PGDM 3.

5 Strategic management Accounting

Unit – I Marginal costing
Course Instructors: Mrs. Annie Kavitha & Mr. N. Ramesh Babu

Name of the student: Roll No:

Coverage:

1. Introduction
2. Cost classification (Behaviour wise – Fixed & Variable)
3. Variable costing VS. Absorption costing
4. Basic problems on Marginal costing
5. Managerial application of Marginal costing (Advanced problems)
6. Case Study

Formulae:

Marginal costing equation: Sales – variable cost = contribution = Fixed cost - profit

1. Profit/ volume ratio = Contribution x 100

Sales
2. Breakeven point (in units) = Fixed cost
Contribution margin per unit
3. Breakeven sales = Fixed cost
P/V ratio
4. Desired sales (in units) = Fixed cost + profit
Contribution margin per unit
5. Desired sales (in Rupees) = Fixed cost + profit
P/V ratio
6. Margin of safety = Profit
P/V ratio
OR
Margin of safety = Actual sales – Breakeven sales
7. P/V ratio = % change in profit
% change in sales

BASIC PROBLEMS
1. Calculate the P/V ratio and Breakeven point from the following particulars:
Rs.
Sales 5,00,000
 Fixed cost 1,00,000
Profit 1,50,000
Ans: P/V ratio = 50%; BEP = 2,00,000
2. Calculate Breakeven point from the following particulars: (HW)
Rs.
Fixed expenses 1,50,000
Variable cost per unit 10
Selling price per unit 15
Ans: BEP – 30,000 units & Rs. 4,50,000
3. From the following information find out the amount of profit earned during the year using the
marginal costing technique: (HW)

Fixed cost Rs.5,00,000

Variable cost Rs. 10 per unit
Selling price Rs. 15 per unit
Output level 1,50,000 units
Ans: profit – Rs. 2,50,000
4. Calculate Breakeven point (HW)
Selling price Rs.50/ unit
Variable cost Rs. 30/ unit
Fixed cost Rs. 2,000
Ans: BEP – 100 units & Rs. 5,000
5. The statement of cost of a cycle is as follows:
Rs.
Material 200
Labour 100
Variable expenses 25
Fixed expenses 75
Profit 125
Selling price 525
The number of cycles made and sold are 10,000 units. Find out: (i) Breakeven point (ii)
how many cycles must be produced and sold if the selling price is reduced by Rs. 25 and the
same profit is maintained?
Ans: (i) 3,750 units (ii) 11,428 units
6. From the following particulars, calculate: (HW)
(i) Breakeven point in terms of sales value and in units.
(ii) Number of units that must be sold to earn a profit of Rs. 90,000.
Fixed Factory overhead cost Rs. 60,000
Fixed selling overhead cost Rs. 12,000
Variable Manufacturing cost per unit Rs. 12
Variable Selling cost per unit Rs. 3
Selling price per unit Rs. 24
Ans: BEP – 8,000 units & Rs.1,92,000; Desired sales – 18,000 units
7. From the following data, you are required to calculate: (HW)
(a) P/V ratio (b) Breakeven sales (c) Sales required to earn a profit of Rs. 4,50,000
Fixed expenses Rs. 90,000
Variable cost per unit:
Direct material Rs. 5
Direct labour Rs. 2
Direct expenses 100% of direct labour
Selling price per unit Rs. 12
 Ans: P/V ratio – 25%; BES – Rs. 3,60,000; D Sales – Rs.21,60,000
8. The competing companies, P Ltd. And Q Ltd., produce and sell the same type of product in the
same market. For the year ended March 2009 their forecasted profit and loss accounts are as
follows:
P Ltd Q Ltd
Rs. Rs. Rs. Rs.
Sales 3,00,000 3,00,000
Less: Variable cost 2,00,000 2,25,000
Fixed cost 50,000 2,50,000 25,000 2,50,000
Estimated profit 50,000 50,000
You are required to calculate:
(a) Profit volume ratio, breakeven point and margin of safety of each business.
(b) State volume at which each business will earn a profit of Rs. 30,000.
(c) Explain giving reasons which business is likely to earn greater profits in the conditions of
(i) Heavy demand for the product
(ii) Low demand for the product
Ans:
(a) P Ltd Q Ltd
P/V ratio 33.33% 25%
BEP Rs.1,50,000 Rs. 1,00,000
M/S Rs. 1,50,000 Rs. 2,00,000
(b) Desired sales Rs. 2,40,000 Rs. 2,20,000
(c) (i) P Ltd., (ii) Q Ltd.
9. The competing companies, ABC Ltd. and XYZ Ltd., produce and sell the same type of product in
the same market. For the year ended March 2009 their forecasted profit and loss accounts are as
follows: (HW)
ABC Ltd XYZ Ltd
Rs. Rs. Rs. Rs.
Sales 3,00,000 3,00,000
Less: Variable cost 2,00,000 1,50,000
Fixed cost 25,000 2,25,000 75,000 2,25,000
Estimated profit 75,000 75,000
You are required to calculate:
(a) Profit volume ratio, breakeven point and margin of safety of each business.
(b) State volume at which each business will earn a profit of Rs. 30,000.
(c) Explain giving reasons which business is likely to earn greater profits in the conditions of
(iii) Heavy demand for the product
(iv) Low demand for the product
Ans:
(a) ABC Ltd XYZ Ltd
P/V ratio 33.33% 50%
(b) BEP Rs.75,000 Rs. 1,50,000
(c) Low demand ABC Ltd., High demand XYZ Ltd.
10. A company proposes and markets industrial containers and packing cases. Due to competition the
company proposes to reduce selling price. If the present level of profits is maintained, indicate the
number of units to be sold if the proposed reduction in selling price is – (a) 5% (b) 10% and (c)
15%.
Rs. Rs.
Present sales (30000 units) 3,00,000
Variable cost 1,80,000
 Fixed cost 70,000
2,50,000
Net profit 50,000
Ans: (a) 34,286 units; (b) 40,000 units; and (c) 48,000 units
11. Sales – 1,00,000; Profit – 10,000; Variable cost – 70% (HW)
Find out (i) P/V ratio, (ii) Fixed csot (iii) Sales volume to earn a profit of Rs. 40,000
Ans: (i)30% (ii)20,000 (iii) 2,00,000
12. Sale of a product amounts to 200 units per month at rs. 10 per unit. Fixed overhead cost is Rs.400
per month and variable cost is Rs. 6 per unit. There is a proposal to reduce prices by 10 percent.
Calculate present and future P/V ratio. How many units must be sold to earn the present total
profits?
Ans: P/V ratio – 40%; 331/3%; 267 units
13. From the following particulars, find out the breakeven point: (HW)
Variable cost per unit – Rs. 15; fixed expenses – Rs. 54,000; selling price per unit – Rs. 20
What should be the selling price per unit, if the breakeven point should be brought down to 6,000
units?
Ans: BEP – 10,800; SP/unit – Rs. 24
14. From the following information, ascertain by how much the value of sales must be increased by
the company to breakeven: (HW)
Sales – Rs. 3,00,000; Fixed cost – Rs. 1,50,000; Variable cost – Rs. 2,00,000
Ans: 1,50,000
15. A company is making a loss of Rs. 40,000 and relevant information is as follows:
Sales – Rs. 1,20,000; Variable cost – Rs. 60,000; Fixed cost – Rs. 1,00,000.
Loss can be made good either by increasing the sales price or by increasing sales volume.
What are breakeven sales if
(a) Present sales level is maintained and the selling price is increased.
(b) If present selling price is maintained and the sales volume is increased. What would be sales
if a profit of Rs. 1,00,000 is required?
Ans: (a) 1,20,000 (b) 4,00,000
16. An analysis of Modern manufacturing Co. Ltd. led to the following information:

