Cost & management

Accounting

Past Papers Compilation

Intermediate
3 Attempts

3rd Edition
• Questions from Dec ’21 to Nov ‘22
• For November ‘23 Attempt
• All Questions in Chapter wise format
•

Vishesh Khatwani | 8555070670

 Table of Contents
Sr. No Particulars Page Number

1 Introduction to Cost & Management Accounting P 1.1 – P 1.3

2 Material Cost P 2.1 - P 2.4
3 Employee Cost & Direct Expenses P 3.1 – P 3.5
4 Overheads, Absorption Costing Method P 4.1 – P 4.6
5 Activity Based Costing P 5.1 – P 5.5
6 Cost Sheet P 6.1 – P 6.5
7 Cost Accounting System P 7.1 – P 7.3
8 Unit & Batch Costing P 8.1
9 Job Costing and Contract Costing P 9.1 – P 9.5
10 Process & Operating Costing P 10.1 – P 10.5
11 Joint Products & By Products P 11.1 – P 11.2
12 Service Costing P 12.1 – P 12.4
13 Standard Costing P 13.1 – P 13.5
14 Marginal Costing P 14.1 – P 14.6
15 Budget & Budgetary Costing P 15.1 – P 15.5
Costing Past Paper NEW Course Compilation includes:
3 Past Paper’s: Dec’21, May ’22 , Nov ‘22

Disclaimer:
While we have made every attempt to ensure that the information contained in this compilation has been obtained from
reliable sources (from the answers given by the Institute of Chartered Accountants of India), Vivitsu is not responsible for any
errors or omissions, or for the results obtained from the use of this information. All information in this site is provided " as is",
with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and
without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability, and
fitness for a particular purpose. In no event will Vivitsu, its related partnerships or corporations, or the partners, agents or
employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in thi s
Site or for any consequential, special, or similar damages, even if advised of the possibility of such damages.

Vishesh Khatwani | 8555070670

 P 1.1

Chapter 1
Introduction to Cost and Management Accounting
Question 1
Differentiate between cost control and cost reduction. (May ‘19, 5 Marks , 5 Marks Dec ’21)
Answer 1
Cost Control Cost Reduction
Cost control aims at maintaining the costs in Cost reduction is concerned with reducing costs.
accordance with the eavours to better them It challenges all standards and end endeavours
continuously to improvise them continuously
Cost control seeks to attain lowest possible Cost reduction recognizes no conditions
cost under existing conditions. permanent, since a change will result in lower
Cost.
In case of Cost Control, emphasis is on past and In case of cost reduction it is on present and
present. future.
Cost Control is a preventive function Cost reduction is a corrective function. It
operates even when an efficient cost control
system exists.
Cost control ends when targets are achieved. Cost reduction has no visible end and is a
Continuous process.

Question 2
Briefly explain the ‘techniques of costing’. (5 Marks Dec ‘21)
Answer 2
Techniques Description
Uniform When a number of firms in an industry agree among themselves to follow the same
Costing system of costing in detail, adopting common terminology for various items and
processes they are said to follow a system of uniform costing.
Advantages of such a system are:
i. A comparison of the performance of each of the firms can be made with that
of another, or with the average performance in the industry.
ii. Under such a system, it is also possible to determine the cost of production of
goods which is true for the industry as a whole. It is found useful when tax-relief
or protection is sought from the Government.
Marginal It is defined as the ascertainment of marginal cost by differentiating between fixed
Costing and variable costs. It is used to ascertain effect of changes in volume or type of
output on profit.
Standard It is the name given to the technique whereby standard costs are pre-determined
Costing and subsequently compared with the recorded actual costs. It is thus a technique of
an cost ascertainment and cost control. This technique may be used in conjunction with
d Variance any method of costing. However, it is especially suitable where the manufacturing
Analysis method involves production of standardized goods of repetitive nature.
Historical It is the ascertainment of costs after they have been incurred. This type of costing
Costing has limited utility.
• Post Costing: It means ascertainment of cost after production is completed.
• Continuous costing: Cost is ascertained as soon as the job is completed or
even when the job is in progress.
Absorption It is the practice of charging all costs, both variable and fixed to operations, processes
Costing or products. This differs from marginal costing where fixed costs are excluded.

Vishesh Khatwani | 8555070670

Chapter 1 Introduction to Cost and Management Accounting
 P 1.2

Direct costing Direct costing is a specialized form of cost analysis that only uses variable costs to
make decisions. It does not consider fixed costs, which are assumed to be associated
with the time periods in which they are incurred.

Question 3
Identify the methods of costing from the following statements:
(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Costs ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units produced. (5 Marks) (May’22)

Answer 3
Method of costing followed:

Situation Method of costing

(i) Costs are directly charged to a group of products. Batch costing
(ii) Nature of the product is complex and method cannot be Multiple costing
ascertained.
(iii) Cost is ascertained for a single product. Unit/ Single/Output costing
(iv) All costs are directly charged to a specific job. Job costing
(v) Costs are charged to operations and averaged over units Process costing
produced.

Question 4
Mention the cost units (physical measurements) for the following
Industry/product:
(i) Automobile
(ii) Gas
(iii) Brick works
(iv) Power

(v) Steel

(vi) Transport (by road)

(vii) Chemical

(viii) Oil

(ix) Brewing
(x) Cement
(5 Marks Nov 22)

Vishesh Khatwani | 8555070670

Chapter 1 Introduction to Cost and Management Accounting
 P 1.3

Answer 4
Industry or Product Cost
Units
Automobile Number
Gas Cubic feet
Brick works 1,000 bricks
Power Kilo-watt hour (kWh)
Steel Tonne
Transport (by road) Passenger- kilometer or Tonne-
kilometer
Chemical Litre, gallon, kilogram, tonne etc.
Oil Barrel, tonne, litre
Brewing Barrel
Cement Ton/ per bag etc.

Vishesh Khatwani | 8555070670

Chapter 1 Introduction to Cost and Management Accounting
 P 2.1

Chapter 2
Material Cost
Question 1
XYZ Ltd. uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process
and has provided the following data for the year ended on 31 st March, 2021:
Particulars Material A Material B
(₹) (₹)
Opening stock as on 01.04.2020 30,000 32,000
Purchase during the year 90,000 51,000
Closing stock as on 31.03.2021 20,000 14,000
(i) You are required to calculate:
(a) The inventory turnover ratio of ‘Material A’ and ‘Material B’.
(b) The number of days for which the average inventory is held for both materials ‘A’ and ‘B’.
(ii) Based on above calculations, give your comments. (Assume 360 days in a year.) (5 Marks
Dec ’21) (Similar to May 18 but different figures)

Answer 1
(i) Calculation of Inventory Turnover ratios and number of days:
Material A (₹) Material B (₹)
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
1,20,000 83,000
Less: Closing stock 20,000 14,000
Materials consumed 1,00,000 69,000
Average inventory: (Opening Stock + Closing 25,000 23,000
Stock) ÷ 2
(a) Inventory Turnover ratio: (Consumption 4 times 3 times
÷ Average inventory)
(b) Number of days for which the average 90 days 120 days
inventory held (Number of Days in a
year/IT ratio)
(ii) Comments: Material A is moving faster than Material B. Or Material A has a less holding period.

Question 2
What is Bill of Material? Describe the uses of Bill of Material in following departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department (5 Marks Dec ‘21)
Answer 2
Bill of Material: It is a detailed list specifying the standard quantities and qualities of materials
and components required for producing a product or carrying out of any job.
Uses of Bill of Material in different department:
Purchase Production Stores Cost/ Accounting
Department Department Department Department

Vishesh Khatwani | 8555070670

Chapter 2 Material Cost
 P 2.2

Materials are Production is planned It is used as a It is used to estimate cost

procured according to the nature, reference document and profit. Any purchase,
(purchased) on volume of the materials while issuing materials issue and usage are
the basis of required to be used. to the requisitioning compared/ verified
specifications Accordingly, material department. against this document.
mentioned in it. requisition lists are
prepared.

Question 3
A Limited a toy company purchases its requirement of raw material from S Limited at ₹ 120 per kg.
The company incurs a handling cost of ₹ 400 plus freight of ₹ 350 per order. The incremental
carrying cost of inventory of raw material is ₹ 0.25 per kg per month. In addition the cost of
working capital finance on the investment in inventory of raw material is ₹ 15 per kg per annum.
The annual production of the toys is 60,000 units and 5 units of toys are obtained from one kg. of
raw material.
Required:
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost. Assume 360
days in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ.(5
Marks)(May’22)

Answer 3
60,000 units
Annual requirement of raw material in kg. (A)=5 units per kg. = 12,000 kg.

Ordering Cost (Handling & freight cost) (O) = ₹ 400 + ₹ 350 = ₹ 750
Carrying cost per unit per annum i.e. inventory carrying cost + working capital cost (c × i)
= (₹ 0.25 × 12 months) + ₹15= ₹ 18 per kg

2 12,000kgs×₹750
(i) E.O.Q.=√ = 1,000 kg.
₹18

(ii) Frequency of orders for procurement:

Annual consumption (A)= 12,000 kg.

Quantity per order (EOQ) = 1,000 kg.

No. of orders per annum

𝐴 12,000kg
[𝐸𝑂𝑄]= 1,000kg = 12

Frequency of placing orders (in months

12 𝑚𝑜𝑛𝑡ℎ𝑠
= 12 𝑜𝑟𝑑𝑒𝑟𝑠 = 1 months

360𝑑𝑎𝑦𝑠
Or, (in days) = = 30 days
12 𝑜𝑟𝑑𝑒𝑟𝑠

(iii) Calculation of total ordering cost and total inventory carrying cost as per EOQ:
Amount/Quantity
Size of the order 1,000 kg.
No. of orders 12
Cost of placing orders ₹ 9,000 (12 orders × ₹ 750)

Vishesh Khatwani | 8555070670

Chapter 2 Material Cost
 P 2.3

Inventory carrying cost ₹ 9,000 (1,000 kg. × ½ × ₹ 18)

Total Cost ₹18,000

Question 4
Write down the treatment of following items associated with purchase of materials.
(i) Cash discount
(ii) IGST
(iii) Demurrage
(iv) Shortage
(v) Basic Custom Duty(5 Marks) (May’22)

Answer 4
Treatment of items associated with purchase of materials is tabulated as below
S. Items Treatment
No.
(i) Cash Discount Cash discount is not deducted from the purchase price. It is treated
as interest and finance charges. It is ignored.
(ii) Integrated Goods and Integrated Goods and Service Tax (IGST) is paid on inter- state
Service Tax (IGST) supply of goods and provision of services and collected from the
buyers. It is excluded from the cost of purchase if credit for the
same is available. Unless mentioned specifically it should not form
part of cost of purchase.
(iii) Demurrage Demurrage is a penalty imposed by the transporter for delay in
uploading or offloading of materials. It is an abnormal cost and not
included with cost of purchase
(iv) Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units absorb the cost of
shortage due to normal reasons. Losses due to breaking of bulk,
evaporation, or due to any unavoidable conditions etc. are the
reasons of normal loss.
Shortage due to abnormal reasons: Shortage arises due to abnormal
reasons such as material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the good units. Losses due
to abnormal reasons are debited to costing profit and loss account.
(v) Basic Custom Duty Basic Custom duty is paid on import of goods from outside India. It
is added with the purchase cost.

Question 5
MM Ltd. uses 7500 valves per month which is purchased at a price of ₹ 1.50 per unit. The carrying
cost is estimated to be 20% of average inventory investment on an annual basis. The cost to
place an order and getting the delivery is ₹ 15. It takes a period of 1.5 months to receive a
delivery from the date of placing an order and a safety stock of 3200 valves is desired.
You are required to determine:
(i) The Economic Order Quantity (EOQ) and the frequency of orders.
(ii) The re-order point.
(iii) The Economic Order Quantity (EOQ) if the valve cost ₹ 4.50 each instead of 1.50
each.
(Assume a year consists of 360 days) (5 Marks Nov 22)
Vishesh Khatwani | 8555070670
Chapter 2 Material Cost
 P 2.4

Answer 5
(i) Calculation of Economic Order Quantity
Annual requirement (A) = 7500×12= 90,000 Valves
Cost per order (O) = ₹ 15
Inventory carrying cost (i) = 20%
Cost per unit of spare (c) = ₹ 1.5
Carrying cost per unit (i × c) = ₹ 1.5 × 20% = ₹ 0.30
2 ×𝐴×𝑂
Economic Order Quantity (EOQ) = √ 𝑖×𝑐
2×90,000×15
=√ 0.3
= 3,000 Valves

Frequency of order or Number of Orders = 90,000/3,000 = 30 orders.

