-in-progress (closing) `1,40,700
(3) Selling price per metric tonne of both the categories of bars: Administrative Overheads (related to production) `1,73,000
Distribution expenses `16 per unit
Sales value 46 ,80 ,000
Selling price per metric ton of good production = = Finished Stock (opening: 1,217 Units) `6,08,500
Equivalent good production 396 tonnes
Sale of scrap of material `8,000
= `11,818.18
Selling price per metric ton of defective units = `11,818.18 × 90% = `10,636.36 The firm produced 14,000 units of output during the year. The stock of finished goods at the end of the
year is valued at cost of production. The firm sold 14,153 units at a price of `618 per unit during the year.
BQ 24
Raw materials ‘AXE’ costing `150 per kg and ‘BXE’ costing `90 per kg are mixed in equal proportions for Prepare cost sheet of the firm.
making product ‘A’. The loss of material in processing works out to 25% of the product. The production [(10 Marks) May 2018]
expenses are allocated at 40% of direct material cost. The end product is priced with a margin of 20% over the
total cost. Answer
Material ‘BXE’ is not easily available and substitute raw material ‘CXE’ has been found for ‘BXE’ costing Cost Sheet
`75 per kg. It is required to keep the proportion of this substitute material in the mixture as low as possible Particulars Amount
and at the same time maintain the selling price of the end product at existing level and ensure the same Raw materials purchased 42,25,000
quantum of profit as at present. Add: Opening stock of raw materials 2,28,000
Add: Freight Inward 1,00,000
You are required to compute the ratio of the mix of the raw materials ‘AXE’ and ‘CXE’. Less: Sale of scrap of materials (8,000)
Less: Closing stock of raw materials (3,05,000)
Answer Materials consumed 42,40,000
Let we are going to produce quantity of product A be 1 kg Direct wages (12,56,000 + 1,50,000) 14,06,000
Now, Prime Cost 56,46,000
Required input of RM AXE & BXE = 1 kg + 25% = 1.25 kg Factory Overheads (20% of 56,46,000) 11,29,200
1 1
Add: Opening WIP 1,92,500
Cost of Raw materials AXE and BXE = 1.25 ×2 × `150 + 1.25 ×2 × `90 = `150 Less: Closing WIP (1,40,700)
Works Cost 68,27,000
Since, company wants to maintain same selling price with present profit or in other words cost will Administrative Overheads 1,73,000
remain same after introduction of material CXE: Cost of Production 70,00,000
Add: Opening Finished goods 6,08,500
Cost of material AXE and CXE = Cost of material AXE and BXE = `150 Less: Closing Finished Goods [(70,00,000 ÷ 14,000) × 1,064 units] (5,32,000)
Let weight of material CXE be X Cost of Goods Sold 70,76,500
Selling expenses (`16 × 14,153) 2,26,448
∴ Proportion of material AXE = 1.25 kg - X Cost of Sales 73,02,948
Cost of material AXE and CXE = `150 Profit (b.f.) 14,43,606
(1.25 – X) × `150 + X × `75 = `150 Sales (14,153 × 618) 87,46,554
`187.5 – 150X + 75X = `150
75X = 37.50
Working Note:
X = .5
∴ 1.25 – X = 1.25 -.5 = .75 Units in closing finished goods = Opening units + Units produced – Units sold
AXE : CXE = .75 : .5 = 3:2 = 1,217 + 14,000 – 14,153 = 1,064 units
 COST SHEET & UNIT COSTING 4.21 COST SHEET & UNIT COSTING 4.22
PYQ 2 Factory Cost 18,25,300
Following details are provided by M/s ZIA Private Limited for the quarter ended 30th September, 2018: Add: Closing WIP 1,90,000
Less: Opening WIP (1,70,800)
Direct Expenses `1,80,000 Gross Factory Cost 18,44,500
Direct Wages being 175% of Factory Overheads `2,57,250 Less: Factory Overheads (1,47,000)
Cost of Goods Sold `18,75,000 Prime Cost 16,97,500
Selling and Distribution Overheads `60,000 Less: Direct Expenses (1,80,000)
Sales `22,10,000 Less Direct Wages (2,57,250)
Administration Overheads are 10% of Factory Overheads Raw Material Consumed 12,60,250
Add: Closing Raw Materials 2,08,000
Stock details as per Stock register: Less Opening Raw Materials (2,45,600)
30.06.2018 30.09.2018 Raw Materials Purchased 12,22,650
Raw Materials `2,45,600 `2,08,000
Work-in-progress `1,70,800 `1,90,000 PYQ 3
Finished Goods `3,10,000 `2,75,000 M/s. Areeba Private Limited has a normal production capacity of 36,000 units of toys per annum. The
estimated costs of production are as under:
You are required to prepare a Cost Sheet showing:
(a) Direct material `40 per unit
(1) Raw Material Consumed (b) Direct labour `30 per unit (subject to a minimum of `48,000 p.m.)
(2) Prime Cost (c) Factory overheads:
(3) Factory Cost Fixed `3,60,000 per annum
(4) Cost of Goods Sold Variable `10 per unit
(5) Cost of Sales and Profit Semi variable `1,08,000 per annum up to 50% capacity and
[(10 Marks) Nov 2018] additional `46,800 for every 20% increase in
capacity or any part thereof.
Answer (d) Administrative overheads `5,18,400 per annum (fixed)
Cost Sheet (e) Selling overheads `8 per unit
Particulars Amount (f) Each unit of raw material yields scrap which is sold at the rate of `5 per unit.
Raw Materials Purchased (W.N.) 12,22,650 (g) In year 2019, the factory worked at 50% capacity for the first three month but it was expected that it
Add: Opening stock of Raw Materials 2,45,600 would work at 80% capacity for the remaining nine month.
Less: Closing stock of Raw Materials (2,08,000) (h) During the first three months, the selling price per unit was `145.
Materials Consumed 12,60,250
Direct Wages 2,57,250 You are required to:
Direct Expenses 1,80,000 (1) Prepare a cost sheet showing prime cost, works cost, cost of production and cost of sales.
Prime Cost 16,97,500 (2) Calculate the selling price per unit for remaining nine month to achieve the total annual profit of
Factory Overheads (2,57,250 ÷ 175%) 1,47,000 `8,76,600.
Add: Opening WIP 1,70,800 [(10 Marks) May 2019]
Less: Closing WIP (1,90,000)
Factory Cost 18,25,300 Answer
Administrative Overheads (10% of 1,47,000) 14,700 (1) Cost Sheet
Add: Opening Finished Goods 3,10,000 Particulars First 3 Months Next 9 Months Total
Less: Closing Finished Goods (2,75,000) Number of Units (W.N. 1) 4,500 21,600 26,100
Cost of Goods Sold 18,75,000 Raw Materials @ `40 per unit 1,80,000 8,64,000 10,44,000
Selling and Distribution Overheads 60,000 Less: Sale of Scrap of Material @ `5 per unit (22,500) (1,08,000) (1,30,500)
Cost of Sales 19,35,000 Raw Materials Consumed 1,57,500 7,56,000 9,13,500
Profit (b.f.) 2,75,000 Direct Labour (W.N. 2) 1,44,000 6,48,000 7,92,000
Sales 22,10,000 Prime Cost 3,01,500 14,04,000 17,05,500
Factory Overheads:
Working Note: Fixed 90,000 2,70,000 3,60,000
Statement Showing Material Purchased Variable @ `10 per unit 45,000 2,16,000 2,61,000
Particulars Amount Semi Variable (W.N. 3) 27,000 1,51,200 1,78,200
Cost of Goods Sold 18,75,000 Works Cost 4,63,500 20,41,200 25,04,700
Add: Closing Finished Goods 2,75,000 Administrative Overheads 1,29,600 3,88,800 5,18,400
Less: Opening Finished Goods (3,10,000) Cost of Production 5,93,100 24,30,000 30,23,100
Cost Of Production 18,40,000 Selling and Distribution OH @ `8 per unit 36,000 1,72,800 2,08,800
Less: Administrative Overheads (14,700) Cost of Sales 6,29,100 26,02,800 32,31,900
 COST SHEET & UNIT COSTING 4.23 COST SHEET & UNIT COSTING 4.24
(2) Statement Showing Selling Price Per Unit Answer
Particulars Amount (1) Statement Showing Value of Material Purchased
Sales Value for First Three Months (4,500 × 145) 6,52,500 Particulars Amount
Less: Cost of Sales for First Three Months (6,29,100) Cost of Goods Sold (91,000 units) 78,26,000
Profit for First Three Months 23,400 Add: Closing Finished Goods [(78,26,000 ÷ 91,000 units) × 5,000 units] 4,30,000
Less: Opening Finished Goods (Nil)
Required Profit from Next Nine Months (8,76,600 – 23,400) 8,53,200 Cost of Production 82,56,000
Cost of Sales for Next Nine Months 26,02,800 Add: Realizable Value from Sale of Defective Output (1,00,000 × 4% × `61) 2,44,000
Sales Value for Next Nine months 34,56,000 Less: Research and Development Cost for Process Improvement (2,50,000)
÷ Number of Units for Next Nine Months ÷ 21,600 Less: Quality Control Cost (2,00,000)
Selling Price Per Unit for Next Nine Months `160.00 Factory Cost 80,50,000
Add: Closing WIP 5,00,000
Working Notes:
Less: Opening WIP (2,00,000)
1. Calculation of production per annum: Gross Factory Cost 83,50,000
50% for 3 months (36,000 units × 50% × 3/12) = 4,500 units Less: Factory Overheads:
80% for 9 months (36,000 units × 80% × 9/12) = 21,600 units Consumable Stores and Spares of Factory (3,50,000)
Lease Rent of Production Asset (2,00,000)
Total production for the year = 26,100 units Prime Cost 78,00,000
Less Direct Employee Cost [(78,00,000 ÷ 1.5) × 0.5] (26,00,000)
2. Calculation of Labour cost: Raw Material Consumed 52,00,000
First Three Months (4,500 × 30 or 48,000 × 3) whichever is higher = 1,44,000 Add: Closing Raw Materials 2,92,000
Next Nine Months (21,600 × 30 or 48,000 × 9) whichever is higher = 6,48,000 Less Opening Raw Materials (2,42,000)
Raw Materials Purchased 52,50,000
3. Calculation of Semi-variable cost:
First Three Months (1,08,000 × 3/12) = 27,000 (2) Cost Sheet
Next Nine Months [(1,08,000 + 46,800 + 46,800) × 9/12] = 1,51,200 Particulars Amount
Raw Materials Purchased 52,50,000
Note: Add: Opening stock of Raw Materials 2,42,000
1. Administrative overheads is assumed to be related to production. Less: Closing stock of Raw Materials (2,92,000)
Materials Consumed 52,00,000
PYQ 4 Add: Direct Employee Cost 26,00,000
XYZ a manufacturing firm, has revealed following information for September, 2019 : Prime Cost 78,00,000
1st September 30th September Add: Factory Overheads:
Raw Materials `2,42,000 `2,92,000 Consumable Stores and Spares of Factory 3,50,000
Works-in-progress `2,00,000 `5,00,000 Lease Rent of Production Asset 2,00,000
Gross Factory Cost 83,50,000
The firm incurred following expenses for a targeted production of 1,00,000 units during the month: Add: Opening WIP 2,00,000
Consumable stores and spares of factory `3,50,000 Less: Closing WIP (5,00,000)
Research and development cost for process improvements `2,50,000 Factory Cost 80,50,000
Quality control cost `2,00,000 Add: Quality Control Cost 2,00,000
Packing cost (secondary) per unit of goods sold `2.00 Add: Research and Development Cost for Process Improvement 2,50,000
Lease rent of production asset `2,00,000 Less: Realizable Value from Sale of Defective Output (2,44,000)
Administrative expenses (general) `2,24,000 Cost of Production 82,56,000
Add: Opening Finished Goods Nil
Selling and distribution expenses `4,13,000
Less: Closing Finished Goods (4,30,000)
Finished goods (opening) Nil
Cost of Goods Sold 78,26,000
Finished goods (closing) 5,000 units
Add: Administrative Expenses (General) 2,24,000
Defective output which is 4% of targeted production, realizes `61 per unit. Closing stock is valued at Add: Secondary Packing Cost (91,000 units × `2) 1,82,000
cost of production (excluding administrative expenses). Cost of goods sold, excluding administrative expenses Add: Selling and Distribution Expenses 4,13,000
amounts to `78,26,000. Direct employees cost is ½ of the cost of material consumed. Selling price of the output Cost of Sales 86,45,000
is `110 per unit. Profit (b.f.) 13,65,000
Sales (91,000 units × `110) 1,00,10,000
You are required to:
(1) Calculate the value of material purchased
(2) Prepare cost sheet showing the profit earned by the firm. Working Note:
[(10 Marks) Nov 2019] Calculation of number of units produced and sold:
 COST SHEET & UNIT COSTING 4.25 COST SHEET & UNIT COSTING 4.26
Target Production = 1,00,000 units PYQ 6
The following data are available from the books and records of Q Ltd. for the month of April 2020:
Good Output = Target Output – Defective Output
= 1,00,000 units – 4% of 1,00,000 = 96,000 units Direct Labour Cost = `1,20,000 (120% of Factory Overheads)
Cost of Sales = `4,00,000
Units Sold = Good Output - Units in Closing Finished Goods
Sales = `5,00,000
= 96,000 units – 5,000 units = 91,000 units
Accounts show the following figures:
PYQ 5
1st April 2020 30th April 2020
X Ltd. manufactures two types of pens ‘Super Pen’ and ‘Normal Pen’. The cost data for the year ended 30 th
September, 2019 is as follows: Raw materials 20,000 25,000
Works in progress 20,000 30,000
Direct material 8,00,000
Finished Goods 50,000 60,000
Direct wages 4,48,000
Production Overhead 1,92,000 Other details:
14,40,000
Selling expenses 22,000
It is further ascertained that: General and administration expenses 18,000
(i) Direct materials cost in Super Pen was twice as much as direct material in Normal Pen.
You are required to prepare a cost sheet for the month of April 2020 showing:
(ii) The direct wages for Normal Pen were 60% of those for Super Pen.
(iii) Production overhead was per unit was same rate for both the types. (1) Prime Cost
(iv) Administration overhead was 200% of direct labour for each. (2) Works Cost
(v) Selling cost was `1 per Super Pen. (3) Cost of Production
(vi) Production and sales during the year were as follows: (4) Cost of Goods Sold
(5) Cost of Sales and Profit earned.
Production Sales [(10 Marks) Jan 2021]
No. of units No. of units
Super Pen 40,000 Super Pen 36,000 Answer
Normal Pen 1,20,000 Cost Sheet for the Month of April 2020
(vii) Selling price was `30 per unit for Super Pen. Particulars Amount
Raw Materials Purchased (W.N.) 1,65,000
Prepare a Cost Sheet for ‘Super Pen’ showing: Add: Opening stock of Raw Materials 20,000
(i) Cost per unit and Total Cost Less: Closing stock of Raw Materials (25,000)
(ii) Profit per unit and Total Profit Materials Consumed 1,60,000
[(10 Marks) Nov 2020] Add: Direct Wages 1,20,000
Prime Cost 2,80,000
Answer Add: Factory Overheads (1,20,000 ÷ 120%) 1,00,000
X Ltd. Add: Opening WIP 20,000
Cost Sheet for the year ending 30.09.2019 Less: Closing WIP (30,000)
Works Cost/Cost of Production 3,70,000
Super Pen
Particulars Add: Opening Finished Goods 50,000
Total Per unit
Less: Closing Finished Goods (60,000)
Direct Materials [(8,00,000 ÷ 40,000 × 2 + 1,20,000 × 1) × 40,000 × 2] 3,20,000 8.00 Cost of Goods Sold 3,60,000
Direct Labour [(4,48,000 ÷ 40,000 × 1 + 1,20,000 × .6) × 40,000 × 1] 1,60,000 4.00 Add: General Administrative Expenses 18,000
Prime Cost 4,80,000 12.00 Add: Selling Expenses 22,000
Production OH [(1,92,000 ÷ 40,000 × 1 + 1,20,000 × 1) × 40,000 × 1] 48,000 1.20 Cost of Sales 4,00,000
Factory Cost 5,28,000 13.20 Profit (b.f.) 1,00,000
Administrative overheads @ 200% of wages 3,20,000 8.00 Sales 5,00,000
Cost of Production 8,48,000 21.20
Less: Closing stock [(8,48,000 ÷ 40,000) × 4,000] (84,800) - Working Note: Statement Showing Material Purchased
Cost of Goods Sold 7,63,200 21.20
Selling Expenses (36,000 × 1) 36,000 1.00 Particulars Amount
Cost of Sales 7,99,200 22.20 Cost of Sales 4,00,000
Profit (b.f.) 2,80,800 7.80 Less: Selling Expenses 22,000
Sales (36,000 × 30) 10,80,000 30.00 Less: General Administrative Expenses 18,000
Cost of Goods Sold 3,60,00
Note: Administrative overhead is specific to the product as it is directly related to direct labour as mentioned Add: Closing Finished Goods 60,000
in the question and hence to be considered in cost of production only. Less: Opening Finished Goods (50,000)
 COST SHEET & UNIT COSTING 4.27 COST SHEET & UNIT COSTING 4.28
Works Cost 3,70,000 Raw materials purchased 2,00,000
Add: Closing WIP 30,000 Add: Carriage inward 20,000
Less: Opening WIP (20,000) Add: Opening stock of raw materials 80,000
Gross Works Cost 3,80,000 Less: Closing stock of raw materials (30,000)
Less: Factory Overheads (1,00,000) Less: Return of raw material (40,000)
Prime Cost 2,80,000 2,30,000
Less Direct Wages (1,20,000) Direct Wages 1,20,000
Raw Material Consumed 1,60,000 Direct Expenses:
Add: Closing Raw Materials 25,000 Cost of special drawing 30,000
Less Opening Raw Materials (20,000) Hire charges paid for plant 24,000
Raw Materials Purchased 1,65,000 Prime Cost 4,04,000
Carriage on return 6,000
PYQ 7 Add: Factory Overheads @ 20% of 4,04,000 80,800
The following data relates to manufacturing of a standard product during the month of March, 2021: Add: Stores overheads @ 10% of 2,30,000 23,000
Add: Cost of rectification of defective product (720 units × 20% of `15) 2,160
Particulars Amount (in `) Gross Factory Cost 5,15,960
Stock of Raw materials as on 01.03.2021 80,000 Add: Opening value of WIP 50,000
Work in Progress as on 01.03.2021 50,000 Less: Closing value of WIP (24,000)
Purchase of Raw material 2,00,000 Factory Cost 5,41,960
Carriage Inwards 20,000 Less: Sales of scrap (5,000)
Direct Wages 1,20,000 Cost of Production 5,36,960
Cost of special drawing 30,000 Administrative Overheads:
Hire charges paid for plant 24,000 Legal charges 2,500
Return of Raw material 40,000 Salary to office staff 25,000
Carriage on return 6,000 Maintenance of office building 2,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500 Selling and Distribution Overheads:
Salary to office staff 25,000 Expenses for participation in Industrial exhibition 8,000
Maintenance of office building 2,000 Warehousing charges 1,500
Depreciation of Delivery van 6,000 Depreciation on Delivery van 6,000
Warehousing charges 1,500 Cost of Sales 5,81,960
Stock of Raw material as on 31.03.2021 30,000
Stock of Work in Progress as on 31.03.2021 24,000 Working note:
Additional information: Calculation finished goods = 8,000 units – 10% rejected = 7,200 units
(a) Stores overheads on materials are 10% of material consumed Defective units = 10% of 7,200 units = 720 units
(b) Factory overheads are 20% of the Prime cost. Wages cost per unit = 1,20,000 ÷ 8,000 = 15 per unit
(c) 10% of the output was rejected and sum of 5,000 was realised on the sale of scrap.
(d) 10% of finished product was found to be defective and the defective products were rectified at an Note: Alternatively hire charges for plant can be treated as indirect expenses and solution will be change
additional expenditure which is equivalent to 20% of proportionate direct wages. accordingly.
(e) The total output was 8,000 units during the month.
PYQ 8
You are required to prepare a Cost Sheet for the above period showing the: G Ltd. manufactures leather bags for office and school purposes. The following information is related with the
(1) Cost of Raw material consumed production of leather bags for the month of September 2021.
(2) Prime Cost
(3) Work Cost (i) Leather sheets and cotton cloths are the main inputs, and the estimated requirement per bag is two
(4) Cost of Production meters of leather sheets and one meter of cotton cloth. 2,000 meter of leather sheets and 1,000 meter of
(5) Cost of Sales cotton cloths are purchased at `3,20,000 and `15,000 respectively. Freight paid on purchases is `8,500.
[(10 Marks) July 2021] (ii) Stitching and finishing need 2,000 man hours at `80 per hour.
(iii) Other direct cost of `10 per labour hour is incurred.
Answer
Cost Sheet (iv) G has 4 machines at a total cost of `22,00,000. Machine has a life of 10 years with a scrape value of 10%
(for the Month ended at 31st March, 2021) of the original cost. Depreciation is charged on straight line method.
Particulars Amount (`) (v) The monthly cost of administrative and sales office staffs are `45,000 and `72,000 respectively. G Ltd.
Material Consumed: pays `1,20,000 per month as rent for a 2400 sq. feet factory premises. The administrative and sales office
occupies 240 sq. feet and 200 sq. feet respectively of factory space.
 COST SHEET & UNIT COSTING 4.29 COST SHEET & UNIT COSTING 4.30
(vi) Freight paid on delivery of finished bags is `18,000. The following data are available from the books and records of A Ltd. for the month of April 2022:
(vii) During the month 35 kg. of scrap (cuttings of leather and cotton) are sold at `150 per kg. Particulars Amount
(viii) There is no opening and closing stocks for input materials. There is 100 bags in stock at the end of the Stock of raw materials on 1st April 2022 10,000
month. Raw materials purchased 2,80,000
Manufacturing wages 70,000
You are required to prepare a cost sheet in respect of above for the month of September 2021 showing: Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
1. Cost of Raw Material Consumed
Lease Rent of Production Assets 10,000
2. Prime Cost Administrative Overheads (Production) 15,000
3. Works/Factory Cost Expenses paid for pollution control and engineering & maintenance 1,000
4. Cost of Production Stock of raw materials on 30th April 2022 40,000
5. Cost of Goods Sold Primary packing cost 8,000
6. Cost of Sales Research & development cost (Process related) 5,000
[(10 Marks) Dec 2021] Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300
Answer
Cost Sheet for the month of September 2021 Stock of finished goods as on 1st April 2022 was 200 units having a total cost of `28,000. The entire opening
stock of finished goods has been sold during the month.
Particulars Total Cost Cost Per Unit
Production during the month of April, 2022 was 3,000 units. Closing stock of finished goods as on 30th
Direct materials consumed:
April, 2022 was 400 units.
Leather sheets 3,20,000 320.00
Cotton cloths 15,000 15.00
You are required to:
Add: Freight paid on purchase 8,500 8.50
Cost of Raw Material Consumed 3,43,500 343.50 (1) Prepare a Cost Sheet for the above period showing the:
Direct wages (`80 × 2,000 hours) 1,60,000 160.00 (a) Cost of Raw Material consumed
Direct expenses (`10 × 2,000 hours) 20,000 20.00 (b) Prime Cost
Prime Cost 5,23,500 523.50 (c) Factory Cost
Factory overheads: (d) Cost of Production
Depreciation on machines {(`22,00,000×90%)÷120 months} 16,500 16.50 (e) Cost of goods sold
Apportion cost of factory rent {(1,20,000 ÷ 2,400) × 1,960} 98,000 98.00 (f) Cost of Sales
Works Cost 6,38,000 638.00
Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25) (2) Calculate selling price per unit, if sale is made at a profit of 20% on sales.
Cost of Production 6,32,750 632.75 [(10 Marks) May 2022]
Less: Closing stock of bags (100 bags × `632.75) (63,275) -
Cost of Goods Sold 5,69,475 632.75 Answer
Administrative Overheads: (1) Cost Sheet
Staff salary 45,000 50.00 Particulars Amount
Apportioned rent {(1,20,000 ÷ 2,400) × 240} 12,000 13.33 Raw Materials Purchased 2,80,000
Add: Opening stock of Raw Materials 10,000
Selling and Distribution Overheads: Less: Closing stock of Raw Materials (40,000)
Staff salary 72,000 80.00 Materials Consumed 2,50,000
Apportioned rent {(1,20,000 ÷ 2,400) × 200} 10,000 11.11 Add: Direct Wages 70,000
Freight paid on delivery of bags 18,000 20.00 Prime Cost 3,20,000
Cost of Sales 7,26,475 807.19 Add: Factory Overheads:
Working Note: Depreciation on plant 15,000
Lease Rent of Production Assets 10,000
1. Factory space = Total space – space occupied by Administrative and Sales office Expenses paid for pollution control and engineering & maintenance 1,000
= 2,400 - 240 – 200 = 1,960 sq. feet Factory Cost 3,46,000
Add: Expenses paid for quality control check activities 4,000
2. Units Produced = Main input raw material used ÷ Main material consumption for 1 unit output Add: Research and Development Cost 5,000
= 2,000 meter leather ÷ 2 meter = 1,000 bags Add: Administration Overheads (Production) 15,000
Add: Primary Packing Cost 8,000
3. Units sold = Units produced – Closing units Cost of Production 3,78,000
= 1,000 – 100 = 900 bags Add: Opening Finished Goods 28,000
Less: Closing Finished Goods [(3,78,000 ÷ 3,000) × 400] (50,400)
PYQ 9
 COST SHEET & UNIT COSTING 4.31 COST SHEET & UNIT COSTING 4.32
Cost of Goods Sold 3,55,600 Note: Administrative overhead is specific to the product as it is directly related to production overheads as
Add: Administrative Expenses 1,300 mentioned in the question and hence to be considered in cost of production only.
Add: Packing cost for redistribution of finished goods 1,500
Cost of Sales 3,58,400 PYQ 11
The following information is available from SN Manufacturing Limited’s books for the month of April 2023.
(2) Selling Price per unit:
April 1 April 30
Cost per unit = 3,58,400 ÷ 2,800 units (200 + 3,000 - 400) = 128 Opening and closing inventories data:
Selling price per unit = 128 ÷ 80% = 160 Stock of finished goods 2,500 units ?
Stock of raw materials `42,500 `38,600
PYQ 10 Work-in-progress `42,500 `42,800
PNME Ltd. manufactures two types of masks- ‘Disposable Masks’ and ‘Cloth Masks’. The cost data for the year Other data are:
ended 31st March, 2022 is as follows: Raw materials purchased `6,95,000
Carriage inward `36,200
Direct Materials `12,50,000 Direct wages paid `3,22,800
Direct Wages `7,00,000 Royalty paid for production `35,800
Production Overheads `4,00,000 Purchase of special designs, moulds and patterns (estimated life `1,53,600
Total `23,50,000 12 production cycles)
Power, fuel and haulage (factory) `70,600
It is further ascertained that: Research and development costs for improving the production `31,680
 Direct materials cost per unit of Cloth Mask was twice as much of Direct materials cost per unit of process (amortized)
Disposable Mask. Primary packing cost (necessary to maintain quality) `6,920
Administrative overhead `46,765
 Direct wages per unit for Disposable Mask were 60% of those for Cloth Mask.
Salary and wages for supervisor and foremen `28,000
 Production overhead per unit was at same rate for both the types of the masks.
 Administration overhead was 50% of Production overhead for each type of mask.
 Selling cost was₹ 2 per Cloth Mask. Other Information:
 Selling Price was ₹ 35 per unit Cloth Mask.  Opening stock of finished goods is to be valued at `8.05 per unit.
 No. of units of Cloth Masks sold - 45,000  During the month of April, 1,52,000 units were produced and 1,52,600 units were sold. The closing stock
of finished goods is to be valued at the relevant month’s cost of production. The company follows the
 No. of units of Production of
FIFO method.
Cloth Masks : 50,000
Disposable Masks : 1,50,000  Selling and distribution expenses are to be charged at 20 paisa per unit.
 Assume that one production cycle completed in one month.
You are required to prepare a cost sheet for Cloth Masks showing:
Required:
(a) Cost per unit and Total cost, (1) Prepare a cost sheet for the month ended on April 30, 2023, showing the various elements of cost (raw
(b) Profit per unit and Total Profit. material consumed, prime cost, factory cost, cost of production, cost of goods sold, and cost sales.)
[(10 Marks) Nov 2022] (2) Calculate the selling price per unit if profit is charged at 20 percent on sales.
[(10 Marks) May 2023]
Answer
PNME Ltd. Answer
Cost Sheet for the year ending 31.03.2022 (1) Cost Sheet of SN Manufacturing Ltd.
Cloth Mask
Particulars Particulars Amount (`) Amount (`)
Total Per unit
Direct Materials [(12,50,000 ÷ 50,000 × 2 + 1,50,000 × 1) × 50,000 × 2] 5,00,000 10.00 Raw material consumed:
Direct Labour [(7,00,000 ÷ 50,000 × 1 + 1,50,000 × .6) × 50,000 × 1] 2,50,000 5.00 Raw materials purchased 6,95,000
Prime Cost Add: Carriage inward 36,200
7,50,000 15.00
Production OH [(4,00,000 ÷ 50,000 × 1 + 1,50,000 × 1) × 50,000 × 1] 1,00,000 2.00 Add: Opening stock of raw materials 42,500
Factory Cost Less: Closing stock of raw materials (38,600) 7,35,100
8,50,000 17.00
Administrative overheads @ 50% of production overheads Direct wages 3,22,800
50,000 1.00
Cost of Production Direct expenses:
9,00,000 18.00
Less: Closing stock [(9,00,000 ÷ 50,000) × 5,000] Royalty paid for production 35,800
(90,000) -
Cost of Goods Sold Special designs, moulds and patterns (1,53,600 × 1/12) 12,800
8,10,000 18.00
Selling Expenses (45,000 × 2) Power, fuel and haulage 70,600 1,19,200
90,000 2.00
Cost of Sales Prime Cost 11,77,100
9,00,000 20.00
Profit (b.f.) Factory overheads:
6,75,000 15.00 Salary and wages for supervisor and foremen
Sales (45,000 × 35) 28,000
15,75,000 35.00 Add: Opening value of WIP 42,500
 COST SHEET & UNIT COSTING 4.33 COST SHEET & UNIT COSTING 4.34

SUGGESTED REVISION
Less: Closing value of WIP (42,800)
Factory Cost 12,04,800
Research & development cost for improvement in production process 31,680
Primary packing cost 6,920 38,600
Cost of Production 12,43,400 Page No. of 3rd, 4th & Revision
Ques. Observations or KEY Points 1st & 2nd
Add: Opening stock of finished goods (2,500 units × 8.05) 20,125 Practical 5th during
No. (Note down during revisions) Revision
Less: Closing stock of finished goods (12,43,400 ÷ 1,52,000) × *1,900 (15,542) Register Revision Exams
Cost of Goods Sold 12,47,983 BQ (Book Questions covering Study Module of ICAI, PM, RTP’s, MTP’s and Important Questions)
Administrative Overheads 46,765 1 Y - -
Selling and Distribution Overheads (1,52,600 × 0.20) 30,520 2 Y - -
Cost of Sales 13,25,268 3 Y Y -
4 Y Y Y
*Closing Stock Units = Opening Units + Produced Units – Units Sold 5 Y Y -
= 2,500 + 1,52,000 – 1,52,600 = 1,900 units 6 Y Y -
7 Y Y Y
(2) Sale Price Per unit: 8 Y Y Y
Cost per unit = 13,25,268 ÷ 1,52,600 = 8.6846 9 Y Y Y
Sale Price per unit = 8.6846 ÷ 80% = `10.86 10 Y Y -
11 Y Y Y
12 Y - -
13 Y Y Y
14 Y Y Y
15 Y Y -
16 Y Y Y
17 Y Y Y
18 Y Y Y
19 Y - -
20 Y Y -
21 Y - -
22 Y Y -
23 Y Y Y
24 Y Y Y
PYQ (Past Year Questions)
1 Y Y Y
2 Y - -
3 Y Y -
4 Y Y Y
5 Y Y -
6 Y - -
7 Y Y Y
8 Y Y -
9 Y Y -
10 Y - -
11 Y Y -
 JOB AND BATCH COSTING 5.1

JOB COSTING
BQ 1

CHAPTER - 5
From the following particulars, prepare the Cost Sheet for Job No.75 and find out the value of the job:

Materials issued for the job `6,000

Productive Wages `4,600
Direct Expenses `500

Provide 60% on productive wages for works on cost (works overheads) and 12 ½% on works cost for

JOB AND BATCH COSTING office on cost (office overheads). Profit to be realised on the selling price 15%.

Answer
Cost Sheet for Job No.75
Particulars Amount
Materials 6,000.00
LEARNING OUTCOMES Productive Wages 4,600.00
Direct Expenses 500.00
Prime Cost 11,100.00
When you have finished studying this chapter, you should be able to: Works on cost (60% of productive wages) 2,760.00
Works Cost 13,860.00
 Understand Job Costing methods and Batch Costing methods. Office on Cost (12½ % on works cost) 1,732.50
Cost of Production 15,592.50
 Understand the difference between job costing and batch costing. Profit (15% on sales) 2,751.62
 Understand the concept of cost per job and cost per batch. Sales (15,592.50 ÷ 85%) 18,344.12

 Understand the method of computation of sales price or quotation BQ 2

per job and per batch and per unit under the batch. A company has been asked to quote for a job. The company aims to make a net profit of 30% on sales. The
estimated cost for the job is as follows:
 Understand the concept of Economic Batch Quantity.
Direct materials 10kg @ `10 per kg
Direct labour 20 hours @ `5 per hour
Variable production overheads are recovered at the rate of `2 per labour hour. Fixed production overheads
for the company are budgeted to be `1,00,000 each year and are recovered on the basis of labour hours. There
are 10,000 budgeted labour hours each year. Other cost in relation to selling, distribution and administration
are recovered at the rate of `50 per job.

Determine quote for the job by the company.

