Cost Sheet

CA Amit Sharma

1 Cost Sheet
CHAPTER

Q.1 Calculation of Cost Sheet PY Nov 18

Following details are provided by M/s ZIA Private Limited for the quarter ending 30 September, 2018:
(i) Direct expenses ` 1,80,000
(ii) Direct wages being 175% of factory overheads ` 2,57,250
(iii) Cost of goods sold ` 18,75,000
(iv) Selling & distribution overheads ` 60,000
(v) Sales ` 22,10,000
(vi) Administration overheads are 10% of factory overheads

Stock details as per Stock Register:

Particulars 30.06.2018 30.09.2018
` `
Raw material 2,45,600 2,08,000
Work-in-progress 1,70,800 1,90,000
Finished goods 3,10,000 2,75,000
You are required to prepare a cost sheet showing:
(i) Raw material consumed
(ii) Prime cost
(iii) Factory cost
(iv) Cost of goods sold
(v) Cost of sales and profit

Ans. Cost Sheet

(for the quarter ending 30 September 2018)

Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,22,650*
Less: Closing stock of raw materials (2,08,000)
Raw materials consumed 12,60,250
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 16,97,500
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,44,500
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost 18,25,300
Add: Administration overheads (10% of factory overheads) 14,700
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000

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Add: Selling & distribution overheads 60,000

Cost of sales 19,35,000
(v) Net Profit 2,75,000
Sales 22,10,000

*(18,75,000 + 2,75,000 – 3,10,000 – (1,47,000 × 10%) + 1,90,000 –1,70,800 – (2,57,250

× 100/175%) - 1,80,000 – 2,57,250 + 2,08,000 – 2,45,600) = 12,22,650
Working notes
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 2,57,250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock of finished
goods – Administrative overheads
Net Profit = Sales - Cost of sales
Alternative solution
Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,37,350*
Less: Closing stock of raw materials (2,08,000)
Raw Material consumed 12,74,950
Add: Direct wages (1,47,000×175% 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 17,12,,200
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,59,200
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost/works cost/cost of production 18,40,000
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Administration overheads (10% of factory overheads) 14,700
Add: Selling & distribution overheads 60,000
Cost of sales 19,49,700
(v) Net Profit 2,60,300
Sales 22,10,000

*(18,75,000 + 2,75,000 – 3,10,000 + 1,90,000 –1,70,800 – 1,47,500 - 1,80,000 –

2,57,250 + 2,08,000 – 2,45,600) = 12,37,350

Working notes
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses Factory Overheads = 257250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock of finished
goods
Net Profit = Sales - Cost of sales

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Q.2 Calculation of Cost Sheet PY Nov 19

XYZ a manufacturing firm, has revealed following information for September ,2019:
1st September 30th September
(`) (`)
Raw Materials 2,42,000 2,92,000
Works-in-progress 2,00,000 5,00,000

The firm incurred following expenses for a targeted production of 1,00,000 units during the month :
(`)
Consumable Stores and spares of factory 3,50,000
Research and development cost for process improvements 2,50,000
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent of production asset 2,00,000
Administrative Expenses (General) 2,24,000
Selling and distribution Expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5000 units

Defective output which is 4% of targeted production, realizes ` 61 per unit. Closing stock is valued at cost of
production (excluding administrative expenses) Cost of goods sold, excluding administrative expenses amounts to
` 78,26,000. Direct employees cost is 1/2 of the cost of material consumed.
Selling price of the output is ` 110 per unit. You are required to :
(i) Calculate the Value of material purchased
(ii) Prepare cost sheet showing the profit earned by the firm.

Ans. Workings:
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4%×1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000
2. Calculation of Cost of Production
Particular Amount (`)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods 4,30,000
 78,26,000 
 x 5,000 units 
 91,000 units 
Cost of Production 82,56,000

3. Calculation of Factory Cost

Particular Amount (`)
Cost of Production 82,56,000
Less: Quality Control Cost (2,00,000)
Less: Research and Development Cost (2,50,000)
Add: Credit for Recoveries/Scrap/By-Products/misc. income (1,00,000 units × 2,44,000
4% × ` 61)
Factory Cost 80,50,000

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4. Calculation of Gross Factory Cost

Particular Amount (`)
Cost of Factory Cost 80,50,000
Less: Opening Work in Process (2,00,000)
Add: Closing Work in Process 5,00,000
Cost of Gross Factory Cost 83,50,000

5. Calculation of Prime Cost

Particular Amount (`)
Cost of Gross Factory Cost 83,50,000
Less: Consumable stores & spares (3,50,000)
Less: Lease rental of production assets (2,00,000)
Prime Cost 78,00,000

6. Calculation of Cost of Materials Consumed & Labour cost

Let Cost of Material Consumed = M and Labour cost = 0.5M
Prime Cost = Cost of Material Consumed + Labour Cost 78,00,000 = M + 0.5M
M = 52,00,000
Therefore, Cost of Material Consumed = ` 52,00,000 and Labour Cost = ` 26,00,000

(i) Calculation of Value of Materials Purchased

Particular Amount (`)

Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000

Cost Sheet
Sl. Particulars Total Cost
(`)
1. Direct materials consumed:
Opening Stock of Raw Material 2,42,000
Add: Additions/ Purchases [balancing figure as perrequirement 52,50,000
(i)]
Less: Closing stock of Raw Material (2,92,000)
Material Consumed 52,00,000
2. Direct employee (labour) cost 26,00,000
3. Prime Cost (1+2) 78,00,000
4. Add: Works/ Factory Overheads Consumable stores and spares
Lease rent of production asset 3,50,000
2,00,000
5. Gross Works Cost (3+4) 83,50,000
6. Add: Opening Work in Process 2,00,000
7. Less: Closing Work in Process (5,00,000)
8. Works/ Factory Cost (5+6-7) 80,50,000
9. Add: Quality Control Cost 2,00,000
10. Add: Research and Development Cost 2,50,000
11. Less: Credit for Recoveries/Scrap/By-Products/misc. income (2,44,000)
12. Cost of Production (8+9+10-11) 82,56,000
13. Add: Opening stock of finished goods -

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14. Less: Closing stock of finished goods (5000 Units) (4,30,000)

15. Cost of Goods Sold (12+13-14) 78,26,000
16. Add: Administrative Overheads (General) 2,24,000
17. Add: Secondary packing 1,82,000
18. Add: Selling Overheads& Distribution Overheads 4,13,000
19. Cost of Sales (15+16+17+18) 86,45,000
20. Profit 13,65,000
21. Sales 91,000 units ` 110 per unit 1,00,10,000

Q.3 Calculation of Cost Sheet PY Nov 20

X Ltd. manufactures two types of pens 'Super Pen' and 'Normal Pen'.
The cost data for the year ended 30th September, 2019 is as follows:

(`)
Direct Materials 8,00,000
Direct Wages 4,48,000
Production Overhead 1,92,000
Total 14,40,000

It is further ascertained that :

(1) Direct materials cost in Super Pen was twice as much of direct material in Normal Pen.
(2) Direct wages for Normal Pen were 60% of those for Super Pen.
(3) Production overhead per unit was at same rate for both the types.
(4) Administration overhead was 200% of direct labour for each.
(5) Selling cost was ` 1 per Super pen.
(6) Production and sales during the year were as follow

Production Sales
No. of units No. of units
Super Pen 40,000 Super Pen 36,000
Normal Pen 1,20,000

(7) Selling price was ` 30 per unit for Super Pen.

Prepare a Cost Sheet for 'Super Pen' showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit

Ans. Preparation of Cost Sheet for Super Pen

No. of units produced = 40,000 units
No. of units sold = 36,000 units
Particulars Per unit (`) Total (`)
Direct materials (Working note- (i)) 8.00 3,20,000
Direct wages (Working note- (ii)) 4.00 1,60,000
Prime cost 12.00 4,80,000
Production overhead (Working note- (iii)) 1.20 48,000
Factory Cost 13.20 5,28,000
Administration Overhead* (200% of direct wages) 8.00 3,20,000
Cost of production 21.20 8,48,000
Less: Closing stock (40,000 units – 36,000 units) - (84,800)
Cost of goods sold i.e. 36,000 units 21.20 7,63,200

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Selling cost 1.00 36,000

Cost of sales/ Total cost 22.20 7,99,200
Profit 7.80 2,80,800
Sales value (` 30 × 36,000 units) 30.00 10,80,000

Working Notes:
(i) Direct material cost per unit of Normal pen = M
Direct material cost per unit of Super pen = 2M
Total Direct Material cost = 2M × 40,000 units + M × 1,20,000 units
Or, ` 8,00,000 = 80,000 M + 1,20,000 M
8,00,000
Or, M = =`4
2,00,000
Therefore, Direct material Cost per unit of Super pen = 2 × ` 4 = ` 8
(ii) Direct wages per unit for Super pen =W
Direct wages per unit for Normal Pen = 0.6W
So, (W x 40,000) + (0.6W x 1,20,000) = ` 4,48,000
W = ` 4 per unit
1,92,000
(iii) Production overhead per unit = = ` 1.20
(40,000 + 1,20,000)
Production overhead for Super pen = ` 1.20 × 40,000 units = ` 48,000
* Administration overhead is specific to the product as it is directly related to direct labour as mentioned in the
question and hence to be considered in cost of production only.
Assumption: It is assumed that in point (1) and (2) of the Question, direct materials cost and direct wages
respectively is related to per unit only.
Note: Direct Material and Direct wages can be calculated in alternative ways.

Calculation of Cost Sheet PY Jan 21

Q.4
XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70% capacity on per annum
basis. Company is in the process of determining sales price for the financial year 2020-21. It has provided the
following information:
Direct Material ` 60 per unit Direct Labour ` 30 per unit Indirect Overheads:
Fixed ` 65,50,000 per annum
Variable ` 15 per unit
Semi-variable ` 5,00,000 per annum up to 60% capacity and ` 50,000 for every 5% increase in capacity or part
thereof up to 80% capacity and thereafter ` 75,000 for every 10% increase in capacity or part
thereof.
Company desires to earn a profit of ` 25,00,000 for the year. Company has planned that the factory will operate
at 50% of capacity for first six months of the year and at 75% of capacity for further three months and for the
balance three months, factory will operate at full capacity.
You are required to :
(1) Determine the average selling price at which each of the toy should be sold to earn the desired profit.
(2) Given the above scenario, advise whether company should accept an offer to sell each Toy at:
(a) ` 130 per Toy
(b) ` 129 per Toy

Ans. (1) Statement of Cost

For first 6 For further 3 For remaining 3 Total
months months months

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6,00,000 x 6,00,000 x 3/12 6,00,000 x 4,12,500

6/12 x 50% = x 75% = 3/12 = units
1,50,000 1,12,500 units 1,50,000 units
units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable 22,50,000 16,87,500 22,50,000 61,87,500
Expenses
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000
Indirect Semi-variable
expenses
- For first six months @ 2,50,000
5,00,000 per annum
- For further three months 1,62,500
@ 6,50,000* per annum
- For further three months 2,12,500 6,25,000
@ 8,50,000** per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45

* ` 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ` 6,50,000

** ` 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%) × 75,000] = ` 8,50,000
(2) (a) Company Should accept the offer as it is above its targeted sales price of ` 128.45 per toy.
(b) Company Should accept the offer as it is above its targeted sales price of ` 128.45 per toy.

Q.5 Calculation of Cost Sheet PY Dec 21

G Ltd. manufactures leather bags for office and school purposes.

The following information is related with the production of leather bags for the month of September, 2021.
(1) Leather sheets and cotton clothes are the main inputs and the estimated requirement per bag is two metres
of leather sheets and one metre of cott on cloth. 2,000 metre of leather sheets and 1,000 metre of cotton
cloths are purchased at ` 3,20,000 and ` 15,000 respectively. Freight paid on purchases is ` 8,500.
(2) Stitching and finishing need 2,000 man hours at ` 80 per hour.
(3) Other direct costs of ` 10 per labour hour is incurred.
(4) G Ltd. have 4 machines at a total cost of ` 22,00,000. Machines have a life of 10 years with a scrap value
of 10% of the original cost. Depreciation is charged on a straight-line method.
(5) The monthly cost of administration and sales office staffs are ` 45,000 and ` 72,000 respectively. G Ltd.
pays ` 1,20,000 per month as rent for a 2,400 sq. feet factory premises. The administrative and sales
office occupies 240 sq. feet and 200 sq. feet respectively of factory space.
(6) Freight paid on delivery of finished bags is ` 18,000.
(7) During the month, 35 kgs of scrap (cuttings of leather and cotton) are sold at ` 150 per kg.
(8) There are no opening and closing stocks of input materials. There is a finished stock of 100 bags in stock
at the end of the month.
You are required to prepare a cost sheet in respect of above for the month of September 2021 showing:
(i) Cost of Raw Material Consumed
(ii) Prime Cost

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(iii) Works/Factory Cost

(iv) Cost of Production
(v) Cost of Goods Sold
(vi) Cost of Sales
Ans. No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2021
Particulars Total Cost Cost per unit
(`) (`)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
(i) Cost of material consumed 3,43,500 343.50
2. Direct wages (`80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (`10 × 2,000 hours) 20,000 20.00
4. (ii) Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines 16,500 16.50
{(` 22,00,000 × 90%) ÷ 120 months}
Apportioned cost of factory rent 98,000 98.00
6. (iii) Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25)
8. (iv) Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × `632.75) (63,275)
11. (v) Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 50.00
- Apportioned rent for administrative office 12,000 13.33
13. Add: Selling and Distribution Overheads
- Staff salary 72,000 80.00
- Apportioned rent for sales office 10,000 11.11
- Freight paid on delivery of bags 18,000 20.00
14. (vi) Cost of Sales 7,26,475 807.19

Apportionment of Factory rent:

To factory building {(` 1,20,000 ÷ 2400 sq. feet) × 1,960 sq. feet} = ` 98,000 To administrative office {(` 1,20,000
÷ 2400 sq. feet) × 240 sq. feet} = ` 12,000 To sale office {(` 1,20,000 ÷ 2400 sq. feet) × 200 sq. feet} = ` 10,000

Q.6 Calculation of Cost Sheet MTP Nov 20

Aloe Ltd. has the capacity to produce 2,00,000 units of a product every month. Its works cost at varying levels
of production is as under:
Level Works cost per unit (`)
10% 400
20% 390
30% 380
40% 370
50% 360
60% 350

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70% 340
80% 330
90% 320
100% 310

Its fixed administration expenses amount to ` 3,60,000 and fixed marketing expenses amount to ` 4,80,000
per month respectively. The variable distribution cost amounts to ` 30 per unit.
It can sell 100% of its output at ` 500 per unit provided it incurs the following further expenditure:
(i) It gives gift items costing ` 30 per unit of sale;
(ii) It has lucky draws every month giving the first prize of ` 60,000; 2nd prize of ` 50,000, 3rd prize of `
40,000 and ten consolation prizes of ` 5,000 each to customers buying the product.
(iii) It spends ` 2,00,000 on refreshments served every month to its customers;
(iv) It sponsors a television programme every week at a cost of ` 20,00,000 per month.

It can market 50% of its output at ` 560 by incurring expenses referred from (ii) to (iv) above and 30% of its
output at ` 600 per unit without incurring any of the expenses referred from ( i) to (iv) above.
PREPARE a cost sheet for the month showing total cost and profit at 30%, 50% and 100% capacity level &
COMPARE its profit.

Ans. Cost Sheet (For the month)

Level of Capacity 30% 50% 100%
60,000 units 1,00,000 units 2,00,000 units
Per unit Total (`) Per unit (`) Total (`) Per unit Total (`)
(`) (`)
Works Cost 380.00 2,28,00,000 360.00 3,60,00,000 310.00 6,20,00,000
Add: Fixed administration 6.00 3,60,000 3.60 3,60,000 1.80 3,60,000
expenses
Add: Fixed marketing 8.00 4,80,000 4.80 4,80,000 2.40 4,80,000
expenses
Add: Variable distribution cost 30.00 18,00,000 30.00 30,00,000 30.00 60,00,000
Add: Special Costs:
- Gift items costs - - - - 30.00 60,00,000
- Customers’ prizes* - - 2.00 2,00,000 1.00 2,00,000
- Refreshments - - 2.00 2,00,000 1.00 2,00,000
programme sponsorship
cost - - 20.00 20,00,000 10.00 20,00,000

Cost of sales 424.00 2,54,40,000 422.40 4,22,40,000 386.20 7,72,40,000

Profit (Bal. fig.) 176.00 1,05,60,000 137.60 1,37,60,000 113.80 2,27,60,000
Sales revenue 600.00 3,60,00,000 560.00 5,60,00,000 500.00 10,00,00,000

* Customers’ prize cost:

Particulars Amount (`)
1st Prize 60,000
2nd Prize 50,000
3rd Prize 40,000
Consolation Prizes (10 × ` 5,000) 50,000
Total 2,00,000

Comparison of Profit

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30% capacity 50% capacity 100% capacity

Rs.176 Rs.137.6 Rs.113.8
x 100 x 100 x 100
Rs.600 Rs.560 Rs.500
29.33 % 24.57% 22.76%

Profit (in value as well as in percentage) is higher at 30% level of capacity than that at 50% and 100% level of
capacity.

Q.7 Calculation of Cost Sheet ICAI MAT

Arnav Inspat Udyog Ltd. has the following expenditures for the year ended 31st March 2023:
Sl. No. (`) (`)

(i) Raw materials purchased 10,00,00,000

(ii) GST paid on the above purchases @18% (eligible for input 1,80,00,000
tax credit)

(iii) Freight inwards 11,20,600

(iv) Wages paid to factory workers 29,20,000
(v) Contribution made towards employees’ PF & ESIS 3,60,000

(vi) Production bonus paid to factory workers 2,90,000

(vii) Royalty paid for production 1,72,600
(viii) Amount paid for power & fuel 4,62,000
(ix) Amount paid for purchase of moulds and patterns (life is
equivalent to two years production) 8,96,000

(x) Job charges paid to job workers 8,12,000

(xi) Stores and spares consumed 1,12,000
(xii) Depreciation on:
Factory building 84,000
Office building 56,000
Plant & Machinery 1,26,000
Delivery vehicles 86,000 3,52,000
(xiii) Salary paid to supervisors 1,26,000
(xiv) Repairs & Maintenance paid for: Plant & Machinery 48,000

Sales office building 18,000

Vehicles used by directors 19,600 85,600
(xv) Insurance premium paid for:
Plant & Machinery 31,200
Factory building 18,100
Stock of raw materials & WIP 36,000 85,300
(xvi) Expenses paid for quality control check activities 19,600

(xvii) Salary paid to quality control staffs 96,200

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(xviii) Research & development cost paid for improvement in

production process 18,200
(xix) Expenses paid for pollution control and engineering &
maintenance 26,600
(xx) Expenses paid for administration of factory work 1,18,600

(xxi) Salary paid to functional mangers:

Production control 9,60,000
Finance & Accounts 9,18,000
Sales & Marketing 10,12,000 28,90,000
(xxii) Salary paid to General Manager 12,56,000
(xxiii) Packing cost paid for:
Primary packing necessary to maintain quality 96,000

For re-distribution of finished goods 1,12,000 2,08,000

(xxiv) Interest and finance charges paid (for usage of non-
equity fund) 7,20,000
(xxv) Fee paid to auditors 1,80,000
(xxvi) Fee paid to legal advisors 1,20,000
(xxvii) Fee paid to independent directors 2,20,000
(xxviii) Performance bonus paid to sales staffs 1,80,000
(xxix) Value of stock as on 1st April, 2022:
Raw materials 18,00,000
Work-in-process 9,20,000
Finished goods 11,00,000 38,20,000
(xxx) Value of stock as on 31st March, 2023:
Raw materials 9,60,000
Work-in-process 8,70,000
Finished goods 18,00,000 36,30,000

Amount realized by selling of scrap and waste generated during manufacturing process – ` 86,000/-
From the above data you are required to PREPARE Statement of cost for Arnav Ispat Udyog Ltd. for the year
ended 31st March, 2023, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods sold
and (v) Cost of sales.

Ans. Statement of Cost of Arnav Ispat Udyog Ltd. for the year ended 31st March, 2023:
Sl.No. Particulars (`) (`)
(i) Material Consumed:
Raw materials purchased 10,00,00,000
Freight inwards 11,20,600
Add: Opening stock of raw materials 18,00,000
Less: Closing stock of raw materials (9,60,000) 10,19,60,600
(ii) Direct employee (labour) cost:

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Wages paid to factory workers 29,20,000

Contribution made towards employees’ PF & ESIS 3,60,000

Production bonus paid to factory workers 2,90,000 35,70,000

(iii) Direct expenses:
Royalty paid for production 1,72,600
Amount paid for power & fuel 4,62,000
Amortised cost of moulds and patterns 4,48,000
Job charges paid to job workers 8,12,000 18,94,600
Prime Cost 10,74,25,200
(iv) Works/ Factory overheads:
Stores and spares consumed 1,12,000
Depreciation on factory building 84,000
Depreciation on plant & machinery 1,26,000
Repairs & Maintenance paid for plant & machinery 48,000

Insurance premium paid for plant & machinery 31,200

Insurance premium paid for factory building 18,100

Insurance premium paid for stock of raw materials & WIP 36,000

Salary paid to supervisors 1,26,000

Expenses paid for pollution control and engineering &
maintenance 26,600 6,07,900
Gross factory cost 10,80,33,100
Add: Opening value of W-I-P 9,20,000
Less: Closing value of W-I-P (8,70,000)
Factory Cost 10,80,83,100
(v) Quality control cost:
Expenses paid for quality control check activities 19,600

Salary paid to quality control staffs 96,200 1,15,800

(vi) Research & development cost paid for improvement in
production process 18,200
(vii) Administration cost related with production:
-Expenses paid for administration of factory work 1,18,600

-Salary paid to Production control manager 9,60,000 10,78,600

(viii) Less: Realisable value on sale of scrap and waste (86,000)

(ix) Add: Primary packing cost 96,000

Cost of Production 10,93,05,700
Add: Opening stock of finished goods 11,00,000
Less: Closing stock of finished goods (18,00,000)
Cost of Goods Sold 10,86,05,700
(x) Administrative overheads:

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Depreciation on office building 56,000

Repairs & Maintenance paid for vehicles used by directors 19,600

Salary paid to Manager- Finance & Accounts 9,18,000

Salary paid to General Manager 12,56,000

Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,20,000 27,69,600
(xi) Selling overheads:
Repairs & Maintenance paid for sales office building 18,000

Salary paid to Manager- Sales & Marketing 10,12,000

Performance bonus paid to sales staffs 1,80,000 12,10,000
(xii) Distribution overheads:
Depreciation on delivery vehicles 86,000
(xiii) Packing cost paid for re-distribution of finished goods 1,12,000 1,98,000

(xiv) Interest and finance charges paid 7,20,000

Cost of Sales 11,35,03,300

Note:
GST paid on purchase of raw materials would not be part of cost of materials as it is eligible for input tax credit.

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2 MATERIAL COST
CHAPTER

Q.1 ABC Analysis MTP May 18

A store keeper has prepared the below list of items kept in the store of the factory.
Item Units Unit cost (`)
A 12,000 30.00
B 18,000 3.00
C 6,000 35.00
D 750 220.00
E 3,800 75.00
F 400 105.00
G 600 300.00
H 300 350.00
I 3,000 250.00
J 20,000 7.50
K 11,500 27.50
L 2,100 75.00

The store keeper requires your help to classify the items for prioritization. You are required to APPLY ABC
analysis to classify the store items as follows:
Store items which constitutes approx 70%, 20% and 10% of total value as A, B and C respectively.

Ans. Statement of Total Cost and Ranking

Item Units % of Total units Unit cost (`) Total cost (`) % of Total cost Ranking
A 12,000 15.30% 30.00 3,60,000 12.97% 2
B 18,000 22.94% 3.00 54,000 1.95% 11
C 6,000 7.65% 35.00 2,10,000 7.57% 5
D 750 0.96% 220.00 1,65,000 5.95% 7
E 3,800 4.84% 75.00 2,85,000 10.27% 4
F 400 0.51% 105.00 42,000 1.51% 12
G 600 0.76% 300.00 1,80,000 6.49% 6
H 300 0.38% 350.00 1,05,000 3.78% 10
I 3,000 3.82% 250.00 7,50,000 27.03% 1
J 20,000 25.49% 7.50 1,50,000 5.41% 9
K 11,500 14.66% 27.50 3,16,250 11.40% 3
L 2,100 2.68% 75.00 1,57,500 5.68% 8
78,450 100.00% 27,74,750 100.00%

All Formulas RTP Nov 22

Q.2
M/s Tanishka Materials Private Limited produces a product which names "ESS". The consumption of raw material
for the production of "ESS" is 210 Kgs to 350 Kgs per week. Other information is as follows:

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Procurement Time: 5 to 9 Days

Purchase price of Raw Materials: ` 100 per kg
Ordering Cost per Order: ` 200
Storage Cost: 1% per month plus ` 2 per unit per annum
Consider 365 days a year.
You are required to CALCULATE:
(a) Economic Order Quantity
(b) Re-Order Level (ROL)
(c) Maximum Stock Level
(d) Minimum Stock Level
(e) Average Stock Level
(f) Number of Orders to be placed per year
(g) Total Inventory Cost
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders, whether
offer is acceptable?
(i) If the answer is no, what should be the counteroffer w.r.t. percentage of discount?

Ans. As procurement time is given in days, consumption should also be calculated in days:
350
Maximum Consumption per Day: = 50 Kgs
7
210
Minimum Consumption per Day: = 30 Kgs.
7

Average Consumption per Day:

(50 + 30) = 40 Kgs
2

(a) Calculation of Economic Order Quantity (EOQ)

Annual consumption of Raw Materials (A): 40 Kgs x 365 days = 14,600 Kgs
Storage or Carrying Cost per unit per annum (C):(` 100 x 1% x 12 months) + ` 2 = ` 14
Ordering Cost (O): ` 200 per Order
2  A O
EOQ =
C
2  14600,600  200
= = 646 Kgs.
14
(b) Re-Order Level (ROL) = (Maximum consumption Rate × Maximum Procurement Time)
= 50 kgs per day × 9 days
= 450 kgs
(c) Maximum Stock Level = Recorder Level + Recorder Quantity – (Minimum Consumption Rate ×
Minimum Procurement Time)
= 450 kgs + 646 kgs - (30 kgs X 5 days)
= 946 kgs
(d) Minimum Stock Level = Recorder Level – (Average consumption Rate × Average Procurement
Time)
= 450 kgs – (40 kgs X 7 days)
= 170 kgs
Maximum Stock Level + Minimum Stock Level
(e) Average Stock Level =
2

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946 kgs + 170 kgs

=
2
= 558 kgs
(f) Number of Orders to be placed per year
Annual Consumption of Raw Materials
=
EOQ
14600 kg
=
646 kgs
= 22.60 Orders or 23 Orders
(g) Total Inventory Cost
Cost of Materials (A x Purchase Price) (14600 kgs x ` 100) = `14,60,000
Total Ordering Cost (No. of Orders x O) (23 Orders x 200) = ` 4,600
Total Carrying Cost (EOQ / 2 x C) (646 kgs / 2 x ` 14 = ` 4,522
Total Inventory Cost = ` 14,69,122

(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders:
Offer Price = ` 100 x 99% = ` 99
Revised Carrying Cost = (` 99 x 1% x 12 months) + `2 = ` 13.88
Revised Order Quantity = 14600 kgs / 2 Orders = 7300 kgs
Total Inventory Cost at Offer Price
Cost of Materials (A x Purchase Price) (14600 kgs x ` 99) = `14,45,400
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ` 400
Total Carrying Cost (EOQ / 2 x C) (7300 kgs / 2 x `13.88) = ` 50,662
Total Inventory Cost = ` 14,96,462
Advice: As total inventory cost at offer price is ` 27,340 (14,96,462 – 14,69,122) higher, offer should not
be accepted.
(i) Counter-offer:
Let Discount Rate = z%
Counter-Offer Price = ` 100 – z% = ` 100 – z
Revised Carrying Cost = [(` 100 – z) x 1% x 12 months] + ` 2 = ` 12 -0.12z + ` 2
= ` 14 – 0.12z
Total Inventory Cost at Counter-Offer Price
Cost of Materials (A x Purchase Price) [14600 kgs x (` 100 – z)] = ` 14,60,000 – 14,600z
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ` 400
Total Carrying Cost (EOQ / 2 x C) [7300 kgs / 2 x (` 14 – 0.12z)] = ` 51,100 – 438z
Total Inventory Cost =` 15,11,500 – 15038z
` 14,69,122 = ` 15,11,500 – 15038z
Or 15038z = 42,378
Or z = 2.82
Therefore, discount should be at least 2.82% in offer price.

Q.3 Calculate Material Cost MTP May 22(1)

SKY Company Ltd., not registered under GST, purchased material ‘RPP’ from a company, registered under
GST. The following information is available for one lot of 5,000 units of material purchased:
Listed price of one lot ` 7,50,000
Trade discount @ 10% on Listed price.
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Road Tax paid ` 15,000
Freight and Insurance ` 51,000

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Detention Charges(or Demurage) ` 15,000

Commission and brokerage on purchases ` 30,000
Amount deposited for returnable containers ` 90,000
Amount of refund on returning the container ` 60,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
You are required to CALCULATE cost per unit of material purchased to SKY Company Ltd.

Ans. Computation of Total cost of material purchased of SKY Manufacturing Company

Particulars Units (Amount in `)

Listed Price of Materials 5,000 7,50,000
Less: Trade discount @ 10% on invoice price (75,000)
6,75,000
Add: CGST @ 6% of ` 6,75,000 40,500
SGST @ 6% of ` 6,75,000 40,500
7,56,000
Add: Road Tax paid 15,000
Freight and Insurance 51,000
Commission and Brokerage Paid 30,000
Add: Cost of returnable containers:
Amount deposited ` 90,000
Less: Amount refunded ` 60,000 30,000
8,82,000
Add: Other Expenses @ 2% of Total Cost 18,000
 8,82, 000 
 x2
 98 
Total cost of material 9,00,000
Less: Shortage due to Normal Loss @ 20% 1,000 -
Total cost of material of good units 4,000 9,00,000
Cost per unit (` 9,00,000/4,000 units) 225

Notes:
1. GST is payable on net price i.e., listed price less discount.
2. Detention charges/ fines imposed for non-compliance of rule or law by any statutory authority
It is an abnormal cost and not included with cost of purchase.
3. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.

Q.4 Economic Order Qty (EOQ) MTP Nov 19

A Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1:4.
The sales department has estimated a demand of 5,00,000 units for the product for the year. To produce one
unit of finished product, 4 units of material A is required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units
Material A 24,000 units
Material B 52,000 units

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To place an order the company has to spend Rs.15,000. The company is financing its working capital using a bank
cash credit @13% p.a.
Product X is sold at Rs.1,040 per unit. Material A and B are purchased at Rs.150 and Rs.200 respectively.

Required:
COMPUTE economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately.

Ans. Workings:
Annual production of Product X = Annual demand – Opening stock
= 5,00,000 – 12,000 = 4,88,000 units
Annual requirement for raw materials = Annual production× Material per unit – Opening stock of material
Material A = 4,88,000 × 4 units – 24,000 units = 19,28,000 units
Material B = 4,88,000 × 16 units – 52,000 units = 77,56,000 units

(i) Computation of EOQ when purchase order for the both materials is placed separately
2  Annual Requirement for material  Ordering cost
EOQ =
Carrying cost per unit per annum

2 ´ 19,28, 000 units 38, 56, 000  Rs.15, 000

Material A = =
´ Rs.15, 000 Rs.19.5
13%of Rs.150
= 54,462 units
2 ´ 19,28, 000 units 1, 55,12, 000´Rs.15, 000
Material B = =
´ Rs.15, 000 Rs.26
13%of Rs.200
= 94,600 units

(ii) Computation of EOQ when purchase order for the both materials is not placed separately
2 ´ (19, 28, 000 + 77, 56, 000) units ´ Rs.15, 000
Material A & B =
13% of Rs.190 *
1, 93, 68, 000´Rs.15, 000
= = 1,08,452 units
Rs.24.7
= 1, 08, 452 ´ 19, 28, 000
Material A = = 21,592 units
96,84, 000
1, 08, 452´ 77, 56, 000
Material A = = 86,860 units
96, 84, 000
* (Rs.150 ´ 19,28, 000) + (Rs.200 ´ 77,56, 000)
= Rs.190
(19,28, 000 + 77,56, 000)

Q.5 Economic Order Qty (EOQ) RTP Nov 19

HBL Limited produces product 'M' which has a quarterly demand of 20,000 units. Each product requires 3 kg. and
4 kg. of material X and Y respectively. Material X is supplied by a local supplier and can be procured at factory
stores at any time, hence, no need to keep inventory for material X. The material Y is not locally available, it
requires to be purchased from other states in a specially designed truck container with a capacity of 10 tons.
The cost and other information related with the materials are as follows:
Particulars Material –X Material-Y
Purchase price per kg. (excluding GST) `140 `640

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Rate of GST 18% 18%

Freight per trip (fixed, irrespective of quantity) - `28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%
On purchased quantity
Other information:
The company has to pay 15% p.a. to bank for cash credit facility.
Input credit is available on GST paid on materials.
Required:
(i) CALCULATE cost per kg. of material X and Y
(ii) CALCULATE the Economic Order quantity for both the materials.

Ans. Working Notes:

Annual purchase quantity for material X and Y:
Annual demand for product M- 20,000 units × 4 = 80,000 units

Particulars Mat-X Mat-Y

Quantity required for per unit of product M 3 kg. 4 kg.
Net quantity for materials required 2,40,000 kg. 3,20,000 kg.
Add: Loss in transit - 6,881 kg.
Add: Loss in process 10,000 kg. 17,204 kg.
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Note - Input credit on GST paid is available; hence, it will not be included in cost of material.
(i) Calculation of cost per kg. of material X and Y:
Particulars Mat-X Mat-Y
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Rate per kg. `140 `640
Purchase price `3,50,00,000 `22,02,14,400
Add: Freight 0 `9,80,000*
Total cost `3,50,00,000 `22,11,94,400
Net Quantity 2,40,000 kg. 3,20,000 kg
Cost per kg. `145.83 `691.23

3, 44, 085kg.
*No. of trucks = = 34.40 trucks or 35 trucks
10 ton´1, 000
Therefore, total freight = 35 trucks × `28,000 = `9,80,000

(ii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:

2xAnnual Requirement ´Order cost
Carryingcos t per unitp.a.
EOQ =

Particulars Mat-X Mat-Y

Annual Requirement 2,50,000 kg. 3,44,085 kg.

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CA Amit Sharma

Ordering cost 0 `28,000

Cost per unit `145.83 `691.23
Carrying cost 15% 15%
Carrying cost per unit p.a. 0* `103.68
EOQ 0 13,632.62 kg.

Q.6 EOQ / Max. Stock Level MTP Nov 22(1)

A company produces a product 'AB' by using two raw materials - 'Material Ae' and 'Material Be' in the ratio of
5:3.A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the trend
will continue for entire year. The ratio of input and output is 8:5.
Other Information about Raw Material Ae is as follows:
Purchase Price ` 150 per kg
Re-order period 2 to 3 days
Carrying Cost 12%
Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase it becomes obsolete.
To place an order for material 'Ae’, the company has to incur an administrative cost of ` 375 per order.
At present, material ‘Ae’ is purchased in a lot of 7,500 kgs. to avail the discount on purchase. Company works for
25 days in a month and production is carried out evenly. Calculate (i) EOQ and (ii) Maximum Stock Level

Ans. (i) Monthly production of AB = 50,000 kgs

Raw material required = 50,000/5 x 8 = 80,000 kgs
Material Ae and Material Be ratio = 5:3
Therefore, material Ae = 80,000/8 x 5 =50,000 kgs

2 x (Annual demand x cost per order)

Calculation of EOQ = Annual holding cost per unit

2 x 50, 000 kgs x 12 x 375

EOQ = 12% of ` 150 =5,000 kgs

(ii) Calculation of maximum stock level of Material Ae which is perishable in nature and is required to be
used within 3.5 days.

(a) Stock equals to 3.5 days consumption = 50,000 kgs/ 25 days x 3.5 days = 7,000 kgs
(b) Maximum stock level for Material Ae
Maximum stock= Reorder quantity + reorder level – (minimum consumption x minimum lead time)
Where, reorder quantity = 7,500 kgs
Reorder level = maximum consumption* x maximum lead time
= 50,000/ 25 x 3 days = 6,000 kgs
Now, Maximum stock level = 7,500 kgs + 6,000 kgs – (50,000 /25 days x 2 days) = 9,500 kgs
Stock required for 3.5 days consumption is lower than the maximum stock level
calculated above. Therefore, maximum stock level will be 7,000 kgs.
(*since production is processed evenly throughout the month hence material consumption will also
be even.)

Q.7 EOQ / Reorder Level RTP May 19

Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is

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required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in the
coming year. The following is the information regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe. The rate of interest charged by bank on
Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work. From the above information
FIND OUT the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) CALCULATE the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Ans. (i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:

Sales forecast of the product ‘Exe’ 10,000 units

Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units

Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.

(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.

(ii) Computation of Economic Order Quantity (EOQ):

2´Annualdemandof 'Dee'´ Orderingcos t

EOQ =
Carryingcos t per unit per annum

2x 17, 200kgx ´720 2x 17, 200kgx ´720

= = = 1,200 kg
`125´13.76% `17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'Dee '  
 +20kg  x 8days 
 364days  

 18, 200kg  

 +20kg  x 8days  =560kg

 364 days  

(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumptionr + Max.consumption
Average Consumption =
2
Min.consumptionr + 70kg
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.

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(a) Re-order Quantity :

EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days)
= 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.

When purchasing the ROQ When purchasing the EOQ

I Order quantity 1,000 kg. 1,200 kg.
II No. of orders a year 17,200kg. 17,200kg.
= 17.2or18orders = 14.33or15orders
1, 000kg. 1,200kg.

III Ordering Cost 18 orders × ` 720 = `12,960 15 orders × ` 720 = `10,800

IV Average Inventory 1, 000kg. 1,200kg.
= 500kg. = 600kg.
2 2
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120
Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440

Q.8 Min, Max, Avg Stock / Reorder RTP Nov 20

A company uses four raw materials A, B, C and D for a particular product for which the following data apply :–
Raw Usage per Re-order Price Delivery period (in Re- order Minimum
Material unit of Quantity per Kg. weeks) level (Kg.) level (Kg.)
product (Kg.) (Kg.) (`) Minimum Average Maximum

A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?

Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What would be the
following quantities:–
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(i) Average stock level of A?
(ii) Re-order level of D?
(iii) Minimum Stock level of D?

Ans. (i) Minimum stock of A

Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900units × 12 kg. × 3 weeks) = 27,600 kg.

(ii) Maximum stock of B

Re-order level + Re-order quantity– (Min. Consumption × Min. Re-order period)
= 70,000 kg.+ 8,000 kg– (550units ×8 kg.× 5 weeks).

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=78,000–22,000 = 56,000 kg.

(iii) Re-order level of C

Maximum re-order period × Maximum Usage
= 7 weeks × (1,250units × 6 kg.) = 52,500 kg.
OR
= Minimum stock of C+(Average consumption × Average delivery time)
= 25,500 kg.+ [(900 units ×6 kg.)×5 weeks] =52,500 kg.

(iv) Average stock level of A

Minimum stock + Maximum stock
= = (Refer to Working Note)
2
27, 600 + 58,800
= = 43,200 kg.
2
Working note
Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550units × 12 kg.) × 2 weeks] = 58,800 kg.
(v) Re-order level of D
Maximum re-order period × Maximum Usage
3 weeks × (1,250 units × 5 kg.) = 18,750 kg
(vi) Minimum stock of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900units × 5 kg. × 2 weeks) = 9,750 kg.

Q.9 Min, Max, Avg Stock / Reorder RTP May 20

Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost method for
inventory valuation. Following are the data of component X:
Date Particulars Units Rate per unit(`)
15-12-19 Purchase Order- 008 10,000 9,930
30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 008) 10,000 -
05-01-20 MRN**-003 (against the Purchase Order- 008) 500 -
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 9,750
10-01-20 Material Requisition-012 4,500 -
12-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
12-01-20 MRN-004 (against the Purchase Order- 009) 400 -
15-01-20 Material Requisition-013 2,200 -
24-01-20 Material Requisition-014 1,500 -
25-01-20 GRN-010 (against the Purchase Order- 010) 10,000 -
28-01-20 Material Requisition-015 4,000 -
31-01-20 Material Requisition-016 3,200 -
*GRN- Goods Received Note; **MRN- Material Returned Note
Based on the above data, you are required to CALCULATE:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level

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(iv) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock as on 31-01-2020.
(v) Value of components used during the month of January, 2020.
(vi) Inventory turnover ratio.

Ans. Workings:
Consumption is calculated on the basis of material requisitions:
Maximum component usage = 4,500 units (Material requisition on 10-01-20)
Minimum component usage = 1,500 units (Material requisition on 24 -01-20)
Lead time is calculated from purchase order date to material received date
Maximum lead time = 21 days (15-12-2019 to 05-01-2020)
Minimum lead time = 14 days (30-12-2019 to 12-01-2020)
Calculations:
(i) Re-order level
= Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units
(ii) Maximum stock level
= Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
= 1,04,500 units – 21,000 units = 83,500 units
(iii) Minimum stock level
= Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units
= 42,000 units
(i) Store Ledger for the month of January 2020:
Date Receipts Issue Balance
GRN/ Units Rate Amt. MRN/ Units Rate Amt. Units Rate Amt.
MRN ` (` ‘000) MR ` (` ‘000) ` (` ‘000)
01-01-20 - - - - - - - - 3,500 9,810 34,335
05-01-20 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
06-01-20 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
10-01-20 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
12-01-20 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
15-01-20 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
24-01-20 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982
25-01-20 010 10,000 9,750 97,500 - - - - 21,400 9,789 2,09,482
28-01-20 - - - - 015 4,000 9,789 39,156 17,400 9,789 1,70,326
31-01-20 - - - - 016 3,200 9,789 31,325 14,200 9,789 1,39,001

[Note: Decimal figures may be rounded-off to the nearest rupee value wherever required)
Value of stock as on 31 01-2020 (‘000) = `1,39,001
(v) Value of components used during the month of January 2020:
Sum of material requisitions 011 to 016 (‘000)
= ` 29,694 + ` 44,541 + ` 21,611 + ` 14,734 + ` 39,156 + ` 31,325 = ` 1,81,061
(vi) Inventory Turnover Ratio
Value of materialsused 1,81, 061 ` 1,81, 061
= = = = 2.09
Averagestock value (1,39, 001 + 34,335) / 2 86, 668

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CA Amit Sharma

Q.10 Total Cost / EOQ / Reorder MTP Dec 21(2)

The yearly production of a company's product which has a steady market is 40,000 units. Each unit of a product
requires 1 kg. of raw material. The cost of placing one order for raw material is ` 1,000 and the inventory carrying
cost is ` 20 per annum. The lead time for procurement of raw material is 36 days and a safety stock of 1,000 kg.
of raw materials is maintained by the company. The company has been able to negotiate the following discount
structure with the raw material supplier
Order quantity (kg.) Discount (`) Upto 6,000
6,001 – 8,000 4,000
8,001 – 16,000 20,000
16,001 – 30,000 32,000
30,001 – 45,000 4,0000
You are REQUIRED to:
(i) Calculate the re-order point considering 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw material after considering
the discount of the company elects to place one, two, four or five orders in the year.
(iii) State the number of orders which the company should place to minimize the costs after taking
EOQ also into consideration.

Ans. Working notes

1. Annual production = 40,000 units
2. Raw material required for 40,000 units (40,000 units × 1 kg.) = 40,000 kg.
2  40, 000 kgs.  ` 1, 000
3. EOQ = = 20, 000kgs
20
4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg.
No. of orders (40,000 kg. ÷ 2,000 kg. = 20 times
Ordering cost (20 orders × `1,000) = ` 20,000
Carrying cost (`) (½ × 2,000 kg. × ` 20) = ` 20,000
Total cost ` 40,000
(i) Re-order point = Safety stock + Lead time consumption
40, 000 kg.
= 1,000 kg. + x 360days
360days
= 1,000 kg. + 4,000 kg. = 5,000 kg.
(ii) Statement showing the total cost of procurement and storage of raw materials (after considering
the discount)
Order No. of Total cost of Average Total cost of Discount Total cost
size orders procurement stock storage of raw
materials
Kg. (`) Kg. (`) (`) (`)
(1) (2) (3)=(2)×`1,000 (4)=½×(1) (5)=(4)×`20 (6) (7)=[(3)+(5)– (6)
40,000 1 1,000 20,000 4,00,000 40,000 3,61,000
20,000 2 2,000 10,000 2,00,000 32,000 1,70,000
10,000 4 4,000 5,000 1,00,000 20,000 84,000
8,000 5 5,000 4,000 80,000 4,000 81,000

(ii) Number of orders which the company should place to minimize the costs after taking EOQ also into
consideration is 20 orders each of size 2,000 kg. The total cost of procurement and storage in this case
comes to ` 40,000, which is minimum.

[ALSO SOLVE ONE QUESTION OF STOCK OUT GIVEN IN ICAI MAT PAGE 2.32]

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3 EMPLOYEE COST
CHAPTER

Q.1 Calculates wages & allocate RTP Nov 20

GZ Ld. pays the following to a skilled worker engaged in production works. The following are the employee benefits
paid to the employee:
(a) Basic salary per day 1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance 50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA), only if works more than
9 hours a day otherwise no overtime allowance. If works for more than
9 hours a day then overtime is considered after 8th hours.
(f) Work of holiday and Sunday Double of per day basic rate provided works atleast 4 hours. The holiday
and Sunday basic is eligible for all allowances and statutory deductions.
(g) Earned leave & Casual leave These are paid leave.
(h) Employer’s contribution to 12% of basic and DA
Provident fund
(i) Employer’s contribution to 7% of basic and DA
Pension fund
The company normally works 8-hour a day and 26-day in a month. The company provides 30 minutes lunch break
in between.
During the month of August 2020, Mr.Z works for 23 days including 15th August and a Sunday and applied for 3
days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours respectively without lunch break.
On 5th and 13th August he worked for 10 and 9 hours respectively.
During the month Mr. Z worked for 100 hours on Job no.HT200.
You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200.

Ans. Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.

(i) Calculation of earnings per day

Particulars Amount (`)
Basic salary (`1,000 × 26 days) 26,000
Dearness allowance (20% of basic salary) 5,200
31,200
House rent allowance (16% of basic salary) 4,160
Employer’s contribution to Provident fund (12% × 31,200) 3,744
Employer’s contribution to Pension fund (7% × 31,200) 2,184

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41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
Earnings per day 1,638

(ii) Calculation of effective wage rate per hour of Mr. Z:

Particulars Amount (`)
Basic salary (`1,000 × 26 days) 26,000
Additional basic salary for Sunday & holiday (`1,000 × 2 days) 2,000
Dearness allowance (20% of basic salary) 5,600
33,600
House rent allowance (16% of basic salary) 4,480
Transport allowance (50 × 23 days) 1,150
Overtime allowance (160 × 2 × 2 hours)* 640
Employer’s contribution to Provident fund (12% × 33,600) 4,032
Employer’s contribution to Pension fund (7% × 33,600) 2,352
Total monthly wages 46,254
Hours worked by Mr. Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic + DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = `160 per hour

(iii) Calculation of wages to be charged to Job no. HT200

= 248 × 100 hours = 24,800

Q.2 Calculates wages & allocate MTP Nov 22(1)

Archika Tyre Manufacturing Private Limited has four workers Ram, Shyam, Mohan & Kundan who are paid wages
on the basis of ` 100 per day, ` 120 per day, ` 130 per day & ` 2500 per month respectively.
Standard working days in a week are six of 8 hours per day. For the month of Octob er 2022, there was only one
holiday other than Sunday for which no payment was made to employees except Kundan who was paid for full
month. Sundays are considered paid holidays i.e. employees are paid for Sunday also even there is no working on
that day. Provident fund contribution is 8% of monthly wages by employer and employee each. ESI contribution
is 5% of monthly wages by employer and 4% of monthly wages by employee.
On the basis of above information, you are required to CALCULATE (regarding the month of October 2022):
(i) Amount of net wages receivable by each employee from the employer.
(ii) What is the total amount of Provident Fund required to be deposited by employer?
(iii) What is the total amount of ESI required to be deposited by employer?
(iv) What is the total labour cost to employer?
(v) If total material cost is ` 20,000 for October 2022 and overheads are charged equal to labour cost,
calculate total cost for the month.

Ans. (i) Calculation of net wages receivable by each employee from the employer (October 2022):
Ram Shyam Mohan Kundan Total
(`) (`) (`) (`) (`)
Wages for October 2022 3,000 3,600 3,900 2,500 13,000
(` 100 x (` 120 x (` 130 x

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CA Amit Sharma
30 days) 30 days) 30 days)
Less: Employee Contribution
to PF @ 8% 240 288 312 200 1,040
Less: Employee Contribution
to ESI @ 4% 120 144 156 100 520
Net Wages Receivable 2,640 3,168 3,432 2,200 11,440

(ii) Calculation of total amount of Provident Fund required to be deposited by employer (October 2022):
(`)
Total Wages for the month 13,000
Employer’s Contribution to Provident Fund @8% of ` 13,000 1,040
Add: Employee’s Contribution to Provident Fund @8% of ` 13,000 1,040
Total amount of Provident Fund required to be deposited by employer 2,080

(iii) Calculation of total amount of ESI required to be deposited by employer (October 2022):
(`)
Total Wages for the month 13,000
Employer’s Contribution to ESI @5% of ` 13,000 650
Add: Employee’s Contribution to ESI @4% of ` 13,000 520
Total amount of ESI required to be deposited by employer 1,170

(iv) Total labour cost to employer (October 2022):

(`)
Total Wages for the month 13,000
Add: Employer’s Contribution to Provident Fund @8% of ` 13,000 1,040
Add: Employer’s Contribution to ESI @5% of ` 13,000 650
Total labour cost to employer 14,690

(v) Calculation of Total Cost for October 2022

(`)
Total Material Cost 20,000
Total Labour Cost 14,690
Total Overheads (Equal to Labour Cost) 14,690
Total Cost 49,380

Q.3 Gurenteed/Rowan/Piece Rate RTP May 19

A Company is undecided as to what kind of wage scheme should be introduced. The following particulars have been
compiled in respect of three workers. Which are under consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -

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CA Amit Sharma

Standard time allowed per unit of each product is:

A B C
Minutes 15 20 30

For the purpose of piece rate, each minute is valued at 1/-

You are required to CALCULATE the wages of each worker under:
(i) Guaranteed hourly rate basis
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earnings are
less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.