So Order can be placed in every 12 (360days/30) days
(ii) Re-order Quantity = {Maximum Consumption X Maximum lead time} + safety Stock
= {7500X1.5} + 3200 = 14,450 Valves
(iii) Calculation of Economic Order Quantity if valve costs ₹ 4.50
Carrying cost is 20% of ₹ 4.50 = ₹ 0.90
2 ×𝐴×𝑂
Economic Order Quantity (EOQ) = √ 𝑖×𝑐
2×90,000×15
=√ 0.9

= 1732.0508 units or 1733 Valves

Question 6
Which system of inventory management is known as 'Demand pull' or 'Pull through'
system of production? Explain. Also, specify the two principles on which this system is
based.(5 Marks Nov 22)

Answer 6
Just in Time (JIT) Inventory Management is also known as ‘Demand pull’ or ‘Pull through’
system of production. In this system, production process actually starts after the order for
the products is received. Based on the demand, production process starts and the
requirement for raw materials is sent to the purchase department for purchase.
It is a system of inventory management with an approach to have a zero inventories in
stores. According to this approach material should only be purchased when it is actually
required for production.
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when they
want.

Vishesh Khatwani | 8555070670

Chapter 2 Material Cost
 P 3.1

Chapter 3
Employee Cost and Direct Expenses
Question 1
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:
(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. (5
Marks Dec ’21)
Answer 1
(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 /10 × 8 × ₹ 150) 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 𝑋 𝐻𝑜𝑢𝑟𝑠 𝑊𝑜𝑟𝑘𝑒𝑑)+(𝑅𝑎𝑡𝑒 𝑋 50% 𝑜𝑓 𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑)
= = ₹ 180
𝐻𝑜𝑢𝑟𝑠 𝑊𝑜𝑟𝑘𝑒𝑑

(𝑅𝑠.150𝑋𝑇)+𝑅𝑠.150 𝑋 50% (10−𝑇)

𝑇
= Rs. 180

150T + 750 -75T = 180T

180T-75T = 750
750
T = 105 = 7.14 hours

Question 2
Discuss the steps involved in setting labour time standards. (5 Marks Dec ‘21)
Answer 2
Procedure of Setting Labour Time Standards
The following are the steps involved in setting labour standards:
(a) Standardization: Products to be produced are decided based on production plan and customer's
order.
(b) Labour specification: Types of labour and labour time is specified. Labour time specification is
based on past records and it takes into account normal wastage of time.
(c) Standardization of methods: Selection of proper machines to use proper sequence and method
of operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations to be performed
is prepared.
Vishesh Khatwani | 8555070670
Chapter 3 Employee Cost and Direct Expenses
 P 3.2

(e) Time and motion study: It is conducted for selecting the best way of completing the job or
motions to be performed by workers and the standard time which an average worker will take for
each job. This also takes into account the learning efficiency and learning effect.
(f) Training and trial: Workers are trained to do the work and time spent at the time of trial run is
noted down.

Question 3
PQR Limited has replaced 72 workers during the quarter ended 31st March 2022. The labour
rates for the quarter are as follows:
Flux method 16%
Replacement method 8%
Separation method 5%
You are required to ascertain:
(i) Average number of workers on roll (for the quarter),
(ii) Number of workers left and discharged during the quarter,
(iii) Number of workers recruited and joined during the quarter,
(iv) Equivalent employee turnover rates for the year. (5 Marks)(May’22)

Answer 3
Working Note:
(i) Average number of workers on roll (for the quarter):
Employee Turnover rate using Replacement method
No of replacements
=Average number of workers on roll × × 100

8 72
Or,10 = =Average number of workers on roll × × 100

72×100
Or, Average number of workers on roll=Average number of workers on roll × =900

(ii) Number of workers left and discharged:

Employee turnover rate (Separation method
No of Separations(S) 5 𝑆
=Average number of workers on roll ×
× 100=10 = 900 Or, S = 45 Hence, number of workers left and
discharged comes to 45

(iii) Number of workers recruited and joined:

Employee turnover rate (Flux method)
No. of Separations ∗ (S) + No. of Accessions(A)
Average number of workers on roll

16 45+𝐴 1,44,00
Or ,10 − 900
Or, [ 100
− 45]=99
16%
Using Flux method = 1
× 4= 64%

8%
Using Replacement method= × 4= 32%
1

Vishesh Khatwani | 8555070670

Chapter 3 Employee Cost and Direct Expenses
 P 3.3

5%
Using Separation method= × 4= 20%
1

Question 4
A manufacturing department of a company has employed 120 workers. The standard output of
product ''NPX" is 20 units per hour and the standard wage rate is ₹ 25 per labour hour.

In a 48 hours week, the department produced 1,000 units of 'NPX' despite 5% of the time paid being
lost due to an abnormal reason. The hourly wages actually paid were ₹ 25.70 per hour.

Calculate:

(i) Labour Cost Variance

(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Idle time Variance (5 Marks)(May’22)

Answer 4
Working Notes:

1. Calculation of standard man hours

When 120 worker works for 1 hr., then the std. output is 20 units.
Std. man hour per unit
120ℎ𝑢𝑟𝑠
= 20𝑢𝑛𝑖𝑡𝑠 = 6ℎ𝑢𝑟𝑠

1. Calculation of std. man hours for actual output

Total std. man hours = 1,000 units × 6 hrs. = 6,000 hrs.

Standard for actual Actual

Hours Rate Amount(₹) Actual hrs.paid Idle time Production Rate (₹) Amount
(₹) hrs. hrs. paid (₹)
6,000 25 1,50,000 5,760 288 5,472 25.70 1,48,032
(48 hrs. x 120
workers)
(i) Labour cost variance
= Std. labour cost – Actual labour cost

= 1,50,000 – 1,48,032 = ₹ 1,968 F

(ii) Labour rate variance

= (SR – AR) × AHPaid

= (25 - 25.70) × 5,760 = ₹ 4,032 A

(iii) Labour efficiency variance

= (SH – AH) × SR

= (6,000 – 5,472) × 25 = ₹ 13,200 F

(iv) Labour Idle time variance

= Idle Hours × SR

= 288 × 25 = ₹ 7,200 A
Vishesh Khatwani | 8555070670
Chapter 3 Employee Cost and Direct Expenses
 P 3.4

Note: Variances can also be calculated for one worker instead of 120.

Question 5
Explain the treatment of Overtime Premium in following situations:

(i) SV & Co. wants to grab some special orders, and overtime is required to meet the same.
(ii) Dept. X has to work overtime to make up a shortfall in production due to some fault of
management in dept. Y.
(iii) S Ltd. has to work overtime regularly throughout the year as a policy due to the workers'
shortage.
(iv) Due to flood in Odisha, RS Ltd. has to work overtime to complete the job.
(v) A customer requested the company MN Ltd. to expedite the job because of his urgency of
work. (5 Marks) (May’22)

Answer 5
Treatment of Overtime premium in different situations
Situation Treatment
(i) SV & Co. wants to grab some special If overtime is required to cope with general production
orders, and overtime is required to programmes or for meeting urgent orders, the overtime
meet the same. premium should be treated as overhead cost of the
particular department or cost centre which works
overtime.
(ii) Dept. X has to work overtime to make up If overtime is worked in a department due to the fault of
a shortfall in production due to some another department, the overtime premium should be
fault of management in dept. Y. charged to the latter
department (Y).
(iii) S Ltd. has to work overtime regularly The overtime premium is treated as a part of employee
throughout the year as a policy due to cost and job is charged at an effective average wage rate.
the workers’ shortage.
(iv) Due to flood in Odisha, RS Ltd. has to Overtime worked on account of abnormal conditions
work overtime to complete the job. such as flood, earthquake etc., should not be charged to
cost, but to
Costing Profit and Loss Account.
(v) A customer requested the company MN Where overtime is worked at the request of the
Ltd. to expedite the job because of his customer, overtime premium is also charged to the job/
urgency of work. customer directly.

Question 6
A skilled worker, in PK Ltd., is paid a guaranteed wage rate of ₹ 15.00 per hour in a 48-
hour week. The standard time to produce a unit is 18 minutes. During a week, a skilled
worker -Mr. ‘A’ has produced 200 units of the product. The Company has taken a drive
for cost reduction and wants to reduce its labour cost.
You are required to:
(i) Calculate wages of Mr. ‘A’ under each of the following methods:
(A) Time rate,
(B) Piece -rete with a guaranteed weekly wage,
(C) Halsey Premium Plan
(D) Rowan Premium Plan
(ii) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium
Plan, the company should follow. (6 Marks Nov 22)
Vishesh Khatwani | 8555070670
Chapter 3 Employee Cost and Direct Expenses
 P 3.5

Answer 6
(i) Calculation of wages of Mr. ‘A’ under different wage schemes:
A. Time rate
Wages = Time Worked × Rate for the time
= 48 hours x ₹ 15
= ₹ 720
B. Piece rate with a guaranteed weekly wage
Wages = Number of units produced × Rate per unit
= 200 units x ₹ 4.50*
= ₹ 900
*(₹ 15 / 60 minutes) x 18 minutes = ₹ 4.50
C. Halsey Premium Plan
Wages = Time taken × Time rate + 50% of time saved × Time rate
Wages = Time taken × Time rate + 50% (Standard time – Actual time) ×
Time rate
= (48 hours x ₹ 15) + 50% of (60 hours# – 48 hours) x ₹ 15
= ₹ 720 + ₹ 90
= ₹ 810
#(200 units x 18 minutes) / 60 minutes = 60 hours
D. Rowan Premium Plan
𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑
Wages = Time taken X Rate per hour + X Time taken X Rate per
𝑇𝑖𝑚𝑒 𝐴𝑙𝑙𝑜𝑤𝑒𝑑
hour
60−48 ℎ𝑜𝑢𝑟𝑠
=(48 hours X Rs. 15) + ( 60ℎ𝑜𝑢𝑟𝑠
X 48 hours X Rs. 15)

= Rs. 720 + Rs. 144

= Rs. 864
(ii) The company may follow Halsey Premium Plan over Rowan Premium Bonus Plan
as the total wages paid is lower than that of Rowan Premium Bonus Plan.

Vishesh Khatwani | 8555070670

Chapter 3 Employee Cost and Direct Expenses
 P 4.1

Chapter 4
Overheads-Absorption Costing Method
Question 1
XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre - determined rate
of ₹ 20 per man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually worked
were ₹ 35.50 lakhs and 1.50 lakh days respectively. Out of the amount of ₹ 35.50 lakhs, ₹ 2.00
lakhs were in respect of wages for stick period and ₹ 1.00 lakh was in respect of expenses of
previous year booked in this current year. During the period, 50,000 units were sold. At the end
of the period, 12,000 completed units were held in stock but there was no opening stock of
finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period
but at the end of the period there were 20,000 uncompleted units which may be treated as 65%
complete in all respects.
On investigation, it was found that 40% of the unabsorbed overheads were due to factory
inefficiency and the rest were attributable to increase in the cost of indirect materials and indirect
labour. You are required to:
(i) Calculate the amount of unabsorbed overheads during the year 2020 -21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal
entry. (10 Marks Dec ‘21)

Answer 1
(i) Amount of under-absorption of overheads during the year 2020-21
(₹)
Total production overheads actually incurred during the year 2020-21 35,50,000

Less: Wages paid during strike period ₹2,00,000

Wages of previous year booked in current year ₹ 1,00,000 3,00,000

Net production overheads actually incurred: (A) 32,50,000

Production overheads absorbed by 1.50 lakh man-days @ ₹ 20 per 30,00,000
man-day: (B)
Amount of under-absorption of production overheads: [(A)–(B)] 2,50,000
(ii) Accounting treatment of under absorption of production overheads: It is given in the statement
of the question that 62,000 units (50,000 sold + 12,000 closing stock – 0 opening stock) were
completely finished and 20,000 units were 65% complete, 40% of the under-absorbed overheads
were due to factory inefficiency and the rest were attributable to increase in cost of indirect
materials and indirect labour.
(₹)
1. (40% of ₹2,50,000) i.e. ₹ 1,00,000 of under – absorbed overheads were due 1,00,000
to factory inefficiency. This being abnormal, should be debited to the
Costing Profit and Loss A/c
2. Balance (60% of ₹ 2,50,000) i.e. ₹ 1,50,000 of under – absorbed overheads 1,50,000
should be distributed over work-in- progress, finished goods and cost of
sales by using supplementary rate
Total under-absorbed overheads 2,50,000
Apportionment of unabsorbed overheads of ₹1,50,000 over work-in-progress, finished goods
and cost of sales.
Equivalent (₹)
Completed units
Work-in-progress (13,000 units × ₹ 2) (Refer to 20000 * 65% = 13,000 26,000
Working Note)
Finished goods (12,000 units × ₹ 2) 12,000 24,000
Cost of sales (50,000 units × ₹ 2) 50,000 1,00,000
Vishesh Khatwani | 8555070670
Chapter 4 Overheads-Absorption Costing Method
 P 4.2

