Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Paper - 8 : COST AND MANAGEMENT ACCOUNTING

Q. 1. (a) In the following cases one out of four answers is correct. You are required to indicate
the correct answer and give reasons for answer :

(i) The cost-volume-profit relationship of a company is described by the equation y = ` 8,00,000 + 0.60x,
in which x represents sales revenue and y is the total cost at the sales volume represented by x. If the
company desires to earn a profit of 20% on sales, the required sales will be.
a. ` 40,00,000
b. ` 35,50,000
c. ` 24,00,000
d. ` 20,00,000

(ii) The cost data pertaining to Product “X” of XL Ltd. are as follows :
Maximum capacity 30,000 units
Normal capacity 15,000 units
Increase in inventory 1,880 units
Variable cost per unit ` 12
Selling price per unit ` 50
Fixed manufacturing overhead costs ` 3,60,000
If the profit under Absorption costing method is ` 1,01,000, the profit under Marginal costing method would
be
a. ` 1,46,120
b. ` 1,23,560
c. ` 55,880
d. ` 73,340

(iii) The total cost incurred in the operation of a business undertaking other than the cost of manufacturing
and production is known as
a. Direct cost
b. Variable cost
c. Commercial cost
d. Conversion cost

(iv) Consider the following data for a company during the month of June 2012
Budgeted hours 4,000
Standard hours for actual production 4,400
Maximum possible hours in the budget period 4,800
Actual hours 3,800
The activity ratio of the company during the month is
a. 111%
b. 120%
c. 95%
d. 117%

(v) Total unit costs are

a. Independent of the cost system, used to generate them
b. Needed for determining product contribution
c. Irrelevant in marginal analysis
d. Relevant for cost-volume-profit analysis

(vi) Which of the following bases is not appropriate for apportionment of Transport department’s cost ?
a. Crane hours
b. Crane value

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

c. Truck Mileage
d. Truck value

(vii) The cost of obsolete inventory acquired several years ago, to be considered in a keep vs. disposal
decision is an example of :
a. Uncontrollable cost
b. Sunk cost
c. Avoidable cost
d. Opportunity cost

(viii) Budgeted sales for the next year is 5,00,000 units. Desired ending finished goods inventory is 1,50,000
units and equivalent units in ending W-I-P inventory is 60,000 units. The opening finished goods
inventory for the next year is 80,000 units, with 50,000 equivalent units in beginning W-I-P inventory
How many equivalent units should be produced ?
a. 5,80,000
b. 5,50,000
c. 5,00,000
d. 5,75,000

(ix) If the asset turnover and profit margin of a company are 1.85 and 0.35 respectively, the return on
investment is
a. 0.65
b. 0.35
c. 1.50
d. 5.29

(x) A company is currently operating at 80% capacity level. The production under normal capacity level
is 1,50,000 units. The variable cost per unit is ` 14 and the total fixed costs are ` 8,00,000. If the
company wants to earn a profit of ` 4,00,000, then the price of the product per unit should be
a. ` 37.50
b. ` 38.25
c. ` 24.00
d. ` 35.00
Answer 1.
(i) – a.
Variable cost = 60% , therefore, contribution to sales ratio = 40% (P/V ratio)
Company’s target profit 20% in sales, therefore, revised contribution which covers only fixed cost = 40% -
20% = 20%.
Required sales = fixed cost / revised contribution = ` 8,00,000/ 20% = ` 40,00,000]

(ii) – c.
Fixed cost per unit = ` 3,60,000 / 15,000 units = ` 24
Profit under absorption costing = ` 1,01,000
Adjustment of fixed manufacturing overhead costs of increased inventory = 1,880 units x ` 24 = ` 45,120
Profit under marginal costing = ` 1,01,000 – ` 45,120 = ` 55,880]

(iii) – c.

(iv) – a.
Activity ratio = Standard hours for actual production x 100
Budgeted hours
= 4,440 hours x 100 = 111%
4,000 hours
(v) – c.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 2
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(vi) – b.

(vii) – b - Costs of obsolete inventory represent the sunk cost because the costs have already been
incurred.

(viii) – a.
Using production related budgets, units to produce equals budgeted sales + desired ending finished goods
inventory + desired equivalent units in ending W-I-P inventory – beginning finished goods inventory –
equivalent units in beginning W-I-P inventory. Therefore, in this case, units to produce is equal to 5,00,000 +
1,50,000 + 60,000 – 80,000 – 50,000 = 5,80,000.

(ix) – a - Return on investment = Asset turnover x Profit margin = 1.85 x 0.35 = 0.65

(x) – c.
Total fixed cost - ` 8,00,000
Expected profit - ` 4,00,000
Variable cost at 80% level
(80% x 1,50,000 units x ` 14) - ` 16,80,000
Total price - ` 28,80,000
Per unit price at 80% level = (` 28,80,000 / 1,20,000 units) = ` 24.00.

Q. 2. Write short notes on :

(i) Value Analysis
(ii) Application of service costing
(iii) Cost benefit analysis
(iv) Cost Indifference Point
(v) Incremental Pricing

Answer 2.
(i) Value Analysis : It is one of the important tools of modern management in the area of
cost reduction. It is also known by other names such as value engineering, value control and
product research. Value analysis is the process of systematic analysis and evaluation of various
techniques and functions with a view to improve organisational performance. It aims at
reducing and controlling the cost of a product from the point of view of its value by analysing
the value currently received. It investigates into the economic attributes of value analysis,
believes in a planned action to improve performance and thereby, generates higher value in a
product and ultimately causes reduction in its cost.
The meaning of the term value may vary from person to person, time to time and place to
place. However, in the context of cost reduction and control it refers to the ‘use value’.
The reduction in the costs of a product and thus increasing the profitability of a concern is the
main advantage of value analysis.
The benefits of value analysis are being derived in many industries, e.g., engineering, building
construction and the oil industry. It is being applied to components of a product, finished
product and also to be methods of packaging.
The various steps involved in value analysis are;
a) Identification of the problem;

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 3
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

b) Collecting information about the function, design, material, labour, overhead costs,
etc., of the product and finding out the availability of the competitive products in the
market; and
c) Exploring and evaluating alternatives and developing them.

(ii) Application of service costing

The service costing is applied in the following situations :
a) Internal service departments – Service costing is applied to the operations concerned
in an organization which provide services to production departments. For example,
Canteen for the staff, Hospital for the staff, boiler house of supplying steam to
production departments, Captive Power generation unit, operation of fleet of
vehicles for transport of raw material to factory or distribution of fi nished goods to the
market outlets, computer department services used by other departments etc.
b) Service organizations – When services are offered to outside customers with a profit
motive and it is the business of the organisation in offering services, lik e Transport
organization, Hotel business, Power generation company etc., service costing is
applied.

(iii) In order to create more wealth by reducing costs, it is absolutely essential to be able to
differentiate between necessary and unnecessary costs. If you try to reduce the necessary costs,
you almost certainly reduce the benefits created by the resources being consumed. This kind of
cost reduction leads to lower than required quality, extended delivery periods, increased
rejections from inadequate materials and so on. The only really effective way of increasing the
wealth created by the company is to search out and eliminate all unnecessary costs.
There are five steps involved in establishing the benefits created by resources consumed in the
business.
Step 1 – Cost Analysis
This involves an analysis of all costs and activities. This can usually be done from any reasonably
designed accounting system.
Step 2 – Contribution Analysis
Analyzing the value of what each activity contributes in terms of income or benefits is important
in establishing the real wealth-creating activities of the business.
Step-3 – Benefit Analysis
Trying to decide on the benefits provided by the service and control activities is no easy matter.
It is very much an attitude of mind, based on asking questions. It is vital to break down costs on
the basis of the reasons why they are incurred, and then to assess the benefits.
Step 4 – Cost Reduction
Develop a cost-reduction programme by establishing those reasons for incurring cost which :
a) Do not contribute to an activity’s earning potential
b) Do not contribute adequately to the activity’s earning potential.
c) Do not create benefits.
d) Do not create adequate benefits for the level of cost.
Step 5 – Profit Improvement
Develop a profit improvement programme by determining those areas which can create
additional income from existing and new resources, based on rationalization and reduced costs
of existing activities.

(iv) Cost Indifference Point – A cost indifference point is the point at which total cost (Fixed
cost and variable cost) of two alternatives under consideration is the same. A company may
have two methods available for production and it may so happen that at lower levels of activity
one method is suitable up to a particular point and beyond that another method is suitable. The

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 4
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

question arises at what level of capacity choice shifts from one production method to another
production method. This point is called cost indifference point and at this point total cost is
identical for the two alternatives. Cost indifference point will occur at a point where :
Total cost of alternative A = Total cost of alternative B
Cost indifference points are useful in analyzing many types of alternative choice decisions such
as choosing between alternative production methods, marketing plans or quality control
programmes.

(v) Incremental Pricing involves comparison of the impact of decisions on revenues

and cost. If a pricing decision results in a greater increase in revenue than in costs, it is
favourable. Profitability is identified as the primary consideration and then the decision is
adjusted to bring it in consonance with the other decisions of the business.
Incremental pricing analyses all aspects of decision-making as listed below :

a) Relevant cost analysis – This technique considers changes in costs rather than in
Average Cost. Overhead allocations are irrelevant. Incremental revenue inflows and Cost
outflows are included for decision-making.
b) Product-line relationship analysis – This technique necessitates consideration
being given to possible complementary relations in demand. Sale of one product may lead
to the sale of a complementary product. This overall effect on profitability has to be
evaluated.
c) Opportunity cost analysis – Incremental revenue should cover Opportunity Cost
and also generate surplus. A price, which results in an Incremental Revenue, which in turn
merely covers the Incremental Costs, is not sufficient. If opportunity costs exceed
Incremental Revenue, the decision is not sound.
d) Time factor analysis – The decision should take into account the short-run and
long-run effect. A high price may increase its immediate profits but may lead to loss of
revenue in the long-run owing to competitors snatching the business.
e) CVP analysis – In fixing prices, consideration should be given to Price-Volume
relationship. The responsiveness of the market to the price should be such that the volume is
increased to achieve full utilization of plant capacity.
f) Risk analysis – Consideration should also be given to the evaluation of
uncertainty and risk factor. The decision taken should be able to maximize the expected
value, based on Probability Theory.

Q. 3.a) Calculate
Value of raw materials consumed;
Total cost of production
Cost of goods sold and
The amount of profit from the following particulars.
Opening Stock: `
Raw Materials 5,000
Finished goods 4,000

Closing Stock:
Raw materials 4,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 5
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Finished goods 5,000

Raw materials purchased 50,000
Wages paid to laborers 20,000
Chargeable expenses 2,000
Rent, rates & taxes 5,000
Power 2,000
Factory heating and lighting 2,000
Factory insurance 1,000
Experimental expenses 500
Wastage of material 200
Office management salaries 4,000
Office printing and stationery 200
Salaries of sales men 2,000
Commission of travelling agents 1,000
Sales 1,00,000

b) It should be management’s endeavor to increase inventory turnover but to reduce labour

turnover. Expand and illustrate the idea contained in this statement.

Answer 3.

a) Cost Sheet

Particulars Amount (`) Amount (`)

Opening stock of raw materials 5,000

(+) Purchase of raw materials 50,000
(-) Closing stock of raw materials (4,000)

Materials Consumed 51,000

Wages 20,000
Chargeable expenses 2,000 22,000

Prime Cost 73,000

(+) Factory overheads

Power 2,000
Factory heating & lighting 2,000
Factory Insurance 1,000
Experimental expenses 500
Wastage of material 200 5,700

Factory Cost (or) Works Cost 78,700

(+) Office overheads

Rent, rates 5,000
Office Salaries 4,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 6
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Printing & Stationary 200 9,200

Cost of Production 87,900

(+) Opening stock of finished goods 4,000

(-) Closing stock of finished goods (5,000)

Cost of goods sold 86,900

(+) Selling & distribution overheads

Salary of salesmen 2,000
Commission of travelling agent 1,000 3,000

Cost of sales (or) Total sales 89,900

(+) Profit 10,100

Sales 1,00,000

b) Inventory turnover: It is a ratio of the value of materials consumed during a period to the
average value of inventory held during the period. A high inventory turnover indicates fast
movement of stock.
Labour turnover: It is defined as an index denoting change in the labour force for an
organization during a specified period. Labour turnover in excess of normal rate is termed as
high and below it as low turnover.
Effects of high inventory turnover and low labour turnover: High inventory turnover reduces
the investment of funds in inventory and thus accounts for the effective use of the concern’s
financial resources. It also accounts for the increase of profitability of a business concern. As
against high labour turnover the low labour turnover is preferred because high labour
turnover causes-decrease in production targets; increase in the chances of break down of
machines at the shopfloor level; increase in the number of accidents; loss of customers and
their brand loyalty due to either non-supply of the finished goods or due to sub-standard
production of finished goods; increase in the cost of selection, recruitment and training;
increase in the material wastage and tools breakage.
All the above listed effects of high labour turnover accounts for the increase in the cost of
production/process/service. This increase in the cost finally accounts for the reduction of
concern’s profitability. Thus, it is necessary to keep the labour turnover at a low level.
As such, it is correct that management should Endeavour to increase invent ory turnover and
reduce labour turnover for optimum and best utilization of available resources and reduce
the cost of production and thus increase the profitability of the organization.