Ans. (i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours worked Hourly wage Wages (`)
(Hours) rate (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400
(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit
(`) Units Wages (`) Units Wages (`) Units Wages (`)
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker-I, II and III will be paid
the wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000 respectively.
Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per
unit in minute minute (`) unit (`)
A 15 1 15
B 20 1 20
C 30 1 30

1. Time allowed to each worker

Worker Product-A Product-B Product-C Total Time
(H ours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600

(iii) Computation of wages of each worker under Premium bonus basis (where each worker receives bonus
based on Rowan Scheme)
Worker Time Time Time Wage Earnings Bonus Total

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CA Amit Sharma

Allowed Taken saved Rate per (`) (`)* Earning

(Hr.) (Hr.) (Hr.) hour (`) (`)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
Time Taken
* xTime SavedxWageRate
Time Allowed
380
Worker − I = =22.5x40 = 850
402.5
100
Worker − II = =25x50 = 1000
125
540
Worker − III = =60x60 = 3240
600

Q.4 Halsey & Rowan PY Jan 21

Z Ltd is working by employing 50 skilled workers. It is considering the introduction of an incentive scheme -
either Halsey Scheme (with 50% Bonus) or Rowan Scheme - of wage payment for increasing the labour
productivity to adjust with the increasing demand for its products by 40%. The company feels that if the
proposed incentive scheme could bring about an average 20% increase over the present earnings of the workers,
it could act as sufficient incentive for them to produce more and the company has accordingly given assurance to
the workers.
Because of this assurance, an increase in productivity has been observed as revealed by the figures for the month
of April, 2020:
Hourly rate of wages (guaranteed) ` 50
Average time for producing one unit by one worker at the previous performance (this may 1.975 hours
be taken as time allowed)
Number of working days in a month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
Required:
(i) Calculate the effective increase in earnings of workers in percentage terms under Halsey and Rowan
scheme.
(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit under both the schemes.
(iii) Advise Z Ltd about the selection of the scheme that would fulfil its assurance of incentivising workers and
also to adjust with the increase in demand.

Ans. Working Notes:

1. Total time wages of 50 workers per month:
= No. of working days in the month × No. of working hours per day of each worker
× Hourly rate of wages × No. of workers
= 24 days × 8 hrs. × ` 50 × 50 workers = 4,80,000
2. Time saved per month:
Time allowed per unit to a worker 1.975 hours
No. of units produced during the month by 50 workers 6,120
units Total time allowed to produce 6,120 units (6,120 × 1.975 hrs) 12,087 hours
Actual time taken to produce 6,120 units (24 days × 8 hrs. × 50 workers) 9,600 hours
Time saved (12,087 hours – 9,600 hours) 2,487 hours
3. Bonus under Halsey scheme to be paid to 50 workers:
Bonus = (50% of time saved) × hourly rate of wages

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CA Amit Sharma

= 50/100 × 2,487 hours × 50 = 62,175

Total wages to be paid to 50 workers are (` 4,80,000 + ` 62,175) ` 5,42,175, if Z Ltd. considers the
introduction of Halsey Incentive Scheme to increase the worker productivity.
4. Bonus under Rowan Scheme to be paid to 50 workers:

Timetaken
Bonus =  Time saved  hourly rate
Time allowed
9, 600 hours
=  2, 487hours  50 = 98, 764
12, 087 hours
Total wages to be paid to 50 workers are (` 4,80,000 + ` 98,764) ` 5,78,764, if Z Ltd. considers
the introduction of Rowan Incentive Scheme to increase the worker productivity.
(i) (a) Effective hourly rate of earnings under Halsey scheme:
(Refer to Working Notes 1, 2 and 3)

Total time wages of 50 workers + Total bonus under Halsey scheme

=
Total hours worked
4, 80, 000 + 62,175
= = 56.48
9, 600 hours
56.48 − 50
Effective increase in earnings of worker (in %) = x 100 = 2.96%
50
(b) Effective hourly rate of earnings under Rowan scheme:
(Refer to Working Notes 1, 2 and 4)
Total time wages of 50 workers + Total bonus under Rowan scheme
Total hours worked
4,80, 000 + 96,875
= 60.29
9, 600 hours
60.29 − 50
Effective increase in earnings of worker (in %)= x 100 = 20.58%
50
(ii) (a) Saving in terms of direct labour cost per unit under Halsey scheme: (Refer to Working Note 3)
Labour cost per unit (under time wage scheme)
= 1.975 hours × ` 50 = ` 98.75
Total wages paid under the schem 5, 42,175
= = = 88.60
Total number of units produced 6,120
Saving per unit = ` 98.75 – ` 88.60 = ` 10.15
(b) Saving in terms of direct worker cost per unit under Rowan Scheme: (Refer to Working Note 4)
Labour cost per unit under Rowan scheme = 5,78,764/6,120 units = 94.57
Saving per unit = 98.75 – 94.57 = 4.18
(iii) Calculation of Productivity:
Normal Production Hours worked/Unit per Hour (9,600/1.975) 4,861
Actual Production Units 6,120
Increase in labour productivity 1,259
% Productivity i.e. increase in production/Normal production 25.9%
Advice: Rowan plan fulfils the company’s assurance of 20% increase over the present earnings of workers.
This would increase productivity by 25.9% only. It will not adjust with the increase in demand by 40%.

Q.5 Halsey & Rowan PY Dec 21

A skilled worker is paid a guaranteed wage rate of ` 150 per hour. The standard time allowed for a job is 10 hours.
He took 8 hours to complete the job. He has been paid the wages under Rowan Incentive Plan.
You are required to:

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CA Amit Sharma

(i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan.
(ii) Calculate the time in which he should complete the job, if the worker is placed under Halsey Incentive
Scheme (50%) and he wants to maintain the same effective hourly rate of earnings.

Ans. (i) Calculation of Effective hourly rate of earnings under Rowan Incentive Plan:
Standard time allowed = 10 hours
Time taken = 8 hours; Time saved = 2 hours
Particulars Amount (`)
A Basic guaranteed wages (`150×8 hours) 1,200
B Add: Bonus for time saved ( 2 × 8 × ` 150) 10 240
C Total earnings (A+B) 1,440
D Hours worked 8 hours
E Effective hourly rate (C÷D) 180

(ii) Let the time taken to complete the job is “T” and the time saved is 10-T Effective hourly rate under the
Halsey Incentive scheme
(Rate × Hours Worked) + (Rate × 50% of Time Saved)

=
(Rate  Hours Worked) + (Rate  50% of Time Saved )
= 180
Hours Worked

(150  T) + 150  50% (10 − T )

= = 180
T
150T + 750 -75T = 180T
180T-75T = 750
750
T = = 7.14
105

Q.6 Halsey & Rowan (Important) RTP July 21

JBL Sisters operates a boutique which works for various fashion houses and retail stores. It has employed 26
workers and pays them on time rate basis. On an average an employee is allowed 8 hours for boutique work on a
piece of garment. In the month of December 2020, two workers M and J were given 15 pieces and 21 pieces of
garments respectively for boutique work. The following are the details of their work:
M J
Work assigned 15 pcs. 21 pcs.
Time taken 100 hours 140 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is 60 per hour. As per the new wages
agreement the workers will be paid 72 per hour w.e.f. 1stJanuary
2021. At the end of the month December 2020, the accountant of the company has wrongly calculated wages to
these two workers taking 72 per hour.
Required:
(i) CALCULATE the loss incurred due to incorrect rate selection.
(ii) CALCULATE the loss incurred due to incorrect rate selection, had Rowan scheme of bonus payment
followed.
(iii) CALCULATE the loss/ savings if Rowan scheme of bonus payment had followed.
(iv) DISCUSS the suitability of Rowan scheme of bonus payment for JBL Sisters?

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Ans. Workings Notes:

Calculation of Total hours saved:
M J
No. of garments assigned (Pieces.) 15 21
Hour allowed per piece (Hours) 8 8
Total hours allowed (Hours) 120 168
Hours Taken (Hours) 100 140
Hours Saved (Hours) 20 28
(i) Calculation of loss incurred due to incorrect rate selection:
(While calculating loss only excess rate per hour has been taken)
M(`) J(`) Total (`)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × `12) (140 Hrs. × `12)
Bonus (as per Halsey Scheme) 120 168 288
(50% of Time Saved × Excess Rate) (50% of 20 Hrs. × `12) (50% of 28 Hrs. × `12)
Excess Wages Paid 1,320 1,848 3,168
(ii) Calculation of loss incurred due to incorrect rate selection had Rowan scheme of bonus payment
followed:
M J Total (`)
(`) (`)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × 12) (140 Hrs. × 12)
200 280 480
 Timetaken   100   140 
  Time saved  Wage rate    20  12    28  12 
 Time allowed   120   168 
Excess Wages Paid 1,400 1,960 3,360

(iii) Calculation of amount that could have been saved if Rowan Scheme were
Followed
M J Total (`)
(`) (`)
Wages paid under Halsey Scheme 1,320 1,848 3,168
Wages paid under Rowan Scheme 1,400 1,960 3,360
Difference (loss) (80) (112) (192)

(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with
the nature of business in which JBL Sisters operates:
(a) Under Rowan Scheme of bonus payment, workers cannot increase their
earnings or bonus by merely increasing its work speed. Bonus under Rowan
Scheme is maximum when the time taken by a worker on a job is half of the time
allowed. As this fact is known to the workers, therefore, they work at such a
speed which helps them to maintain the quality of output too.
(b) If the rate setting department commits any mistake in setting standards for time
to be taken to complete the works, the loss incurred will be relatively low.

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Q.7 Piece Rete System MTP May 22

The standard time allowed for a certain piece of work is 240 hours. Normal wage rate is ` 75 per hour.
The bonus system applicable to the work is as follows:
Percentage of time saved to time allowed (slab rate) Bonus

(i) Up to the first 20% of time allowed 25% of the corresponding saving in time.

(ii) For and within the next 30% of time allowed 40% of the corresponding saving in time.

(iii) For and within the next 30% of time allowed 30% of the corresponding saving in time.

(iv) For and within the next 20% of time allowed 10% of the corresponding saving in time.
CALCULATE the total earnings of a worker over the piece of work and his earnings per hour when he takes-
(a) 256 hours,
(b) 120 hours, and
(c) 24 hours respectively.

Ans. Calculation of total earnings and earnings per hour:

Particulars (a) Time taken is (b) Time taken is (c) Time taken is
256 hours 120 hours 24 hours
A. Time Allowed 240 hours 240 hours 240 hours
B. Time taken 256 hours 120 hours 24 hours
C. Time Saved (A-B) Nil 120 hours 216 hours
D. Bonus hours Nil 40.80 hours 64.80 hours
(Refer workings)
E. Hours to be paid (B+D) 256 hours 160.80 hours 88.80 hours
F. Wages rate per hour ` 75 ` 75 ` 75
G. Total earnings (E×F) ` 19,200 ` 12,060 ` 6,660
H. Earnings per hour (G÷B) ` 75 ` 100.50 ` 277.50

Working Notes:
Calculation of bonus hours:
Time saved 120 hours Time saved 216 hours
For first 20% of time allowed i.e. 48 hours 12 12
(25% of 48 hours) (25% of 48 hours)
For next 30% of time allowed i..e. 72 hours 28.80 28.80
(40% of 72 hours) (40% of 72 hours)
For next 30% of time allowed i..e. 72 hours - 21.60
(30% of 72 hours)
For next 20% of time allowed i..e. 48 hours - 2.40
(10% of 24 hours)
Bonus hours 40.80 64.80

Q.8 Profit lost due to Labour T/o MTP May 19

Anirban Ltd. wants to ascertain the profit lost during the year 20X8-X9 due to increased labour turnover. For
this purpose, they have given you the following information:

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CA Amit Sharma

(1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60% of the
experienced workers. Time required by an experienced worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a defective unit was Rs.
25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is Rs.180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was Rs.1,83,480.
(6) Recruitment cost was Rs.1,56,340
(7) Training cost was Rs.1,13,180.
You are required to CALCULATE the profit lost by the company due to increased labour turnover during the year
20X8-X9.

50, 000
Ans. Output by experienced workers in 50,000 hours = = 5, 000 units
10
 Output by new recruits = 60% of 5,000 = 3,000
units Loss of output = 5,000 – 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of 180 = Rs. 36
Total contribution cost = 36 × 12,000 = Rs. 4,32,000
Cost of repairing defective units = 3,000 × 0.2 × 25 = Rs. 15,000
Profit forgone due to labour turnover
(`)
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 2017-18 9,00,000

Q.9 Profit lost due to Labout T/o MTP May22

R Ltd. is faci ng increasing employee turnover in the factory and before analyzing the causes and taking remedial
steps; the management wants to have an idea of the profit foregone as a result of employee turnover in the last
year.
Last year sales amounted to ` 99,63,960 and P/V ratio was 20%.
The total number of actual hours worked by the direct employee force was 5.34 lakhs. The actual direct employee
hours included 36,000 hours attributable to training new recruits, out of which half of the hours were
unproductive. As a result of the delays by the Personnel Department in filling vacancies due to employee turnover,
1,20,000 potentially productive hours (excluding unproductive training hours) were lost.
The costs incurred consequent on employee turnover revealed, on analysis, the following:
Settlement cost due to leaving ` 52,584
Recruitment costs ` 32,088
Selection costs ` 15,300
Training costs ` 36,588
Assuming that the potential production lost as a consequence of employee turnover could have been sold at
prevailing prices, FIND the profit foregone last year on account of employee turnover.

Ans. Workings:

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(i) Computation of productive hours

Actual hours worked 5,34,000
Less: Unproductive training hours 18,000
Actual productive hours 5,16,000
(ii) Productive hours lost:
Loss of potential productive hours + Unproductive training hours
= 1,20,000 + 18,000 = 1,38,000 hours
(i) Loss of contribution due to unproductive hours:
Sales value
 Total unproductive hours
Actual productive hours
99, 63, 960
=  1,38, 000 hours =` 26,64,780
5,16, 000 hrs
26, 64, 780
Contribution lost for 1,38,000 hours =  20 = 5,32, 956
100
Computation of profit forgone on account of employee turnover
(`)
Contribution foregone (as calculated above) 5,32,956
Settlement cost due to leaving 52,584
Recruitment cost 32,088
Selection cost 15,300
Training costs 36,588
Profit foregone 6,69,516

Q.10 Workers left, joined & average RTP Nov 22

HR Ltd. is progressing in its legal industry. One of its trainee executives, Mr. H, in the Personnel department has
calculated labour turnover rate 24.92% for the last year using Flux method.
Following is the data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end
Records clerk 810 1,620 90 2,340
Human Resource Manager ? 30 90 60
Legal Secretary ? 90 --- ?
Staff Attorney ? 30 30 ?
Associate Attorney ? 30 --- 45
Senior Staff Attorney 6 --- --- 18
Senior Records clerk 12 --- --- 51
Litigation attorney ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Staff Attorney --- 12 --- ---
Senior Records clerk --- 39 --- ---
Employees transferred to the Subsidiary Company
Litigation attorney --- --- 90 ---
Associate Attorney --- --- 15 ---

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At the beginning of the year there were total 1,158 employees on the payroll of the company. The opening strength
of the Legal Secretary, Staff Attorney and Associate Attorney were in the ratio of 3 : 3 : 2.
The company has decided to abandon the post of Litigation attorney and consequently all the Litigation attorneys
were transferred to the subsidiary company.
The company and its subsidiary are maintaining separate set of books of account and separate Personnel
Department.
You are required to:
(a) CALCULATE Labour Turnover rate using Replacement method and Separation method.
(b) VERIFY the Labour turnover rate calculated under Flux method by Mr. H

Ans. Working Notes:

(i) Calculation of no. of employees at the beginning and end of the year
At the Beginning At the end
of the year of the year
Records clerk 810 2,340
Human Resource Manager [Left- 90 +Closing- 60 – Joined- 30] 120 60
Legal Secretary* 45 135
Staff Attorney* 45 45
Associate Attorney* 30 45
Senior Staff Attorney 6 18
Senior Records clerk 12 51
Litigation attorney 90 0
Total 1,158 2,694
(*) At the beginning of the year:
Strength of Legal Secretary, Staff Attorney and Associate Attorney =
[1158 – {810 + 120 + 6 + 12 + 90} employees] or [1158 – 1038 = 120 employees]
3 3 2
[{Legal Secretary - 120 × = 45, Staff Attorney - 120 × = 45 & Associate Attorney - 120 × = 30} employees]
8 8 8
At the end of the year:
[Legal Secretary -(Opening 45 + 90 Joining) = 135; Staff Attorney - (Opening 45 + 30 Joined – 30 Left) = 45]

(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Recruitment Replacement Total Joining
Records clerk 90 1,530 90 1,620
Human Resource Manager 90 -- 30 30
Legal Secretary -- 90 -- 90
Staff Attorney 30 -- 30 30
Associate Attorney 15 15 15 30
Senior Staff Attorney -- 12 -- 12
Senior Records clerk -- 39 -- 39
Litigation attorney 90 -- -- --
Total 315 1,686 165 1,851
(Since, HR Ltd. and its subsidiary are maintaining separate Personnel Department, so transfer-in and transfer-
out are treated as recruitment and separation respectively.)
(a) Calculation of Labour Turnover rate:
No.of employeesreplacedduringtheyear
Replacement Method =  100
Averageno.of employeesonroll

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165 165
=  100 =  100 = 8.57%
(1,158 + 2, 694 ) / 2 1, 926
No.of employeesseparatedduringthe year
Separation Method =  100
Averageno.of employeesonroll
315
=  100 = 16.36%
1, 926
(b) Labour Turnover rate under Flux Method:
No.of employees(Joined + Separated)duringthe year
 10
Averageno.of employeesonroll
No. of employees (Replaced + New recruited + Separated) during the year
= x 100
Average no. of employeeson roll
1,851 + 315
 100 = 112.46%
1, 926
Labour Turnover rate calculated by Mr. H is incorrect as it seems he has not taken the No. of new
recruitment while calculating the labour turnover rate under Flux method.

Q.11 Calculate wages payable ICAI MAT

It is seen from the job card for repair of the customer’s equipment that a total of 154 labour hours have been
put in as detailed below:

Worker ‘A’ paid at ` Worker ‘B’ paid at ` Worker ‘C’ paid at

200 per day of 8 100 per day of 8 ` 300 per day of 8
hours hours hours

Monday (hours) 10.5 8.0 10.5

Tuesday (hours) 8.0 8.0 8.0

Wednesday (hours) 10.5 8.0 10.5

Thursday (hours) 9.5 8.0 9.5

Friday (hours) 10.5 8.0 10.5

Saturday (hours) -- 8.0 8.0

Total (hours) 49.0 48.0 57.0

In terms of an award in employee conciliation, the workers are to be paid dearness allowance on the basis of cost
of living index figures relating to each month which works out @ ` 968 for the relevant month. The dearness
allowance is payable to all workers irrespective of wages rate if they are present or are on leave with wages on
all working days.
Each worker has to work for 8 hours on weekdays. Saturday and Sunday will be weekly holiday, however workers
may work on Saturdays due to exigency of work for 4 hours, though full payment of 8 hours will be made with no
other payments.
Overtime is paid twice of ordinary wage rate if a worker works for more than nine hours in a day. Excluding
holidays, the total number of hours works out to 176 in the relevant month. The company’s contribution to
Provident Fund and Employees State Insurance Premium are absorbed into overheads.
CALCULATE the wages payable to each worker.

Ans. Calculation of hours to be paid for worker A:

Normal Extra Overtime Equivalent normal hours for Total
hours hours hours overtime worked normal

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hours
Monday 8 1 1½ 3 12
Tuesday 8 -- -- -- 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday -- -- -- -- --
Total 40 4 5 10 54
Calculation of hours to be paid for worker B:
Normal Extra Overtime Equivalent normal hours Total
hours hours hours for overtime worked normal
hours
Monday 8 --- --- --- 8
Tuesday 8 --- --- --- 8
Wednesday 8 --- --- --- 8
Thursday 8 --- --- --- 8
Friday 8 --- --- --- 8
Saturday 4 4* --- --- 8
Total 44 4 --- --- 4
8

(*Worker-B has not worked more than 9 hours in any day)

Calculation of hours to be paid for worker C:

Normal Extra Overtime Equivalent normal hours Total

hours hours hours for overtime worked normal
hours

Monday 8 1 1½ 3 12

Tuesday 8 --- --- --- 8

Wednesday 8 1 1½ 3 12

Thursday 8 1 ½ 1 10

Friday 8 1 1½ 3 12

Saturday 8* --- --- --- 8

Total 48 4 5 10 62

(*Worker-C will be paid for equivalent 8 hours, though 4 hours of working is required on Saturday. Further,
no overtime will be paid for working beyond 4 hours since it is paid for working beyond 9 hours.)
Wages payable:

A B C

Basic Wages per hour (`) 25.00 12.50 37.50

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Dearness allowance per hour (`) 5.50 5.50 5.50

Hourly rate (`) 30.50 18.00 43.00

Total normal hours 54.00 48.00 62.00

Total Wages payable (`) 1,647.00 864.00 2,666.00

Q.12 Expenses directly attributable ICAI MAT

Aditya Ltd. is an engineering manufacturing company producing job order on the basis of specification given by
the customers. During the last the month it has completed three job works namely A, B and C. The following are
the items of expenditures which are incurred apart from direct materials and direct employee cost:
(i) Office and administration cost- ` 3,00,000.
(ii) Product blueprint cost for job A – ` 1,40,000
(iii) Hire charges paid for machinery used for job work B- ` 40,000
(iv) Salary to office attendants- ` 50,000
(v) One time license fee paid for software used to make computerised graphics for job C- ` 50,000.
(vi) Salary paid to marketing manager- ` 1,20,000.
Required:
CALCULATE direct expenses attributable to each job

Ans. Calculation of Direct expenses

Particulars Job A (`) Job B (`) Job C (`)
Product blueprint cost 1,40,000 -- --
Hire charges paid for machinery -- 40,000 --
license fee paid for software -- -- 50,000
Total Direct expenses 1,40,000 40,000 50,000

Note:
(i) Office and administration cost is classified as overheads.
(ii) Salary paid to office attendants is classified under office and administration cost.
(iii) Salary paid to marketing manager is classified under selling overheads

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4 OVERHEADS
CHAPTER
Q.1 Machine Hour Rate PY Jan 21

A machine shop has 8 identical machines manned by 6 operators. The machine cannot work without an operator
wholly engaged on it. The original cost of all the 8 machines works out to ` 32,00,000. The following particulars
are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Average rate of wages per day of 8 hours per operator ` 100
Production bonus estimated 10% on wages
Power consumed ` 40,250
Supervision and Indirect Labour ` 16,500
Lighting and Electricity ` 6,000
The following particulars are given for a year:
Insurance ` 3,60,000
Sundry work Expenses ` 50,000
Management Expenses allocated ` 5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine shop.

Ans. Workings:
Particulars Six months 6 operators (Hours)
Normal available hours per month (208 x 6 months x 6 operators) 7,488
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
Computation of Comprehensive Machine Hour Rate
Particulars Amount for six months (`)
Operators' wages (7,380/8 x100) 92,250
Production bonus (10% on wages) 9,225
Power consumed 40,250
Supervision and indirect labour 16,500
Lighting and Electricity 6,000
Repair and maintenance {(5% × ` 32,00,000)/2} 80,000
Insurance (` 3,60,000/2) 1,80,000
Depreciation {(` 32,00,000 × 10%)/2} 1,60,000
Sundry Work expenses (` 50,000/2) 25,000
Management expenses (` 5,00,000/2) 2,50,000
Total Overheads for 6 months 8,59,225
Comprehensive Machine Hour Rate = ` 8,59,225/7,200 hours ` 119.33
(Note: Machine hour rate may be calculated alternatively. Further, presentation of figures may also be done on
monthly or annual basis.)

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Q.2 Machine Hour Rate RTP Jul 21

A manufacturing unit has purchased and installed a new machine at a cost of ` 24,90,000 to its fleet of 5 existing
machines. The new machine has an estimated life of 12 years and is expected to realise ` 90,000 as scrap value
at the end of its working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant maintenance work is
carried out on weekends when production is totally halted. The estimated maintenance hours are 416.
During the production hours machine set -up and change over works are carried out. During the set-up
hours no production is done. A total 312 hours are required for machine set-ups and change overs.
(ii) An estimated cost of maintenance of the machine is ` 2,40,000 p.a.
(iii) The machine requires a component to be replaced every week at a cost of ` 2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each operator is paid ` 30,000
per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine consumes 60 units per hour.
During the maintenance the machine consumes only 10 units per hour. Rate of electricity per unit of
consumption is ` 6.
(vi) Departmental and general works overhead allocated to the operation during last year was ` 5,00,000.
During the current year it is estimated to increase by 10%.
Required: COMPUTE the machine hour rate.

Ans. 1. Effective machine hour:

= Budgeted working hours – Machine Set-up time
= 2,496 hours – 312 hours = 2,184 hours.
2. Operators’ salary per annum:
Salary (3 operators × `30,000 × 12 months) ` 10,80,000
Add: Fringe benefits (20% of `10,80,000) ` 2,16,000
` 12,96,000
3. Depreciation per annum
24, 90, 000 − 90, 000
= 2, 00, 000
12 years
Computation of Machine hour Rate
Amount p.a. (`) Amount perhour (`)
Standing charges
 12,96,000 1  12,96,000 98.90
Operators’ Salary   
 6machines 2,184hours 
Departmental and general overheads:
(` 5,00,000 × 110%) 5,50,000 41.97
 5,50,000 1 
  
 6machines 2,184hours 
(A) 18,46,000 140.87
Machine Expenses
 2,00,000  2,00,000 91.58
Depreciation  
 2,184hours 
Electricity:
During working hours (2,496 hours × 60 units `6) 8,98,560 411.43
During maintenance hours (416 hours × 10 units `6) 24,960 11.43
Component replacement cost (2,400 × 52 weeks) 1,24,800 57.14
Machine maintenance cost 2,40,000 109.89
(B) 14,88,320 681.47

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Machine Hour Rate (A + B) 822.34

Q.3 Comprehensive Mac. Hour Rate PY May 19

M/s Zaina Private Limited has purchased a machine costing ` 29,14,800 and it is expected to have a
salvage value of ` 1,50,000 at the end of its effective life of 15 years. Ordinarily the machine is expected to run
for 4,500 hours per annum but it is estimated that 300 hours per annum will be lost for normal repair &
maintenance. The other details in respect of the machine are as follows:
(i) Repair & Maintenance during the whole life of the machine are expected to be
` 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ` 87,384.
(iv) Power consumptions: 10 units per hour @ ` 7 per unit. No power consumption during repair and
maintenance. ·
(v) Salary to operator per month ` 24,000. The operator devotes one third of his time to the machine.
You are required to calculate comprehensive machine hour rate.

Ans. Effective machine hour = 4,500 – 300 = 4,200 hours

Calculation of Comprehensive machine hour rate
Elements of Cost and Revenue Amount (`) Per Annum
Repair and Maintenance 36,000
(`5,40,000 ÷15 years)
Power (4,200 hours × 10 units × `7) 2,94,000
 29,14,800 − 1,50, 000  1,84,320
 
15 years
Depreciation  

Insurance (`29,14,800 × 2%) 58,296

Oil and Lubricant 87,384
Salary to Operator {(`24,000×12)/3} 96,000
Total Cost 7,56,000
Effective machine hour 4,200
Total Machine Rate Per Hour 180

Q.4 Comprehensive Mac. Hour Rate MTP May 19(1)

From the details furnished below you are required to COMPUTE a comprehensive machine-hour rate:
Original purchase price of the machine (subject to depreciation at 10% per Rs. 6,48,000
annum on original cost)
Normal working hours for the month (The machine works for only 75% of 200 hours
normal capacity)
Wages to Machine-man Rs. 400 per day (of 8 hours)
Wages to Helper (machine attendant) Rs. 275 per day (of 8 hours)
Power cost for the month for the time worked Rs. 65,000
Supervision charges apportioned for the machine centre for the month Rs. 18,000
Electricity& Lighting for the month Rs. 9,500
Repairs & maintenance (machine) including Consumable stores per month Rs. 17,500

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Insurance of Plant & Building (apportioned) for the year Rs. 18,250
Other general expense per annum Rs. 17,500
The workers are paid a fixed Dearness allowance of Rs. 4,575 per month. Production bonus payable to workers
in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the basic wage and
dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour-wage for
debit to production.

Ans. Effective machine hours = 200 hours × 75% = 150 hours

Computation of Comprehensive Machine Hour Rate
Per month (Rs.) Per hour (Rs.)
Fixed cost
Supervision charges 18,000.00

Electricity and lighting 9,500.00

Insurance of Plant and building (Rs.18,250 ÷12) 1,520.83
Other General Expenses (Rs.17,500÷12) 1,458.33
Depreciation (Rs.64,800÷12) 5,400.00
35,879.16 239.19
Direct Cost
Repairs and maintenance 17,500.00 116.67
Power 65,000.00 433.33
Wages of machine man 139.27
Wages of Helper 109.41
Machine Hour rate (Comprehensive) 1,037.87
Wages per machine hour
Machine man Helper
Wages for 200 hours
Machine-man (Rs.400 × 25) Rs.10,000.00 ---
Helper (Rs.275 × 25) --- Rs.6,875.00
Dearness Allowance (DA) Rs.4,575.00 Rs.4,575.00
Rs.14,575.00 Rs.11,450.00
Production bonus (1/3 of Basic and DA) 4,858.33 3,816.67
Leave wages (10% of Basic and DA) 1,457.50 1,145.00
20,890.83 16,411.67
Effective wage rate per machine hour Rs.139.27 Rs.109.41

Q.5 Comprehensive Mac. Hour Rate MTP Nov 22(1)

MG Ltd. manufactures three types of products namely A, B and C. The data relating to a period are as under:
Particulars A B C
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (`) 1,350 1,200 1,800

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Production (units) 3,000 5,000 20,000

Currently the company uses traditional costing method and absorbs all production overheads on the basis of
machine hours. The machine hour rate of overheads is ` 90 per hour. Direct labour hour rate is ` 300 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:
Particulars A B C
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
(i) CALCULATE the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
(ii) CALCULATE the cost per unit of each product using activity based costing principles.

Ans. (i) Statement Showing “Cost per unit - Traditional Method”

Particulars of Costs A (`) B (`) C (`)
Direct Materials 1,350 1,200 1,800
Direct Labour [(4, 12, 8 hours) ` 300] 1,200 3,600 2,400
Production Overheads [(10, 18, 14 hours) ` 90] 900 1,620 1,260
Cost per unit 3,450 6,420 5,460

(ii) Statement Showing “Cost per unit - Activity Based Costing”

Products A B C
Production (units) 3,000 5,000 20,000
(`) (`) (`)
Direct Materials (1350, 1200, 1800) 40,50,000 60,00,000 3,60,00,000
Direct Labour (1200, 3600, 2400) 36,00,000 1,80,00,000 4,80,00,000
Machine Related Costs @ ` 27 per hour 8,10,000 24,30,000 75,60,000
(30,000, 90,000, 2,80,000)
Setup Costs @ ` 1,44,000 per setup (20, 10, 20) 28,80,000 14,40,000 28,80,000
Inspection Costs @ ` 72,000 per inspection (100, 40, 60) 72,00,000 28,80,000 43,20,000
Purchase Related Costs @ ` 11,250 per purchase (60, 100, 160) 6,75,000 11,25,000 18,00,000
Total Costs 1,92,15,000 3,18,75,000 10,05,60,000
Cost per unit (Total Cost X Units) 6,405 6,375 5,028
Working Notes:
1.Number of Batches, Purchase Orders, and Inspections-
Particulars A B C Total
A. Production (units) 3,000 5,000 20,000

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B. Batch Size (units) 150 500 1,000

C. Number of Batches [A. ÷ B.] 20 10 20 50
D. Number of Purchase Order per batch 3 10 8
E. Total Purchase Orders [C. X D.] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C. X F.] 100 40 60 200
2.Total Machine Hours-
Particulars A B C
A. Machine Hours per unit 10 18 14
B. Production (units) 3,000 5,000 20,000
C. Total Machine Hours [A. X B.] 30,000 90,000 2,80,000
Total Machine Hours = 4,00,000
Total Production Overheads-
= 4,00,000 hrs. X ` 90 = ` 3,60,00,000
3.Cost Driver Rates-
Cost Pool % Overheads(`) Cost Driver Basis Cost Driver (Units) Cost Driver Rate (`)
Setup 20% 72,00,000 Number of batches 50 1,44,000 per Setup

Inspection 40% 1,44,00,000 Number of inspections 200 72,000 per Inspection

Purchases 10% 36,00,000 Number of purchases 320 11,250 per Purchase

Machine 30% 1,08,00,000 Machine Hours 4,00,000 27 per Machine Hour

Operation

Q.6 Reapportionment RTP May 22

Pretz Ltd. is a manufacturing company having two production departments, ‘A’ & ‘B’ and two service departments
‘X’ & ‘Y’. The following is the budget for March, 2022:
Total (`) A (`) B (`) X (`) Y (`)
Direct material 2,00,000 4,00,000 4,00,000 2,00,000
Direct wages 10,00,000 4,00,000 2,00,000 4,00,000
Factory rent 9,00,000
Power (Machine) 5,10,000
Depreciation 2,00,000
General Lighting 3,00,000
Perquisites 4,00,000
Additional information:
Area (Sq. ft.) 500 250 250 500
Capital value of assets (` lakhs) 40 80 20 20
Light Points 10 20 10 10
Machine hours 1,000 2,000 1,000 1,000
Horse power of machines 50 40 15 25
A technical assessment of the apportionment of expenses of service departments is as under:
A B X Y

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Service Dept. ‘X’ (%) 55 25 – 20

Service Dept. ‘Y’ (%) 60 35 5 –

You are required to:

(a) PREPARE a statement showing distribution of overheads to various departments.
(b) PREPARE a statement showing re-distribution of service departments expenses to production departments
using-
(i) Simultaneous equation method
(ii) Trial and error method
(i) Repeated Distribution Method.

Ans. Primary Distribution of Overheads

Basis Total (`) A (`) B (`) X (`) Y (`)
Direct materials Direct 6,00,000 – – 4,00,000 2,00,000
Direct wages Direct 6,00,000 – – 2,00,000 4,00,000
Factory rent (2:1:1:2) Area 9,00,000 3,00,000 1,50,000 1,50,000 3,00,000
Power (Machine) H.P. × Machine 5,10,000 1,50,000 2,40,000 45,000 75,000
(10:16:3:5)* Hrs.
Depreciation (2:4:1:1) Capital value 2,00,000 50,000 1,00,000 25,000 25,000
General Lighting Light Points 3,00,000 60,000 1,20,000 60,000 60,000
(1:2:1:1)
Perquisites (5:2:1:2) Direct Wages 4,00,000 2,00,000 80,000 40,000 80,000
35,10,000 7,60,000 6,90,000 9,20,000 11,40,000
*{(1000×50) : (2000×40) : (1000×15) : (1000×25)}
(50000 : 80000 : 15000 : 25000)
(10 : 16 : 3 : 5)
(i) Redistribution of Service Department’s expenses using ‘Simultaneous equation method’
X = 9,20,000 + 0.05 Y
Y = 11,40,000 + 0.20 X
Substituting the value of X,
Y = 11,40,000 + 0.20 (9,20,000 + 0.05 Y)
= 13,24,000 + 0.01 Y
Y - 0.01Y = 13,24,000
Y = 13,24,000
0.99
Y = ` 13,37,374
The total expense of Y is ` 13,37,374 and that of X is ` 9,86,869 i.e., ` 9,20,000 + (0.05 × ` 13,37,374).
Distribution of Service departments’ overheads to Production departments
Production Departments

A (`) B (`)

Overhead as per primary distribution 7,60,000 6,90,000

Dept- X (55% and 25% of ` 9,86,869) 5,42,778 2,46,717

Dept- Y (60% and 35% of ` 13,37,374) 8,02,424 4,68,081

21,05,202 14,04,798

(i) Redistribution of Service Department’s expenses using ‘Trial and Error Method’:

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Service Departments
X (`) Y (`)
Overheads as per primary distribution 9,20,000 11,40,000
(i) Apportionment of Dept-X expenses to Dept-Y (20% of ` 9,20,000) --- 1,84,000

--- 13,24,000
(ii) Apportionment of Dept-Y expenses to Dept-X (5% of ` 13,24,000) 66,200 ---

(i) Apportionment of Dept-X expenses to Dept-Y (20% of ` 66,200) --- 13,240

(ii) Apportionment of Dept-Y expenses to Dept-X (5% of ` 13,240)

662 ---
(i) Apportionment of Dept-X expenses to Dept-Y (20% of ` 662)
132
(ii) Apportionment of Dept-Y expenses to Dept-X (5% of ` 132) 7
Total 9,86,869 13,37,372
Distribution of Service departments’ overheads to Production departments
Production Departments
A (`) B (`)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ` 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ` 13,37,372) 8,02,423 4,68,080
21,05,201 14,04,797

(iii) Redistribution of Service Department’s expenses using ‘repeated distribution method’:

A (`) B (`) X (`) Y (`)
Overhead as per primary distribution 7,60,000 6,90,000 9,20,000 11,40,000
Dept. X overhead 5,06,000 2,30,000 (9,20,000) 1,84,000
apportioned in the ratio (55:25:—:20)
Dept. Y overhead 7,94,400 4,63,400 66,200 (13,24,000)
apportioned in the ratio (60:35:5: —)
Dept. X overhead apportioned in the ratio (55:25:—:20) 36,410 16,550 (66,200) 13,240
Dept. Y overhead 7,944 4,634 662 (13,240)
apportioned in the ratio (60:35:5: —)
Dept. X overhead 364 166 (662) 132
apportioned in the ratio (55:25:—:20)
Dept. Y overhead 79 46 7 (132)
apportioned in the ratio (60:35:5: —)
Dept. X overhead 4 3 (7) -
apportioned in the ratio (55:25:—:20)
21,05,201 14,04,799 − −

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Q.7 Overhead Recovery Rate MTP Nov 22(2)

Madhu Ltd has calculated a predetermined overhead rate of `22 per machine hour for its Quality Check (QC)
department. This rate has been calculated for the budgeted level of activity and is considered as appropriate
for absorbing overheads. The following overhead expenditures at various activity levels had been estimated.
Total overheads Number of machine hours
`3,38,875 14,500
`3,47,625 15,500
`3,56,375 16,500
You are required to:
(i) COMPUTE the variable overhead absorption rate per machine hour.
(ii) COMPUTE the estimated total fixed overheads.
(iii) CALCULATE the budgeted level of activity in machine hours.
(iv) CALCULATE the amount of under/over absorption of overheads if the actual machine hours were 14,970
and actual overheads were `3,22,000.

Ans (i) Computation of variable overhead absorption rate:

Difference in Total overheads
Variable overhead absorption rate =
Difference in levels in terms of machine hours
3,47,625-3,38,875
= = Rs.8.75 per machine
15,500hours-14,500hours

(ii) Computation of Total fixed overheads:

(`)
Total overheads at 14,500 hours 3,38,875
Less: Variable overheads (Rs. 8.75 × 14,500) (1,26,875)
Total fixed overheads 2,12,000

(iii) Calculation of Budgeted level of activity in machine hours:

Let budgeted level of activity = X
8.75 + 2,12, 000
Then, = `32
x
8.75X + Rs.2,12,000 = 22X

13.25X = 2,12,000
X =16,000
Thus, budgeted level of activity = 16,000 machine hours.

(iv) Calculation of Under / Over absorption of overheads:

(Rs.)
Actual overheads 3,22,000
Absorbed overheads (14,970 hours × Rs. 22 per hour) 3,29,340
Over-absorption (3,29,340 – 3,22,000) 7,340

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Q.8 Predetermined Machine Hour RTP Nov 20

Rate
You are given the following information of the three machines of a manufacturing department of X Ltd.:

Preliminary estimates of expenses (per annum)

Machines
Total (`) A (`) B (`) C (`)
Depreciation 2,00,000 75,000 75,000 50,000
Spare parts 1,00,000 40,000 40,000 20,000
Power 4,00,000
Consumable stores 80,000 30,000 25,000 25,000
Insurance of machinery 80,000
Indirect labour 2,00,000
Building maintenance expenses 2,00,000
Annual interest on capital outlay 1,00,000 40,000 40,000 20,000
Monthly charge for rent and rates 20,000
Salary of foreman (per month) 42,000
Salary of Attendant (per month) 12,000

(The foreman and the attendant control all the three machines and spend equal time on them.)

The following additional information is also available:

Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing
department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity throughout
the year and 2% is reasonable for breakdown.
You are required to :

CALCULATE predetermined machine hour rates for the above machines after taking into consideration the
following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
• 20% general increase in wages rates.

Ans Computation of Machine Hour Rate

Basis of Machines
apportionment Total (`) A (`) B (`) C (`)
(A) Standing Charges
Insurance Depreciation Basis (3:3:2) 80,000 30,000 30,000 20,000
Indirect Labour Direct Labour (2:3:3) 2,40,000 60,000 90,000 90,000
Building maintenance Floor Space (2:2:1) 2,00,000 80,000 80,000 40,000

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expenses
Rent and Rates Floor Space (2:2:1) 2,40,000 96,000 96,000 48,000
Salary of foreman Equal 5,04,000 1,68,000 1,68,000 1,68,000
Salary of attendant Equal 1,44,000 48,000 48,000 48,000
Total standing charges 14,08,000 4,82,000 5,12,000 4,14,000
Hourly rate for standing charges 247.43 262.83 212.53
(B) Machine Expenses:
Depreciation Direct 2,00,000 75,000 75,000 50,000
Spare parts Final estimates 1,32,250 46,000 57,500 28,750
Power K.W. rating (3:2:3) 4,00,000 1,50,000 1,00,000 1,50,000
Consumable Stores Direct 80,000 30,000 25,000 25,000
Total Machine expenses 8,12,250 3,01,000 2,57,500 2,53,750
Hourly Rate for Machine expenses 154.52 132.19 130.26
Total (A + B) 22,20,250 7,83,000 7,69,500 6,67,750
Machine Hour rate 401.95 395.02 342.79
Working Notes:
(i) Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days

Total working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}

= 2,008 hours + 200 = 2,208 hours.
Total effective hours= Total working hours × 90% - 2% for break-down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.

(ii) Amount of spare parts is calculated as under:

A (`) B (`) C (`)
Preliminary estimates 40,000 40,000 20,000
Add: Increase in price @ 15% 6,000 6,000 3,000
46,000 46,000 23,000
Add: Increase in consumption @ - 11,500 5,750
25%
Estimated cost 46,000 57,500 28,750
(iii) Amount of Indirect Labour is calculated as under:
(`)
Preliminary estimates 2,00,000
Add: Increase in wages @ 20% 40,000
2,40,000
(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from the cost accounts.

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Q.9 Predetermined OH Rate RTP Nov 22

SE Limited manufactures two products- A and B. The company had budgeted factory overheads amounting to `
36,72,000 and budgeted direct labour hour of 1,80,000 hours. The company uses pre-determined overhead
recovery rate for product costing purposes.
The department-wise break-up of the overheads and direct labour hours were as follows:
Particulars Budgeted Budgeted direct Rate per direct
overheads labour hours labour hour
Department Pie ` 25,92,000 90,000 hours ` 28.80
Department Qui ` 10,80,000 90,000 hours ` 12.00
Total ` 36,72,000 1,80,000 hours
Additional Information:
Each unit of product A requires 4 hours in department Pie and 1 hour in department Qui. Also, each unit of product
B requires 1 hour in department Pie and 4 hours in department Qui.
This was the first year of the company's operation. There was no WIP at the end of the year. However, 1,800
and 5,400 units of Products A and B were on hand at the end of the year.
The budgeted activity has been attained by the company. You are required to:
(i) DETERMINE the production and sales quantities of both products 'A' and 'B' for the above year.
(ii) ASCERTAIN the effect of using a pre-determined overhead rate instead of department-wise overhead
rates on the company's income due to its effect on stock value.
(iii) CALCULATE the difference in the selling price due to the use of pre-determined overhead rate instead of
using department-wise overhead rates. Assume that the direct costs (material and labour costs) per unit of
products A and B were ` 25 and ` 40 respectively and the selling price is fixed by adding 40% over and
above these costs to cover profit and selling and administration overhead.

Ans (i) Computation of production and sales quantities:

The products processing times are as under –
Product A B Total
Department Pie 4 hours 1 hour 90,000 hours
Department Qui 1 hour 4 hours 90,000 hours
Let X and Y be the number of units (production quantities) of the two products. Converting these into
equations, we have –
4X + Y = 90,000 & X + 4Y = 90,000
Solving the above, we get X = 18,000; Y = 18,000

Hence, the Production and Sales Quantities are determined as under –

Product Production Quantity Closing Stock (Given) Sales Quantity
(Balancing Figure)
A 18,000 units 1,800 units 16,200 units
B 18,000 units 5,400 units 12,600 units

(i) Effect of using pre-determined rate of overheads on the company's profit

Product Closing Overhead Overhead included Difference in
Stock included using using department overhead in
Quantity pre- rate closing stock
determined value / Effect
rate on closing stock
value

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A 1,800 1,800 x 5 hours Pie = 1,800 units x 4 (-) ` 45,360

units x ` 20.40 hours x ` 28.80
= ` 1,83,600 = ` 2,07,360
Qui = 1,800 units x 1
hour x ` 12
= ` 21,600
B 5,400 5,400 x 5 hours Pie = 5,400 units x 1 (+) ` 1,36,080
units x ` 20.40 hour x ` 28.80
= ` 5,50,800 = ` 1,55,520
Qui = 5,400 units x 4
hours x `12
= ` 2,59,200
Total ` 7,34,400 ` 6,43,680 (+) ` 90,720
Use of pre-determined overhead rate has resulted in over valuation of stock by
` 90,720 due to which the company's income would be affected (increase) by ` 90,720. Profit would be
affected only to the extent of Overhead contained in closing finished goods and closing WIP, if any.

(ii) Effect of using pre-determined on the products' selling prices

Particulars Product A Product B
Selling Price per unit if pre-determined `177.80 ` 198.80
overhead rate is used
Selling Price per unit if department wise rate ` 213.08 `163.52
is used
Difference ` 35.28 ` 35.28
Under-Priced Over-Priced

Workings:

36, 72, 000

(1) Pre-determined overhead recovery rate = = 20.40 per direct labour
1,80, 000 hours
(2) If pre-determined recovery rate is used
Particulars Product A in ` Product B in `
Materials & Labour 25.00 40.00
Add: Production Overhead 102.00 102.00
A = 5 hours x ` 20.40 per hour
B = 5 hours x ` 20.40 per hour
Cost of production 127.00 142.00
Add: 40% of margin 50.80 56.80
177.80 198.50

(3) If department-wise recovery rate is used

Particulars Product A in ` Product B in `
Materials & Labour 25.00 40.00
Add: Production Overhead 127.20 76.80
A = Pie = 4 hours x ` 28.80
Qui = 1 hour x ` 12
B =Pie = 1 hour x ` 28.80

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Qui = 4 hours x ` 12
Cost of production 152.20 116.80
Add: 40% of margin 60.88 46.72
Selling Price per unit 213.08 163.52

Q.10 Predetermined Mach. Hour Rate MTP Nov 20

s
A Ltd. manufactures two products- A and B. The manufacturing division consists of two production
departments P1 and P2 and two service departments S1 and S2.
Budgeted overhead rates are used in the production departments to absorb factory overheads to the products.
The rate of Department P1 is based on direct machine hours, while the rate of Department P2 is based on direct
labour hours. In applying overheads, the pre-determined rates
are multiplied by actual hours.
For allocating the service department costs to production departments, the basis adopted is as
follows:
(i) Cost of Department S1 to Department P1 and P2 equally, and
(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2 : 1 respectively.
The following budgeted and actual data are available:
Annual profit plan data:
Factory overheads budgeted for the year:
Departments P1 27,51,000 S1 8,00,000
P2 24,50,000 S2 6,00,000

Budgeted output in units: Product A50,000; B 30,000.

Budgeted raw-material cost per unit:
Product A ` 120; Product B ` 150.
Budgeted time required for production per unit:
Department P 1 : Product A : 1.5 machine hours

Product B : 1.0 machine hour

Department P 2 : Product A : 2 Direct labour hours Product B : 2.5 Direct labour hours

Average wage rates budgeted in Department P 2 are:

Product A - ` 72 per hour and Product B – ` 75 per hour.

All materials are used in Department P 1 only.
Actual data (for the month of Jan, 2020):
Units actually produced: Product A : 4,000 units

Product B : 3,000 units

Actual direct machine hours worked in Department P 1:

On Product A 6,100 hours, Product B 4,150 hours.

Actual direct labour hours worked in Department P 2:

On Product A 8,200 hours, Product B 7,400 hours.

Costs actually incurred: Product A Product B

` `

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Raw materials 4,89,000 4,56,000

Wages 5,91,900 5,52,000
Overheads: Department P1 2,50,000 S1 80,000

P2 2,25,000 S2 60,000

You are required to:

(i) COMPUTE the pre-determined overhead rate for each production department.
(ii) PREPARE a performance report for Jan, 2020 that will reflect the budgeted costs and actual costs.

Ans. (i) Computation of pre-determined overhead rate for each production department from budgeted data

Production Service Department

Department
P1 P2 S1 S2
Budgeted factory overheads for the year 27,51,000 24,50,000 8,00,000 6,00,000
(`)
Allocation of service department S1’s 4,00,000 4,00,000 (8,00,000) --
costs to production departments P1 and P2
equally (`)
Allocation of service department S2’s 4,00,000 2,00,000 – (6,00,000)
costs to production departments P1 and P2
in the ratio of 2:1 (`)
Total 35,51,000 30,50,000 -- --
Budgeted machine hours in department 1,05,000 --
P1 (working note-1)
Budgeted labour hours in department P2 -- 1,75,000
(working note-1)
Budgeted machine/ labour hour rate (`) 33.82 17.43

(ii) Performance report for Jan, 2020

(When 4,000 and 3,000 units of Products A and B respectively were actually produced)
Budgeted (`) Actual (`)
Raw materials used in Dept. P1: (`)

A : 4,000 units × ` 120 4,80,000 4,89,000

B : 3,000 units × ` 150 4,50,000 4,56,000
Direct labour cost
(on the basis of labour hours worked in department
P2)
A : 4,000 units × 2 hrs. × ` 72 5,76,000 5,91,900
B : 3,000 units × 2.5 hrs. × ` 75 5,62,500 5,52,000
Overhead absorbed on machine hour basis in Dept.
P1:
A : 4,000 units × 1.5 hrs. × ` 33.82 2,02,920 1,96,420*

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B : 3,000 units × 1 hr. × ` 33.82 1,01,460 1,33,630*

Overhead absorbed on labour hour basis in Dept. P2:

A : 4,000 units × 2 hrs. × ` 17.43 1,39,440 1,49,814**

B : 3,000 units × 2.5 hrs. × ` 17.43 1,30,725 1,35,198**
26,43,045 27,03,962
Working notes:
1.
Product A Product B Total
Budgeted output (units) 50,000 30,000
Budgeted machine hours in Dept. P1 75,000 30,000 1,05,000
(50,000×1.5 hrs.) (30,000×1 hr.)
Budgeted labour hours in Dept. P2 1,00,000 75,000 1,75,000
(50,000×2 hrs.) (30,000×2.5 hrs.)

2.

