Cost and Management Accounting CA R. K.

Mehta

Material Cost and Employee Cost

Time Allowed : 70 Minutes TEST – 2 (Solution) Total Marks: 40 Marks

Answer to Question no.1:

Centralized Purchasing and Decentralized Purchasing

1) CENTRALISED PURCHASING:-Centralized purchasing is the system where one common
purchasing department manages the purchasing function of all the departments of the
organization. Although this system enables the organization to place the order in large
quantities, it may slow down the procurement process.
2) ADVATAGES OF CENTRALISED PURCHASING:
a) Helps in availing quantity discount and cash discount. Hence, cost is reduced.
b) Prompt reporting of scrap, obsolete stock and storage losses.
3) DECENTRALISED PURCHASING:-Decentralized purchasing is a system where purchasing
of material is made by various departments independently as per their own
requirements. It helps to purchase the materials immediately in case of urgent needs.
4) ADVATAGES OF DECENTRALISED PURCHASING:-
a) Local supply sources are developed which reduces the transport cost.
b) Different departments are made accountable and responsible in relation to their
own purchase.
5) WHICH SYSTEM IS BEST? :-It is to be decided by the organization
keeping in mind the following factors:-
a) Nature and Quantity and quality of material to be purchased.
b) Location of purchase Function in business.

Answer to Question no.2:

Essentials of Goods Wages System
1) “Wage System” means the basis of giving financial remuneration to the workers on account of
time end efforts being invested or employed in relation to the production work or any other
work which is assigned by the employer to the employee.
2) Good wage system must have following two features:-
(a) It must increase the confidence level of the workers on account of attractive remuneration
and reduced labour turnover.
(b) It increases the productivity level of the workers which ultimately leads to increase in profit
earning capacity of the business organization.
3) Good wage system must also have following additional features:-
(a) It should be fair to both the employer as well as the employees.
(b) It should be easily understandable.
(c) It should provide more wages for efficient workers.
(d) It should encourage the inefficient workers for gaining the efficiency in the future.
(e) It should follow government rules & regulations.
4) Good wage system must be permanent, i.e., it must not change very often.

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 Cost and Management Accounting CA R. K. Mehta
Answer to Question no.3:
a) Re-order Quantity
Annual Usage (U) = 275 kgs./week × 52 weeks
= 14,300 kg
Cost per order (P) = ` 100
S & C Cost per kg. p.a.(S)= ` 10 × 20% = ` 2
2 UP
Re-order Quantity =
S
2  14,300  100
= = 1,196 kgs.
2
b) Re-order Level
= Maximum Usage Rate × Max. Lead Time
= 450 kgs./week × 8 weeks = 3,600kgs
c) Maximum Stock Level

Re-order Level + Re-order Quantity – (Minimum Usage Rate) (Minimum Lead Time)
= 3,600kgs. +1,196 kg.- (100kgs./week) (4 weeks)
= 4396 kgs.
d) Minimum stock
= Re-order Level – (Average Usage Rate) (Average Lead Time)
= 3,600kgs.- (275kgs./week) (6weeks)
= 3,600kgs. - 1,650 kgs. = 1,950 kgs.
e) Average Stock Level
1
= Minimum Stock + (Re-order Quantity)
2
1
= 1950 kgs. + (1,196 kgs.) = 2,548 kgs.
2

Answer to Question no.4:

Statement Showing Labour Cost
Worker Time Taken Total Wages Efficiency wage Rate/hr.
A 15 hours 15 hrs.@ ` 2.5 = ` 37.5 ` 2.5
B 12 hours ` 30 plus 10% = ` 33 ` 2.75
C 10 hours ` 30 plus 10 % = ` 33 ` 3.30
D 8 hours ` 30 plus 10% = ` 33 ` 4.125
Straight piece-rate = Wage Cost of 12 hours
= 12 hrs. @ ` 2.5 = ` 30
Statement Showing Conversion Cost Per Piece:-
Worker Labour Cost Per Piece Overheads Per Piece Conversion Cost Per Piece
A ` 37.50 15 hrs.@ ` 5 = ` 75 ` 112.50
B ` 33 12 hrs. ` 5 = ` 60 ` 93
C ` 33 10 hrs. @ ` 5 = ` 50 ` 83
D ` 33 8 hrs. @ ` 5 = ` 40 ` 73

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 Cost and Management Accounting CA R. K. Mehta
Answer to Question no.5:
(i) (1)Inventory turnover ratio (Raw material)
Raw material consumed ` 4, 05, 00, 000
= = = 18 times
Average stock of Raw material ` 22, 50, 000
Opening stock + closing stock Nil + 45,00,000
Average stock of raw material = = == ` 22,50,000
2 2
(2)Inventory turnover ratio (Finished goods)
Cost of sales ` 4, 05, 00, 000
= = = 3.75 times.
Average stock of finished goods ` 1, 08, 00, 000
Opening stock + closing stock Nil + 2,16,00,000
Average stock of finished goods = = = ` 1,08,00,000
2 2
Input consumed 1,80, 000 units
(3)Input-Output ratio = × 100 = = 100 = 112.5%
Output obtained 1,60, 000 units
` 4, 05, 00, 000
Input consumed (in quantity) = = 1,80,000 units
` 225 p.u
 Orders held up due to stock shortage 
(4)Stock-out ratio =   × 100
 Total orders received 
12, 000 units
= × 100 = 10%
(1, 00, 000 + 12, 000 + 8, 000) units
Explanation:- During the year, the company has received order of 1,20,000 units and out of which, the order of
12,000 units could not be fulfilled due to stock shortage. Hence, the company fails to fulfill 10% of total ordered quantity.
(ii) Comments:-
(1) Raw material turnover ratio (18 times) is maintained at high level which means that the consumption of raw material is
at fast speed and stock of raw material is held for short period. This situation is favorable to the organization.
(2) Finished goods turnover ratio (3.75 times) is maintained at low level which means that sale of finished goods is at slow
speed and stock of finished goods is held for long period. This situation is unfavorable to the organization.
(3) Input output ratio of 112.5% means that 12.5% of total input is wasted in manufacturing procedure.
(4) Stock-out ratio indicates that the organization lacks internal control system in context of stock management.
Answer to Question no.6:
Statement showing the Profit foregone last year due to labour turnover
Particulars ` ` `
(A) Avoidable Expenses
Settlement Cost 43,820
Recruitment Cost 26,740
Selection Cost 12,750
Training Cost 30,490 1,13,800
(B) Additional Possible Profit
Additional Possible Sales 22,20,650
(-) Variable Cost (80% of Sales) 17,76,520 4,44,130 5,57,930
Computation of Additional Possible Sales
Actual Sales = ` 83,03,300
Total labour hours = 4,45,000hours
(-) Unproductive training(½× 30,000 hrs) = 15,000 hours
Productive time = 4,30,000hours
As a result of labour turnover, following productive time is lost:
Unproductive training time = 15,000 hrs.
Delayed replacement = 1,00,000 hrs. 1,15,000hrs.
Hence, the amount of additional sales that could have been achieved had there been no labour turnover is
(` 83,03,300× 4,30,000 hrs) × 1,15,000 hrs= ` 22,20,650

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