75,000 1,50,000
Journal entry:
Work-in-progress control A/c Dr. ₹ 26,000
Finished goods control A/c Dr. ₹ 24,000
Cost of Sales A/c Dr. ₹ 1,00,000
Costing Profit & Loss A/c Dr. ₹ 1,00,000
To Overhead control A/c ₹ 2,50,000

Working Note:
𝑅𝑠.1,50,000
Supplementary overhead absorption rate = 75,000 𝑢𝑛𝑖𝑡𝑠 = Rs. 2 per unit

Question 2
In a manufacturing company, the overhead is recovered as follows: Factory Overheads: a fixed
percentage basis on direct wages and Administrative overheads: a fixed percentage basis on factory
cost.
The company has furnished the following data relating to two jobs undertaken by it in a period.
Job 1(₹) Job 2(₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Selling price 3,33,312 2,52,000
Profit percentage on total cost 12% 20%
You are required to:
(i) Compute the percentage recovery rates of factory overheads and administrative
overheads.
(ii) Calculate the amount of factory overheads, administrative overheads and profit for each
of the two jobs.
(iii) Using the above recovery rates, determine the selling price to be quoted for job 3.
Additional data pertaining to Job 3 is as follows:
Direct materials ₹ 68,750
Direct wages ₹ 22,500
Profit percentage on selling price 15%
(10 Marks) (May’22)

Answer 2
Computation of percentage recovery rates of factory overheads and administrative overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and administrative
overheads recovery rate as percentage of factory cost be A.
Factory Cost of Jobs:
Direct materials + Direct wages + Factory overhead For Job 1 = ₹ 1,08,000 +₹ 84,000 + ₹ 84,000F
For Job 2 = ₹ 75,000 +₹ 60,000 + ₹ 60,000F
Total Cost of Jobs:
Factory cost + Administrative overhead
For Job 1 = (₹ 1,92,000 + ₹ 84,000F) + (₹ 1,92,000 + ₹ 84,000F) A = ₹ 2,97,600* For Job-2 = (₹ 1,35,000
+ ₹ 60,000F) + (₹1,35,000+ ₹ 60,000F) A = ₹ 2,10,000**
The value of F & A can be found using following equations
1,92,000 + 84,000F + 1,92,000A + 84,000AF = ₹ 2,97,600 …………eqn (i)
1,35,000 + 60,000F + 1,35,000A + 60,000AF = ₹ 2,10,000 …..……eqn (ii)
Multiply equation (i) by 5 and equation (ii) by 7

9,60,000 + 4,20,000F + 9,60,000A + 4,20,000AF = ₹14,88,000 ...eqn (iii)

Vishesh Khatwani | 8555070670
Chapter 4 Overheads-Absorption Costing Method
 P 4.3

9,45,000 + 4,20,000F + 9,45,000A + 4,20,000AF = ₹ 14,70,000 ...eqn (iv)

- - - - -
15,000 + 15,000A = ₹18,000
15,000 A = 18,000 – 15,000
A = 0.20
Now putting the value of A in equation (i) to find the value of F
1,92,000 + 84,000F + (1,92,000 × 0.20) + (84,000 F × 0.20)= ₹ 2,97,600
Or
1,92,000 + 84,000F+38,400+16,800 F = ₹2,97,600
1,00,800 F = 67,200
F = 0.667

On solving the above relations: F = 0.667 and A = 0.20 Hence, percentage recovery rates of:
Factory overheads = 66.7% or 2/3rd of wages and Administrative overheads = 20% of factory cost.
Working note:
Selling price
Total Cost = (100% + Percentage of profit)
*For Job 1 =
₹ 3,33,312
(100% + 12%)
= ₹ 2,97,600

**For Job 2
₹2,52,000
(100% + 10%)
== ₹ 2,10,000
(ii) Statement of jobs, showing amount of factory overheads, administrative overheads and profit:
Job 1 Job 2
(₹) (₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
Factory overheads
2/3rd of direct wages 56,000 40,000
Factory cost 2,48,000 1,75,000
Administrative overheads
20% of factory cost 49,600 35,000
Total cost 2,97,600 2,10,000
Profit (12% & 20% respectively) 35,712 42,000
Selling price 3,33,312 2,52,000
(iii) Selling price of Job 3
(₹)
Direct materials 68,750
Direct wages 22,500
Prime cost 91,250
Factory overheads (2/3rd of Direct Wages) 15,000
Factory cost 1,06,250
Administrative overheads (20% of factory cost) 21,250
Total cost 1,27,500
Profit margin (balancing figure) 22,500
Total Cost
Selling price( 85%
)
Vishesh Khatwani | 8555070670
Chapter 4 Overheads-Absorption Costing Method
 P 4.4

1,50,000

Question 3
Journalize the following transactions assuming the cost and financial accounts are integrated:
Particulars Amount (₹)
Direct Materials issued to production ₹ 5,88,000
Allocation of Wages (Indirect) ₹ 7,50,000
Factory Overheads (Over absorbed) ₹ 2,25,000
Administrative Overheads (Under absorbed) ₹ 1,55,000
Deficiency found in stock of Raw material (Normal) ₹ 2,00,000
(5 Marks)( May’22)

Answer 3
Particulars (₹) (₹)
(i) Work-in-Progress Ledger Control A/c Dr. 5,88,000
To Stores Ledger Control A/c 5,88,000
(Being issue of direct materials to production)
(ii) Factory Overhead control A/c Dr. 7,50,000
To Wages Control A/c 7,50,000
(Being allocation of Indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,25,000
To Costing Profit & Loss A/c 2,25,000
(Being transfer of over absorption of Factory
overhead)
(iv) Costing Profit & Loss A/c Dr. 1,55,000
To Administration Overhead Control A/c 1,55,000
(Being transfer of under absorption of Administration
overhead)
(v) Factory Overhead Control A/c Dr. 2,00,000
To Stores Ledger Control A/c 2,00,000
(Being transfer of deficiency in stock of raw material)
(Note: Costing P/&/L = P/&/L and SLC = MLC)

Question 4
USP Ltd. is the manufacturer of ‘double grip motorcycle tyres’. In the manufacturing
process, it undertakes three different jobs namely, Vulcanising, Brushing and Striping.
All of these jobs require the use of a special machine and also the aid of a robot when
necessary. The robot is hired from outside and the hire charges paid for every six months
is₹ 2,70,000. An estimate of overhead expenses relating to the special machine is given
below:
• Rent for a quarter is ₹ 18,000.
• The cost of the special machine is ₹ 19,20,000 and depreciation is charged
@10% per annum on straight line basis.
• Other indirect expenses are recovered at 20% of direct wages.
The factory manager has informed that in the coming year, the total direct wages will be
₹ 12,00,000 which will be incurred evenly throughout the year.
During the first month of operation, the following details are available from the
Vishesh Khatwani | 8555070670
Chapter 4 Overheads-Absorption Costing Method
 P 4.5

job book: Number of hours the special machine was used

Jobs Without the aid of the With the of the
robot robot
Vulcanising 500 400
Brushing 1000 400
Striping - 1200
You are required to :
(i) Compute the Machine Hour Rate for the company as a whole for a month
(A) when the robot is used and (B) when the robot is not used.
(ii) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanising,
Brushing and Striping. (10 Marks Nov 22)
Answer 4
Working notes:
(I) Total machine hours use 3,500
(500 + 1,000 + 400 + 400 + 1,200)
(II) Total machine hours without the use of robot 1,500
(500 + 1,000)
(III) Total machine hours with the use of robot 2,000
(400 + 400 + 1,200)
(IV) Total overheads of the machine per month
Rent (₹ 18,000 ÷ 3 months) 6,000
Depreciation [(₹ 19,20,000 x 10%) ÷ 12 16,000
months]
Indirect expenses [(₹ 12,00,000 x 20%) ÷ 12 20,000
months]
Total 42,000
(V) Robot hire charges for a month ₹ 45,000
(₹ 2,70,000 ÷ 6 months)
(VI) Overheads for using machines without robot
𝑅𝑠.42,000
= X 1,500 hrs. = Rs. 18,000
3,500 ℎ𝑟𝑠.

(VII) Overheads for using machines with robot

𝑅𝑠.42,000
= X 1,500 hrs. = Rs. 18,000
3,500 ℎ𝑟𝑠.

(i) Computation of Machine hour rate for the individual job

𝑅𝑠.69,000
(A) When the robot was used : = Rs. 34.50 per hour
2,000 ℎ𝑜𝑢𝑟𝑠

𝑅𝑠.18,000
(B) When the robot was not used : = Rs. 12 Per hour
1500 ℎ𝑜𝑢𝑟𝑠

Vishesh Khatwani | 8555070670

Chapter 4 Overheads-Absorption Costing Method
 P 4.6

(ii)
Rate Job
per Vulcanising Brushing Striping
hour
(₹) Hrs. (₹) Hrs. (₹) Hrs. (₹)
Overheads
Without robot 12.00 500 6,000 1,000 12,000 - -
With robot 34.50 400 13,800 400 13,800 1,200 41,400
Total 900 19,800 1,400 25,800 1,200 41,400
Machine hour rate 22 18.43 34.50

Vishesh Khatwani | 8555070670

Chapter 4 Overheads-Absorption Costing Method
 P 5.1

Chapter 5
Activity Based Costing
Question 1
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 License fee Drug License 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 28,20,000 4,70,000 units sold
to 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. (10
Marks Dec ‘21)
Answer 1
(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
Cost of Goods sold (COGS): 41,44,500 68,16,750 1,20,63,750 2,30,25,000
(B)
Support cost (40% of 16,57,800 27,26,700 48,25,500 92,10,000
COGS): (C)
Vishesh Khatwani | (Refer working notes)
8555070670
Chapter 5 Activity Based Costing
 P 5.2

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
= X 100
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑅𝑠.92,10,000
= 𝑅𝑠.2,30,25,000 X 100 = 40%

3. Cost for each activity cost driver:

Activity Total cost Cost allocation base Cost driver rate
(₹) (3)
(1) (2) (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
Ordering cost* (560:810:630) 2,32,400 3,36,150 2,61,450 8,30,000
Delivery cost* 6,17,500 6,50,000 5,52,500 18,20,000
(950:1000:850)
Shelf stocking cost* 6,48,000 9,00,000 16,92,000 32,40,000
(900:1250:2350)
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) - 6,56,400 14,20,300 29,38,300 50,15,000
(B)}
Operating income as a % of 8.81% 12.71% 15.78% 13.46%
revenues
* Refer to working note 3

(i) Comparison on the basis of operating income as per the percentage (%) of revenue:
(a) When
Vishesh Khatwani | 8555070670 support costs are allocated to product lines on the basis of cost of goods sold of
Chapter 5 Activity Based Costing
 P 5.3

each product
Drug A (₹) Drug B (₹) Drug C (₹) Total (₹)
Operating income 22.12% 14.60% 9.32% 13.46%
as a % 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.
(b) When support costs are allocated to product lines using an activity -based costing
system
Drug A (₹) Drug B (₹) Drug C (₹) Total (₹)
Operating income 8.81% 12.71% 15.78% 13.46%
as a % of revenues

On comparing the operating income as a % of revenue of each product, Drug C is the

most profitable product line, though its unit sold is least but with highest revenue.