Answer
Budgeted Job Cost Sheet
Particulars Amount
Direct Materials (10 kg × `10) 100
Direct Labour (20 hours × `5) 100
Prime Cost 200
Production Overheads:
Variable overheads (20 hours × `2) 40
Fixed Overheads [(1,00,000 ÷ 10,000) × 20] 200
Factory Cost 440
Selling, Distribution and Administration Overheads 50
Cost of Production 490
Profit (30% on sales) 210
Quoted Price for Job (490 ÷ 70%) 700
 JOB AND BATCH COSTING 5.2 JOB AND BATCH COSTING 5.3
BQ 3 Prime cost 16,50,000
Hancock receives an order to supply his local farmer with a delivery of cattle feed. The job passes through Factory overhead 4,50,000
three departments and collecting costs as follows: Works cost/ Cost of production 21,00,000
Administration overhead 4,20,000
Mixing Department 100 kg of Owen at `2 per kg Selling and distribution overhead 5,25,000
50 kg of Howe at `1 per kg Cost of sales 30,45,000
20 kg of Benn at `0.50 per kg Profit 6,09,000
10 hours of labour at `4 per hour Sales value 36,54,000
Boiling Department 20 hours of labour at `3 per hour
Working Notes:
60 hours of the boiling machine
1. % of Factory OH to direct wages = (4,50,000/7,50,000) × 100 = 60%
Cooling and skimming Department 50 hours of labour at `2 per hour
2. % of Administration OH to works cost = (4,20,000/21,00,000) × 100 = 20%
Hire of giant thermometer and scoop `200
3. % of Selling & distribution OH to works cost = (5,25,000/21,00,000) × 100 = 25%
The job does not disrupt normal activity levels, which are as follows:
4. % of Profit to sales = (6,09,000/36,54,000) × 100 = 16.67%
Department Labour Hours Machine Hours Budgeted OH
Mixing 200 - `1,600 (b) Cost Sheet for the job order in 2023
Boiling 250 700 `9,100 Particulars Amount
Cooling 550 - `4,950 Direct material 12,00,000
Direct wages 7,50,000
Basis of absorption: Prime cost 19,50,000
Mixing Department : Labour hours Factory overhead (60% on direct wages) 4,50,000
Boiling Department : Machine hours Works cost/ Cost of production 24,00,000
Cooling Department : Labour hours Administration overhead (20% on works cost) 4,80,000
Selling and distribution overhead (25% on works cost + 15%) 6,90,000
Selling and administrative expenses are 30% of factory cost. Cost of sales 35,70,000
Profit (16.6.7% on sales or 20% on cost of sales) 7,14,000
You are required to prepare a statement showing the profit or loss on the job, if the price agreed is Sales value (35,70,000 ÷ 83.33%) 42,84,000
`2,500.
[Loss `61]
BQ 5
A factory used job costing system. The following data are obtained from its books for the year ended 31st
BQ 4 December 2022:
A factory used job costing. The following cost data is obtained from its books for the year ended 31st December Direct materials 18,00,000
2022: Direct wages 15,00,000
Direct materials 9,00,000 Selling & distribution overheads 10,50,000
Direct wages 7,50,000 Administrative overheads 8,40,000
Selling & distribution overheads 5,25,000 Factory overheads 9,00,000
Administrative overheads 4,20,000 Profit 12,18,000
Factory overheads 4,50,000
Profit 6,09,000 (a) Prepare a job sheet indicating the Prime cost, Work cost, Cost of production, Cost of sales & the Sales
value.
(a) Prepare a job sheet indicating the Prime cost, Work cost, Cost of production, Cost of sales & the Sales (b) In 2023, the factory receives an order for a number of jobs. It is estimated that direct materials required
value. will be `4,80,000 and direct labour will cost `3,00,000. Determine what should be the price for the job
(b) In 2023, the factory receives an order for a number of jobs. It is estimated that direct materials required if the factory intends to earn the same rate of profit on sales assuming that the selling and distribution
will be `12,00,000 and direct labour will cost `7,50,000. What should be the price for the jobs if the overheads have gone by up by 15%? The factory recovers factory overheads as a percentage of direct
factory intends to earn the same rate of profit on sales assuming that the selling and distribution wages paid, whereas other overheads as a percentage of cost of production, based on cost rates
overheads have gone by up by 15%? The factory recovers factory overheads as a percentage of direct prevailing in the previous year.
wages and administration & selling and distribution overheads as a percentage of works cost, based on
cost rates prevailing in the previous year.
Answer
(a) Cost sheet for the year ending on 31.12.2022
Answer
(a) Cost sheet for the year ending on 31.12.2022 Particulars Amount
Direct material 18,00,000
Particulars Amount Direct wages 15,00,000
Direct material 9,00,000 Prime cost 33,00,000
Direct wages 7,50,000 Factory overhead 9,00,000
 JOB AND BATCH COSTING 5.4 JOB AND BATCH COSTING 5.5
Works cost/ Cost of production 42,00,000 It is noted that average hourly rates for the three departments, X, Y and Z are similar.
Administration overhead 8,40,000
Selling and distribution overhead 10,50,000 You are required to draw up a job cost sheet showing revised cost using 2022 actual figures as
Cost of sales 60,90,000 basis and add 20% to total cost to determine selling price.
Profit 12,18,000 [Selling Price `189.76]
Sales value 73,08,000
BQ 7
Working Notes: In a factory following the job costing method, an abstract from the work in process as at 30th September was
1. % of Factory OH to direct wages = (9,00,000/15,00,000) × 100 = 60% prepared as under:
2. % of Administration OH to Cost of production = (8,40,000/42,00,000) × 100 = 20% Factory OH
Job no. Materials cost Labour hours Labour cost
Applied
3. % of Selling & dist. OH to Cost of production = (10,50,000/42,00,000) × 100 = 25% 115 1,325 400 800 640
4. % of Profit to sales = (12,18,000/73,08,000) × 100 = 16.67% 118 810 250 500 400
120 765 300 475 380
(b) Cost Sheet for the job order in 2023 Total 2,900 950 1,775 1,420
Particulars Amount
Materials used in October were as follows:
Direct material 4,80,000
Direct wages 3,00,000 Material Requisition Job No. Cost
Prime cost 7,80,000 54 118 300
Factory overhead (60% on direct wages) 1,80,000 55 118 425
Works cost/ Cost of production 9,60,000 56 118 515
Administration overhead (20% on Cost of production) 1,92,000 57 120 665
Selling and distribution overhead (25% on Cost of production + 15%) 2,76,000 58 121 910
Cost of sales 14,28,000 59 124 720
Profit (16.6.7% on sales or 20% on cost of sales) 2,85,600 3,535
Sales value (14,28,000 ÷ 83.33%) 17,13,600
A summary of Labour Hours deployed during October is as under:
BQ 6
A shop floor supervisor of a small factory presented the following cost for Job No. 303, to determine the selling Job No. Numbers of hours
price: Shop A Shop B
Particulars Per Unit 115 25 25
Materials 70 118 90 30
Direct wages 18 hours @ 2.50 per hour 45 120 75 10
(Department X 8 hours; department Y 6 hours and department Z 4 hours) 121 65 -
Chargeable expenses (stores) 5 124 20 10
120 Indirect labour:
Overheads @ 33⅓% 40 Waiting for Material 120 10
Machine breakdown 10 5
Cost 160
Idle time 5 6
Overtime Premium 6 5
Analysis of the profit and loss account for the year 2022:
Particulars Amount Particulars Amount A shop credit slip was issued in October that material issued under requisition no. 54 was returned back to
Materials 1,50,000 Sales net of returns 2,50,000 stores as being not suitable. A material transfer note issued in October indicated that material issued under
Direct wages: requisition no. 55 for Job 118 was directed to Job 124.
Department X 10,000
Department Y 12,000 The hourly rate in Shop A per labour is `3 per hour while at Shop B it is `2 per hour. The factory overhead is
Department Z 8,000 30,000 applied at the same rate as in September. Jobs 115, 118 and 120 were completed in October.
Stores expenses 4,000
Overheads: It is the practice of the management to put a 10% on the factory cost to cover administration and selling
Department X 5,000 overheads and invoice the job to the customer on a total cost plus 20% basis. What would be the invoice price
Department Y 9,000 of these three jobs?
Department Z 2,000 16,000
Selling expenses 20,000 You are asked to compute the factory cost of the completed jobs.
Gross profit 30,000
2,50,000 2,50,000 [Job 115: `3,946.80; Job 118: `3,721.08; Job 120: `3,598.32]
 JOB AND BATCH COSTING 5.6 JOB AND BATCH COSTING 5.7
BQ 8 Answer
A Ltd. is an engineering manufacturing company producing job orders on the basis of specifications provided Statement Showing Works Cost of Job No. 198
by the customers. During the last month it has completed three jobs namely A, B and C. The following are the Particulars Amount
items of expenditure which are included in addition to direct material and direct employee cost: Material 600
(a) Office and administration cost: `6,00,000 Direct labour 400
(b) Product blueprint cost for job A: `2,80,000 Prime cost 1,000
(c) Hire charges paid for machinery used in job work B: `80,000 Factory overhead:
(d) Salary to office attendants: `1,00,000 Machine No. 215 : 40 hours @ `3.50 140
(e) One time license fee paid for software used to make computerized graphics for job C: `1,00,000 Machine No. 160 : 30 hours @ `4.00 120
(f) Salary paid to marketing manager: `2,40,000 240 hours of welders @ `0.20 per hour 48
General 10% of wages 40
Calculate direct expenses related to each Job. Works Cost 1,348

Answer Woking notes:

Calculation of Direct Expenses 1. 6 welders × 5 days × 8 hours = 240 hours
Particulars Job A (`) Job B (`) Job C (`) 2. Unapportioned expenses (General overheads) `2,000 which works out at 10% of direct wages.
Product blueprint cost 2,80,000 - -
Hire charges paid for machinery - 80,000 - BQ 11
License fee paid for software - - 1,00,000 AP Ltd. received a job order for supply and fitting of plumbing materials. Following are the details related with
Total Direct Expenses 2,80,000 80,000 1,00,000 the job work:
Direct Materials:
BQ 9 AP Ltd. uses a weighted average method for the pricing of materials issues.
Mayur Engineering engaged in job work, has completed all jobs in hand on 30th December, 2022 except Job No.
447, showed direct materials and direct labour costs of `40,000 and `30,000 respectively as having been Opening stock of materials as on 12th August 2020:
incurred on Job No.447.
15mm GI Pipe, 12 units of (15 feet size) @ `600 each
The costs incurred by the business on 31st December, 2022, the last day of the accounting year, were as follows: 20mm GI Pipe, 10 units of (15 feet size) @ ` 660 each
Other fitting materials, 60 units @ ` 26 each
Direct Materials (Job 447) `2,000 Direct Labour (Job 447) `8,000
Stainless Steel Faucet, 6 units @ ` 204 each
Indirect Labour `2,000 Miscellaneous Factory Overhead `3,000
Valve, 8 units @ ` 404 each
Purchases:
It is the practice of business to make the jobs absorb factory overheads on the basis of 120% of direct labour
cost. On 16th August 2020:
20mm GI Pipe, 30 units of (15 feet size) @ ` 610 each
Calculate the value of work-in-progress of Job No.447 on 31st December, 2022.
10 units of Valve @ ` 402 each
Answer On 18th August 2020:
Value of Work-In-Progress of Job No.447 as on 31st December, 2022: Other fitting materials, 150 units @ ` 28 each
Direct Materials (40,000 + 2,000) `42,000 Stainless Steel Faucet, 15 units @ ` 209 each
Direct Labour (30,000 + 8,000) `38,000
On 27th August 2020:
Factory Overhead (120% of 38,000) `45,600
15mm GI Pipe, 35 units of (15 feet size) @ ` 628 each
Value of closing WIP `1,25,600
20mm GI Pipe, 20 units of (15 feet size) @ ` 660 each
Valve, 14 units @ ` 424 each
BQ 10
Job No. 198 was commenced on October 10, 2022 and completed on November 1, 2022. Materials used were Issues for the hostel job:
`600 and labour charged directly to the job was `400.
On 12th August 2020:
Other information is as follows: 20mm GI Pipe, 2 units of (15 feet size)
Machine No. 215 used for 40 hours : machine hour rate being `3.50 Other fitting materials, 18 units
Machine No. 160 used for 30 hours : machine hour rate being `4.00 On 17th August 2020:
6 welders worked on the job for five days of 8 hours each : Direct labour hour per welder is `0.20 15mm GI Pipe, 8 units of (15 feet size)
Other fitting materials, 30 units
Expenses not included for calculating the machine hour or direct labour hour rate totalled `2,000, total direct
wages for the period being `20,000. On 28th August 2020:
20mm GI Pipe, 2 units of (15 feet size)
Ascertain the works costs of job No. 198. 15mm GI Pipe, 10 units of (15 feet size)
 JOB AND BATCH COSTING 5.8 JOB AND BATCH COSTING 5.9
Other fitting materials, 34 units 3. Cost of Other fitting materials:
Valve, 6 units Date Calculation Amount (`)
On 30th August 2020: 12.08.20 18 units × `26 468
Other fitting materials, 60 units 17.08.20 30 units × `26 780
Stainless Steel Faucet, 15 units 28.08.20 {(12 units × `26 + 150 units × `28) ÷ 162 units} × 34 units 946.96
30.08.20 {(12 units × `26 + 150 units × `28) ÷ 162 units} × 60 units 1,671.11
Direct Labour: 3,866.07
Plumber: 180 hours @ `100 per hour (includes 12 hours overtime)
Helper: 192 hours @ `70 per hour (includes 24 hours overtime) BATCH COSTING
Overtimes are paid at 1.5 times of the normal wage rate.
BQ 12
Overheads: Overheads are applied @ `26 per labour hour. Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and muffins.
AC use to bake at least 50 units of any item at a time.
Pricing policy: It is company’s policy to price all orders based on achieving a profit margin of 25% on sales A customer has given an order for 600 muffins. To process a batch of 50 muffins, the following cost would be
price. incurred:
Direct materials `500
You are required to: Direct wages `50
(a) Calculate the total cost of the job. Oven set- up cost `150
(b) Calculate the price to be charged from the customer.
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total production
Answer cost of each batch to allow for selling, distribution and administration overheads. AC requires a profit margin
(a) Statement Showing Total Cost of the Job of 25% of sales value.
Particulars Amount Determine the selling price for 600 muffins.
Direct material cost:
15mm GI Pipe (WN 1) 11,051.28 Answer
20mm GI Pipe (WN 2) 2,588.28 Statement of Cost per Batch and per Order
Other fitting materials (WN 3) 3,866.07 Particulars Cost per Batch Total Cost
Stainless steel faucet [{(6 × 204 + 15 × 209) ÷ 21 units } × 15 units] 3,113.57 Direct material cost 500.00 6,000.00
Valve [{(8 × 404 + 10 × 402 + 14 × 424) ÷ 32 units } × 6 units] 2,472.75 Direct wages 50.00 600.00
Oven set-up cost 150.00 1,800.00
Direct wages Prime cost 700.00 8,400.00
Plumber [(180 hours × `100) + (12 hours × `50)] 18,600 Add: Production overhead (20% on direct wages) 10.00 120.00
Helper [(192 hours × `70) + (24 hours × `35)] 14,280 Total Production Cost 710.00 8,520.00
Add: S & D and Administration overhead 71.00 852.00
Overheads [`26 × (180 + 192) hours] 9,672 (10% of Total Production Cost)
Total Cost 65,643.95 Total Cost 781.00 9,372.00
Add : Profit (⅓ of Total Cost) 260.33 3,124
(b) Price to be charged = Total Cost + 25% Profit on Job Price Selling Price 1,041.33 12,496.00
= 65,643.95 ÷ 75% = `87,525,27
No. of batch = 600 units ÷ 50 units = 12 batches
Working Notes:
1. Cost of 15mm GI Pipe: BQ 13
Component SW-10X is made entirely in machine shop No. ASW-11. Materials cost `20 per component. Each
Date Calculation Amount (`)
component takes 6 minutes to produce & the machine operator is paid `15 per hour. Machine hour rate is `72
17.08.20 8 units × `600 4,800
per hour. The setting up of the machine to produce the component takes 3 hours for the operator.
28.07.20 {(4 units × `600 + 35 units × `628) ÷ 39 units} × 10 units 6,251.28
11,051.28 You are required to prepare cost sheet showing the setting up costs & production costs both in
total (i.e. for the batch) & per component, assuming a batch size of (a)100 components, (b) 150
2. Cost of 20mm GI Pipe: components, and (c) 200 components.
Date Calculation Amount (`) [(a) `3,131, `31.31; (b) `4,566, `30.44; `6,001, `30.005]
12.08.20 2 units × `660 1,320
28.08.20 {(8 units × `660 + 30 units × `610 + 20 units × `660) ÷ 58 units} × 2 units 1,268.28 BQ 14
2,588.28 Leo Limited undertaking to supply 1,000 units of a component per month for the months of January, February,
March, 2023. Every month a batch order is opened against which materials and labour cost are booked at
actual cost. Overheads are levied at a rate per labour hour. The selling price is contracted at `15 per unit.
 JOB AND BATCH COSTING 5.10 JOB AND BATCH COSTING 5.11
From the following data, present the cost and profit per unit of each batch order and the overall position Sales value of 1,200 units @ `8 per unit = `9,600
of the order for the 3,000 units. Total cost of 1,200 units @ `7.34 per unit = `8,808
Profit = `792
Month Batch output Material cost Labour cost
January 1,250 6,250 2,500 Note:
February 1,500 9,000 3,000 Ch arg eable exp enses
March 1,000 5,000 2,000 Chargeable expenses =  Direct labour hours for batch
Direct labour hour for the month

Labour is paid at the rate of `2 per hour the other details are:
ECONOMIC/OPTIMUM BATCH QUANTITY
Month Overheads Labour hours
January 12,000 4,000 BQ 16
February 9,000 4,500 Monthly demand for a product 500 units
March 15,000 5,000 Setting-up cost per batch `60
[Cost `10 per unit; Profit `5 per unit, Overall profit on order is `15,000] Cost of manufacturing per unit `20
Rate of interest 10% p.a.
BQ 15
A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing six months. Determine economic batch quantity.
Every month a batch order is opened against which materials and labour hours are booked at actual.
Overheads are levied at a rate per labour hour. The selling price contracted for is `8 per piece. From the Answer
following data present the cost and profit per piece of each batch order and overall position of the order for
2 DS 2 × 6 ,000 × 60
1,200 pieces. EBQ/ Optimum Run size = = = 600 units
C 10 % of 20
Material cost Direct wages Direct labour
Month Batch output
(`) (`) hours
BQ 17
January 210 650 120 240
M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s. KMR Fans on a steady daily
February 200 640 140 280
basis. It is estimated that it costs `1 as inventory holding cost per bearing per month and that the set up cost
March 220 680 150 280
per run of bearing manufacture is `3,200
April 180 630 140 270
May 200 700 150 300
(i) Determine the optimum run size of bearing manufacture?
June 220 720 160 320
(ii) State what would be the interval between two consecutive optimum runs?
(iii) Find out minimum inventory holding cost.
The other details are:

Month
Chargeable
Direct labour hours
Answer
expenses 2DS 2  48 ,000  3,200
January 12,000 4,800 (i) EBQ/ Optimum Run size = = = 5,060 bearings
C 12
February 10,560 4,400
March 12,000 5,000
(ii) Interval between two consecutive optimum runs.
April 10,580 4,600
May 13,000 5,000
= 365 ÷ Number of runs = 365 ÷ 10= 36.5 days
June 12,000 4,800
(iii) Minimum inventory holding cost:
Answer
Statement Showing Cost and Profit = ½ × EBQ × C = ½ × 5,060 × 12 = `30,360
Particulars Jan. Feb. March April May June Total
Batch output (in units) 210 200 220 180 200 220 1,230 Working Notes:
Sales value (`) 1,680 1,600 1,760 1,440 1,600 1,760 9,840
Material cost (`) 650 640 680 630 700 720 4,020 Number of optimum runs = 48,000 ÷ 5,060 = 9.49 or 10 runs
Direct wages (`) 120 140 150 140 150 160 860
Chargeable expenses (`) 600 672 672 621 780 800 4,145 BQ 18
Total cost 1,370 1,452 1,502 1,391 1,630 1,680 9,025 A customer has been ordering 90,000 special design metal columns at the rate of 18,000 columns per order
Profit per batch (`) 310 148 258 49 (30) 80 815 during the past years. The production cost comprises `2,120 for material, `60 for labour and `20 for fixed
Total cost per unit (`) 6.52 7.26 6.83 7.73 8.15 7.64 7.34 overheads. It costs `1,500 to set up for one run of 18,000 column and inventory carrying cost is 5%.
Profit per unit (`) 1.48 0.74 1.17 0.27 (0.15) 0.36 0.66 (i) Find the most economic production run.
(ii) Calculate the extra cost that company incur due to processing of 18,000 columns in a batch.
Overall position of the order for 1,200 units:
 JOB AND BATCH COSTING 5.12 JOB AND BATCH COSTING 5.13
Answer Answer
2 DS 2  90 ,000  1 ,500 2 DS 2  19 ,00 ,000  5,200
(i) Economic Run size = = = 1,567 bearings (a) Economic Batch Quantity = = = 1,14,775 bottles
C 5% of 2,200 C 1 .5

(ii) Calculation of Extra Cost at Run Size 6,000 bearings: (b) Calculation of saving in cost by adopting EBQ:
Particulars At EBQ 1,567 At RBQ 18,000 Particulars At EBQ 1,14,775 At RBQ 1,60,000
Set up Cost (D/RBQ × S) (90,000 ÷ 1,567) 57.4 or 58 set (90,000 ÷ 18,000) 5 set ups Set up Cost (D/RBQ × S) (19,00,000 ÷ 1,14,775) 16.55 (19,00,000 ÷ 1,60,000) 11.87
ups × 1,500 = 87,000 × 1,500 = 7,500 or 17 set ups × 5,200 or 12 set ups × 5,200
Carrying cost (RBQ × ½ × C) ½ × 1,567 × 110 = 86,185 ½ × 18,000 × 110 = 9,90,000 Carrying cost (RBQ × ½ × C) = 88,400 = 62,400
Total Cost 1,73,185 9,97,500 Total Cost ½ × 1,14,775 × 1.5 = 86,082 ½ × 1,60,000 × 1.5 = 1,20,000
Extra Cost - 8,24,315 1,74,482 1,82,400
Saving in Cost - 7,918
BQ 19
X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on a steady basis. It is estimated that it costs BQ 21
10 paise as inventory holding cost per bearing per month and that the set up cost per run of bearing A Company has an annual demand from a single customer for 50,000 litres of a paint product. The total demand
manufacture is `324. can be made up of a range of colour to be produced in a continuous production run after which a set-up of the
machinery will be required to accommodate the colour change. The total output of each colour will be stored
(i) What should be the optimum run size for bearing manufacture? and then delivered to the customer as a single load immediately before production of the next colour
(ii) Assuming that the company has a policy of manufacturing 6,000 bearings per run, how much extra costs commences.
the company would be incurring as compared to the optimum run suggested in (a) above?
(iii) Calculate the inventory holding cost at optimum level? The Set up costs are `100 per set up. The Service is supplied by an outside company as required. The
Holding costs are incurred on rented storage space which costs `50 per sq. meter per annum. Each square
Answer meter can hold 250 Litres suitably stacked.
2 DS 2  24 ,000  324
(a) EBQ/ Optimum Run size = = = 3,600 bearings You are required to calculate
C 1 .2
(i) Calculate the total cost per year where batches may range from 4,000 to 10,000 litres in multiples of
D = Bearing to be manufactured/supplied p.a. = 24,000 bearings 1,000 litres and hence choose the production batch size which will minimize the cost.
S = Set-up cost per run of bearing manufacture = `324 (ii) Use the economic batch size formula to calculate the batch size which will minimise total cost.
C = Carrying cost per bearing p.a. = `0.10 × 12 months
= `1.2 per bearing p.a. Answer
(i) Statement Showing Total Cost Per Year Where Batches May Range from 4,000 to 10,000 Litres in
(b) Calculation of Extra Cost at Run Size 6,000 bearings: Multiples of 1,000 Litres
Particulars At EBQ 3,600 At RBQ 6,000 Production Set-up Cost Per Annum (`) Holding Cost Per Annum (`) Total Cost Per
Set up Cost (D/RBQ × S) (24,000 ÷ 3,600) 6.6 or 7 set (24,000 ÷ 6,000) 4 set ups Size (Lt.) [(D/RBQ) × 100] [½ × RBQ × C] Annum (`)
ups × 324 = 2,268 × 324 = 1,296 4,000 12.5 set up × 100 = 1,250 400 1,650
Carrying cost (RBQ × ½ × C) ½ × 3,600 × 1.2 = 2,160 ½ × 6,000 × 1.2 = 3,600 5,000 10 set up × 100 = 1,000 500 1,500
Total Cost 4,428 4,896 6,000 8.33 set up × 100 = 833 600 1,433
7,000 7.14 set up × 100 = 714 700 1,414
Extra Cost - 468
8,000 6.25 set up × 100 = 625 800 1,425
9,000 5.56 set up × 100 = 556 900 1,456
(c) Inventory holding cost at optimum level is `2,160
10,000 5 set up × 100 = 500 1,000 1,500
BQ 20 As the total cost is minimum at 7,000 ltr. i.e. `1,414, thus economic production lot would be 7,000 Litres.
BTL LLP. manufactures glass bottles for HDL Ltd., a pharmaceutical company, which is in ayurvedic medicines
business. BTL can produce 2,00,000 bottles in a month. Set-up cost of each production run is `5,200 and the
(ii) Economic Batch Quantity (EBQ):
cost of holding one bottle for a year is `1.50.
2DS 2  50 ,000  100
EBQ = = = 7,071 Litres
As per an estimate HDL Ltd. can order as much as 19,00,000 bottles in a year spreading evenly throughout the C .20  1
year. At present the BTL manufactures 1,60,000 bottles in a batch.

Required:
(a) Compute the Economic Batch Quantity for bottle production.
(b) Compute the annual cost saving to BTL by adopting the EBQ of a production.
 JOB AND BATCH COSTING 5.14 JOB AND BATCH COSTING 5.15
42,000F + 96,000A + 42,000FA = `45,000 (4)

PAST YEAR QUESTIONS On solving (3) and (4) we get:

A = 0.25 or 25% on factory cost
PYQ 1 F = 0.40 or 40% on direct wages
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as under:
(ii) Selling Price of the New Order:
Job 1102 Job 1108
Particulars Amount
Selling price `1,07,325 `1,57,920
Materials 64,000
Profit as percentage on cost 8% 12%
Direct Materials `37,500 `54,000 Productive Wages 50,000
Prime Cost 1,14,000
Direct Wages `30,000 `42,000
Factory Overheads (40% Of 50,000) 20,000
It is the policy of the company to charge factory overheads as percentage on direct wages and selling Factory Cost 1,34,000
and administration overheads as percentage on factory cost. Selling And Admin Overheads (25% Of 1,34,000) 33,500
Total Cost 1,67,500
The company has received a new order for manufacturing of a similar job. The estimate of direct
Profit (20% On Sales Or 25% On Cost) 41,875
materials and direct wages relating to the new order is `64,000 and `50,000 respectively. A profit of 20% on
sales is required. Sale Price 2,09,375

You are required to compute: PYQ 2

(i) The rates of Factory overheads and Selling and Administration overheads to be charged; M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year 2014 are given
(ii) The Selling price of the new order. below:
[(9 Marks) Nov 2002]
Opening stock of materials `1,50,000
Closing stock of materials `2,00,000
Answer
Purchase of materials `18,50,000
(i) Computation of rates of factory overheads and selling and administration overheads to be charged: Direct labour `9,50,000
Let % of factory overheads to direct wages be F and % of selling and administrative overheads to factory cost Factory overheads `3,80,000
be A Administrative overheads `2,50,400
Jobs Cost Sheet During 2015, the company has received an order from a car manufacturer where it estimates the cost
Particulars Job 1102 Job 1108 of materials and labour will be `8,00,000 and `4,50,000 respectively.
Direct materials 37,500 54,000
M.L. Auto Ltd. charges factory overhead as a percentage of direct labour and administrative overheads
Direct wages 30,000 42,000
as a percentage of factory cost based on previous year’s cost.
Prime cost 67,500 96,000
Factory overheads 30,000F 42,000F Cost of delivery of the components at customer’s premises is estimated at `45,000.
Factory cost 67,500+30,000F 96,000+42,000F
Selling and Administration overheads (67,500+30,000F)A (96,000+42,000F)A You are required to:
Total cost (67,500+30,000F)(1+A) (96,000+42,000F)(1+A) 1. Calculate the overhead recovery rates based on actual cost of 2014.
2. Prepared a detailed cost statement for the order received in 2015 and the price to be quoted if
* Computation of total cost of jobs: company wants to earn a profit of 10% on sales.
1 ,07 ,325 [(8 Marks) Nov 2015]
Total cost of Job 1102 when 8% is the profit on cost = × 100 = `99,375
108 %
1 ,57 ,920
Answer
Total cost of Job 1108 when 12% is the profit on cost = × 100 = `1,41,000 1. Calculation of overhead recovery rates based on actual cost of 2014:
112 %
Factory overhead 3,80 ,000
Factory overhead rate = × 100 = × 100 = 40%
Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore, we have Direct labour cos t 9,50 ,000
the following equations:
Ad min overhead 2,50 ,400
(67,500 + 30,000F) (1 + A) = `99,375 (1) Admin overhead rate = × 100 = ×100 = 8%
Factory cos t 31 ,30 ,000
(96,000 + 42,000F) (1 + A) = `1,41,000 (2)
Or Working Note:
67,500 + 30,000F + 67,500 A + 30,000FA = `99,375 Factory cost = Opening stock of materials + Purchase of materials – Closing of
96,000 + 42,000F + 96,000 A + 42,000FA = `1,41,000 materials + Labour + Factory overhead
Or = 1,50,000 + 18,50,000 – 2,00,000 + 9,50,000 + 3,80,000
30,000F + 67,500A + 30,000FA = `31,875 (3) = 31,30,000
 JOB AND BATCH COSTING 5.16 JOB AND BATCH COSTING 5.17
2. Statement of Cost and Price Direct Wages @ `4 per hour 60
Particulars ` (Departments A - 4 hrs., B - 7 hrs., C - 2 hrs & D - 2 hrs)
Direct materials 8,00,000 Chargeable Expenses 20
Direct wages 4,50,000 Total 200
Prime cost 12,50,000
Factory overheads @ 40% of 4,50,000 1,80,000 Analysis of the profit and loss account for the year ended 31st March, 2019:
Factory cost 14,30,000 Particulars ` Particulars `
Administration overheads @ 8% of 14,30,000 1,14,400 Material 2,00,000 Sales 4,30,000
Cost of goods sold 15,44,400 Direct Wages
Cost of delivery 45,000 Dept. A 12,000
Cost of sales 15,89,400 Dept. B 8,000
Profit @ 10% of sales 1,76,600 Dept. C 10,000
Sales (15,89,400/90%) 17,66,000 Dept. D 20,000 50,000
Special store items 6,000
PYQ 3 Overheads
XYZ has obtained an order to supply 48,000 bearings per year from a concern on a steady basis. It is estimated Dept. A 12,000
that it costs `.20 as inventory holding cost per bearing per month and that the set up cost per run of bearing Dept. B 6,000
manufacture is `384. Dept. C 9,000
Dept. D 17,000 44,000
You are required to:
Gross profit c/d 1,30,000
(1) Compute optimum run size and number of runs for bearing manufacture. 4,30,000 4,30,000
(2) Compute the interval between two consecutive runs. Selling expenses 90,000 Gross profit b/d 1,30,000
(3) Find out the extra cost incurred, if company adopts a policy to manufacture 8,000 bearings per run as Net profit 40,000
compared to optimum run size. 1,30,000 1,30,000
(4) Give your opinion regarding run size of bearing manufacture.
It is also to be noted that average hourly rates for all the four departments are similar.
Assume 365 days in a year.
[(10 Marks) Nov 2018]
Required:
(a) Prepare a job cost sheet.
Answer
(b) Calculate the entire revised cost using the above figures as the base.
2 DS 2 × 48 ,000 × 384 (c) Add 20% profit on selling price to determine the selling price.
(1) Optimum Run size = = = 3,919 bearings
C 12 × .20 [(5 Marks) Nov 2019]

Number of runs = Annual demand ÷ EBQ = 48,000 ÷ 3,919 Answer

= 12.24 or 13 runs Job Cost Sheet
Particulars Amount
(2) Interval between two runs = 365 ÷ Number of Runs = 365 ÷ 13
Direct Materials 120.00
= 28 days appx.
Direct Wages:
Department A (4 hours × `4) 16.00
(3) Computation of Extra Cost:
Department B (7 hours × `4) 28.00
Particulars At EBQ 3,919 At RBQ 8,000 Department C (2 hours × `4) 8.00
Set up Cost (D/RBQ × S) (48,000 ÷ 3,919) 12.24 or 13 (48,000 ÷ 8,000) 6 set ups × Department D (2 hours × `4) 8.00
set ups × 384 384 Chargeable Expenses 20.00
Carrying cost (RBQ × ½ × C) = 4,992 = 2,304 Prime Cost 200.00
Total Cost ½ × 3,919 × 2.4 = 4,703 ½ × 8,000 × 2.4 = 9,600 Overheads:
9,695 11,904 Department A @ 100% of direct wages 16.00
Extra Cost - 2,209 Department B @ 75% of direct wages 21.00
Department C @ 90% of direct wages 7.20
(4) Opinion: Company should go with the EBQ (i.e. 3,919 bearings) having lower cost than RBQ 8,000 units. Department D @ 85% of direct wages 6.80
Works Cost 251.00
PYQ 4 Selling Expenses @ 30% on works cost 75.30
The following data presented by the supervisor of a factory for a job. Total Cost 326.30
` per unit Profit @ 20% on selling price or 25% on cost 81.575
Direct Material 120 Sales 407.875
 JOB AND BATCH COSTING 5.18 JOB AND BATCH COSTING 5.19
Working note: Required:
(1) Calculation of recovery rate of Overheads: (a) Find out most Economical Production Run.
Recovery rate of overheads =
Overheads
× 100 (b) Calculate the extra cost that company incurs due to production of 15,000 vaccines in a batch.
Direct Wages
[(5 Marks) July 2021]
12,000
Department A = × 100 = 100% of direct wages
12,000
Answer
6,000
Department B = × 100 = 75% of direct wages 2 DS 2 × 60 ,000 × 4 ,800
8,000 (a) Economic Production Run = = = 2,000 vaccines
C 12 × 12
9,000
Department C = × 100 = 90% of direct wages
10,000
(b) Calculation of Extra Cost:
17,000
Department D = × 100 = 85% of direct wages
20,000 Particulars At EBQ 2,000 At RBQ 15,000
Set up Cost (D/RBQ × S) 1,44,000 19,200
(2) Calculation of recovery rate of Selling Expenses: Carrying cost (RBQ × ½ × C) 1,44,000 10,80,000
Selling Expenses 90,000 Total Cost 2,88,000 10,99,200
Recovery rate of selling overheads = × 100 = × 100
Works Cost 4,30,000 − 1,30,000 Extra Cost - 8,11,200
= 30% of works cost
PYQ 7
PYQ 5 In a manufacturing company, the overhead is recovered as follows:
GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the estimates provided by
Pharmaceutical Industry Bureau, there will be a demand of 40 Million 'Stents' in the coming year. GHI Ltd. is Factory Overheads: a fixed percentage basis on direct wages and
expected to have a market share of 2.5% of the total market demand of the Stents in the coming year. It is Administrative overheads: a fixed percentage basis on factory cost.
estimated that it costs `1.50 as inventory holding cost per stent per month and that the set -up cost per run of
stent manufacture is `225. The company has furnished the following data relating to two jobs undertaken by it in a period.