Product A Product B Total

Actual output (units) 4,000 3,000
Actual machine hours utilized in Dept. P1 6,100 4,150 10,250

Actual labour hours utilised in Dept. P2 8,200 7,400 15,600

3. Computation of actual overhead rates for each production department from

actual data

Production Service Department

Department
P1 P2 S1 S2
Actual factory overheads for the month of Jan, 2020 2,50,000 2,25,000 80,000 60,000
(`)
Allocation of service Dept. S1’s costs to production 40,000 40,000 (80,000) -
Dept. P1 and P2 equally (`)
Allocation of service Dept. S2’s costs to production 40,000 20,000 - (60,000)
Dept. P1 and P2 in the ratio of 2:1 (`)
Total 3,30,000 2,85,000 -- --
Actual machine hours in Dept. P1 (working note 2) 10,250 --
Actual labour hours in Dept. P2 (working note 2) -- 15,600

Actual machine/ labour hour rate (`) 32.20 18.27

4. Actual overheads absorbed (based on machine hours)

A : 6,100 hrs × ` 32.20 = ` 1,96,420
B : 4,150 hrs × ` 32.20 = ` 1,33,630
5. Actual overheads absorbed (based on labour hours)
A : 8,200 hrs × ` 18.27 = ` 1,49,814
B : 7,400hrs × ` 18.27 = 1,35,198

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Q.11 Under / Over Absorbed OH RTP May 18

PQR manufacturers – a small scale enterprise, produces a single product and has adopted a policy to recover the
production overheads of the factory by adopting a single blanket rate based on machine hours. The annual
budgeted production overheads for the year 2017-18 are ` 44,00,000 and budgeted annual machine hours are
2,20,000. For a period of first six months of the financial year 2017-18, following information were extracted
from the books:
Actual production overheads ` 24,88,200
Amount included in the production overheads:

Paid as per court’s order ` 1,28,000

Expenses of previous year booked in current year ` 1,200

Paid to workers for strike period under an award ` 44,000

Obsolete stores written off ` 6,700
Production and sales data of the concern for the first six months are as under:
Production:

Finished goods 24,000 units

Works-in-progress

(50% complete in every respect) 18,000 units

Sale:
Finished goods 21,600 units
The actual machine hours worked during the period were 1,16,000 hours. It is revealed from the analysis of
information that ¼ of the under/ over absorption was due to defective production policies and the balance was
attributable to increase/decrease in costs.
Required:
(i) DETERMINE the amount of under/over absorption of production overheads for the six-month period of
2017-18.
(ii) EXAMINE the accounting treatment of under/ over absorption of production overheads, and
(iii) CALCULATE the apportionment of the under/ over absorbed overheads over the items.

Ans (i) Amount of under/ over absorption of production overheads during the period of first six months of
the year 2017-2018:
Amount (`) Amount (`)
Total production overheads actually incurred during the 24,88,200
period
Less: Amount paid to worker as per court order 1,28,000
Expenses of previous year booked in the current year 1,200
Wages paid for the strike period under an award 44,000
Obsolete stores written off 6,700 (1,79,900)
23,08,300
Less: Production overheads absorbed as per machine hour
rate (1,16,000 hours × `20*) 23,20,000
Amount of over absorbed production overheads 11,700
44,00,000
*Budgeted Machine hour rate (Blanket rate) = = ` 20 per hour
2,20,000hours

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(ii) Accounting treatment of over absorbed production overheads: As, one fourth of the over absorbed
overheads were due to defective production policies, this being abnormal, hence should be transferred to
Costing Profit and Loss Account.
Amount to be transferred to Costing Profit and Loss Account = (11,700 × ¼) = ` 2,925
Balance of over absorbed production overheads should be distributed over Works in progress, finished
goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (11,700 × ¾) =` 8,775

8,775
Supplementary rate = =` 0.2659 per unit
33,000Unites
(iii) Apportionment of under absorbed production overheads over WIP, Finished goods and Cost of sales:

Equivalent Amount
completed units (`)
Work-in-Progress (18,000 units × 50% × ` 0.2659) 9,000 2,393
Finished goods (2,400 units × ` 0.2659) 2,400 638
Cost of sales (21,600 units × ` 0.2659) 21,600 5,744
Total 33,000 8,775

Q.12 Under / Over Absorbed OH ICAI MAT

A factory has three production departments. The policy of the factory is to recover the production overheads
of the entire factory by adopting a single blanket rate based on the percentage of total factory overheads to
total factory wages. The relevant data for a month are given below:
Department Direct Direct Factory Direct Machine
Materials Wages Overheads Labour hours hours
(`) (`) (`)
Budget:

Machining 6,50,000 80,000 3,60,000 20,000 80,000

Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000

Packing 1,00,000 70,000 1,25,000 50, 000 -

Actual:
Machining 7,80,000 96,000 3,90,000 24,000 96,000

Assembly 1,36,000 2,70,000 84,000 90,000 11,000

Packing 1,20,000 90,000 1,35,000 60,000 -

The details of one of the representative jobs produced during the month are as under:
Job No. CW 7083 :
Department Direct Materials Direct Direct Labour hours Machine hours
Wages (`)
Machining 1,200 240 60 180
Assembly 600 360 120 30
Packing 300 60 40 -
The factory adds 30% on the factory cost to cover administration and selling overheads and profit.
Required:
(i) COMPUTE the overhead absorption rate as per the current policy of the company and determine the
selling price of the Job No. CW 7083.

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(ii) Suggest any suitable alternative method(s) of absorption of the factory overheads and CALCULATE the
overhead recovery rates based on the method(s) so recommended by you.
(iii) DETERMINE the selling price of Job CW 7083 based on the overhead application rates calculated in (ii)
above.
(iv) CALCULATE the department-wise and total under or over recovery of overheads based on the company’s
current policy and the method(s) recommended by you.

Ans (i) Computation of overhead absorption rate

(as per the current policy of the company)
Department Budgeted factory Budgeted direct wages
Overheads
(`) (`)
Machinery 3,60,000 80,000
Assembly 1,40,000 3,50,000
Packing 1,25,000 70,000
Total 6,25,000 5,00,000
Budgeted factory overheads
Overhead absorption rate = x100
Budgeted direct wages
6,25, 000
= × 100 = 125% of Direct wages
5, 00, 000
(`)

Direct materials (` 1,200 + ` 600 + ` 300) 2,100.00

Direct wages (` 240 + ` 360 + ` 60) 660.00

Overheads (125% × ` 660) 825.00

Total factory cost 3,585.00

Add: Mark-up (30% × ` 3,585) 1,075.50

Selling price 4,660.50

(ii) Methods available for absorbing factory overheads and their

overhead recovery rates in different departments
1. Machining Department
In the machining department, the use of machine time is the predominant factor of production. Hence
machine hour rate should be used to recover overheads in this department. The overhead recovery
rate based on machine hours has been calculated as under:
Budgeted factory overheads
Machine hour rate =
Budgeted machine hours
3, 60, 000
= = ` 4.50 per hour
80, 000 hours
2. Assembly Department
In this department direct labour hours is the main factor of production. Hence direct labour hour rate
method should be used to recover overheads in this department. The overheads recovery rate in this
case is:
Budgeted factory overheads
Direct labour hour rate=
Budgeted direct labourhours

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1, 40, 000
= = ` 1.40 per hour
1, 00, 000 hours
3. Packing Department
Labour is the most important factor of production in this depart- ment. Hence direct labour hour rate
method should be used to recover overheads in this department.
The overhead recovery rate in this case comes to:
Budgeted factory overhead
Budgeted factory overheads
Direct labour hour rate =
Direct labour hours
1,25, 000
= = ` 2.50 per hour
50, 000 hours
(iii) Selling Price of Job CW-7083 [based on the overhead application rates calculated in (ii) above]
(`)

Direct materials 2,100.00

Direct wages 660.00

Overheads (Refer to Working note) 1,078.00

Factory cost 3,838.00

Add: Mark up (30% of ` 3,838) 1,151.40

Selling price 4,989.40

Working note:
Overhead Summary Statement
Dept. Basis Hours Rate(`) Overheads (`)
Machining Machine hour 180 4.50 810
Assembly Direct labour hour 120 1.40 168
Packing Direct labour hour 40 2.50 100
Total 1,078

(ii) Department-wise statement of total under or over recovery of overheads

(a) Under current policy
Departments
Machining Assembly Packing Total
(`) (`) (`) (`)
Direct wages (Actual) 96,000 2,70,000 90,000
Overheads recovered @
125% of Direct wages: (A) 1,20,000 3,37,500 1,12,500 5,70,000
Actual overheads: (B) 3,90,000 84,000 1,35,000 6,09,000
(Under)/Over recovery of
overheads : (A–B) (2,70,000) 2,53,500 (22,500) (39,000)

(b) As per methods suggested

Basis of overhead recovery
Machine Direct Direct Total (`)
hours labour labour
hours hours

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(Assembly) (Packing)
Hours worked 96,000 90,000 60,000
Rate/hour (`) 4.50 1.40 2.50
Overhead recovered (`): (A) 4,32,000 1,26,000 1,50,000 7,08,000
Actual overheads (`): (B) 3,90,000 84,000 1,35,000 6,09,000
(Under)/Over recovery: (A-B) 42,000 42,000 15,000 99,000

Q.13 Cost Sheet ICAI MAT

A light engineering factory fabricates machine parts for customers. The factory commenced fabrication of 12
nos. machine parts as per customers’ specifications, the expenditure incurred on the job for the week ending 21st
August is as tabulated below:
(`) (`)
Direct materials (all items) 780.00
Direct labour (manual) 20 hours @` 15 per hour 300.00
Machine facilities :
Machine No. I : 4 hours @ ` 45 180.00
Machine No. II : 6 hours @ ` 65 390.00 570.00
Total 1,650.00
Overheads @ ` 8 per hour on 20 manual hours 160.00
Total cost 1,810.00
The overhead rate of ` 8 per hour is based on 3,000 man hours per week; similarly, the machine hour rates are
based on the normal working of Machine Nos. I and II for 40 hours out of 45 hours per week.
After the close of each week, the factory levies a supplementary rate for the recovery of full overhead expenses
on the basis of actual hours worked during the week. During the week ending 21st August, the total labour hours
worked was 2,400 and Machine Nos. I and II had worked for 30 hours and 32.5 hours respectively.
PREPARE a Cost Sheet for the job for the fabrication of 12 nos. machine parts duly levying the supplementary
rates.

Ans Fabrication of 12 nos. machine parts (job No)

Date of commencement: 16th August Date of Completion:
Cost sheet for the week ending, August 21st:
(`) (`)
Direct materials (all items) 780.00
Direct labour (manual) 20 hours @` 15 per hour 300.00
Machine facilities:
Machine No. I : 4 hours @ ` 45 180.00
Machine No. II : 6 hours @ ` 65 390.00 570.00
Total 1,650.00
Overheads @ ` 8 per hour on 20 manual hours 160.00
Total cost 1,810.00
Supplementary Rates
Overheads 20 hours @ ` 2 per hour (Refer WN-1) 40.00
Machine facilities: (Refer WN-2)
Machine No. I - 4 hours @ ` 15 60.00
Machine No. II - 6 hours @ ` 15 90.00 190.00
Cost 2,000.00
Working notes (WN):
1. Overheads budgeted: 3,000 man-hours × `8 =`24,000
Actual hours: 2,400 man-hours
Actual rate per hour `24,000 ÷ 2,400 hours = `10
Supplementary charge ` 2 (`10 – ` 8) per hour
2. Machine facilities:

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Machine No. I Machine No. II
Budgeted `1,800 `2,600
(40 × `45) (40 × `65)
Actual number of hours 30 32.5
Actual rate per hour `60.00 `80.00
Supplementary rate per hour ` 15.00 ` 15.00
(`60.00 – `45.00) (`80.00 – `65.00)

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5 ACTIVITY BASED COSTING

CHAPTER

Q.1 ABC v/s Absorption PY May 19

MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct labour
hours. The budgeted overheads and direct labour hours for the month of March 2019 are ` 15,00,000 and
25,000 hours respectively. The information about the company's products is as follows:

Equipment
A B
Budgeted Production Volume 3,200 units 3,850 units
Direct Material Cost ` 350 per unit ` 400 per unit
Direct Labour Cost
A: 3 hours @ ` 120 per hour ` 360
B: 4 hours @ ` 120 per hour ` 480
Overheads of ` 15,00,000 can be identified with the following three major activities:
Order Processing: ` 3,00,000
Machine Processing: ` 10,00,000
Product Inspection: ` 2,00,000
These activities are driven by the number of orders processed, machine hours worked and inspection hours
respectively. The data relevant to these activities is as follows:

Orders processed Machine hours worked Inspection hours

A 400 22,500 5,000
B 200 27,500 15,000

Total 600 50,000 20,000

Required:
(i) Prepare a statement showing the manufacturing cost per unit of each product using the absorption
costing method assuming the budgeted manufacturing volume is attained.
(ii) Determine cost driver rates and prepare a statement showing the manufacturing cost per unit of
each product using activity based costing, assuming the budgeted manufacturing volume is attained.
(iii) MNO Ltd.'s selling prices are based heavily on cost. By using direct labour hours as an application base,
calculate the amount of cost distortion (under costed or over costed) for each equipment.

Ans (i) Overheads application base: Direct labour hours

Equipment Equipment
A (`) B (`)
Direct material cost 350 400
Direct labour cost 360 480
Overheads* 180 240
890 1120

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 Budgeted overheads  15, 00 , 000

*Pre-determined rate =  = = 60
 Budgeted direct labour hours  25 , 000 hours

(ii) Estimation of Cost-Driver rate

Activity Overhead cost Cost-driver level Cost driver rate

(`) (`)
Order processing 600
3,00,000 Orders processed 500
Machine processing 50,000
10,00,000 Machine hours 20
Inspection 15,000
2,00,000 Inspection hours 10
Equipment Equipment
A (`) B (`)
Direct material cost 350 400
Direct labour cost 360 480
Prime Cost(A) 710 880
Overhead Cost
Order processing 400: 200 2,00,000 1,00,000
Machine processing 22,500: 27,500 4,50,000 5,50,000
Inspection 5,000: 15,000 50,000 1,50,000
Total overhead cost 7,00,000 8,00,000

(iii) Calculation of Cost Distortion

Equipment Equipment

A (`) B (`)
Unit manufacturing cost–using direct labour
hours as an application base 890.00 1,120.00
Unit manufacturing cost-using activity based
costing 928.75 1,087.79
Cost distortion -38.75 32.21

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Q.2 ABC v/s Absorption PY Dec 21

A Drug Store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. Due to some
constraints, it has decided to go for only one product line of drugs. It has provided the following data for year
2020-21 for each product line:

Drugs Types
A B C
Revenues (in `) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in `) 41,44,500 68,16,750 1,20,63,750
Number of purchase orders placed (in nos.) 560 810 630
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Units sold (in Nos.) 1,75,200 1,50,300 1,44,500

Following additional information is also provided:

Activity Description of activity Total Cost Cost-allocation base
(`)
Drug Licence fee Drug Licence fee 5,00,000 To be distributed in ratio 2:3:5
between A, B and C

Ordering Placing of orders for 8,30,000 2,000 purchase orders

purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of foods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf- stocking time

Customer Support Assistance provided to 28,20,000 4,70,000 units sold

customers

You are required to:

(i) Calculate the operating income and operating income as a percentage (%) of revenue of each product
line if:
(a) All the support costs (Other than cost of goods sold) are allocated in the ratio of cost of goods
sold.
(b) All the support costs (Other than cost of goods sold) are allocated using activity-based costing
system.
(ii) Give your opinion about choosing the product line on the basis of operating income as a percentage
(%) of revenue of each product line under both the situations as above.

Ans (i) (a) Statement of Operating income and Operating income as a percentage of revenues for each
product line
(When support costs are allocated to product lines on the basis of cost of goods sold of each
product)

Drug A (`) Drug B (`) Drug C (`) Total (`)

Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000

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Cost of Goods sold (COGS): (B) 41,44,500 68,16,750 1,20,63,750 2,30,25,000

Support cost (40% of COGS): (C) 16,57,800 27,26,700 48,25,500 92,10,000

(Refer working notes)

Total cost: (D) = {(B) + (C)} 58,02,300 95,43,450 1,68,89,250 3,22,35,000

Operating income: E = 16,47,700 16,31,550 17,35,750 50,15,000

{(A)-(D)}
Operating income as a 22.12% 14.60% 9.32% 13.46%
% of revenues: (E/A) × 100)

Working notes:
1. Total support cost

(`)
Drug Licence Fee 5,00,000
Ordering 8,30,000
Delivery 18,20,000
Shelf stocking 32,40,000
Customer support 28,20,000
Total support cost 92,10,000

2. Percentage of support cost to cost of goods sold (COGS):

Total Support Cost
= x100
Total cost of goods sold
92,10 , 000
= x100 = 40%
2,30 ,25, 000

3. Cost for each activity cost driver:

Activity Total cost(`) Cost allocation base Cost driver rate

(1) (2) (3) (4) = [(2) ÷ (3)]

Ordering 8,30,000 2,000 purchase orders ` 415 per purchase order

Delivery 18,20,000 2,800 deliveries ` 650 per delivery
Shelf-stocking 32,40,000 4,500 hours ` 720 per stocking hour
Customer support 28,20,000 4,70,000 units sold ` 6 per unit sold

(b) Statement of Operating income and Operating income as a percentage of revenues for each
product line
(When support costs are allocated to product lines using an activity-based costing system)

Drug A (`) Drug B (`) Drug C (`) Total (`)

Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost & Goods sold 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug Licence Fee 1,00,000 1,50,000 2,50,000 5,00,000

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Ordering cost* (560:810:630) 2,32,400 3,36,150 2,61,450 8,30,000

Delivery cost* (950:1000:850) 6,17,500 6,50,000 5,52,500 18,20,000

Shelf stocking cost* (900:1250:2350) 6,48,000 9,00,000 16,92,000 32,40,000

Customer Support cost* 10,51,200 9,01,800 8,67,000 28,20,000

(175200:150300:144500)
Total cost: (B) 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income C: {(A) - (B)} 6,56,400 14,20,300 29,38,300 50,15,000

Operating income as a % of revenues 8.81% 12.71% 15.78% 13.46%

(ii) Comparison on the basis of operating income as per the percentage (%) of revenue:
When support costs are allocated to product lines on the basis of cost of goods sold of each product

Drug A (`) Drug B (`) Drug C (`) Total (`)

Operating income as a 22.12% 14.60% 9.32% 13.46%
% of revenues
On comparing the operating income as a % of revenue of each product, Drug A is the most profitable
product line, though its revenue is least but with highest units sold

Q.3 ABC v/s Absorption RTP July

21
The following budgeted information relates to N Ltd. for the year 2021:

Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(`) (`) (`)
Selling price per unit 90 180 140
Direct cost per unit 50 90 95
Hours Hours Hours
Machine department 3 4 5
(machine hours per unit)
Assembly department 6 4 3
(direct labour hours per
unit)

The estimated overhead expenses for the year 2021 will be as below: Machine Department ` 73,60,000 Assembly
Department ` 55,00,000Overhead expenses are apportioned to the products on the following basis: Machine
Department On the basis of machine hours Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respective cost drivers are found:

Cost Pool Amount (`) Cost Driver Quantity

Machining services 64,40,000 Machine hours 9,20,000 hours

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Assembly services 44,00,000 Direct labour hours 11,00,000 hours

Set-up costs 9,00,000 Machine set-ups 9,000 set-ups
Order processing 7,20,000 Customer orders 7,200 orders
Purchasing 4,00,000 Purchase orders 800 orders

As per an estimate the activities will be used by the three products:

Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150

You are required to PREPARE a product-wise profit statement using:

(i) Absorption costing method;
(ii) Activity-based method.

Ans (i) Profit Statement using Absorption costing method:

Particulars Product Total

X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit (`) 90 180 140
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit (`) 50 90 95
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads:
(i) Machine department (`) 24,00,000 25,60,000 24,00,000 73,60,000
(Working note-1)

(ii) Assembly department (`) 30,00,000 16,00,000 9,00,000 55,00,000

(Working note-1)
G. Total Cost (`) [E+F] 1,04,00,000 1,13,60,000 90,00,000 3,07,60,000
H. Profit (C-G) (14,00,000) 30,40,000 (6,00,000) 10,40,000

(ii) Profit Statement using Activity based costing (ABC) method:

Particulars Product Total

X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit (`) 90 180 140
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit (`) 50 90 95
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (`) 21,00,000 22,40,000 21,00,000 64,40,000
(ii) Assembly services (`) 24,00,000 12,80,000 7,20,000 44,00,000
(iii) Set-up costs (`) 4,50,000 3,00,000 1,50,000 9,00,000

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(iv) Order processing (`) 2,20,000 2,40,000 2,60,000 7,20,000

(v) Purchasing (`) 1,50,000 1,75,000 75,000 4,00,000
G. Total Cost (`) [E+F] 1,03,20,000 1,14,35,000 90,05,000 3,07,60,000
H. Profit (`) (C-G) (13,20,000) 29,65,000 (6,05,000) 10,40,000

Working Notes: 1.

Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5 9,20,000
C. Total Machine hours 3,00,000 3,20,000 3,00,000
[A×B]
D. Rate per hour (`) 8 8 8
E. Machine Dept. cost 24,00,000 25,60,000 24,00,000 73,60,000
[C×D]
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour (`) 5 5 5
I Assembly Dept. cost 30,00,000 16,00,000 9,00,000 55,00,000
[G×H]

73,60,000
Machine hour rate = =8
9,20,000hours
55,00,000
Labour hour rate = =5
11,00,000hours
2. Calculation of cost driver rate

Cost Pool Amount Cost Driver Quantity Driver rate

(`) (`)
Machining services 64,40,000 Machine hours 9,20,000 hours 7.00
Assembly services 44,00,000 Direct labour hours 11,00,000 hours 4.00
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups 100.00
Order processing 7,20,000 Customer orders 7,200 orders 100.00
Purchasing 4,00,000 Purchase orders 800 orders 500.00

3. Calculation of activity-wise cost

Products
X Y Z Total
A. Machining hours (Refer 3,00,000 3,20,000 3,00,000 9,20,000
Working note-1)
B. Machine hour rate (`) (Refer 7 7 7
Working note-2)
C. Machining services cost (`) 21,00,000 22,40,000 21,00,000 64,40,000
[A×B]
D. Labour hours (Refer 6,00,000 3,20,000 1,80,000 11,00,000
Working note-1)
E. Labour hour rate (`) (Refer 4 4 4
Working note-2)

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F. Assembly services cost (`) 24,00,000 12,80,000 7,20,000 44,00,000

[D×E]
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (`) (Refer 100 100 100
Working note-2)
I. Set-up cost (`) [G×H] 4,50,000 3,00,000 1,50,000 9,00,000
J Customer orders 2,200 2,400 2,600 7,200
K. Rate per order (`) (Refer 100 100 100
Working note-2)
L. Order processing cost (`) 2,20,000 2,40,000 2,60,000 7,20,000
[J×K]
M. Purchase orders 300 350 150 800
N. Rate per order (`) (Refer 500 500 500
Working note-2)
O. Purchasing cost (`) [M×N] 1,50,000 1,75,000 75,000 4,00,000

Q.5 ABC v/s Absorption RTP Nov

The profit margin of BABY Hairclips22Company were over 20% of sales producing BROWN and BLACK hairclips.
During the last year, GREEN hairclips had been introduced at 10% premium in selling price after the introduction
of YELLOW hairclips earlier five years back at 10/3% premium. However, the manager of the company is
disheartened with the sales figure for the current financial year as follows:

During the last year, GREEN hairclips had been introduced at 10% premium in selling price after the introduction
of YELLOW hairclips earlier five years back at 10/3% premium. However, the manager of the company is
disheartened with the sales figure for the current financial year as follows:
Traditional Income Statement
Brown Black Yellow Green Total
Sales 1,50,00,000 1,20,00,000 27,90,000 3,30,000 3,01,20,000
Material Costs 50,00,000 40,00,000 9,36,000 1,10,000 1,00,46,000
Direct Labour 20,00,000 16,00,000 3,60,000 40,000 40,00,000
Overhead (3 times of direct labour) 60,00,000 48,00,000 10,80,000 1,20,000 1,20,00,000

Total Operating Income 20,00,000 16,00,000 4,14,000 60,000 40,74,000

Return on Sales (in %) 13.3% 13.3% 14.8% 18.2% 13.5%

It is a known fact that customers are ready to pay premium amount for YELLOW and GREEN hairclips for their
attractiveness; and the percentage returns are also high on new products.
At present, all of the Plant’s indirect expenses are allocated to the products at 3 times of the direct labour
expenses. However, the manager is interested in allocating indirect expenses on the basis of activity cost to
reveal real earner.
He provides support expenses category-wise as follows:

At present, all of the Plant’s indirect expenses are allocated to the products at 3 times of the direct labour
expenses. However, the manager is interested in allocating indirect expenses on the basis of activity cost to
reveal real earner.
He provides support expenses category-wise as follows:

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Support Expenses (`)

Indirect Labour 40,00,000
Labour Incentives 32,00,000
Computer Systems 20,00,000
Machinery depreciation 16,00,000
Machine maintenance 8,00,000
Energy for machinery 4,00,000
Total 1,20,00,000

He provides following additional information for accomplishment of his interest: Incentives to be allocated @
40% of labour expenses (both direct and indirect).
Indirect labours are involved mainly in three activities. About half of indirect labour is involved in handling
production runs. Another 40% is required just for the physical changeover from one color hairclip to another
because YELLOW hairclips require substantial labour for preparing the machine as compared to other colour
hairclips. Remaining 10% of the time is spend for maintaining records of the products in four parts.
Another amount spent on computer system of ` 20,00,000 is for maintenance of documents relating to production
runs and record keeping of the four products. In aggregate, approx.. 80% of the amount expend is involved in the
production run activity and approx.. 20% is used to keep records of the products in four parts.
Other overhead expenses i.e. machinery depreciation, machine maintenance and energy for machinery are
incurred to supply machine capacity to produce all the hairclips (practical capability of 20,000 hours).

Activity Cost Drivers:

Particulars Brown Black Yellow Green Total

Sales Volume (units) 1,00,000 80,000 18,000 2,000 2,00,000
Selling Price (`) 150 150 155 165
Material cost (`) 50 50 52 55
Machine hours per unit (Hrs) 0.10 0.10 0.10 0.10 20,000
Production runs 100 100 76 24 300
Setup time per run (Hrs) 4 1 6 4
You are required to –
(i) CALCULATE operating income and operating income as per percentage of sales using activity-based costing
system.
(ii) STATE the reasons for different operating income under traditional income system and activity-based
costing system.

Ans (i) Calculation of operating income using Activity Based Costing

Overhead cost Allocation Overhead Cost-driver level Cost driver rate

Activity cost
(`) (`) (`)
Indirect labour 56,00,000 50% 28,00,000 300 9,333.33
+ 40% for Production runs
incentives 40% 22,40,000 1052* Setup hours 2,129.28
10% 5,60,000 4 Number of parts 1,40,000
Computer Systems 20,00,000 80% 16,00,000 300 5,333.33

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Production runs
20% 4,00,000 4 1,00,000
Number of parts
Machinery 100% 16,00,000 20,000 80
depreciation 16,00,000 Machine hours
Machine 8,00,000 100% 8,00,000 20,000 40
Maintenance Machine hours
Energy for 4,00,000 100% 4,00,000 20,000 20
Machinery Machine hours

* (100 x 4) + (100 x 1) + (76 x 6) + (24 x 4)

= (400 + 100 + 456 + 96)
= 1052 setup hours

Activity Based Costing

Brown Black Red Green Total
Quantity (units) 1,00,000 80,000 18,000 2,000 2,00,000
(`) (`) (`) (`) (`)
Sales 1,50,00,000 1,20,00,000 27,90,000 3,30,000 3,01,20,000
Less: Material Costs 50,00,000 40,00,000 9,36,000 1,10,000 1,00,46,000

Less: Direct labour 20,00,000 16,00,000 3,60,000 40,000 40,00,000

Less: 40% 8,00,000 6,40,000 1,44,000 16,000 16,00,000

Incentives on direct
labour
(A) 72,00,000 57,60,000 13,50,000 1,64,000 1,44,74,000
Overheads
Indirect labour +
incentives
- 50% based 9,33,333 9,33,333 7,09,334 2,24,000 28,00,000
on Production (9,333.33 x 100) (9,333.33 x (9,333.33 x (9,333.33
runs 100) 76) x 24)
- 40% based 8,51,711 2,12,928 9,70,951 2,04,410 22,40,000
On Setp hours (2,129.28 x 400) (2,129.28 x (2,129.28 x456) (2,129.28
100) x 96)
- 10% based 1,40,000 1,40,000 1,40,000 1,40,000 5,60,000
on number of (1,40,000 x 1)
parts
Computer Systems

- 80% based 5,33,333 5,33,333 4,05,334 1,28,000 16,00,000

on Production (5,333.33 x 100) (5,333.33 x (5,333.33 x76) (5,333.33
runs 100) x 24)
- 20% based 1,00,000 1,00,000 1,00,000 1,00,000 4,00,000
on number of (1,00,000 x 1)
parts

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Machinery 8,00,000 6,40,000 1,44,000 16,000 16,00,000

depreciation (80 x 0.1 x (80 x 0.1 x (80x0.1x18,000) (80 x 0.1 x
1,00,000) 80,000) 2,000)
Machine Maintenance 4,00,000 3,20,000 72,000 8,000 8,00,000
(40 x 0.1 x (40 x 0.1 x (40x0.1x18,000) (40 x 0.1 x
1,00,000) 80,000) 2,000)
Energy for 2,00,000 1,60,000 36,000 4,000 4,00,000
Machinery (20x0.1x1,00,000) (20x0.1x80,000) (20x0.1x18,000) (20x0.1x2,000)

Total Overheads (B) 39,58,377 30,39,594 25,77,619 8,24,410 1,04,00,000

Operating Income 32,41,623 27,20,406 (12,27,619) (6,60,410) 40,74,000

(A-B)
Return on Sales (%) 21.61 22.67 (44.00) (200.12) 13.53

(ii) The difference in the operating income under the two systems is due to the differences in the overheads
borne by each of the products. The Activity Based Costs appear to be more accurate.

Q.6 ABC v/s Absorption MTP Nov

18(2)
Woolmark Ltd. manufactures three types of products namely P, Q and R. The data relating to a period are as
under:

Particulars P Q R
Machine hours per unit 10 18 14
Direct Labour hours per unit @ Rs. 20 4 12 8
Direct Material per unit (Rs.) 90 80 120
Production (units) 3,000 5,000 20,000

Currently the company uses traditional costing method and absorbs all production overheads on the basis of
machine hours. The machine hour rate of overheads is Rs. 6 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:

Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3

The total production overheads are analysed as under:

Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%

Required:
(i) CALCULATE the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
(ii) CALCULATE the cost per unit of each product using activity based costing principles.

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Ans (i) Statement Showing “Cost per unit - Traditional Method”

Particulars of Costs P Q R

(Rs.) (Rs.) (Rs.)

Direct Materials 90 80 120
Direct Labour [(4, 12, 8 hours)  Rs.20] 80 240 160
Production Overheads [(10, 18, 14 hours)  Rs.6] 60 108 84
Cost per unit 230 428 364

(ii) Statement Showing “Cost per unit - Activity Based Costing”

Products P Q R
Production (units) 3,000 5,000 20,000
(Rs.) (Rs.) (Rs.)
Direct Materials (90, 80, 120) 2,70,000 4,00,000 24,00,000
Direct Labour (80, 240, 160) 2,40,000 12,00,000 32,00,000
Machine Related Costs @ Rs.1.80 per hour
(30,000, 90,000, 2,80,000) 54,000 1,62,000 5,04,000
Setup Costs @ Rs.9,600 per setup (20, 10, 20) 1,92,000 96,000 1,92,000
Inspection Costs @ Rs.4,800 per inspection
(100, 40, 60) 4,80,000 1,92,000 2,88,000
Purchase Related Costs @ Rs.750 per purchase
(60, 100, 160) 45,000 75,000 1,20,000
Total Costs 12,81,000 21,25,000 67,04,000
Cost per unit(Total Cost x Units) 427.00 425.00 335.20

Workings
Number of Batches, Purchase Orders, and Inspections-

Particulars P Q R Total

A. Production (units) 3,000 5,000 20,000

B. Batch Size (units) 150 500 1,000

C. Number of Batches [A x B] 20 10 20 50

D. Number of Purchase Order per batch 3 10 8

E. Total Purchase Orders [C  D] 60 100 160 320

F. Number of Inspections per batch 5 4 3

G. Total Inspections [C  F] 100 40 60 200

Total Machine Hours-

Particulars P Q R

A. Machine Hours per unit 10 18 14

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B. Production (units) 3,000 5,000 20,000

C. Total Machine Hours [A  B] 30,000 90,000 2,80,000

Total Machine Hours = 4,00,000

Total Production Overheads-
= 4,00,000 hrs.  Rs. 6
= Rs. 24,00,000

Cost Driver Rates-

Cost Pool % Overheads Cost Cost Driver Rate

(Rs.) Driver (Rs.)
(Units)
Setup 20% 4,80,000 50 9,600 per Setup
Inspection 40% 9,60,000 200 4,800 per Inspection
Purchases 10% 2,40,000 320 750 per Purchase
Machine Hours 30% 7,20,000 4,00,000 1.80 per Machine Hour

Q.7 ABC v/s Absorption MTP Nov

20
BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three range of beauty
soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond. The budgeted costs and production
for the month of December, 2019 are as follows:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond

Production of 4,000 3,000 2,000
soaps (Units)
Resources per Qty Rate Qty Rate Qty Rate
Unit:
- Essential Oils 60 ml ` 200 / 100 ml 55 ml ` 300 / 100 ml 65 ml ` 300 / 100 ml
- Cocoa Butter 20 g ` 200 / 100 g 20 g ` 200 / 100 g 20 g ` 200 / 100 g
- Filtered Water 30 ml ` 15 / 100 ml 30 ml ` 15 / 100 ml 30 ml ` 15 / 100 ml
- Chemicals 10 g ` 30 / 100 g 12 g ` 50 / 100 g 15 g ` 60 / 100 g
- Direct Labour 30 ` 10 / hour 40 ` 10 / hour 60 ` 10 / hour
minutes minutes minutes

Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to its products
using direct labour hour rate, which were budgeted at ` 1,98,000.
Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:

Particulars (`) Cost drivers

Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations

The number of machine operators per unit of production are 5, 5, and 6 for BABYSOFT - Gold, BABYSOFT-
Pearl, and BABYSOFT- Diamond respectively.

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(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively (ii)
Mass of output produced is equivalent to the mass of input materials taken together.)
You are requested to:
(i) PREPARE a statement showing the unit costs and total costs of each product using the absorption costing
method.
(ii) PREPARE a statement showing the product costs of each product using the ABC approach. (iii) STATE
what are the reasons for the different product costs under the two approaches?

Ans (i) Traditional Absorption Costing

BABY SO – BABYSOFT- BABYSOFT- Total
Gold Pearl Diamond
4,000 3,000 2,000 9,000
(a) Production of soaps (units)
(b) Direct labour (minutes) 30 40 60 -
(c) Direct labour hours 2,000 2,000 2,000 6,000
(cxb)/60 minutes

Overhead rate per direct labour hour:

= Budgeted overheads ÷ Budgeted labour hours
= 1,98,000 ÷ 6,000 hours
= 33 per direct labour hour
Unit Costs:
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond
(`) (`) (`)
Direct Costs:
- Direct Labour 5.00 6.67 10.00
 10 x30   10 x 40   10 x 60 
 60   60   60 
     
- Direct Material 167.50 215.50 248.50
(Refer working
note1)
Production Overhead: 16.50 22.00 33.00
 33x30   33x 40   33x60 
 60   60   60 
     
Total unit costs 189.00 244.17 291.50
Number of units 4,000 3,000 2,000
Total costs 7,56,000 7,32,510 5,83,000

Working note-1
Calculation of Direct material cost

BABYSOFT- Gold (`) BABYSOFT- Pearl (`) BABYSOFT- Diamond (`)

Essential oils 120.00 165.00 195.00

 200 x 60   300 x55   300 x 65 

 100   100   100 
     
Cocoa Butter 40.00 40.00 40.00

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 200 x20   200 x20   200 x20 

 100   100   100 
     
Filtered water 4.50 4.50 4.50
 15 x30   15 x30   15 x30 
 100   100   100 
     
Chemicals 3.00 6.00 9.00
 30 x10   50 x12   60 x15 
 100   100   100 
     
Total costs 167.50 215.50 248.50

(ii) Activity Based Costing

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Total

Diamond
Quantity(units) 4,000 3,000 2,000 -
Weight per unit 108 106 117 -
(grams) {(60×0.8)+20+30+10} {(55×0.8)+20+30+12} {(65×0.8)+20+30+15}
4,32,000 3,18,000 2,34,000 9,84,000
Total weight(gm)
Direct labour 30 40 60 -
(minutes)
Direct labour 2,000 2,000 2,000 6,000
hours  4, 000 x30   3, 000 x 40   2, 000 x60 
 60   60   60 
     

Machine 5 5 6 -
operations per
unit
Total 20,000 15,000 12,000 47,000
Operations
Forklifting rate per gram = 58,000 ÷ 9,84,000 grams
= 0.06 per gram

Supervising rate per direct labour hour = 60,000 ÷ 6,000 hours = 10 per labour hour
Utilities rate per machine operations = 80,000 ÷ 47,000 machine operations
= 1.70 per machine operations
Unit Costs under ABC:

BABYSOFT- Gold BABYSOFT- Pearl (`) BABYSOFT- Diamond

(`) (`)
Direct Costs:
- Direct
5.00 6.67 10.00
Labour
167.50 215.50 248.50
- Direct
material

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Production 6.48 6.36 7.02

Overheads: (0.06x108) (0.06  106) (0.06  117)
Forklifting cost
Supervising cost 5.00 6.67 10.00
 10 x30   10 x 40   10 x 60 
 60   60   60 
     
Utilities 8.50 8.50 10.20
(1.70 x5) (1.70 x 5) (1.70 x 6)
Total unit costs 192.48 243.70 285.72
Number of units 4,000 3,000 2,000
Total costs 7,69,920 7,31,100 5,71,440

(iii) Comments: The difference in the total costs under the two systems is due to the differences in
the overheads borne by each of the products. The Activity Based Costs appear to be more precise.

Q.8 ABC v/s Absorption MTP Nov

SMD Limited manufactures four products22(1)namely A, B, C and D using the same production and process facilities.
The company has been following conventional method of costing and wishes to shift to activity-based costing
system.
The data pertaining to four products are:

Product Units Material per unit Labour hours per unit Machine hours per unit
produced (`)
A 1,500 140 1 3
B 2,500 90 3 2
C 10,000 180 2 6
D 6,000 150 1.5 4

The following activity volumes are associated to the production process for the relevant period –

Number of Inspections Number of Material Movements Number of set-ups

A 200 15 100
B 250 20 125
C 900 100 600
D 650 85 400

The cost data also states that:

• Direct Labour cost: ` 60 per hour
• Machine hour rate: ` 280 per hour
• Production overheads are absorbed on machine hour basis.
• For activity-based costing, a thorough, analysis of the production process revealed that: Costs relating to
set-ups and inspection bears the equal percentage while costs relating to machinery accounts for 20%
of the production overhead.
Costs relating to material handling stands at 50% of costs relating to machinery. You are required to:
(i) Prepare a statement showing the unit costs and total costs of each product using the absorption
costing method.
(ii) Prepare a statement showing the unit costs and total costs of each product using activity - based costing
system.

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Ans (i) Cost per unit - Conventional Costing: Absorption rate method

Particulars A (`) B (`) C (`) D (`)

Material 140 90 180 150
Labour @ ` 60 per labour hour 60 180 120 90
Overheads @ ` 280 per machine hour 840 560 1680 1120
Cost per unit (in `) 1,040 830 1,980 1,360
No of units 1,500 2,500 10,000 6,000
Total cost (`) 15,60,000 20,75,000 1,98,00,000 81,60,000

(ii) Statement of apportionment of overheads: Amount (`)

Cost Driver A B C D
Setups Type of No 7,48,000 9,35,000 44,88,000 29,92,000
Cost Setups
of (100 x 7,480) (125x7,480) (600 x 7,480) (400 x7,480)
Machinery Machine 2,52,000 2,80,000 33,60,000 13,44,000
hours (4,500 x 56) (5,000 x 56) (60,000 x 56) (24,000 x 56)
Material No. 1,78,500 2,38,000 11,90,000 10,11,500
Handling Movements
of (15 x 11,900) (20 x 11,900) (100 x 11,900) (85 x 11,900)
of material
Inspection No. 9,16,300 11,45,375 41,23,350 29,77,975
Inspections
of (200x4,581.50 (250x4,581.50 (900x4,581.50 (650x4,581.50)
Total ) 20,94,800 ) 25,98,375 ) 1,31,61,350 83,25,475
Output Units 1,500 2,500 10,000 6,000
Overhead/ unit 1,396.53 1,039.35 1,316.14 1,387.58

Statement showing Cost per unit and Total cost using Activity Based Costing

A (`) B (`) C (`) D (`)

Particula
Material 140.00 90.00 180.00 150.00
rs
Labour 60.00 180.00 120.00 90.00
Total 200.00 270.00 300.00 240.00
No. of units 1,500 2,500 10,000 6,000
Total cost (excluding overheads) 3,00,000 6,75,000 30,00,000 14,40,000
Add: Overheads (as calculated) 20,94,800 25,98,375 1,31,61,350 83,25,475
Total cost 23,94,80 32,73,37 1,61,61,35 97,65,47
0 5 0 5
Cost per unit 1,596.5 1,309.3 1,616.1 1,627.5
3 5 4 8
Working Notes:
1. Calculation of Total machine hours
Particular A B C D
s
(a) Machine hours per unit 3 2 4 6
(b) Production(units) 1,500 2,500 10,000 6,000
(c) Total machine hours (a) x(b) 4,500 5,000 60,000 24,000

Total Machine hours = 93,500

Total production overheads= 93,500 x 280 = 2,61,80,000

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2. Calculation of cost driver rate

Cost pool Amount of Cost Driver Cost Driver Cost Driver Rate (`)
cost (`) (basis) (units)
Setups 91,63,000 No. of Setups 1,225 7,480 per set up
Machinery 52,36,000 Machine Hrs. 93,500 56 per machine hour
Material 26,18,000 No. of Material 220 11,900 per material
Handlings Movements movement
Inspection 91,63,000 No. of Inspections 2,000 4,581.50 per
inspection
2,61,80,00
0

Q.9 Cost Driver Rate MTP May

18 the assumption that profitability can be increased by increasing Rupee
Bank of Surat operated for years under
volume. But that has not been the case. Cost analysis has revealed the following:

Activity Activity Cost (`) Activity Driver Activity Capacity

Providing ATM Service 1,00,000 No. of Transactions 2,00,000
Computer Processing 10,00,000 No. of Transactions 25,00,000
Issuing Statements 8,00,000 No. of Statements 5,00,000
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000

The following annual information on three products was also made available:

Activity Driver Checking Accounts Personal Loans Gold Visa

Units of Product 30,000 5,000 10,000
ATM Transactions 1,80,000 0 20,000
Computer Transactions 20,00,000 2,00,000 3,00,000
Number of Statements 3,00,000 50,000 1,50,000
Telephone Minutes 3,50,000 90,000 1,60,000
Required
(i) CALCULATE rates for each activity.
(ii) Using the rates computed in requirement (i), CALCULATE the cost of each product.

Ans (i) Statement Showing “Activity Rate”

Activity Activity Activity Driver No. of Units of Activity
Cost [a] (`) Activity Driver [b] Rate[a] / [b] (`)

Providing ATM Service 1,00,000 No. of ATM 2,00,000 0.50

Transactions
Computer Processing 10,00,000 No. of Computer 25,00,000 0.40
Transactions
Issuing Statements 8,00,000 No. of Statements 5,00,000 1.60
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000 0.60

(ii) Statement Showing “Cost of Product”

Activity Checking Accounts (`) Personal Loans (`) Gold Visa (`)

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Providing ATM 90,000 --- 10,000

Service (1,80,000 tr.× ` 0.50) (20,000 tr. × ` 0.50)
Computer 8,00,000 80,000 1,20,000
Processing (20,00,000 tr. × ` 0.40) (2,00,000 tr. × ` 0.40) (3,00,000 tr. × ` 0.40)
Issuing 4,80,000 80,000 (50,000 st. × 2,40,000
Statements (3,00,000 st. × ` 1.60) `1.60) (1,50,000 st. × ` 1.60)
Customer 2,10,000 54,000 96,000
Inquiries (3,50,000 min. × ` 0.60) (90,000 min. × ` 0.60) (1,60,000 min. × ` 0.60)
Total Cost [a] ` 15,80,000 ` 2,14,000 ` 4,66,000
Units of Product 30,000 5,000 10,000
[b]
Costof each 52.67 42.80 46.60
Product [a] / [b]

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6 MARGINAL COSTING
CHAPTER

Q.1 MOS/BEP/Pv ratio calc PY May 18

Following figures have been extracted from the books of M/s. RST Private Limited:

Financial Year Sales (`) Profit/Loss (`)

2016-17 4,00,000 15,000(loss)
2017-18 5,00,000 15,000 (Profit)

You are required to calculate:

(i) Profit Volume Ratio
(ii) Fixed Costs
(iii) Break Even Point
(iv) Sales required to earn a profit of ` 45,000.
(v) Margin of Safety in Financial Year 2017-18.

Ans.
Sales (`) Profit (`)
Year 2016 4,00,000 15,000 (loss)
Year 2017 5,00,000 15,000 (profit)
Difference 1,00,000 30,000

Difference in profit 30,000

(i) P/V Ratio = x100= x100=30%
Difference in Sales 1,00,000
(ii) Contribution in 2016 (4,00,000 x 30%) 1,20,000

Add: Loss 15,000

Fixed Cost* 1,35,000

*Contribution = Fixed cost + Profit

 Fixed cost = Contribution – Profit

Fixed cost 1,35,000

(iii) Break-even point = = =4,50,000
P/V ratio 30%
(iv) Sales to earn a profit of 45,000

Fixed cost+Desired profit 1,35,000 + 45,000

= =6,00,000
P/V ratio 30%
(v) Margin of safety in 2017 –18

Margin of safety = Actual sales – Break-even sales

= 5,00,000-4,50,000 = 50,000

Q.2 Calculate sales for fixed profit PY May 18

PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of 2,000 pieces. The Cost
Accountant has presented following information for the year to the management:

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Particulars Amount (`) Amount (`)

Sales 1,500 pieces @ ` 1,800 per piece 27,00,000

Direct Material 5,94,200
Direct Labour 4,42,600
Overheads (40% Fixed) 11,97,000 22,33,800
Net Profit 4,66,300
Evaluate following options:
(i) If selling price is increased by ` 200, the sales will come down to 60% of the total annual capacity. Should
the company increase its selling price?
(ii) The company can earn a profit of 20% on sales if the company provide TIEPIN with ready-made suit. The
cost of each TIEPIN is ` 18. Calculate the sales to earn a profit of 20% on sales.
Ans. (i) Evaluation of Option
Selling Price = 1800 + 200 = 2,000
Sales = 2000 x 60% = 1200 Pieces

(`)
Sales (1,200 pieces @ ` 2,000) 24,00,000
 5,94,200 
Less: Direct Material  x1,200 
 1500 units 
4,75,360
 4,42,600 
Direct Labour  x1,200 
 1,500 units 
3,54,080
 11,97,000x60% 
Variable Overhead  x1,200 
 1,500 units 
5,74,560
Contribution 9,96,000
Less: Fixed cost ( Rs. 11,97,000x40% ) 4,78,800

Profit 5,17,200

If price has been increased by 11.11% (increases by 200 on 1,800) sales goes down by 20% (decreased by
300 on 1,500). Change in demand is greater than change in price. Since the variable costs are still same
profit has been arose to ` 5,17,200 in-spite of high elasticity of demand. PH gems would not be able to
sustain this policy on account of change if any in variable costs.

(ii) Evaluation of Option

(`)
Sales 1,800.00

Less: Direct Material

5,94,200 396.13
1500

Cost of Tie PIN 18.00

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4,42,600 295.07
Direct Labour
1,500

 11,97,000x60%  478.80
Variable Overheads  
 1,500 

Contribution 612.00
P/V Ratio (612/1800x100) 34.0%

Sales to required earn a profit of 20%

4,78,800+0.20 of Sales
Sales =
34.00%
Sales= 34,20,000 or 1,900 units (34,20,000/1800)

To earn profit 20% on sales of readymade suit (along with TIE PIN) company has to sold 1,900 units i.e.
95% of the full capacity. This sales level of 1,900 units is justified only if variable cost is constant. Any
upside in variable cost would impact profitability, to achieve the desired profitability. Production has to be
increased but the scope is limited to 5% only.

Q.3 BEP Units & Sales for fixed PY May 19

M/s Gaurav Private Limited is manufacturing and selling two products: 'BLACK' and 'WHITE' at selling price of
` 20 and ` 30 respectively.
The following sales strategy has been outlined for the financial year 2019-20:
(i) Sales planned for the year will be ` 81,00,000 in the case of 'BLACK' and
` 54,00,000 in the case of 'WHITE'.
(ii) The selling price of 'BLACK' will be reduced by 10% and that of 'WHITE' by 20%.
(iii) Break-even is planned at 70% of the total sales of each product.
(iv) Profit for the year to be maintained at ` 8,26,200 in the case of 'BLACK' and
` 7,45,200 in the case of 'WHITE'. This would be possible by reducing the present
annual fixed cost of ` 42,00,000 allocated as ` 22,00,000 to 'BLACK' and
` 20,00,000 to 'WHITE'.
You are required to calculate:
(1) Number of units to be sold of 'BLACK' and 'WHITE' to Break even during the financial year
2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (iv) above.

Ans (i) Statement showing Break Even Sales

Particulars Black White

Sales Planned 81,00,000 54,00,000
Selling Price (`) 18 24

Number of Units to be sold 4,50,000 2,25,000

Break Even sales (in Units),70% of total sales 3,15,00 1,57,500
Or 0

Break Even sales (in `),70% of total sales 56,70,00 37,80,000

0
(ii) Statement Showing Fixed Cost Reduction

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Profit to be maintained (`) 8,26,200 7,45,200

Margin of Safety (70% of Sales) (`) 24,30,000 16,20,000
PVR (Profit/ Margin of Safety) x 100 34% 46%
Contribution (Sales x 34% or 46%) (`) 27,54,000 24,84,000
Less: Profit (`) 8,26,200 7,45,200

Revised Fixed Cost (`) 19,27,80 17,38,800

Present Fixed Cost (`) 0
22,00,000 20,00,000

Reduction in Fixed Cost 2,72,20 2,61,200

0

Q.4 Calculate lowest Sp PY Nov 19

PJ Ltd manufactures hockey sticks. It sells the products at ` 500 each and makes a profit of ` 125 on each
stick. The Company is producing 5,000 sticks annually by using 50% of its machinery capacity.
The cost of each stick is as under:
Direct Material ` 150
Direct Wages ` 50
Works Overhead ` 125 (50% fixed)
Selling Expenses ` 50 (25% variable)
The anticipation for the next year is that cost will go up as under:
Fixed Charges 10%
Direct Wages 20%
Direct Material 5%
There will not be any change in selling price.
There is an additional order for 2,000 sticks in the next year.
Calculate the lowest price that can be quoted so that the Company can earn the same profit as it has earned in
the current year?