Variable cost (% of sales) Shut-down cost

Direct Materials 32.8 -
Direct labour 28.4 -
Factory overhead 12.6 1,89,900
Distribution expenses 4.1 58,400
General and Administration expenses 1.1 66,700
Budgeted sales for the next year are Rs. 18,50,000.
You are required to determine:
(i) The breakeven sales volume
(ii) The profit at the budgeted sales volume
(iii) The profit if actual sales (a) drop by 10%, (b) increase by 10%.
(iv) The profit if actual sales increase by 5% from budgeted sales.
Ans: (i) 15,00,000; (ii) Rs. 73,500; (iii) (a) Rs. 34,650 (b) 1,12,350; (iv) Rs. 92,925
17. An analysis of costs of a company led to the following information: (HW)

Variable cost (% of sales) Shut-down cost

Direct Materials 33.6 -
Direct labour 28.4 -
Factory overhead 11.6 1,66,700
Distribution expenses 3.3 63,400
 General and Administration expenses 1.1 99,900
Budgeted sales for the next year are Rs. 20,00,000.
You are required to determine:
(v) The breakeven sales volume
(vi) The profit at the budgeted sales volume
(vii) The profit if actual sales (a) drop by 12.5%, (b) increase by 10%.
(viii) Sales to generate a profit of Rs. 2,20,000.
(ix) Ans: (i) 15,00,000; (ii) Rs. 1,10,000; (iii) (a) Rs. 55,000, (b) 1,54,000; (iv) Rs. 25,000
18. The following figures of sales and profits for two periods are available in respect of a concern:
Sales (Rs.) Profit (Rs.)
Period I 1,00,000 15,000
Period II 1,20,000 23,000
You are required to find out:
(a) P/V ratio (b) Fixed cost (c) Breakeven point (d) profit at an estimated sale of Rs. 20,000 (e)
sales required to earn a profit of Rs. 20,000
Ans: (a) 40% (b) 25,000 (c) Rs. 62,500 (d) Rs. 25,000 (e) Rs. 1,12,500
19. The following figures of sales and profits for two periods are available in respect of a concern:
(HW)
Total Sales (Rs.) Total cost(Rs.)
Period I 4,00,000 3,60,000
Period II 3,50,000 3,25,000
You are required to find out:
(b) P/V ratio (b) Fixed cost (c) Breakeven point (d) sales required to earn a profit of Rs. 65,000
Ans: (a) 30% (b) 80,000 (c) Rs. 2,66,667 (d) Rs. 4,83,333
20. Rakshaa Ltd., a multi product company, furnishes you the following data relating to the year
2009
First Half of the year Second Half of the year
Sales Rs. 50,000 Rs. 55,000
Total Cost Rs. 45,000 Rs. 49,000
Assuming that there is no change in prices and variable costs and that the fixed expenses
are incurred equally in the two half periods. Calculate for the year 2009.
(i) The P/V ratio (ii) Fixed expenses (iii) breakeven sales (iv) Percentage of margin of safety
21. The following information relates to production and sale of an article for January and February
2009:
January (Rs.) February (Rs.)
Sales 38,000 65,000
Profit -- 3,000
Loss 2,400 --
Calculate:
(i) Breakeven sales volume (ii) profit or loss at Rs.46,000 sales (iii) Sales to earn a profit of Rs.
46,000 sales
Ans: (i) Rs. 50,000 (ii) Loss Rs. 800 (iii) Rs. 75,000
22. The following information relates to production and sale of an article for November and
December 2009: (HW)
November (Rs.) December (Rs.)
Sales 55,000 80,000
Profit -- 5,000
Loss 2,000 --
Calculate:
(j) Breakeven sales volume (ii) profit or loss at Rs.60,000 sales (iii) Sales to earn a profit of Rs.
10,000 sales
 Ans: (i) Rs. 62,143 (ii) Loss Rs. 600 (iii) Rs. 97,857
23. A company has earned a profit of Rs. 25,000 during the year 2009. If the marginal cost and
selling price of a product are Rs. 7.50 and Rs. 10 per unit respectively, find out the margin of
safety. (HW)
24. From the following information calculate: (HW)
(i) P/V ratio
(ii) Breakeven point
(iii) Margin of safety
Rs.
Total Sales 3,60,000
Selling price, per unit 100
Variable cost, per unit 50
Fixed cost 1,00,000
---------------------------------------------------------------------------------------------------------------------
(iv) If the selling price is reduced to Rs.90, by how much is the margin of safety reduced?
Ans: (i) 50% (ii) Rs. 2,00,000 (iii) Rs. 1,60,000 (iv) Rs. 25,000
25. You are given: (HW)
Margin of safety Rs. 15,000, which represents 30% of sales. P/V ratio 40%. Calculate (a) Sales
(b) Breakeven sales (c) Fixed cost and (d) profit
26. You are required to calculate (a) P/V ratio (b) Margin of safety (c) Sales and (d) variable cost
from the following figures.
Fixed cost Rs. 15,000; Profit Rs. 2,000; breakeven sales Rs. 75,000
27. The P/V ratio of Devi Ltd. Is 50% and the margin of safety is 30%. You are required to work out
the Breakeven sales and the net profit if sales volume is Rs. 60,00,000 (HW)
28. The P/V ratio of a firm dealing in precision instrument is 50% and margin of safety is 40%. You
are required to work out the BEP and net profit if sales volume is Rs. 5,00,000.
29. Manjula Ltd. Has prepared the following budget estimates for the year 2008-2009.
Sales (Units) 21,000
Fixed expenses Rs. 30,000
Sales Rs. 2,10,000
Variable costs Rs. 7 per unit
You are required to
(i) Find the P/V ratio, breakeven point and margin of safety
(ii) Calculate the revised P/V ratio, breakeven point and margin of safety in each of the
following cases
(a) Increase of 10% in selling price;
(b) Decrease of 10% in variable costs;
(c) Increase of sales volume by 2,500 units; and
(d) Increase of Rs.9,000 in fixed costs.