Question 2
Star Limited manufacture three products using the same production methods. A conventional
product costing system is being used currently. Details of the three products for a typical period
are:
Product Labour Hrs. Machine Hrs. per Materials per Volume in
per unit unit Unit1 Units
AX 1.00 2.00 35 7,500
BX 0.90 1.50 25 12,500
CX 1.50 2.50 45 25,000
Direct Labour costs ₹ 20 per hour and production overheads are absorbed on a machine hour basis.
The overhead absorption rate for the period is ₹ 30 per machine hour.
1 Material cost per unit
Management is considering using Activity Based Costing system to ascertain the cost of the
products. Further analysis shows that the total production overheads can be divided as follows:
Particulars %
Cost relating to set-ups 40
Cost relating to machinery 10
Cost relating to material handling 30
Costs relating to inspection 20
Total production overhead 100

The following activity volumes are associated with the product line for the period as a whole.
Total activities for the period:
Product No. of set-ups No. of movements of Materials No. of inspections
AX 350 200 200
BX 450 280 400
CX 740 675 900
Total 1,540 1,155 1,500

Required:
(i) Calculate the cost per unit for each product using the conventional method.
(ii) Calculate the cost per unit for each product using activity based costing method.(10
Marks)(May’22)

Answer 2
I. Statemsent showing “Cost per unit” using “conventional method”
Vishesh Khatwani | 8555070670
Chapter 5 Activity Based Costing
 P 5.4

Particulars of Costs AX BX CX
(₹) (₹) (₹)
Direct Materials 35 25 45
Direct Labour 20 18 30
Production Overheads 60 45 75
Cost per unit 115 88 150
II. Statement Showing “Cost per unit using “Activity Based Costing”
Products AX BX CX
Production (units) 7,500 12,500 25,000
(₹) (₹) (₹)
Direct Materials 2,62,500 3,12,500 11,25,000
Direct Labour 1,50,000 2,25,000 7,50,000
Machine Related Costs 45,000 56,250 1,87,500

Products AX BX CX
Setup Costs 2,62,500 3,37,500 5,55,000
Material handling Cost 1,50,000 2,10,000 5,06,250
Inspection Costs 77,000 1,54,000 3,46,500
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost Units) 126.267 103.62 138.81
Working Notes:
Calculation of Total Machine hours
Particulars AX BX CX
(A) Machine hours per unit 2 1.5 2.5
(B) Production (units) 7,500 12,500 25,000
(C) Total Machine hours (A× B) 15,000 18,750 62,500
Total Machine hours = 96,250
Total Production overheads = 96,250 × 30 = ₹ 28,87,500
Calculation of Cost Driver Rate
Cost Pool %Overheads (₹) Cost Driver Cost Driver Cost Driver Rate (₹)
(Basis) (Units)
Set up 40 11,55,000 No of set ups 1,540 750 per set up
Machine 10 2,88,750 Machine hours 96,250 3 per machine
Operation hour
Material 30 8,66,250 No of material 1,155 750 per material
Handling movement movement
Inspection 20 5,77,500 No of inspection 1,500 385 per
inspection

Question 3
PP Limited is in the process of implementation of Activity Based Costing
System in the organisation. For this purpose, it has identified the following
Business Functions in its organisation:
(i) Research and Development
(ii) Design of Products, Services and Procedures
(iii) Customer Service
(iv) Marketing
Vishesh Khatwani | 8555070670
Chapter 5 Activity Based Costing
 P 5.5

(v) Distribution
You are required to specify two cost drivers for each Business Function
Identified above.
(5 Marks Nov 22)

Answer 3
Business functions Cost
Driver
Research and Development • Number of research projects
• Personnel hours on a project
• Technical complexities of the
project
Design of products, services and • Number of products in design
procedures • Number of parts per product
• Number of engineering hours
Customer Service • Number of service calls
• Number of products serviced
• Hours spent on servicing
products
Marketing • Number of advertisements
• Number of sales personnel
• Sales revenue
Distribution • Number of units distributed
• Number of customers
• Weight of items distributed
(Any two cost drivers of each business function)

Vishesh Khatwani | 8555070670

Chapter 5 Activity Based Costing
 P 6.1

Chapter 6
Cost Sheet
Question 1
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 cotton 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
(iii) Works/Factory Cost
(iv) Cost of Production
(v) Cost of Goods Sold
(vi) Cost of Sales (10 Marks Dec ‘21)
Answer 1
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}
Vishesh Khatwani | 8555070670 Chapter 6 Cost Sheet
 P 6.2

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

Question 2
The following data are available from the books and records of A Ltd. for the month of April 2022:
Particulars Amount (₹)
Stock of raw materials on 1st April 2022 10,000
Raw materials purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & 1,000
maintenance
Stock of raw materials on 30th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300
Stock of finished goods as on 1st April 2022 was 200 units having a total cost of ₹ 28,000. The
entire opening stock of finished goods has been sold during the month Production during the
month of April, 2022 was 3,000 units. Closing stock of finished goods as on 30th April, 2022 was
400 units.
You are required to:
I. Prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed
(ii) Prime Cost

Vishesh Khatwani | 8555070670 Chapter 6 Cost Sheet

 P 6.3

(iii) Factory Cost

(iv) Cost of Production
(v) Cost of goods sold
(vi) Cost of Sales
II. Calculate selling price per unit, if sale is made at a profit of 20% on sales.(10 Marks)(May’22)

Answer 2
sStatement of Cost (for the month of April, 2022)
S. No. Particulars Amount (₹) Amount (₹)
Opening stock of Raw material 10,000
Add: Purchase of Raw material 2,80,000
Less: Closing stock of raw materials (40,000)
Raw material consumed 2,50,000
(i)
Manufacturing wages 70,000
(ii) Prime Cost 3,20,000
Factory/work overheads:
Depreciation on plant 15,000
Lease rent of production Asset 10,000
Expenses paid for pollution control and
engineering & Maintenance 1,000 26,000
(iii) Factory/Work Cost 3,46,000
Expenses paid for quality control check
activity 4,000
Research and Development Cost 5,000
Administration Overheads (Production) 15,000
Primary Packing Cost 8,000
(iv) Cost of Production 3,78,000
Add: Opening stock of finished goods 28,000
Less: Closing stock of finished goods (50,400)
(v) Cost of Goods Sold 3,55,600
Advertisement expenses 1,300
Packing cost for re-
distribution of finished goods sold 1,500
(vi) Cost of Sales 3,58,400

Note: Valuation of Closing stock of finished goods

₹3,78,000
×400 units
300𝑢𝑛𝑖𝑡𝑠
= ₹50,400
₹3,58,400
Cost per unit sold= = ₹ 128 per unit
200+3,000,+400

128
∴Selling Price=80%
= ₹160 per unit

Question 3

PNME Ltd. manufactures two types of masks- 'Disposable Masks' and ‘Cloth Masks'. The cost
data for the year ended 31stMarch, 2022 is as follows:

Vishesh Khatwani | 8555070670 Chapter 6 Cost Sheet

 P 6.4

₹
Direct Materials 12,50,000
Direct Wages 7,00,000
Production 4,00,000
Overhead
Total 23,50,000

It is further ascertained that:

• Direct material cost per unit of Cloth Mask was twice as much of Direct material
cost per unit of Disposable Mask.
• Direct wages per unit for Disposable Mask were 60% of those for Cloth Mask.
• Production overhead per unit was at same rate for both the types of the masks.
• Administration overhead was 50% of Production overhead for each type of mask.
• Selling cost was ₹ 2 per Cloth Mask.
• Selling Price was ₹ 35 per unit of Cloth Mask.
• No. of units of Cloth Masks sold- 45,000
• No. of units of Production of
Cloth Masks: 50,000
Disposable Masks: 1,50,000
You are required to prepare a cost sheet for Cloth Masks showing:
(i) Cost per unit and Total Cost.
(ii) Profit per unit and Total Profit. (10 Marks Nov 22)

Answer 3
Preparation of Cost Sheet for Cloth Masks
No. of units produced = 50,000
units No. of units sold = 45,000
units
Particulars Per unit (₹) Total (₹)
Direct materials (Working note- (i)) 10.00 5,00,000
Direct wages (Working note- (ii)) 5.00 2,50,000
Prime cost 15.00 7,50,000
Production overhead (Working note- (iii)) 2.00 1,00,000
Factory Cost 17.00 8,50,000
Administration Overhead* (50% of Production 1.00 50,000
Overhead)
Cost of production 18.00 9,00,000
Less: Closing stock (50,000 units – 45,000 units) - (90,000)
Cost of goods sold i.e. 45,000 units 18.00 8,10,000
Selling cost 2.00 90,000
Cost of sales/ Total cost 20.00 9,00,000
Profit 15.00 6,75,000
Sales value (₹ 35 × 45,000 units) 35.00 15,75,000

Vishesh Khatwani | 8555070670 Chapter 6 Cost Sheet

 P 6.5

Working Notes:
(i) Direct material cost per unit of Disposable Mask = M
Direct material cost per unit of Cloth Mask = 2M
Total Direct Material cost = 2M × 50,000 units + M × 1,50,000
units Or, ₹ 12,50,000 = 1,00,000 M + 1,50,000 M
𝑅𝑠.12,50,000
Or, M = 2,50,000
= Rs. 5

Therefore, Direct material Cost per unit of Cloth Mask = 2 × ₹ 5 = ₹ 10

(ii) Direct wages per unit for Cloth Mask =W

Direct wages per unit for Disposable

Mask= 0.6W
So, (W x 50,000) + (0.6W x 1,50,000) = ₹ 7,00,000
W = ₹5 per unit
Therefore, Direct material Cost per unit of Cloth Mask = ₹ 5
𝑅𝑠.4,00,000
(iii) Production overhead per unit = = Rs.
(50,000+1,50,000)

Production overhead for Cloth Mask = ₹ 2 × 50,000 units = ₹ 1,00,000

* Administration overhead is related to production overhead in the question and
hence to be considered in cost of production only.

Vishesh Khatwani | 8555070670 Chapter 6 Cost Sheet

 P 7.1

Chapter 7
Cost Accounting System

Question 1
R Ltd. showed a Net Profit of ₹ 3,60,740 as per their cost accounts for the year ended 31st
March, 2021. The following information was revealed as a result of scrutiny of the figures from
the both sets of accounts:
Sr. No. Particulars (₹)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600
Required: Prepare a reconciliation statement showing the profit as per financial records. (5 Marks
Dec ‘21)
Answer 1
Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial records)
(₹) (₹)
Net Profit as per Cost Accounts 3,60,740
Add:
Over recovery of selling overheads in cost accounts 10,250
Rent received credited in financial accounts 5,450 15,700
376,440
Less:
Over valuation of closing stock in cost accounts 7,300
Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 35,850
Profit as per Financial Accounts 3,40,590

Question 2
Answer any four of the following:
Briefly explain the essential features of a good Cost Accounting System. (5 Marks) (May’22)

Answer 2
(a) The essential features, which a good cost accounting system should possess, are as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical, simple and
capable of meeting the requirements of a business concern. The system of costing should not
sacrifice the utility by introducing inaccurate and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost accounting system should be accurate and
authenticated; otherwise it may distort the output of the system and a wrong decision may be
taken.
(c) Uniformity and consistency: There should be uniformity and consistency in classification, treatment
and reporting of cost data and related information. This is required for benchmarking and
Vishesh Khatwani | 8555070670
Chapter 7 Cost Accounting System
 P 7.2

comparability of the results of the system for both horizontal and vertical analysis.

(d) Integrated and inclusive: The cost accounting system should be integrated with other systems like
financial accounting, taxation, statistics and operational research etc. to have a complete overview
and clarity in results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to make necessary
amendment and modifications in the system to incorporate changes in technological, reporting,
regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an
active role of management is required for the development of such a system that reflects a strong
conviction in using information for decision making.