Ans Selling Price = ` 500 Profit = ` 125 No of Sticks = 5,000

Particular Current Year Next Year

(`) (`)
Direct Material 150 157.50
(150 + 5%)
Direct Wages 50 60
(50+20%)
Works Overheads 62.50 62.5
(125 × 50%)
Selling Expenses 12.50 12.5
(50 × 25%)
Total Variable Cost 275 292.50

Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,000) = 5,00,000 5,50,000

1,87,500

Let: Lowest Price Quoted = K

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Now, Sales = Target Profit (5,000 units × ` 125) + Variable Cost + Fixed Cost Or, = (5,000 × 500) + (2,000 × K)
= 6,25,000 + 20,47,500 + 5,50,000 Or, K = ` 361.25
So, Lowest Price that can be quoted to earn the profit of ` 6,25,000 (same as current year) is ` 361.25

Q.5 Best Product Mix PY Nov 20

Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse it's production mix in respect of these
three products - 'X', 'Y' and 'Z'.
You have the following information :
X Y Z
Direct Materials ` (per unit) 160 120 80
Variable Overheads ` (per unit) 8 20 12
Direct labour :

Departments: Rate per Hour (`) Hours per Hours per Hours per
unit unit unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11

From the current budget, further details are as below :

X Y Z
Annual Production at present (in units) 10,000 12,000 20,000
Estimated Selling Price per unit (`) 312 400 240
Sales departments estimate of possible sales in thecoming year (in units) 12,000 16,000 24,000
There is a constraint on supply of labour in Department-A and its manpower cannot be increased beyond its
present level.
Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the total contribution from the best possible product mix.

Ans (i) Statement Showing “Calculation of Contribution/ unit”

Particulars X (`) Y (`) Z (`)

Selling Price (A) 312 400 240

Variable Cost:

Direct Material 160 120 80

Direct Labour

Dept. A (Rate x Hours) 24 40 20

Dept. B (Rate x Hours) 48 120 88

Variable Overheads 8 20 12

Total Variable Cost (B) 240 300 200

Contribution per unit (A - B) 72 100 40

Hours in Dept. A 6 10 5

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Contribution per hour 12 10 8

Rank I II III

Existing Hours = 10,000 x 6hrs. + 12,000 x 10 hrs. + 20,000 x 5 hrs. = 2,80,000 hrs. Best possible
product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12,000 units
Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000 hrs.)
Produce ‘Y’ (the Next Best) = 16,000 units
Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)
Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000 hrs.)
Produce ‘Z’ (balance) = 9,600 units (48,000 hrs./ 5 hrs.)

(ii) Statement Showing “Contribution”

Product Units Contribution/ Unit Total Contribution (`)

(`)
X 12,000 72 8,64,000

Y 16,000 100 16,00,000

Z 9,600 40 3,84,000

Total 28,48,000

Q.6 BE Sales, Sales t/0 PY Jan 21

Two manufacturing companies A and B are planning to merge. The details are as follows:

A B
Capacity utilisation (%) 90 60
Sales (`) 63,00,000 48,00,000
Variable Cost (`) 39,60,000 22,50,000
Fixed Cost (`) 13,00,000 15,00,000

Assuming that the proposal is implemented, calculate:

(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of ` 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ` 60,00,000, what percentage of
increase in selling price is required to sustain an increase of 5% in fixed overheads.

Ans Workings:
1. Statement showing computation of Breakeven of merged plant and other required information

S.No. Particulars Plan A Plant B Merged

Before (90%) After Before (60%) After (100%) Plant (100%)
(`) (100%)(`) (`) (`) (`)

(i) Sales 63,00,000 70,00,000 48,00,000 80,00,000 1,50,00,000

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(ii) Variable cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000

(iii) Contribution (i - ii) 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000
(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000
(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000

Contribution
x100
2 PV ratio of merged plant = Sales
68,50,000
x100=45.67%
= 1,50,00,000
Fixed Cost
(i) Break even sales of merged plant = P/V Ratio
28,00,000
= 45.67%
= 61,30,939.34 (approx..)
61,30,939.34
x100=40.88%
Capacity utilisation = 1,50,00,000
(ii) Profitability of the merged plant at 80% capacity utilisation
= (1,50,00,000 x 80%) x P/v ratio-fixed cost
= 1,20,00,000 x 45.67%-28,00,000
(iii) Sales to earn a profit of ` 60,00,000
Fixed Cost + desired profit
Desired sales = P/V Ratio
28,00,000+60,00,000
=
45.67%
= ` 1,92,68,666 (approx.)
(iii) Increase in fixed cost
= ` 28,00,000 x 5% = ` 1,40,000
Therefore, percentage increase in sales price
1,40,000
= x100=0.726% (approx.)
1,92,68,666

Q.7 BEP/ PV PY Dec 21

AZ company has prepared its budget for the production of 2,00,000 units. The variable cost per unit is ` 16 and
fixed cost is ` 4 per unit. The company fixes its selling price to fetch a profit of 20% on total cost.
You are required to calculate:
(i) Present break-even sales (in ` and in quantity).
(ii) Present profit-volume ratio.
(iii) Revised break-even sales in ` and the revised profit-volume ratio, if it reduces its selling price by 10%.
(iv) What would be revised sales- in quantity and the amount, if a company desires a profit increase of
20% more than the budgeted profit and selling price is reduced by 10% as above in point (iii).

Ans Variable Cost per Unit=`16

Fixed Cost per Unit =` 4, Total Fixed Cost= 2,00,000 units x ` 4 = `8,00,000 Total Cost per Unit =`20
Selling Price per Unit=Total Cost+ Profit =` 20+` 4 =` 24 Contribution per Unit=` 24-`16=` 8

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Fixed Cost 8,00,000

(i) Present Break-even Sales (Quantity) = =
Contribution margin per unit 8
= 1,00,000 units
Present Break-even Sales (`) = 1,00,000 units x ` 24 = ` 24,00,000

8
(ii) Present P/V Ratio = x100=33.33%
24
(iii) Revised Selling Price per Unit = 24-10% of 24 = 21.60
Revised Contribution per Unit= 21.60-16= 5.60
5.60
Revised P/V Ratio = x100=25.926%
21.60
Fixed Cost 8,00,000
Revised Break-even point = = =30,85,705
P/V ratio 25.926%
Or
Fixed Cost 8,00,000
Revised Break-even point (units) = = = 1,42,857 units
Contributionmarginperunit 5.60
Revised Break-even point (`) = 1,42,857 units x 21.60 = 30,85,711

(iv) Present profit =` 8,00,000

Desired Profit = 120% of ` 8,00,000 =` 9,60,000 Sales to earn a profit of ` 9,60,000
Total contribution required = 8.00.000 + 9,60,000 = ` 17,60,000

Fixed cost+ Desired profit 8,00,000+9,60,000

= =3,14,286 units
Contribution per unit 5.60
Revised sales (in `) = 3,14,286 units x 21.60 = 67,88,578

Q.8 Cup Analysis PY Nov 22

An agriculture based company having 210 hectares of land is engaged in growing three different cereals namely,
wheat, rice and maize annually. The yield of the different crops and their selling prices are given below:

Wheat Rice Maize

Yield (in kgs per hectare) 2,000 500 100
Selling Price (` per kg) 20 40 250

The variable cost data of different crops are given below:

Crop Labour charges Packing Materials Other variable expenses

Wheat 8 2 4
Rice 10 2 1
Maize 120 10 20

The company has a policy to produce and sell all the three kinds of crops. The maximum and minimum area to be
cultivated for each crop is as follows:

Crop Maximum Area (in hectares) Minimum Area (in hectares)

Wheat 160 100
Rice 50 40
Maize 60 10

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You are required to:

(i) Rank the crops on the basis of contribution per hectare.
(ii) Determine the optimum product mix considering that all the three cereals are to be produced.
(iii) Calculate the maximum profit which can be achieved if the total fixed cost per annum is ` 21,45,000.
(10 Marks)
(Assume that there are no other constraints applicable to this company)

Ans (i) Statement showing Ranking of crops on the basis of Contribution per hectare

Sl. No Particulars Wheat Rice Maize

(I) Sales price per kg (`) 20 40 250
(II) Variable cost* per kg (`) 14 13 150
(III) Contribution per kg (`) 6 27 100
(IV) Yield (in kgs per hectare) 2,000 500 100
(V) Contribution per hectare (`) 12,000 13,500 10,000
(VI) Ranking II I III

*Variable cost = Labour Charges +Packing Material+ Other Variable Expenses

Therefore, to maximize profits, the order of priority of production would be Rice, Wheat and Maize.
(ii) & (iii) Statement showing optimum product mix considering that all the three cereals are to be produced
and maximum profit thereof

Sl. Particulars Wheat Rice Maize Total

No.
(i) Minimum Area (in hectare) 100 40 10 150
(ii) Remaining area (in hectare) 60
(iii) Distribution of remaining area based on ranking 50 10 - 60
considering Maximum area

(iv) Optimum mix (in hectare) 150 50 10 210

(v) Contribution per hectare (`) 12,000 13,500 10,000
(vi) Total contribution (`) 18,00,000 6,75,000 1,00,000 25,75,000
(vii) Fixed cost (`) 21,45,000
(viii) Maximum Profit (`) 4,30,000

Optimum Product Mix and calculation of maximum profit earned by company can also be presented as
below

(ii) Optimum Product Mix:

Particular Area Yield Total Production

(in hectares) (kg per hectare) (in kgs)

(a) Maximum of Rice 50 500 25000

(b) Minimum of Maize 10 100 1000
(c) Balance of Wheat 150 2000 300000
210 326000

(iii) Calculation of maximum profit earned by the company:

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Production Contribution Total contribution

(in kgs) (` per kg) (`)

(a) Rice 25,000 24 6,75,000

(b) Maize 1,000 100 1,00,000
(c) Wheat 3,00,000 6 18,00,000
Total contribution 25,75,000
Less: Total Fixed Cost per annum (21,45,000)
Maximum profits earned by the company 4,30,000

Q.9 Compute best option RTP May 18

A company manufactures two types of herbal product, A and B. Its budget shows profit figures after
apportioning the fixed joint cost of `15 lacs in the proportion of the numbers of units sold. The budget for 2018,
indicates:
A B
Profit (`) 1,50,000 30,000
Selling Price / unit (`) 200 120
P/V Ratio (%) 40 50
Required:
COMPUTE the best option among the following, if the company expects that the number of units to be sold
would be equal.
(i) Due to exchange in a manufacturing process, the joint fixed cost would be reduced by 15% and the
variables would be increased by 7½ %.
(ii) Price of A could be increased by 20% as it is expected that the price elasticity of demand would be
unity over the range of price.
(iii) Simultaneous introduction of both the option, viz, (i) and (ii) above.

Ans Option (i)

Increase in profit when due to change in a manufacturing process there is reduction in joint fixed cost and
increase in variable costs.

(`)
Revised Contribution from 12,000 units of A due to 7.5% increase in 8,52,000
Variable Cost {12,000 units × (`200 – `129)}
Revised Contribution from 12,000 units of B due to 7.5% increase in 6,66,000
Variable Cost {12,000 units × (`120 – `64.50)}
Total Revised Contribution 15,18,000
Less: Fixed Cost (`15,00,000 – 15% × `15,00,000) 12,75,000
Revised Profit 2,43,000
Less: Existing Profit 1,80,000
Increase in Profit 63,000

Option (ii)
Increase in profit when the price of product A increased by 20% and the price elasticity of its demand would
be unity over the range of price.

(`)
Budgeted Revenue from Product A (12,000 units × `200) 24,00,000

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Revised Demand (in units) (`24,00,000 / `240) 10,000

Revised Contribution (in `) [10,000 units × (`240 – `120)] 12,00,000
Less: Existing Contribution (12,000 units × `80) 9,60,000
Increase in Profit (Contribution) 2,40,000

*Note: Since Price Elasticity of Demand is 1, therefore the Revenue in respect of Products will remain same.
Option (iii)
Increase in profit on the simultaneous introduction of above two options.

(`)
Revised Contribution from Product A [10,000 units × (`240 – `129)] 11,10,000
Revised Contribution from Product B [12,000 units × (`120 – `64.50)] 6,66,000
Total Revised Contribution 17,76,000
Less: Revised Fixed Cost 12,75,000
Revised Profit 5,01,000
Less: Existing Profit 1,80,000
Increase in Profit 3,21,000

A comparison of increase in profit figures under above three options clearly indicates that the option (iii) is the
best as it increases the profit of the concern by `3,21,000.
Note: The budgeted profit / (loss) for 2018 in respect of products A and B should be
` 2,10,000 and (`30,000) respectively instead of ` 1,50,000 and ` 30,000.

Workings

1. Contribution per unit of each product:

Product
A (`) B (`)
Contribution per unit 80 60
(Sales × P/V Ratio) (`200 × 40%) (`120 × 50%)

2. Number of units to be sold:

Total Contribution – Fixed Cost = Profit
Let x be the number of units of each product sold, therefore:
(80x + 60x) – `15,00,000 = `1,50,000 + `30,000
Or x = 12,000 units

Q.10 BEP/ Mos/Sales for profit RTP May

20 R-9. The following figures have been collected from cost records of
A Ltd. manufacture and sales its product
last year for the product R-9:

Elements of Cost Variable Cost portion Fixed Cost

Direct Material 30% of Cost of Goods Sold --
Direct Labour 15% of Cost of Goods Sold --
Factory Overhead 10% of Cost of Goods Sold ` 2,30,000
Administration Overhead 2% of Cost of Goods Sold ` 71,000
Selling & Distribution Overhead 4% of Cost of Sales ` 68,000

Last Year 5,000 units were sold at `185 per unit. From the given DETERMINE the followings:
(i) Break-even Sales (in rupees)
(ii) Profit earned during last year
(iii) Margin of safety (in %)
(iv) Profit if the sales were 10% less than the actual sales.
(Assume that Administration Overhead is related with production activity)

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Ans (1) Calculation of Cost of Goods Sold (COGS):

COGS = DM + DL + FOH + AOH
COGS = {0.3 COGS + 0.15 COGS + (0.10 COGS + ` 2,30,000) + (0.02 COGS + ` 71,000)}
Or, COGS = 0.57 COGS + ` 3,01,000
3, 01, 000
Or, COGS = = ` 7,00,000
0.43
(2) Calculation of Cost of Sales (COS):
COS = COGS + S&DOH
COS = COGS + (0.04 COS + ` 68,000)
Or, COS = ` 7,00,000 + (0.04 COS + ` 68,000)
7, 68, 000
Or, COS = = ` 8,00,000
0.96
(3) Calculation of Variable Costs:
Direct Material- (0.30 × ` 7,00,000) ` 2,10,000
Direct Labour- (0.15 × ` 7,00,000) ` 1,05,000
Factory Overhead- (0.10 × ` 7,00,000) ` 70,000
Administration OH- (0.02 × ` 7,00,000) ` 14,000
Selling & Distribution OH (0.04 × ` 8,00,000) ` 32,000
` 4,31,000
(4) Calculation of total Fixed Costs:
Factory Overhead- ` 2,30,000
Administration OH- ` 71,000
Selling & Distribution OH ` 68,000
` 3,69,000
(5) Calculation of P/V Ratio:
Contribution Sales − Variable Costs
P/V Ratio = x100 = x100
Sales Sales
(185x5, 000 units) − 4,31, 000
= x100 = 53.41%
185 x 5, 000units

(i) Break-Even Sales

Sales − Breakeven sales 3, 69, 000

= = `6,90,882
Sales 53.41%

(ii) Profit earned during the last year

= (Sales – Total Variable Costs) – Total Fixed Costs

= (`9,25,000 - `4,31,000) - `3,69,000

= `1,25,000

(iii) Margin of Safety (%)

Fixed Costs
= x100
P / V Ratio

9,25, 000 − 6, 90, 882

= x100 = 25.31%
9,25, 000

(iv) Profit if the sales were 10% less than the actual sales:

Profit = 90% (`9,25,000 - `4,31,000) - `3,69,000

= `4,44,600 - `3,69,000 = `75,600

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Q.11 Pv ratio/BEP/Total Contri RTP May 22

A Limited manufactures three different products and the following information has been collected from the
books of accounts:

Products
S T U
Sales Mix 25% 35% 40%
Selling Price ` 600 `800 `400
Variable Cost ` 300 `400 `240
Total Fixed Costs ` 36,00,000
Total Sales ` 1,20,00,000

The company has currently under discussion, a proposal to discontinue the manufacture of Product U and replace
it with Product M, when the following results are anticipated:

Products
S T M
Sales Mix 40% 35% 25%
Selling Price ` 600 ` 800 ` 600
Variable Cost ` 300 ` 400 ` 300
Total Fixed Costs ` 36,00,000
Total Sales ` 1,28,00,000

Required:

(i) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing product mix.

(ii) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the proposed product mix

Ans (i) Computation of PV ratio, contribution, profit and break-even sales for existing product mix
Products
S T U Total
Selling Price (`) 600 800 400
Less: Variable Cost (`) 300 400 240
Contribution per unit (`) 300 400 160
P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 25% 35% 40%
Contribution per rupee of sales (P/V Ratio × Sales Mix) 12.5% 17.5% 16% 46%
Present Total Contribution (`1,20,00,000 × 46%) ` 55,20,000
Less: Fixed Costs ` 36,00,000
Present Profit ` 19,20,000
Present Break Even Sales (` 36,00,000/0.46) ` 78,26,087

(ii) Computation of PV ratio, contribution, profit and break-even sale for proposed product mix

Products
S T M Total
Selling Price (`) 600 800 600
Less: Variable Cost (`) 300 400 300
Contribution per unit (`) 300 400 300
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 40% 35% 25%
Contribution per rupee of sales (P/V Ratio x Sales Mix) 20% 17.5% 12.5%

50%

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Proposed Total Contribution (` 1,28,00,000 x 50%) ` 64,00,000

Less: Fixed Costs ` 36,00,000
Proposed Profit ` 28,00,000
Proposed Break- Even Sales (` 36,00,000/0.50) ` 72,00,000

Q.12 Simple Over diff scenario sp MTP Nov

Fixed Cost 18(1)
Rs. 1,20,000
Variable costs Rs. 3 per unit
Selling price Rs. 7 per unit
Output Rs. 50,000 units

CALCULATE the profit for each of the following situation with the above data:
(i) with the data above
(ii) with a 10% increase in output & sales.
(iii) with a 10% increase in fixed costs.
(iv) with a 10% increase in variable costs.
(v) with a 10% increase in selling price.
(vi) taking all the above situations.

Ans (i)
Rs.
Sales 50,000 units at Rs. 7 3,50,000
Variable cost 50,000 × 3 1,50,000
Contribution 50,000 × 4 2,00,000
Fixed costs 1,20,000
Profit 80,000

s-v 7 −3 4
. P/V ratio = x100 = x100 = x100 = 57.14%
s 7 7
F 1,20, 000
BEP (units) = = =30,000 Units
contribution per unit 4
BEP (Value) = 30,000 Units × 7 = Rs. 2,10,000
Profit Rs. 80,000 (as calculated above)

(ii) with a 10% increase in output & sales i.e., 50,000+ 5,000 = 55,000 units

Contribution 55,000 × Rs. 4 per unit Rs. 2,20,000

Fixed costs Rs. 1,20,000
Profit Rs. 1,00,000

(iii) with a 10% increase in Fixed Cost

Contribution (50,000 ×Rs. 4 per unit) Rs. 2,00,000

Fixed cost (1,20,000+ 12,000 ) Rs. 1,32,000
Profit Rs 68,000

(iv) with a 10% increase in variable costs

Selling price per unit 7.00

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Less: variable cost (3+0.30) 3.30

Contribution per unit 3.70
Total contribution 50,000 × 3.70 1,85,000
Fixed costs 1,20,000
Profit 65,000

(v) with a 10% increase in selling price

Selling price per unit (7.00+0.70) 7.70

Variable cost per unit 3.00
Contribution per unit 4.70
Total contribution 50,000 × Rs. 4.70 2,35,000
Fixed costs 1,20,000
Profit 1,15,000

(vi) Effect of all the four above:-

Sales 55,000 × Rs. 7.70 per unit Rs. 4,23,500

Variable cost 55,000 × 3.30 Rs. 1,81,500
Contribution 55,000 × 4.40 Rs. 2,42,000
Fixed cost 1,20,000+ 12,000 Rs. 1,32,000
Profit Rs. 1,10,000

Note: It is assumed that the increased output of 55,000 units has been sold.

Q.13 Opportunity Cost MTP Nov 20

A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option only at the beginning
of each year.

Relevant information about the products for the next year is given below.

X Y Z
Selling Price (Rs. / unit) 100 120 120
Variable Costs (Rs. / unit) 60 90 70
Market Demand (unit) 3,000 2,000 1,000
Production Capacity (unit) 2,000 3,000 900
Fixed Costs (Rs.) 3,00,000

Required
COMPUTE the opportunity costs for each of the products.

Ans
X Y Z
(i) Contribution per unit (Rs.) 40 30 50
(ii) Units (Lower of Production / Market Demand) 2000 2,000 90
(iii) Possible Contribution (Rs.) [ I × II ] 80,000 60,000 45,000
(iv) Opportunity Cost* (Rs.) 60,000 80,000 80,000

(*) Opportunity cost is the maximum possible contribution forgone by not producing alternative product i.e. if
Product X is produced then opportunity cost will be maximum of (Rs. 60,000 from Y, Rs. 45,000 from Z).

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Q.14 Calculate Profit MTP May 22(2)

Company manufacture and sell 3 types of mobile handset. It also manufactures wireless charger for mobile. The
company has worked out following estimates for next year.

Annual Demand Selling Price Material cost Labour cost

(in units) (` per unit) (` per unit) (` per unit)
X5 5,000 8,000 2,000 1,000
X6 4,000 9,000 2,500 1,500
X7 3,000 12,000 3,000 2,000
Wireless Charger 15,000 1,500 300 200

To encourage the sale of wireless charger a discount of 10% in its price is being offered if it were to be
purchased along with mobile. It is expected that customer buying mobile will also buy the wireless charger. The
company factory has an effective capacity of 35,000 labour hours. The labour is paid @ ` 500 per hour. Overtime
of labour has to be paid at double the normal rate. Other variable cost work out to be 50% of direct labour cost
and fixed cost is ` 1,00,00,000. There will be no inventory at the end of the year.

Ans Calculation of Labour overtime hours

Total hours required for production
X5 (5,000 x 2 hrs) 10,000
X6 (4,000 x 3 hrs) 12,000
X7 (3,000 x 4 hrs) 12,000
Wireless Charger(15,000 x 0.40 hrs) 6,000
40,000
(35,000)
Overtime 5,000
Statement of Profitability

Particulars Amount (`) Amount (`)

Sales

X5 (5,000 x 8,000) 4,00,00,000

X6 (4,000 x 9,000) 3,60,00,000

X7 (3,000 x 12,000) 3,60,00,000

Wireless Charger [(12,000 x 1,350) + (3,000 x 1,500) 2,07,00,000 13,27,00,00

0
Less: Variable cost

Material:

X5 (5,000 x 2,000)

X6 (4,000 x 2,500)

X7 (3,000 x 3,000)

Wireless Charger (15,000 x 300) 3,35,00,000

Labour:

X5 (5,000 x 1,000)

X6 (4,000 x 1,500)

X7 (3,000 x 2,000)

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Wireless Charger (15,000 x 200)

Overtime (5,000 x 1,000) 2,50,00,000

Other variable overheads 1,25,00,000 7,10,00,000

Contribution 6,17,00,000

Less: Fixed Cost 1,00,00,000

Profit 5,17,00,000

Q.15 BEP level MTP Nov 22(1)

PS Limited is a manufacturing company and is operating at 75% capacity utilization. The PV ratio at this level of
activity is 40%. The flexible budget drafted by the company for two levels of activity is given below:

Capacity utilization (75 Capacity utilization (100

%) %)
Amount in ` Amount in ` (Lakhs)
(Lakhs)
Direct materials 180 240
Direct wages 120 160
Power and fuel 12 16
Repairs and maintenance 18 21
Consumables 21 28
Supervision 20 20
Indirect labour 36 42
Administrative expenses 21 21
Selling expenses 18 18
Depreciation 54 54

You are required to:

i. CALCULATE the profit earned by PS Limited at 75% level of activity.
ii. CALCULATE the break-even level of activity.

Ans Calculation of Semi Variable component

Repairs and Maintenance (`) Indirect labour (`)

At 75% capacity 18,00,000 36,00,000
At 100% capacity 21,00,000 42,00,000
Variable component for 25% 3,00,000 6,00,000
Hence variable cost at 75% 3,00,000 x 75/25=9,00,000 6,00,000 x 75/25
=18,00,000
18,00,00
Fixed cost at 75% capacity 18,00,000 – 9,00,000 = 9,00,000 36,00,000 –
0
18,00,000=18,00,000

Segregation of Fixed and Variable cost

75% 100% VC at 75% FC at 75%

Direct Material 180 240 180

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Direct Labour 120 160 120

Power and fuel 12 16 12
Repairs and maintenance 18 21 9 9
Consumables 21 28 21
Supervision 20 20 20
Indirect labour 36 42 18 18
Administrative expenses 21 21 21
Selling expenses 18 18 18
Depreciation 54 54 54
Total 500 620 360 140

(i) Calculation of profit earned at 75% capacity

Given PV ratio = 40%, Hence variable cost would be 60%
If variable cost is ` 360 lakhs then sales would be 360/ 0.60 = 600 lakhs
Less: Variable cost = ` 360 lakhs
Less: Fixed cost = ` 140 lakhs
Profit = ` 100 lakhs
(ii) Break-even level of activity
BEP Sales = FC/ P/V ratio = 140 /0.40 = ` 350 lakhs

[ALSO SOLVE ONE QUESTION ON MARGINAL V/S ABSORBTION IN ICAI MAT ILLUSTRATION 14]

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7 STANDARD COSTING
CHAPTER
Q.1 Material Variance PY May 18
Beta Ltd. is manufacturing Product N. This is manufactured by mixing two materials namely Material P and
Material Q. The Standard Cost of Mixture is as under:
Material P 150 ltrs. @ ` 40 per ltr.
Material Q 100 ltrs. @ ` 60 per ltr.
Standard loss @ 20 of total input is expected during production. The cost records for the period exhibit
following consumption: Material P 140 ltrs. @ ` 42 per ltr,
Material Q 110 ltrs. @ ` 56 per ltr,
Quantity produced was 195 ltrs.
Calculate:
(i) Material Cost Variance
(ii) Material Usage Variance.
(iii) Material Price Variance

Ans Take the good output of 195 ltr. The standard quantity of material required for 195 ltr. of output is
195
× 100 = 243.75 ltr.
80
Statement showing computation of Standard Cost/Actual Cost/ Revised Actual
Quantity

Material Standard Cost Actual Cost

Quantity Rate Amount Quantity Rate Amount
[SQ] [SP] [SQ × [AQ] [AP] [AQ × AP]
(Kg.) ( `) SP] ( `) (Kg.) ( `) ( `)
A (60% of 146.25 40 5,850.00 140 42 5,880
243.75 ltr.)
B (40% of. 97.50 60 5,850.00 110 56 6,160
243.75 Kg.)
243.75 11,700.00 200 12,040

Note:

SQ = Standard Quantity = Expected Consumption for Actual Output

AQ = Actual Quantity of Material Consumed
SP = Standard Price Per Unit
AP = Actual Price Per Unit

Computation of Variances:
Material Cost Variance = SQ × SP – AQ × AP
A = ` 146.25 ltr. × ` 40– 140 ltr. × ` 42 = ` 30.00 (A)
B = ` 97.50 ltr. × ` 60 – 110 ltr. × ` 56 = ` 310.00 (A)
Total = ` 30.00 (A) + ` 310.00 (A)
= ` 340.00 (A)

Material Usage Variance = SP × (SQ – AQ)

A = ` 40 × (146.25 ltr. –140 ltr.) = ` 250.00 (F)
B = ` 60 × (97.50 ltr. – 110 ltr.) = ` 750.00 (A)
Total = ` 250.00 (F) + ` 750.00 (A)
= ` 500.00 (A)

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Material Price Variance = AQ × (SP – AP)

A = 140 Kg. × ( ` 40 – ` 42) = ` 280 (A)

B = 110 Kg. × ( ` 60 – ` 56) = ` 440 (F)
Total = ` 280 (A) + ` 440 (F) = ` 160 (F)

Q.2 Materail Variance PY Nov 22

Y Lid manufactures "Product M" which requires three types of raw materials - "A", "B" & "C". Following
information related to 1st quarter of the F.Y. 2022-23 has been collected from its books of accounts. The
standard material input required for 1,000 kg of finished product 'M' are as under:

Material Quantity (Kg.) Std. Rate per Kg. ( `)

A 500 25
B 350 45
C 250 55
1100
Standard Loss 100
Standard Output 1000

During the period, the company produced 20,000 kg of product "M" for which the actual quantity of materials
consumed and purchase prices are as under:
Material Quantity (Kg.) Purchase price per Kg. ( `)
A 11,000 23
B 7,500 48
C 4,500 60

You are required to calculate:

(i) Material Cost Variance
(ii) Material Price Variance for each raw material and Product 'M'
(iii) Material Usage Variance for each raw material and Product 'M'
(iv) Material Yield Variance
Note: Indicate the nature of variance i.e. Favourable or Adverse.

Ans (a) Basic Calculations:

Standard for 20,000 kg. Actual for 20,000 kg.

Qty. Rate Amount Qty. Rate Amount
Kg. ( `) ( `) Kg. ( `) ( `)
A 10,000 25 2,50,000 11,000 23 2,53,000
B 7,000 45 3,15,000 7,500 48 3,60,000
C 5,000 55 2,75,000 4,500 60 2,70,000
Total 22,000 8,40,000 23,000 8,83,000
Calculation of Variances:
(i) Material Cost Variance = Std. Cost for actual output–Actual cost
MCV=8,40,000– 8,83,000 = ` 43,000(A)
(ii) Material Price Variance = (SP–AP) × AQ
A = (25 - 23) x 11,000 = 22,000 (F)
B = (45 – 48) x 7,500 = 22,500 (A)
C = (55 – 60) x 4,500 = 22,500 (A)
23000 (A)
(iii) Material Usages Variance = (SQ–AQ) × SP
A = (10,000 – 11,000) x 25 = 25,000 (A)

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B = (7,000 – 7,500) x 45 = 22,500 (A)

C = (5,000 – 4,500) x 55 = 27,500 (F)
20,000 (A)
(iv) Material Yield Variance = (SQ–RSQ*) × SP
A = (10,000 – 10,454.54) x 25 = 11,363.5(A)
B = (7,000 – 7,318.18) x 45 = 14,318.1(A)
C = (5,000 – 5,227.27) x 55 = 12,500(A)
38,181.6(A)
Revised Standard Quantity (RSQ)
10,000
A = x23,000 = 10,454.54
22,000
7,000
B = x23,000 = 7,318.18
22,000
5,000
C = x23,000 = 5,227.27
22,000
Material Yield Variance can also be Calculated as below
Material yield variance = Standard cost per unit (Actual yield – Standard yield)
8, 40, 000
Standard cost per unit = = ` 42
20, 000
20, 000
New Standard Yield = × 23,000 = 20,909
22, 000
Material yield variance = ` 42 (20,000 – 20,909)
= ` 38,178 (A)

Q.3 Material Variance PY May 23

NC Limited uses a standard costing system for the manufacturing of its product ‘X’. The following information
is available for the last week of the month:
• 25,000 kg of raw material were actually purchased for ` 3,12,500. The expected output is 8 units of
product 'X' from each one kg of raw material. There is no opening and closing inventories. The material
price variance and material cost variance, as per cost records, are ` 12,500 (F) and ` 1800 (A),
respectively.
• The standard time to produce a batch of 10 units of product 'X' is 15 minutes. The standard wage rate
per labour hour is 50. The company employs 125 workers in two categories, skilled and semi-skilled, in a
ratio of 60:40. The hourly wages actually paid were ` 50 per hour for skilled workers and ` 40 per hour
for semi- skilled workers. The weekly working hours are 40 hours per worker. Standard wage rate is the
same for skilled and semi- skilled workers.
• The monthly fixed overheads are budgeted at ` 76,480 Overheads are evenly distributed throughout the
month and assume 4 weeks in a month. In the last week of the month, the actual fixed overhead expenses
were ` 19,500.
Required:
(i) Calculate the standard price per kg and the standard quantity of raw material.
(ii) Calculate the material usage variance, labour cost variance, and labour efficiency variance.
(iii) Calculate the fixed overhead cost variance, the fixed overhead expenditure variance and the fixed
overhead volume variance.
Note: Indicate the nature of variance i.e Favourable or Adverse.

Ans (i) Calculation of Standard price per kg and the standard quantity of raw material:
Standard Price
(a) Material Price Variance = Standard Cost of Actual Quantity – Actual Cost

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12,500 (F) = (SP × AQ) – ` 3,12,500

12,500 (F) = (SP × 25,000) – ` 3,12,500
SP = ` 13
Standard Quantity
(b) Material Cost Variance = Standard Cost – Actual Cost
1,800 (A) = SQ × `13 – ` 3,12,500
SQ = 23,900 kg.

(ii) Calculation of Material Usage Variance, Labour Cost Variance and Labour Efficiency Variance
(a) Material Usage Variance = Standard Cost of Standard Quantity for
Actual Output – Standard Cost of Actual
Quantity
= SQ × SP – AQ × SP
Or
= SP × (SQ – AQ)
= ` 13 × (23,900 kg. – 25,000 kg.)
= ` 14,300 (A)
(b) Labour Cost Variance = Standard Cost – Actual Cost
= (SH × SR) – (AH × AR)
= ` 2,39,000 – ` 2,30,000
= ` 9,000 (F)
(c) Labour Efficiency Variance = Standard Cost of Standard Time for
Actual Production – Standard Cost of Actual Time
= (SH × SR) – (AH × SR)
Or
= (SH – AH) × SR
= ` 50 × [4,780 hrs. – 5,000 hrs.]
= ` 11,000 (A)

(iii) Calculation of Fixed Overhead Cost Variance, Fixed Overhead Expenditure Variance and Fixed Overhead
Volume Variance:
(a) Fixed overhead cost variance = Standard Fixed Overheads – Actual
Fixed Overheads
= 18,279 – 19,500
= ` 1,221(A)
(b) Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual
Fixed Overheads
Variance = ` 19,120 – ` 19,500
= ` 380 (A)
(c) Fixed overhead volume variance = (Budgeted output – Actual Output) X
Budgeted rate per unit
= (2,00,000 – 1,91,200) 0.0956
= ` 8,800 x 0.0956
= ` 841 (A)
Alternative presentation to part (iii) (a) and (b)
(i) Fixed Overhead Cost Variance:
= Overhead absorbed for actual production – Actual overhead incurred
19,120
= x 1,91,200 – 19,500 = ` 1,221(A)
2, 00, 000

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(iii) Fixed Overhead Volume Variance:

= Absorbed overhead – Budgeted overhead
19,120
= x 1,91,200 – 19,120 = ` 841(A)
2, 00, 000
Working Notes:

1. Standard time to produce 10 units of product X is 15 minutes. Therefore we can manufacture

40 units in an hour.
Hours available in a week
125 Workers x 40 Hours = 5,000 hours
Therefore budgeted output = 5,000 x 40 units per hour = 2,00,000 units
Alternatively
15 units
Budgeted time per unit = = 1.5 minutes
10 units
5, 000 Hours  60 Minutes
So, Budgeted output = = 2,00,000 units
1.5 Minutes
Actual output = 23,900 x 8 units = 1,91,200 units
0.25 Hrs
Standard hour for actual output = 1, 91, 200 × = 4, 780 Hrs
10 units
2.
Labour
Budget Revised standard Actual
Hours Rate ` Hours Rate ` Hours Rate `
5,000 50 2,50,000 4,780 50 2,39,000 Skilled 3000 50 1,50,000
Semi-
Skilled 2000 40 80,000
5000 2,30,000
3.
Budget Actual
Units 2,00,000 1,91,200
Fixed Overheads 19,120 19,500

4. Standard Fixed overheads:

19,120
x1,91,200 = `18,279
2, 00, 000
Budgeted rate per unit:
19,120
= ` 0.0956
2, 00, 000

Q.4 Material Variance MTP May 22(2)

Rounak Minerals Ltd. operates in iron ore mining through open cast mining method. Explosives and detonators
are used for excavation of iron ores from the mines. The following are the details of standard quantity of
explosives materials used for mining:

Particulars Rate ( `) Standard Qty. for Iron ore Standard Qty. for
Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic- meter
Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic-meter

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The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be removed to get one tonne of
iron ore).
During the month of December 2021, the company produced 20,000 tonnes of iron ore and removed 58,000
cubic- meter of OB. The quantity of explosive materials used and paid for the month is as below:

Material Quantity Amount ( `)

SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200
You are required to COMPUTE:
(i) Material price variance
(ii) Material quantity variance
(iii) Material cost variance.

Ans 1. Calculation of Standard Qty. of Explosives and Detonators for actual output:

Particulars Iron ore Overburden (OB) Total

SME:
A Actual Output 20,000 tonne 58,000 M3
B Standard Qty per unit 2.4 kg./tonne 1.9 kg./M3
C Standard Qty. for actual 48,000 kg. 1,10,200 kg. 1,58,200 kg.
production [A×B]
Detonators:
D Standard Qty per unit 2 pcs/ tonne 2 pcs/ M3
E Standard Qty. for actual 40,000 pcs. 1,16,000 pcs 1,56,000 pcs
production [A×D]

2. Calculation of Actual Price per unit of materials:

Material Quantity [A] Amount ( `) [B] Rate ( `) [C =

B÷A]
SME 1,67,200 kg. 63,53,600 38.00
Detonators 1,18,400 pcs 24,27,200 20.50

(i) Computation of material price variance:

Material Price Variance = Actual Qty. × (Std. Price - Actual Price)
SME = 1,67,200 kg. × ( `40 – `38) = ` 3,34,400 (F)
Detonators = 1,18,400 pcs × ( `20 – `20.5) = ` 59,200 (A)
Total = ` 2,75,200 (F)
(ii) Computation of material quantity variance:
Material Qty. Variance = Std. Price × (Std. Qty for actual output - Actual Qty.)
SME = `40 × (1,58,200 kg. - 1,67,200 kg.) = ` 3,60,000 (A)
Detonators = `20 × (1,56,000 pcs -1,18,400 pcs) = ` 7,52,000 (F)
Total = ` 3,92,000 (F)
(iii) Computation of material cost variance:
Material cost variance = Std. cost – Actual Cost
Or, (Std. Price × Std. Qty) – (Actual Price × Actual Qty.)
SME = ( `40 × 1,58,200 kg) – ( `38 × 1,67,200 kg.)
= `63,28,000 – `63,53,600 = ` 25,600 (A)
Detonators = ( `20 × 1,56,000 pcs) – ( `20.50 × 1,18,400 pcs)
= `31,20,000 – `24,27,200 = ` 6,92,800 (F)
Total = ` 6,67,200 (F)

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Q.5 Material Variance MTP May 23(1)

Following data is extracted from the books of RAMZY Ltd. for the month of March:
(i) Estimation-
Particulars Quantity (kg.) Price ( `) Amount ( `)
Material-A 1320 ? --
Material-B 990 50 49500
--

Normal loss was expected to be 5% of total input materials. (ii) Actuals- 2,500 kg of output produced.

Particulars Quantity (kg.) Price ( `) Amount ( `)

Material-A 1500 ? --
Material-B ? 53 --
98,000

(iii) Other Information-

Material Cost Variance = ` 5,500 (F)
Material Price Variance = ` 300 (F)
You are required to CALCULATE:
(i) Standard Price of Material-A;
(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance.

Ans
(i) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
Or `5,500 = (SQ × SP) – `98,000
Or (SQ × SP) = `1,03,500
Or (SQA × SPA) + (SQB × SPB) = ` 1,03,500
Or (1,503.8 kg × SPA) + (1,127.8 kg × `50) = ` 1,03,500
Or (1,503.8 kg × SPA) + `56,390 = `1,03,500
Or (1,503.8 kg × SPA) = ` 47,110
Or SPA 47,110
=
1503.80 kg
= `31.33
(ii) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)}
Or `300 = (AQ × SP) – ` 98,000
Or (AQ × SP) = ` 98,300
Or (AQA × SPA) + (AQB × SPB) = `98,300
Or (1,500 kg × `31.33 (from (i) above)) + AQB x `50 = `98,300
Or ` 46,995 + (AQB × ` 50) = ` 98,300
Or (AQB × ` 50) = ` 51,305
Or AQB = 1,026kg
Actual Quantity of Material B = 1,026 kg.
(iii) (AQ × AP) = `98,000
Or (AQA × APA) + (AQB × APB) = ` 98,000

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Or (1,500 kg × APA) + (1,026 kg (from (ii) above) × `53) = ` 98,000

Or (1,500 kg × APA) + ` 54,378 = ` 98,000
Or (1,500 kg APA) = ` 43,622
43,622
Or AP = = ` 29.10
1,500
Actual Price of Material A = `
29.10
(iv) Total Actual Quantity of Material-A and Material-B = AQA + AQB
Or 1,500 kg + 1,026 kg (from (ii) above) = 2,526 kg

Revised SQA = 1320 kg x 2,526 kg

= 1,443 kg
(1,320 + 990)

Revised SQB = 990 kg x 2,526 kg

= 1,083 kg
(1,320 + 990)
(v) Material Mix Variance (A + B) ={(RSQ × SP) – (AQ × SP)}
= {(RSQA × SPA) + (RSQB × SPB) – `98,300} = (1,443 kg (from (iv) above) × ` 31.33 (from
(i) above)) + (1,083 kg (from (iv) above) × `50) - `98,300
= ( `45,209 + `54,150) – `98,300 = ` 1059 (F)

Q.6 Material Variance MTP May 19(2)

BBC Ltd. manufactures Ordinary Portland Cement (OPC). The standard data for the raw materials that are used
to manufacture OPC are as follows:
Material Composition (%) Rate per Metric Ton (Rs.)
Limestone 65 565
Silica 20 4,800
Alumina 5 32,100
Iron ore 5 1,800
Others 5 2,400

During the month of February 20X8, A Ltd. produced 500 MT OPC. Actual data related with the consumption
and costs are as follows:

Raw Material Quantity (MT) Total Cost (Rs.)

Limestone 340 1,90,400
Silica 105 5,09,250
Alumina 25 8,12,500
Iron ore 30 53,400
Others 23 51,750

You are required to COMPUTE the following variances related with the production of OPC for the month of
February 20X8:
(i) Material Price Variance
(ii) Material Mix Variance
(iii) Material Yield Variance
(iv) Material Cost Variance.

Ans (i) Material Price Variance = Actual Quantity (Std. Price – Actual Price)

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 1,90, 400 
Limestone = 340  565 − 
 340 
= 340 (Rs. 565 - Rs. 560) = 1,700 (F)
 5, 09,250 
Silica =105  4800 − 
 105 
=105 (Rs. 4,800 - Rs. 4,850) = 5,250 (A)

 8,12,500 
Alumina = 25  32,100 − 
 25 
=25 (Rs. 32,100 - Rs. 32,500) = 10,000 (A)
 53, 400 
Iron ore =30  18, 00 − 
 30 
=30 (Rs. 1,800 - Rs. 1,780) = 600 (F)

 51,750 
Others = 23  2, 400 − 
 23 
=23 (Rs. 2,400 - Rs. 2,250) = 3,450 (F)
9,500 (A)
(ii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)

Limestone = Rs. 565 (523 × 65% - 340)

= Rs. 565 (339.95 - 340) = 28.25 (A)
Silica = Rs. 4,800 (523 × 20% - 105)
= Rs. 4,800 (104.6 - 105) = 1,920 (A)
Alumina = Rs. 32,100 (523 × 5% - 25)
= Rs. 32,100 (26.15 - 25) = 36,915 (F)
Iron ore = Rs. 1,800 (523 × 5% - 30)
= Rs. 1,800 (26.15 - 30) = 6,930 (A)
Others = Rs. 2,400 (523 × 5% - 23)
= Rs. 2,400 (26.15 - 23) = 7,560 (F)
35,596.75 (F)
(iii) Material Yield Variance = Std. Price (Standard Quantity – Revised Std. Quantity)

Limestone = Rs. 565 (500 × 65% - 523 × 65%)

= Rs. 565 (325 - 339.95) = 8,446.75 (A)
Silica = Rs. 4,800 (500 × 20% - 523 × 20%)
= Rs. 4,800 (100 - 104.6) = 22,080 (A)
Alumina = Rs. 32,100 (500 × 5% - 523 × 5%)
= Rs. 32,100 (25 - 26.15) = 36,915 (A)
Iron ore = Rs. 1,800 (500 × 5% - 523 × 5%)
= Rs. 1,800 (25 - 26.15) = 2,070 (A)
Others = Rs. 2,400 (500 × 5% - 523 × 5%)
= Rs. 2,400 (25 - 26.15) = 2,760 (A)
72,271.75 (A)

(iv) Material Cost Variance = (Std. Quantity × Std. Price) – (Actual Quantity × Actual Price)

Limestone = Rs. 565 × (500 × 65%) - Rs. 1,90,400

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= Rs. 1,83,625 - Rs. 1,90,400 = 6,775 (A)

Silica = Rs. 4,800 × (500 × 20%) - Rs. 5,09,250
= Rs. 4,80,000 – Rs. 5,09,250 = 29,250 (A)
Alumina = Rs. 32,100 (500 × 5%) – Rs. 8,12,500
= Rs. 8,02,500 – Rs. 8,12,500 = 10,000 (A)
Iron ore = Rs. 1,800 (500 × 5%) – Rs. 53,400
= Rs. 45,000 – Rs. 53,400 = 8,400 (A)
Others = Rs. 2,400 (500 × 5%) – Rs. 51,750
= Rs. 60,000 – Rs. 51,750 = 8,250 (F)
46,175 (A)

Q.7 Material, Labour Variance RTP May 19

ABC Ltd. had prepared the following estimation for the month of April:

Quantity Rate ( `) Amount ( `)

Material-A 800 kg. 45.00 36,000
Material-B 600 kg. 30.00 18,000
Skilled labour 1,000 hours 37.50 37,500
Unskilled labour 800 hours 22.00 17,600

Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected labour
hours was also estimated.

At the end of the month the following information has been collected from the cost accounting department:

The company has produced 1,480 kg. finished product by using the followings:

Quantity Rate ( `) Amount ( `)

Material-A 900 kg. 43.00 38,700
Material-B 650 kg. 32.50 21,125
Skilled labour 1,200 hours 35.50 42,600
Unskilled labour 860 hours 23.00 19,780

You are required to CALCULATE:

(a) Material Cost Variance;

(b) Material Price Variance;

(c) Material Mix Variance;

(d) Material Yield Variance;

(e) Labour Cost Variance;

(f) Labour Efficiency Variance and

(g) Labour Yield Variance.

Ans Material Variances:

Material SQ (WN-1) SP ( `) SQ × SP RSQ (WN-2) RSQ × SP AQ AQ × SP AP AQ × AP
( `) ( `) ( `) ( `) ( `)
A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700
B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125
1645 kg 63,450 1550 kg 59,790 1550kg 60,000 59,825

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WN-1: Standard Quantity (SQ):

 800kg 
Material A-  x 1, 400g  = 939.68 or 940 kg.
 0.9x1, 400kg 
 600kg 
Material B-  x 1, 400g  =704.76 or 705 kg.
 0.9x1, 400kg 
WN- 2: Revised Standard Quantity (RSQ):
 800kg 
Material A-  x 1,550Kg  = 885.71 or 886 kg.
 1, 400kg 
 600kg 
Material B-  x 1,550Kg  = 664.28 or 664 kg.
 1, 400kg 
(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
= {63,450 – 59,825} = 3,625 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {60,000 – 59,825} = 175 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {59,790 – 60,000} = 210 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {63,450 – 59,790} = 3,660 (F)
Labour Variances:
Labour SH (WN-3) SR ( `) SH × SR RSH RSH × SR AH AH × SR AR AH × AR
( `) (WN-4) ( `) ( `) ( `) ( `)

Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600
Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780
2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380
WN- 3: Standard Hours (SH):
 0.95X1, 000hr 
Skilled labour-  x 1, 480Kg  =1,115.87 or 1,116 hrs.
 0.90X 1, 400kg. 
 0.95X800hr 
Unskilled labour-  x 1, 480Kg  = 892.69 or 893 hrs.
 0.90 X 1, 400kg. 
WN- 4: Revised Standard Hours (RSH):
 1000hr 
Skilled labour-  x 2, 060hr  =1,144.44 or 1,144 hrs.
 1,800hr 
 800hr 
Unskilled labour-  x 2, 060hr  = 915.56 or 916 hrs.
 1,800hr 
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {61,496 – 62,380} = 884 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {61,496 – 63,920} = 2,424 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}

Q.8 Material, Labour Variance RTP Nov 19

JVG Ltd. produces a product and operates a standard costing system and value material and finished goods
inventories at standard cost. The information related with the product is as follows:

Particulars Cost per unit ( `)

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Direct materials (30 kg at `350 per kg) 10,500

Direct labour (5 hours at `80 per hour) 400
The actual information for the month just ended is as follows:
(a) The budgeted and actual production for the month of September 2019 is 1,000 units.
(b) Direct materials –5,000 kg at the beginning of the month. The closing balance of direct materials for the
month was 10,000 kg. Purchases during the month were made at ` 365 per kg. The actual utilization of
direct materials was 7,200 kg more than the budgeted quantity.
(c) Direct labour – 5,300 hours were utilised at a cost of ` 4,34,600.
Required:
CALCULATE (i) Direct material price and usage variances (ii) Direct labour rate and efficiency variances.

Ans Quantity of material purchased and used.