Problems on Decision Making (Advanced Problems)

I. Make or Buy Decision:

1. A radio manufacturing company finds that while it costs Rs.8 to make each component
No. 011, the same is available in the market at Rs.6.50eash, with an assurance of
continued supply. The breakdown of cost is,
Item per unit (Rs.)
Materials 3
 Labour 2
Other variable expenses 1
Depreciation and other fixed costs 2
Total cost 8
Should the company make or buy? Give also your views in case the supplier reduces the
price from Rs. 6.50 to Rs. 5.50
(Ans. 1. Make 2. Buy)
2. A TV manufacturing company finds that while it costs Rs. 6.25 to make a component
x27Q, the same is available in the market at Rs. 5.75 each. The breakdown of cost is,
Material Rs. 2.75
Wages Rs. 1.75
Other variable overheads Rs. 0.50
Fixed overheads Rs. 1.25
--------------
Total cost Rs. 6.25
---------------
a) Should the company make or buy?
b) What would be your decision if the supplier offers the same component at Rs.
4.85 each? (HW)
(Ans. 1. Make 2. Buy)
3. Auto part Ltd. Has an annual production of 90,000 units for a motor component. The cost
structure of the component is as below.
Per unit (Rs)
Material 270
Labour (25% fixed) 180
Variable expenses 90
Fixed expenses 135
a) The purchase manager has an offer from a supplier who is willing to supply the
component at Rs. 540. Should the component be purchased or produced?
b) Assume the resources now used for this component are to be used to produce
another mew product for which the selling price is Rs. 485 and materials required
will be Rs. 200 per unit. 90,000 units of the product can be produced at the same
cost of labour and expenses. Discuss whether it would be advisable to divert the
resources to manufacture that new product on the footing that the component
presently being produced would, instead of being produced, be purchased from
the market.
(Ans. 1. Make 2. Buy)
II. Product Mix (or) Sales Mix:
1. A company produces two produces namely X and Y. The following facts are given.
Particulars X (Rs.) Y (Rs.)
Contribution per unit 2 3
 Required production hours per unit 1 2
Sales (units) 1500 800
Available production hours =2000 hours.
Determine optimum product mix.
(Ans. 1500 units of X and 250 units of Y)

2. Rashika Ltd. produces three products A, B and C. the cost and other details of three
products are as below.

Particulars A B C
Selling price per unit 100 80 50
Variable cost per unit 60 60 20
Maximum production Per month (units) 5,000 8,000 6,000
Maximum demand Per month (units) 2,000 4,000 2,400

The total hours available are 200 hours per month. Advise the management on the profitable
product mix. (HW)

3. From the following information you are required to,

a. Calculate and present the marginal product cost and contribution per uit.
b. State which of the alternative sales mix you would recommend to the
management and why?

Particulars X (Rs.) Y (Rs)

Selling price per unit 25 20
Direct material per unit 8 6
Direct wages 24 hours @0.25 per hour 16 hours @0.25
Fixed over heads Rs. 750
Variable over heads are 150% of direct wages.
Alternative sales mixes:

A. 250 units of X & 250 units of Y

B. Nil units of X & 400 units of Y
C. 400 units of X & 100 units of Y

Problems on special order:

1. M/S Mini Toy Ltd received an offer from a customer for 10,000 toy trains at Rs. 15 each.
There has to a slight modification in the design so as to differentiate it from the same
product sold to regular customer, but it will not affect the direct product costs.
The company expects to incur its regular unit variable costs and in addition it must
absorb Rs. 10,000 as the cost of freight to the customer’s godown.
The company’s previous year cost data are as below.
Production and sales - 35,000 trains.
 Particulars per train (Rs)
Selling price 20
Material Rs 4
Labour Rs 4
Over heads Rs 10
(60% Fixed) ------ 18
Profit 2
The management has almost decided to turn the offer saying that the price offered is less
than the cost per unit, but before writing to the customer the management requests your
advice. Advise the management in this matter.

2. Indo – British company has a capacity to produce 5000 units but actually producing only
2000 units for the home market at the following costs.

Materials Rs. 40,000

Wages Rs. 36,000
Factory overheads: Rs.
Fixed 12,000
Variable 20,000
Administrative overheads (fixed) 18,000
Selling and distribution overheads:
Fixed 10,000
Variable 16,000
Total cost 1, 52,000
The home market can consume only 2,000 units at a selling price of Rs. 80 per unit. An
additional order for the supply of 3,000 units is received from a foreign country at Rs. 65
per unit. Should this order be accepted or not? (HW)

Problems on Key factor:

1. The following particulars are extracted from the records of a company.

Particulars (per unit) product A product B
Selling price 100 120
Material consumed 2 kgs 3 kgs
Material cost 10 15
Direct labour cost 15 10
Direct expenses 5 6
Machine hours used 1.5 h 2h
Fixed overheads 5 10
Variable overheads 15 20
Direct wages per hour is Rs. 5. Comment on the profitability of each products when,
 a. Total sales potential in units is limited.
b. Total sales potential in value is limited.
c. Raw material is in short supply.
d. Production capacity (in terms of machine hours) is the limiting factor.

Assuming raw material as the key factor, availability of which is 10,000 kgs. And
maximum sales potential of each product being 3,500 units find out the product
mix which will yield maximum profit.
Problems on shut down or suspending activities:
1. A producer is selling a product at Rs. 80 per unit in a market suffering from acute
depression. Monthly fixed cost is Rs.5,00,000 but if suspends production he will
continue to incur fixed costs to the extent of Rs. 4,10,000 per month. Variable cost
per unit is Rs. 50. What is the minimum level of sales in units upto which he should
continue producing assuming that the price does not fall below Rs. 80 per unit.
2. Per unit variable cost of a product is Rs. 45. If the plant has to remain operational the
producer must produce atleast 20,000 units per month. Monthly fixed cost is Rs.
6,00,000 of which Rs. 4,65,000 is unavoidable fixed cost. Upto what minimum price
the producer should continue producing and selling?
3. A single product producer is incurring fixed cost of Rs. 6,00,000 per annum of which
fixed cost of Rs. 4,80,000 will continue to be incurred even if the factory is shutdown
for a year. There will be additional shut down cost of Rs.2,000 per month. Variable
cost per unit is Rs.28. The coming twelve months period is declining economic
activity and the producer is not expecting to recover full cost. He believes he will be
able to sell at Rs. 30 per unit. What is the minimum level of annual output and sale
below which the factory should suspend production activity? (HW)
4. During the previous year a firm sold 50,000 units per month at a price of Rs. 60
whereas the variable cost was Rs. 40 per unit. Monthly fixed cost amounted to Rs.
3,00,000. The current year is of extreme depression and the selling price is coming
down. With best effort the firm can keep variable cost down to Rs. 1,10,000 per
month, if the firm decides to temporarily close down. In that case there will be an
additional shut down cost of Rs. 20,000. The minimum level of monthly output to
keep the plant running cannot be below 25,000 units. What is the minimum price at
which the plant can be kept operational. (HW)

CASE STUDY: AMRITA TEA

By Prof. K Balakrishnan (C) 1977 by the Indian Institute of Management, Ahmadabad.