Required: Particulars Job 1 (`) Job 2 (`)

(a) What would be the optimum run size for Stent manufacture? Direct Materials 1,08,000 75,000
(b) What is the minimum inventory holding cost? Direct Wages 84,000 60,000
(c) Assuming that the company has a policy of manufacturing 4,000 stents per run, how much extra costs Selling Price 3,33,312 2,52,000
the company would be incurring as compared to the optimum run suggested in (i) above? Profit percentage on total cost 12% 20%
[(5 Marks) Jan 2021]
You are required to:
Answer (a) Compute the percentage recovery rates of factory overheads and administrative overheads.
2 DS 2  4 ,00 ,00 ,000  2.5%  225 (b) Calculate the amount of factory overheads, administrative overheads and profit for each of the two
(a) Optimum Run Size = = = 5,000 Stents
C 1.5  12 jobs.
(c) Using the above recovery rates, determine the selling price to be quoted for job 3. Additional data
(b) Minimum Inventory Holding Cost: pertaining to Job 3 is as follows:

Minimum Inventory Holding Cost = ½ × EBQ × C Direct Materials `68,750

= ½ × 5,000 × `18 = `45,000 Direct Wages `22,500
Profit percentage on selling price 15%
(c) Calculation of Extra Cost: [(10 Marks) May 2022]
Particulars At EBQ 5,000 At RBQ 4,000 Answer
Set up Cost (D/RBQ × S) (10,00,000 ÷ 5,000) × 225 (10,00,000 ÷ 4,000) × 225
(a) Computation of percentage recovery rates of factory overheads and administration overheads:
= 45,000 = 56,250
Carrying cost (½× RBQ × C) ½ × 5,000 × 18 ½ × 4,000 × 18 Let % of factory overheads to direct wages be F and % of administrative overheads to factory cost be A
Total Cost = 45,000 = 36,000
90,000 92,250 Jobs Cost Sheet
Extra Cost - 2,250 Particulars Job 1 Job 2
Direct materials 1,08,000 75,000
PYQ 6 Direct wages 84,000 60,000
AUX Ltd. has an Annual demand from a single customer for 60,000 Covid-19 vaccines. The customer prefers Prime cost 1,92,000 1,35,000
to order in the lot of 15,000 vaccines per order. The production cost of vaccine is `5,000 per vaccine. The set- Factory overheads 84,000F 60,000F
up cost per production run of Covid-19 vaccines is `4,800. The carrying cost is `12 per vaccine per month. Factory cost 1,92,000+84,000F 1,35,000+60,000F
 JOB AND BATCH COSTING 5.20 JOB AND BATCH COSTING 5.21
Administration overheads (1,92,000+84,000F)A (1,35,000+60,000F)A Profit 22,500
(1,92,000+84,000F)+ (1,35,000+60,000F)+ Sale Price (1,27,500 ÷ 85%) 1,50,000
Total cost (1,92,000+84,000F)A (1,35,000+60,000F)A
= 2,97,600 = 2,10,000 PYQ 8
A Ltd. is a pharmaceutical company which produces vaccines for diseases like Monkey Pox, Covid-19 and
* Computation of total cost of jobs: Chickenpox. A distributor has given an order for 1,600 Monkey pox vaccines. The company can produce 80
3 ,33 ,312
vaccines at a time. To process a batch of 80 Monkey Pox vaccines, the following costs would be incurred:
Total cost of Job 1 when 12% is the profit on cost = = `2,97,600
112 % Direct materials `4,250
2 ,52 ,000 Direct wages `500
Total cost of Job 2 when 20% is the profit on cost = = `2,10,000
120 % Lab set-up cost `1,400

Now, we have the following equations: The production overheads are absorbed at a rate of 20% of direct wages and 20% of total production cost is
charged in each batch for selling, distribution and administration overheads. The company is willing to earn
1,92,000 + 84,000 F + 1,92,000A + 84,000 FA = 2,97,600 (1) profit of 25% on sales value.
1,35,000 + 60,000F + 1,35,000A + 60,000FA = 2,10,000 (2)
You are required to determine:
Multiply equation (1) by 5 and equation (2) by 7
(a) Total sales value for 1,600 Monkey Pox vaccines
9,60,000 + 4,20,000 F + 9,60,000A + 4,20,000 FA = 14,88,000 (3) (b) Selling price per unit of vaccine.
9,45,000 + 4,20,000F + 9,45,000A + 4,20,000FA = 14,70,000 (4) [(5 Marks) Nov 2022]

By subtracting equation (4) from (3): Answer

(a) Statement Showing Sales Value of 1,600 Vaccines
15,000 + 15,000 A = 18,000
15,000A = 3,000 Particulars Amount
A = 0.2 or 20% Direct materials (4,250 × 20 batches) 85,000
Direct wages (500 × 20 batches) 10,000
Now putting the value of A in equation (1) to find the value of F: Lab set-up cost (1,400 × 20 batches) 28,000
Prime cost 1,23,000
1,92,000 + 84,000F + 1,92,000 × 0.2 + (84,000F × .2 = 2,97,600 Add: Production overhead (20% on direct wages) 2,000
84,000 F + 16,800 F = 67,200 Total Production Cost 1,25,000
F = 0.6667 or 66.67% Add: S & D and Administration overhead (20% of production Cost) 25,000
Total Cost 1,50,000
(b) Statement Showing Amount of Factory Overheads, Administrative Overheads and Profit Add : Profit 50,000
Selling Price (1,50,000 ÷ 75%) 2,00,000
Particulars Job 1 Job 2
Direct materials 1,08,000 75,000
No. of batch = 1,600 units ÷ 80 units = 20 batches
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
(b) Selling price per vaccine = 2,00,000 ÷ 1,600 = `125
Factory overheads (66.67% of wages) 56,000 40,000
Factory cost 2,48,000 1,75,000
Administration overheads (20% of factory cost) PYQ 9
49,600 35,000
Total cost TSK Limited manufactures a variety of products. The annual demand for one of its products ‘X’ is estimated as
2,97,600 2,10,000
Profit 1,35,000 units. Product ‘X’ is to be manufactured done in batches. Set up cost of each batch is `3,375 and
35,712 42,000
inventory holding cost is `5 per unit. It is expected that demand of product ‘X’ would be uniform throughout
Selling Price 3,33,312 2,52,000
the year.
(c) Selling Price of the Job 3
Required:
Particulars Amount
Materials 68,750 (a) Calculate the Economic Batch Quantity (EBQ) for Product ‘X’.
Productive Wages 22,500 (b) Assuming that the company has a policy of manufacturing 7,500 units of Product ‘X’ per batch, calculate
Prime Cost 91,250 the additional cost incurred as compared to the cost incurred as per Economic Batch Quantity (EBQ) as
Factory Overheads (66.67% of 22,500) 15,000 computed in (a) above.
Factory Cost 1,06,250 [(5 Marks) May 2023]
Admin Overheads (20% of 1,06,250) 21,250
Total Cost 1,27,500 Answer
 JOB AND BATCH COSTING 5.22 JOB AND BATCH COSTING 5.23

(a) Economic Batch Quantity =

2 DS
C
=
2  1 ,35,000  3,375
5
= 13,500 units
SUGGESTED REVISION
(b) Calculation of Additional Cost: Page No. of 3rd, 4th & Revision
Ques. Observations or KEY Points 1st & 2nd
Particulars At EBQ 13,500 At RBQ 7,500 Practical 5th during
No. (Note down during revisions) Revision
Set up Cost (D/RBQ × S) 33,750 60,750 Register Revision Exams
Carrying cost (RBQ × ½ × C) 33,750 18,750 BQ (Book Questions covering Study Module of ICAI, PM, RTP’s, MTP’s and Important Questions)
Total Cost 67,500 79,500 1 Y - -
Additional Cost - 12,000 2 Y - -
3 Y Y Y
4 Y Y Y
5 Y - -
6 Y Y Y
7 Y Y Y
8 Y - -
9 Y - -
10 Y Y Y
11 Y Y Y
12 Y Y Y
13 Y Y -
14 Y - -
15 Y Y Y
16 Y - -
17 Y Y Y
18 Y Y Y
19 Y Y -
20 Y - -
21 Y Y Y
PYQ (Past Year Questions)
1 Y Y Y
2 Y Y -
3 Y - -
4 Y Y -
5 Y Y Y
6 Y - -
7 Y Y -
8 Y - -
9 Y - -
 ACTIVITY BASED COSTING 6.1
BQ 1
G-2020 Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as follows:
Particulars A B C

CHAPTER - 6
Direct Material per unit 50 40 40
Direct Labour per unit (`10 per hour) 30 40 50
Production Overheads 30 40 50
Total Cost per unit 110 120 140
Quantity Produced (in units) 10,000 20,000 30,000

ACTIVITY BASED COSTING

G-2020 Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed management
accountant has suggested that the company should introduce ABC system and has identified cost drivers and
cost pools as follows:
Activity Cost Pool Cost Driver Associated Cost
Stores Receiving Purchase Requisitions `2,96,000
Inspection Number of Production Runs `8,94,000
LEARNING OUTCOMES Dispatch Orders Executed `2,10,000
Machine Setup Number of Setups `12,00,000

After studying this chapter you will be able to: The following information is also supplied:
 Discuss problem of traditional costing system. Particulars A B C
No. of Setups 360 390 450
 Discuss usefulness of Activity Based Costing (ABC). No. of Orders Executed 180 270 300
 Discuss Cost Allocation under ABC. No. of Production Runs 750 1,050 1,200
No. of Purchase Requisitions 300 450 500
 Discuss Different level of activities under ABC.
 Understand stages, advantages, and limitations of ABC. You are required to calculate activity based production cost of all the three products.
 Discuss various requirements in ABC implementation. Answer
 Explain the concept of Activity Based Management (ABM). Statement Showing Production Cost Using ABC Method
 Explain the concept of Activity Based Budgeting (ABB). Particulars A (`) B (`) C (`)
Number of units 10,000 20,000 30,000
Direct Material @ `50/40/40 per unit 5,00,000 8,00,000 12,00,000
Direct Labour @ `30/40/50 per unit 3,00,000 8,00,000 15,00,000

Production Overhead:
Stores receiving @ `236.8 per requisition 71,040 1,06,560 1,18,400
(236.8 × 300) (236.8 × 450) (236.8 × 500)
Inspection @ `298 per production run 2,23,500 3,12,900 3,57,600
(298 × 750) (298 × 1,050) (298 × 1,200)
Dispatch @ `280 per order 50,400 75,600 84,000
(280 × 180) (280 × 270) (280 × 300)
Machine setup @ `1,000 per setup 3,60,000 3,90,000 4,50,000
(1,000 × 360) (1,000 × 390) (1,000 × 450)
Total Production Cost 15,04,940 24,85,060 37,10,000
Production Cost Per Unit 150.49 124.25 123.67

Calculation of Activity rate:

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Stores Receiving `2,96,000 Purchase requisitions 1,250 `236.80 per requisition
Inspection `8,94,000 Number of production runs 3,000 `298 per production run
Dispatch `2,10,000 Orders executed 750 `280 per order
Machine Setup `12,00,000 Number of setups 1,200 `1,000 per setup
 ACTIVITY BASED COSTING 6.2 ACTIVITY BASED COSTING 6.3
BQ 2 Production units 45,000 52,500 30,000
KD Ltd. is following Activity Based Costing. Budgeted overheads, cost drivers and volume are as follows: Material cost per unit (`) 350 460 410
Cost Pool Budgeted OH Cost Driver Budgeted Volume Wages per unit @ `80 per hour 240 400 560
Material procurement `18,42,000 No. of orders 1,200 Overhead cost per unit (`) 240 400 560
Material handling `8,50,000 No. of movement 1,240 Total cost per unit (`) 830 1,260 1,530
Maintenance `24,56,000 Maintenance hours 17,550 Selling price (`) 1,037.50 1,575 1,912.50
Set-up `9,12,000 No. of set-ups 1,450
Quality control `4,42,000 No. of inspection 1,820 The following additional information is available relating to overhead cost drivers:
Particulars Product X Product Y Product Z Total
The company has produced a batch of 7,600 units, its material cost was `24,62,000 and wages `4,68,500. Usage No. of machine set-ups 40 160 400 600
activity of the said batch are as follows: No. of purchase orders 400 800 1,200 2,400
Activity Driver Activity Volume No. of customers 1,000 2,200 4,800 8,000
Material orders 56
Material movement 84 Actual production and budgeted production for the month is same. Workers are paid at standard rate. Out of
Maintenance hours 1,420 hours total overhead costs, 30% related to machine set-ups, 30% related to customer order processing while the
No. of set-ups 60 balance proportion related to customer complaint management.
No. of inspections 18
Required:
Required: (1) Compute overhead cost per unit using activity based costing method.
(1) Calculate cost driver rates. (2) Determine the selling price of each product based on activity based costing with the same profit mark-
(2) Calculate the total and unit cost for the batch. up on cost.

Answer Answer
(1) Statement Showing Overheads Cost per Unit
(1) Statement Showing Cost Driver Rate (Using Activity based Costing)

Cost Pool Budgeted OH Cost Driver Volume Cost Driver Rate Activity Cost
Cost Driver Ratio Amount Product X Product Y Product Z
Pool
Material procurement `18,42,000 No. of orders 1,200 `1,535 per order
Material handling `8,50,000 No. of movement 1,240 `685.48 per movement Machine set ups No. of machine 4 : 16 : 40 1,45,80,000 9,72,000 38,88,000 97,20,000
Maintenance `24,56,000 Maintenance hours 17,550 `139.94 per hour set ups
Set-up No. of set-ups 1,450 Customer order No. of purchase 4 : 8 : 12 1,45,80,000 24,30,000 48,60,000 72,90,000
`9,12,000 `628.97 per set-up
Quality control No. of inspection 1,820 processing orders
`4,42,000 `242.86 per inspection
Customer No of 10 : 22 : 48 1,94,40,000 24,30,000 53,46,000 1,16,64,000
complaint mgt customers
(2) Statement Showing Unit Cost and Total Cost for the Batch
Total Cost 58,32,000 1,40,94,000 2,86,74,000
Particulars (`) ÷ Total Units 45,000 52,500 30,000
Direct Material 24,62,000 Overheads Cost Per Unit `129.60 `268.46 `955.80
Direct Labour 4,68,500
Prime Cost 29,30,500 (2) Statement Showing Selling Price of Each Product With same Profit on Cost
Production Overhead: (Based on ABC Method)
Material procurement (`1,535 × 56 orders) 85,960
Particulars Product X Product Y Product Z
Material handling (`685.48 × 84 movements) 57,580
Maintenance (`139.94 × 1,420 hours) Material cost per unit 350 460 410
1,98,715
Wages per unit 240 400 560
Set-up (`628.97 × 60 set-ups) 37,738
Overhead cost per unit under ABC 129.60 268.46 955.80
Quality control (`242.86 × 18 inspections) 4,371
Total cost per unit 719.60 1,128.46 1,925.80
Total Cost for the Batch 33,14,864
Add: Profit @ 25% on cost 179.90 282.12 481.45
÷ Number of units ÷ 7,600
Selling price per unit `899.50 `1,410.58 `2,407.25
Cost Per Unit `436.17
Working Note:
BQ 3
SMP Pvt. Ltd. manufactures three products using three different machines. At present the overheads are (a) Total overheads = 45,000 units of X × `240 + 52,500 units of Y × `400 +
charged to products using labour hours. The following statement for the month of September 2022, using the 30,000 units of Z × `560 = `4,86,00,000
absorption costing method has been prepared:
(b) Cost related to activities:
Product X Product Y Product Z
Particulars Machine set up cost = `4,86,00,000 × 30% = `1,45,80,000
(Using Machine A) (Using Machine B) (Using Machine C)
Customer order processing cost = `4,86,00,000 × 30% = `1,45,80,000
 ACTIVITY BASED COSTING 6.4 ACTIVITY BASED COSTING 6.5
Customer complaint management cost = `4,86,00,000 × 40% = `1,94,40,000 Production Overhead @ `17.00 per hour 8.50 12.75 17.00
(17 × 30/60) (17 × 45/60) (17 × 60/60)
(c) Calculation of profit on cost = Profit per unit ÷ Cost per unit Total Unit Cost 21.50 32.25 33.00
Number of units 4,000 3,000 1,600
Product X = (1,037.50 – 830) ÷ 830 = 25% on cost
Total Cost (total unit cost × number of units) 86,000 96,750 52,800
Product Y = (1,575 – 1,260) ÷ 1,260 = 25% on cost
Product Z = (1,912.50 – 1,530) ÷ 1,530 = 25% on cost
Calculation of overhead rate per direct labour hour:
BQ 4
ABC Ltd. is a multiproduct company, manufacturing three products A, B and C. The budgeted costs and Overhead recovery rate = Budgeted overheads ÷ Budgeted labour hours
production for the year ending 31st March, 2023 are as follows: = `99,450 ÷ 5,850 hours = `17 per hour

Particulars A B C Budgeted labour hours = 4,000 A × 30/60 + 3,000 B × 45/60 + 1,600 C × 60/60
Production quantity (in units) 4,000 3,000 1,600 = 5,850 hours
Resources per unit:
Direct materials (kg.) 4 6 3 (2) Statement Showing Unit Cost and Total Cost Using ABC Method
Direct labour (minutes) 30 45 60
Particulars A (`) B (`) C (`)
Direct Material 8.00 12.00 6.00
The budgeted direct labour rate was `10 per hour, and the budgeted material cost was `2 per kg. Production
Direct Labour 5.00 7.50 10.00
overheads were budgeted at `99,450 and were absorbed to products using the direct labour hour rate. ABC
Production Overhead:
Ltd. followed an Absorption Costing System.
Material handling @ `0.75 per kg 3.00 4.50 2.25
ABC Ltd. is now considering to adopt an Activity Based Costing system. The following additional (4 × 0.75) (6 × 0.75) (3 × 0.75)
information is made available for this purpose. Electricity @ `1.082 per operation 6.49 3.25 2.16
(6 × 1.082) (3 × 1.082) (2 × 1.082)
1. Budgeted overheads were analysed into the following: Storage @ `1,040 per batch 2.60 1.73 9.75
 1 ,040   1 ,040   1 ,040 
Particulars (`)  10   5    15  
 4 ,000   3,000   1 ,600 
Material handling 29,100
Total Unit Cost 25.09 28.98 30.16
Storage costs 31,200
Electricity 39,150 Number of units 4,000 3,000 1,600
Total Cost (total unit cost × number of units) 1,00,360 86,940 48,256
2. The cost drivers identified were as follows:
Calculation of Activity rate:
Material handling Weight of material handled
Storage costs Number of batches of material Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Electricity Number of Machine operations Material handling `29,100 Weight of material handled 38,800 `0.75 per kg
Storage costs `31,200 No. of batches of material 30 `1,040 per batch
3. The cost drivers identified were as follows: Electricity `39,150 No. of Machine operations 36,200 `1.082 per operation

Particulars A B C Total weight = 4,000 × 4 kg + 3,000 × 6 kg + 1,600 × 3 kg = 38,800 kgs

For complete production:
Batches of material 10 5 15 Total machine operations = 4,000 × 6 + 3,000 × 3 + 1,600 × 2 = 36,200 oper.
Per unit of production:
Number of Machine operations 6 3 2 Total batches = 10 + 5 + 15 = 30 batches

You are requested to: (3) Comment: The difference in the total costs under the two systems is due to the differences in the
(1) Prepare a statement for management showing the unit costs and total costs of each product using the overheads borne by each of the products. The Activity Based Costs appear to be more precise.
absorption costing method.
(2) Prepare a statement for management showing the product costs of each product using the ABC approach. BQ 5
(3) What are the reasons for the different product costs under the two approaches? Woolmark Ltd. manufactures three types of products namely P, Q and R. The data relating to a period are as
under:
Answer Particulars P Q R
(1) Statement Showing Unit Cost and Total Cost Using Absorption Costing Method Machine hours per unit 10 18 14
Particulars A (`) B (`) C (`) Direct Labour hours per unit 4 12 8
Direct Material 8.00 12.00 6.00 Direct Material per unit (`) 90 80 120
Direct Labour 5.00 7.50 10.00 Production (units) 3,000 5,000 20,000
 ACTIVITY BASED COSTING 6.6 ACTIVITY BASED COSTING 6.7
Currently the company uses traditional costing method and absorbs all production overheads on the basis of (e) Total no. of Purchase Order = 3 × 20 batches + 10 × 10 batches + 8 × 20 batches
machine hours. The machine hour rate of overheads is `6 per hour. Direct labour hour rate is `20 per hour. = 320 orders
The company proposes to use activity based costing system and the activity analysis is as under:
Particulars P Q R (f) Statement Showing Cost Driver Rate:
Batch size (units) 150 500 1,000 Cost Pool % Overheads Cost Driver Basis Cost Driver Units Cost Driver Rate
Number of purchase orders per batch 3 10 8 Setup 20% 4,80,000 Number of batches 50 9,600/Setup
Number of inspections per batch 5 4 3 Inspection 40% 9,60,000 Number of inspections 200 4,800/Inspection
Purchases 10% 2,40,000 Number of purchases 320 750/Purchase
The total production overheads are analysed as under: Machine Hours 30% 7,20,000 Machine Hours 4,00,000 1.80/Machine Hour
Machine set up costs 20% Total - 24,00,000 - - -
Machine operation costs 30%
Inspection costs 40% BQ 6
Material procurement related costs 10% The following budgeted information relates to N Ltd. for the year 2023:
Required: Products
Particulars
X Y Z
1. Calculate the cost per unit of each product using traditional method of absorbing all production Production and Sales (units) 1,00,000 80,000 60,000
overheads on the basis of machine hours. Selling price per unit `90 `180 `140
2. Calculate the cost per unit of each product using activity based costing principles. Direct cost per unit `50 `90 `95
Machine department (machine hours per unit) 3 4 5
Answer Assembly department (direct labour hours per unit) 6 4 3
1. Statement Showing “Cost per unit as per Traditional Method”
Particulars P (`) Q (`) R (`) The estimated overhead expenses for the year 2023 will be as below:
Direct Materials 90 80 120
Direct Labour [(4, 12, 8 hours) × `20] 80 240 160 Machine Department `73,60,000
Production Overheads [(10, 18, 14 hours) × `6] 60 108 84 Assembly Department `55,00,000
Cost per unit 230 428 364
Overhead expenses are apportioned to the products on the following basis:
2. Statement Showing “Cost per unit as per ABC Method”
Particulars P (`) Q (`) R (`) Machine Department On the basis of machine hours
Production (units) 3,000 5,000 20,000 Assembly Department On the basis of labour hours
Direct Materials @ `90/`80/`120 per unit 2,70,000 4,00,000 24,00,000
Direct Labour @ `80/`240/`160 per unit After a detailed study of the activities the following cost pools and their respective cost drivers are found:
2,40,000 12,00,000 32,00,000
Production Overhead:
Machine Related Costs @ `1.80 per hour of 30,000/ 54,000 1,62,000 5,04,000 Cost Pool Amount Cost Driver Quantity
90,000/2,80,000 hours Machining services `64,40,000 Machine hours 9,20,000 hours
Setup Costs @ `9,600 per setup of 20/10/20 set ups 1,92,000 96,000 1,92,000 Assembly services `44,00,000 Direct labour hours 11,00,000 hours
Inspection Costs @ `4,800 per inspection of 4,80,000 1,92,000 2,88,000 Set-up costs `9,00,000 Machine set-ups 9,000 set-ups
100/40/60 inspection Order processing `7,20,000 Customer orders 7,200 orders
Purchase Related Costs @ `750 per purchase of 45,000 75,000 1,20,000 Purchasing `4,00,000 Purchase orders 800 orders
60/100/160 purchases
Total Costs 12,81,000 21,25,000 67,04,000 As per an estimate the activities will be used by the three products:
Cost per unit (Total Cost ÷ Units) 427.00 425.00 335.20
Products
Particulars
Working Notes: X Y Z
Machine set-ups 4,500 3,000 1,500
(a) Total Machine Hours = 3,000 × 10 + 5,000 × 18 + 20,000 × 14 = 4,00,000 hours Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150
(b) Total Production OH = 4,00,000 machine hours × `6 = `24,00,000
You are required to prepare a product-wise profit statement using:
(c) Total no. of Batches = (3,000 ÷ 150) + (5,000 ÷ 500) + (20,000 ÷ 1,000)
= 20 batches + 10 batches + 20 batches = 50 batches (1) Absorption costing method;
(2) Activity-based method.
(d) Total no. of Inspections = 5 × 20 batches + 4 × 10 batches + 3 × 20 batches
= 200 inspections Answer
 ACTIVITY BASED COSTING 6.8 ACTIVITY BASED COSTING 6.9
(1) Statement of Profit Using Absorption Costing Method BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond
Particulars X (`) Y (`) Z (`) Production (Units) 4,000 3,000 2,000
Sales Value 90,00,000 1,44,00,000 84,00,000 Resources per Unit: Qty Rate Qty Rate Qty Rate
(1,00,000 × 90) (80,000 × 180) (60,000 × 140) Essential Oils 60 ml `200/100 ml 55 ml `300/100 ml 65 ml `300/100 ml
Less: Direct Cost 50,00,000 72,00,000 57,00,000 Cocoa Butter 20 g `200/100 g 20 g `200/100 g 20 g `200/100 g
(1,00,000 × 50) (80,000 × 90) (60,000 × 95) Filtered Water 30 ml `15/100 ml 30 ml `15/100 ml 30 ml `15/100 ml
Less: Overhead: Chemicals 10 g `30/100 g 12 g `50/100 g 15 g `60/100 g
Machine Department 24,00,000 25,60,000 24,00,000 Direct Labour 30 minutes `10/hour 40 minutes `10/hour 60 minutes `10/hour
(1,00,000 × 3 × 8) (80,000 × 4 × 8) (60,000 × 5 × 8)
Assembly Department 30,00,000 16,00,000 9,00,000 Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to its products
(1,00,000 × 6 × 5) (80,000 × 4 × 5) (60,000 × 3 × 5) using direct labour hour rate, which were budgeted at `1,98,000.
Profit (14,00,000) 30,40,000 (6,00,000)
Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:
(2) Statement of Profit Using ABC Method
Particulars X (`) Y (`) Z (`) Particulars (`) Cost drivers
Sales Value 90,00,000 1,44,00,000 84,00,000 Forklifting cost 58,000 Weight of material lifted
(1,00,000 × 90) (80,000 × 180) (60,000 × 140) Supervising cost 60,000 Direct labour hours
Less: Direct Cost 50,00,000 72,00,000 57,00,000 Utilities 80,000 Number of Machine operations
(1,00,000 × 50) (80,000 × 90) (60,000 × 95)
Less: Overhead: The number of machine operations per unit of production are 5, 5, and 6 for BABYSOFT- Gold, BABYSOFT-
Machining services 21,00,000 22,40,000 21,00,000 Pearl, and BABYSOFT- Diamond respectively.
(1,00,000 × 3 × 7) (80,000 × 4 × 7) (60,000 × 5 × 7)
Assembly services 24,00,000 12,80,000 7,20,000 (Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively (ii)
(1,00,000 × 6 × 4) (80,000 × 4 × 4) (60,000 × 3 ×4) Mass of output produced is equivalent to the mass of input materials taken together.)
Set-up costs 4,50,000 3,00,000 1,50,000
(4,500 × 100) (3,000 × 100) (1,500 × 100) You are requested to:
Order processing 2,20,000 2,40,000 2,60,000 1. Prepare a statement showing the unit costs and total costs of each product using the absorption costing
(2,200 × 100) (2,400 × 100) (2,600 × 100) method.
Purchasing 1,50,000 1,75,000 75,000 2. Prepare a statement showing the product costs of each product using the ABC approach.
(300 × 500) (350 × 500 ) (150 × 500) 3. State what are the reasons for the different product costs under the two approaches?
Profit (13,20,000) 29,65,000 (6,05,000)
Answer
Working Note: 1. Statement Showing “Unit Cost and Total Cost as per Absorption Costing”
1. Calculation of overhead rate: BABYSOFT- BABYSOFT- BABYSOFT-
Particulars
Gold Pearl Diamond
Machine Department = Budgeted overheads ÷ Budgeted machine hours
= `73,60,000 ÷ 9,20,000 = `8 per hour Number of units 4,000 3,000 2,000
Direct Materials 167.50 215.50 248.50
Assembly Department = Budgeted overheads ÷ Budgeted labour hours Direct Labour [(30, 40, 60 minutes) @ `10 per hour 5.00 6.67 10.00
= `55,00,000 ÷ 11,00,000 = `5 per hour Production OH [(30, 40, 60 minutes) @ `33 per hour 16.50 22.00 33.00
Cost per unit 189.00 244.17 291.50
2. Calculation of Cost driver rate: Total cost (Cost per unit × number of units) 7,56,000 7,32,510 5,83,000

Cost Pool Amount Cost Driver Volume Cost Driver Rate Working notes:
Machining services `64,40,000 Machine hours 9,20,000 hours `7 per hour
Assembly services `44,00,000 Direct labour hours 11,00,000 hours `4 per hour (a) Total Direct labour hours = 4,000 units × 30/60 + 3,000 × 40/60 + 2,000 × 1 hour
Set-up costs `9,00,000 Machine set-ups 9,000 set-ups `100 per set-up = 2,000 hours + 2,000 hours + 2,000 hours = 6,000 hours
Order processing `7,20,000 Customer orders 7,200 orders `100 per order (b) Overhead rate = Budgeted overheads ÷ Budgeted labour hours
Purchasing `4,00,000 Purchase orders 800 orders `500 per order = `1,98,000 ÷ 6,000 hours = `33/direct labour hour

BQ 7 (c) Calculation of Direct material cost

BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three ranges of beauty BABYSOFT- Gold (`) BABYSOFT- Pearl (`) BABYSOFT- Diamond (`)
soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond. The budgeted costs and production 120.00 165.00 195.00
for the month of December, 2022 are as follows: Essential oils 200 × 60 300 × 55 300 × 65
( ) ( ) ( )
100 100 100
 ACTIVITY BASED COSTING 6.10 ACTIVITY BASED COSTING 6.11
40.00 40.00 40.00 General Supermarket Drugstore Chains Chemist Shops
Particulars
Cocoa Butter 200 × 20 200 × 20 200 × 20 Chains (`) (`) (`)
( ) ( ) ( )
100 100 100 Average revenue per delivery 84,975 28,875 5,445
4.50 4.50 4.50 Average cost of goods sold per delivery 82,500 27,500 4,950
Filtered water 30 × 15 30 × 15 30 × 15 Number of deliveries 330 825 2,750
( ) ( ) ( )
100 100 100
3.00 6.00 9.00 In the past, RST Limited has used gross margin percentage to evaluate the relative profitability of its
Chemicals 30 × 10 50 × 12 60 × 15 distribution channels. The company plans to use activity based costing for analysing the profitability of its
( ) ( ) ( )
100 100 100 distribution channels.
Total cost 167.50 215.50 248.50
The Activity analysis of RST Limited is as under:
2. Statement Showing “Unit Cost and Total Cost as per ABC Costing”
Activity Area Cost Driver
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Customer purchase order processing Purchase orders by customers
Particulars
Diamond Line-item ordering Line-items per purchase order
Number of units 4,000 3,000 2,000 Store delivery Store deliveries
Direct Materials 167.50 215.50 248.50 Cartons dispatched to stores Cartons dispatched to a store per delivery
Direct Labour 5.00 6.67 10.00 Shelf-stocking at customer store Hours of shelf-stocking
Production OH:
Forklifting cost 6.48 6.36 7.02 The April, 2023 operating costs (other than cost of goods sold) of RST Limited are `8,27,970. These operating
(0.06 × 108) (0.06 × 106) (0.06 × 117) costs are assigned to five activity areas. The cost in each area and the quantity of the cost allocation basis used
Supervising cost 5.00 6.67 10.00 in that area for April, 2023 are as follows:
(10 × 30/60) (10 × 40/60) (10 × 60/60)
Utilities 8.50 8.50 10.20 Total costs in Total Units of Cost Allocation
Activity Area
(1.70 × 5) (1.70 × 5) (1.70 × 6) April, 2023 (`) Base used in April, 2023
Cost per unit 192.48 243.70 285.72 Customer purchase order processing 2,20,000 5,500 orders
Total cost 7,69,920 7,31,100 5,71,440 Line-item ordering 1,75,560 58,520 line items
Store delivery 1,95,250 3,905 store deliveries
Working notes: Cartons dispatched to store 2,09,000 2,09,000 cartons dispatched
Shelf-stocking at customer store 28,160 1,760 hours
(a) Forklifting rate = `58,000 ÷ 9,84,000 grams = `0.06 per gram
(b) Supervising rate = `60,000 ÷ 6,000 hours labour hour = `10 labour hour Other data for April, 2023 include the following:
Supermarket Drugstore Chemist
(c) Utilities rate = `80,000 ÷ 47,000 machine operations = `1.70 per machine operations Particulars
Chains Chains Shops
(d) Calculation of Total Weight and Total Operations: Total number of orders 385 990 4,125
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond Total Average number of line items per order 14 12 10
Quantity (units) 4,000 3,000 2,000 - Total number of store deliveries 330 825 2,750
Weight per unit (grams) 108 106 117 - Average no. of cartons shipped per store delivery 300 80 16
{(60×0.8)+20+30+10} {(55×0.8)+20+30+12} {(65×0.8)+20+30+15} Average no. of hours of shelf stocking per store delivery 3 0.6 0.1
Total weight (grams) 4,32,000 3,18,000 2,34,000 9,84,000
(4,000 × 108) (3,000 × 106) (2,000 × 117) Required:
Total operations 20,000 15,000 12,000 47,000 (1) Compute for April, 2023 gross-margin percentage for each of its three distribution channels and compute
(4,000 × 5) (3,000 × 5) (2,000 × 6) RST Limited’s operating income.
(2) Compute the April, 2023 rate per unit of the cost-allocation base for each of the five activity areas.
(3) Compute the operating income of each distribution channel in April, 2023 using the activity based costing
3. Comments: The difference in the total costs under the two systems is due to the differences in the
overheads borne by each of the products. The Activity Based Costs appear to be more accurate. information. Comment on the results. What new insights are available with the activity based cost
information?
(4) Describe four challenges one would face in assigning the total April, 2023 operating costs of `8,27,970 to
BQ 8
five activity areas.
RST Limited specializes in the distribution of pharmaceutical products. It buys from the pharmaceutical
companies and resells to each of the three different markets.
Answer
(1) General Supermarket Chains (1) Statement of Operating Income and Gross Margin % for Each of its Three Distribution Channel
(2) Drugstore Chains General Drugstore
Particulars Chemist Shops Total
(3) Chemist Shops Supermarket Chains
Number of deliveries 330 825 2,750 -
The following data for the month of April, 2023 in respect of RST Limited has been reported: Average revenue per delivery (`) 84,975 28,875 5,445 -
 ACTIVITY BASED COSTING 6.12 ACTIVITY BASED COSTING 6.13
Average COGS per delivery (`) 82,500 27,500 4,950 - - Choice of the time period to compute cost rates per cost driver.
Revenue (`) 2,80,41,750 2,38,21,875 1,49,73,750 6,68,37,375 - Behavioural factors.
Less: Cost of goods sold (`) 2,72,25,000 2,26,87,500 1,36,12,500 6,35,25,000
Gross Margin (`) 8,16,750 11,34,375 13,61,250 33,12,375 BQ 9
Less: Other operating cost (`) - - - 8,27,970 Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh produce
Operating income (`) - - - 24,84,405 and Packaged food. Family store provides the following data for the year 2022-23 for each product line:
Gross Margin (%) 2.91% 4.76% 9.09% 4.96% Soft drinks Fresh produce Packaged food
Operating income (%) - - - 3.72% Revenues `39,67,500 `1,05,03,000 `60,49,500
Cost of goods sold `30,00,000 `75,00,000 `45,00,000
(2) Computation of rate per unit of the cost allocation base for each of the five activity areas Cost of bottles returned `60,000 `0 `0
Rate per Unit of the Cost Number of purchase orders placed 360 840 360
Activity Area Calculation
Allocation Base (`) Number of deliveries received 300 2,190 660
Customer purchase order processing `2,20,000 ÷ 5,500 orders `40 per order Hours of shelf-stocking time 540 5,400 2,700
Line-item ordering `1,75,560 ÷ 58,520 line items `3 per line item Items sold 1,26,000 11,04,000 3,06,000
Store delivery `1,95,250 ÷ 3,905 store deliveries `50 per delivery
Cartons dispatched to store `2,09,000 ÷ 2,09,000 cartons `1 per carton dispatched Family store also provides the following information for the year 2022-23:
Shelf-stocking at customer store `28,160 ÷ 1,760 hours `16 per hour Activity Description of activity Total Cost Cost-allocation base
Bottles returns Returning of empty bottles `60,000 Direct tracing to soft drink line
(3) Statement of Operating Income of Each Distribution Channel Using ABC Method
Ordering Placing of orders for purchases `7,80,000 1,560 purchase orders
General
Drugstore Delivery Physical delivery and receipt of goods `12,60,000 3,150 deliveries
Particulars Supermarket Chemist Shops
Chains Shelf stocking Stocking of goods on store shelves `8,64,000 8,640 hours of shelf-stocking
Chains
and ongoing restocking time
Gross Margin (`) 8,16,750 11,34,375 13,61,250
Customer Support Assistance provided to customers `15,36,000 15,36,000 items sold
Less: Other operating cost (`) (WN) 1,62,910 1,90,410 4,74,650
including check-out
Operating income (`) 6,53,840 9,43,965 8,86,600
Operating income (%) (Operating income ÷ Sales) 2.33% 3.96% 5.92%
Required:
Comments and new insights: The activity-based cost information highlights, how the ‘Chemist Shops’ uses a 1. Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on
larger amount of RST Ltd’s resources per revenue than do the other two distribution channels. Ratio of the basis of cost of goods sold of each product line. Calculate the operating income and operating income
operating costs to revenues, across these markets is: as a % of revenues for each product line.
Markets Calculation Operating cost ratio 2. If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using an
General supermarket chains (1,62,910 ÷ 2,80,41,750) × 100 0.58% activity-based costing system, Calculate the operating income and operating income as a % of revenues
Drug store chains (1,90,410 ÷ 2,38,21,875) × 100 0.80% for each product line.
Chemist shops (4,74,650 ÷ 1,49,73,750) × 100 3.17%
Answer
Working note: 1. Statement of Operating income and Operating income as a % of revenues for each product line
Computation of operating cost of each distribution channel: (When support costs are allocated to product lines on the basis of cost of goods sold of each product)
General Soft Drinks Fresh Packaged Total (`)
Activities Drugstore Chains Chemist Shops
Supermarket Chains (`) Produce (`) Foods (`)
Customer purchase order process 15,400 39,600 1,65,000 Revenues 39,67,500 1,05,03,000 60,49,500 2,05,20,000
(385 × `40) (990 × `40) (4,125 × `40) Cost of Goods sold (COGS) 30,00,000 75,00,000 45,00,000 1,50,00,000
Line item ordering 16,170 35,640 1,23,750 Support cost (30% of COGS) 9,00,000 22,50,000 13,50,000 45,00,000
(385 × 14 × `3) (990 × 12 × `3) (4,125 × 10 × `3) Total cost 39,00,000 97,50,000 58,50,000 1,95,00,000
Store delivery 16,500 41,250 1,37,500 Operating income (Sales – Total cost) 67,500 7,53,000 1,99,500 10,20,000
(330 × `50) (825 × `50) (2,750 × `50) % of Operating income to Sales 1.70% 7.17% 3.30% 4.97%
Cartons dispatched 99,000 66,000 44,000
(330 × 300 × `1) (825 × 80 × `1) (2,750 × 16 × `1) Working notes:
Shelf-stocking 15,840 7,920 4,400 (a) Calculation of Cost Driver Rate
(330 × 3 × `16) (825 × 0.6 × `16) (2,750 × 0.1 × `16)
Operating cost 1,62,910 1,90,410 4,74,650 Activity Total cost (`) Cost allocation base Cost driver rate
(1) (2) (3) (4) = [(2)÷(3)]
(4) Challenges faced in assigning total operating cost of `8,27,970: Ordering 7,80,000 1,560 purchase orders `500 per purchase order
- Choosing an appropriate cost driver for activity area. Delivery 12,60,000 3,150 deliveries `400 per delivery
- Developing a reliable data base for the chosen cost driver. Shelf-stocking 8,64,000 8,640 hours `100 per stocking hour
- Deciding, how to handle costs that may be common across several activities. Customer support 15,36,000 15,36,000 items sold `1 per item sold
 ACTIVITY BASED COSTING 6.14 ACTIVITY BASED COSTING 6.15
(b) Total support cost = 60,000 + 7,80,000 + 12,60,000 + 8,64,000 + 15,36,000 Answer
= 45,00,000 (1) Statement of Operating Income and Percentage of Operating Income for each Product Line
(Allocation of Store Support Cost on the basis of COGS)
45,00,000
(c) Percentage of support cost to COGS = × 100 = 30% Particulars Lemon Grapes Papaya Total
1,50,00,000
Revenue 79,350 2,10,060 1,20,990 4,10,400
2. Statement of Operating income and Operating income as a % of revenues for each product line Less: Cost of goods sold 60,000 1,50,000 90,000 3,00,000
(When support costs are allocated to product lines using an activity based costing system) Less: Store support cost (`90,000 in 6:15:9) 18,000 45,000 27,000 90,000
Operating income (`) 1,350 15,060 3,990 20,400
Soft Drinks Fresh Packaged Total (`)
Operating income (%) 1.70% 7.17% 3.30% 4.97%
(`) Produce (`) Foods (`)
Revenues 39,67,500 1,05,03,000 60,49,500 2,05,20,000
(2) Statement of Operating Income and Percentage of Operating Income for each Product Line
Cost of Goods sold (COGS) 30,00,000 75,00,000 45,00,000 1,50,00,000
(Allocation of Store Support Cost on the basis of ABC)
Bottle return costs 60,000 - - 60,000
Ordering cost (360 : 840 : 360) 1,80,000 4,20,000 1,80,000 7,80,000 Particulars Lemon Grapes Papaya Total
Delivery cost (300 : 2190 : 660) 1,20,000 8,76,000 2,64,000 12,60,000 Revenue 79,350 2,10,060 1,20,990 4,10,400
Shelf stocking cost (540 : 5400 : 2700) 54,000 5,40,000 2,70,000 8,64,000 Less: Cost of goods sold 60,000 1,50,000 90,000 3,00,000
Customer Support cost (1,26,000 : 1,26,000 11,04,000 3,06,000 15,36,000 Less: Store support cost:
11,04,000 : 3,06,000) Bottle return 1,200 - - 1,200
Total cost 35,54,000 1,04,40,000 55,20,000 1,95,00,000 Ordering @ `100 per purchase order 3,600 8,400 3,600 15,600
Operating income (Sales – Total cost) 4,27,500 63,000 5,29,500 10,20,000 Delivery @ `80 per delivery 2,400 17,520 5,280 25,200
% of Operating income to Sales 10.78% 0.60% 8.75% 4.97% Shelf stocking @ `20 per hour 1,080 10,800 5,400 17,280
Customer support @ `0.20/item sold 2,520 22,080 6,120 30,720
BQ 10 Operating income (`) 8,550 1,260 10,590 20,400
Asian manufacturing company has decided to increase the size of the store. It wants the information about the Operating income (%) 10.78% 0.60% 8.75% 4.97%
probability of the individual product lines: Lemon, Grapes and Papaya. It provides the following data for the
2023 for each product line: Calculation of Store Support Cost rate:
Particulars Lemon Grapes Papaya Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Revenue (`) 79,350 2,10,060 1,20,990 Bottle returns `1,200 Direct tracing to product line 1 `1,200
Cost of goods sold (`) 60,000 1,50,000 90,000 Ordering `15,600 Number of purchase orders 156 `100 per purchase order
Cost of bottles returned (`) 1,200 0 0 Delivery `25,200 Number of deliveries 315 `80 per delivery
Number of purchase order placed 36 84 36 Shelf- stocking `17,280 Shelf stocking hours 864 `20 per hour
Number of deliveries received 30 219 66 Customer support `30,720 Number of items sold 1,53,600 `0.20 per item sold
Hours of shelf stocking time 54 540 270
Items sold 12,600 1,10,400 30,600 (3) Statement Showing Comparison