No. of units produced 1,000 units

Std. input per unit 30kg.
Std. quantity (Kg.) 30,000 kg.
Add: Excess usage 7,200 kg.
Actual Quantity 37,200 kg.
Add: Closing Stock 10,000 kg.
Less: Opening stock 5,000 kg.
Quantity of Material purchased 42,200 kg.
(i) Direct Material Price Variance:
= Actual Quantity purchased (Std. Price – Actual Price)
= 42,200 kg.( `350 – `365) = 6,33,000 (Adverse)
Direct Material Usage Variance:
= Std. Price (Std. Quantity – Actual Quantity)
= `350 (30,000 kg. – 37,200 kg.) = `25,20,000 (Adverse)

(ii) Direct Labour Rate Variance:

= Actual hours (Std. Rate – Actual Rate)
= 5,300 hours ( `80 – `82) = `10,600 (Adverse)
Direct Labour Efficiency Variance:
= Std. Rate (Std. hours – Actual hours)
= `80 (1,000 units × 5 hours – 5,300 hours) = `24,000 (Adverse)
Q.9 Material, Labour Variance RTP Nov 22
Ahaan Limited operates a system of standard costing in respect of one of its products 'AH1' which is
manufactured within a single cost centre. Details of standard per unit are as follows:
• The standard material input is 20 kilograms at a standard price of ` 24 per kilogram.
• The standard wage rate is ` 72 per hour and 5 hours are allowed to produce one unit.
• Fixed production overhead is absorbed at the rate of 100% of wages cost. During the month of April 2022,
the following was incurred:
• Actual price paid for material purchased @ ` 22 per kilogram.
• Total direct wages cost was ` 43,92,000
• Fixed production overhead cost incurred was ` 45,00,000
Analysis of variances was as follows:

Variances Favourable Adverse

Direct material price ` 4,80,000 -
Direct material usage ` 48,000
Direct labour rate - ` 69,120
Direct labour efficiency ` 33,120 -

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Fixed production overhead expenditure ` 1,80,000

You are required to CALCULATE the following for the month of April, 2022
(i) Material cost variance
(ii) Budgeted output (in units)
(iii) Quantity of raw materials purchased (in kilograms)
(iv) Actual output (in units)
(v) Actual hours worked
(vi) Actual wage rate per labour hour
(vii) Labour cost variance
(viii) Production overhead cost variance

Ans (i) Direct Material Cost Variance = Direct Material Price Variance + Direct Material Usage Variance
= ` 4,80,000 F + ` 48,000 F = ` 5,28,000 F

(ii) Budgeted Output (units)

Fixed Production Overhead Expenditure Variance
= Budgeted Fixed Overhead - Actual Fixed Overheads
= Budgeted Output x Standard Overhead Rate - Actual Fixed Overheads
` 1,80,000 A = Budgeted Output x ` 360 (5 hrs @ ` 72) - ` 45,00,000
45, 00, 000 − 1,80, 000
Budgeted Output = = 12,000 units
360
(iii) Quantity of Materials purchased (in kilograms)
Material Price Variance = Actual Usage (Standard Price per kg - Actual price per kg)
` 4,80,000 F = Actual Usage ( ` 24 - ` 22)
4,8, 0, 000 − 1,80, 000
Actual usage in kgs = = 2,40,000 kgs
2
(iv) Actual Output (units)
Actual Direct Wages ` 43,92,000
Direct labour rate variance ` 69,120 A
Direct labour efficiency variance ` 33,120 F
Standard labour cost for actual output ` 43,56,000

Standard labour cost for actual output

Actual Output =
Standard wage rate per unit
43,56, 000
= = 12,100 units
360 (72 x 5)
Alternatively, let X be the actual quantity of output
Then, Standard Quantity of input for actual output 'X'
20X = SQ
Material cost variance = (SQ x SP) - (AQ x AP)
` 5,28,000 = (20 x ` 24) - (2,40,000 kgs x ` 22)
480X = ` 52,80,000 + ` 5,28,000
480X = ` 58,08,000
58, 08, 000
X = = 12,100 units
480
(v) Actual hours worked
Labour Efficiency Variance = Standard Labour Rate (Standard time for actual output - Actual time)
` 33,120 F = ` 72 (5 hours x 12100 units - Actual time)
460 hours = 60,500 hours - Actual time

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Actual time = 60,500 - 460 = 60,040 hours

(vi) Actual wage rate per hour

Actual Wages paid = ` 43,92,000
Actual hours worked = 60,040 hours
43,92, 000
Actual Wage rate per hour = = ` 73.15 per hour
60, 040 hours
(vii) Labour cost variance
= Labour rate variance + Labour efficiency variance
= ` 69,120 A + ` 33,120 F
= ` 36,000 A
(viii) Production Overhead Cost Variance
= Actual Output x Standard overhead rate - Actual Overheads Incurred
= 12,100 units x ` 360 - ` 45,00,000
= ` 43,56,000 - ` 45,00,000
= ` 1,44,000 A

Q.10 Material, Labour Variance MTP Nov 22(2)

The following information is available from the cost records of a company for the month of
July, 2022:
(1) Material purchased 22,000 pieces ` 9,00,000
(2) Material consumed 21,000 pieces
(3) Actual wages paid for 5,150 hours ` 2,57,500
(4) Fixed Factory overhead incurred ` 4,60,000
(5) Fixed Factory overhead budgeted ` 4,20,000
(6) Units produced 1,900
(7) Standard rates and prices are:
Direct material ` 45 per piece
Standard input 10 pieces per unit
Direct labour rate ` 60 per hour

Ans (i) Material price variance (on the basis of Single plan):
= Actual Quantity Purchased (Std. Price – Actual Price)
9, 00, 000
=22,000 pcs (𝑅𝑠. 45- = Rs.90,000* (Favourable)
22, 000pcs
OR
Material price variance (on the basis of Partial plan):
= Actual Quantity consumed (Std. Price – Actual Price)
9, 00, 000
= 21,000 pcs (𝑅𝑠. 45- = Rs.85,909* (Favourable)
22, 000pcs
(*Figure may slightly differ due to rounding off the actual price per unit)
(ii) Material usage variance:
= Std. price per piece (Std. Quantity – Actual Quantity consumed)
= Rs.45 (1,900 units × 10 – 21,000) = Rs. 90,000 (Adverse)
(iii) Labour rate variance:

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= Actual hours paid (Std. rate – Actual rate)

2,57,500
= 5,150 hours (𝑅𝑠. 60- = Rs. 51,500 (Favourable)
5,150hours
(iv) Labour efficiency variance:
= Std. rate per hour (Std. hours – Actual hoursworked)
= Rs.60 (1,900 units × 2.5 hours – 5,150 hours) = Rs. 24,000 (Adverse)
(v) Fixed overhead expenditure variance:
= Budgeted Overhead – Actual Overhead
= Rs. 4,20,000 – Rs. 4,60,000 = Rs. 40,000 (Adverse)
(vi) Fixed overhead efficiency variance:
= Std. rate (Std. hours - Actual hours worked)
= Rs.80 (1,900 units × 2.5 hours - 5,150 hours) = Rs. 32,000 (Adverse)
Or,
Fixed overhead efficiency variance on basis of units
= Std. rate per unit (Actual output – Standard output for actual hours)
= Rs.200 (1,900 units - 5,150 / 2.5 hours) = Rs. 32,000 (Adverse)
(vii) Fixed overhead capacity variance:
= Std. rate (Actual hours worked – Budgeted hours)
 4,20, 000 
= Rs. 80  5,150hours −  = Rs. 8,000 (Adverse)
 80 
Or,
Fixed overhead capacity variances on basis of units
= Std. rate per unit (Standard output for actual hours – Budgeted output)
= Rs.200 (2,060 units - 4,20,000 / 200) = Rs. 8,000 (Adverse)

Q.11 Material, Labour & OH Variance RTP Nov 18

Aaradhya Ltd. manufactures a commercial product for which the standard cost per unit is as follows:

( `)
Material:
5 kg. @ ` 4 per kg. 20.00
Labour:
3 hours @ `10 per hour 30.00
Overhead
Variable: 3 hours @ `1 3.00
Fixed: 3 hours @ `0.50 1.50
Total 54.50

During Jan. 20X8, 600 units of the product were manufactured at the cost shown below:

( `)
Materials purchased:
5,000 kg. @ `4.10 per kg. 20,500
Materials used:
3,500 kg.
Direct Labour:
1,700 hours @ ` 9 15,300
Variable overhead 1,900
Fixed overhead 900
Total 38,600

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The flexible budget required 1,800 direct labour hours for operation at the monthly activity level used to set
the fixed overhead rate.
COMPUTE:
(a) Material price variance,
(b) Material Usage variance;
(c) Labour rate variance;
(d) Labour efficiency variance;
(e) Variable overhead expenditure variance;
(f) Variable overhead efficiency variance;
(g) Fixed overhead expenditure variance;
(h) Fixed overhead volume variance;
(i) Fixed overhead capacity variance; and
(j) Fixed overhead efficiency variance.
Also RECONCILE the standard and actual cost of production.

Ans (a) Material price variance:

= (Standard price – Actual Price) × Actual quantity
= ( ` 4 – ` 4.10) × 5,000 = ` 500 Adv.
(b) Material usage variance:
= (Std. quantity for actual output – Actual qtty.) × Std. price
= (600 × 5 – 3,500) × 4 = ` 2,000 Adv.
(c) Labour Rate Variance:
= (Standard rate – Actual rate) × Actual hours
= ( `10 – `9) × 1,700 = ` 1,700 Fav.
(d) Labour Efficiency Variance:
= (Standard hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × `10
= ` 1,000 Fav.
(e) Variable Overhead Expenditure Variance
= (Actual Hours × Standard Rate) – Actual Overhead
= (1,700 × ` 1) – ` 1,900
= ` 200 Adv.
(f) Variable Overhead Efficiency Variance:
= Std. hours for actual output – Actual hours) × Std. rate
= (600 × 3 – 1,700) × `1 = `100 Fav.
(g) Fixed Overhead Expenditure Variance:
= (Budgeted overhead – Actual overhead)
= (1,800 × 0.50 – 900) = Nil
(h) Fixed Overhead Volume Variance:
= (Std. hours for actual output – Budgeted hours) × Std. rate
= (600 × 3 – 1,800) × ` 0.50 = Nil
(i) Fixed Overhead Capacity Variance:
= (Budgeted hours – Actual Hours) × Standard rate
= (1,800 – 1,700) × ` 0.50 = ` 50 Adv.
(j) Fixed Overhead Efficiency Variance:
= (Std. hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × ` 0.50 = ` 50 Fav.

Verification: ( `) ( `)
Overhead recovered: 600 units @ `4.50 2,700
Actual Overhead:

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Variable 1,900
Fixed 900 2,800
100 Adv.
Variable expenditure variance 200 Adv
Variable Efficiency variance 100 Fav.
Fixed expenditure variance Nil
Fixed overhead volume variance Nil
100 Adv.

Reconciliation Statement

Standard Cost: 600 units @ `54.50 32,700

Actual Cost: 38,600
Less: Material Stock at standard cost: (1,500 × `4) 6,000 (32,600) 100 Fav.
Variances: Adv. ( `) Fav. ( `)
Material price 500
Material usage 2,000
Labour rate 1,700
Labour efficiency 1,000
Variable expenditure 200
Variable efficiency 100
Total 2,700 2,800 100 Fav.

Q.12 Labour Variance PY May 19

A gang of workers normally consists of 30 skilled workers, 15 semi-skilled workers and

10 unskilled workers. They are paid at standard rate per hour as under:
Skilled ` 70
Semi-skilled ` 65
Unskilled ` 50
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During the week
ended 31st March, 2019, the gang consisted of 40 skilled, 10 semi-skilled and 5 unskilled workers. The actual
wages paid were at the rate of ` 75,
` 60 and ` 52 per hour respectively. Four hours were lost due to machine breakdown
and 1,600 units were produced.
Calculate the following variances showing clearly adverse (A) or favourable (F)
(i) Labour Cost Variance (ii) Labour Rate Variance
(iii) Labour Efficiency Variance (iv) Labour Mix Variance
(v) Labour Idle Time Variance

Ans (i) Labour Cost Variance = Standard Cost – Actual Cost

= `1,14,400 – `1,54,400
= 40,000 (A)
(1,600*75+400*60+200*52= `1,54,400)
Or
Types of workers Standard Cost – Actual Cost Amount ( `)
Skilled Workers (30x40x70/2,000x1,600)- (40x40x75) 52,800 (A)
67,200-1,20,000
Semi- Skilled (15x40x65/2,000x1,600)- (10x40x60) 7,200 (F)

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31,200-24,000
Un-Skilled Workers (10x40x50/2,000x1,600)- (5x40x52) 5,600 (F)
16,000-10,400
Total 1,14,400-1,54,400 40,000 (A)

(ii) Labour Rate Variance

Types of workers Actual Hours × (Standard Rate - Amount ( `)
Actual Rate)
Skilled Workers 1,600 hours × ( `70.00 – `75.00) 8,000 (A)
Semi- Skilled 400 hours × ( `65.00 – `60.00) 2,000 (F)
Un-Skilled Workers 200 hours × ( `50.00 – `52.00) 400 (A)
Total `8,000 (A) + `2,000 (F) + `400 (A) 6,400 (A)

(iii) Labour Efficiency Variance

Types of workers Standard Rate × (Standard Hours – Amount

Actual Hours) ( `)
Skilled Workers `70.00 × (960 hours – 1,440 hours) 33,600 (A)
Semi- Skilled `65.00 × (480 hours – 360 hours) 7,800 (F)
Un-Skilled Workers `50.00 × (320 hours – 180 hours) 7,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 18,800 (A)

Alternatively labour efficiency can be calculated on basis of labour hours paid

Types of workers Standard Rate × (Standard Hours – Amount

Actual Hours) ( `)
Skilled Workers 70.00 × (960 hours – 1600 hours) 44,800 (A)
Semi- Skilled 65.00 × (480 hours – 400 hours) 5,200 (F)
Un-Skilled Workers 50.00 × (320 hours – 200 hours) 6,000 (F)

Total 33,600 (A) + 7,800 (F) + 7,000 (F) 33,600 (A)

(iv) Labour Mix Variance

= Total Actual Time Worked (hours) × {Average Standard Rate per hour of Standard Gang Less
Average Standard Rate per hour of Actual Gang}
@on the basis of hours worked

1,14, 400 1, 440hrs.  70 + 360hrs.  65 + 180hrs.  50

= 1,980 hours × −
1,760 hrs. 1,980 hrs
= ` 4,500 (A)
Or
Labour Mix Variance
Types of workers Std. Rate x (Revised Actual Hours Amount ( `)
Worked- Actual Hours Worked)
Skilled Workers `70 × (1,080 hrs. – 1440 hrs.) 25,200 (A)
Semi- Skilled `65 × (540 hrs. – 360 hrs.) 11,700 (F)
Un Skilled Workers `50 × (360 hrs. – 180 hrs.) 9,000 (F)
Total `25,200 (A) + `11,700 (F) + `9,000 (F) 4,500 (A)

(v) Labour Idle Time Variance

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Types of workers Standard Rate × (Hours Paid – Hours Amount ( `)

Worked)
Skilled Workers `70.00 × (1,600 hours – 1,440 hours) 11,200 (A)
Semi- Skilled `65.00 × (400 hours – 360 hours) 2,600 (A)
Un-Skilled Workers `50.00 × (200 hours – 180 hours) 1,000 (A)
Total 11,200 (A) + 2,600 (A) + 1,000 (A) 14,800 (A)

Verification:
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance + Labour Idle Time Variance
= 6,400 (A) + 18,800 (A) + 14,800 (A) = ` 40,000 (A)
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance
= 6400(A) + 33600(A)= `40000(A)
In this case, labour idle time variance is a part of labour efficiency variance.
Working Notes:

Category Standard Cost Actual (1600 units) Revised

Hrs. Rate Amt. ( `) Hrs. Rate Amt. ( `) Actual Hours

Skilled 960 70.00 67,200 1,440 1,08,000 1,080

(30Wx40x1,600/ 2, 000) (40Wx36) (1,980x6/11)
75.00

Semi- 480 65.00 31,200 360 21,600 540

Skilled (15Wx40 x1,600/2,000) (10Wx36) 60.00 (1,980x3/11)

Unskilled 320 50.00 16,000 180 52.00 9,360 360

(10Wx40 x1,600/2,000) (5Wx36) (1,980x2/11)

Total 1,760 65 1,14,400 1,980 1,38,960 1,980

Q.13 Labour Variance MTP May 18

The standard labour component and the actual labour component engaged in a week for a job are as follows:

Skilled Semi-skilled Un-Skilled

Workers Workers workers
Standard number of workers in the gang 32 12 6
Standard wage rate per hour ( `) 30 20 10
Actual number of workers employed in the gang 28 18 4
during the week
Actual wages rate per hour ( `) 34 23 12

During the 40 hours working week the gang produced 1,800 standard labour hours of work. CALCULATE:
(i) Total labour cost variance;
(ii) Labour yield variance;
(iii) Labour mix variance; and
(iv) Labour wage rate variance.

Ans Work produced by the gang 1,800 standard labour hours, i.e.,

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1,800
or 36 gang hours
32 + 12 + 6
Standard hours of Skilled Labour (36 x 32) 1,152 hours
Standard hours of Semi-skilled (36 x12) 432 hours
Labour
Standard hours of Un-skilled Labour (36 x 6) 216 hours
Total 1,800 hours
Actual hours of Skilled Labour (40 x 28) 1,120 hours
Actual hours of Semi-skilled Labour (40 x 18) 720 hours
Actual hours of Un-skilled Labour (40 x 4) 160 hours
Total 2,000 hours

Revised Standard hours (actual hours worked expressed in standard ratio)

1,152
Skilled Labour x200 1,280 hours
1,800
432
Semi-skilled Labour x200 480 hours
1,800
216
Unskilled Labour x200 240 hours
1,800
2,000 hours

Skilled Labour 1,152 hours @ ` 30 34,560

Semi-skilled Labour 432 hours @ ` 20 8,640
Unskilled Labour 216 hours @ ` 10 2,160
1,800 hours 45,360
Actual Cost:
Skilled Labour 1,120 hours @ ` 34 38,080
Semi-skilled Labour 720 hours @ ` 23 16,560
Unskilled Labour 160 hours @ ` 12 1,920
2,000 hours 56,560

(i) Total Labour Cost Variance

Standard Cost- Actual Cost `
` 45,360 - ` 56,560 11,200 (A)
(ii) Labour Yield Variance:
(Standard hours for Actual Output - Revised Standard hours) x Standard Rate
Skilled (1,152 - 1,280) x ` 30 3,840 (A)
Semi -skilled (432 - 480) x ` 20 960 (A)
Un-skilled (216 - 240) x ` 10 240 (A)
5,040 (A) 5,040(A)
(iii) Labour Mix Variance:
(Revised Standard Hours - Actual Hours) x Standard Rate
Skilled (1,280 - 1,120) x ` 30 4,800 (F)
Semi-skilled (480-720) x ` 20 4,800(A)
Un-skilled (240-160) x ` 10 800 (F)
800(F) 800 (F)
(iv) Labour Wage Rate Variance:
(Standard Rate - Actual Rate) x Actual Hours

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Skilled ( ` 30 - ` 34) x1,120 4,480 (A)

Semi-skilled ( ` 20 - ` 23) x 720 2,160 (A)
Un-skilled ( ` 10 - ` 12) x 160 320 (A)
6,960 (A) 6,960 (A)
Check : Total Labour Cost Variance = Yield + Mix + Rate 11,200 (A)

Q.14 Labour, OH Variance MTP Nov 18(2)

Arnav Ltd. manufactures a product Q, the standard cost of which is as follows:

Standard Cost per unit (Rs.)

Direct Material 600
Direct labour:
- Skilled @ Rs.80 per hour 120
- Unskilled @ Rs.60 per hour 90
Variable overheads 75
Fixed overheads 30
915

During the month just ended 4,000 units of Q were produced. The actual labour cost was as follows.

Rate per hour (Rs.) Cost (Rs.)

Skilled 87.50 5,77,500
Unskilled 55.00 2,97,000

10% of the labour time was lost due to idle time. The standard idle time was 7.5% of labour time. Arnav Ltd. has
budgeted to produce 4,200 units of Q. Arnav Ltd. absorbs its overheads on direct labour hour (effective hours)
basis. Actual fixed and variable overheads incurred were Rs.1,55,000 and Rs.2,85,000 respectively.
CALCULATE:
(i) Labour rate variance;
(ii) Labour efficiency variance;
(iii) Labour mix variance;
(iv) Labour yield variance;
(v) Labour idle time variance;
(vi) Variable overhead expenditure variance and
(vii) Variable overhead efficiency variance.

Ans
Skilled Unskilled
Standard Rate per hour 80 60
Standard time for producing one unit 1.5 hours (Rs.120 ÷ Rs.80) 1.5 hours (Rs.90 ÷ Rs.60)
Actual hours paid (AH Paid) 6,600 hours 5,400 hours
Standard hours required to produce 6,000 hours 6,000 hours
4,000 units (SH) (1.5 hours× 4,000 units) (1.5 hours× 4,000 units)
Actual hours worked 6, 600 5, 400
(AH Workd) x97.5 x97.5
100 100
= 6,435 hours = 5,265 hours
Revised Std. Hours (RSH)  6,600 + 5, 400   6,600 + 5, 400 
 x97.5  0.5  x97.5  0.5
 100   100 

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= 5,850 hours = 5,850 hours

Idle timeAbnormal 6,600 - 6,435 = 165 hours 5,400 – 5,265 = 135 hours

Skilled Unskilled
Standard Rate per hour 80 60
Standard time for producing one unit 1.5 hours (Rs.120 ÷ Rs.80) 1.5 hours (Rs.90 ÷ Rs.60)
Actual hours paid (AHPaid) 6,600 hours 5,400 hours
Standard hours required to produce 6,000 hours 6,000 hours
4,000 units (SH) (1.5 hours× 4,000 units) (1.5 hours× 4,000 units)
Actual hours worked
(AH Workd) 6,600 5, 400
x 97.5 x 97.5
100 100
= 6,435 hours = 5,265 hours
Revised Std. Hours (RSH)  6,600 + 5, 400   6,600 + 5, 400 
 x97.5  0.5  x97.5  0.5
 100   100 

= 5,850 hours = 5,850 hours

Idle timeAbnormal 6,600 - 6,435 = 165 hours 5,400 – 5,265 = 135 hours

(i) Labour Rate Variance = AH Paid(Std. Rate – Actual Rate)

- Skilled = 6,600 hours (Rs.80 – Rs.87.50) = Rs.49,500 (A)
- Unskilled= 5,400 hours (Rs.60 – Rs.55) = Rs.27,000 (F)
= Rs.22,500 (A)

(ii) Labour Efficiency Variance = Std. Rate (SH – AH Worked)

- Skilled = Rs.80 (6,000 hours – 6,435 hours) = Rs.34,800 (A)
- Unskilled= Rs.60 (6,000 hours – 5,265 hours) = Rs.44,100 (F)
= Rs.9,300 (F)

(iii) Labour Mix Variance = Std. Rate (RSH – AH Worked)

- Skilled = Rs.80 (5,850 hours – 6,435 hours) = Rs.46,800 (A)
- Unskilled= Rs.60 (5,850 hours – 5,265 hours) = Rs.35,100 (F)
= Rs.11,700 (A)

(iv) Labour Yield Variance = Std. Rate (SH – RSH)

- Skilled = Rs.80 (6,000 hours – 5,850 hours) = Rs.12,000 (F)
- Unskilled= Rs.60 (6,000 hours – 5,850 hours) = Rs.9,000 (F)
= Rs.21,000 (F)

(v) Labour Idle time Variance = Std. Rate × Idle time Abnormal
- Skilled = Rs.80 × 165 hours = Rs.13,200 (A)
- Unskilled= Rs.60 × 135 hours = Rs.8,100 (A)
= Rs.21,300 (A)

(vi) Variable Overhead Expenditure Variance

= AH Worked (SR - AR)
 Rs.75 Rs.2,85, 000 
= 11,700 hours  − 
 2x1.5hours 11,700hours 
= 11,700 hours (Rs.25 – Rs.24.36) = Rs.7,488 (F)

(vii) Variable Overhead Efficiency Variance

= Std. Rate (SH – AH Worked) = Rs.25 (12,000 – 11,700) = Rs.7,500 (F)

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Q.15 OH Variance PY Jan 21

Premier Industries has a small factory where 52 workers are employed on an average for 25 days a month and
they work 8 hours per day. The normal down time is 15%. The firm has introduced standard costing for cost
control. Its monthly budget for November, 2020 shows that the budgeted variable and fixed overhead are `
1,06,080 and ` 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the end of the month:

Actual hours worked 8,100 hrs.

Actual production expressed in standard hours 8,800 hrs.
Actual Variable Overheads ` 1,02,000
Actual Fixed Overheads ` 2,00,000

You are required to calculate:

(i) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.
(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.
(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio.
(c) Activity ratio.

Ans Calculation of budgeted hours

Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead
 1, 06, 080 
=  x 8,100  -1,02,000
 8,840 
= 4800 A
(b) Variable overhead efficiency variance
Std. rate per hour × (Std. hours for actual production – Actual hours)
1, 06, 080
= (8,800 hours – 8,100 hours)
8,840
= 8400 F
(ii) Fixed overhead variances
(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ` 2,21,000 – ` 2,00,000
= 21,000 F
(b) Fixed overhead capacity variance
= Std rate x (Actual hours – budgeted hours)
2,21, 000
= x (8,100 – 8,840)
8,840
(c) Fixed overhead efficiency variance
= Std rate x (Std hours for actual production – Actual hours)

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2,21, 000
= x (8,800 – 8,100)
8,840
= 17,500 F
(iii) Control Ratios
(a) Capacity Ratio
Actual hours 8,100
= x100 = x 100 = 91.63%
Budgeted hours 8,840
(b) Efficiency Ratio
Standard hours 8,800
= x100 = x 100 = 108.64%
Actual hours 8,100
(c) Activity Ratio
Standard hours 8,800
= x100 = x 100 = 99.55%
Budgted hours 8,840

Q.16 OH Variance MTP Nov 19

In a manufacturing company the standard units of production of the year were fixed at 1,20,000 units and
overhead expenditures were estimated to be:
Fixed Rs. 12,00,000; Variable Rs. 6,00,000;
Semi-Variable Rs. 1,80,000
Actual production during the April, 2019 of the year was 8,000 units. Each month has 20 working days.
During the month there was one public holiday. The actual overheads amounted to:
Fixed Rs. 1,10,000; Variable Rs. 48,000

Semi-variable Rs. 19,200

Semi-variable charges are considered to include 60 per cent expenses of fixed nature and 40 per cent of
variable character.
CALCULATE the followings:
(i) Overhead Cost Variance
(ii) Fixed Overhead Cost Variance
(iii) Variable Overhead Cost Variance
(iv) Fixed Overhead Volume Variance
(v) Fixed Overhead Expenditure Variance
(vi) Calendar Variance.

Ans COMPUTATION OF VARIANCES

(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads

= (Rs.87,200 + Rs.44,800) – (Rs.1,21,520 + Rs.55,680)

= Rs. 45,200 (A)
(ii) Fixed Overhead Cost = Absorbed Fixed Overheads – Actual Fixed Overheads
Variance = Rs. 87,200 – Rs.1,21,520
= Rs.34,320 (A)
(iii) Variable Overhead Cost = Standard Variable Overheads for Production –
Variance Actual
Variable Overheads
= Rs. 44,800 – Rs. 55,680
= Rs. 10,880 (A)

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(iv) Fixed Overhead Volume = Absorbed Fixed Overheads – Budgeted

Variance Fixed
Overheads
= Rs. 87,200 – Rs.1,09,000
= Rs. 21,800 (A)
(v) Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual Fixed Overheads
Variance
= Rs.10.90 × 10,000 units – Rs.1,21,520
= Rs.12,520 (A)
(vi) Calendar Variance = Possible Fixed Overheads – Budgeted Fixed Overheads
= Rs.1,03,550 – Rs.1,09,000
= Rs. 5,450 (A)

WORKING NOTE

Budgeted Fixed Overheads Rs.12, 00, 000 Rs. 10

Fixed Overheads per Unit= =
Budgeted Output 1,20, 000units

Fixed Overheads element in Semi-Variable Overheads i.e. 60% of

Rs. 1,08,000
Rs.1,80,000
Budgeted Fixed Overheads Rs.1, 08, 000
Fixed Overheads per Unit = =
Budgeted Output 1,20, 000units Rs. 0.90
Standard Rate of Absorption of Fixed Overheads per unit (Rs.10 + Rs.0.90)

Rs.10.90
Fixed Overheads Absorbed on 8,000 units @ Rs10.90 Rs. 87,200
Budgeted Variable Overheads Rs. 6,00,000
Add : Variable element in Semi-Variable Overheads 40% of Rs. 1,80,000 Rs. 72,000
Total Budgeted Variable Overheads Rs. 6,72,000
Budgeted Fixed Overheads Rs.6,72, 000 Rs.5.60
Standard Variable Cost per unit = =
Budgeted Output 1,20, 000units
Standard Variable Overheads for 8,000 units @ Rs.5.60 Rs. 44,800
Budgeted Annual Fixed Overheads (Rs. 12,00,000 + 60% of Rs. 1,80,000) Rs.13,08,000
Budgeted Fixed Overheads Rs.1,03,550
Possible Fixed Overheads = xActual Days
Budgeted Output
 Rs.1, 09, 000 
= 19Days 
 20Days 

Actual Fixed Overheads (Rs.1,10,000 + 60% of Rs. 19,200) Rs.1,21,520

Actual Variable Overheads (Rs.48,000 + 40% of Rs.19,200) Rs. 55,680

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8 JOINT & BY PRODUCT

CHAPTER

Q.1 Allocate Cost PY May 19

A Factory is engaged in the production of chemical Bomex and in the course of its manufacture a by-
product Cromex is produced which after further processing has a commercial value. For the month of April
2019 the following are the summarised cost data:

Joint Expenses (`) Separate Expenses (`)

Bomex Cromex
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling Price per unit 100 40
Estimated profit per unit on sale of Cromex 5
Number of units produced 2,000 2,000
units units

The factory uses net realisable value method for apportionment of joint cost to by-products.
You are required to prepare statements showing :
(i) Joint cost allocable to Cromex
(ii) Product wise and overall profitability of the factory for April 2019.

Ans. (i) Statement Showing Joint Cost Allocation to ‘Cromex’

Particulars Cromex (`)

Sales (` 40 × 2,000 units) 80,000
Less: Post Split Off Costs (28,000)
(4,000+18,000+6,000)
Less: Estimated Profit (` 5 × 2,000 units) (10,000)
Joint cost allocable 42,000

(ii) Statement Showing Product Wise and Overall Profitability

Particulars Bomex (`) Cromex (`) Total (`)

Sales 2,00,000 80,000 2,80,000
Less: Share in Joint Expenses (1,38,000)* (42,000) (1,80,000)
Less: Post Split Off Costs (36,000) (28,000) (64,000)
Profit 26,000 10,000 36,000
(*) 1,80,000 – 42,000

Allocate Cost PY May 23

Q.2
Product 'X' that passes through three processes: R, S and T. Three types of raw materials, viz., J, K, and L are
used in the ratio of 40:40:20 in process R. The output of each process is transferred to next process. Process

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loss is 10% of total input in each process. At the stage of output in process T, a by-product 'Z' is emerging and
the ratio of the main product 'X' to the by-product 'Z' is 80:20. The selling price of product 'X' is `60 per
kg.The company produced 14,580 kgs of product ‘X’
Material price : Material J @ ` 15 per kg;
Material K @ ` 9 per kg. Material L@ ` 7 per kg Process costs are as follows:

Process Variable cost per kg (`) Fixed cost of Input (`)

R 5.00 42,000
S 4.50 5,000
T 3.40 4,800

The by-product 'Z' cannot be processed further and can be sold at ` 30 per kg at the split- off stage. There is
no realizable value of process losses at any stage.
Required:
Present a statement showing the apportionment of joint costs on the basis of the sales value of product 'X'
and by-product 'Z' at the split- off point and the profitability of product 'X' and by-product 'Z.

Ans. Working Notes:

1. Calculation of Input of Raw Material
Let assume total raw material in Process R be 100%
 Output of Process T will be equal to:
Input R 100%
- 10% Normal Loss ` 10
Input S ` 90%
- 10% Normal loss `9
Input T 81%
- 10% Normal loss ` 8.1
Output of T 72.9
Actual output of X 14,580 units
Which is 80% of the total output
 Output of Process T
14580
= = 18,225
80%
18225
 Input of Process R = = 25,000 kgs
72.9%
Alternative presentation for Calculation of Input in Process R, S and T Working notes:

Process T (Kg.)
To Input (Transfer from process S) 20,250 By Normal loss 2,025
By Output Product X 14,580
By output of by-product 3,645
Z
20,250 20,250

Process S (kg.)
To Input (Transfer from process S) 22,500 By Normal loss (10%) 2,250
By Transfer to process T 20,250

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22,500 22,500

Process R (kg.)
To Input 25,000 By Normal loss (10%) 2,500
By Transfer to process S 22,500
25,000 25,000

2. Calculation of Joint Cost

Process Inputs Variable cost per kg Variable cost Fixed Cost Total Cost
` ` ` `
R 25,000 5 1,25,000 42,000 1,67,000
S 22,500 4.5 1,01,250 5,000 1,06,250
T 20,250 3.4 68,850 4,800 73,650
3,46,900

Raw material J 10000 x 15

` 1,50,000
K 10000 x 9
` 90,000
L 5000 x 7` 35,000
2,75,000
Add: Processing cost (as above) ` 3,46,900
Total Joint Cost 6,21,900
(i) Statement showing apportionment of Joint Cost

Particulars Product X By-Product Z Total

Units 14,580 3,645
Selling price (`) 60 30
Sales Value (`) 8,74,800 1,09,350 9,84,150
(` 6,21,900 to apportioned in ratio of 5,52,800 69,100 6,21,900
sales value at split off point)

(ii) Statement of Profitability

Particulars Product X By-Product Z Total

Sales Value 8,74,800 1,09,350 9,84,150
Joint Cost (5,52,800) (69,100) (6,21,900)
(As apportioned above)

Profit 3,22,000 40,250 3,62,250

Q.3 Allocate cost PY Nov 20

A company's plant processes 6,750 units of a raw material in a month to produce two products 'M' and 'N'.
The process yield is as under:
Product M 80%
Product N 12%
Process Loss 8%
The cost of raw material is ` 80 per unit.

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Processing cost is ` 2,25,000 of which labour cost is accounted for 66%. Labour is chargeable to products 'M'
and 'N' in the ratio of 100:80.
Prepare a Comprehensive Cost Statement for each product showing:
(i) Apportionment of joint cost among products 'M' and 'N' and
(ii) Total cost of the products 'M' and 'N'.

Ans. Comprehensive Cost Statement

Particulars Total Cost (`) Product-M (`) Product-N (`)

No. of units produced * 5,400 units 810 units
Cost of raw material (` 80 × 6,750 units) 5,40,000
Processing cost:
- Labour cost (` 2,25,000 × 66%) 1,48,500
- Other costs (` 2,25,000 - 1,48,500) 76,500
Total joint cost 7,65,000
(i) Apportionment of joint costs between the joint
products
Labour cost in the ratio of 100:80 1,48,500 82,500 66,000
 148500x100   148500x80 
   
 180   180 
Other joint costs (including material) in the ratio of 6,16,500 5,36,087 80,413
output  616500x5400   616500x810 
(5,400:810)    
 6210   6210 

(ii) Total product cost 7,65,000 6,18,587 1,46,413

No. of units produced of Product M = 6750 units x 80% = 5400 units
No. of units produced of Product N = 6750 units x 12% = 810 units

Q.4 Allocate Cost PY Jan 21

Mayura Chemicals Ltd buys a particular raw material at ` 8 per litre. At the end of the processing Department-
I, this raw material splits-off into products X, Y and Z. Product X is sold at the split-off point, with no further
processing. Products Y and Z require further processing before they can be sold. Product Y is processed in
Department-2, and Product Z is processed in Department-3. Following is a summary of the costs and other
related data for the year 2019-20:

Particulars Department
1 2 3
Cost of Raw Material ` 4,80,000 - -
Direct Labour ` 70,000 ` 4,50,000 ` 6,50,000
Manufacturing Overhead ` 48,000 ` 2,10,000 ` 4,50,000
Products
X Y Z
Sales (litres) 10,000 15,000 22,500
Closing inventory (litres) 5,000 - 7,500
Sale price per litre (`) 30 64 50

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There were no opening and closing inventories of basic raw materials at the beginning as well as at the end of
the year. All finished goods inventory in litres was complete as to processing. The company uses the Net-
realisable value method of allocating joint costs.
You are required to prepare:
(i) Schedule showing the allocation of joint costs.
(ii) Calculate the Cost of goods sold of each product and the cost of each item in Inventory.
(iii) A comparative statement of Gross profit.

Ans. (i) Statement of Joint Cost allocation of inventories of X, Y and Z

Products Total
X (`) Y (`) Z (`) (`)
Final sales value of total 4,50,000 9,60,000 15,00,000 29,10,000
production (Working Note 1) (15,000 x ` 30) (15,000 x ` 64) (30,000 x ` 50)
Less: Additional cost -- 6,60,000 11,00,000 17,60,000
Net realisable value (at 4,50,000 3,00,000 4,00,000 11,50,000
split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000
(Working Note 2)

(ii) Calculation of Cost of goods sold and Closing inventory

Products Total
X (`) Y (`) Z (`) (`)
Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs -- 6,60,000 11,00,000 17,60,000
Cost of goods sold (COGS) 2,34,000 8,16,000 13,08,000 23,58,000
Less: Cost of closing 78,000 -- 3,27,000 4,05,000
inventory (COGS × 100/3%) (COGS × 25%)
(Working Note 1)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000

(iii) Comparative Statement of Gross Profit

Products Total
X (`) Y (`) Z (`) (`)
Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000
(10,000 x ` 30) (15,000 x ` 64) (22,500 x ` 50)
Less: Cost of goods 1,56,000 8,16,000 9,81,000 19,53,000
sold
Gross Profit 1,44,000 1,44,000 1,44,000 4,32,000

Working Notes:
1. Total production of three products for the year 2019-2020

Products Quantity sold in Quantity of closing Total production Closing inventory

litres inventory in litres percentage (%)

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(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)

X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
Z 22,500 7,500 30,000 25
2. Joint cost apportioned to each product:
Total Joint cost
= x Net Realisable Value of each product
TotalNetRealisable Value
598000
Joint cost of product X = x ` 4,50,000 = ` 2,34,000
1150000
598000
Joint cost of product Y = x ` 3,00,000 = ` 1,56,000
1150000
598000
Joint cost of product Z = x ` 4,00,000 = ` 2,08,000
1150000

Q.5 Allocate Cost & Further Process RTP May 18

A company processes a raw material in its Department 1 to produce three products, viz. A, B and X at the same
split-off stage. During a period 1,80,000 kgs of raw materials were processed in Department 1 at a total cost of
` 12,88,000 and the resultant output of A, B and X were 18,000 kgs, 10,000 kgs and 54,000 kgs respectively. A
and B were further processed in Department 2 at a cost of ` 1,80,000 and ` 1,50,000 respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in further processing. The
details of sales affected during the period were as under:

A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000

There were no opening stocks. If these products were sold at split-off stage, the selling prices of A, B and X
would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint costs to A, B and X.
(ii) PREPARE a statement showing the cost per kg of each product indicating joint cost and further
processing cost and total cost separately.
(iii) PREPARE a statement showing the product wise and total profit for the period.
(iv) DECIDE with supporting calculations as to whether any or all the products should be further processed
or not

Ans. (i) Statement showing the apportionment of joint costs to A, B and X

Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value at the point 9,00,000 4,00,000 5,40,000 18,40,000
of split off (`) (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportionmen t on the  1288000   1288000   1288000 
 x900000   x400000   x540000 
basis of sales value at  1840000   1840000   1840000 
the point of split off (`)

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(ii) Statement showing the cost per kg. of each product (indicating joint cost; further processing cost
and total cost separately)

Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. (`) 10 15 2
 180000   150000   108000 
     
 18000 kg   10000 kg   54000 kg 
Total cost per kg (`) 45 43 9

(iii) Statement showing the product wise and total profit for the period

Products A B X Total
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000
Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000
Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 1224000   250000   792000 
     
 17000 kg   5000 kg   44000 kg 

2. Valuation of closing stock:

Since the selling price per kg of products A, B and X is more than their total costs, therefore
closing stock will be valued at cost.

Products A B X Total
Closing stock (kgs.) 1,000 5,000 10,000
Cost per kg (`) 45 43 9
Closing stock value(`) 45,000 2,15,000 90,000 3,50,00
(` 45 x 1,000 kg) (` 43 x 5,000 kg) (`9x10,000 kg)

(iv) Calculations for processing decision

Products A B X
Selling price per kg at the point of split off (`) 50 40 10

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Selling price per kg after further processing (`) 72 50 18

(Refer to working Note 1)
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6

Product A and X has an incremental profit per unit after further processing, hence, these two products
may be further processed. However, further processing of product B is not profitable hence, product B
shall be sold at split off point.

Q.6 Material Variance MTP May 23

A company produces two joint products A and B from the same basic materials. The processing is completed in
three departments.
Materials are mixed in Department I. At the end of this process, A and B get separated. After separation, A is
completed in the Department II and B in Department III. During a period, 4,00,000 kg of raw material was
processed in Department I at a total cost of ` 17,50,000, and the resultant 50% becomes A and 40% becomes
B and 10% normally lost in processing.
In Department II, 1/5th of the quantity received from Department I is lost in processing. A is further processed
in Department II at a cost of ` 2,60,000.
In Department III, further new material is added to the material received from Department I and weight
mixture is doubled, there is no quantity loss in the department III. Further processing cost (with material cost)
in Department III is ` 3,00,000.
The details of sales during the said period are:
Product A Product B
Quantity sold (kg) 1,50,000 3,00,000
Sales price per kg (`) 10 4
There were no opening stocks. If these products sold at split-off-point, the selling price of A and B would be `
8 and ` 4 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint cost to A and B in proportion of sales value at
split off point.
(ii) PREPARE a statement showing the cost per kg of each product indicating joint cost, processing cost and
total cost separately.
(iii) PREPARE a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product A and B, give your COMMENT
that products should be further processed or not.

Ans. Calculation of quantity produced

Dept I (kg) Dept II (kg) Dept III (kg)

Input 4,00,000 2,00,000 1,60,000
(50% of 4,00,000 kg.) (40% of 4,00,000 kg.)
Weight (lost) or added (40,000) (40,000) 1,60,000
(10% of 4,00,000 kg.) (1/5th of 2,00,000 kg.)
3,60,000 1,60,000 3,20,000
Production of A 2,00,000 1,60,000 --
Production of B 1,60,000 -- 3,20,000

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(i) Statement of apportionment of joint cost of dept I

Product A Product B
Output (kg) 2,00,000 1,60,000
Selling price per kg (`) 8 4
Sales value (`) 16,00,000 6,40,000
Share in Joint cost (5:2) 12,50,000 5,00,000
(` 17,50,000 × 5 ÷ 7) (` 17,50,000 × 2 ÷ 7)

(ii) Statement of cost per kg

Product A Product B
Output (kg) 1,60,000 3,20,000
Share in joint cost (`) 12,50,000 5,00,000
Joint Cost per kg (`) (A) 7.8125 1.5625
Further processing cost (`) 2,60,000 3,00,000
Further processing cost per kg (`) (B) 1.625 0.9375
Total cost per kg (`) {(A)+(B)} 9.4375 2.5000

(iii) Statement of profit

Product A Product B
Output (kg) 1,60,000 3,20,000
Sales (kg) (1,50,000) (3,00,000)
Closing stock (kg) 10,000 20,000
(`) (`)
Sales 15,00,000 12,00,000
(1,50,000 kg × ` 10) (3,00,000 kg × ` 4)
Add: closing stock (at full cost) 94,375 50,000
(10,000 kg × ` 9.4375) (20,000 kg × ` 2.5)
Value of production 15,94,375 12,50,000
Less: Share in joint cost 12,50,000 5,00,000
Further processing cost 2,60,000 3,00,000
Profit 84,375 4,50,000

(iv) Profitability statement before and after processing

Product A Product B
Before (`) After (`) Before (`) After (`)
Sales Value 16,00,000 6,40,000
Share in joint costs 12,50,000 5,00,000
Profit 3,50,000 84,375 1,40,000 4,50,000
(as per iii above) (as per iii above)

Product A should be sold at split off point and product B after processing because of higher profitability.

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Q.7 Further Processing RTP May 23

Key Pee Limited produces and sells the following products:

Products Units Selling price at split-off point (`) Selling price after further processing (`)
A 500000 42.5 62.5
B 75000 32.5 42.5
C 62500 20 30
D 50000 25 -
E 187500 35 50

Cost of raw material ` 89,75,000 and other manufacturing ex-penses cost `13,67,500 in the manufacturing
process which are absorbed on the products on the basis of their ‘Net realisable value’. The further processing
costs of A, B, C and E are `31,25,000; ` 3,75,000; `1,25,000 and `3,75,000 respectively. Fixed costs are
`11,82,500.
You are required to PREPARE the following in respect of the coming year:
(a) Statement showing income forecast of the company assuming that none of its products are to be
further processed.
(b) Statement showing income forecast of the company assuming that products A, B, C and E are to be
processed further.

Ans. Working Note:

Apportionment of joint costs on the basis of Net Realisable Value method

Products Sales Value (`) Post separation Cost (`) Net Realisable Value (`) Apportioned Cost (`)
A 3,12,50,000 31,25,000 2,81,25,000 67,74,563

(5,00,000 units x ` 62.50)

B 31,87,500 3,75,000 28,12,500 6,77,456

(75,000 units x ` 42.5)

C 18,75,000 1,25,000 17,50,000 4,21,528

(62,500 units x ` 30)

D 12,50,000 --- 12,50,000 3,01,092

(50,000 units x ` 25)

E 93,75,000 3,75,000 90,00,000 21,67,860

(1,87,500 units x ` 50)

4,29,37,500 1,03,42,500

Total joint cost =Raw material costs + Manufacturing expenses = `89,75,000 + `13,67,500 = `1,03,42,500
Apportioned joint cost = (Total Joint Cost/ Total Net Realisable value of each X Net Realisable value of each
product)
Apportioned joint cost for Product A = (1,03,42,500 / 4,29,37,500 X 2,81,25,000) = `67,74,563.32
Similarly, the apportioned joint cost for products B, C, D and E are `6,77,456, `4,21,528, `3,01,092 and
`21,67,860 respectively.
(a) Statement showing income forecast of the company assum-ing that none of its products are further
processed.

Products

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CA Amit Sharma

A (`) B (`) C (`) D (`) E (`) Total (`)

Sales revenue 2,12,50,000 24,37,500 12,50,000 12,50,000 65,62,500 3,27,50,000

(`42.5 × (` 32.5 × (` 20 × 62,500) (` 25 × 50,000) (` 35 ×
5,00,000) 75,000) 1,87,500)
Less: Apportioned 67,74,563 6,77,456 4,21,528 3,01,092 21,67,860 1,03,42,500
Costs (Refer
Working note)

1,44,75,437 17,60,044 8,28,472 9,48,908 43,94,640 2,24,07,500

Less: Fixed Cost 11,82,500
Profit 2,12,25,000

(b) Statement showing income forecast of the company: assuming that products A, B, C and E are further
processed (Refer to working note)

Products
A (`) B (`) C (`) D (`) E (`) Total (`)
A. Sales revenue 3,12,50,000 31,87,500 18,75,000 12,50,000 93,75,000 4,69,37,500
B. Apportioned Costs 67,74,563 6,77,456 4,21,528 3,01,092 21,67,860 1,03,42,500
C. Further processing cost 31,25,000 3,75,000 1,25,000 - 3,75,000 40,00,000
D. Total 98,99,563 10,52,456 5,46,528 3,01,092 25,42,860 1,43,42,500
processing cost (B+ C)
E. Excess of sales revenue (A- 2,13,50,437 21,35,044 13,28,472 9,48,908 68,32,140 3,25,95,000
D)
F. Fixed Cost 11,82,500
G. Profit (E - F) 3,14,12,500

Q.8 Further Processing MTP May 18

SV chemicals Limited processes 9,00,000 kgs. of raw material in a month purchased at ` 95 per kg in department
X. The input output ratio of department X is 100 : 90. Processing of the material results in two joint products
being produced 'P1' and 'P2' in the ratio of 60 : 40. Product 'P1' can be sold at split off stage or can be further
processed in department Y and sold as a new product 'YP1'. The input output ratio of department Y is 100 : 95.
Department Y is utilized only for further processing of product 'P1' to product 'YP1'. Individual departmental
expenses are as follows:

Dept. X (` lakhs) Dept. Y (` lakhs)

Direct Materials 95.00 14.00
Direct Wages 80.00 27.00
Variable Overheads 100.00 35.00
Fixed Overheads 75.00 52.00
Total 350.00 128.00

Further, selling expenses to be incurred on three products are:

Particulars Amount (` in lakhs)

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Product ‘P1’ 28.38

Product ‘P2’ 25.00
Product ‘YP1’ 19.00

Selling price of the products ‘P1’ and ‘P2’ at split off point is ` 110 per kg and ` 325 per kg respectively. Selling
price of new product ‘YP1’ is ` 150 per kg.
You are required to:
(i) PREPARE a statement showing apportionment of joint costs, in the ratio of value of sales, net of selling
expenses.
(ii) PREPARE a Statement showing profitability at split off point.
(iii) PREPARE a Statement of profitability of ‘YP1’.
(iv) DETERMINE that would you recommend further processing of P1?

Ans. Working Notes:

Input output ratio of material processed in Department X = 100:90

Particulars Quantity (Kg)

Material input 9,00,000

Less: Loss of material in process @ 10% of 9,00,000 kgs (90,000)

Output 8,10,000
Output of department X is product ‘P1’ and ‘P2’ in the ratio of 60 : 40.
60x810000
Output ‘P1’ = = 4,86,000 kgs.
100
40x810000
Output ‘P2’ = = 3,24,000 kgs.
100
Statement showing ratio of net sales

Product P1 P2 Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (`) 110.00 325.00
Sales Value (` in lakhs) 534.60 1,053.00 1587.60
Less: Selling Expenses (` in lakhs) (28.38) (25.00) (53.38)
Net Sales (` in lakhs) 506.22 1,028.00 1,534.22
Ratio 33% 67% 100.00

Computation of Joint Costs

Particulars Amount (` Lakhs)

Raw Material input 9,00,000 kgs @ ` 95 per kg 855.00
Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00

(i) Statement showing apportionment of joint costs in the ratio of net sales

Particulars Amount (` in lakhs)

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Joint cost of P1 – 33% of ` 1,205 lakhs 397.65

Joint cost of P2 – 67% of ` 1,205 lakhs 807.35
Total 1,205.00

(ii) Statement showing profitability at split off point

Product P1 P2 Total
Net Sales Value (` in lakhs) – [A] 506.22 1,028.00 1,534.22
Less: Joint costs (` in lakhs) (397.65) (807.35) (1,205.00)
Profit (` in lakhs) [A] – [B] 108.57 220.65 329.22

Alternative Presentation

Product P1 P2 Total
Sales Value (` in lakhs) – [A] 534.60 1,053.00 1,587.60
Less: Joint costs (` in lakhs) 397.65 807.35 1,205.00
Selling Expenses 28.38 25.00 53.38
Total Cost [B] 426.03 832.35 1,258.38
Profit (` in lakhs) [A] – [B] 108.57 220.65 329.22

(iii) Statement of profitability of product ‘YP1’

Particulars YP1
Sales Value (` in lakhs) (Refer working note) [A] 629.55
Less: Cost of P1 397.65
Cost of Department Y 128.00
Selling Expenses of Product ‘YP1’ 19.00
Total Costs [B] 544.65
Profit (` in lakhs) [A] – [B] 84.90

Working Note:
Computation of product ‘YP1’
Quantity of product P1 input used = 4,86,000 kgs
Input output ratio of material processed in Department Y = 100 : 95

Particulars Quantity (Kg)

Material input 4,86,000

Less: Loss of material in process @ 5% of 4,86,000 (24,300)

Output 4,61,700
Sales Value of YP1 = 4,61,700 kgs @ ` 150 per kg = ` 692.55 lakhs
(iv) Determination of profitability after further processing of product P1 into product YP1:

Particulars (` in lakhs)

Profit of Product ‘P1’ {refer (ii) above} 108.57

Profit of Product ‘YP1’{refer (iii) above} 84.90

Decrease in profit after further processing 23.67

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Based on the above profitability statement, further processing of product P1 into YP1 should not be
recommended.