Q. 4.a) In a factory two workmen A and B produce the same product using the same material.
They are paid bonus according to Rowan System. The time allotted to the product is 40 hours. A
takes 25 hours and B takes 30 hours to finish the product. The factory cost of the product for A is `
193.75 and for B `205. The factory overhead rate is one rupee per man-hour. Find the normal rate
of wages and the cost of materials used for the product.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 7
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

b) Define Product costs. Describe three different purposes for computing product costs.
Answer 4.
a) Let ‘M’ be the material cost and ‘R’ be the rate of wage per hour.
A — Earnings = (25 x R) + [(40-25) / 40] x 25R
= 25R + 9.375 R = 34.375 R
B — Earnings = (30 x R) + [(40-30) / 40] x 30R
= 30R + 7.5 R = 37.5 R
A = M + 34.375 R + 25 = 193.75
B = M + 37.5 R + 30 = 205.00
M + 34.375 R = 168.75 .... (i)
M + 37.500 R = 175.00 .... (ii)
Solving (i) & (ii) we get,
3.125 R = 6.25
R=2
Normal rate of wage = ` 2 per hour
M + 37.5 R + 30 = 205
M + 75 + 30 = 205
M = 100
Material cost = ` 100

b) Definition of product costs :

Product costs are inventorial costs. These are the costs, which are assigned to the product.
Under marginal costing variable manufacturing costs and under absorption costing, total
manufacturing costs constitute product costs.
Purposes for computing product costs :
The three different purposes for computing product costs are as follows:
(i) Preparation of financial statements: Here focus is on inventorial costs.
(ii) Product pricing: It is an important purpose for which product costs are used. For this
purpose, the cost of the areas along with the value chain should be included to make the
product available to the customer.
(iii) Contracting with government agencies: For this purpose government agencies may not
allow the contractors to recover research and development and marketing costs under
cost plus contracts.

Q. 5. a) A manufacturing unit produces two products X and Y. The following information is

furnished:

Particulars Product X Product Y

Units produced ( Qty) 20,000 15,000

Units Sold (Qty) 15,000 12,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 8
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Machine Hours utilised 10,000 5,000

Design charges 15,000 18,000

Software development charges 24,000 36,000

Royalty paid on sales `54,000 [@ `2 per unit sold, for both the products]; Royalty paid on units
produced `35,000 [@ Re.1 per unit purchased, for both the products], Hire charges of equipment
used in manufacturing process of Product X only `5,000, Compute the Direct Expenses.

b) In a manufacturing company where costing is done with a view to fix prices, state whether
and, if so, to what extent the following items are includible in cost .
(i) Bonus and gratuity
(ii) Depreciation on plant and machinery .

Answer 5.
a) Computation of Direct Expenses
Particulars Product X Product Y

Royalty paid on Sales 30,000 24,000

Add Royalty paid on units produced 20,000 15,000

Add Hire charges of equipment used in manufacturing process of 5,000 ----

Product X only

Add Design Charges 15,000 18,000

Add Software development charges related to production 24,000 36,000

Direct Expenses 94,000 93,000

Note:
(i) Royalty on production and royalty on sales are allocated on the basis of units produced
and units sold respectively. These are directly identifiable and traceable to the number of units
produced and units sold. Hence, this is not an apportionment.
(ii) No adjustments are made related to units held, i.e. closing stock.

b) The Cost Accountant makes no decision on pricing. Pricing is the domain of top
management and sometimes sales management. The cost accountant only helps
management in providing cost data and also determines the financial effects of fixing prices or
the change in prices on the profitability of the undertaking. Here the cost accountant is required
to analyse whether, and if so the extent to which –bonus and gratuity; depreciation on plant
and machinery – be included as elements of cost.
i) Bonus and gratuity: Bonus under the payment of Bonus Act is to be paid compulsorily to
the workers although the amount of bonus may vary with amount of profit earned. A
minimum bonus of 8.33% is, however, payable irrespective of profit or loss earned by the
concern. The amount of bonus, therefore, may be included in a direct labour cost to the
extent of the minimum bonus, as the same is payable even in a loss situation. Any
amount paid as bonus in excess of the minimum may be considered as an

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 9
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

appropriation of profit. However, bonus linked with productivity is definitely a part of the
overhead cost.
So far as gratuity is concerned, it is indeed directly linked with the wages and is not by
any means related to the profits. Accordingly, it should be treated as an element of
cost:
(ii) Depreciation on plant and machinery: Depreciation on fixed assets represents the
consumption of the value of the concerned assets in the process of operations. This
consumption, is therefore an indirect cost of the production and operations. Witho ut this,
true cost of production cannot be obtained. Hence, depreciation charged in the
accounts is considered as includible as an element of cost.

Q. 6.a) A pipe company manufactures two products A and B during the first year of its
operations. For purposes of product costing, an overhead rate of application of `1.70 per direct
labour hour was used, based on budgetary factory overhead of ` 3,40,000 and budgeted direct
labour hours of 2,00,000 as follows:
Budgeted overhead Budgeted Hours Product A Product B
Department 1 ` 2,40,000 1,00,000 1hour 4 hours
Department 2 ` 1,00,000 1,00,000 4 hours 1hour
3,40,000 2,00,000 5 hours 5 hours
At the end of the year, there was no work on process. There were, however, 2,000 and 6,000
finished units, respectively of products A and B on hand. Assume that budgeted activity was
attained.
(i) What was the effect on the company’s income of using a plant wise overhead rate instead
of departmental overhead rates?
(ii) Assume that material and labour costs per unit of product A were ` 10 and that the selling
price was established by adding 40% to cover profit and selling and administrative
expenses. What difference in selling price would result from the use of departmental against
plant wise overhead rates?
(iii) Explain why departmental overhead rates were generally preferable to plant wise rates.

b) The following are the costing records for the year 2012 of a manufacturer:
Production 10,000 units; Cost of Raw Materials ` 2,00,000; Labour Cost ` 1,20,000; Factory
Overheads ` 80,000; Office Overheads ` 40,000; Selling Expenses ` 10,000, Rate of Profit 25% on
the Selling Price.
The manufacturer decided to produce 15,000 units in 2013. It is estimated that the cost of raw
materials will increase by 20%, the labour cost will increase by 10%, 50% of the overhead
charges are fixed and the other 50% are variable. The selling expenses per unit will be reduced
by 20%. The rate of profit will remain the same.
Prepare a Cost Statement for the year 2013 showing the total profit and selling price per unit.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 10
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Answer 6. a)
(i) Computation of effect on income of company by using Plant wise over head rate instead of
departmental Overhead Rates:

Particulars A B

Overheads using plant wise OH rate

A = (1.7 x 5) B = (1.7 x 5) 8.5 8.5

(-) Overhead using dept OH rate

A = [(1x2.4) + (4x1)] = 6.4 6.4 10.6
B = [(4x2.4) + (1x1)] = 10.6

2.1 (-) 2.1

No. of units of stock 2,000 6,000

Increase or decrease in value of stock 4,200 12,600

Closing stock of A will increase by ` 4200 and that of B will decrease by ` 12,600. As a result of
this, company’s profit was shown in excess by ` 8,400.
(ii) Computation of selling price of Product A by using plant wise Overhead Rate:

Particulars Amount (`)

Materials & Labour 10.00

Overheads 8.50

18.50

(+) 40% towards Selling & Distribution OH’s and profit 7.40

Selling Price 25.90

Computation of Selling Price of Product ‘A’ by using Dept. OH rates:

Particulars Amount

Materials & Labour 10.00

Overheads 6.40

16.40

(+) 40% towards Selling & Distribution OH’s and profit 6.56

Selling Price 22.96

Difference in Selling Price = 25.90 – 22.96 = 2.94

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 11
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(iii) When there are departments, departments OH rate should be used for absorbing
factory overheads and not by using plant wise/general/blanket/single overhead rate. The
reason being in different departments, nature of working differs. In one department, machine
play dominant role. In some other department, material play dominant role. Depending upon
dominance of each factor, OH rate should be used for absorbing overheads.
Therefore, it is always advisable, preferable and appropriate to use departmental overhead rate
instead of blanket overhead rate.

b) Statement of Cost & Profit (Cost Sheet)

(Output 10,000 units)

Particulars Cost per unit (in `) Total Cost (in `)

Raw Materials 20 2,00,000

Labour 12 1,20,000

PRIME COST 32 3,20,000

Add: Factory Overhead 8 80,000

WORKS COST 40 4,00,000

Add: Office Overhead 4 40,000

COST OF PRODUCTION 44 4,40,000

Add: Selling Expenses 1 10,000

COST OF SALES 45 4,50,000

Add: Profit (25% on Selling Price or 33.33% on Cost

of Sales) 15 1,50,000

SELLING PRICE 60 6,00,000

Statement of Cost & Profit (Cost Sheet)

(Output 15,000 units)

Particulars Cost per unit (in `) Total Cost (in `)

Raw Materials (` 20 x 120% x 15,000) 24.00 3,60,000

Labour (` 12 x 110% x 15,000) 13.20 1,98,000

PRIME COST 37.20 5,58,000

Add: Factory Overhead

(` 80,000 x 50% + ` 4 x 15,000) 6.67 1,00,000

WORKS COST 43.87 6,58,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 12
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Add: Office Overhead (` 40,000 x 50% + ` 2 x 3.33 50,000

15,000)

COST OF PRODUCTION 47.20 7,08,000

Add: Selling Expenses (` 1 x 80% x 15,000) 0.80 12,000

COST OF SALES 48.00 7,20,000

Add: Profit (25% on Selling Price or 33.33% on Cost

of Sales) 16.00 2,40,000

SELLING PRICE 64.00 9,60,000

Q. 7. XY Ltd. maintains its accounts on a non-integrated basis. Both the financial accountant and
cost accountant have completed their accounts for the year ended 30.6.2011 and a
memorandum account reconciling the profit figures has been prepared. During the year
Production overheads has been absorbed in the cost accounts as a percentage of direct wages
at a rate of 250%.
You are required to prepare a detailed statement showing how the profit as shown in the cost
accounts was arrived at. Any difference not explainable from the available data should be
treated as being due to the difference in “Administrative Expenses”.
The financial accountant has prepared the following account.
Dr. Manufacturing Trading and P & L Account for The Year Ended 30.6.2011 Cr.

Particulars (`) (`) Particulars (`) (`)

To, Raw materials consumed: By, Trading A/c

Opening stock 51,296 Cost of goods

manufactured 4,74,772

Purchases 1,99,334

2,50,630

Less: Closing stock 47,382 2,03,248

To, Direct wages 80,072

To, Production Overhead A/c 1,90,680

Work in Progress

Opening Stock 24,496

Less: Closing stock 23,724 772

4,74,772 4,74,772

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 13
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Finished Goods: By, Sales 6,25,600

Opening stock 63,890

Cost of goods

manufactured 4,74,772

5,38,662

Less: Closing stock 65,702 4,72,560

Gross Profit c/d 1,52,640

6,25,600 6,25,600

To, Debenture Interest 2,000 By, Gross Profit b/d 1,52,640

To, Discount allowed 2,964 By, Discount 1,790

received

To, Distribution expenses 16,926

To, Sales Expenses 30,562

To, Net Profit c/d 48,920

1,54,430 1,54,430

The Memorandum account reconciling the profit shown in the financial and cost accounts for
the year ended 30th June, 2011 is as follows:

Particulars (`) (`) Particulars (`) (`)

Profit shown in the 48,920 Profit as shown in the

Financial A/c Cost A/c 1,00,300

Difference in stock Difference in stock

valuation : valuation:

Opening stock: Opening stock:

Work -in- progress 350 Raw material 320

Finished goods 652

Closing stock: Closing stock:

Work-in-progress 296 Finished goods 682 1,002

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 14
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Raw Material 422

1,720

Sales Expenses 30,562 Discount received 1,790

Distribution 16,926
Expenses

Debenture Interest 2,000

Discount Allowed 2,964

1,03,092 1,03,092

Answer 7.
Statement of Cost and Profit (Or) Cost Sheet

Particulars Amount Amount

` `
Opening Stock of material 51,296
(+) Difference 320 51,616
(+) Purchases 1,99,334

2,50,950

(-) Closing stock of raw material 47,382

(+) Difference 422 47,804
Material consumed 2,03,146

(+) Direct wages 80,072

Prime cost 2,83,218

(+) Factory OH’s (250% of wages) 2,00,180

4,83,398

(+) Opening stock of WIP 24,496

(-) Difference 350 24,146
5,07,544

(-) Closing stock of WIP 23,724

(+) Difference 296 24,020
Works Cost 4,83,524

(+) Administration overheads (53,058 – 9,500) (bal. figure) 43,558

Cost of Production 5,27,082

(+) Opening stock of finished goods (63,890 – 652) 63,238

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 15
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

5,90,320

(-) Less: Cl. Stock of finished goods 65,702

(-) Difference 682 65,020
Cost of goods sold 5,25,300
Selling expenses --
Cost of sales (or) Total cost 5,25,300

Profit 1,00,300

Sales 6,25,600

Q. 8. a) In a factory following the Job Costing Method, an abstract from the work in process as at
30th September, was prepared as under.