Amrita tea of Darjeeling had always sold its products through a sole selling agency. The
government started devising schemes to eliminate middlemen and Amrita wanted to respond to
the new public policy towards private distribution.
 This year, Amrita had made a net profit before tax (NPBT) of 10 percent on sale of Rs 20
lakhs. It is feared that elimination of the sole selling agency and selling directly to retailers
would result in a 40 percent drop in sales next year. Fixed expenses would increase from the
present figure of Rs 2.0 lakhs to 3.0 lakhs owing to the additional warehousing, distribution, and
other marketing efforts.
Elimination of middlemen would, of course, save Amrita a substantial chunk of variable costs.
They were not willing to give the details of the sole selling agency agreement and how much
variable cost they would eliminate by the switch-over. Instead, they wanted advice on the
following:
1. How much the variable costs need to be reduced next year in order to make the same
NPBT (not in terms of percentage, but in absolute amount), under the new scheme as
they made this year.
2. If they are likely to make a NPBT of Rs 1.8 lakhs next year under the new arrangement, what
do you think is happening to their break-even? Would they have a larger or smaller “margin of
safety,” and by how much?

Assignment Submission Date:

1. ---------------------------

2. ---------------------------

3. ----------------------------

Case Study Submission Date: -----------------------

Additional notes:
 PGDM 3.5 Strategic management Accounting

Unit – II Budgetary Control

Course Instructors: Mr. N. Ramesh Babu& Mrs. Annie Kavitha

Name of the student: Roll No:

Coverage:

1. Budgeting & Budgetary Control

2. Various functional Budgets
3. Flexible Budget
4. Cash Budget
5. Zero based Budgeting
6. Master Budget
7. Case study

Sales Budget:

1. P. Ltd. Manufactures two brands of Pen Hero & Zero. The sales division of the company
has three departments in different areas of the country.
The sales budgets for the year ending 31st December 2009 were:
Hero – Department I – 3,00,000; Department II – 5,62,500; Department III – 1,80,000
and Zero – Department I – 4,00,000; Department II – 6,00,000; and Department III –
20,000. Sales prices are Rs. 3 and Rs. 1.20 in all departments.
It is estimated that by forced sales promotion, the sale of ‘Zero’ in department I will
increase by 1,75,000. It is also expected that by increasing production and arranging
extensive advertisement, Department III will be enabled to increase the sale of ‘Zero’ by
50,000.
It is recognized that the estimated sales by Department II represent an unsatisfactory
target. It is agreed to increase both estimates by 20%.
Prepare a sales budget for the year 2009.

Production Budget & Production Cost Budget:

1. Prepare a production budget for each month and a summarized production cost budget for
the six months period ending 31st December 2009 from the following data of product ‘X’.

(i) The units to be sold for different months are as follows:

July, 2009 1,100
August 1,100
September 1,700
October 1,900
November 2,500
 December 2,300
January, 2010 2,000
(ii) There will be no work in progress at the end of any month.
(iii) Finished units equal to half the sales for the next month will be in stock at the end of
each month (including June, 2009)
(iv) Budgeted production and production cost for the year ending 31st December, 2009 are
as follows:
Production (units) 22,000
Direct materials (per unit) Rs. 10
Direct wages (per unit) Rs. 4
Total factory overheads apportioned to products Rs. 88,000.
It is required to prepare:
(a) Production Budget for the last six months of 2009; and
(b) Production Cost Budget for the same period.
Ans: 11,050 units; (b) Rs. 1,98,900.
(i) Prepare a production budget for each month and a summarized production cost
budget for the six months period ending 31st December 2009 from the following data
of product ‘Fish plate X’. The units to be sold for different months are as follows:

July, 2009 2,200

August 2,200
September 3,400
October 3,800
November 5,000
December 4,600
January, 2010 4,000
(ii) There will be no work in progress at the end of any month.
(iii) Finished units equal to half the sales for the next month will be in stock at the end of
each month (including June, 2009)
(iv) Budgeted production and production cost for the year ending 31st December, 2009 are
as follows:
Production (units) 44,000
Direct materials (per unit) Rs. 10
Direct wages (per unit) Rs. 4
Total factory overheads apportioned to products Rs. 88,000.
It is required to prepare:
(c) Production Budget for the last six months of 2009; and
(d) Production Cost Budget for the same period.
Ans: 22,100 units; (b) Rs. 3,53,600.

Material cost Budget:

1. The sales director of a manufacturing company reports that next year he expects to sell
40,000 units of a particular product. The production department gives the following
figures:
 Two kinds of raw materials A and B are required for manufacturing the product.
Each product requires 3 units of material A and 2 units of material B. The estimated
opening balances next year will be:
Finished product - 10,000 units, material A – 12,000 units, material B – 15,000 units.
The desirable closing balances at the end of the year are:
Finished product – 16,000 units, material A – 14,000 units, material B – 15,000 units.
Draw up a material purchase budget.
Ans: A – 1,40,000; B – 92,000
2. From the following figures prepare Raw materials purchase Budget for Jan. 2009:
Materials (units)

A B C D E F
Estimated stock on January 1 16,000 6,000 24,000 2,000 14,000 28,000
Estimated stock on January 31 20,000 8,000 28,000 4,000 16,000 32,000
Estimated consumption 1,20,000 44,000 1,32,000 36,000 88,000 1,72,000
Standard price per unit 25 P. 5 P. 15 P. 10 P. 20 P. 30 P.
1. Ans: A – 31,000; B – 2,300; C – 20,400; D – 3,800; E – 18,000; F – 52,000

Direct Labour Budget:

1. A factory works 8 hours a day, 6 days in a week and budget period is one year and during
each quarter, lost hours due to live, holidays etc. estimated to be 124 hours.
Particulars Product A Product B
Direct Labour per unit:
In Department P 2 hours @ Re. 1 per hour 1 hour @ Rs. 2 per hour
In Department Q 1 hour @ Rs. 3 per hour 1 hour @ Rs. 3 per hour
Units to be produced as
Per production budget 10,000 units 4,000 units
Required:
a. Prepare manpower Budget showing Direct labour hours and no. of works.
b. Prepare Manpower budget showing labour cost.

Manufacturing overhead cost Budget:

1. From the information given below, prepare a manufacturing overhead budget for the
quarter ending December 31, 2009:
Budgeted output during the quarter 5,000 units
Fixed overheads Rs. 30,000
Variable overheads (@ Rs. 5 per unit) Rs. 15,000
Semi-variable overheads
(40% fixed and 60% varying @ Rs. 3 per unit)
Ans: Rs. 76,000
Selling and Administration Budget:

1. You are required to prepare a sales overhead budget from the estimates given below:
 Rs.
Advertisement 2,500
Salaries of the sales department 5,000
Expenses of sales department 1,500
Counter salesmen’s salaries and dearness allowance 6,000
Travelling salesmen’s commission at 10% on their sales and expenses at 5% on their
sales.
Sales during the period were estimated as follows:
Counter sales (Rs.) Travelling Salesmen’s (Rs.)
80,000 10,000
1,20,000 15,000
1,40,000 20,000
Ans: 17,300; 18,450; 19,400

Flexible Budget:

1. The expenses for the production of 5,000 units in a factory are given as follows:
Per unit Rs.
Materials 2,50,000
Labour 1,00,000
Variable overhead 75,000
Fixed overhead 50,000
Administrative expenses (5% variable) 50,000
Selling expenses (20% fixed) 50,000
You are required to prepare a budget for the production of 7,000 units.
2. The following information relates to a flexible budget at 60% capacity. Find out the
overhead costs at 50% and 70% capacity and also determine the overhead rates:
Expenses at 60% capacity
Variable overheads: Rs.
Indirect labour 10,500
Indirect materials 8,400
Semi-variable overheads:
Repairs and Maintenance (70% fixed, 30% variable) 7,000
Electricity (50% fixed, 50% variable) 25,200
Fixed overheads:
Office expenses including salaries 70,000
Insurance 4,000
Depreciation 20,000
Estimated direct labour hours 1,20,000
3. With the following data for a 60% activity, prepare a budget for production at 80% and
100% capacity:
Production at 60% activity 600 units
Materials Rs. 100 per unit
Labour Rs. 40 per unit
Direct expenses Rs. 10 per unit
Factory overheads Rs. 40,000 (40% fixed)
 Administrative expenses Rs. 30,000 (60% fixed)
4. Draw a flexible Budget for a overhead expenses on bases of the following data and
determined overhead rates at 70%, 80% and 90% plant capacity
Element Cost 70%Capacity 80% Capacity 90% Capacity
Variable overheads:
Indirect labour ---- 12,000 ----
Stores and spares ---- 4,000 ----
Semi-variable overheads:
Power (30% fixed) ---- 20,000 ----
Repairs and Maintenance
(40% variable) ---- 2,000 ----
Fixed overheads:
Depreciation ---- 11,000 ----
Insurance ---- 3,000 ----
Salaries ---- 10,000 ----
Total overheads ---- 62,000 ----
Direct labour hours ---- 1,24,000 hours ----

5. The following information at 50% capacity is given. Prepare a flexible budget and
forecast the profit or loss at 60%, 70% and 90%.
Expenses at 50% capacity
Fixed expenses: Rs.
Salaries 50,000
Rent and taxes 40,000
Depreciation 60,000
Administrative expenses 70,000
Variable expenses:
Materials 2,00,000
Labour 2,50,000
Others 40,000
Semi-variable expenses :
Repairs 1,00,000
Indirect labour 1,50,000
Others 90,000
It is estimated that fixed expenses will remain constant at all capacities. Semi-
variable expenses will not change between 45% and 60% capacity, will rise by 10%
between 60% and 75% capacity, a further increase of 5% when capacity crosses 75%.
Estimated sales at various levels of capacity are:
Capacity Sales (Rs.)
60% 11,00,000
70% 13,00,000
90% 15,00,000

Cash budget:
1. The income and expenditure forecasts for months of March to August, 2009 are given as
follows:
Months Sales Purchases Wages Manufacturing Office Selling
(Credit) (Credit) Expenses expenses expenses
Rs. Rs. Rs. Rs. Rs. Rs.
March 60,000 36,000 9,000 3,500 2,000 4,000
April 62,000 38,000 8,000 3,750 1,500 5,000
May 64,000 33,000 10,000 4,000 2,500 4,500
June 58,000 35,000 8,500 3,750 2,000 3,500
July 56,000 39,000 9,500 5,000 1,000 3,500
August 60,000 34,000 8,000 5,200 1,500 4,500
You are given the following further information:
(a) Plant costing Rs. 16,000 is due for delivery in July payable 10% on delivery and the
balance after 3 months.
(b) Advance tax of Rs. 8,000 is payable in March and June each.
(c) Creditors allow 2 months credit and debtors are paying one month late.
(d) Opening Balance of Cash Rs. 8,000.
(e) Lag of one month in expenses.
Prepare a cash budget for the months May to July.
Ans: May – Rs. 15,750; June – Rs. 12,750; July – Rs. 18,400
2. Infotech commenced its business on 1st April 2009 and deposits Rs 1, 00,000 in SBI. The
sum deposited would not be sufficient to finance its operations over a period of 4 months.
Relevant data is as under:
1. Sales are made on 30 days term, 2% discount.
2. Furniture purchases for Rs. 10,000 preferred to be made in April, 2009.
3. Budgeted figures April May June July
Purchases 50,000 40,000 30,000 40,000
Wages 40,000 50,000 40,000 40,000
Expenses 4,000 5,000 4,000 4,000
Sales 60,000 70,000 80,000 80,000
4. All purchases made on 30 days term.
As a finance manager, you are asked to prepare a cash budget for the company and
also ascertain the OD limits to seek from the banker.

3. Prepare a cash budget for the three months ending 30th June from the following
information:
(a) Month Sales Materials Wages Overheads
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300
(b) Credit terms are:
Sales/ Debtors – 10% sales are on cash, 50% of the credit sales are collected next
month and the balance in the following month.
 (c) Creditors: Materials, 2 months
Wages, ¼ month
Overheads, ½ month.
(d) Cash and Bank balance on 1st April expected to be Rs. 6,000.
(e) Other relevant information are:
1. Plant and machinery will be installed in February at a cost of Rs. 96,000, the
monthly installment of Rs. 2,000 are payable from April onwards.
2. Dividend @5% on

Case Study (Master Budget)

Victoria Kite Company, a small Melbourne firm that sells kites on the web wants a master
budget for the next three months, beginning January 1, 2005. It desires an ending minimum cash
balance of $5,000 each month. Sales are forecasted at an average wholesale selling price of $8
per kite. In January 1, Victoria Kite is beginning Just–In-Time (JIT) deliveries from suppliers,
which means that purchases equal expected sales.

On January 1, purchases will cease until inventory reaches $6,000, after which time purchases
will equal sales. Merchandise costs average $4 per kite. Purchases during any given month are
paid in full during the following month. All sales are on credit, payable within 30 days, but
experience has shown that 60% of current sales are collected in the current month, 30% in the
next month, and 10% in the month thereafter. Bad debts are negligible.

Monthly operating expenses are as follows:

WAGES AND SALARIES $15,000

INSURANCE EXPIRED 125
DEPRECIATION 250
MISCELLANEOUS 2,500
RENT 250/MONTH + 10% OF QUARTERLY
SALES OVER $10,000
Cash dividends of $1,500 are to be paid quarterly, beginning January 15, and are declared on the
fifteenth of the previous month. All operating expenses are paid as incurred, except insurance,
depreciation, and rent. Rent of $250 is paid at the beginning of each month, and the additional
10% of sales is paid quarterly on the tenth of the month following the end of the quarter. The
next settlement is due January 10. The company plans to buy some new fixtures for $3,000 cash
in March.

Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per annum.
Management wants to minimize borrowing and repay rapidly. Interest is computed and paid
when the principal is repaid. Assume that borrowing occurs at the beginning, and repayments at
the end of he months in question. Money is never borrowed at the beginning and repaid at the
end of the same month. Compute the interest to the nearest dollar.
 Assets as of Dec 31, Liabilities as of Dec 31, 2004
2004
Cash $5,000 Accounts Payable (Merchandise) $35,550
Accounts Receivable 12,500 Dividends Payable 1,500
Inventory* 39,050 Rent Payable 7,800
Unexpired Insurance 1,500 = $44,850
Fixed assets, net 12,500
= $70,55
0
* November 30 inventory balance = $16,000

Recent and Forecasted sales:

October = $38,000 December = $25,000 February= $75,000 April= $45,000

November = 25,000 January = 62,000 March = 38,000
Questions:

1. Prepare a master budget including a budgeting income statement, balance sheet,

statement of cash receipts and disbursements, and supporting schedules for the months
January through March 2005.

2. Explain why there is a need for a bank loan and what operating sources provides the cash
for the repayment of the bank loan

Assignment Submission Date: ----------------------

Case Study Submission Date: -----------------------

 Unit 3
Standard Costing & Variance Analysis

Student Name = Roll no. =

Coverage:-

o Introduction
o Standard Cost
o Analysis of Variances
o Material Variances + Problems
o Labour Variances + Problems
o Overhead Variances + Problems
o Sales (or) Profit variances + problems
Formulae in Standard Costing

S.No Summery – Standard Costing – Formulae

I. Material variances
a) MCV = (ASQ × SP) – (AQ × AP)
b) MPV = AQ (SP – AP)
c) MUV = SP (ASQ – AQ)
d) MMV = SP (RSQ – AQ)
e) MYV = SYR (AY - RSY)
Verification :- a = ( b+c ) ; c = ( d+e ) ; a = [ b +( d+e ) ]

II. Labour variances

a) LCV = (AST × SR) – (AT × AR)
b) LPV = AT (SR – AR)
c) LITV = (SR × AIT) = adverse analysis
d) LEV = SR (AST – AT*) Note- ( AT* =AT – AIT )
e) LMV = SR (RST – AT*)
f) LYV = SYR ( AY – RSY )
Verification :- a = ( b+c+d ) ; d = (e+f) ; a = [ b+c+(e+f) ]
III. Over head variances
1) Variable / OH / Variances
a) V/OH/COST/V = ( AO × SR Per U ) – (AO × AR Per U)
( AST × SR Per Hr.) – (AT × AR Per Hr)
b) V/OH/EXPN/V = AT ( SR Per Hr – AR Per Hr )
c) V/OH/EFFICIENCY/V = SR Per Hr. ( AST – AT )

Verification :- a = ( b+c )

2) Fixed / OH / Variances
a) F/OH/COST/V = ( AO × SR Per U ) – ( AO × AR Per U )
b) F/OH/EXPN/V = ( B/F/OH’s – A/F/OH’s )
c) F/OH/VOLUME/V = SR Per U ( AO – BO )
d) F/OH/CAPASITY/V = SR Per U ( RBO – ABO )
e) F/OH/CALENDER/V = SR Per U ( ABO – BO )
f) F/OH/EFFICIENCY/V = SR Per U ( AO – RBO )
Verification :- a = ( b+c ) ; c= (d+e+f) ; a = b+(d+e+f )
IV. Sales Variances
Method – 1 :- “PROFIT” or Sales Margin method” (m/I )
Method – 2 :- : “TURNOVER” or “Sales Value Method” ( M/II )

a) M/I :- TSMV = ( AQ × APt per U ) – ( SQ × SPt per U )

M/II :- TSVV = ( AQ × ASP per U ) – ( SQ × SSP per U )

b) M/I :- SPV = AQ ( Apt – SPt ) per U

M/II :- SPV = AQ ( ASP – SSP ) per U

c) M/I :- SVV = SPt per U ( AQ – SQ )

 M/II :- SVV = SSP per U ( AQ – SQ )

d) M/I :- SMV = SPt per U ( AQ – RSQ )

M/II :- SMV = SSP per U ( RSQ – SQ )

e) M/I :- SQV = SPt per U ( RSQ – SQ )

M/II :- SSeV = SSP per U ( RSQ – SQ )

Verification :- a = ( b+c ) ; c = ( d+e ) ; a = [ b +( d+e ) ]

Problems on Material Variances

1) In a manufacturing process, the following standards apply:-

Standard price: Raw material ‘A’ Rs. 1 per kg.

. Raw material ‘B’ Rs. 5 per kg

Standard Mix – 75 % ‘A’; 25 % ‘B’ (by weight)

Standard Yield – 90 %

In a period, the actual costs, usage and output were as follows;

Used :- 4,400 Kgs. of ‘A’ costing Rs 4,650

. 1,600 Kgs. of ‘B’ costing Rs 7,850

Output:- 5,670 Kgs. of products.

The budgeted output for the period was 7,200 Kgs.

Calculate all the Variances.

Ans: MCV = Rs 100 (F), MPV = (100) (A), MUV = 200 (F), MMV = 400 (F), MYV = 600 (F).

2) The standard mix of product MS is as follows:

Kgs Material Price per Kg

50 A Rs. 5.00
20 B Rs. 4.00
30 C Rs. 10.00

The standard loss in production is 10 % of input, there is no scrap value. Actual production for a month
was 7,240 of MS from 80 mixes. Actual purchases and consumption of material during the month were:
 Kgs material Price per Kg.
4,160 A Rs. 5.50
1,680 B Rs. 3.75
2,560 C Rs. 9.50

You are required to calculate & present the following variances:

. 1) MCV, 2) MPV, 3) MMV, 4) MYV, 5) MUV

Ans: 1) Rs. 2,820 (A), 2) 360 (A) 3) 2440 (A) 4) 200 (A) 5) 2240 (A)

3. The standard mix of a product is:

X 60 Units @15 p. per Unit

Y 80 Units @20 p. per Unit
Z 100 Units @25 p. per Unit
240

10 units of the finished product should be obtained from this mix. During the month of the march, ten
mixes were completed and the consumption was:

X 640 Units @20 p. per Unit 128

Y 960 Units @15 p. per Unit 144
Z 840 Units @30 p. per Unit 252
2,440 524

Actual output was 90 units

Calculate the appropriate material Variances

Ans. MCV = 74 (A), MPV = 26 (A), MUV = 48 (A), MMV = 10.35(F), MYV = 58.35(A).

4). S.V.Ltd. manufactures BXE by mixing three raw materials, for every batch of 100 kgs of ‘BXE’ 125 kgs
of raw materials are used. In September, 2009, 60 batches were prepared to produce an output of 5,600
kgs of ‘BXE’ the standard and actual particulars for September 2009 are as fallows:-

Raw Mix (%) Standard Price per Mix (%) Actual price Quantity of raw
material Kg. (Rs) Per Kg (Rs) material purchased (Kg)
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate: I. Material Cost Variances; II. Material Price Variances; III. Material Mix Variances;
. IV. Material Yield Variances

Ans; I. MCV=30,200(A), ii. MPV=2,200(A) iii. MUV=28,000(A) IV. MMV=11,200(A) V. MYV=16,800(A)

5. The standard material cost for 100 kg. of chemical ‘D’ is made up of:

 Chemical A – 30 kgs @ Rs. 4.00 per kg.