Q.9 Reverse Calculation MTP Nov 18(1)

Three products X,Y and Z alongwith a byproduct B are obtained again in a crude state which require further
processing at a cost of Rs. 5 for X; Rs. 4 for Y; and Rs. 2.50 for Z per unit before sale. The byproduct is however
saleable as such to a nearby factory. The selling prices for the three main products and byproduct, assuming
they should yield a net margin of 25 percent of cost, are fixed at Rs. 13.75 Rs. 8.75 and Rs. 7.50 and Re. 1.00
respectively – all per unit quantity sold.
During a period, the joint input cost including the material cost was Rs. 90,800 and the respective outputs were:

X 8,000 units
Y 6,000 units
Z 4,000 units
B 1,000 units

By product should be credited to the joint cost and only the net joint costs are to be allocated to the main
products.
CALCULATE the joint cost per unit of each product and the margin available as a percentage on cost.

Ans. Working Notes:

(i) Computation of Allocation Ratio for Joint Costs

Products
X Y Z.
Rs. Rs. Rs.
Selling Price 13.75 8.75 7.50
Less: Anticipated margin@ 25% on cost or 20% on sales 2.75 1.75 1.50
Cost of sales 11.00 7.00 6.00
Less: Post split off cost 5.00 4.00 2.50
Joint cost per unit 6.00 3.00 3.50
Output (units) 8,000 6,000 4,000
Total output cost 48,000 18,000 14,000
Allocation ratio for joint costs 24 9 7

(ii) Computation of net allocable joint costs

Rs. Rs.
Joint input cost including material cost 90,800
Less: Credit for realization from by-product B: Sales revenue (1,000 × Re. 1)
1,000
Less: profit @ 25% on cost or 20% on sales 200 800
Net joint costs to be allocated 90,000

Determination of joint cost per unit of each product

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CA Amit Sharma

Product Net joint costs allocation Rs. Output (units) Rs. Joint cost per unit Rs.
X 54,000 (Note : 1) 8,000 6.75
Y 20,250 6,000 3.38
Z 15,750 4,000 3.94
90,000

Profit margin available on each product as a percentage on cost

Product Joint Cost Post spilt off Total Cost Rs. Selling Price Rs. Margin Rs. Margin % on cost
Rs. cost Rs. Rs.
X 6.75 5.00 11.75 13.75 2.00 17.02
Y 3.38 4.00 7.38 8.75 1.37 18.56
Z 3.94 2.50 6.44 7.50 1.06 16.46

Note: 1
24
X= x90000 =54,000
40
9
Y= x90000 =20,250
40
7
Z= x90000 =15,750
40
90,000

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9 PROCESS COSTING
CHAPTER

Q.1 Process Cost a/c & FG a/c PY May 19

KT Ltd. produces a product EMM which passes through two processes before it is completed and
transferred to finished stock. The following data relate to May 2019:

Particulars Process Finished stock

A (`) B (`)
(`)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output of Process B is
transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at prime cost.
Finished stock is valued at the price at which it is received from Process B. Sales during the period are ` 75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each stage.

Ans. Process-A A/c

Particulars Total Cost Profit Particulars Total Cost Profit

(`) (`) (`) (`) (`) (`)
Opening stock 5,000 5,000 _ Process B 28,800 21,600 7,200
A/c
Direct materials 9,000 9,000 _
Direct wages 5,000 5,000 _
19,000 19,000 _
Less: Closing (2,000) (2,000) _
stock
Prime Cost 17,000 17,000 _
Overheads 4,600 4,600 _
Process Cost 21,600 21,600 _
Profit (33.33% of 7,200 - 7,200
total cost)
28,800 21,600 7,200 28,800 21,600 7,200

Process-B A/c

Particulars Total Cost Profit Particulars Total Cost Profit

(`) (`) (`) (`) (`) (`)
Opening stock 5,500 4,500 1,000 Finished stock 61,675 41,550 20,125
A/c

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Process A A/c 28,800 21,600 7,200

Direct materials 9,500 9,500 _
Direct wages 6,000 6,000 _
49,800 41,600 8,200
Less: Closing stock (2,490) (2,080) (410)
Prime Cost 47,310 39,520 7,790
Overheads 2,030 2,030 _
Process Cost 49,340 41,550 7,790
Profit (25% of total 12,335 - 12,335
cost)

61,675 41,550 20,125 61,675 41,550 20,125

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit

(`) (`) (`) (`) (`) (`)
Opening stock 10,000 6,000 4,000 Costing P&L 75,000 44,181 30,819
A/c
Process B A/c 61,675 41,550 20,125
71,675 47,550 24,125
Less: Closing stock (5,000) (3,369) (1,631)
COGS 66,675 44,181 22,494
Profit 8,325 - 8,325
75,000 44,181 30,819 75,000 44,181 30,819

Q.2 Process 1-2 a/c PY Nov 19

A product passes through two distinct processes before completion. Following information are available in this
respect :
Process-1 Process-2
Raw materials used 10,000 units -
Raw material cost (per unit) ` 75 -
Transfer to next process/Finished good 9,000 units 8,200 units
Normal loss (on inputs) 5% 10%
Direct wages ` 3,00,000 ` 5,60,000
Direct expenses 50% of direct wages 5% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realisable value of scrap (per unit) ` 13.50 ` 145
8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing stock of
work-in-progress.
Prepare:
(i) Process-1 and Process-2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account.

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Ans. (i) Process-1 Account

Particulars Units Total (`) Particulars Units Total (`)

To Raw Material 10,000 7,50,000 By Normal Loss A/c 500 6,750
Consumed @ 13.5
” Direct Wages -- 3,00,000 ” Process 2 @ 9,000 12,01,500
133.5
” Direct -- 1,50,000 ” By Abnormal 500 66,750
Expenses Loss @ 133.5
“ Manufacturing 75,000
Overheads
10,000 12,75,000 10,000 12,75,000

Cost per unit of completed units and abnormal loss:

12, 75, 000 − 6, 750
= = 133.5
10 , 000units − 500units
(ii) Dr. Process-2 Account Cr.

Particulars Units Total (`) Particulars Units Total (`)

To Process-I A/c 9,000 12,01500 By Normal Loss A/c@ 900 1,30,500
145
” To Direct -- 5,60,000 ” By Finished StockA/c 8,200 21,04,667
Wages [bal fig]
” Direct Expenses -- 3,64,000
” Manufacturing -- 84,000
Overheads
” To Abnormalgain 100 25,667
(` 256.67 × 100
units)
9,100 22,35,167 9,100 22,35,167

Cost per unit of completed units and abnormal gain:

22, 09,500 − 130500
= 256.67
8,100units
Dr. Finished Goods A/c Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process II 8,200 21,04,667 By By Cost of 8,000 20,53,333
A/c Sales
” By Balance c/d 200 51,334
8,200 21,04,66 8,200 21,04,667
7
(iii) Normal Loss A/c
Dr. Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process I 500 6,750 By By abnormal Gain II 100 14,500
Process II 900 1,30,500 By Cash 500 6,750

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By Cash 800 1,16,000

1400 1,37,250 1400 1,37,250
(iv) Abnormal Loss A/c
Dr. Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process I 500 66,750 By By Cost Ledger 500 6,750
Control A/c
By Costing P& L 60,000
A/C (Abnormal
Loss)
66,750 66,750
(v) Abnormal Gain A/c

Dr. Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Normal Loss 100 14,500 By Process II 100 25,667
A/c @ 145
To Costing P & L 11,167
A/C
100 25,667 100 25,667

Q.3 Process 1-2 a/c PY Nov 20

Following details are related to the work done in Process-I by ABC Ltd. during the month of May 2019 :

(`)
Opening work in process (3,000 units)
Materials 1,80,500
Labour 32,400
Overheads 90,000
Materials introduced in Process-I (42,000 units) 36,04,000
Labour 4,50,000
Overheads 15,18,000

Units Scrapped : 4,800 units

Degree of completion :
Materials : 100%
Labour & overhead : 70%
Closing Work-in-process : 4,200 units
Degree of completion :
Materials : 100%
Labour & overhead : 50%
Units finished and transferred to Process-II : 36,000 units
Normal loss:
4% of total input including opening work-in-process
Scrapped units fetch ` 62.50 per piece.
Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit.

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CA Amit Sharma

(iii) Process-I A/c

(iv) Normal Loss Account and
(v) Abnormal Loss Account

Ans. (i) Statement of Equivalent Production (Weighted Average method)

Particulars Input Particulars Output Equivalent Production

Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 3,000 Completed and 36,000 100 36,000 100 36,000
Transferred to
Process-II
Units 42,000 Normal Loss 1,800 -- -- -- --
introduced (4% of 45,000 units)
Abnormal loss 3,000 100 3,000 70 2,100
(Balancing figure)
Closing WIP 4,200 100 4,200 50 2,100
45,000 45,000 43,200 40,200

(ii) Statement showing cost for each element

Particulars Materials (`) Labour (`) Overhead (`) Total (`)

Cost of opening work-in- 1,80,500 32,400 90,000 3,02,900
process
Cost incurred duringthe 36,04,000 4,50,000 15,18,000 55,72,000
month
Less: Realisable (1,12,500) -- -- (1,12,500)
Value of normal scrap (`
62.50 × 1,800
units)
Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400
Equivalent units: (B) 43,200 40,200 40,200
Cost per equivalent 85.00 12.00 40.00 137.00
unit: (C) = (A ÷ B)

Statement of Distribution of cost

Particulars Amount (`) Amount (`)

1. Value of units completed and transferred: 49,32,000
(36,000 units × ` 137)
2. Value of Abnormal Loss:
- Materials (3,000 units × ` 85) 2,55,000
- Labour (2,100 units × ` 12) 25,200
- Overheads (2,100 units × ` 40) 84,000 3,64,200
3. Value of Closing W-I-P:
- Materials (4,200 units × ` 85) 3,57,000
- Labour (2,100 units × ` 12) 25,200
- Overheads (2,100 units × ` 40) 84,000 4,66,200

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(iii) Process-I A/c

Particulars Units (`) Particulars Units (`)

To Opening W.I.P:
− Materials 3,000 1,80,500 By Normal Loss(` 1,800 1,12,500
− Labour -- 32,400 62.5 × 1,800

− Overheads -- 90,000 units)

To Materials introduced 42,000 36,04,000 By Abnormal loss 3,000 3,64,200

To Labour 4,50,000 By Process-I A/c 36,000 49,32,000
To Overheads 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900

(iv) Normal Loss A/c

Particulars Units (`) Particulars Units (`)

To Process-I 1,800 1,12,500 By Cost 1,800 1,12,500
A/c Ledger Control
A/c
1,800 1,12,500 1,800 1,12,500

(v) Abnormal Loss A/c

Particulars Units (`) Particulars Units (`)

To Process-I 3,000 3,64,200 By Cost Ledger 3,000 1,87,500
A/c Control A/c (` 62.5 ×
3,000 units)
By Costing Profit & 1,76,700
Loss A/c (Bal. Figure)
3,000 3,64,200 3,000 3,64,200

Q.4 Process a/c prepare PY July 21

A Manufacturing unit manufactures a product 'XYZ' which passes through three distinct Processes - X, Y and
Z. The following data is given:

Process X Process Y Process Z

Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000
• The total Production Overhead of ` 15,750 was recovered @ 150% of Direct wages.
• 15,000 units at ` 2 each were introduced to Process 'X'.
• The output of each process passes to the next process and finally, 12,000 units were transferred to Finished
Stock Account from Process 'Z'.
• No stock of materials or work in progress was left at the end.
The following additional information is given:

Process % of wastage to normal input Value of Scrap per unit (`)

X 6% 1.10
Y ? 2.00

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Z 5% 1.00

You are required to:

(i) Find out the percentage of wastage in process 'Y', given that the output of Process 'Y' is transferred
to Process 'Z' at ` 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z.

Ans. Process-X Account

Dr. Cr.
Particulars Units (`) Particulars Units (`)
To Material 15,000 30,000 By Normal Loss A/c [(6% 900 990
introduced of 15,000 units)
” Additional -- 2,600 x ` 1.1] 14,100 41,610
material ” Process-Y A/c
” Direct wages -- 4,000 (` 2.951* × 14,100
” Production OH -- 6,000 units)
15,000 42,600 15,000 42,600
*Cost per unit of completed units
Total cos t − Re alisable value from normal loss 42, 600 − 990
= = = 2.951
Input units-Normal loss units 15, 000 units − 900 units

Dr. Process-Y Account Cr.

Particulars Units (`) Particulars Units (`)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of
” Additional -- 2,250 14,100 units) x 12,205 48,820
material
` 2]
” Direct wages -- 3,500 ” Process-Z A/c(`
” Production OH -- 5,250 4 × 12,205
units)
14,100 52,610 14,100 52,610
*Calculation for % of wastage in process ‘Y’:
Let’s consider number of units lost under process ‘Y’ = A
Total cos t − Re alisable value from normal loss
Now, =4
Input units-Normal loss units
52, 610 − 2 A
=4
14 ,100units − A
2A = 3,790 => A = 1,895 units
1,895units
% of wastage = = 13.44%
14 ,100units

Dr. Process-Z Account Cr.

Particulars Units (`) Particulars Units (`)
To Process-Y A/c 12,205 48,820 By Normal Loss A/c 610 610
[(5% of 12,205
-- 2,000 units) x ` 1] 12,000 59,726
” Additional material ”
Finished Stock
-- 3,000
A/c (` 4.9771$ ×
-- 4,500

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” Direct wages 405 2,016 12,000 units)

” Production OH 12,610 60,336 12,610 60,336

” Abnormal gain
(` 4.9771$ × 405
units)

Cost per unit of completed units

Total cos t − Re alisable value from normal loss 58,320 − 610
= = = 4.9771
Input units-Normal loss units 12,205units − 610units
Alternative Solution

Dr. Process-X Account Cr.

Particulars Units (`) Particulars Units (`)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units) x
` 1.1]
” Additional -- 2,600 ” Process-Y A/c 14,100 41,610
material (` 2.951* × 14,100 units)
” Direct wages -- 4,000
” Production -- 6,000
OH
15,000 42,600 15,000 42,600
*Cost per unit of completed units
Total cos t − Re alisable value from normal loss 42, 600 − 990
= = 2.951
Inputs units-Normal loss units 15, 000units − 900units
Dr. Process-Y Account Cr.
Particulars Units (`) Particulars Units (`)
To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of 14,100
” Additional material -- 2,250 12,631 50,524
units) x ` 2]
” Direct wages -- 3,500 ” Process-Z A/c
” Production OH -- 5,250 (` 4 × 12,631@ units)
” Abnormal gain 426 1,704
(` 4 × 426 units)
14,526 54,314 14,526 54,314
Working Notes:
1. Units Transferred from Process Z Account to Finished Stock = 12,000 Units i.e 95% of
Inputs.
So, Input of Z or Output of Y is 12,000 x 100/95 = 12,631 Units and Normal Loss (5%) is 631
units.
2. Let’s consider number of units lost under process ‘Y’ as:
For Normal loss = A
For Abnormal loss =B
Now, A + B = 1,469 [i.e. 14,100 – 12,631] …(I)
(A x ` 2 per unit) + (B x ` 4 per unit) = [ 52,610 – 50,524]
2A + 4B = 2,086 …(II)
Now, putting the values of (I) in (II), we get, 2(1,469 – B) + 4B = 2,086

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2938 – 2B + 4B = 2,086
2B = - 852 => B = - 426 units
Since, the figure of B is in negative, it is an abnormal gain of 426 units. Further, A (i.e. normal
loss) = 1,469 + 426 = 1,895 units
1,895
3. % of wastage in Process Y Account = = 13.44%
14 ,100units

Dr. Process-Z Account Cr.

Particulars Units (`) Particulars Units (`)
To Process-Y A/c 12,631 50,524 By Normal Loss A/c 631 631
[(5% of 12,631
” Additional material -- 2,000 units)
” Direct wages -- 3,000 x ` 1]
” Production OH -- 4,500 12,000 59,393
12,631 60,024 ” 12,631 60,024

Finished Stock A/c

(` 4.9494$ × 12,000
units)
Total cost-Realisable value from normal loss
Cost per unit of completed units =
Input units-Normal loss units
60 , 024 − 631
= = 4.9494
12, 631units − 631units

Q.5 Process a/c abnormal loss PY May 22

STG Limited is a manufacturer of Chemical 'GK', which is required for industrial use. The complete production
operation requires two processes. The raw material first passes through Process I, where Chemical 'G' is
produced. Following data is furnished for the month April 2022:

Particulars (in kgs.)

Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)
Material input quantity 1,05,000
Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)

You are further provided that:

Particulars (in `)
Opening work-in-progress costMaterial cost
Processing cost 29,500
14,750
Material input cost 3,34,500
Processing cost 2,53,100
Normal process loss may be estimated to be 10% of material input. It has no realizable value. Any loss over and
above normal loss is considered to be 100% complete in material and processing.

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The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II for producing Chemical
'GK'. Further materials are added in Process II which yield 1.20 kg. of Chemical 'GK' for every kg. of Chemical
'G' introduced. The chemicals transferred to Process II for further processing are then sold as Chemical 'GK'
for ` 10 per kg. Any quantity of output completed in Process I, are sold as Chemical 'G' @ ` 9 per kg.
The monthly costs incurred in Process II (other than the cost of Chemical 'G') are: Input 60,000 kg. of Chemical
'G'
Materials Cost ` 85,000
Processing Costs ` 50,000 You are required:
(i) Prepare Statement of Equivalent production and determine the cost per kg. of Chemical ‘G' in Process I
using the weighted average cost method.
(ii) Prepare a statement showing cost of Chemical 'G’ transferred to Process II, cost of abnormal loss and cost
of closing work-in progress.
(iii) STG is considering the option to sell 60,000 kg. of Chemical 'G' of Process I without processing it
further in Process-II. Will it be beneficial for the company over the current pattern of processing
60,000 kg in process-II?

Ans. (i) Statement of Equivalent Production

Particulars Input Particulars Total Material Processing

quantity Cost
% Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000
Material Input 1,05,000 Normal loss 10,500 - - - -
(10% of
1,05,000)
Abnormal loss 4,500 100% 4,500 100% 4,500
(Bal. fig.)
Closing WIP 16,500 100% 16,500 60% 9,900
1,14,500 1,14,500 1,04,000 97,400
Statement of Cost for each element

Particulars Material Processing Total cost

(`) (`) (`)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25
Alternative Presentation
Statement showing cost per kg of each statement

(`) (`)
Material 29,500 + 3,34,500 3.5
1,04,000
Processing cost 14,750 + 2,53,100 2.75
97,400
Total Cost per kg 6.25

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(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of abnormal loss and cost of
closing work-in- progress

(`)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:
Material (16,500 × 3.5) 57,750
Processing cost (9,900 × 2.75) 27,225
84,975
(iii) Calculation of Incremental Profit / Loss after further processing

Particulars (`) (`)

Sales if further processed (A) (60,000 x 1.20 x ` 10) 7,20,000
Calculation of cost in Process II
Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 x ` 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.
Alternative Presentation
Calculation of Incremental Profit / Loss after further processing

(`)
If 60,000 units are sold @ ` 9 5,40,000
If 60,000 units are processed in process II (60,000 × 1.2 × ` 7,20,000
10)
Incremental Revenue (A) 1,80,000
Incremental Cost: (B)
Material Cost 85,000
Processing Cost 50,000
1,35,000
Incremental Profit (A-B) 45,000
Additional net profit on further processing in Process II is 45,000. Therefore, it is advisable to process
further chemical ‘G’.

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Q.6 Process iii a/c RTP Nov 18

From the following information for the month of January, 20X9, PREPARE Process-III cost accounts.

Opening WIP in Process-III 1,600 units at ` 24,000

Transfer from Process-II 55,400 units at ` 6,23,250
Transferred to warehouse 52,200 units
Closing WIP of Process-III 4,200 units
Units Scrapped 600 units
Direct material added in Process-III ` 2,12,400
Direct wages ` 96,420
Production overheads ` 56,400

Degree of completion:

Opening Stock Closing Stock Scrap

Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%

The normal loss in the process was 5% of the production and scrap was sold @ ` 5 per unit.
(Students may treat material transferred from Process – II as Material – A and fresh material used in Process
– III as Material B)

Ans. Statement of Equivalent Production

Process III

Equivalent Production

Input Output Material-A Material-B Labour & Overhead

Units Units
Details Particulars % Units % Units % Units
Opening 1,600 Work on Op. 1,600 - - 20 320 40 640
WIP WIP
Process- 55,400 Introduced 50,600 100 50,600 100 50,600 100 50,600
II
Transfer & completed
during
the month
Normal loss (5% 2,640 - - - - - -
of 52,800 units)
4,200 100 4,200 70 2,940 50 2,100
Closing WIP
Abnormal Gain (2,040) 100 (2,040) 100 (2,040) 100 (2,040)
57,000 57,000 52,760 51,820 51,300

Working note:
Production units = Opening units + Units transferred from Process-II – Closing Units
= 1,600 units + 55,400 units – 4,200 units
= 52,800 units
Statement of Cost

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Cost (`) Equivalet Cost per

units equivalet
units (`)
Material A (Transferred from previous process) 6,23,250
Less: Scrap value of normal loss (2,640 units × ` 5) (13,200)
6,10,050 52,760 11.5627
Material B 2,12,400 51,820 4.0988
Labour 96,420 51,300 1.8795
Overheads 56,400 51,300 1.0994
9,75,270 18.6404

Amount Amount
(`) (`)
Opening WIP Material A 24,000
Completed opening Material B (320 units × ` 4.0988) 1311.62
WIP units-1600
Wages (640 units × ` 1.8795) 1202.88
Overheads (640 units × ` 1.0994) 703.62 3,218.12
Introduced & 50,600 units × ` 18.6404 9,43,204.24
Completed- 50,600
units
Total cost of 52,200 9,70,422.36
finished goods units
Closing WIP units- Material A (4,200 units × 48,563.34
4,200 ` 11.5627)
Material B (2,940 units × ` 4.0988) 12,050.47
Wages (2,100 units × ` 1.8795) 3,946.95
Overheads (2,100 units × 2,308.74
` 1.0994)
66,869.50
38026.42
Abnormal gain units - (2,040 units × ` 18.6404)
2,040
Process III A/c

Particulars Units Amount (`) Particulars Units Amount (`)

To Balance b/d 1,600 24,000 By Normal loss 2,640 13,200
To Process II 55,400 6,23,250 By Finished 52,200 9,70,422.36
A/c goods
To Direct 2,12,400 By Closing WIP 4,200 66,874.06*
material
To Direct wages 96,420
To Production 56,400
overheads
To Abnormal gain 2,040 38,026.42
59,040 10,50,496.42 59,040 10,50,496.42
* Difference in figure due to rounding off has been adjusted with closing WIP

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Q.7 Process I & eq production RTP July 21

A company produces a component, which passes through two processes. During the month of November, 2020,
materials for 40,000 components were put into Process- I of which 30,000 were completed and transferred to
Process- II. Those not transferred to Process- II were 100% complete as to materials cost and 50% complete
as to labour and overheads cost. The Process- I costs incurred were as follows:
Direct Materials ` 3,00,000
Direct Wages ` 3,50,000
Factory Overheads ` 2,45,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores.
There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units, remained
unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and
overheads.
Costs incurred in Process-II are as follows:
Packing Materials ` 80,000
Direct Wages ` 71,125
Factory Overheads ` 85,350
Packing material cost is incurred at the end of the second process as protective packing to the completed units
of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.
Ans. Process I
Statement of Equivalent Production and Cost

Input Particulars Output Equivalent Production

(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000

Particulars Materials Labour Overhead Total

Cost incurred (`) 3,00,000 3,50,000 2,45,000 8,95,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (`) 7.50 10.00 7.00 24.50
Process-I Account

Particulars Units (`) Particulars Units (`)

To Materials 40,000 3,00,000 By Process-II A/c 30,000 7,35,000
(30,000 units ×
`24.5)
To Labour 3,50,000 By Closing WIP* 10,000 1,60,000
To Overhead 2,45,000
40,000 8,95,000 40,000 8,95,000
* (Material 10,000 units × ` 7.5) + (Labour 5,000 units × ` 10) + (Overheads 5,000 units × `7)
= ` 75,000 + ` 50,000 + ` 35,000 = ` 1,60,000
Process II
Statement of Equivalent Production and Cost

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Input Particulars Output Equivalent Production

(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 -- -- --
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450

Particulars Materials Labour Overhead Total

Process-I Cost 7,35,000 -- -- 7,35,000
Cost incurred (`) -- 71,125 85,350 1,56,475
Equivalent units 29,800 28,450 28,450 --
Cost per equivalent unit (`) 24.6644 2.5000 3.0000 30.1644
Process-II Account

Particulars Units (`) Particulars Units (`)

To Process-I A/c 30,000 7,35,000 By Normal loss A/c 200 --
To Packing Material -- 80,000 By Finished Goods 28,000* 9,24,604
Stock A/c
To Direct Wages -- 71,125 By Closing WIP 1,800** 46,871
To Factory Overhead -- 85,350
30,000 9,71,475 30,000 9,71,475
* 28,000 × ` 30.1644 = ` 8,44,603 + ` 80,000 (Packing Material Cost) = ` 9,24,604
** 1,800 units × ` 24.6644 + 450 units × (` 2.5 + `3) = ` 46,871

Q.8 Process I/II/Abnormal Loss MTP May 19(1)

Aditya Agro Ltd. mixes powdered ingredients in two different processes to produce one product. The output of
Process- I becomes the input of Process-II and the output of Process-II is transferred to the Packing
department.
From the information given below, you are required to PREPARE accounts for Process-I, Process-II and
Abnormal loss/ gain A/c to record the transactions for the month of February 20X9.
Process-I

Input:
Material A 6,000 kilograms at Rs. 50 per kilogram
Material B 4,000 kilograms at Rs. 100 per kilogram
Labour 430 hours at Rs. 50 per hour
Normal loss 5% of inputs. Scrap are disposed off at Rs.16 per kilogram
Output 9,200 kilograms.

There is no work- in- process at the beginning or end of the month.

Process-II

Input:
Material C 6,600 kilograms at Rs. 125 per kilogram
Material D 4,200 kilograms at Rs. 75 per kilogram
Flavouring Essence Rs. 3,300

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Labour 370 hours at Rs.50 per hour

Normal loss 5% of inputs with no disposal value
Output 18,000 kilograms.

There is no work-in-process at the beginning of the month but 1,000 kilograms in process at the end of the
month and estimated to be only 50% complete so far as labour and overhead were concerned. Overhead of Rs.
92,000 incurred to be absorbed on the basis of labour hours.

Ans.
Particulars Qty. Amount ) Particulars Qty Amount
(kgs) . (Rs.)
(kgs)
To Material A 6,000 3,00,000 By Normal loss 500 8,000
To Material B 4,000 4,00,000 By Process-II A/c 9,200 7,38,857

To Labour -- 21,500 By Abnormal loss A/c 300 24,093

To Overhead -- 49,450

 92, 000 x 430hrs 

 800hrs 
 
10,000 7,70,950 10,000 7,70,950

*{(3, 00 , 000 + 4 , 00 , 000 + 21,500 + 49, 450) − 8, 000} 7 , 70 , 950 − 8, 000

= = 80,3105
(10 , 000 − 500)units 9,500units

Particulars Qty Amount Particulars Qty. (kgs) Amount

. (Rs.) (Rs.)
(kgs)
To Process-I A/c 9,200 7,38,857 By Normal loss 1,000 --
To Material C 6,600 8,25,000 By Packing 18,000 18,42,496
Dept. A/c
(See the working
notes)
To Material D 4,200 3,15,000 By WIP A/c 1,000 1,00,711
(See the working
notes)

To Flavouring essence -- 3,300

To Labour -- 18,500
To Overheads -- 42,550

 92, 000 x370hrs 

 800hrs 
 
20,000 19,43,207 20,000 19,43,207

Abnormal loss A/c

Particulars Qty. Amount Particulars Qty. Amount

(kgs) (Rs.) (kgs) (Rs.)

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To Process-I A/c 300 24,093 By Bank 300 4,800

By Costing -- 19,293
Profit & Loss A/c
300 24,093 300 24,093

Working Notes:
Calculation of Equivalent Production units

Input Units Output Units Process-I Mat-C & D Labour & OH

(%) Units (%) Units (%) Units
9,200 Transferred to 18,000 100 18,000 100 18,000 100 18,000
Packing.

Mat-C 6,600 Closing WIP 1,000 100 1,000 100 1,000 50 500

Mat-D 4,200 Normal loss 1,000 -- -- -- -- -- --

20,000 20,000 19,000 19,000 18,500
Calculation of Unit cost

Cost component Amount (Rs.) Equivalent units Cost per unit

(Rs.)
Transferred-in 7,38,857 19,000 38.8872
Material-C 8,25,000 19,000 43.4211
Material-D 3,15,000 19,000 16.5789
Flavouring essence 3,300 19,000 0.1737
Total Material Cost 18,82,157 19,000 99.0609
Labour 18,500 18,500 1.0000
Overheads 42,550 18,500 2.3000
Total Cost 19,43,207 102.3609

Value of Materials transferred to Packing Department

= 18,000 unit × Rs.102.3609 = 18,42,496
Value of WIP : For Materials- 1,000 units × Rs.99.0609 = Rs.99,061 For Labour & Overheads 500 units ×
Rs.3.30 = Rs.1,650
Rs.1,00,711

Q.9 Process I/II/III & Costing PL MTP May 20

G K Ltd. produces a product "XYZ" which passes through two processes, viz. Process-A and Process-B.The details
for the year ending 31st March, 2020 are as follows:

Process A Process - B
40,000 units introduced at a cost of Rs. 3,60,000 -
Material consumed Rs. 2,42,000 2,25,000
Direct wages Rs. 2,58,000 1,90,000
Manufacturing expenses Rs. 1,96,000 1,23,720
Output in units 37,000 27,000
Normal wastage of inputs 5% 10%
Scrap value (per unit) Rs. 15 20

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Selling price (per unit) Rs. 37 61

Additional Information:
(a) 80% of the output of Process-A, was passed on to the next process and the balance was sold. The entire
output of Process- B was sold.
(b) Indirect expenses for the year was Rs. 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility centre.
Required:
(i) PREPARE Process-A and Process-B Account.
(ii) PREPARE Costing Profit & Loss Account showing the net profit/ net loss for the year.

Ans. (i) Process- A Account

Particulars Units Amount Particulars Units Amount

(Rs.) (Rs.)
To Inputs 40,000 3,60,000 By Normal wastage 2,000 30,000
(2,000 units × Rs.15)
To Material --- 2,42,000 1,000 27,000
By Abnormal loss A/c
To Direct wages --- 2,58,000 (1,000 units × Rs.27) By 29,600 7,99,200

To Manufacturing Exp. --- 1,96,000 Process- B (29,600 7,400 1,99,800

40,000 10,56,000 units × Rs.27) By Profit 40,000 10,56,000
& Loss A/c (7,400 units
× Rs.27)

10 ,56, 000 − 30 , 000

Cost per unit = = 27 per unit
40 , 000units − 2, 000units
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,000 units- (37,000 units + 2,000 units) = 1,000 units
Transfer to Process- B = 37,000 units x 80% = 29,600 units
Sale = 37,000 units × 20% = 7,400 units
Process- B Account

Particulars Units Amount Particulars Units Amount

(Rs.) (Rs.)
To Process- A A/c 29,600 7,99,200 By Normal wastage 2,960 59,200
(2,960 units × Rs. 20) By
To Material --- 2,25,000 27,000 12,96,000
Profit & Loss A/c
To Direct Wages --- 1,90,000 (27,000 units × Rs. 48)
To Manufacturing Exp. --- 1,23,720
To Abnormal Gain A/c 360 17,280
(360 units × Rs. 48) 29,960 13,55,200 29,960 13,55,200

13,37 , 920 − 59,200

Cost per unit = = 48 per unit
29, 600units − 2, 960units
Normal wastage = 29,600 units × 10% = 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units
(ii) Costing Profit & Loss Account

Particulars Amount (Rs.) Particulars Amount (Rs.)

To Process- A A/c 1,99,800 By Sales:
To Process- B A/c 12,96,000 - Process-A 2,73,800

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(7,400 units × Rs. 37)
To Abnormal loss A/c 12,000 - Process- B 16,47,000
(27,000 units × Rs. 61)
To Indirect Expenses 4,48,080 By Abnormal gain 10,080
By Net loss 25,000
19,55,880 19,55,880

Working Notes:
Normal wastage (Loss) Account

Particulars Units Amount (Rs.) Particulars Units Amount (Rs.)

To Process- 2,000 30,000 By Abnormal Gain A/c 360 7,200
A A/c (360 units × Rs. 20)
To Process- 2,960 59,200 By Bank (Sales) 4,600 82,000
B A/c
4,960 89,200 4,960 89,200

Abnormal Loss Account

Particulars Units Amount Particulars Units Amount (Rs.)

(Rs.)
To Process- 1,000 27,000 By Bank A/c 1,000 15,000
A A/c (1,000 units × Rs. 15)
By Profit & Loss A/c --- 12,000
1,000 27,000 1,000 27,000

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount

(Rs.) (Rs.)
To Normal loss A/c 360 7,200 By Process- B A/c 360 17,280
(360 units × Rs.
20) To Profit & 10,080
Loss A/c 360 17,280 360 17,280

Q.10 Process I, Eq Prod, apportion MTP Nov 20

‘Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve sugarcane crushing for
juice extraction, then filtration and boiling of juice along with some chemicals and then letting it cool to cut
solidified jaggery blocks.
The main process of juice extraction (Process – I) is done in conventional crusher, which is then filtered and
boiled (Process – II) in iron pots. The solidified jaggery blocks are then cut, packed and dispatched. For
manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which extracts only 45 litre of juice.
Following information regarding Process – I has been obtained from the manufacturing department of
Healthy Sweets for the month of January, 2020:
Opening work-in process (4,500 litre)
(`)
Sugarcane 50,000

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Labour 15,000
Overheads 45,000
Sugarcane introduced for juice extraction (1,00,000 kg) 5,00,000
Direct Labour 2,00,000
Overheads 6,00,000
Abnormal Loss: 1,000 kg
Degree of completion:
Sugarcane 100%
Labour and overheads 80%
Closing work-in process: 9,000 litre
Degree of completion:
Sugarcane 100% Labour and overheads
80%
Extracted juice transferred for filtering and boiling: 39,500 litre
(Consider mass of 1 litre of juice equivalent to 1 kg)
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iii) Statement of distribution cost, and
(iv) Process-I Account.

Ans. (i) Statement of Equivalent Production

Particulars Input Particulars Output Equivalent Production
Units Units Sugarcane Labour & O.H.
% Units % Units
Opening WIP 4,500 Completed and 39,500 100 39,500 100 39,500
transferred to
Process - II
Units 1,00,000 Normal Loss 55,000 -- -- -- --
introduced (55%* of
1,00,000)
Abnormal loss 1,000 100 1,000 80 800
Closing WIP 9,000 100 9,000 80 7,200
1,04,500 1,04,500 49,500 47,500

* 100 kg of sugarcane extracts only 45 litre of juice. Thus, normal loss = 100 – 45 = 55%
(ii) Statement showing cost for each element

Particulars Sugarcane Labour Overhead Total

(`) (`) (`) (`)
Cost of opening work-in-process 50,000 15,000 45,000 1,10,000
Cost incurred during the month 5,00,000 2,00,000 6,00,000 13,00,000
Total cost: (A) 5,50,000 2,15,000 6,45,000 14,10,000
Equivalent units: (B) 49,500 47,500 47,500
Cost per equivalent unit: (C) = (A ÷ B) 11.111 4.526 13.579 29.216

(iii) Statement of Distribution of cost

Amount Amount
(`) (`)

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1. Value of units completed and transferred 11,54,032

(39,500 units × ` 29.216)
2. Value of Abnormal Loss:
- Sugarcane (1,000 units × ` 11.111) 11,111
- Labour (800 units × ` 4.526) 3,621
- Overheads (800 units × ` 13.579) 10,863 25,595
3. Value of Closing W-I-P:
- Sugarcane (9,000 units × ` 11.111) 99,999
- Labour (7,200 units × ` 4.526) 32,587
- Overheads (7,200 units × ` 13.579) 97,769 2,30,355
(iv) Process-I A/c

Particulars Units (`) Particulars Units (`)

To Opening W.I.P: By Normal Loss 55,00 --
0
Sugarcane 50,00 By 1,000 25,613
4,500 0 Abnormal
loss (`25,595 + `18
(difference due
to
approximation))
- Labour -- 15,000 By Process-II A/c 39,500 11,54,032
- Overheads -- 45,000 By Closing WIP 9,000 2,30,355
To Sugarcane introduced 100,000 5,00,000
To Direct Labour 2,00,000
To Overheads 6,00,000
104,500 14,10,000 104,500 14,10,000

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10 BUDGET AND BUDGETORY CONTROL

CHAPTER

Q.1 Production & Purchase Budge PY Nov 18

SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23 commencing on 1st
April 2022, production will be constrained by direct labour. It is estimated that only 12,000 hours of direct
labour hours will be available in each month.
For market reasons, production of either of the two garments must be at least 25% of the production of the
other. Estimated cost and revenue per garment are as follows:
Shirt Short (`)
(`)
Sales price 60 44
Raw Materials
Fabric @12 per metre 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed Overhead @ 4 per hour 4 2
Profit 18 22

From the month of July 2022 direct labour will no longer be a constraint. The company expects to be able to sell
15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock at the beginning of July 2022.
Sales volumes are expected to grow at 10% per month cumulatively thereafter throughout the year. Following
additional information is available:
• The company intends to carry stock of finished garments sufficient to meet 40% of the next month's
sale from July 2022 onwards.
• The estimated selling price will be same as above. Required:
I. Calculate the number of shirts and shorts to be produced per month in the first quarter of financial year
2022-2023 to maximize company's profit.
II. Prepare the following budgets on a monthly basis for July, August and September 2022:
(i) Sales budget showing sales units and sales revenue for each product.
(ii) Production budget (in units) for each product.

Ans. I. Calculation of number of shirts & shorts to be produced per month:

Contribution per labour hour:

Shirts (`) Shorts (`)

A Sales Price per unit 60 44
B Variable Cost:
- Raw materials 30 16
- Direct labour 8 4
38 20
C Contribution per unit [A-B] 22 24
D Labour hour per unit 1 hour 0.5 hour
E Contribution per labour hour [C÷D] 22 48

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Production plan for the first three months:

Since, Shorts has the higher Contribution per labour hour, it will be made first. Shirts will be 25% of
Shorts. The quantity will be determined as below:
Let the Quantity of Shorts be X and Shirts will be 0.25 X, then
(Qty. of Shorts × labour hour per unit) + (Qty. of Shirts × labour hour per unit) = Total labour hours
available
Or, (X × 0.5 hour) + (0.25X × 1 hour) = 12,000 hours
Or, 0.5X + 0.25X = 12,000 Or, 0.75X = 12,000
Or, X = 12,000÷0.75
= 16,000 units of Shorts
Therefore, for Shirts = 25% of 16,000 units
= 4,000 units
Production per month for the first quarter will be:
Shorts- 16,000 units & Shirts- 4,000 units

II. (i) Sales Budget for the month of July, August & September 2022:

July 2022 August 2022 September 2022

Shirts Shorts Shirts Shorts Shirts Shorts
A Sales demand 15,000 20,000 16,500 22,000 18,150 24,200
B Selling price per unit(`) 60 44 60 44 60 44
C Sales Revenue (`) 9,00,000 8,80,000 9,90,000 9,68,000 10,89,000 10,64,800

(ii) Production budget for the month of July, August & September 2022:

July 2022 August 2022 September 2022 October 2022

Shirts Shorts Shirts Shorts Shirts Shorts Shirts Shorts
A Opening stock 0 0 6,600 8,800 7,260 9,680
B Sales demand 15,000 20,000 16,500 22,000 18,150 24,200 19,965 26,620
C Closing stock 6,600 8,800 7,260 9,680 7,986 10,648
D Production 21,600 28,800 17,160 22,880 18,876 25,168
[B+C-A]

Q.2 Current Year & next year PY May 23

PQR Limited manufactures three products - Product X, Product Y and Product Z. The output for the current
year is 2,50,000 units of Product X, 2,80,000 units of Product Y and 3,20,000 units of Product Z respectively.
Selling price of Product X is 1.25 times of Product Z whereas Product Y can be sold at double the price at which
product Z can be sold. Product Z can be sold at a profit of 20% on its marginal cost.
Other information are as follows:

Product X Product Y Product Z

Direct Material Cost (Per unit) ` 20 ` 20 ` 20
Direct Wages Cost (per unit) ` 16 ` 24 ` 16

Raw material used for manufacturing all the three products is the same. Direct Wages are paid @ ` 4 per labour
hour, Total overhead cost of the company is ` 52,80,000 for the year, out of which ` 1 per labour hour is variable
and the rest is fixed.

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In the next year it is expected that sales of product X and product Z will increase by 12% and 15% respectively
and sale of product Y will decline by 5%. The total overhead cost of the company for the next year is estimated
at ` 55,08,000. The variable cost of ` 1 per labour hour remains unchanged.
It is anticipated that all other costs will remain same for the next year and there is opening and closing stock.
Selling Price per unit of each product will remain unchanged in the next year.
Required:
Prepare a budget showing the current position and the position for the next year clearly indicating the total
product-wise contribution and profit for the company as a whole.

Ans. (i) Budget showing current position of total product wise contribution and profitability

Particulars Product X (`) Product Y (`) Product Z (`) Total (`)

A Direct material cost (per unit) 20 20 20

B Direct wages cost (per unit) 16 24 16

C Variable overhead per unit 4 6 4

(Refer WN-1)

D Total variable cost/ Marginal cost 40 50 40

per unit [A+B+C]

E Add: Profit [20% of D] - - 8

F Selling price unit [D+E] - - 48

G Price weight 1.25 2 1

H Selling price per unit [Selling price 60 96 48

of Product Z × G]

I Contribution per unit [H-D] 20 46 8

J Quantity to be sold 2,50,000 2,80,000 3,20,000

K Total Contribution [J×I] 50,00,000 1,28,80,000 25,60,000 2,04,40,000

L Fixed Overheads [Refer WN-1] 13,20,000

M Profit 1,91,20,000
Working Notes:
1. Segregation of Overheads into variable and fixed in current year

Particulars Product Product Product Total

X (`) Y (`) Z (`) (`)

A Total overhead cost - - - 52,80,000

B Labour hour per unit [Direct wages Cost ÷ 4 6 4

Re.1]

C Quantity produced 2,50,000 2,80,000 3,20,000

D Total variable overhead cost [B×C] 10,00,000 16,80,000 12,80,000 39,60,000

E Fixed overhead cost [A-D] 13,20,000

(ii) Budget showing next year’s position of total product wise contribution and Profitability

Particulars Product Product Y Product Z Total

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X (`) (`) (`) (`)

A Selling price per unit 60 96 48
B Contribution per unit 20 46 8
C Quantity to be sold 2,80,000 2,66,000 3,68,000
[112% of [95% of [115% of
2,50,000] 2,80,000] 3,20,000]
D Total Contribution [B×C] 56,00,000 1,22,36,000 29,44,000 2,07,80,000
Fixed Overheads [Refer WN 2] 13,20,000
Profit 1,94,60,000

Working Notes:
2. Segregation of Overheads into variable and fixed in next year

Particulars Product X Product Y Product Z Total

(`) (`) (`) (`)
A Total overhead cost - - - 55,08,000
B Labour hour per unit [Direct wages 4 6 4
Cost ÷ Re.1]
C Quantity produced 2,80,000 2,66,000 3,68,000
D Total variable overhead cost [B×C] 11,20,000 15,96,000 14,72,000 41,88,000
E Fixed overhead cost[A-D] 13,20,000

Q.3 Consumption of Rm & stores PY May 23

A Limited has furnished the following information for the months from 1 stJanuary to 30th April, 2023:

January February March April

Number of Working days 25 24 26 25
Production (in units) per working day 50 55 60 52
Raw Material Purchases (% by weights to total of 4 months) 21% 26% 30% 23%
Purchase price of raw material (per kg) ` 10 ` 12 ` 13 ` 11

Quantity of raw material per unit of product: 4 kg.

Opening stock of raw material on 1stJanuary: 6,020 kg. (Cost ` 63, 210)
Closing stock of raw material on 30thApril: 5,100 kg.
All the purchases of material are made at the start of each month.
Required:
(i) Calculate the consumption of raw materials (in kgs) month-by- month and in total.
(ii) Calculate the month-wise quantity and value of raw materials purchased.
(iii) Prepare the priced stores ledger for each month using the FIFO method.

Ans. (i) Calculation of consumption of Raw Material (in kgs) month by month and total

Particulars Jan Feb March April Total

No. of working days 25 24 26 25 -

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Production (Per day) 50 55 60 52 -

Production 1,250 1,320 1,560 1,300 5,430
Raw Material Consumed (in kgs) 5,000 5,280 6,240 5,200 21,720

Calculation of Raw Material Purchased

Purchased (Kg)
Closing stock on 30th April 5,100
Add: Raw Material consumed 21,720
Less: Opening stock on 1st January (6,020)
Raw Material purchased 20,800

(ii) Calculation of month wise quantity and value of raw material purchased

% Purchased (Kg) Price (`) Value (`)

January 21 4,368 10 43,680
February 26 5,408 12 64,896
March 30 6,240 13 81,120
April 23 4,784 11 52,624
Total 20,800 2,42,320

(iii) Store Price Ledger by using FIFO method.

Receipts Issue Balance

Months Particulars Qty Rate Amount Qty Rate Amount (`) Qty Rate Amount (`)
(`)
Jan Opening 6,020 10.5 63,210
Purchases 4,368 10 43,680 6,020 10.5 63,210
4,368 10 43,680
Consumption 5,000 10.5 52,500 1,020 10.5 10,710
4,368 10 43,680
Feb Purchases 5,408 12 64,896 1,020 10.5 10,710
4,368 10 43,680
5,408 12 64,896
Consumption 1,020 10.5 10,710 108 10 1,080
4,260 10 42,600 5,408 12 64,896
March Purchase 6,240 13 81,120 108 10 1,080
5,408 12 64,896
6,240 13 81,120
Consumption 108 10 1,080
5,408 12 64,896
724 13 9,412 5,516 13 71,708
April Purchases 4,784 11 52,624 5,516 13 71,708
4,784 11 52,624
Consumption 5,200 13 67,600 316 13 4,108
4,784 11 52,624
56,732

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Q.4 Production & Purchase budge RTP May 18

G Ltd. manufactures two products called ‘M’ and ‘N’. Both products use a common raw material Z. The raw material
Z is purchased @ ` 36 per kg from the market. The company has decided to review inventory management policies
for the forthcoming year.
The following information has been extracted from departmental estimates for the year ended 31st March
2018 (the budget period):
Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5
Additional information:
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material cost.
- The cost of placing an orders is ` 320 per order.
- The management of G Ltd. has decided that there should not be more than 40 orders in a year for the
raw material Z.
Required:
(i) PREPARE functional budgets for the year ended 31st March 2018 under the following headings:
(a) Production budget for Products M and N (in units).
(b) Purchases budget for Material Z (in kgs and value).
(ii) CALCULATE the Economic Order Quantity for Material Z (in kgs).
(iii) If there is a sole supplier for the raw material Z in the market and the supplier do not sale more than
4,000 kg. of material Z at a time. Keeping the management purchase policy and production quantity mix
into consideration, CALCULATE the maximum number of units of Product M and N that could be produced.

Ans. (i) (a) Production Budget (in units) for the year ended 31st March 2016

Product M Product N
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000
 28320   13160 
   
 0.96   0.94 

(b) Purchase budget (in kgs and value) for Material Z

Product M Product N
No. of units to be produced 29,500 14,000

Usage of Material Z per unit of production 5 kg. 6 kg.

Material needed for production 1,47,500 kg. 84,000 kg.

Materials to be purchased 1,63,889 kg. 88,421 kg.

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 147500   84000 
   
 0.90   0.95 
Total quantity to be purchased 2,52,310 kg.
Rate per kg. of Material Z `36
Total purchase price `90,83,160
(ii) Calculation of Economic Order Quantity for Material Z
2x252310kg.x320 161478400
EOQ = = = 6385.72kg.
36x11% 3.96
(iii) Since, the maximum number of order per year can not be more than 40 orders and the maximum quantity
per order that can be purchased is 4,000 kg. Hence, the total quantity of Material Z that can be available
for production:
= 4,000 kg. × 40 orders = 1,60,000 kg.

Product M Product N
Material needed for production to maintain the 1,03,929 kg. 56,071 kg.
same production mix  163889   88421 
 160000x   160000x 
 252310   252310 

Less: Process wastage 10,393 kg. 2,804 kg.

Net Material available forproduction 93,536 kg. 53,267 kg.
Units to be produced 18,707 units 8,878 units
 93536kg.   53267kg. 
   
 5kg.   6kg. 

Q.5 Production budget/Mat RTP July 21

RS Ltd manufactures and sells a single product and has estimated sales revenue of ` 302.4 lakh during the year
based on 20% profit on selling price. Each unit of product requires 6 kg of material A and 3 kg of material B and
processing time of 4 hours in machine shop and 2 hours in assembly shop. Factory overheads are absorbed at a
blanket rate of 20% of direct labour. Variable selling & distribution overheads are ` 60 per unit sold and fixed
selling & distribution overheads are estimated to be ` 69,12,000.
The other relevant details are as under:
Purchase Price: Material A ` 160 per kg
Materials B ` 100 per kg
Labour Rate: Machine Shop ` 140 per hour
Assembly Shop ` 70 per hour

Finished Stock Material A Material B

Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg

Required:
(i) CALCULATE number of units of product proposed to be sold and selling price per unit,
(ii) PREPARE Production Budget in units, and
(iii) PREPARE Material Purchase Budget in units.

Ans. Workings:
Statement Showing “Total Variable Cost for the year”

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Particulars Amount (`)

Estimated Sales Revenue 3,02,40,000

Less: Desired Profit Margin on Sale @ 20% 60,48,000
Estimated Total Cost 2,41,92,000
Less: Fixed Selling and Distribution Overheads 69,12,000
Total Variable Cost 1,72,80,000

Statement Showing “Variable Cost per unit”

Particulars Variable Cost p.u. (`)

Direct Materials:
A: 6 Kg. @ ` 160 per kg. 960
B: 3 Kg. @ ` 100 per kg. 300
Labour Cost:
Machine Shop: 4 hrs. @ ` 140 per hour 560
Assembly Shop: 2 hrs. @ ` 70 per hour 140
Factory Overheads: 20% of (` 560 + ` 140) 140
Variable Selling & Distribution Expenses 60
Total Variable Cost per unit 2,160

(i) Calculation of number of units of product proposed to be sold and selling price per unit:

Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ` 1,72,80,000 / ` 2,160
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ` 3,02,40,000 / 8,000 units
= ` 3,780
(ii) Production Budget (units)

Particulars Units
Budgeted Sales 8,000
Add: Closing Stock 3,000
Total Requirements 11,000
Less: Opening Stock (2,500)
Required Production 8,500

(iii) Materials Purchase Budget (Kg.)