Job No. Materials Direct Labour Factory Overheads

Applied (`)
115 1,325 400 hrs 800 640
118 810 250 hrs. 500 400
120 765 300 hrs 475 380
2,900 1,775 1,420

Materials used in October were as follows:

Material requisitions No. Job no. Cost (`)

54 118 300

55 118 425

56 118 515

57 120 665

58 121 910

59 124 720

3,535

A summary of Labour Hours deployed during October is as under:

NUMBER OF HOURS
JOB NO.
SHOP A SHOP B

115 25 25

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 16
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

118 90 30

120 75 10

121 65 -

124 20 10

275 75

Indirect Labour:

Waiting for material 20 10

Machine breakdown 10 5

Idle time 5 6

Overtime premium 6 5

316 101

A shop credit slip was issued in October, that material issued under requisition No.54 was
returned back to stores as being not suitable. A material transfer note issued in October
indicated that material issued under requisition No.55 for Job 118 was directed to Job 124.
The hourly rate in shop A per labour hour is `3 while at shop B it is ` 2 per hour. The factory
overhead is applied at the same rate as in September; Jobs 115, 118 and 120 were completed in
October.
You are asked to compute the factory cost of the completed jobs. It is practice of the
management to put a 10% on the factory cost to cover administration and selling overheads
and invoice the job to the customer on a total cost plus 20% basis what would be the invoice
price of these three jobs?

b) What is the difference between Contribution and Profit ?

Answer 8.
a) Calculation of selling price of the Job

Job No. 115 118 120

` ` `

Costs in September:

Material 1,325 810 765

Labour 800 500 475

Overheads 640 400 380

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 17
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Total (A) 2,765 1,710 1,620

Costs in October:

Material - 515 665

Labour

(25 x 3)+(25 x 2) 125

(90 x 3)+(30 x 2) 330

(75 x 3)+(10 x 2) 245

Overheads (80%) 100 264 196

Total (B) 225 1,109 1,106

Total Factory Cost (A+B) 2,990 2,819 2,726

Add: Admn. Overheads @ 10% 299.0 281.9 272.6

3,289.0 3,100.9 2,998.6

Profit 20% 651.80 620.18 599.72

Selling Price 3,946.80 3,721.08 3,598.32

b) Difference between Contribution and Profit

Contribution Profit
1. It includes fixed cost and profit. 1. It does not include Fixed cost.
2. Marginal Costing technique uses the 2. Profit is the accounting concept to
concept of contribution. determine profit or loss of a business
concern.
3. At break-even point, contribution 3. Only the sales in excess or break-even
equals to Fixed cost. points results in profit.
4. Contribution concept is used in 4. Profit is computed to determine the
managerial decision making. profitability of product and the concern.

Q. 9. a) A company is manufacturing building bricks and fire bricks. Both the products require
two processes. Brick forming and Heat treatment. The requirements for the two bricks are:
BUILDING BRICKS FIRE BRICKS
Forming per 100 bricks 3 hrs. 2 hrs.
Heat treatment per 100 bricks 2hrs. 5 hrs.
Total costs of the two departments in one month were:
Forming ` 21,200

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 18
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Heat Treatment `48,800

Production during the month was:
Building Bricks 1,30,000 Nos.
Fire Bricks 70,000 Nos.
Prepare statement of manufacturing costs for the two varieties of bricks.

b) Deluxe limited undertook a contract for `5,00,000 on 1st July, 2011. On 30th June 2012 when
the accounts were closed, the following details about the contract were gathered:
Particulars `
Materials purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant Purchased 50,000
Materials on hand 30-6-2012 25,000
Wages accrued 30-6-2012 5,000
Work certified 2,00,000
Cash received 1,50,000
Depreciation of Plant 5,000
Work uncertified 15,000
The above contract contained an escalator clauses which read as follows:
“In the event of prices of materials and rates of wages increase by more than 5% the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages
beyond 5% in each case”.
It was found that since the date of signing the agreement the prices of materials and wage rates
increased by 25% the value of the work certify does not take into account the effect of the
above clause.
Prepare the contract account. Working should form part of the answer.

Answer 9.
a) Statement Showing Number of Hours

Particulars Buil. Bricks Fire Bricks Total

Forming
(1,30,000/100) x 3 3,900 1,400 5,300
(70,000/100) x 2
Heat treatment 2,600 3,500 6,100
(1,30,000/100) x 2
(70,000/100) x 5
Total 6,500 4,900 11,400
Cost of forming per hour = 21,200 / 5,300 = 4
Cost of Heat treatment per hour = 48,800 / 6,100 = 8

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 19
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Statement showing computation of manufacturing cost per two varieties of bricks:

Particulars Buil. Bricks Fire Bricks Total

` ` `
Forming
(3,900 x 4), (1,400 x 4) 15,600 5,600 21,200
Heat treatment
(2,600 x 8), (3,500 x 8) 20,800 28,000 48,800

Total 36,400 33,600 70,000

b) Cost of material & wages incurred = ` (1,00,000 + 45,000 + 5,000 – 25,000 )

= `1,25,000
Cost of material & wages before increase in prices = ` (1,25,000 x 100/125 )
= `1,00,000
Increase in contract price = `25/100 [1,25,000 – ` (1,00,000 x 105/100)]
= `5,000
Dr. Contract Account Cr.

Particulars Amount Particulars Amount

` `
To, Material purchased A/c 1,00,000 By, Material on hand 25,000
To, Wages A/c 50,000 Work certified 2,05,000 2,20,000
To, General Expenses A/c 10,000 Work uncertified 15,000
To, Depreciation on plant 5,000
To, P & L A/c 19,512
To, Reserve c/d 60,488
2,45,000 2,45,000

Q. 10. a) An oil company gives the following cost data. You are required to prepare various
process accounts. Purchases of 1,000 quintals of copra @ ` 500 per quintal.

Particulars Crushing Refining Finishing

` ` `

Cost of labour 6,600 3,000 3,000

Electric Power 1,000 500 400

Sundry Material 700 200 -

Repair to machinery and plant 500 400 400

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 20
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Steam 250 150 100

Other Factory Expenses 4950 2250 2250

` 9,450, to be charged at 75% of wages

Cost of Casks - ` 580, Normal loss in 1st process was 30% of input, actual output 690 quintals.
Process II: By product 90 quintals value ` 6,200
Process III: Normal loss 5% Actual output 580 quintals
Scrap of 1st process realised ` 10 per quintal.

b) SM Ltd., furnished you the following information relating to process B for the month of October,
2012.
(i) Opening work-in-progress- NIL
(ii) Units introduced - 10,000 units @ `3 per unit
(iii) Expenses debited to the process; Direct materials `14,650; Labour `21,148; Overheads `
42,000
(iv) Finished output - 9,500 units
(v) Closing work-in-progress 350 units; Degree of completion : Material 100%; Labour and
overheads 50%
(vi) Normal loss in process- one percent of input
(vii) Degree of completion of abnormal loss: Material 100% ; Labour and Overheads 80%
(viii) Units scrapped as normal loss were sold at `1 per unit
(ix) All the units of abnormal loss were sold at `2.50 per unit.
Prepare:
A. Statement of Equivalent Production
B. Statement of Cost
C. Process - B Account
D. Abnormal Loss Account

Answer 10. a)
Dr. Crushing Process - Account Cr.

Particulars Units ` Particulars Units `

To, Copra introduced 1000 5,00,000 By, Normal Loss A/c 300 3,000
[30% x 1000] x `10

To, Wages A/c 6,600 By, Abnormal Loss A/c 10 7,300

To, Electric Row A/c 1,000 5,14,000-3,000

×10
1,000-300
To, Material A/c 700 By, Transfer to Refining Process- 690 5,03,700

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 21
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

A/c @ ` 730/-per unit

To, Repair to Machinery and 500

Plant A/c

To, Steam A/c 250

To, Factory Expenses A/c 4,950

1000 5,14,000 1000 5,14,000

Dr. Refining Process- Account Cr.

Particulars Units ` Particulars Units `

To, Transfer from Crushing 690 5,03,700 By, Stock of By-products A/c 90 6,200
Process A/c
To, Labour Expenses A/c 3,000 By, Transfer to Finishing Process 600 5,04,000
A/c @ ` 840 per unit
To, Power A/c 500

To, Material A/c 200

To, Machinery and Plant 400

Repairs A/c
To, Steam A/c 150

To, Other Factory Expenses 2,250

A/c
690 5,10,200 690 5,10,200

Dr. Finishing Process- Account Cr.

Particulars Units ` Particulars Units `

To, Transfer from Refining 600 5,04,000 By, Normal Loss A/c 30 -
Process A/c
To, Labour A/c 3,000 By, Transfer to Finished Stock A/c 580 5,19,100

To, Power A/c 400

To, Repairs A/c 400

To, Steam A/c 100

To, Factory Expenses A/c 2,250

To, Abnormal Gain A/c 10 8,950

610 5,19,100 610 5,19,100

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 22
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

b) Statement of Equivalent Production

Input Output Units Material Labour Overheads

% Units % Units % Units

10000 Normal Loss 100 - - - - - -

Finished Units 9500 100 9500 100 9500 100 9500

Closing Stock 350 100 350 50 175 50 175

Abnormal Loss 50 100 50 80 40 80 40

10000 10000 9900 9715 9715

Statement of Cost

Particulars Cost Equivalent Cost per unit

` units `
Material 44,550 9,900 4.5000
(30000+14650)-100

Labour 21,148 9,715 2.1768

Overhead 42,000 9,715 4.3232
Value of Closing Stock

Element Units Cost per unit Total Cost

Material 350 4.5 1575.00

Labour 175 2.1768 380.94

Overhead 175 4.3232 756.56

2712.50 Say, ` 2713

Value of Abnormal Loss

Element Units Cost per unit Total Cost

Material 50 4.5 225.000

Labour 40 2.1768 87.072

Overhead 40 4.3232 172.928

485

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 23
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Dr. Process Account Cr.

Particulars Units ` Particulars Units `

To, Material Introduced 10000 30000 By, Normal Loss A/c 100 100
To, Material A/c 14650 By, Abnormal Loss A/c 50 485

To, Labour A/c 21148 By, Closing Stock A/c 350 2,713

To, Overheads A/c 42000 By, Transfer to Next Process

@ ` 11 per unit 9500 1,04,500
10000 107798 10000 1,07,798

Abnormal Loss Account

Dr. Cr.

Particulars Units ` Particulars Units `

To, Process A/c 50 485 By, Debtors / Cash 50 125

By, costing P & L A/c - 360

50 485 50 485

Q. 11. a) Beauty soap, company manufactures four different brands of soaps namely Komal,
Lovely, Makeup and Nice. The data on production and sale of these brands during 2012 is
reproduced below.
Brand Name Komal Lovely Makeup Nice
Production & Sales (units) 3,00,000 5,00,000 70,000 40,000
Sale value ` Lakhs 15 31 2.8 1.2
All the above soaps are manufactured jointly up to a particular process. At split off point they are
formed into cake-sand packed. The annual cost data were as under.
Direct Material Cost ` 30 lakhs
Value added ` 20 lakhs
(includes profit at 25% on total cost)
Out of the above brands, Make up is sold in unpacked condition without further processing while
other 3 brands further processed at an additional cost:
Komal `1,20,000
Lovely `1,30,000 and
Nice ` 50,000
You are required to:-
(i) Work out the profit and cost of each brand of soap after allocating joint cost on the basis of
Net Realisable value at split up point. (per unit cost not required).