Asian manufacturing company also provides the following information for the year 2023: Particulars Lemon Grapes Papaya Total
Under Traditional Costing System 1.70% 7.17% 3.30% 4.97%
Activity Description of Activity Total Cost Cost Allocation Basis Under ABC System 10.78% 0.60% 8.75% 4.97%
Bottle returns Returning of empty bottles to the store `1,200 Direct tracing to product line
Ordering Placing of orders of purchases `15,600 156 purchase orders BQ 11
Delivery Physical delivery and the receipts of `25,200 315 deliveries
RVP Cinema provides the following data for the year 2022-23:
merchandise
Shelf- stocking Stocking of merchandise on store shelves `17,280 864 hours of time Premium Recliner
Particulars 7D Hall Cafeteria
and ongoing restocking Hall Hall
Customer Assistance provided to customers `30,720 1,53,600 items sold Revenue (`) 11,55,000 18,75,000 9,30,000 5,25,000
support including bagging and checkout Cost of goods sold (`) - - - 4,51,125
Digital media cost (`) 6,19,800 9,46,875 4,02,900 -
Required Number of Credit Card transactions 75,000 90,000 60,000 45,000
Number of Tests 12,000 18,000 15,000 7,500
(1) Asian manufacturing company currently allocates store support costs (all costs other than the cost of
Number of Setups 225 450 150 75
goods sold) to the product line on the basis of the cost of goods sold of each product line. Calculate the
Area in Square feet 3,000 4,500 2,250 750
operating income and operating income as the percentage of revenue of each product line.
Number of Customer contacts 2,62,500 3,00,000 1,50,000 37,500
(2) If Asian manufacturing company allocates store support costs (all costs other than the cost of goods sold)
Number of Customer online orders 2,10,000 2,47,500 1,20,000 22,500
to the product lines on the basis of ABC system, Calculate the operating income and operating income as
the percentage of revenue of each product line.
Cost analysis has revealed the following:
(3) Show a comparison statement.
 ACTIVITY BASED COSTING 6.16 ACTIVITY BASED COSTING 6.17
Activity Activity Cost Activity Driver Activity Capacity Activity Cost Driver Capacity Cost
Marketing Expenses `2,25,000 Number of Customer contacts 7,50,000 Power Kilowatt hours 50,000 kilowatt hours `2,00,000
Website Maintenance Expense `1,50,000 Number of Customer online orders 6,00,000 Quality inspection Number of inspections 10,000 inspections `3,00,000
Credit Card Processing Fees `1,35,000 Number of Credit Card transaction 2,70,000
Cleaning Equipment Cost `3,15,000 Number of square feet 10,500 The company makes three products M, S and T. For the year ended March 31, 2023, the following consumption
Inspecting and testing costs `2,62,500 Number of tests 52,500 of cost drivers was reported:
Setting up machine’s costs `4,50,000 Number of set-ups 900 Product Kilowatt hours Quality inspections
M 10,000 3,500
Required: S 20,000 2,500
(1) If RVP Cinema allocates all costs (other than the cost of goods sold and digital media costs) to the T 15,000 3,000
departments on the basis of Activity Based Costing system, Calculate the operating income and percentage
of operating income of each department. Required:
(2) RVP Cinema operated for years under the assumption that profitability can be increased by increasing (1) Compute the costs allocated to each product from each activity.
net revenue from Cafeteria. However, the supervisor of RVP Cinema wants to shut down Cafeteria. On (2) Calculate the cost of unused capacity for each activity.
the basis of (1) above, State whether the contention of the Supervisor is valid or not. (3) Discuss the factors the management considers in choosing a capacity level to compute the budgeted fixed
overhead cost rate.
Answer
(1) Statement of Operating Income and Percentage of Operating Income for each Department Answer
Particulars Premium Hall Recliner Hall 7D Hall Cafeteria (1) Statement of Cost Allocation to Each Product from Each Activity
Revenue 11,55,000 18,75,000 9,30,000 5,25,000 Product
Activity
Less: Cost of Goods Sold - - - 4,51,125 M (`) S (`) T (`) Total (`)
Less: Digital Media Costs 6,19,800 9,46,875 4,02,900 - Power @ `4 per kwh 40,000 80,000 60,000 1,80,000
Less: Other Costs: (10,000 × `4) (20,000 × `4) (15,000 × `4)
Marketing Expenses 78,750 90,000 45,000 11,250
(2,62,500 × .30) (3,00,000 × .30) (1,50,000 × .30) (37,500 × .30) Quality inspection @ `30 per inspection 1,05,000 75,000 90,000 2,70,000
Website Maintenance Exps. 52,500 61,875 30,000 5,625 (3,500 × `30) (2,500 × `30) (3,000 × `30)
(2,10,000 × .25) (2,47,500 × .25) (1,20,000 × .25) (22,500 × .25)
Credit Card Processing Fees 37,500 45,000 30,000 22,500 Working note:
(75,000 × .50) (90,000 × .50) (60,000 × .50) (45,000 × .50) Cost driver rate/Activity rate:
Cleaning Equipment Cost 90,000 1,35,000 67,500 22,500
Power = `2,00,000 ÷ 50,000 kwh = `4 per kwh
(3,000 × 30) (4,500 × 30) (2,250 × 30) (750 × 30)
Quality inspection = `3,00,000 ÷ 10,000 inspections = `30 per inspection
Inspecting and testing costs 60,000 90,000 75,000 37,500
(12,000 × 5) (18,000 × 5) (15,000 × 5) (7,500 × 5)
Setting up machine’s costs 1,12,500 2,25,000 75,000 37,500 (2) Computation of cost of unused capacity for each activity:
(225 × 500) (450 × 500) (150 × 500) (75 × 500) Power = `2,00,000 - `1,80,000 = `20,000
Operating Income (`) 1,03,950 2,81,250 2,04,600 (63,000) Quality inspection = `3,00,000 - `2,70,000 = `30,000
Operating Income (%) 9% 15% 22% (12%)
Total cost of unused capacity is `50,000.
Calculation of Activity rate:
Activity Cost Pool Amount Activity Driver Volume Activity Rate (3) Factors management consider in choosing a capacity level to compute the budgeted fixed overhead
Marketing Expenses `2,25,000 Number of Customer contacts 7,50,000 `0.30 cost rate:
Website Maintenance `1,50,000 Number of Customer online 6,00,000 `0.25 - Effect on product costing & capacity management
Expense orders - Effect on pricing decisions.
Credit Card Processing Fees `1,35,000 Number of Credit Card 2,70,000 `0.50 - Effect on performance evaluation
transaction - Effect on financial statements
Cleaning Equipment Cost `3,15,000 Number of square feet 10,500 `30.00 - Regulatory requirements.
Inspecting and testing costs `2,62,500 Number of tests 52,500 `5.00 - Difficulties in forecasting chosen capacity level concepts.
Setting up machine’s costs `4,50,000 Number of set-ups 900 `500.00
BQ 13
(2) Contention of Supervisor is valid as operating income of Cafeteria is negative i.e. (`63,000) or percentage ABC Ltd. manufactures two types of machinery equipment Y and Z and applies/absorbs overheads on the basis
of loss is 12%. of direct labour hours. The budgeted overheads and direct labour hours for the month of December, 2023 are
`12,42,500 and 20,000 hours respectively.
BQ 12
MST Limited has collected the following data for its two activities. It calculates activity cost rates based on cost The information about Company’s products is as follows:
driver capacity.
 ACTIVITY BASED COSTING 6.18 ACTIVITY BASED COSTING 6.19
Particulars Equipment Y Equipment Z Working note:
Budgeted Production volume 2,500 units 3,125 units
Calculation of overheads cost per unit under ABC costing
Direct material cost `300 per unit `450 per unit
Direct labour cost: Overheads
Y : 3 hours @ `150 per hour - Activity Overhead cost Cost driver Ratio
`450 Y Z
Z : 4 hours @ `150 per hour - `600 Order processing `2,10,000 Orders processed 350 : 250 `1,22,500 `87,500
Machine processing `8,75,000 Machine hours 23,000 : 27,000 `4,02,500 `4,72,500
ABC Ltd.’s overheads of `12,42,500 can be identified with three major activities: Inspection `1,57,500 Inspection hours 4,000 : 11,000 `42,000 `1,15,500
Order Processing (`2,10,000), machine processing (`8,75,000), and product inspection (`1,57,500). Total overheads `5,67,000 `6,75,500
÷ Number of units ÷ 2,500 ÷ 3,125
These activities are driven by number of orders processed, machine hours worked, and inspection hours,
respectively. The data relevant to these activities is as follows: Overhead per unit `226.80 `216.16

Equipments Orders processed Machine hours worked Inspection hours BQ 14

Y 350 23,000 4,000 Alpha Limited has decided to analyse the profitability of its five new customers. It buys bottled water at `90
Z 250 27,000 11,000 per case and sells to retail customers at a list price of `108 per case. The data pertaining to five customers are:
Total 600 50,000 15,000
Customers
Particulars
Required: A B C D E
(1) Assuming use of direct labour hours to absorb/apply overheads to production, compute the unit Cases sold 4,680 19,688 1,36,800 71,550 8,775
manufacturing cost of the equipment Y and Z, if the budgeted manufacturing volume is attained. List Selling Price (`) 108 108 108 108 108
(2) Assuming use of activity based costing, compute the unit manufacturing costs of the equipment Y and Z, if Actual Selling Price (`) 108 106.20 99 104.40 97.20
the budgeted manufacturing volume is achieved. Number of Purchase orders 15 25 30 25 30
(3) ABC Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application base, Number of Customer visits 2 3 6 2 3
calculate the amount of cost distortion (under-costed or overcosted) for each equipment. Number of deliveries 10 30 60 40 20
Kilometres travelled per delivery 20 6 5 10 30
Answer Number of expedited deliveries 0 0 0 0 1
(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method
Its five activities and their cost drivers are:
Particulars Equipment Y Equipment Z
Direct material cost `300 `450 Activity Cost Driver Rate
Direct labour cost `450 `600 Order taking `750 per purchase order
Overheads @ `62.125 per hour for 3 hours and 4 hours `186.38 `248.50 Customer visits `600 per customer visit
Manufacturing cost per unit `936.38 `1,298.50 Deliveries `5.75 per delivery Km travelled
Product handling `3.75 per case sold
Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours Expedited deliveries `2,250 per expedited delivery
= `12,42,500 ÷ 20,000 hours = `62.125/hour
Required:
Total labour hours = 2,500 units of Y × 3 hours + 3,125 units of Y × 4 hours (1) Compute the customer-level operating income of each of five retail customers now being examined (A,
= 20,000 hours B, C, D and E). Comment on the results.
(2) What insights are gained by reporting both the list selling price and the actual selling price for each
(2) Statement Showing Unit Manufacturing Cost Using ABC Method customer?
Particulars Equipment Y Equipment Z
Direct material cost `300 `450 Answer
Direct labour cost `450 `600 (1) Computation of Customer Level Operating Income
Overheads per unit (W.N.) `226.80 `216.16
Customers
Manufacturing cost per unit `976.80 `1,266.16 Particulars
A (`) B (`) C (`) D (`) E (`)
Cases sold 4,680 19,688 1,36,800 71,550 8,775
(3) Statement Showing Cost Distortion
Revenue at list price @ `108 p.u. 5,05,440 21,26,304 1,47,74,400 77,27,400 9,47,700
Particulars Equipment Y Equipment Z Less: Discount - 35,438 12,31,200 2,57,580 94,770
Unit manufacturing cost: Revenue net of discount 5,05,440 20,90,866 1,35,43,200 74,69,820 8,52,930
Using direct labour hours as an application base 936.38 1298.50 Less: COGS @ `90 p.u. 4,21,200 17,71,920 1,23,12000 64,39,500 7,89,750
Using activity based costing 976.80 1,266.16 Gross Margin 84,240 3,18,946 12,31,200 10,30,320 63,180
Cost distortion (-) 40.42 + 32.34 Less: Customer level operating 31,150 95,415 5,40,825 2,90,563 62,906
activities cost (W.N.)
Low volume product Y is under-costed and high volume product Z is over-costed using direct labour hours for
Customer level Operating income 53,090 2,23,531 6,90,375 7,39,757 274
overhead absorption.
 ACTIVITY BASED COSTING 6.20 ACTIVITY BASED COSTING 6.21
Comment on the results: Customer D is the most profitable customer. D’s profits are even higher than C Computer Processing 5,00,000 Half this amount is fixed and no change is expected.
(whose revenue is the highest) despite having only 52.30% of the unit volume of customer C. The main reason The variable portion is expected to increase to three times
is that C receives a discount of ` 9 per case while customer D receives only a ` 3.60 discount per case. the current level.
(This activity is driven by the number of computer
Customer E is the least profitable. The profits of E is even less than A (whose revenue is least) Customer
transactions)
E received a discount of ` 10.80 per case, makes more frequent orders, requires more customer visits and
Issuing Statements 18,00,000 Presently, 3 lakh statements are made. In the budget
requires more delivery kms. in comparison with customer A.
period, 5 lakh statements are expected.
For every increase of one lakh statement, one lakh rupees
Working note:
is the budgeted increase.
Computation of customer level operating activities costs:
(This activity is driven by the number of statements)
Customers Computer Inquiries 2,00,000 Estimated to increase by 80% during the budget period.
Particulars
A (`) B (`) C (`) D (`) E (`) (This activity is driven by telephone minutes)
Order taking costs (`) 11,250 18,750 22,500 18,750 22,500
(No. of purchase × `750) The activity drivers and their budgeted quantifies are given below:
Customer visits costs (`) 1,200 1,800 3,600 1,200 1,800
Activity Drivers Deposits Loans Credit Cards
(No. of customer visits × `600)
No. of ATM Transactions 1,50,000 - 50,000
Delivery vehicles travel costs (`) 1,150 1,035 1,725 2,300 3,450
No. of Computer Processing Transactions 15,00,000 2,00,000 3,00,000
(Kms travelled × `5.75 per km.)
No. of Statements to be issued 3,50,000 50,000 1,00,000
Product handling costs (`) 17,550 73,830 5,13,000 2,68,313 32,906
Telephone Minutes 3,60,000 1,80,000 1,80,000
(units × `3.75)
Cost of expediting deliveries (`) - 2,250
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000 Credit Card
(No. of expedited deliveries × `2,250)
Accounts.
Total cost of customer level operating
31,150 95,415 5,40,825 2,90,563 62,906
activities (`)
Required:
1. Calculate the budgeted rate for each activity.
(2) Insight gained by reporting both the list selling price and the actual selling price for each customer: 2. Prepare the budgeted cost statement activity wise.
Separate reporting of both-the listed and actual selling prices enables Alpha Ltd. To examine which customer 3. Compute the budgeted product cost per account for each product using (1) and (2) above.
has received what discount per case, whether the discount received has any relationship with the sales volume.
The data given below provides us with the following information; Answer
Statement Showing “Budgeted Cost per unit of the Product”
Sales volume Discount per case (`)
C (1,36,800 cases) 9.00 Budgeted Budgeted Activi
D (71,550 cases) 3.60 Activity Activity ty Credit
Activity Activity Driver Deposits Loans
B (19,688 cases) 1.80 Cost Driver Rate Cards
E (8,775 cases) 10.80 (`) units (`)
A (4,680 cases) 0 ATM Services 8,00,000 No. of ATM 2,00,000 4.00 6,00,000 - 2,00,000
Transaction
The above data clearly shows that the discount given to customers per case has a direct relationship with sales Computer 10,00,000 No. of Computer 20,00,000 0.50 7,50,000 1,00,000 1,50,000
volume, except in the case of customer E. The reasons for `10.80 discount per case for customer E should be Processing processing
explored. Transaction
Issuing 20,00,000 No. of Statements 5,00,000 4.00 14,00,000 2,00,000 4,00,000
BQ 15 Statements
‘Humara Apna’ bank offers three products, viz., deposits, Loans and Credit Cards. The bank has selected 4 Computer 3,60,000 Telephone Minutes 7,20,000 0.50 1,80,000 90,000 90,000
activities for a detailed budgeting exercise, following activity based costing methods. The bank wants to know Inquiries
the product wise total cost per unit for the selected activities, so that prices may be fixed accordingly. Budgeted Cost 41,60,000 29,30,000 3,90,000 8,40,000
Units of Product (as estimated in the budget period) 58,600 13,000 14,000
The following information is made available to formulate the budget: Budgeted Cost per unit of the product 50 30 60

Present Working Note:

Activity Estimation for the budget period
Cost (`)
ATM Services: Budgeted
Activity Remark
(a) Machine Maintenance 4,00,000 All fixed, no change. Cost (`)
(b) Rents 2,00,000 Fully fixed, no change. ATM Services:
(c) Currency Replenishment Cost 1,00,000 Expected to double during budget period. (a) Machine Maintenance 4,00,000 All fixed, no change.
Total 7,00,000 (This activity is driven by no. of ATM transactions) (b) Rents 2,00,000 Fully fixed, no change.
(c) Currency Replenishment Cost 2,00,000 Doubled during budget period.
 ACTIVITY BASED COSTING 6.22 ACTIVITY BASED COSTING 6.23

PAST YEAR QUESTIONS

Total 8,00,000
Computer Processing 2,50,000 `2,50,000 (half of `5,00,000) is fixed and no change is
expected.
7,50,000 `2,50,000 (variable portion) is expected to increase to
three times the current level. PYQ 1
Total 10,00,000 PQR pens Ltd. manufactures two products ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data for the year
Issuing Statements 18,00,000 Existing. 2017:
2,00,000 2 lakh statements are expected to be increased in budgeted
Annual Output Total Machine Total Number of Total Number of
period. For every increase of one lakh statement, one lakh Product
(Units) Hours Purchase Orders Set-ups
rupees is the budgeted increase.
Gel Pen 5,500 24,000 240 30
Total 20,00,000
Ball Pen 24,000 54,000 448 56
Computer Inquiries 3,60,000 Estimated to increase by 80% during the budget period.
(`2,00,000 × 180%)
The annual overheads are as under:
Particulars `
Volume related activity costs 4,75,020
Set up related cost 5,79,988
Purchase related cost 5,04,992

Calculate the overhead cost per unit of each Product: Gel Pen and Ball Pen on the basis of:
(1) Traditional method of charging overheads
(2) Activity based costing method and
(3) Find out the difference in cost per unit between both the methods.
[(10 Marks) May 2018]

Answer
(1) Statement Showing Overhead Cost per unit “Traditional Method”
Particulars Gel Pen Ball Pen
Overheads @ `20 per machine hour `4,80,000 `10,80,000
(24,000 × 20) (54,000 × 20)
Number of units 5,500 24,000
Overheads Cost Per Unit `87.27 `45.00

Overheads Recovery Rate = Annual Overheads ÷ Annual Machine Hours

= (4,75,020 + 5,79,988 + 5,04,992) ÷ (24,000 + 54,000)
= `15,60,000 ÷ 78,000 = `20 per machine hour

Note: Overheads is recovered on the basis of Machine Hours (as per ICAI suggested answer).

(2) Statement Showing Overhead Cost per unit “Activity Based Costing”
Activity Cost Pool Cost Driver Ratio Amount Gel Pen Ball Pen
Volume related activity costs Machine Hours 24 : 54 4,75,020 1,46,160 3,28,860
Set up related cost No. of Setups 30 : 56 5,79,988 2,02,321 3,77,667
Purchase related cost No. of Purchase Orders 240 : 448 5,04,992 1,76,160 3,28,832
Total Cost 5,24,641 10,35,359
÷ Total Units 5,500 24,000
Overheads Cost Per Unit `95.39 `43.14
Note: Machine hours is used as Cost driver of volume related activity cost (as per ICAI suggested answer).

(3) Difference in overheads cost per unit under both methods

Particulars Gel Pen Ball Pen
Overheads cost per unit (Traditional method) `87.27 `45.00
Overheads cost per unit (Activity based cost) `95.39 `43.14
Difference in overheads cost per unit - `8.12 + `1.86
 ACTIVITY BASED COSTING 6.24 ACTIVITY BASED COSTING 6.25
PYQ 2 Direct Labour 3,75,200
M/s HMB Limited is producing a product in 10 batches each of 15,000 units in a year incurring the following Prime Cost 30,13,900
overheads their on: Production Overhead:
Material procurement (`1,500 × 48 orders) 72,000
Particulars (`) Maintenance (`190.53 × 810 hours) 1,54,329
Material procurement 22,50,000 Set-up (`304.22 × 40 set-ups) 12,169
Maintenance 17,30,000 Quality control (`189.96 × 25 inspections) 4,749
Set-up 6,84,500 Total Cost 32,57,147
Quality control 5,14,800 Number of units 15,000
Cost Per Unit `217.14
The prime cost for the year amounted to `3,01,39,000. The company is using currently the method of
absorbing overheads on the basis of prime cost. Now it wants to shift to activity based costing. Statement Showing Determination of Cost Driver Rate
Information relevant to activity drivers for a year are as under: Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Material procurement `22,50,000 Material orders 1,500 `1,500 per order
Activity Driver Activity Volume
Maintenance `17,30,000 Maintenance hours 9,080 `190.53 per hour
No. of purchase orders 1,500
Set-up `6,84,500 No. of set-ups 2,250 `304.22 per set-up
Maintenance hours 9,080
Quality control `5,14,800 No. of inspections 2,710 `189.96 per inspection
No. of set-ups 2,250
No. of inspections 2,710
PYQ 3
The company has produced a batch of 15,000 units and has incurred `26,38,700 and `3,75,200 on materials MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour
hours. The budgeted overheads and direct labour hours for the month of March 2019 are `15,00,000 and
and wages respectively.
25,000 hours respectively.
The usage of activities of the said batch are as follows:
The information about the company’s products is as follows:
Activity Driver Activity Volume
Material orders 48 Particulars Equipment A Equipment B
Maintenance hours 810 Budgeted Production volume 3,200 units 3,850 units
No. of set-ups 40 Direct material cost `350 per unit `400 per unit
No. of inspections 25 Direct labour cost:
Y : 3 hours @ `120 per hour `360 -
You are required to: Z : 4 hours @ `120 per hour - `480
(1) Find out cost of product per unit on absorption costing basis for the said batch.
(2) Determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of activity Overheads of `15,00,000 can be identified with three major activities:
based costing. Order Processing `3,00,000
[(10 Marks) Nov 2018] Machine Processing `10,00,000
Product Inspection `2,00,000
Answer
(1) Statement Showing Unit Cost Using Absorption Costing Method These activities are driven by number of orders processed, machine hours worked, and inspection hours,
Particulars (`) respectively. The data relevant to these activities is as follows:
Direct Material 26,38,700
Direct Labour 3,75,200 Equipments Orders processed Machine hours worked Inspection hours
Prime Cost 30,13,900 A 400 22,500 5,000
Production Overhead @ 17.1847% of Prime Cost 5,17,930 B 200 27,500 15,000
Total Cost 35,31,830 Total 600 50,000 20,000
÷ Number of units ÷ 15,000
Cost Per Unit `235.46 Required:
(1) Prepare a statement showing the manufacturing cost per unit of each product using the absorption
Calculation of overhead rate:
costing method assuming the budgeted manufacturing volume is attained.
Overheads Recovery Rate = (Total Overheads ÷ Total Prime Cost) × 100 (2) Determine cost driver rates and prepare a statement showing the manufacturing costs of each product
= [(22,50,000 + 17,30,000 + 6,84,500 + 5,14,800) ÷ 3,01,39,000] × 100 using activity based costing, assuming the budgeted manufacturing volume is attained.
= 17.1847 % of Prime Cost (3) MNO Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application base,
calculate the amount of cost distortion (under-costed or over-costed) for each equipment.
(2) Statement Showing Unit Cost and Total Cost Using ABC Method [(10 Marks) May 2019]
Particulars (`)
Direct Material 26,38,700 Answer
 ACTIVITY BASED COSTING 6.26 ACTIVITY BASED COSTING 6.27
(1) Statement Showing Unit Manufacturing Cost Using Absorption Costing Method Number of Customers Visits 4 6 12 4 6
Particulars Equipment A Equipment B Number of Deliveries 20 60 120 80 40
Direct material cost `350 `400 Kilometers Travelled Per Delivery 40 12 10 20 60
Direct labour cost `360 `480 Number of Expediate Deliveries 0 0 0 0 2
Overheads @ `60 per hour `180 `240
Manufacturing cost per unit `890 `1,120 Its five activities and their cost drivers are:
Activity Cost Driver
Predetermined overhead rate = Budgeted overheads ÷ Budgeted labour hours Order taking `200 per purchase order
= `15,00,000 ÷ 25,000 hours = `60 per hour Customer visits `300 per customer visit
Deliveries `4.00 per delivery km travelled
Total labour hours = 3,200 units of A × 3 hours + 3,850 units of B × 4 hours Product handling `2.00 per case sold
= 25,000 hours Expedited deliveries `100 per each such delivery

(2) Statement Showing Determination of Cost Driver Rate Required:

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
(1) Compute the customer level operating income of each of five retail customers by using the Cost Driver
Order processing `3,00,000 Orders processed 600 `500 per order
rates.
Machine processing `10,00,000 Machine hours 50,000 `20 per machine hour
(2) Examine the result to give your comments on customer ‘D’ in comparison with customer ‘C’ and on
Inspection `2,00,000 Inspection hours 20,000 `10 per inspection hour
customer ‘E’ in comparison with customer ‘A’.
[(10 Marks) Nov 2019]
Statement Showing Unit Manufacturing Cost Using ABC Method
Particulars Equipment A Equipment B Answer
Direct material cost `350 `400 (1) Computation of Customer Level Operating Income
Direct labour cost `360 `480
Overheads per unit (W.N.) `218.75 `207.79 Customers
Particulars
Manufacturing cost per unit `928.75 `1,087.79 A (`) B (`) C (`) D (`) E (`)
Cases sold 9,360 14,200 62,000 38,000 9,800
(3) Statement Showing Cost Distortion Revenue at list price @ `54 p.u. 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Less: Discount - 8,520 3,10,000 1,44,400 52,920
Particulars Equipment A Equipment B Revenue net of discount 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
Unit manufacturing cost: Less: COGS @ `45 p.u. 4,21,200 6,39,000 27,90,000 17,10,000 4,41,000
Using direct labour hours as an application base 890 1,120 Gross Margin 84,240 1,19,280 2,48,000 1,97,600 35,280
Using activity based costing 928.75 1,087.79 Less: Customer level operating 29,120 43,080 1,44,400 93,600 43,200
Cost distortion (-) 38.75 + 32.21 activities cost (W.N.)
Customer Level Operating Income 55,120 76,200 1,03,600 1,04,000 (7,920)
Working note:
Calculation of overheads cost per unit under ABC costing: Working note:
Overheads A B
Order processing @ `500 per order of 400/200 orders `2,00,000 `1,00,000 Computation of customer level operating activities costs:
Machine processing `20 per machine hour of 22,500/27,500 hours `4,50,000 `5,50,000 Customers
Inspection `10 per inspection hour of 5,000/15,000 hours `50,000 `1,50,000 Particulars
A (`) B (`) C (`) D (`) E (`)
Total overheads `7,00,000 `8,00,000 Order taking costs (`) 6,000 10,000 12,000 10,000 12,000
÷ Number of units ÷ 3,200 ÷ 3,850 (No. of purchase orders × `200)
Overhead per unit `218.75 `207.79 Customer visits costs (`) 1,200 1,800 3,600 1,200 1,800
(No. of customer visits × `300)
PYQ 4 Delivery costs (`) 3,200 2,880 4,800 6,400 9,600
PQR Ltd has decided to analyse the profitability of it’s five new customers. It buys soft drink bottles in cases at (*Kms travelled × `4.00 per km.)
`45 per case and sells them to retail customers at a list price of `54 per case. The data pertaining to five Product handling costs (`) 18,720 28,400 1,24,000 76,000 19,600
customers are given below: (Number of case sold × `2.00)
Customers Cost of expediting deliveries (`) - - - - 200
Particulars (No. of expedited deliveries × `100)
A B C D E
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price ` 54 54 54 54 54 Total cost of customer level operating activities 29,120 43,080 1,44,400 93,600 43,200
Actual Selling Price ` 54 53.40 49 50.20 48.60
Number of Purchase Orders 30 50 60 50 60 * Kms travelled = Number of deliveries × Kilometres travelled per delivery
 ACTIVITY BASED COSTING 6.28 ACTIVITY BASED COSTING 6.29
(2) Comment on the results: Shelf Stocking costs @ `199 per hours 21,890 31,840 33,830
(110 × 199) (160 × 199) (170 × 199)
Customer D and Customer C: Operating income of Customer D is more than of Customer C, despite having
Total Cost 2,56,090 2,52,240 2,41,430
only 61.29% (38,000 units) of the units volume sold in comparison to Customer C (62,000 units). Customer C
receives a higher percent of discount i.e. 9.26% (`5) while Customer D receive a discount of 7.04% (`3.80).
Though the gross margin of customer C (`2,48,000) is more than Customer D (`1,97,600) but total cost of PYQ 6
customer level operating activities of C (`1,44,400) is more in comparison to Customer D (`93,600). As a result, ABC Ltd. manufactures three products X, Y and Z using the same plant and resources. It has given the following
operating income is more in case of Customer D. information for the year ended on 31st March, 2020:

Customer E and Customer A: Customer E is not profitable while Customer A is profitable. Customer E receives Particulars X Y Z
a discount of 10% (`5.4) while Customer A doesn’t receive any discount. Sales Volume of Customer A and E is Production quantity (in units) 1,200 1,440 1,968
almost same. However, total cost of customer level operating activities of E is far more (`43,200) in comparison Resources per unit:
to Customer A (`29,120). This has resulted in occurrence of loss in case of Customer E. Direct materials (`) 90 84 176
Direct labour (`) 18 20 30
PYQ 5
ABC Ltd. is engaged in production of three types of Fruit Juices: Apple, Orange and Mixed Fruit. The following Budgeted direct labour rate was `4 per hour and the production overheads, shown in table below, were
cost data for the month of March 2020 are as under: absorbed to products using direct labour hour rate. Company followed Absorption Costing Method. However,
the company is now considering adopting Activity Based Costing Method.
Particulars Apple Orange Mixed Fruit
Units produced and sold 10,000 15,000 20,000 Budgeted Overheads (`) Cost Driver Remarks
Material per unit (`) 8 6 5 Material 50,000 No. of orders No. of orders was 25 units for each
Direct Labour per unit (`) 5 4 3 Procurement product.
No. of Purchase Orders 34 32 14 Set-up 40,000 No. of production All the three products are produced
No. of Deliveries 110 64 52 Runs in production runs of 48 units.
Shelf Stocking Hours 110 160 170 Quality Control 28,240 No. of Inspections Done for each production run.
Maintenance 1,28,000 Maintenance Total maintenance hours were
Overheads incurred by the company during the month are as under: hours 6,400 and was allocated in the
Particulars (`) ratio of 1:1:2 between X, Y & Z.
Ordering costs 64,000
Delivery costs 1,58,200 Required:
Shelf Stocking costs 87,560 (1) Calculate the total cost per unit of each product using the Absorption Costing Method.
(2) Calculate the total cost per unit of each product using the Activity Based Costing Method.
Required: [(10 Marks) Jan 2021]
(1) Calculate cost driver’s rate.
(2) Calculate total cost of each product using Activity Based Costing. Answer
[(6 Marks) Nov 2020] (1) Statement Showing Total Cost Per Unit of Each Product Using Absorption Costing Method
Particulars X (`) Y (`) Z (`)
Answer
Direct Material 90 84 176
(1) Statement Showing Cost Driver Rate
Direct Labour 18 20 30
Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate Production Overhead @ `9 per hour 40.50 45 67.50
Ordering costs 64,000 No. of Purchase Orders 80 `800 per purchase order (9 × 18/4) (9 × 20/4) (9 × 30/4)
Delivery costs 1,58,200 No. of Deliveries 226 `700 per delivery Total Unit Cost 148.50 149 273.50
Shelf Stocking costs 87,560 Shelf Stocking Hours 440 `199 per shelf stocking hours
Working Note:
(2) Statement Showing Total Cost Using Activity Based Costing Calculation of overhead rate per direct labour hour:
Particulars Apple Orange Mixed Fruit Overhead recovery rate = Budgeted overheads ÷ Budgeted labour hours
Units produced and sold 10,000 15,000 20,000 = (50,000 + 40,000 + 28,240 + 1,28,000)÷ 27,360 hours = `9/hour
Material cost @ `8/ `6/ `5 per unit 80,000 90,000 1,00,000
Direct Labour @ `5/ `4/ `3 per unit 50,000 60,000 60,000 Budgeted labour hours = 1,200 X × 18/4 + 1,440 Y × 20/4 + 1,968 C × 30/4 = 27,360 hours
Production Overhead:
Ordering costs @ `800 per purchase order 27,200 25,600 11,200 (2) Statement Showing Total Cost Per Unit of Each Product Using ABC Method
(34 × 800) (32 × 800) (14 × 800) Particulars X (`) Y (`) Z (`)
Delivery costs @ `700 per delivery 77,000 44,800 36,400 Direct Material 90 84 176
(110 × 700) (64 × 700) (52 × 700) Direct Labour 18 20 30
 ACTIVITY BASED COSTING 6.30 ACTIVITY BASED COSTING 6.31
Production Overhead: Answer
Material Procurement 10.81 10.89 10.85 (1) Statement of Cost Allocation to Each Product from Each Activity
[(48×270.27)/1,200] [(58×270.27)/1,440] [(79×270.27)/1,968] Product
Set-up 8.68 8.68 8.68 Activity
P (`) Q (`) R (`) Total (`)
[(25×416.67)/1,200] [(30×416.67)/1,440] [(41×416.67)/1,968]
Direct Labour hours 1,00,000 80,000 60,000 2,40,000
Quality Control 6.13 6.13 6.13
(10,000 × `10) (8,000 × `10) (6,000 × `10)
[(25×294.17)/1,200] [(30×294.17)/1,440] [(41×294.17)/1,968]
Production runs 60,000 54,000 48,000 1,62,000
Maintenance 26.67 22.22 32.52
(200 × `300) (180 × `300) (160 × `300)
[(20×6,400×1/4)/1,200] [(20×6,400×1/4)/1,440] [(20×6,400×1/2)/1,968]
Quality Inspections 90,000 75,000 45,000 2,10,000
Total Unit Cost 160.29 151.92 264.18
(3,000 × `30) (2,500 × `30) (1,500 × `30)
Calculation of Activity rate:
Working note:
Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Cost driver rate/Activity rate:
Material Procurement `50,000 No. of orders 185 `270.27 per order
Set-up `40,000 No. of production Runs 96 `416.67 per run Direct Labour hours = `3,00,000 ÷ 30,000 labour hours = `10 per hour
Quality Control `28,240 No. of Inspections 96 `294.17 per inspection Production runs = `1,80,000 ÷ 600 production runs = `300 per run
Maintenance `1,28,000 Maintenance hours 6,400 `20 per hour Quality inspection = `2,40,000 ÷ 8,000 inspection runs = `30 per inspection

Total no. of orders = (1,200 + 1,440 + 1,968) ÷ 25 (2) Computation of cost of unused capacity for each activity:
= 48 orders + 58 orders + 79 orders = 185 orders
Direct Labour hours = `3,00,000 - `2,40,000 = `60,000
Total no. of production run = (1,200 + 1,440 + 1,968) ÷ 48 Production runs = `1,80,000 - `1,62,000 = `18,000
= 25 runs + 30 runs + 41 runs = 96 runs Quality inspection = `2,40,000 - `2,10,000 = `30,000

Total no. of inspection = Total no. of runs = 96 inspections Total cost of unused capacity is `1,08,000.