Question 3

X Ltd. follows Non-Integrated Accounting System. Financial Accounts of the company

show a Net Profit of ₹ 5,50,000 for the year ended 31st March, 2022. The chief
accountant of the company has provided following information from the Financial
Accounts and Cost Accounts:

Sr. No Particulars (₹)

(i) Legal Chargers Provided in Financial accounts 15,250
(ii) Interim Dividend received credited in financial 4,50,000
accounts
(iii) Preliminary Expenses written off in financial 25,750
accounts
(iv) Over recovery of selling overheads in cost accounts 11,380
(v) Profit on sale of capital asset credited in financial 30,000
accounts
(vi) Under valuation of closing stock in cost accounts 25,000
(vii) Over recovery of production overheads in cost 10,200
accounts
(viii) Interest paid on Debentures shown in financial 50,000
accounts
Required:
Find out the Profit (Loss) as per Cost Accounts by preparing a Reconciliation Statement.
(5 Marks Nov 22)
Answer 3
Reconciliation Statement
(Reconciliation the profit as per financial records with the profit as per
costing records)
Particulars (₹) Total (₹)
Profit as per Financial Accounts 5,50,000
Add: Legal Charges 15,250
Preliminary expenses written off 25,750
Interest paid 50,000 91,000
6,41,000
Less: Under-valuation of closing stock in cost book 25,000
Vishesh Khatwani | 8555070670
Chapter 7 Cost Accounting System
 P 7.3

Interim Dividend Received 4,50,000

Over recovery of selling overheads in cost 11,380
accounts
Over recovery of production overhead in cost 10,200 5,26,580
accounts
Profit on sale of Assets 30,000
Profit as per Cost Accounts 1,14,420

Question 4
Indicate, for following items, whether to be shown in the Cost Accounts or Financial
Accounts:
(i) Preliminary expenses written off during the year
(ii) Interest received on bank deposits
(iii) Dividend, interest received on investments

(iv) Salary for the proprietor at notional figure though not incurred
(v) Charges in lieu of rent where premises are owned
(vi) Rent receivables
(vii) Loss on sale of Fixed Assets
(viii) Interest on capital at notional figure though not incurred
(ix) Goodwill written off

(x) Notional Depreciation on the assets fully depreciated for which book value
is Nil.
(5 Marks Nov 22)
Answer 4
S. No. Items Accounts
(i) Preliminary expenses written off during the Financial Accounts
year
(ii) Interest received on bank deposits Financial Accounts
(iii) Dividend, interest received on investments Financial Accounts
(iv) Salary for the proprietor at notional figure Cost Accounts
though not incurred
(v) Charges in lieu of rent where premises are Cost Accounts
owned
(vi) Rent receivables Financial Accounts
(vii) Loss on the sales of Fixed Assets Financial Accounts
(viii) Interest on capital at notional figure though Cost Accounts
not incurred
(ix) Goodwill written off Financial Accounts
(x) Notional Depreciation on the assets fully Cost Accounts
depreciated for which book value is nil

Vishesh Khatwani | 8555070670

Chapter 7 Cost Accounting System
 P 8.1

Chapter 8
Unit & Batch Costing
Question 1
A Ltd. is a pharmaceutical company which produces vaccines for diseases like Monkey Pox,
Covid-19 and Chickenpox. A distributor had given an order for 1,600 Monkey Pox Vaccines. The
company can produce 80 vaccines at a time. To process a batch of 80 Monkey Pox vaccines, the
following costs would be incurred:

Direct Materials 4,250

Direct wages 500
Lab set-up cost 1,400
The Production Overheads are absorbed at a rate of 20% of direct wages and 20% of total
production cost is charged in each batch for Selling, distribution and administration
Overheads. The company is willing to earn profit of 25% on sales value.
You are required to determine:
(i) Total Sales value for 1,600 Monkey Pox Vaccines
(ii) Selling price per unit of the Vaccine. (5 Marks Nov 22)
Answer 1
(i) & (ii) Calculation of Sales value and Selling price per unit of Monkey Pox vaccine
Particulars Amount (₹) Amount (₹) for 1600 Amount (₹)
per Batch units or 20 batches per unit
Direct materials 4,250 85,000 53.125
Direct wages 500 10,000 6.250
Lab set-up cost 1,400 28,000 17.500
Production overheads 100 2,000 1.250
(20% of direct wages)
Production Cost 6,250 1,25,000 78.125
Selling, distribution and 1,250 25,000 15.625
administration cost (20%
of Production cost)
Total Cost 7,500 1,50,000 93.75
Add: Profit (1/3rd of Total 2,500 50,000 31.25
cost or 25% of Sales
value)
Sales value 10,000 2,00,000 125.00

Vishesh Khatwani | 8555070670

Chapter 8 Unit & Batch Costing
 9.1

Chapter 9
Job Costing and Contract Costing
Question 1
A construction company has obtained a contract of ₹ 30 lakhs contract price.
The following details are available in respect of this contract for the year ended March
31, 2021:
Particulars (₹)
Materials purchased 2,00,000
Materials issued from stores 8,00,000
Wages paid 1,50,000
Plant Supervisor Salary 2,40,000
Drawing and maps 50,000
Sundry expenses 30,000
Electricity charges 40,000
Plant hire expenses paid 75,000
Sub-contract cost 40,000
Materials returned to stores 35,000
Materials returned to suppliers 50,000
The following balances related to the contract for the year ended on March 31, 2020 and
March 31, 2021 are available:
As on 31st March, 2020 As on 31st March, 2021
(₹) (₹)

Work certified 2,50,000 70% of Contract Price

Work uncertified 10,000 ?
Materials at site 35,000 25,000
Wages outstanding 15,000 22,000
Plant hire charges outstanding 20,000 15,000

Further informations are as under:

1. An additional plant was used for 270 days costing ₹ 5,00,000 with a residual value of ₹ 20,000
having life of 4 years.
2. During the year, material costing ₹ 40,000 was sold for ₹ 20,000.
3. Plant supervisor has devoted 1/3rd of his time to this contract.
4. As on 31.03-2021, 80% of the contract was completed.
You are required to prepare Contract Account and show the notional profit or loss as on 31st
March, 2021 (Assume 360 days in a year). (10 Marks Dec ‘21)
Answer 1
Contract A/c
Dr. Cr.
Particulars Amount Particulars Amount
(₹) (₹)
To Opening Work in progress By Material returned to 35,000
store
- Work certified 2,50,000 By Material returned to 50,000
suppliers
- Work uncertified 10,000 2,60,000 By Costing P&L (Loss on 20,000
sale of material)
To Material at site 35,000 By Material Sold 20,000
Vishesh Khatwani | 8555070670
Chapter 9 Job Costing and Contract Costing
 9.2

To Material purchased 2,00,000 By Material at site 25,000

To Stores 8,00,000 By Works cost (Bal. fig.) 17,02,000
To Wages 1,50,000
Add: Closing O/s wages 22,000
Less: Opening O/s wages (15,000) 1,57,000
To Plant supervisor salary 80,000
(2,40,000 × 1/3)
To Drawing and maps 50,000
To Sundry expenses 30,000
To Electricity charges 40,000
To Plant hire expenses 75,000
Add: O/s at end 15,000
Less: O/s at beginning (20,000) 70,000
To Sub-contract 40,000
To Depreciation 90,000
5,00,000 − 20,000 270
[ × ]
4 360
18,52,000 18,52,000
To works cost 17,02,000 By work in progress:
To Costing P&L(Notional profit) 6,10,750 Work certified 21,00,000
Work uncertified 2,12,750 23,12,750
23,12,750 23,12,750

Working Note:
Calculation of Value of work uncertified
Cost incurred till date 17,02,000
Estimate total cost ( 17,02,000 / 80%) 21,27,500

Cost of work certified till date (21,27,500 × 70%) 14,89,250

Cost of uncertified work (17,02,000 – 14,89,250) 2,12,750

Question 2
Paramount Constructions Limited is engaged in construction and erection of bridges under long
term contracts. It has entered into a big contract at an agreed price of ₹ 250 Lakhs subject to an
escalation clause for material and labour as spelt out in the contract and corresponding actual are
as follows:
Standard Actual
Material Quantity Tonnes Rate Per Tonne (₹) Quantity Tonnes Rate Per Tonne(₹)
P 2,800 1,500 3,000 1,750
Q 3,100 900 2,900 800
R 800 4,500 950 4,350
S 150 32,500 120 34,200
Labour Hours Hourly rate (₹) Hours Hourly rate (₹)
LM 65,000 60 61,500 70
LN 46,000 45 45,000 50
Required:
(i) Prepare a statement showing admissible additional claim of material and labour due to
escalation clause.
(ii) Determine the final price payable after admissible escalation claim.(5 Marks) (May’22)
Vishesh Khatwani | 8555070670
Chapter 9 Job Costing and Contract Costing
 9.3

Answer 2
Statement showing Additional claim
Standard Standard Actual Variation in Escalation
Qty/Hrs. Rate (₹) Rate (₹) Rate (₹) Claim (₹)
(a) (b) (c) (d) = (c)–(b) (e) =(a) × (d)
Materials
P 2,800 1,500 1,750 250 7,00,000
Q 3,100 900 800 (100) (3,10,000)
R 800 4,500 4,350 (150) (1,20,000)
S 150 32,500 34,200 1,700 2,55,000
Materials escalation claim: (A) 5,25,000
Wages
LM 65,000 60 70 10 6,50,000
LN 46,000 45 50 5 2,30,000
Wages escalation claim: (B) 8,80,000
Final claim: (A + B) 14,05,000
Statement showing final price payable
(₹) (₹)
Agreed price 2,50,00,000
Add: Agreed escalation
Material cost 5,25,000
Labour cost 8,80,000 14,05,000
Final price payable 2,64,05,000

Question 3
Distinguish between Job costing and Process Costing. (Any five points of differences)
(5 Marks) (May’22)

Answer 3
Job Costing Process Costing
i) A Job is carried out or a product is The process of producing the product has
produced by specific orders. a continuous flow and the product
produced is homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period
for each process or department.
iii) Each job is separate and Products lose their individual identity as
independent of other jobs. they are manufactured in a continuous
flow.
iv) Each job or order has a number and costs The unit cost of process is an average cost
are collected against the for the period.
same job number.
v) Costs are computed when a job is Costs are calculated at the end of the cost
completed. The cost of a job may be period. The unit cost of a process may be
determined by adding all costs against computed by dividing the total cost for
the job. the period by the output of the
process during that period.
vi) As production is not continuous and each Process of production is usually
job may be different, so more managerial standardized and is therefore, quite
attention is stable. Hence control here is
required for effective control. comparatively easier.

Vishesh Khatwani | 8555070670

Chapter 9 Job Costing and Contract Costing
 9.4

Question 4
XYZ Construction Ltd. has obtained a contract of ₹ 25,00,000 in the Financial Year 2021-22. The
work on the contract commenced immediately and it is expected that the contract will be
completed by 31st March,2023. Chief accountant of the company has provided following
information related to the Contract:
Particulars 2021-22 2022-23
(Actual) (in ₹) (Estimated) (in₹)
Material issued 4,00,000 3,50,000
Wages: Paid 2,50,000 1,40,000
- Prepaid at the end of the Year 15,000 -
Plant 2,00,000 -
Sundry Expenses: Paid 50,000 35,000
- Outstanding at the end of the year 7,500 5,000
Office Expenses: Paid 65,000 55,000
- Outstanding at the end of the year 12,500 15,000
Contingency Expenses - 1,25,000

Following additional information is also available:

• A part of plant costing ₹ 12,000 was scrapped and written off in the F.Y.2021-22.
• The value of Plant-at-Site on 31st March,2022 was ₹ 18,000.
• Company would have to spend an additional sum of ₹ 80,000 on the plant in FY.
2022-23 and the residual value of the plant on the completion of contract would
be ₹ 10,000.
• A part of material costing ₹ 30,000 was scrapped and sold for ₹ 20,000 in F.Y. 2021-
22.
• The value of Material-at-Site on 31st March, 2022 was ₹ 17,000.
• Cash received on account till 31st March,2022 was ₹ 13,50,000 representing 90%
of the work certified.
• The cost of work uncertified on 31st March, 2022 was valued at 20% of work
certified. You are required to:
(i) Prepare a Contract Account for the year ended 31st March, 2022
(ii) Calculate Estimated Total Profit on this Contract. (10 Marks Nov 22)

Answer 4
Contract Account (2021-22)
Particulars (₹) Particulars (₹)
To Materials 4,00,000 By Costing P & L A/c 12,000
issued
To Wages paid 2,50,000 By Material sold 20,000
Less: Prepaid 15,000 2,35,000 By Plant at site c/d 18,000
To Plant 2,00,000 By Material at site 17,000
c/d
To Sundry 50,000 By Costing P & L A/c 10,000
Expenses (₹ 30,000 – ₹
20,000)
Add: 7,500 57,500 By Work-in-progress
Outstanding c/d
Vishesh Khatwani | 8555070670
Chapter 9 Job Costing and Contract Costing
 9.5

To Office 65,000 Work certified 15,00,000

Expenses (13,50,000 ÷ 90%)
Add: 12,500 77,500 Work uncertified 3,00,000 18,00,000
Outstanding (15,00,000 x 20%)
To Notional profit 9,07,000
(Profit for the
year)
18,77,000 18,77,000

Calculation of Estimated Profit

(₹) (₹)
(1) Material consumed (4,00,000-10,000-20,000) 3,70,000
Add: Further consumption 3,50,000 7,20,000
(2) Wages: 2,35,000
Add: Further cost (1,40,000+15,000) 1,55,000 3,90,000
(3) Plant used (2,00,000-12,000) 1,88,000
Add: Further plant introduced 80,000
Less: Closing balance of plant (10,000) 2,58,000
(4) Sundry expenses 57,500
Add: Further expenses (35,000-7,500) 27,500
Add: Outstanding 5,000 90,000
(5) Office expenses 77,500
Add: Further expenses (55,000 – 12,500) 42,500
Add: Outstanding 15,000 1,35,000
(6) Reserve for contingencies 1,25,000
Estimated profit (balancing figure) 7,82,000
Contract price 25,00,000