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 24
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(ii) Find out revised cost and profit on each brand if the company decides to sell all soaps at
split up point at following prices; Komal ` 4.50; Lovely `6.00; Make up ` 4.00 and Nice ` 1.50
per unit.
Assume that for allocation of joint cost net Realisable value method is used.
(iii) With the working results in (a) and (b) above advise Beauty Soap Company about the
processing decision as to which soap to ;be sold at split of point and which to be processed
further so as to maximise profit. Substantiate your decision with suitable costing to
technique.

b) Manar lodging home is being run in a small hill station with 50 single rooms. The home offers
concessional rates during six off- season months in a year. During this period, half of the full room
rent is charged. The management’s profit margin is targeted at 20% of the room rent. The
following are the cost estimates and other details for the year ending on 31st March 2012.
[Assume a month to be of 30 days].
(i) Occupancy during the season is 80% while in the off- season it is 40% only.
(ii) Expenses:
Staff salary [Excluding room attendants] ` 2,75,000
Repairs to building ` 1,30,500
Laundry and linen ` 40,000
Interior and tapestry ` 87,500
Sundry expenses ` 95,400
(iii) Annual depreciation is to be provided for buildings @ 5% and on furniture and equipments @
15% on straight-line basis.
(iv) Room attendants are paid ` 5 per room day on the basis of occupancy of the rooms in a month.
(v) Monthly lighting charges are ` 120 per room, except in four months in winter when it is ` 30
per room and this cost is on the basis of full occupancy for a month.
(vi) Total investment in the home is ` 100 lakhs of which ` 80 lakhs relate to buildings and
balance for furniture and equipments.
You are required to work out the room rent chargeable per day both during the season and the
off-season months on the basis of the foregoing information.

Answer 11.a)
Computation of Joint Cost

Particulars Amount
(`)
Direct material 30,00,000
(+) value added 20,00,000
Total Sales 50,00,000
(-) Profit @ 25% on cost (i.e. 20% on sales) 10,00,000
Total Cost 40,00,000
(-) Separate Cost (120 + 130 + 50) 3,00,000
Joint Cost 37,00,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 25
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Statement Showing Computation of Profit After Further Processing:

Particulars K L M N Total

` ` ` ` `

(I) Sales after further processing 15,00,000 31,00,000 2,80,000 1,20,000 50,00,000

(II) Separate cost 1,20,000 1,30,000 - 50,000 3,00,000

(III) Sales before further processing 13,80,000 29,70,000 2,80,000 70,000 47,00,000
NRV= (I-II)

(IV) Joint Costs 10,86,383 23,38,085 2,20,426 55,106 37,00,000

(V) Profit or Loss (III-IV) 2,93,617 6,31,915 59,574 14,894 10,00,000

Statement Showing Computation of Profit Before Further Processing:

Particulars K L M N Total

` ` ` ` `

(I) Sales at split off 13,50,000 30,00,000 2,80,000 60,000 46,90,000

(II) Joint Cost (as apportioned above) 10,86,383 23,38,085 2,20,426 55,106 37,00,000

(III Profit or Loss 2,63,617 6,61,915 59,574 4,894 9,90,000

)

Statement Showing Computation of Incremental Profit By Further Processing

Particulars K L M N Total

` ` ` ` `

(I) Sales after further process 15,00,000 31,00,000 2,80,000 1,20,000 50,00,000

(II) Sales before further process 13,50,000 30,00,000 2,80,000 60,000 46,90,000

(III) Incremental sales (I-II) 1,50,000 1,00,000 - 60,000 3,10,000

(IV) Separate costs 1,20,000 1,30,000 - 50,000 3,00,000

(V) Incremental Profit (loss) (III-IV) 30,000 (30,000) - 10,000 10,000

Products K and N are to be further Process and whereas Products L and M need not to be further
process

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 26
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

b)
(i) Computation of Estimated Cost for the year ending 31st March, 2012

Particulars Amount
`

Salary 2,75,000

Repairs 1,30,500

Laundry and linen 40,000

Interior decoration 87,500

Depreciation:
5% on ` 80 lakhs: ` 4,00,000
15% on ` 20 lakhs: ` 3,00,00 7,00,000
Sundry expenses 95,400

Total costs 13,28,400

(ii) Number of room days in a year:

Occupancy during season for 6 months @ 80% (50 x0.80 x 6 x 30) = 7,200
Off-season occupancy for 6 months @ 40% (50 x 0.40 x 6 x 30) = 3,600
Total number of room days during a year = 10,800
(iii) Attendant’s salary
For 10,800 room days @ ` 5 per day = ` 54,000
(iv) Light charges for 8 months @ ` 120 per month i.e. ` 120/30 = ` 4 per room day.
Light charges for 4 months @ ` 30 per month, i.e. ` 30/30 = ` 1 per room day
Total lighting charges:
During season @ ` 4 for 7200 days = ` 28,800
During off season 2 months @ ` 4 for 1200 days (2/6 x 3600) = ` 4,800
During 4 months of winter @ Re. 1 for 2,400 days (4/6 x 3600) = ` 2,400
Note: It is given in the example that during four months of winter, the lighting is ` 30 per room,
which is 1/4th of the lighting charges during the remaining period of the year. Hence the rate of
room day which is ` 4 will also be 1/4th for winter period and so it is taken as Re. 1 per room day.
Statement of Total Estimated Cost

Particulars Amount
`
Expenses as shown in I above 13,28,000
Attendant’s salary as shown in III above 54,000
Lighting charges as shown in IV above 36,000
Total cost 14,18,400
Computation of total Full Room Days
During season : 7,200
Off-season : 1,800 (Equivalent to 50% rate of 3,600 days)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 27
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Total Full Room Days : 9,000

Computation of Room Rent
Cost per room day : ` 14,18,400 / 9,000 = ` 157.60
Add: Profit margin at 20% of rent or 25%
Of cost = ` 39.40
Room Rent = ` 197.00
Therefore, during season, room rent of ` 197 is to be charged while in the off-season room rent of
` 98.50 is to be charged.

Q. 12. The cost structure of an article the selling price of which is ` 45,000 is as follows:

Direct Materials 50%

Direct Labour 20%

Overheads 30%

An increase of 15% in the cost of materials and of 25% in the cost of labour is anticipated. These
increased costs in relation to the present selling price would cause a 25% decrease in the
amount of present profit per article.
You are required:
(a) To prepare a Statement of Profit Per Article at Present, and
(b) The Revised Selling Price to produce the same percentage of profit to sales as before.

Answer 12.
Present Statement of Profit per article

Particulars `

Direct Materials 0.5x 15,000

Direct Labour 0.2x 6,000

Overheads 0.3x 9,000

Total Cost 30,000

Profit (50% on Cost) 15,000

Selling Price 45,000

Statement of Revised Selling Price Per Article

Particulars `

Direct Materials 0.575x 17,250

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 28
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Direct Labour 0.250x 7,500

Overheads 0.300x 9,000

Total Anticipated Cost 33,750

Profit (50% on Cost) 16,875

Selling Price 50,625

Working Notes:
Suppose,
x = Total Cost
y = Profit per article
Hence x + y = ` 45,000
Statement Showing The Present & Anticipated Cost Per Article

Items Present Cost Increase % ` Anticipated Cost

Direct Materials 0.5x 15.00 0.575x

Direct Labour 0.2x 25.00 0.250x

Overheads 0.3x 0.300x

x 1.125x

1.125x + 0.75y = ` 45,000 - I

x + y = 45,000 - II
1.5 x+ y = 60,000 (Multiply both sides of first equation by 4/3)-III
(Deducting (III) equation 0.5x = 15,000
From equation (II), we get x = ` 30,000
and y = ` 15,000

Q. 13. a) A market gardener is planning his production for next season and he asked you, as a
cost consultant, to recommend the optimum mix of vegetable production for the coming year.
He has given you the following data relating to the current year:
POTATOES TOMATOES PEAS CARROTS
Area occupied in acres 25 20 30 25
Yield per acre in tons 10 8 9 12
Selling Price per ton ` 1,000 1,250 1,500 1,350
Variable Cost per acre:
Fertilizer 300 250 450 400
Seeds 150 200 300 250
Pesticides 250 150 200 250

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 29
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Direct Wages 4,000 4,500 5,000 5,700

Fixed Overhead per annum: `5,40,000
The land which is being used for the production of carrots and peas can be used for either crop
but not for potatoes and tomatoes. The land being used for potatoes and tomatoes can be used
for either crops but not carrots and peas. In order to provide an adequate market service, the
gardener must produce each year at least 40 tons of each of potatoes and tomatoes and 36
tons of each peas and carrots .You are required to present a statement to show :
(i) (1) The profit for the current year:
(2) The profit for the production mix you would recommend;
(ii) Assuming that the land could be cultivated in such a way that any of the above crops could
be produced and there was no market commitment. You are required to:
(1) Advice the market gardener on which crop he should concentrate his production.
(2) Calculate the profit if he were to do so, and
(3) Calculate in rupees the breakeven - point of sales.
b) ‘In decision-making only relevant costs should be considered’. Explain.

Answer 13.
a) Statement showing computation of contribution and determination of priority for
profitability:
Particulars Potatoes Tomatoes Peas Carrots

I. Sales per acre (`) 10,000 10,000 13,500 16,200

II. Variable cost (`) 4,700 5,100 5,950 6,600

III. Contribution (`) 5,300 4,900 7,550 9,600

IV. Priority III IV II I

(i)
(1) Statement showing computation of profit for current year:

Sr. No. Particulars Potatoes Tomatoes Peas Carrots Total

I. No. of acres 25 20 30 25 100

II. Contribution per acre (`) 5,300 4,900 7,550 9,600

III. Total contribution (`) 1,32,500 98,000 2,26,500 2,40,000 6,97,000

IV. Fixed cost (`) 5,40,000

V. Profit (`) 1,57,000

(2) Statement showing optimum mix under given conditions and computation of profit at that
mix:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 30
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Sr. No. Particulars Potatoes Tomatoes Peas Carrots Total

Minimum production in tons 40 40 36 36 100

Area required for this (acre) 4 5 4 3 16

Remaining area (acre) 36 -- -- 48 84

I. No. of acres 40 5 4 51

II. Contribution per acre (`) 5,300 4,900 7,550 9,600

III. Total contribution (`) 2,12,000 24,500 30,200 4,89,600 7,56,300

IV. Fixed cost (`) 5,40,000

V. Profit (`) 2,16,300

(ii)
(1) If the land is suitable for growing any of the crops and there is no market commitment,
the gardener is advised to concentrate his production on carrots.
(2) & (3):

Sr. No. Particulars `

I. Sales (16,200 x 100) 16,20,000

II. Contribution (9,600 x 100) 9,60,000

III. Fixed cost 5,40,000

IV. Profit 4,20,000

Break even sales = (5,40,000 x 16,20,000) / 9,60,000

= ` 9,11,250

b) Relevant costing for decision making purposes is not only important to classify costs
according to the way in which they behave, but also as to whether or not they are relevant
to a particular decision. A relevant cost is a future cost which differs between alternatives. It
can also be defined as any cost which affected by the decision at hand.
The main features of a relevant cost are as follows :
(i) It must be a future cost i.e. one which is expected to be incurred and not a
historic (sunk) cost which has already been incurred.
(ii) It must be an incremental (additional) or avoidable cost.
In considering a range of alternative actions, costs which will be identical for all alternatives
are irrelevant and can be ignored for the purpose of decision-making. Every decision deals
with future. The function of the decision-maker is to select the courses of action for the
future. A relevant cost is a future cash flow arising as a direct consequence of the decision

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 31
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

under review. Only relevant costs should be considered in decision making, because it is
assumed that in the long-run future profits will be maximized if the ‘cash profits’ of the
company, i.e. the cash earned from sales minus the cash expenditures on making and
selling the goods, are also maximized.

Q. 14. An engineering company receives in enquiry for the manufacture of certain products,
where costs estimated as follows per product. Direct materials ` 3.10; Direct labour (5 hours) `
2.05; Direct expenses ` 0.05 Variable overheads 20 paise per hour.
The manufacture of these products will necessitate the provision of special tooling costing
approximately ` 4,500. The price per unit is ` 8.00. For an order to be considered profitable it is
necessary for it to yield a target contribution at the rate of ` 0.30 per Labour Hour (after tooling
cost).
Find out:
a. The sales level at which contribution to profit commences.
b. The sales at which the contribution exceeds the target.