PYQ 7 (3) Cost Sheet

PQR Ltd. is engaged in the production of three Products P, Q and R. the company calculates Activity Cost Rates Particulars Amount (`)
on the basis of Cost Driver capacity which is provided as below: (A) Direct Cost:
Activity Cost Driver Cost Driver Capacity Cost Direct Material 18,000
Direct Labour hours Labour hours 30,000 Labour hours `3,00,000 Direct expenses: Initial design cost (30,000 × 1,500/12,000) 3,750
Production runs Number of Production runs 600 Production runs `1,80,000 Total (A) 21,750
Quality Inspections Number of inspections 8,000 Inspections `2,40,000 (B) Indirect cost:
Direct Labour hours (1,500 × `10) 15,000
The consumption of activities during the period is as under: Production runs (15 × `300) 4,500
Quality Inspections (250 × `30) 7,500
Activity/Products P Q R Total (B) 27,000
Labour hours 10,000 8,000 6,000 Total cost (A + B) 48,750
Production runs 200 180 160 Add: Profit @ 20% on cost 9,750
Quality Inspections 3,000 2,500 1,500 Sales value 58,500
Sale Price per unit of S (58,500 ÷ 1,500) 39
You are required to:
(1) Compute the costs allocated to each product from each activity.
PYQ 8
(2) Calculate the cost of unused capacity for each activity.
A Drug store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. Due to some
(3) A potential customer has approached the company for supply of 12,000 units of a new product ‘S’ to be
constraints, it has decided to go for only one product line of drugs. It has provided the following data for the
delivered in lots of 1,500 units per quarter. This will involve an initial design cost of `30,000 and per year 2020-21 for each product line:
quarter production will involve the following:
Direct Material `18,000 A B C
Direct Labour hours 1,500 hours Revenues `74,50,000 `1,11,75,000 `1,86,25,000
No. of production runs 15 Cost of goods sold `41,44,500 `68,16,750 `1,20,63,750
No. of quality inspections 250 Number of purchase orders placed 560 810 630
Number of deliveries received 950 1,000 850
Prepare cost sheet segregating Direct and Indirect costs and compute the Sales value per quarter Hours of shelf-stocking time 900 1,250 2,350
of product ‘S’ using ABC system considering a mark-up of 20% on cost. Items sold 1,75,200 1,50,300 1,44,500
[(10 Marks) July 2021]
 ACTIVITY BASED COSTING 6.32 ACTIVITY BASED COSTING 6.33
Following additional information is also provided: each of the support costs for allocating it to the product line. Thus, it is much more accurate. Accordingly
now Drug C seems to be most profitable at 15.78% and Drug A seems to be the least profitable at 8.81%.
Activity Description of activity Total Cost Cost-allocation base Therefore, it is suggested that company should go with Drug C.
Drug License fee Drug License fee `5,00,000 To be distributed in ratio 2:3:5
between A, B and C Working notes:
Ordering Placing of orders for purchases `8,30,000 2,000 purchase orders
Delivery Physical delivery and receipt of goods `18,20,000 2,800 deliveries (a) Total support cost = `5,00,000 + `8,30,000 + `18,20,000 + `32,40,000 + `28,20,000
Shelf stocking Stocking of goods `32,40,000 4,500 hours of shelf-stocking = `92,10,000
time
Customer Support Assistance provided to customers `28,20,000 4,70,000 items sold (b) Total COGS = `41,44,500 + `68,16,750 + `1,20,63,750
= `2,30,25,000
Required:
92,10,000
1. Calculate the operating income and operating income as a percentage (%) of revenue of each product (c) % of support cost to COGS = × 100 = 40%
line if: 2,30,25,000
(a) All support cost (other than cost of goods sold) are allocated in the ratio of cost of goods sold.
(b) All support cost (other than cost of goods sold) are allocated using an activity-based costing system. (d) Calculation of Cost Driver Rate
Activity Total cost (`) Cost allocation base Cost driver rate
2. Give your opinion about choosing the product line on the basis of operating income as a percentage (%) of (1) (2) (3) (4) = [(2)÷(3)]
revenue of each product line under both the situations as above. Drug License fee 5,00,000 2 : 3 : 5 total 10 `50,000 per base point
[(10 Marks) Dec 2021] Ordering 8,30,000 2,000 purchase orders `415 per purchase order
Delivery 18,20,000 2,800 deliveries `650 per delivery
Answer Shelf-stocking 32,40,000 4,500 hours `720 per stocking hour
1. (a) Statement of Operating income and Operating income as a % of revenues for each product line Customer support 28,20,000 4,70,000 items sold `6 per item sold
(When support costs are allocated to product lines on the basis of cost of goods sold of each product)
A (`) B (`) C (`) Total (`) PYQ 9
Revenues 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000 Star Limited manufacture three products using the same production methods. A conventional product costing
Cost of Goods sold (COGS) 41,44,500 68,16,750 1,20,63,750 2,30,25,000 system is being used currently. Details of the three products for a typical period are:
Support cost (40% of COGS) 16,57,800 27,26,700 48,25,500 92,10,000 Particulars AX BX CX
Total cost 58,02,300 95,43,450 1,68,89,250 3,22,35,000 Direct Labour hours per unit 1.00 0.90 1.50
Operating income (Sales – Total cost) 16,47,700 16,31,550 17,35,750 50,15,000 Machine hours per unit 2.00 1.50 2.50
% of Operating income to Sales 22.12% 14.60% 9.32% 13.46% Direct Material per unit (`) 35 25 45
Volume (units) 7,500 12,500 25,000
1. (b) Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines using an activity based costing system) Direct Labour costs `20 per hour and production overheads are absorbed on a machine hour basis. The
overhead absorption rate for the period is `30 per machine hour.
A (`) B (`) C (`) Total (`)
Management is considering using Activity Based Costing system to ascertain the cost of the products.
Revenues 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Further analysis shows that the total production overheads can be divided as follows:
Cost of Goods sold (COGS) 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug license fee @ `50,000/base point 1,00,000 1,50,000 2,50,000 5,00,000 Cost relating to set up 40%
(50,000 × 2) (50,000 × 3) (50,000 × 5) Cost relating to machinery 10%
Ordering cost @ `415/purchase order 2,32,400 3,36,150 2,61,450 8,30,000 Cost relating to material handling 30%
(415 × 560) (415 × 810) (415 × 630) Cost relating to Inspection 20%
Delivery cost @ `650/delivery 6,17,500 6,50,000 5,52,500 18,20,000
(650 × 950) (650 × 1,000) (650 × 850) The following activity volumes are associated with the product line for the period as a whole. Total activities
Shelf stocking cost @ `720/hour 6,48,000 9,00,000 16,92,000 32,40,000 for the period:
(720 × 900) (720 × 1,250) (720 × 2,350)
Customer Support cost @ `6/unit 10,51,200 9,01,800 8,67,000 28,20,000 Particulars AX BX CX Total
(6 × 1,75,200) (6 × 1,50,300) (6 × 1,44,500) Number of set-ups 350 450 740 1,540
Total cost 67,93,600 97,54,700 1,56,86,700 3,22,35,000 Number of movement of Materials 200 280 675 1,155
Operating income (Sales – Total cost) 6,56,400 14,20,300 29,38,300 50,15,000 Number of inspections 200 400 900 1,500
% of Operating income to Sales 8.81% 12.71% 15.78% 13.46% Required:
2. Opinion about choosing the product line: As per first method where we use COGS as a flat rate for 1. Calculate the cost per unit of each product using the conventional method.
allocating support costs, Drug A seems to be most profitable @ 22.12% and Drug C seems to be least 2. Calculate the cost per unit of each product using activity based costing method.
profitable @ 9.32% but this is deceptive method. ABC method on the other hand uses the cost driver in [(10 Marks) May 2022]
 ACTIVITY BASED COSTING 6.34 ACTIVITY BASED COSTING 6.35
Answer (a) Compute the costs allocated to each product – Express Coffee and Instant Coffee from each activity on
1. Statement Showing “Cost per unit as per Conventional Method” the basis of Activity – Based Costing (ABC) method.
Particulars AX (`) BX (`) CX (`) (b) Find out the Overhead cost per units of each product – Express coffee and instant coffee based on (a)
above.
Direct Materials 35 25 45
[(4 Marks) Nov 2022]
Direct Labour [(1, 0.9, 1.5 hours) × `20] 20 18 30
Production Overheads [(2, 1.5, 2.5 hours) × `30] 60 45 75
Cost per unit 115 88 150 Answer
(a) Statement Showing Cost Allocated to Each Product Using Activity Based Costing
2. Statement Showing “Cost per unit as per ABC Method” Activity Cost Pool Cost Driver Ratio Amount Express coffee Instant coffee
Particulars AX (`) BX (`) CX (`) Machine Processing No. of machine hours 20 : 120 7,00,000 1,00,000 6,00,000
Set up related costs No. set ups 20 : 44 7,68,000 2,40,000 5,28,000
Production (units) 7,500 12,500 25,000
Purchase related costs No. of purchase 160 : 384 6,80,000 2,00,000 4,80,000
Direct Materials @ `35/`25/`45 per unit 2,62,500 3,12,500 11,25,000
Direct Labour @ `20/`18/`30 per unit Total Cost `5,40,000 `16,08,000
1,50,000 2,25,000 7,50,000
Production Overhead:
Setup Costs @ `750 per setup 2,62,500 3,37,500 5,55,000 (b) Overhead cost per unit:
(750 × 350) (750 × 450) (750 × 740) Express coffee = 5,40,000 ÷ 5,000 = `108
Machine Related Costs @ `3 per hour 45,000 56,250 1,87,500 Instant coffee = 16,08,000 ÷ 60,000 = `26.80
(3 × 15,000) (3 × 18,750) (3 × 62,500)
Material Handling Cost @ `750 per movement 1,50,000 2,10,000 5,06,250 PYQ 11
(750 × 200) (750 × 280) (750 × 675) Beta Limited produces 50,000 Units, 45,000 Units and 62,000 Units of product ‘A’, ‘B’ and ‘C’ respectively. At
Inspection Costs @ `385 per inspection 77,000 1,54,000 3,46,500 present the company follows absorption costing method and absorbs overhead on the basis of direct labour
(385 × 200) (385 × 400) (385 × 900) hours. Now, the Company wants to adopt Activity Based Costing.
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost ÷ Units) 126.267 103.62 138.81 The information provided by Beta Limited is as follows:

Working Notes: Product A Product B Product C

Floor Space Occupied 5,000 Sq. Ft. 4,500 Sq. Ft. 6,200 Sq. Ft.
(a) Total Machine Hours = 7,500 × 2 + 12,500 × 1.5 + 25,000 × 2.5 = 96,250 hours Direct Labour Hours 7,500 Hours 7,200 Hours 7,800 Hours
Direct Machine Hours 6,000 Hours 4,500 Hours 4,650 Hours
(b) Total Production OH = 96,250 machine hours × `30 =`28,87,500 Power Consumption 32% 28% 40%

(c) Statement Showing Cost Driver Rate: Overhead for year are as follows:
Cost Pool % Overheads Cost Driver Basis Volume Cost Driver Rate Rent & Taxes `8,63,500
Set-up 40% 11,55,000 No of set ups 1,540 750/Setup Electricity Expense `10,66,475
Machine related cost 10% 2,88,750 No of Machine Hours 96,250 3/Machine Hour Indirect labour `13,16,250
Material handling 30% 8,66,250 No of Material movements 1,155 750/Movement Repair & Maintenance `1,28,775
Inspection 20% 5,77,500 No of inspections 1,500 385/Inspection `33,75,000
Total - 28,87,500 - - - Required:
(1) Calculate the overhead rate per labour hour under Absorption Costing.
PYQ 10 (2) Prepare a cost statement showing overhead cost per unit for each product – ‘A’, ‘B’ and ‘C’ as per
XYZ Ltd. is engaged in manufacturing two products- Express Coffee and Instant Coffee. It furnishes the Activity based Costing.
following data for a year: [(5 Marks) May 2023]
Actual Output Total Machine Total Number of Total Number of
Products
(units) Hours Purchase set ups Answer
Express Coffee 5,000 20,000 160 20 (1) Overhead rate per labour hour = Overhead ÷ Labour hours
Instant Coffee 60,000 1,20,000 384 44 = `33,75,000 ÷ 22,500 hours (7,500 + 7,200 + 7,800)
= `150 per labour hour
The annual overheads are as under:
(2) Statement Showing Overheads Cost per Unit
Particulars Amount (Using Activity based Costing)
Machine Processing costs 7,00,000
Set up related costs 7,68,000 Activity Cost Pool Cost Driver Ratio Amount Product A Product B Product C
Purchase related costs 6,80,000 Rent & Taxes Floor space 50:45:62 8,63,500 2,75,000 2,47,500 3,41,000
Electricity Expense Power consumption 32:28:40 10,66,475 3,41,272 2,98,613 4,26,590
You are required to: Indirect labour Direct labour hours 75:72:78 13,16,250 4,38,750 4,21,200 4,56,300
 ACTIVITY BASED COSTING 6.36 ACTIVITY BASED COSTING 6.37

SUGGESTED REVISION
Repair & Maintenance Machine hours 600:450:465 1,28,775 51,000 38,250 39,525
Total Cost 11,06,022 10,05,563 12,63,415
÷ Total Units ÷50,000 ÷45,000 ÷62,000
Overheads Cost Per Unit `22.12 `22.35 `20.38
Page No. of 3rd, 4th & Revision
Ques. Observations or KEY Points 1st & 2nd
Practical 5th during
No. (Note down during revisions) Revision
Register Revision Exams
BQ (Book Questions covering Study Module of ICAI, PM, RTP’s, MTP’s and Important Questions)
1 Y Y Y
2 Y Y -
3 Y Y Y
4 Y Y Y
5 Y Y Y
6 Y Y Y
7 Y Y Y
8 Y Y Y
9 Y Y -
10 Y Y Y
11 Y Y -
12 Y Y Y
13 Y Y Y
14 Y Y Y
15 Y Y Y
PYQ (Past Year Questions)
1 Y Y -
2 Y Y Y
3 Y Y Y
4 Y Y -
5 Y Y -
6 Y Y Y
7 Y Y Y
8 Y Y -
9 Y Y -
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11 Y Y -
 DIRECT EXPENSES 7.1
1. Direct Expenses:
Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a
product or for provision of service and can be directly traced in an economically feasible manner to a cost

CHAPTER - 7
object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service etc.

DIRECT EXPENSES 2. Measurement of Direct Expenses:

The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties
and taxes (for which input credit not available), commission and other directly attributable costs.

In case of sub-contracting, where goods are get manufactured by job workers independent of the principal
LEARNING OUTCOMES entity, are measured at agreed price. Where the principal supplies some materials to the job workers, the
value of such materials and other incidental expenses are added with the job charges paid to the job workers.

After studying this chapter you will be able to: 3. Treatment of Direct Expenses:
 Discuss the measurement of Direct expenses Direct Expenses form part of the prime cost for the product or service to which it can be directly traceable
and attributable. In case of lump-sum payment or onetime payment, the cost is amortised over the estimated
 Discuss the treatment of Direct expenses. production volume or benefit derived.
If the expenses incurred are of insignificant amount i.e. not material, it can be treated as part of overheads.

BQ 1
Aditya Ltd. is an engineering manufacturing company producing job order on the basis of specification given
by the customers. During the last the month it has completed three job works namely A, B and C. The following
are the items of expenditures which are incurred apart from direct materials and direct employee cost:
(a) Office and administration cost: `3,00,000
(b) Product blueprint cost for job A: `1,40,000
(c) Hire charges paid for machinery used in job work B: `40,000
(d) Salary to office attendants: `50,000
(e) One time license fee paid for software used to make computerized graphics for job C: `50,000
(f) Salary paid to marketing manager: `1,20,000

Calculate direct expenses attributable to each Job.

Answer
Calculation of Direct Expenses
Particulars Job A (`) Job B (`) Job C (`)
Product blueprint cost 1,40,000 - -
Hire charges paid for machinery - 40,000 -
License fee paid for software - - 50,000
Total Direct Expenses 1,40,000 40,000 50,000

BQ 2
The following expenditures were incurred in Aditya Ltd. For the month of March 2024:
Particulars `
Paid for power & fuel 4,80,200
Wages paid to factory workers 8,44,000
Bill paid to job workers 9,66,000
Royalty paid for production 8,400
 DIRECT EXPENSES 7.2
Fee paid to technician hired for the job 96,000
Administrative overheads 76,000
Commission paid to sales staffs 1,26,000

You are required to calculate direct expenses for the month.

CHAPTER - 8
Answer
Calculation of Direct Expenses
Particulars `

SERVICE COSTING
Paid for power & fuel 4,80,200
Bill paid to job workers 9,66,000
Royalty paid for production 8,400
Fee paid to technician hired for the job 96,000
Total 15,50,600

Notes:
LEARNING OBJECTIVES
(a) Wages paid to factory workers is direct employee cost.
(b) Administrative overhead is indirect expense.
(c) Commission paid to sales staffs comes under selling expenses. When you have finished studying this chapter, you should be able to
 Understand the service sector and different services.
 Understand the concept of cost unit and cost per unit for various
services.
 Understand the concept of cost classification.
 Understand the commercial tonne kilometers and absolute tonne
kilometers.
 Understand to method of computation of operating cost, net taking
and total taking in respect of Transport, Hotel and lodges, Hospital,
Educational institute, IT & ITES, Toll, Financial institutes,
Insurance and Power generation services etc.
 SERVICE COSTING 8.1 SERVICE COSTING 8.2
TRANSPORT SERVICE Seating capacity utilization was 60%. All the buses ran 25 days of the month. Each bus made four round
trips daily.
BQ 1 (a) Find out the cost per passenger-km and the cost per round trip per passenger.
AXA Passenger Transport Company is running 5 buses between two towns, which are 40 kms apart. Seating (b) What would have been the cost per round trip per passenger if the seating capacity utilisation were to go
capacity of each bus is 40 passengers. Following details are available from their books, for the month of April up to 80%?
2023: (c) What would have been the cost per round trip per passenger, if all the expenses (other than depreciation)
Salary of Drivers, Cleaners and Conductors `24,000 were to go up by 20% at a seating capacity utilisation of 80%?
Salary to Supervisor `10,000 [(a) `0.168, `8.40; (b) `0.126, `6.30; (c) `0.146, `7.30]
Diesel and other Oil `40,000
Repairs and Maintenance `8,000 BQ 3
Taxation and Insurance `16,000 Mr. Jaidka owns a fleet of taxis and the following information is available from the records maintained by him:
Depreciation `26,000
(i) Number of taxis 10 (vii) Garage rent `600 p.m.
Insurance `20,000
(ii) Cost of each taxi `20,000 (viii) Insurance premium 5% p.a.
Total `1,44,000
(iii) Salary of manager `600 p.m. (ix) Annual tax `600 per taxi
(iv) Salary of accountant `500 p.m. (x) Driver’s salary `200 p.m. per taxi
Actual passengers carried were 75% of the seating capacity. All the five buses run on all days for the
(v) Salary of cleaner `200 p.m. (xi) Annual repairs `1,000 per taxi
month. Each bus made one round trip per day.
(vi) Salary of mechanic `400 p.m.
Calculate cost per passenger – Kilometer.
Total life of a taxi is about 2,00,000 kms taxi runs in all 3,000 kms in a month of which 30% it runs empty.
Petrol consumption is one litre for 10 kms @ `1.80 per litre. Oil and other sundries are `5 per 100 kms.
Answer
Operating Cost Sheet Calculate the effective cost of running a taxi per km.
Particulars Amount [`0.779 per km]
(A) Standing Charges:
Salary of Drivers, Cleaners and Conductors 24,000 BQ 4
Salary to Supervisor 10,000 ABC Transport Company has been given a route 40 km long to run a bus. The bus costs the company a sum of
Taxation and Insurance 16,000 `10,00,000. It has been insured at 3% p.a. and the annual tax will amount to `20,000. Garage rent is `20,000
Depreciation 26,000 p.m. Annual repairs will be `2,04,000 and the bus is likely to last for 2.5 years.
Insurance 20,000 The driver's salary will be `30,000 p.m. and the conductor's salary will be `25,000 p.m. in addition to
Total (A) 96,000 10% of takings as commission (to be shared by the driver and the conductor equally). Cost of stationery will
(B) Running Expenses: be `1,000 p.m. Manager cum Accountant's salary is `17,000 p.m. Petrol and oil will be `500 per 100 km.
Diesel and other Oil 40,000
Total (B) 40,000 The bus will make 3 up and down trips carrying on an average 40 passengers on each trip.
(C) Maintenance Charges:
Assuming 15% profit on takings, calculate the buy fare to be charged from each passenger. The
Repairs and Maintenance 8,000 bus will run on an average 25 days in a month.
Total (C) 8,000
Total operating cost (A + B + C) 1,44,000
÷ Total passenger - kms
Answer
÷ 3,60,000 Statement of Cost Per Passenger Km
Cost per passenger-km `0.40
Particulars Amount
Working: (A) Standing Charges:
Depreciation per month (10,00,000 ÷ 2.5 Years × 1/12) 33,333
Passenger-kms = 5 buses × 40 kms × 40 passengers × 75% × 30 days × 2 = 3,60,000
Insurance per month [(10,00,000 × 3%) × 1/12] 2,500
Annual Tax for one month (20,000 × 1/12) 1,667
BQ 2
Garage Rent 20,000
Fast Roadways runs 10 buses between two suburban centres which are 25 kms apart. Seating capacity of each
Manager-cum accountant’s salary 17,000
bus is 30 passengers.
Stationery 1,000
The expenses for the month of November were as under: Driver’s salary 30,000
Conductor’s salary 25,000
Salaries of Mechanical Staff `6,000 Total (A) 1,30,500
Salaries of Drivers and Conductors `60,000 (B) Running Charges:
Diesel, Oil and Lubricants `40,000 Petrol and oil (500/100 × 6,000 kms) 30,000
Taxes, Insurance, etc. `5,200 Commission @ 10% of collections 23,667
Repairs and Maintenance `8,000 Total (B) 53,667
Depreciation `32,000 (C) Maintenance Charges:
Total `1,51,200 Repairs and maintenance (2,04,000 × 1/12) 17,000
 SERVICE COSTING 8.3 SERVICE COSTING 8.4
Total (C) 17,000 Taking (WN 2) 8,822.21
Total operating cost (A + B + C) 2,01,167 ÷ Total round trips per month (25 days × 4 round trips) 100
Add: Profit @ 15% of collections 35,500 Taking per round trip `88.22
Collections (WN 3) 2,36,667
÷ Total Passenger-kms WN 1: Calculation of total travelling of a car in one month:
÷ 2,40,000
Fare for per passenger-km `0.9861 = 20 Kms. × 2 sides × 4 times × 25 days = 4,000 kms
WN 2: Calculation of collections:
WN 1: Calculation of total travelling of bus in one month:
Total collections = Operating cost (excluding commission on collections) + 10% for
= 2 × No of round trips daily × Distance one way × No of days
commission + 15% for profit
= 2 × 3 × 40 × 25 = 6,000 kms
= 6,616.66 + 25% of collections
WN 2: Calculation of passenger-kms per month: Collections = `8,822.21
= No of kms travelled per month × No of passengers
BQ 6
= 6,000 × 40 = 2,40,000 passenger-kms
Saitravels owns a bus and operates a tourist service on daily basis. The bus starts from Newcity to Restvillage
WN 3: Calculation of collections: and returns back to Newcity the same day. Distance between Newcity and Restvillage is 250 kms. This trip
operates for 10 days in a month.
Total collections = Operating cost (excluding commission on collections) + 10% for
commission + 15% for profit The bus also plies for another 10 days between Newcity and Shivapur and return back to Newcity the
= 1,30,500 + 30,000 + 17,000 + 25% of collections same day, distance between these two places is 200 kms.
Collections = `2,36,667 The bus makes local sightseeing trips for 5 days in a month, covering a total distance of 60 kms per
day.
BQ 5 The following data are given:
Shankar has been promised a contract to run a tourist car on a 20 km long route for the chief executive of a
multinational firm. He buys a car costing `1,50,000. The annual cost of insurance and taxes are `4,500 and Cost of bus `3,50,000
`900 respectively. He has to pay `500 per month for a garage where he keeps the car when it is not in use. The Depreciation 25% per annum
annual repair costs are estimated at `4,000. The car is estimated to have a life of 10 years, at the end of which Driver's salary `1,200 p.m.
the scrap value is likely to be `50,000. Conductor's salary `1,000 p.m.
He hires a driver who is to be paid `300 per month plus 10% of the takings as commission. Other Part-time clerk's salary `400 p.m.
incidental expenses are estimated at `200 per month. Petrol and oil will cost `100 per 100 kms. The car will Insurance `1,800 p.a.
make 4 round trips each day. Diesel consumption 4 kms per litre @ `8/litre
Token tax `2,400 p.a.
Assuming that profit of 15% on taking is desired and that the car will be on the road for 25 days Permit fee `1,000 p.m.
on an average per month what should he charge per round trip? Lubricant oil `100 for every 200 kms.
Repairs and maintenance `1,500 p.m.
Answer Normal capacity 50 persons
Operating Cost Sheet
Particulars Amount While plying to and from Restvillage the bus occupies 90% of the capacity and 80% when it plies
(A) Standing Charges: between Newcity to Shivapur (both ways). In the city the bus runs full capacity. Passenger Tax is 20% of net
Insurance (4,500 ÷ 12) 375 takings of the travel’s firm.
Taxes (900 ÷ 12) 75
Garage Rent 500 Calculate the rate to be charged to Restvillage and Shivapur from Newcity per passenger, if the
Driver's Salary 300 profit required to be earned is 33-⅓% of net takings of the firm.
Incidental Expenses 200 [Newcity to Restvillage: 250kms × 0.161 = `40.25; Newcity to Shivapur: 200kms × 0.161 = `32.20]
Depreciation (10,000 ÷ 12) 833.33
Total (A) 2,283.33 BQ 7
(B) Running Charges:
Mr. X owns a bus which runs according to the following schedule:
Petrol and Oil (1.00 × 4,000) 4,000
Commission @ 10% on taking (10% of 8,822.21) 882.22 (i) Delhi to Chandigarh and back the same day
Total (B) 4,882.22 Distance covered : 250 kms one way
(C) Maintenance Charges: Number of days runs each month : 8
Annual Repairs (4,000 ÷ 12) 333.33 Seating capacity occupied : 90%
Total (C) 333.33
Total operating cost (A + B + C) 7,498.88 (ii) Delhi to Agra and back the same day:
Add: Profit @ 15% on taking (15% of 8,822.21) 1,323.33 Distance covered : 210 kms one way
Numbers of days run each month : 10
 SERVICE COSTING 8.5 SERVICE COSTING 8.6
Seating capacity occupied : 85% Working Notes:
(iii) Delhi to Jaipur and back the same day 1. Calculation of taking:
Distance covered : 270 kms one way Taking = Total operating cost + Profit + Passenger tax
Numbers of days run each month : 6 = 2,34,345.25 + 30% of taking + 20% of taking
Seating capacity occupied : 100% Taking = 2,34,345.25 + 50% of taking
Taking = 4,68,690.50
(iv) Following are the other details
Cost of the bus : `12,00,000 2. Calculation of total km runs per month:
Salary of the driver : `24,000 p.m. Bus route Kms per trip Trips per day Days per month Kms per month
Salary of the Conductor : `21,000 p.m.
Delhi to Chandigarh 250 2 8 4,000 kms
Salary of the part-time Accountant : `5,000 p.m.
Delhi to Agra 210 2 10 4,200 kms
Insurance of the bus : `4,800 p.a.
Delhi to Jaipur 270 2 6 3,240 kms
Diesel consumption : 4 kms per litre
11,440 kms
Diesel rate : `56 per liter
Road tax : `15,915 p.a. 3. Calculation of total passenger kms:
Lubricant Oil : `10 per 100 kms = (4,000 kms × 50 persons × 90%) + (4,200 kms × 50 persons × 85%) +
Permit fee : `315 p.m. (3,240 kms × 50 persons × 100%)
Repairs and maintenance : `1,000 p.m. = 5,20,500
Depreciation of the bus : 20% p.a.
Seating capacity of the bus : 50 persons BQ 8
Passenger tax : 20% of the total taking SMC is a public school having five buses each plying in different directions for the transport of its school
students. In view of a large number of students availing of the bus service, the buses work two shifts daily both
Calculate the bus fare to be charged from each passenger to earn a profit of 30% on total taking, in the morning and in the afternoon. The buses are garaged in the school. The work load of the students has
fares are to be indicated per passenger for the journeys (i) Delhi to Chandigarh, (ii) Delhi to Agra and been so arranged that in the morning the first trip picks up senior students and the second trip plying an hour
(iii) Delhi to Jaipur later picks up the junior students. Similarly in the afternoon the first trip drops the junior students and an hour
later second trip takes the senior students home.
Answer
Statement of Fare to be Charged The distance travelled by each bus one way is 8 kms. The school works 25 days in a month and remains
closed for vacation in May, June and December. Bus fee, however is payable by the students for all the 12
Particulars Amount
months in a year.
(A) Standing Charges:
Salary of driver 24,000
The details of expenses for a year are as under:
Salary of conductor 21,000
Salary of part time accountant 5,000 Driver’s salary `4,500 per month per driver
Insurance (4,800 ÷ 12) 400 Cleaner’s salary `3,500 per month
Road tax (15,915 ÷ 12) 1,326.25 (Salary payable for all 12 months and 1 cleaner employee for all the 5 buses)
Permit fee 315 License fee, taxes etc. `8,600 per bus per annum
Depreciation (`12,00,000 × 20%)  12 20,000 Insurance `10,000 per bus per annum
Total (A) 72,041.25 Repair and maintenance `35,000 per bus per annum
(B) Running Costs: Purchase price of the bus `15,00,000 each
Diesel (11,440 km  4 km) × `56 1,60,160 Life 12 years
Lubricant oil (11,440 km.  100 ) × `10 1,144 Salvage value at the end of economic life `3,00,000
Total (B) 1,61,304 Diesel cost `45.00 per litre
(C) Maintenance Costs: Average mileage 4 kms per litre
Repairs and Maintenance 1,000 Seating capacity of each bus 50 students
Total (C) 1,000 (The seating capacity is fully occupied during the whole year)
Total Operating Cost (A + B + C) 2,34,345.25
Add: Profit @ 30% on Taking 1,40,604.15 Students picked up and dropped within a range up to 4 kms of distance from the school are charged
Net Taking 3,74,952.40 half fare and fifty per cent of the students travelling in each trip are in this category. Ignore interest.
Add: Passenger tax @ 20 % on Taking 93,738.10
Taking per month 4,68,690.50 Since the charges are to be based on average cost, you are required to:
÷ Total passenger kms ÷ 5,20,500 (a) Prepare a statement showing the expenses of operating a single bus and the fleet of five buses for a year.
Fare per passenger per km 0.90
Fare Delhi to Chandigarh (250 × 0.90) (b) Work out the average cost per student per month in respect of (i) Students coming from the distance of
`225 up to 4 kms from the school and (ii) Students coming from the distance beyond 4 kms from the school.
Fare Delhi to Agra (210 × 0.90) `189
Fare Delhi to Jaipur (270 × 0.90) `243 [(a) `3,78,000 & `18,90,000; (b) (i) `210, (ii) `420]
 SERVICE COSTING 8.7 SERVICE COSTING 8.8
BQ 9 Mileage 20 km/kg 240 km/charge
A company is considering three alternative proposals for conveyance facilities for its sales personnel who have Electricity consumption per full charge - 30 KWH
to do considerable travelling approximately 20,000 Kms every year. The proposals are as follows: CNG cost per kg (`) 60 -
Power cost per KWH (`) - 7.60
(i) Purchase and maintain it’s own fleet of cars. The average cost of a car is `6,00,000. 8,000 5,200
Annual maintenance cost (`)
(ii) Allow the executive to use his own car and reimburse expenses at the rate of `10 per kilometer and 7,600 14,600
Annual insurance (`)
also bear insurance costs. Tyre replacement cost in every 5 year (`) 16,000 16,000
(iii) Hire cars from an agency at `1,80,000 per year per car. The Company will have to bear costs of petrol, 12,000 5,40,000
Battery replacement cost in every 8 year (`)
taxes and tyres.
The following further details are available: Apart from the above, the following are the additional information:
(a) Petrol `6 per km. Particulars
(b) Repairs and maintenance `0.20 per km. Average distance covered by a car in a month 1,500 km
(c) Tyres `0.12 per km. Driver’s salary (`) 20,000 p.m.
(d) Insurance `1,200 per car per annum. Garage rent per car (`) 4,500 p.m.
(e) Taxes `800 per car per annum. Share of Office and administration cost per car (`) 1,500 p.m.
(f) Life of the car 5 years with annual mileage of 20,000 kms.
(g) Resale value `80,000 at the end of the fifth year. Calculate the operating cost of vehicle per month per car for both CNG & EV options.