Particulars Material Material

A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)

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Quantity to be purchased 51,500 27,000

Q.6 Flexible Sales Budget RTP May 22

Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is in process of preparing
its revenue budget for the year 2022. The company has the following information which can be useful in preparing
the budget:
(i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes.
(ii) The sales price of `23,000 per tonne will be increased by 10% provided Wholesale Price Index (WPI)
increases by 5%.
(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw material cost is
`4,500 per tonne. The price of raw material will also increase by 10% if WPI increase by 5%.
(iv) The projected increase in WPI for 2022 is 4%
(v) A total of 6,000 employees works for the company. The company works 26 days in a month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year wage agreement. The
earnings per manshift (means an employee cost for a shift of 8 hours) is ` 3,000 (excluding terminal
benefits). The new wage agreement will be implemented from 1st July 2022 and it is expected that a 15%
increase in pay will be given.
(vii) The casual employees are getting a daily wage of ` 850. The wages in linked to Consumer Price Index (CPI).
The present CPI is 165.17 points and it is expected to be 173.59 points in year 2022.
(viii) Power cost for the year 2021 is ` 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60% of power is used for
production purpose (directly related to production volume) and remaining are for employee quarters and
administrative offices.
(ix) During the year 2021, the company has paid ` 60,00,000 for safety and maintenance works. The amount
will increase in proportion to the volume of production.
(x) During the year 2021, the company has paid ` 1,20,000 for the purchase of diesel to be used in car hired
for administrative purposes. The cost of diesel will increase by 15% in year 2022.
(xi) During the year 2021, the company has paid ` 6,00,000 for car hire charges (excluding fuel cost). In year
2022, the company has decided to reimburse the diesel cost to the car rental company. Doing this will
attract 5% GST on Reverse Charge Mechanism (RCM) basis on which the company will not get GST input
credit.
(xii) Depreciation on fixed assets for the year 2021 is ` 80,40,00,000 and it will be 15% lower in 2022.
Required:
From the above information PREPARE Revenue (Flexible) budget for the year 2022 and also show the
budgeted profit/ loss for the year.

Ans. Revenue Budget (Flexible Budget) of Maharatna Ltd. for the Year 2022

Particulars PY 2021 CY 2022

A Sales Volume (Tonnes) 4,20,000 4,70,400
[112%×4,20,000]
B Selling Price per tonne (`) 23,000 23,000
(` in lakh) (` in lakh)
C Sales value [A×B] 96,600 1,08,192
D Raw material Cost:
(i) Qty. of Material 9,66,000 10,81,920
[2.3 tonnes × A] (tonnes)
(ii) Price per tonne (`) 4,500 4,500
(iii) Total raw material cost (` in lakh) [(i)×(ii)] 43,470 48,686.40
E Wages & Salary Cost:

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(i) Wages to casual employees (15% × 6,000 = 900 2,386.80 2,508.47

employees) [900 × 26 × 12 × [900 × 26 × 12 ×
` 850] ` 893.33]
(ii) Salary to permanent employees (85% × 6,000 = 5,100 47,736 51,316.20
employees) [5100 × 26 × 12 × [(5100 × 26 × 6 ×
` 3,000] ` 3,000) + (5100 × 26
× 6 × ` 3,450)]
(iii) Total wages & salary [(i)+(ii)] 50,122.80 53,824.67
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units) [40% × 7,00.000] 2,80,000 2,80,000
(iii) Total Power consumption (units) [(i)+(ii)] 7,00,000 7,50,400
(iv) Power rate per unit (`) [`42,00,000 ÷ 7,00,000] 6.00 6.00
(v) Total power cost [(iii)×(iv)] 42 45.024
G Safety and maintenance Cost 60 67.20
[112% × 60,00,000]
H Diesel cost 1.2 -
I Car Hire charge:
(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5% on RCM basis - 0.369
[5%×(i+ii)]
(iv) Total Car hire charge cost [(i)+(ii)+(iii)] 6 7.749
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C-L] (5,142) (1273.043)

Q.7 Sales Budget RTP Nov 23

XY Co. Ltd manufactures two products viz., X and Y and sells them through two divisions, East and West. For
the purpose of Sales Budget to the Budget Committee, following information has been made available for the
year 2022-23:

Budgeted Sales Actual Sales

Product
East Division West Division East Division West Division
X 400 units at ` 9 600 units at ` 9 500 units at ` 9 700 units at ` 9
Y 300 units at ` 21 500 units at ` 21 200 units at ` 21 400 units at ` 21

Adequate market studies reveal that product X is popular but underpriced. It is expected that if the price of X
is increased by ` 1, it will, find a ready market. On the other hand, Y is overpriced and if the price of Y is reduced
by ` 1 it will have more demand in the market. The company management has agreed for the aforesaid price
changes. On the basis of these price changes and the reports of salesmen, following estimates have been

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prepared by the Divisional Managers:

Percentage increase in sales over budgeted sales

Product East Division West Division

X + 10% + 5%
Y + 20% + 10%

With the help of intensive advertisement campaign, following additional sales (over and above the above
mentioned estimated sales by Divisional Mangers) are possible:

Product East Division West Division

X 60 units 70 units
Y 40 units 50 units

You are required to prepare Sales Budget for 2023-24 after incorporating above estimates and also show the
Budgeted Sales and Actual Sales of 2022-23.

Ans. Statement Showing Sales Budget for 2023-24

Product X Product Y Total

Division Qty. Qty.
Rate (`) Amt. (`) Rate (`) Amt. (`) Amt. (`)
East 5001 10 5,000 4003 20 8,000 13,000
West 7002 10 7,000 6004 20 12,000 19,000
Total 1,200 12,000 1,000 20,000 32,000

Workings
1. 400 × 110% + 60 = 500 units
2. 600 × 105% + 70 = 700 units
3. 300 × 120% + 40 = 400 units
4. 500 × 110% + 50 = 600 units
Statement Showing Sales Budget for 2022-23

Division Product X Product Y Total

Qty. Rate (`) Amt. (`) Qty. Rate (`) Amt. (`) Amt. (`)
East 400 9 3,600 300 21 6,300 9,900
West 600 9 5,400 500 21 10,500 15,900
Total 1,000 9,000 800 16,800 25,800

Statement Showing Actual Sales for 2022-23

Product X Product Y Total
Division Qty. Rate (`) Amt. (`) Qty. Rate (`) Amt. (`) Amt. (`)
East 500 9 4,500 200 21 4,200 8,700
West 700 9 6,300 400 21 8,400 14,700
Total 1,200 10,800 600 12,600 23,400

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Q.8 Production/Purchase Rm Bud MTP Nov 19

V Ltd. produces and markets a very popular product called ‘X’. The company is interested in presenting its budget
for the second quarter of 2019.
The following information are made available for this purpose:
(i) It expects to sell 50,000 bags of ‘X’ during the second quarter of 2019 at the selling price of Rs. 900 per
bag.
(ii) Each bag of ‘X’ requires 2.5 kgs. of a raw – material called ‘Y’ and 7.5 kgs. of raw – material called ‘Z’.
(iii) Stock levels are planned as follows:

Particulars Beginning of Quarter End of Quarter

Finished Bags of ‘X’ (Nos.) 15,000 11,000
Raw – Material ‘Y’ (Kgs.) 32,000 26,000
Raw – Material ‘Z’ (Kgs.) 57,000 47,000
Empty Bag (Nos.) 37,000 28,000

(iv) ‘Y’ cost Rs.120 per Kg., ‘Z’ costs Rs.20 per Kg. and ‘Empty Bag’ costs Rs.80 each.
(v) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is Rs.50 per hour.
(vi) Variable manufacturing costs are Rs.45 per bag. Fixed manufacturing costs Rs.30,00,000 per
quarter.
(vii) Variable selling and administration expenses are 5% of sales and fixed administration and selling expenses
are Rs.20,50,000 per quarter.
Required
(i) PREPARE a production budget for the said quarter.
(ii) PREPARE a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said quarter in quantity as
well as in rupees.
(iii) COMPUTE the budgeted variable cost to produce one bag of ‘X’.
(iv) PREPARE a statement of budgeted net income for the said quarter and show both per unit and total cost
data.

Ans. (i) Production Budget of ‘X’ for the Second Quarter

Particulars Bags (Nos.)

Budgeted Sales 50,000
Add: Desired Closing stock 11,000
Total Requirements 61,000
Less: Opening stock 15,000
Required Production 46,000

(ii) Raw–Materials Purchase Budget in Quantity as well as in Rs. for 46,000 Bags of ‘X’

Particulars ‘Y’ ‘Z’ Empty Bags

Kgs. Kgs. Nos.

Production Requirements 2.5 7.5 1.0

Per bag of ‘X’

Requirement for Production 1,15,000 3,45,000 46,000

(46,000 × 2.5) (46,000 × 7.5) (46,000 × 1)
Add: Desired Closing Stock 26,000 47,000 28,000

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Total Requirements 1,41,000 3,92,000 74,000

Less: Opening Stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs.120 Rs.20 Rs.80
Cost of Purchase (Rs.) 1,30,80,000 67,00,000 29,60,000

(iii) Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’

Particulars (Rs.)

Raw – Material

Y 2.5 Kg @120 300.00

Z 7.5 Kg. @20 150.00

Empty Bag 80.00

Direct Labour(Rs.50× 9 minutes / 60 minutes) 7.50

Variable Manufacturing Overheads 45.00

Variable Cost of Production per bag 582.50

(iv) Budgeted Net Income for the Second Quarter

Particulars Per Bag (Rs.) Total (Rs.)

Sales Value (50,000 Bags) 900.00 4,50,00,000
Less: Variable Cost:
Production Cost 582.50 2,91,25,000
Admn. & Selling Expenses (5% of Sales Price) 45.00 22,50,000
Budgeted Contribution 272.50 1,36,25,000
Less: Fixed Expenses:
Manufacturing 30,00,000
Admn. & Selling 20,50,000
Budgeted Net Income 85,75,000

Q.9 Budget ratios MTP May 20

ZX Ltd. has furnished the following information:

Budgeted Actual March 2020

Number of working days 25 27
Production (in units) 20,000 22,000
Fixed Overheads Rs. 3,00,000 Rs. 3,10,000

Budgeted fixed overhead rate is Rs. 10.00 per hour. In March 2020, the actual hours worked were 31,500. In
relation to fixed overheads, CALCULATE:
(i) Efficiency Variance

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(ii) Capacity Variance

(iii) Calendar Variance
(iv) Volume Variance
(v) Expenditure Variance

Rs.3, 00, 000

Ans. (1) Budgeted Hours = = 30,000 hours
Rs.10 per hour

(2) Standard Fixed Overhead rate per hour (Standard Rate):

Budgeted fixed overheads Rs.3, 00, 000
= = = Rs.10.00
Budgeted Hours 30, 000hours
30, 000hours
(3) Standard hour per unit of output = = 1.5 hours
20, 000units
(4) Standard hours for Actual Output = 22,000 units × 1.5 hours = 33,000 Hours
Rs.3, 00, 000
(5) Budgeted Overhead per day for budgeted days= = Rs.12, 000
25 days
(6) Budgeted Overhead for actual days worked = Rs.12,000 × 27 days = Rs.3,24,000
30, 000hours
(7) Budgeted Hours for Actual days worked = = 32,400 hours
25 days
Computation of Variances in relation to Fixed Overheads:
(i) Efficiency Variance
= Standard Rate × (Standard hours for actual output – Actual hours worked)
= Rs.10 (33,000 hours – 31,500 hours) = Rs.15,000 (Favourable)
(ii) Capacity Variance
= Standard Rate × (Actual Hours – Budgeted Hours for actual days worked)
= Rs.10 (31,500 hours – 32,400 hours) = Rs.9,000 (Adverse)
(iii) Calendar Variance
= Standard/Budgeted Fixed Overhead Rate per day × (Actual Working days – Budgeted working days)
= Rs.12,000 (27 days – 25 days) = Rs.24,000 (Favourable)
(iv) Volume Variance
= Standard Rate × (Standard hours – Budgeted hours)
= Rs.10 (33,000 hours – 30,000 hours) = Rs.30,000 (Favourable)
(v) Expenditure Variance
= Budgeted Overheads – Actual Overheads
= Rs.3,00,000 – Rs.3,10,000 = Rs.10,000 (Adverse)
Note: Overhead Variances may also be calculated based on output.

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11 SERVICE COSTING
CHAPTER
Q.1
Lorry Running Ques PY May 19
X Ltd. distributes' its goods to a regional dealer using single lorry. The dealer premises are 40 kms away by road.
The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on the outward
journey and empty on return journey. The following information is available:
Diesel Consumption 8 km per litre
Diesel Cost ` 60 per litre
Engine Oil ` 200 per week
Driver's Wages (fixed) ` 2,500 per week
Repairs ` 600 per week
Garage Rent ` 800 per week
Cost of Lorry (excluding cost of tyres) ` 9,50,000
Life of Lorry 1,60,000 kms
Insurance ` 18,200 per annum
Cost of Tyres ` 52,500
Life of Tyres 25,000 kms
Estimated sale value of the lorry at end of its life is ` 1,50,000
Vehicle License Cost ` 7,800 per annum
Other Overhead Cost ` 41,600 per annum
The lorry operates on a 5 day week.
Required:
(i) A statement to show the total cost of operating the vehicle for the four week period analysed into Running
cost and Fixed cost.
(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in a year)

Ans. Working Notes:

Particulars For 4 weeks For 1 week

(by dividing by 4)
Total distance travelled (40 k.m × 2 3,200 km 800 km
× 2 trips × 5 days × 4 weeks)
Total tonne km (40 k.m × 10 tonnes × 2 16,000 tonne km 4,000 tonne km
× 5 days × 4 weeks)

(i) Statement showing Operating Cost

Particulars For 4 For 1 week

weeks (by dividing by
4)

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A. Fixed Charges:
Drivers’ wages (`2,500 4 weeks) 10,000 2,500

Garage rent (`800 × 4 weeks) 3,200 800

Insurance {(`18,200 ÷ 52 weeks) × 4 weeks} 1,400 350
Vehicle license {(`7,800 ÷ 52 weeks) × 4 600 150
weeks}
Other overheads cost {(`41,600 ÷ 52 weeks) × 3,200 800
4 weeks}
Total (A) 18,400 4,600
B. Running Cost:
Cost of diesel {(3,200 ÷ 8 kms) × `60} 24,000 6,000
Engine Oil (`200 × 4 weeks)* 800 200
Repairs (`600 × 4 weeks)* 2,400 600
Depreciation on vehicle 16,000 4,000
 9,50, 000 − 1,50, 000 
 x3200km 
 1, 60 , 000 km 

 52,500  6,720 1,680

 25, 000km x3,200km 
Depreciation on tyres  

Total (B) 49,920 12,480

C. Total Cost (A + B) 68,320 17,080

*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates these with time
i.e. in weeks instead of running of vehicle.

(ii) Calculation of vehicle operating cost:

68,320 17 , 080
Operating cost per k.m. = or = 21.35
3,200kms 800kms

Q.2 Hotel Ques (Room rent/day) PY Nov 19

A hotel is being run in a Hill station with 200 single rooms. The hotel 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 th e year ending 31st March ,2019:
(i) Occupancy during the season is 80% while in the off-season it is 40%.
(ii) Total investment in the hotel is ` 300 lakhs of which 80% relates to Buildings and the balance to Furniture
and other Equipment.
(iii) Room attendants are paid ` 15 per room per day on the basis of occupancy of rooms in a month.
(iv) Expenses:
• Staff salary (excluding that of room attendants) ` 8,00,000
• Repairs to Buildings ` 3,00,000

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• Laundry Charges ` 1,40,000

• Interior Charges ` 2,50,000
• Miscellaneous Expenses ` 2,00,200
(v) Annual Depreciation is to be provided on Buildings @ 5% and 15% on Furniture and other Equipments
on straight line method.
(vi) Monthly lighting charges are ` 110, 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.

Ans. Working Notes:

(i) Total Room days in a year

Season Occupancy (Room-days) Equivalent Full Room

charge days
Season – 80% 200 Rooms × 80% × 6 28,800 Room Days × 100%
Occupancy months × 30 days in a = 28,800
month = 28,800 Room
Days
Off-season – 40% 200 Rooms × 40% × 6 14,400 Room Days × 50%
Occupancy months × 30 days in a = 7,200
month = 14,400 Room
Days
Total Room Days 28,800 + 14,400 = 43,200 36,000 Full Room days
Room Days

(ii) Lighting Charges:

It is given in the question that lighting charges for 8 months is `110 per month and during winter season
of 4 months it is `30 per month. Further it is also given that peak season is 6 months and off season is
6 months.
It should be noted that – being Hill station, winter season is to be considered as part of Off season.
Hence, the non-winter season of 8 months include – Peak season of 6 months and Off season of 2 months.
Accordingly, the lighting charges are calculated as follows:

Season Occupancy (Room-days)

Season & Non-winter – 200 Rooms × 80% × 6 months × ` 110 per

80% Occupancy month = ` 1,05,600

Off- season & Non-winter – 200 Rooms × 40% × 2 months × `110 per
40% Occupancy (8 – 6 months) month = ` 17,600

Off- season & -winter – 200 Rooms × 40% × 4 months × ` 30 per

40% Occupancy months) month = ` 9,600

Total Lighting charges ` 1,05,600+ ` 17,600 + ` 9,600 = ` 132,800

Statement of total cost:

(`)
Staff salary 8,00,000
Repairs to building 3,00,000
Laundry 1,40,000
Interior 2,50,000

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Miscellaneous Expenses 2,00,200

Depreciation on Building (` 300 Lakhs × 80% × 5%) 12,00,000
Depreciation on Furniture & Equipment (` 300 Lakhs × 20% × 15%) 9,00,000
Room attendant’s wages (` 15 per Room Day for 43,200 Room 6,48,000
Days)
Lighting charges 1,32,800
Total cost 45,71,000
Add: Profit Margin (20% on Room rent or 25% on Cost) 11,42,750
Total Rent to be charged 57,13,750

Calculation of Room Rent per day:

Total Rent / Equivalent Full Room days = ` 57,13,750/ 36,000 = ` 158.72
Room Rent during Season = ` 158.72
Room Rent during Off season = ` 158.72 × 50% = ` 79.36

Q.3 Toll Road (BOT) Ques PY Nov 20

SEZ Ltd. built a 120 km. long highway and now operates a toll road to collect tolls. The company has invested `
900 crore to build the road and has estimated that a total of 120 crore vehicles will be using the highway during
the 10 years toll collection tenure. The other costs for the month of “June 2020” are as follows:

(i) Salary:
• Collection personnel (3 shifts and 5 persons per shift) - ` 200 per day per person.
• Supervisor (3 shifts and 2 persons per shift) - ` 350 per day per person.
• Security personnel (2 shifts and 2 persons per shift) - ` 200 per day per person.
• Toll Booth Manager (3 shifts and 1 person per shift) - ` 500 per day per person.

(ii) Electricity - ` 1,50,000

(iii) Telephone - ` 1,00,000

(iv) Maintenance cost - ` 50 lakhs

(v) The company needs 30% profit over total cost. Required:
(1) Calculate cost per kilometre.
(2) Calculate the toll rate per vehicle.

Ans. Statement of Cost

Particulars (`)
A. Apportionment of (` 900crore / (12months x 10 years)) 7,50,00,000
Capital Cost

B. Other Costs
Salary to Collection (3 Shifts × 5 persons per shift × 30 days 90,000
Personnel × ` 200 per day)

Salary to Supervisor (3 Shifts × 2 persons per shift × 30 days 63,000

× ` 350 per day)

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Salary to Security (2 Shifts × 2 persons per shift × 30 days 24,000

Personnel × ` 200 per day)
Salary to Toll Booth (3 Shifts × 1 person per shift × 30 days 45,000
Manager × ` 500 per day)

Electricity 1,50,000

Telephone 1,00,000

4,72,000

C. Maintenance cost 50,00,000

Total (A + B + C) 8,04,72,000

(1) Calculation of cost per kilometre:

Total cos t 8, 04, 72, 000

= = 6,70,600
Totalkm. 120km.
(2) Calculation of toll rate per vehicle:
Total cos t + 25% profit 8, 04 , 72, 000 + 2, 41, 41, 600
= = 10.46
Vehicles per month 1, 00 , 00 , 000 vehicles
Working:
Total estimated vehicles 1 month
Vehicles per month = x
10 years 12months
120 crore 1 month
= x = 1 crore vehicles
10 years 12months

Q.4 Hospital Ques + BED PY Jan 21

ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a building at a rent of `
50,000 per month with the agreement to bear the repairs and maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when the situation demands.
Though the unit is open for patients all the 365 days in a year, scrutiny of accounts for the year 2020 reveals
that only for 120 days in the year, the unit had the full capacity of 100 patients per day and for another 80
days, it had, on an average only 40 beds occupied per day. But, there were occasions when the beds were full,
extra beds were hired at a charge of ` 50 per bed per day. This did not come to more than 5 beds above the
normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year amounted
to ` 20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the basis of
the number of patients attended and time spent by them which on an average worked out to ` 30,000 per month
in the year 2020. Doctors are paid Rs 30,000 permonth.
The permanent staff expenses and other expenses of the unit were as follows:

`
2 Supervisors each at a per month salary of 5,000
4 Nurses each at a per month salary of 3,000
2 Ward boys each at a per month salary of 1,500
Other Expenses for the year were as under:

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Repairs and Maintenance 28,000

Food supplied to patients 4,40,000
Caretaker and Other services for patients 1,25,000
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Cost of Oxygen etc. other than directly borne for treatment of 75,000
patients
General Administration Charges allocated to the unit 71,000

Required:

(i) What is the profit per patient day made by the unit in the year 2020, if the unit recovered an overall
amount of ` 200 per day on an average from each patient.

(ii) The unit wants to work on a budget for the year 2021, but the number of patients requiring medical care
is a very uncertain factor. Assuming that same revenue and expenses prevail in the year 2021 in the first
instance, work out the number of patient days required by the unit to break even.

Ans. Workings:

Calculation of number of Patient days

100 Beds × 120 days = 12000

40 Beds × 80 days = 3,200

Extra beds = 400

Total = 15,600

(i) Statement of Profitability

Particulars Amount (`) Amount (`)

Income for the year (` 200 per patient per day × 31,20,000
15,600 patient days)
Variable Costs:
Doctor Fees (` 30,000 per month × 12) 3,60,000
Food to Patients (Variable) 4,40,000
Caretaker Other services to patients (Variable) 1,25,000
Laundry charges (Variable) 1,40,000
Medicines (Variable) 2,80,000
Bed Hire Charges (` 50 × 400 Beds) 20,000
Total Variable costs (13,65,000)
Contribution 17,55,000
Fixed Costs:
Rent (` 50,000 per month × 12) 6,00,000
Supervisor (2 persons × ` 5,000 × 12) 1,20,000
Nurses (4 persons × ` 3,000 × 12) 1,44,000
Ward Boys (2 persons x ` 1500 x12) 36,000

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Repairs (Fixed) 28,000

Cost of Oxygen 75,000
Administration expenses allocated 71,000
Total Fixed Costs (10,74,000)
Profit 6,81,000

Calculation of Contribution and profit per Patient day

Total Contribution = 17,55,000
Total Patient days = 15,600 days
Contribution per Patient day = 17,55,000 / 15,600 days = 112.50
Total Profit = 6,81,000
Total Patient days = 15,600 days
Profit per Patient day = 6,81,000 / 15,600 days = 43.65

(ii) Breakeven Point = Fixed Cost / Contribution per Patient day

= ` 10,74,000 / ` 112.50
= 9,547 patient days

Passenger (Bus) Ques PY Dec 21

Q.5
Paras Travels provides mini buses to an IT company for carrying its employees from home to office and dropping
back after office hours. It runs a fleet of 8 mini buses for this purpose. The buses are parked in a garage adjoining
the company's premises. Company is operating in two shifts (one shift in the morning and one shift in the
afternoon). The distance travelled by each mini bus one way is 30 kms. The company works for 20 days in a month.
The seating capacity of each mini bus is 30 persons. The seating capacity is normally 80% occupied during the
year. The details of expenses incurred for a year are as under:

Particulars
Driver’s salary ` 20,000 per driver per month
Lady attendant’s salary (mandatorily required for each mini bus) ` 10,000 per attendant per month
Cleaner’s salary (One cleaner for 2 mini buses) ` 15,000 per cleaner per month
Diesel (Avg. 8 kms per litre) ` 80 per litre
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes ` 5,080 per mini bus per month
Garage rent paid ` 24,000 per month
Repair & maintenance including engine oil and lubricants (for every ` 2,856 per mini bus
5,760 kms)
Purchase Price of mini bus ` 15,00,000 each
Residual life of mini bus 8 Years
Scrap value per mini bus at the end of residual life ` 3,00,000
Paras Travels charges two types of fare from the employees. Employees coming from a distance of beyond 15 kms
away from the office are charged double the fare which is charged from employees coming from a distance of
up-to 15 kms. away from the office. 50% of employees travelling in each trip are coming from a distance beyond
15 kms. from the office. The charges are to be based on average cost.
You are required to:
(i) Prepare a statement showing expenses of operating a single mini bus for a year,
(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance upto 15 kms. from the office.
(b) Employees coming from a distance beyond 15 kms. from the office.

Ans. (i) Statement of Expenses of operating a mini bus in a year

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Particulars Rate (`) Per Bus per

annum (`)
(A) Standing Charges:
Driver’s salary 20,000 p.m 2,40,000
Lady attendant’s salary 10,000 p.m 1,20,000
Average Cleaner’s salary (50%) 15,000 p.m 90,000
Insurance charge 30,000 p.a. 30,000
License fee, taxes etc. 5,080 p.m. 60,960
Average Garage Rent 24,000 p.m 36,000
Depreciation {(15,00,000 – 3,00,000) ÷ 1,50,000 p.a. 1,50,000
8}
(B) Maintenance Charges:
Repairs & maintenance including engine 28,560 p.a.
oil and lubricants (Working Note 1)
(C) Operating Charges:
Diesel (Working Note 2) 5,76,000
Total Cost (A + B + C) 13,31,520
Cost per month 1,10,960

(ii) Average cost per employee per month:

(a) Employee coming from distance of upto 15 km

Total cos t per month 1,10 , 960

= = =1,541.11
Tota l n o of equivalent employee 72 *

(b) Employee coming from a distance beyond 15 km

= 1541.11 × 2 = ` 3,082.2

* Considering half fare employees as a base

Full fare employees (12 × 2)

Add: Half fare employees (Working Note 3)

Total Equivalent number of employees per month

Total Equivalent number of employees per month (morning + afternoon shift of company)

Working Notes:

1. Calculation of Repairs and maintenance cost of a bus :

Distance travelled in a year:

(4 trip × 2 shifts × 30 km. × 20 days × 12 months) Distance travelled p.a.: 57,600 km.

Repairs and maintenance cost per Bus per annum:

2. Calculation of diesel cost per bus per annum: Distance travelled in a year = 57,600 km

Diesel cost per Bus per annum:

57,600 km.

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3. Calculation of equivalent number of employees per bus:

Seating capacity of a bus 30 employees

Occupancy (80% of capacity) 24 employees
Half fare employees (50% of 24 employees) 12 employees
Full fare employees (50% of 24 employees) 12 employee

[Note: Total Equivalent number of employees per month (morning + afternoon shift of company
can also be calculated considering full fare employees as a base. In that case the number will
be 36. Then fare for employees coming from distance beyond 15km will be

1,10 , 960
= 3,082.22 and employees coming from distance upto 15 km will be 3,082.22 / 2
36
= ` 1,541.11]

Loan Process Ques. PY Nov 22

Q.6

ABC Bank is having a branch which is engaged in processing of 'Vehicle Loan' and 'Education Loan' applications
in addition to other services to customers. 30% of the overhead costs for the branch are estimated to be
applicable to the processing of 'Vehicle Loan' applications and 'Education Loan' applications each.

Branch is having four employees at a monthly salary of ` 50,000 each, exclusively for processing of Vehicle Loan
applications and two employees at a monthly salary of ` 70,000 each, exclusively for processing of Education
Loan applications.

In addition to above, following expense are incurred by the Branch:

• Branch Manager who supervises all the activities of branch, is paid at ` 90,000 per month.

• Legal charges, Printing & stationery and Advertising Expenses are incurred at ` 30,000, ` 12,000 and `
18,000 respectively for a month.

• Other expenses are ` 10,000 per month. You are required to:

(i) Compute the cost of processing a Vehicle Loan application on the assumption that 496 Vehicle Loan
applications are processed each month.

(ii) Find out the number of Education Loan Applications processed, if the total processing cost per Education
Loan Application is same as in the Vehicle Loan Application as computed in (i) above.

Ans.
Particulars Vehicle loan Education loan Total
Applications Application
(`) (`) (`)
Employee Cost 2,00,000 1,40,000 3,40,000
(` 50,000 × 4) (` 70,000 × 2)
Apportionment of Branch 27,000 27,000 54,000
manager’s salary
Legal charges, Printing & 18,000 18,000 36,000
stationery and Advertising
expenses
Other expenses 3,000 3,000 6,000
Total cost 2,48,000 1,88,000 4,36,000

(i) Computation of cost of processing a vehicle loan application:

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Total Cost ÷ No. of applications

` 2,48,000 ÷ 496 = ` 500

(ii) Computation of no. of Education loan Processed

Total Cost = No. of applications × Processing cost per application

` 1,88,000 = No. of applications × ` 500

No. of education loan applications = `1,88,000 ÷ `500 = 376 applications

Q.7 Toll Plaza Ques PY May 23

RST Toll Plaza Limited built an 80-kilometre-long highway between two cities and operates a toll plaza to collect
tolls from passing vehicles using the highway. The company has estimated that 50,000 light weight, 12,000
medium weight and 10,000 heavy weight vehicles will be using the highway in one month in outward journey and
the same number for return journey.
As per government notification, vehicles used for medical emergencies, Members of Parliament, and essential
services are exempt from toll charges. It is estimated that 10% of light weight vehicles will pass the highway
for such use.
It is the policy of the company that if vehicles return within 24 hours of their outward journey, the toll fare
will be reduced by 25 percent automatically. It is estimated that 30% of chargeable light weight vehicles return
within the specified time frame.
The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight vehicles and that of
heavy weight vehicles as 2 times of the medium weight vehicles.
The toll and maintenance cost for a month is ` 59,09,090, The company requires a profit of 10% over the total
cost to cover interest and other costs.
Required:

(i) Calculate the toll rate for each type of vehicle if concession facilities are not available on the return
journey.

(ii) Calculate the toll rate that will be charged from light weight vehicles if a return journey concession
facility is available, assuming that the revenue earned from light weight vehicles calculated in option (i)
remains the same.

Ans. Working Notes:

(1) Calculation of equivalent numbers of Light weight vehicles (when no concession is provided on
return journey)

Type of vehicle Monthly Return Ratio Equivalent light

traffic (A) traffic (C) weight [(A + B) × C]
(B)
Light weight 45,000* 45,000 1 90,000
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,50,000

*50,000 light vehicles less 10% exempted vehicles

(2) Calculation of equivalent numbers of Light weight vehicles (when concession is provided on return
journey)

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Type of vehicle Monthly Return traffic Ratio Equivalent light

traffic (C) weight [(A + B) ×
(A) (B) C]

Light weight 45,000* 41,625 1 86,625

[45,000- (45,000 ×
30% × 25%)]
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,46,625

(i) Calculation of toll rate for each type of vehicle:

Total cost to cover ÷ Equivalent type of vehicles

(` 59,09,090 + 10% of ` 59,09,090) ÷ 2,50,000 equivalent vehicles (Refer

working note 1)

= 65,00,000 ÷ 2,50,000 = ` 26

Toll rate for:

Light weight vehicle = ` 26

Medium weight vehicle = ` 26 × 2.5 = ` 65 Heavy weight vehicle = ` 26 × 5 = ` 130

(ii) Calculation of toll rate for each type of vehicle:

Revenue earned from Light weight vehicle in (i) above

= 90,000 vehicles × ` 26 = ` 23,40,000

New toll rate to maintain the same revenue from Light weight vehicle

= ` 23,40,000 ÷ 86,625 (Refer working note-2) = ` 27.01 Light weight vehicle = ` 27.01

Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75 = 20.26

Alternative presentation

(ii) Toll rate to be charged from light weight vehicles if concession applicable

Revenue share in light vehicles = 90,000 × 26 = ` 23,40,000

Suppose rate is x, then outward journey 45,000 x; return journey (45,000 - 30% of 45,000) + 13,500
(x - 0.25)

45,000x + 31,500x + 13500 (0.75x) = ` 23,40,000

Toll rate to be charged from light weight vehicles : 86,625x = ` 23,40,000 =

` 27.01

Rate to be charged from 76,500 light weight vehicles @ 27.01; revenue will be

` 20,66,494

Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75 = 20.26 revenue will be ` 2,73,506

Q.8 Students/ School Ques RTP May 18

AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,

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Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes but for
accounting purpose it treats higher secondary as a separate responsibility centre. The Managing committee of
the school wants to revise its fee structure for higher secondary students. The accountant of the school has
provided the following details for a year:

Amount (`)
Teachers’ salary (15 teachers × `35,000 × 12 months) 63,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × `10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000

Other information:
(i)
Standard 11 & 12 Primary &
Arts Commerce Science Secondary

No. of students 120 360 180 840

Lab classes in a year 0 0 144 156
No. of examinations in a year 2 2 2 2
Time spent at library per 180 hours 120 hours 240 hours 60 hours
student per year
Time spent by principal for 208 hours 312 hours 480 hours 1,400 hours
administration
Teachers for 11 & 12 standard 4 5 6 -

(ii) One teacher who teaches economics for Arts stream students also teaches commerce stream students. The
teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also teaches business
mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for higher
secondary section.
(v) All school students irrespective of section and age participates in annual functions and sports activities.

Required:
(i) CALCULATE cost per student per annum for all three streams.
(ii) If the management decides to take uniform fee of ` 1,000 per month from all higher secondary students,
CALCULATE stream wise profitability.
(iii) If management decides to take 10% profit on cost, COMPUTE fee to be charged from the students of all
three streams respectively.

Ans. Calculation of Cost per annum

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Particulars Arts (`) Commerce (`) Science (`) Total (`)

Teachers’ salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000
R-apportionment of Economics & Mathematics teachers’ (84,000) 1,45,091 (61,091) -
salary (W.N- 2)
Principal’s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary (W.N-4) - - 1,72,800 1,72,800
Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600
Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000
Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200
Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200
Office & Administration expenses (W.N- 7) 1,21,600 3,64,800 1,82,400 6,68,800
Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000
Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400

(i) Calculation of cost per student per annum

Particulars Arts (`) Commerce (`) Science (`) Total (`)

Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
No. of students 120 360 180 660
Cost per student per annum 17,397 9,533 19,238 13,610

(ii) Calculation of profitability

Particulars Arts (`) Commerce (`) Science (`) Total (`)

Total Fees per annum 12,000 12,000 12,000
Cost per student per annum 17,397 9,533 19,238
Profit/ (Loss) per student per annum (5,397) 2,467 (7,238)
No. of students 120 360 180
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)

(iii) Computation of fees to be charged to earn a 10% profit on cost

Particulars Arts (`) Commerce (`) Science (`)

Cost per student per annum 17,397 9,533 19,238

Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764

Working Notes:

(1) Teachers’ salary

Particulars Arts Commerce Science

No. of teachers 4 5 6
Salary per annum (`) 4,20,000 4,20,000 4,20,000
Total salary 16,80,000 21,00,000 25,20,000

(2) Re-apportionment of Economics and Mathematics teachers’ salary

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Economics Mathematics
Particulars Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re-apportionment (`) (84,000) 84,000 (61,091) 61,091
 4,20, 000   4,20, 000 
 1, 040 x208   1,140 x160 
   

Hotel Rent Ques PY May 19

Q.9

A company runs a holiday home. For this purpose, it has hired a building at a rent of ` 10,00,000 per month
alongwith 5% of total taking. It has three types of suites for its customers, viz., single room, double rooms and
triple rooms.
Following information is given:

Type of suite Number Occupancy percentage

Single room 100 100%

Double rooms 50 80%

Triple rooms 30 60%

The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of triple rooms
suite as twice of the double rooms suite.
The other expenses for the year 20X9 are as follows:

(`)
Staff salaries 14,25,00,000
Room attendants’ wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000

Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to CALCULATE the rent to be charged for each type of suite.

Ans. (i) Total equivalent single room suites

Nature of suite Occupancy (Room-days) Equivalent single room

suites (Room-days)
Single room suites 36,000 36,000
(100 rooms x 360 days x 100%) (36,000 x 1)
Double rooms suites 14,400 36,000
(50 rooms x 360 days x 80%) (14,400 x 2.5)
Triple rooms suites 6,480 32,400
(30 rooms x 360 days x 60%) (6,480 x 5)
1,04,400

(ii) Statement of total cost:

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(`)
Staff salaries 14,25,00,000
Room attendant’s wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
25,21,00,000
Building rent {(`10,00,000 12 months) + 1,20,00,000+ 5% on total takings
5% on total taking}
Total cost 26,41,00,000 + 5% on total takings

Profit is 20% of total takings

 Total takings = ` 26,41,00,000 + 25% (5% +20%) of total takings Let x be rent for single room suite
Then 1,04,400 x = 26,41,00,000 + 0.25 × 1,04,400 x

Or, 1,04,400 x = 26,41,00,000 + 26,100 x

Or, 78,300 x = 26,41,00,000

Or, x = 3,373

(iii) Rent to be charged for single room suite = ` 3,373 Rent for double rooms suites ` 3,373 x 2.5 = `
8,432.5 Rent for triple rooms suites ` 3,373 x 5 = ` 16,865

Q.10 Lorry/ Truck Ques RTP Nov 19

A transport company has a fleet of four trucks of 10 tonne capacity each plying in different directions for
transport of customer's goods. The trucks run loaded with goods and return empty. The distance travelled,
number of trips made and the load carried per day by each truck are as under:

Truck No. One way Distance Km No. of trips per day Load carried per trip /
day tonnes
1 48 4 6
2 120 1 9
3 90 2 8
4 60 4 8

The analysis of maintenance cost and the total distance travelled during the last two years is as under

Year Total distance travelled Maintenance Cost `

1 1,60,200 1,38,150
2 1,56,700 1,35,525

Diesel ` 60 per litre. Each litre gives 4 km per litre of diesel on anaverage.
Driver's salary ` 22,000 per truck per month
Licence and taxes ` 15,000 per annum per truck

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Insurance ` 80,000 per annum for all the four trucks

Purchase Price per `30,00,000, Life 10 years. Scrap value at the end of life is
truck `1,00,000.
Oil and sundries ` 525 per 100 km run.
General Overhead ` 1,10,840 per annum

The following are the details of expenses for the year under review:

The trucks operate 24 days per month on an average.

Required
(i) PREPARE an Annual Cost Statement covering the fleet of four trucks.
(ii) CALCULATE the cost per km. run.
(iii) DETERMINE the freight rate per tonne km. to yield a profit of 30% on freight.

Ans. (i) Annual Cost Statement of four vehicles

(` )
Diesel {(4,21,632 km. ÷ 4 km) × ` 60) (Refer to Working Note 1) 63,24,480
Oil & sundries {(4,21,632 km. ÷ 100 km.) × ` 525} 22,13,568
Maintenance {(4,21,632 km. × ` 0.75) + ` 18,000}(Refer 3,34,224
to Working Note 2)

Drivers' salary {(`22,000 × 12 months) × 4 trucks} 10,56,000

Licence and taxes (` 15,000 × 4 trucks) 60,000
Insurance 80,000
Depreciation {(`29,00,000 ÷ 10 years) × 4 trucks} 11,60,000
General overhead 1,10,840
Total annual cost 1,13,39,112

(ii) Cost per km. run

Totalannual cost of vehicles

Cost per kilometer run = (Refer to Working Note 1)
Totalkilometre travelled annually

1,13,39,112
= = 26.89
4 ,21, 632kms
(iii) Freight rate per tonne km (to yield a profit of 30% on freight)

Totalannual cos tofthreevehicles

Cost per tonne km = = (Refer to Working Note 1)
Totaleffectivenesstonneskmsperannum

1,13,39,112
= = 7.04
16,10 , 496kms

7.04
Freight rate per tonne km. x1 = 10.06
0.7
Working Notes:

1. Total kilometre travelled and tonnes kilometre (load carried) by four trucks in one year

Truck number One way No. of trips Total distance covered Load carried per trip/day Total effective

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distance in kms in km per day in tonnes tonnes km

1 48 4 384 6 1,152
2 120 1 240 9 1,080
3 90 2 360 8 1,440
4 60 4 480 8 1,920
Total 1,464 5,592

Total kilometre travelled by four trucks in one year

(1,464 km. × 24 days × 12 months) = 4,21,632

Total effective tonnes kilometre of load carried by four trucks during one year

(5,592 tonnes km. × 24 days × 12 months) = 16,10,496

2. Fixed and variable component of maintenance cost:

Differenceinma int enance cos t

Variable maintenancecost per km =
Differenceindis tan cetravelled

1,38,150 − 1,35,525
=
1, 60 ,200kms − 1,56, 700kms
= 0.75

Fixed maintenance cost = Total maintenance cost–Variable maintenance cost

= 1,38,150-1,60,200 kms x 0.75 = 18,000

Q.11 Lorry/Transport Co. RTP Nov 20

A transport company has 20 vehicles, the capacities are as follows:

No. of Vehicles Capacity per vehicle

5 9 MT
6 12 MT
7 15 MT
2 20 MT

The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between these
stations is 100 kilometers. Each vehicle makes one round trip per day on an average. Vehicles are loaded with an
average of 90 per cent of capacity at the time of departure from station ‘A’ to station ‘B’ and at the time of
return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day. The
following information is related to the month of August, 2020:

Salary of Transport Manager ` 60,000

Salary of 30 drivers ` 20,000 each driver
Wages of 25 Helpers ` 12,000 each helper
Loading and unloading charges ` 850 each trip
Consumable stores (depends on running of vehicles) ` 1,35,000
Insurance (Annual) ` 8,40,000
Road Licence (Annual) ` 6,00,000
Cost of Diesel per litre ` 78

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Kilometres run per litre each vehicle 5 Km.

Lubricant, Oil etc. ` 1,15,000
Cost of replacement of Tyres, Tubes, other parts etc. (on running basis) ` 4,25,000
Garage rent (Annual) ` 9,00,000
Routine mechanical services ` 3,00,000
Electricity charges (for office, garage and washing station) ` 55,000
Depreciation of vehicles (on time basis) ` 6,00,000

There is a workshop attached to transport department which repairs these vehicles and other vehicles also. 40
per cent of transport manager’s salary is debited to the workshop. The transport department has been
apportioned `88,000 by the workshop during the month. During the month operation was for 25 days.

You are required:

(i) CALCULATE per ton-km operating cost.
(ii) DETERMINE the freight to be charged per ton-km, if the company earned a profit of 25 per cent on
freight.

Ans. (i) Operating Cost Sheet for the month of August, 2020

Particulars Amount (`)

A. Fixed Charges:
Manager’s salary (`60,000 × 60%) 36,000
Drivers’ Salary (`20,000 x 30 drivers) 6,00,000
Helpers’ wages (`12,000 x 25 helpers) 3,00,000
Insurance (`8,40,000 ÷ 12 months) 70,000
Road licence (`6,00,000 ÷ 12 months) 50,000
Garage rent (`9,00,000 ÷ 12 months) 75,000
Routine mechanical services 3,00,000
Electricity charges (for office, garage and washing station) 55,000
Depreciation of vehicles 6,00,000
Apportioned workshop expenses 88,000
Total (A) 21,74,000
B. Variable Charges:
Loading and unloading charges (Working Note 1) 7,65,000
Consumable Stores 1,35,000
Cost of diesel (Working Note 2) 14,04,000
Lubricant, Oil etc. 1,15,000
Replacement of Tyres, Tubes & other parts 4,25,000
Total (B) 28,44,000
C. Total Cost (A + B) 50,18,000
D. Total Ton-Kms. (Working Note 3) 9,43,200
E. Cost per ton-km. (C ÷ D) 5.32

(ii) Calculation of Chargeable Freight

Cost per ton-km. ` 5.32
Add: Profit @ 25% on freight or 33⅓% on cost ` 1.77
Chargeable freight per ton-km. ` 7.09

Working Notes:

1. Wages paid to loading and unloading labours

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Numbers of vehicles available per day × No. of days × trips × wages per trip (20 vehicles × 90%) × 25
days × 2 trips × `850

18 × 25 × 2 × 850 = `7,65,000

2. Cost of Diesel:

Distance covered by each vehicle during August, 2020

= 100 k.m. x 2 x 25 days x 90% = 4,500 km.

4 ,500kmx20vehicles
Consumption of diesel = = 18, 000litres
5k.m.
Cost of diesel = 18,000 litres x 78 = 14,04,000

3. Calculation of total ton-km:

Total Ton-Km. = Total Capacity x Distance covered by each vehicle x Average

Capacity Utilisation ratio.

= [ (5 x 9MT) +(6x12MT) + (7x15MT) +(2x20MT)] x 4,500 k.m. x

(90% + 70%)
2
= (45+72+105+40) x 4,500 k.m. x 80%

= 262 x 4,500 x 80%.

= 9,43,200 ton-km

Q.12 School Bus Ques (Passenger) RTP July 21

VPS is a public school having 25 buses each plying in different directions for the transport of its school students.
In view of large number of students availing of the bus service, the buses work two shifts daily both in the
morning and in the afternoon. The buses are garaged in the school. The workload of the students has been so
arranged that in the morning, the first trip picks up senior students and the second trip plying an hour later
picks up junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour later
the second trip takes the senior students home.

The distance travelled by each bus, one way is 8 km. The school works 22 days in a month and remains closed for
vacation in May and June. The bus fee, however, is payable by the students for all the 12 months in a year.

The details of expenses for a year are as under:

Driver's salary – payable for all the 12 in months ` 12,000 per month per driver Cleaner's salary
payable for all the 12 months ` 8,000 per month per cleaner License fees, taxes etc.
` 8,400 per bus per annum

Insurance Premium ` 15,600 per bus per annum

Repairs and Maintenance ` 20,500 per bus per annum

Purchase price of the bus ` 20,00,000 each

Life of the bus 16 years

Scrap value ` 1,60,000

Diesel Cost ` 78. 50 per litre

Each bus gives an average of 5 km. per litre of diesel. The seating capacity of each bus is 40 students.

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The school follows differential transportation fees based on distance travelled as under:

Students picked up and dropped within the range Transportation fee Percentage of students
of distance from the school availing this facility
2 km. 25% of Full 15%
4 km. 50% of Full 30%
8 km. Full 55%

Due to a pandemic, lockdown imposed on schools and the school remained closed from April 2020 to
December 2020. Drivers and cleaners were paid 75% of their salary during the lockdown period. Repairing
cost reduced to 75% for the year 2020.

Ignore the interest cost. Required:

(i) PREPARE a statement showing the expenses of operating a single bus and the fleet of 25 buses for a
year.

(ii) FIND OUT transportation fee per student per month in respect of:

(a) Students coming from a distance of upto 2 km. from the school.

(b) Students coming from a distance of upto 4 km. from the school; and

(c) Students coming from a distance of upto 8 km. from the school.

(iii) CALCULATE the minimum bus fare that must be recovered from the students for the year 2020.

Ans. (i) Statement showing the expenses of operating a single bus and the fleet of 25 buses for a year
Particulars Per bus per annum (`) Fleet of 25 buses per
annum (`)
Running costs : (A)
Diesel (Refer to working note 1) 2,21,056 55,26,400
Repairs & maintenance costs: (B) 20,500 5,12,500
Fixed charges:
Driver's salary 1,44,000 36,00,000
(` 12,000 × 12 months)
Cleaners salary 96,000 24,00,000
(` 8,000 × 12 months)
Licence fee, taxes etc. 8,400 2,10,000
Insurance 15,600 3,90,000
 20, 00, 000 − 1, 60, 000  1,15,000 28,75,000
Depreciation  
 16years 
Total fixed charges: (C) 3,79,000 94,75,000
Total expenses: (A+B+C) 6,20,556 1,55,13,900

(ii) Average cost per student per month in respect of students coming from a distance of:

(a) 2 km. from the school {` 6,20,556 / (236 students × 12 months)} ` 219.12
(Refer to Working Note 2)
(b) 4 km. from the school (` 219.12 × 2) ` 438.24
(c) 8 km. from the school (` 219.12 × 4) ` 876.48

(iii) Calculation of minimum bus fare to be recovered from the students during the year 2020:

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Statement showing the expenses of operating a single bus in year 2020

Particulars Per bus per annum (`)

Running costs : (A)
Diesel (Refer to working note 3) 66,316.80
Repairs & maintenance costs: (B) 15,375
(` 20,500 x 0.75)
Fixed charges:
Driver's salary 1,17,000
{` 12,000 × 3 months + (75% of ` 12,000 × 9 months)}
Cleaners salary 78,000
{` 8,000 × 3 months + (75% of ` 8,000 × 9 months)}
Licence fee, taxes etc. 8,400
Insurance 15,600
20 , 00 , 000 − 1, 60 , 000 1,15,000
Depreciation
16years
Total fixed charges: (C) 3,34,000
Total expenses: (A+B+C) 4,15,691.80

Minimum bus fare to be recovered:

(a) 2 km. from the school {` 4,15,691.8 / (236 students × 12 months)} ` 146.78
(Refer to Working Note 2)
(b) 4 km. from the school (` 146.78 × 2) ` 293.56
(c) 8 km. from the school (`146.78 × 4) ` 587.12

Working Notes:

1. Calculation of diesel cost per bus:

No. of trips made by a bus each day 4

Distance travelled in one trip both ways (8 km. × 2 trips) 16 km.
Distance travelled per day by a bus (16 km. × 4 shifts) 64 km.
Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled per year (1,408 × 10 months) 14,080 km.
No. of litres of diesel required per bus per year 2,816 litres
(14,080 km. ÷ 5 km.)
Cost of diesel per bus per year (2,816 litres × ` 78.50) ` 2,21,056

2. Calculation of equivalent number of students per bus:

Bus capacity of 2 trips (40 students × 2 trips) 80 students

4th fare students (15% × 80 students)

1/ 12 students

½ fare students (30% × 80 students × 2) (equivalent to 1/4th 48 students

fare students)
Full fare students (55% × 80 students × 4) (equivalent to 1/4th 176 students
fare students)

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Total students equivalent to 1/4th fare students 236 students

3. Calculation of diesel cost per bus in Year 2020:

Distance travelled during a month (64 km. × 22 days) 1,408 km.