Answer 14.
Statement Showing Computation of Contribution

Sr. No. Particulars Amount (`)

I. Selling price 8.00

II. Variable cost

Direct material 3.10
Direct Labour 2.05
Direct expenses 0.05
Variable OH (5 x 0.2) 1.00

III. Total Variable Cost 6.20

Contribution (i - iii) 1.80

Break even units = 4,500 / 1.8 = 2,500 units.

Break even sales = 2,500 x 8 = ` 20,000
Target profit = ` 0.3 per hour i.e. ` 1.5 per unit (5 x 0.3)
Let ‘S’ be the required units.
Desired profit = 1.5 x S = 1.5S
Required units = 4,500 + 1.5S / 1.8
S = 4,500 + 1.5S / 1.8
S = 15,000 units
Required sales = 15,000 x 8 = ` 1,20,000.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 32
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 15. Given below is the basic data relating to New India Company for three years:
Year1 Year 2 Year 3

Production and Inventory data

Planned production (in units) 2,500 2,500 2,500
Finished goods inventory (in units), Jan 1 0 0 750
Actual production (in units) 2,500 2,500 2,500
Sales (in units) 2,500 1,750 3,250
Finished goods inventory (in units), Dec 31 0 750 0
Revenue and cost data, all three-years
Sales price per unit ` 48
Manufacturing costs per unit
Direct material 12
Direct labour 8
Variable manufacturing overhead 4
Total variable cost per unit 24
Used only under absorption costing:
Fixed manufacturing overhead = Annual fixed OH / Annual Production 12
= ` 30,000 / ` 2,500
Total absorption cost per unit ` 36
Variable selling and administrative cost per unit
Fixed selling and administrative cost per year `4
` 5,000
You are required to Prepare:
(a) Absorption Costing Income Statement
(b) Variable Costing Income Statement.
(c) Reconciliation of Income under Absorption and Variable Costing.
(d) Throughput Costing Income Statement and Comment how it is relatively more useful.
Draw your conclusion.

Answer 15.
(a) Absorption Costing Income Statement
New India Company
Income Statement as per Absorption Costing

Particulars ` Year1 ` Year 2 ` Year 3

Sales revenue (at ` 48 per unit) 1,20,000 84,000 1,56,000

Less: Cost of goods sold 90,000 63,000 1,17,000
(at absorption cost of ` 36 per unit)
Gross margin 30,000 21,000 39,000
Less: Selling and administrative expenses:
Variable (at ` 4 per unit) 10,000 7,000 13,000
Fixed 5,000 5,000 5,000

Operating Income 15,000 9,000 21,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 33
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(b) Variable Costing Income Statement

New India Company
Income Statement as per Variable Costing

Particulars Year1 Year 2 Year 3

(`) (`) (`)

Sales revenue (at ` 48 per unit) 1,20,000 84,000 1,56,000

Less: Variable expenses:
Variable manufacturing costs
(at variable cost of ` 24 per unit) 60,000 42,000 78,000
Variable selling & admn. Costs 10,000 7,000 13,000
(at ` 4 per unit)
Contribution margin 50,000 35,000 65,000
Less: Fixed expenses :
Fixed manufacturing overhead 30,000 30,000 30,000
Fixed selling & admn. Expenses 5,000 5,000 5,000

Operating Income 15,000 0 30,000

(c) Reconciliation of Income under Absorption and Variable Costing

New India Company
Reconciliation of Income under Absorption and Variable Costing

Particulars Year1 Year 2 Year 3

(`) (`) (`)

Cost of goods sold under absorption costing 90,000 63,000 1,17,000

Variable manufacturing costs under variable costing 60,000 42,000 78,000
Difference 30,000 21,000 39,000
Fixed manufacturing overhead as a period expense under 30,000 30,000 30,000
variable costing.
Balance
0 (9,000) 9,000
Operating Income under variable costing
15,000 0 30,000
Operating income under absorption costing
15,000 9,000 21,000

Difference in operating income 0 (9,000) 9,000

The following table shows, this difference in the amount of fixed overhead expenses explains the
difference in reported income under absorption and variable costing:

Year Change in Fixed Overhead Difference in Fixed Absorption Costing Income

Inventory (in Overhead Minus Variable Costing
Rate
units) Income

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 34
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Expenses

Year 1 0 x ` 12 = = 0 = 0
Year 2 750 increase x ` 12 = = ` 9,000 = `9,000
Year 3 750 decrease x ` 12 = = (9,000) = (9,000)

(d) Throughput Costing Income Statement

New India Company
Income Statement as per Throughput Costing
Particulars Year1 Year 2 Year 3
(`) (`) (`)

Sales revenue (at ` 48 per unit) 1,20,000 84,000 1,56,000

Less: Cost of goods sold (at throughput cost: 30,000 21,000 39,000
Direct – material cost)1
Throughput 90,000 63,000 1,17,000
Less: Operating costs: 20,000 20,000 20,000
Direct labour 10,000 10,000 10,000
Variable manufacturing overhead 30,000 30,000 30,000
Fixed manufacturing overhead 10,000 7,000 13,000
Variable Selling & Admn. Costs 5,000 5,000 5,000
Fixed selling & Admn. Costs 75,000 72,000 78,000
Total Operating costs

Operating Income 15,000 (9,000) 39,000

Notes:
1. Standard direct-material cost per unit of ` 12 multiplied by sales volume in units.
2. Assume that management has committed to direct labour sufficient to produce the
planned annual production volume of 2500 units; direct labour cost is used at a rate of ` 8
per unit produced.
3. Assumes management has committed to support resources sufficient to produce the
planned annual production volume of ` 2500 units; variable overhead cost is used at a rate
of ` 4 per unit produced. Fixed overhead is ` 30,000 per year.
4. Variable selling and administrative costs used amount to ` 1 per unit sold. Fixed selling and
administrative costs are ` 5,000 per year.

Q. 16. Trimake Limited makes three main products, using broadly the same production methods
and equipment for each. A conventional product costing system is used at present, although an
Activity Based Costing (ABC) system is being considered. Details of the three products, for
typical period are:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 35
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Labour Hours per Machine Hours

Material Per unit Volumes Units
unit per unit

Product X ½ 1½ ` 20 750

Product Y 1½ 1 `12 1,250

Product Z 1 3 `25 7,000

Direct labour costs ` 6 per hour and production overheads are absorbed on a machine hour
basis. The rate for the period is ` 28 per machine hour.
You are required:
(a) To calculate the cost per unit for each product using conventional methods.
Further analysis shows that the total of production overheads can be divided as follows
%
Costs relating to set-ups 35
Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
Total production overhead 100%
The following activity volumes are associated with the product line for the period as a whole.
Total activities for the period

Number of movements
Number of Set-ups Number of Inspections
of materials

Product X 75 12 150

Product Y 115 21 180

Product Z 480 87 670

670 120 1,000

You are required:

b) To calculate the cost per unit for each product using ABC principles;
Answer 16.
(a) Computation of cost per unit using Conventional Methods:
Total overheads `
X = 750 x 1.5 x 28 = 31,500
Y = 1250 x 1 x 28 = 35,000
Z = 7000 x 3 x 28 = 5,88,000
6,54,500

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 36
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Computation of Cost

Particulars X Y Z

` ` `

Materials 20 12 25

Labour 3 9 6

Overheads 42 28 84

Factory Cost 65 49 115

(b) Under ABC Costing

Setup Machine Machine Inspection Total

Handling Cost Expenses
Cost Cost

Costs (`) 2,29,075 1,30,900 98,175 1,96,350 6,54,500

Cost Driver No. of setups Machine hours No. of No. of

movement of Inspections
materials

Cost driver rates (`) 341.90 5.6 818.125 196.35

(229075/670) (130900/23375) (98,175/120) (196350/1000)

Cost per unit under ABC costing

Particulars X Y Z

` ` ` ` ` `

Materials 20.00 12.00 25.00

Labour 3.00 9.00 6.00

Overheads

Setup Cost 34.19 31.45 23.44

Machine cost 8.40 5.60 16.80

Machine Handling Cost 13.09 13.74 10.17

Inspection Cost 39.27 94.95 28.27 79.06 18.79 69.20

Total Cost 117.95 100.06 100.20

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 37
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 17. Rana manufactures a product by a series of mixing of ingredients. The product is packed
in company’s made bottles and put into an attractive carton. One division of company
manufactures the bottles while another division prepares the mix that does the packing.
The user division obtained the bottle from the bottle manufacturing division. The bottle
manufacturing division has obtained the following quotations from an external source for supply
of empty bottles.
Volume no of bottles For 8,00,000 bottles For 12,00,000 bottles
Total price offer (`) 14,00,000 20,00,000
The estimated cost is:
Volume no of bottles For 8,00,000 bottles For 12,00,000 bottles
Total Cost (`) 10,40,000 14,40,000
The sales value and the end cost in the mixing/packing division are:
Volume no of bottles For 8,00,000 bottles For 12,00,000 bottles
Total sales value (`) 91,20,000 1,27,80,000
Total Cost ** (`) 64,80,000 96,80,000
** Excluding cost of bottles
There is a considerable discussion as to the proper transfer price from the bottle division to the
marketing division.
The divisional managers salary is an incentive bonus based on profits of the centres.
You are required to show for the given two levels of activity the profitability of the two divisions
and the total organisation based on appropriate transfer price determined on the basis of:
i. Shared profit related to the cost
ii. Market price
Answer 17.
Statement showing Computation of transfer price on the basis of profit shared on cost basis:

Particulars Output (8,00,000) Output (12,00,000)

(`) (`)

Sales 91,20,000 1,27,80,000

Costs:

Product manufacturing division 64,80,000 96,80,000

Bottle manufacturing division 10,40,000 14,40,000

75,20,000 1,11,20,000

Profit 16,00,000 16,60,000

Share of bottle manufacturing division 2,21,276 2,14,964

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 38
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Product manufacturing division 13,78,724 14,45,036

Transfer price 12,61,276 16,54,964

Transfer price per bottle 1.5777 1.379

Profitability on the basis of market price:

Particulars Output (8,00,000) Output (12,00,000)

(`) (`) (`) (`)

Bottle manufacturing division

Sale value 14,00,000 20,00,000

(-)cost 10,40,000 14,40,000

Profit 3,60,000 5,60,000

Product manufacturing division

Sale value 91,20,000 1,27,80,000

(-)cost of product 64,80,000 96,80,000

Cost of bottle 14,00,000 20,00,000

78,80,000 1,16,80,000

Profit 12,40,000 11,00,000

Total profit 16,00,000 16,60,000

Transfer price 1.75 1.67

Q. 18. A company manufactures two products, A and B and the budgeted data for the year are
as follows:

Product A (`) Product B (`)

Sales price per unit 100 75

Direct material per unit 20 10

Direct wages per unit 5 4

Total works overhead 10,105 9,009

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 39
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Total marketing overhead 1,200 1,100

The sales manager forecasts the sales in units as follows:

Product A Product B
(units) (units)

January 28 10

February 28 12

March 24 16

April 20 20

May 16 24

June 16 24

July to January (next year) Per month 18 20

It is assumed that (i) there will be no work in progress at the end of any month, and (ii) finished
units equal to half the sales for the following month will be kept in stock.
Prepare (a) A Production Budget for each month and (b) A Summarized Profit and Loss
Statement for the year.
Answer 18.
(a) Production Budget (in number of units)

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL

Product –A

Sales 28 28 24 20 16 16 18 18 18 18 18 18 240

Add: Closing Stock 14 12 10 8 8 9 9 9 9 9 9 9

42 40 34 28 24 25 27 27 27 27 27 27

Less: Opening Stock 14 14 12 10 8 8 9 9 9 9 9 9

Production 28 26 22 18 16 17 18 18 18 18 18 18 235

Product- B

Sales 10 12 16 20 24 24 20 20 20 20 20 20 226

Add: Closing Stock

6 8 10 12 12 10 10 10 10 10 10 10

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 40
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

16 20 26 32 36 34 30 30 30 30 30 30

Less: Opening Stock

5 6 8 10 12 12 10 10 10 10 10 10

Production 11 14 18 22 24 22 20 20 20 20 20 20 231

(b) Summarised Product Cost Budget

Output Particulars Product A Product B Total

235 units (`) 231 units (`) (`)
Direct Material : A @ ` 20 4,700
B @ ` 10 2310
7,010

Direct Labour : A @ ` 5 1,175

B@`4 924
2,099

Works overheads 10,105 9009 19,114

Total production Cost 15,980 12243 28,223

Cost per unit 68 53

(15,980/235) (12,243/231)

Summarised Profit and Loss Statement for the Year

Particulars Product A Product B Total

(`) (`) (`)

Sales 24,000 16,950 40,950

Less: 16,320 11,978
Production Cost of goods sold (240 x 68) 1,200 1,100
(226 x 53)
Marketing Overheads

Total (ii) Cost (ii) 17,520 13,078 30,598

Profit (i - ii) 6,480 3,872 10,352

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 41
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 19. The budget controller of a manufacturing organisation producing three products has
compiled the following data for the annual budget for the year 2013.