Estimated Profit can also be calculated showing cost as per Contract Account for the
year 2021-22 and estimated cost for the year 2022-23 in the following manner
Calculation of Estimated Profit
Cost as per contract A/c 2021-22 (A) 8,93,000
Estimated cost for 2022-23
Material (3,50,000 +17,000) 3,67,000
Wages (1,40,000 +15,000) 1,55,000
Sundry Expenses (3,5000-7,500 +5,000) 32,500
Contingency Expenses 1,25,000
Office expenses (55,000 +15,000-12,500) 57,500
Plant (80,000+18,000-10,000) 88,000
Total estimated cost of 2022-23(B) 8,25,000
C=(A)+(B) 17,18,000
Estimated Profit (D)-(C) 7,82,000
Contract Price(D) 25,00,000

Vishesh Khatwani | 8555070670

Chapter 9 Job Costing and Contract Costing
 P 10.1

Chapter 10
Process & Operation Costing
Question 1
A product passes through Process-I and Process-II. Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing
overheads were ₹ 52,500. Normal Loss anticipated was 5% of input, 9,650 units of output
were produced and transferred out from Process-I to Process-II. Input raw materials issued to
Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ₹ 5 per unit. You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account(5 Marks Dec ’21)
Answer 1
(i) Process - I Account
Particulars Units (₹) Particulars Units (₹)
To Materials 10,000 80,000 By Normal loss (5%of 500 2,500
10,000)
To Wages - 60,000 By Process-II A/c 9,650 1,93,000
(₹20*×9,650units )
To Manufacturing OH 52,500
To Abnormal Gain A/c 150 3,000
(₹20*×150units)
10,150 1,95,500 10,150 1,95,500
(80,000 + 60,000 + 52,500) - 2,500
* = ₹ 20
10,000 - 500
(ii) Abnormal Gain - Account
Particulars Units (₹) Particulars Units (₹)
To Normal loss A/c 150 750 By Process-I A/c 150 3,000
To Costing P&L A/c - 2,250
150 3,000 150 3,000

Question 2
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 cost Material cost
Processing cost 29,500
14,750
Material input cost 3,34,500
Processing cost 2,53,100
Vishesh Khatwani | 8555070670
Chapter 10 Process & Operation Costing
 P 10.2

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.
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?
(Note: You are not required to prepare Process Accounts) (10 Marks )(May’22)
Answer 2
I.Statement of Equivalent Production
Particulars Input Particulars Total Material Processing Cost
quantity % Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000
Material Input 1,05,000 Normal loss (10% 10,500 - - - -
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 + 3,34,000 3.5
1,04,000
Processing cost 14,750 + 2,53,100 2.75
1,04,000
Total Cost per kg 6.25
(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of abnormal loss and cost
Vishesh Khatwani | 8555070670
Chapter 10 Process & Operation Costing
 P 10.3

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 × ₹ 10) 7,20,000
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, itis advisable to
process further chemical ‘G’.

Question 3
N Ltd. produces a product which passes through two processes – Process – I and Process-II. The
company has provided following information related to the Financial Year 2021-22:
Process-I Process -II
Raw Material @₹ 65 per unit 6,500 units -
Direct Wages ₹ 1,40,000 ₹ 1,30,000
Direct Expenses 30% of Direct 35% of Direct
Wages Wages
Vishesh Khatwani | 8555070670
Chapter 10 Process & Operation Costing
 P 10.4

Manufacturing Overheads ₹ 21,500 ₹ 24,500

Realisable value of scrap per unit ₹ 4.00 ₹ 16.00
Normal Loss 250 units 500 units
Units transferred to Process-II / finished 6,000 units 5,500
stock units
Sales - 5,000
units
There was no opening or closing stock of work-in progress.
You are required to prepare:
(i) Process-I Account
(ii) Process -II Account
(iii) Finished Stock Account (10 Marks Nov 22)

Answer 3
Process-I A/c
Particulars Units (₹) Particulars Units (₹)
To Raw material 6,500 4,22,500 By Normal loss 250 1,000
used (₹ 65 × 6,500 (250 units × ₹ 4)
units)
To Direct wages -- 1,40,000 By Process- II A/c 6,000 6,00,000
(₹ 100 × 6,000
units)
To Direct expenses -- 42,000 By Abnormal loss 250 25,000
(30% of ₹ 1,40,000) (₹ 100 × 250
To Manufacturing 21,500 units)
overhead
6,500 6,26,000 6,500 6,26,000

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡−𝑅𝑒𝑎𝑙𝑖𝑠𝑎𝑏𝑙𝑒 𝑣𝑎𝑙𝑢𝑒 𝑓𝑟𝑜𝑚 𝑛𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠

Cost per unit of completed units and abnormal loss : 𝐼𝑛𝑝𝑢𝑡𝑠 𝑢𝑛𝑖𝑡𝑠−𝑁𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠 𝑢𝑛𝑖𝑡𝑠

𝑅𝑠.6,26,000−𝑅𝑠.1,000 𝑅𝑠.6,25,000
= 6,500 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 = 6,250 𝑢𝑛𝑖𝑡𝑠 = Rs. 100
Process- II A/c
Particulars Units (₹) Particulars Units (₹)
To Process - I A/c 6,000 6,00,000 By Normal loss 500 8,000
(500 units × ₹16)
To Direct wages -- 1,30,000 By Finished Stock 5,500 7,92,000
A/c (₹144 × 5,500
units)
To Direct expenses -- 45,500
(35% of ₹
1,30,000)
To Manufacturing -- 24,500
overhead 6,000 8,00,000 6,000 8,00,000

Cost per unit of completed units and abnormal loss:

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑎𝑙𝑖𝑠𝑎𝑏𝑙𝑒 𝑣𝑎𝑙𝑢𝑒 𝑓𝑟𝑜𝑚 𝑛𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠
𝐼𝑛𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠 𝑢𝑛𝑖𝑡𝑠

Vishesh Khatwani | 8555070670

Chapter 10 Process & Operation Costing
 P 10.5

𝑅𝑠.8,00,000−𝑅𝑠.8.000 𝑅𝑠.7,92,000
= 6,000 𝑢𝑛𝑖𝑡𝑠−500 𝑢𝑛𝑖𝑡𝑠 = 5,500 𝑢𝑛𝑖𝑡𝑠 = Rs. 144

Finished Goods Stock A/c

Particulars Units (₹) Particulars Units (₹)
To Process II A/c 5,500 7,92,000 By Cost of Sales 5,000 7,20,000
(₹144 × 5,000
units)
By Balance 500 72,000
c/d
5,500 7,92,000 5,500 7,92,000

Vishesh Khatwani | 8555070670

Chapter 10 Process & Operation Costing
 P 11.1

Chapter 11
Joint Product and By Product
Question 1
Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term. (4 Marks Dec ‘21)
Answer 1
(i) Joint Products - Joint products represent “two or more products separated in the course of the same
processing operation usually requiring further processing, each product being in such proportion
that no single product can be designated as a major product”.
In other words, two or more products of equal importance, produced, simultaneously from the same
process, with each having a significant relative sale value are known as joint products. For example,
in the oil industry, gasoline, fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all
produced from crude petroleum. These are known as joint products.
(ii) By-Products - These are defined as “products recovered from material discarded in a main process, or from
the production of some major products, where the material value is to be considered at the time of
severance from the main product.” Thus, by- products emerge as a result of processing operation of
another product or they are produced from the scrap or waste of materials of a process. In short, a
by-product is a secondary or subsidiary product which emanates as a result of manufacture of the
main product. The point at which they are separated from the main product or products is known
as split-off point. The expenses of processing are joint till the split –off point.
Examples of by-products are molasses in the manufacture of sugar, tar, ammonia and benzole
obtained on carbonisation of coal and glycerine obtained in the manufacture of soap.

Question 2
RST Limited produces three joint products X, Y and Z. The products are processed further. Pre-
separation costs are apportioned on the basis of weight of output of each joint product. The
following data are provided for the month of April, 2022.
Cost incurred up to separation point: ₹ 10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80
₹ ₹ ₹
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre:
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45
You are required to:
Prepare a statement showing profit or loss made by each product after further processing using
the presently adopted method of apportionment of pre-separation cost.
Advise the management whether, on purely financial consideration, the three products are to be
processed further or not.(5 Marks)(May22)

Answer 2
Statement showing profit/loss by each product after further processing products
Product X Product Y Product Z
(in ₹) (in ₹) (in ₹)
Sales value after further processing 5,000 5,600 4,800
Less: Further processing cost 2,000 1,200 800
Less: Joint Cost* (as apportioned) 4,000 2,800 3,200
Profit/(loss) (1,000) 1,600 800

Vishesh Khatwani | 8555070670

Chapter 11 Joint Product and By Product
 P 11.2

*Statement showing apportionment of joint cost on the basis of physical units

Product X Product Y(in ₹) Product Z Total (₹)
(in ₹) (in ₹)
Output (in litre) 100 70 80 250
Weight 0.4 (100/250) 0.28 (70/250) 0.32 (80/250)
Joint cost apportioned 4,000 2,800 3,200
(ii)Decision whether to process further or not
Product X(in ₹) Product Y(in ₹) Product Z(in ₹)
Incremental Revenue 2,500 700 1,200
[(50-25) × 100] [(80-70) × 70] [(60-45) × 80]
Less: Further processing cost 2,000 1,200 800
Incremental profit /(loss) 500 (500) 400
Product X Product Y Product Z Total
(in ₹) (in ₹) (in ₹)
Sales 2500 4900 3600 11000
Pre separation costs 4000 2800 3200 10000
Profit/(Loss) (1500) 2100 400 1000
It is advisable to further process only product X and Z and to sale product Y at the point of separation.

Question 3
ASR Ltd mainly produces Product 'L' and gets a by-Product 'M' out of a joint process. The net
realizable value of the by-product is used to reduce the joint production costs before the joint
costs are allocated to the main product. During the month of October 2022, company incurred
joint production costs of ₹ 4,00,000. The main Product 'L' is not marketable at the split off
point. Thus, it has to be processed further. Details of company's operation are as under:

Particulars Product L By- Product M

Production (units) 10,000 200
Selling price per kg ₹ 45 ₹5
Further processing ₹ 1,01,000 -
cost
You are required to find out:
(i) Profit earned from Product 'L'.
(ii) Selling price per kg of product 'L', if the company wishes to earn a profit of ₹
1,00,000 from the above production. (5 Marks Nov 22)
Answer 3
(i) Calculation of profit on product ‘L’
Particular ₹
Sales 4,50,000
Less: Further processing cost (1,01,000)
3,49,000
Less: Joint Production Cost* (3,99,000)
loss (50,000)
*Joint Production Cost = [4,00,000 – (200 × 5)] = 3,99,000
(ii) Calculation of desired selling price of product ‘L’
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡+𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
Desired Selling Price = 𝑈𝑛𝑖𝑡𝑠 𝑀𝑒𝑎𝑠𝑢𝑟𝑒𝑑
1,00,000+1,01,000+3,99,000
= 10,000
= Rs. 60 per kg.
Vishesh Khatwani | 8555070670
Chapter 11 Joint Product and By Product
 P 12.1

Chapter 12
Service Costing
Question 1
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 ` 10,000 per attendant per month
each mini bus)
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 ` 2,856 per mini bus
lubricants (for every 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 ` 3,00,000
life
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. (10 Marks Dec ‘21)
Answer 1
(a) (i) Statement of Expenses of operating a mini bus in a year
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) ÷ 8} 1,50,000 p.a. 1,50,000

Vishesh Khatwani | 8555070670 Chapter 12 Service Costing

 P 12.2

(B) Maintenance Charges:

Repairs & maintenance including engine oil and 28,560 p.a.
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 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒎𝒐𝒏𝒕𝒉 𝟏,𝟏𝟎,𝟗𝟔𝟎
= 𝑻𝒐𝒕𝒂𝒍 𝒏𝒐.𝒐𝒇 𝒆𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆 = 𝟕𝟐∗
= Rs. 1,541.11

B. Employee coming from a distance beyond 15 km

= 1541.11 × 2 = ` 3,082.22
* Considering half fare employees as a base
Full fare employees (12 × 2) 24 employees
Add: Half fare employees (Working Note 3) 12 employees
Total Equivalent number of employees per month 36 employees
Total Equivalent number of employees per month (morning + 72 employees
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:
57,600 𝑘𝑚.
= 5,760 𝑘𝑚
X Rs. 2,856 per bus

= ` 28,560 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.
= 8 𝑘𝑚
X Rs. 80
= 5,76,000
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 1,10,960/36 =` 3,082.22
and employees coming from distance upto 15 km will be 3,082.22 / 2 = ` 1,541.11]

Question 2
Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is at distance
of 15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet of lorries having carrying
Vishesh Khatwani | 8555070670 Chapter 12 Service Costing
 P 12.3

capacity of 4 tonnes is used to transport coal from the mines. Records reveal that average speed of
the lorries is 40 kms per hour when running and regularly take 15 minutes to unload at the rail head.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading time is 25
minutes per load.
Additional Information:
Drivers' wages, depreciation, insurance and taxes, etc. ₹ 12 per hour Operated Fuel, oil tyres, repairs
and maintenance, etc. ₹ 1.60 per km
You are required to prepare a statement showing the cost per tonne kilometre of carrying coal from
each mine 'X' and 'Y'.\ (5 Marks)(May’22)
Answer 2
Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine X (₹) Mine Y (₹)
Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance and
taxes)
X: 1 hour 30 minutes @ ₹ 12 per hour 18.00
Y: 1 hour 40 minutes @ ₹ 12 per hour 20.00
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
X: 30 km. ₹ 1.60 per km. 48.00
Y: 40 km. ₹ 1.60 per km. 64.00
Total cost per trip (₹) 66.00 84.00
Cost per tonne – km (Refer to working note 2) 1.1 1.05
₹66 ₹84
[ ] [ ]
60 𝑡𝑜𝑛𝑛𝑒 − 𝑘𝑚 80 𝑡𝑜𝑛𝑛𝑒 − 𝑘𝑚

Working notes:
Mine- X Mine- Y
(1) Total operated time taken per trip
Running time to & fro 45 minutes 60 minutes

60 𝑚𝑖𝑛𝑢𝑡𝑒𝑠 60 𝑚𝑖𝑛𝑢𝑡𝑒𝑠
[30𝑘𝑚 × ] [40𝑘𝑚 × ]
40 𝑘𝑚 40 𝑘𝑚
Un-loading time 15 minutes 15 minutes
Loading time 30 minutes 25 minutes
Total operated time 90 minutes or 100 minutes or
1 hour 30 minutes 1 hour 40 minutes
(2) Effective tones – km. 60(4 tonnes × 15 km.) 80(4 tonnes × 20 km.)