Distance travelled during the year 2020 (1,408 × 3 months) 4,224 km.
No. of litres of diesel required per bus per year 844.8 litres
(4,224 km. ÷ 5 km.)
Cost of diesel per bus per year (844.8 litres × ` 78.50) ` 66,316.80

Q.13 Bus Ques (Passenger) RTP Dec 21

Mr. PS owns a bus which runs according to the following schedule:

(i) Delhi to Hisar and back, the same day

Distance covered: 160 km. one way
Number of days run each month: 9
Seating capacity occupied 90%.
(ii) Delhi to Aligarh and back, the same day
Distance covered: 160 km. one way
Number of days run each month: 12
Seating capacity occupied 95%
(iii) Delhi to Alwar and back, the same day
Distance covered: 170 km. one way
Number of days run each month: 6
Seating capacity occupied 100%
(iv) Following are the other details:
Cost of the bus ` 15,00,000
Salary of the Driver ` 30,000 p.m.
Salary of the Conductor ` 26,000 p.m.
Salary of the part-time Accountant ` 7,000 p.m.
Insurance of the bus ` 6,000 p.a.
Diesel consumption 5 km. per litre at ` 90 per litre
Road tax ` 21,912 p.a.
Lubricant oil ` 30 per 100 km.
Permit fee ` 500 p.m.
Repairs and maintenance ` 5,000 p.m.
Depreciation of the bus @ 30% p.a.
Seating capacity of the bus 50 persons

Passenger tax is 20% of the total takings.

CALCULATE the bus fare to be charged from each passenger to earn a profit of 30% on total takings.
The fares are to be indicated per passenger for the journeys: (i) Delhi to Hisar (ii) Delhi to Aligarh and (iii)
Delhi to Alwar.

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Ans. Working Notes:

1. Total Distance (in km.) covered per month

Bus route Km. per trip Trips per day Days per month Km. per month

Delhi to Hisar 160 2 9 2,880

Delhi to Aligarh 160 2 12 3,840
Delhi to Alwar 170 2 6 2,040
Total 8,760

2. Passenger- km. per month

Total seats available per month Capacity utilised Km. per Passenger-
(at 100% trip Km. per month
capacity)
(%) Seats
Delhi to Hisar & 900 90 810 160 1,29,600
Back (50 seats x 2 trips x 9 (810 seats ×
days) 160 km.)

Delhi to Aligarh& 1,200 95 1,140 160 1,82,400

Back (50 seats x 2 trips x 12 (1,140 seats
days) × 160 km.)

Delhi to Alwar & 600 100 600 170 1,02,000

Back (50 seats x 2 trips x 6 (600 seats ×
days) 170 km.)

Total 4,14,000

Monthly Operating Cost Statement

Particulars (`) (`)

(i) Running Costs
Diesel {(8,760 km x 5 km) x ` 90} 1,57,680.00

Lubricant oil {(8,760 km x 100) x ` 30} 2,628.00 1,60,308.00

(ii) Maintenance Costs

Repairs & Maintenance 5,000.00
(iii) Standing charges
30,000.00
Salary to driver
Salary to conductor 26,000.00
Salary of part-time accountant 7,000.00
Insurance (` 6,000 ÷12) 500.00
Road tax (` 21,912 ÷12) 1,826.00
Permit fee 500.00
Depreciation {(` 15,00,000 x 30%) x 12} 37,500.00 1,03,326.00

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Total costs per month before Passenger Tax 2,68,634.00

(i)+(ii)+(iii)
Passenger Tax* 1,07,453.60

Total Cost 3,76,087.60

Add: Profit* 1,61,180.40

Total takings per month 5,37,268.00

*Let total takings be X then,

X = Total costs per month before passenger tax + 0.2 X (passenger tax) + 0.3 X (profit) X = ` 2,68,634 +
0.2 X + 0.3 X

0.5 X = ` 2,68,634 or, X = ` 5,37,268

Passenger Tax = 20% of ` 5,37,268 = ` 1,07,453.60 Profit = 30% of ` 5,37,268 = ` 1,61,180.40

Calculation of Rate per passenger km. and fares to be charged for different routes

Rate per Passenger-Km.

Totaltakingspermonth
=
TotalPassenger − Km per month

5,37 ,268
= = 1.30 [approx.]
4 ,14 , 000Passenger − km.
Bus fare to be charged per passenger:

Delhi to Hisar = ` 1.30 x 160 km ` 208.00

Delhi to Aligarh = ` 1.30 x 160 km ` 208.00
Delhi to Alwar = ` 1.30 x 170 km ` 221.00

Q.14 Vehicle running cost Ques RTP May 22

Navya LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the offices of
Noida, Gurugram and Faridabad. At present it operates CNG fuelled cars but it is also considering to upgrade
these into Electric vehicle (EV). The details related with the owning of CNG & EV propelled cars are as tabulated
below:

Particulars CNG Car EV Car

Car purchase price (`) 9,20,000 15,20,000
Govt. subsidy on purchase of car (`) -- 1,50,000
Life of the car 15 years 10 years
Residual value (`) 95,000 1,70,000
Mileage 20 km/kg 240 km per charge
Electricity consumption per full charge -- 30 Kwh
CNG cost per Kg (`) 60 --
Power cost per Kwh (`) -- 7.60
Annual Maintenance cost (`) 8,000 5,200
Annual insurance cost (`) 7,600 14,600

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Tyre replacement cost in every 5 -year (`) 16,000 16,000

Battery replacement cost in every 8- year (`) 12,000 5,40,000

Apart from the above, the following are the additional information:

Particulars

Average distance covered by a car in a month 1,500 km

Driver’s salary (`) 20,000 p.m
Garage rent per car (`) 4,500 p.m
Share of Office & Administration cost per car (`) 1,500 p.m

Required:
CALCULATE the operating cost of vehicle per month per car for both CNG & EV options.

Ans. Working Notes:

1. Calculation of Depreciation per month:

Particulars CNG Car EV Car

A Car purchase price (`) 9,20,000 15,20,000

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

2. Fuel/ Electricity consumption cost per month:

Particulars CNG Car EV Car

A Average distance covered in a month (KM) 1,500 1,500

B Mileage (KM) 20 240

C Qty. of CNG/ Full charge required [A÷B] 75 kg. 6.25
D Electricity Consumption [C×30kwh] - 187.5
E Cost of CNG per kg (`) 60 -
F Power cost per Kwh (`) - 7.60
G CNG Cost per month (`) [C×E] 4,500 -
H Power cost per month (`) [D×F] - 1,425

3. Amortised cost of Tyre replacement:

Particulars CNG Car EV Car

A Life of vehicle 15 years 10 years

B Replacement interval 5 years 5 years

C No. of time replacement required 2 times 1 time

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D Cost of tyres for each replacement (`) 16,000 16,000

E Total replacement cost (`) [C×D] 32,000 16,000

F Amortised cost per year (`) [E÷A] 2,133.33 1,600

E Cost per month (`) [F÷12] 177.78 133.33

4. Amortised cost of Battery replacement:

Particulars CNG Car EV Car

A Life of vehicle 15 years 10 years

B Replacement interval 8 years 8 years

C No. of time replacement required 1 time 1 time

D Cost of battery for each replacement (`) 12,000 5,40,000

E Total replacement cost (`) [C×D] 12,000 5,40,000

F Amortised cost per year (`) [E÷A] 800 54,000

E Cost per month (`) [F÷12] 66.67 4,500

Calculation of Operating cost per month:

Particulars CNG Car (`) EV Car (`)

A Running cost:

Fuel cost/ Power consumption cost [ReferWN- 4,500 1,425

2]

B Maintenance cost:

Annual Maintenance cost [Annual cost 666.67 433.33

÷12]

Annual Insurance cost [Annual cost ÷12] 633.33 1,216.67

Amortised cost of Tyre replacement[Refer 177.78 133.33

WN-3]

Amortised cost of Battery replacement[Refer 66.67 4,500

WN-4]

1,544.45 6,283.33

C Fixed cost:

Depreciation [Refer WN-1] 4,583.33 10,000

Driver’s salary 20,000 20,000

Garage rent 4,500 4,500

Share of Office & Administration cost 1,500 1,500

30,583.33 36,000

D Operating cost per month [A+B+C] 36,627.78 43,708.33

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Q.15 Bus Passenger Bases ques RTP Nov 22

Royal Transport Services runs fleet of buses within the limits of Jaipur city. The following are the details which
were incurred by the company during October, 2021:

Cost of each Bus 24,00,000

Garage Rent 1,00,000

Insurance 25,000

Road tax 20,000

Manager’s Salary 60,000

Assistant’s Salary (Two) 32,000 each

Supervisor’s Salary (Three) 24,000 each

Driver’s Salary (Twenty-Five) 20,000 each

Cleaner’s Salary (Twenty) 5,000 each

Office Staff’s Salary 1,00,000

Consumables 1,20,000

Repairs & Maintenance 90,000

Other Fixed Expenses 72,000

Diesel (10 Kms per Litre) 80 per litre

Oils & Lubricants 1,45,000

Tyres and tubes 35,000

Depreciation 10% p.a. on Cost

Other details are as below:

Capacity

12 Buses 60 passenger

13 Buses 50 Passengers

Each Bus make 4 round trips, 10 km in each trip in one way. On average 80% bus seats are occupied and generally
5 buses are to be kept away for repairs each day.

Calculate Cost per passenger & Cost sheet for 20 passengers.

Ans.

Particulars Amount (`) Amount (`)

Standing Charges:
Depreciation (` 24,00,000 X 10% X 1/12 X 25) 5,00,000
Garage Rent 1,00,000
Insurance Road 25,000
Tax 20,000

Manager’s Salary 60,000

Assistant’s Salary (` 32,000 X 2) 64,000

Supervisor’s Salary (` 24,000 X 3) 72,000

5,00,000

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Driver’s Salary (` 20,000 X 25) 1,00,000

Cleaner’s Salary (` 5,000 X 20) 1,00,000
Office Staff’s Salary 1,20,000
Consumables 90,000
18,23,000
Repairs & MaintenanceOther 72,000
Fixed Expenses Running
3,96,800
Charges
1,45,000 5,76,800
Diesel (49,600 Kms / 10 Kms X ` 80 per unit)Oils &
35,000 23,99,800
Lubricants
Tyres and tubes
Total Operating Cost

TotalOperatingCost
Cost per passenger-km =
Passenger − kms

23, 99,800
= = 0.883
27 ,18, 080
Working Note:

Calculation of Total Kilometers and Passenger Kilometers

Specification Total Km. Passenger–Km.

12 Buses (60 Passengers) 29,760 Kms 14,28,480
(10 Kms × 4 X 2 trips × 31days x 12 Buses) (29760 Kms x 60 Pass. x
80%)
13 Buses (50 Passengers) 32,240 Kms 12,89,600
(10 Kms × 4 X 2 trips × 31days x 13 Buses) (32240 Kms x 50 Pass. x
80%)
Total 62,000 27,18,080

Since 5 buses out of 25 buses are kept for repairs every day

Actual total Km. 62,000 × 20/25 = 49,600

Q.16 Airline/ Passenger Ques MTP Nov 18(2)

DKG Airlines owns single passenger aircraft and operates between Melbourne and Delhi only. Flight leaves
Melbourne on Monday and Thursday and departs from Delhi on Wednesday and Saturday. DKG Airlines cannot
afford any more flight between Melbourne and Delhi. Only economical class seats are available on its flight and
all tickets are booked by travel agents. The following information are collected.

Seating capacity per plane 360

Average passengers per flight 250
Flights per week 4
Flights per year 208
Average one-way fare Rs.50,000
Variable fuel cost Rs.28,00,000 per flight

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Food service to passengers (not charged to Passengers) Rs.2,600 per passenger

Commission to travel agents 15% of fare
Fixed annual lease cost allocated to each flight Rs. 15,30,000 per flight
Fixed ground services (maintenance, check in, Baggage handling cost) allocated to each Rs.1,70,000 per flight
flight
Fixed salaries of flight crew allocated to each flight Rs.6,50,000 per flight

For the sake of simplicity assume that fuel cost is unaffected by the actual number of passengers on a flight.
Required:
(i) CALCULATE the operating income that DKG Airlines makes on each way flight between Melbourne and
Delhi?
(ii) The market research department of DKG Airlines indicates that lowering the average one-way fare to
Rs. 48,000 and increase in agents’ commission to 17.5% will increase the average number of passenger
per flight to 275. DECIDE whether DKG Airlines should lower its fare or not?

Ans (i) Statement of operating income of DKG Airlines for Melbourne-Delhi flight (one way)

Particulars Amount (Rs.) Amount (Rs.)

Fare received (per flight): 250 passengers × Rs. 50,000 1,25,00,000
Variable costs (per flight):
- Fuel cost 28,00,000
- Food (250 × Rs. 2,600) 6,50,000
- Commission to Travel Agents (15% of Rs. 1,25,00,000) 18,75,000 (53,25,000)
Contribution per flight 71,75,000
Fixed cost (per flight):
Annual lease cost 15,30,000
Fixed ground service costs 1,70,000
Salaries of flight crew 6,50,000 (23,50,000)
Operating income per flight 48,25,000

(ii) Operating income of DKG Airlines per Melbourne-Delhi flight (one way) after reduction in fare

Fare received (per flight): 275 passengers × Rs. 48,000 1,32,00,000

Variable costs (per flight):
Fuel cost 28,00,000
Food (275 × Rs.2,600) 7,15,000
Commission to Travel Agents (17.5% of Rs.1,32,00,000) 23,10,000 (58,25,000)
Contribution per flight 73,75,000

Excess contribution due to lowering of fare (Rs.73,75,000 – Rs.71,75,000) = Rs.2,00,000. DKG Airlines
should lower its fare as it would increase its contribution by Rs. 2,00,000

Q.17 BOT New Ques MTP Nov 19

SLS Infrastructure builts and operates a 110 k.m. long highway on the basis of Built-Operate- Transfer (BOT)
model for a period of 25 years. A traffic assessment has been carried out to estimate the traffic flow per day.
The details are as below:

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Sl. No. Type of vehicle Daily traffic volume

1. T wo wheelers 44,500
2. Car and SUVs 3,450
3. Bus and LCV 1,800
4. Heavy commercial vehicles 816

The following is the estimated cost of the project:

Sl. no. Activities Amount

(Rs. in lakh)
1 Site clearance 170.70
2 Land development and filling work 9,080.35
3 Sub base and base courses 10,260.70
4 Bituminous work 35,070.80
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, 29,055.60
etc .
6 Drainage and protection work 9,040.50
7 Traffic sign, marking and road 8,405.00
8 appurtenance Maintenance, repairing and rehabilitation Environmental 12,429.60
management
9 Total Project cost 982.00
Total 1,14,495.25

An average cost of Rs.1,120 lakh has to be incurred on administration and toll plaza operation. On the basis of
the vehicle specifications (i.e. weight, size, time saving etc.), the following weights has been assigned to the
passing vehicles:

Sl. No. Type of vehicle

1. T wo wheelers 5%
2. Car and SUVs 20%
3. Bus and LCV 30%
4. Heavy commercial vehicles 45%

CACULATE the total project cost per day of concession period.

(ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company wants to earn a profit of
15% on total cost.
[Note: Concession period is a period for which an infrastructure is allowed to operate and recovers its
investment]

Ans. School Contract Account

Particulars Amount Particulars Amount

(Rs.) (Rs.)
To Plant 2,40,000 By Material returned 47,000
To Hire of plant 77,000 By Plant c/d 1,65,000
To Materials 6,62,000 By Materials c/d 50,000
To Direct wages 9,60,000 By WIP c/d:

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Add: Accrued 40,000 10,00,000 Value of work certified 24,00,000

To Wages related costs 1,32,000 Cost of work not certified 1,80,000
To Direct expenses 34,000
To Supervisory staff:
Direct 90,000
Indirect 20,000 1,10,000
To Regional office expenses 50,000
To Head office expenses 30,000
To Surveyors’ fees 27,000
To Notional profit c/d 4,80,000
28,42,000 28,42,000

Hotel Ques MTP Dec 21(2)

Q.18
A hotel is being run in a Hill station with 200 single rooms. The hotel offers concessional rates during six off-
season (winter) 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 31st March, 2021:

(i) Occupancy during the season is 80% while in the off-season it is 40%.

(ii) Total investment in the hotel is ` 300 lakhs of which 80% relates to Buildings and the balance to
Furniture and other Equipment.

(iii) Room attendants are paid ` 15 per room per day on the basis of occupancy of rooms in a month.

(iv) Expenses :
• Staff salary (excluding that of room attendants) ` 8,00,000
• Repairs to Buildings ` 3,00,000
• Laundry Charges ` 1,40,000
• Interior Charges ` 2,50,000
• Miscellaneous Expenses ` 2,00,200

(v) Annual Depreciation is to be provided on Buildings @ 5% and 15% on Furniture and other Equipments on
straight line method.

(vi) Monthly lighting charges are ` 110 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.
You are REQUIRED to workout the room rent chargeable per day both during the season and the off-
season months using the foregoing information.
(Assume a month to be of 30 days and winter season to be considered as part of off-season).

Ans. (i) Total Room days in a year

Season Occupancy (Room-days) Equivalent Full Room charge

days
Season – 80% 200 Rooms × 80% × 6 months 28,800 Room Days × 100%
Occupancy × 30 days in a month = 28,800 = 28,800
Room Days
Off-season – 40% 200 Rooms × 40% × 6 months 14,400 Room Days × 50% = 7,200

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Occupancy × 30 days in a month = 14,400
Room Days
Total Room Days 28,800 + 14,400 = 43,200 36,000 Full Room days
Room Days

(ii) Lighting Charges:

It is given in the question that lighting charges for 8 months is `110 per month and during winter season
of 4 months it is `30 per month. Further it is also given that peak season is 6 months and off season is 6
months.
It should be noted that – being Hill station, winter season is to be considered as part of Off season.
Hence, the non-winter season of 8 months include – Peak season of 6 months and Off season of 2 months.
Accordingly, the lighting charges are calculated as follows:

Season Occupancy (Room-days)

Season & Non-winter – 200 Rooms × 80% × 6 months × ` 110 per month
80% Occupancy = ` 1,05,600

Off- season & Non-winter – 200 Rooms × 40% × 2 months × `110 per month
40% Occupancy (8 – 6 months) = ` 17,600

Off- season & -winter – 200 Rooms × 40% × 4 months × ` 30 per month
40% Occupancy months) = ` 9,600

Total Lighting charges ` 1,05,600+ ` 17,600 + ` 9,600 = ` 132,800

Statement of total cost:

(`)
Staff salary 8,00,00
0
Repairs to building 3,00,00
0
Laundry 1,40,000
Interior 2,50,00
0
Miscellaneous Expenses 2,00,20
0
Depreciation on Building (` 300 Lakhs × 80% × 5%) 12,00,00
0
Depreciation on Furniture & Equipment (` 300 Lakhs × 20% × 15%) 9,00,00
0
Room attendant’s wages (` 15 per Room Day for 43,200 Room Days) 6,48,00
0
Lighting charges 1,32,800
Total cost 45,71,00
0
Add: Profit Margin (20% on Room rent or 25% on Cost) 11,42,750
Total Rent to be charged 57,13,75
0
Calculation of Room Rent per day:
Total Rent / Equivalent Full Room days = ` 57,13,750/ 36,000 = ` 158.72
Room Rent during Season – ` 158.72
Room Rent during Off season = ` 158.72 × 50% = ` 79.36

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Q.19 Compare 3 Different Situation MTP Nov 22(1)

A company has the following three alternative proposals for conveyance facilities for its sales personnel who
has to do substantial traveling, approximately 20,000 kilometers yearly:
(i) Purchasing and maintaining its own fleet of cars. The average cost of a car is ` 7,20,000
(ii) Allow the Executive to use their own car and reimburse the expenses @ ` 12 per kilometer and also bear
insurance costs.
(iii) Hire cars from an agency at ` 2,16,000 per year per car. The company will have to bear costs of petrol,
taxes and tyres.
The following further details are available:
Petrol ` 7.20 per km.
Tyre ` 0.144 per km.
Taxes ` 960 per car per annum
Repairs and maintenance ` 0.24 per km.
Insurance ` 1,440 per car per annum
Life of the car 5 years with annual mileage of 20,000 km.
Resale value ` 96,000 at the end of the fifth year.
WORK OUT the relative costs of three proposals and rank them.

Ans. Calculation of relative costs of three proposals and their ranking

I- Use II- Use III- Use

of of own of hired
company’s car car car
per km. (`) per km. per km.
Reimbursement -- 12.00 --
(`) (`)
Hire Charges -- -- 10.80 *
Fixed cost:
Insurance 0.072 0.072 --
Taxes 0.048 -- 0.048
Depreciation 6.24 -- --
#
Running and Maintenance Cost:
Petrol 7.20 -- 7.20
Repairs and Maintenance 0.24 -- --
Tyre 0.144 -- 0.144
Total cost per km. 13.944 12.072 18.192
Cost for 20,000 km. 2,78,880 2,41,440 3,63,840
Ranking of proposals II I III

(` 2,16,000 ÷ 20,000 km.) = ` 10.80

[(` 7,20,000 - ` 96,000) ÷ 5 years] ÷ 20,000 km. = ` 6.24
The Second alternative i.e., use of own car by the executive and reimbursement of expenses by the company is
the best alternative from company’s point of view.

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12 Cost Accounting System

CHAPTER

Q.1 Memo Reconciliation Account PY May 19

M/s Abid Private Limited disclosed a net profit of ` 48,408 as per cost books for the year ending 31st March
2019. However, financial accounts disclosed net loss of ` 15,000 for the same period. On scrutinizing both the
set of books of accounts, the following information was revealed:
Works Overheads under-recovered in Cost Books 48,600
Office Overheads over-recovered in Cost Books 11,500
Dividend received on Shares 17,475
Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800
Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000
Prepare a Memorandum Reconciliation Account.

Ans. Memorandum Reconciliation Account

Dr. Cr.
Particulars (`) Particulars (`)
To Works overheads under 48,600 By Net profit as per Costing books 48,408
recovered in Cost Accounts
To Provision for doubtful debts 17,800 By Office overheads over recovered in cost 11,500
accounts

To Obsolescence loss 17,200 By Dividend received on shares 17,475

To Store adjustment (Debit) 35,433 By Interest on fixed deposit 21,650
By Depreciation over- charged 5,000
By Net loss as per financial accounts 15,000
1,19,033 1,19,033

[Note: This question may also be solved by taking net loss as per financial accounts as basis.]

Q.2 Reconciliation Statement PY Jul 21

The Profit and Loss account of ABC Ltd. for the year ended 31st March, 2021 is given below:
Profit and Loss account
(for the year ended 31st March, 2021)

To Direct Material 6,50,000 By Sales (15000 units) 15,00,000

To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000

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To Selling overheads 85,000

To Loss on sale of investments 2,000
To Net Profit 57,000
15,09,000 15,09,000

• Factory overheads are 50% fixed and 50% variable.

• Administrative overheads are 100% fixed.
• Selling overheads are completely variable.
• Normal production capacity of ABC Ltd. is 20,000 units.
• Indirect Expenses are absorbed in the cost accounts on the basis of normal production capacity.
• Notional rent of own premises charged in Cost Accounts is amounting to ` 12,000. You are required to:
(i) Prepare a Cost Sheet and ascertain the Profit as per Cost Records for the year ended 31st March, 2021.
(ii) Reconcile the Profit as per Financial Records with Profit as per Cost Records.
Ans. (i) Cost Sheet
(for the year ended 31st March, 2021)

(`) (`)
Direct material 6,50,000
Direct wages 3,50,000
Prime cost 10,00,000
Factory Overheads:
Variable (50% of ` 2,60,000) 1,30,000
Fixed (` 1,30,000 × 15,000/20,000) 97,500 2,27,500
Works cost 12,27,500
Administrative Overheads (` 1,05,000 × 15,000/20,000) 78,750
Notional Rent 12,000
Cost of production 13,18,250
Selling Overheads 85,000
Cost of Sales 14,03,250
Profit (Balancing figure) 96,750
Sales revenue 15,00,000

(ii) Statement of Reconciliation

(Reconciling profit shown by Financial and Cost Accounts)

(`) (`)
Profit as per Cost Account 96,750
Add: Dividend received 9,000
Add: Notional Rent 12,000 21,000
Less: Factory Overheads under-charged in Cost Accounts (` 2,60,000 – ` 32,500
2,27,500)
Less: Administrative expenses under-charged in Cost Accounts (` 1,05,000 – ` 26,250
78,750)
Less: Loss on sale of Investments 2,000 (60,750)

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Profit as per Financial Accounts 57,000

(Note: Solution can be done considering base profit as per Financial Accounts)

Q.3 Cost Ledger Control Account RTP May 18

As of 31st March, 2018, the following balances existed in a firm’s cost ledger, which is maintained separately on
a double entry basis:

Debit (`) Credit (`)

Stores Ledger Control A/c 3,20,000 −
Work-in-process Control A/c 1,52,000 −
Finished Goods Control A/c 2,56,000 −
Manufacturing Overhead Control A/c − 28,000
Cost Ledger Control A/c − 7,00,000
7,28,000 7,28,000

During the next quarter, the following items arose:

(`)
Finished Product (at cost) 2,35,500
Manufacturing overhead incurred 91,000
Raw material purchased 1,36,000
Factory wages 48,000
Indirect labour 20,600
Cost of sales 1,68,000
Materials issued to production 1,26,000
Sales returned (at cost) 8,000
Materials returned to suppliers 11,000
Manufacturing overhead charged to production 86,000

Required:
PREPARE the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-in-process Control A/c, Finished Stock
Ledger Control A/c, Manufacturing Overhead Control A/c, Wages Control A/c, Cost of Sales A/c and the Trial
Balance at the end of the quarter as per costing records.

Ans. Cost Ledger Control Account

Particulars (`) Particulars (`)

To Store Ledger Control A/c 11,000 By Opening Balance 7,00,000
To Balance c/d 9,84,600 By Store ledger control A/c 1,36,000
By Manufacturing Overhead Control A/c 91,000
By Wages Control A/c 68,600
9,95,600 9,95,600

Stores Ledger Control Account

Particulars (`) Particulars (`)

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To Opening Balance 3,20,000 By WIP Control A/c 1,26,000

To Cost ledger control A/c 1,36,000 By Cost ledger control A/c (Returns) 11,000
By Balance c/d 3,19,000
4,56,000 4,56,000

WIP Control Account

Particulars (`) Particulars (`)

To Opening Balance 1,52,000 By Finished Stock Ledger Control A/c 2,35,500
To Wages Control A/c 48,000 By Balance c/d 1,76,500
To Stores Ledger Control A/c 1,26,000
To Manufacturing Overhead Control 86,000
A/c
4,12,000 4,12,000

Finished Stock Ledger Control Account

Particulars (`) Particulars (`)

To Opening Balance 2,56,000 By Cost of Sales 1,68,000
To WIP Control A/c 2,35,500 By Balance c/d 3,31,500
To Cost of Sales A/c (Sales Return) 8,000
4,99,500 4,99,500

Manufacturing Overhead Control Account

Particulars (`) Particulars (`)

To Cost Ledger Control A/c 91,000 By Opening Balance 28,000
To Wages Control A/c 20,600 By WIP Control A/c 86,000
To Over recovery c/d 2,400
1,14,000 1,14,000

Wages Control Account

Particulars (`) Particulars (`)

To Transfer to Cost Ledger Control 68,600 By WIP Control A/c 48,000
A/c
By Manufacturing Overhead Control A/c 20,600
68,600 68,600

Cost of Sales Account

Particulars (`) Particulars (`)

To Finished Stock Ledger 1,68,000 By Finished Stock Ledger Control A/c (Sales 8,000
Control A/c return)
By Balance c/d 1,60,000
1,68,000 1,68,000

Trial Balance

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(`) (`)
Stores Ledger Control A/c 3,19,000
WIP Control A/c 1,76,500
Finished Stock Ledger Control A/c 3,31,500
Manufacturing Overhead Control A/c -- 2,400
Cost of Sales A/c 1,60,000
Cost ledger control A/c -- 9,84,600
9,87,000 9,87,000

Q.4 Reconciliation Statement RTP Nov 19

The financial books of a company reveal the following data for the year ended 31 st March, 20X8:

Opening Stock: (`)

Finished goods 625 units 53,125
Work-in-process 46,000
01.04.20X7 to 31.03.20X8
Raw materials consumed 8,40,000
Direct Labour 6,10,000
Factory overheads 4,22,000
Administration overheads (Production related) 1,98,000
Dividend paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest received 38,000
Rent received 46,000
Sales 12,615 units 22,80,000
Closing Stock: Finished goods 415 units 45,650
Work-in-process 41,200

The cost records provide as under:

➢ Factory overheads are absorbed at 70% of direct wages.
➢ Administration overheads are recovered at 15% of factory cost.
➢ Selling and distribution overheads are charged at ` 3 per unit sold.
➢ Opening Stock of finished goods is valued at ` 120 per unit.
➢ The company values work-in-process at factory cost for both Financial and Cost Profit Reporting.
Required:
(i) PREPARE a statements for the year ended 31st March, 20X8. Show
➢ the profit as per financial records
➢ the profit as per costing records.
(iii) PREPARE a statement reconciling the profit as per costing records with the profit as per Financial
Records.

Ans. (i) Statement of Profit as per Financial records (for the year ended March 31, 20X8)

(`) (`)
To Opening stock of 53,125 By Sales 22,80,000

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Finished Goods
To Work-in-process 46,000 By Closing stock of finished Goods 45,650
To Raw materials consumed 8,40,000 By Work-in-Process 41,200
To Direct labour 6,10,000 By Rent received 46,000
To Factory overheads 4,22,000 By Interest received 38,000
To Administration overheads 1,98,000
To Selling & distribution 72,000
overheads
To Dividend paid 1,22,000
To Bad debts 18,000
To Profit 69,725
24,50,850 24,50,850

Statement of Profit as per Costing records

(for the year ended March 31,20X8)

(`)
Sales revenue (A) (12,615 units) 22,80,000
Cost of sales:
Opening stock (625 units ×` 120) 75,000
Add: Cost of production of 12,405 units (Refer to working note 2) 21,63,350
Less: Closing stock (`174.39 × 415 units) (72,372)
Cost of goods sold (12,615 units) 21,65,978
Selling & distribution overheads (12,615 units ×` 3) 37,845
Cost of sales: (B) 22,03,823
Profit: {(A) – (B)} 76,177

(ii) Statement of Reconciliation

(Reconciling the profit as per costing records with the profit as per financial records)

(`) (`)
Profit as per Cost Accounts 76,177
Add: Administration overheads over absorbed (` 2,81,550 – ` 1,98,000) 83,550
Opening stock overvalued (` 75,000 – ` 53,125) 21,875
Interest received 38,000

Rent received 46,000

Factory overheads over recovered (` 4,27,000 – ` 4,22,000) 5,000 1,94,425
2,70,602

Less: Selling & distribution overheads under recovery (` 72,000 – ` 34,155

37,845)
Closing stock overvalued (` 72,372 – ` 45,650) 26,722

Dividend 1,22,000

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Bad debts 18,000 (2,00,877)

Profit as per financial accounts 69,725

Working notes:
1. Number of units produced
Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405

2. Cost Sheet

(`)
Raw materials consumed 8,40,000
Direct labour 6,10,000
Prime cost 14,50,000
Factory overheads (70% of direct wages) 4,27,000
Factory cost 18,77,000
Add: Opening work-in-process 46,000
Less: Closing work-in-process 41,200
Factory cost of goods produced 18,81,800
Administration overheads (15% of factory cost) 2,81,550
Cost of production of 12,405 units (Refer to working note 1) 21,63,350
Cost of production per unit:
Total Cost of Production 21, 63,350
= =`174.39
No.of unitsproduced 12, 405 units

Q.5 Reconciliation Statement RTP May 23

The financial records of Riva Private Limited showed a net profit of `1,69,500 for the year ended 31st March,
2022. The cost accounts, however, disclosed a net loss of ` 88,500 for the same period. The following information
were revealed as a result of scrutiny of the figures of cost accounts and financial accounts:

(`)
(i) (Administrative overhead under recovered 63,750.0
(ii) Factory overhead over recovered 3,37,500.0
(iii) Depreciation under charged in Cost Accounts 65,000.0
(iv) Dividend received 50,000.0
(v) Loss due to obsolescence charged in Financial Accounts 42,000.0
(vi) Income tax provided 1,09,000.0
(vii) Bank interest credited in Financial Accounts 34,000.0
(viii) Value of opening stock:

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In Cost Accounts 4,12,500.0

In Financial Accounts 3,62,500.0
(ix) Value of closing stock:
In Cost Accounts 3,13,750.0
In Financial Accounts 3,30,000.0
(x) Goodwill written-off in Financial Accounts 62,500.0
(xi) Notional rent of own premises charged in Cost Accounts 1,50,000.0
(xii) Provision for doubtful debts in Financial Accounts 37,500.0

Prepare a reconciliation statement by taking costing net loss as base.

Ans. Statement of Reconciliation

Sl. No. Particulars (`) (`)

Net loss as per Cost Accounts (88,500)
Additions
1 Factory O/H over recovered 3,37,500
2 Dividend Received 50,000
3 Bank Interest received 34,000
4 Difference in Value of Opening Stock 50,000
(4,12,500 – 3,62,500)
5 Difference in Value of Closing Stock 16,250
(3,30,000 – 3,13,7500)
6 Notional Rent of own Premises 1,50,000 6,37,750
Deductions
1 Administration O/H under recovered 63,750
2 Depreciation under charged 65,000
3 Loss due to obsolescence 42,000
4 Income tax Provided 1,09,000
5 Goodwill written-off 62,500
6 Provision for doubtful debts 37,500 (3,79,750)
Net Profit as per Financial A/c. 1,69,500

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13 JOB & BATCH COSTING

CHAPTER

Q.1 Batch Costing: Optimum run PY Nov 18

XYZ Ltd. has obtained an order to supply 48000 bearings per year from a concern. On a steady basis, it is
estimated that it costs ` 0.20 as inventory holding cost per bearing per month and the set-up cost per run of
bearing manufacture is ` 384.
You are required to:
(i) compute the optimum run size and number of runs for bearing manufacture.
(ii) compute the interval between two consecutive runs.
(iii) find out the extra costs to be incurred, if company adopts a policy to manufacture 8000 bearings per run
as compared to optimum run Size.
(iv) give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year.

Ans. (i) Optimum batch size or Economic Batch Quantity (EBQ):

2DS 2X48000X384
EBQ = = = 3919.18 or 3,920 units
C 2.4
Number of Optimum runs = 48,000 ÷ 3,920 = 12.245 or 13 run
(ii) Interval between 2 runs (in days) = 365 days ÷ 13 = 28 days
Or 365÷12.24=29.82 days
(iii) If 8,000 bearings are manufactures in a run:
Total cost = Set-up cost + Inventory holding cost
= `.384×(48,000÷8,000) + (8,000÷2)×`.2.4
= 2304+9,600 = 11,904
Extra cost = `(11,904 – 9,406*) =` 2,498/-
OR
Extra cost = ` (11,904 – 9,696*) = ` 2,208/-
* Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
Average Inventory = 3,920 units ÷ 2 = 1,960 units
Carrying Cost per unit per annum = `0.2 × 12 months = `2.4
Minimum Inventory Holding Costs = 1,960 units × `2.4 = `4,704
Total cost = Set-up cost + Inventory holding cost = (12.245×384) + 4704 = ` 9,406
(approx.)
OR
Total cost = Set-up cost + Inventory holding cost = (13×384) + 4704 = ` 9,696
(approx.)
(iv) To save cost the company should run at optimum batch size i.e. 3,920 Units. It saves ` 2,498 or 2208. Run
size should match with the Economic production run of bearing manufacture. When managers of a
manufacturing operation make decisions about the number of units to produce for each production run,
they must consider the costs related to setting up the production process and the costs of holding
inventory
Alternative presentation to part 3(a) (iii)
Statement showing Total Cost at Production Run size of 3,600 and 8,000 bearings

A. Annual requirement 48,000 48,000

B. Run Size 3,920 8,000
C. No. of runs (A/B) 12.245 6

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D. Set up cost per run ` 384 ` 384

E. Total set up cost (CxD) ` 4,702 ` 2,304
F. Average inventory (B/2) 1,960 4,000
G. Carrying cost per unit p.a. 2.40 2.40
H. Total Carrying cost (FxG) 4,704 9,600
I. Total cost (E+H) 9,406 11,904

Extra cost incurred, if run size is of 8,000= `11,904-9,406= ` 2,498

Q.2 Job Cost Sheet & Sp. PY Nov 19

The following data is presented by the supervisor of a factory for a Job:
` per unit
Direct Material 120
Direct Wages @ ` 4 per hour
(Departments A-4 hrs, B-7 hrs, C-2 hrs & D-2 hrs) 60
Chargeable Expenses 20
Total 200
Analysis of the Profit and Loss Account for the year ended
31st March, 2019

Material 2,00,000 Sales 4,30,000

Direct Wages
Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000 50,000
Special Store items 6,000
Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross Profit c/d 1,30,000
4,30,000 4,30,000
Selling Expenses 90,000 1,30,000
Net Profit 40,000 Gross Profit b/d
1,30,000 1,30,000
It is also to be noted that average hourly rates for all the four departments are similar. Required:
(i) Prepare a Job Cost Sheet.
(ii) Calculate the entire revised cost using the above figures as the base.
(iii) Add 20% profit on selling price to determine the selling price.

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Ans. (b) Job Cost Sheet

Customer Details ——— Job No._________________
Date of commencement —— Date of completion _________

Particulars Amount (`)

Direct materials 120
Direct wages:
Deptt. A ` 4.00 × 4 hrs. ` 16.00
Deptt. B ` 4.00 × 7 hrs. ` 28.00
Deptt. C ` 4.00 × 2 hrs. ` 8.00
Deptt. D ` 4.00 × 2 hrs. ` 8.00 60
Chargeable expenses 20
Prime cost 200
Overheads

12000 ` 16
Deptt. A = x100 =100% of ` 16
12000

6000 ` 21
Deptt. B = x100 = 75% of ` 28
8000
9000 ` 7.20
Deptt. C = x100 = 90% of ` 8
10000
9000
= x100 = 90% of ` 8 = ` 7.20
10000

17000 ` 6.80 51.00

Deptt. D = x100 = 85% of ` 8
20000
Works cost 251.00
Selling expenses =100 = 30% of work cost 75.30
Total cost 326.30
Profit (20% profit on selling price i.e 25% of total cost) 81.58
Selling price 407.88

Q.3 Total Cost for Job & Price RTP Nov 20

AP Ltd. received a job order for supply and fitting of plumbing materials. Following are the details related with
the job work:
Direct Materials
AP Ltd. uses a weighted average method for the pricing of materials issues. Opening stock of materials as on 12th
August 2020:
- 15mm GI Pipe, 12 units of (15 feet size) @ `600 each
- 20mm GI Pipe, 10 units of (15 feet size) @ ` 660 each
- Other fitting materials, 60 units @ ` 26 each
- Stainless Steel Faucet, 6 units @ ` 204 each
- Valve, 8 units @ ` 404 each

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Purchases:
On 16th August 2020:
- 20mm GI Pipe, 30 units of (15 feet size) @ ` 610 each
- 10 units of Valve @ ` 402 each
On 18th August 2020:
- Other fitting materials, 150 units @ ` 28 each
- Stainless Steel Faucet, 15 units @ ` 209 each
On 27th August 2020:
- 15mm GI Pipe, 35 units of (15 feet size) @ ` 628 each
- 20mm GI Pipe, 20 units of (15 feet size) @ ` 660 each
- Valve, 14 units @ ` 424 each
Issues for the hostel job:
On 12th August 2020:
- 20mm GI Pipe, 2 units of (15 feet size)
- Other fitting materials, 18 units
On 17th August 2020:
- 15mm GI Pipe, 8 units of (15 feet size)
- Other fitting materials, 30 units
On 28th August 2020:
- 20mm GI Pipe, 2 units of (15 feet size)
- 15mm GI Pipe, 10 units of (15 feet size)
- Other fitting materials, 34 units
- Valve, 6 units
On 30th August 2020:
- Other fitting materials, 60 units
- Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ `100 per hour (includes 12 hours overtime)
Helper: 192 hours @ `70 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.
Overheads:
Overheads are applied @ `26 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on sales price.
You are required to
(a) CALCULATE the total cost of the job.
(b) CALCULATE the price to be charged from the customer.

Ans. (a) Calculation of Total Cost for the Job:

Particulars Amount (`) Amount (`)

Direct Material Cost:
- 15mm GI Pipe (Working Note- 1) 11,051.28
- 20mm GI Pipe (Working Note- 2) 2,588.28
- Other fitting materials (Working Note- 3) 3,866.07
- Stainless steel faucet
 6x204 + 15x209 
15 units x  
 21units  3,113.57
- Valve

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 8x404 + 10x402 + 14x424 

6 units x   2,472.75 23,091.95
 32units 
Direct Labour:
- Plumber [(180 hours × `100) + (12 hours ×`50)] 18,600.00
- Helper [(192 hours × `70) + (24 hours × `35)] 14,280.00 32,880.00
- Overheads[`26 × (180 + 192) hours] 9,672.00
Total Cost 65,643.95

(b) Price to be charged for the job work:

Amount (`)
Total Cost incurred on the job 65,643.95

 65643.95  21,881.32
Add: 25% Profit on Job Price  x25% 
 75%  87,525.27
Working Note:
1. Cost of 15mm GI Pipe

Date Amount (`)

17-08-2020 8 units × ` 600 4,800.00
28-08-2020 6,251.28
 4x600+35x628 
10 units x  
 39units  11,051.28

2. Cost of 20mm GI Pipe

Date Amount (`)

12-08-2020 2 units × ` 660 1,320.00
28-08-2020  8x660+30x610+20x660 
2 units x  
 58 units  1,268.28
2,588.28

3. Cost of Other fitting materials

Date Amount (`)

12-08-2020 18 units × ` 26 468.00
17-08-2020 30 units × ` 26 780.00
28-08-2020  12x26+150x28  946.96
34 units x  
 162units 
30-08-2020  12x26+150x28 
60 units x  
 162units  1,671.11
3,866.07

Q.4 Cost & Profit Per Batch RTP May 23

A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing six months.
Every month a batch order is opened against which materials and labour hours are booked at actual. Overheads

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CA Amit Sharma

are levied at a rate per labour hour. The selling price contracted for is ` 80 per piece. From the following data.
COMPUTE the cost and profit per piece of each batch order and overall position of the order for 1,200 pieces.

Month Batch Output Material cost Direct wages Direct labour

(Pieces) (`) (`) (Hours)
January 210 6,500 1,200 240
February 200 6,400 1,400 280
March 220 6,800 1,500 280
April 180 6,300 1,400 270
May 200 7,000 1,500 300
June 220 7,200 1,600 320
The other details are:

Month Chargeable expenses Direct labour

(`) Hours
January 1,20,000 4,800
February 1,05,600 4,400
March 1,20,000 5,000
April 1,05,800 4,600
May 1,30,000 5,000
June 1,20,000 4,800

Ans.
Particulars Jan. (`) Feb. (`) March (`) April (`) May (`) June (`) Total (`)
Batch output(in pieces) 210 200 220 180 200 220 1,230
Sale value @ `80 16,80 16,00 17,60 14,40 16,00 17,60 98,40
Material cost 6,500 6,400 6,800 6,300 7,000 7,200 40,20
Direct wages 1,200 1,400 1,500 1,400 1,500 1,600 8,600
Chargeable expenses* 6,000 6,720 6,720 6,210 7,800 8,000 41,45
Total cost 13,70 14,52 15,02 13,91 16,30 16,80 90,25
Profit per batch 3,100 1,480 2,580 490 (300) 800 8,150
Total cost per piece 65.2 72.6 68.3 77.3 81.5 76.4 73.4
Profit per piece 14.8 7.4 11.7 2.7 (1.5) 3.6 6.6

Overall position of the order for 1,200 pieces

Sales value of 1,200 pieces @ ` 80 per piece ` 96,000
Total cost of 1,200 pieces @ ` 73.4 per piece ` 88,080
Profit ` 7,920
Chargeable expenses
* Direct labour hours for batch
Direct labour hour for the month

Q.5 OH Recover Rate & Cost Sheet RTP Nov 23

SM Motors Ltd. is a manufacturer of auto components. Following are the details of expenses for the year 2022-

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23:
(`)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2023-24, the company has received an order from a car manufacturer where it estimates
that the cost of material and labour will be ` 80,00,000 and ` 40,50,000 respectively. The company charges
factory overhead as a percentage of direct labour and administrative overheads as a percentage of factory
cost based on previous year's cost.
Cost of delivery of the components at customer's premises is estimated at ` 4,50,000.
You are required to:
(i) Calculate the overhead recovery rates based on actual costs for 2022-23.
(ii) Prepare a Job cost sheet for the order received and the price to be quoted if the desired profit is 25%
on sales.

Ans. (i) Calculation of Overhead Recovery Rate:

3080000
Factory Overhead Recovery Rate = 100 = 34% of Direct labour
9050000
2050400
Administrative Overhead Recovery Rate = 100 = 6.91% of Factory Cost
29680000
Working Note: Calculation of Factory Cost in 2022-23

Particulars Amount (`)

Opening Stock of Material 15,00,000

Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)

Material Consumed 1,75,50,000

Direct Labour 90,50,000

Prime Cost 2,66,00,000

Factory Overhead 30,80,000

Factory Cost 2,96,80,000

(ii) Job Cost Sheet for the order received in 2023-24

Particulars Amount (`)

Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of ` 40,50,000) 13,77,000
Factory Cost 1,34,27,000
Administrative Overhead (6.91% of `1,34,27,000) 9,27,806
Cost of delivery 4,50,000
Total Cost 1,48,04,806

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Add: Profit @ 25% of Sales or 33.33% of cost 49,34,935

Sales value (Price to be quoted for the order) 1,97,39,741

Hence the price to be quoted is `1,97,39,741.

Q.6 Economic Batch Quantity MTP May 22(2)

Arnav Ltd. operates in beverages industry where it manufactures soft -drink in three sizes of Large (3 litres),
Medium (1.5 litres) and Small (600 ml) bottles. The produc ts are processed in batches. The 5,000 litres capacity
processing plant consumes electricity of 90 Kilowatts per hour and a batch takes 1 hour 45 minutes to complete.
Only symmetric size of products can be processed at a time. The machine set-up takes 15 minutes to get ready
for next batch processing. During the set-up, power consumption is only 20%.
(I) The current price of Large, Medium and Small are ` 150, ` 90 and ` 50 respectively.
(II) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-C are required which
costs ` 0.50 and `1,000 per litre respectively.
(III) 20 direct workers are required. The workers are paid ` 880 for 8 hours shift of work.
(IV) The average packing cost per bottle is `3
(V) Power cost is ` 7 per Kilowatt -hour (Kwh)
(VI) Other variable cost is ` 30,000 per batch.
(VII) Fixed cost (Administration and marketing) is ` 4,90,00,000.
(VIII) The holding cost is ` 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of products:

Large Medium Small

3,00,000 7,50,000 20,00,000

Required:
CALCULATE net profit/ loss of the organisation and also COMPUTE Economic Batch Quantity (EBQ).

Ans. Workings:
1. Maximum number of bottles that can be processed in a batch:

5000 ltrs
=
Bottle volume

Large Medium Small

Qty (ltr) Max bottles Qty (ltr) Max bottles Qty (ml) Max bottles

3 1,666 1.5 3,333 600 8,333

For simplicity of calculation small fractions has been ignored.

2. Number of batches to be run:

Large Medium Small Total

A Demand 3,00,000 7,50,000 20,00,000
B Bottles per batch (Refer WN-1) 1,666 3,333 8,333
C No. of batches [A÷B] 180 225 240 645

For simplicity of calculation small fractions has been ignored.

3. Quantity of Material-W and Material C required to meet demand:

Particulars Large Medium Small Total

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

B Qty per bottle (Litre) 3 1.5 0.6

C Output (Litre) [A×B] 9,00,000 11,25,000 12,00,000 32,25,000

D Material-W per litre of 14 14 14

output (Litre)

E Material-W required (Litre) 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000

[C×D]

F Material-C required per litre 25 25 25

of output (ml)

G Material-C required (Litre) 22,500 28,125 30,000 80,625

[(C×F)÷1000]

4. No. of Man-shift required:

Large Medium Small Total

A No. of batches 180 225 240 645

B Hours required per batch (Hours) 2 2 2

C Total hours required (Hours) [A×B] 360 450 480 1,290

D No. of shifts required [C÷8] 45 57 60 162

E Total manshift [D×20 workers] 900 1,140 1,200 3,240

For simplicity of calculation small fractions has been ignored.

5. Power consumption in Kwh

Large Medium Small Total

For processing

A No. of batches 180 225 240 645

B Hours required per batch (Hours) 1.75 1.75 1.75 1.75

C Total hours required (Hours) [A×B] 315 393.75 420 1,128.75

D Power consumption per hour (Kwh) 90 90 90 90

E Total Power consumption (Kwh) [C×D] 28,350 35,437.5 37,800 1,01,587

F Per batch consumption* (Kwh) [E÷A] 157.5 157.5 157.5 157.5

For set-up

G Hours required per batch (Hours) 0.25 0.25 0.25 0.25

H Total hours required (Hours) [A×G] 45 56.25 60 161.25

I Power consumption per hour (Kwh) [20%×90] 18 18 18 18

J Total Power consumption 810 1,012.5 1,080 2,902.5

(Kwh) [H×I]

K Per batch consumption* (Kwh) [J÷A] 4.5 4.5 4.5 4.5

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* Per batch consumption can be directly calculated as [Hours required per batch x Power consumption per
hour]
Calculation of Profit/ loss per batch:

Particulars Large Medium Small Total

A Demand (bottle) 3,00,000 7,50,000 20,00,000 30,50,000
B Price per bottle (`) 150 90 50
C Sales value (`) [A×B] 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000
Direct Material cost:
E Material-W (`) [Qty in 63,00,000 78,75,000 84,00,000 2,25,75,000
WN-3 × `0.50]
F Material-C (`) [Qty in 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000
WN-3 × `1,000]
G [E+F] 2,88,00,000 3,60,00,000 3,84,00,000 10,32,00,000
H Direct Wages (`) [Man-shift 7,92,000 10,03,200 10,56,000 28,51,200
in WN-4 × × `880]
I Packing cost (`) [A×`3] 9,00,000 22,50,000 60,00,000 91,50,000
Power cost (`)
J For processing (`) 1,98,450 2,48,062.5 2,64,600 7,11,112.5
[WN-5 × `7]
K For set-up time (`) [WN-5 × 5,670 7,087.5 7,560 20,317.5
`7]
L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430
M Other variable cost (`) [No. 54,00,000 67,50,000 72,00,000 1,93,50,000
of batch in WN-2 × `30,000]
N Total Variable cost per 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630
batch [G+H+I+L+M]
O Profit/loss before 89,03,880 2,12,41,650 4,70,71,840 7,72,17,370
fixed cost [C-N]
P Fixed Cost 4,90,00,000
Q Net Profit [O-P] 2,82,17,370

Computation of Economic Batch Quantity (EBQ):

2xDxS
EBQ =
C
D = Annual Demand for the Product = Refer A below
S = Set-up cost per batch = Refer D below
C = Carrying cost per unit per annum =Refer E below

Particulars Large Medium Small

A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
B Power cost for set-up time (`) 31.50 31.50 31.50
[Consumption per batch in WN-5 × `7]

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Fast Cost FM by AB Chapter - 13

 Job & batch Costing
CA Amit Sharma

C Other variable cost (`) 30,000 30,000 30,000

D Total Set-up cost [B+C] 30,031.50 30,031.50 30,031.50
E Holding cost: 1.00 1.00 1.00
F EBQ (Bottle) 1,34,234 2,12,243 3,46,592

226 By CA Amit Sharma

Chapter - 13 Fast Cost FM by AB