Price per kg Products

A B C

Raw materials: Kg per unit

RM1 `5.00 1 6 12

RM2 2.00 6 - 14

RM3 3.00 6 10 2

Direct Labour Rate per hour Hours per unit

Dept1 `2.00 9 4 4

Dept2 3.00 3 4 2

Dept3 4.00 2 5 4

Factory Overheads:

Variable 4 8 6

Sales value (` Lakhs) 346.50 275.40 263.25

Stock of finished goods on 1,200 800 1,000

1.1.2013 (units)

Fixed factory overhead rate per direct labour hour

Dept1 5.00

Dept2 3.00

Dept3 6.00

The following policies have been laid down for the budgeted year 2013:
(i) Fixed factory overheads will be absorbed on direct labour hour basis.
(ii) Administration overheads are absorbed at the rate at 20% of factory cost.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 42
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(iii) Selling and distribution overheads (one-third variable) are recovered at the rate of 25% of
the cost of production including administration overheads.
(iv) The mark up on the cost of sales for profit is:
Product ‘A’ 10%, Product ‘B’ 20%, Product ‘C’ 30%.
(v) Inventories of finished goods will be reduced by 25% on 31-12-2013.
(vi) The finished goods inventories are valued on marginal cost basis. The marginal cost of the
opening stocks on 1.1.2013 were:
(vii) Product ‘A’ `80, Product ‘B’ `120 and Product ‘C’ `140
You are required to compute:
(a) The number of units of each product estimated to be sold in the budget year.
(b) The number of unit of each product proposed to be produced in the budget year .
(c) The contribution to sales ratio envisaged for each of the products
(d) Valuation of opening and closing stock of finished goods on marginal cost basis.

Answer 19.
Computation of Selling Price for the Product

Particulars A B C

(i) Material:

RM 1 5.00 30.00 60.00

RM 2 12.00 0.00 28.00

RM 3 18.00 30.00 6.00

35.00 60.00 94.00

(ii) Labour

Dept-1 18.00 8.00 8.00

Dept-2 9.00 12.00 6.00

Dept-3 8.00 20.00 16.00

35.00 40.00 30.00

PRIME COST (i +ii) 70.00 100.00 124.00

(iii) Factory Overheads:

Variable 4.00 8.00 6.00

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 43
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Fixed:

Dept-1 45.00 20.00 20.00

Dept-2 9.00 12.00 6.00

Dept-3 12.00 30.00 24.00

70.00 70.00 56.00

FACTORY COST (i+ii+iii) 140.00 170.00 180.00

(iv) Administration Overheads 28.00 34.00 36.00

(v) Cost of Production 168.00 204.00 216.00

(vi) Selling and distribution overheads 42.00 51.00 54.00

(vii) Total Cost 210.00 255.00 270.00

(viii) Profit 21.00 51.00 81.00

(ix) Selling Price 231.00 306.00 351.00

(x) Expected Number of Units to be sold

= 1,50,000 = 75,000
= 90,000

(a) 1,50,000 90,000 75,000

(b) Production Budget

Particulars A B C

Sales 1,50,000 90,000 75,000

Add: Closing Stock 900 600 750

1,50,900 1,90,600 75,750

Less: Opening Stock 1,200 800 1,000

Production 1,49,700 89,800 74,750

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 44
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(c) Computation of Contribution to Sales Ratio

Particulars A B C

(i) Selling price 231 306 351

(ii) Variable cost 88 125 148

[74+(42/3)] [108+17] [130+18]

(iii) Contribution [I – II] 143 181 203

(iv) P/V Ratio 61.90% 59.15% 57.83%

(d) statement showing valuation of stocks

Particulars A B C

Opening Stock (units) 1200 800 1000

Variable cost 80 120 140

Value 96,000 96,000 1,40,000

Closing Stock (units) 900 600 750

Variable cost 88 125 148

Value 72,900 75,000 1,11,000

Q. 20. Manufacturers Ltd. produce three products from three basic raw materials in three
departments. The company operates a budgetary control system and values its stock of finished
goods on a total cost basis. From the following data, you are required to produce for the month
of July 2013 the following budgets.
(a) Production
(b) Material usage
(c) Purchases
(d) P & L A/c for each product and in total.
Budget data for July 2013

Product

A B C

` ` `

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 45
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Sales 15,00,000 10,80,000 16,80,000

Stock of finished products at July 1, 2013 in units 3,000 2,000 2,500

Department

I II III

Product overhead (`) 2,39,000 2,01,300 3,91,200

Direct labour hours 47,800 67,100 65,200

Direct material: M1 M2 M3

Stock July 1, 2013 in units 24,500 20,500 17,500

The company is introduced a new system of inventory control which should reduce stocks. The
forecast is that stocks as at 31st July 2013 will be reduced as follows:
Raw materials by 10% and finished products by 20%.
Fixed production overhead is absorbed on a direct labour hour basis. It is expected that there
will be no work-in-progress as the beginning or end of the month.
Administration costs are absorbed by the products at a rate of 20% of production cost and
selling and distribution cost is absorbed by products at a rate of 40% of production cost.
Profit is budgeted as a percentage of total cost as follows:
Product A 25%, Product B 12½% and product C 16 %
Standard data per unit of Product

Price per unit A B C

Direct Material ` Units Units Units

M1 2.00 5 - 12

M2 4.00 - 10 9

M3 1.00 5 5 -

Rate per Hour

Direct Wages ` Hours Hours Hours

Department I 2.50 4 2 2

Department II 2.00 6 2 3

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 46
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Department III 1.50 2 4 6

Other variable costs ` 10 20 15

Answer 20.
Statement of Cost and Profit per Unit
Particulars A (`) B (`) C (`)

(i) Material: ` `

M1 10 - 24

M2 - 40 36

M3 5 5 -

15 45 60

(ii) Labour:

Dept-I 10 5 5

Dept-II 12 4 6

Dept-III 3 6 9

25 15 20

(iii) Other Variable cost 10 20 15

(iv) Production overheads:

Dept-I 20 10 10

Dept-II 18 6 9

Dept-III 12 24 36

(v) TOTAL PRODUCTION COST (i+ii+iii+iv) 100 120 150

(vi) Administration overheads 20 24 30

(vii) Selling & Distribution Overheads 40 48 60

(viii) Total Cost (v+vi+vii) 160 192 240

(ix) PROFIT PER UNIT 40 24 40

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 47
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

[25% x 160] [12 ½ % x 192] [16 2/3 % x 240]

(x) SELLING PRICE PER UNIT 200 216 280

(xi) Number of units sold 7500 5000 6000

(xii) Total Profit [ix × xi](`) 3,00,000 1,20,000 24,0,000

(a) Production Budget

Particulars A B C

Sales 7500 5000 6000

Add: Closing stock 2400 1600 2000

9900 6600 8000

Less: Opening stock 3000 2000 2500

PRODUCTION 6900 4600 5500

(b) & (c ) Material Usage And Purchase Budget

Particulars M1 M2 M3

Material required for:

Product A 34500 - 34500

Product B - 46000 23000

Product C 66000 49500 -

100500 95500 57500

Add: Closing stock 22050 18450 15750

122550 113950 73250

Less: Opening stock 24500 20500 17500

PURCHASES 98050 93450 55750

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 48
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 21. A brass foundry making castings which are transferred to the machine shop of the
company at standard price uses a standard costing system. Basing standards in regard to
material stocks which are kept at standard price are as follows

Standard Mixture: 70% Copper and 30% Zinc

Standard Price: Copper ` 2,400 per ton and Zinc ` 650 per ton

Standard loss in melt: 5% of input

Figures in respect of a costing period are as follows:

Commencing stocks: Copper 100 tons

Zinc 60 tons

Finished stock: Copper 110 tons

Zinc 50 tons

Purchases: Copper 300 tons cost `7,32,500

Zinc 100 tons cost `62,500

Metal melted 400 tons

Casting produced 375 tons

Present figures showing: Material price, Mixture and Yield

Variance

Answer 21.
Computation of Actual Quantity (AQ)

Particulars Copper Zinc

Quantity (tons) Value (`) Quantity (tons) Value (`)

Opening Stock 100 2,40,000 60 39,000

Add: Purchases 300 7,32,500 100 62,500

400 9,72,500 160 1,01,500

Less: Closing stock 110 2,64,000 50 32,500

AQ 290 7,08,500 110 69,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 49
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Analysis of Given Data

Standard Data Actual Data

Material Quantity (tons) Price (`) Value (`) Quantity (tons) Price (`) Value (`)

Copper 280 2,400 6,72,000 290 7,08,500

Zinc 120 650 78,000 110 69,000

400 7,50,000 400 7,77,500

Less: Loss @ 5% 20 - 25 -

380 7,50,000 375 7,77,500

Computation of Required Values

Material SQSP (1) RSQSP (2) AQSP (3) AQAP (4)

Copper 276.31 x 2,400 6,72,000 290 x 2,400 7,08,500

= 6,63,157.87 = 6,96,000

Zinc 118.42 x 650 78,000 110 x 650 69,000

= 76,973.68 = 71,500

Total 7,40,132 7,50,000 7,67,500 7,77,500

Computation of SQ
SQ = x AQ for that material

For Copper = x 375 = 276.31 units.

For Zinc = x 375 = 118.42 units.

Where (1) SQSP = Standard Cost of Standard Material = ` 7,40,132

(2) RSQSP = Revised Standard Cost of Material = ` 7,50,000
(3) AQSP = standard Cost of Actual Material = ` 7,67,500
(4) AQAP = Actual Cost of Material = ` 7,77,500.
Computation of Required Variances:
a. Material Yield Variance = (1) – (2) = `9,868 (A) [`(7,40,132 – 7,50,000)]
b. Material Mix Variance = (2) – (3) = `17,500 (A) [`(7,50,000 – 7,67,500)]

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 50
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

c. Material Usage Variance = (1) – (3) = `27,368 (A)[`(7,40,132 – 7,67,500)]

d. Material Price Variance = (3) – (4) = `10,000 (A) [`(7,67,500 – 7,77,500)]
e. Material Cost Variance = (1) – (4) = `37,368 (A) [`(7,40,132 – 7,77,500)]

Q. 22. The standard set for material consumption was 100kg. @ ` 2.25 per kg.
In a cost period:
Opening stock was 100 kg. @ ` 2.25 per kg.
Purchases made 500 kg. @ ` 2.15 per kg.
Consumption 110 kg.
Calculate: a) Usage b) Price variance
1) When variance is calculated at point of purchase
2) When variance is calculated at point of issue on FIFO basis
3) When variance is calculated at point of issue on LIFO basis
Solution:
a) Computation of Material Usage Variance
Material Usage Variance = SQSP – AQSP
= SP (SQ – AQ)
= 2.25(100-110)
= 22.50 (A)
b) Computation of Price variance:
1) When Variance is calculated at the point of purchase:
Price variance = AQSP – AQAP
= (110 x 2.25) – (110 x 2.15)
= 11 (F)
2) When variance is calculated at the point of issue on FIFO basis
Price variance = AQSP – AQAP
= (110 x 2.25) – ([100 x 2.25]+[10 x 2.15])
= 1 (F)
3) When variance is calculated at the point of issue on LIFO basis
Price variance = AQSP – AQAP
= (110 x 2.25) – (110 x 2.15)
= 247.50-236.50
= 11 (F)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 51
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 23. Calculate variances from the following:

STANDARD ACTUAL

INPUT MATERIAL (`)/KG TOTAL INPUT MATERIAL (`)/KG TOTAL

400 A @ 50 20,000 420 A @ 45 18,900

200 B @20 4,000 240 B @ 25 6,000

100 C @15 1,500 90 C @15 1,350

700 25,500 750 26,250

LABOUR HOURS LABOUR HOURS

100 @ `2 per hour 200 120 @ `2.50 per hour 300

200 woman @ ` 1.50 300 500 240 woman @ ` 1.60 384 684

25 Normal Loss 75 Actual Loss

675 26000 675 26,934

Answer 23.
Calculation of Material Variances:

(1) (2) (3) (4)

SQSP (`) RSQSP (`) AQSP (`) AQAP (`)

A 428.57 x 50 420 x 50

B 214.29 x 20 240 x 20

C 107.14 x 15 90 x 15

A 20,000 21,429 21,000 18,900

B 4,000 4,289 4,800 6,000

C 1,500 1,607 1,350 1,350

` 25,500 ` 27,325 ` 27,150 ` 26,250

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 52
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

RSQ for
A = 400/700 x 750 = 428.67 units
B = 200/700 x 750 = 214.29 units
C = 100/700 x 750 = 107.14 units
1. SQSP = Standard Cost of Standard Material = ` 25,500
2. RSQSP= Revised Standard Cost of Material = ` 27,325
3. AQSP= Standard Cost of Actual Material = ` 27,150
4. AQAP= Actual Cost of Material = ` 26,250
a. Material Yield Variance (1-2) = ` 1,825 (A)
b. Material Mix Variance (2-3) = ` 175 (F)
c. Material Usage Variance (1-3) = ` 1,650 (A)
d. Material Price Variance (3-4) = ` 900 (F)
e. Material Cost Variance (1-4) = ` 750 (A)
Calculation of Labour Variances:

(1) (2) (3) (4)

SRSH (`) SRRSH (`) SRAH (`) ARAH (`)

Men 2 x 107.14 2 x 120

Women 1.50 x 214.28 1.50 x 240

Men 200 214.28 240 300

Women 300 321.42 360 384

` 500 ` 536 ` 600 ` 684

RSH for
Men = 100/700 x 750 = 107.14 units.
Women = 200/700 x 750 = 214.28 units.
1. SRSH = Standard Cost of Standard Labour = ` 500
2. SRRSH = Revised Standard Cost of Labour = ` 536
3. SRAH = Standard Cost of Actual Labour = ` 600
4. ARAH = Actual Cost of Labour = ` 684
a. Labour Yield Variance (1-2) = ` 36 (A)
b. Labour Mix Variance (2-3) = ` 64 (A)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 53
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

c. Labour Efficiency Variance (1-3) = ` 100 (A)

d. Labour Rate Variance (3-4) = ` 84 (A)
e. Labour Cost Variance (1-4) = ` 184 (A)

Q. 24. ABC Ltd adopts a Standard Costing System. The standard output for a period is 20,000 units
and the standard cost and profit per unit is as under:

Particulars `

Direct Material (3 units @ `1.50) 4.50

Direct Labour (3 hrs. @ `1.00 ) 3.00

Direct Expenses 0.50

Factory Overheads : Variable 0.25

Fixed 0.30

Administration Overheads 0.30

Total Cost 8.85

Profit 1.15

Selling Price (Fixed by Government) 10.00

The actual production and sales for a period was 14,400 units. There has been no price revision
by the Government during the period.
The following are the variances worked out at the end of the period:

Favourable Adverse
(`) ( `)

Direct Material

Price 4,250

Usage 1,050

Direct labour

Rate 4,000

Efficiency 3,200

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 54
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Factory
Overheads

Variable – Expenditure 400

Fixed – Expenditure 400

Fixed – Volume 1,680

Administration
Overheads

Expenditure 400

Volume 1,680

You are required to:

Ascertain the details of actual costs and prepare a Profit and Loss Statement for the period
showing the actual Profit/Loss. Show working clearly.
Reconcile the Actual Profit with Standard Profit.
Answer 24.
Statement showing the Actual Profit and Loss Statement

Particulars Amount Amount

` `

Standard Material Cost (14,400 x 4.50) 64,800

Add: Price Variance 4,250

Less: Usage Variance (1,050) 68,000

Standard Labour Cost (14,400 x 3) 43,200

Add: Rate Variance 4,000

Less: Efficiency Variance (3,200) 44,000

Direct Expenses (14,400 x 0.50) 7,200

Prime Cost 1,19,200

Factory Overhead:

Variable (14,400 x 0.25) 3,600

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 55
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Less: Expenditure Variance (400) 3,200

Fixed (14,400 x 0.30) 4,320

Add: Volume Variance 1,680

Less: Expenditure Variance (400) 5,600

Administration Overhead (14,400 x 0.3) 4,320

Add: Volume Variance 1,680

Add: Exp. Variance 400 6,400

Total Cost 1,34,400

Profit (B/F) 9,600

Sales 1,44,000

Statement showing Reconciliation of Standard Profit with Actual Profit

Particulars ` `

Standard Profit (14,400 x 1.15) 16,560

Add: Material Usage Variance 1,050

Labour efficiency Variance 3,200

Variable Overhead Expenditure Variance 400

Fixed Overhead Expenditure Variance 400 5,050

21,610

Less: Material Price Variance 4,250

Labour Rate Variance 4,000

Fixed Overhead Volume Variance 1,680

Administration Expenditure Variance 400

Administration Volume Variance 1,680 12,010

Actual Profit 9,600

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 56
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 25. You have been appointed as Management Accountant of S.M. Ltd. Given below is the
Company’s operating profit and loss Statement for the month of April, 2012.

Particulars Standard and Actual

Variances

` `

Budgeted Sales: 90,000

Variances due to : (i) Volume of Orders 5,000

(ii) Selling prices 2,000 97,000

Budgeted Profit 19,000

Profit Variance due to : (i) Sales Volume 1,200

(ii) Selling Price 2,000 22,200

Production Cost Variances:

Materials:

Price 750

Usage (300) 450

Labour:

Rate (1,250)

Efficiency (500) (1,750)

Overheads Expenditure: Fixed 500

Variable (1,250)

Efficiency 1,000

Capacity 500 750

Operating Profit 21,650

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 57
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

The Costing Department provides you with the following information about sales and costs for the
month of May, 2012.

Standard Cost Budgeted Sales Actual Sales

per unit (`)
Product Number of Units Sales Value ( `) Number of Units Sales Value ( `)

A 31 1,250 50,000 1,400 54,000

B 25 1,000 30,000 950 27,500

C 15 750 15,000 900 17,500

Materials: `

Standard Cost of materials actually used 26,150

Standard Cost of materials allowed 26,650

Actual Cost of materials used 27,150

Labour:

Standard Labour Cost per hour ` 0.90

Actual Clocked Hours 22,000

Actual Labour Cost ` 21,300

Budgeted Hours (hours) 20,000

Standard Hours produced (hours) 22,500

Overheads:
Budgeted rates of overheads recovery per direct labour hour:
Variable ` 1.00 Fixed ` 0.50
Actual Overhead Costs.
Variable ` 21,500 Fixed ` 12,000
Prepare an Operating Profit and Loss Statement for May, 2012 in the same form as for April, 2012.
Answer 25.

AQAP (1) (`) AQSP (2) (`) SQSP (3) (`)

A 54,000 56,000 50,000

B 27,500 28,500 30,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 58
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

C 17,500 18,000 15,000

`99,000 `1,02,500 `95,000

1. AQAP = Actual Sales = ` 99,000

2. AQSP = Actual Quality of Sales = `1,02,500
3. SQSP = Standard or Budgeted Sales = ` 95,000
a. Sales Volume Variance = 2 – 3 = ` 7,500 (F)
b. Sales Price Variance = 1 – 2 = ` 3,500 (A)

AQAR (1) (`) AQSR (2) (`) SQSR (3) (`)

A 1,400 × 7.5714 1,400 × 9 1,250 × 9

B 950 × 3.9473 950 × 5 1,000 × 5

C 900 × 4.4444 900 × 5 750 × 5

A 10,600 12,600 11,250

B 3,750 4,750 5,000

C 4,000 4,500 3,750

`18,350 `21,850 `20,000

SR = Standard Selling Price – Standard Cost per unit

AR = Actual Selling Price – Standard Cost per unit
SR: A = 9; B = 5; and C = 5
AR:
A = (54000/1400) – 31= ` 7.5714
B = (27500/950) – 25= `3.9473
B = (17500/900) – 15= `4.4444
1. AQAR = Actual Profit = ` 18,350
2. AQSR = Actual Sales at Standard Rate of Profit = ` 21,850
3. SQSR = Budgeted Profit = ` 20,000
a. Profit Variance Due to Sales Volume = 2 – 3 = ` 1,850 (F)
b. Profit Variance due to Selling Price = 1 – 2 = `3,500 (A)
c. Total Profit Variance = 1 – 3 = ` 1,650 (A)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 59
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Material Variance:

SQSP (1) (`) AQSP (2) (`) AQAP (3) (`)

26,650 26,150 27,150

1. SQSP = Standard Cost of Standard Material = ` 26,650

2. AQSP = Standard Cost of Actual material = ` 26,150
3. AQAP = Actual Cost of Material = ` 27,150
a. Material Usage Variance = 1 – 2 = ` 500 (F)
b. Material Price Variance = 2 – 3 = ` 1,000 (A)
Labour Variances:

SRSH (1) (`) SRAH (2) (`) ARAH (3) (`)

0.9 × 22,500 0.9 × 22,000

20,250 19,800 21,300

1. SRSH = Standard Cost of Standard Labour = ` 20,250

2. SRAH = Standard Cost of Actual Labour = ` 19,800
3. ARAH = Actual Cost of Labour = ` 21,300
a. Labour Efficiency Variance = 1 – 2 = ` 450 (F)
b. Labour Rate Variance = 2 – 3 = ` 1,500 (A)
Variable Overhead Variances:

SRSH (1) (`) SRAH (2) (`) ARAH (3) (`)

1 × 22,500 1 × 22,000

` 22,500 ` 22,000 ` 21,500

1. SRSH = Standard Cost Standard Variable Overheads = ` 22,500

2. SRAH= Standard Cost of Actual Variable Overheads = ` 22,000
3. ARAH = Actual Variable Overheads = ` 21,500
a. Variable Overheads Efficiency Variance = 1 – 2 = ` 500 (F)
b. Variable Overheads Expenditure Variance = 2 – 3 = ` 500 (A)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 60
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Fixed Overhead Variances:

(1) SRSH (`) (2) SRAH (`) (3) SRBH (`) (4) ARAH (`)

0.5 × 22,500 0.5 × 22,000 0.5 × 20,000

`11,250 `11,000 `10,000 `12,000

1. SRSH = Standard Cost of Standard Fixed Overheads = ` 11,250

2. SRAH = Standard Cost of Actual Fixed Overheads = ` 11,000
3. SRBH = Budgeted Fixed Overheads = ` 10,000
4. ARSH = Actual Fixed Overheads = ` 12,000
a. Fixed Overheads Efficiency Variance = 1 – 2 = ` 250 (F)
b. Fixed Overheads Capacity Variance = 2 – 3 = ` 1,000 (F)
c. Fixed Overheads Expenditure Variance = 3 – 4 = ` 2,000 (A)
Operating Profit and Loss Statement for the month of May, 2012:

Standard Actual
Variances Variances

` `

Budgeted Sales 95,000

Variances due to Volume 7,500

Variances due to Selling Prices (3,500) 99,000

Budgeted Profit 20,000

Variance due to Sales Volume 1,850

Variance due to Selling prices (3,500) 18,350

Production Cost Variances:

Material usage 500

Material Price (1,000) (500)

Labour efficiency 450

Labour Rate (1,500) (1,050)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 61
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Overheads:

Expenditure: Variable (500)

Fixed (2,000)

Efficiency (Variable and Fixed) 750

Capacity 1,000 (750)

Operating Profit 16,050

Q. 26. The share of total production and the cost-based fair price computed separately for each
of the four units in industry are as follows:

` per unit

Share of Production 40% 25% 20% 15%

Material Costs 150 180 170 190

Direct Labour 100 120 140 160

Depreciation 300 200 160 100

Other Overheads 300 300 280 240

850 800 750 690

20% return on capital employed 630 430 350 230

Fair Price 1,480 1,230 1,100 920

Capital employed per unit is worked out as follows:

Net Fixed Assets 3,000 2,000 1,600 1,000

Working Capital 140 150 150 150

Total 3,140 2,150 1,750 1,150

Indicate with reasons, what should be the Uniform Price fixed for the product.
Answer 26.
Computation of Uniform Price :
Weighted Average Cost= [850 x 40%] + [800 x 25%] + [750 x 20%] + [690 x 15%]
= 340 + 200 + 150 + 103.5
= ` 793.5
Weighted Average Return on Capital Employed (profit)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 62
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

= [630 x 40%] + [430 x 25%] + [350 x 20%] + [230 x 15%]

= 252 + 107.5 + 70 + 34.5
= `464
Uniform Price = 793.5 + 464 = ` 1,257.5

Q. 27. Purchase of Materials `5,00,000 (inclusive of Trade Discount `8,000); Import Duty paid
`45,000; Freight inward `62,000 ; Insurance paid for import by air ` 28,000; Rebates allowed
`10,000; Cash discount `3,000; CENVAT Credit refundable `7,000; Abnormal Loss of Materials
`14,000; Price variation due to computation of cost under standard rates `1,500. Compute the
landed cost of material.
Answer 27.
Computation of Landed Cost of Material

Particulars Amount (`)

Purchase price of Material 5,00,000

Add Import Duties of purchasing the material 45,000

Add Freight Inward during the procurement of material 62,000

Add Price Variation due to computation of cost under standard rates 1,500

Total 6,08,500

Less Trade Discount 8,000

Less Abnormal Loss of materials 14,000

Less Rebates 10,000

Value of Receipt of Material 5,76,500

Note:
(i) Normal loss is not deducted
(ii) Price variation is allowable inclusion as the cost was maintained on standard cost.