Question 3
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

Vishesh Khatwani | 8555070670 Chapter 12 Service Costing

 P 12.4

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. (5 Marks Nov 22)

Answer 3
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 & stationery, 18,000 18,000 36,000
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:
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

Vishesh Khatwani | 8555070670 Chapter 12 Service Costing

 P 13.1

Chapter 13
Standard Costing
Question 1
In a manufacturing company the standard units of production for the year were fixed at 1,20,000
units and overhead expenditures were estimated to be as follows:
Particulars Amount
(₹)
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature and 40% are of 1,80,000
variable nature)
Variable 6,00,000
Actual production during the month of April, 2021 was 8,000 units. Each month has 20 working
days. During the month there was one public holiday. The actual overheads were as follows:
Particulars Amount (₹)
Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% are of 19,200
variable)
Variable 48,000
You are required to calculate the following variances for the month of April 2021:
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 (10 Marks Dec ‘21)
Answer 1
(a) Working Notes
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑅𝑠.12,00,000
= 1,20,000 𝑢𝑛𝑖𝑡𝑠 ₹ 10
Fixed Overheads = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡

Fixed Overheads element in Semi-Variable Overheads i.e. 60% of ₹ 1,08,000

₹1,80,000
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑅𝑠.1,08,000 ₹ 0.90
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡
= 1,20,000 𝑢𝑛𝑖𝑡𝑠
Fixed Overheads =

Standard Rate of Absorption of Fixed Overheads per unit (₹10 + ₹ 10.90

₹0.90)
Fixed Overheads Absorbed on 8,000 units @ ₹ 10.90 ₹ 87,200
Budgeted Variable Overheads ₹ 6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ₹ 1,80,000 ₹ 72,000
Total Budgeted Variable Overheads ₹ 6,72,000
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑅𝑠.6,72,000
Standard Variable Cost per unit = = 1,20,000 𝑢𝑛𝑖𝑡𝑠 ₹5.60
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡

Standard Variable Overheads for 8,000 units @ ₹5.60 ₹ 44,800

Budgeted Annual Fixed Overheads (₹ 12,00,000 + 60% of ₹ 1,80,000)
Vishesh Khatwani | 8555070670 ₹ 13,08,000
Chapter 13 Standard Costing
 P 13.2

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

Possible Fixed Overheads = X Actual Days ₹ 1,03,550
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡

𝑅𝑠. 1,09,000
⌊ 𝑋 19 𝐷𝑎𝑦𝑠⌋
20 𝐷𝑎𝑦𝑠

Actual Fixed Overheads (₹1,10,000 + 60% of ₹ 19,200) ₹ 1,21,520

Actual Variable Overheads (₹48,000 + 40% of ₹19,200) ₹ 55,680
COMPUTATION OF VARIANCES
i. Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (₹ 87,200 + ₹ 44,800) – (₹ 1,21,520 + ₹ 55,680)
= ₹ 45,200 (A)
ii. Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed
Overheads
= ₹ 87,200 – ₹ 1,21,520
= ₹ 34,320 (A)
iii. Variable Overhead Cost Variance = Standard Variable Overheads for Production–
Actual Variable Overheads
= ₹ 44,800 – ₹ 55,680
= ₹ 10,880 (A)
iv. Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
= ₹ 87,200 – ₹1,09,000
= ₹ 21,800 (A)
v. Fixed Overhead Expenditure Variance = Budgeted Fixed Overheads – Actual
Fixed Overheads
= ₹ 10.90 × 10,000 units – ₹ 1,21,520
= ₹ 12,520 (A)
vi. Calendar Variance = Possible Fixed Overheads – Budgeted
Fixed Overheads
= ₹ 1,03,550 – ₹ 1,09,000
= ₹ 5,450 (A)
OR
Calendar Variance = (Actual days – Budgeted days) x Standard fixed overhead
rate per day
Standard fixed overhead rate per day = 1308000/20*12 = ₹ 5450
Fixed Overhead Calendar Variance = (19-20) x 5450 = 5450(A)

Question 2
Discuss briefly some of the criticism which may be levelled against the Standard Costing System(5
Marks) (May’22)
Answer 2
Criticism of Standard Costing
Vishesh Khatwani | 8555070670
Chapter 13 Standard Costing
 P 13.3

(i) Variation in price: One of the chief problem faced in the operation of the standard costing system
is the precise estimation of likely prices or rate to be paid. The variability of prices is so great that
even actual prices are not necessarily adequately representative of cost. But the use of
sophisticated forecasting techniques should be able to cover the price fluctuation to some extent.
Besides this, the system provides for isolating uncontrollable variances arising from variations to
be dealt with separately.
(ii) Varying levels of output: If the standard level of output set for pre-determination of standard costs
is not achieved, the standard costs are said to be not realised. However, the statement that the
capacity utilisation cannot be precisely estimated for absorption of overheads may be true only in
some industries of jobbing type. In vast majority of industries, use of forecasting techniques,
market research, etc., help to estimate the output with reasonable accuracy and thus the variation
is unlikely to be very large. Prime cost will not be affected by such variation and, moreover, variance
analysis helps to measure the effects of idle time.
(iii) Changing standard of technology: In case of industries that have frequent technological changes
affecting the conditions of production, standard costing may not be suitable. This criticism does
not affect the system of standard costing. Cost reduction and cost control is a cardinal feature of
standard costing because standards once set do not always remain stable. They have to be revised.
(iv) Attitude of technical people: Technical people are accustomed to think of standards as physical
standards and, therefore, they will be misled by standard costs. Since technical people can be
educated to adopt themselves to the system through orientation courses, it is not an
insurmountable difficulty.
(v) Mix of products: Standard costing presupposes a pre-determined combination of products both in
variety and quantity. The mixture of materials used to manufacture the products may vary in the
long run but since standard costs are set normally for a short period, such changes can be taken
care of by revision of standards.
(vi) Level of Performance: Standards may be either too strict or too liberal because they may be based
on (a) theoretical maximum efficiency, (b) attainable good performance or (c) average past
performance. To overcome this difficulty, the management should give thought to the selection of
a suitable type of standard. The type of standard most effective in the control of costs is one which
represents an attainable level of good performance.
(vii) Standard costs cannot possibly reflect the true value in exchange: If previous historical
costs are amended roughly to arrive at estimates for ad hoc purposes, they are not standard costs
in the strict sense of the term and hence they cannot also reflect true value in exchange. In arriving
at standard costs, however, the economic and technical factors, internal and external, are brought
together and analysed to arrive at quantities and prices which reflect optimum operations. The
resulting costs, therefore, become realistic measures of the sacrifices involved.
(viii) Fixation of standards may be costly: It may require high order of skill and competency. Small
concerns, therefore, feel difficulty in the operation of such system.

Question 3
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 Std. Rate per Kg.

(Kg.) (₹)
A 500 25
B 350 45
C 250 55
Vishesh Khatwani | 8555070670
1100
Chapter 13 Standard Costing
 P 13.4

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 (10 Marks Nov 22)
Note: Indicate the nature of variance i.e. Favourable or Adverse.
Answer 3
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) 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)
Vishesh Khatwani | 8555070670
Chapter 13 Standard Costing
 P 13.5

10,000
A = 22,000 X 23,000 = 10,454.54
7,000
B = 22,000 X 23,000 = 7,318.18
5,000
C = 22,000 X 23,000 = 5,227.17

Material Yield Variance can also be Calculated as below

Material yield variance = Standard cost per unit (Actual yield – Standard yield)
𝑅𝑠.8,40,000
Standard Cost per unit = = Rs. 42
20,000
20,000
New Standard Yield = X 23,000 = 20,909
22,000

Material yield variance = ₹ 42 (20,000 – 20,909)

= ₹ 38,178 (A)

Vishesh Khatwani | 8555070670

Chapter 13 Standard Costing
 P 14.1

Chapter 14
Marginal Costing
Question 1
A Z 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). (10 Marks Dec ‘21)
Answer 1
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 = Rs. 20+Rs. 4 = Rs. 24
Contribution per unit = Rs. 24- Rs. 16 = Rs. 8
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 𝑅𝑠.8,00,000
(i) Present Break- even Sales (Quantity) = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
𝑅𝑠.8

Present Break –even Sales(Rs.) = 1,00,000 units X Rs. 24 = Rs. 24,00,000

(ii) Present P/V Ratio = 8/24 X 100 = 33.33%

(iii) Revised Selling Price per unit = Rs. 24 – 10% of Rs. 24 = Rs. 21.60

Revised Contribution per unit = Rs. 21.60 – Rs. 16 = Rs. 5.60

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 8,00,000
Revised Break-even point (Rs.) = 𝑃 = = Rs. 30,85,705
𝑅𝑎𝑡𝑖𝑜 25.926%
𝑉

Or
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 𝑅𝑠.8,00,000
Revised Break-even point (units) = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
5.60

= 1,42,857

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

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
= 5.60
= 3,14,286 units

𝑅𝑒𝑣𝑖𝑠𝑒𝑑 Sales (in Rs.) = 3,14,286 units X Rs. 21.60 = Rs. 67,88,578

Vishesh Khatwani | 8555070670

Chapter 14 Marginal Costing
 P 14.2

Question 2
Top-tech a manufacturing company is presently evaluating two possible machines for the
manufacture of superior Pen-drives. The following information is available:
Particulars Machine A Machine B
Selling price per unit ₹ 400.00 ₹ 400.00
Variable cost per unit ₹ 240.00 ₹ 260.00
Total fixed costs per year ₹ 350 lakhs ₹ 200 lakhs
Capacity (in units) 8,00,000 10,00,000
Required:
(i) Recommend which machine should be chosen?
(ii) Would you change your Answer, if you were informed that in near future demand will be
unlimited and the capacities of the two machines are as follows?
Machine A - 12,00,000 units Machine B - 12,00,000 units Why?(5 Marks)(May’22)
Answer 2
Machine-A Machine-B Total
A Selling price per unit (₹) 400 400
B Variable cost per cost (₹) 240 260
C Contribution per unit (₹) [A-B] 160 140
D Units 8,00,000 10,00,000
E Total contribution (₹ [C×D] 12,80,00,000 14,00,00,000 26,80,00,000
F Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000
G Profit [E-F] (₹) 9,30,00,000 12,00,00,000 21,30,00,000
H Profit per unit [G÷D] (₹) 116.25 120.00
(i) Machine B has the higher profit of ₹2,70,00,000 than the Machine-A. Further, Machine-B’s fixed
cost is less than the fixed cost of Machine-A and higher capacity. Hence, Machine B be
recommended.
Note: This Question can also be solved as below:
Indifferent point = Difference in fixed cost / difference in variable cost per unit
= 1,50,00,000 / 20 = 7,50,000 units
At the level of demand 7,50,000 units both machine options equally profitable. If demand below
7,50,000 units, select machine B (with lower FC).
If demand above 7,50,000 units, select machine A (with lower VC).
(ii) When the capacities of both the machines are same and demand for the product is unlimited,
calculation of profit will be as follows:
Machine-A Machine-BTotal
A Contribution per unit (₹) 160 140
B Units 12,00,000 12,00,000
C Total contribution (₹) [A×B] 19,20,00,000 16,80,00,000 36,00,00,000
D Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000
E Profit [C-E] (₹) 15,70,00,000 14,80,00,000 30,50,00,000
F Profit per unit [E÷B] (₹) 130.83 123.33
Yes, the preference for the machine would change because now, Machine A is having higher
contribution and higher profit, hence recommended.