Work out the relative costs of three proposals and rank them. Answer
Operating Cost Sheet
Answer Particulars CNG Car (`) EV Car (`)
Calculation of Relative Costs of Three Proposals and their Ranking (A) Running Charges:
Particulars Own Car Reimbursement Hire Fuel cost/ Power consumption cost 4,500 1,425
(A) Standing Charges: Total (A) 4,500 1,425
Insurance 1,200 1,200 - (B) Standing Charges
Taxes 800 - 800 Depreciation 4,583.33 10,000
Depreciation (6,00,000 – 80,000) × 1/5 1,04,000 - - Monthly insurance cost (7,600 ÷ 12)/ (14,600 ÷ 12) 633.33 1,216.67
Hire Charges - - 1,80,000 Driver’s salary 20,000 20,000
Total (A) 1,06,000 1,200 1,80,800 Garage rent 4,500 4,500
(B) Running Charges: Share of office and administration cost 1,500 1,500
Petrol (20,000 × 6) 1,20,000 - 1,20,000 Total (B) 31,216.66 37,216.67
Reimbursement (20,000 × 10) - 2,00,000 - (C) Maintenance Charges:
Monthly maintenance cost (8,000 ÷ 12)/ (5,200 ÷ 12) 666.67 433.33
Total (B) 1,20,000 2,00,000 1,20,000 Amortised cost of tyre replacement [(16,000 ÷ 5 years) ÷ 12] 177.78 133.33
(C) Maintenance Charges: Amortised cost of battery replacement 66.67 4,500
Repairs and maintenance (20,000 × 0.20) 4,000 - - Total (C) 911.12 5,066.66
Tyres (20,000 × .12) 2,400 - 2,400 Total Cost (A + B + C) 36,627.78 43,708.33
Total (C) 6,400 - 2,400
Total Cost (A + B + C) 2,32,400 2,01,200 3,03,200 Working notes:
Rank II I III (a) Fuel cost per month = (`60 ÷ 20 kms) × 1,500 kms = `4,500
Power cost per month = (`7.6 × 30 KWH ÷ 240 kms) × 1,500 kms = `1,425
Analysis:
The Second alternative i.e., use of own car by the executive and reimbursement of expenses by the company is (b) Depreciation CNG Car = (`9,20,000 – `95,000) ÷ 15 Years × 1/12 = `4,583.33
the best alternative from company’s point of view.
Depreciation EV Car = (`15,20,000 – `1,50,000 – `1,70,000) ÷ 10 Years × 1/12
BQ 10 = `10,000
Navya LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the offices of Noida,
Gurugram and Faridabad. At present it operates CNG fuelled cars but it is also considering to upgrade these (c) Amortised cost of tyre CNG Car:
into Electric vehicle (EV). The details related with the owning of CNG & EV propelled cars are as tabulated Life of car = 15 years
below: Replacement of tyres = after 5 years
Particulars CNG Car EV Car Total replacements = only 2 replacements during 15 years
Car purchase price (`) 9,20,000 15,20,000 (no replacement at the end of useful life, sold as scrap)
Govt. subsidy to purchase car (`) - 1,50,000 Amortised cost = [(`16,000 × 2) ÷ 15 Years] × 1/12 = `177.78
Life of the car 15 Years 10 Years
Residual value (`) 95,000 1,70,000 (d) Amortised cost of tyre EV Car:
 SERVICE COSTING 8.9 SERVICE COSTING 8.10
Life of car = 10 years BQ 12
Replacement of tyres = after 5 years Prakash Automobiles distributes its foods to a regional dealer using a single lorry. The dealer's premises are
Total replacements = only 1 replacement during 10 years 40 kms away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day fully loaded on
(no replacement at the end of useful life, sold as scrap) the outward journeys and empty on return journeys.
Amortised cost = (`16,000 ÷ 10 Years) × 1/12 = `133.33
The following information is available for a four weekly period during the year 2023:
(e) Amortised cost of battery CNG Car: Petrol consumption 8 kms per litre
Life of car = 15 years Petrol cost `13 per litre
Replacement of battery = after 8 years Oil `100 per week
Total replacements = only one replacement during 15 years Driver's wages `400 per week
Amortised cost = (`12,000 ÷ 15 Years) × 1/12 = `66.67 Repairs `100 per week
Garage rent `150 per week
(f) Amortised cost of battery EV Car: Cost of lorry (excluding tyres) `4,50,000
Life of lorry 80,000 kms
Life of car = 10 years Insurance `6,500 per annum
Replacement of battery = after 8 years Cost of tyres `6,250
Total replacements = only one replacement during 10 years Life of tyres 25,000 kms
Amortised cost = (`5,40,000 ÷ 10 Years) × 1/12 = `4,500 Estimated sale value of lorry `50,000 at end of its life
Vehicle license cost `1,300 per annum
BQ 11 Other overhead cost `41,600 per annum
A practicing Chartered Accountant now spends on an average `2.50 per km on taxi fare for his client's work. The lorry operates five days week
He is considering two alternatives, the purchase of a new small car or an old bigger car.
Required:
The estimated cost figures are: (a) A statement to show the total cost of operating the vehicle for the four weekly period analysed into
Items New Small Car Old Big Car running costs and fixed costs.
(b) Calculate the vehicle cost per kilometer and ton-km.
Purchase price 84,000 40,000
Sale price after 5 years 34,000 8,000
Repairs and servicing per annum 1,800 2,400 Answer
Taxes and Insurance p.a. 3,400 1,600 (a) Statement of Operating Cost of a Lorry of M/S Prakash Automobile
Kms run per litre 15 kms. 8 kms (For the four weekly period)
Petrol price per litre (including mobile oil) 8.50 8.50 Particulars Amount
(A) Fixed Costs:
He estimates that he does 12,000 kms annually. Which of the three alternatives will be cheaper?
Garage rent (150 × 4) 600
Insurance (6,500  52) × 4 500
Answer License cost (1,300  52) 4100 100
Statement Showing Relative Costs of Three Alternatives Other overheads (41,600  52) × 4 3,200
Particulars New Small Car Old Big Car Taxi Driver’s wages (400 × 4) 1,600
(A) Standing Charges: Total (A) 6,000
Taxes and Insurance 3,400 1,600 - (B) Running Costs:
Depreciation: Cost of petrol (3,200 Kms × 13/8) 5,200
Small Car (84,000 – 34,000) × 1/5 10,000 - - Oil (100 × 4) 400
Big Car (40,000 – 8,000) × 1/5 - 6,400 - Repairs (100 × 4) 400
Total (A) 13,400 8,000 - Cost of tyres 800
(B) Running Charges: Depreciation [{(4,50,000 – 50,000) ÷ 80,000 Kms} × 3,200 Kms] 16,000
Petrol: Total (B) 22,800
Small Car (12,000 × 8.5/15) 6,800 - - Total operating cost (A + B) 28,800
Big Car (12,000 × 8.5/8) - 12,750 -
Taxi fare (12,000 × 2.5) - - 30,000 (b) Vehicle cost per kilometer = Total cost ÷ Total Km
Total (B) 6,800 12,750 30,000 = 28,800 ÷ 3,200 km = `9.00
(C) Maintenance Charges:
Repairs and Servicing 1,800 2,400 - Cost per ton-km = Total cost ÷ Total ton-km
Total (C) 1,800 2,400 - = 28,800 ÷ 16,000 ton-km = `1.80
Total Cost (A + B + C) 22,000 23,150 30,000
Working notes:
Small Car option is cheaper. 1. Distance travelled in 4 weeks period:
40 kms one way × 2 (return) × 2 trips × 5 days × 4 weeks = 3,200 kms
 SERVICE COSTING 8.11 SERVICE COSTING 8.12
2. Total ton-km = 1,600 kms × 10 + 1,600 kms × Nil = 16,000 Total (A) 17,86,000
(B) Running Charges:
3. Tyres cost = (6,250  25,000 kms) × 3,200 kms = `800 Loading and unloading charges 7,65,000
Consumable Stores 1,35,000
BQ 13 Cost of diesel [(90,000 kms ÷ 5 kms) × `78] 14,04,000
A transport company has 20 vehicles, which capacities are as follows: Lubricants, Oil etc. 1,15,000
Total (B) 24,19,000
No of vehicles Capacity per vehicle (C) Maintenance Charges:
5 9 MT Replacement of Tyres, Tubes & other parts 4,25,000
6 12 MT Routine mechanical services 3,00,000
7 15 MT Apportioned work shop expenses (for repairs of vehicles) 88,000
2 20 MT Total (C) 8,13,000
Total operating cost (A + B + C) 50,18,000
The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between these ÷ Total ton-kms. 9,43,200
stations is 100 kilometres. Each vehicle makes one round trip per day an average. Vehicles are loaded with an Cost per ton-km `5.32
average of 90 per cent of capacity at the time of departure from station ‘A’ to station ‘B’ and at the time of
return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.
(ii) Calculation of Chargeable Freight:
The following information is related to the month of October, 2023:
Freight per ton-km = Cost per ton-km + 25% profit on freight
Salary of Transport Manager `60,000 = `5.32 ÷ 75% = `7.093
Salary of 30 drivers `20,000 each driver
Wages of 25 Helpers `12,000 each helper Working notes:
Loading and unloading charges `850 each trip 1. Calculation of kms ran in Oct, 2023 = 100 kms × 2 × 25 days × 20 vehicles × 90%
Consumable stores (depends on the running of vihicles) `1,35,000 = 90,000 kms.
Insurance (Annual) `8,40,000
Road Licence (Annual) `6,00,000 2. Loading and unloading charges = [(20 vehicles × 90%) × 25 days × 2 trips × `850]
Cost of Diesel per litre `78 = `7,65,000
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. `1,15,000 3. Calculation of ton-kms = {100 kms × 25 days × 90% × [(5 × 9 tons) + (6 × 12 tons) + (7 × 15
Cost of replacement of Tyres, Tubes, other parts etc. (on running basis) `4,25,000 tons) + (2 × 20 tons)] + 100 kms × 25 days × 70% [(5 × 9 tons) + (6 ×
Garage rent (Annual) `9,00,000 12 tons) + (7 × 15 tons) + (2 × 20 tons)]} - 10%
Routine mechanical services `3,00,000 = 9,43,200 ton-km
Electricity and Gas charges (for office, garage and washing station) `55,000
Depreciation of vehicles (on time basis) `6,00,000 BQ 14
There is a workshop attached to transport department which repairs these vehicles and other vehicles A Factory which uses a large amount of coal is situated between two collieries X and Y, the former being 5 kms
also. 40 per cent of transport manager’s salary is debited to the workshop. The transport department has been and the latter being 10 kms far from the factory. A fleet of lorries of 5 tonnes carrying capacity is used for the
apportioned `88,000 by the workshop during the month. During the month operation was 25 days. collection coal from the pitheads. The lorry averages a speed of 20 kms per hour when running and regularly
takes 10 minutes in the factory premises to unload. At colliery X the loading time averages 30 minutes per load
You are required: and at colliery Y 20 minutes per load.
(i) Calculate per ton-km operating cost. Driver's wages, license, insurance, depreciation, garage rent and similar charges are noticed to cost `6
(ii) Determine the freight to be charged per ton-km, if the company earned a profit of 25 per cent on freight. per hour operated. Fuel oil, tyres, repairs and similar charges are noticed to cost `0.60/km run.
Draw a statement showing the cost per tonne km of carrying coal from each colliery if the coal is
Answer
equal quality and price. From which colliery should the purchase be made?
(i) Operating Cost Sheet for the month of October, 2023
Particulars Amount Answer
(A) Standing Charges: Statement Showing Cost per Tonne-Km
Salaries & Wages: Particulars Colliery X Colliery Y
Manager (60% of `60,000) 36,000 Drivers wages, license, insurance, depreciation, garage (6.00 × 70/60) (6.00 × 90/60)
Drivers (30 × `20,000) 6,00,000 rent and similar charges @ `6 per hour 7.00 9.00
Helpers (25 × `12,000) 3,00,000 Fuel oil, tyres, repairs similar charges @ `0.60 per Km (0.60 × 10 kms) (0.60 × 20 kms)
Insurance (`8,40,000 ÷ 12) 70,000 6.00 12.00
Road licence (`6,00,000 ÷ 12) 50,000 Operating Cost 13.00 21.00
Garage rent (`9,00,000 ÷ 12) 75,000 ÷ Effective tonne-kms ÷ 25 ÷ 50
Electricity charges 55,000 Cost per tonne-km `0.52 `0.42
Depreciation 6,00,000 Decision: Purchase should be made from colliery X having lower operating cost per trip.
 SERVICE COSTING 8.13 SERVICE COSTING 8.14
Working Notes:
Compute “Absolute MT-Kilometer” and “Commercial MT – Kilometer”.
(1) Total operating time in 1 trip: Colliery X Colliery Y
Answer
Running time (mine to plot) 60/20
× 5 Kms 60/20 ×
10 Kms Weighted Average or Absolute basis MT kms:
15 minutes 30 minutes = 20 MT × 80 kms + 12 MT × 120 kms + 16 MT × 160 kms
Loading time 30 minutes 20 minutes = 5,600 MT km.

Running time (plot to mine) 15 minutes 30 minutes Simple Average or Commercial basis MT kms:
Unloading time 10 minutes 10 minutes = Average load × Total kms travelled
20  12  16
Total operating time in one trip 70 minutes 90 minutes = MT × 360 kms = 5,760 MT km.
3
(2) Effective tonnes km per trip: 5 tonnes × 5 kms + 5 tonnes × 10 kms +
Nil tonnes × 5 kms Nil tonnes × 10 kms BQ 17
= 25 tonne kms = 50 tonne kms Harry transport Service is a Delhi based national goods transport service provider, owning five trucks for this
purpose. The cost of running and maintaining these trucks are as follows:
BQ 15 Diesel cost `15 per km.
A chemical factory runs its boiler on furnace oil obtained from Indian oil and Bharat petroleum whose depots Engine oil `4,200 for every 14,000 km.
are situated at a distance of 12 and 8 miles from the factory site. Transportation of furnace oil is made by the Repairs and maintenance `12,000 for every 10,000 km.
company's own tank lorries for 5 tonnes capacity each. Onward trips are made only on full load and the lorries Driver’s salary `20,000 per truck per month
return empty. The filling in time takes an average 40 minutes for Indian oil and 30 minutes for Bharat Cleaner’s salary `7,000 per truck per month
petroleum. But the emptying time in the factory is only 40 minutes for all. From the records available it is been Supervision and other general expenses `15,000 per month
that the average speed of the company's lorries work out to 24 miles per hour. Cost of loading of goods `200 per Metric Ton (MT)
The varying operating charges average `0.60 paise per mile covered and fixed charges `7.50 per hour
of operation. Calculate the cost per tonne mile for each source. Each truck was purchased for `20 Lakhs with an estimated life of 7,20,000 km.

Answer During the next month, it is expecting 6 bookings the details of which are as follows:
Statement Showing Cost per Tonne-mile Sl. No. Journey Distance (in kms) Weight – Up (in MT) Weight – Down (in MT)
Particulars Indian Oil Bharat Petroleum 1 Delhi to Kochi 2,700 15 7
Fixed charges @ `7.50 per hour (7.50 × 140/60) (7.50 × 110/60) 2 Delhi to Guwahati 1,890 13 0
17.50 13.75 3 Delhi to Vijaywada 1,840 16 0
Variable charges @ `0.60 per mile (0.60 × 24 miles) (0.60 × 16 miles) 4 Delhi to Varanasi 815 11 0
14.40 9.60 5 Delhi to Asansol 1,280 13 5
Operating Cost 31.90 23.35 6 Delhi to Chennai 2,185 11 9
÷ Effective tonne-miles ÷ 60 ÷ 40 Total 10,710 79 21
Cost per tonne-km `0.5317 `0.5838
Required:
Working Notes:
(1) Calculate the total absolute ton-km for the next month.
(1) Total operating time in 1 trip: Indian Oil Bharat Petroleum (2) Calculate cost per ton-km.
Running time (factory to depot) 60/24
× 12 miles 60/24 ×
8 miles
30 minutes 20 minutes Answer
Loading time 40 minutes 30 minutes (1) Calculation of total absolute ton-km:
Running time (Depot to factory) 30 minutes 20 minutes = (15 MT × 2,700 km + 7 MT × 2,700 km) + (13 MT × 1,890 km) + (16 MT × 1,840 km) +
Unloading time 40 minutes 40 minutes (11 MT × 815 km) + (13 MT × 1,280 + 5 MT × 1,280 km) + (11 MT × 2,185 km + 9 MT ×
2,185 km)
Total operating time in one trip 140 minutes 110 minutes = 1,89,115 ton-km.
(2) Effective tonnes-miles per trip: 5 tonnes × 12 miles + 5 tonnes × 8 miles + (2) Operating Cost Sheet Showing Cost per MT-km
Nil tonnes × 12 miles Nil tonnes × 8 miles
= 60 tonne miles = 40 tonne miles Particulars Amount
(A) Standing Charges:
BQ 16 Drivers’ salaries (`20,000 × 5 trucks) 1,00,000
A Lorry starts with a load of 20 MT of Goods from Station ‘A’. It unloads 8 MT in Station ‘B’ and balance goods Cleaners’ salaries (`7,000 × 5 trucks) 35,000
in Station ‘C’. On return trip, it reaches Station ‘A’ with a load of 16 MT, loaded at Station ‘C’. The distance Supervision and other expenses 15,000
between A to B, B to C and C to A are 80 Kms, 120 Kms and 160 Kms, respectively. Total (A) 1,50,000
 SERVICE COSTING 8.15 SERVICE COSTING 8.16
(B) Running Charges: Notes:
Diesel cost (21,420 kms × `15) 3,21,300 (1) While calculating absolute/commercial ton km., actual load carried are considered irrespective of the fact
Engine oil cost [(`4,200/14,000) × 21,420] 6,426 it attracts fines or penalty.
Cost of loading [(79 + 21) × `200] 20,000 (2) Fine paid for overloading is an abnormal expenditure and is not included in the operating cost of the bus.
Depreciation [(`20 Lakhs/7,20,000) × 21,420] 59,500 This amount will be debited to Costing Profit and Loss A/c and hence deducted from operating profit to
Total (B) 4,07,226 arrive at net profit/loss.
(3) No concession or reduction in rates for any delivery of goods at station ‘C’.
(C) Repairs and Maintenance Charges:
Repairs and maintenance [(`12,000/10,000) × 21,420] 25,704 Working Notes:
Total (C) 25,704
Calculation of absolute ton-kms:
Total operating cost (A + B + C) 5,82,930
÷ Total ton-kms. 1,89,115
A to B = (10 journeys × 300 kms × 6 tons) + {2 journeys × [(140 kms × 6 tons) + (160 kms × 4
Cost per ton-km `3.08 tons)]}
= 20,960
Working notes:
(a) Calculation of kms = 10,710 km. × 2 sides = 21,420 kms. B to A = (5 journeys × 300 kms × 8 tons) + (6 journeys × 300 kms × 6 tons) + {1 journey × [(160
kms × 6 tons) + (140 kms × Nil tons)]}
BQ 18 = 23,760
Global Transport Ltd. charges `90 per ton for its 6-tons truck load from city ‘A’ to city ‘B’. The charges for the
return journey are `84 per ton. No concession or reduction in these rates is made for any delivery of goods at Total = 20,960 + 23,760 = 44,720
intermediate station ‘C’.
In January 2023, the truck made 12 outwards journeys for city ‘B’ with full load out of which 2 tons BQ 19
were unloaded twice in the way at city ‘C’. The truck carried a load of 8 tons in its return journey for 5 times GTC has a lorry of 6-ton carrying capacity. It operates lorry service from city A to city B. It charges `2,400 per
but was once caught by police and `1,200 was paid as fine. For the remaining trips the truck carried full load ton from city ‘A’ to city ‘B’ and `2,200 per ton for the return journey from city ‘B’ to city ‘A’. Goods are also
out of which all the goods on load were reloaded once at city ‘C’, but it returned without any load once only delivered to an intermediate city ‘C’ but no concession or reduction in rates is given. Distance between the city
from ‘C’ station to ‘A’ station. The distance from city ‘A’ to city ‘C’ and city ‘B’ are 140 kms and 300 kms ‘A’ to ‘B’ is 300 km and distance from city ‘A’ to ‘C’ is 140 km.
respectively.
In January 2023, the truck made 12 outward journeys for city ‘B’. The details of journeys are as follows:
Annual fixed cost and maintenance charges are `60,000 and `12,000 respectively. Running charges
spent during January 2023 are `2,944. Outward journey No. of journeys Load (in ton)
‘A’ to ‘B’ 10 6
You are required to find out the cost per absolute ton-kilometer and the profit for January, 2023. ‘A’ to ‘C’ 2 6
‘C’ to ‘B’ 2 4
Answer Return journey No. of journeys Load (in ton)
Statement of Cost per Absolute Ton-Kilometer ‘B’ to ‘A’ 5 8
(For the month of January, 2023) ‘B’ to ‘A’ 6 6
Particulars Amount ‘B’ to ‘C’ 1 6
Fixed cost (60,000 ÷ 12) 5,000 ‘C’ to ‘A’ 1 0
Maintenance charges (12,000 ÷ 12) 1,000
Running charges 2,944 Annual fixed costs and maintenance charges are `6,00,000 and `1,20,000 respectively. Running charges spent
Total operating cost 8,944 during January 2023 are `2,94,400 (includes `12,400 paid as penalty for overloading).
÷ Absolute ton-kms ÷ 44,720
Cost per ton-km `0.20 You are required to:
1. Calculate the cost as per (a) Commercial ton-kilometre. (b) Absolute ton-kilometre
Statement of Profit
2. Calculate Net Profit/ loss for the month of January, 2023.
(For the month of January, 2023)
Particulars Amount Answer
Receipts: 1. (a) Calculation of cost per commercial ton-kms:
A to B (12 journeys × 6 tons × `90) 6,480
B to A (5 journeys× 8 tons × `84) + (7 journeys× 6 tons × `84) 6,888 3,42,000
Total Receipts 13,368 Cost per commercial ton-km = = `7.62
44,862
Less: Total operating cost (8,944)
Operating Profit 4,424 1. (b) Calculation of cost per absolute ton-kms:
Less: Fine paid for overloading (1,200)
Net Profit `3,224 Cost per absolute ton-km =
3,42,000
= `7.65
44,720
 SERVICE COSTING 8.17 SERVICE COSTING 8.18
2. Statement of Profit No. of trips a day 3 2 4
(For the month of January, 2023) One way distance from the processing plant 24 k.m. 34 k.m. 16 k.m.
Particulars Amount Fee and tax p.m. `5,600 `6,400 Nil
Receipts: All the 5 vehicles assigned to Devgarh panchayat, were purchased five years back at a cost of `9,25,000 each.
From outward journey (12 journeys × 6 tons × `2,400) 1,72,800 The 4 vehicles assigned to Ramgarh panchayat, were purchased two years back at a cost of `11,02,000 each
From return journey (5 journeys × 8 tons × `2,200) + (7 journeys × 6 tons × `2,200) 1,80,400 and the remaining vehicles assigned to Pratapgarh were purchased last year at a cost of `13,12,000 each. With
Total Receipts 3,53,200 the purchase of each vehicle a two years free servicing warranty is provided. A vehicle gives 10 kmpl mileage
Less: Total operating cost (3,42,000) in the first two year of purchase, 8 kmpl in next two years and 6 kmpl afterwards. The vehicles are subject to
Operating Profit 11,200 depreciation of 10% p.a. on straight line basis irrespective of usage. A vehicle has the capacity to carry 10,000
Less: Fine paid for overloading (12,400) litres of milk but on an average only 70% of the total capacity is utilized.
Net Loss for the month (`1,200)
The following expenditure is related with the vehicles:
Notes:
(1) While calculating absolute/commercial ton km., actual load carried are considered irrespective of the fact Salary of Driver (a driver for each vehicle) `24,000 p.m.
it attracts fines or penalty. Salary to Cleaner (a cleaner for each vehicle) `12,000 p.m.
(2) Penalty paid for overloading is an abnormal expenditure and is not included in the operating cost of the Allocated garage parking fee `4,200 per vehicle per month
bus. This amount will be debited to Costing Profit and Loss A/c and hence deducted from operating profit Servicing cost for every complete 5,000 k.m. run `15,000
to arrive at net profit/loss. Price of diesel per litre `78.00
(3) No concession or reduction in rates for any delivery of goods at station ‘C’.
From the above information you are required to calculate:
Working Notes: (a) Total operating cost per month for each vehicle. (Take 30 days for the month)
(i) Statement of Total Monthly Cost (b) Vehicle operating cost per litre of milk.
(For the month of January, 2023)
Particulars Amount Answer
Fixed cost (6,00,000 ÷ 12) 50,000 (a) Operating Cost Sheet for Each Vehicle (Monthly)
Maintenance charges (1,20,000 ÷ 12) 10,000 Particulars Ramgarh Pratapgarh Devgarh
Running charges (2,94,400 – 12,400) 2,82,000 (A) Fixed Costs:
Total Operating Cost 3,42,000 Salary to drivers 96,000 72,000 1,20,000
(4 × 24,000) (3 × 24,000) (5 × 24,000)

(ii) Calculation of commercial ton-kms: Salary to cleaners 48,000 36,000 60,000

(4 × 12,000) (3 × 12,000) (5 × 12,000)
Total distance = 12 journeys × 300 kms × 2 (two way) = 7,200 Allocated garage parking fee 16,800 12,600 21,000
(4 × 4,200) (3 × 4,200) (5 × 4,200)
Total weight = 12 journeys × 6 ton + 2 journeys × 4 ton + 5 journeys × 8 ton + 6 Depreciation 36,733 32,800 38,542
Journeys × 6 ton + 1 journey × 6 ton = 162 ton Toll tax passes 5,600 6,400 -
Total (A) 2,03,133 1,59,800 2,39,542
Commercial ton-km = Total distance × Average weight
(B) Variable Costs:
= 7,200 kms × (162 tons ÷ 26 journeys) = 44,862
Diesel cost 1,68,480 95,472 2,49,600
Servicing cost 45,000 - 45,000
(iii) Calculation of absolute ton-kms:
Total (B) 2,13,480 95,472 2,94,600
A to B = (10 journeys × 300 kms × 6 tons) + {2 journeys × [(140 kms × 6 tons) + Total Operating Cost (A + B) 4,16,613 2,55,272 5,34,142
(160 kms × 4 tons)]} Operating cost per vehicle 1,04,153 85,091 1,06,828
= 20,960 (4,16,613 ÷ 4) (2,55,272 ÷ 3) (5,34,142 ÷ 5)

B to A = (5 journeys × 300 kms × 8 tons) + (6 journeys × 300 kms × 6 tons) + {1 (b) Vehicle operating cost per litre of milk:
journey × [(160 kms × 6 tons) + (140 kms × Nil tons)]}
= 23,760 = Total operating cost ÷ Total Milk carried a month
= (4,16,613 + 2,55,272 + 5,34,142) ÷ 79,80,000 = `0.15
Absolute ton-km = 20,960 + 23,760 = 44,720
Working Notes:
BQ 20 1. Calculation of distance covered by each vehicle in a month:
GMCS Ltd. collects raw milk from the farmers of Ramgarh, Pratapgarh and Devgarh panchayats and processes Ramgarh = 4 vehicles × 3 trips × 2 × 24 kms. × 30 days = 17,280 kms
this milk to make various dairy products. GMCS has its own vehicles (tankers) to collect and bring the milk to Pratapgarh = 3 vehicles × 2 trips × 2 × 34 kms. × 30 days = 12,240 kms
the processing plant. Vehicles are parked in the GMCS Ltd.’s garage situated within the plant compound. Devgarh = 5 vehicles × 4 trips × 2 × 16 kms. × 30 days = 19,200 kms
Following are the some information related with the vehicles:
2. Calculation of cost of diesel:
Ramgarh Pratapgarh Devgarh Ramgarh = 17,280 kms × 78/8 = `1,68,480
No. of vehicles assigned 4 3 5
 SERVICE COSTING 8.19 SERVICE COSTING 8.20
Pratapgarh = 12,240 kms × 78/10 = `95,472 Building rent:
Devgarh = 19,200 kms × 78/6 = `2,49,600 Fixed 1,20,000
Variable @ 5% on taking 1,76,067
3. Calculation of cost of service: Total Cost 28,17,067
Ramgarh (17,280 kms)= three completed 5,000 kms @ 15,000 per completion = `45,000 Add: Profit @ 20% on taking 7,04,266
Pratapgarh = under free service warranty = Nil *Total Taking 35,21,333
Devgarh (19,200 kms.) = 3 completed 5,000 kms @ 15,000 per completion = `45,000 ÷ Equivalent single room days ÷ 1,04,400
Rent for single room day `33.73
4. Calculation of Depreciation: Rent for double room day (33.73 × 2.5) `84.32
Rent for triple room day (33.73 × 2.5 × 2) `168.65
Ramgarh = 11,02,000 × 4 vehicles × 10% × 1/12 = `36,733
Pratapgarh = 13,12,000 × 3 vehicles × 10% × 1/12 = `32,800
Devgarh = 9,25,000 × 5 vehicles × 10% × 1/12 = `38,542 Working Notes:
1. Calculation of Taking:
5. Calculation of Milk litre:
*Total Taking = Operating cost (excluding rent on taking) + 5% for rent + 20% for profit
Ramgarh = 10,000 litres × .70 × 4 vehicles × 3 trips × 30 days = 25,20,000 = `26,41,000 + 25% of total takings
Pratapgarh = 10,000 litres × .70 × 3 vehicles × 2 trips × 30 days = 12,60,000 75% of Taking = `26,41,000
Devgarh = 10,000 litres × .70 × 5 vehicles × 4 trips × 30 days = 42,00,000 Total Taking = `35,21,333
Total = 79,80,000 litres
2. Calculation of equivalent single room suites:
HOTEL AND LODGES Type of suites Room days Equivalent single room suites
Single room suite 100 × 360 ×100% = 36,000 36,000 × 1= 36,000
BQ 21 Double room suite 50 × 360 × 80% = 14,400 14,400 × 2.5 = 36,000
A company runs a holiday home. For this purpose, it has hired a building at a rent of `10,000 per month along Triple room suite 30 × 360 × 60% = 6,480 6,480 × 5 = 32,400
with 5% of total taking. It has three types of suites for its customers viz. single room, double room and triple Total equivalent single room days 1,04,400
room. Following information is given:
Type of suites Number of rooms Occupancy percentage BQ 22
Single room 100 100% A lodging home is being run in a small hill station with 100 single rooms. The home offers concessional rates
Double room 50 80% during six off-season (Winter) months in a year. During this period, half of the full room rent is charged. The
Triple room 30 60% management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates and
other details for the year ending on 31st March. [Assume a month to be of 30 days].
The rent of double room suite is to be fixed at 2.5 times of the single room suite and that of triple room
suite as twice of the double room suite. (a) Occupancy during the season is 80% while in the off- season it is 40% only.
(b) Total investment in the home is `200 lakhs of which 80% relate to buildings and balance for furniture
The other expenses for the year 2023 are as follows: and equipment.
Expenses ` (c) Expenses:
Staff salaries 14,25,000 Staff salary [Excluding room attendants] `5,50,000
Room attendant’s wages 4,50,000 Repairs to building `2,61,000
Lighting, heating and power 2,15,000 Laundry charges `80,000
Repairs and renovation 1,23,500 Interior `1,75,000
Laundry charges 80,500 Miscellaneous expenses `1,90,800
Interior decoration 74,000 (d) Annual depreciation is to be provided for buildings @ 5% and on furniture and equipment @ 15% on
Sundries 1,53,000 straight-line basis.
(e) Room attendants are paid `10 per room day on the basis of occupancy of the rooms in a month.
Provide profit @ 20% on total taking and assume 360 days in a year. You are required to calculate
(f) Monthly lighting charges are `120 per room, except in four months in winter when it is `30 per room.
the rent to be charged for each type of suite.
You are required to work out the room rent chargeable per day both during the season and the off-
Answer season months on the basis of the foregoing information.
Statement Showing Rent to be Charged
Particulars ` Answer
Staff salaries 14,25,000 Statement Showing Per Day Chargeable Rent
Room attendant's wages 4,50,000 `
Particulars
Lighting, heating and power 2,15,000
Staff salary 5,5,0000
Repairs and renovation 1,23,500
Repairs to building 2,61,000
Laundry charges 80,500
Laundry charges 80,000
Interior decoration 74,000
Interior 1,75,000
Sundries 1,53,000
 SERVICE COSTING 8.21 SERVICE COSTING 8.22
Miscellaneous expenses 1,90,800 Answer
Depreciation: (a) Statement Showing Profit Per Patient Day
On Building (`200 lakhs × 80% × 5%) 8,00,000 Particulars Amount
On Furniture (`200 lakhs × 20% × 15%) 6,00,000 (A) Variable Costs:
Room attendant's wages: Doctor fess (2,50,000 × 12) 30,00,000
In Season (100 rooms × 80% × 30 days × 6 months × `10) 1,44,000 Food to Patients (Variable) 8,80,000
In Off-Season (100 rooms × 40% × 30 days × 6 months × `10) 72,000 Other services to patients (Variable) 3,00,000
Lighting charges: Laundry charges (Variable) 6,00,000
Season & Non Winter (100 rooms × 80% × 6 months × `120) 57,600 Medicines (Variable) 7,50,000
Off-Season & Non Winter (100 rooms × 40% × 2 months × `120) 9,600 Bed hire charges (100 × 750 beds) 75,0000
Off-Season & Winter (100 rooms × 40% × 4 months × `30) 4,800 Total (A) 56,05,000
(B) Fixed Costs:
Total Cost 29,44,800 Rent (75,000 × 12) 9,00,000
Add: Profit @ 20% on Room rent or 25% on Cost 7,36,200 Supervisors (2 persons × 25,000 × 12) 6,00,000
Total Rent to be Charged 36,81,000 Nurses (4 persons × 20,000 × 12) 9,60,000
÷ Equivalent Off-Season room days ÷ 36,000 Ward Boys (4 persons × 5,000 × 12) 2,40,000
Rent for one room per day in Off-Season `102.25 Repairs (Fixed) 81,000
Rent for one room per day in Season (`102.25 × 2) `204.50 Other fixed expenses 10,80,000
Administration expenses allocated 10,00,000
Working Notes: Total (B) 48,61,000
Equivalent Off –Season room days = 100 × 80% × 30 days × 6 months × 2 (double of Off-Season) + Total cost (A + B) 1,04,66,000
100 × 40% × 30 days × 6 months × 1 Collection from patients (2,000 × 8,000 patient days) 1,60,00,000
= 14,400 × 2 + 7,200 × 1 Profit (Collection – Total cost) 55,34,000
= 36,000 Room days Profit per patient day (Profit ÷ Patient days) 691.75

HOSPITAL (b) Calculation of BEP for the hospital:

BEP = Fixed cost ÷ Contribution per patient day
BQ 23 = 48,61,000 ÷ 1,299.375 = 3,741 patient days
ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more beds can
be added, if required. Working Notes:
Rent per month `75,000 1. Calculation of number of Patient days:
Supervisors 2 persons `25,000 per month each
= (35 beds × 150 days) + (25 beds × 80 days) + 750 beds
Nurses 4 persons `20,000 per month each
= 8,000
Ward Boys 4 persons `5,000 per month each
Doctors paid `2,50,000 per month 2. Calculation Contribution per patient day:
(paid on the basis of number of patients attended and the time spent by them)
Contribution = Sales – Variable cost
Other expenses for the year are as follows: = 1,60,00,000 – 56,05,000 = 1,03,95,000
Repairs (Fixed) `81,000 Contribution per patient day = 1,03,95,000 ÷ 8,000 = 1,299.375
Food to Patients (Variable) `8,80,000
Other services to patients (Variable) `3,00,000 INFORMATION TECHNOLOGY (IT) AND IT ENABLED SERVICES (ITES)
Laundry charges (Variable) `6,00,000
Medicines (Variable) `7,50,000 BQ 24
Other fixed expenses `10,80,000 Following are the data pertaining to Infotech Pvt. Ltd, for the year 2022 – 23:
Administration expenses allocated `10,00,000
Salary to 5 Software Engineers `15,00,000
It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25 beds are Salary to 2 Project Leaders `9,00,000
occupied. The hospital hired 750 beds at a charge of `100 per bed per day, to accommodate the flow of patients. Salary to Project Manager `6,00,000
However, this does not exceed more than 5 extra beds over and above the normal capacity of 35 beds on any Repairs & maintenance `3,00,000
day. Administration overheads `12,00,000

You are required to The company executes a Project XYZ, the details of the same as are as follows:

(a) Calculate profit per Patient day, if the hospital recovers on an average `2,000 per day from each patient Project duration 6 months
(b) Find out Breakeven point for the hospital. Travel expenses incurred for the project `1,87,500
 SERVICE COSTING 8.23 SERVICE COSTING 8.24
One Project Leader and three Software Engineers were involved for the entire duration of the project, whereas Required:
Project Manager spends 2 months’ efforts, during the execution of the project. Two Laptops were purchased 1. Calculate cost per kilometre per month.
at a cost of `50,000 each, for use in the project and the life of the same is estimated to be 2 years. 2. Calculate the toll rate per vehicle.
Prepare Project cost sheet considering overheads are absorbed on the basis of salary. Answer
1. Statement of Cost per Kilometer per Month
Answer (for the month April)
Project Cost Sheet
Particulars Amount (`)
Particulars Amount Salary to Collection personnel (3 shifts × 4 persons × 30 days × 550 per day) 1,98,000
Salaries: Salary to Supervisor (2 shifts × 1 person × 30 days × 750 per day) 45,000
Software engineers (3 × 25,000 × 6 months) 4,50,000 Salary to Security personnel (3 shifts × 6 persons × 30 days × 450 per day) 2,43,000
Project Leader (37,500 × 6 months) 2,25,000 Salary to Toll booth manager (2 shifts × 1 persons × 30 days × 900 per day) 54,000
Project manager (50,000 × 2 months) 1,00,000 Electricity 8,00,000
Total Salary 7,75,000 Telephone 1,40,000
Overheads (50 % of Salary) 3,87,500 Maintenance cost 30,00,000
Travel expenses 1,87,500 Depreciation and amortization expenses 1,50,00,000
Depreciation on Laptops [(1,00,000 ÷ 2 years) × 6/12] 25,000 Total Cost for April 2020 1,94,80,000
Total Project Cost 13,75,000 ÷ Total kilometers ÷ 60 kms
Cost per Kilometer for April `3,24,667
Working Notes:
1. Total Overheads per annum = Repairs & Maintenance + Administration Overheads 2. Calculation of toll rate per vehicle:
= 3,00,000 + 12,00,000
Total Toll Collection in April = Total Cost for April + 25%
= 15,00,000
= `1,94,80,000 + 25 % = `2,43,50,000
2. Calculation of total salary per annum and salary per month:
Toll Rate per vehicle = Total collection for April ÷ Total vehicles in April
Particulars Total Per Annum Per Person Per Annum Per Person Per Month = `2,43,50,000 ÷ 10,00,000 = `24.35
Salary to 5 Software Engineers `15,00,000 `3,00,000 `25,000
Salary to 2 Project Leaders `9,00,000 `4,50,000 `37,500 Working Notes:
Salary to Project Manager `6,00,000 `6,00,000 `50,000
Calculation of number of vehicles using the highway per month:
Total `30,00,000 `13,50,000 `1,12,500
Total estimated number of vehicles using highway in 10 years = 12 crores
3. Calculation of Overhead absorption rate: ∴ Total number of vehicles using highway in 1 year = 1.2 crores
∴ Total number of vehicles using highway in 1 month = 10,00,000
Overhead absorption rate = Total overheads per annum ÷ Total salary per annum
= 15,00,000 ÷ 30,00,000 = 50% of salary BQ 26
SLS Infrastructure built and operates 110 km. highway on the basis of Built-Operate-Transfer (BOT) for the
TOLL PLAZA or TOLL ROADS period of 25 years. A traffic assessment has been carried out to estimate the traffic flow per day shows the
following figures:
BQ 25
BHG Toll Plaza Ltd built a 60 km. long highway and now operates a toll plaza to collect tolls from passing Sl. No. Type of vehicle Daily traffic volume
vehicles using the highway. The company has estimated that a total of 12 crores vehicles (only single type of 1 Two wheelers 44,500
vehicle) will be using the highway during the 10 years toll collection tenure. 2 Car and SUVs 3,450
3 Bus and LCV 1,800
Toll Operating and Maintenance cost for the month of April are as follows: 4 Heavy commercial vehicles 816
Salary: The following is the estimated cost of the project:
Collection Personnel (3 Shifts and 4 persons per shift) `550 per day per person
Supervisor (2 Shifts and 1 person per shift) `750 per day per person Amount
Activities
Security Personnel (3 Shifts and 6 persons per shift) `450 per day per person (` in Lakh)
Toll Booth Manager (2 Shifts and 1 person per shift) `900 per day per person Site clearance 170.70
Electricity `8,00,000 Land development and filling work 9,080.35
Telephone `1,40,000 Sub base and base courses 10,260.70
Maintenance cost `30 Lakhs Bituminous work 35,070.80
Bridge, flyover, underpasses, pedestrian subway, footbridge, etc. 29,055.60
Monthly depreciation and amortisation expenses will be `1.50 crore. Further, the company needs 25% profit Drainage and protection work 9,040.50
over total cost to cover interest and other costs. Traffic sign, marking and road appurtenance 8,405.00
 SERVICE COSTING 8.25 SERVICE COSTING 8.26
Maintenance, repairing and rehabilitation 12,429.60 (b) Calculation of Equivalent Two wheelers per day:
Environment management 982.00
Sl. Equivalent Two
Total Project Cost 1,14,495.25 Type of vehicle Weight (%) Ratio Daily traffic volume
No. wheeler
1 Two wheelers 5% 1 44,500 44,500
An average cost of `1,120 Lakh has to be incurred on administration and toll plaza operation.
2 Car and SUVs 20% 4 3,450 13,800
3 Bus and LCV 30% 6 1,800 10,800
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights has
4 Heavy commercial vehicles 45% 9 816 7,344
been assigned to passing vehicles:
Total Equivalent Two wheeler per day 76,444
Sl. No. Type of vehicle Weight (%)
1 Two wheelers 5% EDUCATIONAL INSTITUTIONS
2 Car and SUVs 20%
3 Bus and LCV 30% BQ 27
4 Heavy commercial vehicles 45% A professional institute has organised correspondence course for the benefit of its students who have to
undergo two courses Intermediate and Final, the latter being open to only those who pass the former. The
Required: number of students involved per annum is 12,500 and 5,000 for intermediate course and final course
(1) Calculate the total project cost per day of concession period. respectively.
(2) Compute toll fee to be charged for per vehicle of each type, if the company wants earn a profit of 15% on The fixed expenses for the two courses taken together are as under:
total cost.
Salaries:
Academic `13,44,000
Note: Concession period is a period for which an infrastructure is allowed to operate and recover its
General `3,15,000
investment.
Rent, lighting etc. `2,45,000
Postage, telephone etc. `1,75,000
Answer
Stationery `1,22,500
(1) Statement Showing Total Project Cost per Day
Amount The following further details are also available:
Activities
(` in Lakh) Intermediate Final
Site clearance 170.70 Number of study papers 60 90
Land development and filling work 9,080.35 No. of pages per study paper 40 48
Sub base and base courses 10,260.70 Cost per pages `0.08 `0.10
Bituminous work 35,070.80 Packing and forwarding per set `25 `37.50
Bridge, flyover, underpasses, pedestrian subway, footbridge, etc. 29,055.60 No. of annual answer papers to be submitted 16 -
Drainage and protection work 9,040.50 Cost of correcting one answer paper `3 -
Traffic sign, marking and road appurtenance 8,405.00 Postage per answer paper `1 -
Maintenance, repairing and rehabilitation 12,429.60
Environment management 982.00 Ascertain the cost of imparting tuition per student for the course.
Administration and toll plaza operation cost 1,120.00
Total Project Cost 1,15,615.25
÷ Concession period in days (25 years × 365 days)
Answer
÷ 9,125
Statement Showing Cost of Imparting Tuition per Student
Cost per day of concession period (` in Lakh) `12.67
Particulars Intermediate Final
(2) Statement Showing Toll Fee to be Charged per Vehicle of Each Type Fixed Expenses per student (WN) 125.80 125.80
Cost of study papers:
Particulars Amount Intermediate (60 × 40 × 0.08) 192.00 -
Toll to be recovered per day 14,57,050 Final (90 × 48 × 0.10) - 432.00
÷ Total equivalent Two wheelers per day ÷ 76,444 Packing and forwarding per set 25.00 37.50
Toll per Two wheelers `19.06 Cost of correcting answer papers (16 × 3) 48.00 -
Toll per Cars and SUVs (`19.06 × 4) `76.24 Cost of postage answer papers (16 × 1) 16.00 -
Toll per Bus and LCV (`19.06 × 6) `114.36 Cost of Imparting Tuition per Student `406.80 `595.30
Toll per Heavy commercial vehicles (`19.06 × 9) `171.54
Working Note:
Working note:
Fixed expenses = 13,44,000 + 3,15,000 + 2,45,000 + 1,75,000 + 1,22,500
(a) Calculation of Toll per day: = 22,01,500
Toll recovery per day = Cost per day of concession period + 15% profit on cost
= `12,67,000 + 15% of `12,67,000 = `14,57,050 Fixed expense per student = 22,01,500 ÷ 17,500 students = 125.80
 SERVICE COSTING 8.27 SERVICE COSTING 8.28
BQ 28 (b) One teacher who teaches economics for Arts stream students also teaches commerce stream students.
Star study centre provides coaching classes to school students. The study centre has taken an auditorium of The teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.
250 seat capacity on rent `3,75,000 per month. It has also hired some renowned teachers for taking classes. A
teacher takes `3,000 per hour. The study centre has decided to conduct a batch of 2 hour per day for 3 days a (c) There is another teacher who teaches mathematics for Science stream students also teaches business
week for 4 months. mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
commerce students.
(1) Calculate the total cost per batch.
(2) Compute the minimum fee to be charged per student in a batch, if the centre operates at 60% capacity. (d) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for higher
(3) Determine the fee per student if the study centre desires to earn a profit of 50% on cost and study secondary section.
centre operates at 50% capacity.
(e) All school students irrespective of section and age participates in annual functions and sports activities.
Answer
(1) Statement Showing Cost per Batch Required:
Particulars Amount
1. Calculate cost per student per annum for all three streams.
Auditorium hire charges (3,75,000 × 4 months) 15,00,000
2. If the management decides to take uniform fee of `1,000 per month from all higher secondary students,
Teachers’ remuneration (3,000 × 2 hour × 3 days × 4 weeks × 4 months) 2,88,000
calculate stream wise profitability.
Total cost per batch `17,88,000 3. If management decides to take 10% profit on cost, compute fee to be charged from the students of all
three streams respectively.
(2) Minimum Fee per Student in a Batch = Total Cost per batch ÷ Number of students
= `17,88,000 ÷ 150 students (250 seats × 60%)
Answer
= `11,920 1. Statement of Cost per Student per annum
(3) Fee per Student in a Batch = (Total Cost + Profit) ÷ Number of students Particulars Arts (`) Commerce (`) Science (`) Total (`)
= `17,88,000 + 50% of `17,88,000 ÷ 125 students Teachers’ salary 16,80,000 21,00,000 25,20,000 63,00,000
(250 seats × 50%) (35,000×12×4) (35,000×12×5) (35,000×12×6)
= `21,456 Re-apportionment of salary:
of Economics teacher (84,000) 84,000 - -
BQ 29 of Mathematics teacher - 61,091 (61,091) -
AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts, Principal’s salary 1,24,800 1,87,200 2,88,000 6,00,000
Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes, but for Lab assistants’ salary - - 1,72,800 1,72,800
accounting purpose it treats higher secondary as a separate responsibility centre. The Managing committee of Salary to library staff 43,200 28,800 57,600 1,29,600
the school wants to revise its fee structure for higher secondary students. The accountant of the school has Salary to peons 31,636 94,909 47,455 1,74,000
provided the following details for a year: Examination expenses 86,400 2,59,200 1,29,600 4,75,200
Salary to other staffs 38,400 1,15,200 57,600 2,11,200
Amount (`) Office & Administration expenses 1,21,600 3,64,800 1,82,400 6,68,800
Teachers’ salary (25 teachers × `35,000 × 12 months) 1,05,00,000 Annual Day expenses 36,000 1,08,000 54,000 1,98,000
Principal’s salary 14,40,000 Sports expenses 9,600 28,800 14,400 52,800
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000 Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
Salary to library staff 1,44,000 ÷ Number of Students ÷ 120 ÷ 360 ÷ 180 ÷ 660
Salary to peons (4 peons × `10,000 × 12 months) 4,80,000 Cost per student per annum 17,397 9,533 19,238 13,610
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000 2. Statement of Profitability
Office & Administration cost 15,20,000
Particulars Arts (`) Commerce (`) Science (`) Total (`)
Annual day expenses 4,50,000
No. of students 120 360 180 660
Sports expenses 1,20,000
Total Fees @ 12,000 per student p.a. 14,40,000 43,20,000 21,60,000 79,20,000
Less: Total Cost per annum (20,87,636) (34,32,000) (34,62,764) (89,82,400)
Other information:
Total Profit/ (Loss) per annum (6,47,636) 8,88,000 (13,02,764) (10,62,400)
(a)
Standard 11 & 12 Primary &
3. Statement Showing Fees to be Charged to Earn a 10% Profit on Cost
Arts Commerce Science Secondary
Particulars Arts (`) Commerce (`) Science (`)
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156 Cost per student per annum 17,397 9,533 19,238
No. of examinations in a year 2 2 2 2 Add: Profit @10% 1,740 953 1,924
Time spent at library per student per year 180 hours 120 hours 240 hours 60 hours Fees per annum 19,137 10,486 21,162
Time spent by principal for administration 208 hours 312 hours 480 hours 1,400 hours Fees per month 1,595 874 1,764
Teachers for 11 & 12 standard 4 5 6 10
Working Notes:
 SERVICE COSTING 8.29 SERVICE COSTING 8.30
(a) Re-apportionment of Economics and Mathematics teachers’ salary: 1. Statement Showing Total Cost for ‘Professionals Protection Plus’ Policy
Economics Mathematics Particulars Amount
Particulars (a) Product development, Marketing and Sales support:
Arts Commerce Science Commerce
No. of classes 832 208 940 160 Policy development cost 11,25,000
Salary re-apportionment (`) (84,000) 84,000 (61,091) 61,091 Cost of marketing of the policy 45,20,000
(`4,20,000 ÷ 1,040) × 208 (`4,20,000 ÷ 1,100) × 160 Sales support expenses 11,45,000
Total (a) 67,90,000
(b) Operations:
(b) Principal’s salary has been apportioned on the basis of time spent by him for administration of classes.
Policy issuance cost 10,05,900
Policy servicing cost 35,20,700
(c) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the students.
Claims management cost 1,25,600
Total (b) 46,52,200
(d) Salary of library staffs are apportioned on the basis of time spent by the students in library.
(c) IT Cost:
IT cost 74,32,000
(e) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable to higher
Total (c) 74,32,000
secondary classes is calculated as below:
(d) Support functions:
Particulars Amount (`) Postage and logistics 10,25,000
Peon dedicated for higher secondary (1 peon × 10,000 × 12 months) 1,20,000 Facilities cost 15,24,000
Add: 15% of other peons’ salary {15% of 3 peons × 10,000 × 12 months) } 54,000 Employees cost 5,60,000
Total 1,74,000 Office administration cost 16,20,400
Total (d) 47,29,400
(f) Examination expenditure has been apportioned taking number of students into account (It may also be Total Cost (a + b + c + d) 2,36,03,600
apportioned on the basis of number of examinations).
2. Calculate cost per policy = Total Cost ÷ No. of Policies
(g) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are = `2,36,03,600 ÷ 528
apportioned on the basis of number of students. = `44,703.79

INSURANCE COMPANIES 3. Cost per rupee of insured value = Total Cost ÷ Total insured value
= `2,36,03,600 ÷ `1,320 crores
BQ 30 = `0.0018
Sanziet Lifecare Ltd. operates in life insurance business. Last year it launched a new term insurance policy for
practicing professionals ‘Professionals Protection Plus’. The company has incurred the following expenditures FINANCIAL INSTITUTES
during the last year for the policy:
BQ 31
Policy development cost `11,25,000
The loan department of a bank performs several functions in addition to home loan application processing
Cost of marketing of the policy `45,20,000
task. It is estimated that 25% of the overhead costs of loan department are applicable to the processing of
Sales support expenses `11,45,000
home-loan application. The following information is given concerning the processing of a loan application:
Policy issuance cost `10,05,900
Policy servicing cost `35,20,700
Direct professional labour:
Claims management cost `1,25,600
IT cost `74,32,000 Loan processor monthly salary `2,40,000
Postage and logistics `10,25,000 (4 employees @ `60,000 each)
Facilities cost `15,24,000
Employees cost `5,60,000 Loan department overhead costs (monthly):
Office administration cost `16,20,400
Chief loan officer’s salary `75,000
Number of policy sold 528
Telephone expenses `7,500
Total insured value of policies `1,320 crore
Depreciation Building `28,000
Legal advice `24,000
Required:
Advertising `40,000
1. Calculate total cost for Professionals Protection Plus’ policy segregating the costs into four main activities Miscellaneous `6,500
namely (a) Product development, Marketing and Sales support, (b) Operations, (c) IT and (d) Support Total overhead costs `1,81,000
functions.
2. Calculate cost per policy. You are required to compute the cost of processing home loan application on the assumption that
3. Calculate cost per rupee of insured value. five hundred home loan applications are processed each month.

Answer Answer
 SERVICE COSTING 8.31 SERVICE COSTING 8.32
Statement of Cost of Processing of One Home Loan Application Answer
Particulars Amount Cost Statement of Chambal Thermal Power Station
Direct professional labour cost (4 employees × 60,000) 2,40,000 Particulars Amount
Service overhead cost (25% of 1,81,000) 45,250 (A) Fixed Costs:
Total processing cost per month 2,85,250 Plant supervision 3,00,000
÷ Number of applications processed per month ÷ 500 Administration overheads 20,00,000
Cost of Processing One Home Loan Application `570.50 Depreciation (`2,00,00,000 × 5%) 10,00,000
Total (A) 33,00,000
POWER HOUSES (B) Variable Costs:
Operating labour (Student can treat it as fixed also) 15,00,000
BQ 32 Lubricant, spares and stores 4,00,000
Prepare the cost statement of Ignus Thermal Power Station showing the cost of electricity generated per kwh, Repairs and Maintenance 5,00,000
from the data provided below pertaining to the year 2022-23: Coal cost (10,00,000 kwh ÷ 5 kwh) × `4.25 per kg 8,50,000
Total (B) 32,50,000
Total units generated 20,00,000 kwh Total Operating Cost (A + B) 65,50,000
Operating labour `30,00,000 ÷ Total kwh generated ÷ 10,00,000
Repairs & maintenance `10,00,000 Cost of electricity generated per kwh `6.55
Lubricants, spares and stores `8,00,000
Plant supervision `6,00,000
Administration overheads `40,00,000
BQ 34
A manufacturing firm facing shortage of electric power supply from the state electricity board has set up its
own power generation plant for efficient running of its production units in the factory.
5 kwh. of electricity generated per kg of coal consumed @ `4.25 per kg. Depreciation charges @ 5% on capital
cost of `5,00,00,000.
The following information has been taken from the records in connection with the generation of
power for a month:
Answer
Cost Statement of Ignus Thermal Power Station 1. Number of units generated was 10,00,000 for the month of which 10% was utilised by the generator
Particulars Amount departments.
(A) Fixed Costs:
Plant supervision 6,00,000 2. Consumption data of materials etc., for the month:
Administration overheads 40,00,000 (a) Coal consumed 300 MT @ `3,600 per MT
Depreciation (`5,00,00,000 × 5%) 25,00,000 (b) Oil consumed 4.5 MT @ `40,000 per MT
Total (A) 71,00,000 (c) Cost of water extraction & treatment 6 lakhs liters @ `1.25 per litre
(B) Variable Costs:
Operating labour (Student can treat it as fixed also) 30,00,000 3. Steam boiler costs `20 lakhs with a residual value of `2 lakhs after a life of 10 years.
Lubricant, spares and stores 8,00,000
Repairs and Maintenance 10,00,000 4. Salaries and wages per month:
Coal cost (20,00,000 kwh ÷ 5 kwh) × `4.25 per kg 17,00,000
Total (B) (a) For staff of generating plant:
65,00,000
Total Operating Cost (A + B) 1,36,00,000 (i) 100 skilled workers @ `3,000 p.m. (ii) 150 helpers @ `1,500 p.m.
÷ Total kwh generated ÷ 20,00,000
Cost of electricity generated per kwh `6.80 (b) For staff of boiler house:

BQ 33 (i) 60 category A workers @ `1,500 p.m. (ii) 100 category B workers @ `1,000 p.m.
From the following data pertaining to the year 2022-23 prepare a cost statement showing the cost of electricity
generated per kwh by Chambal Thermal Power Station. 5. Cost of generating plant `36 lakhs with no residual value and depreciation @ 10% straight line basis is to
be charged.
Total units generated 10,00,000 kwh
Operating labour `15,00,000 6. Repairs and maintenance of generating plant and boiler `50,000 p.m.
Repairs & maintenance `5,00,000
Lubricants, spares and stores `4,00,000 7. Share of administrative charges `40,000 p.m.
Plant supervision `3,00,000
Administration overheads `20,00,000 8. Sales value of ash disposed off `15,000 p.m.

5 kwh. of electricity generated per kg. of coal consumed @ `4.25 per kg. Depreciation charges @ 5% on capital Calculate the cost per unit of electricity generated.
cost of `2,00,00,000.
 SERVICE COSTING 8.33 SERVICE COSTING 8.34

PAST YEAR QUESTIONS

Answer
Cost Statement Showing per Unit Cost
Particulars Amount
(A) Fixed Costs:
PYQ 1
Depreciation:
A transport service company is running five buses between two towns which are 50 kms apart. Seating
Steam boiler [(`20,00,000 – 2,00,000) × 1/10 × 1/12] 15,000
capacity of each bus is 50 passengers.
Generating plant (`36,00,000 × 10% × 1/12) 30,000
Share of Administrative charges 40,000 The following particulars were obtained from their books for April 1998:
Salaries and wages:
Generating plant: Wages of drivers, conductors and cleaners `24,000
Skilled workers (`3,000 × 100) 3,00,000 Salaries of office staff `10,000
Helpers (`1,500 × 150) 2,25,000 Diesel oil and other oil `35,000
Boiler house: Repairs and maintenance `8,000
Category A workers (`1,500 × 60) 90,000 Taxation, insurance etc. `16,000
Category B workers (`1,000 × 100) 1,00,000 Depreciation `26,000
Total (A) 8,00,000 Insurance and other expenses `20,000
(B) Variable Costs: Total `1,39,000
Coal consumed (`3,600 × 300) 10,80,000 Actually, passengers carried were 75 per cent of seating capacity. All buses ran on all days of the month.
Oil consumed (`40,000 × 4.5) 1,80,000 Each bus made one round trip per day.
Water extraction & treatment (`1.25 × 6,00,000) 7,50,000
Repairs and maintenance 50,000 Find out the cost per passenger-km.
Total (B) 20,60,000 [(5 Marks) Nov 1998]
Total Operating Cost before Sale of Ash (A + B) 28,60,000
Less: Sale of ash (15,000) Answer
Total Operating Cost Net of Sale of Ash 28,45,000 Operating Cost Sheet
÷ Total Effective units generated (10,00,000 – 10%) ÷ 9,00,000 (For the month of April 1998)
Cost per unit electricity generated `3.161 Particulars Amount
(A) Standing Charges:
Wages of drivers, conductors and cleaners 24,000
Salaries of office staff 10,000
Taxation, insurance etc. 16,000
Depreciation 26,000
Insurance and other expenses 20,000
Total (A) 96,000
(B) Running Charges:
Diesel oil and other oil 35,000
Total (B) 35,000
(C) Maintenance Charges:
Repairs and maintenance 8,000
Total (C) 8,000
Total operating cost (A + B + C) 1,39,000
÷ Total tonne-kms 5,62,500
Cost per passenger-km `0.2471
Working Notes:
Total Passenger kms = No. of Buses × Distance × Round trip × Seating capacity × % of capacity
utilization × No. of days operated
= 5 Buses × 50 kms × 2 × 50 passengers × 75% × 30 days = 5,62,500

PYQ 2
A lorry starts with a load of 20 tonnes of goods from station A. It unloads 8 tonnes at station B and rest of goods
at station C. It reaches back directly to station A after getting reloaded with 16 tonnes of goods at station C.
The distance between A to B, B to C and then from C to A are 80 kms, 120 kms and 160 kms respectively.

Compute ‘Absolute tonnes km’ and ‘Commercial tonnes km’.

[(5 Marks) Nov 1999]
 SERVICE COSTING 8.35 SERVICE COSTING 8.36
Answer Truck no. One way distance No of round trips Load carried per trip
Absolute tonne kms: 1 16 4 6
This is the sum total of tonnes – kms, arrived at by multiplying various distances by respective load quantities 2 40 2 9
carried as calculated below: 3 30 3 8
= 20 tonnes × 80 kms + 12 tonnes × 120 kms + 16 tonnes × 160 kms The analysis of maintenance cost and the total distance travelled during the last two years is as under:
= 5,600 tonnes km.
Year Total distance travelled Maintenance Cost
1 1,60,200 `46,050
Commercial tonne kms:
2 1,56,700 `45,175
This is computed by average load being multiplied by total distance travelled as calculated below:
= Average load × Total kms travelled The following are the details of expenses for the year under review:
20  12  16
= tonnes × 360 kms = 5,760 tonnes km. Diesel : `10 per litre (Each litre gives 4 km mileage)
3
Drivers' salary : `2,000 per month.
License and taxes : `5,000 per annum per truck.
PYQ 3 Insurance : `5,000 per annum for all the three vehicles.
A mineral is transported from two miners ‘A’ and ‘B’ and unloaded at plots in a railway station. Mine A is at a Purchase price per truck : `3,00,000.
distance of 10 kms and B is at a distance of 15 kms from railhead plots. A fleet of lorries of 5 tonnes carrying
Life : 10 years.
capacity is used for the transport of mineral from the mines. Records reveal that the lorries average a speed of Scrap value : `10,000 at the end of economic life.
30 kms per hour when running and regularly take 10 minutes to unload at the railhead. At mine A loading time
Oil and sundries : `25 per 100 km run.
averages 30 minutes per load while at mine B loading time averages 20 minutes per load.
General Overhead : `11,084 per annum.
The vehicles operate : 24 days per month on an average.
Driver’s wages, depreciation, insurance and taxes are found to cost `9 per hour operated. Fuel, oil
tyres, repairs and maintenance cost `1.20 per km. Required:
(i) Prepare an annual cost statement covering the fleet of three vehicles.
Draw up a statement, showing the cost per tonne kilometer of carrying mineral from each mine. (ii) Calculate the cost per km run.
[(10 Marks) Nov 2000] (iii) Determine the freight rate per tonne km to yield a profit of 10% on freight.
[(10 Marks) Nov 2001]
Answer
Statement Showing Cost per Tonne-Km Answer
Particulars Mine A Mine B (i) Annual Cost Statement of 3 Vehicles
Fixed Expenses @ `9 per hour (9.00 × 80/60) (9.00 × 90/60) Particulars Amount
12.00 13.50 (A) Fixed Expenses:
Variable Expenses @ `1.20 per km (1.20 × 20 kms) (1.20 × 30 kms) Driver’s salary (2,000 × 12 × 3) 72,000
24.00 36.00 Licence and taxes (5,000 × 3) 15,000
Operating Cost 36.00 49.50 Insurance 5,000
÷ Effective tonne-kms ÷ 50 ÷ 75 Depreciation [(3,00,000 - 10,000) ÷ 10 Years] × 3 87,000
Cost per tonne-km `0.72 `0.66 General overheads 11,084
Total (A) 1,90,084
Working Notes: (B) Variable Expenses:
1. Total operating time in 1 trip: Diesel (1,34,784 × 10 ÷ 4) 3,36,960
Mine A Mine B Oil and sundries (1,34,784 × 25 ÷ 100) 33,696
Running time (mine to plot) 60 Mnt/
30 Kms × 10 Kms
60 Mnt/
30 Kms × 15 Kms
Total (B) 3,70,656
20 minutes 30 minutes (C) Maintenance Expenses:
Loading time 30 minutes 20 minutes Variable maintenance cost (1,34,784 kms × 0.25) 33,696
Running time (plot to mine) 20 minutes 30 minutes Fixed maintenance cost 6,000
Unloading time 10 minutes 10 minutes Total (C) 39,696
Total operating time in one trip 80 minutes 90 minutes Total operating cost (A + B + C) 6,00,436
2. Effective tonnes km per trip: 5 tonnes × 10 kms + 5 tonnes × 15 kms +
(ii) Calculation of cost per km run:
Nil tonnes × 10 kms Nil tonnes × 15 kms
Total annual cost of 3 trucks 6,00,436
= 50 tonne kms = 75 tonne kms = = `4.4548
Total distance travelled 1,34,784

PYQ 4 (iii) Calculation of freight per tonne km:

A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different directions for
transport of customer’s goods. The trucks run loaded with goods and return empty. The distance travelled, Total operating cost = 6,00,436
number of trips made and the load carried per day by each truck are as under: Profit @ 10% on freight = 66,722
Total freight = 6,67,218
 SERVICE COSTING 8.37 SERVICE COSTING 8.38
Freight per tonne km = Total freight
= 6,67,218
= `1.27 Distance from the school Bus Fee % of students availing facility
Total tonne kms 5,25,312 4 kms 25% of Full 15%
8 kms 50% of Full 30%
WN: 16 kms Full 55%
(1) Total km travelled & effective tones km of load carried generated by 3 trucks annually:
One way No of round Total distance Load carried Total effective Ignore interest. Since the bus fee has to be based on average cost, you are required to:
Truck
distance trips per day per day per trip tonne kms (i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year.
1 16 kms 4 128 kms 6 384 (ii) Work out average cost per student per month in respect of:
2 40 kms 2 160 kms 9 720 a. Students coming from a distance of upto 4 kms from the School;
3 30 kms 3 180 kms 8 720 b. Students coming from a distance of upto 8 kms from the School; and
Total tonne kms per day 1,824 c. Students coming from a distance of upto 16 kms from the School.
[(10 Marks) May 2004]
Total kms travelled by 3 trucks annually:
468 kms (128 + 160 + 180) × 24 days × 12 months = 1,34,784 kms Answer
(i) Statement showing the expenses of operating a single bus and the fleet of 25 buses
Total effective tonne km of load carried by 3 trucks annually: Particulars 1 Bus 25 Buses
(A) Standing Charges:
1,824 tonne kms × 24 days × 12 months = 5,25,312 tonne kms Driver’s salary 60,000 15,00,000
Cleaner’s salary 7,200 1,80,000
(2) Segregation of fixed & variable component of maintenance cost: Licence fee, Taxes etc 2,300 57,500
Insurance 15,600 3,90,000
Difference in cost 46,050 - 45,175
Variable maintenance cost per km = = Depreciation 93,750 23,43,750
Difference in distance 1,60,200 - 1,56,700 Total (A) 1,78,850 44,71,250
= `0.25 per km (B) Maintenance Charges:
Repairs and maintenance 16,400 4,10,000
Fixed maintenance cost = Total cost – Variable cost Total (B) 16,400 4,10,000
= 46,050 – (1,60,200 kms × 0.25) = `6,000 (C) Running Charges: 14,20,800
Diesel 56,832
PYQ 5 Total (C) 56,832 14,20,800
EPS is a public school having 25 buses each plying in different directions for the transport of its school Total operating cost (A + B + C) 2,52,082 63,02,050
students. In view of large number of students availing of the bus service, the buses work two shifts daily both
in the morning and in the afternoon. The buses are garaged in the school. (ii) Average cost per student per month in respect of students coming from a distance of:
The workload of the students has been so arranged that in the morning the first trip picks up senior (a) 4 kms from the school = (2,52,082 ÷ 12) ÷ 354 students = `59.34
students and the second trip plying an hour later picks up junior students. Similarly, in the afternoon the first (b) 8 kms from the school = `59.34 × 2 = `118.68
trip takes the junior students and an hour later the second trip takes the senior students home. (c) 16 kms from the school = `59.34 × 4 = `237.36
The distance travelled by each bus, one way is 16 kms. The school works 24 days in a month and
remains closed for vacation in May and June. The bus fee, however is payable by the students for all the 12 Working notes:
months in a year. 1. Calculation of diesel cost per bus:
The details of expenses for the year 2003-2004 are as under: No of trips made by a bus each day = 4
Distance travelled in one trip both ways = 32 kms (16 kms × 2 trips)
Driver's salary payable (for all the 12 months) `5,000 per month per driver Distance travelled per day by a bus = 128 kms (32 kms × 4 shifts)
Cleaner's salary payable (for all the 12 months) `3,000 per month per cleaner Distance travelled during a month = 3,072 kms (128 kms × 24 days)
(One cleaner has been employed for every five buses) Distance travelled per year = 30,720 kms (3,072 × 10 months)
Licence fees, Taxes etc. `2,300 per bus per annum No of litres of diesel required = 3,072 litres (30,720 kms ÷ 10 kms)
Insurance premium `15,600 per bus per annum
Repairs and maintenance `16,400 per bus per annum Cost of diesel per bus per year = `56,832 (3,072 litres × `18.50)
Purchase price of the bus `16,50,000 each bus
Life of the bus 16 years 2. Calculation of number of 25% equivalent students per bus:
Scrap value `1,50,000 Bus capacity of 2 trips = 120 students
Diesel cost `18.50 per litre 25% Fare students = 18 students (120 × 15%)
50% Fare students = 36 students (120 × 30%)
Each bus gives an average of 10 kms per litre of diesel. The seating capacity of each bus is 60 students. Full Fare students = 66 students (120 × 55%)\
The seating capacity is fully occupied during the whole year.
Total 25% equivalent students = 18 + (36 × 2) + (66 × 4)
The school follows differential bus fees based on distance travelled as under: = 354 students
 SERVICE COSTING 8.39 SERVICE COSTING 8.40
PYQ 6 Answer
In order to develop tourism, ABCL airline has been given permit to operate three flights in a week between X Total Passengers km = No. of buses × Distance in one side trip × Two way × No. of days in a month
and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The normal occupancy is × No. of trips × capacity in each bus × capacity utilized
estimated at 60% throughout the year of 52 weeks. The one way fare is `7,200. = 6 × 20 × 2 × 25 × 8 × 40 × 80% = 15,36,000 Passenger kms
The costs of operation of flights are:
PYQ 8
Fuel cost (variable) `96,000 per flight A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B and rest of
Food served on board on non-chargeable basis `125 per passenger goods at station C. It reaches back directly to station A after setting reloaded with 18 tonnes of goods station
Commission 5% of fare applicable for all Booking C. The distance between A to B, B to C and then from C to A are 270 kms, 150 kms and 325 kms respectively.
Fixed cost:
Compute Absolute tonnes km and Commercial tonnes km.
Aircraft lease `3,50,000 per flight
[(5 Marks) May 2009]
Crew `72,000 per flight
Required: Answer
Absolute tonne kms = A to B × tonnes + B to C × tonnes + C to A × tonnes
(i) Calculate the net operating income per flight.
= 270 kms × 24 tonnes + 150 kms × (24 – 10) + 325 kms × 18 tonnes
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the fare is reduced to
= 6,480 + 2,100 + 5,850 = 14,430 tonnes km
`6,720. Advise, whether this proposal should be implemented or not.
[(10 Marks) May 2005]
Commercial tonne kms = Total distance × Average load
Answer = (270 + 150 + 325) kms ×  24  14  18  tones = 13,907 tonnes km
 3 
(i) Statement Showing Net Operating Income per Flight
PYQ 9
Particulars Amount Amount
A transport company has been given a 40 kilometres long route to run 5 buses. The cost of each but is
Fare collection (96 × 7,200) 6,91,200
`6,50,000. The buses will make 3 round trips per day carrying on average 80 percent passengers of their
Variable costs:
seating capacity. The seating capacity of each bus is 40 passengers. The buses will run on an average 25 days
Fuel 96,000
in a month.
Commission 5% 34,560
Food (96 × 125) 12,000 1,42,560 The other information for the year 2010-11 are given below:
Contribution per Flight (6,91,200 – 1,42,560) 5,48,640
Garage rent `4,000 per month
Fixed costs:
Annual repairs and maintenance `22,500 each bus
Crew 72,000
Salaries of 5 drivers `3,000 each per month
Lease 3,50,000 4,22,000
Net Income per Flight (5,45,640 – 4,22,000) Wages of 5 conductors `1,200 each per month
1,26,640
Manager’s salary `7,500 per month
60
*Number of passengers 160 × = 96 passengers Road tax, permit fee etc. `5,000 for a quarter
100 Office expenses `2,000 per month
Cost of diesel per litre `33
(ii) Statement Showing Net Operating Income per Flight at Reduced Fare Kilometres run per litre for each bus 6 Kilometres
Particulars Amount Amount Annual depreciation 15% of cost
Fare collection (108 × 6,720) 7,25,760 Annual Insurance 3% of cost
Variable costs:
You are required to calculate the bus fare to be charged from each passenger per kilometer, if the
Fuel 96,000
company wants to earn a profit of 33-1/3 percent on taking (total receipts from passengers).
Commission 5% 36,288
[(10 Marks) May 2010]
Food (108 × 125) 13,500 1,45,788
Contribution per flight (7,25,760 – 1,45,788) 5,79,972
Fixed costs: Answer
Crew 72,000 Operating Cost Sheet
Lease 3,50,000 4,22,000 Particulars Amount
Net Income per Flight (5,79,972 – 4,22,000) 1,57,972 (A) Standing Charges:
Garage rent per month 4,000
There is an increase in net operating income by `31,332. Hence, the proposal is acceptable. Salaries of 5 drivers per month (3,000 × 5) 15,000
Wages of 5 conductors per month (1,200 × 5) 6,000
PYQ 7 Manager’s salary per month 7,500
Calculate total passenger kilometer from the following information: Road tax, permit fee etc. (5,000 × 4 ÷ 12) 1,667
Number of buses 6, number of days operating in a month 25, trips (both side) made by each bus per day 8, Office expenses per month 2,000
distances covered 20 kilometers (one side), capacity of bus 40 passengers, normally 80% of capacity utilized. Insurance per month (6,50,000 × 3% ÷ 12) × 5 8,125
[(2 Marks) Nov 2007] Depreciation per month (6,50,000 × 15% ÷ 12) × 5 40,625
Total (A) 84,917
 SERVICE COSTING 8.41 SERVICE COSTING 8.42
(B) Running Charges: Building rent:
Diesel (30,000 × 33 ÷ 6) 1,65,000 Fixed 1,20,000
Total (B) 1,65,000 Variable @ 5% on taking 1,76,067
(C) Maintenance Charges: Total Cost 28,17,067
Repairs and maintenance (22,500 × 5 ÷ 12) 9,375 Add: Profit @ 20% on taking 7,04,266
Total (C) 9,375 *Total Taking 35,21,333
Total operating cost (A + B + C) 2,59,292 ÷ Equivalent single room days ÷ 1,04,400
Add: Profit @ 33-1/3% of taking 1,29,646 Rent for single room day `33.73
Taking 3,88,938 Rent for double room day (33.73 × 2.5) `84.32
÷ Total passenger kms ÷ 9,60,000 Rent for triple room day (33.73 × 2.5 × 2) `168.65
Fare per passenger km `0.405
Working Notes:
WN 1: Calculation of total traveling of 5 buses per month: 1. Calculation of Taking:
= No of round trips daily × Distance two way × No of days × No of buses *Total Taking = Operating cost (excluding rent on taking) + 5% for rent + 20% for profit
= 3 × 80 × 25 × 5 = 30,000 kms = `26,41,000 + 25% of total takings
WN 2: Calculation of passenger kms per month: 75% of Taking = `26,41,000
Total Taking = `35,21,333
= No of kms travelled per month × Capacity occupied × No of passengers
= 30,000 × 40 × 80% = 9,60,000 kms 2. Calculation of equivalent single room suites:
Type of suites Room days Equivalent single room suites
PYQ 10 Single room suite 100 × 360 ×100% = 36,000 36,000 × 1= 36,000
A company runs a holiday home. For this purpose, it has hired a building at a rent of `10,000 per month along Double room suite 50 × 360 × 80% = 14,400 14,400 × 2.5 = 36,000
with 5% of total taking. It has three types of suites for its customers viz. single room, double room and triple Triple room suite 30 × 360 × 60% = 6,480 6,480 × 5 = 32,400
room. Following information is given: Total equivalent single room days 1,04,400
Type of suites Number of rooms Occupancy percentage
Single room 100 100% PYQ 11
Double room 50 80% The following information relates to a bus operator:
Triple room 30 60% Cost of the bus `18,00,000
Insurance charges 3% p.a.
The rent of double room suite is to be fixed at 2.5 times of the single room suite and that of triple room suite
Manager-cum accountant's salary `8,000 p.m.
as twice of the double room suite.
Annual tax `50,000
The other expenses for the year 2006 are as follows: Garage rent `2,500 p.m.
Annual repair and maintenance `1,50,000
Expenses ` Expected life of bus 15 years
Staff salaries 14,25,000 Scrap value at the end of 15 years `1,20,000
Room attendant’s wages 4,50,000 Driver's salary `15,000 p.m.
Lighting, heating and power 2,15,000 Conductor's salary `12,000 p.m.
Repairs and renovation 1,23,500 Stationery `500 p.m.
Laundry charges 80,500 Engine oil, lubricants (for 1,200 kms.) `2,500
Interior decoration 74,000 Diesel and oil (for 10 kms.) `52
Sundries 1,53,000 Commission to driver and conductor (shared equally) 10% of collections
Provide profit @ 20% on total taking and assume 360 days in a year. You are required to calculate Route distance 20 km long
the rent to be charged for each type of suite. The bus will make 3 round trips for carrying on an average 40 passengers in each trip. Assume 15%
profit on collections. The bus will work on an average 25 days in a month.
Answer
Calculate fare for passenger-km. [(8 Marks) Nov 2013]
Statement Showing Rent to be Charged
Particulars ` Answer
Staff salaries 14,25,000 Statement of Fare for Passenger-km
Room attendant's wages 4,50,000
Particulars Amount
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500 (A) Standing Charges:
Depreciation per month [(18,00,000 - 1,20,000) × 1/15 × 1/12] 9,333
Laundry charges 80,500
Insurance per month [(18,00,000 × 3%) × 1/12] 4,500
Interior decoration 74,000
Manager-cum accountant’s salary 8,000
Sundries 1,53,000
Annual Tax for one month (50,000 × 1/12) 4,167
 SERVICE COSTING 8.43 SERVICE COSTING 8.44
Garage Rent 2,500 Answer
Driver’s salary 15,000 Operating Cost Statement
Conductor’s salary 12,000 Particulars Amount
Stationery 500 (A) Fixed Charges:
Total (A) 56,000 Insurance 15,600
(B) Running Charges: Garage Rent (2,400 × 4 quarters) 9,600
Diesel and oil (52/10 × 3,000 kms) 15,600 Road Tax 5,000
Engine oil, lubricants (2,500/1,200 × 3,000 kms) 6,250 Salary of Operating Staff (7,200 × 12 months) 86,400
Commission @ 10% of collections ‘WN’ 12,047 Depreciation 68,000
Total (B) 33,897 Total (A) 1,84,600
(C) Maintenance Charges: (B) Variable Charges:
Repairs and maintenance (1,50,000 × 1/12) 12,500 Diesel [(1,80,000 km ÷ 5 km) × 13] 4,68,000
Total (C) 12,500 Oil and Sundries [(1,80,000 km ÷ 100 km) × 22] 39,600
Total operating cost (A + B + C) 1,02,397 Total (B) 5,07,600
Add: Profit @ 15% of collections 18,070 (C) Maintenance Charges:
Collections (WN 3) 1,20,467 Repairs (4,800 × 4 quarters)
÷ Total Passenger-kms 19,200
÷ 1,20,000 Tyres and Tubes (3,600 × 4 quarters) 14,400
Fare for per passenger-km `1.004 Total (C) 33,600
Total Operating Cost (A + B + C) 7,25,800
WN 1: Calculation of total travelling of bus in one month: Add: Profit @ 25% of Taking 3,42,359
Add: Passenger Tax @ 22% Taking 3,01,275
= 2 × No of round trips daily × Distance one way × No of days
Total Taking 13,69,434
= 2 × 3 × 20 × 25 = 3,000 kms

WN 2: Calculation of passenger-kms per month: Calculation of cost per passenger km and one way fare per passenger:

= No of kms travelled per month × No of passengers Total Operating Cost 7 ,25 ,800
= 3,000 × 40 = 1,20,000 passenger-kms Cost per passenger km = = = `0.18
Total Passenger Km 40 ,32 ,000
WN 3: Calculation of collections:
Total Taking 13 ,69 ,434
Total collections = Operating cost (excluding commission on collections) + 10% for One way fare per passenger = × 30 km = × 30 km
Total Passenger Km 40 ,32 ,000
commission + 15% for profit = 90,350 + 25% of collections = `10.19
Collections = `1,20,467
WN 1: Calculation of total travelling of bus in one year:
PYQ 12 30 km × 2 sides × 10 trips × 25 days × 12 months = 1,80,000 kms
A mini-bus, having a capacity of 32 passengers, operates between two places – ‘A’ and ‘B’. The distance between
the place ‘A’ and ‘B’ is 30 km. The bus makes 10 round trips in a day for 25 days in a month. On an average, the WN 2: Calculation of passenger-kms per year:
occupancy ratio is 70% and is expected throughout the year.
1,80,000 km × 32 passengers × 70% = 40,32,000 passenger-kms
The details of other expenses are as under:
WN 3: Calculation of Taking:
Insurance `15,600 per annum
Garage Rent `2,400 per quarter Total taking = Operating cost + 25% for profit + 22% for passenger tax
Road Tax `5,000 per annum = 7,25,800 + 47% of Total taking
Repairs `4,800 per quarter Total Taking = `13,69,434
Salary of Operating Staff `7,200 per month
Tyres and Tubes `3,600 per quarter
PYQ 13
Diesel (one litre is consumed for every 5 km) `13 per litre
‘RP’ Resort (P) Ltd. offers three types of rooms to its guests, viz. deluxe room, super deluxe room and luxury
Oil and Sundries `22 per 100 km run
suite.
Depreciation `68,000 per annum
You are required to ascertain the tariff to be charged to the customers for different types of rooms
on the basis of following information:
Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit @ 25% on total
taking. Type of Rooms Number of Rooms Occupancy
Deluxe Room 100 90%
Prepare operating cost statement on the annual basis and find out the cost per passenger
Super Deluxe Room 60 75%
kilometer and one way fare per passenger.
Luxury Suite 40 60%
[(8 Marks) May 2015]
 SERVICE COSTING 8.45 SERVICE COSTING 8.46
Rent of ‘super deluxe’ room is to be fixed at 2 times of the ‘deluxe room’ and that of ‘luxury suite’ is PYQ 14
three times of ‘deluxe room’. Royal transport company has been given a 50 kilometre long route to run 6 buses. The cost of each bus is
`7,50,000. The buses will make 3 round trips per day carrying on an average 75 percent passengers of their
Annual expenses are as follows: seating capacity. The seating capacity of each bus is 48 passengers. The buses will run on an average 25 days
in a month. The other information for the year 2016-17 is given below:
Particulars ` in Lakhs
Staff salaries 680.00 Garage Rent `6,000 per month
Lighting, heating and power 300.00 Annual Repairs & Maintenance `24,000 each bus
Repairs, maintenance and renovation 180.00 Salaries of 6 drivers `4,000 each per month
Linen 30.00 Wages of 6 conductors `1,600 each per month
Laundry charges 24.00 Wages of 6 cleaners `1,000 each per month
Interior decoration 75.00 Manager’s salary `10,000 per month
Sundries 30.28 Road Tax, Permit fee, etc. `6,000 for a quarter
Office expenses `2,500 per month
An attendant for each room was provided when the room was occupied and he was paid `500 per day Cost of diesel per litre `66
towards wages. Further depreciation is to be provided on building @ 5% on `900 lakhs, furniture and fixtures Kilometer run per litre for each bus 6 kilometres
@ 10% on `90 lakhs and air conditioners @ 10% on `75 lakhs. Annual Depreciation 20% of cost
Annual Insurance 4% of cost
Profit is to be provided @ 25% on total taking and assume 360 days in a year. Engine oils & lubricants (for 1,000 kilometres) `2,000
[(8 Marks) June 2015]
You are required to calculate the bus fare to be charged from each passenger per kilometer (upto
Answer four decimal points), if the company wants to earn profit of 33-⅓% on taking (total receipts from
Statement Showing Tariff to be Charged passengers).
Particulars ` in Lakhs [(8 Marks) Nov 2016]
Staff salaries 680.00
Lighting, heating and power 300.00 Answer
Repairs, maintenance and renovation 180.00 Operating Cost Sheet
Linen 30.00 Particulars Amount
Laundry charges 24.00 (A) Fixed Expenses:
Interior decoration 75.00 Garage rent (6,000 × 12) 72,000
Sundries 30.28 Salaries of 6 drivers (4,000 × 6 × 12) 2,88,000
Room attendant's wages 286.20 Wages of 6 conductors (1,600 × 6 × 12) 1,15,200
Depreciation : Wages of 6 cleaners (1,000 × 6 × 12) 72,000
Building 5% on `900 lakhs 45.00 Manager’s salary (10,000 × 12) 1,20,000
Furniture and fixtures 10% on `90 lakhs 9.00 Road tax, permit fee etc. (6,000 × 4) 24,000
Air conditioners 10% on `75 lakhs 7.50 Office expenses (2,500 × 12) 30,000
Total Cost 1,666.98 Depreciation (7,50,000 × 20% × 6) 9,00,000
Add: Profit @ 25% on taking 555.66 Insurance (7,50,000 × 4% × 6) 1,80,000
Total Taking 2,222.64 Total (A) 18,01,200
÷ Equivalent single room days ÷ 90,720 (B) Variable Expenses:
Tariff for Deluxe Room `2,450 Diesel (5,40,000 × 66 ÷ 6) 59,40,000
Tariff for Super Deluxe Room (2,450 × 2) `4,900 Engine oils & lubricants (2,000 ÷ 1,000) × 5,40,000 10,80,000
Tariff for Luxury Suite (2,450 × 3) `7,350 Total (B) 70,20,000
(C) Maintenance Expenses:
Working Notes: Repairs and maintenance (24,000 × 6) 1,44,000
Total (C) 1,44,000
1. Calculation of Attendant wages: Total operating cost (A + B + C) 89,65,200
Wages = No of rooms occupied in a year × `500 per room per day Add: Profit @ 33-⅓% of taking 44,82,600
= 57,240 × `500 = `286.20 lakhs Taking 1,34,47,800
÷ Total passenger kms ÷ 1,94,40,000
2. Calculation of equivalent single room suites: Fare per passenger km `0.6918
Name of Room Room Days Equivalent Deluxe Room p.a.
WN 1: Calculation of total traveling of 5 buses per annum:
Deluxe Room 100 × 360 × 90% = 32,400 32,400 × 1= 32,400
Super Deluxe Room 60 × 360 × 75% = 16,200 16,200 × 2 = 32,400 = No of round trips daily × Distance two way × No of days × No of buses × 12
Luxury Suite 40 × 360 × 60% = 8,640 8,640 × 3 = 25,920 = 3 × 100 × 25 × 6 × 12 = 5,40,000 kms
Total 57,240 90,720
 SERVICE COSTING 8.47 SERVICE COSTING 8.48
WN 2: Calculation of passenger kms per annum: Working Notes:
= No of kms travelled per annum × Capacity occupied × No of passengers 1. Calculation of number of Patient days:
= 5,40,000 × 48 × 75% = 1,94,40,000 kms = (50 beds × 200 days) + (30 beds × 105 days) + (20 beds × 60
days) + 250 beds = 14,600
PYQ 15
A group of ‘Health Care Services’ has decided to establish a Critical Care Unit in a metro city with an investment 2. Calculation Contribution per patient day:
of `85 Lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and 10 more beds, if required, can
Contribution = Sales – Variable cost
be added.
= 3,65,00,000 – 1,30,65,500 = 2,34,34,500
Building rent `2,25,000 per month
Contribution per patient day = 2,34,34,500 ÷ 14,600 = 1,605.10
Manager salary (Number of manager-03) `50,000 per month each
Nurses salary (Number of nurses-24) `18,000 per month each
PYQ 16
Ward boy’s salary (Number of ward boys-24) `9,000 per month each
A company wants to outsource the operation of its canteen to a contractor. The company will provide space
Doctor’s payment (based on number of patients attended) `5,50,000 per month
for cooking, free electricity and furniture in the canteen. The contractor will have to provide lunch to 300
Food to laundry services (Variable) `39,53,000
workers of which 180 are vegetarian (Veg) and the rest are non-vegetarian (Non-Veg). In the case of non-veg
Medicines to patients (Variable) `22,75,000 per year
meals, there will be a non-veg item in addition to the veg items. A contractor who is interested in the contract
Administration overheads `28,00,000 per year
has analysed the cost likely to be incurred. His analysis is given below:
Depreciation on equipments 15% per annum on original cost
Cereals `8 per plate
It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were occupied Veg items `5 per plate
and for 60 days 20 beds were occupied. Non-veg items `15 per plate
Spices `1 per plate
The hospital hired 250 beds at a charge of `950 per bed to accommodate the flow of patients. However,
Cooking oil `4 per plate
this never exceeded the normal capacity of 50 beds on a day.
One cook salary `13,000 per month
Three helpers salary `7,000 per month each
Find out:
Fuel (two commercial cylinder per month) `1,000 each
(a) Profit per Patient day, if the hospital charges on an average `2,500 per day from each patient.
(b) Breakeven point per patient day (make calculation on annual basis). On an average the canteen will remain open for 25 days in a month. The contractor wants to charge
[(10 Marks) May 2018] the non-veg meals at 1.50 times of the veg meals.

Answer You are required to calculate:

(a) Statement Showing Profit Per Patient Day
(a) The price per meal (veg and non-veg separately) that contractor should quote if he wants a profit of 20%
Particulars Amount on his takings.
(A) Variable Cost: (b) The price per meal (veg and non-veg separately) that a worker will be required to pay if the company
Food and laundry Services 39,53,000 provides 60% subsidy for meals out of welfare fund.
Medicines to Patients 22,75,000 [(8 Marks) May 2018]
Doctor’s Payment (5,50,000 × 12) 66,00,000
Hire Charges of Beds (250 × 950) 2,37,500 Answer
Total (A) 1,30,65,500 (a) Statement Showing Price Per Meal Quoted By Contractor
(B) Fixed Expenses:
Particulars Amount
Building Rent (2,25,000 × 12) 27,00,000
Manager’s Salary (3 × 50,000 × 12) (A) Variable Cost:
18,00,000
Nurse’s Salary (24 × 18,000 × 12) Cereals (7,500 × 8) 60,000
51,84,000
Ward Boy’s Salary (24 × 9,000 × 12) Veg items (7,500 × 5) 37,500
25,92,000
Administration Overheads Cooking oil (7,500 × 4) 30,000
28,00,000
Depreciation on Equipment (15% of 85,00,000) Spices (7,500 × 1) 7,500
12,75,000
Total (B) Non-veg items (3,000 × 15) 45,000
1,63,51,000
Total cost (A + B) Total (A) 1,80,000
2,94,16,500
Collection from patients (2,500 × 14,600 patient days) (B) Fixed Cost:
3,65,00,000 Salary of cook
Profit (Collection – Total cost) 13,000
70,83,500 Salaries of helpers (7,000 × 3)
Profit per patient day (Profit ÷ Patient days) 21,000
485.17 Fuel (1,000 × 2) 2,000
Total (B) 36,000
(b) Calculation of BEP for the hospital: Total Cost (A + B) 2,16,000
BEP = Fixed cost ÷ Contribution per patient day Add: Profit @ 20% on taking or 25% on cost 54,000
= 1,63,51,000 ÷ 1,605.10 = 10,186.90 patient days Total Takings 2,70,000
÷ Equivalent Veg-meals (4,500 + 1.5 × 3,000) ÷ 9,000
 SERVICE COSTING 8.49 SERVICE COSTING 8.50
Price meal per meal (Veg) ` 30 = 2 × No of round trips daily × Distance one way × No of days
Price meal per meal (Non-veg) (1.5 × 30) ` 45 = 2 × 4 × 25 × 25 = 5,000 kms

(b) Price per meal payable by worker: WN 2: Calculation of passenger-kms per month:
= No of kms travelled per month × No of passengers
Veg Meal = 30 – 60% = ` 12 = 5,000 × 40 = 2,00,000 passenger-kms
Non-veg Meal = 45 – 60% = ` 18
WN 3: Calculation of Takings:
Working Notes: Total takings = Operating cost (excluding commission on takings) + 10% for
1. Calculation of number of meals per month: commission + 25% for profit
= Veg Meals + Non-veg Meals = 1,82,000 + 35% of takings
= 180 workers × 25 days + 120 workers × 25 days Total Takings = `2,80,000
= 4,500 + 3,000 = 7,500
PYQ 18
PYQ 17 X Ltd. distributes its goods to a regional dealer using single lorry. The dealer premises are 40 kms away by
M/s XY Travels has been given a 25 km long route to run an air-conditioned Mini Bus. The cost of bus is road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on the
`20,00,000. It has been insured at 3% p.a. while annual road tax amounts to `36,000. Annual repairs will be outward journey and empty on return journey.
`50,000 and the bus is likely to last for 5 years. The driver's salary will be `2,40,000 per annum and the The following information is available:
conductor's salary will be `1,80,000 per annum in addition to 10% of takings as commission (to be shared by
the driver and the conductor equally). Office and administration overheads will be `3,18,000 per annum. Diesel consumption 8 km per litre
Diesel and oil will be `1,500 per 100 km. The bus will make 4 round trips carrying on an average 40 passengers Diesel cost `60 per litre
on each trip. Assuming 25% profit on takings, and the bus will run on an average 25 days in a month. Engine oil `200 per week
Driver’s wages (fixed) `2,500 per week
You are required to: Repairs `600 per week
(a) Prepare operating cost sheet (for the month). Garage rent `800 per week
(b) Calculate fare to be charged per passenger km. Cost of lorry (excluding cost of type) `9,50,000
[(10 Marks) Nov 2018] Life of lorry 1,60,000 kms
Insurance `18,200 per annum
Answer Cost of tyres `52,500
(a) Operating Cost Sheet (for the month) Life of tyres 25,000 kms
Estimated sale value of the lorry at end of its life is `1,50,000
Particulars Amount
Vehicle license cost `7,800 per annum
(A) Standing Charges:
Other overheads cost `41,600 per annum
Depreciation (20,00,000 ÷ 5 Years × 1/12) 33,333
The lorry operates 5 days a week
Insurance [(20,00,000 × 3%) ÷ 12] 5,000
Annual Tax for (36,000 ÷ 12) 3,000
Required:
Driver’s salary (2,40,000 ÷ 12) 20,000
Conductor’s salary (1,80,000 ÷ 12) 15,000 (1) A statement to show the total cost of operating the vehicle for the four week period analysed into
Office and administration overheads (3,18,000 ÷ 12) 26,500 Running cost and Fixed cost.
Total (A) 1,02,833 (2) Calculate the vehicle operating cost per km and per tonne km. (assume 52 weeks in a year.)
(B) Running Charges: [(10 Marks) May 2019]
Diesel and oil (1,500/100 × 5,000 kms) 75,000
Commission @ 10% of collections ‘WN’ 28,000 Answer
Total (B) 1,03,000 (1) Statement Showing Total Cost of Operating
(C) Maintenance Charges: (For the four weekly period)
Repairs (50,000 × 1/12) 4,167 Particulars Amount
Total (C) 4,167 (A) Fixed Costs:
Total operating cost (A + B + C) 2,10,000 Driver’s wages (2,500 × 4) 10,000
Add: Profit @ 25% of collections 70,000 Garage rent (800 × 4) 3,200
Total Takings (WN 3) 2,80,000 Insurance (18,200 × 4/52) 1,400
Vehicle license (7,800 × 4/52) 600
(b) Calculation of fare to be charged per passenger-km: Other overheads (41,600 × 4/52) 3,200
Fare per passenger km = Total Takings ÷ Total Passenger-kms Total (A) 18,400
= 2,80,000 ÷ 2,00,000 = ` 1.40 (B) Running Costs:
Diesel (3,200 Kms × 60/8) 24,000
WN 1: Calculation of total travelling of bus in one month: Engine oil (200 × 4) 800
Repairs (600 × 4) 2,400
 SERVICE COSTING 8.51 SERVICE COSTING 8.52
Cost of tyres 6,720 Room attendant's wages:
Depreciation [{(9,50,000 – 1,50,000) ÷ 1,60,000 Kms} × 3,200 Kms] 16,000 In Season (200 rooms × 80% × 30 days × 6 months × `15) 4,32,000
Total (B) 49,920 In Off-Season (200 rooms × 40% × 30 days × 6 months × `15) 2,16,000
Total operating cost (A + B) 68,320 Lighting charges:
Season (200 rooms × 80% × 6 months × `110) 1,05,600
(2) Vehicle cost per kilometer = Total cost ÷ Total Kms Off-Season & Non Winter (200 rooms × 40% × 2 months × `110) 17,600
= 68,320 ÷ 3,200 kms = `21.35 Off-Season & Winter (200 rooms × 40% × 4 months × `30) 9,600
Total Cost 45,71,000
Cost per tonne kilometer = Total cost ÷ Total tonne kms Add: Profit @ 20% on Room rent or 25% on Cost 11,42,750
= 68,320 ÷ 16,000 kms = `4.27 Total Rent to be Charged 57,13,750
÷ Equivalent Off-Season room days ÷ 72,000
Working notes: Rent for one room per day in Off-Season `79.356
Rent for one room per day in Season (`79.36 × 2) `158.72
1. Distance travelled in 4 weeks period:
40 kms one way × 2 (return) × 2 trips × 5 days × 4 weeks = 3,200 kms Working Notes:
Equivalent Off –Season room days = 200 × 80% × 30 days × 6 months × 2 (double of Off-Season) +
2. Total tonne kilometers = 1,600 kms × 10 + 1,600 kms × Nil = 16,000 200 × 40% × 30 days × 6 months × 1
= 28,800 × 2 + 14,400 × 1 = 72,000 Room days
3. Tyres cost = (52,500  25,000 kms) × 3,200 kms = `6,720
PYQ 20
PYQ 19 SEZ Ltd. built a 120 km. long highway and now operates a toll plaza to collect tolls. The company has invested
A hotel is being run in a hill station with 200 single rooms. The hotel offers concessional rates during six off- `900 crore to build the road and has estimated that a total of 120 crore vehicles will be using the highway
season (Winters) months in a year. During this period, half of the full room rent is charged. The management’s during the 10 years toll collection tenure. The other costs for the month of June 2020 are as follows:
profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for
(i) Salary:
the year ending 31st March, 2019:
Collection Personnel (3 Shifts and 5 persons per shift) `200 per day per person
(1) Occupancy during the season is 80% while in the off-season it is 40%. Supervisor (3 Shifts and 2 person per shift) `350 per day per person
(2) Total investment in the hotel is `300 lakhs of which 80% relates to Building and the balance to Furniture Security Personnel (2 Shifts and 2 persons per shift) `200 per day per person
and other Equipment. Toll Booth Manager (3 Shifts and 1 person per shift) `500 per day per person
(3) Room attendants are paid `15 per room per day on the basis of occupancy of rooms in a months. (ii) Electricity `1,50,000
(4) Expenses: (iii) Telephone `1,00,000
Staff Salary (excluding that of room attendants) `8,00,000 (iv) Maintenance cost `50 Lakhs
Repairs to Buildings `3,00,000 (v) The company needs 30% profit over total cost.
Laundry Charges `1,40,000
Interior Charges `2,50,000 Required:
Miscellaneous Expenses `2,00,200 1. Calculate cost per kilometer.
(5) Annual depreciation is to be provided on Building @ 5% and 15% on Furniture and other Equipments 2. Calculate the toll rate per vehicle.
on straight line method. [(10 Marks) Nov 2020]
(6) Monthly lighting charges are `110, except in four months in winter when it is `30 per room.
Answer
You are required to work out the room rent chargeable per day both during the season and the off- 1. Statement of Cost per Kilometer
season months using the foregoing information. Assume a month to be of 30 days. (for the month June 2020)
[(10 Marks) Nov 2019] Particulars Amount
Apportionment of capital cost/ Depreciation [(`900 crores ÷ 10 years) ×1/12] 7,50,00,000
Answer Salary to Collection personnel (3 shifts × 5 persons × 30 days × `200 per day) 90,000
Statement Showing Per Day Chargeable Rent Salary to Supervisor (3 shifts × 2 person × 30 days × `350 per day) 63,000
Particulars ` Salary to Security personnel (2 shifts × 2 persons × 30 days × `200 per day) 24,000
Salary to Toll booth manager (3 shifts × 1 persons × 30 days × `500 per day) 45,000
Staff Salary 8,00,000
Electricity 1,50,000
Repairs to Building 3,00,000
Telephone 1,00,000
Laundry Charges 1,40,000
Maintenance cost 50,00,000
Interior Charges 2,50,000
Miscellaneous Expenses 2,00,200 Total Cost 8,04,72,000
Depreciation: ÷ Total kilometers ÷ 120 kms
On Building (`300 lakhs × 80% × 5%) 12,00,000 Cost per Kilometer `6,70,600
On Furniture (`300 lakhs × 20% × 15%) 9,00,000
2. Calculation of toll rate per vehicle:
 SERVICE COSTING 8.53 SERVICE COSTING 8.54
Total Toll Collection in June 2020 = Total Cost + 30% Laundry charges 1,40,000
= `8,04,72,000 + 30 % = `10,46,13,600 Medicines 2,80,000
Bed hire charges 20,000
Toll Rate per vehicle = Total collection for June ÷ Total vehicles in June Total (A) 13,65,000
= `10,46,13,600 ÷ 1,00,00,000 = `10.46 (B) Fixed Expenses:
Rent (50,000 × 12) 6,00,000
Working Notes:
Supervisors (2 × 5,000 × 12) 1,20,000
Calculation of number of vehicles using the highway per month: Nurses (4 × 3,000 × 12) 1,44,000
Ward Boys (2 × 1,500 × 12) 36,000
Total estimated number of vehicles using highway in 10 years = 120 crores Repairs and Maintenance 28,000
∴ Total number of vehicles using highway in 1 year = 12 crores Cost of Oxygen etc. other than directly borne for treatment of patients 75,000
∴ Total number of vehicles using highway in 1 month = 1,00,00,000 General Administration Charges allocated to the unit 71,000
Total (B) 10,74,000
PYQ 21 Total cost (A + B) 24,39,000
ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a building at a rent of Collection from patients (200 × 15,600 patient days) 31,20,000
`50,000 per month with the agreement to bear the repairs and maintenance charges also. Profit (Collection – Total cost) 6,81,000
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when the situation Profit per patient day (Profit ÷ Patient days) 43.65
demands. Though the unit is open for patients all the 365 days in a year, scrutiny of accounts for the year 2020
reveals that only for 120 days in the year, the unit had the full capacity of 100 patients per day and for another
80 days, it had, on an average only 40 beds occupied per day. But, there were occasions when the beds were (2) Calculation of BEP for the hospital:
full, extra beds were hired at a charge of `50 per bed per day. This did not come to more than 5 beds above the BEP = Fixed cost ÷ Contribution per patient day
normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year amounted = 10,74,000 ÷ 112.50 = 9,547 patient days
to `20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the Working Notes:
basis of the number of patients attended and time spent by them which on an average worked out to `30,000 1. Calculation of number of Patient days:
per month in the year 2020. = (100 beds × 120 days) + (40 beds × 80 days) + (20,000 ÷ 50)
= 15,600
The permanent staff expenses and other expenses of the unit were as follows:
Particulars Amount 2. Calculation Contribution per patient day:
2 Supervisors each at a per month salary of 5,000 Contribution = Sales – Variable cost
4 Nurses each at a per month salary of 3,000 = 31,20,000 – 13,65,000 = 17,55,000
2 Ward boys each at a per month salary of 1,500
Contribution per patient day = 17,55,000 ÷ 15,600 = 112.50
Other Expenses for the year were as under:
Repairs and Maintenance 28,000 PYQ 22
Food supplied to patients 4,40,000 MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its newly launched
Caretaker and Other services for patients 1,25,000 ‘COVID-19’ Insurance policy:
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000 Office administration cost `48,00,000
Cost of Oxygen etc. other than directly borne for treatment of patients 75,000 Claims management cost `3,80,000
General Administration Charges allocated to the unit 71,000 Employees cost `16,20,000
Postage and logistics `32,40,000
Required: Policy issuance cost `29,50,000
(1) What is the profit per patient day made by the unit in the year 2020, if the unit recovered an overall Facilities cost `46,75,000
amount of `200 per day on an average from each patient. Cost of marketing of the policy `1,38,90,000
(2) The unit wants to work on a budget for the year 2021, but the number of patients requiring medical care Policy development cost `35,00,000
is a very uncertain factor. Assuming that same revenue and expenses prevail in the year 2021 in the first Policy servicing cost `96,45,000
instance, work out the number of patient days required by the unit to break even. Sales support expenses `32,00,000
[(10 Marks) Jan 2021] IT cost ?
Number of policy sold 2,800
Answer Total insured value of policies `3,500 Crores
(1) Statement Showing Profit Per Patient Day Cost per rupee of insured value `0.002
Particulars Amount Required:
(A) Variable Cost: 1. Calculate total cost for “Covid-19” insurance policy segregating the costs into four main activities namely
Doctor Fee (30,000 × 12) 3,60,000 (a) Product development, Marketing and Sales support, (b) Operations, (c) IT cost and (d) Support
Food to Patients 4,40,000 functions.
Caretaker and Other services for patients 1,25,000 2. Calculate cost per policy. [(5 Marks) July 2021]
 SERVICE COSTING 8.55 SERVICE COSTING 8.56
Answer Paras Travels charges two types of fare from the employees. Employees coming from a distance of beyond 15
1. Statement Showing Total Cost for “Covid-19” Insurance Policy km away from the office are charged double the fare which is charged from employees coming from a distance
Particulars Amount of up to 15 km away from the office. 50% of employees travelling in each trip are coming from a distance
beyond 15 km from the office. The charges are to be based on average cost.
(a) Product development, Marketing and Sales support:
Policy development cost 35,00,000 You are required to:
Cost of marketing of the policy 1,38,90,000
1. Prepare a statement showing expenses of operating a single mini bus for a year,
Sales support expenses 32,00,000
Total (a) 2,05,90,000
2. Calculate the average cost per employee per month in respect of:
(b) Operations: (a) Employees coming from a distance up to 15 km from the office.
Policy issuance cost 29,50,000 (b) Employees coming from a distance beyond 15 km from the office.
Policy servicing cost 96,45,000 [(10 Marks) Dec 2021]
Claims management cost 3,80,000
Total (b) 1,29,75,000 1. Statement Showing Expenses of Operating a Single Mini Bus for a Year
(c) IT Cost: Particulars `
IT cost 2,21,00,000 (A) Standing Charges:
Total (c) 2,21,00,000 Driver’s salary (`20,000 × 12 months) 2,40,000
(d) Support functions: Lady attendant’s salary (`10,000 × 12 months) 1,20,000
Postage and logistics 32,40,000 Cleaner’s salary (`15,000 × 12 months × 1/2) 90,000
Facilities cost 46,75,000 Insurance charges (2% of `15,00,000) 30,000
Employees cost 16,20,000 Licence fees and taxes (`5,080 × 12 months) 60,960
Office administration cost 48,00,000 Garage rent (`24,000 × 12 months × 1/8) 36,000
Total (d) 1,43,35,000 Depreciation {(`15,00,000 - `3,00,000) × 1/8} 1,50,000
Total Cost (a + b + c + d) 7,00,00,000 Total (A) 7,26,960
(B) Maintenance Charges:
2. Cost per policy = Total Cost ÷ No. of Policies Repairs and maintenance {(`2,856 ÷ 5,760) × 57,600} 28,560
= `7,00,00,000 ÷ 2,800 = `25,000 Total (B) 28,560
(C) Running Charges:
Working note: Calculation of IT cost: Diesel {(`80 ÷ 8) × 57,600} 5,76,000
Total (C) 5,76,000
Cost per rupee of insured value = Total Cost ÷ Total insured value
Total operating cost (A + B + C) 13,31,520
0.002 = Total Cost ÷ `3,500 crores
Total Cost = `3,500 crores × 0.002 = `7,00,00,000
2. Calculation of average cost per employee per month:
IT cost = Total cost – other costs
IT cost = 7,00,00,000 – 2,05,90,000 – 1,29,75,000 – 1,43,35,000 Operating cost of Mini Bus per month = `13,31,520 ÷ 12 = `1,10,960
= 2,21,00,000 No. of employees per bus in two trips = 30 persons × 2 trips × 80%
= 48
PYQ 23
Paras Travels provides mini buses to an IT company for carrying its employees from home to office and Let the fare charged from employee within 15 km be = X
dropping back after office hours. It runs a fleet of 8 mini buses for this purpose. The buses are parked in a Fare for employee beyond 15 km = 2X
garage adjoining the company's premises. Company is operating in two shifts (one shift in the morning and
one shift in the afternoon). The distance travelled by each mini bus one way is 30 km. The company works for Total Cost or fare (`1,10,960) = (48 × 50% × X) + (48 × 50% × 2X) = 72X
20 days in a month. The seating capacity of each mini bus is 30 persons. The seating capacity is normally 80% X = `1,10,960 ÷ 72 = `1,541.11
occupied during the year. The details of expenses incurred for a year are as under:
(a) Average cost per employee per month coming from a distance up to 15 kms. = `1,541.11
Driver’s salary `20,000 per driver per month
Lady attendant’s salary (mandatorily required for each mini bus) `10,000 per attendant per month (b) Average cost per employee per month coming from a distance beyond 15 kms. = 2X
Cleaner's salary (One cleaner for 2 mini buses) `15,000 per cleaner per month = `1,541.11 × 2
Diesel (Avg. 8 km per liter) `80 per liter = `3,082.22
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes `5,080 per mini bus per month Working notes:
Garage rent paid `24,000 per month
Repair & maintenance including engine oil and lubricants (for `2,856 per mini bus Calculation of kms. run by a mini bus in a year:
every 5,760 km)
= One way distance × 2 (both ways) × No of trips × No of days in a month × 12 months in a year
Purchase Price of mini bus `15,00,000 each
= 30 kms. × 2 × 4 (two shifts and two trips in each shift) × 20 days × 12 months
Residual life of mini bus 8 Years
= 57,600 kms.
Scrap value per mini bus at the end of residual life `3,00,000
 SERVICE COSTING 8.57 SERVICE COSTING 8.58
PYQ 24  Other Expenses are `10,000 per month.
Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is at distance of 15 kms
and Y is at a distance of 20 kms from the rail head plots. A fleet of lorries having carrying capacity of 4 tonnes You are required to:
is used to transport coal from the mines. Records reveal that average speed of the lorries is 40 kms per hour
(a) Compute the cost of processing a Vehicle Loan Application on the assumption that 496 Vehicle Loan
when running and regularly take 15 minutes to unload at the rail head.
applications are processes each month.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading time is 25
(b) Find out the number of Education Loan Applications processes, if the total processing cost per Education
minutes per load.
Loan Application is same as in the Vehicle Loan Application as computed in (a) above.
[(5 Marks) Nov 2022]
Additional Information:
Drivers' wages, depreciation, insurance and taxes, etc. `12 per hour Answer
(a) Statement of Cost of Processing One Vehicle Loan Application
Operated Fuel, oil, tyres, repairs and maintenance, etc. `1.60 per km
Particulars Amount
You are required to prepare a statement showing the cost per tonne kilometre of carrying coal Direct labour cost (4 employees × 50,000) 2,00,000
from each mine 'X' and 'Y'. Allocation of branch overhead cost (30% of 1,60,000) 48,000
[(5 Marks) May 2022] Total processing cost per month 2,48,000
÷ Number of applications processed per month ÷ 496
Answer Cost of Processing One Vehicle Loan Application `500
Statement Showing Cost per Tonne-Km
Particulars Mine X Mine Y (b) Statement Showing Number of Education Loan Application
Drivers wages, license, insurance, depreciation, garage (12.00 × 90/60) (12.00 × 100/60) Particulars Amount
rent and taxes @ `12 per hour 18.00 20.00 Direct labour cost (2 employees × 70,000) 1,40,000
Fuel, oil, tyres, repairs and maintenance @ `1.60 per Km (1.60 × 30 kms) (1.60 × 40 kms) Allocation of branch overhead cost (30% of 1,60,000) 48,000
48.00 64.00 Total processing cost per month 1,88,000
Operating Cost 66.00 84.00 ÷ Total processing cost per Education Loan Application ÷ 500
÷ Effective tonne-kms ÷ 60 ÷ 80 Number of Education Loan Application 376
Cost per tonne-km `1.10 `1.05
Working Notes:
Working Notes:
Overheads costs of the branch = 90,000 + 30,000 + 12,000 + 18,000 + 10,000 = `1,60,000
(1) Total operating time in 1 trip: Mine X Mine Y
Running time (to & fro) 60/ × 30 Kms
40
60/ ×
40 40 Kms PYQ 25
45 minutes 60 minutes RST Toll Plaza Limited built a 80 kilometer long highway between two cities and operates a toll plaza to collect
tolls from passing vehicles using the highway. The company has estimated that 50,000 light weight, 12,000
Unloading time 15 minutes 15 minutes medium weight and 10,000 heavy weight vehicles will be using the highway in one month in outward journey
Loading time 30 minutes 25 minutes and the same number for return journey.

Total operating time in one trip 90 minutes 100 minutes As per government notification, vehicles used for medical emergencies, members of parliament, and essential
services are exempt from toll charges. It is estimated that 10% of light weight vehicles will pass the highway
(2) Effective tonnes km per trip: 4 tonnes × 15 kms + 4 tonnes × 20 kms + for such use.
Nil tonnes × 15 kms Nil tonnes × 20 kms It is the policy of the company that if vehicles return within 24 hours of their outward journey. The toll fare
will be reduced by 25 percent automatically. It is estimated 30% of chargeable light weight vehicles return
= 60 tonne kms = 80 tonne kms within the specified time frame.

PYQ 25 The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight vehicles and that of
ABC Bank is having a branch which is engaged in processing of ‘Vehicle Loan’ and ‘Education Loan’ applications heavy weight vehicles as 2 times of the medium weight vehicles.
in addition to other services to customers. 30% of the overhead costs of the branch are estimated to be The toll operating and maintenance cost for a month is `59,09,090. The company requires a profit of 10% over
applicable to the processing of ‘Vehicle Loan’ applications and ‘Education Loan’ applications each. the total cost to cover interest and other costs.
Branch is having four employees at a monthly salary of `50,000 each, exclusively for processing of
Vehicle loan applications and two employees at a monthly salary of `70,000 each, exclusively for processing Required:
of Education Loan applications. (a) Calculate the toll rate for each type of vehicles if concession facilities are not available on the return
In addition to above, following expenses are incurred by the Branch: journey.
(b) Calculate the toll rate that will be charged from light weight vehicles if a return journey concession
 Branch Manager who supervises all the activities of branch, is paid at `90,000 per month. facility is available, assuming that the revenue earned from light weight vehicles calculate in option (a)
 Legal charges, Printing & stationery and Advertising Expenses are incurred at `30,000, `12,000 and remains the same.
`18,000 respectively for a month, [(5 Marks) May 2023]
 SERVICE COSTING 8.59 SERVICE COSTING 8.60

SUGGESTED REVISION
Answer
(a) Calculation of toll rate for each type of vehicles:

Total collection from toll = Cost + 10% = `59,09,090 + 10%

= `64,99,999 Page No. of 3rd, 4th & Revision
Ques. Observations or KEY Points 1st & 2nd
Practical 5th during
No. (Note down during revisions) Revision
Let, toll rate for Light weight vehicle be ‘T’ then toll rate for Medium weight vehicle will 2.5T and for Register Revision Exams
Heavy weight vehicles will 5T BQ (Book Questions covering Study Module of ICAI, PM, RTP’s, MTP’s and Important Questions)
1 Y - -
Now, 2 Y - -
Total Toll collection = (45,000 × 2 × T) + (12,000 × 2 × 2.5T) + (10,000 × 2 × 5T) 3 Y Y -
`64,99,999 = 2,50,000T 4 Y Y Y
T = `26 5 Y Y -
6 Y Y -
Toll rate for light vehicles = `26 7 Y Y Y
Toll rate for light vehicles = 2.5T = `26 × 2.5 = `65 8 Y Y -
Toll rate for light vehicles = 5T = `26 × 5 = `130 9 Y Y Y
10 Y Y Y
Note: Toll plaza collects toll from 45,000 light weight vehicles one side journey (50,000 – 10% Exempt 11 Y - -
vehicles). 12 Y Y Y
13 Y Y Y
(b) Calculation of toll rate of Light weight vehicles with concession facility: 14 Y Y -
15 Y - -
Revenue earned from Light weight vehicles under (a) = 45,000 × 2 × `26 = `23,40,000 16 Y Y Y
17 Y Y Y
Let, toll rate for Light weight vehicle be ‘T’ then toll rate for return Light weight vehicle be ‘0.75T’ 18 Y Y -
19 Y Y Y
Revenue from Light weight vehicles = (45,000×T) + (45,000×70%×T + 45,000×30%×0.75T) 20 Y Y -
`23,40,000 = 86,625T
21 Y Y -
T = `27.013
22 Y Y Y
23 Y Y Y
24 Y Y Y
25 Y Y Y
26 Y Y Y
27 Y - -
28 Y - -
29 Y Y Y
30 Y Y Y
31 Y Y Y
32 Y Y Y
33 Y Y -
34 Y - -
PYQ (Past Year Questions)
1 Y - -
2 Y - -
3 Y Y Y
4 Y Y Y
5 Y Y Y
6 Y - -
7 Y - -
8 Y - -
9 Y Y -
10 Y Y Y
11 Y Y -
12 Y Y -
 SERVICE COSTING 8.61
13 Y Y -
14 Y Y -
15 Y Y Y
16 Y - -
17 Y Y -
18 Y Y -
19 Y Y -
20 Y - -
21 Y - -
22 Y Y Y
23 Y Y -
24 Y - -
25 Y Y Y