 Chemical B – 40 kgs @ Rs. 5.00 per kg.
 Chemical C – 80 kgs @ Rs. 6.00 per kg.

In a batch, 500 kga of chemical ‘D’ were produced from a mix of:

 Chemical A – 140 kgs at a cost of Rs. 588

 Chemical B – 220 kgs at a cost of Rs. 1,056
 Chemical C – 440 kgs at a cost of Rs. 2,860

How do they yield, mix & the price factors contribute, to the variance in the actual cost per 100 kgs, of
chemical ‘D’ over the standard cost ?

Ans: MCV=100.8(A); MPV=40.8(A); MMV=7(A); MYV=53(A)

6. Vardhaman Ltd is producing floor mats in rolls of standard size measuring 3 meters wide and 30
meters long by feeding raw materials to a continuous processing machine.

Standard mixture fixed for a batch of 900 Sq.Mts. of floor cover is as follows

 20,000 kgs. of material X at Rs. 1.00 per kg.

 800 kgs. of material Y at Rs. 1.50 per kg.
 20 kgs. of material Z at Rs. 30.00 per kg.

During June 2009; 1,505 standard size rolls were produced from materials issued for 150 batches. The
actual usage and the cost of material as follows;

 3, 00,500 kgs. of material X at Rs. 1.10 per kg

 1, 19,600 kgs. of material Y at Rs. 1.65 per kg
 3,100 kgs. of material Z at Rs. 29.50 per kg

You are required to show the break-up of material cost variances arising during June 2009.

Ans; MCV=47,400(A); MPV=46,440(A); MUV=1,000(A); MMV=2,630.7(A); MYV=1,630.7(F)

7. Compute the missing data indicated by Question Marks from the following:

Particulars A B
Standard Price/ Unit Rs. 12 Rs. 15
Actual Price / Unit Rs. 15 Rs.20
Standard Input (kgs) 50 ?
Actual Input (kgs) ? 70
Material Price Variances ? ?
Material Usage Variances ? Rs 300 Adverse
Material Cost Variances ? ?
Material mix variances for both products together were Rs. 45 adverse.

Ans :- For R/M ‘A’ = Actual Input = 40 kgs ; MPV = Rs. 120(A); MUV= 120(F); MCV = Nil

For R/M ‘B’ = Standard Input = 50 kgs; MPV = Rs. 350(A); MCV = 650(A).

Labour Variances

1) Standard labour hours & rate for production of article ‘A’ are given below

Hrs Rate (Rs) Total (Rs)

Skilled worker 5 1.50 per hour 7.50
Unskilled worker 8 0.50 per hour 4.00
Semi skilled worker 4 0.75 per hour 3.00
14.50
Actual Data:- Articles produced 1,000 units -

Hrs Rate per Hr Total (Hr)

Skilled worker 4500 2.00 9,000
Unskilled worker 10000 0.45 4,500
Semi skilled worker 4200 0.75 3,150
16,650
Calculate – a) LCV, b) LRV, c) LEV, d) LMV, e) LYV
Ans – a) 2,150(A), b) 1,750(A), c) 400(A), d) 1,050(F) e) 1,450(A)
2) The details regarding composition & the weekly wage rate of labour force engaged on a job
scheduled to be completed in 30 weeks are as follows –

Category of workers No.of. labour Weekly wage rate No.of.labour Weekly wage rate
Skilled worker 75 Rs 60 70 Rs. 70
Unskilled worker 45 Rs 40 30 Rs. 50
Semi skilled worker 60 Rs 30 80 Rs. 20
The work is actually completed in 32 weeks.
Calculate the various labour variances.
Ans. a) LCV=Rs 13,000(A) b) LRV=6,400(A) c) LEV=6,600(A) d) LMV=9,600(F) e) LYV=16,200(A)
3) A contract job is scheduled to be completed in 30 weeks with a labour compliment of 100 skilled
operatives, 40 semi skilled operatives, and 60 unskilled operatives. The standard weekly wages
of each type of operatives are – skilled Rs.60, semi skilled Rs-36, & Unskilled Rs-24.
The work is actually completed within 32 weeks with a labour force of 80 skilled, 50 semi skilled,
& 70 unskilled operatives and the actual weekly wage rates average Rs. 65 for skilled, Rs.40 for
semi skilled & Rs. 20 for unskilled labour.
Analyze the variances in the labour cost due to various reasons.
 Ans. a) LCV=Rs.8,800(A) b) LRV=10,240(A) c) LEV=1,440(F) d) LMV=19,200(F) e) LYN=17,760(A).

4) The standard labour component & the actual labour component engaged in a week for a job are
as under:

Skilled Semi skilled Unskilled

workers works workers
A Standard No.of workers in the gang 32 12 6
B Standard wage rate per Hour (Rs) 3 2 1
C Actual no.of workers employed in the 28 18 4
gang during the week
D Actual wage rate per Hour 4 3 2
During the 40 – hour working week, the gang produced 1,800 standard labour hours of work.
Calculate the different labour variances.

Ans. a) LCV=2,424(A), b) LRV=2,000(A), c) LEV=188.8(A) d) LMV=19.2(F) e) LYV=208(A).

5) The data obtained from a manufacturing concern are:-

Men Women
Number in standard gang 20 10
Standard rate per hour Rs 0.90 Rs 0.80
Number in actual gang 16 14
Actual rate per hour Rs 1.00 Rs 0.70
In a 48 hour week, the gang as actually compared, produced 1,200 standard hours.
Compute wages variances?

Ans; a) LCV=Rs. 198.4(A) b) LRV=9.6(A) c) LEV=188.8(A) d) LMV=19.2(F) e) LYV=208(A).

Problems on Material & Labour Variances

1) Trishul industries turns out only one article, the Prime Cost Standard for which have been
established as follows:
Per Completed Price
 Material – 5 lbs. @ Rs. 4.20 Rs. 21
Labour – 3 Hours @ Rs. 3 Rs. 9

The production schedule for the month of July 2009, required completion of 5,000 pieces. However,
5,120 pieces were actually completed.

Purchases for the month of July 2009 amounted to 30,000 lbs. of material at the total invoice price of Rs.
1,35,000

Production records for the month of July 2009 showed the following actual result:-

 Materials requisitioned & used 25,700 lbs.

 Direct labour – 15,500 Hours Rs. 48,480.

Calculate appropriate material and labour variances.

Ans. a) MCV=RS. 8,130(A) b) MPV=7,710(A) c) MUV=420(A) d)MMV=Nil e) MYV=420(A)

a. LCV=Rs. 2,400(A) b) LRV=3,030(A) c) LEV=630(F) d)LMV=Nil e) LYV=630(F)

2 ) The following information is available from the cost records of Novell & Co. for the month of march,
2009.

 Materials purchased 20,000 units Rs. 88,000

Materials consumed 19,000 units
 Actual wages paid for 4,950 hours Rs. 24,750
Units produced 1,800 units

Standard rates & pieces are:-

 Direct material rate is Rs 4.00 per unit.