Question 3
UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps and
sells its lamps at ₹ 450 per unit. During the quarter ending on 31st December, 2021, it produced and
sold 12,000 units and suffered a loss of ₹ 35 per unit. During the quarter ending on 31st March,
2022, it produced and sold 30,000 units and earned a profit of ₹ 40 per unit.
You| 8555070670
Vishesh Khatwani are required to calculate:
Chapter 14 Marginal Costing
 P 14.3

(i) Total fixed cost incurred by UV ltd. per quarter.

(ii) Break Even sales value (in rupees)
Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e., quarter ending
on 30th June, 2022).(5 Marks)( May’22)

Answer 3
Quarter ending 31st Quarter ending 31st March,
December, 2021 (₹) 2022(₹)
Sales (No. of units sold x ₹ 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]

Change in profit
P/V Ratio= × 100
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠
16,20,000
∴ 81,00,000
× 100=20%

(i) Fixed Cost = Sales × P/V ratio – profit

= ₹ 1,35,00,000 × 20% – 12,00,000
= ₹ 15,00,000
Alternative Presentation for the calculation of Fixed cost
Quarter ending Quarter ending 31st
31stDecember, 2021(₹) March, 2022(₹)
Sales (No. of units sold x ₹ 450 per 54,00,000 1,35,00,000
unit)
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
Total cost 58,20,000 1,23,00,000
VC per unit = (1,23,00,000 – 58,20,000) / (30,000 – 12,000)
= 64,80,000 / 18,000 =₹ 360 per unit
Fixed cost = TC – VC , 58,20,000 (360 x12,000 units) ₹15,00,000
Fixed cost
× 100
𝑃/𝑉 𝑟𝑎𝑡𝑖𝑜
15,00,000
20%
= ₹75,00,000
(i) Profit, if sales reach 50,000 units for the quarter ending 30th June, 2022
(₹)
Sales (50,000 × ₹ 450) 2,25,00,000
Less: Variable cost 1,80,00,000
Contribution 45,00,000
Less: Fixed cost 15,00,000
Profit 30,00,000

Question 4
ABC Ltd sells its Product ‘Y’ at a price of ₹ 300 per unit and its variable cost is ₹ 180 per unit.
The fixed costs are ₹ 16,80,000 per year uniformly incurred throughout the year. The Profit for
the year is ₹ 7,20,000.
You are required to calculate:
(i) BEP in value (₹) and units.
(ii) Margin of Safety
Vishesh Khatwani | 8555070670
Chapter 14 Marginal Costing
 P 14.4

(iii) Profits made when sales are 24,000 units.

(iv) Sales in value (₹) to be made to earn a net profit of ₹ 10,00,000 for the year. (5 Marks Nov
22)

Answer 4
(i) Calculation of BEP in value
𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑖𝑐𝑒−𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 300−180
P/V ratio = = = 40%
𝑆𝑎𝑙𝑒𝑠 300
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 16,80,000
Break Even Point in Value ( ₹) = 𝑃 = 40%
= Rs. 42,00,000
𝑟𝑎𝑡𝑖𝑜
𝑣
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 16,80,000
Break Even Point in Units = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 = 120%
= 14,000 Units
𝑅𝑠.42,00,000
(Alternatively , 300
= 14000 Units)

𝑷𝒓𝒐𝒇𝒊𝒕 𝟕,𝟐𝟎,𝟎𝟎𝟎
(ii) Margin of Safety (in Amount) = 𝑷 = 𝟒𝟎%
= Rs. 18,00,000
𝒓𝒂𝒕𝒊𝒐
𝑽

Margin of safety may also be calculated by deducting BEP sales from present sale. Present
sale is ₹ 60,00,000 i.e. (16,80,000 + 7,20,000)/40%.
𝑷𝒓𝒐𝒇𝒊𝒕 𝟕,𝟐𝟎,𝟎𝟎𝟎
Margin of Safety (in Units) = = = 6,000 units
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝟏𝟐𝟎

(iii) Profit when sales are 24,000 units

Particular (₹)
Contribution (24,000 X 120) 28,80,000
Less: Fixed cost 16,80,000
Profit 12,00,000

(iv) Sales in value to earn a net profit of ₹10,00,000

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡+𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 16,80,000+10,00,000

𝑃 = 40%
= Rs. 67,00,000
𝑟𝑎𝑡𝑖𝑜
𝑣

Question 5
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 2,000 500 100
hectare)
Selling Price (₹ per kg) 20 40 250

The variable cost data of different crops are given below:

(All figures in ₹ per kg)
Crop Labour Packing Other variable
charges Materials 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:
Vishesh Khatwani | 8555070670
Chapter 14 Marginal Costing
 P 14.5

Crop Maximum Area (in Minimum Area (in

hectares) hectares)
Wheat 160 100
Rice 50 40
Maize 60 10

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 Nov 22)
(Assume that there are no other constraints applicable to this company)

Answer 5
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 50 10 - 60
based on ranking 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
(in hectares) (kg per kgs)
hectare)
Vishesh Khatwani | 8555070670
Chapter 14 Marginal Costing
 P 14.6

(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:

Production Contribution Total
(in kgs) (₹ per kg) contribution
(₹)
(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 (21,45,000)
annum
Maximum profits earned by 4,30,000
the company

Vishesh Khatwani | 8555070670

Chapter 14 Marginal Costing
 P 15.1

Chapter 15
Budget & Budgetary Control
Question 1
The Accountant of KPMR Ltd. has prepared the following budget for the coming year
2022 for its two products ‘AYE’ and ‘ZYE’:
Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in ₹) Amount (in ₹)
Selling Price per unit 200 180
Direct Material per unit 80 70
Direct Labour per unit 40 35
Variable Overhead per unit 20 25
Fixed Overhead per unit 10 10

After reviewing the above budget, the management has called the marketing team for suggesting
some measures for increasing the sales. The marketing team has suggested that by promoting
the products on social media, the sales quantity of both the products can be increased by 5%.
Also, the selling price per unit will go up by 10%. But this will result in increase in expenditure on
variable overhead and fixed overhead by 20% and 5% respectively for both the products.
You are required to prepare flexible budget for both the products:
(i) Before promotion on social media,
(ii) After promotion on social media. (5 Marks Dec ’21)
Answer 1
(i) Flexible Budget (before promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,000 3,000
(units)
Amount (₹) Amount (₹) Amount (₹)
A. Sales Value 8,00,000 5,40,000 13,40,000
(₹ 200×4,000) (₹ 180×3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(₹ 80 × 4,000) (₹70 × 3,000)
C. Direct labour 1,60,000 1,05,000 2,65,000
(₹ 40 × 4,000) (₹ 35 × 3,000)
D. Variable Overheads 80,000 75,000 1,55,000
(₹ 20 × 4,000) (₹ 25 × 3,000)
E. Total Variable Cost 5,60,000 3,90,000 9,50,000
(B+C+D)
F. Contribution (A-E) 2,40,000 1,50,000 3,90,000
G. Fixed Overhead 40,000 30,000 70,000
(₹10 × 4,000) (₹10 × 3,000)
H. Profit (F-G) 2,00,000 1,20,000 3,20,000
Profit per unit 50 40
(ii) Flexible Budget (after promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,200 3,150

Vishesh Khatwani | 8555070670

Chapter 15 Budget & Budgetary Control
 P 15.2

(units) (4,000×105%) (3,000×105%)

Amount (₹) Amount (₹) Amount (₹)
A. Sales Value 9,24,000 6,23,700 15,47,700
(₹ 220 × 4,200) (₹ 198 × 3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(₹ 80 × 4,200) (₹ 70 × 3,150)
C. Direct labour 1,68,000 1,10,250 2,78,250
(₹ 40 × 4,200) (₹ 35 × 3,150)
D. Variable Overheads 1,00,800 94,500 1,95,300
(₹ 24 × 4,200) (₹ 30 × 3,150)
E. Total Variable Cost 6,04,800 4,25,250 10,30,050
(B+C+D)
F. Contribution (A-E) 3,19,200 1,98,450 5,17,650
G. Fixed Overhead 42,000 31,500 73,500
(₹ 40,000 × (₹ 30,000 ×
105%) 105%)
H. Profit (F-G) 2,77,200 1,66,950 4,44,150
Profit per unit 66 53

Question 2
What is ‘Budgetary Control System’ and discuss the components of the same. (5 Marks Dec ‘21)
Answer 2
Budgetary Control System: It is the system of management control and accounting in which all
the operations are forecasted and planned in advance to the extent possible and the actual results
compared with the forecasted and planned results.
Components of Budgetary Control System: The policy of a business for a defined period is
represented by the master budget, the detailed components of which are given in a number of
individual budgets called functional budgets. These functional budgets are broadly grouped under
the following heads:
1. Physical budgets: Those budgets which contain information in quantitative terms such as
the physical units of sales, production etc. This may include quantity of sales, quantity of
production, inventories, and manpower budgets are physical budgets.
2. Cost budgets: Budgets which provides cost information in respect of manufacturing,
administration, selling and distribution, etc. for example, manufacturing costs, selling costs,
administration cost, and research and development cost budgets are cost budgets.
3. Profit budgets: A budget which enables the ascertainment of profit. For example, sales
budget, profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial position of a
concern, for example, cash budgets, capital expenditure budget, budgeted balance sheet
etc.

Question 3
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.
Vishesh Khatwani | 8555070670
Chapter 15 Budget & Budgetary Control
 P 15.3

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.(10 Marks)(May’22)

Answer 3
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
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:
Vishesh Khatwani | 8555070670
Chapter 15 Budget & Budgetary Control
 P 15.4

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 60 44 60 44 60 44
unit (₹)
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 0 0 6,600 8,800 7,260 9,680
stock
B Sales 15,000 20,000 16,500 22,000 18,150 24,200 19,965 26,620
demand
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]

Question 4
Define Budget Manual. What are the salient features of Budget Manual? (5 Marks Nov 22)

Answer 4
Budget Manual: The budget manual is a booklet specifying the objectives of an organisation in
relation to its strategy. The budget is made to decide how much an organisation would earn and
spend and in what manner. In the budget, the organisation sets its priorities too.
Effective budgetary planning relies on the provision of adequate information to the individuals
involved in the planning process. Many of these information needs are contained in the budget
manual. A budget manual is a collection of documents that contains key information for those
involved in the planning process .
CIMA London defines budget manual as, 'A document which sets out the responsibilities of the
persons engaged in, the routines of, and the forms and records required for, budgetary control'.
Contents of a budget manual: Typical budget manual may include the following:
(i) A statement regarding the objectives of the organisation and how they can be
achieved through budgetary control;
(ii) A statement about the functions and responsibilities of each executive, both
regarding preparation and execution of budgets;
(iii) Procedures to be followed for obtaining the necessary approval of budgets. The
authority of granting approval should be stated in explicit terms. Whether, one two
or more signatures are required on each document should be clearly stated;
(iv) A form of organisation chart to show who are responsible for the preparation of
each functional budget and the way in which the budgets are interrelated.
(v) A timetable for the preparation of each budget.

Vishesh Khatwani | 8555070670

Chapter 15 Budget & Budgetary Control
 P 15.5

(vi) The manner of scrutiny and the personnel to carry it out;

(vii) Reports, statements, forms and other record to be maintained.
(viii) The accounts classification to be employed. It is necessary that the framework
within which the costs, revenue and other financial accounts are classified must be
identical both in the accounts and budget department.
(ix) The reporting of the remedial action.
(x) The manner in which budgets, after acceptance and issuance, are to be revised or
amended, these are included in budgets and on which action can be taken only with
the approval of top management
(xi) This will prevent the formation of a ‘bottleneck’ with the late preparation of one
budget
holding up the preparation of all others.
(xii) Copies of all forms to be completed by those responsible for preparing budgets,
with explanations concerning their completion.
(xiii) A list of the organization’s account codes, with full explanations of how to use them.
(xiv) Information concerning key assumptions to be made by managers in their budgets,
for example the rate of inflation, key exchange rates, etc.
(Any four points)

Vishesh Khatwani | 8555070670

Chapter 15 Budget & Budgetary Control