Q. 28. a) Gross pay `10,30,000 (including cost of idle time hours paid to employee `25,000);
Accommodation provided to employee free of cost [this accommodation is owned by
employer, depreciation of accommodation `1,00,000, maintenance charges of the
accommodation `90,000, municipal tax paid for this accommodation `3,000], Employer’s
Contribution to P.F. `1,00,000 (including a penalty of `2,000 for violation of PF rules), Employee’s
Contribution to P.F. `75,000. Compute the Employee cost.

b) A research project, to date, has cost a company ` 2,50000 and is under review. It is
anticipated that, should the project be allowed to proceed, it will be completed in about one
year and can be sold for ` 4,00,000. The following additional information is available -

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 63
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

(i) Materials have just been received for ` 60,000. These are extremely toxic, and if not used
in the project, have to be disposed of by special means at ` 15,000.
(ii) Labour : ` 75,000. The men are highly skilled. If they are released from the Research
Project, they may be transferred to the Works Department of the company and consequently the
sales could increase by ` 1,50,000. The Accountant estimates that the prime cost of those sales
would be ` 1,00,000 and the overhead absorbed (All fixed) would amount to ` 25,000.
(iii) Research staff : ` 1,60,000. A decision has already been taken that this will be the last
major piece of research undertaken and consequently, when work on the project ceases, the
staff involved will be made redundant. Redundancy and Severance Pay have been estimated at
` 25,000.
(iv) Share of General Building Expenses: ` 35,000. The Managing Director is not sure what is
included in this amount, but the accounts staff charge similar amounts each year to each
department.
You are required to advise whether the project should be allowed to proceed and explain the
reasons for the treatment of each of the amounts above in your analysis.

Answer 28.
a) Computation of Employee Cost
Particulars Amount
(`)

Gross Pay ( net of cost of idle time) =[10,30,000 (-) 25,000] 9,95,000

Add Cost of accommodation provided by employer 1,93,000

= Depreciation (+) Municipal Tax paid (+) maintenance charges = 1,00,000
+ 90,000 + 3,000 = 1,93,000

Add Employer’s Contribution to PF excluding penalty paid to PF authorities [ = 98,000

1,00,000 (-) 2,000]

Employee Cost 12,86,000

Note:
(i) Assumed that the entire accommodation is exclusively used by the employee. Hence, cost
of accommodation provided includes all related expenses/costs, since these are
identifiable/traceable to the cost centre.
(ii) Cost of idle time hours is an excludible item. Since it is already included in the gross pay,
hence excluded.
(iii) Penalty paid to PF authorities is not a normal cost. Since, it is included in the amount of
contribution, it is excluded.

b) Effect of Continuing the Project

Particulars Nature and Computation `
Cost incurred till date Historical and irrelevant Nil
Materials Already purchased. Hence historical and irrelevant Nil
Disposal cost Not incurred if project is continued. Hence opportunity (15,000)
gain, relevant
Labour Has alternative use. Hence variable cost + opportunity 1,25,000
cost is relevant
Variable cost = 75,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 64
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Opportunity cost = Contribution lost on sales = 1,50,000 –

1,00,000 = 50,000
(Note : Absorbed FOH is not relevant in determining
opportunity cost)
Research staff Variable cost. Hence relevant 1,60,000
Redundancy & Committed cost. Hence irrelevant Nil
Severance pay
Share of general OH Apportionment. Hence irrelevant Nil
Total additional cost 2,70,000
Additional revenue from the project 4,00,000
Net benefit from continuing the project 1,30,000
Project may be continued since there is net benefit of ` 1,30,000.

Q. 29. The New Enterprises Ltd. has three producing departments A,B and C two service
Departments D and E. The following figures are extracted from the records of the Co.
`
Rent and Rates 5,000
General Lighting 600
Indirect Wages 1,500
Power 1,500
Depreciation on Machinery 10,000
Sundries 10,000
The following further details are available:
A B C D E
Floor Space (Sq.Mts.) 2,000 2,500 3,000 2,000 500
Light Points 10 15 20 10 5
Direct Wages 3,000 2,000 3,000 1,500 500
H.P. of machines 60 30 50 10 --
Working hours 6,226 4,028 4,066 -- --
Value of Material 60,000 80,000 1,00,000 -- --
Value of Assets 1,20,000 1,60,000 2,00,000 10,000 10,000
The expenses of D and E are allocated as follows:
A B C D E
D 20% 30% 40% -- 10%
E 40% 20% 30% 10% --
What is the factory cost of an article if its raw material cost is `50, labour cost `30 and it passes
through Departments A, B and C. For 4, 5 & 3 hours respectively.

Answer 29.
Statement showing apportionment of overheads to departments
Particulars Basis Total (`) A (`) B (`) C (`) D (`) E (`)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 65
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Rent & Rates Space

(4:5:6:4:1) 5,000 1,000 1,250 1,500 1,000 250

Lighting Light Points

(2:3:4:2:1) 600 100 150 200 100 50

Indirect wages Direct wages

(6:4:6:3:1) 1,500 450 300 450 225 75

Power Horse Power

(6:3:5:1) 1,500 600 300 500 100 --

Depreciation Value of Asset

(12:16:20:1:1) 10,000 2,400 3,200 4,000 200 200

Sundries Direct wages

(6:4:6:3:1) 10,000 3,000 2,000 3,000 1,500 500

Wages Actual 2,000 -- -- -- 1,500 500

30,600 7,550 7,200 9,650 4,625 1,575

Repetitive Distribution Method `

Particulars A B C D E

Totals 7,550 7,200 9,650 4,625 1,575

Cost of D (2:3:4:1) 925 1,387 1,850 (4,625) 463

8,475 8,587 11,500 -- 2,038

Cost of E (4:2:3:1) 815 408 611 204 (2,038)

9,290 8,995 12,111 204 --

Cost of D (2:3:4:1) 41 61 82 (204) 20

9,331 9,056 12,193 -- 20

Cost of E (4:2:3:1) 8 4 6 2 (20)

9,339 9,060 12,199 2 --

Cost of D (2:3:4:1) -- 1 1 (2) --

9,339 9,061 12,200 -- --

Working Hours 6,226 4,028 4,066

Rate per hour 1.5 2.25 3.00

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 66
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Computation of Factory Cost of the Article `

Particulars Amount

Material 50.00
Labour 30.00
Overheads 6.00
Dept A (4 x 1.5) 11.25
Dept B (5 x 2.25) 9.00
Dept C (3 x 3)

Factory Cost 106.25

Simultaneous Equation Method

Let total cost of Service Department D be ` ‘d’.
Let total cost of Service Department E be ` ‘e’.
d = 4625 + 10/100 e
e = 1575 + 10/100 d
100 d = 462500 + 10 e
100 d – 10e = 462500 (1)
100 e = 157500 + 10 d
-10 d + 100 e = 157500 (2)
Equ. (1) 100 d – 10e = 462500
Equ. (2) x 10 - 100 d + 1000e = 1575000
990e = 2037500
e = 2037500 / 990
= 2,058
Substituting the value of ‘e’ in Equation (1), we get
100 d – 10 (2058) = 462500
d = 483080 / 100
d = 4831

Particulars A B C D E

Totals 7,550 7,200 9,650 4,625 1,575

Costs of D (2:3:4:1) (4831) 966 1,450 1,932 (4,831) 483

Costs of E (4:2:3:1) (2,058) 823 412 617 206 (2058)

9,339 9,062 12,199 -- --

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 67
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Q. 30. a) Pink Limited undertakes to supply 1000 units of a component per month for the months
of January, Feb. and March 20X1. Every month a batch order is opened against which materials
and labour cost are booked at actual. Overheads are levied at a rate per labour hour. The
selling price is contracted at `15 per unit.
From the following data, present the cost and profit per unit of each batch order and the overall
position of the order for the 3000 units.
Month Batch Material Cost ` Labour cost `
Output(Numbers) `
January 20X1 1250 6250 2500
February 20X1 1500 9000 3000
March 20X1 1000 5000 2000
Labour is paid at the rate of ` 2 per hour. The other details are:
Month Overheads total Labour Hours
January 20X1 `12000 4000
February 20X1 `9000 4500
March 20X1 `15000 5000

b) The Dynamic company has three divisions. Each of which makes a different product.
The budgeted data for the coming year are as follows:
A (`) B (`) C (`)
Sales 1,12,000 56,000 84,000
Direct Material 14,000 7,000 14,000
Direct Labour 5,600 7,000 22,400
Direct Expenses 14,000 7,000 28,000
Fixed Cost 28,000 14,000 28,000
61,600 35,000 93,400
The Management is considering to close down the division C’. There is no possibility of reducing
fixed cost. Advise whether or not division C’ should be closed down.
Answer 30.
a) Statement of Cost and profit per unit of each Batch
Particulars January February March Total
A. Batch output 1250 1500 1000 3750
(Number)

B. Sales Value ( A x ` `18,750 `22,500 `15,000 `56,250

15)
C. Material 6,250 9,000 5,000 20,250
Wages 2,500 3,000 2,000 7,500
Overheads 3,750 3,000 3,000 9,750

Total Cost 12,500 15,000 10,000 37,500

D. Profit per batch ( B-C) 6,250 7,500 5,000 18,750

E. Cost per Unite ( C/A) 10 10 10 10

F. Profit per Unit ( D/A) 5 5 5 5

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 68
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

Working Notes :
Jan. 20X1 Feb. 20X1 March 20X1
A. Labour Hours
(Labour Cost/ Labour `2500/2 ` 3000/2 ` 2000/2
Rate per hour = 1250 = 1500 = 1000

B. Overheads per hour ` 12000/4000 ` 9000/4 ` 15000/5000

(Total overheads/ Total Labour =`3 =`2 =`3
Hours)
C. Overheads for the batch (A x B) `3750 ` 3000 ` 3000

Particulars `

A. Sales Value ( 3000 units x `15) 45,000

B. Less: Total cost ( 3000 units x ` 10) 30,000

Profit (A- B)
15,000
b) Statement showing computation of profit before closing down of division C:

Sr. No. Particulars A B C Total

(`) (`) (`) (`)
I. Sales 1,12,000 56,000 84,000 2,52,000

II. Variable cost

Direct Material 14,000 7,000 14,000 35,000
Direct Labour 5,600 7,000 22,400 35,000
Direct expenses 14,000 7,000 28,000 49,000

III. Total Variable Cost 33,600 21,000 64,400 1,19,000

IV. Contribution (i - iii) 78,400 35,000 19,600 1,33,000

V. Fixed cost 70,000

VI. Profit (iv - v) 63,000

Statement showing computation of profit after closing ‘C’:

Sr. No. Particulars A B Total

(`) (`) (`)

I. Sales 1,12,000 56,000 1,68,000

II. Variable cost

Direct Material 14,000 7,000 21,000
Direct Labour 5,600 7,000 12,600
Direct expenses 14,000 7,000 21,000

III. Total Variable Cost 33,600 21,000 54,600

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 69
 Revisionary Test Paper_Intermediate_Syllabus 2008_June 2013

IV. Contribution (i - iii) 78,400 35,000 1,13,400

V. Fixed cost 70,000

VI. Profit (iv - v) 43,400

From the above computations, it was found that profit is decreased by ` 19,600 by closing down
division ‘C’, it should not be closed down. In other words, as long as if there is a contribution of `
1, from division ‘C’, it should not be closed down.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 70