 Standard input is 10 numbers for one unit.
 Direct labour rate is 4.00 per hour.
 Standard requirement is 2.5 hours per unit.

You are required to compute, all material & labour variances for the month of march 2009.

Ans. a) MCV=RS. 11,600(A) b) MPV=7,600(A) c) MUV=4,000(A) d) MMV=Nil e) MYV=4,000(A)

a) LCV=Rs. 6,750(A) b) LRV=4,950(A) c) LEV=1,800(F) d)LMV=Nil e) LYV=1,800(A)

3) In a certain period, results were as follows:

Output 6,500 units

Wages paid Rs 48,750 for 16,250 Hours
 Material Rs 34,000 for 4,000 Kgs
Variances:

Labour Rs. 1,875 ( adverse )

Labour efficiency Rs. 1,275 ( favourable )
Labour idle time Rs. 700 (adverse )
Material price Rs. 1,850 ( favourable )
Material usage Rs. 1,200 ( favourable )
Calculate the Standard Prime Cost per Unit.

Ans: S/M/C per Unit = Rs. 5.70 ; S/L/C per unit=Rs. 7.30; S/P/C per unit = Rs. 13.00 per unit.

Problems on Over head Variances

1) The following data is obtained from the books of a manufacturing company regarding VARIABLE
overheads;
Calculate ‘V/OH’ variances.

Budget production for January 300 units

Budgeted variable overhead Rs. 7,800
Standard time for one unit 20 Hrs
Actual production for January 2009 250 Units
Actual hours worked 4,500 Hrs
Actual work overhead Rs.7,000
Ans: a) V/OH cost Var. = Rs 500(A) b) V/OH exp. Var. = Rs 1,150(A) c) V/OH Eff. Var. = Rs 650(F)

2) From the following data, calculate ‘V/OH’ variances.

budgeted Actual
Standard overheads Rs 2,50,000 Rs 2,60,000
Output in units 25,000 20,000
Working hours 1,25,000 1,10,000
Ans: V/OH Cost var. = Rs 60,000(A), b) V/OH exp. Var. = Rs. 40,000(A), c) V/OH eff. Var.= Rs 20,000 (A)

3) From the following data, calculate the F/OH Variances:

Item budgeted actual

Over heads Rs. 3,75,000 Rs. 3,77,500
Output per man hours in units 2 1.9
Number of working days 25 27
Man hours per day 5,000 5,500
Ans: a) F/OH Cost Var. = Rs 45,725(F); b) F/OH Exp. Var. = Rs 2,500(A); c) F/OH Vol. Var. = Rs 48,225(F)
d) F/OH Cap. Var. = Rs 40,500(F) e) F/OH Cal. Var. = Rs 30,000(F) f) F/OH Eff. Var. = Rs 22,275(A)

4) From the following data, calculate F/OH Variances :-

 a) Effective Variance b) Capacity variance c) Calendar variance
d) Volume Variance e) Expenditure Variances f) Cost Variances

Item Budgeted Actual

No.of working days 20 22
Man hours per day 8,000 8,400
Output per man hours in units 1.0 0.9
Overhead (Rs) 1,60,000 1,68,000
Ans; a) Rs 18,480(A), b) Rs 8,800(F), c) Rs 16,000(F), d) Rs 6,320(F), e) Rs 8,000(A), f) Rs 1,680(A)

5) The following information has been obtained from the records of a manufacturing organization
using the Standard Costing System :-

Standard Actual
Production (units) 4,000 3,800
Working days 20 21
Fixed overhead (Rs) 40,000 39,000
Variable overhead (Rs) 12,000 12,000
You are required to calculate the following overhead variances, assuming that there was a 5 % increase
in capacity:- I. Variable Overhead Variances

II. Fixed Overhead Variances

a) Expenditure Variances b) Volume variances c) Efficiency variances

d) Calendar Variances e) capacity Variances f) Cost Variances

also prepare a statement reconciling the standard fixed overhead worked out by using the standard
overhead rate & the actual fixed overhead

Ans ; I. 600(A) II. a) 1,000(F), b) 2,000(A), c) 6,100(A), d) 2,000(F), e) 2,100(F), f) 1,000(A)

6) From the following data, calculate the V/OH Cost Variance & all F/OH Variances :-

budgeted Actual
Output 15,000 units 16,000 units
No.of working days 25 27
Fixed overheads Rs. 30,000 Rs. 30,500
Variable overheads Rs. 45,000 Rs. 47, 500
There was an increase of 5% in capacity.

Ans ; I. Rs 1,000(F), II. a) Rs. 1,500(F), b) 500(A), c) 2,000(F), d) 1,620(F), e) 2,400(F), f) 2,020(A).
Problems on Sales or Profit Variances :-

1) Modern toys Ltd. Had budgeted the following sales for December 2009:-
 Toy A 900 units @ Rs.50 per unit
 Toy B 650 units @ Rs. 100 per unit
 Toy C 1,200 units @ Rs. 75 per unit

As against this, the actual sales were:-

 Toy A 1,000 units @ Rs. 55 per unit

 Toy B 700 units @ Rs. 95 per unit
 Toy C 1,100 units @ Rs. 78 per unit

The cost per unit of A,B & C was Rs. 45, Rs. 85, & Rs. 65 respectively. Compute the different variances to
explain the difference between the budgeted and actual profit.

Ans:- Sales Variances under M/I = a) Rs. 5,050(F), b) 4,800(F), c) 250(F), d) 230(A), e) 480(F).

2) The sales manager of a company engaged in the manufacture and sales of 3 products P, Q, & R.
And gives you following information for the month of June 2009:-
Budgeted sales

Product Units sold Selling price per unit Std margin per unit
P 2,000 Rs. 12 Rs. 6
Q 2,000 Rs. 8 Rs. 4
R 2,000 Rs. 5 Rs. 1
Actual Sales

P 1,500 units for Rs. 15,000

Q 2,500 units for Rs. 17,500
R 3,500 units for Rs. 21,000
You are required to calculate the following variances on the basis of profit & turnover:-
i. SPV b) SVV c) SMV d) SQV e) TSMV/TSVV

Ans : Sales Variances under M/I = a) Rs.2,000(A), b) 500(F), c) 5,000(A), d) 5,500(F), e) 1,500(A)

Sales Variances under M/II = a) Rs.2,000(A), b) 5,500(F), c) 7,000(A), d) 12,500(F), e) 3,500(F)

 3). Compute the missing data indicated by the question marks from the following:

Sales quantity Product R Product S

Standard (units) ? 400
Actual (units) 500 ?

Price/Units Rs Rs
Standard 12 15
Actual 15 20
Sales Price variances ? ?
Sales Volume Variances 1,200 F ?
Sales value variances ? ?

Sales mix variances for both the products together was Rs. 450 F. ‘F’ denotes Favorable

Ans : For Product ‘R’ Standard input = 400 units, SPV = Rs. 1,500(F), S/value/V = 2,700(F)

For Product ‘S’ Actual input = 800 units, SPV = Rs. 4,000(F), SVV = 6,000(F), S/value/V = 6,000(F).